U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1997
Commission file number: 0-22057
GK INTELLIGENT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1079784
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5555 SAN FELIPE, SUITE 625
HOUSTON, TX 77056
(Address of principal offices)
(713) 840-7722
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for past 90 days.
Yes [X] No [ ]
Issuer had no revenues for the quarter ended August 31, 1997.
As of October 15, 1997 registrant had 15,935,619 shares of Common Stock
outstanding.
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GK INTELLIGENT SYSTEMS, INC.
FORM 10-QSB REPORT INDEX
10-QSB PART AND ITEM NO. PAGE NO.
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Balance Sheet as of August 31, 1997........................3
Statements of loss for the three months ended
March 31, 1997 and 1996..................................4
Statements of cash flows for the three months ended
March 31, 1997 and 1996..................................5
Notes to financial statements..............................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............7
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS..........................................9
ITEM 2. CHANGES IN SECURITIES......................................9
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS......................................9
ITEM 5. OTHER INFORMATION..........................................9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...........................9
2
<PAGE>
GK INTELLIGENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
(Unaudited)
AUGUST 31,
1997
------------
ASSETS
Current:
Cash ......................................................... $ 216,010
Prepaid expenses ............................................. 52,519
Total Current Assets ........................................... 268,529
Computer software costs, net ................................... 2,606,132
Other equipment, net ........................................... 178,348
Organization costs, net ........................................ 35,435
Other .......................................................... 7,191
------------
Total Assets ................................................... $ 3,095,635
============
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
Current Liabilities:
Accounts payable and accrued liabilities ..................... $ 86,979
Due to majority stockholder .................................. 145,851
Capital lease obligations, current portion ................... 16,920
Total Current Liabilities ...................................... 249,750
------------
Capital lease obligations, less current portion ................ 88,974
------------
Commitments and Contingencies
Stockholders' Equity (Capital Deficit):
Series A preferred stock; redeemable and convertible
with liquidation preference of $6.00 per share ............. 3,389,432
Common stock ................................................. 15,800
Additional paid-in capital ................................... 12,657,641
Deficit accumulated during the development stage ............. (13,305,962)
------------
Total Stockholders' Equity (Capital Deficit) ................... 2,756,911
------------
Total Liabilities and Stockholders' Equity ..................... $ 3,095,635
============
3
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GK INTELLIGENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF LOSS
(Unaudited)
THREE MONTHS ENDED
AUGUST 31,
-----------------------------
1997 1996
------------ -----------
Revenues .................................... $ -- $ --
Expenses:
Depreciation and amortization ............ 215,090 199,188
President's compensation ................. 60,000 60,000
Employee compensation .................... 386,726 --
Professional services .................... 314,104 62,178
Other general and administrative ......... 128,663 23,372
------------ -----------
Net loss .................................... $ (1,104,583) $ (344,738)
============ ===========
Net Loss Per Share of Common Stock .......... $ (.09) $ (.04)
============ ===========
Weighted Average Number of Shares of
Common Stock Outstanding ................. 12,775,988 9,282,992
============ ===========
4
<PAGE>
GK INTELLIGENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
(Unaudited)
INCREASE (DECREASE) IN CASH
THREE MONTHS ENDED
AUGUST 31,
------------------------
1997 1996
----------- ---------
Operating activities:
Net loss ......................................... $(1,104,583) $(344,738)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ................ 215,090 199,188
Issuance of common stock and warrants
for various expenses ....................... 468,794 2,833
Changes in assets and liabilities:
Other current assets ....................... 6,004 --
Accounts payable and accrued liabilities ... (74,736) 31,752
----------- ---------
Net cash used in operating activities .... (489,431) (110,965)
----------- ---------
Investing activities:
Purchased software ............................... (49,487) (9,999)
Other capital expenditures ....................... (10,994) (3,834)
----------- ---------
Net cash used in investing activities .... (60,481) (13,833)
----------- ---------
Financing activities:
Proceeds from private placements ................. 427,064 152,500
Repayment of borrowings .......................... (9,607) (3,901)
----------- ---------
Net cash provided by financing activities 417,457 148,599
----------- ---------
Net increase in cash ............................... (132,455) 23,801
Cash at beginning of period ........................ 348,465 19,283
----------- ---------
Cash at end of period .............................. $ 216,010 $ 43,084
=========== =========
5
<PAGE>
GK INTELLIGENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. ACCOUNTING POLICIES
The accompanying unaudited financial statements have been prepared in accordance
with the instructions to interim financial reporting as prescribed by the
Securities and Exchange Commission. All adjustments, which, in the opinion of
management, are necessary for a fair presentation of the results for the interim
periods have been reflected in the accompanying unaudited financial statements.
For further information regarding accounting policies, refer to the Company's
audited financial statements for the years ended May 31, 1997 and 1996 and for
the period from inception (October 4, 1993) through May 31, 1997 included in the
Company's 1997 Annual Report on Form 10-KSB.
2. GOING CONCERN UNCERTAINTY AND MANAGEMENT PLANS
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered recurring
operating losses since its inception that raise substantial doubt about its
ability to meet future expected expenditures necessary to fully develop its
software products and applications and to continue as a going concern. The
financial statements do not reflect any adjustments that might result from the
outcome of this uncertainty. In this regard, the Company is currently seeking
short and long term debt or equity financing sufficient to fund projected
working capital and software product development needs and is anticipating the
general release of several software products into the market during 1998.
However, there can be no assurance that the amount and terms of such debt or
equity financing, or that the profits from the sale of software products in 1998
will be sufficient to fund the Company's software development expenditure
requirements. Accordingly, the Company will continue to seek additional sources
of financing as may be necessary.
3. PRIVATE PLACEMENT
During June and July, 1997, the Company issued 459,000 shares of its common
stock to accredited investors for net proceeds of approximately $427,000.
4. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the three months ended August 31, 1997, the Company recorded non-cash
compensation expense as a result of the (i) issuance of 100,000 shares of common
stock to key employees valued at $212,000, (ii) recognition of $55,131 of
employee compensation associated with common stock warrants granted in 1997,
(iii) issuance of 50,000 shares of common stock to key professionals valued at
$106,250 and (iv) recognition of $95,413 of compensation to key professionals
associated with common stock warrants granted in 1997. Non-cash compensation
expense recorded during the three months ended August 31, 1997 was determined
using the estimated fair market value of the Company's common stock or common
stock warrants on the date such instruments were granted.
In 1997, the Company's board of directors approved the issuance of a total of
2,900,000 shares of the Company's common stock to (i) the president and majority
stockholder, (ii) a director, (iii) a consultant and (iv) certain key employees
for services performed in 1997 valued at $2.00 per share, or $5,800,000. The
Company's May 31, 1997 financial statements included an accrual for the issuance
of such shares. During the three months ended August 31, 1997, the Company
formally issued the shares described above and accordingly, the $5,800,000
compensation accrual was reclassified to common stock and additional paid-in
capital in the accompanying financial statements.
6
<PAGE>
PART I. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the attached
condensed financial statements and notes thereto.
OVERVIEW
The Company is a development stage enterprise engaged in the acquisition,
development and marketing of sophisticated software products and applications.
From inception (October 4, 1993) to date, the Company has realized no revenues
and its activities have been limited to the acquisition of software assets used
to develop its planned line of intelligent products and applications, product
development, research and development of software products and initial marketing
activities.
RESULTS OF OPERATIONS
REVENUES. There were no revenues for the quarters ended August 31, 1997 and
1996. The Company does not expect to begin to realize any significant revenues
until at least the end of the third quarter of the fiscal year ending May 31,
1998.
EXPENSES. Expenses for the quarter ended August 31, 1997 increased by $759,845
to $1,104,583 from $344,738 in the same period in 1996, a 220% increase. The
increase is due primarily to increases in employee compensation, professional
services and other general and administrative expenses as described below.
Employee compensation for the quarter ended August 31, 1997 increased to
$386,726 from $0 in the same period in 1996 due to the hiring of product
management, research and development, and administrative employees, primarily
during fiscal 1997, in order to carry out the development and marketing of the
Company's planned software products and applications. In addition, employee
compensation for the quarter ended August 31, 1997 includes $267,131 of non-cash
compensation resulting from (i) the issuance of 100,000 shares of common stock
to key employees in recognition of their services and loyalty to the Company
valued at $212,000 and (ii) the recognition of $55,131 of compensation
associated with common stock warrants granted to key employees in recognition of
their services and loyalty to the Company during the fiscal year ended May 31,
1997.
Professional services for the quarter ended August 31, 1997 increased by
$251,926 to $314,104 from $62,178 in the same period in 1996 due primarily to
increased business activity undertaken by the Company relating to its underlying
technology contracts and its initial filings of Forms 10-SB and 10-KSB with the
Securities and Exchange Commission. In addition, professional services for the
quarter ended August 31, 1997 includes $201,663 of non-cash compensation
resulting from (i) the issuance of 50,000 shares of common stock to key
professionals in recognition of their services and loyalty to the Company valued
at $106,250 and (ii) the recognition of $95,413 of compensation associated with
common stock warrants granted to key professionals in recognition of their
services and loyalty to the Company during the fiscal year ended May 31, 1997.
Other general and administrative expenses for the quarter ended August 31, 1997
increased by $105,291 to $128,663 from $23,372 in the same period in 1996 due
primarily to the general increase in the Company's business activities described
above as well as the increased level of employees needed to support such
activities.
7
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
GOING CONCERN UNCERTAINTY AND MANAGEMENT'S PLANS. The Company has suffered
recurring operating losses since its inception that raise substantial doubt
about its ability to meet future expected expenditures necessary to fully
develop its planned software products and applications and to continue as a
going concern. The accompanying unaudited financial statements do not reflect
any adjustments that might result from the outcome of these uncertainties. The
current cash forecast indicates that there will be negative cash flow from
operations for at least the first three quarters of the fiscal year ending May
31, 1998. The Company is currently seeking short and long term debt or equity
financing sufficient to fund projected working capital and software product and
application development needs. However, there is no assurance that sufficient
proceeds will be obtained or that the Company will reach a positive cash flow
position in the future.
CASH USED IN OPERATING ACTIVITIES. The Company's net cash flow from operating
activities resulted in deficits of $489,431 and $110,965 for the three month
periods ended August 31, 1997 and 1996, respectively. The $378,466 increase is
due primarily to the increase in business activity undertaken by the Company
relating to the development of its software products and applications and its
initial filings of Forms 10-SB and 10-KSB with the Securities and Exchange
Commission.
CASH USED IN INVESTING ACTIVITIES. The Company's net cash used in investing
activities during the quarter ended August 31, 1997 increased by $46,648 to
$60,481 from $13,833 in the same period in 1996 due primarily to the increased
development activities associated with its planned software products and
applications.
CASH FLOW FROM FINANCING ACTIVITIES. The Company's net cash flows from financing
activities during the quarter ended August 31, 1997 increased by $268,858 to
$417,457 from $148,599 in the same period in 1996 due primarily to the issuance
of 459,000 shares of the Company's common stock during June and July, 1997, to
thirty-one accredited investors at $1.00 per share. Based on the Company's
current plan of operations it is anticipated that its current cash balance will
provide sufficient working capital for approximately two months. The Company
will need additional financing thereafter to continue development and marketing
of its products and applications. Additionally, the Company may require
significant additional financing to complete any acquisition in furtherance of
product or application development. If financing is required, such financing may
be raised through additional equity offerings, joint ventures or other
collaborative relationships, borrowings or other sources. In this regard, the
Company is currently negotiating with several potential investors to obtain both
short term and long term capital. To date however, the Company has no firm
commitment for any such additional financing and there can be no assurance that
any such financing will be available or, if it is available, that it will be
available on acceptable terms to the Company. If adequate funds are not
available to satisfy either short or long-term capital requirements, the Company
may be required to limit its operations significantly.
8
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - None
ITEM 2. CHANGES IN SECURITIES - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5. OTHER INFORMATION - Subsequent event.
On October 24, 1997, the Company established a six-month
commercial line of credit at Southwest Bank of Texas. This
credit facility bears interest at the Bank's prime rate plus
one percent, is personally guaranteed by Gary Kimmons, and
secured by the Company's accounts, general intangibles,
contract rights and chattel paper, including but not limited
to the Company's computer software and proceeds therefrom. The
initial draw against the line of credit is $25,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS - None
(b) REPORTS ON FORM 8-K - None
9
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GK Intelligent Systems, Inc.
Date: October 24, 1997 By //S//ROD NORVILLE
Rod Norville, Director,
Chief Financial Officer,
Chief Accounting Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S QUARTERLY REPORT FOR THE THREE MONTH PERIOD ENDED AUGUST 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-END> AUG-31-1997
<CASH> 216
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<ALLOWANCES> 0
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<CURRENT-ASSETS> 269
<PP&E> 4,302
<DEPRECIATION> (1,517)
<TOTAL-ASSETS> 3,096
<CURRENT-LIABILITIES> 250
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0
3,389
<COMMON> 16
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