===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarterly period Ended: September 30, 2003; or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period _________ to __________
Commission File Number: 0-22057
-----------------------
GK INTELLIGENT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0513297
----------------------------- -----------------
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2602 Yorktown Place, Houston, Texas 77056
-------------------------------------------------
(Address of principal executive offices) (Zip Code)
(713) 626-1504
-------------------------------------------------
(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 a
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the registrant's common stock, $0.001
par value, as of September 30, 2003, was 26,716,274.
Transitional Small Business Disclosure Format. Yes [ ] No [X]
1
GK INTELLIGENT SYSTEMS, INC.
Report on Form 10-QSB
For the Quarter Ended September 30, 2003
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements (unaudited).................................................. 3
Balance Sheet .................................................................... 3
Statements of Operations ......................................................... 4
Statements of Cash Flows.......................................................... 5
Notes to the Financial Statements ................................................ 7
Item 2. Management's Discussion and Analysis or Plan of Operation ........................ 11
Item 3. Controls and Procedures .......................................................... 14
Part II. Other Information
Item 1. Legal Proceedings ................................................................ 14
Item 2. Changes in Securities ............................................................ 14
Item 3. Defaults Upon Senior Securities .................................................. 14
Item 4. Submission of Matters to a Vote of Security Holders .............................. 14
Item 5. Other Information ................................................................ 14
Item 6. Exhibits and Reports on Form 8-K ................................................. 17
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
GK INTELLIGENT SYSTEMS, INC.
(A Development Stage Company)
Balance Sheet
ASSETS
September 30,
2003
(Unaudited)
---------------
CURRENT ASSETS
Cash $ 13,993
---------------
Total Current Assets 13,993
---------------
COMPUTER SOFTWARE, NET -
---------------
TOTAL ASSETS $ 13,993
===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 227,229
Accrued liabilities 1,187,132
Accrued liabilities - related parties 90,729
Stock subscription payable 25,000
Notes payable 384,500
Notes payable - related parties 16,296
---------------
Total Current Liabilities 1,930,886
---------------
TOTAL LIABILITIES 1,930,886
---------------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock authorized: 10,000,000 preferred shares at $0.001 par
value; -0- issued and outstanding -
Common stock authorized: 275,000,000 common shares at $0.001 par
value; 26,716,274 shares issued and outstanding 26,716
Additional paid-in capital 40,231,499
Unearned compensation (194,300)
Deficit accumulated during the development stage (41,980,808)
---------------
Total Stockholders' Equity (Deficit) (1,916,893)
---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 13,993
===============
The accompanying notes are an integral part of these financial statements.
3
GK INTELLIGENT SYSTEMS, INC.
(A Development Stage Company)
Statements of Operations
(Unaudited)
From
Inception
For the Three For the Nine on October 4,
Months Ended Months Ended 1993 through
September 30, September 30, September 30,
------------------------------- --------------------------------------------------
2003 2002 2003 2002 2003
-------------- --------------- --------------- ----------------- --------------
REVENUES $ - $ - $ - $ - $ 100,156
Cost of sales - - - - 29,961
-------------- --------------- --------------- ----------------- --------------
Gross margin - - - - 70,195
-------------- --------------- --------------- ----------------- --------------
EXPENSES
Loss on disposal of fixed assets - - - - 1,385,199
Depreciation and amortization - - - - 3,458,369
Impairment loss on software - - - - 1,308,520
General and administrative 170,617 206,900 871,246 406,297 36,885,909
-------------- --------------- --------------- ----------------- --------------
Total Costs and Expenses 170,617 206,900 871,246 406,297 43,037,997
-------------- --------------- --------------- ----------------- --------------
LOSS BEFORE OTHER INCOME
(EXPENSE) (170,617) (206,900) (871,246) (406,297) (42,967,802)
-------------- --------------- --------------- ----------------- --------------
OTHER INCOME (EXPENSE)
Interest income - - - - 7,663
Loss on disposition of debt (25,000) - (25,000) - (25,000)
Gain on release of debt - - 2,652,925 2,250 2,728,178
Interest expense (28,595) (84,616) (142,582) (261,853) (1,536,532)
-------------- --------------- --------------- ----------------- --------------
Total Other Income (Expense) (53,595) (84,616) 2,485,343 (259,603) 1,174,309
-------------- --------------- --------------- ----------------- --------------
INCOME (LOSS) BEFORE INCOME
TAXES (224,212) (291,516) 1,614,097 (665,900) (41,793,493)
INCOME TAXES - - - - -
-------------- --------------- --------------- ----------------- --------------
NET INCOME (LOSS) (224,212) (291,516) 1,614,097 (665,900) (41,793,493)
DIVIDENDS ON PREFERRED STOCK - - - - (187,315)
-------------- --------------- --------------- ----------------- --------------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDERS $ (224,212) $ (291,516) $ 1,614,097 $ (665,900) $ (41,980,808)
============== =============== =============== ================= ==============
BASIC INCOME (LOSS) PER SHARE $ (0.01) $ (0.02) $ 0.07 $ (0.03)
============== =============== =============== =================
BASIC WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 24,725,561 15,222,952 22,907,947 19,723,059
============== =============== =============== =================
FULLY DILUTED INCOME PER SHARE $ 0.05
===============
FULLY DILUTED WEIGHTED AVERAGE
NUMBER OF SHARE OUTSTANDING 30,314,597
===============
The accompanying notes are an integral part of these financial statements.
4
GK INTELLIGENT SYSTEMS, INC.
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
From
Inception
For the Nine Months on October 4,
Months Ended 1993 through
September 30, September 30,
--------------------------------------
2003 2002 2003
------------------ ------------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,614,097 $ (665,900) $ (41,793,493)
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Depreciation and amortization - - 3,458,369
Loss on disposal of fixed assets - - 1,385,199
Impairment loss on software - - 1,308,520
Gain on release of debt (2,652,925) (2,250) (2,728,178)
Loss on disposition of debt 25,000 - 25,000
Beneficial conversion on issuance of debt - - 103,068
Amortization of unearned compensation 46,900 263,280 5,929,531
Issuance of common stock, options and warrants
for services 376,898 60,500 13,584,317
Changes in operating assets and liabilities:
Increase in accounts payable and accrued
expenses 280,051 261,470 4,314,750
Increase in accrued liabilities - related party 112,152 77,900 1,209,956
------------------ ------------------ ----------------
Net Cash Used by Operating Activities (197,827) (5,000) (13,202,961)
------------------ ------------------ ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of software - - (915,742)
Other capital expenditures - - (1,651,988)
Organization costs - - (78,745)
------------------ ------------------ ----------------
Net Cash Used by Investing Activities - - (2,646,475)
------------------ ------------------ ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in stock subscription payable 25,000 - 25,000
Proceeds from issuance of note payable - 50,000 1,098,769
Common stock issued for cash 225,000 - 14,024,829
Payments on notes payable - - (306,637)
Proceeds from issuance of notes payable - related party - - 250,000
Payments on notes payable - related party (53,746) - (53,746)
Receipt of subscription receivable - - 779,900
Capital contributed by the Company's president - - 45,314
------------------ ------------------ ----------------
Net Cash Provided by Financing Activities 196,254 50,000 15,863,429
------------------ ------------------ ----------------
NET INCREASE (DECREASE ) IN CASH (1,573) 45,000 13,993
CASH AT BEGINNING OF PERIOD 15,566 - -
------------------ ------------------ ----------------
CASH AT END OF PERIOD $ 13,993 $ 45,000 $ 13,993
================== ================== ================
The accompanying notes are an integral part of these financial statements.
5
GK INTELLIGENT SYSTEMS, INC.
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
From
Inception
For the Nine Months on October 4,
Months Ended 1993 through
September 30, September 30,
--------------------------------------
2003 2002 2003
------------------ ------------------ -----------------
SUPPLEMENTAL SCHEDULE OF CASH FLOW
ACTIVITIES:
Cash Paid For:
Income taxes $ - $ - $ -
Interest $ 2,255 $ - $ 39,255
Schedule of Non-Cash Financing Activities:
Common stock issued for debt $ 153,155 $ 13,583 $ 851,840
Common stock issued for debt- related party $ 102,125 $ 789,062 $ 891,187
Options and warrants issued for debt - related party $ 110,000 $ - $ 110,000
Common stock issued for services - related party $ 10,625 $ 60,000 $ 4,619,748
Options and warrants issued for services $ 20,000 $ - $ 2,461,986
Common stock issued for services $ 346,273 $ 500 $ 6,502,583
Fixed assets distributed for debt $ - $ - $ 42,738
The accompanying notes are an integral part of these financial statements.
6
GK INTELLIGENT SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
September 30, 2003 and 2002
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited 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 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. It is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's December 31, 2002 audited financial statements. Operating results
for the nine months ended September 30, 2003 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2003.
NOTE 2 - GOING CONCERN
The Company's 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 cash or other material assets, nor does it have an established source
of revenue to cover its operating costs and to allow it to continue as a
going concern. The 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. The Company
also continues to pursue the development and marketing of its software to
generate sales to cover the Company's working capital needs and software
development expenditures. 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 - SIGNIFICANT AND SUBSEQUENT EVENTS
Commitments and Contingencies
-----------------------------
On September 14, 2002, an agreed judgment was entered on behalf of Lyon
Financial Services d.b.a. The Manifest Group. It was ordered that GK
Intelligent Systems, Inc. and Gary Kimmons, individually as guarantor, pay
to Lyon Financial Services d.b.a. The Manifest Group the sum of $20,000
with interest at eight percent per annum from September 20, 2001 to the
above date of judgment, as well as $1,500 in attorney's fees. Subsequent to
the judgment for $21,500, the two parties agreed to settle for $12,750. The
Company has paid $7,750 through September 30, 2003.
7
GK INTELLIGENT SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
September 30, 2003 and 2002
NOTE 3 - SIGNIFICANT AND SUBSEQUENT EVENTS (Continued)
Common Stock
------------
During the nine months ended September 30, 2003, the Company issued 900,000
common shares for $225,000 of cash proceeds or $0.25 per share. These
shares were issued pursuant to an October 18, 2002 Private Placement
Memorandum (see further discussion at Note 6).
During the nine months ended September 30, 2003, the Company had issued
3,582,154 common shares to various consultants valued at $0.10 to $0.17 per
share for financial and other related services performed pursuant to
various consulting agreements.
During the nine months ended September 30, 2003, the Company had issued
876,581 common shares to the Company's President/CEO and to a Director
valued at $0.15 to $0.18 per share for the conversion of related party
debt.
During the nine months ended September 30, 2003, the Company had issued
62,500 common shares to a Director of the Company valued at $0.17 per share
for services performed.
Significant Events
------------------
On July 22, 2003, the Company entered into a consulting agreement with an
unrelated individual. Under the agreement, the individual will provide
executive management and public markets consulting and will receive
compensation of $75,000 or 500,000 shares of the Company's common stock
pursuant to the Company's Non-Employee Director and Consultant Retainer
Stock Plan. On August 7 and September 17, 2003, the Company issued 300,000
and 200,000 shares of common stock to the individual as payment in full.
On September 17, 2003, the Company entered into a consulting agreement with
an individual. Under the agreement, the individual will provide
entertainment consulting. Compensation will be in the form of 1,200,000
shares of common stock that were issued on September 30, 2003.
Subsequent Events
-----------------
On October 1, 2003, the Company entered into an agreement with BMA
Ventures, Inc., for the dissemination via fax broadcasting of information
regarding the Company. Pursuant to the terms of the Agreement, BMA received
200,000 restricted shares of common of the company. The securities were
issued pursuant to the exemption from registration provided under Section
4(2) and 4(6) of the Securities Act of 1933.
On October 10, 2003, the Company entered into a Software Distribution
Agreement with NPI Management Group, Inc. (NPI). Pursuant to the agreement,
NPI was granted the worldwide distribution rights for a period of 48 months
to the Company's shrink wrapped boxed software program known as "Around the
Web in 80 Minutes. Within ninety (90) days of the execution of the
Agreement NPI shall invest into the Company a minimum of fifty thousand
dollars ($50,000) to be used solely for the upgrading of the product for
market readiness. Additional investments of cash
8
GK INTELLIGENT SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
September 30, 2003 and 2002
NOTE 3 - SIGNIFICANT AND SUBSEQUENT EVENTS (Continued)
Subsequent Events (Continued)
-----------------------------
from NPI to the Company, up to a maximum of one hundred and fifty thousand
dollars ($150,000) may be necessary and will be determined by mutual
consent of the parties to this agreement based upon on the expert opinions
of the contractors performing the product upgrades. In addition to the
upgrade fee set forth above, NPI shall pay the Company a royalty of fifteen
percent (15%) of all gross revenues for the Software sold, licensed,
delivered or otherwise transferred pursuant to the Agreement by NPI or
anyone acting on its behalf, for its benefit or through a grant of rights
from it. Royalties shall be payable quarterly within ten (10) days
following the close of the quarter during which the royalties accrued with
adjustments following a year-end audit.
On October 28, 2003, the Company issued 500,000 shares of common stock for
Consulting Services. The shares were registered under the Securities Act of
1933 on Form S-8 and registered by coordination in the State of Utah.
On November 5, 2003, the Company entered into a Consulting Services
Agreement with Stanton, Walker & Company. Under the Agreement, Stanton
Walker & Company, shall provide advice and counsel regarding the Company's
strategic business plans, strategy and negotiations with potential business
strategic partnering, corporate planning and or other general business
consulting needs as expressed by Client. In addition to certain ongoing
transaction fees which may be paid pursuant to the terms of the Agreement,
Stanton Walker shall receive an initial fee of 900,000 shares of the common
stock of the Company which shares were registered under the Securities Act
of 1933 on Form S-8 and will be registered by coordination in the State of
New York.
On November 5, 2003, the Company entered into a Compensation Agreement with
Wenthur and Chachas, under which the Company agreed to issue and Wenthur
and Chachas agreed to accept 160,000 shares of common stock as payment of
the balance of $20,000 of legal fees due as of November 5, 2003, and owing
for past legal services provided to the Company. The 160,000 shares were
registered under the Securities Act of 1933 on Form S-8 and are being
registered by coordination pursuant to Section 25111 of the California
Corporations Code.
On November 11, 2003, the Company issued 200,000 restricted shares of
common stock to William and Darlene Brown, and 200,000 restricted shares of
common stock to Fran and Frances Yorek, for consulting and advisory
services provided to the Company. The securities were issued pursuant to
the exemption from registration provided under Section 4(2) and 4(6) of the
Securities Act of 1933.
NOTE 4 - RELEASE OF DEBT
The Company had a total of $2,652,926 of accounts payable, notes payable,
accrued liabilities, and accrued interest, which had been outstanding
longer than four years. According to the Company's legal council, 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, 2003, no such actions to enforce payment of
the obligations have been filed. Accordingly, the amounts have been written
off and a gain on extinguishment of debt of $2,652,926 and $2,250 has been
recorded in the nine months ended September 30, 2003 and 2002,
respectively.
9
GK INTELLIGENT SYSTEMS, INC.
(A Development Stage Company)
Notes to Financial Statements
September 30, 2003 and 2002
NOTE 5 - 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, 2003 and December 31, 2002 and changes during the nine months
ended September 30, 2003 and the year ended December 31, 2002 is presented
below:
2003 2002
------------------------------- ------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------- ---------------- ------------- ---------------
Outstanding, beginning of
year 826,559 $ 0.34 830,309 $ 0.34
Granted 3,380,091 0.35 - -
Expired/Cancelled - - (3,750) 1.25
Exercised - - - -
------------- ---------------- ------------- ---------------
Outstanding end of year 4,206,650 $ 0.34 826,559 $ 0.34
============= ================ ============= ===============
Exercisable 4,206,650 $ 0.34 826,559 $ 0.34
============= ================ ============= ===============
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 2003 Life Price 2003 Price
---------------------- ------------- ------------- ------------- ------------- ---------------
$ 0.10-9.99 4,190,000 4.75 $ 0.10-9.99 4,190,000 $ 1.00
1.00-39.99 10,050 0.75 1.00-39.99 10,050 13.32
40.00-50.00 6,600 1.00 40.00-50.00 6,600 40.91
---------------------- ------------- ------------- ------------- ------------- ---------------
$ 0.10-50.00 4,206,650 3.75 $ 0.01-5.00 4,206,650 $ 2.57
====================== ============= ============= ============= ============= ===============
NOTE 6 - WARRANTS
On October 18, 2002, the Company issued a Private Placement Memorandum
(PPM) to accredited investors as defined in Rule 501 of Regulation 1 of the
Securities Act of 1933. This PPM was for 40 units with each unit consisting
of 100,000 shares of common stock and a warrant to purchase up to 200,000
shares of common stock. Each warrant vests immediately and will be
exercisable for a period of two years from the date of issuance. Each unit
is being offered for $25,000 or $0.25 per share. Each warrant vests
immediately and is exercisable for a period of 2 years at $0.35 per share.
The Company has sold 16 units pursuant to the PPM or 1,600,000 shares of
common stock and 3,200,000 warrants.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
CAUTIONARY FORWARD - LOOKING STATEMENT
--------------------------------------
The following discussion should be read in conjunction with the Company's
financial statements and related notes.
Certain matters discussed herein may contain forward-looking statements
that are subject to risks and uncertainties. Such risks and uncertainties
include, but are not limited to, the following:
- the volatile and competitive nature of the software business,
- the uncertainties surrounding the rapidly evolving markets in
which the Company competes,
- the uncertainties surrounding technological change and the
Company's dependence on computer systems,
- the Company's dependence on its intellectual property rights,
- the success of marketing efforts by third parties,
- the changing demands of customers and
- the arrangements with present and future customers and third
parties.
Should one or more of these risks or uncertainties materialize or should
any of the underlying assumptions prove incorrect, actual results of current and
future operations may vary materially from those anticipated.
Business Overview
-----------------
From inception (October 4, 1993) through March, 1999, the Company has
utilized funds obtained primarily through private placements of restricted
common stock to acquire and develop core software technologies used in the
creation of computer-based training products. The Company's first product,
Around the Web in 80 Minutes, a CD-ROM based internet training course, was
introduced at the COMDEX Fall '98 trade show in mid November 1998 and
subsequently made available to consumers solely through direct sales beginning
in late November 1998. During the first quarter of 1999, in an effort to align
itself with established product distribution companies capable of serving major
national retailers, the Company shifted emphasis from its direct sales approach
to a distributor-based approach and engaged as its marketing representatives
High Altitude Sales and Marketing, Inc. and Computer Generation. As a result,
the Company in turn signed distribution agreements with Ingram Micro, Inc. and
Tech Data Corporation in February and March 1999, respectively. Ingram Micro,
Inc. distributes products and services to more than 115,000 resellers in 120
countries. Tech Data serves more than 100,000 value-added resellers and retail
dealers in the United States, Canada, the Caribbean, Latin America, Europe, and
the Middle East.
To fund its operations, the Company commenced a private placement in
November 1998, which was closed in early May 1999 after raising $3,373,000 for
the sale of 168,650 (post reverse split adjusted) shares of its common stock.
Due to increased marketing costs associated with product rollout the Company
needed additional capital. Unable to secure necessary capital from institutional
sources, the Company attempted a private placement in May 1999 wherein it
offered 240,000 (post reverse split adjusted) units at $2.00 per unit with each
unit consisting of one share of common stock and one warrant to purchase one
share of common stock at an exercise price of $4.00 per share. As of May 13,
1999, no funding had occurred under the new private placement.
11
Thereafter, the Company continued to pursue the private placement of its
securities with accredited investors but was unsuccessful. In May 1999, Gerald
C. Allen requested that Gary F. Kimmons resign as Chief Executive Officer,
claiming that if Mr. Kimmons resigned the Company would receive financing which
would be provided through previous private placement sources. Before a
resignation agreement could be effectuated, the Company at the direction of
Gerald C. Allen announced the resignation of Mr. Kimmons and purported to
appoint Winston Van Bieutenen as Chief Executive. Despite these actions, no
financing was forthcoming as Mr. Allen represented, and on June 11, 1999, Marcus
F. Wray, Jean Paul Dejoria, and Gerald C. Allen all submitted letters of
resignation as officers and directors of the Company. Mr. Kimmons attempted to
resurrect the Company and was unable to do so, and the Company closed its doors
on June 11, 1999.
Statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, and in future filings by the
Company with the Securities and Exchange Commission, in the Company's press
releases and in oral statements made with the approval of an authorized
executive officer which are not historical or current facts are "forward-looking
statements" made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 and are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The following
important factors, among others, in some cases have affected and in the future
could affect the Company's actual results and could cause the Company's actual
financial performance to differ materially from that expressed in any
forward-looking statement: (i) the extremely competitive conditions that
currently exist in the market for "blank check" companies similar to the Company
and (ii) lack or resources to maintain the Company's good standing status and
requisite filings with the Securities and Exchange Commission. The foregoing
list should not be construed as exhaustive and the Company disclaims any
obligation subsequently to revise any forward-looking statements to reflect
events or circumstances after the date of such statements or to reflect the
occurrence of anticipated or unanticipated events.
Plan of Operation
-----------------
The Company has not engaged in any material operations or had any revenues
from operations during the last three fiscal years. The Company's plan of
operation for the next 12 months is to continue to seek the acquisition of
assets, property or business that may benefit the Company and its shareholders.
Because the Company has virtually no resources, management anticipates that to
achieve any such acquisition, the Company will be required to issue shares of
its common stock as the sole consideration for such acquisition.
In the event that the Company contacts or is contacted by a private company
or other entity which may be considering a merger with or into the Company, it
is possible that the Company would be required to raise additional funds in
order to accomplish the transaction. Otherwise, and even though the Company only
possesses nominal funds, as the Company does not engage in any ongoing business
which requires the routine expenditure of funds, the Company would not be
required to raise additional funds during the next twelve months. The Company
does not routinely expend any funds for the ownership or lease of property, as
any routine activities are being conducted out of an office made available by
the Company's President.
12
During the next 12 months, the Company's only foreseeable cash requirements
will relate to maintaining the Company in good standing and making the requisite
filings with the Securities and Exchange Commission and the payment of expenses
associated with reviewing or investigating any potential business venture, which
may be advanced by management or principal shareholders, or as loans to the
Company. Because the Company has not identified any such venture as of the date
of this Report, it is impossible to predict the amount of any such loan.
However, any such loan will not exceed $25,000 and will be on terms no less
favorable to the Company than would be available from a commercial lender in an
arm's length transaction. Management may at its discretion raise any required
funds through any private placement of "unregistered" and "restricted"
securities or any public offering of its common stock.
Results of Operations
---------------------
The Company had no net revenues for the three months and nine months ended
September 30, 2003 and 2002. The Company had operating expenses of $170,617 for
the three months ending September 30, 2003 compared to $206,900 for the
comparative period of 2002. The Company had operating expenses of $871,246 for
the nine months ended September 30, 2003 compared to $406,297 for the same
period in 2002. The increase was due to the issuance of shares of the Company's
common stock to consultants who are assisting in reviving the Company's
operations. The consultants are developing the Company's business plan and
providing legal and accounting services. The Company paid $376,898 and $60,500
of these expenses through the issuance of common stock, options and warrants, in
2003 and 2002 respectively.
The Company unsuccessfully launched its product sales in the first six
months of 1999. The Company was unable to raise sufficient capital to sustain
its marketing effort and closed its offices and terminated most of the personnel
in June of 1999. The Company's expenses are accruals of officer compensation and
interest on its liabilities. The Company was inactive until the second quarter
of 2002.
Liquidity
---------
During the nine months ended September 30, 2003 and 2002, the Company used
cash in operations of $197,827 and $5,000, respectively. The Company had cash on
hand of $13,993 as of September 30, 2003 compared to $45,000 cash as of
September 30, 2002. The Company received $225,000 from the sale of common stock
and also received $25,000 in a stock subscription payable. during the nine
months ended September 30, 2003. The State of Texas provides that any
liabilities not paid or reduced to a judgment within four years of the date
incurred are not legally collectible. During the nine months ended September 30,
2003, $2,652,925 of the Company's liabilities fell beyond this statute of
limitations accordingly the Company recorded a gain on the release of debt for
this amount. The Company used $53,746 to repay a loan from an officer in 2003.
The Company ceased operations in 1999 and was inactive in 2000 and 2001.
13
Item 3. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures. Our principal
executive officer and principal financial officer have evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Exchange Act), as of a date within 90 days of
the filing date of this Quarterly Report on Form 10-QSB. Based on such
evaluation, they have concluded that as of such date, our disclosure controls
and procedures are effective and designed to ensure that information required to
be disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in applicable SEC rules and forms.
(b) Changes in internal controls. There were no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of evaluation by our principal executive officer
and principal financial officer.
PART II - OTHER INFORMATION.
Item 1. Legal Proceedings.
The Company is not a party to any pending legal proceedings and is not
aware of any pending claims or assessments that may have a material adverse
impact on the Company's financial position or results of operations.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of our shareholders during the third
quarter.
Item 5. Other Information.
Consulting Agreement with W. Andrew Stack
-----------------------------------------
On July 22, 2003, the Company entered into a Consulting Agreement to retain
the services of W. Andrew Stack for a period of three months. Under the
Agreement, Mr. Stack is to provide certain legal services and meet with and
advise certain members of the Company's executive management regarding a
comprehensive program of positioning the Company and its publicly traded
securities within the marketplace to optimize exposure to customers and
potential shareholders. Mr. Stack will also assist the Company in devising an
internal protocol for corporate governance in light of the recently enacted
Sarbanes Oxley legislation. The fee for Mr. Stack's services is $75,000, which
was paid in the form of 500,000 shares of the common stock of the company which
shares were registered under the Securities Act of 1933 on Form S-8 and
registered by qualification pursuant to Section 304 of the Oklahoma Securities
Act.
14
Consulting Agreement with Gust C. Kepler
----------------------------------------
On September 17, 2003, the Company entered into a Consulting Agreement with
Gust C. Kepler for a period of 12 months. Under the Agreement, Mr. Kepler shall
advise the Company regarding entertainment consulting issues that may arise as a
result of negotiations with other music industry entities or artists, promote
the Company to assist in building industry presence for the Client and business
model, assist the Company in obtaining, negotiating and structuring licensing
agreements for artists, labels, and assist the Company with introductions to key
music and entertainment industry personnel to assist in developing and marketing
the Company's website and interactive technology systems. The fee for Mr.
Kepler's services is $72,000, which was paid in the form of 1,200,000 shares of
the common stock of the company which shares were registered under the
Securities Act of 1933 on Form S-8 and registered by qualification pursuant to
Section 48-2-105 of the Tennessee Securities Act of 1980.
Compensation Agreement with Wenthur & Chachas, LLP
--------------------------------------------------
On September 17, 2003, the Company entered into a Compensation Agreement
with Wenthur & Chachas, under which the Company agreed to issue and Wenthur &
Chachas agreed to accept 500,000 shares of common stock as payment of $25,000 of
legal fees due and owing for past legal services provided to the Company. The
500,000 shares were registered under the Securities Act of 1933 on Form S-8 and
registered by coordination pursuant to Section 25111 of the California
Corporations Code.
Recent Sale of Unregistered Securities
--------------------------------------
On July 2, 2003, the Company issued 100,000 restricted shares of common
stock to Strategic Resources International, Inc., pursuant to the terms of that
certain Financial Public Relations Agreement dated April 24, 2003. No
underwriters were used. The securities were issued pursuant to an exemption from
registration provided under Section 4(2) and 4(6) of the Securities Act of 1933.
During the quarter ended September 30, 2003, the Company sold 1 Unit at a
price of $25,000 per Unit (1/2 Unit to two individuals), under its Private
Placement Memorandum dated October 18, 2002. Each Unit consists of 100,000
restricted shares of Common Stock and a Warrant to purchase 200,000 restricted
shares of Common Stock. Each Warrant vests immediately and is exercisable for a
period of two years from date of issuance at an exercise price of $0.35 per
share. No underwriters were used. The securities were issued pursuant to an
exemption from registration provided under Section 4(2) and 4(6) of the
Securities Act of 1933.
Subsequent Events
-----------------
Dissemination Agreement with BMA Ventures, Inc.
----------------------------------------------
On October 1, 2003, subsequent to the period covered by this report,, the
Company entered into an agreement with BMA Ventures, Inc., for the dissemination
via fax broadcasting of information regarding the Company. Pursuant to the terms
of the Agreement, BMA received 200,000 restricted shares of common of the
company. The securities were issued pursuant to an exemption from registration
provided under Section 4(2) and 4(6) of the Securities Act of 1933.
15
Distribution Agreement with NPI Management Group, Inc.
-----------------------------------------------------
On October 10, 2003, subsequent to the period covered by this report, the
Company entered into a Software Distribution Agreement with NPI Management
Group, Inc. Pursuant to the agreement, NPI was granted the worldwide
distribution rights for a period of 48 months to the Company's shrink wrapped
boxed software program known as "Around the Web in 80 Minutes." Within ninety
(90) days of the execution of the Agreement NPI shall invest into the Company a
minimum of fifty thousand dollars ($50,000) to be used solely for the upgrading
of the product for market readiness. Additional investments of cash from NPI to
the Company, up to a maximum of one hundred and fifty thousand dollars
($150,000) may be necessary and will be determined by mutual consent of the
parties to this agreement based on the expert opinions of the contractors
performing the product upgrades. In addition to the upgrade fee set forth above,
NPI shall pay the Company a royalty of fifteen percent (15%) of all gross
revenues for the Software sold, licensed, delivered or otherwise transferred
pursuant to the Agreement by NPI or anyone acting on its behalf, for its benefit
or through a grant of rights from it. Royalties shall be payable quarterly
within ten (10) days following the close of the quarter during which the
royalties accrued with adjustments following a year-end audit.
Issued of Shares to Gordon Jones
--------------------------------
On October 28, 2003, the Company issued 500,000 shares of common stock to
Gordon Jones for Consulting Services provided to the Company. The shares were
registered under the Securities Act of 1933 on Form S-8 and registered by
coordination in the State of Utah.
Consulting Agreement with Stanton, Walker & Company
---------------------------------------------------
On November 5, 2003, subsequent to the period covered by this report, the
Company entered into a Consulting Services Agreement with Stanton, Walker &
Company. Under the Agreement, Stanton Walker Mr. Kepler shall provide advice and
counsel regarding the Company's strategic business plans, strategy and
negotiations with potential business strategic partnering, corporate planning
and or other general business consulting needs as expressed by Client. In
addition to certain ongoing transaction fees which may be paid pursuant to the
terms of the Agreement, Stanton Walker shall receive an initial fee of 900,000
shares of the common stock of the company which shares were registered under the
Securities Act of 1933 on Form S-8 and will be registered by coordination in the
State of New York.
Compensation Agreement with Wenthur & Chachas, LLP
--------------------------------------------------
On November 5, 2003, subsequent to the period covered by this report, the
Company entered into a Compensation Agreement with Wenthur & Chachas, under
which the Company agreed to issue and Wenthur & Chachas agreed to accept 160,000
shares of common stock as payment of the balance of $20,000 of legal fees due as
of November 5, 2003, and owing for past legal services provided to the Company.
The 160,000 shares were registered under the Securities Act of 1933 on Form S-8
and are being registered by coordination pursuant to Section 25111 of the
California Corporations Code.
16
Recent Sale of Unregistered Securities
--------------------------------------
On November 11, 2003, subsequent to the period covered by this report, the
Company issued 200,000 restricted shares of common stock to William and Darlene
Brown, and 200,000 restricted shares of common stock to Frank and Frances Yorek,
for consulting and advisory services provided to the Company. The securities
were issued pursuant to an exemption from registration provided under Section
4(2) and 4(6) of the Securities Act of 1933.
Item 6. Exhibits and Reports on Form 8-K.
(a) List of Exhibits attached or incorporated by referenced pursuant to
Item 601 of Regulation S-B.
Exhibit Description
3.1* Certificate of Incorporation of the Company and Amendments thereto.
3.2* By-laws of the Company;
3.3* Amendment to Certificate of Incorporation
3.4* Certificate of Amendment to Certificate of Incorporation
10.11* Consulting Agreement with Berkshire Capital Management Co., Inc.
10.12* Consulting and Finder's Fee Agreement with The Herman Group, L.P.
10.13* Engagement Letter with Petty International Development Corp.
10.14* Consulting Agreement with Ron Sparkman.
10.15* Consulting Agreement with Rockne J. Horvath.
10.16* Consulting Agreement with Stephen K. Carper.
10.17* Consulting Agreement with Renee H. Ethridge.
10.18* Consulting Agreement with Technical Objective, Inc.
10.19* Debt Resolution Agreement with Gary F. Kimmons.
10.20* Interim Compensation Agreement with Gary F. Kimmons.
10.21* Amended and Restated Consulting Agreement with Dick Meador.
10.22* Promissory Note to BDO Seidman LLP.
10.23* Consulting Agreement with Alan S. Litvak.
10.24* Promissory Note to Gary Kimmons.
10.25* Marketing Agreement with BTH2
10.26* Consulting Agreement with AfterpPlay Entertainment Inc. dated 12/12/02
10.27* Consulting Agreement with Suns Associates Group dated 12/13/02
10.28* Non-Employee Director Agreement with Dick Mead dated 3/31/03
10.29* Employment Agreement with Gary F. Kimmons dated 2/1/03
10.30* GK Intelligent Systems, Inc. 2003 Stock Option Plan
10.31* GK Intelligent Systems, Inc. Non-Employee Directors and Consultants Retainer Stock Plan for the Year 2003
10.32* Financial Public Relations Agreement with Strategic Resources dated 4/24/03
10.33* Settlement Agreement with Brewer & Pritchard dated 4/28/03
10.34* Consulting Agreement with Sage Office Solutions dated 5/4/03
10.35* Consulting Agreement with Donald Giebler dated 5/14/03
10.36* Consulting Agreement with Benchmark Consulting dated 5/30/03
10.37* Registration Rights Agreement with Benchmark Consulting dated 5/30/03
10.38* Benchmark Consulting Warrant Dated 5/30/03
10.39* Consulting Agreement with W. Andrew Stack dated 7/22/03
10.40* Consulting Agreement with Gust C. Kepler dated 9/17/03
10.41* Consulting Agreement with Wenthur & Chachas dated 9/17/03
10.42** BMA Ventures, Inc. Agreement
10.43* Distribution Agreement with NPI
10.44* Consulting Services Agreement with Stanton, Walker & Company
10.45* Consulting Agreement with Wenthur & Chachas dated 11/5/03
21** Subsidiaries
99.1** Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
99.2** Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
99.3** 906 Certification
-----------------------
* Previously filed.
** Filed herewith.
(b) Reports on Form 8-K.
The Company filed reports on Form 8-K on August 8, 2003, September 19,
2003, and September 24, 2003. There were no other reports on Form 8-K filed
during the period covered by this report.
Subsequent to the period covered by this report the Company filed reports
on Form 8-K on October 2, 2003, October 9, 2003, October 14, 2003, October 27,
2003, October 28, 2003, and November 10, 2003,
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
GK Intelligent Systems, Inc.
Dated: November 17, 2003 /S/ Gary F. Kimmons
--------------------------------------
By: Gary F. Kimmons
Its: President, Chief Executive Office
and Chief Financial Officer
18