United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended: March 31, 2002
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.)
301 Clematis Street, Suite 3124
West Palm Beach, Florida 33401
(Address of principal executive offices)(Zip code)
(561) 835-6600
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of March 31, 2002: 24,797,353 shares of common stock, $.001 par
value per share.
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
FORM 10-QSB
QUARTERLY PERIOD ENDED March 31, 2002
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets
March 31, 2002 (Unaudited)......................................3
Consolidated Statements of Operations (Unaudited)
For the Three and Six Months Ended March 31, 2002 and 2001......4
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended March 31, 2002 and 2001................5
Notes to Consolidated Financial Statements...............................6-12
Item 2 - Management's Discussion and Analysis and Plan of Operation.....13-19
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.................................................20
Item 2 - Changes in Securities and Use of Proceeds.........................20
Item 3 - Default upon Senior Securities....................................21
Item 4 - Submission of Matters to a Vote of Security Holders...............21
Item 6 - Exhibits and Reports on Form 8-K..................................22
Signatures.................................................................23
-2-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31,
2002
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 936,779
Marketable equity securities 297,533
Accounts receivable - net of allowance 854,181
for doubtful accounts of $100,000
Inventories 914,297
Prepaid expenses and other 237,474
Total Current Assets 3,240,264
PROPERTY AND EQUIPMENT - Net 144,008
GOODWILL 369,919
SECURITY DEPOSITS 890
Total Assets $ 3,755,081
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,816,355
Total Current Liabilities 1,816,355
MINORITY INTEREST 167,897
STOCKHOLDERS' EQUITY:
Preferred stock ($.001 Par Value; 20,000,000 Shares Authorized;
no shares issued and outstanding at March 31, 2002) -
Common stock ($.001 Par Value; 200,000,000 Shares Authorized;
24,797,353 shares issued and outstanding) 24,798
Additional paid-in capital 11,881,412
Accumulated deficit (10,011,080)
Less: Deferred Compensation (171,209)
Accumulated other comprehensive income 46,908
Total Stockholders' Equity 1,770,829
Total Liabilities and Stockholders' Equity $ 3,755,081
See notes to consolidated financial statements
-3-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended For the Six Months Ended
March 31, March 31,
--------------------------------- ---------------------------------
2002 2001 2002 2001
--------------- --------------- ---------------- ----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
NET REVENUES $ 8,128,300 $ - $ 14,728,302 $ -
COST OF SALES 7,794,908 - 13,810,006 -
GROSS PROFIT 333,392 - 918,296 -
OPERATING EXPENSES:
Selling, general and administrative 323,496 30,000 567,664 79,739
Total Operating Expenses 323,496 30,000 567,664 79,739
INCOME (LOSS) FROM OPERATIONS 9,896 (30,000) 350,632 (79,739)
OTHER INCOME (EXPENSE):
Loss from sale of marketable securities (2,483) - (43,734) -
Interest Income 174 - 1,121 -
Total Other Income (Expense) (2,309) - (42,613) -
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS
AND MINORITY INTEREST 7,587 (30,000) 308,019 (79,739)
DISCONTINUED OPERATIONS:
Income (loss) from discontinued operations 9,000 (47,740) 9,000 (4,733,110)
INCOME (LOSS) BEFORE MINORITY INTEREST 16,587 (77,740) 317,019 (4,812,849)
MINORITY INTEREST IN INCOME OF SUBSIDIARY 34,025 - (39,124) -
NET INCOME (LOSS) $ 50,612 $ (77,740) $ 277,895 $ (4,812,849)
BASIC INCOME (LOSS) PER COMMON SHARE:
Income (loss) from continuing operations $ (0.00) $ (0.00) $ 0.01 $ (0.01)
Loss from discontinued operations 0.00 (0.01) 0.00 (0.59)
Net income (loss) per common share $ (0.00) $ (0.01) $ 0.01 $ (0.60)
DILUTED INCOME (LOSS) PER COMMON SHARE:
Income (loss) from continuing operations $ 0.00 $ (0.00) $ 0.01 $ (0.01)
Loss from discontinued operations 0.00 (0.01) 0.00 (0.59)
Net income (loss) per common share $ 0.00 $ (0.01) $ 0.01 $ (0.60)
Weighted Common Shares Outstanding - Basic 24,359,486 8,034,658 24,182,397 8,034,321
Weighted Common Shares Outstanding - Diluted 24,655,674 8,034,658 24,478,585 8,034,321
See notes to consolidated financial statements
-4-
GENESIS TECHNOLOGY GROUP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended
March 31,
----------------------------------
2002 2001
---------------- ---------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations $ 268,895 $ (79,739)
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by (used in) operating activities:
Depreciation and amortization 8,093 -
Loss on sale of marketable securities 43,734 -
Issuance of stock options 60,193 -
Common stock issued for services 23,750 -
Minority interest (76,468) -
Changes in assets and liabilities:
Accounts receivable (28,845) -
Inventories 99,844 -
Prepaid and other current assets 52,577 -
Due from related party 18,023 -
Accrued payable and accrued expenses (35,803) -
Deferred revenues (76,500) -
---------------- ---------------
NET CASH PROVIDED BY (USED IN) CONTINUING OPERATING ACTIVITIES 357,493 (79,739)
---------------- ---------------
Income (loss) from discontinued operations 9,000 (4,733,110)
Adjustments to reconcile income (loss) from discontinued
operations to net cash used in discontinued operating activities:
Net decrease in net assets from discontinued operations - 4,800,349
---------------- ---------------
NET CASH PROVIDED BY DISCONTINUED OPERATING ACTIVITIES 9,000 67,239
---------------- ---------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 366,493 (12,500)
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in acquisition 106,790 -
Proceeds from sale of marketable securities 21,040 -
Increase in marketable securities (171,203) -
Capital expenditures (56,293) -
---------------- ---------------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (99,666) -
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 124,500 12,500
---------------- ---------------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 124,500 12,500
---------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 391,327 -
CASH AND CASH EQUIVALENTS - beginning of period 545,452 -
---------------- ---------------
CASH AND CASH EQUIVALENTS - end of period $ 936,779 $ -
================ ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Noncash investing and financing activities:
Common stock issued for equipment $ - $ 12,825
================ ===============
Acquisition details:
Fair value of assets acquired $ 813,452 $ -
Liabilities assumed $ (544,692) $ -
Common stock issued for acquisitions $ (268,760) $ -
---------------- ---------------
Goodwill $ 10,540 $ -
See notes to consolidated financial statements.
-5-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). The accompanying consolidated
financial statements for the interim periods are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the financial
position and operating results for the periods presented. The consolidated
financial statements include the accounts of the Company and its wholly and
partially owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. These consolidated financial statements
should be read in conjunction with the financial statements for the nine months
ended September 30, 2001 and notes thereto contained in the Transition Report on
Form 10-KSB of Genesis Technology Group, Inc. (the "Company") as filed with the
Securities and Exchange Commission. The results of operations for the six months
ended March 31, 2002 are not necessarily indicative of the results for the full
fiscal year ending September 30, 2002.
Minority interest
In August 2001, the Company acquired an 80% common stock ownership in G-Choice.
At March 31, 2002, the Company reported minority interest in the balance sheet
of $167,897. For financial statement reporting purposes, the assets, liabilities
and earnings of G-Choice are consolidated in the Company's financial statements,
and the remaining ownership of G-Choice has been recorded as "Minority Interest"
in the consolidated balance sheet.
In November and December 2001, the Company acquired an 80% common stock
ownership in Yastock and Zhaoli. Subsequently, the Company purchased the
remaining 20% interest in Yastock for $18,000. For financial statement reporting
purposes, the assets, liabilities and earnings of Yastock and Zhaoli are
consolidated in the Company's financial statements.
Net income (loss) per share
Basic earnings per share is computed by dividing net loss by weighted average
number of shares of common stock outstanding during each period. Diluted loss
per share is computed by dividing net loss by the weighted average number of
shares of common stock, common stock equivalents and potentially dilutive
securities outstanding during each period. In fiscal 2001, diluted loss per
common share is not presented because it is anti-dilutive.
-6-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2002
(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,
expenses and cash flows are translated at weighted average exchange rates for
the period to approximate translation at the exchange rates prevailing at the
dates those elements are recognized in the financial statements. Translation
adjustments resulting from the process of translating the local currency
financial statements into U.S. dollars are included in determining comprehensive
loss.
The functional currency of the Company's Chinese subsidiaries is the local
currency. The financial statements of the subsidiary are translated to United
States dollars using period-end rates of exchange for assets and liabilities,
and average rates of exchange for the period for revenues, costs, and expenses.
Net gains and losses resulting from foreign exchange transactions are included
in the consolidated statements of operations and were not material during the
periods presented. The cumulative translation adjustment and effect of exchange
rate changes on cash at March 31, 2002 was not material.
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, 2002.
All marketable securities are classified as available for sale at March 31,
2002. 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.
Reclassifications
Certain prior periods' balances have been reclassified to conform to the current
period's financial statement presentation. These reclassifications had no impact
on previously reported results of operations or stockholders' equity (deficit).
-7-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2002
(UNAUDITED)
NOTE 2 - ACQUISITIONS
On November 15, 2001, the Company entered into a Stock Purchase Agreement with
Shanghai Zhaoli Technology Development Company, Limited ("Zhaoli") and Zhaoli's
shareholder. Zhaoli is a Chinese company with principal offices in Shanghai,
China. Zhaoli is an information technology company that integrates sales and
technology with services. Currently, its sales cover printer, copier, scanner
and network products, as well as network integration. Zhaoli also develops
proprietary software systems, such as its e-learning software for K-12 education
in China. As a result of the acquisition, the Company issued 400,000 shares of
its common stock with a fair market value of $220,000 in exchange for 80% of the
capital stock of Zhaoli. The Company accounted for this acquisition using the
purchase method of accounting. The purchase price exceeded the fair value of net
assets acquired by $5,651. The excess has been applied to goodwill. The results
of operations of Zhaoli are included in the accompanying financial statements
from November 15, 2001 (effective date of acquisition) to March 31, 2002.
On December 1, 2001, the Company entered into a Stock Purchase Agreement with
Yastock Investment Consulting Company, Limited ("Yastock") and the shareholders
of Yastock. Yastock is an investment consulting firm located in Shanghai, China
that specializes in raising capital and consulting in a number of areas,
including trading information, public relations, corporate management, corporate
strategic evaluations and human resources. As a result of the acquisition, the
Company issued 92,000 shares of its common stock with a fair market value of
$48,760 in exchange for 80% of the capital stock of Yastock. The Company
accounted for this acquisition using the purchase method of accounting. The
purchase price exceeded the fair value of net assets acquired by $4,889. The
excess has been applied to goodwill. Subsequently, the Company acquired the
remaining 20% of Yastock for $18,000. The results of operations of Yastock are
included in the accompanying financial statements from December 1, 2001
(effective date of acquisition) to March 31, 2002.
-8-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2002
(UNAUDITED)
NOTE 2 - ACQUISITIONS (Continued)
The following unaudited pro forma consolidated results of operations have been
prepared as if the acquisitions of Zhaoli and Yastock had occurred as of the
following periods:
------------------------------------------------------ --------------------
Six Months Ended
March 31, 2002
------------------------------------------------------ --------------------
Net Revenues $ 16,336,000
Net Income from continuing operations $ 299,000
Net Income per Share from continuing operations $ .01
Pro forma data does not purport to be indicative of the results that would have
been obtained had these events actually occurred at the beginning of the periods
presented and is not intended to be a projection of future results.
NOTE 3 - SEGMENT INFORMATION
The following information is presented in accordance with SFAS No. 131,
Disclosure about Segments of an Enterprise and Related Information. In fiscal
2001, the Company operated in three reportable business segments - (1) sale of
computer equipment and accessories , (2) Web hosting and distribution services,
and (3) consulting services for small public and private companies regarding
public relations, corporate financing, mergers and acquisitions, e-commerce,
business operations support and marketing . The Company's reportable segments
are strategic business units that offer different products. They are managed
separately based on the fundamental differences in their operations. The Company
did not have any reportable segments for the six months ended March 31, 2001.
-9-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2002
(UNAUDITED)
NOTE 3 - SEGMENT INFORMATION (Continued)
Information with respect to these reportable business segments for the six
months ended March 31, 2002 is as follows:
--------------------------- ------------------- -------------------- --------------------- ---------------------
Computer and Web Hosting and
Equipment Sales Distribution Consulting Services Consolidated Totals
Services
--------------------------- ------------------- -------------------- --------------------- ---------------------
3/31/02
Net Revenues $ 12,895,887 $ 1,323,558 $ 508,857 $ 14,728,302
Gross Profit $ 353,466 $ 55,973 $ 508,857 $ 918,296
Segment profit (Loss)
from operations $ 112,097 $ (9,852) $ 166,650 $ 268,895
For the six months ended March 31, 2002, the Company derived approximately 87%
of its revenue from its subsidiaries located in the People's Republic of China.
Sales and identifiable assets by geographic areas for the six months ended March
31, 2002 and as of March 31, 2002, respectively, were as follows:
Sales Identifiable Assets
United States $ 1,516,308 $ 1,542,330
China 13,211,994 2,212,751
----------------- -----------------
Total $ 14,728,302 $ 3,755,081
================= =================
NOTE 4 - RELATED PARTY TRANSACTIONS
Due from/to related party
Occasionally, the Company advances/borrows funds to/from an officer of the
Company. The advances are non-interest bearing and are payable on demand.
NOTE 5- STOCKHOLDERS' EQUITY
Preferred stock
The Company is authorized to issue 20,000,000 shares of Preferred Stock, par
value $.001, with such designations, rights and preferences as may be determined
from time to time by the Board of Directors.
-10-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2002
(UNAUDITED)
NOTE 5- STOCKHOLDERS' EQUITY (Continued)
Common stock
In March 2002, the Company issued 300,000 shares of common stock to an officer
in connection with exercise of 300,000 stock options for net proceeds of
$87,000.
In March 2002, the Company issued 141,000 shares of common stock to a consultant
in connection with exercise of 141,000 stock options for net proceeds of
$37,500.
Stock options
On January 25, 2002, the Company entered into a one year consulting agreement
with a third party for business development and marketing services. In
connection with this consulting agreement which commences on February 1, 2002,
the Company shall grant 50,000 options per month to purchase shares of common
stock for services rendered for an aggregate of 600,000 options. The options
have an exercise price of $.35 per share and expire five years from grant date.
As of March 31, 2002, the Company has granted 100,000 options under this
agreement. The fair value of each 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
ranging of 108 percent; risk-free interest rate of 5.00 percent and an expected
holding periods of 5 years. In connection with these options, the company
recorded consulting expense amounting to $32,550.
In March 2002, 92,000 options were granted to an employee with an exercise price
of $.35 per share. The Company accounts for stock options issued to employees in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
As such, compensation cost is measured on the date of grant as the excess of the
current market price of the underlying stock over the exercise price. Since the
exercise price was greater than the current market value at the date of grant,
no compensation expense has been recognized.
In March 2002, the Company entered into 12 month consulting agreements and
granted an aggregate of 2,000,000 stock options (1,000,000 each) to two
consultants for business development and marketing services. These options were
granted with an exercise price of $.33 per shares and expire on September 30,
2002. The fair value of each 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 ranging of 108
percent; risk-free interest rate of 5.00 percent and an expected holding periods
of one-half a year. In connection with these options, the company recorded
deferred compensation expense of $176,000, which is being amortized into
consulting expense over the term of the option.
-11-
GENESIS TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2002
(UNAUDITED)
NOTE 5- STOCKHOLDERS' EQUITY (Continued)
Stock options (Continued)
A summary of outstanding options and warrants at March 31, 2002 are as follows:
Shares Range of Remaining Average
Underlying Exercise Contractual Exercise
Warrants Price Life Price
----------------- -------------- ---------------- -------------
Outstanding at September 695,000 $ 0.00-1.50 1 to 5 yrs 1.00
30, 2001
Granted 5,082,000 0.16-0.50 .5 to 5 yrs 0.27
Expired (0) 0.00 -
Exercised (441,000) 0.26-0.29 0.28
----------------- -------------- -------------
Outstanding at March
31, 2002 5,336,000 $ 0.00-1.50
0.40
================= ============== =============
NOTE 6 - CONSULTING AGREEMENT
On March 26, 2002, the Company entered into a consulting agreement with the
NETdigest.com, Inc., a publicly-traded company ("Netdigest"), to provide to
Netdigest with financial assistance in obtaining a suitable merger candidate for
Netdigest to acquire and to facilitate reorganization thereafter.
As consideration, Netdigest will pay the Company a consulting fee in the form of
ten million (10,000,000) restricted shares of Netdigest's publicly traded common
stock.
-12-
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following analysis of the results of operations and financial
condition of the Company should be read in conjunction with the financial
statements of Genesis Technology Group, Inc. for the nine months ended September
30, 2001 and notes thereto contained in the Report on Form 10-KSB of Genesis
Technology Group, Inc. as filed with the Securities and Exchange Commission.
This report on Form 10-QSB contains forward-looking statements that are
subject to risks and uncertainties that could cause actual results to differ
materially from those discussed in the forward-looking statements and from
historical results of operations. Among the risks and uncertainties which could
cause such a difference are those relating to our dependence upon certain key
personnel, our ability to manage our growth, our success in implementing the
business strategy, our success in arranging financing where required, and the
risk of economic and market factors affecting us or our customers. Many of such
risk factors are beyond the control of the Company and its management.
OVERVIEW
Genesis Technology Group Inc. ("Genesis" or the "Company") was formed
as the result of a change in business model and management of newagecities.com,
Inc., which ceased active operations at the end of June 2001. The mission of
Genesis Technology Group, Inc. is to create a family of technology and service
related entities, via acquisitions, partnerships and joint ventures, in which
the entities build on the existing success and profitability of each other, with
specific focus on the emerging markets in the Pacific Rim.
China's entrance into the World Trade Organization has provided Genesis
with the opportunity to market their services to the growing niche of small to
mid-size U.S. companies that wish to enter into the Chinese market, but do not
have the knowledge and resources to do so cost-effectively. Genesis is marketing
itself to these companies as a resource to assist in arranging marketing,
distribution, forming joint ventures, or establishing a manufacturing base in
China. In addition, the Company aims to play a key role in assisting small to
mid-size Chinese private companies that desire growth, to expand their business
with the financial and operational support of the Genesis.
The Company develops, invests in, and operates technology and service
related companies in the US and China. The Corporate strategy includes the
internal development and operation of subsidiaries within the Company family, as
well as investment in other technology companies directly, and through a variety
of venture capital arrangements.We do not expect to operate as an investment
company in accordance with the investment company act of 1940, and we will limit
our activities in order not to become subject to that act.
By building on the success of already successful businesses, Genesis
intends to become an important player in the expanding Cross-Pacific marketplace
-increasing its revenues, profitability and market value by accelerating the
success of its subsidiaries and partner companies.
Genesis' strategy includes the internal development and operation of
majority-owned subsidiaries within the corporate family, as well as investment
in other technology companies either directly by the Company, or through other
venture capital arrangements. The strategy also envisions and promotes
opportunities for synergistic business relationships among the Company's
subsidiaries.
-13-
ACQUISITIONS
As of the date of this filing, we have either acquired or started-up
seven companies.
On August 1, 2001 we acquired Genesis Systems, Inc. of St. Paul,
Minnesota. Genesis Systems provides a wide range of business and financial
services for public and private companies with an emphasis on early-stage
technology companies. These services include assistance in mergers and
acquisitions, capital raising and financing, strategic planning, public
relations and operations. Genesis Systems has established a network of strategic
partners to assist in performing these services.
On August 14, 2001, we acquired 100 % of PropaMedia, Inc., a provider
of media rich Web hosting and distribution services, located in Los Angeles, CA.
Propamedia offers end-to-end streaming and hosting services, including content
capture, encoding and production, storage, live and on-demand video and audio
streaming, and managed services. PropaMedia's services can be used for video and
audio distribution services to transmit entertainment, sports, news,
advertising, business communications, and distance learning content.
PropaMedia's technologies support all major Internet audio and video formats.
PropaMedia has developed proprietary streaming technologies that increase the
number of end-users able to view video content at once, improve end-users' video
viewing experience, and provide clients with real-time monitoring and reporting.
On August 22, 2001, we acquired a majority interest (80%) of Shanghai
G-Choice Science Development Company, Limited (G-Choice). G-Choice's business
services include computer product sales, network services, software development,
and systems integration. G-Choice has extensive experience in computer system
engineering, and software research and development, including its popular Point
of Sale software, currently sold via a network of over 4,000 distributors
throughout China. G-Choice was founded in 1999 and is located in Shanghai,
China; has approximately 86 employees and has recently expanded its sales
network to include other areas of China.
In October 2001, we formed two subsidiaries, each of which the company
owns a majority interest in. The first was Espectus Systems, Inc. Espectus is an
interactive, direct marketing company, specializing in permission-based e-mail
marketing, media buying, customer relationship management and online surveys.
The company specializes in low cost, high return opt-in marketing campaigns for
a variety of large and small companies worldwide. Genesis owns 80% of Espectus.
As of March 31, 2002, operating activities from our Espectus subsidiary were
immaterial.
The second subsidiary formed in October was Biosystems Technologies,
Inc. Biosystems' mission is the commercialization, marketing and distribution of
biomedical products and technologies used to diagnose and treat HIV/AIDS, cancer
and other immune-related diseases. Biosystems seeks to harness the latest
scientific discoveries to commercialize and market the potential of proprietary
technologies that will form the basis of a range of new and potentially
effective treatments for a variety of diseases. We own 85% of Biosystems, with
the remaining 15% owned by Dr. Ronald Watson, a noted immunology professor and
researcher.
-14-
Unlike traditional biotechnology companies which can spend millions of
dollars on research and development of new products, Biosystems seeks unique
products that are fully developed or in the final stages of development.
Biosystems will then attempt to commercialize and market these products via
licensing agreements, with particular emphasis on introducing these products to
China and the Pacific Rim. There can be no assurances that products will be
acquired or developed or that Biosystems will have sufficient financial
resources to bring these products to market. As of March 31, 2002, Biosystems
had no material operating activity.
On November 15, 2001, we acquired 80% of Shanghai Zhaoli Technology
Development Company, Limited (Zhaoli"), an Information Technology enterprise
that integrates sales and technology with services. Currently, its sales cover
printer, copier, scanner and network products, as well as network integration.
In addition to hardware sales and service, the company focuses much of its
resources on the development of proprietary software systems, such as its
e-learning software for K-12 education in China. Zhaoli has approximately 65
employees at seven branches and exclusive stores in Shanghai and a strong and
growing presence throughout eastern areas of China.
On December 1, 2001, we acquired 80% of Yastock Investment Consulting
Company, Limited ("Yastock"), an investment consulting firm located in Shanghai,
China that specializes in raising capital and consulting in a number of areas,
including public relations, corporate management, corporate strategic
evaluations and human resources. In addition to its ongoing business, Yastock's
management will oversee all of Genesis' operations in China and will be an
important source of financial and operational support for our Chinese
subsidiaries. On January 1, 2002, we acquired the remaining 20% of Yastock,
making it a wholly owned subsidiary. Yastock has 25 part and full-time
employees.
CONSULTING ACTIVITIES
In addition to overseeing the operations of its subsidiaries, the
company has been growing its cross pacific consulting business. Management
believes that China's entrance into the WTO offers a unique opportunity for
Genesis to secure itself a position as a leader in the growing market for
cross-pacific products, technology, capital, and property exchange. To that end,
the company is beginning to market itself to other U.S. firms interested in
Chinese partnerships for manufacturing and distribution of a variety of products
in China.
To aid in achieving its goals, the company has signed on as the only
U.S. representative of the Shanghai Technology Stock (Property Rights) Exchange
(STSE). STSE is a technology transfer exchange sponsored by the Shanghai
Municipal Government with independent corporate qualifications. STSE is a
vehicle for the transfer of technology and property rights. As a representative
of the STSE, we can introduce American companies and individuals who would like
to sell or license intellectual property to a Chinese partner or use technology
to form a joint venture in China to the STSE for purposes of listing their
technologies or intellectual properties. Companies wishing to enter the exchange
pay a listing fee and a success fee based on any completed transaction. We will
receive a portion of each of these fees for any company it brings to STSE.
-15-
On March 26, 2002, we entered into a consulting agreement with the
NETdigest.com, Inc., a publicly-traded company ("Netdigest"), to provide to
Netdigest with financial assistance in obtaining a suitable merger candidate for
Netdigest to acquire and to facilitate reorganization thereafter.
As consideration, Netdigest will pay the Company a consulting fee in
the form of ten million (10,000,000) restricted shares of Netdigest's publicly
traded common stock.
Six months ended March 31, 2002 compared to six months ended March 31, 2001
Our failure to successfully complete a planned financing of $3 to 5
million in June 2001 resulted in the merger between the Company and New Leaf
Distributing not being completed. Management believed that without the
consummation of the merger and/or the financing, we could not continue to
operate. Our limited revenues did not adequately cover expenses. As such, active
operations were ceased in the end of June 2001. Until our recent acquisitions of
several companies subsequent to June 2001, our Company had no business
operations other than those pertaining to the maintenance of our corporate
existence and filing of reports required under the United States Securities and
Exchange Commission.
REVENUES AND COSTS BY SEGMENT:
For the six months ended March 31, 2002, we had consolidated revenues
of $14,728,302 as compared to $0 for the same period in fiscal 2001. This
increase resulted from the acquisition of our subsidiaries and is outlined
below.
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Genesis Systems, Inc.
Revenue for the six months ended March 31, 2002 from Genesis Systems,
Inc. was $192,750. This revenue was generated from consulting service in which
we received stock or cash for services.
Other selling, general and administrative expenses of our Genesis
Systems subsidiary consisted of salaries of $56,000, rent of $12,478, marketing
and other expenses amounting to $60,119. Additionally, we recorded a realized
loss from the sale of marketable securities received for consulting services of
$36,957 for the six months ended March 31, 2002.
G-Choice
Revenue from our G-Choice, our 80% owned Chinese subsidiary during the
six months ended March 31, 2002 was $8,001,128 as compared to $0 during the six
months ended March 31, 2001. Revenues from our G-Choice subsidiary are generated
from the sale of computer parts and equipment.
Cost of sales for G-Choice for the six months ended March 31, 2002
amounted to $7,733,053 or 96.6% of revenues as compared to $0 for the six months
ended March 31, 2001 and consisted of the cost of computer parts and equipment
sold.
For the six months ended march 31, 2002, other selling, general and
administrative expenses consisted salaries, rent and other office expenses
amounting to $126,432.
For the six months ended march 31, 2002, we recorded minority interest
expense of $31,583 related to our 20% minority interest.
Propamedia
Revenue for the six months ended March 31, 2002 from Propamedia was
$1,317,629 as compared to $0 for the six months ended March 31, 2001. This
revenue was generated from streaming and hosting services.
Cost of sales for Propamedia for the six months ended March 31, 2002
amounted to $1,267,585 or 96% of revenues as compared to $0 for the six months
ended March 31, 2001 and consisted of the cost charged by third party vendors
for services rendered.
For the six months ended March 31, 2002, other selling, general and
administrative expenses consisted accounting fees, rent and other office
expenses amounting to $50,578.
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Yastock
Revenue for the six months ended March 31, 2002 from Yastock was
$316,107 as compared to $0 for the six months ended March 31, 2001. This revenue
was generated from consulting services and software licensing fees.
Other selling, general and administrative expenses consisted salaries,
commissions, accounting fees and office rent amounting to $16,016.
Zhaoli
Revenue for the six months ended March 31, 2002 from Zhaoli was
$4,894,759 as compared to $0 for the six months ended March 31, 2001. This
revenue was generated from sales of printers, copiers, network equipment and
software licensing fees.
Cost of sales for Zhaoli for the six months ended March 31, 2002
amounted to $4,809,368 or 98% of revenues as compared to $0 for the six months
ended March 31, 2001.
For the six months ended March 31, 2002, other selling, general and
administrative expenses consisted of salaries, rent and other expenses amounting
to $82,845.
Other
In November 2001, the Company announced that its subsidiary; Biosystems
Technologies, Inc. had entered into a distribution agreement for a Rapid HIV
Test Kit with Pacific Biotech Company, Limited. Under the terms of the
agreement, Biosystems Technologies was to have the exclusive distribution rights
for the HIV Dipstick Kit in China. The Company has since rescinded this
agreement, as it has learned that Pacific Biotech is a licensed distributor for
the product, but not for China. Upon notification, Biosystems halted all testing
of the product and ceased efforts to distribute the product in China. In
addition, the Company immediately removed all references to this agreement from
its Web site and the Biosystems Web site. The company is currently in
negotiation with Pacific Biotech for distribution rights to related products
that it has the rights to distribute in China.
We incurred additional selling, general and administrative expenses
related to our corporate existence. For the six months ended March 31, 2002,
consulting expense amounted to $72,685 compared to $0 for the six months ended
March 31, 2001. For the six months ended March 31, 2002, we had salary expense
of $15,320; rent of $3,297, and other expenses consisting of professional fees
and office expenses of $65,752 as compared to professional fees and other
expenses of $79,739 for the six months ended March 31, 2001.
For the six months ended March 31, 2002, we had income from
discontinued operations related to the settlement of debt as compared to a loss
from discontinued operations of $(4,733,110) for the six months ended March 31,
2001.
See "Condensed Consolidated Financial Statements - Note 2, Segment
Information" for additional information.
We reported income from operations (net of minority interest in income
of subsidiaries) for the six months ended March 31, 2002 of $268,895 compared to
a loss from operations for the six months ended March 31, 2001 of $(79,739).
Additionally, we reported income from discontinued operations for the six months
ended March 31, 2002 of $9,000 as compared to a loss from discontinued
operations of $4,733,110 for the six months ended March 31, 2001.
This translates to an overall per-share income of $.01 for the six
months ended March 31, 2002 compared to a per share loss of $(.60) for the six
months ended March 31, 2001.
-18-
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, the Company had cash and equivalents balance of
$1,190,365, which represents a $391,327 increase from the $545,452 balance at
September 30, 2001. As of March 31, 2002, our cash position by geographic area
is as follows:
Cash
-----------------
United States $ 462,834
China 473,945
-----------------
Total $ 936,779
=================
Management has invested substantial time evaluating and considering
numerous proposals for possible acquisition or combination developed by
management or presented by investment professionals, the Company's advisors and
others. The Company continues to consider acquisitions, business combinations,
or start up proposals, which could be advantageous to shareholders. No assurance
can be given that any such project, acquisition or combination will be
concluded.
The Company intends to continue its trading activities and as a
consequence the future financial results of the Company may be subject to
substantial fluctuations. As part of the Company's investment activities the
Company may sell a variety of equity or debt securities obtained as revenue for
consulting services. Such investments often involve a high degree of risk and
must be considered extremely speculative.
At March 31, 2002, our Company had stockholders' equity of $1,770,829.
Our Company's future operations and growth will likely be dependent on our
ability to raise capital for expansion and to implement our strategic plan.
Net cash provided by operations was $366,493 for the six months ended
March 31, 2002 as compared to net cash used in operations of $12,500 for the
six months ended March 31, 2001. The difference is due to the implementation of
our new business model and the acquisition of our subsidiaries between August
and December 2001.
Net cash used in investing activities for the six months ended March
31, 2002 was $99,666 as compared to $ -0- for the six months ended March 31,
2001. The difference was attributable to cash acquired from acquisitions of
$106,790 and proceeds received from the sale of marketable securities of $21,040
offset by cash used for capital expenditures of $(56,293) and increases in
marketable securities of $171,203.
Net cash provided by financial activities were $124,500 for the six
months ended March 31, 2002 and compared to $12,500 for the six months ended
March 31, 2001 and related to proceeds from the exercise of stock options.
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.
-19-
OPERATING RISK
(a) Country risk
Currently, the Company's revenues are primarily derived from sale of
computer equipment and accessories to customers in the Peoples Republic of China
(PRC). The Company hopes to expand its operations to countries outside the PRC,
however, such expansion has not been commenced and there are no assurances that
the Company will be able to achieve such an expansion successfully. Therefore, a
downturn or stagnation in the economic environment of the PRC could have a
material adverse effect on the Company's financial condition.
(b) Products risk
In addition to competing with other computer and electronics equipment
companies, the Company could have to compete with larger US companies who have
greater funds available for expansion, marketing, research and development and
the ability to attract more qualified personnel if access is allowed into the
PRC market. If US companies do gain access to the PRC markets, it may be able to
offer products at a lower price. There can be no assurance that the Company will
remain competitive should this occur.
(c) Exchange risk
The Company generates revenue and incurs expenses and liabilities in
Chinese renminbi and U.S. dollars. As a result, the Company is subject to the
effects of exchange rate fluctuations with respect to any of these currencies.
For example, the value of the renminbi depends to a large extent on PRC's
domestic and international economic and political developments, as well as
supply and demand in the local market. Since 1994, the official exchange rate
for the conversion of renminbi to U.S. dollars has generally been stable and the
renminbi has appreciated slightly against the U.S. dollar. However, given recent
economic instability and currency fluctuations, the Company can offer no
assurance that the renminbi will continue to remain stable against the U.S.
dollar or any other foreign currency. The Company's results of operations and
financial condition may be affected by changes in the value of renminbi and
other currencies in which its earnings and obligations are denominated. The
Company has not entered into agreements or purchased instruments to hedge its
exchange rate risks, although the Company may do so in the future.
Although Chinese governmental policies were introduced in 1996 to allow
the convertibility of renminbi into foreign currency for current account items,
conversion of renminbi into foreign exchange for capital items, such as foreign
direct investment, loans or security, requires the approval of the State
Administration of Foreign Exchange, or SAFE, which is under the authority of the
People's Bank of China. These approvals, however, do not guarantee the
availability of foreign currency. The Company cannot be sure that the Company
will be able to obtain all required conversion approvals for its operations or
that Chinese regulatory authorities will not impose greater restrictions on the
convertibility of the renminbi in the future. Because a significant amount of
its revenues are in the form of renminbi, its inability to obtain the requisite
approvals or any future restrictions on currency exchanges will limit its
ability to utilize revenue generated in renminbi to fund its business activities
outside PRC.
-20-
(d) Political risk
Currently, PRC is in a period of growth and is openly promoting
business development in order to bring more business into PRC. Additionally PRC
allows a Chinese corporation to be owned by the United States corporation. If
the PRC government changes the laws or regulations, the Company's ability to
operate the PRC subsidiaries could be affected.
(e) Our future performance is dependent on its ability to retain key personnel
Our performance is substantially dependent on the performance of our
senior management. In particular, the Company's success depends on the continued
effort of our Chief Executive Officer, James Wang, to maintain all contact with
our Chinese subsidiaries. The Company's inability to retain James Wang could
have a material adverse effect on our prospects, businesses, Chinese operations,
financial conditions and share price.
Part II - OTHER INFORMATION
Item 1.Legal Proceedings
Master Financial Group, Inc. v Genesis Systems, Inc. (Court File No.
62-C7-01-000832) was filed on February 14, 2000, against Genesis Systems, Inc.,
a subsidiary of Genesis Technology Group, in the County of Ramsey, Minnesota,
seeking to rescind a stock subscription agreement made with Genesis Systems,
Inc. This agreement calls for a total subscription to purchase shares of the
Company's stock in the amount of $1,000,000. The payments were to be made in
four equal installments; to date the Company has received $250,000. The Company
believes that this suit is without merit and intends to vigorously contest the
action. Management does not believe this suit will have any material impact on
the company business and financial performance. Other than that, we are not a
party to any material legal proceeding, nor are any of our officers, directors
or affiliates a party adverse to us in any legal or regulatory proceeding.
Item 2. Changes in Securities and Use of Proceeds
Preferred stock
The Company is authorized to issue 20,000,000 shares of Preferred
Stock, par value $.001, with such designations, rights and preferences as may be
determined from time to time by the Board of Directors.
Common stock
In March 2002, the Company issued 300,000 shares of common stock to an
officer in connection with exercise of 300,000 options for net proceeds of
$87,000.
In March 2002, the Company issued 141,000 shares of common stock to a
consultant in connection with exercise of 141,000 options for net proceeds of
$37,500.
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Stock options
On January 25, 2002, the Company entered into a one year consulting
agreement with a third party for business development and marketing services. In
connection with this consulting agreement, which commences on February 1, 2002,
the Company shall grant 50,000 options per month to purchase shares of common
stock for services rendered for an aggregate of 600,000 options. The options
have an exercise price of $.35 per share and expire five years from grant date.
As of March 31, 2002, the Company has granted 100,000 options under this
agreement. The fair value of each 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
ranging of 108 percent; risk-free interest rate of 5.00 percent and an expected
holding periods of 5 years. In connection with these options, the company
recorded consulting expense amounting to $32,550.
In March 2002, 92,000 options were granted to an employee with an
exercise price of $.35 per share. The Company accounts for stock options issued
to employees in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation cost is measured on the date of grant as
the excess of the current market price of the underlying stock over the exercise
price. Since the exercise price was greater than the current market value at the
date of grant, no compensation expense has been recognized.
In March 2002, the Company entered into 12 month consulting agreements
and granted an aggregate of 2,000,000 stock options (1,000,000 each) to two
consultants for business development and marketing services. These options were
granted with an exercise price of $.33 per shares and expire on September 30,
2002. The fair value of each 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 ranging of 108
percent; risk-free interest rate of 5.00 percent and an expected holding periods
of one-half a year. In connection with these options, the company recorded
deferred compensation expense of $176,000, which is being amortized into
consulting expense over the term of the option.
We do not expect to operate as an investment company in accordance with the
investment company act of 1940, and we will limit our activities in order not to
become subject to that act.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
-22-
Item 6. Exhibits and Reports on Form 8-K
(1) Exhibits
Exhibit
Number Description
----------- ----------------
(2) Reports on Form 8-K
On January 14, 2002 the Company filed an 8-K with regard to the Stock
Purchase Agreement with Zhaoli Science and Technology Development Company,
Limited dated November 15, 2001 and the Stock Purchase Agreement with Yastock
Investment Consulting Company, Limited dated December 1, 2001.
-23-
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in West Palm Beach, Florida on May 10,
2002.
GENESIS TECHNOLOGY GROUP, INC.
By: /s/ James Wang
------------------
James Wang
Chairman and Chief Executive Officer
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