NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013 and September 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 nine months ended September 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 nine months ended September 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 accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes.  Management believes that the estimates utilized in preparing its condensed consolidated financial statements are reasonable and prudent.  The most significant estimates used in these condensed consolidated financial statements include the allowance for doubtful accounts, reserves for returns, inventory reserves, valuation allowance on deferred tax assets and share based compensation.  Actual results could differ from these estimates.

Recently Issued Accounting Pronouncements

In July 2013, the FASB issued ASU 2013-11,”Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”.  This update to the income tax guidance clarifies the diversity in practice in the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists.  This update requires the unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset or as a liability to the extent the entity cannot or does not intend to use the deferred tax asset for such purpose.  The new accounting guidance is effective beginning January 1, 2014 and should be applied prospectively to all unrecognized tax benefits that exist at the effective date and retrospective application is permitted. The Company does not expect the adoption of ASU 2013-11 to have a material impact on its consolidated financial statements.

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INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013 and September 30, 2012

 (Unaudited)

Note 2 - Summary of significant accounting policies (continued)

Concentration of credit risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, include cash and trade receivables.  The Company maintains cash in bank accounts that, at times, may exceed federally insured limits.  The Company has not experienced any losses and believes it is not exposed to any significant risks on its cash in bank accounts.

As of September 30, 2013 and December 31, 2012, approximately 95% 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 nine months ended September 30, 2013.  For the three and nine months ended September 30, 2012, approximately 13% and 6%, respectively, of net sales were made to one televised shopping network major customer.

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 Convertible 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 September 30, 2013 and December 31, 2012 the amount of Transfirst reserves were approximately $150,000.

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 general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations.

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INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013 and September 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 $334,000 at September 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 $167,000 at September 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 September 30, 2013 and December 31, 2012 is approximately $133,000 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 $1,100 and $3,600 and $8,700 and $10,600 for the three and nine months ended September 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 nine months ended September 30, 2013 and 2012.

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INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013 and September 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 ^® 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 payment received prior to shipment on international sales approximated $188,000 and $240,000 as of September 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 nine months ended September 30, 2013:

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INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013 and September 30, 2012

 (Unaudited)

Note 2 - Summary of significant accounting policies (continued)

Shipping and handling

Amounts billed to a customer for shipping and handling are included in net sales; shipping and handling revenue approximated $872,000 and $947,000 and $3,020,000 and $1,690,000 for the three and nine months ended September 30, 2013 and 2012, respectively.  Shipping and handling costs are included in cost of sales.  Shipping and handling costs approximated $700,000 and $497,000 and $2,639,000 and $961,000 for the three and nine months ended September 30, 2013 and 2012, respectively.

Research and development

Research and development costs are expensed as incurred and are included in selling and marketing expense in the accompanying condensed consolidated financial statements.  Research and development costs primarily consist of efforts to discover and develop new products and the testing and development of direct-response advertising related to these products.  Research and development costs approximated $32,000 and $39,000 and $85,000 and $53,000 for the three and nine months ended September 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 approximately $2,770,000 and $2,374,000 and $9,518,000 and $4,348,000 in such costs for the three and nine months ended September 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.

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INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013 and September 30, 2012

 (Unaudited)

Note 2 - Summary of significant accounting policies (continued)

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 September 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 September 30, 2013, 2,191,668 options are outstanding under the 2011 Plan.

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.

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INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013 and September 30, 2012

(Unaudited)

Note 2 - Summary of significant accounting policies (continued)

Stock options (continued)

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

Of the stock options outstanding as of September 30, 2013 under the Stock Option Plans, 660,002 options are currently vested and exercisable. The weighted average exercise price of these options was $0.21. These options expire through September 2022. The aggregate intrinsic value for options outstanding and exercisable at September 30, 2013 was approximately $142,000. The aggregate intrinsic value for options outstanding and exercisable at September 30, 2012 was approximately $162,000.  The aggregate intrinsic value for options exercised during the nine months ended September 30, 2013 was approximately $180,000.

For the three and nine months ended September 30, 2013 and 2012, the Company recorded approximately $57,000 and $93,300 and $200,000 and $183,900, respectively, in share compensation expense related to vesting of options previously granted under the Stock Option Plans.  At September 30, 2013, there was approximately $531,000 of total unrecognized compensation cost related to non-vested option grants that will be recognized over the remaining vesting period of approximately 3 years.

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INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013 and September 30, 2012

(Unaudited)

Note 2 - Summary of significant accounting policies (continued)

Stock options (continued)

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

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

Of the stock options outstanding outside of the plan at September 30, 2013, 1,073,333 options are currently vested and exercisable. The weighted average exercise price of these options was $0.19. These options expire between December 2013 and March 2023. The aggregate intrinsic value for options outstanding and exercisable at September 30, 2013 was approximately $264,000. The aggregate intrinsic value for options outstanding and exercisable at September 30, 2012 was approximately $178,000.  The aggregate intrinsic value for options exercised during the nine months ended September 30, 2013 was approximately $5,000.

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INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013 and September 30, 2012

(Unaudited)

Note 2 - Summary of significant accounting policies (continued)

Stock options (continued)

For the three and nine months ended September 30, 2013 and 2012, the Company recorded approximately $1,600 and $89,000 and $136,000 and $187,000, respectively, in share based compensation expense related to vesting of options previously granted outside of the Stock Option Plans.  At September 30, 2013, there was approximately $331,000 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 nine months ended September 30, 2013 to value the stock options outstanding outside the plan:

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

For the nine months ended September, 2013 and 2012, the Company recognized approximately $224,000 and $95,000, respectively, in share based compensation expense related to employee stock options and approximately $111,000 and $275,000, respectively related to share based compensation expense related to non-employee stock based awards.  

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INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013 and September 30, 2012

(Unaudited)

Note 3 - Commitments and contingencies

Leases

As of September 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 nine months ended September 30, 2013 and 2012 totaled approximately $13,000 and $7,000 and $33,000 and $25,000, respectively.  The schedule below details the future financial obligations under the remaining lease as of September 30, 2013.

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.  Royalty payments are made on a monthly basis and are calculated by multiplying the number of units of product sold, domestically and internationally, by $2.50.  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 $177,000 and $210,000 and $729,000 and $521,000 for the three and nine months ended September 30, 2013 and 2012, respectively.

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INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013 and September 30, 2012

(Unaudited)

Note 3- Commitments and contingencies (continued)

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 $75,000 has been made for the nine months ended September 30, 2013.  

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 has a scheduled expiration of April 20, 2014.

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INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013 and September 30, 2012

(Unaudited)

Note 4 – Severance payable

In September 2010 the Company entered into a severance agreement with a former consultant.   Under the severance agreement, the consultant 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 allowed 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 $98,000 at September 30, 2013 and $128,600 at December 31, 2012, of which $40,800 is current and $57,200 is long-term as of September 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 nine months ended September 30, 2013 and 2012, was approximately $5,200 and $7,000 and $17,800 and $14,000, respectively.  Interest charged through September 30, 2013 was fully paid at September 30, 2013.

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 nine months ended September 30, 2013 and 2012, $52,000 and $0, and $137,000 and $0, respectively, in principal prepayments were made on the note.  At September 30, 2013 and December 31, 2012, the balance outstanding was $453,723 and $590,723, respectively.  An additional principal payment of $20,000 was made in October 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 September 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 September 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 $900, and $300 and $3,100, for the three and nine months ended September 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.

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INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013 and September 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:

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 $0 and $25,000, and $11,000 and $36,000 of share based compensation expense for the three and nine months ended September 30, 2013 and 2012, respectively related to the issuance of these shares, and the Company has remaining unrecognized expense of approximately $6,000, which will be recognized over the next 10 months.

For the three and nine months ended September 30, 2013 and 2012, the Company recorded approximately $0 and $149,000 and $0 and $160,000, respectively, of share based compensation expense for the 500,000 warrants issued to the consultants.  The warrants were fully expensed at settlement.  As of September 30, 2013, there was no unrecognized compensation costs related to these warrant grants.

For the three and nine months ended September 30, 2013 and 2012, the Company recorded approximately $0 and $32,000 and $0 and $47,000, 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 September 30, 2013, there was no unrecognized compensation costs related to these warrant grants.

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INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013 and September 30, 2012

(Unaudited)

Note 7 - Capital transactions (continued)

For the three and nine months ended September 30, 2013 and 2012, the Company recorded approximately $5,000 and $58,000, and $14,000 and $58,000, 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 September 30, 2013, there was approximately $34,000 of total unrecognized compensation costs related to these warrant grants which will be recognized over the remaining 22.5 months.  On October 24, 2012, 125,000 warrants issued to one of the consultants were exercised for total consideration of $13,000.  

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 the three and nine months ended September 30, 2013 and 2012, the Company recorded approximately $5,000 and $3,000, and $14,000 and $3,000 of share based compensation, respectively.  As of September 30, 2013, there was approximately $34,000 of total unrecognized compensation costs related to these warrant grants which will be recognized over the remaining 22.5 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 nine months ended September 30, 2013, approximately $9,000 and $28,000, respectively was expensed and included in share based compensation expense in our accompanying consolidated financial statements.  Approximately $67,000 is capitalized at September 30, 2013 and approximately $37,000 and $30,000 is reflected as current and non-current assets, respectively, in our accompanying condensed consolidated balance sheet.

As of September 30, 2013, the following warrants were outstanding and exercisable:

On September 1, 2013, the Company entered into a one year investor relations consulting agreement, in which 150,000 shares of restricted stock were agreed to be issued to a consultant.  Restricted stock awards provide that, during the applicable vesting periods, the shares awarded may not be sold or transferred by the participant. The fair market value was $0.45. 37,500 shares vested as of the date of executed agreement.  An additional 37,500 shares vest on December 31, 2013, with the remaining 75,000 shares vesting on February 28, 2014.  The award contains service conditions based on the consultant’s continued service for the Company.  For the three and nine months ended September 30, 2013, the Company recorded approximately $5,000 of share based compensation, respectively.  As of September 30, 2013, there was approximately $60,000 of total unrecognized compensation costs related to this restricted stock grant which will be recognized over the remaining eleven months.  

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INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013 and September 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 September 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 September 30, 2013 there were 5,231,669 stock options outstanding and 1,733,335 were vested and exercisable at an average exercise price of $0.23.

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

As the Company was in a loss position for the three end nine months ended September 30, 2012, all shares were anti-dilutive.  

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

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INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013 and September 30, 2012

(Unaudited)