United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended: March 31, 2004
Commission file number: 333-86347
GENESIS TECHNOLOGY GROUP, INC.
(Exact name of registrant as specified in its charter)
Florida 65-1130026
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
777 Yamato Road, Suite 130
Boca Raton, Florida 33431
(Address of principal executive offices)(Zip code)
(561) 988-9880
(Registrant's telephone number,
including area code)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of May 1, 2004 45,784,570 outstanding shares of common stock,
$.001 par value per share.
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
FORM 10-QSB
QUARTERLY PERIOD ENDED MARCH 31, 2004
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheet
March 31, 2004 (Unaudited).........................................3
Consolidated Statements of Operations (Unaudited)
For the Three and Six Months Ended March 31, 2004 and 2003..........4
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended March 31, 2004 and 2003....................5
Notes to Consolidated Financial Statements............................6-17
Item 2 - Management's Discussion and Analysis or Plan of
Operation...................................................18-25
Item 3 - Controls and Procedures.....................................26-27
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings..............................................27
Item 2 - Changes in Securities and Use of Proceeds.................. 27-28
Item 3 - Default upon Senior Securities.................................29
Item 4 - Submission of Matters to a Vote of Security Holders............29
Item 5 - Other Information..............................................29
Item 6 - Exhibits and Reports on Form 8-K...............................29
Signatures..............................................................30
-2-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 2004
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,475,791
Marketable equity securities 18
Accounts receivable (net of allowance 603,397
for doubtful accounts of $10,700)
Inventories 195,535
Prepaid expenses and other 254,185
-------
Total Current Assets 3,528,926
---------
PROPERTY AND EQUIPMENT - Net 108,617
-------
OTHER ASSETS:
Goodwill 10,540
Marketable equity securities - restricted 34,500
Other assets 49,105
------
Total Other Assets 94,145
------
Total Assets $ 3,731,688
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Loans payable $ 120,773
Loans payable - related parties 197,318
Accounts payable and accrued expenses 578,756
Deferred revenue 43,333
Due to related party 362,319
-------
Total Current Liabilities 1,302,499
---------
MINORITY INTEREST 35,895
------
STOCKHOLDERS' EQUITY:
Convertible preferred stock series A ($.001 Par Value;
218,000 Shares Authorized; 160,000 shares issued
and outstanding) 160
Common stock ($.001 Par Value; 200,000,000 Shares Authorized;
42,530,794 shares issued and outstanding) 42,531
Additional paid-in capital 17,369,195
Accumulated deficit (14,685,111)
Less: Deferred compensation (118,979)
Less: Subscriptions receivable (51,267)
Accumulated other comprehensive loss (163,235)
---------
Total Stockholders' Equity 2,393,294
---------
Total Liabilities and Stockholders' Equity $ 3,731,688
===========
See notes to unaudited consolidated financial statements
-3-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended For the Six Months Ended
March 31 March 31
------------------------------ ----------------------------
2004 2003 2004 2003
------------- ------------- ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
NET REVENUES $ 6,356,179 $ 5,881,487 $ 12,921,556 $ 11,158,157
COST OF SALES 6,135,680 5,673,501 12,317,205 10,825,454
------------- ------------- ------------ ------------
GROSS PROFIT 220,499 207,986 604,351 332,703
------------- ------------- ------------ ------------
OPERATING EXPENSES:
Consulting 22,738 138,451 179,483 373,702
Salaries and non-cash compensation 394,054 113,067 725,255 220,837
Selling, general and administrative 264,295 259,863 494,067 444,748
------------- ------------- ------------ ------------
Total Operating Expenses 681,087 511,381 1,398,805 1,039,287
------------- ------------- ------------ ------------
LOSS FROM OPERATIONS (460,588) (303,395) (794,454) (706,584)
OTHER INCOME (EXPENSE):
Gain (loss) from sale of marketable securities (15,257) 763 (13,333) (11,904)
Settlement income - - 196,650 -
Interest expense, net 1,347 (2,380) (1,150) (4,876)
------------- ------------- ------------ ------------
Total Other Income (Expense) (13,910) (1,617) 182,167 (16,780)
------------- ------------- ------------ ------------
LOSS BEFORE DISCONTINUED OPERATIONS AND
MINORITY NTEREST (474,498) (305,012) (612,287) (723,364)
------------- ------------- ------------ ------------
DISCONTINUED OPERATIONS:
Loss from discontinued operations - (336) - (320)
------------- ------------- ------------ ------------
Total Loss from Discontinued Operations - (336) - (320)
------------- ------------- ------------ ------------
LOSS BEFORE MINORITY INTEREST (474,498) (305,348) (612,287) (723,684)
MINORITY INTEREST IN INCOME OF SUBSIDIARY 129 - (834) -
------------- ------------- ------------ ------------
NET LOSS (474,369) (305,348) (613,121) (723,684)
BENEFICIAL CONVERSION FEATURE - PREFERRED STOCK (500,000) - (500,000) -
------------- ------------- ------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (974,369) $ (305,348) $(1,113,121) $ (723,684)
============= ============= ============ ============
LOSS PER COMMON SHARE - BASIC AND DILUTED
Loss from continuing operations $ (0.02) $ (0.01) $ (0.03) $ (0.02)
Loss from discontinued operations - (0.00) - (0.00)
------------- ------------- ------------ ------------
Net loss per common share - basic and diluted $ (0.02) $ (0.01) $ (0.03) $ (0.02)
============= ============= ============ ============
Weighted Common Shares Outstanding - basic and diluted 40,641,580 31,667,600 40,125,138 30,351,117
============= ============= ============ ============
See notes to unaudited consolidated financial statements
-4-
GENESIS TECHNOLOGY GROUP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six Months
March 31,
-------------------------
2004 2003
----------- -------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations $ (613,121) (723,364)
Adjustments to reconcile loss from
continuing operations to net cash used
in operating activities:
Depreciation and amortization 12,762 4,133
(Gain) loss on sale of marketable
securities (13,999) 11,904
Settlement income (196,650) -
Stock-based compensation 502,951 329,864
Minority interest 834 -
Loss on disposal of property and equipment 2,984 -
Changes in assets and liabilities:
Accounts receivable (336,470) 37,785
Inventories 51,379 155,668
Prepaid and other current assets (28,005) (73,733)
Other assets 41,001 (29,334)
Accounts payable and accrued expenses 385,234 197,832
Deferred revenues (72,500) (15,000)
---------------- ----------------
NET CASH USED IN CONTINUING
OPERATING ACTIVITIES (263,600) (104,245)
---------------- ----------------
Income from discontinued operations - (320)
Adjustments to reconcile income from
discontinued operations to net cash
provided by (used in) discontinued
operating activities:
Net decrease in net liabilities from
discontinued operations - 4,772
---------------- ----------------
NET CASH PROVIDED BY (USED IN)
DISCONTINUED OPERATING ACTIVITIES - 4,452
---------------- ----------------
NET CASH USED IN OPERATING ACTIVITIES (263,600) (99,793)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities 233,551 12,826
Capital expenditures (6,941) (1,785)
---------------- ----------------
NET CASH FLOWS PROVIDED BY
INVESTING ACTIVITIES 226,610 11,041
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock, net 1,902,475 -
Proceeds from notes payable 97,172 -
Due to related party 13,207 5,392
Proceeds from exercise of stock options 315,550 288,089
----------- ----------------
NET CASH FLOWS PROVIDED BY
FINANCING ACTIVITIES 2,328,404 293,481
---------------- ----------------
EFFECT OF EXCHANGE RATE
CHANGES IN CASH (421) -
---------------- ----------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 2,290,993 204,729
CASH AND CASH EQUIVALENTS
- beginning of year 184,798 57,574
---------------- ----------------
CASH AND CASH EQUIVALENTS
- end of period $ 2,475,791 $ 262,303
================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Noncash investing and financing
activities: Marketable securities
exchanged for debt $ - $ 51,000
================ ================
Common stock issued for debt $ 101,533 $ 140,000
================ ================
Common stock and stock
subscriptions receivable cancelled $ - $ 137,317
============ ================
Common stock issued for subscription
receivable $ - $ 269,100
=========== ================
See notes to unaudited consolidated financial statements.
-5-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The Company
Genesis Technology Group, Inc. (the "Company" or "Genesis") is a business
development firm that specializes in assisting small and mid-sized companies in
entering the Chinese market. The Company's strategy includes marketing itself as
a resource for these companies in marketing, distribution, manufacturing,
forming joint ventures, or establishing a base in China. As a part of that
strategy, the Company has become a member of the Shanghai Technology Stock
(Property Rights) Exchange, an organization that promotes the influx of
technology into China. The Company also has acquired companies in the U.S. and
China for the purposes of further developing these companies, with operational,
managerial and financial support. The strategy also envisions and promotes
opportunities for synergistic business relationships among all of the companies
that Genesis works with, both clients and subsidiaries.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). The accompanying consolidated
financial statements for the interim periods are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the financial
position and operating results for the periods presented. The consolidated
financial statements include the accounts of the Company and its wholly and
partially owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. These consolidated financial statements
should be read in conjunction with the financial statements for the year ended
September 30, 2003 and notes thereto contained on Form 10-KSB of the Company as
filed with the Securities and Exchange Commission. The results of operations for
the six months ended March 31, 2004 are not necessarily indicative of the
results for the full fiscal year ending September 30, 2004.
Net income (loss) per share
Basic loss per share is computed by dividing net loss by weighted average number
of shares of common stock outstanding during each period. Diluted loss per share
is computed by dividing net loss by the weighted average number of shares of
common stock, common stock equivalents and potentially dilutive securities
outstanding during each period.
Inventories
Inventories, consisting of computer equipment and accessories, are stated at the
lower of cost or market utilizing the first-in, first-out method, and are
located in China.
-6-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2004
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Marketable equity securities
Marketable equity securities consist of investments in equity of publicly traded
and non-public domestic and foreign companies and are stated at market value
based on the most recently traded price of these securities at March 31, 2004.
All marketable securities are classified as available for sale at March 31,
2004. Unrealized gains and losses, determined by the difference between
historical purchase price and the market value at each balance sheet date, are
recorded as a component of Accumulated Other Comprehensive Income in
Stockholders' Equity. Realized gains and losses are determined by the difference
between historical purchase price and gross proceeds received when the
marketable securities are sold. Restricted marketable equity securities are
shown as long-term assets.
Foreign currency translation
Transactions and balances originally denominated in U.S. dollars are
presented at their original amounts. Transactions and balances in other
currencies are converted into U.S. dollars in accordance with Statement of
Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation,"
and are included in determining net income or loss.
For foreign operations with the local currency as the functional currency,
assets and liabilities are translated from the local currencies into U.S.
dollars at the exchange rate prevailing at the balance sheet date. Revenues,
expenses and cash flows are translated at the average exchange rate for the
period to approximate translation at the exchange rate prevailing at the dates
those elements are recognized in the financial statements. Translation
adjustments resulting from the process of translating the local currency
financial statements into U.S. dollars are included in determining comprehensive
loss. As of March 31, 2004, the exchange rate for the Chinese Renminbi (RMB) was
$1 US for 8.28 RMB.
The functional currency of the Company's Chinese subsidiaries is the local
currency. The financial statements of the subsidiary are translated to United
States dollars using period-end rates of exchange for assets and liabilities,
and the average rate of exchange for the period for revenues, costs, and
expenses. Net gains and losses resulting from foreign exchange transactions are
included in the consolidated statements of operations and were not material
during the periods presented. The cumulative translation adjustment and effect
of exchange rate changes on cash at March 31, 2004 was not material.
-7-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2004
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Stock-based compensation
The Company accounts for stock options issued to employees in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. As
such, compensation cost is measured on the date of grant as the excess of the
current market price of the underlying stock over the exercise price. Such
compensation amounts, if any, are amortized over the respective vesting periods
of the option grant. The Company adopted the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation" and SFAS 148, "Accounting for
Stock-Based Compensation -Transition and Disclosure", which permits entities to
provide pro forma net income (loss) and pro forma earnings (loss) per share
disclosures for employee stock option grants as if the fair-valued based method
defined in SFAS No. 123 had been applied. The Company accounts for stock options
and stock issued to non-employees for goods or services in accordance with the
fair value method of SFAS 123.
Had compensation cost for the stock option plan been determined based on the
fair value of the options at the grant dates consistent with the method of SFAS
123, "Accounting for Stock Based Compensation", the Company's net loss and loss
per share would have been changed to the pro forma amounts indicated below for
the six months ended March 31, 2004 and 2003:
2004 2003
---------------- -------------
Net loss as reported $ (613,121) $ (723,684)
Less: stock-based employee compensation
included in reported net loss 124,650 -
Add: stock-based employee compensation
expense determined under fair value based
method, net of related tax effect (82,743) (149,920)
------------ --------------
Pro forma net loss $ (572,214) $ (873,604)
=============== =============
Basic loss per share:
As reported $ (.12) $ (.05)
=============== =============
Pro forma $ (.13) $ (.06)
=============== =============
The above pro forma disclosures may not be representative of the effects on
reported net earnings for future years as options vest over several years and
the Company may continue to grant options to employees.
-8-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2004
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Reclassifications
Certain prior periods' balances have been reclassified to conform to the current
period's financial statement presentation. These reclassifications had no impact
on previously reported results of operations or stockholders' equity (deficit).
NOTE 2 - RELATED PARTY TRANSACTIONS
Due from related party
An officer of the Company advanced funds to the Company for working capital
purposes. The advances are non-interest bearing and are payable on demand. At
March 31, 2004, the Company did not owe this officer any funds. Additionally, a
minority shareholder of the Company's Chorry (Zhaoli) subsidiary, advanced
$362,319 to this subsidiary for working capital purposes. These advances are
non-interest bearing and are payable on demand.
NOTE 3 - SEGMENT INFORMATION
The following information is presented in accordance with SFAS No. 131,
Disclosure about Segments of an Enterprise and Related Information. In the
periods ended March 31, 2004 and 2003, the Company operated in two reportable
business segments - (1) sale of computer equipment and accessories and (2)
business development services for small public and private companies regarding
public relations, corporate financing, mergers and acquisitions, e-commerce,
business operations support and marketing. The Company's reportable segments are
strategic business units that offer different products. They are managed
separately based on the fundamental differences in their operations.
-9-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2004
(UNAUDITED)
NOTE 3 - SEGMENT INFORMATION (Continued)
Information with respect to these reportable business segments for the six
months ended March 31, 2004 and 2003 is as follows: `
For the Six Months For the Six Months
Ended Ended
March 31, 2004 March 31,2003
-------------------------------------- --------------------- -----------------
Net revenues:
-------------------------------------- --------------------- -----------------
Computer Equipment and Accessories $ 12,567,981 $ 10,989,842
-------------------------------------- --------------------- -----------------
Consulting Services 353,575 168,315
-------------------------------------- --------------------- -----------------
Consolidated Net Revenue 12,921,556 11,158,157
-------------------------------------- --------------------- -----------------
Cost of sales and operating expenses:
-------------------------------------- --------------------- -----------------
Computer Equipment and Accessories 12,563,462 10,981,422
-------------------------------------- --------------------- -----------------
Consulting Services 1,139,786 875,743
-------------------------------------- --------------------- -----------------
Depreciation:
-------------------------------------- --------------------- -----------------
Computer Equipment and Accessories 4,323 3,443
-------------------------------------- --------------------- -----------------
Consulting Services 8,439 4,133
-------------------------------------- --------------------- -----------------
Interest (expense) income:
-------------------------------------- --------------------- -----------------
Computer Equipment and Accessories 3,976 -
-------------------------------------- --------------------- -----------------
Consulting Services (5,131) (5,000)
-------------------------------------- --------------------- -----------------
Net Income (Loss):
-------------------------------------- --------------------- -----------------
Computer Equipment and Accessories $ 3,338 $ 5,097
-------------------------------------- --------------------- -----------------
Consulting Services (616,459) (728,781)
-------------------------------------- --------------------- -----------------
Net Loss $ (613,121) $ (723,684)
==================================== ===================== =================
Total Assets at March 31,2004 and 2003:
-------------------------------------- --------------------- -----------------
Computer Equipment and Accessories $ 1,147,668 $ 440,308
-------------------------------------- --------------------- -----------------
Consulting Services 2,584,020 760,750
-------------------------------------- --------------------- -----------------
Consolidated Asset Total $ 3,731,688 $ 1,201,058
==================================== ===================== =================
-10-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2004
(UNAUDITED)
NOTE 3 - SEGMENT INFORMATION (Continued)
For the six months ended March 31, 2004 and 2003, the Company derived
approximately 97% and 99% of its revenue from its subsidiaries located in the
People's Republic of China, respectively. Sales and identifiable assets by
geographic areas for the six months ended March 31, 2004 and 2003, and as of
March 31, 2004, respectively, were as follows:
Revenues
For the Six Months Ended Identifiable Assets
March 31, at March 31,
2004 2003 2004
----------- ----------- ------------------------
United States $ 375,044 $ 161,175 $ 2,419,855
China 12,546,512 10,996,982 1,331,833
-------------- ------------- -------------------------
Total $ 12,921,556 $ 11,158,157 $ 3,731,688
============== ============== =========================
Currently, the Company's revenues are primarily derived from sale of computer
equipment and accessories to customers in the Peoples Republic of China (PRC).
The Company hopes to expand its operations to countries outside the PRC,
however, such expansion has not been commenced and there are no assurances that
the Company will be able to achieve such an expansion successfully. Therefore, a
downturn or stagnation in the economic environment of the PRC could have a
material adverse effect on the Company's financial condition.
-11-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2003
(UNAUDITED)
NOTE 4 - LOANS PAYABLE
On April 1, 2002, the Company borrowed $80,000 from an individual related
to an officer of the Company. The loan bears interest at 10% per annum and is
unsecured. All unpaid principal and accrued interest was payable on April 1,
2003. In the event of default of the loan agreement, the lender is to receive
shares of the Company's common stock at a 25% discount to the average closing
price of the previous 20 trading days of the Company's common stock equal to the
total amount due to the lender. As of March 31, 2004, this loan remains unpaid.
The lender has not provided the Company with a notice of default.
On July 31, 2002, the Company borrowed $20,000 from an individual related to an
officer of the Company. The loan bears interest at 10% per annum and is
unsecured. All unpaid principal and accrued interest was payable on January 1,
2003. At the option of the lender, the entire obligation may be repaid with
common stock calculated by dividing the amount due by the average closing common
stock price for ten days prior to the repayment discounted by 40%, with a
maximum price of $0.13 per share. The beneficial conversion feature present in
the issuance of this note payable as determined on the date funds were received
under the loan agreement totaled $12,500 and was recorded as interest expense
and additional paid-in capital. As of March 31, 2004, no conversion had
occurred. As of March 31, 2004, the loan remains unpaid.
In January 2004, the Company's subsidiary, Yastock, borrowed $97,318 from an
officer of the Company. The loan is non-interest bearing, is unsecured, and is
payable on June 30, 2004. As of March 31, 2004, the loan remains unpaid.
The Company's Chinese subsidiary, Chorry (Zhaoli), entered into a loan agreement
with a Chinese bank to borrow $120,773. The loan bears interest at a rate of
5.85% per annum and is payable prior to March 25, 2005.
NOTE 5 - STOCKHOLDERS' EQUITY
Preferred stock
The Company is authorized to issue 20,000,000 shares of Preferred Stock, par
value $.001, with such designations, rights and preferences as may be determined
from time to time by the Board of Directors.
In January 2004, the Board of Directors established a Series A 6% Cumulative
Convertible Preferred Stock (the "Series A Preferred Stock") authorized to be
issued by the Company, with the designations and amounts thereof, together with
the voting powers, preferences and relative, participating, optional and other
special rights of the shares of each such series, and the qualifications,
limitations or restrictions as follows:
-12-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2004
(UNAUDITED)
NOTE 5 - STOCKHOLDERS' EQUITY (Continued)
Preferred stock (continued)
The number of shares of Series A Preferred Stock shall be 218,000. Each share of
Series A Preferred Stock shall have a stated value equal to $10 (as adjusted for
any stock dividends, combinations or splits with respect to such shares) (the
"Stated Value"), and $.001 par value.
The Holders of outstanding shares of Series A Preferred Stock are entitled to
receive preferential dividends in cash out of any funds of the Company legally
available at the time for declaration of dividends before any dividend or other
distribution will be paid or declared and set apart for payment on any shares of
any Common Stock, or other class of stock presently authorized or to be
authorized (the Common Stock, and such other stock being hereinafter
collectively the "Junior Stock") at the rate of 6% simple interest per annum on
the Stated Value per share payable quarterly commencing with the period ending
March 31, 2004 when as and if declared. At the Holder's option, however, the
dividend payments may be made in additional fully paid and non assessable shares
of Series A Preferred Stock at a rate of one share of Series A Preferred Stock
for each $10 of such dividend not paid in cash.
Shares of Series A Preferred Stock shall have the following conversion rights
and obligations:
(a) Subject to the further provisions in the agreement, each Holder of
shares of Series A Preferred Stock shall have the right at any time commencing
after the issuance to the Holder of Series A Preferred Stock, to convert such
shares into fully paid and non-assessable shares of Common Stock of the Company
determined in accordance with the Conversion Price as defined below (the
"Conversion Price"). All issued or accrued but unpaid dividends may be converted
at the election of the Holder simultaneously with the conversion of principal
amount of Stated Value of Series A Preferred Stock being converted.
(b) The number of shares of Common Stock issuable upon conversion of
each share of Series A Preferred Stock shall equal (i) the sum of (A) the Stated
Value per share and (B) at the Holder's election accrued and unpaid dividends on
such share, divided by (ii) the Conversion Price. The Conversion Price shall be,
at the election of the Holder, the lesser of: (x) $.36, or (y) 80% of the
Closing Bid Price for the trading day immediately preceding the initial purchase
of Series A Preferred Stock by the first Holder thereof. The Closing Bid Price
shall mean the closing bid price of the Corporation's Common Stock as reported
by the Bloomberg L.P. OTC Bulletin Board or the principal exchange or market
where traded.
-13-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2004
(UNAUDITED)
NOTE 5 - STOCKHOLDERS' EQUITY
Preferred stock (continued)
On January 16, 2004, the Company consummated a securities purchase agreement
under which the Company agreed to issue $2,000,000 stated value of its newly
created Series A Preferred Stock to several institutional investors. On January
16, 2004 the Company closed its initial Series A Preferred Stock and issued
100,000 shares of Series A Preferred Stock ($1,000,000 stated value) for net
proceeds of $944,987. The Series A Preferred Stock is convertible at $0.232 per
share. In addition, the Company issued warrants to purchase 215,517 shares of
its common stock at $0.3045 on the initial closing.
On March 31, 2004, the Company closed on the remaining balance of its Series A
Preferred Stock with various institutional investors. As part of this closing
phase, the Company issued 100,000 shares of Series A Preferred Stock ($1,000,000
stated value) for net proceeds of $957,488. These shares of Series A Preferred
Stock are convertible into common stock at $0.232 per share, and included
warrants to purchase 215,517 shares of its common stock exercisable at $0.3045.
On the date of issuance of the Series A Preferred Stock, the effective
conversion price was at a discount to the price of the common stock into which
it was convertible. The Company recorded a $500,000 preferred stock dividend
related to the beneficial conversion feature.
In connection with the preferred stock offering, the Company paid a broker's fee
to a financial institution of $90,000 and issued warrants to purchase a total of
300,000 shares of its common stock exercisable at $0.3045.
In March 2004, Series A preferred stockholders' converted 40,000 share of Series
A Preferred Stock into 1,740,469 shares on common stock.
Common stock
In March 2004, the Company issued 1,740,469 shares of common stock in connection
with the conversion of 40,000 shares of Series A Preferred Stock.
On March 29, 2004, the Company issued an aggregate of 240,000 shares of its
common stock to officers for services rendered. The Company valued these shares
at $0.245 per share and recorded stock-based compensation expense relating to
this issuance of $58,800.
-14-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2004
(UNAUDITED)
NOTE 5 - STOCKHOLDERS' EQUITY (continued)
Stock options and warrants
In connection with the preferred stock funding, the Company granted warrants to
purchase 731,034 shares of its common stock at $0.3045. The Warrants shall be
exercisable for five years after the issue dates of the Warrants.
A summary of outstanding options and warrants at March 31, 2004 are as follows:
Number of Weighted
Options and Average
Warrants Exercise Price
---------------------------- ---------------- ----------------
Stock options and warrants
---------------------------- ---------------- ----------------
Balance at October 1, 2003 10,910,000 $ 0.18
---------------------------- ---------------- ----------------
Granted 1,948,535 0.18
---------------------------- ---------------- ----------------
Exercised (3,755,501) 0.14
---------------------------- ---------------- ----------------
Forfeited (500,000) 0.37
---------------------------- ---------------- ----------------
Balance at March 31. 2004 8,603,034 $ 0.20
---------------------------- =============== =================
Options exercisable at end
of period 8,603,034 $ 0.20
---------------------------- =============== =================
Weighted average fair value of options
granted during the period $ 0.18
---------------------------- ---------------- ----------------
The following table summarizes information about employee stock options and
consultant warrants outstanding at March 31, 2004:
Options and Warrants Outstanding Options and Warrants Exercisable
------------------------------------------- --------------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding at Contractual Exercise Exercisable at Exercise
Price March 31, 2004 Life Price March 31, 2004 Price
----------- ---------------- ------------ -------- ---------------- ------------
$ 0.60-2.25 450,000 1.25 Years $ 1.52 450,000 $ 1.52
0.23-0.36 1,501,034 4.10 Years 0.24 1,501,034 0.24
0.05-0.15 6,652,000 4.00 Years 0.09 6,652,000 0.09
----------- ---------------- ------------ -------- ---------------- ------------
8,603,034 $ 0.20 8,603,034 $ 0.20
=============== ======= ================ ============
-15-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2004
(UNAUDITED)
NOTE 6 - SETTLEMENT INCOME
On December 31, 2003, the Company settled its litigation against Hy-Tech
Technology Group, Inc. ("HYTT"). The Settlement Agreement resulted in the
Company accepting 3,750,000 common shares of restricted Hy-Tech Technology
Group, Inc. stock (OTCBB: HYTT). In a related matter, the Company conveyed
300,000 of those shares to Elite Financial Communications Group, which had
initially introduced the Company to key principals among the HYTT parties. In
connection with the settlement, the Company recorded settlement income of
$196,650 based on the fair market value of 3,450,000 net shares that the Company
received.
NOTE 7 - SUBSEQUENT EVENTS
In April 2004, Series A preferred stockholders' converted 57,500 share of Series
A Preferred Stock into 2,478,732 shares on common stock.
On April 6, 2004, the Company's Board of Directors authorized, approved and
adopted the 2004 Stock Option Plan (the "Plan") covering 10,000,000 shares of
common stock. As of April 21, 2004, 5,650,250 shares underlying options had been
granted under the Plan. The purpose of the Plan is to encourage stock ownership
by the Company's officers, directors, key employees and consultants, and to give
such persons a greater personal interest in the success of our business and an
added incentive to continue to advance and contribute to us.
-17-
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS
The following analysis of the results of operations and financial condition of
the Company should be read in conjunction with the financial statements of
Genesis Technology Group, Inc. for the year ended September 30, 2003 and notes
thereto contained in this Report on Form 10-KSB of Genesis Technology Group,
Inc.
This report on Form 10-KSB contains forward-looking statements that are
subject to risks and uncertainties that could cause actual results to differ
materially from those discussed in the forward-looking statements and from
historical results of operations. Among the risks and uncertainties which could
cause such a difference are those relating to our dependence upon certain key
personnel, our ability to manage our growth, our success in implementing the
business strategy, our success in arranging financing where required, and the
risk of economic and market factors affecting us or our customers. Many of such
risk factors are beyond the control of the Company and its management.
OVERVIEW
We are an international company with operations in the United States
and the People's Republic of China. Our computer equipment and accessories
division represented approximately 97% of our consolidated revenues for the six
months ended March 31, 2004 and approximately 96% of our consolidated revenues
for the fiscal year ended September 30, 2003. Our consulting services division
represented approximately 3% our consolidated revenues for the six months ended
March 31, 2004 and approximately 4% of our consolidated revenues for the fiscal
year ended September 30, 2003.
We believe that the computer and equipment accessories division of our
business will become a less significant phase of our operations in future
periods as we expand our consulting services segment. We believe that as we
further develop our consulting services segment, more opportunities to expand
our operations through acquisitions will also be presented to us. It is critical
to our long-term business model to both increase our revenues from the
consulting services segment of our existing business, as well as to diversify
our revenue base. By virtue of the nature of our consulting services and the
professional experience of our management and directors, we interact with a
number of both U.S. and Chinese companies. Through this broadening of our
relationship base, we believe that we will be able to not only provide better
services to our client companies, but we will have certain advantages over other
companies our size when it comes to identifying and closing acquisitions.
Our computer equipment and accessories division is an established
business which can grow internally without significant additional capital. The
fee-based structure of our consulting services division is such that if our
client company is successful in its particular venture, we can earn additional
fees. These fees could range from a flat cash fee, to a fee which includes a
combination of equity in our client and a success fee payable upon the
completion of transactions such as acquisitions, formations of joint ventures,
or licensing or selling technologies in China, to a solely performance based fee
upon the completion of the project. We do not intend to operate as an investment
company or become subject to the Investment Company Act of 1940. However, in
order to materially grow our business we will need to raise additional working
capital. Capital will typically be needed not only for the acquisition of
additional companies, but also for the effective integration, operations and
expansion of these businesses.
-18-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS
(continued)
There are no assurances we will be able to raise additional capital. If we are
unable to secure additional capital as need, this inability will in all
likelihood hamper or restrict our ability to acquire and integrate additional
companies and to otherwise increase our revenues in future periods.
Our consulting service division is an international business development firm
that specializes in leading and assisting companies in penetrating the Chinese
market for business development and commerce, as well as assisting Chinese
companies in penetrating the US market or listing in the US public market. We
have a seat as a member of the Shanghai Technology Stock (Property Rights)
Exchange, an organization that promotes the influx of technology into China
In January, the Company signed a collaboration agreement with Global Boardroom
Solutions (GBS), a private business development firm that focuses on Latin
America. GBS management has a combined history of nearly 30 years in South
America running the operations for Xerox, Ryder, Purina and other major
multi-nationals. Genesis proposed bridging the economic interests of China and
Latin America, and the GBS executives, Dennis Custage and Nolan (Bud) Robyn,
accompanied Gary Wolfson and Xun Mei DelSesto from Genesis on a 2-week trip to
China in April. As a result, the collaboration agreement is being significantly
expanded and should result in the creation of Genesis Latin American Ventures,
of which Genesis will own 51% and GBS 49%, with both parties providing pro rata
funding. This Latin American initiative could result in increased revenues to
Genesis in the next 6-24 months, but numerous details must be completed before
actual business activities can commence.
After receiving the $2 million in funding through the private placement,
the Company is planning to undertake a merger and acquisition program. No
mergers or acquisitions have been completed to date, but several are in advanced
negotiations. These include--but are not limited to--such prospects as: a
prominent paper packaging company in Ningbo, a 22-year-old computer reseller of
China-manufactured hardware in Latin America, a Beijing software company,
a telecommunications service company that could complement the Company's
current Shanghai license, sourcing product for a US hardware reseller,
plus other prospects. While every effort is being expended to complete the
best of these transactions, it is speculative to forecast if and when any of
these will be consummated.
-19-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS
(continued)
FOREIGN EXCHANGE CONSIDERATIONS
Because revenues from our operations in the PRC accounted for
approximately 97% and approximately 98% of our consolidated net revenues for the
six months ended March 31, 2004 and the fiscal year ended September 30, 2003,
respectively, how we report net revenues from our PRC-based companies is of
particular importance to understanding our financial statements. Transactions
and balances originally denominated in U.S. dollars are presented at their
original amounts. Transactions and balances in other currencies are converted
into U.S. dollars in accordance with Statement of Financial Accounting Standards
(SFAS) No. 52, "Foreign Currency Translation," and are included in determining
net income or loss. For foreign operations with the local currency as the
functional currency, assets and liabilities are translated from the local
currencies into U.S. dollars at the exchange rate prevailing at the respective
balance sheet date. Revenues and expenses are translated at weighted average
exchange rates for the period to approximate translation at the exchange rates
prevailing at the dates those elements are recognized in the financial
statements. Translation adjustments resulting from the process of translating
the local currency financial statements into U.S. dollars are included in
determining comprehensive loss.
The functional currency of our Chinese subsidiaries, Chorry (Zhaoli)
and Yastock, is the Chinese RMB, the local currency. The financial statements of
the subsidiaries are translated to U.S. dollars using year-end rates of exchange
for assets and liabilities, and average rates of exchange for the period for
revenues, costs, and expenses. Net gains and losses resulting from foreign
exchange transactions are included in the consolidated statements of operations
and were not material during the periods presented. The cumulative translation
adjustment and effect of exchange rate changes on cash at March 31, 2004 was not
material.
RESULTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 2004 COMPARED TO SIX MONTHS ENDED MARCH 31, 2003
CONSOLIDATED RESULTS:
The following discussion relates to our consolidated results of
operations. Further discussion and analysis of operating results follows and is
discussed by segment.
Revenues
For the six months ended March 31, 2004, we had consolidated revenues
of $12,921,556 as compared to $11,158,157 for the six months ended March 31,
2003. This increase resulted substantially from increased revenues from our
computer hardware and accessories segment as well as increased revenues from our
business development and consulting segment and is discussed below.
-20-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS
(continued)
Cost of Sales
For the six months ended March 31, 2004, cost of sales was directly
related to our computer equipment and accessories segment and amounted to
$12,317,205 as compared to $10,825,454 for the six months ended March 31, 2003.
This increase resulted substantially from increased revenue from our computer
segment and is outlined below.
Operating Expenses
For the six months ended March 31, 2004, operating expenses which
include consulting fees, rent, salaries and non-cash compensation, depreciation
expense and other selling, general and administrative, were $1,398,805 as
compared to $1,039,287 for the six months ended March 31, 2003.
Loss from sale/disposal of marketable securities
For the six months ended March 31, 2004, we recorded a loss from the
sale of marketable securities of $13,333 as compared to a loss of $11,904 for
the six months ended March 31, 2003.
Settlement income
On December 31, 2003, we settled our litigation against Hy-Tech
Technology Group, Inc. ("HYTT"). The Settlement Agreement resulted in us
accepting 3,750,000 common shares of restricted Hy-Tech Technology Group, Inc.
stock (OTCBB: HYTT). In a related matter, we conveyed 300,000 of those shares to
Elite Financial Communications Group, which had initially introduced us to key
principals among the HYTT parties. In connection with the settlement, we
recorded settlement income of $196,650 based on the fair market value of
3,450,000 net shares that we received.
Interest expense, net
Interest expense was $1,150 for the six months ended March 31, 2004 as
compared to $4,876 for the six months ended March 31,
2003.
OVERALL
We reported a net loss for the six months ended March 31, 2004 of
$(613,121) compared to a net loss for the six months ended March 31, 2003 of
$(723,684). During the six months ended March 31, 2004, we recorded a preferred
stock dividend of $500,000 related to the beneficial conversion feature of our
Series A Preferred Stock. This translates to an overall per-share loss available
to shareholders of ($.03) for the six months ended March 31, 2004 compared to
per-share loss of ($.02) for the six months ended March 31, 2003.
-21-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS
(continued)
RESULTS OF OPERATIONS BY SEGMENT:
Consulting Services Segment
Revenue for the six months ended March 31, 2004 was $353,575 as
compared to $168,315 for the six months ended March 31, 2004. This revenue was
generated from business development services. The increase in revenues was
attributable to the fact that during fiscal 2003 and in the first and second
quarter in fiscal 2004, we entered into business development contracts to assist
companies in introducing their products into the Chinese marketplace. We have
been aggressively marketing our business development services through
round-table meetings and through our referral sources.
For the six months ended March 31, 2004, we incurred operating expenses
of $1,148,225 as compared to $879,876 for the six months ended March 31, 2003.
For the six months ended March 31, 2004, operating expenses consisted of rent of
$34,122, consulting fees of $179,483, salaries and non-cash compensation of
$652,718, and other selling, general and administrative expenses of $281,902.
For the six months ended March 31, 2003, operating expenses consisted of rent of
$45,320, consulting fees of $373,702, salaries and non-cash compensation of
$220,837 and other selling, general and administrative expenses of $240,017. The
increase in operating expenses was primarily attributable to the following:
(1) During the six months ended March 31, 2003, we incurred rent
in an office on Minneapolis, MN which is now closed.
Accordingly, our rent expense decreased during the six months
ended March 31, 2004 as compared to March 31, 2003.
(2) Our consulting expense decreased to $179,483 for the six
months ended March 31, 2004, from $373,702 for the three six
months ended March 31, 2003. The decrease was due to decreased
non-cash consulting expenses recorded during the six months
ended March 31, 2003 in connection with the grant of stock
options to consultants for services rendered.
(3) Salaries and non-cash compensation expense increased to
$652,718 for the six months ended March 31, 2004 from $220,837
for the six months ended March 31, 2003, an increase of
$431,881. In the latter part fiscal 2003, we increased our
marketing and administrative staff by two persons. The
remaining increase in salaries and non-cash compensation
expense was attributable to the recording of non-cash
compensation in connection with the granting of stock options
to officers, employees, and directors and the issuance of
common shares during the six months in March 31, 2004 for
bonuses amounting to $135,060.
-22-
RESULTS OF OPERATIONS BY SEGMENT (continued):
Consulting Services Segment (continued)
(4) Other selling, general and administrative expenses increased
to $273,463 for the six months ended March 31, 2004 from
$235,884 for the six months ended March 31, 2003, an increase
of $37,579. The increase was attributable to additional travel
related expenses related to increased travel to China, and
increased administrative and office expenses due to increased
operations.
For the six months ended March 31, 2004 and 2003, we incurred interest
expense of $5,131 and $4,876, respectively.
Computer Equipment and Accessories Segment
Revenues for the six months ended March 31, 2004 were $12,567,981 as
compared to $10,989,842 for the six months ended March 31, 2003 from our
subsidiary Chorry (Zhaoli), a Chinese company. This revenue was generated from
sales of printers, copiers, network equipment and software licensing fees. The
increase in sales mainly resulted from increasing demand from the market, as the
Chinese government required all companies by July 1, 2003 to issue all
transaction receipts and invoices by using a printer and a computer in order to
smooth its tax collections.
Cost of sales for Chorry (Zhaoli) for the six months ended March 31,
2004 amounted to $12,317,205 or 98% of net sales as compared to $10,825,454 or
98.5% of net sales for the six months ended March 31, 2003. We continue to
experience low gross profit margins on our products sales.
For the six months ended March 31, 2004, operating expenses consisted
of salaries of $72,537, rent expense of $75,602, and other selling, general and
administrative expenses amounted to $101,276 as compared to other selling,
general and administrative expenses of $158,063 for the six months ended March
31, 2003. In fiscal 2003, we incurred additional rent due our growing need for
warehouse space. Additionally, due to increased net revenues, we increased our
workforce.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2004, we had a cash balance of $2,475,791. As of March 31,
2004, our cash position by geographic area is as follows:
United States $ 2,256,154
China 219,637
-------------
Total $ 2,475,791
=============
-23-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS
(continued)
On January 16, 2004, we consummated a securities purchase agreement
under which we agreed to issue $2,000,000 stated value of its newly created
Series A 6% Cumulative Convertible Preferred Stock (the "Series A Preferred
Stock") to several institutional investors. The stated value of the Series A
Preferred Stock is $10.00 per share. Through March 31, 2004, the Company sold
200,000 Series A Preferred shares for net proceeds of $1,902,475. We intend on
using these proceeds for working capital purposes and to seek acquisition
candidates.
Management has invested substantial time evaluating and considering
numerous proposals for possible acquisition or combination developed by
management or presented by investment professionals, the Company's advisors and
others. We continue to consider acquisitions, business combinations, or start up
proposals, which could be advantageous to shareholders. No assurance can be
given that any such project; acquisition or combination will be concluded.
We intend to continue our trading activities and as a consequence the
future financial results of the Company may be subject to substantial
fluctuations. As part of our investment activities, we may sell a variety of
equity or debt securities obtained as revenues for business development
services. Such investments often involve a high degree of risk and must be
considered extremely speculative.
At March 31, 2004, our Company had stockholders' equity of $2,393,294.
Our Company's future operations and growth will likely be dependent on our
ability to raise capital for expansion and to implement our strategic plan.
Net cash used in operations was $(263,600) for the six months ended
March 31, 2004, as compared to net cash used in operations of $(104,245) for the
six months ended March 31, 2003. For the six months ended March 31, 2004 we used
cash to fund our net loss of $613,121 offset by non-cash items such as
stock-based compensation of $502,951, depreciation expense of $12,762 and
settlement income of $(196,650) as well as changes in assets and liabilities of
$40,639. For the six months ended March 31, 2003 we used cash to fund our net
loss of $723,364 offset by non-cash items such as stock-based compensation of
$329,864, depreciation expense of $4,133, a loss on the sale of marketable
securities of $11,904, as well as changes in assets and liabilities of $273,218.
Net cash provided by investing activities for the six months ended
March 31, 2004 was $226,610 as compared to net cash provided by investing
activities for the six months ended March 31, 2003 of $11,041. For six months
ended March 31, 2004, we received $233,551 from the sale of marketable
securities offset by cash used for capital expenditures of $(6,941). For the six
months ended March 31, 2003, we received cash from the sale of marketable
securities of $12,826 offset by cash used for capital expenditures of $(1,785).
-24-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS
(continued)
Net cash provided by financing activities were $2,328,404 for six
months ended March 31, 2004 as compared to $293,481 for the six months ended
March 31, 2003. For the six months ended March 31, 2004, net cash provided by
financing activities related primarily to proceeds from the exercise of stock
options and related party loans of $315,550 and $13,207, respectively, proceeds
from the sale of preferred stock of $1,902,475, and proceeds from notes payable
of $97,172. For the six months ended March 31, 2003, net cash provided by
financing activities related to proceeds from related party loans of $5,392 and
proceeds from the exercise of stock options of $288,089.
We currently have no material commitments for capital expenditures. Our
future growth is dependent on our ability to raise capital for expansion, and to
seek additional revenue sources. If we decide to pursue any acquisition
opportunities or other expansion opportunities, we may need to raise additional
capital, although there can be no assurance such capital-raising activities
would be successful.
CRITICAL ACCOUNTING POLICIES
A summary of significant accounting policies is included in Note 1 to
the audited consolidated financial statements included in our filing on Form
10-KSB as filed with the Securities and Exchange Commission for the year ended
September 30, 2003. Management believes that the application of these policies
on a consistent basis enables the Company to provide useful and reliable
financial information about the company's operating results and financial
condition.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
We account for stock options issued to employees in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. As such,
compensation cost is measured on the date of grant as the excess of the current
market price of the underlying stock over the exercise price. Such compensation
amounts, if any, are amortized over the respective vesting periods of the option
grant. We adopted the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" and SFAS 148, "Accounting for Stock-Based Compensation
-Transition and Disclosure", which permits entities to provide pro forma net
income (loss) and pro forma earnings (loss) per share disclosures for employee
stock option grants as if the fair-valued based method defined in SFAS No. 123
had been applied. We account for stock options and stock issued to non-employees
for goods or services in accordance with the fair value method of SFAS 123.
Our revenues from the sale of products are recorded when the goods are
shipped. Consulting income is recognized on a straight-line basis over the
period of the service agreement. Deferred revenues relates to consulting
revenues that is being recognized over the period of the service agreement.
-25-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS
(continued)
Marketable equity securities consist of investments in equity of publicly traded
and non-public domestic companies and are stated at market value based on the
most recently traded price of these securities at March 31, 2004. All marketable
securities are classified as available for sale at March 31, 2004. Unrealized
gains and losses, determined by the difference between historical purchase price
and the market value at each balance sheet date, are recorded as a component of
Accumulated Other Comprehensive Income in Stockholders' Equity. Realized gains
and losses are determined by the difference between historical purchase price
and gross proceeds received when the marketable securities are sold.
OPERATING RISK
(a) Country risk
Currently, the Company's revenues are primarily derived from sale of
computer equipment and accessories to customers in the Peoples Republic of China
(PRC). The Company hopes to expand its operations to countries outside the PRC,
however, such expansion has not been commenced and there are no assurances that
the Company will be able to achieve such an expansion successfully. Therefore, a
downturn or stagnation in the economic environment of the PRC could have a
material adverse effect on the Company's financial condition. As experienced in
Spring 2003, diseases such as SARS can significantly impact the PRC economy and
affect the company productivity.
(b) Products risk
In addition to competing with other computer and electronics equipment
companies, the Company could have to compete with larger US companies who have
greater funds available for expansion, marketing, research and development and
the ability to attract more qualified personnel if access is allowed into the
PRC market. If US companies do gain access to the PRC markets, it may be able to
offer products at a lower price. There can be no assurance that the Company will
remain competitive should this occur.
(c) Exchange risk
The Company generates revenue and incurs expenses and liabilities in
Chinese renminbi and U.S. dollars. As a result, the Company is subject to the
effects of exchange rate fluctuations with respect to any of these currencies.
For example, the value of the renminbi depends to a large extent on PRC's
domestic and international economic and political developments, as well as
supply and demand in the local market. Since 1994, the official exchange rate
for the conversion of renminbi to U.S. dollars has generally been stable and the
renminbi has appreciated slightly against the U.S. dollar. However, given recent
economic instability and currency fluctuations, the Company can offer no
assurance that the renminbi will continue to remain stable against the U.S.
dollar or any other foreign currency. The Company's results of operations and
financial condition may be affected by changes in the value of renminbi and
other currencies in which its earnings and obligations are denominated. The
Company has not entered into agreements or purchased instruments to hedge its
exchange rate risks, although the Company may do so in the future.
-26-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS
(continued)
Although Chinese governmental policies were introduced in 1996 to allow
the convertibility of renminbi into foreign currency for current account items,
conversion of renminbi into foreign exchange for capital items, such as foreign
direct investment, loans or security, requires the approval of the State
Administration of Foreign Exchange, or SAFE, which is under the authority of the
People's Bank of China. These approvals, however, do not guarantee the
availability of foreign currency. The Company cannot be sure that the Company
will be able to obtain all required conversion approvals for its operations; or
that Chinese regulatory authorities will not impose greater restrictions on the
convertibility of the renminbi in the future. Because a significant amount of
its revenues are in the form of renminbi, its inability to obtain the requisite
approvals or any future restrictions on currency exchanges will limit its
ability to utilize revenue generated in renminbi to fund its business activities
outside PRC.
(d) Political risk
Currently, the PRC is in a period of growth and is openly promoting
business development in order to bring more business into PRC. Additionally, the
PRC allows a Chinese corporation to be owned by a United States corporation. If
the laws or regulations are changed by the PRC government, the Company's ability
to operate the PRC subsidiaries could be affected.
(e) Our future performance is dependent on its ability to retain key personnel
Our performance is substantially dependent on the performance of our
senior management. In particular, the Company's success depends on the continued
effort of our Senior Management to maintain all contact with our Chinese
subsidiaries. The Company's inability to retain Senior Management could have a
material adverse effect on our prospects, businesses, Chinese operations,
financial conditions
ITEM 3. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer (collectively,
the "Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures for us. Based upon such officers' evaluation
of these controls and procedures as of a date within 45 days of the filing of
this Quarterly Report, and subject to the limitations noted hereinafter, the
Certifying Officers have concluded that our disclosure controls and procedures
are effective to ensure that information required to be disclosed by us in this
Quarterly Report is accumulated and communicated to management, including our
principal executive officers as appropriate, to allow timely decisions regarding
required disclosure.
The Certifying Officers have also indicated that there were no
significant changes in our internal controls or other factors that could
significantly affect such controls subsequent to the date of their evaluation,
and there were no corrective actions with regard to significant deficiencies and
material weaknesses.
-27-
ITEM 3. CONTROLS AND PROCEDURES (continued)
Our management, including each of the Certifying Officers, does not
expect that our disclosure controls or our internal controls will prevent all
error and fraud. A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the
control system are met. In addition, the design of a control system must reflect
the fact that there are resource constraints, and the benefits of controls must
be considered relative to their costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within a company have
been detected. These inherent limitations include the realities that judgments
in decision-making can be faulty, and that breakdowns can occur because of
simple error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people or by
management override of the control. The design of any systems of controls also
is based in part upon certain assumptions about the likelihood of future events,
and their can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, control may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of these inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
Part II - OTHER INFORMATION
Item 1.Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
Preferred stock
In January 2004, the Board of Directors established a Series A 6%
Cumulative Convertible Preferred Stock (the "Series A Preferred
Stock") authorized to be issued by the Company, with the
designations and amounts thereof, together with the voting powers,
preferences and relative, participating, optional and other special
rights of the shares of each such series, and the qualifications,
limitations or restrictions as follows:
The number of shares of Series A Preferred Stock shall be 200,000
to five institutional investors. Each share of Series A Preferred
Stock shall have a stated value equal to $10 (as adjusted for any
stock dividends, combinations or splits with respect to such
shares) (the "Stated Value"), and $.001 par value.
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Item 2. Changes in Securities and Use of Proceeds (continued)
On January 16, 2004, we consummated a securities purchase agreement
under which the Company agreed to issue $2,000,000 stated value of
its newly created Series A Preferred Stock to several institutional
investors. On January 16, 2004, we closed our initial Series A
Preferred Stock and issued 100,000 shares of Series A Preferred
Stock ($1,000,000 stated value) for net proceeds of $944,987. The
Series A Preferred Stock is convertible at $0.232 per share. In
addition, we issued warrants to purchase 215,517 shares of its
common stock at $0.3045 on the initial closing
On March 31, 2004, we closed on the remaining balance of its Series
A Preferred Stock with various institutional investors. As part of
this closing phase, we issued 100,000 shares of Series A Preferred
Stock ($1,000,000 stated value) for net proceeds of $957,488. These
shares of Series A Preferred Stock are convertible into common
stock at $0.232 per share, and included warrants to purchase
215,517 shares of its common stock exercisable at $0.3045.
The issuance of these shares are exampt under Rule 506 of
Regulation D of the Securities act of 1933.
Common stock
In March 2004, we issued 1,740,469 shares of common stock in
connection with the conversion of 40,000 shares of Series A
Preferred Stock.The issuance of these shares are exampt under
section (3)(A)(9) of the Securities act of 1933.
On March 29, 2004, we issued an aggregate of 240,000 shares of its
common stock to officers for services rendered. The issuance of
these shares are exampt under section 4(2) of the Securities act
of 1933.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(1) Exhibits
Exhibit
Number Description
------ ----------------
31.1 Certification by Chief Executive Officer Pursuant to Section 302
31.2 Certification by Chief Financial Officer Pursuant to Section 302
32.1 Certification by Chief Executive Officer Pursuant to Section 906
32.2 Certification by Chief Financial Officer Pursuant to Section 906
Item 6. Exhibits and Reports on Form 8-K (continued)
(2) Reports on Form 8-K
On January 16, 2004, we reported that we consummated a
securities purchase agreement under which we agreed to issue
$2,000,000 stated value of our newly created Series A 6%
Cumulative Convertible Preferred Stock (the "Series A Preferred
Stock") to several institutional investors.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in Boca Raton, Florida on May 12, 2004.
GENESIS TECHNOLOGY GROUP, INC.
By: /s/ Gary Wolfson
--------------------
Gary Wolfson
Chief Executive Officer
By: /s/ Adam Wasserman
----------------------
Adam Wasserman
Chief Financial Officer
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