| Summary of Significant Accounting Policies | 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 three months ended March 31, 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. 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 In August 2016, the FASB issued ASU
2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments .
In June 2016, the FASB issued Accounting
Standard Update ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments In March 2016, the FASB issued Accounting
Standards Update 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting In February 2016, the FASB issued ASU
No. 2016-02 Leases (Topic 842) In November 2015, the FASB issued ASU
No. 2015-17 Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes In July 2015, the FASB issued ASU No.
2015-11 Inventory (Topic 330) - Simplifying the Measurement of Inventory In May 2014, FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers 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 March 31, 2017, 43% 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, 2% of the Company’s accounts receivable was cash due from our credit card processors, 29% was due
from live home shopping and 22% was due from e-commerce accounts 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 months ended March 31, 2017, there were
no major customers. For the three months ended March 31, 2016, 11% of net sales were made to one international third party distributor. 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, other 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 dollar (which is also the reporting currency of
the subsidiary). The operations of our foreign subsidiaries are conducted in the local currency of the subsidiary which is Hong
Kong Dollar (HKD), Great Britain Pounds (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
loss on the accompanying statements of operations and comprehensive loss. Accounts receivable Accounts receivable are recorded net
of allowances for returns and doubtful accounts of approximately $271,000 at March 31, 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 $276,000 and $91,000 at March 31, 2017 and December
31, 2016, respectively. Other receivable Other receivable is a current receivable
due from PhotoMedex Acquistion related to the transition service agreement as part of the PhotoMedex acquisition. As of March 31,
2017, the other receivable was approximately $589,000. 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 $399,000---- and $74,000 at March 31, 2017 and December 31, 2016, respectively. Included in inventory at March
31, 2017 and December 31, 2016 is approximately $66,000 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 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 $32,300 and $1,900
for the three months ended March 31, 2017 and 2016, respectively. Property and equipment consisted of
the following at:
March 31, 2017 December 31, 2016
Equipment, computer hardware and software $ 882,580 $ 33,549
Furniture and fixtures 77,405 40,549
Leasehold Improvements 18,896 -
$ 978,881 $ 74,098
Accumulated depreciation (82,904 ) (58,099 )
Property and equipment, net $ 895,977 $ 15,999 Intangible assets Definite-lived
intangibles are amortized using the straight-line method Impairment of long-lived assets In accordance with ASC 360-10, “Accounting
for the Impairment or Disposal of Long-Lived Assets,” long-lived assets are reviewed for impairment when circumstances indicate
that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of the assets to the future net undiscounted cash flows estimated by the Company to be generated by such
assets. If such assets are considered to be impaired, the impairment to be recognized is the amount by which the carrying amount
of the assets exceeds the fair value of the assets. Assets to be disposed of by sale are recorded as held for sale at the lower
of carrying value or estimated net realizable value. No impairment losses were identified or recorded for the three months ended
March 31, 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 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. 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:
March 31, 2017 December 31, 2016
Deferred extended warranty revenue:
At beginning of period $ 509,389 $ 629,143
Revenue deferred for new warranties, year to date 43,386 118,148
Revenue recognized year to date (64,380 ) (237,902 )
At end of period $ 488,395 $ 509,389
Current portion $ 230,325 $ 235,015
Non-current portion 258,070 274,374
$ 488,395 $ 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 $628,000 and $415,000 for the three
months ended March 31, 2017 and 2016, respectively. Shipping and handling costs are included in cost of sales. Shipping and handling
costs approximated $405,000 and $197,000 for the three months ended March 31, 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 $44,000
and $29,000 for the three months ended March 31, 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 $1,632,000 and $844,000 in media costs for airing of television and print advertising,
$143,000 and $7,000 in new production costs, and $846,000 and $348,000 in internet marketing costs for the three months ended March
31, 2017 and 2016, 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 our employees, officers and directors, and is intended
to advance our best interests by providing personnel who have substantial responsibility for our management and growth with additional
incentive by increasing their proprietary interest in our success, thereby encouraging them to remain our employee. The Plan is
administered by our Board of Directors, and authorizes the issuance of stock options not to exceed a total of 3,000,000 shares.
The terms of any awards under the Plan are determined by the Board of Directors, provided that no options may be granted at less
than the fair market value of the stock as of the date of the grant. The Plan expired in February 2011. As of March 31, 2017, 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 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 March 31, 2017, 3,523,335 options are
outstanding under the 2011 Plan. We account for equity instruments issued
to non-employees in accordance with the provisions of ASC Topic 505, subtopic 50, Equity-Based Payments to Non-Employees 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 three months ended March
31, 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 - - - -
Exercised during the period (35,000 ) - (35,000 ) 0.22
Forfeited during the period (5,000 ) - (5,000 ) 0.22
Balance, March 31, 2017 3,640,002 - 3,640,002 $ 0.24
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 (131,667 ) - (131,667 ) 0.38
Balance, March 31, 2016 3,555,002 - 3,555,002 $ 0.21 Of the stock options outstanding as
of March 31, 2017 under the Stock Option Plans, 2,560,000 options are currently vested and exercisable. The weighted average exercise
price of these options was $0.22. These options expire through November 2026. The aggregate intrinsic value for options outstanding
and exercisable at March 31, 2017 and 2016 was approximately $994,000 and $29,000, respectively. The aggregate intrinsic value
for options exercised during the three months ended March 31, 2017 and 2016 was approximately $13,000 and $31,000, respectively. For the three months ended March 31,
2017 and 2016, we recorded approximately $75,000 and $106,000, respectively, in stock compensation expense under the Stock Option
Plans. At March 31, 2017, there was approximately $334,000 of total unrecognized compensation cost related to non-vested option
grants that will be recognized over the remaining vesting period of 3 years. The following is a summary of stock
options outstanding outside of the Stock Option Plans for the three months ended March 31, 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 - - - -
Expired during the period - - - -
Balance, March 31, 2017 516,667 1,676,667 2,193,334 $ 0.35
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, March 31, 2016 516,667 1,676,667 2,193,334 $ 0.35 Of the stock options outstanding outside
of the Stock Option Plans as of March 31, 2017, 2,135,001 options are currently vested and exercisable. The weighted average exercise
price of these options was $0.35. These options expire through January 2026. The aggregate intrinsic value for options outstanding
and exercisable at March 31, 2017 and 2016, was approximately $585,000 and $37,000 respectively. There were no options exercised
during the three months ended March 31, 2017 and 2016. For the three months ended March 31,
2017 and 2016, we recorded approximately $7,000 and $15,000, respectively, in stock compensation expense related to stock options
outside of the Stock Option Plans. At March 31, 2017, there was approximately $18,000 of total unrecognized compensation cost related
to non-vested option grants that will be recognized over a remaining vesting period of 3 years. There were no grants for the three
months ended March 31, 2017. The following assumptions were used
in the Black-Scholes option pricing model for the options granted in the three months ended March 31, 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 three months ended March 31, 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
Vested (50,000 ) - (50,000 ) 0.21
Forfeited (5,000 ) - (5,000 ) 0.22
Balance March 31, 2017 - nonvested 1,138,335 - 1,138,335 $ 0.28 | Note 2 - Summary of significant accounting
policies Principles of consolidation Our accompanying consolidated financial
statements include the accounts of our wholly-owned subsidiaries BBI, ICTV Holdings and Ermis Lab, Inc. In October 2016, ICTV Holdings
and Ermis Lab, Inc. were formed as holding companies for the asset purchase agreements that were entered into with PhotoMedex,
Inc. and Ermis Lab, Inc. (see Note 10-Subsequent Events) and did not have any activity through December 31, 2016. All significant
inter-company transactions and balances have been eliminated. 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 consolidated financial statements and accompanying notes.
Management believes that the estimates utilized in preparing its consolidated financial statements are reasonable and prudent.
The most significant estimates used in these 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 January 2017, Financial Accounting
Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2017-01, Business Combinations (Topic
805): Clarifying the Definition of a Business In August 2016, FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,(“ASU 2016-15”).
In June 2016, FASB issued Accounting
Standard Update ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments In March 2016, FASB issued Accounting
Standards Update 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting In February 2016, FASB issued ASU No.
2016-02 Leases (Topic 842), In November 2015, FASB issued ASU No.
2015-17 Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes In July 2015, FASB issued ASU No. 2015-11 -
Inventory (Topic 330) - Simplifying the Measurement of Inventory In May 2014, FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers Concentration of credit risk Financial instruments, which potentially
subject us to concentrations of credit risk, include cash and trade receivables. We maintain cash in bank accounts that, at times,
may exceed federally insured limits. We have not experienced any losses and believes it is not exposed to any significant risks
on its cash in bank accounts. As of December 31, 2016, 55% of our
accounts receivable were due from various individual customers to whom our products had been sold directly via Direct Response
Television. In addition, 4% of our accounts receivable was cash due from our credit card processors as well as 25% was due from
e-commerce accounts 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 fiscal years ended December 31, 2016 and December 31, 2015, there were no major customers. 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,
accounts receivable, accounts payable, and accrued liabilities approximate their fair values due to the short settlement period
for these instruments. Cash and cash equivalents We consider all unrestricted highly
liquid investments with an original maturity of three months or less to be cash equivalents. Foreign currency transactions Transactions we entered into in currencies
other than 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 Consolidated Statements of Operations. Accounts receivable Accounts receivable are recorded net
of allowances for returns and doubtful accounts of approximately $123,000 and $119,000 as of December 31, 2016 and 2015, respectively.
The allowances are calculated 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 have 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 Consolidated Balance Sheets were approximately $91,000 and $80,000 as of December 31, 2016 and 2015, respectively Inventories Inventories consist primarily of finished
products held for resale, and are valued at the lower of cost (first-in, first-out method) or market. We adjust inventory for estimated
obsolescence when necessary based upon demand and market conditions. The Company’s reserve for obsolescence was approximately
$74,000 and $123,000 as of December 31, 2016 and 2015, respectively. Included in inventory at December 31, 2016 and 2015 is approximately
$67,000 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 $8,000, for each
of the years ended December 31, 2016 and 2015. 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 us 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 in the years ended December 31, 2016
and 2015. Related party transactions During the year ended December 31, 2016,
we had one sale of products for 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 were similar to other international third party sales. 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
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. We offer 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 Included in deferred revenue –
short-term are payments received prior to shipment on international sales of approximately $142,000 and $221,000 as of December
31, 2016 and 2015, respectively. We have a return policy whereby the
customer can return any product received within 30 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. We sell warranties on the DermaWand TM
Years ended December 31,
2016 2015
Deferred extended warranty revenue:
At beginning of period $ 629,143 $ 670,075
Revenue deferred for new warranties 118,148 174,852
Revenue recognized (237,902 ) (215,784 )
At end of period $ 509,389 $ 629,143
Current portion $ 235,015 $ 223,397
Non-current portion 274,374 405,746
$ 509,389 $ 629,143 Shipping and handling The amount billed to a customer for
shipping and handling is included in revenue. Shipping, handling and processing revenue approximated $2,097,000 and $3,134,000
for the years ended December 31, 2016 and 2015, respectively. Shipping and handling costs are included in cost of sales. Shipping
and handling costs approximated $861,000 and $1,628,000 for the years ended December 31, 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 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 $111,000
and $115,000 for the years ended December 31, 2016 and 2015, 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 consolidated financial statements. Production
costs associated with the creation of new and updated infomercials and advertising campaigns are expensed at the commencement of
a campaign. We incurred approximately $4,965,000 and $7,907,000 in media costs for airing our infomercials, $239,000 and $323,000
in new production costs, and $1,347,000 and $906,000 in internet marketing costs for the years ended December 31, 2016 and 2015,
respectively. Income taxes In preparing our consolidated financial
statements, we make estimates of our current tax exposure and temporary differences resulting from timing differences for reporting
items for book and tax purposes. We recognize deferred taxes by the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred income taxes are recognized for differences between the financial statement and
tax basis of assets and liabilities at enacted statutory tax rates in effect for the years in which the differences are expected
to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment
date. In addition, valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to
be realized. In consideration of our accumulated losses and limited historical ability to generate taxable income to utilize our
deferred tax assets, we have estimated that we will not be able to realize any benefit from our temporary differences and have
recorded a full valuation allowance. If we sustain profitability in the future at levels which cause management to conclude that
it is more likely than not that we will realize all or a portion of the net operating loss carry-forward, we would record the estimated
net realized value of the deferred tax asset at that time and would then provide for income taxes at a rate equal to our combined
federal and state effective rates. Subsequent revisions to the estimated net realizable value of the deferred tax asset could cause
our provision for income taxes to vary significantly from period to period. Stock options In June 2001, our shareholders approved
our 2001 Stock Option Plan (the “Plan”). The Plan is designed for our employees, officers and directors and is intended
to advance our best interests by providing personnel who have substantial responsibility for our management and growth with additional
incentive by increasing their proprietary interest in our success, thereby encouraging them to remain our employee. The Plan is
administered by our Board of Directors, and authorizes the issuance of stock options not to exceed a total of 3,000,000 shares.
The terms of any awards under the Plan are determined by the Board of Directors, provided that no options may be granted at less
than the fair market value of the stock as of the date of the grant. The Plan expired in February 2011. As of December 31, 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 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 of 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 December 31, 2016, 3,563,335 options
are outstanding under the 2011 Plan. We account for equity instruments issued
to non-employees in accordance with the provisions of ASC Topic 505, subtopic 50, Equity-Based Payments to Non-Employees 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 years ended December 31,
2016 and 2015:
Number of Shares Weighted Average
Employee
Non- Employee Totals
Exercise Price
Balance, January 1, 2016 4,036,669 - 4,036,669 $ 0.21
Granted during the year 725,000 - 725,000 0.34
Exercised during the year (650,000 ) - (650,000 ) 0.16
Forfeited during the year (431,667 ) - (431,667 ) 0.26
Balance, December 31, 2016 3,680,002 - 3,680,002 $ 0.24
Number of Shares Weighted Average
Employee Non- Employee Totals
Exercise Price
Balance, January 1, 2015 4,220,002 350,000 4,570,002 $ 0.40
Granted during the year 300,000 - 300,000 0.21
Exercised during the year (335,000 ) (350,000 ) (685,000 ) 0.14
Forfeited during the year (148,333 ) - (148,333 ) 0.39
Balance, December 31, 2015 4,036,669 - 4,036,669 $ 0.21 Of the stock options outstanding as
of December 31, 2016 under the Stock Option Plans, 2,595,000 options are currently vested and exercisable. The weighted average
exercise price of these options was $0.22. These options expire through November 2026. The aggregate intrinsic value for options
outstanding and exercisable at December 31, 2016 and 2015, was approximately $203,000 and $60,000, respectively. The aggregate
intrinsic value for stock options exercised during the years ended December 31, 2016 and 2015 was approximately $82,000 and $51,000,
respectively. For the years ended December 31, 2016
and 2015, we recorded approximately $363,000 and $528,000, respectively, in stock compensation expense under the Stock Option Plans.
At December 31, 2016, there was approximately $391,000 of total unrecognized compensation cost related to non-vested option grants
that will be recognized over the remaining vesting period of 3 years. The following assumptions are used in
the Black-Scholes option pricing model for the years ended December 31, 2016 and 2015 to value the stock options granted during
the period:
2016 2015
Risk-free interest rate 1.58-2.18% Risk-free interest rate 2.05%
Expected dividend yield 0.00 Expected dividend yield 0.00
Expected life 6.00 years Expected life 6.00 years
Expected volatility 152-153% Expected volatility 156%
Forfeiture rate 5.0% Forfeiture rate 5.0%
Weighted average grant date fair value $0.33 Weighted average grant date fair value $0.20 The following is a summary of stock
options outstanding outside of the Stock Option Plans for the years ended December 31, 2016 and 2015:
Number of Shares Weighted Average
Employee Non- Employee Totals
Exercise Price
Balance, January 1, 2016 466,667 1,976,667 2,443,334 $ 0.32
Granted during the year 50,000 - 50,000 0.21
Expired during the period - (300,000 ) (300,000 ) 0.08
Balance, December 31, 2016 516,667 1,676,667 2,193,334 $ 0.35
Number of Shares Weighted Average
Employee Non- Employee Totals
Exercise Price
Balance, January 1, 2015 466,667 2,016,667 2,483,334 $ 0.36
Exercised during the year - (40,000 ) (40,000 ) 0.15
Balance, December 31, 2015 466,667 1,976,667 2,443,334 $ 0.32 Of the stock options currently outstanding
outside of the Stock Option Plans at December 31, 2016, 2,085,001 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 December 31, 2016 and 2015, was approximately $124,000 and $72,000, respectively. The aggregate
intrinsic value for stock options exercised during the years ended December 31, 2016 and 2015 was approximately $0 and $2,000,
respectively. For the years ended December 31, 2016
and 2015, we recorded approximately $54,000 and $62,000, respectively in stock compensation expense related to stock options outside
of the Stock Option Plans. At December 31, 2016, there was approximately $25,000 of total unrecognized compensation cost related
to non-vested option grants that will be recognized over a remaining vesting period of 3 years. On December 28, 2015, we modified the
exercise price of 1,630,000 options issued to nine employees and 500,000 options to one employee under our 2011 Stock Option Plan.
The options were issued with a fair market value exercise price of $0.21 per share for the nine employees and $0.24 for the remaining
employee. Additionally, on December 28, 2015, we modified the exercise price of 200,000 options issued to three of our independent
directors at a fair market value exercise price of $0.21 per share. The vesting period remained the same, provided the recipients
are still our employees or directors at the time of vesting. The accounting impact from the modification was immaterial and the
expense remained the same. The following assumptions are used in
the Black-Scholes option pricing model for the years ended December 31, 2016. There were no grants for the year ended December
31, 2015.
2016
Risk-free interest rate 1.94%
Expected dividend yield 0.00
Expected life 6.0 years
Expected volatility 156%
Forfeiture rate 5.0%
Weighted average grant date fair value $0.21 The following is a summary of all stock
options outstanding, and nonvested for the year ended December 31, 2016:
Number of Shares Weighted Average
Employee
Non- Employee Totals
Exercise Price
Balance, January 1, 2016 – nonvested 1,843,335 - 1,843,335 $ 0.22
Granted 775,000 - 775,000 0.33
Vested (1,125,000 ) (1,125,000 ) 0.25
Forfeited (300,000 ) - (300,000 ) 0.23
Balance, December 31, 2016 – nonvested 1,193,335 - 1,193,335 $ 0.27 |
