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 MAY 31, 2005
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.)
6701 Carmel Road, Suite 205, Charlotte, NC 28226
(Address of Principal Executive Offices)
704-837-0500
(Issuer's Telephone Number)
Former address was 7810 Ballantyne Commons Pky, Suite 300, Charlotte, NC 28277
(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 June 30, 2005: 6,916,385 shares
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
PART I.
ITEM 1. FINANCIAL STATEMENTS
The following unaudited Condensed Consolidated Financial Statements as of May
31, 2005 and for the three months and nine months ended May 31, 2005 and 2004
respectively, have been prepared by Market Central, Inc., a Delaware
corporation.
MARKET CENTRAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
May 31, 2005 August 31, 2004
------------ ---------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,716,813 $ 344,099
Accounts receivable, net of allowance for doubtful accounts of $0.00 at May 31, 2005 and 518,593 719,262
August 31, 2004
Related parties, net allowance for doubtful accounts of $0.00 at May 31, 2005 and August -- 277,119
31, 2004
Notes receivable (note D) 657,293 --
Prepaid expenses and other assets 64,179 149,282
-------------------------------
Total Current Assets: 2,956,878 1,489,762
-------------------------------
Property and equipment: 189,614 143,484
Less: accumulated depreciation (121,109) (103,861)
-------------------------------
Property and equipment, net: 68,505 39,623
-------------------------------
Net assets from discontinued operations (note B) 851,826
-------------------------------
Other Assets:
Notes receivable (note D) 713,707 --
Restricted cash (note C) -- 109,617
Goodwill 745,050 745,050
Deposits and other -- 50,308
Capitalized financing costs, net of amortization of $7,420 and $0 at May 31, 2005 and
August 31, 2004, respectively 240,154 --
Patents and trademarks, net of accumulated amortization of $56, 771 and $32,440 at May
31, 2005 and August 31, 2004, respectively 40,548 64,879
-------------------------------
Total other assets 1,739,459 969,854
-------------------------------
Total assets $ 4,764,842 3,351,065
===============================
Liabilities and Deficiency in Stockholders' Equity
May 31, 2005 August 31, 2004
-------------------------------
Current Liabilities:
Accounts payable and accrued liabilities $ 3,226,847 $ 4,242,462
Note payable to related parties (notes E & J) 365,148 1,210,474
Notes payable, current portion (note E) 3,241 1,830,422
Due to Factor (note F) 115,884 483,590
Accrued preferred stock dividend (note H) 444,282 61,067
Current portion of capital lease obligation 593,012 648,484
Deferred interest income 239,445 --
-------------------------------
Total Current Liabilities 4,987,859 8,476,499
-------------------------------
6.4% Convertible notes (note G) 526,221
Notes payable - related party (notes E & J) 854,852
Capital lease obligation - long-term portion 18,885 64,716
Commitments and Contingencies (note M) --
Liabilities from discontinued operations (note B) -- 85,234
Deficiency in Stockholders' Equity: --
Preferred stock, par value $.001 per share; 10,000,000 shares authorized; Series
A - 5,557,005 shares and 2,241,407 shares issued and outstanding at May 31, 2005
and August 31, 2004, respectively (note H) 5,557 2,251
Series B - 350,000 shares issued and outstanding at May 31, 2005 and August 31, 2004
(note H) 350 350
Common stock, par value, $.001 per share; 75,000,000 shares authorized; 6,916,385 shares
and 13,391,693 shares issued and outstanding at May 31, 1005 and August 31, 2004,
respectively (note H) 6,916 13,392
Common stock receivable (note H) -- (800)
Additional paid-in-capital 35,666,786 27,672,231
Preferred stock dividend (875,000) (875,000)
Accumulated deficit (36,427,584) (32,087,808)
-------------------------------
Total shareholders' deficit (1,622,975) (5,275,384)
-------------------------------
Total liabilities and shareholders' deficit $ 4,764,842 $ 3,351,065
===============================
See accompanying notes to unaudited condensed consolidated financial statements
MARKET CENTRAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS
ENDED MAY 31,
----------------------------
2005 2004
------------ ------------
Revenues, Net $ 4,893 $ 9,686
Cost of Sales -- 1,312
----------------------------
Gross Profit 4,893 8,374
----------------------------
Operating Expenses:
Selling, General & Administrative 1,028,964 1,052,102
Depreciation and Amortization 18,615 12,212
----------------------------
Total Operating Expenses 1,047,579 1,064,314
Loss From Operations (1,042,686) (1,055,940)
Other income (expense): (9,983) --
Interest income (expense): (1,091,054) (158,852)
----------------------------
Total other (income) expense (1,101,037) (158,852)
----------------------------
Loss from continuing operations, (Before income taxes and discontinued operations) (2,143,723) (1,214,792)
Provisions for Income Taxes -- --
Loss from Continuing Operations, before Discontinued Operations (2,143,723) (1,214,792)
Loss from Discontinued Operations (note B) (543,329) (982,766)
Gain from disposal of discontinued operations (note B) 552,491 2,749,370
----------------------------
Net Income (Loss) $ (2,134,561) $ 551,812
============================
Preferred stock dividend - beneficial conversion feature (875,000)
Cumulative convertible preferred stock dividend requirements (304,523) (25,877)
----------------------------
Net loss attributable to Common Shareholders $ (2,439,084) $ (349,065)
============================
Net (loss) per common share $ (0.20) $ (0.03)
Continuing operations: $ (0.20) $ (0.16)
Discontinued operations: $ 0.00 $ 0.13
Weighted Average Shares Outstanding:
Basic and assumed diluted 12,456,895 13,299,676
See accompanying notes to unaudited condensed consolidated financial statements
MARKET CENTRAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE NINE MONTHS
ENDED MAY 31,
----------------------------
2005 2004
------------ ------------
Revenues, Net $ 11,677 $ 21,268
Cost of Sales -- --
----------------------------
Gross Profit 11,677 21,268
Operating Expenses:
Selling, General & Administrative 2,424,898 2,056,163
Impairment of Good will (Note K) -- 4,062,003
Depreciation and Amortization 41,579 36,636
----------------------------
TOTAL OPERATING EXPENSES 2,466,477 6,154,802
LOSS FROM OPERATIONS (2,454,800) (6,133,534)
----------------------------
Other income (expense): (Note L) 223,822 --
Interest income (expense): (1,193,145) (288,604)
----------------------------
Total other (income) expense (969,323) (288,604)
----------------------------
Loss from continuing operations, (Before income taxes and discontinued operations) (3,424,123) (6,422,138)
Provisions for Income Taxes -- --
Loss from Continuing Operations, before Discontinued Operations (3,424,123) (6,422,138)
Loss from Discontinued Operations (note B) (1,085,432) (2,468,820)
Gain from disposal of discontinued operations (note B) 552,491 2,749,370
----------------------------
Net Income (Loss) (3,957,064) (6,141,588)
----------------------------
Preferred stock dividend - beneficial conversion feature (875,000)
Cumulative convertible preferred stock dividend requirements (382,712) (25,877)
----------------------------
Net loss attributable to Common Shareholders $ (4,339,776) $ (7,042,465)
============================
Net (loss) per common share $ (0.35) $ (0.53)
Continuing operations: $ (0.31) $ (0.55)
Discontinued operations: $ (0.04) $ 0.02
Weighted Average Shares Outstanding:
Basic and assumed diluted 12,456,895 13,279,279
See accompanying notes to unaudited condensed consolidated financial statements
MARKET CENTRAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
MAY 31, 2005 MAY 31, 2004
---------------------------
Cash Flows used in operating activities $(3,165,184) $ (3,337,184)
Cash Flows used in investing activities (46,130) (250,755)
Cash Flows provided by financing activities 4,584,028 4,197,353
---------------------------
Net Increase in cash and cash equivalents 1,372,714 609,414
---------------------------
Cash and Cash equivalents at beginning of period 344,099 337,953
---------------------------
Cash and Cash equivalents at end of period $ 1,716,813 $ 947,367
===========================
Supplemental Cash Flow Information:
Cash paid during the period for interest 123,867 328,805
Cash paid during the period for income taxes -- --
Stock options and warrants issued in exchange for services rendered 203,020 662,587
Common stock issued for debt
Preferred shares issued in exchange for debt 1,051,028
Common stock issued in exchange for services rendered $ 218,416
Beneficial conversion feature in connection with issuance
of convertible debentures $ 2,388,603
Value of warrants attached to convertible debenture $ 1,397,234
Amortization of beneficial conversion feature in
connection with issuance of convertible debentures $ 95,544
Amortization of value of warrants attached to convertible
Debenture $ 55,889
Disposal of call center assets:
Notes receivable 971,000
Cash 129,000
Debts assumed by buyer 85,234
Assets disposed 562,743
Net gain on disposal segment 552,491
Disposal of US Conversion, Inc.: (Note B)
Sylvia Holdings common stock received 500
Assets disposed (68,211)
Debts assumed by buyer 2,967,081
Net gain on disposal segment (2,749,370)
Net cash paid for disposition 150,000
See accompanying notes to unaudited condensed consolidated financial statements
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2005
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 and nine-month
period ending May 31, 2005 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. dba Scientigo, Inc. (the "Company") is primarily focused in
intelligent Business Process Automation technologies, specializing in developing
and licensing intellectual property to partners whose products and services
complement our technologies for the benefit of clients. These customizable
solutions enable organizations to convert data from a processing and storage
burden into a competitive advantage, whether structured, semi-structured, or
unstructured, whether it is in paper or digital form, and regardless of volume.
The Company's believes its technology provides next generation artificial
intelligence and collaboration capabilities today. In addition, the Company
provides customer support and professional services to support its products.
Scientigo product strategy is to focus on developing and licensing technologies
from its valuable intellectual property portfolio. Development of the technology
that is the foundation of Scientigo's unique capabilities was begun in the mid
1990s and has resulted in four issued patents with numerous patents pending or
under development both within the United States and internationally.
The unaudited condensed consolidated financial statements for the three and nine
months ended May 31, 2005, include the accounts of the Company and its wholly
owned subsidiaries, Tigo Software, Inc., ecommerce support centers, inc.
("ecom") and Convey Systems International, Inc. ("CSI"). All significant
inter-company transactions and balances have been eliminated in consolidation.
The Company's CSI subsidiary was formed to be the acquiring entity of the assets
of The Tag Group, Inc., a transaction that has not yet been completed and CSI is
essentially inactive. Tigo Software, Inc. was formed in May 2005 to ease the
separation of the Company's IDR and enterprise search activities. At May 31,
2005, this subsidiary was inactive.
In May 2005 the Company sold its call center operations and related assets. The
Company's call center operations were contained within its ecom subsidiary. The
ecom operations are 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 and information on the sale price are
further described in Note B. 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.
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.
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2005
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, 2004 and 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 For the nine months ended
-------------------------- --------------------------
May 31, 2005 May 31, 2004 May 31, 2005 May 31, 2004
------------ ------------ ------------ ------------
Net income (loss) - as reported $ (2,134,561) $ 551,812 $ (3,957,064) $ (6,141,588)
============ ============ ============ ============
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) (247,937) ( 27,930) (557,082) (56,280)
------------ ------------ ------------ ------------
Net loss - Pro Forma $ (2,382,498) $ 523,882 $ (4,514,146) $ (6,197,888)
Net loss attributable to common
stockholders - Pro forma $ (2,687,021) $ (376,995) $ (4,896,858) $ (7,103,697)
Basic (and assuming dilution) loss
per share - as reported $ (.20) $ (.03) $ (.35) $ (.53)
Basic (and assuming dilution) loss
per share - Pro forma $ (.22) $ (.03) $ (.39) $ (.53)
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123R (revised 2004), "Share-Based Payment" which is a
revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation".
Statement 123R supersedes APB opinion No. 25, "Accounting for Stock Issued to
Employees", and amends FASB Statement No. 95, "Statement of Cash Flows".
Generally, the approach in Statement 123R is similar to the approach described
in Statement 123. However, Statement 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro-forma disclosure is no longer
an alternative. On April 14, 2005, the SEC amended the effective date of the
provisions of this statement. The effect of this amendment by the SEC is that
the Company will have to comply with Statement 123R and use the Fair Value based
method of accounting no later than the first quarter of 2006. Management has not
determined the impact that this statement will have on Company's consolidated
financial statements.
NEW ACCOUNTING PRONOUNCEMENTS
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, "Accounting for
Conditional Asset Retirement Obligations, an interpretation of FASB Statement
No. 143," which requires an entity to recognize a liability for the fair value
of a conditional asset retirement obligation when incurred if the liability's
fair value can be reasonably estimated. The Company is required to adopt the
provisions of FIN 47 no later than the end of its fiscal 2005. The Company does
not expect the adoption of this Interpretation to have a material impact on its
consolidated financial position, results of operations or cash flows.
In May 2005 the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion
No. 20 and FASB Statement No. 3." SFAS 154 requires retrospective application to
prior periods' financial statements for changes in accounting principle, unless
it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS 154 also requires that retrospective
application of a change in accounting principle be limited to the direct effects
of the change. Indirect effects of a change in accounting principle, such as a
change in non-discretionary profit-sharing payments resulting from an accounting
change, should be recognized in the period of the accounting change. SFAS 154
also requires that a change in depreciation, amortization, or depletion method
for long-lived, non-financial assets be accounted for as a change in accounting
estimate effected by a change in accounting principle. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Early adoption is permitted for accounting changes and
corrections of errors made in fiscal years beginning after the date this
Statement is issued. The Company does not expect the adoption of this SFAS to
have a material impact on its consolidated financial position, results of
operations or cash flows.
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2005
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.
As a result of the sale of its call center business in May, 2005, which
represented the Company's sole operating business segment, the Company allocated
certain general administrative expenses previously incurred by the call center
segment to continuing operations based upon various allocation methodologies.
Allocations of these expenses include officer and other compensation,
professional fees, occupancy costs, and other general office expenses.
Management believes that these allocation methodologies are reasonable. The
expenses allocated are not necessarily indicative of the expenses that would
have been incurred if the call center segment had not been disposed of. The
Company may incur additional general administrative expenses, and other costs as
a result of its current reorganization.
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2005
UNAUDITED
NOTE B - DISCONTINUED OPERATIONS
ecommerce support centers, inc
On May 23, 2005, the Company sold substantially all the assets that comprise its
call center operations. The assets sold were included in the Company's ecom
subsidiary and the sale provided for a sale price of $1,100,000 and the
assumption of certain liabilities, which approximated $85,000. The purchase
price was payable $129,000 at closing and a $971,000 5% note due $25,000 per
month including interest until the balance is paid. The financial statements
reflect the operating results and balance sheet items of the discontinued
operations separately from continuing operations. Prior years have been
restated.
The following summarizes the assets and liabilities from discontinued operations
at May 23, 2005, the date of disposition, and August 31, 2004, respectively:
May 23, 2005 August 31, 2004
(Date of Disposition)
------------ ---------------
Assets:
Leasehold Improvements $ 1,243,278 $ 1,243,278
Furniture and Fixtures 935,114 934,113
Computers and Software 1,851,769 1,851,769
Accumulated Depreciation (3,467,418) (3,177,334)
------------ ---------------
Total Assets $ 562,743 $ 851,826
============ ===============
May 23, 2005 August 31, 2004
(Date of Disposition)
------------ ---------------
Liabilities:
Accounts payable and accrued liabilities $ 85,234 $ 85,234
------------ ---------------
Total Liabilities $ 85,234 $ 85,234
============ ===============
The following summarizes the gain on the disposition of the call center business
segment:
CustomerLinx promissory note (Note D) $ 971,000
Cash received 129,000
Debts assumed by CustomerLinx 85,234
Net assets disposed of (562,743)
Disposition costs (70,000)
------------
Net gain on disposal of segment $ 552,491
============
The results for the three and nine month periods ended May 31, 2004 have been
restated. Operating results for the discontinued operations for the three and
nine month periods ended May 31, 2005 and 2004 were:
For the three months For the nine months
ended May 31, ended May 31,
-------------------------- --------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Revenues $ 1,100,100 $ 1,965,614 $ 3,977,112 $ 5,951,436
Expenses (1,595,729) (2,290,982) (4,875,844) (7,588,671)
----------- ----------- ----------- -----------
Net loss before income taxes (495,629) (325,368) (898,732) (1,637,235)
Income tax provision -- -- -- --
----------- ----------- ----------- -----------
Net loss (495,629) (325,368) (898,732) (1,637,235)
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2005
UNAUDITED
NOTE B - DISCONTINUED OPERATIONS (CONTINUED)
U.S. CONVERGION, INC.
In May 2004, the Company sold its wholly owned subsidiary, Convergion to Sylvia
through a Stock Purchase Agreement ("Agreement"). 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 following summarizes the gain on the disposition of the Convergion business
segment in May 2004:
Sylvia common stock $ 500
Debts assumed by Sylvia 2,967,081
Net assets disposed of (68,211)
Disposition costs (150,000)
-----------
Net gain on disposal of segment $ 2,749,370
===========
The results for the three and nine month periods ended May 31, 2004 have been
restated. Operating results for the discontinued operations for the three and
nine month periods ended May 31, 2004 were:
Three Months Ended Nine Months Ended
May 31, 2004 May 31, 2004
------------------ -----------------
Revenues $ 94,250 $ 2,249,354
Expenses (751,648) (3,080,939)
------------------ -----------------
Net loss $ (657,398) $ (831,585)
================== =================
The three month and nine month periods ended May 31, 2005 included costs related
to U.S. Convergion, Inc. of $47,700 and $186,700 which have been included in
loss from discontinued operations.
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.
This liability and related restricted cash was settled during May 2005.
NOTE D - NOTES RECEIVABLE
The Company's sale of its call center operations on May 23, 2005 provided for
the purchaser to issue the Company a promissory note of $971,000 (Note B). This
note bears interest at 5% and is payable at the rate of $25,000 per month
including interest. The note will be paid in full in 43 months and is secured by
all the assets sold to the purchaser.
In May 2005, the Company made a $400,000 loan to one of its principal
shareholders. This loan is due and payable in one year. The note is secured with
a pledge of 990,010 shares of the Company's common stock and 262,238 of the
Company's Series A Preferred stock. Repayment of this note will be from the sale
proceeds from the common stock which is held as security for the loan. The
borrower has agreed to, and executed appropriate documents, to provide the
Company with control over the sale of a portion of these shares in the market to
repay the $400,000 loan. The Company expects to receive the proceeds each month
depending upon market conditions. The loan does not bear interest payable in
cash, but shall accrue interest at the rate of 159,630 shares of the Company's
common stock per $400,000 of principal per annum, subject to a maximum accrual
of 159,630 shares regardless of the time of payment (the "In-Kind Prepaid
Interest"). As of May 31, 2005, the shareholder remitted 159,630 shares of
common stock to the Company, and the Company accounted for the 159,630 shares,
valued at 239,445, as deferred interest income and will amortize the deferred
interest over the terms of the note. A summary of notes receivable at May 31,
2005 and August 31, 2004 is as follows:
May 31, 2005 August 31, 2004
------------ ---------------
Note receivable from Customerlinx of North Carolina, Inc., with interest at 5%
and requiring monthly payments of $25,000 including interest, secured by all
the assets sold to Customerlinx of North Carolina, Inc. $ 971,000
Note receivable from related party due in one year, secured by common stock
and Series A preferred stock 400,000 --
------------ ---------------
Total 1,371,000 --
------------ ---------------
Less: current portion (657,293) --
------------ ---------------
$ 713,707 --
============ ===============
NOTE E - NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTIES
Notes payable at May 31, 2005 and August 31, 2004 are as follows:
May 31, August 31,
2005 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. This note was
paid in full as of May 31, 2005 $ -- $ 501,134
Note payable in monthly installments of $1,919 including interest at 7.34% per
annum; unsecured; maturity date is in May 2005. This note was
paid in full as of May 31, 2005 -- 18,975
Note payable in monthly installments of $2,813 including interest at 6% per
annum; unsecured; maturity date is in February 2005. This note was
paid in full as of May 31, 2005 -- 19,180
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2005
UNAUDITED
NOTE E - NOTES PAYABLE AND NOTES PAYABLE TO RELATED PARTIES (CONTINUED)
(Continued)
May 31, August 31,
2005 2004
------------ ------------
Note payable to related party due in monthly principal installments $20,429 and
interest at 30 day LIBOR plus 2.75%; maturity date is May 2008(Note J) 1,100,000 --
Note payable to bank in monthly installments of interest only at LIBOR daily
floating rate plus 3.5%; maturity date is December 2004, personally guaranteed
by Company shareholders. This note was assumed by one of the Company's
shareholders. (Note J) -- 1,250,000
Note payable on demand to a related party, interest payable at 6% per annum on
repayment date; unsecured. (see Note J) -- 237,569
Note payable on demand to a related party, interest payable at 6% per annum on
repayment date; unsecured. (see Note J) 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 J) 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. 3,241 41,133
------------ ------------
3,040,896
Less: current portion (368,389) (3,040,896)
------------ ------------
$ 854,852 $ --
============ ============
NOTE F - DUE FROM FACTOR
The Company's subsidiary, ecommerce support centers, inc., had 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. The Company terminated the agreement
with the factor effective May 31, 2005 in conjunction with the sale of the call
center assets. This termination provided for payoff of the factor through
receipt of accounts receivable; the debt was fully satisfied by June 30, 2005.
At May 31, 2005 and August 31, 2004 respectively, balance due from factor
(included in accounts receivable) was as follows:
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2005
UNAUDITED
NOTE F - DUE FROM FACTOR (CONTINUED)
May 31, August 31,
2005 2004
----------- -----------
Accounts Receivable - Factored $ 144,855 $ 604,488
Less: Advance from Factor (115,884) (483,590)
----------- -----------
Net Due from Factor $ 28,971 $ 120,898
=========== ===========
NOTE G - CONVERTIBLE NOTES PAYABLE
The Company began offering a 6.4% convertible note ("Convertible Note") in April
2005 with an aggregate face value of $6,250,000 and a maturity of May 2007. The
Convertible Note is offered with a 20% discount, resulting in net proceeds
before commissions of $5,000,000 to the Company when fully subscribed. The
Convertible Note was initially offered only to holders of the Company's Series A
Preferred Stock. Attached to the Convertible Notes are warrants to purchase
3,125,000 shares of the Company's common stock at an exercise price of $1.00 per
share and a term which expires in June 2010. The Convertible Notes provide for
conversion of the face amount of the notes into the Company's common stock at
$1.3325 per share and they provide for interest to be paid quarterly. The
repayment of the Convertible Notes is secured by a first priority security
interest in the Company's intellectual property granted pursuant to a security
agreement to be entered into by the Company. Upon the payment or conversion of
$5,000,000 of the total Principal Amount of the Notes, the XML patents owned by
Scientigo will be released from such security interest.
As of May 31, 2005, the Company sold Convertible Notes with a face value of
$4,160,625 and received net proceeds of $3,328,500 before commissions of
$166,425. Commissions and capitalized financing costs were amortized over the
maturity period (twenty five months) of the convertible notes. The entire amount
of the original issue discount of $832,125 has been expensed in interest expense
during the three month period ending May 31, 2005.
A summary of convertible notes payable at May 31, 2005 and August 31, 2004 is as
follows:
May 31, 2005 August 31, 2004
------------ ---------------
Convertible notes payable; 6.4% per annum; payable quarterly due May 2007;
noteholders have the option to convert unpaid note principal into the
Company's common stock at $1.3325 per share. The noteholders are secured by a
first priority security interest in the Company's intellectual property
$ 4,160,625 --
Debt Discount - beneficial conversion feature, net of accumulated amortization
of $95,544 and $0 at May 31, 2005 and August 31, 2004, respectively.
(2,293,059) --
Debt Discount - value attributable to warrants attached to notes, net of
accumulated amortization of $55,889 and $0 at May 31, 2005 and August 31,
2004, respectively. (1,341,345) --
------------ ---------------
Total 526,221 --
Less: current portion -- --
------------ ---------------
$ 526,221 --
============ ===============
In accordance with Emerging Issues Task Force Issue 98-5, Accounting for
Convertible Securities with a Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios ("EITF 98-5"), the Company recognized an imbedded
beneficial conversion feature present in the Convertible Note. The Company
allocated a portion of the proceeds equal to the intrinsic value of that feature
to additional paid-in capital. The Company recognized and measured an aggregate
of $2,388,603 of the proceeds, which is equal to the intrinsic value of the
imbedded beneficial conversion feature, to additional paid-in capital and a
discount against the Convertible Note. The debt discount attributed to the
beneficial conversion feature is amortized over the Convertible Note's maturity
period (twenty five months) as interest expense.
In accordance with Emerging Issues Task Force Issue 00-27, Application of Issue
No. 98-5 to Certain Convertible Instruments ("EITF - 0027"), the Company
recognized the value attributable to the warrants in the amount of $1,397,234 to
additional paid-in capital and a discount against the Convertible Note. The
Company valued the warrants in accordance with EITF 00-27 using the
Black-Scholes pricing model and the following assumptions: contractual terms of
5 years, an average risk free interest rate of 2.03%, a dividend yield of 0%,
and volatility of 102%. The debt discount attributed to the value of the
warrants issued is amortized over the Convertible Note's maturity period (twenty
five months) as interest expense.
The Company amortized the Convertible Note debt discount attributed to the
beneficial conversion feature and the value of the attached warrants and
recorded non-cash interest expense of $151,433 and $0 for the period ended May
31, 2005 and 2004, respectively.
NOTE H - 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 and in
September 2004, November 2004 and April 2005, they designated an additional
3,377,111 shares bringing the total to 5,628,518 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 May 31, 2005, the Company has 6,916,385 shares of common stock, 350,000
shares of Series B Convertible Preferred Stock and 5,557,005 shares of Series A
Convertible Preferred Stock issued and outstanding. As of August 31, 2004, the
Company had 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 nine-month period ended May 31, 2005, the Company issued an aggregate
of 3,305,598 shares of Series A Preferred Stock and received $3,018,143 of net
proceeds and exchanged for shareholder debt of $1,051,218. These proceeds from
issuance of Series A Preferred Stock are subject to 10% cash commissions and
certain offering costs. As of May 31, 2005, the Company had accrued cumulative
preferred stock dividends and charged to retained deficit in the amount of
$444,282.
During the nine-month period ended May 31, 2005, the Company issued an aggregate
of 159,064 shares of common stock to employees and consultants in exchange for
services rendered. The shares issued to employees and consultants were valued at
approximately $1.20 to $1.85 per share, which approximated the fair value of the
shares issued during the period the services were rendered. Compensation costs
of $218,416 were charged to discontinued operations during the nine month period
ended May 31, 2005.
Additionally, the Company issued an aggregate of 205,970 shares of its common
stock to consultants during the nine month period ended May 31, 2005 upon the
exercise of stock options at $0.01 per share. The Company received $2,059 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.
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2005
UNAUDITED
NOTE H - CAPITAL STOCK (CONTINUED)
In connection with the Settlement Agreement and Mutual Release the Company
entered into in August 2004 with the Company's former CEO and Board of Directors
member ("Former CEO"), the Former CEO returned to the Company 800,000 shares of
common stock during the nine month period ended May 31, 2005, and such shares
were canceled. In April 2005, the escrow agent handling the November 2004
agreement between the Company and its two largest shareholders notified the
Company that one of the shareholders had tendered 2,940,370 of the Company's
common shares as called for in the agreement. The remaining shareholder, per the
agreement, had until April 30, 2005 to tender his shares to the escrow agent.
During April and May 2005, the Company and the remaining shareholder negotiated
an agreement that was consummated on May 31, 2005. This agreement provided for
the shareholder to tender additional 159,630 shares of the Company's common
stock in exchange for a loan of $400,000 (Note D). This new agreement
effectively resulted in the successful completion of the escrow agreement and
the additional 159,630 shares tendered to the Company have been accounted for as
deferred interest income in the accompanying May 31, 2005 financial statements.
NOTE I - STOCK OPTIONS AND WARRANTS
STOCK 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 May 31, 2005, after giving effect to 1:10
reverse split in common stock in February 2003:
Options Outstanding Options Exercisable
Weighted Average
Number Contractual Life Number Weighted Average
Exercise Price Outstanding (Years) Exercise Price Exercisable Exercise Price
- -------------- ----------- ------- -------------- ----------- --------------
$ .01- $3.16 5,777,424 4.83 $ 2.05 1,629,925 $ 1.78
---------- ------- ------------ --------- -----------
5,777,424 4.83 $ 2.05 1,629,925 $ 1.78
========== ======= ============ ========= ===========
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) 0.01
Cancelled or expired (12,875) 17.06
---------- --------
Outstanding at August 31, 2004 1,065,927 $2.06
========== ========
Granted 5,205,000 2.03
Exercised (235,966) 0.01
Cancelled or expired (257,537) 4.46
---------- --------
Outstanding at May 31, 2005 5,777,424 $ 2.05
========== ========
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2005
UNAUDITED
NOTE I - STOCK OPTIONS AND WARRANTS (CONTINUED)
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 May 31, 2005 after giving effect to 1:10 reverse
split in common stock in February 2003.
Warrants Outstanding Warrants Exercisable
Weighted Average
Number Contractual Life Weighted Average Number Weighted Average
Exercise Prices: Outstanding (Years) Exercise Price Exercisable Exercise Price
- ---------------- ----------- ------- -------------- ----------- --------------
$ 0.90- $7.81 5,486,848 4.03 $ 1.51 5,486,848 $ 1.51
$ 11.06- $17.50 93,586 1.51 $ 12.17 93,586 $ 12.17
--------- ------- -------- --------- --------
5,580,434 3.97 $ 1.69 5,580,434 $ 1.69
========= ======= ========= ========= ========
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 1.94
Exercised -- --
Cancelled or expired (80,631) 22.54
---------- --------------
Outstanding at August 31, 2004 4,746,997 $ 3.06
========== ==============
Granted 3,732,307 1.02
Exercised -- --
Cancelled or expired (2,898,870) 2.99
---------- --------------
Outstanding at May 31, 2005 5,580,434 $ 1.69
========== ==============
The weighted-average fair value of stock options and warrants granted to
employees, consultants and shareholders during the period ended May 31, 2005 and
2004, respectively and the weighted-average significant assumptions used to
determine those fair values, using a Black-Scholes option pricing model are as
follows:
May 31, 2005 August 31, 2004
----------------- -----------------
Significant assumptions (weighted-average):
Risk-free interest rate at grant date 2.30% 1.01%
Expected stock price volatility 82% 80%
Expected dividend payout -- --
Expected option life-years (a) 4.0 to 10.0 3.0 to 4.0
(a) The expected option/warrant life is based on contractual expiration dates.
If the Company recognized compensation cost for the non-qualified stock option
and warrant 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
$(4,896,858) and $(0.39), respectively, for the period ended May 31, 2005, and
$(7,103,697) and $(0.53), respectively, for the period ended May 31, 2004 (Note
A).
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2005
UNAUDITED
NOTE I - STOCK OPTIONS AND WARRANTS (CONTINUED)
The estimated value of the options and warrants granted to consultants was in
lieu of cash compensation for services performed. The amount of the expense
charged to operations in connection with granting the stock options to
consultants was $19,787 during the period ended May 31, 2004. The amount of the
expense charged to operations in connection with granting warrants in exchange
for financing costs for the issuance of Series A Preferred Stock amounted
$413,200 during the period ended May 31, 2004. In February 2004, the Company
also granted an aggregate of 84,092 options in exchange for $167,500 of
previously incurred debt. Additionally, included in the total numbers of stock
options outstanding at May 31, 2004 were 144,092 stock options the Company
granted to consultants in exchange for services rendered, exercisable at $0.01
per share. The Company valued those options at the fair market value of its
common stock at the date the options were granted. Compensation costs of
$229,600 were charged to operations during the period ended May 31, 2004. As of
May 31, 2004, the Company received $68 of proceeds for 67,500 stock options
exercised
The Company granted 274,455 compensatory warrants to consultants in December
2004. The amount of the expense charged to operations in connection with
granting warrants to consultants was $28,955 during the period ended February
28, 2005. In May 2005, the Company and the consultant mutually agreed to cancel
these warrants. The Company has reversed compensation expense charged to
operations in connection with the issuance of these warrants in the quarter
ended May 31, 2005. Additionally, the Company granted 100,000 stock options to a
consultant in October 2004, exercisable at $0.01 per share. The Company valued
those options at the fair market value of its common stock at the date the
options were granted and $139,000 of compensation expense was charged to
discontinued operations during the period ended May 31, 2005. The Company
granted 25,000 stock options to a consultant in May 2005, exercisable at $0.01
per share. The Company valued those options at the fair market value of its
common stock at the date the options were granted and $38,750 of compensation
expense was charged to operations during the period ended May 31, 2005. The
Company also granted 1,666 stock options to Board of advisors, compensation
expense of $2,117 was charged to operations during the period ended May 31,
2005. The Company granted 25,000 compensatory stock options to a consultant in
exchange for services rendered, compensation expense of $23,153 was charged to
operations during the period ended May 31, 2005. During the period ended May 31,
2005, the Company received $1,223 of proceeds for 122,333 stock options
exercised (Note F). In May 2005, the Company issued an aggregate of 2,080,313
warrants in connection with issuance of its convertible notes (Note G).
NOTE J - RELATED PARTY TRANSACTIONS
During the nine months and three month periods ended May 31, 2005, the Company
recognized $151,616 and $38,715 of sales in connection with services provided
Cheapseats, Inc. During the nine months and three month periods ended May 31,
2005, the Company recognized $1,015,006 and $426,552 of sales in connection with
services provided Cheapseats, Inc., J&C Nationwide, Inc. and Gibralter
Publishing, Inc. and/or its successor entities. Gibralter Publishing, Inc.,
Cheapseats, Inc. and J&C Nationwide, Inc. are owned by individuals who were
Company officers, directors and significant shareholders. Due to the
discontinued operations treatment of the call center revenues, these amounts are
included in the loss from discontinued operations in the Statements of
Operations. At May 31, 2005, the accounts receivable- related parties includes
$428,747 due relating to these revenues.
During the nine month period ended May 31, 2005, the Company's President and its
CFO advanced a total of $75,000 in the form of unsecured notes to the Company
for working capital purposes. As of May 31, 2005, the balance on these notes was
$0. A Company shareholder advanced funds in the form of an unsecured,
non-interest bearing note to the Company for working capital purposes. As of May
31, 2005, the amount due to the shareholder is $120,000 (Note D). The Company
shall repay the note with common stock at the rate of 100,000 shares of common
stock per $120,000 of advances. Operating advances from the Company's two
primary shareholders had been made to the Company at various times since
February 2003, and then in December 2004 one of these shareholders assumed
$1,250,000 of the Company's bank debt which has been reflected as $1,100,000 in
notes due to related parties (Note E) and $1,250,000 in notes payable (Note E)
at May 31, 2005 and August 31, 2004, respectively. During the three months ended
May 31, 2005, the Company entered into a loan agreement relating to this
$1,100,000 loan that provides for interest at 30 day LIBOR plus 2.75% and
monthly principal payments of $20,429 through May 2008.
During the three months ended May 31, 2005, the Company and the two primary
shareholders completed a series of transactions related to the November 2004
escrow agreement. In summary, these transactions included:
1) the contribution of 5,880,740 shares of common stock to the Company
(Note H) and
2) issuance of 788,906 shares of Series A Preferred Stock in exchange
for $1,051,218 of shareholder debt, net of accounts receivable from
Cheapseats, Inc. and J&C Nationwide, Inc. of $428,747;
In order to facilitate the proper execution of the escrow agreement, the Company
provided one of its principal shareholders with a $400,000 secured loan (Note D)
with a one year term and monthly payments. The loan is secured with 990,010
shares of the Company's common stock and 262,238 of the Company's Series A
Preferred stock. Principal payments are based upon the Company's sale, in the
open market, of the shareholder's common stock that secures this loan.
NOTE K - IMPAIRMENT OF GOODWILL
As a result of the Company's evaluation of the goodwill related to its U.S
Convergion, Inc. acquisition and related circumstances, Company management
during 2004, determined that more likely than not the fair value of the
reporting unit's goodwill has been reduced below its carrying value. As a
result, management performed an evaluation of the reporting unit's tangible and
intangible assets for purposes of determining the implied fair value of goodwill
at February 29, 2004. Upon completion of the assessment, management recorded a
non-cash impairment charge of $4,062,003 relating to the Company's U.S.
Convergion, Inc. subsidiary, net of tax, or $0.30 per share during the nine
months ended May 31, 2004 to reduce the carrying value of goodwill in this
reporting unit to its estimated value of $ 0.
MARKET CENTRAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2005
UNAUDITED
NOTE L - OTHER INCOME
During the nine months ended May 31, 2005 other income (expense) totals $223,822
which includes primarily other income of $235,661 recognized during the first
six months of fiscal 2005 relating to the Company's settlement of vendor
obligations for amounts less than originally agreed to. Due to the Company's
financial condition during recent years, certain vendor obligations are in
arrears and these vendors have agreed to accept reduced amounts to settle the
debts than had been originally agreed to.
NOTE M - 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 was ruled on and accepted in U.S.
District Court for the Eastern District of North Carolina during the three
months ended May 31, 2005. The Company was also placed on probation for one
year.
NOTE N - SUBSEQUENT EVENTS
The Company has made a formal exchange offer to exchange (a) one (1) Preferred
Stock Warrant to purchase one (1) share of Common Stock and one (1) share of
Common Stock, for (b) each share of Series A Preferred Stock surrendered to the
Company by such Series A Holder for cancellation (the "Exchange Offer"). If such
Exchange Offer is accepted by the Series A Holder, any accrued but unpaid
dividends will be paid through the issuance of Series A Preferred Stock and
added to the number of shares exchanged for Common Stock. Such Preferred Stock
Warrants will be exercisable at $.85 per share and will have a term ending June
30, 2007. The Exchange Offer, which will be offered to holders of record of the
Series A Preferred Stock as of April 29, 2005, shall remain available no longer
than Midnight, New York City time on August 4, 2005, subject to the right of the
Company to extend such time period. As of May 31, 2005, the Company has received
approximately $175,000 of proceeds in connection with the exercise of Preferred
Stock Warrants to be issued in the exchange offer. However, the Company has
informed the Series A Holder that the terms of the exchange offer will be
modified and has accounted for the money received as liabilities due to Series A
Holder at May 31, 2005.
Subsequent to May 31, 2005, the Company has sold approximately an additional
$1,000,000 of its 6.4% Convertible Notes.
In June 2005, the Company entered into a long term lease for office space in
Charlotte, NC. The lease provides for minimum commitment of approximately $6,800
per month for a term of 63 months.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Market Central, Inc. (formerly Paladyne Corp.) (the "Company") has three wholly
owned subsidiaries, Tigo Software, Inc., ecommerce support centers, inc.("ecom")
and Convey Systems International, Inc.. The ecom subsidiary's activities have
been reflected as discontinued operations in the accompanying financial
statements. Convey Systems International, Inc. is inactive at this time.
The Company's on-going operations are conducted within Market Central, Inc.
Market Central, Inc. will be changing its name, with appropriate shareholder
approval to Scientigo, Inc. This change is expected to be effective in August
2005. The Company is now primarily focused in intelligent Business Process
Automation technologies, specializing in developing and licensing intellectual
property to partners whose products and services complement our technologies for
the benefit of clients. These customizable solutions enable organizations to
convert data from a processing and storage burden into a competitive advantage,
whether structured, semi-structured, or unstructured, whether it is in paper or
digital form, and regardless of volume. The Company's believes its technology
provides next generation artificial intelligence and collaboration capabilities
today. In addition, the Company provides customer support and professional
services to support its products. Scientigo product strategy is to focus on
developing and licensing technologies from its valuable intellectual property
portfolio.
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.
COMPARISON OF THE THREE MONTHS ENDED MAY 31, 2005 TO THE THREE MONTHS ENDED
MAY 31, 2004
As discussed in Note B to the financial statements, the statements of operations
for three months ended May 31, 2005 and 2004, respectively reflect the
reclassification of the Company's call center operating results into one line
item, discontinued operations, and in the 2004 accounts the reclassification of
the operations of U.S. Convergion, Inc. is also treated the same way.
Accordingly, all amounts remaining in the various line items on the statements
of operations reflect the ongoing activities of the Company which relate to the
Company's software products and intellectual property assets.
Revenues from continuing operations for the three months ended May 31, 2005 and
2004, respectively were $4,893 and $9,686, respectively. These sales relate to
the Company's software products and the related sales of certain preliminary
licenses and "proof of concept" work for clients. Increases or decreases from
the prior period are not meaningful at this level of activity. Cost of sales for
this level of activity is not significant or particularly meaningful due to the
lack of traditional direct costs. The Company's new focus to exploit its
intellectual property and related software products began within the last nine
months with sales as of May 31, 2005 being minimal.
Operating expenses were $1,028,964 and $1,052,102 during the three month periods
ended May 31, 2005 and 2004, respectively. The decrease in operating expenses
from 2004 to 2005 is $23,138, and relates to a net increase in expenses in 2005
related to salaries, legal and other costs associated with the Company's
shifting focus from call center oriented business to software and related
intellectual property which was more than offset by the non-recurring charge in
2004 of $400,000 related to the Company's settlement of a lawsuit.. The growth
in salaries is a result of the Company's recruitment of management and marketing
personnel needed to exploit its market opportunity. Depreciation and
amortization were $18,615 and $12,212 for the three month periods ended May 31,
2005 and 2004, respectively. This expense includes $8,110 of amortization
expenses related to the Company's patent portfolio during both periods shown.
Interest expense increased significantly from $158,852 to $1,091,054 during the
three months ended May 31, 2005 as compared to the three months ended May 31,
2004. This increase of $932,202 is attributable to the Company's 6.4%
Convertible Notes. These notes were sold at a 20% discount from face value,
which due to the terms permitting the holders to convert these notes into common
stock immediately, results in the entire discount of $832,125 for sales through
May 31, 2005 being expensed as interest expense. In addition, the conversion
price stipulated in the notes results in a discount due to beneficial conversion
of $151,433 being expensed in the three months ended May 31, 2005. Interest
expense of $15,216 was accrued at May 31, 2005 to be paid to the holders of
these notes
COMPARISON OF THE NINE MONTHS ENDED MAY 31, 2005 TO THE NINE MONTHS ENDED
MAY 31, 2004
As discussed in Note B to the financial statements, the statements of operations
for nine months ended May 31, 2005 and 2004, respectively reflect the
reclassification of the Company's call center operating results into one line
item, discontinued operations, and in the 2004 accounts the reclassification of
the operations of U.S. Convergion, Inc. is also treated the same way.
Accordingly, all amounts remaining in the various line items on the statements
of operations reflect the ongoing activities of the Company which relate to the
Company's software products and intellectual property assets.
Revenues from continuing operations for the nine months ended May 31, 2005 and
2004, respectively were $11,677 and $21,268, respectively. These sales relate to
the Company's software products and the related sales of certain preliminary
licenses and "proof of concept" work for clients. Increases or decreases from
the prior period are not meaningful at this level of activity. Cost of sales for
this level of activity is not significant or particularly meaningful due to the
lack of traditional direct costs. The Company's new focus to exploit its
intellectual property and related software products began within the last nine
months with sales as of May 31, 2005 being minimal.
Operating expenses (excluding depreciation and amortization), which in the 2004
period included the $4,062,003 impairment charge, were $2,424,898 and $6,118,166
during the nine month periods ended May 31, 2005 and 2004, respectively. The
2004 period amount is $2,056,163 when the impairment charge is excluded from the
amount. The increase in operating expenses from 2004 to 2005 is $368,735
excluding the impairment charge and consists of increased payroll and consultant
costs together with a growth in legal and professional fees relating to the
Company's transition from a call center dominated company to a technology based
enterprise. During the nine month periods ended May 31, 2005 and 2004,
respectively, the increase in Operating expenses is also the result of the shift
of general and administrative personnel and costs related to the on-going
operations of the Company being effected during the first few months of the 2005
period while in 2004, these items were generally focused on the call center
operations and have been reclassified into discontinued operations. The growth
in salaries is a result of the Company's recruitment of management and marketing
personnel needed to exploit its market opportunity. Depreciation and
amortization were $41,579 and $36,636 for the nine month periods ended May 31,
2005 and 2004, respectively. This expense includes $24,330 of amortization
expenses related to the Company's patent portfolio during both periods shown.
Other income of $223,822 recognized during the nine months ended May 31, 2005 is
due to the Company's settlement of vendor obligations for amounts less than
originally agreed to which totaled approximately $235,000. Due to the Company's
financial condition during recent years, certain vendor obligations are in
arrears and these vendors have agreed to accept reduced amounts to settle the
debts than had been originally agreed to. Other expenses of approximately
$12,000 are netted against this other income.
Interest expense increased significantly from $288,604 to $1,193,145 during the
nine months ended May 31, 2005 as compared to the nine months ended May 31,
2004. This increase of $904,541 is attributable to the Company's 6.4%
Convertible Notes. These notes were sold at a 20% discount from face value,
which due to the terms permitting the holders to convert these notes into common
stock immediately, results in the entire discount of $832,125 for sales through
May 31, 2005 being expensed as interest expense. In addition, the conversion
price stipulated in the notes results in a discount due to beneficial conversion
of $151,433 being expensed in the three months ended May 31, 2005. Interest
expense of $15,216 was accrued at May 31, 2005 to be paid to the holders of
these notes
LIQUIDITY AND CAPITAL RESOURCES
The Company is not currently generating positive cash flow but with the sale of
the 6.4% Convertible Notes cash resources on hand along with the remaining
unsold Convertible Notes should be sufficient for its long term needs. During
the three months ended May 31, 2005, the Company has reduced vendor payables and
other obligations that were in arrears and in default. Sale of Series A
preferred stock and sale of 6.4% Convertible Notes since February 2005 has
resulted in approximately $4,180,000 in capital for the Company during the three
months ended May 31, 2005. These Note sales have been the primary source of
capital for the Company and approximately $1,700,000 remains to be sold, at May
31, 2005, unless additional notes are authorized by the Board of Directors. The
Company's decision to sell its call center operations will result in improved
cash flows but the Company must, and is continuing to pursue other capital
sources to enable it to grow and enhance its operations going forward.
Subsequent to May 31, 2005, approximately an additional $1,000,000 of such Notes
has been sold.
The Company's principal cash requirements are for selling, general and
administrative expenses, employee costs, funding of accounts receivable and
capital expenditures. The Company's redirection to a technology enterprise that
includes both software products and licensing of intellectual property will
dramatically alter all phases of the Company's operations and cash flow issues.
Cash used in operating activities was $3,165,184 for the nine months ended May
31, 2005. This was due primarily as a result of operating losses, caused by the
revenue levels that are at less than a breakeven volume. Increasing revenues or
further cost cutting will be required in the future. The Company invested
$46,130 in computers and furniture during this period. The Company met its cash
requirements during the nine months ended May 31, 2005 mainly through the
receipt of $3,018,143 in net proceeds from its sale of its Series A Preferred
Stock, and $3,162,075 in net proceeds from its 6.4% Convertible Notes, While the
Company has continued to raise capital to meet its working capital requirements,
additional financing is required in order to meet unforeseen future needs. There
are no assurances the Company will be successful in raising the funds required
and any equity raised would be dilutive to existing shareholders.
The Company's independent certified public accountants have stated in their
report included in the Company's August 31, 2004 Form 10-KSB, that the Company
has incurred operating losses in the last two years, and that the Company is
dependent upon management's ability to develop profitable operations. These
factors among others raised substantial doubt about the Company's ability to
continue as a going concern at that time.
Since August 31, 2004, the Company has raised substantial capital and has
substantially mitigated these doubts.
INFLATION
In the opinion of management, inflation has not had a material effect on the
operations of the Company.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Certain statements made in this report, and other written or oral statements
made by or on behalf of the Company may constitute "forward-looking statements"
under the Private Securities Litigation Reform Act of 1995. When used in this
report, the words "believes," "expects," "estimates," "intends," "will" and
similar expressions are intended to identify forward-looking statements.
Statements regarding future events and developments and our future performance,
as well as the Company's expectations, beliefs, plans, intentions, estimates or
projections relating to the future, are forward-looking statements within the
meaning of these laws. Examples of such statements in this report include the
Company's current plans for improving liquidity and its future acquisition
plans. 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 ability of the Company to
provide for its debt obligations and to provide for working capital needs from
operating revenue; general economic conditions; the ability to integrate
acquisitions successfully and without disruptions to normal operations; and
other risks detailed in the Company's periodic report filings with the
Securities and Exchange Commission. The Company believes that these
forward-looking statements are reasonable; however, you should not place undue
reliance on such statements. These statements are based on current expectations
and speak only as of the date of such statements. The Company undertakes no
obligation to publicly update or revise any forward-looking statement, whether
as a result of future events, new information or otherwise.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures: As of May 31, 2005, the
Company's management carried out an evaluation, under the supervision of the
Company's Chief Executive Officer and the Chief Financial Officer of the
effectiveness of the design and operation of the Company's system of disclosure
controls and procedures pursuant to the Securities and Exchange Act, (Rule
13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective, as of the date of their
evaluation, for the purposes of recording, processing, summarizing and timely
reporting material information required to be disclosed in reports filed by the
Company under the Securities Exchange Act of 1934.
(b) Changes in internal controls: There were no changes in internal controls
over financial reporting, known to the Chief Executive Officer or Chief
Financial Officer that occurred during the period covered by this report that
has materially affected, or is likely to materially affect, the Company's
internal control over financial reporting.
PART II
ITEM 1. LEGAL PROCEEDINGS
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 was ruled on and accepted in U.S.
District Court for the Eastern District of North Carolina during the three
months ended May 31, 2005. The Company was also placed on probation for one
year.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) From December 1, 2004, through May 31, 2005, the Company issued 1,062,855
shares of Series A Preferred Stock at $1.3325 per share. Each share of Preferred
Stock is convertible into one (1) share of the Company's Common Stock. The
Company paid a commission of 7% on all shares issued and issued one warrant to
purchase one share of Common Stock at $1.3325 per share for each seven shares of
Series A Preferred Stock sold. The shares were issued pursuant to Section 4(2)
of the Securities Act of 1933, as amended, as they were sold only to accredited
investors and not more than 35 nonaccredited investors. From April 30, 2005
through May 31, 2005, the Company issued $4,160,625 principal amount of its 6.4%
Convertible Notes ("Notes") and 2,080,313 warrants to purchase Company Common
Stock at $1.00 per share with a term ending June 2010. The Notes were sold at a
20% discount, are convertible into shares of Common Stock at $1.3325 Principal
Amount per share, and are secured by the Company's intellectual property.
(b) None
(c) The following table provides information about purchases by us and our
affiliated purchasers during the quarter ended May 31, 2005 of equity securities
that are registered by us pursuant to Section 12 of the Securities Exchange Act
of 1934:
ISSUER PURCHASES OF EQUITY SECURITIES
(a) (b) (c) (d)
Total Number of Average Price Total Number of Shares (or Maximum Number (or Approximate
Shares (or Units) Paid per Share Units) Purchased as Part of Dollar Value) of Shares (or Units)
Period Purchased) (or Unit) Publicly Announced Plans or that May Yet Be Purchased Under the
Programs (1) Plans or Programs (1)
03/01/05-03/31/05 0 $0 0 0
04/01/05-04/30/05 0 $0 0 0
05/01/05-05/31/05 0 $0 0 0
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(a) Exhibits
10.1 Asset Purchase Agreement dated May 23, 2005, between Customerlinx of
North Carolina, E-Commerce Support Centers, Inc. and Market Central,
Inc. (previously filed as Exhibit 10.1 to Current Report on Form 8-K
filed July 6, 2005).
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).
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: July 20, 2005 By /s/ Doyal G. Bryant
-----------------------
Doyal G. Bryant
President
Date: July 20, 2005 By /s/ Clifford Clark
-----------------------
Clifford Clark
Chief Financial Officer