| **UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-QSB**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             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| (Mark One)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             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| **x
**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

For the quarterly period ended: June 30, 2006

 

**Or**

 

**o
**TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

For the transition period from ____________ to _____________

 

Commission File Number: 000-50983

 

**MERCHANDISE CREATIONS, INC.**

(Exact name of registrant as specified in its charter)

 

Nevada

20-1703887

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

8201 Towne Main Drive #1421

Plano, Texas

75024

(Address of principal executive offices)

(Zip Code)

 

 

(972) 987-5880

(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 o

 

**APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:**

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes o No o

 

**APPLICABLE ONLY TO CORPORATE ISSUERS:**

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 10,593,000

 

 

 

 

 

**MERCHANDISE CREATIONS, INC.**

**(A Development Stage Company)**

 

**Table of Contents**

 

**Page**

 

PART I – FINANCIAL INFORMATION

3

Unaudited Condensed Financial Statements

3

CONDENSED BALANCE SHEET

4

CONDENSED STATEMENTS OF OPERATIONS

5

CONDENSED STATEMENTS OF CASH FLOW

6

NOTES TO CONDENSED FINANCIAL STATEMENTS

7

Management’s Discussion and Plan of Operation

16

Controls and Procedures

17

PART II – OTHER INFORMATION

18

Exhibits and Reports on Form 8-K

18

SIGNATURES

19

 

 

 

 

 

 

 

 

2

 

 

 

**PART I – FINANCIAL INFORMATION**

 

**Unaudited Condensed Financial Statements**

 

The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and pursuant to the rules and regulations of the Securities and Exchange Commission (“Commission”). While these statements reflect all normal recurring adjustments which are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the financial statements and footnotes thereto, which are included in the Company’s Registration Statement on Form 10-KSB for the year ended December 31, 2005 previously filed with the Commission on March 30, 2006, and subsequent amendments made thereto.

 

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

**MERCHANDISE CREATIONS, INC.**

**(A DEVELOPMENT STAGE COMPANY)**

**CONDENSED BALANCE SHEET**

**JUNE 30, 2006**

**(UNAUDITED)**

 

 

**ASSETS**

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

Cash and cash equivalents

 

$

7,088

 

Inventory

 

 

5,158

 

 

 

 

 

 

Total Current Asset

 

 

12,246

 

 

 

 

 

 

**Total Asset**

 

$

12,246

 

 

 

 

 

 

**LIABILITY AND STOCKHOLDERS’ EQUITY**

 

 

 

 

 

 

 

 

 

**LIABILITY**

 

 

 

 

Current Liability:

 

 

 

 

Accounts payable

 

$

—

 

 

 

 

 

 

Total Current Liability

 

 

—

 

 

 

 

 

 

**Total Liability**

 

 

—

 

 

 

 

 

 

**STOCKHOLDERS’ EQUITY**

 

 

 

 

Common stock, $.001 Par Value, 100,000,000 shares authorized;

 

 

 

 

10,593,000 shares issued and outstanding

 

 

10,593

 

Additional paid-in capital

 

 

29,057

 

Deficit accumulated during the development stage

 

 

(27,404

)

 

 

 

 

 

**Total Stockholders’ Equity**

 

 

12,246

 

 

 

 

 

 

**TOTAL LIABILITY AND STOCKHOLDERS’ EQUITY**

 

$

12,246

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed financial statements.

 

 

4

 

 

 

**MERCHANDISE CREATIONS, INC.**

**(A DEVELOPMENT STAGE COMPANY)**

**CONDENSED STATEMENTS OF OPERATIONS**

**FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2006 AND 2005**

**(WITH CUMULATIVE TOTALS SINCE INCEPTION)**

**(UNAUDITED)**

 

 

 

 

**SIX MONTHS ENDED**

 

**THREE MONTHS ENDED**

 

**Cumulative Totals**

 

 

 

**June 30,**

 

**June 30,**

 

**June 30,**

 

**June 30,**

 

**October 1, 2004 (inception)**

 

 

 

**2006**

 

**2005**

 

**2006**

 

**2005**

 

**through June 30, 2006**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**OPERATING REVENUES**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

1,505

 

$

7,846

 

$

300

 

$

2,729

 

$

9,351

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**COST OF SALES**

 

 

953

 

 

4,928

 

 

191

 

 

2,729

 

 

3,152

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**GROSS PROFIT**

 

 

552

 

 

2,918

 

 

109

 

 

—

 

 

6,199

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**OPERATING EXPENSES**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commissions

 

 

451

 

 

3,531

 

 

89

 

 

1,228

 

 

3,981

 

Professional fees

 

 

5,767

 

 

6,224

 

 

803

 

 

3,473

 

 

20,060

 

General and administrative expenses

 

 

1,475

 

 

3,371

 

 

705

 

 

1,289

 

 

9,562

 

**Total Operating Expenses**

 

 

7,693

 

 

13,026

 

 

1,597

 

 

5,990

 

 

33,603

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**NET LOSS BEFORE PROVISION FOR INCOME TAXES**

 

 

(7,141

)

 

(10,108

)

 

(1,488

)

 

(5,990

)

 

(27,404

)

Provision for income taxes

 

 

—

 

 

—

 

 

—

 

 

—

 

 

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**NET LOSS APPLICABLE TO COMMON SHARES**

 

$

 (7,141

)

$

 (10,108

)

$

 (1,488

)

$

 (5,990

)

$

 (27,404

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**BASIC AND DILUTED LOSS PER COMMON**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**SHARES**

 

$

 (0.00

)

$

 (0.00

)

$

 (0.00

)

$

 (0.00

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**WEIGHTED AVERAGE NUMBER OF COMMON**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**SHARES OUTSTANDING**

 

 

10,593,000

 

 

10,593,000

 

 

10,593,000

 

 

10,593,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed financial statements. 

 

 

5

 

 

 

**MERCHANDISE CREATIONS, INC.**

**(A DEVELOPMENT STAGE COMPANY)**

**CONDENSED STATEMENTS OF CASH FLOWS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005**

**(WITH CUMULATIVE TOTALS SINCE INCEPTION)**

**(UNAUDITED)**

 

 

 

 

 

 

 

 

**Cumulative Totals**

 

 

 

 

 

 

 

**October 1, 2004 (inception)**

 

 

 

**2006**

 

**2005**

 

**through June 30, 2006**

 

 

 

 

 

 

 

 

 

 

 

 

**CASH FLOWS FROM OPERATING ACTIVITIES**

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

 (7,141

)

$

 (10,108

)

$

 (27,404

)

Adjustments to reconcile net loss to net cash

 

 

 

 

 

 

 

 

 

 

(used in) operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Changes in assets and liabilities**

 

 

 

 

 

 

 

 

 

 

(Increase) decrease in accounts receivable

 

 

2,796

 

 

(2,796

)

 

—

 

(Increase) decrease in inventory

 

 

1,094

 

 

(4,908

)

 

(5,158

)

Increase (decrease) in accounts payable

 

 

(446

)

 

422

 

 

—

 

 

 

 

 

 

 

 

 

 

 

 

Total adjustments

 

 

3,444

 

 

(7,282

)

 

(5,158

)

 

 

 

 

 

 

 

 

 

 

 

**Net cash (used in) operating activities**

 

 

(3,697

)

 

(17,390

)

 

(32,562

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**CASH FLOWS FROM FINANCING ACTIVITIES**

 

 

 

 

 

 

 

 

 

 

Issuance of common stock

 

 

—

 

 

29,650

 

 

39,650

 

 

 

 

 

 

 

 

 

 

 

 

**Net cash provided by financing activities**

 

 

—

 

 

29,650

 

 

39,650

 

 

 

 

 

 

 

 

 

 

 

 

**NET INCREASE (DECREASE) IN**

 

 

 

 

 

 

 

 

 

 

**CASH AND CASH EQUIVALENTS**

 

 

(3,697

)

 

12,260

 

 

7,088

 

 

 

 

 

 

 

 

 

 

 

 

**CASH AND CASH EQUIVALENTS –**

 

 

 

 

 

 

 

 

 

 

**BEGINNING OF PERIOD**

 

 

10,785

 

 

6,265

 

 

—

 

 

 

 

 

 

 

 

 

 

 

 

**CASH AND CASH EQUIVALENTS – END OF PERIOD**

 

$

7,088

 

$

18,525

 

$

7,088

 

 

 

 

 

 

 

 

 

 

 

 

**SUPPLEMENTAL CASH FLOW INFORMATION**

 

 

 

 

 

 

 

 

 

 

During the period, cash was paid for the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

$

—

 

$

—

 

$

—

 

Income taxes 

 

$

—

 

$

—

 

$

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed financial statements.

 

 

6

 

 

 

**MERCHANDISE CREATIONS, INC.**

**(A DEVELOPMENT STAGE COMPANY)**

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**JUNE 30, 2006 AND 2005**

**(UNAUDITED)**

 

**NOTE 1 -**

**ORGANIZATION AND BASIS OF PRESENTATION**

 

The condensed unaudited financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. The condensed financial statements and notes are presented as permitted on Form 10-QSB and do not contain information included in the Company’s annual statements and notes. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed financial statements be read in conjunction with the December 31, 2005 audited financial statements and accompanying notes thereto. While managementbelieves the procedures followed in preparing these condensed financial statements are reasonable, the accuracy of the amounts are in some respects dependent upon the facts that will exist, and procedures that will be accomplished by the Company later in the year.

 

These condensed financial statements reflect all adjustments, including normal recurring adjustments, which in the opinion of management, are necessary to present fairly the operations and cash flows for the periods presented.

 

Merchandising Creations, Inc. (the “Company”), a development stage company, was incorporated in the State of Nevada on October 1, 2004. Merchandising Creations, Inc. (MCI) is a promotional and marketing company that plans to assist bands and artists in the music industry in the State of Texas, design, promote and sell custom designed merchandise. The Company plans to offer music industry customers a total package of merchandising services, including, but not limited to, the design and outsourcing of the manufacture of the promotional merchandise, as well as managing sales at any live performance or on-line.

 

The merchandising aspects of the music industry have expanded rapidly in the past several years and growth is expected to continue at a strong pace for the foreseeable future. This offers excellent opportunities for new companies to enter the market. Merchandise Creations intends to address the needs of band/artist customers in the music industry who seek a total package of merchandising services.

 

 

 

 

 

 

 

 

 

7

 

 

 

**MERCHANDISE CREATIONS, INC.**

**(A DEVELOPMENT STAGE COMPANY)**

**NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)**

**JUNE 30, 2006 AND 2005**

**(UNAUDITED)**

 

**NOTE 2 -**

**SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Development Stage Company**

 

The Company is considered to be in the development stage as defined in Statement of Financial Accounting Standards (SFAS) No. 7, “Accounting and Reporting by Development Stage Enterprises”. The Company has devoted substantially all of its efforts to business planning and development. Additionally, the Company has allocated a substantial portion of their time and investment in bringing their product to the market, and the raising of capital.

 

**Use of Estimates**

 

Preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated 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**

 

For financial statement presentation purposes, the Company considers short-term, highly liquid investments with original maturities of three months or less to be cash and cash equivalents.

 

The Company maintains cash and cash equivalent balances at a financial institution that is insured by the Federal Deposit Insurance Corporation up to $100,000.

 

 

 

 

 

 

 

 

 

8

 

 

 

**MERCHANDISE CREATIONS, INC.**

**(A DEVELOPMENT STAGE COMPANY)**

**NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)**

**JUNE 30, 2006 AND 2005**

**(UNAUDITED)**

 

**NOTE 2 -**

**SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES****(CONTINUED)**

 

**Inventories**

 

Inventories consist of promotional merchandise held for sale in the ordinary course of business and are stated at the lower of cost, or market determined on the first-in-first-out basis.

 

**Revenue Recognition**

 

Currently, the Company has one primary source of revenue:  the sale of promotional merchandise for local musicians.

 

The Company’s revenue recognition policy for this source of revenue is as follows: the Company relies on Staff Accounting Bulletin Topic 13, in determining when recognition of revenue occurs. The main criteria that the Company meets when determining when revenue is realized or realizable and earned, is when the Company has persuasive evidence of an order being initiated. Typically, the Company recognizes revenue when orders are placed which usually occurs at live events, thus revenue is usually recognized immediately.

 

Cost is recorded on the accrual basis as well, when the services are incurred rather than when payment is made.

 

**Fair Value of Financial Instruments**

 

The Company’s financial instruments are all carried at amounts that approximate their estimated fair value as of June 30, 2006.

 

 

 

 

 

 

 

9

 

 

 

**MERCHANDISE CREATIONS, INC.**

**(A DEVELOPMENT STAGE COMPANY)**

**NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)**

**JUNE 30, 2006 AND 2005**

**(UNAUDITED)**

 

**NOTE 2 -**

**SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES****(CONTINUED)**

 

**Income Taxes**

 

The provision for income taxes includes the tax effects of transactions reported in the financial statements. Deferred taxes would be recognized for differences between the basis for assets and liabilities for financial statement and income tax purposes. The major difference relate to the net operating loss carryforwards generated by sustaining deficits during the development stage.

 

**Advertising Costs**

 

Advertising and promotions costs are expensed as incurred. The Company incurred costs of $0 for the six months ended June 30,2006 and 2005 and $2,729 for the period October 1, 2004 (inception) through June 30, 2006.

 

**Net (Loss) Per Share of Common Stock**

 

Historical net (loss) per common share is computed using the weighted average number of common shares outstanding. Diluted earnings per share (EPS) include additional dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options and warrants.

 

The following table sets forth the computation of basic and diluted earnings per share:

 

 

 

 

**Six Months Ended**

 

 

 

**June 30, 2006**

 

**June 30, 2005**

 

 

 

 

 

 

 

 

 

Net (loss)

 

$

 (7,141

)

$

 (10,108

)

 

 

 

 

 

 

 

 

Weighted average common shares outstanding (Basic)

 

 

10,593,000

 

 

10,593,000

 

 

 

 

 

 

 

 

 

Options

 

 

—

 

 

—

 

Warrants

 

 

—

 

 

—

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding (Diluted)

 

 

10,593,000

 

 

10,593,000

 

 

 

 

 

 

10

 

 

 

**MERCHANDISE CREATIONS, INC.**

**(A DEVELOPMENT STAGE COMPANY)**

**NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)**

**JUNE 30, 2006 AND 2005**

**(UNAUDITED)**

 

 

**NOTE 2 -**

**SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES****(CONTINUED)**

 

**Net (Loss) Per Share of Common Stock (Continued)**

 

All dilutive securities were not included in the calculation of dilutive earnings per share because the effect would be anti-dilutive when the Company has incurred a loss from operations. The Company currently has no potentially dilutive securities outstanding.

 

**Recent Accounting Pronouncements**

 

**Share Based Payments**

 

In December 2004, the FASB issued Financial Accounting Standards No. 123 (revised 2004) (FAS 123R), “Share-Based Payment, “ FAS 123R replaces FAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” FAS 123R requires compensation expense, measured as the fair value at the grant date, related to share-based payment transactions to be recognized in the financial statements over the period that an employee provides service in exchange for the award. The Company intends to adopt FAS 123R using the “modified prospective” transition method as defined in FAS 123R. Under the modified prospective method, companies are required to record compensation cost prospectively for the unvested portion, as of the date of adoption, of previously issued and outstanding awards over theremaining vesting period of such awards. FAS 123R is effective January 1, 2006. The implementation of this standard did not have a material impact on its financial position, results of operations or cash flows.

 

In May 2005, the FASB issued FAS No. 154, “Accounting Changes and Error Corrections.” FAS No. 154 replaces Accounting Principles Board (“APB”) Opinion No. 20, “Accounting Changes” and FAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” FAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. APB No. 20 previously required that most voluntary changes in accounting principle be recognized by including the cumulative effect of changing to the new accounting principle in net income in the period of the change. FAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

 

 

 

 

 

 

 

11

 

 

 

**MERCHANDISE CREATIONS, INC.**

**(A DEVELOPMENT STAGE COMPANY)**

**NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)**

**JUNE 30, 2006 AND 2005**

**(UNAUDITED)**

 

 

**NOTE 2 -**

**SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES****(CONTINUED)**

 

The adoption of FAS No. 154 did not have a material impact on the Company’s financial position or results of operations.

 

In February 2006, the FASB issued FAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140.” FAS No. 155 resolves issues addressed in FAS No. 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets,” and permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of FAS No. 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies thatconcentrations of credit risk in the form of subordination are not embedded derivatives and amends FAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. FAS No. 155 is effective for all financial instruments acquired or issued after the beginning of the first fiscal year that begins after September 15, 2006. The Company is currently evaluating the effect the adoption of FAS No. 155 but believes it will not have a material impact on its financial position or results of operations.

 

In March 2006, the FASB issued FAS No. 156, “Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140.” FAS No. 156 requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract under a transfer of the servicer’s financial assets that meets the requirements for sale accounting, a transfer of the servicer’s financial assets to a qualified special-purpose entity in a guaranteed mortgage securitization in which the transferor retains all of the resulting securities and classifies them as either available-for-sale or trading securities in accordance with FAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” and an acquisition or assumption of an obligation to service a financialasset that does not relate to financial assets of the servicer or its consolidated affiliates. Additionally, FAS No. 156 requires all separately recognized servicing 

 

 

 

 

 

 

 

 

 

12

 

 

 

**MERCHANDISE CREATIONS, INC.**

**(A DEVELOPMENT STAGE COMPANY)**

**NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)**

**JUNE 30, 2006 AND 2005**

**(UNAUDITED)**

 

 

**NOTE 2 -**

**SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES****(CONTINUED)**

 

assets and servicing liabilities to be initially measured at fair value, permits an entity to choose either the use of an amortization or fair value method for subsequent measurements, permits at initial adoption a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights and requires separate presentation of servicing assets and liabilities subsequently measured at fair value and additional disclosures for all separately recognized servicing assets and liabilities. FAS No. 156 is effective for transactions entered into after the beginning of the first fiscal year that begins after September 15, 2006. The Company is currently evaluating the effect the adoption of FAS No. 156 but believes it will not have a material impact on its financial position or results of operations.

 

**NOTE 3 -**

**STOCKHOLDERS’ EQUITY**

 

On October 1, 2004 the Company was formed with one class of common stock, par value $0.001. The Company authorized 100,000,000 shares of common stock.

 

In October 2004, the Company issued 10,000,000 shares of stock to its officer for cash of $10,000.

 

In March 2005, the Company issued 539,000 shares of stock in a private placement for cash of $29,650.

 

 

 

 

 

 

 

 

13

 

 

 

**MERCHANDISE CREATIONS, INC.**

**(A DEVELOPMENT STAGE COMPANY)**

**NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)**

**JUNE 30, 2006 AND 2005**

**(UNAUDITED)**

 

 

**NOTE 4 -**

**GOING CONCERN**

 

As shown in the accompanying financial statements, as is typical of companies going through the development stage, the Company incurred a net loss for the period October 1, 2004 (Inception) through June 30, 2006. The Company is currently in the development stage, and there is no guarantee whether the Company will be able to generate enough revenue and/or raise capital to support current operations and generate anticipated sales. This raises substantial doubt about the Company’s ability to continue as a going concern.

 

Management believes that the Company’s capital requirements will depend on many factors including the success of the Company’s product development efforts. With the business plan being followed, management believes along with working capital being raised that operations and sales will make the Company a viable entity over the next year.

 

The financial statements do not include any adjustments relating to the recoverability or classification of recorded assets and liabilities that might result should the Company be unable to continue as a going concern.

 

**NOTE 5 -**

**PROVISION FOR INCOME TAXES**

 

Deferred income taxes will be determined using the liability method for the temporary differences between the financial reporting basis and income tax basis of the Company’s assets and liabilities. Deferred income taxes will be measured based on the tax rates expected to be in effect when the temporary differences are included in the Company’s tax return. Deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases.

 

At June 30, 2006 and 2005, deferred tax assets consist of the following:

 

 

 

 

**June 30, 2006**

 

**June 30, 2005**

 

 

 

 

 

 

 

 

 

Deferred tax assets

 

$

9,591

 

$

4,375

 

Less: valuation allowance

 

 

(9,591

)

 

(4,375

)

Net deferred tax assets

 

$

—

 

$

—

 

 

 

 

 

 

 

14

 

 

 

**MERCHANDISE CREATIONS, INC.**

**(A DEVELOPMENT STAGE COMPANY)**

**NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)**

**JUNE 30, 2006 AND 2005**

**(UNAUDITED)**

 

 

**NOTE 5 -**

**PROVISION FOR INCOME TAXES****(CONTINUED)**

 

At June 30, 2006 and 2005, the Company had accumulated deficits during the development stage of $27,404 and $12,499 available to offset future taxable income through 2026. The Company established valuation allowances equal to the full amount of the deferred tax assets due to the uncertainty of the utilization of the operating losses in future periods.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15

 

 

 

**Management’s Discussion and Plan of Operation**

 

*Forward-Looking Statements*

 

This Quarterly Report contains forward-looking statements about Merchandise Creations, Inc.’s business, financial condition and prospects that reflect management’s assumptions and beliefs based on information currently available. We can give no assurance that the expectations indicated by such forward-looking statements will be realized. If any of our management’s assumptions should prove incorrect, or if any of the risks and uncertainties underlying such expectations should materialize, MCI’s actual results may differ materially from those indicated by the forward-looking statements.

 

The key factors that are not within our control and that may have a direct bearing on operating results include, but are not limited to, acceptance of our services, our ability to expand our customer base, managements’ ability to raise capital in the future, the retention of key employees and changes in the regulation of our industry.

 

There may be other risks and circumstances that management may be unable to predict. When used in this Quarterly Report, words such as,  *”believes,”*  *”expects,” “intends,”*  *”plans,”*  *”anticipates,”*  *”estimates”*and similar expressions are intended to identify forward-looking statements, although there may be certain forward-looking statements not accompanied by such expressions.

 

*Management’s Discussion*

 

We were incorporated in the State of Nevada on October 1, 2004, and have begun to implement our planned operations. Since our inception, our efforts have focused primarily on the development and implementation of our business plan, which include the following activities:  

 

1.

Formation of the company and obtaining start-up capital; 

 

2.

Obtaining capital through sales of our common stock; 

 

3.

Developing our corporate hierarchy, including naming directors to our board, appointing our executive officers and setting forth a business plan; 

 

4.

Establishing relationships with suppliers of promotional merchandise and band/artists; 

 

5.

Establishing a website at www.merchandisecreations.com; and

 

6.

Purchasing an inventory of promotional merchandise for Tommy Alverson.

 

In the three months ended June 30, 2006, we generated $300 in revenues. In the prior year ago three months ended June 30, 2005, we generated $2,729 in revenues. For the six months ended June 30, 2006, we generated $1,505, which is a decrease of 81% (or $6,341) from revenues of $7,846 generated in the six months ended June 30, 2005. Our management attributes the decline in revenues to Tommy Alverson, our sole merchandising client, seeking revenue opportunities not involving our company. As a result, future sales may be severely adversely impacted. Sales since our inception on October 1, 2004 through June 30, 2006, was $9,351. We do not have any long-term agreements to sell our products to any single customer or group of customers. As a result, we are unable to predict the stability of, and ability to continue to generate, ongoing revenues.

 

Our cost of sales for the three months ended June 30, 2006 was $191, which led to a gross profit of $109 for the period. During the three months ended June 30, 2005, cost of sales was $2,729, which negated revenues of the same amount. For the six months ended June 30, 2006, cost of sales were $953, resulting in a gross profit of $552 for the period. In the comparable six month period ended June 30, 2005, cost of sales were $4,928, for gross profit of $2,918. Cost of sales from our inception through June 30, 2006 was $3,152, related specifically to sales of our promotion merchandise. The resultant gross profit since our inception on October 1, 2004 was $6,199.

 

Expenses for the quarter ended June 30, 2006 were $1,597, which consisted of general and administrative expenses of $705, commissions of $89 and professional fees of $803. In the comparable year ago quarter, we incurred $1,289 in 

 

16

 

 

general and administrative expenses, as well as $3,473 in professional fees and $1,228 in commissions, for aggregate expenses of $5,990. The decrease in expenditures is partially related to the lack of business generated by our arrangement with Mr. Alverson, as well as a general leveling of expenditures related to formation and development of our organization and infrastructure. Since our inception, we accumulated $33,603 in total expenses, $9,562 of which is due to general and administrative expenses, $3,981 in commissions and $20,060 of which were professional fees. We expect to continue to incur general and administrative expenses for the foreseeable future, although we cannot estimate the extent of these costs.

As a result of expenditures related to pursuing our stated business objective of selling promotional merchandise and lack of material revenues, we have incurred net losses since our inception. For the three months ended June 30, 2006, our net loss was $1,488, as opposed to a net loss of $5,990 during the year ago three month period ended June 30, 2005. From the date of our inception to June 30, 2006, we had a cumulative deficit of $27,404. We expect to incur ongoing losses for the next 12 months of operations unless we are able to increase our revenue generating ability significantly. Our independent registered public accountants have expressed substantial doubt about our ability to continue as a going concern in the footnoted financial statements. If our business fails, our investors may face a complete loss of their investment.

We have inventory of $5,158 as of June 30, 2006, which we believe we can sell to generate revenues. Generating sales in the next 6 to 12 months is important to continue as a going concern. However, we cannot guarantee that we will generate such growth. As of June 30, 2006, we had $7,088 in cash on hand, which we believe will be sufficient to continue our operations for at least the next six to twelve months. However, if our expenses are greater than anticipated or if we do not generate sufficient cash flow to support our operations over the next 6 to 12 months, we may need to raise additional capital by issuing capital stock in exchange for cash in order to continue as a going concern. There are no formal or informal agreements to attain such financing. We cannot assure you that any financing can be obtained or, if obtained, that it will be on reasonable terms. Without realization ofadditional capital, it would be unlikely for us to continue as a going concern.

In order to support our planned ongoing operations for the next 12 months, we must continue to generate sales. However, we cannot guarantee that we will continue to generate any revenues. If we do not generate sufficient cash flow to support our operations over the next 12 to 18 months, we may need to raise additional capital by issuing capital stock in exchange for cash in order to continue as a going concern. There are no formal or informal agreements to attain such financing. We can not assure you that any financing can be obtained or, if obtained, that it will be on reasonable terms. Without realization of additional capital, it would be unlikely for us to continue as a going concern.

We expect to have negative cash flows for the remainder of fiscal year 2006, as we have a limited ability to realize cash flows from sales. In addition, if our costs of operations increase unexpectedly, we may need to raise additional capital by issuing equity or debt securities in exchange for cash. There can be no assurance that we will be able to secure additional funds in the future to stay in business. Our independent registered public accountants have expressed substantial doubt about our ability to continue as a going concern because we have limited operations and have not fully commenced planned principal operations.

There are no known trends, events or uncertainties that have had or that are reasonably expected to have a material impact on our revenues from continuing operations. Additionally, we do not believe that our business is subject to seasonal factors. Our management does not expect to incur costs related to research and development. We currently do not own any significant plant or equipment that we would seek to sell in the near future. Our management does not anticipate the need to hire additional full- or part- time employees 

We have not paid for expenses on behalf of any of our directors. Additionally, we believe that this fact shall not materially change.

 

**Controls and Procedures**

 

We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in our reports filed under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

17

 

 

 

Based upon their evaluation as of the end of the period covered by this report, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are not effective to ensure that information required to be included in our periodic SEC filings is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms.

 

Our board of directors was advised by Bagell, Josephs, Levine & Company, L.L.C., our independent registered public accounting firm, that during their performance of audit procedures for 2005 Bagell, Josephs, Levine & Company, L.L.C. identified a material weakness as defined in Public Company Accounting Oversight Board Standard No. 2 in our internal control over financial reporting.

 

This deficiency consisted primarily of inadequate staffing and supervision that could lead to the untimely identification and resolution of accounting and disclosure matters and failure to perform timely and effective reviews. However, our resources and size prevent us from being able to employ sufficient resources to enable us to have adequate segregation of duties within our internal control system. Management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

**PART II – OTHER INFORMATION**

 

**Exhibits and Reports on Form 8-K**

 

 

**Exhibit Number**

**Name and/or Identification of Exhibit**

 

 

3

Articles of Incorporation & By-Laws

 

 

 

(a) Articles of Incorporation filed October 1, 2004 *

 

 

 

(b) By-Laws adopted October 5, 2004 *

 

 

31

Rule 13a-14(a)/15d-14(a) Certifications

 

 

32

Certification under Section 906 of the Sarbanes-Oxley Act (18 U.S.C. Section 1350)

 

 

 

 

*  Incorporated by reference herein filed as exhibits to the Company’s Registration Statement on SB-2 previously filed with the SEC on April 29, 2005, and subsequent amendments made thereto.

 

 

 

 

 

 

 

 

 

18

 

 

 

**SIGNATURES**

 

Pursuant to the requirements of the Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

**MERCHANDISE CREATIONS, INC.**

(Registrant)

 

 

Signature

Title

Date

 

 

 

/s/ Robert B. Turner

President and 

August 7, 2006

Robert B. Turner

Chief Executive Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19

 

 

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