Attached files
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment 1 to Form 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) Securities
Exchange Act of 1934 for Quarterly Period Ended September 30, 2010
-OR-
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities And Exchange Act of 1934 for the transaction period from
_________ to________
Commission File Number 333-118993
Genesis Electronics Group, Inc.
(Exact name of Registrant in its charter)
Nevada 41-2137356
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification
number)
5555 Hollywood Blvd., Suite 303
Hollywood, Florida 33021
(Address of principal executive offices) (Zip Code)
Registrant's Telephone number, including area code: (954) 272-1200
Indicate by check mark whether the issuer (1) 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 issuer (1) 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 (section 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 [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerate filer, or a small
reporting company as defined by Rule 12b-2 of the Exchange Act):
Large accelerated filer [ ] Non-accelerated filer [ ]
Accelerated filer [ ] Smaller reporting company [x]
2
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [x]
The number of outstanding shares of the registrant's common stock.
November 12, 2010: Common Stock - 165,056,906
Explanatory Note
Our company is filing this Form 10-Q/A for the period ended September
30, 2010 to amend the consolidated financial statements. This amended
report does not reflect events occurring after the filing of the
Form 10-Q on November 12, 2010.
3
GENESIS ELECTRONICS GROUP, INC.
For the quarterly period ended September 30, 2010
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 27
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 36
Item 4. Controls and Procedures 36
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 39
Item 1A. Risk Factors 39
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds 39
Item 3. Defaults upon Senior Securities 39
Item 4. (Removed and Reserved) 39
Item 5. Other Information 39
Item 6. Exhibits 39
SIGNATURES 40
4
GENESIS ELECTRONICS GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
Year ended
September 30, 2010 December 31, 2009
------------------ -----------------
(Unaudited)
(Restated -
See Note 12)
ASSETS
CURRENT ASSETS:
Cash $ 17,302 $ 66,069
Prepaid expense and other
current asset 10,560 14,160
Deferred offering cost 300,000 -
---------- -----------
Total current assets 327,862 80,229
PROPERTY AND EQUIPMENT, net 191 695
License agreement, net 121,917 200,292
----------- -----------
Total assets $ 449,970 $ 281,216
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued
expenses $ 174,491 $ 264,857
Accrued payable on license
agreement 125,000 155,000
Secured convertible debenture,
net of debt discount 12,599 -
Convertible debt 931,919 931,919
Note payable 15,647 15,647
Loans payable 40,000 40,000
Due to related party 14,885 40,485
Deferred revenue 63 176
----------- -----------
Total current liabilities 1,314,604 1,368,084
----------- -----------
STOCKHOLDERS' DEFICIT:
Common stock, $0.001 par
value, 300,000,000
authorized, 163,456,906
and 152,644,072 issued
and outstanding, at September
30, 2010 and December 31,
2009, respectively 163,457 152,644
Additional paid-in capital 7,557,278 6,879,836
Accumulated deficit (8,510,494) (8,125,631)
Subscription receivable (74,875) (73,717)
----------- -----------
Total stockholders'
deficit (864,634) (1,166,868)
----------- -----------
5
Total liabilities and
stockholders' deficit $ 449,970 $ 281,216
============ ===========
See notes to unaudited consolidated financial statements.
6
GENESIS ELECTRONICS GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
2010 2009 2010 2009
-------- -------- -------- --------
(Restated - (Restated -
See Note 12) See Note 12)
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net Sales $ 6,294 $ 14,511 $ 22,311 $ 69,172
--------- --------- --------- ---------
Operating expenses:
Professional fees 9,107 7,832 38,771 30,887
Consulting fees 28,000 27,070 46,400 45,310
Compensation 48,610 21,120 98,770 60,662
Other selling, general
and administrative 71,371 43,621 193,990 107,597
--------- --------- --------- ---------
Total operating
expenses 157,088 99,643 377,931 244,456
--------- --------- --------- ---------
Loss from operations (150,794) (85,132) (355,620) (175,284)
--------- --------- --------- ---------
Other expenses:
Interest expense (22,272) (1,113) (29,243) (199,339)
--------- --------- --------- ---------
Total other expenses (22,272) (1,113) (29,243) (199,339)
--------- --------- --------- ---------
Loss before provision for
income taxes (173,066) (86,245) (384,863) (374,623)
Provision for income taxes - - - -
--------- --------- --------- ---------
Net loss $(173,066) $ (86,245) $(384,863) $(374,623)
========= ========= ========= =========
Net loss per common share
- basic and diluted $ - $ - $ - $ -
========= ========= ========= =========
Weighted average number of
shares outstanding - basic
and diluted 161,517,346 141,389,035 157,593,360 130,816,886
=========== =========== =========== ===========
See notes to unaudited consolidated financial statements.
7
GENESIS ELECTRONICS GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended
September 30,
-------------------------
2010 2009
-------- --------
(Restated -
See Note 12)
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $(384,863) $(374,623)
--------- ---------
Adjustments to reconcile net loss to
net cash used in operations:
Depreciation 504 507
Amortization on license agreement 78,375 -
Common stock issued for services 38,000 8,090
Amortization of debt discount 12,599 -
Amortization of deferred financing cost 12,600 -
Services performed applied against
subscription receivable 20,000 -
Interest expense for the settlement of
a related party loan - 196,000
Changes in assets and liabilities:
Prepaid expenses and other 11,000 (11,000)
Accounts payable and accrued expenses (10,366) 20,488
Accrued payable on license agreement (30,000) -
Deferred revenues (113) (350)
--------- ---------
Total adjustments 132,599 213,735
--------- ---------
Net cash used in operating activities (252,264) (160,888)
--------- ---------
Cash flows from financing activities:
Proceeds from sale of common stock 229,097 199,579
Payments on related party advances (25,600) (6,300)
--------- ---------
Net cash provided by financing activities 203,497 193,279
--------- ---------
Net increase (decrease) in cash (48,767) 32,391
Cash - beginning of the period 66,069 2,319
--------- ---------
Cash - end of the period $ 17,302 $ 34,710
========= =========
8
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 $ -
========= =========
Common stock issued for settlement of
loans $ - $ 49,000
========= =========
Common stock issued as deferred
offering cost $ 300,000 $ -
========= =========
Common stock issued in connection
with accrued salaries $ 80,000 $ -
========= =========
See notes to unaudited consolidated financial statements.
9
GENESIS ELECTRONICS GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-
Q. Accordingly, the consolidated financial statements do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments considered necessary for a fair
presentation have been included and such adjustments are of a normal
recurring nature. These consolidated financial statements should be
read in conjunction with the financial statements for the year ended
December 31, 2009 and notes thereto contained in the Report on Form 10-
K of Genesis Electronic Group, Inc. and Subsidiary ("our Company" or
the "Company") as filed with the Securities and Exchange Commission
(the "Commission"). The results of operations for the nine months ended
September 30, 2010 are not necessarily indicative of the results for
the full fiscal year ending December 31, 2010.
The unaudited consolidated financial statements are prepared in
accordance with generally accepted accounting principles in the United
States of America ("US GAAP"). The unaudited consolidated statements
include the accounts of Genesis Electronics Group, Inc. and its wholly-
owned subsidiary. All significant inter-company balances and
transactions have been eliminated.
ASB Accounting Standards Codification
The issuance by the FASB of the Accounting Standards CodificationTM (the
"Codification") on July 1, 2009 (effective for interim or annual
reporting periods ending after September 15, 2009), changes the way
that GAAP is referenced. Beginning on that date, the Codification
officially became the single source of authoritative nongovernmental
GAAP; however, SEC registrants must also consider rules, regulations,
and interpretive guidance issued by the SEC or its staff. The change
affects the way the Company refers to GAAP in financial statements and
in its accounting policies. All existing standards that were used to
create the Codification became superseded. Instead, references to
standards consist solely of the number used in the Codification's
structural organization.
Organization
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.
10
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 is being 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 is the
acquirer for accounting purposes and Genesis is the acquired company.
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.
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.
Acquisition of Genesis
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 share exchange consideration included the issuance of 1,907,370
shares of the Company's stock valued at $0.03 per share. The total
purchase price was common stock valued at $57,144.
11
The Company accounted for the acquisition utilizing the purchase method
of accounting in accordance with FASB ASC 805 "Business Combinations".
The Company is the acquirer for accounting purposes and Genesis is 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.
The net purchase price, including acquisition costs paid by the
Company, was allocated to the liabilities assumed on the records of the
Company as follows:
Goodwill 1,717,602
Liabilities assumed (1,660,458)
---------
Net purchase price $ 57,144
===========
Since the Company has minimal revenues, has incurred losses and cash
used in operations, the Company deemed the acquired goodwill to be
impaired and wrote-off the goodwill on the acquisition date.
Accordingly, during fiscal year 2008, the Company recorded an
impairment of goodwill of $1,717,602 on the accompanying statement of
operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ
from those estimates. Significant estimates in 2010 and 2009 include
the valuation of stock-based compensation, and the useful life of
property, equipment, website development.
Cash and Cash Equivalents
For purposes of the unaudited consolidated statements of cash flows,
the Company considers all highly liquid instruments purchased with a
maturity of three months or less and money market accounts to be cash
equivalents.
Fair Value of Financial Instruments
Effective January 1, 2008, the Company adopted FASB ASC 820, "Fair
Value Measurements and Disclosures" ("ASC 820"), for assets and
liabilities measured at fair value on a recurring basis. ASC 820
establishes a common definition for fair value to be applied to
existing generally accepted accounting principles that require the use
of fair value measurements, establishes a framework for measuring fair
value and expands disclosure about such fair value measurements. The
adoption of ASC 820 did not have an impact on the Company's financial
position or operating results, but did expand certain disclosures.
12
ASC 820 defines fair value as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Additionally,
11
ASC 820 requires the use of valuation techniques that maximize the use
of observable inputs and minimize the use of unobservable inputs. These
inputs are prioritized below:
Level 1: Observable inputs such as quoted market prices in active
markets for identical assets or liabilities
Level 2: Observable market-based inputs or unobservable inputs that
are corroborated by market data
Level 3: Unobservable inputs for which there is little or no market
data, which require the use of the reporting entity's own assumptions.
Cash and cash equivalents include money market securities that are
considered to be highly liquid and easily tradable as of September 30,
2010 and 2009. These securities are valued using inputs observable in
active markets for identical securities and are therefore classified as
Level 1 within our fair value hierarchy.
In addition, FASB ASC 825-10-25 Fair Value Option was effective for
January 1, 2008. ASC 825-10-25 expands opportunities to use fair value
measurements in financial reporting and permits entities to choose to
measure many financial instruments and certain other items at fair
value. The Company did not elect the fair value options for any of its
qualifying financial instruments.
The carrying amounts reported in the consolidated balance sheet for
cash, accounts payable, accrued expenses, loans payable, notes payable,
due to related parties and deferred revenue approximate their fair
market value based on the short-term maturity of these instruments.
Property and Equipment
Property and equipment are stated at cost. Depreciation and
amortization are provided using the straight-line method over the
estimated economic lives of the assets, which are from five to seven
years. Expenditures for major renewals and betterments that extend the
useful lives of property and equipment are capitalized. Expenditures
for maintenance and repairs are charged to expense as incurred.
Website Development
Costs that the Company has incurred in connection with developing the
Company's websites are capitalized and amortized using the straight-
line method over expected useful lives of three years.
13
Impairment of Long-lived Assets
Long-Lived Assets of the Company are reviewed for impairment whenever
events or circumstances indicate that the carrying amount of assets may
not be recoverable, pursuant to guidance established in ASC 360-10-35-
15, "Impairment or Disposal of Long-Lived Assets". The Company
recognizes an impairment loss when the sum of expected undiscounted
future cash flows is less than the carrying amount of the asset. The
amount of impairment is measured as the difference between the asset's
estimated fair value and its book value. The Company did not consider
it necessary to record any impairment charges during the nine months
ended September 30, 2010 and 2009.
Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board, or FASB,
issued FASB ASC Topic 718: Compensation - Stock Compensation ("ASC
718"). 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. For the nine months ended September 30, 2010, the
Company did not grant any stock options to employees.
Net Loss per Common Share
Net loss per common share are calculated in accordance with ASC Topic
260: Earnings Per Share. Basic loss per share is computed by dividing
net loss by the weighted average number of shares of common stock
outstanding during the period. The computation of diluted net earnings
per share does not include dilutive common stock equivalents in the
weighted average shares outstanding as they would be anti-dilutive. As
of September 30, 2010 and 2009, there were options and warrants to
purchase 2,025,000 shares of common stock and 97,191,998 shares
equivalent issuable pursuant to embedded conversion features which
could potentially dilute future earnings per share.
Income Taxes
Income taxes are accounted for under the asset and liability method as
prescribed by ASC Topic 740: Income Taxes. Deferred income tax assets
and liabilities are computed for differences between the carrying
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amounts of assets and liabilities for financial statement and tax
purposes. Deferred income tax assets are required to be reduced by a
valuation allowance when it is determined that it is more likely than
not that all or a portion of a deferred tax asset will not be realized.
In determining the necessity and amount of a valuation allowance,
management considers current and past performance, the operating market
environment, tax planning strategies and the length of tax benefit
carryforward periods.
Pursuant to ASC Topic 740-10: Income Taxes related to the accounting
for uncertainty in income taxes, the evaluation of a tax position is a
two-step process. The first step is to determine whether it is more
likely than not that a tax position will be sustained upon examination,
including the resolution of any related appeals or litigation based on
the technical merits of that position. The second step is to measure a
tax position that meets the more-likely-than-not threshold to determine
the amount of benefit to be recognized in the financial statements. A
tax position is measured at the largest amount of benefit that is
greater than 50% likelihood of being realized upon ultimate settlement.
Tax positions that previously failed to meet the more-likely-than-not
recognition threshold should be recognized in the first subsequent
period in which the threshold is met. Previously recognized tax
positions that no longer meet the more-likely-than-not criteria should
be de-recognized in the first subsequent financial reporting period in
which the threshold is no longer met. The accounting standard also
provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosures, and
transition. The adoption had no effect on the Company's consolidated
financial statements.
Research and Development
Research and development costs, if any, are expensed as incurred.
Related Parties
Parties are considered to be related to the Company if the parties
that, directly or indirectly, through one or more intermediaries,
control, are controlled by, or are under common control with the
Company. Related parties also include principal owners of the Company,
its management, members of the immediate families of principal owners
of the Company and its management and other parties with which the
Company may deal if one party controls or can significantly influence
the management or operating policies of the other to an extent that one
of the transacting parties might be prevented from fully pursuing its
own separate interests. The Company discloses all related party
transactions. All transactions shall be recorded at fair value of the
goods or services exchanged. Property purchased from a related party is
recorded at the cost to the related party and any payment to or on
behalf of the related party in excess of the cost is reflected as a
distribution to related party.
15
Subsequent Events
For purposes of determining whether a post-balance sheet event should
be evaluated to determine whether it has an effect on the financial
statements for the period ending September 30, 2010, subsequent events
were evaluated by the Company as of the date on which the unaudited
consolidated financial statements at and for the period ended September
30, 2010, were available to be issued.
Revenue Recognition
The Company follows the guidance of the FASB ASC 605-10-S99 "Revenue
Recognition Overall - SEC Materials. The Company records revenue when
persuasive evidence of an arrangement exists, services have been
rendered or product delivery has occurred, the sales price to the
customer is fixed or determinable, and collectibility is reasonably
assured. The Company applies 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.
The following policies reflect specific criteria for the various
revenues streams of the Company:
The Company has three primary revenue sources: website design,
transaction fees, and hosting fees.
- 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.
Web hosting fees received in advance are reflected as deferred revenue
on the accompanying balance sheet.
Deferred Offering Cost
The Company defers as other current assets the direct incremental costs
of raising capital until such time as the offering is completed. At
the time of the completion of the offering, the costs are charged
against the capital raised. Should the offering be terminated,
deferred offering costs are charged to operations during the period in
which the offering is terminated.
16
Recently Issued Accounting Pronouncements
In June 2009, the FASB issued ASC Topic 810-10, "Amendments to FASB
Interpretation No. 46(R)". This updated guidance requires a qualitative
approach to identifying a controlling financial interest in a variable
interest entity (VIE), and requires ongoing assessment of whether an
entity is a VIE and whether an interest in a VIE makes the holder the
primary beneficiary of the VIE. It is effective for annual reporting
periods beginning after November 15, 2009. The adoption of ASC Topic
810-10 did not have a material impact on the results of operations and
financial condition.
In October 2009, the FASB issued ASU No. 2009-13, "Multiple-Deliverable
Revenue Arrangements." This ASU establishes the accounting and
reporting guidance for arrangements including multiple revenue-
generating activities. This ASU provides amendments to the criteria for
separating deliverables, measuring and allocating arrangement
consideration to one or more units of accounting. The amendments in
this ASU also establish a selling price hierarchy for determining the
selling price of a deliverable. Significantly enhanced disclosures are
also required to provide information about a vendor's multiple-
deliverable revenue arrangements, including information about the
nature and terms, significant deliverables, and its performance within
arrangements. The amendments also require providing information about
the significant judgments made and changes to those judgments and about
how the application of the relative selling-price method affects the
timing or amount of revenue recognition. The amendments in this ASU are
effective prospectively for revenue arrangements entered into or
materially modified in the fiscal years beginning on or after June 15,
2010. The adoption of this guidance did not have a material impact on
the results of operations and financial condition.
In October 2009, the FASB issued ASU No. 2010-14, "Certain Revenue
Arrangements That Include Software Elements." This ASU changes the
accounting model for revenue arrangements that include both tangible
products and software elements that are "essential to the
functionality," and scopes these products out of current software
revenue guidance. The new guidance will include factors to help
companies determine what software elements are considered "essential to
the functionality." The amendments will now subject software-enabled
products to other revenue guidance and disclosure requirements, such as
guidance surrounding revenue arrangements with multiple-deliverables.
The amendments in this ASU are effective prospectively for revenue
arrangements entered into or materially modified in the fiscal years
beginning on or after June 15, 2010. Early application is permitted.
The adoption of this guidance did not have a material impact on the
results of operations and financial condition.
In January 2010, the FASB issued Accounting Standards Update ("ASU")
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
17
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"). 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. There was not a material impact from the
adoption of this guidance on our 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 Company
anticipates that adoption of these additional disclosures will not have
a material effect on its financial position or results of operations.
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.
NOTE 2 - PROPERTY AND EQUIPMENT
At September 30, 2010, property and equipment consist of the following:
Useful Life
(Years)
-----------
Computer equipment and software 5 $ 12,542
Office furniture and fixtures and
equipment 7 4,328
--------
16,870
Less accumulated depreciation (16,679)
--------
$ 191
========
18
At December 31, 2009, property and equipment consist of the following:
Useful Life
(Years)
-----------
Computer equipment and software 5 $ 12,542
Office furniture and fixtures and
equipment 7 4,328
--------
16,870
Less accumulated depreciation (16,175)
--------
$ 695
========
For the nine months ended September 30, 2010 and 2009, depreciation
expense amounted to $504 and $507, respectively.
NOTE 3 - 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 solar powered cell
phone and iPod chargers.
At September 30, 2010, license agreement consisted of the following:
Useful Life
(Years)
-----------
License agreement 2 $ 209,000
Less accumulated amortization (87,083)
--------
$121,917
========
At December 31, 2009, license agreement consisted of the following:
Useful Life
(Years)
-----------
License agreement 2 $ 209,000
Less accumulated amortization (8,708)
--------
$200,292
========
For the nine months ended September 30, 2010 and 2009, amortization
expense amounted to $78,375 and $0, respectively. Accrued payable
related to this license agreement as of September 30, 2010 amounted to
$125,000.
19
NOTE 4 - LOANS PAYABLE
On May 22, 2008, in connection with the acquisition, 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, 2010,
loans payable and related accrued interest amounted to $40,000 and
$13,971, respectively. As of December 31, 2009, loans payable and
related accrued interest amounted to $40,000 and $11,571, respectively.
NOTE 5 - RELATED PARTY TRANSACTIONS
An officer of the Company advance funds to the Company for working
capital purposes. The advances are non-interest bearing and are payable
on demand. At September 30, 2010 and December 31, 2009, the Company
owed this related party $14,885 and $40,485, respectively.
NOTE 6 - NOTE PAYABLE
On May 22, 2008, in connection with the acquisition, 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, 2010, note
payable and related accrued interest amounted to $15,647 and $8,419,
respectively. As of December 31, 2009, note payable and related accrued
interest amounted to $15,647 and $7,480, respectively.
NOTE 7 - CONVERTIBLE DEBT
On May 22, 2008, in connection with the acquisition, 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.
20
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, 2010 and December 31, 2009, convertible debt amounted
to $931,919.
NOTE 8 - 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 (see Note 10). This debenture matures 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 is included in
other current assets.
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 $0.01 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. In connection
with this convertible debenture, the Company recorded deferred
financing cost of $20,000 and will be amortized over the term of the
note.
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 $20,000 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 the convertible debt currently has a
fixed conversion price of $0.005, the convertible debt is not a
derivative.
21
At September 30, 2010, convertible debenture consisted of the
following:
September 30, 2010
------------------
Secured convertible debenture $ 20,000
Less: debt discount (7,401)
--------
Secured convertible debenture - net $ 12,599
As of September 30, 2010, amortization of debt discount and deferred
financing cost amounted to $12,599 and $12,600, respectively, and are
included in interest expense. As of September 30, 2010, accrued
interest on this debenture amounted to $705.
NOTE 9 - 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 was in the development stage through December 31,
2005 and has an accumulated deficit of $8,510,494, had net losses,
negative working capital and negative cash flows from operations for
the nine months ended September 30, 2010 of $384,863, $986,742 and
$252,264 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, 2010, the Company sold 5,212,834 common shares for
net proceeds of $165,255 and subscription receivable of $85,000. For
the nine months ended September 30, 2010 the Company collected
subscription receivable of $63,842.
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.
22
NOTE 10 - STOCKHOLDERS' DEFICIT
Common Stock
For the nine months ended September 30, 2010, the Company received net
proceeds of $165,255 and subscription receivable of $85,000 from the
sale of 5,212,834 shares of the Company's common stock.
For the nine months ended September 30, 2010, the Company collected
subscription receivable of $63,842. During the nine months ended
September 30, 2010, the Company applied $20,000 against subscription
receivable for services rendered by one of our employees.
In February 2010, the Company issued 250,000 shares of common stock for
public relation services rendered. The Company valued these common
shares at the fair value on the date of grant at $.04 per share or
$10,000. In connection with issuance of these shares, the Company
recorded stock-based consulting expense of $10,000 during the nine
months ended September 30, 2010.
In May 2010, the Company entered into a Securities Purchase Agreement
with Tangiers Investors, LP ("Investor"). The Company has 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 the
Company's common stock during the pricing period as quoted by
Bloomberg, LP on the Over-the-Counter Bulletin Board. The Company 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 the
Company's common stock. The Company agrees to pay the Investor a
commitment fee of 3,000,000 shares of the Company's common stock
pursuant to the Securities Purchase Agreement. The Company valued
these common shares at the fair value on the date of grant at $0.10 per
share or $300,000 and has been recorded as deferred offering cost.
In July 2010, in connection with a consulting agreement, the Company issued
350,000 shares of common stock for Public relations and marketing
services until September 15, 2010. The Company valued these common
shares at the fair value on the date of grant at $.08 per share or
$28,000. The Company did not extend the term of this agreement after
September 15, 2010.
In July 2010, the Company issued in aggregate 2,000,000 shares of
common stock to the Company's CEO and an officer of the Company in
connection with the payment of their accrued salaries during fiscal
year 2009 pursuant to the amended employment agreements. The Company
valued these common shares at the fair market value on the date of
grant at $.04 per share or $80,000.
23
Stock Options
A summary of the stock options as of September 30, 2010 and changes
during the periods is presented below:
Weighted Average
Number of Options Exercise Price
----------------- ----------------
Balance at beginning of year 2,025,000 $ 0.40
Granted - -
Exercised - -
Cancelled - -
--------- -------
Balance at end of period 2,025,000 $ 0.40
========= =======
Options exercisable at end of
period 2,025,000 $ 0.40
========= =======
The following table summarizes the Company's stock option outstanding
at September 30, 2010:
OPTIONS OUTSTANDING AND EXERCISABLE
-----------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RANGE OF REMAINING EXERCISE
EXERCISE PRICE NUMBER LIFE PRICE
-------------- ------ --------- --------
$ 0.40 2,025,000 1 year after 0.40
effective
registration
NOTE 11 - SUBSEQUENT EVENTS
In October 2010, the Company received net proceeds of approximately
$11,000 and subscription receivable of $94,000 from the sale of
2,600,000 shares of the Company's common stock.
NOTE 12 - RESTATEMENT
The Company has restated its interim consolidated financial statements
as at and for the nine months ended September 30, 2010 to reflect the
reversal of license fees included in other selling, general, and
administrative expense of 30,000, the recording of amortization of
license agreement of $78,375, capitalization of the license agreement
of $209,000 and the recording of accumulated amortization and accrued
payable on license agreement of $87,083 and $125,000, respectively. In
addition, we are recording at fair value the 3,000,000 shares paid as
commitment fee in connection with a securities purchase agreement in
May 2010 instead of recording at par value and was recognized as
deferred offering cost. The Company also made a correction related to
24
the issuance of 2,000,000 shares to the Company's CEO and an officer of
the Company in connection with the payment of their accrued salaries of
$80,000 during fiscal year 2009 pursuant to the amended employment
agreements.
Consolidated Balance Sheet data As at September 30, 2010
(Unaudited)
Adjustments
As Filed to Restate Restated
-------- ----------- --------
Deferred offering cost $ - $ 300,000 (h) $ 300,000
---------- --------- -----------
Total Current Assets 27,862 300,000 327,862
---------- --------- -----------
License agreement, net $ - 121,917 (a)(b)$ 121,917
---------- --------- -----------
Total Assets 28,053 421,917 449,970
========== ========= ===========
Accrued payable on license agreement - 125,000 (c) 125,000
---------- --------- -----------
Total Current Liabilities 1,189,604 125,000 1,314,604
---------- --------- -----------
Total Liabilities 1,189,604 125,000 1,314,604
---------- --------- -----------
Stockholders' Deficit
Additional paid-in capital 7,337,278 220,000 7,557,278
Accumulated deficit (8,587,411) (76,917) (8,510,494)
---------- --------- -----------
Total Stockholders' Deficit (1,161,551) 296,917 (864,634)
---------- --------- -----------
Total Liabilities and
Stockholders' Deficit $ 28,053 $ 421,917 $ 449,970
========== ========= ===========
(a) To capitalize the patent license of $209,000 based on the license
agreement.
(b) To record accumulated amortization on the license agreement over
the term of the agreement amounting to $87,083.
(c) To record the remaining obligation under the license agreement
($209,000 less $84,000 representing cash payment of $40,000 and stock
payment valued at $44,000).
25
Consolidated Statement of Income data For the Three Months Ended
September 30, 2010 (Unaudited)
Adjustments
As Filed to Restate Restated
-------- ----------- --------
Compensation $ 208,610 $(160,000) (i) $ 48,610
Other selling, general and
administrative expenses 55,246 16,125 (d)(e) 71,371
--------- --------- ---------
Total operating expenses 300,963 (143,875) 157,088
--------- --------- ---------
Loss from operations 294,669 (143,875) 150,794
--------- --------- ---------
Net loss $ 316,941 $(143,875) $ 173,066
========= ========= =========
Net loss per Common Share:
Basic $ (0.00) $ - $ (0.00)
========= ========= =========
Diluted $ (0.00) $ - $ (0.00)
========= ========= =========
Weighted Average Common Shares
Outstanding:
Basic 161,517,346 161,517,346
=========== ===========
Diluted 161,517,346 161,517,346
=========== ===========
Consolidated Statement of Income data For the Nine Months Ended
September 30, 2010 (Unaudited)
Adjustments
As Filed to Restate Restated
-------- ----------- --------
Compensation $ 258,770 $(160,000) (i) $ 98,770
Other selling, general and
administrative expenses 145,615 48,375 (f)(g) 193,990
--------- --------- ---------
Total operating expenses 489,556 (111,625) 377,931
--------- --------- ---------
Loss from operations 467,245 (111,625) 355,620
--------- --------- ---------
Net loss $ 496,488 $(111,625) $ 384,863
========= ========= =========
Net loss per Common Share:
Basic $ (0.00) $ - $ (0.00)
========= ========= =========
Diluted $ (0.00) $ - $ (0.00)
========= ========= =========
26
Weighted Average Common Shares
Outstanding:
Basic 157,593,360 157,593,360
=========== ===========
Diluted 157,593,360 157,593,360
=========== ===========
(d) To reflect the reversal of license fees included in other selling,
general, and administrative expense of $10,000 representing cash and
stock payment in September 2010.
(e) To record amortization expense on the license agreement over the
term of the agreement amounting to $26,125 during the three months
ended September 30, 2010.
(f) To reflect the reversal of license fees included in other selling,
general, and administrative expense of $30,000 representing cash
payment during the nine months ended September 30, 2010.
(g) To record amortization expense on the license agreement over the
term of the agreement amounting to $78,375 during the nine months ended
September 30, 2010.
(h) To record at fair value the 3,000,000 shares paid as commitment fee
in connection with a securities purchase agreement in May 2010 instead
of recording at par value and was recognized as deferred offering cost.
(i) To record the issuance of 2,000,000 shares of common stock to the
Company's CEO and an officer of the Company in connection with the
payment of their accrued salaries of $80,000 during fiscal year 2009
pursuant to the amended employment agreements and the reversal of stock
based compensation of $160,000 in July 2010. The Company erroneously
recorded such issuance as stock based compensation during 2010.
Consolidated Statement of Cash Flows For the Nine Months Ended
September 30, 2010 (Unaudited)
Adjustments
As Filed to Restate Restated
-------- ----------- --------
Net loss $ 496,488 $(111,625) $ 384,863
--------- --------- ---------
Adjustments to reconcile net loss to
net cash used in operating activities:
Amortization of license agreement - 78,375 (g) 78,375
Common stock issued for services 198,000 (160,000) (i) 38,000
Changes in assets and liabilities:
Accrued payable on license
agreement - (30,000) (30,000)
--------- --------- ---------
Cash Used in Operating Activities (252,264) - (252,264)
--------- --------- ---------
27
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
--------
Through December 31, 2005, we were a developmental stage e-commerce
company. We currently operate an e-commerce website that enables any
business to establish a fully functional online retail presence. Our
website, 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.
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. While we are still engaged in this business,
our primary focus has now shifted towards the further development and
marketing of the above described products.
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 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.
GOING CONCERN
-------------
As reflected in the accompanying unaudited consolidated financial
statements, we had an accumulated deficit of approximately $8.5
million, a working capital deficit of $986,742, had net losses for the
nine months ended September 30, 2010 of $384,863 and cash used in
operations during the nine months ended September 30, 2010 of $252,264.
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
28
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 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.
Computer equipment and furniture is stated at cost less accumulated
depreciation. Depreciation is computed over the assets' estimated
useful lives (five to seven years) using straight line methods of
accounting. Maintenance costs are charged to expense as incurred while
upgrades and enhancements that result in additional functionality are
capitalized.
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.
We have three primary revenue sources: website design, transaction
fees, and hosting fees.
- 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.
Web hosting fees received in advance are reflected as deferred revenue
on the accompanying balance sheet.
29
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
---------------------
Nine months ended September 30, 2010 compared to nine months ended
September 30, 2009
Net sales for the nine months ended September 30, 2010 were $22,311 as
compared to net sales of $69,172 for the nine months ended September
30, 2009, a decrease of $46,861 or approximately 68%. We are
continuing to create customer awareness for our products. The decrease
in revenues is primarily attributable to the non renewal of subscribers
who had completed their annual hosting commitment during fiscal 2009.
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 nine months ended September 30, 2010
were $377,931, an increase of $133,475, or approximately 55%, from
total operating expenses for the nine months ended September 30, 2009
of $244,456.
30
This increase is primarily attributable to:
- an increase of $7,884, or approximately 26%, in professional
fees incurred in connection with our SEC filings. This increase is
primarily related to increase in legal fees in connection with general
business counsel and litigation matters,
- a slight increase of $1,090, or approximately 2%, in consulting
fees.
- an increase of $388,108, or 63%, in compensation expense to
$98,770 for the nine months ended September 30, 2010 as compared to
$60,662 for the nine months ended September 30, 2009. Compensation
expense which includes salaries and stock based compensations to our
employees. The increase is primarily attributable to increases in
compensation levels of certain of our employees,
- an increase of $86,393, or approximately 80%, in other selling,
general and administrative expenses as a result of increase in
amortization expense related to a license agreement entered in November
2009 of $78,375 and office expense attributable to our subsidiary
Genesis Electronics Inc.
We reported a loss from operations of $355,620 for nine months ended
September 30, 2010 as compared to a loss from operations of $175,284
for the nine months ended September 30, 2009.
Total other expense for the nine months ended September 30, 2010 were
$29,243, a decrease of $170,096, from total other expense for nine
months ended September 30, 2009 of $199,339.
- Interest expense consists primarily of interest recognized in
connection with the amortization of debt discount, and interest on our
promissory notes. The decrease in interest expense is primarily
attributable to the issuance of 4,900,000 shares of common stock to one
of our officers in connection with a settlement of related party loans
during the nine months ended September 30, 2009. We have recognized
non-recurring interest expense of $196,000 in connection with this
settlement in 2009 offset by an increase in amortization of debt
discount and deferred financing cost of $25,199 during the nine months
ended September 30, 2010.
We reported a net loss of $384,863 or (0.00) per share for the nine
months ended September 30, 2010 as compared to a net loss of $374,623
or $(0.00) per share for the nine months ended September 30, 2009.
Three months ended September 30, 2010 compared to three months ended
September 30, 2009
Net sales for the three months ended September 30, 2010 were $6,294 as
compared to net sales of $14,511 for the three months ended September
30, 2009, a decrease of $8,217 or approximately 57%. We are continuing
to create customer awareness for our products. The decrease in
revenues is primarily attributable to the non renewal of subscribers
31
who had completed their annual hosting commitment during fiscal 2009.
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, 2010
were $157,088, an increase of $57,445, or approximately 58%, from total
operating expenses for the three months ended September 30, 2009 of
$99,643.
This increase is primarily attributable to:
- a slight increase of $1,275, or approximately 16%, in
professional fees incurred in connection with our SEC filings,
- an increase of $930, or approximately 3%, in consulting fees,
- an increase of $27,490, or 130%, in compensation expense to
$48,610 for the three months ended September 30, 2010 as compared to
$21,120 for the three months ended September 30, 2009. Compensation
expense which includes salaries and stock based compensations to our
employees. The increase is primarily attributable to increases in
compensation levels of certain of our employees,
- an increase of $27,750, or approximately 64%, in other selling,
general and administrative expenses as a result of increase in
amortization expense related to a license agreement entered in November
2009 of $26,125 and office expense attributable to our subsidiary
Genesis Electronics Inc.
We reported a loss from operations of $150,794 for three months ended
September 30, 2010 as compared to a loss from operations of $85,132 for
the three months ended September 30, 2009.
Total other expense for the three months ended September 30, 2010 were
$22,272, an increase of $21,159, from total other expense for the nine
months ended September 30, 2009 of $1,113.
- Interest expense consists primarily of interest recognized in
connection with the amortization of debt discount, and interest on our
promissory notes. The increase is primarily attributable to the
amortization of debt discount and deferred financing cost of $20,706
during the three months ended September 30, 2010.
We reported a net loss of $173,066 or (0.00) per share for the three
months ended September 30, 2010 as compared to a net loss of $86,245 or
$(0.00) per share for the three months ended September 30, 2009.
32
Liquidity and Capital Resources
-------------------------------
During the nine months ended September 30, 2010, we received net
proceeds of $165,255 and subscription receivable of $85,000 from the
sale of our common stock. For the nine months ended September 30,
2010, we collected subscription receivable of $63,842. These funds
were used for working capital purposes.
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 $544,863 offset by depreciation of $504,
amortization of license agreement of $78,375, stock based expense of
$38,000, amortization of debt discount of $12,599, amortization of
deferred financing cost of $12,600, non-cash expense of $20,000 applied
against subscription receivable and add back of changes in assets and
liabilities of $29,479. Net cash used in operating activities for the
nine months ended September 30, 2009 amounted to $160,888 and was
primarily attributable to our net losses of $374,623 offset by
depreciation of $507, stock based expense of $8,090, interest expense
of $196,000 in connection with the settlement of a related party loan
and changes in assets and liabilities of $9,138.
Net cash flows provided by financing activities was $203,497 for the
nine months ended September 30, 2010 as compared to net cash provided
by financing activities of $193,279 for the nine months ended September
30, 2009, an increase of $10,218. For the nine months ended September
30, 2010, we received proceeds from the sale of common stock and
collection of subscription receivable of $229,097 and an offset by
payments on related party advances of $25,600. For the nine months
ended September 30, 2009, we received proceeds from the sale of common
stock and collection of subscription receivable of $199,579 offset by
payments on related party advances of $6,300.
We reported a net decrease in cash for the nine months ended September
30, 2010 of $48,767 as compared to a net increase in cash of $32,391
for the nine months ended September 30, 2009. At September 30, 2010,
we had cash on hand of $17,302.
Contractual Obligations and Off-Balance Sheet Arrangements
-----------------------------------------------------------
Contractual Obligations
The following tables summarize our contractual obligations as of
September 30, 2010.
Payments Due by Period
--------------------------------------------------------
Less than 3-5 5 Years
Total 1 Year 1-3 Years Years +
----- --------- --------- ----- -------
Contractual Obligations:
Notes payable $ 15,647 $ 15,647 $ - $ - $ -
Loans payable 40,000 40,000 - - -
Secured convertible
Debenture 20,000 20,000 - - -
33
Convertible debt 931,919 931,919 - - -
Loans payable - related
party 14,885 14,885 - - -
Accrued interest 22,390 22,390
---------- -------- -------- -------- --------
Total Contractual
Obligations: $1,044,841 $1,044,841 $ - $ - $ -
License Agreement
----------------
In November 2009, we entered into a license agreement with Johns
Hopkins University Applied Physics Lab whereby the registrant will have
a limited exclusive license to JHU/APL's Integrated Power Source
patents. The patents are for the solar powered cell phone and iPod
chargers. To date, we have paid $40,000 and issued 2 million shares of
the registrants's common stock. Remaining future license payments
under the license agreement are as follows:
Due upon the one year anniversary of the license $125,000
Should we elect not to execute the option to an exclusive license for
the patents in advance of the one year anniversary of execution of
license agreement, the $125,000 second year anniversary execution fee
payment will be reduced to $36,000.
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 agree to pay 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 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
34
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.
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 June 2009, the FASB issued ASC Topic 810-10, "Amendments to FASB
Interpretation No. 46(R)". This updated guidance requires a qualitative
approach to identifying a controlling financial interest in a variable
interest entity, and requires ongoing assessment of whether an entity
is a VIE and whether an interest in a VIE makes the holder the primary
beneficiary of the VIE. It is effective for annual reporting periods
beginning after November 15, 2009. The adoption of ASC Topic 810-10 did
not have a material impact on the results of operations and financial
condition.
In October 2009, the FASB issued ASU No. 2009-13, "Multiple-Deliverable
Revenue Arrangements." This ASU establishes the accounting and
reporting guidance for arrangements including multiple revenue-
generating activities. This ASU provides amendments to the criteria
for separating deliverables, measuring and allocating arrangement
consideration to one or more units of accounting. The amendments in
this ASU also establish a selling price hierarchy for determining the
selling price of a deliverable. Significantly enhanced disclosures are
also required to provide information about a vendor's multiple-
deliverable revenue arrangements, including information about the
nature and terms, significant deliverables, and its performance within
arrangements. The amendments also require providing information about
the significant judgments made and changes to those judgments and about
how the application of the relative selling-price method affects the
timing or amount of revenue recognition. The amendments in this ASU
are effective prospectively for revenue arrangements entered into or
materially modified in the fiscal years beginning on or after June 15,
2010. Early application is permitted. The adoption of this guidance
did not have a material impact on the results of operations and
financial condition.
35
In October 2009, the FASB issued ASU No. 2010-14, "Certain Revenue
Arrangements That Include Software Elements." This ASU changes the
accounting model for revenue arrangements that include both tangible
products and software elements that are "essential to the
functionality," and scopes these products out of current software
revenue guidance. The new guidance will include factors to help
companies determine what software elements are considered "essential to
the functionality." The amendments will now subject software-enabled
products to other revenue guidance and disclosure requirements, such as
guidance surrounding revenue arrangements with multiple-deliverables.
The amendments in this ASU are effective prospectively for revenue
arrangements entered into or materially modified in the fiscal years
beginning on or after June 15, 2010. Early application is permitted.
The adoption of this guidance did not have a material impact on the
results of operations and financial condition.
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. There was not a material impact from the adoption of this
guidance on our 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 registrant
anticipates that adoption of these additional disclosures will not have
a material effect on its financial position or results of operations.
36
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 Edward C. Dillon, our chief executive
officer, and Nelson Stark, our chief financial officer, evaluated the
effectiveness of the design and operation of our disclosure controls
and procedures as of September 30, 2010.
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. Dillon and Mr. Stark, 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, 2010.
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 ("Section 404") on an annual basis. As
previously reported on our Form 10-K for the year ended December 31,
2009, management identified significant deficiencies related to (i) our
internal audit functions and (ii) a lack of segregation of duties
within accounting functions.
37
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.
38
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On January 29, 2010, Genesis Electronics Group, Inc., Genesis
Electronics, Inc., and two of our officers, Raymond Purdon and Edward
Dillon (Plaintiffs), filed a Complaint against Michael Louis Lattuca
and Charles Liebegott (Defendants), in the Circuit Court for the 17th
Judicial Circuit, Broward County, Florida Case #10004394-11. This
Civil Action was taken against Mr. Lattuca and Mr. Liebegott for
reasons of fraudulent inducement, breach of contract and defamation,
causing damages to the Plaintiffs and for which relief is sought. The
Defendants were hired on a trial-basis in June 2009 and terminated
after approximately 8-weeks and 3-weeks, respectively. The law firms
of Pepper Hamilton LLP in Princeton, NJ and Law Office of Howard Neu,
P.A. in Pembroke Pines, FL are representing the Plaintiffs.
Item 1A. Risk Factors
Not applicable to smaller reporting companies
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
For the nine months ended September 30, 2010, we received net proceeds
of $165,255 and subscription receivable of $85,000 from the sale of
5,212,834 common shares.
In October 2010, we received net proceeds of approximately $11,000 and
subscription receivable of $94,000 from the sale of 2,600,000 common
shares.
Item 3. Defaults Upon Senior Securities
None
Item 4. (Removed and Reserved)
Item 5. Other Information
None
Item 6. Exhibits
Exhibit 31 - Certifications pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 32 - Certifications pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
39
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.
Dated: April 6, 2011
GENESIS ELECTRONICS GROUP, INC.
By: /s/ Edward C. Dillon
---------------------------
Edward C. Dillon
Chief Executive Officer
By: /s/Nelson Stark
--------------------------
Nelson Stark
Chief Financial Officer
