UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended December 31, 2006
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For the transition period from ________ to __________
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.)
7900 GLADES ROAD, SUITE 420
BOCA RATON, FLORIDA 33434
---------------------------------
(Address of principal executive offices)
(561) 988-9880
--------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: At February 10, 2007, there were
84,557,112 outstanding shares of common stock, $.001 par value per share.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
This quarterly report contains forward-looking statements. These forward-looking
statements are subject to risks and uncertainties and other factors that may
cause our actual results, performance or achievements to be materially different
from the results, performance or achievements expressed or implied by the
forward-looking statements. You should not unduly rely on these statements.
Forward-looking statements can be identified by the fact that they do not relate
strictly to historical or current facts. They use words such as "anticipate,"
"estimate," "expect," "project," "intend," "plan," "believe," "project,"
"contemplate," "would," "should," "could," or "may." With respect to any
forward-looking statement that includes a statement of its underlying
assumptions or bases, we believe such assumptions or bases to be reasonable and
have formed them in good faith, assumed facts or bases almost always vary from
actual results, and the differences between assumed facts or bases and actual
results can be material depending on the circumstances. When, in any
forward-looking statement, we express an expectation or belief as to future
results, that expectation or belief is expressed in good faith and is believed
to have a reasonable basis, but there can be no assurance that the stated
expectation or belief will result or be achieved or accomplished. All subsequent
written and oral forward-looking statements attributable to us, or anyone acting
on our behalf, are expressly qualified in their entirety by the cautionary
statements.
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
FORM 10-QSB
QUARTERLY PERIOD ENDED December 31, 2006
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheet
December 31, 2006 (Unaudited)................................ 3
Consolidated Statements of Operations (Unaudited)
For the Three Months Ended December 31, 2006................. 4
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended December 31, 2006................. 5
Notes to Consolidated Financial Statements............................ 6-12
Item 2 - Management's Discussion and Analysis or Plan of Operation.... 15-21
Item 3 - Controls and Procedures...................................... 21-22
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings............................................ 22
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds.. 22-23
Item 3 - Default upon Senior Securities .............................. 23
Item 4 - Submission of Matters to a Vote of Security Holders.......... 23
Item 5 - Other Information............................................ 23
Item 6 - Exhibits..................................................... 23
Signatures............................................................ 24
- 2 -
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2006
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................................... $ 735,043
Marketable equity securities, at market ....................... 74,660
Prepaid expenses and other current assets ..................... 17,289
Deferred contract costs ....................................... 323,388
------------
Total Current Assets ...................................... 1,150,380
PROPERTY AND EQUIPMENT - Net .................................... 16,105
OTHER ASSETS:
Restricted marketable equity securities, at market ............ 4,098,539
Other assets .................................................. 45,583
------------
Total Assets .............................................. $ 5,310,607
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses ......................... $ 201,800
Liabilities of discontinued operations ........................ 150,709
------------
Total Current Liabilities ................................. 352,509
------------
MINORITY INTEREST ............................................... 18,379
------------
SHAREHOLDERS' EQUITY:
Preferred stock ($.001 Par Value; 20,000,000 Shares Authorized) -
Convertible preferred stock Series A ($.001 Par Value; 218,000
Shares Authorized; 15,400 shares issued and outstanding) .... 15
Common stock ($.001 Par Value; 200,000,000 Shares Authorized;
84,057,112 shares issued and outstanding) ................... 84,058
Additional paid-in capital .................................... 22,334,605
Accumulated deficit ........................................... (17,243,901)
Less: treasury stock, at cost (10,000 shares) ................. (2,805)
Less: deferred compensation ................................... (249,455)
Less: subscription receivable ................................. (182,340)
Accumulated other comprehensive income ........................ 199,542
------------
Total Shareholders' Equity ................................ 4,939,719
------------
Total Liabilities and Shareholders' Equity ................ $ 5,310,607
============
See notes to unaudited consolidated financial statements
- 3 -
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended
December 31,
---------------------------
2006 2005
------------ ------------
(Unaudited) (Unaudited)
NET REVENUES ..................................... $ - $ 5,000
------------ ------------
OPERATING EXPENSES:
Consulting ..................................... 51,730 -
Salaries and stock-based compensation .......... 616,982 194,162
Selling, general and administrative ............ 179,512 77,080
------------ ------------
Total Operating Expenses ................. 848,224 271,242
------------ ------------
LOSS FROM OPERATIONS ............................. (848,224) (266,242)
------------ ------------
OTHER INCOME (EXPENSE):
Gain from sale of marketable securities ........ 33,895 40,457
Unrealized loss on trading securities .......... (25,601) -
Settlement income .............................. 157,500 -
Interest income ................................ 4,622 38
------------ ------------
Total Other Income (Expense) ............. 170,416 40,495
------------ ------------
LOSS BEFORE DISCONTINUED OPERATIONS, INCOME TAXES
AND MINORITY INTEREST .......................... (677,808) (225,747)
------------ ------------
DISCONTINUED OPERATIONS:
Gain from discontinued operations .............. - 2,624
------------ ------------
Total gain from Discontinued Operations .. - 2,624
------------ ------------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST ... (677,808) (223,123)
PROVISION FOR INCOME TAXES ....................... - -
------------ ------------
LOSS BEFORE MINORITY INTEREST .................... (677,808) (223,123)
MINORITY INTEREST IN LOSS OF SUBSIDIARY .......... 2,526 -
------------ ------------
NET LOSS ......................................... $ (675,282) $ (223,123)
============ ============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED:
Net loss from continuing operations ............ $ (0.01) $ -
Net loss from discontinued operations .......... - -
------------ ------------
Net loss per common share ...................... $ (0.01) $ -
============ ============
Weighted common shares outstanding - basic ..... 83,890,354 69,765,010
============ ============
Weighted common shares outstanding - diluted ... 83,890,354 69,765,010
============ ============
See notes to unaudited consolidated financial statements
-4-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended
December 31,
--------------------------
2006 2005
----------- -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ......................................... $ (675,282) $ (223,123)
Income from discontinued operations .............. - 2,624
----------- -----------
Loss from continuing operations .................. (675,282) (225,747)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation ................................... 1,456 1,792
Minority interest income ....................... (2,526) -
Gain on sale of marketable securities .......... (33,895) (40,457)
Unrealized loss on trading securities .......... 25,601 -
Stock-based compensation and consulting ........ 518,912 193,792
Settlement income .............................. (157,500) -
Changes in assets and liabilities:
Prepaid and other current assets ............... (10,559) -
Deferred contract costs ........................ (102,885) -
Other assets ................................... - 4,249
Accounts payable and accrued expenses .......... (5,704) 8,649
Due to related party ........................... (75,000) -
Deferred revenue ............................... - (5,000)
----------- -----------
Net cash used in continuing operations activities (517,382) (62,722)
----------- -----------
Net cash used in discontinued operations ......... - (1,168)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES .............. (517,382) (63,890)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................. (1,920) -
Proceeds from sale of marketable securities ...... 534,001 81,151
----------- -----------
NET CASH FLOWS PROVIDED BY INVESTING ACTIVITIES .... 532,081 81,151
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions from minority interest ............. 127,734 -
----------- -----------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES .... 127,734 -
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES IN CASH ............ - 1,167
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS .......... 142,433 18,428
CASH AND CASH EQUIVALENTS - beginning of year ...... 592,610 17,887
----------- -----------
CASH AND CASH EQUIVALENTS - end of period .......... $ 735,043 $ 36,315
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest ..................................... $ - $ -
=========== ===========
Income taxes ................................. $ - $ -
=========== ===========
Non-cash investing and financing activities:
Distribution of marketable securities to LLC
member for minority interest ................ $ 1,684,224 $ -
=========== ===========
Issuance of common stock for deferred
contract costs .............................. $ 120,000 $ -
=========== ===========
See notes to unaudited consolidated financial statements
-5-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
(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 and marketing firm that specializes in advising and providing a
turnkey solution for Chinese small and mid-sized companies entering Western
markets. The Company dedicates its expertise and capital resources to expand the
potential of Chinese partner companies. The Company provides the marketing
strategy, counsel, and plans to support its clients' business, financial, and
marketing goals. The Company works closely with top management to define its
strategy and business model to develop effective tactics to support business
development. The Company's business mission is to create substantial,
incremental stockholder value for emerging growth companies by executing
strategy-driven programs that professionally incubate and mature Chinese
companies and prepare them for Western markets.
Genesis provides strategy and execution services to Chinese clients, who believe
that penetrating US markets is critical to achieving their core operating and
financial objectives. The Company fosters development projects that require
marketing, manufacturing, finance, and product deployment expertise for
companies in the United States and China. The Company's core competency is
sourcing merger and acquisitions opportunities for both its contract clients and
the Company. Genesis makes a long-term commitment to these partner companies,
and it helps guide their entry into the foreign terrain of an alien business
culture and capital markets.
Effective June 20, 2005, the Company formally established Genesis Equity
Partners LLC ("GEP") in which it owns 51% and strategic partners own the
remaining 49%. Subsequently, it has planned to organize additional limited
liability companies, dedicated to specific Chinese partner companies. While its
equity position in these LLC's may vary, the minimum ownership shall be
maintained at 51%, to ensure reporting of consolidated earnings.
In the fall of 2005, GEP signed a contract with The Jin Ma Group Company, Ltd.
("Jin Ma"), a real estate development company in Western China, to globalize its
operations in the areas of real estate, construction, and hospitality. Jin Ma
has been active in its industry since its founding in 1980. To be known in the
U.S. as Gold Horse International, Inc., a Nevada corporation, GEP will receive a
significant equity position in Gold Horse and ongoing consulting fees for
coordination and oversight of its U.S. business activities.
On November 20, 2006, GEP signed a contract with an environmental technologies
company in the power generation and industrial dyeing sectors. GEP could receive
a significant equity position and ongoing consulting fees for coordination and
oversight of its U.S. business activities This Chinese company required that GEP
refrain from publicizing its name or exact location until the audit by an
accredited US accounting firm has been completed. GEP is responsible for paying
for the audit, and the procedure typically takes 60-120 days, unless unforeseen
complexities are discovered during the process. A New York-based auditing firm
was engaged in early February 2007.
- 6 -
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
THE COMPANY (CONTINUED)
On December 11, 2006, GEP signed a contract with a health foods beverage
company. GEP could receive a significant equity position and ongoing consulting
fees for coordination and oversight of its U.S. business activities. This
Chinese company required that GEP refrain from publicizing its name or exact
location until the audit by an accredited US accounting firm has been completed.
GEP is responsible for paying for the audit, and the procedure typically takes
60-120 days, unless unforeseen complexities are discovered during the process.
GEP has incurred approximately $323,388 of legal, audit and other related fees
and expenses in connection with the signing of these agreements, which have been
recorded as deferred contract costs in the accompanying balance sheet. While the
earning of a significant equity position in these partner companies could
positively impact the earnings and assets of the Company, it also carries
significant risks, including--but not limited to--such circumstances as (1) the
audit may conclude that the Chinese partner companies do not have the value or
potential concluded in the screening and pre-audit stages; (2) the Chinese
partner companies maintain the right to cancel the GEP contracts, with just 60
days' notice, until it reaches public company status; and (3), for a variety of
reasons, the Chinese partner companies may never reach public company status.
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
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, 2006 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 three months ended December 31, 2006 are not necessarily
indicative of the results for the full fiscal year ending September 30, 2007.
USE OF ESTIMATES
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 revenue and expenses during the reporting period. Actual
results could differ from those estimates. Significant estimates in fiscal 2007
and 2006 include the valuation of stock-based compensation, and the useful life
of property and equipment.
- 7 -
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
(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 December 31,
2006. The Company has marketable securities classified as trading and available
for sale securities at December 31, 2006. Realized and unrealized gains and
losses on trading securities are included in earnings. Unrealized gains and
losses on available for sale securities, 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. For the purpose of computing realized gains and
losses, cost is identified on a specific identification basis. For marketable
equity securities for which there is an other-than-temporary impairment, an
impairment loss is recognized as a realized loss. For the three months ended
December 31, 2006 and 2005, the Company recognized a gain of $33,895 and $40,457
from the sale of marketable equity securities, respectively.
NET INCOME (LOSS) PER SHARE
Basic income (loss) per share is computed by dividing net income (loss) by
weighted average number of shares of common stock outstanding during each
period. Diluted income per share is computed by dividing net income by the
weighted average number of shares of common stock, common stock equivalents and
potentially dilutive securities outstanding during each period. The Company's
common stock equivalents at December 31, 2006 include 22,911,611 unexercised
warrants and options and 663,793 shares issuable upon conversion of Series A
preferred stock. The computation of diluted net earnings per share does not
include dilutive common stock equivalents in the weighted average shares
outstanding as they would be anti-dilutive.
STOCK-BASED COMPENSATION
The Company uses Statement of Financial Accounting Standards No. 123 (revised
2004), Share Based Payment ("SFAS No. 123R"). SFAS No. 123R establishes the
financial accounting and reporting standards for stock-based compensation plans.
As required by SFAS No. 123R, the Company recognized the cost resulting from all
stock-based payment transactions including shares issued under its stock option
plans in the financial statements.
REVENUE RECOGNITION
The Company follows the guidance of the Securities and Exchange Commission's
Staff Accounting Bulletin 104 for revenue recognition. In general, the Company
records revenue when persuasive evidence of an arrangement exists, services have
been rendered or product delivery has occurred, the sales price to the customer
is fixed or determinable, and collectability is reasonably assured. The
following policies reflect specific criteria for the various revenues streams of
the Company:
- 8 -
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
REVENUE RECOGNITION (CONTINUED)
o Consulting income is recognized on a straight-line basis over the
period of the service agreement.
o Deferred revenues relates to consulting revenues that is being
recognized over the period of the service agreement.
Substantially all of the services the Company provides are paid in common shares
issued by its clients. These instruments are classified as marketable equity
securities on the consolidated balance sheet, if still held at the financial
reporting date. These instruments are stated at fair value in accordance with
the provision of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS No.
115) and EITF 00-8 "Accounting by a grantee for an equity instrument to be
received in conjunction with providing goods or services." Primarily all of the
equity instruments are received from small public companies. For the three
months ended December 31, 2006 and 2005, the Company recorded revenues of $0 and
$5,000, respectively.
NOTE 2 - GOING CONCERN
As reflected in the accompanying consolidated financial statements, the Company
had an accumulated deficit of $17,243,901 and working capital of $797,871 at
December 31, 2006, net losses in three months ended December 31, 2006 of
$675,282 and cash used in operations during the three months ended December 31,
2006 of $517,382.While the Company reported net income of $6,210,685 for the
fiscal year ended September 30, 2006, its operating results for future periods
will include significant expenses, including compensation expense, travel
expense, professional fees, marketing costs, and administrative and general
overhead expenses, and costs related to the fulfillment of obligations related
to its client contracts, which the Company will incur as it continues to
implement its business model. As a result, the Company is unable to predict
whether it will continue to achieve profitability in the future. There can be no
assurances whatsoever that the Company will be able to successfully implement
its business model, identify and close acquisitions of operating companies,
identify and close contract clients, penetrate its target markets or attain a
wide following for its services. The Company is attempting to increase revenues
and cash flows and control costs. While the Company believes in the viability of
its strategy to improve sales volume and in its ability to raise additional
funds and/or sell its investments in marketable equity securities, there can be
no assurances to that effect. The ability of the Company to continue as a going
concern is dependent on the Company's ability to further implement its business
plan, generate increased revenues, and obtain operating cash from the sale of
marketable equity securities received for services. The consolidated financial
statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern. Management believes that the actions
presently being taken to further implement its business plan and generate
additional revenues provide the opportunity for the Company to continue as a
going concern.
- 9 -
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
(Unaudited)
NOTE 3 - STOCKHOLDERS' EQUITY
COMMON STOCK
On November 20, 2006, the Company issued 600,000 shares to a Beijing-based
consultant for business development services rendered in connection with its GEP
operations. The Company valued these common shares at the fair market value on
the date of grant of $0.10 per share or $60,000 based on the trading price of
common shares. Accordingly, the Company recorded deferred contract costs of
$60,000, which will be expensed upon the completion of GEP's contract an
environmental technologies company in the power generation and industrial dyeing
sectors.
On November 30, 2006, in connection with the appointment of a new board of
director, Rodrigo Arboleda, the Company issued 500,000 shares of restricted
common stock to the new board of director member for services to be rendered for
a one-year period. The Company valued these common shares at the fair market
value on the date of grant of $0.135 per share or $67,500 based on the trading
price of common shares. Accordingly, the Company recorded stock-based
compensation expense of $5,625 and deferred compensation of $61,875, which will
be amortized over the remaining service period.
On November 21, 2006, in connection with the settlement of a lawsuit with the
Company former director and employee, the Company entered into a settlement and
Release Agreement (the "Release Agreement"), whereby the former director and
employee returned 1,575,000 shares of the Company's common stock owned by him.
The Company cancelled these shares. The parties agreed to release each other
from further action and have dismissed the lawsuit with prejudice. In connection
with the return of the 1,575,000 shares of common stock, the Company recorded
settlement income of $157,500 based on the fair market value of the common stock
on the date of settlement of $0.10 per share or $157,500 based on the trading
price of common shares.
On December 11, 2006, the Company issued 500,000 shares to a Beijing-based
consultant for business development services rendered in connection with its GEP
operations. The Company valued these common shares at the fair market value on
the date of grant of $0.12 per share or $60,000 based on the trading price of
common shares. Accordingly, the Company recorded deferred contract costs of
$60,000, which will be expensed upon the completion of GEP's contract with a
health foods beverage company.
- 10 -
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
(Unaudited)
NOTE 3 - STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS AND WARRANTS
As of December 31, 2006, the total future compensation expense related to
non-vested and vested options not yet recognized in the consolidated statement
of operations is $1,086,934.
A summary of the stock options and warrants as of December 31, 2006 and changes
during the period is presented below:
Number of Weighted
Options and Average
Warrants Exercise Price
----------- --------------
Balance at beginning of year ............... 22,911,611 $0.133
Granted .................................... - -
Exercised .................................. - -
Forfeited .................................. - -
---------- ------
Balance at December 31, 2006 ............... 22,911,611 $0.133
========== ======
Options exercisable at end of period ....... 22,911,611 $0.133
========== ======
Weighted average fair value of options
granted during the period ................. $ -
The following table summarizes information about employee and consultants stock
options and investor warrants outstanding at December 31, 2006:
Options and Warrants
Options and Warrants Outstanding Exercisable
------------------------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding at Contractual Exercise Exercisable at Exercise
Price December 31, 2006 Life Price December 31, 2006 Price
---------- ----------------- ----------- -------- ----------------- --------
$0.30-0.31 3,213,361 2.35 Years $0.305 3,213,361 $0.305
0.145 7,400,000 0.58 Years 0.145 7,400,000 0.145
0.085-0.10 7,923,250 3.56 Years 0.086 7,923,250 0.086
0.056-0.06 4,375,000 0.87 Years 0.059 4,375,000 0.059
----------------- -------- ----------------- --------
22,911,611 $0.133 22,911,611 $0.133
================= ======== ================= ========
- 11 -
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
(Unaudited)
NOTE 4 - RELATED PARTY TRANSACTIONS
During the three months ended December 31, 2006, the Company incurred $2,905 in
accounting fees to a company owned by Adam Wasserman, the Company's chief
financial officer for accounting services rendered related to Jin Ma which has
been included in deferred contract costs on the accompanying consolidated
balance sheet.
During the three months ended December 31, 2006, the Company distributed
3,302,400 shares of SEAA to China West, LLC.
NOTE 5 - CONTINGENCIES
LITIGATION
KEKE ZHANG A/K/A KATHERINE ZHANG VS. GENESIS TECHNOLOGY GROUP, INC., A FLORIDA
CORPORATION AND GARY L. WOLFSON - CASE NO. 50 2006 CA 003447, PALM BEACH COUNTY,
FLORIDA
--------------------------------------------------------------------------------
In April 2006, a former employee of the Company filed a lawsuit against the
Company and our Chief Executive Officer alleging breach of an employment
agreement, loss of compensation, and losses from the value associated with
denied stock options. The Company plans to vigorously defend its position and
believe that any settlement will not have a material adverse effect on its
financial condition.
NOTE 6 - SUBSEQUENT EVENTS
On January 1, 2007, in connection with the appointment of a new board of
director, Robert D. Cain, the Company issued 500,000 shares of restricted common
stock to the new board of director member for services to be rendered for a
one-year period. The Company valued these common shares at the fair market value
on the date of grant of $.14 per share or $70,000 based on the trading price of
common shares. Accordingly, the Company recorded deferred compensation of
$70,000, which will be amortized over the remaining service period.
On January 22, 2007, the Company entered into a consulting agreement with
Venture Spark, LLC, a company owned by Robert D. Cain, a member of the Company's
Board of Directors. Venture Spark, LLC agreed to develop a business prospectus
and other materials for the Company to be used in business development
activities. The Company agreed to pay Venture Sparks, LLC $18,000.
On February 7, 2007, effective February 12, 2007, the Company entered into a
one-month investor relations agreement with a third party. In connection with
the agreement, the Company paid $16,000.
- 12 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following analysis of our consolidated financial condition and
results of operations for the three months ended December 31, 2006 and 2005,
should be read in conjunction with the consolidated financial statements,
including footnotes, and other information presented in our Form 10-KSB for the
year ended September 30, 2006 as filed with the Securities and Exchange
Commission.
OVERVIEW
During fiscal 2005 our operations were related to our computer
equipment and accessories division, and our consulting services division. In
November 2005, we entered into an agreement to sell our computer services
division and the transaction closed in February 2006. The operations of our
computer services division are reported as discontinued operations in the
financial statements, which are included elsewhere in this quarterly report.
Following the sale of our computer services division, we have focused
substantially all of our time and our resources on our consulting division. In
June 2005, we formally established GEP, a limited liability partnership of which
we are a 51% owner. Our consulting services are offered through GEP. The
minority members of GEP include China West, LLC, holding 25% of GEP, and Shaohua
Tan, Inc., a company owned by Dr. Shaohua Tan, a member of our Board of
Directors, holding 24% of GEP. We, along with China West, are the managing
members of GEP. The Company has also planned to organize additional limited
liability companies, dedicated to specific Chinese partner companies. While its
equity position in these LLC's may vary, the minimum ownership shall be
maintained at 51%, to ensure reporting of consolidated earnings.
GEP is a full service advisory company specializing in small
Chinese-based companies, which are traded on the U.S. public markets. We offer a
comprehensive suite of services tailored to the specific needs of our clients.
The menu of services offered by GEP includes:
* U.S. representative offices
* General business consulting services
* Merger and acquisition strategy planning and analysis
* Advice on U.S. capital markets, including assessment of potential
sources of investment capital
* Coordination of professional resources
* Corporate asset evaluation
* Public relations
* Advice and structure assistance for strategic alliances, partnerships
and joint ventures
GEP enters into agreements with its consulting clients, which provide
for a fixed fee to it for its services. The amount of fee varies based upon the
scope of the services GEP renders. For fiscal year 2006, all of GEP's fees were
paid in shares of its client's securities, which are valued at fair market value
for the purposes of revenue recognition. The shares received are unregistered
shares. Our policy is to sell securities we receive as compensation as soon as
we remove any restriction and not to hold these securities as investments.
- 13 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
In March 2006, GEP signed a General Partnership Agreement with Liang
Fang Pharmaceutical, Ltd. ("Liang"), a company registered in the People's
Republic of China. In August 2006, GEP and the members of Liang established
Lotus Pharmaceutical International, Inc., a Nevada company ("Lotus") and in
September 2006, Lotus and its stockholders closed a reverse merger with Lotus
Pharmaceuticals, Inc. (formerly S.E. Asia Trading Company, Inc.), a
publicly-trading company ("SEAA"). At closing GEP received 13,209,600
restricted, common shares of SEAA for services performed in assisting Lotus
facilitate the merger with SEAA and for other business development services.
Separately, Lotus has entered into consulting service agreements and
equity-related agreements with Beijing Liang Fang Pharmaceutical Co., Ltd. and
Beijing En Zhe Jia Shi Pharmaceutical Co., Ltd. We valued the 13,209,600 shares
received at $.51 per share based on an accredited business valuation performed
by an independent party. Accordingly, during fiscal year 2006, we recorded
revenue of $6,736,896 related to the receipt of these restricted marketable
equity securities.
On September 28, 2006, GEP immediately distributed 3,170,304 shares of
SEAA to Shaohua Tan, Inc., a company owned by Mr. Tan, which represented 24% of
the shares received as compensation for our services and during the three months
ended December 31, 2006 distributed 3,302,400 shares of SEAA to the beneficial
owner, China West, LLC. We retain control over 6,736,896 shares. The value of
the shares held by our company is reflected on our balance sheet at December 31,
2006, which appears elsewhere in this report in restricted marketable equity
securities, at market.
While it is not our policy to hold securities we accept as payment for
services as long-term investments, we are not always able to immediately
liquidate such securities as a result of either market conditions or
restrictions on resale imposed by Federal securities laws. These unsold
securities comprise substantially all of our assets. Our balance sheet reflects
investments in marketable securities, which are securities, which are freely
saleable by us, and restricted investments in marketable securities held for
sale, which represent securities, which are not freely saleable under Federal
securities laws. Realized gains or losses on securities are recognized at the
time the securities are sold. Unrealized gains or losses on trading securities
are recognized on a monthly basis in our statement of operations based upon the
changes in the fair market value of the securities. Unrealized gains or losses
on investment in marketable securities held for sale are recognized as a
component of comprehensive income on a monthly basis based on changes in the
fair market value of the securities. These changes in valuations of the
securities can have the effect of significantly increasing our net income and
comprehensive income, if the price of the securities increases from the original
value assigned to it at the time the related revenue was recognized. Conversely,
if the price were to decline, such decreases could negatively impact our net
income and comprehensive income.
Our revenues for fiscal 2005 and fiscal 2006 were materially dependent
on a limited number of consulting clients. In addition, under our present
business model, our ability to generate revenues from our consulting contracts
is dependent upon factors, which may be out of our control. Accordingly, while
we could enter into agreement with companies, which may produce revenue for us
in future periods, it is also possible that the events necessary for us to
receive payment for our services may never occur. In addition, we are
responsible for the payment of various fees and expenses to third parties
related to the services we provide, which such payments are not conditioned upon
our receipt of payment from our client. While we do not believe it to be likely,
it is possible that we could expend significant funds on behalf of a particular
client and never earn our fee from that client.
- 14 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
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. Currently, we are not actively pursuing any acquisitions.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these consolidated financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates based on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
A summary of significant accounting policies is included in Note 1 to
the audited consolidated financial statements included on this Form 10-KSB as
filed with the U.S. Securities and Exchange Commission. Management believes that
the application of these policies on a consistent basis enables us to provide
useful and reliable financial information about the company's operating results
and financial condition.
Accounting for Stock Based Compensation - Effective October 1, 2005, we
adopted Statement of Financial Accounting Standards No. 123 (revised 2004),
Share Based Payment ("SFAS No. 123R"). SFAS No. 123R establishes the financial
accounting and reporting standards for stock-based compensation plans. As
required by SFAS No. 123R, we recognize the cost resulting from all stock-based
payment transactions including shares issued under our stock option plans in the
financial statements. The adoption of SFAS No. 123R will have a negative impact
on our future results of operations.
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 December 31,
2006. We have marketable securities classified as trading and available for sale
securities at December 31 2006. Realized and unrealized gains and losses on
trading securities are included in earnings. Unrealized gains and losses on
available for sale securities, 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. Realized gains or losses on the sale or exchange of equity securities and
declines in value judged to be other than temporary are recorded in gains
(losses) on equity securities, net. Marketable equity securities are presumed to
be impaired if the fair value is less than the cost basis continuously for three
consecutive quarters, absent evidence to the contrary.
- 15 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
Revenue recognition - We follow the guidance of the Securities and
Exchange Commission's Staff Accounting Bulletin 104 for revenue recognition. In
general, we record revenue when persuasive evidence of an arrangement exists,
services have been rendered or product delivery has occurred, the sales price to
the customer is fixed or determinable, and collectability is reasonably assured.
The following policies reflect specific criteria for our revenues stream:
o Consulting income is recognized on a straight-line basis over the
period of the service agreement.
o Deferred revenues relates to consulting revenues that is being
recognized over the period of the service agreement.
Substantially all of the services we provide are paid in common shares
issued by our clients. These instruments are classified as marketable equity
securities on the consolidated balance sheet, if still held at the financial
reporting date. These instruments are stated at fair value in accordance with
the provision of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS No.
115) and EITF 00-8 "Accounting by a grantee for an equity instrument to be
received in conjunction with providing goods or services." Primarily all of the
equity instruments are received from small public companies.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2006 COMPARED THE THREE MONTHS ENDED DECEMBER
31, 2005
REVENUES
For the three months ended December 31, 2006, we had consolidated
revenues of $0 as compared to $5,000 for the three months ended December 31,
2005, a decrease of $5,000 or 100%. During the three months ended December 31,
2006, we spent a substantial amount of time coordinating and facilitating the
completion of services in connection with the agreement entered between GEP and
Jin Ma Group Company, Ltd. ("Jin Ma"), a real estate development company in
Western China. We anticipate that this transaction will be completed in the near
future at such time GEP will receive a significant equity position in Gold Horse
and ongoing consulting fees for coordination and oversight of its U.S. business
activities. We currently have a limited number of client companies, and for the
year ended September 30, 2006, one of our clients represented approximately
99.9% of our total revenues. While we continue to market our consulting
services, we may need to raise additional working capital to fund our daily
operations and the commitments to our client contracts. Accordingly, we may be
limited in the amount of engagements we accept from additional consulting
clients, thereby limiting our ability to generate revenues in future periods. We
cannot assure you that we will ever be able to successfully implement our
expanded business model or increase our revenues in future periods.
OPERATING EXPENSES
For the three months ended December 31, 2006, operating expenses which
include consulting fees, salaries and non-cash compensation, and other selling,
general and administrative, were $848,224 compared to $271,242 for the three
months ended December 31, 2005,an increase of $576,982 or 213%.
- 16 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
The increase in operating expenses was primarily attributable to the
following:
o Our consulting expense increased to $51,730 for the three months ended
December 31, 2006 from $0 for the three months ended December 31, 2005,
an increase of $51,730. The increase was primarily due to the
recognition of stock-based consulting expenses of $44,556 from
amortization of deferred compensation in connection with the granting
of common stock and stock options to consultants in fiscal year 2006.
o Salaries and stock-based compensation expense increased to $616,982 for
the three months ended December 31, 2006 from $194,162 for three months
ended December 31, 2005, an increase of $422,820 or 218%. The increase
in salaries and stock-based compensation expense was attributable to an
increase in the amount of stock-based compensation of $474,356
recognized from amortization of deferred compensation in connection
with the granting of stock options to officers, employees, and
directors in fiscal 2006 offset by a decrease in overall salary
expense. Additionally, at December 31, 2006, we had deferred
compensation of $249,455 and there was approximately $1,087,000 of
total unrecognized compensation expense related to option-based
compensation arrangements which will be amortized into expense during
fiscal 2007.
o Other selling, general and administrative expenses increased to
$179,512 for the three months ended December 31, 2006 from $77,080 for
the three months ended December 31, 2005, a decrease of $102,432 or
133%. Other selling, general and administrative expenses included the
following:
2006 2005
-------- -------
Professional fees ....................... $127,632 $33,833
Rent .................................... 14,089 11,100
Travel and entertainment ................ 7,481 14,040
Other selling, general and administrative 30,310 18,107
-------- -------
Total .............................. $179,512 $77,080
======== =======
Professional fees increased by $93,799 or 277% for the three months
ended December 31, 2006 primarily due to an increase in legal fees of $81,656
related to general corporate matters, a litigation matter against a former
employee, and other legal matters in which we are the plaintiff. Additionally,
we incurred an increase in auditing fees of approximately $10,000.
Rent expense increased to $14,089 for the three months ended December
31, 2006 from $11,100 for three months ended December 31, 2005, an increase of
$2,989 or 27%. The increase in rent was primarily attributable to an increase in
common area maintenance expenses and the leasing on a month-to-month basis
office space in Beijing, China.
During the three months ended December 31, 2006, travel related
expenses decreased by $6,559 or 47% as compared to the 2005 period and was
attributable to a decrease in the number of staff traveling to China.
- 17 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
Other selling, general and administrative expenses include office
expenses and supplies, telephone and communications, and other expenses. For the
three months ended December 31, 2006, other selling, general and administrative
expenses amounted to $30,310 compared to $18,107 during the three months ended
December 31, 2005, an increase of $12,203 or 67%. The increase was attributable
to an increase in operational activities as we further develop our consulting
services segment.
GAIN FROM SALE OF MARKETABLE SECURITIES
For the three months ended December 31, 2006, we recorded a gain from
the sale of marketable securities of $33,895 compared to a $40,457 for the three
months ended December 31, 2005. The gain from the sale of marketable securities
relates to marketable securities that we had purchased and previously received
for business development services rendered by us and which we had previously
valued and recorded as revenue over the contract period. The gain represents the
difference in the sale price of the marketable securities and the fair value of
services provided which was previously recorded as revenue. Additionally, in
connection with services previously rendered, we were granted warrants to
purchase marketable securities, which we exercised at a price less than fair
market value. These marketable securities were sold and contributed to the gain
from sale of marketable securities.
UNREALIZED LOSS ON TRADING SECURITIES
We recorded an unrealized loss on trading securities of $25,601 for the
three months ended December 31, 2006 as compared to $0 for the three months
ended December 31, 2005. The unrealized loss on trading securities relates to
marketable securities that we had previously received for business development
services rendered by us and which we had previously valued and recorded as
revenue over the contract period. The loss represents the difference between the
fair values at the end of each reporting period.
SETTLEMENT INCOME
On November 21, 2006, in connection with the settlement of a lawsuit
with our former director and employee, we entered into a settlement and Release
Agreement (the "Release Agreement"), whereby the former director and employee
returned 1,575,000 shares of the Company's common stock owned by him. We
cancelled these shares. The parties agreed to release each other from further
action and have dismissed the lawsuit with prejudice. In connection with the
return of the 1,575,000 shares of common stock, we recorded settlement income of
$157,500 based on the fair market value of the common stock on the date of
settlement of $.10 per share or $157,500 based on the trading price of common
shares.
GAIN (LOSS) FROM DISCONTINUED OPERATIONS
For the three months ended December 31, 2005, we recorded a gain from
discontinued operations of $2,624 associated with the discontinuation of our
Chorry subsidiary, which was sold on February 14, 2006 as compared to $0 for the
three months ended December 31, 2006.
MINORITY INTEREST
For the three months ended December 31, 2006, we reported a minority
interest income of $2,526 as compared to $0 for the three months ended December
31, 2005. In 2006, the minority interest is attributable to GEP's minority
interest members, and had the effect of reducing our net loss.
- 18 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
OVERALL
We reported net loss for the three months ended December 31, 2006 of
$675,282 compared to a net loss for the three months ended December 31, 2005 of
$223,123. This translates to an overall per-share loss available to shareholders
of $.01 for the three months ended December 31, 2006 compared to per-share loss
of $0 for three months ended December 31, 2005.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2006, we had cash on hand of approximately $735,000 and
working capital of approximately $798,000. Our current assets primarily include
approximately $74,600 in investments in trading marketable equity securities,
and $323,388 in deferred contract costs associated with on-going client
contracts. Our current liabilities primarily consist of $201,801 of accounts
payable and $150,709 of liabilities from discontinued operations. During the
three months ended December 31, 2006, we sold approximately $500,000 of our
investments in trading marketable equity securities to fund our operations.
At December 31, 2006, our marketable equity securities consist of the
following:
Description Fair Market Value
----------- -----------------
Un-restricted marketable equity securities:
------------------------------------------
Sunwin International Neutraceuticals, Inc. (SUWN.OB) ....... $ 24,920
Dragon International Corp (DRGG.OB) ........................ 49,400
Com-Guard.com, Inc. (CGUD,PK) .............................. 340
----------
$ 74,660
==========
Restricted marketable equity securities:
----------------------------------------
Lotus Pharmaceuticals, Inc. (LTUS.OB) ...................... $3,435,817
Dragon Capital Group (DRGV.PK) ............................. 662,722
----------
$4,098,539
==========
While the value of investments in restricted marketable equity
securities held for sale represent substantially all of our assets, we are not
presently able to liquidate these securities and generate cash to pay our
operating expenses. Under Federal securities laws these securities cannot be
readily resold by us generally absent a registration of those securities under
the Securities Act of 1933. We have been advised by the client company that
intends to register a portion of our shares in a registration statement if it is
successful in finalizing its private placement in the near future. This client,
however, is under no contractual obligation to register those shares and we
cannot predict when, if ever, that we will be able to liquidate those securities
or the amount of proceeds we can expect to receive from the sale. While under
generally accepted accounting principles we are required to reflect the fair
value of these securities on our balance sheet, they are not readily convertible
into cash.
- 19 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
We have recently met our obligations from cash proceeds received from
the sale of marketable equity securities. Although proceeds from sales of
marketable equity securities have allowed us to meet our obligations in the
recent past, there can be no assurances that our present methods of generating
cash flow will be sufficient to meet future obligations. Historically, we have,
from time to time, been able to raise additional capital from sales of our
capital stock, but there can be no assurances that we will be able to raise
additional capital in this manner.
Net cash used in operations was $517,382 for the three months ended
December 31, 2006 as compared to net cash used in operations of $63,890 for the
three months ended December 31, 2005, an increase of $453,492 or 710%. For the
three months ended December 31, 2006, we used cash to fund our net loss of
$675,282 offset by non-cash items such as stock-based compensation of $518,912,
depreciation expense of $1,456, unrealized loss on trading securities of
$25,601, non-cash settlement income of $157,500, changes in assets and
liabilities of $194,148 and a gain on sale of marketable securities of $33,895.
For the three months ended December 31, 2005, we used cash to fund our net loss
of $225,747 ($223,123 from continuing operations and $2,624 from discontinued
operation) offset by non-cash items such as stock-based compensation of
$193,792, depreciation expenses of $1,792, and changes in assets and liabilities
of $7,898 and as well as add back of other non-cash items such as gain on sale
marketable securities of $40,457 and minority interest income of $2,526.
Net cash provided by investing activities for the three months ended
December 31, 2006 was $532,081 as compared to net cash provided by investing
activities for the three months ended December 31, 2005 of $81,151. For the
three months ended December 31, 2006, we received cash from the sale of
marketable securities of $534,001 and purchased of office equipment amounted to
$1,920. For the three months ended December 31, 2005, we received cash from the
sale of marketable securities of $81,151.
Net cash provided by financing activities was $127,734 for the three
months ended December 31, 2006 as compared to net cash provided by financing
activities of $0 for the three months ended December 31, 2005. For the three
months ended December 31, 2006, net cash provided by financing activities was
related to a contribution from a minority interest of $127,733.
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. There are no assurances that such capital will
be available to us when needed or upon terms and conditions, which are
acceptable to us. If we are able to secure additional working capital through
the sale of equity securities, the ownership interests of our current
stockholders will be diluted. If we raise additional working capital through the
issuance of debt or additional dividend paying securities our future interest
and dividend expenses will increase. If we are unable to secure additional
working capital as needed, our ability to grow our sales, meet our operating and
financing obligations as they become due and continue our business and
operations could be in jeopardy and we could be forced to limit or cease our
operations.
- 20 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued several
new accounting pronouncements:
In July 2006, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation (FIN) No. 48, "Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109." This interpretation provides guidance
for recognizing and measuring uncertain tax positions, as defined in SFAS No.
109, "Accounting for Income Taxes." FIN No. 48 prescribes a threshold condition
that a tax position must meet for any of the benefit of an uncertain tax
position to be recognized in the financial statements. Guidance is also provided
regarding de-recognition, classification, and disclosure of uncertain tax
positions. FIN No. 48 is effective for fiscal years beginning after December 15,
2006. The Company does not expect that this interpretation will have a material
impact on its financial position, results of operations, or cash flows.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements" ("FAS 157"). This Statement defines
fair value as used in numerous accounting pronouncements, establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosure related to the use of fair value measures in financial
statements. The Statement is to be effective for the Company's financial
statements issued in 2008; however, earlier application is encouraged. The
Company is currently evaluating the timing of adoption and the impact that
adoption might have on its financial position or results of operations
Other accounting standards that have been issued or proposed by the
FASB or other standards-setting bodies that do not require adoption until a
future date are not expected to have a material impact on the consolidated
financial statements upon adoption.
ITEM 3. CONTROLS AND PROCEDURES
We maintain "disclosure controls and procedures," as such term is
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act"), that are designed to ensure that information required to be
disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission rules and forms, and that such 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. We conducted an evaluation (the "Evaluation"), under the supervision
and with the participation of our Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), of the effectiveness of the design and operation of
our disclosure controls and procedures ("Disclosure Controls") as of the end of
the period covered by this report pursuant to Rule 13a-15 of the Exchange Act.
Based on this Evaluation, our CEO and CFO concluded that our Disclosure Controls
were effective as of the end of the period covered by this report.
We have also evaluated our internal controls for financial reporting,
and there have been no significant changes in our internal controls or in other
factors that could significantly affect those controls subsequent to the date of
their last evaluation.
- 21 -
ITEM 3. CONTROLS AND PROCEDURES (CONTINUED)
Our management, including our CEO and CFO, does not expect that our
Disclosure Controls and internal controls will prevent all errors and all 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. Further, 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 the 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 a 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 or
board override of the control. The design of any system of controls also is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions; over time, controls may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected. CEO and CFO Certifications Appearing
immediately following the signatures section of this report there are
Certifications of the CEO and the CFO. The Certifications are required in
accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302
Certifications). This Item of this report, which you are currently reading is
the information concerning the Evaluation referred to in the Section 302
Certifications and this information should be read in conjunction with the
Section 302 Certifications for a more complete understanding of the topics
presented.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
KEKE ZHANG A/K/A KATHERINE ZHANG VS. GENESIS TECHNOLOGY GROUP, INC., A
FLORIDA CORPORATION AND GARY L. WOLFSON - CASE NO. 50 2006 CA 003447,
PALM BEACH COUNTY, FLORIDA
-----------------------------------------------------------------------
In April 2006, a former employee of the Company filed a lawsuit against
the Company and our Chief Executive Officer alleging breach of an
employment agreement, loss of compensation, and losses from the value
associated with denied stock options. We plan to vigorously defend our
position and believe that any settlement will not have a material
adverse effect on our financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On November 20, 2006, we issued 600,000 shares to a Beijing-based
consultant for business development services rendered in connection
with its GEP operations. We valued these common shares at the fair
market value on the date of grant of $0.10 per share or $60,000 based
on the trading price of common shares.
- 22 -
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.(continued)
On November 30, 2006, in connection with the appointment of a new board
of director, Rodrigo Arboleda, we issued 500,000 shares of restricted
common stock to the new board of director member for services to be
rendered for a one year period. The Company valued these common shares
at the fair market value on the date of grant of $0.135 per share or
$67,500 based on the trading price of common shares.
On December 11, 2006, we issued 500,000 shares to a Beijing-based
consultant for business development services rendered in connection
with its GEP operations. We valued these common shares at the fair
market value on the date of grant of $0.12 per share or $60,000 based
on the trading price of common shares.
The recipients were accredited or otherwise sophisticated investors and
the transactions were exempt from registration under the Securities Act
of 1933 in reliance on an exemption provided by Section 4(2) of that
act. The recipients had access to information concerning our company.
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
Exhibit
Number Description
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31.1 Certification of the Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 *
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 *
32.1 Certification of Chief Executive Officer Certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 *
32.2 Certification of Chief Financial Officer Certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 *
* Filed herein
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SIGNATURES
In accorance with the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
GENESIS TECHNOLOGY GROUP, INC.
February 14, 2007 By: /s/ Gary L. Wolfson
-------------------
Gary L. Wolfson
Chief Executive Officer
February 14, 2007 By: /s/ Adam Wasserman
------------------
Adam Wasserman
Chief Financial and Accounting Officer
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