SANTEON GROUP, INC. - FORM 10-Q

Attached files

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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
EXCEL - IDEA: XBRL DOCUMENT - SANTEON GROUP, INC.	Financial_Report.xls

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, 2013

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 August 13, 2013, there were 1,190,783 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, 2013 (unaudited) and December 31, 2012	3

Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2013 and 2012	4

Unaudited Condensed Consolidated Statement of Stockholders’ Equity (Deficit) for the Six Months Ended June 30, 2013	5

Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012	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.	17

Item 4. Controls and Procedures.	17

PART II - OTHER INFORMATION	19

Item 1. Legal Proceedings.	19

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	19

Item 3. Defaults upon Senior Securities.	19

Item 4. Mine Safety Disclosures	19

Item 5. Other Information.	19

Item 6. Exhibits.	19

Signatures	20

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

SANTEON GROUP INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2013 AND DECEMBER 31, 2012

	June 30, 2013			December 31, 2012
ASSETS	(Unaudited)
Current assets:
Cash	$	203,354		$	183,785
Accounts receivable		668,449			796,466
Other current assets		12,480			16,795
Total current assets		884,283			997,046

Property, plant and equipment, net		29,897			20,364
Software assets, net		227,519			281,212
Other assets		23,950			8,783
Total non-current assets		281,366			310,359

Total Assets	$	1,165,649		$	1,307,405

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses	$	795,404		$	1,107,345
Notes payable - current portion		76,267			120,509
Total current liabilities		871,671			1,227,854

Long term liabilities:
Deferred rent		60,747			-
Notes payable		47,761			83,166
Total long term liabilities		108,508			83,166

Stockholders' equity (deficit):
Preferred stock, par value $0.001, 50,000,000 shares authorized: 0 shares issued and outstanding as of June 30, 2013 and December 31, 2012, respectively		-			-
Common stock, par value $0.001, 50,000,000 shares authorized; 1,190,783 and 1,184,899 shares issued and outstanding as of June 30, 2013 and December 31, 2012, respectively		1,191			1,185
Common stock to be issued		95,277			10,000
Additional paid in capital		1,538,680			1,518,726
Treasury Stock, at cost, 0 and 16,238 shares as of June 30, 2013 and December 31, 2012, respectively		-			(38,925	)
Accumulated deficit		(1,449,678	)		(1,494,601	)
Total stockholders' equity (deficit)		185,470			(3,615	)

Total Liabilities and Stockholders' Equity (Deficit)	$	1,165,649		$	1,307,405

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, 2013 AND 2012

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30, 2013			June 30, 2012			June 30, 2013			June 30, 2012

Revenues	$	1,355,614		$	926,643		$	2,560,681		$	1,701,193

Cost of revenue		644,184			525,167			1,257,558			1,020,092
Gross Profit		711,430			401,476			1,303,123			681,101

Operating expenses:
General, selling and administration		763,432			415,750			1,303,155			819,837
Depreciation and amortization		1,845			1,439			3,685			2,813
Total operating expenses		765,277			417,189			1,306,840			822,650

Loss from operations		(53,847	)		(15,713	)		(3,717	)		(141,549	)

Other Income (Expenses):
Interest expense		(4,694	)		(1,954	)		(7,432	)		(8,352	)
Gain on forgiveness / settlement of debt		7,766			18,750			7,766			75,290
Gain on cancellation of debt		33,023			-			33,023			-
Gain from foreign currency transactions		13,040			149			15,339			546
Loss on disposal of asset		-			-			(56	)		-
Total other income, net		49,135			16,945			48,640			67,484

(Loss) income before provision for income taxes		(4,712	)		1,232			44,923			(74,065	)

Provision for income tax expense (benefit)		-			-			-			-

Net (loss) income	$	(4,712	)	$	1,232		$	44,923		$	(74,065	)

Net (loss) income per common share, basic	$	(0.00	)	$	0.00		$	0.04		$	(0.06	)

Net (loss) income per common share, diluted	$	(0.00	)	$	0.00		$	0.04		$	(0.06	)

Weighted average number of common shares outstanding, basic		1,200,182			1,201,424			1,195,281			1,201,904

Weighted average number of common shares outstanding, diluted		1,200,182			1,201,424			1,208,662			1,201,904

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

SANTEON GROUP INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE SIX MONTHS ENDED JUNE 30, 2013

(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			Equity(Deficit)

Balance, December 31, 2012		1,184,899		$	1,185		5,000		$	10,000		$	1,518,726			(16,238	)	$	(38,925	)	$	(1,494,601	)	$	(3,615	)

Common stock issued for accrued interest		1,250			1		-			-			1,749			-			-			-			1,750
Repurchases of common stock		(366	)		-		-			-			-			(366	)		(720	)		-			(720	)
Common stock issued for cash		5,000			5		(5,000	)		(10,000	)		9,995			-			-			-			-
Common stock issued for compensation		-			-		17,551			45,277			-			-			-			-			45,277
Common stock issued for loan repayment and accrued interest		-			-		21,277			50,000			-			-			-			-			50,000
Stock-based compensation - stock options granted		-			-		-			-			47,855			-			-			-			47,855
Cancellation of treasury stock		-			-		-			-			(39,645	)		16,604			39,645			-			-
Net income		-			-		-			-			-			-			-			44,923			44,923

Balance, June 30, 2013		1,190,783		$	1,191		38,828		$	95,277		$	1,538,680			-		$	-		$	(1,449,678	)	$	185,470

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, 2013 AND 2012

(Unaudited)

	June 30, 2013			June 30, 2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	44,923		$	(74,065	)
Adjustments to reconcile net Income (loss) to net cash provided by operating activities:
Depreciation and amortization		72,593			67,647
Loss on disposal of assets		56			-
Gain on forgiveness / settlement of debt		(7,766	)		(75,290	)
Gain on cancellation of debt		(33,023	)		-
Common stock to be issued for services rendered		5,000			22,500
Stock-based compensation expense - common stock options		47,855			-
Common stock issued for accrued interest		1,750			-
Changes in operating assets and liabilities:
Accounts receivable		128,016			(128,713	)
Other current assets		4,316			(1,285	)
Other assets		(15,167	)		-
Accounts payable and accrued expenses		(165,128	)		227,916
Net cash provided by operating activities		83,425			38,710

CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized software assets		(15,215	)		-
Purchases of property, plant and equipment		(14,274	)		(1,300	)
Proceeds from sale of fixed assets		1,000			-
Net cash used in investing activities		(28,489	)		(1,300	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Payments for treasury stock		(720	)		(10,000	)
Repayments of notes payable-related party		-			(23,000	)
Repayments of notes payable		(34,647	)		(17,023	)
Net cash used in financing activities		(35,367	)		(50,023	)

Net increase (decrease) in cash		19,569			(12,613	)
Cash, beginning of the period		183,785			16,960

Cash, end of the period	$	203,354		$	4,347

Supplemental disclosures of cash flow information:
Income tax paid	$	-		$	-
Interest paid	$	1,443		$	-

Supplemental disclosures for non-cash investing and financing activities:
Common stock to be issued for settlement of debt and accrued interest	$	50,000		$	-
Common stock to be issued for payment of accrued bonus	$	40,277		$	-

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, 2013

(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 that 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 2001, the accounting acquirer. Upon completion of the reverse merger transaction, the Registrant 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, Cairo, Egypt and Pune India.

Basis of Presentation

The accompanying unaudited condensed consolidated interim financial statements of the Company 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, 2013 and the results of operations for the three and six months ended June 30, 2013 and 2012 and cash flows for the six months ended June 30, 2013 and 2012. The results from operations for the three and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

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, 2012, included in the Company’s annual report on Form 10-K filed with the SEC on March 19, 2013.

The condensed consolidated financial statements as of December 31, 2012 contained herein have been derived from the audited consolidated financial statements as at December 31, 2012, 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, 2013, the Company had one wholly owned subsidiary: Santeon, Inc. with Santeon Egypt and Santeon India Pvt. Ltd. operating as branch offices 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. Liquidity

We believe that our present cash balance, the recent trends of strong revenue growth, net profits generated and net cash generated by operating activities, contracts in hand and current customer prospects will be sufficient to sustain our operations for the next twelve months and beyond even though our current liabilities are roughly equal to our current assets as of June 30, 2013.

We also believe that our relatively low level of capital needs will be met from cash generated by operations; however, to achieve our business objectives, we may require additional funding such as bank loans, public or private debt instruments, the sale of shares for cash or other capital raising methods. To date, we have not received a commitment for capital in any amount and cannot assure you that we will be able to obtain such capital on terms satisfactory to the Company.

Note 3. Reverse Stock Split

On November 23, 2012 the shareholders holding a majority of the voting power of the Company’s outstanding voting stock (the “Majority Shareholder”) acted by written consent approving an amendment to our Amended and Restated Certificate of Incorporation (“Certificate of Incorporation”) to (a) effect a reverse stock split of our common stock by a ratio of one-for-four hundred (1:400) as shall be determined at the sole discretion of the Chief Executive Officer at any time prior to March 31, 2013, subject to receiving all requisite approvals and completion of required notice periods, and (b) reduce the number of authorized shares of our common stock from seven hundred million (700,000,000) shares to fifty million (50,000,000) shares.

On December 10, 2012 the Chief Executive Officer, in accordance with the above-mentioned written consent, determined that the reverse stock split ratio shall be a ratio of one-for-four hundred (1:400). The actions to be taken pursuant to the Written Consent became effective on January 4, 2013 following receipt of approval from FINRA and the filing of the Amended Certificate of Incorporation with the Delaware Secretary of State (the “Effective Date”). The amendment to the Certificate of Incorporation reflecting the Reverse Stock Split that was filed with the Delaware Secretary of State is attached as an Exhibit to this Form 10-K. To avoid the existence of fractional shares of our common stock, the Company will pay cash in lieu of fractional shares.

All references to common stock, share and per share amounts have been retroactively restated to reflect the stock split, unless explicitly stated otherwise.

Note 4. 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 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 capitalized internal labor costs of $15,215 and $15,215 for the three and six months ended June 30, 2013, respectively, and $0 for the three and six months ended June 30, 2012. Amortization expense related to the capitalization of software development of $32,003 and $32,003 has been recorded under cost of revenues for the three months ended June 30, 2013 and 2012, respectively, and amortization expense $64,006 and $64,006 has been recorded under cost of revenues for the six months ended June 30, 2013 and 2012, respectively. Also, included in cost of revenue is amortization expense related to the acquired software of $2,451 and $414 for the three months ended June 30, 2013 and 2012, respectively, and $4,903 and $828 for the six months ended June 30, 2013 and 2012, respectively. The table below reflects the capitalized software costs as of June 30, 2013 and December 31, 2012.

	June 30, 2013		December 31, 2012
	(unaudited)

Software, net of accumulated amortization of $442,705 and $378,700 at June 30, 2013 and December 31, 2012, respectively.	$	212,566	$	261,356

Acquired software, net of accumulated amortization of $59,188 and $54,285 at June 30, 2013 and December 31, 2012, respectively, and accumulated impairment of $243,667 at June 30, 2013 and December 31, 2012, respectively.		14,953		19,856

Software assets, net	$	227,519	$	281,212

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. There was no impairment charge recognized for the three and six months ended June 30, 2013 for the Company’s acquired software.

Note 5: Notes Payable

As of June 30, 2013 and December 31, 2012, the Company had outstanding notes payable as follows:

	June 30, 2013		December 31, 2012
	(unaudited)

2.00% Unsecured Promissory Note due March 2015	$	34,372	$	158,675

15.00% Unsecured Note due July 2007		-		45,000

Total Notes Payable		34,372		203,675

less: current portion of Notes Payable		-		(120,509	)
Long term portion of Notes Payable	$	34,372	$	83,166

During the three months ended June 30, 2013, the full principal amount of the 15.00% Unsecured Note due July 2007 plus $10,631 in accrued and unpaid interest were converted to 21,277 shares of the Company’s common stock valued at $50,000. As a result of this transaction, the Company recorded a gain on forgiveness of debt of $5,631 in the unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2013.

Note 6. Capital Stock

Common Stock:

During the six months ended June 30, 2013, the Company:

1.	Issued and certificated 1,250 shares of common stock to a certain lender as payment of interest for a note payable that were valued at $1,750. The note payable was fully repaid and discharged in December 2012;

Issued 21,277 shares of common stock to the lender of the 15.00% Unsecured Note due July 2007 for principal value of $45,000 plus $5,000 in accrued and unpaid interest. The note payable was fully discharged in June 2013. These shares were not certificated until after the quarter ended June 30, 2013;

3.	Issued 15,551 shares of common stock in lieu of cash to Dr. Ashraf M. Rofail as bonus compensation for services rendered during the year ended December 31, 2012. These shares were not certificated until after the quarter ended June 30, 2013; and

Issued 2,000 shares of common stock to KCSA Strategic Communications for investor relations advisory services performed during June 2013. As per the agreement with them, KCSA will receive $5,000 in cash and a number of shares of common stock valued at $5,000 each month for their services to the Company. These shares were not certificated until after the quarter ended June 30, 2013.

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, 2013 have been included in the calculations of weighted average number of common shares outstanding, basic and diluted, and earnings (loss) per share, basic and diluted, for the three and six months ended June 30, 2013, as they are considered outstanding.

Employee Stock Options:

During the three and six months ended June 30, 2013, the Company granted to certain employees of the Company 10,250 and 89,500 and, respectively, incentive stock options to purchase common stock of the Company pursuant to the 2012 Employee Incentive Stock Option Plan.

The following table summarizes the changes in options outstanding and the related exercise prices for the options of the Company’s common stock issued to employees under the 2012 Employee Incentive Stock Option Plan as of June 30, 2013:

		Options Outstanding						Options Exercisable
Exercise Prices (S)		Number Outstanding		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price (S)		Number Exercisable		Weighted Average Exercise Price
$	2.00		55,750		9.5	$	2.00		-	$	-
$	2.20		16,000		9.5	$	2.20		8,000	$	2.20
$	2.59		10,250		10	$	2.59		-	$	-
			82,000				-		8,000	$	2.20

Transactions involving employee stock options issued are summarized as follows:

	Number of Shares		Weighted Average Price Per Share
Outstanding at December 31, 2012		-	$	-
Granted		89,500		2.07
Exercised		-		-
Cancelled		(7,500)		(2.00)
Outstanding at June 30, 2013		82,000	$	2.07

The fair value of these stock options granted and the significant assumptions used to determine those fair values, using a Black-Scholes option-pricing model are as follows:

Significant assumptions:
Risk-free interest rate at grant date	0.78	%
Expected stock price volatility	268.85	%
Expected dividend payout	—
Expected option life-years	5

As a result of the assumptions above, non-cash, stock-based compensation expense of $32,127 was charged to the unaudited condensed consolidated statement of operations for the three months ended June 30, 2013 and $47,855 for the six months ended June 30, 2013. This figure was higher than the expense accrued in the three months ended March 31, 2013 ($15,728) due to the accelerated vesting of 8,000 stock options granted to a former officer and director of the Company, Dr. Ahmed Sidky. Dr. Sidky has ninety days from his last day of employment with the Company, June 14, 2013, to dispose of the stock options or they will expire and revert back to the Company.

Note 7. Subsequent Events

Subsequent to the quarter, the Company intends to issue 15,000 restricted shares each to two independent external directors of the Company as per their Director’s Service Agreements with the Company. The restricted stock awards will fully vest at the end of one year from the date of issuance, to coincide with the term of their service agreement, and were issued pursuant to the terms of the 2012 Employee Incentive Stock Option Plan. In addition to the restricted stock award, the independent external directors will receive $2,000 each per quarterly meeting they attend in person.

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

Background

Santeon Group Inc. (“Santeon”, the “Company” or “we” or “our”) is a diversified software products and services company specializing in the transformation and optimization of business performance through the deployment or the development of innovative products and services using Agile in across the commercial, government and consumer sectors. Our innovative products and services enable organizations to optimize performance and maximize value. Our clients include state and local governments, federal agencies and numerous private sector customers.

While our roots are in healthcare, our name means health (“santé” is French for health), we have expanded into a more horizontal solution offering carrying the same principals of building a “healthy” organization. Whether we are building solutions for commercial, government or consumers, the overall performance and 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 partners into targeted vertical markets. Over the past two years, in spite of difficult global financial circumstances and an exceptionally soft business climate, the Company was able to acquire large enterprise customers as well as federal government agencies. As we continue to innovate in new products and services, the Company expects new revenue opportunities to emerge.

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

During the six months ended June 30, 2013, the Company reclassified from current assets to other assets certain deposits held by landlords to account for the long-term nature of the deposits. The amount re-classed for the six months ended June 30, 2013 was $23,950 and the amount re-classed for the year ended December 31, 2012 was $8,783.

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 and/or services delivered 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 yet been delivered and/or service has not yet been rendered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered and/or service rendered 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) 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; (2) customized software development, which includes software systems support revenues and are recognized when completed and invoiced to the customer; and (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.).

Cost of Revenue

The Company accounts for the direct costs of revenue as Cost of Revenue (“COR”). These include, software purchased for resale, the cost of producing and printing training materials, the cost of Agile training professionals, and the labor cost of software developers whose sole job responsibility is developing and supporting software for resale to our customers.

The Company believes the software products developed by its software developers has a significant useful life and thus amortizes the capitalized labor cost of the software developers (“Capitalized Labor”) over a five-year period. The Capitalized Labor amortization expense is reflected in the COR line of the consolidated statements of operations. The Company undertakes to periodically evaluate the net carrying value of the Capitalized Labor and resulting amortization expense to determine if the net present value of future cash flows as per ASC 985-20, Software-Costs of Software to be Sold, Leased or Marketed.

Cash

The Company considers cash to consist of cash on hand and temporary investments having an original maturity of 90 days or less that are readily convertible into cash.

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 amount reported in the consolidated balance sheets for accounts receivables, accounts payable and accrued expenses and notes payable approximate fair value because of the immediate or short-term maturity of these financial instruments.

The Company uses fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. In accordance with Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), the Company groups its assets at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value.

Accounts Receivable

Trade receivables are carried at their estimated collectible amounts. Trade credit is generally extended on a short-term basis; thus trade receivables do not bear interest. Trade accounts receivable are periodically evaluated for collectability based on past credit history with customers and their current financial condition.

The Company records allowances for doubtful accounts based upon a specific review of all significant outstanding invoices. For those invoices not specifically reviewed, provisions are provided at differing rates, based upon the age of the receivable, the collection history associated with the specific customer or product sold. The Company writes-off a receivable and charges it against the recorded allowance when the Company has exhausted its collection efforts without success. The Company currently has no reserves for uncollectible accounts as of June 30, 2013 and December 31, 2012, respectively.

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 months ended June 30, 2013, there were 82,000 common stock options granted and outstanding and no warrants or preferred shares 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.

Newly Issued Accounting Standards

There have been various 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, 2013 vs. three months ended June 30, 2012

Revenues

During the three months ended June 30, 2013, we generated total revenues of $1,355,614 as compared to $926,643 for the three months ended June 30, 2012. Of the $428,971 period over period increase in revenues, an increase of $397,814 was generated by the Agile business, a net increase of $46,160 in eBN and media subscriptions offset by a net decrease of $15,003 was generated from software development and maintenance.

Cost of Revenues

Cost of revenues for the three months ended June 30, 2013 was $644,184 compared to $525,167 for the three months ended June 30, 2012. The period over period increase of $119,017 is due to an increase of $85,983 in headcount to support the increase in Agile training, coaching and consulting and software development, support and maintenance revenues and an increase of $33,034 related to non-headcount related expenses.

Operating Expenses

Overall operating expenses for the three months ended June 30, 2013 were $765,277 compared to $417,189 for the three months ended June 30, 2012. Of the $348,088 period over period increase in total operating expenses, the primary components of the change are: an increase of $236,742 in personnel and personnel-related expenses, an increase of $46,448 for administrative rent and utilities arising from the new headquarters space lease, an increase of $20,237 for administrative computer equipment and peripherals as period costs, an increase of $16,646 related to public compliance expenses, an increase of $14,059 for non-billable travel expenses and a net increase of $13,956 in other administrative costs.

Net Income (Loss)

The Company had a net loss of $4,712 for the three months ended June 30, 2013, compared to net income of $1,232 for the three months ended June 30, 2012. Included in the quarters ended June 30, 2013 and 2012 was non-cash stock compensation expense of $32,127 and $0 as well as foreign currency transaction gains of $13,040 and $149, respectively. Included in the net (loss) income for the three months ended June 30, 2013 and 2012 was a gain on forgiveness/settlement of debt of $7,766 and $18,750 and a gain on cancellation of debt of $33,023 and $0, respectively.

The main component of the gain on cancellation of debt for the three months ended June 30, 2013 is a write-off of $30,400 related to a liability that was recorded on the balance sheet in a prior period. The origin of this liability was a Securities Purchase Agreement, that was filed on March 14, 2007, between Diamond I, Inc. (“Diamond I” and a predecessor of Santeon) and NewMarket Technology Inc. (“NewMarket”), a potential investor in Diamond I. The agreement provided for certain cash advances from NewMarket to Diamond I so that Diamond I could meet its public company reporting requirements ahead of the cash investment NewMarket was to make in Diamond I and to provide for other working capital needs. The intended investment was never consummated, and thus the Securities Purchase Agreement expired. However, management assumed there was an obligation on the part of the Diamond I to repay to NewMarket the advanced funds, or $30,400; however, upon careful examination of the Securities Purchase Agreement, there is no provision for the return of the advanced funds, and thus no requirement to create an obligation on the financial statements of Diamond I. Santeon’s current management made several attempts over multiple years to contact NewMarket to confirm the obligation, but to no avail. Therefore, the Company took the decision to write-off the obligation, resulting in cancellation of debt income of $30,400 for the three months ended June 30, 2013.

Results of Operations. Six months ended June 30, 2013 vs. six months ended June 30, 2012

Revenues

During the six months ended June 30, 2013, we generated total revenues of $2,560,681 as compared to $1,701,193 for the six months ended June 30, 2012. Of the $859,488 period over period increase in revenues, an increase of $793,742 was generated by the Agile business, a net increase of $91,109 in eBN and media subscriptions offset by a net decrease of $25,363 from software development and maintenance.

Cost of Revenues

Cost of revenues for the six months ended June 30, 2013 was $1,257,558 compared to $1,020,092 for the six months ended June 30, 2012. The period over period increase of $237,466 is due to an increase of $219,891 in headcount to support the increase in Agile training, coaching and consulting and software development, support and maintenance revenues and an increase of $17,575 related to non-headcount related expenses.

Operating Expenses

Overall operating expenses for the six months ended June 30, 2013 were $1,306,840 compared to $822,650 for the six months ended June 30, 2012. Of the $484,190 period over period increase in total operating expenses, the primary components of the change are: an increase of $335,873 in personnel and personnel-related expenses, an increase of $65,781 related to public compliance expenses, an increase of $35,805 for administrative rent and utilities arising from the new headquarters space lease, an increase of $24,437 for non-billable travel expenses, an increase of $19,559 for administrative computer equipment and peripherals as period costs and a net increase of $2,735 in other administrative costs.

Net Income (Loss)

The Company had net income of $44,923 for the six months ended June 30, 2013, compared to a net loss of $74,065 for the six months ended June 30, 2012. Included in the six months ended June 30, 2013 and 2012 was non-cash stock compensation expense of $47,855 and $0 as well as foreign currency transaction gains of $15,339 and $546, respectively. Included in the net income (loss) for the six months ended June 30, 2013 and 2012 was a gain on forgiveness/settlement of debt of $7,766 and $75,290 and a gain on cancellation of debt of $33,023 and $0, respectively.

The main component of the gain on cancellation of debt for the six months ended June 30, 2013 is a write-off of $30,400 related to a liability that was recorded on the balance sheet in a prior period. The origin of this liability was a Securities Purchase Agreement, that was filed on March 14, 2007, between Diamond I, Inc. (“Diamond I” and a predecessor of Santeon) and NewMarket Technology Inc. (“NewMarket”), a potential investor in Diamond I. The agreement provided for certain cash advances from NewMarket to Diamond I so that Diamond I could meet its public company reporting requirements ahead of the cash investment NewMarket was to make in Diamond I and to provide for other working capital needs. The intended investment was never consummated, and thus the Securities Purchase Agreement expired. However, management assumed there was an obligation on the part of the Diamond I to repay to NewMarket the advanced funds, or $30,400; however, upon careful examination of the Securities Purchase Agreement, there is no provision for the return of the advanced funds, and thus no requirement to create an obligation on the financial statements of Diamond I. Santeon’s current management made several attempts over multiple years to contact NewMarket to confirm the obligation, but to no avail. Therefore, the Company took the decision to write-off the obligation, resulting in cancellation of debt income of $30,400 for the six months ended June 30, 2013.

Financial Condition

Net cash provided by operating activities was $83,425 for the six months ended June 30, 2013 compared to net cash provided by operating activities of $38,710 for the six months ended June 30, 2012. The generation of cash from operating activities for the six months ended June 30, 2013 is due to the net income of $44,923, the addition of non-cash depreciation and amortization expenses and loss on disposal of assets of $72,649, the gain on forgiveness/settlement of debt of $7,766, the gain on cancellation of debt of $33,023, the issuance of common stock for payment of services rendered of $5,000, stock-based compensation expense of $47,855 and the issuance of common stock for payment of interest expense of $1,750, offset by the net negative change in the operating assets and liabilities accounts of $47,963, that include accounts receivable, other assets and accounts payable and accrued expenses.

Net cash used in investing activities for the six months ended June 30, 2013 was $28,489 related to leasehold improvements for the new administrative office space occupied in April 2013, the capitalization of labor related to the development of new Agile training courses and related training manuals and investments made in other property and equipment, as compared to $1,300 for the six months ended June 30, 2012.

Net cash used in financing activities was $35,367 and $50,023 for the six months ended June 30, 2013 and 2012, respectively. The net cash used in financing activities for both periods was primarily related to payments to reduce notes payable and notes payable – related party and some re-purchases of the Company’s common stock.

As of June 30, 2013, the Company had a working capital surplus (Current Assets exceeded Current Liabilities) of $12,612 and had an accumulated deficit of $1,449,678. 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 Chief Financial Officer (principal financial officer) as appropriate, to allow timely decisions regarding required disclosure. During the period ended June 30, 2013 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, 2013.

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 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, 2013 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, 2013 based on the COSO framework criteria. Management has not identified any 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 months ended June 30, 2013 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 months ended June 30, 2013 are fairly stated, in all material respects, in accordance with US GAAP.

Limitations on Effectiveness of Controls and Procedures

Our management, including our Chief Executive Officer and 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, 2013, 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.

Common Stock:

During the six months ended June 30, 2013, the Company:

1.	Issued and certificated 1,250 shares of common stock to a certain lender as payment of interest for a note payable that were valued at $1,750. The note payable was fully repaid and discharged in December 2012;

3.	Issued 15,551 shares of common stock to Dr. Ashraf M. Rofail bonus compensation in lieu of cash for the year ended December 31, 2012. These shares were not certificated until after the quarter ended June 30, 2013; and

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 August 14, 2013 on its behalf by the undersigned, thereunto duly authorized.

	SANTEON GROUP INC.

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

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