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CENTERGISTIC SOLUTIONS, INC.

 

Condensed Consolidated Balance Sheet

		December 31,
		2006
		(Unaudited)
ASSETS
Current
Cash and cash equivalents		$	170,019
Trade receivables, less allowance for doubtful
accounts of $88,500			940,444
Inventories			122,162
Prepaid expenses			58,601
Miscellaneous receivables			16,028
Total current assets			1,307,254
Property, equipment, and leasehold
improvements, net of accumulated depreciation of $758,396			46,097
Capitalized software development costs,
net of accumulated amortization of $1,837,886			15,265
Other assets
Deferred offering costs			540,754
Other			(9,922	)
Total other assets			530,832
		$	1,899,448

See accompanying notes to condensed consolidated financial statements.

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CENTERGISTIC SOLUTIONS, INC.

 

Condensed Consolidated Balance Sheet (continued)

		December 31,
		2006
		(Unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities
Notes payables - related parties		$	47,997
Notes payables - Line of Credit-related party			360,000
Accounts payable			412,253
Accrued expenses			298,396
Deferred income			311,931
Total liabilities, all current			1,430,577
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			296,462
Accumulated deficit			(2,816,171	)
Unearned stock compensation			(2,476	)
Common stock to be redeemed			(67,454	)
Total stockholders’ equity (deficit)			468,871
Total liabilities and stockholders’
equity (deficit)		$	1,899,448

 

See accompanying notes to condensed consolidated financial statements.

 

2

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CENTERGISTIC SOLUTIONS, INC.

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

 

			Six Months Ended						Three Months Ended
			December 31,						December 31,
			2006			2005			2006			2005
			(Unaudited)						(Unaudited)
Revenues:
Software and service revenues		$	1,616,834		$	1,263,229			757,733			742,303
Professional services			81,700			31,300			37,150			22,300
Hardware sales			800			239,411			-			102,011
Total revenues			1,699,334			1,533,940			794,883			866,614
Cost of revenues:
Software and service costs			267,861			356,696			121,086			244,007
Professional services			1,537			-			1,537			-
Hardware costs			268			172,787			268			71,226
Total cost of revenues			269,666			529,483			122,891			315,233
Gross profit			1,429,668			1,004,457			671,992			551,381
Operating expenses:
Selling and marketing			222,861			298,669			104,669			157,755
Research and development			90,938			156,682			46,220			73,810
General and administrative			836,536			774,996			402,576			403,833
Total operating expenses			1,150,335			1,230,347			553,465			635,398
Operating Income (loss)			279,333			(225,890	)		118,527			(84,017	)
Other income (expense)			985			(5,424	)		758			(4,567	)
Interest expense			(28,033	)		(17,040	)		(11,709	)		(7,111	)
Income (loss) before income taxes			252,285			(248,354	)		107,576			(95,695	)
Income tax provision						(3,200	)		-			(3,200	)
Income (loss)			252,285			(251,554	)		107,576			(98,895	)
Other comprehensive income, net of tax			-			-			-			-
Comprehensive Income (loss)		$	252,285		$	(251,554	)		107,576			(98,895	)
Basis and diluted net income (loss) per share		$	0.02		$	(0.02	)		0.01			(0.01	)
Weighted-average number of
common shares outstanding			10,724,312			10,699,312			10,724,312			10,699,312

 

See accompanying notes to condensed consolidated financial statements.

 

3

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CENTERGISTIC SOLUTIONS, INC.

 

Condensed Consolidated Statements of Cash Flows

 

		Six Months Ended
		December 31,
		2006			2005
		(Unaudited)
Cash flows from operating activities
Net income (loss)		$	252,285		$	(251,554	)
Adjustments to reconcile net income (loss) to
net cash used by operating activities:
Depreciation and amortization			66,798			73,621
Provision for doubtful accounts			29,250			6,000
Stock compensation			3,726			3,726
Non-cash interest expense
Loss on sale of securities
available for sale
Increase (decrease) from changes
in assets and liabilities:
Trade receivables			(196,944	)		(71,425	)
Inventories			(2,017	)		(18,242	)
Prepaid expenses			(24,898	)		(18,544	)
Miscellaneous receivables			6,300			(2,578	)
Deposits			-			8,270
Other			21,160			4,647
Accounts payable			(47,286	)		92,806
Accrued expenses			45,386			(5,244	)
Deferred income			5,630			125,176
Net cash provided (used) by operating activities			159,390			(53,341	)
Cash flows from investing activities
Proceeds from sale of securities			-			-
Additions to capitalized software development costs
Purchase of equipment			(2,863	)		(6,922	)
Net cash used by investing activities			(2,863	)		(6,922	)

 

See accompanying notes to condensed consolidated financial statements.

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CENTERGISTIC SOLUTIONS, INC.

 

Condensed Consolidated Statements of Cash Flows (continued)

 

		Six Months Ended
		December 31,
		2006			2005
		(Unaudited)
Cash flows from financing activities
Deferred offering costs			-			24,480
Principal payments on term loan and
notes payable			(36,000	)		-
Borrowings on short-term debt			-			81,000
Repurchase of common stock			(41,696	)		-
Accrued ESOT distribution			32,196			-
Net cash (used) provided by
financing activities			(45,500	)		105,480
Net (decrease) increase in cash and cash equivalents			111,027			45,217
Cash and cash equivalents, beginning of period			58,992			80,486
Cash and cash equivalents, end of period		$	170,019		$	125,703
Supplemental Disclosures of Cash Flow
Information:
Cash payments for:
Interest		$	26,533		$	16,140
Income tax payments		$	-		$	3,200

 

See accompanying notes to condensed consolidated financial statements.

 

5

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CENTERGISTIC SOLUTIONS, INC.

Notes to Condensed Consolidated Financial Statements

(Information with Respect to the Six Months Ended

December 31, 2006 and 2005 is Unaudited)

 

Organization and Nature of Business

Centergistic Solutions, Inc. (the “Company”) was incorporated in the State of California on March 10, 1972.

The Company provides integrated information distribution and reporting systems, serving both general business and contact center environments. The products provide critical information throughout the enterprise to help companies improve performance and increase personnel productivity.

Substantially all of the remaining operations are conducted by the Company’s Mexican subsidiary, Centergistic Solutions, S. DE R.L. DE D.V. (formerly known as AAC de Latin America). The Mexican operations distribute products of its parent, as well as other telecommunications products from third parties.

 

2.	Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements as of December 31, 2006 and for the six month periods ended December 31, 2006 and 2005 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions per Item 310(b) of Regulation SB. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Operating results for the six month period ended December 31, 2006 are not necessarily indicative of the results that may be expected for the year ending June 30, 2007. These condensed consolidated financial statements and notes thereto should be read with the consolidated financial statements for the year ended June 30, 2006 included in the Company’s Form 10-KSB filed with the Securities and Exchange Commission.

 

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CENTERGISTIC SOLUTIONS, INC.

Notes to Condensed Consolidated Financial Statements

(Information with Respect to the Six Months Ended

December 31, 2006 and 2005 is Unaudited)

 

2. Summary of Significant Accounting Policies (continued)

Principles of Consolidation

The accompanying condensed consolidated financial statements as of December 31, 2006 and for the six months ended December 31, 2006 and 2005 include the accounts of the Company and its wholly owned subsidiary, Centergistic Solutions, S. DE R.L. DE D.V. (“Centergistic Solutions - Mexico”). All significant intercompany accounts and transactions have been eliminated.

Segment Reporting

The Company adopted Statement of Financial Accounting Standard (“SFAS”) No. 131, “Disclosures About Segment of an Enterprise and Related Information,” beginning July

2003. SFAS No. 131 establishes standards for the way to report information about operating segments and related disclosures about products and services, geographic areas, and major customers in financial statements. As of and for the six months ended December 31, 2006, the Company views its operations and manages its business in two segments: Centergistic Solutions and Centergistic Solutions - Mexico.

The following represents the total assets by segment:		December 31, 2006
Centergistic Solutions		$	4,473,098
Centergistic Solutions - Mexico			580,730
			5,053,828
Eliminations			(3,154,380	)
Total consolidated assets		$	1,899,448

 

The following represents the revenues, gross profit and net income (loss) by segment:

		Three Months Ended						Six Months Ended
		December 31,						December 31,
		2006			2005			2006			2005
Centergistic Solutions
Revenues		$	479,119		$	353,705		$	1,028,754		$	766,016
Gross profit		$	468,128		$	275,136		$	1,005,159		$	585,886
Net income (loss)		$	150,358		$	(141,945	)	$	305,181		$	(255,347	)
Centergistic Solutions - Mexico
Revenues		$	315,764		$	512,909		$	670,580		$	767,924
Gross profit		$	203,864		$	276,245		$	424,509		$	418,571
Net income (loss)		$	(42,551	)	$	43,050		$	(52,896	)	$	3,793

 

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CENTERGISTIC SOLUTIONS, INC.

Notes to Condensed Consolidated Financial Statements

(Information with Respect to the Six Months Ended

December 31, 2006 and 2005 is Unaudited)

 

2.	Summary of Significant Accounting Policies (continued)

Net Income (Loss) Per Share

In accordance with the provisions of SFAS No. 128, “Earnings Per Share,” the Company is required to disclose basic and diluted earnings (loss) per share. Basic earnings (loss) per share is computed by dividing net income (loss), by the weighted average number of common shares outstanding during each period. Diluted earnings (loss) per share is similar to basic earnings (loss) per share, except that the weighted average number of common shares outstanding is increased to reflect the dilutive effect of potential common shares, such as those issuable upon the exercise of stock or warrants, as if they had been issued.

For all periods presented, there is no difference between basic and diluted loss per common share, as the effects of stock options or warrants are anti-dilutive, given the net loss applicable to common shares for each period.

Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade accounts receivable.

The Company maintains its cash balances at financial institutions that management believes possess high-credit quality, and related cash balances are insured by the Federal Deposit Insurance Corporation up to $100,000 and the Securities Investor Protection Corporation up to $500,000. At December 31, 2006, the Company did not have any amounts held in the bank in excess of federally insured limits.

Management believes that concentrations of credit, with respect to trade receivables, are minimized by the Company’s customer base. As of December 31, 2006, the Company’s largest customer accounted for 4% of total trade receivables. For each of the six months ended December 31, 2006 and 2005, the Company’s largest customer accounted for 15% of total Company net revenues, respectively. There was one other customer that accounted for 14% of total Company’s net revenues for the six months ended December 31, 2006. That customer accounted for 4% of total trade receivables at December 31, 2006. No other customers exceeded 10% of such amounts as of each respective period-end.

As of December 31, 2006, customers of the Company’s Mexican subsidiary accounted for 43% of total trade receivables. For each of the six months ended December 31, 2006 and 2005 sales to customers of the Company’s Mexican subsidiary account for 39% and 50%, respectively, of total Company net revenues.

 

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CENTERGISTIC SOLUTIONS, INC.

Notes to Condensed Consolidated Financial Statements

(Information with Respect to the Six Months Ended

December 31, 2006 and 2005 is Unaudited)

 

2.	Summary of Significant Accounting Policies (continued)

Deferred Offering Costs

The Company has engaged the services of investment bankers to assist with the potential funding of future operations through private investors or sell the public shell. As of December 31, 2006, the Company capitalized a net amount of $540,754 for these services and such are included in the accompanying condensed consolidated balance sheets as deferred offering costs. There can be no assurance that the Company will receive funding from private investors or be able to sell the shell. If the Company is able to receive private funding or sell the shell, the deferred offering costs will be offset against the proceeds received; otherwise, such will be expensed when the offering efforts are terminated or the Company finds there is no market for the public shell.

Accounting for Stock-based Compensation

The Company has adopted SFAS No. 123, “Accounting for Stock-based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-based Compensation-Transition and Disclosure,” which establishes financial accounting and reporting standards for stock-based compensation. SFAS No. 123 generally suggests, but does not require, stock-based employee compensation transactions be accounted for based on the fair value of the consideration received, or the fair value of the equity instruments issued, whichever is more reliably measurable. Companies that do not elect to change their accounting for stock-based employee compensation are required to disclose the effect on net income as if the provisions of SFAS No. 123 were followed. The Company has decided to retain the provisions of APB Opinion No. 25, and related interpretations thereof, for recognizing stock-based employee compensation expense, which includes members of the board of directors. Non-employee stock compensation is recorded at fair value in accordance with SFAS No. 123.

In accordance with APB Opinion No. 25, the Company has incurred compensation cost aggregating $80,610 through December 31, 2006 for stock option grants, of which $3,726 was recognized during the six-month periods ended December 31, 2006 and 2005. Had compensation cost for the stock-based compensation plan been determined based on the fair value of awards (the method described in SFAS No. 123), the reported net loss would have been as shown below:

 

2.	Summary of Significant Accounting Policies (continued)

Accounting for Stock-based Compensation (continued)

		Six Months
		Ended December 31,
		2005			2004
Net income (loss), as reported		$	252,285		$	(251,554	)
Add: Stock compensation
expense recorded in
accordance with APB
Opinion No. 25			3,726			3,726
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method
for all stock options, net of
related tax effects			(9,245	)		(8,738	)
Pro forma net income (loss)		$	246,766		$	(256,566	)
Pro forma net income (loss) per share		$	0.02		$	(0.02	)

The fair value of each grant is estimated at the grant date using the following assumptions: no stock price volatility; no dividends for all years; risk-free interest rates of 4.4% and 3.25% for the six month periods ended December 31, 2006 and 2005, respectively, and expected lives of ten years for all grants.

 

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CENTERGISTIC SOLUTIONS, INC.

Notes to Condensed Consolidated Financial Statements

(Information with Respect to the Six Months Ended

December 31, 2006 and 2005 is Unaudited)

 

2.	Summary of Significant Accounting Policies (continued)

Revenue Recognition

The Company typically provides bundled software and services through a distributor network. Each component of a bundled solution is separately identified based upon vendor specific objective evidence. The components of revenue are recognized as follows:

§

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.

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CENTERGISTIC SOLUTIONS, INC.

Notes to Condensed Consolidated Financial Statements

(Information with Respect to the Six Months Ended

December 31, 2006 and 2005 is Unaudited)

 

3.	Capitalized Software Development Costs

 

Research and development, which includes design, development, and testing of new software, software maintenance, and enhancement costs, is expensed as incurred until technological feasibility has been established for the product. Technological feasibility is defined as a completion of detail program design. Thereafter, certain costs, such as coding and testing, are capitalized until the product is available for general release to customers.

Software costs are amortized on a product-by-product basis using the straight-line method over the remaining estimated economic life of the software product, which is typically six to five years. Actual future sales and remaining economic life of the product could differ significantly from these estimates. Amortization of software costs for the six months ended December 31, 2006 and 2005 was $15,000 and $40,920, respectively, and is included general and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive income (loss).

The following describes the components of capitalized software development costs as of December 31, 2005 and the related estimated lives:

 

	Date Technological
	Feasibility		Estimated
	Established		Life
CenterStats	December 2001		5 years
AgentView	June 1999		5 years

 

The following summarizes the costs capitalized by product as of December 31, 2006:

 

CenterStats		$	398,998
AgentView (fully amortized)			307,476
Fully amortized products			1,146,677
			1,853,151
Accumulated
amortization			(1,837,886	)
		$	15,265

4.	Notes Payable - Related Parties

On November 30, 2004, as amended on March 31, 2005, the Company entered into a line of credit agreement with Venture Communications Corporation, a shareholder and related party. The terms of the agreement call for a maximum advance of $400,000 secured by a lien on all the assets of the Company. Interest on the advances are payable monthly at 10% per annum. Advances and unpaid interest on the line are due on July 1, 2007. Advances on the line are personally guaranteed in equal amounts by the President/CEO and Vice President/COO/CFO of the Company. The balance of the line at December 31, 2006 is $360,000.

 

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CENTERGISTIC SOLUTIONS, INC.

Notes to Condensed Consolidated Financial Statements

(Information with Respect to the Six Months Ended

December 31, 2006 and 2005 is Unaudited)

 

4.	Notes Payable - Related Parties (continued)

On December 31, 2002, the Company entered into two notes payable to two of its officers for an aggregate $24,975. Such notes bear interest at 6% and the principal and interest are due and payable on demand. These notes are secured by all of the assets of the Company.

 

In April 2004, the Company entered into a note payable with an employee of the Company for $5,000. The note bears interest at 6% and the principal and interest are due on demand. The note is secured by all of the assets of the Company.

In July 2003, the Company agreed to purchase 148,328 shares of Company common stock from a former employee for $44,220 and issued a secured promissory note payable in such amount. The note bears interest at 5% per annum, and monthly payments in the amount of $2,750 are due and payable on the note commencing after December 31, 2003. As each payment is made, the Company cancels and retires 8,728 shares. Payment of the note is secured by substantially all of the Company’s assets. The balance of the note at December 31, 2006 is $18,022.

5.	Commitments and Contingencies

 

Off-Balance Sheet Arrangement

The Company provides indemnifications of varying scope and size to certain customers against claims of intellectual property infringement made by third parties arising from the use of the Company’s products. Management evaluates estimated losses for such indemnifications under SFAS No. 5, “Accounting for Contingencies,” as interpreted by FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees.” Management considers such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of the loss. As of December 31, 2006, the Company has not encountered material costs as a result of such obligations and has not accrued any liabilities related to such indemnifications in the accompanying condensed consolidated financial statements.

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CENTERGISTIC SOLUTIONS, INC.

Notes to Condensed Consolidated Financial Statements

(Information with Respect to the Six Months Ended

December 31, 2006 and 2005 is Unaudited)

 

6.	Stockholders’ Equity

Stock Option Plans

The stockholders of the Company have approved the Centergistic Solutions, Inc. Incentive Stock Option Plan (the “Plan”), which provides for the issuance of up to 2,800,000 shares of its common stock. Options granted under the Plan are not exercisable until two years after they are issued and expire ten years after the date of issue. The options vest at a rate of 25% per year over a four-year period. At December 31, 2006, 1,042,000 shares were available for grant under the terms of this Plan.

In January 1998, the stockholders of the Company approved a nonqualified stock option plan for the directors of the Company. The plan provides for issuance of up to 800,000 shares of its common stock to directors. Options are granted based on attendance at board meetings. At December 31, 2006, 470,400 shares were available for grant under the terms of this plan.

A summary of the status of the plans, and changes during the six months ended December 31, 2006 is as follows:

Fixed Options		Shares			Weighted Average Exercise Price
Outstanding at beginning  of period			2,436,200		$	.51
Expired			(355,000	)		(.57	)
Granted			6,400			.36
Outstanding at end of period			2,087,600		$	.50
Exercisable at end of period			1,639,300		$	.54
Weighted average fair value of options granted during the period					$	.36

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CENTERGISTIC SOLUTIONS, INC.

Notes to Condensed Consolidated Financial Statements

(Information with Respect to the Six Months Ended

December 31, 2006 and 2005 is Unaudited)

 

6.	Stockholders’ Equity (continued)

Stock Option Plans (continued)

A summary of stock options outstanding at December 31, 2006 is as follows:

		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			1,354,800			6.59		$	.39			906,500		$	.39
$0.52 to $0.79			732,800			1.94			.72			732,800			.72
			2,087,600					$	.50			1,639,300		$	.54

Common Stock Purchase Warrants

In connection with the line of credit agreement (Note 4), the Company issued warrants to its CEO and CFO to purchase 111,110 shares of common stock at $0.36 per share, which are exercisable any time prior to January 2010. All of these warrants were outstanding as of December 31, 2006.

 

14

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

A NOTE ABOUT FORWARD-LOOKING STATEMENTS

 

The statements, other than statements of historical fact, included in this report are forward-looking statements.  Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “plan,” “seek,” or “believe.”  We believe that the expectations reflected in such forward-looking statements are accurate.  However, we cannot assure you that such expectations will occur.  Our actual future performance could differ materially from such statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results and events to differ materially. For a detailed discussion of these risks and uncertainties please see the “Factors That May Affect Future Results” section of this report. You should not unduly rely on these forward-looking statements, which speak only as of the date of this report.  Except as required by law, we are not obligated to release publicly any revisions to these forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events.

 

General

 

We are a provider of business performance and intelligence management software that enables companies to translate data into critical and meaningful metrics allowing for improved financial and operational performance. Our software provides managers with customizable reporting and analysis tools. These tools allow for real-time monitoring of and reporting against crucial benchmarks in an organization. This enables constant monitoring of a company’s progress against financial and operational goals, and helps achieve optimal operational performance.

 

Business performance and intelligence management software uses historical and real-time data and metrics to provide managers with visibility on the business operations in real-time. We provide call/contact center managers with powerful reporting and analytic tools allowing the constant monitoring of the operational effectiveness and efficiency. While our current market focus is on the call/contact center, we offer software to all operational areas of the enterprise to gauge performance and profitable improvement. We also offer consulting, training, technical support and programming services for our customers and partners.

 

Our company operates through its domestic headquarters and our wholly-owned Mexican subsidiary located in Mexico City, Mexico. Our domestic operation sells AgentView, CenterStats, and the related hardware necessary to run these applications or display statistics derived from these applications, training and educational services, installation, custom programming and support services.

 

Centergistic Solutions, Inc., Inc. was incorporated in Los Angeles, California on March 13, 1972. Centergistic Solutions, Inc. Latina America S. de R.L. de C.V., a limited liability partnership, was formed in Mexico City, Mexico on May 19, 2000. This partnership was a successor to Centergistic Solutions, Inc. Latina America S.A. de C.V., a Mexican corporation originally formed July 1, 1993.

 

Our Mexican subsidiary acts as a distribution company selling our AgentView and CenterStats products along with other vendor sourced products to a variety of distributors and end-users in Latin and South America. They also sell training and educational services, installation and product support packages.

 

We face several significant challenges common in our industry: continued revenue growth; market segment risk; technological changes; and liquidity and capital resources.

 

We face challenges in growing our revenues because our CenterStats product has not been installed in a large number of clients to date, and has not achieved wide customer acceptance due to limited marketing and sales activities. We are dependent upon the sale of CenterStats to substantially grow our revenues. We have developed a sales and marketing plan to achieve this revenue growth, but need capital necessary to implement the plan.

 

We currently sell our products and services into the call/contact center market. We generally sell in two different types of environments. In one instance, our products are part of a bundled sale at the time of a new call/contact center purchase and installation. We are dependent on our distributors for a majority of these types of sales. In the other instance, we sell to established call/contact centers that perceive a lack of data, statistics, and metrics to effectively manage and monitor the performance of their centers. We generate revenue in this arena through both direct end-user sales and distribution channel sales. We face challenges that our distributors could find new sources of this type product or even internally develop their own product. We also face challenges that the call/contact center market undergoes significant changes, restructuring, contraction, or evolution into different technologies.

 

We are subject to a rapidly changing technological environment. Our ability to keep current with the demands of technology is critical to our success. Each time the data flow of a particular application in the call/contact center changes or new applications are created, we must be able to retrieve that data. Our products must be changed also so that we may retrieve that data. If we cannot continue to stay atop the technology curve, we will not be able to compete effectively in this market space. To combat this challenge, we have developed technology partnerships with many of the industry application providers such as Avaya, Cisco, Concerto, Genesys, Microsoft, and Nortel to name a few. These partnerships allow us the environment to test our products and certify that our products work with a specific vendor application and to get updates as their technology changes.

 

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Current Conditions

 

We derive a substantial portion of our revenues from sales to customers in Mexico, Latin America and South America. For the six month periods ended December 31, 2006 and 2005, these customers represented approximately 39% and 50%, respectively, of our total net revenues.

 

Our revenues in these countries are derived from our subsidiary, Centergistic Solutions, Inc. Latin America S. R. L. de C.V., a limited liability partnership. Its office is located in Mexico City and houses 20 employees. This company acts primarily as a distributor, selling our AgentView and CenterStats products along with others sourced from third party vendors such as PC call accounting, voicemail products, data collection devices, and LED display boards. This company sells its products primarily to companies such as Avaya, Siemens and Alcatel.

 

On November 30, 2004, and amended March 31, 2005, we entered into a line of credit agreement with Venture Communications Corporation, a shareholder and related party. The terms of the agreement call for a maximum advance of $400,000 secured by a lien on all the assets of the Company. Advances on the line are personally guaranteed in equal amounts by the President/CEO and Vice President/COO/CFO of the Company. We believe current operations will provide sufficient working capital to sustain operations through the remainder of the fiscal year.

 

In October 2005, we reduced headcount and eliminated programs in order to reduce our operating costs. With the decline in revenues from last fiscal year, we were forced to eliminate as much expense as possible in order to continue operating the business. We reduced our operating expenses by $272,000, or 18%, from last year. Much of this reduction was in payroll and related employment costs. We expect this cost reduction trend to continue throughout the remainder of the fiscal year.

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and equity and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual results may differ from these estimates under different assumptions or conditions.

 

Revenue Recognition

 

Our revenue recognition policy is significant because revenue is a key component of our results of operations. We derive our revenue primarily from sales of our various products. As described below, significant management judgments and estimates must be made and used in connection with revenue recognized in any accounting period. If our management makes different judgments or uses different estimates, material differences may result in the amount and timing of our revenue for any period. We recognize revenue from the sale of our products when:

 

	•		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.

 

We derive revenues from licensing our software products, selling computer and display hardware, and providing customer support, training, installation, and consulting services. 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. Sales to distributors are recognized upon delivery as our distributors generally have customer orders in hand before ordering from us. Should orders be cancelled, our distributors are subject to restocking charges of 10%-25% except for custom orders which are non-cancelable.

 

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Our software licensing agreement provides the customer with certain warranty provisions, including a limited time to test the software. If the customer can prove the software is not functioning, we have the opportunity to remedy the problem, and if not resolved, the customer can return the software. Historically, returns and warranty costs have not been significant.

Advance contract payments for services, consisting primarily of software customer support, are recorded as deferred income until after the expiration of the software warranty period, at which time the revenue is recognized ratably over the term of the maintenance period. All subsequent software support is billed separately and recognized ratably over the life of the support period.

 

Revenue from computer and display hardware is recognized upon shipment, and consulting service revenue is recognized as services are rendered.

 

Allowance for Doubtful Accounts

 

Our management estimates the uncollectability of our accounts receivable for losses that may result from the inability of our customers to make required payments. Management specifically analyzes accounts receivable and historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. If our customers’ financial condition deteriorates such that it impairs their ability to make payments to us, additional allowances may be required. As of December 31, 2006 and June 30, 2006, our accounts receivable balances were $940,000 and $773,000, respectively, net of our estimated allowances for doubtful accounts of $89,000 and $59,000, respectively.

 

The accounts receivable balance increased during the six month period ended December 31, 2006. The Company achieved higher revenue volumes during this period and a significant amount of revenue ($350,000) was generated in November and not collected as yet. We do expect the accounts receivable balance to grow as we increase our sales of CenterStats. The payment cycle on these types of sales will stretch to 75-90 days from our typical experience of 45-60 days.

 

We have taken steps to address this trend by requiring staged payments on these contracts when milestones are completed. We now typically require 25% of the contract amount due upon signing, 50 to 65% upon delivery, and the remaining balance due 30 days thereafter. We do not expect this trend to significantly impact us as we believe revenues will continue to grow sufficiently to enable us to generate enough cash flow to sustain operations.

 

Capitalized Software Development Costs

 

We account for software development costs in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.” SFAS No. 86 specifies that software development costs incurred internally should be expensed as incurred until technological feasibility has been established. Once technological feasibility has been established, all software development costs should be capitalized until the product is available for general release to customers. Technological feasibility is defined as a completion of detail program design. Amortization of capitalized software costs totaled $15,000 and $41,000 for the six month periods ended December 31, 2006 and 2005, respectively.

 

Long-Lived Assets

 

During fiscal year 2003, we adopted SFAS No. 144, “Accounting for the Impairment of Disposal of Long-Lived Assets,” which addresses significant issues relating to the implementation of SFAS No. 121 and develops a single accounting model, based on the framework established in SFAS No. 121 for long-lived assets to be disposed of by sale, whether such assets are or are not deemed to be a business. SFAS No. 144 also modifies the accounting and disclosure rules for discontinued operations. Implementation of such standard has not had a material effect on the accompanying consolidated financial statements. As of December 31, 2006, no such indicators of impairment were identified by management.

 

Stock-Based Compensation

 

From time to time, we provide compensation in the form of shares of our common stock as well as options or warrants to acquire shares of our common stock.

 

We derive the value of rights to acquire our common stock granted to non-employees, such as options or warrants, from pricing models that consider current market and contractual prices for our stock, as well as time value and yield curve or volatility factors. Pricing models and their underlying assumptions impact the amount and timing of unrealized gains and losses we recognize, and use of different pricing models or assumptions could produce different financial results.

 

Options granted to employees are valued using the intrinsic value method which bases compensation on the difference between the market value of the underlying shares of common stock and the exercise price at the date of grant.

 

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Results of Operations for the Six Months Ended December 31, 2006 as Compared to the Six Months Ended December 31, 2005

 

We believe there is some improvement in the economy in general and corporate infrastructure technology spending in specific. Fortunately, we saw increases in revenue in our U.S. and European markets, but an decline in our Mexican subsidiary. We expect to see continued improvement in our revenue as long as corporate infrastructure technology spending remains consistent. Our biggest risks continue to be revenue growth, and the capital raise necessary to implement our sales and marketing strategy.

 

Revenues

 

		Six Month Period Ended December 31,
		(In thousands)
			2006			%			2005			%
Centergistic (U.S.)		$	1,028			60.5		$	766			49.9
Mexico and Latin America		$	671			39.5		$	768			50.1
Total		$	1,699			100.0		$	1,534			100.0

 

Total net revenues increased by $165,000 or 11% for the six month period ended December 31, 2006 (“PE 2006”) as compared to the six month period ended December 31, 2005 (“PE 2005”). Revenues from U.S. based operations increased by $262,000 or 34% from the PE 2005. Revenues from our Mexican subsidiary decreased by $97,000 or 13% during PE 2006.

 

In the U.S. based operations, direct sales of AgentView increased $206,000 or 278% compared to PE 2005. We introduced a new version of software with enhanced features including increased security and several customers who delayed purchasing effected orders this year. In addition, several customers upgraded to the new version. We are starting to see increased interest from customers requiring multiple data sources and a high number of agents. This will help our revenue in the future as one of our AgentView products is priced on a “per agent” basis. We also charge additional amounts for multiple data sources. As corporate infrastructure technology spending is increasing, we expect our revenue to increase.

 

Distribution revenue in the U.S. increased by $25,000 or 7% from PE 2005. Revenue from our largest distributor, Dacon, increased by $32,000 or 14% from PE 2005. We expect business from Dacon to increase during the next nine months as we see increased volume as an upgrade program was introduced to the British Telecom (“BT”) installed base, and an expected roll out of our CenterStats product to that base as well. The significant factor was that distribution software revenue increased by $263,000 and distribution hardware revenue decreased by $238,000. This increase in software and decrease in hardware revenue is a direct result of our strategy to eliminate hardware sales and increase our margins by selling software and services. We also signed a new distributor in July 2006 that generated $236,000 during the six months ended December 31, 2006. We expect the revenue stream to slow somewhat from these levels, but still provide consistent revenue over the remainder of our fiscal year.

 

Installation and training revenues increased by $15,000 or 51% from PE 2005. These revenues increased due to the additional software sales. We expect these revenues to increase as more Agent View and CenterStats products are sold.

 

Mexico and Latin America revenues decreased by $97,000 or 13% as compared to PE 2005. We made a decision to drop low margin 3^rd party hardware sales of certain products in Mexico in order to improve our margins. The reduction in revenue is a function of the dropped products. We expect to see our revenues begin to steadily improve through the remainder of our fiscal year, with an improving trend as the Mexican and South American economies improve.

 

Cost of Revenues

 

Cost of revenues decreased to $270,000 or 16% of revenues as compared to $530,000 or 35% of revenues in PE 2005. Costs associated with hardware and third party products sales decreased by $172,000. As a lesser portion of our revenue over this past six months ended December 31, 2005 was derived from hardware sales, our costs related to hardware and third-party products decreased accordingly. We expect declining hardware revenues and costs throughout this remainder of the fiscal year resulting in improved cost of revenue percentages. We have stopped selling hardware and have concentrated solely on software and service related revenues.

 

Gross Profit

 

Gross profit improved to 84% of revenues in PE 2006, or $1,430,000, as compared to 65%, or $1,004,000, in PE 2005. The improvement in gross profit percentage is attributable to the mix of revenue to software and service products from hardware and third-party sourced products. We expect this trend to end as we sell more AgentView and CenterStats to direct end-users throughout the remainder of the fiscal year.

 

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Operating Expenses

 

Sales and Marketing

 

Sales and marketing expenses decreased $76,000 or 25% as compared to PE 2005. We spent less on sales salaries and wages by $30,000 due to reduced staff and consolidation of a sales management position. Trade show expenses were lower by $19,000 and travel expenses were lower by $11,000. We face the risk of not having the necessary capital to fully implement our sales and marketing strategy next fiscal year. If we do not receive any capital, we will scale back our implementation of the sales and marketing strategy, and this will adversely affect our revenue and profitability in our future fiscal periods.

 

Our strategy will continue to slowly fund our sales and marketing programs by investing any cash generated by operations. Absent any outside funding, we will continue this process for the foreseeable future. We plan to slowly hire sales professionals as funds permit. We will hire to the level that can be sustained from our existing operational cash flow.

 

General and Administrative

 

General and administrative expenses increased by $62,000 or 8% as compared to PE 2005. The creation of a bonus plan for senior executives caused a $111,000 increase over last year. Salaries and wages decreased by $23,000 due to the elimination of an administrative manager position. Amortization of capitalized software decreased by $26,000.

 

We anticipate general and administrative expenses to increase as we add staff. As a result of obtaining public reporting company status, our professional fees in upcoming fiscal years are expected to greatly increase. We anticipate general and administrative costs to increase by $100,000 to $150,000 per year due to increased professional fees, director and officer liability insurance, and increased employee benefit costs.

 

Research and Development

 

Research and development expenses decreased by $66,000 or 42% over the same period as last year primarily due to closing our development office in India. We had previously employed a staff of four programmers in India to help with writing and testing new code. Due to cost and management constraints, we elected to terminate the staff and close the office. This resulted in a savings of $46,000 in salaries and wages and $15,000 in rent and professional fees from the previous year.

 

We plan to increase the staffing level upon achieving sufficient operational cash flow. Primarily, these developers will develop interfaces to enable our products to work with “best of breed” call/contact center applications.

 

Other (Expense) Income

 

The interest expense during both PE 2006 and 2005 were related primarily to interest on the line of credit. This expense is expected to remain constant until we achieve sufficient operating cash necessary to begin to pay down the debt.

 

Net Income (Loss)

 

Net income increased to $252,000 as compared to a loss of $252,000 in PE 2005, a $504,000 or 200% improvement. The improvement was primarily due to higher software and service revenue levels achieved in the period with substantially higher margins.

 

Liquidity and Capital Resources

 

Net cash provided by provided by operating activities was $159,000 in PE 2006 as opposed to cash used by operating activities of $53.000 in PE 2005. The net cash provided by operations in PE 2006 was comprised of the net income and depreciation and amortization of $67,000 offset by a decrease in assets and liabilities of $193,000. The net cash used for operations in PE 2005 was comprised primarily of loss from operations of $252,000 offset by depreciation and amortization of $74,000, and a net increase from changes in assets and liabilities of $115,000.

 

Net cash from investing activities used $3,000 in PE 2006 as compared to $7,000 in PE 2005. The cash used in both period ends were primarily due to purchase of fixed assets.

 

Net cash used in financing activities was $46,000 in PE 2006 as compared to net cash provided by financing activites of $105,000 in PE 2005. The amount used in PE 2006 was primarily comprised of payments on debt. The amount provided in PE 2005 was primarily due to borrowings of $81,000 and reductions in deferred offering costs of $25,000.

 

We had deficit working capital of $123,000 at December 31, 2006.

 

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We expect to generate enough working capital from profits to fund operations through the remainder of our fiscal year. 

 

In March 2002, we received two loans from our officers and directors, Ricardo Brutocao and David Cunningham. The total of these two loans is $24,975. The loans are payable on demand and bear interest at 6%. As of December 31, 2006, the balance of these loans is $24,975.

 

In July 2003, we agreed to purchase 148,328 shares of our common stock from Al Wild, a former employee, for $44,220 and issued our secured promissory note payable to Mr. Wild in such amount. Our note bears interest at the rate of 5% per annum, and monthly payments of principal and interest in the amount of $2,700 are due and payable on the note commencing September 30, 2003. As each monthly payment is made on our note, we may cancel and retire 8,728 of the shares. Mr. Wild may cancel our note at any time and elect to receive the remainder of the shares we purchased from him that have not been cancelled and retired by us in accordance with our agreement. Payment of our note to Mr. Wild is secured by all of our assets. The balance of this note at December 31, 2006 is $18,022.

 

In November 2003, and amended March 2005, we entered into a line of credit agreement with Venture Communications Corporation, a shareholder and related party. The agreement calls for a maximum advance of $400,000 secured by a lien on all the assets of the Company. The balance of this line at December 31, 2006 was $360,000.

 

We face the risk that we will not be able to raise the necessary capital to fully fund our sales and marketing plan. If we are not successful in raising capital, we will have to scale back our plans for the future. This will impact our future revenue growth and profitability.

 

If a capital raise is not successful, we will reduce our planned hires to the level that can be sustained from our existing operational cash flow. We will also scale back our future product launch and marketing of CenterStats to the level that they will be funded by operational cash flow. We will also implement, necessitated on business conditions, several cost cutting strategies identified by management.

 

We currently have not entered into any agreements nor are we currently in discussions with any potential merger or acquisition candidate. However, we intend to pursue an acquisition strategy upon successful completion of a capital raise and the listing of our stock on the OTC Bulletin Board. As we believe our current market space has a number of relatively small companies, our strategy will be to increase market share, customer base, and technology by acquiring these companies. We also believe that acquiring certain key distributors, thereby securing our sales channels, makes sound business sense. We may possibly seek to acquire one or more distributors in the future.

 

Results of Operations for the Three Months Ended December 31, 2006 as Compared to the Three Months Ended December 31, 2005

 

We believe there is some improvement in the economy in general and corporate infrastructure technology spending in specific. We saw increases in revenue in almost all lines of business this past quarter, and expect to see improvement in our revenue as long as corporate infrastructure technology spending remains consistent. Our biggest risks continue to be revenue growth, and the capital raise necessary to implement our sales and marketing strategy.

 

Revenues

 

		Three Month Period Ended December 31,
		(In thousands)
		2006			%			2005			%
Centergistic (U.S.)		$	479			60.3		$	354			40.8
Mexico and Latin America		$	316			39.7		$	513			59.2
Total		$	795			100.0		$	867			100.0

 

Total net revenues decreased by $72,000 or 8% for the three month period ended December 31, 2006 (“PE 2006”) as compared to the three month period ended December 31, 2005 (“PE 2005”). Revenues from U.S. based operations increased by $125,000 or 57% from the PE 2005. Revenues from Mexico decreased by $197,000 or 38% during PE 2006.

 

In the U.S. based operations, direct sales of AgentView increased $164,000 or 547% compared to PE 2005. We were successful in selling our new version of software and upgrading several customers to the new platform. Our focus has turned away from hardware sales, concentrating primarily on selling software and services. We expect this trend of reducing hardware sales to continue throughout the remainder of the fiscal year and beyond. We are starting to see increased interest from customers requiring multiple data sources and a high number of agents. This will help our revenue in the future as one of our AgentView products is priced on a “per agent” basis. We also charge additional amounts for multiple data sources. As corporate infrastructure technology spending is increasing, we expect our revenue to increase.

 

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Distribution revenue in the U.S. dropped by $32,000 or 19% from PE 2005. Revenue from our largest distributor, Dacon, increased by $33,000 or 49% from PE 2005. We expect business from Dacon to increase during the remainder of our fiscal year as we introduced an upgrade program to the British Telecom (“BT”) installed base, and will expect a roll out of our CenterStats product to that base as well. We signed a new distributor in July 2006 and this distributor produced $80,000 in revenue during the three months ended December 31, 2006. We saw distribution hardware revenue fall by $102,000 during the PE 2006. We made a concerted effort to sell software and services to our distributors instead of hardware and 3^rd party sourced products during our last fiscal year. We expect this trend to continue throughout the remainder of our fiscal year.

 

Installation and training revenues decreased by $5,000 or 36% from PE 2005 due to timing of installations. We expect these revenues to increase as more Agent View and CenterStats products are sold.

 

Mexico and Latin America revenues decreased by $197,000 or 38% as compared to PE 2005. We made a decision to drop low margin 3^rd party hardware sales of certain products in Mexico in order to improve our margins. The reduction in revenue is a function of the dropped products. We expect to see our revenues begin to steadily improve through the remainder of our fiscal year, with an improving trend as the Mexican and South American economies improve.

 

Cost of Revenues

 

Cost of revenues decreased to $123,000 or 15% of revenues as compared to $315,000 or 36% of revenues in PE 2005. Costs associated with hardware and third party products sales decreased by $71,000. As a greater portion of our revenue over this past three months ended December 31, 2006 was derived from software and service sales, our costs related to hardware and third-party product sales declined accordingly. We made a concerted effort to eliminate hardware sales and reduce sales of lower margin products in Mexico. This, along with higher software and service sales, increased our margins substantially. We expect declining hardware revenues and costs to occur throughout the remainder of our fiscal year resulting in improved cost of revenue percentages.

 

Gross Profit

 

Gross profit improved to 85% of revenues in PE 2006, or $672,000, as compared to 64%, or $551,000, in PE 2005. The improvement in gross profit percentage is attributable to the mix of revenue to software and service products from hardware and third-party sourced products. We expect this trend to continue as we sell more AgentView and CenterStats to direct end-users and reduce our hardware sales.

 

Operating Expenses

 

Sales and Marketing

 

Sales and marketing expenses decreased $53,000 or 34% as compared to PE 2005. We saw decreased salaries and wages of $20,000 due to lower staffing levels and consolidation of a sales management position. We spent less on trade shows this period by $10,000 and lower travel and entertainment expenses of $5,000. We also spent less on commissions ($7,000) due to the reduced sales level in Mexico. We also reduced the use of outside consultants by $5,000 during PE 2006. We face the risk of not having the necessary capital to fully implement our sales and marketing strategy next fiscal year. If we do not receive capital, we will scale back our implementation of the sales and marketing strategy, and this will adversely affect our revenue and profitability in our future fiscal periods.

 

Our strategy will continue to slowly fund our sales and marketing programs by investing any cash generated by operations. Absent any outside funding, we will continue this process for the foreseeable future. If we are not successful in raising capital, we will reduce our planned hires to the level that can be sustained from our existing operational cash flow.

 

General and Administrative

 

General and administrative expenses basically remained flat as compared to PE 2005. Salaries and wages and the related payroll taxes decreased by $25,000 due to reduced staff and eliminating an administrative management position. Amortization of capitalized software decreased by $14,000 and rent expenses decreased by $10,000. These decreases were offset by an increase in bonus of $54,000 due to implementing a plan for executive management.

 

We anticipate general and administrative expenses to increase as we add staff. As a result of obtaining public reporting company status, our professional fees in upcoming fiscal years are expected to greatly increase. We anticipate general and administrative costs to increase by $100,000 to $150,000 per year due to increased professional fees, director and officer liability insurance, and increased employee benefit costs.

 

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Research and Development

 

Research and development expenses decreased by $28,000 or 38% over the same period as last year primarily due to closing our development center which opened in India in May 2003. Salaries decreased by $20,000 due to the reductions related to the India closure and travel costs decreased by $3,000 due to not traveling to India as frequently and closing the office saved $5,000 in rent and professional fees..

 

We plan to increase the staffing level upon generating sufficient operational cash flow. Primarily, these developers will develop interfaces to enable our products to work with “best of breed” call/contact center applications.

 

Other (Expense) Income

 

The interest expense during both PE 2006 and PE 2005 were related to interest on the line of credit. This expense is expected to remain constant until we achieve sufficient operating cash necessary to begin to pay down the debt.

 

Net Income (Loss)

 

Net income increased to $108,000 as compared to a $99,000 loss in PE 2005, a $207,000 or 209% improvement. The improvement was primarily due to higher software and service revenue levels achieved in the period with substantially higher margins.

 

Factors That May Affect Future Results

 

We have experienced losses in the past, anticipate losses for the foreseeable future and may never achieve profitability.

 

We generated net income of $252,000 during the six months ended December 31, 2006, but as of such date our accumulated deficit was $2,816,000. We expect that our operating expenses will increase significantly as we continue to expand our business. As a result, we will need to generate significantly more revenues from sales of our CenterStats product to achieve profitability. We have a limited operating history with our CenterStats product and we are not able to estimate when, if ever, our revenues will increase sufficiently to cover these expenses. We cannot assure you that our revenue will grow in the future or that additional capital will be made available to us. If revenues grow slower than we anticipate, or if operating expenses exceed our expectations or cannot be reduced accordingly, or if we cannot obtain additional capital, our business, operating results and financial condition will be materially and adversely affected, which could cause our investors to lose all or part of their investment in our common stock.

 

We have not generated any significant revenues from the sale of our CenterStats product and if we are unable to increase sales, our business, operating results and financial condition will be materially adversely affected.

 

We began marketing our CenterStats product in March 2002. Our marketing efforts to date have been very limited because we lack sufficient capital to implement our sales and marketing strategy. Revenues for the six month periods ended December 31, 2006 and 2004 were $1,699,000 and $1,534,000, respectively.

 

Our future revenues will depend significantly on our ability to penetrate the call/contact center or business intelligence software market space. We have developed a sales and marketing strategy to achieve revenue growth, but we need additional capital to implement it. If we are not successful in selling our products in our targeted market due to insufficient additional capital or other factors including competitive pressures or technological advances by others, our business, operating results and financial condition will be materially and adversely affected.

 

We need additional capital to implement our current business strategy, which may not be available to us, and if we raise additional capital, it may dilute our investor’s, ownership in us.

 

We believe that the proceeds of a private placement offering or public stock offering, together with cash generated from operations, will be sufficient to meet our anticipated needs for business expansion, capital expenditures, working capital and general corporate purposes for the foreseeable future, but no less than a period of 12 months after the date of this report. Thereafter, we may need to raise additional funds.

 

If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our shareholders will be reduced, shareholders may experience additional dilution and such securities may have rights, preferences and privileges senior to those of the Common Stock and may have covenants which impose restrictions on our operations. There can be no assurance that any necessary additional financing will be available on terms favorable to us or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to fund our marketing needs or expansion, to take advantage of unanticipated acquisition opportunities, to develop or enhance services or products or to respond to competitive pressures. This inability could have a material adverse effect on our value, prospects, business, results of operations and financial condition.

 

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Our quarterly operating results, revenues and expenses may fluctuate significantly which could have an adverse effect on the market price of our common stock.

 

Our operating results, revenues and expenses may fluctuate significantly from quarter to quarter due to a variety of factors including:

 

	•		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.

 

We believe that period-to period comparisons of our results of operations are not a good indication of future performance. There can be no assurance that future revenues and results of operations will not vary substantially. It is also possible that in future quarters; our operating results will be below the expectations of public market analysts and investors. In that event, the trading price of our common stock may fall.

 

The loss of Dacon PLC as a customer would materially adversely affect our business, operating results and financial condition.

 

We sell a substantial portion of our products to Dacon PLC, which is based in the United Kingdom and has been a distributor of our products for the past 12 years. For each of the six month periods ended December 31, 2006 and 2005, Dacon accounted for 15%, respectively, of net revenues, and 4% of total trade receivables as of December 31, 2006. The loss of Dacon PLC as a customer would have a material adverse effect on our business, operating results and financial condition.

 

We face risks associated with operations in Mexico, Latin America and South America which could adversely affect our business, operating results and financial condition.

 

We derive a substantial portion of our revenues from sales to customers in Mexico, Latin America and South America. For the six month periods ended December 31, 2006 and 2005, these customers represented approximately 39% and 50%, respectively, of our total net revenues.

 

We face certain risks inherent in conducting business internationally, and such specific risks in Mexico, Latin America and South America as languages and cultural differences, legal and governmental regulatory requirements and potential political and economic unrest. Any of these factors could seriously harm our ability to generate future revenues from these customers, and, consequently, our business, operating results and financial condition.

 

We operate in a competitive business environment and if we cannot compete effectively, we may face price reductions and decreased demand for our products.

 

The market for our products and services is intensely competitive and subject to technological change. Competitors vary in size and in the scope and breadth of the products and services they offer. We encounter competition from a number of sources, all of which offer performance management reporting systems to the call/contact center market. We expect additional competition from other established and emerging companies as the market for performance management reporting solutions and complementary products continues to develop and expand. We encounter competition in the United States from a number of sources, including Symon and Innova, all of which offer performance management reporting systems to the call/contact center market. Some of our current and many of our potential competitors have longer operating histories, greater name recognition, larger client bases and significantly greater financial, engineering, technical, marketing and other resources than we do. As a result, these companies may be able to respond more quickly to new or emerging technologies and changes in customer demands or to devote greater resources to the development, promotion and sale of their products than we can.

 

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In addition, current potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of our prospective customers. Accordingly, it is possible that new competitors or alliances among competitors may emerge and acquire significant market share. We expect that the call/contact center market will continue to attract new competitors and new technologies, possibly involving alternative technologies that are more sophisticated and cost-effective than our technology. New product introductions by our competitors could cause a decline in sales, a reduction in the sales price, or a loss of market acceptance of our existing products. There can be no assurance that we will be able to compete successfully against current or future competitors or that competitive pressures faced by us will not materially adversely affect our business, financial condition and results of operations.

 

We rely in part, on third-party distributors to market and distribute our products, and their failure to do so successfully could significantly harm our ability to maintain and expand our customer base, which would adversely affect our operating results and financial condition.

 

Our sales and marketing strategy includes channels of third party distributors. We have developed a number of these relationships and intend to develop new ones. Our inability to attract new distributors or their inability to penetrate their respective market segments or the loss of any of our third-party distributors as a result of competitive products offered by other companies, or products similar to ours that are developed internally by them or otherwise, could harm our ability to maintain and expand our customer base. Our ability to achieve revenue growth in the future will depend in part on our success in developing and maintaining successful relationships with these third-party distributors. If we are unable to develop or maintain our relationships with these third-party distributors, our operating results and financial condition will suffer.

 

We must increase our direct sales force to sell our products, and if we are unable to hire and train new sales personnel, our future growth will be impaired.

 

Our direct sales force currently consists of three persons. Our sales and marketing strategy includes increasing the level of direct sales. Our ability to achieve revenue growth in the future will depend on our ability to recruit, train, and retain qualified direct sales personnel. If we are not able to obtain additional capital, we will not be able to increase the size of our direct sales force. Even if we are successful in obtaining additional capital, there is no assurance that we will be successful in recruiting and retaining qualified sales personnel. Our inability to increase the size and productivity of our direct sales force could impair our growth and adversely affect our operating results and financial condition.

 

If we fail to keep pace with rapid technological changes in our industry, we could lose existing customers and be unable to attract new business.

 

Our market is characterized by rapidly changing technologies, frequent new product and service introductions and evolving industry standards. The introduction of products embodying new technologies and the emergence of new industry standards can render our existing products obsolete and unmarketable in short periods of time. We expect new products and services, and enhancements to existing products and services to continue to be developed and introduced by others, which will compete with, and reduce the demand for, our products and services. Our future success will depend, in part, on our ability to enhance the performance features and reliability of our current products and introduce new products that keep pace with technological developments and emerging industry standards and to address the increasingly sophisticated needs of our customers. We may have to raise additional capital to successfully improve the features and reliability of our products and services. We may not be able to obtain the capital or obtain it on terms acceptable to us. There can be no assurance that we will be successful in developing, marketing and selling new products or product enhancements that meet these changing demands, that we will not experience difficulties that could delay or prevent the successful development, introduction and marketing of these products or that our new products and product enhancements will adequately meet the demands of the marketplace and achieve market acceptance.

 

We may lose sales, or sales may be delayed, due to the long sales cycle for our products, which would reduce our revenues.

 

Our customers generally involve many people in the decision to purchase our products and consulting and other services. As a result, we may wait many months before a sale can actually be completed. During this long sales cycle, events may occur that affect the size or timing of the order or even cause it to be canceled. For example, our competitors may introduce new products, or the customer’s own budget and purchasing priorities may change. If these events were to occur, sales of our products may be cancelled or delayed, which would reduce our revenues.

 

If we do not retain our senior management and other key employees, we may not be able to successfully implement our business strategy.

 

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Our future success depends to a significant extent on the continued services of our senior management, particularly, Ricardo Brutocao, Chief Executive Officer, and David Cunningham, Chief Operating and Financial Officer, and other key personnel, particularly, Rama Iyer, Vice President, Technology and Product Management. The loss of the services of any of these persons could have a material adverse effect on our business, results of operations and financial condition. We have no employment agreement with Mr. Iyer. We do not maintain “key person” life insurance for any of our personnel at this time but may decide to in the future. Competition for qualified personnel in our industry is intense and we compete for these personnel with other companies that have greater financial and other resources than we do. Our future success will depend in large part upon on our ability to attract, retain and motivate highly qualified personnel, and there can be no assurance that we will be able to do so. If we have any difficulty in hiring needed qualified personnel, our business, financial condition and results of operations could be materially adversely affected.

 

Our success depends on growth in the telecommunications industry.

 

While the Company as a whole is not dependent upon the telecommunications industry, our AgentView legacy products are substantially positioned in the sector. Our business would be adversely affected to the extent that the telecommunications industry continues to contract through consolidation and advances in technology, or does not achieve sustainable growth particularly usage by companies who use multiple software applications. A number of factors may inhibit the telecommunications industry’s growth, including:

 

	•		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.

 

If these conditions continue to occur in the future, the telecommunications industry, as well as the purchase of our products by it, could grow more slowly or decline.

 

Our limited ability to protect our proprietary technology and other rights may adversely affect our ability to compete.

 

We rely on a combination of trademarks, copyrights, trade secret laws and contractual provisions to protect our intellectual rights. We also have a patent pending for an information management system. We cannot assure our investors that our patent application will result in any patent being issued to us or, if issued, that any patent claims will be of sufficient scope or strength to provide any meaningful protection or any competitive advantage to us. There can be no assurance that these protections will be adequate to prevent our competitors from misappropriating our technology or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology. To protect our trade secrets and other proprietary information, we require employees, consultants and others to enter into confidentiality agreements. We cannot assure our investors that these agreements will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information.

 

If we are found to infringe the proprietary rights of others, we could be required to redesign our products, pay royalties or enter into license agreements with third parties.

 

Although we have never been the subject of a material intellectual property dispute, there can be no assurance that a third party will not assert that our technology violates its intellectual property rights in the future. As the number of software products in our target market increases and the functionality of these products further overlap, we believe that software developers may become increasingly subject to infringement claims. Any claims, whether with or without merit, could:

 

	•		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.

 

There can be no assurance that third parties will not assert infringement claims against us in the future with respect to our current or future products or that any such assertion will not require us to enter into royalty arrangements (if available) or litigation that could be costly to us.

 

A large percentage of our stock is owned by relatively few people, including officers and directors, and their interest may be different from and conflict with yours.

 

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As of December 31, 2006 our officers and directors beneficially owned a total of 6,897,086 shares (including shares issuable upon exercise of options, warrants or convertible securities beneficially owned by them that are exercisable or convertible within 60 days after December 31, 2006), or approximately 58% of our outstanding common stock. You may be subject to certain risks due to the concentrated ownership of our common stock. For example, these stockholders, if acting together, would be able to influence or control matters requiring approval by our stockholders, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions. They may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. The concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.

 

Future sales of shares of our common stock which are eligible for sale by our stockholders may decrease the price of our common stock.

 

We had 10,724,312 shares of common stock outstanding on December 31, 2006. All of these shares are “restricted securities” under Rule 144 of the Securities Act of 1933. An additional 2,553,710 shares underlying options and warrants outstanding on December 31, 2006 will be restricted securities if and when they are issued. Restricted securities may be sold only if they are registered under the Securities Act or if an exemption from the registration requirements of the Securities Act is available. Generally, stockholders may sell restricted securities without registration after holding them for one year and subject to certain volume limitations. Actual sales or the prospect of sales by our present stockholders or by future holders of restricted securities, pursuant to a registration statement, under Rule 144, or otherwise, may, in the future, have a depressive effect on the market price of our common stock. A decline in the price of shares of our common stock might impede our ability to raise capital through the issuance of additional shares of our common stock or other equity securities.

 

There is no market for our common stock and we cannot assure you that a market will develop or what the market price of our common stock will be.

 

Although our common stock has very limited trading on the over-the-counter market on the OTC Electronic Bulletin Board, we can give no assurance that an active trading market will develop. If an active trading market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at an attractive price or at all. We cannot predict the prices at which our common stock will trade. It is possible that in future quarters our operating results may be below the expectations of public market analysts and investors and, as a result of these and other factors, the price of our common stock may decline.

 

Our common stock will be deemed to be penny stock which may make it difficult for investors to sell their shares.

 

If a market ever develops for our common stock, our common stock will be deemed to be penny stock as that term is defined in Rule 3a51-1 of the Securities Exchange Act of 1934 (the “Exchange Act”). Penny Stocks are stocks: (i) with a price of less than five dollars per share; (ii) that are not traded on a recognized national exchange; (iii) whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ listed stocks must still meet requirement (i) above); or (iv) in issuers with net tangible assets less than $2,000,000 (if the issuer has been in continuous operation for at least three years) or $5,000,000 (if in continuous operation for less than three years) or, with average revenues of less than $6,000,000 for the last three years.

 

Section 15(g) of the Exchange Act and Rule 15g-2 of the Exchange Act require broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor’s account. Potential investors in our common stock are urged to obtain and read such disclosures carefully before purchasing any shares that are deemed to be penny stock.

 

Moreover, Rule 15g-9 of the Exchange Act requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to: (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transaction in penny stocks are suitable for the investor and that the investor has significant knowledge and experience to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from such investor, confirming that it accurately reflects the investor’s financial situation, investment experience and investment objects. Compliance with these requirements may make it more difficult for investors in our common stock to resell the shares to third parties or to otherwise dispose of them.

 

No dividends anticipated to be paid.

 

 

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ITEM 3. CONTROLS AND PROCEDURES

As of the last day covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Operating Officer who is also the Company’s Chief Financial Officer, of the effectiveness of the design, and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the Chief Operating Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting him to material information relating to the Company (including its consolidated subsidiary) required to be included in the Company’s Exchange Act filings.

 

There has not been any change in the Company’s internal controls over financial reporting during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

(UPDATE AS APPROPRIATE)

ITEM 1. LEGAL PROCEEDINGS

 

None.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

The Company has a note payable to a former employee in connection with a stock repurchase agreement that requires monthly payments of $2,750 pursuant to contractual terms. The current balance of the note payable is $18,022 and the Company’s most recent payment under the note agreement was in August 2004. The note is secured by substantially all of the Company’s assets.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

None.

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SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	CENTERGISTIC SOLUTIONS, INC.
Date: February 20, 2007		/s/ Ricardo G. Brutocao
		Ricardo G. Brutocao,
		Chief Executive Officer

Date: February 20, 2007		/s/ David M. Cunningham
		David M. Cunningham,
		Chief Operating Officer and Chief Financial Officer (Principal Accounting Officer)

 

 

EXHIBIT INDEX

 

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+

 

*  Filed herewith +  Furnished herewith

 

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