UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2006
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For the transition period from ________ to __________
Commission file number: 333-86347
GENESIS TECHNOLOGY GROUP, INC.
------------------------------
(Exact name of registrant as specified in its charter)
FLORIDA 65-1130026
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7900 GLADES ROAD, SUITE 420
BOCA RATON, FLORIDA 33434
---------------------------------
(Address of principal executive offices)
(561) 988-9880
--------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: At July 31, 2006, there were
84,010,561 outstanding shares of common stock, $.001 par value per share.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
This quarterly report contains forward-looking statements. These forward-looking
statements are subject to risks and uncertainties and other factors that may
cause our actual results, performance or achievements to be materially different
from the results, performance or achievements expressed or implied by the
forward-looking statements. You should not unduly rely on these statements.
Forward-looking statements can be identified by the fact that they do not relate
strictly to historical or current facts. They use words such as "anticipate,"
"estimate," "expect," "project," "intend," "plan," "believe," "project,"
"contemplate," "would," "should," "could," or "may." With respect to any
forward-looking statement that includes a statement of its underlying
assumptions or bases, we believe such assumptions or bases to be reasonable and
have formed them in good faith, assumed facts or bases almost always vary from
actual results, and the differences between assumed facts or bases and actual
results can be material depending on the circumstances. When, in any
forward-looking statement, we express an expectation or belief as to future
results, that expectation or belief is expressed in good faith and is believed
to have a reasonable basis, but there can be no assurance that the stated
expectation or belief will result or be achieved or accomplished. All subsequent
written and oral forward-looking statements attributable to us, or anyone acting
on our behalf, are expressly qualified in their entirety by the cautionary
statements.
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
FORM 10-QSB
QUARTERLY PERIOD ENDED June 30, 2006
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheet
June 30, 2006 (Unaudited).................................... 3
Consolidated Statements of Operations (Unaudited)
For the Three and Nine Months Ended June 30, 2006 and 2005... 4
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended June 30, 2006 and 2005............. 5
Notes to Consolidated Financial Statements................... 6-15
Item 2 - Management's Discussion and Analysis or Plan of Operation.... 16-24
Item 3 - Controls and Procedures...................................... 24
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings............................................ 25
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds.. 25
Item 3 - Default upon Senior Securities............................... 25
Item 4 - Submission of Matters to a Vote of Security Holders.......... 25
Item 5 - Other Information............................................ 25
Item 6 - Exhibits..................................................... 25
Signatures............................................................ 26
-2-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 2006
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................................... $ 1,390,697
Marketable equity securities, at market ....................... 92,140
Prepaid expenses .............................................. 1,022
Deferred acquisition costs .................................... 129,970
Due from related party ........................................ 10,800
------------
Total Current Assets ........................................ 1,624,629
PROPERTY AND EQUIPMENT - Net .................................... 17,619
OTHER ASSETS:
Restricted marketable equity securities, at market ............ 1,715,996
Other assets .................................................. 67,083
------------
Total Assets ................................................ $ 3,425,327
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses ......................... $ 52,995
Due to related party .......................................... 21,000
Liabilities of discontinued operations ........................ 150,709
------------
Total Current Liabilities ................................... 224,704
------------
MINORITY INTEREST ............................................... 10,053
------------
SHAREHOLDERS' EQUITY:
Preferred stock ($.001 Par Value; 20,000,000 Shares Authorized)
Convertible preferred stock Series A ($.001 Par Value; 218,000
Shares Authorized; 15,900 shares issued and outstanding) .. 16
Common stock ($.001 Par Value; 200,000,000 Shares Authorized;
83,510,561 shares issued and outstanding) ................. 83,511
Additional paid-in capital .................................... 21,389,036
Accumulated deficit ........................................... (19,081,121)
Less: treasury stock, at cost (10,000 shares) ................. (2,805)
Less: deferred compensation ................................... (316,622)
Less: subscription receivable ................................. (105,840)
Accumulated other comprehensive income ........................ 1,224,395
------------
Total Shareholders' Equity .................................. 3,190,570
------------
Total Liabilities and Shareholders' Equity .................. $ 3,425,327
============
See notes to consolidated financial statements
-3-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended For the Nine Months Ended
June 30, June 30,
--------------------------- ---------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
NET REVENUES ............................................... $ 3,333 $ 9,738 $ 13,333 $ 148,825
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Consulting ............................................ 65,961 92,240 65,961 162,754
Salaries and stock-based compensation ................. 107,891 482,565 424,944 1,426,144
Severance expense ..................................... - (3,190) - 329,343
Selling, general and administrative ................... 194,874 120,280 429,359 554,159
------------ ------------ ------------ ------------
Total Operating Expenses ........................... 368,726 691,895 920,264 2,472,400
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS ....................................... (365,393) (682,157) (906,931) (2,323,575)
------------ ------------ ------------ ------------
OTHER INCOME:
Gain from sale of marketable securities ............... 504,312 - 1,046,894 -
Interest income ....................................... 9,855 1 10,640 2,911
------------ ------------ ------------ ------------
Total Other Income ................................. 514,167 1 1,057,534 2,911
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS ............... 148,774 (682,156) 150,603 (2,320,664)
DISCONTINUED OPERATIONS:
Gain (loss) on disposal of discontinued operations .... (36,681) 63,982 237,377 (377,346)
Income (loss) from discontinued operations ............ 6,500 83,089 9,124 (233,194)
------------ ------------ ------------ ------------
Total Income (Loss) from Discontinued Operations ... (30,181) 147,071 246,501 (610,540)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE MINORITY INTEREST ..................... 118,593 (535,085) 397,104 (2,931,204)
MINORITY INTEREST IN LOSS OF SUBSIDIARY .................... - 2,123 - 2,123
------------ ------------ ------------ ------------
NET INCOME (LOSS) .......................................... 118,593 (532,962) 397,104 (2,929,081)
PREFERRED STOCK DIVIDEND ................................... - - (88,304) -
------------ ------------ ------------ ------------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS ......... $ 118,593 $ (532,962) $ 308,800 $ (2,929,081)
============ ============ ============ ============
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE:
Income (loss) from continuing operations .............. $ - $ (0.01) $ - $ (0.04)
Income (loss) from discontinued operations ............ - - - -
------------ ------------ ------------ ------------
Net income (loss) per common share .................... $ - $ (0.01) $ - $ (0.04)
============ ============ ============ ============
Weighted Common Shares Outstanding - Basic ............ 82,862,209 63,484,407 75,346,830 59,865,641
============ ============ ============ ============
Weighted Common Shares Outstanding - Diluted .......... 87,739,914 63,484,407 78,913,330 59,865,641
============ ============ ============ ============
See notes to consolidated financial statements
-4-
GENESIS TECHNOLOGY GROUP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended
June 30,
---------------------------
2006 2005
----------- -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ...................................................... $ 397,104 $(2,929,081)
Income (loss) from discontinued operations ............................. 246,501 (610,540)
----------- -----------
Income (loss) from continuing operations ............................... 150,603 (2,318,541)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization ........................................ 5,937 4,234
Gain on sale of marketable securities ................................ (1,046,894) -
Common stock issued and forgiveness of subscription for severance .... - 88,125
Severance expense .................................................... - 121,608
Stock-based compensation and consulting .............................. 526,302 1,216,093
Marketable securities received for services .......................... - (114,000)
Marketable securities distributed for settlement ..................... - 22,800
Minority interest .................................................... - (2,123)
Changes in assets and liabilities:
Prepaid and other current assets ..................................... (1,022) 40,339
Due from related party ............................................... (10,800) -
Other assets ......................................................... 4,327 9,583
Accounts payable and accrued expenses ................................ 12,718 (96,571)
Deferred revenue ..................................................... (13,333) (32,500)
----------- -----------
Net cash used in continuing operations ................................. (372,162) (1,060,953)
Net cash used in discontinued operations ............................... (7,668) (122,952)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES .................................... (379,830) (1,183,905)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................................... - (6,683)
Deferred acquisition cost .............................................. (129,970) -
Purchase of marketable securities ...................................... (100,200) -
Proceeds from sale of marketable securities ............................ 1,412,260 -
----------- -----------
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES ................ 1,182,090 (6,683)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from related party advances ................................... 34,800 -
Repayments on related party advances ................................... (13,800) -
Proceeds from exercise of stock options and warrants ................... 548,380 25,983
----------- -----------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES .......................... 569,380 25,983
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES IN CASH .................................. 1,170 -
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..................... 1,372,810 (1,164,605)
CASH AND CASH EQUIVALENTS - beginning of year ............................ 17,887 1,436,188
----------- -----------
CASH AND CASH EQUIVALENTS - end of period ................................ $ 1,390,697 $ 271,583
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest ........................................................... $ - $ 2,783
=========== ===========
Income taxes ....................................................... $ - $ -
=========== ===========
Non-cash investing and financing activities:
Preferred stock dividend paid with common stock .................... $ 88,304 $ -
=========== ===========
Common stock issued for debt ....................................... $ 13,902 $ -
=========== ===========
Common stock issued for subscription receivable .................... $ 105,840 $ -
=========== ===========
See notes to consolidated financial statements.
-5-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Genesis Technology Group, Inc. (the "Company" or "Genesis") is a business
development and marketing firm that specializes in advising and providing a turn
key solution for Chinese small and mid-sized companies entering Western markets.
The Company dedicates its expertise and capital resources to expand the
potential of Chinese partner companies. The Company provides the marketing
strategy, counsel, and plans to support its clients' business, financial, or
marketing goals. The Company works closely with top management to define
strategy and model to develop effective tactics to support business development.
The Company's business mission is to create substantial, incremental stockholder
value for emerging growth companies by executing strategy-driven programs that
quickly incubate and mature Chinese companies and prepare them for Western
markets.
Genesis provides strategy and execution services to Chinese clients who believe
that penetrating US markets is critical to achieving their core operating and
financial objectives. The Company fosters development projects that require
marketing, manufacturing, finance, and product deployment expertise for
companies in the United States and China. The Company's core competency is
sourcing merger and acquisitions opportunities for both its contract clients and
the Company.
Effective June 20, 2005, the Company formally established Genesis Equity
Partners LLC ("GEP") in which it owns 51%.
In the fall of 2005, GEP signed a contract with The Jin Ma Group Company, Ltd.
("Jin Ma'), a real estate development company in Western China, to globalize its
operations in the areas of real estate, construction, and hospitality. To be
known as Gold Horse International, Inc., GEP will receive a significant equity
position in Gold Horse and ongoing consulting fees for coordination and
oversight of its U.S. business activities. Currently, Jin Ma is undergoing an
audit of its financial statements by an independent accounting firm.
On March 15, 2006, GEP signed a General Partnership Agreement with Liang Fang
Pharmaceutical, Ltd. ("Liang"), a company registered in the People's Republic of
China. Liang is based in Beijing and is a drug development, medical device, and
retail drug store enterprise with 10 retail outlets. GEP will receive a
significant equity position in Liang Fang and ongoing consulting fees for
coordination and oversight of its U.S. business activities. Among Liang's best
selling products, Valsartan Capsules are a medicine for primary hypertension or
high blood pressure. Valsartan first came to market in America in 1996, known as
Diovan. Currently, Liang is undergoing an audit of its financial statements by
an independent accounting firm.
The Company has incurred approximately $130,000 of legal, audit and other
related fees and expenses in connection with the signing of these Agreements
which have been recorded as deferred acquisition costs in the accompanying
balance sheet. These fees will be included as a component of the cost of the
Acquired Assets pursuant to Statement of Financial Accounting Standards No. 141
Business Combinations or expensed if the Agreement is not consummated.
-6-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2006
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
THE COMPANY (CONTINUED)
On November 15, 2001, the Company entered into a Stock Purchase Agreement with
Shanghai Chorry Technology Development Co., Limited ("Chorry") and Chorry's
shareholder and acquired an 80% interest in Chorry. Chorry was formerly known as
Shanghai Zhaoli Technology Development Company Ltd. Chorry is a Chinese company
with principal offices in Shanghai, China. On November 2, 2005, the Company
entered into a stock purchase agreement with Dragon Ventures (OTC: DRGV), a
Nevada public corporation, for the sale of Chorry. The Company closed on this
transaction on February 14, 2006 (See Note 2 - Discontinued Operations).
Accordingly, Chorry is reported as a discontinued operation, and prior periods
have been restated in the Company's consolidated financial statements and
related footnotes to conform to this presentation.
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 (See Note 2).
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). The accompanying consolidated financial statements for the interim
periods are unaudited and reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the financial position and operating results for the
periods presented. The consolidated financial statements include the accounts of
the Company and its wholly and partially owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. These consolidated
financial statements should be read in conjunction with the financial statements
for the year ended September 30, 2005 and notes thereto contained on Form 10-KSB
of the Company as filed with the Securities and Exchange Commission. The results
of operations for the nine months ended June 30, 2006 are not necessarily
indicative of the results for the full fiscal year ending September 30, 2006.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates. Significant estimates in 2006 and
2005 include the valuation of stock-based compensation, and the useful life of
property and equipment.
-7-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2006
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
MARKETABLE EQUITY SECURITIES
Marketable equity securities consist of investments in equity of publicly traded
and non-public domestic and foreign companies and are stated at market value
based on the most recently traded price of these securities at June 30, 2006.
All marketable securities are classified as available for sale at June 30, 2006.
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. For the nine months ended June 30, 2006, the Company recognized a gain of
$1,046,894 from the sale of marketable securities.
NET INCOME (LOSS) PER SHARE
Basic income (loss) per share is computed by dividing net income (loss) by
weighted average number of shares of common stock outstanding during each
period. Diluted income per share is computed by dividing net income by the
weighted average number of shares of common stock, common stock equivalents and
potentially dilutive securities outstanding during each period. In the 2005
period, diluted loss per common share is not presented because it is
anti-dilutive. The following table presents a reconciliation of basic and
diluted earnings per share:
For the Three Months For the Nine months
Ended June 30, Ended June 30,
2006 2005 2006 2005
----------- ------------ ----------- ------------
Net income (loss) available to common shareholders $ 118,593 $ (532,962) $ 308,800 $ (2,929,081)
Weighted average shares outstanding - basic ...... 82,862,209 63,484,407 75,346,830 59,865,641
Income (loss) per share - basic .................. $ 0.00 $ (0.01) $ 0.00 $ (0.04)
=========== ============ =========== ============
Net income (loss) available to common shareholders $ 118,593 $ (532,962) $ 308,800 $ (2,929,081)
=========== ============ =========== ============
Weighted average shares outstanding - basic ...... 82,862,209 63,484,407 75,346,830 59,865,641
Effect of dilutive securities
Convertible preferred stock ................... - - - -
Unexercised warrants and options .............. 4,877,705 - 3,566,500 -
----------- ------------ ----------- ------------
Weighted average shares outstanding- diluted ..... 87,739,914 63,484,407 78,913,330 59,865,641
=========== ============ =========== ============
Income (loss) per share - diluted ................ $ 0.00 $ (0.01) $ 0.00 $ (0.04)
=========== ============ =========== ============
-8-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2006
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 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. As
of June 30, 2006, the exchange rate for the Chinese Renminbi (RMB) was $1 US for
8.00647 RMB. The cumulative translation adjustment and effect of exchange rate
changes on cash at June 30, 2006 was not material.
STOCK-BASED COMPENSATION
Effective October 1, 2005, the Company adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), Share Based Payment ("SFAS No. 123R"). SFAS
No. 123R establishes the financial accounting and reporting standards for
stock-based compensation plans. As required by SFAS No. 123R, the Company
recognized the cost resulting from all stock-based payment transactions
including shares issued under its stock option plans in the financial
statements. As a result of adopting SFAS No. 123R, the Company's net loss for
the nine months ended June 30, 2006 was $15,816 higher than if we had continued
to account for stock-based compensation under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and its related
interpretations ("APB Opinion No. 25").
Prior to October 1, 2005, the Company accounted for stock-based employee
compensation plans (including shares issued under its stock option plans) in
accordance with APB Opinion No. 25 and followed the pro forma net income, pro
forma income per share, and stock-based compensation plan disclosure
requirements set forth in the Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation ("SFAS No. 123").
-9-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2006
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
STOCK-BASED COMPENSATION (CONTINUED)
The following table sets forth the computation of basic and diluted income per
share for the nine months ended June 30, 2005 and illustrates the effect on net
loss and loss per share as if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee compensation:
Net loss as reported .......................... $(2,929,081)
Less: stock-based employee compensation
included in reported net loss ................. 32,452
Add: stock-based employee compensation
expense determined under fair-value based
method, net of related tax effect ............. (57,655)
-----------
Pro forma net loss ............................ $(2,954,284)
===========
Basic loss per share:
As reported .................... $ (.04)
===========
Pro forma ...................... $ (.05)
===========
NOTE 2 - DISCONTINUED OPERATIONS
As described in Note 1, on May 1, 2005, the shareholders of Extrema unanimously
agreed to discontinue the operations of Extrema. 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.
Additionally, on November 2, 2005, the Company entered into a stock purchase
agreement with Dragon Ventures (Pink sheets symbol: DRGV), a Nevada public
corporation, for the sale of its majority-owned subsidiary Chorry. The Company
closed on this transaction on February 14, 2006.
-10-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2006
(Unaudited)
NOTE 2 - DISCONTINUED OPERATIONS (CONTINUED)
The agreement included the following provisions:
(1) The Company delivered 100% of its shares in Chorry, representing its 80%
ownership of that subsidiary, to DRGV.
(2) DRGV paid to the Company 17,159,965 shares of DRGV's common stock at a
price calculated at the average closing price at the initial closing date
on December 15, 2005 of $.027 per share or $463,319. Accordingly, in
connection with the sale of Chorry, for the nine months ended June 30,
2006, the Company recorded a gain from sale of discontinued operations of
$237,377.
Accordingly, Chorry is reported as a discontinued operation, and prior periods
have been restated in the Company's financial statements and related footnotes
to conform to this presentation.
The remaining liabilities of discontinued operations are presented in the
balance sheet under the caption "Liabilities of discontinued operation". The
approximate carrying amounts of the major classes of these liabilities as of
June 30, 2006 are summarized as follows:
Liabilities:
Accounts payable and accrued expenses ........... $150,709
--------
Liabilities of discontinued operation ........... $150,709
========
The following table sets forth for the nine months ended June 30, 2006 and 2005
indicated selected financial data of the Company's discontinued operations.
2006 2005
----------- ------------
Revenues ........................................... $ 7,398,358 $ 20,703,892
Cost of sales ...................................... 7,259,500 20,054,670
----------- ------------
Gross profit ....................................... 138,858 649,222
Operating and other non-operating expenses ......... 129,734 882,416
----------- ------------
Gain (loss) from discontinued operations ........... 9,124 (233,194)
Gain (loss) from disposal of discontinued operations 237,377 (377,346)
----------- ------------
Total gain (loss) from discontinued operations ..... $ 246,501 $ (610,540)
=========== ============
-11-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2006
(Unaudited)
NOTE 3 - STOCKHOLDERS' EQUITY
COMMON STOCK
On November 30, 2005, in connection with the exercise of stock options, the
Company issued 528,000 shares of common stock to an employee for a subscription
receivable of $15,840 due in March 2006. In April 2006, this employee filed a
lawsuit against the Company (see note 5).
On December 9, 2005, Series A preferred stockholders' converted 11,600 share of
Series A Preferred Stock into 500,000 shares of common stock.
In January 2006, the Company issued 1,006,869 shares of common stock to its
chief financial officer for services rendered. The Company valued these common
shares at the fair market value on the dates of grant of $.05 per share or
$50,345 based on the trading price of common shares. Accordingly, the Company
recorded stock-based compensation expense of $36,443 and reduced accounts
payable by $13,900.
In March 2006, Series A preferred stockholders' converted 70,000 share of Series
A Preferred Stock into 3,017,241 shares of common stock. Additionally, in
connection with the conversion, the Company issued 380,621 shares of common
stock for preferred stock dividends of $88,304.
In March 2006, in connection with the exercise of stock options, the Company
issued 5,468,750 shares of common stock to executives and a director for cash
proceeds of $46,875 and deferred compensation of $160,156.
In March 2006, in connection with the exercise of warrants, the Company issued
1,646,983 shares of common stock for proceeds of $501,506.
On May 5, 2006, in connection with a 24-month consulting agreement, the Company
issued 1,000,000 shares of common stock for investor relations services rendered
and to be rendered in the future. The Company valued these common shares at the
fair market value on the date of grant at per share price of $.23. In connection
with issuance of these shares, for the nine months ended June 30, 2006, the
Company recorded stock-based consulting expense of $19,167 and deferred
compensation of $210,833 which will amortized over the remaining service period.
On May 18, 2006, in connection with the exercise of options granted to a
consultant for services, the Company issued 500,000 shares of common stock for a
subscription receivable of $90,000 due in October 31, 2006.
For the nine months ended June 30 2006, the Company recorded stock-based
compensation of approximately $383,000 from the amortization of deferred
compensation.
-12-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2006
(Unaudited)
NOTE 3 - STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS AND WARRANTS
On November 30, 2005, the Company granted 528,000 stock options to an employee
at an exercise price of $.03 per share. These options were immediately exercised
for a subscription receivable of $15,840. The Company accounts for stock options
issued to employees in accordance with the provisions of SFAS 123R and related
interpretations. The fair value of this option grant was estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions dividend yield of -0- percent; expected volatility
of 373 percent; risk-free interest rate of 3.75 percent and an expected holding
periods of 3.00 years. In connection with these options, the Company recorded
stock-based compensation expense of $26,376.
On February 14, 2006, the Company granted 250,000 stock options to an executive
at an exercise price of $.31 per share. The Company accounts for stock options
issued to employees in accordance with the provisions of SFAS 123R and related
interpretations. The fair value of this option grant was estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions dividend yield of -0- percent; expected volatility
of 379 percent; risk-free interest rate of 3.75 percent and an expected holding
periods of 5.00 years. In connection with these options, the Company recorded
stock-based compensation expense of $15,000.
On May 18, 2006, the Company granted 500,000 stock options to a consultant at an
exercise price of $.18 per share. The options were immediately exercise for a
subscription receivable of $90,000. The Company valued these warrants utilizing
the Black-Scholes options pricing model at approximately $0.12 or $61,000 and
recorded a stock-based consulting expense of approximately $46,000 and deferred
consulting of $15,000 to be amortized over the remaining service period.
As of June 30, 2006, the total future compensation expense related to non-vested
options not yet recognized in the consolidated statement of operations is $0.
A summary of the stock options and warrants as of June 30, 2006 and changes
during the period is presented below:
Weighted
Number of Average
Options and Exercise
Warrants Price
----------- ----------
Balance at beginning of year ................... 19,188,526 $ 0.095
Granted ........................................ 1,278,000 0.140
Exercised ...................................... (8,143,733) 0.100
Forfeited ...................................... (1,657,432) 0.268
----------- ----------
Balance at June 30, 2006 ....................... 10,665,361 $ 0.146
=========== ==========
Options exercisable at end of period ........... 10,665,361 $ 0.146
=========== ==========
Weighted average fair value of options granted
during the period .............................. $ 0.140
-13-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2006
(Unaudited)
NOTE 3 - STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS AND WARRANTS (CONTINUED)
The following table summarizes information about employee and consultants stock
options and investor warrants outstanding at June 30, 2006:
Options and Warrants
Options and Warrants Outstanding Exercisable
---------------------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding at Contractual Exercise Exercisable at Exercise
Price June 30, 2006 Life Price June 30, 2006 Price
---------- -------------- ----------- -------- -------------- --------
$0.28-0.34 3,233,361 2.00 Years $ 0.31 3,233,361 $ 0.31
0.12-0.15 540,000 2.10 Years 0.14 540,000 0.14
0.05-0.10 6,892,000 2.00 Years 0.07 6,892,000 0.07
-------------- -------- -------------- --------
10,665,361 $ 0.146 10,665,361 $ 0.146
============== ======== ============== ========
NOTE 4 - RELATED PARTY TRANSACTIONS
DUE FROM RELATED PARTIES
As of June 30, 2006, the consolidated financial statements include balances and
transactions with related parties. At June 30, 2006, the Company had a
receivable from a member of GEP amounting to $10,800 for reimbursement due of
certain marketing expenses in connection to the promotion and marketing campaign
of Genesis Equity Partners, LLC. These advances were payable on demand and bear
no interest.
DUE TO RELATED PARTY
In June 2006, the Company paid $13,800 to an officer for advances made to the
Company for working capital purposes in March 2006.
At June 30, 2006, the Company owed $21,000 to a GEP for working capital
advances. The advances are payable on demand and bear no interest.
-14-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2006
(Unaudited)
NOTE 5 - CONTINGENCIES
Litigation
KEKE ZHANG A/K/A KATHERINE ZHANG VS. GENESIS TECHNOLOGY GROUP, INC., A FLORIDA
CORPORATION AND GARY L. WOLFSON - CASE NO. 50 2006 CA 003447
------------------------------------------------------------------------------
In April 2006, a former employee of the Company filed a lawsuit against the
Company and its Chief Executive Officer alleging, amongst other things, breach
of an employment agreement, loss of compensation, and losses from the value
associated with denied stock options. The Company plans to vigorously defend its
position and believes that any settlement will not have a material adverse
effect on its financial condition.
NOTE 6 - SUBSEQUENT EVENTS
On July 13, 2006, the Company granted 500,000 stock options to a consultant at
an exercise price of $.153 per share. The options were immediately exercise for
a subscription receivable of $76,500. The Company valued these warrants
utilizing the Black-Scholes options pricing model at approximately $0.13 or
$63,000.
-15-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following analysis of our consolidated financial condition and
results of operations for the nine months ended June 30, 2006 and 2005, should
be read in conjunction with the consolidated financial statements, including
footnotes, and other information presented in our Form 10-KSB for the year ended
September 30, 2005 as filed with the Securities and Exchange Commission.
OVERVIEW
We are a business development and marketing firm that specializes in
proving leadership and commerce opportunities to small and mid-sized companies
in the United States and China. We provide and procure development projects that
require marketing, manufacturing, finance, and product deployment expertise. Our
core competency is sourcing merger and acquisitions opportunities for both our
contract clients and Genesis respectfully. The majority of our commercial
proceedings involve China in a significant capacity. Historically our clients
range from global 1000 companies, emerging high-growth organizations, to
venture-backed start-ups. Genesis, and through its subsidiaries, creates and
fosters a unique framework for business collaboration between companies and
organization in United States and China.
Genesis and The YaSheng Group, Ltd. ("YaSheng") signed a Letter of
Intent dated December 13, 2005. YaSheng is a Chinese biotech/agribusiness
conglomerate in Gansu Province, China. The merger would have consisted of a
YaSheng subsidiary merging into GTEC, and the succeeding entity possibly having
a majority ownership by YaSheng. We have currently ceased our negotiations with
YaSheng.
Effective June 20, 2005, we formally established Genesis Equity
Partners LLC ("GEP") in which we own 51% and the balance of 49% is owned by
China West LLC (25%) and a director of the Company (24%).
In the fall of 2005, GEP signed a contract with The Jin Ma Group
Company, Ltd., a real estate development company in Western China, to globalize
its operations in the areas of real estate, construction, and hospitality. To be
known as Gold Horse International, Inc., GEP will receive a significant equity
position in Gold Horse and ongoing consulting fees for coordination and
oversight of its U.S. business activities, when established. Currently, Jin Ma
is undergoing an audit of its financial statements by an independent accounting
firm.
On March 15, 2006, GEP signed a General Partnership Agreement with
Liang Fang Pharmaceutical, Ltd. ("Liang"), a company registered in the People's
Republic of China. Liang is based in Beijing and is a drug development, medical
device, and retail drug store enterprise with 10 retail outlets. GEP will
receive a significant equity position in Liang Fang and ongoing consulting fees
for coordination and oversight of its U.S. business activities, when
established. Among Liang's best selling products, Valsartan Capsules are a
medicine for primary hypertension or high blood pressure. Valsartan first came
to market in America in 1996, known as Diovan. For its U.S. operations, this
pharmaceutical company will be known as Lotus Pharmaceuticals, Inc.
Currently, Liang Fang is undergoing an audit of its financial statements by an
independent accounting firm.
-16-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
We intend to repeat this strategy and secure similar contracts with
other qualified Chinese companies. Presently, we have five such candidates in
the due diligence phase.
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.
Discontinued operations
On November 15, 2001, we entered into a Stock Purchase Agreement with
Shanghai Chorry Technology Development Co., Limited ("Chorry") and Chorry's
shareholder and acquired an 80% interest in Chorry. Chorry was formerly known as
Shanghai Zhaoli Technology Development Company Ltd. Chorry is a Chinese company
with principal offices in Shanghai, China. On November 2, 2005, the Company
entered into a stock purchase agreement with Dragon Ventures (OTC: DRGV), a
Nevada public corporation, for the sale of Chorry. We closed on this transaction
on February 14, 2006. Accordingly, Chorry 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.
On May 1, 2005, the shareholders of Extrema unanimously agreed to
discontinue the operations of Extrema. Our 60% owned subsidiary, Extrema LLC,
ceased U.S. operations which will contribute to the costs savings. For the
periods discussed, 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.
We believe that as we develop our consulting services, 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, 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.
-17-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
The fee-based structure of our consulting services 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.
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 2006 and thereafter.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these consolidated financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates based on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
A summary of significant accounting policies is included in Note 1 to
the audited consolidated financial statements included in this Form 10-KSB.
Management believes that the application of these policies on a consistent basis
enables us to provide useful and reliable financial information about the
company's operating results and financial condition.
Accounting for Stock Based Compensation - Effective October 1, 2005, we
adopted Statement of Financial Accounting Standards No. 123 (revised 2004),
Share Based Payment ("SFAS No. 123R"). SFAS No. 123R establishes the financial
accounting and reporting standards for stock-based compensation plans. As
required by SFAS No. 123R, the Company recognized the cost resulting from all
stock-based payment transactions including shares issued under its stock option
plans in the financial statements. The adoption of SFAS No. 123R will have a
negative impact on our future results of operations.
-18-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
Marketable equity securities consist of investments in equity of
publicly traded and non-public domestic companies and are stated at market value
based on the most recently traded price of these securities at June 30, 2006.
All marketable securities are classified as available for sale at June 30, 2006.
Unrealized gains and losses, determined by the difference between historical
purchase price and the market value at each balance sheet date, are recorded as
a component of Accumulated Other Comprehensive Income in Stockholders' Equity.
Realized gains and losses are determined by the difference between historical
purchase price and gross proceeds received when the marketable securities are
sold. Realized gains or losses on the sale or exchange of equity securities and
declines in value judged to be other than temporary are recorded in gains
(losses) on equity securities, net. Marketable equity securities are presumed to
be impaired if the fair value is less than the cost basis continuously for three
consecutive quarters, absent evidence to the contrary.
RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 2006 COMPARED THE NINE MONTHS ENDED JUNE 30, 2005
REVENUES
For the nine months ended June 30, 2006, we had consolidated revenues
of $13,333 as compared to $148,825 for the nine months ended June 30, 2005, a
decrease of $135,492 or 91%. During the nine months ended June 30, 2006, we
spent a substantial amount of time with discussions with potential candidates
for acquisition, and the sale of our Chorry subsidiary. This diversion of time
had a negative effect on our management and marketing revenues. However, we
entered into contracts with clients in China with enormous potential for
significant revenues and profit. We expect our revenues to increase during
fiscal 2006, however, we can not give any assurances that revenues will
increase.
For the nine months ended June 30, 2006, operating expenses which
include consulting fees, rent, salaries and non-cash compensation, professional
fees and other selling, general and administrative, were $920,264 compared to
$2,472,400 for the nine months ended June 30, 2005, a decrease of $1,552,136 or
63%.
The decrease in operating expenses was primarily attributable to the
following:
* Our consulting expense decreased to $65,961 for the nine months ended
June 30, 2006 from $162,754 for the nine months ended June 30, 2005, a decrease
of $96,973 or 60%. The decrease was due to a decline in the use of consultants
and a change in our business model and the sectors of our focus.
-19-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
OPERATING EXPENSES
* Salaries and stock-based compensation expense decreased to $424,944
for the nine months ended June 30, 2006 from $1,426,144 for nine months ended
June 30, 2005, a decrease of $1,001,200 or 70%. The decrease in salaries and
stock-based compensation expense was attributable to a decrease in the recording
of stock-based compensation in connection with the granting of common stock and
stock options to officers, employees, and directors and the amortization of
deferred compensation. Additionally, we had a decrease of approximately $165,000
attributable to a decrease in staff in our US and China business development
offices. Additionally, at June 30, 2006, we had deferred compensation of
$316,622, which will be amortized into expense during fiscal 2006.
* During the nine months ended June 30, 2005, we recorded severance
expense of $329,343 related to a severance and separation agreement we signed
with a former officer/director of the Company compared to $0 for the nine months
ended June 30, 2006. 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 decreased to
$429,359 for the nine months ended June 30, 2006 from $554,159 for the nine
months ended June 30, 2005, a decrease of $124,800 or 23%. Other selling,
general and administrative expenses included the following:
2006 2005
------------ ------------
Professional fees ..................... $197,948 $155,692
Rent .................................. 37,719 57,650
Travel and entertainment .............. 39,464 59,462
Other selling, general and
administrative....................... 154,228 281,355
------------ ------------
Total ............................ $ 429,359 $ 554,159
============ ============
In fiscal 2005, professional fees increased by $42,256 or 27% due to an
increase in legal fees of $34,017 related to general corporate matters, a
litigation matter against a former employee, and other legal matters in which we
are the plaintiff. Additionally, we incurred an increase in accounting and
auditing fees of approximately $8,239.
-20-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
Rent expense decreased to $37,719 for the nine months ended June 30,
2006 from $57,650 for nine months ended June 30, 2005, a decrease of $19,931 or
35%. The decrease in rent was attributable to the relocation of our offices to a
smaller, less expensive office facility and the closing of our office in
Shanghai, China.
During the nine months ended June 30, 2006, travel related expenses
decreased by $19,998 or 34% as compared to the 2005 period and was attributable
to a decrease in the number of staff traveling to China and the use of
consultants and staff in Beijing.
Other selling, general and administrative expenses include office
expenses and supplies, telephone and communications, and other expenses. For the
nine months ended June 30, 2006, other selling, general and administrative
expenses amounted to $154,228 compared to $281,355 during the nine months ended
June 30, 2005, a decrease of $127,127 or 45%. The decrease was attributable to
the closing of our Shanghai office, the reduction in marketing activities, and
cost cutting measures.
GAIN FROM SALE OF MARKETABLE SECURITIES
For the nine months ended June 30, 2006, we recorded a gain from the
sale of marketable securities of $1,046,894 compared to a $0 for the nine months
ended June 30, 2005. The gain from the sale of marketable securities relates to
marketable securities that we had previously received for business development
services rendered by us and which we had previously valued and recorded as
revenue over the contract period. The gain represents the difference in the sale
price of the marketable securities and the fair value of services provided which
was previously recorded as revenue. Additionally, in connection with services
previously rendered, we were granted warrants to purchase marketable securities
which we exercised at a price less than fair market value. These marketable
securities were sold and contributed to the gain from sale of marketable
securities.
GAIN (LOSS) FROM DISCONTINUED OPERATIONS
For the nine months ended June 30, 2006, we recorded a gain from
discontinued operations of $9,124 associated with the discontinuation of our
Chorry subsidiary which was sold on February 14, 2006 and Extrema subsidiary.
For the nine months ended June 30, 2005, we recorded a loss from discontinued
operations of $233,194 due to the closure of our Extrema subsidiary and the
discontinuation of our Chorry subsidiary.
On November 2, 2005, we entered into a stock purchase agreement with
Dragon Ventures (OTC: DRGV), a Nevada public corporation, for the sale of our
majority-owned subsidiary Chorry. In connection with this agreement, we
delivered 100% of our shares in Chorry, representing our 80% ownership of that
subsidiary, to DRGV, we received 17,159,965 common shares of DRGV valued at
closing at approximately $463,000 calculated at the average closing price of
$.027 per share on December 15, 2005. In connection with the sale of Chorry, for
the nine months ended June 30, 2006, we reported a gain from the sale of Chorry
of $237,377 compared to a loss of $377,346 for the disposition of Extrema for
the nine months ended June 30, 2005.
-21-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
OVERALL
We reported net income for the nine months ended June 30, 2006 of
$397,104 compared to a net loss for the nine months ended June 30, 2005 of
$2,929,081. This translates to an overall per-share income available to
shareholders of $.00 for the nine months ended June 30, 2006 compared to
per-share loss of $.04 for nine months ended June 30, 2005.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2006, we had a cash balance of $1,390,697 and working
capital of $1,399,925. During the nine months ended June 30, 2006, we received
cash amounting to approximately $1,412,260 from the sale of marketable equity
securities. We will continue to sell marketable equity securities to obtain cash
for working capital purposes. At June 30, 2006, we had marketable securities
available for sale with a fair market value of $92,140. We are presently meeting
our current obligations from cash proceeds received from the sale of marketable
equity securities. Although proceeds from sales of marketable equity securities
have allowed us to meet our obligations in the recent past, there can be no
assurances that our present methods of generating cash flow will be sufficient
to meet future obligations. Historically, we have, from time to time, been able
to raise additional capital from sales of our capital stock, but there can be no
assurances that we will be able to raise additional capital in this manner.
Net cash used in operations was $379,830 for the nine months ended June
30, 2006 as compared to net cash used in operations of $1,183,905 for the nine
months ended June 30, 2005, a decrease of $804,075 or 68%. For the nine months
ended June 30, 2006, we used cash to fund our loss from continuing operations.
For the nine months ended June 30, 2005, we used cash to fund our net loss of
$(2,929,081) offset by non-cash items such as stock-based compensation of
$1,216,093, depreciation expenses of $4,234 and severance expense of $232,533 as
well as other non-cash items and changes in assets and liabilities of $292,316.
Net cash provided by investing activities for the nine months ended
June 30, 2006 was $1,182,090 as compared to net cash used in investing
activities for the nine months ended June 30, 2005 of $6,683. For the nine
months ended June 30, 2006, we received cash from the sale of marketable
securities of $1,412,260. In March 2006, we exercised stock warrants and
purchased marketable securities for $100,200. During the nine months ended June
30, 2006, we used cash in connection with deferred acquisition cost of
approximately $130,000 related to agreements entered by one of our subsidiaries,
Genesis Equity Partners, LLC. For the nine months ended June 30, 2005, we used
cash for capital expenditures of $6,683.
Net cash provided by financing activities was $569,380 for the nine
months ended June 30, 2006 as compared to net cash provided by financing
activities of $25,983 for the nine months ended June 30, 2005. For the nine
months ended June 30, 2006, net cash provided by financing activities related to
proceeds received from the exercise of stock warrants of $548,380 and proceeds
from related party advances of $34,800 offset by repayment of related party
advances of $13,800. For the nine months ended June 30, 2005, net cash provided
by financing activities related to proceeds received from the exercise of stock
options of $25,983.
-22-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (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. There are no assurances that such capital will
be available to us when needed or upon terms and conditions which are acceptable
to us. If we are able to secure additional working capital through the sale of
equity securities, the ownership interests of our current stockholders will be
diluted. If we raise additional working capital through the issuance of debt or
additional dividend paying securities our future interest and dividend expenses
will increase. If we are unable to secure additional working capital as needed,
our ability to grow our sales, meet our operating and financing obligations as
they become due and continue our business and operations could be in jeopardy
and we could be forced to limit or cease our operations.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued several
new accounting pronouncements:
In May 2005, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 154, "Accounting Changes and
Error Corrections-a replacement of APB Opinion No. 20 and FASB Statement No. 3"
("SFAS 154"). This Statement replaces APB Opinion No. 20, Accounting Changes,
and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements, and changes the requirements for the accounting for and reporting of
a change in accounting principle. This Statement applies to all voluntary
changes in accounting principle. It also applies to changes required by an
accounting pronouncement in the unusual instance that the pronouncement does not
include specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed.
APB Opinion No. 20 previously required that most voluntary changes in
accounting principle be recognized by including in net income of the period of
the change the cumulative effect of changing to the new accounting principle.
This Statement requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. When it is impracticable to determine the period-specific effects of an
accounting change on one or more individual prior periods presented, this
Statement requires that the new accounting principle be applied to the balances
of assets and liabilities as of the beginning of the earliest period for which
retrospective application is practicable and that a corresponding adjustment be
made to the opening balance of retained earnings (or other appropriate
components of equity or net assets in the statement of financial position) for
that period rather than being reported in an income statement.
When it is impracticable to determine the cumulative effect of applying
a change in accounting principle to all prior periods, this Statement requires
that the new accounting principle be applied as if it were adopted prospectively
from the earliest date practicable. This Statement shall be effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The Company does not believe that the adoption of SFAS
154 will have a significant effect on its financial statements.
-23-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
Other accounting standards that have been issued or proposed by the
FASB or other standards-setting bodies that do not require adoption until a
future date are not expected to have a material impact on the consolidated
financial statements upon adoption.
ITEM 3. CONTROLS AND PROCEDURES
We maintain "disclosure controls and procedures," as such term is
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act"), that are designed to ensure that information required to be
disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. We conducted an evaluation (the "Evaluation"), under the supervision
and with the participation of our Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), of the effectiveness of the design and operation of
our disclosure controls and procedures ("Disclosure Controls") as of the end of
the period covered by this report pursuant to Rule 13a-15 of the Exchange Act.
Based on this Evaluation, our CEO and CFO concluded that our Disclosure Controls
were effective as of the end of the period covered by this report.
We have also evaluated our internal controls for financial reporting,
and there have been no significant changes in our internal controls or in other
factors that could significantly affect those controls subsequent to the date of
their last evaluation.
Our management, including our CEO and CFO, does not expect that our
Disclosure Controls and internal controls will prevent all errors and all fraud.
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of a simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management or
board override of the control. The design of any system of controls also is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions; over time, controls may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected. CEO and CFO Certifications Appearing
immediately following the signatures section of this report there are
Certifications of the CEO and the CFO. The Certifications are required in
accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302
Certifications). This Item of this report, which you are currently reading is
the information concerning the Evaluation referred to in the Section 302
Certifications and this information should be read in conjunction with the
Section 302 Certifications for a more complete understanding of the topics
presented.
-24-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
KEKE ZHANG A/K/A KATHERINE ZHANG VS. GENESIS TECHNOLOGY GROUP, INC., A FLORIDA
CORPORATION AND GARY L. WOLFSON - CASE NO. 50 2006 CA 003447, PALM BEACH COUNTY,
FLORIDA
--------------------------------------------------------------------------------
In April 2006, a former employee of the Company filed a lawsuit against
the Company and our Chief Executive Officer alleging breach of an employment
agreement, loss of compensation, and losses from the value associated with
denied stock options. We plan to vigorously defend our position and believe that
any settlement will not have a material adverse effect on our financial
condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On May 5, 2006, we issued 1,000,000 shares of common stock for
services. The Company valued these common shares at the fair market value on the
date of grant at per share price of $.23. The recipient was an accredited or
otherwise sophisticated investor and the transaction was exempt from
registration under the Securities Act of 1933 in reliance on an exemption
provided by Section 4(2) of that act. The recipient had access to information
concerning our company.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
Exhibit
Number Description
------- -----------
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 *
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 *
32.1 Certification of Chief Executive Officer Certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 *
32.2 Certification of Chief Financial Officer Certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 *
* Filed herein
-25-
SIGNATURES
In accorance with the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
GENESIS TECHNOLOGY GROUP, INC.
By: /s/ Gary Wolfson
----------------------------
August 10, 2006 Gary Wolfson
Chief Executive Officer
By: /s/ Adam Wasserman
----------------------------
August 10, 2006 Adam Wasserman
Chief Financial and Accounting Officer
-26-