UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(Amendment No. 1)
Quarterly report pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the quarterly period ended August 31, 1999
Commission File Number: 17598
CONSYGEN, INC.
(Exact name of Registrant as specified in its charter)
Texas 76-0260145
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 South 52nd Street, Tempe, Arizona 85281
(Address of principal executive offices) (Zip Code)
(480) 394-9100
(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 [X] No [ ] 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.
15,497,301 shares of Common Stock, $.003 par value, as of November 10, 1999.
<PAGE>
CONSYGEN, INC.
INDEX
PART I FINANCIAL INFORMATION:
Item 1. Financial Statements.
Consolidated Balance Sheet, August 31, 1999 2
Consolidated Statements of Operations - Three
Months Ended August 31, 1999 and August 31, 1998 3
Consolidated Statements of Cash Flows - Three
Months Ended August 31, 1999 and August 31, 1998 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II OTHER INFORMATION
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K. 15
SIGNATURES 16
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED IN THIS REPORT AND IN DOCUMENTS
INCORPORATED BY REFERENCE HEREIN CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURIRIES EXCHANGE ACT OF 1934. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED
HEREIN OR INCORPORATED BY REFERENCE HEREIN THAT ARE NOT STATEMENTS OF HISTORICAL
FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE
FOREGOING, THE WORDS "BELIEVES," "PLANS," "ANTICIPATES," "EXPECTS," "ESTIMATES,"
AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
ALTHOUGH THE COMPANY BELIEVES THAT THE ASSUMPTIONS ON WHICH SUCH FORWARD-LOOKING
STATEMENTS ARE BASED ARE REASONABLE, THERE CAN BE NO ASSURANCE THAT SUCH
ASSUMPTIONS WILL PROVE TO BE ACCURATE, AND ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT
MAY CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO,
THOSE SET FORTH UNDER THE CAPTION "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS REPORT.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSYGEN, INC.
CONSOLIDATED BALANCE SHEETS
August 31,
1999
ASSETS ------------
Current Assets:
Cash and Cash Equivalents $ 9,413
Restricted Cash 133,264
Accounts Receivable 49,126
Inventory 319,401
Prepaid Expenses 20,096
Other Current Assets 10,425
------------
Total Current Assets 541,724
------------
Property and Equipment - Net 1,321,005
------------
Other Assets:
Debt Issuance Expense - Net 275,501
Other Assets 19,284
------------
Total Other Assets 294,785
------------
Total Assets $ 2,157,514
============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts Payable $ 226,553
Notes Payable 237,769
Capital Lease - Current portion 11,063
Mortgage - Current portion 13,309
Accrued Liabilities 827,931
Convertible debentures 3,500,000
------------
Total Current Liabilities 4,816,625
------------
Capital lease - Long Term Portion 39,646
Mortgage - Long Term 532,635
------------
Total Liabilities 5,388,907
------------
Commitments & Contingencies
Stockholders' Equity :
Common Stock, $.003 par Value, Authorized
40,000,000 Shares, Issued 15,497,301 Shares
at August 31, 1999 46,492
Additional Paid-in Capital 25,326,767
Accumulated Deficit (28,204,652)
Treasury Stock, at cost (70,000 shares) (400,000)
------------
Total Stockholders' Equity (3,231,392)
------------
Total Liabilities and Stockholders' Equity $ 2,157,514
============
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
CONSYGEN, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
For the Three Months
Ended August 31,
------------------------------
1999 1998
----------- -----------
Counterfeit Cop Revenue $ 44,503 $ --
Software Services Revenue 73,365 147,964
----------- -----------
Revenues $ 117,868 $ 147,964
----------- -----------
Costs and Expenses:
Cost of Sales - Cop 9,243
Cost of Sales - Software Services 204,683 226,090
Software Development 125,175 193,801
Selling, General and Administrative Expenses 783,935 809,927
Interest Expense 97,014 54,000
Depreciation and Amortization 59,010 43,650
----------- -----------
Total Costs and Expenses 1,279,061 1,327,468
----------- -----------
Loss from Operations (1,161,193) (1,179,504)
Interest Income 5,755 53,354
Other Income 27,493 --
Other Expenses (287,458) --
----------- -----------
Net Loss $(1,415,403) $(1,126,150)
=========== ===========
Weighted Average Common Shares Outstanding 15,416,201 15,341,093
=========== ===========
Net Loss per Commion Share $ (0.09) $ (0.07)
=========== ===========
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
CONSYGEN, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Three Months Ended
August 31,
---------------------------
1999 1998
----------- -----------
Cash Flows from Operating Activities:
Net Loss $(1,415,403) $(1,126,150)
Adjustments to Reconcile Net Loss to
Net Cash (Used) by Operating Activities:
Depreciation and amortization 60,585 43,650
Write-off of investment in technology 230,000 --
Changes in Operating Assets and Liabilities:
Accounts Receivable (40,692) 65,742
Inventories (158,081) --
Prepaid Expenses and Other Assets (682) (7,942)
Accounts Payable 176,227 (59,389)
Accrued Liabilities 241,904 15,358
----------- -----------
Net Cash (Used) by Operating Activities (906,142) (1,068,731)
----------- -----------
Cash Flows from Investing Activities:
Utilization of certificate of deposit
for inventory purchases 333,944 --
Purchases of Furniture and Equipment (72,497) (69,806)
Purchase of technology (230,000) --
----------- -----------
Net Cash (Used) by Investing Activities 31,447 (69,806)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from Sale of Common Stock 14,941 5,161
Payments of principal on loans (3,056) --
Proceeds of Loans payable -- Related Parties 147,051 --
Payments of principal on capital lease
obligations (14,136) --
----------- -----------
Net Cash Provided by Financing Activities 144,800 5,161
----------- -----------
Net Decrease in Cash and Cash Equivalents (729,895) (1,133,376)
Cash and Cash Equivalents -- Beginning of Period 739,308 4,991,434
----------- -----------
Cash and Cash Equivalents -- End of Period $ 9,413 $ 3,858,058
=========== ===========
Supplemental Cash Flow Information:
Cash Paid for Interest $ 49,470 $ --
=========== ===========
Non-Cash Financing and Investing Activities:
Issuance of Common Stock as Loan Incentive $ 20,839 $ --
=========== ===========
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
CONSYGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 1999 (Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of ConSyGen,
Inc., a Texas corporation ("ConSyGen-Texas") and its wholly-owned subsidiary,
ConSyGen, Inc., an Arizona corporation ("ConSyGen-Arizona"). Significant
intercompany accounts and transactions have been eliminated.
ConSyGen-Texas and its wholly-owned subsidiary ConSyGen-Arizona are
hereafter collectively referred to as the "Company."
In the opinion of the Company, the accompanying unaudited consolidated
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 that are
beyond the control of the Company.
NOTE 2 - STOCKHOLDERS' EQUITY (DEFICIT)
STOCK OPTIONS
The Company has issued new options during the three months ended August 31,
1999. The Company has intends to compensate employees with additional options,
and at August 31, 1999 720,000 options, with an exercise price of $0.50, have
been granted.
NOTE 3 - Net Loss Per Share
The computation of diluted net loss per share is not presented because
conversion, exercise or contingent issuance of securities would have an
antidilutive effect on loss per share.
NOTE 4 - LEGAL PROCEEDINGS
On December 3, 1998, the three holders of the Company's outstanding
Convertible Debentures, Sovereign Partners Limited Partnership, a Delaware
limited partnership, Dominion Capital Fund, Ltd., a Bahamian Corporation, and
Canadian Advantage Limited Partnership, an Ontario, Canada, Limited Partnership,
commenced an action (Case No. 98CIV.8457 in the United States District Court for
the Southern District of New York) against the Company for specific performance
of the provisions of the Debentures which permit the holders to convert the debt
evidenced by the Debentures into shares of the Company's common stock. The
Debentures are described on page 10 of the Company's Registration Statement on
Form S-3, filed with the Securities and Exchange Commission, effective September
29, 1998.
5
<PAGE>
On December 28, 1998, the Company filed an answer in that action denying
that, under the pertinent circumstances, the Company is obligated to effect any
such conversion. The Company also filed a counterclaim against the holders, and
new claims against certain agents of the holders, in the same action, alleging
that the holders and the agents made material misrepresentations in connection
with the purchase and sale of the Debentures and made unlawful short sales of
the Company's common stock.
On February 1, 1999, Stephen M. Hicks, general partner of Sovereign Account
and two of the three holders of the Company's outstanding Convertible
Debentures, Sovereign Partners Limited Partnership, a Delaware limited
partnership and Dominion Capital Fund Ltd., a Bahamian Corp. served an action
which was filed in the United States District Court for the Southern District of
New York against the Company and Thomas S. Dreaper, its former president and
Chief executive officer, to recover damages for alleged intentional and
calculated defamation. The Plaintiffs seek compensation from ConSyGen and
Dreaper each in the amount of $1,000,000 or in such sum as the Court shall
determine, together with exemplary or punitive damages.
On February 4, 1999, Thomson Kernaghan & Co. Limited and Mark E. Valentine
served an action which was filed in the Ontario Court (General Division) against
the Company, Thomas S. Dreaper, its former president and Chief executive
officer, and Raj Kapur its chief financial officer to recover damages for
alleged defamation. The Plaintiffs seek compensation from ConSyGen, Dreaper and
Kapur jointly and severally each in the amount of $2,000,000 for general
damages, cost of the action, applicable taxes and other relief as the Court
shall determine.
At August 31, 1999, the litigation has yet to proceed to point where any
estimate can be made of the likelihood of an adverse effect on the Company's
financial condition or the amount of such an effect.
NOTE 5 - DEBT
The Company borrowed $147,000 from an officer who is its largest single
shareholder. Of that amount, the Company used $50,000 for an extension of time
to pay the balance on a purchased technology. The balance was used for working
capital purposes. The loans have been classified as current debt in the
accompanying balance sheet.
NOTE 6 - PURCHASED TECHNOLOGY
On June 16, 1999, the Company entered into an agreement with a third party
to acquire certain software. The software was represented to have unique
capabilities related to data base retrieval. The Company acquired the software
in connection with its attempts to move into other product lines including
internet commerce. The original purchase price for the software was $600,000.
The Company had estimated at the time of purchase that an additional $275,000
would be required to complete development of the software. The Company paid
$180,000 cash at the date of purchase but failed to make the $420,000 payment
6
<PAGE>
due on July 30, 1999. The Company received a 30 day extension of the July 30,
1999 due date by making a payment of $50,000 against the balance due and issuing
120,000 shares of common stock to the seller of the software. The stock was
transferred from the holdings of an officer who is the largest single
shareholder. The Company later made a determination that the software would
require significant additional development and believed that the capabilities of
the software were misrepresented by the seller. The Company failed to make the
final payment of $370,000 and the status of the software and its utilization by
the Company are presently uncertain. However, the Company determined that it
will not invest significant additional resources into the development of this
product and has written-off its investment in this software in the first quarter
of fiscal 2000.
NOTE 7 - SUBSEQUENT EVENTS
The Company has borrowed additional funds subsequent to August 31, 1999.
The Company obtained $150,000 through a loan collateralized by a second mortgage
on the Company's office building and land. The Company obtained an additional
$180,000 through loans from outside parties.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements and the Notes thereto appearing
elsewhere in the Report. The Company and its wholly-owned subsidiary,
ConSyGen-Arizona, are herein collectively referred to as the "Company."
OVERVIEW
The Company continues to market its Consygen 2000 Conversion Services.
However, the Company recognizes that the opportunity for long-term revenue
generation in this market is diminishing. The Company believes there remain
short-term opportunities for its services in this market, especially in certain
foreign markets. The Company has not historically met its goals for revenue in
its conversion services business. The Company has had numerous contracts for its
conversion services and believes it has successfully completed those contracts.
However, the volume of such services has not met management's expectations nor
has that volume resulted in profitable operations.
The Company has attempted to introduce and market its Counterfeit Cop
product. At August 31, 1999, there have been some sales of the Counterfeit Cop.
Subsequent to August 31 1999, the Company entered into distribution agreement
with a third party that has a national distribution network. The Company expects
sales to begin with this third party in the third quarter of fiscal 2000.
Due to the lack of profitable operations and difficulties raising
additional capital, the Company has experienced significant cash flow
difficulties. Subsequent to May 31, 1999, the Company has borrowed approximately
$500,000. Some of those borrowings have come from a board member and significant
shareholder and other amounts have come from lenders with the Company's office
building serving as collateral on those borrowings. Even with the borrowings,
the Company has had difficulties meeting its payroll and other operating
obligations. The Company has fallen behind on scheduled payrolls and certain
members of management have deferred taking salaries.
The Company will continue to attempt to implement its business plan with
the continuation of its Year 2000 Services, marketing and distribution of the
Counterfeit Cop and introduction of new products and development of E-Commerce
business. There can be no assurances that the Company will be successful in any
of these areas. It has not been successful to-date in producing profitable
operations in its Year 2000 Services business. In addition, the Company will
require significant additional capital to move forward on any of these product
lines and new ventures.
8
<PAGE>
The Company is involved in material litigation. The Company has become
involved in a dispute with its debenture holders. The debenture holders have
filed claims against the Company and certain of its former and current officers.
The litigation alleges that the Company failed to honor the debenture holders'
request to convert the debt to common stock. The Company refused to honor the
request because it believed there was inappropriate trading of the Company's
common stock on the part of the debenture holders. The litigation if resolve in
favor of the debenture holders could have a material adverse effect on the
Company. The aggregate claims against the Company in this litigation is
approximately $4,000,000. There could also be damages due under the terms of the
debenture agreement ranging from $50,000 to $700,000. The Company has filed
counter claims in this matter and intends to vigorously defend its positions.
The outcome of this litigation remains uncertain. However, the Company's legal
counsel in this matter is recommending alternative resolutions to litigation.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
NET LOSSES. For the quarter ended August 31, 1999, the Company incurred net
losses of $1,415,000, compared with net losses of $1,126,000 for the comparable
prior quarter, an increase of $274,000. An explanation of these losses is set
forth below.
REVENUES. For the quarter ended August 31, 1999, the Company had operating
revenue of $118,000, compared with $148,000 operating revenue for the comparable
prior period. The 1998 revenue was related to several completed and in process
conversion service contracts while 1999 revenue is comprised of $74,000 for Y2K
and $44,000 for Counterfeit Cop.
COST OF CONVERSION SERVICES. Cost of conversion services consists primarily
of personnel costs directly related to the performance of conversion services by
the Company. For the three months ended August 31, 1999, cost of conversion
services were $140,000 compared with $226,090 for the comparable prior period.
The decrease in cost of conversion services is primarily attributable to the
reduction of staff due to decrease in Y2K business. The cost of conversion as a
percentage of sales is high due to unabsorbed costs attributable to low sales
volume
SOFTWARE DEVELOPMENT EXPENSES. For the three months ended August 31, 1999,
software development expenses were $427,000, compared with $194,000 for the
comparable prior period. The increase in software development expenses is
primarily attributable to write-off of technology purchase of approximately
$230,000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the quarter ended August
31, 1999, selling, general and administrative expenses were $783,935, compared
with $810,000 for the comparable prior period. The decrease of $16,000 is
attributable to a decrease in the following; advertising expense of $52,581,
payroll expenses of $52,833, rent expense of $10,638, in repairs of $10,754,
which is offset by an increase in the following; outside services of $64,257,
professional fees of $37,744 (including a decrease in employment services of
$52,956, a decrease in accounting services of $29,080 and an increase in legal
expense of $119,790), and employee business expense of $8,805.
INTEREST EXPENSE. For the quarter ended August 31, 1999, interest
expense was $97,014 compared with $54,000 for the comparable prior period. The
current year interest expense is primarily composed of interest accrual on
$3,5000,000 principal amount of the Company's 6% Convertible Debentures and
$550,000 mortgage.
9
<PAGE>
DEPRECIATION AND AMORTIZATION EXPENSE. For the quarter ended August 31,
1999, depreciation expense was approximately $60,585, compared with $ 43,650 for
the comparable prior period. The increase is primarily due to purchases of
additional computers, furniture and building.
MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company has suffered material operating losses and is experiencing
difficulties meeting its current obligations, including regular payroll
obligations. Due to lack of ongoing revenue, the Company has not had adequate
working capital and since May 31, 1999, cash has almost exclusively come from
borrowings. The Company is attempting to raise sufficient equity capital to meet
its current obligations and to implement its new business plan. However, the
Company has experienced difficulty in doing so and there can be no assurances
that it will be successful in raising capital or implementing its new business
plan.
The Company has utilized significant resources in research and development
and marketing efforts. Those efforts must continue in order for the Company to
be successful in the implementation of its new strategic direction. (See
"Cautionary Factors" below) The Company will require additional capital, most
likely from private placements of equity, in order to meet its obligations and
to implement its new strategic direction.
As of August 31, 1999, the Company had $9,000 in cash and cash equivalents,
compared with approximately $739,000 at May 31, 1999. The Company had working
capital deficit of approximately $4,275,000 at August 31, 1999, compared with a
working capital deficit of approximately $2,861,000 at May 31, 1999, an increase
in working capital deficit of approximately $1,414,000. The decrease in working
capital is primarily attributable to the net loss for three months of
$1,415,000. The Company had convertible debentures of $3,500,000 at August 31,
1999 and at May 31, 1999.
The Company continues to incur significant losses. During the quarter ended
August 31, 1999, the Company's operations used approximately $900,000 in cash,
an average of approximately $300,000 per month. The decrease in Company's cash
expenditures due to decrease in sales and marketing personnel are being offset
by increase in litigation expenses. If the Company continues to incur
significant losses, the Company's liquidity could be materially and adversely
affected. The Company does not currently have any established bank credit
facility, and there can be no assurance that the Company will be able to obtain
the additional capital in the form of debt or equity financing necessary to
continue its operations and if no significant sales are realized. Current
liabilities have increased to $4,817,000 as compared to $4,272,000 at May 31,
1999 due to accrued interest payable on convertible debentures and accrued legal
fees related to the same. Accrued liabilities has also increased due to accrued
payroll. Payroll has been deferred by certain officers. The Company has failed
to make several scheduled payrolls. The Company has also defaulted on certain
short-term debt it entered into in the second quarter of fiscal 2000. The
Company incurred additional debt in the second quarter of fiscal 2000 of
approximately $750,000.
10
<PAGE>
The Company does not intend to require material capital expenditures in the
short term. However, as discussed above, the Company will require cash to
implement its new strategic direction. In June 1999, the Company entered into an
agreement with a third party to purchase certain technology. The terms of that
agreement include an original purchase price for the software of $600,000. The
Company had estimated at the time of purchase that an additional $275,000 would
be required to complete development of the software. The Company paid $180,000
cash at the date of purchase but failed to make the $420,000 payment due on July
30, 1999. The Company received a 30 day extension of the July 30, 1999 due date
by making a payment of $50,000 against the balance due and issuing 120,000
shares of common stock to the seller of the software. The Company later made a
determination that the software would require significant additional development
and believed that the capabilities of the software were misrepresented by the
seller. The Company failed to make the final payment of $370,000. The Company
has abandoned the project and wrote-off its investment in the technology.
Due to the Company's dispute with its debenture holders, scheduled interest
payments have been accrued but not paid. The non-payment of interest represent a
technical default under the terms of the debenture. If the Company's common
stock is delisted from Nasdaq SmallCap, it would constitute another event of
default. A remedy of default includes the holders declaring the debt immediately
payable. The Company has asserted substantial claims against the debenture
holders but there can be no assurance that the Company will be successfull in
its litigation with the Debenture Holders. The Company believes that due to the
dispute, the remedies for default are also uncertain. The debt is classified as
short-term.
IMPACT OF INFLATION
Increases in the inflation rate are not expected to effect the Company's
operating expenses. Although the Company has no current plans to borrow
additional funds, if it were to do so at variable interest rates, any increase
in interest rates would increase the Company's borrowed funds.
SEASONALITY
The Company's operations are not affected by seasonal fluctuations,
although the Company's cash flows may at times be affected by fluctuations in
the timing for large contracts.
YEAR 2000 COMPLIANCE
The Company's review of its own operating systems does not indicate any
Year 2000 problems. There can be no assurance that the Year 2000 issue can be
resolved by third parties such as banks, electric, water and phone utility
companies prior to the upcoming change in century. Although the Company may
incur costs resulting from increased charges by such third party service
providers resulting from the impact of Year 2000 issues and related corrective
efforts, the likelihood or amount of such costs is too speculative to estimate
at this time.
11
<PAGE>
PART II -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
UNPROFITABLE OPERATING HISTORY AND LIMITED FINANCIAL RESOURCES. The Company
has not historically been profitable, and as of May 30, 1999, had suffered
cumulative operating losses aggregating over $25,000,000, and at May 30, 1999,
had a net capital deficiency and a net working capital deficiency. These
conditions raise substantial doubts about the ability of the Company to continue
as a going concern. During fiscal 2000, the Company expects to meet its working
capital and other cash requirements with cash derived from operations and other
financing as required, although there can be no assurance that the Company will
generate cash from its operations in the near future or that the Company will
obtain financing on acceptable terms. The Company has had difficulties meeting
its payroll and other operating obligations. The Company has fallen behind on
scheduled payrolls and certain members of management have deferred taking
salaries. Additionally, the Company has no cash on hand. The Company must
continue to improve the efficiency of its operations to achieve and maintain
positive cash flow from operations. See "Business-Restructuring and New Business
Focus," "- Liquidity and Capital Resources,". There is no assurance, however,
that the Company will be able to continue as a going concern, that cash from
operations and the other sources described above will be achieved or will be
sufficient for the Company's needs, or that the Company will be able to achieve
profitability on a consistent basis.
ADDITIONAL FINANCING. The Company will require additional funds to continue
product development and marketing, and to support its working capital
requirements. The Company may seek such additional financing through private
placements of debt or equity financing, and through collaborative arrangement
with others. If adequate funds are not available when required or on acceptable
terms, the Company may be required to delay, scale back or eliminate its product
development activities and sales and marketing efforts. If this were to become
necessary, it could adversely affect the Company's business, results of
operations and financial condition.
THE COMPANY IS DEPENDENT ON ITS NEW STRATEGIC DIRECTION TO REPLACE REVENUES
FROM ITS YEAR 2000 AND COUNTERFEIT COP BUSINESS. Until the development of the
Company's new businesses the Company will derive substantially all of its
revenues from its Year 2000 and Counterfeit COP business. Management anticipates
that the Year 2000 and Counterfeit COP business will begin to decline, perhaps
dramatically, in the next few years. In order for the Company to sustain its
viability in the next few years, it will need to develop new products. The
successful development of any new products is dependent on a number of factors,
including availability of cash, the Company's ability to develop acceptable
products, anticipate the future changes and demands of applicable markets,
retrain or hire necessary personnel, and the Company's ability to provide
sufficient capital either from internally generated revenues or external sources
to properly fund the development of new products. Also, if the Company does not
complete the development of new products, it will need to seek other
opportunities to replace the revenues generated by its Year 2000 and Counterfeit
COP business. If the Company is unable to complete the development of new
products or find other sources of revenues, it could have a material adverse
affect on the Company's business, results of operations and financial condition.
12
<PAGE>
THE COMPANY'S FUTURE RESULTS WILL DEPEND ON ITS ABILITY TO MANAGE CHANGE.
The Company expects to continue to experience periods of rapid change as it
implements its restructuring. The failure of the Company's new management team
to successfully manage the changing business could have a material adverse
impact on the Company's business, results of operations and financial condition.
THE COMPANY FACES POTENTIAL LIABILITY TO CLIENTS FROM ITS YEAR 2000
BUSINESS. There is increasing litigation arising out of failures or potential
failures in computer systems arising out of the Year 2000 problem. To date, the
Company is not a party to any litigation arising out of a Year 2000 failure. The
Company has attempted to limit its liability for Year 2000 claims through
provisions in contracts with customers, limiting damages, generally providing no
warranties on services through the Year 2000, and disclaiming all other
warranties. These contractual protections may not be enforceable in all
instances, and may not otherwise protect the Company from the substantial costs
involved in defending a Year 2000 claim. The Company currently self-insures
against the possibility of these costs. In the event the Company becomes a party
to any such litigation, the cost of defending such litigation or adverse outcome
could materially adversely affect the Company's business, results of operations
and financial condition.
THE COMPANY MAY NOT BE ABLE TO RESPOND TO RAPID TECHNOLOGICAL CHANGE. Rapid
technological change characterizes the markets for Internet professional
services and Year 2000 services. The Company's future success will depend
significantly on its ability to improve existing services and products, offer
new services, and develop and market new products and services. The Company's
failure to adequately and timely respond to changing technology could result in
material adverse effects to its business, results of operations and financial
condition.
THE COMPANY MAY BE ADVERSELY AFFECTED IF IT LOSES KEY PERSONNEL. The
Company's success depends largely on the skills, experience and performance of
some key members of its senior management and technical personnel. The loss of
one or more of these key personnel could have a material adverse effect on the
business, results of operations and financial condition.
THE COMPANY'S RESULTS MAY BE ADVERSELY AFFECTED BY ITS FUTURE INTERNATIONAL
OPERATIONS. The Company anticipates that international business will account for
a growing portion of its revenues in 2000. The risks inherent in international
markets, include:
* unexpected changes in regulatory requirements;
* difficulties in staffing and managing foreign operations;
* political instability; potentially adverse tax consequences;
* potentially adverse differences in business customs,
practices and norms;
* differences in accounting practices;
* longer payment cycles;
* problems in collecting accounts receivable;
* fluctuations in currency exchange rates; and
* seasonal reductions in business activity during the summer
months in Europe.
Any of these could adversely impact the success of the Company's international
operations. The factors described above may have an adverse effect on the
Company's future international revenues and, consequently, on the Company's
business, results of operations and financial condition.
13
<PAGE>
THE COMPANY FACES COMPETITION FOR YEAR 2000 AND COUNTERFEIT COP BUSINESS.
The Company's Year 2000 services have intense competition from two different
sources: remediation performed in-house and remediation and validation software
and services offered by direct competitors. Many of the Company's with respect
to its Year 2000 and Counterfeit COP business are better established, have
existing relationships with customers and have far greater resources than the
Company. As a result of this competition, the Company's revenues for its Year
2000 and Counterfeit COP business could decrease which would have a material
adverse effect on its business, results of operations and financial condition.
THE COMPANY MAY NOT BE ABLE TO DEVELOP SUCCESSFUL PRODUCTS. The Company
plans to develop new products. This plan is in a development stage and will
require significant expenditures of resources to complete the development
effort. The Company cannot be certain that it will have any cash on hand to
devote to the development and marketing of new products, new product
enhancements or new products compliant with present or emerging Internet
technology standards. Any delays in developing and releasing new products could
have a material adverse effect on the Company's business, results of operations
and financial condition.
THE COMPANY MAY BE ADVERSELY AFFECTED IF IT IS NOT ABLE TO ATTRACT AND
RETAIN QUALIFIED PROFESSIONALS. The future success of the Company's new
strategic direction will depend on its ability to attract, train, motivate and
retain personnel who provide the Internet strategy, technology, marketing, and
creative skills required by clients. The Company believes that there is a
shortage of, and significant competition for, professionals with the advanced
technological skills necessary to perform the services related to E-Commerce
products and services. The Company intends to transfer current employees from
its Year 2000 business to its E-Commerce business. The transition will require
training in new technology and new skills sets applicable to E-Commerce
technology. Once trained, such individuals will be in higher demand because of
their new skill set. Additionally, not all of the Company's current personnel
will be able to acquire the skills necessary to transition to the Company's new
business. The Company cannot be certain that it will be successful in
attracting, transitioning or retaining qualified technological personnel in the
future. The Company's failure to do so could have a material adverse affect on
its ability to deliver and enhance its services.
COMPANY'S PRODUCTS AND SERVICES OBSOLETE. The markets for counterfeit
detection devices and Internet and electronic commerce products and services are
characterized by rapidly changing technology which results in product
obsolescence and short product life cycles. Accordingly, the Company's success
is dependent upon its ability to anticipate technological changes in the
industry and to conditionally identify, obtain and successfully market new
products and services that satisfy evolving technologies, customer preferences
and industry requirements. There can be no assurance that competitors will not
market products and services which have perceived advantages over those of the
Company or which render the Company's products and services obsolete or less
marketable.
INTELLECTUAL PROPERTY PROTECTION. While the Company believes that its
product and technologies are adequately protected against infringement by
confidentiality agreements, licensing agreements, copyright laws and the complex
nature of the products and technologies themselves, there can be no assurance of
effective protection. Monitoring and identifying unauthorized use of the
Company's technology may prove difficult, and the cost of distraction, and time
required for litigation may impair or completely frustrate the Company's ability
to guard adequately against such infringement.
14
<PAGE>
EFFECT OF YEAR 2000 PROBLEM UPON COMPANY OPERATIONS. The Company, like any
other company, owns or uses computer software that may be impacted by the Year
2000 problem. During 1998, the Company began a review of the software it is
currently using in order to identify any systems that need to be made Year 2000
compliant. This review includes a survey of vendors of software or services to
the Company to ensure that their software is also Year 2000 compliant. The
Company intends to ensure that all such software will by Year 2000 compliant
well in advance of December 31, 1999. Management has not yet completed its
assessment of the Company's potential Year 2000 compliance costs and related
potential on the Company's operations, however, management does not believe that
the expense or effect of such compliance will be material to the Company.
THE COMPANY MIGHT NOT BE SUCCESSFUL IN IMPLEMENTING ITS DOMESTIC AND
WORLDWIDE PROPOSED TRANSITION FROM YEAR 2000 AND EXPANSION. The Company intends
to transition from the provision of Year 2000 products and services and
Counterfeit COP to the provision of products, services and solutions in the
Internet and E-Commerce and systems integration and expand its operations
domestically and internationally; however, the Company has limited experience in
effectuating rapid expansion of in managing operations which are geographically
dispersed. There can be no assurance the Company's current management, personnel
and other corporate infrastructure will be adequate to manage the Company's
growth.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The list of Exhibits which are filed with this report or incorporated
by reference herein is set forth in the Exhibit Index that appears following the
signature page, which Exhibit Index is incorporated herein by this reference.
(b) Reports on Form 8-K.
The Company filed form 8-K on 12/30/98, which reported a legal action
against the Company, on December 3, 1998, for specific performance of the
provisions of the Debentures which permit the holders to convert the debt
evidenced by the debentures into shares of the Company's common stock. On
December 28, 1998, the Company filed an answer in that action denying that,
under the pertinent circumstances, the Company is obligated to effect any such
conversion. The Company also filed a counterclaim against the holders, and new
claims against certain agents of the holders, in the same action, alleging that
the holders and the agents made material misrepresentations in connection with
the purchase and sale of the Debentures and made unlawful short sales of the
Company's common stock.
15
<PAGE>
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: February 7, 2000 By: /s/ A. Lewis Burridge
---------------- --------------------------------
A. Lewis Burridge, President
(Principal Executive Officer)
16
<PAGE>
EXHIBIT INDEX
4.3 Subscription Agreement used in connection with the Rule 506 sale of
Convertible Debentures in the aggregate principal amount of $3,500,000
(including form of Convertible Debenture, form of Warrant, and form of
Registration Rights Agreement, attached as Exhibits A, B and D,
respectively, to the Subscription Agreement). (4)
4.4 Form of Common Stock Purchase Warrant to purchase an aggregate of 10,000
shares issued in partial payment of finders' fees in connection with sale
of Convertible Debentures in aggregate principal amount of $3,500,000.
(4)
4.7 Form of Common Stock Purchase Warrant to purchase 200,000 shares issued
to consultant, Howard R, Baer, on August 1, 1997. (1)
4.8 Form of Common Stock Purchase Warrant to purchase 100,000 shares issued
to Howard R, Baer's designee, Kevin C. Baer, on August 1, 1997. (1)
4.11 Common Stock Purchase Warrant to purchase 100,000 shares issued to a
consultant's designee, Irvington International Limited, as of November
10, 1997. (3)
4.12 Agreement dated as of July 17, 1998 between the Registrant and Tom S.
Dreaper relating to employment and grant of options to purchase 1,000,000
shares of common stock of the Registrant. (6)
10.7 Registrant's 1996 Non-Qualified Stock Option Plan. (2)
10.8 Registrant's Second Amended and Restated 1997 Non-Qualified Stock Option
Plan. (5)
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 November 30, 1997 and
incorporated herein by reference.
(2) 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 reference.
(3) Filed as an Exhibit, with the same Exhibit number, to the Registrant's
Registration Statement on Form S-1, File No. 333-40649, and incorporated
herein by reference.
(4) Filed as an Exhibit, with the same Exhibit number, to the Registrant's
Annual Report on Form 10-K for the year ended May 29, 1998, and
incorporated herein by reference.
(5) Filed as an Exhibit No. 10.8 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended August 31, 1998, and incorporated herein by
reference.
(6) Filed as an Exhibit No. 4.12 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended August 31, 1998, and incorporated herein by
reference.
* Filed herewith
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-START> JUN-01-1999
<PERIOD-END> AUG-31-1999
<CASH> 9,413
<SECURITIES> 133,234
<RECEIVABLES> 49,126
<ALLOWANCES> 0
<INVENTORY> 319,401
<CURRENT-ASSETS> 541,724
<PP&E> 1,321,005
<DEPRECIATION> (372,556)
<TOTAL-ASSETS> 2,157,514
<CURRENT-LIABILITIES> 4,816,625
<BONDS> 0
0
0
<COMMON> 46,492
<OTHER-SE> (3,277,885)<F1>
<TOTAL-LIABILITY-AND-EQUITY> (3,231,392)
<SALES> 117,868
<TOTAL-REVENUES> 117,868
<CGS> 213,926
<TOTAL-COSTS> 1,279,061
<OTHER-EXPENSES> 254,210
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97,014
<INCOME-PRETAX> (1,415,403)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,415,403)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,415,403)
<EPS-BASIC> (0.09)
<EPS-DILUTED> 0
<FN>
<F1>OTHER SE CONSISTS OF:
Additional Paid-in-Capital 25,326,767
Accumulated Deficit (28,204,652)
Treasury Stock, at Cost (400,000)
------------
(3,277,885)
============
</FN>
</TABLE>
