UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to __________
Commission file number: 333-86347
GENESIS TECHNOLOGY GROUP, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 65-1130026
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7900 GLADES ROAD, SUITE 420
BOCA RATON, FLORIDA 33434
(Address of principal executive offices) (Zip Code)
(561) 988-9880
(Registrant's telephone number, including area code)
777 YAMATO ROAD, SUITE 130
BOCA RATON, FLORIDA 33431 (Former
name or former address, if changed since last report)
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 April 30, 2005: 60,032,654 outstanding shares of common
stock, $.001 par value per share.
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
FORM 10-QSB
QUARTERLY PERIOD ENDED MARCH 31, 2005
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheet
March 31, 2005 (Unaudited)............................................3
Consolidated Statements of Operations (Unaudited)
For the Three and Six Months Ended March 31, 2005 and 2004...........4
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended March 31, 2005 and 2004......................5
Notes to Consolidated Financial Statements............................6-16
Item 2 - Management's Discussion and Analysis or Plan of Operation...17-27
Item 3 - Controls and Procedures........................................27
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings..............................................28
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds....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.......................................................28
Signatures..............................................................29
-2-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 2005
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................................................................... $ 569,789
Marketable equity securities .................................................................. 70,104
Accounts receivable (net of allowance for doubtful accounts of $12,850) ....................... 491,329
Inventories ................................................................................... 255,026
Prepaid expenses and other .................................................................... 251,372
------------
Total Current Assets ...................................................................... 1,637,620
------------
PROPERTY AND EQUIPMENT - Net ...................................................................... 120,124
------------
OTHER ASSETS:
Goodwill ....................................................................................... 5,651
Marketable equity securities - restricted ...................................................... 291,200
Other assets ................................................................................... 145,406
------------
Total Other Assets ........................................................................ 442,257
------------
Total Assets .............................................................................. $ 2,200,001
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Loan payable .................................................................................. $ 120,773
Accounts payable and accrued expenses ......................................................... 573,564
Deferred revenue .............................................................................. 25,833
Net liabilities of discontinued operation ..................................................... 208,972
Due to related party .......................................................................... 362,319
------------
Total Current Liabilities ................................................................. 1,291,461
------------
MINORITY INTEREST ................................................................................. 50,075
------------
SHAREHOLDERS' EQUITY:
Preferred stock ($.001 Par Value; 20,000,000 Shares Authorized) ............................... -
Convertible preferred stock Series A ($.001 Par Value; 218,000 Shares Authorized;
97,500 shares issued and outstanding) ..................................................... 97
Common stock ($.001 Par Value; 200,000,000 Shares Authorized;
60,032,654 shares issued and outstanding) ................................................. 60,032
Additional paid-in capital .................................................................... 19,461,651
Accumulated deficit ........................................................................... (18,058,582)
Less: Deferred compensation ................................................................... (577,188)
Accumulated other comprehensive loss .......................................................... (27,545)
------------
Total Shareholders' Equity ................................................................ 858,465
------------
Total Liabilities and Shareholders' Equity ................................................ $ 2,200,001
============
See notes to consolidated financial statements
-3-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended For the Six Months Ended
March 31, March 31,
--------------------------- ---------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
NET REVENUES ............................................. $ 6,200,514 $ 6,356,179 $ 12,370,748 $ 12,921,556
COST OF SALES ............................................ 6,035,034 6,135,680 11,946,293 12,317,205
------------ ------------ ------------ ------------
GROSS PROFIT ............................................. 165,480 220,499 424,455 604,351
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Consulting .......................................... 34,984 22,738 70,514 179,483
Salaries and non-cash compensation .................. 487,788 394,054 1,026,445 725,255
Severance expense ................................... - - 332,533 -
Selling, general and administrative ................. 238,751 264,295 637,286 494,067
------------ ------------ ------------ ------------
Total Operating Expenses ......................... 761,523 681,087 2,066,778 1,398,805
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS ..................................... (596,043) (460,588) (1,642,323) (794,454)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Gain (loss) from sale of marketable securities ...... - (15,257) - (13,333)
Settlement income ................................... - - - 196,650
Interest income (expense), net ...................... (1,460) 1,347 529 (1,150)
------------ ------------ ------------ ------------
Total Other Income (Expense) ..................... (1,460) (13,910) 529 182,167
------------ ------------ ------------ ------------
LOSS BEFORE DISCONTINUED OPERATIONS AND
MINORITY NTEREST ................................... (597,503) (474,498) (1,641,794) (612,287)
------------ ------------ ------------ ------------
DISCONTINUED OPERATIONS:
Loss from disposal of discontinued operations ......... (441,328) - (441,328) -
Loss from discontinued operations ..................... (211,905) - (313,125) -
------------ ------------ ------------ ------------
Total Loss from Discontinued Operations .......... (653,233) - (754,453) -
------------ ------------ ------------ ------------
LOSS BEFORE MINORITY INTEREST, ........................... (1,250,736) (474,498) (2,396,247) (612,287)
MINORITY INTEREST IN (LOSS) INCOME OF SUBSIDIARY ......... (138) 129 657 (834)
------------ ------------ ------------ ------------
NET LOSS ................................................. (1,250,874) (474,369) (2,395,590) (613,121)
BENIFICIAL CONVERSION FEATURE-PREFERRED STOCK ............ - (500,000) - (500,000)
------------ ------------ ------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS ............. $ (1,250,874) $ (974,369) $ (2,395,590) $ (1,113,121)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE:
Loss from continuing operations ....................... $ (0.01) $ (0.02) $ (0.03) $ (0.03)
Loss from discontinued operations ..................... (0.01) - (0.01) -
------------ ------------ ------------ ------------
Net loss per common share ............................. $ (0.02) $ (0.02) $ (0.04) $ (0.03)
============ ============ ============ ============
Weighted Common Shares Outstanding - Basic and Diluted 59,690,756 40,641,580 58,056,258 40,125,138
============ ============ ============ ============
See notes to consolidated financial statements
-4-
GENESIS TECHNOLOGY GROUP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended
March 31,
-----------------------------
2005 2004
----------- -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations ............................................ $(1,641,137) $ (613,121)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ................................................ 7,864 12,762
Gain on sale of marketable securities ........................................ - (13,999)
Common stock issued and forgiveness of subscription for severance ............ 88,125 -
Settlement income ............................................................ - (196,650)
Severance expense ............................................................ 121,608 -
Stock-based compensation ..................................................... 674,824 502,951
Loss on disposal of property and equipment ................................... - 2,984
Minority interest ............................................................ (862) 834
Marketable securities received for services .................................. (114,000) -
Marketable securities distributed for settlement ............................. 22,800 -
Changes in assets and liabilities:
Accounts receivable .......................................................... (233,692) (336,470)
Inventories .................................................................. 63,639 51,379
Prepaid and other current assets ............................................. (38,659) (28,005)
Other assets ................................................................. 8,333 41,001
Accounts payable and accrued expenses ........................................ 311,601 385,234
Deferred revenue ............................................................. (25,000) (72,500)
----------- -----------
Net cash used in continuing operations activities .............................. (754,556) (263,600)
----------- -----------
Loss from discontinued operations .............................................. (754,453) -
Adjustments to reconcile loss from discontinued
operations to net cash used in discontinued operating activities:
Impairment of assets ......................................................... 441,328 -
Net increase in net liabilities of discontinued operations ................... 108,399 -
----------- -----------
Net cash used in discontinued operations ....................................... (204,726) -
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES ............................................ (959,282) (263,600)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities .................................... - 233,551
Capital expenditures ........................................................... (2,778) (6,941)
----------- -----------
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES ........................ (2,778) 226,610
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock,net ...................................... - 1,902,475
Proceeds from notes payable .................................................... - 97,172
Due to related parties ......................................................... (172,873) 13,207
Proceeds from exercise of stock options ........................................ 25,983 315,550
----------- -----------
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES ........................ (146,890) 2,328,404
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES IN CASH .......................................... - (421)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................. (1,108,950) 2,290,993
CASH AND CASH EQUIVALENTS - beginning of year .................................... 1,678,739 184,798
----------- -----------
CASH AND CASH EQUIVALENTS - end of period ........................................ $ 569,789 $ 2,475,791
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest .................................................................... $ - $ -
=========== ===========
Income taxes ................................................................ $ - $ -
=========== ===========
Noncash investing and financing activities:
Common stock issued for accrued salary and debt ............................. $ - $ 101,533
=========== ===========
Common stock issued for deferred compensation ............................... $ 888,750 $ -
=========== ===========
See notes to consolidated financial statements.
-5-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 a Company in
China (Shanghai Chorry Technology Development Company, Ltd. "Chorry") and 60% of
a Florida company (Extrema, LLC), both of which sell computer hardware and
peripherals, and derives approximately 99% of its revenues from the sale of
computer hardware and peripherals. The Company's strategy includes marketing
itself as a resource for small and mid-sized companies in marketing,
distribution, manufacturing, forming joint ventures, or establishing a base in
China. The strategy envisions and promotes opportunities for synergistic
business relationships among all of the companies that Genesis works with, both
clients and subsidiaries.
Recently, 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. GHK leverages 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 relies on its close cooperation with numerous OEMs to offer high
quality LCD products at the lowest cost. GHK has the advantage of a direct sales
network, which bypasses several layers of middlemen and trading companies, to
deliver the best products at the best prices. 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 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.
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 six months ended March 31, 2005 are not necessarily
indicative of the results for the full fiscal year ending September 30, 2005.
-6-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2005
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 March 31, 2005, there were options and warrants
to purchase 10,140,406 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 substantially 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.
For foreign operations with the local currency as the functional currency,
assets and liabilities are translated from the local currencies into U.S.
dollars at the exchange rate prevailing at the balance sheet date. Revenues,
expenses and cash flows are translated at the average exchange rate for the
period to approximate translation at the exchange rate prevailing at the dates
those elements are recognized in the financial statements. Translation
adjustments resulting from the process of translating the local currency
financial statements into U.S. dollars are included in determining comprehensive
loss. As of March 31, 2005, the exchange rate for the Chinese Renminbi (RMB) was
$1 US for 8.28 RMB.
The functional currency of the Company's Chinese subsidiaries is the local
currency. The financial statements of the subsidiary are translated to United
States dollars using period-end rates of exchange for assets and liabilities,
and the average rate of exchange for the period for revenues, costs, and
expenses. Net gains and losses resulting from foreign exchange transactions are
included in the consolidated statements of operations and were not material
during the periods presented. The cumulative translation adjustment and effect
of exchange rate changes on cash at March 31, 2005 were not material.
-7-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2005
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
STOCK-BASED COMPENSATION
The Company accounts for stock options issued to employees in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. As
such, compensation cost is measured on the date of grant as the excess of the
current market price of the underlying stock over the exercise price. Such
compensation amounts, if any, are amortized over the respective vesting periods
of the option grant. The Company adopted the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation" and SFAS 148, "Accounting for
Stock-Based Compensation -Transition and Disclosure", which permits entities to
provide pro forma net income (loss) and pro forma earnings (loss) per share
disclosures for employee stock option grants as if the fair-value based method
defined in SFAS No. 123 had been applied. The Company accounts for stock options
and stock issued to non-employees for goods or services in accordance with the
fair value method of SFAS 123.
Had compensation cost for the stock option plan been determined based on the
fair value of the options at the grant dates consistent with the method of SFAS
123, "Accounting for Stock Based Compensation", the Company's net loss and loss
per share would have been changed to the pro forma amounts indicated below for
the six months ended March 31, 2005 and 2004:
2005 2004
----------- ---------
Net loss as reported ..................... $(2,395,590) $(613,121)
Less: stock-based employee compensation
included in reported net loss ............ 32,452 124,650
Add: stock-based employee compensation
expense determined under fair-value based
method, net of related tax effect ........ (57,655) (82,743)
----------- ---------
Pro forma net loss ....................... $(2,420,793) $(572,214)
=========== =========
Basic loss per share:
As reported ........................... $ (.04) $ (.03)
=========== =========
Pro forma ............................. $ (.04) $ (.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.
-8-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2005
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
MARKETABLE EQUITY SECURITIES
Marketable equity securities consist of investments in equity of publicly traded
and non-public domestic and foreign companies and are stated at market value
based on the most recently traded price of these securities at March 31, 2005.
All marketable securities are classified as available for sale at March 31,
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.
NOTE 2 - RELATED PARTY TRANSACTIONS
Due to related party
A minority shareholder of the Company's Chorry subsidiary, advanced $362,319 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 (the "Agreement") with its former Chairman/President, Dr. James Wang
("Dr.Wang"), Yastock Investment Consulting Company, Limited ("Yastock"), and
Shanghai Yastand Information Technology Company, Limited ("Yastand"). The
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 ("Shares") pursuant to the Company's 2004 Stock Option Plan,
which Shares are 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.
-9-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2005
(UNAUDITED)
NOTE 3 - SEPARATION AND SEVERANCE AGREEMENT (CONTINUED)
(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 Securities and
Exchange Commission ("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
Technologies, Ltd.
(f) Dr. Wang's options ("Options") to purchase 1,500,000 shares ("Option
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 (3) years, Wang, Yastock and Yastand shall not
(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.
NOTE 4 - DISCONTINUED OPERATIONS
Effective September 8, 2004, the Company acquired 60% of the common stock of
Extrema LLC ("Extrema"), a Miami-based computer hardware wholesaler. On May 1,
2005, the shareholders of Extrema 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; and (c) the Company's decision to consolidate all trading
and sourcing activities into its new subsidiary located in Hong Kong, GHK.
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.
-10-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2005
(UNAUDITED)
NOTE 4 - DISCONTINUED OPERATIONS (CONTINUED)
The assets and liabilities of Extrema are presented in the balance sheet under
the captions "Net liabilities of discontinued operation". The carrying amounts
of the major classes of these assets and liabilities as of March 31, 2005 are
summarized as follows:
Accounts receivable, net ....................... $ 30,604
Accounts payable and accrued expenses .......... (239,576)
---------
Net liabilities of discontinued operation ...... $(208,972)
=========
The following table sets forth, for the periods indicated, selected financial
data of the Company's discontinued operation.
Six Months Ended
March 31,
------------------------
2005 2004
----------- ----------
Revenue ..................................... $ 1,875,380 $ -
Cost of Sales ............................... 1,886,524 -
----------- ----------
Gross Profit (loss) ......................... (11,144) -
Expenses .................................... 301,981 -
----------- ----------
Loss from discontinued operations ........... (313,125) -
Loss from disposal of discontinued operations (441,328) -
----------- ----------
Total loss from discontinued operations ..... $ (754,453) $ -
=========== ==========
-11-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 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 March 31, 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 six months ended
March 31, 2005 and 2004 is as follows:
FOR THE SIX MONTHS FOR THE SIX MONTHS
ENDED ENDED
MARCH 31, 2005 MARCH 31, 2004
------------------ ------------------
(UNAUDITED) (UNAUDITED)
NET REVENUES:
Computer Equipment and Accessories $ 12,231,661 $ 12,567,981
Consulting Services 139,087 353,575
------------ ------------
Consolidated Net Revenue 12,370,748 12,921,556
------------ ------------
COST OF SALES AND OPERATING EXPENSES:
Computer Equipment and Accessories 12,227,982 12,563,462
Consulting Services 1,777,225 1,139,786
DEPRECIATION:
Computer Equipment and Accessories 4,584 4,323
Consulting Services 3,280 8,439
INTEREST (EXPENSE) INCOME:
Computer Equipment and Accessories (2,381) 3,976
Consulting Services 2,910 (5,131)
DISCONTINUED OPERATIONS:
Computer Equipment and Accessories (754,453) -
NET INCOME (LOSS):
Computer Equipment and Accessories $ (757,082) $ 3,338
Consulting Services (1,638,508) (616,459)
------------ ------------
NET LOSS $ (2,395,590) $ (613,121)
============ ============
TOTAL ASSETS AT MARCH 31, 2005 AND 2004:
Computer Equipment and Accessories $ 1,301,341 $ 1,147,668
Consulting Services 898,660 2,584,020
------------ ------------
Consolidated Asset Total $ 2,200,001 $ 3,731,688
============ ============
-12-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2005
(UNAUDITED)
NOTE 5 - SEGMENT INFORMATION (CONTINUED)
For the six months ended March 31, 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. Sales and identifiable assets by
geographic areas for the six months ended March 31, 2005 and 2004 and as of
March 31, 2005, respectively, were as follows:
Revenues
-----------------------------
For the Six Months Ended Identifiable Assets
March 31, at March 31,
2005 2004 2005
----------- ----------- -----------
United States ............ $ 139,087 $ 375,044 $ 898,660
China .................... 12,231,661 12,546,512 1,301,341
----------- ----------- -----------
Total ................ $12,370,748 $12,921,556 $ 2,200,001
=========== =========== ===========
Currently, 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
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 $85,000 and deferred compensation
of $85,000 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.
-13-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 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 $299,479
and deferred compensation of $419,271 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 six months ended March 31, 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 $28,158 based on the trading price of
common shares. Accordingly, for the six months ended March 31, 2005, the Company
recorded stock-based compensation expense of $28,157.
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 three months ended December 31, 2004 under the intrinsic value method of APB
25.
-14-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2005
(UNAUDITED)
NOTE 7 - STOCKHOLDERS' EQUITY (CONTINUED)
A summary of outstanding options and warrants at March 31, 2005 are as follows:
Number of Weighted
Options and Average
Warrants Exercise Price
Stock options and warrants
--------------------------
Balance at October 1, 2004 10,699,976 $ 0.180
Granted 604,319 0.060
Exercised (463,889) 0.058
Forfeited (700,000) -
Balance at March 31, 2005 10,140,406 $ 0.126
========== =======
Options exercisable at end of period 10,140,406 $ 0.126
========== =======
Weighted average fair value of options
granted during the period $ 0.060
The following table summarizes information about employee stock options and
consultant warrants outstanding at March 31, 2005:
Options and Warrants
Options and Warrants Outstanding Exercisable
---------------------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding at Contractual Exercise Exercisable at Exercise
Price March 31, 2005 Life Price March 31, 2005 Price
---------- -------------- ----------- -------- -------------- --------
$ 2.25 150,000 0.75 Years $ 2.25 150,000 $ 2.25
0.23-0.34 861,034 2.50 Years 0.30 861,034 0.30
0.12-0.15 540,000 3.10 Years 0.14 540,000 0.14
0.05-0.10 8,589,372 3.50 Years 0.07 8,589,372 0.07
-------------- -------- -------------- --------
10,140,406 $ 0.126 10,140,406 $ 0.126
============== ======== ============== ========
-15-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2005
(UNAUDITED)
NOTE 8 - GOING CONCERN
The accompanying financial statements are prepared assuming the Company will
continue as a going concern. During the six months ended year ended March 31,
2005, the Company incurred net losses of $2,395,590 and had negative cash flows
from operations in the amount of $959,282. 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 - SUBSEQUENT EVENT
In April 2005, the Company entered into an operating lease for its new corporate
headquarters in Boca Raton, Florida that expires is May 2008. Monthly rent under
this operating is approximately $3,500 per month plus common expenses and is
subject to certain escalation clauses.
-16-
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 a
Company in China (Shanghai Chorry Technology Development Company, Ltd. "Chorry")
and 60% of a Florida company (Extrema LLC), both of which sell computer hardware
and peripherals, and derives approximately 99% of its revenues from the sale of
computer hardware and peripherals. The Company's strategy includes marketing
itself as a resource for small and mid-sized companies in marketing,
distribution, manufacturing, forming joint ventures, or establishing a base in
China. The strategy envisions and promotes opportunities for synergistic
business relationships among all of the companies that Genesis works with, both
clients and subsidiaries.
Recently, the Company incorporated a new subsidiary, Genesis (Hong Kong) OEM
Direct, Ltd. (`GHK'). GHK purpose is to consolidate certain sales channels and
related trading activities. GHK leverages its position as first-tier distributor
and its access to superior technology to develop and market LCD monitors 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 relies on
its close cooperation with numerous OEMs to offer high quality LCD products at
the lowest cost. GHK has the advantage of a direct sales network, which bypasses
several layers of middlemen and trading companies, to deliver the best products
at the best prices. Currently, GHK has no revenues.
The electronics market 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.
-17-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
On May 1, 2005, the shareholders of Extrema 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; and (c) the Company's decision to consolidate all
trading and sourcing activities into its new subsidiary located in Hong Kong,
GHK.
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:
o Ability of Chorry to increase gross profit margins.
o Ability of Chorry to increase revenues enough to be become more
profitable.
o 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.
o Interest in purchasing Chorry from qualified parties.
Our 60% owned subsidiary, Extrema LLC, ceased U.S. operations which will
contribute to the costs savings. For the six months ended March 31, 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 $754,453, including an operating loss
attributable to Extrema of $313,125.
We believe that as we further develop our consulting services segment, more
opportunities to expand our operations through acquisitions will also be
presented to us. It is critical to our long-term business model to both increase
our revenues from the consulting services segment of our existing business, as
well as to diversify our revenue base. By virtue of the nature of our consulting
services and the professional experience of our management and directors, we
interact with a number of both U.S. and Chinese companies. Through this
broadening of our relationship base, we believe that we will be able to not only
provide better services to our client companies, but we will have certain
advantages over other companies our size when it comes to identifying and
closing acquisitions.
The fee-based structure of our consulting services division is such that if our
client company is successful in its particular venture, we can earn additional
fees. These fees could range from a flat cash fee, to a fee which includes a
combination of equity in our client and a success fee payable upon the
completion of transactions such as acquisitions, formations of joint ventures,
or licensing or selling technologies in China, to a solely performance based fee
upon the completion of the project. We do not intend to operate as an investment
company or become subject to the Investment Company Act of 1940. However, in
order to materially grow our business we will need to raise additional working
capital. Capital will typically be needed not only for the acquisition of
additional companies, but also for the effective integration, operation and
expansion of these businesses. There are no assurances we will be able to raise
additional capital. If we are unable to secure additional capital as need, this
inability will in all likelihood hamper or restrict our ability to acquire and
integrate additional companies and to otherwise increase our revenues in future
periods.
-18-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
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.
FOREIGN EXCHANGE CONSIDERATIONS
Because revenues from our operations in the PRC accounted for approximately 98%
and 96% of our consolidated net revenues for the six months ended March 31, 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 March 31, 2005 and 2004 was not material.
-19-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
RESULTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 2005 COMPARED TO SIX MONTHS ENDED MARCH 31, 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 six months ended March 31, 2005, we had consolidated revenues of
$12,370,748 as compared to $12,921,556 for the six months ended March 31, 2004,
a decrease of $550,808 or 4.3%. This decrease resulted from a decrease in
revenues from our computer hardware and accessories and a decrease in our
business development segment as discussed below.
Cost of Sales
For the six months ended March 31, 2005, cost of sales was directly related to
our computer equipment and accessories segment and amounted to $11,946,293 as
compared to $12,317,205 for the six months ended March 31, 2004. This decrease
resulted substantially from decreased revenues from our computer segment and is
outlined below.
Operating Expenses
For the six months ended March 31, 2005, operating expenses which include
consulting fees, rent, salaries and non-cash compensation, depreciation expense
and other selling, general and administrative, were $2,066,778 compared to
$1,398,805 for the six months ended March 31, 2004, an increase of $667,973 or
47.8%. 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 six months ended March 31, 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 March 31, 2005, we had deferred compensation of
$577,188, which will be amortized into expense during fiscal 2005.
-20-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
Loss from sale/disposal of marketable securities
For the six months ended March 31, 2005, we recorded no gain or loss from the
sale of marketable securities as compared to $(13,333) loss for the six months
ended March 31, 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 March 31, 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 $529 for the six months ended March 31, 2005
as compared to interest expense, net of $(1,150) for the six months ended March
31, 2004.
Loss from discontinued operations
For the six months ended March 31, 2005, we recorded a loss from discontinued
operations of $754,453 associated with the closure of our Extrema subsidiary. On
May 1, 2005, the shareholders of Extrema 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; (c) and we moved and consolidated all trading and sourcing
activities into our new Genesis Hong Kong OEM Direct branch.. In connection with
the closure of Extrema LLC, we wrote off intangible assets and property
equipment amounting to $441,328 that were impaired due to the closure.
Additionally, we incurred operating losses of $313,125 related to this
discontinued operation.
OVERALL
We reported a net loss for the six months ended March 31, 2005 of $2,395,590
compared to a net loss for the six months ended March 31, 2004 of $613,121. This
translates to an overall per-share loss available to shareholders of $.04 for
the six months ended March 31, 2005 compared to per-share loss of $.03 for three
months ended March 31, 2004.
-21-
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 six months ended March 31, 2005 were $12,231,661 as
compared to $12,567,981 for the six months ended March 31, 2004, a decrease of
$336,320 or 2.7%. This decrease in sales mainly resulted from a decrease in
demand from the China markets.
Cost of sales for Chorry for the six months ended March 31, 2005
amounted to $11,946,293 or 97.7% of net sales as compared to $12,317,205 or 98%
of net sales for the six months ended March 31, 2004, a decrease of $370,912 or
3%. This translates in a gross profit margin of 2.3% and 2% for the six months
ended March 31, 2005 and 2004, respectively. We expect to continue to experience
low gross profit margins on our products sales.
For the six months ended March 31, 2005, we incurred operating expenses
of $286,273 compared to $249,415 for the six months ended March 31, 2004, an
increase of $36,858 or 14.8% and consisted of the following:
2005 2004
--------- ---------
Salaries $ 82,866 $ 72,537
Rent 84,927 75,602
Other selling, general and administrative 118,480 101,276
--------- ---------
Total operating expenses $ 286,273 $ 249,415
========= =========
During the six months ended March 31, 2005, we incurred additional rent
of $9,325 due to our growing need for warehouse space. Additionally, during the
six months ended March 31, 2005, we incurred increased salary expenses of
$10,329 due to increases in our workforce. Other selling, general and
administrative expenses incurred by Chorry increased by $17,204 due to an
increase in freight charges, technology expenses and general administrative
expenses.
Consulting Services Segment
Revenue for the six months ended March 31, 2005 was $139,087 as
compared to $353,575 for the six months ended March 31, 2004, a decrease of
$214,488 or 61%. During the six months ended March 31, 2005, we spent a
substantial amount of time on administrative tasks related to a severance and
separation agreement that was executed in December 2004 as well as issues
related to our discontinued Extrema subsidiary. 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.
-22-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS (CONTINUED)
For the six months ended March 31, 2005, we incurred operating expenses
of $1,780,505 as compared to $1,148,225 for the six months ended March 31, 2004,
an increase of $632,280 or 55%. For the six months ended March 31, 2005,
operating expenses consisted of rent of $42,726, consulting fees of $70,514,
salaries and non-cash compensation of $943,579, severance expense of $329,343,
and other selling, general and administrative expenses of $394,343. For the six
months ended March 31, 2004, operating expenses consisted of rent of $34,122,
consulting fees of $179,483, salaries and non-cash compensation of $652,718,
other selling, general and administrative expenses of $281,902.
The increase in operating expenses was primarily attributable to the
following:
* Our consulting expense decreased to $70,514 for the six months ended
March 31, 2005 from $179,483 for the six months ended March 31, 2004. The
decrease was due to decreased non-cash consulting expenses recorded during the
six months ended March 31, 2005 in connection with the grant of stock options to
consultants for services rendered. For the six months ended March 31, 2005,
non-cash consulting expense amounted to $0 as compared to $38,000 in the 2004
period. Additionally, during the six months ended March 31, 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 $943,579 for
the six months ended March 31, 2005 from $652,718 for six months ended March 31,
2004, an increase of $290,861 or 44.6%. 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 and the amortization of deferred compensation which accounted for
approximately $210,000 of the increase. The remaining increase was attributable
to an increase in staff and an increase in executive salaries.
* During the six months ended March 31, 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
$394,343 for the six months ended March 31, 2005 from $281,902 for the six
months ended March 31, 2004, an increase of $112,441 or 39.9%. Travel related
expenses increased by $2,535 or 6% to $44,652 for the six months ended March 31,
2005 as compared to $42,118 and related to increased travel to China. We
incurred increased marketing costs associated with our Chinese round table
events, and increased administrative and office expenses due to increased
operations.
For the six months ended March 31, 2005, we incurred interest income,
net of $2,910 as compared to interest expense of $(5,126) for the six months
ended March 31, 2004.
-23-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2005, we had a cash balance of $569,789. As of March 31,
2005, our cash position by geographic area is as follows:
United States $ 365,771
China 204,018
----------
Total $ 569,789
==========
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.
Net cash used in operations was $(959,282) for the six months ended
March 31, 2005 as compared to net cash used in operations of $(263,600) for the
six months ended March 31, 2004. For the six months ended March 31, 2005, we
used cash to fund our net loss of $2,395,590 ($1,641,137 from continuing
operations and $754,453 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 $674,824, depreciation and
amortization expense of $7,864, and settlement expense of $232,533, impairment
losses related to our discontinued operations of $441,328, as well as changes in
assets and liabilities of $194,621. For the six months ended March 31, 2004, we
used cash to fund our net loss of $613,121 offset by non-cash items such as
stock-based compensation of $502,951 ,depreciation expenses of $12,762 and
settlement income of $(196,650) as well as changes in assets and liabilities of
$40,639.
Net cash used in investing activities for the six months ended March
31, 2005 was $2,778 as compared to net cash provided by investing activities for
the six months ended March 31, 2004 of $226,610. For the six months ended March
31, 2005, we used cash for capital expenditures of $2,778. For the six months
ended March 31, 2004, we received cash from the sale of marketable securities of
$233,551 offset by cash used for capital expenditures of $(6,941).
Net cash used in financing activities was $146,890 for the six months
ended March 31, 2005 as compared to net cash provided by financing activities of
$ 2,328,404 for the six months ended March 31, 2004. For the six months ended
March 31, 2005, net cash used in financing activities related primarily to the
repayment of related party advances of $172,873 offset by proceeds received from
the exercise of stock options of $25,983. For the six months ended March 31,
2004, net cash provided by financing activities related primarily to proceeds
from the exercise of stock options and related party loans of $315,550 and
$13,207, respectively, proceeds from the sale of preferred stock of $1,902,475
and proceeds from notes payable of $97,172.
-24-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS (CONTINUED)
We currently have no material commitments for capital expenditures.
Our future growth is dependent on our ability to raise capital for
expansion, and to seek additional revenue sources. If we decide to pursue any
acquisition opportunities or other expansion opportunities, we may need to raise
additional capital, although there can be no assurance such capital-raising
activities would be successful.
CRITICAL ACCOUNTING POLICIES
A summary of significant accounting policies is included in Note 1 to
the audited consolidated financial statements included in our filing on Form
10-KSB as filed with the Securities and Exchange Commission for the year ended
September 30, 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.
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 are 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 March 31, 2005.
All marketable securities are classified as available for sale at March 31,
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.
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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 December 2004, the FASB issued SFAS Statement No. 153, "Exchanges of
Non-monetary Assets." The Statement is an amendment of APB Opinion No. 29 to
eliminate the exception for non-monetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of non-monetary assets
that do not have commercial substance. We believe that the adoption of this
standard will have no material impact on our financial statements.
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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS (CONTINUED)
(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 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 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.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Effective September 8, 2004, the Company acquired 60% of the common
stock of Extrema LLC ("Extrema"), a Miami-based computer hardware
wholesaler. On May 1, 2005, the shareholders of Extrema 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; and (c) the Company's decision to consolidate all trading
and sourcing activities into its new subsidiary located in Hong Kong,
GHK.
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. For the six months ended
March 31, 2005, we recorded a loss from discontinued operations of
$754,453 associated with the closure of our Extrema subsidiary. In
connection with this closure, we wrote off intangible assets and
property equipment amounting to $441,328 that were impaired due to the
closure. Additionally, we incurred operating losses of $313,125 related
to this discontinued operation.
Item 6. Exhibits
Exhibit
Number Description
------- -----------
31.1 Rule 13a - 14(a)/15d-14(a) Certification of the Chief
Executive Officer *
31.2 Rule 13a - 14(a)/15d-14(a) Certification of the Chief
Financial Officer *
32.1 Certification of Chief Executive Officer Certification under
Section 906 *
32.2 Certification of Principal Financial and Accounting Officer
Certification under Section 906 *
_________
* Filed herein
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SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in Boca Raton, Florida on May 23, 2005.
GENESIS TECHNOLOGY GROUP, INC.
By: /s/ Gary Wolfson
--------------------
Gary Wolfson
Chief Executive Officer
By: /s/ Adam Wasserman
----------------------
Adam Wasserman
Chief Financial Officer
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