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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report pursuant to Section 13 or 15(d) of the
[X] Securities Exchange Act of 1934
For the quarterly period ended March 31, 2003
OR
Transition Report Pursuant to Section 13 or 15(d) of
[ ] the Securities Exchange Act of 1934
Commission File No. 000-15034
NIMBUS GROUP, INC.
(Exact name of registrant as specified in its charter)
Florida 01-0656115
(State of Incorporation) (I.R.S. Employer
Identification Number)
2999 NE 191st, Suite 805
Aventura, FL 33180
(Address of principal executive offices) (Zip Code)
305-692-3732
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
As of May 19, 2003, 7,438,889 shares of Common Stock, $.001 par value
were outstanding.
================================================================================
NIMBUS GROUP, INC.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.............................................................................
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................................
Item 4. Controls and Procedures..........................................................................
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................
Item 2. Changes in Securities and Use of Proceeds........................................................
Item 3. Defaults Upon Senior Securities..................................................................
Item 4. Submission of Matters to a Vote of Security Holders..............................................
Item 5. Other Information................................................................................
Item 6. Exhibits and Reports on Form 8-K.................................................................
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited)
NIMBUS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 40,864 $ 500,408
Accounts receivable -- 49,454
Shareholder receivable 45,123 55,421
Inventory, net -- 121,236
Prepaid expenses and other current assets 7,300 62,502
------------ ------------
Total current assets 93,287 789,021
Property and equipment, net 688,089 519,614
Other -- 6,854
------------
Total assets $ 781,376 $ 1,315,489
============ ============
LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY
Current liabilities:
Accounts payable $ 397,397 $ 708,152
Accrued expenses 45,218 230,239
Amounts due to related party -- 2,105,301
Deferred revenue -- 9,103
------------ ------------
Total current liabilities 442,615 3,052,795
Commitments and Contingencies
Shareholders' (deficiency) equity :
Preferred shares, $0.001 par value, 10 million shares
authorized, no shares issued and outstanding -- --
Common shares, $0.001 par value, 50 million shares
authorized, 7,438,889 and 7,438,889 shares
issued and outstanding, respectively 7,133 7,439
Additional paid-in capital 10,988,796 10,988,796
Accumulated deficit (11,345,257) (12,733,541)
------------ ------------
Total shareholders' (deficiency) equity (349,328) (1,737,306)
------------ ------------
Total liabilities and shareholders' (deficiency) equity $ 93,287 $ 1,315,489
============ ============
1
NIMBUS GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
FOR THE THREE-MONTHS
ENDED MARCH 31,
------------------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 1,388,284 $ (807,874)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization -- 124,256
Change in operating assets and liabilities:
Accounts receivable 49,454 (170,274)
Shareholder receivables 10,298 6,081
Inventory 121,236 (76,904)
Prepaid expenses and other current assets 55,202 52,539
Other assets 6,854 393
Accounts payable (310,755) 514,701
Accrued expenses (185,021) (86,119)
Amounts due to related party (2,105,301) 188,607
Deferred revenue (9,103) (39,910)
----------- -----------
Net cash used in operating activities (978,852) (294,504)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment 519,614 (37,917)
----------- -----------
Net cash used in investing activities 519,614 (37,917)
----------- -----------
Cash flows from financing activities:
(306)
Book overdraft -- --
----------- -----------
Net cash provided by financing activities (306) --
----------- -----------
Net decrease in cash and cash equivalents (459,544) (332,421)
Cash and cash equivalents at beginning of period 500,408 379,775
----------- -----------
Cash and cash equivalents at end of period $ 40,864 $ 47,354
=========== ===========
2
NIMBUS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE-MONTHS
ENDED MARCH 31,
---------------------------------------------------
2003 2002
------------------------- ------------------------
Net revenues $ 542,908 $ 3,105,151
Cost of net revenues 404,488 2,462,788
------------------------- ------------------------
Gross margin 138,420 642,363
------------------------- ------------------------
Operating expenses:
General and administrative expenses 183,106 746,717
Auction fees 92,165 134,174
Sales and marketing 22,065 271,249
Fulfillment 20,225 223,716
Web site development expenses -- 74,412
------------------------- ------------------------
Total operating expenses 317,561 1,450,268
------------------------- ------------------------
Net loss from operations (179,141) (807,905)
Gain on sale of assets and extinguishment of debt 1,567,425 --
Interest income, net -- 31
------------------------- ------------------------
Net income (loss) $ 1,388,285 $ (807,874)
========================= ========================
Basic and diluted loss per common share $ 0.19 $ (0.11)
========================= ========================
Weighted average number of common
shares outstanding 7,133,279 7,438,889
========================= ========================
3
Estimated
useful lives
(in years) March 31, 2003 December 31, 2002
------------- ------------------- -----------------------
Computer equipment 3 $ 98,061 $ 498,061
Computer software 3 519,743 519,743
Furniture and fixtures 5 26,000 86,001
Telecomunnication equipment 5 39,485 39,485
Leasehold improvements 5 4,800 130,231
------------------- -----------------------
688,089 1,273,521
Less: accumulated depreciation
and amortization (753,907)
------------------- -----------------------
Property and equipment, net 688,089 519,614
=================== =======================
4
NOTE 1. NATURE OF OPERATIONS AND DISCONTINUED OPERATIONS:
During fiscal 2001, Take to Auction.com, Inc. ("TTA"), a company which sells
products online through multiple distribution channels, reorganized its
corporate structure and changed its primary business focus. On September 26,
2001, TTA, Nimbus Group Inc., a Florida corporation and wholly-owned subsidiary
of TTA ("Nimbus"), and TTA Solutions, Inc., a Florida corporation and
wholly-owned subsidiary of Nimbus ("TTA Solutions"), entered into an Agreement
and Plan of Merger (the "Merger Agreement"). Additionally, another wholly-owned
subsidiary of Nimbus, Nimbus Jets, Inc., ("Nimbus Jets") was formed. As a result
of the Merger, Nimbus (the "Company") became the parent company of two
wholly-owned subsidiaries, TTA and Nimbus Jets under the Merger Agreement. All
revenues generated relate solely to TTA. The Company's current business plan is
the wholesale distribution of fragrances and skincare products.
On February 19, 2003, Watch Junction, Inc. purchased a license to certain
technology and certain assets of Take to Auction. Watch Junction is owned 100%
by the former President of TTA, Mr. Albert Friedman. Mr. Friedman made a cash
payment in the amount of $50,000 and returned 305,610 shares of the Company's
common stock back to the Company.
TTA operated the Perfumania.com retail storefront prior to January 2003, which
offered over 2,000 fragrance and fragrance-related products, including bath and
aromatherapy products. As of December 31, 2002, we owed Perfumania.com
approximately $2.1 million relating primarily to inventory purchased from a
license agreement (the "License Agreement"). On January 28, 2003, we received a
letter from E Com Ventures, Inc. ("ECMV"), the parent of Perfumania.com,
indicating we were in default of our Website Operations Services Agreement (the
"Agreement") for non-payment of amounts due of approximately $1.9 million to
Perfumania.com in connection with the Agreement. To settle the breach of
contract claim, we agreed to terminate the Agreement in exchange for a release
of the outstanding obligations owed to Perfumania.com. On February 28, 2003, we
completed the process of returning the operations of Perfumania.com back to
ECMV.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES:
Significant accounting policies and practices used by the Company in the
preparation of the accompanying consolidated financial statements are as
follows:
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. However, the Company has
incurred net losses since inception in the amount of approximately $11.3 million
and has a deficiency in working capital of approximately $350,000. These
factors, among others, may indicate that the Company will be unable to continue
as a going concern for a reasonable period of time. The Company's continuation
as a going concern is dependent upon future events, including obtaining
financing adequate to support the Company's cost structure and business plan.
MANAGEMENT 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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
5
BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net loss per share is computed by dividing the net loss
available to common shareholders for the period by the weighted average number
of Common Shares outstanding for the period.
INVENTORY
Inventory, consisting of finished goods, is stated at the lower of cost or
market, cost being determined based on a moving weighted average cost basis,
which approximates the first-in, first-out method. The cost of inventory
includes product cost and freight charges.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost, less accumulated depreciation and
amortization. Depreciation and amortization is calculated using the
straight-line method over the estimated useful lives of the related assets.
Costs of major additions and improvements are capitalized and expenditures for
maintenance and repairs which do not extend the useful life of the asset are
expensed when incurred. Gains or losses arising from sales or retirements are
included in income currently. The Company reviews its long-lived assets for
impairment on a periodic basis and records an impairment loss to operations if
the sum of the expected future undiscounted cash flows is less than the carrying
amount of the asset. An impairment loss would be recognized to reduce the
carrying amount of the impaired asset to its fair value.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, Take to Auction.com, Inc. All significant
intercompany balances and transactions have been eliminated in consolidation.
SOFTWARE DEVELOPMENT COSTS
In accordance with Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" and Emerging Issues
Task Force 00-2, "Accounting For Web Site Development Costs", the Company
capitalizes acquired and internally developed or modified software solely to
meet the Company's internal needs integral to the Company's Web site. The
Company capitalizes certain internal and external costs directly associated with
developing or modifying the internal use software, which begins with the
application development stage and ends when the project is substantially
complete and ready for its intended use. The ongoing assessment of
recoverability of capitalized software development costs require considerable
judgment by management with respect to certain external factors, including, but
not limited to, estimated economic life and changes in software and hardware
technologies.
REVENUE RECOGNITION
Revenues from membership fees are deferred at the time of billing and are
recognized ratably over the term of annual membership. Revenues from superstore
setup fees are deferred at the time of billing and are recognized ratably over
the first six months of store ownership. Revenues related to sales of products
are recorded at the sales price and recognized at the time that the product is
shipped. Revenues related to shipping and handling fees are recognized at the
time that the product is shipped. In December 1999, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101, 'Revenue Recognition in
Financial Statements,' providing guidance with respect to revenue recognition
issues and disclosures. The Company believes that its existing accounting
policies comply with the requirements of this published guidance.
6
SALES AND MARKETING EXPENSES
Marketing and sales expenses, which consist primarily of advertising and
promotional costs, are charged to operations as incurred.
START UP COSTS
The Company expensed all start up costs as incurred.
INCOME TAXES
The Company utilizes the asset and liability method of accounting for deferred
income taxes. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is established when
it is more likely than not that some or all of the deferred tax assets will not
be realized.
SIMPLE IRA PLAN
The Company sponsored the Nimbus Group, Inc. SIMPLE IRA Plan (the "Plan"), a
defined contribution plan provided pursuant to the requirements of the Internal
Revenue Code of 1986, as amended. All employees were eligible to participate in
the Plan as of the first day of any month. Participants made pre-tax
contributions to the Plan subject to a statutorily prescribed annual limit. The
Company was required to make matching contributions, not to exceed 3% of a
participant's annual compensation, to the Plan. Each participant was fully
vested in their account, including the participant's contributions, the
Company's matching contribution and the investment earnings thereon.
Contributions by the participants or by the Company to the Plan, and the income
earned on such contributions, are generally not taxable to the participants
until withdrawn. Contributions by the Company are generally deductible by the
Company when made. The participant's and the Company's contributions are held in
an IRA. The Company accrued a matching contribution to the Plan as of December
31, 2002, 2001 and 2000 of approximately $28,000, $37,000 and $30,000
respectively, which represents the total contributions made to the Plan by the
Company for the years ended December 31, 2002, 2001 and 2000, respectively. In
February, 2003, the Company cancelled its SIMPLE IRA Plan.
WARRANTS
As required by Statement of Financial Position No. 123, ("SFAS No. 123") the
Company accounts for warrants issued to non-employees not issued in conjunction
with debt by amortizing the fair value of such warrants over the vesting period.
During fiscal 2000, expenses related to such warrants was $68,200 and are
included in general and administrative expenses in the accompanying consolidated
statement of operation. No warrants were issued during the three months ended
March 31, 2003, fiscal 2002 or 2001.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"), establishes standards for recording and displaying
comprehensive income and its components. SFAS No. 130 requires certain
components of equity to be recorded as other comprehensive income. The Company
has no other comprehensive income during the fiscal years ended December 31,
2002, 2001 and 2000.
SEGMENT REPORTING
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS No. 131"), establishes
standards for public business enterprises to report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. The Company operated in one
segment during 2002, 2001 and 2000.
7
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to
be applied prospectively to exit or disposal activities initiated after December
31, 2002. Management has not yet determined the impact SFAS No. 146 compliance
will have on the condensed consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure an amendment of FASB Statement No.
123. This Statement amends SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of that
Statement to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation. Finally, this Statement amends APB Opinion No. 28,
Interim Financial Reporting, to require disclosure about those effects in
interim financial information. We intend to continue to account for stock-based
compensation based on the provisions of APB Opinion No. 25. SFAS 148's amendment
of the transition and annual disclosure provisions of SFAS 123 are effective for
fiscal years ending after December 15, 2002, and the disclosure requirements for
interim financial statements are effective for interim periods beginning after
December 15, 2002. We will adopt the disclosure provisions of SFAS 148 beginning
in the quarter ending March 31, 2003.
NOTE 3. INITIAL PUBLIC OFFERING:
Effective June 12, 2000 (the actual closing date was June 16, 2000), the Company
completed an equity offering of 1.3 million Common Shares at an offering price
of $8.00 per share. Net proceeds to the Company, after deducting approximately
$2.5 million in costs, fees, underwriter discounts and other expenses associated
with the offering, were approximately $7.9 million and were used primarily for
inventory expansion, other capital expenditures necessary to support the
Company's growth, working capital, and other general corporate purposes.
NOTE 4. RELATED PARTY TRANSACTIONS:
The Company received an advance of $1 million on December 21, 1999 from E Com
Ventures, Inc. ("ECMV") and an additional advance of $1 million on March 9,
2000. The chairman of the board of ECMV is also the chairman of the board of the
Company. These advances were structured into two separate two-year convertible
note agreements, each bearing interest at six percent (6%) per annum. ECMV had
the right to convert all, but not less than all for each note, of the principal
amount into shares of the Company's common stock at the conversion price equal
to $7.20. One of the notes was converted into 138,889 shares of common stock on
June 16, 2000 and the other note was repaid in full on June 20, 2000. In
addition, the Company granted a total of 200,000 warrants to ECMV at $7.20.
These warrants, which expired on June 12, 2001, were recorded at an estimated
fair value of $562,000, using an option pricing model, and were amortized over
the life of the notes.
On October 12, 2000, the Company advanced ECMV $500,000. This amount bore
interest at the prime rate and was due on December 31, 2000. ECMV repaid the
principal and accrued interest in full on December 28, 2000.
During March 2000, the Company loaned a shareholder approximately $66,000. This
amount was due on demand and accrued interest at the prime rate plus two
percent. During October 2001, the shareholder repaid the principal balance and
accrued interest in full in the amount of $77,617.
8
During November 2000, the Company loaned its Chairman of the Board approximately
$100,000. During 2002, principal payments of approximately $7,000 were made. The
remaining amount, approximately $45,000, is due on demand and accrues interest
at the prime rate plus two percent. This loan is classified as shareholder
receivables in the accompanying consolidated balance sheet.
Effective September 1, 2001, the Company entered into a licensing agreement (the
"License Agreement") with Perfumania.com to license its retail fragrance Web
site. Under the terms of the agreement, the Company pays royalties to
Perfumania.com of 5% of defined product sales for sales up to $8 million per
annum, decreasing to 3% on sales exceeding $11 million per annum. Royalty
expense under this agreement for the years ended December 31, 2002 and 2001 were
approximately $277,000 and $75,000, respectively.
As of December 31, 2002, we owed Perfumania.com approximately $2.1 million
relating primarily to inventory purchased from the License Agreement. On January
28, 2003, we received a letter from ECMV stating that we were in default of the
License Agreement for non-payment of amounts due and based on recent public
filings that showed that we continue to report losses, have negative working
capital and equity, ECMV was terminating the License Agreement. The Company is
in the process of returning the operations of Perfumania.com back to ECMV. As
part of the transition of the P.com return, ECMV will assume certain liabilities
of TTA, relating to the operations of Perfumania.com.
Effective September 23, 1999, the Company entered into a 60 month service
agreement (the "USi Agreement") with USinternetworking, Inc. ('USi'), a software
and network provider, to develop and host the Company's Web site. The Company
paid an initial fee of $40,000 and the USi Agreement was for 60 equal monthly
service fee payments of $41,000 commencing on December 15, 1999 through December
14, 2004 (the "Initial Period"). During December 1999, the Company notified USi
that it was terminating the USi Agreement (as per the terms of the USi
Agreement) for USi's material breach of its obligations hereunder. A breach of
contract lawsuit has been threatened by USi. The Company and USi discussed a
resolution of the matter, although no discussions have occurred as of late. The
Company believes that it has meritorious defenses, as well as counterclaims, to
any claim which may be brought by USi, and if any such claim is brought, the
Company will defend it vigorously. However, if USi successfully pursues its
claim against the Company, it may have a material adverse effect on the Company
and the operation of its business. During January 2002, USi filed voluntary
petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the United
States Bankruptcy Court.
On February 19, 2003, Watch Junction, Inc. purchased a license to certain
technology and certain assets of Take to Auction. Watch Junction is owned 100%
by the former President of TTA, Mr. Albert Friedman. Mr. Friedman made a cash
payment in the amount of $50,000 and returned 305,610 shares of the Company's
common stock back to the Company.
On December 28, 1999, the Company entered into a five year operating lease
agreement for its corporate headquarters. Monthly rent payments are
approximately $14,500 during the period of this agreement.
9
NIMBUS GROUP, INC.
ITEM 2: Management's Discussion and Analysis of Financial condition and Results
of Operations
================================================================================
This report contains "forward-looking statements" within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended. These forward-looking
statements include, among others, statements concerning the Company's outlook
for 2003 and beyond, the Company's expectations, beliefs, future plans and
strategies, anticipated events or trends, and similar expressions concerning
matters that are not historical facts. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements. The
forward-looking statements in this report are subject to risks and uncertainties
that could cause actual results to differ materially from those expressed in or
implied by the forward-looking statements. These risks and uncertainties are
described in more detail in our Annual Report on Form 10-K for the year ended
December 31, 2002 filed with the Securities and Exchange Commission.
Overview
During January 2002, our Board adopted a formal plan of disposition of our
wholly owned subsidiary Take to Auction.com, Inc., (TTA), in connection with our
overall strategic program designed to focus our resources on Nimbus Jets and the
development of a national air taxi service.
Nimbus Jets, a start-up air taxi service, was to offer a convenient and
cost-effective private jet solution for business travelers and individuals
alike. We intended to make personal jet travel broadly affordable throughout
North and South America. Unlike current alternative methods of flying, primarily
commercial, charter or fractional ownership, Nimbus Jets was to fly an on-demand
private air taxi service.
Due to the continuous declining market conditions of the air transportation
industry, during January 2003, our Board resolved not to continue to pursue the
development of a private air taxi service and to refocus its efforts on a plan
to bring Nimbus Group to profitable levels. On January 15, 2003, Mr. Jonathan
Geller tendered his resignation as Chief Technology Officer, effective
immediately. Mr. Geller will continue to consult for us and will remain on our
Board. On February 3, 2003, Mr. Mitchell Morgan tendered his resignation as
Chief Financial Officer, but has continued to serve as our Principal Financial
Officer for purposes of complying with our SEC reporting obligations.
On February 19 2003, Watch Junction, Inc. acquired a license to certain
technology and purchased certain assets of TTA. Watch Junction is owned 100% by
the former President of TTA, Mr. Albert Friedman. Mr. Friedman made a cash
payment in the amount of $50,000 and returned 305,610 shares of our common stock
back to us.
TTA operated the Perfumania.com retail storefront prior to January 2003, which
offered over 2,000 fragrance and fragrance-related products, including bath and
aromatherapy products. As of December 31, 2002, we owed Perfumania.com
approximately $2.1 million relating primarily to inventory purchased from a
license agreement (the "License Agreement"). On January 28, 2003, we received a
letter from E Com Ventures, Inc. ("ECMV"), the parent of Perfumania.com,
indicating we were in default of our Website Operations Services Agreement (the
"Agreement") for non-payment of amounts due of approximately $1.9 million to
Perfumania.com in connection with the Agreement. To settle the breach of
contract claim, we agreed to terminate the Agreement in exchange for a release
of the outstanding obligations owed to Perfumania.com. On February 28, 2003, we
completed the process of returning the operations of Perfumania.com back to ECMV
(the "P.com Return"). As of December 31, 2002, we owed Perfumania.com
approximately $2.1 million relating primarily to inventory purchased from the
License Agreement. On January 28, 2003, we received a letter from ECMV, the
parent of Perfumania.com, indicating we were in default of our Agreement for
non-payment of amounts due of approximately $1.9 million to Perfumania.com in
connection with the Agreement. To settle the breach of contract claim, we agreed
to terminate the Agreement in exchange for a release of the outstanding
obligations owed to Perfumania.com. We returned the operations of Perfumania.com
back to ECMV. As part of the transition of the P.com Return, ECMV assumed
certain liabilities of TTA, relating to the operations of Perfumania.com.
10
On March 1 2003, Nimbus management began devising a plan that would take our
company to profitable levels over the next 18 months by capitalizing on our
experience in marketing, branding and licensing.
Business Plan of Operations
Our company is currently in the planning stages of changing its primary focus to
the wholesale distribution of fragrances, both proprietary and under license, as
well as a diverse line skincare products. We plan to initially distribute
product lines via retail outlets across the United States. With the hiring of
qualified marketing personnel, we will promote its proposed fragrance and
skincare lines to gain preferred shelf space through regular retail promotions.
While penetrating U.S. retail stores, we plan to simultaneously move to secure
other distribution relationships with leading retailers abroad. We do not plan
to directly manufacture any product, nor take large positions in inventory.
Conversely, our plan to utilize direct delivery to its retail customer utilizing
back-to-back bank letters of credit coupled with Just in Time (JIT) inventory
management. Given that Nimbus has not reported earnings since inception, we
believe this new business focus is based on more traditional business
fundamentals and that our company may be able to create value for its
shareholders via a simpler, yet potentially profitable distribution model. We
currently employee 3 individuals, including 1 executive officer. We believe the
number of employees is adequate for the implementation of our new business plan,
although we intend to hire additional employees in June 2003.
Results of Operations
The results of operations for the three month periods ended March 31, 2003 and
2002 reflect the results of operations for our wholly owned subsidiary TTA. We
have materially changed the focus and business plan of our company. In addition,
for the three months ended March 31, 2003 our business operations decreased
significantly, except for general and administrative activities and activities
associated with the reorganization of our company. As such, the comparative
results of our operation for the periods below may be meaningless.
Net Revenues. TTA's revenues were derived from sales of product at auction and
through storefronts, sales of product through Perfumania.com and TTA Direct,
membership fees paid by our users for TTA Auctions, set-up fees paid by users to
open their own virtual storefront through TTA Superstores, and shipping and
handling fees. We are no longer engaged in these sales activities.
Overall net revenues decreased approximately $2,562,151 or 82.5% to
approximately $543,000 for the three-month period ended March 31, 2003 compared
to $3,105,151 for the three-month period ended March 31, 2002. The decrease is
due the changes in our operations described above.
Auction revenues were approximately $34,000 for the three-month period ended
March 31, 2003 and approximately $1,000,000 for the three-month period ended
March 31, 2002.
For the three-month period ended March 31, 2003, revenues from TTA Direct
decreased to approximately $21,000 compared to approximately $558,000 for the
three-month period ended March 31, 2002.
Cost of Net Revenues. Cost of net revenues consist primarily of the cost of the
merchandise sold and outbound shipping costs related to those items. Cost of net
revenues decreased $2,058,300 to $404,488 for the three month period ended March
31, 2003, compared to approximately $2,462,788 for the three month period ended
March 31, 2002. Cost of net revenues as a percentage of revenues were
approximately 75% for the three month period ended March 31, 2003 and 79% for
the three month period ended March 31, 2002.
General and Administrative Expenses. General and administrative expenses consist
of payroll and related expenses for executive, accounting and administrative
personnel, professional fees and other general corporate expenses. General and
administrative expenses decreased approximately $564,000 to approximately
$103,000 for the three-month period ended March 31, 2003 compared to
approximately $747,000 for the three-month period ended March 31, 2002. General
and administrative expenses as a percentage of net revenues were 34% for the
three month period ended March 31, 2003 and 24% for the three-month period ended
March 31, 2002. The decrease in general and
11
administrative expenses was due to the suspension of our business operations
during the three month period ended March 31, 2003 and the reduction in
administrative and executive personal.
Auction Fees. Auction fees consist of fees incurred by us for posting and
selling items at online auction sites. Auction fees decreased approximately
$42,000 to $92,165 for the three-month period ended March 31, 2003, compared to
$134,174 for the three-month period ended March 31, 2002.
Sales and marketing. Sales and marketing expenses consist of fees incurred for
advertising and promotion of our brand. Sales and marketing decreased
approximately $249,000 to approximately $22,000 for the three-month period ended
March 31, 2003 compared to approximately $271,000 for the three-month period
ended March 31, 2002.
Fulfillment. Fulfillment expenses decreased approximately $203,500 to $20,225
for the three month period ended March 31, 2003 compared to $223,716 for the
three month period ended March 31, 2002.
Web site development expenses. Web site development expenses consist principally
of expenses incurred to develop and maintain our network operations and systems
and telecommunications infrastructure. Web site development expenses decreased
approximately $54,000 to approximately $20,000 for the three-month period ended
March 31, 2003 compared to $74,412 for the three-month period ended March 31,
2002. Although we believe that our Web site development is currently completed
and we will not incur development costs in the future in order to implement our
intended business plan.
Gain on sale of assets. For the three month period ended March 31, 2003 we had a
gain on sales of assets of $1,567,425 due to the sale of certain of our assets
to a related party. On February 19, 2003 we licensed the technology and sold
certain assets of TTA to Watch Junction. Watch Junction is owned 100% by the
former President of TTA, Mr. Albert Friedman. Mr. Friedman made a cash payment
in the amount of $50,000 and returned 305,610 shares of our common stock back to
us.
Net income (loss). The net income totaled approximately $1,388,284 for the
three-month period ended March 31, 2003 as compared to a net loss of $807,874
for the three month period ended March 31, 2002. The net income resulted from
the gain on sale of assets to a related party described above.
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements during fiscal 2003 will be to fund the
operations of our future business plan. We have had negative cash flows since
inception, resulting primarily from our wholly-owned subsidiary, TTA. Our
working capital to date has been provided primarily by the proceeds from our
initial capitalization of $1,000,000, other private placements, the issuance of
the Notes (see below), and our initial public offering consummated in June 2000.
Cash and cash equivalents at March 31, 2003 were approximately $40,864. Cash and
cash equivalents at December 31, 2002, 2001 and 2000 were approximately $0.5
million, $0.4 million and $1.1 million, respectively. Our working capital
(deficit) totaled approximately ($349,300) at March 31, 2003, ($2.3) million at
December 31, 2002, (0.7) million at December 31, 2001 and $3.0 million at
December 31, 2000.
We had $1,388,284 provided in operating activities for the three months ended
March 31, 2003 which resulted from the license of technology and sale of certain
assets described above. Approximately $0.2 million of cash was provided in
operating activities for the year ended December 31, 2002. This was primarily
the result of a loss of approximately $1.8 million, offset primarily by a
decrease in our inventory of approximately $0.6 million and an increase in
amounts due related party of approximately $1.1 million. The increase in amounts
due related party resulted from amounts owed to ECMV relating to our License
Agreement which was terminated during January 2003. We used cash of
approximately $0.5 million in operating activities for the year ended December
31, 2001. This was primarily the result of a loss of approximately $4.1 million,
as well as decreases in inventory of approximately $2.2 million, in prepaid
expenses and other current assets of $0.3 million and in deferred revenue of
$0.5 million, offset primarily by increases in amounts due related party of $0.8
million. During the year ended December 31, 2001, inventory levels were
decreased in an effort to liquidate some of our slower moving inventory items
and provide the necessary cash flows to fund our current operations. The
12
decrease in prepaid expenses and other current assets primarily related to
amounts advanced to suppliers for specialty purchased inventory of which a
majority of this inventory has been received subsequent to December 31, 2000.
The increase in amounts due related party resulted from amounts owed to ECMV
relating to our service agreement in which we outsourced our warehouse and
distribution functions. We used cash of approximately $7.8 million in operating
activities for the year ended December 31, 2000. This was primarily the result
of a loss of approximately $6.3 million, the increase in our inventory of
approximately $3.0 million and the increase in prepaid expenses and other
current assets of $0.5 million. During the year ended December 31, 2000,
inventory levels were increased to support the growth in our membership base
from approximately 50,000 credits as of December 31, 1999 to approximately 1.1
million credits as of December 31, 2000. The increase in prepaid expenses and
other current assets primarily related to amounts advanced to suppliers for
specialty purchased inventory of which a majority of this inventory had been
received subsequent to December 31, 2000. The additional changes in other
operating assets and liabilities were principally related to increases in
accounts payable, accrued expenses, amounts due related party and deferred
revenue of approximately $1.4 million.
As of December 31, 2002, we owed Perfumania.com approximately $2.1 million
relating primarily to inventory purchased from the License Agreement. On January
28, 2003, we received a letter from ECMV, the parent of Perfumania.com,
indicating we were in default of our Agreement for non-payment of amounts due of
approximately $1.9 million to Perfumania.com in connection with the Agreement.
To settle the breach of contract claim, we agreed to terminate the Agreement in
exchange for a release of the outstanding obligations owed to Perfumania.com. As
a result of returning the operations of Perfumania.com back to ECMV, amounts due
to related parties decreased from $2,105,301 as of December 31, 2003 to $-0- at
March 31, 2003. As part of the transition of the P.com Return, ECMV has also
assumed certain liabilities of TTA, relating to the operations of
Perfumania.com.
We had no cash flows from financing activities for the three months ended March
31, 2003 nor years ended December 31, 2002 and 2001. Cash provided by financing
activities for the year ended December 31, 2000 was approximately $9.2 million.
This was the result of net proceeds received from our initial public offering of
approximately $9.4 million, proceeds received from our stock subscriptions
receivable (relating to our initial capitalization) in the amount of
approximately $0.6 million, and proceeds received from a convertible promissory
note (the "Note") in the amount of $1 million from ECMV, a company related
through a common chairman of the board, offset by the repayment of another note
(similar in all respects to the "Note") in the amount of $1 million, and
payments made for offering costs of approximately $0.8 million.
During November 2000, we loaned our Chairman of the Board approximately
$100,000. The remaining amount outstanding as of March 31, 2003, approximately
$45,000, is due on demand and accrues interest at the prime rate plus two
percent.
We have incurred net losses since inception, and our ability to ultimately
obtain profitable operations is dependent upon future events, including without
limitation, obtaining financing adequate to support our cost structure and
future business plans. We are in the process of evaluating a suitable business
plan and we are trying to raise additional funds through the private offering of
our securities. There can be no assurance that a new business strategy will be
evaluated and completed in a timely manner, that it will be successfully
implemented, or that funding on a private offering will be successfully
completed, or that our future cash flows will be sufficient to meet all of our
obligations and commitments. The failure to generate such sufficient cash flows
could significantly adversely affect the market value of our common stock and
the operation of our business, results of operations and financial condition.
New Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supercedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions
of Accounting Principles Board ("APB") Opinion No. 30, Reporting the Results of
Operations for a Disposal of a Segment of a Business. SFAS 144 is effective for
fiscal years beginning after December 15, 2001. Adoption of SFAS 144 caused us
to reflect the operations of TTA for fiscal years 2001 and 2000 as discontinued
operations. In addition, we reviewed the long lived assets to be disposed of for
impairment and recognized an impairment loss of approximately $0.3 million.
13
Recent Accounting Pronouncements
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to
be applied prospectively to exit or disposal activities initiated after December
31, 2002. Management has not yet determined the impact SFAS No. 146 compliance
will have on the condensed consolidated financial statements.
14
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the quarter ended March 31, 2003, there have been no material changes in
the information about our market risk as of December 31, 2002 as set forth in
item 7A. of the Company's Form 10-K for the year ended December 31, 2002. Our
market risk exposure with respect to financial instruments is to changes in the
"prime rate" in the United States. We have a loan receivable, due on demand,
from our chairman and interim CEO in the amount of approximately $45,000 bearing
interest at prime plus two percent. As of March 31, 2003, we had no short or
long-term investments.
ITEM 4: CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report, the Company carried
out an evaluation of the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. This
evaluation was done under the supervision and with the participation of the
Company's Principal Executive Officer and Principal Financial Officer. Based
upon that evaluation, they concluded that the Company's disclosure controls and
procedures are effective in gathering, analyzing and disclosing information
needed to satisfy the Company's disclosure obligations under the Exchange Act.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect those controls since the most recent
evaluation of such controls.
PART II - OTHER INFORMATION
================================================================================
Item 1. Legal Proceedings
We are not currently a party to any formal legal proceedings. A breach of
contract lawsuit has been threatened by USinternetworking, Inc. ('USi'), a
developer of Web sites. We signed a contract, effective as of September 23,
1999, with USi for the development of our second generation user interface, as
well as certain other services (the 'USi Agreement'). During December 1999, we
notified USi that we were terminating the USi Agreement (as per the terms of the
USi Agreement) for USi's material breach of its obligations thereunder. The
parties discussed a resolution of the matter, although no discussions have
occurred as of late. We believe that we have meritorious defenses, as well as
counterclaims, to any claim which may be brought by USi, and if any such claim
is brought, we will defend it vigorously. However, if USi successfully pursues
its claim against us, it may have a material adverse effect on us and the
operation of our business. During January 2002, USi filed voluntary petitions
for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States
Bankruptcy Court.
As of December 31, 2002, we owed Perfumania.com approximately $2.1 million
relating primarily to inventory purchased from the License Agreement. On January
28, 2003, we received a letter from E Com Ventures, Inc. ("ECMV"), the parent of
Perfumania.com, indicating we were in default of our Website Operations Services
Agreement (the "Agreement") for non-payment of amounts due of approximately $1.9
million to Perfumania.com in connection with the Agreement. To settle the breach
of contract claim, we agreed to terminate the Agreement in exchange for a
release of the outstanding obligations owed to Perfumania.com. On February 28,
2003, we completed the process of returning the operations of Perfumania.com
back to ECMV.
Item 2. Change in Securities and Use of Proceeds
We did not issue or sell any unregistered securities during the quarter ended
March 31, 2003.
15
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
On January 15, 2003, Mr. Jonathan Geller tendered his resignation as Chief
Technology Officer, effective immediately. Mr. Geller will continue to consult
for us and will remain on our Board. On February 3, 2003, Mr. Mitchell Morgan
tendered his resignation as Chief Financial Officer, but has continued to serve
as our Principal Financial Officer for purposes of complying with our SEC
reporting obligations. Effective June 2, 2003, Ms. Sandra Orr shall commence
serving as our Chief Financial Officer. Ms. Orr's biographical information is as
follows:
Ms. Orr holds an MBA degree from the University of Pittsburgh, a bachelor of
arts from Westminister College. She is also a CPA in the State of Florida. Ms.
Orr has over 17 years experience in managing a variety of functional areas
including marketing, operations, finance and accounting. Ms. Orr currently
serves as an Adjunct Professor in marketing and e-business for Graduate School
of Business at the University of Miami. She has held Vice President positions
with Ryder Systems from 1984 to 2001.
On May 19, 2003, We acquired from Omniscent Corp. certain rights to a portfolio
of fragrance brands and Skincare line that include; The Cara Mia Swiss
Formulated Skincare line, Phantom Women and Men Fragrances, as well as Ultra-E
Fragrance for the Young Set. The Cara Mia line will initially debut with four
products created specifically to repair and rejuvenate the users skin. The other
two brands are Phantom Parfum and Ultra-e fragrances. Our company acquired these
rights from Omniscent for 2,500,000 shares of preferred convertible stock. The
rights and designations of the preferred shares have not been finalized,
although it is anticipated that the preferred shares will be convertible into
shares of common stock of our company on a one to one basis at the option of the
holder.
Effective May 20, 2003, we entered into a licensing agreement with Victory
International USA LLC to distribute its Cara Mia Cosmetics brand worldwide.
Under the terms of the agreement, Victory is to advance the company $200,000
against royalties of 12% on all net sales made by Victory International USA LLC.
First deposit of $50,000 was received on May 21, 2003, the balance is due by
September 2003. Ongoing royalties are payable quarterly.
Effective May 21, 2003, we also acquired the licensing rights for the Phantom
Fragrances brand which is licensed to Moar International. Under the terms of the
licensing agreement a royalty fee of 5% on net sales of the brand will be paid
to us by Moar International. First payment is due August 2003.
Item 6. Exhibits and Reports on Form 8-K
(a) Index to Exhibits.
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ---------------------
99.1 Certification by Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes - Oxley Act of 2002.
99.2 Certification by Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes - Oxley Act of 2002.
16
(b) Reports on Form 8-K.
On January 29, 2003, we filed a current report on Form 8-K to disclose
that on January 28, 2003 we received a letter from E Com Ventures, Inc., the
parent of Perfumania.com, indicating we were in default of our Web Site
Operations Services Agreement for non-payment of amounts due and that the
Agreement was therefore terminated.
On February 5, 2003, we filed a current report on Form 8-K to disclose
that on January 15, 2003 Jonathan Geller resigned as chief technology officer of
our company, citing personal commitments as his reason for resigning. Mr. Geller
has remained as a consultant to our company as well as a director of our
company. In addition, the Form 8-K disclosed that on February 3, 2003 Mitchell
Morgan resigned as chief financial officer as well as director of our company,
citing family obligations as his reasons for resignation.
On February 24, 2003, we filed a current report on Form 8-K to disclose
that on February 18, 2003 Watch Junction, Inc. purchased a license to certain
technology and purchased certain assets of Take to Auction.com, Inc. ("TTA").
The report also disclosed that Watch Junction, Inc. is owned by the former
president of TTA, Mr. Albert Friedman. Total consideration for the license and
purchase was $50,000 and 305,610 shares of our common stock owned by Mr.
Friedman. The shares of stock repurchased by our company were returned to
treasury. In addition, the current report also disclosed that to settle a breach
of contract claim made by E Com Ventures, Inc., we had agreed to terminate the
Web Site Operation Services Agreement with E Com Ventures, Inc. in exchange for
a release of the outstanding obligations owed to Perfumania.com under the
Agreement.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officer.
NIMBUS GROUP, INC.
By: /s/ Ilia Lekach
----------------------------------
Ilia Lekach
Chairman of the Board and
nterim Chief Executive Officer
By: /s/ Mitchell Morgan
----------------------------------
Mitchell Morgan
Principal Financial Officer
Date: May 25, 2003
18
Certifications
I, ILIA LEKACH, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NIMBUS GROUP,
INC.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
exchange act rules 13a-14 and 15d-14) for the registrant and have:
A) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
B) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "evaluation
date"); and
C) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the evaluation date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
A) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
B) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls.
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: MAY 25, 2003
/s/Ilia Lekach
- -----------------------
ILIA LEKACH
Chief Executive Officer (or equivalent)
19
I, MITCHELL MORGAN, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NIMBUS GROUP,
INC.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
exchange act rules 13a-14 and 15d-14) for the registrant and have:
A) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
B) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "evaluation
date"); and
C) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the evaluation date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
A) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
B) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls.
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: MAY 25, 2003
/s/ Mitchell Morgan
- -----------------------
MITCHELL MORGAN
Chief Financial Officer (or equivalent)
20