SANTEON GROUP, INC. - FORM 10-Q

Attached files

file	filename
EXCEL - IDEA: XBRL DOCUMENT - SANTEON GROUP, INC.	Financial_Report.xls
EX-32.1 - EXHIBIT 32.1 - SANTEON GROUP, INC.	ex32x1.htm
EX-32.2 - EXHIBIT 32.2 - SANTEON GROUP, INC.	ex32x2.htm
EX-31.1 - EXHIBIT 31.1 - SANTEON GROUP, INC.	ex31x1.htm
EX-31.2 - EXHIBIT 31.2 - SANTEON GROUP, INC.	ex31x2.htm

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

Form 10-Q

(Mark one)

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2012

o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File No. 33-19961

Santeon Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware		01-0623010
(State or Other Jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

11720 Plaza America Drive, Suite 150, Reston, Virginia 20190

(Address of principal executive offices, including zip code)

(703) 970-9200

(Issuer’s telephone number, including area code)

Indicate by check mark 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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

As of October 10, 2012, there were 476,415,809 shares outstanding of the issuer’s common stock.

SANTEON GROUP, INC.

INDEX
	Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets as of June 30, 2012 (unaudited) and December 31, 2011	3

Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2012 and 2011	4

Unaudited Condensed Consolidated Statement of Stockholders’ Deficit for the Six Months Ended June 30, 2012	5

Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011	6

Notes to Unaudited Condensed Consolidated Financial Statements	7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	12

Item 3. Quantitative and Qualitative Disclosures About Market Risk.	16

Item 4. Controls and Procedures.	16


PART II - OTHER INFORMATION	18

Item 1. Legal Proceedings.	18

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	18

Item 3. Defaults upon Senior Securities.	18

Item 4. Mine Safety Disclosures	18

Item 5. Other Information.	18

Item 6. Exhibits.	18

Signatures	19

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

SANTEON GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30, 2012			December 31, 2011
ASSETS	(Unaudited)
Current assets:
Cash	$	4,347		$	16,960
Accounts receivable		710,192			581,479
Other current assets		16,445			15,160
Total current assets		730,984			613,599

Property and equipment, net		17,233			18,746
Software assets, net		330,053			394,887
Total non-current assets		347,286			413,633

Total Assets	$	1,078,270		$	1,027,232

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses	$	1,019,755		$	861,879
Notes payable - related party		74,033			97,033
Notes payable - current portion of long term liabilities		119,758			241,500
Total current liabilities		1,213,546			1,200,412

Long term liabilities:
Notes payable		118,219			-
Total long term liabilities		118,219			-

Stockholders' deficit :
Common stock, par value $0.001, 700,000,000 shares authorized; 480,188,423 and 271,646,830 shares issued as of June 30, 2012 and December 31, 2011, respectively, 475,388,163 and 271,646,830 shares outstanding as of June 30, 2012 and December 31, 2011, respectively		475,388			271,647
Common stock to be issued		13,000			484,590
Additional paid in capital		1,041,523			750,999
Treasury stock, at cost, 4,800,260 and 0 shares as of June 30, 2012 and December 31, 2011, respectively		(28,925	)		-
Accumulated deficit		(1,754,481	)		(1,680,416	)
Total stockholders' deficit		(253,495	)		(173,180	)

Total Liabilities and Stockholders' Deficit	$	1,078,270		$	1,027,232

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

SANTEON GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30, 2012			June 30, 2011			June 30, 2012			June 30, 2011

Revenues	$	926,643		$	426,391		$	1,701,193		$	936,444
Costs of revenue		525,167			310,910			1,020,092			676,603
Gross Profit		401,476			115,481			681,101			259,841

Operating expenses:
General, selling and administration		415,750			345,849			819,837			602,683
Depreciation and amortization		1,439			1,209			2,813			2,417
Total operating expenses		417,189			347,058			822,650			605,100

Loss from operations		(15,713	)		(231,577	)		(141,549	)		(345,259	)

Other Income/(Expense):
Interest expense		(1,954	)		(8,089	)		(8,352	)		(16,124	)
Other income		18,750			-			18,750			-
Gain on settlement of debt		-			-			56,540			-
Gain (loss) from foreign currency transactions		149			(124	)		546			(1,047	)
Total Other Income (Expense)		16,945			(8,213	)		67,484			(17,171	)

Income (loss) before provision for income taxes		1,232			(239,790	)		(74,065	)		(362,430	)

Income tax (benefit) expense		-			-			-			-

Net income (loss)	$	1,232		$	(239,790	)	$	(74,065	)	$	(362,430	)

Net income (loss) per common share, basic and diluted	$	0.00		$	(0.00	)	$	(0.00	)	$	(0.00	)

Weighted average number of common shares outstanding, basic and diluted		480,601,579			455,260,887			480,793,430			446,754,585

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

SANTEON GROUP, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT

FOR THE SIX MONTHS ENDED JUNE 30, 2012

(Unaudited)


	Common stock						Common Shares To Be Issued						Additional Paid in			Treasury stock					Accumulated			Total Shareholder's
	Shares			Par Value			Shares			Amount			Capital			Shares		Amount			Deficit			Deficit

Balance, December 31, 2011		271,646,830		$	271,647			141,218,253		$	484,590		$	750,999			-	$	-		$	(1,680,416	)	$	(173,180	)

Common stock issued and certificated to Santeon, Inc. shareholders in connection with Merger Transaction in May 2010		80,000,000			80,000			(80,000,000	)		(8,000	)		(72,000	)		-		-			-			-
Common stock issued to X2A consulting, LLC shareholders in connection with acquisition in April 2010		10,000,000			10,000			(10,000,000	)		(88,000	)		78,000			-		-			-			-
Common stock issued for cash		36,487,302			36,487			(36,487,302	)		(224,000	)		187,513			-		-			-			-
Common stock certificated that was issued as stock-based compensation		75,273,340			75,273			(5,650,000	)		(87,250	)		34,477			-		-			-			22,500
Common stock certificated that was issued for services rendered		4,789,840			4,790			(4,789,840	)		(42,750	)		37,960			-		-			-			-
Common stock certificated that was issued for loan repayment		1,991,111			1,991			(1,991,111	)		(21,590	)		19,599			-		-			-			-
Repurchase and cancellation of common stock		(4,800,260	)		(4,800	)		-			-			4,975			4,800,260		(28,925	)		-			(28,750	)
Net loss		-			-			-			-			-			-		-			(74,065	)		(74,065	)

Balance, June 30, 2012		475,388,163		$	475,388			2,300,000		$	13,000		$	1,041,523			4,800,260	$	(28,925	)	$	(1,754,481	)	$	(253,495	)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

SANTEON GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011

(Unaudited)

	June 30, 2012			June 30, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(74,065	)	$	(362,430	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		67,647			67,250
Other income		(18,750	)
Gain on settlement of debt		(56,540	)		-
Common stock issued for compensation		22,500			-
Changes in operating assets and liabilities:
Accounts receivable		(128,713	)		(255,354	)
Other current assets		(1,285	)		374
Accounts payable and accrued expenses		227,916			291,055
Net cash provided by (used in) operating activities		38,710			(259,105	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and furniture		(1,300	)		(9,118	)
Net cash used in investing activities		(1,300	)		(9,118	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock		-			195,000
Payment for treasury stock		(10,000	)		-
Proceeds from issuance of notes payable - related party		-			72,033
Repayment of notes payable - related party		(23,000	)		(16,000	)
Repayment of notes payable		(17,023	)		(6,500	)
Net cash (used in) provided by financing activities		(50,023	)		244,533

Net decrease in cash		(12,613	)		(23,690	)
Cash, beginning of the period		16,960			27,353

Cash, end of the period	$	4,347		$	3,663

Supplemental disclosures of cash flow information:
Taxes paid	$	-		$	-
Interest paid	$	-		$	-

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

SANTEON GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Six Months Ended June 30, 2012

(Unaudited)

Note 1. Nature and Summary of Significant Accounting Policies

Nature of Company

Santeon Group, Inc. (“SGI” or the “Registrant), a publicly traded Delaware corporation formerly known as ubroadcast, Inc. (“ubroadcast”), originally formed as a Nevada corporation was reincorporated under the laws of the State of Delaware in 2009. The Registrant’s subsidiary, SI Acquisitions, Inc., consummated a reverse merger transaction on May 12, 2010 with Santeon, Inc., a privately held Delaware corporation formed in 2002, the accounting acquirer. Upon completion of the reverse merger transaction, the ubroadcast changed its name to Santeon Group, Inc. and the historical financial statements are those of Santeon, Inc., the surviving entity and accounting acquirer. All references that refer to (the “Company” or “SGI” or “we” or “us” or “our”) are Santeon Group, Inc., the Registrant, and its wholly owned subsidiaries unless otherwise differentiated. We are a diversified software development and services company specializing in the development of software to facilitate business process management (“BPM”) and document management for the healthcare, environmental/energy and media sectors. We offer innovative software solutions for that enable organizations to optimize performance and maximize their revenues. Our clients include state and local governments, federal agencies and numerous private sector customers.

Our corporate offices are located in Reston, Virginia with branch offices in Tampa, Florida and Cairo, Egypt.

Basis of Presentation

The accompanying unaudited condensed consolidated interim financial statements of Santeon Group, Inc. (“Santeon” or the “Company” or “We”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.

In the opinion of management, the unaudited condensed consolidated interim financial statements have been prepared on the same basis as the annual consolidated financial statements and reflect all adjustments (consisting of normal recurring adjustments) considered necessary to present fairly the consolidated financial position as of June 30, 2012 and the results of operations and cash flows for the three and six months ended June 30, 2012 and 2011. The results from operations for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

The unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto for the year ended December 31, 2011, included in the Company’s annual report on Form 10-K filed with the SEC on August 16, 2012.

The condensed consolidated financial statements as of December 31, 2011 contained herein have been derived from the audited consolidated financial statements as at December 31, 2011, but do not include all disclosures required by the accounting principles generally accepted in the United States of America.

Basis of Consolidation

As of June 30, 2012, the Company had one wholly owned subsidiary: Santeon, Inc. with Santeon Egypt operating as a branch office under Santeon, Inc. The unaudited condensed consolidated financial statements include our accounts and the accounts of our wholly owned subsidiary. All significant intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

Reclassifications

Certain reclassifications have been made in the prior period’s financial statements to conform with the current period’s financial statements presentation.

Note 2. Going Concern

The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying unaudited condensed consolidated financial statements, the Company incurred a net loss of $74,065 and $362,430 for the six months ended June 30, 2012 and 2011, respectively; accumulated deficits of $1,754,481 as of June 30, 2012 and $1,680,416 as of December 31, 2011; and a negative working capital position (current liabilities exceeded current assets) of $482,562 as of June 30, 2012 and $586,813 as of December 31, 2011. These factors among others raise substantial doubt regarding the Company’s ability to continue as going concern.

The Company’s continued existence is dependent upon management’s ability to develop and achieve profitable operations and/or upon securing additional financing to carry out its planned business objectives. The Company intends to fund its business development, acquisition endeavors and operations first through internally generated cash flow from existing operations and secondarily through equity and/or debt financing arrangements.

The Company has undertaken further steps as part of a plan to improve operations with the goal of sustaining our operations for the next twelve months and beyond to address our lack of liquidity by raising additional funds, either in the form of debt or equity or some combination thereof. However, there can be no assurance that the Company can successfully accomplish these steps and or business plans, and it is uncertain that the Company will achieve a profitable level of operations and be able to obtain additional financing

There can be no assurance that any additional financings will be available to the Company on satisfactory terms and conditions, if at all. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Note 3. Software and Software Under Development

The primary business of the Company is to provide technology products and services that enable organizations to optimize performance and maximize revenues through its BPM software products and services. A substantial number of the employees of the Company are engaged in the development of and further enhancement of the Company’s BPM and IPTV software platforms. The products and services enabled by these software platforms are ultimately sold to customers for their personal use or to partners who then in turn sell the services to their customers.

In accordance with ASC 985-20, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," the Company capitalizes certain costs related to the development of new software products or the enhancement of existing software products. These costs are capitalized from the point in time that technological feasibility has been established, as evidenced by a working model or detailed working program design to the point in time that the product is available for general release to customers. Capitalized development costs are amortized on a straight-line basis over the estimated economic lives of the products of 5 years, beginning when the product is placed into service. Software under development are not amortize until completion and when they are in service. Research and development costs incurred prior to establishing technological feasibility and costs incurred subsequent to general product release to customers are charged to expense as incurred. The Company periodically evaluates whether events or circumstances have occurred that indicate that the remaining useful lives of the capitalized software development costs should be revised or that the remaining balance of such assets may not be recoverable.

The acquired software was acquired in connection with the Merger Transaction completed on May 12, 2010, which consisted of media platforms.

The Company has taken the position that the employees whose time is dedicated to development of and further enhancement of the Company’s BPM software platform should be treated as a capital asset and amortized over a five (5) year period. The Company did not capitalize any internal labor costs for the three and six months ended June 30, 2012 and 2011, respectively. Amortization expense related to the capitalization of software development of $32,003 has been recorded under cost of revenues for the three months ended June 30, 2012 and 2011, respectively, and $64,006 for the six months ended June 30, 2012 and 2011, respectively. Also, included in cost of revenue is amortization expense related to the acquired software of $414 for the three months ended June 30, 2012 and 2011, respectively, and $828 for the six months ended June 30, 2012 and 2011, respectively. The table below reflects the capitalized software costs as of June 30, 2012 and December 31, 2011.

	June 30, 2012		December 31, 2011
	(unaudited)

Software, net of accumulated amortization of $314,694 and $250,689 at June 30, 2012 and December 31, 2011, respectively.	$	325,362	$	389,368

Acquired software, net of accumulated amortization of $53,150 and $52,322 at June 30, 2012 and December 31, 2011, respectively, and accumulated impairment of $243,667 at June 30, 2012 and December 31, 2011.		4,691		5,519

Software assets, net	$	330,053	$	394,887

Management performs periodic evaluation on the net carrying value of the Company’s revenue-generating assets as compared to the net present value of cash flows generated by them to determine if they are properly valued and reflected on the Company’s consolidated financial statements. An impairment charge of $0 was recognized for the three and six months ended June 30, 2012 and at December 31, 2011 for the Company’s acquired software.

Note 4: Notes Payable

As of June 30, 2012 and December 31, 2011, the Company had outstanding notes payable as follows:

	June 30, 2012			December 31, 2011
	(unaudited)

2.00% Unsecured Promissory Note due March 2015 (1)	$	192,977		$	196,500

15.00% Unsecured Note due July 2007		45,000			45,000

Total Notes Payable		237,977			241,500

less: current portion of Notes Payable		(119,758	)		(241,500	)
Long term portion of Notes Payable	$	118,219		$	-

(1) The 2.00% Unsecured Promissory Note due March 2015 was previously classified as the 10.00% Unsecured Convertible Promissory Note due August 2008. During the three months ended March 31, 2012, the original Note was restructured and replaced with the new Unsecured Promissory Note due March 2015. The new Note has an amortizing payment plan such that the Company would make thirty-six equal installments of $6,015 per month to the note holder until the loan was fully satisfied. The Company made the first payment in April 2012 and has been making payments in accordance with the Note’s payment plan as of June 30, 2012. As a result of restructuring the original Note, the Company recognized a gain on the settlement of debt of $56,540 during the three months ended March 31, 2012.

The 15.00% Unsecured Note due July 2007 is classified as short-term as of June 30, 2012 and December 31, 2011 as the maturity date lapsed and the Company is currently negotiating with the lender for revised repayment terms.

Note 5. Related Party Transactions

Unsecured Loan Agreement due December 2011

In January 2011, a relative of one of the Company’s directors extended to the Company a non-interest bearing loan in the amount of fifty thousand US dollars ($50,000) for a period of twelve months. The purpose of the loan was to provide capital for growth and general operating needs for Santeon, Inc. In lieu of cash interest, the lender accepted one million two hundred fifty thousand (1,250,000) shares of the Company’s common stock, that were valued at $8,250, as compensation for the loan during the fourth quarter of 2011.

As of June 30, 2012 and December 31, 2011, the outstanding balance was $25,000 and $30,000, respectively.

Loan from Officer

In June 2011, an officer of the Company extended a loan to the Company in the amount of twenty two thousand thirty three dollars ($22,033) for a period of one year. The terms of the loan agreement state that the loan will be interest-free for the first year, but if any part of the loan remained unpaid after the one-year anniversary, the unpaid principal would accrue interest monthly based on an annual rate of 12.00%.

As of June 30, 2012 and December 31, 2011, the outstanding balance was $22,033, respectively.

11.00% Unsecured Loan Agreement due March 2007

In June 2006, the holder of the 11.00% Unsecured Loan Agreement due March 2007 (the “Loan Agreement”) signed a loan agreement with Mr. Ashraf M. Rofail for a total of seventy-five thousand dollars ($75,000) in three installments of twenty-five thousand dollars ($25,000) each with the first installment being made in July 2006 and the last installment in March 2006. The purpose of the loan was to provide capital for growth and general operating needs for Santeon, Inc. The loan was set to mature in March 2007, on the first anniversary of the last loan installment of $25,000.

Subsequent to receiving all of the funds, Mr. Rofail immediately deposited the funds into the operating account of Santeon, Inc. and the funds were utilized for business growth and general working capital needs. While Santeon is not specifically named in the Loan Agreement, the purpose of the loan is specifically stated in the Loan Agreement and further, Mr. Rofail deposited into Santeon’s operating account all of the funds received from the lender; thus, the Company believes the obligation for repayment of the loan is on the Company.

In November 2010, the lender sought a judgment in court against Mr. Rofail, personally, as the maturity date as stated in the Loan Agreement had lapsed and the principal amount of the loan together with accrued and unpaid interest remained outstanding. The judgment against Mr. Rofail specified a specific repayment schedule and a forbearance of interest expenses on the outstanding principal as long as Mr. Rofail makes monthly principal payments. The Company has been making, on Mr. Rofail’s behalf, monthly payments of $3,000 in satisfaction of the judgment.

As of June 30, 2012 and December 31, 2011, the settled outstanding loan balance was $27,000 and $45,000, respectively.

Note 6. Capital Stock

During the six months ended June 30, 2012, the Company:

1.	Issued 2,500,000 shares of common stock to a certain senior employee of the Company pursuant to an employment agreement that was valued at $22,500.

2.	Certificated the previously authorized and issued shares of common stock as follows:

a.	80,000,000 shares of common stock to the shareholders of Santeon, Inc. in connection with the Merger Transaction consummated in May 2010;

b.	10,000,000 shares of common stock to the shareholders of X2A Consulting LLC in connection with the Merger Transaction consummated in April 2010;

c.	36,487,302 shares of common stock to investors for cash valued at $224,000;

d.	75,273,340 shares of common stock as stock-based compensation valued at $87,250, which included the 2,500,000 shares of common stock valued at $22,500 as disclosed in item #1 above;

e.	4,789,840 shares of common stock for services rendered valued at $42,750; and

f.	1,991,111 shares of common stock as loan repayments valued at $21,590.

Received into treasury 2,928,788 shares of returned common stock originally valued at $18,750 that were issued to a vendor of the Company for services rendered in a previous period. The vendor returned the common stock to the Company for no consideration and the Company recorded $18,750 as other income as there is no further obligation from the Company.

Received into treasury 175,000 shares of returned common stock originally valued at $175 that were previously issued pursuant to a stock subscription agreement put in place in 2006. Prior to the Merger Transaction in 2010, the party to the subscription agreement returned the common stock to the Company to settle the unpaid portion of the subscription receivable and cancelled the remaining portion of the subscription agreement. There is no further obligation on the part of the Company or the subscriber with respect to the stock subscription agreement.

5.	Repurchased 1,696,472 shares of common stock from a former officer and employee of the Company pursuant to a settlement agreement for cash valued at $10,000.

The above securities are exempt from registration under the Securities Act of 1933, as amended, pursuant to the provisions of Section 4(2) thereof and Rule 506 thereunder, as a transaction not involving a public offering. Shares authorized for issuance, but not physically certificated until after June 30, 2012 have been included in the calculations of weighted average number of common shares outstanding and earnings (loss) per share for the three and six months ended June 30, 2012 as they are considered outstanding.

Note 7. Subsequent Events

Subsequent to the quarter ended June 30, 2012, the Company:

1.	Certificated in July 2012, 300,000 shares of common stock which were sold for $3,000 cash to a certain investor during 2010 and which were previously presented as common shares to be issued.

2.	In August 2012, the Company repaid to one of its officers the full principal of $22,033 (related party note) plus accrued interest. This note has been fully satisfied.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Background

Santeon Group, Inc. (“SGI” or the “Company” or “we” or “our”) is a diversified software products and services company specializing in the transformation and optimization of business through the deployment or the development of innovative products and services using Agile mindsets in the information systems/technology, healthcare, environmental/energy and media sectors. Our innovative software solutions enable organizations to optimize performance and maximize revenues. Our clients include state and local governments, federal agencies and numerous private sector customers.

SGI is focused on the development and provision of business solutions software and technology to assist companies with performance optimization and maximizing revenues. While our roots are in healthcare, our name means health (“santé” is French for health), we have expanded into software development, media, energy and agile carrying the same principals of building a “healthy” organization. Whether we are building solutions for healthcare, media or agile, the health of the organization and how they benefit from our products and services is of the utmost importance.

Innovation forward is the mindset that drives our product development, service delivery and the solutions we offer our customers. We approach each business opportunity with an open mind and creativity always looking for what is best, not what is traditional or common. We strongly believe our innovation is what sets us apart from our competition and what will set our customers apart from their competition. We always look ahead at what is of long-term value. We are agile in our thinking but focused in our execution. We are not chasers of what is trendy or what is buzz, we are evaluators of what is sustainable and reliable. Innovation is what drives our business and forward is where we are moving. We are focused on two specific aspects of our operations, specifically securing and growing the current client base and revenue, as well as new sales through both direct and in-direct sales channels.

It is important that the Company’s technology offerings are scalable, easy to implement, attract market leading channel partners, and provide tremendous value for the end customer. We continue to refine our technology assets, making them easier to deploy through channel partners into targeted vertical sales channels. Over the past two years, in spite of difficult financial circumstances and an exceptionally soft business climate, the Company was able to develop multiple distribution channels for its products. As these channels continue to develop, the Company expects new revenue opportunities to emerge.

Our corporate offices are located in Reston, Virginia with branch offices in Tampa, Florida and Cairo, Egypt. Our common stock is quoted on the inter-dealer quotation system operated by the OTC Market Group under the symbol SANT.

Critical Accounting Policies

Significant Accounting Policies

Financial Reporting Release No. 60, published by the SEC, recommends that all companies include a discussion of critical accounting policies used in the preparation of their financial statements. While all these significant accounting policies impact our consolidated financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our consolidated financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates.

We believe that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause a material effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.

General

The Company’s unaudited condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, which require management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenue, if any, and expenses, and the disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Board of Directors. Management believes that the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates under different assumptions or conditions.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the consolidated financial statements. Management believes the following critical accounting policies reflect the significant estimates and assumptions used in the preparation of the Consolidated Financial Statements.

Revenue Recognition

The Company recognizes revenue in accordance with Accounting Standards Codification subtopic 605-10, Revenue Recognition (“ASC 605-10”) which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and/or services rendered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company defers any revenue for which the product has not been delivered and/or services has not been rendered or is subject to refund until such time that the Company and the customer jointly determine that the product and/or services has been delivered or no refund will be required. ASC 605-10 incorporates Accounting Standards Codification subtopic 605-25, Multiple-Element Arrangements (“ASC 605-25”). ASC 605-25 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. The effect of implementing 605-25 on our consolidated financial position and results of operations was not significant.

The Company’s sources of revenues include: (1) customized software development, which includes software systems support revenues and are recognized when completed and invoiced to the customer; (2) fees from Agile training services, which includes the revenue for training classes that range in duration from 1 to 3 days, which are recognized immediately after the completion of the training class and deemed to be earned; (3) software license fees, which includes sales of licenses to use or re-sell pre-existing software, including client consulting, either on a fixed fee or a per end-user fee arrangement and are recognized over the term that the license for use is granted to the customer (one month, one year, etc.).

Stock-Based Compensation

We account for stock, stock options and warrants using the fair value method promulgated by Accounting Standards Codification subtopic 480-10, Distinguishing Liabilities from Equity (“ASC 480-10”) which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services. Therefore, our results include non-cash compensation expense as a result of the issuance of stock, stock options and warrants and we expect to record additional non-cash compensation expense in the future. We follow Accounting Standards Codification subtopic 718-10, Compensation (“ASC 718-10”) which requires that all share-based payments to both employees and non-employees be recognized in the income statement based on their fair values.

For the three and six months ended June 30, 2012, there were no warrants, preferred shares or common stock options issued and outstanding.

Impairment of Long-Lived Assets

The Company follows ASC 360, "Property, Plant and Equipment" which requires that long-lived assets and certain identifiable intangibles held and used by us be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of the long-lived assets and certain identifiable intangibles will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 360 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less disposal costs.

Fair Value of Financial Instruments

Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) requires disclosure of the fair value of certain financial instruments. The carrying value of cash and cash equivalents, accounts payable and accrued liabilities, and short-term borrowings, as reflected in the unaudited condensed consolidated balance sheets, approximate fair value because of the short-term maturity of these instruments. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized or disclosed in the unaudited condensed consolidated financial statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk. Where practicable the fair values of financial assets and financial liabilities have been determined and disclosed; otherwise only available information pertinent to fair value has been disclosed.

The Company adopted Accounting Standards Codification subtopic 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”) and Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”), which permits entities to choose to measure many financial instruments and certain other items at fair value. Neither of these statements had an impact on the Company’s consolidated financial position, results of operations or cash flows.

Newly Issued Accounting Standards

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the IASB (the Boards) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments to the FASB Accounting Standards Codification (Codification) in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. We are currently assessing the impact of this update on our consolidated financial statements.

There were various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's consolidated financial position, results of operations or cash flows.

Results of Operations. Three months ended June 30, 2012 vs. three months ended June 30, 2011

Revenues

During the three months ended June 30, 2012, we generated total revenues of $926,643 as compared to $426,391 for the three months ended June 30, 2011. Of the $500,252 period over period increase in revenues, an increase of $252,660 was generated by the Agile business, and increase of $243,365 was generated from software development and maintenance, and a net increase of $4,227 in all other businesses, such as eBN and media platform subscriptions.

Cost of Revenues

Cost of revenues for the three months ended June 30, 2012 was $525,167 compared to $310,910 for the three months ended June 30, 2011. The period over period increase of $214,257 is due to an increase of $230,676 in headcount for Agile training, coaching and consulting and software development, support and maintenance offset by a net decrease of $16,419 related to non-headcount expenses related to these two lines of business.

Operating Expenses

Overall operating expenses for the three months ended June 30, 2012 were $417,189 compared to $347,058 for the three months ended June 30, 2011. Of the $70,131 period over period increase in total operating expenses, the primary components of the change are: an increase of $119,871 in personnel and personnel-related expenses, an increase of $12,098 related to marketing expense, an increase of $11,301 for administrative rent and utilities, a decrease of $43,700 for third-party agent commissions, a decrease of $20,516 related to public company compliance expenses, a decrease of $5,597 in travel expenses, and a net decrease of $3,326 in other administrative costs.

Net Loss

The Company had a net profit of $1,232 for the three months ended June 30, 2012, compared to a net loss of $239,790 for the three months ended June 30, 2011. Included in the quarters ended June 30, 2012 and 2011 was a foreign currency transaction gain of $149 and a foreign currency transaction loss of $124, respectively. In addition, included in the net profit for June 30, 2012 was other income of $18,750 resulting from the return of common stock, for no additional consideration and with no further obligation on the part of the Company, that was previously issued to a vendor for services rendered.

Results of Operations. Six months ended June 30, 2012 vs. Six months ended June 30, 2011

Revenues

During the six months ended June 30, 2012, we generated total revenues of $1,701,193 as compared to $936,444 for the six months ended June 30, 2011. Of the $764,749 period over period increase in revenues, an increase of $381,054 was generated from software development and maintenance, $380,718 was generated by the Agile business and a net increase of $2,977 in all other businesses, such as eBN and media platform subscriptions.

Cost of Revenues

Cost of revenues for the six months ended June 30, 2012 was $1,020,092 compared to $676,603 for the six months ended June 30, 2011. The period over period increase of $343,489 is due to an increase of $371,602 in headcount for Agile training, coaching and consulting and software development, support and maintenance offset by a decrease of $28,113 related to non-headcount expenses related to these two lines of business.

Operating Expenses

Overall operating expenses for the six months ended June 30, 2012 were $822,650 compared to $605,100 for the six months ended June 30, 2011. Of the $217,550 period over period increase in total operating expenses, the primary components of the change are: an increase of $257,639 in personnel and personnel-related expenses, an increase in marketing of $23,934, an increase of $21,872 for administrative rent and utilities, an increase of $6,935 in travel expenses, a decrease of $49,235 related to public company compliance expenses, a decrease of $44,700 related to third-party agent commissions and a net increase of $1,105 in other administrative costs.

Net Loss

The Company had a net loss of $74,065 for the six months ended June 30, 2012, compared to a net loss of $362,430 for the six months ended June 30, 2011. Included in the six month period ended June 30, 2012 and 2011 was a foreign currency transaction gain of $546 and a foreign currency transaction loss of $1,047, respectively. In addition, included in the net loss for the six months ended June 30, 2012 was other income of $18,750 resulting from the return of common stock, for no additional consideration and with no further obligation on the part of the Company, that was previously issued to a vendor for services rendered and a gain on the settlement of debt of $56,540.

Financial Condition

Net cash provided by operating activities was $38,710 during the six months ended June 30, 2012 compared to cash used in operating activities of $259,105 during the six months ended June 30, 2011. The generation of cash from operating activities for the six months ended June 30, 2012 is partially due to the issuance of common stock for compensation of $22,500. In addition, the net movements in the operating assets and liabilities accounts, which include accounts receivable, other assets and accounts payable and accrued expenses, provided cash of $97,918 during the six months ended June 30, 2012.

Net cash used in investing activities was $1,300 and $9,118 for the six months ended June 30, 2012 and 2011, respectively.

Net cash used in financing activities was $50,023 for the six months ended June 30, 2012 as compared to net cash provided by financing activities of $244,533 for the six months ended June 30, 2011. The net cash provided by financing activities decreased by $294,556 on a period over period basis due to a net increase of $17,523 in payments to reduce notes payable and notes payable – related party, an increase of $10,000 for the repurchase of common stock, a net decrease of $195,000 in proceeds from the sale of common stock and a net decrease of $72,033 in the proceeds from the issuance of notes payable – related party.

As of June 30, 2012, the Company had a working capital deficit (Current Liabilities exceeded Current Assets) of $482,562 and had an accumulated operating deficit of $1,754,481. While there is no assurance that the Company will generate sufficient net income in subsequent periods such that the accumulated deficit will turn into positive retained earnings, the Company intends to invest prudently in the growth of its products and services in order to grow top-line revenue and generate net income in future periods.

Our Capital Needs

Based on contracts in hand and current customer prospects, the Company believes it will be able to sustain and potentially increase its current level of operations in the coming months. We also anticipate that our relatively low level of capital needs will be met through cash generated from operations; however, to achieve our business objectives, we may require additional funding through bank loans, the sale of shares for cash and other fund-raising methods. To date, we have not received a commitment for capital in any amount and we cannot assure you that we will be able to obtain any capital.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that material information required to be disclosed in our periodic reports filed under the Securities Exchange Act of 1934, as amended, or 1934 Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Acting Chief Financial Officer (principal financial officer) as appropriate, to allow timely decisions regarding required disclosure. During the period ended June 30, 2012 we carried out an evaluation, under the supervision and with the participation of our management, including the principal executive officer and the principal financial officer (principal financial officer), of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13(a)-15(e) under the 1934 Act. Based on this evaluation, because of the Company’s limited resources and limited number of employees, management concluded that our disclosure controls and procedures were not effective as of June 30, 2012.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is designed to provide reasonable assurances regarding the reliability of financial reporting and the preparation of the financial statements of the Company in accordance with U.S. generally accepted accounting principles, or GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.

With the participation of our Chief Executive Officer and Acting Chief Financial Officer (principal financial officer), our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of June 30, 2012 based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on our evaluation and the material weaknesses described below, management concluded that the Company did not maintain effective internal control over financial reporting as of June 30, 2012 based on the COSO framework criteria. Management has identified control deficiencies regarding the lack of segregation of duties and/or the need for a stronger internal control environment. Management of the Company believes that these material weaknesses are due to the small size of the Company’s accounting staff. The small size of the Company’s accounting staff may prevent adequate controls in the future, such as segregation of duties, due to the cost/benefit of such remediation.

To mitigate the current limited resources and limited employees, we rely heavily on direct management oversight of transactions, along with the use of external legal and professional accounting consultants. As we grow, we expect to increase our number of employees, which will enable us to implement adequate segregation of duties within the internal control framework.

These control deficiencies could result in a misstatement of account balances that would result in a reasonable possibility that a material misstatement to our consolidated financial statements may not be prevented or detected on a timely basis. Accordingly, we have determined that these control deficiencies as described above together constitute a material weakness.

In light of this material weakness, we performed additional analyses and procedures in order to conclude that our consolidated financial statements for the three and six months ended June 30, 2012 included in this Quarterly Report on Form 10-Q are fairly stated in accordance with US GAAP. Accordingly, management believes that despite our material weaknesses, our consolidated financial statements for the three and six months ended June 30, 2012 are fairly stated, in all material respects, in accordance with US GAAP.

This quarterly report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm.

Limitations on Effectiveness of Controls and Procedures

Our management, including our Chief Executive Officer and Acting Chief Financial Officer, do not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Changes in Internal Controls

During the fiscal quarter ended June 30, 2012, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

We are not currently involved in any legal proceedings.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

During the six months ended June 30, 2012, the Company:

1.	Issued 2,500,000 shares of common stock to a certain senior employee of the Company pursuant to an employment agreement that was valued at $22,500.

2.	Certificated the previously authorized and issued shares of common stock as follows:

a.	80,000,000 shares of common stock to the shareholders of Santeon, Inc. in connection with the Merger Transaction consummated in May 2010;

b.	10,000,000 shares of common stock to the shareholders of X2A Consulting LLC in connection with the Merger Transaction consummated in April 2010;

c.	36,487,302 shares of common stock to investors for cash valued at $224,000;

d.	75,273,340 shares of common stock as stock-based compensation valued at $87,250, which included the 2,500,000 shares of common stock valued at $22,500 as disclosed in item #1 above;

e.	4,789,840 shares of common stock for services rendered valued at $42,750; and

f.	1,991,111 shares of common stock as loan repayments valued at $21,590.

5.	Repurchased 1,696,472 shares of common stock from a former officer and employee of the Company pursuant to a settlement agreement for cash valued at $10,000.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibit No.		Description
31.1 *		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 *		Certification of Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 *		Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 *		Certification of Principal Financial and Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101*		Interactive Data Files
* filed herewith.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on October 12, 2012 on its behalf by the undersigned, thereunto duly authorized.

	SANTEON GROUP, INC.

	By:	/s/ Ashraf M. Rofail
		Dr. Ashraf M. Rofail
		Chairman and CEO

Attached files

Stock widget

Investing forum

SANTEON GROUP, INC. Reports

Also read