SPLINTERNET HOLDINGS INC - FORM 10-Q

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EX-32.1 - SPLINTERNET HOLDINGS INC	v167422_ex32-1.htm
EX-31.2 - SPLINTERNET HOLDINGS INC	v167422_ex31-2.htm
EX-31.1 - SPLINTERNET HOLDINGS INC	v167422_ex31-1.htm
EX-32.2 - SPLINTERNET HOLDINGS INC	v167422_ex32-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________to ______________

Commission file number 333-134658

SPLINTERNET HOLDINGS, INC. (Exact Name of Registrant as Specified in Its Charter)

Delaware	22-393-8509
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)

535 Connecticut Avenue, 2nd floor, Norwalk, CT 06854 (Address of Principal Executive Offices)

Registrant’s Telephone Number, Including Area Code: (203) 354-9164

_____________________________________________________________________ Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report.

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o

Non-accelerated filer o Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

As of November 13, 2009, there were 66,671,216 outstanding shares of Common Stock, $.001 par value.

SPLINTERNET HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

			Page
PART I - FINANCIAL INFORMATION

	Item 1.	Financial Statements.	3
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	15
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	26
	Item 4T.	Controls and Procedures.	26

PART II - OTHER INFORMATION

	Item 1.	Legal Proceedings.	27
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	27
	Item 3.	Default upon Senior Securities.	28
	Item 4.	Submission of Matters to a Vote of Security Holders.	28
	Item 5.	Other Information.	28
	Item 6.	Exhibits.	28

SIGNATURES			29

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements.

	Condensed Consolidated Balance Sheets at September 30, 2009 (Unaudited) and December 31, 2008	4
	Condensed Consolidated Statements of Operations (Unaudited) for the three months and nine months ended September 30, 2009 and 2008	5
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2009 and 2008	6
	Notes to the Condensed Consolidated Financial Statements (Unaudited)	7

EXPLANATORY NOTE: The financial statements included in this Report have not been reviewed by an independent public accountant as required by Regulation S-X. We undertake the responsibility to file an amended Form 10-Q for this period when the review is completed. Our failure to obtain the review of our interim unaudited financial statements required by Regulation S-X may result in changes to the financial statements when reviewed by an independent public accountant.

SPLINTERNET HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
	2009			2008
	(unaudited)
ASSETS
Cash and cash equivalents	$	52,903		$	6,407
Accounts receivable		26,158			8,750
Prepaid expenses		108,838			12,452
Note receivable		77,961			77,958
Due From Employees		22,913			-

Total current assets		288,773			105,567

Property and equipment, net		29,634			34,804

Goodwill		2,831,790			2,831,790
Security deposits		14,394			14,394
Total assets	$	3,164,591		$	2,986,555

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Accounts payable	$	159,894		$	122,621
Accrued expenses		69,177			334,143
Loans from officers		706,186			226,571
Total current liabilities		935,257			683,335
Total liabilities		935,257			683,335
Commitments
Stockholders’ equity:
Capital stock:
Preferred stock, 10,000,000 shares authorized and none outstanding
Common stock, $0.001 par value; 90,000,000 shares authorized; 66,671,216 and 61,940,679 shares issued and outstanding		66,674			61,941
Additional paid-in capital		6,777,208			5,980,762
Accumulated deficit		(4,614,548	)		(3,739,483	)
Total stockholders’ equity		2,229,334			2,303,220
Total liabilities and stockholders’ equity	$	3,164,591		$	2,986,555

See notes to condensed consolidated financial statements.

SPLINTERNET HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended September 30,						Nine Months ended September 30,
	2009			2008			2009			2008
Service revenue	$	294,285		$	244,167		$	681,684		$	645,125

Cost of revenue		331,995			239,172			656,796			619,917
Gross profit		(37,710	)		4,995			24,888			25,208

Selling, general and administrative expenses		187,443			462,195			747,834			1,158,875

Research and development costs		33,233			63,688			124,336			178,847
Loss from operations		(258,386	)		(520,888	)		(847,282	)		(1,312,514
Interest income		1,350			3,449			4,053			21,847
Interest expense		16,269			417			31,836			417
Net loss	$	(273,305	)	$	(517,856	)	$	(875,065	)	$	(1,291,084

Net loss per share:
Basic and Diluted	$	(0.00	)	$	(0.01	)	$	(0.01	)	$	(0.02

Weighted average common stock outstanding:
Basic and Diluted		65,689,073			61,503,179			63,820,820			59,380,946

See notes to condensed consolidated financial statements.

SPLINTERNET HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended September 30,
	2009			2008
Cash flow from operating activities:
Net loss	$	(875,065	)	$	(1,291,084	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		5,171			4,812
Non-cash stock option expense		-			86,217
Non-cash stock compensation expense		711,179
Change in assets and liabilities, net of acquisition
Increase/(decrease) in accounts receivable		(17,408	)		3,413
Increase/(decrease) in prepaid expenses		(96,388	)		40,305
Increase in advances to employee		(22,913	)
Increase in notes receivable		(3	)		(30	)
Increase in deferred revenue		-			40,000
Increase/(decrease) in accounts payable and accrued expenses		(227,694	)		112,438
Net cash used in operating activities		(523,121	)		(1,003,928	)

Cash flows from financing activities:
Pre acquisition loans to Vidiation, Inc.		-			(165,000	)
Loans from officer		479,615			75,417
Proceeds from sale of common stock		90,000			-
Net cash provided by (used in) financing activities		569,615			(89,583	)

Net increase in cash and cash equivalents		46,496			(1,093,511	)

Cash and cash equivalents, beginning of period		6,407			1,105,057
Cash and cash equivalents, end of period	$	52,903		$	11,546

Supplemental disclosure of cash flow information
Non-cash investing and financing activity
Issuance of stock for the purchase of Vidiation, Inc.	$	-		$	2,609,557
Issuance of common stock for services	$	255,947		$	-

See notes to condensed consolidated financial statements.

SPLINTERNET HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. PRINCIPAL BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Splinternet Holdings, Inc., a Company incorporated in the State of Delaware on March 22, 2006, conducted a share for share exchange of securities with Splinternet Communications, Inc. (“Splinternet”) on April 3, 2006, whereby 214,002 shares of the common stock, par value $0.001 per share, of Splinternet Communications, Inc. were exchanged for 53,500,500 shares of the common stock, par value $0.001 per share, of Splinternet Holdings, Inc. (the “Share Exchange”), as a result of which Splinternet Communications, Inc. became a wholly owned subsidiary of Splinternet Holdings, Inc. (“ the Company”). Splinternet Holdings, Inc. does not conduct any business or own any assets other than all of the issued and outstanding shares of Splinternet Communications, Inc. and Vidiation, Inc.

Splinternet Communications, Inc. was incorporated in the State of Connecticut in January 2000. Splinternet Communications, Inc., which also operates under the name Defentect in connection with its radiation detection business, is a developer of Internet Protocol (IP) based management, monitoring and messaging system which interfaces with Defentect’s radiation detection devices, third-party radiation detection sensors and other third-party threat-event sensors. The software which is managed over the Web, utilizing existing network infrastructure, to provide administrative and configuration services enabling our customers to add these type of devices to their existing security systems for unmanned detection, alerts and messaging for a variety of threat-event detection. In addition, Splinternet continues to resell excess VoIP capacity primarily to traditional international carriers.

On April 30, 2008, the Company acquired Vidiation, Inc. (“Vidiation”)a radiation detection company, for a purchase price of approximately $2.6 million, excluding transaction costs of approximately $0.01 million. The acquisition was accounted for as a purchase business combination. The purchase price was allocated to the net assets and liabilities acquired based on their estimated fair values as of the acquisition date. The excess of the purchase price over the estimated fair value of the net assets acquired was allocated to goodwill. All significant inter-company accounts and transactions have been eliminated in the condensed consolidated financial statements.

Vidiation, Inc. is a radiation detection sales and marketing company incorporated in the State of Delaware on December 10, 2007, which acquired certain assets from Vidiation LLC. Vidiation LLC was a radiation detection technology development company which had extensive sales and marketing experience in the surveillance and security market space and was actively engaged in that space.

2. BASIS OF PREPARATION

Pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-Q, the financial statements, footnote disclosures and other information normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed. The financial statements contained in this report are unaudited and have not been reviewed by an independent public accountant as required by Regulation S-X but, in the opinion of the Company, reflect all adjustments, consisting of only normal recurring adjustments necessary as of September 30, 2009 and the results of operations and cash flows for the interim periods ended September 30, 2009 and 2008 to fairly present the financial position presented herein. The results of operations for any interim period are not necessarily indicative of results for the full year. The balance sheet at December 31, 2008 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Basic loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted loss per share is computed by dividing net loss by the weighted average number of shares of common stock, potential common stock and potentially dilutive securities outstanding during each period. Warrants to purchase 1,032,500 shares of the Company's common stock, as of September 30, 2009, were not included in the calculation, due to the fact that these warrants were anti-dilutive for the three and nine months ended September 30, 2009. 603,393 options issued in 2008 were excluded as they were not vested. Vested options to purchase 301,667 shares of the Company's common stock, as of September 30, 2009, were not included in the calculation, due to the fact that these options were anti-dilutive for the three and nine months ended September 30, 2009.

Fair Value of Financial Instruments

All current assets are carried at their cost and current liabilities are recorded at their contract amount, which approximates fair value because of their short term nature. The carrying value of short-term financing arrangements and notes receivable approximates fair value because interest rates over the relative term of these instruments approximate current market interest rates.

LIQUIDITY

As of September 30, 2009, the Company had approximately $53,000 in cash and liabilities of approximately $935,000. The Company’s net cash used in operating activities for the nine months ended September 30, 2009 was $523,121 hence, the Company will require additional funding in order to be adequately funded for the foreseeable future.

The Company has a history of substantial operating losses and an accumulated deficit of $4,614,548 as of September 30, 2009. For the nine months ended September 30, 2009, our net loss was $875,065. The Company has historically experienced cash flow difficulties primarily because expenses have exceeded revenues. The Company expects to incur additional operating losses for the immediate near future. These factors, among others, raise significant doubt about ability to continue as a going concern. If the Company is unable to generate sufficient revenue from operations to pay expenses or is unable to obtain additional financing on commercially reasonable terms, our business, financial condition and results of operations will be materially and adversely affected.

Recent Accounting Pronouncements

The FASB issued ASC 105, Generally Accepted Accounting Principles, which established the FASB Accounting Standards Codification as the sole source of authoritative nongovernmental U.S. generally accepted accounting principles (“GAAP”) in June 2009. The Statement does not change existing GAAP. Pursuant to the provisions of FASB ASC 105, the Company has updated references to GAAP in its financial statements for the period ended September 30, 2009.

The FASB issued ASC 855, Subsequent Events (formerly referred to as SFAS No. 165) in May 2009. The pronouncement establishes recognition and disclosure standards for events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. This guidance is effective on a prospective basis for interim periods ending after June 15, 2009. The Company adopted the guidance as of June 30, 2009 and it had no impact on the Company’s financial position or results of operations.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS) No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and all interim periods within those fiscal years. In February 2008, the FASB released FASB Staff Position FSP FAS 157-2 – Effective Date of FASB Statement No. 157 which delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. The implementation of SFAS No. 157 for financial assets and liabilities, effective January 1, 2008, did not have an impact on the Company’s consolidated financial position and results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure, on an item-by-item basis, specified financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are required to be reported in earnings at each reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, the provisions of which are required to be applied prospectively. The Company adopted this Statement in fiscal year 2008 and the adoption of this Statement did not have a material effect on the Company’s consolidated financial position, results of operations, or cash flows.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations”, which replaces SFAS No 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS No. 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company will adopt this Statement in fiscal year 2009 and its effects on future periods will depend on the nature and significance of any acquisitions subject to this Statement.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-an Amendment of ARB No. 51. SFAS 160 establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. This statement also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. The adoption of SFAS 160 is not currently expected to have a material effect on the Company’s consolidated financial position, results of operations, or cash flows.

In April 2009, the Financial Accounting Standards Board, or FASB, issued FASB Staff Position, or FSP, No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, to amend the other-than-temporary impairment guidance in debt securities to be based on intent to sell instead of ability to hold the security and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This pronouncement is effective for periods ending after June 15, 2009. We do not expect the adoption of SFAS 115-2 to have a material impact on our consolidated financial position and results of operations.

In April 2009, the FASB issued FSP No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, or FSP 157-4. FSP 157-4 provides additional authoritative guidance to assist both issuers and users of financial statements in determining whether a market is active or inactive, and whether a transaction is distressed. The FSP will be effective for us for the quarter ending June 30, 2009. We do not expect the adoption of FSP 157-4 to have a material impact on our consolidated financial position and results of operations.

In April 2009, the FASB issued FSP FAS No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, or FSP 107-1 and APB 28-1. FSP 107-1 and APB 28-1 require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. FSP 107-1 and APB 28-1 will be effective for us for the quarter ending June 30, 2009. We do not expect the changes associated with adoption of this FSP to have a material impact our consolidated financial position and results of operations.

In April 2009, the Financial Accounting Standards Board (“FASB”) issued FSP SFAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, to amend the provisions related to the initial recognition and measurement, subsequent measurement and disclosure of assets and liabilities arising from contingencies in a business combination under SFAS 141(R). Under the new guidance, assets acquired and liabilities assumed in a business combination that arise from contingencies should be recognized at fair value on the acquisition date if fair value can be determined during the measurement period. If fair value cannot be determined, companies should typically account for the acquired contingencies using existing guidance. We do not believe adoption of SFAS 141(R) will have a material impact to the consolidated financial statements.

In May 2009, the FASB issued Statement No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 requires that an entity shall recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. The standard also requires entities to disclose the date through which subsequent events have been evaluated, as well as whether that date is the date the financial statements were issued or the date the financial statements were available to be issued. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009, and is to be applied prospectively. Accordingly, the Company adopted the provisions of SFAS in the second quarter of 2009. The adoption of the provisions of SFAS 165 did not have a material effect on the Company’s consolidated financial condition, results of operations, or cash flows.

In June 2009, the FASB issued Statement No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162” (“SFAS 168”). SFAS 168, or the FASB Accounting Standards Codification (“Codification”), will become the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. On the effective date of SFAS 168, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company does not expect the standard to have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.

The FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140,” (FASB ASC 860, Transfers and Servicing) in June 2009. The Statement improves the relevance, comparability and transparency of information presented in a reporting entity’s financial statements about a transfer of financial assets, the effects of a transfer on its financial position, financial performance and cash flows, and the transferor’s continuing involvement, if any, with the transferred financial assets. The Statement is effective for interim and annual reporting periods beginning after November 15, 2009. The adoption of this guidance to SFAS 140 is not expected to have a material effect on the Company’s consolidated financial condition, results of operations, or cash flows.

The FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R) (FASB ASC 810, Consolidations) in June 2009. The Statement requires the use of a qualitative approach to identify the entity that has a controlling financial interest in a variable interest entity. The Statement is effective for interim and annual reporting periods beginning after November 15, 2009. The adoption of the provisions of SFAS 167 is not expected to have a material effect on the Company’s consolidated financial condition, results of operations, or cash flows.

The FASB issued Accounting Standards Update (“ASU”) 2009-05, Measuring Liabilities at Fair Value (“ASU 2009-05”) in August 2009. ASU 2009-05 reiterates the definition of fair value for a liability as the price that would be paid to transfer it in an orderly transaction between market participants at the measurement date and requires a company to consider its own nonperformance risk, including its own credit risk, in fair-value measurements of liabilities. The update is effective for interim and annual reporting periods that begin after August 27, 2009 and applies to all fair value measurements of liabilities required by FASB ASC 820 Fair Value Measurements and Disclosure. No new fair value measurements are required by the new guidance. The adoption of ASU 2009-05 as of October 1, 2009 is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

3. MAJOR CUSTOMER

During the three and nine months ended September 30, 2009 and 2008, one customer (BuenaVox LLC) accounted for 97% of all revenues, for both these periods.

4. TAXES

Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109.” FIN 48 provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the financial statements in accordance with SFAS No. 109. Tax positions must meet a “more-likely-than-not” recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. Upon the adoption of FIN 48, the Company had no unrecognized tax benefits. During the nine months ended September 30, 2009 and 2008, the Company recognized no adjustments for uncertain tax benefits.

The Company recognizes interest and penalties, if any, related to uncertain tax positions in selling, general and administrative expenses. No interest and penalties related to uncertain tax positions were accrued at September 30, 2009.

The tax years 2003 through 2007 remain open to examination by the major taxing jurisdictions in which the Company operates. The Company expects no material changes to unrecognized tax positions within the next twelve months.

As of September 30, 2009 the Company has net operating loss carryforwards of approximately $4,605,000 available to offset taxable income through the year 2028.

The Company recorded a deferred income tax asset for the tax effect of net operating loss carryforwards and temporary differences, aggregating approximately $1,840,000 as of September 30, 2009. In recognition of the uncertainty regarding the ultimate amount of income tax benefits to be derived, the Company has recorded a valuation allowance of $1,840,000 at September 30, 2009.

5. STOCKHOLDERS EQUITY

During the nine months ended September 30, 2009 the Company issued 4,010,537 shares of common stock to employees and consultants for services rendered and recorded a non-cash stock compensation expense of approximately $711,000. Included in that amount were issuances of 375,000 shares of stock to its chairman of the board and 1,000,000 shares of stock to an outside consultant for providing marketing, financial oversight and strategic planning services for twelve months beginning August 17, 2009. The Company recorded non-cash stock compensation expense of approximately $35,000 and $15,000 respectively. The Company also issued to Frank O’Connor for services rendered 250,000 warrants which are exercisable into shares of common stock at $0.40 per share and expire in two years.

The Company also sold 720,000 common shares and 720,000 warrants and received proceeds of $90,000. The warrants have a strike price of $0.10 per share and expire in June 2011. Each warrant is exchangeable for one share of the Company’s common stock.

6. STOCK PLAN

On April 22, 2008, the Board of Directors of the Company adopted the Splinternet Holdings, Inc. 2008 Stock Incentive Plan (the “2008 Stock Plan”). Under the 2008 Stock Plan, officers, other employees and directors of, and consultants to, the Company or its subsidiaries may be awarded stock options, stock appreciation rights and other stock awards. The number of shares subject to the 2008 Stock Plan may not exceed 6,000,000 shares in total. Adoption of the 2008 Stock Plan is subject to the approval by the Company’s shareholders within twelve months of the adoption by the Board of Directors. The 2008 Stock Plan provides for the grant of (i) options that are intended to qualify as incentive stock options ("Incentive Stock Options") within the meaning of Section 422 or 424 of the Internal Revenue Code to key employees and (ii) options not so intended to qualify ("Nonqualified Stock Options") to officers, employees of or consultants to the Company or any non employee director. On April 22 and 30, 2008, the Board of Directors granted 1,265,000 nonqualified stock options to employees and consultants. The Stock Plan is administered by a committee of the Board of Directors (or if there is no committee, the Board of Directors itself). The committee shall determine the terms of the options granted, including the exercise price, the number of shares subject to the option and the terms and conditions of exercise. During the three months ended December 31, 2008, 360,000 stock options were forfeited when the individuals stopped working for the Company.

The exercise price of Incentive Stock Options granted under the plan must be at least equal to the fair market value of the shares on the date of the grant. The maximum term for each Incentive Stock Option granted is five years. Options shall be exercisable at such times and in such installments as the committee shall provide in the terms of each individual option. The maximum number of shares for which options may be granted to any individual in any fiscal year is 2,000,000. The Stock Plan also provides for the granting of stock appreciation rights, restricted stock awards, restricted stock unit awards, performance awards, qualified performance awards and stock awards. The Board of Directors has not granted any of these other types of awards.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123(R), using the modified prospective transition method. The adoption of SFAS 123(R) resulted in share-based compensation expense for the three and nine months ended September 30, 2009 of approximately $34,000 and $102,000 respectively. For the three and nine months ended September 30, 2008 the share-based compensation expense was approximately $35,000 and $86,200.

The Company recognizes stock-based compensation costs on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. The Company has a 100% valuation allowance recorded against its deferred tax assets; therefore the stock-based compensation has no tax effect on the Consolidated Statements of Operations.

As of September 30, 2009, there was approximately $217,000 of unrecognized compensation cost related to non-vested stock option awards, which is expected to be recognized over a remaining weighted-average vesting period of 4.63 years.

7. SEGMENT INFORMATION

The Company conducts its operations in two business segments; the Radiation Sensor and Detection Division (Defentect) and the VoIP Division (through Splinternet Communications, Inc.). The accounting policies of the reportable segments are the same as those described in Note 2 of the Company’s consolidated financial statements included in the Form 10-K for the year ended December 31, 2008. The Company evaluates the performance of its operating segments primarily based on revenues and operating income. Corporate costs are generally allocated to the segments based on a three factor formula (revenues, payroll and certain assets).

Three Months ended September 30, 2009	Radiation			VoIP			Corporate		Total
Revenues	$	7,500		$	286,785		$	—	$	294,285
Operating income (loss)		(213,025	)		(45,361	)		—		(258,386	)
Total assets		2,845,533			48,549			269,659		3,163,741
Depreciation		636			1,088			—		1,724

Nine Months ended September 30, 2009
Revenues	$	7,500		$	674,184		$	—	$	681,684
Operating income (loss)		(862,344	)		15,063			—		(847,281	)
Total assets		2,845,533			48,549			269,659		3,163,741
Depreciation		1,909			3,263			—		5,172

Three Months ended September 30, 2008	Radiation			VoIP			Corporate			Total
Revenues	$	—		$	244,167		$	—		$	244,167
Operating income (loss)		(525,883	)		4,995			(220,187	)		(520,888	)
Total assets		2,847,754			55,592			179,222			3,082,568
Depreciation		1062			1,088			—			2,150

Nine Months ended September 30, 2008
Revenues	$	—		$	645,125		$	—		$	645,125
Operating income (loss)		(1,115,096	)		(197,418	)		—			(1,312,514	)
Total assets		2,847,754			55,592			179,222			3,,082,568
Depreciation		1,549			3,263			—			4,812

8. LOANS FROM OFFICER

Mr. James C. Ackerly, the President and secretary, treasurer and director, made loans to the Company during the nine months ended September 30, 2009 of $465,000. The loans are demand loans that are secured by all the assets of the Company and accrue interest at the rate of 8%. The Company accrued $27,278 in interest charges due to loans payable to Mr. Ackerly.

9. CONTINGENCY

In 2008, Kerrigan & Associates, Inc. (“Kerrigan”) commenced an action against Vidiation, Inc., Vidiation LLC, Frank O’Connor and others in Fairfax Circuit Court, Fairfax, Virginia wherein Kerrigan alleges that it is owed $59,000 for consulting services rendered prior to our acquisition of Vidiation, Inc. Splinternet has been added as a defendant wherein Kerrigan alleges that Splinternet Holdings, Inc. assumed all of the assets and liabilities of Vidiation, Inc.

On February 26, 2009, Vidiation, Inc. and Frank O’Connor agreed to settle the dispute. Under the terms of the settlement, Vidiation, Inc. paid $12,000 on February 26, 2009 and $22,000 on May 22, 2009 to Kerrigan. Mr. O’Connor agreed to reimburse Vidiation, Inc. for both payments. In the event that Mr. O’Connor does not reimburse Vidiation, Inc. for either of the two payments to the vendor, Vidiation, Inc. or the Company may satisfy the obligation by withholding funds otherwise due from Vidiation, Inc. or the Company to Mr. O’Connor.

On April 28, 2009, The Idler Company, Inc. (“Idler”) commenced an action against Splinternet Holdings, Inc., Vidiation, Inc., Vidiation, LLC, Frank O’Connor and James C. Ackerly in the United States District Court, District of Connecticut pertaining to the purchase by Idler of shares of Vidiation, LLC for $100,000 in 2007. Such action alleges various securities law violations, breach of contract, rescission, fraud and unjust enrichment. The Company intends to vigorously defend this matter. However, the Company cannot predict or estimate the timing or ultimate outcome of this matter.

10. SUBSEQUENT EVENTS

During October and November 2009 James C. Ackerly, President and Chief Executive Officer, loaned the Company $50,000 and $35,000 respectively.

The Company evaluated subsequent events as of November 18, 2009.

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

The following discussion should be read in conjunction with the Financial Statements included in this report and is qualified in its entirety by the foregoing.

Forward-Looking Statements

This report contains “forward-looking statements”, which involve known and unknown risks, uncertainties and other factors which could cause actual financial or operating results, performances or achievements expressed or implied by such forward-looking statements not to occur or be realized. These forward-looking statements generally are based on our best estimates of future results, performances or achievements, based upon current conditions and assumptions. Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “can,” “could,” “project,” “expect,” “believe,” “plan,” “predict,” “estimate,” “anticipate,” “intend,” “continue,” “potential,” “would,” “should,” “aim,” “opportunity” or similar terms, variations of those terms or the negative of those terms or other variations of those terms or comparable words or expressions. These risks and uncertainties include, but are not limited to:

	·	general economic conditions in both foreign and domestic markets,

	·	Cyclical factors affecting our industry,

	·	lack of growth in our industry,

	·	our ability to comply with government regulations,

	·	a failure to manage our business effectively and profitably,

	·	our ability to sell both new and existing products and services at profitable yet competitive prices, and

	·	other risks and uncertainties set forth from time to time in our filings with the Securities and Exchange Commission.

You should carefully consider these risks, uncertainties and other information, disclosures and discussions which contain cautionary statements identifying important factors that could cause actual results to differ materially from those provided in the forward-looking statements. Splinternet Holdings, Inc. undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

Splinternet Holdings, Inc. (“we”, “us”, “our”, the “Company” or “Splinternet”) was incorporated in the State of Delaware on March 22, 2006. On April 3, 2006, Splinternet Holdings, Inc. conducted a share for share exchange of securities with Splinternet Communications, Inc. whereby 214,002 shares of the common stock, par value $0.001 per share, of Splinternet Communications, Inc. were exchanged for 53,500,500 shares of the common stock, par value $0.001 per share, of Splinternet Holdings, Inc. (the “Share Exchange”), as a result of which Splinternet Communications, Inc. became a wholly owned subsidiary of Splinternet Holdings, Inc.

Splinternet Communications, Inc. was incorporated in the State of Connecticut in January 12, 2000. Splinternet Communications, Inc. which operates under the name Defentect in connection with its radiation detection business is a developer of Internet Protocol (IP) based management, monitoring and messaging system which interfaces with Defentect’s radiation detection devices, third-party radiation detection sensors and other third-party threat-event sensors. The software which is managed over the Web, utilizing existing network infrastructure, to provide administrative and configuration services enabling our customers to add these type of devices to their existing security systems for unmanned detection, alerts and messaging for a variety of threat-event detection. In addition, Splinternet continues to resell excess VoIP capacity primarily to traditional international carriers.

On April 30, 2008, Splinternet Holdings, Inc. consummated the transaction contemplated by an Agreement and Plan of Merger (the “Vidiation Merger Agreement”) dated February 7, 2008 among the Company, Vidiation, Inc., a Delaware corporation and Splinternet Merger Sub I, Inc. (a wholly owned subsidiary of the Company formed for the purpose of such transaction) (the “Merger Sub”) pursuant to which the Merger Sub has merged into Vidiation, Inc. resulting in Vidiation, Inc. becoming a wholly-owned subsidiary of the Company. Upon closing, Splinternet Holdings, Inc. issued an aggregate of 4,788,179 shares of common stock to the shareholders of Vidiation, Inc. in exchange for the cancellation of the then outstanding shares of common stock of Vidiation, Inc.

Since our inception, the Company has generated limited revenues. We are presently considering the acquisition of other companies with compatible products and which can benefit from the Company’s infrastructure under circumstances where there is a strategic, technology, and marketing fit for enhancement. In addition to seeking acquisition candidates, during the quarter ended December 31, 2007, the Company began its development of a radiation device which signifies our entry into the radiation detection market. During 2008, we developed Internet Protocol (IP) based management, monitoring and messaging system which interfaces with our radiation detection devices, third-party radiation detection sensors and other third-party threat-event sensors. During the fourth quarter 2008 we began product trials for our radiation detection device and management, monitoring and messaging system with a major metropolitan hospital, a major metropolitan police department and a global transportation and logistics provider. These trials completed during the second quarter 2009 at which time the Company submitted system proposals to the hospital and transportation provide for additional product. During the quarter ended September 30, 2009, the Company began shipping its radiation detection product. The Company continues purchasing long distance minutes at wholesale prices from phone companies and then reselling them at a markup to its customers. The Company believes that over time it will build sales volume sufficient to cover the costs of operations through this strategy. There is no guarantee that the Company will be successful in its efforts to either acquire other companies or generate service or equipment sales sufficient to cover its costs of operations.

Results of Operations

SERVICE REVENUE

Service revenue for the three months and nine months ended September 30, 2009 were $294,285 and $681,684 which is an increase from $244,167 and $645,125 for the three months and nine months ended September 30, 2008. The increase is due to higher usage of the Company’s long distance termination by its customer during the three and nine months ended September 30, 2009 as compared to the same period in 2008.

COST OF REVENUE

The Company continues to purchase long distance minutes at wholesale prices from phone companies and then resells them at a markup to its customers. For the three months and nine months ended September 30, 2009, the costs of the wholesale minutes were $331,995 and $656,796 which is an increase from $239,172 and $619,917 for the three months and nine months ended September 30, 2008. The increase is due to higher usage of the Company’s long distance termination by its customer during the three and nine months ended September 30, 2009 as compared to the same period in 2008.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

In the three and nine months ended September 30, 2009, selling, general and administrative costs were $187,443 and $747,834 which is a decrease from $462,195 and $1,158,875 in the comparable period in 2008. The decreases are the result of cost cutting measures the Company began undertaking since the fourth quarter of 2008.

RESEARCH AND DEVELOPMENT

Research and development decreased to $33,233 and $124,336 in the three and nine months ended September 30, 2009 from $63,688 and $178,847 for the comparable periods in 2008. The decreases are the result of cost cutting measures the Company began undertaking since the fourth quarter of 2008.

INTEREST INCOME

Interest earned in the three and nine months ended September 30, 2009 was $1,350 and $4,053 compared to $3,449 and $21,847 for the comparable period in 2008. This is primarily due to a lower average balance invested in 2009 due to the Company using cash to fund operations and lower interest rates.

INTEREST EXPENSE

Interest expense in the three and nine months ended September 30, 2009 was $16,269 and $31,836 compared to $417 and $417 for the comparable period in 2008. This is due to the accrual of interest on notes made by the President and Chief Executive Officer to the Company.

NET LOSS

We recognized a net loss of $273,305, during the three months ended September 30, 2009 compared to a net loss of $517,856 during the same period in the prior year for an overall decrease in net loss of $244,551. We recognized a net loss of $875,065, during the nine months ended September 30, 2009 compared to a net loss of $1,291,084, during the same period in the prior year for an overall decrease in net loss of $416,019. The decrease in the net loss was primarily the result of the Company’s cost cutting measure which began during the fourth quarter of 2008.

Financial Condition, Liquidity and Capital Resources

As of September 30, 2009, we had approximately $53,000 in cash and liabilities of approximately $935,000; hence, we require additional funding in order to be adequately funded for the foreseeable future. The Company has primarily supplied its cash needs through loans from Mr. Ackerly (the Company’s President and Chief Executive Officer) and stock offerings. The Company’s need to obtain capital from outside investors is expected to continue until we are able to achieve profitable operations, if ever.

The Company has a history of substantial operating losses and an accumulated deficit of $4,614,548 as of September 30, 2009. The Company has historically experienced cash flow difficulties primarily because expenses have exceeded revenues. The Company expects to incur additional operating losses for the immediate near future. These factors, among others, raise significant doubt about ability to continue as a going concern.

Net cash used by operating activities for the nine months ended September 30, 2009 was $523,121which was primarily the result of the net loss of $875,065 plus decreases in accounts payable and accrued expenses of $227,694 offset by non-cash stock compensation expense of $711,179. This compares to net cash used by operating activities for the nine months ended September 30, 2008 of $1,003,928 which was primarily the result of the net loss of $1,291,084 offset by an increase in accounts payable and accrued expenses of $112,438, a decrease in prepaid expenses of $40,305 and a non-cash stock option expense of $86,217. No net cash was used in investing activities for the nine months ended September 30, 2009 and for the same period in the prior year. This is due to the Company eliminating the purchase of property and equipment to conserve cash. For the nine months ended September 30, 2009, net cash provided by (used in) financing activities was $569,615 compared to a use of $89,583 for the nine months ended September 30, 2008. The change in 2009 is primarily due to loans from the President and Chief Executive Officer of the Company in the amount of $479,615 during the first nine months of 2009 compared to $75,417 in the same period of 2008 and the sale of common stock which generated $90,000 in net proceeds during the first nine months of 2009 versus the loaning of $165,000 to Vidiation, Inc. during the same period in 2008. If the Company is unable to generate sufficient revenue from operations to pay expenses or is unable to obtain additional financing on commercially reasonable terms, our business, financial condition and results of operations will be materially and adversely affected which may force us to cease operations.

Subsequent to September 30, 2009 the President and current CEO loaned the Company $85,000 which bears interest at 8% per annum and is due on demand.

Capital Commitments

The Company currently has no material commitments for capital expenditures.

Trends

The radiation detection industry, which the Company has recently entered, is subject to federal, state, and international governmental regulation. Unknown matters, new laws and regulations, or stricter interpretations of existing laws or regulations may materially affect our entry into this business or operations in the future and/or could increase the cost of compliance. Our products will have to comply with various domestic and international standards that are used by regulatory and accreditation bodies for approving such services and products. The failure of the Company to obtain accreditation for its products and services may adversely affect us and the market perception of the effectiveness of our proposed products. In the future, changes in these standards and accreditation requirements may also result in the Company having to incur substantial costs to adapt its offerings and procedures. Additionally, changes affecting radiation detection practices, including new understandings of the hazards of radiation exposure and amended regulations, may impact how the Company’s services are used by its customers and may, in some circumstances, cause the Company to alter its products and delivery of its services.

The VoIP industry in which we operate is in a state of dynamic and rapid change. VoIP services are gaining acceptance in the marketplace and we intend to take advantage of that trend by attempting to sell into a more willing marketplace, despite the increased competition.

We have noted that several VoIP service retailers in the United States are currently offering services to end users for no charge, as a promotional program to attract users to their systems. We acknowledge that this may attract users, but do not believe there is any assurance users acquired in this manner can be converted into sources of revenue, even if they are part of a subscriber base to which advertising can be delivered on behalf of third parties. The role of United States retail services in that environment is unknown.

Seasonal Fluctuations

There have been no fluctuations in our business to date which can be attributed to seasonality.

Employment Agreements

Currently, we have no written employment agreements with any of our employees or officers.

Risk Factors

Our independent registered public accounting firm has issued a going concern opinion.

Our auditors have included an explanatory paragraph in their opinion that accompanies our audited financial statements as of and for the year ended December 31, 2008, indicating that our recurring losses from operations, stockholders’ deficiency, and working capital deficiency raise substantial doubt about our ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We have a limited operating history and a history of substantial operating losses and we may not be able to continue our business.

We have a history of substantial operating losses and an accumulated deficit of $4,614,548 as of September 30, 2009. For the nine months ended September 30, 2009, our net loss was $980,605. We have historically experienced cash flow difficulties primarily because our expenses have exceeded our revenues. We expect to incur additional operating losses for the immediate near future. These factors, among others, raise significant doubt about our ability to continue as a going concern. If we are unable to generate sufficient revenue from our operations to pay expenses or we are unable to obtain additional financing on commercially reasonable terms, our business, financial condition and results of operations will be materially and adversely affected and we could be forced to cease operations.

We will need additional financing in order to continue our operations which we may not be able to raise.

We will require additional capital to finance our future operations. We can provide no assurance that we will obtain additional financing sufficient to meet our future needs on commercially reasonable terms or otherwise. If we are unable to obtain the necessary financing, our business, operating results and financial condition will be materially and adversely affected and we could be forced to cease operations.

Our performance depends on market acceptance of our products and we cannot be sure that our products are commercially viable.

We expect to derive a substantial portion of our future revenues from the sales of radiation detection equipment and services that is only now entering the initial marketing phase. Although we believe our products and technologies will be commercially viable, these are new products. If markets for our products fail to develop further, develop more slowly than expected or are subject to substantial competition, our business, financial condition and results of operations will be materially and adversely affected and we could be forced to cease operations.

Rapidly changing technology and substantial competition may adversely affect our business.

Our business is subject to rapid changes in technology. We can provide no assurances that research and development by competitors will not render our technology obsolete or uncompetitive. We compete with a number of companies that have technologies and products similar to those offered by us and have greater resources, including more extensive research and development, marketing and capital than we do. If our technology is rendered obsolete or we are unable to compete effectively, our business, operating results and financial condition will be materially and adversely affected.

Defects in our products may adversely affect our business.

Complex technologies such as the technologies developed by us may contain defects when introduced and also when updates and new products are released. Our introduction of technology with defects or quality problems may result in adverse publicity, product returns, reduced orders, uncollectible or delayed accounts receivable, product redevelopment costs, loss of or delay in market acceptance of our products or claims by customers or others against us. Such problems or claims may have a material and adverse effect on our business, financial condition and results of operations.

If we are unable to successfully integrate acquisitions, our revenue growth and future profitability may be negatively impacted.

The process of integrating an acquired business, technology or product may result in unforeseen operating difficulties and expenditures and may absorb significant management attention and capital that would otherwise be available for ongoing development of our business. In addition, we may not be able to maintain the levels of operating efficiency that any company we may acquire achieved or might have achieved separately. Additional risks we face include:

·	the need to implement or remediate controls, procedures and policies appropriate for a public company in an acquired company that, prior to the acquisition, lacked these controls, procedures and policies;

·	cultural challenges associated with integrating employees from an acquired company or business into our organization;

·	retaining key employees from the businesses we acquire;

·	the need to integrate an acquired company’s accounting, management information, human resource and other administrative systems to permit effective management; and

to the extent that we engage in strategic transactions outside of the United States, we face additional risks, including risks related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries.

Future acquisitions and investments could involve the issuance of our equity securities, potentially diluting our existing shareholders, the incurrence of debt, contingent liabilities or amortization expenses, write-offs of goodwill, intangibles, or acquired in-process technology, or other increased expenses, any of which could harm our financial condition. Our shareholders may not have the opportunity to review, vote on or evaluate future acquisitions or investments.

Our stock price can be extremely volatile.

Our common stock is traded on the OTC Bulletin Board. There can be no assurance that an active public market will continue for the common stock, or that the market price for the common stock will not decline below its current price. Such price may be influenced by many factors, including, but not limited to, investor perception of us and our industry and general economic and market conditions. The trading price of the common stock could be subject to wide fluctuations in response to announcements of our business developments or our competitors, quarterly variations in operating results, and other events or factors. In addition, stock markets have experienced extreme price volatility in recent years. This volatility has had a substantial effect on the market prices of companies, at times for reasons unrelated to their operating performance. Such broad market fluctuations may adversely affect the price of our common stock.

Trading on the OTC Bulletin Board may be sporadic because it is not a stock exchange, and stockholders may have difficulty reselling their shares.

Our common stock is quoted on the OTC Bulletin Board. Trading in stock quoted on the OTC Bulletin Board is often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with our operations or business prospects. Moreover, the OTC Bulletin Board is not a stock exchange, and trading of securities on the OTC Bulletin Board is often more sporadic than the trading of securities listed on the NASDAQ SmallCap.

Our common stock is subject to the “penny stock” rules of the SEC and the trading market in our securities is limited, which makes transactions in our stock cumbersome and may reduce the value of an investment in our stock.

The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require that a broker or dealer approve a person's account for transactions in penny stocks and the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

In order to approve a person's account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience objectives of the person and make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form sets forth the basis on which the broker or dealer made the suitability determination and that the broker or dealer received a signed, written agreement from the investor prior to the transaction.

Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

We do not expect to pay dividends on our common stock.

We have not declared dividends on our common stock since our incorporation and we have no present intention of paying dividends on our common stock.

MANY OF THESE RISKS AND UNCERTAINTIES ARE OUTSIDE OF OUR CONTROL AND ARE DIFFICULT FOR US TO FORECAST. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED IN THE FORWARD-LOOKING STATEMENTS.

Critical Accounting Policies

The following is a discussion of the accounting policies that the Company believes are critical to its operations:

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue recognition

We follow the guidance of the Securities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin 104 for revenue recognition. In general, we record revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured.

We recognize revenue when products have been shipped or services have been performed. In cases where a customer prepays a subscription for services to be performed in a period which extends from one accounting period into a subsequent period, we only recognize the portion of income due for services performed in the current reporting period. In cases where there is an acceptance period during which a subscriber may cancel their agreement without penalty, we defer the revenue recognition until the end of that acceptance period.

Goodwill

Goodwill represents the excess of the purchase price over the fair market value of net assets acquired. The process of determining goodwill requires judgment. The Company had recorded Goodwill as a result of its acquisition of Vidiation, Inc. Vidiation, Inc. had signed numerous reseller agreements, established relationships with key corporations in the radiation detection industry and negotiated pilot programs to test the Splinternet Defentect technology at the time of the acquisition. These were measurable outputs that Vidiation, Inc. had achieved as a sales and marketing firm in the radiation technology industry at the time of the acquisition. The combination of these outputs with its policies, procedures, management and systems, combined to allow the Vidiation, Inc. to meet the definition of a business and therefore was subject to SFAS 141, Business Combinations accounting. As a result, after allocating the purchase price to tangible and intangible assets, the difference was determined to be Goodwill. Evaluating goodwill for impairment involves the fair value of the reporting units. Inherent in such fair value determinations are certain judgments and estimates, including the interpretation of current economic indicators and market valuations, and the strategic plans with regard to the Company’s operations. To the extent additional information arises or the strategies change, it is possible the conclusion regarding goodwill impairment could change, which could have a material effect on the financial position and results of operations. For these reasons, the Company believes the accounting estimates related to goodwill impairment is a critical accounting estimate.

Recent accounting pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards Board (“SFAS”) No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and all interim periods within those fiscal years. In February 2008, the FASB released FASB Staff Position FSP FAS 157-2 – Effective Date of FASB Statement No. 157 which delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. The implementation of SFAS No. 157 for financial assets and liabilities, effective January 1, 2008, did not have an impact on our consolidated financial position and results of operations.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure, on an item-by-item basis, specified financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are required to be reported in earnings at each reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, the provisions of which are required to be applied prospectively. We adopted this Statement in fiscal year 2008 the adoption of this Statement did not have a material effect on our consolidated financial position, results of operations, or cash flows.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, which replaces SFAS No 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS No. 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We will adopt this Statement in fiscal year 2009 and its effects on future periods will depend on the nature and significance of any acquisitions subject to this Statement.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-an Amendment of ARB No. 51. SFAS 160 establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. This statement also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. The adoption of SFAS 160 is not currently expected to have a material effect on our consolidated financial position, results of operations, or cash flows.

Off-Balance Sheet Arrangements

We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, and results of operations, liquidity or capital expenditures.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4T. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure (1) that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms, and (2) that this information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures.

Prior to the filing date of this report, under the supervision and review of our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in alerting them in a timely manner to material information regarding us that is required to be included in our periodic reports to the SEC.

In addition, there have been no significant changes in our internal controls or in other factors that could significantly affect those controls that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We can provide no assurance, however, that our system of disclosure controls and procedures will always achieve its stated goals under all future conditions, no matter how remote.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Except as set forth below, we are not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.

On February 26, 2009, Vidiation Inc. and Frank O’Connor agreed to settle the dispute. Under the terms of the settlement, Vidiation, Inc. paid $12,000 on February 26, 2009 and $22,000 on May 22, 2009 to Kerrigan. Mr. O’Connor agreed to reimburse Vidiation, Inc. for both payments. In the event that Mr. O’Connor does not reimburse Vidiation, Inc. for either of the two payments to the vendor, Vidiation, Inc. or the Company may satisfy the obligation by withholding funds otherwise due from Vidiation, Inc. or the Company to Mr. O’Connor.

On April 28, 2009, The Idler Company, Inc. (“Idler”) commenced an action against Splinternet Holdings, Inc., Vidiation, Inc., Vidiation, LLC, Frank O’Connor and James C. Ackerly in the United States District Court, District of Connecticut pertaining to the purchase by Idler of shares of Vidiation, LLC for $100,000 in 2007. Such action alleges various securities law violations, breach of contract, rescission, fraud and unjust enrichment. We intend to vigorously defend this matter. However, we cannot predict or estimate the timing or ultimate outcome of this matter.

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

In connection with the appointment of Ambassador L. Paul Bremer, III to serve as a member of the Company’s Board of Directors, effective October 10, 2008, the Board has agreed to issue to Ambassador Bremer, or his designee, 1,000,000 shares of our common stock which will vest quarterly over two years with acceleration of vesting when authorized by the Board of Directors in acknowledgement of extraordinary circumstances or success. As a result, unless accelerated, 125,000 shares will be issued to Ambassador Bremer quarterly and the Company will record non-cash compensation expense for the fair value of shares issued. A total of 500,000 shares have been issued to date. Of such amount, 375,000 were issued in 2009. The issuance of these shares of common stock are exempt from registration requirements pursuant to Section 4(2) of the Securities Act of 1933, as amended.

During the second and third quarters of 2009, we sold an aggregate of 720,000 shares of our common stock to certain investors for total gross proceeds of $90,000 in a private placement offering to accredited investors only. In connection therewith, the investors received 720,000 warrants exercisable into shares of common stock at $0.10 per share which warrants shall expire in two years. These securities were sold directly by the Company, without engaging in any advertising or general solicitation of any kind and without payment of underwriting discounts or commissions to any person. The securities were issued in reliance upon the exemption from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, and/or Rule 506 thereunder.

During the second quarter of 2009, the Company issued to Frank O’Connor for services rendered 500,000 shares of common stock and 250,000 warrants which are exercisable into shares of common stock at $0.40 per share and expire in two years. The issuance of these securities were exempt from registration requirements pursuant to Section 4(2) of the Securities Act of 1933, as amended.

During the third quarter of 2009, the Company issued 1,000,000 shares of common stock to Steven R. Cloyes for certain consulting services. The issuance of these securities were exempt from registration requirements pursuant to Section 4(2) of the Securities Act of 1933, as amended.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act)

31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act)

32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

32.2	Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

	SPLINTERNET HOLDINGS, INC. (Registrant)

Dated: November 23, 2009	By:	/s/ James C. Ackerly
		James C. Ackerly, Chief Executive Officer
		and President (Principal Executive Officer)


Dated: November 23, 2009	By:	/s/ John T. Grippo
		John T. Grippo, Chief Financial Officer
		(Principal Financial Officer)

SPLINTERNET HOLDINGS INC - FORM 10-Q - November 23, 2009

Attached files

SPLINTERNET HOLDINGS INC Reports