UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 30, 2011
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from ______ to _______
Commission File Number:
333-118993
GENESIS ELECTRONICS GROUP, INC.
(Exact name of registrant as specified in its charter)
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Nevada
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41-2137356
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(State or other jurisdiction
of incorporation or organization)
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(
I.R.S. Employer
Identification No.
)
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5555 Hollywood Blvd., Suite 303
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Hollywood, Florida
33021
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(Address of principal executive offices)
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(Zip Code)
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(954) 272-1200
(Registrant’s telephone number, including area code)
Not applicable.
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the 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 by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
x
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
¨
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Accelerated filer
¨
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Non-accelerated filer
¨
(Do not check if a smaller reporting company)
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Smaller reporting company
x
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
¨
No
x
As of November 18, 2011, there were
201,146,387
shares of the issuer’s common stock issued and outstanding.
CAUTIONARY STATEMENT
All statements included or incorporated by reference in this Quarterly Report on Form 10-Q, other than statements or characterizations of historical fact, are “forward-looking statements.” Examples of forward-looking statements include, but are not limited to, statements concerning projected net sales, costs and expenses and gross margins; our accounting estimates, assumptions and judgments; the demand for our products; the competitive nature of and anticipated growth in our industry; and our prospective needs for additional capital. These forward-looking statements are based on our current expectations, estimates, approximations and projections about our industry and business, management’s beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by such words as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing,” similar expressions and variations or negatives of these words. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which are set forth in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2010, which could cause our financial results, including our net income or loss or growth in net income or loss to differ materially from prior results, which in turn could, among other things, cause the price of our common stock to fluctuate substantially. These forward-looking statements speak only as of the date of this report. We undertake no obligation to revise or update publicly any forward-looking statement for any reason, except as otherwise required by law.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
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Page
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Item 1.
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Financial Statements
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4
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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17
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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25
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Item 4.
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Controls and Procedures
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25
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PART II
OTHER INFORMATION
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Item 1.
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Legal Proceedings
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26
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Item 1A.
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Risk Factors
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26
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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26
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Item 3.
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Defaults Upon Senior Securities
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26
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Item 4.
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(Removed and Reserved)
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27
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Item 5.
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Other Information
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27
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Item 6.
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Exhibits
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27
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Signatures
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28
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PART I – FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
GENESIS ELECTRONICS GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
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(unaudited)
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ASSETS
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Current assets
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Cash
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$
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18,405
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$
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5,485
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Inventory, net
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1,405
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1,257
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Note receivable
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10,000
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Prepaid and other current assets
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6,778
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3,160
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Deferred offering costs
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300,000
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300,000
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Total current assets
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336,588
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309,902
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License agreement, net
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8,188
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84,334
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Total assets
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$
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344,776
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$
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394,236
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LIABILITIES AND STOCKHOLDERS' DEFICIT
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Current liabilities
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Accounts payable and other accrued expenses
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$
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245,362
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$
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206,872
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Accrued payable license agreement
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30,000
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50,000
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Secured convertible debentures,
net of debt discount
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40,000
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21,168
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Convertible promissory notes,
net of debt discount
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110,573
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-
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Convertible debt
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931,919
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931,919
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Note payable
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15,647
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15,647
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Loans payable
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40,000
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40,000
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Due to related party
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-
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11,510
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Total liabilities
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1,413,501
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1,277,116
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Stockholders' deficit
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Common stock, $0.001 par value,
300,000,000 authorized, 201,146,387 and
168,831,906 issued and outstanding,
respectively
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190,376
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168,832
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Additional paid-in-capital
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8,148,624
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7,907,153
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Accumlated deficit
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(9,406,225
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)
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(8,953,865
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)
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Subscription receivable
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(1,500
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)
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(5,000
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)
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Total stockholders' deficit
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(1,068,725
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)
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(882,880
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Total liabilities and stockholders' deficit
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$
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344,776
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$
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394,236
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See accompanying notes to these consolidated financial statements.
GENESIS ELECTRONICS GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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2011
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2010
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2011
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2010
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Net sales
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$
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-
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$
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-
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$
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4,428
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$
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-
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Cost of sales
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-
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-
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2,858
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-
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Gross margin
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-
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-
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1,570
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-
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Operating expenses
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Advertising
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-
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1,720
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-
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1,720
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Selling, marketing
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-
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-
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25,064
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-
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Professional fees
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14,165
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19,385
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37,939
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19,386
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Consulting fees
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6,307
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8,368
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51,408
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23,200
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General and administrative
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13,818
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21,362
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34,560
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90,548
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Depreciation
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-
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-
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-
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504
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Amortization of license agreement
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24,562
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(2,246
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)
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76,146
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-
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Amortization of debt discount
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9,856
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-
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40,256
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-
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Total operating expenses
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68,708
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48,589
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265,373
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135,358
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Loss from operations
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(68,708
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)
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(48,589
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)
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(263,803
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)
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(135,358
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)
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Other (income) expense
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Gain on sale of assets
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(10,000
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)
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-
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(10,000
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)
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Interest expense
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11,256
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11,136
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16,152
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14,621
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Total other (income) expense
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1,256
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11,136
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6,152
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14,621
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Loss from continuing operations before provision
for taxes based on income
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(69,964
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)
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(59,725
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)
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(269,955
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)
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(149,979
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)
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Provision for income taxes
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-
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-
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-
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-
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Loss from continuing operations
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(69,964
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)
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(59,725
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)
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(269,955
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)
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(149,979
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)
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Loss from discontinued operations
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(34,148
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)
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$
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(257,216
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)
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$
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(182,405
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)
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$
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(346,509
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)
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Net loss
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$
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(104,112
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)
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$
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(316,941
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)
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$
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(452,360
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)
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$
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(496,488
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)
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Basic and diluted loss per share
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$
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(0.00
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)
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$
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(0.00
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)
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$
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(0.00
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)
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$
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(0.00
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)
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Basic and diluted weighted-average shares outstanding
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183,717,672
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161,517,346
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171,722,848
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157,593,360
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See accompanying notes to these consolidated financial statements.
GENESIS ELECTRONICS GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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Nine Months Ended
September 30,
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2011
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2010
|
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Cash flows from operating activities
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Net loss
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$
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(452,360
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)
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$
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(496,488
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)
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Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
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Depreciation
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-
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|
504
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Amortization of license agreement
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76,146
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-
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Amortization of debt discount
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2,970
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12,599
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Amortization of deferred financing costs
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77,543
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12,600
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Common stock issued for services
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8,765
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198,000
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Service performed applied against subscription receivable
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-
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20,000
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Changes in assets and liabilities (net of dispositions
and acquisitions)
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Inventory
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(148
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)
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|
|
-
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|
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Note receivable
|
|
|
(10,000
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)
|
|
|
-
|
|
|
Prepaid and other current assets
|
|
|
(3,618
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)
|
|
|
11,000
|
|
|
Accounts payable and accrued expenses
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|
|
38,489
|
|
|
|
(10,366
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)
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Accrued payable license agreement
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|
|
(20,000
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)
|
|
|
-
|
|
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Debt discount from convertible promissory notes
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74,503
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|
|
|
-
|
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Subscription receivable
|
|
|
3,500
|
|
|
|
-
|
|
|
Deferred revenues
|
|
|
-
|
|
|
|
(113
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)
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Net cash (used in ) operating activities
|
|
|
(204,210
|
)
|
|
|
(252,264
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)
|
|
|
|
|
|
|
|
|
|
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Cash flows from investing activities
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|
|
|
|
|
|
|
|
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Payments on license agreement
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(20,000
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)
|
|
|
(25,600
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)
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|
Net cash (used in ) investing activities
|
|
|
(20,000
|
)
|
|
|
(25,600
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)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock
|
|
|
7,169
|
|
|
|
229,097
|
|
|
Net proceeds from convertible promissory notes
|
|
|
229,081
|
|
|
|
-
|
|
Increase in additional paid-in-capital from issuance
of common stock and convertible debt discount
|
|
|
12,390
|
|
|
|
-
|
|
|
Payments to related party advance
|
|
|
(11,510
|
)
|
|
|
-
|
|
|
Net cash provided by financing activities
|
|
|
237,130
|
|
|
|
229,097
|
|
|
Net increase (decrease) in cash
|
|
|
12,920
|
|
|
|
(48,767
|
)
|
|
Cash at beginning of period
|
|
|
5,485
|
|
|
|
66,069
|
|
|
Cash at end of period
|
|
$
|
18,405
|
|
|
$
|
17,302
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Non-cash investing and financing activities
|
|
|
|
|
|
|
|
|
Secured convertible debenture issued in connection
with securities purchase agreement
|
|
$
|
-
|
|
|
$
|
20,000
|
|
See accompanying notes to these consolidated financial statements.
GENESIS ELECTRONICS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOT
E 1 – ORGANIZATION AND BUSINESS
Genesis Electronics Group, Inc., formerly Pricester.com, Inc., was incorporated under the name Pricester, Inc. on April 19, 2001 in the State of Florida. Pursuant to Articles of Amendment filed on February 24, 2009, the name of the registrant was changed to Genesis Electronics Group, Inc.
On February 11, 2005, Pricester.Com (the "Company") merged into Pricester.com, Inc, ("BA22") a public non-reporting company (that was initially incorporated in Nevada in March 1998 as Business Advantage #22, Inc). BA22 acquired 100% of the Company's outstanding common stock by issuing one share of its common stock for each share of the Company's then outstanding common stock of 21,262,250 shares. The acquisition was treated as a recapitalization for accounting purposes.
Through December 31, 2005, the Company was a developmental stage e- commerce company. The Company currently operates an e-commerce website that enables any business to establish a fully functional online retail presence. Pricester.com is an Internet marketplace which allows vendors to host their website with product and service listings and allows consumers to search for listed products and services.
In May 2008, the Company obtained through a vote of majority of its shareholders the approval to increase the authorized common shares from 50,000,000 to 300,000,000 shares of common stock at $0.001 par value.
On May 22, 2008, the Company completed a share exchange with Genesis Electronics, Inc., a Delaware corporation ("Genesis") which is described below.
The share exchange was accounted for as a purchase method acquisition pursuant to FASB ASC 805 "Business Combinations". Accordingly, the purchase price was allocated to the fair value of the assets acquired and the liabilities assumed. The Company was the acquirer for accounting purposes and Genesis was the acquired company.
Genesis was originally formed in Delaware on October 22, 2001 and is engaged in the development of solar and alternative energy applications for consumer devices such as mobile phones.
In November 2008, the Company obtained through a vote of majority of its shareholders the approval to change the Company's name to Genesis Electronics Group, Inc. In February 2009, the Company filed an amendment to its Articles of Incorporation with the Secretary of State of Nevada. The Company changed its name to Genesis Electronics Group, Inc.
On May 22, 2008, the Company entered into an Agreement and Plan of Share Exchange (the "Acquisition Agreement") by and among the Company, Genesis Electronics, Inc. ("Genesis") and the Genesis Stockholders.
Upon closing of the merger transaction contemplated under the Acquisition Agreement (the "Acquisition"), on May 22, 2008, the Company acquired all of the outstanding common shares of Genesis and Genesis became a wholly-owned subsidiary of the Company.
The Company was the acquirer for accounting purposes and Genesis was the acquired company. Accordingly, the Company applied push-down accounting and adjusted to fair value all of the assets and liabilities directly on the financial statements of the Subsidiary, Genesis Electronics, Inc.
Genesis Electronics Group, Inc. (the “Company”) and it’s wholly owned subsidiary Genesis Electronics, Inc. (“Genesis”), operates in one reportable business segment, solar and alternative energy applications for consumer devices such as mobile phones.
Prior to July 20, 2011 the Company also operated an e-commerce website that enabled a business to establish a fully functional online retail presence. Pricester.com was an Internet marketplace which allowed vendors to host their website with product and service listings and allowed consumers to search for listed products and services. On July 20, 2011 the Company sold all of the assets to its Website segment.
Liquidity and Going Concern
The accompanying unaudited consolidated financial statements have been prepared assuming that the Company will continue as a going concern. This contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company incurred a net loss of $452,360 for the nine months ended September 30, 2011, as compared to a net loss of $496,488 for the nine months ended September 30, 2010. Additionally, the Company experienced a net loss of $828,000 for the year ended December 31, 2010 and had experienced net losses in each of the prior nine years. These matters, among others, raise substantial doubt about the Company’s liquidity and ability to fund future operations.
At September 30, 2011, the Company had cash of only $18,405 and significant current liabilities.
Accordingly, the Company has limited liquidity and access to capital. The Company has insufficient liquidity to fund its operations for the next twelve months or less. In addition, any of the following factors could result in insufficient capital to fund the Company’s operations for a period significantly shorter than twelve months:
|
|
●
|
if the Company’s capital requirements or cash flow vary materially from its current projections;
|
|
|
●
|
if the Company is unable to timely collect its accounts receivable;
|
|
|
●
|
if the Company is unable to timely bring new successful products to market; or
|
|
|
●
|
if other unforeseen circumstances occur.
|
These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern and the Company’s independent registered public accounting firm has issued a report expressing substantial doubt about the Company’s ability to continue as a going concern.
The Company’s plans for correcting these deficiencies include ongoing efforts to bring new products to market and explore other products with its customers, seeking new equity capital and timely collection of accounts receivable.
The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the inability of the Company to continue as a going concern.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements and should be read in conjunction with the consolidated financial statements for the year ended December 31, 2010, and notes thereto included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on April 12, 2011. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of adjustments of a normal recurring nature, necessary for a fair presentation of the Company’s financial position as of September 30, 2011, and its results of operations for the periods presented. These unaudited consolidated financial statements are not necessarily indicative of the results to be expected for the entire year.
The report of the Company’s independent registered public accounting firm dated April 12, 2011 contained in the Company’s financial statements as of and for the year ended December 31, 2010 includes a paragraph that explains that the Company has incurred significant recurring losses, has serious liquidity concerns and may require additional financing in the foreseeable future. The report concludes that these matters, among others, raise substantial doubt about the Company’s ability to continue as a going concern. Reports of independent auditors questioning a company’s ability to continue as a going concern are generally viewed unfavorably by analysts and investors. This report may make it difficult for the Company to raise additional financing necessary to grow or operate its business. The Company urges potential investors to review this report before making a decision to invest in Genesis Electronics Group, Inc.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates and assumptions.
Certain amounts from prior periods have been reclassified to conform with current period presentation and all significant inter-company balances have been eliminated.
NOTE 3 – FAIR VALUE MEASUREMENTS
The Company’s financial assets that are measured on a recurring basis at fair value as of September 30, 2011 and December 31, 2010 consisted only of cash in the amount of $18,405 and $5,485, respectively.
Level 1
. The Company utilizes the market approach to determine the fair value of its assets and liabilities under Level 1 of the fair value hierarchy. The market approach pertains to transactions in active markets involving identical or comparable assets or liabilities.
Level 2
. The fair values determined through Level 2 of the fair value hierarchy are derived principally from or corroborated by observable market data. Inputs include quoted prices for similar assets, liabilities (risk adjusted), and market-corroborated inputs, such as market comparables, interest rates, yield curves, and other items that allow value to be determined.
Level 3
. The fair values determined through Level 3 of the fair value hierarchy are derived principally from unobservable inputs to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset (or similar assets) at the measurement date. As of June 30, 2011, no fair value measurements for assets or liabilities under Level 3 were recognized in the Company’s consolidated financial statements.
There were no changes in the Company’s valuation techniques during the nine months ended September 30, 2011.
The Company is not exposed to changes in interest rates which could result in cash flow risks.
NOTE 4 – LICENSE AGREEMENT
During November 2009, the Company licensed the use of certain patents from a third party. This license agreement will aid the Company as it furthers its business plan. The patents are for the conversion of solar energy in to batteries for use with cells phone and iPod chargers. As of September 30, 2011 and December 31, 2010 the license agreement consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
License agreement
|
|
$
|
196,500
|
|
|
$
|
196,500
|
|
|
Less: Accumulated amortization
|
|
|
(188,312
|
)
|
|
|
(112,166
|
)
|
|
Total
|
|
$
|
8,188
|
|
|
$
|
84,334
|
|
For the three months and nine months ended September 30, 2011, amortization expense amounted to $24,562 and $76,146, respectively. Accrued payable related to this license agreement as of September 30, 2011 and December 31, 2010 amounted to $30,000 and $50,000, respectively.
NOTE 5 – ACCOUNTS PAYABLE AND OTHER ACCRUED EXPENSES
Accounts payable and other accrued expenses as of September 30, 2011 and December 31, 2010 consisted of the following:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
212,623
|
|
|
$
|
172,269
|
|
|
Accrued compensation and related benefits
|
|
|
7,010
|
|
|
|
9,371
|
|
|
Accrued interest
|
|
|
25,729
|
|
|
|
24,737
|
|
|
Other accrued expenses
|
|
|
-
|
|
|
|
495
|
|
|
|
|
$
|
245,362
|
|
|
$
|
206,872
|
|
NOTE 6 – LOANS PAYABLE
On May 22, 2008, in connection with the acquisition of Genesis, the Company assumed loans payable from certain third parties. These loans bear 8% interest per annum and are payable on demand. As of September 30, 2011, loans payable and related accrued interest amounted to $40,000 and $4,037, respectively. As of December 31, 2010, loans payable and related accrued interest amounted to $40,000 and $14,771, respectively.
NOTE 7 – RELATED PARTY TRANSACTIONS
An officer of the Company advanced funds to the Company for working capital purposes. The advances are non-interest bearing and are payable on demand. At September 30, 2011 and December 31, 2010, the Company owed this related party $0 and $11,510, respectively.
NOTE 8 – NOTE PAYABLE
On May 22, 2008, in connection with the acquisition of Genesis, the Company assumed a note payable from a third party. These loans bear 8% interest per annum and is payable on demand. As of September 30, 2011 and December 31, 2010, note payable and related accrued interest amounted to $15,647 and $8,732, respectively.
NOTE 9 – CONVERTIBLE DEBT
On May 22, 2008, in connection with the acquisition of Genesis, the Company assumed certain debts from a third party, Corporate Debt Solutions ("Corporate Debt") amounting to $1,049,717. Corporate Debt assumed a total of $1,049,717 of promissory notes issued by two former officers of Genesis and a certain third party. These promissory notes were issued to the Company's subsidiary, Genesis. Immediately following the closing of the acquisition agreement, on May 23, 2008, the Company entered into a settlement agreement with Corporate Debt Solutions ("Corporate Debt"). Pursuant to the settlement agreement, the Company shall issue shares of common stock and deliver to Corporate Debt, to satisfy the principal and interest due and owing through the issuance of freely trading securities of up to 100,000,000 shares. The parties have agreed that Corporate Debt shall have no ownership rights to the Settlement Shares not yet issued until it has affirmed to the Company that it releases the Company for the proportionate amount of claims represented by each issuance. The said requested number of shares of common stock is not to exceed 4.99% of the outstanding stock of the Company at any one time. In connection with this settlement agreement, the Company recorded and deemed such debt as a convertible liability with a fixed conversion price of $0.01. Accordingly, the Company recognized a total debt discount of $1,049,717 due to a beneficial conversion feature and such debt discount was immediately amortized to interest expense during fiscal year 2008. In June 2008, the Company issued 2,223,456 shares in connection with the conversion of this convertible debt. The fair value of such shares issued amounted to approximately $23,346.
Between July 2008 and August 2008, the Company issued 8,995,374 shares in connection with the conversion of this convertible debt. The fair value of such shares issued amounted to approximately $94,452.
At September 30, 2011 and December 31, 2010, convertible debt amounted to $931,919.
NOTE 10 – SECURED CONVERTIBLE DEBENTURE
In May 2010, the Company issued a 9% Secured Convertible Debenture for $20,000 to Tangiers Investors, LP in connection with the Securities Purchase agreement. This debenture matured on December 23, 2010. The Company did not receive the cash proceeds from such issuance of this debenture and accordingly, the Company recorded deferred financing cost of $20,000 and will be amortized over the term of the note. Such deferred financing cost of $20,000 was amortized during fiscal 2010. The Company is currently in negotiation with the note holder to pay off this convertible debt.
The Company had the right to prepay any portion of the principal amount at 150% of such amount along with the accrued interest. This debenture including interest shall be convertible into shares of the Company's common stock at the lower of $0.01 per share or a price of 70% of the average of the two lowest volume weighted average price determined on the then current trading market for ten trading days prior to conversion at the option of the holder. On August 5, 2010, the Company entered into an amendment agreement with the debenture holder whereby the debenture shall be convertible at a fixed conversion price $0.005 per share.
Additionally, in December 2010, the Company issued a 9% Secured Convertible Debenture for $20,000 to Tangiers Investors, LP. This debenture matured on September 15, 2011. The Company may prepay any portion of the principal amount at 150% of such amount along with the accrued interest. This debenture including interest shall be convertible into shares of the Company's common stock at the lower of $0.05 per share or a price of 70% of the average of the two lowest volume weighted average price determined on the then current trading market for ten trading days prior to conversion at the option of the holder. In March 2011, the Company entered into an amendment agreement with the debenture holder whereby this debenture shall be convertible at a fixed conversion price $0.005 per share. The debenture has not been converted as of the date of this filing.
In accordance with ASC 470-20-25, the convertible debentures were considered to have an embedded beneficial conversion feature (BCF) because the effective conversion price was less than the fair value of the Company's common stock. These convertible debentures were fully convertible at the issuance date, therefore the portion of proceeds allocated to the convertible debentures of $40,000 was determined to be the value of the beneficial conversion feature and was recorded as a debt discount and is being amortized over the term of this debenture.
Additionally, the Company evaluated whether or not the convertible debt contains embedded conversion options, which meet the definition of derivatives under ASC 815-15 "Accounting for Derivative Instruments and Hedging Activities" and related interpretations. The Company concluded that since these convertible debts currently have a fixed conversion price of $0.005, the convertible debts are not considered a derivative.
At September 30, 2011, and December 31, 2010, convertible debentures consisted of the following:
|
|
|
|
|
|
|
|
|
Secured convertible debentures
|
|
$
|
40,000
|
|
|
$
|
40,000
|
|
|
Less: Debt discount
|
|
|
-
|
|
|
|
(18,832
|
)
|
|
|
|
$
|
40,000
|
|
|
$
|
21,168
|
|
During the three and nine months ended September 30, 2011, amortization of debt discount amounted to $4,891 and $18,832, respectively. As of September 30, 2011 and December 31, 2010, accrued interest on these debentures amounted to $4,037 and $1,234, respectively.
NOTE 11 – CONVERTIBLE PROMISSORY NOTES
In January 2011, the Company issued a convertible promissory note amounting to $50,000. The note bears interest at 8% per annum and matures on October 5, 2011. The Company paid deferred financing cost of $3,000 in connection with this note payable and is being amortized over the term of the note. The note is convertible at the option of the holder into shares of common stock beginning on the date which is 180 days after the date of this note, at a conversion price equal to 58% of the average of three lowest trading prices during the 10 trading day period of the Company’s common stock prior to the date of conversion.
In February 2011, the Company issued a convertible promissory note amounting to $42,500 with the same terms and conditions of the convertible promissory note issued in January 2011. The Company paid deferred financing cost of $2,500 in connection with this note payable and is being amortized over the term of the note.
In May 2011, the Company issued a convertible promissory note amounting to $20,000 with the same terms and conditions of the convertible promissory note issued in January 2011. The Company paid deferred financing cost of $2,500 in connection with this note payable and is being amortized over the term of the note.
In August 2011, the Company issued a convertible promissory note amounting to $25,000 with the same terms and conditions of the convertible promissory note issued in January 2011. The Company paid deferred financing cost of $2,500 in connection with this note payable and is being amortized over the term of the note.
In accordance with ASC 470-20-25, the convertible note was considered to have an embedded beneficial conversion feature (BCF) because the effective conversion price was less than the fair value of the Company’s common stock. Therefore the portion of proceeds allocated to the convertible debentures of $68,450 was determined to be the value of the beneficial conversion feature and was recorded as a debt discount and is being amortized over the term of the note. The Company evaluated whether or not the convertible note contains embedded conversion options, which meet the definition of derivatives under ASC 815-15 “Accounting for Derivative Instruments and Hedging Activities” and related interpretations. The Company concluded that the convertible notes issued in January 2011 and March 2011 is not considered a derivative until after 180 days from the date of issuance. As of June 30, 2011, accrued interest amounted to $3,444. As of June 30, 2011, amortization of deferred financing cost on these notes amounted to $46,177.
Convertible promissory notes as of September 30, 2011 and December 31, 2010 consisted of the following:
|
|
|
|
|
|
|
|
|
Secured convertible promissory note
|
|
$
|
147,500
|
|
|
$
|
-
|
|
|
Less: Debt discount
|
|
|
(36,927
|
)
|
|
|
-
|
|
|
|
|
$
|
110,573
|
|
|
$
|
-
|
|
For the three and nine months at September 30, 2011, amortization of debt discount amounted to $29,906 and $72,873, respectively,
NOTE 12 – GOING CONCERN
The accompanying unaudited consolidated financial statements are prepared assuming the Company will continue as a going concern. Going concern contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time. The Company has an accumulated deficit of $9,406,225, had net losses and negative working capital and negative cash flows from operations for the nine months ended September 30, 2011 of $452,360, $1,076,913 and $204,210 respectively. While the Company is attempting to increase revenues, the growth has not been significant enough to support the Company's daily operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. For the nine months ended September 30, 2011, the Company sold 7,169,000 common shares for net proceeds of $134,500 and subscription receivable of $22,500 and received net proceeds of $27,500 from the issuance of convertible promissory notes.
Management is attempting to raise additional funds by way of a public or private offering. While the Company believes in the viability of its strategy to increase sales volume and in its ability to raise additional funds, there can be no assurances to that effect. The Company shareholders have continued to advance funds to the Company but there can be no assurance that future advances will be made available.
The Company's limited financial resources have prevented the Company from aggressively advertising its products and services to achieve consumer recognition. These financial statements do not include any adjustments relating to the recoverability and classifications of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence.
NOTE 13 – STOCKHOLDERS' DEFICIT
For the nine months ended September 30, 2011, the Company received net proceeds of $12,000 and $15,500 from subscription receivables, respectively, from the sale of 2,400,000 and 700,000 shares of the Company's common stock. In connection with these sales of the Company’s common stock, the Company issued 1,000,000 shares of common stock to an affiliated company whereby its president is a director of the Company for net proceeds of approximately $10,000.
In February 2011, in connection with a consulting agreement, the Company issued in aggregate 2,000,000 shares of common stock for public relations and marketing services until June 2, 2011. The Company valued these common shares at the fair value on the date of grant at $.04 per share or $80,000 and recorded stock-based compensation and prepaid expense of $40,000 and $40,000 respectively as of March 31, 2011.
NOTE 14 – STOCK-BASED COMPENSATION
Common Stock Issued in Connection with the Exercise of Options
During the nine months ended September 30, 2011 and 2010, the Company did not issue any shares of common stock in connection with the exercise of any employee stock options.
Stock Option Plans
The following table is a summary of the stock options as of September 30, 2011:
|
|
Stock Options
Outstanding
|
Stock Options
Exercisable
|
Weighted- Average
Remaining
Contractual Life
|
Weighted- Average
Exercise Price of
Options Outstanding
|
Weighted- Average
Exercise Price of
Options Exercisable
|
|
$0.40
|
2,025,000
|
2,025,000
|
1 year after effective registration
|
$0.40
|
$0.40
|
NOTE 15 – REPORTABLE SEGMENT
ASC Topic 280 requires use of the "management approach" model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. During the three and nine months ended September 30, 2011 and 2010, the Company operated in two reportable business segments, development of e-commerce websites for businesses and solar and alternative energy applications for consumer devices such as mobile phones.
However, on July 20, 2011 the Company sold the e-commerce website segment and now operates only in the solar and alternative energy applications segment.
Operating Leases
The Company occupies its facility on a month to month lease agreement.
Employment Contracts
The Company entered into an employment agreement on January 14, 2008 with its chief executive officer which expires in January 2013. The employment agreement calls for an issuance of 500,000 free trading shares of the Company's common stock. Additionally, based on this agreement, the Company shall issue 1,000,000 restricted shares of common stock during each fiscal year of the term of this agreement. In October 2008, this agreement was amended whereby the chief executive officer shall received 2,000,000 restricted shares of common stock during each fiscal year instead of 1,000,000 shares which took effect in fiscal 2009.
The Company entered into an employment agreement on January 14, 2008 with an officer of the Company which expires in January 2013. The employment agreement calls for an issuance of 500,000 free trading shares of the Company's common stock. Additionally, based on this agreement, the Company shall issue 1,000,000 restricted shares of common stock during each fiscal year of the term of this agreement. In October 2008, this agreement was amended whereby the officer of the Company shall received 2,000,000 restricted shares of common stock during each fiscal year instead of 1,000,000 shares which took effect in fiscal 2009.
License Agreement
During November 2009, the Company licensed the use of certain patents from a third party. This license agreement will aid the Company as it furthers its business plan. In November 2009, the Company entered into a license agreement with Johns Hopkins University Applied Physics Lab ("JHU/APL") whereby the Company will have a limited exclusive license to JHU/APL's Integrated Power Source patents. The patents are for the conversion of solar energy in to batteries for use with cells phone and iPod chargers, During fiscal 2009 and 2010, the Company paid $40,000 and issued 2 million shares of the Company's common stock. The Company valued these common shares at the fair market value on the date of grant at $.022 per share or $44,000. In November 2010, the Company entered into an amendment agreement in connection with this license agreement. Pursuant to the amended license agreement, the Company additionally paid $25,000 and issued 500,000 shares of the Company's common stock in November 2010. The Company valued these common shares at the fair market value on the date of grant at $.075 per share or $37,500.
The final license payment of $30,000 under the amended license agreement was due on August 24, 2011 and the Company is currently in negotiations to restructure a payment schedule for the balance due under the agreement.
The Company has capitalized the patent license for a total of $196,500 and is amortizing them over the term of this license agreement. The Company has recognized $24,562 and $76,146 of amortization expense during the three and nine months ended September 30, 201, respectively. Accrued payable related to this license agreement as of September 30, 2011 and December 31, 2010 amounted to $30,000 and $50,000 respectively.
The Company shall also pay minimum annual royalty payments as defined in the license agreement. The royalty is 6% on net sales of the product sold using the technology under these patents. In addition, the Company shall pay sales milestone payments as set forth in this license agreement. The Company may terminate this agreement and the license granted herein, for any reason, upon giving JHU/APL sixty days written notice.
Service Agreements
The Company periodically enters into various agreements for the provision of services from third parties including, but not limited to, public relations, financial consulting, sales consulting and manufacturing consulting. The agreements generally are ongoing until such time as they are terminated. Compensation for services is paid either on a fixed monthly rate or based on a percentage, as specified. These expenses are included in operating expenses in the accompanying consolidated statements of operations.
NOTE 17 – SUBSEQUENT EVENTS
On October 24, 2011 and October 28, 2011, the Convertible Promissory Note holder converted $8,000 and $5,000 of the outstanding notes into 8,888,889 shares and 3,846,154 shares of the Company’s common stock, respectively, in accordance with the terms of the notes.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our unaudited consolidated financial statements for the three and nine months ended September 30, 2011 and the related notes and the other financial information included elsewhere in this report. This discussion contains forward-looking statements regarding the data storage and consumer electronics industries and our expectations regarding our future performance, liquidity and financial resources. Our actual results could differ materially from those expressed in these forward-looking statements as a result of any number of factors, including those set forth under the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2010 and elsewhere in this report.
Overview
Through December 31, 2005, we were a developmental stage e-commerce company. We operated an e-commerce website that enabled any business to establish a fully functional online retail presence. The website, Pricester.com, was an Internet marketplace which allowed vendors to host their website with product and service listings and allowed consumers to search for listed products and services. On July 20, 2011 the Company sold all of the assets to the Website segment.
On May 22, 2008, we completed a merger with Genesis Electronics, Inc., a Delaware corporation. Genesis was originally formed in Delaware on October 22, 2001 and is engaged on the development of solar and alternative energy applications for consumer devices such as mobile phones.
Until its acquisition of Genesis, our business was solely focused on our internet shopping portal, and building and hosting websites for the small business sector. Since the sale of the Website segment on July 22, 2011, our primary focus has now shifted towards the further development and marketing of solar and alternative energy applications for consumer devices such as mobile phones..
Plan of Operations
We have only received minimal revenues. We do not have sufficient cash on hand to meet funding requirements for the next twelve months. Although we eventually intend to primarily fund general operations and our marketing program with revenues received from the sale of the Pricester Custom Designed Websites, hosting and transaction fees, our revenues are not increasing at a rate sufficient to cover our monthly expenses in the near future. We will have to seek alternative funding through debt or equity financing in the next twelve months that could result in increased dilution to the shareholders. In May 2010, we entered into a Securities Purchase Agreement with Tangiers Investors, LP ("Investor"). We agreed to issue and sell to the investor pursuant to the terms of this agreement for an aggregate purchase price of up to $5,000,000. The purchase price shall be set at 85% of the lowest volume weighted average price of our common stock during the pricing period as quoted by Bloomberg, LP on the Over-the-Counter Bulletin Board. We shall prepare and file a Registration Statement with the Securities and Exchange Commission and shall cause such Registration statement to be declared effective prior to the first sale to the investor of our common stock.
Going Concern
As reflected in the accompanying consolidated financial statements, we had an accumulated deficit of approximately $9.4 million, a working capital deficit of $1,076,913, had net losses and cash used in operations for the nine months ended September 30, 2011 of $452,360 and $204,210, respectively. While we are attempting to increase sales, it has not been significant enough to support the registrant's daily operations. We will attempt to raise additional funds by way of a public or private offering. While we believe in the viability of our strategy to improve sales volume and in our ability to raise additional funds, there can be no assurances to that effect. Our limited financial resources have prevented us from aggressively advertising our products and services to achieve consumer recognition. Our ability to continue as a going concern is dependent on our ability to further implement our business plan and generate increased revenues.
Critical Accounting Policies
Our consolidated financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by management's applications of accounting policies. Critical accounting policies for the registrant include the useful life of property and equipment and web development costs.
We review the carrying value of intangibles and other long-lived assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparison of its carrying amount to the undiscounted cash flows that the asset or asset group is expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the property, if any, exceeds its fair market value.
The following policies reflect specific criteria for the various revenues streams of the Company:
We earn revenue primarily from website design, transaction fees, hosting fees and sales of solar-powered consumer products.
- Website design revenue is recognized as earned when the website is complete, control is transferred and the customer has accepted its website, usually within seven days of the order.
- Transaction fee income comprises fees charged for use of credit cards or other forms of payment in the purchase of items sold on the customers' websites. The transaction fee income is recognized as earned when funds transfers (via credit card or other forms of payments) between the buyer and seller has been authorized.
- Revenues from website hosting fees are recognized when earned.
- Revenues from the sale of solar-powered consumer products are recognized upon delivery of the product to the customer.
Web hosting fees received in advance are reflected as deferred revenue on the accompanying consolidated balance sheet.
We apply ASC 605-25: Multiple Element Arrangements, to account for revenue arrangements with multiple deliverables. ASC 605-25 addresses certain aspects of accounting by a vendor for arrangements under which the vendor will perform multiple revenue-generating activities. When an arrangement involves multiple elements, the entire fee from the arrangement is allocated to each respective element based on its relative fair value and recognized when revenue recognition criteria for each element are met. Fair value for each element is established based on the sales price charged when the same element is sold separately.
In December 2004, the Financial Accounting Standards Board, or FASB, issued FASB ASC Topic 718: Compensation - Stock Compensation. Under ASC 718, companies are required to measure the compensation costs of share- based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. Companies may elect to apply this statement either prospectively, or on a modified version of retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods under ASC 718. Upon adoption of ASC 718, the Company elected to value employee stock options using the Black-Scholes option valuation method that uses assumptions that relate to the expected volatility of the Company's common stock, the expected dividend yield of our stock, the expected life of the options and the risk free interest rate. Such compensation amounts, if any, are amortized over the respective vesting periods or period of service of the option grant.
Results of Operations
The tables presented below, which compare our results of operations from one period to another, present the results for each period, the change in those results from one period to another in both dollars and percentage change and the results for each period as a percentage of net sales. The columns present the following:
|
|
●
|
The first two data columns in each table show the dollar results for each period presented.
|
|
|
|
|
|
|
●
|
The columns entitled “Dollar Variance” and “Percentage Variance” show the change in results, both in dollars and percentages. These two columns show favorable changes as positive and unfavorable changes as negative. For example, when our net sales increase from one period to the next, that change is shown as a positive number in both columns. Conversely, when expenses increase from one period to the next, that change is shown as a negative in both columns.
|
|
|
|
|
|
|
●
|
The last two columns in each table show the results for each period as a percentage of net sales.
|
Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010 (Unaudited)
|
|
|
Three Months Ended
September 30,
|
|
|
|
|
|
|
|
|
Results as a
Percentage of
Net Sales
|
|
|
|
|
2011
|
|
|
2010
|
|
|
(Unfavorable)
|
|
|
(Unfavorable)
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
0.0%
|
|
|
|
*
|
|
|
|
*
|
|
|
Cost of sales
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0%
|
|
|
|
*
|
|
|
|
*
|
|
|
Gross margin
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0%
|
|
|
|
*
|
|
|
|
*
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
-
|
|
|
|
1,720
|
|
|
|
1,720
|
|
|
|
100.0%
|
|
|
|
*
|
|
|
|
*
|
|
|
Selling, marketing
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0%
|
|
|
|
*
|
|
|
|
*
|
|
|
Professional fees
|
|
|
14,165
|
|
|
|
19,385
|
|
|
|
5,220
|
|
|
|
26.9%
|
|
|
|
*
|
|
|
|
*
|
|
|
Consulting fees
|
|
|
6,307
|
|
|
|
8,368
|
|
|
|
2,061
|
|
|
|
24.6%
|
|
|
|
*
|
|
|
|
*
|
|
|
General and administrative
|
|
|
13,818
|
|
|
|
21,362
|
|
|
|
7,544
|
|
|
|
35.3%
|
|
|
|
*
|
|
|
|
*
|
|
|
Depreciation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0%
|
|
|
|
*
|
|
|
|
*
|
|
|
Amortization of license agreement
|
|
|
24,562
|
|
|
|
(2,246
|
)
|
|
|
(26,808
|
)
|
|
|
-1193.6%
|
|
|
|
*
|
|
|
|
*
|
|
|
Amortization of debt discount
|
|
|
9,856
|
|
|
|
-
|
|
|
|
(9,856
|
)
|
|
|
-100.0%
|
|
|
|
*
|
|
|
|
*
|
|
|
Other expense
|
|
|
1,256
|
|
|
|
11,136
|
|
|
|
9,880
|
|
|
|
88.7%
|
|
|
|
*
|
|
|
|
*
|
|
Loss from continuing operations
before provision for income taxes
|
|
|
(69,964
|
)
|
|
|
(59,725
|
)
|
|
|
10,239
|
|
|
|
-17.1%
|
|
|
|
*
|
|
|
|
*
|
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0%
|
|
|
|
*
|
|
|
|
*
|
|
|
Net loss from continuing operations
|
|
|
(69,964
|
)
|
|
|
(59,725
|
)
|
|
|
10,239
|
|
|
|
17.1%
|
|
|
|
*
|
|
|
|
*
|
|
Discontinued operations, net of
income tax
|
|
|
(34,148
|
)
|
|
|
(257,216
|
)
|
|
|
223,068
|
|
|
|
86.7%
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(104,112
|
)
|
|
$
|
(316,941
|
)
|
|
$
|
233,307
|
|
|
|
73.6%
|
|
|
|
*
|
|
|
|
*
|
|
* Calculation has no value as there were no net sales during the period
There were no net sales of our solar products for the three months ended September 30, 2011 and September 30, 2010, respectively. We are continuing to create customer awareness for our products. There can be no assurances that we will continue to recognize similar net revenue in future periods or that we will ever report profitable operations.
Total operating expenses for the three months ended September 30, 2011 were $68,708, an increase of $20,119, or approximately 41%, from total operating expenses for the three months ended September 30, 2010 of $48,589.
The increased operating expenses are primarily attributable to increases of $26,808 in amortization of license agreement and $9,856 in amortization of debt discount all of which were partially offset by decreases of $7,544 in general and administrative expenses; $5,220 in professional fees; $2,061 in consulting fees and $1,720 in advertising expenses;.
We reported a net loss of $104,112 or $0.00 per share for the three months ended September 30, 2011 from continuing operations as compared to a net loss of $316,941 or $0.00 per share for the three months ended September 30, 2010. Net loss from discontinued operations were $34,148 or $0.00 per share for the three months ended September 30, 2011 as compared to a net loss from discontinued operations of $257,216 or $0.00 for the three months ended September 20, 2010.
Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010 (Unaudited)
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
|
|
|
Results as a
Percentage of
Net Sales
|
|
|
|
|
2011
|
|
|
2010
|
|
|
(Unfavorable)
|
|
|
(Unfavorable)
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
4,428
|
|
|
$
|
-
|
|
|
$
|
4,428
|
|
|
|
100.0%
|
|
|
|
100.0%
|
|
|
|
*
|
|
|
Cost of sales
|
|
|
2,858
|
|
|
|
-
|
|
|
|
(2,858
|
)
|
|
|
-100.0%
|
|
|
|
64.5%
|
|
|
|
*
|
|
|
Gross margin
|
|
|
1,570
|
|
|
|
-
|
|
|
|
1,570
|
|
|
|
100.0%
|
|
|
|
35.5%
|
|
|
|
*
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
-
|
|
|
|
1,720
|
|
|
|
1,720
|
|
|
|
100.0%
|
|
|
|
0.0%
|
|
|
|
*
|
|
|
Selling, marketing
|
|
|
25,064
|
|
|
|
-
|
|
|
|
(25,064
|
)
|
|
|
-100.0%
|
|
|
|
566.0%
|
|
|
|
*
|
|
|
Professional fees
|
|
|
37,939
|
|
|
|
19,386
|
|
|
|
(18,553
|
)
|
|
|
-95.7%
|
|
|
|
856.8%
|
|
|
|
*
|
|
|
Consulting fees
|
|
|
51,408
|
|
|
|
23,200
|
|
|
|
(28,208
|
)
|
|
|
-121.6%
|
|
|
|
1161.0%
|
|
|
|
*
|
|
|
General and administrative
|
|
|
34,560
|
|
|
|
91,052
|
|
|
|
56,492
|
|
|
|
62.0%
|
|
|
|
780.5%
|
|
|
|
*
|
|
|
Amortization of license agreement
|
|
|
76,146
|
|
|
|
-
|
|
|
|
(76,146
|
)
|
|
|
-100.0%
|
|
|
|
1719.6%
|
|
|
|
*
|
|
|
Amortization of debt discount
|
|
|
40,256
|
|
|
|
-
|
|
|
|
(40,256
|
)
|
|
|
-100.0%
|
|
|
|
909.1%
|
|
|
|
*
|
|
|
Other expense
|
|
|
6,152
|
|
|
|
14,621
|
|
|
|
8,469
|
|
|
|
57.9%
|
|
|
|
138.9%
|
|
|
|
*
|
|
Loss from continuing operations
before provision for income taxes
|
|
|
(269,955
|
)
|
|
|
(149,979
|
)
|
|
|
(119,976
|
)
|
|
|
-80.0%
|
|
|
|
-6096.5%
|
|
|
|
*
|
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0%
|
|
|
|
0.0%
|
|
|
|
*
|
|
|
Net loss from continuing operations
|
|
|
(269,955
|
)
|
|
|
(149,979
|
)
|
|
|
(119,976
|
)
|
|
|
-80.0%
|
|
|
|
-6096.5%
|
|
|
|
*
|
|
Discontinued operations, net of
income tax
|
|
|
(182,405
|
)
|
|
|
(346,509
|
)
|
|
|
164,104
|
|
|
|
47.4%
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(452,360
|
)
|
|
$
|
(496,488
|
)
|
|
$
|
44,128
|
|
|
|
-8.9%
|
|
|
|
-10215.9%
|
|
|
|
*
|
|
* Calculation has no value as there were no net sales during the period
Net sales for the nine months ended September 30, 2011 were $4,428 as compared to net sales of $0 for the nine months ended September 30, 2010. The increase in revenues is primarily attributable to the sales of our initial production of our solar and alternative energy application products. There can be no assurances that we will continue to recognize similar net revenue in future periods or that we will ever report profitable operations.
Gross margin for the nine months ended September 30, 2011increased by $1,570 as compared to the nine months ended September 30, 2010 as a result of the delivery of our solar and alternative energy application products.
Total operating expenses for the nine months ended September 30, 2011 were $271,525, an increase of $121,546, or approximately 81%, from total operating expenses for the nine months ended September 30, 2010 of $149,979.
The increased operating expenses are primarily attributable to increases of $76,146 of amortization of the license agreement, $40,256 of amortization of debt discount, $28,208 in consulting fees, $25,064 in selling and marketing expenses and $18,553 in professional fees, all of which were partially offset by decreases of $56,492 in general and administrative expenses, $8,469 in other expense which is primarily interest expenses that was partially offset from the sale of assets in the nine months ended September 30, 2011 and $1,720 in advertising expenses and.
We reported a net loss of $452,360 or $0.00 per share for the nine months ended September 30, 2011 as compared to a net loss of $496,488 or $0.00 per share for the nine months ended September 30, 2010.
Liquidity and Capital Resources
During the nine months ended September 30, 2011, we received net proceeds of $32,500 and subscription receivable of $15,500 from the sale of our common stock. For the three months ended September 30, 2011, we collected subscription receivable of $12,000 and received net proceeds of $27,500,000 from the issuance of convertible promissory notes. These funds were used for working capital purposes.
Net cash used in operating activities for the nine months ended September 30, 2011 amounted to $204,210 and was primarily attributable to our net losses of $452,360 offset by amortization of deferred financing cost of $77,543 , amortization of license agreement of $76,146, add back of reductions in assets and liabilities of $29,378 and amortization of debt discount of $2,970. Net cash used in operating activities for the nine months ended September 30, 2010 amounted to $252,264 and was primarily attributable to our net losses of $496,488 offset by $198,000 of stock issued for services, amortization of deferred financing costs of $12,600, amortization of debt discount of $12,599, depreciation of $504 and offset by changes in assets and liabilities of $20,521.
Net cash flows provided by financing activities was $237,130 for the nine months ended September 30, 2011 as compared to net cash provided by financing activities of $229,097 for the nine months ended September 30, 2010, a decrease of $4,357. For the nine months ended September 30, 2011, we collected net proceeds of $229,081 from the issuance of convertible notes received, and received proceeds from the sale of common stock and collection of subscription receivable of $7,196, all partially offset by payments on related party advances of $11,510. For the nine months ended September 30, 2010, we received proceeds from the sale of common stock and collection of subscription receivable of $220,097.
We reported a net increase in cash for the nine months ended September 30, 2011 of $12,920 as compared to a net decrease in cash of $48,767 for the nine months ended September 30, 2010. At September 30, 2011, we had cash on hand of $18,405.
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
The following tables summarize our contractual obligations as of September 30, 2011:
|
|
|
Payments Due by Period
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
40,000
|
|
|
$
|
40,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Loans payable
|
|
|
15,647
|
|
|
|
15,647
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Secured convertible debt
|
|
|
40,000
|
|
|
|
40,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Convertible promissory notes
|
|
|
124,500
|
|
|
|
124,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Accrued interest
|
|
|
25,729
|
|
|
|
25,729
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
License fee
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total contractual obligations
|
|
$
|
275,876
|
|
|
$
|
275,876
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
During November 2009, we licensed the use of certain patents from a third party. This license agreement will aid us as we further our business plan. In November 2009, we entered into a license agreement with Johns Hopkins University Applied Physics Lab for a limited exclusive license to JHU/APL's Integrated Power Source patents. The patents are for the solar powered cell phone and iPod chargers. During fiscal 2009 and 2010, the Company paid $40,000 and issued 2 million shares of the Company's common stock. We valued these common shares at the fair market value on the date of grant at $.022 per share or $44,000. In November 2010, we entered into an amendment agreement in connection with this license agreement. Pursuant to the amended license agreement, the Company additionally paid $25,000 and issued 500,000 shares of the Company's common stock in November 2010. We valued these common shares at the fair market value on the date of grant at $.075 per share or $37,500.
The final license payment of $30,000 under the amended license agreement was due on August 24, 2011 and the Company is currently in negotiations to restructure a payment schedule for the balance due under the agreement.
We shall also pay minimum annual royalty payments as defined in the license agreement. The royalty is 6% on net sales of the product sold using the technology under these patents. In addition, we shall pay sales milestone payments as set forth in this license agreement. We may terminate this agreement and the license granted herein, for any reason, upon giving JHU/APL sixty days written notice.
Securities Purchase Agreement
In May 2010, we entered into a Securities Purchase Agreement with Tangiers Investors, LP. We have agreed to issue and sell to the investor pursuant to the terms of this agreement for an aggregate purchase price of up to $5,000,000. The purchase price shall be set at 85% of the lowest volume weighted average price of our common stock during the pricing period as quoted by Bloomberg, LP on the Over-the-Counter Bulletin Board. We shall prepare and file a registration statement with the Securities and Exchange Commission and shall cause such registration statement to be declared effective prior to the first sale to the investor of our common stock. We issued the Investor a commitment fee of 3,000,000 shares of our common stock pursuant to the Securities Purchase Agreement.
Secured Convertible Debenture
In May 2010, we issued a 9% Secured Convertible Debenture for $20,000 to Tangiers Investors, LP. This debenture matures on December 23, 2010. We had the right to prepay any portion of the principal amount at 150% of such amount along with the accrued interest. This debenture including interest shall be convertible into shares of our common stock at the lower of $0.01 per share or a price of 70% of the average of the two lowest volume weighted average price determined on the then current trading market for ten trading days prior to conversion at the option of the holder. On August 5, 2010, we entered into an amendment agreement with the debenture holder whereby the debenture shall be convertible at a fixed conversion price $0.005 per share.
Additionally, in December 2010, we issued a 9% Secured Convertible Debenture for $20,000 to Tangiers Investors, LP. This debenture matures on September 15, 2011. We may prepay any portion of the principal amount at 150% of such amount along with the accrued interest. This debenture including interest shall be convertible into shares of our common stock at the lower of $0.05 per share or a price of 70% of the average of the two lowest volume weighted average price determined on the then current trading market for ten trading days prior to conversion at the option of the holder. In March 2011, we entered into an amendment agreement with the debenture holder whereby this debenture shall be convertible at a fixed conversion price $0.005 per share.
Off-balance Sheet Arrangements
We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
Recently Issued Accounting Pronouncements
In January 2010, the FASB issued Accounting Standards Update No. 2010-06, “Improving Disclosures about Fair Value Measurements” an amendment to ASC Topic 820, “Fair Value Measurements and Disclosures.” This amendment requires an entity to (i) disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers and (ii) present separate information for Level 3 activity pertaining to gross purchases, sales, issuances, and settlements.
ASU No. 2010-06 is effective for the Company for interim and annual reporting beginning after December 15, 2009, with one new disclosure effective after December 15, 2010. The adoption of ASU No. 2010-06 did not have a material impact on the results of operations and financial condition.
In February 2010, the FASB issued Accounting Standards Update 2010-09,
Amendments to Certain Recognition and Disclosure Requirements
. ASU 2010-09 amends the guidance issued in ASC 855,
Subsequent Events
, by not requiring SEC filers to disclose the date through which an entity has evaluated subsequent events. ASU 2010-09 was effective upon issuance. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In July 2010, the FASB issued ASU No. 2010-20, Receivables (Topic 310) “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”. ASU 2010-20 requires additional disclosures about the credit quality of a company’s loans and the allowance for loan losses held against those loans. Companies will need to disaggregate new and existing disclosures based on how it develops its allowance for loan losses and how it manages credit exposures. Additional disclosure is also required about the credit quality indicators of loans by class at the end of the reporting period, the aging of past due loans, information about troubled debt restructurings, and significant purchases and sales of loans during the reporting period by class. The new guidance is effective for interim- and annual periods beginning after December 15, 2010. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
Other accounting standards that have been issued or proposed by FASB 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.
Quantitative and Qualitative Disclosures About Market Risk
Not applicable to smaller reporting companies.
Item 4.
Controls and Procedures
Disclosure Controls and Procedures
Our management, including M. Thomas Makmann, our chief executive officer, and Thomas L. Gruber, our chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2011.
Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures.
Management conducted its evaluation of disclosure controls and procedures under the supervision of our chief executive officer and our chief financial officer. Based on that evaluation, our management, including Mr. Makmann and Mr. Gruber, concluded that because of the significant deficiencies in internal control over financial reporting described below, our disclosure controls and procedures were not effective as of September 30, 2011.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(F) and 15d-15(F) under the Securities Exchange Act. Our management is also required to assess and report on the effectiveness of our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 on an annual basis. As previously reported on our Form 10-K for the year ended December 31, 2010, management identified significant deficiencies related to:
(i) our internal audit functions and
(ii) a lack of segregation of duties within accounting functions.
Management has determined that our internal audit function is significantly deficient due to insufficient qualified resources to perform internal audit functions.
Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, we will implement procedures to assure that the initiation of transactions, the custody of assets and the recording of transactions will be performed by separate individuals.
We believe that the foregoing steps will remediate the material weaknesses identified above, and we will continue to monitor the effectiveness of these steps and make any changes that our management deems appropriate. Due to the nature of these material weaknesses in our internal control over financial reporting, there is more than a remote likelihood that misstatements which could be material to our annual or interim financial statements could occur that would not be prevented or detected.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1.
Legal Proceedings
None
Item 1A.
Risk Factors
Not applicable to smaller reporting companies
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
For the six months ended June 30, 2011, we received net proceeds of $1,500 and subscription receivable of $2,000 from the sale of 75,000 restricted common shares to non-affiliates.
For the six months ended June 30, 2011, we received net proceeds of $10,000 from the sale of and 1,000,000 restricted common shares to Grandview Partners Capital LLC, an affiliated company. Raymond Purdon, a director of the registrant, is the president of Grandview Partners Capital LLC.
Between April 2011 and May 2011, we received net proceeds of approximately $21,000 from the sale of 2,094,000 restricted common shares to non-affiliates.
In April 2011, we received net proceeds of approximately $10,000 from the sale of 2,000,000 restricted common shares to Grandview Partners Capital LLC, an affiliated company. Raymond Purdon, a director of the registrant, is the president of Grandview Partners Capital LLC.
These shares were issued in a transaction that was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) of the Securities Act.
Item 3.
Defaults Upon Senior Securities
None
Item 4.
(Removed and Reserved)
Not Applicable
Item 5.
Other Information
None
Item 6.
Exhibits
|
Exhibit
Number
|
|
Description
|
|
|
|
|
|
31.1
|
|
Certification Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (*)
|
|
|
|
|
|
31.2
|
|
Certification Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes–Oxley Act of 2002 (*)
|
|
|
|
|
|
32.1
|
|
Certification of President and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (*)
|
|
|
|
|
|
101.INS
|
|
XBRL Instance Document
|
|
|
|
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document
|
|
|
|
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
|
|
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
|
|
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
|
|
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
___________________
(*) Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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|
GENESIS ELECTRONICS GROUP, INC.
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Dated: November 21, 2011
|
By:
|
/s/ M. Thomas Makmann
|
|
|
|
|
M. Thomas Makmann
|
|
|
|
|
President and Chief Executive Officer
|
|
|
|
|
|
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28
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