UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly report pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the quarterly period ended February 29, 2000
Commission File Number: 17598
CONSYGEN, INC.
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(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
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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 (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.
16,865,261 shares of Common Stock, $.003 par value, as of April 7, 2000.
<PAGE>
CONSYGEN, INC.
INDEX
PART I FINANCIAL INFORMATION:
Item 1. Financial Statements.
Consolidated Balance Sheet,
February 29, 2000 2
Consolidated Statements of Operations - Three and Nine
Months Ended February 29, 2000 and February 29, 1999 3
Consolidated Statements of Cash Flows - Three and Nine
Months Ended February 29, 2000 and February 29, 1999 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 17
Item 6. Exhibits and Reports on Form 8-K. 17
SIGNATURES 18
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 SHEET
ASSETS
February 29,
2000
------------
Current Assets:
Cash and Cash Equivalents $ 16,691
Restricted cash --
Accounts Receivable 27,171
Inventory 432,512
Prepaid Expenses 19,204
Other Current Assets 11,754
------------
Total Current Assets 507,332
------------
Property and Equipment - Net 1,244,473
------------
Other Assets:
Debt Issuance Expense 270,997
Other Assets 35,185
------------
Total Other Assets 306,182
------------
Total Assets $ 2,057,987
============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts Payable $ 314,138
Notes Payable 737,450
Capital Lease - Current portion 7,529
Accrued Liabilities 1,339,440
Convertible debentures 3,500,000
------------
Total Current Liabilities 5,898,557
Capital Lease - Long Term Portion 39,646
Mortgage - Long Term 539,516
Long-Term Debt 448,708
------------
Total Liabilities 6,926,427
------------
Commitments & Contingencies
Stockholders' Equity :
Common Stock, $.003 par Value, Authorized
40,000,000 Shares, Issued and outstanding
15,896,420 Shares at February 29, 2000 47,689
Additional Paid-in Capital 27,857,119
Accumulated Deficit (32,373,248)
Treasury Stock, at cost (70,000 shares) (400,000)
------------
Total Stockholders' Equity (4,868,440)
------------
Total Liabilities and Stockholders' Equity $ 2,057,987
============
The accompanying notes are an integral part of the financial statements.
2
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CONSYGEN, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended February 29, Ended February 29,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Counterfeit Cop Revenue $ 29,518 $ -- $ 104,433 $ --
Software Services Revenue -- 217,267 108,388 689,606
------------ ------------ ------------ ------------
Revenues 29,518 217,267 212,821 689,606
------------ ------------ ------------ ------------
Costs and Expenses:
Cost of Sales - Cop 8,159 -- 24,672 --
Cost of Sales - Software Services -- 213,809 270,563 651,096
Software Development 213,290 171,836 528,671 523,396
Selling, General and Administrative Expenses 2,775,750 970,851 4,158,011 2,941,160
Interest Expense 117,729 52,500 350,856 159,000
Depreciation and Amortization 63,260 49,161 188,262 141,889
------------ ------------ ------------ ------------
Total Costs and Expenses 3,178,188 1,458,157 5,521,035 4,416,541
------------ ------------ ------------ ------------
Loss from Operations (3,148,670) (1,240,890) (5,308,214) (3,726,935)
Interest Income -- 21,965 5,755 117,649
Other Income -- 27,493
Other Expenses (19,075) (309,033)
------------ ------------ ------------ ------------
Net Loss $ (3,167,745) $ (1,218,925) $ (5,583,999) $ (3,609,286)
============ ============ ============ ============
Weighted Average Common Shares Outstanding 16,337,703 15,434,860 15,750,809 15,419,339
============ ============ ============ ============
Net Loss per Commion Share $ (0.19) $ (0.08) $ (0.35) $ (0.23)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
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CONSYGEN, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
February 29,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss $(5,583,999) $(3,609,286)
Adjustments to Reconcile Net Loss to
Net Cash (Used) by Operating Activities:
Depreciation and amortization 188,261 99,605
Write-off of investment in technology 230,000
Short-term debt financing costs expensed 93,529
Value of employee stock options under variable plan 1,750,912
Changes in Operating Assets and Liabilities:
Accounts Receivable (18,737) (98,234)
Inventories (272,766) 0
Prepaid Expenses and Other Assets (16,208) 21,055
Accounts Payable 263,812 (14,167)
Accrued Liabilities 722,693 166,041
----------- -----------
Net Cash (Used) by Operating Activities (2,642,503) (3,434,986)
----------- -----------
Cash Flows from Investing Activities:
Utilization of certificate of deposit for inventory purchases 467,208
Purchases of Furniture and Equipment (76,692) (166,601)
Purchase of technology (230,000)
----------- -----------
Net Cash (Used) by Investing Activities 160,516 (166,601)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from Sale of Common Stock 794,766 89,429
Payments of principal on loans (39,484) --
Proceeds of Loans payable -- Related Parties 642,450 --
Proceeds on other notes payable 420,179
Payments for debt financing costs (40,871)
Payments of principal on capital lease obligations (17,670) --
----------- -----------
Net Cash Provided by Financing Activities 1,759,370 89,429
----------- -----------
Net Decrease in Cash and Cash Equivalents (722,617) (3,512,158)
Cash and Cash Equivalents -- Beginning of Period 739,308 4,991,434
----------- -----------
Cash and Cash Equivalents -- End of Period $ 16,691 $ 1,479,276
=========== ===========
Supplemental Cash Flow Information:
Cash Paid for Interest $ 72,268 $ --
=========== ===========
Non-Cash Financing and Investing Activities:
Issuance of Common Stock as Loan Incentive $ 20,839 $ --
=========== ===========
Equipment acquired under capital lease $ 49,969
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
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CONSYGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 29, 2000 (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 issued stock options to employees that were later repriced. In
accordance with APB No. 25, these options are now classified as variable awards.
On the basis of the price of the Company's common stock at February 29, 2000,
the intrinsic value of those options was recognized as compensation expense in
the three months ended February 29, 2000. The intrinsic value was determined to
be $1,750,912. The Company intends to continue to compensate employees with
stock options.
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 6%
Convertible Debentures Due May 29, 2003 (the "Debentures"), Sovereign Partners
5
<PAGE>
Limited Partnership, a Delaware limited partnership, Dominion Capital Fund,
Ltd., a Bahamian Corporation, and Canadian Advantage Limited Partnership, an
Ontario, Canada, Limited Partnership (together the "Debenture Holders"),
commenced an action (Case No. 98CIV.8457 in the United States District Court for
the Southern District of New York; the "Debenture Litigation") 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 (SEC File No. 333-61869).
On February 1, 1999, Stephen M. Hicks, general partner of Sovereign Partners and
two of the three Debenture Holders, Sovereign Partners Limited Partnership and
Dominion Capital Fund Ltd., 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 (the
"New York Defamation Litigation"), to recover damages for alleged intentional
and calculated defamation. The plaintiffs sought compensation from the Company
and Dreaper each in the amount of $1,000,000 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, and Rajesh K. Kapur its former
chief financial officer, to recover damages for alleged defamation (the "Ontario
Defamation Litigation"; the New York Defamation Litigation and the Ontario
Defamation Litigation are together referred to as the "Defamation Litigation").
The plaintiffs sought compensation from the Company, Dreaper and Kapur jointly
and severally each in the amount of $2,000,000 for general damages, and other
relief.
Based upon the Company's due diligence and the discovery that has been conducted
in the Debenture Litigation and the Defamation Litigation, the Company has now
determined that there was, and is, no basis in fact for the statements made by
the Company, through its former management and other representatives, alleging
wrongdoing by the plaintiffs in the Debenture Litigation and the Defamation
Litigation (the "Plaintiffs"). Therefore, the Company has concluded that there
was no actionable conduct by the Plaintiffs with respect to the Company or its
shareholders. In recognition and acknowledgement of this fact and the Company's
undisputed financial obligations to the Debenture Holders, the Company has
reached a settlement with the Plaintiffs and has entered into a Settlement
Agreement dated April 11, 2000, with the Plaintiffs, including the Debenture
Holders (the "Settlement Agreement"). If the Company honors its obligations
under the Settlement Agreement and the Debentures, the settlement will fully and
finally resolve the Debenture Litigation and the Defamation Litigation.
Under the Settlement Agreement, the Company has agreed to honor the terms of the
Debentures (and the related common stock purchase warrants) and to convert the
principal and accrued interest on the Debentures into common stock of the
Company as the Debenture Holders request such conversion and as permitted under
the Debentures. As of April 13, 2000, $800,000 in principal amount of the
Debentures has been converted into shares of common stock of the Company in
6
<PAGE>
partial implementation of the settlement. In addition, the Company has agreed to
pay (in common stock to be issued as the Debentures are converted) an additional
$350,000 in liquidated damages, which amount has been accrued in the third
quarter. The Debenture Holders have agreed to limit their aggregate daily sales
of common stock of the Company to the greater of (i) 25% of the higher of the
previous day's trading volume or the current day's trading volume, (ii) an
amount worth $20,000 or (iii) 20,000 shares, and have further agreed not to
engage in "short sales" of the Company's common stock. The Company has agreed to
cooperate with the Debenture Holders so that they can sell the maximum number of
shares of common stock of the Company allowed under the Settlement Agreement and
Rule 144, and has further agreed to take actions to provide and make available
to the Plaintiffs facts and information pertaining to the subject matter of the
Defamation Litigation and other related matters as specified in the Settlement
Agreement. The Company is also obligated to maintain its common stock listed for
trading with the over-the-counter bulletin board, to comply with its reporting
obligations under the Securities Exchange Act of 1934 and to refrain from any
statement contradicting or repudiating the Settlement Agreement or accusing the
Plaintiffs of wrongdoing. In the event of a default by the Company under the
Settlement Agreement, the Company would immediately become obligated to pay to
the Debenture Holders in cash (i) $200,000 in legal fees together with (ii) the
unconverted portion of the $350,000 liquidated damages and principal and
interest owed pursuant to the Debentures, and the Plaintiffs could enter a
stipulated judgment against the Company for that amount.
On August 10, 1999 Thomas S. Dreaper, former president and chief executive
officer of the Company, served an action which was filed in the United States
District Court for the District of Nevada against the Company and A. Lewis
Burridge, its current President and CEO, seeking indemnification and
reimbursement of legal expenses in connection with the Defamation Litigation,
for damages for breach of his indemnification agreement with the Company, and
for exemplary and punitive damages in an amount in excess of $1,000,000.
Although the Company believes that the settlement of the Defamation Litigation
substantially mitigates potential damages in the litigation brought by Dreaper,
the outcome of this litigation, and its potential financial impact on the
Company, cannot yet be estimated.
NOTE 5 - DEBT
In the nine months ended February 29, 2000, 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.
The Company has also secured additional debt collateralized by the
Company's office building.
7
<PAGE>
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
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. The Company has 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.
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 is no longer marketing its Year 2000 Conversion Services. The
Company is still capable of performing Year 2000 work if solicited by clients,
but the Company's business model has changed, and Year 2000 business
opportunities are no longer apparent.
The Company continues to market its Counterfeit Cop. For the three and nine
months ended February 29, 2000, sales of the Counterfeit Cop were $30,000 and
$104,000 respectively. The Company has entered into distribution agreements with
third parties that have national distribution networks. The Company intends to
actively market this product through this distribution channel.
8
<PAGE>
The Company is introducing a new "E-Commerce" product. The Company is
seeking strategic domestic and international joint venture partners to launch
this new product line. The company has signed a memorandum of understanding with
an Australian partner and has registered a new Delaware corporation as a holding
company. The company expects to formalize the Australian joint venture during
the fourth quarter, and to sign at least one domestic partnership agreement.
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
$1,200,000. 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 deferred taking salaries during the quarter.
The Company will continue to attempt to implement its business plan with
the marketing and distribution of the Counterfeit Cop and introduction of new
products and development of the E-Commerce business. The company believes that
its new technology is extremely valuable. Although the Company will require
additional capital to move forward on these product lines and new ventures, the
company has already entered into a memorandum of understanding with an
Australian partner. The Company believes that partnerships of this type around
the world are feasible, and is currently negotiating several contracts around
the world.
The Company has been involved in material litigation with holders (the
"Debenture Holders") of the Company's 6% Convertible Debentures Due May 29, 2003
(the "Debentures"). In 1998, the Debenture Holders filed a lawsuit against the
Company based upon the Company's failure to honor the Debenture Holders'
requests to convert the Debentures to common stock (the "Debenture Litigation").
In January 1999, the Debenture Holders and other plaintiffs (together the
"Plaintiffs") filed related lawsuits against the Company and certain former
officers of the Company, and others, to recover damages for alleged intentional
and calculated defamation (the "Defamation Litigation"). Subsequent to February
29, 2000, the Company has entered into a definitive Settlement Agreement with
the Plaintiffs to settle the Debenture Litigation and the Defamation Litigation.
If the Company honors its obligations under the Settlement Agreement and the
Debentures, the settlement will fully and finally resolve the Debenture
Litigation and the Defamation Litigation. Under the Settlement Agreement, the
Company has agreed to honor the terms of the Debentures (and the related common
stock purchase warrants) and to convert the principal and accrued interest on
the Debentures into common stock of the Company as the Debenture Holders request
such conversion and as permitted under the Debentures. As of April 13, 2000,
$800,000 in principal amount of the Debentures has been converted into shares of
common stock of the Company in partial implementation of the settlement. In
addition, the Company has agreed to pay (in common stock to be issued as the
Debentures are converted) an additional $350,000 in liquidated damages, which
amount has been accrued in the third quarter. The Company has agreed to perform
additional non-monetary obligations under the Settlement Agreement which, while
they represent material terms of the Settlement Agreement, management of the
Company believes the Company can successfully perform without a material adverse
financial impact on the Company.
9
<PAGE>
The Company is involved in material litigation with a former officer and
director of the Company relating to a claim for indemnification and
reimbursement of legal expenses in connection with the Defamation Litigation and
for damages, including substantial exemplary and punitive damages. Although the
Company believes that the settlement of the Defamation Litigation substantially
mitigates potential damages in this litigation, the outcome of this litigation,
and its potential financial impact on the Company, cannot yet be estimated.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
NET LOSSES. For the three and nine months ended February 29, 2000, the Company
incurred net losses of $3,168,000 and $5,584,000, respectively, compared with
net losses of $1,219,000 and $3,609,000 for the comparable prior periods, an
increase of $1,949,000 and $1,975,000, respectively. An explanation of these
losses is set forth below.
REVENUE for the three and nine months ended February 29, 2000, was $30,000 and
$213,000 respectively compared to $217,000 and $690,000 for comparative periods
in the previous year. The decrease in revenue reflects the change in the
Company's strategic direction from the Year 2000 services. The current year
revenues include that for Year 2000 services of $-0- and $108,000 for the three
and nine months ended February 29, 2000, respectively. Year 2000 service
revenues for comparable periods in the previous year were $217,000 and $690,000,
representing all revenue for those periods. The company is no longer marketing
it's Year 2000 conversion services, and has transferred all of the employees
working on these services to other projects.
The Company is beginning its efforts to move the Counterfeit Cop through the
distribution channels it has established with certain national distributors.
Through the end of February, the volume of Counterfeit Cop sales had yet to
provide significant contribution to the Company's operations.
COST OF SALES-COP, represents the cost of obtaining units from the Company's
supplier. These costs represent 28% and 24% of related revenue for the three and
nine months ended February 29, 2000, respectively. Near term gross margins on
the Counterfeit Cop will increase as the Company negotiates different pricing
structures under the new distribution agreements.
COST OF CONVERSION SERVICES was 251% of the related revenue for the nine months
ended February 29, 2000, respectively. These categories include certain fixed
costs that, when allocated, are greater than the sales generated. Cost of
conversion services was 65% and 93% of the related revenue for the three and
nine months ended February 29, 2000, respectively. The variances for fiscal 2000
reflect the much lower revenue volume and changes of personnel from Year 2000
services to other product lines and research and development.
10
<PAGE>
SOFTWARE DEVELOPMENT EXPENSES. For the three and nine months ended February 29,
2000, respectively, software development expenses were $213,000 and $529,000,
compared with $172,000 and $523,000 for the comparable prior periods. The
increase in software development expenses is primarily attributable to write-off
of technology purchase of approximately $230,000 in the nine months ended
February 29, 2000 and development associated with new E-commerce products. The
Company reduced its overall expenses, yet certain employees are dedicated to
research and development as the Company develops new products for its new
strategic direction. These personnel are assigned to development of the
Company's prospective E-Commerce products. The Company intends to begin
capitalizing certain software development costs when proprietary software
products have reached technological feasibility.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $2,776,000 and $4,158,000 for the three and nine
months ended February 29, 2000, respectively compared with $971,000 and
$2,941,000 for the comparable prior periods, an increase of approximately
$1,805,000 and $1,217,000 for the three and nine month periods respectively. The
increase in selling, general and administrative expenses in the three-month
period is primarily attributable to $1,751,000 associated with the value of
employee stock options under variable awards. In general, the Company has
reduced operating expenses as a result of implementing its new business model.
Also, the Company has significantly reduced marketing expenses related to the
Year 2000 services.
INTEREST EXPENSE. For the three and nine months ended February 29, 2000,
interest expense was $118,000 and $351,000 compared with $53,000 and $159,000
for the comparable prior periods. The prior 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. However, the Company incurred
significant new debt in the nine months ended February 29, 2000. Some of the
debt was issued at significant discounts. The Company issued Notes payable of
approximately $685,000 and received $600,000 cash for those notes. These notes
had short-term maturities so much of that discount had been amortized as
interest expense.
DEPRECIATION AND AMORTIZATION EXPENSE. For the three and nine months ended
February 29, 2000, depreciation expense was approximately $63,000 and $188,000
respectively, compared with $49,000 and $142,000 for the comparable prior
periods. The increase is primarily due to purchases of additional computers,
furniture and building improvements.
Numerous options granted to employees were repriced by the Company in the
year ended May 31, 1999. Under the Proposed Interpretation, ACCOUNTING FOR
CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION, AN INTERPRETATION OF APB
OPINION NO. 25, issued by the Financial Accounting Standards Board, these
constitute variable awards that may require the Company to recognize
compensation expense. The price of the Company's common stock has recently been
consistently higher than the repriced exercise price of these options.
11
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MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company has suffered material operating losses. Due to lack of ongoing
substantive revenue, the Company has not had adequate working capital and since
May 31, 1999, cash has almost exclusively come from borrowings and private sales
of the Company's common stock. The Company is attempting to raise sufficient
equity capital to meet its current obligations and to implement its new business
plan. The company expects to fund operations in the fiscal fourth quarter
through sales of its Counterfeit Cop products.
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 February 29, 2000, the Company had $17,000 in cash and cash
equivalents, compared with approximately $739,000 at May 31, 1999. The Company
had working capital deficit of approximately $5,391,000 at February 29, 2000,
compared with a working capital deficit of approximately $2,848,000 at May 31,
1999, an increase in working capital deficit of approximately $2,543,000. The
decrease in working capital is primarily attributable to the net loss for the
nine months of $3,805,000 less new long term debt of approximately $450,000 and
$795,000 in new equity. The Company had convertible debentures of $3,500,000 at
February 29, 2000, and at May 31, 1999. Under the terms of the settlement with
the holders of the Company's convertible debentures, the debentures may be
converted into common stock at the debenture holders' request. As of April 13,
2000, $800,000 in principal amount of the debentures has been converted into
shares of common stock of the Company in partial implementation of the
settlement.
The Company had net cash used from operations of $2,642,000 for the nine
months ended February 29, 2000, an average of approximately $294,000 per month.
There were non-cash expenses of approximately $2,263,000. The Company utilized
restricted cash to increase its inventory levels. The Company's accounts payable
and accrued liabilities increased by $636,000 in the nine months ended February
29, 2000.
The Company's inventory balance increased to $433,000 at February 29, 2000,
compared to $161,000 at May 31, 1999. The increase of $272,000 relates to a
purchase commitment for units of the Counterfeit Cop. As discussed above, the
Company anticipates more significant sales of the Counterfeit Cop to commence in
the short term. The Company has completed its obligation to the Asian supplier
of the original minimum order and no longer is required to maintain a fully
collateralized letter of credit.
12
<PAGE>
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. Current liabilities have
increased to $5,899,000 at February 29, 2000, as compared to $4,259,000 at May
31, 1999 due to accrued interest payable on convertible debentures and other
debt and accrued legal fees related to the same. Accrued liabilities have also
increased due to accrued payroll. During the quarter certain officers and
employees deferred taking salary, although they were all receiving regular
payroll checks at quarter's end. Payroll liabilities at February 29, 2000 were
approximately $238,000 compared to approximately $72,000 at May 31, 1999. The
Company incurred approximately $610,000 in new short-term debt in the nine
months ended February 29, 2000.
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. However, as discussed above, the
Company has entered into a Settlement Agreement with its debenture holders. If
the Company honors its obligations under the Settlement Agreement and the
debentures, the settlement will fully and finally resolve the dispute and will
allow for all principal and interest due under the debentures to be converted
into common stock of the Company as the debenture holders request such
conversion and as permitted under the debentures. If the Company defaults under
the Settlement Agreement, the debenture holders may declare the unconverted
portion of the debt immediately payable.
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.
13
<PAGE>
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.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
MATERIAL LITIGATION. The Company is involved in material litigation, the
outcome of which presently remains uncertain. If such litigation matters are
resolved unfavorably, this could have a material adverse effect on the Company
and its financial condition.
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. The Company has had difficulties meeting its payroll and
other operating obligations. Additionally, the Company has minimal 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."
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
14
<PAGE>
revenues from its Counterfeit COP business. Management has discontinued
marketing the Year 2000 business, but expects the Counterfeit COP business to be
exceptionally strong in the next few years. The company has signed three "Master
Distributors" and is negotiating with several more. The terms of each Master
Distributor contract indicate that each one will provide over $1,000,000 in
annual revenue. The company has been so successful in negotiating these
contracts that it has begun to insert penalty clauses into each contract,
thereby guaranteeing the revenue. The company recently hired a new managing
director to oversee the Counterfeit Cop business.
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. The Company believes that it is
making progress on its E-Commerce products and is presently seeking strategic
and joint venture partners.
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
15
<PAGE>
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. However, the Company believes that it's new technology is well ahead
of the market. The company cites the favorable terms of the initial Australian
joint venture as validation of its beliefs.
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.
THE COMPANY MAY NOT BE ABLE TO DEVELOP SUCCESSFUL PRODUCTS. The Company
plans to develop new products. Although the Company has already begun
negotiations for one joint venture agreement for it's new technology, this plan
will require significant expenditures of resources to complete the development
effort. 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
16
<PAGE>
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 has transferred 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.
PART II --- OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
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
17
<PAGE>
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. The Company filed form 8-K on March 22, 2000, detailing
the settlement term sheet agreed to with the debenture holders.
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: April 13, 2000 By: /s/ A. Lewis Burridge
------------------------------------
A. Lewis Burridge, President
(Principal Executive Officer)
18
<PAGE>
EXHIBIT INDEX
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 Amended and Restated By-Laws of the Registrant. (4)
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. (2)
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). (6)
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. (6)
4.5 Form of Subscription Agreement used in connection with Rule 506 sale
of 120,000 shares for gross proceeds of $1,080,000. (1)
4.6 Form of Subscription Agreement used in connection with Rule 506 sale
of 152,000 shares for gross proceeds of $882,500. (1)
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)
4.9 Subscription Agreement used in connection with Rule 506 sale of
900,000 shares for gross proceeds of $5,276,250. (3)
4.10 Form of Subscription Agreement used in connection with issuance of
30,747 shares in payment of indebtedness in the aggregate amount of
$250,575. (3)
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)
4.13 Amendment dated August 13, 1998, to 6% Convertible Debenture
Subscription Agreement and related Registration Rights Agreement dated
May 29, 1998, filed as Exhibit 4.13 to the Registrant's Registration
Statement on Form S-3, File No. 333-61869, and incorporated herein by
reference.
10.7 Registrant's 1996 Non-Qualified Stock Option Plan. (2)
10.8 Registrant's Amended and Restated 1997 Non-Qualified Stock Option
Plan. (7)
10.9 Consulting Agreement between the Registrant and M.H. Meyerson & Co.,
Inc. dated August 19, 1996. (5)
<PAGE>
10.10 Form of Indemnification Contract between the Registrant and each
executive officer and director of the Registrant. (3)
10.11 Agreement between the Registrant and Carriage House Capital, Inc.,
effective as of September 1, 1997, terminating all existing agreements
between the Registrant and Carriage House Capital, Inc., and its
affiliates. (3)
10.12 Settlement Term Sheet between the Registrant and the Debenture Parties
dated March 8, 2000, filed as Exhibit 10.12 to the Registrant's
Current Report on Form 8-K dated March 8, 2000 and incorporated herein
by reference.
21 List of Subsidiaries of the Registrant -- filed as Exhibit number 21
to the Registrant's Annual Report on Form 10-K for the year ended May
29, 1999, and incorporated herein by reference
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, 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
Quarterly Report on Form 10-Q for the quarter ended February 28, 1998, and
incorporated herein by reference.
(5) Filed as Exhibit No. 10.10 to the Registrant's Annual Report on Form 10K
for the year ended May 31, 1997, and incorporated herein by reference.
(6) Filed as an Exhibit, with the same Exhibit number, to the Registrant's
Annual Report on Form 10-K for the year ended May 31, 1998, and
incorporated herein by reference.
(7) 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.
* Filed herewith
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