U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: August 31, 2003
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from ________________ to __________________
Commission file number 000-33231
Hy-Tech Technology Group, Inc.
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(Exact name of small business issuer as specified in its charter)
Delaware 95-4868120
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1840 Boy Scout Drive, Fort Myers, Florida 33907
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(Address of principal executive offices)
(239) 278-4111
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(Issuer's telephone number)
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(Former Name, Former Address and Former Fiscal Year, if Changed Since
Last Report)
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 practical date: 55,999,073 as of October 1,
2003
Transitional Small Business Disclosure Format (check one).
Yes [ ]; No [X]
1
Hy-Tech Technology Group, Inc.
August 31, 2003
Quarterly Report on Form 10-QSB
Table of Contents
Page
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Special Note Regarding Forward Looking Statements.................................................3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.....................................................................4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....9
Item 3. Controls and Procedures.................................................................13
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds...............................................13
Item 6. Exhibits and Reports on Form 8-K........................................................14
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
To the extent that the information presented in this Quarterly Report
on Form 10-QSB for the quarter ended August 31, 2003, discusses financial
projections, information or expectations about our products or markets, or
otherwise makes statements about future events, such statements are
forward-looking. We are making these forward-looking statements in reliance on
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Although we believe that the expectations reflected in these
forward-looking statements are based on reasonable assumptions, there are a
number of risks and uncertainties that could cause actual results to differ
materially from such forward-looking statements. These risks and uncertainties
are described, among other places in this Quarterly Report, in "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
In addition, we disclaim any obligations to update any forward-looking
statements to reflect events or circumstances after the date of this Quarterly
Report. When considering such forward-looking statements, you should keep in
mind the risks referenced above and the other cautionary statements in this
Quarterly Report.
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS Page
----
Consolidated Condensed Balance Sheets as of August 31, 2003 and February 28, 2003 (unaudited) ...........5
Consolidated Condensed Statements of Operations for the three and six months ended August 31,
2003 and August 31, 2002 (unaudited) ..............................................................6
Consolidated Condensed Statement of Cash Flows for the six months ended August 31, 2003
(unaudited) .......................................................................................7
Notes to Consolidated Condensed Financial Statements.....................................................8
4
HY-TECH TECHNOLOGY GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
August 31, 2003 February 28, 2003
----------- -----------
ASSETS
Current Assets
Cash $ 48,147 $ 165,149
Accounts receivable, net 521,963 1,468,375
Other receivables 9,670 10,200
Inventories, net 817,388 1,739,698
Prepaid expenses 120,697 31,114
----------- -----------
Total current assets 1,517,865 3,414,536
Property and equipment, net 525,530 843,080
Other assets 75,364 72,331
----------- -----------
Total assets $ 2,118,759 $ 4,329,947
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 1,961,459 $ 2,079,594
Accrued expenses 422,682 409,512
Notes payable 65,000 --
Line of credit -- 2,886,000
Advances -- 278,236
Loans payable - shareholders -- 105,000
Current portion of loans payable -- 1,479,639
Sales taxes payable 33,040 --
----------- -----------
Total current liabilities 2,482,181 7,237,981
Long-term liabilities
Loan payable, net of current portion -- 81,325
Convertible debt 424,566 --
----------- -----------
Total liabilities 2,906,747 7,319,306
Commitment and contingencies
Shareholders' Equity
Common stock 2,184,214 24,028
Accumulated deficit (2,972,201) (3,013,387)
Total shareholders' deficit (787,988) (2,989,359)
----------- -----------
Total liabilities and shareholders'
deficit $ 2,118,759 $ 4,329,947
=========== ===========
5
HY-TECH TECHNOLOGY GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
August 31, August 31,
---------------------------------- ----------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net revenues $ 3,354,614 $ 7,397,311 $ 7,350,944 $ 13,432,041
Cost of revenues 2,838,396 6,378,739 6,440,749 11,443,723
------------ ------------ ------------ ------------
Gross margin 516,218 1,018,572 910,195 1,988,318
General, administrative and selling 1,013,545 1,160,812 2,385,515 2,478,022
------------ ------------ ------------ ------------
Loss from operations (497,327) (142,240) (1,475,320) (489,704)
------------ ------------ ------------ ------------
Other income (expense)
Other income (expense) 0 3,727 (6,288) 6,948
Gain on settlement of debt 0 0 1,655,601 0
Interest (125,745) (113,629) (132,807) (156,481)
------------ ------------ ------------ ------------
(125,745) (109,902) 1,516,506 (149,533)
------------ ------------ ------------ ------------
Net income (loss) $ (623,072) $ (252,142) $ 41,186 $ (639,237)
============ ============ ============ ============
Net income (loss) per share:
Net income (loss) - basic and
diluted $ (0.02) $ (0.02) $ 0.00 $ (0.04)
============ ============ ============ ============
Weighted average shares outstanding:
Basic and diluted 31,946,290 16,000,000 30,092,182 16,000,000
============ ============ ============ ============
6
HY-TECH TECHNOLOGY GROUP, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended August 31,
--------------------------------
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 41,186 $ (639,237)
Adjustments to reconcile net income (loss) to cash provided
provided by operating activities:
Depreciation and amortization 203,997 194,350
Gain on settlement of debt (1,655,601) --
Gain on disposition of assets (56,686) --
Common stock for services 132,000 --
Bad debt expense 20,000 --
Changes in assets and liabilities:
Accounts receivable 926,412 (91,200)
Inventories 922,310 708,692
Other receivables 529 171,428
Prepaid expenses (89,583) 13,466
Other assets (3,033) 4,561
Accounts payable (118,135) 695,999
Accrued expenses and sales taxes payable 46,210 (378,727)
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CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 369,606 679,332
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (30,071) (560,430)
Proceeds from disposition of assets 200,310 --
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES 170,239 (560,430)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings from (payments on) line of credit (1,603,139) 66,000
Proceeds from loans 1,050,000 --
Payments of loan payable (80,978) (96,716)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES (634,117) (30,716)
----------- -----------
NET INCREASE (DECREASE) IN CASH (117,002) 88,186
Cash, beginning of period 165,149 65,962
----------- -----------
Cash, end of period $ 48,147 $ 154,148
=========== ===========
Non-cash transactions:
Conversion of convertible notes for common stock $ 625,434 $ --
=========== ===========
Stock issued for advances $ 278,236 $ --
=========== ===========
7
HY-TECH TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Presentation
The consolidated condensed balance sheet of the Company as of August 31, 2003,
the related consolidated condensed statements of operations for the three and
six months ended August 31, 2003 and 2002 and the consolidated condensed
statement of cash flows for the six months ended August 31, 2003 included in the
consolidated condensed financial statements have been prepared by the Company
without audit. In the opinion of management, the accompanying condensed
financial statements include all adjustments (consisting of normal, recurring
adjustments) necessary to summarize fairly the Company's financial position and
results of operations. The results of operations for the three and six months
ended August 31, 2003 are not necessarily indicative of the results of
operations for the full year or any other interim period. The information
included in this Form 10-QSB should be read in conjunction with Management's
Discussion and Analysis and Financial Statements and notes thereto included in
the Company's February 28, 2003 Form 10-KSB.
Consolidation
The accompanying consolidated financial statements include the accounts of
Hy-Tech Technology Group and its wholly-owned subsidiary, Hy-Tech Computer
Systems. Intercompany accounts and transactions were eliminated in
consolidation.
Use of Estimates
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent liabilities as of the date of the financial statements
and reporting period. Accordingly, actual results could differ materially from
those estimates.
Convertible Debenture
In April 2003, Hy-Tech issued a convertible debenture for $1,000,000 due in
April 2008. The convertible debenture is convertible into common stock at the
lesser of (a) $0.35 per share or 125% of the average closing bid prices per
share of the Company's Common Stock during the five trading days immediately
preceding April 29, 2003 or (b) 100% of the average of the three lowest closing
bid prices for the forty days preceding the date of conversion. In connection
with the financing, Hy-Tech paid a fee of $100,000. The convertible debentures
if not converted are due in August 2008. As of August 31, 2003, the outstanding
convertible debentures totaled $424,566.
Subsequent Event
8
On October 7, 2003, the convertible debentures were fully converted to common
stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BACKGROUND
We were formed in 1992 as a supplier to the information technology
business. In January 31, 2003, we completed a reverse acquisition into SRM
Networks, an Internet service provider, in which we were deemed the "accounting
acquirer". We have discontinued SRM Network's Internet business. In connection
with the transaction, SRM Networks, Inc. changed its name to Hy-Tech Technology
Group, Inc.
In May 2003, Martin Nielson assumed full time responsibilities as CEO,
brought new investors to the company, and is attempting to transform Hy-Tech
Technology Group, Inc. from a custom systems builder and an authorized
distributor of the world's leading computer systems and components to a
solutions provider offering an expanding range of services and software to its
customer base. During the fiscal first quarter, the Company took steps necessary
to design this new business strategy and during the second quarter the Company
began to implement this strategy. This new business strategy also seeks growth
by acquisition as well as organic growth..
During this period, a number of significant steps were taken to prepare
the Company for the launch of this new plan. Among these steps taken were: o
construction of the details of the new plan o restructuring of the personnel,
including identifying new additions to management o reduction of costs and
writing off unproductive assets o engagement of key professionals, including
investment banking teams o negotiating with sources of new investment o
identifying and negotiating with acquisition targets
This plan is now being implemented over the course of the next few
quarters, the plan should become more evident as execution of portions of the
expansion processes commence.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
condensed consolidated financial statements and related notes included elsewhere
is this report. Except for the historical financial information contained
herein, the matters discussed in this Quarterly Report on Form 10-QSB may be
considered "forward-looking" statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Act of
1934, as amended. Such statements include declarations regarding the intent,
beliefs or current expectations of our management. Such forward-looking
statements are not guarantees of future performance and involve a number of
risks and uncertainties. We undertake no obligation to publicly release the
results of any revision to these forward-looking statements, which may be made
to reflect events or circumstances after the dates hereof or to reflect the
occurrence of unanticipated events.
9
The following discussion compares the three and six months ended August
31, 2003 to the three and six months ended August 31, 2002.
During the three and six months ended August 31, 2003 (the "2003
Periods") net revenues were $3,354,614 and $7,350,944, respectively, compared to
revenues of $7,397,311 and $13,432,041 for the three and six months ended August
31, 2002 (the "2002 Periods"). This represents a decrease of approximately 54.7%
and 45.3% from the 2002 Periods. This decrease is due to restrictions on our
inventory purchases that were imposed by our primary lender and the general
decrease in the information technology business that occurred during the 2003
Period as compared to the 2002 Period.
Gross margins for the three and six months ended August 31, 2003 were
$516,218 and $910,195, respectively, compared to gross margins of $1,018,572 and
$1,988,318 for the three and six months ended August 31, 2002. Gross margins as
a percentage of net revenues were 15.4% and 12.4% for the three and six months
ended August 31, 2003, respectively, compared to 13.8% and 14.8% for three and
six months ended August 31, 2002, respectively. The decrease in gross margins
for the six months ended August 31, 2003 resulted in part from the sale of older
and slower moving inventory so that we could adjust our product line to more
profitable items. To a lesser extent, this decrease in gross margins was due to
our having to purchase inventory from higher cost vendors due to the lack of
liquidity that resulted from our lending arrangements.
General, administrative and selling expenses for the three and six
months ended August 31, 2003 were $1,013,545 and $2,385,515, respectively,
compared to $1,160,310 and $2,478,022 for the three and six months ended August
31, 2002. Of the general, administrative and selling expenses, approximately
$425,000 incurred during the three and six months ended August 31, 2003 were
attributed to fundraising costs and the Company's reverse acquisition into SRM
Networks and its obligations as a reporting company under the securities laws
during the 2003 Periods with no comparable expenses during the 2002 Periods. The
overall decrease in the 2003 Periods was primarily due to cost reduction efforts
initiated by the Company in the fiscal first quarter.
Interest expense for the three and six months ended August 31, 2003
were $125,745 and $132,807, respectively, compared to $113,629 and $156,481 for
the three and six months ended August 31, 2002.
During the 2003 Periods we had a gain on the settlement of debt of
$1,665,601, with no comparable gain during the 2002 Periods. This gain arose
from the settlement of our debt with our primary lender, SunTrust Bank.
Net income (loss) for the three and six months ended August 31, 2003
were $623,072 loss and $41,186 income, respectively, compared to net loss of
$252,142 and $639,237 for the three and six months ended August 31, 2002.
10
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 2003, we had cash of $48,147, current assets of
$1,517,865 and current liabilities of $2,482,181. At August 31, 2003, we had
negative working capital of $964,316, compared to negative working capital of
$2,416,010 as of May 31, 2003.
On April 29, 2003, we settled the claims of our primary lender,
SunTrust Bank pursuant to a Settlement Agreement for aggregate payments of $1.5
million. Under the terms of the Settlement Agreement, we delivered $1 million
dollars to SunTrust on April 29, 2003. This $1 million represented all of the
proceeds of the sale of a convertible debenture that was issued to a private
investor. We also agreed to pay the balance owed to SunTrust in three
installments. All of these installments have been paid and SunTrust has released
the Company from all of its claims.
We are overdue with payments to numerous vendors. Four of our vendors
have pending litigation against us for claims of approximately $430,000. One
vendor who commenced litigation with a claim of approximately $128,000 settled
with us for fifteen payments of $5,000 each, the first payment of which has been
made. Two vendors with aggregate claims of approximately $229,000 have
threatened to commence litigation. We settled with one of these vendors for a
total $36,000 in periodic payments. We are in the process of negotiating payment
terms with all of the vendors who have not agreed to terms.
We believe that cash generated from operations will in all
likelihood be insufficient to fund our ongoing operations through the next
twelve months. Although we have received some equity and debt financing, efforts
are underway to secure additional financing to enable us to meet our
obligations, as execution of our business plan may require additional capital to
fund. We currently have certain financing agreements in place for potential
sources of financing but there can be no assurance that we will be able to
successfully raise such additional funds or that such funds will be available on
acceptable terms. Funds raised through future equity financing will likely be
dilutive to our current shareholders. The incurrence of indebtedness would
result in an increase in our fixed obligations and could result in borrowing
covenants that would restrict our operations. There can be no assurance that
financing will be available in sufficient amounts or on terms acceptable to us,
if at all. If financing is not available when required or is not available on
acceptable terms, we may be unable to develop or enhance our products or
services. In addition, we may be unable to take advantage of business
opportunities or respond to competitive pressures. Any of these events could
have a material and adverse effect on our business, results of operations and
financial condition. Lack of additional funds will materially affect our
business and may cause us to cease operations. Consequently, shareholders could
incur a loss of their entire investment in the Company. Our financial statements
were prepared on the assumption that we will continue as a going concern. The
report of our independent accountants for the year ended February 28, 2003
acknowledges that we have incurred losses in each of the last two fiscal years
and that we will require additional funding to sustain our operations. These
conditions cause substantial doubt as to our ability to continue as a going
concern. Our financial statements included herein do not include any adjustments
that might result should we be unable to continue as a going concern.
11
RISKS AND UNCERTAINTIES
Our business is subject to the effects of general economic conditions, and in
particular, market conditions in the software and computer industries. Our
operating results have been and continue to be adversely affected as a result of
the recent unfavorable global economic conditions and reduced consumer spending
in the high tech sector. These adverse economic conditions in the U.S., may
continue in the short term, and they may continue to adversely affect our
revenue and earnings. If these economic conditions do not improve, or if we
experience a continued weakening of the economy or technology spending, we may
experience material adverse impacts on our business.
Other Factors That May Affect Future Results of Operations:
o delays in shipment or availability of existing products
o introduction of new products by major competitors
o weakness in demand for hardware and components
o lack of growth in worldwide personal computer sales
o corporate reductions in IT spending
o inability to integrate companies and products we acquire
o industry transitions to new business and information delivery
models
o changes occurring in the global market conditions affecting
our customers
Statements included in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" which are not historical facts are
forward-looking statements. These forward-looking statements involve risks and
uncertainties that could render them materially different, including, but not
limited to, the risk that new products and product upgrades may not be available
on a timely basis, the risk that such products and upgrades may not achieve
market acceptance, the risk that competitors will develop similar products and
reach the market first, and the risk that the Company would not be able to fund
its working capital needs from cash flow.
12
ITEM 3. CONTROLS AND PROCEDURES
Our principal executive officer and principal financial officer
evaluated the effectiveness of our disclosure controls and procedures as (as
such term is 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
report. Based on this evaluation, our principal executive officer and principal
financial officer have concluded that our controls and procedures are effective
in providing reasonable assurance that the information required to be disclosed
in this report is accurate and complete and has been recorded, processed,
summarized and reported as of the end of the period covered by this report.
During the fiscal quarter covered by this report, there have not been any
significant changes in our internal controls or, to our knowledge, in other
factors that could significantly affect our internal controls.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
On April 28, 2003, the Company acquired by merger Sanjay Haryama
("SH"), a company that had completed a $1,000,000 financing transaction pursuant
to Rule 504 of Regulation D of the General Rules and Regulations under the
Securities Act of 1933 as amended pursuant to a Convertible Debenture Purchase
Agreement (the "Purchase Agreement") dated April 21, 2003 between SH and HEM
Mutual Assurance Company, an accredited Colorado investor (the "Investor"). In
connection therewith, SH sold a 1% $1,000,000 Convertible Debenture due April
20, 2008 (the "SH Debenture") to the Investor. The unpaid principal amount of
the SH Debenture was convertible into unrestricted shares of SH common stock to
be held in escrow pending the repayment or conversion of the SH Debenture.
Pursuant to the merger, the Company assumed all obligations of SH under the SH
Debenture and issued the holder thereof its 1 % $1,000,000 Convertible Debenture
due April 28, 2008 (the "Convertible Debenture") in exchange for the SH
Convertible Debenture. The material terms of the Convertible Debenture are
identical to the terms of the SH Convertible Debenture except that the unpaid
principal amount of the Convertible Debenture is convertible into unrestricted
shares of the Company's Common Stock (the "Common Stock"). The per share
conversion price for the Convertible Debenture in effect on any conversion date
is the lesser of (a) $0.35 or one-hundred twenty-five percent (125%) of the
average of the closing bid prices per share of the Company's Common Stock during
the five (5) trading days immediately preceding April 29, 2003 or (b) one
hundred percent (100%) of the average of the three (3) lowest closing bid prices
per share of the Company's Common Stock during the forty (40) trading days
immediately preceding the date on which the holder of the Convertible Debenture
provides the escrow agent with a notice of conversion. The number of shares of
the Company's Common Stock issuable upon conversion is also subject to
anti-dilution provisions. The Investor's right to convert the Convertible
Debenture is subject to the limitation that the Investor may not at any time own
more than 4.99% of the outstanding Common Stock of the Company, unless the
Company is in default of any provision of the Convertible Debenture or the
Investor gives seventy five (75) days advance notice of its intent to exceed the
limitation.
13
During the fiscal quarter covered by this report, the Investor
converted an aggregate of $325,434 principal amount of the Debenture and accrued
interest into an aggregate of 7,533,844 shares of the Company's common stock.
After the fiscal quarter, the principal balance of the Debenture was fully
converted into shares of the Company's common stock.
14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Rule 13(a)-14(a)/15(d)-14(a) Certification of Principal
Executive Officer
31.2 Rule 13(a)-14(a)/15(d)-14(a) Certification of Principal
Financial Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
(b) Reports on Form 8-K
None.
15
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, hereunto duly
authorized.
Hy-Tech Technology Group, Inc.
Dated: October 14, 2003 By: /s/ Martin Nielson
--------------------------------
Martin Nielson
Chief Executive Officer