UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
|X| QUARTERLY REPORT UNDER SECTION 13 0R 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended November 30, 2004
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ________________
Commission File Number 0-22969
Market Central, Inc.
(Name of Small Business Issuer in its Charter)
Delaware 59-3562953
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1650A Gum Branch Road, Jacksonville, NC 28540
(Address of Principal Executive Offices)
910-478-0097
(Issuer's Telephone Number)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes |X| No |_|
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Class: Common Stock, $.001 par value
Outstanding as of January 7, 2005: 13,542,117 shares
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
PART I.
ITEM 1. FINANCIAL STATEMENTS
The following unaudited Condensed Consolidated Financial Statements for the
three months ended November 30, 2004 and November 30, 2003 have been prepared by
Market Central, Inc. a Delaware corporation.
2
MARKET CENTRAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
November 30, August 31,
2004 2004
ASSETS
Current Assets:
Cash and cash equivalents $ 344,099
Accounts receivable, net of allowance for doubtful accounts of $0 at
November 30, 2004 and August 31, 2004 $ 686,286 719,262
Accounts receivable - related parties, net of allowance for doubtful
accounts of $0 at November 30, 2004 and August 31, 2004 390,031 277,119
Prepaid expenses and other assets 23,175 149,282
------------ ------------
Total Current Assets 1,099,492 1,489,762
Property and Equipment:
Furniture and fixtures 1,051,489 1,051,489
Computers and software 1,890,651 1,877,877
Leasehold improvement 1,243,278 1,243,278
------------ ------------
4,185,418 4,172,644
Less: accumulated depreciation 3,381,352 3,281,195
------------ ------------
Property and Equipment, net 804,066 891,449
Other Assets:
Restricted cash (Note C) 109,617 109,617
Goodwill 745,050 745,050
Deposits and other 28,762 50,308
Patents and trademarks, net of accumulated amortization of $40,551
and $32,440 at November 30, 2004 and August 31, 2004, respectively 56,768 64,879
------------ ------------
Total Other Assets 940,197 969,854
Total Assets $ 2,843,755 $ 3,351,065
============ ============
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
Current Liabilities:
Cash disbursed in excess of available funds $ 70,141
Accounts payable and accrued liabilities 4,253,571 $ 4,327,696
Note payable to related parties (Note D and H) 1,518,102 1,210,474
Notes payable, current portion (Note D) 1,541,617 1,830,422
Due to factor (Note E) 304,598 483,590
Accrued preferred stock dividend (Note F) 93,619 61,067
Current portion of capital lease obligation 648,304 648,484
------------ ------------
Total Current Liabilities 8,429,952 8,561,733
Capital lease obligation - long-term portion 50,849 64,716
Commitments and Contingencies (Note J) -- --
Deficiency in Stockholders' Equity:
Preferred stock, par value $.001 per share; 10,000,000 shares
authorized;
Series A - 2,778,153 shares and 2,251,407 shares issued and outstanding
at November 30, 2004 and August 31, 2004, respectively (Note F) 2,778 2,251
Series B - 350,000 shares issued and outstanding at November 30, 2004
and August 31, 2004 (Note F) 350 350
Common stock, par value $.001 per share; 75,000,000 shares authorized;
13,542,117 shares and 13,391,693 shares issued and outstanding at
November 30, 2004 and August 31, 2004, respectively (Note F) 13,542 13,392
Common stock receivable (Note F) (6,681) (800)
Additional paid-in-capital 28,426,461 27,672,231
Preferred stock dividend (Note F) (875,000) (875,000)
Accumulated deficit (33,198,496) (32,087,808)
------------ ------------
Total Deficiency in Stockholders' Equity (5,637,046) (5,275,384)
------------ ------------
Total Liabilities and Deficiency in Stockholders' Equity $ 2,843,755 $ 3,351,065
============ ============
See accompanying notes to unaudited condensed consolidated financial statements
3
MARKET CENTRAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
NOVEMBER 30,
2004 2003
---- ----
Revenues, net $ 1,434,456 $ 2,029,618
Cost of sales 983,224 1,440,474
------------ ------------
Gross profit 451,232 589,144
Operating expenses:
Selling, general and administrative 1,337,289 1,139,439
Depreciation and amortization 108,268 240,066
------------ ------------
Total operating expenses 1,445,557 1,379,505
Loss from operations (994,325) (790,361)
Interest income (expenses) (83,811) (95,551)
------------ ------------
Total other expenses (83,811) (95,551)
Loss from continuing operations, before income taxes and
discontinued operations (1,078,136) (885,912)
Provision for income taxes -- --
------------ ------------
Loss from continuing operations, before discontinued operations (1,078,136) (885,912)
Income from discontinued operations (Note B) -- 58,892
------------ ------------
Net loss $ (1,078,136) $ (827,020)
============ ============
Cumulative convertible preferred stock dividend requirements
(Note F) (32,552) --
------------ ------------
Net loss attributable to common shareholders $ (1,110,688) $ (827,020)
============ ============
Net (loss) per common share (basic and assumed diluted) $ (0.08) $ (0.06)
============ ============
Continuing operations: (0.08) (0.06)
============ ============
Discontinued operations: -- 0.00
============ ============
Weighted Average Shares Outstanding Basic and assumed diluted 13,427,147 13,268,969
See accompanying notes to unaudited condensed consolidated financial statements
4
MARKET CENTRAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
2004 2003
---- ----
Net cash (used in) operating activities: $ (798,234) $ (1,486,222)
Net cash (used in) investing activities (12,774) (3,541)
Net cash provided by financing activities 466,909 1,357,939
----------- ------------
Net (decrease) in cash and cash equivalents (344,099) (131,824)
Cash and cash equivalents at beginning of the period 344,099 337,953
----------- ------------
Cash and cash equivalents at end of the period $ -- $ 206,129
=========== ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest $ 28,227 $ 117,584
Cash paid during the period for income taxes -- --
Common stock issued in exchange for services rendered (Note F) 107,900 --
Stock options and warrants granted in exchange for services
rendered (Note F) -- 3,166
Accrued preferred stock dividend (Note F) 32,552 --
See accompanying notes to unaudited condensed consolidated financial statements.
5
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2004
UNAUDITED
NOTE A - SUMMARY OF ACCOUNTING POLICIES
General
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB, and therefore, do
not include all the information necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Accordingly, the results from operations for the three-month period ending
November 30, 2004 are not necessarily indicative of the results that may be
expected for the year ended August 31, 2005. The unaudited consolidated
financial statements should be read in conjunction with the consolidated August
31, 2004 financial statements and footnotes thereto included in the Company's
SEC Form 10-KSB.
Business and Basis of Presentation
Market Central, Inc. (the "Company") is a global technology management company
specializing in solutions that connect people and businesses with information.
The Company holds multiple patents and patent-pending technologies and has
developed a suite of solutions that include software for next-generation search,
intelligent document recognition, data capture, cleansing, mining, and
integration.
The unaudited condensed consolidated financial statements for the three months
ended November 30, 2004, include the accounts of the Company and its wholly
owned subsidiary, ecommerce support centers, inc. ("ecom"). All significant
inter-company transactions and balances have been eliminated in consolidation.
In May 2004, the Company sold a subsidiary, U.S. Convergion, Inc.
("Convergion"), to Sylvia Holding Co., Inc. ("Sylvia"), a Nevada Corporation, in
exchange for 500,000 shares of Sylvia's common stock, and other goods and
valuable consideration. The Convergion business segment is accounted for as a
discontinued operation, and accordingly, amounts in the financial statements,
and related notes for all periods shown have been restated to reflect
discontinued operations accounting. Summarized results of the discontinued
business are further described in Note B.
The Company's current operations consist of providing outsourced contact center
solutions through ecom and marketing and sales efforts related to the Company's
software products and patented intellectual property.
Stock Based Compensation
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS 123." This statement
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in APB
Opinion No. 25 and related interpretations. Accordingly, compensation expense
for stock options is measured as the excess, if any, of the fair market value of
the Company's stock at the date of the grant over the exercise price of the
related option.
6
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2004
UNAUDITED
NOTE A - SUMMARY OF ACCOUNTING POLICIES (Continued)
Stock Based Compensation (Continued)
The Company has adopted the annual disclosure provisions of SFAS No. 148 in its
financial reports for the year ended August 31, 2003 and has adopted the interim
disclosure provisions for its financial reports for the subsequent periods. Had
compensation costs for the Company's stock options been determined based on the
fair value at the grant dates for the awards, the Company's net loss and losses
per share would have been as follows (transactions involving stock options
issued to employees and Black-Scholes model assumptions are presented in
Note G):
For the three months ended
November 30,
2004 2003
---- ----
Net loss - as reported $ (1,078,136) $ (827,020)
Add: Total stock based employee compensation expense as
reported under intrinsic value method (APB. No. 25) -- --
Deduct: Total stock based employee compensation expense
as reported under fair value based method (SFAS No. 123)
(292,375) (11,663)
------------ -----------
Net loss - Pro Forma $ (1,370,511) $ (838,683)
============ ===========
Net loss attributable to common stockholders - Pro forma $ (1,403,063) $ (838,683)
============ ===========
Basic (and assuming dilution) loss per share - as
reported $ (0.08) $ (0.06)
============ ===========
Basic (and assuming dilution) loss per share - Pro forma $ (0.10) $ (0.06)
============ ===========
New Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS
151, Inventory Costs-- an amendment of ARB No. 43, Chapter 4. This Statement
amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify
the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4,
previously stated that ". . . under some circumstances, items such as idle
facility expense, excessive spoilage, double freight, and rehandling costs may
be so abnormal as to require treatment as current period charges. . . ." This
Statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal." In addition,
this Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. This Statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. Management does not believe the
adoption of this Statement will have any immediate material impact on the
Company.
In December 2004, the FASB issued SFAS No.152, "Accounting for Real Estate
Time-Sharing Transactions--an amendment of FASB Statements No. 66 and 67" ("SFAS
152) The amendments made by Statement 152 This Statement amends FASB Statement
No. 66, Accounting for Sales of Real Estate, to reference the financial
accounting and reporting guidance for real estate time-sharing transactions that
is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real
Estate Time-Sharing Transactions. This Statement also amends FASB Statement No.
67, Accounting for Costs and Initial Rental Operations of Real Estate Projects,
to state that the guidance for (a) incidental operations and (b) costs incurred
to sell real estate projects does not apply to real estate time-sharing
transactions. The accounting for those operations and costs is subject to the
guidance in SOP 04-2. This Statement is effective for financial statements for
fiscal years beginning after June 15, 2005. with earlier application encouraged.
The Company does not anticipate that the implementation of this standard will
have a material impact on its financial position, results of operations or cash
flows.
7
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2004
UNAUDITED
NOTE A - SUMMARY OF ACCOUNTING POLICIES (Continued)
Reclassification
Certain reclassifications have been made to conform
to prior periods' data to the current presentation. These reclassifications had
no effect on reported losses.
NOTE B - DISCONTINUED OPERATIONS
In May 2004, the Company sold its wholly owned subsidiary, Convergion to Sylvia
through a Stock Purchase Agreement ("Agreement"). Pursuant to the Agreement,
Sylvia acquired certain assets and assumed certain liabilities of Convergion and
agreed to issue to the Company a total of 500,000 shares of its common stock
valued at $0.001 per share.
As a result of the sale of the Convergion business segment, the Company
accounted for the segment as a discontinued operation, and accordingly, the
amounts in the financial statements and related notes for all periods shown have
been restated to reflect discontinued operations accounting. The financial
statements reflect the operating results and balance sheet items of the
discontinued operations separately from continuing operations. The results for
the three month period ended November 30, 2003 have been restated. Operating
results for the discontinued operations for the period ended November 30, 2003
were:
Revenues $ 1,617,415
Expenses (1,558,523)
-----------
Net income $ 58,892
===========
In connection with the Agreement, the Company issued to Sylvia a promissory note
("Note") in the amount of $500,000 to serve as security for the obligations of
the Company under the Agreement. The Note shall only become due and payable upon
the demand of Sylvia upon an event of default of the Agreement. Additionally,
the Company entered into a Security Agreement with Sylvia. Pursuant to the
Security Agreement, the Company granted Sylvia a security interest in any and
all existing or after acquired assets of the Company, subject to first lien
financing of up to $3,000,000 if any, securing the Company's obligations to
Sylvia under the Note (collectively the "Escrow Document"). The Escrow Document
is held by the legal counsel of Sylvia and shall be released to the Company when
all covenants, representation, and conditions in the Stock Purchase Agreement
are satisfied or otherwise expire. As of November 30, 2004, the Escrow Document
has not been released by Sylvia.
NOTE C - RESTRICTED CASH
In June 2004, the Onslow County Tax Office, North Carolina sought the
garnishment of the Company's bank balance in the amount of $109,617 for
outstanding property taxes owed by the Company's wholly-owned subsidiary, ecom.
The Company has obtained a court order to allow the Company to defend its
position and recalculate the exact amount of taxes due. The Company's management
believes that the recalculated amount due was approximately $78,000. As of
November 30, 2004, the Company has not resolved the issue with Onslow County Tax
Office. The Company has included the amount of taxes due in its accrued
liabilities at November 30, 2004 and August 31, 2004 and accounted restricted
cash in the amount of $109,617.
8
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2004
UNAUDITED
NOTE D - NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTIES
Notes Payable at November 30, 2004 and August 31, 2004 are as follows:
November 30, August 31,
2004 2004
---- ----
Note payable in monthly installments of $33,333 including interest at 6%
per annum; maturity date is in March 2005; collateralized by 500,000 shares
held by a major stockholder and personal guarantees by two stockholders $
The Company is currently in default under the terms of the note agreement 226,134 $ 501,134
Note payable in monthly installments of $1,919 including interest at 7.34%
per annum; unsecured; maturity date is in May 2005 13,400 18,975
Note payable in monthly installments of $2,813 including interest at 6% per
annum; unsecured; maturity date is in February 2005 10,950 19,180
Note payable to Bank in monthly installments of interest only at LIBOR
daily floating rate plus 3.5%; current maturity date is December 9, 2004;
personally guaranteed by Company shareholders 1,250,000 1,250,000
Note payable on demand to a related party, interest payable at 6% per annum
on repayment date; unsecured. (Note H) 237,569 237,569
Note payable on demand to a related party, interest payable at 6% per annum
on repayment date; unsecured. (Note H) 1,160,533 852,905
Note payable on demand to a related party, non-interest bearing; unsecured;
maturity date is in May 2004; the Company shall repay the note with Company
common stock. The Company is currently in default under the terms of the
note agreement. (Note H) 120,000 120,000
Note payable; liabilities assumed pursuant to Assets Purchase Agreement
with Pliant; interest payable at 12% per annum, interest due and principal
due in March 2004; unsecured. The Company is in default under the terms of
the note agreements 41,133 41,133
----------- -----------
3,059,719 3,040,896
Less: current portion (3,059,719) (3,040,896)
----------- -----------
$ -- $ --
=========== ===========
NOTE E - DUE FROM FACTOR
The Company's subsidiary, ecommerce support centers, inc., has an arrangement
for a $2,000,000 factoring facility whereby the factor purchases eligible
receivables and advances 80% of the purchased amount to the Company. Purchased
receivables are bought at 96.25% of their face amount. The Company receives a
rebate of 2.40% for invoices paid by customers between one to thirty days, and
2.36% for invoices paid by customers after thirty days reduced by .04% per
additional day such invoice remains outstanding. The arrangement is accounted
for as a sale of receivables on which the factor has recourse to the 20%
residual of aggregate receivables purchased and outstanding. Net charge to the
Company is 1.35% of the invoices paid by customers between one to thirty days,
and 1.39% after thirty days, increased by .04% per additional day such invoice
remains outstanding. In connection with this agreement, the Company is required
to maintain certain financial covenants. At November 30, 2004 and August 31,
2004, balance due from factor (included in accounts receivable) was as follows:
November 30, August 31,
2004 2004
---- ----
Accounts Receivable - Factored $ 380,748 $ 604,488
Less: Advance from Factor (304,598) (483,590)
---------- -----------
Net Due from Factor $ 76,150 $ 120,898
========== ===========
9
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2004
UNAUDITED
NOTE F - CAPITAL STOCK
The Company is authorized to issue 75,000,000 shares of common stock with $.001
par value per share and 10,000,000 shares of preferred stock with $.001 par
value per share. In July 2001, the Board of Directors of the Company designated
1,800,000 shares as 8% Cumulative Convertible Series C Preferred Stock and
1,050,000 shares as 8% Cumulative Convertible Series D Preferred Stock. In
February 2003, the Company effected a one-for-ten reverse stock split of its
outstanding shares of common stock. The Company's 75,000,000 authorized shares
of common stock with $.001 par value remained unchanged. All references in
consolidated financial statements and notes to financial statements, numbers of
shares and share amounts have been restated to reflect the reverse split. In
December 2003, the Company's Board of Directors designated 2,251,407 shares of
Series A Convertible Preferred Stock, par value $.001 per share and 350,000
shares of Series B Convertible Preferred Stock, par value $.001 per share. Both
Series A Preferred Stock and Series B Preferred Stock have a liquidation
preference with is senior to the Company's Common Stock. The Series A Preferred
Stock provides for a 4% annual cumulative dividend, that is payable when
declared by the Company's Board of Directors and is payable in shares of the
Series A Preferred Stock.
As of November 30, 2004, the Company has 13,542,117 shares of common stock,
350,000 shares of Series B Convertible Preferred Stock and 2,778,153 shares of
Series A Convertible Preferred Stock issued and outstanding. As of August 31,
2004, the Company has 13,391,693 shares of common stock, 350,000 shares of
Series B Convertible Preferred Stock and 2,251,407 shares of Series A
Convertible Preferred Stock issued and outstanding.
During the three-month period ended November 30, 2004, the Company issued an
aggregate of 526,746 shares of Series A Preferred Stock and received $640,451 of
proceeds, net of offering costs and fees of $61,439. As of November 30, 2004,
the Company had accrued cumulative preferred stock dividends and charged to
retained deficit in the amount of $93,619.
In November 2004, the Company issued an aggregate of 83,000 shares of common
stock to consultants in exchange for services rendered. The shares issued to
consultants were valued at approximately $1.30 per share, which approximated the
fair value of the shares issued during the period the services were rendered.
Compensation costs of $107,900 were charged to operations during the period
ended November 30, 2004. Additionally, the Company issued an aggregate of 67,424
shares of its common stock to consultants in November 2004 in exchange for stock
options exercised at $0.01 per share. The Company received $674 of proceeds, net
of costs and fees (Note G). The Company valued the stock options at the fair
value of its common shares at the date the options were granted and compensation
costs were charged to operations in prior period at the time the options were
granted.
The common stock receivable shown on the financial statements relates to the
800,000 shares of common stock which the former Company President agreed in
August 2004 to return to the Company but due to lost stock certificates this
return has not yet occurred. The Company and its former President completed this
transaction in January 2005. Additionally, in November 2004, the Company was
notified that its two largest shareholders were returning 5,880,740 shares of
common stock to the Company in connection with certain other actions which have
been formally agreed to (Note K). The transactions specified in this
notification and agreement has not been formally completed although all parties
are bound by its provisions.
10
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2004
UNAUDITED
NOTE G - STOCK OPTIONS AND WARRANTS
Options
The following table summarizes the changes in options outstanding and the
related prices for the shares of the Company's common stock issued to employees,
consultants and shareholders at November 30, 2004, after giving effect to 1:10
reverse split in common stock in February 2003:
Options Outstanding Options Exercisable
Weighted Average Weighted --------------------------------
Number Contractual Life Average Number Weighted Average
Exercise Price Outstanding (Years) Exercise Price Exercisable Exercise Price
-------------- ----------- ------- -------------- ----------- --------------
$ .01-$3.16 4,964,970 5.17 $ 2.00 1,581,470 $ 1.50
$ 7.00-$9.50 20,000 0.36 $ 8.25 20,000 $ 8.25
$ 10.25-$11.40 68,335 0.17 $ 10.26 68,335 $ 10.25
--------- ---- ------- --------- -------
5,053,305 4.78 $ 2.14 1,669,805 $ 1.93
========= ==== ======= ========= =======
Transactions involving the Company's options issuance are summarized as follows:
Number Weighted Average
of shares Exercise Price
--------- --------------
Outstanding at August 31, 2003 302,210 5.22
========== ======
Granted 844,092 1.30
Exercised (67,500) .01
Cancelled (12,875) 17.06
---------- ------
Outstanding at August 31, 2004 1,065,927 $ 2.06
========== ======
Granted 4,139,802 2.04
Exercised (67,424) .01
Cancelled (85,000) 1.92
---------- -------
Outstanding at November 30, 2004 5,053,305 $ 2.14
========== ======
Warrants
The following table summarizes the changes in warrants outstanding and the
related prices for the shares of the Company's common stock issued to employees,
consultants and shareholders at November 30, 2004 after giving effect to 1:10
reverse split in common stock in February 2003.
Warrants Outstanding Warrants Exercisable
-------------------- --------------------
Weighted Average Weighted Weighted
Number Contractual Life Average Number Average
Exercise Prices: Outstanding (Years) Exercise Price Exercisable Exercise Price
---------------- ----------- ------- -------------- ----------- --------------
$ 1.33- $7.81 2,197,530 3.58 $ 2.36 2,197,530 $ 2.36
$11.06- $11.88 97,931 .74 $11.49 97,931 $ 11.49
$12.81- $17.50 21,350 .97 $15.13 21,350 $ 15.13
$25.00- $33.75 16,250 .25 $25.67 16,250 $ 25.67
--------- ---- ------ --------- -------
2,333,061 3.41 $ 3.03 2,333,061 $ 3.03
========= ==== ====== ========= =======
11
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2004
UNAUDITED
NOTE G - STOCK OPTIONS AND WARRANTS - continued
Warrants (continued)
Transactions involving the Company's warrants issuance are summarized as
follows:
Number Weighted Average
of shares Exercise Price
--------- --------------
Outstanding at August 31, 2003 4,135,176 $ 3.43
========= =========
Granted 692,452 2.12
Exercised - -
Cancelled (80,631) 16.89
--------- ---------
Outstanding at August 31, 2004 4,746,997 $ 3.12
========= =========
Granted 239,416 $1.01
Exercised -
Cancelled (2,653,352) 2.93
---------- =========
Outstanding at November 30, 2004 2,333,061 $ 3.03
========== =========
The weighted-average fair value of stock options and warrants granted to
employees, consultants and shareholders during the three months ended November
30, 2004 and 2003 and the weighted-average significant assumptions used to
determine those fair values, using a Black-Scholes option pricing model are as
follows:
2004 2003
---- ----
Significant assumptions (weighted-average):
Risk-free interest rate at grant date 1.77% 1.01%
Expected stock price volatility 24% 38%
Expected dividend payout - -
Expected option life-years (a) 4.0 to 6.0 3.0 to 4.0
(a) The expected option/warrant life is based on contractual expiration dates.
The Company did not grant compensatory options or warrants to consultants during
the three-month period ended November 30, 2004. The amount of the expense
charged to operations in connection with granting stock options and warrants to
consultants was $3,166 during the period ended November 30, 2003. During the
three months ended November 30, 2004, the Company received $674 of proceeds for
67,424 stock options exercised (Note F). If the Company recognized compensation
cost for the non-qualified employee stock option plan in accordance with SFAS
No. 123, the Company's pro forma net loss attributable to common shareholders
and net loss per share would have been $(1,403,063) and $(0.10), respectively
for the three-month period ended November 30, 2004 and $(838,683) and $(0.06),
respectively for the three-month period ended November 30, 2003.
NOTE H- RELATED PARTY TRANSACTIONS
During the three month periods ended November 30, 2004 and 2003, the Company
recognized $112,912 and $588,454, respectively of sales in connection with
services provided to related party call center customers. During the quarter
ended November 30, 2004, of these three related parties, only Cheapseats, Inc
was a customer of the Company, representing 8% of sales for that period. During
the quarter ended November 30, 2003, Gibraltar Publishing, Inc., J&C Nationwide,
Inc. and Cheapseats, Inc were all customers of the call center representing 29%
of the Company's sales for that period. Each of these companies is controlled by
a director and/or significant shareholder of the Company. J&C Nationwide, Inc.
and Cheapseats, Inc. were indebted to the Company for services in the aggregate
amount of $390,031 and $277,119 at November 30, 2004 and August 31, 2004,
respectively.
12
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2004
UNAUDITED
NOTE H- RELATED PARTY TRANSACTIONS (Continued)
During the three month period ended November 30, 2004, two of the Company's
principal shareholders advanced funds in the form of unsecured notes, interest
payable at 6% per annum, to the Company for working capital purposes. As of
November 30, 2004 and August 31, 2004, the amount due to the shareholders is
$1,398,102 and $1,090,474, respectively (Note D and K). Additionally, a Company
principal shareholder had advanced funds in the form of an unsecured,
non-interest bearing note to the Company for working capital purposes. As of
November 30, 2004 and August 31, 2004, the amount due to the shareholder is
$120,000. The Company shall repay the note with common stock at the rate of
100,000 shares of common stock per $120,000 of advances. The Company is
currently in default under the term of the note agreement (Note D).
NOTE I - INVESTMENT IN SUBSIDIARY
In September 2004, the Company received 2,000,000 shares of common stock from
Ariel Way, Inc., a private company, which approximately 10% of the outstanding
stock of Ariel Way, Inc. These shares were issued in exchange for a license for
the software controlled by Convey Systems, Inc. and other management consulting
services provided by the Company's executive management. The Company expects to
complete the purchase of Convey Systems, Inc. in February 2005. This license and
the consulting services were valued at $250,000 by Ariel Way, Inc. Ariel Way,
Inc. has had limited activities and limited sales of its equity securities. The
Company has not valued the Ariel Way, Inc. shares at this time and is carrying
its ownership of those shares at its par value.
NOTE J - COMMITMENTS AND CONTINGENCIES
Litigation
In September 2004, an order requesting the U.S. Attorney for Eastern District of
North Carolina to prosecute an alleged criminal contempt of court by the
Company, that occurred in the case of Tweddle Litho Corp. vs. Gibralter
Publishing, Inc. and Market Central, Inc., ("Tweddle Case") was entered by a
judge in the U.S. District Court, Eastern District of North Carolina in the
United States District Court for the Eastern District of North Carolina. The
U.S. Attorney for the Eastern District of North Carolina issued a criminal
information against Market Central, Inc. alleging contempt of court by virtue of
the Company's violation of a court order entered on May 13, 2004 in the Tweddle
Case when Market Central, Inc. sold its wholly-owned subsidiary, Convergion on
June 2, 2004 in violation of the provisions of the order of May 13, 2004
enjoining the Company from transferring any of its assets out of the ordinary
course of business. In October 2004, the Company and the U.S. Attorney entered
into a written plea agreement whereby the Company agreed to pay $50,000 for the
alleged criminal contempt of court. The matter is set for disposition in U.S.
District Court for the Eastern District of North Carolina on February 7, 2005.
The U.S. States Attorney is supporting the Plea Agreement and the Company
expects that the Court will accept the plea agreement. The Company has accounted
the $50,000 for the alleged criminal contempt of court in connection with the
Plea Agreement as accrued liabilities at August 31, 2004.
NOTE K - SUBSEQUENT EVENTS
In November 2004, the Company's two largest shareholders notified the Company
that they were returning approximately 5,800,000 common shares to the Company's
treasury and cancelled a warrant that they owned which provided them with the
right to purchase approximately 2,300,000 shares of common stock in the Company,
they resigned from the Company's Board of Directors and agreed to convert
approximately $1,000,000 in demand notes due from the Company into shares of the
Company's Series A Preferred Stock. This agreement also provides for the bank
debt of $1,250,000 to be assumed by one or both of these shareholders in
exchange for a note payable from the Company. This new note provides for
interest only, a LIBOR plus 1.5%, through the earlier of when the shareholder
returns his approximate 2,900,000 shares to the Company, but no later than April
2005. These shares are currently pledged as collateral on a loan between the
shareholder and a bank. If the shares are not returned until after April 2005,
the Company has no other obligation on the note to the shareholder. The
shareholder assumed the note and had the Company released in December 2004.
Certain other actions in connection with this agreement have not been formally
completed although all parties are bound by its provisions.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS
OF OPERATIONS
Overview
Market Central, Inc. (formerly Paladyne Corp.) (the "Company") is a knowledge
management company specializing in solutions that enable businesses to
efficiently store, categorize and retrieve information with state of the art
software. The Company owns multiple patents and patent-pending technologies and
has developed a suite of solutions that include software for next-generation
search, intelligent document recognition, data capture, cleansing, mining, and
integration. The Company also operates one wholly-owned subsidiary, ecommerce
support centers, inc.("ECOM"). ECOM provides outsourced contact center solutions
and Customer Relationship Management (CRM) services. ECOM provides inbound
technical support, sales, and customer service; outbound pre-sales and sales;
data mining; campaign management; CRM Integration (contact center systems
design, sales, integration and life-cycle support).
The Company's executive offices are at 1650A Gum Branch Road, Jacksonville, NC
28540 and its telephone number is (910) 478-0097.
The Company's unaudited condensed consolidated financial statements are
presented on a going concern basis, which contemplates the realization of assets
and satisfaction of liabilities in the normal course of business. As with any
new venture, concerns must be considered in light of the normal problems,
expenses and complications encountered by entrance into established markets and
the competitive environment in which the Company operates. The unaudited
condensed consolidated financial statements do not include, nor does management
feel it necessary, any adjustments to reflect any possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the possible inability of the Company to
continue as a going concern.
The Company had, prior to November 30, 2004, maintained business relationships
with three related businesses, Gibralter Publishing, Inc. ("Gibralter"),
Cheapseats, Inc. and J&C Nationwide, Inc. Each of these companies had call
center contracts with the Company's ecom subsidiary and is owned or controlled
by an officer and/or board member of the Company. All of these relationships
were terminated prior to November 30, 2004. These three related companies
accounted for approximately $112,900 or 8% of the revenues for the three-month
period ended November 30, 2004.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to the total revenues
of principal items contained in the Company's Unaudited Condensed Consolidated
Statements of Operations for the three months ended November 30, 2004 and
November 30, 2003, respectively. The percentages discussed throughout this
analysis are stated on an approximate basis.
Three months Ended November 30,
(UNAUDITED) 2004 2003
---- ----
Total revenues 100% 100%
Cost of revenues 68.5% 70.9%
------ -----
Gross profit 31.5% 29.1%
Operating expenses 100.8% 67.9%
------ ------
Operating income (loss) (69.3%) 38.8%
Interest expense 5.8% 4.7%
------ ------
Net loss (75.2%) (43.7%)
------- -------
14
COMPARISON OF THE THREE MONTHS ENDED NOVEMBER 30, 2004 TO THE THREE MONTHS ENDED
NOVEMBER 30, 2003
Revenue for the three months ended November 30, 2004 and 2003 were $1,434,456,
and $2,029,618, respectively; this represents a decrease of 29.3% in sales.
This decrease of $595,162 is due principally to the decline in revenue from the
related party call center clients. These three clients accounted for $475,554 or
80% of the decline.
Cost of revenues were $983,224 and $1,440,474, respectively, for the three
months ended November 30, 2004 and 2003 which represents 68.5% and 70.9% of
revenue for the periods. The decrease in cost of sales of $457,250 or 31.7% from
2003 to 2004 is attributable primarily to the decline in revenue discussed
above. The percentage decrease in cost of revenue when compared to revenue was
2.4% from 70.9% to 68.5% for the three months ended November 2003 and 2004,
respectively. This slight decline in cost of revenue, and corresponding increase
in gross profit percent is due to certain minor operating changes and the
absence of the lower margin, high volume Gibralter contract in the 2004 results.
Gross profit was $451,232 and $589,141, respectively for the three months ended
November 30, 2004 and 2003 which represents 31.5% and 29.0% of revenue for the
respective periods. The increase in gross profit percentage is due to the
decreases in costs of revenue discussed above. Operating expenses, including
depreciation and amortization, have increased slightly from $1,379,505 to
$1,445,557, respectively for the three months ended November 30, 2003 and 2004,
respectively. This increase of $66,052 includes a decline in depreciation and
amortization expense of $131,798 and an increase in other costs of $197,850. The
growth in other costs is primarily financing and financial consulting costs
which were $171,000 and $-0- in the three months ended November 30, 2004 and
2003 respectively. Depreciation expense declined due to assets reaching the end
of their depreciable lives.
Interest expense, as percentage of revenue, increased from 4.7% to 5.8% during
the three months ended November 30, 2003 as compared to the three months ended
November 30, 2004. This increase in percentage is due to the decline in
revenues. Interest expense declined from $95,551 to $83,811 due primarily to the
conversion of the $5,000,000 in notes payable to Gibralter in December 2003
which was substantially offset with borrowings under the Company's accounts
receivable factoring arrangements which began in November 2003.
LIQUIDITY AND CAPITAL RESOURCES
The Company failed to generate positive cash flow during the three months ended
November 30, 2004 as well as during the year ended August 31, 2004, and its cash
resources on hand are insufficient for its long term needs. As a result, certain
debt, vendor payables, capital leases and other obligations are in arrears and
default. This situation has existed since 2001 and the Company has taken several
significant steps to alleviate the problem. During the three months ended
November 30, 2004, the Board of Directors approved the sale of up to $4,000,000
in additional Series A preferred Stock. During the year ended August 31, 2004,
$3,000,000 of these shares were sold. This action by the Board was taken in an
effort to stabilize the capital needs of the Company and to permit the Company
to exploit its knowledge management assets. During the three months ended
November 30, 2004, gross proceeds from the sales of Series A shares were
approximately $702,000, subsequent to November 30, 2004 gross proceeds have
approximated $750,000. As part of the November 2004 agreement made with two
significant shareholders approximately $1,000,000 of their demand notes (net of
current accounts receivable) will be converted into Series A preferred shares.
As of November 30, 2004, the Company had a working capital deficit of
$7,330,460. The Company generated a deficit in cash flow from operations of
$798,234 for the three-month period ended November 30, 2004. The deficit in cash
flow from operating activities for the period is primarily attributable to the
Company's net loss from operations of $1,078,136, adjusted for depreciation and
amortization of $108,268, common stock issued to consultants in exchange for
compensation of $107,900, amortization of capitalized financing fees of $63,930
previously paid by stock options and warrants, an increase in accounts
receivable of approximately $80,000, and a decrease in accounts payable and
accrued liabilities of approximately $74,000. Cash flows used in investing
activities for the three-month period ended November 30, 2004 consisted of the
acquisition of $12,774 of computers and equipment used in operations. The
Company met its cash requirements during the three months ended November 30,
2004 primarily through approximately $640,000 of net proceeds from the issuance
of Series A Preferred Stock, offset by reducing approximately $179,000 of
borrowings pursuant to a factoring agreement.
15
The Company expects that after completion of the sale of the Series A Preferred
Stock, an additional capital raise of up to $10,000,000 will be necessary to
provide the stability needed to fully exploit the Company's opportunities in the
knowledge management markets. Management has been aggressively preparing for
this subsequent offering and they are optimistic that the subsequent offering
will be possible and that it will be accretive to existing shareholders. There
are no assurances the Company will be successful in raising the funds required.
The Company also expects that sales of its SourceWare products will begin in the
second quarter of fiscal 2005, although this cannot be predicted with certainty.
While the Company has raised capital to meet its working capital requirements in
the past, additional financing is required in order to meet current and
projected cash flow deficits from operations. The Company is seeking financing
in the form of equity through a private placement of its preferred stock. There
are no assurances the Company will be successful in raising the funds required
and any equity raised would be substantially dilutive to existing shareholders.
THE INDEPENDENT AUDITOR'S REPORT ON THE COMPANY'S AUGUST 31, 2004 FINANCIAL
STATEMENTS INCLUDED IN THE COMPANY'S FORM 10KSB STATES THAT THE COMPANY'S
RECURRING LOSSES RAISE SUBSTANTIAL DOUBTS ABOUT THE COMPANY'S ABILITY TO
CONTINUE AS A GOING CONCERN.
INFLATION
In the opinion of management, inflation has not had a material effect
on the operations of the Company.
RISK FACTORS AND CAUTIONARY STATEMENTS
Forward-looking statements in this report are made pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. The Company
wishes to advise readers that actual results may differ substantially from such
forward-looking statements. Forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially from those
expressed in or implied by the statements, including, but not limited to, the
following: the ability of the Company to provide for its debt obligations and to
provide for working capital needs from operating revenue, and other risks
detailed in the Company's periodic report filings with the Securities and
Exchange Commission.
16
ITEM 3. CONTROLS AND PROCEDURES
(a) On November 30, 2004, we made an evaluation of our disclosure controls and
procedures. In the opinion of the Company's Chief Executive Officer and Chief
Financial Officer, the disclosure controls and procedures are adequate because
the systems of controls and procedures are designed to assure, among other
items, that 1) recorded transactions are valid; 2) valid transactions are
recorded; and 3) transactions are recorded in the proper period in a timely
manner to produce financial statements which present fairly the financial
condition, results of operations and cash flows for the respective periods being
presented. Moreover, the evaluation did not reveal any significant deficiencies
or material weaknesses in our disclosure controls and procedures.(b) There have
been no significant changes in our internal controls or in other factors that
has affected or is reasonably likely to materially affect these controls since
the last evaluation.
17
PART II
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) In the quarter ended November 30, 2004, we issued an aggregate of
33,000 shares of restricted common stock to a consultant in exchange for
services rendered, valued at $42,900. The shares were issued pursuant to an
exemption provided by Section 4(2) of the Securities Act.
(b) None.
(c) The Company has not entered into any plans or programs under which
we may repurchase our common stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
(a) Exhibits
No. Description
4.1 Amended and Restated Certificate of Designations, Powers, Preferences
and Relative, Participating, Optional and Other Special Rights of the
Series A Convertible Preferred Stock of Market Central, Inc. dated
September 13, 2004 (filed herewith).
4.2 Certificate of Amendment of Certificate of Designations, Powers,
Preferences and Relative, Participating, Optional and Other Special
Rights of the Series A Convertible Preferred Stock of Market Central,
Inc. dated November 17, 2004 (filed herewith).
31.1 Certification of Doyal G. Bryant pursuant to Section 302 of the Sarbanes
Oxley Act of 2002 (filed herewith).
31.2 Certification of Clifford A. Clark pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
32.1 Certification of Doyal G. Bryant Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
32.2 Certification of Clifford A. Clark Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
ITEM 6. OTHER INFORMATION
None
18
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.
MARKET CENTRAL, INC.
Date: January 14, 2005 By /s/ Doyal G. Bryant
-------------------
Doyal G. Bryant
President
Date: January 14, 2005 By /s/ Clifford A. Clark
---------------------
Clifford A. Clark
Chief Financial Officer
19