GENESIS
TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2005
(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 Shanghai Chorry Technology
Development Company, Ltd. (“Chorry”), a company operating in China which sells
computer hardware and peripherals, and 60% of Extrema, LLC. The Company derives
approximately 99% of its revenues from the sale of computer hardware and
peripherals. The Company's consulting services division provides 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 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. The strategy envisions and promotes opportunities for synergistic
business relationships among all of the companies that Genesis works with, both
clients and subsidiaries.
In
April 2005, the Company incorporated a new subsidiary, Genesis (Hong Kong) OEM
Direct, Ltd. (‘GHK’). GHK’s purpose is to consolidate certain sales channels and
related trading activities of the Company. Management of the Company believes
that GHK
will be able to leverage its position as first-tier distributor and its access
to superior technology to develop and market LCD,s and LCD products. GHK is
engaged in the IT products business and specializes in sale and export LCD
products such as Panel PC’s and LCD Monitors. The business will rely upon on its
close cooperation with numerous OEMs to offer high quality LCD products at the
lowest cost. Management of the Company believes that GHK will have the advantage
of a direct sales network, which will bypass several layers of middlemen and
trading companies, to deliver the best products at the best prices. Management
believes that GHK can also accommodate Genesis clients in consummating
transactions with the assistance of its banking relationship with Standard &
Chartered Bank.
On
May 1, 2005, the shareholders of Extrema, a Miami, Florida based company which
sold computer hardware and peripherals, unanimously agreed to discontinue the
operations of Extrema because
of (a) the disappointing performance of Extrema including continuing operating
losses; (b) the Company’s lack of ability to obtain working capital loans to
finance the purchase of inventory and to finance accounts receivable (See Note
4); and (c) the Company’s decision to consolidate all trading and sourcing
activities into its new subsidiary, GHK, located in Hong Kong.
GENESIS
TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2005
(UNAUDITED)
NOTE
1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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, 2004 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, 2005 are not necessarily
indicative of the results for the full fiscal year ending September 30,
2005.
Net
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. Diluted
loss per common share is not presented because it is anti-dilutive. At June 30,
2005, there were options and warrants to purchase 9,990,466 shares of common
stock, which could potentially dilute future earnings per share.
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.
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.
GENESIS
TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2005
(UNAUDITED)
NOTE
1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Foreign
currency translation (continued)
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, 2005, the exchange rate for the Chinese Renminbi (RMB) was $1.00 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, 2005 were not material.
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.
GENESIS
TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2005
(UNAUDITED)
NOTE
1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Stock-based
compensation (continued)
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, 2005 and 2004:
| |
|
2005 |
|
2004 |
|
|
Net
loss as reported |
|
$ |
(2,929,081 |
) |
$ |
(973,673 |
) |
| |
|
|
|
|
|
|
|
|
Less:
stock-based employee compensation included in reported net loss
|
|
|
32,452 |
|
|
277,494 |
|
| |
|
|
|
|
|
|
|
|
Add:
stock-based employee compensation expense determined under fair-value
based method, net of related tax effect |
|
|
(57,655 |
) |
|
(189,309 |
) |
| |
|
|
|
|
|
|
|
|
Pro
forma net loss |
|
$ |
(2,954,284 |
) |
$ |
(885,488 |
) |
| |
|
|
|
|
|
|
|
|
Basic
loss per share: |
|
|
|
|
|
|
|
|
As
reported |
|
$ |
(.05 |
) |
$ |
(.03 |
) |
|
Pro
forma |
|
$ |
(.05 |
) |
$ |
(.03 |
) |
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.
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, 2005.
All marketable securities are classified as available for sale at June 30, 2005.
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.
For
the purpose of computing realized gains and losses, cost is identified on a
specific identification basis. For marketable securities for which there is an
other-than-temporary impairment, an impairment loss is recognized as a realized
loss.
GENESIS
TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2005
(UNAUDITED)
NOTE
2 - RELATED PARTY TRANSACTIONS
Due
to related party
In
fiscal 2003, a minority shareholder of the Company’s Chorry subsidiary, advanced
$362,318 to this subsidiary for working capital purposes. These advances are
non-interest bearing and are payable on demand.
NOTE
3 - SEPARATION AND SEVERANCE AGREEMENT
On
December 13, 2004, the Company entered into a Separation and Severance Agreement
with its former Chairman/President, Dr. James Wang, Yastock Investment
Consulting Company, Limited ("Yastock"), and Shanghai Yastand Information
Technology Company, Limited ("Yastand"). The Separation and Severance Agreement
provides, effective December 13, 2004, the resignation of Dr. Wang as President,
Chairman of the Board and as a director of the Company, and the termination of
his Employment Agreement dated August 1, 2004, including all rights, benefits
and obligations pursuant thereto. The agreement provided for the following
severance provisions:
(a)
The
Company transferred its ownership interest in Yastock and Yastand, free and
clear of all liens, pledges, hypothecation, option, contract and other
encumbrance, to the previous owners. In connection with this transfer, the
Company incurred severance expense of $121,608.
(b)
Yastock/Yastand
shall transfer all rights and privileges of certain agreements to the
Company.
(c)
The
Company issued Dr. Wang 562,500 shares of the Company's common stock pursuant to
the Company's 2004 Stock Option Plan, which such shares were registered under an
effective registration statement on Form S-8. In connection with issuance of
these shares, the Company recorded severance expense of $61,875.
(d) In
December 2004, the Company paid Dr. Wang cash of $100,000 which was released
from escrow after the Company filed its annual report on Form 10-KSB for the
year ended September 30, 2004 with the SEC and the Annual Report was accepted by
the SEC Edgar filing system. In connection with this cash payment, the Company
recorded severance expense of $100,000.
(e) Dr.
Wang will assist the Company in maintaining a positive relationship between the
Company and its subsidiary, Chorry.
(f) Dr.
Wang's options to purchase 1,500,000 shares of the Company's common stock at an
exercise price of .06 cents per share received pursuant to the Employment
Agreement and the Company's Non-Qualified Stock Option Plan shall terminate on
December 31, 2005, unless exercised prior thereto.
(g) For
a period of three years, Dr. Wang, Yastock and Yastand agreed not to (i) without
first obtaining the written consent of the Company, directly or indirectly, do
business with any of the past or current customers of the Company, or (ii)
directly or indirectly, solicit or proposition, or otherwise attempt to induce
any of the customers of the Company to terminate their relationships with the
Company.
|
|
(h)
The Company transferred to Yastock 95,000 shares of Dragon
International Group Corp. restricted common stock. In connection with the
transfer of these shares, the Company recorded severance expense of
$22,800. |
GENESIS
TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2005
(UNAUDITED)
NOTE
4 - DISCONTINUED OPERATIONS
Effective
September 8, 2004, the Company acquired 60% of the common stock of Extrema. As
described in Note 1, on May 1, 2005, the shareholders of Extrema unanimously
agreed to discontinue its operations.
Extrema is
reported as a discontinued operation, and prior periods have been restated in
the Company's financial statements and related footnotes to conform to this
presentation.
The
liabilities of Extrema are presented in the balance sheet under the captions
"Liabilities of discontinued operation".
The
carrying amounts of the major classes of these liabilities as of June 30, 2005
are summarized as follows:
|
Accounts
payable and accrued expenses |
|
|
163,709 |
|
| |
|
|
|
|
|
Liabilities
of discontinued operation |
|
$ |
163,709 |
|
The
following table sets forth, for the periods indicated, selected financial data
of the Company's discontinued operation.
| |
|
Nine
Months Ended
June
30, |
|
| |
|
2005 |
|
2004 |
|
| |
|
|
|
|
|
|
Revenue |
|
$ |
1,875,627 |
|
$ |
- |
|
|
Cost
of Sales |
|
|
1,868,525 |
|
|
- |
|
|
Gross
Profit |
|
|
7,102 |
|
|
- |
|
|
Expenses |
|
|
348,924 |
|
|
- |
|
| |
|
|
|
|
|
|
|
|
Loss
from discontinued operations |
|
|
(341,822 |
) |
|
- |
|
| |
|
|
|
|
|
|
|
|
Loss
from disposal of discontinued operations |
|
|
(377,346 |
) |
|
- |
|
| |
|
|
|
|
|
|
|
|
Total
loss from discontinued operations |
|
$ |
(719,168 |
) |
$ |
- |
|
GENESIS
TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2005
(UNAUDITED)
NOTE
5 - 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, 2005 and 2004, 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. Information with respect to these
reportable business segments for the nine months ended June 30, 2005 and 2004 is
as follows:
| |
|
For
the Nine Months Ended
June
30, 2005 |
|
For
the Nine Months Ended
June
30, 2004 |
|
| |
|
(Unaudited) |
|
(Unaudited) |
|
|
Net
revenues: |
|
|
|
|
|
|
Computer
Equipment and Accessories |
|
$ |
18,828,265 |
|
$ |
17,622,779 |
|
|
Consulting
Services |
|
|
148,825 |
|
|
432,605 |
|
| |
|
|
|
|
|
|
|
|
Consolidated
Net Revenue |
|
|
18,977,090 |
|
|
18,055,384 |
|
| |
|
|
|
|
|
|
|
|
Cost
of sales and operating expenses: |
|
|
|
|
|
|
|
|
Computer
Equipment and Accessories |
|
|
18,607,153 |
|
|
17,610,781 |
|
|
Consulting
Services |
|
|
2,468,166 |
|
|
1,572,954 |
|
|
Depreciation: |
|
|
|
|
|
|
|
|
Computer
Equipment and Accessories |
|
|
10,661 |
|
|
6,484 |
|
|
Consulting
Services |
|
|
4,234 |
|
|
12,908 |
|
|
Interest
(expense) income: |
|
|
|
|
|
|
|
|
Computer
Equipment and Accessories |
|
|
(2,381 |
) |
|
- |
|
|
Consulting
Services |
|
|
2,911 |
|
|
(8,144 |
) |
|
Discontinued
operations: |
|
|
|
|
|
|
|
|
Computer
Equipment and Accessories |
|
|
(719,168 |
) |
|
- |
|
|
Net
Income (Loss): |
|
|
|
|
|
|
|
|
Computer
Equipment and Accessories |
|
$ |
108,628 |
|
$ |
4,411 |
|
|
Consulting
Services |
|
|
(3,037,709 |
) |
|
(978,084 |
) |
| |
|
|
|
|
|
|
|
|
Net
Loss |
|
$ |
(2,929,081 |
) |
$ |
(973,673 |
) |
| |
|
|
|
|
|
|
|
|
Total
Assets at June 30, 2005 and 2004: |
|
|
|
|
|
|
|
|
Computer
Equipment and Accessories |
|
$ |
1,340,337 |
|
$ |
1,196,559 |
|
|
Consulting
Services |
|
|
705,044 |
|
|
2,344,484 |
|
| |
|
|
|
|
|
|
|
|
Consolidated
Asset Total |
|
$ |
2,045,381 |
|
$ |
3,541,043 |
|
| |
|
|
|
|
|
|
|
GENESIS
TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2005
(UNAUDITED)
NOTE
5 - SEGMENT INFORMATION (continued)
For
the nine months ended June 30, 2005 and 2004, the Company derived approximately
99%
and 97%
of its revenue from its subsidiaries located in the People’s Republic of China,
respectively. Additionally, the Company’s cash balances in China amounted to
$107,004 or 40% of the Company’s cash balances. Sales and identifiable assets by
geographic areas for the nine months ended June 30, 2005 and 2004 and as of June
30, 2005, respectively, were as follows:
|
Revenues |
|
| |
|
For
the Nine Months Ended
June
30, |
|
Identifiable
Assets
at
June 30, |
|
| |
|
2005 |
|
2004 |
|
2005 |
|
|
United
States |
|
$ |
148,825 |
|
$ |
451,210 |
|
$ |
689,793 |
|
|
China |
|
|
18,828,265 |
|
|
17,604,174 |
|
|
1,355,588 |
|
|
Total |
|
$ |
18,977,090 |
|
$ |
18,055,384 |
|
$ |
2,045,381 |
|
Currently,
substantially all of the Company’s revenues are primarily derived from sale of
computer equipment and accessories to customers in the People’s 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
6 - LOAN PAYABLE
In
fiscal 2002, the Company’s Chinese subsidiary, Chorry, 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, 2006.
NOTE
7 - STOCKHOLDERS’ EQUITY
Common
stock
On
October 1, 2004, in connection with an employment agreement, the Company issued
1,000,000 shares of common stock to an executive. The Company valued these
common shares at the fair market value on the dates of grant of $.175 per share
or $170,000 based on the trading price of common shares. Accordingly, the
Company recorded stock based compensation of $127,500 and deferred compensation
of $42,500 which will be amortized over the remaining service
period.
For
the three months ended December 31, 2004, in connection with the exercise of
stock options, the Company issued 463,889 shares of common stock to employees
for net proceeds of $25,983 and the reduction of a subscription payable of
$850.
GENESIS
TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE
30, 2005
(UNAUDITED)
NOTE
7 - STOCKHOLDERS’ EQUITY (Continued)
Common
stock (continued)
On
November 1, 2004, in connection with two employment agreements, the Company
issued 6,250,000 shares of restricted common stock to executives. The Company
valued these common shares at the fair market value on the dates of grant of
$.115 per share or $718,750 based on the trading price of common shares.
Accordingly, the Company recorded stock-based compensation expense of $479,167
and deferred compensation of $239,583 which will be amortized over the remaining
service period.
On
December 13, 2004, in connection with a severance and separation agreement, the
Company issued 562,500 shares of the Company's common stock pursuant to the
Company's 2004 Stock Option Plan. The Company valued these common shares at the
fair market value on the dates of grant of $.11 per share or $61,875 based on
the trading price of common shares and recorded settlement expense of
$61,875.
On
February 3, 2005, the Company issued 343,706 shares of common stock to two
executives. The Company valued these common shares at the fair market value on
the dates of grant of $.085 per share or $29,215 based on the trading price of
common shares. Accordingly, for the nine months ended June 30, 2005, the Company
recorded stock-based compensation expense of $29,215.
On
March 2, 2005, the Company issued 312,866 shares of common stock to two
executives. The Company valued these common shares at the fair market value on
the dates of grant of $.09 per share or $28,157 based on the trading price of
common shares. Accordingly, for the nine months ended June 30, 2005, the Company
recorded stock-based compensation expense of $28,157.
On
April 1, 2005, the Company issued 1,626,977 shares of common stock to two
executives. The Company valued these common shares at the fair market value on
the dates of grant of $.07 per share or $113,888 based on the trading price of
common shares. Accordingly, for the nine months ended June 30, 2005, the Company
recorded stock-based compensation expense of $113,888.
On
April 1, 2005, in connection with an employment agreement, the Company issued
500,000 shares of common stock to a director. The Company valued these common
shares at the fair market value on the dates of grant of $.07 per share or
$35,000 based on the trading price of common shares. Accordingly, for the nine
months ended June 30, 2005, the Company recorded stock-based compensation
expense of $35,000.
On
April 25, 2005, in connection with a consulting agreement, the Company issued
1,500,000 shares of common stock to a consultant for investor relations
services. The Company valued these common shares at the fair market value on the
dates of grant of $.061 per share or $91,500 based on the trading price of
common shares. Accordingly, for the nine months ended June 30, 2005, the Company
recorded stock-based consulting expense of $68,625 and deferred consulting
expense of $22,875 to be amortized over the service period.
GENESIS
TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June
30, 2005
(UNAUDITED)
NOTE
7 - STOCKHOLDERS’ EQUITY (continued)
On
May 31, 2005, the Company issued 763,867 shares of common stock to two
executives. The Company valued these common shares at the fair market value on
the dates of grant of $.06 per share or $45,832 based on the trading price of
common shares. Accordingly, for the nine months ended June 30, 2005, the Company
recorded stock-based compensation expense of $45,832.
In
May and June 2005, the Company issued 14,973 shares of common stock to two
employees. The Company valued these common shares at the fair market value on
the dates of grant of $.07 per share or $1,048 based on the trading price of
common shares. Accordingly, for the nine months ended June 30, 2005, the Company
recorded stock-based compensation expense of $1,048.
For
the nine months ended June 30 2005, the Company recorded stock-based
compensation of $255,208 from the amortization of deferred
compensation.
Stock
options and warrants
During
the three months ended December 31, 2004, 604,319 options were granted to an
employee of the Company with an exercise price of $.06 per share. 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 stock-based compensation of $32,452 during the nine months
ended June 30, 2005 under the intrinsic value method of APB 25.
A
summary of outstanding options and warrants at June 30, 2005 are as follows:
| |
|
Number
of Options and Warrants |
|
Weighted
Average Exercise Price |
|
|
Stock
options and warrants |
|
|
|
|
|
|
Balance
at October 1, 2004 |
|
|
10,699,976
|
|
$ |
0.18 |
|
|
Granted |
|
|
604,319
|
|
|
0.06 |
|
|
Exercised |
|
|
(463,889 |
) |
|
0.06 |
|
|
Forfeited |
|
|
(849,940 |
) |
|
(0.34 |
) |
| |
|
|
|
|
|
|
|
|
Balance
at June 30, 2005 |
|
|
9,990,466
|
|
$ |
0.126 |
|
| |
|
|
|
|
|
|
|
|
Options
exercisable at end of period |
|
|
9,990,466
|
|
$ |
0.126 |
|
|
Weighted
average fair value of options granted during the period |
|
|
|
|
$ |
0.060 |
|
GENESIS
TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June
30, 2005
(UNAUDITED)
NOTE
7 - STOCKHOLDERS’ EQUITY (continued)
The
following table summarizes information about employee stock options and
consultant and investor warrants outstanding at June 30, 2005:
|
Options
and Warrants Outstanding |
|
Options
and Warrants Exercisable |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Range
of Exercise Price |
|
Number
Outstanding at June 30, 2005 |
|
Weighted
Average Remaining Contractual Life |
|
Weighted
Average Exercise Price |
|
Number
Exercisable
at
June
30, 2005 |
|
Weighted
Average Exercise Price |
|
|
$2.25 |
|
|
150,000 |
|
|
0.75
Years |
|
$ |
2.25 |
|
|
150,000 |
|
$ |
2.25 |
|
|
0.23-0.34 |
|
|
811,034 |
|
|
2.50
Years |
|
|
0.30 |
|
|
811,034 |
|
|
0.30 |
|
|
0.12-0.15 |
|
|
540,000 |
|
|
3.10
Years |
|
|
0.14 |
|
|
540,000 |
|
|
0.14 |
|
|
0.05-0.10 |
|
|
8,489,432 |
|
|
3.50
Years |
|
|
0.07 |
|
|
8,489,432 |
|
|
0.07 |
|
| |
|
|
9,990,466
|
|
|
|
|
$ |
0.126 |
|
|
9,990,466
|
|
$ |
0.126 |
|
NOTE
8 - GOING CONCERN
The
accompanying financial statements are prepared assuming the Company will
continue as a going concern. During the nine months ended year ended June 30,
2005, the Company incurred net losses of $2,929,081 and had negative cash flows
from operations in the amount of $1,250,804. While the Company is attempting to
increase sales and to reduce expenses, the growth of revenues and the reduction
of expenses has not been significant enough to support the Company’s daily
operations. Management intends to attempt to raise additional funds by way of a
public or private offering. While the Company believes in the viability of its
strategy to increase sales volume, to decrease expenses and in its ability to
raise additional funds, there can be no assurances to that effect.
NOTE
9 - 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 People’s 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.
GENESIS
TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June
30, 2005
(UNAUDITED)
NOTE
9 - OPERATING RISK
(b)
Products risk
In
addition to competing with other computer and electronics equipment companies,
the Company competes with larger US companies who have greater funds available
for expansion, marketing, research and development and the ability to attract
more qualified personnel. These companies 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)
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.
(d)
Our future performance is dependent on its ability to retain key
personnel
The
Company’s 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.
ITEM
2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
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, 2004 and notes thereto
contained in this Report on Form 10-KSB of Genesis Technology Group,
Inc.
This
report on Form 10-QSB 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 a business development firm that specializes in assisting small and
mid-sized companies in entering the Chinese market. We currently own 80% of
Chorry, a Chinese company which sells computer hardware and peripherals, and
derive approximately 99% of our 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. The strategy envisions and
promotes opportunities for synergistic business relationships among all of the
companies that Genesis works with, both clients and subsidiaries. In fiscal 2004
we purchased 60% of Extrema. In May 2005 Extrema ceased U.S. operations which
will contribute to the costs savings. For the nine months ended June 30, 2005,
Extrema
is
reported as a discontinued operation, and prior periods have been restated in
the Company's financial statements and related footnotes to conform to this
presentation. In connection with the closing of Extrema, we recorded a loss from
discontinued operations of $719,168, including an operating loss attributable to
Extrema of $341,822.
Recently,
in April 2005, we incorporated a new subsidiary, Genesis (Hong Kong) OEM Direct,
Ltd. (‘GHK’). GHK purpose is to consolidate certain sales channels and related
trading activities. Management believes that GHK
will be able to leverages its position as first-tier distributor and its access
to superior technology to develop and market LCD monitors and LCD products. GHK,
which has not produced any revenues to date, will be engaged in the IT products
business and specializes in sale and export LCD products such as Panel PC’s and
LCD Monitors. The business will rely on its close cooperation with numerous OEMs
to offer high quality LCD products at the lowest cost. Management believes that
GHK will have the advantage of a direct sales network, which will bypass several
layers of middlemen and trading companies, to deliver the best products at the
best prices. We anticipate minimal revenues in the fourth quarter.
The
electronics market in China appears to be quite stable. However, profitability
is difficult to achieve due to low margins, which are prevalent in this
industry. Our revenues have remained constant. However, the cost of business is
of increasing concern. If we cannot generate better margins and profits, we will
act judiciously and consider selling our ownership in Chorry. Globally,
electronics are increasingly competitive. We feel the best opportunities for
Genesis and our shareholders may lay in other compelling industries.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
(continued)
We
are currently evaluating our Chorry subsidiary and we may decide to sell this
subsidiary in the near future. Our decision will be based on factors such
as:
| · |
Ability
of Chorry to increase gross profit margins. |
| · |
Ability
of Chorry to increase revenues enough to be become more
profitable. |
| · |
Cost/benefit
relationship of maintaining Chorry as a subsidiary. Currently, we incur
professional fees related to Chorry associated with our SEC filings and we
incur additional administrative expenses to maintain this subsidiary.
|
| · |
Interest
in purchasing Chorry from qualified
parties. |
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.
The
fee-based structure of our consulting services division is such that if our
client company is successful in its particular venture, we can earn additional
fees. These fees could range from a flat cash fee, to a fee which includes a
combination of equity in our client and a success fee payable upon the
completion of transactions such as acquisitions, formations of joint ventures,
or licensing or selling technologies in China, to a solely performance based fee
upon the completion of the project. We do not intend to operate as an investment
company or become subject to the Investment Company Act of 1940.
We
are engaged in a series of discussions for the purpose of entering into
technology and sales alliances or possible acquisitions. Such discussions are
ongoing and the Company anticipates that these negotiations will lead to the
consummation of several critical contracts, agreements and/or alliances in the
foreseeable future that will provide the Company with the ability to increase
revenues and attain profitability through fiscal year 2005 and thereafter. While
the Company has not signed any definitive agreements, the Company is actively
seeking acquisitions or business
opportunities to, among other things, increase revenues and improve stockholder
value, which businesses or lines of business may or may not relate to the
current core business of the Company.
We
intend to continue to pursue acquisitions that we believe could complement or
expand our business, or augment our market coverage. We seek companies or
product lines that we believe have consistent historical cash flow and brand
growth potential and can be purchased at a reasonable price. We also may acquire
businesses that we feel could provide us with important relationships or
otherwise offer us growth opportunities. We plan to fund our future acquisitions
through bank financing, seller debt or equity financing and public or private
equity financing. Although we are actively seeking acquisitions that will expand
our existing products or add new lines of business, as of the date of this we
have no agreements with respect to any such acquisitions, and there can be no
assurance that we will be able to identify and acquire such businesses or obtain
necessary financing on favorable terms. While we are seeking
acquisitions that we believe would improve our financial results, a completed
acquisition may not provide the anticipated financial results, thus leading to
continuing net losses. Even if we achieve profitability, we may not be able to
sustain or increase profitability on a quarterly or annual basis.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
(continued)
FOREIGN
EXCHANGE CONSIDERATIONS
Because
revenues from our operations in the PRC accounted for approximately 98% and 96%
of our consolidated net revenues for the nine months ended June 30, 2005 and for
the fiscal year ended September 30, 2004, respectively, how we report net
revenues from our PRC-based companies is of particular importance to
understanding our financial statements. Transactions and balances originally
denominated in U.S. dollars are presented at their original amounts.
Transactions and balances in other currencies are converted into U.S. dollars in
accordance with Statement of Financial Accounting Standards (SFAS) No. 52,
"Foreign Currency Translation," and are included in determining net income or
loss. For foreign operations with the local currency as the functional currency,
assets and liabilities are translated from the local currencies into U.S.
dollars at the exchange rate prevailing at the respective balance sheet date.
Revenues and expenses are translated at weighted average exchange rates for the
period to approximate translation at the exchange rates prevailing at the dates
those elements are recognized in the financial statements. Translation
adjustments resulting from the process of translating the local currency
financial statements into U.S. dollars are included in determining comprehensive
loss.
The
functional currency of our Chinese subsidiaries 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 each of June 30, 2005 and 2004 was not material.
Until
1994, the Renminbi experienced a gradual but significant devaluation against
most major currencies, including U.S. dollars, and there was a significant
devaluation of the Renminbi on January 1, 1994 in connection with the
replacement of the dual exchange rate system with a unified managed floating
rate foreign exchange system. Since 1994, the value of the Renminbi relative to
the U.S. Dollar has remained stable and has appreciated slightly against the
U.S. dollar. Countries, including the United States, have argued that the
Renminbi is artificially undervalued due to China's current monetary policies
and have pressured China to allow the Renminbi to float freely in world markets.
On July 21, 2005, the PRC reported that it would have its currency pegged to a
basket of currencies rather than just tied to a fixed exchange rate to the
dollar. It also increased the value of its currency 2% higher against the
dollar, effective immediately.
If
any devaluation of the Renminbi were to occur in the future, returns on our
operations in China, which are expected to be in the form of Renminbi, will be
negatively affected upon conversion to U.S. dollars. Although we attempt to have
most future payments, mainly repayments of loans and capital contributions,
denominated in U.S. dollars, if any increase in the value of the Renminbi were
to occur in the future, our product sales in China and in other countries may be
negatively affected.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
(continued)
RESULTS
OF OPERATIONS
NINE
MONTHS ENDED JUNE 30, 2005 COMPARED TO NINE MONTHS ENDED JUNE 30,
2004
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, 2005, we had consolidated revenues of $18,977,090
as compared to $18,055,384 for the nine months ended June 30, 2004, an increase
of $921,706 or 5.1%. This increase resulted from an increase in revenues from
our computer hardware and accessories of $1,205,486 and a decrease in our
business development segment of $283,780 as discussed below.
Cost
of Sales
For
the nine months ended June 30, 2005, cost of sales was directly related to our
computer equipment and accessories segment and amounted to $18,186,145, or 95.8
% or revenues as compared to $17,249,843, or 95.5% of revenues for the nine
months ended June 30, 2004. Overall, we recognized gross margin of 4.20% and
4.50% for the nine months ended June 30, 2005 and 2004, respectively. This
increase resulted substantially from increased revenues from our computer
segment offset by decrease in revenues from our business development business
and is outlined below. Overall, we recognized gross margin of 4.20% and 4.50%
for the nine months ended June 30, 2005 and 2004, respectively.
Operating
Expenses
For
the nine months ended June 30, 2005, operating expenses which include consulting
fees, rent, salaries and non-cash compensation, depreciation expense and other
selling, general and administrative, were $2,904,069 compared to $1,953,284 for
the nine months ended June 30, 2004, an increase of $950,785 or 48.7%. As
discussed below, increases in operating expenses were attributable to the
recording of non-cash compensation in connection with the granting of stock and
stock options to officers and employees and the amortization of deferred
compensation, and the recording of severance expense related to a severance and
separation agreement that we signed with a former officer/director of the
Company. During the nine months ended June 30, 2005, travel related expenses
increased due to increased travel to China as well as increased marketing costs
associated with our Chinese round table events, and increased administrative and
office expenses due to increased operations. Additionally, professional fee
expenses increased attributable to legal and accounting expenses incurred in
connection with our audits of our annual financial statements. Non-cash
compensation increased due to the issuance of 7,250,000 restricted common shares
to executives in October and November 2004, which have been valued at the fair
market value on the dates of grant of $.115 to $.17 per share or $888,750 based
on the trading price of common shares and which will be amortized over the
service period. Additionally, at June 30, 2005, we had deferred compensation of
$323,188, which will be amortized into expense during fiscal 2005. We are
currently implementing cost-cutting measures to cut costs in our business
development segment.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
(continued)
Loss
from sale/disposal of marketable securities
For
the nine months ended June 30, 2005, we recorded no gain or loss from the sale
of marketable securities as compared to $(13,333) loss for the nine months ended
June 30, 2004.
Settlement
income
On
December 31, 2003, we settled our litigation against Innova Holdings, Inc.
(formerly Hy-Tech Technology Group, Inc.) (“Innova”). The Settlement Agreement
resulted in us accepting 3,750,000 common shares of restricted Innova stock
(OTCBB: IVHG). 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 IVHG parties. As of June 30, 2005, Genesis still owned the
entire 3,450,000 of IVHG, which is now free trading. 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
income (expenses) net was $530 for the nine months ended June 30, 2005 as
compared to interest expense, net of $(8,144) for the nine months ended June 30,
2004.
Loss
from discontinued operations
For
the nine months ended June 30, 2005, we recorded a loss from discontinued
operations of $719,168 associated with the closure of our Extrema subsidiary.
In
connection with the closure of Extrema LLC, we wrote off intangible assets and
property equipment amounting to $377,346 that were impaired due to the closure.
Additionally, we incurred operating losses of $341,822 related to this
discontinued operation.
OVERALL
We
reported a net loss for the nine months ended June 30, 2005 of $2,929,081
compared to a net loss for the nine months ended June 30, 2004 of $973,673. This
translates to an overall per-share loss available to shareholders of $.05 for
the nine months ended June 30, 2005 compared to per-share loss of $.03 for nine
months ended June 30, 2004.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
(continued)
RESULTS
OF OPERATIONS BY SEGMENT:
Computer
Equipment and Accessories Segment
Revenues for
the nine months ended June 30, 2005 were $18,828,265 as compared to $17,622,779
for the nine months ended June 30, 2004, an increase of $1,205,486 or 6.87%.
This increase in sales mainly resulted from an increase in demand from the China
markets during the quarter ended June 30, 2005.
Cost
of sales for Chorry for the nine months ended June 30, 2005 amounted to
$18,186,145 or 96.6% of net sales as compared to $17,249,843 or 98% of net sales
for the nine months ended June 30, 2004, an increase of $936,302 or 5.4%. This
translates in a gross profit margin of 3.4% and 2.1% for the nine months ended
June 30, 2005 and 2004, respectively. We expect to continue to experience low
gross profit margins on our products sales. During the quarter ended June 30,
2005, we had several sales that generated higher than normal gross profit
margins. We believe this increase in gross margins is temporary and was
attributable to certain sales.
For
the nine months ended June 30, 2005, we incurred operating expenses of $431,669
compared to $367,422 for the nine months ended June 30, 2004, an increase of
$64,247 or 17.5% and consisted of the following:
| |
|
2005 |
|
2004 |
|
|
Salaries |
|
$ |
130,149 |
|
$ |
108,845 |
|
|
Rent |
|
|
124,957 |
|
|
111,464 |
|
|
Other
selling, general and administrative |
|
|
176,563 |
|
|
147,113 |
|
| |
|
|
|
|
|
|
|
|
Total
operating expenses |
|
$ |
431,669 |
|
$ |
367,422 |
|
During
the nine months ended June 30, 2005, we incurred additional rent of $13,493 due
to our growing need for warehouse space. Additionally, during the nine months
ended June 30, 2005, we incurred increased salary expenses of $21,304 due to
increases in our workforce. Other selling, general and administrative expenses
incurred by Chorry increased by $29,450 due to an increase in freight charges,
technology expenses and general administrative expenses.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS
(continued)
Consulting
Services Segment
Revenue
for the nine months ended June 30, 2005 was $148,825 as compared to $432,605 for
the nine months ended June 30, 2004, a decrease of $283,780 or 66%. During the
nine months ended June 30, 2005, we spent a substantial amount of time on
administrative tasks related to a severance and separation agreement that was
executed in December 2004, to our discontinued Extrema subsidiary, and to
discussion with potential candidates for acquisition. This diversion of time had
a negative effect on our consulting revenues. We expect our revenues to increase
during fiscal 2005 as we refocus our attention.
For the nine
months ended June 30, 2005, we incurred operating expenses of $2,472,400 as
compared to $1,585,862 for the nine months ended June 30, 2004, an increase of
$886,538 or 56%. For the nine months ended June 30, 2005, operating expenses
consisted of rent of $57,650, consulting fees of $162,754, salaries and non-cash
compensation of $1,426,144, severance expense of $329,343, and other selling,
general and administrative expenses of $496,509. For the nine months ended June
30, 2004, operating expenses consisted of rent of $35,991, consulting fees of
$250,739, salaries and non-cash compensation of $889,561, other selling, general
and administrative expenses of $409,571.
The
increase in operating expenses was primarily attributable to the
following:
*
Rent
expense increased to $57,650 for the nine months ended June 30, 2005 from
$35,991 for nine months ended June 30, 2004, an increase of $21,659 or 60.2%.
The increase in rent was attributable to the leasing of a residential apartment
in China for an employee amounting to $3,000 and the leasing of office space for
our China offices of $ 9,685 during the nine months ended June 30,
2005.
*
Our
consulting expense decreased to $162,754 for the nine months ended June 30, 2005
from $250,739 for the nine months ended June 30, 2004. The decrease was due to
decreased non-cash consulting expenses recorded during the nine months ended
June 30, 2005 in connection with the grant of stock options to consultants for
services rendered. For the nine months ended June 30, 2005, non-cash consulting
expense amounted to $68,625 as compared to $105,153 in the 2004 period.
Additionally, during the nine months ended June 30, 2004, we transferred to
consultants 165,000 common shares received by a client for work performed and
accordingly recorded consulting expense of $107,750 related to the transfer of
these shares.
*
Salaries
and non-cash compensation expense increased to $1,426,144 for the nine months
ended June 30, 2005 from $889,561 for nine months ended June 30, 2004, an
increase of $536,583 or 61%. The increase in salaries and non-cash compensation
expense was attributable to the recording of non-cash compensation in connection
with the granting of stock and stock options to officers and employees which
accounted for $541,249 of the increase, including the amortization of deferred
compensation from fiscal 2004. This was offset by a decrease of $4,666
attributable to a decrease in staff in our China business development offices
and an increase in executive salaries under employment agreements.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS
(continued)
*
During
the nine months ended June 30, 2005, we recorded severance expense of $332,533
related to a severance and separation agreement we signed with a former
officer/director of the Company. In connection with this agreement, we paid cash
of $100,000, issued common shares with a value of $61,875, reduced a
subscription receivable of $26,250, distributed marketable securities with a
value of $22,800, and incurred
severance expense of $121,608 related to the distribution of the net assets of
Yastock.
*
Other
selling, general and administrative expenses increased to $496,509 for the nine
months ended June 30, 2005 from $409,571 for the nine months ended June 30,
2004, an increase of $86,938 or 21.2%. We incurred expenses of $31,630 related
to our new China offices including telephone, travel and entertainment other
office expenses, increases in health insurance costs of approximately $10,000,
increases in marketing costs associated with our Chinese round table events, and
increased administrative and office expenses due to increased operations. We
expect our selling, general and administrative expenses to decrease as we look
to cut costs which may include staff reductions.
For
the nine months ended June 30, 2005, we incurred interest income, net of $2,911
as compared to interest expense of $(8,144) for the nine months ended June 30,
2004.
LIQUIDITY
AND CAPITAL RESOURCES
At
June 30, 2005, we had a cash balance of $271,583. As of June 30, 2005, our cash
position by geographic area is as follows:
|
United
States |
|
$ |
164,579 |
|
|
China |
|
|
107,004 |
|
| |
|
|
|
|
|
Total |
|
$ |
271,583 |
|
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 to several institutional investors. The
stated value of the Series A 6% Cumulative Convertible Preferred Stock is $10.00
per share. We had sold 200,000 Series A 6% Cumulative Preferred shares for net
proceeds of $1,902,475. We are using these proceeds for working capital purposes
and to seek acquisition candidates. We do not intend to sell any more Series A
shares. These funds are being used for working capital purposes.
As
of June 30, 2005, we had marketable securities with a fair market value of
$341,953 which we intend on selling to obtain cash for working capital
purposes.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS
(continued)
Net
cash used in operations was $1,250,804 for the nine months ended June 30, 2005
as compared to net cash used in operations of $417,012 for the nine months ended
June 30, 2004. For the nine months ended June 30, 2005, we used cash to fund our
net loss of $2,929,081 ($2,209,913 from continuing operations and $719,168 from
discontinued operations) and recorded income from the receipt of marketable
securities for services of $114,000 offset by non-cash items such as stock-based
compensation of $1,216,093, depreciation and amortization expense of $14,895,
settlement expense of $232,533, impairment losses related to our discontinued
operations of $441,328, as well as changes in assets and liabilities of
$(200,742). 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 expenses of $19,392 and settlement income of
$(196,650) as well as other non-cash items and changes in assets and liabilities
of $122,287.
Net
cash used in investing activities for the nine months ended June 30, 2005 was
$9,461 as compared to net cash provided by investing activities for the nine
months ended June 30, 2004 of $221,118. For the nine months ended June 30, 2005,
we used cash for capital expenditures of $9,461. For the nine months ended June
30, 2004, we received cash from the sale of marketable securities of $233,551
offset by cash used for capital expenditures of $(12,433).
Net
cash used in financing activities was $146,891 for the nine months ended June
30, 2005 as compared to net cash provided by financing activities of $ 2,158,588
for the nine months ended June 30, 2004. For the nine months ended June 30,
2005, net cash used in financing activities related primarily to the repayment
of related party advances of $172,874 offset by proceeds received from the
exercise of stock options of $25,983. 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. This increase was offset by cased used
in financing activities of $120,919 for the repayment of notes payable and
$$80,000 for the repayment of related party notes payable.
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. If we should pursue the
sale of Chorry, we can not estimate at this time what proceeds, if any, we would
receive in that transaction.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS
(continued)
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,
2004. 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.
Accounting
for Stock Based Compensation - We account for stock based compensation utilizing
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at fair
value. We have chosen to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the estimated fair market value of our stock at the date of the grant
over the amount an employee must pay to acquire the stock. We have adopted the
"disclosure only" alternative described in SFAS 123 and SFAS 148 (See Recent
Accounting Pronouncements), which require pro forma disclosures of net income
and earnings per share as if the fair value method of accounting had been
applied. Because of this election, we continue to account for our employee
stock-based compensation plans under Accounting Principles Board
(APB) Opinion No. 25 and the related interpretations. We are required
to comply with SFAS No. 123 (revised 2004) starting on the first day
of our fiscal year 2006. We are currently evaluating the effect that the
adoption of SFAS No. 123 (revised 2004) will have on our consolidated
operating results and financial condition.
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, 2005. All marketable
securities are classified as available for sale at June 30, 2005. 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. 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.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS
(continued)
RECENT
ACCOUNTING PRONOUNCEMENTS
The
Financial Accounting Standards Board has recently issued several new accounting
pronouncements:
In
December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment, an
Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R
requires companies to recognize in the statement of operations the grant- date
fair value of stock options and other equity-based compensation issued to
employees. FAS No. 123R is effective beginning in the Company's second
quarter of fiscal 2006. We are in process of evaluating the impact of this
pronouncement on our financial position.
In
May 2005, FASB issued FASB Statement 154, “Accounting Changes and Error
Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“
FAS 154”). FAS
154 changes the requirements for the accounting for and reporting of a change in
accounting principle. The provisions of FAS 154 require, unless impracticable,
retrospective application to prior periods’ financial statements of (1) all
voluntary changes in principles and (2) changes required by a new accounting
pronouncement, if a specific transition is not provided. FAS
154 also requires that a change in depreciation, amortization, or depletion
method for long-lived, non-financial assets be accounted for as a change in
accounting estimate, which requires prospective application of the new method.
FAS
154 is effective for all accounting changes made in fiscal years beginning after
December 15, 2005.
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 People’s Republic of China (PRC) and to
customers in Brazil. The Company hopes to expand its operations to countries
outside the PRC and Brazil, 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 and Brazil could have a material adverse effect on the
Company's financial condition.
(b)
Products risk
In
addition to competing with other computer and electronics equipment companies,
the Company competes with larger US companies who have greater funds available
for expansion, marketing, research and development and the ability to attract
more qualified personnel. These companies 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)
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.
(d)
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.
ITEM
3. CONTROLS AND PROCEDURES
Our
Chief Executive Officer and Principal 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 as of the end of the period
covered by 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.
Part
II - OTHER INFORMATION
Item
1. Legal Proceedings
None
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.
On
April 1, 2005, we issued 1,626,977 shares of common stock to two executives as
compensation for services rendered. The Company valued these common shares at
the fair market value on the dates of grant of $.07 per share or $113,888 based
on the trading price of common shares. The recipients were accredited 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.
On
April 1, 2005, in connection with an employment agreement, we issued 500,000
shares of common stock to an employee as compensation for services. The Company
valued these common shares at the fair market value on the dates of grant of
$.07 per share or $35,000 based on the trading price of common shares. The
recipient was an accredited investor and the transaction was exempt from
registration under the Securities Act of 1933 in reliance on an exemption
provided by Section 4(2) of that act.
On
April 25, 2005, in connection with a consulting agreement, we issued 1,500,000
shares of common stock to a consultant as compensation for investor relations
services. We valued these common shares at the fair market value on the dates of
grant of $.061 per share or $91,500 based on the trading price of common shares.
The recipient was an accredited or otherwise sophisticated investor and the
transaction was exempt from registration under the Securities Act of 1933 in
reliance on an exemption provided by Section 4(2) of that act. The recipient had
access to information concerning our company.
On
May 31, 2005, we issued 763,867 shares of common stock to two executives as
compensation for services. We valued these common shares at the fair market
value on the dates of grant of $.06 per share or $45,832 based on the trading
price of common shares. The recipients were accredited 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.
On
May and June 2005, we issued 14,973 shares of common stock to two employees as
compensation for services. The Company valued these common shares at the fair
market value on the dates of grant of $.07 per share or $1,048 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
The
terms of service of three (3) Directors of the Board of Directors expired on May
30, 2005, including Robert Zhuang, Shan Ting Ting, and Li Shaoqing. Fernando
Praca resigned as reported in an 8K dated June 3, 2005. The three (3) current
Directors in good standing include: Kenneth Clinton, Shaohua Tan, and Gary L.
Wolfson. Dr. Tan's term expires March 31, 2007, while Messrs. Clinton's and
Wolfson's terms expire on August 1, 2007. Company bylaws permit a maximum of
nine (9) directors.
Our
CEO, Mr. Wolfson utilized his own 3.125 million common shares of restricted
stock to collateralize a loan in the amount of $55,000 from a private individual
not affiliated with the Company. This loan is due and payable on November 20,
2005.
Item
6. Exhibits
|
Exhibit
Number |
Description |
| |
|
|
31.1
|
|
|
31.2 |
|
|
32.1 |
|
|
32.2 |
|
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.
By:
/s/ Gary Wolfson
----------------------------
August
22, 2005 Gary
Wolfson
Chief
Executive Officer
By:
/s/ Adam Wasserman
----------------------------------
August
22, 2005 Adam
Wasserman
Chief
Financial and Accounting Officer