Item 1 below.
Note
9- Recent Accounting Pronouncements
Uncertainty
in Income Taxes
In
July
2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes" ("FIN 48"). FIN 48 requires the use of a two-step approach for
recognizing and measuring tax benefits taken or expected to be taken in a tax
return and disclosures regarding uncertainties in income tax positions. The
Company is required to adopt FIN 48 effective January 1, 2007. The cumulative
effect of initially adopting FIN 48 will be recorded as an adjustment to opening
retained earnings in the year of adoption and will be presented separately.
Only
tax positions that meet the more likely than not recognition threshold at the
effective date may be recognized upon adoption of FIN 48. The Company is
currently evaluating the impact this new standard; however, the standard is
not
expected to have a significant impact on the financial position, results of
operation or cash flows.
Fair
Value Measurements
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 does not require new
fair
value measurements but rather defines fair value, establishes a framework for
measuring fair value and expands disclosure of fair value measurements. SFAS
157
is effective for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. The Company is currently assessing the impact
of SFAS 157 on the consolidated financial position and results of
operations.
Quantifying
and Evaluating the Materiality of Unrecorded Misstatements
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108 ("SAB 108").
SAB 108 provides guidance on quantifying and evaluating the materiality of
unrecorded misstatements. SAB 108 is effective for fiscal years ending after
November 15, 2006, with earlier application encouraged for any interim period
of
the first fiscal year ending after November 15, 2006, filed after the
publication of SAB 108 (September 13, 2006). The adoption of SAB 108 did not
have a material impact on the consolidated financial position and results of
operations.
Income
Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion
Feature
In
September 2005, the EITF reached a consensus on Issue No. 05-8, "Income Tax
Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature"
("EITF No. 05-8"). Under EITF No. 05-8, issuance of convertible debt with a
beneficial conversion feature recorded pursuant to EITF 98-5, "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios" and EITF 00-27, "Application of Issue No. 98-5
to
Certain Convertible Instruments" results in a temporary difference for purposes
of applying SFAS 109. The deferred taxes recognized for the temporary difference
should be recorded as an adjustment to additional paid-in capital. The EITF
No.
05-8 Consensus should be applied retrospectively to all instruments with a
beneficial conversion feature accounted for under EITF 98-5 and EITF 00-27
for
periods beginning after December 15, 2005. The adoption of EITF 05-8 did
not have a material impact on the financial statements.
Modification
of Convertible Debt Instruments
In
November 2006, the EITF reached a final consensus in EITF Issue 06-6
"Debtor's Accounting for a Modification (or Exchange) of Convertible Debt
Instruments" ("EITF No. 06-6"). EITF No. 06-6 addresses the modification
of a convertible debt instrument that changes the fair value of an embedded
conversion option and the subsequent recognition of interest expense for the
associated debt instrument when the modification does not result in a debt
extinguishment pursuant to EITF No. 96-19, "Debtor's Accounting for a
Modification or Exchange of Debt Instruments." The consensus should be applied
to modifications or exchanges of debt instruments occurring in interim or annual
periods beginning after November 29, 2006. The Company is currently evaluating
the impact of this guidance on the consolidated financial position, results
of
operations or cash flows.
Accounting
for a Previously Bifurcated Conversion Option in a Convertible Debt
Instrument
In
November 2006, the FASB ratified EITF Issue No. 06-7, "Issuer's
Accounting for a Previously Bifurcated Conversion Option in a Convertible
Debt
Instrument When the Conversion Option No Longer Meets the Bifurcation Criteria
in FASB Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities" ("EITF No. 06-7"). At the time of issuance, an embedded
conversion option in a convertible debt instrument may be required to be
bifurcated from the debt instrument and accounted for separately by the issuer
as a derivative under SFAS No. 133, based on the application of EITF No.
00-19.
Subsequent to the issuance of the convertible debt, facts may change and
cause
the embedded conversion option to no longer meet the conditions for separate
accounting as a derivative instrument, such as when the bifurcated instrument
meets the conditions of Issue 00-19 to be classified in stockholders' equity.
Under EITF No. 06-7, when an embedded conversion option previously accounted
for
as a derivative under SFAS No. 133 no longer meets the bifurcation criteria
under that standard, an issuer shall disclose a description of the principal
changes causing the embedded conversion option to no longer require bifurcation
under SFAS No. 133 and the amount of the liability for the conversion option
reclassified to stockholders' equity. EITF No. 06-7 should be applied to
all
previously bifurcated conversion options in convertible debt instruments
that no
longer meet the bifurcation criteria in SFAS No. 133 in interim or annual
periods beginning after December 15, 2006, regardless of whether the debt
instrument was entered into prior or subsequent to the effective date of
EITF
No. 06-7. Earlier application of EITF No. 06-7 is permitted in periods for
which
financial statements have not yet been issued. The Company is currently
evaluating the impact of this guidance on the consolidated financial position,
results of operations or cash flows.
Registration
Payment Arrangements
In
December 2006, the FASB issued FASB Staff Position ("FSP") EITF 00-19-2
"Accounting for Registration Payment Arrangements" ("FSP EITF 00-19-2") which
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement should be
separately recognized and measured in accordance with SFAS No. 5,
"Accounting for Contingencies." Adoption of FSP EITF 00-19-2 is
required for fiscal years beginning after December 15, 2006. The
Company is currently evaluating the expected effect of FSP EITF 00-19-2 on
its
consolidated financial statements and is currently not yet in a position to
determine such effects.
The
Fair Value Option for Financial Assets and Financial
Liabilities
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159, "The Fair Value Option for Financial Assets and Financial Liabilities
-
Including an amendment to FASB Statement No. 115." This statement permits
companies to choose to measure many financial instruments and other items at
fair value. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. This Statement is expected to expand the
use of fair value measurement of accounting for financial instruments. This
statement applies to all entities, including not for profit. The fair value
option established by this statement permits all entities to measure eligible
items at fair value at specified election dates. This statement is effective
as
of the beginning of an entity's first fiscal year that begins after November
15,
2007. The Company is currently assessing the impact adoption of SFAS No. 159
will have on the consolidated financial statements.
ITEM
2. MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
report contains forward-looking statements. These forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical results or anticipated
results, including those set forth under "ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION—Risk Factors," below, and elsewhere in this
report. In some cases, you can identify forward looking statements by
terms such as "may," "intend," "might," "should," "could," "would," "expect,"
"believe," "anticipate," "estimate," "predict," "potential," or the negative
of
these terms, and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and
uncertainties, which could cause actual results to differ materially from those
projected. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date
hereof. We undertake no obligation to publicly release the result of
any revisions to these forward-looking statements, which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence
of
unanticipated events. The forward-looking statements in this report
are based upon management's current expectations and beliefs, which management
believes are reasonable.
In
this
report, unless the context indicates otherwise, the terms "Company," "we,"
"us,"
and "our" refer to Satellite Security Corporation, a Nevada corporation, and
its
subsidiaries.
OVERVIEW
The
Company currently does not have, and since March 7, 2007, has not had, any
ongoing business operations or any revenue sources. Until operations
ceased in March of 2007, we had been engaged in the business of providing
satellite-based asset tracking solutions and services, through the operations
of
our formerly wholly owned subsidiary Satellite. On March 7, 2007, Satellite
lacked sufficient working capital to continue to fund its operations in the
ordinary course of business, and all Satellite employees were
released. Satellite effectively ceased operations. We do
not have, and since March 7, 2007, have not had, any ongoing business operations
or any revenue sources. On April 2, 2007, we were forced to vacate
our office premises due to non-payment of rent, a default under the terms of
Satellite's lease.
In
a
current report on form 8-K filed with the Commission on July 2, 2007, we
reported that in June 2007 the holders of our Secured Convertible
Promissory Notes (the "Noteholders") informed the Company that they intended
to
exercise their remedies under, among other sources of authority, the California
Uniform Commercial Code (the "UCC") and Section 9620 thereof, pursuant to which
they may accept collateral in satisfaction of the obligations secured by such
collateral. On June 29, 2007 we entered into an agreement with the
Noteholders (the "Noteholders Agreement") pursuant to which we agreed to consent
to the Noteholders foreclosure on, and to transfer to the Noteholders,
substantially all of our assets including the stock of our subsidiary
entities. In exchange, the Noteholders agreed to (i) convert all
outstanding amounts due and all obligations under the Notes into an aggregate
of
2,000,000 shares of our common stock (calculated on a post split basis after
taking into account the reverse split discussed below); (ii) waive all breaches,
defaults and/or events of default under the loan documents related to the Notes,
and all penalties, accrued and unpaid interest, charges, fees and costs; and
(iii) cancel all outstanding Class A common stock purchase warrants and Class
B
common stock purchase warrants issued to the Noteholders in connection with
the
Notes.
The
obligations under the Noteholders Agreement were subject to certain conditions,
including principally a 1 for 500 reverse split of our outstanding common
stock. On July 30, 2007 we mailed to our stockholders and
filed with the Commission a Consent Solicitation Statement seeking approval
of
the 1 for 500 reverse stock split and describing the transactions contemplated
by the Noteholders Agreement. Effective as of August 6, 2007, we
obtained stockholder approval of a 1 to 500 reverse stock split of our
outstanding shares of common stock. We have filed a certificate of
amendment to our articles of incorporation with the Nevada Secretary of State
which became effective on August 18, 2007. As of the effective date,
every 500 shares of our common stock that were issued and outstanding
immediately prior to the effective date were combined into one issued and
outstanding share of common stock. Neither the par value per share of our common
stock ($0.001) nor the total number of authorized shares of our common stock
(250,000,000) were changed. No fractional shares of common stock were
issued in connection with the effectiveness of the reverse
split. Instead, we rounded up and issued a whole share to each
affected stockholder.
Following
the effectiveness of the reverse stock split, we consummated the transactions
contemplated by the Noteholders Agreement on September 14, 2007. We
were in default under the Notes, which were secured by all of our assets, and
we
owed more than $3.5 million thereunder. Upon consummation of the
transactions contemplated by the Noteholders Agreement, in accordance with
the
Noteholders' exercise of their remedy under California Uniform Commercial Code
§
9620, we and Satellite consented to the acceptance by the Noteholders of our
right, title and interest in substantially all of our assets and in exchange
for
our consent, the Noteholders, among other things: (i) converted all outstanding
amounts due and all obligations under the Notes into an aggregate of 2,000,000
shares of our common stock (calculated on a post split basis after taking into
account the reverse split discussed above); (ii) waived all breaches, defaults
and/or events of default under the loan documents related to the Notes, and
all
penalties, accrued and unpaid interest, charges, fees and costs; and (iii)
cancelled all outstanding Class A common stock purchase warrants and Class
B
common stock purchase warrants issued to the Noteholders in connection with
the
Notes. Accordingly, our obligations under the Notes, including our
obligation to pay the principal, plus all accrued interest, were
terminated.
After
giving effect to the reverse split and the transactions contemplated under
the
Noteholders Agreement, the Noteholders held 2,000,000 shares of our common
stock, 1,000,000 of which were transferred to our chief executive office, Zirk
Engelbrecht, in exchange for certain commitments from Mr. Engelbrecht, and
our
other existing stockholders held approximately 220,000 shares of our outstanding
common stock. The reverse split was not intended to be a going
private transaction.
RESULTS
OF DISCONTINUED OPERATIONS
Revenues
We
had no
revenues for the three months ended September 30, 2007, compared to $419,632
for
the same period in 2006. Revenues were $96,875 for the nine months
ended September 30, 2007, compared to $1,074,929 for the same period in 2006,
a
decrease of $978,054 or 91%. The decreases were primarily due to the
cessation of operations of Satellite.
Cost
of Revenues
Cost
of
revenues includes hardware, wireless airtime expense and personnel-related
costs
for Satellite's Monitoring and Support Center. We had no costs of
revenues for the three months ended September 30, 2007, compared to $355,764
or
85% of revenues for the same period in 2006. Costs of revenues were
$94,823 or 98% of revenues for the nine months ended September 30, 2007,
compared to $917,356 or 85% of revenues for the same period in 2006, a decrease
of $822,533, or 90%. The decrease in cost of revenues is related
primarily to the cessation of operations of Satellite.
Research
and Development
Research
and development expenses include payroll, and costs associated with software
development, product design and outsourcing for Satellite. We had no
research and development expenses for the three months ended September 30,
2007,
compared to $67,863 for the same period in 2006. Research and
development expenses were $69,986 for the nine months ended September 30, 2007,
compared to $205,030 for the same period in 2006, a decrease of $135,044, or
66%. The decreases were primarily due to the cessation of operations
of Satellite.
Marketing
and Sales Expenses
Marketing
and sales expenses include payroll, and costs associated with advertising,
promotions, trade shows, seminars, and similar programs, as well and travel
expenses for Satellite. We had no marketing and sales expenses the
three months ended September 30, 2007, compared with $196,375 for the same
period in 2006. Marketing and sales expenses were $42,010 for the
nine months ended September 30, 2007, compared with $485,320 for the same period
in 2006, a decrease of $443,310, or 91%. The decreases were primarily
due to the cessation of operations of Satellite.
General
and Administrative
General
and administrative expenses include payroll and costs associated with the
finance, facilities, and legal and other administrative functions of Satellite
and the Company. General and administrative costs were $39,347 for
the three months ended September 30, 2007 compared with $830,799 for the same
period in 2006, a decrease of $791,452 or 95%. General and
administrative costs were $785,944 for the nine months ended September 30,
2007
compared with $2,299,787 for the same period in 2006, a decrease of $1,513,843
or 66%. The decreases were primarily due to the cessation of
operations of Satellite.
Interest
Expense
There
was
no nterest expense for the three months ended September 30, 2007 compared to
$3,127,590 for the same period in 2006. Interest expense was
$2,723,316 for the nine months ended September 30, 2007 compared to $3,993,958
for the same period in 2006.
The
interest expense for the nine months ended September 30, 2007 was primarily
due
to the following: (i)forgiveness of interest
on
the $3,300,000 of Notes as a result of entering into the Noteholders Agreement
on June 29, 2007, and (ii)non-cash debt discount
amortization associated with a secured note agreement as of June 30,
2007. Interest expense on the amortization of the balance of debt
discount on the $3,3000,000 of the Notes for the nine months
ended September 30, 2007 was $2,784,658.
Net
Change in Fair Value of Common Stock Warrants and Embedded Derivative
Liability
Net
change in fair value of common stock warrants and embedded derivative liability
of $3,063,108 for the nine months ended September 30, 2007 consists of the
net
change in the carrying values of the liabilities for the common stock warrants
and the embedded derivative liabilities related to the Notes on September 30,
2007.
Net
Profit/Loss
Net
profit/loss includes profit/loss from operations and interest
expense. We recorded a net profit of $1,627,232 for the nine months
ended September 30, 2007 compared to a net loss of $6,104,425 for the same
period in 2006. The increase in net profit for the nine months ended
September 30, 2007 as compared to the same period of 2006 was due to a decrease
in operating costs of $2,092,198; and charges incurred in connection with the
Noteholders Agreement including increased interest expense of $1,270,642; the
net change in fair value of $3,063,108 on common stock warrants and embedded
derivative related to the Notesand other income which consists mainly of a
gain
on the transfer of assets and liabilities of Satellite to the Noteholders of
$2,144,385.
Liquidity
and Capital Resources
On
September 30, 2007, we had no cash and our only current assets was
the subscription receivable from our chief executive officer. Our
working capital as of September 30, 2007 was $53,606.
Net
cash
provided by operating activities during the nine months ended September 30,
2007
was $545,188. The primary use of cash from operating activities was
the operating loss of $895,887. This was offset by non-cash
adjustments required by the Noteholders Agreement including income of $3,063,108
from the change in value of warrants and embedded derivative liability, non-cash
interest expense of $2,784,658, and the transfer of all Satellite assets and
liabilities to the Noteholders in accordance with the Noteholders
Agreement.
There
was
no cash used by investing activities during the three month period ended
September 30, 2007. We have no significant capital expenditures
planned within the foreseeable future.
Since
our
inception, we have financed our cash needs primarily through financing
activities. Net cash
provided by financing activities for the nine months ended September 30, 2007
was $822,273 primarily from loans under a convertible note from our chief
executive officer and the transfer of Satellite's debt to the Noteholders in
accordance with the Noteholders Agreement.
As
emphasized in the Report of Independent Registered Public Accounting Firm on
our
December 31, 2006 financial statements, we have incurred recurring negative
cash
flows from operations, significant losses, working capital deficits and
increasing shareholder deficiencies. Further, we have yet to establish
profitable operations. These factors, among others, raise substantial doubt
about our ability to continue as a going concern.
RISK
FACTORS
This
report includes forward-looking statements about our business and results of
operations that are subject to risks and uncertainties. See "SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS," above. Factors that could
cause or contribute to such differences include those discussed
below. In addition to the risk factors discussed below, we are also
subject to additional risks and uncertainties not presently known to us or
that
we currently deem immaterial. If any of these known or unknown risks
or uncertainties actually occur, our business could be harmed
substantially.
We
have ceased operations.
We
have
ceased the operations of Satellite, our sole operating subsidiary. We
currently have no cash on hand and our remaining operations are supported
through loans from our sole director and chief executive officer, Mr. Zirk
Engelbrecht. We are also looking to enter into a business combination
with another operating company. However, no definitive agreements
currently exist with any prospective candidates with respect to a business
combination. See "- Overview," above. We will not generate
any revenues until, at the earliest, we successfully negotiate and structure
transactions to finance future operations or after the consummation of a
business combination. We cannot assure you as to when, or if, we will
successfully negotiate and structure transactions to finance future operations
or a business combination will occur. If we are unable to negotiate and
structure transactions to finance future operations or enter into a business
combination, we will not be able to continue as a going concern.
In
order to continue as a going concern will need to enter into a business
combination and raise funds in the public or private capital
markets. We do not know at this time whether we will be successful in
entering into a business combination, the nature of the business that we would
undertake as a result of that combination, or the impact on our capital
structure from any such combination or related
financing.
We
do not
anticipate restarting our satellite based asset tracking
business. Consequently, if we are to continue as a going concern, we
will have to identify a target operating company and successfully enter into
a
business combination. While we have had discussions with prospective
operating companies, no contracts or arrangements with any target operating
company exist at this time. See"- Overview," above. We do
not know what business any target operating company will be engaged in, or
what
risks we may face in connection with such a combination. Any
combination will likely result in a substantial recapitalization of our
equity. We cannot provide any guidance or assurance as to the
possible terms of any recapitalization or financing, or the impact on the
existing holders of our equity. If we fail to continue as a going
concern, you may lose all of the value of your investment. Even if we
are successful in obtaining additional funds, the terms of the financing may
have the effect of substantially diluting your interest.
Our
ability to restart operations or successfully effect a business combination
and
to be successful afterwards will be completely dependent upon the efforts of
our
key personnel, some of whom may join us following any future financing or
business combination and may be unfamiliar with the requirements of operating
a
public company, which may adversely affect our
operations.
Our
ability to successfully restart operations or effect a business combination
will
be completely dependent upon the efforts of our current key
personnel. However, if we are successful in effecting a business
combination, we anticipate employing other personnel including key management
personnel. While we intend to closely scrutinize any additional individuals
we
engage after a business combination or financing transaction, we cannot assure
you that our assessment of these individuals will prove to be correct or that
these individuals will remain with us. These individuals may be unfamiliar
with
the requirements of operating a public company as well as United States
securities laws which could cause us to expend time and resources helping them
become familiar with such laws. This could be expensive and time-consuming
and
could lead to various regulatory issues that may materially adversely affect
our
operations.
We
are dependant upon the continued services and support from our sole director
and
chief executive officer to continue our operations.
Our
continued operations are substantially dependent on Zirk
Engelbrecht. Mr. Engelbrecht currently serves as our sole director
and chief executive officer. In addition, Mr. Engelbrecht has provided the
financial support necessary to maintain our status as a reporting company under
the Securities Exchange Act of 1934, or the Exchange Act, including payment
of
the fees of our independent auditors and legal counsel. We currently
have no unrestricted cash on hand and no other arrangements for payment of
these
services. Mr. Engelbrecht is engaged in other significant business
endeavors and is not obligated to contribute any specific number of hours per
week to our affairs. If Mr. Engelbrecht's other business affairs
require him to devote substantial amounts of time to such affairs in excess
of
their current commitment levels, it could limit his ability to devote time
to
our affairs and could have a negative impact on our ability to consummate any
financing transaction or business combination. If Mr. Engelbrecht
were to resign from his position of director or chief executive officer, or
to
withdraw his financial support, we may be forced to discontinue operations
altogether.
The
sale of the shares of our common stock acquired in private placements could
cause the price of our common stock to decline.
Under
the
terms of the Noteholders Agreement, the Notes converted into 2,000,000 shares
of
our common stock and as of July 2007 the Noteholders may rely on the provisions
of Rule 144 to effect sales and may resell the shares of our common stock
acquired upon the conversion of the Notes. We have no way of knowing
whether or when such shares may be sold. Depending upon market
liquidity at the time, a sale of shares by the Noteholders at any given time
could cause the trading price of our common stock to decline. The
sale of a substantial number of shares of our common stock, or anticipation
of
such sales, could make it more difficult for us to sell equity or equity-related
securities in the future at a time and at a price that we might otherwise wish
to effect sales.
We
may issue additional shares of our capital stock, including through convertible
debt securities, to finance future operations or complete a business
combination, which would reduce the equity interest of our stockholders and
likely cause a change in control of our ownership.
Although
we have no commitments as of the date of this report to issue any additional
securities, we may issue a substantial number of additional shares of our common
stock or preferred stock, or a combination of both, including through
convertible debt securities, to finance future operations or complete a business
combination. The issuance of additional shares of our common stock or
any number of shares of preferred stock, including upon conversion of any debt
securities:
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·
|
may
significantly reduce the equity interest of our current
stockholders;
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·
|
will
likely cause a change in control if a substantial number of our shares
of
common stock or voting preferred stock are issued, which may affect,
among
other things, our ability to use our net operating loss carryforwards,
if
any, and could also result in a change in management;
and
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·
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may
adversely affect prevailing market prices for our common
stock.
|
Because
we may be deemed to have no "independent" directors, actions taken and expenses
incurred by our officer and director on our behalf will generally not be subject
to "independent" review.
Zirk
Engelbrecht, our chief executive officer, is currently our sole
director. Mr. Engelbrecht does not have an employment agreement with
us, and does not currently receive any compensation for his
services. However, he may receive compensation in the future and may
receive reimbursement for out-of-pocket expenses incurred by him in connection
with activities on our behalf, such as identifying potential financing
opportunities or target businesses and performing due diligence related
thereto. Because of his position as our sole director and executive
officer, we will not have the benefit of independent directors examining the
propriety of decisions made by Mr. Engelbrecht. Although we believe that all
actions taken by Mr. Engelbrecht on our behalf will be in our best interests,
we
cannot assure you that this will be the case. If actions are taken, or expenses
are incurred that are not in our best interests, it could have a material
adverse effect on our business and operations and the price of our
stock.
A
limited number of stockholders own approximately 60.31% of our stock and may
act, or prevent certain types of corporate actions, to the detriment of other
stockholders.
Following
the effectiveness of the reverse split (August 18, 2007), our directors,
officers and greater than 5% stockholders own approximately 60.31% of our issued
and outstanding common stock. Accordingly, these stockholders may, if
they act together, exercise significant influence over all matters requiring
stockholder approval, including the election of a majority of the directors
and
the determination of significant corporate actions. This
concentration could also have the effect of delaying or preventing a change
in
control that could otherwise be beneficial to our stockholders.
We
have never paid dividends on our capital stock, and we do not anticipate paying
any cash dividends in the foreseeable future.
We
have
paid no cash dividends on any of our classes of capital stock to date and we
currently intend to retain our future earnings, if any, to fund the development
and growth of our business. In addition, the terms of the Notes
prohibit us from making any dividend payment or distribution to holders of
our
common stock while any portion of the Notes remain outstanding. As a
result, capital appreciation, if any, of our common stock will be your sole
source of gain for the foreseeable future.
Our
common stock is traded on the OTCBB, which may be detrimental to
investors.
Our
shares of common stock are currently traded on the OTCBB. Stocks
traded on the OTCBB generally have limited trading volume and exhibit a wide
spread between the bid/ask quotation.
Our
common stock is subject to penny stock rules.
Our
common stock is subject to Rule 15g-1 through 15g-9 under the Exchange Act,
which imposes certain sales practice requirements on broker-dealers which
sell
our common stock to persons other than established customers and "accredited
investors" (generally, individuals with net worths in excess of $1,000,000
or
annual incomes exceeding $200,000 (or $300,000 together with their
spouses)). For transactions covered by this rule, a broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser's written consent to the transaction prior to the
sale. This rule adversely affects the ability of broker-dealers to
sell our common stock and purchasers of our common stock to sell their shares
of
such common stock. Additionally, our common stock is subject to the
SEC regulations for "penny stock." Penny stock includes any equity
security that is not listed on a national exchange and has a market price
of
less than $5.00 per share, subject to certain exceptions. The
regulations require that prior to any non-exempt buy/sell transaction in
a penny
stock, a disclosure schedule set forth by the SEC relating to the penny stock
market must be delivered to the purchaser of such penny stock. This
disclosure must include the amount of commissions payable to both the
broker-dealer and the registered representative and current price quotations
for
the common stock. The regulations also require that monthly
statements be sent to holders of penny stock which disclose recent price
information for the penny stock and information of the limited market for
penny
stocks. These requirements adversely affect the market liquidity of
our common stock.
Recently
enacted and proposed changes in securities laws and regulations are likely
to
increase our costs.
The
Sarbanes-Oxley Act of 2002, or SOX, that became law in July 2002 requires
changes in some of our corporate governance, public disclosure and compliance
practices. SOX also requires the SEC to promulgate new rules on a
variety of subjects. We expect these developments to increase our
legal and financial compliance costs, and to make some activities more
difficult, such as stockholder approval of new option plans. We
expect these developments to make it more difficult and more expensive for
us to
obtain director and officer liability insurance, and we may be required to
accept reduced coverage or incur substantially higher costs to obtain
coverage. These developments could make it more difficult for us to
attract and retain qualified members of our board of directors, particularly
to
serve on our audit committee, and qualified executive officers. We
are presently evaluating and monitoring regulatory developments and cannot
estimate the timing or magnitude of additional costs we may incur as a
result.
ITEM
3. CONTROLS AND
PROCEDURES
Our
disclosure controls and procedures are designed to ensure (i) that
information we are required to disclose in the reports we file or submit under
the Exchange Act are recorded, processed, summarized, and reported within
the time periods specified in the SEC's rules and forms; and (ii) that
information we are required to disclose in the reports we file or submit under
the Exchange Act is accumulated and communicated to our management, including
our principal executive and principal financial officer, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.
We
maintain disclosure controls and procedures designed to ensure that material
information related to our company is recorded, processed, summarized and
reported within the time periods specified in the SEC rules and
forms.
Under
the
supervision of our chief executive officer, we evaluated 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 upon that evaluation, our chief
executive officer concluded that as of September 30, 2007, the design and
operation of such disclosure controls and procedures were not effective at
the
reasonable assurance level because of a material weakness.
Material
Weakness.
The
Public Company Accounting Oversight Board has defined a material weakness as
a
"significant deficiency or combination of significant deficiencies that results
in more than a remote likelihood that a material misstatement of the annual
or
interim financial statements will not be prevented or detected." In
relation to the audit for the year ended December 31, 2006, management and
our independent auditor, Tauber & Balser, P.C., identified the
following material weakness in our internal controls: During the
audit for the year ended December 31, 2006, our auditors proposed many
audit adjustments that were discussed with management, with final concurrence
that such adjustments should be recorded by management. We did not
have in place adequate controls to ensure that the general ledger balances
were
accurate and reported in accordance with generally accepted accounting
principals applied in the United States.
Subsequent
to the year ended December 31, 2006, we were involved in a number of significant
events, including the resignation of our chief financial officer and the
cessation of operations of Satellite. With the cessation of
operations, we released all but one of our employees and our internal control
over financial reporting is entirely at the board of directors
level.
Changes
In Internal Controls Over Financial Reporting.
No
changes were made in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended
September 30, 2007 that has materially affected, or is likely to materially
affect, our internal control over financial reporting.
Limitations
On Disclosure Controls And Procedures.
Our
management does not expect that our disclosure controls or internal controls
over financial reporting will prevent all errors or all instances of fraud.
A
control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system's objectives will
be
met. Further, the design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within our company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Controls can also be circumvented by the individual acts
of
some persons, by collusion of two or more people, or by management override
of
the controls. The design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and any design may not
succeed in achieving its stated goals under all potential future conditions.
Over time, controls may become inadequate because of changes in conditions
or
deterioration in the degree of compliance with policies or procedures. Because
of the inherent limitation of a cost-effective control system, misstatements
due
to error or fraud may occur and not be detected.
Our
company (as a "non-accelerated filer") is not now subject to the requirements
of
Section 404(b) of SOX, which requirements, subject to change, are now scheduled
to be effective for fiscal years ending on or after December 15,
2008. Under Section 404(b), our auditors will be required to perform
an audit of management's assessment of the effectiveness of our internal control
over financial reporting intended to enable us to issue a report, based on
our
audit, containing their opinions on both management's assessment and on the
effectiveness of our internal control over financial reporting. Section 404(a)
of the SOX, however, requires management to conduct and report upon its own
assessment of a company's internal control over financial reporting for fiscal
years ending on or after December 15, 2007, and, accordingly, places substantial
responsibility on management to perform considerable work in preparing for
this
activity, not only in the design and conduct of its testing and other assessment
procedures in developing adequate, detailed documentation of the company's
internal control policies and procedures, but also the procedures applied by
management in conducting its assessment and the results thereof. With respect
to
such preparation only, but not with respect to performing management's
assessment procedures, our auditors are available to provide only limited
assistance in documenting and making recommendations to management regarding
internal controls, subject to advance approval of the audit committee or
equivalent financial oversight or governance body, but only to the extent that,
in their sole judgment, our auditors believe their independence will not be
impaired.
PART
II — OTHER INFORMATION
ITEM
1.
LEGAL PROCEEDINGS
In
the
course of business, the Company has been, and may continue to be, involved
in
various claims seeking monetary damages and other relief. The amount
of the ultimate liability, if any, from such claims cannot be determined.
However, in the opinion of the Company's management, the ultimate liability
for
any legal claims currently pending against the Company will not have a material
adverse affect on the Company's financial position, results of operations or
cash flows.
ITEM
2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM
3.
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On
or
about July 31, 2007, the Company mailed to its stockholders a consent
solicitation statement soliciting the consent of its stockholders to a 500
for 1 reverse split of the Company's common stock. The Company
received the requisite approval from its stockholders effective as
of August 6, 2007, and the Company filed a certificate of
amendment to its articles of incorporation with the Nevada Secretary of
State to effect the reverse split, which was effective August 18, 2007. As
such, every 500 shares of the Company’s common stock that were issued and
outstanding immediately prior to the filing of the certificate of amendment
effecting the reverse stock split were combined into one issued and
outstanding share of common stock. Neither the par value per share of the
Company’s common stock ($0.001) nor the total number of authorized shares of the
Company’s common stock (250,000,000) changed. No fractional shares of
common stock were issued in connection with the reverse
split. Instead, the Company rounded up and issued a whole share to
each affected stockholder.
ITEM
5. OTHER
INFORMATION
On
September 30, 2007, our chief executive officer and sole director, Mr.
Engelbrecht,
entered into a subscription agreement with us pursuant to which he will be
issued, from time to time, up to $50,000 worth of our common
stock. The value of the shares we will issue will be based on the
market price at the time we issue such shares.
ITEM
6.
EXHIBITS
|
Exhibit
No.
|
Description
|
|
Subscription
agreement dated September 30, 2007 between the registrant and Zirk
Engelbrecht.
|
|
|
Certification
of Periodic Report by the Chief Executive Officer, Pursuant to Section
302
of the Sarbanes-Oxley Act of 2002.
|
|
|
Certification
of Periodic Report by the Chief Financial Officer, Pursuant to Section
302
of the Sarbanes-Oxley Act of 2002.
|
|
|
Certification of
Chief Executive Officer pursuant to 18 U.S.C, Section 1350, adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
Certification of
Chief Financial Officer pursuant to 18 U.S.C, Section 1350,
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
* Filed
as an exhibit to this report
|
|