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 period ended March 31, 2007
[ ] 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 May 15, 2007, there were
84,641,977 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 March 31, 2007
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheet
March 31, 2007 (Unaudited)................................... 3
Consolidated Statements of Operations (Unaudited)
For the Three and Six Months Ended March 31, 2007............ 4
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended March 31, 2007...................... 5
Notes to Unaudited Consolidated Financial Statements.................. 6-13
Item 2 - Management's Discussion and Analysis or Plan of Operation.... 14-25
Item 3 - Controls and Procedures...................................... 25-26
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings............................................ 26
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds.. 27
Item 3 - Default upon Senior Securities .............................. 27
Item 4 - Submission of Matters to a Vote of Security Holders.......... 27
Item 5 - Other Information............................................ 27
Item 6 - Exhibits..................................................... 27
Signatures............................................................ 28
- 2 -
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 2007
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................................... $ 157,467
Marketable equity securities, at market ....................... 120,080
Prepaid expenses and other current assets ..................... 55,625
Deferred contract costs ....................................... 410,223
------------
Total Current Assets ...................................... 743,395
PROPERTY AND EQUIPMENT - Net .................................... 14,552
OTHER ASSETS:
Restricted marketable equity securities, at market ............ 7,252,335
Other assets .................................................. 19,583
------------
Total Assets .............................................. $ 8,029,865
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses ......................... $ 136,677
Liabilities of discontinued operations ........................ 150,709
------------
Total Current Liabilities ................................. 287,386
------------
MINORITY INTEREST ............................................... 54,003
------------
SHAREHOLDERS' EQUITY:
Preferred stock ($.001 Par Value; 20,000,000 Shares Authorized)
Convertible preferred stock Series A ($.001 Par Value; 218,000
Shares Authorized; 15,400 shares issued and outstanding) .... 15
Common stock ($.001 Par Value; 200,000,000 Shares Authorized;
84,213,406 shares issued and outstanding) ................... 84,214
Additional paid-in capital .................................... 22,822,167
Accumulated deficit ........................................... (18,199,589)
Less: treasury stock, at cost (10,000 shares) ................. (2,805)
Less: deferred compensation ................................... (240,524)
Less: subscription receivable ................................. (182,340)
Accumulated other comprehensive income ........................ 3,407,338
------------
Total Shareholders' Equity ................................ 7,688,476
------------
Total Liabilities and Shareholders' Equity ................ $ 8,029,865
============
See notes to unaudited consolidated financial statements
- 3 -
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended For the Six Months Ended
March 31, March 31,
---------------------------- ----------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
NET REVENUES .................................... $ - $ 5,000 $ - $ 10,000
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Consulting .................................... 115,262 - 166,992 -
Salaries and stock-based compensation ......... 618,756 152,234 1,235,738 356,496
Selling, general and administrative ........... 228,134 128,062 407,646 195,042
------------ ------------ ------------ ------------
Total Operating Expenses ................ 962,152 280,296 1,810,376 551,538
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS ............................ (962,152) (275,296) (1,810,376) (541,538)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Gain from sale of marketable securities ....... - 502,125 33,895 542,582
Unrealized loss on trading securities ......... (8,580) (34,181) -
Settlement income ............................. - 157,500 -
Interest income ............................... 1,801 747 6,423 785
------------ ------------ ------------ ------------
Total Other Income (Expense) ............ (6,779) 502,872 163,637 543,367
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS,
INCOME TAXES AND MINORITY INTEREST ............ (968,931) 227,576 (1,646,739) 1,829
------------ ------------ ------------ ------------
DISCONTINUED OPERATIONS:
Gain from disposal of discontinued operations . - 274,058 - 274,058
Gain from discontinued operations ............. - - - 2,624
------------ ------------ ------------ ------------
Total gain from Discontinued Operations . - 274,058 - 276,682
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY
INTEREST ...................................... (968,931) 501,634 (1,646,739) 278,511
PROVISION FOR INCOME TAXES ...................... - - - -
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE MINORITY INTEREST .......... (968,931) 501,634 (1,646,739) 278,511
MINORITY INTEREST IN LOSS OF SUBSIDIARY ......... 13,243 - 15,769 -
------------ ------------ ------------ ------------
NET INCOME (LOSS) ............................... $ (955,688) $ 501,634 $ (1,630,970) $ 278,511
============ ============ ============ ============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED:
Net loss from continuing operations ........... $ (0.01) $ - $ (0.02) $ -
Net loss from discontinued operations ......... - - - -
------------ ------------ ------------ ------------
Net loss per common share ..................... $ (0.01) $ - $ (0.02) $ -
============ ============ ============ ============
Weighted common shares outstanding - basic .... 84,543,919 73,426,603 84,215,331 71,568,379
============ ============ ============ ============
Weighted common shares outstanding - diluted .. 84,543,919 77,618,100 84,215,331 73,874,470
============ ============ ============ ============
See notes to unaudited consolidated financial statements
- 4 -
GENESIS TECHNOLOGY GROUP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended
March 31,
--------------------------
2007 2006
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ......................................................... $(1,630,970) $ 278,511
Income from discontinued operations ....................................... - 276,682
----------- -----------
Income (loss) from continuing operations .................................. (1,630,970) 1,829
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation ............................................................ 3,009 3,958
Minority interest income ................................................ (15,769) -
Gain on sale of marketable securities ................................... (33,895) (542,582)
Unrealized loss on trading securities ................................... 34,181 -
Stock-based compensation and consulting ................................. 1,015,561 353,126
Settlement income ....................................................... (157,500) -
Impairment loss ......................................................... 26,000 -
Changes in assets and liabilities:
Prepaid and other current assets ........................................ (48,895) (4,036)
Deferred contract costs ................................................. (189,720) -
Other assets ............................................................ - 4,327
Accounts payable and accrued expenses ................................... (70,827) 36,050
Due to related party .................................................... (75,000) -
Deferred revenue ........................................................ - (10,000)
----------- -----------
Net cash used in continuing operations activities ......................... (1,143,825) (157,328)
----------- -----------
Net cash used in discontinued operations .................................. - (1,168)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES ....................................... (1,143,825) (158,496)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ...................................................... (1,920) -
Purchase of marketable securities ......................................... (100,200)
Proceeds from sale of marketable securities ............................... 534,001 613,537
----------- -----------
NET CASH FLOWS PROVIDED BY INVESTING ACTIVITIES ............................. 532,081 513,337
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from related party advances ...................................... - 13,800
Proceeds from exercise of stock options and warrants ...................... - 501,506
Contributions from LLC members ............................................ 176,601 -
----------- -----------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES ............................. 176,601 515,306
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES IN CASH ..................................... - 1,170
----------- -----------
NET (DECREASE) INCREASE IN CASH ............................................. (435,143) 871,317
CASH - beginning of year .................................................... 592,610 17,887
----------- -----------
CASH - end of period ........................................................ $ 157,467 $ 889,204
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest ................................................................ $ - $ -
=========== ===========
Income taxes ............................................................ $ - $ -
=========== ===========
Non-cash investing and financing activities:
Distribution of marketable securities to LLC member for minority interest $ 1,684,224 $ -
=========== ===========
Issuance of common stock for deferred contract costs .................... $ 120,000 $ -
=========== ===========
Preferred stock dividend paid with common stock ......................... $ - $ 88,304
=========== ===========
Common stock issued for debt ............................................ $ - $ 13,902
=========== ===========
See notes to unaudited consolidated financial statements
- 5 -
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2007
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
turnkey 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, and
marketing goals. The Company works closely with top management to define its
strategy and business 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 professionally 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. Genesis makes a long-term commitment to these partner companies,
and it helps guide their entry into the foreign terrain of an alien business
culture and capital markets.
Effective June 20, 2005, the Company formally established Genesis Equity
Partners LLC ("GEP"), a Florida limited liability partnership, in which it owns
51% and strategic partners own the remaining 49%. Subsequently, the Company
organized additional limited liability companies, dedicated to specific Chinese
partner companies. While its equity position in these LLC's may vary, the
minimum ownership shall be maintained at 51%, to ensure reporting of
consolidated earnings. The following limited liability companies have been
established during the three months ended March 31, 2007:
o Genesis Equity Partners, LLC (Huayang) - established in the State of
Delaware on February 1, 2007 and currently owned 100% by the Company.
o Genesis Equity Partners, LLC (Liziyuan) -established in the State of
Delaware on February 27, 2007 and currently owned 100% by the Company.
o Genesis Equity Partners, LLC (Site) - established in the State of Delaware
on March 28, 2007 and currently owned 100% by the Company.
GEP has incurred approximately $410,223 of legal, audit and other related fees
and expenses in connection with the signing of these agreements, which have been
recorded as deferred contract costs in the accompanying balance sheet. While the
earning of a significant equity position in these partner companies could
positively impact the earnings and assets of the Company, it also carries
significant risks, including--but not limited to--such circumstances as (1) the
audit may conclude that the Chinese partner companies do not have the value or
potential concluded in the screening and pre-audit stages; (2) the Chinese
partner companies maintain the right to cancel the GEP contracts, with just 60
days' notice, until it reaches public company status; and (3), for a variety of
reasons, the Chinese partner companies may never reach public company status.
- 6 -
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2007
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). The accompanying consolidated financial statements for the interim
periods are unaudited and reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the financial position and operating results for the
periods presented. The consolidated financial statements include the accounts of
the Company and its wholly and partially owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. These consolidated
financial statements should be read in conjunction with the financial statements
for the year ended September 30, 2006 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, 2007 are not necessarily
indicative of the results for the full fiscal year ending September 30, 2007.
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 fiscal 2007
and 2006 include the valuation of stock-based compensation, and the useful life
of property and equipment.
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, 2007.
The Company has marketable securities classified as trading and available for
sale securities at March 31, 2007. Realized and unrealized gains and losses on
trading securities are included in earnings. Unrealized gains and losses on
available for sale securities, 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 equity securities for which there
is an other-than-temporary impairment, an impairment loss is recognized as a
realized loss.
- 7 -
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2007
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
NET 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. The Company's
common stock equivalents at March 31, 2007 include 22,911,611 unexercised
warrants and options and 663,793 shares issuable upon conversion of Series A
preferred stock. The computation of diluted net earnings per share does not
include dilutive common stock equivalents in the weighted average shares
outstanding as they would be anti-dilutive.
STOCK-BASED COMPENSATION
The Company uses 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.
REVENUE RECOGNITION
The Company follows the guidance of the Securities and Exchange Commission's
Staff Accounting Bulletin 104 for revenue recognition. In general, the Company
records revenue when persuasive evidence of an arrangement exists, services have
been rendered or product delivery has occurred, the sales price to the customer
is fixed or determinable, and collectability is reasonably assured. The
following policies reflect specific criteria for the various revenues streams of
the Company:
Consulting income is recognized on a straight-line basis over the period of the
service agreement. Deferred revenues relates to consulting revenues that is
being recognized over the period of the service agreement.
Substantially all of the services the Company provides are paid in common shares
issued by its clients. These instruments are classified as marketable equity
securities on the consolidated balance sheet, if still held at the financial
reporting date. These instruments are stated at fair value in accordance with
the provision of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS No.
115) and EITF 00-8 "Accounting by a grantee for an equity instrument to be
received in conjunction with providing goods or services." Primarily all of the
equity instruments are received from small public companies.
- 8 -
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2007
NOTE 2 - GOING CONCERN
As reflected in the accompanying consolidated financial statements, the Company
had an accumulated deficit of $18,199,589 and working capital of $456,009 at
March 31, 2007, net losses in six months ended March 31, 2007 of $1,630,970 and
cash used in operations during the six months ended March 31, 2007 of
$1,143,825.While the Company reported net income of $2,909,606 for the fiscal
year ended September 30, 2006, its operating results for future periods will
include significant expenses, including compensation expense, travel expense,
professional fees, marketing costs, and administrative and general overhead
expenses, and costs related to the fulfillment of obligations related to its
client contracts, which the Company will incur as it continues to implement its
business model. As a result, the Company is unable to predict whether it will
continue to achieve profitability in the future. There can be no assurances
whatsoever that the Company will be able to successfully implement its business
model, identify and close acquisitions of operating companies, identify and
close contract clients, penetrate its target markets or attain a wide following
for its services. The Company is attempting to increase revenues and cash flows
and control costs. While the Company believes in the viability of its strategy
to generate sales volume and in its ability to raise additional funds and/or
sell its investments in marketable equity securities, there can be no assurances
to that effect. The ability of the Company to continue as a going concern is
dependent on the Company's ability to further implement its business plan,
generate increased revenues, and obtain operating cash from the sale of
marketable equity securities received for services. The consolidated financial
statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern. Management believes that the actions
presently being taken to further implement its business plan and generate
additional revenues provide the opportunity for the Company to continue as a
going concern.
NOTE 3 - MARKETABLE EQUITY SECURITIES
Marketable equity securities consist of investments in equity of publicly traded
companies and are stated at market value based on the most recently traded price
of these securities at March 31, 2007. The Company has marketable securities
classified as trading and available for sale securities at March 31, 2007.
Realized and unrealized gains and losses on trading securities are included in
earnings. Unrealized gains and losses on available for sale securities,
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 equity securities for which there is an
other-than-temporary impairment, an impairment loss is recognized as a realized
loss. For the six months ended March 31, 2007 and 2006, the Company recognized a
gain of $33,895 and $542,582 from the sale of trading marketable equity
securities, respectively, which has been reflected in the accompanying
consolidated statement of operations. Additionally, the Company recognized an
unrealized loss on trading securities of $34,181 and $0, respectively, which has
been reflected in the accompanying consolidated statement of operations. For the
three months ended March 31, 2007, the Company recorded an unrealized gain of
$3,120,220 which primarily related to an increase in the fair value of 6,736,896
shares we hold in Lotus Pharmaceuticals, Inc. ("Lotus") of $3,301,079 based on a
recent private placement of Lotus.
- 9 -
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2007
NOTE 4 - INVESTMENT IN NON-MARKETABLE EQUITY SECURITIES
Certain securities that the Company may receive for services can be determined
to be non-marketable. Non-marketable securities where the Company owns less than
20% of the investee are accounted for at cost pursuant to APB No. 18, "The
Equity Method of Accounting for Investments in Common Stock" ("APB 18")
The Company periodically reviews its investments in non-marketable securities
and impairs any securities whose value is considered non-recoverable. For the
six months ended March 31, 2007, the Company recorded an impairment loss of
$26,000 related to its remaining securities in a Chinese limited liability
company which has been included in other selling, general and administrative
expenses on the accompanying consolidated statement of operations.
NOTE 5 - STOCKHOLDERS' EQUITY
COMMON STOCK
On November 20, 2006, the Company issued 600,000 shares to a Beijing-based
consultant for business development services rendered in connection with its GEP
operations. The Company valued these common shares at the fair market value on
the date of grant of $0.10 per share or $60,000 based on the trading price of
common shares. Accordingly, the Company recorded deferred contract costs of
$60,000, which will be expensed upon the completion of GEP's contract an
environmental technologies company in the power generation and industrial dyeing
sectors.
On November 30, 2006, in connection with the appointment of a new board of
director, Rodrigo Arboleda, the Company issued 500,000 shares of restricted
common stock to the new board of director member for services to be rendered for
a one-year period. The Company valued these common shares at the fair market
value on the date of grant of $0.135 per share or $67,500 based on the trading
price of common shares. Accordingly, the Company recorded stock-based
compensation expense of $22,500 and deferred compensation of $45,000, which will
be amortized over the remaining service period.
On November 21, 2006, in connection with the settlement of a lawsuit with the
Company former director and employee, the Company entered into a settlement and
Release Agreement (the "Release Agreement"), whereby the former director and
employee returned 1,575,000 shares of the Company's common stock owned by him.
The Company cancelled these shares. The parties agreed to release each other
from further action and have dismissed the lawsuit with prejudice. In connection
with the return of the 1,575,000 shares of common stock, the Company recorded
settlement income of $157,500 based on the fair market value of the common stock
on the date of settlement of $0.10 per share or $157,500 based on the trading
price of common shares.
On December 11, 2006, the Company issued 500,000 shares to a Beijing-based
consultant for business development services rendered in connection with its GEP
operations. The Company valued these common shares at the fair market value on
the date of grant of $0.12 per share or $60,000 based on the trading price of
common shares. Accordingly, the Company recorded deferred contract costs of
$60,000, which will be expensed upon the completion of GEP's contract with a
health foods beverage company.
- 10 -
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2007
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
On January 1, 2007, in connection with the appointment of a new board of
director, Robert D. Cain, the Company issued 500,000 shares of restricted common
stock to the new board of director member for services to be rendered for a
one-year period. The Company valued these common shares at the fair market value
on the date of grant of $.14 per share or $70,000 based on the trading price of
common shares. Accordingly, the Company recorded stock-based compensation
expense of $17,500 and deferred compensation of $52,500, which will be amortized
over the remaining service period.
On March 29, 2007, the Company cancelled 343,706 shares of common stock
previously issued to officers of the Company. In connection with the return of
the 343,706 shares of common stock, the Company reduced stock-based compensation
expense by $48,119 based on the fair market value of the common stock on the
date of cancellation of $0.14 per share or $48,119 based on the trading price of
common shares.
For the six months ended March 31, 2007, stock-based compensation expense
amounted to $80,993.
STOCK OPTIONS AND WARRANTS
For the six months ended March 31, 2007, the Company recorded stock-based
compensation expense of $934,568 related to stock options granted in fiscal
2006, which is being amortized over the remaining service period. As of March
31, 2007, the total future compensation expense related to vested options not
yet recognized in the consolidated statement of operations is $621,097.
A summary of the stock options and warrants as of March 31, 2007 and changes
during the period is as follows:
Number of Weighted
Options and Average
Warrants Exercise Price
----------- --------------
Balance at beginning of year ........ 22,911,611 $0.133
Granted ............................. - -
Exercised ........................... - -
Forfeited ........................... - -
----------- ------
Balance at March 31, 2007 ........... 22,911,611 $0.133
=========== ======
Options and warrants exercisable
at end of period .................. 22,911,611 $0.133
=========== ======
Weighted average fair value of
options granted during the period .. $ -
- 11 -
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2007
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about employee and consultants stock
options and investor warrants outstanding at March 31, 2007:
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, 2007 Life Price March 31, 2006 Price
---------- ----------------- ----------- -------- ----------------- --------
$0.30-0.31 3,213,361 2.10 Years $0.305 3,213,361 $0.305
0.145 7,400,000 0.33 Years 0.145 7,400,000 0.145
0.085-0.10 7,923,250 3.31 Years 0.086 7,923,250 0.086
0.056-0.06 4,375,000 0.62 Years 0.059 4,375,000 0.059
----------------- -------- ----------------- --------
22,911,611 $0.133 22,911,611 $0.133
================= ======== ================= ========
NOTE 6 - RELATED PARTY TRANSACTIONS
During the six months ended March 31, 2007, the Company incurred $4,615 in
accounting fees to a company owned by Adam Wasserman, the Company's chief
financial officer for accounting services rendered related to Jin Ma which has
been included in deferred contract costs on the accompanying consolidated
balance sheet.
During the six months ended March 31, 2007, the Company distributed 3,302,400
shares of Lotus Pharmaceuticals, Inc. to China West, LLC, a member of GEP LLC,
organized in the State of Florida. China West, LLC is not a member of the GEP
limited liability companies organized in the State of Delaware, as described
herein. GEP LLC (Florida) is the entity through which Lotus and Gold Horse
International, Inc. entered the private-to-public program.
On January 22, 2007, the Company entered into a consulting agreement with
Venture Spark, LLC, a company owned by Robert D. Cain, a member of the Company's
Board of Directors. Venture Spark, LLC agreed to develop a business prospectus
and other materials for the Company to be used in business development
activities. In connection with this agreement, the Company paid Venture Sparks,
LLC $18,000.
- 12 -
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2007
NOTE 7 - 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, 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. The Company plans to vigorously defend its position and
believe that any settlement will not have a material adverse effect on its
financial condition.
NOTE 8 - SUBSEQUENT EVENTS
On April 13, 2007, the Company issued 428,571 common shares to a Beijing-based
consultant for business development services rendered in connection with its GEP
operations. The Company valued these common shares at the fair market value on
the date of grant of $0.14 per share or $60,000 based on the trading price of
common shares. Accordingly, the Company recorded deferred contract costs of
$60,000, which will be expensed upon the completion of a certain GEP contract.
- 13 -
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 six months ended March 31, 2007 and 2006, 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, 2006 as filed with the Securities and Exchange Commission.
OVERVIEW
In June 2005, we formally established GEP, a Florida limited liability
partnership of which we are a 51% owner. Our consulting services are offered
through GEP. The minority members of GEP (Florida) include China West, LLC,
holding 25% of GEP, and Shaohua Tan, Inc., a company owned by Dr. Shaohua Tan, a
member of our Board of Directors, holding 24% of GEP (Florida). We, along with
China West, are the managing members of GEP (Florida). The Company has also
organized additional limited liability companies, dedicated to specific Chinese
partner companies. While its equity position in these LLC's may vary, the
minimum ownership shall be maintained at 51%, to ensure reporting of
consolidated earnings. The following limited liability companies have been
established during the three months ended March 31, 2007:
o Genesis Equity Partners, LLC (Huayang) - established in the State of
Delaware on February 1, 2007 and currently owned 100% by the Company.
o Genesis Equity Partners, LLC (Liziyuan) -established in the State of
Delaware on February 27, 2007 and currently owned 100% by the Company.
o Genesis Equity Partners, LLC (Site) - established in the State of
Delaware on March 28, 2007 and currently owned 100% by the Company.
GEP is a full service advisory company specializing in small
Chinese-based companies, which are traded on the U.S. public markets. We offer a
comprehensive suite of services tailored to the specific needs of our clients.
The menu of services offered by the GEP partner companies includes:
* U.S. representative offices
* General business consulting services
* Merger and acquisition strategy planning and analysis
* Advice on U.S. capital markets, including assessment of potential
sources of investment capital
* Coordination of professional resources
* Corporate asset evaluation
* Public relations
* Advice and structure assistance for strategic alliances, partnerships
and joint ventures
GEP enters into agreements with its consulting clients, which provide
for a fixed fee to it for its services. The amount of fee varies based upon the
scope of the services GEP renders. For fiscal year 2006, all of GEP's fees were
paid in shares of its client's securities, which are valued at fair market value
for the purposes of revenue recognition. For the six months ended March 31,
2007, GEP has not received any such shares. The shares received are unregistered
shares. Our policy is to sell securities we receive as compensation as soon as
we remove any restriction and not to hold these securities as investments.
- 14 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
In March 2006, GEP, organized in the State of Florida, signed a General
Partnership Agreement with Liang Fang Pharmaceutical, Ltd. ("Liang"), a company
registered in the People's Republic of China. In August 2006, GEP and the
members of Liang established Lotus Pharmaceutical International, Inc., a Nevada
company ("Lotus") and in September 2006, Lotus and its stockholders closed a
reverse merger with Lotus Pharmaceuticals, Inc. (formerly S.E. Asia Trading
Company, Inc.), a publicly-trading company ("LTUS"). At closing GEP received
13,209,600 restricted common shares of LTUS for services performed in assisting
Lotus facilitate the merger with LTUS and for other business development
services. We valued the 13,209,600 shares received at $.51 per share based on an
accredited business valuation performed by an independent party. Accordingly,
during fiscal year 2006, we recorded revenue of $6,736,896 related to the
receipt of these restricted marketable equity securities. On September 28, 2006,
GEP immediately distributed 3,170,304 shares of LTUS to Shaohua Tan, Inc., a
company owned by Mr. Tan, which represented 24% of the shares received as
compensation for our services and during the six months ended March 31, 2007
distributed 3,302,400 shares of LTUS to the beneficial owner, China West, LLC.
We retain control over 6,736,896 shares. The value of the shares held by our
company is reflected on our balance sheet at March 31, 2007, which appears
elsewhere in this report in restricted marketable equity securities, at market.
In the fall of 2005, GEP, organized in the State of Florida, 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. Jin Ma has been active in its
industry since its founding in 1980. To be known in the U.S. as Gold Horse
International, Inc., a Nevada corporation, GEP will receive a significant equity
position in Gold Horse and ongoing consulting fees for coordination and
oversight of its U.S. business activities. We are assisting Jin Ma in the final
stages of this contract and expect that Jin MA will finalize the closing of a
reverse merger with a public company in June 2007.
On November 20, 2006, GEP, organized in the State of Delaware, signed a
contract with an environmental technologies company in the power generation and
industrial dyeing sectors. GEP could receive a significant equity position and
ongoing consulting fees for coordination and oversight of its U.S. business
activities This Chinese company required that GEP refrain from publicizing its
name or exact location until the audit by an accredited US accounting firm has
been completed. GEP is responsible for paying for the audit, and the procedure
typically takes 60-120 days, unless unforeseen complexities are discovered
during the process. A New York-based auditing firm was engaged in early February
2007.
On March 11, 2007, GEP organized in the State of Delaware, signed a
contract with a health foods beverage company. GEP could receive a significant
equity position and ongoing consulting fees for coordination and oversight of
its U.S. business activities. This Chinese company required that GEP refrain
from publicizing its name or exact location until the audit by an accredited US
accounting firm has been completed. GEP is responsible for paying for the audit,
and the procedure typically takes 60-120 days, unless unforeseen complexities
are discovered during the process.
- 15 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
While it is not our policy to hold securities we accept as payment for
services as long-term investments, we are not always able to immediately
liquidate such securities as a result of either market conditions or
restrictions on resale imposed by Federal securities laws. These unsold
securities comprise substantially all of our assets. Our balance sheet reflects
investments in marketable securities, which are securities, which are freely
saleable by us, and restricted investments in marketable securities held for
sale, which represent securities, which are not freely saleable under Federal
securities laws. Realized gains or losses on securities are recognized at the
time the securities are sold. Unrealized gains or losses on trading securities
are recognized on a monthly basis in our statement of operations based upon the
changes in the fair market value of the securities. Unrealized gains or losses
on investment in marketable securities held for sale are recognized as a
component of comprehensive income on a monthly basis based on changes in the
fair market value of the securities. These changes in valuations of the
securities can have the effect of significantly increasing our net income and
comprehensive income, if the price of the securities increases from the original
value assigned to it at the time the related revenue was recognized. Conversely,
if the price were to decline, such decreases could negatively impact our net
income and comprehensive income.
Our revenues for fiscal 2006 and fiscal 2007 were materially dependent
on one consulting client. In addition, under our present business model, our
ability to generate revenues from our consulting contracts is dependent upon
factors, which may be out of our control. Accordingly, while we could enter into
agreement with companies, which may produce revenue for us in future periods, it
is also possible that the events necessary for us to receive payment for our
services may never occur. In addition, we are responsible for the payment of
various fees and expenses to third parties related to the services we provide,
which such payments are not conditioned upon our receipt of payment from our
client. While we do not believe it to be likely, it is possible that we could
expend significant funds on behalf of a particular client and never earn our fee
from that client.
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.
SPECIAL CONSIDERATIONS REGARDING THE INVESTMENT ACT OF 1940
It has not been the intention of the Company to function as an
investment company and to be primarily engaged and operate in a manner in which
its asset base would be comprised in substantial part of securities and passive
investments in which the Company would not have a significant control
relationship. As is evidenced from the Company's historical experience, its
primary asset until mid-February 2006 was its 80% owned subsidiary, Chorry
Technology Development Co., Ltd. In addition, the Company has held at least a
majority owned interest in several other companies which were disposed of or
discontinued their operations between the end of 2004 and September 30, 2006.
- 16 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
U.S. companies that have more than 100 shareholders or are publicly
traded in the U.S. and are, or hold themselves out as being, engaged primarily
in the business of investing, reinvesting or trading in securities, are subject
to regulation under the Investment Company Act of 1940. While we do not believe
our company is an "investment company" within the scope of the Investment
Company Act of 1940, by virtue of the percentage of the value of securities that
we hold to our total assets, under certain circumstances we could be subject to
the provisions of the Investment Company Act of 1940 in the event we are unable
to fulfill our business model in a timely manner.
Because Investment Company Act regulation is, for the most part,
inconsistent with our business model, we cannot feasibly operate our business as
a registered investment company. Our board of directors has adopted a resolution
stating that it is not our intent to become subject to the Investment Company
Act of 1940 and authorizing our officers to take such actions as are necessary,
including the periodic liquidation of any marketable equity securities we may
own to reduce those holdings below the threshold level as prescribed by the
Investment Company Act of 1940. There are no assurances we will be able to
timely liquidate a sufficient number of these shares or increase our asset base
in a manner so as to reduce our holdings to a level below the necessary
threshold. If we are deemed to be, and are required to register as, an
investment company, we will be forced to comply with substantive requirements
under the Investment Company Act of 1940, including:
o limitations on our ability to borrow;
o limitations on our capital structure;
o restrictions on acquisitions of interests in associated companies;
o prohibitions on transactions with affiliates;
o restrictions on specific investments; and
o compliance with reporting, record keeping, voting, proxy disclosure and
other rules and regulations.
Given the significant number of shares that we own, it is possible that
our future sales of securities will create downward pressure on the trading
price for that stock. We are unable at this time to predict the amount of
proceeds we will inevitably receive from the sale of these shares.
SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002
Unless there are further postponements by the Securities and Exchange
Commission of the enactment of Section 404 of the Sarbanes-Oxley Act of 2002 as
it relates to small business issuers such as our company, in connection with our
annual report for our fiscal year ending December 31, 2007 our management will
be required to provide an assessment of the effectiveness of our internal
control over financial reporting, including a statement as to whether or not
internal control over financial reporting is effective. In order to comply with
this requirement we will need to engage a consulting firm to undertake an
analysis of our internal controls as we do not have the expertise to conduct the
necessary evaluation. While we have yet to engage such a consulting firm, we
expect to incur consulting fees in developing the necessary documentation and
testing procedures required. We are unable at this time to predict the amount of
these fees
- 17 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
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 on our 10-KSB as filed
with the U.S. Securities and Exchange Commission. 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, we recognize the cost resulting from all stock-based
payment transactions including shares issued under our stock option plans in the
financial statements. The adoption of SFAS No. 123R will have a negative impact
on our future results of operations.
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, 2007.
We have marketable securities classified as trading and available for sale
securities at March 31 2007. Realized and unrealized gains and losses on trading
securities are included in earnings. Unrealized gains and losses on available
for sale securities, 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.
- 18 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
Revenue recognition - We follow the guidance of the Securities and
Exchange Commission's Staff Accounting Bulletin 104 for revenue recognition. In
general, we record revenue when persuasive evidence of an arrangement exists,
services have been rendered or product delivery has occurred, the sales price to
the customer is fixed or determinable, and collectability is reasonably assured.
The following policies reflect specific criteria for our revenues stream:
Consulting income is recognized on a straight-line basis over the
period of the service agreement. Deferred revenues relates to consulting
revenues that is being recognized over the period of the service agreement.
Substantially all of the services we provide are paid in common shares
issued by our clients. These instruments are classified as marketable equity
securities on the consolidated balance sheet, if still held at the financial
reporting date. These instruments are stated at fair value in accordance with
the provision of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS No.
115) and EITF 00-8 "Accounting by a grantee for an equity instrument to be
received in conjunction with providing goods or services." Primarily all of the
equity instruments are received from small public companies.
RESULTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 2007 COMPARED THE SIX MONTHS ENDED MARCH 31, 2006
REVENUES
For the six months ended March 31, 2007, we had consolidated revenues
of $0 as compared to $10,000 for the six months ended March 31, 2006, a decrease
of $10,000 or 100%. During the six months ended March 31, 2007, we spent a
substantial amount of time coordinating and facilitating the completion of
services in connection with the agreement entered between GEP and Jin Ma Group
Company, Ltd. ("Jin Ma"), a real estate development company in Western China and
the signing of agreements with new clients. We anticipate that the Jin Ma
transaction will be completed in June 2007 and at closing of this transaction
GEP will receive a significant equity position in Jin Ma and ongoing consulting
fees for coordination and oversight of its U.S. business activities. We
currently have a limited number of client companies, and for the year ended
September 30, 2006, one of our clients represented approximately 99.9% of our
total revenues. While we continue to market our consulting services, we may need
to raise additional working capital to fund our daily operations and the
commitments to our client contracts. Accordingly, we may be limited in the
amount of engagements we accept from additional consulting clients, thereby
limiting our ability to generate revenues in future periods. We cannot assure
you that we will ever be able to successfully implement our expanded business
model or increase our revenues in future periods.
- 19 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
OPERATING EXPENSES
For the six months ended March 31, 2007, operating expenses which
include consulting fees, salaries and non-cash compensation, and other selling,
general and administrative, were $1,810,376 compared to $551,538 for the six
months ended March 31, 2006, an increase of $1,258,838 or 228%.
The increase in operating expenses was primarily attributable to the following:
o Our consulting expense increased to $166,992 for the six months ended
March 31, 2007 from $0 for the six months ended March 31, 2006, an
increase of $166,992. The increase was primarily due to the recognition
of stock-based consulting expenses of $89,113 from amortization of
deferred compensation in connection with the granting of common stock
to consultants in fiscal year 2006. Additional, we incurred consulting
fees for business development services rendered. Additionally, at March
31, 2007, we had deferred consulting expense of $143,024 which will be
amortized into expense during fiscal 2007.
o Salaries and stock-based compensation expense increased to $1,235,738
for the six months ended March 31, 2007 from $356,496 for six months
ended March 31, 2006, an increase of $879,242 or 246.6%. The increase
in salaries and stock-based compensation expense was attributable to an
increase in the amount of stock-based compensation during the 2007
period as compared to the 2006 period of $822,515 recognized from
amortization of deferred compensation in connection with the granting
of stock options to officers, employees, and directors in fiscal 2006
and in January 2007. Additional, during the six months ended March 31,
2007, we paid a bonus to two officers of the Company in the aggregate
amount of $80,000, we incurred an increase in overall salary expense of
10% for our executive officers, and we reduced stock-based compensation
by $48,119 due to the return of cancellation of common stock.
Additionally, at March 31, 2007, we had deferred compensation of
$97,500 and there was $621,097 of unrecognized compensation expense
related to option-based compensation arrangements which will be
amortized into expense during fiscal 2007.
o Other selling, general and administrative expenses increased to
$407,646 for the six months ended March 31, 2007 from $195,042 for the
six months ended March 31, 2006, an increase of $212,604 or 109%. Other
selling, general and administrative expenses included the following:
2007 2006
-------- --------
Professional fees ....................... $221,954 $ 74,168
Rent .................................... 30,399 24,050
Travel and entertainment ................ 29,619 37,512
Impairment loss ......................... 26,000 -
Other selling, general and administrative 99,674 59,312
-------- --------
Total .............................. $407,646 $195,042
======== ========
Professional fees increased by $147,786 or 199% for the six months
ended March 31, 2007 primarily due to an increase in legal fees of $156,533
related to general corporate matters, a litigation matter against a former
employee, and other legal matters in which we were the plaintiff. Additionally,
we had a decrease in auditing fees of approximately $10,000.
- 20 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
Rent expense increased to $30,399 for the six months ended March 31,
2007 from $24,050 for the six months ended March 31, 2006, an increase of $6,349
or 26.4%. The increase in rent was primarily attributable to an increase in
common area maintenance expenses and the leasing on a month-to-month basis
office space in Beijing, China offset by monthly sub-lease rental income of
$4,500.
During the six months ended March 31, 2007, travel related expenses
decreased by $7,893 or 21% as compared to the 2006 period and was attributable
to a decrease in the number of staff traveling to China.
For the six months ended March 31, 2007, we recorded an impairment loss
of $26,000 related to our remaining investment in a Chinese limited liability
company, which we deemed impaired.
Other selling, general and administrative expenses include office
expenses and supplies, telephone and communications, and other expenses. For the
six months ended March 31, 2007, other selling, general and administrative
expenses amounted to $99,674 compared to $59,312 during the six months ended
March 31, 2006, an increase of $40,362 or 68%. The increase was attributable to
an increase in operational activities as we further develop our consulting
services segment.
GAIN FROM SALE OF MARKETABLE SECURITIES
For the six months ended March 31, 2007, we recorded a gain from the
sale of marketable securities of $33,895 compared to a $542,582 for the six
months ended March 31, 2006. The gain from the sale of marketable securities
relates to marketable securities that we had purchased and 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.
UNREALIZED LOSS ON TRADING SECURITIES
We recorded an unrealized loss on trading securities of $34,181 for the
six months ended March 31, 2007 as compared to $0 for the six months ended March
31, 2006. The unrealized loss on trading 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 loss represents the difference between the fair values
at the end of each reporting period.
SETTLEMENT INCOME
On November 21, 2006, in connection with the settlement of a lawsuit
with our former director and employee, we entered into a settlement and Release
Agreement (the "Release Agreement"), whereby the former director and employee
returned 1,575,000 shares of the Company's common stock owned by him. We
cancelled these shares. The parties agreed to release each other from further
action and have dismissed the lawsuit with prejudice. In connection with the
return of the 1,575,000 shares of common stock, we recorded settlement income of
$157,500 based on the fair market value of the common stock on the date of
settlement of $.10 per share or $157,500 based on the trading price of common
shares.
- 21 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
GAIN (LOSS) FROM DISCONTINUED OPERATIONS
For the six months ended March 31, 2006, we recorded a gain from
discontinued operations of $276,682 associated with the discontinuation of our
Chorry subsidiary, which was sold on February 14, 2006 as compared to $0 for the
six months ended March 31, 2007.
MINORITY INTEREST
For the six months ended March 31, 2007, we reported a minority
interest income of $15,769 as compared to $0 for the six months ended March 31,
2006. In 2007, the minority interest is attributable to GEP's minority interest
members, and had the effect of reducing our net loss.
OVERALL
We reported net loss for the six months ended March 31, 2007 of
$(1,646,739) compared to net income for the six months ended March 31, 2006 of
$278,511. This translates to an overall per-share loss available to shareholders
of $(0.02) for the six months ended March 31, 2007 compared to per-share income
of $0.00 for six months ended March 31, 2006.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2007, we had cash on hand of approximately $157,000 and
working capital of approximately $456,000. Our current assets also include
approximately $120,000 in investments in trading marketable equity securities,
and $410,223 in deferred contract costs associated with on-going client
contracts. Our current liabilities primarily consist of $136,677 of accounts
payable and $150,709 of liabilities from discontinued operations. During the six
months ended March 31, 2007, we sold approximately $500,000 of our investments
in trading marketable equity securities to fund our operations.
At March 31, 2007, our marketable equity securities consist of the following:
Description Fair Market Value
----------- -----------------
Un-restricted marketable equity securities:
-------------------------------------------
Sunwin International Neutraceuticals, Inc. (SUWN.OB) ..... $ 17,200
Dragon International Corp (DRGG.OB) ...................... 34,200
Dragon Capital Group (DRGV.PK) ........................... 68,000
Com-Guard.com, Inc. (CGUD.PK) ............................ 680
----------
$ 120,080
==========
Restricted marketable equity securities:
----------------------------------------
Lotus Pharmaceuticals, Inc. (LTUS.OB) (1) ................ $6,736,896
Dragon Capital Group (DRGV.PK) ........................... 515,439
----------
$7,252,335
==========
(1) During the three months ended, we increased the value of our holdings in
LTUS by $3,301,079 or $1.00 per shares based on a recent private placement by
LTUS.
- 22 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
While the value of investments in restricted marketable equity
securities held for sale represent substantially all of our assets, we are not
presently able to liquidate these securities and generate cash to pay our
operating expenses. Under Federal securities laws these securities cannot be
readily resold by us generally absent a registration of those securities under
the Securities Act of 1933. We have been advised by the client company that it
registered a portion of our shares in a registration statement which was
declared effective in May 2007. Although we are able to liquidate a portion of
those securities ,we can not predict the amount of proceeds we can expect to
receive from the sale. While under generally accepted accounting principles we
are required to reflect the fair value of restricted equity securities on our
balance sheet, they are not readily convertible into cash.
We have recently met our 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 $1,143,825 for the six months ended
March 31, 2007 as compared to net cash used in operations of $158,496 for the
six months ended March 31, 2006, an increase of $985,329 or 622%. For the six
months ended March 31, 2007, we used cash to fund our net loss of $1,679,089 and
to fund deferred contract costs of $189,720 offset by non-cash items such as
stock-based compensation of $1,063,680, depreciation expense of $3,009,
unrealized loss on trading securities of $34,181, non-cash settlement income of
$(157,500), a gain on sale of marketable securities of $33,895, an impairment
loss of $26,000, and changes in other assets and liabilities of $(194,722).
Net cash provided by investing activities for the six months ended
March 31, 2007 was $532,081 as compared to net cash provided by investing
activities for the six months ended March 31, 2006 of $513,337. For the six
months ended March 31, 2007, we received cash from the sale of marketable
securities of $534,001 and purchased of office equipment amounted to $1,920. For
the six months ended March 31, 2006, we received cash from the sale of
marketable securities of $613,537 and purchased marketable securities of
$100,200.
Net cash provided by financing activities was $176,601 for the six
months ended March 31, 2007 as compared to net cash provided by financing
activities of $501,506 the six months ended March 31, 2006. For the six months
ended March 31, 2007, net cash provided by financing activities was related to a
contribution from a minority interest of $176,601. For the six months ended
March 31, 2006, net cash provided by financing activities was primarily related
to the receipt of proceeds from the exercise of stock options and warrants of
$501,506.
We currently have no material commitments for capital expenditures.
We do not currently have any off-balance sheet arrangements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
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 March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing
of Financial Assets, an amendment of FASB Statement No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities".
This statement requires all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable, and permits for
subsequent measurement using either fair value measurement with changes in fair
value reflected in earnings or the amortization and impairment requirements of
Statement No. 140. The subsequent measurement of separately recognized servicing
assets and servicing liabilities at fair value eliminates the necessity for
entities that manage the risks inherent in servicing assets and servicing
liabilities with derivatives to qualify for hedge accounting treatment and
eliminates the characterization of declines in fair value as impairments or
direct write-downs. SFAS No. 156 is effective for an entity's first fiscal year
beginning after September 15, 2006. The adoption of this statement did not have
a significant effect on our reported financial position or results of
operations.
In July 2006, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation (FIN) No. 48, "Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109." This interpretation provides guidance
for recognizing and measuring uncertain tax positions, as defined in SFAS No.
109, "Accounting for Income Taxes." FIN No. 48 prescribes a threshold condition
that a tax position must meet for any of the benefit of an uncertain tax
position to be recognized in the financial statements. Guidance is also provided
regarding de-recognition, classification, and disclosure of uncertain tax
positions. FIN No. 48 is effective for fiscal years beginning after December 15,
2006. We do not expect that this interpretation will have a material impact on
our financial position, results of operations, or cash flows.
In September 2006, FASB issued SFAS 157 `Fair Value Measurements'. This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles (GAAP), and expands disclosures
about fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, this Statement does not require any
new fair value measurements. However, for some entities, the application of this
Statement will change current practice. This Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. Management is currently
evaluating the effect of this pronouncement on financial statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
In December 2006, FASB Staff Position No. EITF 00-19-2, "Accounting for
Registration Payment Arrangements," was issued. The FSP specifies that the
contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement, whether issued as a
separate agreement or included as a provision of a financial instrument or other
agreement, should be separately recognized and measured in accordance with SFAS
No. 5, "Accounting for Contingencies." The Company believes that its current
accounting is consistent with the FSP. Accordingly, adoption of the FSP had no
effect on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities, Including an Amendment of FASB
Statement No. 115" , under which entities will now be permitted to measure many
financial instruments and certain other assets and liabilities at fair value on
an instrument-by-instrument basis. This Statement is effective as of the
beginning of an entity's first fiscal year that begins after November 15, 2007.
Early adoption is permitted as of the beginning of a fiscal year that begins on
or before November 15, 2007, provided the entity also elects to apply the
provisions of SFAS 157. The Company is currently assessing the impact, if any,
the adoption of SFAS 159 will have on its consolidated financial statements.
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
As required by Rule 13a-15 under the Securities Exchange Act of 1934,
as of March 31, 2007, the end of the period covered by this report, our
management concluded its evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures. Disclosure controls and
procedures are controls and procedures designed to reasonably assure that
information required to be disclosed in our reports filed under the Securities
Exchange Act of 1934, such as this report, is recorded, processed, summarized
and reported within the time periods prescribed by SEC rules and regulations,
and to reasonably assure that such information is accumulated and communicated
to our management, including our Chief Executive Officer who also acts as our
principal financial and principal accounting officer, to allow timely decisions
regarding required disclosure.
Our management does not expect that our disclosure controls and
procedures will prevent all error and all fraud. A control system, no matter how
well designed and operated, can provide only reasonable, not absolute, assurance
that the control system's objectives will be met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, have been detected. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. The design of any system of controls is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions.
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Based upon the evaluation, our Chief Executive Officer has concluded
that our disclosure controls and procedures are effective for timely gathering,
analyzing and disclosing the information we are required to disclose in our
reports filed under the Securities Exchange Act of 1934. Our management, which
includes our Chief Executive Officer, concluded that our disclosure controls and
procedures are effective to (i) give reasonable assurance that the information
required to be disclosed by us in reports that we file under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms, and (ii) ensure that information required to be disclosed in the reports
that we file or submit under the Securities Exchange Act of 1934 is accumulated
and communicated to our management, including our CEO, to allow timely decisions
regarding required disclosure.
There have been no changes in our internal control over financial
reporting during our last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
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.
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. We anticipate this lawsuit
to be resolved before December 31, 2007.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On January 1, 2007, in connection with the appointment of a new board
of director, Robert D. Cain, the Company issued 500,000 shares of
restricted common stock to the new board of director member for
services to be rendered for a one-year period. The Company valued these
common shares at the fair market value on the date of grant of $.14 per
share or $70,000 based on the trading price of common shares.
Accordingly, the Company recorded deferred compensation of $70,000,
which will be amortized over the remaining service period.
On March 29, 2007, the Company cancelled 343,706 shares of common stock
previously issued to officers of the Company.
On April 13, 2007, we issued 428,571 common shares to a Beijing-based
consultant for business development services rendered in connection
with its GEP operations. We valued these common shares at the fair
market value on the date of grant of $0.14 per share or $60,000 based
on the trading price of common shares. Accordingly, the Company
recorded deferred contract costs of $60,000, which will be expensed
upon the completion of a certain GEP contract.
The recipients were accredited or otherwise sophisticated investors and
the transactions were exempt from registration under the Securities Act
of 1933 in reliance on an exemption provided by Section 4(2) of that
act. The recipients had access to information concerning our company.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
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
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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 L. Wolfson
-----------------------
May 18, 2007 Gary L. Wolfson
Chief Executive Officer
By: /s/ Adam Wasserman
----------------------
May 18, 2007 Adam Wasserman
Chief Financial and Accounting Officer
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