Form 10KSB/A for COLLECTIBLE CONCEPTS
GROUP INC
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20-Oct-2005
Annual Report
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Some of the information in this Form 10-KSB 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 under "Risk Factors,"
"Business" and elsewhere in this prospectus. See "Risk Factors."
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.
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 July of 2004, our Stories for Heroes audio book of Arthur children's stories
were 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 Fanbana's
with various college logos to several hundred McDonald's stores in the southeastern
and southwestern USA.
On September 17, 2004, we signed an agreement with the NFL for a license and
we were granted permission to produce and sell our products for all 32 NFL teams.
In September 2004, NFL great Joe Theismann joined CCGI as an advisor and consultant.
On February 28, 2005, the Company sold a 2.5% interest in its future revenues
generated under each of its National Football League ("NFL") license
(2005), its National Basketball Association ("NBA") license in 2005-2006
and any future license in 2006 with Major League Baseball ("MLB"),
if obtained. The agreement included a clause that would extend the partial sale
of revenues to an additional year of sales under the NFL license, should the
Company be unsuccessful in obtaining the MLB license.
During the year ended February 28, 2005, the Company successfully signed licensing
agreements with over 25 different colleges, which include Notre Dame, The Ohio
State University, University of Miami and University of Southern California.
The Company also signed a licensing agreement with the National Basketball Association
in February 2005. The Company is also pursuing more collegiate licenses.
Sales for the twelve months ended February 28, 2005 were comprised primarily
of products offered with our National Football League License and College Licenses.
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 twelve months ended February 28, 2005 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. This is especially evidenced
by the arrangement with Maxim Logistics who will be our principal provider of
Satin Scrolls, one of our leading 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 feel 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, general and administrative expense consists of payroll and related
fringe benefits, royalties, commissions paid to manufacturers sales representatives,
advertising, rent, depreciation 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, general and administrative
expenses. Costs of manufacturing products for sale are included within costs
of sales.
The amount and timing of the revenue generated from the sales of our professional
sports and collegiate licenses related products are more predictable then the
entertainment related products we concentrated on in the past. As these sales
grow our revenues and net income may fluctuate significantly between comparable
periods. Additionally, since our inception, we have experienced significant
operating and net losses that we have been able to fund by obtaining private
capital. Until we achieve significant sales, we do not know when we will generate
income from operations and if we will be able to raise sufficient capital necessary
to fund future operations.
As of the fiscal year ended February 28, 2005, we had an accumulated deficit
of $ 21,858,769. This deficit arose from operating losses and not any particular
transaction or transactions. We have not generated sufficient revenues to meet
our operating expenses. As a result, there is substantial doubt about our ability
to continue as a going concern.
Twelve Months Ended February 28, 2005 compared to Twelve Months Ended February
29, 2004.
Net revenue for the twelve months ended February 28 2005 was $679,682 and primarily
consisted of sales of professional and collegiate sports related products, X-Men
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 and future sales from these
products are not expected. Net revenue for the twelve months ended February
29, 2004 was $117,816 and primarily consisted of sales of X-Men products, Terminator
products, Marvel Character products, E-Bay Internet sales and a Special Ninja
scroll sale.
Cost of sales for the twelve months ended February 28, 2005 increased by $459,276
from the twelve months ended February 29, 2004. This increase was mainly attributable
to the increase in product sales of promotional Fanbana's and products related
to our National Football League and Collegiate licenses. Cost of sales as a
percentage of revenues decreased to 87.9% for the twelve months ended February
28, 2005 as compared to 117% for the same period last year.
Selling, general and administrative expenses for the twelve months ended February
28, 2005 increased to $1,289,910 from $1,266,228 for the same period the previous
year. For the twelve months ended February 28, 2005 and February 29, 2004 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 $186,209
and $412,975 respectively. As previously mentioned, we incur 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 twelve months ended February
28, 2005, we incurred charges relating to the costs of producing the samples
as well as the related package design of $44,952 versus charges of $36,975 for
the same period the previous year.
We incurred interest expense of $749,747 for the twelve months ended February
28, 2005 as compared to $469,150 for the same period the previous year due to
increased borrowings and the beneficial conversion calculation related to the
application of the Emerging Issues Task Force Bulletin for accounting of convertible
securities and notes and loans payable with beneficial conversion features.
The beneficial conversion calculation added $487,500 and $268,750 of interest
expense respectively for the twelve months ended February 28, 2005 and February
29, 2004, respectively.
As a result of the above, we had a net loss of $1,680,968 for the twelve months
ended February 28, 2005 as compared to a net loss of $1,322,823 for the same
period last year.
Liquidity and Capital Resources
As of February 28, 2005, we had a working capital deficiency of $5,105,539.
The working capital deficit as of February 28, 2005 is a direct result of the
unprofitable operations for prior years as well as for the past twelve months
ended February 28, 2005 that resulted in cash used in operating activities of
$735,665. We had an ending cash balance of $1,040 at February 28, 2005. As such,
we will have to raise additional capital within the next twelve months.
We have financed our losses through private sales of equity and debt securities
and the issuance of stock for services. During the twelve months ended February
28, 2005, we received the following capital infusions: $735,000 from issuance
of secured convertible debentures and $1,612 (net of repayments) from other
borrowings. Additionally, during this period, we received notices requesting
conversion from the holders of demand notes, convertible debentures and accrued
interest in the aggregate amount of $282,070. These instruments were converted
into 226,991,973 shares of common stock.
As of February 28, 2005, we had $506,098 in outstanding notes and loans payable,
(of which $4,297 is due to related parties) $127,300 in convertible subordinated
debentures and $1,580,695 in outstanding convertible secured debentures. As
of February 28, 2005, we had $1,569,467 in accounts payable and $2,237,933 in
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.
In connection with our licensing agreements with professional sports organizations
and colleges and universities, we are required to pay miminum royalty fees.
As of February 28, 2005, we owe $238,969 in unpaid mimimum royalties, of which
$215,750 is owed on non renewed agreements.
Our independent auditors have issued a going concern paragraph in their opinion
on our consolidated financial statements 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 Sold
Convertible Rate
Notes Sold
----------------------- ---------------- ------------ -------------------------------------------------------------
--------------
----------------------- ---------------- ------------ -------------------------------------------------------------
--------------
May 2000 $400,000 10% $0.04 or 25% of market value 4,000,000
($258,820
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
----------------------- ---------------- ------------ -------------------------------------------------------------
--------------
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% $.01 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 15% $.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 15% $.0016 or 25% of the average of the lowest three intraday
1,700,000
trading prices during the twenty trading days immediately
preceding conversion
----------------------- ---------------- ------------ -------------------------------------------------------------
--------------
The secured convertible notes bear interest as described above, typically mature
two years from the date of issuance or two years from when the company is 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 September 30, 2005, 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 $.001 and, therefore, the conversion price
for the secured convertible notes was $.00025. Based on this conversion price,
the $2,933,820 in secured convertible notes remaining, excluding interest, were
convertible into 11,735,280,000 shares of our common stock. If the Company's
stock price should decrease, the Company will be required to issue substantially
more shares, which will cause dilution to the Company's 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 the Company's 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 filed any
registration statements registering the securities underlying the convertible
securities. As a result, an event of default has occurred regarding all of the
above listed secured convertible debentures, except for the secured convertible
debentures issued July 7, 2005. As a result of this default, we are obligated
to pay the debenture holders the principal amount of the debentures together
with interest and certain other amounts. We do not have the capital resources
to pay the amounts required under this agreement. The secured convertible debenture
holders have informed us that they do not intend to take any action at this
time due to the default. We do not, however, have any legally binding commitment
from the debenture holders to waive the default provision of the debenture.
In addition, we granted the investors a security interest in substantially all
of our assets, including the assets of our wholly owned subsidiaries, and intellectual
property.
In August 2001, we issued $71,800 in subordinated convertible debentures. The
debentures have a 12% coupon and mature one year from date of issuance. Conversions
to common stock are at the lower of $0.01 or 25% of the average of the lowest
three intraday trading prices during the twenty trading days immediately preceding
conversion. The debentures are in default.
In May 2004, we issued $65,500 in subordinated convertible debentures. The debentures
have a 12% coupon and mature one year from date of issuance. Conversions to
common stock are at a price of $.001 per share of common stock. Conversions
of any interest on the debentures are at current market price. On September
1, 2004, $10,000 of the note, and $1,200 in interest were converted into 11,428,571
shares of common stock. The debentures are in default.
The Company currently does not have a sufficient number of authorized shares
of common stock available if all debt holders decided to convert their
convertible secured debentures in the Company's common stock. The Company is
working on rectifying the situation. The provisions of the debt instruments
call for a 24% penalty on the amount of debt owed if a noteholder attempts to
convert and there are not enough authorized shares available. The secured convertible
debenture holders have informed us that they have not and do not intend to convert
any of their debt at this time. Therefore, no accrual for the penalty has been
made at February 28, 2005. We do not, however, have any legally binding commitment
from the debenture holders to waive the default provision of the debenture.
The lack of a sufficient number of authorized shares of common stock available
for the conversion of all our outstanding convertible debt resulted from a combination
of issues. First, as a result of the variable conversation price, as our stock
price has declined since we first issued the convertible notes/debentures, resulting
in a significant increase in the number of shares issuable upon conversion of
all our outstanding convertible debt. Second, since becoming a public company,
we have had problems in filing our periodic reports on a timely basis. Between
the filing of our quarterly report on January 14, 2002 for the quarter ended
August 31, 2001 (which itself was not timely filed) and the filing of our quarterly
report on July 20, 2004 for the quarter ended November 30, 2001, we did not
file any periodic reports. On April 14, 2005, we filed our quarterly report
for the quarter ended November 30, 2004, which brought us current for the first
time in several years. Unfortunately, we did not file our annual report for
the year ended February 28, 2005 or our quarterly reports for the quarter ended
May 31, 2005 on a timely basis. Those reports have subsequently been filed and
we are now current in our reporting requirements. However, as a result of our
lack of filings, we were unable to file an information/proxy statement during
that time to increase the number of shares of our authorized common stock. In
addition, as a result of our lack of filings, we had limited ability to raise
funds. As a result, we sold multiple rounds of convertible debentures/notes
at a significant discount to the market price in . . .