We have audited the accompanying consolidated balance sheets of International Commercial Television, Inc. and Subsidiary (collectively, the Company) as of December 31, 2013 and 2012, and the related consolidated statements of operations, shareholders equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 2013. The financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly we express no such opinion.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of International Commercial Television, Inc. and Subsidiary as of December 31, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY
INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
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.
The Company sells various health, wellness and beauty products through infomercials and other channels. The products are primarily marketed and sold throughout the United States and internationally via infomercials. Although our companies are incorporated in Nevada and New Zealand, a substantial portion of operations are currently run from our Wayne, Pennsylvania office.
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 Companys common stock. This transaction is between entities under common control and accordingly the net asset acquired is recorded at zero, which was the carrying value of BBI and was recorded as a capital transaction.
ICTV utilizes a distinctive marketing strategy and multi-channel distribution model to develop, market and sell products through infomercials, live home shopping television, specialty outlets and online shopping. It offers health and beauty products, including DermaWand
TM
, a skin care device that reduces the appearance of fine lines and wrinkles, and helps improve skin tone and texture; and DermaVital
TM
, a professional quality skin care line that effects superior hydration.
The goal of our strategy is to use the brand awareness we create in our infomercials so that we can sell the products featured in our infomercials, along with related families of products, under distinct brand names on both a continuity program model basis and in traditional retail stores. Our goal is to have these families of products sold in the traditional retail environment in shelf-space dedicated to the product category. We are developing the infrastructure to create these brands of products so that we can implement our business plan. Currently, this plan is being executed with the DermaWand
TM
and the DermaVital
TM
skincare line. The Company is presently exploring other devices and consumable product lines.
Note 2 - Summary of significant accounting policies
Principles of consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary BBI. 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 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.
Recently Issued Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 adoption of ASU 2013-11 did not have a material impact on its consolidated financial statements.
F-7
INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
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 December 31, 2013 and 2012, 90% and 90% of the Companys accounts receivable were due from various individual customers to whom our products had been sold directly via Direct Response Television; 7% and 5%, respectively were due from a third party; 1.5% and 4% was cash due from the Companys credit card processors; the remaining 1.5% and 1% of the Companys accounts receivable were due from two and one wholesale infomercial operators, respectively. Major customers are considered to be those who accounted for more than 10% of net sales. For the fiscal years ended December 31, 2013 and 2012, there were no major customers.
Fair value of financial instruments
Fair value estimates, assumptions and methods used to estimate fair value of the Companys financial instruments are made in accordance with the requirements of Accounting Standards Codification (ASC) 825-10, Disclosures about Fair Value of Financial Instruments. The Company has used available information to derive its estimates. However, because these estimates are made as of a specific point in time, they are not necessarily indicative of amounts the Company could realize currently. The use of different assumptions or estimating methods may have a material effect on the estimated fair value amounts. The carrying values of financial instruments such as cash, accounts receivable, accounts payable, and accrued liabilities approximate their fair values due to the short settlement period for these instruments. It is not practicable to estimate the fair value of the Note Payable to Shareholder due to its related party nature.
Cash and cash equivalents
The Company considers all unrestricted highly liquid investments with an original maturity of three months or less to be cash equivalents.
Cash held in escrow
Transfirst ePayment Services (Transfirst), ICTVs 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 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 as Cash held in escrow. Effective August 1, 2013, the Company switched its credit card processing from Transfirst to Litle & Co., LLC (Litle). Litle does not require a reserve to be held for its processing. The Company still utilizes Transfirst for electronic check processing. As a result of the change in credit card processors, Transfirst released approximately $87,000 of the reserve through December 31, 2013, with a portion remaining for electronic check processing. The Company expects the remainder of the reserve to be released in 2014. At December 31, 2013 and 2012 the amount of Transfirst reserves was approximately $63,000 and $150,000, respectively.
Foreign currency transactions
Transactions entered into by the Company in currencies other than its local currency, are recorded in its local currency and any changes in currency exchange rates that occur from the initiation of a transaction until settled are recorded as foreign currency gains or losses in the Consolidated Statements of Operations.
Accounts receivable
Accounts receivable are recorded net of allowances for returns and doubtful accounts of approximately $446,000 and $623,000 as of December 31, 2013 and 2012, respectively. The allowances are calculated based on historical customer returns and bad debts.
F-8
INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
Note 2 - Summary of significant accounting policies (continued)
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 Consolidated Balance Sheets were approximately $239,000 and $248,000 as of December 31, 2013 and 2012, respectively.
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. The Company has recorded approximately $139,000 and $251,000 in inventory of consigned product as of December 31, 2013 and 2012, respectively, 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 $10,000 and $14,000, respectively, for the years ended December 31, 2013 and 2012.
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 in the fiscal years ended December 31, 2013 and 2012.
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 Companys 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.
Revenue related to our DermaVital
TM
continuity program is recognized monthly upon shipment to customers. Revenue related to international wholesale customers is recorded at gross amounts with a corresponding charge to cost of sales upon shipment. Deferred revenue short-term for payment received prior to shipment on international sales approximated $119,000 and $240,000 as of December 31, 2013 and 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. Returns for the years presented have been offset against gross sales.
F-9
INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
Note 2 - Summary of significant accounting policies (continued)
In 2012, the Company started selling warranties on the DermaWand
TM
for one-year, three-year and lifetime terms. One-year and three-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 consolidated balance sheets. Changes in the Companys deferred service revenue related to the warranties is presented in the following table:
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
Deferred extended warranty revenue:
|
|
|
|
|
|
|
At beginning of period
|
|
$
|
171,319
|
|
$
|
-
|
Revenue deferred for new warranties
|
|
|
436,816
|
|
|
186,535
|
Revenue recognized
|
|
|
(97,505)
|
|
|
(15,216)
|
At end of period
|
|
$
|
510,630
|
|
$
|
171,319
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
123,809
|
|
$
|
41,333
|
Non-current portion
|
|
|
386,821
|
|
|
129,986
|
|
|
$
|
510,630
|
|
$
|
171,319
|
Shipping and handling
The amount billed to a customer for shipping and handling is included in revenue: shipping and handling revenue approximated $5,990,000 and $3,546,000 for the years ended December 31, 2013 and 2012, respectively. Shipping and handling costs are included in cost of sales. Shipping and handling costs approximated $3,443,000 and $2,082,000 for the years ended December 31, 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 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. Product testing and development costs approximated $168,000 and $70,000 for the years ended December 31, 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 consolidated financial statements. The Company incurred approximately $12,950,000 and $7,626,000 in such costs for the years ended December 31, 2013 and 2012, respectively.
Income taxes
In preparing our consolidated financial statements, we make estimates of our current tax exposure and temporary differences resulting from timing differences for reporting items for book and tax purposes. We recognize deferred taxes by the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for differences between the financial statement and tax bases of assets and liabilities at enacted statutory tax rates in effect for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. In addition, valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. In consideration of our accumulated losses and limited historical ability to generate taxable income to utilize our deferred tax assets, we have estimated that we will not be able to realize any benefit from our temporary differences and have recorded a full valuation allowance. If we sustain profitability in the future at levels which cause management to conclude that it is more likely than not that we will realize all or a portion of the net operating loss carry-forward, we would record the estimated net realized value of the deferred tax asset at that time and would then provide for income taxes at a rate equal to our combined federal and state effective rates. Subsequent revisions to the estimated net realizable value of the deferred tax asset could cause our provision for income taxes to vary significantly from period to period.
The Companys policy is to recognize interest and penalties related to tax matters in general and administrative expenses in the Consolidated Statements of Operations.
F-10
INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
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 of 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 subsidiaries 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 subsidiaries. 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 December 31, 2013, 933,334 options are outstanding under the Plan.
In December 2011, our shareholders approved our 2011 Stock Option Plan (the 2011 Plan). The 2011 Plan is designed for selected employees, officers, and directors of 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. Generally, the options granted vest over three years with one-third vesting on each anniversary date of the grant. As of December 31, 2013, 2,541,668 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 issued to employees and directors. The Company recognizes compensation expense in an amount equal to the fair value of share-based payments such as stock options granted to employees over the requisite vesting period of the awards. Stock options granted to non-employees are remeasured at each reporting period.
The following is a summary of stock options outstanding under the Plan and 2011 Plan (collectively Stock Option Plans) for the years ended December 31, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Weighted
Average
|
|
|
Employee
|
|
|
Non-
Employee
|
|
|
Totals
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2013
|
|
|
2,730,000
|
|
|
|
350,000
|
|
|
|
3,080,000
|
|
|
$
|
0.18
|
Granted during the year
|
|
|
1,295,000
|
|
|
|
-
|
|
|
|
1,295,000
|
|
|
|
0.27
|
Exercised during the year
|
|
|
(899,998)
|
|
|
|
-
|
|
|
|
(899,998)
|
|
|
|
0.10
|
Forfeited during the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2013
|
|
|
3,125,002
|
|
|
|
350,000
|
|
|
|
3,475,002
|
|
|
$
|
0.24
|
F-11
INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
Note 2 - Summary of significant accounting policies (continued)
Stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Weighted
Average
|
|
|
Employee
|
|
|
Non-
Employee
|
|
|
Totals
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2012
|
|
|
1,300,000
|
|
|
|
350,000
|
|
|
|
1,650,000
|
|
|
$
|
0.08
|
Granted during the year
|
|
|
1,510,000
|
|
|
|
-
|
|
|
|
1,510,000
|
|
|
|
0.29
|
Exercised during the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
Forfeited during the year
|
|
|
(80,000)
|
|
|
|
-
|
|
|
|
(80,000)
|
|
|
|
(0.11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2012
|
|
|
2,730,000
|
|
|
|
350,000
|
|
|
|
3,080,000
|
|
|
$
|
0.18
|
Of the stock options outstanding as of December 31, 2013 under the Stock Option Plans, 747,502 options are currently vested and exercisable. The weighted average exercise price of these options was $0.20. These options expire through September 2022. The aggregate intrinsic value for options outstanding and exercisable at December 31, 2013 was approximately $486,000. The aggregate intrinsic value for options outstanding and exercisable at December 31, 2012 was approximately $276,000. The aggregate intrinsic value for stock options exercised during the year ended December 31, 2013 was approximately $184,000.
For the years ended December 31, 2013 and 2012, the Company recorded approximately $262,000 and $250,000 respectively in stock compensation expense under the plan. At December 31, 2013, there was approximately $551,000 of total unrecognized compensation cost related to non-vested option grants that will be recognized over the remaining vesting period of approximately 3 years.
The following assumptions are used in the Black-Scholes option pricing model for the years ended December 31, 2013 and 2012 to value the stock options granted during the period:
|
|
|
|
|
|
2013
|
|
2012
|
Risk-free interest rate
|
1.14% - 2.13%
|
|
Risk-free interest rate
|
1.19% - 1.62%
|
Expected dividend yield
|
0.00
|
|
Expected dividend yield
|
0.00
|
Expected life
|
6.00 years
|
|
Expected life
|
6.00 years
|
Expected volatility
|
318% - 352%
|
|
Expected volatility
|
305% - 316%
|
Weighted average grant date fair value
|
$0.30
|
|
Weighted average grant date fair value
|
$0.30
|
The following is a summary of stock options outstanding outside of the Stock Option Plans for the years ended December 31, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Weighted
Average
|
|
|
Employee
|
|
|
Non-
Employee
|
|
|
Totals
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2013
|
|
|
150,000
|
|
|
|
1,650,000
|
|
|
|
1,800,000
|
|
|
$
|
0.20
|
Granted during the year
|
|
|
175,000
|
|
|
|
190,000
|
|
|
|
365,000
|
|
|
|
0.34
|
Exercised during the year
|
|
|
(33,333)
|
|
|
|
-
|
|
|
|
(33,333)
|
|
|
|
0.15
|
Expired during the year
|
|
|
-
|
|
|
|
(250,000)
|
|
|
|
(250,000)
|
|
|
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2013
|
|
|
291,667
|
|
|
|
1,590,000
|
|
|
|
1,881,667
|
|
|
$
|
0.23
|
F-12
INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
Note 2 - Summary of significant accounting policies (continued)
Stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Weighted
Average
|
|
|
Employee
|
|
|
Non-
Employee
|
|
|
Totals
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2012
|
|
|
-
|
|
|
|
250,000
|
|
|
|
250,000
|
|
|
$
|
0.18
|
Granted during the year
|
|
|
150,000
|
|
|
|
1,400,000
|
|
|
|
1,550,000
|
|
|
|
0.20
|
Exercised during the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
Expired during the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2012
|
|
|
150,000
|
|
|
|
1,650,000
|
|
|
|
1,800,000
|
|
|
$
|
0.20
|
Of the stock options currently outstanding outside of the Stock Option Plans at December 31, 2013, 823,333 options are currently vested and exercisable. The weighted average exercise price of these options was $0.20. These options expire through April 2023. The aggregate intrinsic value for options outstanding and exercisable at December 31, 2013 was approximately $537,000. The aggregate intrinsic value for options outstanding and exercisable at December 31, 2012 was $243,000.
For the years ended December 31, 2013 and 2012, the Company recorded approximately $377,000 and $272,000, respectively in stock compensation expense under the plan. At December 31, 2013, there was approximately $473,000 of total unrecognized compensation cost related to non-vested option grants that will be recognized over the remaining vesting period of approximately 3 years.
The following assumptions are used in the Black-Scholes option pricing model for the years ended December 31, 2013 and 2012 to value the stock options outstanding outside the plan:
|
|
|
|
|
|
2013
|
|
2012
|
Risk-free interest rate
|
1.14% 3.04%
|
|
Risk-free interest rate
|
0.72% 1.78%
|
Expected dividend yield
|
0.00
|
|
Expected dividend yield
|
0.00
|
Expected life
|
5.00 10.00 years
|
|
Expected life
|
3.00 10.00 years
|
Expected volatility
|
262% 322%
|
|
Expected volatility
|
263% - 394%
|
Weighted average grant date fair value
|
$0.43
|
|
Weighted average grant date fair value
|
$0.31
|
The following is a summary of all stock options outstanding, and nonvested for the year ended December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Weighted Average
|
|
|
Employee
|
|
|
Non-
Employee
|
|
Totals
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2013 nonvested
|
|
|
2,463,333
|
|
|
|
1,383,333
|
|
|
3,846,666
|
|
|
$
|
0.21
|
Granted
|
|
|
1,470,000
|
|
|
|
190,000
|
|
|
1,660,000
|
|
|
|
0.29
|
Vested
|
|
|
(1,009,999
|
)
|
|
|
(710,833
|
)
|
|
(1,720,832
|
)
|
|
|
0.20
|
Balance, December 31, 2013 nonvested
|
|
|
2,923,334
|
|
|
|
862,500
|
|
|
3,785,834
|
|
|
$
|
0.25
|
F-13
Note 3 - Commitments and contingencies
Leases
As of December 31, 2013, the Company had an active lease related to the office space rented in Wayne, Pennsylvania. Total rent expense incurred during 2013 and 2012 totaled approximately $49,000 and $34,000, respectively. During the year ended December 31, 2013, the Company moved to a different building within the same facility and has amended the lease through March 2016. The schedule below details the future financial obligations under the lease.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
TOTAL OBLIGATION
|
|
Wayne - Corporate HQ
|
|
$
|
52,500
|
|
|
$
|
53,100
|
|
|
$
|
13,300
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
118,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Lease Obligations
|
|
$
|
52,500
|
|
|
$
|
53,100
|
|
|
$
|
13,300
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
118,900
|
|
DermaWand
TM
On October 15, 1999, Windowshoppe.com Limited (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 R.J.M.Ventures (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 license and reconveyance agreements dated April 1, 2000 entered into by the Company and WSL and RJML. On January 5, 2001, WSL entered into an agreement with Omega 5. WSL shall have worldwide nonexclusive rights to manufacture, market and distribute DermaWand
TM
. 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 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 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 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 Companys 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 Company met the minimum requirements in each of the years ended December 31, 2013 and 2012.
The amount of royalty expense incurred for sales of the DermaWand
TM
included in selling and marketing in the accompanying Consolidated Statements of Operations were approximately $1,018,000 and $795,000 for the years ended December 31, 2013 and 2012, respectively.
Employment Agreement
Effective March 1, 2011, the Company entered into an employment agreement with the CEO of the Company. Under the terms of this agreement, the Company will pay an annual salary of $180,000, subject to review and, if appropriate, adjustment on an annual basis by the Companys 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 pay in a lump sum payment equal to one year of his base salary, health insurance reimbursement and automobile expenses allowance as in effect on the date of termination. Under the Employment Agreement, Mr. Claney will be considered terminated without cause if his substantive responsibilities are changed without his prior approval, or if all or substantially all of the assets of the Company are sold, or a controlling interest in the Company is sold, unless in connection with such a sale Mr. Claneys Employment Agreement is assumed by the buyer or he is offered an employment contract for substantially the same responsibilities, for a term of at least one year, and at substantially the same compensation, terms and benefits as provided in the Employment Agreement.
F-14
INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
Note 3 - Commitments and contingencies (continued)
On April 17, 2012, the Company entered into an employment agreement with Richard Ransom, our President. 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 Companys Board of Directors. Effective January 1, 2013, this annual salary was increased to $160,000 and approved by the Board of Directors. The President 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 years salary and benefits.
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. On February 20, 2007, the Company purchased its own liability insurance, which expires on April 20, 2014. The Company intends to renew this policy. At present, management is not aware of any claims against the Company for any products sold.
Note 4 Severance payable
In September 2010 the Company entered into a severance agreement with a former consultant. Under the severance agreement, the consultant will be paid $270,000 over a 27 month period in increments of $10,000 per month beginning in September 2010 and continuing through November 2012. The Company recorded the $270,000 as a General and Administrative expense in the three months ended September 30, 2010. In April 2011, the Company amended the aforementioned severance agreement. The amendment allows the Company to make monthly payments of $3,400 per month for a period of one year from April 2011 through March 2012. In March 2012, the Company amended the aforementioned severance agreement for a second time to continue the monthly payment amount of $3,400 through March 2016. The severance payable balance at December 31, 2013 and 2012 is $87,800 and $128,600, respectively of which $40,800 is current and $47,000 is long-term as of December 31, 2013.
Note 5 - Related party transactions
The Company had received short-term advances from a shareholder totaling $50,000 during the year ended December 31, 2012. The $50,000 loan accrued interest of 6% annually and was repaid in October 2012.
The Company also received short-term advances from another shareholder with repayments of $30,900 during the year ended December 31, 2012. These advances were non-interest bearing and without specific terms of repayment.
The Company has a note payable to the Better Blocks Trust, a major shareholder, in the amount 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 with new terms to 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 at 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 accrued. 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 payments of approximately $23,000 and $21,000 were paid during 2013 and 2012, respectively. As of December 31, 2013 and 2012, the balance outstanding was approximately $394,000 and $591,000, respectively.
On April 1, 2012, when the 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.
F-15
INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
Note 5 - Related party transactions (continued)
The principal balance of this note shall be due and payable in three equal payments on each of April 1, 2015, April 1, 2016, and April 1, 2017. This note may be prepaid in whole or in part at any time without penalty, and any prepayment shall be applied against the next principal payment due. Principal payments of $197,000 and $0 were made during the years ended December 31, 2013 and 2012, respectively. On February 5, 2014, the Better Blocks Trust sold $50,000 of its note to the Company to an accredited investor, who then converted the $50,000 note into 100,000 shares of the Companys stock at the contractual conversion price of $.50 per share. Additionally, on March 18, 2014, The Better Blocks Trust sold $75,000 of its note to the Company to an accredited investor, who then converted the $75,000 note into 150,000 shares of the Companys stock at the contractual conversion price of $.50 per share. The Shares were issued as restricted stock, with a restrictive legend placed on the share certificate. The issuance of the shares was exempt from registration under Regulation D and Section 4(2) of the Securities Act of 1933. Furthermore, an additional $75,000 in principal payments were made on this note through March 27, 2014.
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 accrued interest at prime (3.25% at December 31, 2012) plus 1%. Interest was paid monthly. Principal payments were to be paid in fifteen monthly installments of approximately $6,500 (C$6,667), beginning in March 2012 and ending May 2013. The loan permitted 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) were due in two installments of $20,000 (approximates C$) payable on April 15, 2012 and July 15, 2012. In addition, the interest rate on the note was modified to lenders cost (prime), plus two-percent and the note became convertible into shares of the Companys 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 December 31, 2013 and 2012 was approximately $0 and $30,200 (C$30,000), respectively. The balance was paid in full by March 2013. Interest paid on the loan for the years ended December 31, 2013 and 2012, was approximately $200 and $3,600, respectively.
The lender of this note is also one of the two persons that receive royalty payments on the DermaWand sales as noted in Note 3
Note 7 - Capital transactions
On February 17, 2012, the Board authorized the issuance of up to 2,500,000 shares of common stocks to be purchased at $0.15 per share through February 29, 2012. On February 29, 2012, the Board amended the resolution to authorize the issuance of up to 3,000,000 shares of common stock to be purchased at $0.15 per share through March 23, 2012. A total of 2,590,000 shares were purchased through March 23, 2012 for gross proceeds of $388,500. In addition, for every three shares of common stock purchased, the purchasers received one warrant to purchase common stock at $0.25 per share. A total of 863,333 warrants were issued. The warrants expire three years after their issuance date. The warrants have a weighted average fair value of $0.32. The fair value of the warrant has been estimated on the date of grant using a Black-Scholes Pricing Model with the following assumptions:
|
|
Risk-free interest rate
|
0.36% 0.58%
|
Expected dividend yield
|
0.00
|
Expected life
|
3.00 years
|
Expected volatility
|
410% 418%
|
Exercise price
|
$0.25
|
F-16
INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
Note 7 - Capital transactions (continued)
The fair value of the warrants was approximately $274,000, and was recorded as an increase and corresponding decrease to additional paid-in capital for the year ended December 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. Upon termination, approximately $23,000 was expensed during the year ended December 31, 2012. 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 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. For the years ended December 31, 2013 and 2012, the Company recorded approximately $10,800 and $38,800, 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 7 months.
The Company used the Black Scholes model to value the 1,500,000 warrants granted using under the consulting agreement. The weighted average grant date fair value of these warrants was $0.06.
For the years ended December 31, 2013 and 2012, the Company recorded approximately $0 and $160,000, respectively, of stock based compensation expense to fully expense the 500,000 warrants issued to the consultants under the consulting agreement. As of December 31, 2013, there was no unrecognized compensation costs related to these warrant grants.
For the years ended December 31, 2013 and 2012, the Company recorded approximately $0 and $47,000, respectively, of stock based compensation expense to fully expense the 1,000,000 warrants issued to the consultants under the consulting agreement. As of December 31, 2013, there was no unrecognized compensation costs related to these warrant grants.
For the years ended December 31, 2013 and 2012, the Company recorded approximately $18,300 and $62,700, respectively, of stock based compensation expense for the 250,000 new warrants issued to the consultants under the settlement agreement. The expense related to the consultant no longer performing services was recognized immediately. As of December 31, 2013, there was approximately $29,000 of total unrecognized compensation costs related to these warrant grants which will be recognized over the remaining 19.5 months. On October 24, 2012, 125,000 warrants issued to one of the consultants were exercised for total consideration of $12,500.
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 years ended December 31, 2013 and 2012, the Company recorded approximately $18,300 and $7,700, respectively, of stock based compensation expense for the 125,000 warrants issued to the consultant under the new consulting agreement. As of December 31, 2013, there was approximately $29,000 of total unrecognized compensation costs related to these warrant grants which will be recognized over the remaining 19.5 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 and will be expensed over the consultant term. For the years ended December 31, 2013 and 2012, approximately $37,000 and $15,000, respectively, was expensed and included in stock based compensation expense in our accompanying consolidated financial statements. Approximately $58,000 is capitalized and approximately $37,000 and $21,000 is reflected as current and non-current assets, respectively, in our accompanying consolidated balance sheet.
F-17
INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
Note 7 - Capital transactions (continued)
The warrants have a weighted average fair value of $0.44. The fair value of the new warrants has been estimated on the date of grant using a Black-Scholes Pricing Model with the following assumptions:
|
|
Risk-free interest rate
|
0.31 0.42%
|
Expected dividend yield
|
-
|
Expected life
|
3.00 years
|
Expected volatility
|
401%
|
Exercise price
|
$0.10 $0.30
|
At December 31, 2013, the following warrants were outstanding and exercisable:
|
|
|
|
|
|
|
|
|
|
|
|
Holder
|
|
Warrants Outstanding
|
|
|
Exercise Price
|
|
|
Expiration Date
|
|
|
|
|
|
|
|
|
|
Shareholders in February 2012 private placement
|
|
|
863,333
|
|
|
|
$0.25
|
|
|
|
February March 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Consultant
|
|
|
125,000
|
|
|
|
$0.10
|
|
|
|
August 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Consultant
|
|
|
125,000
|
|
|
|
$0.30
|
|
|
|
August 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
|
1,113,333
|
|
|
|
$0.10 - $0.30
|
|
|
|
|
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 and 37,500 shares vested as of the date of executed agreement. An additional 37,500 shares vested on December 31, 2013, with the remaining 75,000 shares vesting on February 28, 2014. The award contains service conditions based on the consultants continued service for the Company. For the year ended December 31, 2013, the Company recorded approximately $37,300 of share based compensation. As of December 31, 2013, there was approximately $75,200 of total unrecognized compensation costs related to this restricted stock grant which will be recognized over the remaining eight months. As of December 31, 2013, $32,500 of expense related to shares that have vested was included in prepaid expenses.
Note 8 - Basic and diluted earnings (loss) 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 December 31, 2013, there were 1,113,333 warrants outstanding and exercisable. The warrants are exercisable between $0.10 and $0.30 per share expiring through August 2015. At December 31, 2013 there were 5,356,669 stock options outstanding with 1,570,835 options vested and exercisable at a weighted average exercise price of $0.22.
F-18
INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
Note 8 - Basic and diluted earnings (loss) per share (continued)
The following securities were not involved in the computation of diluted net loss per share as their effect would have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2013
|
|
|
2012
|
Options to purchase common stock
|
|
|
1,940,000
|
|
|
|
4,880,000
|
Warrants to purchase common stock
|
|
|
125,000
|
|
|
|
1,503,417
|
Convertible note payable from shareholder
|
|
|
-
|
|
|
|
1,332,291
|
As the Company was in a loss position for the year ended December 31, 2012, all shares were anti-dilutive.
The number of shares of common stock used to calculate basic and diluted earnings per share for years ended December 31, 2013 and 2012 was determined as follows:
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
Basic weighted average shares outstanding
|
|
|
21,547,775
|
|
|
|
20,110,242
|
Dilutive effect of outstanding stock options
|
|
|
1,603,888
|
|
|
|
-
|
Dilutive effect of outstanding warrants
|
|
|
383,195
|
|
|
|
-
|
Dilutive effect of restricted stock awards
|
|
|
10,413
|
|
|
|
-
|
Dilutive effect of convertible note payable
|
|
|
1,181,447
|
|
|
|
-
|
|
|
|
|
|
|
|
|
Weighted average dilutive shares outstanding
|
|
|
24,726,718
|
|
|
|
20,110,242
|
The computations for basic and fully diluted earnings (loss) per share are as follows:
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2013:
|
|
Loss
(Numerator)
|
|
Weighted Average
Shares (Denominator)
|
|
Per Share Amount
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
Income to common shareholders
|
|
$
|
1,645,878
|
|
21,547,775
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
Income to common shareholders, including interest expense on convertible note payable of $22,769
|
|
$
|
1,668,647
|
|
24,726,718
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2012:
|
|
Loss
(Numerator)
|
|
Weighted Average
Shares (Denominator)
|
|
Per Share Amount
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
Loss to common shareholders
|
|
$
|
(550,448)
|
|
20,110,242
|
|
$
|
(0.03)
|
F-19
INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
Note 9 - Income taxes
The income tax expense for the years ended December 31, 2013 and 2012 consist of the following:
|
|
|
|
|
|
|
|
Current
|
|
2013
|
|
|
2012
|
Federal
|
|
$
|
31,000
|
|
|
$
|
40,000
|
State
|
|
|
24,000
|
|
|
|
8,600
|
Total
|
|
$
|
55,000
|
|
|
$
|
48,600
|
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. Significant components of the Companys deferred tax assets (liabilities) are approximately as follows as of December 31, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
Net operating loss
|
|
$
|
121,000
|
|
|
$
|
901,000
|
Accrued returns and allowances
|
|
|
263,000
|
|
|
|
334,000
|
Accumulated depreciation
|
|
|
(5,000)
|
|
|
|
(5,000)
|
Stock options
|
|
|
262,000
|
|
|
|
390,000
|
Deferred income
|
|
|
242,000
|
|
|
|
158,000
|
Other
|
|
|
242,000
|
|
|
|
207,000
|
Total deferred tax assets
|
|
$
|
1,125,000
|
|
|
$
|
1,985,000
|
Valuation allowance
|
|
|
(1,125,000
|
)
|
|
|
(1,985,000)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
As of December 31, 2012, the Company had approximately $2,800,000 of gross federal net operating losses and approximately $800,000 of gross state net operating losses available, of which approximately $2,400,000 and $400,000, respectively, are expected to be utilized in 2013. As of December 31, 2013, the Company completed its IRC Section 382 study and concluded that the availability of the Companys net operating loss carry forwards will not be subject to annual limitations against taxable income in future periods due to change in ownership rules. The Company has provided a full valuation allowance on the remaining net deferred asset as the Company does not have sufficient history of taxable income. During 2012, the Company filed income tax returns from inception, 1998 through 2011; therefore, the statute for all years remains open and all years from 1998 through 2012 could potentially be audited. The Company is now current in all tax filings.
The Companys policy is to recognize interest and penalties related to tax matters in general and administrative expenses in the Consolidated Statements of Operations. At December 31, 2013 and 2012, the Company had approximately $190,000 and $270,000, respectively accrued for various tax penalties. The following is a summary of the activity in the penalties payable for the year ended December 31, 2013. The accrual has been reduced because a closing agreement was issued by the Wisconsin Department of Revenue resolving an outstanding tax issue, no tax or penalties were due upon resolution.
|
|
Balance, January 1, 2013
|
$ 270,000
|
Reductions in reserve
|
(80,000)
|
Balance, December 31, 2013
|
$ 190,000
|
A reconciliation between the Companys effective tax rate and the federal statutory rate for the years ended December 31, 2013 and 2012, is as follows:
|
|
|
|
|
Federal rate
|
|
34.00%
|
|
34.00%
|
State tax rate
|
|
0.95%
|
|
5.95%
|
Effect of permanent differences
|
|
5.10%
|
|
5.03%
|
Change in valuation allowance
|
|
(39.7)%
|
|
(32.18)%
|
Other
|
|
2.9%
|
|
-
|
Effective tax rate
|
|
3.25%
|
|
12.80%
|
F-20
INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
Note 10 - Segment reporting
The Company operates in one industry segment and is engaged in the selling of various consumer products primarily through direct marketing infomercials. The Company evaluates performance and allocates resources based on several factors, of which the primary financial measure is operating income by geographic area. Operating expenses are primarily prorated based on the relationship between domestic and international sales. International sales are classified as when a product is sold through a third party international distributor. Domestic sales are DRTV sales sold directly to the consumer by the Company. Included in domestic sales is approximately $150,000 in DRTV sales in Canada.
Information with respect to the Companys operating income (loss) by geographic area is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2013
|
|
For the year ended December 31, 2012
|
|
|
Domestic
|
|
International
|
|
Totals
|
|
Domestic
|
|
International
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET SALES
|
|
$
|
36,261,537
|
|
$
|
4,702,590
|
|
$
|
40,964,127
|
|
$
|
19,152,585
|
|
$
|
3,767,801
|
|
$
|
22,920,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF SALES
|
|
|
9,525,450
|
|
|
1,983,404
|
|
|
11,508,854
|
|
|
5,642,849
|
|
|
1,837,939
|
|
|
7,480,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
26,736,087
|
|
|
2,719,186
|
|
|
29,455,273
|
|
|
13,509,736
|
|
|
1,929,862
|
|
|
15,439,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
7,631,281
|
|
|
236,216
|
|
|
7,867,497
|
|
|
4,160,082
|
|
|
186,970
|
|
|
4,347,052
|
Selling and marketing
|
|
|
19,807,598
|
|
|
56,838
|
|
|
19,864,436
|
|
|
11,521,033
|
|
|
47,238
|
|
|
11,568,271
|
Total operating expenses
|
|
|
27,438,879
|
|
|
293,054
|
|
|
27,731,933
|
|
|
15,681,115
|
|
|
234,208
|
|
|
15,915,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
(702,792)
|
|
$
|
2,426,132
|
|
$
|
1,723,340
|
|
$
|
(2,171,379)
|
|
$
|
1,695,654
|
|
$
|
(475,725)
|
Selected balance sheet information by segment is presented in the following table as of December 31:
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
Domestic
|
|
$
|
4,765,746
|
|
|
$
|
4,414,775
|
International
|
|
|
6,240
|
|
|
|
25,453
|
Total Assets
|
|
$
|
4,771,986
|
|
|
$
|
4,440,228
|
Note 11 Subsequent events
On January 3, 2014, a shareholder exercised 35,000 warrants previously issued in connection with a private offering, at an exercise price of $.25 per share. The Shares were issued as restricted stock, with a restrictive legend placed on the share certificate. The issuance of the shares was exempt from registration under Regulation D and Section 4(2) of the Securities Act of 1933.
On January 9, 2014, a shareholder exercised 100,000 warrants previously issued in connection with a private offering, at an exercise price of $.25 per share. The Shares were issued as restricted stock, with a restrictive legend placed on the share certificate. The issuance of the shares was exempt from registration under Regulation D and Section 4(2) of the Securities Act of 1933.
On January 15, 2014, one of our key employees exercised 8,333 options previously issued to him, at an exercise price of $.228 per share. The Shares were issued as restricted stock, with a restrictive legend placed on the share certificate. The issuance of the shares was exempt from registration under Regulation D and Section 4(2) of the Securities Act of 1933.
F-21
INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 and 2012
Note 11 Subsequent events (continued)
On January 24, 2014, a shareholder exercised 333,333 warrants previously issued in connection with a private offering, at an exercise price of $.25 per share, and 133,333 options previously issued to him at an exercise price of $.15 per share. The Shares were issued as restricted stock, with restrictive legends placed on the share certificates. The issuance of the shares was exempt from registration under Regulation D and Section 4(2) of the Securities Act of 1933.
On January 29, 2014, one of our key employees exercised 166,667 options previously issued to him, at an exercise price of $.0828 per share. The Shares were issued as restricted stock, with a restrictive legend placed on the share certificate. The issuance of the shares was exempt from registration under Regulation D and Section 4(2) of the Securities Act of 1933.
On February 18, 2014, an option holder exercised 125,000 options previously issued, at an exercise price of $.10 per share. The Shares were issued as restricted stock, with a restrictive legend placed on the share certificate. The issuance of the shares was exempt from registration under Regulation D and Section 4(2) of the Securities Act of 1933.
On February 21 2014, two of our key employees exercised 100,000 options at an exercise price of $.0828 per share, and 10,000 options at an exercise price of $.23 per share. The Shares were issued as restricted stock, with restrictive legends placed on the share certificates. The issuance of the shares was exempt from registration under Regulation D and Section 4(2) of the Securities Act of 1933.
On March 4, 2014, the Company entered into a licensing agreement with Ermis Labs, LLC, in which ICTV has obtained the exclusive worldwide rights to manufacture and distribute their line of Coral Actives acne treatment and skin cleansing products. As part of the agreement, the Company agreed to purchase approximately $150,000 in inventory and entered into a four month transition services agreement at $5,500 per month. This agreement extends ICTVs presence in the health, wellness and beauty industry and gives it the ability to offer its customers and audience a differentiated solution in the acne treatment and skin cleansing area. The Coral Actives product line consists of a cleanser & serum 2-step acne treatment, retinol exfoliating cleanser, penetrating acne serum gel, moisturizer and cleansing bar. ICTV plans include further development and build-out of a continuity program, production of a new direct response television marketing infomercial and expansion of distribution channels, including retail.
On March 18, 2014, The Better Blocks Trust sold $75,000 of its note to the Company to an accredited investor, who then converted the $75,000 note into 150,000 shares of the Companys stock at the contractual conversion price of $.50 per share. The Shares were issued as restricted stock, with a restrictive legend placed on the share certificate. The issuance of the shares was exempt from registration under Regulation D and Section 4(2) of the Securities Act of 1933.
F-22