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EX-31 - 302 CERTIFICATIONS - Genesis Electronics Group, Inc.genesis10q2q10ex31am1.txt
EX-32 - 906 CERTIFICATIONS - Genesis Electronics Group, Inc.genesis10q2q10ex32am1.txt

                   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 June 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 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]

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.
August 13, 2010:  Common Stock  -  161,846,906



2 Explanatory Note The registrant is filing this Form 10-Q/A to amend the consolidated financial statements for the period ended June 30, 2010. This amended report does not reflect events occurring after the filing of the Form 10-Q on August 13, 2010.
3 GENESIS ELECTRONICS GROUP, INC. Form 10-Q/A For the quarterly period ended June 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 37 Item 1A. Risk Factors 37 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 37 Item 3. Defaults upon Senior Securities 37 Item 4. (Removed and Reserved) 37 Item 5. Other Information 37 Item 6. Exhibits 37 SIGNATURES 38
4 GENESIS ELECTRONICS GROUP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS Year ended June 30, 2010 December 31, 2009 ------------- ----------------- (Restated - See Note 12) (Unaudited) ASSETS CURRENT ASSETS: Cash $ 49,185 $ 66,069 Prepaid expense and other current asset 34,160 14,160 Deferred offering cost 300,000 - ----------- ----------- Total current assets 383,345 80,229 PROPERTY AND EQUIPMENT, net 359 695 License agreement, net 148,042 200,292 ----------- ----------- Total assets $ 531,746 $ 281,216 =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts payable and accrued expenses $ 248,962 $ 264,857 Accrued payable on license agreement 135,000 155,000 Secured convertible debenture, net of debt discount 4,493 - Convertible debt 931,919 931,919 Note payable 15,647 15,647 Loans payable 40,000 40,000 Due to related party 16,685 40,485 Deferred revenue 108 176 ----------- ----------- Total current liabilities 1,392,814 1,448,084 ----------- ----------- STOCKHOLDERS' DEFICIT: Common stock, $0.001 par value, 300,000,000 authorized, 159,396,906 and 152,644,072 issued and outstanding, at June 30, 2010 and December 31, 2009, respectively 159,397 152,644 Additional paid-in capital 7,366,838 6,879,836 Accumulated deficit (8,337,428) (8,125,631)
5 Subscription receivable (49,875) (73,717) ----------- ----------- Total stockholders' deficit (861,068) (1,166,868) ----------- ----------- Total liabilities and stockholders' deficit $ 531,746 $ 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 Six Months Ended June 30, June 30, -------------------------- ------------------------ 2010 2009 2010 2009 ---- ---- ---- ---- (Restated - (Restated - See Note 12) See Note 12) (Unaudited) (Unaudited) (Unaudited) (Unaudited) --------------------------------------------------------- Net Sales $ 8,355 $ 24,117 $ 16,017 $ 54,661 ---------- ---------- ---------- ---------- Operating expenses: Professional fees 18,631 18,555 29,664 23,055 Consulting fees 2,020 8,339 18,400 18,240 Compensation 29,520 21,010 50,160 39,542 Other selling, general and administrative 61,064 38,621 122,619 63,976 ---------- ---------- ---------- ---------- Total operating expenses 111,235 86,525 220,843 144,813 ---------- ---------- ---------- ---------- Loss from operations (102,880) (62,408) (204,826) (90,152) ---------- ---------- ---------- ---------- Other income (expenses): Interest expense (5,858) (197,113) (6,971) (198,226) ---------- ---------- ---------- ---------- Total other income (expenses) (5,858) (197,113) (6,971) (198,226) ---------- ---------- ---------- ---------- Loss before provision for income taxes (108,738) (259,521) (211,797) (288,378) ---------- ---------- ---------- ---------- Provision for income taxes - - - - ---------- ---------- ---------- ---------- Net loss $ (108,738) $ (259,521) $ (211,797) $ (288,378) ========== ========== ========== ========== Net loss per common share - basic and diluted $ - $ - $ - $ - ========== ========== ========== ========== Weighted average number of shares outstanding - basic and diluted 158,084,352 136,387,928 155,583,217 125,444,427 =========== =========== =========== =========== See notes to unaudited consolidated financial statements
7 GENESIS ELECTRONICS GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, ------------------------ 2010 2009 ------------------------ (Restated - See Note 12) (Unaudited) (Unaudited) --------- --------- Cash flows from operating activities: Net loss $(211,797) $(288,378) Adjustments to reconcile net loss to net cash used in operations: Depreciation 336 337 Amortization on license agreement 52,250 - Common stock issued for services 10,000 - Amortization of debt discount 4,493 - Interest expense for the settlement of a related party loan - 196,000 Changes in assets and liabilities: Accounts receivable - 10,909 Prepaid expenses and other - (11,000) Accounts payable and accrued expenses (15,895) - Accrued payable on license agreement (20,000) - Deferred revenues (68) (357) --------- --------- Total adjustments 31,116 195,889 --------- --------- Net cash used in operating activities (180,681) (92,489) --------- --------- Cash flows from financing activities: Proceeds from sale of common stock 187,597 171,779 Payments on related party advances (23,800) (2,800) --------- --------- Net cash provided by financing activities 163,797 168,979 --------- --------- Net increase (decrease) in cash (16,884) 76,490 Cash - beginning of the period 66,069 2,319 --------- --------- Cash - end of the period $ 49,185 $ 78,809 ========= ========= Supplemental disclosure of cash flow information: Cash paid for: Interest $ - $ - ========= ========= Income taxes $ - $ - ========= =========
8 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 $ - ========= ========= See notes to unaudited consolidated financial statements
9 GENESIS ELECTRONICS GROUP, INC. AND SUBSIDIARY NOTES TO UNAUDITED 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 six months ended June 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
12 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. 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, 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 June 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 six months ended June 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 six months ended June 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 June 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
14 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 June 30, 2010, subsequent events were evaluated by the Company as of August 12, 2010, the date on which the unaudited consolidated financial statements at and for the period ended June 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 Accounting Standards Update No. 2009-01, "Generally Accepted Accounting Principles" (ASC Topic 105) which establishes the FASB Accounting Standards Codification ("the Codification" or "ASC") as the official single source of authoritative U.S. generally accepted accounting principles ("GAAP"). All existing accounting standards are superseded. All other accounting guidance not included in the Codification will be considered non-authoritative. The Codification also includes all relevant Securities and Exchange Commission ("SEC") guidance organized using the same topical structure in separate sections within the Codification. Following the Codification, the Board will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates ("ASU") which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification. The Codification is not intended to change GAAP, but it will change the way GAAP is organized and presented. The Codification is effective for our third-quarter 2009 financial statements and the principal impact on our financial statements is limited to disclosures as all future references to authoritative accounting literature will be referenced in accordance with the Codification. In May 2009, the FASB issued (ASC Topic 855), "Subsequent Events" (ASC Topic 855). This guidance is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. It is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this guidance did not have a material impact on our consolidated financial statements. 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
17 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 Company is currently evaluating this new ASU. 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 Company is currently evaluating this new ASU. 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 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. 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.
18 NOTE 2 - PROPERTY AND EQUIPMENT At June 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 (16,511) -------- $ 359 ======== 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 six months ended June 30, 2010 and 2009, depreciation expense amounted to $336 and $337, 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 June 30, 2010, license agreement consisted of the following: Useful Life (Years) ----------- License agreement 2 $ 209,000 Less accumulated amortization (60,958) -------- $148,042 ========
19 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 six months ended June 30, 2010 and 2009, amortization expense amounted to $52,250 and $0, respectively. Accrued payable related to this license agreement as of June 30, 2010 amounted to $135,000. 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 June 30, 2010, loans payable and related accrued interest amounted to $40,000 and $13,171, 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 June 30, 2010 and December 31, 2009, the Company owed this related party $16,685 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 June 30, 2010, note payable and related accrued interest amounted to $15,647 and $8,106, 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
20 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 June 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 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
21 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. At June 30, 2010, convertible debenture consisted of the following: June 30, 2010 ------------- Secured convertible debenture $ 20,000 Less: debt discount (15,507) -------- Secured convertible debenture - net $ 4,493 As of June 30, 2010, amortization of debt discount amounted to $4,493 and is included in interest expense. As of June 30, 2010, accrued interest on this debenture amounted to $251. 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 $8,337,428, had net losses, negative working capital and negative cash flows from operations for the six months ended June 30, 2010 of $211,797, $1,009,469 and $180,681 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 six months ended June 30, 2010, the Company sold 3,502,834 common shares for net proceeds of $123,755 and subscription receivable of $40,000. For the six months ended June 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
22 recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence. NOTE 10 - STOCKHOLDERS' DEFICIT Common Stock For the six months ended June 30, 2010, the Company received net proceeds of $123,755 and subscription receivable of $40,000 from the sale of 3,502,834 shares of the Company's common stock. For the six months ended June 30, 2010, the Company collected subscription receivable of $63,842. 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 six months ended June 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. Stock Options A summary of the stock options as of June 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 - - --------- -------
23 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 June 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 July 2010, the Company received net proceeds of approximately $6,000 from the sale of 100,000 shares of the Company's common stock. 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 may extend the term of this agreement until December 1, 2010 in exchange for an additional 300,000 shares of common stock. 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 their employment agreements. The Company valued these common shares at the fair market value on the date of grant at $.08 per share or $160,000 and has been recorded as stock-based compensation. On August 5, 2010, in connection with the Secured Convertible Debenture dated in May 2010, the Company entered into an amendment agreement with the debenture holder whereby the debenture shall be convertible at a fixed conversion price of $0.005 per share. NOTE 12 - RESTATEMENT The Company has restated its interim consolidated financial statements as at and for the six months ended June 30, 2010 to reflect the reversal of license fees included in other selling, general, and administrative expense of 20,000, the recording of accrued salaries of $80,000 in fiscal 2009 in connection with the amended employment
24 agreements of our chief executive officer and an officer of the Company the recording of amortization of license agreement of $52,250, capitalization of the license agreement of $209,000 and the recording of accumulated amortization and accrued payable on license agreement of $60,958 and $135,000, 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 have been recognized as deferred offering cost. Consolidated Balance Sheet data As at June 30, 2010 (Unaudited) Adjustments As Filed to Restate Restated -------- ----------- -------- Deferred offering cost $ - $ 300,000 $ 300,000 ---------- --------- ----------- Total Current Assets 83,345 300,000 383,345 ---------- --------- ----------- License agreement, net $ - 148,042 (a)(b)$ 148,042 ---------- --------- ----------- Total Assets 83,704 448,042 531,746 ========== ========= =========== Accounts payable and accrued expenses 168,962 80,000 (h) 248,962 Accrued payable on license agreement - 135,000 (c) 135,000 ---------- --------- ----------- Total Current Liabilities 1,177,814 215,000 1,392,814 ---------- --------- ----------- Total Liabilities 1,177,814 215,000 1,392,814 ---------- --------- ----------- Stockholders' Deficit Additional paid-in capital 7,066,838 300,000 7,366,838 Accumulated deficit (8,270,470) (66,958) (8,337,428) ---------- --------- ----------- Total Stockholders' Deficit (1,094,110) 233,042 (861,068) ---------- --------- ----------- Total Liabilities and Stockholders' Deficit $ 83,704 $ 448,042 $ 531,746 ========== ========= =========== (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 $60,958. (c) To record the remaining obligation under the license agreement ($209,000 less $74,000 representing cash payment of $30,000 and stock payment valued at $44,000).
25 Consolidated Statement of Income data For the Three Months Ended June 30, 2010 (Unaudited) Adjustments As Filed to Restate Restated -------- ----------- -------- Other selling, general and administrative expenses $ 44,939 $ 16,125 $ 61,064 --------- --------- --------- Total operating expenses 95,110 16,125 (d)(e) 109,608 --------- --------- --------- Loss from operations 86,755 16,125 102,880 --------- --------- --------- Net loss $ 92,613 $ 16,125 $ 108,738 ========= ========= ========= Net loss per Common Share: Basic $ (0.00) $ - $ (0.00) ========= ========= ========= Diluted $ (0.00) $ - $ (0.00) ========= ========= ========= Weighted Average Common Shares Outstanding: Basic 158,084,352 158,084,352 =========== =========== Diluted 158,084,352 158,084,352 =========== =========== Consolidated Statement of Income Data For the Six Months Ended June 30, 2010 (Unaudited) Adjustments As Filed to Restate Restated -------- ----------- -------- Other selling, general and administrative expenses $ 90,369 $ 32,250 $ 122,619 --------- --------- --------- Total operating expenses 188,593 32,250 (f)(g) 220,843 --------- --------- --------- Loss from operations 172,576 32,250 204,826 --------- --------- --------- Net loss $ 179,547 $ 32,250 $ 211,797 ========= ========= ========= Net loss per Common Share: Basic $ (0.00) $ - $ (0.00) ========= ========= ========= Diluted $ (0.00) $ - $ (0.00) ========= ========= ========= Weighted Average Common Shares Outstanding: Basic 155,583,217 155,583,217 =========== =========== Diluted 155,583,217 155,583,217 =========== ===========
26 (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 June 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 June 30, 2010. (f) To reflect the reversal of license fees included in other selling, general, and administrative expense of $20,000 representing cash payment during the six months ended June 30, 2010. (g) To record amortization expense on the license agreement over the term of the agreement amounting to $52,250 during the six months ended June 30, 2010. (h) To record accrued salaries of $80,000 in fiscal 2009 which represents 2,000,000 shares of common stock of the Company payable to the chief executive officer and an officer of the Company pursuant to their amended employment agreements. During fiscal 2009, the Company used the fair market value on the date of grant at $.04 per share. Consolidated Statement of Cash Flows For the Six Months Ended June 30, 2010 (Unaudited) Adjustments As Filed to Restate Restated -------- ----------- -------- Net loss $ 179,547 $ 32,250 $ 211,797 --------- --------- --------- Adjustments to reconcile net loss to net cash used in operating activities: Amortization of license agreement - (52,250) (g) (52,250) Changes in assets and liabilities: Accrued payable on license Agreement - 20,000 20,000 --------- --------- --------- Cash Used in Operating Activities (180,681) - (180,681) --------- --------- ---------
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 $8.3 million, a working capital deficit of $929,469, had net losses for the six months ended June 30, 2010 of $211,797 and cash used in operations during the six months ended June 30, 2010 of $180,681. 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. 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
29 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 ("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. Results of Operations --------------------- Six months ended June 30, 2010 compared to six months ended June 30, 2009 Net sales for the six months ended June 30, 2010 were $16,017 as compared to net sales of $54,661 for the six months ended June 30, 2009, a decrease of $38,644 or approximately 71%. 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 six months ended June 30, 2010 were $220,843, an increase of $76,030, or approximately 53%, from total operating expenses for the six months ended June 30, 2009 of $144,813. This decrease is primarily attributable to: - an increase of $6,609, or approximately 29%, 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,
30 - a slight increase of $160, or approximately 1%, in consulting fees. - an increase of $10,618, or 27%, in compensation expense to $50,160 for the six months ended June 30, 2010 as compared to $39,542 for the six months ended June 30, 2009. The increase is attributable to increases in compensation levels of certain of our employees, - an increase of $58,643, or approximately 92%, 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 $52,250 and office expense attributable to our subsidiary Genesis Electronics Inc. We reported a loss from operations of $204,826 for six months ended June 30, 2010 as compared to a loss from operations of $90,152 for the six months ended June 30, 2009. Total other expense for the six months ended June 30, 2010 were $6,971, a decrease of $191,255, from total other expense for six months ended June 30, 2009 of $198,226. - Interest expense consists primarily of interest recognized in connection with the amortization of debt discount, and interest on our promissory notes. The decrease of $191,255 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 six months ended June 30, 2009. We have recognized non-recurring interest expense of $196,000 in connection with this settlement in 2009. We reported a net loss of $211,797 or (0.00) per share for the six months ended June 30, 2010 as compared to a net loss of $288,378 or $(0.00) per share for the six months ended June 30, 2009. Three months ended June 30, 2010 compared to three months ended June 30, 2009 Net sales for the three months ended June 30, 2010 were $8,355 as compared to net sales of $24,117 for the three months ended June 30, 2009, a decrease of $15,762 or approximately 65%. 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 three months ended June 30, 2010 were $127,360, an increase of $40,835, or approximately 47%, from total operating expenses for the three months ended June 30, 2009 of $86,525. This decrease is primarily attributable to: - a slight increase of $76, or approximately 1%, in professional fees incurred in connection with our SEC filings,
31 - a decrease of $6,319, or approximately 76%, in consulting fees, - an increase of $8,510, or 41%, in compensation expense to $29,520 for the three months ended June 30, 2010 as compared to $21,010 for the three months ended June 30, 2009. The increase is attributable to increases in compensation levels of certain of our employees, - an increase of $38,568, or approximately 100%, 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 $119,005 for three months ended June 30, 2010 as compared to a loss from operations of $62,408 for the three months ended June 30, 2009. Total other expense for the three months ended June 30, 2010 were $5,858, a decrease of $191,255, from total other expense for six months ended June 30, 2009 of $197,113. - Interest expense consists primarily of interest recognized in connection with the amortization of debt discount, and interest on our promissory notes. The decrease of $191,255 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 six months ended June 30, 2009. We have recognized non-recurring interest expense of $196,000 in connection with this settlement in 2009. We reported a net loss of $124,863 or $(0.00) per share for the three months ended June 30, 2010 as compared to a net loss of $259,521 or $(0.00) per share for the three months ended June 30, 2009. Liquidity and Capital Resources ------------------------------- During the six months ended June 30, 2010, we received net proceeds of $123,755 and subscription receivable of $40,000 from the sale of our common stock. For the six months ended June 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 six months ended June 30, 2010 amounted to $180,681 and was primarily attributable to our net losses of $211,797 offset by depreciation of $336, amortization of license agreement of $52,250, stock based expense of $10,000, amortization of debt discount of $4,493 and add back of changes in assets and liabilities of $35,963. Net cash used in operating activities for the six months ended June 30, 2009 amounted to $92,489 and was primarily attributable to our net losses of $288,378 offset by depreciation of $337, interest expense of $196,000 in connection with the settlement of a related party loan and changes in assets and liabilities of $448.
32 Net cash flows provided by financing activities was $163,797 for the six months ended June 30, 2010 as compared to net cash provided by financing activities of $168,979 for the six months ended June 30, 2009, a decrease of $5,182. For the six months ended June 30, 2010, we received proceeds from the sale of common stock and collection of subscription receivable of $187,597 and an offset by payments on related party advances of $23,800. For the six months ended June 30, 2009, we received proceeds from the sale of common stock and collection of subscription receivable of $171,779 offset by payments on related party advances of $2,800. We reported a net decrease in cash for the six months ended June 30, 2010 of $16,884 as compared to a net increase in cash of $76,490 for the six months ended June 30, 2009. At June 30, 2010, we had cash on hand of $49,185. Contractual Obligations and Off-Balance Sheet Arrangements ----------------------------------------------------------- Contractual Obligations The following tables summarize our contractual obligations as of June 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 - - - Convertible debt 931,919 931,919 - - - Loans payable - related party 16,685 16,685 - - - Accrued interest 21,277 21,277 ---------- ---------- -------- -------- -------- Total Contractual Obligations: $1,045,528 $1,045,528 $ - $ - $ - License Agreement In November 2009, we 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 solar powered cell phone and iPod chargers. To date, we have paid $30,000 and issued 2 million shares of the Company's common stock. Remaining future license payments under the license agreement are as follows: Due September 1, 2010 $10,000 Due upon the one year anniversary of the license $125,000
33 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 Tangiers 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 Tangiers 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 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, Tangiers Investors, LP, whereby the debenture shall be convertible at a fixed conversion price of $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.
34 Recently Issued Accounting Pronouncements In June 2009, the FASB issued Accounting Standards Update No. 2009-01, "Generally Accepted Accounting Principles" which establishes the FASB Accounting Standards Codification as the official single source of authoritative U.S. generally accepted accounting principles. All existing accounting standards are superseded. All other accounting guidance not included in the Codification will be considered non- authoritative. The Codification also includes all relevant Securities and Exchange Commission guidance organized using the same topical structure in separate sections within the Codification. Following the Codification, the Board will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification. The Codification is not intended to change GAAP, but it will change the way GAAP is organized and presented. The Codification is effective for our third-quarter 2009 financial statements and the principal impact on our financial statements is limited to disclosures as all future references to authoritative accounting literature will be referenced in accordance with the Codification. In May 2009, the FASB issued ASC Topic 855, "Subsequent Events". This guidance is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. It is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this guidance did not have a material impact on our consolidated financial statements. 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
35 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 registrant is currently evaluating this new ASU. 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 registrant is currently evaluating this new ASU. 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. 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.
36 Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable to smaller reporting companies. Item 4. Controls and Procedures Evaluation of Changes in Internal Control over Financial Reporting: During the three months ended June 30, 2010, there were no changes in our internal controls over financial reporting (as defined in Rule 13a- 15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to material affect, our internal control over financial reporting. Evaluation of Disclosure Controls and Procedures: 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 of 1934 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. Our management does not expect that our disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. 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, Edward Dillon, our chief executive officer, and Nelson Stark, our chief financial officer concluded that because of the material weaknesses in internal control over financial reporting described below, our disclosure controls and procedures were not effective as of June 30, 2010.
37 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), have 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 six months ended June 30, 2010, we received net proceeds of $30,000 from the sale of 585,000 shares of unregistered common shares. In April 2010, we received net proceeds of approximately $30,000 from the sale of 585,000 shares of our common stock. In July 2010, in connection with a consulting agreement, we issued 350,000 shares of common stock for public relations and marketing services until September 15, 2010. In July 2010, we issued in aggregate 2,000,000 shares of common stock to our CEO and officer of the Company in connection with their employment agreements. 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
38 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, CEO and Director By: /s/ Nelson Stark --------------------------- Nelson Stark, CFO and Director