UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2008
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________to ______________
Commission file number 333-134658
SPLINTERNET HOLDINGS, INC. |
| (Exact Name of Registrant as Specified in Its Charter) |
| |
| Delaware | | 22-393-8509 |
(State or Other Jurisdiction of Incorporation or Organization) | | (IRS Employer Identification No.) |
| |
535 Connecticut Avenue, 2nd floor, Norwalk, CT 06854 |
| (Address of Principal Executive Offices) |
| |
| Registrant’s Telephone Number, Including Area Code: (203) 354-9164 |
| |
| |
| Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report. |
| |
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 definition 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 | | 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 14, 2008, there were 61,503,179 outstanding shares of Common Stock, $.001 par value
SPLINTERNET HOLDINGS, INC. AND SUBSIDIARIES
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SPLINTERNET HOLDINGS, INC. AND SUBSIDIARIES
| | | | | | |
| | June 30, | | December 31, | |
| | | 2008 | | 2007 | |
| | | (unaudited) | | | |
ASSETS | | | | | |
| Cash | | $ | 287,632 | | $ | 1,105,057 | |
| Accounts receivable | | | 16,299 | | | 32,363 | |
| Prepaid expenses | | | 21,954 | | | 40,848 | |
| Notes receivable | | | 155,946 | | | 155,916 | |
| Total current assets | | | 481,831 | | | 1,334,184 | |
| | | | | | | | |
| Property and equipment, net | | | 40,836 | | | 23,504 | |
| | | | | | | | |
| Goodwill | | | 2,831,790 | | | — | |
| Security deposits | | | 14,394 | | | 13,544 | |
| Total assets | | $ | 3,368,851 | | $ | 1,371,232 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | |
| Liabilities: | | | | | | | |
| Accounts payable | | $ | 111,982 | | $ | 28,693 | |
| Accrued expenses | | | 72,525 | | | 44,304 | |
| Capital lease obligation-current portion | | | 905 | | | — | |
| Total current liabilities | | | 185,412 | | | 72,997 | |
| | | | | | | | |
| Capital lease obligation-long term portion | | | 1,896 | | | — | |
| Advance from employee | | | 12,663 | | | — | |
| Total liabilities | | | 199,971 | | | 72,997 | |
| Commitments | | | | | | | |
| Stockholders’ equity: | | | | | | | |
| Capital stock: | | | | | | | |
| Preferred stock, 10,000,000 shares authorized and | | | | | | | |
| none outstanding | | | | | | | |
| Common stock, $0.001 par value; 90,000,000 | | | | | | | |
| shares authorized; 61,503,179 and 56,715,000 shares | | | | | | | |
| issued and outstanding | | | 61,503 | | | 56,715 | |
| Additional paid-in capital | | | 5,834,590 | | | 3,195,171 | |
| Accumulated deficit | | | (2,727,563 | ) | | (1,953,651 | ) |
| Total stockholders’ equity | | | 3,168,880 | | | 1,298,235 | |
| Total liabilities and stockholders’ equity | | $ | 3,368,851 | | $ | 1,371,232 | |
| | | | | | | | |
| | | | | | | |
| See notes to condensed consolidated financial statements. |
SPLINTERNET HOLDINGS, INC. AND SUBSIDIARIES
| | | | | | |
| | | Three Months Ended June 30, | | Six Months ended June 30, | |
| | | 2008 | | 2007 | | 2008 | | 2007 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Service revenue | | $ | 222,301 | | $ | 31,679 | | $ | 400,959 | | $ | 35,429 | |
| | | | | | | | | | | | | | |
| Cost of revenue | | | 208,778 | | | 14,694 | | | 380,746 | | | 14,694 | |
| | | | | | | | | | | | | | |
| Gross profit | | | 13,523 | | | 16,985 | | | 20,213 | | | 20,735 | |
| | | | | | | | | | | | | | |
| Selling, general and administrative expenses | | | 478,001 | | | 297,540 | | | 697,364 | | | 592,381 | |
| | | | | | | | | | | | | | |
| Research and development costs | | | 58,234 | | | 40,575 | | | 115,159 | | | 61,150 | |
| | | | | | | | | | | | | | |
| Loss from operations | | | (522,712 | ) | | (321,130 | ) | | (792,310 | ) | | (632,796 | ) |
| | | | | | | | | | | | | | |
| Interest income | | | 7,766 | | | 23,598 | | | 18,462 | | | 45,415 | |
| Interest expense | | | 64 | | | — | | | 64 | | | — | |
| Net loss | | $ | (515,010 | ) | $ | (297,532 | ) | $ | (773,912 | ) | $ | (587,381 | ) |
| | | | | | | | | | | | | | |
| Net loss per share: | | | | | | | | | | | | | |
| Basic and Diluted | | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.01 | ) |
| | | | | | | | | | | | | | |
| Weighted average common stock outstanding: | | | | | | | | | | | | | |
| Basic and Diluted | | | 59,924,658 | | | 53,500,500 | | | 58,319,829 | | | 53,500,500 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| See notes to condensed consolidated financial statements. |
SPLINTERNET HOLDINGS, INC. AND SUBSIDIARIES
| | | | |
| | | Six Months Ended June 30, | |
| | | 2008 | | 2007 | |
| | | | | | |
| | | | | | |
| Cash flow from operating activities: | | | | | |
| Net loss | | $ | ( 773,912 | ) | $ | ( 587,381 | ) |
| Adjustments to reconcile net loss to net cash | | | | | | | |
| used in operating activities: | | | | | | | |
| Depreciation | | | 2,662 | | | 1,713 | |
| Non-cash stock option expense | | | 35,000 | | | — | |
| | | | | | | | |
| Change in assets and liabilities, net of acquisition | | | | | | | |
| Decrease/(increase) in accounts receivable | | | 16,064 | | | (19,813 | ) |
| Decrease in prepaid expenses | | | 22,189 | | | 26,311 | |
| Increase in notes receivable | | | (30 | ) | | — | |
| Increase in deposits | | | — | | | (2,500 | ) |
| Increase/(decrease) in accounts payable | | | | | | | |
| and accrued expenses | | | 45,602 | | | (17,179 | ) |
| Net cash used in operating activities | | | (652,425 | ) | | (598,849 | ) |
| | | | | | | | |
| Cash flows from investing activities: | | | | | | | |
| Purchase of property and equipment | | | — | | | (9,994 | ) |
| Net cash used in investing activities | | | — | | | (9,994 | ) |
| | | | | | | | |
| Cash flows from financing activities: | | | | | | | |
| Pre acquisition loans to Vidiation, Inc. | | | (165,000 | ) | | — | |
| Return of common stock proceeds | | | — | | | (12,500 | ) |
| Net cash used in financing activities | | | (165,000 | ) | | (12,500 | ) |
| | | | | | | | |
| Net decrease in cash and cash equivalents | | | (817,425 | ) | | (621,343 | ) |
| Cash and cash equivalents, beginning of period | | | 1,105,057 | | | 2,307,232 | |
| Cash and cash equivalents, end of period | | $ | 287,632 | | $ | 1,685,889 | |
| | | | | | | | |
| Non-Cash Investing and Financing Activities: | | | | | | | |
| Issuance of stock to purchase Vidiation, Inc. | | $ | 2,609,557 | | $ | — | |
| | | | | | | | |
| | | | | | | | |
| See notes to condensed consolidated financial statements. |
SPLINTERNET HOLDINGS, INC. AND SUBSIDIARIES
(UNAUDITED)
1. PRINCIPAL BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On April 3, 2006, Splinternet Holdings, Inc., a Company incorporated in the State of Delaware on March 22, 2006 conducted a share for share exchange of securities with Splinternet Communications, Inc. (“Splinternet”) whereby 214,002 shares of the common stock, par value $0.001 per share, of Splinternet Communications, Inc. were exchanged for 53,500,500 shares of the common stock, par value $0.001 per share, of Splinternet Holdings, Inc. (the “Share Exchange”), as a result of which Splinternet Communications, Inc. became a wholly owned subsidiary of Splinternet Holdings, Inc. (“ the Company”). Splinternet Holdings, Inc. does not conduct any business or own any assets other than all of the issued and outstanding shares of Splinternet Communications, Inc.
On April 30, 2008, the Company acquired Vidiation, Inc. (“Vidiation”). Vidiation is a newly-formed radiation detection marketing company, for a purchase price of approximately $2.6 million, excluding transaction costs of approximately $0.01 million. The acquisition was accounted for as a purchase business combination. The consolidated financial statements include the results of Vidiation from the date of acquisition. The purchase price was allocated to the net assets and liabilities acquired based on their estimated fair values as of the acquisition date. The excess of the purchase price over the estimated fair value of the net assets acquired was allocated to goodwill. A final determination of the purchase price allocation will be made within one year of the acquisition date upon completion of a third party valuation. All significant inter-company accounts and transactions have been eliminated in the condensed consolidated financial statements.
Splinternet Communications, Inc. was incorporated in the State of Connecticut in January 2000. Splinternet is a developer of VoIP (Voice over Internet Protocol) technology and services which enable the customer to make phone calls utilizing the Internet as an alternative to the traditional Public Switched Telephone Network.
2. BASIS OF PREPARATION
Pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-Q, the financial statements, footnote disclosures and other information normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed. The financial statements contained in this report are unaudited but, in the opinion of the Company, reflect all adjustments, consisting of only normal recurring adjustments necessary to fairly present the financial position as of June 30, 2008 and the results of operations and cash flows for the interim period of the fiscal year ending December 31, 2008 presented herein. The results of operations for any interim period are not necessarily indicative of results for the full year. The balance sheet at December 31, 2007 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The unaudited financial statements include all the accounts of the Company.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Basic loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted loss per share is computed by dividing net loss by the weighted average number of shares of common stock, potential common stock and potentially dilutive securities outstanding during each period. Options to purchase 1,265,000 shares of the Company's common stock, as of June 30, 2008 and 3,214,500 warrants to purchase shares of common stock as of June 30, 2007, were not included in the calculation, due to the fact that these options and warrants were anti-dilutive for the three and six months ended June 30, 2008 and 2007, respectively.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and all interim periods within those fiscal years. In February 2008, the FASB released FASB Staff Position FSP FAS 157-2 - Effective Date of FASB Statement No. 157 which delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. The implementation of SFAS No. 157 for financial assets and liabilities, effective January 1, 2008, did not have an impact on the Company’s financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure, on an item-by-item basis, specified financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are required to be reported in earnings at each reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, the provisions of which are required to be applied prospectively. The Company will adopt this Statement in fiscal year 2008 and does not expect the adoption of this Statement to have a material effect on the Company’s consolidated financial position, results of operations, or cash flows.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations”, which replaces SFAS No 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS No. 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company will adopt this Statement in fiscal year 2009 and its effects on future periods will depend on the nature and significance of any acquisitions subject to this Statement.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-an Amendment of ARB No. 51 SFAS 160 establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. This statement also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. The adoption of SFAS 160 is not currently expected to have a material effect on the Company’s consolidated financial position, results of operations, or cash flows.
3. MAJOR CUSTOMER
During the three and six months ended June 30, 2008 and 2007, one customer (BuenaVox LLC) accounted for 96% and 71% of all revenues, respectively.
4. TAXES
Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109.” FIN 48 provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the financial statements in accordance with SFAS No. 109. Tax positions must meet a “more-likely-than-not” recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. Upon the adoption of FIN 48, the Company had no unrecognized tax benefits. During the six months ended June 30, 2008 and 2007, the Company recognized no adjustments for uncertain tax benefits.
The Company recognizes interest and penalties, if any, related to uncertain tax positions in selling, general and administrative expenses. No interest and penalties related to uncertain tax positions were accrued at June 30, 2008.
The tax years 2003 through 2007 remain open to examination by the major taxing jurisdictions in which the Company operates. The Company expects no material changes to unrecognized tax positions within the next twelve months.
As of June 30, 2008 the Company has net operating loss carryforwards of approximately $2,716,000 available to offset taxable income through the year 2028.
The Company recorded a deferred income tax asset for the tax effect of net operating loss carryforwards and temporary differences, aggregating approximately $1,086,000 as of June 30, 2008. In recognition of the uncertainty regarding the ultimate amount of income tax benefits to be derived, the Company has recorded a valuation allowance of $1,086,000 at June 30, 2008.
5. ACQUISITION OF VIDIATION, INC.
On April 30, 2008, the Company acquired Vidiation pursuant to which at closing Splinternet Merger Sub I, Inc. (a wholly owned subsidiary of the Company formed in 2008 for the purpose of such transaction) merged into Vidiation, as a result of which Vidiation became a wholly-owned subsidiary of the Company. The Company issued an aggregate of 4,788,179 shares of common stock of the Company to the shareholders of Vidiation in exchange for the cancellation of the then outstanding shares of common stock of Vidiation. As a result, the former shareholders of Vidiation own 7.8% of the total issued and outstanding shares of common stock of the Company.
In connection with the closing, the parties executed a supplemental closing agreement whereby, among other things, (i) the parties acknowledged that the Vidiation loans shall not be extinguished as a result of the transaction consummated under the Vidiation Merger Agreement, and (ii) Vidiation and Frank O’Connor reaffirmed and acknowledged their continuing obligation under the Vidiation loans. In addition, both Vidiation and Vidiation’s president agreed to indemnify the Company with respect to any of the then existing liabilities of Vidiation.
The costs of the acquisition were allocated on the basis of the estimated fair values of the assets acquired and liabilities assumed. The acquisition was accounted for using the purchase method whereby intangible assets identified in connection with the acquisition were recorded in accordance with the provisions of SFAS No. 141.
Vidiation is a radiation detection marketing company. The acquisition is intended to accelerate revenue growth in the Company’s radiation detection business by increasing sales coverage through the addition of sales people from Vidiation with knowledge of the marketplace and existing client relationships, increasing the Company’s presence in targeted markets and providing greater coverage in several key industries. The acquisition is also intended to achieve cost synergies in general and administrative expenses.
The stock portion of the acquisition consists of 4,788,179 shares at a price per share of $.545, which was the average closing price of a share of Splinternet common stock for the average of the 5 consecutive trading days before and after prior to the public announcement by Splinternet of the contemplated purchase of Vidiation.
In February, March and April 2008, the Company made loans to Vidiation, Inc. in the principal amount of $165,000 which loans are due on demand and accrue interest at a rate of 6.0% per annum to the date of payment in full. Such obligation has been guaranteed by Frank O’Connor and Vidiation, LLC. Such loans made by the Company to Vidiation, Inc. are referred to as the “Vidiation Loans”. These loans have been eliminated in the consolidated financial statements as of June 30, 2008.
The following table summarizes the allocation of the purchase price based on estimated preliminary fair values of the assets acquired and liabilities assumed at the date of acquisition subject to a final third party valuation:
| | | | |
| Total purchase price | | $ | 2,609,558 | |
| Assets acquired | | | | |
| Cash | | $ | 2,306 | |
| Prepaid expenses | | | 3,295 | |
| Fixed assets | | | 19,994 | |
| Deposits | | | 850 | |
| Accounts payable and accrued expenses | | | 79,000 | |
| Notes payable | | | 169,678 | |
| Net liabilities acquired | | | (222,233 | ) |
| Goodwill (residual) | | $ | 2,831,790 | |
The pro forma effect on revenues, net loss, and loss per share amounts for the six months ended June 30, 2008, assuming the Vidiation, Inc. transaction had closed on January 1, 2008, are as follows:
Net revenues: $ 400,959
Net loss: $ 1,000,070
Loss per share: $ 0.02 per share
The unaudited pro forma combined financial information does not necessarily represent what would have occurred if the acquisition had taken place on the dates presented and is not representative of the Company’s future consolidated results.
6. STOCK OPTION PLAN
On April 22, 2008, the Board of Directors of the Company adopted the Splinternet Holdings, Inc. 2008 Stock Incentive Plan (the “2008 Stock Plan”). Under the 2008 Stock Plan, officers, other employees and directors of, and consultants to, the Company or its subsidiaries may be awarded stock options, stock appreciation rights and other stock awards. The number of shares subject to the 2008 Stock Plan may not exceed 6,000,000 shares in total. Adoption of the 2008 Stock Plan is subject to the approval by the Company’s shareholders within twelve months of the adoption by the Board of Directors. The 2008 Stock Plan provides for the grant of (i) options that are intended to qualify as incentive stock options ("Incentive Stock Options") within the meaning of Section 422 or 424 of the Internal Revenue Code to key employees and (ii) options not so intended to qualify ("Nonqualified Stock Options") to officers, employees of or consultants to the Company or any non employee director. On April 22 and 30 2008, the Board of Directors granted 1,265,000 nonqualified stock options to employees and consultants. The Stock Option Plan is administered by a committee of the Board of Directors (or if there is no committee, the Board of Directors itself). The committee shall determine the terms of the options exercised, including the exercise price, the number of shares subject to the option and the terms and conditions of exercise.
The exercise price of Incentive Stock Options granted under the plan must be at least equal to the fair market value of the highest and lowest price of the shares on the date of the grant. The maximum term for each Incentive Stock Option granted is five years. Options shall be exercisable at such times and in such installments as the committee shall provide in the terms of each individual option. The maximum number of shares for which options may be granted to any individual in any fiscal year is 2,000,000. The Stock Option Plan also provides for the granting of stock appreciation rights, restricted stock awards, restricted stock unit awards, performance awards, qualified performance awards and stock awards. The Board of Directors has not granted any of these other types of awards.
Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123(R), using the modified prospective transition method. The adoption of SFAS 123(R) resulted in share-based compensation expense for the three and six months ended June 30, 2008 of approximately $35,000 for the options expected to vest. There were no grants of stock options for the three months ended March 31, 2008 or the three and six months ended June 30, 2007.
The Company recognizes stock-based compensation costs on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. The Company has a 100% valuation allowance recorded against its deferred tax assets, therefore the stock-based compensation has no tax effect on the Consolidated Statements of Operations.
The following table summarizes stock option activity:
Options Outstanding | | Shares Subject to Options Outstanding | | Weighted- Average Exercise Price Per Option | | Weighted- Average Remaining Contractual Life | |
| Balance at January 1, 2008 | | | 0 | | | | | | | |
| Granted Options | | | 1,265,000 | | $ | 1.35 | | | 4.8 Years | |
| Balance at June 30, 2008 | | | 1,265,000 | | $ | 1.35 | | | | |
At June 30, 2008 the aggregate intrinsic value was $58,500.
Number Outstanding | | | | | | Weighted-Average Fair Value at Grant Date | | | Weighted-Average Contractual Life | |
| Non-Vested shares at December 31, 2007 | | | 0 | | $ | — | | | | |
| Options Granted | | | 1,265,000 | | | | | $ | 5.0 | |
| Options Vested | | | — | | $ | | | | | |
| Non-Vested shares at June 30, 2008 | | | 1,265,000 | | $ | .81 | | | 4.8 | |
| | | | | | | | | | | |
As of June 30, 2008, there was approximately $585,000 of unrecognized compensation cost related to non-vested stock option awards, which is expected to be recognized over a remaining weighted-average vesting period of 4.8 years.
The fair value of options granted during the three and six months ended June 30, 2008 was approximately $1,031,000.
No stock options have been exercised since the adoption of the Stock Option Plan.
The fair value of each option grant is estimated on the date of grant using the Black Scholes option pricing model with the following weighted-average assumptions used for grants during the three months ended June 30, 2008: risk-free interest rate of 2.4% and 2.96% based on the U.S. Treasury yields in effect at the time of grant; expected dividend yields of 0 percent as the Company has not, and does not intend to, declare dividends; and expected lives of 5 years based upon the length of the grant. The expected volatility used was 83%, based on an average of volatility calculations from several public companies in the same industry. Options have vesting periods of 3 years with contractual lives of 5 years.
In accordance with Emerging Issues Task Force No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or In Conjunction with Selling, Goods or Services”, the Company measures the fair value of the equity instruments issued to non-employees using the stock price and other measurement assumptions as of the earlier of the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or the date at which the counterparty’s performance is complete.
7. SEGMENT INFORMATION
The Company conducts its operations in two business segments; the Radiation Sensor and Detection Division and the VoIP Division. The accounting policies of the reportable segments are the same as those described in Note 2 of the Company’s consolidated financial statements included in the Form 10-K for the year ended December 31, 2007. The Company evaluates the performance of its operating segments primarily based on revenues and operating income. Corporate costs are generally allocated to the segments based on a three factor formula (revenues, payroll and certain assets).
| Three Months ended June 30, 2008 | | Radiation | | VoIP | | Corporate | | Total | |
| Revenues | | $ | — | | $ | 222,301 | | $ | — | | $ | 222,301 | |
| Operating income (loss) | | | (314,961 | ) | | 12,436 | | | (220,187 | ) | | (522,712 | ) |
| Total assets | | | 2,851,297 | | | 44,128 | | | 473,426 | | | 3,368,851 | |
| Capital expenditures | | | — | | | — | | | — | | | — | |
| Depreciation | | | 487 | | | 1,088 | | | | | | 1,575 | |
| | | | | | | | | | | | | | |
| Six Months ended June 30, 2008 | | | | | | | | | | | | | |
| Revenues | | $ | — | | $ | 400,959 | | $ | — | | $ | 400,959 | |
| Operating income (loss) | | | (590,160 | ) | | 18,038 | | | (220,188 | ) | | (792,310 | ) |
| Total assets | | | 2,851,297 | | | 44,128 | | | 473,426 | | | 3,368,851 | |
| Capital expenditures | | | — | | | — | | | — | | | — | |
| Depreciation | | | 487 | | | 2,175 | | | — | | | 2,662 | |
The Company operated only in the VoIP segment during 2007; therefore segment information is only presented for 2008.
8. CONTINGENCY
The Company recently became involved in one claim arising in the ordinary course of business. Management is of the opinion that the ultimate outcome of this matter would not have a material adverse impact on the financial position of the Company or the results of its operations and we intend to vigorously defend ourselves against this claim.
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion should be read in conjunction with the Financial Statements included in this report and is qualified in its entirety by the foregoing.
Forward-Looking Statements
This report contains “forward-looking statements”, which involve known and unknown risks, uncertainties and other factors which could cause actual financial or operating results, performances or achievements expressed or implied by such forward-looking statements not to occur or be realized. These forward-looking statements generally are based on our best estimates of future results, performances or achievements, based upon current conditions and assumptions. Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “can,” “could,” “project,” “expect,” “believe,” “plan,” “predict,” “estimate,” “anticipate,” “intend,” “continue,” “potential,” “would,” “should,” “aim,” “opportunity” or similar terms, variations of those terms or the negative of those terms or other variations of those terms or comparable words or expressions. These risks and uncertainties include, but are not limited to:
| · | general economic conditions in both foreign and domestic markets, |
| · | cyclical factors affecting our industry, |
| · | lack of growth in our industry, |
| · | our ability to comply with government regulations, |
| · | a failure to manage our business effectively and profitably, |
| · | our ability to sell both new and existing products and services at profitable yet competitive prices, and |
| · | other risks and uncertainties set forth from time to time in our filings with the Securities and Exchange Commission. |
You should carefully consider these risks, uncertainties and other information, disclosures and discussions which contain cautionary statements identifying important factors that could cause actual results to differ materially from those provided in the forward-looking statements. Splinternet Holdings, Inc. undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
Splinternet Holdings, Inc. (“we”, “us”, “our”, the “Company” or “Splinternet”) was incorporated in the State of Delaware on March 22, 2006. On April 3, 2006, Splinternet Holdings, Inc. conducted a share for share exchange of securities with Splinternet Communications, Inc. whereby 214,002 shares of the common stock, par value $0.001 per share, of Splinternet Communications, Inc. were exchanged for 53,500,500 shares of the common stock, par value $0.001 per share, of Splinternet Holdings, Inc. (the “Share Exchange”), as a result of which Splinternet Communications, Inc. became a wholly owned subsidiary of Splinternet Holdings, Inc. Splinternet Holdings, Inc. does not conduct any business or own any assets other than all of the issued and outstanding shares of Splinternet Communications, Inc. Splinternet Communications, Inc. was incorporated in the State of Connecticut in January 12, 2000. Splinternet is a developer of VoIP (Voice over Internet Protocol) technology and services which enable the customer to make phone calls utilizing the internet as an alternative to the traditional Public Switched Telephone Network.
On April 30, 2008, the Company acquired Vidiation, Inc. (“Vidiation”). The Company issued an aggregate of 4,788,179 shares of common stock of the Company to the shareholders of Vidiation, Inc. in exchange for the cancellation of the then outstanding shares of common stock of Vidiation, Inc.
Vidiation, Inc. is a newly-formed radiation detection marketing company, which acquired certain assets held by Vidiation, LLC. Both Vidiation, Inc. and Vidiation, LLC are companies formerly controlled by Frank O’Connor, who has remained President of Vidiation, Inc.
In February, March and April 2008, the Company made loans to Vidiation, Inc. in the principal amount of $165,000 which loans are due on demand and accrue interest at a rate of 6.0% per annum to the date of payment in full. Such obligation has been guaranteed by Frank O’Connor and Vidiation, LLC. Such loans made by the Company to Vidiation, Inc. are referred to as the “Vidiation Loans”.
On April 30, 2008, and in connection with the closing, the parties executed a supplemental closing agreement whereby, among other things, (i) the parties acknowledged that the Vidiation Loans shall not be extinguished as a result of the transaction consummated under the Vidiation Merger Agreement, and (ii) Vidiation, Inc. and Frank O’Connor reaffirmed and acknowledged their continuing obligation under the Vidiation Loans. In addition, both Vidiation, Inc. and Frank O’Connor agreed to indemnify the Company with respect to any of the then existing liabilities of Vidiation, Inc.
Since our inception, the Company has generated limited revenues. Although we recently completed an acquisition of a company in the anti-terrorism industry, we are presently considering the acquisition of other companies operating in either the VoIP market space or with compatible products and which can benefit from the Company’s infrastructure under circumstances where there is a strategic, technology, and marketing fit for enhancement. In addition to seeking acquisition candidates, during the quarter ended June 30, 2008, the Company continued purchasing long distance minutes at wholesale prices from phone companies and then reselling them at a markup to its customers.
Additionally, we believe our infrastructure is sufficiently flexible to allow the development and deployment of a variety of radiation detection products and services. We continue to develop those products and expect to begin marketing them actively in the second half of this year and expect to recognize additional revenue in the fourth quarter. The Company believes that over time it will build sales volume sufficient to cover the costs of operations through this strategy. There is no guarantee that the Company will be successful in its efforts to either acquire other companies or generate service or equipment sales sufficient to cover its costs of operations.
Recent Events
On April 22, 2008, the Board of Directors of the Company adopted the Splinternet Holdings, Inc. 2008 Stock Incentive Plan (the “2008 Stock Plan”). Under the 2008 Stock Plan, officers, other employees and directors of, and consultants to, the Company or its subsidiaries may be awarded stock options, stock appreciation rights and other stock awards. The number of shares subject to the 2008 Stock Plan may not exceed 6,000,000 shares. The adoption of the 2008 Stock Plan is subject to the approval by the Company’s shareholders within twelve months of the adoption by the board of directors.
Results of Operations
SERVICE REVENUE
Service revenue for the three months and six months ended June 30, 2008 were $222,301 and $400,959 which is an increase from $31,679 and $35,429 for the three months and six months ended June 30, 2007. The Company continues to provide hosting services but new switching and termination services which were initiated during the second quarter 2007 accounts for the increase in revenues during the three and six months ended June 30, 2008.
COST OF REVENUE
The use of VoIP services requires a combination of hardware and software to convert the electronic signals which would otherwise comprise a traditional telephone call into a packetized data stream and route those packets over a data network, such as the Internet.
In 2007, the Company began purchasing long distance minutes at wholesale prices from phone companies and then resells them at a markup to its customers. For the three months and six months ended June 30, 2008, the costs of the wholesale minutes were $208,778 and $380,746. For the three months and six months ended June 30, 2007, the costs of the wholesale minutes were $14,694 and $14,694 respectively. The Company continues to provide hosting services but new switching and termination services which were initiated during the second quarter 2007 accounts for the increase in cost of revenue during the three and six months ended June 30, 2008.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
In the three months ended June 30, 2008, selling, general and administrative costs were $478,001 which is an increase from $297,540 in the comparable period in 2007. Selling, general and administrative costs for the six months ended June 30, 2008 were $697,364 which is an increase from $592,381 in the six months ended June 30, 2007. The increases were the result of two events which the Company undertook during the first half of 2008. The first was a change in our business strategy which moved the Company from an emphasis on VoIP to new radiation detection products and services. The second was the acquisition of Vidiation, Inc. Vidiation has four full-time salaried employees and three consultants. With this acquisition the Company’s S G & A expenses have also increased due to more sales travel and conference attendance.
RESEARCH AND DEVELOPMENT
Research and development increased to $58,234 and $115,159 in the three months and six months ended June 30, 2008 from $40,575 and $61,150 for the comparable periods in 2007. The increases were the result of consulting expenses related to product development associated with the Company’s radiation detection device and software.
INTEREST INCOME
Interest earned in the three months and six months ended June 30, 2008 were $7,766 and $18,462 compared to $23,598 and $45,415 for the comparable periods in 2007. This was primarily due to a lower average balance invested in 2008 due to the Company using cash to fund operations.
NET LOSS
We recognized a net loss of $515,010, during the three months ended June 30, 2008 compared to a net loss of $297,532 during the same period in the prior year for an overall increase in net loss of $217,478. We recognized a net loss of $773,912, during the six months ended June 30, 2008 compared to a net loss of $587,381 during the same period in the prior year for an overall increase in net loss of $186,531. The increases in the net loss were primarily the result of the acquisition of Vidiation, Inc. This was due to an emphasis being placed on development of new radiation detection products and services. We believe the steps being taken in development of our new radiation detection products and services offerings will allow us to increase revenues and return to profitability.
Financial Condition, Liquidity and Capital Resources
As of June 30, 2008, we had approximately $287,600 in cash and liabilities of approximately $200,000. Our net cash used in operating activities for the six months ended June 30, 2008 was $652,425; hence, we require additional funding in order to be adequately funded for the next twelve months. Further, with the registration of shares of our Common Stock with the Securities and Exchange Commission and subsequent commencement of trading on the OTC Bulletin Board under the symbol “SLNH” which trading commenced on October 5, 2006, we feel we will have increased access to both private and public capital markets.
Net cash used by operating activities for the six months ended June 30, 2008 was $652,425 which was primarily the result of the net loss of $773,912. Net cash used in investing activities for the six months ended June 30, 2008 was $0 compared to $9,994 for the six months ended June 30, 2007. This change was due to eliminating the purchase of property and equipment. For the six months ended June 30, 2008, net cash used in financing activities was $162,694 compared to $12,500 which was provided by financing activities for the six months ended June 30, 2007. The change in 2008 was due to the loans to Vidiation, Inc. of $165,000 during the first six months of 2008 versus a return of an overpayment of equity in 2007. We will require additional capital to finance our future operations. We can provide no assurance that we will obtain additional financing sufficient to meet our future needs on commercially reasonable terms or otherwise. If we are unable to obtain the necessary financing, our business, operating results and financial condition will be materially and adversely affected.
Capital Commitments
The Company currently has no material commitments for capital expenditures.
Trends
The radiation detection industry, which the Company has recently entered, is subject to federal, state, and international governmental regulation. Unknown matters, new laws and regulations, or stricter interpretations of existing laws or regulations may materially affect our entry into this business or operations in the future and/or could increase the cost of compliance. Our products will have to comply with various domestic and international standards that are used by regulatory and accreditation bodies for approving such services and products. The failure of the Company to obtain accreditation for its products and services may adversely affect us and the market perception of the effectiveness of our proposed products. In the future, changes in these standards and accreditation requirements may also result in the Company having to incur substantial costs to adapt its offerings and procedures. Additionally, changes affecting radiation detection practices, including new understandings of the hazards of radiation exposure and amended regulations, may impact how the Company’s services are used by its customers and may, in some circumstances, cause the Company to alter its products and delivery of its services.
The VoIP industry in which we operate is in a state of dynamic and rapid change. VoIP services are gaining acceptance in the marketplace and we intend to take advantage of that trend by attempting to sell into a more willing marketplace, despite the increased competition.
We have noted that several VoIP service retailers in the United States are currently offering services to end users for no charge, as a promotional program to attract users to their systems. We acknowledge that this may attract users, but do not believe there is any assurance users acquired in this manner can be converted into sources of revenue, even if they are part of a subscriber base to which advertising can be delivered on behalf of third parties. The role of United States retail services in that environment is unknown.
Seasonal Fluctuations
There have been no fluctuations in our business to date which can be attributed to seasonality.
Employment Agreements
Currently, we have no written employment agreements with any of our employees or officers.
Risk Factors
We have a limited operating history and a history of substantial operating losses and we may not be able to continue our business.
We have a history of substantial operating losses and an accumulated deficit of $2,727,563 as of June 30, 2008. For the six months ended June 30, 2008, our net loss was $773,912. We have historically experienced cash flow difficulties primarily because our expenses have exceeded our revenues. We expect to incur additional operating losses for the immediate near future. These factors, among others, raise significant doubt about our ability to continue as a going concern. If we are unable to generate sufficient revenue from our operations to pay expenses or we are unable to obtain additional financing on commercially reasonable terms, our business, financial condition and results of operations will be materially and adversely affected.
We will need additional financing in order to continue our operations which we may not be able to raise.
We will require additional capital to finance our future operations. We can provide no assurance that we will obtain additional financing sufficient to meet our future needs on commercially reasonable terms or otherwise. If we are unable to obtain the necessary financing, our business, operating results and financial condition will be materially and adversely affected.
Our performance depends on market acceptance of our products and we cannot be sure that our products are commercially viable.
We expect to derive a substantial portion of our future revenues from the sales of radiation detection equipment and services that is only now entering the initial marketing phase. Although we believe our products and technologies will be commercially viable, these are new products. If markets for our products fail to develop further, develop more slowly than expected or are subject to substantial competition, our business, financial condition and results of operations will be materially and adversely affected.
Rapidly changing technology and substantial competition may adversely affect our business.
Our business is subject to rapid changes in technology. We can provide no assurances that research and development by competitors will not render our technology obsolete or uncompetitive. We compete with a number of companies that have technologies and products similar to those offered by us and have greater resources, including more extensive research and development, marketing and capital than we do. If our technology is rendered obsolete or we are unable to compete effectively, our business, operating results and financial condition will be materially and adversely affected.
Defects in our products may adversely affect our business.
Complex technologies such as the technologies developed by us may contain defects when introduced and also when updates and new products are released. Our introduction of technology with defects or quality problems may result in adverse publicity, product returns, reduced orders, uncollectible or delayed accounts receivable, product redevelopment costs, loss of or delay in market acceptance of our products or claims by customers or others against us. Such problems or claims may have a material and adverse effect on our business, financial condition and results of operations.
If we are unable to successfully integrate acquisitions, our revenue growth and future profitability may be negatively impacted.
The process of integrating an acquired business, technology or product may result in unforeseen operating difficulties and expenditures and may absorb significant management attention and capital that would otherwise be available for ongoing development of our business. In addition, we may not be able to maintain the levels of operating efficiency that any company we may acquire achieved or might have achieved separately. Additional risks we face include:
| · | the need to implement or remediate controls, procedures and policies appropriate for a public company in an acquired company that, prior to the acquisition, lacked these controls, procedures and policies; |
| · | cultural challenges associated with integrating employees from an acquired company or business into our organization; |
| · | retaining key employees from the businesses we acquire; |
| · | the need to integrate an acquired company’s accounting, management information, human resource and other administrative systems to permit effective management; and |
| · | to the extent that we engage in strategic transactions outside of the United States, we face additional risks, including risks related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries. |
Future acquisitions and investments could involve the issuance of our equity securities, potentially diluting our existing shareholders, the incurrence of debt, contingent liabilities or amortization expenses, write-offs of goodwill, intangibles, or acquired in-process technology, or other increased expenses, any of which could harm our financial condition. Our shareholders may not have the opportunity to review, vote on or evaluate future acquisitions or investments.
Our stock price can be extremely volatile.
Our common stock is traded on the OTC Bulletin Board. There can be no assurance that an active public market will continue for the common stock, or that the market price for the common stock will not decline below its current price. Such price may be influenced by many factors, including, but not limited to, investor perception of us and our industry and general economic and market conditions. The trading price of the common stock could be subject to wide fluctuations in response to announcements of our business developments or our competitors, quarterly variations in operating results, and other events or factors. In addition, stock markets have experienced extreme price volatility in recent years. This volatility has had a substantial effect on the market prices of companies, at times for reasons unrelated to their operating performance. Such broad market fluctuations may adversely affect the price of our common stock.
Trading on the OTC Bulletin Board may be sporadic because it is not a stock exchange, and stockholders may have difficulty reselling their shares.
Our common stock is quoted on the OTC Bulletin Board. Trading in stock quoted on the OTC Bulletin Board is often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with our operations or business prospects. Moreover, the OTC Bulletin Board is not a stock exchange, and trading of securities on the OTC Bulletin Board is often more sporadic than the trading of securities listed on the NASDAQ SmallCap.
Our common stock is subject to the “penny stock” rules of the SEC and the trading market in our securities is limited, which makes transactions in our stock cumbersome and may reduce the value of an investment in our stock.
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require that a broker or dealer approve a person's account for transactions in penny stocks and the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience objectives of the person and make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form sets forth the basis on which the broker or dealer made the suitability determination and that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
We do not expect to pay dividends on our common stock.
We have not declared dividends on our common stock since our incorporation and we have no present intention of paying dividends on our common stock.
MANY OF THESE RISKS AND UNCERTAINTIES ARE OUTSIDE OF OUR CONTROL AND ARE DIFFICULT FOR US TO FORECAST. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED IN THE FORWARD-LOOKING STATEMENTS.
Critical Accounting Policies
The following is a discussion of the accounting policies that the Company believes are critical to its operations:
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue recognition
We follow the guidance of the Securities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin 104 for revenue recognition. In general, we record revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured.
We recognize revenue when products have been shipped or services have been performed. In cases where a customer prepays a subscription for services to be performed in a period which extends from one accounting period into a subsequent period, we only recognize the portion of income due for services performed in the current reporting period. In cases where there is an acceptance period during which a subscriber may cancel their agreement without penalty, we defer the revenue recognition until the end of that acceptance period.
Goodwill
Goodwill represents the excess of the purchase price of acquired businesses over the estimated fair value of the tangible and identifiable intangible net assets acquired. Under SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is not amortized but is tested for impairment, at least annually, at the reporting unit level. A reporting unit can be an operating segment or a business if discrete financial information is prepared and reviewed by management. Under the impairment test, if a reporting unit’s carrying amount exceeds its estimated fair value, goodwill impairment is recognized to the extent that the reporting unit’s carrying amount of goodwill exceeds the implied fair value of the goodwill.
Impairment of long-lived assets and intangible assets
The Company reviews long-lived assets and intangible assets other than goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount of the respective asset may not be recoverable. Such evaluation may be based on a number of factors including current and projected operating results and cash flows, changes in management’s strategic direction as well as other economic and market variables. The Company’s policy regarding long-lived assets and intangible assets other than goodwill is to evaluate the recoverability of these assets by determining whether the balance can be recovered through undiscounted future operating cash flows. Should events or circumstances indicate that the carrying value might not be recoverable based on undiscounted future operating cash flows, an impairment loss would be recognized.
Recent accounting pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards Board (“SFAS”) No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and all interim periods within those fiscal years. In February 2008, the FASB released FASB Staff Position FSP FAS 157-2 - Effective Date of FASB Statement No. 157 which delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. The implementation of SFAS No. 157 for financial assets and liabilities, effective January 1, 2008, did not have an impact on our financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure, on an item-by-item basis, specified financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are required to be reported in earnings at each reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, the provisions of which are required to be applied prospectively. We will adopt this Statement in fiscal year 2008 and do not expect the adoption of this Statement to have a material effect on our consolidated financial position, results of operations, or cash flows.
In December 2007, FASB issued SFAS No. 141 (revised 2007), Business Combinations, which replaces SFAS No 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS No. 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We will adopt this Statement in fiscal year 2009 and its effects on future periods will depend on the nature and significance of any acquisitions subject to this Statement.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-an Amendment of ARB No. 51. SFAS 160 establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. This statement also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. The adoption of SFAS 160 is not currently expected to have a material effect on our consolidated financial position, results of operations, or cash flows.
Off-Balance Sheet Arrangements
We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Not applicable.
We maintain disclosure controls and procedures that are designed to ensure (1) that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms, and (2) that this information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures.
Prior to the filing date of this report, under the supervision and review of our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in alerting them in a timely manner to material information regarding us that is required to be included in our periodic reports to the SEC.
In addition, there have been no significant changes in our internal controls or in other factors that could significantly affect those controls that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We can provide no assurance, however, that our system of disclosure controls and procedures will always achieve its stated goals under all future conditions, no matter how remote.
Except as set forth below, we are not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.
We understand that Vidiation, Inc. has been named as a defendant in an action commenced in Fairfax Circuit Court, Fairfax, Virginia by a party alleging it is owed $59,000 for consulting services. We understand that the plaintiff is seeking to add Splinternet Holdings, Inc. as a defendant. We intend to defend ourselves vigorously against this claim and do not currently have enough information to assess the likely outcome of this matter.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
On April 22, 2008, we granted options to six persons to purchase an aggregate of 585,000 shares of common stock with an exercise price of $1.25 per share and, on April 30, 2008, we granted options to five persons to purchase an aggregate of 680,000 shares of common stock with an exercise price of $1.43 per share. These stock options vest annually over three years beginning one year from the date of issuance. These stock options were granted pursuant to the Company’s 2008 Stock Incentive Plan which was adopted by the Board of Directors of the Company on April 22, 2008. The issuance of these stock options was exempt from registration requirements pursuant to Section 4(2) of the Securities Act of 1933, as amended.
On April 30, 2008, we consummated the transaction contemplated by an Agreement and Plan of Merger dated February 7, 2008 among Splinternet Holdings, Inc., Vidiation, Inc. and Splinternet Merger Sub I, Inc. (our wholly owned subsidiary formed for the purpose of such transaction) (the “Merger Sub”) pursuant to which the Merger Sub has merged into Vidiation, Inc. resulting in Vidiation, Inc. becoming our wholly-owned subsidiary of the Company. Upon closing, we issued an aggregate of 4,788,179 shares of our common stock to the shareholders of Vidiation, Inc. in exchange for the cancellation of the then outstanding shares of common stock of Vidiation, Inc. The exchange of Vidiation, Inc. common stock for our common stock was exempt pursuant to Section 4(2) of the Securities Act of 1933, as amended.
| Item 3. | Defaults Upon Senior Securities |
Not applicable.
| Item 4. | Submission of Matters to a Vote of Security Holders |
Not applicable.
Not applicable.
| | | 2008 Stock Incentive Plan |
| | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act) |
| 31.2 | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act) |
| 32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) |
| 32.2 | Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
SPLINTERNET HOLDINGS, INC.
(Registrant)
Dated: August 14, 2008
James C. Ackerly
Chief Executive Officer and President
(Principal Executive Officer)
Dated: August 14, 2008
John T. Grippo
Chief Financial Officer
(Principal Financial Officer)
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