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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-18222
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Chell Group Corporation
(Exact Name of Registrant as Specified in Its Charter)
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New York 11-2805051
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
150, 630 - 8th Avenue SW, Calgary AB T2P 1G6
(Address of Registrant's Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (403) 303-8258
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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 No |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes |_| No |X|
As of November 30, 2004, the number of shares issued and outstanding of the
Company's common stock, par value $0.001 per share was 32,129,417.
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CHELL GROUP CORPORATION
AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Page
ITEM 1. Financial Statements
Consolidated Balance Sheets as of November 30, 2003 (Unaudited) and August 31, 2003 3
Consolidated Statements of Operations for the three ended November 30, 2003 and 2002
(Unaudited) 4
Consolidated Statements of Cash Flows for the three months ended November 30, 2003 and 2002
(Unaudited) 5
Notes to Unaudited Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 13
ITEM 4. Controls and Procedures 14
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 14
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 14
ITEM 3. Defaults upon Senior Securities 14
ITEM 4. Submissions of Submissions of Matters to a Vote of Security Holders 14
ITEM 5. Other Information 14
ITEM 6. Exhibits 14
Signatures 17
Item 1. FINANCIAL STATEMENTS
CHELL GROUP CORPORATION
CONSOLIDATED BALANCE SHEETS
(Expressed in Canadian dollars)
==================================================================================================================
November 30, 2003 August 31, 2003
(unaudited) (audited)
$ $
- ------------------------------------ ------------------------------- ------------------------- -------------------
ASSETS
Current
Cash and cash equivalents 458,448 327,685
Accounts receivable, trade - net of allowance for doubtful
accounts of $462,058 and $356,195, respectively 4,447,784 3,560,286
Other receivables -- --
Inventory 160,618 208,340
Prepaid expenses 46,623 76,077
Buildings held for sale 1,161,001 1,177,045
- -------------------------------------------------------------------- ------------------------- -------------------
Total current assets 6,274,474 5,349,433
- -------------------------------------------------------------------- ------------------------- -------------------
Property and equipment, net 510,768 638,143
Goodwill 276,794 276,794
Other assets 117,496 63,600
Net assets of discontinued operations - assets held for sale 870,358 969,292
- -------------------------------------------------------------------- ------------------------- -------------------
8,049,890 7,297,262
- -------------------------------------------------------------------- ------------------------- -------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current
Bank overdraft 696,861 908,432
Bank indebtedness 4,256,989 3,935,166
Accounts payable and accrued liabilities 6,049,500 5,469,224
Accrued interest payable 1,470,197 1,347,220
Income Taxes payable 46,569 --
Deferred revenue 245,895 297,243
S-term advances 272,192 312,191
Current portion, long-term debt 1,268,145 1,305,301
Payable on acquisition 4,852,976 4,852,976
Loan payable, related party 1,020,000 1,020,000
Mortgages of buildings held for sale 1,083,333 1,114,583
Convertible debt 7,624,912 7,978,676
- -------------------------------------------------------------------- ------------------------- -------------------
Total current liabilities 28,887,569 28,541,012
- -------------------------------------------------------------------- ------------------------- -------------------
Long-term debt, net of current portion 101,950 113,392
Liabilities of discontinued operations 1,559,167 1,546,454
- -------------------------------------------------------------------- ------------------------- -------------------
Total liabilities 30,548,686 30,200,858
- -------------------------------------------------------------------- ------------------------- -------------------
Preferred Series B shares: 454,545 shares [August 2003 - 454,545] 7,294 7,294
Shareholders' equity (deficit)
Common stock
14,295,410 common shares [August 2003 - 10,504,913] 959,754 733,997
Additional paid in capital 26,614,448 26,655,538
Accumulated other comprehensive income 1,689,660 1,150,558
Accumulated deficit (51,769,952) (51,450,983)
- -------------------------------------------------------------------- ------------------------- -------------------
Total shareholders' equity (deficit) (22,506,090) (22,910,890)
- -------------------------------------------------------------------- ------------------------- -------------------
8,049,890 7,297,262
- -------------------------------------------------------------------- ------------------------- -------------------
The accompanying notes are an integral part of these consolidated
financial statements
3
CHELL GROUP CORPORATION INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2003 AND NOVEMBER 30, 2002
(Expressed in Canadian dollars - unaudited)
- --------------------------------------------------------------------- ------------------- --------------------
2003 2002
$ $
- --------------------------------------------------------------------- ------------------- --------------------
REVENUE
Product sales 7,955,702 5,605,928
Service sales 588,413 478,065
- --------------------------------------------------------------------- ------------------- --------------------
8,544,115 6,083,993
- --------------------------------------------------------------------- ------------------- --------------------
COST OF SALES
Product sales 6,464,603 5,220,467
Service sales 228,758 58,909
- --------------------------------------------------------------------- ------------------- --------------------
6,693,361 5,279,376
- --------------------------------------------------------------------- ------------------- --------------------
GROSS PROFIT 1,850,754 804,617
OPERATING EXPENSES
Selling, general and administrative expenses 2,059,616 1,992,178
Depreciation and amortization 189,873 311,487
- --------------------------------------------------------------------- ------------------- --------------------
2,249,489 2,303,665
- --------------------------------------------------------------------- ------------------- --------------------
Loss from operations (398,735) (1,499,048)
Interest expense 342,285 589,700
Loss on disposal of investments/property -- 248,587
- --------------------------------------------------------------------- ------------------- --------------------
Loss before provision for income taxes (741,020) (2,337,335)
Provision for income taxes -- 2,282
- --------------------------------------------------------------------- ------------------- --------------------
Loss from continuing operations (741,020) (2,339,617)
- --------------------------------------------------------------------- ------------------- --------------------
Discontinued Operations
Gain (loss) from discontinued operations (net of applicable income 422,051 (682,574)
tax of $0)
Gain on disposal on debt -- 2,051,215
- --------------------------------------------------------------------- ------------------- --------------------
Gain (loss) from discontinued operations 422,051 1,368,641
- --------------------------------------------------------------------- ------------------- --------------------
Net Loss (318,969) (970,976)
Other comprehensive income - foreign currency translation 539,102 (395,956)
- --------------------------------------------------------------------- ------------------- --------------------
Comprehensive Gain (loss) 220,133 (1,366,932)
- --------------------------------------------------------------------- ------------------- --------------------
Loss per share:
Basic and diluted from continuing operations (0.05) (0.26)
Basic and diluted from discontinued operations 0.03 0.15
- --------------------------------------------------------------------- ------------------- --------------------
Net loss per share (0.02) (0.11)
- --------------------------------------------------------------------- ------------------- --------------------
Basic weighted average number of common shares outstanding 14,218,487 9,028,239
Diluted weighted average number of common shares outstanding 14,218,487 9,028,239
- --------------------------------------------------------------------- ------------------- --------------------
The accompanying notes form an integral part of these
consolidated financial statements.
4
CHELL GROUP CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2003 AND NOVEMBER 30, 2002
(Expressed in Canadian dollars - unaudited)
- -------------------------------------------------------------------- ---------- ----------
2003 2002
$ $
- -------------------------------------------------------------------- ---------- ----------
OPERATING ACTIVITIES
Net loss for the year from continuing operations (318,969) (970,976)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 227,816 1,629,176
Interest cost from amortization of discount 62,923 324,038
Provision for doubtful accounts 105,863 57,040
Loss on disposal/sale of capital assets -- 248,587
Due from stockholder -- 227,365
Gain on settlement of debt -- (2,051215)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, trade (916,440) 2,690,524
Decrease (increase) in income taxes receivable -- --
Decrease (increase) in inventory 47,722 (125,671)
Decrease (increase) in prepaid expenses 56,448 9,813
Decrease (increase) in other accounts receivable -- --
Decrease (increase) in other assets (53,896) 160,714
Increase (decrease) in accounts payable and accrued liabilities 1,093,863 (598,619)
Increase (decrease) in accrued interest payable 122,977 353,650
Increase (decrease) in deferred revenue (51,348) (326,111)
Increase (decrease) in income taxes payable 139 30,252
- -------------------------------------------------------------------- ---------- ----------
Cash (used in) provided by operating activities 377,098 1,658,567
- -------------------------------------------------------------------- ---------- ----------
INVESTING ACTIVITIES
Purchase of property and equipment (49,464) (44,306)
Proceeds from disposal of property and equipment -- 265,289
- -------------------------------------------------------------------- ---------- ----------
Cash (used in) provided by investing activities (49,464) 220,983
- -------------------------------------------------------------------- ---------- ----------
FINANCING ACTIVITIES
Bank Indebtedness 321,823 (379,222)
Net borrowings on line of credit (211,571) (899,629)
Payment to Logicorp shareholders (39,999) --
Borrowing from Logicorp shareholders 10,009 77,575
Payments on long-term debt (89,858) (464,960)
- -------------------------------------------------------------------- ---------- ----------
Cash used in financing activities (9,596 (1,666,236)
- -------------------------------------------------------------------- ---------- ----------
Effects of foreign loss 122,414 (442,198)
- -------------------------------------------------------------------- ---------- ----------
Net (decrease) increase in cash and cash equivalents during the 440,452 (228,884)
period from continuing operations
Net (decrease) increase in cash and cash equivalents during the (309,689) 148,016
period from discontinue operations
Cash and cash equivalents, beginning of period 327,685 107,258
- -------------------------------------------------------------------- ---------- ----------
Cash and cash equivalents, end of period 458,448 26,390
- -------------------------------------------------------------------- ---------- ----------
Income taxes paid -- --
Interest paid 140,016 158,866
The accompanying notes are an integral part of these consolidated financial
statements.
5
CHELL GROUP CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2003 AND NOVEMBER 30, 2002 (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying financial statements for the interim periods are
unaudited and reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the financial position and operating results for the periods
presented. These financial statements should be read in conjunction with the
financial statements and notes thereto, together with Management's Discussion
and Analysis of Financial Condition and Results of Operations, contained in the
Annual Report on Form 10-K of Chell Group Corporation (the "Company")
(Commission No.0-18066), filed with the Securities and Exchange Commission on
May 13, 2004. The results of operations for the three months ended November 30,
2003 are not necessarily indicative of the results for the full fiscal year
ending August 31, 2004.
NOTE 2. GENERAL
The financial statements of the Company for the three months ended
November 30, 2003 (the "2004 First Fiscal Quarter"), include the operations of
the Company's wholly-owned subsidiaries Chell Merchant Capital Group Inc.
("CMCG"), Chell.com (USA) Inc., and 3484751 Canada Inc. The financial statements
also include CMCG's wholly-owned subsidiaries Logicorp Data Systems Ltd. and
Logicorp Service Group Ltd., 123557 Alberta Ltd., and 591360 Alberta Ltd., which
will be together referred to as "Logicorp" and Logicorp's wholly-owned
subsidiary eTelligent Solutions Inc. ("eTelligent). Discontinued operations
consist of NTN Interactive Network Inc. ("NTNIN") which was sold on December 15,
2003. Effective August 8, 2004, the Company's previously wholly-owned
subsidiaries, Logicorp Data Systems Inc., and Logicorp Service Group Inc.
(together, "Logicorp") issued common shares to NewMarket Technologies, a
publicly-traded company for US$2.1 million, such that NewMarket holds 51% of the
outstanding equity securities of Logicorp. In exchange for 51% of these
subsidiaries, NewMarket will pay $1.1 million in cash and $1.0 million will be
paid to Logicorp according to the terms of a $1.0 million, 24-month promissory
note.
The financial statements of the Company for the three months ended
November 30, 2002 (the "2003 First Fiscal Quarter"), include the operations of
the Company's wholly-owned subsidiaries Chell Merchant Capital Group Inc.
("CMCG"), Chell.com (USA) Inc., and 3484751 Canada Inc. The financial statements
also include CMCG's wholly-owned subsidiaries Logicorp Data Systems Ltd. and
Logicorp Service Group Ltd., 123557 Alberta Ltd., and 591360 Alberta Ltd., which
will be together referred to as "Logicorp" and Logicorp's wholly-owned
subsidiary eTelligent Solutions Inc. ("eTelligent). Discontinued operations
consist of NTN Interactive Network Inc. ("NTNIN") which was sold on December 15,
2003 and GalaVu Entertainment Network Inc. ("GalaVu") which was sold on April
25, 2003.
Prior period's figures have been reclassified to be consistent with any
reclassifications in the current period.
NOTE 3. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets (SFAS 144), that is applicable to financial
statements issued for fiscal years beginning after December 15, 2001. The new
rules on asset impairment supersede SFAS 121, Accounting for the impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and portions of
Accounting Principles Board Opinion 30, "Reporting the Results of Operations."
This Standard provides a single accounting model for long-lived assets to be
disposed of and significantly changes the criteria that would have to be met to
classify an asset as held-for-sale. Classification as held-for-sale is an
important distinction since such assets are not depreciated and are stated at
the lower of fair value and carrying amount. This Standard also requires
expected future operating losses from discontinued operations to be displayed in
the period(s) in which the losses are incurred, rather than as of the
measurement date as presently required. The Company is currently assessing the
potential impact of SFAS 144 on the operating results and financial position.
6
In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, business combinations can no longer be
reflected by using the pooling of interests method of accounting and goodwill
(and intangible assets deemed to have indefinite lives) will no longer be
amortized but will be subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be amortized over their
useful lives.
NOTE 4 - SEGMENT INFORMATION (Unaudited)
The following describes the performance by segment for the three months ended
November 30, 2003 and 2002:
- ---------------------------------------------------------------------------------------------------
For Three Months Ended
November 30, 2003 November 30, 2002
$ $
- ---------------------------------------------------------------------------------------------------
External revenue
Systems Integration 8,544,115 6,083,993
- ---------------------------------------------------------------------------------------------------
8,544,115 6,083,993
- ---------------------------------------------------------------------------------------------------
Operating profit (loss)
Systems Integration (157,541) (669,884)
Corporate (241,194) (829,164)
- ---------------------------------------------------------------------------------------------------
(398,735) (1,499,048)
- ---------------------------------------------------------------------------------------------------
Net income (loss)
Systems Integration (251,165) (764,862)
Corporate (489,855) (1,574,755)
Discontinued operations 422,051 1,368,641
- ---------------------------------------------------------------------------------------------------
(318,969) (970,976)
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
As at
November 30, 2003 November 30, 2002
$ $
- ---------------------------------------------------------------------------------------------------
Total assets
Systems Integration 5,354,543 3,839,986
Corporate 1,824,989 1,721,539
Discontinued operations 870,358 3,156,415
- ---------------------------------------------------------------------------------------------------
8,049,890 8,717,940
- ---------------------------------------------------------------------------------------------------
7
NOTE 5. EARNINGS PER SHARE
Earnings per share were calculated in accordance with Statement of
Financial Accounting Standards No. 128. The following table sets forth the
computation of basic and diluted earnings per share for the three months ended
November 30, 2003 and November 30, 2002:
- -----------------------------------------------------------------------------------------------------------
For Three Months Ended
November 30, 2003 November 30, 2002
$ $
- -----------------------------------------------------------------------------------------------------------
Numerator:
Net loss (numerator for basic and diluted loss per share) from
continuing operations (741,020) (2,339,617)
Net income (numerator for basic and diluted loss per
share) from discontinued operations 422,051 1,368,641
- -----------------------------------------------------------------------------------------------------------
Net loss (numerator for basic and diluted loss per (318,969) (970,976)
share)
===========================================================================================================
Denominator for basic and diluted loss per share
- -adjusted weighted average number of shares and 14,218,487 9,028,239
assumed conversions
===========================================================================================================
Basic and diluted loss per share from continuing (0.05) (0.26)
operations
Basic and diluted loss per share from discontinued 0.03 0.15
operations
- -----------------------------------------------------------------------------------------------------------
Net loss per share (0.02) (0.11)
===========================================================================================================
NOTE 6. SUBSEQUENT EVENTS
[a] Sale of Buildings and Land
During the fiscal year ended August 31, 2003, we owned an approximately
25,000 square foot parcel of land, located at 14 Meteor Drive in Toronto,
Ontario, on which stands a 12,500 square foot, one story building. On December
19, 2003, we sold this land and building to an unrelated third party for
approximately $730,000 and recorded a gain on the sale of approximately
$100,000.
During the fiscal year ended August 31, 2003, we owned an approximately
29,000 square foot parcel of land, located at 10 Meteor Drive, Toronto, Ontario,
on which stands a 14,000 square foot, two story building. We sold this land and
building to an unrelated party on March 7, 2004 for approximately $710,000. The
Company anticipates a gain of approximately $70,000.
[b] Logicorp Advances
During 2003, B.O.T.B., an affiliated company, advanced Logicorp Data
Systems $820,000. The advance is due on demand and did not carry a stated
interest rate. Due to its long-term nature, the Company has imputed interest on
the advance at a rate of 9%.
[c] Resignation of Stephen McDermott (CEO)
Effective April 28, 2004, Stephen McDermott resigned his posts of Chief
Executive Officer and Chairman of the Board. David Bolink, current Board Member
has been appointed Chief Executive Officer and Chairman of the Board.
8
[d] Sale of Logicorp
Effective August 8, 2004, the Company's previously wholly-owned
subsidiaries, Logicorp Data Systems Inc., and Logicorp Service Group Inc.
(together, "Logicorp") issued common shares to NewMarket Technologies
("NewMarket"), a publicly-traded company for US$2.1 million, such that NewMarket
holds 51% of the outstanding equity securities of Logicorp. In exchange for 51%
of these subsidiaries, NewMarket will pay Logicorp $1.1 million in cash at
closing. An additional $1.0 million will be paid to Logicorp according to the
terms of a $1.0 million, 24-month promissory note. As a result of this
transaction, the Company holds the remaining 49% of the outstanding shares of
Logicorp.
Twelve (12) months following the first anniversary of the purchase of
the 51% interest, if Logicorp has achieved annual sales of at least $18,000,000
with at least a breakeven profit, Chell Group will have an option to require
NewMarket to acquire the remaining 49% of the sellers remaining stock for a
purchase price of $1,900,000 to be paid in NewMarket stock with piggyback
registration rights. NewMarket will have an equal right to require the sale of
Chell Group's remaining 49% stock position in Logicorp under the same
performance conditions.
[e]1109822 Alberta Inc.
Subsequent to year end, on May 26, 2004, the Company founded a new
Canadian subsidiary corporation, 1109822 Alberta Ltd. This wholly-owned
subsidiary was created to act as a holding company for investments in various
sectors, including electronic payment processing. 1109822 Alberta Ltd. has
purchased 33 Units of a Canadian limited partnership, Tech Income Limited
Partnership 1 ("Tech Income") for $495,000 (approximately US$390,000 at current
exchange rates). Tech Income was founded in early 2004 with the objective of
building products and services to compete in the growing online payment
processing industry. Tech Income is currently carrying on business as "Broker
Payment Systems" or "BPS". This is an electronic payment transfer system which
facilitates payments and transfers of funds securely and in real time to and
from equity brokerage firms for investing clients. BPS is currently marketing
this system in the United States. Management of the Company (and its subsidiary)
believes that the Chell Group can better profit from the expected growth in this
sector by pooling resources with Tech Income (and its existing product offering)
rather than by moving into this area alone. The most recent information provided
to us by Tech Income (as at September 15, 2004) shows that 1109822 Alberta Ltd.
holds approximately 32% of Tech Income's issued and outstanding units. This
position may be diluted as Tech Income continues to sell units to other
investors. The Company expects to account for this under the equity method of
accounting.
Broker Payment Management Inc., which works with Tech Income in
distributing the BPS products and services, has been invested in directly by the
Company ($495,000 was advanced on June 18, 2004). Chell Group currently (as at
September 15, 2004) holds approximately 19% of Broker Payment Management Inc.'s
equity shares. The Company expects to account for this under the cost method of
accounting.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Management is responsible for preparing the Company's consolidated
financial statements and related information that appears in this Form 10-Q.
Management believes that the consolidated financial statements fairly reflect
the form and substance of transactions and reasonably present the Company's
consolidated financial condition and results of operations in conformity with
accounting principles generally accepted in the United States of America
("GAAP"). Management has included in the Company's consolidated financial
statements amounts that are based on estimates and judgments, which it believes
are reasonable under the circumstances. The Company maintains a system of
internal accounting policies, procedures and controls intended to provide
reasonable assurance, at the appropriate cost, that transactions are executed in
accordance with the Company's authorization and are properly recorded and
reported in the consolidated financial statements, and that assets are
adequately safeguarded.
The Company's operations are primarily conducted through its 100% owned
subsidiaries: Logicorp Data Systems Ltd. ("LDS"), and Logicorp Service Group
Ltd., ("LSG") and LDS wholly-owned subsidiary eTelligent Solutions Inc.
("eTelligent").
The following discussion addresses the financial condition and results
of operations of the Company. This discussion should be read in conjunction with
the Company's Annual Report on Form 10-K for the fiscal year ended August 31,
2003 and with the Company's unaudited consolidated interim financial statements
as of November 30, 2003 and for the three month period ended November 30, 2003
and 2002 contained herein.
Results for any interim periods are not necessarily indicative of
results for any full year.
CORPORATE BACKGROUND
We are engaged in the business of providing interactive entertainment
services and systems integration services. Our core businesses are the systems
integration services provided by our Logicorp Data Systems Ltd. subsidiary and
the interactive entertainment services provided by our NTN Interactive Network
subsidiary.
As of November 30, 2003, we had a working capital deficit of $22,613,095
and an accumulated deficit of $51,769,952. We generated revenues of $8,544,115
for the 2004 First Fiscal Quarter and incurred a net loss of $318,969. In
addition, during the 2004 First Fiscal Quarter, net cash provided by operating
activities was $377,098.
We are in a transitional stage of operations and, as a result, the
relationships between revenue, cost of revenue, and operating expenses reflected
in the financial information included in this annual file do not represent
future expected financial relationships. Accordingly, we believe that, at our
current stage of operations period-to-period comparisons of results of
operations are not meaningful.
PLAN OF OPERATIONS
Our business strategy is to divest ourselves of non-core operating and
wind up all non-operating companies. While at the same time refocusing our
energies in our core companies and bring these operations to profitable
operations. Our core operations are the systems integration segment companies.
We will be bringing our corporate entity current with all of its filings and
will begin to petition for market status. While all the time looking for new
opportunities that may arise in order to increase our value and profitability.
10
We expect our general and administrative costs to increase in future
periods due to our operating as a public company whereby we will incur added
costs for filing fees, increased professional services and insurance costs.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED NOVEMBER 30, 2003 COMPARED TO
THE THREE MONTHS ENDED NOVEMBER 30, 2002.
The Company's total revenues for the 2004 First Fiscal Quarter were
$8,544,115, compared to $6,083,993 for the 2003 First Fiscal Quarter, an
increase of $2,460,122 or 40.4%. eTelligent was purchased on June 1, 2002, so
there are no comparative financials for the 2003 First Fiscal Quarter.
eTelligent's total revenue for the 2004 First Fiscal Quarter was $538,887 or
21.9% of the total increase. Like for like revenues increased $1,921,235 or
31.6%. Logicorp experience stronger sales in the 2004 First Fiscal Quarter than
it did in the 2003 First Fiscal Quarter.
Total cost of sales for the 2004 First Fiscal Quarter were $6,693,361
compared to $5,279,376 for the 2003 First Fiscal Quarter, and increase of
$1,413,982 or 26.8%. The decrease is consummate with the decreased level of
sales. eTelligent was purchased on June 1, 2002, so there are no comparative
financials for the 2003 First Fiscal Quarter. eTelligent's total revenue for the
2004 First Fiscal Quarter was $216,225 or 15.3% of the total increase. Like for
like cost of sales increased $1,197,757 or 22.7%. Logicorp experience stronger
sales in the 2004 First Fiscal Quarter than it did in the 2003 First Fiscal
Quarter.
Total selling, general and administrative expenses for the 2004 First
Fiscal Quarter were $2,059,616, compared to $1,992,178 for the 2003 First Fiscal
Quarter, an increase of $67,438 or 3.4%. eTelligent was purchased on June 1,
2002, so there are no comparative financials for the 2003 First Fiscal Quarter.
eTelligent's total selling, general and administrative expenses for the 2004
First Fiscal Quarter were $322,017. Like for like selling, general and
administrative expenses decreased $254,579 or 12.8%. The decrease was the result
of decreased staffing levels and lower legal and accounting fees.
Depreciation and amortization for the 2004 First Fiscal Quarter were
$189,873, compared to $311,487 for the 2003 First Fiscal Quarter, a decrease of
$121,614 or 39.0%. The decrease results from some assets becoming fully
depreciated.
Interest and bank charges for the 2004 First Fiscal Quarter were
$342,285, compared to $589,700 for the 2003 First Fiscal Quarter, a decrease of
$247,415 or 42.0%. The decrease results from the complete amortization of the
discount on convertible debt. In the 2004 First Fiscal Quarter, there was only
one month amortization compared to three in the 2003 First Fiscal Quarter.
There was a no loss on the disposal of investments/property in the 2004
First Fiscal Quarter compared to a loss of $248,587 for the 2003 First Fiscal
Quarter. The loss in the 2003 First Fiscal Quarter resulted from the loss on the
sale of a building and property.
There was no provision for income taxes recorded in the 2004 First
Fiscal Quarter compared with a $2,282 provision for income taxes for the 2003
First Fiscal Quarter. As the tax provision is based upon the individual
companies' taxable income, a minimal provision was incurred, as not all the
companies are in a taxable position. There are no deferred tax assets recorded
by the Company.
As a result of all of the above, the net loss from continuing
operations for the 2004 First Fiscal Quarter was $741,020, compared to net loss
of $2,339,617 for the 2003 First Fiscal Quarter, a decrease of $1,598,597. The
decrease was primarily the result of increased sales.
The gain from discontinued operations for the 2004 First Fiscal Quarter
was $422,051, compared to gain of $1,368,641 for the 2003 First Fiscal Quarter,
a decrease of $946,590. In the 2003 First Fiscal Quarter there was a gain on the
disposal of debt and there is no corresponding gain in the 2004 First Fiscal
Quarter. In addition, GalaVu was sold in April 2003 and thus there is no loss
($381,486 for the 2003 First Fiscal Quarter) associated with this discontinued
subsidiary for the 2004 First Fiscal Quarter. The discontinued subsidiary of NTN
experienced a net income of $422,051 for the 2004 First Fiscal Quarter, compared
to a loss of $301,088 for the 2003 First Fiscal Quarter.
11
As a result of all of the above, the net loss for the 2004 First Fiscal
Quarter was $318,969, compared to net loss of $970,976 for the 2003 First Fiscal
Quarter, a decrease of $652,007. The 2004 First Fiscal Quarter reduced loss
resulted primarily from increased sales levels offset by a decrease in the gains
from discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital deficit changed from $23,191,579 at
August 31, 2003 to $22,613,095 at November 30, 2003, a decrease of $578,484.
For the 2004 First Fiscal Quarter, the Company had a net increase of
cash of $130,763 compared to a net decrease of $80,868 in the 2003 First Fiscal
Quarter.
Cash used in operating activities for the 2004 First Fiscal Quarter was
$377,098 compared to $1,658,567provided by operating activities in the 2003
First Fiscal Quarter. In 2004, the major items that contributed to cash being
used in operating activities were as follows: increase in accounts receivable of
$916,440, increase of other assets of $53,396 and decrease in deferred revenue.
The major items that contributed to cash being provided by operating activities
were as follows: net loss with non-cash expenses added back of $77,633, the
increase in accounts payable and accrued liabilities of $1,093,863 and the
increase accrued interest of $122,977. In fiscal 2003, the major items that
contributed to cash being provided by operating activities were as follows: the
decrease in accounts receivable of $2,690,524 and the increase in accrued
interest payable of $353,650. The major items that contributed to cash being
used in operating activities were as follows: the increase in accounts payable
and accrued liabilities of $598,619, an increase in inventory of $125,671 and
the decrease in accrued revenue of $326,111.
Cash used in investing activities in the 2004 First Fiscal Quarter was
$49,464 compared to the $220,983 provide by investing activities in the 2003
First Fiscal Quarter, a decrease of $270,447. The decrease was primarily the
result no proceeds from the disposal of property and equipment of $265,289 in
the 2004 First Fiscal Quarter.
Cash used in financing activities in the 2004 First Fiscal Quarter was
$9,595, compared to the $1,666,236 provided in the 2003 First Fiscal Quarter.
Our business plan for 2004 contemplates obtaining additional working
capital through refinancings or restructurings of our existing loan agreements,
reducing operating overhead (which has already begun through workforce
consolidation), and the possible sale of some of our existing subsidiaries. Our
management is of the opinion that they will be able to obtain enough working
capital and that together with funds provided by operations, there will be
sufficient working capital for the Company's requirements.
CAUTIONARY STATEMENTS RELEVANT TO FORWARD-LOOKING INFORMATION FOR THE PURPOSE OF
SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
The Company and its representatives may, from time to time, make
written or oral forward-looking statements with respect to their current views
and estimates of future economic circumstances, industry conditions, company
performance and financial results. These forward-looking statements are subject
to a number of factors and uncertainties, which could cause the Company's actual
results and experiences to differ materially from the anticipated results and
expectations, expressed in such forward-looking statements. The Company cautions
readers not to place undue reliance on any forward-looking statements, which
speak only as of the date made. Among the factors that may affect the operating
results of the Company are the following: (i) fluctuations in the cost and
availability of raw materials, such as feed grain costs in relation to
historical levels; (ii) market conditions for finished products, including the
supply and pricing of alternative proteins which may impact the Company's
pricing power; (iii) risks associated with leverage, including cost increases
attributable to rising interest rates; (iv) changes in regulations and laws,
including changes in accounting standards, environmental laws, occupational and
labor laws, health and safety regulations, and currency fluctuations; and (v)
the effect of, or changes in, general economic conditions.
12
This management discussion and analysis of the financial condition and
results of operations of the Company may include certain forward-looking
statements, within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
including, without limitation, statements with respect to anticipated future
operations and financial performance, growth and acquisition opportunity and
other similar forecasts and statements of expectation. Words such as expects,
anticipates, intends, plans, believes, seeks, estimates, should and variations
of those words and similar expressions are intended to identify these
forward-looking statements. Forward-looking statements made by the Company and
its management are based on estimates, projections, beliefs and assumptions of
management at the time of such statements and are not guarantees of future
performance. The Company disclaims any obligations to update or review any
forward-looking statements based on the occurrence of future events, the receipt
of new information or otherwise.
Actual future performance, outcomes and results may differ materially
from those expressed in forward-looking statements made by the Company and its
management as a result of a number of risks, uncertainties and assumptions.
Representative examples of these factors include, without limitation, general
industrial and economic conditions; cost of capital and capital requirements;
shifts in customer demands; changes in the continued availability of financial
amounts and the terms necessary to support the Company's future business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Inflation
The rate of inflation has had little impact on the Company's operations
or financial position during the three months ended November 30, 2003 and
November 30, 2002 and inflation is not expected to have a significant impact on
the Company's operations or financial position during the 2004 Fiscal Year.
Foreign Exchange Risk
The Company pays a number of its suppliers, including its licensor and
principal supplier, NTN Communications, Inc., in US dollars, in addition the
Company holds a large amount of US dollar debt, and fluctuations in the value of
the Canadian dollar against the US dollar will have an impact on its gross
profit as well as its net income. If the value of the Canadian dollar falls
against the US dollar, the cost of sales of the Company will increase thereby
reducing its gross profit and net income. Conversely, if the value of the
Canadian dollar rises against the US dollar, its gross profit and net income
will increase.
As of November 30, 2003, the Company had outstanding indebtedness of
approximately $5.3 million denominated in U.S. dollars. The potential foreign
exchange loss resulting from a hypothetical 10% increase for the three months
ended November 30, 2003 in the devaluation of the Cdn/US dollar exchange rate
would be approximately $530,000. This loss would be reflected in the balance
sheet as increases in the principal amount of its dollar-denominated
indebtedness and in the income statement as an increase in foreign exchange
losses, reflecting the increased cost of servicing dollar-denominated
indebtedness. This analysis does not take into account the positive effect that
the hypothetical increase would have on accounts receivable and other assets
denominated in U.S. dollars.
13
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this quarterly report, an
evaluation was performed under the supervision and with the participation of the
Company's management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Section 13a-15(e) and
15d-15(3) of the Securities Exchange Act of 1934, as amended). Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the design and operation of these disclosure controls and procedures were
effective.
There have been no significant changes in the Company's internal
controls over financial reporting that occurred during the Company's second
fiscal quarter that has materially affected or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
(a) Exhibits
The following list sets forth the applicable exhibits (numbered in
accordance with Item 601 of Regulation S-K) required to be filed with this
Quarterly Report on Form 10-Q:
14
Exhibit
Number Description of Exhibit Location
------ ---------------------- --------
2.1 Stock Purchase Agreement, dated October 1, 1996, among Connolly-Daw
Holdings Inc., 1199846 Ontario Ltd., Douglas Connolly, Wendy Connolly and
NTN Interactive Network Inc., minus Schedules thereto.................... +1, Exh. 10.1
3.1 Articles of Incorporation, as amended to date p. 59
3.2 By-Laws, as amended to date p. 62
4.1 Specimen Stock Certificate p. 71
10.1 License Agreement, dated March 23, 1990, between NTN Communications, Inc.
and NTN Interactive Network Inc. +2, Exh. 10.9
10.2 Stock Purchase Agreement, dated as of October 4, 1994, between NTN Canada
and NetStar Enterprises Inc. (formerly, Labatt Communications Inc.)...... +3, Exh. A
10.3 Option, dated as of October 4, 1994, registered in the name of NetStar
Enterprises Inc. (formerly, Labatt Communications Inc)................... +3, Exh. B
10.4 Designation Agreement dated as of October 4, 1994, among NTN Canada,
Inc., NTN Interactive Network Inc. and NetStar Enterprises Inc. (formerly
Labatt Communications Inc.) +3, Exh. C
10.5 Registration Rights Agreement, dated as of October 4, 1994, between NTN
Canada and NetStar Enterprises Inc. (formerly, Labatt Communications Inc.) +3, Exh. D
10.6 Promissory Note of NTN Interactive Network Inc. registered in the name of
Connolly-Daw Holdings, Inc. +1, Exh. 10.2
10.7 Promissory Note of NTN Interactive Network Inc., registered in the name
of 1199846 Ontario Ltd. +1, Exh. 10.3
10.8 Option Agreement, dated October 1, 1996, among Connolly-Daw Holdings
Inc., NTN Interactive Network Inc. and NTN Canada, Inc................... +1, Exh. 10.5
10.9 Option Agreement, dated October 1, 1996, among 1199846 Ontario Ltd., NTN
Interactive Network Inc. and NTN Canada, Inc. +1, Exh. 10.6
10.10 Registration Rights Agreement, dated October 1, 1996, among NTN Canada,
Inc., Connolly-Daw Holdings Inc. and 1199846 Ontario Ltd................. +1, Exh. 10.4
10.11 Employment Agreement dated as of August 31, 1994, between NTN Interactive
Network Inc. and Peter Rona +4, Exh. 10.11
10.12 Management Agreement dated October 1, 1996, between Magic Lantern
Communications Ltd. and Connolly-Daw Holdings Inc. +4, Exh. 10.12
10.13 Employment Agreement dated October 1, 1996, between Magic Lantern
Communications Ltd. and Douglas Connolly +4, Exh. 10.13
10.14 Employment Agreement dated October 1, 1996, between Magic Lantern
Communications Ltd. and Wendy Connolly +4, Exh. 10.14
10.15 Asset Purchase Agreement, dated September 10, 1999, by and between
1373224 Ontario Limited, Networks North Inc. and Arthur Andersen Inc., to
acquire the property and assets of GalaVu Entertainment Inc., from the
person appointed by the court of competent jurisdiction as the receiver
or receiver and manager of the property, assets and undertaking of
GalaVu. +5, Exh. 10.15
10.16 Promissory Note, dated September 10, 1999, by and between 1373224 Ontario
Limited, as Debtor, and the Holder, as Creditor. +5, Exh. 10.16
10.17 General Security Agreement, dated September 10, 1999, by and between
1373224 Ontario Limited, to acquire the property and assets of GalaVu
Entertainment Inc., from the person appointed by the court of competent
jurisdiction as the receiver or receiver and manager of the property,
assets and undertaking of GalaVu. +5, Exh. 10.17
10.18 Securities Pledge Agreement, dated September 10, 1999, by and between
1373224 Ontario Limited to acquire the property and assets of GalaVu
Entertainment Inc., from the person appointed by the court of competent
jurisdiction as the receiver or receiver and manager of the property,
assets and undertaking of GalaVu. +5, Exh. 10.18
10.19 Certificate to the Escrow Agent certifying that the conditions of Closing
have been satisfied or waived. +5, Exh. 10.19
10.20 Certificate to the Escrow Agent certifying that the conditions of Closing
have not been satisfied or waived. +5, Exh. 10.20
15
10.21 Occupancy and Indemnity Agreement, dated September 10, 1999, by and
between 1373224 Ontario Limited to acquire the property and assets of
GalaVu Entertainment Inc., from the person appointed by the court of
competent jurisdiction as the receiver or receiver and manager of the
property, assets and undertaking of GalaVu. +5, Exh. 10.21
10.22 Order of the Ontario Superior Court of Justice, dated September, 1999,
approving the transaction contemplated herein, and vesting in the
Purchaser the right, title and interest of GalaVu and the Receiver, if
any, in and to the Purchased Assets, free and clear of the right, title
and interest of any other person other than Permitted Encumbrances.......
+5, Exh. 10.22
10.23 Bill of Sale, dated September 13, 1999, by and between 1373224 Ontario
Limited to acquire the property and assets of GalaVu Entertainment Inc.,
from the person appointed by the court of competent jurisdiction as the
receiver or receiver and manager of the property, assets and undertaking
of GalaVu. +5, Exh. 10.23
10.24 Covenant of Networks North Inc. for valuable consideration to allot and
issue and pay to the Receiver 100,000 common shares in accordance with
the Purchase Agreement date September 10, 1999, between 1373224 Ontario
Limited and the Receiver +5, Exh. 10.24
10.25 Agreement of Purchase and Sale dated August 4, 2000 by and among Networks
North Inc., Networks North Acquisition Corp., Chell.com Ltd. and Cameron
Chell . +6, Exh. A
10.26 Valuation of Chell.com Ltd. as of May 31, 2000 by Stanford Keene......... +6, Exh. B.
10.27 Share Purchase Agreement by and among Chell Group Corporation, Chell
Merchant Capital Group, Inc., Melanie Johannesen, Randy Baxandall, Morris
Chynoweth, Elaine Chynoweth, the Johannesen Family Trust, the Baxandall
Family Trust, the Merc Family Trust, Logicorp Data Systems Ltd., 123557
Alberta Ltd., Logicorp Service Group Ltd. and 591360 Alberta
Ltd................................................................ +7, Exhibit 2.1
10.28 Share Purchase Agreement, dated as of April 25, 2003 between DVOD
Networks Inc., and Chell Group Corporation, minus schedules thereto;
10.29 Assignment of Debt and Security, dated April 25, 2003 between Chell Group
Corporation and DVOD Networks Inc;
10.30 Assignment of Debt and Security, dated April 25, 2003 among NTN
Interactive Network Inc., DVOD Networks Inc and GalaVu Entertainment
Network Inc.;
10.31 Form of Assignment of Debt and Security, dated April 25, 2003 among
488605 Ontario Limited, Ruth Margel and DVOD Networks Inc., minus
schedules thereto.
10.32 Stock Purchase Agreement dated as of August 2, 2004, by and among +5, Exh. 10.25
NewMarket Technology, Inc., the Registrant and Logicorp Data Systems, Ltd.
10.33 Bonus Agreement entered into August 2, 2004, by and between the +5, Exh. 10.26
Registrant and NewMarket Technology.
10.34 Form of Promissory Note issued by NewMarket Technology, Inc. to Logicorp +5, Exh. 10.27
Data Systems, Ltd.
10.35 Unanimous Shareholders Agreement dated August 2, 2004 by and among +5, Exh. 10.28
NewMarket Technology, Inc., the Registrant and Logicorp Data Systems, Ltd.
10.36 Registration Rights Agreement dated as of August 2, 2004, is entered into +5, Exh. 10.29
by and among NewMarket Technology, Inc., and the Registrant......
21 List of Subsidiaries p. 19
16
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
- ----------------
+1 All Exhibits so indicated are incorporated herein by reference to the
exhibit listed above in the Company's Current Report on Form 8-K (Date
of Report: October 2, 1996) (File No. 0-18066), filed on October 17,
1996.
+2 All Exhibits so indicated are incorporated herein by reference to the
exhibit listed above in the Annual Report on Form 10-K of NTN
Communications, Inc., for its fiscal year ended December 31, 1990)
(File No. 2-91761-C), filed on April 1, 1991.
+3 All Exhibits so indicated are incorporated herein by reference to the
exhibit listed above in the Company's Current Report on Form 8-K (Date
of Report: October 4, 1994) (File No. 0-18066), filed on October 18,
1994.
+4 All Exhibits so indicated are incorporated herein by reference to the
exhibit listed above in the Company's Annual Report on Form 10-K (Date
of Report: November 27, 1996) (File No. 0-18066), filed on December 16,
1996.
+5 All Exhibits so indicated are incorporated herein by reference to the
exhibit listed above in the Company's 8-K (Date of Report: September
13, 1997) (File No. 0-18066), filed on December 16, 1996.
+6 All Exhibits so indicated are incorporated herein by reference to the
exhibit number listed above in the Definitive Proxy Statement on Form
14A of the Registrant (File No. 000-18066), filed with the Securities
and Exchange Commission on August 8, 2000.
+7 All Exhibits so indicated are incorporated herein by reference to the
exhibit number listed above in the Company's Current Report on Form 8-K
(Date of Report: December 13, 2001) (File No. 0-18066), filed on
December 28, 2001.
++ Filed electronically pursuant to Item 401 of Regulation S-T.
+ Incorporated by reference. See Exhibit Index.
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CHELL GROUP CORPORATION
By /s/ David Bolink
Dated: November 30, 2004 ---------------------------------------
David Bolink
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ David Bolink
Dated: November 30, 2004 -------------------------------------------
David Bolink
Chief Executive Officer, Chief Accounting
Officer