SEC Filing Summary: Desert Gateway, Inc. (10-Q)
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for Desert Gateway, Inc. for the period ended May 31, 2010. The registrant is a shell company organized to investigate and acquire a target business to achieve long-term growth. The company has no active operations, no revenues, and is currently insolvent. The filing was signed on October 25, 2010.
Key Financial Metrics
| Metric | Three Months Ended May 31, 2010 | Three Months Ended May 31, 2009 |
|---|---|---|
| Revenue | $0 | $0 |
| Net Loss | ($6,644) | ($7,645) |
| Cash Used in Operating Activities | ($18) | ($19) |
| Cash Balance (End of Period) | $4,629 | $4,752 |
| Total Assets | $4,629 | $4,752 |
| Total Liabilities | $57,506 | $53,880 |
| Stockholders' Deficiency | ($52,877) | ($49,233) |
| Convertible Debt (Current) | $19,793 | $16,667 |
| Weighted Average Shares Outstanding | 95,910,983 | 95,910,983 |
Material Changes vs. Prior Period
- Operating Expenses: Total costs and expenses decreased by $1,001 (from $7,645 to $6,644), primarily due to a reduction in general and administrative expenses from $4,019 to $3,018.
- Debt Amortization: Interest and amortization of debt discount remained constant at $3,626 for both periods.
- Related Party Services: The company recognized $3,000 in fair value for services and office space provided by the sole officer/director in both periods, recorded as a contribution to paid-in capital.
- Liquidity: Cash decreased by $18 during the quarter. Total liabilities increased by $3,626, driven by the amortization of the convertible debt discount and accrued interest.
Outlook, Risks, and Management Commentary
- Going Concern: Management explicitly states that the company has negative working capital, negative stockholders' equity, and no revenues. These conditions raise substantial doubt about the company's ability to continue as a going concern. Continued operations depend on locating a merger candidate and securing additional capital from stockholders or investors.
- Plan of Operation: The company intends to consummate a business combination within the next 12 months. It has no specific target identified and will not restrict candidates to any industry. Costs will be funded by treasury cash or loans from management/stockholders.
- Convertible Debt: The company holds a $25,000 convertible promissory note maturing November 1, 2010. It bears 8% interest and is convertible at $0.01 per share. The note carries a significant discount due to a beneficial conversion feature, resulting in an effective yield of 629%.
- Internal Controls: Management concluded that disclosure controls and procedures were not effective as of the end of the period due to resource constraints, though they believe the financial statements fairly present the company's condition.
- Risk Factors: Key risks include the speculative nature of the shell company status, intense competition for acquisition targets, lack of full-time management, and the potential for significant dilution to existing shareholders upon a merger.
Investor Verification Checklist
- Insolvency Status: Verify the company's ability to meet the $57,506 in liabilities, particularly the $19,793 convertible debt maturing in November 2010, given only $4,629 in cash.
- Merger Progress: Confirm if any preliminary discussions with target companies have occurred, as the filing states no contacts have been made.
- Capital Requirements: Assess the likelihood of obtaining additional funding from the sole officer/director or other investors to sustain operations until a merger.
- Related Party Dependence: Note that $3,000 of quarterly expenses are covered by the sole officer's pro-bono services; verify if this arrangement is sustainable.
- Share Dilution: Understand that a future business combination will likely result in significant dilution, as the company plans to offer a controlling interest to a target business.