<PAGE> 1
Page 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
---------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 000-28909
GreyStone Digital Technology, Inc.
(Exact Name of Registrant as Specified in its Charter)
---------------
<TABLE>
<S> <C>
Delaware 84-1107140
-------- ----------
(State or other jurisdiction (IRS Employer
incorporated or organization) Identification No.)
</TABLE>
4950 Murphy Canyon Road, San Diego, CA 92123
--------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(858) 874-7000
--------------
(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 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OUTSTANDING AT DECEMBER 31, 1999
- ------------------- --------------------------------
<S> <C>
Common Stock, $.001 par value 16,275,679
</TABLE>
<PAGE> 2
Page 2
SIGNATURE
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.
GreyStone Digital Technology, Inc.
/s/ MARSHALL GELLER
------------------------------------
Marshall Geller
Chief Financial Officer
Dated: February 14, 2000
<PAGE> 3
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INDEX
GreyStone Digital Technology, Inc.
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION 4
Item 1. FINANCIAL STATEMENTS 4
Balance Sheets at December 31, 1999
(Unaudited) and March 31, 1999 4
Statements of Operations (unaudited) for the three
and nine months ended December 31, 1999 and 1998 5
Statement of Stockholder's Equity (Deficiency) (unaudited)
for the nine months ended December 31, 1999 6
Statements of Cash Flows (unaudited)
for the nine months ended December 31, 1999 and 1998 7
Notes to Financial Statements 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 18
PART II. OTHER INFORMATION 18
Item 1. LEGAL PROCEEDINGS 18
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 18
Item 3. DEFAULTS UPON SENIOR SECURITIES 18
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
Item 5. OTHER INFORMATION 18
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 19
EXHIBIT INDEX 20
</TABLE>
<PAGE> 4
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND NOTES
GREYSTONE DIGITAL TECHNOLOGY, INC. AND SUBSIDIARY
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
(Consolidated) ------------
(Unaudited) (Audited)
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,206,096 $ 795,480
Accounts receivable, net of allowance for doubtful
accounts of $ 40,000 221,671 200,477
------------ ------------
Total current assets 1,427,767 995,957
Notes receivable and accrued interest of
$3822 including $50,000 from a related party 553,822
Equipment and furniture, net of accumulated depreciation
and amortization of $2,283,683 and $2,112,335 255,707 176,827
Other assets 118,494 104,138
------------ ------------
Total $ 2,355,790 $ 1,276,922
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Accounts payable and accrued expenses $ 673,428 $ 1,130,553
Short-term notes payable 402,000
Loans payable to officers 140,810
Notes payable to principal stockholder 20,000 128,000
------------ ------------
Total liabilities 693,428 1,801,363
------------ ------------
Commitments and contingencies
Stockholders' equity (deficiency):
Preferred stock, $.001 par value; 3,000,000 shares authorized:
None issued or outstanding
Common stock, $.001 par value; 30,000,000 shares authorized;
16,275,679 and 14,621,937 shares issued and outstanding 16,276 30,596,760
Additional paid-in capital 39,470,773 2,383,584
Subscriptions receivable from equity transactions (1,560,292) (327,500)
Accumulated deficit (36,264,395) (33,177,285)
------------ ------------
Total stockholders' equity (deficiency) 1,662,362 (524,441)
============ ============
Total $ 2,355,790 $ 1,276,922
============ ============
</TABLE>
See Notes to Unaudited Financial Statements
<PAGE> 5
Page 5
GREYSTONE DIGITAL TECHNOLOGY, INC. AND SUBSIDIARY
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended December 31 Nine months ended December 31
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 381,286 $ 563,354 $ 1,331,641 $ 1,601,962
------------ ------------ ------------ ------------
Expenses:
Cost of revenues 293,481 249,469 813,270 901,426
Marketing and sales 203,831 149,633 561,871 573,795
Research and development 220,401 74,562 750,620 759,148
General and administrative 1,034,287 661,106 2,283,179 1,565,421
------------ ------------ ------------ ------------
Totals 1,752,000 1,134,770 4,408,940 3,799,790
------------ ------------ ------------ ------------
Loss from operations (1,370,714) (571,416) (3,077,299) (2,197,828)
Interest expense, including $2,537, $6,275,
$9,811 and $19,103 on loans from principal
stockholder 2,537 19,093 9,811 63,257
------------ ------------ ------------ ------------
Net loss $ (1,373,251) $ (590,509) $ (3,087,110) $ (2,261,085)
============ ============ ============ ============
Basic net loss per share $ (0.09) $ (0.04) $ (0.20) $ (0.16)
============ ============ ============ ============
Basic weighted average number of shares
outstanding 15,263,337 14,219,376 15,111,407 14,132,443
============ ============ ============ ============
</TABLE>
See Notes to Unaudited Financial Statements
<PAGE> 6
Page 6
GREYSTONE DIGITAL TECHNOLOGY, INC. AND SUBSIDIARY
STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIENCY)
(Unaudited)
Nine months ended December 31,1999
<TABLE>
<CAPTION>
Subscriptions
Common Stock Additional receivable
------------------------- Paid-In from Equity Accumulated
Shares Amount Capital transactions Deficit Total
---------- ----------- ---------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, April 1, 1999 14,621,937 $30,596,760 $2,383,584 $(327,500) $(33,177,285) $(524,441)
Common Stock sold for cash,
net of selling expenses of $201,207 575,283 3,250,470 3,250,470
Common Stock issued upon
conversion of notes payable
to principal stockholder 11,111 50,000 50,000
Common Stock issued to pay
for accrued interest 4,296 19,332 19,332
Warrants issued to purchase
common stock 225,700 225,700
Stock options to purchase
common stock granted to non-employee 37,800 37,800
Common stock issued upon
exercise of warrants 335,905 1,694,452 1,694,452
Common stock cancelled upon
exercise of recession offer (1,000) (4,500) (4,500)
Common stock issued upon exercise
of warrants in exchange for stock
subscription receivable 248,147 1,232,792 (1,232,792) 0
Change in par value of
common stock to .001 per share (36,823,510) 36,823,510 0
Common stock issued upon
completion of merger agreement 480,000 480 179 659
Net Loss (3,087,110) (3,087,110)
---------- ----------- ---------- --------- ------------ ---------
Balance, December 31, 1999 16,275,679 $16,276 $39,470,773 $(1,560,292) $(36,264,395) $1,662,362
========== =========== ========== ========= ============ =========
</TABLE>
See Notes to Unaudited Financial Statements
<PAGE> 7
Page 7
GREYSTONE DIGITAL TECHNOLOGY, INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended December 31,
1999 1998
----------- -----------
<S> <C> <C>
Operating activities:
Net loss $(3,087,110) $(2,261,085)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss on disposal of fixed assets 666
Depreciation and amortization 171,348 208,287
Compensation expense recorded upon issuance of warrants
and compensatory stock options 263,500 218,628
Changes in operating assets and liabilities:
Notes receivable interest (3,822)
Accounts receivable (21,194) 191,600
Other assets (14,356) (59,203)
Accounts payable and accrued expenses (437,793) 608,523
----------- -----------
Net cash used in operating activities (3,129,427) (1,092,584)
----------- -----------
Investing activities
Purchases of software licenses and equipment (250,228)
----------- -----------
Net cash used in investing activities (250,228)
Financing activities:
Repayments of notes payable to principal stockholder (58,000) (2,607)
Repayments of loans payable to officers (140,810)
Issuances of notes receivable (500,000)
Issuances of related party notes receivable (50,000)
Proceeds from (repayments of) short-term notes payable (402,000) 1,023,600
Exercise of warrants for common stock 1,694,452
Common stock issued net of selling expenses 3,246,629 102,928
----------- -----------
Net cash provided by financing activities 3,790,271 1,123,921
----------- -----------
Net increase in cash and cash equivalents 410,616 31,337
Cash and cash equivalents, beginning of year 795,480 5,083
----------- -----------
Cash and cash equivalents, end of period $ 1,206,096 $ 36,420
=========== ===========
</TABLE>
<PAGE> 8
Page 8
GREYSTONE DIGITAL TECHNOLOGY, INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS (Continuation)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended December,
1999 1998
---------- --------
<S> <C> <C>
Supplemental disclosure of cash flow data:
Interest paid $ 93,425 $ 7,607
========== ========
Supplemental disclosure of noncash investing and financing activities:
Common stock issued upon exercise of warrants for stock
subscription receivable $1,232,792
==========
Common stock issued as payment for:
Short-term notes payable $650,000
========
Short-term notes payable and cancellation of warrants $220,000
========
Notes payable to principal stockholder $ 50,000 $ 25,000
========== ========
Conversion of convertible notes payable $ 30,000
========
Accrued interest payable $ 19,332 $ 23,229
========== ========
Services $ 95,000
========
</TABLE>
See Notes to Unaudited Financial Statements
<PAGE> 9
Page 9
GREYSTONE DIGITAL TECHNOLOGY, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Unaudited interim financial statements:
In the opinion of management, the accompanying unaudited
financial statements reflect all adjustments, consisting of
normal recurring accruals, necessary to present fairly the
financial position of the accounts of GreyStone Digital
Technology, Inc. (the Parent) and its subsidiary GreyStone
Technology, Inc. (the Company) as of December 31, 1999 and the
results of operations for the three and nine month periods ended
December 31, 1999 and 1998 and cash flows and changes in
stockholders' equity (deficiency) for the nine months ended
December 31, 1999. These unaudited financial statements should
be read in conjunction with the audited financial statements and
the other information included in the registration statement on
Form S-4 which was declared effective by the SEC on November 12,
1999 ("Registration Statement").
The results of operations for the three and nine month periods
ended December 31, 1999 are not necessarily indicative of the
results of operations for the year ending March 31, 2000.
Note 2 - The Merger and other matters
On December 27,1999 a merger between Express Capital Concepts,
Inc. and GreyStone Technology, Inc. was completed, whereupon
Express Capital Concepts was renamed GreyStone Digital
Technology, Inc., underwent a 1-for-41.66667 reverse stock split
(which reduced its issued and outstanding common stock to
480,000 shares), changed the par value of the stock from $0.0001
to $0.001 per share, and reduced the total authorized common
stock from 500,000,000 shares to 30,000,000 shares.
Simultaneously, 15,211,627 shares of common stock were issued to
GreyStone Technology, Inc. common stock holders. The transaction
has been accounted for as a reverse acquisition, wherein
GreyStone Technology, Inc., the operating company, is treated as
the acquirer for reporting purposes. The Balance sheets,
statements of shareholders equity (deficiency) and cash flow are
consolidated between GreyStone Digital Technology, Inc., and
GreyStone Technology, Inc. as of December 31, 1999. All
significant inter-company accounts and transactions are
eliminated in consolidation.
Note 3 - Notes Receivable and Accrued Interest
Notes receivable at December 31, 1999 consisted of a $500,000,
9% note scheduled to mature on February 21, 2000. Additionally,
the company loaned $20,000 on August 6, 1999, $10,000 on
September 22,1999 and $20,000 on November 17,1999 to the
Pointe-Force Company, Inc. and its principal. All loans are for
a one-year term and bear interest at a rate of 8.75% per year.
<PAGE> 10
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Note 4 - Earnings (loss) per share:
Effective March 31, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, Earnings
per Share ("SFAS 128"), which requires the presentation of
"basic" and "fully-diluted" earnings (loss) per common share, as
further explained in Note 1 of the notes to the audited
financial statements of the Company, included in the
Registration Statement.
Since the Company had losses applicable to common stock in the
three and nine month periods ended December 31, 1999 and 1998,
the assumed effects of the exercise of outstanding stock options
and warrants were anti-dilutive and, accordingly, dilutive per
share amounts have not been presented in the accompanying
unaudited statements of operations. Such options and warrants
could potentially dilute basic earnings per share in the future.
Note 5 - Segment reporting:
Effective March 31, 1999, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 131, Disclosures
about Segments of an Enterprise and Related Information ("SFAS
131"). SFAS 131 established standards for the way that public
enterprises report financial and descriptive information about
reportable operating segments in annual financial statements and
interim financial statements issued to stockholders. SFAS 131
supersedes SFAS 14, Financial Reporting for Segments of a
Business Enterprise, but retains the requirement to report
information about major customers.
Information on industry segments are scheduled below:
<TABLE>
<CAPTION>
Common/
Government Commercial Corporate Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Nine months ended December 31, 1999:
Revenue $ 1,230,048 $ 55,999 $ 45,594 $ 1,331,641
=========== =========== =========== ===========
Net loss $ (501,960) ($ 337,754) $(2,247,396) $(3,087,110)
=========== =========== =========== ===========
Nine months ended December 31, 1998:
Revenue $ 1,582,332 $ 14,615 $ 6,015 $ 1,602,962
=========== =========== =========== ===========
Net Income (loss) $ 91,333 $ (728,755) $(1,623,663) $(2,261,085)
=========== =========== =========== ===========
</TABLE>
Note 6 - Warrants:
The Company has issued warrants in conjunction with the sale of
convertible notes payable, assisting the Company in acquiring
capital, the extending of loans, as an incentive to equity
investors and as part of the consideration paid to various
<PAGE> 11
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consultants. Based on the provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") using the Black-Scholes option
pricing model and assuming a risk-free interest rate of 6%,
expected warrant lives of one to four years, expected volatility
of 5% and dividends of 0%, the compensation expense relating to
the warrants issued was $225,700 and $165,100 for the nine
months ended December 31, 1999 and 1998, respectively. Each
warrant entitles the holder to purchase one share of common
stock upon exercise. The warrants expire at various dates from
2002 through 2008. Additional information regarding warrants
outstanding at December 31, 1999 and changes in outstanding
warrants during the nine months then ended follows:
<TABLE>
<CAPTION>
Number of Exercise
Warrants Price
-------- -----
<S> <C> <C>
Outstanding at April 1, 1999 4,489,948 $4.95 to $12.00
Exercised (584,052) $4.95 to $10.00
Cancelled (60,000) $10.00
Granted 3,253,200 $4.95 to $10.00
---------
Outstanding at December 31, 1999 7,099,096 $4.95 to $12.00
=========
Exercisable at December 31, 1999 5,622,297 $4.95 to $12.00
=========
Weighted average fair value of warrants
granted during the period $ .50
===============
</TABLE>
Note 7 - Income taxes:
The Company had net operating loss carry forwards at December
31, 1999 of approximately $31,000,000 available to reduce future
Federal taxable income and approximately $11,800,000 available
to reduce state taxable income, if any. The net operating loss
carry forwards expire between 2006 and 2019 for Federal tax
purposes and 2000 and 2004 for state tax purposes. The related
deferred tax assets were fully reserved through valuation
allowances at December 31, 1999 and 1998 and, accordingly, there
was no provision or credit for income taxes.
The expected Federal income tax benefit, computed based on the
Company's pre-tax loss and the statutory Federal income tax
rate, was approximately $1,235,000 for the nine months ended
December 31, 1999. The potential benefits were eliminated
through equivalent increases in the Company's valuation
allowance primarily for deferred tax assets arising from net
operating loss carry forwards (see Note 10 of the notes to the
audited financial statements of the Company which are included
in the Registration Statement).
<PAGE> 12
Page 12
Note 8 - Stock option plans:
As further explained in Note 12 of the notes to the audited
financial statements, which are included in the Registration
Statement, the Company has two incentive stock option ("ISO")
plans - the "1991 Plan" and the "1994 Plan". In addition, the
Company issued nonqualified stock options ("NSOs") in 1994, 1995
and 1998. Information related to the plans and other options
granted follows:
<TABLE>
<CAPTION>
Options
Options Outstanding at
Year Type Authorized December 31,1999
- ---- ---- ---------- ----------------
<S> <C> <C> <C>
1991 ISO 1,000,000 0
1994 NSO 200,000 200,000
1994 ISO 2,000,000 1,766,262
1995 NSO 200,000 200,000
1997 NSO 640,000 640,000
1998 NSO 750,000 750,000
---------
3,556,262
=========
</TABLE>
The amount of compensation expense recognized for the nine
months ended December 31, 1999 and 1998 relating to the granting
of NSO stock options under the provisions of SFAS No. 123 was
$37,800 and $12,600 for the nine months ended December 31, 1999
and 1998, respectively.
In the opinion of management, if compensation cost for the stock
options granted to employees had been determined based on the
fair value of the options at the grant date under the provisions
of Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS No. 123") using
the Black-Scholes option pricing model and assuming a risk-free
interest rate of 6%, expected option lives of one to four years,
expected volatility of 5% and dividends of 0%, the Company's pro
forma net loss arising from such computations would have been
increased by approximately $1,031,900 and $432,700 for the nine
months ended December 31, 1999 and 1998, respectively.
Additional information regarding options outstanding under the
Company's stock option plans at December 31, 1999 and changes in
outstanding options during the nine months then ended follows:
<PAGE> 13
Page 13
Note 8 - Stock option plans (concluded):
<TABLE>
<CAPTION>
Weighted
Shares Average
Or Price Exercise
Per Share Price
--------- -----
<S> <C> <C>
Outstanding at April 1, 1999 2,581,050 $3.81
Granted 1,071,750 5.10
Cancelled (96,538) 4.46
---------
Outstanding at December 31, 1999 3,556,262 4.19
=========
Price range at December 31, 1999 $.275 to $6.80
==============
Exercisable at December 31, 1999 3,139,083 4.07
=========
Available for grant at December 31, 1999 1,233,738
---------
Weighted average fair value of options
granted during the period $1.06
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1999, all of which are at fixed
prices:
<TABLE>
<CAPTION>
Weighted Average
Remaining
Number Contractual Number
Exercise of Options Life of Options of Options
Price Outstanding Outstanding Exercisable
----- ----------- ----------- -----------
<S> <C> <C> <C>
$ .275 200,000 1.62 Years 200,000
1.000 200,000 4.51 Years 200,000
3.825 1,057,262 3.66 Years 1,040,062
4.950 1,050,000 4.63 Years 966,666
5.100 1,024,000 9.47 Years 717,355
6.800 25,000 8.40 Years 15,000
--------- ---------
3,556,262 3,139,083
========= =========
</TABLE>
Note 9 - Related party transactions and balances:
The Company had outstanding notes payable to its Principal
Stockholder of $20,000 at December 31, 1999, which were
unsecured, nonconvertible and bore interest at 9%. Accrued
interest of approximately $9,811 is included in accounts payable
and accrued expenses in the accompanying unaudited December 31,
1999 balance sheet. See Note 13 of the notes to the audited
financial statements of the Company which are included in the
Registration Statement. On December
<PAGE> 14
Page 14
31, 1999, the Principal Stockholder agreed to extend the
maturity date from December 31, 1999 to December 31, 2000.
In July 1999, a professional services agreement was entered into
between the Company and the Pointe Force Company, Inc., an
entity owned by a director of the Company. Point Force supports
the Company in the areas of mergers and acquisitions, strategic
planning, corporate financing and relations with the investment
community. Under this one-year advisory services agreement, the
director or Pointe-Force is compensated in the amount of $11,000
per month, exclusive of expenses. Additionally, the Company
loaned $20,000 on August 6, 1999, $10,000 on September 22, 1999
and $20,000 on November 17, 1999 to the Pointe Force Company,
Inc. and its principal. All loans are for a one-year term and
bear interest at a rate of 8.75% per year.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS: NO ASSURANCES INTENDED
This report contains statements that are not purely historical , and as such are
forward-looking statements under the federal securities laws. These include
forward-looking statements regarding management's intentions, plans, hopes,
beliefs, expectations or projections of the future. These forward-looking
statements involve risks and uncertainties, including without limitation,
acceptance of the company's products and services: additional financing
requirements; the impact of competitive products or pricing; technological
changes; the effect of economic conditions; the ability to successfully
commercialize the company's entertainment products; the company's dependence on
key engineering, technical, and other personnel skilled in government
contracting; the ability of the government to terminate contracts and
subcontracts at any time; and other risks and uncertainties detailed from time
to time in the company's reports filed with the Securities and Exchange
Commission. One or more of these factors could affect the company's business and
financial results in future periods, and could cause actual results to differ
materially from plans and projections. There can be no assurance that the
forward-looking statements in this report will prove to be accurate, and
issuance of such forward-looking statements should not be regarded as a
representation by the company, or any other person, that the objectives and
plans of the company will be achieved. All forward-looking statements made in
this report are based on information presently available to management, and the
company assumes no obligation to update any forward-looking statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
Revenues for the three months ended December 31, 1999 were $381,286 as compared
to $563,354 for the same three months ended December 31, 1998. During both of
these periods, the Government Strategic Business Unit (SBU) generated
essentially all revenues. The sales decline of $182,068 in the Government SBU
between periods was primarily the result of a delay in funding of government
contracts. The company redirected a portion of the
<PAGE> 15
Page 15
Government SBU engineering staff to product development efforts in support of
the RAGE 2.0. Although revenues are expected from the sale of commercial
entertainment products, GreyStone expects to incur additional losses as it
continues to market and develop its entertainment products.
Costs of revenues increased 18% to $293,481 for the three months ended December
31, 1999, compared to $249,469 for the same three-month period in 1998. As a
percentage of revenues, costs of revenues were 77% in 1999 compared to 44% for
the same three-month period in 1998. Cost of revenues increased during the
current period due to an increase in material/subcontract costs for computers
and software tools in support of contractual work. Additionally, travel costs
were higher than usual, primarily as a result of GreyStone's support of overseas
military experiments.
The components that made up the cost of revenues include burdened labor, direct
travel, other direct costs, direct material, subcontracts and applicable SBU
burden. These cost components can vary from period to period and are highly
dependent on such factors as the nature of the work performed, location and
duration of the work (i.e., company versus customer site), who performed the
work (i.e., company personnel versus subcontractors) and who provided any
required equipment (i.e., company versus customer).
Marketing and sales expenses were $203,831 or 54% of revenues for the three
months ended December 31, 1999 compared to $149,633 or 27% of revenues for the
same three month period in 1998. The increase was in the Government SBU.
Marketing and sales expenses result from bid and proposal activity as well as
attendance at trade shows, company product demonstrations and in-house
marketing-related activities. These types of expenses vary from period to period
and are highly dependent upon the extent and manner in which the company focuses
its efforts regarding potential future opportunities during the reporting period
Research and development expenses increased by 196% to $220,401 for the three
months ended December 31, 1999, as compared to $74,562 for the same three-month
period in 1998. The increase of research and development expenses was in the
Government SBU and reflects development costs for RAGE 2.0 and the Unmanned Air
Vehicle (UAV) Toolkit.
General and administrative expenses increased to $1,034,287 for the three months
ended December 31, 1999, compared to $661,106 for the same three month period in
1998, resulting in an increase of $373,181. General and administrative increases
were the result of legal, accounting and other related costs associated with the
completion of the business combination with Express Capital Concepts, Inc. in
December 1999. Additionally, there was an increase in compensation expense
associated with the issuance of warrants and compensatory stock options.
Interest expense was $2,537 for the three months ended December 31, 1999,
compared to $19,093 for the same three month period ended in 1998, a decline of
$16,556 and reflects the paying down and/or conversion of certain company
indebtedness to equity.
The net loss of $1,373,251 increased by $782,742 or 133% from the $590,509 net
loss reported in the previous period in 1998. In summary, during the current
period, revenues were
<PAGE> 16
Page 16
down by $182,068 or 32%, while total expenses, including
interest, increased by $600,674 or 52%.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 1999 AND 1998
Revenues for the nine months ended December 31, 1999 were $1,331,641, as
compared to $1,601,962 for the same nine months ended December 31,1998. During
both of these periods, the Government Strategic Business Unit (SBU) generated
essentially all revenues, with $1,230,048 of revenue in the current nine month
reporting period and $1,582,269 in the nine months ending December 31,1998,
while Commercial revenue was $55,999 in the current period and $14,615 in the
previous period. The sales decline in the Government SBU between periods was
primarily the result of a delay in funding of government contracts. The company
redirected a portion of the Government SBU engineering staff to product
development efforts in support of the RAGE 2.0 product release. Commercial
revenues of $55,999 in the current reporting period were the result of work done
by GreyStone on a special project for Legoland Windsor Park Ltd. Although
revenues are expected from the sale of commercial entertainment products,
GreyStone expects to incur additional losses as it continues to market and
develop its entertainment products.
Costs of revenues declined 10 % to $813,270 for the nine months ended December
31, 1999, compared to $901,426 for the same nine-month period in 1998. As a
percentage of revenues, costs of revenues were 61% in 1999 compared to 56% for
the same nine-month period in 1998. Cost of revenues increased during the
current period due to an increase in material/subcontract costs for computers
and software tools in support of contractual work. Additionally, travel costs
were higher than usual primarily as a result of GreyStone's support of overseas
military experiments.
The components that made up the cost of revenues include burdened labor, direct
travel, other direct costs, direct material, subcontracts and applicable SBU
burden. These cost components can vary in amount from period to period and are
highly dependent on such factors as the nature of the work performed, location
and duration of the work (i.e., company versus customer site), who performed the
work (i.e., company personnel versus subcontractors) and who provided any
required equipment (i.e., company versus customer).
Marketing and sales expenses were $561,871 or 42% of revenues for the nine
months ended December 31, 1999 compared to $573,795 or 36% of revenues for the
same nine month period in 1998. Although there is a net decline of $11,924 in
company marketing and sales expenses in the current period, Government SBU
marketing and sales expenses actually increased by $91,161, while Commercial SBU
marketing and sales expenses decreased by $103,085. Marketing and sales expenses
result from bid and proposal activity as well as attendance at trade shows,
company product demonstrations and in-house marketing-related activities. These
types of expenses vary from period to period and are highly dependent upon the
extent and manner in which the company focuses its efforts regarding potential
future opportunities during the reporting period.
Research and development expenses declined slightly to $750,620 for the nine
months ended December 31, 1999, as compared to $759,148 for the same nine-month
period in 1998.
<PAGE> 17
Page 17
Although there was a net decline of $8,528 in company research
and development costs, Government SBU research and development costs actually
increased by $288,920 as a result of development efforts on RAGE 2.0. A decline
of research and development expenses in the commercial SBU of $297,448 reflects
the completion of development of the XS-G game.
General and administrative expenses increased to $2,283,179 for the nine months
ended December 31, 1999, compared to $1,565,421 for the same nine month period
in 1998, resulting in an increase of $717,758. General and administrative
increases were the result of legal, accounting and other related costs
associated with the completion of the business combination with Express Capital
Concepts, Inc. in December 1999. Additionally, there was an increase in
compensation expense associated with the issuance of warrants and compensatory
stock options.
Interest expense was $9,811 for the nine months ended December 31, 1999,
compared to $63,257 for the same nine month period ended in 1998, a decline of
$53,446 and reflects the paying down and/or conversion of certain company
indebtedness to equity.
The net loss of $3,087,110 increased by $826,025 or 37% from the $2,261,085 net
loss reported in the previous period in 1998. In summary, during the current
period, revenues were down by $270,321 or 17%, while total expenses, including
interest, increased by $555,704 or 14%.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the nine months ended December 31,
1999 was $3,129,427, whereas cash used for the nine months ended December 31,
1998 was $1,092,584. Cash flow from operations decreased during the first nine
months of 1999 compared to the first nine months of 1998 due to an increase in
accounting, legal and other related expenses associated with the completion of
the business combination with Express Capital Concepts, Inc. in December 1999.
Additionally, cash was used to reduce accounts payable and accrued expenses by
$437,793 during the current period, increase other assets by $14,356, and
accounts receivable increase by $21,194.
Net cash used in investing activities increased by $250,228 for the nine months
ended December 31, 1999, due to expenditures for software licenses and equipment
of $250,228. Net cash provided by financing activities increased by $3,790,271
for the nine months ended December 31,1999, and was primarily the result of
issuing common stock of $3,246,629 and the exercise of $1,694,452 of warrants
for common stock. This was offset by repayment on notes and loans payable of
$600,810, of which $58,000 was to the principal stockholder and $140,810 were to
officers, and issuances of notes receivable of $550,000 of which $50,000 was to
a related party.
At December 31, 1999, the Company had $1,206,096 in cash and cash equivalents.
The Company anticipates that in the future, it will need to obtain debt or
equity financing to continue its operations for at least the next 12 months.
<PAGE> 18
Page 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Pending legal proceedings which arose during the reporting period have been
previously reported on Registrant's Registration Statement on Form 8(A) filed on
January 14, 2000 which incorporated by reference Registrant's Registration
Statement on Form S-4 (declared effective on November 12, 1999). There have been
no material developments concerning legal proceedings since their first report.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Changes in Securities which occurred during the reporting period have been
previously reported on Registrant's Registration Statement on Form 8(A) filed on
January 14, 2000 which incorporated by reference Registrant's Registration
Statement on Form S-4 (declared effective on November 12, 1999). The change was
accomplished by the amendment and restatement of the Registrant's Articles of
Incorporation to effectuate a 1 to 41.66667 (reverse) stock split, to reduce the
authorized common stock from 500,000,000 shares to 30,000,000 shares, to reduce
the authorized preferred stock from 10,000,000 shares to 3,000,000 shares, and
to reduce the par value of all stock from $0.0001 per share to $0.001 per share.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 20, 1999 the stockholders of registrant approved and adopted an
amendment and restatement of the Certificate of Incorporation by a written
consent of stockholders to action taken without a meeting. The shareholders
voting represented 18,263,500 shares, or approximately 91.3% of the then-issued
and outstanding stock. All shares voted were in favor of the amendment.
On December 21, 1999 the stock stockholders of registrant approved and adopted
an amendment and restatement of the Bylaws by a written consent of stockholders
to action taken without a meeting. The shareholders voting represented
18,263,500 shares, or approximately 91.3% of the then-issued and outstanding
stock. All shares voted were in favor of the amendment.
ITEM 5. OTHER INFORMATION
Not applicable.
<PAGE> 19
Page 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<S> <C>
27.0 Financial Data Schedule
</TABLE>
(b) Reports in Form 8-K
During the three months ended December 31, 1999, the Company filed no
reports on Form 8-K.
<PAGE> 20
Page 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<S> <C>
27.0 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> OCT-1-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,206,096
<SECURITIES> 0
<RECEIVABLES> 261,671
<ALLOWANCES> 40,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,427,767
<PP&E> 2,539,390
<DEPRECIATION> 2,283,683
<TOTAL-ASSETS> 2,355,790
<CURRENT-LIABILITIES> 693,428
<BONDS> 0
0
0
<COMMON> 16,276
<OTHER-SE> 1,646,086
<TOTAL-LIABILITY-AND-EQUITY> 2,355,790
<SALES> 0
<TOTAL-REVENUES> 1,331,641
<CGS> 0
<TOTAL-COSTS> 813,270
<OTHER-EXPENSES> 3,635,670
<LOSS-PROVISION> (40,000)
<INTEREST-EXPENSE> 9,811
<INCOME-PRETAX> 3,087,110
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,087,110
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,087,110)
<EPS-BASIC> (.20)
<EPS-DILUTED> 0
</TABLE>
