CALIFORNIA
|
95-2873122
|
|
(State
or other jurisdiction of incorporation or organization)
|
(IRS
Employer identification No.)
|
Page
|
||
Part
I. FINANCIAL INFORMATION
|
||
Item
1. Financial Statements:
|
||
Condensed
Consolidated Balance Sheet at March 31, 2006 (Unaudited)
|
3
|
|
Condensed
Consolidated Statements of Operations and Comprehensive Income
(Loss)
|
||
For
the Nine and Three Months Ended March 31, 2006 and 2005
(Unaudited)
|
5
|
|
Condensed
Consolidated Statements of Cash Flows
|
||
For
the Nine Months Ended March 31, 2006 and 2005 (Unaudited)
|
6
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
8
|
|
Item
2. Management’s Discussion and Analysis of Financial
|
||
Condition
and Results of Operations
|
20
|
|
Item
3. Controls and Procedures
|
32
|
|
Part
II. OTHER INFORMATION
|
||
Item
1. Legal Proceedings
|
33
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
33
|
|
Item
3. Defaults Upon Senior Securities
|
33
|
|
Item
4. Submission of Matters to a Vote of Security Holders
|
33
|
|
Item
5. Other Information
|
33
|
|
Item
6. Exhibits
|
33
|
|
SIGNATURES
|
34
|
|
EXHIBIT
INDEX
|
35
|
March
31,
|
||||
2006
|
||||
ASSETS
|
||||
Current
|
||||
Cash
and cash equivalents
|
$
|
81,997
|
||
Trade
receivables, less allowance for doubtful
|
||||
accounts
of $53,250
|
661,796
|
|||
Inventories
|
133,534
|
|||
Prepaid
expenses
|
46,351
|
|||
Miscellaneous
receivables
|
37,328
|
|||
Total
current assets
|
961,006
|
|||
Property,
equipment, and leasehold
|
||||
improvements,
net of accumulated depreciation of $715,896
|
85,734
|
|||
Capitalized
software development costs,
|
||||
net
of accumulated amortization of $1,802,426
|
50,725
|
|||
Other
assets
|
||||
Deferred
offering costs
|
529,854
|
|||
Other
|
23,475
|
|||
Total
other assets
|
553,329
|
|||
$
|
1,650,794
|
March
31,
|
||||
2006
|
||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
||||
Current
liabilities
|
||||
Notes
payables - related parties
|
$
|
47,997
|
||
Notes
payables - Line of credit-related party
|
385,000
|
|||
Accounts
payable
|
385,006
|
|||
Accrued
expenses
|
168,593
|
|||
Deferred
income
|
351,918
|
|||
Total
liabilities, all current
|
1,338,514
|
|||
Commitments
and contingencies
|
||||
(Notes
4 through 7)
|
||||
Stockholders’
equity (deficit)
|
||||
Common
stock, 80,000,000 shares authorized;
|
||||
10,724,312
shares issued and outstanding
|
3,058,510
|
|||
Additional
paid-in capital
|
291,462
|
|||
Accumulated
deficit
|
(3,003,869
|
)
|
||
Unearned
stock compensation
|
(8,065
|
)
|
||
Common
stock to be redeemed
|
(25,758
|
)
|
||
Total
stockholders’ equity (deficit)
|
312,280
|
|||
Total
liabilities and stockholders’
|
||||
equity
(deficit)
|
$
|
1,650,794
|
Nine
Months Ended
|
Three
Months Ended
|
||||||||||||
March
31,
|
March
31,
|
||||||||||||
2006
|
2005 |
2006
|
2005
|
||||||||||
(Unaudited)
|
(Unaudited)
|
||||||||||||
Revenues:
|
|||||||||||||
Software
and service revenues
|
$
|
2,011,309
|
$
|
2,329,705
|
748,080
|
755,331
|
|||||||
Professional
services
|
69,698
|
16,560
|
38,398
|
-
|
|||||||||
Hardware
sales
|
326,016
|
329,921
|
86,605
|
134,915
|
|||||||||
Total
revenues
|
2,407,023
|
2,676,186
|
873,083
|
890,246
|
|||||||||
Cost
of revenues:
|
|||||||||||||
Software
and service costs
|
430,044
|
442,487
|
73,348
|
152,482
|
|||||||||
Professional
services
|
16,242
|
4,780
|
16,242
|
-
|
|||||||||
Hardware
costs
|
257,045
|
291,901
|
84,258
|
127,992
|
|||||||||
Total
cost of revenues
|
703,331
|
739,168
|
173,848
|
280,474
|
|||||||||
Gross
profit
|
1,703,692
|
1,937,018
|
699,235
|
609,772
|
|||||||||
Operating
expenses:
|
|||||||||||||
Selling
and marketing
|
460,729
|
552,256
|
162,060
|
188,337
|
|||||||||
Research
and development
|
227,359
|
306,997
|
70,677
|
101,346
|
|||||||||
General
and administrative
|
1,224,527
|
1,431,088
|
449,531
|
498,145
|
|||||||||
Total
operating expenses
|
1,912,615
|
2,290,341
|
682,268
|
787,828
|
|||||||||
Operating
loss
|
(208,923
|
)
|
(353,323
|
)
|
16,967
|
(178,056
|
)
|
||||||
Other
expense
|
(5,191
|
)
|
(4,725
|
)
|
233
|
(43
|
)
|
||||||
Interest
expense
|
(32,390
|
)
|
(12,185
|
)
|
(15,350
|
)
|
(9,775
|
)
|
|||||
Income
(loss) before income taxes
|
(246,504
|
)
|
(370,233
|
)
|
1,850
|
(187,874
|
)
|
||||||
Income
tax provision
|
(3,200
|
)
|
(3,200
|
)
|
-
|
-
|
|||||||
Net
Income (loss)
|
(249,704
|
)
|
(373,433
|
)
|
1,850
|
(187,874
|
)
|
||||||
Other
comprehensive income, net of tax
|
-
|
-
|
-
|
-
|
|||||||||
Comprehensive
Income (loss)
|
$
|
(249,704
|
)
|
$
|
(373,433
|
)
|
1,850
|
(187,874
|
)
|
||||
Basis
and diluted net loss per share
|
$
|
(0.02
|
)
|
$
|
(0.04
|
)
|
-
|
(0.02
|
)
|
||||
Weighted-average
number of
|
|||||||||||||
common
shares outstanding
|
10,705,334
|
10,507,590
|
10,717,645
|
10,699,312
|
Nine
Months Ended
|
|||||||
March
31,
|
|||||||
2006
|
2005
|
||||||
Cash
flows from operating activities
|
|||||||
Net
loss
|
$
|
(249,704
|
)
|
$
|
(373,433
|
)
|
|
Adjustments
to reconcile net loss to
|
|||||||
net
cash used by operating activities:
|
|||||||
Depreciation
and amortization
|
106,325
|
134,561
|
|||||
Provision
for doubtful accounts
|
22,750
|
(7,000
|
)
|
||||
Stock
compensation
|
5,589
|
5,589
|
|||||
Non-cash
interest expense
|
|||||||
Loss
on sale of securities
|
|||||||
available
for sale
|
|||||||
Increase
(decrease) from changes
|
|||||||
in
assets and liabilities:
|
|||||||
Trade
receivables
|
(125,631
|
)
|
(68,519
|
)
|
|||
Inventories
|
21,602
|
(18,504
|
)
|
||||
Prepaid
expenses
|
17,327
|
(34,388
|
)
|
||||
Miscellaneous
receivables
|
(4,578
|
)
|
(12,706
|
)
|
|||
Deposits
|
5,964
|
-
|
|||||
Deferred
legal fees
|
(5,000
|
)
|
-
|
||||
Accounts
payable
|
(88,671
|
)
|
54,440
|
||||
Accrued
expenses
|
43,891
|
(25,378
|
)
|
||||
Deferred
income
|
170,301
|
47,244
|
|||||
Net
cash used by operating activities
|
(79,835
|
)
|
(298,094
|
)
|
|||
Cash
flows from investing activities
|
|||||||
Proceeds
from sale of securities
|
-
|
-
|
|||||
Additions
to capitalized software development costs
|
-
|
-
|
|||||
Purchase
of equipment
|
(7,384
|
)
|
(18,867
|
)
|
|||
Net
cash used by investing activities
|
(7,384
|
)
|
(18,867
|
)
|
Nine
Months Ended
|
|||||||
March
31,
|
|||||||
2006
|
2005
|
||||||
(Unaudited)
|
|||||||
Cash
flows from financing activities
|
|||||||
Deferred
offering costs
|
19,480
|
(86,463
|
)
|
||||
Issuance
of common stock
|
5,000
|
||||||
Borrowings
on short-term debt
|
66,000
|
285,000
|
|||||
Repurchase
of common stock
|
2,750
|
(5,363
|
)
|
||||
Loan
against distribution
|
(4,500
|
)
|
(500
|
)
|
|||
Payments
received on note receivable
|
-
|
2,202
|
|||||
Net
cash (used) provided by
|
|||||||
financing
activities
|
88,730
|
194,876
|
|||||
Net
(decrease) increase in cash and cash equivalents
|
1,511
|
(122,085
|
)
|
||||
Cash
and cash equivalents, beginning
of period
|
80,486
|
149,846
|
|||||
Cash
and cash equivalents, end
of period
|
$
|
81,997
|
$
|
27,761
|
|||
Supplemental
Disclosures of Cash Flow
|
|||||||
Information:
|
|||||||
Cash
payments for:
|
|||||||
Interest
|
$
|
31,040
|
$
|
19,410
|
|||
Income
tax payments
|
$
|
3,200
|
$
|
3,200
|
1.
|
Organization
and Nature of Business
|
2.
|
Summary
of Significant Accounting
Policies
|
2.
|
Summary
of Significant Accounting Policies
(continued)
|
March
31, 2006
|
||||
Centergistic
Solutions
|
$
|
4,090,711
|
||
Centergistic
Solutions - Mexico
|
615,675
|
|||
4,706,386
|
||||
Eliminations
|
(3,055,592
|
)
|
||
Total
consolidated assets
|
$
|
1,650,794
|
Nine
Months Ended March 31,
|
Three
Months Ended March 31,
|
||||||||||||
2006
|
2005
|
2006
|
2005
|
||||||||||
Centergistic
Solutions
|
|||||||||||||
Revenues
|
$
|
1,256,765
|
$
|
1,688,201
|
$
|
490,749
|
$
|
557,227
|
|||||
Gross
profit
|
$
|
983,478
|
$
|
1,391,520
|
$
|
397,592
|
$
|
424,455
|
|||||
Net
income (loss)
|
$
|
(269,497
|
)
|
$
|
(445,502
|
)
|
$
|
(14,150
|
)
|
$
|
(189,048
|
)
|
|
Centergistic
Solutions - Mexico
|
|||||||||||||
Revenues
|
$
|
1,150,258
|
$
|
987,985
|
$
|
382,334
|
$
|
333,019
|
|||||
Gross
profit
|
$
|
720,214
|
$
|
545,498
|
$
|
301,643
|
$
|
185,317
|
|||||
Net
income (loss)
|
$
|
19,802
|
$
|
72,071
|
$
|
16,009
|
$
|
1,176
|
2.
|
Summary
of Significant Accounting Policies
(continued)
|
2.
|
Summary
of Significant Accounting Policies
(continued)
|
2.
|
Summary
of Significant Accounting Policies
(continued)
|
Nine
Months
|
|||||||
Ended
March 31,
|
|||||||
2006
|
2005
|
||||||
Net
loss, as reported
|
$
|
(249,704
|
)
|
$
|
(373,433
|
)
|
|
Add:
Stock compensation expense recorded in accordance with APB Opinion
No.
25
|
5,589
|
5,589
|
|||||
Deduct:
Total stock-based employee compensation expense determined under
fair
value based method for all stock options, net of related tax
effects
|
(13,355
|
)
|
(34,859
|
)
|
|||
Pro
forma net loss
|
$
|
(257,470
|
)
|
$
|
(402,703
|
)
|
|
Pro
forma net loss per share
|
$
|
(0.02
|
)
|
$
|
(0.04
|
)
|
2.
|
Summary
of Significant Accounting Policies
(continued)
|
·
|
Software
license fees for site licenses and master license agreements are
recognized as revenue upon delivery of the software, and when remaining
obligations are not significant. The Company’s software licensing
agreement provides the customer with a 90-day warranty and return
provision, including a limited time to test the software. If the
customer
can prove that the software is not functioning, the Company has the
opportunity to remedy the problem and, if not resolved, the customer
may
return the software. The Company considers the need for a reserve
for
warranty and returns on a quarterly basis; however, such occurrences
have
historically not been significant.
|
·
|
Advance
contract payments for software services, consisting primarily of
software
maintenance and support, are recorded as deferred income until the
services are provided. After the expiration of the software license
warranty period, the Company commences recognition of the contract
payments ratably over the term of the maintenance period. All subsequent
software maintenance and support is billed separately and recognized
ratably over the life of the maintenance period.
|
·
|
Revenues
from software sold to distributors are recognized upon delivery since
title passes upon delivery. The distributor is subject to a restocking
fee
of 10%-25% if an order is returned; however, historically, such returns
have been insignificant. Special orders are
non-cancelable.
|
·
|
Software
and service revenues include services related to maintenance, time
and
materials contracts, installation and training. Such revenues are
recognized as the services are
rendered.
|
·
|
Revenues
from the sale of computer and display hardware are recognized upon
shipment, which is generally concurrent with the passage of
title.
|
·
|
Professional
services revenues are derived from the services provided by the Company’s
consulting business. Such revenues are recognized as the services
are
rendered.
|
3.
|
Capitalized
Software Development Costs
|
Date
Technological
|
|
|
|
||||
|
|
Feasibility
|
|
Estimated
|
|
||
|
|
Established
|
|
Life
|
|||
CenterStats
|
December
2001
|
5
years
|
|||||
AgentView
|
June
1999
|
5
years
|
CenterStats
|
$
|
398,998
|
||
AgentView
(fully amortized)
|
307,476
|
|||
Fully
amortized products
|
1,146,677
|
|||
1,853,151
|
||||
Accumulated
amortization
|
(1,802,426
|
)
|
||
$
|
50,725
|
4.
|
Notes
Payable - Related Parties
(continued)
|
5.
|
Commitments
and Contingencies
|
6.
|
Stockholders’
Equity
|
Fixed
Options
|
Shares
|
Weighted
Average Exercise
Price
|
|||||
Outstanding
at beginning of
period
|
2,623,400
|
$
|
0.53
|
||||
Expired
|
(270,400
|
)
|
(0.60
|
)
|
|||
Granted
|
83,200
|
0.36
|
|||||
Outstanding
at end of period
|
2,436,200
|
$
|
0.51
|
||||
Exercisable
at end of period
|
1,565,000
|
$
|
0.58
|
||||
Weighted
average fair value of options granted during the period
|
$
|
0.36
|
6.
|
Stockholders’
Equity (continued)
|
Options
Outstanding
|
Options
Exercisable
|
||||||||||||||||
Fixed
Options
|
Number
Outstanding
|
Weighted
Average Remaining Contractual
Life
|
Weighted
Average
Exercise
Price
|
Number
Exercisable
|
Weighted
Average Exercise
Price
|
||||||||||||
$
|
0.30
to $0.47
|
1,487,400
|
7.35
|
$
|
0.38
|
616,200
|
$
|
0.38
|
|||||||||
$
|
0.52
to $0.79
|
948,800
|
2.40
|
0.71
|
948,800
|
0.71
|
|||||||||||
2,436,200
|
$
|
0.51
|
1,565,000
|
$
|
0.58
|
ITEM 2. |
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
|
·
|
|
we
have persuasive evidence that an arrangement exists. For all sales,
we use
a binding purchase order and sales order confirmation as evidence
of an
arrangement. Sales through certain of our distributors are evidenced
by a
master agreement governing the relationship, together with binding
purchase orders on a transaction by transaction basis;
|
|
·
|
|
the
product is delivered to the customer under the terms of the arrangement
and title passes. Passage of title generally occurs when the product
is
delivered to a common carrier, but in some cases occurs when the
customer
receives the product;
|
|
·
|
|
the
revenue is fixed and determinable. At the time of the transaction,
we
assess whether the fee associated with our revenue transactions is
fixed
and determinable based on the payment terms associated with the
transaction. If a significant portion of a fee is due after our normal
payment terms, which are 30 to 75 days from invoice date, then we
account for the fee as not being fixed and determinable. In these
cases,
we recognize revenue as the fees become due; and
|
|
·
|
|
collection
of the resulting receivable is reasonably assured. We assess collection
based on a number of factors, including past transaction history
with the
customer and the credit-worthiness of the customer. We do not request
collateral from our customers. If we determine that collection of
a fee is
not reasonably assured, then we defer the fee and recognize revenue
at the
time collection becomes reasonably assured, which generally is upon
receipt of cash.
|
Nine
Month Period Ended March 31, (In thousands)
|
|||||||||||||
|
|
2006
|
|
%
|
|
2005
|
|
%
|
|||||
Centergistic
(U.S.)
|
$
|
1,257
|
52.2
|
$
|
1,688
|
63.1
|
|||||||
Mexico
and Latin America
|
$
|
1,150
|
47.8
|
$
|
988
|
36.9
|
|||||||
Total
|
$
|
2,407
|
100.0
|
$
|
2,676
|
100.0
|
Three
Month Period Ended March 31, (In thousands)
|
|||||||||||||
2005
|
%
|
2004
|
%
|
||||||||||
Centergistic
(U.S.)
|
$
|
491
|
56.2
|
$
|
557
|
62.6
|
|||||||
Mexico
and Latin America
|
$
|
382
|
43.8
|
$
|
333
|
37.4
|
|||||||
Total
|
$
|
873
|
100.0
|
$
|
890
|
100.0
|
|
·
|
|
market
acceptance of our CenterStats product,
|
|
|||
|
·
|
|
the
timing, size and execution of orders and shipments,
|
|
|||
|
·
|
|
lengthy
and unpredictable sales cycles,
|
|
|||
|
·
|
|
the
timing of introduction and market acceptance of new products or product
enhancements by us or our competitors,
|
|
|||
|
·
|
|
Product
and price competition,
|
|
|||
|
·
|
|
the
relative proportions of revenues derived from license fees and services,
|
|
|||
|
·
|
|
Changes
in our operating expenses,
|
|
|||
|
·
|
|
our
success in increasing our direct sales force,
|
|
|||
|
·
|
|
our
success in maintaining relationships with our third-party distributors
and
adding new ones, and
|
|
|||
|
·
|
|
fluctuations
in general economic conditions.
|
|
·
|
|
financial
difficulties and recent bankruptcies of major providers such as Global
Crossing and Worldcom;
|
|
|||
|
·
|
|
competitive
concerns centered around large-scale price cutting;
|
|
|||
|
·
|
|
reluctance
of industry companies to place purchase orders for capital expenditures;
and
|
|
|||
|
·
|
|
lack
of increasing customer demand for premium and high-speed services.
|
|
·
|
|
be
expensive and time consuming to defend,
|
|
·
|
|
cause
us to cease making, licensing or using products that incorporate
the
challenged intellectual property,
|
|
|||
|
·
|
|
require
us to redesign our products, if feasible,
|
|
|||
|
·
|
|
divert
management’s attention and resources, and
|
|
|||
|
·
|
|
require
us to enter into royalty or licensing agreements in order to obtain
the
right to use necessary technologies.
|
CENTERGISTIC SOLUTIONS, INC.
|
||
|
|
|
Date:
January 18, 2007
|
/s/ Ricardo G. Brutocao | |
Ricardo
G. Brutocao,
|
||
Chief
Executive Officer
|
Date:
Janaury 18, 2007
|
/s/ David M. Cunningham | |
David
M. Cunningham,
|
||
Chief
Operating Officer and Chief Financial
|
||
Officer
(Principal Accounting Officer)
|
No.
|
Description
|
|
31.1
|
Certification
of CEO - Rule 13a - 14(a) or 15d - 14(a)*
|
|
31.2
|
Certification
of CFO - Rule 13a - 14(a) or 15d - 14(a)*
|
|
32
|
Certification
pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of
the Sarbanes-Oxley Act of
2002+
|