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EX-32 - EXHIBIT 32 - ICTV Brands Inc.ex32.htm
EX-31.1 - EXHIBIT 31.1 - ICTV Brands Inc.ex31_1.htm
EX-31.2 - EXHIBIT 31.2 - ICTV Brands Inc.ex31_2.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010

Commission File Number 0-49638

INTERNATIONAL COMMERICAL TELEVISION INC.
(Name of Registrant as Specified in Its Charter)
 
 
Nevada
76-0621102
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)

487 Devon Park Dr. Ste 212 Wayne, PA 19087
(Address of Principal Executive Offices) (Zip Code)

(206) 780-2921
(Registrant’s Telephone Number, Including Area Code)

Securities registered under Section 12(b) of the Exchange Act: NONE.

Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK, PAR VALUE, $0.001

Indicate by checkmark if registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  o Yes   x No

Indicate by checkmark if registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. o Yes   x No

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    o Yes    x No

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-K or any amendment to this Form 10-K.  x

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

Larger Accelerated Filer o
Accelerated Filer o
Non-Accelerated Filer o
Small Reporting Company x

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12B-2 of the Securities Act).  o Yes    x No

The aggregate market value of the voting common stock held by non-affiliates on June 30, 2010 (the last business day of our most recently completed second fiscal quarter) was $2,466,005 using the closing price of $0.17 on June 30, 2010.
 
As of March 23, 2011, the registrant had issued and outstanding 16,038,381 shares of common stock.

Documents Incorporated by Reference:  None.
 


 
 

 

INTERNATIONAL COMMERCIAL TELEVISION INC.

Annual Report on Form 10- K
For the Year Ended December 31, 2010

Part I
 
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Part II
 
 
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Part III
 
 
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Part IV
 
 
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Part I

FORWARD-LOOKING STATEMENTS

The matters discussed in this Form 10- K may 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 International Commercial Television Inc (“ICTV”).  You should not place undue reliance on forward-looking statements.  Forward-looking statements involve risks and uncertainties.  The actual results that ICTV 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 ICTV assumes no obligation to update this information.  Readers are urged to carefully review and consider the various disclosures made by ICTV in our reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect its business.


Overview

We produce long-form infomercials and short-form advertising spots and sell our proprietary brands of advertised products directly to our viewing audience. In addition, we sell products via televised shopping networks, the internet, and retail distribution channels.

The goal of our business plan is to create brand awareness through our infomercial and spot advertising so that these brands and their families of products may be sold in dedicated shelf-space areas by product category in traditional retail stores.  We acquire the rights to our products that we market via licensing agreements, acquisition and in-house development.  We currently sell these products domestically and internationally.

A short-form spot is a 30-second, 60-second, or 120-second commercial, while a long-form infomercial is a 28 1/2-minute direct response commercial.  Short-form spots generally feature products that can be explained or demonstrated in two minutes or less, with a selling price of $29 or less.  Long-form infomercials generally feature products with a selling price of $30 - $300 and are usually unique, with more benefits and features, and thus require a lengthier demonstration and explanation.

In 2010, our international division has been our primary revenue source. For the fiscal years ended December 31, 2010 and December 31, 2009,   51% of our product sales for the year ended December 31, 2010 were generated from products sold internationally, as compared to 22% for the same period in 2009.  International revenues resulted primarily from the sale of products to international distributors who in turn marketed our products to their respective markets via direct response and retail marketing channels.

Our domestic business represented 49% of our sales volume for the year ended December 31, 2010, as compared to 78% for the same period in 2009.

We are a Nevada corporation, and our headquarters are located at 487 Devon Park Drive, Suite 212, Wayne, PA 19087 and a sales and marketing office based at 755 Winslow Way East, Suite 303A, Bainbridge Island, WA 98110.

The ICTV Strategy

Many of our competitors who produce successful infomercials fail to capitalize on their success by associating the products featured in their infomercials with a particular brand.  We think that there is a unique opportunity to do so.   Our goal is to create several brands of products and to introduce our brands of products to the market by airing infomercials featuring one or a few anchor products for each particular brand.  As our brands achieve recognition through the infomercial of the anchor product(s), we plan to sell the anchor product(s) and related families of products under those brands in traditional retail stores.  Our objective is to have our brands of proprietary products sold in retail stores in dedicated shelf space areas by product category.  We are currently developing the infrastructure we will need to develop our brands and to take families of products under those brands to the traditional retail environment.

 
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Our Proposed Brands and Current Products

We continually seek to develop, acquire or obtain the license to consumer products that we believe can be distributed and marketed profitably, especially in the retail environment.  Our success depends, in part, on our ability to market products that appeal to viewers and that can be easily associated with a particular brand.  In order to succeed, we are also aware of the need to identify new products to supplement and possibly replace our existing product lines as they mature through product life cycles.
 
Our product development and marketing department is the backbone of our Company.  We put forth extensive effort to research and develop new products that are unique and that will be suitable both for direct response marketing in infomercials and for sale in traditional retail stores.  Our development of new product ideas stems from a variety of sources, including inventors, trade shows, strategic alliances with manufacturing and consumer product companies, industry conferences, and the continuous review of new developments within targeted brand and product categories.  In addition, we also receive unsolicited new product proposals from independent parties.

The Company also internally generates ideas for new products that it wishes to develop.  If the Company has an idea for a product, it will present prototype specifications to one of its manufacturers to develop a prototype, and the Company will then evaluate the feasibility of selling the product through an infomercial.

When we evaluate a product for its suitability for an infomercial, we consider how appropriate it is for television demonstration and how consumers will perceive the value of the product.  Part of our selection criteria for new products are as follows:

 
§
Products must be unique, demonstrable, have mass-market appeal and generally be unavailable elsewhere in the marketplace.  Benefits must be capable of being demonstrated visually, preferably with support from customer testimonials;
 
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Must support a minimum 5 times mark-up from landed cost while still representing good perceived value to the consumer;
 
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Must have a unique “hook” to be able to catch the attention of the viewer - infomercials simply portray the consumer’s problem and the solution provided by the product and usually present a significant before and after state - the bigger the problem solved by the product, the greater the sales potential;
 
§
Easily and effectively promoted through sustained television branding;
 
§
Supports a margin sufficiently high enough to maintain profitability to us when sold through conventional retailers;
 
§
Has high volume sales potential, to ensure retailer interest;
 
§
Exhibits potential for “back-end” sales either through traditional retail or by company-run “auto ship” continuity programs - the more related products that are available for upsell/back-end campaigns, the wider the advantage in the infomercial marketplace;
 
§
Should have the potential to be turned into a long-term retail item – a product can drive retail sales by capitalizing on awareness advertising that is created with a successful infomercial; and
 
§
Must be relatively easy to ship.

Our primary product categories are health and beauty, diet and fitness, and leisure and toy products.  These categories have performed well in DRTV campaigns and they move smoothly to retail sales channels.  Retail buyers seek out new and better products in these categories, especially branded products that have gained a high profile through television.

 
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The following is a list of products we own or have certain rights to and that we are currently marketing or plan to market over the next twelve months.

Health and Beauty Products

The Health and Beauty category is a strong and proven DRTV category as products in this category demonstrate well on television with before and after clinicals, possess high profit margins, and are aimed at the highly motivated “Fountain of Youth” markets.

DermaWandTM

We have a worldwide exclusive license to sell the DermaWand, a skin care appliance that reduces fine lines and wrinkles and improves overall skin appearance.  The price consumers pay for DermaWandTM varies from country to country, however, it generally ranges from approximately $90-$120.  The DermaWand is sold and marketed with DermaVital skin care products which are offered with a monthly continuity program.

In an agreement executed on May 20, 2009, ICTV granted exclusive distribution rights of the DermaWandTM to Allstar Marketing Group (“Allstar”) for all U.S. distribution channels with the exception of televised home shopping and beauty salons. Allstar’s distribution channels included DRTV, web, print, catalog, radio, and retail distribution in the U.S. In consideration of this exclusive license, ICTV was to be paid a royalty based on a percentage of Allstar’s U.S. sales of both the DermaWand and any associated sales of ICTV’s DermaVital skin care product line.

In the year ended December 31, 2009, ICTV received a non-refundable royalty advance of  $150,000 and earned approximately $56,000 in royalties from Allstar for U.S. distribution under their agreement.   At December 31, 2009, approximately $94,000 of the non-refundable royalty advance was unearned.  In addition, we sold $271,000 of DermaWand and DermaVital inventory to Allstar in 2009. This inventory was sold at our cost and was recorded as sales, and we will earn royalties on the products sold.

On March 3, 2010, ICTV terminated its agreement with Allstar, with an effective date of March 13, 2010. After a “sell-off” period granted to Allstar that ended April 30, 2010, ICTV secured its rights back for complete U.S. distribution of the DermaWand.  The $94,000 in non-refundable royalty advance was recognized as revenue upon the termination of the agreement.

DermaVital Hydra Infusion Treatment

DermaVital is a product that allows water to penetrate the skin's surface, thus re-hydrating the deeper layers.  Medical experts, including dermatologists, agree that dehydration or lack of water is a major cause of skin problems.  The problem is that the skin by itself is virtually waterproof and water cannot penetrate its resilient surface.  This moisturizing formula has the ability to send water into the deeper layers of the skin where it is most needed.  The result is a deeper moisturization that softens, cleanses and hydrates the skin in a way that enhances and supports the skin's own natural functions.

DermaVital has been offered to DermaWand buyers through U.S. DRTV and Internet distribution channels as a monthly continuity program, and to HSN customers as an “add on” product to their DermaWand purchase.

Additional Products – Various Categories

Smart Stacks
We acquired the rights to exclusively manufacture and market an innovative storage system known as “Smart Stacks”.  Since the long-form infomercial was first aired in October 1998, one million Smart Stacks storage systems have been sold worldwide, of which 400,000 of those were sold on QVC in triple pack form.
 
A new range of larger size Smart Stacks has just been completed and prototypes were shown to a large US home shopping channel who has indicated a willingness to sell them on their network subject to their approval of the final product.  We had intended to re-edit the Smart Stacks infomercial, but elected to test the new configuration on a major US shopping channel beforehand.  The results have confirmed our intention to re-edit the current show, however, increased product costs will require us to reconfigure the entire product offer.
 
In the fall of 2010, the Company did a DRTV media test of Smart Stacks and we plan to do further test in 2011.  Our marketing efforts to date with regard to Smart Stacks have focused primarily on the international market.

 
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Slender LiftTM

In November 2009, we acquired worldwide exclusive license to manufacture and sell the Slender LiftTM, a slimming garment system for women. In the spring of 2010, the Company did a DRTV media test of Slender LiftTM and we plan to have airings on a televised home shopping channel in early 2011.

BetterBlocksTM

In April 2000 we acquired the exclusive, royalty-free worldwide license to manufacture market and distribute BetterBlocksTM, a patented plastic toy building system, under the Share and Option Purchase Agreement with The Better Blocks Trust, a shareholder.   BetterBlocksTM has been sold mainly through DRTV, mail order catalogues, retail and the television shopping channel QVC.

The Company tested the BetterBlocksTM product line on televised shopping in the fall of 2009, and has continued to sell the product on the internet in 2010.  Revenue for BetterBlocksTM was approximately $300 during 2010 and $38,000 during 2009.
 
Snap N Set

In July 2010, we entered into an exclusive, royalty-free worldwide agreement to distribute Snap N Set, a patented fishing lure system manufactured by MBCT Global Ventures, LLC.  As part of the agreement, ICTV will develop and produce at its own expense 60-second, 120-second, and 15 minute infomercials.   In January 2011, ICTV began production of these infomercials and plans to run a U.S. media test of the product in April 2011.

Marketing, Sales, Production and Distribution

We use infomercials to build brand awareness and identity.

Infomercials are designed to motivate the viewer to purchase the product immediately (or in the case of lead-generation DRTV, to inquire about the product).  As a result, where brand TV spots generally focus on one key benefit, infomercials give the viewer all the information they need to make a purchasing decision, including presenting multiple features and benefits, and providing price and quality comparisons.  Most infomercials also include a special time-sensitive offer designed to induce immediate response.

Infomercials are characterized by benefit-driven copy, captivating demonstrations and attractive offers.  A typical infomercial consists of two or three "pods" that each last from 6 -12 minutes.  Each pod contains product and benefit information for consumers to make a decision on whether or not to purchase.  The pod concludes with a call-to-action (CTA) during which the seller asks for the order.

More importantly, we feel that infomercials build brand awareness.  Viewers of a long-form infomercial are exposed to the name and features of a particular brand and product for nearly thirty minutes.  We think that this brand recognition will make it easier to market the featured product in the retail environment, because consumers who have seen our infomercials will already have been exposed to the brand.  We expect other products within the featured product’s family to benefit from brand association in the retail environment.  We believe this introduction of product family brands through infomercials will save much time, money and effort that we would otherwise have to spend on marketing if we were to introduce our products to traditional retail without airing the infomercials first.

We also think infomercials are an easy means by which to measure the success of our marketing efforts.  We can measure how successful an infomercial is or will be by doing a media test.  If the product performs well during test marketing, we can increase the media time for the infomercial.  We can also target certain markets by buying media time in particular locations or cities.  The products we sell via our infomercials may do well in some markets, but not in others.  When orders are placed, we gather demographic information about the purchaser and use this information to determine our future target markets.

We contract with several independent companies to manufacture our products.  In general, we place an order with the manufacturer and we pay the manufacturer cash upon shipment of the goods.  In some instances, we provide the manufacturer with an advance payment to cover a portion of the manufacturers’ costs, and we pay the balance after the goods are shipped.

We contract with telemarketing firms to answer phones and capture orders for products sold through our infomercials.  Our storage of inventory, customer service, order processing, and order shipping functions are performed by an outside third party contracted fulfillment company - Motivational Fulfillment in Chino, California.

 
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We generally fulfill our orders within one to five days of the date customers order our products.  If for some reason we are unable to fulfill an order within five days of the date of a customer’s order, then we provide the customer with a letter explaining the reason for the delay.  The letter will also provide the customer with a revised shipping date not to exceed thirty days, and will offer the customer an option to either consent to the delay in shipping or to cancel their order and receive a prompt refund.

Infomercial Production

In the past, we have produced our infomercials with internal management resources, but we also have utilized independent production companies to produce our infomercials.  We have relationships with several independent producers, and we contract out such functions as a way to keep our overhead to a minimum. We, along with the owner or inventor of the product (as the case may be) will always have input in the production process.  Even when we out-source production, we utilize a company specialist to oversee all scripting, filming and editing of the infomercial, and we take great care to ensure that the infomercial is produced in such a way that it can easily be adapted to international markets.

Media Testing

Once the infomercial is produced, we acquire a minimal amount of inventory and purchase $10,000-$20,000 worth of media time through one of our preferred direct response television specialist media agencies to test the infomercial in select target markets.  The agencies generally have comprehensive records of the markets and time slots in which certain product categories have historically sold well.  The agencies also have comprehensive tracking and analyzing programs to test and track the sales response in the markets where we air our infomercials.  The agencies will provide us with a report showing the amount of revenue generated from the infomercial as a ratio to media dollars spent.  For example, a 2.5:1 ratio means that for every $1.00 spent on media, $2.50 was generated in sales.  We take this information, along with other things such as cost of goods, fulfillment charges, telemarketing costs, insurance, returns, credit card commissions and shipping costs and generate our own reports to assess the success of the infomercial in our target markets.

Product Rollout

If a positive result is achieved during media testing, we will begin to build up inventory of the product and “roll out” the infomercial on a wider scale by increasing media spending on a weekly basis until a point just before returns diminish.  When we roll out infomercials, we generally begin with a media spend of $75,000-$100,000 per week for media time for a long-form infomercial and a minimum of $50,000 per week for a short-form infomercial or spot.  We monitor results, payoffs and profitability of our infomercials on a daily basis and aim to be very cautious as to when and how we go about rolling out our infomercials.

In our experience, a “good average” infomercial, which we define as having a media ratio of 2.5:1, will have a life span of eight to twelve months and will, at its peak, sustain $150,000-$200,000 in media spending per week.  A “hit” infomercial, which we define as having a media ratio of 4:1 or greater, will have a life span of 12 to 24 months, and at its peak, will sustain $600,000-$700,000 in media spending per week.

International Sales

The goal of our international division is to establish solid distribution relationships in each country where our products are marketed. By doing so, we can tailor our products and production for each individual region, and develop relationships with local experts and established companies that are intimate with the marketplace.  When a product that was domestically sold in an infomercial is prepared for international distribution, the international infomercial operator will dub the infomercial, develop product literature in the appropriate foreign language and review the infomercial’s compliance with local laws.  The international infomercial operator will then test the infomercial and roll it out on a larger scale if the test marketing is successful.  We believe that many well-produced infomercials can produce profitable margins somewhere internationally, even if they have failed in the United States.

 
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For the year ended December 31, 2010, international product sales contributed to about 51% of our revenue as compared to 22% for the previous year.  We do expect to continue to devote attention to the international market and to have our infomercials aired internationally through our strategic alliances that we have and will continue to develop throughout the world.  We are working to leverage our line of products that we market internationally and test which shows sell best in each country and region.

Traditional Retail Sales

We aim to capitalize on the brand and product awareness we create through our infomercials by selling our proprietary brands of products and related families of products under those brands in dedicated shelf-space areas by product category in traditional retail stores.  We believe that traditional retail sales are a logical step to take after we create brand and product awareness through our infomercials, because we will not have to incur any significant marketing costs and expenses that consumer product companies would otherwise have to incur when introducing their products to the traditional retail environment.

We are currently working toward creating the infrastructure that we will need in order to take our brands and products to the traditional retail environment. The objective of the DRTV strategy is to build brands that are attractive to our main target market - national retailers.

Other Direct Response Sales Methods

Once we have rolled out a product in an infomercial, we prepare to distribute the product via other direct response methods, such as mail order catalogs, direct mail, credit card statement inserts and live appearances on television home shopping channels such as HSN and QVC.  We believe that this is an additional means by which to use the brand awareness we create in our infomercials, and to reach consumers who might not watch television.  These other direct response methods also extend the time period during which each of our products can generate revenue.

Customer Service

We seek to provide our customers with quality customer service.  We generally offer an unconditional 30-day money back return policy to purchasers of our products.  Our policy is to investigate the cause of returns if returns begin to undermine our expectations for a product’s profitability.

Competition

We compete directly with several established companies that generate sales from infomercials and direct response television, as well as small independent direct response television producers.    Products similar to ours may be sold in department stores, pharmacies, general merchandise stores, magazines, newspapers, direct mail advertising, catalogs and over the internet.  Many of our major competitors, who include Thane International Inc. and Guthy-Renker Corp., have substantially greater financial, marketing and other resources than us.

We expect that we will face additional competition from new market entrants and current competitors as they expand their direct marketing business models.  The barriers to entry in the infomercial industry are fairly low, but there are many difficult hurdles for young entrants to overcome if they are to be successful in the long-term.  To be competitive, we believe we must respond promptly and effectively to the challenges of technological change, evolving standards and our competitors’ innovations.  We must also source successful products, create brand awareness and utilize good sales pitches for our products.  We believe that although we have a limited operating history, we are strategically positioned to compete because of our management’s experience and strong relationships in the industry.  In addition, we feel that associating our products with particular brands and focusing on the traditional retail environment, as we intend to do, will give us a competitive advantage over traditional infomercial companies who fail to capitalize on the consumer awareness they create via their infomercials.

 
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Intellectual Property

Our success is dependent, in part, upon our proprietary rights to our primary products.  The following consists of a description of our intellectual property rights.
 

 
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Trademarks
 
We have several registered trademarks for BetterBlocksTM in countries throughout the world.  We have also registered trademarks in the United States for DermaWandTM, DermaVitalTM, and Slender LiftTM .

 
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Patents

We have patents for the toy building elements of BetterBlocksTM in several countries throughout the world.  We also have the exclusive right to the use of the worldwide patent for DermaWandTM, as is necessary to manufacture, market and distribute DermaWandTM .

 
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Copyrights

We have copyright registrations for all versions of our infomercials for DermaWandTM and BetterBlocksTM.

 
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Registered Designs

We have registered designs for BetterBlocksTM in several countries throughout the world.

There can be no assurance that our current or future intellectual property rights, if any, will not be challenged, invalidated or circumvented, or that any rights granted under our intellectual property will provide competitive advantages to us.  In addition, there can be no assurance that claims allowed on any future patents will be sufficiently broad to protect our products.  The laws of some foreign countries may not protect our proprietary rights to the same extent as do the laws of the United States.  We intend to enforce our proprietary rights through the use of licensing agreements and, when necessary, litigation.  Although we believe the protection afforded by our patents, trademarks, copyrights and registered designs has value, rapidly changing technology and industry standards make our future success depend primarily on the innovative skills, expertise, and management abilities of our team rather than on patent and trademark protection.

Royalty Agreements
In April 2000, we assumed from R.J.M. Ventures Limited and Better Blocks International Limited, by virtue of the Share and Option Purchase Agreement we signed with The Better Blocks Trust, the obligation to pay royalties on the sales of the DermaWandTM under the following agreements:

DermaWandTM

 
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Under a marketing and royalty agreement with the developer of DermaWandTM, we are obligated to pay them a royalty at a fixed rate per unit sold.  The agreement is silent as to its duration.

Governmental Regulation

We are subject to regulation by a variety of federal, state and local agencies, including the Federal Trade Commission, the Federal Communications Commission, the Consumer Product Safety Commission and the FDA under the FDC Act.  The government regulations to which we are subject vary depending on the types of products we manufacture and market.  As we begin to market a broader variety of products and services, we may become subject to regulation by additional agencies.

 
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We are also subject to the Federal Mail/Telephone Order Rule.  Under the Mail/Telephone Order Rule, it is an unfair or deceptive act or practice for a seller to solicit any order for the sale of merchandise to be ordered by the buyer through the mail or by telephone unless, at the time of the solicitation, the seller has a reasonable basis to expect that it will be able to ship the ordered merchandise to the buyer within 30 days after the seller’s receipt of a properly completed order from the buyer.  If the buyer uses credit to pay for the merchandise, the time period within which the seller must ship the merchandise to the buyer is extended to 50 days.  Under the Mail/Telephone Order Rule, the seller, among other things, must provide the buyer with any revised shipping date.  If the seller is unable to fulfill an order within 30 or 50 days, as the case may be, then the seller must provide the buyer an option either to consent to a delay in shipping or to cancel their order and receive a prompt refund.

There can be no assurance that new laws, rules, regulations or policies that may have an adverse effect on our operations will not be enacted or promulgated at a future date.

Employees

During the course of 2010 we employed a total of seven employees, six full-time employees and one part-time employee.  At the end of the year the Company had reduced its employees to five full-time employees.  We consider our labor relations to be good.  None of our employees are covered by a collective bargaining agreement.
 
 
Research and Development

Our research and development costs have consisted of efforts to discover and develop new products and the testing and development of direct-response advertising related to these products.

Available Information and Reports to Stockholders

We are subject to the information and periodic reporting requirements under Section 12(g) of the Securities Exchange Act and, accordingly, will file periodic reports, proxy statements and other information with the Securities and Exchange Commission.  Any document we file may be read and copied at the Commission’s Public Reference Room located at 450 Fifth Street NW, Washington DC 20549.  Please call the Commission at 1-800-SEC-0330 for further information about the public reference rooms.  Our filings with the Commission are also available to the public from the Commission’s website at http://www.sec.gov.

Shareholders and prospective purchasers of our common stock should carefully consider the following risk factors in addition to the other information appearing in this Annual Report on Form 10-K.

There is no assurance that our strategy to leverage brand awareness created by our infomercials into the retail market will work, and the value of your investment may decline if we do not attain retail sales.

The goal of our business plan is to create brand awareness through infomercials so that we can use this brand awareness to sell our products under our brands in traditional retail stores in dedicated shelf-space areas.  Our success will depend on our ability to associate our products with particular brands to create consumer awareness and to enter the traditional retail market.  If our strategy to leverage brand awareness created by our infomercials into the retail market does not work and we do not attain retail sales, the value of your investment may decline.

If the response rates to our infomercials are lower than we predict, we may not achieve the customer base necessary to become or remain profitable, and the value of your investment may decrease.

Our revenue projections assume that a certain percentage of viewers who see our infomercials will purchase our products.  If a lower percentage of these viewers purchase our products than we project, we will not achieve the customer base necessary to become or remain profitable, and the value of your investment may decrease.

 
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If our infomercials are not successful, we will not be able to recoup significant advance expenditures spent on production and media times, and our business plan may fail.

Our business involves a number of risks inherent in operating a direct response television business.  The production of infomercials and purchase of media time for television involves significant advance expenditures.  A short-form infomercial generally costs around $15,000-$40,000 to produce, while production costs for a long-form infomercial are generally around $120,000-$180,000.  We are dependent on the success of the infomercials we produce and the public’s continued acceptance of infomercials in general.  If our infomercials do not generate consumer support and create brand awareness and we cannot recover the initial money we spend on production and media time, we will not be able to recoup the advance expenditures and may go out of business if new products and additional capital are not available.

We depend on key management and employees, the loss of whom may prevent us from implementing our business plan, limit our profitability and decrease the value of your stock.

We are dependent on the talent and resources of our key executives and employees.  In particular, the success of our business depends to a great extent on Kelvin Claney, our President and Chief Executive Officer and a member of our Board of Directors.  Mr. Claney has extensive experience in the infomercial industry, and his services are critical to our success.  The market for persons with experience in the direct response television industry is very competitive, and there can be no guarantee that we will be able to retain the services of Mr. Claney.  We do not have an employment agreement with Mr. Claney, and as a result, there is no assurance that he will continue to stay with our Company in the future.  We have not obtained key man insurance with respect to Mr. Claney or any of our executive officers.  The loss of Mr. Claney may prevent us from implementing our business plan, which may limit our profitability and decrease the value of your stock.

If we cannot protect our intellectual property rights, our operating results will suffer, and you could ultimately lose your investment.

We seek to protect our proprietary rights to our products through a combination of patents, trademarks, copyrights and design registrations.  Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we consider proprietary.  Litigation may be necessary to enforce our intellectual property rights and to determine the validity and scope of the proprietary rights of others.  Any litigation could result in substantial costs and diversion of management and other resources with no assurance of success and could seriously harm our business and operating results.  Investors could lose their entire investment.

If we do not continue to source new products, our ability to compete will be undermined, and we may be unable to implement our business plan.

Our ability to compete in the direct marketing industry and to expand into the traditional retail environment depends to a great extent on our ability to develop or acquire new innovative products under particular brands and to complement these products with related families of products under those brands.  If we do not source new products as our existing products mature through their product life cycles, or if we do not develop related families of products under our brands, we will not be able to implement our business plan, and the value of your investment may decrease.

Our shares are classified as “penny stock,” which will make it more difficult to sell than exchange-traded stock.

Our securities are subject to the Securities and Exchange Commission rule that imposes special sales practice requirements upon broker-dealers that sell such securities to other than established customers or accredited investors.  For purposes of the rule, the phrase “accredited investors” means, in general terms, institutions with assets exceeding $5,000,000 or individuals having a net worth in excess of $1,000,000 or having an annual income that exceeds $200,000 (or that, combined with a spouse’s income, exceeds $300,000).  For transactions covered by the rule, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser’s written agreement to the transaction prior to the sale.  Consequently, the rule may affect the ability of purchasers of our securities to buy or sell in any market that may develop.

 
9


In addition, the Securities and Exchange Commission has adopted a number of rules to regulate “penny stocks”.  A “penny stock” is any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions.  Such rules include Rules 3a51-1, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6 and 15g-7 under the Securities and Exchange Act of 1934, as amended.  The rules may further affect the ability of owners of our shares to sell their securities in any market that may develop for them.  Shareholders should be aware that, according to the Securities and Exchange Commission Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse.  Such patterns include:

 
·
control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
 
·
manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
 
·
“boiler room” practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons;
 
·
excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
 
·
the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.

Our issuance of additional shares may have the effect of diluting the interest of shareholders.

Any additional issuances of common stock by us from our authorized but unissued shares may have the effect of diluting the percentage interest of existing shareholders.  Out of our 100,000,000 authorized common shares, 84,452,821 shares, or approximately 85%, remain unissued at December 31, 2010.  The board of directors has the power to issue such shares without shareholder approval.  None of our 20,000,000 authorized preferred shares are issued.  We fully intend to issue additional common shares or preferred shares in order to raise capital to fund our business operations and growth objectives.

The board of directors’ authority to set rights and preferences of preferred stock may prevent a change in control by shareholders of common stock.

Preferred shares may be issued in series from time to time with such designation, rights, preferences and limitations as our board of directors determines by resolution and without shareholder approval.  This is an anti-takeover measure.  The board of directors has exclusive discretion to issue preferred stock with rights that may trump those of common stock.  The board of directors could use an issuance of preferred stock with dilutive or voting preferences to delay, defer or prevent common stockholders from initiating a change in control of the Company or reduce the rights of common stockholders to the net assets upon dissolution.  Preferred stock issuances may also discourage takeover attempts that may offer premiums to holders of our common stock.

Concentration of ownership of management and directors may reduce the control by other shareholders over ICTV.

Our executive officers and directors own or exercise full or partial control over approximately 46% of our outstanding common stock.  As a result, other investors in our common stock may not have much influence on corporate decision-making.  In addition, the concentration of control over our common stock in the executive officers and directors could prevent a change in control of ICTV.

 
10


Our board of directors is staggered, which makes it more difficult for a stockholder to acquire control of the Company.

Our articles of incorporation and bylaws provide that our board of directors be divided into three classes, with one class being elected each year by the stockholders.  This generally makes it more difficult for stockholders to replace a majority of directors and obtain control of the board.

Stockholders do not have the authority to call a special meeting, which discourages takeover attempts.

Our articles of incorporation permit only our board of directors to call a special meeting of the stockholders, thereby limiting the ability of stockholders to effect a change in control of the Company.

We do not anticipate paying dividends to common stockholders in the foreseeable future, which makes investment in our stock speculative or risky.

We have not paid dividends on our common stock and do not anticipate paying dividends on our common stock in the foreseeable future.  The board of directors has sole authority to declare dividends payable to our stockholders.  The fact that we have not and do not plan to pay dividends indicates that we must use all of our funds generated by operations for reinvestment in our operating activities.  Investors also must evaluate an investment in our Company solely on the basis of anticipated capital gains.

Limited liability of our executive officers and directors may discourage stockholders from bringing a lawsuit against them.

Our articles of incorporation and bylaws contain provisions that limit the liability of directors for monetary damages and provide for indemnification of officers and directors.  These provisions may discourage stockholders from bringing a lawsuit against officers and directors for breaches of fiduciary duty and may also reduce the likelihood of derivative litigation against officers and directors even though such action, if successful, might otherwise have benefited the stockholders.  In addition, a stockholder’s investment in our Company may be adversely affected to the extent that costs of settlement and damage awards against officers or directors are paid by us under the indemnification provisions of the articles of incorporation and bylaws.  The impact on a stockholder’s investment in terms of the cost of defending a lawsuit may deter the stockholder from bringing suit against one of our officers or directors.  We have been advised that the SEC takes the position that this provision does not affect the liability of any director under applicable federal and state securities laws.

We face risk related to late tax filings.

The Company has not filed its mandatory tax filings since inception. Management believes that the potential income tax liability to the Company is not significant since the Company reported significant losses for most years since inception. Moreover, to the best of management’s knowledge, the Company does not believe that not filing tax returns is a violation of any of its contractual covenants. The Company is working to become current with its mandatory tax filings.

We face risk related to our accounting restatements and late SEC filings.

We have restated our Form 10-K for the year ended December 31, 2007, Forms 10-Q for the periods ended June 30, 2008 and 2007, March 31, 2008 and 2007, and September 30, 2007.  These restatements and delay in filing financial statements and periodic reports with the SEC for the fiscal years ending December 31, 2009 and 2008 and quarterly filings for the period ended March 31, 2010 may lead to litigation claims and/or regulatory proceedings against us. The defense of any such claims or proceedings may cause the diversion of management’s attention and resources, and we may be required to pay damages if any such claims or proceedings are not resolved in our favor. Any litigation or regulatory proceeding, even if resolved in our favor, could cause us to incur significant legal and other expenses. We also may have difficulty raising equity capital or obtaining other financing as a result of the restatements and delay in filing financial statements and periodic reports with the SEC and we may not be able to effectuate our current business strategy. Moreover, we may be the subject of negative publicity focusing on the financial statement errors and resulting restatement and delay in filing financial statements and periodic reports with the SEC and negative reactions from our stockholders, creditors or others with whom we do business. The occurrence of any of the foregoing could harm our business and reputation and cause the price of our securities to decline.

 
11



None


PROPERTIES
Our executive offices are located in Wayne, Pennsylvania with a monthly lease payment of $2,940.

On February 1, 2011, we entered into a 1-year office lease in Bainbridge Island, WA with a monthly lease payment of $650.

We believe that our present facilities will be suitable for the operation of our business for the foreseeable future and should we need to expand, we expect that suitable additional space will be available on commercially reasonable terms, although no assurance can be made in this regard.  Our property is adequately covered by insurance in both the Bainbridge Island and Wayne locations.


We are not a party to any material pending legal proceeding or litigation and none of our property is the subject of a pending legal proceeding.  Further, our officers and directors know of no material legal proceedings against us or our property contemplated by any entity including any governmental authority.

ITEM 4.  Reserved

 
12


PART II


MARKET FOR COMMON EQUITY

Our common stock is currently traded in the “pink sheets,” which does not constitute an “established trading market”.  The range of reported high and reported low bid prices per share for our common stock for each fiscal quarter within the last two fiscal years, as reported by Stockwatch is set forth below.  These quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and may not represent actual transactions.
 
 
Quarter ended
 
High
 
 
Low
 
Quarter ended
 
High
 
 
Low
 
 
 
$
 
 
$
 
 
 
$
 
 
$
 
December 31, 2010
 
 
0.15
     
0.03
 
December 31, 2009
 
 
0.35
 
 
 
0.10
 
September 30, 2010
 
 
0.23
     
0.07
 
September 30, 2009
 
 
0.55
 
 
 
0.15
 
June 30, 2010
 
 
0.30
     
0.05
 
June 30, 2009
 
 
0.80
 
 
 
0.17
 
March 31, 2010
 
 
0.80
     
0.05
 
March 31, 2009
 
 
0.51
 
 
 
0.15
 
 
HOLDERS

As of March 23, 2011, there were 16,038,381 shares of common stock outstanding.   We estimate these shares are held by approximately 300 shareholders of record.

DIVIDENDS

To date we have not paid any dividends on our common stock, and we do not expect to declare or pay any dividends on our common stock in the foreseeable future.  Payment of any dividends will be dependent upon our future earnings, if any, our financial condition, and other factors the board of directors determines are relevant.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

In June 2001, our shareholders approved our 2001 Stock Option Plan (the “Plan”).  The Plan is designed for selected employees, officers, directors and key consultants to the Company and its subsidiaries, 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 following table presents information as to the number of shares of our common stock which are authorized for issuance under the Plan as of December 31, 2010.

 
13



 
 
(a)
 
 
(b)
 
 
(c)
 
Plan Category
 
Number of securities to be issued upon exercise of outstanding options
 
 
Weighted-average exercise price of outstanding options
 
 
Number of securities remaining available for future issuance under the Plan (excluding securities reflected in column (a))
 
Equity compensation plans approved by security holders
 
 
657,000
 
 
$
2.00
 
 
 
2,343,000
 
Equity compensation plans not approved by security holders
 
 
250,000
 
 
$
0.18
 
 
 
n/a
 
Total
 
 
907,000
 
 
$
1.50
 
 
 
2,343,000
 



The following discussion should be read in conjunction with the consolidated financial statements in Item 7.  Certain statements contained in this report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements.  Factors that could cause or contribute to such differences include those discussed in the “Outlook: Issues and Uncertainties” section of this Form 10- K.

Overview

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

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

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

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

 
14


Results of Operations

The following discussion compares operations for the fiscal year ended December 31, 2010, with the fiscal year ended December 31, 2009.

Revenues

Net sales decreased to approximately $3,903,000, in 2010 from approximately $5,899,000 in 2009, a decrease of $1,996,000 or 34%. The major reason for the decrease in revenue in 2010 relates to selling the DermaWand at reduced prices on televised home shopping (HSN) as compared to 2009.   During the majority of 2009, the DermaWandTM sold for $89.95 on HSN.  Throughout 2010, the screen price for the DermaWandTM ranged from a high of $69.95 to a low of $49.95. These reductions in price throughout 2010 greatly affected the overall sales revenue for DermaWandTM.  In addition, during 2010 The Company did not actively market the DermaWandTM via a DRTV Campaign, as compared to 2009 when the Company ran the DRTV campaign through March 2009 until we entered into an agreement with Allstar Marketing Group (“Allstar”) which resulted in approximately $94,000 and $56,000 of royalty revenue during 2010 and 2009 respectively. In the agreement, Allstar received exclusive distribution rights of DermaWandTM for all U.S. distribution channels with the exception of televised home shopping and beauty salons.  As a result, the Company terminated its  DRTV campaign for the DermaWand in the U.S as of March 2009.  In March of 2010, The Company terminated its agreement with Allstar and as a result, retained all U.S. distribution rights of DermaWandTM. We continue to sell the DermaWand on televised home shopping (HSN) and we continue to maintain our relationships with our customers in the international market. In 2010, 51.4% of our revenue came from our international sales compared to 21.7% in 2009, and 48.6% of our revenue were generated by our domestic sales as compared to 78.3% in 2009.   The majority of our revenue in 2010 was through direct distribution of our own product, DermaWandTM. 100% of net sales were generated by the sale of our own products in 2010 and 2009.

Gross Margin

Gross margin percentage decreased to approximately 46.1% in 2010 from approximately 50.9% in 2009.  In 2010, we generated approximately $1,801,000 in gross margin, compared to approximately $3,002,000 in 2009.  The major reason for the decrease relates to the termination of our DRTV campaign for the DermaWand, which generated the highest margin of all of our distribution channels.  In addition, our margins were greatly reduced for televised home shopping (HSN) during 2010.

Operating Expenses

Total operating expenses decreased to approximately $2,597,000 in 2010, down from approximately $3,243,000 in 2009, a decrease of $646,000, or 19.9%.  Management’s efforts to reduce the level of expenses over the past 12 months are one of the reasons for the decrease in operating expenses.  A large portion of the decrease in operating expenses, approximately $610,000, can be attributed to a decrease in media costs associated with the domestic marketing campaign of our DermaWandTM product.  The total decrease in operating expenses was offset by an increase in general and administrative expenses, which includes approximately $339,000 of severance expense. The remaining $36,000 in operating expense reduction relates to managements efforts to control costs during 2010.

Net Loss

Our net loss for the year ended December 31, 2010 was approximately $796,000, compared to a 2009 net loss of approximately $241,000. The major reason for the increased 2010 net loss was the reduction of revenue generated in our US distribution of the Derma WandTM product. In addition to the decrease in revenue, the Company entered into a few severance agreements with former employees and a consultant whose relationships with the Company were terminated during 2010.   Total severance expense incurred during 2010 totaled approximately $339,000, compared to $0 in 2009.

Liquidity and Capital Resources

At December 31, 2010, we had approximately $161,000 in cash and cash equivalents (including restricted cash), compared to approximately $376,000 at December 31, 2009. We incurred a negative cash flow from operations of approximately $319,000 in 2010, compared to a negative cash flow from operations of approximately $12,000 in 2009. In addition to the approximately $796,000 net loss, the Company’s cash flow from operations were impacted by a decrease in inventory on hand of approximately $488,000 and a decrease in accounts receivable of approximately $17,000.

 
15


The Company has a note payable to The Better Blocks Trust (“BB Trust”), a shareholder, in the amount of approximately $591,000.  This loan is interest-free and has no specific terms of repayment.
 
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern.  The Company generated negative cash flows from operating activities during the year ended December 31, 2010, of approximately $319,000, and the Company, for the most part, has experienced recurring losses from operations. As of December 31, 2010, the Company had a negative working capital of approximately $879,000, compared to approximately $339,000 at December 31, 2009, and an accumulated deficit of approximately $6,218,000 as of December 31, 2010.

Management plans to continue to seek to raise funds in addition to the sources above primarily through the sale of capital stock to sources still to be identified. However, to date, no additional sources have been identified by the Company and at this time, the Company is not party to any additional funding agreements.

As noted above under “Business,” our goal is to use the brand awareness we create in our infomercials to sell the products featured in our infomercials, along with related families of products, under distinct brand names in traditional retail stores.  We will need to raise additional capital to execute that business plan. There can be no assurance that the required capital will be available on commercially reasonable terms, if at all.  If we are unable to raise additional capital, we will assess all available alternatives including a sale of our assets or a merger.  If none of these alternatives are available, we will be unable to continue as a going concern.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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 in Note 2 in the Notes to the Consolidated Financial Statements. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. However, the following policies could be deemed to be critical within the SEC definition.

 
16


Accounts receivable

Accounts receivable are recorded net of allowances for returns and doubtful accounts of approximately $7,000 and $3,000 for the years ended December 31, 2010 and 2009 respectively.  The allowances are calculated based on historical customer returns and bad debts.

In addition to reserves for returns on accounts receivable, an accrual is made against returns for product that have been sold to customer and had cash collections, while the customer still has the right to return the product.   The amounts of these accruals included in accounts payable and accrued liabilities in our consolidated Balance Sheets were approximately $9,000 and $45,000 at December 31, 2010 and 2009, 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 not recorded any inventory of consigned product as of December 31, 2010 and 2009 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.
 
Revenue recognition

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

The Company offered a 30-day risk-free trial.  If a customer selects the 30-day risk-free trial, revenue on these sales was not recognized until customer acceptance and collectability are assured which we determine to be when the trial period ends. If the risk-free trial expired without action by the customer, product was determined to be accepted by the customer and revenue was 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.

After the Company entered into the exclusive distribution agreement with Allstar in May 2009, the Company no longer had any sales with a 30-day free trial period.   As part of the agreement with Allstar the Company received non-refundable royalty advances which were booked as deferred revenue until Allstar sold DermaWands.   Allstar is required to provide ICTV with monthly royalty statements per the contract within 30 days of the end of each month.  The Company records revenue in the month goods were sold per the Allstar royalty report.  The Allstar agreement was terminated in March 2010.

 
17


Revenue related to international wholesale customers is recorded at gross amounts with a corresponding charge to cost of sales.

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 years presented have been offset against gross sales.

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 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 Consolidated Statements of Operations.

New Accounting Pronouncements
 
In October 2009, the FASB issued Accounting Standards Update No. 2009-13, "Multiple-Deliverable Revenue Arrangements" ("ASU No. 2009-13"). ASU No. 2009-13 amends guidance included within Accounting Standards Codification ("ASC") Topic 605-25 to require an entity to use an estimated selling price when vendor specific objective evidence or acceptable third party evidence does not exist for any products or services included in a multiple element arrangement. The arrangement consideration should be allocated among the products and services based upon their relative selling prices, thus eliminating the use of the residual method of allocation. ASU No. 2009-13 also requires expanded qualitative and quantitative disclosures regarding significant judgments made and changes in applying this guidance. ASU No. 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010.  Early adoption and retrospective application are also permitted.  We are currently evaluating the impact of adopting the provisions of ASU No. 2009-13.

 
18


Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.



Financial statements are set forth on pages F-1 through F-19.

 
On August 18, 2010 the Audit Committee of the Company’s Board of Directors engaged EisnerAmper LLP to serve as the Company’s new independent registered public accounting firm, after it was notified on August 16, 2010 that Amper, Politziner, and Mattia, LLP (“Amper”), an independent registered public accounting firm, would not be able to stand for re-appointment because it combined its practice on that date with that of Eisner LLP (“Eisner”) to form EisnerAmper LLP, an independent registered public accounting firm.  The Company filed Form 8-K on August 18, 2010 acknowledging this change.

During the Company’s fiscal year ended December 31,  2009 and through the date we engaged EisnerAmper LLP, the Company did not consult with Eisner regarding any matters of reportable events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.

The audit report of Amper on the consolidated financial statements of the Company as of and for the year ended December 31, 2009 did not contain an adverse opinion or a disclaimer of opinion, but was modified to express substantial doubt about the Company’s ability to continue as a going concern.

In connection with the audit of the Company’s consolidated financial statements for the fiscal year ended December 31, 2009 and through August 16, 2010, there were (i) no disagreement between the Company and Amper on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of Amper, would have caused Amper to make reference to the subject matter of the disagreement in their report on the Company’s financial statements for such year or for any reporting period since the Company’s last fiscal year end (ii) no reportable events within the meaning set forth in item 304(a)(1)(v) of Regulation S-K.

 
19


Disclosure Controls and Procedures

We carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2010 (the “Evaluation Date”).  Management conducted an evaluation of the design and operation of the Company’s internal control over financial reporting as of December 31, 2010.  This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of the Evaluation Date as a result of the material weaknesses in internal control over financial reporting discussed below.

Disclosure controls and procedures are those controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

During the audit of our financial statements for the year ended December 31, 2008, our independent registered public accounting firm Amper, Politziner & Mattia, LLP (AP&M), informed us and our Board of Directors that they had discovered conditions which they deemed to be material weaknesses in our internal controls (as defined by standards established by the Public Company Accounting Oversight Board).  AP&M informed us and our Board of Directors that these material weaknesses continued to be material weaknesses during the year ended December 31, 2009. EisnerAmper, LLP (“EA”) informed us and our Board of Directors that these material weaknesses continued to be material weaknesses during the year ended December 31, 2010 and are summarized as follows:

 
·
A lack of sufficient resources and an insufficient level of monitoring and oversight, which restricts the Company's ability to gather, analyze and report information relative to the financial statement assertions in a timely manner, including insufficient documentation and review of selection and application of generally accepted accounting principles.

 
·
The limited size of the accounting department makes it impracticable to achieve an appropriate segregation of duties.

 
·
There are no formal documented closing and reporting calendar and checklists.

 
·
There are no formal cash flow forecasts, business plans, and organizational structure documents to guide the employees in critical decision-making processes.

 
·
There are ineffective controls over accounting for revenue recognition and allowances for returns and bad debts.

 
·
Documentation (and retention thereof) of certain transactions was not completed on a timely basis.

 
·
Income and sales tax filings have not been made timely.

 
·
Material weaknesses identified in the past have not been remediated.

 
·
Lack of an audit committee which results in ineffective oversight over the Company’s financial reporting and accounting.

 
20


Additionally, EisnerAmper LLP identified the following material weakness during their audit of financial statements for the year ended December 31, 2010:

 
·
Controls over the accounting for certain equity transactions were ineffective. This material weakness is attributed to lack of technical expertise with respect to the application of Accounting Standards Codification Topic 815-40 which deals with accounting for equity-based instruments that may require to be treated as derivative instruments.

Management's Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, for the Company.

Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial reporting and the preparation of financial statements for external purposes, in accordance with generally accepted accounting principles.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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

Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, management conducted an evaluation of the effectiveness of our internal control over financial reporting, as of the Evaluation Date, based on the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis.

Based on its evaluation, management identified certain material weaknesses listed below, some of which are included in the list of above material weaknesses reported by our independent public accounting firm.  As such, management has concluded that our internal control over financial reporting was not effective as of December 31, 2010.

Insufficient Resources: We have an inadequate number of personnel with requisite expertise in the key functional areas of finance and accounting.

Inadequate Segregation of Duties: We have an inadequate number of personnel to properly implement control procedures.

Insufficient Written Policies & Procedures: We have insufficient written policies and procedures for accounting and financial reporting.

Lack of Audit Committee: We do not have a functioning audit committee resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures.

The information set forth in this Item 9A(T) shall not be considered filed under the Exchange Act. This annual report does not include an attestation report of EisnerAmper LLP, the Company’s independent registered public accounting firm, regarding internal control over financial reporting. Management’s report was not subject to attestation by EisnerAmper LLP pursuant to the rules of the SEC that permit the Company to provide only management’s report in this Form 10-K.

 
21


Remediation of Material Weaknesses

Management is committed to improving its internal controls and will (1) continue to use third party specialists to address shortfalls in staffing and to assist the Company with accounting and finance responsibilities, (2) increase the frequency of independent reconciliations of significant accounts which will mitigate the lack of segregation of duties until there are sufficient personnel, (3) prepare and implement sufficient written policies and checklists for financial reporting and closing processes and (4) may consider appointing outside directors and audit committee members in the future. The Company cannot predict when it will be able to appropriately address such weaknesses.

Changes in internal control over financial reporting

As of the evaluation date, there were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2010 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.


None.

PART III


The following table sets forth the name, age and position of each director and executive officer of ICTV.  The directors serve staggered terms of one, two, or three years and until their successors are elected and qualified.  Officers hold their positions at the pleasure of the board of directors, without prejudice to the terms of any employment agreement.

NAME
AGE
POSITION
Kelvin Claney
60
President, Chief Executive Officer, Secretary and Director
Richard Ransom
32
Chief Financial Officer
Stephen Jarvis
56
Director

Kelvin Claney – President and Chief Executive Officer, Secretary, Director

Kelvin Claney has served as a director of the Company since January 2001.  Mr. Claney began working in the United States direct response business in 1989 as an independent contractor to National Media Corp., where he produced, sourced, and executive-produced various infomercial projects, including Euro Painter, HP9000, Auri polymer sealant and Color Cote 2000™, Dustmaster 2000, LeSnack, Iron Quick and Fatfree Express.  Since 1992, Mr. Claney has served as President of R.J.M. Ventures, Inc., a television direct response marketing company, where he was responsible for such things as identifying projects the Company wants to become involved in, selecting production companies to produce infomercials and selecting media times to promote the infomercials.  The creation of the Smart StacksTM infomercial, which is now owned by ICTV, was one of the projects Mr. Claney was responsible for as President of R.J.M. Ventures, Inc.  He also created the infomercial for the children’s toy product known as BetterBlocksTM, which was then owned by The Better Blocks Trust.

Stephen Jarvis – Director

Stephen Jarvis has served as a director of the Company since December 17, 2009.  Mr. Jarvis is the co-founder and President of Positive Response Vision, Inc., located in Manila, Philippines.  Formed in 1996, Positive Response Vision is one of the largest infomercial-based direct response companies in Southeast Asia, and has approximately 400 employees.  The company markets and distributes a vast range of products throughout the Philippines. As President, Mr. Jarvis is responsible for product sourcing and acquisition, inventory, finance control and design issues.  Mr. Jarvis also produces infomercials in a private capacity, licensing them to Positive Response Vision and other international infomercial companies.  Mr. Jarvis has been engaged in direct response marketing since 1983.

Richard Ransom – Chief Financial Officer

Richard Ransom joined ICTV in July of 2008 as the Company’s Controller, and was appointed as Chief Financial Officer on December 8, 2008. Mr. Ransom joined the Company with eight years of experience in financial management roles at Traffic.com, Hildebrandt International, and Grant Thorton. He is a graduate of Pennsylvania State University with a degree in Accounting, and received his MBA from Delaware Valley College in December, 2009.
 
 
22

 
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Control persons, including all directors and executive officers, of our Company are required by Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), to report to the SEC their transactions in, and beneficial ownership of, the Company's common stock, including any grants of options to purchase common stock.  To the best of the Company's knowledge, the Company’s directors and executive officers timely filed all required reports with the SEC during the year ended December 31, 2010.

Audit Committee and Code of Ethics

We have not formally appointed an audit committee, and the entire Board of Directors (two persons) currently serves the function of an audit committee.  Because of the small number of persons involved in management of the Company, we do not have an audit committee financial expert serving on our Board.  We have not yet adopted a code of ethics applicable to our chief executive officer and chief financial officer, or persons performing those functions, because of the small number of persons involved in management of the Company.

 
23



Compensation of Named Executive Officers

The following table sets forth all compensation paid or earned for services rendered to ICTV in all capacities during the years ended December 31, 2010 and 2009, by our chief executive officer and president, chief operating officer, and chief financial officer (the "Named Officers").    No options or SAR grants were made to the Named Officers in 2010 or 2009, nor were any options or SAR’s exercised by the Named Officers.

Summary Compensation Table

Name And Principal Position
Year
 
Salary ($)
 
Bonus ($)
Kelvin Claney (President and CEO)
2010
 
 
180,000
 
nil
 
2009
 
 
180,000
 
nil
Richard Ransom  (Chief Financial Officer)
2010
 
 
125,000
 
nil
 
2009
 
 
125,000
 
nil
Richard Scheiner (Chief Operating Officer)1
2010
 
 
200,000
 
nil
 
2009
 
 
200,000
 
nil
1
Mr. Scheiner resigned as of October 29, 2010

Compensation of Directors

Directors receive no compensation for their service as directors, although they do receive reimbursement for expenses.

Employment Contracts

We entered into an Employment Agreement with Kelvin Claney, our President and Chief Executive Officer, effective March 1, 2011.  The Agreement provides, among other things, that if Mr. Claney’s employment is terminated without cause, he will be entitled to 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. Claney’s 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.


The following table sets forth, as of March 29, 2011 our outstanding common stock owned of record or beneficially by (1) each person who owned of record, or was known by us to own beneficially, more than 5% of our common stock, (2) each executive officer, (3) each director and (4) the shareholdings of all executive officers and directors as a group.  As of March 23, 2011, we had 16,038,381 shares of common stock issued and outstanding.

Name
 
Number of Shares Owned
 
 
Percentage of Shares Owned
 
Kelvin Claney, President and Chief Executive Officer, Member of the Board of Directors (1)
 
 
6,598,826
 
 
 
41.1
%
The Better Blocks Trust, declared January 1, 1994 (2)
 
 
6,578,826
 
 
 
41.0
%
                 
Stephen Jarvis, Member of the Board of Directors (3)
 
 
305,000
 
 
 
1.9
%
ALL EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP – 3 INDIVIDUALS
 
 
6,903,826
 
 
 
43.0
%

 
24


Except as noted below, all shares are held of record and each record shareholder has sole voting and investment power.

(1)
Includes 6,578,826 shares owned by The Better Blocks Trust, of which Mr. Claney is a joint trustee.  Mr. Claney disclaims beneficial ownership of the shares and options owned or controlled by The Better Blocks Trust beyond the extent of his pecuniary interest.  Mr. Claney’s business address is 755 Winslow Way East, Suite 303A , Bainbridge Island, Washington 98110.
(2)
The address for The Better Blocks Trust is 1 Kimberly Road, Epson, Auckland City, Auckland New Zealand, c/oBarry Stafford, Stafford Klaassen.
(3)
Mr. Jarvis’s business address is 320 J P Razal Street, Unit 301, 3rd Floor Aralco Bldg., Poblacion, Makati City 1210, Philippines.

There are no arrangements known to ICTV, the operation of which may result in a change of control of the Company.


The Company has received short-term advances from a shareholder.  These advances amounted to approximately $2,500 and $5,000 during the years ended December 31, 2010 and 2009, respectively. The advances are offset by repayments which amounted to approximately $3,200 and $7,000 during the years ended December 31, 2010 and 2009, respectively.  These advances are non-interest bearing and without specific terms of repayment.  These advances are included in Accounts Payable – Related Parties on the accompanying consolidated balance sheets.

The Company has a note payable to the Better Blocks Trust, a major shareholder, in the amount of $590,723. This loan is interest-free and has no specific terms of repayment.

We have two directors.  Under the definition of director independence found in NASD Rule 4200, Stephen Jarvis is our sole independent director.


Audit Fees
 
On August 18, 2010 the Audit Committee of the Company’s Board of Directors engaged EisnerAmper LLP to serve as the Company’s new independent registered public accounting firm, after it was notified on August 16, 2010 that Amper, Politziner, and Mattia, LLP (“Amper”), an independent registered public accounting firm, would not be able to stand for re-appointment because it combined its practice on that date with that of Eisner LLP (“Eisner”) to form EisnerAmper LLP, an independent registered public accounting firm.  The Company filed Form 8-K on August 18, 2010 acknowledging this change.

The aggregate fees billed to the Company for professional services rendered for the audit of the Company's annual financial statements, review of the Company's quarterly financial statements, and other services normally provided in connection with statutory and regulatory filings or engagements was approximately $89,250 in 2010 and approximately $108,000 in 2009.

Approximately $68,250 and $21,000 were billed for services rendered from EisnerAmper, LLP and Amper, Politziner & Mattia, LLP, respectively.
 
Audit-Related Fees
 
There were no fees billed in each of the last two fiscal years for assurance and related services by our independent registered public accounting firm that are reasonably related to the performance of the audit or review of our financial statements, and are not reported above.
 
Tax Fees
 
There were no fees billed in each of the last two fiscal years for professional services rendered by our independent registered public accounting firm for tax compliance, tax advice, and tax planning.
 
All Other Fees

There were no other fees billed in each of the last two fiscal years for professional services rendered by our independent registered public accounting firm.

 
25


All fees for audit and non-audit services, and any material fees for other services, are approved in advance by our Chief Financial Officer.

PART IV


Financial Statements

Reports of Independent Registered Public Accounting Firms
 
F-1-F-2
Consolidated Financial Statements:
 
 
Consolidated Balance Sheets
 
F-3
Consolidated Statements of Operations
 
F-4
Consolidated Statements of Shareholders’ Deficit
 
F-5
Consolidated Statements of Cash Flows
 
F-6
Notes to Consolidated Financial Statements
 
F-7 – F-20

Exhibits

2 *
Share and Option Purchase Agreement
   
3.1 *
Amended and Restated Articles of Incorporation
   
3.2 *
Amended and Restated Bylaws
   
3.3 *
First Amendment to Amended and Restated Bylaws
   
10.1 *
2001 Stock Option Plan
   
10.2 *
Promissory Note by Moran Dome Exploration Inc. payable to the Trustees of the Better Blocks Trust, in the amount of $590,723.27
   
10.3 *
Extension of Promissory Note dated August 23, 2001, by and between the Trustees of the Better Blocks Trust and International Commercial Television Inc.
   
10.4 **
Second Extension of Promissory Note dated March 25, 2002, by and between the Trustees of the Better Blocks Trust and International Commercial Television  Inc.
   
10.5 ***
Assignment of Trademark by Dimensional Marketing Concepts, Inc.
   
Rule 13a-14(a)/15d-14(a) Certification – Chief Executive Officer
   
Rule 13a-14(a)/15d-14(a) Certification – Chief Financial Officer
   
Section 1350 Certifications
   
*
Incorporated  by  reference  from  Form  SB-2  filed  with the Securities and Exchange  Commission  on  October  3,  2001.
   
**
Incorporated  by  reference from Post-Effective Amendment No. 1 to Form SB-2 filed  with  the  Securities  and  Exchange  Commission  on  April  12,  2002.
   
***
Incorporated  by reference from Amendment No. 1 to Form SB-2 filed with the Securities  and  Exchange  Commission  on  December  24,  2001.
   
****
Filed herewith

 
26


SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
 
INTERNATIONAL COMMERCIAL TELEVISION INC.
 
 
 
 
 
 
Date:
March 29, 2011
 
By:
/s/  Kelvin Claney
 
 
 
 
 
Name: Kelvin Claney
 
 
 
 
 
Title: President and Chief Executive Officer
 

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By:
/s/ Kelvin Claney
 
Date:
March 29 2011
 
Name: Kelvin Claney
     
 
Title: Chief Executive Officer and Director
     
 
       
By:
/s/  Richard Ransom
 
Date:
March 29, 2011
 
Name: Richard Ransom
     
 
Title: Chief Financial Officer, Principle Accounting Officer
     
 
       
By:
/s/  Stephen Jarvis
 
Date
March 29, 2011
 
Name: Stephen Jarvis
     
 
Title: Director
     

 
27


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

International Commercial Television Inc. and Subsidiaries

Reports of Independent Registered Public Accounting Firms for the years ended December 31, 2010 and 2009
F-1-F2
 
 
Consolidated Balance Sheets as of December 31, 2010 and 2009
F-3
 
 
Consolidated Statements of Operations for the years ended December 31, 2010 and 2009
F-4
 
 
Consolidated Statements of Shareholders’ Deficit for the years ended December 31, 2010 and 2009
F-5
 
 
Consolidated Statements of Cash Flows for the years ended December 31, 2010 and 2009
F-6
 
 
Notes to the Consolidated Financial Statements
F-7

 
28


Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
International Commercial Television, Inc.

We have audited the accompanying consolidated balance sheet of International Commercial Television, Inc. and Subsidiary (collectively, the “Company”) as of December 31, 2010, and the related consolidated statements of operations, shareholders’ deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit 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 Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of International Commercial Television, Inc. and Subsidiary as of December 31, 2010, and the results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the consolidated financial statements, the Company’s recurring losses from operations and negative cash flows from operations raise substantial doubt about its ability to continue as a going concern.  Management’s plans considering these matters are also described in Note 1 to the consolidated financial statements.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/EisnerAmper, LLP

Edison, New Jersey
March 28, 2011

 
F-1


Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
International Commercial Television, Inc.

We have audited the accompanying consolidated balance sheet of International Commercial Television, Inc. and Subsidiary (collectively, the “Company”) as of December 31, 2009, and the related consolidated statements of operations, shareholders’ deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit 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 Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of International Commercial Television, Inc. and Subsidiary as of December 31, 2009, and the results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the consolidated financial statements, the Company’s recurring losses from operations and negative cash flows from operations raise substantial doubt about its ability to continue as a going concern.  Management’s plans considering these matters are also described in Note 1 to the consolidated financial statements.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/Amper, Politziner & Mattia, LLP

Edison, New Jersey
June 21, 2010

 
F-2


INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2010 AND 2009

   
2010
   
2009
 
ASSETS
           
   
 
       
CURRENT ASSETS:
 
 
       
Cash and cash equivalents
  $ 158,482     $ 373,503  
Restricted cash
    2,060       2,992  
Accounts receivable, net of doubtful account reserves of $1,801 and $586, respectively
    75,805       92,548  
Inventories, net
    526,821       1,014,909  
Prepaid expenses and other current assets
    46,674       49,577  
                 
Total current assets
    809,842       1,533,529  
                 
                 
Furniture and equipment
    183,117       183,117  
Less accumulated depreciation
    148,776       134,437  
Furniture and equipment, net
    34,341       48,680  
                 
Total assets
  $ 844,183     $ 1,582,209  
                 
                 
LIABILITIES AND SHAREHOLDERS’ DEFICIT
               
                 
CURRENT LIABILITIES:
               
Accounts payable and accrued liabilities
  $ 621,687     $ 865,294  
Accounts payable - related parties
    30,859       31,567  
Severance payable - short term
    153,333       -  
Deferred revenue
    32,698       135,400  
Tax penalties payable
    260,000       250,000  
Note payable to shareholder
    590,723       590,723  
Total current liabilities
    1,689,300       1,872,984  
                 
Long-term severance payable
    110,000       -  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
SHAREHOLDERS’ DEFICIT:
               
Preferred stock 20,000,000 shares authorized, no shares issued and outstanding
               
                 
Common stock, $0.001 par value, 100,000,000 shares authorized, 15,547,179 and 14,505,912 shares issued and outstanding as of December 31, 2010 and December 31, 2009, respectively
    5,448       4,407  
Additional paid-in-capital
    5,257,293       5,126,763  
Accumulated deficit
    (6,217,858 )     (5,421,945 )
                 
Total shareholders’ deficit
    (955,117 )     (290,775 )
                 
Total liabilities and shareholders’ deficit
  $ 844,183     $ 1,582,209  
 
See accompanying notes to consolidated financial statements.

 
F-3


INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

   
2010
   
2009
 
   
 
       
NET SALES
  $ 3,903,219     $ 5,898,707  
                 
COST OF SALES
    2,102,448       2,896,652  
                 
GROSS PROFIT
    1,800,771       3,002,055  
                 
OPERATING EXPENSES:
               
                 
General and administrative
    2,197,927       1,953,705  
Selling and marketing
    399,175       1,289,206  
                 
Total operating expenses
    2,597,102       3,242,911  
                 
OPERATING LOSS
    (796,331 )     (240,856 )
                 
OTHER INCOME (EXPENSES), NET:
               
Interest income (expense), net
    418       (279 )
Total other income (expenses), net
    418       (279 )
                 
NET LOSS
  $ (795,913 )   $ (241,135 )
                 
BASIC AND DILUTED NET LOSS PER SHARE
  $ (0.05 )   $ (0.02 )

See accompanying notes to consolidated financial statements.

 
F-4


INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

   
Common Stock
   
Additional
             
   
$0.001 par value
   
Paid-In
   
Accumulated
   
 
 
   
Shares
   
Amount
   
Capital
   
Deficit
   
Totals
 
   
 
   
 
   
 
   
 
   
 
 
   
 
   
 
   
 
   
 
   
 
 
Balance at January 1, 2009
    14,505,912     $ 4,407     $ 5,111,937     $ (5,180,810 )   $ (64,466 )
                                         
Net loss
    -       -       -       (241,135 )     (241,135 )
                                         
Stock based compensation
    -       -       14,826       -       14,826  
                                         
                                         
Balance at December 31, 2009
    14,505,912     $ 4,407     $ 5,126,763     $ (5,421,945 )   $ (290,775 )
                                         
Net loss
    -       -       -       (795,913 )     (795,913 )
                                         
Stock based compensation
    -       -       27,444       -       27,444  
                                         
Exercise of warrants
    1,041,267       1,041       103,086        -       104,127  
                                         
Balance at December 31, 2010
    15,547,179     $ 5,448     $ 5,257,293     $ (6,217,858 )   $ (955,117 )

See accompanying notes to consolidated financial statements.

 
F-5


INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

   
2010
   
2009
 
   
 
       
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
       
Net loss
  $ (795,913 )   $ (241,135 )
Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities:
               
Depreciation
    14,339       14,875  
Stock based compensation
    27,444       14,826  
Change in assets and liabilities
               
Accounts receivable
    16,743       475,189  
Inventories
    488,088       1,384,009  
Prepaid expenses and other current assets
    2,902       119,074  
Accounts payable and accrued liabilities
    (243,606 )     (1,918,815 )
Severance payable
    263,333       -  
Tax penalties
    10,000       10,000  
Deferred revenue
    (102,702 )     113,097  
Net cash and cash equivalents used in  operating activities
    (319,372 )     (11,824 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
                 
Additions to property and equipment
    -       (1,112 )
Net cash and cash equivalents used in investing activities
    -       (1,112 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Exercised warrants
    104,127       -  
Advances from related parties
    2,524       4,496  
Payments to related parties
    (3,232 )     (6,893 )
Net cash and cash equivalents provided by (used in) financing activities
    103,419       (2,397 )
                 
NET DECREASE IN CASH AND CASH EQUIVALENTS
    (215,953 )     (15,333 )
                 
CASH AND CASH EQUIVALENTS, beginning of the year
    376,495       391,828  
                 
CASH AND CASH EQUIVALENTS, end of the year
  $ 160,542     $ 376,495  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Interest paid
  $ -     $ 950  

See accompanying notes to consolidated financial statements.

 
F-6


INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009

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.

Strategic Media Marketing Corp. (“SMM”), a wholly owned subsidiary, was incorporated in the Province of British Columbia on February 11, 2003 and has a December 31 fiscal year-end.

The Company sells various consumer products.  The products are primarily marketed and sold throughout the United States and internationally via infomercials.  Although our companies are incorporated in Nevada and British Columbia, operations are currently run from Washington State, Pennsylvania, and British Columbia.

Liquidity and Going Concern

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern.  The Company generated negative cash flows from operating activities in the past fiscal year of approximately $319,000, and the Company, for the most part, has experienced recurring losses from operations. The Company had negative working capital of approximately $879,000 and an accumulated deficit of approximately $6,218,000 as of December 31, 2010.

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

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 SMM.  All significant inter-company transactions and balances have been eliminated.

 
F-7


INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009

Note 2 - Summary of significant accounting policies (continued)

Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles of the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.  Management believes that the estimates utilized in preparing its consolidated financial statements are reasonable and prudent.  Actual results could differ from these estimates.

Concentration of credit risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, include cash and trade receivables.  The Company maintains cash in bank accounts that, at times, may exceed federally insured limits.  As of December 31, 2010, the Company did not exceed the federally insured limit in its investment savings. The Company has not experienced any losses and believes it is not exposed to any significant risks on its cash in bank accounts. As of December 31, 2010 and December 31, 2009, 4% and 0% of the Company’s accounts receivable were due from various individual customers to whom our products had been sold directly via Direct Response Television; the remaining 96% and 100% of the Company’s accounts receivable were due from two and three wholesale infomercial operators, respectively.

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 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.

Restricted Cash

Transfirst ePayment Services (“Transfirst”), ICTV’s credit card processing vendor for VISA and Mastercard transactions in the United States, maintains a reserve fund within our processing account to cover all fees, charges, and expenses due them, including those estimated for possible customer charge backs. These reserves are updated periodically by Transfirst and maintained for a rolling 180 days of activity. Based upon established levels of risk, this normally represents approximately 2% of transaction volume for the period, and is considered as “Restricted Cash”.  At December 31, 2010 and 2009 the amount of Transfirst reserves were approximately $2,000 and $3,000 respectively.

 
F-8


INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009

Note 2 - Summary of significant accounting policies (continued)

Accounts receivable

Accounts receivable are recorded net of allowances for returns and doubtful accounts of approximately $7,000 and $3,000 for the years ended December 31, 2010 and 2009 respectively.  The allowances are calculated based on historical customer returns and bad debts.

In addition to reserves for returns on accounts receivable, an accrual is made against returns for product that have been sold to customer and had cash collections, while the customer still has the right to return the product.   The amounts of these accruals included in accounts payable and accrued liabilities in our consolidated Balance Sheets were approximately $9,000 and $45,000 at December 31, 2010 and 2009, 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 not recorded any inventory of consigned product as of December 31, 2010 and 2009 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 $14,000 and $15,000 for the years ended December 31, 2010 and 2009, 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 in the fiscal years ended December 31, 2010 and 2009.

 
F-9


INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009

Note 2 - Summary of significant accounting policies (continued)

Revenue recognition

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

The Company offers a 30-day risk-free trial as one of its payment options.  Revenue on the 30-day risk-free trial sales is not recognized until customer acceptance and collectability are assured which we determine to be when the trial period ends. If the risk-free trial expires without action by the customer, product is determined to be accepted by the customer and revenue is recorded.  Revenue for items purchased without the 30-day free trial is recognized upon shipment of the product to the customer and collectability is assured.

The Company entered into an exclusive distribution agreement with Allstar Marketing (“Allstar”) in May 2009. As part of the agreement with Allstar the Company received non-refundable royalty advances which were booked as deferred revenue until Allstar sold DermaWands.   Allstar is required to provide ICTV with monthly royalty statements per the contract within 30 days of the end of each month.  The Company records revenue in the month goods were sold per the Allstar royalty statements.

In March 2010, the Allstar agreement was terminated and the Company retained the exclusive distribution rights for the Derma Wand.   Upon termination of the contract, the Company recognized the remaining non-refundable royalty advances that were previously booked in deferred revenue. The Company recognized $94,000 and $56,000 in revenue related to the Allstar agreement in the years ended December 31, 2010 and 2009 respectively.
 
Revenue related to international wholesale customers is recorded at gross amounts with a corresponding charge to cost of sales upon shipment.

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

Shipping and handling

Amounts billed to customers for shipping and handling are included in revenue: shipping and handling revenue approximated $13,000 and $225,000 for the years ended December 31, 2010 and 2009, respectively. Shipping and handling costs are included in cost of sales. Shipping and handling costs approximated $167,000 and $255,000 for the years ended December 31, 2010 and 2009, 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.

Media costs

Media costs are expensed as incurred and are included in selling and marketing expense in the accompanying consolidated financial statements.  The Company incurred approximately $11,000 and $621,000 in such costs for the years ended December 31, 2010 and 2009, respectively.

 
F-10


INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009

Note 2 - Summary of significant accounting policies (continued)

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 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 Consolidated Statements of Operations.

Stock options

The Company has a 2001 Stock Option Plan (“Plan”).  The purpose of this Plan is to provide additional incentives to key employees, officers, directors and consultants of the Company and its subsidiaries in order to help attract and retain the best available personnel for positions of responsibility and otherwise promoting the success of the business activities.  It is intended that options issued under this Plan constitute nonqualified stock options. The general terms of awards under the option plan are that 10% will vest every 6 months. The maximum term of options granted is 10 years and the number of shares authorized for grants of options is 3,000,000.

The Company uses ASC 718, Share-Based Payments, to account for stock-based compensation. The Company recognizes compensation expense in an amount equal to the fair value of share-based payments such as stock options granted to employees over the requisite vesting period of the awards. Stock options granted to non-employees are remeasured at each reporting period.

For the years ended December 31, 2010 and 2009, the Company recorded approximately $7,000 and $15,000 respectively in stock compensation expense related to vesting of options previously granted.

 
F-11


INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009

Note 2 - Summary of significant accounting policies (continued)

Stock options (continued)

The following is a summary of stock options outstanding under the existing stock option plan for the years ended December 31, 2010 and 2009:

 
 
Number of Shares
 
 
Weighted Average
 
 
 
Employee
 
 
Non-Employee
 
 
Totals
 
 
Exercise Price
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2010
 
 
-
 
 
 
817,000
 
 
 
817,000
 
 
$
1.68
 
Granted
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
Exercised
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
Expired
 
 
-
 
 
 
(160,000)
 
 
 
(160,000)
 
 
 
0.36
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2010
 
 
-
 
 
 
657,000
 
 
 
657,000
 
 
$
2.00
 

 
 
Number of Shares
 
 
Weighted Average
 
 
 
Employee
 
 
Non-Employee
 
 
Totals
 
 
Exercise Price
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2009
 
 
-
 
 
 
1,117,000
 
 
 
1,117,000
 
 
$
1.39
 
Granted
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
Exercised
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
Expired
 
 
-
 
 
 
 (300,000)
 
 
 
(300,000)
 
 
 
0.35
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2009
 
 
-
 
 
 
817,000
 
 
 
817,000
 
 
$
1.68
 

Of the stock options currently outstanding, 657,000 options are currently vested and exercisable. The weighted average exercise price of these options was $2.00. These options expire in September  2011.  The aggregate intrinsic value for options outstanding and exercisable at December 31, 2010 and 2009 was immaterial.

The following assumptions are used in the Black-Scholes option pricing model for the years ended December 31, 2010 and 2009 to value the stock options outstanding:

 
2010
2009
 
 
 
Risk-free interest rate
0.04%
3.810-4.490%
Expected dividend yield
0.00
0.00
Expected life
0.85 years
5.41-6.85 years
Expected volatility
411.21%
125.81 - 191.49%
Weighted average grant date fair value
$0.23
$0.24

 
F-12


INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009
Note 2 - Summary of significant accounting policies (continued)

Stock options (continued)

During 2010, 250,000 options were granted to a consultant for services rendered.   For the year ended December 31, 2010, the Company recorded approximately $20,000 in stock compensation expense.   The exercise price for the 150,000 and 100,000 options granted was $0.25 and $0.075 per share respectively and the options will be fully vested in approximately 2.3 years.

 
2010
 
 
Risk-free interest rate
0.98%
Expected dividend yield
0.00
Expected life
3.00 years
Expected volatility
442.25%
Weighted average grant date fair value
$0.08

New Accounting Pronouncements

In October 2009, the FASB issued Accounting Standards Update No. 2009-13, "Multiple-Deliverable Revenue Arrangements" ("ASU No. 2009-13"). ASU No. 2009-13 amends guidance included within Accounting Standards Codification ("ASC") Topic 605-25 to require an entity to use an estimated selling price when vendor specific objective evidence or acceptable third party evidence does not exist for any products or services included in a multiple element arrangement. The arrangement consideration should be allocated among the products and services based upon their relative selling prices, thus eliminating the use of the residual method of allocation. ASU No. 2009-13 also requires expanded qualitative and quantitative disclosures regarding significant judgments made and changes in applying this guidance. ASU No. 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010.  Early adoption and retrospective application are also permitted.  We are currently evaluating the impact of adopting the provisions of ASU No. 2009-13.

Note 3 - License and reconveyance agreements

Effective April 1, 2000, the Company entered into a License and Reconveyance Agreement with Windowshoppc.com Limited (“WSL”) and R.J.M. Ventures (“RJML”).  These agreements are royalty-free.  WSL and RJML owned or had rights in certain intellectual properties that were transferred or assigned to ICTV during 2003.  Accordingly, WSL and RJML granted all production rights, proprietary rights, inventory, development rights, tangible assets, licenses and any assets or rights to the Company.  The Company has the right to further develop and enhance the intellectual properties as the Company sees fit.

 
F-13


INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009

Note 4 - Commitments and contingencies

Leases

As of December 31, 2010, the Company had active leases related to the office space rented in Wayne, Pennsylvania and Bainbridge Island, Washington.  Total rent expense incurred during 2010 and 2009 totaled approximately $57,000 and $66,000, respectively.   The schedule below details the future financial obligations under the remaining two leases.

 
 
2011
 
 
2012
 
 
2013
 
 
2014
 
 
2015
 
 
TOTAL OBLIGATION
 
Bainbridge Island
 
$
5,535
 
 
$
-
 
 
$
-
 
 
$
-
 
 
$
-
 
 
$
5,535
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wayne - Corporate HQ
 
$
33,150
 
 
$
8,075
 
 
$
-
 
 
$
-
 
 
$
-
 
 
$
41,225
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Lease Obligations
 
$
38,685
 
 
$
8,075
 
 
$
-
 
 
$
-
 
 
$
-
 
 
$
46,760
 
 
DermaWandTM

On October 15, 1999, WSL entered into an endorsement agreement with an individual for her appearance in a DermaWand infomercial.  On July 11, 2001, the agreement was amended to include a royalty payment for each unit sold internationally, up to a maximum royalty payment for any one calendar quarter.  Further, if the infomercial is aired in the United States, then the airing fee will revert back to the same flat rate per calendar quarter.  The initial term of the agreement was five years starting October 15, 1999.  The agreement automatically and continually renews for successive additional five-year terms unless RJML is in material default and is notified in writing at least thirty days prior to the end of the then current term that the individual intends to terminate the agreement.

The Company assumed any and all responsibilities associated with the agreements noted above on April 1, 2000, pursuant to the license and reconveyance agreement disclosed in Note 3.


 
F-14

 
INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009

Note 4 - Commitments and contingencies (continued)

On January 5, 2001, WSL entered into an agreement with Omega 5.  This agreement was amended  July 28, 2010.  WSL shall have worldwide nonexclusive rights to manufacture, market and distribute DermaWandTM.  In consideration of these rights, WSL shall pay a monthly payment for each unit sold of DermaWand depending on various scenarios as defined in the agreement.  The agreement is silent as to its duration.

During 2007, the Company entered into an exclusive license agreement with Omega 5 wherein ICTV was assigned all of the trademarks and all of the patents and pending patents relating to the DermaWandTM and was granted exclusive license with respect to the commercial rights to the DermaWandTM. The geographical scope of the license granted is the entire world consisting of the United States of America and all of the rest of the world.   The license remains exclusive to ICTV provided ICTV pays to Omega 5 a minimum annual payment of $250,000 in the initial 18 month term of the agreement and in each succeeding one-year period. If the Company fails to meet the minimum requirements as outlined in the agreement, it may be forced to assign the trademarks and patents back to Omega 5. After the initial term, the exclusive license granted shall renew automatically for a three year period, and thereafter automatically at three-year intervals.
 
The amount of expenses incurred for sales of the DermaWandTM were approximately $403,000 and $381,000 for the years ended December 31, 2010 and 2009, respectively, which included the $250,000 minimum payment.

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 to cover all direct to consumer product sales in the US and worldwide. At present, management is not aware of any claims against the Company for any products sold.

The policy expires on April 20, 2011.

Note 5 – Severance payable

In September 2010 the Company entered into a severance agreement with a former consultant.   Under the severance agreement, the consultant will be paid $270,000 over a 27 month period in increments of $10,000 per month beginning in September 2010 and continuing through November 2012.  The Company recorded the $270,000 as a General and Administrative expense in the three months ended September 30, 2010.  The severance payable balance at December 31, 2010 is $230,000 of which $120,000 is current and $110,000 is long-term.

In October 2010, the Company terminated the employment of its Chief Operating Officer and committed to paying a four month severance.   The severance payable balance at December 31, 2010 is $33,333, all of which is a current liability.

Note 6 - Related party transactions

The Company has received short-term advances from a shareholder.  These advances amounted to approximately $2,500 and $5,000 during the years ended December 31, 2010 and 2009, respectively. The advances are offset by payments which amounted to approximately $3,200 and $7,000 during the years ended December 31, 2010 and 2009, respectively.  These advances are non-interest bearing and without specific terms of repayment.  These advances are included in accounts payable – related parties, on the accompanying consolidated balance sheets.

The Company has a note payable to a shareholder in the amount of $590,723. This loan is interest-free and has no specific terms of repayment.

 
F-15


INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009

Note 7 - Capital transactions

There were no capital transactions during the years ended December 31, 2010 and 2009.

We issued a total of 1,600,000 shares of our common stock and an equal number of warrants in a private placement of common stock and warrants in December 2007.  In the purchase agreement, the investors bought their stock at $2.20 per share, received warrants to purchase an equal number of shares at $3.00 per share, and were granted certain anti-dilution rights, which would essentially re-price their purchase if we later sold shares at a lower price.  At our current stock price, the anti-dilution provisions essentially precluded our raising capital through sales of our stock.

As a result, the Company requested that the investors waive their anti-dilution rights.  One of the requirements for us to obtain the requested waivers was to reduce the warrant exercise price to more closely reflect our current stock price.  The result of our negotiations with the investors was a reduction in the warrant exercise price to $.10 per share for those warrants exercised promptly, and a reduction in the warrant exercise price to $.40 per share for most of the remaining warrants.

On November 5, 2010, the Company’s Board of Directors approved a resolution which modified the terms of the 1,600,000 warrants.  The modified terms were (i) waiver of anti-dilution rights, (ii) modification of the exercise price of the warrants as defined in the agreement, and (iii) extension of expiration date to December 1, 2013.

At December 31, 2010, 1,041,267 warrants have been exercised for approximately $104,000.  The remaining warrants of 558,733 are exercisable between $0.10 and $3.00 per share and expire through December 1, 2013.
 
The Company accounted for this change of warrants as a modification of the warrants.   The modification of warrants, an equity instrument, resulted in a transfer of value to the holders of the instrument, thus as such this transfer of value has been characterized as a deemed dividend to shareholders.  The Company valued the deemed dividend as the incremental fair value of modified warrants compared to the fair value of the old warrants immediately prior to modification.  The weighted average grant date fair value of the warrants after modification was $0.05 per share.   The fair value of the warrants prior to modification was insignificant, therefore a deemed dividend to the shareholder was recorded for approximately $77,000 to account for the incremental fair value of the warrant modification, which is reflected as an increase and corresponding decrease in additional paid in capital.

The following assumptions were used in determining the grant date fair value of the warrants:

 
2010
 
 
Risk-free interest rate
0.60%
Expected dividend yield
0.00
Expected life
3.00 years
Expected volatility
365.00%

 
F-16


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 December 31, 2010, there were 558,733 warrants outstanding and exercisable. The warrants are exercisable between $0.10 and $3.00 per share expiring December 1, 2013. At December 31, 2010 there were 907,000 stock options outstanding and 657,000 were vested and exercisable at an exercise price of $2.00.

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

   
December 31
 
 
 
2010
 
 
2009
 
Options to purchase common stock
 
 
907,000
 
 
 
837,000
 
Warrants to purchase common stock
 
 
558,733
 
 
 
1,781,625
 

 
F-17


INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009

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

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

For the year ended December 31, 2010:
 
Income/(Loss) (Numerator)
 
Weighted Average Shares (Denominator)
 
Per Share Amount
 
 
 
 
 
 
 
 
 
Basic and diluted loss per share
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss to common shareholders
 
$
(795,913)
 
14,508,765
 
$
(0.05)
 

For the year ended December 31, 2009:
 
Income/(Loss) (Numerator)
 
Weighted Average Shares (Denominator)
 
Per Share Amount
 
 
 
 
 
 
 
 
 
Basic and diluted loss per share
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss to common shareholders
 
$
(241,135)
 
14,505,912
 
$
(0.02
)

Note 9 - Income taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company has provided a full valuation allowance on the net deferred tax asset because of uncertainty regarding its realization.  This asset primarily consists of net operating losses.  For the most part, the Company has experienced operating losses since inception. Therefore the Company has accumulated approximately $4,900,000 and $4,300,000 of net operating loss carryforwards for federal and state purposes, respectively, which expire twenty years from the time of incurrence for federal purposes. Expiration for the state net operating carryforwards may vary based on different state rules.

Significant components of the Company’s deferred tax assets (liabilities) are approximately as follows as of December 31, 2010 and 2009:

 
 
2010
 
 
2009
 
Net operating loss
 
$
1,856,000
 
 
$
1,605,000
 
Accrued returns and allowances
 
 
4,000
 
 
 
18,000
 
Accumulated depreciation
 
 
(5,000)
 
 
 
(14,000)
 
Other
 
 
59,000
 
 
 
70,000
 
Total deferred tax assets
 
$
1,914,000
 
 
$
1,679,000
 
Valuation allowance
 
 
(1,914,000)
 
 
 
(1,679,000
)
Net deferred tax assets
 
$
-
 
 
$
-
 

A valuation allowance for all of our net deferred tax assets has been provided as we are unable to determine, at this time, that the generation of future taxable income against which the net operating loss (“NOL”) and carryforwards could be used can be predicted to be more likely than not.  Net change to our valuation allowance for the year ended December 31, 2010 was an increase of $235,000.

Due to the change in ownership provisions of the Internal Revenue Code, the availability of the Company’s net operating loss carry forwards may be subject to annual limitations against taxable income in future periods, which could substantially limit the eventual utilization of such carry forwards. The Company has not analyzed the historical or potential impact of its equity financings on beneficial ownership and therefore no determination has been made whether the net operating loss carry forward is subject to any Internal Revenue Code Section 382 limitation.   To the extent there is a limitation, there would be a reduction in the deferred tax asset with an offsetting reduction in the valuation allowance.

 
F-18


INTERNATIONAL COMMERCIAL TELEVISION INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009

Note 9 - Income taxes (continued)

Current United States Federal tax law limits the use of net operating loss carry forwards after there has been a substantial change in ownership, as defined in Internal Revenue code Section 382, during a three year period. The Company has not evaluated whether a change in ownership has occurred over the last three years.  The Company’s use of net operating losses for United States and state tax purposes may be limited under the Internal Revenue Code if it is determined that a change in ownership has occurred.
 
 
The Company has not filed income tax returns since inception; therefore, the statute for all years remains open and any of these years could potentially be audited.

The Company’s policy is to recognize interest and penalties related to tax matters in general and administrative expenses in the Consolidated Statements of Operations.

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.

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

 
 
For the year ended December 31, 2010
 
 
For the year ended December 31, 2009
 
 
 
Domestic
 
 
International
 
 
Totals
 
 
Domestic
 
 
International
 
 
Totals
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NET SALES
 
$
1,898,174
   
$
2,005,045
   
$
3,903,219
 
 
$
4,618,028
 
 
$
1,280,679
 
 
$
5,898,707
 
 
 
 
                   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                   
 
 
 
 
 
 
 
 
 
 
 
 
COST OF SALES
 
 
1,290,420
     
812,028
     
2,102,448
 
 
 
2,319,421
 
 
 
577,231
 
 
 
2,896,652
 
 
 
 
                   
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
 
 
607,754
     
1,193,017
     
1,800,771
 
 
 
2,298,607
 
 
 
703,448
 
 
 
3,002,055
 
 
 
 
                   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                   
 
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss)
 
$
(1,895,078)
    $
1,098,747
    $
(796,331)
 
 
$
(865,010
)
 
$
624,154
 
 
$
(240,856
)

Selected balance sheet information by segment is presented in the following table as of December 31:

Total Assets
 
2010
 
 
2009
 
Domestic
 
$
810,252
 
 
$
1,528,237
 
International
 
 
33,931
 
 
 
53,972
 
Total Assets
 
$
844,183