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: December 31, 2003
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 January 31, 2004 40,460,325 outstanding shares of common
stock, $.001 par value per share.
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
FORM 10-QSB
QUARTERLY PERIOD ENDED DECEMBER 31, 2003
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheet
December 31, 2003 (Unaudited).....................................3
Consolidated Statements of Operations (Unaudited)
For the Three Months Ended December 31, 2003 and 2002.............4
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended December 31, 2003 and 2002.............5
Notes to Consolidated Financial Statements.................................6-17
Item 2 - Management's Discussion and Analysis or Plan of Operation........18-26
Item 3 - Controls and Procedures..........................................26-27
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings...................................................27
Item 2 - Changes in Securities and Small Business Issuer
Purchases of Equity..............................................27-28
Item 3 - Default upon Senior Securities......................................28
Item 4 - Submission of Matters to a Vote of Security Holders.................28
Item 5 - Other Information...................................................28
Item 6 - Exhibits and Reports on Form 8-K....................................29
Signatures...................................................................30
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31,
2003
-----------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 661,694
Marketable equity securities 59,136
Accounts receivable (net of allowance for
doubtful accounts of $7,700) 266,028
Inventories 128,196
Prepaid expenses and other 212,360
----------
Total Current Assets 1,327,414
----------
PROPERTY AND EQUIPMENT - Net 116,748
----------
OTHER ASSETS:
Goodwill 10,540
Marketable equity securities - restricted 196,650
Other assets 104,106
----------
Total Other Assets 311,296
----------
Total Assets $ 1,755,458
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Loans payable $ 220,773
Accounts payable and accrued expenses 261,016
Deferred revenue 48,333
Due to related parties 363,309
----------
Total Current Liabilities 893,431
----------
MINORITY INTEREST 36,024
----------
STOCKHOLDERS' EQUITY:
Preferred stock ($.001 Par Value; 20,000,000 Shares Authorized;
no shares issued and outstanding) -
Common stock ($.001 Par Value; 200,000,000 Shares Authorized;
40,079,325 shares issued and outstanding) 40,079
Common stock issuable (381,000 shares) 381
Additional paid-in capital 14,863,875
Accumulated deficit (13,710,742)
Less: Deferred compensation (234,056)
Less: Subscriptions receivable (118,767)
Accumulated other comprehensive loss (14,767)
----------
Total Stockholders' Equity 826,003
----------
Total Liabilities and Stockholders' Equity $ 1,755,458
===========
See notes to unaudited consolidated financial statements
F-3
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended
December 31,
--------------------------------------
2003 2002
---------------- -----------------
(Unaudited) (Unaudited)
NET REVENUES $ 6,565,377 $ 5,276,670
COST OF SALES 6,181,525 5,151,953
---------------- -----------------
GROSS PROFIT 383,852 124,717
---------------- -----------------
OPERATING EXPENSES:
Consulting 180,822 235,251
Salaries and non-cash compensation 331,201 107,770
Selling, general and administrative 205,695 184,885
---------------- -----------------
Total Operating Expenses 717,718 527,906
---------------- -----------------
LOSS FROM OPERATIONS (333,866) (403,189)
OTHER INCOME (EXPENSE):
Gain (loss) from sale of
marketable securities 1,924 (12,667)
Settlement income 196,650 -
Interest expense, net (2,497) (2,496)
---------------- -----------------
Total Other Income (Expense) 196,077 (15,163)
---------------- -----------------
LOSS BEFORE DISCONTINUED OPERATIONS AND
MINORITY NTEREST (137,789) (418,352)
---------------- -----------------
DISCONTINUED OPERATIONS:
Income from discontinued operations - 16
---------------- -----------------
Total Income from Discontinued Operations - 16
---------------- ----------------
LOSS BEFORE MINORITY INTEREST (137,789) (418,336)
MINORITY INTEREST IN INCOME OF SUBSIDIARY (963) -
---------------- -----------------
NET LOSS $ (138,752) $ (418,336)
================ =================
LOSS PER COMMON SHARE - BASIC AND DILUTED
Loss from continuing operations $ (0.00) $ (0.02)
Loss from discontinued operations - -
---------------- -----------------
Net loss per common share
- basic and diluted (0.00) $ (0.02)
================ =================
Weighted Common Shares Outstanding
- basic and diluted 39,572,570 28,528,875
================ =================
See notes to unaudited consolidated financial statements
F-4
GENESIS TECHNOLOGY GROUP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended
December 31,
------------------------------
2003 2002
----------- -------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations $ (138,752) (418,352)
Adjustments to reconcile loss from
continuing operations to net cash used
in operating activities:
Depreciation and amortization 6,306 5,894
(Gain) loss on sale of marketable
securities (1,924) 12,667
Settlement income (196,650) -
Stock-based compensation 282,798 233,418
Minority interest 963 -
Marketable equity securities received
for consulting services (27,332) (4,000)
Changes in assets and liabilities:
Accounts receivable 899 (69,571)
Inventories 118,718 82,475
Prepaid and other current assets 13,403 (67,505)
Other assets (13,167) (6,009)
Accrued payable and accrued expenses 15,544 199,884
Deferred revenues (67,500) (11,250)
------------- ---------------
NET CASH USED IN CONTINUING OPERATING
ACTIVITIES (6,694) (42,349)
-------------- ----------------
Income from discontinued operations - 16
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 - (16)
-------------- ----------------
NET CASH PROVIDED BY (USED IN)
DISCONTINUED OPERATING ACTIVITIES - -
------------ ----------------
NET CASH USED IN OPERATING ACTIVITIES (6,694) (42,349)
------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities 176,008 13,713
Capital expenditures (6,048) (5,234)
------------ ----------------
NET CASH FLOWS PROVIDED BY INVESTING ACTIVITIES 169,960 8,479
------------ ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in subscription receivable - 10,000
Due to related party 14,197 7,808
Proceeds from exercise of stock options 300,000 49,900
----------- ----------------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 314,197 67,708
---------- ----------------
EFFECT OF EXCHANGE RATE CHANGES IN CASH (567) -
---------- ----------------
NET INCREASE IN CASH AND CASH EQUILALENTS 476,896 33,838
CASH AND CASH EQUIVALENTS - beginning of year 184,798 57,574
------------- ----------------
CASH AND CASH EQUIVALENTS - end of period $ 661,694 $ 91,412
========== ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Noncash investing and financing activities:
Marketable securities exchanged for debt $ - $ 51,000
========= ================
Common stock issued for debt $ 101,533 $ 140,000
================ ================
Common stock and stock
subscriptions receivable cancelled $ - $ 70,000
============== ================
Common stock issued for
subscription receivable $ - $ 190,000
============== ================
See notes to unaudited consolidated financial statements.
F-5
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003
(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.At the present time, the primary source of the
Company's revenues is derived from its Chorry (Zhaoli) equipment and accessories
subsidiary based in China. The Company believes that this segment will become a
less significant phase of its operations as its business development services
segment expands and new acquisitions are made. The Company's strategy includes
marketing itself as a resource for these companies in marketing, distribution,
manufacturing, forming joint ventures, or establishing a base in China. As a
part of that strategy, the Company has become a member of the Shanghai United
Assets and Equity Exchange , an organization that promotes the influx of
technology into China. The Company also has acquired companies in China and
previously in the U.S. 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. In
addition, the company acquires and invests in innovative technology companies in
China or forms joint ventures with both American and elite Chinese companies,
focusing on emerging technology industries including, but not limited to,
nanotechnology, biotech, wireless telecommunication, information systems,
environmental protection and biomedicine technologies.
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 Genesis
Technology Group, Inc. (the "Company") as filed with the Securities and Exchange
Commission. The results of operations for the three months ended December 31,
2003 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)
December 31, 2003
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Marketable equity securities
Marketable equity securities consist of investments in equity of publicly traded
and non-public domestic and foreign companies and are stated at market value
based on the most recently traded price of these securities at December 31,
2003. All marketable securities are classified as available for sale at December
31, 2003. 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 December 31, 2003, the exchange rate for the Chinese Renminbi (RMB)
was $1 US for 8.27 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 December 31, 2003 was not material.
-7-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2003
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Stock-based compensation
The Company accounts for stock options issued to employees in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. As
such, compensation cost is measured on the date of grant as the excess of the
current market price of the underlying stock over the exercise price. Such
compensation amounts, if any, are amortized over the respective vesting periods
of the option grant. The Company adopted the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation" and SFAS 148, "Accounting for
Stock-Based Compensation -Transition and Disclosure", which permits entities to
provide pro forma net income (loss) and pro forma earnings (loss) per share
disclosures for employee stock option grants as if the fair-valued based method
defined in SFAS No. 123 had been applied. The Company accounts for stock options
and stock issued to non-employees for goods or services in accordance with the
fair value method of SFAS 123.
Had compensation cost for the stock option plan been determined based on the
fair value of the options at the grant dates consistent with the method of SFAS
123, "Accounting for Stock Based Compensation", the Company's net loss and loss
per share would have been changed to the pro forma amounts indicated below for
three months ended December 31, 2003 and 2002:
2003 2002
---------------- ------------------
Net earnings
As reported $ (138,752) $ (418,336)
Pro forma $ (187,097) $ (418,336)
Basic earnings per share
As reported $(.01) $(.02)
Pro forma $(.01) $(.02)
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)
December 31, 2003
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Reclassifications
Certain prior periods' balances have been reclassified to conform to the current
period's financial statement presentation. These reclassifications had no impact
on previously reported results of operations or stockholders' equity (deficit).
NOTE 2 - RELATED PARTY TRANSACTIONS
Due from related party
An officer of the Company advanced funds to the Company for working capital
purposes. The advances are non-interest bearing and are payable on demand. At
December 31, 2003, the Company did not owe this officer any funds. Additionally,
a minority shareholder of the Company's Zhaoli subsidiary, advanced $363,309 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 December 31, 2003 and 2002, 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)
December 31, 2003
(UNAUDITED)
NOTE 2 - SEGMENT INFORMATION (Continued)
Information with respect to these reportable business segments for the three
months ended December 31, 2003 and 2002 is as follows: `
For the Three Months For the Three Months
Ended Ended
December 31, 2003 December 31, 2002
------------------------------ ---------------------- ----------------------
Net Revenues:
Computer Equipment and Accessories $ 6,310,368 $ 5,223,480
Consulting Services 255,009 53,190
Consolidated Net Revenue 6,565,377 5,276,670
Cost of Sales and Operating expenses:
Computer Equipment and Accessories 6,303,394 5,221,120
Consulting Services 589,543 456,989
Depreciation:
Computer Equipment and Accessories 2,161 -
Consulting Services 4,145 1,750
Interest Expense:
Computer Equipment and Accessories - -
Consulting Services 2,500 2,500
Income (Loss):
Computer Equipment and Accessories $ 3,850 $ 2,360
Consulting Services (142,602) (420,696)
Net Loss $ (138,752) $ (418,336)
--------------------- ------------------
Total Assets at December 31, 2003
and 2002:
Computer Equipment and Accessories $ 959,987 $ 484,334
Consulting Services 795,471 707,555
--------------------- ------------------
Consolidated Asset Total $ 1,755,458 $ 1,191,889
===================== ==================
-10-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2003
(UNAUDITED)
NOTE 3 - SEGMENT INFORMATION (Continued)
For the three months ended December 31, 2003 and 2002, the Company derived
approximately 96% and 99% of its revenue from its subsidiaries located in the
People's Republic of China, respectively. Sales and identifiable assets by
geographic areas for the three months ended December 31, 2003 and 2002, and as
of December 31, 2003, respectively, were as follows:
Revenues
For the Three Months Ended Identifiable Assets
December 31, at December 31,
2003 2002 2003
-------------- -------------- ------------------------
United States $ 278,344 $ 49,750 $ 712,777
China 6,287,033 5,226,920 1,042,681
----------- ------------ --------------
Total $ 6,565,377 $ 5,276,670 $ 1,755,458
=============== ================= ========================
Currently, the Company's revenues are primarily derived from sale of computer
equipment and accessories to customers in the Peoples Republic of China (PRC).
The Company hopes to expand its operations to countries outside the PRC,
however, such expansion has not been commenced and there are no assurances that
the Company will be able to achieve such an expansion successfully. Therefore, a
downturn or stagnation in the economic environment of the PRC could have a
material adverse effect on the Company's financial condition.
-11-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2003
(UNAUDITED)
NOTE 4 - LOANS PAYABLE
On April 1, 2002, the Company borrowed $80,000 from an individual related to an
officer of the Company. The loan bears interest at 10% per annum and is
unsecured. All unpaid principal and accrued interest is payable on April 1,
2003. In the event of default of the loan agreement, the lender is to receive
shares of the Company's common stock at a 25% discount to the average closing
price of the previous 20 trading days of the Company's common stock equal to the
total amount due to the lender. As of December 31, 2003, this loan remains
unpaid. The lender has not provided the Company with a notice of default.
On July 31, 2002, the Company borrowed $20,000 from an individual related to an
officer of the Company. The loan bears interest at 10% per annum and is
unsecured. All unpaid principal and accrued interest was payable on January 1,
2003. At the option of the lender, the entire obligation may be repaid with
common stock calculated by dividing the amount due by the average closing common
stock price for ten days prior to the repayment discounted by 40%, with a
maximum price of $0.13 per share. The beneficial conversion feature present in
the issuance of this note payable as determined on the date funds were received
under the loan agreement totaled $12,500 and was recorded as interest expense
and additional paid-in capital. As of December 31, 2003, no conversion had
occurred. As of December 31, 2003, the loan remains unpaid.
The Company's Chinese subsidiary, 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, 2004.
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:
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.
-12-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2003
(UNAUDITED)
NOTE 5 - STOCKHOLDERS' EQUITY (Continued)
Preferred stock (continued)
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.
The Company will pay a broker's fee to Coastline Capital Partners, an
institutional finance division of Western International Securities, Inc., of
$90,000 and will issue warrants to purchase a total of 300,000 shares of its
common stock exercisable at $0.3045. Genesis has agreed to file a registration
statement covering the shares issued and issuable under the Subscription
Agreement within 45 days following the above closing.
-13-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2003
(UNAUDITED)
NOTE 5 - STOCKHOLDERS' EQUITY
Common stock
In October 2003, the Company issued 3,755,501 shares of its common stock
relating to the exercise of options held by executives, employees and
consultants, respectively. The Company received proceeds of $245,000, reduced
accrued salaries by $116,423, reduced to related party of $44,627, reduced
accounts payable by $1,908, and has a subscription receivable of $53,617 related
to these share issuances.
On November 13, 2003, the Company issued an aggregate of 150,000 144 restricted
shares of its common stock to directors for services rendered and to be rendered
in the future. The Company valued these shares at $51,000 or $0.34 per share and
recorded compensation expense relating to this issuance of $29,750 and deferred
compensation expense of $21,250 to be amortized over the service period.
On December 15, 2003, the Company issued an aggregate of 231,000 144 restricted
shares of its common stock to employees and officers for services rendered. The
Company valued these shares at $0.31 per share and recorded stock-based
compensation expense relating to this issuance of $71,610.
-14-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2003
(UNAUDITED)
NOTE 5 - STOCKHOLDERS' EQUITY (continued)
Stock options
In October 2003, 472,501 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.
On October 7, 2003, the Company entered into a six month agreement with a
consultant. The consultant received 500,000 options to purchase shares of the
Company's common stock at an exercise price of $0.05 per share. The Company
valued these shares at approximately $0.096 per share and recorded consulting
expense relating to this issuance of options of $24,076 and deferred consulting
expenses of $24,077. This consultant exercised 483,000 of these options in
October 2003 (see Common stock).
On November 13, 2003, 150,000 options were granted to directors of the Company
with an exercise price of $.125. 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 $18,813 for the three months ended December 31, 2003 and
deferred compensation of $13,437 under the intrinsic value method of APB 25. The
deferred compensation will be amortized over the service period,
On November 13, 20,000 options were granted to directors of the Company with an
exercise price of $.34 for services provided. 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)
December 31, 2003
(UNAUDITED)
NOTE 5 - STOCKHOLDERS' EQUITY (continued)
Stock options (continued)
A summary of outstanding options and warrants at December 31, 2003 are as
follows:
Number of Weighted
Options and Average
Warrants Exercise Price
Stock Options
----------------------------------- ---------------- ----------------
Balance at beginning of period 10,910,000 $ 0.18
Granted 1,142,501 0.10
Exercised (3,755,501) 0.14
Forfeited (500,000) 0.37
Balance at end of period 7,797,000 $ 0.19
----------------------------------- =============== ================
Options exercisable at end of period 7,797,000 $ 0.19
----------------------------------- =============== ================
Weighted average fair value of options $ 0.10
granted during the period
The following table summarizes information about employee stock options and
consultant warrants outstanding at December 31, 2003:
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 December 31, 2003 Life Price December 31, 2003 Price
----------- ----------------- ----------- ------- ----------------- --------
$ 0.60-2.25 450,000 1.50 Years $ 1.52 450,000 $ 1.52
0.23-0.36 695,000 2.10 Years 0.29 695,000 0.29
0.05-0.15 6,652,000 4.27 Years 0.09 6,652,000 0.09
-------------- ------- ---------------- --------
7,797,000 $ 0.18 7,797,000 $ 0.18
================ ======= ================ =========
-16-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2003
(UNAUDITED)
NOTE 6 - SETTLEMENT INCOME
On December 31, 2003, the Company settled its litigation against Hy-Tech
Technology Group, Inc. ("HYTT"). The Settlement Agreement resulted in the
Company accepting 3,750,000 common shares of restricted Hy-Tech Technology
Group, Inc. stock (OTCBB: HYTT). In a related matter, the Company conveyed
300,000 of those shares to Elite Financial Communications Group, which had
initially introduced the Company to key principals among the HYTT parties. In
connection with the settlement, the Company recorded settlement income of
$196,650 based on the fair market value of 3,450,000 net shares that the Company
received.
NOTE 7 - SUBSEQUENT EVENTS
See Note 5 regarding Preferrd stock offering.
-17-
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS
The following analysis of the results of operations and financial condition of
the Company should be read in conjunction with the financial statements of
Genesis Technology Group, Inc. for the year ended September 30, 2003 and notes
thereto contained in this Report on Form 10-QSB 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
Genesis Technology Group Inc. ("Genesis", the "Company" or "we") is an
international business development firm that specializes in leading and
assisting companies in penetrating the Chinese market for business development
and commerce, as well as assisting Chinese companies in penetrating the US
market or listing in the US public market. We have a seat as a member of the
Shanghai United Assets and Equity Exchange , an organization that promotes the
influx of technology into China. In addition, the company acquires and invests
in innovative technology companies in China or forms joint ventures with both
American and elite Chinese companies, focusing on emerging technology industries
including, but not limited to, nanotechnology, biotech, wireless
telecommunication, information systems, environmental protection and biomedicine
technologies.
A significant model for our future business development is the introduction
of US companies in the Life and Health Science arena to China. Life and Health
Science is compromised of different but related industries such as
pharmaceuticals, environmental science, biotechnology, and healthcare
development. These industries range from water, soil, and air testing and
remediation to hospital facility development and management. These are new and
robust areas in China that desperately need attention and expertise. Genesis'
goal is to assist companies that are active in these areas in entering the
Chinese market.
In addition to our business development services, we have also acquired
companies in the U.S. and China for the purposes of further developing these
companies, with managerial, operational, and financial support. Our model
envisions and promotes opportunities for synergistic business relationships
among all of the companies that we work with, both clients and subsidiaries.
As we continue to grow, acquisitions and mergers is a significant piece
of our growth model. We are concentrating on mergers and acquisitions activity
with firms in both the U.S. and China that mirror our strategy. These
relationships will be built around consolidating key resources, financial and
physical assets, brand names, and human resources.
We currently have three active subsidiary companies. We own 80% of one
computer hardware and software manufacturer/distributor located in Shanghai
China. We own 100% of two consulting companies, one in the U.S. and one in
China. We own 85% of an inactive biotechnology-marketing firm that is located in
the Unites States.
-18-
Our subsidiary Shanghai Chorry (Zhaoli) Technology Development Co., Ltd was
established in 1998, notworthy distributor of computer hardware and office
automation facilities in Shanghai; at the same time it has accumulated a shared
value of "Sincerity, Profession, Teamwork, Excellence" within the company.
Suppliers to Shanghai Chorry (Zhaoli) are all world known corporations: EPSON,
CANON, HP, RICOH, BROTHER and START, etc. With the authorization of the above
mentioned corporations Shanghai Chorry (Zhaoli) is involved in the IT related
products, ranging from Color Laser Printer, Scanner, Copier, Facsimile Machine,
MFP, Module Router, Switch, Video Telephone, Computer to Supplies, and focusing
on providing the innovative technology solutions to enhance customers' business
agility. Customers of Chorry (Zhaoli) include banks, telecom, hospitals,
securities, supermarkets, airports, railway stations and other government
departments. By the time of this report, Chorry (Zhaoli) has achieved 2,500
clients so far, which is an invaluable asset to the company.
Simultaneously, Chorry (Zhaoli) has developed a widely-spread sales channel.
With headquarter and a customer center in Shanghai Chorry (Zhaoli) has 9
affiliated branches in Wukang, Pacific, Buy-now-mart, Daqian digital plaza,
Cyber-mart, Xinzha, Furongjiang computer mart, PuDong Xinling and Wujiaochang
Yigao Computer mart.
IT related products distributed by Chorry (Zhaoli) are mainly for commercial
purposes, also for home use.
Moreover, with the increasing application of IT products the demands for
pragmatic application software and solutions will increase too. Nowadays,
network, advertising, media, service industry, etc, have become the potential
customer, for instance, Chorry (Zhaoli)'s LED Demo solution is one of the
favorite technology for indoor and outdoor information output.
BUSINESS DEVELOPMENT
In addition to overseeing the operation of its subsidiaries, we have been
growing our cross-pacific business development/consulting business. Management
believes that China's entrance into the WTO offers a unique opportunity for
Genesis to secure itself a position as a leader in the growing market for
cross-pacific products, technology, capital, and property exchange. To that end,
we market our self to other U.S. firms interested in Chinese partnerships for
manufacturing and distribution of a variety of products in China, with a strong
focus on the Life and Health Science arena.
We currently have 28 clients under contract. In the last 12 months, we have
grown our client base from 2 to 28 clients. Company management has met with over
400 firms that have shown significant interest in introducing their product or
service to China or the U.S. We are assisting these clients in penetrating the
Chinese market for the purposes of product and solutions sales, distribution,
manufacturing, and/or research and development.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2003 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2002
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 three months ended December 31, 2003, we had consolidated
revenues of $6,565,377 as compared to $5,276,670 for the three months ended
December 31, 2002. This increase resulted substantially from increased revenues
from our computer hardware and accessories segment and is discussed below.
Cost of Sales
For the three months ended December 31, 2003, cost of sales was
directly related to our computer equipment and accessories segment and amounted
to $6,181,525 as compared to $5,151,953 for the three months ended December 31,
2002. This increase resulted substantially from increased revenue from our
computer segment and is outlined below.
-19-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS
(continued)
Operating Expenses
For the three months ended December 31, 2003, operating expenses which
include consulting fees, rent, salaries and non-cash compensation, depreciation
expense and other selling, general and administrative, were $717,718 as compared
to $527,906 for the three months ended December 31, 2002.
Loss from sale/disposal of marketable securities
For the three months ended December 31, 2003, we recorded a gain from the
sale of marketable securities of $1,924 as compared to a loss of $(2,497) for
the three months ended December 31, 2002.
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
Interest expense was $2,497 for the three months ended December 31,
2003 as compared to $2,496 for the three months ended December 31, 2002.
OVERALL
We reported a net loss for the three months ended December 31, 2003 of
$(138,752) compared to a net loss for the three months ended December 31, 2002
of $(418,336). This translates to an overall per-share loss of ($.00) for the
three months ended December 31, 2003 compared to per-share loss of ($.02) for
the three months ended December 31, 2002.
RESULTS OF OPERATIONS BY SEGMENT:
Consulting Services Segment
Revenue for the three months ended December 31, 2003 was $255,009 as
compared to $53,190 for the three months ended December 31, 2002. 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 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.
-20-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS
(continued)
For the three months ended December 31, 2003, we incurred operating
expenses of $593,688 as compared to $458,739 for the three months ended December
31, 2002. For the three months ended December 31, 2003, operating expenses
consisted of rent of $24,859, consulting fees of $180,822, salaries and non-cash
compensation of $294,831 and other selling, general and administrative expenses
of $93,176. For the three months ended December 31, 2002, operating expenses
consisted of rent of $20,352, consulting fees of $235,251, salaries and non-cash
compensation of $115,678 and other selling, general and administrative expenses
of $87,458. The increase in operating expenses was primarily attributable to the
following:
(1) During fiscal 2002, we relocated our administrative offices
into larger leased space. Accordingly, our rent expense
increased in fiscal 2003 compared to fiscal 2002.
(2) Our consulting expense decreased to $180,822 for the three
months ended December 31, 2003 from $235,251 for the three
months ended December 31, 2002. The decrease was due to
decreased non-cash consulting expenses recorded during the
three months ended December 31, 2003 in connection with the
grant of stock options to consultants for services rendered.
(3) Salaries and non-cash compensation expense increased to
$294,831 for the three months ended December 31, 2003 from
$115,678 for the three months ended December 31, 2002. In
fiscal 2003, we increased our marketing and administrative
staff by two persons. The remaining increase in salaries and
non-cash compensation expense was attributable to the
recording of non-cash compensation in connection with the
granting of stock options to officers, employees, and
directors and the issuance of common shares in December 2003
for bonuses amounting to $71,610.
(4) Other selling, general and administrative expenses increased
to $93,176 for the three months ended December 31, 2003 from
$87,458 for the three months ended December 31, 2002, an
increase of $5,718.
For the three months ended December 31, 2003 and 2002, we incurred
interest expense of $2,500 and $2,500, respectively.
-21-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS
(continued)
RESULTS OF OPERATIONS BY SEGMENT (continued):
Computer Equipment and Accessories Segment
Revenues for the three months ended December 31, 2003 were $6,310,368
as compared to $5,223,480 for the three months ended December 31, 2002 from our
subsidiary Zhaoli, a Chinese company. This revenue was generated from sales of
printers, copiers, network equipment and software licensing fees. The increase
in sales mainly resulted from increasing demand from the market, as the Chinese
government required all companies by July 1, 2003 to issue all transaction
receipts and invoices by using a printer and a computer in order to smooth its
tax collections.
Cost of sales for Zhaoli for the three months ended December 31, 2003
amounted to $6,181,525 or 97.9% of net sales as compared to $5,151,953 or 97.6%
of net sales for the three months ended December 31, 2002. We continue to
experience low gross profit margins on our products sales.
For the three months ended December 31, 2003, operating expenses
consisted of salaries of $36,370, rent expense of $39,049, and other selling,
general and administrative expenses amounted to $48,611 as compared to salaries
expense of $9,014, rent expense of $25,158, and other selling, general and
administrative expenses of $34,995 for the three months ended December 31, 2002.
In fiscal 2003, we incurred additional rent due our growing need for warehouse
space. Additionally, due to increased net revenues, we increased our workforce.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2003, we had a cash balance of $661,694. As of December
31, 2003, our cash position by geographic area is as follows:
Cash
-------
United States $ 373,816
China 287,878
------------
Total $ 661,694
============
On January 16, 2004, we consummated a securities purchase agreement under
which we agreed to issue $2,000,000 stated value of its newly created Series A
6% Cumulative Convertible Preferred Stock (the "Series A Preferred Stock") to
several institutional investors. The stated value of the Series A Preferred
Stock is $10.00 per share. Of this amount, the Company received gross proceeds
of $1,000,000 from the sale of 100,000 shares of Series A Preferred Stock. Upon
filing of a registration statement we will sell an additional 100,000 shares of
Series A Preferred Stock in addition to the previous sale for an additional
$1,000,000 of proceeds.
-22-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS
(continued)
Management has invested substantial time evaluating and considering
numerous proposals for possible acquisition or combination developed by
management or presented by investment professionals, the Company's advisors and
others. We continue to consider acquisitions, business combinations, or start up
proposals, which could be advantageous to shareholders. No assurance can be
given that any such project; acquisition or combination will be concluded.
We intend to continue our trading activities and as a consequence the
future financial results of the Company may be subject to substantial
fluctuations. As part of our investment activities, we may sell a variety of
equity or debt securities obtained as revenues for business development
services. Such investments often involve a high degree of risk and must be
considered extremely speculative.
At December 31, 2003, our Company had stockholders' equity of $826,003.
Our Company's future operations and growth will likely be dependent on our
ability to raise capital for expansion and to implement our strategic plan.
Net cash used in operations was $(6,694) for the three months ended
December 31, 2003 as compared to net cash used in operations of $(42,349) for
the three months ended December 31, 2002. The difference is due to increased
cash flow generated by our business development services which has given us
additional cash flows from operations.
Net cash provided by investing activities for the three months ended
December 31, 2003 was $169,960 as compared to net cash provided by investing
activities for the three months ended December 31, 2002 of $8,479. For the three
months ended December 31, 2003, we received $176,008 from the sale of marketable
securities offset by cash used for capital expenditures of $(6,048). For the
three months ended December 31, 2002, we received cash from the sale of
marketable securities of $13,713 offset by cash used for capital expenditures of
$(5,234).
Net cash provided by financing activities were $314,197 for the three
months ended December 31, 2003 as compared to $67,708 for the three months ended
December 31, 2002. For the three months ended December 31, 2003, net cash
provided by financing activities related primarily to proceeds from the exercise
of stock options and related party loans of $ 300,000 and $14,197, respectively.
For the three months ended December 31, 2002, net cash provided by financing
activities related to proceeds from related party loans of $7,808 and proceeds
from the exercise of stock options of $59,900.
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.
-23-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS
(continued)
CRITICAL ACCOUNTING POLICIES
A summary of significant accounting policies is included in Note 1 to
the audited consolidated financial statements included our filing on Form 10-KSB
as filed with the Securities and Exchange Commission for the year ended
September 30, 2003. Management believes that the application of these policies
on a consistent basis enables the Company to provide useful and reliable
financial information about the company's operating results and financial
condition.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
We account for stock options issued to employees in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. As such,
compensation cost is measured on the date of grant as the excess of the current
market price of the underlying stock over the exercise price. Such compensation
amounts, if any, are amortized over the respective vesting periods of the option
grant. We adopted the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" and SFAS 148, "Accounting for Stock-Based Compensation
-Transition and Disclosure", which permits entities to provide pro forma net
income (loss) and pro forma earnings (loss) per share disclosures for employee
stock option grants as if the fair-valued based method defined in SFAS No. 123
had been applied. We account for stock options and stock issued to non-employees
for goods or services in accordance with the fair value method of SFAS 123.
Our revenues from the sale of products are recorded when the goods are
shipped. Consulting income is recognized on a straight-line basis over the
period of the service agreement. Deferred revenues relates to consulting
revenues that is being recognized over the period of the service agreement.
Marketable equity securities consist of investments in equity of publicly traded
and non-public domestic companies and are stated at market value based on the
most recently traded price of these securities at December 31, 2003. All
marketable securities are classified as available for sale at December 31, 2003.
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.
-24-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS
(continued)
OPERATING RISK
(a) Country risk
Currently, the Company's revenues are primarily derived from sale of
computer equipment and accessories to customers in the Peoples Republic of China
(PRC). The Company hopes to expand its operations to countries outside the PRC,
however, such expansion has not been commenced and there are no assurances that
the Company will be able to achieve such an expansion successfully. Therefore, a
downturn or stagnation in the economic environment of the PRC could have a
material adverse effect on the Company's financial condition. As experienced in
Spring 2003,diseases such as SARS can significantly impact the PRC economy and
affect the company productivity.
(b) Products risk
In addition to competing with other computer and electronics equipment
companies, the Company could have to compete with larger US companies who have
greater funds available for expansion, marketing, research and development and
the ability to attract more qualified personnel if access is allowed into the
PRC market. If US companies do gain access to the PRC markets, it may be able to
offer products at a lower price. There can be no assurance that the Company will
remain competitive should this occur.
(c) Exchange risk
The Company generates revenue and incurs expenses and liabilities in
Chinese renminbi and U.S. dollars. As a result, the Company is subject to the
effects of exchange rate fluctuations with respect to any of these currencies.
For example, the value of the renminbi depends to a large extent on PRC's
domestic and international economic and political developments, as well as
supply and demand in the local market. Since 1994, the official exchange rate
for the conversion of renminbi to U.S. dollars has generally been stable and the
renminbi has appreciated slightly against the U.S. dollar. However, given recent
economic instability and currency fluctuations, the Company can offer no
assurance that the renminbi will continue to remain stable against the U.S.
dollar or any other foreign currency. The Company's results of operations and
financial condition may be affected by changes in the value of renminbi and
other currencies in which its earnings and obligations are denominated. The
Company has not entered into agreements or purchased instruments to hedge its
exchange rate risks, although the Company may do so in the future.
-25-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS
(continued)
Although Chinese governmental policies were introduced in 1996 to allow
the convertibility of renminbi into foreign currency for current account items,
conversion of renminbi into foreign exchange for capital items, such as foreign
direct investment, loans or security, requires the approval of the State
Administration of Foreign Exchange, or SAFE, which is under the authority of the
People's Bank of China. These approvals, however, do not guarantee the
availability of foreign currency. The Company cannot be sure that the Company
will be able to obtain all required conversion approvals for its operations; or
that Chinese regulatory authorities will not impose greater restrictions on the
convertibility of the renminbi in the future. Because a significant amount of
its revenues are in the form of renminbi, its inability to obtain the requisite
approvals or any future restrictions on currency exchanges will limit its
ability to utilize revenue generated in renminbi to fund its business activities
outside PRC.
(d) Political risk
Currently, the PRC is in a period of growth and is openly promoting
business development in order to bring more business into PRC. Additionally, the
PRC allows a Chinese corporation to be owned by a United States corporation. If
the laws or regulations are changed by the PRC government, the Company's ability
to operate the PRC subsidiaries could be affected.
(e) Our future performance is dependent on its ability to retain key personnel
Our performance is substantially dependent on the performance of our
senior management. In particular, the Company's success depends on the continued
effort of our Senior Management to maintain all contact with our Chinese
subsidiaries. The Company's inability to retain Senior Management could have a
material adverse effect on our prospects, businesses, Chinese operations,
financial conditions
ITEM 3. CONTROLS AND PROCEDURES
Quarterly Controls Evaluation and Related CEO and CFO Certifications
We conducted an evaluation of the effectiveness of the design and operation of
our "disclosure controls and procedures" (Disclosure Controls) as of the end of
the period covered by this Quarterly Report. The controls evaluation was done
under the supervision and with the participation of management, including our
Chief Executive Officer (CEO) and Chief Financial Officer (CFO).
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.
Attached as exhibits to this Quarterly Report are certifications of the CEO and
the CFO, which are required in accord with Rule 13a-14 of the Exchange Act. This
Controls and Procedures section includes the information concerning the controls
evaluation referred to in the certifications and it should be read in
conjunction with the certifications for a more complete understanding of the
topics presented.
Definition of Disclosure Controls
Disclosure Controls are controls and procedures designed to reasonably assure
that information required to be disclosed in our reports filed under the
Exchange Act, such as this Quarterly Report, is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms.
Disclosure Controls are also designed to reasonably assure that such information
is accumulated and communicated to our management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure. Our
Disclosure Controls include components of our internal control over financial
reporting, which consists of control processes designed to provide reasonable
assurance regarding the reliability of our financial reporting and the
preparation of financial statements in accordance with accounting principles
generally accepted in the United States.
Limitations on the Effectiveness of Controls
Our management, including the CEO and CFO, does not expect that our Disclosure
Controls or our internal control over financial reporting will prevent all error
and all fraud. A control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that the control system's
objectives will be met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, 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. The
design of any system of controls is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of changes in
conditions or deterioration in the degree of compliance with policies or
procedures. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
Conclusions
Based upon the controls evaluation, our CEO and CFO have concluded that, subject
to the limitations noted above, as of the end of the period covered by this
Quarterly Report, our Disclosure Controls were effective to provide reasonable
assurance that material information relating to Genesis and its consolidated
subsidiaries is made known to management, including the CEO and CFO.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as
defined in Rules13a-15(f) and 15d-15(f) of the Exchange Act) that occurred
during the quarter ended December 31, 2003 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.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.
-26-
Part II - OTHER INFORMATION
Item 1.Legal Proceedings
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.
Item 2. Changes in Securities and Small Business Issuer Purchases of Equity
Preferred stock
In January 2004, the Board of Directors established a Series A 6%
Cumulative Convertible Preferred Stock (the "Series A Preferred Stock")
authorized to be issued by the Company, with the designations and amounts
thereof, together with the voting powers, preferences and relative,
participating, optional and other special rights of the shares of each such
series, and the qualifications, limitations or restrictions as follows. The
issuace of the preffered stock was exempt under rule 506 of the Registration Act
of 1933.
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.
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Common stock
On November 13, 2003, the Company was to issue an aggregate of 150,000
shares of its common stock to directors for services rendered and to be rendered
in the future. The Company valued these shares at $0.34 per share and recorded
compensation expense relating to this issuance of $29,750 and deferred
compensation expense of $21,250 to be amortized over the service period. As of
December 31, 2003, these shares had not been issued and are reflected as common
stock assumable on the accompanying consolidated balance sheet.
On December 15, 2003, the Company issued an aggregate of 231,000
shares of its common stock to employees and officers for services rendered. The
Company valued these shares at $0.31 per share and recorded stock-based
compensation expense relating to this issuance of $71,610. As of December 31,
2003, these shares had not been issued and are reflected as common stock
issuabled on the accompanying consolidated balance sheet.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
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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
Item 1 . Legal Proceedings
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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 February 17,
2004.
GENESIS TECHNOLOGY GROUP, INC.
By: /s/ Gary Wolfson
------------------
Gary Wolfson
Chief Executive Officer
In accordance with the Securities Exchange Act, the registrant has caused
this report to be singed on behalf by the undersigned that is duly authorized of
1934, this report has been signed by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
------------------ ---------- --------
/s/ Gary Wolfson Chief Executive Officer and February 17, 2004
------------------------ Director
Gary Wolfson
/s/ Adam Wasserman CFO and Principal Financial February 17, 2004
------------------------ and Accounting Officer
Adam Wasserman
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