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ICTL > SEC Filings for ICTL > Form 10-Q on 13-Aug-2013All Recent SEC Filings

Show all filings for INTERNATIONAL COMMERCIAL TELEVISION INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for INTERNATIONAL COMMERCIAL TELEVISION INC


13-Aug-2013

Quarterly Report


MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

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

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

Overview

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

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

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

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

Results of Operations

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

Revenues

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


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

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

Gross Margin

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

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

Operating Expenses

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

                                             For the three months
                                                 ended June 30
                                           2013       2012   Increase
            Answering Service             $ 737,000 $152,000 $ 585,000
            Customization & Duplication      67,000   45,000    22,000
            Merchant Fees                   284,000   65,000   219,000
            Total                       $ 1,088,000 $262,000 $ 826,000



                                              For the six months
                                                 ended June 30
                                           2013       2012    Increase
            Answering Service            $1,583,000 $296,000 $1,287,000
            Customization & Duplication     118,000   82,000     36,000
            Merchant Fees                   600,000  100,000    500,000
            Total                       $ 2,301,000 $478,000 $1,823,000


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

Income Tax Expense (Benefit)

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

Net Income

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

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

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


Liquidity and Capital Resources

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

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

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

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

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

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

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


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

ITEM 3.

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