Form 10QSB/A for COLLECTIBLE CONCEPTS GROUP INC
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20-Oct-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 audited consolidated financial statements and related notes included
in the Company's Form 10-KSB for the year ended February 28, 2005.
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 opportunities
and products that addressed new markets in keeping with the Company's new marketing
direction aimed at the collegiate and professional sports marketplaces.
In March 2005, the Company signed a licensing agreement with the NBA, which
expires on September 30, 2006. The agreement includes a 12% royalty paid on
sales, with a minimum royalty of $25,000, which is included in prepaid royalties
as of May 31, 2005, and is being amortized.
On May 12, 2005, the Company signed a licensing agreement with the Arena Football
League, which expires on June 30, 2007. The agreement includes a 12% royalty
paid on sales with no minimum royalty guarantees. The Company paid $10,000,
which is included in prepaid royalties as of May 31, 2005, and is being amortized.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
On May 18, 2005, the Company 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 47,368,422 shares of its common stock. This
money is being used to re-new the Company's product license with the National
Football League and to produce enough quantity of NFL related products (Fanbana's,
Megaphone Caps and Scrolls) to meet expected demand for the upcoming season.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MAY 31, 2005 COMPARED TO THREE MONTHS MAY 31, 2004.
Net revenue for the three months ended May 31, 2005 was $15,032 compared to
net revenue of $63,775 for the three months ended May 31, 2004. The decrease
in revenue was due primarily to the discontinued sales in X-Men and Marvel Characters
products.
Cost of sales for the three months ended May 31, 2005 decreased by $13,481 from
the three months ended May 31, 2004. Cost of sales as a percentage of revenues
increased to 145.9% for the three months ended May 31, 2004 as compared to 55.5%
for the same period last year. The decrease in cost is due to the decrease in
sales volume. The increase as a percentage is attributable to the type of products
that were sold and their impact on the decrease in sales volume that lead to
a higher shipping cost per unit and resulted in a gross loss before operating
and other expenses.
Selling, general and administrative expenses for the three months ended May
31, 2005 increased to $293,126 from $230,120 for the same period the previous
year. For the three months ended May 31, 2005 and May 31, 2004 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 approximately
$30,000 and $0 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 May 31, 2005, the Company incurred charges relating to the costs of producing
the samples as well as the related package design of approximately $610 versus
charges of approximately $12,543 for the same period the previous year.
The Company incurred interest expense of $171,666 for the three months ended
May 31, 2005 as compared to $131,167 for the same period the previous yeardue
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 $100,000 and
$75,000 of interest expense for the three months ended May 31, 2005 and 2004,
respectively.
As a result of the above, the Company had a net loss of $471,694 for the three
months ended May 31, 2005 as compared to a net loss of $315,657 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 May 31, 2005, the Company has not generated sufficient revenues
to meet operating expenses. As a result, there is substantial doubt about the
Company's
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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.
As of May 31, 2005, the Company had a working capital deficiency of $5,736,067.
The working capital deficit increased from February 28, 2005 as a direct result
of the unprofitable operations for the three months ended May 31, 2005 that
resulted in cash used in operating activities of $401,117. The Company had an
ending cash balance of $19,304 at May 31, 2005.
The Company has financed its losses through private sales of equity and debt
securities and the issuance of stock for services. During the three months ended
May 31, 2005 the Company received the following capital infusions:
$373,332 (net of discount) from the issuance of convertible secured debentures
and $15,000 from notes and loans payable. During the three months ended May
31, 2005, the Company made payments of $28,951 toward notes and loans payable.
To obtain funding for its ongoing operations, the Company entered into a Securities
Purchase Agreement with accredited investors on May 18, 2005, for the sale of
$400,000 in secured convertible notes. The secured convertible notes bear interest
at 10%, matures three years from the date of issuance, and are convertible into
the Company's common stock, at the investors' option, at the lower of (i) $0.0016
or (ii) 25% 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,
the Company has granted the investors a security interest in substantially all
of its assets and intellectual property and registration rights.
An event of default has occurred regarding all of the convertible secured debentures
outstanding as of May 31, 2005. 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. In addition, the Company granted
the investors a security interest in substantially all of its assets, including
the assets of its wholly owned subsidiaries, and intellectual property.
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 into 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 do not intend to convert any of their debt
at this time. Therefore, no accrual for the penalty has been made at May 31,
2005. We do not, however, have any legally binding commitment from the debenture
holders to waive the default provision of the debenture.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
As of May 31, 2005, the Company had $500,879 in outstanding notes and loans
payable, $127,300 in convertible subordinated debentures and $1,601,320 (net
of discount) in outstanding convertible secured debentures. As of May 31, 2005,
the Company had $1,422,690 in accounts payable, $2,338,495 in accrued expenses,
accrued payroll, accrued royalties and related taxes. In November 2002, the
Company successfully negotiated a long-term payment plan with the IRS to retire
its outstanding payroll tax obligations. The plan was executed in December 2002
and calls for escalating monthly payments to be made over a period of 18 months.
After an initial down payment of $25,800 in December 2002, the Company had agreed
to a payment schedule of $5,750 for the first six months, $13,000 for the next
six months and $25,000 for the final six months. The Company made the agreed
payments in a timely fashion through the first six months and is currently behind
schedule on the balance. The Company is negotiating with the IRS to recast the
plan in accordance with its ability to make timely payments.
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.
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 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS 154") which replaces Accounting Principles
Board Opinions No. 20 "Accounting Changes" and SFAS No. 3, "Reporting
Accounting Changes in Interim Financial Statements-An Amendment of APB Opinion
No. 28." SFAS 154 provides guidance on the accounting or and reporting
of accounting changes and error corrections. It establishes retrospective application,
or the latest practicable date, as the required method for reporting a change
in accounting principle and the reporting of a correction of an error. SFAS
154 is effective for accounting changes and a correction of errors made in fiscal
years beginning after December 15, 2005 and is required to be adopted by the
Company in the first quarter of fiscal 2007. The Company is currently evaluating
the effect that the adoption of SFAS 154 will have on its consolidated results
of operations and financial condition.