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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________to_________
Commission File No. 000-31871
iGENISYS, INC.
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(Exact Name of Registrant as Specified in its Charter)
Colorado 84-1485196
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
654 North Belt East, Suite 310
Houston, Texas 77060
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(Address of principal executive offices)(Zip code)
(281) 820-0200
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(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Number of shares of common stock outstanding at November 20, 2000: 10,925,025
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iGENISYS, INC. AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial statements:
Independent accountants' report 3
Condensed consolidated balance sheet - September 30, 2000 4-5
Condensed consolidated statements of operations -
three and six months ended September 30, 2000 and 1999 6
Condensed consolidated statements of cash flows -
six months ended September 30, 2000 and 1999 7-8
Notes to condensed consolidated financial statements 9-11
Item 2. Management's discussion and analysis of financial condition
and results of operations 12-22
PART II. OTHER INFORMATION 23
SIGNATURES 24
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
iGeniSys, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
iGeniSys, Inc. and subsidiary as of September 30, 2000, and the related
condensed consolidated statements of operations for the three-month and six-
month periods then ended. These financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
for them to be in conformity with generally accepted accounting principles.
GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
November 17, 2000
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<TABLE>
<CAPTION>
iGENISYS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2000
(UNAUDITED)
ASSETS
------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 25,170
Accounts receivable, net of allowance
for doubtful accounts $65,400 783,277
Contracts in process 80,848
Prepaid expenses and other 17,105
-----------
Total current assets 906,400
FURNITURE AND EQUIPMENT, net 113,844
INTANGIBLES AND OTHER ASSETS:
Development costs, net of accumulated
amortization $110,464 (Note 2) 413,949
Deferred offering costs (Note 3) 90,608
Deposits and other 8,903
------------
$ 1,533,704
============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
-------------------------------------------------
CURRENT LIABILITIES:
Revolving line of credit $ -
Notes Payable:
Related parties (Note 4) 1,065,096
Other 91,258
Current portion of obligations under
capital leases 2,133
Accounts payable 749,018
Accrued expenses 362,209
Deferred contract revenue 9,000
Management fees payable, affiliate 96,000
-----------
Total current liabilities 2,374,714
-----------
LONG-TERM DEBT:
Long-term portion of obligations under
capital leases 16,752
-----------
Total liabilities 2,391,466
-----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIENCY) (Note 5):
Preferred stock, $.01 par value; authorized
50,000,000 shares; no shares issued and
outstanding -
Common stock, $.001 par value; authorized
100,010,000 shares:
Class A; issued and outstanding 10,915,025
shares 10,915
Class B; issued and outstanding 10,000
shares 10
Additional paid-in capital 1,229,250
Accumulated deficit (2,097,937)
-----------
Total shareholders' equity
(deficiency) (857,762)
-----------
$ 1,533,704
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<TABLE>
<CAPTION>
iGENISYS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED SEPTEMBER 30
(UNAUDITED)
For the three months For the Six Months
Ended September 30, Ended September 30,
---------------------- ----------------------
2000 1999 2000 1999
----- ----- ----- ------
<S> <C> <C> <C> <C>
REVENUES $ 753,681 $ 712,609 $1,689,061 $1,542,924
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Contract costs 321,598 369,718 729,691 927,748
Research and
development - 71,508 - 196,806
Selling, general
and administra-
tive:
Affiliates 9,000 9,000 18,000 18,000
Other 464,130 451,613 1,014,072 867,901
Depreciation and
amortization 42,667 43,738 85,115 74,515
----------- ----------- ---------- -----------
837,395 945,577 1,846,878 2,084,970
----------- ----------- ---------- -----------
OPERATING LOSS (83,714) (232,968) (157,817) (542,046)
----------- ----------- ---------- -----------
INTEREST EXPENSE:
Related parties 41,078 - 69,168 8,204
Other 23,043 19,701 58,205 44,131
----------- ----------- ---------- -----------
64,121 19,701 127,373 52,335
----------- ----------- ---------- -----------
NET LOSS $ (147,835) $ (252,669) $ (285,190) $ (594,381)
=========== =========== =========== ===========
BASIC AND DILUTED
LOSS PER COMMON
SHARE $ (.01) $ (.02) $ (.03) $ (.06)
=========== =========== =========== ===========
WEIGHTED AVERAGE
NUMBER OF COMMON
SHARES
OUTSTANDING 10,925,025 10,240,695 10,925,025 10,099,640
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<TABLE>
<CAPTION>
iGENISYS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED SEPTEMBER 30
(UNAUDITED)
2000 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $ (285,190) $(594,381)
Adjustments to reconcile net
loss to net cash (used in)
provided by operating
activities -
Provision for doubtful accounts 43,100 20,500
Depreciation and amortization 85,115 74,515
(Increase) decrease in -
Accounts receivable (125,156) 365,972
Contracts in process 28,055 65,980
Prepaid expenses and other
assets 2,456 (27,457)
Increase (decrease) in -
Accounts payable 105,626 40,442
Accrued expenses 67,926 25,936
Deferred contract revenue (24,000) -
Management fees payable,
affiliate 18,000 18,000
Due to affiliate - (34,931)
------------ ------------
Net cash used by operating
activities (84,068) (45,424)
------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of furniture and
equipment (10,006) (41,474)
Development costs (122,436) (19,265)
------------ ------------
Net cash used in investing
activities (132,442) (60,739)
------------ ------------
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CASH FLOWS FROM FINANCING
ACTIVITIES:
(Repayment of) increase in bank
overdraft (39,860)
Repayment of notes payable,
related party (31,287) -
Proceeds from notes payable,
related party 220,000 -
Increase (decrease) in line of
credit, net, related party 627,674 (335,909)
Increase (decrease) in line of
credit, net (540,731) 287,869
Repayments of obligations under
capital leases (8,006) (15,316)
Deferred offering costs (37,373) -
Proceeds from issuance of common
stock - 246,800
------------ ------------
Net cash provided by financing
activities 230,277 143,584
------------ ------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 13,767 37,421
CASH AND CASH EQUIVALENTS,
BEGINNING 11,403 -
------------ ------------
CASH AND CASH EQUIVALENTS ENDING $ 25,170 $ 37,421
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest $ 87,232 $ 52,335
============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In August 1999, an affiliate's note payable of $91,258 to a bank was assumed
by the Company in exchange for a $91,258 reduction in amounts the Company owed
to the affiliate.
</TABLE>
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iGENISYS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
1. Basis of presentation:
The condensed consolidated financial statements of iGeniSys, Inc. and
subsidiary (the "Company") for the three-month and six-month periods ended
September 30, 2000 and 1999, have been prepared by the Company, without audit
by the Company's independent auditors. In the opinion of the Company's
management, all adjustments necessary to present fairly the financial
position, results of operations, and cash flows of the Company as of September
30, 2000, and for the periods then ended have been made. Those adjustments
consist only of normal and recurring adjustments.
Certain information and note disclosures normally included in the
Company's annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. These
condensed consolidated financial statements should be read in conjunction with
a reading of the financial statements and notes thereto included in the
Company's Form SB-2 filed November 6, 2000 with the Securities and Exchange
Commission. The results of operations for the three and six months ended
September 30, 2000 and 1999, are not necessarily indicative of the results to
be expected for the full year.
The condensed consolidated financial statements as of and for the periods
ended September 30, 2000 include the accounts of iGeniSys, Inc., and GeniSys
Information Systems, Inc. All significant intercompany accounts and
transactions have been eliminated in consolidation.
2. Recent accounting pronouncements:
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities was issued in June 1998. This statement, as amended, is effective
for fiscal years beginning after June 15, 2000. Currently, the Company does
not have any derivative financial instruments and does not participate in
hedging activities, therefore management believes SFAS No. 133 will not impact
the Company's financial position or results of operations.
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin ("SAB") No. 101 Revenue Recognition in
Financial Statements. SAB No. 101, as amended by SAB No.101A and SAB No.
101B, is effective no later than the fourth fiscal quarter of fiscal years
beginning after December 31, 1999. SAB No. 101 provides the staff's views in
applying generally accepted accounting principles to selected revenue
recognition issues. Currently, the Company believes it complies with the
accounting and disclosure described in SAB No. 101, therefore, management
believes that SAB No. 101 will not impact the Company's financial statements.
3. Development costs:
The Company's software development costs consist primarily of
enhancements and software production costs related to products for which
technological and market feasibility has been established. Accordingly, such
costs are capitalized as incurred. In the six month period ended September
30, 2000 the Company capitalized costs of approximately $122,000. Amortization
of the capitalized cost begins, on a straight-line basis over the estimated
lives of the products, which is generally three years, when the product is
complete. Amortization expense of approximately $54,000 and $46,000 was
recorded related to these costs during the six month periods ended September
30, 2000 and 1999, respectively and approximately $27,000 and $30,000 during
the three months ended September 30, 2000 and 1999, respectively.
Capitalization ceases when the product has been completed and the product is
ready for release to our customers. Prior to the establishment of
technological and market feasibility, development costs are expensed. None of
these costs were incurred under contracts with customers. In the six month
and three month periods ended September 30, 2000, the Company did not incurred
any costs for research and development expenses related to software
development. In the six month and three month periods ended September 30,
1999, the Company incurred approximately $197,000, and $72,000, respectively
for research and development expenses related to software development.
4. Deferred offering costs:
Specific incremental costs incurred in connection with the Company's
initial public offering (Note 5) have been deferred and will be charged
against the gross proceeds of the offering. If the offering is not
successful, the costs will be charged to operations.
5. Related party transactions:
In May 2000, the Company entered into a revolving line of credit
factoring arrangement ("Credit Agreement") with its major shareholder.
Under the terms of this agreement, which are similar to a factoring
arrangement, the Company is able to obtain financing for 85% of specific
accounts receivable up to $750,000. The Company pays a processing fee for
financing each receivable depending upon the number of days from the funding
of the advance until that invoice is paid by the customer. In addition, the
Company pays interest on the total amount advanced at a rate equal to the
prime rate plus 2%. The receivables are financed on a full recourse basis
and, accordingly, the Credit Agreement is accounted for as a borrowing. The
agreement can be terminated with 30 days notice after certain events are met.
The agreement matures in May 2001. At September 30, 2000, the outstanding
balance due under the Credit Agreement was $627,674.
In April 2000, the major shareholder and the Company entered into a
$750,000 line of credit agreement with a bank. The line of credit bears
interest at the Wall Street Journal prime rate plus 1/2% (9.5% at inception).
Interest is due monthly and the line matures in April 2001. At September 30,
2000, the major shareholder had borrowed $746,759 under the line, of which
$627,674 was advanced to the Company under the Credit Agreement. As co-signer
on the bank line of credit agreement, the Company is contingently liable for
the $746,759 of borrowings made by the major shareholder. However, the major
shareholder has agreed to apply payments received under the Credit Agreement,
net of fees, interest and other charges, to the repayment of the bank line of
credit, and to indemnify and hold harmless the Company to the extent of
payments.
6. Capital stock:
The Company has 50,000,000 shares of $.01 par value preferred stock
authorized, with no shares issued. These shares, when issued, will have
preferences and restrictions as determined by the Company's board of
directors.
The common stock of the Company is divided into Class A and Class B
shares. There are a total of 100,010,000 shares of $.001 par value common
stock authorized with 10,000 being designated as Class B shares. The rights
of Class A and B shares are identical, except that Class B shares may only be
issued to the Company's chairman of the board and chief executive officer (the
"chairman"). Further, Class B shares have the right to elect a majority of
the board of directors and such shares automatically convert to Class A shares
on a one-for-one basis upon the transfer to a person other than the chairman
or entity not controlled directly or indirectly by the chairman.
In May 1999, the Company adopted the 1999 Equity Incentive Plan (the
"Plan"), which provides for awards in the form of options, including incentive
stock options (ISOs), non-statutory options (NSOs), stock bonuses, rights to
purchase restricted stock, and stock appreciation rights (SARs). Employees,
directors, consultants and advisors of the Company will be eligible for the
grant of NSO's, stock bonuses, and rights to purchase restricted stock. Only
employees will be eligible for the grant of ISOs and SARs. Under the Plan,
options issued are to generally have exercise prices not less than the fair
value of the Company's common stock. Options generally vest over a nine-year
period. An aggregate of 2,500,000 shares of the Company's common stock is
reserved for issuance under the Plan. Management believes that the exercise
price of the options granted to employees was equal to the market value of the
Company's common stock at the date of grant (based on the Company's private
placements of common stock) and, accordingly, no compensation expense has been
recorded.
The following table summarizes the aggregate stock option activity for
the six months ended September 30, 2000:
<TABLE>
<CAPTION>
Range of
Shares exercise price
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<S> <C> <C>
Outstanding at March 31, 2000 1,520,000 $ 0.40
Granted 190,000 0.60-1.50
Exercised - -
Forfeited - -
---------- -----------
Outstanding at September 30, 2000 1,710,000 $ .40-1.50
========== ===========
</TABLE>
7. Initial Public Offering:
The Company has filed a registration statement with the Securities and
Exchange Commission for the initial public offering of its common stock, which
became effective in November 2000. The Company plans to sell up to 1,500,000
shares of common stock for a proposed offering price of approximately $1.50
per share. To date, no shares have been sold as a part of this offering.
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<PAGE>
Item 2 - Management's Discussion and Analysis of financial condition and
results of operations
The following Management's Discussion and Analysis should be read in
conjunction with the accompanying unaudited Condensed Consolidated Financial
Statements and Notes thereto.
FORWARD LOOKING STATEMENTS
The statements in this Quarterly Report on Form 10-QSB that are not based
on historical data are forward looking, including for example, information
about future sales growth; expected changes in levels of various expenses; the
Company's plans for future investments in new services, or products; and
financing plans and expectations.
Forward looking statements involve numerous known and unknown risks and
uncertainties that could cause actual results to be materially different from
estimated or expected results. Such risks and uncertainties include, among
others, a change in the Company's business model, adequate funding to execute
business plans, fluctuating contract margins, changing levels of demand for
the Company's products and services, the effect of constantly changing general
economic and political conditions, the impact of competitive services and
pricing, uncertainties caused by clients (including the timing of projects and
changes in the scope of services requested) and other risks and uncertainties
that may be disclosed from time to time in the future public statements or in
documents filed with the Securities and Exchange Commission. As a result, no
assurance can be given as to future results.
OVERVIEW
We operate with iGeniSys, Inc. as the holding company of our subsidiary,
GeniSys Information Systems, Inc. Our operations to date have been conducted
through our subsidiary. Our primary business is consulting in the project
management arena and the development of project and enterprise management
software. We also perform services relating to assisting our customers in
implementing our software and improving overall project management and
control.
Historically we have been primarily a project management consulting firm with
limited sales of software. Our revenues have been derived from consulting
with clients on a wide range of project management issues.
Results of operations - three months ended September 30, 2000 compared to
three months ended September 30, 1999
REVENUES
Revenues for the three months ended September 30, 2000 were $754,000, an
increase of $41,000, or 6% from the prior year's second quarter of $713,000.
The increase in revenues reflects strong consulting revenues to the Company's
largest customer.
OPERATING EXPENSES
Contract Costs
--------------
Contract costs for the three months ended September 30, 2000 were
$322,000 or 43% of revenues, which represents a decrease of $48,000 or 13%
from the prior year's contract costs of $370,000, or 52% of revenues. This
decrease is due to higher current year billing rates.
Research and Development
------------------------
We had no research and development expenses for the three months ended
September 30, 2000 due to all of our software products having achieved
technological feasibility. Capitalized research and development costs for the
three months ended September 30, 2000 were $38,000. We expect capitalized
software development costs to increase in the future as we incur costs to
develop new products and upgrades to existing products.
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses for the three months ended
September 30, 2000 were $473,000, an increase of $12,000, or 3% from the three
months ended September 30, 1999. The increase is generally due to increases
in overall operating expenses.
Depreciation and Amortization
-----------------------------
Depreciation and amortization expenses were $43,000 for the three months
ended September 30, 2000, a decrease of $1,000, or 2% from the three months
ended September 30, 1999. Depreciation charges during the three months
ended September 30, 2000 were approximately $2,500 more than the three months
ended September 30, 1999 due to a higher depreciable asset base. Amortization
expense during the three months ended September 30, 2000 were approximately
$3,500 less than the three months ended September 30, 1999.
OPERATING LOSS
The Company's operating loss of $84,000 for the three months ended
September 30, 2000, decreased $149,000 from the three months ended September
30, 1999 of $233,000. The decrease is attributed to higher revenues, lower
contract costs, and no research and development costs in the current year.
INTEREST EXPENSE
Interest expense for the three months ended September 30, 2000 was
$64,000, an increase of $44,000, or 220% from the three months ended
September 30, 1999 of $20,000. Attributing to the increase was the
outstanding line of credit balance and new debt incurred to fund operations.
NET LOSS
The Company's net loss of $148,000 for the three months ended September
30, 2000, is a decrease of $105,000, or 42% from the three months ended
September 30, 1999 of $253,000. Attributing to this improvement were the
increase in revenue and the no research and development costs.
Results of operations - six months ended September 30, 2000 compared to six
months ended September 30, 1999
REVENUES
Revenues for the six months ended September 30, 2000 were $1,689,000, an
increase of $146,000, or 10 % from the six months ended September 30, 1999 of
$1,542,000. The increase in revenues reflects strong consulting revenues to
the Company's largest customer.
OPERATING EXPENSES
Contract Costs
--------------
Contract costs for the six months ended September 30, 2000 were $730,000,
or 43% of revenues, which represents a decrease of 198,000 or 21% from six
months ended September 30, 1999 of $928,000, or 60% of revenues. This
decrease is primarily attributed to higher current year billing rates.
Research and Development
------------------------
We had no research and development expenses for the six months ended
September 30, 2000 since all of our software products have achieved
technological feasibility. Capitalized research and development costs for the
six months ended September 30, 1999 were $122,000. We expect software
development expenses to increase in the future as we incur expenses to develop
new products and upgrades to existing products.
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses for the six months ended
September 30, 2000 were $1,032,000, a $ 146,000, or 16% increase over the six
months ended September 30, 1999 of $886,000. The increase was attributed to
higher staff payroll and higher professional fees.
Depreciation and Amortization
-----------------------------
Depreciation and amortization was $85,000 for the six months ended
September 30, 2000, a $10,000, or 13% increase over the six months ended
September 30, 1999 of $75,000. The increase reflects amortization of the GEM
software, which was not at technological feasibility until December 1999.
OPERATING LOSS
The Company's operating loss of $158,000 for the six months ended
September 30, 2000, was a decrease of $384,000 from the six months ended
September 30, 1999 of $542,000. The improvement is attributed to higher
revenues, lower contract costs, and no research and development costs in the
current year.
INTEREST EXPENSE
Interest expense for the six months ended September 30, 2000 was $127,000
an increase of $75,000, or 144% from the six months ended September 30, 1999
of $52,000. The increase includes interest expense incurred on the
outstanding line of credit balance and new debt incurred to fund operations.
NET LOSS
The Company's net loss of $285,000 for the six months ended September 30,
2000 is a decrease of $309,000, or 52% from the six months ended September 30,
1999 of $594,000. Attributing to this improvement were the revenue increase,
lower contract costs, and the no research and development costs.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations to date primarily through the private
sale of equity securities and borrowings from our majority shareholder and
other related parties. During the six months ended September 30, 2000 no
common stock shares were sold, however we did obtain a short-term interim loan
for $200,000. During the year ended March 31, 2000 we sold $960,004 shares of
our common stock for $471,800. In addition, as of September 30, 2000, we
have borrowed over $1,065,000 from our major shareholder and other related
parties.
Since we began operations, we have experienced a shortage of working
capital. Our consolidated financial statements have been prepared assuming
that we will continue as a going concern. Due to our continuing operating
losses and negative cash flows from our operations, the report of our auditors
issued in conjunction with our consolidated financial statements for the
fiscal year ended March 31, 2000 contained an explanatory paragraph indicating
that the foregoing matters raised substantial doubt about our ability to
continue as a going concern. We cannot provide any assurance that we will be
profitable in the future or that we will be able to achieve our business
objectives. We need additional working capital in order to support our growth
and short-term strategy. We do not believe that the working capital available
to us through commercial lenders and related parties will be sufficient to
support all of our current and future capital needs. Sources of working
capital that we will rely upon are:
* The present offering of common stock. Since we are conducting the
offering ourselves, we are uncertain that this offering will be
successful.
* The continuing support of our major shareholder and related parties.
While we believe that our major shareholder and other related
parties will continue their support, there are limits to their
ability to provide additional capital.
* Increased operating revenues. Our flagship software product, GEM,
was commercially released in June 2000. We are heavily reliant upon
the commercial success of GEM to increase our operating revenues.
While initial marketing efforts have been encouraging, we cannot be
sure that GEM will be a commercial success. A significant GEM
software sale has not occurred since GEM became commercially viable.
If our strategy to improve working capital through the foregoing plan is
unsuccessful, we will have no choice but to curtail operations, which would
result in an impairment in our software development and marketing efforts.
CURRENT LIABILITIES
At September 30, 2000, our current liabilities were approximately
$2,375,000. Of that amount, $1,065,000 consisted of notes payable to related
parties, of which approximately $628,000 consisted of our line of credit,
which will be repaid out of accounts receivable. We expect the remaining
$437,000 will be extended by the holders of those notes due to their
affiliation with the Company. An additional $96,000 represents an accrual of
a management fee payable under consulting agreement with our major
shareholder. We also expect this liability to be extended if necessary. The
remaining approximate $1,214,000 represents accounts payable and accrued
expenses due to vendors and unrelated parties. Our plan to address these
liabilities includes:
* To the extent available, proceeds from the offering will be used to
reduce those obligations most critical to our continuing operations.
* Operating revenues should become available to repay some of this
debt, since with the commercial release of our GEM software,
research and development expenses should decline and software and
consulting revenues are expected to increase from sales of GEM
implementations.
Given that 40 % of our current liabilities are payable to related parties, we
do not believe that it is necessary to retire all of our current debt in order
to be viable. However, we do rely upon some offering proceeds to reduce
trade payables as well as an increase in revenues and a reduction in research
and development expense to improve cash flow, of which there can be no
assurance.
WORKING CAPITAL
At September 30, 2000, we had a working capital deficit of $1,469,000,
compared to a working capital deficit of $933,000 and $360,000 at fiscal years
ended March 31, 2000 and 1999. This increase in working capital deficit is
due to cash required to fund our continuing operating losses, which have
resulted in a shareholders' deficiency at September 30, 2000 of $858,000.
NOTES PAYABLE - RELATED PARTIES
At September 30, 2000, we had notes payable to related parties, including
our major shareholder, of $437,000, all of which were current obligations.
The foregoing does not include approximately $628,000 that we owe to our major
shareholder under a factoring revolving line of credit, which she provides and
is secured by our accounts receivable. Promissory notes totaling
approximately $437,000 and accruing interest at the rates between 10% and 15%
are due between November 2000 and July 2001. Our computer software products
have been pledged to secure the note held by our major shareholder and the
note held by one of our directors.
REVOLVING LINE OF CREDIT
During fiscal 1999, we had commercial revolving line of credit with
Strategic Finance, Inc. under which we had a factoring line of credit with a
maximum borrowing limit of $2,000,000. This commercial credit was secured by
our accounts receivable and personally guaranteed by Mr. And Mrs. Bell. At
March 31, 2000, the outstanding balance due to Strategic Finance, Inc. was
approximately $540,000. In April 2000, Strategic Finance, Inc. terminated
the line of credit. The outstanding balance was repaid by through collection
of our accounts receivable by Strategic Finance, Inc. In May 2000, to replace
the Strategic Finance, Inc., relationship, Mrs. Bell extended to us a
revolving line of credit with a maximum borrowing limit of $750,000. This
line of credit is backed by a parallel line of credit that the Company and
Mrs. Bell have with Guaranty Bank and Trust Company. Under this arrangement,
Mrs. Bell provides us advances against our accounts receivable, which advances
are funded by draws from Guaranty Bank. Mrs. Bell is paid a 2% fee on each
advance and the outstanding credit balance under the revolving line accrues
interest at the rate of prime plus 2%. At November 17, 2000 the outstanding
balance on this revolving line of credit was approximately $609,000 (excluding
cash reserves of $102,000), leaving approximately $141,000 available for
additional advances.
CASH FLOWS
Net cash used by operating activities was $84,000 for the six months
ended September 30, 2000, compared to net cash used by operating activities of
45,000 for the six months ended September 30, 1999. Net cash used by
operating activities for the fiscal years ended March 31, 2000 and 1999 were
$546,264 and $542,464, respectively. We expect operating activities to be a
net cash user for at least the next two fiscal quarters and continue to be a
net cash user unless operating results improve. Investing activities also
resulted in a net cash use, reflecting the investment in certain software
development costs. As a result, virtually all of our cash flow was derived
from financing activities for the six months ended September 30, 2000, and
fiscal years ended March 31, 2000 and 1999. During the six months ended
September 30, 2000, we obtained a $200,000 long-term note.
Our working capital deficit represents the most substantial impediment to
our continuing operations. We are heavily dependent upon the success of this
offering and the future commercial success of our GEM software product to
alleviate our lack of liquidity, however we cannot be sure that we will be
successful in these efforts. We have not had a successful GEM software sale
since its commercial release in June 2000.
Capitalized Software Costs
Our software development costs consist primarily of enhancements and
software production costs related to products for which technological and
market feasibility has been established. We consider technological
feasibility to be achieved when we have completed all planning, designing,
coding and testing activities that are necessary to establish a working model
of the product. Capitalization ceases when the product has been completed and
the product is ready for release to our customers. Prior to achieving
technological feasibility, research and development costs are expensed.
During the three and six months ended September 30, 1999, we incurred
approximately $72,000 and $197,000, respectively, for research and
development expenses related to software development. We did not incur any
research and development expenses during the three and six months ended
September 30, 2000. Our capitalized software costs and cumulative expenses
incurred through September 30, 2000 for each of our products were
approximately as follows:
<TABLE>
<CAPTION>
Cumulative
Date Since inception
Technological Research and
Feasibility Capitalized Development
Products Achieved Costs Expenses
--------------------- ------------- --------------------------
<S> <C> <C> <C>
GeniSys Enterprise
Management TM December 1999 $ 232,000 $ 746,000
Gatekeeper TM March 1998 242,000 251,000
Visual Project Manager TM December 1999 51,000 126,000
---------- ------------
$ 525,000 $ 1,123,000
=========== ============
Accumulated Amortization 111,000
Net book value at
September 30, 2000 $ 414,000
============
</TABLE>
We expect to realize the net capitalized value through the future sales of our
software products.
RECENT ACCOUNTING PRONOUNCEMENTS:
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities was issued in June 1998. This statement, as amended, is effective
for fiscal years beginning after June 15, 2000. Currently, the Company does
not have any derivative financial instruments and does not participate in
hedging activities, therefore management believes SFAS No. 133 will not impact
the Company's financial position or results of operations.
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin ("SAB") No. 101 Revenue Recognition in
Financial Statements. SAB No. 101, as amended by SAB No.101A and SAB No.
101B, is effective no later than the fourth fiscal quarter of fiscal years
beginning after December 31, 1999. SAB No. 101 provides the staff's views in
applying generally accepted accounting principles to selected revenue
recognition issues. Currently, the Company believes it complies with the
accounting and disclosure described in SAB No. 101, therefore, management
believes that SAB No. 101 will not impact the Company's financial statements.
<PAGE>
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None.
Item 3. Default Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
None.
<PAGE>
<PAGE>
SIGNATURE
In accordance with 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.
iGENISYS, INC.
Date: November 20, 2000 By: /s/ J. Daniel Bell
-------------------- -----------------------------------
J. Daniel Bell, President
