================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
________________________________________________________________________________
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended February 28, 1998
Commission file number: 0-22057
GK INTELLIGENT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1079784
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
5555 SAN FELIPE, SUITE 625
HOUSTON, TX 77056
(Address of principal offices)
(713) 840-7722
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for past 90 days.
Yes X No __________
Issuer had no revenues for the three and nine months ended February 28, 1998.
As of April 16, 1998 registrant had 22,992,383 shares of Common Stock
outstanding.
================================================================================
GK INTELLIGENT SYSTEMS, INC.
FORM 10-QSB REPORT INDEX
10-QSB PART AND ITEM NO. PAGE NO.
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Balance Sheet as of February 28, 1998......................3
Statements of loss for the three and nine months ended
February 28, 1998 and 1997...............................4
Statements of cash flows for the nine months ended
February 28, 1998 and 1997...............................5
Notes to financial statements..............................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............8
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.........................................10
ITEM 2. CHANGES IN SECURITIES.....................................10
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...........................10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS.....................................10
ITEM 5. OTHER INFORMATION.........................................10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..........................10
2
GK INTELLIGENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
(Unaudited)
February 28,
1998
---------
ASSETS
Current:
Cash ..................................................... $ 5,426
Prepaid expenses.......................................... 17,155
---------
Total Current Assets........................................ 22,581
Computer software costs, net ............................... 2,367,126
Other equipment, net ....................................... 167,406
Organization costs, net..................................... 27,561
Other....................................................... 6,822
---------
Total Assets................................................ $2,591,496
==========
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
Current Liabilities:
Accounts payable and accrued liabilities.................. $ 403,145
Note payable to bank...................................... 150,000
Due to majority stockholder............................... 162,601
Preferred stock dividends payable......................... 53,000
Capital lease obligations, current portion ............... 23,057
---------
Total Current Liabilities................................... 791,803
---------
Capital lease obligations, less current portion............. 93,197
Commitments and Contingencies (Notes 2, 5 and 7)
Stockholders' Equity (Capital Deficit):
Series A preferred stock; redeemable and convertible
with liquidation preference of $6.00 per share (Note 5). 3,389,432
Common stock.............................................. 17,462
Additional paid-in capital................................ 13,687,740
Deficit accumulated during the development stage.......... (15,388,138)
-----------
Total Stockholders' Equity (Capital Deficit)................ 1,706,496
---------
Total Liabilities and Stockholders' Equity.................. $2,591,496
==========
See accompanying notes to financial statements.
3
GK INTELLIGENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF LOSS
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
------------------------- ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Revenues............................. $ - $ - $ - $ -
Expenses:
Depreciation and amortization..... 216,271 206,866 647,079 612,757
President's compensation.......... 60,000 222,500 180,000 342,500
Employee compensation............. 326,274 337,889 1,027,012 413,314
Professional services............. 329,094 322,982 905,360 873,405
Other general and administrative.. 121,882 51,517 374,308 166,870
--------- --------- --------- ---------
Net loss............................. (1,053,521) (1,141,754) (3,133,759) (2,408,846)
Dividends on preferred stock......... (53,000) - (53,000) -
--------- --------- --------- ---------
Net loss applicable to common stock.. $(1,106,521) $(1,141,754) $(3,186,759) $(2,408,846)
=========== =========== =========== ===========
Basic Loss Per Share (Note 6)........ $ (.07) $ (.10) $ (.21) $ (.23)
=========== =========== =========== ===========
Weighted Average Number of Shares of.
Common Stock Outstanding.......... 16,915,668 11,383,997 15,215,466 10,256,319
=========== =========== =========== ===========
See accompanying notes to financial statements.
4
GK INTELLIGENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
(Unaudited)
INCREASE (DECREASE) IN CASH
NINE MONTHS ENDED
FEBRUARY 28,
--------------------------
1998 1997
----------- ------------
Operating activities:
Net loss ......................................... $(3,133,759) $(2,408,846)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ................ 647,079 612,756
Issuance of common stock and warrants
for various expenses ....................... 1,033,757 1,003,758
Changes in assets and liabilities:
Other current assets ....................... 41,368 (35,210)
Accounts payable and accrued liabilities ... 258,180 (144,133)
----------- ------------
Net cash used in operating activities .... (1,153,375) (971,675)
Investing activities:
Purchased software ............................... (211,684) (59,386)
Other capital expenditures ....................... (22,595) (7,756)
----------- -----------
Net cash used in investing activities .... (234,279) (67,142)
----------- -----------
Financing activities:
Proceeds from private placements ................. 893,862 1,643,384
Proceeds from borrowings ......................... 169,499 --
Repayment of borrowings .......................... (18,746) (65,664)
----------- -----------
Net cash provided by financing activities 1,044,615 1,577,720
----------- ------------
Net increase (decrease) in cash .................... (343,039) 538,903
Cash at beginning of period ........................ 348,465 19,283
----------- -----------
Cash at end of period .............................. $ 5,426 $ 558,186
=========== ===========
See accompanying notes to financial statements.
5
GK INTELLIGENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. ACCOUNTING POLICIES
The accompanying unaudited financial statements have been prepared in accordance
with the instructions to interim financial reporting as prescribed by the
Securities and Exchange Commission. All adjustments, which, in the opinion of
management, are necessary for a fair presentation of the results for the interim
periods have been reflected in the accompanying unaudited financial statements.
For further information regarding accounting policies, refer to the Company's
audited financial statements for the years ended May 31, 1997 and 1996 and for
the period from inception (October 4, 1993) through May 31, 1997 included in the
Company's 1997 Annual Report on Form 10-KSB.
2. GOING CONCERN UNCERTAINTY AND MANAGEMENT PLANS
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered recurring
operating losses since its inception that raise substantial doubt about its
ability to meet future expected expenditures necessary to fully develop its
software products and applications and to continue as a going concern. The
financial statements do not reflect any adjustments that might result from the
outcome of this uncertainty. In this regard, the Company is currently seeking
short and long term debt or equity financing sufficient to fund projected
working capital and software product development needs and is anticipating the
general release of several software products into the market during 1999.
However, there can be no assurance that the amount and terms of such debt or
equity financing, or that the profits from the sale of software products in 1999
and thereafter, if any, will be sufficient to fund the Company's software
development expenditure requirements. Accordingly, the Company will continue to
seek additional sources of financing as may be necessary.
3. PRIVATE PLACEMENTS
During the three and nine months ended February 28, 1998, the Company issued
695,510 and 1,307,100 shares of its common stock to accredited investors in
negotiated private placements for net proceeds of $329,898 and $893,862,
respectively.
4. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the nine months ended February 28, 1998, the Company recorded non-cash
compensation expense resulting from the (i) issuance of 775,000 shares of common
stock to key employees valued at $468,245, (ii) recognition of $102,349 of
employee compensation associated with common stock warrants granted in 1997,
(iii) issuance of 210,000 shares of common stock to key professionals valued at
$164,750 and (iv) recognition of $298,413 of compensation to key professionals
associated with common stock warrants and options granted in 1998 and 1997.
Non-cash compensation expense recorded during the nine months ended February 28,
1998 was determined using the estimated fair market value of the Company's
common stock, common stock warrants or common stock options on the date such
instruments were granted.
In 1997, the Company's board of directors approved the issuance of a total of
2,900,000 shares of the Company's common stock to (i) the president and majority
stockholder, (ii) a director, (iii) a consultant and (iv) certain key employees
for services performed in 1997 valued at $2.00 per share, or $5,800,000. The
Company's May 31, 1997 financial statements included an accrual for the issuance
of such shares. During the nine months ended February 28, 1998, the Company
formally issued the shares described above and accordingly, the $5,800,000
compensation accrual was reclassified to common stock and additional paid-in
capital in the accompanying financial statements.
6
GK INTELLIGENT SYSTEMS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
5. SERIES A PREFERRED STOCK
Effective November 2, 1995, the Company issued 883,333 shares of Series A
convertible, redeemable preferred stock to Microelectronics and Computer
Technology Corporation ("MCC") in exchange for a perpetual, non-exclusive
worldwide right and license to use and commercialize certain computer software
technologies developed by MCC. The Series A preferred stock has a stated value
of $6.00 per share, a par value of $.001 per share, accrues dividends at 6% per
annum beginning January 1, 1998 and is convertible into 883,333 shares of the
Company's common stock beginning January 1, 1998. During the three months ended
February 28, 1998, the Company accrued dividends of $53,000 relating to the
Series A preferred stock.
6. LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards ("SFAS") No. 128, Earnings Per Share. SFAS 128
is effective for the quarter ended February 28, 1998. SFAS 128 simplifies the
standards required under current accounting rules for computing earnings per
share and replaces the presentation of primary earnings per share and fully
diluted earnings per share with a presentation of basic earnings per share and
diluted earnings per share. Basic earnings per share includes no dilution and is
computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution of securities that could share in the
earnings of an entity, similar to fully diluted earnings per share. The diluted
loss per share of common stock has not been provided for all periods presented
in the accompanying Statements of Loss as the effect is anti-dilutive.
7. SUBSEQUENT EVENTS
Effective March 17, 1998 the Company elected Rod Canion, co-founder and former
chief operating officer of Compaq Computer Corporation ("Compaq"), as chairman
of its board of directors. In connection therewith, the Company issued 3,000,000
shares of its common stock to Mr. Canion at a purchase price of $.05 per share.
Non-cash compensation expense of $787,500 associated with this transaction was
recorded by the Company in March 1998.
Effective April 14, 1998, the Company acquired the consulting services of
John Gribi, former chief financial officer of Compaq, to assist in the
development of the Company's infrastructure and operating systems. Mr. Gribi
was also elected to the Company's board of directors.
Subsequent to February 28, 1998, the Company issued 2,162,754 shares of its
common stock to accredited investors in negotiated private placements for net
proceeds of approximately $1,250,000.
Effective April 1, 1998, the Company reached a preliminary agreement with a
group of accredited investors to issue approximately 4.6 million shares of its
common stock for approximately $5.4 million.
7
PART I. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the attached
condensed financial statements and notes thereto. Discussions relating to the
Company's operations, liquidity and capital resources contain certain statements
that are "Forward Looking Statements" within the meaning of Section 27A of the
Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Although the Company believes that the expectations reflected in
Forward Looking Statements are reasonable, there can be no assurances that such
expectations will prove to be accurate. Generally, these statements relate to
business plans, strategies, anticipated strategies, levels of capital
expenditures in current and future operations, liquidity and anticipated capital
financing needed to effect the business plan. All phases of the Company's
operations are subject to a number of uncertainties, risks and other influences,
many of which are outside the control of the Company and cannot be predicted
with any degree of accuracy. In light of the significant uncertainties inherent
in the Forward Looking Statements made in the following discussion, the
inclusion of such statements should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved.
OVERVIEW
The Company is a development stage enterprise engaged in the acquisition,
development and marketing of sophisticated software products and applications.
From inception (October 4, 1993) to date, the Company has realized no revenues
and its activities have been limited to the acquisition of software assets used
to develop its planned line of intelligent products and applications, product
development, research and development of software products and initial marketing
activities.
RESULTS OF OPERATIONS
REVENUES. There were no revenues for the three and nine month periods ended
February 28, 1998 and 1997. Although the Company is in the final stages of
pre-testing and marketing its initial internet training product, no significant
revenues from this or other products is expected until at least the second
quarter of the fiscal year ending May 31, 1999.
EXPENSES. Expenses for the three months ended February 28, 1998 decreased by
$88,233 from the same period in 1997 while expenses for the nine months ended
February 28, 1998 increased by $724,913 from the same period in 1997. The
changes are due primarily to a decrease in president's compensation offset by
increases in employee compensation and other general and administrative expenses
as described below.
THREE MONTHS ENDED FEBRUARY 28, 1998
President's compensation for the three months ended February 28, 1998
decreased by $162,500 to $60,000 from $225,500 in the same period in 1997 due
to the issuance of 50,000 shares of common stock to the president in 1997 in
recognition of services performed valued at $162,500. Other general and
administrative expenses for the three months ended February 28, 1998
increased by $70,365 to $121,882 from $51,517 in the same period in 1997 due
to the general increase in personnel and general business activities
associated with the development of the Company's planned software products
and applications.
NINE MONTHS ENDED FEBRUARY 28, 1998
President's compensation for the nine months ended February 28, 1998
decreased by $162,500 to $180,000 from $342,500 in the same period in 1997
due to the issuance of 50,000 shares of common stock to the president in the
third quarter of 1997 in recognition of services performed valued at
$162,500. Employee compensation for the nine months ended February 28, 1998
increased by $613,698 to $1,027,012 from $413,314 during the same period in
1997 due primarily to the hiring of product management, research and
development, and administrative employees, primarily during fiscal 1997, in
order to carry out the development and marketing of the Company's planned
8
software products and applications. Other general and administrative expenses
for the nine months ended February 28, 1998 increased by $207,438 to $374,308
from $166,870 in the same period in 1997 due primarily to the general
increase in the Company's business activities described above as well as the
increased level of employees and other professionals.
LIQUIDITY AND CAPITAL RESOURCES
GOING CONCERN UNCERTAINTY AND MANAGEMENT'S PLANS. The Company has suffered
recurring operating losses since its inception that raise substantial doubt
about its ability to meet future expected expenditures necessary to fully
develop its planned software products and applications and to continue as a
going concern. The accompanying unaudited financial statements do not reflect
any adjustments that might result from the outcome of these uncertainties. The
current cash forecast indicates that there will be negative cash flow from
operations through the fiscal year ending May 31, 1999. The Company is currently
seeking short and long term debt or equity financing sufficient to fund
projected working capital and software product and application development,
marketing and distribution needs. However, there is no assurance that sufficient
proceeds will be obtained or that the Company will reach a positive cash flow
position in the future.
CASH USED IN OPERATING ACTIVITIES. The Company's net cash flow from operating
activities resulted in deficits of $1,153,375 and $971,675 for the nine month
periods ended February 28, 1998 and 1997, respectively. The $181,700 increase is
due primarily to the increase in business activity undertaken by the Company
relating to the development of its software products and applications and its
continuing efforts to seek short and long term financing to fund such
development.
CASH USED IN INVESTING ACTIVITIES. The Company's net cash used in investing
activities during the nine months ended February 28, 1998 increased by $167,137
to $234,279 from $67,142 in the same period in 1997 due primarily to the
increased development activities associated with its planned software products
and applications.
CASH FLOW FROM FINANCING ACTIVITIES. The Company's net cash flows from financing
activities during the nine months ended February 28, 1998 decreased by $533,105
to $1,044,615 from $1,577,720 in the same period in 1997 due primarily to a
reduction of approximately $750,000 in the amount of equity funds raised during
the nine months ended February 28, 1998 which was partially offset by an
increase in bank and other borrowings of $169,499 during the same period.
FUTURE CAPITAL REQUIREMENTS. Subsequent to February 28, 1998, the Company has
received approximately $1,250,000 from sales of 2,162,754 shares of its common
stock through April 16, 1998 which will provide sufficient working capital for
approximately three months. The Company will need additional financing
thereafter to continue development and marketing of its products and
applications. In connection therewith, the Company reached a preliminary
agreement with a group of accredited investors to issue approximately 4.6
million shares of its common stock for approximately $5.4 million.
Notwithstanding this potential financing, however, the Company may require
significant additional financing to fully implement its product development,
marketing and distribution plans or to complete any acquisition in furtherance
of such plans. If financing is required, such financing may be raised through
additional equity offerings, joint ventures or other collaborative
relationships, borrowings and other sources. To date, the Company has no
commitment for any such additional financing and there can be no assurance that
any such financing will be available or, if it is available, that it will be
available on acceptable terms. If adequate funds are not available to satisfy
either short or long-term capital requirements, the Company may be required to
limit its operations significantly. The Company does not expect that its
internal source of liquidity will improve until net cash is provided by
operating activities and, until such time, the company will rely upon external
sources for liquidity.
9
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS-
During the three months ended February 28, 1998, the Company
and its majority shareholder were named as defendants in a
lawsuit filed by a former consultant alleging breach of
contract and related claims, and seeking economic and
exemplary damages in excess of $500,000. To date, no discovery
has commenced. The Company believes the suit is wholly without
merit and intends to vigorously defend its position.
ITEM 2. CHANGES IN SECURITIES - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS - None
(b) REPORTS ON FORM 8-K - None
10
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GK Intelligent Systems, Inc.
Date: April 16,1998 By /s/ ROD NORVILLE
Rod Norville, Director, Chief Financial
Officer, Chief Accounting Officer
11