Form 10QSB for COLLECTIBLE CONCEPTS GROUP INC
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14-Apr-2005
Quarterly Report
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Some of the information in this Form 10-QSB contains forward-looking statements
that involve substantial risks and uncertainties. You can identify these statements
by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue,"
or similar words. You should read statements that contain these words carefully
because they:
o discuss our future expectations;
o contain projections of our future results of operations or of our financial
condition; and
o state other "forward-looking" information.
We believe it is important to communicate our expectations. However, there may
be events in the future that we are not able to accurately predict or over which
we have no control. Our actual results and the timing of certain events could
differ materially from those anticipated in these forward-looking statements
as a result of certain factors, including those set forth in our filings with
the Securities and Exchange Commission.
GENERAL
The following detailed analysis of operations should be read in conjunction
with the 2004 audited consolidated financial statements and related notes included
in the Company's Form 10-KSB for the year ended February 29, 2004.
In November 2004, the Company continues to pursue its re-evaluated business
model. The Company believes that licenses have evolved into less time sensitive
and sale spiking properties. The Company is not renewing or continuing licenses
that do not fit our new business model. The Company's new business model will
be focused on more evergreen properties and those with a longer window of opportunity.
The Company recognized the need to have products that addressed the mainstream
consumer market where market size and repeat sales opportunities could give
the Company a means to stabilize and grow its revenues. To avoid the time, expense
and risks associated with in-house new product development, the Company sought
out entities with mainstream consumer products whose marketability could be
enhanced by the addition of the Company's licenses. These activities produced
new joint ventures and products that addressed new markets in keeping with the
Company's new marketing direction aimed at the collegiate and professional sports
marketplaces.
In September 2004, NFL great Joe Theismann joined CCGI as an advisor and consultant.
In October 2004, the Company had signed a licensing agreement with the National
Football League to sell Fanbana and Megaphone Cap products for all the NFL teams.
During the nine months ended November 30, 2004, the Company successfully signed
licensing agreements with over thirty different colleges, which include Notre
Dame, The Ohio State University, University of Miami and University of Southern
California. The Company also sent licensing proposals to the National Basketball
League (signed February 2005), and Major League Baseball. The Company is also
in pursuing more collegiate licenses.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
During the nine months ended November 30, 2004, the Company teamed with Delta
and McDonald's in separate deals to have these companies use our Fanabana product
as a promotional give away item at sporting events. Delta gave these items that
had the team name on one side and Delta on the other at the following sporting
events: the Boston Marathon, a New York Mets game, a Cincinnati Bengals game
and an Atlanta Falcons game. McDonald's use the same promotional concept at
football games with colleges in southeastern parts of the country.
In July of 2004, our Stories for Heroes audio book of Arthur children's stories
was released for distribution in a pre-launch campaign on Amazon.com. CCGI partnered
with 212 Media Group to manage the manufacturing, marketing and distribution
of the audio book. The CD itself is an enhanced audio CD that features stories,
pictures, music and games for children, parents and teachers. Celebrity readers
include Clay Aiken, Kelly Ripa and Kevin Bacon
On July 19, 2004, we entered into an exclusive licensing agreement with Dimensional
Products & Imaging, Inc.(DPI), to develop and market unique print products
using DPI's Vertical D TM dimensional imaging.
In July, 2004, one of our largest distributors, the CLP Group, Inc. succeeded
in obtaining approval from McDonald's fast food chain as an approved vendor
of our Fanbana product line. This is an important achievement inasmuch as approval
as a McDonald's vendor involves close scrutiny and clears the path for sales
to this huge international chain. CLP is actively engaged in selling our Fanbanas
with various college logos to several hundred McDonald's stores in the southeastern
and southwestern USA.
CRITIAL ACCOUNTING POLICIES
Our financial statements are prepared based on the application of accounting principles generally accepted in the United States of America. These accounting principles require us to exercise significant judgment about future events that affect the amounts reported throughout our financial statements. Actual events could unfold quite differently than our previous judgments had predicted. Therefore the estimates and assumptions inherent in the financial statements included in this report could be materially different once those actual events are known. We believe the following policies may involve a higher degree of judgment and complexity in their application and represent critical accounting policies used in the preparation of our financial statements. If different assumptions or estimates were used, our financial statements could be materially different from those included in this report.
Revenue Recognition: We recognize revenues in accordance with Staff Accounting
Bulletin 104, Revenue Recognition in Financial Statements (SAB 104). We develop
and sell collectibles in the entertainment, sports and music markets. Revenue
from such product sales is recognized when persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable and collectibility
is probable. At this time the earnings process is complete and the risks and
rewards of ownership have transferred to the customer, which is generally when
the goods are shipped and all significant obligations of the Company have been
satisfied.
Accounts Receivable: We must make judgments about the collectibility of our
accounts receivable to be able to present them at their net realizable value
on the balance sheet. To do this, we carefully analyze the aging of our customer
accounts, try to understand why accounts have not been paid, and review historical
bad debt problems. From this analysis, we record an estimated allowance for
receivables that we believe will ultimately become uncollectible.
Realizability of Inventory Values: We make judgments about the ultimate realizability
of our inventory in order to record our inventory at its lower of cost or market.
These judgments involve reviewing current demand for our products in comparison
to present inventory levels and reviewing inventory costs compared to current
market values.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Long-lived Assets. We assess the impairment of long-lived assets whenever events
or changes in circumstances indicate that their carrying value may not be recoverable
from the estimated future cash flows expected to result from their use and eventual
disposition. Our long-lived assets subject to this evaluation include property
and equipment and amortizable intangible assets. Intangible assets other than
goodwill are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying value may not be fully recoverable. We are required
to make judgments and assumptions in identifying those events or changes in
circumstances that may trigger impairment.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting
For Certain Financial Instruments with Characteristics of both Liabilities and
Equity". SFAS No. 150 changes the accounting for certain financial instruments
with characteristics of both liabilities and equity that, under previous pronouncements,
issuers could account for as equity. The new accounting guidance contained in
SFAS No. 150 requires that those instruments be classified as liabilities in
the balance sheet.
SFAS No. 150 affects the issuer's accounting for three types of freestanding
financial instruments. One type is a mandatory redeemable share, which the issuing
company is obligated to buy back in exchange for cash or other assets. A second
type includes put options and forward purchase contracts, which involves instruments
that do or may require the issuer to buy back some of its shares in exchange
for cash or other assets. The third type of instruments that are liabilities
under this Statement is obligations that can be settled with shares, the monetary
value of which is fixed, tied solely or predominantly to a variable such as
a market index, or varies inversely with the value of the issuers' shares. SFAS
No. 150 does not apply to features embedded in a financial instrument that is
not a derivative in its entirety.
Most of the provisions of Statement 150 are consistent with the existing definition
of liabilities in FASB Concepts Statement No. 6, "Elements of Financial
Statements". The remaining provisions of this Statement are consistent
with the FASB's proposal to revise that definition to encompass certain obligations
that a reporting entity can or must settle by issuing its own shares. This Statement
shall be effective for financial instruments entered into or modified after
May 31, 2003 and otherwise shall be effective at the beginning of the first
interim period beginning after June 15, 2003, except for mandatory redeemable
financial instruments of a non-public entity, as to which the effective date
is for fiscal periods beginning after December 15, 2004.
In January 2003, (as revised in December 2003) The Financial Accounting Standards
Board ("FASB") issued Interpretation No. 46, "Consolidation of
Variable Interest Entities", an interpretation of Accounting Research Bulletin
("ARB") No. 51, "Consolidated Financial Statements". Interpretation
No. 46 addresses consolidation by business enterprises of variable interest
entities, which have one or both of the following characteristics: (i) the equity
investment at risk is not sufficient to permit the entity to finance its activities
without additional subordinated support from other parties, which is provided
through other interest that will absorb some or all of the expected losses of
the entity; (ii) the equity investors lack one or more of the following essential
characteristics of a controlling financial interest: the direct or indirect
ability to make decisions about the entities activities through voting rights
or similar rights; or the obligation to absorb the expected losses of the entity
if they occur, which makes it possible for the entity to finance its activities;
the right to receive the expected residual returns of the entity if they occur,
which is the compensation for the risk of absorbing the expected losses.
Interpretation No. 46(R), as revised, also requires expanded disclosures by
the primary beneficiary (as defined) of a variable interest entity and by an
enterprise that holds a significant variable interest in a variable interest
entity but is not the primary beneficiary.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Interpretation No. 46(R), as revised, applies to small business issuers no later
than the end of the first reporting period that ends after December 15, 2004.
This effective date includes those entities to which Interpretation 46 had previously
been applied. However, prior to the required application of Interpretation No.
46, a public entity that is a small business issuer shall apply Interpretation
46 or this Interpretation to those entities that are considered to be special-purpose
entities no later than as of the end of the first reporting period that ends
after December 15, 2003.
Interpretation 46(R) may be applied prospectively with a cumulative-effect adjustment
as of the date on which it is first applied or by restating previously issued
financial statements for one or more years with a cumulative-effect adjustment
as of the beginning of the first year restated.
In December 2004, the FASB issued SFAS No. 123 (R), "Share-Based Payment".
SFAS No. 123 (R) revises SFAS No. 123, "Accounting for Stock-Based Compensation"
and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees".
SFAS No. 123 (R) focuses primarily on the accounting for transactions in which
an entity obtains employee services in share-based payment transactions. SFAS
No. 123 (R) requires companies to recognize in the statement of operations the
cost of employee services received in exchange for awards of equity instruments
based on the grant-date fair value of those awards (with limited exceptions).
SFAS No. 123 (R) is effective as of the first interim or annual reporting period
that begins after June 15, 2005 for non-small business issuers and after December
15, 2005 for small business issuers. Accordingly, the Company will adopt SFAS
No. 123 (R) in its quarter ending March 31, 2006. The Company is currently evaluating
the provisions of SFAS No. 123 (R) and has not yet determined the impact, if
any, that SFAS No. 123 (R) will have on its financial statement presentation
or disclosures.
Management does not expect the adoption of these pronouncements to have a material
impact on the Company's consolidated financial position or results of operations.
RESULTS OF OPERATIONS NINE MONTHS ENDED NOVEMBER 30, 2004 COMPARED TO NINE MONTHS
ENDED NOVEMBER 30, 2003.
Net revenue for the nine months ended November 30, 2004 was $385,380 compared
to net revenue of $127,773 for the nine months ended November 30, 2003. The
increase in revenue was due primarily to the sales generate by products in connections
with the new licenses the Company has been obtaining.
Cost of sales for the nine months ended November 30, 2004 increased by $252,910
from the nine months ended November 30, 2003. Cost of sales as a percentage
of revenues increased to 95.2% for the nine months ended November 30, 2004 as
compared to 89.3% for the same period last year. The increase is mainly attributable
to the development of new sales products and the Company's use of introduction
pricing to establish market share
.
Selling, general and administrative expenses for the nine months ended November
30, 2004 increased to $967,805 from $789,137 for the same period the previous
year. For the nine months ended November 30, 2004 and 2003, the services obtained
through the issuance of stock include internal accounting and financial services,
internet website creation, marketing assistance, insurance program review and
general management consulting services in the amount of $186,209 and $248,225,
respectively. As previously mentioned, the Company incurs charges to bring the
product to market. These charges relate to the costs of producing samples as
well as the related package design costs that must be approved by the licensor
prior to full production runs of the product. For the nine months ended November
30, 2004, the Company incurred charges relating to the costs of producing the
samples as well as the related package design of approximately $48,671 versus
charges of approximately $19,231 for the same period the previous year.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The Company incurred interest expense of $548,851 for the nine months ended
November 30, 2004 as compared to $331,926 for the same period the previous year
due to increased borrowings and the beneficial conversion calculation related
to the application of the EITF ("Emerging Issues Task Force") Bulletin
for accounting of convertible securities and notes and loans payable with beneficial
conversion features. The beneficial conversion calculation added $356,250 and
$225,000 of interest expense respectively for the nine months ended November
30, 2004 and 2003, respectively.
As a result of the above, the Company had a net loss of $1,330,990 for the nine
months ended November 30, 2004 as compared to a net loss of $1,082,319 for the
same period last year.
THREE MONTHS ENDED NOVEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED NOVEMBER
30,
2003.
Net revenue for the three months ended November 30, 2004 was $65,444 compared
to net revenue of $40,957 for the three months ended November 30, 2003. The
increase in revenue was due primarily to the sales generate by products in connections
with the new licenses the Company has been obtaining.
Cost of sales for the three months ended November 30, 2004 decreased by $17,461
from the three months ended November 30, 2003. Cost of sales as a percentage
of revenues decreased to 52.9% for the three months ended November 30, 2004
as compared to 127.2% for the same period last year. The decrease is mainly
attributable to better product development of new sales products and better
pricing as we establish market share.
Selling, general and administrative expenses for the three months ended November
30, 2004 increased to $473,029 from $306,736 for the same period the previous
year. For the three months ended November 30, 2004 and 2003, the services obtained
through the issuance of stock included internal accounting and financial services,
internet website creation, marketing assistance, insurance program review and
general management consulting services in the amount of approximately $106,501
and $118,025,respectively. As previously mentioned, the Company incurs charges
to bring the product to market. These charges relate to the costs of producing
samples as well as the related package design costs that must be approved by
the licensor prior to full production runs of the product. For the three months
ended November 30, 2004, the Company incurred charges relating to the costs
of producing the samples as well as the related package design of approximately
$24,117 versus charges of approximately $5,648 for the same period the previous
year.
The Company incurred interest expense of $229,265 for the three months ended November 30, 2004 as compared to $118,587 for the same period the previous year due to increased borrowings and the beneficial conversion calculation related to the application of the EITF ("Emerging Issues Task Force") Bulletin for accounting of convertible securities and notes and loans payable with beneficial conversion features. The beneficial conversion calculation added $156,250 and $81,250 of interest expense respectively for the three months ended November 30, 2004 and 2003, respectively.
As a result of the above, the Company had a net loss of $636,826 for the three
months ended November 30, 2004 as compared to a net loss of $420,480 for the
same period last year.
LIQUIDITY AND CAPITAL RESOURCES
Since the Company's inception, it has experienced significant operating and
net losses that it has been able to fund by obtaining private capital. The Company,
therefore, cannot predict if and when it will generate income from operations
and if it will be able to raise sufficient capital necessary to fund future
operations.
As of November 30, 2004, the Company has not generated sufficient revenues
to meet operating expenses. As a result, there is substantial doubt about the
Company's ability to continue as a going concern. We anticipate that we will
require up to approximately $1,000,000 to fund our continued operations for
the next twelve months, depending on revenues from operations.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
As of November 30, 2004, the Company had a working capital deficiency of $4,941,863.
The working capital deficit increased from February 29, 2004 as a direct result
of the unprofitable operations for the nine months ended November 30, 2004 of
$1,330,990 that resulted in cash used in operating activities of $746,055. The
Company had an ending cash balance of $471 at November 30, 2004.
The Company has financed its losses through private sales of equity and debt
securities and the issuance of stock for services. During the nine months ended
November 30, 2004, the Company received the following capital infusions:
$735,000, net of discount, from the issuance of convertible secured debentures,
$165,000 from notes and loans payable and $43,108 from other borrowings.
During the nine months ended November 30, 2004, the Company made repayments
of $196,675.
To obtain funding for our ongoing operations, we entered into a Securities Purchase
Agreement with accredited investors on March 17, 2004, for the sale of
(i) $100,000 in secured convertible notes. The secured convertible notes bear
interest at 15%, mature one year from the date of issuance, and are convertible
into our common stock, at the investors' option, at the lower of (i) $0.01 or
(ii) 75% of the average of the three lowest intraday trading prices for the
common stock on a principal market for the 20 trading days before but not including
the conversion date. The full principal amount of the secured convertible notes
is due upon default under the terms of secured convertible notes. In addition,
we have granted the investors a security interest in substantially all of our
assets and intellectual property and registration rights.
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with accredited investors on May 28, 2004, for the sale of
(i) $550,000 in secured convertible notes. The secured convertible notes bear
interest at 15%, matures two years from the date of issuance, and are convertible
into our common stock, at the investors' option, at the lower of (i) $0.01 or
(ii) 75% of the average of the three lowest intraday trading prices for the
common stock on a principal market for the 20 trading days before but not including
the conversion date. The full principal amount of the secured convertible notes
is due upon default under the terms of secured convertible notes. In addition,
we have granted the investors a security interest in substantially all of our
assets and intellectual property and registration rights.
To obtain funding for our ongoing operations, we entered into a Securities Purchase Agreement with accredited investors on September 30, 2004, for the sale of (i) $250,000 in secured convertible notes. The secured convertible notes bear interest at 15%, matures two years from the date of issuance, and are convertible into our common stock, at the investors' option, at the lower of (i) $0.01 or (ii) 75% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including the conversion date. The full principal amount of the secured convertible notes is due upon default under the terms of secured convertible notes. In addition, we have granted the investors a security interest in substantially all of our assets and intellectual property and registration rights. An event of default has occurred regarding various convertible secured debentures and convertible subordinated debentures in that the Company did not have an effective registration statement within 150 days of the sale of convertible debentures.
As a result of this default, the Company is obligated to pay the debenture holders the principal amount of the debentures together with interest and certain other amounts. The Company does not have the capital resources to pay the amounts required under this agreement. The secured convertible debenture holders have informed the Company that they do not intend to take any action at this time due to the default. The Company does not, however, have any legally binding commitment from the debenture holders to waive the default provision of the debentures. Subsequent to November 30, 2004, the convertible secured debenture holders converted $22,001 of this debt into 46,200,000 shares of the Company's common stock.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
As of November 30, 2004, the Company had $625,418 in outstanding notes and loans
payable, $127,300 in convertible subordinated debentures and $1,565,713 in outstanding
convertible secured debentures. As of November 30, 2004, the Company had $1,412,561
in accounts payable, $2,024,722 in accrued expenses, accrued payroll, accrued
royalties and related taxes. These liabilities are for federal withholding taxes
and are related to calendar years 1999, 2000 and 2001. In July 2002, the Company
reached an agreement with the Internal Revenue Service on a payment plan for
the back taxes owed. The plan called for the Company to make twelve monthly
payments of $5,272, followed by six monthly payments of $13,200, followed by
six monthly payments of $25,000. The Company made the first eleven payments
of $5,272, but defaulted on payments thereafter. In December 2002, the Company
began making monthly payments of $2,500, which the Company continues to do when
the funds are available. The Company has a verbal agreement with the IRS that
the Company will continue to make monthly payments of $2,500 with the understanding
that the Company will accelerate and increase these payments when feasible,
and the IRS will refrain from pursuing immediate payment in full. The Company,
however, does not have a written agreement with the IRS to these terms.
The Company has been able to operate based on deferring vendor and employee payments, deferring interest and debt repayments and obtaining additional borrowings and proceeds from equity. However, there is no guarantee that the Company will continue to be successful with respect to these actions. Furthermore, there can be no assurances that the Company will be able to obtain the necessary funding to finance their operations or grow revenue in sufficient amounts to fund their operating expenses.