UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended: March 31, 2005
Commission file number: 033-25900
CENUCO, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2228820
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6421 CONGRESS AVENUE, SUITE 201
BOCA RATON, FLORIDA 33487
(Address of principal executive offices)
(Zip code)
(561) 994-4446
(Registrant's telephone number, including area code)
Indicate by check mark whether 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
--- ---
APPLICABLE TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practical date:
On April 30, 2005, the issuer had outstanding 13,750,556 shares of common stock,
$.001 par value per share.
CENUCO, INC. AND SUBSIDIARIES
FORM 10-QSB
QUARTERLY PERIOD ENDED MARCH 31, 2005
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet
As of March 31, 2005 (Unaudited) ........................................3
Consolidated Statements of Operations (Unaudited)
For the Three and Nine Months ended March 31, 2005 and 2004..............4
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended March 31, 2005 and 2004........................5
Condensed Notes to Consolidated Financial Statements..................6-15
Item 2 - Management's Discussion and Analysis and
Results of Operations.......................................15-25
Item 3 - Control and Procedures.........................................26
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings..............................................26
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds....27
Item 4 - Submission of Matters to a Vote of Security Holders............27
Item 5 - Other Information..............................................27
Item 6 - Exhibits and Reports on Form 8-K...............................27
Signatures..............................................................27
-2-
CENUCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 2005
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents ..................................................... $ 54,409
Short-term Investments ........................................................ 6,088,290
Note Receivable, Current Portion .............................................. 119,800
Accounts Receivable (Net of Allowance for Doubtful Accounts of $39,873) ....... 109,081
Inventories ................................................................... 12,847
Other Current Assets .......................................................... 216,569
------------
Total Current Assets ...................................................... 6,600,996
------------
PROPERTY AND EQUIPMENT:
Computer Equipment and Software ............................................... 234,580
Furniture, Fixtures and Office Equipment ...................................... 50,632
Leasehold Improvements ........................................................ 3,051
------------
Total Property and Equipment .............................................. 288,263
Less: Accumulated Depreciation ................................................ (175,011)
------------
Total Property and Equipment, Net ......................................... 113,252
------------
OTHER ASSETS:
Note Receivable, less current portion ......................................... 580,200
Security Deposits ............................................................. 7,732
------------
Total Other Assets ........................................................ 587,932
------------
Total Assets .............................................................. $ 7,302,180
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable .............................................................. $ 122,389
Other Accrued Expenses ........................................................ 182,086
------------
Total Current Liabilities ................................................. 304,475
LONG-TERM LIABILITIES:
Deferred Gain from Sale of Business ........................................... 200,000
------------
Total Liabilities ......................................................... 504,475
------------
COMMITMENTS AND CONTINGENCIES (See Note 5)
STOCKHOLDERS' EQUITY:
Preferred Stock ($.001 Par Value; 1,000,000 Shares Authorized)
No Shares Issued and Outstanding) ......................................... -
Common Stock ($.001 Par Value; 25,000,000 Shares Authorized;
13,652,056 Shares Issued and Outstanding) ................................. 13,653
Common Stock Issuable (261 shares) ............................................ -
Additional Paid-in Capital .................................................... 12,266,841
Accumulated Deficit ........................................................... (5,482,789)
------------
Total Stockholders' Equity ................................................ 6,797,705
------------
Total Liabilities and Stockholders' Equity ................................ $ 7,302,180
============
See accompanying notes to consolidated financial statements
-3-
CENUCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended For the Nine Months Ended
March 31, March 31,
--------------------------- --------------------------
2005 2004 2005 2004
------------ ------------ ------------ -----------
NET REVENUES .................................................... $ 153,889 $ 48,666 $ 397,720 $ 138,383
COST OF SALES ................................................... 70,901 3,269 286,887 17,642
------------ ------------ ------------ -----------
GROSS PROFIT .................................................... 82,988 45,397 110,833 120,741
------------ ------------ ------------ -----------
COSTS AND EXPENSES:
Research and Development .................................... 59,589 4,808 98,452 25,379
Bad Debt Expense ............................................ 27,330 - 47,673 -
Selling and Promotion ....................................... 62,408 46,361 204,183 103,118
General and Administrative .................................. 538,152 694,642 2,007,295 1,573,932
------------ ------------ ------------ -----------
Total Operating Expenses ................................ 687,479 745,811 2,357,603 1,702,429
------------ ------------ ------------ -----------
LOSS FROM OPERATIONS ............................................ (604,491) (700,414) (2,246,770) (1,581,688)
OTHER INCOME:
Settlement Income ........................................... 20,351 - 20,351 -
Interest Income ............................................. 23,093 565 71,326 9,410
------------ ------------ ------------ -----------
Total Other Income ...................................... 43,444 565 91,677 9,410
------------ ------------ ------------ -----------
LOSS BEFORE DISCONTINUED OPERATIONS ............................. (561,047) (699,849) (2,155,093) (1,572,278)
DISCONTINUED OPERATIONS:
Gain from Sale of Discontinued Operations, net of income taxes - - 1,814,648 -
Income (Loss) from Discontinued Operations ................... (16,072) 174,428 91,056 404,407
------------ ------------ ------------ -----------
Total Income (Loss) from Discontinued Operations ........ (16,072) 174,428 1,905,704 404,407
------------ ------------ ------------ -----------
NET LOSS ........................................................ $ (577,119) $ (525,421) $ (249,389) $(1,167,871)
============ ============ ============ ===========
INCOME (LOSS) PER COMMON SHARE- BASIC AND DILUTED
Loss from continuing operations .............................. $ (0.04) $ (0.07) $ (0.17) $ (0.16)
Income from discontinued operations .......................... (0.00) 0.02 0.15 0.04
------------ ------------ ------------ -----------
Net loss per common share .................................... $ (0.04) $ (0.05) $ (0.02) $ (0.12)
============ ============ ============ ===========
Weighted Common Shares Outstanding - Basic and Diluted .... 13,191,891 10,197,290 12,647,905 9,466,185
============ ============ ============ ===========
See accompanying notes to consolidated financial statements
-4-
CENUCO, INC. AND SUBSIDIAIRES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended
March 31,
-------------------------
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from Continuing Operations .................................... $(2,155,093) $(1,572,278)
Adjustments to Reconcile Net Loss from Continuing Operations
to Net Cash Used in Operating Activities:
Depreciation ................................................ 29,175 35,169
Stock-Based Compensation .................................... 545,821 640,858
Provision for Doubtful Accounts ............................. 47,673 -
Settlement Income ........................................... (20,351) -
(Increase) Decrease in:
Accounts Receivable ...................................... (129,818) 4,798
Inventories .............................................. 5,435 16,910
Other Current Assets ..................................... (144,253) 23,008
Security Deposits ........................................ 910 -
Increase (Decrease) in:
Accounts Payable ......................................... 11,123 20,875
Other Accrued Expenses ................................... 55,327 (27,848)
Deferred Revenue ......................................... (3,667) 7,617
----------- -----------
Net Cash Flows Used in Continuing Operating Activities ................. (1,757,718) (850,891)
----------- -----------
Income from Discontinued Operations ................................. 1,905,704 404,407
Adjustments to Reconcile Income from Discontinued
Operations to Net Cash Used in Discontinued Operating Activities:
Gain from Sale of Discontinued Operation .................... (1,814,648) -
Net Decrease in Net Liabilities of Discontinued Operations .. 236,979 103,169
----------- -----------
Net Cash Provided by Discontinued Operating Activities ................. 328,035 507,576
----------- -----------
Net Cash Flows Used in Operating Activities ............................ (1,429,683) (343,315)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in Short-term Investment .................................. (698,292) (2,576,546)
Acquisition of Property and Equipment .............................. (14,375) (34,882)
----------- -----------
Net Cash Flows Used in Investing Activities ............................ (712,667) (2,611,428)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Sale of Common Stock ................................. - 2,778,439
Proceeds from Exercise of Stock Options and Warrants ............... 1,890,441 2,800
----------- -----------
Net Cash Flows Provided by Financing Activities ........................ 1,890,441 2,781,239
----------- -----------
Net Decrease in Cash and Cash Equivalents .............................. (251,909) (173,504)
Cash and Cash Equivalents - Beginning of Year .......................... 306,318 295,088
----------- -----------
Cash and Cash Equivalents - End of Period .............................. $ 54,409 $ 121,584
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ............................................................ $ - $ -
=========== ===========
Income Taxes ........................................................ $ - $ -
=========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for debt ....................................... $ - $ 9,000
=========== ===========
Common stock issued for future services ........................... $ - $ 830,362
=========== ===========
See accompanying notes to consolidated financial statements
-5-
CENUCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Currently, Cenuco, Inc., (a Delaware corporation) and Subsidiaries (the
"Company") primary focus is on wireless application development. Through its
subsidiary, the Company is engaged in a wireless application technology
business, primarily related to the transmission of secure and non-secured video
onto cellular platforms via proprietary technologies. This is also known as
remote video monitoring via cellular device. In this wireless segment, the
Company provides cellular carriers, Internet Service Providers, resellers, and
distributors a host of wireless video streaming products which can generate an
increase in subscriber adoption of wireless data services, as well as broadband
Internet services.
On September 30, 2004, the Company sold substantially all of the assets and
business of its education subsidiary (See Note 3).
The accompanying unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). The accompanying consolidated financial statements for the interim
periods are unaudited and reflect all adjustments (consisting only of normal
recurring adjustments and adjustments for the asset sale) which are, in the
opinion of management, necessary for a fair presentation of the financial
position and operating results for the periods presented. The consolidated
financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant inter company accounts and transactions have been
eliminated. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements for the year ended June 30, 2004 and notes
thereto contained in the Company's report on Form 10-KSB as filed with the SEC.
The results of operations for the nine months ended March 31, 2005 are not
necessarily indicative of the results for the full fiscal year ending June 30,
2005.
Reclassifications
-----------------
Certain reclassifications have been made to the prior period's consolidated
statements of operations to conform to the current period's presentation.
Concentrations of Credit Risk
-----------------------------
The Company maintains its cash balances at quality financial institutions which,
at times, exceed federally insured limits. These balances are insured by the
Federal Deposit Insurance Corporation up to $100,000. At March 31, 2005, the
Company had $5,913,291 in United States bank deposits, which exceed federally
insured limits. The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant credit risk on cash on deposit.
Inventories
-----------
Inventories, consisting of security cameras and equipment, are stated at the
lower of cost or market utilizing the first-in, first-out method.
-6-
CENUCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2005
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
-------------------
The Company follows the guidance of the Securities and Exchange Commission's
Staff Accounting Bulletin 104 for revenue recognition. In general, the Company
records revenue when persuasive evidence of an arrangement exists, services have
been rendered or product delivery has occurred, the sales price to the customer
is fixed or determinable, and collectability is reasonably assured. The
following policies reflect specific criteria for the various revenues streams of
the Company:
In connection with the development and sale of wireless solutions and web
services, which include the development of business-to-business and
business-to-consumer wireless applications, and state of the art wireless
technology and services, the Company recognizes revenue as services are
performed on a pro-rata basis over the contract term or when products are
delivered. The Company periodically enters into agreements whereby the customer
or distributor may purchase wireless products on a consignment type basis.
Revenues are recognized under these arrangements only when the customer or
distributor has resold the product and the Company has an enforcement right to
its sales price.
Revenues are earned from licensing arrangements pursuant to the terms of those
agreements.
Stock Options
-------------
The Company accounts for stock options issued to employees in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. As
such, compensation cost is measured on the date of grant as the excess of the
current market price of the underlying stock over the exercise price. Such
compensation amounts, if any, are amortized over the respective vesting periods
of the option grant. The Company adopted the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation" and SFAS 148, "Accounting for
Stock-Based Compensation -Transition and Disclosure", which permits entities to
provide pro forma net income (loss) and pro forma earnings (loss) per share
disclosures for employee stock option grants as if the fair-valued based method
defined in SFAS No. 123 had been applied. The Company accounts for stock options
and stock issued to non-employees for goods or services in accordance with the
fair value method of SFAS 123.
The exercise prices of all options granted by the Company equal the market price
at the dates of grant. No compensation expense has been recognized. Had
compensation cost for the stock option plan been determined based on the fair
value of the options at the grant dates consistent with the method of SFAS 123,
"Accounting for Stock Based Compensation", the Company's net loss and loss per
share would have been changed to the pro forma amounts indicated below for the
nine months ended March 31, 2005 and 2004:
-7-
CENUCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2005
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Stock Options (continued)
-------------------------
For the Nine Months Ended
March 31,
-------------------------
2005 2004
---------- -----------
Net loss as reported ........................... $(249,389) $(1,167,871)
Less: total stock-based employee
compensation expense determined under
fair value based method, net of related tax
effect ......................................... (134,052) (46,791)
--------- -----------
Pro forma net loss ............................. $(383,441) $(1,214,662)
========= ===========
Basic and diluted loss per share:
As reported ..................... $ (.02) $ (.12)
========= ===========
Pro forma ....................... $ (.03) $ (.13)
========= ===========
The above pro forma disclosures may not be representative of the effects on
reported net earnings for future years as options vest over several years and
the Company may continue to grant options to employees.
Earnings (Loss) Per Common Share
--------------------------------
Basic net earnings (loss) per share equals net earnings (loss) divided by the
weighted average shares outstanding during the period. For the three and nine
months ended March 31, 2005 and 2004, the computation of diluted net earnings
per share does not include dilutive common stock equivalents in the weighted
average shares outstanding as they would be antidilutive. Not included in basic
shares are 2,935,712 stock options and warrants because they are anti-dilutive
in 2005 and 2004, respectively.
Intangibles and other Long-Lived Assets
---------------------------------------
The Company reviews the carrying value of intangibles and other long-lived
assets for impairment at least annually or whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of long-lived assets is measured by comparison of
its carrying amount to the undiscounted cash flows that the asset or asset group
is expected to generate. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the property, if any, exceeds its fair market value. Goodwill
represents the excess of the cost of the Company's acquired subsidiaries or
assets over the fair value of their net assets at the date of acquisition. Under
Statement of Financial Accounting Standards ("SFAS") No. 142, goodwill is
subject to at least an annual assessment for impairment applying a fair-value
based test. There were no impairment losses during the three and nine months
ended March 31, 2005.
-8-
CENUCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2005
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent Accounting Pronouncements
--------------------------------
In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments." The EITF reached a consensus about the
criteria that should be used to determine when an investment is considered
impaired, whether that impairment is other-than-temporary, and the measurement
of an impairment loss and how that criteria should be applied to investments
accounted for under SFAS No. 115, "Accounting in Certain Investments in Debt and
Equity Securities." EITF 03-01 also included accounting considerations
subsequent to the recognition of an other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. Additionally, EITF 03-01 includes new
disclosure requirements for investments that are deemed to be temporarily
impaired. In September 2004, the Financial Accounting Standards Board (FASB)
delayed the accounting provisions of EITF 03-01; however the disclosure
requirements remain effective for annual reports ending after June 15, 2004. The
Company believes that the adoption of this standard will have no material impact
on its financial statements.
In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS
151 "Inventory Costs". 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). In
addition, this Statement requires that allocation of fixed production overhead
to the costs of conversion be based on the normal capacity of the production
facilities. The provisions of this Statement will be effective for the Company
beginning with its fiscal year ending 2006. The Company is currently evaluating
the impact this new Standard will have on its operations, but believes that it
will not have a material impact on the Company's financial position, results of
operations or cash flows.
In December 2004, the FASB issued SFAS 153 "Exchanges of Non monetary Assets -
an amendment of APB Opinion No. 29". This Statement amended APB Opinion 29 to
eliminate the exception for non-monetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of non-monetary assets
that do not have commercial substance. A non-monetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. The adoption of this Standard is not
expected to have any material impact on the Company's financial position,
results of operations or cash flows.
In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
an Amendment of FASB Statement No. 123" ("FAS No. 123R"). This FAS No. 123R
requires companies to recognize in the statement of operations the grant- date
fair value of stock options and other equity-based compensation issued to
employees. The Statement also establishes fair value as the measurement
objective for transactions in which an entity acquires goods or services from
non-employees in share-based payment transactions. The Statement replaces SFAS
123 "Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25
"Accounting for Stock Issued to Employees". The provisions of this Statement
will be effective for the Company beginning with its fiscal year ending 2005.
The Company is currently evaluating the impact this new Standard will have on
its financial position, results of operations or cash flows.
-9-
CENUCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2005
NOTE 3 - SALE OF SUBSIDIARY
Effective September 30, 2004, the Company entered into a Purchase and Sale
Agreement (the "Sale Agreement") and sold substantially all of the assets of its
education subsidiary for $1,000,000, subject to a reduction of $200,000 if the
buyer does not collect 95% of the receivables on the books as of September 30,
2004 prior to September 30, 2005. In connection with the Sale Agreement, the
Company received $300,000 in cash. As of March 31, 2005, the Company reflected a
receivable from the sale of business on the accompanying balance sheet.
Additionally, the buyer executed a promissory note in favor of the Company in
the amount of $700,000 payable as follows:
(a) Twenty (20) equal and consecutive quarterly payments of $29,122.87 each
(amortized on the basis of $500,000), with payments beginning on March
1, 2005. Interest accrues at a rate of 6% per annum. During the first 6
months, interest will accrue but not be paid. The $15,000 of interest
accrued is payable in 5 equal monthly installments beginning December
1, 2004. According to the Purchase and Sale Agreement, any existing
trade payables can be deducted against quarterly payments owed to the
Company. As of March 31, 2005, the Company had not received any
payments.
(b) A final balloon payment of $200,000 due on January 1, 2010. If the
purchase price is reduced due to buyer not collecting 95% of the
receivables on the books as of September 30, 2004 prior to September
30, 2005, the final balloon payment will be eliminated.
As a result of the sale of the Company's subsidiary, for the nine months ended
March 31, 2005, the Company recorded a gain of $1,814,648 and a deferred gain on
the sale of $200,000 (representing the contingent balloon payment due). The
results of operations of the Company's education subsidiary is reported
separately as a discontinued operation, and prior periods have been restated in
the Company's financial statements, related footnotes and the management's
discussion and analysis to conform to this presentation.
The Company's income (loss) from discontinued operations for the nine months
ended March 31, 2005 and 2004 are summarized as follows:
For the Nine Months Ended,
March 31,
--------------------------
2005 2004
---------- ----------
Sales .................................... $ 261,288 $ 779,072
Operating Expenses ....................... 170,232 374,665
---------- ----------
Net income from discontinued operations
before gain on sale .................... 91,056 404,407
Gain on sale of assets of subsidiary ..... 1,814,648 -
---------- ----------
Income from discontinued operations ...... $1,905,704 $ 404,407
========== ==========
-10-
CENUCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2005
NOTE 3 - SALE OF SUBSIDIARY (continued)
The gain on sale from the sale of substantially all of the assets of the
Company's education subsidiary is calculated as follows:
Sale price for subsidiary's assets ...................... $ 1,000,000
Less: direct transaction expenses:
Investment banking fee ............................. (80,000)
Add: net deficit of subsidiary at date of sale .......... 1,094,648
Less: deferred gain on sale of subsidiary ............... (200,000)
-----------
Gain on disposal of subsidiary, net of taxes ............ $ 1,814,648
===========
NOTE 4 - STOCKHOLDERS' EQUITY
Common stock
------------
In July 2004, the Company issued 10,000 common shares previously issuable. In
October 2004, the Company issued 3,036 common shares previously issuable.
On July 23, 2004, the Company issued an aggregate of 34,000 shares of common
stock (17,000 common shares each) to two employees' of the Company for services
rendered. Such shares were valued at their market value on the date of issuance
at $3.71 per share. The Company recorded compensation of $126,140 related to
these services.
During the quarter ended September 30, 2004, the Company issued 265 shares of
common stock for accounting services rendered. The Company valued these shares
at their market value on the first date at the beginning of the service period
at $5.65 per share and recorded professional fees of $1,500.
During the quarter ended September 30, 2004, the Company issued 100,000 shares
of common stock upon the exercise of 100,000 warrants for proceeds of $100,000
or $1.00 per share.
During the quarter ended September 30, 2004, the Company issued 10,000 shares of
common stock upon the exercise of 10,000 options for proceeds of $5,500 or $.55
per share.
During the quarter ended December 31, 2004, the Company issued 300,000 shares of
common stock upon the exercise of 300,000 warrants for proceeds of $300,000 or
$1.00 per share.
During the quarter ended December 31, 2004, the Company issued 280,776 shares of
common stock upon the exercise of 236,560 and 44,216 warrants at $4.50 and $4.00
per share, respectively, for proceeds of $1,241,384.
-11-
CENUCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2005
NOTE 4 - STOCKHOLDERS' EQUITY (continued)
Common stock (continued)
------------------------
During the quarter ended December 31, 2004, the Company issued 368 shares of
common stock for accounting services rendered. The Company valued these shares
at their market value on the first date at the beginning of the service period
at $4.08 per share and recorded professional fees of $1,500.
During the quarter ended March 31, 2005, the Company issued 261 shares of common
stock for accounting services rendered. The Company valued these shares at their
market value on the first date at the beginning of the service period at $5.75
per share and recorded professional fees of $1,500. At March 31, 2005, these
shares had not been issued and are included in common stock issuable on the
accompanying balance sheet.
On February 25, 2005, the Company issued 624,661 shares of common stock in a
cashless exercise of 691,666 options that were previously granted to certain
officers and directors of the Company.
During the quarter ended March 31, 2005, the Company issued 151,679 shares of
common stock upon the exercise of 151,679 warrants and options for proceeds of
$243,557.
Common stock options
--------------------
On July 23, 2004, the Company granted options to purchase 60,000 shares of
common stock to employees of the Company. The options are exercisable at $3.71
per share, which exceeds the fair market value of the common stock at the grant
date. Accordingly, under APB 25, no compensation expense was recognized. The
options expire on July 23, 2014 or earlier due to employment termination.
On July 28, 2004, the Company granted options to purchase 40,000 shares of
common stock to employees of the Company. The options are exercisable at $4.00
per share, which exceeds the fair market value of the common stock at the grant
date. Accordingly, under APB 25, no compensation expense was recognized. The
options expire on July 28, 2014 or earlier due to employment termination.
A summary of the status of the Company's outstanding stock options as of March
31, 2005 and changes during the nine months ended March 31, 2005 is as follows:
Weighted Average
Exercise
Shares Price
--------- ----------------
Outstanding at June 30, 2004 ............ 1,361,000 $ 0.96
Granted .............................. 100,000 3.83
Exercised ............................ (727,665) (0.62)
Forfeited ............................ (176,667) (1.81)
--------- --------
Outstanding at March 31, 2005 ........... 556,668 $ 1.52
========= ========
Options exercisable at end of period .... 201,666 $ 1.55
========= ========
Weighted-average fair value of options
granted during the period ......... $ 3.83
-12-
CENUCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2005
NOTE 4 - STOCKHOLDERS' EQUITY (continued)
The following information applies to options outstanding at March 31, 2005:
Options Outstanding Options Exercisable
-------------------------- ---------------------
Weighted -
Range Average Weighted - Weighted -
of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Shares Life (Years) Price Shares Price
-------- ------- ------------ ---------- ------- ----------
$0.42 73,332 7.25 $ 0.42 - $0.42
$0.55 40,000 5.75 $ 0.55 40,000 $0.55
$1.15 218,335 8.85 $ 1.15 25,000 $1.15
$1.55 35,001 7.85 $ 1.55 23,333 $1.55
$2.00 130,000 8.85 $ 2.00 113,333 $2.00
$3.71 40,000 9.00 $ 3.71 - $ -
$4.00 20,000 9.25 $ 4.00 - $ -
------- -------
556,668 201,666
======= =======
Common stock warrants
---------------------
A summary of the status of the Company's outstanding stock warrants granted for
services as of March 31, 2005 and changes during the nine months ended March 31,
2005 is as follows:
Weighted
Average
Exercise
Shares Price
--------- --------
Outstanding at June 30, 2004 ............ 3,050,000 $ 3.50
Granted ................................. - -
Exercised ............................... (721,456) (2.53)
Forfeited ............................... - -
--------- --------
Outstanding at March 31, 2005 ........... 2,328,544 $ 3.83
========= ========
Warrants exercisable at end of year ..... 2,328,544 $ 3.83
========= ========
The following information applies to all warrants outstanding at March 31, 2005:
Warrants Outstanding Warrants Exercisable
-------------------------- ---------------------
Weighted -
Range Average Weighted - Weighted -
of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Shares Life (Years) Price Shares Price
-------- --------- ------------ ---------- --------- ----------
$1.00 500,000 3.65 $ 1.00 500,000 1.00
$4.00 105,784 4.25 $ 4.00 105,784 4.00
$4.50 1,372,760 4.13 $ 4.50 1,372,760 4.50
$5.00 to
$6.50 350,000 4.25 $ 5.21 350,000 5.21
---------
2,328,544
=========
-13-
CENUCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2005
NOTE 5 - MERGER AGREEMENT
On March 17, 2005, the Company announced that it has entered into a Merger
Agreement, dated as of March 16, 2005 (the "Merger Agreement"), with Hermes
Holding Company, Inc., a Delaware corporation and wholly owned subsidiary of the
Company (the "Merger Sub"), and Hermes Acquisition Company I LLC, a Delaware
limited liability company ("Seller"). Pursuant to the Merger Agreement, Merger
Sub will be merged with and into Seller (the "Merger"), as a result of which the
separate existence of Merger Sub shall cease and Seller shall continue as the
surviving company and a wholly-owned subsidiary of the Company.
Seller, through its subsidiaries, Lander Co., Inc. and Lander Co. Canada Limited
(collectively, "Lander"), manufactures, markets and distributes value brand
(LANDER) health and beauty care products. Lander also produces private label
health and beauty care products for certain major retailers. Lander owns and
operates a manufacturing and distribution facility in Binghamton, New York, and
operates a manufacturing facility in Toronto, Canada. In addition, Lander
utilizes distribution facilities in Charlotte, North Carolina and Buena Park,
California.
Pursuant to the Merger Agreement, the Company will issue shares (the "Merger
Shares"), representing 65% of the shares of the Company's common stock, $.001
par value per share, to be outstanding after the Merger, to the owners of Seller
in exchange for their equity interests in Seller. The Merger Shares were offered
to the owners of Seller pursuant to an exemption from registration under Section
4(2) of the Securities Act of 1933, as amended, and the rules and regulations
there under. The transaction is intended to qualify as a tax-free reorganization
for both companies and their respective stockholders and members.
The closing is conditioned on, among other things, (1) the Company stockholders
approving the Merger Agreement and the issuance of the Merger Shares, (2) the
Company stockholders approving an amendment to the Company's certificate of
incorporation to change the name of the Company to Lander Co., Inc. or another
name selected and to increase the Company's authorized common stock to 100
million shares, (3) the Company obtaining a fairness opinion that the Merger is
fair to the Company's stockholders from a financial point of view and (4) the
Company having cash and cash equivalents on hand at closing of approximately $6
million, subject to no liens. Because the number of Merger Shares will exceed
20% of the Company's current outstanding shares, the Company is required to seek
stockholder approval of the issuance of such shares, in accordance with Section
712 of the Listing Standards, Policies and Requirements of the American Stock
Exchange.
NOTE 6 - SUBSEQUENT EVENTS
During April 2005, the Company issued 98,500 shares of common stock upon the
exercise of 98,500 warrants at $1.00 per share for proceeds of $98,500.
In May 2005, the Company signed a settlement agreement with Omnipoint, based on
the breach of an Asset Purchase Agreement, dated on October 21, 2004. Omnipoint
agreed to pay the Company $250,000 in 25 monthly payments. In connection with
the settlement agreement, the Company received $10,000 in April 2005.
-14-
CENUCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2005
NOTE 7 - LEGAL MATTERS
In February 2005, the Company was made a party to a patent infringement suit by
Raymond Anthony Joao, an individual who has reportedly developed a monitoring
apparatus and method, a control, monitoring and / or security apparatus and
method and a control apparatus and method for vehicles and / or for premises. He
believes that we use a type of monitoring apparatus and / or method for which he
has been granted a patent in the United States. The United States District Court
Southern District of New York (USDC SD NY 05 Civ. 1037 (CM) (MDF)) is hearing
allegations of infringement brought by Joao.
The Company filed an answer to Joao's complaint denying infringement and
asserting certain other defenses. In April 2005, we filed a counter-claim in
this litigation alleging that prior to February 2005 all involved parties in
this lawsuit executed an agreement which specifically prohibits this suit. An
executed copy of this agreement, signed by Joao and Cenuco, was submitted for
the court's review as part of our counter-claim. Among other things, the outcome
will likely depend not only upon the enforcement of the aforementioned agreement
but may also be upon whether the aforementioned patents are determined to be
valid and infringed. Management believes that we are not infringing, and that
this lawsuit has no basis. However, we are presently unable to predict either
the effect or degree of effect this litigation will have on our business and
financial condition. There is no other pending material litigation to which we
are a party or to which any of our property is subject.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
GENERAL
The following analysis of the results of operations and financial
condition of the Company should be read in conjunction with the consolidated
financial statements for the year ended June 30, 2004 and notes thereto
contained in the Report on Form 10-KSB of Cenuco, Inc. as filed with the SEC.
These financial statements reflect the consolidated operations of Cenuco, Inc.
for the nine months ended March 31, 2005 and 2004, respectively.
This report on Form 10-QSB contains forward-looking statements. These
statements consist of any statement other than a recitation of historical fact
and can be identified by the use of forward-looking terminology such as "may,"
"expect," "anticipate," "estimate" or "continue" or the negative thereof or
other variations thereon or comparable terminology. The reader is cautioned that
all forward-looking statements are necessarily speculative and there are certain
risks and uncertainties that could cause actual events or results to differ
materially from those referred to in such forward-looking statements. We do not
have a policy of updating forward-looking statements and thus it should not be
assumed that silence over time means that actual events are bearing out as we
estimated in such forward-looking statements.
-15-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
(continued)
Currently, Cenuco, Inc., (a Delaware corporation) and Subsidiaries (the
"Company") primary focus is on wireless application development. Through our
subsidiary, we are engaged in a wireless application technology business,
primarily related to the transmission of secure and non-secured video onto
cellular platforms via proprietary technologies. This is also known as remote
video monitoring via cellular device. In this wireless segment, Cenuco provides
cellular carriers, Internet Service Providers, resellers, and distributors a
host of wireless video streaming products which generate an increase in
subscriber adoption of wireless data services, as well as broadband Internet
services. The business model provides additional recurring monthly service
revenue models for carriers, ISPs, resellers and distributors. Wireless data
services are expected to grow 50% this year reaching $5.5 billion by 2009. 22
million Americans will access mobile video content via cellular devices, with
over 31 million utilizing video messaging. Cellular video services are expected
to account for almost 15% of all wireless data related revenues across the
industry, with Cenuco uniquely positioned to be a service provider to all
parties (Sources: Business Week - June 21, 2004, and In-Stat MDR - March, 2004).
We are currently in deployment negotiations and/or testing relationships with a
number of international and national cellular carriers, retail chains, major
distribution providers, resellers, and potential technology licensees on a
global basis.
Our wireless remote video monitoring technologies via cellular device
(cellular phone, Pocket PC mobile Edition, Smart Phone, remote wireline
computer, and remote cellular connected computer) have been productized during
the 2004 fiscal year to service a variety of market segments. On July 9, 2003,
we announced our being awarded the General Services Administration contract
number GS-03F-0025N by the United States government, allowing the company to
sell it's products, technologies, and services to every branch of the United
States government, including all military agencies and the Department of
Homeland Security. The market size for remote video monitoring is estimated in
excess of $100 million domestically, and as high as $500 million globally.
Our partnerships and affiliations developed during Fiscal 2004 and
expanded during Fiscal 2005 include: Intel Corporation, Microsoft Corporation,
Qualcomm, Tyco, and other leading technology organizations. These relationships
allow us access to new emerging technologies provided by these partner firms, as
well as co-operative marketing programs, providing us access to significant
resources in the wireless remote monitoring market.
Cellstar, Infosonics, D&H Distributing, Worthington Distribution, and
other integrated distribution companies represent significant revenue
opportunities for us, with access to hundreds of their sales personnel on a
national and international basis. We enjoy contracted relationships with all of
the distributors mentioned above. They all currently represent our wireless
remote monitoring products and services.
LANDER MERGER
On March 17, 2005, we announced that we have entered into a Merger
Agreement, dated as of March 16, 2005 (the "Merger Agreement"), with Hermes
Holding Company, Inc., a Delaware corporation and wholly owned subsidiary of the
Company (the "Merger Sub"), and Hermes Acquisition Company I LLC, a Delaware
limited liability company ("Seller" or "Hermes"). Pursuant to the Merger
Agreement, Merger Sub will be merged with and into Seller (the "Merger"), as a
result of which the separate existence of Merger Sub shall cease and Seller
shall continue as the surviving company and a wholly-owned subsidiary of the
Company.
-16-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
(continued)
Hermes, through its subsidiaries, Lander Co. Inc. and Lander Co. Canada
Limited (collectively, "Lander"), is a manufacturer, marketer and distributor of
the leading value brand (LANDER) health and beauty care products. Lander also
produces private label brands for a limited number of top retailers through its
Canadian facility. With fiscal year 2005 revenues of approximately $72 million,
(fiscal year end February 28, 2005) Lander boasts a category leadership position
in the rapidly growing marketplace for value health and beauty care (HBC)
products - sold in dollar store and value focused retailers such as Wal-Mart and
Kmart. www.lander-hba.com
The Lander brand is recognized as the largest specialty bath brand as
reported in 2004 by Information Resources, Inc. (IRI), a global provider of
market content and business performance management within consumer goods and
retail industries. Lander is headquartered in Lawrenceville, New Jersey (5
minutes west of Princeton, New Jersey and mid way between New York and
Philadelphia). The company owns and operates two manufacturing and distribution
facilities, one in Binghamton, New York and the other in Toronto, Canada. In
addition, Lander utilizes distribution facilities in Charlotte, North Carolina
and Buena Park, California.
As part of this merger agreement, which is specified by our 8K filing
on March 17th 2005, the companies are in the process of producing the relevant
filings and proxy statements for shareholder consideration, as applicable.
Upon the closure of the merger, the parent company name will be changed
to Lander, and the company will be comprised of two operating divisions. Health
and Beauty products will operate under the Lander brand name. Wireless
technologies and applications will operate under the Cenuco brand name.
Our current management feels that the merger will have a positive
effect for the Company and our long term prospects. We will gain additional
logistics and distribution knowledge, which is a strong component of Lander's
current business operations. We believe that additional efficiencies and cost
savings will be forthcoming for the entire enterprise after the merger
completion.
Lander also currently supports a number of key customers, including
Wal-Mart, CVS, and others. We hope to be able to introduce our wireless consumer
products into these retail channels. Additionally, all of these retail channels
have needs for remote video monitoring technologies to combat theft and
liability. We intend to work with these current Lander customers on how Cenuco
Wireless technologies can assist and extend their loss-prevention and monitoring
infrastructure.
Additionally, Cenuco wireless technology applications have the ability
to transmit virtually any type of data to a cellular device, not just video.
Lander represents a unique opportunity to apply our technology to issues
surrounding: warehousing, inventory control, manufacturing review and control,
supply chain management, RFID tag tracking, logistics, sell-through tracking,
and numerous others. It is management's belief that the combined knowledge of
both companies will result in additional wireless and cellular-based
applications focused on these and other applications.
With the consummation of this merger, the management of both companies
understands that continuity of operations, while taking advantage of relevant
cost savings through combining the operations of both enterprises, is important
to shareholder value. The management of both firms has exemplarily experience
within their respective industries, and it is the intention to leverage this
knowledge base for the acceleration of revenues for both businesses as a
combination.
-17-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
(continued)
Pursuant to the Merger Agreement, we will issue shares (the "Merger
Shares"), representing 65% of the shares of our common stock, $.001 par value
per share, to be outstanding after the Merger, to the owners of Seller in
exchange for their equity interests in Seller. The Merger Shares were offered to
the owners of Seller pursuant to an exemption from registration under Section
4(2) of the Securities Act of 1933, as amended, and the rules and regulations
there under. The transaction is intended to qualify as a tax-free reorganization
for both companies and their respective stockholders and members.
The closing is conditioned on, among other things, (1) the Company
stockholders approving the Merger Agreement and the issuance of the Merger
Shares, (2) the Company stockholders approving an amendment to the Company's
certificate of incorporation to change the name of the Company to Lander Co.,
Inc. or another name selected and to increase the Company's authorized common
stock to 100 million shares, (3) us obtaining a fairness opinion that the Merger
is fair to the Company's stockholders from a financial point of view and (4) the
Company having cash and cash equivalents on hand at closing of approximately $6
million, subject to no liens. Because the number of Merger Shares will exceed
20% of the Company's current outstanding shares, the Company is required to seek
stockholder approval of the issuance of such shares, in accordance with Section
712 of the Listing Standards, Policies and Requirements of the American Stock
Exchange.
Subsequent to March 31, 2005, in connection with the proposed Lander
Merger, management of both companies has discussed a change in the structure of
the transaction that would serve to minimize costs and permit a timely closing
of the merger. The parties are presently considering an amendment to the merger
agreement that provides for the membership interests in Hermes to be converted
in the merger into the right to receive a new preferred stock of Cenuco that
votes along with the common stock and represents 65% of the outstanding voting
power of Cenuco following the merger. The preferred stock would be convertible
into common stock of Cenuco upon approval of the vote of holders of Cenuco
common stock (without any vote of the preferred stock) at a meeting of
stockholders to be held as promptly as practicable following the closing of the
merger. If the parties agree to amend the merger agreement, it is contemplated
that the closing of the merger will take place by the end of May, 2005.
Other Developments
Orange, a division of France Telecom, is considered to be the third
largest cellular carrier in the world. With more than 54 million subscribers
across greater than 16 operating markets, Orange currently grosses more than $30
billion in annualized sales. Orange is also one of the most progressive carriers
regarding data network capabilities, data applications, support of application
developers like Cenuco, and ARPU generation from data in general. For example,
Orange has true 3G networks live, with subscribers, in multiple operating
markets. Data comprises more than 10% of total this carrier's revenues. Through
our association with Intel, Cenuco has been working directly with Orange
regarding Cenuco's cellular streaming technologies and products, since 2004.
Twice annually, Orange holds a "Code Camp" event where more than 100 of the top
cellular application developers in the world are invited to work directly with
Orange technical, marketing, and executive personnel for three days. The event
is by invitation only. In addition, Orange conducts a Code Camp Challenge during
this event, with awards given to a few select companies for productized data
applications. Cenuco's engineering team took this opportunity to offer the first
public demonstration of our Advanced MobileMonitor (AMM) technologies during
this event. Unlike our standard MobileMonitor (which requires a USB camera
hooked to a personal computer to broadcast live video to cellular handsets), AMM
allows for direct, live private-stream video broadcasting right from the camera
in a cellular handset (camera phone), to virtually any other data capable
cellular handset (including multiple handsets simultaneously), and/or remote
personal computers. This system was shown live on both 2G and 3G cellular
networks.
-18-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
(continued)
As a result of this successful series of demonstrations, Orange awarded
Cenuco with "Best Use of the Orange Voice and Data Network.". Additionally,
Cenuco's standard MobileMonitor kitted product was announced as approved and
included into the Orange application catalog for Smartphone, Pocket PC phone,
and J2ME handset categories. With inclusion in the Orange application catalog,
any Orange operating market has technical approval to deploy Cenuco's
MobileMonitor product. With that benchmark achieved, we are continuing our
localization and commercialization discussions with Orange for various operating
markets.
RESULTS OF OPERATIONS
Nine Months Ended March 31, 2005 compared to Nine Months Ended March 31, 2004
Revenues
For the nine months ended March 31, 2005, revenues from the sale of our
wireless products and services was $397,720 as compared to $138,383 for the nine
months ended March 31, 2004, an increase of $259,337 or 187%, and is summarized
as follows.
Equipment and Software Sales ........... $379,980 $ 32,676
Wireless Solutions and Web Services .... 17,740 105,707
-------- --------
$397,720 $138,383
======== ========
The increase in our revenue was attributable to the sale of our Mobile
Monitor product. In the second quarter, our Mobile Monitor product began
shipping in larger quantities than anticipated.
We are in the process of launching our latest line of applications
geared for commercial, enterprise, and Federal customers. This line will be sold
through several Manufacturers Representatives, Distributors, and Resellers
already established. These new products are based on the common core
technologies already proven in the marketplace. With this new launch, we show
the extensibility of our core technology, and how it can be applied to multiple
business sectors with minimal modification.
In May of 2004, we announced an agreement with PowerLinx. We combined
the PowerLinx SecureVue camera system with our technologies, allowing users to
see the live video from SecureVue cameras on all compatible cellular handsets
and devices. The combined offering has initiated sales through channels such as
the Home Shopping Network. Revenues from this engagement were based on product
sell through, which began in December of 2004, and will continue well into 2005.
Additionally, we entered into a software licensing agreement with PowerLinx,
whereby PowerLinx has licensed 10,000 copies of our software for inclusion into
their SecureVue camera kits. These combined kits are slated for sale through
similar channels.
We have been engaged by Tyco Fire and Security (Sensormatic), for early
stage development to combine our core technologies into select Tyco Digital
Video Recorder and CCTV systems. Upon successful conclusion, a larger scale
royalty/licensing relationship between us and Tyco may result.
-19-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS (Continued)
Nine Months Ended March 31, 2005 compared to Nine Months Ended March 31, 2004
We continue deployment testing for MobileMonitor with a number of
carriers globally. It is expected that additional revenue generating
opportunities will result. Also, we have a number of software licensing
engagements under negotiation, which are currently in testing phases. It is
expected that these engagements will come to fruition near-term.
Cost of Sales and Gross Profit
For the nine months ended March 31, 2005, we incurred cost of sales
related to the sale of equipment and software of $286,887 or 72.1% of revenues,
compared to $17,642 or 12.7% of revenues for the nine months ended March 31,
2004. The increase in costs of sales and the corresponding percentage is due the
change in product. In 2004, we redesigned our product to include more hardware.
In 2003, sales from our product were software related, which had a minimal cost.
For the nine months ended March 31, 2005, gross profit was $110,833 or 27.9%
compared to $120,741 or 87.3% for the nine months ended march 31, 2004. We
expect our gross margins to increase as we recognize revenues from licensing
agreements associated with our software which has minimal costs associated with
it.
Research and Development
For the nine months ended March 31, 2005, research and development
expense amounted to $98,452 as compared to $25,379 for the nine months ended
March 31, 2004, an increase of $73,073 or 288%. For the nine months ended March
31, 2005, we allocated salaries of $56,154 to research and development. We
continue to develop our products and expect this amount to increase in the
future.
Bad Debt Expense
For the nine months ended March 31, 2005, bad debt expense amounted to
$47,673 as compared to $0 for the nine months ended March 31, 2004. The increase
in bad debt was attributable to the reserve of uncollectible accounts
receivable.
Selling and Promotion
For the nine months ended March 31, 2005, selling and promotion
expenses amounted to $204,183, which included $1,859 in commission expense,
$67,216 in advertising expense, printing and reproduction expense of $6,154,
travel expenses of $87,493, and other expenses of $41,461. For the nine months
ended March 31, 2004, selling and promotion expenses amounted to $103,118, which
included $44,205 in commission expense, $24,254 in advertising expense, printing
and reproduction expense of $3,848, travel expenses of $26,849 and other
expenses of $3,962. The increase in selling and promotion expense was $101,065
or 98% and is attributable to an increase in our marketing efforts in order to
gain market acceptance of our products. We will continue to aggressively market
our products and plan on attending trade shows, advertising in publications, and
will seek public relations opportunities.
-20-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS (Continued)
Nine Months Ended March 31, 2005 compared to Nine Months Ended March 31, 2004
General and Administrative
For the nine months ended March 31, 2005, we incurred $2,007,295 of
general and administrative expenses as compared to $1,573,932, an increase of
$433,363 or 27.5%. General and administrative expenses consisted of the
following:
For the nine months For the nine months
ended March 31, 2005 ended March 31, 2004
-------------------- --------------------
Salaries ........................... $ 665,714 $ 439,356
Consulting expenses ................ 83,037 157,969
Rent ............................... 62,644 66,117
Professional fees .................. 220,052 79,284
Non-cash compensation and consulting 541,321 572,209
Other .............................. 434,527 258,997
---------- ----------
Total ................... $2,007,295 $1,573,932
========== ==========
For the nine months ended March 31, 2005, our salaries increased by
$226,358 as compared to the nine months ended March 31, 2004. The increase was
attributable the hiring of three new software engineers.
For the nine months ended March 31, 2005, consulting expenses decreased
by $74,932 as compared to the nine months ended March 31, 2004. The decrease was
attributable to a decrease in use of independent software engineers.
For the nine months ended March 31, 2005, professional fees increase by
$140,768 as compared to the nine months ended March 31, 2004 and was
attributable to increase legal fees in connection with our terminated merger
with Omnipoint, the sale or our subsidiary, and other legal matters.
For the nine months ended March 31, 2005, non-cash compensation and
consulting expense decreased by $30,888 as compared to the nine months ended
March 31, 2004. The decrease was attributable to the reduction of amortization
of deferred compensation and consulting for the nine months ended March 31, 2005
for warrants granted in December 2003.
For the nine months ended March 31, 2005, other general and
administrative expenses increased by $175,530 as compared to the nine months
ended March 31, 2004. The increase was attributable an increase in medical
insurance premiums, increased payroll taxes, increased fees association with our
annual meeting, increased fees associated with our listing on the American Stock
Exchange, and increased postage.
-21-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS (Continued)
Nine Months Ended March 31, 2005 compared to Nine Months Ended March 31, 2004
Settlement Income
For the nine months ended March 31, 2005 and 2004, settlement income
was $20,351 and $0, respectively. The increase is related to a settlement of
accounts payable.
Interest Income
For the nine months ended March 31, 2005 and 2004, interest income was
$71,326 and $9,410, respectively. The increase relates to interest income
receivable of $14,994 due on note receivable from the sale our subsidiary as
well as an increase in excess cash balances in interest-bearing accounts with
two financial institutions.
Discontinued Operations
For the nine months ended March 31, 2005, income from discontinued
operations related to our former education subsidiary, was $1,905,704 and
consisted of a gain from the sale of all of the assets of our subsidiary of
$1,814,648 and income from discontinued operations of $91,056. For the nine
months ended March 31, 2004, income from discontinued operations was $404,407
related to income from discontinued operations.
Net loss
As a result of the foregoing factors, we recognized a net loss of
$249,389 on a consolidated basis for the nine months ended March 31, 2005 as
compared to net loss of $1,167,871for the nine months ended March 31, 2004.
Income (loss) per share is summarized as follows:
For the nine For the nine
months ended months ended
March 31, 2005 March 31, 2004
-------------- --------------
INCOME (LOSS) PER COMMON SHARE
- Basic and diluted
Loss from continuing operations ....... $ (0.17) $ (0.16)
Income from discontinued operations ... 0.15 0.04
----------- -----------
Net income (loss) per common share .... $ 0.02 $ (0.12)
=========== ===========
Weighted Common Shares Outstanding
- Basic and diluted ................ 12,647,905 9,466,185
=========== ===========
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2005, we had $6,142,699 in cash and cash equivalents
and a short-term investment on hand to meet our obligations. Our short-term
investments consist of certificates of deposit that are liquid.
-22-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
(Continued)
In fiscal 2004, in connection with a private placement, we sold one
unit for $100,000 comprised of 100,000 shares of common stock and warrants
entitling the holder to purchase up to 100,000 shares of the Company's common
stock, at an exercise price of $1.00. Additionally, in March 2004, we
consummated a capital raise through a private placement offered to accredited
investors and sold 30,000 units aggregating 1,500,000 shares of common stock and
1,500,000 warrants for net proceeds of $5,380,044 and received proceeds of
$69,300 from the exercise of options and warrants.
For the nine months ended March 31, 2005, we received proceeds of
$1,890,441 from the exercise of stock options and warrants. In the future, we
plan on raising additional funds to expand our operations or to pursue
acquisition opportunities or other expansion opportunities
In order to conserve cash, Steven Bettinger, President of Cenuco,
elected to defer compensation beginning in February 2005.
During the nine months ended March 31, 2005, we invested substantial
time and resources developing and evaluating products and opportunities for our
wireless solutions segment. We will continue to develop new wireless solutions
for both of our segments and may consider acquisitions, business combinations,
or start up proposals, which could be advantageous to our product lines or
business plans, although the Company expects to be profitable in the future
there can be no assurance.
Net cash used in operations was $1,429,683 for the nine months ended
March 31, 2005 as compared to net cash used in operations of $343,315 for the
nine months ended March 31, 2004. For the nine months ended March 31, 2005, we
used cash in continuing operations of $1,757,718 offset by cash provided by
discontinued operations of $328,035. For the nine months ended March 31, 2004,
we used cash in continuing operations of $850,891 offset by cash provided by
discontinued operations of $507,576. We feel that our current cash balance is
sufficient to sustain our operations over the ensuing 12-month period, including
the expected growth during this period.
Net cash used in investing activities for the nine months ended March
31, 2005 was $712,667 as compared to net cash used in investing activities of
$2,611,428 for nine months ended March 31, 2004 and primarily related to our
investment in certificate of deposits during the nine months ended March 31,
2005 and 2004 of $698,292 and $2,576,546, respectively. Additional we acquired
property and equipment of $14,375 and $34,882 for the nine months ended March
31, 2005 and 2004, respectively.
Net cash provided by financing activities for the nine months ended
March 31, 2005 was $1,890,441 and related to cash proceeds received from the
exercise of stock options and warrants. For the nine months ended March 31,
2004, we received proceeds of $2,778,439 from the sales of our common stock and
$2,800 from the exercise of stock options.
We have no material commitments for capital expenditures. Our future
growth is dependent on our ability to raise capital for expansion, and to seek
additional revenue sources. If we decide to pursue any acquisition opportunities
or other expansion opportunities, we may need to raise additional capital,
although there can be no assurance such capital- raising activities would be
successful.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
(Continued)
CRITICAL ACCOUNTING POLICIES
A summary of significant accounting policies is included in Note 1 to
the audited financial statements included in our Annual Report on Form 10-KSB
for the year ended June 30, 2004. We believe that the application of these
policies on a consistent basis enables us to provide useful and reliable
financial information about our operating results and financial condition.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
We account for stock options issued to employees in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. As such,
compensation cost is measured on the date of grant as the excess of the current
market price of the underlying stock over the exercise price. Such compensation
amounts, if any, are amortized over the respective vesting periods of the option
grant. We adopted the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" and SFAS 148, "Accounting for Stock-Based Compensation
-Transition and Disclosure", which permits entities to provide pro forma net
income (loss) and pro forma earnings (loss) per share disclosures for employee
stock option grants as if the fair-valued based method defined in SFAS No. 123
had been applied. We account for stock options and stock issued to non-employees
for goods or services in accordance with the fair value method of SFAS 123.
In connection with the development and sale of wireless solutions and
web services, which include the development of business-to-business and
business-to-consumer wireless applications, and state of the art wireless
technology and services, we recognize revenue as services are performed on a
pro-rata basis over the contract term or when products are delivered. We
periodically enter into agreements whereby the customer or distributor may
purchase wireless products on a consignment type basis. Revenues are recognized
under these arrangements only when the customer or distributor has resold the
product and we have an enforcement right to its sales price.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued the
following new accounting pronouncement:
In November 2004, the Financial Accounting Standards Board (FASB)
issued SFAS 151 "Inventory Costs". 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). In addition, this Statement requires that allocation of fixed
production overhead to the costs of conversion be based on the normal capacity
of the production facilities. The provisions of this Statement will be effective
for the Company beginning with its fiscal year ending 2006. We are currently
evaluating the impact this new Standard will have on its operations, but
believes that it will not have a material impact on our financial position,
results of operations or cash flows.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
(Continued)
In December 2004, the FASB issued SFAS 153 "Exchanges of Non monetary
Assets - an amendment of APB Opinion No. 29". This Statement amended APB Opinion
29 to eliminate the exception for non-monetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of non-monetary
assets that do not have commercial substance. A non-monetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. The adoption of this Standard
is not expected to have any material impact on our financial position, results
of operations or cash flows.
In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based
Payment, an Amendment of FASB Statement No. 123" ("FAS No. 123R"). This FAS No.
123R requires companies to recognize in the statement of operations the grant-
date fair value of stock options and other equity-based compensation issued to
employees. The Statement also establishes fair value as the measurement
objective for transactions in which an entity acquires goods or services from
non-employees in share-based payment transactions. The Statement replaces SFAS
123 "Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25
"Accounting for Stock Issued to Employees". The provisions of this Statement
will be effective for the Company beginning with its fiscal year ending 2005. We
are currently evaluating the impact this new Standard will have on our financial
position, results of operations or cash flows.
In March 2004, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and
its Application to Certain Investments." The EITF reached a consensus about the
criteria that should be used to determine when an investment is considered
impaired, whether that impairment is other-than-temporary, and the measurement
of an impairment loss and how that criteria should be applied to investments
accounted for under SFAS No. 115, "Accounting in Certain Investments in Debt and
Equity Securities." EITF 03-01 also included accounting considerations
subsequent to the recognition of an other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. Additionally, EITF 03-01 includes new
disclosure requirements for investments that are deemed to be temporarily
impaired. In September 2004, the Financial Accounting Standards Board (FASB)
delayed the accounting provisions of EITF 03-01; however the disclosure
requirements remain effective for annual reports ending after June 15, 2004. We
believe that the adoption of this standard will have no material impact on our
financial statements.
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ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we conducted an
evaluation, under the supervision and with the participation of the Chief
Executive Officer and Principal Accounting Officer, of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation, the Chief
Executive Officer and Principal Accounting Officer concluded that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms. There was no change in the Company's internal control over financial
reporting during the Company's most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
Changes in Internal Controls
There have been no significant changes (including corrective actions
with regard to significant deficiencies or material weaknesses) in our internal
controls or in other factors that could significantly affect these controls
subsequent to the Evaluation Date set forth above.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February 2005, we were made a party to a patent infringement suit by
Raymond Anthony Joao, an individual who has reportedly developed a
monitoring apparatus and method, a control, monitoring and / or
security apparatus and method and a control apparatus and method for
vehicles and / or for premises. He believes that we use a type of
monitoring apparatus and / or method for which he has been granted a
patent in the United States. The United States District Court Southern
District of New York (USDC SD NY 05 Civ. 1037 (CM) (MDF)) is hearing
allegations of infringement brought by Joao.
We filed an answer to Joao's complaint denying infringement and
asserting certain other defenses. In April 2005, we filed a
counter-claim in this litigation alleging that prior to February 2005
all involved parties in this lawsuit executed an agreement which
specifically prohibits this suit. An executed copy of this agreement,
signed by Joao and Cenuco, was submitted for the court's review as part
of our counter-claim. Among other things, the outcome will likely
depend not only upon the enforcement of the aforementioned agreement
but may also be upon whether the aforementioned patents are determined
to be valid and infringed. Management believes that we are not
infringing, and that this lawsuit has no basis. However, we are
presently unable to predict either the effect or degree of effect this
litigation will have on our business and financial condition. There is
no other pending material litigation to which we are a party or to
which any of our property is subject.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certification of CEO
32.2 Section 1350 Certification of CFO
(b) Reports on Form 8-K
On March 17, 2005, we filed an 8-K and announced that we have entered
into a Merger Agreement, dated as of March 16, 2005 (the "Merger
Agreement"), with Hermes Holding Company, Inc., a Delaware corporation
and wholly owned subsidiary of the Company (the "Merger Sub"), and
Hermes Acquisition Company I LLC, a Delaware limited liability company
("Seller"). Pursuant to the Merger Agreement, Merger Sub will be merged
with and into Seller (the "Merger"), as a result of which the separate
existence of Merger Sub shall cease and Seller shall continue as the
surviving company and a wholly-owned subsidiary of the Company.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, duly authorized.
CENUCO, INC. AND SUBSIDIARIES
Dated: May 9, 2005 By: /s/ Steven Bettinger
------------------------
Steven Bettinger, President and
Chief Executive Officer
Dated: May 9, 2005 By: /s/ Adam Wasserman
----------------------
Adam Wasserman, Chief Financial Officer
and Principal Accounting Officer
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