Principles of consolidation

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

Concentration of Credit Risk

Concentration of credit risk

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

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

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

Cash and Cash Equivalents

Cash and cash equivalents

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

Functional Currency Translation

Functional currency translation

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

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

Inventories

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

Intangible Assets

Intangible assets

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

Revenue Recognition

Revenue recognition

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

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

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

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

Direct to consumer

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

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

Retail

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

International third-party distributors

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

Airlines and Hong Kong Retail

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

Warranty

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

Variable consideration

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

Judgments

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

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

Sales taxes

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

Shipping and handling costs

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

Remaining Performance Obligations

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

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

	Remaining Three Months 2018		2019		2020		2021		2022		2023

Estimated Deferred Warranty Revenue from remaining	$	44,000	$	126,000	$	69,000	$	42,000	$	19,000	$	2,000

Disaggregation of revenue

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Direct to Consumer	$	3,606,472	$	5,460,161	$	12,528,617	$	17,719,533
International Third-Party Distributors		334,856		321,642		1,807,245		1,842,373
Retail		1,065,923		1,377,613		5,491,498		2,226,044
Airlines/Hong Kong Retail		476,658		400,338		1,639,411		1,368,999
	$	5,483,909	$	7,559,754	$	21,466,771	$	23,156,949

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

	September 30, 2018		December 31, 2017
Accounts receivable, net of allowance for returns of $604,664 and $747,269, respectively, and doubtful accounts of $264,498 and $166,034, respectively	$	2,208,095	$	3,576,376
Total contract assets	$	2,208,095	$	3,576,376

Deferred revenue	$	504,390	$	598,378
Accrued returns and contract fees payable		102,980		179,922
Total contract liabilities	$	607,370	$	778,300

Advertising

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

Stock Options

Stock options

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

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

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

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

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

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

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

Balance, September 30, 2018		3,938,335			-		3,938,335		$	0.21

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

Balance, September 30, 2017		3,730,002			-		3,730,002		$	0.26

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

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

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

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

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

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

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

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

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

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

	Number of Shares
	Employee		Non - Employee		Totals		Weighted Average Exercise Price

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

	Number of Shares
	Employee			Non - Employee			Totals			Weighted Average Exercise Price

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

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

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

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

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

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

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

										Weighted Average
	Employee			Non- Employee			Totals			Exercise Price

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

Reclassifications

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