NEWS*** SEC FILING ***10KSB/A***
Form 10KSB/A for COMPETITIVE COMPANIES INC
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10-May-2007
Annual Report
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULT OF OPERATIONS.
CURRENT OPERATIONS
CCI, Competitive Communications and CCI Residential Services (collectively referred to as the "Company") provide telephone, cable television, long distance/inter - exchange, and dial up and high-speed Internet connections and e-mail services, mainly to customers who live in multi-tenant residential buildings. The Company's operations are located in Riverside, California and substantially all of its customers are California residents.
On May 5, 2005, the Company merged with CA Networks, Inc. ("CAN"), which was a development stage enterprise in the process of developing a business model in the same industry as CCI. CAN was formed under the laws of the state of Wyoming on January 14, 2004. The combined companies maintained the name of CCI.
We provide telecommunications services primarily to residents of apartment complexes, and other users, including business and residential, in primary and secondary metropolitan areas in California, Alabama, and Mississippi. We offer a set of telecommunications products and services including local telephone services, domestic and international long distance services and enhanced voice, data and internet services. We generally price our services at a discount of 5% to 10% below the prices charged by traditional local phone companies. As of the date of this filing, we are operational in 10 apartment complexes in California, Mississippi, and Alabama and use 8 of our own telephone switches.
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OVERVIEW AND OUTLOOK
Recent developments in our industry, such as court decisions concerning access fees, increase use of cell phones by apartment dwellers and the like, have caused us to reevaluate our business plan. We have decided to focus on improving our VoIP (Voice over Internet Protocol) services by moving up our testing to the end of the first quarter of 2006. We began the launch of the VoIP to existing customers in the on May 1, 2006 at a complex in San Ramon, California. We further plan to convert all existing customers and new customers to VoIP by December 1, 2006. Once we have performed the testing and our installation is complete, we believe we will be able to offer more competitive prices for our services. Also we plan to bundle our services of DSL and cable television, which should increase our margins associated with these services.
Results of Operations for the Years Ended December 31, 2005 and 2004.
The following table is a summary of our operations for the year ended December
31, 2005 as compared to the year ended December 31, 2004.
For the Years Ended December 31, Increase / (Decrease)
2005 2004 $ %
Revenues $ 773,230 $ - $ 773,230 -%
Cost of sales 686,194 - 686,194 -%
Gross Profit 87,036 - 87,036 -%
Expenses
General and Administrative 396,147 223,896 172,251 77%
Salaries and Wages 245,619 - 245,619 -
Consulting Fees 376,402 - 376,402 -
Depreciation 40,740 428 40,312 942%
Bad Debt 34,824 - 34,824 -
Impairment of goodwill 778,000 - 778,000 -
Impairment of Operating Assets 44,376 - 44,376 -
Total operating expenses 1,916,108 224,324 1,691,784 754%
Net operating income (loss) (1,829,072) (224,324) (1,604,748) -
Net (Loss) $ (1,996,556) $ (224,324) $ 1,772,232 790%
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Revenues:
Revenues for the years ended December 31, 2005 were $773,230 compared to $-0- in the year ended December 31, 2004. This resulting increase in revenues was attributed to our acquisition of Competitive Companies, Inc.
Cost of sales:
Cost of sales for the year ended December 31, 2005 was $686,194 compared to $-0- for the year ended December 31, 2004. Our acquisition of an operational company has resulted in additional costs not previously incurred as a development stage company.
Gross profit
Gross profit for the year ended December 31, 2005 was $87,036, an increase of $87,036 as compared to $-0- for the year ended December 31, 2004. Gross profit as a percentage of revenue for the years ended December 31, 2005 was 11%. We anticipate a similar gross profit margin on a go-forward basis with the acquisition and commencement of operations.
General and Administrative expenses:
General and administrative expenses were $396,147 for the year ended December 31, 2005 versus $223,896 for the year ended December 31, 2004, which resulted in an increase of $172,251 or 77%. As a development stage company our general and administrative expenses were limited to those required for development towards an operational enterprise. With the acquisition occurring in during the year ended December 31, 2005, our general and administrative expenses have increased due to the additional location and operations.
Net Operating Income (Loss):
Net operating loss for the year ended December 31, 2005 was $1,829,072 as compared to a net operating income of $224,324 for the fiscal 2004. This increase of $1,604,748 from 2004 was a result of additional operational expenses incurred due to the business acquisition completed in 2005 as well as the impairment of current operating assets.
Net Income (Loss):
The net loss for the year ended December 31, 2005 was $1,966,556 versus a net loss of $224,324 for the year ended December 31, 2004, a change in net loss of $1,772,232.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes total assets, accumulated deficit, stockholders' equity and working capital at December 31, 2005.
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December 31, 2005
Current Assets $ 120,906
Current Liabilities $ 663,654
Accumulated (Deficit) $ (2,152,812)
Stockholders' (Deficit) $ (366,727)
Working Capital (Deficit) $ (542,748)
We have incurred losses since inception and may incur future losses. We are in default on our major debt obligations. Our current financial condition raises substantial doubt about our ability to continue as a going concern.
In addition, we are in default on a $207,450 note payable to GST due April 28, 2004. The note is secured by the telecommunications equipment purchased with the proceeds from the note. GST has filed for bankruptcy and is winding up its business affairs and a new creditor has not been assigned.
We are also in default on a note payable to Frontier Communications Services, Inc., bearing interest at 10% and requiring monthly principal and interest payments of $3,000. Frontier is currently in bankruptcy and the new creditor has not yet been assigned. This note was originally due on March 15, 2003, however due to the aforementioned, the required monthly payments have not been made since December 31, 2002. The note is secured by the telecommunications equipment purchased with the proceeds from the note. We also have debt of $34,130 to a related party.
Going Concern
The financial statements included in this filing have been prepared in conformity with generally accepted accounting principles that contemplate our continuance as a going concern. Our ability to continue as a going concern is dependent on our ability to raise funds to finance ongoing operations and repay debt; however we may not be able to raise sufficient funds to do so. Our independent auditors have raised substantial doubt about our ability to continue as a going concern over the next twelve months. Our poor financial condition has led us to revise our business plan.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results or operations, liquidity, capital expenditures or capital resources that is material to investors.
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Application of Critical Accounting Policies and Pronouncements
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions. While there are a number of significant accounting policies affecting our consolidated financial statements; we believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments:
Recent Issued Accounting Pronouncements
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections" ("SFAS No. 154") which supersedes APB Opinion No. 20, "Accounting Changes" and SFAS No. 3 "Reporting Accounting Changes in Interim Financial Statements". SFAS No. 154 changes the requirements for accounting for and reporting of changes in accounting principle. The statement requires the retroactive application to prior periods' financial statements of changes in accounting principles, unless it is impracticable to determine either the period specific effects or the cumulative effect of the change. SFAS No. 154 does not change the guidance for reporting the correction of an error in previously issued financial statements or the change in an accounting estimate. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not believe SFAS No. 154 will have an immediate significant impact on its financial position or results of operations.
FACTORS THAT MAY AFFECT OUR RESULTS OF OPERATION
RISKS RELATING WITH OUR BUSINESS AND MARKETPLACE
We have incurred losses since inception and may incur future losses. In addition, we are in default on major debt obligations and our poor financial condition raises substantial doubt about our ability to continue as a going concern.
Our net operating losses for the year ended December 31, 2005 totaled $1,829,072. We have never operated at a profit. As of December 31, 2005, we had a stockholders' deficit of $366,727 and only had $5,279 in cash available to finance our operations and a working capital deficit of $542,748.
In addition, we are in default on a $207,450 note payable to GST due April 28, 2004. The note is secured by the telecommunications equipment purchased with the proceeds from the note. We are also in default on a note payable to Frontier Communications Services, Inc., bearing interest at 10% and requiring monthly principal and interest payments of $3,000. Frontier is currently in bankruptcy and the new creditor has not yet been assigned. This note was originally
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due on March 15, 2003, however due to the aforementioned, the required monthly payments have not been made since December 31, 2002. The note is secured by the telecommunications equipment purchased with the proceeds from the note.
Our ability to continue as a going concern is dependent on our ability to raise funds to finance ongoing operations and repay debt; however we may not be able to raise sufficient funds to do so. Our independent auditors have indicated that there is substantial doubt about our ability to continue as a going concern over the next twelve months. Because of these factors, an investor cannot determine if and when we will become profitable and therefore runs the risk of losing their investment.
We have incurred substantial losses and expect to continue to incur losses for the foreseeable future.
For the last two fiscal years ended December 31, 2005 and 2004, we sustained net losses of $1,966,556 and $34,981, respectively. Capital requirements have been and will continue to be significant, and our cash requirements have exceeded cash flow from operations since inception. We are in need of additional capital to continue our operations and have been dependent on the proceeds of private placements of securities to satisfy working capital requirements. We will continue to be dependent upon the proceeds of future offerings or public offerings to fund development of products, short-term working capital requirements, marketing activities and to continue implementing the current business strategy. There can be no assurance that we will be able to raise the necessary capital to continue operations.
If we are unable to obtain additional funding, our business operations will be harmed and if we do obtain additional financing our then existing stockholders may suffer substantial dilution.
We will require additional funds to expand our operations. We anticipate that we will require up to approximately $750,000 to fund our continued operations for the next twelve months, depending on revenue from operations. Additional capital will be required to effectively support the operations and to otherwise implement our overall business strategy. There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all. The inability to obtain additional capital will restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we will likely be required to curtail our marketing and development plans and possibly cease our operations. Any additional equity financing may involve substantial dilution to our then existing stockholders.
Without realization of additional capital, it would be unlikely for us to continue as a going concern.
As a result of our deficiency in working capital at December 31, 2005 and other factors, our auditors have included an explanatory paragraph in their audit report regarding substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments as a result of this uncertainty. The going concern qualification may adversely impact our ability to raise the capital necessary for the continuation of operations.
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We may not be able to provide our products and services if we do not connect or continue to connect with the traditional carriers, our primary competitors.
As a competitive carrier, we must coordinate with traditional carriers so that we can provide local service to customers on a timely and competitive basis. The Telecommunications Act created incentives for regional Bell operating companies to cooperate with competitive carriers and permit access to their facilities by denying such companies the ability to provide in-region long distance services until they have satisfied statutory conditions designed to open their local markets to competition. The regional Bell operating companies in our markets are not yet permitted by the FCC to offer long distance services. These companies may not be accommodating once they are permitted to offer long distance service. Currently Verizon is permitted to offer both local and long distance service in some our mutual service areas, but we have not yet noticed any impact on our markets.
Many competitive carriers, including us, have experienced difficulties in working with traditional carriers with respect to initiating, connecting, and implementing the systems used by these competitive carriers to order and receive network elements and wholesale services and locating equipment in the offices of the traditional carriers.
If we cannot obtain the cooperation of a regional Bell operating company in a region, whether or not we have been authorized to offer long distance service, our ability to offer local services in such region on a timely and cost-effective basis will be harmed.
Competition from companies with already established marketing links and brand recognition to our potential customers may adversely affect our ability to introduce and market our products.
The telecommunications industry is highly competitive. Many of our current and potential competitors have financial, personnel and other resources, including brand name recognition, substantially greater than ours, as well as other competitive advantages over us. Certain competitors may be able to secure product from vendors on more favorable terms, devote greater resources to marketing and promotional campaigns, and adopt more aggressive pricing than we will. There can be no assurance we will be able to compete successfully against these competitors, which ultimately may have a materially adverse effect on our business, results of operations, financial condition and potential products in the future.
Because our principal competitors are also our suppliers, our revenues may be reduced.
In each of the markets we target, we will compete principally with the traditional local phone companies serving that area, such as SBC, BellSouth or Southwestern Bell. We must purchase the telecommunications services we offer from these or similar carriers. Our suppliers could charge less than we do which could reduce our revenues.
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RISKS FACTORS RELATING TO OUR COMMON STOCK
Our common stock could be deemed a low-priced "Penny" stock which could make it cumbersome for brokers and dealers to trade in our common stock, making the market for our common stock less liquid and negatively affecting the price of our stock.
In the event we are accepted for trading in the over-the-counter market, trading of our common stock may be subject to certain provisions of the Securities Exchange Act of 1934, commonly referred to as the "Penny Stock Rules" as defined in Rule 3a51-1. A penny stock is generally defined to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions. If our stock is deemed to be a penny stock, trading will be subject to additional sales practice requirements on broker-dealers. These require a broker-dealer to:
• Deliver to the customer, and obtain a written receipt for, a disclosure document;
• Disclose certain price information about the stock;
• Disclose the amount of compensation received by the broker-dealer or any associated person of the broker-dealer;
• Send monthly statements to customers with market and price information about the penny stock; and
• In some circumstances, approve the purchaser's account under certain standards and deliver written statements to the customer with information specified in the rules.
Consequently, penny stock rules may restrict the ability or willingness of broker-dealers to trade and/or maintain a market in our common stock. Also, prospective investors may not want to get involved with the additional administrative requirements, which may have a material adverse effect on the trading of our shares.
If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board which would limit the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.
Companies trading on the OTC Bulletin Board, such as us, must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board. More specifically, NASD has enacted Rule 6530, which determines eligibility of issuers quoted on the OTC Bulletin Board by requiring an issuer to be current in its filings with the Commission. Pursuant to Rule 6530(e), if we file our reports late with the Commission three times in a two-year period or our securities are removed from the OTC Bulletin Board for failure to timely file twice in a two-year period then we will be ineligible for quotation on the OTC Bulletin Board. Currently, this annual report will be considered late and our securities have been removed from the OTC Bulletin Board as we were unable to meet the filing grace period as defined under Rule 12b-25. Therefore, we must not have two more late filings or have our securities removed from the OTC Bulletin Board one more time within the next two years or we will be in jeopardy of being dequoted from the OTC Bulletin Board. As a result, the market
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liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.
Stocks traded on the bulletin board are usually thinly traded, highly volatile, have fewer market makers and are not followed by analysts; our stockholders may have greater difficulty in selling their shares when they want and for the price they want.
Investors may have greater difficulty in getting orders filled because it is anticipated that if our stock trades on a public market, it initially will trade on the over-the-counter bulletin board rather than on Nasdaq. Investors' orders may be filled at a price much different than expected when an order is placed. Trading activity in general is not conducted as efficiently and effectively on the OTC:BB as with Nasdaq-listed securities.
Investors must contact a broker dealer to trade bulletin board securities. Investors do not have direct access to the bulletin board service. For bulletin board securities, there only has to be one market maker.
Bulletin board transactions are conducted almost entirely manually. Because there are no automated systems for negotiating trades on the bulletin board, they are conducted via telephone. In times of heavy market volume, the limitations of this process may result in a significant increase in the time it takes to execute investor orders. Therefore, when investors place market orders
- an order to buy or sell a specific number of shares at the current market price - it is possible for the price of a stock to go up or down significantly during the lapse of time between placing a market order and execution of the order.
Furthermore, because bulletin board stocks are usually not followed by analysts, there may be lower trading volume than for Nasdaq-listed securities.
NASD sales practice requirements may also limit a stockholder's ability to buy and sell our stock.
In addition to the "penny stock" rules described above, the National Association of Securities Dealers (NASD) has adopted rules that require that, in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information. Under interpretations of these rules, the NASD believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The NASD requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
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