NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2016 and 2015
(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. The Company together with its wholly-owned subsidiary, Better Blocks International Limited (“BBI”), a New
Zealand corporation, sells various health, wellness and beauty products as well as miscellaneous consumer products through a number
of sales channels throughout the United States and internationally. Although our companies are incorporated in Nevada and New
Zealand, our operations are currently run from the Wayne, Pennsylvania office.
The
Company develops, markets and sells products through a multi-channel distribution strategy, including direct response television,
digital marketing campaigns, live home shopping, traditional retail and e-commerce market places, and our international third
party distributor network. We offer primarily health, beauty and wellness products as well as various consumer products, including
DermaWand
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 use the brand awareness we create in our marketing campaigns so that we can sell the products, along
with related families of products, under distinct brand names through multiple sales channels including direct response television
(“DRTV”), digital marketing channels, live home shopping, traditional retail and e-commerce marketplaces, and our
third party international distributor network.
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 with 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 consolidated financial statements, including the
notes thereto, appearing in our Annual Report on Form 10-K for the year ended December 31, 2015. 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, 2016 are not necessarily indicative of operating results that may be achieved over the course of the full year.
Principles
of consolidation
The
accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary,
BBI. All significant inter-company transactions and balances have been eliminated.
ICTV
BRANDS INC. AND SUBSIDIARY
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2016 and 2015
(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, valuation allowance
on deferred tax assets and share based compensation. Actual results could differ from these estimates.
Recently
Issued Accounting Pronouncements
In
August 2016, Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“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 of 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 adaption permitted. The Company is currently evaluating
the impact of the new guidance to the consolidated financial statements.
In
June 2016, FASB issued Accounting Standard Update 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. The Company is currently evaluating the impact of the new guidance on our consolidated
financial statements.
In
March 2016, FASB issued Accounting Standards Update 2016-09,
Compensation – Stock Compensation (Topic 718): Improvements
to Employee Share-Based Payment Accounting
(“ASU 2016-09”) which simplifies several aspects of the accounting
for share-based payment transactions including the accounting for income taxes, forfeitures and statutory tax withholding requirements,
as well as classification in the statement of cash flows. The methods of adoption are dependent on the specific aspects of the
new guidance adopted. ASU 2016-09 will be effective for fiscal years beginning after December 15, 2016 and for interim periods
within those fiscal years. Early adoption is permitted but the Company must adopt all amendments that apply in the same period
if they choose to adopt early. The Company is currently evaluating the impact of the new guidance to the consolidated financial
statements.
In
February 2016, FASB issued ASU No. 2016-02 “Leases (Topic 842)”, (“ASU 2016-02”). This standard requires
entities that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created
by those leases. The standard is effective for fiscal years and the interim periods within those fiscal years beginning after
December 15, 2018. The guidance is required to be applied by the modified retrospective transition approach. Early adoption is
permitted. The Company is currently evaluating the impact of the new guidance to the consolidated financial statements.
In
November 2015, FASB issued ASU No. 2015-17 Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,
which
simplifies current guidance and requires companies to classify all deferred tax assets and liabilities as noncurrent on the balance
sheet. ASU 2015-17 can be applied either prospectively or retrospectively and is effective for periods beginning after December
15, 2016, with early adoption permitted. The Company believes the effect of this guidance will not be material to its consolidated
financial statements and related disclosures.
ICTV
BRANDS INC. AND SUBSIDIARY
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2016 and 2015
(Unaudited)
Note
2 - Summary of significant accounting policies (continued)
In
July 2015, FASB issued ASU No. 2015-11- Inventory (Topic 330) - Simplifying the Measurement of Inventory, which provides that
an entity should measure inventory within the scope of this update at the lower of cost and net realizable value. Net realizable
value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal,
and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The
amendments in this update are effective for the annual periods beginning after December 15, 2016, and for interim periods within
those fiscal years. The Company does not expect the adoption of this standard to have a material impact on the consolidated financial
statements.
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. Accounting Standards Update No. 2014-09 is effective for annual reporting periods beginning after December
15, 2017, including interim periods within that reporting period. Early adoption is permitted, but not before the original effective
date of the standard. The Company is currently evaluating the impact of the new guidance on our consolidated financial statements.
Concentration
of credit risk
Financial
instruments, which potentially subject the Company to concentrations of credit risk, include cash and trade receivables. The Company
maintains cash in bank accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses
and believes it is not exposed to any significant risks on its cash in bank accounts.
As
of September 30, 2016, 64% of the Company’s accounts receivable were due from various individual customers to whom our products
had been sold directly via Direct Response Television. In addition, 21% of the Company’s accounts receivable was cash due
from retail and e-commerce customers and 3% of the Company’s accounts receivable was cash due from the Company’s credit
card processors as of September 30, 2016. 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, 2016, there were 10% and 0%, respectively, of net sales made to one e-commerce
customer as compared to no major customers for the three and nine months ended September 30, 2015.
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.” The Company has used available information to derive its estimates. However, because these
estimates are made as of a specific point in time, they are not necessarily indicative of amounts the Company could realize currently.
The use of different assumptions or estimating methods may have a material effect on the estimated fair value amounts. The carrying
values of financial instruments such as cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities
approximate their fair values due to the short settlement period for these instruments.
Cash
and cash equivalents
The
Company considers 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.
ICTV
BRANDS INC. AND SUBSIDIARY
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2016 and 2015
(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 $135,000 at September 30, 2016 and
$119,000 at December 31, 2015. The allowances are estimated based on 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 $89,000 and $80,000 at September 30, 2016 and December
31, 2015, respectively.
Inventories
Inventories
consist primarily of products held for resale, and are valued at the lower of cost (first-in, first-out method) or market. The
Company adjusts inventory for estimated obsolescence when necessary based upon demand and market conditions. The Company’s
reserve for obsolescence was approximately $103,000 and $123,000 at September 30, 2016 and December 31, 2015, respectively. Included
in inventory at September 30, 2016 and December 31, 2015 is approximately $64,000 and $42,000, 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.
Furniture
and equipment
Furniture
and equipment are carried at cost and depreciation is computed over the estimated useful lives of the individual assets ranging
from 3 to 5 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 $2,000 and $6,000 for the three and nine months ended September 30, 2016 and 2015, respectively.
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 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, 2016 and 2015.
Related
party transactions
During
the nine months ended September 30, 2016, the Company had one sale of approximately $14,000 with an international third party
distributor affiliated with one of our Board of Director members. The pricing and terms of the sale are similar to other international
third party sales.
Revenue
recognition
The
Company recognizes 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 are net of sales taxes. Revenues from product
sales are recorded net of provisions for estimated chargebacks, rebates, expected returns and cash discounts.
ICTV
BRANDS INC. AND SUBSIDIARY
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2016 and 2015
(Unaudited)
Note
2 - Summary of significant accounting policies (continued)
The
Company offers a 30-day risk-free trial as one of its payment options. Revenue on the 30-day risk-free trial sales is not recognized
until customer acceptance and collectability are assured which we determine to be when the trial period ends. If the risk-free
trial expires without action by the customer, product is determined to be accepted by the customer and revenue is recorded. Revenue
for items purchased without the 30-day free trial is recognized upon shipment of the product to the customer and collectability
is 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 customers
is recorded at gross amounts with a corresponding charge to cost of sales upon shipment.
The
Company had international third party distributor sales and retail sales of approximately $388,000 and $221,000 as of September
30, 2016 and December 31, 2015, respectively, included in deferred revenue – short-term on the accompanying condensed consolidated
balance sheets for payments received prior to shipment.
The
Company has a return policy whereby the customer can return any product received within 30 days of receipt for a full refund.
The Company provides 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.
The
Company sells warranties on the DermaWand
TM
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 the Company’s
deferred service revenue related to the warranties is presented in the following table:
|
|
September
30, 2016
|
|
|
December
31, 2015
|
|
Deferred extended warranty revenue:
|
|
|
|
|
|
|
|
|
At beginning of period
|
|
$
|
629,143
|
|
|
$
|
670,075
|
|
Revenue deferred for new warranties,
year to date
|
|
|
90,652
|
|
|
|
174,852
|
|
Revenue recognized
year to date
|
|
|
(176,055
|
)
|
|
|
(215,784
|
)
|
At end of period
|
|
$
|
543,740
|
|
|
$
|
629,143
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
238,274
|
|
|
$
|
223,397
|
|
Non-current portion
|
|
|
305,466
|
|
|
|
405,746
|
|
|
|
$
|
543,740
|
|
|
$
|
629,143
|
|
Shipping
and handling
The
amount billed to customers for shipping and handling is included in revenue. Shipping, handling and processing revenue approximated
$571,000 and $1,633,000 and $489,000 and $2,593,000 for the three and nine months ended September 30, 2016 and 2015, respectively.
Shipping and handling costs are included in cost of sales. Shipping and handling costs approximated $232,000 and $659,000 and
$284,000 and $1,476,000 for the three and nine months ended September 30, 2016 and 2015, 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 statements of operations. 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.
Product testing and development costs approximated $31,000 and $88,000 and $26,000 and $90,000 for the three and nine months ended
September 30, 2016 and 2015, respectively.
ICTV
BRANDS INC. AND SUBSIDIARY
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2016 and 2015
(Unaudited)
Note
2 - Summary of significant accounting policies (continued)
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 statements of operations. Production costs associated with the creation of new and updated infomercials and advertising
campaigns are expensed at the commencement of a campaign. The Company incurred approximately $1,444,000 and $1,206,000 in media
costs for airing its infomercials, $7,000 and $85,000 in new production costs, and $299,000 and $146,000 in internet marketing
costs for the three months ended September 30, 2016 and 2015, respectively and approximately $4,011,000 and $6,519,000 in media
costs for airing its infomercials, $210,000 and $293,000 in new production costs, and $899,000 and $462,000 in internet
marketing costs for the nine months ended September 30, 2016 and 2015, 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 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 selected employees,
officers and directors of the Company and its subsidiary, and is intended to advance the best interests of the Company by providing
personnel who have substantial responsibility for the management and growth of the Company and its subsidiary with additional
incentive by increasing their proprietary interest in the success of the Company, thereby encouraging them to remain in the employ
of the Company or its subsidiary. The Plan is administered by the Board of Directors of the Company, 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, 2016, 116,667 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
selected employees, officers, and directors of the Company and its subsidiary, and is intended to advance the best interests of
the Company by providing personnel who have substantial responsibility for the management and growth of the Company and its subsidiary
with additional incentive by increasing their proprietary interest in the success of the Company, thereby encouraging them to
remain in the employ of the Company or its subsidiary. The 2011 Plan is administered by the Board of Directors of the Company,
and authorizes the issuance of stock options not to exceed a total of 6,000,000 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. Generally, the options granted vest over three years with one-third vesting on each anniversary date
of the grant. As of September 30, 2016, 3,138,335 options are outstanding under the 2011 Plan.
ICTV
BRANDS INC. AND SUBSIDIARY
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2016 and 2015
(Unaudited)
Note
2 - Summary of significant accounting policies (continued)
Stock
options (continued)
The
Company accounts 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 share-based
compensation 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.
The
Company uses ASC Topic 718, “Share-Based Payments” to account for share-based compensation issued to employees and
directors. The Company recognizes compensation expense in an amount equal to the 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, 2016 and 2015:
|
|
Number
of Shares
|
|
|
Weighted
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
Average
|
|
|
|
Employee
|
|
|
Employee
|
|
|
Totals
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2016
|
|
|
4,036,669
|
|
|
|
-
|
|
|
|
4,036,669
|
|
|
$
|
0.21
|
|
Exercised during
the period
|
|
|
(350,000
|
)
|
|
|
-
|
|
|
|
(350,000
|
)
|
|
|
0.11
|
|
Forfeited
during the period
|
|
|
(431,667
|
)
|
|
|
-
|
|
|
|
(431,667
|
)
|
|
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2016
|
|
|
3,255,002
|
|
|
|
-
|
|
|
|
3,255,002
|
|
|
$
|
0.21
|
|
|
|
Number
of Shares
|
|
|
Weighted
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
Average
|
|
|
|
Employee
|
|
|
Employee
|
|
|
Totals
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2015
|
|
|
4,220,002
|
|
|
|
350,000
|
|
|
|
4,570,002
|
|
|
$
|
0.40
|
|
Exercised during
the period
|
|
|
(309,279
|
)
|
|
|
(350,000
|
)
|
|
|
(659,279
|
)
|
|
|
0.14
|
|
Forfeited
during the period
|
|
|
(15,000
|
)
|
|
|
-
|
|
|
|
(15,000
|
)
|
|
|
0.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2015
|
|
|
3,895,723
|
|
|
|
-
|
|
|
|
3,895,723
|
|
|
$
|
0.38
|
|
Of
the stock options outstanding as of September 30, 2016 under the Stock Option Plans, 2,318,334 options are currently vested and
exercisable. The weighted average exercise price of these options was $0.21. These options expire through December 2025. The aggregate
intrinsic value for options outstanding and exercisable at September 30, 2016 and 2015 was approximately $12,000 and $349,000,
respectively. The aggregate intrinsic value for options exercised during the nine months ended September 30, 2016 was approximately
$31,000.
For
the three and nine months ended September 30, 2016 and 2015, the Company recorded approximately $42,000 and $218,000 and $138,000
and $416,000, respectively in share based compensation expense related to vesting of options previously granted under the Stock
Option Plans. At September 30, 2016, there was approximately $322,000 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 no grants for the nine months ended September 30, 2016 and 2015.
ICTV
BRANDS INC. AND SUBSIDIARY
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2016 and 2015
(Unaudited)
Note
2 - Summary of significant accounting policies (continued)
Stock
options (continued)
The
following is a summary of stock options outstanding outside of the existing Stock Option Plans for the nine months ended September
30, 2016 and 2015:
|
|
Number
of Shares
|
|
|
Weighted
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
Average
|
|
|
|
Employee
|
|
|
Employee
|
|
|
Totals
|
|
|
Exercise
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
|
|
|
|
Number
of Shares
|
|
|
Weighted
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
Average
|
|
|
|
Employee
|
|
|
Employee
|
|
|
Totals
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2015
|
|
|
466,667
|
|
|
|
2,016,667
|
|
|
|
2,483,334
|
|
|
$
|
0.36
|
|
Granted during the
period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
during the period
|
|
|
-
|
|
|
|
(40,000
|
)
|
|
|
(40,000
|
)
|
|
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2015
|
|
|
466,667
|
|
|
|
1,976,667
|
|
|
|
2,443,334
|
|
|
$
|
0.36
|
|
Of
the stock options outstanding as of September 30, 2016 outside of the existing Stock Option Plans, 2,051,667 options are currently
vested and exercisable. The weighted average exercise price of these options was $0.36. These options expire through January 2026.
The aggregate intrinsic value for options outstanding and exercisable at September 30, 2016 and 2015 outside of the existing stock
option plans was approximately $7,000 and $384,000, respectively. There were no options exercised during the nine months ended
September 30, 2016.
For
the three and nine months ended September 30, 2016 and 2015, the Company recorded approximately $13,000 and $41,000 and $16,000
and $223,000 of expense, respectively, in share based compensation related to vesting of options previously granted outside of
the Stock Option Plans. At September 30, 2016, there was approximately $38,000 of total unrecognized compensation cost related
to non-vested option grants outside the Stock Options Plans which will be recognized over the remaining vesting period of approximately
3 years.
There
were no grants for the nine months ended September 30, 2015. The following assumptions were used in the Black-Scholes option pricing
model for one grant issued in 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
|
%
|
ICTV
BRANDS INC. AND SUBSIDIARY
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2016 and 2015
(Unaudited)
Note
2 - Summary of significant accounting policies (continued)
Stock
options (continued)
The
following is a summary of all stock options outstanding and nonvested for the nine months ended September 30, 2016:
|
|
Number
of Shares
|
|
|
Weighted
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
Average
|
|
|
|
Employee
|
|
|
Employee
|
|
|
Totals
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2016 – nonvested
|
|
|
1,843,335
|
|
|
|
-
|
|
|
|
1,843,335
|
|
|
$
|
0.22
|
|
Granted
|
|
|
50,000
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
0.21
|
|
Vested
|
|
|
(515,000
|
)
|
|
|
-
|
|
|
|
(515,000
|
)
|
|
|
0.23
|
|
Forfeited
|
|
|
(300,000
|
)
|
|
|
|
|
|
|
(300,000
|
)
|
|
|
0.23
|
|
Balance September 30, 2016 - nonvested
|
|
|
1,078,335
|
|
|
|
-
|
|
|
|
1,078,335
|
|
|
$
|
0.22
|
|
Note
3- Commitments and contingencies
Leases
As
of September 30, 2016, the Company had an active lease through March 2017 related to the office space rented in Wayne, Pennsylvania.
Rent expense incurred during the three and nine months ended September 30, 2016 and 2015 totaled approximately $14,000 and $41,000
and $14,000 and $42,000, respectively. The schedule below details the future financial obligations under the lease.
|
|
Remaining
three months
2016
|
|
|
2017
|
|
|
TOTAL
OBLIGATION
|
|
Wayne - Corporate HQ
|
|
$
|
13,300
|
|
|
$
|
13,300
|
|
|
$
|
26,600
|
|
Product
Liability Insurance
For
certain products, the Company was (and is) listed as an additional insured party under the product manufacturers’ insurance
policy. The current policy has a scheduled expiration of April 20, 2017. At present, management is not aware of any claims against
the Company for any products sold.
ICTV
BRANDS INC. AND SUBSIDIARY
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2016 and 2015
(Unaudited)
Note
4 – Severance payable
In
September 2010, the Company entered into a severance agreement with a former consultant. Under the severance agreement, the consultant
was to be paid $270,000 over a 27 month period in increments of $10,000 per month beginning in September 2010 and continuing through
November 2012. In April 2011, the Company amended the aforementioned severance agreement to monthly payments of $3,400 per month
through March 2016. In December 2015, the Company recorded additional severance payable of $40,000 for termination benefits provided
to three former employees after employment due to restructuring. These benefits include salary and medical continuation coverage
and was paid out by April 30, 2016. The severance payable balance was approximately $0 and $46,000 at September 30, 2016 and December
31, 2015, respectively.
Note
5 - Other assets and liabilities
On
January 22, 2016, the Company entered into a Purchase Agreement with Omega 5 Technologies, Inc. to acquire the worldwide ownership
of the DermaWand patent and all related trademarks and intellectual property for the sum of $1,200,000 to be paid out as follows:
$300,000 per year for calendar years 2016 through 2019, payable in uniform quarterly installments on or before the last day of
each calendar quarter. As a result, effective January 1, 2016, 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, the Company recorded an offsetting asset and liability at January 1, 2016 in the amount of $1,200,000
for the asset from the intellectual property acquired and a corresponding liability per the payment schedule. As there is no interest
charged with the purchase agreement the Company 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 other 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, 2016, the other liability balance was approximately $951,000, including the discount for imputed interest of
approximately $24,000, of which approximately $288,000 was current. For the three and nine months ended September 30, 2016, we
amortized approximately $4,000 and $12,000 of interest expense related to the discount for imputed interest. The other asset balance
was approximately $946,000 as of September 30, 2016 with amortization of approximately $73,000 and $218,000 being recorded in
cost of sales for the three and nine months ended September 30, 2016. The accumulated amortization was approximately $218,000
as of September 30, 2016. There was approximately $103,000 and $591,000 in royalty expense for DermaWand for the three and nine
months ended September 30, 2015. Management evaluates the other asset for impairment when there is a triggering event and concluded
there was no such event as of September 30, 2016.
ICTV
BRANDS INC. AND SUBSIDIARY
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2016 and 2015
(Unaudited)
Note
6 – Notes payable
On
July 2, 2014, the Company entered into a $500,000, one-year Credit Facility with JPMorgan Chase Bank, N.A with an expiration date
of July 2, 2015. Interest on the Credit Facility was calculated using the Adjusted One Month LIBOR Rate plus 2.50%. The facility
was collateralized by a lien on the Company’s assets and required the Company to maintain prescribed levels of liquidity
and EBITDA. Effective November 7, 2014, the Credit Facility was amended to remove the EBITDA covenant and hold $500,000 as cash
collateral for the amount of the line of credit. The Company did not utilize the Credit Facility. Effective February 18, 2015,
the Company terminated the Credit Facility and the $500,000 collateral held in escrow was released.
Note
7 - 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 per share is computed by dividing earnings 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, 2016, there were no warrants outstanding and
exercisable. At September 30, 2016, there were 5,448,336 stock options outstanding and 4,370,001 were vested and exercisable at
an average exercise price of $0.28.
All
outstanding securities were anti-dilutive for the three and nine months ended September 30, 2016 and 2015 as a result of a net
loss for all 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,
|
|
|
|
2016
|
|
|
2015
|
|
Options to purchase common
stock
|
|
|
5,448,336
|
|
|
|
6,339,057
|
|
The
computations for basic and fully diluted earnings per share are as follows:
|
|
|
|
|
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 three-months
ended September, 2015:
|
|
(Loss)(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per
Share Amount
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss to common
shareholders
|
|
$
|
(821,945
|
)
|
|
|
24,693,678
|
|
|
$
|
(0.03
|
)
|
ICTV
BRANDS INC. AND SUBSIDIARY
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2016 and 2015
(Unaudited)
Note
7 - Basic and diluted earnings per share (continued)
The
computations for basic and fully diluted earnings per share are as follows:
|
|
|
|
|
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
|
)
|
|
|
|
|
|
Weighted
Average
|
|
|
|
|
For the nine-months
ended September 30, 2015:
|
|
(Loss)
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per
Share Amount
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss to common
shareholders
|
|
$
|
(805,501
|
)
|
|
|
24,320,974
|
|
|
$
|
(0.03
|
)
|
Note
8 - Income taxes
The
provision for income taxes is $0 for both the three and nine months ended September 30, 2016 and 2015. The effective tax rates
reflect provisions for current federal and state income taxes. As of December 31, 2015, the Company had approximately $2,479,000
of gross federal net operating losses and $874,000 of gross state net operating losses available. The Company has completed an
IRC Section 382 study and concluded that the availability of the Company’s net operating loss carry forwards will not be
subject to annual limitations against taxable income in future periods due to change in ownership rules as of September 30, 2016.
The Company has provided a full valuation allowance on its net deferred asset as the Company does not have sufficient history
of 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. The Company recorded zero interest and penalties for the three and nine months ended September 30, 2016 and 2015.
Note
9 - Segment reporting
The
Company operates in one industry segment and is engaged in the selling of various consumer products primarily through direct marketing
channels. The Company evaluates performance and allocates resources based on several factors, of which the primary financial measure
is operating income (loss) by the end customer, either direct to consumer DRTV sales or wholesale international third party distributor
sales. Operating expenses are primarily prorated based on the relationship between DRTV consumer sales and international third
party distributor sales
ICTV
BRANDS INC. AND SUBSIDIARY
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2016 and 2015
(Unaudited)
Note
9 - Segment reporting (continued)
Information
with respect to the Company’s operating income (loss) by segment is as follows:
|
|
For
the three months ended
September 30, 2016
|
|
|
For
the three months ended
September 30, 2015
|
|
|
|
DRTV
Consumer
|
|
|
International
Third Party Distributor
|
|
|
Totals
|
|
|
DRTV
Consumer
|
|
|
International
Third Party Distributor
|
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET SALES
|
|
$
|
3,338,816
|
|
|
$
|
864,714
|
|
|
$
|
4,203,530
|
|
|
$
|
3,002,942
|
|
|
$
|
612,938
|
|
|
$
|
3,615,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF SALES
|
|
|
712,313
|
|
|
|
446,685
|
|
|
|
1,158,998
|
|
|
|
871,916
|
|
|
|
338,861
|
|
|
|
1,210,777
|
|
Gross profit
|
|
|
2,626,503
|
|
|
|
418,029
|
|
|
|
3,044,532
|
|
|
|
2,131,026
|
|
|
|
274,077
|
|
|
|
2,405,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
913,917
|
|
|
|
121,835
|
|
|
|
1,035,752
|
|
|
|
1,029,416
|
|
|
|
148,873
|
|
|
|
1,178,289
|
|
Selling
and marketing
|
|
|
2,253,300
|
|
|
|
13,803
|
|
|
|
2,267,103
|
|
|
|
2,021,008
|
|
|
|
27,884
|
|
|
|
2,048,892
|
|
Total operating
expense
|
|
|
3,167,217
|
|
|
|
135,638
|
|
|
|
3,302,855
|
|
|
|
3,050,424
|
|
|
|
176,757
|
|
|
|
3,227,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
(loss)
|
|
$
|
(540,714
|
)
|
|
$
|
282,391
|
|
|
$
|
(258,323
|
)
|
|
$
|
(919,398
|
)
|
|
$
|
97,320
|
|
|
$
|
(822,078
|
)
|
|
|
For
the nine months ended September 30, 2016
|
|
|
For
the nine months ended September 30, 2015
|
|
|
|
DRTV
Consumer
|
|
|
International
Third Party Distributor
|
|
|
Totals
|
|
|
DRTV
Consumer
|
|
|
International
Third Party
Distributor
|
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET SALES
|
|
$
|
9,252,382
|
|
|
$
|
3,218,884
|
|
|
$
|
12,471,266
|
|
|
$
|
15,739,693
|
|
|
$
|
4,000,119
|
|
|
$
|
19,739,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF SALES
|
|
|
2,076,631
|
|
|
|
1,622,133
|
|
|
|
3,698,764
|
|
|
|
4,140,715
|
|
|
|
2,083,160
|
|
|
|
6,223,875
|
|
Gross profit
|
|
|
7,175,751
|
|
|
|
1,596,751
|
|
|
|
8,772,502
|
|
|
|
11,598,978
|
|
|
|
1,916,959
|
|
|
|
13,515,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
2,832,132
|
|
|
|
244,357
|
|
|
|
3,076,489
|
|
|
|
3,732,492
|
|
|
|
516,107
|
|
|
|
4,248,599
|
|
Selling and marketing
|
|
|
6,609,066
|
|
|
|
27,884
|
|
|
|
6,636,950
|
|
|
|
9,988,561
|
|
|
|
84,608
|
|
|
|
10,073,169
|
|
Total operating
expense
|
|
|
9,441,198
|
|
|
|
272,241
|
|
|
|
9,713,439
|
|
|
|
13,721,053
|
|
|
|
600,715
|
|
|
|
14,321,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
(loss)
|
|
$
|
(2,265,447
|
)
|
|
$
|
1,324,510
|
|
|
$
|
(940,937
|
)
|
|
$
|
(2,122,075
|
)
|
|
$
|
1,316,244
|
|
|
$
|
(805,831
|
)
|
Selected
balance sheet information by segment is presented in the following table as of:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Domestic
|
|
$
|
4,474,191
|
|
|
$
|
4,242,502
|
|
International
|
|
|
29,000
|
|
|
|
37,825
|
|
Total Assets
|
|
$
|
4,503,191
|
|
|
$
|
4,280,327
|
|
ICTV
BRANDS INC. AND SUBSIDIARY
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2016 and 2015
(Unaudited)
Note
10 – Subsequent Events
PHMD
Asset Purchase Agreement
On
October 4, 2016, the Company and its newly formed wholly-owned subsidiary, ICTV Holdings, Inc., a Nevada corporation (“ICTV
Holdings”), entered into an asset purchase agreement (the “PhotoMedex Purchase Agreement”) with PhotoMedex,
Inc., a Nevada corporation (“PhotoMedex”), and its 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, the “Sellers”), pursuant to
which ICTV Holdings has agreed to acquire substantially all of the assets of the Sellers, including, but not limited to, all of
the equity interests of 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 (collectively,
the “PhotoMedex Target Business”), for a total purchase price of $9,500,000. Such acquisition is referred to herein
as the “PhotoMedex Acquisition.” The PhotoMedex Acquisition includes the acquisition from the Sellers 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) Kryobak, and (h)
ClearTouch (the “Consumer Products”).
The
purchase price to be paid by ICTV Holdings in the PhotoMedex Acquisition, for which the Company is also jointly and severally
liable, is payable as follows: (i) $3,000,000 of the purchase price 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 Company’s
private placement described in more detail below (the “Escrow Agreement”), which escrow funds will be paid to the
Sellers at the closing of the PhotoMedex Acquisition (the “PhotoMedex Closing”) in accordance with the Escrow Agreement
and subject to the conditions thereof; (ii) $2,000,000 of the purchase price shall be paid by ICTV Holdings to the Sellers on
or before the 90
th
day following the PhotoMedex Closing; and (iii) the remainder of the purchase price shall be 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, the Company delivered to PhotoMedex a letter of credit from LeoGroup Private Debt Facility, L.P. (“LeoGroup”),
a private equity fund, that secures the Company’s obligation to make the $2 million payment referred to in clause (ii) above.
The Company expects to fund the payment of the purchase price and expenses incurred in connection with the PhotoMedex Acquisition
through a combination of cash on hand and the private placement described below.
Under
the PhotoMedex Purchase Agreement, the Company and ICTV Holdings are required to pay to the Sellers a continuing monthly royalty
on net cash (invoiced amount less sales refunds, returns, rebates, allowances and similar items) actually received by ICTV Holdings
or its affiliates from sales of the Consumer Products. Such royalty payments commence with net cash actually received from and
after the PhotoMedex Closing and continue until the total royalty paid to Sellers totals $4,500,000, calculated as follows: (i)
35% of net cash from the sale of all 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
Consumer Products made through HSN in the United States, QVC in the European Union, and 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 Consumer Products other than the foregoing sales.
ICTV
Holdings will also assume certain liabilities and obligations of the Sellers relating to the PhotoMedex Target Business, including
contractual obligations, and various other liabilities and obligations arising out of or relating to the PhotoMedex Target Business
after the PhotoMedex Closing.
ICTV
BRANDS INC. AND SUBSIDIARY
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2016 and 2015
(Unaudited)
Note
10 – Subsequent Events (continued)
The
PhotoMedex Purchase Agreement contains customary representations, warranties and covenants, as well as indemnification provisions
subject to specified limitations. The indemnification provided by PhotoMedex under the PhotoMedex Purchase Agreement covers
breaches of representations and warranties of the Sellers, breaches of covenants or other obligations of the Sellers, and liabilities
retained by the Sellers. The indemnification provided by the Company and ICTV Holdings covers breaches of representations
and warranties of the Company and ICTV Holdings, breaches of covenants or other obligations of the Company or ICTV Holdings, and
liabilities assumed by ICTV Holdings. In the case of the indemnification provided by PhotoMedex with respect to breaches
of certain non-fundamental representations and warranties, the obligations of PhotoMedex are subject to a cap on losses equal
to $2,250,000, and its liability for the other indemnification, including for breaches of fundamental representations and warranties
shall not exceed the purchase price actually received by the Sellers. In addition, in the case of the indemnification provided
by PhotoMedex with respect to breaches of certain representations and warranties, PhotoMedex will only become liable for indemnified
losses if the amount exceeds $100,000, whereupon PhotoMedex will only be liable for losses in excess of such $100,000 threshold.
The Company and ICTV Holdings have the ability to set off indemnity claims against future royalty payments owed to the Sellers
subject to following an administrative procedure outlined in the PhotoMedex Purchase Agreement with respect to such set off claims
and the Company and ICTV Holdings must first set-off the amount of any indemnification claims against the royalty payments before
making a claim directly against PhotoMedex.
The
closing of the PhotoMedex Acquisition is subject to customary closing conditions, including, without limitation, the completion
of accounting and legal due diligence investigations; the receipt of all authorizations, consents and approvals of all governmental
authorities or agencies; the receipt of any required consents of any third parties; the receipt of an opinion from counsel to
the Sellers; the release of any security interests on the PhotoMedex Target Business; delivery of all documents required for the
transfer of the acquired assets, including all intellectual property assignments and lease assignments; and the requisite approvals
of the stockholders of the Company and PhotoMedex.
The
PhotoMedex Purchase Agreement contains certain termination rights that could be exercised by the parties. Either the Sellers,
on the one hand, or the Company or ICTV Holdings, on the other hand, may terminate the PhotoMedex Purchase Agreement if the closing
has not occurred by February 1, 2017 if the conditions to closing have not been satisfied by such date, except that a party cannot
terminate the PhotoMedex Purchase Agreement if the failure of the closing to occur is due to the failure of such party to perform
its covenants, agreements and conditions under the PhotoMedex Purchase Agreement. In addition, either the Sellers, on the one
hand, or the Company or ICTV Holdings, on the other hand, may terminate the PhotoMedex Purchase Agreement if there has been a
material misrepresentation or breach of covenant or agreement contained in the PhotoMedex Purchase Agreement on the part of the
other party and such breach of a covenant or agreement has not been promptly cured after at least 14 day’s written notice
is given.
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.
Subject
to satisfaction of the conditions described above and assuming the PhotoMedex Purchase Agreement is not terminated, the PhotoMedex
Acquisition is expected to close in the fourth quarter of 2016 or early first quarter of 2017.
ICTV
BRANDS INC. AND SUBSIDIARY
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2016 and 2015
(Unaudited)
Note
10 – Subsequent Events (continued)
Ermis
Labs Purchase Agreement
On October 4, 2016, the Company and its newly formed wholly-owned subsidiary, Ermis Labs, Inc., a Nevada corporation (the
“Purchaser”), entered into an asset purchase agreement (the “Ermis Labs Purchase Agreement”) with
LeoGroup and Ermis Labs, Inc., a New Jersey corporation (“Ermis Labs”), pursuant to which the Purchaser has
agreed to acquire substantially all of the assets of Ermis Labs (collectively, the “Ermis Labs Target Business”),
for a total purchase price of $2,150,000. Such acquisition is referred to herein as the “Ermis Labs
Acquisition.”
The
purchase price to be paid by the Company and the Purchaser in the Ermis Labs Acquisition is payable as follows: (i) $400,000 of
the purchase price shall be paid at the closing of the Ermis Labs Acquisition (the “Ermis Labs Closing”) through the
issuance of 2,500,000 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”),
to the shareholders of Ermis Labs, the value of which was based on the closing price of the Common Stock on the OTCQX on October
4, 2016, which was $0.16 per share; and (ii) the remainder of the purchase price shall be payable in the form of a continuing
royalty as described in more detail below. The issuance of the Common Stock pursuant to the Ermis Labs Purchase Agreement is being
made in reliance upon an exemption from registration provided under Section 4(a)(2) of the Securities Act of 1933, as amended
(the “Securities Act”).
Under
the Ermis Labs Purchase Agreement, the Purchaser is 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 the Purchaser or its
affiliates from sales of the over-the-counter medicated skin care products acquired in the Ermis Labs Acquisition, commencing
with net cash actually received by the Purchaser or its affiliates from and after the Ermis Labs Closing and continuing until
the total royalty paid to Ermis Labs totals $1,750,000; provided, however, that the Purchaser is 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
Purchaser will also assume certain liabilities and obligations of Ermis Labs relating to the Ermis Labs Target Business, including
contractual obligations, and various other liabilities and obligations arising out of or relating to the Ermis Labs Target Business
after the Ermis Labs Closing.
The
Ermis Labs Purchase Agreement contains customary representations, warranties and covenants, as well as indemnification provisions
subject to specified limitations. The indemnification provided by Ermis Labs and LeoGroup under the Ermis Labs Purchase Agreement
covers breaches of representations, warranties and covenants of Ermis Labs and LeoGroup, and liabilities retained by the Ermis
Labs. The indemnification provided by the Company and the Purchaser covers breaches of representations, warranties and covenants
of the Company and the Purchaser, and liabilities assumed by the Purchaser. In the case of the indemnification provided by
Ermis Labs and LeoGroup with respect to breaches of certain non-fundamental representations and warranties, Ermis Labs and LeoGroup
will only become liable for indemnified losses if the amount exceeds $50,000, whereupon they will be liable for all losses relating
back to the first dollar. Furthermore, the liability of Ermis Labs and LeoGroup for breaches of any and all representations and
warranties shall not exceed the purchase price payable under the Ermis Labs Purchase Agreement. The Purchaser has the ability
to set off indemnity claims against future royalty payments owed to the Ermis Labs subject to following an administrative procedure
outlined in the Ermis Labs Purchase Agreement with respect to such set off claims.
The
closing of the Ermis Labs Acquisition is subject to customary closing conditions, including, without limitation, the completion
of accounting and legal due diligence investigations; the receipt of all authorizations, consents and approvals of all governmental
authorities or agencies; the receipt of any required consents of any third parties; the release of any security interests on the
Ermis Labs Target Business; delivery of all documents required for the transfer of the acquired assets, including all intellectual
property assignments. Closing of the Ermis Labs Acquisition is also subject to the prior or simultaneous closing of the PhotoMedex
Acquisition.
ICTV
BRANDS INC. AND SUBSIDIARY
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2016 and 2015
(Unaudited)
Note
10 – Subsequent Events (continued)
The
Ermis Labs Purchase Agreement contains certain termination rights that could be exercised by the parties. Either Ermis Labs or
LeoGroup, on the one hand, or the Company or the Purchaser, on the other hand, may terminate the Ermis Labs Purchase Agreement
if the closing has not occurred by February 1, 2017 if the conditions to closing have not been satisfied by such date, except
that a party cannot terminate the Ermis Labs Purchase Agreement if the failure of the closing to occur is due to the failure of
such party to perform its covenants, agreements and conditions under the Ermis Labs Purchase Agreement. In addition, any party
may terminate the Ermis Labs Purchase Agreement if there has been a material misrepresentation or breach of covenant or agreement
contained in the Ermis Labs Purchase Agreement on the part of another party and such breach of a covenant or agreement has not
been promptly cured after at least 14 day’s written notice is given.
Subject
to satisfaction of the conditions described above and assuming the Ermis Labs Purchase Agreement is not terminated, the Ermis
Labs Acquisition is expected to close in the fourth quarter of 2016 or early first quarter of 2017.
Securities
Purchase Agreement
On
October 4, 2016, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with
certain accredited investors (the “Investors”), including two investors who are family members to one of our board
members, pursuant to which the Investors have agreed to purchase 8,823,530 shares of Common Stock at a price of $0.34 per
share, for aggregate gross proceeds of $3,000,000 (the “Private Placement”), of which $1,500,000 was from the related
party investors previously mentioned. The issuance of the Common Stock pursuant to the Securities Purchase Agreement is being
made in reliance upon an exemption from registration provided under Section 4(a)(2) of the Securities Act.
The
proceeds of the Private Placement have been deposited into an escrow account established by the Escrow Agent under Escrow Agreement
described above under “PhotoMedex Asset Purchase Agreement.” The escrow funds will be paid to the Sellers at the PhotoMedex
Closing in accordance with the Escrow Agreement and subject to the conditions contained in the Escrow Agreement for the release
of such funds.
The
Securities Purchase Agreement contains customary representations, warranties and covenants of the Company and the Investors. The
closing of the Private Placement is subject to customary closing conditions, including, without limitation, the receipt of all
authorizations, consents and approvals and delivery of customary officer certificates. Closing of the Private Placement is also
subject to the prior or simultaneous closing of the PhotoMedex Acquisition.
Pursuant
to the Securities Purchase Agreement, the Company has also agreed to enter into a registration rights agreement with the Investors
in connection with the closing of the Private Placement, pursuant to which the Company will file and maintain a registration statement
with respect to the resale of the Common Stock on the terms and conditions set forth therein.
The
Securities Purchase Agreement may be terminated as follows: (i) by written agreement of the Company and the Investors holding
a majority of the shares sold under the Securities Purchase Agreement; (ii) automatically upon the termination of the PhotoMedex
Purchase Agreement; or (iii) by the Company or an Investor (as to itself but no other Investor) upon written notice to the other,
if the Closing shall not have taken place by February 1, 2017; provided, that the right to terminate under (iii) shall not be
available to any person whose failure to comply with its obligations under the Securities Purchase Agreement has been the cause
of or resulted in the failure of the closing to occur on or before such time.
Subject
to satisfaction of the conditions described above and assuming the Securities Purchase Agreement is not terminated, the Private
Placement is expected to close in the fourth quarter of 2016 or early first quarter of 2017. Pursuant to the Securities Purchase
Agreement, the Company may complete one or more subsequent closings on or prior to February 1, 2017 for up to maximum aggregate
gross proceeds of $7,000,000.