Form 10QSB for COLLECTIBLE CONCEPTS
GROUP INC
24-Jul-2006
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.
The following detailed analysis of operations should be read in conjunction
with the audited consolidated financial statements and related notes included
in the Company's Form 10-KSB for the year ended February 28, 2006.
General
We earn revenues from distributing high-end and novelty products principally
related to the entertainment and sports industries. These products are sold
through retailers, distributors, department stores, the Internet and catalogs.
We continue to pursue our re-evaluated business model. We believe that licenses
have evolved into less time sensitive and sale spiking properties. Our new business
model focuses on more evergreen properties and those with a longer window of
opportunity. We recognize the need to have products that addressed the mainstream
consumer market where market size and repeat sales opportunities could give
us a means to stabilize and grow our revenues. To avoid the time, expense and
risks associated with in-house new product development, we have sought out entities
with mainstream consumer products whose marketability could be enhanced by the
addition of our licenses. These activities produced new joint ventures and products
that addressed new markets in keeping with our new marketing direction aimed
at the collegiate and professional sports marketplaces.
We had a licensing agreement with the NFL by which we had permission to produce
and sell our products for all 32 NFL teams. This license ended March 31, 2006
and was not renewed.
On February 28, 2005, we sold a partial interest (2.5%) in our future revenues
generated under our National Football League ("NFL") license (2005),
our National Basketball Association ("NBA") license in 2005-2006 and
our upcoming license in 2006 with Major League Baseball ("MLB"). The
agreement included a clause that would extend the partial sale of revenues to
an additional year of sales under the NFL license, should we be unsuccessful
in obtaining the MLB license. The 2.5% revenues stake was sold to a third-party
company for a total of $80,000. Additionally, the purchaser assumed the rights
to a 1.603% anti-dilution ownership in us from its previous owner, as well as
all of the issued shares of common stock previously owned by that party.
We acquired a historical film library containing thousands of hours of sports
events including, among others, boxing, baseball, football and auto racing.
The asset acquisition agreement was entered into December 15, 2005 and gives
us title to the entire library. The film library consists of over 5,000 hours
of sporting events from the years 1948 through 1972. Additionally, there are
also sports films in the library after 1972. As well, there is an old time cartoon
library as well as classic movies. The film library was acquired for a purchase
price of $250,000 with $50,000 paid in cash and the remainder in a note payable
due five years from the acquisition date along with interest accrued at 6% per
annum. As part of acquisition of the film library, we were assigned a licensing
agreement whereby royalties (minimum of $50,000 per year) will be received over
the next ten years, although there are questions concerning the ability of the
licensee to pay such royalties. Additionally, we have entered into a Joint Marketing
agreement with Back in Time TV under which we will cross market each other's
products.
On April 10, 2006 we signed a license agreement with Diann Wall-Wilson for a
broad line of products utilizing her copyrighted designs for the United States
Marine Corp Bulldog, United States Navy Goat, United States Air Force Falcon
and the Coast Guard Otter. We paid $20,000 for this license in $5,000 monthly
increments beginning April 10, 2006 and the final payment was paid July 10,
2006. This licensing agreement is for 5 years. The agreement calls for a 10%
royalty of which the $20,000 in initial payments are a pre-paid royalty.
On April 30, 2006, we entered into a Joint Venture Agreement with Gridworks,
Inc. of Elgin, Iowa. Under the agreement, a new corporation called American
Sports Ventures, Inc. was formed of which Collectible Concepts Group, Gridworks
and Mr. Nick Fegen are the shareholders with ownership percentages of 37.5%,
37.5% and 25%, respectively. Gridworks is a licensed manufacturer of high quality
wood sports collectibles including such items as laser etched baseballs, footballs,
basketballs, baseball bats and similar items each featuring a team or college
logo and/or commemorating a special event such as a Super Bowl or World Series
victory. Under the terms of the agreement, Collectible Concepts Group and Nick
Fegen will be providing the capital necessary to fund the Gridworks operations
as well as all marketing and other operating expenses associated with American
Sports Ventures, Inc. Gridworks will be providing its wood collectibles to American
Sports Ventures at absolute cost and we will be executing various marketing
initiatives to sell the products. These initiatives include marketing through
our national sales rep organization, direct marketing via Internet sales on
our web site and direct to consumer at retail mall kiosks during the holiday
season. Profits from operations after all expenses and costs and a reserve for
operating expenses, will be distributed to the shareholders in accordance with
their respective ownership percentage. The web site was activated in June 2006
and a Holiday Retail Mall Sales Program has been designed and is currently being
presented to Specialty Retailers in selected regions of the country in anticipation
of the upcoming holiday sales cycle. Our risks of any potential losses are limited
to any expenses we may incur.
Our Stories for Heroes audio book of Arthur children's stories are sold exclusively
on Amazon.com. We 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.
We have 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.
On March 23, 2006, we entered into a Securities Purchase Agreement with AJW
Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and New Millennium
Capital Partners II, LLC for the sale of (i) $400,000 in secured convertible
notes and (ii) warrants to purchase 100,000,000 shares of our common stock.
On May 31, 2006, we entered into a Securities Purchase Agreement with AJW Offshore,
Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and New Millennium Capital
Partners II, LLC for the sale of (i) $500,000 in secured convertible notes and
(ii) warrants to purchase 100,000,000 shares of our common stock.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MAY 31, 2006 COMPARED TO THREE MONTHS ENDED MAY 31, 2005.
Net revenue for the three months ended May 31, 2006 was $443,795 and primarily
consisted of sales of professional and collegiate sports related products, promotional
Fanbana sales and E-Bay Internet sales. Net revenue for the three months ended
May 31, 2005 was $15,032 and primarily consisted of sales of professional and
collegiate sports related products, X-Men products, Terminator products, Marvel
Character products, promotional Fanbana sales and E-Bay Internet sales. Sales
from X-men and Marvel Character products were sell offs of merchandise remaining
under licenses that previously expired.
Sales for the three months ended May 31, 2006 were comprised primarily of products
offered with our National Football League License and College Licenses. The
National Football League license expired on March 31, 2006 and was not renewed.
Instead of paying the royalties for the NFL license our self, we have decided
to work with distributors who have NFL licenses to sell their products instead.
Since the NFL season does not start until August, we cannot determine what impact,
if any, the change in our business strategy will have on our sales.
Additional revenues were also produced from the sale of products related to
our Marvel, Three Stooges and Terminator license and a special order of Nurse
Dana scrolls. In addition to income from traditional sources, revenue was generated
from Internet sales through e-bay. The timely availability of product samples
has become a critical element in the ability to successfully obtain orders from
distributors and especially retailers who prepare product sales plans (plan-o-gram)
at least six months in advance. Consumer demand for these products is most often
driven directly by the initial start of a sports season and followed later by
the success of individual teams. Consequently, we have missed the window of
opportunity afforded us by certain of our licenses. We are constantly seeking
to remedy this serious problem by raising additional working capital and, most
importantly, by seeking new sourcing for our principal products that can produce
samples in a timely and cost effective way to support the sales efforts.
Cost of sales for the three months ended May 31, 2006 increased by $122,304
from the three months ended May 31, 2006. This increase was mainly attributable
increased sales volume. Cost of sales as a percentage of revenues increased
to 32.5% for the three months ended May 31, 2006 as compared to 145.2% for the
same period last year.
Cost of sales for the three months ended May 31, 2006 were comprised of costs
associated with the sale of the products related to the National Football League
License and College Licenses. These products are contract manufactured for us
by both domestic and foreign companies to specifications developed by us and
approved by the various licensors. We do not feel this places us at risk for
filling future orders on a timely basis because we have developed relationships
with alternate suppliers for most of our products. Several of our manufacturers
will also store and ship product directly to a customer, thereby reducing shipping
time and eliminating the costs we would incur if the product was first shipped
to our location. We also feels we are not at risk for any currency fluctuations
in our dealing with our foreign manufacturers since all orders are based on
U.S. dollars and we do not have any long term purchase commitments.
Selling and administrative expenses for the three months ended May 31, 2006
increased to $723,652 from $290,638 for the same period the previous year. For
the three months ended May 31, 2006 we incurred $341,800 in non cash services
through the issuance of common stock.
Selling and administrative expense consists of payroll and related fringe benefits,
royalties, commissions paid to manufacturers sales representatives, advertising,
rent and other related fixed overhead expenses. Also included in this category
are the expenses related to the replication of movie props to ready them for
mass production by the contract manufacturers, as well as the non-cash costs
related to services satisfied by the issuance of our stock. The services provided
were in direct support of our operations. As we grow through acquisitions and
the sales of current product, we anticipate we will have to rely less on the
issuance of stock for services due to increased cash flows as well as capital.
The benefits to us from these stock transactions are to reduce the use of cash,
which allow us to devote the maximum amount of resources to expanding the business.
For accounting purposes, we valued these services at the fair market value of
the services rendered or the fair market value of the stock at times of issuance
whichever was more readily determinable. Production costs include prototypes
and samples of packaging, displays and products. All expensed production costs
are included within selling and administrative expenses.
We incurred interest expense of $409,006 for the three months ended May 31,
2006 as compared to $230,659 for the same period the previous year due to increased
borrowings and the debt accretion related to the application of SFAS
133. The accretion of debt calculation added $287,821 and $109,954 of interest
expense respectively for the three months ended May 31, 2006 and May 31, 2005,
respectively.
For the three months ended May 31, 2006, we incurred a non-cash loss in adjusting
the fair value of the embedded conversion feature and related warrant derivatives
relating to the convertible debentures of $3,072,492 as compared with $1,180,466
during the prior year. Additionally, for the three months ended May 31, 2006,
we incurred a non-cash loss with conversion of our convertible debentures to
common stock of $353,267.
As a result of the above, we had a net loss of $4,720,384 for the three months
ended May 31, 2006 as compared to a net loss of $1,711,153 for the same period
last year.
LIQUIDITY AND CAPITAL RESOURCES
As of May 31, 2006, we had a working capital deficiency of $5,325,548. The working
capital deficit as of May 31, 2006 is a direct result of the unprofitable operations
for prior years as well as for the past three months ended May 31, 2006 that
resulted in cash used in operating activities of $696,270. We had an ending
cash balance of $500,233 at May 31, 2006. As such, we will have to raise additional
capital within the next twelve months.
We have financed our losses through private sales of debt securities and the
issuance of stock for services. During the three months ended May 31, 2006,
we received the following capital infusions: $900,000 from issuance of secured
convertible debentures.
We have entered into an agreement with an individual investor whereby the investor
agreed to provide us with a line of credit up to $750,000 with an interest rate
of 18% per annum, payable annually, maturing one year from each draw. We, at
our option, can repay the debt in cash or may elect to convert any of the loans
into shares of our common stock at 75% of the closing bid of the previous day.
As of May 31, 2006, we have borrowed $215,000, net, from this facility.
We are working with various distributors and independent sales representatives
in an effort to cut costs, offer a greater variety of products and to increase
the customer base for our products. We believe that if we can increase our revenues
and improve our gross profit margin that this will allow us to reach profitability.
While we have raised capital to meet our working capital and financing needs
in the past, additional financing is required within the next 12 months in order
to meet our current and projected cash flow deficits from operations and development.
We have sufficient funds to conduct our operations for several months, but not
for 12 months or more. We believe that we will need approximately $750,000 in
additional funds to continue operations for the next 12 months, depending on
revenues from operations. We are constantly seeking additional sources of financing;
however, there can be no assurance that financing will be available in amounts
or on terms acceptable to us, if at all.
As of May 31, 2006, we had $547,452 in outstanding notes and loans payable,
(of which $1,143 is due to related parties) $37,500 in convertible subordinated
debentures and $2,111,416 in outstanding convertible secured debentures, net.
As of May 31, 2006, we had $3,592,052 in accounts payable, accrued expenses,
accrued payroll, accrued royalties and related taxes. (Some of the accrued expenses
are for federal withholding taxes and are related to calendar years 1999, 2000
and 2001. We are currently making payments on our current federal payroll tax
obligations as well as monthly payments for these prior obligations). We have
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 we will continue to be successful
with respect to these actions. Furthermore, there can be no assurances that
we will be able to obtain the necessary funding to finance our operations or
grow revenue in sufficient amounts to fund our operating expenses.
Our independent auditors have issued a going concern paragraph in their opinion
on our consolidated financial statements for the year ended February 28, 2006
that is included in our Form 10-KSB that states there is substantial doubt about
our ability to continue as a going concern. Our ability to continue as a going
concern is dependent on our ability to access capital through debt and equity
funding as well as market and sell our various products.
To obtain funding for its ongoing operations, the Company has entered into Securities
Purchase Agreements with several accredited investors, on the following dates
for the sale of secured convertible notes and warrants:
---------------------- ------------------ ----------- ------------------------------------------------------------
----------------
Transaction Date Secured Interest Conversion Price Warrants
Convertible Rate
Notes Sold
---------------------- ------------------ ----------- ------------------------------------------------------------
----------------
---------------------- ------------------ ----------- ------------------------------------------------------------
----------------
May 2000 $400,000 10% $0.04 or 25% of market value 4,000,000
($186,128
remaining)
---------------------- ------------------ ----------- ------------------------------------------------------------
----------------
May 28, 2002 $75,000 12% $.01 or 25% of the average of the lowest three intraday
150,000
trading prices during the twenty trading days immediately
preceding conversion
---------------------- ------------------ ----------- ------------------------------------------------------------
----------------
November 26, 2002 $250,000 15% $.01 or 25% of the average of the lowest three
intraday 500,000
trading prices during the twenty trading days immediately
preceding conversion
---------------------- ------------------ ----------- ------------------------------------------------------------
----------------
May 15, 2003 $25,000 15% $.01 or 25% of the average of the lowest three intraday
50,000
trading prices during the twenty trading days immediately
preceding conversion
---------------------- ------------------ ----------- ------------------------------------------------------------
----------------
June 20, 2003 $25,000 15% $.01 or 25% of the average of the lowest three intraday
50,000
trading prices during the twenty trading days immediately
preceding conversion
---------------------- ------------------ ----------- ------------------------------------------------------------
----------------
July 23, 2003 $25,000 15% $.01 or 25% of the average of the lowest three intraday
50,000
trading prices during the twenty trading days immediately
preceding conversion
---------------------- ------------------ ----------- ------------------------------------------------------------
----------------
November 14, 2003 $50,000 15% $.01 or 25% of the average of the lowest three
intraday 100,000
trading prices during the twenty trading days immediately
preceding conversion
---------------------- ------------------ ----------- ------------------------------------------------------------
----------------
January 13, 2004 $50,000 15% $.01 or 25% of the average of the lowest three
intraday 100,000
trading prices during the twenty trading days immediately
preceding conversion
---------------------- ------------------ ----------- ------------------------------------------------------------
----------------
February 13, 2004 $25,000 15% $.01 or 25% of the average of the lowest three
intraday 50,000
trading prices during the twenty trading days immediately
preceding conversion
---------------------- ------------------ ----------- ------------------------------------------------------------
----------------
---------------------- ------------------ ----------- ------------------------------------------------------------
----------------
Transaction Date Secured Interest Conversion Price Warrants
Convertible Rate
Notes Sold
---------------------- ------------------ ----------- ------------------------------------------------------------
----------------
---------------------- ------------------ ----------- ------------------------------------------------------------
----------------
March 16, 2004 $100,000 15% $.01 or 25% of the average of the lowest three intraday
200,000
trading prices during the twenty trading days immediately
preceding conversion
---------------------- ------------------ ----------- ------------------------------------------------------------
----------------
May 28, 2004 $550,000 15% $.01 or 25% of the average of the lowest three intraday
1,650,000
trading prices during the twenty trading days immediately
preceding conversion
---------------------- ------------------ ----------- ------------------------------------------------------------
----------------
September 30, 2004 $250,000 15% $.0026 or 25% of the average of the lowest three
intraday 1,250,000
trading prices during the twenty trading days immediately
preceding conversion
---------------------- ------------------ ----------- ------------------------------------------------------------
----------------
May 18, 2005 $400,000 10% $.0016 or 25% of the average of the lowest three intraday
47,368,422
trading prices during the twenty trading days immediately
preceding conversion
---------------------- ------------------ ----------- ------------------------------------------------------------
----------------
July 7, 2005 $850,000 10% $.0016 or 25% of the average of the lowest three intraday
1,700,000
trading prices during the twenty trading days immediately
preceding conversion
---------------------- ------------------ ----------- ------------------------------------------------------------
----------------
September 29, 2005 $302,597 2% $0.0016 or 25% of the average of the lowest three
intraday -0-
trading prices during the twenty trading days immediately
preceding conversion
---------------------- ------------------ ----------- ------------------------------------------------------------
----------------
January 20, 2006 $400,000 10% $0.0016 or 20% of the average of the lowest three
intraday 400,000
trading prices during the twenty trading days immediately
preceding conversion
---------------------- ------------------ ----------- ------------------------------------------------------------
----------------
March 23, 2006 $400,000 8% $0.03 or 20% of the average of the lowest three intraday
100,000,000
trading prices during the twenty trading days immediately
preceding conversion
---------------------- ------------------ ----------- ------------------------------------------------------------
----------------
May 31, 2006 $500,000 8% $0.03 or 25% of the average of the lowest three intraday
100,000,000
trading prices during the twenty trading days immediately
preceding conversion
---------------------- ------------------ ----------- ------------------------------------------------------------
----------------
The secured convertible notes bear interest as described
above, typically mature one to three years from the date of issuance or one
to three years from when we are in compliance with the terms of the securities
purchase agreements, and are convertible into our common stock, at the investors'
option, on the terms as described above. As of July 14, 2006, the average of
the three lowest intraday trading prices for our common stock during the preceding
20 trading days as reported on the Over the Counter Bulletin Board was $.0001
and, therefore, the conversion price for the secured convertible notes was $.000025
at 25% or $.00002 at 20%. Based on this conversion price, the $4,463,725 in
secured convertible notes remaining, excluding interest, would convert into
186,549,000,000 shares of our common stock. If the price of our common stock
should decrease, we will be required to issue substantially more shares, which
will cause dilution to our existing stockholders. There is no upper limit on
the number of shares that may be issued, which will have the effect of further
diluting the proportionate equity interest and voting power of holders of our
common stock.
In connection with the sale of convertible notes, we granted the investors registration
rights. Pursuant to the registration rights agreements, we were required to
file registration statements for the shares underlying the convertible notes
and warrants within a specified period of time from the sale of such securities
and to have the registration statement declared effective by the Securities
and Exchange Commission within another specified period of time. In the event
that we did not timely file the registration statements or have them declared
effective, we are obligated to pay liquidated damages. We have not . . .