UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549


FORM 10-Q

Mark One


   X . QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended June 30, 2013


        . TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from _______________ to _______________


Commission file number: 0-49638


INTERNATIONAL COMMERCIAL TELEVISION INC.

(Exact name of small business issuer as specified in its charter)


Nevada

76-0621102

State or other jurisdiction of

incorporation or organization

(IRS Employer

Identification No.)


489 Devon Park Drive, Suite 315 Wayne, PA 19087

(Address of principal executive offices)


(484) 598-2300

(Issuer's telephone number)


Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  X . No       .


Indicate by check-mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  X . No       .


Indicate by check-mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”,” accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer

        .

Accelerated filer

        .

Non-accelerated filer

        . (Do not check if a smaller reporting company)

Smaller reporting company

   X .


Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes       . No  X .


State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of August 12, 2013, the Issuer had 21,706,087 shares of common stock, par value $0.001 per share, issued and outstanding.


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




1




TABLE OF CONTENTS



PART I - FINANCIAL INFORMATION

3

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

4

 

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

27

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

31

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

31

 

 

 

PART II - OTHER INFORMATION

32

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

32

 

 

 

ITEM 1A.

RISK FACTORS

32

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

32

 

 

 

ITEM 3.

DEFAULTS ON SENIOR SECURITIES

32

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

32

 

 

 

ITEM 5.

OTHER INFORMATION

32

 

 

 

ITEM 6.

EXHIBITS

33

 

 

 

SIGNATURES

34




2




PART I - FINANCIAL INFORMATION



ITEM 1.

FINANCIAL STATEMENTS



Condensed Consolidated Balance Sheets as of June 30, 2013 (unaudited) and December 31, 2012

4

 

 

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2013 and 2012 (unaudited)

5

 

 

Condensed Consolidated Statement of Shareholders’ Equity (Deficit) for the six months ended June 30, 2013 (unaudited)

6

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012 (unaudited)

7

 

 

Notes to the Condensed Consolidated Financial Statements

8




3




INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

 

 

 

 

 

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF

 

 

June 30,

 

December 31,

 

 

2013

 

2012

 

 

(Unaudited)

 

 

ASSETS

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

Cash and cash equivalents

$

368,061

$

758,358

Cash held in escrow

 

150,020

 

150,008

Accounts receivable, net of allowance for returns and doubtful

  accounts of $520,634 and $623,061, respectively

 

 

 

 

 

1,392,837

 

1,154,855

Inventories, net

 

2,698,779

 

1,979,757

Prepaid expenses and other current assets

 

569,098

 

324,991

Total current assets

 

5,178,795

 

4,367,969

 

 

 

 

 

 

 

 

 

 

Furniture and equipment

 

81,507

 

71,258

Less accumulated depreciation

 

(64,548)

 

(56,949)

Furniture and equipment, net

 

16,959

 

14,309

 

 

 

 

 

Other assets

 

39,624

 

57,950

 

 

 

 

 

Total assets

$

5,235,378

$

4,440,228

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

Accounts payable and accrued liabilities

$

2,144,431

$

3,360,745

Convertible note payable

 

-

 

30,169

Severance payable

 

40,800

 

40,800

Deferred revenue

 

211,528

 

281,774

Income tax payable

 

-

 

48,600

Tax penalties payable

 

190,000

 

270,000

Total current liabilities

 

2,586,759

 

4,032,088

 

 

 

 

 

Severance payable – long-term

 

67,400

 

87,800

Deferred revenue – long-term

 

274,443

 

129,986

Convertible note payable to shareholder

 

505,723

 

590,723

Total long-term liabilities

 

847,566

 

808,509

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY (DEFICIT):

 

 

 

 

Preferred stock 20,000,000 shares authorized, no shares issued and outstanding

 

-

 

-

Common stock, $0.001 par value, 100,000,000 shares authorized,

    21,706,087 and 20,772,756 shares issued and

    outstanding as of June 30, 2013 and December 31, 2012,

 

 

 

 

 

 

 

 

 

 

 

 

respectively

 

11,495

 

10,562

Additional paid-in-capital

 

7,226,288

 

6,843,267

Accumulated deficit

 

(5,436,730)

 

(7,254,198)

 

 

 

 

 

Total shareholders’ equity (deficit)

 

1,801,053

 

(400,369)

 

 

 

 

 

Total liabilities and shareholders’ equity (deficit)

$

5,235,378

$

4,440,228


See accompanying notes to condensed consolidated financial statements.




4




INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the six months ended

 

 

 

June 30,

2013

 

June 30,

2012

 

June 30,

2013

 

June 30,

2012

 

 

 

 

 

 

 

 

 

 

NET SALES

 

$

10,455,115

$

3,836,498

$

22,855,348

$

6,491,809

 

 

 

 

 

 

 

 

 

 

COST OF SALES

 

 

2,943,979

 

1,460,415

 

6,450,836

 

2,444,913

 

 

 

 

 

 

 

 

 

 

GROSS PROFIT

 

 

7,511,136

 

2,376,083

 

16,404,512

 

4,046,896

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

General and administrative

 

 

2,020,865

 

628,192

 

3,955,458

 

1,171,025

Selling and marketing

 

 

5,123,128

 

1,627,270

 

10,550,867

 

2,775,852

Total operating expenses

 

 

7,143,993

 

2,255,462

 

14,506,325

 

3,946,877

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

 

367,143

 

120,621

 

1,898,187

 

100,019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE, NET

 

 

(5,970)

 

(8,147)

 

(12,675)

 

(9,153)

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE PROVISION (BENEFIT) FOR INCOME TAX

 

 

361,173

 

112,474

 

1,885,512

 

90,866

 

 

 

 

 

 

 

 

 

 

PROVISION (BENEFIT) FOR INCOME TAXES

 

 

(287,736)

 

-

 

68,044

 

-

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

648,909

$

112,474

$

1,817,468

$

90,866

 

 

 

 

 

 

 

 

 

 

NET INCOME  PER SHARE

 

 

 

 

 

 

 

 

 

BASIC

 

$

0.03

$

0.01

$

0.09

$

0.00

DILUTED

 

$

0.03

$

0.00

$

0.08

$

0.00

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF COMMON SHARES

 

 

 

 

 

 

 

 

 

BASIC

 

 

21,706,087

 

20,647,756

 

21,360,600

 

19,520,119

DILUTED

 

 

24,533,069

 

24,002,893

 

24,018,364

 

22,875,256

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.




5




INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY


CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)

FOR THE SIX MONTHS ENDED JUNE 30, 2013

(Unaudited)



 

Common Stock

 

Additional

 

 

 

 

 

$0.001 par value

 

Paid-In

 

Accumulated

 

 

 

Shares

 

Amount

 

Capital

 

Deficit

 

Totals

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2013

20,772,756

$

10,562

$

6,843,267

$

(7,254,198)

$

(400,369)

 

 

 

 

 

 

 

 

 

 

Share based compensation expenses

-

 

-

 

276,920

 

-

 

276,920

 

 

 

 

 

 

 

 

 

 

Issuance of common stock for consulting services

-

 

-

 

10,834

 

-

 

10,834

 

 

 

 

 

 

 

 

 

 

Exercise of options

933,331

 

933

 

95,267

 

-

 

96,200

 

 

 

 

 

 

 

 

 

 

Net income

-

 

-

 

-

 

1,817,468

 

1,817,468

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2013

21,706,087

$

11,495

$

7,226,288

$

(5,436,730)

$

1,801,053


See accompanying notes to condensed consolidated financial statements.




6




INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012

( Unaudited )

 

 

 

 

 

 

 

2013

 

2012

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

Net income

$

1,817,468

$

90,866

Adjustments to reconcile net income  to net cash and cash equivalents used in operating activities:

 

 

 

 

Depreciation

 

7,599

 

7,003

Bad debt expense

 

1,754,814

 

206,634

Share based compensation

 

306,082

 

225,041

Tax penalties payable

 

(80,000)

 

-

      Change in assets and liabilities

 

 

 

 

Accounts receivable

 

(1,992,796)

 

(647,472)

Inventories

 

(719,022)

 

(131,761)

Prepaid expenses, other current assets and other assets

 

(164,410)

 

(168,914)

Accounts payable and accrued liabilities

 

(1,216,313)

 

75,600

Severance payable

 

(20,400)

 

(20,400)

Income tax payable

 

(128,299)

 

-

Accrued interest to shareholder

 

-

 

7,015

Deferred revenue

 

74,211

 

240,660

Net cash used in operating activities

 

(361,066)

 

(115,728)

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

Purchase of furniture and equipment

 

(10,250)

 

(1,211)

Net cash used in investing activities

 

(10,250)

 

(1,211)

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

Proceeds from issuance of common stock

 

-

 

388,500

Proceeds from exercise of options

 

96,200

 

-

Proceeds from note payable

 

-

 

40,000

Payments on note payable

 

(30,169)

 

(47,600)

Payments on note payable to shareholder

 

(85,000)

 

-

Advances from related parties

 

-

 

50,000

Payments to related parties

 

-

 

(31,935)

Net cash (used in) provided by financing activities

 

(18,969)

 

398,965

 

 

 

 

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

 

(390,285)

 

282,026

 

 

 

 

 

CASH AND CASH EQUIVALENTS, beginning of the period

 

908,366

 

58,804

 

 

 

 

 

CASH AND CASH EQUIVALENTS, end of the period

$

518,081

$

340,830

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

Taxes paid

$

145,530

$

-

Fair value of warrants in connection with sale of common stock

$

-

$

273,831

Interest paid

$

12,924

$

9,224


See accompanying notes to condensed consolidated financial statements.



7



INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY


NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2013 and June 30, 2012

(Unaudited)


Note 1 - Organization, Business of the Company and Liquidity


Organization and Nature of Operations


International Commercial Television Inc., (the “Company” or “ICTV”) was organized under the laws of the State of Nevada on June 25, 1998.


Effective February 17, 2011, the Company acquired 100% of the equity interest in Better Blocks International Limited (“BBI”).


The Company sells various consumer products.  The products are primarily marketed and sold throughout the United States and internationally via infomercials.  Although our companies are incorporated in Nevada and New Zealand, a substantial portion of our operations are currently run from the Wayne, Pennsylvania office.


Liquidity and Going Concern


The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern.  The Company generated negative cash flows from operating activities in the six month period ended June 30, 2013 of approximately $361,000. The Company had working capital of approximately $2,592,000 and an accumulated deficit of approximately $5,437,000 as of June 30, 2013.  


The goal of our strategy is to use the brand awareness we create in our infomercials so that we can sell the products featured in our infomercials, along with related families of products, under distinct brand names in traditional retail stores.  Our goal is to have these families of products sold in the traditional retail environment in shelf-space dedicated to the product category.  We are developing the infrastructure to create these brands of products so that we can implement our business plan.  


Currently, this plan is being executed with the DermaWand TM and the DermaVital TM skincare line. The Company does not require any additional capital to grow the DermaWand TM and the DermaVital TM businesses. The Company is currently exploring other devices and consumable product lines.


There is no guarantee that the Company will be successful in bringing our products into the traditional retail environment.  If the Company is unsuccessful in achieving this goal, the Company will be required to raise additional capital to meet its working capital needs.  If the Company is unsuccessful in completing additional financings, it will not be able to meet its working capital needs or execute its business plan. In such case the Company will assess all available alternatives including a sale of its assets or merger, the suspension of operations and possibly liquidation, auction, bankruptcy, or other measures. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverability of the carrying amount of recorded assets or the amount of liabilities that might result should the Company be unable to continue as a going concern.



8




INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY


NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2013 and June 30, 2012

(Unaudited)


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 consolidated financial statements, including the notes thereto, appearing in our Annual Report on Form 10-K for the year ended December 31, 2012.  In the opinion of management, all adjustments necessary for a fair presentation of the 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 and six months ended June 30, 2013 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 for the six months ended June 30, 2013 and 2012.  All significant inter-company transactions and balances have been eliminated.


Use of estimates


The preparation of financial statements in conformity with generally accepted accounting principles of the United States of America 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 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


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 June 30, 2013 and December 31, 2012, approximately 78% and 90% of the Company’s accounts receivable were due from various individual customers to whom our products had been sold directly via Direct Response Television.  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 six months ended June 30, 2013.  For the three and six months ended June 30, 2012, approximately 19% and 13%, respectively, of the Company’s gross sales were made to one international major customer.



9




INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY


NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2013 and June 30, 2012

 (Unaudited)


Note 2 - Summary of significant accounting policies (continued)


Fair value of financial instruments


Fair value estimates, assumptions and methods used to estimate fair value of the Company’s financial instruments are made in accordance with the requirements of Accounting Standards Codification (“ASC”) 825-10, “Disclosures about Fair Value of Financial Instruments.” 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, accounts receivable, accounts payable, and accrued liabilities approximate their fair values due to the short settlement period for these instruments. It is not practicable to estimate the fair value of the Note Payable to Shareholder due to its related party nature.


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.


Cash held in escrow


Transfirst ePayment Services (“Transfirst”), ICTV’s credit card processing vendor for VISA, MasterCard, Discover and American Express transactions in the United States, maintains a reserve fund within our processing account to cover all fees, charges, and expenses due to them, including those estimated for possible customer charge backs. These reserves are updated periodically by Transfirst and maintained for a rolling 180 days of activity. Based upon established levels of risk, this normally represents approximately 2% of transaction volume for the period, with a maximum of $150,000 and is considered “Cash held in escrow.”  At June 30, 2013 and December 31, 2012 the amount of Transfirst reserves were approximately $150,000 and $150,000 respectively.


Foreign currency transactions


Transactions are entered into by the Company in currencies other than its local currency (U.S. Dollar).  Currency gains or losses are recorded in the Condensed Consolidated Statements of Operations.



10




INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY


NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2013 and June 30, 2012

 (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 $521,000 at June 30, 2013 and $623,000 at December 31, 2012.  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 returns 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 $151,000 at June 30, 2013, and $248,000 at December 31, 2012.


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.  Included in inventory at June 30, 2013 and December 31, 2012 is approximately $153,000 and $251,000, 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.


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 7 years.  Depreciation is computed using the straight-line method. The related cost and accumulated depreciation of assets retired or otherwise disposed of are removed from the accounts and the resultant gain or loss is reflected in earnings.  Maintenance and repairs are expensed currently while major renewals and betterments are capitalized.


Depreciation expense amounted to approximately $4,000 and $3,500 and $7,600 and $7,000 for the three and six months ended June 30, 2013 and 2012, 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 six months ended June 30, 2013 and 2012.



11




INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY


NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2013 and June 30, 2012

 (Unaudited)


Note 2 - Summary of significant accounting policies (continued)


Revenue recognition


For our domestic direct response television sales generated by our infomercials, product sales revenue is recognized when the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectability is reasonably assured. The Company’s revenues in the Condensed Consolidated Statement of Operations are net of sales taxes.


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 assured.


Revenue related to our DermaVital TM continuity program is recognized monthly upon shipment to customers.  Revenue related to international wholesale customers is recorded at gross amounts with a corresponding charge to cost of sales upon shipment. Deferred revenue for payments received prior to shipment on international sales approximated $128,000 and $240,000 as of June 30, 2013 and December 31, 2012, respectively.


The Company has a return policy whereby the customer can return any product received within 30 days of receipt for a full refund excluding shipping and handling.  However, historically the Company has accepted returns past 30 days of receipt. The Company provides an allowance for returns based upon past experience.  All significant returns for the periods presented have been offset against gross sales.


In 2012, the Company started selling warranties on the DermaWand TM for one-year, three-year and lifetime terms.  In 2013, the Company started selling five-year warranties and discontinued lifetime warranties.  Revenues under one-year, three-year and five-year warranties are recognized ratably over the term.  Lifetime warranties are recognized over the estimated term of 5 years.  Any unearned warranty is included in deferred revenue on the accompanying condensed consolidated balance sheet.  Changes in the Company’s deferred service revenue related to the warranties, included in deferred revenue in the Condensed Consolidated Balance Sheet is presented in the following table for the six months ended June 30, 2013:


  

 

June 30, 2013

Deferred extended warranty revenue:

 

 

 

Balance at January 1, 2013

 

$

171,319

Revenue deferred for new warranties

 

 

225,980

Revenue recognized

 

 

(39,848)

Balance at June 30, 2013

 

$

357,451

 

 

 

 

Current portion

 

$

83,008

Non-current portion

 

 

274,443

 

 

$

357,451


Shipping and handling


Amounts billed to a customer for shipping and handling are included in net sales; shipping and handling revenue approximated $1,020,000 and $440,000 and $2,207,000 and $743,000 for the three and six months ended June 30, 2013 and 2012, respectively.  Shipping and handling costs are included in cost of sales.  Shipping and handling costs approximated $896,000 and $238,000 and $1,939,000 and $464,000 for the three and six months ended June 30, 2013 and 2012, respectively.



12



INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY


NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2013 and June 30, 2012

 (Unaudited)


Note 2 - Summary of significant accounting policies (continued)


Research and development


Research and development costs are expensed as incurred and are included in selling and marketing expense in the accompanying condensed consolidated financial statements.  Research and development costs primarily consist of efforts to discover and develop new products and the testing and development of direct-response advertising related to these products.  Research and development costs approximated $34,000 and $13,000 and $53,000 and $14,000 for the three and six months ended June 30, 2013 and 2012, respectively.


Media and production costs


Media and production costs are expensed as incurred and are included in selling and marketing expense in the accompanying condensed consolidated financial statements.  The Company incurred $3,313,000 and $1,114,000 and $6,747,000 and $1,974,000 in such costs for the three and six months ended June 30, 2013 and 2012, 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 lack of 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 become profitable 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 immediately 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, which would be approximately 40% under current tax laws. 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.


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.


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 to 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 June 30, 2013, 933,334 options are outstanding under the 2001 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 to 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 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.  As of June 30, 2013, 2,091,668 options are outstanding under the 2011 Plan.




13



INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY


NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2013 and June 30, 2012

 (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 stock-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.  


The Company uses ASC Topic 718, “Share-Based Payments” to account for stock-based compensation. 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.  Stock options granted to non-employees are remeasured at each reporting period.


The following is a summary of stock options outstanding under the Plan and 2011 Plan (collectively “Stock Option Plans”) for the six months ended June 30, 2013 and 2012:


 

Number of Shares

Weighted

Average

 

Employee

Non-

Employee

Totals

Exercise

Price

 

 

 

 

 

Balance, January 1, 2013

 2,730,000

 350,000

 3,080,000

$              0.18

Granted during the year

 845,000

 -

 845,000

0.23

Exercised during the year

(899,998)

-

(899,998)

0.10

 

 

 

 

 

Balance, June 30, 2013

2,675,002

350,000

3,025,002

$              0.22

 

 

 

 

 

 

 

 

 

 

 

Number of Shares

Weighted

Average

 

Employee

Non-

Employee

Totals

Exercise

Price

 

 

 

 

 

Balance, January 1, 2012

 1,300,000

 350,000

 1,650,000

$              0.08

Granted during the year

 1,010,000

 -

 1,010,000

0.16

Exercised during the year

 -

 -

 -

-

Expired during the year

-

-

-

-

 

 

 

 

 

Balance, June 30, 2012

2,310,000

350,000

2,660,000

$              0.11


Of the stock options outstanding as of June 30, 2013 under the Stock Option Plans, 493,332 options are currently vested and exercisable. The weighted average exercise price of these options was $0.10. These options expire through April 2022. The aggregate intrinsic value for options outstanding and exercisable at June 30, 2013 was approximately $217,000. The aggregate intrinsic value for options outstanding and exercisable at June 30, 2012 was approximately $136,000.  The aggregate intrinsic value for options exercised during the six months ended June 30, 2013 was approximately $180,000.


For the three and six months ended June 30, 2013 and 2012, the Company recorded approximately $153,000 and $57,500 and $143,000 and $91,000, respectively, in share compensation expense related to vesting of options previously granted under the Stock Option Plans.  At June 30, 2013, there was approximately $570,000 of total unrecognized compensation cost related to non-vested option grants that will be recognized over the remaining vesting period of approximately 3 years.




14



INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY


NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2013 and June 30, 2012

 (Unaudited)


Note 2 - Summary of significant accounting policies (continued)


The following assumptions are used in the Black-Scholes option pricing model for the six months ended June 30, 2013 and 2012 to value the stock options granted during the period:


Stock options (continued)


2013

 

2012

Risk-free interest rate

1.14 – 1.25%

 

Risk-free interest rate

1.41%

Expected dividend yield

0.00

 

Expected dividend yield

0.00

Expected life

6.00 years

 

Expected life

6.00 years

Expected volatility

318 – 320%

 

Expected volatility

305%

Weighted average grant date fair value

$0.26

 

Weighted average grant date fair value

$0.18


The following is a summary of stock options outstanding outside of the Stock Option Plans for the six months ended June 30, 2013 and 2012:


 

Number of Shares

Weighted

Average

 

Employee

Non-

Employee

Totals

Exercise

Price

 

 

 

 

 

Balance, January 1, 2013

 150,000

 1,650,000

 1,800,000

$              0.20

Granted during the year

 150,000

 90,000

 240,000

0.28

Exercised during the year

(33,333)

-

(33,333)

0.15

 

 

 

 

 

Balance, June 30, 2013

266,667

1,740,000

2,006,667

$              0.21

 

 

 

 

 

 

 

 

 

 

 

Number of Shares

Weighted

Average

 

Employee

Non-

Employee

Totals

Exercise

Price

 

 

 

 

 

Balance, January 1, 2012

 -

 250,000

 250,000

$              0.18

Granted during the year

 -

 1,250,000

 1,250,000

0.13

Exercised during the year

-

-

-

-

 

 

 

 

 

Balance, June 30, 2012

-

1,500,000

1,500,000

$              0.12


Of the stock options outstanding outside of the plan at June 30, 2013, 973,338 options are currently vested and exercisable. The weighted average exercise price of these options was $0.16. These options expire between December 2013 and March 2023. The aggregate intrinsic value for options outstanding and exercisable at June 30, 2013 was approximately $368,000. The aggregate intrinsic value for options outstanding and exercisable at June 30, 2012 was approximately $79,000.  The aggregate intrinsic value for options exercised during the period was approximately $5,000.



15




INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY


NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2013 and June 30, 2012

 (Unaudited)


Note 2 - Summary of significant accounting policies (continued)


Stock options (continued)


For the three and six months ended June 30, 2013 and 2012, the Company recorded approximately $159,000 and $35,600 and $134,000 and $97,000, respectively, in share based compensation expense related to vesting of options previously granted outside of the Stock Option Plans.  At June 30, 2013, there was approximately $412,000 of total unrecognized compensation cost related to non-vested option grants outside the plan that will be recognized over the remaining vesting period of approximately 3 years.


The following assumptions are used in the Black-Scholes option pricing model for the six months ended June 30, 2013 to value the stock options outstanding outside the plan:


2013

 

2012

Risk-free interest rate

1.14 – 2.52%

 

Risk-free interest rate

0.31 – 1.67%

Expected dividend yield

0.00

 

Expected dividend yield

0.00

Expected life

5.00 - 10.00 years

 

Expected life

3.00 – 10.00 years

Expected volatility

262 – 320%

 

Expected volatility

269 – 418%

Weighted average grant date fair value

$0.27

 

Weighted average grant date fair value

$0.32


The following is a summary of all stock options outstanding and nonvested for the six months ended June 30, 2013:


  

 

Number of Shares

 

Weighted

Average

  

 

Employee

 

 

Non-

Employee

 

 

Totals

 

Exercise

Price

  

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2013 – nonvested

 

 

2,463,333

 

 

 

1,383,333

 

 

 

3,846,666

 

$

0.21

Granted

 

 

995,000

 

 

 

90,000

 

 

 

1,085,000

 

 

0.24

Vested

 

 

(826,667)

 

 

 

(540,000)

 

 

 

(1,366,667)

 

 

0.15

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance June 30, 2013 - nonvested

 

 

2,631,666

 

 

 

933,333

 

 

 

3,564,999

 

$

0.25


For the six months ended June, 2013 and 2012, the Company recognized approximately $144,000 and $57,000, respectively, in share based compensation expense related to employee stock options and approximately $133,000 and $131,000, respectively related to share based compensation expense related to non-employee stock based awards.   




16



INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY


NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2013 and June 30, 2012

 (Unaudited)


Note 3 - Commitments and contingencies


Leases  


As of June 30, 2013, the Company has an active lease related to the office space in Wayne, Pennsylvania through April 2016.  Total rent expense incurred during the three and six months ended June 30, 2013 and 2012 totaled $12,000 and $6,000 and $22,000 and $18,000, respectively.  The schedule below details the future financial obligations under the remaining lease as of June 30, 2013.


 

Remaining six months 2013

2014

2015

2016

TOTAL OBLIGATION

Wayne - Corporate HQ

$ 26,000

$ 52,500

$ 53,100

$ 13,300

$ 144,900

 

 

 

 

 

 

Total Lease Obligations

$ 26,000

$ 52,500

$ 53,100

$ 13,300

$ 144,900


DermaWand TM


During 2007, the Company entered into an exclusive license agreement with Omega 5 wherein ICTV was assigned all of the trademarks and all of the patents and pending patents relating to the DermaWand TM  and was granted exclusive license with respect to the commercial rights to the DermaWand TM .  This agreement was amended and superseded on July 28, 2010.   The geographical scope of the license granted is the entire world.   The license remains exclusive to ICTV provided ICTV pays to Omega 5 a minimum annual payment of $250,000 in the initial 18 month term of the agreement and in each succeeding one-year period.  If in any calendar year the payments made by the Company to Omega exceed the annual minimum of $250,000, then the amount in excess of the annual minimum or “rollover amount” will be credited towards the Company’s annual minimum for the immediately following calendar year only.  If the Company fails to meet the minimum requirements as outlined in the agreement, it may be forced to assign the trademarks and patents back to Omega 5. After the initial term, the exclusive license granted shall renew automatically for a three year period, and thereafter automatically at three-year intervals.


The amount of expenses incurred for sales of the DermaWand TM related to these agreements were approximately $261,000 and $209,000 and $552,000 and $311,000 for the three and six months ended June 30, 2013 and 2012, respectively.


Employment Agreement


Effective March 1, 2011, the Company entered into an employment agreement with the CEO of the Company.  Under the terms of this agreement, the Company will pay an annual salary of $180,000, subject to review and, if appropriate, adjustment on an annual basis by the Company’s Board of Directors. Effective January 1, 2013, this annual salary was increased to $240,000 and approved by the Board of Directors. The CEO is also entitled to annual performance bonuses as determined appropriate by the Board of Directors, and is entitled to receive stock options and other employee benefits such as health insurance reimbursement; automobile allowance and other reimbursable expenses.  The initial term of this employment agreement is five years and automatically renews for successive one year periods unless either party provides not less than 60 days prior written notice of their intent not to renew the agreement.  If the employment agreement is terminated by the Company without cause, the employee will be entitled to a severance payment equal to one year’s salary and benefits.


On April 17, 2012, the Company entered into an employment agreement with the President and CFO of the Company.  Under the terms of this agreement, the Company will pay an annual salary of $125,000, subject to review and, if appropriate, adjustment on an annual basis by the Company’s Board of Directors. Effective January 1, 2013, this annual salary was increased to $160,000 and approved by the Board of Directors.  The President and CFO is also entitled to annual performance bonuses as determined appropriate by the Board of Directors, and is entitled to receive stock options and other employee benefits such as health insurance reimbursement; automobile allowance and other reimbursable expenses.  The employment agreement will continue until terminated by either party in accordance with the terms of the agreement. If the employment agreement is terminated by the Company without cause, the employee will be entitled to a severance payment equal to one year’s salary and benefits.  


The Company accrued approximately $106,000 in bonuses to the CEO and the President and CFO for the year ended December 31, 2012, included in accounts payable and accrued expenses in the accompanying consolidated financial statements.  These bonuses were paid in February 2013.  A bonus accrual of approximately $33,000 has been made for the six months ended June 30, 2013.  



17



INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY


NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2013 and June 30, 2012

 (Unaudited)


Note 3- Commitments and contingencies (continued)


Legal


In January 2013, the Company received a letter from a California law firm alleging certain violations of the California Consumer Legal Remedies Act in connection with the Company’s advertising and marketing of its DermaWand TM product. The law firm purported to represent a class of plaintiffs and invited us to contact them in order to amicably resolve the matter.


We consulted with counsel and presented to the California law firm the substantiation for our advertising and marketing claims. While they acknowledged a good portion of our substantiation, the law firm continued to press for a settlement under threat of litigation.  On May 1, 2013, the Company reached a tentative settlement agreement with the plaintiff and their law firm for less than the $325,000 the plaintiff was asking for to settle the suit.   The final agreement and corresponding settlement payment was finalized in May 2013.


Other matters


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 had a scheduled expiration of April 20, 2013.  The policy was renewed in April 2013 with a new scheduled expiration date of April 20, 2014.


Note 4 – Severance payable


In September 2010 the Company entered into a severance agreement with a former consultant.   Under the severance agreement, the consultant will 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.  The Company recorded the $270,000 as a General and Administrative expense in the three months ended September 30, 2010.  In April 2011, the Company amended the aforementioned severance agreement.   The amendment allows the Company to make monthly payments of $3,400 per month for a period of one year from April 2011 through March 2012.  In March 2012, the Company amended the aforementioned severance agreement for a second time to continue the monthly payment amount of $3,400 through March 2016.  The severance payable balance was approximately $108,200 at June 30, 2013 and $128,600 at December 31, 2012, of which $40,800 is current and $67,400 is long-term as of June 30, 2013.


Note 5 - Related party transactions


The Company has a note payable to a shareholder with an original balance of $590,723.  Prior to April 1, 2012, this loan was interest-free and had no specific terms of repayment. On April 1, 2012, the note payable was modified.   The new terms include interest at the rate of four and three quarters percent (4.75%) per annum.  Interest on the unpaid balance of the note is to be paid in arrears as of the end of each calendar quarter, with payment due on the first day of the month following the quarter as to which interest is being paid.  The first payment of interest was due on January 1, 2013, for the three quarters beginning April 1, 2012 and ending on December 31, 2012.  Interest on the loan for the three and six months ended June 30, 2013 and 2012, was approximately $6,100 and $7,000 and $12,600 and $7,000, respectively.  Interest charged through June 30, 2013 was fully paid at June 30, 2013.  




18




INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY


NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2013 and June 30, 2012

 (Unaudited)


Note 5 - Related party transactions (continued)


The principal balance of this note shall be due and payable in three equal payments on each of April 1, 2015, April 1, 2016, and April 1 2017.  This note may be prepaid in whole or in part at any time without penalty, and any prepayment shall be applied against the next principal payment due.  For the three and six months ended June 30, 2013 and 2012, $30,000 and $0, and $85,000 and $0, respectively, in principal prepayments were made on the note.  At June 30, 2013 and December 31, 2012, the balance outstanding was $505,723 and $590,723, respectively.  An additional payment of $15,000 was made in July 2013.


At April 1, 2012, when this note was modified, a conversion option was added that stated that all or any part of this note may be converted into shares of common stock of the Company at any time, and from time to time, prior to payment, at a conversion price of $0.50 per share.  Conversion is at the option of lender.  Any amount not converted will continue to be payable in accordance with the terms of the note.  The Company considered this a modification of debt that was not substantive, thus no gain or loss was recorded upon modification.


Note 6 – Notes payable


In December 2011, the Company entered into an unsecured note payable with a Canadian lender in the amount of approximately $98,000 (C$100,000). This loan accrues interest of prime (3.25% at June 30, 2013 and December 31, 2012) plus 1%. Interest is paid monthly. Principal payments are to be paid in fifteen monthly installments of approximately $6,500 (C$6,667), beginning in March 2012 and ending May 2013. The loan permits payment in advance without penalty at any time.  


On January 24, 2012, the Company entered into a note modification with the Canadian lender increasing the outstanding balance to approximately $137,000 (C$140,000) as additional borrowings were made by the Company.  The principal payments on the additional borrowings of approximately $39,500 (C$40,000) are in two installments of $20,000 (approximates C$) payable on April 15, 2012 and July 15, 2012, respectively.  In addition, the interest rate on the note was modified to lender’s cost (prime), plus two-percent and the note became convertible into shares of the Company’s common stock at a fixed conversion rate of $0.196 (C$.20) per share.  The Company considered this a modification of debt that was not substantive, thus no gain or loss was recorded upon modification.  The amount of the beneficial conversion upon modification was deemed insignificant to the consolidated financial statements.  The amount outstanding under the note at June 30, 2013 and December 31, 2012 was approximately $0 and $30,200 (C$30,000), respectively.  Interest on the loan is paid monthly and was approximately $0 and $1,200, and $300 and $2,200, for the three and six months ended June 30, 2013 and 2012, respectively.


The lender of this note is also one of the two persons that receive royalty payments on the DermaWand TM sales as noted in Note 3.




19




INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2013 and June 30, 2012

 (Unaudited)


Note 7 - Capital transactions


On February 17, 2012, the Board authorized the issuance of up to 2,500,000 shares of common stocks to be purchased at $0.15 per share through February 29, 2012.  On February 29, 2012, the Board amended the resolution to authorize the issuance of up to 3,000,000 shares of common stock to be purchased at $0.15 per share through March 23, 2012.  A total of 2,590,000 shares were purchased through March 23, 2012 for gross proceeds of $388,500.  In addition, for every three shares of common stock purchased, the purchasers received one warrant to purchase common stock at $0.25 per share.  A total of 863,333 warrants were issued. The warrants expire three years after their issuance date.    The warrants have a weighted average fair value of $0.32.


The fair value of the warrant has been estimated on the date of grant using a Black-Scholes Pricing Model with the following assumptions:


Risk-free interest rate

 

 

0.36 – 0.58

%

Expected dividend yield

 

 

0.00

 

Expected  life

 

3.00 years

 

Expected volatility

 

 

410% – 418

%

Exercise price

 

 

$0.25

 


The fair value of the warrants was approximately $274,000, recorded as an increase and corresponding decrease to additional paid-in capital during the three months ended March 31, 2012.  


During the year ended December 31, 2011, the Company entered into a three year corporate public relations consulting agreement where the consultants received compensation in the form of 500,000 shares of stock, 500,000 warrants with an exercise price of $0.10 that expire 14 months from the date of the agreement, and 1,000,000 warrants with an exercise price of $0.50 that expire 24 months from the date of the agreement.  On August 15, 2012, the Company entered into a settlement agreement with the consultants to terminate the consulting agreement.  As part of the agreement, the consultants maintained the 500,000 shares of common stock previously issued and all warrants previously issued were terminated.  In addition, the consultants received 250,000 new warrants with an exercise price of $0.10 that expire 3 years from the date of the agreement.


The 500,000 shares of common stock issued were originally valued at the fair market value of the stock on the date of grant.  The total value of the stock was approximately $65,000 and the expense was being recognized over the consulting period.  As noted in the previous paragraph, on August 15, 2012, the Company terminated the consulting agreement through a settlement agreement with these consultants and concurrently entered into a new consultant agreement with one of these consultants.  Therefore, any unrecognized expense related to common stock and warrants issued was immediately recognized upon termination of services with the one consultant and expense related to the other consultant will be recognized over the remaining consulting term.  The Company recognized approximately $5,000 and $0, and $11,000 and $0 of share based compensation expense for the three and six months ended June 30, 2013 and 2012, respectively related to the issuance of these shares, and the Company has remaining unrecognized expense of approximately $7,000, which will be recognized over the next 13 months.


For the three and six months ended June 30, 2013 and 2012, the Company recorded approximately $0 and $5,800 and $0 and $11,000, respectively, of share based compensation expense for the 500,000 warrants issued to the consultants.  The warrants were fully expensed at settlement.  As of June 30, 2013, there was no unrecognized compensation costs related to these warrant grants.




20




INTERNATIONAL COMMERCIALTELEVISION INC. AND SUBSIDIARY

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2013 and June 30, 2012

 (Unaudited)


Note 7 - Capital transactions (continued)


For the three and six months ended June 30, 2013 and 2012, the Company recorded approximately $0 and $7,500 and $0 and $15,000, respectively, of share based compensation expense for the 1,000,000 warrants issued to the consultants.  The warrants were fully expensed at settlement.  As of June 30, 2013, there was no unrecognized compensation costs related to these warrant grants.


For the three and six months ended June 30, 2013, the Company recorded approximately $4,600 and $9,200, respectively of share based compensation expense for the 250,000 warrants issued to the consultants under the settlement agreement.  The expense related to the consultant no longer performing services was recognized immediately during the year ended December 31, 2012.  As of June 30, 2013, there was approximately $38,100 of total unrecognized compensation costs related to these warrant grants which will be recognized over the remaining 25.5 months.  On October 24, 2012, 125,000 warrants issued to one of the consultants were exercised for total consideration of $12,500.  


As previously stated, on August 15, 2012, the Company entered into a three year corporate public relations consulting agreement with one of the previous consultants.  As part of the agreement, the consultant will receive a monthly consulting fee of $4,000, a commission of $7.50 for each DermaWand TM sold plus 5% of the net revenue from other products sold on a third party website, and 125,000 additional warrants with an exercise price of $0.30 that expires 36 months from the date of the agreement.  For three and six months ended June 30, 2013, the Company recorded approximately $4,600 and $9,200 of share based compensation, respectively.  As of June 30, 2013, there was approximately $38,100 of total unrecognized compensation costs related to these warrant grants which will be recognized over the remaining 25.5 months.  


Due to the fact that any warrants issued to the consultant under the new consulting agreement are nonforfeitable, the 125,000 warrants with an exercise price of $0.10 and a fair value of $55,000, and the 125,000 warrants with an exercise price of $0.30 and a fair value of $55,000, which aggregated $110,000, were recorded in equity and were capitalized on the balance sheet in prepaid expenses and other current assets during 2012 and will be expensed over the consultant term.  For the three and six months ended June 30, 2013, approximately $9,200 and $18,400, respectively was expensed and included in share based compensation expense in our accompanying consolidated financial statements.  Approximately $76,000 is capitalized at June 30, 2013 and approximately $36,000 and $40,000 is reflected as current and non-current assets, respectively, in our accompanying condensed consolidated balance sheet.


As of June 30, 2013, the following warrants were outstanding:


Holder

 

Warrants

Outstanding

 

Exercise

Price

 

Expiration

Date

  

 

 

 

 

 

 

Shareholders in 2007 placement (modified 2010)

 

390,084

 

$0.10 - $3.00

 

December 2013

Shareholders in February 2012 private placement

 

863,333

 

$0.25

 

February – March

2015

Consultant

 

125,000

 

$0.10

 

August 2015

Consultant

 

125,000

 

$0.30

 

August 2015

 

 

 

 

 

 

 

Balance at June 30, 2013

 

1,503,417

 

$0.10 - $3.00

 

 




21



INTERNATIONAL COMMERCIALTELEVISION INC. AND SUBSIDIARY

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2013 and June 30, 2012

 (Unaudited)


Note 8 - 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. For the purposes of obtaining future capital to finance the Companies’ operations and to fund future expansion of the Companies’ Direct Response Television campaign certain shareholders are able to purchase additional stock with stock warrants attached to common stock issued. At June 30, 2013, there were 1,503,417 warrants outstanding and exercisable. The warrants are exercisable between $0.10 and $3.00 per share expiring through August 2015. At June 30, 2013 there were 5,031,669 stock options outstanding and 1,466,670 were vested and exercisable at an average exercise price of $0.22.


The following securities were not involved in the computation of diluted net income per share as their effect would have been anti-dilutive:


 

June 30,

  

2013

 

 

2012

Options to purchase common stock

 

2,735,000

 

 

 

-

Warrants to purchase common stock

 

515,084

 

 

 

1,000,000

Convertible note payable from shareholder

 

-

 

 

 

1,181,447


The number of shares of common stock used to calculate basic and diluted earnings per share for the six months ended June 30, 2013 and 2012 was determined as follows:


 

Three Months Ended

Six Months Ended

 

June 30,

2013

June 30,

2012

June 30,

2013

 

June 30,

2012

 

 

 

 

 

 

Basic weighted average shares outstanding

21,706,087

20,647,756

21,360,600

 

19,520,119

Dilutive effect of outstanding stock options

1,306,975

2,619,212

1,116,423

 

2,619,212

Dilutive effect of outstanding warrants

448,561

557,778

359,894

 

557,778

Dilutive effect of convertible note payable

1,071,446

178,147

1,181,447

 

178,147

 

 

 

 

 

 

Weighted average dilutive shares outstanding

24,533,069

24,002,893

24,018,364

 

22,875,256




22




INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2013 and June 30, 2012

 (Unaudited)


Note 8 - Basic and diluted earnings per share (continued)


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


 

 

Weighted

Average

 


For the 3-months ended June 30, 2013:

Income

(Numerator)

Shares (Denominator)

Per Share Amount

 

 

 

 

Basic earnings per share

 

 

 

Income to common shareholders

$        648,909

21,706,087

$          0.03

 

 

 

 

Diluted earnings per share

 

 

 

Income to common shareholders, including interest expense on convertible note payable of $6,085

$         654,994

24,533,069

$          0.03

 

 

 

 

 

 

Weighted Average

 


For the 3-months ended June, 2012:

Income

(Numerator)

Shares (Denominator)

Per Share Amount

 

 

 

 

Basic earnings per share

 

 

 

Income to common shareholders

$         112,474

20,647,756

$          0.01

 

 

 

 

Diluted earnings per share

 

 

 

Income to common shareholders, including interest expense on convertible note payable of $1,198

$          113,672

24,002,893

$          0.00

 

 

 

 

 

 

Weighted

Average

 


For the 6-months ended June 30, 2013:

Income

(Numerator)

Shares (Denominator)

Per Share Amount

 

 

 

 

Basic income per share

 

 

 

Income to common shareholders

$        1,817,468

21,360,600

$          0.09

 

 

 

 

Diluted earnings per share

 

 

 

Income to common shareholders, including interest expense on convertible note payable of $12,924

$       1,830,392

24,018,364

$          0.08

 

 

 

 

 

 

Weighted Average

 

For the 6-months ended June 30, 2012:

Income

(Numerator)

Shares (Denominator)

Per Share Amount

 

 

 

 

Basic income per share

 

 

 

Income to common shareholders

$           90,866

19,520,119

$          0.00

 

 

 

 

Diluted earnings per share

 

 

 

Income to common shareholders, including interest expense on convertible notes payable of $2,209

$           93,075

22,875,256

$          0.00



23



INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY


NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2013 and June 30, 2012

 (Unaudited)


Note 9 - Income taxes


The provision (benefit) for income tax for the three and six months ended June 30, 2013 and 2012 consists of the following:


 

 

Three Months Ended

 

Six Months Ended

Current

 

June 30, 2013

 

June 30, 2012

 

June 30, 2013

 

June 30, 2012

  Federal

$

(231,000)

$

-

$

 

37,000

$

 

-

  State

 

(57,000)

 

-

 

 

31,000

 

 

-

Total

$

(288,000)

$

-

$

 

68,000

$

 

-


The (benefit) for income tax is approximately ($288,000) and $0 for the three months ended June 30, 2013 and 2012, respectively, or (80%) and 0%, respectively, of pre-tax income The provision for income tax is approximately $68,000 and $0 for the six months ended June 30, 2013 and 2012, respectively, or 3.6% and 0%, respectively, of pre-tax income. The effective tax rates for 2013 and 2012 reflect provisions for current federal and state income taxes.   A full valuation allowance is provided against the deferred tax assets because it is not more likely than not that the assets will be realized.  The effective rate differs from the statutory rate primarily due to the expected utilization of net operating losses for which no tax benefit has previously been provided. The benefit for the three month period ended June 30, 2013 is a result of the Company’s revised forecast of taxable income for the year ended December 31, 2013 and expected utilization of net operating losses.  This revised forecast resulted in lower taxable income than was estimated during the three months ended March 31, 2013, therefore, resulting in a benefit to arrive at the lower tax expense expected for the six months ended June 30, 2013.  As of December 31, 2012, the Company had approximately $2,527,000 of gross federal net operating losses and approximately $420,000 of gross state net operating losses available, of which $1,974,000 and $150,000, respectively, are expected to be utilized in 2013. As of June 30, 2013, there is not sufficient positive evidence to support that it is more likely than not that the Company will be able to utilize its deferred tax assets. The Company has generated one year of taxable income thus far. Additionally, the Company is currently undergoing an IRC Section 382 study which could potentially reduce the amount of deferred tax assets that may be utilized in the future. Due to the change in ownership provisions of the Internal Revenue Code, the availability of the Company’s net operating loss carry forwards may be subject to annual limitations against taxable income in future periods, which could substantially limit the eventual utilization of such carry forwards.  The Company is currently analyzing the historical or potential impact of its equity financings on beneficial ownership; however, no determination has been made whether the net operating loss carry forward is subject to any Internal Revenue Code Section 382 limitation.  To the extent there is a limitation, there would be a reduction in the amount of net operating losses permitted to be used to offset taxable income in 2013 causing the effective tax rate to increase.  


During 2012, the Company filed income tax returns from inception, 1998, through 2011; therefore, the statute for all years remains open and any of these years could potentially be audited.


The Company’s policy is to recognize interest and penalties related to tax matters in general and administrative expenses in the Consolidated Statements of Operations. The Company recorded zero interest and penalties for the quarters ended June 30, 2013 and 2012.   At June 30, 2013 and December 31, 2012 the Company has approximately $190,000 and $270,000 accrued for various tax penalties.  The following is a summary of the activity in the penalties payable for the six months ended June 30, 2013.  The accrual has been reduced because a closing agreement was issued by the Wisconsin Department of Revenue resolving an outstanding tax issue, no tax or penalties were due upon resolution.


Balance, January 1, 2013

$

270,000

Reductions in reserve

 

(80,000)

Balance, June 30, 2013

$

190,000




24




INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY


NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2013 and June 30, 2012

 (Unaudited)


Note 10 - Segment reporting


The Company operates in one industry segment and is engaged in the selling of various consumer products primarily through direct marketing infomercials and televised home shopping.  The Company evaluates performance and allocates resources based on several factors, of which the primary financial measure is operating income (loss) by geographic area.  Operating expenses are primarily prorated based on the relationship between domestic and international sales.


Information with respect to the Company’s operating income (loss) by geographic area is as follows:


 

For the three months ended June 30, 2013

For the three months ended June 30, 2012

 

Domestic

International

Totals

Domestic

International

Totals

 

 

 

 

 

 

 

NET SALES

$     9,207,549

$  1,247,566

$ 10,455,115

$  2,484,851

$ 1,351,647

$ 3,836,498

 

 

 

 

 

 

 

COST OF SALES

2,395,003

548,976

2,943,979

819,125

641,290

1,460,415

Gross profit

6,812,546

698,590

7,511,136

1,665,726

710,357

2,376,083

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

General and administrative

 1,962,704

 58,161

 2,020,865

 583,909

 44,283

 628,192

Selling and marketing

5,110,473

 12,655

5,123,128

 1,615,875

 11,395

 1,627,270

Total operating expense

7,073,177

70,816

7,143,993

2,199,784

55,678

2,255,462

 

 

 

 

 

 

 

Operating income (loss)

$     (260,631)

$    627,774

$       367,143

$  (534,058)

$    654,679

$    120,621

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended June 30, 2013

For the six months ended June 30, 2012

 

Domestic

International

Totals

Domestic

International

Totals

 

 

 

 

 

 

 

NET SALES

$   20,615,117

$  2,240,231

$ 22,855,348

$ 4,544,980

$ 1,946,829

$ 6,491,809

 

 

 

 

 

 

 

COST OF SALES

5,452,219

998,617

6,450,836

1,528,955

915,958

2,444,913

Gross profit

15,162,898

1,241,614

16,404,512

3,016,025

1,030,871

4,046,896

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

General and administrative

 3,846,303

 109,155

 3,955,458

 1,088,351

 82,674

 1,171,025

Selling and marketing

10,529,509

 21,358

 10,550,867

 2,757,048

 18,804

 2,775,852

Total operating expense

14,375,812

130,513

 14,506,325

3,845,399

101,478

3,946,877

 

 

 

 

 

 

 

Operating income (loss)

$        787,086

$  1,111,101

$   1,898,187

$  (829,374)

$    929,393

$    100,019




25




INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY


NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2013 and June 30, 2012

 (Unaudited)


Note 10 - Segment reporting (continued)


Selected balance sheet information by segment is presented in the following table as of:


 

 

June 30,

 

December 31,

 

Total Assets

 

2013

 

2012

 

Domestic

 

$

5,235,378

 

$

 4,414,775

 

International

 

 

-

 

 

25,453

 

Total Assets

 

$

5,235,378

 

$

4,440,228

 


Note 11 – Subsequent events


On July 11, 2013, the Company issued to one of its key employees options to purchase a total of 100,000 shares under the Company’s 2011 Incentive Stock Option Plan.  The option exercise price is $.555 per share.  The options vest over three years, provided the employee remains employed by the Company or a subsidiary of the Company at the time of vesting. The issuance of the options was exempt from registration under Regulation D and Section 4(2) of the Securities Act of 1933.


On July 24, 2013, the Company issued to a consultant an option to purchase 100,000 shares, at a price of $.25 per share, for services rendered to be rendered to the Company.  The option vest over three years provided the consultant continues to serve the Company as a consultant to the Company or subsidiary of the Company at the time of vesting. The issuance of the options was exempt from registration under Regulation D and Section 4(2) of the Securities Act of 1933.


On July 24, 2013, the Company entered into a licensing agreement with BioActive Skin Technologies LLC (BioActive), in which the Company will obtain the exclusive worldwide rights to manufacture and distribute BioActive beauty products and formulations. The agreement consists of an initial 18-month term and subsequent 12-month terms.   As part of the agreement, the Company will pay a royalty calculated as a percentage of sales with a minimum annual payment of $100,000.  The Company will incur infomercial costs which it hopes to test before the end of fiscal year 2013.





26



ITEM 2.

MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION


Except for the historical information presented in this document, the matters discussed in this Form 10-Q, and specifically in the "Management's Discussion and Analysis or Plan of Operation”, or otherwise incorporated by reference into this document contain "forward looking statements" (as such term is defined in the Private Securities Litigation Reform Act of 1995).  These statements can be identified by the use of forward-looking terminology such as "believes", "expects", "may", "will", "intends", "should", or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties.  The safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, apply to forward-looking statements made by the Company.  You should not place undue reliance on forward-looking statements.  Forward-looking statements involve risks and uncertainties.  The actual results that the Company achieves may differ materially from any forward-looking statements due to such risks and uncertainties.  These forward-looking statements are based on current expectations, and the Company assumes no obligation to update this information.  Readers are urged to carefully review and consider the various disclosures made by the Company in this report on Form 10-Q and in the Company's other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect the Company's business.


The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the Financial Statements and accompanying notes and the other financial information appearing elsewhere in this report.


Overview


Although we currently sell products through infomercials, the goal of our business plan is to use the brand awareness we create in our infomercials so that we can sell the products featured in our infomercials, along with related families of products, under distinct brand names in traditional retail stores.  Our goal is to have these families of products sold in the traditional retail environment in shelf-space dedicated to the product category.  We are developing the infrastructure to create these brands of products so that we can implement our business plan.


Fluctuations in our revenue are driven by changes in our product mix.  Revenues may vary substantially from period-to-period depending on our product line-up.  A product that generates revenue in one quarter may not necessarily generate revenues in each quarter of a fiscal year for a variety of reasons, including, seasonal factors, number of infomercials run, the product’s stage in its life-cycle, the public’s general acceptance of the infomercial and other outside factors, such as the general state of the economy.


Just as fluctuations in our revenues are driven by changes in our product mix, our gross margins from period to period depend on our product mix.  Our gross margins vary according to whether the products we sell are primarily our own products or third-party products.  As a general rule, the gross margins for our own products are considerably higher based on proportionately smaller cost of sales.  For third-party products, our general experience is that our gross margins are lower, because we record as cost of sales the proportionately higher cost of acquiring the product from the manufacturer.  Within each category (i.e., our own products versus third-party products), gross margins still tend to vary based on factors such as market price sensitivity and cost of production.


Many of our expenses for our own products are incurred up-front.  Some of our up-front expenditures include infomercial production costs and purchases of media time.  If our infomercials are successful, these up-front expenditures produce revenue as consumers purchase the products aired on the infomercials.  We do not incur infomercial production costs and media time for our third-party products, because we merely act as the distributor for pre-produced infomercials.  It is the responsibility of the international infomercial operators to whom we sell the third-party products to take the pre-produced infomercial, adapt it to their local standards and pay for media time.


Results of Operations


The following discussion compares operations for the three and six months ended June 30, 2013 with the three and six months ended June 30, 2012.


Revenues


Our revenues increased to approximately $10,455,000 and $22,855,000 for the three and six months ended June 30, 2013, up from approximately $3,836,000 and $6,492,000 recorded during the three and six months ended June 30, 2012, a 173% and 252% increase, respectively. There were two major reasons for the increase in revenue.  The first reason relates to continued success of the new DermaWand TM infomercial, which began airing in November 2011.  During the three and six months ended June 30, 2013 sales relating to DermaWand TM for direct response television (DRTV) were approximately $7,554,000 and $16,891,000 as compared to approximately $2,254,000 and $3,930,000 during the three and six months ended June 30, 2012.  



27




This increase in DRTV revenue was in part due to the launching of a new Spanish language version of the DermaWand TM infomercial that was launched in August 2012. In addition, we had approximately 19,000 and 11,000 airings of the English and Spanish language versions of the DermaWand TM infomercial for the six months ended June 30, 2013, respectively, compared to 11,000 and 0 airings for the six months ended June 30, 2012, respectively. We have also been successful in building an auto-ship continuity program with our DermaVital TM skincare line.  Currently there are over 18,000 customers in one of three DermaVital TM preferred beauty clubs, all of which pay $19.95 to $39.95 per month to receive the three core products in the line; Pre-Face Beauty Treatment, Hydra Infusion Beauty Treatment, and Skin Mist.  Customers are enrolled month to month and can cancel at any time.  The Company is focused on expanding the DermaVital TM line and building the continuity program.  Sales related to DermaVital TM during the three and six months ended June 30, 2013 were approximately $1,077,000 and $2,113,000 as compared to approximately $224,000 and $371,000 during the three and six months ended June 30, 2012.


Another reason for the increase in revenue for the six months ended June 30, 2013 was an increase in international sales.  During the three and six months ended June 30, 2013, international sales revenue for the DermaWand TM was approximately $1,248,000 and $2,240,000, as compared to approximately $1,352,000 and $1,947,000 during the three and six months ended June 30, 2012.   The increase in sales internationally is primarily due to the new DermaWand TM infomercial running in Europe, Asia, and South America.


Gross Margin  


Gross margin percentage was approximately 72% for the three and six months ended June 30, 2013, up from approximately 62% during the three and six months ended June 30, 2012.  The main reason for the increase in gross margin was that the sales generated from the new DermaWand TM infomercial have an average selling price of $145, including shipping and handling, which represented the majority of sales for the three and six months ended June 30, 2013. In comparison, for the three and six months ended June 30, 2012, there was a more significant portion of our sales generated from televised home shopping, which had a selling price of approximately $60 to $100.  


For the three and six months ended June 30, 2013 we generated approximately $7,511,000 and $16,405,000 in gross margin, compared to approximately $2,376,000 and $4,047,000 for the three and six months ended June 30, 2012.


Operating Expenses


Total operating expenses increased to approximately $7,144,000 and $14,506,000 during the three and six months ended June 30, 2013, from approximately $2,255,000 and $3,947,000 during the three and six months ended June 30, 2012, an increase of approximately $4,888,000, or 217% and $10,559,000 or 268%.  This increase in operating expenses in primarily due to the expenses associated with running the new DermaWand TM infomercial.  The largest of these expenses are media expenditures.   Total media and production expenses increased to approximately $3,313,000 and $6,747,000 for the three and six months ended June 30, 2013, from approximately $1,114,000 and $1,974,000 for the three and six months ended June 30, 2012. Media and production expenses increased due to increased airings and the costs of running the Spanish infomercial which was not run in the six months ended June 30, 2012.  Other expenses that increased in association with the DermaWand TM infomercial are as follows:


 

For the three months

 ended June 30

 

2013

2012

Increase

Answering Service

$ 737,000

$152,000

$ 585,000

Customization & Duplication

67,000

45,000

22,000

Merchant Fees

284,000

65,000

219,000

Total

$ 1,088,000

$262,000

$ 826,000


 

For the six months

 ended June 30

 

2013

2012

Increase

Answering Service

$1,583,000

$296,000

$1,287,000

Customization & Duplication

118,000

82,000

36,000

Merchant Fees

600,000

100,000

500,000

Total

$ 2,301,000

$478,000

$1,823,000




28




In addition to the increased costs associated with the infomercial; there was also a significant increase in share based compensation and bad debt expenses.  Total share based compensation expenses increased to approximately $326,000 and $306,000 during the three and six months ended June 30, 2013, from approximately $112,000 and $225,000 during the three and six months ended June 30, 2012. Total bad debt expenses increased to approximately $791,000 and $1,755,000 during the three and six months ended June 30, 2013, from approximately $90,000 and $207,000 during the three and six months ended June 30, 2012. Bad debt as a percentage of DRTV sales increased to 10% during the six months ended June 30, 2013 from 5% during the six months ended June 30, 2012.  The main reason for this was the increase in sales related primarily to the infomercial. In addition, during the six months ended June 30, 2013, the percentage of total revenues that was related to international sales was lower than during the six months ended June 30, 2012. Although there was an increase in international sales during the six months ended June 30, 2013, which have no bad debts, this increase was substantially offset by the disproportionate increase in infomercial sales.  


Income Tax Expense (Benefit)


The provision (benefit) for income tax increased to approximately ($288,000) and $68,000, from $0 and $0 during the three and six month periods ended June 30, 2013 and 2012, respectively.  For the six months ended June 30, 2013 and 2012, the provision represented an effective tax rate of 3.6% and 0%, respectively, of pre-tax income.  The effective tax rates for 2013 and 2012 reflect provisions for current federal and state income taxes.   A full valuation allowance is provided against the deferred tax assets because it is not more likely than not that the assets will be realized.  The effective rate differs from the statutory rate primarily due to the expected utilization of net operating losses for which no tax benefit has previously been provided. As of December 31, 2012, the Company had approximately $2,527,000 of gross federal net operating losses and approximately $420,000 of gross state net operating losses available, of which approximately $1,974,000 and $150,000 are expected to be utilized in 2013. As of June 30, 2013, there is not sufficient positive evidence to support that it is more likely than not that the Company will be able to utilize its deferred tax assets. The Company has generated one year of taxable income thus far. Additionally, the Company is currently undergoing an IRC Section 382 study which could potentially reduce the amount of deferred tax assets that may be utilized in the future. The benefit for the three month period ended June 30, 2013 is a result of the Company’s revised forecast of taxable income for the year ended December 31, 2013 and expected utilization of net operating losses.  This revised forecast resulted in lower taxable income than was estimated during the three months ended March 31, 2013, therefore, resulting in a benefit to arrive at the lower tax expense expected for the six months ended June 30, 2013.   


Net Income


The Company generated net income of approximately $649,000 and $1,817,000 for the three and six months ended June 30, 2013, compared with a net income of approximately $112,000 and $91,000 for the three and six months ended June 30, 2012.  There are three significant reasons for the increase in net income.  The first reason was the increase in gross margin of 10% for both periods.  Since sales of both DermaWand TM and DermaVital TM increased significantly, the Company was able to take advantage of pricing discounts based on the quantity of goods it purchased from its suppliers.   In addition, the gross margin also increased due to a higher percentage of sales coming from the DRTV business, which generates the highest margins.


The second reason for the increase in net income was the increase in continuity sales generated from the monthly shipments of the Company’s DermaVital TM skincare products.  Sales from DermaVital TM for the three and six months ended June 30, 2013 were approximately $1,077,000 and $2,113,000 as compared to approximately $224,000 and $371,000 during the three and six months ended June 30, 2012.  Since these sales occur after the expense of acquiring the customer has already occurred (i.e. media expenses, telemarketing expenses, etc.), the profit margin on these particular sales is high, compared to the initial DRTV sale that results directly from the running of an infomercial.


The third major reason for the increase in net income was the increase in sales from our international distribution for the six months ended June 30, 2013.  Sales to 3 rd party international distributors were approximately $1,248,000 and $2,240,000 for the three and six months ended June 30, 2013, compared with sales of approximately $1,352,000 and $1,947,000 for the three and six months ended June 30, 2012.   These sales are also highly profitable as the Company incurs no expense of acquiring the customers, just the cost of goods.



29




Liquidity and Capital Resources


At June 30, 2013, we had approximately $518,000 in cash (including cash held in escrow), compared to approximately $908,000 at December 31, 2012.  We generated negative cash flows from operations of approximately $361,000 in the six months ended June 30, 2013 compared to a negative cash flow from operations of approximately $116,000 for the same period in 2012.  The negative cash flow from operations during the current period was primarily a result of a net income of approximately $1,817,000, an increase in accounts receivable of approximately $1,993,000, an increase in inventory of approximately $719,000, an increase in prepaid expense and other current assets of approximately $164,000, a decrease in accounts payable and accrued liabilities of approximately $1,216,000, a decrease in severance payable of approximately $20,000, partially offset by an increase in deferred revenue of approximately $74,000, share based compensation expense of approximately $306,000, bad debt expense of approximately $1,755,000 and depreciation expense  of approximately $8,000. The most significant driver of the activity was the increase in inventory due to expected future sales and the decrease in accounts payable and accrued liabilities.


The Company has a note payable to The Better Blocks Trust (“BB Trust”), a shareholder, originally in the amount of $590,723.  On April 1, 2012, the shareholder note payable was modified.   The new terms include interest at the rate of four and three quarters percent (4.75%) per annum.  Interest on the unpaid balance of this note shall be paid in arrears as of the end of each calendar quarter, with payment due on the first day of the month following the quarter as to which interest is being paid.  The first payment of interest was due on January 1, 2013, for the three quarters beginning April 1, 2012 and ending on December 31, 2012.  The principal balance of this note shall be due and payable in three equal payments on each of April 1, 2015, April 1, 2016, and April 1 2017.  Interest on the loan for the three and six months ended June 30, 2013 and 2012, was approximately $6,000 and $7,000 and $12,600 and $7,000, respectively


This note may be prepaid in whole or in part at any time without penalty, and any prepayment shall be applied against the next principal payment due.  For the three and six months ended June 30, 2013 and 2012, $30,000 and $0 and $85,000 and $0, respectively, in principal prepayments were made on the note.  At June 30, 2013 and December 31, 2012, the balance outstanding was approximately $505,723 and $590,723, respectively.   All or any part of this note may be converted into shares of common stock of the Company at any time, and from time to time, prior to payment, at a conversion price of $0.50 per share.  Conversion is at the option of lender.  Any amount not converted will continue to be payable in accordance with the terms of the note.  (See Note 5).


In December 2011, the Company entered into a note payable with a Canadian lender in the amount of approximately $98,000 (C$100,000). This loan accrues interest of prime plus 1%. Interest is paid monthly.  Principal payments are to be paid in monthly installments of approximately $6,500 (C$6,667), beginning in March 2012 and ending May 2013.  On January 24, 2012, the Company entered into a note modification with the Canadian lender, increasing the outstanding balance to approximately $137,000 (C$140,000) as additional borrowings were made by the Company.  The principal payments on the additional borrowings of approximately $39,500 (C$40,000) are in two installments of $20,000 (approximates C$) payable on April 15, 2012 and July 15, 2012, respectively. In addition, the interest rate on the note was modified to lender’s cost, plus two-percent and the note became convertible into shares of the Company’s common stock at a fixed conversion rate of $0.196 (C$0.20) per share. As of June 30, 2013, there was no outstanding balance on this note.


The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern.  The Company generated negative cash flows from operating activities during the six months ended June 30, 2013, of approximately $361,000. As of June 30, 2013, the Company had a working capital of approximately $2,592,000, compared to approximately $336,000 at December 31, 2012, and an accumulated deficit of approximately $5,437,000 as of June 30, 2013.  


Although we currently sell our products primarily though infomercials, the goal of our business is to use the brand awareness we create in our infomercials to sell our products (along with additional line extensions) under distinct brand names in traditional retail stores. Our objective is to have these families of products sold in the traditional retail environment in shelf-space dedicated to the product category. We are developing the infrastructure to create these brands of products so that we can implement our business plan.


There is no guarantee that the Company will be successful in bringing our products into the traditional retail environment. If the Company is unsuccessful in achieving this goal, the Company will be required to raise additional capital to meet its working capital needs. If the Company is unsuccessful in completing additional financings, it will not be able to meet its working capital needs or execute its business plan. In such case the Company will assess all available alternatives including a sale of its assets or merger, the suspension of operations and possibly liquidation, auction, bankruptcy, or other measures. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements does not include any adjustment relating to the recoverability of the carrying amount of recorded assets or the amount of liabilities that might result should the Company be unable to continue as a going concern.



30




CRITICAL ACCOUNTING POLICIES AND ESTIMATES


There have been no changes to our critical accounting policies and estimates in the six months ended June 30, 2013. The Securities and Exchange Commission (“SEC”) defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Our significant accounting policies are described under “Critical Accounting Policies” in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7, as well as in our consolidated financial statements and footnotes thereto for the year ended December 31, 2012, as filed with the Commission with our Annual Report form 10-K filed on March 30, 2013.


ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Not applicable


ITEM 4.

CONTROLS AND PROCEDURES


The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported within the time frames specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and its Chief Financial Officer, to allow timely decisions regarding required disclosure based closely on the definition of "disclosure controls and procedures" in Rule 13a-15(e) and 15d-15(e).  


Management recognizes that there are inherent limitations in the effectiveness of any system of internal control, and accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect material misstatements. In addition, effective internal control at a point in time may become ineffective in future periods because of changes in conditions or due to deterioration in the degree of compliance with our established policies and procedures.


Our independent registered public accounting firm EisnerAmper LLP has informed us of certain conditions which they deemed to be material weaknesses in our internal controls (as defined by standards established by the Public Company Accounting Oversight Board) which are disclosed in our Form 10-K for the year ended December 31, 2012.


We carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2013 (the “Evaluation Date”).  This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, and a conclusion on this evaluation. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer. Based upon that evaluation, management concluded that, as of the end of such period, our disclosure controls and procedures were not effective at the reasonable assurance level because of the material weaknesses in internal control over financial reporting noted above, which continued to be material weaknesses.  The material weaknesses exist mainly due to the fact that we are a small company with limited accounting personnel.  The Company is currently working to remediate these material weaknesses.

 

There were no changes in our internal control over financial reporting for the quarter ended June 30, 2013 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.


Off-Balance Sheet Arrangements


We do not have any off-balance sheet arrangements.




31




PART II – OTHER INFORMATION


ITEM 1.

LEGAL PROCEEDINGS


None


ITEM 1A.

RISK FACTORS


Not required for smaller reporting company


ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES


On April 23, 2013, the Company issued a total of 720,000 incentive stock options under our 2011 Stock Option Plan. The options were issued with a fair market value exercise price of $.228 per share, except for 100,000 options issued to our Chief Executive Officer, which were issued at an exercise price of 110% of fair market value, or $.251 per share.  The options vest one third each year over the next three years, provided the recipient is still employed by the Company.  The options may be exercised, once vested, at any time prior to 10 years from the date of grant.  Each of the recipients of the options is officers or key employees of the Company, and the issuance of the options was exempt from registration under Section 4(2) of the Securities Act of 1933.


On April 23, 2013, the Company issued 50,000 statutory stock options to each of our two outside directors, who are not employees of the Company. The options were issued with an exercise price of $.228 per share and vested immediately.  The issuance of the options was exempt from registration under Regulation D and Section 4(2) of the Securities Act of 1933.


On April 23, 2013, the Company issued an option to purchase 50,000 shares, at a price of $.25 per share, for services rendered to the Company.  The option vested immediately. The issuance of the option was exempt from registration under Regulation D and Section 4(2) of the Securities Act of 1933.


ITEM 3.

DEFAULTS UPON SENIOR SECURITIES


None


ITEM 4.

MINE SAFETY DISCLOSURES


None


ITEM 5.

OTHER INFORMATION


None




32




ITEM 6.

EXHIBITS


Exhibit

 

Number

Description

 

 

2 *

Share and Option Purchase Agreement

 

 

3.1 *

Amended and Restated Articles of Incorporation

 

 

3.2 *

Amended and Restated Bylaws

 

 

3.3 *

First Amendment to Amended and Restated Bylaws

 

 

10.1 *

2001 Stock Option Plan

 

 

10.2 *

Promissory Note by Moran Dome Exploration Inc. payable to the Trustees of the Better Blocks Trust, in the amount of $590,723.27

 

 

10.3 *

Extension of Promissory Note dated August 23, 2001, by and between the Trustees of the Better Blocks Trust and International Commercial Television Inc.

 

 

10.4 **

Second Extension of Promissory Note dated March 25, 2002, by and between the Trustees of the Better Blocks Trust and International Commercial Television  Inc.

 

 

10.5 ***

Assignment of Trademark by Dimensional Marketing Concepts, Inc.

 

 

 

 

****

Rule 13a-14(a)/15d-14(a) Certification – Chief Executive Officer

 

 

31.2****

Rule 13a-14(a)/15d-14(a) Certification – Chief Financial Officer

 

 

32****

Section 1350 Certifications


*  Incorporated  by  reference  from  Form  SB-2  filed  with the Securities and Exchange  Commission  on  October  3,  2001.


**  Incorporated  by  reference from Post-Effective Amendment No. 1 to Form SB-2 filed  with  the  Securities  and  Exchange  Commission  on  April  12,  2002.


***  Incorporated  by reference from Amendment No. 1 to Form SB-2 filed with the Securities  and  Exchange  Commission  on  December  24,  2001.


**** Filed herewith




33




SIGNATURES


In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



INTERNATIONAL COMMERCIAL TELEVISION INC.

Registrant



Date: August 13, 2013

By: /s/ Kelvin Claney

Name:  Kelvin Claney

Title: Chief Executive Officer



Date: August 13, 2013

By: /s/ Richard Ransom

Name:  Richard Ransom

Title: Chief Financial Officer





34


Exhibit 31.1


I, Kelvin Claney, certify that:


1. I have reviewed this Quarterly Report on Form 10-Q of International Commercial Television, Inc.;


2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:


(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and


5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):


(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and


(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.



Date: August 13, 2013


/s/ Kelvin Claney

Kelvin Claney, Chief Executive Officer




Exhibit 31.2


I, Richard Ransom, certify that:


1. I have reviewed this Quarterly Report on Form 10-Q of International Commercial Television, Inc.;


2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:


(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and


5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):


(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and


(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.



Date: August 13, 2013


/s/ Richard Ransom

Richard Ransom, Chief Financial Officer




Exhibit 32


In connection with the Quarterly Report of International Commercial Television, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Kelvin Claney, Chief Executive Officer of the Company, and Richard Ransom, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of their knowledge and belief:


(1)

the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and


(2)

the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.



/s/ Kelvin Claney

Kelvin Claney, Chief Executive Officer


/s/ Richard Ransom

Richard Ransom, Chief Financial Officer


Date: August 13, 2013