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: June 30, 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 July 31, 2004 48,121,813 outstanding shares of common stock,
$.001 par value per share.
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
FORM 10-QSB
QUARTERLY PERIOD ENDED JUNE 30, 2004
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheet
June 30, 2004 (Unaudited).........................................3
Consolidated Statements of Operations (Unaudited)
For the Three and Nine Months Ended June 30, 2004 and 2003........4
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended June 30, 2004 and 2003..................5
Notes to Consolidated Financial Statements............................6-19
Item 2 - Management's Discussion and Analysis
or Plan of Operation........................................20-28
Item 3 - Controls and Procedures..................................... 29
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings..............................................30
Item 2 - Changes in Securities and Use of Proceeds......................30
Item 3 - Default upon Senior Securities.................................30
Item 4 - Submission of Matters to a Vote of Security Holders............30
Item 5 - Other Information...........................................30-31
Item 6 - Exhibits and Reports on Form 8-K...............................31
Signatures..............................................................32
-2-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 2004
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,147,069
Marketable equity securities 18,029
Accounts receivable (net of allowance
for doubtful accounts of $23,000) 243,633
Inventories 276,108
Prepaid expenses and other 614,042
---------------
Total Current Assets 3,298,881
-------------------
PROPERTY AND EQUIPMENT - Net 110,372
-------------------
OTHER ASSETS:
Goodwill 10,540
Marketable equity securities - restricted 27,600
Other assets 93,650
-------------------
Total Other Assets 131,790
-------------------
Total Assets $ 3,541,043
===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Loan payable - related party $ 20,000
Accounts payable and accrued expenses 649,602
Deferred revenue 38,333
Due to related party 362,320
------------------
Total Current Liabilities 1,070,255
------------------
MINORITY INTEREST 36,164
-----------------
STOCKHOLDERS' EQUITY:
Preferred stock ($.001 Par Value; 20,000,000 Shares Authorized) -
Convertible preferred stock series A ($.001 Par Value;
218,000 Shares Authorized; 97,500 shares issued
and outstanding) 97
Common stock ($.001 Par Value; 200,000,000 Shares Authorized;
48,121,813 shares issued and outstanding) 48,122
Additional paid-in capital 17,673,086
Accumulated deficit (15,045,663)
Less: Deferred compensation (21,042)
Less: Subscriptions receivable (42,850)
Accumulated other comprehensive loss (177,126)
-------------------
Total Stockholders' Equity 2,434,624
-------------------
Total Liabilities and Stockholders' Equity $ 3,541,043
===================
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 Nine Months Ended
June 30, June 30,
------------------------------ ----------------------------
2004 2003 2004 2003
-------------- ------------- ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
NET REVENUES $ 5,133,828 $ 6,862,613 $ 18,055,384 $ 18,020,770
COST OF SALES 4,932,638 6,523,730 17,249,843 17,349,184
-------------- ------------- ------------ ------------
GROSS PROFIT 201,190 338,883 805,541 671,586
-------------- ------------- ------------ ------------
OPERATING EXPENSES:
Consulting 4,103 89,042 183,586 462,744
Salaries and non-cash compensation 331,304 185,875 1,056,559 406,712
Selling, general and administrative 219,072 297,102 713,139 741,850
-------------- ------------- ------------ ------------
Total Operating Expenses 554,479 572,019 1,953,284 1,611,306
-------------- ------------- ------------ ------------
LOSS FROM OPERATIONS (353,289) (233,136) (1,147,743) (939,720)
OTHER INCOME (EXPENSE):
Gain (loss) from sale of marketable securities - (195) (13,333) (12,099)
Settlement income - - 196,650 -
Interest expense, net (6,994) (22,627) (8,144) (27,503)
-------------- ------------- ------------ ------------
Total Other Income (Expense) (6,994) (22,822) 175,173 (39,602)
-------------- ------------- ------------ ------------
LOSS BEFORE DISCONTINUED OPERATIONS AND
MINORITY INTEREST (360,283) (255,958) (972,570) (979,322)
-------------- ------------- ------------ ------------
DISCONTINUED OPERATIONS:
Loss from discontinued operations - 502 - 182
-------------- ------------- ------------ ------------
Total Loss from Discontinued Operations - 502 - 182
-------------- ------------- ------------ ------------
LOSS BEFORE MINORITY INTEREST (360,283) (255,456) (972,570) (979,140)
MINORITY INTEREST IN INCOME OF SUBSIDIARY (269) - (1,103) -
-------------- ------------- ------------ ------------
NET LOSS (360,552) (255,456) (973,673) (979,140)
BENEFICIAL CONVERSION FEATURE - PREFERRED STOCK - - (500,000) -
-------------- ------------- ------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (360,552) $ (255,456) $(1,473,673) $ (979,140)
============== ============= ============ ============
LOSS PER COMMON SHARE - BASIC AND DILUTED
Loss from continuing operations $ (0.01) $ (0.01) $ (0.03) $ (0.03)
Loss from discontinued operations - 0.00 - 0.00
-------------- ------------- ------------ ------------
Net loss per common share - basic and diluted $ (0.01) $ (0.01) $ (0.03) $ (0.03)
============== ============= ============ ============
Weighted Common Shares Outstanding - basic and diluted 46,258,613 33,485,672 42,162,168 31,395,968
============== ============= ============ ============
See notes to unaudited consolidated financial statements
-4-
GENESIS TECHNOLOGY GROUP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months
June 30,
-----------------------------------
2004 2003
---------------- ----------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations $ (973,673) (979,322)
Adjustments to reconcile loss from continuing
operations to net cash used in operating activities:
Depreciation and amortization 19,392 11,014
Loss on sale of marketable securities 13,333 12,099
Settlement income (196,650) -
Stock-based compensation 611,632 558,196
Beneficial conversion feature on notes payable - 20,000
Minority interest 1,103 -
Loss on disposal of property and equipment 508 -
Marketable securities received for services (135,082) (123,375)
Marketable securities distributed for services 107,750 -
Changes in assets and liabilities:
Accounts receivable (1,706) (7,486)
Inventories (29,194) (189,781)
Prepaid and other current assets (387,862) (142,400)
Other assets (3,961) (29,307)
Accounts payable and accrued expenses 634,898 374,290
Deferred revenue (77,500) (15,000)
---------------- ----------------
NET CASH USED IN CONTINUING OPERATING ACTIVITIES (417,012) (511,072)
---------------- ----------------
Income from discontinued operations - 182
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 - 4,954
---------------- ----------------
NET CASH USED IN OPERATING ACTIVITIES (417,012) (506,118)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities 233,551 12,826
Capital expenditures (12,433) (1,785)
---------------- ----------------
NET CASH FLOWS PROVIDED BY INVESTING ACTIVITIES 221,118 11,041
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock, net 1,902,475 -
Proceeds from notes payable-related party 97,500 -
Payments on notes payable-related party (80,000) -
Payments on notes payable (120,919) (120,919)
Due to related party 13,208 373,625
Proceeds from exercise of stock options 346,324 429,139
---------------- ----------------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 2,158,588 681,845
---------------- ----------------
EFFECT OF EXCHANGE RATE CHANGES IN CASH (423) -
---------------- ----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,962,271 186,768
CASH AND CASH EQUIVALENTS - beginning of year 184,798 57,574
---------------- ----------------
CASH AND CASH EQUIVALENTS - end of period $ 2,147,069 $ 244,342
================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Noncash investing and financing activities:
Common stock issued for debt $ 429,801 $ -
================ ================
See notes to unaudited consolidated financial statements.
-5-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 currently owns 80% of a Company selling
computer hardware and peripherals in China, and derives approximately 98% of its
revenues from the sale of computer hardware and peripherals. The Company's
strategy includes marketing itself as a resource for small and mid-sized
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 United Assets and Equity Exchange (SUAEE) (formerly
known as 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 nine months ended June 30, 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)
JUNE 30, 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 June 30, 2004.
All marketable securities are classified as available for sale at June 30, 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 June 30, 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 June 30, 2004 were not material.
-7-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 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-value 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 nine months ended June 30, 2004 and 2003:
2004 2003
---------------- -------------
Net loss as reported $ (973,673) $ (979,140)
Less: stock-based employee compensation
included in reported net loss 277,494 -
Add: stock-based employee compensation
expense determined under fair-value
based method, net of related tax effect
(189,309) (230,000)
-------------- --------------
Pro forma net loss $ (885,488) $ (1,209,190)
=============== =============
Basic loss per share:
As reported $ (.03) $ (.03)
=============== =============
Pro forma $ (.03) $ (.04)
=============== =============
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)
JUNE 30, 2004
(UNAUDITED)
NOTE 2 - RELATED PARTY TRANSACTIONS
Due from related party
From time to time, an officer of the Company advances funds to the Company for
working capital purposes. The advances are non-interest bearing and are payable
on demand. At June 30, 2004, the Company did not owe this officer any funds.
Additionally, a minority shareholder of the Company's Chorry (Zhaoli)
subsidiary, advanced $362,320 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 June 30, 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)
JUNE 30, 2004
(UNAUDITED)
NOTE 3 - SEGMENT INFORMATION (Continued)
Information with respect to these reportable business segments for the nine
months ended June 30, 2004 and 2003 is as follows: `
For the Nine Months For the Nine Months
Ended Ended
June 30, 2004 June 30, 2003
---------------------------------------- -------------------- ------------------
Net revenues:
Computer Equipment and Accessories $ 17,622,779 $ 17,660,055
Consulting Services 432,605 360,715
-------------------- ----------------
Consolidated Net Revenue 18,055,384 18,020,770
-------------------- ----------------
Cost of sales and operating expenses:
Computer Equipment and Accessories 17,610,781 17,643,411
Consulting Services 1,572,954 1,306,065
Depreciation:
Computer Equipment and Accessories 6,484 5,164
Consulting Services 12,908 5,850
Interest (expense) income:
Computer Equipment and Accessories - -
Consulting Services (8,144) (27,519)
Net Income (Loss):
Computer Equipment and Accessories $ 4,411 $ 11,480
Consulting Services (978,084) (990,620)
-------------------- ----------------
Net Loss $ (973,673) $ (979,140)
==================== ================
Total Assets at June 30, 2004 and 2003:
Computer Equipment and Accessories $ 1,196,559 $ 850,651
Consulting Services 2,344,484 786,807
-------------------- ----------------
Consolidated Asset Total $ 3,541,043 $ 1,637,458
===================== =================
-10-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2004
(UNAUDITED)
NOTE 3 - SEGMENT INFORMATION (Continued)
For the nine months ended June 30, 2004 and 2003, the Company derived
approximately 97.5% and 98% of its revenue from its subsidiaries located in the
People's Republic of China, respectively. Sales and identifiable assets by
geographic areas for the nine months ended June 30, 2004 and 2003, and as of
June 30, 2004, respectively, were as follows:
Revenues
For the Nine Months Ended Identifiable Assets
June 30, at June 30,
2004 2003 2004
------------- ---------------- ------------------------
United States $ 451,210 $ 356,099 $ 2,172,153
China 17,604,174 17,664,671 1,368,890
-------------- ---------------- -----------------------
Total $ 18,055,384 $ 18,020,770 $ 3,541,043
=============== ================ ========================
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.
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. In June 2004, the Company repaid the entire
principal amount of this loan plus all accrued interest.
-11-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2004
(UNAUDITED)
NOTE 4 - LOANS PAYABLE (continued)
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 June 30, 2004, no conversion had occurred.
As of June 30, 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, unsecured, and was
payable on June 30, 2004. In May 2004, this balance was repaid by offsetting the
loan payable against funds receivable from the exercise of 1,250,000 stock
options totaling $97,500.
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. As of June 30, 2004, the
loan was repaid.
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)
JUNE 30, 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)
JUNE 30, 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 of common stock.
In April 2004, Series A preferred stockholders' converted 62,500 share of Series
A Preferred Stock into 2,694,249 shares of common stock.
-14-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2004
(UNAUDITED)
NOTE 5 - STOCKHOLDERS' EQUITY (continued)
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 the business and an
added incentive to continue to advance and contribute to the Company.
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.
In April 2004, the Company issued 2,694,249 shares of common stock in connection
with the conversion of 62,500 shares of Series A Preferred Stock.
In May and June 2004, the Company issued 2,896,770 shares of its common stock
relating to the exercise of options granted to executives, employees and
consultants, respectively. The Company received proceeds of $30,744, reduced
accrued salaries by $154,557, reduced related party loans by $97,500, and
reduced accounts payable by $24,293 related to these share issuances.
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.
In May 2004, 1,310,770 options were granted to officers and employees of the
Company with an exercise price of $.13 for accrued salary. 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. Since the current market price equaled
the exercise price, no compensation expense was recognized in connection with
these options under the intrinsic value method of APB 25.
-15-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2004
(UNAUDITED)
NOTE 5 - STOCKHOLDERS' EQUITY (continued)
Stock options and warrants (continued)
In June 2004, 136,000 options were granted to an employee of the Company with an
exercise price of $.079. 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. In connection with these options, the Company recorded non-cash
compensation of $10,744 during the three months ended June 30, 2004 under the
intrinsic value method of APB 25.
A summary of outstanding options and warrants at June 30, 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 3,395,305 0.15
Exercised (6,652,271) 0.17
Forfeited (1,395,000) 0.56
------------- ----------------
Balance at June 30, 2004 6,258,034 $ 0.22
============== ================
Options exercisable at end of period 6,258,034 $ 0.22
============== ================
Weighted average fair value of options $ 0.15
granted during the period
================
-16-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2004
(UNAUDITED)
NOTE 5 - STOCKHOLDERS' EQUITY (continued)
Stock options and warrants (continued)
The following table summarizes information about employee stock options and
consultant warrants outstanding at June 30, 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 June 30, 2004 Life Price June 30, 2004 Price
------------ --------------- ---------------- ----------- --------------- ----------
$ 0.60-2.25 450,000 1.00 Years $ 1.52 450,000 $ 1.52
0.23-0.36 1,251,034 3.75 Years 0.31 1,251,034 0.31
0.05-0.15 4,557,000 4.00 Years 0.09 4,557,000 0.09
--------------- ----------- -------------- ----------
6,258,034 $ 0.22 6,258,034 $ 0.22
=============== =========== ============== ==========
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
The Company signed a letter of intent to acquire a 60% interest in ExtremA LLC
on May 17, 2004. Based in Miami, ExtremA LLC is a computer hardware wholesaler,
established in 1982, with an extensive sales network in Latin America. Genesis
intends to acquire controlling interest in this company primarily to resell
computer hardware and peripherals manufactured in China to the Latin American
markets. The due diligence has been completed and the acquisition agreement is
in the final stages of negotiation. If the acquisition is to occur, it should be
completed by the end of August 2004.
-17-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2004
(UNAUDITED)
NOTE 7 - SUBSEQUENT EVENTS (continued)
The Company acquired a 90% interest in Shanghai Yastand Information Technology
Company, Limited on July 1, 2004. Robert Zhuang, a director of the Company and
President of Shanghai Yastock Investment Consulting Services Company, Limited (a
wholly-owned subsidiary of the Company), transferred his 90% ownership of
Shanghai Yastand to Shanghai Yastock. In return, Shanghai Yastock forgave a loan
of $30,000 that Shanghai Yastand previously owed to Shanghai Yastock. Shanghai
Yastand owns an SMS license from the China government to become a service
provider in the wireless SMS industry. In August 2004, the Company lent $75,000
to Shanghai Yastand as part of a $200,000 commitment to invest in the SMS
business in China. As of June 30, 2004, Shanghai Yastand has not generated
substantial revenue and does not have substantial assets. Shanghai Yastand
financials will be consolidated into the Company's financials effective on July
1, 2004.
Subsequent to June 30, 2004, the Company entered into a joint venture with China
International Intellectech Corporation and formed a joint venture called CIIC
Investment Banking Services (Shanghai) Company Limited ("CIIC"). The Company
invested $60,000 in this joint venture and holds a 30% ownership interest. The
CIIC joint venture serves as an incubator for elite Chinese companies. Robert
Zhuang, President of Shanghai Yastock, a wholly-owned subsidiary of the Company,
acts as Vice General Manager of the joint venture and is in charge of daily
operations.
Genesis Latin America, Inc. (GLA) is a collaborative venture in which the
Company, as of July 2004, holds a 51% interest and Global Boardroom Solutions, a
Latin American-focused consulting and business development firm owns a 49%
interest. GLA, funded by both partners on a pro rata basis in July 2004,
launched an active initiative by sourcing Chinese companies interested in
exploring opportunities in the Southern Hemisphere.
-18-
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 97.5% of our consolidated revenues for the nine months
ended June 30, 2004 and approximately 98% of our consolidated revenues for the
fiscal year ended September 30, 2003. Our consulting services division
represented approximately 2.5% of our consolidated revenues for the nine months
ended June 30, 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 we will 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 broadening of our relationship base, we believe that
we will continue to provide better services to our client and 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's venture and a success fee payable upon the completion of
transactions such as acquisitions, formations of joint ventures, or licensing or
selling technologies in China. These fees could also include 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.
-19-
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 needed, 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 services 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. We have a seat as a member of the
Shanghai United Assets and Equity Exchange (formerly the Shanghai Technology
(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. GBS's top executives accompanied Gary Wolfson and Xun Mei
DelSesto from Genesis on a 2-week trip to China in April. As a result, the
collaboration agreement was significantly expanded and resulted in the creation
of Genesis Latin America, Inc., of which Genesis owns 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, and actual business
activities have commenced.
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 negotiations.
In May 2004, the Company responded to inquiries from shareholders by creating a
page entitled "Shareholders Ask" on the www.genesis-technology.net and
www.genesis-china.net websites. A recurring question has been an update on
progress made in China for contract clients. As numerous of these contracts are
with other public companies, it is difficult for Genesis to offer a unilateral
assessment, without the concurrence of the client. Most Chinese initiatives
generally require a 12-36 month period before any significant revenues are
realized.
Perhaps illustrating the prominence of the Company, its web page entitled
"Chinese Charities" is listed first on Google among over 125,000 such listings.
The purpose of this page is solely philanthropic, and the Company intends to use
its good will and efforts to promote and support such worthy Chinese charities.
-20-
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
97.5% and approximately 98% of our consolidated net revenues for the six months
ended June 30, 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 consolidated 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
Shanghai 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 June 30,
2004 was not material.
RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 2004 COMPARED TO NINE MONTHS ENDED JUNE 30, 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 nine months ended June 30, 2004, we had consolidated revenues of
$18,055,384 as compared to $18,020,770 for the nine months ended June 30, 2003.
This increase resulted from an increase in revenues from our business
development segment offset by a decrease in revenues from our computer hardware
and accessories segment and is discussed below.
-21-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS
(continued)
Cost of Sales
For the nine months ended June 30, 2004, cost of sales was directly related to
our computer equipment and accessories segment and amounted to $17,249,843 as
compared to $17,349,184 for nine months ended June 30, 2003. This decrease
resulted substantially from decreased revenue from our computer segment and is
outlined below.
Operating Expenses
For the nine months ended June 30, 2004, operating expenses which include
consulting fees, rent, salaries and non-cash compensation, depreciation expense
and other selling, general and administrative, were $1,953,284 as compared to
$1,611,306 for the nine months ended June 30, 2003 and is outlined by segment
below.
Loss from sale/disposal of marketable securities
For the nine months ended June 30, 2004, we recorded a loss from the sale of
marketable securities of $13,333 as compared to a loss of $12,099 for the nine
months ended June 30, 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 $8,144 for the nine months ended June 30, 2004 as compared
to $27,503 for the nine months ended June 30, 2003.
OVERALL
We reported a net loss for the nine months ended June 30, 2004 of $(973,673)
compared to a net loss for the nine months ended June 30, 2003 of $(979,140).
During the nine months ended June 30, 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 nine months ended June 30, 2004 compared to
per-share loss of ($.03) for nine months ended June 30, 2003.
-22-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS
(continued)
RESULTS OF OPERATIONS BY SEGMENT:
Consulting Services Segment
Revenue for the nine months ended June 30, 2004 was $432,605 as compared to $
360,715 for the nine months ended June 30, 2003. 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. In 2004, our employees have made
several trips with our clients to China to meet with prospective partners, and
are actively working on behalf of our clients to secure distribution and
partnership agreements.
At an earlier roundtable event, the Company met the principals of Global
Boardroom Solutions, which--after six months--resulted in the creation of
Genesis Latin America, Inc. Also, among its new clients sourced through such
efforts, BersaChem, Inc, has received distribution proposals from several
qualified Chinese companies. Additionally, the Company led a business mission
with over 20 South Florida delegates, including Broward County, Florida Mayor
Ilene Lieberman, to four Chinese cities.
In August 2004, CEO Gary Wolfson returns to China to launch an initiative
between the Russian Federation and China. The Company could benefit from any
contracts signed between interests in these thriving economic forces. Meetings
with over 50 Chinese companies have been arranged in Beijing and Shanghai.
For the nine months ended June 30, 2004, we incurred operating expenses of
$1,585,862 as compared to $1,306,065 for the nine months ended June 30, 2003.
For the nine months ended June 30, 2004, operating expenses consisted of rent of
$35,991, consulting fees of $183,585, salaries and non-cash compensation of
$947,714, and other selling, general and administrative expenses of $418,572.
For the nine months ended June 30, 2003, operating expenses consisted of rent of
$67,328, consulting fees of $462,744, salaries and non-cash compensation of
$406,712 and other selling, general and administrative expenses of $369,281. The
increase in operating expenses was primarily attributable to the following:
(1) During the nine months ended June 30, 2003, we incurred rent
in an office on Minneapolis, MN which is now closed.
Accordingly, our rent expense decreased during the nine months
ended June 30, 2004 as compared to June 30, 2003.
(2) Our consulting expenses decreased to $183,585 for the nine
months ended June 30, 2004, from $462,744 for the nine months
ended June 30, 2003. The decrease was due to decreased
non-cash consulting expenses recorded during the nine months
ended June 30, 2003 in connection with the grant of stock
options to consultants for services rendered.
-23-
RESULTS OF OPERATIONS BY SEGMENT (continued):
Consulting Services Segment (continued)
(3) Salaries and non-cash compensation expense increased to
$947,714 for the nine months ended June 30, 2004 from $406,712
for the nine months ended June 30, 2003, an increase of
$541,002. 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
expenses were 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 nine months ended June 30, 2004 for
bonuses and the amortization of deferred compensation.
(4) Other selling, general and administrative expenses increased
to $405,663 for the nine months ended June 30, 2004 from
$369,281 for the nine months ended June 30, 2003, an increase
of $136,382. The increase was attributable to additional
travel related expenses of approximately $52,000 related to
increased travel to China, increased marketing costs
associated with our Chinese round table events, and increased
administrative and office expenses due to increased
operations. Additionally, our professional fee expenses
increased by approximately $50,000 due to the filing of our
registration statement of Form SB-2.
For the nine months ended June 30, 2004 and 2003, we incurred an
interest expense of $8,144 and $27,519, respectively.
Computer Equipment and Accessories Segment
Revenues for the nine months ended June 30, 2004 were $17,622,779 as compared to
$17,660,055 for the nine months ended June 30, 2003 from our subsidiary Chorry
(Zhaoli), a Chinese company, a decrease of $37,276 or less than 1%. This revenue
was generated from sales of printers, copiers, network equipment and software
licensing fees.
Cost of sales for Chorry (Zhaoli) for the nine months ended June 30, 2004
amounted to $17,249,843 or 97.9% of net sales as compared to $17,349,184 or
96.3% of net sales for the nine months ended June 30, 2003. We continue to
experience low gross profit margins on our product sales.
For the nine months ended June 30, 2004, we incurred operating expenses of
$367,422 compared to $299,391 for the nine months ended June 30, 2003 and
consisted of the following:
2004 2003
Salaries $ 108,845 $ 41,776
Rent 111,464 102,102
Other selling, general and administrative 147,113 155,513
---------------- ----------------
Total operating expenses $ 367,422 $ 299,391
=================== ===============
In fiscal 2004, we incurred additional rent due to our growing need for
warehouse space. Additionally, during the nine months ended June 30, 2004, we
incurred increased salary expenses as we increased our workforce.
-24-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS
(continued)
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2004, we had a cash balance of $2,147,069. As of June 30, 2004, our
cash position by geographic area is as follows:
United States $ 2,040,810
China 106,259
---------------
Total $ 2,147,069
===============
On January 16, 2004, 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. The stated value of the Series A Preferred
Stock is $10.00 per share. Through June 30, 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 acquisitions 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, or acquisition 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.
Net cash used in operations was $(417,012) for the nine months ended June 30,
2004, as compared to net cash used in operations of $(511,072) for the nine
months ended June 30, 2003. For the nine months ended June 30, 2004 we used cash
to fund our net loss of $973,673 offset by non-cash items such as stock-based
compensation of $611,632, depreciation expense of $19,392 and settlement income
of $(196,650) as well as changes in assets and liabilities of $134,675. For the
nine months ended June 30, 2003, we used cash to fund our net loss of $979,322
offset by non-cash items such as stock-based compensation of $558,196,
depreciation expense of $11,014, as well as changes in assets and liabilities of
$(9,684).
Net cash provided by investing activities for the nine months ended June 30,
2004 was $221,118 as compared to net cash provided by investing activities for
the nine months ended June 30, 2003 of $11,041. For nine months ended June 30,
2004, we received $233,551 from the sale of marketable securities offset by cash
used for capital expenditures of $(12,433). For the nine months ended June 30,
2003, we received cash from the sale of marketable securities of $12,826 offset
by cash used for capital expenditures of $(1,785).
-25-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS
(continued)
Net cash provided by financing activities was $2,158,588 for the nine months
ended June 30, 2004 as compared to $681,845 for the nine months ended June 30,
2003. For the nine months ended June 30, 2004, net cash provided by financing
activities related primarily to proceeds from the exercise of stock options and
related party loans of $346,324 and $13,208, respectively, proceeds from the
sale of preferred stock of $1,902,475, and proceeds from notes payable of
$97,500 offset by loan repayments of $200,919. For the nine months ended June
30, 2003, net cash provided by financing activities related to proceeds from
related party loans of $373,625, proceeds from the exercise of stock options of
$429,139 offset by payment on loans payable of ($120,919).
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-value 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 No. 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.
-26-
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 June 30, 2004. All marketable
securities are classified as available for sale at June 30, 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 the 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 (RMB) 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 the 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.
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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 the 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 and financial
condition.
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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.
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 there
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.
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Part II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
Common stock
In April 2004, we issued 2,694,249 shares of common stock in
connection with the conversion of 62,500 shares of Series A
Preferred Stock. The issuances of these shares are exempt under
section (3)(a)(9) 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
We signed a letter of intent to acquire a 60% interest in ExtremA
LLC on May 17, 2004. Based in Miami, ExtremA LLC is a computer
hardware wholesaler, established in 1982, with an extensive sales
network in Latin America. Genesis intends to acquire controlling
interest in this company primarily to resell computer hardware and
peripherals manufactured in China to the Latin American markets.
The due diligence has been completed and the acquisition agreement
is in the final stages of negotiation. If the acquisition is to
occur, it should be completed by the end of August 2004.
We acquired a 90% interest in Shanghai Yastand Information
Technology Company, Limited on July 1, 2004. Robert Zhuang, a
director of the Company and President of Shanghai Yastock
Investment Consulting Services Company, Limited (a wholly-owned
subsidiary of the Company), transferred his 90% ownership of
Shanghai Yastand to Shanghai Yastock. In return, Shanghai Yastock
forgave a loan of $30,000 that Shanghai Yastand previously owed to
Shanghai Yastock. Shanghai Yastand owns an SMS license from the
China government to become a service provider in the wireless SMS
industry. In August 2004, the Company lent $75,000 to Shanghai
Yastand as part of a $200,000 commitment to invest in the SMS
business in China. As of June 30, 2004, Shanghai Yastand has not
generated substantial revenue and does not have substantial assets.
Shanghai Yastand financials will be consolidated into the our
financials effective on July 1, 2004.
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Item 5. Other Information (continued)
Subsequent to June 30, 2004, we entered into a joint venture with
China International Intellectech Corporation and formed a joint
venture called CIIC Investment Banking Services (Shanghai) Company
Limited ("CIIC"). We invested $60,000 in this joint venture and
hold a 30% ownership interest. The CIIC joint venture serves as an
incubator for elite Chinese companies. Robert Zhuang, President of
Shanghai Yastock, a wholly-owned subsidiary of the Company, acts as
Vice General Manager of the joint venture and is in charge of daily
operations.
Genesis Latin America, Inc. (GLA) is a collaborative venture in
which the Company, as of July 2004, holds a 51% interest and Global
Boardroom Solutions, a Latin American-focused consulting and
business development firm owns a 49% interest. GLA, funded by both
partners on a pro rata basis in July 2004, launched an active
initiative by sourcing Chinese companies interested in exploring
opportunities in the Southern Hemisphere.
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
(2) Reports on Form 8-K
On April 5, 2004, we reported that we closed on the remaining
balance of our Series A 6% Cumulative Convertible Preferred
Stock ("Series A Preferred Stock") with various institutional
investors previously reported in the Company's Form 8-K Current
Report of January 16, 2004.
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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 August 16,
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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