MIDNIGHT
HOLDINGS GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 - Basis of
Presentation
The
accompanying unaudited consolidated financial statements of Midnight Holdings
Group, Inc. have been prepared in accordance with accounting principles
generally accepted in the United States of America and the rules of the
Securities and Exchange Commission, and should be read in conjunction with
the
audited financial statements and notes thereto contained in Midnight's Annual
Report filed with the SEC on Form 10-KSB for the year ended December 31,
2006.
In the opinion of management, all adjustments, consisting of normal recurring
adjustments necessary for a fair presentation of financial position and the
results of operations for the interim periods presented, have been reflected
herein. The results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year. Notes to the
consolidated financial statements which would substantially duplicate the
disclosure contained in the audited consolidated financial statements for
2006
as reported in the 10-KSB for the year ended December 31, 2006 have been
omitted.
Note
2 – Going
Concern
As
set
forth in the accompanying consolidated financial statements, Midnight incurred
net losses for the six months ended June 30, 2007 and has an accumulated
deficit
and a working capital deficit as of June 30, 2007. These conditions raise
substantial doubt as to Midnight’s ability to continue as a going concern.
Management plans to raise funds through the sale of convertible notes and
continues to seek financing to fund its operating losses and revenue growth
plans. The financial statements do not include any adjustments that might
be
necessary if Midnight is unable to continue as a going concern.
Note
3 – Additional
Borrowings
During
the six months ended June 30, 2007, Midnight issued 10% callable secured
convertible notes to four investors with 4,100,000 common stock purchase
warrants, for an aggregate of $2,050,000. These new notes,
together with accrued and unpaid interest, are convertible at any
time at the option of the holder into shares of common stock of Midnight
at the
lesser of $0.02 per share or 25% of the average of the lowest 3
trading days from the last 20 trading days ending one day prior to the date
of
conversion. Interest is due at the end of each quarter. The face amounts
of the
notes are due three years from the date of issuance. The due dates range
from
January 18, 2010 to June 15, 2010. The warrants have a five year life and
are
exercisable at $0.04 per share.
In
connection with the long term notes and the warrants, Midnight entered into
Registration Rights Agreements with the investors, requiring Midnight to
file a
registration statement registering 200% of the shares of common stock issuable
upon conversion of the notes and the shares of common stock issuable upon
repayment of the principal amount of the notes, including any interest accrued
thereon, and 100% of the shares of common stock issuable upon exercise of
the
warrants. The required registration statements have not yet been
filed.
As
long
as the notes are outstanding, if Midnight enters into any subsequent
financing on terms more favorable than the terms governing the notes, then
the
holders of the notes have the option to exchange the notes, valued at
their stated value, together with accrued but unpaid interest for the securities
to be issued in the subsequent financing. Additionally, if Midnight issues
common stock or other securities convertible into common stock at a price
per
share lower than the conversion price of the notes, the conversion price
of the
notes will be reduced to that lower conversion price.
All
of
the warrants require that, if Midnight issues common stock or other securities
convertible into common stock at a price per share lower than the market
price,
the exercise price of the warrants will be reduced to that lower
price.
Note
4 – Derivative
Liability
Midnight
evaluated the application of SFAS 133 and EITF 00-19 for the conversion options
on the notes and the warrants. Based on the guidance in SFAS 133 and EITF
00-19,
Midnight concluded both the conversion option and the warrants were required
to
be accounted for as derivatives. Existing agreements as well as the convertible
notes issued in the first six months of 2007 have variable conversion prices
resulting in an indeterminate number of shares to potentially be issued.
This
creates the possibility that Midnight will not have enough available shares
to
settle all outstanding common stock equivalents. SFAS 133 and EITF 00-19
require
Midnight to bifurcate and separately account for the conversion option as
an
embedded derivative and the warrants as freestanding derivatives. Midnight
is
required to record the fair value of the conversion options and the warrants
on
its balance sheet at fair value with changes in the values of these derivatives
reflected in the consolidated statement of operations as “Derivative instrument
income (expense).”
Midnight
used the Black Scholes pricing model to determine the fair values of the
embedded conversion options derivatives and the warrants. The model uses
market
sourced inputs such as interest rates, stock prices, and option volatilities,
the selection of which requires management's judgment, and which may impact
net
income or loss. Midnight uses volatility rates based upon the closing stock
price of industry competitors due to Midnight’s lack of historical trading
history. Midnight uses a risk free interest rate which is the U. S. Treasury
bill rate for securities with a maturity that approximates the estimated
expected life of a derivative or security. Midnight uses the closing market
price of the common stock on the date of issuance of a derivative or at the
end
of a quarter when a derivative is valued at fair value. The volatility factor
used in the Black Scholes pricing model has a significant effect on the
resulting valuation of the derivative liabilities on the balance sheet. Midnight
used the following assumptions for the Black Scholes pricing model: market
price
on date of issuance; no expected dividend yield; expected volatility of 60%;
risk-free interest rates of 4.41% to 5.24%; and option terms equal to the
term
of the warrant or term of the debenture for conversion options.
A
summary
of the convertible notes and derivative liability is as follows:
The
proceeds from the issuance of the notes and warrants were first allocated
to the
warrant derivatives based on their fair values and then to the embedded
derivatives based on their fair values. To the extent that the fair values
of
the derivatives exceeded the proceeds a loss on derivatives was recognized
at
issuance date in the Consolidated Statements of Operations. The discount
to the
notes created by the allocation of the proceeds to the derivatives will be
amortized over the life of the debentures using the effective interest
method.
Note
5 – Common
Stock
During
the six months ended June 30, 2007, Midnight converted $16,441 of its
convertible debt and $66,460 of associated embedded derivatives to 7,550,000
shares of common stock.
Note
6 – Accrued Convertible
Debt Non-compliance Costs
As
of
June 30, 2007, Midnight's accrued debt non-compliance costs did not change
from
the $604,679 as of December 31, 2006. On September 5, 2007, the holders of
Midnight's convertible notes agreed to waive all penalties accrued on all
notes
issued prior to that date and to waive all such penalties on those notes
through
December 31, 2007
.
Note
7 – Acquisition of
Subsidiary
On
March
30, 2007, Midnight purchased the businesses of 3 franchise operations from
Elite
Automotive Group, LLC – All Night Auto of Warr Acres, All Night Auto of Norman,
and All Night Auto of Yukon. The purchase price was $1,121,306 which
consisted of $350,000 cash, a note payable discounted to $278,124 and $493,182
of capital lease obligations. Midnight purchased the three businesses
to expand Midnight’s operations into Oklahoma.
Midnight
estimated the fair value allocation of the purchase price as
follows:
Note
9 – Subsequent
Events
Between
July 2007 and December 2007, Midnight issued 10% callable secured convertible
notes to 4 investors with 5,230,880 common stock purchase warrants, for an
aggregate of $2,617,645. These new notes, together with accrued and unpaid
interest, are convertible at any time at the option of the holder into shares
of
common stock of Midnight at the lesser of $0.02 per share or 25% of the average
of the lowest 3 trading days from the last 20 trading days ending 1
day prior to the date of conversion. Interest is due at
the end of each quarter. The face amounts of the notes are due 3
years from the date of issuance. The due dates range from July 2,
2010 to December 7, 2010. The warrants have a 5 year life and are exercisable
at
$0.08 per share.
During
the period from July 1, 2007 through December 27, 2007, Midnight converted
$33,987 of its convertible debt to 336,378,961 shares of its common
stock.
During
September 2007, the Bloomington, Illinois joint venture location
closed.
During
December 2007, Midnight issued an aggregate of 104,935,000 shares of its common
stock to employees and other outside parties. 89,935,000 shares were issued
for
services while 15,000,000 shares were issued to retire debt and its related
interest.
ITEM
2.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD
LOOKING
STATEMENTS
This Quarterly Report on Form 10-QSB and any documents incorporated herein
contain “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995 (the “Reform Act”) We claim
the protection of the safe harbor for forward-looking statements contained
in
the Reform Act. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. When used in this Quarterly Report, statements
that are not statements of current or historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
“plan”, “intend”, “may,” “will,” “expect,” “believe”, “could,” “anticipate,”
“estimate,” or “continue” or similar expressions or other variations or
comparable terminology are intended to identify such forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. Except as
required by law, the Company undertakes no obligation to update any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Any
reference to the “Company, “Midnight,” the “Registrant”, the “Small Business
Issuer”, “we”, “our” or “us” means Midnight Holdings Group, Inc.
The following discussion and analysis should be read in conjunction with our
unaudited financial statements as of June 30, 2007 and for the three and six
month periods ended June 30, 2007 and 2006, and the notes thereto, all of which
financial statements are included elsewhere in this Form 10-QSB.
Critical
Accounting Policies
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Our discussion and analysis of our financial statements and the results
of
our operations are based upon our financial statements and the data
used
to prepare them. The Company’s financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States. On an ongoing basis we reevaluate our judgments and estimates
including those related to revenues, bad debts, long-lived assets,
and
derivative financial instruments. We base our estimates and judgments
on
our historical experience, knowledge of current conditions and our
beliefs
of what could occur in the future considering available information.
Actual results may differ from these estimates under different assumptions
or conditions.
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Our significant accounting policies are disclosed in the Notes to
our
consolidated financial statements. The following discussion describes
our
most critical accounting policies, which are those that are both
important
to the presentation of our financial condition and results of operations
and that require significant judgment or use of complex estimates.
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We
recognize revenues in accordance with SEC Staff Accounting Bulletin No. 104,
“Revenue Recognition”, which superseded SAB No. 101, “Revenue Recognition in
Financial Statements”. Accordingly, revenues are recorded when persuasive
evidence of an arrangement exists, delivery has occurred or services have been
rendered, our prices to buyers are fixed or determinable, and collectibility
is
reasonably assured.
We
derive a majority of our revenues
from a combination of direct sales of automotive products and services to
retail, commercial and fleet clients through Company owned service center/retail
outlets as well as through services provides to our joint-venture partnerships
and franchisees.
These
revenues generally consist of facility lease rents, percentages of the sales
volume of our joint-venture partnerships. We are reimbursed for expenditures
made on behalf of the joint-venture partnerships for property operating
expenses, real estate taxes, maintenance and repairs, automotive tools, and
equipment services and products.
Revenues
also include franchise
royalties based upon a percentage of the gross revenue generated by each
franchised location as well as other franchise related fees for services
provided to franchisees under the terms of their franchise agreements
(including, but not limited to, the initial franchisee fees and training
fees).
Derivative
Financial Instruments
We
do not use derivative instruments to
hedge exposures to cash flow, market, or foreign currency risks. We evaluate
all
of it financial instruments to determine if such instruments are derivatives
or
contain features that qualify as embedded derivatives. For derivative financial
instruments that are accounted for as liabilities, the derivative instrument
is
initially recorded at its fair value and is then re-valued at each reporting
date, with changes in the fair value reported as charges or credits to income.
For option-based derivative financial instruments, we use the Black-Scholes
option-pricing model to value the derivative instruments at inception and
subsequent valuation dates. The classification of derivative instruments,
including whether such instruments should be recorded as liabilities or as
equity, is re-assessed at the end of each reporting period. Derivative
instrument liabilities are classified in the balance sheet as current or
non-current based on whether or not net-cash settlement of the derivative
instrument could be required within 12 months of the balance sheet
date.
Income
taxes
We have a history of losses. These losses have generated sizable
federal
net operating loss (NOL) carry forwards, which approximated $11,600,000
at
December 31, 2006.
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Generally
accepted accounting principles require that we record a valuation allowance
against the deferred income tax asset associated with these NOL and other
deferred tax assets if it is “more likely than not” that we will not be able to
utilize them to offset future income taxes. Due to our history of unprofitable
operations, we have recorded a valuation allowance that fully offsets our
deferred tax assets. We currently provide for income taxes only to the extent
that we expect to pay cash taxes on current income.
The
achievement of profitable future operations at levels sufficient to begin using
the NOL carry forwards could cause management to conclude that it is more likely
than not that we will realize all of the remaining NOL carry forwards and other
deferred tax assets. The NOL carry forwards could be limited in accordance
with
the Internal Revenue Code based on certain changes in ownership that occur
or
could occur in the future. Upon achieving profitable operations, we would
immediately record the estimated net realizable value of the deferred tax assets
at the time and would then provide for income taxes at a rate equal to our
combined federal and state effective rates. Subsequent revisions to the
estimated net realizable value of the deferred tax assets could cause our
provision for income taxes to vary significantly from period to
period.
Results
of Operations: Comparison of Six Months Ended June 30, 2007 to Six Months Ended
June 30, 2006
Significant
Transactions:
The following significant transactions impacted the consolidated
results
of operations for the Six month period ended June 30, 2007 compared
to the
six month period ended June 30, 2006:
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We
were in the initial stages of opening additional service centers
in 2006,
and as such were increasing the operating expenses to provide the
infrastructure to do so. As these newly opened service centers were
in
their infancy, they had not yet reach the level of attaining profitable
operations. In addition, all of the services that were opened in
2006 were
either sold to one of our joint venture partners in 2007 or were
closed.
The results of the operations that were closed have been reclassified
to
income or loss from discontinued operations in both periods.
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We
have obtained significant additional funding in the form of convertible
callable secured notes, which has resulted in a considerable increase
in
the amount of interest expense incurred compared to the year ago
period.
This was necessary to fund the infrastructure to enable us to execute
our
business plan.
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The following discussion compares and discusses for each item below, the
Company’s performance year to date, with the Company’s year to date performance
as of the same date in 2006 (“Year to Date”), and the Company’s performance for
the calendar quarter covered by this Report, with the performance for the
same
calendar quarter in 2006 (“Quarter to Quarter”).
During the six months ended June 30, 2007, revenues increased by
$1,385,900 or 139% to $2,384,700 compared to the same six months
performance in the prior fiscal year. Service center revenue increased
$654,800 as the result of the acquisition of the Oklahoma operations
purchased from a former franchisee, which contributed $500,500 of
additional revenue in the second quarter of 2007 and an overall increase
in store revenues of $154,300 as the result of increasing sales efforts
at
the store level and expanded efforts of management to execute our
business
plan to expand our sales. Sales to our Joint Venture partners in
the 2007
period increased by $397,700. This can be attributed to the greater
reliance on our corporate purchasing and in turn, the selling of
the
products to the joint venture operations, in addition to two of the
service centers being sold to one of the Company’s Joint Venture partners
at the end of the first quarter of 2007. Revenue from royalties on
franchise operating sales decreased by $15,300 as the result of the
sale
of the operations of the franchisee to the Company at the end of
the first
quarter of 2007.
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Revenues
for the quarter ended June 30,
2007 increased by $962,600 or 184% to $1,486,000 compared to the quarter ended
June 30, 2006. Service center revenue increased $466,800 due to the
expanded efforts of management to execute our business plan to expand our sales
and the previously mentioned acquisition of the Oklahoma operations. Sales
to
our Joint Venture partners in the 2007 period increased by $518,700. This can
be
attributed to the greater reliance on our corporate purchasing and in turn,
the
selling of the products to the joint venture operations. Revenue from royalties
on franchise operating sales decreased by $22,900. There were no franchise
operations during the quarter ended June 30, 2007.
Cost
of Sales:
During the six months ended June 30, 2007, cost of sales increased by $759,500
or 73% to $1,800,700, compared to the same six months in the prior fiscal
year.
The increase in cost of sales was primarily attributable to an increase in
labor
costs during the initial startup of new service center openings.
Our cost of sales for the quarter ended June 30, 2007 increased by
$494,800 or 104% to $972,200 compared to cost of sales for the quarter
ended June 30, 2006. The increase in cost of sales was attributable
to the
increase in sales, but at a lesser percentage of increase. This is
due
primarily to the sales of product to our joint venture operations
which
does not require any labor or shop costs and to the greater reliance
on
our corporate purchasing and in turn, the selling of the products
to the
joint venture operations.
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During the six months ended June 30, 2007, gross profit increased
by
$626,500 to $584,100 compared to the same six months in the prior
year.
The increase in gross profit can be attributed to increased sales
of
product to our joint venture operations which does not require any
labor
or shop costs and to the greater reliance on our corporate purchasing
and
in turn, the selling of the products to the joint venture operations.
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During the quarter ended June 30, 2007, gross profit increased by
$467,700
to $513,900 compared to the gross profit for the quarter ended June
30,
2006. The increase in gross profit can be attributed to increased
sales of
product to our joint venture operations which does not require any
labor
or shop costs and to the greater reliance on our corporate purchasing
and
in turn, the selling of the products to the joint venture operations.
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During the six months ended June 30, 2007, operating expenses increased by
$625,800 or 39% to $2,239,100 compared to the same six months in the prior
fiscal year. The increase in operating expenses was primarily attributable
to an
increase in the Company’s infrastructure to execute its business plan. The
operating expenses did not increase significantly, even though revenue more
than
doubled in the comparable periods.
During the quarter ended June 30, 2007, operating expenses increased by $549,700
or 66% to $1,378,700 compared to the operating expenses for the quarter ended
June 30, 2006. The increase in operating expenses was primarily attributable
to
an increase in the Company’s infrastructure to execute its business plan,
although the increases in expenses were substantially less that the increase
in
revenues, which increase approximately 184% for the comparative periods.
The
Company now has the infrastructure in place to execute its business plan.
Other
Income and Expenses
We
incurred an increase in interest
expense of $289,300 to $493,700 for the six months ended June, 2007 compared
to
the corresponding six month period of the prior fiscal year. This was due to
increased borrowing under convertible secured notes payable obtained to finance
our business plan.
Equity in losses of joint ventures in which we have a minority interest
was $522,900 and $98,300 for the six months ended June 30, 2007 and
2006
respectively. This was primarily due to ongoing start up costs and
expenses incurred by these joint ventures. We had no unconsolidated
affiliates during 2007 or 2006.
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Derivative instrument expense is explained in the discussion of critical
accounting issues and further in the notes to the financial statements. The
identification of, and accounting for, derivative instruments is complex. Our
derivative instruments are re-valued at the end of each reporting period, with
changes in the fair value of the derivative liability recorded as charges or
credits to income, in the period in which the changes occur. The identification
of, and accounting for, derivative instruments and the assumptions used to
value
them significantly affect our financial statements. For the six months ended
June 30, 2007, the derivative instrument income totaled $1,321,400, compared
to
an expense of $16,565,600 for the six months ended June 30, 2006.
During the quarter ended March 31, 2007, we sold two of our wholly owned
subsidiaries to one of our joint venture partners, which resulted in a gain
on
the sale in the amount of $67,000.
Liquidity
and Capital Resources
Cash and cash equivalents totaled $58,100 as of June 30, 2007, a
decrease
of $12,200 from December 31, 2006. Including the derivative instruments,
we had a working capital deficit of $35,784,400 as of June 30, 2007
as
compared to $34,408,500 as of December 31, 2006. A total of $32,277,300
of
this was attributable to our derivative liabilities. Cash flows from
operations and credit lines from banks are used to fund short-term
liquidity and capital needs such as service center parts, salaries
and
capital expenditures. For longer-term liquidity needs such as
acquisitions, new developments, renovations and expansions, we currently
rely on asset leasing, loans from our investor group, term loans,
revolving lines of credit, sale of common stock, and joint venture
investors.
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Between January 1 and December 18, 2007, we obtained an additional
$4,667,645 in funding from our investor group, with continued commitments
for additional funding.
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We
remain optimistic about our long term business prospects. However,
we
still face obstacles in achieving profitability. We anticipate that
because of our team focus on our current operations and through our
planned expansion efforts, we will experience substantial increases
in
revenue that will help the Company reach profitability during 2008
or
2009. We have invested a significant amount of our working capital,
technical infrastructure and personnel time in preparing the Company
for
the anticipated revenue increases.
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We believe that cash generated from operations and additional financing,
either
in the form of additional borrowings or the equity market will be sufficient
to
meet our working capital requirements for the next 12 months. Our current
business plan anticipates that new service center growth will be funded through
“Launch Investors”. It is anticipated that such Launch Investors will fund the
start up of new (A) service center operations each in the approximate amount
of
$200,000; (B) service center operations with the infrastructure to sell retail
products in each in the approximate amount of $550,000; and/or (C) the start
up
of a new hub and spoke retail mall/remote service center operations each
in the
approximate amount of $775,000. They will earn an estimated annual
return between 15% and 18% on their investment plus principal repayment over
the
term of the investment – a minimum of one year and a maximum of three years.
Additionally, in 2007, the Company began working on the expansion Midnight
Auto
Franchise Corp division and expects to begin warehouse distribution of its
products and services to non-All Night Auto entities by the end of 2008.
This
estimate is a forward-looking statement that involves risks and uncertainties.
Equity
During the six months ended June 30, 2007, the Company converted $16,441
of its
convertible debt and $66,400 of associated embedded derivatives to 7,550,000
shares of common stock.
During the six months ended June 30, 2007 and 2006, no dividends were paid
to
holders of our common stock and we did not issue any preferred stock.
As
a publicly traded company, we expect to have access to capital through
both the public equity and debt markets. We expect to have an effective
registration statement authorizing us to publicly issue shares of
preferred stock, common stock and warrants to purchase shares of
common
stock that will allow us to raise additional capital as necessary
to fund
expansion and growth activities in 2008. We anticipate that this
combination of equity and debt sources will provide adequate liquidity
so
that we can continue to fund our growth needs and expansion activities.
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Our goal is to develop and implement a conservative debt-to-total-market
capitalization ratio in order to enhance our access to the broadest range of
capital markets, both public and private.
We
expect to continue to have access to the capital resources necessary
to
expand and develop our business. Future development and acquisition
activities will be undertaken as suitable opportunities arise. We
will
continue to pursue these activities unless adequate sources of financing
are not available or if we cannot achieve satisfactory returns on
our
investments.
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An
annual capital budget is prepared for each service center that is
intended
to provide for all necessary recurring and non-recurring capital
expenditures. We believe that operating cash flows from mature operations
will provide the necessary funding for these expenditures.
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ITEM
3. CONTROLS AND PROCEDURES
We
maintain disclosure controls and
procedures that are designed to ensure that information required to be disclosed
in our Exchange Act reports is recorded, processed, summarized and reported
within the time periods 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 Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosure
based closely on the definition of “disclosure controls and procedures” in Rule
13a-15(e). In designing and evaluating the disclosure controls and procedures,
our management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply
its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures. We maintain that the controls and procedures in place do provide
reasonable assurance that all necessary disclosures are communicated as
required.
At the end of the period covered by this Quarterly Report on Form 10-QSB, we
carried out an evaluation, under the supervision and with the participation
of
our management, including our Chief Financial Officer, of the effectiveness
of
the design and operation of our disclosure controls and procedures. Based on
the
foregoing, our Chief Financial Officer concluded that our disclosure controls
and procedures were not effective to ensure that all material information
required to be disclosed in this Quarterly Report on Form 10-QSB has been made
known to them in a timely fashion.
In
connection with the completion of its audit of, and the issuance of its report
on our financial statements for the year ended December 31, 2006, Malone &
Bailey, PC identified deficiencies that existed in the design or operation
of
our internal control over financial reporting
.
The deficiencies in our internal control related to the accounting for
derivative instruments, accounting for equity method investments, expense
recognition, and disclosure control deficiencies related to transactions
involving discontinued operations and investment in equity method investees.
Proper adjustments were made to correct these internal control deficiencies.
Disclosure control deficiencies relating to these transactions have been
appropriately corrected in this Quarterly Report on Form 10-QSB. We are in
the
process of improving our internal control over financial reporting in an effort
to remediate these deficiencies through improved supervision and training of
our
accounting staff. These deficiencies have been disclosed to our Board of
Directors. Additional effort is needed to fully remedy these deficiencies and
we
are continuing our efforts to improve and strengthen our control processes
and
procedures. Our management and directors will continue to work with our auditors
and other outside advisors to ensure that our controls and procedures are
adequate and effective.
Our
Chief
Executive Officer and Chief Financial Officer have also evaluated whether any
change in our internal controls occurred during the last fiscal quarter and
have
concluded that there were no changes in our internal controls or in other
factors that occurred during the last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, these
controls.