Attached files
| file | filename |
|---|---|
| EX-32 - EXHIBIT 32 - ICTV Brands Inc. | ex32.htm |
| EX-31.2 - EXHIBIT 31.2 - ICTV Brands Inc. | ex31_2.htm |
| EX-31.1 - EXHIBIT 31.1 - ICTV Brands Inc. | ex31_1.htm |
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 March 31, 2011
o 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) |
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Nevada
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76-0621102
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State or other jurisdiction of incorporation or organization
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(IRS Employer Identification No.)
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| 487 Devon Park Drive, Suite 212 Wayne, PA 19087 | ||
| (Address of principal executive offices) |
| (206) 780-2921 | ||
| (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 o
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 o
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 o | Accelerated filer o |
| Non - accelerated filer o (Do not check if 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 o 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 May 13, 2011, the Issuer had 17,255,253 shares of common stock, par value $0.001 per share, issued and outstanding.
Transitional Small Business Disclosure Format (Check one): Yes o No x
| PART I - FINANCIAL INFORMATION | |||
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ITEM 1.
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1
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ITEM 2.
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19
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ITEM 3.
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22
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ITEM 4T.
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22
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| PART II - OTHER INFORMATION | |||
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ITEM 1.
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22
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ITEM 1A.
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23
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ITEM 2.
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23
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ITEM 3.
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23
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ITEM 4.
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23
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ITEM 5.
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23
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ITEM 6.
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23
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24
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PART I - FINANCIAL INFORMATION
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Condensed Consolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010
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2
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Condensed Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010 (unaudited)
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3
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Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010 (unaudited)
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4
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Notes to the Condensed Consolidated Financial Statements
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5-18
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INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARIES
AS OF
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March 31,
2011
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December 31,
2010
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|||||||
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(Unaudited)
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||||||||
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ASSETS
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||||||||
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CURRENT ASSETS:
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||||||||
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Cash and cash equivalents
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$ | 41,408 | $ | 158,482 | ||||
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Restricted cash
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1,740 | 2,060 | ||||||
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Accounts receivable, net of doubtful account reserves of $305 and $1,801 respectively
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4,076 | 75,805 | ||||||
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Inventories, net
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569,051 | 526,821 | ||||||
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Prepaid expenses and deposits
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11,901 | 46,674 | ||||||
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Total current assets
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628,176 | 809,842 | ||||||
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Furniture and equipment
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183,117 | 183,117 | ||||||
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Less accumulated depreciation
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152,299 | 148,776 | ||||||
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Furniture and equipment, net
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30,818 | 34,341 | ||||||
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Total assets
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$ | 658,994 | $ | 844,183 | ||||
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LIABILITIES AND SHAREHOLDERS’ DEFICIT
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CURRENT LIABILITIES:
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||||||||
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Accounts payable and accrued liabilities
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$ | 727,818 | $ | 621,687 | ||||
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Accounts payable - related parties
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30,859 | 30,859 | ||||||
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Severance payable-short term
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40,800 | 153,333 | ||||||
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Deferred revenue
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30,060 | 32,698 | ||||||
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Tax penalties payable
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260,000 | 260,000 | ||||||
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Note payable to shareholder
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590,723 | 590,723 | ||||||
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Total current liabilities
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1,680,260 | 1,689,300 | ||||||
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Long-term severance payable
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159,200 | 110,000 | ||||||
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COMMITMENTS AND CONTINGENCIES
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SHAREHOLDERS’ DEFICIT:
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Preferred stock 20,000,000 shares authorized, no shares issued and outstanding
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||||||||
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Common stock, $0.001 par value, 100,000,000 shares authorized, 16,047,179 and 15,547,179 shares issued and outstanding as of March 31, 2011 and December 31, 2010, respectively
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5,948 | 5,448 | ||||||
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Additional paid-in-capital
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5,264,973 | 5,257,293 | ||||||
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Accumulated deficit
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(6,451,387 | ) | (6,217,858 | ) | ||||
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Total shareholders’ deficit
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(1,100,466 | ) | (955,117 | ) | ||||
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Total liabilities and shareholders’ deficit
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$ | 658,994 | $ | 844,183 | ||||
INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARIES
(Unaudited)
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For the three months ended
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March 31, 2011
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March 31, 2010
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NET SALES
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$ | 532,238 | $ | 1,325,913 | ||||
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COST OF SALES
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359,618 | 779,780 | ||||||
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GROSS PROFIT
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172,620 | 546,133 | ||||||
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OPERATING EXPENSES:
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General and administrative
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287,663 | 474,296 | ||||||
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Selling and marketing
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118,493 | 147,109 | ||||||
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Total operating expenses
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406,156 | 621,405 | ||||||
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OPERATING LOSS
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(233,536 | ) | (75,272 | ) | ||||
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INTEREST INCOME
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7 | 144 | ||||||
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NET LOSS
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(233,529 | ) | (75,128 | ) | ||||
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BASIC AND DILUTED NET LOSS PER SHARE
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$ | (0.01 | ) | $ | (0.01 | ) | ||
See accompanying notes to condensed consolidated financial statements.
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INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARIES
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FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010
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(Unaudited)
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2011
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2010
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net loss
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$ | (233,529 | ) | $ | (75,128 | ) | ||
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Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation
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3,523 | 3,585 | ||||||
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Stock based compensation
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8,180 | — | ||||||
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Change in assets and liabilities
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Accounts receivable
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71,729 | (92,082 | ) | |||||
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Inventories
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(42,230 | ) | 223,237 | |||||
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Prepaid expenses and other current assets
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34,773 | 15,430 | ||||||
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Accounts payable and accrued liabilities
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106,131 | (122,146 | ) | |||||
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Severance payable
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(63,333 | ) | — | |||||
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Deferred revenue
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(2,638 | ) | (54,121 | ) | ||||
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Net cash used in operating activities
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(117,394 | ) | (101,225 | ) | ||||
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CASH FLOWS FROM FINANCING ACTIVITIES:
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Payments to related parties
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— | (1,015 | ) | |||||
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Net cash used in financing activities
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— | (1,015 | ) | |||||
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NET DECREASE IN CASH AND CASH EQUIVALENTS
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(117,394 | ) | (102,240 | ) | ||||
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CASH AND CASH EQUIVALENTS, beginning of the period
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160,542 | 376,495 | ||||||
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CASH AND CASH EQUIVALENTS, end of the period
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$ | 43,148 | $ | 274,255 | ||||
See accompanying notes to condensed consolidated financial statements.
INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARIES
March 31, 2011 and March 31, 2010
(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 and its wholly owned subsidiaries are:
Strategic Media Marketing Corp. (“SMM”) was incorporated in the Province of British Columbia on February 11, 2003 and has a December 31 fiscal year-end.
Effective February 17, 2011, the Company acquired 100% of the equity interest in Better Blocks International Limited (“BBI”), see Note 7.
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 British Columbia, operations are currently run from Washington State, Pennsylvania, and British Columbia.
Liquidity and Going Concern
The accompanying 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 three month period ended March 31, 2011 of approximately $117,000, and the Company, for the most part, has experienced recurring losses from operations. The Company had a negative working capital of approximately $1,052,000 and an accumulated deficit of approximately $6,451,000 as of March 31, 2011.
Although we currently sell our products primarily through infomercials, the goal of our business plan 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 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.
INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011 and March 31, 2010
(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, 2010. 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 months ended March 31, 2011 are not necessarily indicative of operating results that may be achieved over the course of the full year.
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. As of March 31, 2011, the Company did not exceed the federally insured limit in its investment savings. 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 March 31, 2011 and March 31, 2010, 46% and 0% of the Company’s accounts receivable were due from various individual customers to whom our products had been sold directly via Direct Response Television; the remaining 54% and 100% of the Company’s accounts receivable were due from three and four wholesale infomercial operators, respectively.
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. Actual results could differ from these estimates.
INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011 and March 31, 2010
(Unaudited)
Note 2 - Summary of significant accounting policies (continued)
Restricted Cash
Transfirst ePayment Services (“Transfirst”), ICTV’s credit card processing vendor for VISA and Mastercard transactions in the United States, maintains a reserve fund within our processing account to cover all fees, charges, and expenses due 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, and is considered as “Restricted Cash”. At March 31, 2011 and December 31, 2010 the amount of Transfirst reserves were approximately $2,000 and $2,000 respectively.
Accounts receivable
Accounts receivable are recorded net of allowances for returns and doubtful accounts of approximately $800 at March 31, 2011 and $7,000 at December 31, 2010 respectively. The allowances are calculated based on historical customer returns and bad debts.
In addition to reserves for returns on accounts receivable, an accrual is made against returns for product that have been sold to customer 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 $16,000 at March 31, 2011, and $9,000 at December 31, 2010.
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 $3,500 and $3,600 for the three months ended March 31, 2011 and 2010, respectively.
INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011 and March 31, 2010
(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 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.
The Company entered into an exclusive distribution agreement with Allstar Marketing (“Allstar”) in May 2009. As part of the agreement with Allstar the Company received non-refundable royalty advances which were booked as deferred revenue until Allstar sold DermaWands. Allstar is required to provide ICTV with monthly royalty statements per the contract within 30 days of the end of each month. The Company records revenue in the month goods were sold per the Allstar royalty statements.
In March 2010, the Allstar agreement was terminated and the Company retained the exclusive distribution rights for the Derma Wand. Upon termination of the contract, the Company recognized the remaining non-refundable royalty advances that were previously booked in deferred revenue. The Company recognized $0 and $94,000 in revenue related to the Allstar agreement in the three months ended March 31, 2011 and 2010 respectively.
Revenue related to international wholesale customers is recorded at gross amounts with a corresponding charge to cost of sales upon shipment.
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.
Shipping and handling
Amounts billed to a customer for shipping and handling are included in revenue; shipping and handling revenue approximated $4,000 and $1,000 for the three months ended March 31, 2011 and 2010, respectively. Shipping and handling costs are included in cost of sales. Shipping and handling costs approximated $46,000 and $50,000 for the three months ended March 31, 2011 and 2010, respectively.
INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011 and March 31, 2010
(Unaudited)
Note 2 - Summary of significant accounting policies (continued)
Media and production costs
Media and production costs are expensed as incurred and are included in selling and marketing expense in the accompanying consolidated financial statements. The Company incurred $0 and $6,000 in such costs for the three months ended March 31, 2011 and 2010, respectively.
Stock options
The Company has adopted an incentive stock option plan (“Plan”). The purpose of this Plan is to provide additional incentives to key employees, officers, directors and consultants of the Company and its subsidiaries in order to help attract and retain the best available personnel for positions of responsibility and otherwise promoting the success of the business activities. The maximum term of options granted is 10 years and the number of shares authorized for grants of options is 3,000,000.
The Company uses ASC 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.
INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011 and March 31, 2010
(Unaudited)
Note 2 - Summary of significant accounting policies (continued)
Stock options (continued)
The following is a summary of stock options outstanding under the existing stock option plan for the three months ended March 31, 2011 and 2010:
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Number of Shares
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Weighted
Average
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|||||||||||||||
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Employee
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Non-
Employee
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Totals
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Exercise
Price
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Balance, January 1, 2011
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— | 657,000 | 657,000 | $ | 2.00 | |||||||||||
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Granted during 2011
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1,300,000 | — | 1,300,000 | 0.08 | ||||||||||||
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Exercised during the year
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— | — | — | — | ||||||||||||
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Cancelled during the year
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— | — | — | — | ||||||||||||
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Balance, March 31, 2011
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1,300,000 | 657,000 | 1,957,000 | $ | 0.73 | |||||||||||
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Number of Shares
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Weighted
Average
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|||||||||||||||
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Employee
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Non-
Employee
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Totals
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Exercise
Price
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Balance, January 1, 2010
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— | 817,000 | 817,000 | $ | 1.68 | |||||||||||
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Granted during 2010
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— | — | — | — | ||||||||||||
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Exercised during the period
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— | — | — | — | ||||||||||||
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Cancelled during the period
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— | — | — | — | ||||||||||||
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Balance, March 31, 2010
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— | 817,000 | 817,000 | $ | 1.68 | |||||||||||
There were 1,300,000 stock options granted under the existing stock option plan during the three months ended March 31, 2011. Of the stock options currently outstanding, 657,000 options are currently vested and exercisable. The weighted average exercise price of these options was $2.00. These options expire in September 2011. The aggregate intrinsic value for options outstanding and exercisable at March 31, 2011 and 2010 was immaterial.
INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011 and March 31, 2010
(Unaudited)
Note 2 - Summary of significant accounting policies (continued)
Stock options (continued)
During February 2011, 1,300,000 options were granted to employees. For the three months ended March 31, 2011, the Company recorded approximately $8,000 in stock compensation expense and approximately $161,000 of total unrecognized compensation cost related to non-vested option grants. The exercise price for the options granted was $0.0828 per share and the options will be fully vested in approximately 3 years.
| March 31, | ||||
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2011
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Risk-free interest rate
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3.03 | % | ||
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Expected dividend yield
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0.00 | |||
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Expected life
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6.00 years
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Expected volatility
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340.25 | % | ||
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Weighted average grant date fair value
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$ | 0.13 | ||
Note 3 - License and reconveyance agreements
Effective April 1, 2000, the Company entered into a License and Reconveyance Agreement with Windowshoppc.com Limited (“WSL”) and R.J.M. Ventures (“RJML”). These agreements are royalty-free. WSL and RJML owned or had rights in certain intellectual properties that were transferred or assigned to ICTV during 2003. Accordingly, WSL and RJML granted all production rights, proprietary rights, inventory, development rights, tangible assets, licenses and any assets or rights to the Company. The Company has the right to further develop and enhance the intellectual properties as the Company sees fit.
INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011 and March 31, 2010
(Unaudited)
Note 4 - Commitments and contingencies
Leases
As of March 31, 2011, the Company had two active leases related to the office space rented in two locations: Bainbridge Island, Washington and Wayne, Pennsylvania. Total rent expense incurred during the three months ended March 31. 2011 and 2010 totaled $13,218 and $14,172 respectively. The schedule below details the future financial obligations under the remaining two leases.
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2011
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2012
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2013
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2014
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2015
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2016
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TOTAL OBLIGATION
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Bainbridge Island
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$ | 2,590 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 2,590 | |||||||||||||||
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Wayne - Corporate HQ
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$ | 24,225 | $ | 8,075 | $ | — | $ | — | $ | — | $ | — | $ | 32,300 | |||||||||||||||
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Total Lease Obligations
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$ | 26,815 | $ | 8,075 | $ | — | $ | — | $ | — | $ | — | $ | 34,890 | |||||||||||||||
DermaWandTM
On October 15, 1999, WSL entered into an endorsement agreement with an individual for her appearance in a DermaWand infomercial. On July 11, 2001, the agreement was amended to include a royalty payment for each unit sold internationally, up to a maximum royalty payment for any one calendar quarter. Further, if the infomercial is aired in the United States, then the airing fee will revert back to the same flat rate per calendar quarter. The initial term of the agreement was five years starting October 15, 1999. The agreement automatically and continually renews for successive additional five-year terms unless RJML is in material default and is notified in writing at least thirty days prior to the end of the then current term that the individual intends to terminate the agreement.
The Company assumed any and all responsibilities associated with the agreements noted above on April 1, 2000, pursuant to the license and reconveyance agreement disclosed in Note 3.
INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011 and March 31, 2010
(Unaudited)
Note 4 - Commitments and contingencies (continued)
On January 5, 2001, WSL entered into an agreement with Omega 5. This agreement was amended July 28, 2010. WSL shall have worldwide nonexclusive rights to manufacture, market and distribute DermaWandTM. In consideration of these rights, WSL shall pay a monthly payment for each unit sold of DermaWand depending on various scenarios as defined in the agreement. The agreement is silent as to its duration.
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 DermaWandTM and was granted exclusive license with respect to the commercial rights to the DermaWandTM. The geographical scope of the license granted is the entire world consisting of the United States of America and all of the rest of the 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 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 DermaWandTM were approximately $57,000 and $112,000 for the periods ended March 31, 2011 and 2010, respectively.
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 has a scheduled expiration of April 20, 2011. The policy was renewed again in April 2011 with a new scheduled expiration date of April 20, 2012.
At present, management is not aware of any claims against the Company for any products sold.
Note 5 – 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. Beginning in April 2012, the monthly payments will increase back to $10,000 per month through August 2013. The severance payable balance at March 31, 2011 is $200,000 of which $40,800 is current and $159,200 is long-term.
INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011 and March 31, 2010
(Unaudited)
Note 6 - Related party transactions
The Company has received short-term advances from a shareholder. There were no advances for the three months ended March 31, 2011 and 2010. The advances are offset by repayments which amounted to approximately $0 and $1,000 during the three months ended March 31, 2011 and 2010, respectively. These advances are non-interest bearing and without specific terms of repayment. These advances are included in accounts payable – related parties, on the accompanying consolidated balance sheets.
The Company has a note payable to a shareholder in the amount of $590,723. This loan is interest-free and has no specific terms of repayment.
Note 7 - Capital transactions
In December 2007 we issued a total of 1,600,000 shares of our common stock and an equal number of warrants in a private placement of common stock and warrants. In the purchase agreement, the investors bought their stock at $2.20 per share, received warrants to purchase an equal number of shares at $3.00 per share, and were granted certain anti-dilution rights, which would essentially re-price their purchase if we later sold shares at a lower price. At our current stock price, the anti-dilution provisions essentially precluded our raising capital through sales of our stock.
As a result, the Company requested that the investors waive their anti-dilution rights. One of the requirements for us to obtain the requested waivers was to reduce the warrant exercise price to more closely reflect our current stock price. The result of our negotiations with the investors was a reduction in the warrant exercise price to $.10 per share for those warrants exercised promptly, and a reduction in the warrant exercise price to $.40 per share for most of the remaining warrants.
On November 5, 2010, the Company’s Board of Directors approved a resolution which modified the terms of the 1,600,000 warrants. The modified terms were (i) waiver of anti-dilution rights, (ii) modification of the exercise price of the warrants as defined in the agreement, and (iii) extension of expiration date to December 1, 2013.
Through March 31, 2011, 1,041,267 warrants have been exercised for approximately $104,000. The remaining warrants of 558,733 are exercisable between $0.10 and $3.00 per share and expire through December 1, 2013.
The Company accounted for this change of warrants as a modification of the warrants during the year ended December 31, 2010. The modification of warrants, an equity instrument, resulted in a transfer of value to the holders of the instrument, thus this transfer of value has been characterized as a deemed dividend to shareholders. The Company valued the deemed dividend as the incremental fair value of modified warrants compared to the fair value of the old warrants immediately prior to modification. The weighted average grant date fair value of the warrants after modification was $0.05 per share. The fair value of the warrants prior to modification was insignificant, therefore a deemed dividend to the shareholder was recorded for approximately $77,000 to account for the incremental fair value of the warrant modification, which is reflected as an increase and corresponding decrease in additional paid in capital for the year ended December 31, 2010.
INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011 and March 31, 2010
(Unaudited)
Note 7 - Capital transactions (continued)
On February 17, 2011, the Company acquired from one of its shareholders 100% of its equity interest in Better Blocks International Limited (“BBI”), consisting primarily of intellectual properties in exchange for 500,000 shares of the Company’s common stock.
This transaction is between entities under common control and accordingly the net asset acquired is recorded at zero, which is the carrying value by BBI and is recorded as a capital transaction.
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 March 31, 2011, there were 558,733 warrants outstanding and exercisable. The warrants are exercisable between $0.10 and $3.00 per share expiring December 1, 2013. At March 31, 2011 there were 1,957,000 stock options outstanding and 657,000 were vested and exercisable at an exercise price of $2.00.
The following securities were not involved in the computation of diluted net loss per share as their effect would have been anti-dilutive:
|
March 31
|
||||||||
|
2011
|
2010
|
|||||||
|
Options to purchase common stock
|
1,957,000
|
837,000
|
||||||
|
Warrants to purchase common stock
|
558,733
|
1,781,625
|
||||||
INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011 and March 31, 2010
(Unaudited)
Note 8 - Basic and diluted earnings per share (continued)
The computations for basic and fully diluted earnings per share are as follows:
|
For the 3-months ended March 31, 2011:
|
Loss
(Numerator)
|
Weighted
Average
Shares (Denominator)
|
Per Share
Amount
|
||||||||||
|
Basic and diluted earnings per share
|
|||||||||||||
|
Loss to common shareholders
|
$ | (233,529 | ) | 15,630,512 | $ | (0.01 | ) | ||||||
|
For the 3-months ended March 31, 2010:
|
Loss
(Numerator)
|
Weighted Average
Shares (Denominator)
|
Per Share
Amount
|
||||||||||
|
Basic and diluted loss per share
|
|||||||||||||
|
Loss to common shareholders
|
$ | (75,128 | ) | 14,505,912 | $ | (0.01 | ) | ||||||
INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011 and March 31, 2010
(Unaudited)
Note 9 - Segment reporting
The Company operates in one industry segment and is engaged in the selling of various consumer products primarily through direct marketing 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 loss by geographic area is as follows:
|
For the three months ended March 31, 2011
|
For the three months ended March 31, 2010
|
|||||||||||||||||||||||
|
Domestic
|
International
|
Totals
|
Domestic
|
International
|
Totals
|
|||||||||||||||||||
|
NET SALES
|
$ | 386,040 | $ | 146,198 | $ | 532,238 | $ | 699,971 | $ | 625,942 | $ | 1,325,913 | ||||||||||||
|
COST OF SALES
|
296,054 | 63,564 | 359,618 | 487,663 | 292,117 | 779,780 | ||||||||||||||||||
|
Gross profit
|
89,986 | 82,634 | 172,620 | 212,308 | 333,825 | 546,133 | ||||||||||||||||||
|
Operating expenses:
|
||||||||||||||||||||||||
|
General and administrative
|
285,659 | 2,004 | 287,663 | 453,834 | 20,462 | 474,296 | ||||||||||||||||||
|
Selling and marketing
|
118,493 | — | 118,493 | 141,372 | 5,737 | 147,109 | ||||||||||||||||||
|
Total operating expense
|
404,152 | 2,004 | 406,156 | 595,206 | 26,199 | 621,405 | ||||||||||||||||||
|
Operating income (loss)
|
$ | (314,166 | ) | $ | 80,630 | $ | (233,536 | ) | $ | (382,898 | ) | $ | 307,626 | $ | (75,272 | ) | ||||||||
Selected balance sheet information by segment is presented in the following table as of:
|
March 31,
|
December 31,
|
|||||||
|
Total Assets
|
2011
|
2010
|
||||||
|
Domestic
|
$
|
654,622
|
$
|
810,252
|
||||
|
International
|
4,372
|
33,931
|
||||||
|
Total Assets
|
$
|
658,994
|
$
|
844,183
|
||||
INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011 and March 31, 2010
(Unaudited)
Note 10 - Income taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company has provided a full valuation allowance on the net deferred tax asset because of uncertainty regarding its realization. This asset primarily consists of net operating losses. For the most part, the Company has experienced operating losses since inception. Therefore the Company has accumulated approximately $3,600,000 of net operating loss carryforwards for federal and state purposes, which expire twenty years from the time of incurrence for federal purposes. Expiration for the state net operating carryforwards may vary based on different state rules.
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 March 31, 2011 and 2010. At March 31, 2011 and December 31, 2010 the Company has approximately $260,000 accrued for various tax penalties.
The Company has not filed income tax returns since inception; therefore, the statute for all years remains open and any of these years could potentially be audited.
Note 11 – Subsequent events
On April 1, 2011, the Company issued 1,000,000 shares of common stock in a private placement at $0.10 for total consideration of $100,000.
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 are selling 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 quarter ended March 31, 2011 with the quarter ended March 31, 2010.
Revenues
Our revenues decreased to approximately $532,000 for the quarter ended March 31, 2011, down from approximately $1,326,000 recorded during the comparative quarter in 2010, a 60% decrease. There were three major reasons for the decrease in revenue. The first reason relates to reduced sales on televised home shopping (HSN) as compared to the same period 2010. During the three months ended March 31, 2011, the DermaWandTM revenue on HSN was approximately $362,000, as compared to approximately $539,000 during the comparative quarter in 2010.
The second reason for the decrease in revenue was a decline in international sales. During the three months ended March 31, 2011, international sales revenue for the DermaWandTM was approximately $146,000, as compared to approximately $626,000 during the comparative quarter in 2010.
The third reason for the decrease in revenue was that in March 2010, the Company recognized approximately $94,000 of royalty income relating to the non-refundable royalty advance paid under the Allstar agreement. No revenue was recognized under the Allstar agreement in 2011.
All revenues recorded during the quarter ended March 31, 2011 were generated by our own products, as was the case during the comparative period in 2010.
Gross Margin
Gross margin percentage was approximately 32% for the quarter ended March 31, 2011, down from approximately 41% during the comparative quarter in 2010. The major reason for the decrease relates to the selling price on the DermaWand on the Home Shopping Network has decrease over the last year from and high of $69.95 to a low of $49.95.
In addition, the $94,000 of royalty income relating to the non-refundable royalty advance paid under the Allstar agreement, was recognized in March 2010. This royalty income had no cost of sales associated with it, thus increasing the gross margin in 2010 as compared to 2011.
Operating Expenses
Total operating expenses decreased to approximately $406,000 during the quarter ended March 31, 2011, from approximately $621,000 during the quarter ended March 31, 2010, down approximately $215,000, or 35%. Management’s efforts to reduce the level of expenses over the past 12 months are one of the reasons for the decrease in operating expenses. A large portion of the decrease in operating expenses, approximately $68,000, can be attributed to a decrease in payroll expenses. In addition, the Company has decreased accounting expenses by approximately $40,000 and consulting expenses by approximately $77,000. The remaining $30,000 in operating expense reduction relates to managements efforts to control costs during the first quarter of 2011.
Net Loss
The Company generated a net loss of approximately $234,000 for the quarter ended March 31, 2011, compared with a net loss of approximately $75,000 for the quarter ended March 31, 2010. The major reason for the increased 2011 net loss was the reduction of revenue generated in our US and International distribution of the Derma WandTM product.
Liquidity and Capital Resources
At March 31, 2011, we had approximately $43,000 in cash on hand (including restricted cash), compared to approximately $161,000 at December 31, 2010. We generated negative cash flows from operations of approximately $117,000 in the first quarter of 2011 compared to a negative cash flow from operations of approximately $101,000 for the same period in 2010. The negative cash flow from operations during the current period was a result of a net loss of approximately $234,000, a decrease in accounts receivable of approximately $72,000, an increase in inventory of approximately $42,000, a decrease in prepaid expense and deposits of approximately $35,000, an increase in accounts payable of approximately $106,000, a decrease in severance payable of approximately $63,000, a decrease in deferred revenue of approximately $3,000, stock based compensation expense of approximately $8,000 and depreciation expense of approximately $4,000
We have a note payable to The Better Blocks Trust (“BB Trust”) in the amount of approximately $591,000.
On April 1, 2011, the Company issued 1,000,000 shares of common stock in a private placement at $0.10 for total consideration of $100,000.
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 quarter ended March 31, 2011, of approximately $117,000, and the Company, for the most part, has experienced recurring losses from operations. As of March 31, 2011, the Company had a negative working capital of approximately $1,052,000 compared to a negative working capital of approximately $879,000 at December 31, 2010, and an accumulated deficit of approximately $6,451,000 as of March 31, 2011.
Management plans to continue to seek to raise funds in addition to the sources above primarily through the sale of capital stock to sources still to be identified. However, to date, no additional sources have been identified by the Company and at this time, the Company is not party to any additional funding agreements.
As noted above under “Business,” our goal is to use the brand awareness we create in our infomercials to sell the products featured in our infomercials, along with related families of products, under distinct brand names in traditional retail stores. We will need to raise additional capital to execute that business plan. There can be no assurance that the required capital will be available on commercially reasonable terms, if at all. If we are unable to raise additional capital, we will assess all available alternatives including a sale of our assets or a merger. If none of these alternatives are available, these conditions raise substantial doubt about the Company’s ability to continue as a going concern.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no changes to our critical accounting policies and estimates in the three months ended March 31, 2011. 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, 2010, as filed with the Commission with our Annual Report form 10-K filed on March 29, 2011.
Not applicable
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, 2010.
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 March 31, 2011 (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 March 31, 2011 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.
PART II – OTHER INFORMATION
None
Not required for smaller reporting company
None
None
None
| 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
|
|
|
Rule 13a-14(a)/15d-14(a) Certification – Chief Financial Officer
|
|
|
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
|
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: May 16, 2011
|
By: |
|
/s/ Kelvin Claney | |
| Name: | Kelvin Claney | |||
| Title: | Chief Executive Officer | |||
| Date: May 16, 2011 | ||||
| By: | /s/ Richard Ransom | |||
| Name: | Richard Ransom | |||
| Title: | Chief Financial Officer | |||
Page 24