UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
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
September
30, 2008
.
OR
o
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
period from _________
to __________
Commission
file number 333-142911
STI
GROUP, INC.
|
(Exact
name of registrant as specified in its
charter)
|
Delaware
|
|
35-2065470
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer Identification No.)
|
30950
Rancho Viejo Road Suite 120
San
Juan Capistrano, CA
|
|
92675
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
Registrant’s
telephone number, including area code (
949)
260-0150
Indicate
by check mark whether the issuer (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
Smaller
reporting company
x
(Do
not
check if a smaller reporting company)
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
APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE
YEARS
Indicate
by check mark whether the registrant has filed all documents and reports
required by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a
court.
Yes
o
No
o
APPLICABLE
ONLY TO CORPORATE ISSUERS
State
the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date.
Title
of each class
|
|
Number
of Shares Outstanding as of November 17, 2008
|
Common
Stock, $.001 par value
|
|
14,860,000
|
STI
GROUP, INC.
Form
10-Q
INDEX
|
PAGE
NUMBER
|
|
|
PART
I.
FINANCIAL
INFORMATION
|
|
|
|
|
|
Item
1
|
Financial
Statements
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets at September 30, 2008 (Unaudited) and December
31,
2007
|
3
|
|
|
|
|
|
Consolidated
Statements of Operations (Unaudited)
for
the three and nine months ended September 30, 2008 and
2007
|
4
|
|
|
|
|
|
Consolidated
Statements of Cash Flows (Unaudited)
for
the nine months ended September 30, 2008 and 2007
|
5
|
|
|
|
|
|
Notes
to Unaudited Consolidated Financial Statements
|
6
|
|
|
|
|
Item
2
|
Management’s
Discussion and Analysis of Financial
Condition
and Results of Operations
|
19
|
|
|
|
|
Item
4T
|
Controls
and Procedures
|
27
|
|
|
|
|
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
|
|
Item
1
|
Legal
Proceedings
|
28
|
|
|
|
|
Item
2
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
|
|
|
|
Item
3
|
Defaults
Upon
Senior Securities
|
|
|
|
|
|
Item
4
|
Submission
of Matters to a Vote of Security Holders
|
|
|
|
|
|
Item
5
|
Other
Information
|
|
|
|
|
|
|
|
|
|
Item
6
|
Exhibits
|
|
|
|
|
|
Signature
|
29
|
|
|
|
|
EXHIBITS:
EX
- 31.1
Certification Pursuant to Section 302
EX
- 32.1
Certification Pursuant to Section 906
ITEM
1:
FINANCIAL
STATEMENTS
STI
GROUP, INC.
|
CONSOLIDATED
BALANCE SHEETS
|
ASSETS
|
|
September
30,
|
|
December
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
|
|
$
|
76,830
|
|
$
|
21,644
|
|
Accounts
receivable, net
|
|
|
8,241
|
|
|
676,315
|
|
Note
receivable - related party
|
|
|
44,866
|
|
|
150,884
|
|
Prepaid
expenses and other current assets
|
|
|
970
|
|
|
970
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
130,907
|
|
|
849,813
|
|
|
|
|
|
|
|
|
|
Fixed
assets, net of accumulated depreciation of $911 and $0, respectively
|
|
|
9,085
|
|
|
-
|
|
Deferred
financing costs, net
|
|
|
6,025
|
|
|
9,778
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
146,017
|
|
$
|
859,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
414,148
|
|
$
|
623,856
|
|
Due
to related parties
|
|
|
-
|
|
|
36,000
|
|
Sales
tax payable
|
|
|
655
|
|
|
13,994
|
|
Accrued
expenses
|
|
|
118,118
|
|
|
151,679
|
|
Convertible
notes payable, net of discount of $301,557 and $489,054, respectively
|
|
|
448,443
|
|
|
260,946
|
|
Derivative
liabilities
|
|
|
1,229,028
|
|
|
1,294,161
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
2,210,392
|
|
|
2,380,636
|
|
|
|
|
|
|
|
|
|
Warrant
liabilities
|
|
|
147,084
|
|
|
148,191
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
2,357,476
|
|
|
2,528,827
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
deficit:
|
|
|
|
|
|
|
|
Series
A convertible preferred stock; $0.001 par value; liquidation preference
($10,937,200 at September 30, 2008) of $100 per share plus accrued
but
unpaid dividends; 100,000 shares authorized 100,000 shares issued
and
outstanding at September 30, 2008; 90,800 shares issued and outstanding
at
December 31, 2007
|
|
|
100
|
|
|
91
|
|
Common
stock; $0.001 par value; 1,000,000,000 shares authorized; 14,860,000
shares issued and outstanding
|
|
|
14,860
|
|
|
14,860
|
|
Additional
paid-in capital
|
|
|
95,792
|
|
|
73,514
|
|
Accumulated
deficit
|
|
|
(2,322,211
|
)
|
|
(1,757,701
|
)
|
|
|
|
|
|
|
|
|
Total
stockholders' deficit
|
|
|
(2,211,459
|
)
|
|
(1,669,236
|
)
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' deficit
|
|
$
|
146,017
|
|
$
|
859,591
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements
|
STI
GROUP, INC.
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30, 2008
|
|
September
30, 2007
|
|
September
30, 2008
|
|
September
30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
26,587
|
|
$
|
743,454
|
|
$
|
1,961,311
|
|
$
|
1,774,733
|
|
Cost
of revenues
|
|
|
21,438
|
|
|
530,369
|
|
|
1,631,363
|
|
|
1,297,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
5,149
|
|
|
213,085
|
|
|
329,948
|
|
|
476,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
187,812
|
|
|
294,724
|
|
|
726,696
|
|
|
917,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(182,663
|
)
|
|
(81,639
|
)
|
|
(396,748
|
)
|
|
(440,978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value of derivative and warrant liabilities
|
|
|
32,454
|
|
|
3,551
|
|
|
66,240
|
|
|
(11,235
|
)
|
Interest
expense, net
|
|
|
(78,670
|
)
|
|
(75,214
|
)
|
|
(233,202
|
)
|
|
(220,575
|
)
|
Total
other expense, net
|
|
|
(46,216
|
)
|
|
(71,663
|
)
|
|
(166,962
|
)
|
|
(231,810
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before provision for income taxes
|
|
|
(228,879
|
)
|
|
(153,302
|
)
|
|
(563,710
|
)
|
|
(672,788
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
-
|
|
|
-
|
|
|
800
|
|
|
800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(228,879
|
)
|
$
|
(153,302
|
)
|
$
|
(564,510
|
)
|
$
|
(673,588
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.02
|
)
|
$
|
(0.01
|
)
|
$
|
(0.04
|
)
|
$
|
(0.05
|
)
|
Diluted
|
|
$
|
(0.02
|
)
|
$
|
(0.01
|
)
|
$
|
(0.04
|
)
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
14,860,000
|
|
|
14,860,000
|
|
|
14,860,000
|
|
|
14,860,000
|
|
Diluted
|
|
|
14,860,000
|
|
|
14,860,000
|
|
|
14,860,000
|
|
|
14,860,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
(unaudited)
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2008
|
|
September
30, 2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
loss
|
|
$
|
(564,510
|
)
|
$
|
(673,588
|
)
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Bad
debt expense
|
|
|
6,078
|
|
|
15,261
|
|
Depreciation
expense
|
|
|
911
|
|
|
-
|
|
Change
in fair value of derivative and warrant liabilities
|
|
|
(66,240
|
)
|
|
11,235
|
|
Amortization
of discount on convertible notes payable
|
|
|
187,497
|
|
|
187,498
|
|
Amortization
of deferred financing costs
|
|
|
3,753
|
|
|
3,752
|
|
Accrued
interest income added to principal
|
|
|
(5,283
|
)
|
|
(7,911
|
)
|
Issuance
of preferred stock for services
|
|
|
7,711
|
|
|
29,238
|
|
Stock
compensation
|
|
|
14,576
|
|
|
36,439
|
|
Management
fee applied against note receivable - related party
|
|
|
111,301
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
661,996
|
|
|
880,694
|
|
Prepaid
expenses and other current assets
|
|
|
-
|
|
|
(12,277
|
)
|
Accounts
payable and accrued expenses
|
|
|
(256,608
|
)
|
|
(409,073
|
)
|
Due
to related parties
|
|
|
(36,000
|
)
|
|
(14,000
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
65,182
|
|
|
47,268
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of fixed assets
|
|
|
(9,996
|
)
|
|
-
|
|
Repayment
of note receivable - related party
|
|
|
-
|
|
|
113,000
|
|
Issuance
of note receivable - related party
|
|
|
-
|
|
|
(205,000
|
)
|
Net
cash used in investing activities
|
|
|
(9,996
|
)
|
|
(92,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
55,186
|
|
|
(44,732
|
)
|
|
|
|
|
|
|
|
|
Cash,
beginning of period
|
|
|
21,644
|
|
|
286,557
|
|
|
|
|
|
|
|
|
|
Cash,
end of period
|
|
$
|
76,830
|
|
$
|
241,825
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
800
|
|
$
|
800
|
|
Cash
paid for interest
|
|
$
|
4,764
|
|
$
|
2,693
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements
|
STI
GROUP, INC.
Notes
to
Consolidated Financial Statements
(Unaudited)
NOTE
1. BACKGROUND, ORGANIZATION AND BASIS OF PRESENTATION
Basis
of Presentation
The
unaudited consolidated financial statements have been prepared in accordance
with the instructions to Form 10-Q and Item 8-03 of Regulation S-X. Accordingly,
they do not include all footnote disclosures required by accounting principles
generally accepted in the United States of America. These consolidated financial
statements should be read in conjunction with our audited consolidated financial
statements and notes thereto for the year ended December 31, 2007 included
in
our Registration Statement on Form S-1 filed with the SEC on April 2, 2008.
The
accompanying consolidated financial statements reflect all adjustments, which,
in the opinion of management, are necessary for a fair presentation of our
financial position, results of operations and cash flows for the interim periods
in accordance with accounting principles generally accepted in the United States
of America. The results for any interim period are not necessarily indicative
of
the results for the entire fiscal year.
Organization
The
predecessor to STI Group, Inc., MAS Acquisition VIII Corp. (“MAS”), was
originally incorporated in October 1996 in the state of Indiana. MAS commenced
operations in December 1999 upon the acquisition of NetStaff, Inc., an
Internet-based business-to-business electronic commerce company. In May 2002,
MAS changed its focus and became a provider of business consulting and
technology service solutions for the financial services industry. In July 2002,
MAS reincorporated as Financial Systems Group, Inc. (“FSG”) in the state of
Delaware. Subsequently, all operations were discontinued and there were no
operations until December 15, 2006, as discussed below.
On
December 15, 2006, FSG acquired Solana Technologies, Inc. (“STI”). In the
acquisition, FSG issued 60,000 shares of its Series A Preferred Stock to the
shareholders of STI in exchange for all of STI’s common stock. In connection
with a concurrent December 2006 secured convertible note financing, the Company
agreed to exchange the principal amount of outstanding secured convertible
notes
issued by the Company to the investors in a prior financing and other securities
of the Company for 20,000 shares of its Series A Preferred Stock and in
consideration of the investors agreeing to waive all claims, defaults interest,
penalties, fees, charges or other obligations accrued or owed by the Company
to
the investors in connection with the prior financing. As a result of the
foregoing transactions, FSG experienced a change in voting control, senior
management and its Board of Directors. Accordingly, the acquisition was
accounted for as a reverse merger accompanied by a recapitalization in
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141,
Accounting
for Business Combinations.
Accordingly, STI was deemed to be the accounting acquirer and surviving company
for accounting purposes. The accompanying consolidated financial statements
are
the historical financial statements of STI and reflect the results of operations
of STI from September 18, 2006, the date of inception of STI, through September
30, 2008.
Subsequently,
the consolidated entity (the “Company”) changed its name to STI Group, Inc.
The
Company provides a full range of services in the areas of network design and
engineering, including hardware and software, security, project management
and
maintenance and support services. The Company provides these services to
governmental and domestic public safety agencies and small to large domestic
commercial businesses in the United States, in the communications, energy,
financial services, education, healthcare, manufacturing, retail and
transportation sectors.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts and
transactions of the Company and its subsidiary STI. All intercompany
transactions and balances have been eliminated in consolidation.
Going
Concern
The
Company's consolidated financial statements are prepared using the accrual
method of accounting in accordance with accounting principles generally accepted
in the United States of America, and have been prepared on a going concern
basis, which contemplates the realization of assets and the settlement of
liabilities in the normal course of business. At September 30, 2008, the Company
has an accumulated deficit of $2,322,211 and the
Company’s
current liabilities exceeded its current assets by $2,079,485. In addition,
at
September 30, 2008, the Company was in default on its convertible notes payable
(see Note 5).
Although
no note
holder has sent the Company a notice of acceleration of amounts owed under
the
secured convertible notes, there can be no assurance that the note holders
will
not take such action in the future. In the event of any acceleration of
these obligations, or i
f
the
Company is unable to raise enough money to cover the amounts payable, it may
be
forced to restructure, file for bankruptcy, sell assets or cease operations.
In
June
and July 2008, the senior management and several employees of STI resigned.
STI
has not been able to replace the management and staff losses and has experienced
the loss of substantially all of its revenue in since July 2008.
As
a
result of STI’s reduced level of operations, the Company expects that their
revenue in the fourth quarter of 2008 will be dependent on their ability to
stabilize the operations of STI, to supplement STI’s management and staff and to
maintain its customer relationships. However, to date, their efforts have not
been successful and there can be no assurance that their efforts ultimately
will
be successful.
As
a
result of the recent loss of senior management and key employees and
substantially all of the revenue of STI, the Company does not have sufficient
capital to continue its operations beyond the end of 2008. The Company will
require additional capital prior to year-end to continue its current business
at
STI or to expand its operations beyond those of STI.
In
view
of the matters described above, recoverability of a major portion of the
recorded asset amounts shown in the accompanying consolidated balance sheets
is
dependent upon continued operations of the Company, which in turn is dependent
upon the Company's ability to raise additional capital, obtain financing and
succeed in its future operations. The above factors raise substantial doubt
about the Company’s ability to continue as a going concern. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts and classification
of liabilities that might be necessary should the Company be unable to continue
as a going concern.
NOTE
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America 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 consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant estimates include
the collectibility of receivables, the valuation of common and preferred stock,
the valuation of derivative and warrant liabilities, and the valuation allowance
of the deferred tax asset. Actual results could differ from those estimates.
Fair
Value of Financial Instruments
The
Company’s consolidated financial instruments consist of cash, accounts
receivable, note receivable from related party, accounts payable, accrued
expenses, convertible notes payable and amounts due to related parties. Pursuant
to SFAS No. 107,
Disclosures
About Fair Value of Financial Instruments
,
the
Company is required to estimate the fair value of all financial instruments
at
the balance sheet date. The Company considers the carrying values of its
financial instruments, except for convertible notes payable, to approximate
their fair values due to their short maturities. The fair value of the
convertible notes payable approximates their carrying values based on rates
currently available to the Company for similar instruments.
Concentrations
of Credit Risk
The
Company maintains its cash balances at credit-worthy financial institutions
that
are insured by the Federal Deposit Insurance Corporation ("FDIC") up to
$100,000. Management believes the risk of loss of cash balances in excess of
the
insured limit to be low.
Customer
Concentrations
As
of
September 30, 2008, two customers comprised 92% of the Company’s accounts
receivable and these two customers accounted for 10% of the net revenues for
the
nine months ended September 30, 2008. Two customers accounted for 37% of the
net
revenues for the nine months ended September 30, 2008.
As
of
December 31, 2007, three customers comprised 46% of the Company’s accounts
receivable. Two customers accounted for 70% of the net revenues for the nine
months ended September 30, 2007.
A
significant portion of the Company's business is located in southern California
and is subject to economic conditions and regulations in this geographic
area.
Accounts
Receivable
Accounts
receivable consist of amounts billed to customers upon performance of services
or delivery of goods and expenses incurred by the Company but not yet billed
to
customers for consulting services. The Company extends credit to its customers
based upon its assessment of their credit worthiness and generally does not
require collateral. The Company performs ongoing credit evaluations of customers
and adjusts credit limits based upon payment history and the customers' current
creditworthiness, as determined by its review of their current credit
information. The Company continuously monitors collections and payments from
its
customers and maintains a provision for estimated credit losses based upon
its
historical experience and any customer-specific collection issues that it has
identified. The allowance for doubtful accounts totaled $15,942 and $9,864
as of
September 30, 2008 and December 31, 2007, respectively.
Deferred
Financing Costs
Deferred
financing costs represent costs incurred in connection with obtaining debt
financing and are capitalized and amortized over the term of the related debt
instrument using the straight-line method, which approximates the effective
interest method (see Note 4).
Derivative
Financial Instruments
The
Company’s derivative financial instruments consist of embedded derivatives
related to the Callable Secured Convertible Term Notes (the “Notes”) entered
into on December 15, 2006 (see Note 5). These embedded derivatives include
certain conversion features, variable interest features, and default provisions.
The accounting treatment of derivative financial instruments requires that
the
Company record the derivatives and related warrants at their fair values as
of
the inception date of the agreement and at fair value as of each subsequent
balance sheet date. In addition, under the provisions of Emerging Issues Task
Force (“EITF”) Issue No. 00-19,
Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in,
a
Company's Own Stock
,
as a
result of entering into the Notes, the Company is required to classify all
non-employee stock options and warrants as derivative liabilities and mark
them
to market at each reporting date. As of September 30, 2008, there were no
non-employee options and warrants other than those issued in connection with
the
Notes.
Any
change in fair value will be recorded as non-operating, non-cash income or
expense at each reporting date. If the fair value of the derivatives is higher
at the subsequent balance sheet date, the Company will record a non-operating,
non-cash charge. If the fair value of the derivatives is lower at the subsequent
balance sheet date, the Company will record non-operating, non-cash income.
The
embedded derivatives were valued using the Black-Scholes Option Pricing Model
with the following assumptions for 2008 and 2007, respectively: dividend yield
of 0% and 0%; annual volatility of 205% and 205%; and risk free interest rates
ranging from 1.78% to 2.98% and 5.0% as well as probability analysis related
to
trading volume restrictions and other factors.
Revenue
Recognition
The
Company’s revenues consist primarily of network software/hardware products and
professional consulting and training services. For these sales, the Company
utilizes written contracts or purchase orders as the means to establish the
terms and conditions upon which its products and services are sold to its end
customers.
For
sales
of network hardware and software products, revenue is recognized in accordance
with Staff Accounting Bulletin ("SAB") 101,
Revenue
Recognition in Financial Statements,
as
revised by SAB 104. Accordingly, revenue is recognized at the date of shipment
to customers when a formal arrangement exists, the price is fixed or
determinable, the delivery is completed, no other significant obligations by
the
Company exist and collectibility of the receivable is reasonably assured.
Payments received before all of the relevant criteria for revenue recognition
are satisfied are recorded as deferred revenue. Revenues and costs of revenues
from consulting or training contracts are recognized during the period in which
the service is performed.
In
accordance with EITF Issue No. 06-3,
How
Taxes Collected from Customers and Remitted to Governmental Authorities Should
Be Presented in the Income Statement (That Is, Gross Versus Net
Presentation)
,
revenues are reported net of sales taxes collected.
Net
Loss per Share
The
Company adopted the provisions of SFAS No. 128,
Earnings
Per Share
("EPS").
SFAS No. 128 provides for the calculation of basic and diluted earnings or
loss
per share. Basic loss per share includes no dilution and is computed by dividing
loss available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted loss per share reflects the potential
dilution of securities that could share in the losses of the entity. Such
amounts include shares potentially issuable pursuant to the Notes and the
attached warrants and the convertible preferred stock (see Notes 5 and 7).
For
the periods ended September 30, 2008 and 2007, basic and diluted loss per share
are the same as the potentially dilutive shares were excluded from diluted
loss
per share as their effect would be anti-dilutive for the periods then ended.
Had
such shares been included in diluted EPS, they would have resulted in
weighted-average common shares of 654,261,818
and
577,686,315
for
the
nine months ended September 30, 2008 and 2007, respectively.
Issuance
of Shares for Non-Cash Consideration
The
Company accounts for the issuance of equity instruments to acquire goods and/or
services based on the fair value of the goods and services or the fair value
of
the equity instrument at the time of issuance, whichever is more reliably
determinable.
The
Company's accounting policy for equity instruments issued to consultants and
vendors in exchange for goods and services follows the provisions of EITF Issue
No. 96-18,
Accounting
for Equity Instruments That are Issued to Other Than Employees for Acquiring,
or
in Conjunction with Selling, Goods or Services
and EITF
Issue No. 00-18,
Accounting
Recognition for Certain Transactions Involving Equity Instruments Granted to
Other Than Employees.
The
measurement date for the fair value of the equity instruments issued is
determined at the earlier of (i) the date at which a commitment for performance
by the consultant or vendor is reached or (ii) the date at which the consultant
or vendor's performance is complete. In the case of equity instruments issued
to
consultants, the fair value of the equity instrument is recognized over the
term
of the consulting agreement.
Stock-Based
Compensation
At
September 30, 2008, the Company has one stock-based compensation
plan.
Upon
inception, the Company adopted SFAS No. 123 (revised 2004),
Share-Based
Payment
,
("SFAS
123(R)") which establishes standards for the accounting of transactions in
which
an entity exchanges its equity instruments for goods or services, primarily
focusing on accounting for transactions where an entity obtains employee
services in share-based payment transactions. SFAS 123(R) requires a public
entity to measure the cost of employee services received in exchange for an
award of equity instruments, including stock options, based on the grant-date
fair value of the award and to recognize it as compensation expense over the
period the employee is required to provide service in exchange for the award,
usually the vesting period. In March 2005, the SEC issued Staff Accounting
Bulletin No. 107 ("SAB 107") relating to SFAS 123(R). The Company has
applied the provisions of SAB 107 in its adoption of SFAS 123(R).
Stock-based
compensation expense recognized during the period is based on the value of
the
portion of share-based payment awards that is ultimately expected to vest during
the period. Stock-based compensation expense recognized in the Company's
consolidated statement of operations for the nine months ended September 30,
2008 included compensation expense for the share-based payment awards granted
based on the grant date fair value estimated in accordance with the provisions
of SFAS 123(R). As stock-based compensation expense recognized in the
consolidated statement of operations for the nine months ended September 30,
2008 is based on awards ultimately expected to vest, it has been reduced for
estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at
the
time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Stock-based compensation expense for
the nine months ended September 30, 2008 and 2007 totaled $14,576 and $36,439,
respectively.
SFAS
123(R) requires the cash flows resulting from the tax benefits resulting from
tax deductions in excess of the compensation cost recognized for those options
to be classified as financing cash flows. Due to the Company's loss position,
there were no such tax benefits during the nine months ended September 30,
2008.
Description
of Plan
The
Company’s 2007 Stock Incentive Plan (the “2007 Plan”) was adopted by the Board
of Directors and approved by the Company’s stockholders in May 2007. The Company
has initially reserved 6,000,000 shares of common stock for issuance under
the
2007 Plan. Awards under the 2007 Plan may be made in the form of (i) incentive
stock options (to eligible employees only); (ii) nonqualified stock options;
(iii) restricted stock; (iv) stock awards; (v) performance shares; or (vi)
any
combination of the foregoing. No incentive stock options may be granted more
than ten years after May 7, 2007. As of September 30, 2008, the Company has
approximately 6,000,000 shares available for future issuances.
Summary
of Assumptions and Activity
The
fair value of stock-based awards to employees and directors is calculated
using the Black-Scholes option pricing model even though the model
was
developed to estimate the fair value of freely tradeable, fully
transferable options without vesting restrictions, which differ
significantly from the Company's stock options. The Black-Scholes
model
also requires subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the
calculated values. The expected term of options granted is derived
from
historical data on employee exercises and post-vesting employment
termination behavior. The risk-free rate selected to value any particular
grant is based on the U.S. Treasury rate that corresponds to the
pricing
term of the grant effective as of the date of the grant. The expected
volatility is based on the historical volatility of comparable publicly
traded companies as the Company’s stock is not traded. These factors could
change in the future, affecting the determination of stock-based
compensation expense in future periods.
A
summary of option activity as of September 30, 2008 and changes during
the
nine month period then ended, is presented as
below:
|
There
were no options granted during the nine months ended September 30, 2008. The
Company granted 2,972,000 options during the nine months ended September 30,
2007. Upon the exercise of options, the Company issues new shares from its
authorized shares.
As
of
September 30, 2008, there was no unrecognized compensation cost related to
employee stock option compensation arrangements. The total fair value of shares
vested during the nine months ended September 30, 2008 and 2007 was $14,576
and
$36,439, respectively, which was recorded as selling, general and administrative
expenses in the accompanying consolidated statements of operations.
Income
Taxes
The
Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting
for Income Taxes
.
Under
SFAS No. 109, deferred tax assets and liabilities are recognized for future
tax
benefits or consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
A
valuation allowance is provided for significant deferred tax assets when it
is
more likely than not that such assets will not be realized through future
operations.
Recently
Adopted Accounting Pronouncements
In
December 2006, the Financial Accounting Standards Board (“FASB”) issued a FASB
Staff Position (“FSP”) EITF Issue No. 00-19-2,
Accounting
for Registration Payment Arrangements
(“FSP
00-19-2”) which addresses an issuer’s accounting for registration payment
arrangements. FSP 00-19-2 specifies that the contingent obligation to make
future payments or otherwise transfer consideration under a registration payment
arrangement, whether issued as a separate agreement or included as a provision
of a financial instrument or other agreement, should be separately recognized
and measured in accordance with FASB Statement No. 5,
Accounting
for Contingencies
.
The
guidance in FSP 00-19-2 amends FASB Statements No. 133,
Accounting
for Derivative Instruments and Hedging Activities
,
and No.
150,
Accounting
for Certain Financial Instruments with Characteristics of both Liabilities
and
Equity
,
and
FASB Interpretation No. 45,
Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others,
to
include scope exceptions for registration payment arrangements. FSP 00-19-2
is
effective immediately for registration payment arrangements and the financial
instruments subject to those arrangements that are entered into or modified
subsequent to the issuance of FSP 00-19-2. For registration payment arrangements
and financial instruments subject to those arrangements that were entered into
prior to the issuance of FSP 00-19-2, this is effective for financial statements
issued for fiscal years beginning after December 15, 2006, and interim periods
within those fiscal years. The Company entered into a Registration Rights
Agreement on December 15, 2006 (see Note 5). All of the Company’s obligations
under the Registration Rights Agreement, as amended, have been met and the
Company has determined that no accrual is necessary as of September 30, 2008
as
it is not considered probable that the Company will make any payments under
the
applicable provisions of the Registration Rights Agreement.
In
July 2006, the FASB issued FASB Interpretation No. 48
,
Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement
No. 109
(“FIN
48”), which clarifies the accounting and disclosure for uncertainty in tax
positions, as defined. FIN 48 seeks to reduce the diversity in practice
associated with certain aspects of the recognition and measurement related
to
accounting for income taxes. The Company adopted the provisions of FIN 48 as
of
January 1, 2007, and believes that its income tax filing positions and
deductions will be sustained on audit and does not anticipate any adjustments
that will result in a material change to its financial position. Therefore,
no
reserves for uncertain income tax positions have been recorded pursuant to
FIN
48. In addition, the Company did not record a cumulative effect adjustment
related to the adoption of FIN 48. The Company’s policy for recording interest
and penalties associated with income-based tax audits is to record such items
as
a component of income taxes.
Recent
Accounting Pronouncements
In
September 2006, the FASB adopted SFAS No. 157,
Fair
Value Measurements.
SFAS No.
157 establishes a framework for measuring fair value and expands disclosure
about fair value measurements. Specifically, this standard establishes that
fair
value is a market-based measurement, not an entity specific measurement. As
such, the value measurement should be determined based on assumptions the market
participants would use in pricing an asset or liability, including, but not
limited to assumptions about risk, restrictions on the sale or use of an asset
and the risk of nonperformance for a liability. The expanded disclosures include
disclosure of the inputs used to measure fair value and the effect of certain
of
the measurements on earnings for the period. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007. In February 2008, the FASB
issued FSP 157-2,
Effective
Date of FASB Statement No. 157
,
which
delays the effective date of SFAS No. 157 for non-financial assets and
liabilities to fiscal years beginning after November 15, 2008. The
adoption of SFAS No. 157 related to financial assets and liabilities did
not have a material impact on the Company's consolidated financial
statements. The Company is currently evaluating the impact, if any, that
SFAS No. 157 may have on its future consolidated financial statements related
to
non-financial assets and liabilities.
In
October 2008, the FASB issued FSP No. 157-3,
Determining
the Fair Value of a Financial Asset When the Market for That Asset is Not
Active
.
FSP No.
157-3 clarifies the application of SFAS No. 157 in a market that is not active,
and provides an illustrative example intended to address certain key application
issues. FSP No. 157-3 is effective immediately, and applies to the Company’s
September 30, 2008 financial statements. The Company has concluded that the
application of FSP No. 157-3 did not have a material impact on its consolidated
financial position and results of operations as of and for the periods ended
September 30, 2008.
On
February 15, 2007, the FASB, issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Liabilities—Including an Amendment of
SFAS 115
.
This
standard permits an entity to choose to measure many financial instruments
and
certain other items at fair value. This option is available to all entities.
Most of the provisions in SFAS 159 are elective; however, an amendment to SFAS
115
“Accounting
for Certain Investments in Debt and Equity Securities”
applies
to all entities with available for sale or trading securities. SFAS 159 is
effective as of the beginning of an entity’s first fiscal year that begins after
November 15, 2007. The adoption of SFAS No. 159 did not have a material
impact on the Company’s consolidated financial position or results of
operations.
In
December 2007, the FASB issued SFAS No. 141(R),
Business
Combinations
.
SFAS
No. 141(R) establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any non-controlling interest in the
acquiree and recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase. SFAS No. 141(R) also
sets forth the disclosures required to be made in the financial statements
to
evaluate the nature and financial effects of the business combination. SFAS
No.
141(R) applies prospectively to 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. Accordingly, the Company will adopt this standard
in fiscal 2009. The Company is currently evaluating the potential
impact of the adoption of SFAS No. 141(R) on its consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 160,
Non-controlling
Interests in Consolidated Financial Statements, an amendment of ARB No.
51
.
SFAS
No. 160 will change the accounting and reporting for minority interests,
which will be recharacterized as non-controlling interests (NCI) and classified
as a component of equity. This new consolidation method will significantly
change the accounting for transactions with minority interest
holders. SFAS No. 160 requires retroactive adoption of the
presentation and disclosure requirements for existing minority interests. All
other requirements of SFAS No. 160 shall be applied
prospectively. SFAS No. 160 is effective for fiscal years
beginning after December 15, 2008 and, as such, the Company will adopt this
standard in fiscal 2009. The Company is currently evaluating the
potential impact of the adoption of SFAS No. 160 on its consolidated
financial statements.
In
March
2008, the FASB issued SFAS No. 161,
Disclosures
about Derivative Instruments and Hedging Activities
.
SFAS
No. 161 is intended to improve financial reporting about derivative instruments
and hedging activities by requiring enhanced disclosures to enable investors
to
better understand their effects on an entity's financial position, financial
performance, and cash flows. The provisions of SFAS No. 161 are effective for
the quarter ending March 31, 2009. The Company is currently evaluating the
impact of the provisions of SFAS No. 161.
NOTE
3. NOTE RECEIVABLE - RELATED PARTY
The
Company has a revolving note receivable from Strands Management Company, LLC
(“Strands”), formerly known as Monarch Bay Management Company, LLC. David
Walters, the Company’s chief executive officer and chairman of the board, is a
50% owner of Strands. The note receivable is intended to provide working capital
to Strands, as needed, in amounts up to $500,000. The note bears interest at
the
greater of 8% or $150 per annum and matures on December 31, 2008. In the event
of default, the interest rate may increase by 3% at the option of the Company.
The balance of the note receivable as of September 30, 2008 was $44,017, plus
accrued interest receivable of $849. Interest income on the note receivable
was
$5,283 and $7,911 for the nine months ended September 30, 2008 and 2007,
respectively.
NOTE
4. DEFERRED FINANCING COSTS
Deferred
financing costs as of September 30, 2008 and December 31, 2007 are as follows:
Amortization
of deferred financing costs was $3,753 and $3,752 for the nine months ended
September 30, 2008 and 2007, respectively, and is included in interest expense,
net in the accompanying consolidated statements of operations.
NOTE
5. CONVERTIBLE NOTES PAYABLE
On
December 15, 2006, the Company entered into a Securities Purchase Agreement
(the
“SPA”) with AJW Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC
and New Millennium Capital Partners II, LLC (collectively, the “Investors”) for
the sale of (i) $750,000 in Notes that mature three years from the date of
issuance and (ii) warrants to purchase 6,000,000 shares of the Company’s common
stock at an exercise price of $0.03 per share.
The
Notes
bear interest at 6% per annum. However, no interest will be due and payable
for
any month in which the intraday trading price as quoted on the Over-the-Counter
Bulletin Board (“OTCBB”) is greater than $0.025 for each trading day during the
month.
The
Notes
are convertible into the Company’s common stock, at the Investors' option, at
the lower of $0.025 per share or the variable conversion price (the “Variable
Price”) of 55% of the average of the three lowest intraday trading prices for
the common stock as quoted on the OTCBB for the 20 trading days preceding,
but
not including, the conversion date. If, after receipt of a notice of conversion,
there are not sufficient authorized but unissued shares to effect such
conversion, the Variable Price will be the lower of 50% of the average of the
three lowest intraday trading prices for the common stock as quoted on the
OTCBB
for the 20 days preceding (i) the date on which the notice of conversion is
given and (ii) the date on which the Company has sufficient authorized shares
to
effect the conversion.
In
the
event that the Company’s shares of common stock are trading at or below $0.025
and subject to certain conditions, the Company has the right to prepay the
Notes
at 130% of the outstanding principal balance plus accrued interest, default
interest, if any, and any other amounts due and payable under various damages
provisions in the SPA.
In
the
event that the Company’s shares of common stock are trading at an average daily
trading price of the volume weighted average price for the five days immediately
preceding December 15, 2006 ($0.025) for each day of the month ending on the
date of prepayment, the Company may prepay a portion of the outstanding
principal balance multiplied by 102% plus the interest due on the Notes for
the
following month. In such event, the Investors may not convert the Notes in
the
month subsequent to the prepayment.
If
the
shares of common stock pursuant to a conversion are not delivered to the
Investors within two days from the date the conversion notice is given for
any
reason other than the deficiency in the number of authorized shares to effect
the conversion, the Company will pay to the Investors a penalty of $2,000 per
day. The penalty is payable in cash or may be added to the principal balance
at
the option of the Investors. Any amounts added to the principal balance will
be
convertible into shares of common stock in accordance with the terms of the
Notes.
In
addition, upon a conversion default, the Company shall pay the Investors
interest at the rate of 15% on all outstanding principal, accrued interest
and
default interest (if any) from the date of default until the date there are
sufficient authorized shares.
In
the
event the Investors have converted 19.99% of the number of shares of common
stock outstanding on December 15, 2006, the Company must either eliminate the
prohibition on conversions in excess of 19.99% or pay to the Investors 130%
of
the principal outstanding at that time plus accrued interest and default
interest, if any.
The
Company granted the Investors a security interest in substantially all of its
assets and intellectual property. The Company was also required to file a
registration statement with the Securities and Exchange Commission by April
30,
2007 to register the shares of common stock underlying the Notes and the
warrants. The Company entered into an amendment to the SPA which extended the
date to file a registration statement to May 31, 2007. If the registration
statement was not declared effective by June 30, 2008, the Company was required
to pay a penalty to the Investors of 0.002% of the outstanding principal balance
on the Notes per month or the pro rata portion thereof until the registration
statement was declared effective. Such payment was payable in cash or shares
of
common stock at the option of the Company. On April 15, 2008, the registration
statement covering a portion of the shares issuable under the SPA was declared
effective. In the event the Company breaches any representation or warranty
in
the SPA, the Company is required to pay a penalty in shares or cash, at the
election of the Investors, in an amount equal to 3% of the outstanding principal
amount of the Notes per month plus accrued and unpaid interest.
The
full
principal amount of the Notes is due upon a default under the terms of the
SPA
at the greater of (i) 130% of the outstanding principal balance plus accrued
interest and default interest, if any or (ii) the highest number of shares
of
common stock issuable on conversion treating the trading day immediately
preceding the date of default as the conversion date for purposes of determining
the lowest applicable conversion price.
In
conjunction with the Notes, the Company issued warrants to purchase 6,000,000
shares of its common stock. The warrants are exercisable until seven years
from
the date of issuance at an exercise price of $0.03 per share. The Investors
may
exercise the warrants on a cashless basis if the shares of common stock
underlying the warrants are not then registered pursuant to an effective
registration statement. In the event the Investors exercise the warrants on
a
cashless basis, the Company will not receive any proceeds. In addition, the
exercise price of the warrants will be adjusted in the event the Company issues
common stock at a price below market, with the exception of any securities
issued as of the date of the warrants or issued in connection with the Notes
issued pursuant to the SPA. In addition to all other available remedies at
law
or in equity, if the Company fails to deliver certificates for the shares of
common stock underlying the warrants within three business days after the
warrant is exercised, then the Company shall pay to the holder in cash a penalty
(the “Penalty”) equal to 2% of the number of shares of common stock to which the
holder is entitled multiplied by the average of the last reported trading prices
for the five trading days preceding the exercise date for each day that the
Company fails to deliver certificates for the shares of common stock underlying
the warrants.
The
Investors have agreed to restrict their ability to convert their Notes or
exercise their warrants and receive shares of the Company’s common stock such
that the number of shares of common stock held by them in the aggregate and
their affiliates after such conversion or exercise does not exceed 4.99% of
the
then issued and outstanding shares of the Company’s common stock.
The
Notes
include certain features that are considered embedded derivative financial
instruments, such as a variety of conversion options, a variable interest rate
feature, events of default and a variable liquidated damages clause. These
features are described below, as follows:
|
·
|
The
Notes’ conversion features are identified as embedded derivatives and
have
been bifurcated and recorded on the Company’s consolidated balance sheet
at their fair value;
|
|
·
|
Annual
interest on the Notes is equal to 6% provided that no interest
shall be
due and payable for any month in which the Company’s trading price is
greater than $0.025 for each trading day of the month, which potential
interest rate reduction is identified as an embedded derivative
but has a
nominal value and has not been included in this analysis;
|
|
·
|
The
Notes contain a non-standard anti-dilution provision which provides
for an
adjustment of the fixed conversion price in the event the Company
issues
or grants any warrants, rights or options at a price less than
the fixed
conversion price then in effect, which is identified as an embedded
derivative but has a nominal value and has not been included in
this
analysis;
|
|
·
|
The
SPA includes a penalty provision based on any failure to meet registration
requirements for shares issuable under the conversion of the note
or
exercise of the warrants, which represents an embedded derivative,
but
such derivative has not been included in this analysis at September
30,
2008 because this derivative has a nominal value and the Company’s
assessment of the likelihood of not meeting the registration requirements
is remote; and
|
|
·
|
The
SPA contains certain events of default including not having adequate
shares registered to effectuate allowable conversions; in that
event, the
Company is required to pay a conversion default payment at 15%
interest,
which is identified as an embedded derivative but has a nominal
value and
has not been included in this
analysis.
|
The
initial fair value assigned to the embedded derivatives was $1,324,777, which
consisted of the fair values of the conversion-related derivatives of $1,175,945
and the fair value of the warrants of $148,832. The Company recorded the first
$750,000 of fair value of the derivatives and warrants to debt discount (equal
to the total proceeds received as of December 31, 2006), which will be amortized
to interest expense over the term of the Notes. The remaining balance of
$574,777 was recorded as interest expense for the period ended December 31,
2006.
As
of
September 30, 2008, the carrying amount of the Notes was $448,443, net of the
unamortized debt discount of $301,557. Interest expense on the Notes totaled
$232,423 for the nine months ended September 30, 2008, which consisted of the
amortization of the debt discount of $187,497, amortization of debt issuance
costs of $3,753 and interest accrued at the face rate of $33,781 plus $7,392
of
default interest as the Company failed to make the quarterly interest payments
(see below). Interest expense on the Notes totaled $224,908 for the nine months
ended September 30, 2007, which consisted of the amortization of the debt
discount of $187,498, amortization of debt issuance costs of $3,752 and interest
accrued at the face rate of $33,658.
The
Company is not in compliance with the obligation to pay interest when due on
the
Notes. The Notes provide for a default interest rate of 15% per annum on the
outstanding due but unpaid interest amounts. As of September 30, 2008, the
Company has accrued $11,330 in default interest under the Notes. The failure
to
comply with the obligations relating to these Notes exposes the Company to
demands for immediate repayment (at a premium to outstanding principal) as
well
as default interest and liquidated damages claims by the Note holders. As the
Company is in default of its obligations under its convertible notes payable
as
of September 30, 2008 and December 31, 2007, all principal and accrued interest,
and related derivative liabilities related to the convertible notes payable
have
been classified as current liabilities in the accompanying consolidated balance
sheets at September 30, 2008 and December 31, 2007.
The
changes in the fair value of the derivative and warrant liabilities for the
nine
months ended September 30, 2008 and 2007 have been reflected on the consolidated
statements of operations.
The
market price of the Company’s common stock significantly impacts the extent to
which the Company may be required or may be permitted to convert the
unrestricted and restricted portions of the Notes into shares of the Company’s
common stock. The lower the market price of the Company’s common stock at the
respective times of conversion, the more shares the Company will need to issue
to convert the principal and interest payments then due on the Notes. If the
market price of the Company’s common stock falls below certain thresholds, the
Company will be unable to convert any such repayments of principal and interest
into equity, and the Company will be forced to make such repayments in cash.
The
Company’s operations could be materially adversely impacted if the Company is
forced to make repeated cash payments on the Notes.
NOTE
6. COMMITMENTS AND CONTINGENCIES
Operating
Lease
The
Company conducts its operations in a facility leased under the terms of a
non-cancelable operating lease at a monthly rent of $3,800 through December
31,
2008. Rent expense for the leased facility was $26,600 and $34,200 for the
nine
months ended September 30, 2008 and 2007, respectively. In October 2008, the
Company entered into a settlement and release agreement with the lessor whereby
the Company is obligated to make payments totaling $2,500 in exchange for a
a
release of all obligations due under the lease.
Consulting
Agreements
The
Company has entered into a variety of consulting agreements for services to
be
provided to the Company in the ordinary course of business. These agreements
call for expense reimbursement and various payments upon performance of
services.
Legal
Services Agreement
On
October 1, 2006, the Company entered into an agreement for legal services to
be
performed through December 31, 2007. The term will automatically be extended
for
successive three-month periods unless either party gives written notice within
90 days of the expiration of the term or extended term. The agreement requires
monthly payments of $3,000. In addition, the attorney will earn a fee equal
to
the greater $15,000 or 0.5% of the amount of any completed financing or
re-financing transaction and 1.0% of the acquisition price of any completed
merger or acquisition. During the nine months ended September 30, 2008 and
2007,
the Company incurred $27,000 in connection with the agreement which is included
in selling, general and administrative expenses in the accompanying consolidated
statements of operations. This agreement was terminated effective November
1,
2008.
Indemnities
and Guarantees
The
Company has an indemnification agreement with David Walters, its majority
beneficial shareholder (see Note 8) and chief executive officer, under which
the
Company will indemnify him to the fullest extent permitted by law in connection
with his provision of services to the Company. Specifically, the Company is
obligated to indemnify him for the following:
|
·
|
Acts,
omissions or transactions for which he is prohibited from receiving
indemnification under applicable
law.
|
|
·
|
Claims
initiated or brought voluntarily by him and not by way of defense,
except
for claims brought to establish or enforce a right to indemnification
or
in specific cases if the Board of Directors has approved the initiation
or
bringing of such claim, or as otherwise required under the Delaware
General Corporation Law, regardless of whether he ultimately is
determined
to be entitled to such indemnification, advance expense payment
or
insurance recovery, as the case may
be.
|
|
·
|
Any
proceeding instituted by him to enforce or interpret his indemnification
agreement, if a court of competent jurisdiction determines that
each of
the material assertions made by him in such proceeding was not
made in
good faith or was frivolous.
|
|
·
|
Violations
of Section 16(b) of the Exchange Act or any similar successor
statute.
|
The
Company has also made certain indemnities and guarantees, under which it may
be
required to make payments to a guaranteed or indemnified party in relation
to
certain actions or transactions. The Company indemnifies its directors,
officers, employees, consultants and agents, as permitted under the laws of
the
State of Delaware. In connection with its facility lease, the Company has
indemnified its lessor for certain claims arising from the use of the
facilities. Pursuant to the terms of the Notes, the Company is also required
to
indemnify the Investors for damages resulting from various circumstances,
including breach of representation or warranty. The duration of the guarantees
and indemnities varies, and is generally tied to the life of the agreement.
These guarantees and indemnities do not provide for any limitation of the
maximum potential future payments the Company could be obligated to make.
Historically,
the Company has not been obligated nor incurred any payments for these
obligations and, therefore, no liabilities have been recorded for these
indemnities and guarantees in the accompanying consolidated balance
sheets.
Legal
Proceedings
In
September 2008, STI filed suit against its former senior management and their
new employer in the case Solana Technologies, Inc. v. Ipkeys Technologies,
LLC,
et al. (Superior Court of California, County of San Diego). In the case, STI
alleged misappropriation of trade secrets, unfair competition, breach of loyalty
and other claims. In November 2008, the defendants filed a counter-complaint
against STI, the Company, our Chairman and Chief Executive Officer and another
individual alleging intentional and negligent misrepresentation and breach
of
contract. No amounts have been accrued as of September 30, 2008.
In
November 2008, a vendor of STI filed a request for entry of default judgment
in
the case TriGeo Network Security, Inc. v. Solana Technologies, Inc. (Superior
Court of California, County of San Diego). The plaintiff in the case alleged
breach of contract and sought payment of $35,613, plus interest and attorneys’
fees. STI does not have adequate funding to engage counsel and assert a defense
in the matter or to pay the amount of any judgment obtained in the case. The
Company has accrued $35,613 in accounts payable as of September 30,
2008.
NOTE
7. STOCKHOLDERS’ DEFICIT
Series
A Preferred Stock
The
Company is authorized to issue up to 20 million shares of preferred stock,
of
which 100,000 shares have been designated as Series A preferred stock with
a par
value of $0.001 per share. Holders of Series A preferred stock are entitled
to
receive cumulative dividends of $6.00 per share per annum, payable quarterly,
when and if declared by the board of directors, prior to and in preference
to
any declaration or payment of a dividend, other than dividends payable in shares
of common stock. Holders of Series A preferred stock are also entitled to a
liquidation preference of $100 per share plus accrued but unpaid dividends
to be
paid prior to any distributions to the holder of common stock. Each share of
Series A preferred stock is convertible into the number of common shares
determined by dividing the liquidation preference plus any accrued but unpaid
dividends divided by the conversion price. The conversion price is the lesser
of
(i) $0.025 or (ii) 75% of the average of the three lowest trading prices of
the
common stock for the 20 trading days ending one day prior to the conversion.
The
holders of Series A preferred stock have the right to convert their shares
such
that the holder would not beneficially own in excess of 4.99% of the number
of
common shares outstanding immediately after giving effect to the conversion.
Each holder of Series A preferred stock is entitled to vote on all matters
and
shall be entitled to the number of votes per share a holder of the common stock
into which the Series A preferred stock is convertible, taking into account
the
applicable ownership limitations. So long as 50% of the issued Series A
preferred shares are outstanding, the Company must first obtain the approval
of
the Series A preferred stockholders to change the capital structure of the
Company, pay dividends or sell or encumber a substantial amount of the Company’s
property.
On
May 1,
2008, the Company issued 5,000 shares of its Series A Preferred Stock as a
non-refundable retainer for the services provided by Strands under the Support
Services Agreement (see Note 8). These shares were valued at $4,191 and are
included in selling, general and administrative expenses for the nine months
ended September 30, 2008.
On
May 1,
2008, the Company issued 4,200 shares of its Series A Preferred Stock as a
non-refundable retainer for the services provided by MBA under the Placement
Agency and Advisory Services Agreement (see Note 8). These shares were valued
at
$3,520 and are included in selling, general and administrative expenses for
the
nine months ended September 30, 2008.
Common
Stock
The
Company is authorized to issue up to 1,000,000,000 shares of its $0.001 par
value common stock. Holders of common stock are entitled to one vote per share
and may participate ratably in dividends when and if declared by the board
of
directors.
Warrants
See
Note
5.
NOTE
8.
RELATED
PARTY TRANSACTIONS
On
October 1, 2006, the Company entered into an agreement with Monarch Bay Capital
Group (“MBCG”) for corporate development and chief financial officer services at
the rate of $20,000 per month plus reimbursement of certain out-of-pocket
expenses. The initial term of the agreement expires on December 31, 2008 and
continues thereafter on a month-to-month basis unless terminated by either
party. On May 1, 2007, this agreement was terminated by mutual consent. The
Company incurred $80,000 under the terms of the agreement for the nine months
ended September 30, 2007 which is included in selling, general, and
administrative expenses in the accompanying consolidated statement of
operations. No amounts were outstanding as of December 31, 2007.
On
February 1, 2007, the Company entered into an agreement with Strands for
corporate development strategy and execution services and for chief financial
officer services. Under the agreement with Strands, the Company will pay to
Strands a fee of 5% of the Company’s total revenue from any product development
relationship, licensing relationship, distribution relationship or any other
similar transaction or relationship involving the Company and a partner or
customer introduced by Strands. The fee will be due and payable in cash when
the
associated revenue from the transaction is collected by the Company. The initial
term of the agreement expires on December 31, 2008 and continues thereafter
on a
month-to-month basis unless terminated by either party. On May 1, 2007, this
agreement was terminated by mutual consent. No amounts were incurred or paid
under this agreement during the nine month periods in 2007 or 2008.
On
May 1,
2007, the Company entered into a Support Services Agreement with Strands. Under
the Support Services Agreement, Strands will provide the Company with financial
management services, facilities and administrative services, business
development services, creditor resolution services and other services as agreed
by the parties. As a retainer for the services provided by Strands under the
Support Services Agreement, the Company issued to Strands 5,000 shares of its
Series A Preferred Stock. The Company will also pay to Strands monthly cash
fees
of $22,000 for the services. In addition, Strands will receive fees equal to
(a)
6% of the revenue generated from any business development transaction with
a
customer or partner introduced to the Company by Strands and (b) 20% of the
savings to the Company from any creditor debt reduction resolved by Strands
on
behalf of the Company. The initial term of the Support Services Agreement
expired May 1, 2008. This agreement was renewed on May 1, 2008. As a retainer
for the services provided by Strands under the renewed Support Services
Agreement, the Company issued to Strands 5,000 shares of its Series A Preferred
Stock (see Note 7). The Company will pay to Strands monthly cash fees of $23,100
for the services. In addition, Strands will receive fees equal to (a) 6% of
the
revenue generated from any business development transaction with a customer
or
partner introduced to the Company by Strands and (b) 20% of the savings to
the
Company from any creditor debt reduction resolved by Strands on behalf of the
Company. The renewed Support Services Agreement expires May 1, 2009. The Company
incurred $203,500 and $110,000 under the terms of the agreement for the nine
months ended September 30, 2008 and 2007, respectively, which is included in
selling, general, and administrative expenses in the accompanying consolidated
statements of operations. The March through July 2008 fees of $111,301 were
not
paid to Strands, rather the fee was applied to outstanding interest and
principal due on the revolving note receivable from Strands (see Note 3). No
amounts were outstanding under this agreement as of September 30,
2008.
On
May 1,
2007, the Company entered into a Placement Agency and Advisory Services
Agreement with Monarch Bay Associates (“MBA”). MBA is a FINRA member firm. David
Walters, the Company’s chief executive officer and chairman of the board, is a
50% owner of MBA. Under the agreement, MBA will act as the Company’s placement
agent on an exclusive basis with respect to private placements of the Company’s
capital stock and as the Company’s exclusive advisor with respect to
acquisitions, mergers, joint ventures and similar transactions. As a retainer
for the services provided by MBA under the Placement Agency and Advisory
Services Agreement, the Company issued to MBA 5,000 shares of its Series A
Preferred Stock. In addition, MBA will receive fees equal to (a) 9% of the
gross
proceeds raised by the Company in any private placement (plus warrants to
purchase 9% of the number of shares of common stock issued or issuable by the
Company in connection with the private placement) and (b) a success fee equal
to
3% of the total consideration paid or received by the Company or stockholders
in
an acquisition, merger, joint venture or similar transaction. The initial term
of the Placement Agency and Advisory Services Agreement expired May 1, 2008.
On
May 1, 2008, the Company renewed the Placement Agency and Advisory Services
Agreement with MBA. As a retainer for the services provided by MBA under the
renewed Placement Agency and Advisory Services Agreement, the Company issued
to
MBA 4,200 shares of its Series A Preferred Stock (see Note 7). In addition,
MBA
will receive fees equal to (a) 9% of the gross proceeds raised by the Company
in
any private placement (plus warrants to purchase 9% of the number of shares
of
common stock issued or issuable by the Company in connection with the private
placement) and (b) a success fee equal to 3% of the total consideration paid
or
received by the Company or stockholders in an acquisition, merger, joint venture
or similar transaction. The renewed Placement Agency and Advisory Services
Agreement expires May 1, 2009. On August 20, 2008, the Company entered into
Amendment No. 1 of the Placement Agency and Advisory Services Agreement to
include strategic acquisition of operating companies and related transactions.
As a retainer for the services provided by MBA under the amended Placement
Agency and Advisory Services Agreement, the Company will pay MBA a monthly
retainer of $5,000 in cash. The Company incurred $10,000 and $0 under the terms
of the agreement during the nine months ended September 30, 2008 and 2007,
respectively, which is included in selling, general, and administrative expenses
in the accompanying consolidated statement of operations. No amounts were
outstanding as of September 30, 2008.
In
March,
June, and September 2008, the Company entered into a quarterly engagement
agreement with Strands to perform valuation services on the embedded derivative
features within the convertible notes. The Company incurred $10,500 for services
performed under this agreement during the nine months ended September 30, 2008.
Amounts outstanding under these agreements totaled $3,500 and $3,500 as of
September 30, 2008 and December 31, 2007, respectively.
On
December 28, 2007, the Company borrowed $29,000 from Service Advantage
International, Inc. (“SAI”) for working capital purposes. Keith Moore is a 50%
owner of Strands and MBA. Keith Moore beneficially owns 49.5% of SAI. The
Company incurred interest at the rate of 14.25% per annum. As of December 31,
2007, accrued interest payable on the loan was $34 and is included in accrued
expenses in the accompanying consolidated balance sheet. Interest expense on
this loan was $604 for the nine months ended September 30, 2008. The outstanding
balance and accrued interest was repaid in full on February 28,
2008.
NOTE
9.
EMPLOYEE
SAVINGS PLAN
During
2007, the Company established an employee savings plan pursuant to Section
401(k) of the Internal Revenue Code. The plan allows participating employees
to
deposit into tax deferred investment accounts up to 90% of their salary, subject
to annual limits. The Company, at its option, may make contributions under
the
plan. The Company did not make any contributions to the plan during 2007 or
2008.
NOTE
10. SUBSEQUENT EVENTS
In
October 2008, STI entered into a settlement and release agreement with a lessor
whereby STI is obligated to make payments totaling $2,500 in exchange for a
release of all obligations due under the lease.
In
November 2008, a vendor of STI filed a request for entry of default judgment
in
the case TriGeo Network Security, Inc. v. Solana Technologies, Inc. (Superior
Court of California, County of San Diego). The plaintiff in the case alleged
breach of contract and sought payment of $35,613, plus interest and attorneys’
fees. STI does not have adequate funding to engage counsel and assert a defense
in the matter or to pay the amount of any judgment obtained in the case. The
Company has accrued $35,613 in accounts payable as of September 30,
2008.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion should be read in conjunction with our consolidated
financial statements and related notes for the year ended December 31, 2007
and
the other financial information included elsewhere in this report and in our
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on April 2, 2008.
Information
Regarding Forward-Looking Statements
Our
Management’s Discussion and Analysis and Plan of Operation contains not only
statements that are historical facts, but also statements that are
forward-looking.
The
forward-looking statements generally include our management's plans and
objectives for future operations, including plans, objectives and expectations
relating to our future economic performance, business prospects, revenues,
working capital, liquidity, ability to obtain financing, generation of income
and actions of secured parties not to foreclose on our assets. The
forward-looking statements may also relate to our current beliefs regarding
revenues we might earn if we are successful in implementing our business
strategies. The forward-looking statements generally can be identified by the
use of the words "believe," "intend," "plan," "expect," "forecast," "project,"
"may," "should," "could," "seek," "pro forma," "estimate," "continue,"
"anticipate" and similar words. The forward-looking statements and associated
risks may include, relate to, or be qualified by other important factors,
including, without limitation:
-
anticipated trends in our financial condition and results of operations
(including expected changes in our gross margin and selling, general and
administrative expenses);
-
our
ability to finance our working capital and other cash requirements;
-
our
business strategy for organic and acquired growth; and
-
our
ability to distinguish ourselves from our current and future
competitors.
Although
the forward-looking statements in this Form 10-Q reflect the good faith judgment
of our management, such statements can only be based on facts and factors
currently known by them. Consequently, and because forward-looking statements
are inherently subject to risks and uncertainties, the actual results and
outcomes may differ materially from the results and outcomes discussed in the
forward-looking statements. You are urged to carefully review and consider
the
various disclosures made by us in this report and in our other reports as we
attempt to advise interested parties of the risks and factors that may affect
our business, financial condition, and results of operations and
prospects
.
Overview
We
provide a full range of services in the areas of network design and engineering,
including hardware and software, security, project management and maintenance
and support services for advanced communications networks. We provide these
services to governmental and public safety agencies and medium to large
commercial businesses, in the United States, in the communications, energy,
financial services, education, healthcare, manufacturing, retail and
transportation sectors.
Our
objective is to grow our core business through a combination of internal and
acquired growth. The key elements to our strategy are:
|
·
|
Further
penetrate markets in which we have existing customers. We have
developed
relationships with customers in selected markets, such as municipal
and
public safety. We are using our relationships with these customers
and our
knowledge of their needs to attract other potential customers in
these
markets. We intend to use this same approach to enter new markets.
|
|
·
|
Exploit
opportunities to sell additional products and services to our existing
customers. We plan to focus our sales efforts toward our existing
customers to expand the scope of the solutions we provide to them.
|
|
·
|
Enhance
our sales and customer support infrastructure. We intend to continue
making investments in our corporate infrastructure, including sales,
marketing, implementation, and customer
support.
|
|
·
|
Acquire
complementary businesses and technologies. We intend to build our
revenue
base and solutions by selectively acquiring complementary businesses
and
technologies. We target companies with the following characteristics:
(1)
an established market presence in their respective fields, (2)
a loyal
customer base that can be used to sell other products and services,
and
(3) products and services that provide recurring, predictable service
and
maintenance revenue streams.
|
While
these are the key elements of our current strategy, there can be no guarantees
that our strategy will not change, or that we will succeed in achieving these
goals individually or collectively.
As
a
result of the recent loss of senior management and key employees at our sole
operating subsidiary Solana Technologies, Inc. (discussed in more detail below),
we are in the process of reevaluating our growth strategy with respect to both
our existing operations and the potential for new lines of
business.
On
December 15, 2006, we acquired Solana Technologies, Inc. (“STI”). In the
acquisition, we issued 60,000 shares of our Series A Preferred Stock to the
shareholders of STI in exchange for all of STI’s common stock and experienced a
change in voting control, senior management and the Board of Directors. As
a
result, the acquisition was accounted for as a reverse merger accompanied by
a
recapitalization in accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 141,
Accounting
for Business Combinations.
STI was
deemed to be the accounting acquirer and surviving company for accounting
purposes. The accompanying consolidated financial statements are the historical
financial statements of STI and reflect the results of operations of STI from
September 18, 2006, the date of inception of STI through September 30, 2008.
STI
provides network design, engineering, project management and maintenance and
support services for advanced communications networks. The key employees of
STI
had operated a similar business, either on a standalone basis or as part of
a
larger company, since 1986, and have provided IT products and engineering
services to over 1,200 companies during that time span. These employees joined
STI in September of 2006 upon termination of their employment with their
previous employer who was unable to meet payroll obligations or provide adequate
working capital for their operation. Although STI had no customer contractual
relationships at its inception, its key employees contacted prior client
contacts and were able to generate immediate new contracts and revenue.
In
June
and July 2008, the senior management and several employees of STI resigned.
STI
has not been able to replace the management and staff losses and has experienced
the loss of substantially all of its revenue in since July 2008.
As
a
result of STI’s reduced level of operations, we expect that our revenue in the
fourth quarter of 2008 will be dependent on our ability to stabilize the
operations of STI, to supplement STI’s management and staff and to maintain its
customer relationships. However, to date, our efforts have not been successful
and there can be no assurance that our efforts ultimately will be successful.
The
Company's consolidated financial statements are prepared using the accrual
method of accounting in accordance with accounting principles generally accepted
in the United States of America, and have been prepared on a going concern
basis, which contemplates the realization of assets and the settlement of
liabilities in the normal course of business. At September 30, 2008, the Company
has an accumulated deficit of $2,322,211 and
the
Company’s current liabilities exceeded its current assets by $2,079,485. In
addition, at September 30, 2008, the Company was in default on its convertible
notes payable.
Although
no note
holder has sent the Company a notice of acceleration of amounts owed under
the
secured convertible notes, there can be no assurance that the note holders
will
not take such action in the future. In the event of any acceleration of
these obligations, or i
f
the
Company is unable to raise enough money to cover the amounts payable, it may
be
forced to restructure, file for bankruptcy, sell assets or cease operations.
As
a
result of the recent loss of senior management and key employees and
substantially all of the revenue of STI, the Company does not have sufficient
capital to continue its operations beyond the end of 2008. We will require
additional capital prior to year-end to continue our current business at STI
or
to expand our operations beyond those of STI.
In
view
of the matters described above, recoverability of a major portion of the
recorded asset amounts shown in the accompanying consolidated balance sheets
is
dependent upon continued operations of the Company, which in turn is dependent
upon the Company's ability to raise additional capital, obtain financing and
to
succeed in its future operations. The above factors, among others, raise
substantial doubt about the Company’s ability to continue as a going concern.
The consolidated financial statements do not include any adjustments relating
to
the recoverability and classification of recorded asset amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
December
2006 Secured Convertible Note Financing
In
December 2006, we entered into a securities purchase agreement with four
accredited investors, under which we sold for $750,000 in proceeds secured
convertible notes having an aggregate principal amount of $750,000, a 6% annual
interest rate (payable quarterly), and a term of three years. We also sold
warrants to purchase up to an aggregate of 6,000,000 shares of our Common Stock
at $0.03 per share.
The
four
accredited investors, AJW Partners, LLC, AJW Qualified Partners, LLC, AJW
Offshore, Ltd. and New Millennium Capital Partners II, LLC subscribed for and
purchased 6.7%, 12.1%, 80.0% and 1.2%, respectively, of the total offering.
In
connection with the December 2006 securities purchase agreement, the Company
agreed to exchange the principal amount of outstanding secured convertible
notes
issued by the Company to the investors in a prior financing and other securities
of the Company for 20,000 shares of our Series A Preferred Stock. In addition,
the investors agreed to waive all claims, defaults, interest, penalties, fees,
charges or other obligations accrued or owed by the Company to the investors
in
connection with the prior financing.
The
secured convertible notes are convertible into our Common Stock, at the selling
stockholders' option, at the lower of (i) $0.025 or (ii) 55% of the average
of
the three lowest intraday trading prices for the Common Stock on a principal
market for the 20 trading days before but not including the conversion date.
Accordingly, there is in fact no limit on the number of shares into which the
notes may be converted. The applicable conversion price for the secured
convertible notes is $0.01375 as of September 30, 2008. Based on this conversion
price, the $750,000 secured convertible notes, excluding interest, were
convertible into 54,545,455 shares of our Common Stock. AJW Partners, LLC,
AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and New Millennium Capital Partners
II, LLC have contractually agreed to restrict their ability to convert or
exercise their warrants and receive shares of our Common Stock such that the
number of shares of Common Stock held by them and their affiliates after such
conversion or exercise does not exceed 4.99% of the then issued and outstanding
shares of Common Stock.
There
are
various risks of default associated with the secured convertible notes,
including the fact that the secured convertible notes become immediately due
and
payable upon failure to pay the principal and interest of the secured
convertible notes, the failure to convert the secured convertible notes to
Common Stock, the failure to obtain the effectiveness of the registration
statement covering the resale of the shares of the common stock issuable upon
conversion of the secured convertible notes and exercise of the warrants on
or
before June 30, 2008, an assignment for the benefit of the Company’s or its
subsidiaries’ creditors, an application for or consent to the appointment of a
receiver for the Company or its subsidiaries, any judgment against the Company
in excess of $50,000, and/or any bankruptcy, insolvency, reorganization or
liquidation proceedings instituted by or against the Company or its
subsidiaries. If an event of default on the secured convertible notes has
occurred and is continuing, the holders may demand all amounts under the notes
due and payable. In that case, we would be required to pay the holders of the
secured convertible notes an amount equal to the greater of (x) 130% times
the
sum of the outstanding amount of the secured convertible notes per month plus
accrued and unpaid interest on the secured convertible notes plus any additional
amounts owed to the holders of the secured convertible notes or (y) the value
of
the highest number of shares of Common Stock issuable upon conversion of or
otherwise pursuant to the amount calculated under clause (x) determined based
upon the highest closing price of the Common Stock during the period beginning
on the date of default and ending on the date the payment described herein.
Additionally, we made certain representations and warranties and agreed to
certain covenants that are customary for securities purchase agreements. In
the
event that we breach those representations, warranties or covenants, we will
be
subject to liquidated damages in the amount of 3% of the outstanding amount
of
the secured convertible notes per month plus accrued and unpaid interest on
the
secured convertible notes for breaches by us of certain representations,
warranties and certain covenants. If we are unable to pay these liquidated
damages we may be forced to abandon or curtail our business
operations.
We
are
currently not in compliance with our obligation to pay interest when due on
our
secured convertible notes. As of September 30, 2008, we had failed to pay
$80,753 in interest on the notes plus $11,330 in default interest. Our failure
to comply with our obligations relating to these securities exposes us to
demands for immediate repayment (at a premium to outstanding principal) as
well
as default interest and liquidated damages claims by the security holders.
In
the
December 2006 securities purchase agreement, we agreed that, without the consent
of the selling stockholders, we would not obtain additional equity financing
(including debt financing with an equity component) that involves (i) the
issuance of our Common Stock at a discount to the market price of the Common
Stock on the date of issuance (taking into account the value of any warrants
or
options to acquire our Common Stock issued in connection therewith) or (ii)
the
issuance of convertible securities that are convertible into an indeterminate
number of shares of Common Stock or (iii) the issuance of warrants during a
“lock-up” period that lasts until 180 days following the date that the
registration statement is declared effective by the Securities and Exchange
Commission (plus any days in which sales cannot be made thereunder). In
addition, for an additional two-year period following expiration of the
“lock-up” period, we granted the selling stockholders a right to purchase any
securities we propose to issue in an equity financing (including debt with
an
equity component). The foregoing limitations do not apply to securities issued
in connection with certain underwritten public offerings, merger and acquisition
activities or compensatory arrangements.
Stock
Purchase Warrants
The
warrants expire seven years from their date of issuance. The warrants include
anti-dilution rights, whereby the exercise price of the warrants shall be
adjusted in the event that the Company issues or sells any shares of the
Company's Common Stock for no consideration or consideration less than the
average of the last reported sale prices for the shares of the Company's Common
Stock on the OTC Bulletin Board for the five trading days immediately preceding
such date of issuance or sale. The exercise price of the warrants are also
proportionately increased or decreased in the event of a reverse stock split
or
forward stock split, respectively. The exercise price is also adjusted pursuant
to the warrants in the event the Company effects a consolidation, merger or
sale
of substantially all of its assets and/or if the Company declares or makes
any
distribution of its assets (including cash) to holders of its common stock
as a
partial liquidating dividend, as provided in the warrants.
The
warrants also contain a cashless exercise, whereby if a registration statement
covering the warrants is not effective, the warrant holders may convert the
warrants into shares of the Company's restricted Common Stock. In the event
of a
cashless exercise under the warrants, in lieu of paying the exercise price
in
cash, the selling stockholders can surrender the warrant for the number of
shares of Common Stock determined by multiplying the number of warrant shares
to
which it would otherwise be entitled by a fraction, the numerator of which
is
the difference between (i) the average of the last reported sale prices for
the
Company's Common Stock on the OTC Bulletin Board for the five trading days
preceding such date of exercise and (ii) the exercise price, and the denominator
of which is the average of the last reported sale prices for the Company's
Common Stock on the OTC Bulletin Board for the five trading days preceding
such
date of exercise . For example, if the selling stockholder is exercising 100,000
warrants with a per warrant exercise price of $0.75 per share through a cashless
exercise when the average of the last reported sale prices for the Company's
Common Stock on the OTC Bulletin Board for the five trading days preceding
such
date of exercise is $2.00 per share, then upon such cashless exercise the
warrant holder will receive 62,500 shares of the Company's Common
Stock.
Off-Balance
Sheet Arrangements
The
Company does not have any off-balance sheet arrangements.
Critical
Accounting Policies and Estimates
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America 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 consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant estimates include
the collectibility of receivables, the valuation of common and preferred stock,
the valuation of derivative and warrant liabilities, and the valuation allowance
of the deferred tax asset. Actual results could differ from those estimates.
Accounts
Receivable
Accounts
receivable consist of amounts billed to customers upon performance of services
or delivery of goods and expenses incurred by the Company but not yet billed
to
customers for consulting services. The Company extends credit to its customers
based upon its assessment of their credit worthiness and generally does not
require collateral. The Company performs ongoing credit evaluations of customers
and adjusts credit limits based upon payment history and the customers' current
creditworthiness, as determined by its review of their current credit
information. The Company continuously monitors collections and payments from
its
customers and maintains a provision for estimated credit losses based upon
its
historical experience and any customer-specific collection issues that it has
identified. The allowance for doubtful accounts totaled $15,942 and $9,864
as of
September 30, 2008 and December 31, 2007, respectively.
Valuation
of Derivative Financial Instruments
The
Company’s derivative financial instruments consist of embedded derivatives
related to the Callable Secured Convertible Term Notes (the “Notes”) entered
into on December 15, 2006. These embedded derivatives include certain conversion
features, variable interest features, call options and default provisions.
The
accounting treatment of derivative financial instruments requires that the
Company record the derivatives and related warrants at their fair values as
of
the inception date of the agreement and at fair value as of each subsequent
balance sheet date. In addition, under the provisions of EITF Issue No. 00-19,
Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in,
a
Company's Own Stock
,
as a
result of entering into the Notes, the Company is required to classify all
other
non-employee stock options and warrants as derivative liabilities and mark
them
to market at each reporting date. As of September 30, 2008, there were no
non-employee options and warrants other than those issued in connection with
the
Notes.
Any
change in fair value will be recorded as non-operating, non-cash income or
expense at each reporting date. If the fair value of the derivatives is higher
at the subsequent balance sheet date, the Company will record a non-operating,
non-cash charge. If the fair value of the derivatives is lower at the subsequent
balance sheet date, the Company will record non-operating, non-cash income.
The
embedded derivatives were valued using the Black-Scholes Option Pricing Model
with the following assumptions for 2008 and 2007, respectively: dividend yield
of 0% and 0%; annual volatility of 205% and 205%; and risk free interest rates
ranging from 1.78% to 2.98% and 5.0% as well as probability analysis related
to
trading volume restrictions and other factors.
Revenue
Recognition
The
Company’s revenues consist primarily of network software/hardware products and
professional consulting and training services. For these sales, the Company
utilizes written contracts or purchase orders as the means to establish the
terms and conditions upon which its products and services are sold to its end
customers.
For
sales
of network hardware and software products, revenue is recognized in accordance
with Staff Accounting Bulletin ("SAB") 101,
Revenue
Recognition in Financial Statements,
as
revised by SAB 104. Accordingly, revenue is recognized at the date of shipment
to customers when a formal arrangement exists, the price is fixed or
determinable, the delivery is completed, no other significant obligations by
the
Company exist and collectibility of the receivable is reasonably assured.
Payments received before all of the relevant criteria for revenue recognition
are satisfied are recorded as deferred revenue. Revenues and costs of revenues
from consulting or training contracts are recognized during the period in which
the service is performed.
In
accordance with EITF Issue No. 06-3,
How
Taxes Collected from Customers and Remitted to Governmental Authorities Should
Be Presented in the Income Statement (That Is, Gross Versus Net
Presentation)
,
revenues are reported net of sales taxes collected.
Issuance
of Shares for Non-Cash Consideration
The
Company accounts for the issuance of equity instruments to acquire goods and/or
services based on the fair value of the goods and services or the fair value
of
the equity instrument at the time of issuance, whichever is more reliably
determinable.
The
Company's accounting policy for equity instruments issued to consultants and
vendors in exchange for goods and services follows the provisions of EITF Issue
No. 96-18,
Accounting
for Equity Instruments That are Issued to Other Than Employees for Acquiring,
or
in Conjunction with Selling, Goods or Services
and EITF
Issue No. 00-18,
Accounting
Recognition for Certain Transactions Involving Equity Instruments Granted to
Other Than Employees.
The
measurement date for the fair value of the equity instruments issued is
determined at the earlier of (i) the date at which a commitment for performance
by the consultant or vendor is reached or (ii) the date at which the consultant
or vendor's performance is complete. In the case of equity instruments issued
to
consultants, the fair value of the equity instrument is recognized over the
term
of the consulting agreement.
Stock-Based
Compensation
At
September 30, 2008, the Company has one stock-based compensation
plan.
Upon
inception, the Company adopted SFAS No. 123 (revised 2004),
Share-Based
Payment
,
("SFAS
123(R)") which establishes standards for the accounting of transactions in
which
an entity exchanges its equity instruments for goods or services, primarily
focusing on accounting for transactions where an entity obtains employee
services in share-based payment transactions. SFAS 123(R) requires a public
entity to measure the cost of employee services received in exchange for an
award of equity instruments, including stock options, based on the grant-date
fair value of the award and to recognize it as compensation expense over the
period the employee is required to provide service in exchange for the award,
usually the vesting period. In March 2005, the SEC issued Staff Accounting
Bulletin No. 107 ("SAB 107") relating to SFAS 123(R). The Company has
applied the provisions of SAB 107 in its adoption of SFAS 123(R).
Stock-based
compensation expense recognized during the period is based on the value of
the
portion of share-based payment awards that is ultimately expected to vest during
the period. Stock-based compensation expense recognized in the Company's
consolidated statement of operations for the nine months ended September 30,
2008 included compensation expense for the share-based payment awards granted
based on the grant date fair value estimated in accordance with the provisions
of SFAS 123(R). As stock-based compensation expense recognized in the
consolidated statement of operations for the nine months ended September 30,
2008 is based on awards ultimately expected to vest, it has been reduced for
estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at
the
time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. The estimated average forfeiture rate
for the nine months ended September 30, 2008 of 0% was based on estimated future
employee forfeitures. Stock-based compensation expense for the nine months
ended
September 30, 2008 and 2007 totaled $14,576 and $36,439,
respectively.
SFAS
123(R) requires the cash flows resulting from the tax benefits resulting from
tax deductions in excess of the compensation cost recognized for those options
to be classified as financing cash flows. Due to the Company's loss position,
there were no such tax benefits during the nine months ended September 30,
2008.
RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 2007
Net
Revenues
Net
revenues totaled $26,587 for the three months ended September 30, 2008 compared
to $743,454 for the comparable period in the prior year. The $716,867 or 96%
decrease can be attributed to the resignation of the senior management and
several employees of STI in June and July 2008. STI has not been able to replace
the management and staff losses and has experienced the loss of substantially
all of its revenue in since July. As a result of STI’s reduced level of
operations, we expect that our revenue in the fourth quarter of 2008 will be
dependent on our ability to stabilize the operations of STI, to supplement
STI’s
management and staff and to maintain its customer relationships. However, to
date, our efforts have not been successful and there can be no assurance that
our efforts ultimately will be successful.
Cost
of Revenues and Gross Profit
Cost
of
revenues totaled $21,438 for the three months ended September 30, 2008 compared
to $530,369 in the same period in the prior year. The decrease in cost of
revenues can be primarily attributed to the resignation of the senior management
and several employees of STI in June and July 2008. Cost of revenues were 81%
of
net revenues in the current period versus 71% in the same period in the prior
year. Gross profit margins were 19% of net revenues in the current period
compared to 29% in the same period in the prior year. The deterioration of
margin compared to the margins realized during the 2007 period can be attributed
to the competitive market place which has put additional pressure on the pricing
of the Company’s products and services.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses (“SG&A”) totaled $187,812 for the three
months ended September 30, 2008 compared to $294,724 for the same period in
the
prior year. Included within SG&A is management fees to a related party,
consulting fees, legal fees, audit fees, and other expenses incurred in the
normal course of operations. The decrease from the comparable period in the
prior year can be attributed to the resignation of the senior management team
and several employees of STI in June and July 2008. We expect our selling,
general and administrative expenses to continue to decrease in the fourth
quarter of 2008, as the Company reduces its cost structure in response to its
reduced level of operations.
Change
in fair value of derivative and warrant liabilities
The
decrease in the fair value of the derivative and warrant liabilities for the
three months ended September 30, 2008 totaled $32,454 due to the valuation
performed at the end of the period. During the same period in the prior year,
the fair value of the derivative and warrant liabilities decreased by
$3,551.
Interest
Expense, net
Interest
expense, net totaled $78,670 for the three months ended September 30, 2008,
which consisted of the amortization of the debt discount of $62,499,
amortization of debt issuance costs of $1,251 and interest accrued at the face
rate of $11,342 plus $2,888 of default interest as the Company failed to make
the quarterly interest payments (see below). These amounts were partially offset
by $849 of interest income from a note receivable from a related party. Interest
expense, net totaled $75,214 for the three months ended September 30, 2007,
which consisted of the amortization of the debt discount of $62,499,
amortization of debt issuance costs of $1,251 and interest accrued at the face
rate of $11,342. These amounts were partially offset by $2,823 of interest
income from a note receivable from a related party.
Net
Loss
As
a
result of the above, net loss was $228,879 and $153,302 for the three months
ended September 30, 2008 and 2007, respectively. The net losses are mainly
a
result of selling, general and administrative expenses exceeding gross profit
as
well as the interest expense incurred on the convertible notes.
RESULTS
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THE
NINE
MONTHS ENDED SEPTEMBER 30, 2007
Net
Revenues
Net
revenues totaled $1,961,311 for the nine months ended September 30, 2008
compared to $1,774,733 for the comparable period in the prior year. The $186,578
or 11% increase can be attributed to a $75,358 increase in hardware and software
sales as well as a $266,649 increase in maintenance and support services,
partially offset by a $172,773 decrease in project management. Hardware and
software sales accounted for 48% of total revenues in the current period versus
49% in the same period in the prior year. Project management accounted for
17%
of revenues during the nine months ended September 30, 2008 compared to 28%
in
the same period in the prior year. Maintenance and support services accounted
for 35% of revenues in the current period versus only 23% in the same period
in
the prior year. Although the Company experienced growth in first nine months
of
2008 versus 2007, the Company experienced the loss of substantially all of
its
revenue in the third quarter of 2008 and expects this loss of revenue to
continue at least through the fourth quarter of 2008. In June and July 2008,
the
senior management and several employees of STI resigned. STI has not been able
to replace the management and staff losses. As a result of STI’s reduced level
of operations, we expect that our revenue in the fourth quarter of 2008 will
be
dependent on our ability to stabilize the operations of STI, to supplement
STI’s
management and staff and to maintain its customer relationships. However, to
date, our efforts have not been successful and there can be no assurance that
our efforts ultimately will be successful.
Cost
of Revenues and Gross Profit
Cost
of
revenues totaled $1,631,363 for the nine months ended September 30, 2008
compared to $1,297,971 in the same period in the prior year. Cost of revenues
were 83% of net revenues in the current period versus 73% in the same period
in
the prior year. Gross profit margins were 17% of net revenues in the current
period compared to 27% in the same period in the prior year. The deterioration
of margin compared to the margins realized during the 2007 period can be
attributed to the competitive market place which has put additional pressure
on
the pricing of the Company’s products and services. Additionally, utilization
rates of our professional staff were lower than previous periods which had
an
adverse impact on our professional services margins.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses (“SG&A”) totaled $726,696 for the nine
months ended September 30, 2008 compared to $917,740 for the same period in
the
prior year. Included within SG&A is management fees to a related party,
consulting fees, legal fees, audit fees, and other expenses incurred in the
normal course of operations. The decrease from the comparable period in the
prior year can be attributed to the resignation of the senior management team
and several employees of STI in June and July 2008. We expect our selling,
general and administrative expenses to continue to decrease in the fourth
quarter of 2008, as the Company reduces its cost structure in response to its
reduced level of operations.
Change
in fair value of derivative and warrant liabilities
The
decrease in the fair value of the derivative and warrant liabilities for the
nine months ended September 30, 2008 totaled $66,240 due to the valuation
performed at the end of the period. During the same period in the prior year,
the fair value of the derivative and warrant liabilities increased by
$11,235.
Interest
Expense, net
Interest
expense, net totaled $233,202 for the nine months ended September 30, 2008,
which consisted of the amortization of the debt discount of $187,497,
amortization of debt issuance costs of $3,753 and interest accrued at the face
rate of $33,781 plus $7,392 of default interest as the Company failed to make
the quarterly interest payments (see below). These amounts were partially offset
by $5,283 of interest income from a note receivable from a related party.
Interest expense, net totaled $220,575 for the nine months ended September
30,
2007, which consisted of the amortization of the debt discount of $187,497,
amortization of debt issuance costs of $3,753 and interest accrued at the face
rate of $33,658. These amounts were partially offset by $7,911 of interest
income from a note receivable from a related party.
Net
Loss
As
a
result of the above, net loss was $564,510 and $673,588 for the nine months
ended September 30, 2008 and 2007, respectively. The net losses are mainly
a
result of selling, general and administrative expenses exceeding gross profit
as
well as the interest expense incurred on the convertible notes.
LIQUIDITY
AND CAPITAL RESOURCES
We
have
incurred operating losses since our inception and have limited financial
resources until such time that we are able to generate positive cash flow from
operations. We had cash of $76,830 as of September 30, 2008.
Net
cash
provided by operations totaled $65,182 for the nine months ended September
30,
2008. This was primarily due to a net loss of $564,510, offset by the non-cash
expenses of amortization of debt discount of $187,497, amortization of deferred
financing costs of $3,753, management fee applied against note receivable -
related party of $111,301, and stock compensation charges. An additional
contributing factor was a decrease in accounts receivable.
Net
cash
provided by operations totaled $47,268 for the nine months ended September
30,
2007. This was primarily due to a net loss of $673,588, offset by the non-cash
expenses of amortization of debt discount of $187,498, amortization of deferred
financing costs $3,752 and a $880,694 decrease in accounts
receivable.
Net
cash
used in investing activities totaled $9,996 for the nine months ended September
30, 2008 and related to purchase of fixed assets. Net cash used in investing
activities totaled $92,000 for the nine months ended September 30, 2007 and
related to the issuance of a note receivable to a related party. The Company
identified the opportunity to invest in the note which bears interest at the
greater of 8% or $150 per annum and matures on December 31, 2008. In the event
of default, the interest rate may increase by 3% at the option of the Company.
We believe that the terms of the note receivable are as or more favorable to
us
than equivalent investments.
We
have
historically lost money. As of September 30, 2008, we had an accumulated deficit
of $2,322,211 and have incurred losses since inception. Our operating cash
losses (net loss adjusted for non-cash expenses) for the nine months ended
September 30, 2008 were approximately $374,000 or an average of $41,500 per
month.
To
achieve cash-flow breakeven or profitability we will need to generate
significant additional revenues to offset our cost of revenues and our selling,
general and administrative expenses. Our ability to achieve cash-flow breakeven
or profitability has been adversely affected by the recent staff losses at
STI.
In June and July 2008, the senior management and several employees of STI
resigned. STI has not been able to replace the management and staff losses
and
has experienced the loss of a substantially all of its revenue since July 2008.
As a result of STI’s reduced level of operations, we expect that our revenue in
the fourth quarter of 2008 will be dependent on our ability to stabilize the
operations of STI, to supplement STI’s management and staff and to maintain its
customer relationships. However, to date, our efforts have not been successful
and there can be no assurance that our efforts ultimately will be successful.
As
a result of the recent loss of senior management and key employees at STI,
we
are in the process of reevaluating our growth strategy in respect of both our
existing operations and the potential for new lines of business.
We
depend
on relationships with entities controlled by David Walters for outsourced
financial management, administrative, investment banking and other services.
Accordingly, the success of the Company heavily depends upon our relationships
with, and the performance of, these entities. Any failure of the Company to
pay
for such outsourced services could have a material adverse effect on our
business and operations and cause us to expend significant resources in finding
replacement providers. The Company does not have sufficient liquidity to pay
for
such services beyond the end of 2008..
As
of
September 30, 2008, we had incurred approximately $750,000 in debt obligations.
We are not in compliance with our obligation to pay interest when due on our
secured convertible notes. As of September 30, 2008, we had failed to pay
$80,753 in interest on the notes plus $11,330 in default interest. Our failure
to comply with our obligations relating to these securities exposes us to
demands for immediate repayment (at a premium to outstanding principal) as
well
as default interest by the security holders.
We
do not
currently have enough capital to pay current interest on or to repay any of
our
debt obligations. In addition, we require additional capital to continue our
business operations beyond the end of 2008. We plan to explore alternatives
to
restructure or otherwise satisfy our obligations to our note holders and to
obtain additional financing from existing investors as well as new third
parties. However, there can be no assurance that capital from any sources will
be available, or if such financing is available, that it will be on terms that
management deems sufficiently favorable.
If
we are
unsuccessful in obtaining additional capital upon terms that management deems
sufficiently favorable, or at all, we may be forced to default on our debt
obligations and to curtail or abandon our business plan, file for bankruptcy,
sell assets or cease operations. A default could result in the liquidation
of
all or a portion of our assets, most likely at less than their market value.
If
we are forced to take any of these steps, any investment in our Common Stock
may
be worthless.
ITEM
4T:
CONTROLS
AND PROCEDURES
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports
made
pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange
Act”).
is
recorded, processed, summarized and reported within the timelines specified
in
the Securities and Exchange Commission’s rules and forms, and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Principal Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and operated, can
only
provide reasonable assurance of achieving the desired control objectives, and
in
reaching a reasonable level of assurance, management necessarily was required
to
apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures.
As
required by Rule 13a-15(b) under the Exchange Act, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Principal Financial Officer, 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 the
foregoing, our Chief Executive Officer and Principal Financial Officer concluded
that our disclosure controls and procedures were
effective
as of the end of period covered by this report in timely alerting them to
material information relating to STI Group, Inc. required to be disclosed in
our
periodic reports with the Securities and Exchange Commission.
There
were no changes in our internal controls over financial reporting (as such
term
is defined in Rule 13a-15(f) under the Exchange Act) that occurred during
the nine months ended September 30, 2008, that have materially affected, or
are reasonably likely to materially affect, our internal controls over financial
reporting,
O
ur
Chief
Executive Officer and Principal Financial Officer concluded that our disclosure
controls and procedures were
effective
as of the end of period covered by this report in timely alerting them to
material information relating to STI Group, Inc. required to be disclosed in
our
periodic reports with the Securities and Exchange Commission.
PART
II - OTHER INFORMATION
ITEM
1: LEGAL PROCEEDINGS
In
September 2008, STI filed suit against its former senior management and their
new employer in the case Solana Technologies, Inc. v. Ipkeys Technologies,
LLC,
et al. (Superior Court of California, County of San Diego). In the case, STI
alleged misappropriation of trade secrets, unfair competition, breach of loyalty
and other claims. In November 2008, the defendants filed a counter-complaint
against STI, the Company, our Chairman and Chief Executive Officer and another
individual alleging intentional and negligent misrepresentation and breach
of
contract. No amounts have been accrued as of September 30, 2008.
In
November 2008, a vendor of STI filed a request for entry of default judgment
in
the case TriGeo Network Security, Inc. v. Solana Technologies, Inc. (Superior
Court of California, County of San Diego). The plaintiff in the case alleged
breach of contract and sought payment of $35,613, plus interest and attorneys’
fees. STI does not have adequate funding to engage counsel and assert a defense
in the matter or to pay the amount of any judgment obtained in the case. The
Company has accrued $35,613 in accounts payable as of September 30,
2008.
ITEM
2: RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM
3: DEFAULTS UPON SENIOR SECURITIES
We
are
not in compliance with the obligation to pay interest when due on our secured
convertible notes. As of September 30, 2008, we had failed to pay $80,753 in
interest on the notes plus $11,330 in default interest. Our failure to comply
with our obligations relating to these securities exposes us to demands for
immediate repayment (at a premium to outstanding principal) as well as default
interest by the security holders. We do not currently have the cash on hand
to
repay this amount if the holders elect to exercise their repayment or other
remedies, or to pay interest on our secured convertible notes. If we are unable
to raise enough money to cover this amount payable under the notes we may be
forced to restructure, file for bankruptcy, sell assets or cease
operations.
ITEM
4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM
5: OTHER INFORMATION
None.
ITEM
6: EXHIBITS
See
the
attached Index to Exhibits.
SIGNATURE
In
accordance with the requirements of the Exchange Act, the registrant caused
this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
STI
GROUP, INC.
|
|
|
Date:
November 19, 2008
|
By:
/s/
David
Walters
David
Walters
Chief
Executive Officer
(Principal
Executive Officer)
|
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
David Walters
|
|
Chief
Executive Officer (
Principal
Financial and Accouting Officer)
|
|
November
19, 2008
|
David
Walters
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INDEX
TO EXHIBITS
Exhibit
No.
|
Identification
of Exhibit
|
|
|
31.1
|
Certification
of Principal Executive Officer and Principal Financial Officer
pursuant to
Rules 13a-14 and 15d-14 promulgated under the Securities Exchange
Act of
1934
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant
to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
STI (CE) (USOTC:STUO)
Gráfico Histórico do Ativo
De Fev 2025 até Mar 2025
STI (CE) (USOTC:STUO)
Gráfico Histórico do Ativo
De Mar 2024 até Mar 2025