UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly ended August 31, 2001
[X] Transition report under Section 13 or 15(d) of the Exchange Act
For the transiton period from ________________ to ______________
Commission file number 0-28891
Commercial Concepts, Inc.
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(Exact name of small business issuer as specified in its charter)
Utah 87-0409620
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
324 South 400 West Suite B, Salt Lake City, Utah 84101
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(Address of principal executive offices)
(801) 328-0540
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(Issuer's telephone number)
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
stock equity, as of August 31, 2001 was 33,854,425.
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
Accountants' Review Report
Board of Directors
Commercial Concepts, Inc.
Salt Lake City, Utah
We have reviewed the accompanying balance sheet of Commercial Concepts, Inc. as
of August 31, 2001 and the related statements of operations for the three and
six months then ended and the statements of cash flows and stockholders' deficit
for the six months then ended in accordance with Statements on Standards for
Accounting and Review Services issued by the American Institute of Certified
Public Accountants. All information included in these financial statements is
the representation of the management of Commercial Concepts, Inc. The balance
sheet of the Company as of February 28, 2001 was previously audited and our
report dated May 10, 2001 expressed an unqualified opinion on the February 28,
2001 balance sheet and included an explanatory paragraph concerning the
Company's ability to continue as a going concern.
A review consists principally of inquiries of company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying August 31, 2001 financial statements in order for
them to be in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has current liabilities in excess of current
assets, a net stockholders' deficit and has incurred substantial operating
losses, all of which raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of the uncertainty.
/s/ CHRISTENSEN & DUNCAN CPA's LC
CHRISTENSEN & DUNCAN CPA's LC
October 10, 2001
Commercial Concepts, Inc.
BALANCE SHEETS
August 31 February 28
ASSETS 2001 2001
(Unaudited)
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CURRENT ASSETS
Cash and cash equivalents $ 101,977 $ 1,621
Trade receivables 30,425 11,548
Employee advances 8,000 11,700
Prepaid expenses and other current assets 1,501 1,683
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Total current assets 141,903 26,552
PROPERTY AND EQUIPMENT, net 61,341 70,233
SOFTWARE DEVELOPMENT COSTS 554,642 550,291
DEPOSITS 7,217 7,217
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$ 765,103 $ 654,293
=========== ===========
LIABILITIES AND STOCKHOLDERS DEFICIT
CURRENT LIABILITIES
Trade accounts payable $ 110,718 $ 88,030
Accrued compensation 217,005 301,622
Other accrued expenses 39,756 8,418
Current portion of long-term debt 4,000 4,850
Short-term notes payable 158,488 167,988
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Total current liabilities 529,967 570,908
LONG-TERM LIABILITIES
Convertible notes payable 1,575,769 830,172
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Total liabilities 2,105,736 1,401,080
STOCKHOLDERS' DEFICIT
Common stock 33,855 28,198
Paid-in-capital 3,178,774 2,807,473
Receivable from shareholders (213,880) (200,880)
Accumulated deficit (4,339,382) (3,381,578)
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Total stockholders' deficit (1,340,633) (746,787)
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$ 765,103 $ 654,293
=========== ===========
Commercial Concepts, Inc.
UNAUDITED STATEMENTS OF OPERATIONS
For Quarter Ended August 31, For the Six Months Ended August 31,
2001 2000 2001 2000
---- ---- ---- ----
SALES $ 27,126 $ 20,194 $ 36,218 $ 38,401
COST OF SALES 3,417 5,703 10,234 10,161
----------- ----------- ----------- -----------
GROSS MARGIN 23,709 14,491 25,984 28,240
OPERATING EXPENSES
General and administrative 209,053 312,117 469,688 664,407
Sales and marketing 64,701 - 132,676 -
Product development 95,818 - 190,822 -
----------- ----------- ----------- -----------
Total operating expenses 369,572 312,117 793,186 664,407
----------- ----------- ----------- -----------
OPERATING LOSS (345,863) (297,626) (767,202) (636,167)
OTHER INCOME (EXPENSE)
Interest income 1,157 121 1,393 123
Financing costs (48,465) 1,963 (85,275) 2,473
Interest expense (37,794) (6,685) (106,720) (9,434)
----------- ----------- ----------- -----------
Total other income (expense) (85,102) (4,601) (190,602) (6,838)
----------- ----------- ----------- -----------
NET LOSS BEFORE INCOME TAXES (430,965) (302,227) (957,804) (643,005)
Benefit for income taxes - - - -
----------- ----------- ----------- -----------
NET LOSS $ (430,965) $ (302,227) $ (957,804) $ (643,005)
=========== =========== =========== ===========
NET LOSS PER COMMON SHARE
Weighted Average Shares Outstanding:
Basic 31,363,473 26,971,503 29,940,565 25,631,642
Diluted 31,363,473 26,971,503 29,940,565 25,631,642
Net loss per Common Share:
Basic $ (0.014) $ (0.011) $ (0.032) $ (0.025)
Diluted (0.014) (0.011) (0.032) (0.025)
Commercial Concepts, Inc.
UNAUDITED STATEMENTS OF CASH FLOWS
For the Six Months Ended August 31,
2001 2000
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CASH FLOWS FOR OPERATING ACTIVITIES
Net loss $ (957,804) $ (643,005)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 14,636 11,066
Common stock issued for expenses 67,000 363,393
Interest added to convertible debt balances 120,316
Changes in operating assets and liabilities: - -
Trade receivables and advances (26,877) 18,632
Prepaids and other assets 182 (6,164)
Accounts payable and accrued liabilities 42,998 55,621
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Net cash used in operating activities (739,549) (200,457)
CASH FROMS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (5,744) (5,750)
Additions to capitalized software & patents (4,351) (401,168)
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Net cash used in investing activities (10,095) (406,918)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 950,000 -
Payments of notes payable (100,000) -
Net proceeds from notes receivable from shareholders - (2,555)
Net proceeds from issuance short-term debt - 280,848
Net proceeds from issuance of common stock 310,500
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Net cash provided by financing activities 850,000 588,793
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Net change in cash and cash equivalents 100,356 (18,582)
Cash and cash equivalents, beginning of period 1,621 31,171
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 101,977 $ 12,589
========== ==========
SUPPLEMENTAL DISCLOSURES
Cash interest paid $ 2,545 $ 7,693
Conversion of long-term debt to common stock 243,888 -
Common stock issued in settlement of liabilities 66,070 -
Commercial Concepts, Inc.
UNAUDITED STATEMENT OF STOCKHOLDERS' DEFICIT
Six Months Ended August 31, 2001
Paid-In
Capital In
Common Stock Excess of Accumulated
Shares Amount Par Value Deficit
------ ------ --------- -------
Balance at February 28, 2001 (Audited) 28,197,590 $ 28,198 $ 2,807,473 $ (3,381,578)
Common stock issued for services 757,400 757 66,243 -
Common stock issued in conversion of debt 4,040,835 4,041 239,847 -
Common stock issued in payment of liabilities 858,600 859 65,211 -
Net loss - - - (957,804)
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Balance at August 31, 2001 33,854,425 $ 33,855 $ 3,178,774 $ (4,339,382)
========== ======== =========== ============
COMMERCIAL CONCEPTS, INC
NOTES TO REVIEWED FINANCIAL STATEMENTS
For the Six Months Ended August 31, 2001
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Commercial Concepts, Inc. (the Company) creates
proprietary software platforms. From these platforms individual Internet related
database software products are developed. As each product completes beta testing
the Company seeks a distribution partner to market and provide ongoing support
for the product.
Interim Financial Information: The accompanying interim financial statements of
the Company are unaudited, but in the opinion of management reflect all
adjustments (consisting of normal recurring accruals) necessary for fair
presentation of the results for such periods. The results of operations for any
interim period are not necessarily indicative of the results for the respective
full year. These financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Company's annual report
on Form 10KSB for the year ended February 28, 2001 as filed with the Securities
and Exchange Commission.
Cash and Cash Equivalents: The Company considers all highly liquid investments
with maturities of three months or less when purchased to be cash equivalents.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Property and Equipment: Property and equipment is stated at cost, less
accumulated depreciation. Depreciation is calculated using the straight-line
method over the estimated useful lives of the assets, generally three to seven
years, except for leasehold improvements, which are depreciated using the
straight-line method over the shorter of the estimated useful lives of the
assets or the remaining lease terms. Normal maintenance and repair items are
expensed as incurred.
Capitalization of Software Development Costs: The Company's policy is to expense
research and development costs until technological feasibility is reached and
all related research and development activities are completed. Subsequent
production expenses to bring the product to market are then capitalized.
Capitalization of software costs is discontinued when the product is available
for general release to customers. Amortization expense of capitalized software
costs has not been provided for in the accompanying statements of operations
because the software products are not available as yet for sale to customers.
Revenue Recognition - For the quarters ended August 31, 2001 and 2000, sales
represented miscellaneous sales of computer hardware and/or multi-media projects
and for the quarter ended August 31, 2001 it also includes revenue for software
development services. It is anticipated that future sales will consist primarily
of software development revenues, royalty payments from distributors of the
Company's Picturebase Medical product and/or advertising revenues associated
with the Company's Wavescreen software. Future revenues will be recognized by
the Company as royalties are earned upon sales by the distributors of the
Company's Picturebase Medical product and/or over the course of each advertisers
contract associated with the Company's Wavescreen software. Software development
revenue will be recognized as earned.
Income Taxes: Deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.
COMMERCIAL CONCEPTS, INC
NOTES TO REVIEWED FINANCIAL STATEMENTS
For the Six Months Ended August 31, 2001
2. GOING CONCERN
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates the continuation of
the Company as a going concern. As reflected in the accompanying financial
statements, the Company has current liabilities in excess of current assets, has
a net stockholders' deficit and has incurred substantial operating losses, all
of which raise substantial doubt about its ability to continue as a going
concern.
In order to develop additional working capital and attract continued equity
investment, the Company has reorganized management, formulated a new business
plan, and developed and marketed new business products. On or about July 18,
2000, the Company initiated a borrowing relationship with a private investment
group (see Notes 4 and 6). Through August 31, 2001, the Company has borrowed
$1,300,000 under the terms of four convertible long-term notes payable. In
addition, $300,000 was borrowed on December 3, 2000 from a separate investment
group. Management believes that the actions presently being taken will provide
the opportunity for the Company to continue as a going concern.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
February 28
2001 2000
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(Unaudited)
Leasehold improvements $ 7,000 $ 7,000
Computer and other equipment 104,799 99,055
Furniture 12,173 12,173
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Total 123,972 118,228
Less accumulated amortization (62,631) (47,995)
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$ 61,341 $ 70,233
====================================
4. NOTES PAYABLE
Short-term debt consisted of the following:
August 31
2001 February 28
(Unaudited) 2001
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Notes payable (collateralized by
one-million shares of the Company's
common stock) to an individual at
dates from June 22, 2000 through April
12, 2001, due at various dates through
April 12, 2002, plus all accrued
interest at 15%. $ 90,500 $ 68,500
Note payable to an individual dated
November 3, 2000, collateralized by
200,000 shares of the Company's common
stock, payable on demand plus all
accrued interest at 15%. 15,000 15,000
Note payable (non-collateralized) to an
individual dated June 15, 2000 payable
on demand plus all accrued interest at
10%. 42,988 42,988
Note payable to a limited partnership
dated February 2001, collateralized by
571,250 shares of the Company's common
stock, payable on March 15, 2001 plus
all accrued interest at 12%. - 30,000
Note payable to a corporation
(non-collateralized) dated January 23,
2001 due on demand plus all accrued
interest at 10%. 10,000 10,000
Other - 1,500
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Total $ 158,488 $ 167,988
============ ============
COMMERCIAL CONCEPTS, INC
NOTES TO REVIEWED FINANCIAL STATEMENTS
For the Six Months Ended August 31, 2001
4. NOTES PAYABLE (CONTINUED)
Long-term debt consisted of the following at August 31, 2001 and February 28,
2001:
August 31
2001 February 28
(Unaudited) 2001
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Convertible notes payable to a private
investment group with $250,000
originally due on July 20, 2003,
$250,000 due on September 20, 2003,
$300,000 originally due on April 19,
2004, and $500,000 due on June 14,
2004 plus all accrued interest at 6%
to 8% (see Note 6). $1,153,410 $514,712
Convertible note payable to a private
investment group due December 3, 2003
plus all accrued interest at 8% (see
Note 6). 318,016 305,918
Convertible note payable to an
individual due August 29, 2003 plus
all accrued interest at 6% 100,034
Capital leases 8,309 14,392
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Total 1,579,769 835,022
Less current-portion (4,000) (4,850)
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Long-term portion $1,575,769 $830,172
========== ========
Long-term debt as of August 31, 2001 is scheduled to mature as follows:
2002 $ 4,000
2003 4,309
2004 1,571,460
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Total $1,579,769
==========
5. RECEIVABLE FROM SHAREHOLDERS
The following summarizes receivable amounts from shareholders for purchase of
Company stock:
2,000,000 shares issued May 5, 1999
to a Company officer valued at $.06
per share $120,000
1,598,000 shares issued August 9, 1999
to a Company officer, valued at $.06
per share. 93,880
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Remaining balance due $213,880
========
6. CONVERSION OF NOTES PAYABLE
The convertible notes payable described in note 4 above can be converted into
common shares of the Company based upon the three lowest closing share prices
during the thirty trading days prior to the date of the note, or the three
lowest closing prices during the sixty trading days prior to the conversion
date. The Company retains a redemption clause in the notes that allow the
Company to repurchase the notes upon payment of 130% to 150% of the note's face
value, plus accrued interest. In addition, the Company issued warrants to
purchase 3,460,000 shares of the Company's common stock with exercise prices
ranging from $0.4375 to $.115 in connection with these notes.
COMMERCIAL CONCEPTS, INC
NOTES TO REVIEWED FINANCIAL STATEMENTS
For the Six Months Ended August 31, 2001
6. CONVERSION OF NOTES PAYABLE (CONTINUED)
On March 7, 2001 the Company issued warrants to purchase 40,816 shares of the
Company's common stock at $.175 in connection with a short-term $50,000 note
payable entered into on March 1, 2001. The note was converted into 340,136
shares of the Company's common stock during the three months ended May 31, 2001.
Four employees including two officers of the Company have the option to convert
accrued salaries in the amount of $151,059 into 1,575,893 shares of the
Company's common stock.
7. LEASE COMMITMENTS
As of August 31, 2001, the Company leased office space and certain equipment
under non-cancelable operating leases. Future minimum operating lease
requirements for the years following August 31, 2001 are as follows:
2002 $ 80,069
2003 81,911
2004 41,235
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Total $203,215
========
MANAGEMENTS DISCUSSION AND ANALYSIS
Sales: Sales increased by approximately $7,000 for the three months ended August
31, 2001 to $27,126 over the same period in the prior year but decreased by
approximately $2,000 for the six month periods ended August 31, 2001 and 2000.
There has been a change in the mix of revenues between the periods. While
revenues for the three and six month periods ended August 31, 2000 were
comprised primarily of media revenue, a substantial portion of the revenue for
the comparable periods in 2001 were derived from software development. There
were some minor amounts of revenue generated during each period in 2001 from
beta versions of both Wavescreens and Picturebase products.
Cost of sales: Cost of sales decreased by approximately $2,300 for the three
months ended August 31, 2001 to $3,417 over the same period in the prior year,
but remained relatively flat between the six month periods ended August 31, 2001
and 2000. The decrease in 2001 relates to the shift between the media revenues
with lower margins to software development revenues that have higher margins.
For the 2001 six month period, the margins decreased due to some equipment costs
related to the Picturebase products. Although these costs are normally passed on
to the customer, in certain cases, the Company agreed to bear the cost of the
hardware costs.
Operating expenses: Operating expenses increased from $312,117 for the three
months ended August 31, 2000 to $369,572 for the same period in 2001. This
increase of about $57,500 represents an increase of 18% and is primarily the
result of additional sales personnel with their related salary, benefits and
travel costs. Operating expenses increased from $664,407 for the six months
ended August 31, 2000 to $793,186 for the same period in 2001. The increase of
about $$128,800 represents an increase of 19%. This increase is comprised of
salaries and benefits from additional employees in sales and marketing and
programming, rent, legal and consultants.
Interest expense: Interest expense increased by approximately $31,100 and
$97,300 from the three and six month periods ended August 31, 2000 to the same
periods in 2001. These increases are directly related to the long-term
convertible notes payable discussed in the financial statements. Although
interest accrues on these notes, payment is not due until converted or repaid at
the maturity of the notes. Accrued interest is convertible into common stock
with the principal of the notes. In addition, the Company incurred some
financing costs in relation to these notes that are shown on the income
statement adjacent to the interest expense.
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 2001, the Company had cash and other current assets of $141,903
while current liabilities were $529,967. The Company used approximately $404,500
in operations for the quarter ended August 31, 2001 and $739,600 for the
six-month period then ended. Most of the cash used resulted from the net losses
for the period. Cash was generated from financing activities for those same
periods. The Company raised $600,000 and $900,000 in convertible debt for the
three and six month period ended
August 31, 2001, respectively. The terms and interest rates related to this debt
are discussed in the Notes to the Reviewed Financial Statements as of August 31,
2001.
MANAGEMENT CHANGES
During the quarter ended August 31, 2001, Karl A. Hansen, the Company's Chief
Financial Officer resigned to relocate across the country. Following his
decision, the Company hired V. Kelly Randall to assume the position of Chief
Financial Officer. Mr. Randall has a broad background in financial management
with extensive involvement in public and private financings. From 1979 until
1991 Mr. Randall, who is a CPA, spent approximately 12 years with Ernst & Young.
Since leaving Ernst & Young, he has served as a financial officer with Baxter
Research Medical, a manufacturer of medical supplies for open-heart surgeries,
Mycotech Corporation, a biotech company and Found, Inc. an Internet related
software company. Mr. Randall worked with several SEC reporting companies
including two companies listed on the New York Stock Exchange. He has been
involved in financings, mergers and acquisitions and financial and SEC reporting
issues with these companies. As the Chief Financial Officer and Vice President
of Finance and Administration of both Mycotech Corporation and Found, Inc., Mr.
Randall was a key member of the management team responsible for raising private
equity capital for these companies. He also was responsible for all of the
general administrative functions of the companies including human resources,
information systems, investor relations, purchasing and finance. Mr. Randall
holds a BS degree in Finance and a MAcc degree from Utah State University.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant cause
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Commercial Concepts, Inc.
/s/ George E. Richards 10/10/01
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George E. Richards, President and Chief
Executive Officer
10/10/01
/s/ Scott Adamson
-----------------------------------------------
Scott Adamson, Executive Vice President
/s/ V. Kelly Randall 10/10/01
-----------------------------------------------
V. Kelly Randall, Vice President and Chief
Financial Officer