United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 000-22057
GK INTELLIGENT SYSTEMS, INC.
---------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 76-0513297
-------------- -------------
(State or other (IRS Employer
jurisdiction of Identification
incorporation or No.)
organization)
2602 Yorktown Place
Houston, Texas 77056
-----------------------------------
(Address of principal executive offices)
(713) 626-1504
--------------------------
(Issuer's telephone number)
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 the past 90 days. Yes [X] No[ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
As of September 30, 2004, the Issuer had 135,580,465 shares of common stock
outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
1
GK INTELLIGENT SYSTEMS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS (unaudited)....................... 2
Consolidated Balance Sheet ........................ 3
Consolidated Statements of Operations ............. 4
Consolidated Statements of Cash Flows.............. 5
Notes to the Consolidated Financial Statements .... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION ............................................. 10
ITEM 3. CONTROLS AND PROCEDURES................................ 14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...................................... 15
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES................ 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES........................ 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS ................................... 16
ITEM 5. OTHER INFORMATION...................................... 16
ITEM 6. EXHIBITS .............................................. 16
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
GK INTELLIGENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
2
GK INTELLIGENT SYSTEMS, INC. AND SUBSIDIARIES
(Development Stage Company)
Consolidated Balance Sheet
(Unaudited)
ASSETS
September 30,
2004
--------------
CURRENT ASSETS
Cash $ 200,949
Accounts receivable 123,970
Accounts receivable - related 10,090
--------------
Total Current Assets 335,009
--------------
FIXED ASSETS, NET 11,284
OTHER ASSETS
Goodwill 1,721,705
--------------
Total Other Assets 1,721,705
--------------
TOTAL ASSETS $ 2,067,998
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 215,376
Accrued liabilities 776,052
Accrued liabilities - related parties 97,027
Notes payable 121,512
Notes payable - related parties 346,721
--------------
Total Current Liabilities 1,556,688
--------------
TOTAL LIABILITIES 1,556,688
--------------
STOCKHOLDERS' EQUITY
Preferred stock: $0.001 par value, 10,000,000 shares
authorized, -0- shares issued and outstanding -
Common stock: $0.001 par value, 275,000,000
shares authorized, 135,580,465 shares issued
and outstanding 135,580
Additional paid-in capital 44,588,501
Unearned compensation (416,395)
Accumulated deficit (43,796,376)
--------------
Total Stockholders' Equity 511,310
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,067,998
==============
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
3
GK INTELLIGENT SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
------------------------------- ----------------------------
2004 2003 2004 2003
---------------- -------------- -------------- -------------
REVENUES $ 338,020 $ - $ 338,020 $ -
Cost of Sales - - - -
---------------- -------------- -------------- -------------
Gross Margin 338,020 - - 338,020
---------------- -------------- -------------- -------------
OPERATING EXPENSES
Professional fees 550,893 108,211 1,433,189 490,985
Payroll expense 246,692 60,000 613,893 180,000
Depreciation and amortization 465 - 729 -
General and administrative 36,243 2,406 93,193 200,261
---------------- -------------- -------------- -------------
Total Expenses 834,293 170,617 2,141,004 871,246
---------------- -------------- -------------- -------------
LOSS FROM OPERATIONS (496,273) (170,617) (1,802,984) (871,246)
---------------- -------------- -------------- -------------
OTHER INCOME (EXPENSE)
Gain on release of debt - - 871,090 2,652,925
Gain (loss) on extinguishment of debt (4,177) (25,000) (26,298) (25,000)
Interest expense (17,546) (28,595) (68,453) (142,582)
---------------- -------------- -------------- -------------
Total Other Income (Expense) (21,723) (53,595) 776,339 2,485,343
---------------- -------------- -------------- -------------
NET INCOME (LOSS) (517,996) (224,212) (1,026,645) 1,614,097
DIVIDENDS ON PREFERRED STOCK - - - -
---------------- -------------- -------------- -------------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDERS $ (517,996) $ (224,212) $ (1,026,645) $ 1,614,097
================ ============== ============== =============
BASIC INCOME (LOSS) PER SHARE $ (0.00) $ (0.01) $ (0.02) $ 0.07
================ ============== ============== =============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 105,694,647 24,725,561 63,188,185 22,907,947
================ ============== ============== =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
4
GK INTELLIGENT SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine
Months Ended
September 30,
------------------------------
2004 2003
-------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (1,026,645) $ 1,614,097
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 729 -
Gain on release of debt (871,090) (2,652,925)
(Gain) loss on extinguishments of debt 26,298 25,000
Amortization of unearned compensation 476,235 46,900
Issuance of common stock, stock options, and
warrants for services rendered 845,447 376,898
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses and other assets 6,476 -
Decrease in accounts receivable and accounts
receivable - related party 3,929 -
Increase in accounts payable and accrued expenses 9,768 280,051
Increase in accrued liabilities - related party (94,992) 112,152
-------------- ---------------
Net Cash Used by Operating Activities (623,845) (197,827)
-------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES - -
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from note payable 47,000 -
Payments on notes payable 7,000 -
Proceeds from note payable - related party 154,614 -
Payments on notes payable - related party - (53,746)
Increase in stock subscription payable - 25,000
Proceeds from stock subscription receivable 10,000 -
Purchase of cash in acquisitions 105,085 -
Common stock issued for cash 514,998 225,000
-------------- ---------------
Net Cash Provided by Financing Activities 824,697 196,254
-------------- ---------------
NET INCREASE (DECREASE) IN CASH 200,852 (1,573)
CASH AT BEGINNING OF PERIOD 97 15,566
-------------- ---------------
CASH AT END OF PERIOD $ 200,949 $ 13,993
============== ===============
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
5
GK INTELLIGENT SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
For the Nine
Months Ended
September 30,
------------------------------
2004 2003
-------------- ---------------
SUPPLEMENTAL SCHEDULE OF CASH FLOW ACTIVITIES:
Cash Paid For:
Income taxes $ - $ -
Interest $ - $ 2,255
Schedule of Non-Cash Financing Activities:
Common stock issued for debt $ 10,000 $ 153,155
Common stock issued for debt - related parties $ - $ 102,125
Stock options and warrants issued for debt - related parties $ - $ 110,000
Common stock, warrants, and options issued for services $ 1,530,600 $ 366,273
Common stock, warrants, and options issued for services -
related parties $ - $ 10,625
The accompanying notes are an integral part of these consolidated financial statements.
F-5
6
GK INTELLIGENT SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2004
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted in accordance with such rules and regulations.
The information furnished in the interim condensed financial statements
include normal recurring adjustments and reflects all adjustments, which, in
the opinion of management, are necessary for a fair presentation of such
financial statements. Operating results for the three months and nine months
ended September 30, 2004 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2004.
Certain amounts related to prior periods have been reclassified to conform
with current period financial statement presentation.
NOTE 2 - GOING CONCERN
The Company's consolidated financial statements are prepared using accounting
principles generally accepted in the United States of America applicable to a
going concern which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. However, the Company does not
have sufficient current assets to cover its short-term liabilities, nor does
it have an established, ongoing source of revenue to cover its operating costs
and to allow it to continue as a going concern. These consolidated financial
statements do not reflect any adjustments that might result from the outcome
of this uncertainty. It is the intent of the Company to obtain additional
financing through equity offerings or other feasible financing alternatives to
fund its ongoing operations. In addition, the Company has recently
consummated the acquisitions of Stellar Software, Inc. and Texas Source Group,
Inc., which management believes will eventually increase the profitability of
the Company. The Company continues to pursue the development and marketing of
its software technology to generate sales revenues, and also continues to seek
potential merger or acquisition candidates in order to further bolster the
Company's sales. There is no assurance that the Company will be successful in
raising the needed capital or that there will be sales of its software.
NOTE 3 - RELEASE OF DEBT
The Company has certain accounts payable, notes payable, accrued liabilities,
and accrued interest, which had been outstanding for some time. According to
the Company's legal counsel, The Texas Code V.T.C.A., Civil Practice and
Remedies Code Section 16.004 (a), states that an action upon any contract
obligation or liability founded upon an instrument in writing must be brought
within four years of such a written agreement. As of September 30, 2004, no
such actions to enforce payment of the obligations have been filed.
Accordingly, a total of $3,167,125 has been written-off and a gain on release
of debt recognized of which $871,090 and $2,652,925 has been recorded in the
nine months ended September 30, 2004 and 2003, respectively.
F-6
7
GK INTELLIGENT SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Continued)
September 30, 2004
NOTE 4 - STOCK OPTIONS
During 1998, the Company established the "1998 Stock Option Plan" (the plan)
to promote the interest of the Company and its shareholders by attracting and
retaining exceptional employees and directors. Any employee, of the Company
is eligible to be designated a participant. The Board of the Company has sole
and complete authority to determine the employees to whom options shall be
granted, the number of each grant and any additional conditions and
limitations. The exercise price shall not be less than the fair market value
of the underlying shares.
A summary of the status of the Company's outstanding stock options as of
September 30, 2004 and December 31, 2003 and changes during the nine months
ended September 30, 2004 and the year ended December 31, 2003 is presented
below:
September 30, December 31,
2004 2003
--------------------- ---------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
----------- --------- ----------- ---------
Outstanding, beginning of year 4,500,050 $ 0.34 826,559 $ 0.34
Granted 6,944,444 0.20 4,400,000 0.20
Expired/Cancelled (500,000) 0.35 (729,509) 0.34
Exercised (6,944,444) - - -
----------- --------- ----------- ---------
Outstanding end of year 4,000,050 $ 0.20 4,500,050 $ 0.20
=========== ========= =========== =========
Exercisable 4,000,050 $ 0.21 3,500,050 $ 0.21
=========== ========= =========== =========
Outstanding Exercisable
------------------------------------ ----------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of at Sept.30, Contractual Exercise at Sept.30, Exercise
Exercise Prices 2004 Life Price 2004 Price
- ----------------- ------------ ------------- --------- ------------ ----------
$ 0.08 300,000 7.00 $ 0.08 300,000 $ 0.08
$ 0.18 3,500,000 7.94 $ 0.18 2,500,000 $ 0.18
$ 0.35 100,000 6.00 $ 0.35 100,000 $ 0.35
$ 0.50 100,000 4.80 $ 0.50 100,000 $ 0.50
$ 25.00 50 4.65 $ 25.00 50 $ 25.00
------------ ------------- --------- ------------ ----------
4,000,050 7.55 $ 0.20 3,000,050 $ 0.21
============ ============= ========= ============ ==========
F-7
8
GK INTELLIGENT SYSTEMS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements (Continued)
September 30, 2004
NOTE 5 - ACQUISITIONS
On June 16, 2004, the Company entered into a Purchase Agreement (the "Purchase
Agreement"), pursuant to which the Company agreed to purchase all of the
issued and outstanding shares of common stock of Stellar Software Network,
Inc., a Texas corporation ("Stellar"). The Purchase Agreement was amended on
June 18, 2004. According to the terms of the Agreement, the Company acquired
all of the issued and outstanding shares of common stock of Stellar, in
exchange for $191,000, paid in the form of the 8,025,211 shares of the
Company's common stock. Stellar is engaged in the business of custom software
development and information technology services.
On August 13, 2004, the Company entered into a Corporate Restructuring
Agreement ("the Agreement") in which the Company acquired all the issued and
outstanding common stock of Texas Source Group, Inc. ("TSG"). According to
the terms of the Agreement, the Company acquired all of the TSG's issued and
outstanding common stock in exchange for $1,500,000, in the form of the
Company's common stock (42,857,153 shares). TSG is a full-service provider of
collaborative e-business process software, process consulting, web development
and hosting services.
9
Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis compares our results of operations for
the three and nine months ended September 30, 2004 to the same period in 2003.
This discussion and analysis should be read in conjunction with our
consolidated condensed financial statements and related notes thereto included
elsewhere in this report and our Form 10-KSB for the year ended December 31,
2003.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Report on Form 10-QSB contains forward-looking statements, including,
without limitation, statements concerning possible or assumed future results
of operations and those preceded by, followed by or that include the words
"believes," "could," "expects," "intends" "anticipates," or similar
expressions. Our actual results could differ materially from these anticipated
in the forward-looking statements for many reasons including the risks
described in our 10-KSB for the period ended December 31, 2003 and elsewhere
in this report. Although we believe the expectations reflected in the
forward-looking statements are reasonable, they relate only to events as of
the date on which the statements are made, and our future results, levels of
activity, performance or achievements may not meet these expectations. We do
not intend to update any of the forward-looking statements after the date of
this document to conform these statements to actual results or to changes in
our expectations, except as required by law.
OVERVIEW
Our business plan is to become a next-generation media and entertainment
corporation. To capitalize on what we believe to be a significant investment
opportunity, we launched a new music entity called Recording Artists Worldwide
Inc. (RAWW !) We are seeking to acquire privately held entertainment
entities, initially in the music sector.
In July 2004, we acquired Stellar Software Solutions, Inc. as a wholly owned
subsidiary. Stellar Software Network is a Texas corporation that hires
programmers and contracts them to companies. The acquisition of Stellar
Software Network allowed us to generate our first revenues since 1999.
10
In August 2004, we acquired Ascendant Texas Source Group, Inc.,a Texas
corporation, is a full service provider of quality collaborative e-business
process software, process consulting, rapid web development and hosting
services.
We acquired Stellar Software Network Inc. and Ascendant TEXAS Source Group to
create positive initial cash flow and to create an internal architecture for
managing future acquisitions.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make a wide variety of estimates and assumptions that affect (i)
the reported amounts of assets and liabilities and disclosure regarding
contingent assets and liabilities as of the date of the financial statements,
and (ii) the reported amounts of revenues and expenses during the periods
covered by the financial statements. Our management routinely makes judgments
and estimates regarding the effect of matters that are inherently uncertain.
As the number of variables and assumptions affecting the future resolution of
the uncertainties increases, these judgments become even more subjective and
complex. We have identified certain accounting policies that we deem to be
most important to the portrayal of our current financial condition and results
of operations. Our significant accounting policies are disclosed in Note 1 of
the Notes to the Financial Statements. Several of these critical accounting
policies are as follows:
Amortization and Impairment of Software Costs
- ---------------------------------------------
Amortization is based on the estimated useful lives of the software
applications (usually three years) and is computed using the straight-line
method. Additionally, management reviews the net carrying value of all
computer software on a regular basis. If the software is deemed to be damaged
or obsolete, or if the carrying value of the software is otherwise deemed to
be an inaccurate statement of the asset's true value, software costs are
written-off in full to expense as of the date the assessment of obsolescence
is made.
Research and Development
- ------------------------
We have elected to follow the policy of charging the costs of research and
development to expense as incurred.
Advertising
- ------------
We have elected to follow the policy of charging the costs of advertising to
expense as incurred.
Common Stock Issued for Services and Debt
- -----------------------------------------
Due to the periodic shortage of liquid funds available to us, we have at times
deemed it beneficial to us to issue common stock for services and/or debt, as
an alternative to paying cash for these items. Management has elected to
follow the policy of valuing the common shares issued at the market value on
the date of issuance. Any differences between the value of the common stock
and the value of the debt satisfied through the issuance of common stock are
posted to "gain/loss on extinguishment of debt" on the date of issuance.
THREE AND NINE MONTHS ENDED September 30, 2004 AS COMPARED TO THE THREE AND
NINE MONTHS ENDED SEPTEMBER 30, 2003
RESULTS OF OPERATIONS
We had net revenues of $338,020 for the three months ended September 30, 2004
compared to $0 for same period in 2003. The increase in net revenues was the
result of our purchasing two subsidiaries. Our new subsidiary, Texas Source
Group, had revenues of $60,844 and our other new subsidiary, Stellar Software
Network had revenues of $277,176, from the dates we bought them to the end of
the quarter.
We had operating expenses of $834,293 for the three months ended September 30,
2004 compared to $170,617 for the comparative period of 2003. The $663,676
increase was due primarily to the issuance of shares and options to
consultants. In 2004, we hired consultants to develop our business plan and
provide legal and accounting services.
The other reason our operating expenses increased this year when compared to
last year was our acquisition of Stellar Software Network and Texas Source
Group. We purchased Stellar Software Network in July and Texas Source Group in
August of 2004. Stellar Software Network had operating expenses of $255,191
and Texas Source Group had $46,117 of these expenses after we bought them. We
had no active subsidiaries in 2003.
11
Interest expense during the three months ended September 30, 2004 was $17,546,
a decrease of $11,049 from the interest expense of $28,595 incurred in the
three months ended September 30, 2003. We attribute the decrease in interest
expense to the decrease in debt.
Our net loss was $517,996 during the three months ended September 30, 2004
compared to a net loss of $224,212 incurred in the three months ended
September 30, 2003. Our increased net loss was the result of our efforts to
acquire operating companies and the related cost of the consultants we hired
to make these acquisitions.
We had net revenues of $338,020 for the nine months ended September 30, 2004
compared to $0 for same period in 2003. The increase in net revenues was again
the result of our purchasing two subsidiaries. Our new subsidiary, Texas
Source Group had revenues of $60,844 and our other new subsidiary, Stellar
Software Network, had revenues of $277,176, from the dates we bought them to
the end of the nine months.
We incurred operating expenses of $2,141,004 for the nine months ended
September 30, 2004 compared to $871,246 for the comparative period of 2003.
The $1,269,758 increase was due primarily to the issuance of shares and
options to consultants. In 2004, we hired consultants to develop our business
plan and provide legal and accounting services.
Our operating expenses also increased this year when compared to last year was
our acquisition of Stellar Software Network and Texas Source Group. We
purchased Stellar Software Network in July and Texas Source Group in August of
2004. Stellar Software Network had operating expenses of $255,191 and Texas
Source Group had $46,117 of these expenses after we bought them. We had no
active subsidiaries in 2003.
During the nine months ended September 30, 2004, we experienced a gain on
release of debt of $871,090. We experienced a gain on release of debt in the
comparative period for 2003 of $2,652,925. The Texas Code provides, in part,
that any action upon any contract obligation or liability founded upon an
instrument in writing must be brought within four years of such a written
agreement. Our old liabilities were written off during the nine months ended
September 30, 2004 due to the fact that the relevant statute of limitations
now bars certain actions from being filed to enforce or collect such
liabilities. Interest expense during the nine months ended September 30, 2004
was $68,453, a decrease of $74,129 from the interest expense of $142,582
incurred in the three months ended September 30, 2003. We attribute the
decrease in interest expense to the decrease in debt as described above.
Our net loss was $1,026,645 during the nine months ended September 30, 2004
compared to a net income of $1,614,097 incurred in the nine months ended
September 30, 2003. Our increased net loss was the result of our efforts to
acquire operating companies and the related cost of the consultants we hired
to make these acquisitions. Excluding the gain on forgiveness of debt in both
periods the net loss would have been $1,897,735 and $1,038,828, respectively.
The gain on forgiveness of debt is an unusual occurrence and is not part of
our ongoing operations.
LIQUIDITY
During the nine months ended September 30, 2004, we used cash from operations
of $623,845 compared to using $197,827 in the prior year. This is the result
of our acquiring our two active subsidiaries. We had cash on hand of $200,949
as of September 30, 2004 compared to $13,993 cash as of September 30, 2003.
12
The State of Texas provides that any liabilities founded upon any contract
obligation or an instrument in writing not brought within four years of the
date incurred are not legally collectible. During the nine months ended
September 30, 2004, $883,512 of our liabilities fell beyond this statute of
limitations. Accordingly, we recorded a gain on the release of debt for this
amount. We ceased operations in 1999 and were inactive in 2000 and 2001.
We anticipate that we will need to raise approximately $500,000 in cash in the
next twelve months to cover general and administrative expenses and other
anticipated cash needs. We are seeking to raise such needed funds through the
sale of our shares of stock or through issuing debt. We may not be able to
raise the necessary funds on terms acceptable to us, or at all.
Capital Commitments
On February 1, 2003, we entered into a new employment agreement with Mr.
Kimmons. The agreement provides for a three-year term that automatically
renews at the end of the term for consecutive one-year terms, and which
provides for an annual base compensation of $240,000 and non-qualified stock
options to 3,000,000 shares of Common Stock exercisable until February 1,
2013, at a purchase price of $0.18 per share (110% of the closing market price
on the date of grant). Options to purchase 1,000,000 shares were exercisable
immediately, options to purchase 1,000,000 shares vested and were exercisable
when we were current and filed our annual and quarterly reports for the years
2000, 2001 and 2002 and any reports then due for the fiscal year 2003, and
options to purchase 1,000,000 shares vested and were exercisable when we had
raised a minimum of $500,000 in investment capital.
On September 26, 2002, we entered into a Promissory Note with Gary Kimmons
where we promised to pay Mr. Kimmons $170,041 with interest of 6% per annum
upon demand, as repayment for monies he paid on our behalf.
On September 17, 2003, we entered into a Consulting Agreement with Gust C.
Kepler where, in exchange for Mr. Kepler's services, we agreed to pay, at our
option, $72,000 cash or 1,200,000 shares of our common stock of valued at a
price of $0.06 per share.
On January 19, 2004, we entered into a Referral Fee Agreement with Michael
Aczon wherein he shall receive a referral fee as described below as soon as
practical after each closing of an acquisition that is directly the result of
a facilitated introduction by him to us. The referral fee shall be calculated
by taking the total consideration paid for an acquisition and multiplying that
by the following percentages: For the first $1 million of acquisition cost:
5.0%, For the next $1 million of acquisition cost: 4.0%, For the next $1
million of acquisition cost: 3.0%, For the next $1 million of acquisition
cost: 2.0%, For all consideration above $4 million: 1.0%. The referral fee
shall be paid in the same manner and in the same ratio as that of the
transaction.
On August 2, 2004, we entered into an Employment Agreement with Sunil Nariani
where in exchange for serving as President of our Stellar Software Network
subsidiary from August 2, 2004 until July 14, 2006, he will receive an annual
base salary of $120,000, subject to annual review by us, and a bonus at the
end of each fiscal year of 50% of the increase over the base fiscal year of
2003 of the audited earnings before tax.
13
On August 19, 2004, we entered into an Employment Agreement with Julie Maranto
where, in exchange for serving as President of our Texas Source Group
subsidiary from August 19, 2004 until August 18, 2006, she will receive an
annual base salary of $120,000, subject to annual review by us, and a bonus at
the end of each fiscal year of 50% of the increase over the base fiscal year
of 2003 of the audited earnings before tax.
A default judgment was taken against us in the 11th Judicial District Court of
Harris County, TX in favor of Marathon Oil Company on August 31, 1999 in the
amount of $326,943 representing past and future rentals under a lease
agreement, together with $7,500 in attorney's fees and post judgment interest
at 10% per annum until paid. Credit towards the judgment was ordered for sale
of personal property by the Sheriff or Constable. We believe that the
personal property sold for approximately $28,000. To the extent that the
property was leased during the unexpired term, it is possible that there would
be a mitigation of damages claim in our favor. We believe that some or all of
the space was subsequently rented approximately 90 days later.
On March 3, 2002, a judgment was entered against us in favor of Fidelity
Leasing in the amount of $29,854 in damages, fees and costs, and it is subject
to interest.
On May 14, 2004, we entered into a Consulting Agreement with Deanna Slater
where, in return for her services, we will pay her a monthly fee of $6,000 in
the form of cash or our common stock, at her election.
On October 1, 2004, we entered into an agreement with 432 Group, LLC to
sublease their office space they leased from 432 Park South Realty, LLC. The
term begins October 1, 2004 and ends on October 31, 2005, and is at the
monthly rental fee of $2,250. However, 432 Group has granted us a temporary
rent credit of $1,125 for the months of October, November, and December 2004,
which total temporary rent credit of $3,375 is payable in equal monthly
installments over the immediately subsequent 10 months. Accordingly, the
monthly rent for January 2005 through October 2005 shall be $2,588.
On September 15, 2004, we entered into an agreement to retain
Rubenstein Investor Relations, Inc. as our investor relations consultant for a
four-month period commencing on September 9, 2004, in exchange for a fee of
$6,000.
Subsidiaries
- ------------
As of November 1, 2004, we had six wholly-owned subsidiary companies, Smart
One Learning Systems, Inc., Recording Artists Worldwide, Inc., The Baseball
Club, Inc., Your True Voice Studios, The Texas Source Group, Inc. and Stellar
Software Network, Inc. Smart One Learning Systems, Your True Voice Studios
and The Baseball Club are currently dormant.
Item 3. Controls and Procedures
Evaluation of disclosure controls and procedures. Our management, with the
participation of our principal executive officer and principal financial
officer, has evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end
of the period covered by this Quarterly Report on Form 10-QSB. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that these disclosure controls and procedures are effective and
designed to ensure that the information required to be disclosed in our
reports filed or submitted under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the requisite time
periods.
Changes in internal controls. There was no change in our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended) that occurred during our last
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Awalt Group, Inc. - Awalt Group, Inc. commenced litigation against us in
January 2004 in the United States District Court, Southern District of Texas,
Houston Division (Cause No. H-03-5832). This case relates to advertising and
promotional services rendered prior to July 1999. The Plaintiff is requesting
$77,189.27 for actual amounts invoiced and $10,000 in attorney's fees. Per
their invoices, these are for services rendered from May 26, 1998 through June
15, 1999. We have filed an answer and are defending the lawsuit under Section
16.004 of the Texas Civil Practice and Remedies Code, i.e., we believe that
the statute of limitations has tolled the claim.
11500 Northwest, L.P. - 11500 Northwest commenced litigation against us on
October 31, 2003 in the 11th Judicial District Court for Harris County, Texas
(Cause No. 2003-60705). This case relates to a breach of a lease agreement
allegedly entered into on or about March 5, 1999 for certain office
space never occupied by us. Plaintiff is requesting past due rents of an
unspecified amount, broker's commission of $21,806.40, tenant improvements of
$51,439.29, attorney's fees, costs and prejudgment interest. We intend to
defend the lawsuit, deny breach of the alleged lease agreement and further
intend to defend under Section 16.004 of the Texas Civil Practice & Remedies
Code, i.e. we believe that the statute of limitations has tolled some or all
of the claims. The suit was served on April 13, 2004
and no discovery has been conducted by either side.
Item 2. Unregistered Sales of Equity Securities
We issued the following unregistered securities during the quarter ended
September 30, 2004:
On July 16, 2004, we issued 8,025,211 restricted shares of common stock to
Sunil Nariani in connection with the acquisition of Stellar Software Network.
On July 15, 2004, we authorized the issuance of 3,529,412 shares of common
stock, issued in 12 monthly installments, to Sunil Nariani pursuant to a
Consulting Agreement executed by the parties.
On August 17, 2004, we issued 42,857,714 restricted shares of common stock to
Julie Maranto in connection with the acquisition of Texas Source Group.
On September 16, 2004, we issued a warrant to Rubenstein Investor Relations to
purchase during a three-year period 80,000 shares of our common stock at an
exercise price of $.04 as compensation for services.
15
With respect to the sales of our common stock described above, we relied on
the Section 4(2) and/or 4(6) exemptions from securities registration under the
federal securities laws for transactions not involving any public offering. No
advertising or general solicitation was employed in offering the shares. The
shares were sold to sophisticated and/or accredited investors. The securities
were offered for investment purposes only and not for the purpose of resale or
distribution, and the transfer thereof was appropriately restricted by us.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information.
None.
Item 6. Exhibits
Exhibit Number Description of Exhibit
2.1 Corporate Reorganization Agreement between the Registrant and Julie
Maranto, dated August 13, 2004 (filed as Exhibit 2.1 to the
Registrant's Current Report on Form 8-K filed on August 19, 2004, and
incorporated herein by reference).
3.1 Amended and Restated Certificate of Incorporation (filed as Exhibit
3.(i) to the Registrant's Registration Statement on Form 10-SB filed on
January 24, 1997 and incorporated herein by reference).
3.2 Amended and Restated Bylaws (filed as Exhibit 3.(ii) to the
Registrant's Registration Statement on Form 10-SB filed on January 24,
1997 and incorporated herein by reference).
3.3 Certificate of Amendment to the Certificate of Incorporation (filed as
Exhibit 3.3 to the Registrant's Annual Report on Form 10KSB filed on
September 14, 1998 and incorporated herein by reference).
3.4 Certificate of Amendment to the Certificate of Incorporation filed as
Exhibit 3.(i) to the Registrant's Quarterly Report on Form 10QSB filed
on May 5, 2003 and incorporated herein by reference).
4.1 Warrant Agreement between the Registrant and Rubenstein Investor
Relations, Inc., dated September 16, 2004.
10.1 Promissory Note from the Registrant to Gary Kimmons, dated September
26, 2002 (filed as Exhibit 10.24 to the Registrant's Current Report on
Form 8-K filed on November 6, 2002 and incorporated herein by
reference).
10.2 Employment Agreement with Gary F. Kimmons, dated February 1, 2003
(filed as Exhibit 10.29 to the Registrant's Annual Report on Form
10KSB filed on May 5, 2003 and incorporated herein by reference).
10.3 Consulting Agreement between the Registrant and Gust C. Kepler, dated
September 17, 2003 (filed as Exhibit 4.1 to the Registrant's Form S-8
filed on September 19, 2003 and incorporated herein by reference).
10.4 Consulting Services Agreement between the Registrant and Stanton,
Walker & Company, dated November 5, 2003 (filed as Exhibit 4.1 to the
Registrant's Form S-8 filed on November 10, 2003 and incorporated
herein by reference).
10.5 GK Intelligent Systems, Inc. 2004 Stock Option Plan (filed as Exhibit
4.1 to the Registrant's Form S-8 filed on April 5, 2004 and
incorporated herein by reference).
10.6 Non-Employee Director Agreement between the Registrant and Dick Meador,
dated December 24, 2003 (filed as Exhibit 10.47 to the Registrant's
Annual Report on Form 10KSB filed on April 23, 2004 and incorporated
herein by reference).
16
10.7 Referral Fee Agreement between the Registrant and Michael Aczon, dated
January 19, 2004 (filed as Exhibit 10.50 to the Registrant's Annual
Report on Form 10KSB filed on April 23, 2004 and incorporated herein by
reference).
10.8 Consulting Agreement between the Registrant and Z.A. Consulting, LLC,
dated February 27, 2004 (filed as Exhibit 10.52 to the Registrant's
Annual Report on Form 10KSB filed on April 23, 2004 and incorporated
herein by reference).
10.9 First Amendment to Consulting Services Agreement between the Registrant
and Stanton, Walker & Company, dated March 29, 2004 (filed as Exhibit
10.54 to the Registrant's Annual Report on Form 10KSB filed on April
23, 2003 and incorporated herein by reference).
10.10 Second Amended and Restated Consulting Agreement between the Registrant
and Harvey Levin, dated October 11, 2004 (filed as Exhibit 99.6 to the
Registrant's Registration Statement on Form S-8 filed on October 19,
2004 and incorporated herein by reference).
10.11 Consulting Agreement between the Registrant and Isabella Elliott, dated
March 26, 2004 (filed as Exhibit 10.56 to the Registrant's Annual
Report on Form 10KSB filed on April 23, 2004 and incorporated herein by
reference).
10.12 Second Amended and Restated Consulting Agreement between the Registrant
and Jon Pearman, dated October 11, 2004 (filed as Exhibit 99.5 to the
Registrant's Registration Statement on Form S-8 filed on October 19,
2004 and incorporated herein by reference).
10.13 Third Amended and Restated Consulting Agreement between the Registrant
and Lisa L. Fincher, dated October 11, 2004 (filed as Exhibit 99.4 to
the Registrant's Registration Statement on Form S-8 filed on October
19, 2004 and incorporated herein by reference).
10.14 Third Amended and Restated Consulting Agreement between the Registrant
and Ted Davis, dated October 11, 2004 (filed as Exhibit 99.1 to the
Registrant's Registration Statement on Form S-8 filed on October 19,
2004 and incorporated herein by reference).
10.15 Third Amended and Restated Consulting Agreement between the Registrant
and D. Scott Elliott, dated October 11, 2004 (filed as Exhibit 99.2 to
the Registrant's Registration Statement on Form S-8 filed on October
19, 2004 and incorporated herein by reference).
10.16 Amended and Restated Consulting Agreement between the Registrant and
Linda Davis, dated June 3, 2004 (filed as Exhibit 10.16 to the
Registrant's Quarterly Report on Form 10-QSB filed on August 18, 2004
and incorporated herein by reference).
10.17 Consulting Agreement between the Registrant and Deanna Slater, dated
May 14, 2004 (filed as Exhibit 10.68 to the Registrant's Quarterly
Report on Form 10QSB filed on May 19, 2004 and incorporated herein by
reference).
10.18 Investment Agreement between the Registrant and Dutchess Private
Equities Fund, II, L.P., dated June 23, 2004 (filed as Exhibit 10.69 to
the Registrant's Current Report on Form 8-K filed on June 29, 2004 and
incorporated herein by reference).
10.19 Registration Rights Agreement between the Registrant and Dutchess
Private Equities Fund, II, L.P., dated June 23, 2004 (filed as Exhibit
10.70 to the Registrant's Current Report on Form 8-K filed on June 29,
2004 and incorporated herein by reference).
10.20 Consulting Agreement between the Registrant and Sunil Nariani, dated
July 15, 2004 (filed as Exhibit 10.72 to the Registrant's Current
Report on Form 8-K filed on July 28, 2004 and incorporated herein by
reference).
10.21 Employment Agreement between the Registrant and Sunil Nariani, dated
August 2, 2004 (filed as Exhibit 10.71 to the Registrant's Current
Report on Form 8-K filed on July 28, 2004 and incorporated herein by
reference).
10.22 Employment Agreement between the Registrant and Julie Maranto, dated
August 19, 2004.
10.23 Referral Fee Agreement between the Registrant and Shay Kronfeld, dated
July 23, 2004.
10.24 Consulting Agreement between the Registrant and Richard Russotto, dated
September 13, 2004 (filed as Exhibit 99.3 to the Registrant's
Registration Statement on Form S-8 filed on October 19, 2004 and
incorporated herein by reference).
10.25 Sublease Agreement between the Registrant and 432 Group, LLC, dated
October 1, 2004.
10.26 Letter re: Agreement to retain Rubenstein Investor Relations, Inc. as
investor relations consultant, dated September 15, 2004 (filed as
Exhibit 99.2 to the Registrant's Current Report on Form 8-K filed on
September 27, 2004 and incorporated herein by reference).
10.27 Referral Fee Agreement between the Registrant and Wade Brooks, dated
August 30, 2004.
10.28 Referral Fee Agreement between the Registrant and Barry Bergman, dated
September 9, 2004.
10.29 Referral Fee Agreement between the Registrant and Hantman & Associates
and/or Robert Hantman, dated August 30, 2004.
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Officers pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURE
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, hereunto
duly authorized.
Date: November 22, 2004 GK INTELLIGENT SYSTEMS, INC.
/s/ Gary F. Kimmons
-----------------------
Gary F. Kimmons
President, Chief Executive Office and
Chief Financial Officer