GRAND TOYS INTERNATIONAL INC - 10-Q Quarterly Report

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FORM 10-Q

Securities and Exchange Commission

Washington, D.C. 20549

(Mark One)

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2004

[ ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________.

Commission File No. 0-22372.

GRAND TOYS INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in its Charter)

Nevada

98-0163743

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization

Identification No.)

1710 Route Transcanadienne, Dorval, Quebec, Canada, H9P 1H7

(Address of principal executive offices)

(514) 685-2180

(Registrant’s telephone number, including Area Code)

(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 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 _____

Indicate the number of shares outstanding of each of the Issuer’s classes of common equity, as of August 11, 2004: 5,355,244

GRAND TOYS INTERNATIONAL, INC.


Index to Quarterly Report on Form 10 – Q
Filed with the Securities and Exchange Commission
Period ended June 30, 2004

ITEMS IN FORM 10 – Q	PAGE

Part I – Financial Information Item 1. Consolidated Financial Statements:

Consolidated Balance Sheets At June 30, 2004 (unaudited) and December 31, 2003	2-3
Consolidated Statements of Operations (unaudited) For The Three Month and Six Month Periods ended June 30, 2004 and 2003	4
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (unaudited) For the Six Month Periods ended June 30, 2004	5
Consolidated Statements of Cash Flows(unaudited) For The Six Month Periods ended June 30, 2004 and 2003	6

Notes to unaudited Consolidated Financial Statements	7-19

Item 2. Management’s Discussion and Analysis	20-31
Item 3. Quantitative and Qualitative Disclosures About Market Risk	31-32
Item 4. Controls and Procedures	32

Part II - Other Information

Item 1. Legal proceedings	32
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	32
Item 3. Defaults Upon Senior Securities	32
Item 4. Submission of Matters to a Vote of Security Holders	33
Item 5. Other Information	33
Item 6. Exhibits and Reports on Form 8-K	33

Signatures	34-35

Certifications	36-39

GRAND TOYS INTERNATIONAL, INC.

Part I. – Financial Information

Item 1. Consolidated Financial Statements

Consolidated Balance Sheets

		June 30, 2004		December 31, 2003
		(Unaudited)
Assets

Current assets:
Cash	$	757,196	$	1,487,318
Short-term deposit (note 14(c))		500,000		500,000
Accounts receivable (net of allowance for
doubtful accounts of $9,441; 2003 - $9,712)		2,093,977		1,598,907
Due from Playwell International Limited		1,744,017		804,252
Due from employees		4,011		771
Current portion of loan receivable (note 2)		302,894		161,447
Note receivable (note 9)		127,802		-
Inventory		2,049,408		1,682,298
Prepaid expenses (note 3)		474,105		367,288
Total current assets		8,053,410		6,602,281

Note receivable (note 9)		-		286,896

Loan receivable (note 2)		-		220,963

Equipment and leasehold improvements, net (note 4)		198,631		219,988


Other assets (note 5)		8,676		13,331



Total assets	$	8,260,717	$	7,343,459

GRAND TOYS INTERNATIONAL, INC.

Consolidated Balance Sheets

		June 30, 2004		December 31, 2003
		(Unaudited)
Liabilities and Stockholders' Equity

Current liabilities:
Bank indebtedness (note 6)	$	1,647,808	$	1,579,458
Trade accounts payable		1,172,734		1,047,390
Other accounts payable and accrued liabilities		363,274		217,567
Accrued compensation		55,654		111,085
Accrued legal expenses		153,362		151,711
Total current liabilities		3,392,832		3,107,211

Minority interest		100		100

Stockholders' equity:
Capital stock (note 7):
Voting common stock, $0.001 par value:
12,500,000 shares authorized,
5,355,244 shares issued and outstanding		5,355		5,355
Additional paid-in capital		22,749,791		22,750,518
Deficit		(17,249,667)		(17,968,179)
Accumulated other comprehensive income-
cumulative currency translation adjustment		(637,694)		(551,546)
		4,867,785		4,236,148

Commitments and contingencies (notes 13 and 14)

Total liabilities and stockholders' equity	$	8,260,717	$	7,343,459

See accompanying notes to unaudited consolidated financial statements.

GRAND TOYS INTERNATIONAL, INC.

Consolidated Statements of Operations (Unaudited)

	For the three months ended June 30,				For the six months ended June 30,
		2004		2003		2004		2003
Net sales	$	2,775,237	$	2,602,474	$	5,588,935	$	5,509,806

Cost of goods sold		1,423,243		1,396,821		3,097,848		3,086,339
Gross profit		1,351,994		1,205,653		2,491,087		2,423,467

Operating costs and expenses:
General and administrative		508,656		692,264		1,008,077		1,221,357
Salaries and fringe benefits		296,001		378,927		633,890		673,629
Royalties		21,361		57,871		44,235		127,766
Bad debt expense		11,537		18,848		24,476		29,449
Depreciation and amortization		13,436		17,514		26,863		33,933
		850,991		1,165,424		1,737,541		2,086,134
Non-operating expense (income):
Interest expense		21,194		26,471		40,640		47,208
Interest revenue		(9,446)		(13,431)		(23,576)		(28,325)
Foreign exchange loss (gain)		6,971		(31,577)		17,970		(90,720)
		869,710		1,146,887		1,772,575		2,014,297

Earnings before income taxes		482,284		58,766		718,512		409,170

Income tax expense		-		-		-		325

Earnings from continuing operations		482,284		58,766		718,512		408,845

Gain on sale of discontinued operations		-		129,725		-		232,727

Net earnings applicable to common stockholders	$	482,284	$	188,491	$	718,512	$	641,572

Earnings per share (note 10):

Continuing operations:
Basic	$	0.09	$	0.02	$	0.13	$	0.15
Diluted		0.08		0.01		0.12		0.04

Discontinued operations:
Basic		-		0.05		-		0.08
Diluted		-		0.02		-		0.04

Net earnings:
Basic		0.09		0.07		0.13		0.23
Diluted		0.08		0.03		0.12		0.11

GRAND TOYS INTERNATIONAL, INC.

Consolidated Statements of Stockholders' Equity and Comprehensive Income (Unaudited)

		Capital Stock		Additional Paid in Capital		Deficit		Accumulated other comprehensive income		Total

January 1, 2004	$	5,355	$	22,750,518	$	(17,968,179)	$	(551,546)	$		4,236,148

Net earnings for the period		-		-		718,512		-			718,512
Foreign currency adjustment		-		-		-		(86,148)			(86,148)
Total comprehensive income											632,364

Compensation expense		-		(727)		-		-			(727)

June 30, 2004	$	5,355	$	22,749,791	$	(17,249,667)	$	(637,694)	$		4,867,785

GRAND TOYS INTERNATIONAL, INC.

Consolidated Statements of Cash Flows (Unaudited)

For the six months ended June 30,
		2004		2003

Cash flows from operating activities:
Net earnings from continuing operations	$	718,512	$	408,845
Adjustments for:
Depreciation and amortization		26,863		33,933
Amortization of product development costs		4,265		1,584
Compensation expense		(727)		1,615
Net change in non-cash operating working capital
items (note 11)		(1,757,360)		(55,778)
Net cash (used for) provided by operating activities		(1,008,447)		390,199
from continuing operations
Net cash used for operating activities from		-		(113,331)
discontinuing operations
Net cash (used for) provided by operating activities		(1,008,447)		276,868

Cash flows from financing activities:
Increase (decrease) in bank indebtedness		54,479		(267,360)
Repurchase of shares		-		(12,982)
Decrease in loan payable to a director		-		(32,169)
(Decrease) increase in due from employees		(3,248)		4,121
Other		82		1,512
Net cash provided by (used for) financing activities		51,313		(306,878)

Cash flows from investing activities:
Proceeds from loan receivable		79,516		89,138
Proceeds from note receivable		159,094		370,694
Decrease in other assets		-		19,965
Additions to equipment and leasehold improvements		(11,598)		(2,993)
Net cash provided by investing activities		227,012		476,804

Net decrease in cash and cash equivalents		(730,122)		446,794
Cash and cash equivalents, beginning of period		1,487,318		540,896
Cash and cash equivalents, end of period	$	757,196	$	987,690

Supplemental disclosure of cash flow information (note 12)

GRAND TOYS INTERNATIONAL, INC.

Notes to Unaudited Consolidated Financial Statements

Grand Toys International, Inc. (the “Company”), a Nasdaq SmallCap listed company, is organized under the laws of the State of Nevada. Its principal business activity, through its wholly-owned Canadian and US operating subsidiaries, is the distribution of toys and related items.

Significant accounting policies:

(a)

Principles of consolidation:

These consolidated financial statements, presented in US dollars and in accordance with accounting principles generally accepted in the United States, include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.

(b)

Revenue recognition:

Sales are recognized at the time of shipment of products. The Company estimates liabilities and records provisions for customer allowances as a reduction of revenue, when such revenue is recognized.

Net sales include gross revenues, freight charged to customers and FOB commissions, net of allowances and discounts such as defectives, returns, volume rebates, cooperative advertising, cash discounts, customer fines, new store allowance, markdowns, freight and warehouse allowance.

(c)

Cost of Goods Sold:

Cost of Goods Sold includes cost of merchandise, duties, brokerage fees, inbound freight, packaging, product development and provision on slow-moving inventory.

(d)

General and Administrative Costs:

General and Administrative costs include advertising expense, royalties, rent, insurance costs, travel and entertainment, utilities, courier, repairs and maintenance, communications expense, office supplies, professional fees, dues and membership, bank charges and property taxes expense.

Outbound shipping and handling costs incurred by the company are included in general and administrative expenses. For the six-month periods ended June 30, 2004 and June 30, 2003, freight out was $35,588 and $27,788 respectively.

(e)

Inventory:

Inventory is valued at the lower of cost, determined by the first in, first out method, and net realizable value. The only significant class of inventory is finished goods.

(f)

Prepaid expenses:

Prepaid expenses primarily include insurance, advances on inventory purchases, current portion of royalties and real estate taxes. Insurance costs are written off over the term of the respective policies.

Prepaid royalties relate to licensing agreements for character properties. These contracts can extend for up to three years. Total expense for the six-month periods ended June 30, 2004 was $44,235 (2003 - $127,767) and is shown as royalty expense in the statements of operations.

Prepaid taxes are amortized on a straight-line basis over the period to which they relate. The amount expected to be recognized in the statement of operations in 2004 is $55,593.

(g)

Other assets:

Prepaid royalties are capitalized and amortized as earned in relation to product sales, over a period not to exceed the term of the related agreements. The amounts expected to be recognized in the statement of operations during the remainder of 2004 and the year 2005 are $1,583 and $1,772, respectively.

Product development costs for proprietary product lines are capitalized and written off over a period of twenty-four months, the estimated life of a new product. If a product is abandoned the related costs are written off immediately.

(h)

Equipment and leasehold improvements:

Equipment and leasehold improvements are stated at cost less accumulated depreciation.

Depreciation methods and annual rates adopted by the Company are as follows:

Asset	Method	Annual rates/periods

Computer equipment	Declining balance	30%
Machinery and equipment	Declining balance	20%
Furniture and fixtures	Declining balance	20%
Trucks and automobiles	Declining balance	30%
Telephone equipment	Declining balance	30%