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 November 30, 1996
Commission File Number: 17598
CONSYGEN, INC.
(Exact name of registrant as specified in its charter)
Texas 76-0260145
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10201 South 51st Street, Suite 140, Phoenix, Arizona 85044
- ---------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(602) 496-4545
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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 (or for such shorter period that the
registrant was required to file such reports) Yes [ ] No [X] 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.
13,509,831 shares of Common Stock, $.003 par value, as of June 30, 1997
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CONSYGEN, INC. AND SUBSIDIARIES
INDEX
Page
PART I FINANCIAL INFORMATION:
Consolidated Condensed Balance Sheets,
November 30, 1996 and May 31, 1996 2
Consolidated Condensed Statements of Operations - Three
and Six Months Ended November 30, 1996 and 1995 3
Consolidated Condensed Statements of Cash Flows - Six
Months Ended November 30, 1996 and 1995 4
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II OTHER INFORMATION 13
SIGNATURES 16
PART I FINANCIAL INFORMATION
Item I. Financial Statements
CONSYGEN, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
November 30, May 31,
1996 1996
---- ----
<S> <C> <C>
Current Assets:
Cash $ 2,901 $ -
Cash in Escrow 98,200 -
Accounts Receivable - 13,265
Debt Issuance Expense - Net 54,166 103,333
Prepaid Expenses 1,026 -
------------- ------------
Total Current Assets 156,293 116,598
Furniture and Equipment - Net 74,433 53,970
Other Assets 5,688 6,789
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Total Assets $ 236,414 $ 177,357
============= ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Notes Payable $ 309,505 $ 324,597
Loans Payable 175,200 175,200
Loans Payable - Related Parties 146,211 870,890
Accounts Payable 74,746 166,556
Accrued Liabilities 158,673 200,818
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Total Current Liabilities 864,335 1,738,061
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Commitments and Contingencies
Stockholders' Deficit:
Common Stock $.003 Par Value, 500,000,000 Shares Authorized,
Issued and Outstanding 13,686,231 Shares at November 30, 1996
and 6,749,994 at May 31, 1996 41,059 20,250
Additional Paid-In Capital 16,333,223 9,253,469
Accumulated Deficit (17,002,203) (10,834,423)
------------- ------------
Total Stockholders' Deficit ( 627,921) (1,560,704)
------------- ------------
Total Liabilities and Stockholders' Deficit $ 236,414 $ 177,357
============= ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
CONSYGEN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For The For The
Three Months Ended Six Months Ended
November 30, November 30,
------------ ------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ - $ 7,612 $ - $ 19,212
------------- ----------- ----------- -----------
Costs and Expenses:
Software Development 262,932 132,988 473,492 268,926
General and Administrative Expenses 4,479,404 378,738 5,506,313 516,999
Interest Expense 42,064 29,434 105,044 73,331
Depreciation and Amortization 31,965 3,003 82,930 6,006
------------- ----------- ----------- -----------
Total Costs and Expenses 4,816,365 544,163 6,167,779 865,262
------------- ----------- ----------- -----------
Net Loss $ (4,816,365) $ (536,551) $(6,167,779) $ (846,050)
============= =========== =========== ===========
Weighted Average Common Shares
Outstanding 13,686,231 6,233,327 10,881,558 6,116,661
============= =========== =========== ===========
Net Loss Per Common Share $ (.35) $ (.09) $ (.57) $ (.14)
============= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
CONSYGEN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For The
Six Months Ended
November 30,
------------
1996 1995
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net Loss $(6,167,779) $ (846,050)
Adjustments to Reconcile Net Loss to
Net Cash Provided (Used) by Operating
Activities:
Depreciation 9,763 6,006
Stock Issued for Services 5,167,961 300,000
Amortization of Debt Issuance Expense 73,167 -
Loan Interest - Additional Paid-in Capital 32,860 32,929
Changes in Operating Assets and Liabilities:
Accounts Receivable 13,265 11,125
Prepaid Expenses and Other Assets 75 23,641
Accounts Payable (98,210) (7,876)
Accrued Liabilities 16,697 116,540
----------- -----------
Net Cash (Used) by Operating Activities (952,201) (363,685)
----------- -----------
Cash Flows From Investing Activities:
Purchases of Furniture and Equipment (30,227) (10,332)
----------- -----------
Net Cash (Used) by Investing Activities (30,227) (10,332)
----------- -----------
Cash Flows From Financing Activities:
Proceeds of Debt Financing 1,123,700 -
Proceeds of Loans and Notes Payable 34,908 206,585
Payments of Loans and Notes Payable (50,000) -
Proceeds of Loans Payable - Related Parties (24,679) 167,657
Payments of Loans Payable - Related Parties - -
Cash in Escrow (98,600) -
----------- -----------
Net Cash Provided by Financing Activities 985,329 374,242
----------- -----------
Net Increase in Cash 2,901 225
Cash - Beginning of Period - 43
----------- -----------
Cash - End of Period $ 2,901 $ 268
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
CONSYGEN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
For The
Six Months Ended
November 30,
------------
1996 1995
---- ----
<S> <C> <C>
Supplemental Cash Flow Information:
Cash Paid for Interest $ 3,010 $ 9,165
================= ===============
Cash Paid for Income Taxes $ - $ -
================= ===============
Supplemental Disclosure of Non-Cash Financing Activities:
Cancellation of Debt into Additional Paid-In Capital -
Related Parties $ 350,000 $ -
================= =============
Issuance of Common Stock as Debt Issuance Expense $ 24,000 $ 50,000
================= =============
Issuance of Common Stock as Payment of Debt -
Related Parties $ 350,000 $ -
================= =============
Debt Issuance Expense as Additional Paid-In Capital $ - $ 90,000
================= =============
Effect of Reverse Acquisition - Accounts Payable Acquired $ 6,800 $ -
================= =============
Issuance of Common Stock as Payment of Debt $ 1,182,543 $ -
================= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996
(Unaudited)
NOTE 1 - Operations and Basis of Presentation
History of ConSyGen, Inc., (f/k/a C Square Ventures, Inc.)
ConSyGen, Inc., a Texas corporation ("ConSyGen-Texas), was
incorporated on September 28, 1988 as C Square Ventures, Inc. ConSyGen-Texas was
formed for the purpose of obtaining capital in order to take advantage of
domestic and foreign business opportunities which may have profit potential. On
March 16, 1989, ConSyGen-Texas (then C Square Ventures, Inc.) completed an
initial public offering.
On September 5, 1996, ConSyGen-Texas acquired 100% of the
issued and outstanding shares of ConSyGen, Inc., a privately held Arizona
corporation ("ConSyGen-Arizona") (f/k/a International Data Systems, Inc.). On
June 25, 1996, International Data Systems, Inc. changed its name to ConSyGen,
Inc. Immediately prior to the acquisition transaction, ConSyGen-Texas effected a
1-for-40 reverse split of its common stock. In connection with the acquisition,
ConSyGen-Texas issued an aggregate of 9,275,000 shares of its common stock
directly to the stockholders of ConSyGen-Arizona in exchange for all of the
issued and outstanding shares of ConSyGen-Arizona. The exchange resulted in
ConSyGen-Arizona's stockholders holding a larger portion of voting rights of
ConSyGen-Texas than was held by the ConSyGen-Texas stockholders prior to the
acquisition (approximately 69% at closing). In connection with the acquisition,
outstanding options to purchase 1,275,000 shares of ConSyGen-Arizona's common
stock granted under its Non-Qualified Stock Option Plan were terminated and
ConSyGen-Texas adopted a new Non-Qualified Stock Option Plan. In addition,
ConSyGen-Arizona terminated warrants to purchase 1,000,000 shares of its common
stock in connection with the acquisition, and ConSyGen-Texas issued replacement
warrants to purchase 1,000,000 shares of its common stock. As a result of the
acquisition, ConSyGen-Arizona became a wholly-owned subsidiary of
ConSyGen-Texas. The transaction has been treated as a reverse acquisition
(purchase) with ConSyGen-Arizona being the acquirer and ConSyGen-Texas being the
acquired company. Consequently, only the historical operations of
ConSyGen-Arizona are presented for the periods through September 5, 1996.
Subsequent to the acquisition, ConSyGen-Texas changed its name to ConSyGen, Inc.
(A Texas corporation).
ConSyGen-Texas and its wholly-owned subsidiary
ConSyGen-Arizona are hereafter collectively referred to as the "Company".
Description of Subsidiary Business
ConSyGen-Arizona was incorporated in Arizona on October 11,
1979. It is currently engaged in the business of rendering automated software
conversion services, including "year 2000" conversions, although it has not yet
realized any operating revenue from its conversion business this year. Until
1995, ConSyGen-Arizona licensed its proprietary computer software used in the
hotel and airline industries, and provided software maintenance services. In
1996 ConSyGen-Arizona discontinued its practice of software licensing and
providing maintenance services. ConSyGen-Arizona's future operations are
dependent, in part, upon its ability to protect and further develop its
proprietary software conversion technology. ConSyGen-Arizona operates in an
industry where its competitors have greater capital resources to devote to the
development and marketability of their technologies. ConSyGen-Arizona believes
that its proprietary software provides fully automated conversion solutions
including year 2000 conversion services.
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996
(Unaudited)
NOTE 1 - Operations and Basis of Presentation (Continued)
Basis of Presentation
In the opinion of the Company, the accompanying unaudited
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the results of operations and
cash flows for the periods presented.
Results of operations for interim periods are not necessarily
indicative of the results of operations for a full year due to external factors
which are beyond the control of the Company.
Principles of Consolidation
The consolidated financial statements include the accounts of
ConSyGen-Texas and its wholly-owned subsidiary, ConSyGen, Inc., an Arizona
corporation ("ConSyGen-Arizona"). Significant intercompany accounts and
transactions have been eliminated.
NOTE 2 - Debt Financings
During 1995 ConSyGen-Arizona entered into an agreement with a
consultant, which was supplemented in June 1996, under which the consultant
agreed to assist ConSyGen-Arizona in obtaining financing. ConSyGen-Arizona
issued 100,000 shares of its common stock to the consultant as a retainer for
services to be rendered. Such shares were valued at $.50 per share and have been
capitalized as debt issuance expense. In 1996 such consultant assisted
ConSyGen-Arizona in raising approximately $1,200,000 in a private placement of
debt. The debt bore interest at a rate of 10% per annum, was unsecured, and was
to be repaid in one year. As additional consideration to the lenders,
ConSyGen-Arizona agreed to issue warrants to purchase an aggregate of 1,000,000
shares of ConSyGen-Arizona's common stock at an exercise price of $5.00 per
share. The warrants become exercisable one year from the date of the loan, have
a term of two years and are callable upon 60 days notice. In connection with
ConSyGen-Texas' acquisition of ConSyGen-Arizona, ConSyGen-Arizona terminated
these warrants and ConSyGen-Texas reserved for issuance new warrants to purchase
1,000,000 shares of ConSyGen-Texas common stock on the same terms and
conditions. Such consultant had loaned the Company $84,000 at December 31, 1996.
This $84,000 loan was repaid by the Company in March 1997.
Following the loan transaction, the Company's consultant
transferred common stock of ConSyGen-Texas held by it to the lenders in exchange
for ConSyGen-Arizona's debt. As a result of this transaction, ConSyGen-Arizona's
obligation to repay the lenders was extinguished and ConSyGen-Arizona became
obligated to repay such consultant. On September 5, 1996, ConSyGen-Texas and the
consultant agreed that ConSyGen-Texas would issue an aggregate of 200,000 shares
of its common stock to such consultant, of which 173,648 shares were in
cancellation of ConSyGen-Arizona's debt acquired by the consultant from the
lenders and 26,352 shares were as payment for services.
CONSYGEN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996
(Unaudited)
NOTE 3 - Stockholders' Deficit
Acquisition of ConSyGen-Arizona
On September 5, 1996, ConSyGen-Texas, pursuant to an exchange
agreement, acquired 100% of the issued and outstanding shares of
ConSyGen-Arizona directly from the stockholders of ConSyGen-Arizona. Immediately
prior to the acquisition, ConSyGen-Texas effected a 1 for 40 reverse split of
its common stock. In connection with the acquisition, ConSyGen-Texas issued an
aggregate of 9,275,000 shares of its common stock in exchange for all of the
issued and outstanding shares of ConSyGen-Arizona. The exchange resulted in
ConSyGen-Arizona's shareholders holding a larger portion of the voting rights of
ConSyGen-Texas than was held by the ConSyGen-Texas stockholders prior to the
acquisition (approximately 69% at closing). The transaction has been treated as
a reverse acquisition (purchase) with ConSyGen-Arizona being the acquirer and
ConSyGen-Texas being the acquired company. Subsequent to the acquisition,
ConSyGen-Texas changed its legal name to ConSyGen, Inc.
Upon the closing of the acquisition, ConSyGen-Texas issued
3,850,000 shares of common stock to various consultants for services rendered.
Such shares were registered under the Securities Act of 1933, as amended,
pursuant to a Registration Statement on Form S-8. In addition, ConSyGen-Texas
issued 150,000 shares of common stock to a consultant for services rendered.
These 4,000,000 shares were valued at $1.00 per share, which was management's
best estimate of fair market value at the time of issuance. The accompanying
financial statements include a charge of $4,000,000 for the issuance of such
shares, which is included in general and administrative expenses.
NOTE 4 - Subsequent Events
In March 1997, ConSyGen-Texas raised $1,000,000 before
deducting finder's fees of $100,000 through a private placement of convertible
notes (the "Notes") in the principal amount of $1,000,000. The Notes are
unsecured, bear interest at the rate of 6% per annum, are payable in March 2000,
and are convertible into common stock of ConSyGen-Texas. The principal amount of
the Notes is convertible into common stock of ConSyGen-Texas at a rate equal to
the lesser of (1) $10.85 per share (115% of the closing bid price of the common
stock on March 21,1997); or (2) that price which is equal to 70% of the average
closing bid price of the common stock for the five trading days preceding the
date of conversion. ConSyGen-Texas is obligated to register the shares of common
stock issuable upon conversion of the Notes, under the Securities Act of 1933,
as soon as practicable after the closing date. ConSyGen-Texas is obligated to
pay certain penalties if the underlying shares are not registered under the
Securities Act of 1933 within 90 days of the date of Closing. ConSyGen-Texas may
compel conversion of the Notes at any time after the expiration of six months
after the effective date of the Registration Statement. The Notes are
redeemable, at a price equal to 130% of the principal amount of the Notes, in
the event that the price of ConSyGen-Texas' common stock is less than the bid
price on March 21, 1997.
In June 1997, the Company raised approximately $1,000,000, net
of a finder's fee, through the private sale of 120,000 shares of common stock at
a price of $9.00 per share. The Company has agreed to use its best efforts to
register the shares for resale under the Securities Act of 1933, within 120 days
of the closing.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
ConSyGen, Inc., a Texas corporation ("ConSyGen-Texas"), was
incorporated on September 28, 1988 as C Square Ventures, Inc. ConSyGen-Texas was
formed for the purpose of obtaining capital in order to take advantage of
domestic and foreign business opportunities which may have profit potential. On
March 16, 1989, ConSyGen-Texas (then C Square Ventures, Inc.) completed an
initial public offering.
Acquisition of ConSyGen, Inc.
ConSyGen-Texas entered into an agreement, dated as of August
28, 1996, to acquire 100% of the issued and outstanding shares of ConSyGen,
Inc., a privately held Arizona corporation ("ConSyGen-Arizona") (f/k/a
International Data Systems, Inc.). Immediately prior to the acquisition
transaction, ConSyGen-Texas effected a 1-for-40 reverse split of its common
stock. ConSyGen-Texas closed the acquisition of ConSyGen-Arizona on September 5,
1996. As a result of the acquisition, ConSyGen-Arizona became a wholly-owned
subsidiary of ConSyGen-Texas. The transaction has been treated as a reverse
acquisition (purchase) with ConSyGen-Arizona being the acquirer and
ConSyGen-Texas being the acquired company. Consequently, only the historical
operations of ConSyGen-Arizona are presented through September 5, 1996.
In connection with the acquisition, ConSyGen-Texas issued an
aggregate of 9,275,000 shares of its common stock directly to the stockholders
of ConSyGen-Arizona, in exchange for all of the issued and outstanding shares of
ConSyGen-Arizona. Upon the closing of the acquisition, ConSyGen-Texas issued an
additional 3,850,000 shares of common stock to various consultants for services
rendered. Such shares were registered under the Securities Act of 1933, as
amended, pursuant to a Registration Statement on Form S-8. In addition,
ConSyGen-Texas issued 150,000 shares of common stock to a consultant for
services rendered. Following the closing of the acquisition, ConSyGen-Arizona's
stockholders held a larger portion of the voting rights of ConSyGen-Texas than
was held by the ConSyGen-Texas stockholders prior to the acquisition
(approximately 69% at closing). In connection with the acquisition, outstanding
options to purchase 1,275,000 shares of ConSyGen-Arizona's common stock granted
under its Non-Qualified Stock Option Plan were terminated and ConSyGen-Texas
adopted a new Non-Qualified Stock Option Plan and issued options to purchase
1,275,000 shares of common stock at an exercise price of $1.00 per share. In
addition, ConSyGen-Arizona terminated warrants to purchase 1,000,000 shares of
its common stock in connection with the acquisition, and ConSyGen-Texas reserved
for issuance replacement warrants to purchase 1,000,000 shares of its common
stock at an exercise price of $5.00 per share.
ConSyGen-Texas and its wholly-owned subsidiary,
ConSyGen-Arizona, are hereafter collectively referred to as the "Company".
Description of Business of ConSyGen, Inc.
ConSyGen-Texas' business consists solely of the business of
its wholly owned subsidiary, ConSyGen-Arizona. ConSyGen-Arizona was incorporated
in Arizona on October 11, 1979. Until 1995, ConSyGen-Arizona licensed its
proprietary computer software, which was used in the hotel and airline
industries, and also provided software maintenance services. In 1996,
ConSyGen-Arizona discontinued its practice of software licensing and providing
software maintenance services. ConSyGen-Arizona is currently engaged in the
business of rendering automated software conversion
services, although it has not yet realized any operating revenue from its
conversion business this year. ConSyGen-Arizona uses its proprietary toolsets to
provide fully automated conversions of mainframe hardware applications to open
systems. ConSyGen-Arizona also uses its toolsets to convert software so that it
is Year 2000 compliant. The company's ConSyGen 2000 toolset is a fully-automated
toolset that automatically corrects dates in both source code and data to be
compliant for the Year 2000 and beyond. The company's ConSyGen Conversion
toolset automatically converts software to run on a different hardware platform.
For example, the company can automatically convert software running on older
BULL, IBM, Unisys, etc., mainframes so that it can run on the new Client/Server
platforms (often called downsizing).
Material Changes in Results of Operations
As described above, the Company entered into an agreement,
dated as of August 28, 1996, to acquire all of the issued and outstanding shares
of ConSyGen, Inc., an Arizona corporation. The acquisition was closed on
September 5, 1996.
Net Losses
For the quarter ended November 30, 1996, the Company had a net
loss of $4,816,000, compared to a net loss of $537,000 for the comparable prior
quarter, an increase of $4,279,000. For the six months ended November 30, 1996,
the Company had a net loss of $6,168,000, compared with a net loss of $846,000
for the comparable prior period, an increase of $5,322,000 or 629%. An
explanation of these losses is set forth below.
For the nine months ended February 28, 1997, the Company
incurred net losses of approximately $6.7 million on a consolidated basis (after
giving effect to the acquisition). Approximately $5.2 million of these losses
was attributable to common stock issued in payment of services rendered.
Revenues
For the quarter ended November 30, 1996, the Company had no
operating revenue, compared with operating revenue of approximately $8,000 for
the quarter ended November 30, 1995. For the six months ended November 30, 1996,
the Company had no operating revenue, compared with operating revenue of
approximately $19,000 for the six months ended November 30, 1995. The decreases
in operating revenue are primarily attributable to the Company's abandonment of
its software licensing and maintenance business. The Company abandoned software
licensing and maintenance so that it could focus on the development of software
for use in providing conversion services, including Year 2000 conversion
services.
Software Development Expenses
For the quarter ended November 30, 1996, software development
expenses were approximately $263,000, compared with approximately $133,000 for
the quarter ended November 30, 1995, an increase of approximately $130,000 or
98%. For the six months ended November 30, 1996, software development expenses
were approximately $473,000, compared with approximately $269,000 for the six
months ended November 30, 1995, an increase of approximately $204,000 or 76%.
The increases in software development expenses, are primarily attributable to
the Company's shift in focus from software maintenance to the development of
software for use in providing conversion services, including Year 2000
conversion services.
General and Administrative Expenses
For the quarter ended November 30, 1996, general and
administrative expenses were approximately $4,479,000, compared with
approximately $379,000 for the three months ended November 30, 1995, an increase
of $4,100,000 or approximately 1082%. This increase in general and
administrative expenses was primarily attributable to an increase in non-cash
charges in the amount of approximately $4.0 million, related to the issuance of
common stock to consultants for services rendered. In addition, general and
administrative expenses increased approximately $100,000, consisting primarily
of increased professional fees and salaries and related expenses. For the six
months ended November 30, 1996, general and administrative expenses were
$5,506,000, compared with $517,000 for the six months ended November 30, 1995,
an increase of approximately $4,989,000 or 965%. This increase in general and
administrative expenses was primarily attributable to an increase in non-cash
charges of approximately $4,900,000, related to the issuance of common stock to
consultants for services rendered. In addition, administrative expenses
increased approximately $100,000, consisting primarily of increased professional
fees and salaries and related expenses.
Depreciation and Amortization Expense
For the quarter ended November 30, 1996, depreciation and
amortization expense was approximately $32,000, compared with $3,000 for the
comparable prior period, an increase of $29,000 or 966%. This increase is
attributable primarily to the amortization of debt issuance expense incurred in
connection with obtaining debt financing. For the six months ended November 30,
1996, depreciation and amortization expense was approximately $83,000, compared
with $6,000 for the comparable prior period, an increase of $77,000 or 1,283%.
This increase is also attributable primarily to the amortization of debt
issuance expense incurred in connection with obtaining debt financing.
Material Changes in Financial Condition, Liquidity and
Capital Resources
The Company is currently experiencing, and has in the past
experienced, a severe working capital deficiency and has historically incurred
substantial and recurring losses. At this time, the Company is not generating
any revenue. The Company continues, however, to incur substantial costs and
expenses in connection with its business operations and the development of its
software. At June 30, 1997, the Company will need to raise additional capital
within approximately two to three months. If the Company is unable to raise
additional capital or generate significant revenue within the next two to three
months, the Company will not be able to fund its continuing operations and
continue as a going concern, in which case there would be a material adverse
effect on the Company, its business and the price of its common stock.
The Company's cash and cash in escrow balances were
approximately $100,000 at November 30, 1996, compared with no cash or cash in
escrow at May 31, 1996. This $100,000 increase is primarily attributable to
proceeds remaining from a debt financing. The Company had a working capital
deficit of approximately $708,000 at November 30, 1996, compared with a working
capital deficit of approximately $1,621,000 at May 31, 1996, a decrease in the
working capital deficit of approximately $913,000 or 56%. This decrease in the
working capital deficit is primarily attributable to a decrease in indebtedness
to a related party, in the amount of $700,000, through the issuance of common
stock, increased cash and cash in escrow of approximately $100,000 and a
decrease in accounts payable and accrued liabilities of approximately $130,000.
At February 28, 1997, the Company had a working capital
deficit of approximately $1,147,000 on a consolidated basis (after giving effect
to the acquisition), compared with a working capital deficit at May 31, 1996 of
$195,000 on an unconsolidated basis (before giving effect to the
acquisition). This $952,000 increase in the working capital deficit since May
31, 1996 was primarily attributable to increased notes and loans payable of the
consolidated company.
To remedy the working capital deficit, the Company is actively
seeking to raise capital through a private offering of equity and or debt
securities and has increased its marketing efforts, including establishing
strategic alliances, in order to have its services marketed to a wide range of
customers. Since February 28, 1997, the Company has, through the private sale of
convertible debt and equity securities, raised approximately $2.1 million, which
the Company has been using to fund its continuing operations. There can be no
assurance that the Company will in the future be able to raise sufficient funds
to continue its operations. Nor can there be any assurance that the Company will
be able to internally generate sufficient funds to continue its operations. The
failure of the Company to raise sufficient additional funds, either through
additional financing or continuing operations, will have a material adverse
effect on the Company. The issuance of additional equity securities and or
rights to acquire equity securities will dilute the interest of the current
stockholders of the Company.
As of June 1997, the Company has committed to spend
approximately $200,000 for capital expenditures, consisting of $170,000 for
computer equipment and $30,000 for furniture and fixtures. The Company will fund
these expenditures out of currently available cash.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The National Association of Securities Dealers, Inc. ("NASD") in
December 1996 advised the Company that it is conducting a routine review of
trading in ConSyGen-Texas' common stock following the acquisition of
ConSyGen-Arizona. The NASD made a written inquiry of the Company to which the
Company responded in writing in January 1997. The NASD made inquiry with respect
to, among other things, a private placement by ConSyGen-Arizona, the acquisition
of ConSyGen-Arizona by ConSyGen-Texas, and issuances of common stock by the
Company during 1996. The NASD has not yet responded in writing to the Company's
written response. The outcome of the NASD review could have a material adverse
effect on the Company and the price of and trading market for the Company's
common stock.
Item 2. Changes in Securities
As described in Part I under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations", ConSyGen-Texas
entered into an agreement, dated as of August 28, 1996, to acquire 100% of the
issued and outstanding shares of ConSyGen, Inc., a privately held Arizona
corporation ("ConSyGen-Arizona") (f/k/a International Data Systems, Inc.).
ConSyGen-Texas closed the acquisition of ConSyGen-Arizona on September 5, 1996.
Following the acquisition, ConSyGen-Texas' business consisted solely of the
business of ConSyGen-Arizona. In connection with the acquisition, ConSyGen-Texas
issued an aggregate of 9,275,000 shares of its common stock directly to the
stockholders of ConSyGen-Arizona in exchange for all of the issued and
outstanding shares of ConSyGen-Arizona. In addition, upon the closing of the
acquisition, ConSyGen-Texas issued 150,000 shares of common stock to a
consultant for services rendered and agreed to issue 200,000 shares to a
consultant in cancellation of indebtedness and as payment for services. In
connection with the acquisition, ConSyGen-Arizona terminated outstanding options
to purchase 1,275,000 shares of common stock granted under its Non-Qualified
Stock Option Plan, and ConSyGen-Texas adopted a new Non-Qualified Stock Option
Plan and issued options to purchase 1,275,000 shares of common stock to
employees of ConSyGen-Arizona. In addition, in connection with the acquisition,
ConSyGen-Arizona terminated warrants to purchase 1,000,000 shares of its common
stock, and ConSyGen-Texas reserved for issuance replacement warrants to purchase
1,000,000 shares of its common stock, on the same terms and conditions. On
September 3, 1996, ConSyGen-Texas agreed to issue 100,000 shares to a consultant
as a retainer for services to be rendered.
None of the foregoing shares of common stock, options or warrants were
registered under the Securities Act of 1933.
To the extent that the foregoing transactions constituted "sales"
within the meaning of the Securities Act, the securities issued in such
transactions were not registered under the Securities Act, as amended, in
reliance upon the exemption from registration set forth in Section 4(2) thereof,
relating to sales by an issuer not involving any public offering. Each of the
foregoing transactions, to the extent constituting "sales" within the meaning of
the Securities Act, were exempt under Section 4(2) thereof based on the
following facts: to the knowledge of the issuer, there was no general
solicitation, there were a limited number of purchasers, the purchasers were
provided with or had access to information about the issuer, and either the
purchasers or their respective representatives were sophisticated about business
and financial matters.
Item 3. Defaults Upon Senior Securities
The following defaults on the indebtedness of the Company (after giving
effect to the acquisition) existed at February 28, 1997.
The Company is in default under the terms of a note payable, in the
principal amount of $23,000, bearing interest at approximately 10% per annum and
due June 30, 1989. The Company did not repay the principal and interest due
under the terms of the note on the due date. The payee under the note has not
made demand on the Company for payment. As of February 28, 1997, the total
arrearage under the note was $45,000, consisting of $23,000 in principal and
approximately $22,000 of interest.
The Company is in default under the terms of a note payable, in the
principal amount of $100,000, bearing interest at 10% per annum and due July 31,
1996. The Company did not repay the principal and interest due under the terms
of the note on July 31, 1996, and interest has been accruing at the default rate
of
18% per annum since that date. The payee under the note has not made demand on
the Company for payment. As of February 28, 1997, the total arrearage under the
note was $128,000, consisting of $100,000 in principal and approximately $28,000
of interest.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION OF EXHIBIT
2 Plan of Acquisition between the Registrant and the
stockholders of ConSyGen, Inc., an Arizona
corporation, dated August 28, 1996, filed as Exhibit 2
to the Registrant's Current Report on Form 8-K dated
September 5, 1996 and incorporated herein by
reference.
3.1 Articles of Incorporation of the registrant, as
amended. (1)
3.2 By-Laws of the registrant, filed as Exhibit 3.B to the
Registrant's Registration Statement on Form S-18, File
No. 33-22900 - FW, and incorporated herein by
reference.
4.1 Specimen common stock certificate, filed as Exhibit
4.B to the Registrant's Registration Statement on Form
S-18, File No. 33-22900 - FW, and incorporated herein
by reference.
4.2 Form of Common Stock Purchase Warrant used in
connection with issuance of warrants to purchase an
aggregate of 1,000,000 shares of the Registrant's
Common Stock, $.003 par value. (1)
4.3 Subscription Agreement between the Registrant and
Little Wing, L.P. for convertible debt of the
Registrant (including Summary of Terms). (1)
4.4 Subscription Agreement between the Registrant and
Tonga Partners, L.P. for convertible debt of the
Registrant (including Summary of Terms). (1)
10.1 Agreement between the Registrant and Carriage House
Capital, Inc., dated May 19, 1997, superseding letter
agreements (also filed as Exhibit 10.1 hereto) between
Carriage House Capital, Inc. and the Registrant's
wholly-owned subsidiary, dated June 14, 1996 and
October 26, 1995. (1)
10.2 Consulting Agreement between Carriage House Capital,
Inc. and the Registrant dated July 10, 1996. (1)
- -------------------------------
(1) Filed as an Exhibit, with the same Exhibit number, to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended August 31, 1996 and
incorporated herein by this reference.
Item 6. Exhibits and Reports on Form 8-K - Continued
(a) Exhibits
EXHIBIT NO. DESCRIPTION OF EXHIBIT
10.3 Consulting Agreement between Mikesco, Inc. and the
Registrant dated July 10, 1996. (1)
10.4 Consulting Agreement between Concorda Corp. and the
Registrant dated July 10, 1996. (1)
10.5 Consulting Agreement between Scarlett Investment
Group, Inc. and the Registrant dated July 10, 1996.
(1)
10.6 Consulting Agreement between The Canter Corporation
and the Registrant dated August 20, 1996. (1)
10.7 Registrant's 1996 Non-Qualified Stock Option Plan. (1)
10.8 Registrant's 1997 Non-Qualified Stock Option Plan. (1)
10.9 Consulting Agreement between the Registrant and
Innovative Research Associates, Inc. (1)
27 Financial Data Schedule
(b) Reports on Form 8-K
The following Current Report on Form 8-K was filed during the quarter
ended November 30, 1996, the Registrant filed a Current Report on form 8-K,
dated September 5, 1996, on November 18, 1996, which reported a change in
control of the Registrant (Item (1)) and the Registrant's acquisition of
ConSyGen, Inc., an Arizona corporation.
- -------------------------------
(1) Filed as an Exhibit, with the same Exhibit number, to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended August 31, 1996 and
incorporated herein by this reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSYGEN, INC.
Date: July 3, 1997 By: /s/Ronald I. Bishop
-------------------- -----------------------------------
Ronald I. Bishop, President
and Chief Executive Officer
Date: July 3, 1997 By: /s/Kenneth Harvey
-------------------- -----------------------------------
Kenneth Harvey, Controller
(Chief Accounting Officer)
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
2 Plan of Acquisition between the Registrant and the
stockholders of ConSyGen, Inc., an Arizona
corporation, dated August 28, 1996, filed as Exhibit 2
to the Registrant's Current Report on Form 8-K dated
September 5, 1996 and incorporated herein by
reference.
3.1 Articles of Incorporation of the registrant, as
amended.(1)
3.2 By-Laws of the registrant, filed as Exhibit 3.B to the
Registrant's Registration Statement on Form S-18, File
No. 33-22900 - FW, and incorporated herein by
reference.
4.1 Specimen common stock certificate, filed as Exhibit
4.B to the Registrant's Registration Statement on Form
S-18, File No. 33-22900 - FW, and incorporated herein
by reference.
4.2 Form of Common Stock Purchase Warrant used in
connection with issuance of warrants to purchase an
aggregate of 1,000,000 shares of the Registrant's
Common Stock, $.003 par value.(1)
4.3 Subscription Agreement between the Registrant and
Little Wing, L.P. for convertible debt of the
Registrant (including Summary of Terms).(1)
4.4 Subscription Agreement between the Registrant and
Tonga Partners, L.P. for convertible debt of the
Registrant (including Summary of Terms).(1)
10.1 Agreement between the Registrant and Carriage House
Capital, Inc., dated May 19, 1997, superseding letter
agreements (also filed as Exhibit 10.1 hereto) between
Carriage House Capital, Inc. and the Registrant's
wholly-owned subsidiary, dated June 14, 1996 and
October 26, 1995.(1)
10.2 Consulting Agreement between Carriage House Capital,
Inc. and the Registrant dated July 10, 1996.(1)
10.3 Consulting Agreement between Mikesco, Inc. and the
Registrant dated July 10, 1996.(1)
10.4 Consulting Agreement between Concorda Corp. and the
Registrant dated July 10, 1996.(1)
10.5 Consulting Agreement between Scarlet Investment Group,
Inc. and the Registrant dated July 10, 1996.(1)
10.6 Consulting Agreement between The Canter Corporation
and the Registrant dated August 20, 1996.(1)
10.7 Registrant's 1996 Non-Qualified Stock Option Plan.(1)
10.8 Registrant's 1997 Non-Qualified Stock Option Plan.(1)
10.9 Consulting Agreement between the Registrant and
Innovative Research Associates, Inc.(1)
27 Financial Data Schedule
- -------------------
(1) Filed as an Exhibit, with the same Exhibit number, to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended August 31, 1996 and
incorporated herein by this reference.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANTS QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 30,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> MAY-31-1997 MAY-31-1997
<PERIOD-START> JUN-01-1996 SEP-01-1996
<PERIOD-END> NOV-30-1996 NOV-30-1996
<CASH> 101,101 101,101
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 156,293 156,293
<PP&E> 74,433<F1> 74,433<F1>
<DEPRECIATION> 0<F1> 0<F1>
<TOTAL-ASSETS> 236,414 236,414
<CURRENT-LIABILITIES> 864,335 864,335
<BONDS> 0 0
0 0
0 0
<COMMON> 41,059 41,059
<OTHER-SE> (668,980)<F2> (668,980)<F2>
<TOTAL-LIABILITY-AND-EQUITY> 236,414 236,414
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 6,062,735 4,774,301
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 105,044 42,064
<INCOME-PRETAX> (6,167,779) (4,816,365)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (6,167,779) (4,816,365)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,167,779) (4,816,365)
<EPS-PRIMARY> (.57) (.35)
<EPS-DILUTED> 0 0
<FN>
<F1> Net of accumulated depreciation.
<F2> Accumulated deficit of $(17,002,203) net of additional paid in capital
of 16,333,223.
</FN>
</TABLE>
