Skye 10QSB 3-31-2007
U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-QSB
(Mark
One)
xQUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended March 31, 2007
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: 000-27549
SKYE
INTERNATIONAL, INC.
(Exact
name of Company as specified in its charter)
NEVADA
|
88-0362112
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
7701
E. Gray Road, Suite 4 Scottsdale, AZ
85260
|
|
|
(Address
of principal executive
offices) (Zip Code)
|
|
|
|
|
|
Company's
telephone number: (480)
993-2300
|
|
|
|
|
|
7650
E. Evans Road, Suite C Scottsdale, AZ
85260
|
|
|
(Former
name, address and phone number if
changed since last report)
|
|
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the Company was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x
Noo
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
exchange A Rule 12b-2) Yes ¨ No x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
APPLICABLE
ONLY TO CORPORATE ISSUERS
State
the
number of shares outstanding of each of the issuer's classes of common equity:
As
of March 31, 2007 - 22,569,243 common shares of $0.001 par value.
Transitional
Small Business Disclosure Format (check one): YES o NO
x
|
Index
|
Page
Number
|
|
|
|
PART
I
|
FINANCIAL
INFORMATION
|
3
|
|
|
|
ITEM
1.
|
Financial
Statements (unaudited)
|
3
|
|
|
|
|
Consolidated
Balance Sheets as of March 31, 2007 and December 31, 2006
|
3-4
|
|
|
|
|
Consolidated
Statements of Operations for the three months ended March 31, 2007
and
2006 |
5
|
|
|
|
|
Consolidated
Statements of Cash Flows for the three months ended March 31, 2007
and
2006
|
|
|
|
|
|
Consolidated
Statements of Stockholders' Equity cumulative from December 31, 2000
to
March 31, 2007
|
7
-9
|
|
|
|
|
Notes
to Financial Statements
|
10-21
|
|
|
|
ITEM
2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations/Plan of Operation
|
21-37
|
|
|
|
ITEM
3.
|
Controls
and Procedures
|
37
|
|
|
|
PART
II
|
OTHER
INFORMATION
|
37
|
|
|
|
ITEM
1.
|
Legal
Proceedings
|
37
|
|
|
|
ITEM
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
39
|
|
|
|
ITEM
3.
|
Defaults
Upon Senior Securities
|
39
|
|
|
|
ITEM
4.
|
Submission
of Matters to Vote of Security Holders
|
40
|
|
|
|
ITEM
5.
|
Other
Information
|
40
|
|
|
|
ITEM
6.
|
Exhibits
|
40
|
|
|
|
SIGNATURES
|
|
40
|
PART
I.
FINANCIAL INFORMATION
ITEM
1 Financial
Statements (unaudited)
Skye
International, Inc. and Subsidiaries
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31
|
|
|
December
31
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
Cash
|
|
|
36,272
|
|
|
8,672
|
|
Accounts
Receivable, Net
|
|
|
-
|
|
|
-
|
|
Inventory
at Cost
|
|
|
163,010
|
|
|
163,062
|
|
Prepaid
Expenses
|
|
|
99,379
|
|
|
99,379
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
298,661
|
|
|
271,112
|
|
|
|
|
|
|
|
|
|
EQUIPMENT,
NET
|
|
|
42,554
|
|
|
43,921
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
Patents
and Software, Net
|
|
|
-
|
|
|
-
|
|
Deposits
|
|
|
-
|
|
|
-
|
|
Intangible
Assets
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
Other Assets
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
|
341,215
|
|
|
315,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
|
2,061,671
|
|
|
2,160,624
|
|
Other
Payables
|
|
|
23,649
|
|
|
31,132
|
|
Notes
Payable
|
|
|
1,198,512
|
|
|
1,053,615
|
|
Accrued
Interest Payable
|
|
|
76,267
|
|
|
72,917
|
|
Warranty
Accrual
|
|
|
34,570
|
|
|
34,570
|
|
Customer
Deposits
|
|
|
103,371
|
|
|
103,371
|
|
|
|
|
3,498,040
|
|
|
3,456,228
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
3,498,040
|
|
|
3,456,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
BALANCE SHEETS - continued
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
Common
Stock authorized is
|
|
|
|
|
|
|
|
100,000,000
shares at $0.001par value.
|
|
|
|
|
|
|
|
Issued
and outstanding on December 31,
|
|
|
|
|
|
|
|
2006
were 22,569,243 shares, December 31,
|
|
|
|
|
|
|
|
2006
were 21,622,243 shares, December 31,
|
|
|
22,569
|
|
|
21,622
|
|
|
|
|
|
|
|
|
|
Common
Stock Subscribed
|
|
|
108,675
|
|
|
108,675
|
|
|
|
|
|
|
|
|
|
Paid
in Capital
|
|
|
9,444,761
|
|
|
9,256,308
|
|
|
|
|
|
|
|
|
|
Accumulated
Deficit
|
|
|
(12,732,830
|
)
|
|
(12,527,800
|
)
|
|
|
|
|
|
|
|
|
Total
Stockholders' Equity (Deficit)
|
|
|
(3,156,824
|
)
|
|
(3,141,194
|
)
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND
|
|
|
|
|
|
|
|
STOCKHOLDERS
EQUITY
|
|
|
341,215
|
|
|
315,034
|
|
The
accompanying notes are an integral part of these
statements.
Skye
International, Inc. and Subsidiaries
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
March
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
INCOME
|
|
|
|
|
|
|
|
Product
Sales
|
|
$
|
-
|
|
$
|
8,032
|
|
Other
Income
|
|
|
-
|
|
|
2,600
|
|
|
|
|
|
|
|
|
|
Total
Income
|
|
|
-
|
|
|
10,632
|
|
|
|
|
|
|
|
|
|
Cost
of Goods Sold
|
|
|
24,142
|
|
|
1,074
|
|
|
|
|
|
|
|
|
|
Gross
Income
|
|
|
(24,142
|
)
|
|
9,558
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
Legal
and Professional
|
|
|
109,035
|
|
|
456,941
|
|
General
and Administrative
|
|
|
22,767
|
|
|
193,611
|
|
Research
and Development
|
|
|
30,000
|
|
|
-
|
|
Advertising/Marketing
|
|
|
-
|
|
|
27,929
|
|
Loss
on Disposal of Assets
|
|
|
-
|
|
|
-
|
|
Depreciation
|
|
|
2,761
|
|
|
1,906
|
|
|
|
|
|
|
|
|
|
Total
Expenses
|
|
|
164,563
|
|
|
680,387
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME AND (EXPENSE):
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
18,478
|
|
|
8,631
|
|
GainonExtinguishment
of Indebtedness
|
|
|
(2,153
|
)
|
|
-
|
|
|
|
|
16,325
|
|
|
689,018
|
|
|
|
|
|
|
|
|
|
Net
(Loss) before Income Taxes
|
|
|
(205,030
|
)
|
|
(679,460
|
)
|
|
|
|
|
|
|
|
|
Income
Tax Expense
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
NET
(LOSS)
|
|
|
(205,030
|
)
|
|
(679,460
|
)
|
|
|
|
|
|
|
|
|
Basic
and diluted (loss) per share
|
|
$
|
(0.01
|
)
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Common
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
|
21,622,243
|
|
|
18,197,287
|
|
The
accompanying notes are an integral part of these
statements.
Skye
international, Inc. and Subsidiaries
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Mos.
|
|
|
Three
Mos.
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss)
|
|
$
|
(205,030
|
)
|
$
|
(679,460
|
)
|
|
|
|
|
|
|
|
|
Depreciation
Expense.
|
|
|
2,761
|
|
|
1,906
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Inventory
|
|
|
52
|
|
|
(52,542
|
)
|
Accounts
Receivable
|
|
|
-
|
|
|
(7,127
|
)
|
Prepaid
Expense
|
|
|
-
|
|
|
(1,500
|
)
|
Deposits
|
|
|
-
|
|
|
-
|
|
Accrued
Interest Payable
|
|
|
3,350
|
|
|
2,070
|
|
Accounts
Payable
|
|
|
(106,436
|
)
|
|
-
|
|
Notes
Payable
|
|
|
144,897
|
|
|
-
|
|
Customer
Deposits
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by Operating Activities
|
|
|
(160,406
|
)
|
|
(263,744
|
)
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase/Disposal
of Assets
|
|
|
(1,394
|
)
|
|
(986
|
)
|
|
|
|
|
|
|
|
|
Net
Cash (Used) by Investing Activities
|
|
|
(1,394
|
)
|
|
(986
|
)
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for services rendered.
|
|
|
188,400
|
|
|
205,500
|
|
Shares
issued to retire debt and interest.
|
|
|
1,000
|
|
|
-
|
|
Stock
Subscriptions
|
|
|
-
|
|
|
(155,000
|
)
|
Proceeds
from sale of Common Stock
|
|
|
-
|
|
|
210,000
|
|
Discount
on Convertible Debt
|
|
|
-
|
|
|
-
|
|
Stock
Options Granted
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by Financing Activities
|
|
|
189,400
|
|
|
260,500
|
|
|
|
|
|
|
|
|
|
Net
Increase/(Decrease) in Cash
|
|
|
27,600
|
|
|
(4,230
|
)
|
|
|
|
|
|
|
|
|
Cash,
Beginning of Period
|
|
|
8,672
|
|
|
2,711
|
|
|
|
|
|
|
|
|
|
Cash,
End of Period
|
|
$
|
36,272
|
|
$
|
(1,519
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Information:
|
|
|
|
|
|
|
|
Taxes
|
|
|
-
|
|
|
-
|
|
Interest
Expense
|
|
$
|
18,476
|
|
$
|
10,510
|
|
The
accompanying notes are an integral part of these
statements.
Skye
International, Inc., and Subsidiaries
|
STATEMENT
OF STOCKHOLDER'S DEFICIT
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Common
Stock
|
|
|
Paid
in
|
|
|
Accumulated
|
|
|
Total
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Subscribed
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2000
|
|
|
580,000
|
|
$
|
580
|
|
|
|
|
$
|
333,920
|
|
$
|
(828,006
|
)
|
$
|
(493,506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares issued for Services
|
|
|
52,500
|
|
|
53
|
|
|
|
|
|
52,447
|
|
|
|
|
|
52,500
|
|
Contribution
to Capital
|
|
|
|
|
|
|
|
|
|
|
|
24,265
|
|
|
|
|
|
24,265
|
|
Common
Shares issued to retire
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Note and accrued Interest
|
|
|
60,000
|
|
|
60
|
|
|
|
|
|
187,022
|
|
|
|
|
|
187,082
|
|
Net
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(120,900
|
)
|
|
(120,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2001
|
|
|
692,500
|
|
$
|
693
|
|
|
|
|
$
|
597,654
|
|
$
|
(948,906
|
)
|
$
|
(350,559
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares issued for cash
|
|
|
104,778
|
|
|
105
|
|
|
|
|
|
96,895
|
|
|
|
|
|
97,000
|
|
Common
Shares issued for services
|
|
|
455,800
|
|
|
455
|
|
|
|
|
|
110,045
|
|
|
|
|
|
110,500
|
|
Common
Shares issued for prepaid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
service
|
|
|
162,500
|
|
|
163
|
|
|
|
|
|
16,087
|
|
|
|
|
|
16,250
|
|
Common
Shares issued for proposed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
business
acquisition
|
|
|
6,433,406
|
|
|
6,433
|
|
|
|
|
|
896,997
|
|
|
|
|
|
903,430
|
|
Common
Shares issued to retire
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
note and accrued Interest
|
|
|
60,000
|
|
|
60
|
|
|
|
|
|
200,670
|
|
|
|
|
|
200,730
|
|
Common
Shares issued to retire debt
|
|
|
22,500
|
|
|
22
|
|
|
|
|
|
23,272
|
|
|
|
|
|
23,294
|
|
Net
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-2,798,586
|
|
|
(2,798,586
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2002
|
|
|
7,931,484
|
|
$
|
7,931
|
|
|
|
|
$
|
1,941,620
|
|
$
|
(3,747,492
|
)
|
$
|
(1,797,941
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares issued for Cash
|
|
|
434,894
|
|
|
435
|
|
|
|
|
|
967,925
|
|
|
|
|
|
968,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares issued in recapitalization
|
|
|
3,008,078
|
|
|
3,008
|
|
|
|
|
|
(166,940
|
)
|
|
|
|
|
(163,932
|
)
|
Net
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(371,821
|
)
|
|
(371,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2003
|
|
|
11,374,456
|
|
$
|
11,374
|
|
|
|
|
$
|
2,742,605
|
|
$
|
(4,119,313
|
)
|
$
|
(1,365,334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares issued for services
|
|
|
800,000
|
|
|
800
|
|
|
|
|
|
228,080
|
|
|
|
|
|
228,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares issued to retire Debt and interest of $91,281
|
|
|
172,354
|
|
|
172
|
|
|
|
|
|
91,109
|
|
|
|
|
|
91,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares issued for cash
|
|
|
66,667
|
|
|
67
|
|
|
|
|
|
16,600
|
|
|
|
|
|
16,667
|
|
through
exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares cancelled in
|
|
|
(2,075,000
|
)
|
|
-2,075
|
|
|
|
|
|
2,075
|
|
|
|
|
|
-
|
|
acquisition
settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Options issued for
|
|
|
|
|
|
|
|
|
|
|
|
19,000
|
|
|
|
|
|
19,000
|
|
services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock issued for prepaid
|
|
|
2,250,000
|
|
|
2,250
|
|
|
|
|
|
110,250
|
|
|
|
|
|
112,500
|
|
services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares valued at $159,876
|
|
|
537,500
|
|
|
538
|
|
|
|
|
|
159,338
|
|
|
|
|
|
159,876
|
|
Issued to obtain $1,075,000 debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,893,330
|
)
|
|
(1,893,330
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2004
|
|
|
13,125,977
|
|
$
|
13,126
|
|
|
|
|
$
|
3,369,057
|
|
$
|
(6,012,643
|
)
|
$
|
(2,630,460
|
)
|
STATEMENT
OF STOCKHOLDER'S DEFICIT - continued
Balance
December 31, 2004
|
|
|
13,125,977
|
|
$
|
13,126
|
|
|
|
|
$
|
3,369,057
|
|
$
|
(6,012,643
|
)
|
$
|
(2,630,460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock granted but not
|
|
|
|
|
|
|
|
|
275,000
|
|
|
|
|
|
|
|
|
275,000
|
|
issued
until 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock granted in 2004 but
|
|
|
|
|
|
|
|
|
|
|
|
945,000
|
|
|
|
|
|
945,000
|
|
not
earned by related party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consulting
agreements until 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares issued for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consulting
and outside services
|
|
|
260,525
|
|
|
261
|
|
|
|
|
|
237,162
|
|
|
|
|
|
237,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares issued in
|
|
|
391,832
|
|
|
392
|
|
|
|
|
|
414,129
|
|
|
|
|
|
414,521
|
|
conjunction
with related party consulting contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for
|
|
|
524,500
|
|
|
525
|
|
|
|
|
|
535,646
|
|
|
|
|
|
536,170
|
|
employee
stock Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock to reduce
|
|
|
78,067
|
|
|
78
|
|
|
|
|
|
52,266
|
|
|
|
|
|
52,344
|
|
existing
debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares Issued in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
connection
with Debt
|
|
|
50000
|
|
|
50
|
|
|
|
|
|
12450
|
|
|
|
|
|
12,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of convertible bridge
|
|
|
842,511
|
|
|
843
|
|
|
|
|
|
462,539
|
|
|
|
|
|
463,382
|
|
notes
into common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in private
|
|
|
2,564,819
|
|
|
2,565
|
|
|
|
|
|
1,408,085
|
|
|
|
|
|
1,410,650
|
|
placements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,051,870
|
)
|
|
(4,051,870
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2005
|
|
|
17,838,231
|
|
$
|
17,839
|
|
$
|
275,000
|
|
$
|
7,436,333
|
|
$
|
(10,064,513
|
)
|
$
|
(2,335,340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares issued in conjunction with
|
|
|
378,750
|
|
|
379
|
|
|
|
|
|
262,496
|
|
|
|
|
|
262,875
|
|
related
party consulting services and to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
employees
for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares issued for
|
|
|
808,100
|
|
|
808
|
|
|
|
|
|
420,444
|
|
|
|
|
|
421,252
|
|
consulting
and outside services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares issued in private
|
|
|
370,000
|
|
|
370
|
|
|
-210,000
|
|
|
209,630
|
|
|
|
|
|
0
|
|
placements,
previously subscribed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares subscribed
|
|
|
|
|
|
|
|
|
43,675
|
|
|
|
|
|
|
|
|
43,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock options issued for services
|
|
|
|
|
|
|
|
|
|
|
|
32,216
|
|
|
|
|
|
32,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
on Convertible Debt
|
|
|
|
|
|
|
|
|
|
|
|
15,922
|
|
|
|
|
|
15,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares issued to retire debt and
interest
|
|
|
412,902
|
|
|
413
|
|
|
|
|
|
226,080
|
|
|
|
|
|
226,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares issued in private stock
|
|
|
1,814,260
|
|
|
1,814
|
|
|
|
|
|
653,186
|
|
|
|
|
|
655,000
|
|
placements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,463,287
|
)
|
|
(2,463,287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2006
|
|
|
21,622,243
|
|
$
|
21,623
|
|
$
|
108,675
|
|
$
|
9,256,308
|
|
$
|
(12,527,800
|
)
|
$
|
(3,141,194
|
)
|
STATEMENT
OF STOCKHOLDER'S DEFICIT -
continued
Balance
December 31, 2006
|
|
|
21,622,243
|
|
$
|
21,623
|
|
$
|
108,675
|
|
$
|
9,256,308
|
|
$
|
(12,527,800
|
)
|
$
|
(3,141,194
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares issued in conjunction with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related
party consulting services and to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
employees
for services
|
|
|
192,000
|
|
|
192
|
|
|
|
|
|
38,208
|
|
|
|
|
|
38,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares issued for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consulting
and outside services
|
|
|
750,000
|
|
|
750
|
|
|
|
|
|
149,250
|
|
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares issued to retire debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
interest
|
|
|
5,000
|
|
|
5
|
|
|
|
|
|
995
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(205,030
|
)
|
|
(205,030
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
March 31, 2007
|
|
|
22,569,243
|
|
$
|
22,570
|
|
$
|
108,675
|
|
$
|
9,444,761
|
|
$
|
(12,732,830
|
)
|
$
|
(3,156,824
|
)
|
The
accompanying notes are an integral part of these statements.
SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2007 and December 31, 2006
Note
1. THE
COMPANY
The
Company
Skye
International, Inc., a Nevada corporation, was originally organized on
November
23, 1993 as Amexan, Inc. On June 1, 1998, the name was changed to Nostalgia
Motorcars, Inc. On June 11, 2002, the Company changed its name to Elution
Technologies, Inc. It changed its name to Tankless Systems Worldwide,
Inc. on
June 4, 2003 and to Skye International, Inc. on October 21, 2005.
Skye
has
three subsidiary corporations, all wholly-owned:
|
·
|
Envirotech
Systems Worldwide, Inc., an Arizona corporation
(“Envirotech”);
|
|
·
|
ION
Tankless, Inc., an Arizona corporation (“ION”);
and
|
|
·
|
Valeo
Industries, Inc., a Nevada corporation
(“Valeo”).
|
On
November 7, 2003, the Company acquired Envirotech Systems Worldwide,
Inc.
(Envirotech), a private Arizona corporation, as a wholly owned subsidiary.
Through this merger, the former shareholders of Envirotech acquired a
controlling interest in Tankless Systems Worldwide, Inc. (Tankless) and,
accordingly, the acquisition is accounted for as a reverse merger with
Envirotech being the accounting acquirer of Tankless.
Envirotech
was organized December 9, 1998 and has a limited history of operations.
The
initial period of its existence involved research and development of
a line of
electronic, tankless water heaters. With the acquisition of Envirotech,
the
Company is in the business of designing, developing, manufacturing and
marketing
several models of electronic, tankless water heaters. With the adoption
of the
SKYE name in October 2005 the business of the Company was expanded to
include
the manufacture and sale of consumer lifestyle appliances, including
tankless
water heaters.
In
January 2004, Skye formed ION to perform research, development and marketing
of
new heating technologies. In January 2005, it created Valeo to license
ION
technologies and to manufacture products using those technologies.
Nature
of Business
The
Company is in the business of designing, developing, manufacturing and
marketing
consumer lifestyle products, including, initially, several models of
an
electronic, tankless water heater. The
Company’s products, together with a limited quantity of related parts purchased
for resale, are sold primarily through manufacturer’s representatives and
wholesale distributors in the United States and Canada. Based upon the
nature of
the Company’s operations, facilities and management structure, the Company
considers its business to constitute a single segment for financial reporting
purposes.
Basis
of Consolidation
The
accompanying consolidated financial statements reflect the operations,
financial
position and cash flows of the Company and include the accounts of the
Company
and its subsidiaries after elimination of all significant inter-company
transactions in consolidation.
Basis
of Presentation
The
Consolidated Financial Statements of Skye International include all of
its
wholly owed subsidiaries.
SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2007 and December 31, 2006
Note
1. THE
COMPANY - continued
On
August
6, 2004, Envirotech filed a voluntary petition with the United States
Bankruptcy
Court for the District of Arizona (Case No. 2:04-13908-RTB ) seeking
relief
under Chapter 11 of the Bankruptcy Code as a means to resolve all existing
litigation, judgments and efforts to collect on judgments entered against
Envirotech. On December 2004, the Company filed its proposed plan of
reorganization and disclosure statement with the Bankruptcy Court. This
Plan
was
not approved and in January 2006, the Company’s motion to withdraw its Chapter
11 filing was granted by the Bankruptcy Court for the District of Arizona
without prejudice or relief from any of its liabilities previously classified
as
Subject to Compromise,
As
such,
the accompanying Consolidated Financial Statement for the three months
ended
March 31, 2007, March 31, 2006, and the year ended December 31, 2006
were not
prepared in accordance with Statement of Position 90-7 (“SOP 90-7”), “Financial
Reporting by Entities in Reorganization under the Bankruptcy Code” (See Note 2)
which requires that all pre-petition liabilities subject to compromise
are
segregated in the consolidated balance sheets as of end of the respective
years
and classified as Liabilities Subject to Compromise, at the estimated
amount of
allowable claims with liabilities not subject to compromise being separately
classified.
These
Consolidated Financial Statements have been prepared on a going concern
basis,
which contemplates the realization of assets and the satisfaction of
liabilities
in the normal course of business. Accordingly, the financial statements
do not
include any adjustments that might be necessary should the Company be
unable to
continue as a going concern. As described more fully below, there is
substantial
doubt about the Company's ability to continue as a going concern which
is
predicated upon, among other things, the ability to generate cash flows
from
operations and, when necessary, obtaining financing sources sufficient
to
satisfy the Company’s future obligations.
The
accompanying comparative Consolidated Financial Statements for the three
months
ended March 31, 2007, March 31, 2006, and the year ended December 31,
2006 have
been restated to reflect the Company’s withdrawal of its bankruptcy court
petition.
Recently
Issued Accounting Standards
Below
is
a listing of the most recent accounting standards and their effect on
the
Company.
In
September 2006, the Financial Accounting Standards Board issued Statement
of
Financial Accounting Standards No. 157, “Fair Value Measurements” which defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles (GAAP), and expands disclosures about
fair value
measurements. Where applicable, SFAS No. 157 simplifies and codifies
related guidance within GAAP and does not require any new fair value
measurements. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. Earlier adoption is encouraged. The Company does
not expect the adoption of SFAS No. 157 to have a significant effect on its
financial position or results of operation.
In
June
2006, the Financial Accounting Standards Board issued FASB Interpretation
No.
48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109”, which prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of
a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition. FIN 48 is effective for
fiscal
years beginning after December 15, 2006. The Company does not expect
the
adoption of FIN 48 to have a material impact on its financial reporting,
and the
Company is currently evaluating the impact, if any, the adoption of FIN
48 will
have on its disclosure requirements.
SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2007 and December 31, 2006
Note
1. THE
COMPANY - continued
In
March
2006, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 156, “Accounting for Servicing of Financial Assets—an
amendment of FASB Statement No. 140.” This statement requires an entity to
recognize a servicing asset or servicing liability each time it undertakes
an
obligation to service a financial asset by entering into a servicing
contract in
any of the following situations: a transfer of the servicer’s financial assets
that meets the requirements for sale accounting; a transfer of the servicer’s
financial assets to a qualifying special-purpose entity in a guaranteed
mortgage
securitization in which the transferor retains all of the resulting securities
and classifies them as either available-for-sale securities or trading
securities; or an acquisition or assumption of an obligation to service a
financial asset that does not relate to financial assets of the servicer
or its
consolidated affiliates. The statement also requires all separately recognized
servicing assets and servicing liabilities to be initially measured at
fair
value, if practicable, and permits an entity to choose either the amortization
or fair value method for subsequent measurement of each class of servicing
assets and liabilities. The statement further permits, at its initial
adoption,
a one-time reclassification of available for sale securities to trading
securities by entities with recognized servicing rights, without calling
into
question the treatment of other available for sale securities under Statement
115, provided that the available for sale securities are identified in
some
manner as offsetting the entity’s exposure to changes in fair value of servicing
assets or servicing liabilities that a servicer elects to subsequently
measure
at fair value and requires separate presentation of servicing assets
and
servicing liabilities subsequently measured at fair value in the statement
of
financial position and additional disclosures for all separately recognized
servicing assets and servicing liabilities. This statement is effective
for
fiscal years beginning after September 15, 2006, with early adoption
permitted
as of the beginning of an entity’s fiscal year. Management believes the adoption
of this statement will have no immediate impact on the Company’s financial
condition or results of operations.
Note
2. SIGNIFICANT
ACCOUNTING POLICIES
Use
of
Estimates and Assumptions
The
discussion and analysis of the Company's financial condition and results
of
operations are based upon the Company's consolidated financial statements,
which
have been prepared in accordance with accounting principles generally
accepted
in the United States. The preparation of these financial statements requires
making 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 may differ from these estimates
under
different assumptions or conditions. Critical accounting policies are
defined as
those that entail significant judgments and estimates, and could potentially
result in materially different results under different assumptions and
conditions.
Cash
and Cash Equivalents
All
highly liquid debt instruments with a maturity of six months or less
at the time
of purchase are considered to be cash equivalents. Cash equivalents are
stated
at cost, which approximates fair value because of the short-term maturity
of
these instruments.
Fair
Value of Financial Instruments
Financial
instruments consist of cash and cash equivalents, accounts payable, accrued
expenses and short-term and long-term convertible debt obligations. Including
promissory notes, and related party liabilities, the fair value of these
financial instruments approximates their carrying amount as of March
31, 2007
and December 31, 2006 due to the nature of or the short maturity of these
instruments.
Research
and Development
The
Company's research and development efforts concentrate on new product
development, improving product durability and expanding technical expertise
in
the manufacturing process. The Company expenses product research and
development
costs as they are incurred. With the organization of its subsidiary ION,
the
Company continues to expense research and development costs as incurred
in
developing additional products based on new technologies.
SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2007 and December 31, 2006
Note
2. SIGNIFICANT
ACCOUNTING POLICIES
-
continued
Marketing
Strategy
The
Company sells to large wholesale distributors through its network of
manufacturer’s representatives.. The Company has periodically advertised on
cable television stations, at trade shows and through trade magazines
and it
maintains a website.
Revenue
Recognition
The
Company records sales when revenue is earned. The Company sells on credit
to its
distributors and manufacturer’s representatives. Due to the Company’s Warranty
and Right of Return policy, six percent of the sales are recognized immediately
and the balance is recognized 25 - 40 days after shipment of the product
to the
customer. All shipments are FOB shipping point. Sales to distributors
and
manufacturer’s representatives are sold FOB shipping point with receivables
recorded 25 to 40 days post shipping. In 2005, substantially all of the
Company’s gross revenues of $172,169 were generated by the Valeo subsidiary and
were generated through sales of the ESI-2000 unit to individuals over
the
internet, the majority of whom paid in advance by credit card payments.
The
Company no longer manufactures the ESI-2000 product lines and so the
Company
plans to refund the purchase price paid for undelivered heaters or,
alternatively, to ship new heaters to those customers that did not receive
delivery of an ESI-2000 heater. The Company had no revenue from sales
of
products during 2006 or during the three-month period ended March 31,
2007.
Accounts
Receivable
Accounts
receivable are recorded when an order is received from a distributor
and
shipped. An allowance for doubtful accounts was set up based on the actual
rate
of uncollected accounts. Net accounts receivable is as follows:
|
|
|
Mar.
31,
2007
|
|
|
Dec.
31,
2006
|
|
Accounts Receivable
|
|
$
|
-0-
|
|
$
|
-0-
|
|
Less:
Allowance for Doubtful Accounts
|
|
|
(-0-
|
)
|
|
(-0-
|
)
|
Net
Accounts Receivable
|
|
$
|
-0-
|
|
$
|
$-0-
|
|
The
Company maintains allowances for doubtful accounts for estimated probable
losses
resulting from inability of the company’s customers to make the required
payments. The company continues to assess the adequacy of the reserves
for
doubtful accounts based on the financial condition of the Company’s customers
and external factors that may impact collectability.
Advertising
Advertising
expense included the cost of sales brochures, print advertising in trade
publications, displays at trade shows and maintenance of an Internet
site.
Advertising is expensed when incurred. Advertising expense for the three
months
ended March 31, 2007 and the year ended March 31, 2006, was $-nil- and
$27,929
respectively.
Inventory
The
Company contracts with a third party to manufacture the units and is
neither
billed for nor obligated for any work-in-process. The Company only supplies
certain parts and materials and is then billed for completed products.
Parts and
material inventory is stated at the lower of cost (first-in, first-out)
or net
realizable value.
Property
and equipment are depreciated or amortized using the straight-line method
over
their estimated useful lives, which range from two to seven years. Fixed
assets
consist of the following:
|
|
|
Mar.
31,
2007
|
|
|
Dec.
31,
2006
|
|
Property,
Equipment, furniture and Fixtures
|
|
$
|
63,016
|
|
$
|
61,622
|
|
Less:
Accumulated Depreciation
|
|
|
(20,461
|
)
|
|
(17,701
|
)
|
Net
Fixed Assets
|
|
$
|
42,554
|
|
$
|
43,921
|
|
SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2007 and December 31, 2006
Note
2. SIGNIFICANT
ACCOUNTING POLICIES
-
continued
Patents
We
evaluate potential impairment of long-lived assets in accordance with
FAS
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
FAS No. 144 requires that certain long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that
the
carrying amount of an asset may not be fully recoverable based on expected
undiscounted cash flows that result from the use and eventual disposition
of the
asset. The amount of any impairment is measured as the difference between
the
carrying value and the fair value of the impaired asset. Patent and software
costs include direct costs of obtaining patents. Costs for new patents
are
either expensed as they are incurred or capitalized and amortized over
the
estimated useful lives of seventeen years and software over five years.
Earnings
per Share
The
basic
(loss) per share is calculated by dividing the Company’s net loss available to
common shareholders by the weighted average number of common shares outstanding
during the year.
The
Company has potentially dilutive securities outstanding at the end of
the
statement periods. Therefore, the basic and diluted earnings (loss) per
share
are presented on the face of the statement of operations. There are 600,000
options at $0.55 and 300,000 options at $0.50 per share available at
this time.
There are also $100,000 of outstanding convertible debentures which within
12
months may be converted into restricted common shares of the Company
at a 30%
discount to the then current 10-day moving average of the Company’s common
stock. All outstanding warrants were either exercised or cancelled and
convertible debt is anti-dilutive.
Stock
Based Compensation
In
December 2004, the FASB issued FAS No. 123R, “Share-Based Payment.”
This statement is a revision to FAS No. 123, “Accounting for Stock-Based
Compensation,” and it supersedes APB Opinion No. 25, “Accounting for Stock
Issued to Employees,” and amends FAS No. 95, “Statement of Cash Flows.” FAS
No. 123R requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the income statement based
on
their fair values. The Company uses the Black-Scholes pricing model for
determining the fair value of stock based compensation.
Equity
instruments issued to non-employees for goods or services are accounted
for at
fair value and are marked to market until service is complete or a performance
commitment date is reached.
Warranty
and Right of Return
In
connection with the sale of each product, the Company provides a limited
30-day
money back guarantee less a 6% restocking charge. After the 30 days the
Company
provides a five year warranty on replacement of parts. The tank chamber
is
warranted not to leak for 10 years. The Company has limited history with
claims
against its warranty. The Company defers a portion of the revenue as
would
generally be required for post-contract customer support ("PCS") arrangements
under SOP 97-2. Accordingly, the revenue allocated to the warranty portion
of
such sales is deferred and recognized ratably over the life of the warranty.
As
of March 31, 2007 a total of $34,570 in refunds and warranty allowances
were
recorded against Product Sales.
Balance
of Warranty Accrual for 2003
|
$
|
3,240
|
Balance
of Warranty Accrual for 2004
|
|
9,725
|
Balance
of Warranty Accrual for 2005
|
|
21,625
|
Balance
of Warranty Accrual for 2006
|
|
0
|
Balance
of Warranty Accrual for 2007
|
|
0
|
Total
Warranty Accrual as of March 31, 2007
|
$
|
34,570
|
SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2007 and December 31, 2006
Note
3 NOTES
PAYABLE AND CAPITAL LEASE OBLIGATIONS
In
the
third quarter of 2006 the Company received $100,000 of subscription funds
in
exchange for the issuance of $100,000 of principal 12% convertible debentures
(the “Debentures”). The Debentures, together with accrued interest thereon are
convertible at the option of the holder any time during the 12 months
from
issuance thereof into restricted common stock of the Company at a price
equal to
a 30% discount to the then current 10-day moving average of the Company’s common
stock. Additionally, the investor received one (1) share of the Company’s
restricted common stock for each One Dollar ($1.00) amount of debentures
purchased. At the date of this report the Debenture shares had not yet
been
issued from treasury. When issued 100,000 shares will be delivered to
investors.
Notes
payable and capital lease obligations consist of the following:
|
|
|
Three
Mos. Ended
|
|
|
Yr.
Ended
|
|
|
|
|
Mar.
31
|
|
|
Dec.
31,
|
|
|
|
|
2006
|
|
|
2006
|
|
Convertible
Notes, Unsecured, Matured March 2001 bear 12.5% Interest, principle
and
interest convertible into one common share and one warrant
at 75% of the average closing price over the 10-day period
prior to
conversion. Warrants have expired and notes have not been converted
and are in default.
|
|
$
|
70,000
|
|
$
|
70,000
|
|
|
|
|
|
|
|
|
|
Convertible
Notes, Unsecured, Matured one-year from issue date, bear 10%
Interest
payable quarterly, principle and interest convertible into
one common
share
for each outstanding $1.00. Forty notes were issued between January
23, 2004 and January 15, 2005. Of these notes, thirty six had
been either
repaid
or converted at December 31, 2005. Of the remaining four notes,
three were
converted in April 2006; the fourth has not been converted
or repaid
and
is in default. Aggregate Amount:
|
|
$
|
15,000
|
|
$
|
215,000
|
|
|
|
|
|
|
|
|
|
Demand
Note with Attorneys, 6% Interest, All Assets of Subsidiary,
Envirotech,
pledged as Collateral; Note is in default. Note has been acquired
by
Envirotech’s parent, Skye
|
|
$
|
194,895
|
|
$
|
194,895
|
|
|
|
|
|
|
|
|
|
Demand
Note with Former Distributor of Subsidiary, Envirotech, in
Settlement and
Repurchase of Distributorship Territory, 7% Interest; Note
is in default
|
|
$
|
519,074
|
|
$
|
519,074
|
|
|
|
|
|
|
|
|
|
Demand
Note Made by Subsidiary, Envirotech, 10% Interest, Payable
Monthly; Note
is in default
|
|
$
|
11,880
|
|
$
|
11,880
|
|
|
|
|
|
|
|
|
|
Demand
Note Made by Subsidiary, Envirotech, 6% Interest; Note is in
default
|
|
$
|
35,000
|
|
$
|
35,000
|
|
|
|
|
|
|
|
|
|
Demand
Note Made by Subsidiary, Envirotech; Note is in default
|
|
$
|
72,391
|
|
$
|
72,391
|
|
|
|
|
|
|
|
|
|
Demand
Note Made by ION Tankless in favor of related party;
|
|
$
|
120,000
|
|
$
|
120,000-
|
|
|
|
|
|
|
|
|
|
Demand
Note Made by Valeo in favor of related party;
|
|
$
|
13,000
|
|
$
|
13,000-
|
|
|
|
|
|
|
|
|
|
Demand
Note Made by Skye in favor of related party;
|
|
$
|
65,000
|
|
$
|
65,000-
|
|
|
|
|
|
|
|
|
|
Convertible
Notes, Unsecured, Issued March 2006, Matured March 2007,
bear 5%
Interest, principle and interest convertible into one common
share $0.55
per share. Notes have not been converted and are now in
default.
|
|
$
|
75,000
|
|
$
|
75,000
|
|
|
|
|
|
|
|
|
Demand
Note Made by SKYE in favor of consultants; Note is in default
|
|
$
|
10,000
|
|
$
|
10,000
|
SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2007 and December 31, 2006
Note
4.
STOCKHOLDERS’ EQUITY
On
March
24, 2005, the Company adopted an employee stock incentive plan setting
aside
500,000 shares of the Company’s common stock for issuance to officers,
employees, directors and consultants for services rendered or to be rendered.
The proposed maximum offering price of such shares is $1.00 per share.
A
compensation committee appointed by the Board of Directors has the right
to
grant awards or stock options and administers the plan. On March 30,
2005, the
Company filed a Registration on Form S-8 with the Securities Exchange
Commission
covering the 500,000 shares provided by this plan, at a maximum offering
price
of $1.00 per share. As of March 31, 2007 and December 31, 2006, the Company
has
issued 462,541 shares under the 2005 Stock Incentive Plan. No shares
were issued
under the Plan during the three months ended March 31, 2007. As of March
31,
2007, 37,459 shares remain unissued under this Plan.
The
Company was initially capitalized on November 30, 1993 with the issue
of 500,000
shares for $5,000. During 2005 the Company issued 652,357 shares for
$651,943 in
consulting services; 524,500 shares at $536,170 for employee stock awards;
78,067 shares for $54,647 in debt reduction; 842,511 shares to retire
$881,536
in convertible notes; and 2,564,819 shares for $, 296,483 in cash in
private
placements.
During
2006, the Company issued 205,000 shares for consulting and legal services
valued
at $230,753; 370,000 shares previously subscribed for cash in private
placements; 412,902 shares to retire principal and interest on outstanding
bridge loans; 1,814,260 shares in private placements for $655,000; 110,000
shares for legal fees valued at $48,000; 600,000 shares for consultants
for fees
valued at $330,000; 50,000 shares for investment banking fees and services
valued at $17,500; 173,750 shares for employees in lieu of pay and for
signing
bonuses valued at $57,375, and 100,000 shares to be issued in connection
with
the receipt of $100,000 in convertible bridge notes.
During
the three months ended March 31, 2007, the Company issued 942,000 shares
for
consulting and legal services valued at 188,400, and 5,000 shares to
retire debt
in the amount of $3,153. The total common stock issued and outstanding
at March
31, 2007 is 22,569,243, shares.
Warrants
No
warrants are outstanding.
Stock
Options
In
connection with the acquisition of Envirotech Systems Worldwide, Inc.,
the
Company issued immediately vested stock options on October 29, 2003 to
one of
the principal shareholders of Envirotech. He was granted the right to
purchase
300,000 restricted common shares at $0.55 per share until October 29,
2004 which
was extended to December 31, 2004. This option expired without exercise
on
December 31, 2005.
On
February 11, 2004 the company granted 5-year stock options to purchase
600,000
shares of restricted common stock at $0.50 per share to consultants assisting
in
company operations. Using a discounted stock price of $0.43, exercise
price of
$0.50, 5-year option, risk-free rate of 4.1% and a volatility rate of
.038 the
value of these options is calculated at $0.03 using the Black-Scholes
model. The
aggregate value of 600,000 options is $18,000. By amendment dated September
6,
2005, the option period has been extended for an additional 5 years,
to expire
February 11, 2014. At March 31, 2007 and December 31, 2006, none of the
options
have been exercised.
SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2007 and December 31, 2006
Note
4.
STOCKHOLDERS’ EQUITY - continued
In
October 2005, the Company granted an option to its website developer
to purchase
100,000 shares of common stock at a variable price based on market price,
exercisable within one year. This option expired without having been
exercised.
In
September 2006, the Company granted options to each of its directors
to purchase
50,000 shares at $0.50. In addition it granted an option to its Chairman,
to
purchase 150,000 shares at $0.50. The options may be exercised at any
time
within five (5) years of the date of grant. Using a discounted stock
price of
$0.49, exercise price of $0.50, 5-year option, risk-free rate of 5.35%
and a
volatility rate of .052 the value of these options is calculated at $0.03
using
the Black-Scholes model. The aggregate value of 300,000 options is $32,216.
At
March 31, 2007 and December 31, 2006, none of the options have been
exercised.
Outstanding
stock options are as follows:
|
Shares
|
Balance,
December 31, 2004
|
700,000
|
Granted,
2005
|
0
|
Expired,
2005
|
(100,000)
|
Balance,
December 31, 2005
|
600,000
|
Granted,
2006
|
300,000
|
Expired,
2006
|
0
|
Balance,
December 31, 2006
|
900,000
|
Granted
2007
|
0
|
Expired
2007
|
0
|
Balance
March 31, 2007
|
900,000
|
Note
5. INCOME
TAXES
The
Company provides for income taxes under Statement of Financial Accounting
Standards No. 109, Accounting
for Income Taxes .
SFAS
No. 109. Under SFAS No. 109, deferred tax assets and liabilities are
recognized
based on temporary differences between the financial statement and tax
basis of
assets and liabilities using enacted tax rates in effect in the years
in which
the differences are expected to reverse. SFAS No. 109 requires current
recognition of net deferred tax assets to the extent that it is more
likely than
not such net assets will be realized. To the extent that the Company
believes
that its net deferred tax assets will not be realized, a valuation allowance
must be recorded against those assets.
SFAS
No.
109 requires the reduction of deferred tax assets by a valuation allowance
if,
based on the weight of available evidence, it is more likely than not
that some
or all of the deferred tax assets will not be realized. In the Company’s
opinion, it is uncertain whether they will generate sufficient taxable
income in
the future to fully utilize the net deferred tax asset. Accordingly,
a valuation
allowance equal to the deferred tax asset has been recorded. The total
deferred
tax asset is calculated by multiplying a 35% estimated tax rate by the
cumulative Net Operating Loss of $12,732,830. The total valuation allowance
is
equal to the total deferred tax asset.
|
|
Three
Mos.
Ended
Mar 31,
2007
|
|
|
Year
Ended
Dec.
31,
2006
|
|
|
|
|
|
|
|
|
Deferred
Tax Asset
|
$
|
4,456,491
|
|
$
|
4,384,730
|
|
Valuation
Allowance
|
$
|
(4,456,491
|
)
|
$
|
(4,384,730
|
)
|
Current
Taxes Payable
|
$
|
0
|
|
$
|
0
|
|
Income
Tax Expense
|
$
|
0
|
|
$
|
0
|
|
SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2007 and December 31, 2006
Note
5. INCOME
TAXES - continued
Below
is
a chart showing the estimated federal net operating losses and the years
in
which they will expire.
|
|
|
Amount
|
|
|
Expiration
|
|
1993-2003
|
|
$
|
4,119,312
|
|
|
2013-2023
|
|
|
2004
|
|
$
|
1,893,331
|
|
|
2024
|
|
|
2005
|
|
$
|
4,051,870
|
|
|
2025
|
|
|
2006
|
|
$
|
2,463,287
|
|
|
2026
|
|
|
2007
|
|
$
|
71,760
|
|
|
2027
|
|
|
Total
|
|
$
|
12,732,830
|
|
|
|
|
|
Note
6. LEASES
AND OTHER COMMITMENTS
The
Company uses space provided at no cost by officers and directors.
Note
7. GOING
CONCERN
The
accompanying financial statements have been prepared on a going concern
basis,
which contemplates the realization of assets and the satisfaction of
liabilities
in the normal course of business. The Company has incurred net losses
since
inception with an accumulated deficit of $12,732,830 as of March 31,
2007. The
Company has not generated meaningful revenues in the last 2 years. The
Company
has a working capital deficit of $3,199,379 as of March 31, 2007. These
factors,
among others, raise substantial doubt about the Company’s ability to continue as
a going concern.
Management’s
Plans
The
Company has expended considerable efforts in working with its contract
manufacturer in order to begin the production of its new line of products.
The
Company expects that the first units will be produced in 2007 with sales
and
delivery to also commence during such period. Despite commencing production,
the
Company expects that it may take up to one year for the production design
and
processes to stabilize. The Company has continued to focus development
efforts
on the commercialization of its patent pending Paradigm™
technology.
To date the Company has not been successful in developing a cost effective
means
to commercialize the technology into a consumer product line. The Company
is
currently negotiating with a critical supplier to jointly complete the
engineering and commercialization process and then subsequently engage
in
engineering for manufacturing phase. The Company has developed a sales
and
distribution network.
The
Company is negotiating with several broker-dealers with a view to completing
further private placements to fund our business strategy, but to date
the
Company has not yet concluded any such arrangement. The Company’s business
strategy requires it to raise in excess of $3 million over the next 12
month
period in order to fully execute its business plan. Management believes
that, in
order to properly exploit the introduction of its products, it will be
necessary
to be positioned not only as a quality supplier of products, but also
able to
supply a sufficient volume of product to meet wholesale demand.
Note
8. PENDING
LITIGATION
Distributor
Suit .
Prior
to the acquisition of Envirotech, by the Company, Envirotech was the
defendant
in a lawsuit filed by a former distributor alleging a breach of a Distributor
Agreement entered into with Envirotech in May, 1998. On August 13, 2003,
Envirotech entered into a Settlement Agreement and Release pursuant to
which
Envirotech agreed to pay the distributor the sum of $520,500 in installments
over a period of ten years. The obligations under this Settlement Agreement
are
secured by a Security Agreement covering all assets of Envirotech except
its
intellectual properties, as defined therein, subordinated, however, to
a first
lien on all assets of Envirotech, tangible and intangible, granted to
the Senior
Secured Creditor in 2001 and 2002 by Envirotech to secure two promissory
notes
given in satisfaction of legal fees. As part of the settlement, Envirotech
granted the distributor a Stipulated Judgment which was not to be filed
of
record so long as no default existed. On May 3, 2004, the distributor
claimed a
breach and filed the Stipulated Judgment. Management believes no default
existed
to warrant the filing of the judgment. With the filing of the Bankruptcy
Petition by Envirotech (see below), this action was stayed. However,
with the
dismissal of the Chapter 11 Proceedings on February 28, 2006, this judgment
is
once again a claim against the assets of Envirotech, subject, however,
to the
claims and rights of the Senior Secured Creditor.
SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2007 and December 31, 2006
Note
8. PENDING
LITIGATION - continued
Seitz
Suit .
In
2002, Envirotech was named as a Defendant in a law suit filed in the
U.S.
District Court for the Southern District of Texas, Houston, Texas (Civil
Action
No. H-02-4782, David Seitz and Microtherm, Inc., vs. Envirotech Systems
Worldwide, Inc., and Envirotech of Texas, Inc. (the “Seitz Suit”). The Company
is not affiliated with Envirotech of Texas, Inc. The suit alleges that
Envirotech has infringed upon patent rights of others and seeks damages
and an
order to cease and desist. Management believes the suit is without merit.
The
suit was stayed pending the disposition of the Chapter 11 Bankruptcy
Petition
filed by Envirotech in August 2004. On September 30, 2005, however, the
Bankruptcy Court allowed the plaintiff to re-open the Seitz Suit and
he has done
so. The suit is in the discovery stage and the Company is vigorously
engaged in
the process. On December 5, 2005, the Houston Court issued an injunction
against
Envirotech and its affiliated entities, including Skye, enjoining them
from
further marketing, advertising or offering for sale, or accepting any
orders for
(i) the Envirotech ESI 2000 heater, (ii) any other heater, regardless
of its
model, using parts of the Model ESI 2000 heater, and (iii) any other
heater,
regardless of model number, utilizing in whole any part any technology
embodied
in the Model ESI 2000 heater. On July 26, 2006 Envirotech retained the
Dallas,
TX firm Hemingway, Hansen, LLP to continue the defense and prosecution
of this
litigation. At a subsequent hearing on February 28, 2007, the Court indicated
that it would reconsider and modify the wording on the scope of the preliminary
injunction. This matter is still under review. Additionally, the Court
allowed
Seitz to amend his complaint. Seitz filed his amended complaint attempting
to
expand the complaint to also cover Skye, Valeo and the FORTIS™ product. Skye and
Valeo have filed motions to dismiss Skye and Valeo which are being considered.
In addition, Envirotech has filed a ten count counterclaim against Seitz.
Envirotech continues to aggressively defend the Seitz suit and will pursue
this
litigation to conclusion.
Unpaid
Legal Fees .
Subsequent to December 31, 2003, Envirotech has been named in five separate
lawsuits for unpaid legal and consulting fees totaling $280,000. These
include
the Myers and Jenkins Suit and the Sensor Technologies Suit discussed
below. On
May 3, 2004, Envirotech settled one of these suits claiming fees of $112,500.
In
connection with that settlement, Envirotech reimbursed the plaintiff
for alleged
out-of-pocket expenses and the Company issued 10,000 shares of common
stock,
restricted under SEC Rule 144, to the plaintiff on the basis of a loan
from the
Company to Envirotech. The settlement, and any settlements of the other
suits,
will be reflected as a charge in the year of the settlement. In two of
the other
three suits judgments have been granted in the aggregate amount of approximately
$155,500, both of which were stayed by the bankruptcy filing discussed
above.
The fourth suit is on behalf of a law firm that served as a contract
arbitrator
in Envirotech’s dispute with the Distributor noted above. With the dismissal of
the Chapter 11 proceedings, the Company has received notice from the
plaintiff
that it intends to resume the suit, which seeks approximately $3,500
in fees.
Myers
and Jenkins Suit .
On May
24, 2006, Envirotech was served with a Motion for Entry of Default in
connection
with an action filed in Arizona Superior Court, case number CV-2006-003671
by
Envirotech’s prior legal counsel, Myers and Jenkins. The motion seeks judgment
for the payment of the principal sum of $103,830, together with interest
and
costs. Envirotech has not defended the action.
Sensor
Technologies Suit .
On May
24, 2006, Envirotech was served with an Application for Entry of Default
in
connection with an action filed in the Arizona Superior Court, case number
CV-2006-0060632, by Sensor Technologies & Systems, Inc., an engineering firm
that provided engineering consulting services in connection with Envirotech’s
ESI-2000 product. The application seeks judgment for the payment of $72,391,
together with interest and costs. Envirotech has not defended the action.
Bankruptcy
Proceedings .
On
August 6, 2004, Envirotech filed a Voluntary Petition for protection
under
Chapter 11 of the United States Bankruptcy Code in Phoenix, Arizona.
The filing
of this Petition with the Bankruptcy Court stayed all existing litigation,
judgments and efforts to collect on the judgments. Envirotech was acquired
by
the Company in November 2003 in a stock-for-stock transaction and has
been held
and operated by the Company as an operating subsidiary. With the exception
of a
guarantee to one critical supplier in the current amount of approximately
$42,500, Skye has not assumed any liability for the obligations of Envirotech.
As of the date of the filing of the Chapter 11 Bankruptcy Petition, Envirotech
had liabilities of approximately $1.6 million. Several creditors, not
related to
the supply of parts or the assembly of products, have obtained judgments
against
Envirotech and an action was pending in the U.S. District Court, Southern
District of Texas, alleging patent infringement (see above). All claims
of
creditors, including the above-mentioned judgments, and efforts to collect
same,
together with the litigation pending in the U.S. District Court in Houston,
were
stayed during the pendency of the Bankruptcy Proceedings. Envirotech
filed a
Disclosure Statement and Plan of Reorganization on November 7, 2004 and
the
Court approved its request to submit the plan to the creditors for approval.
The
Plan, however, did not receive approval of the Court and Envirotech subsequently
filed a Motion to Dismiss the Chapter 11 proceedings which was granted,
with
prejudice, on February 28, 2006. As a result of this dismissal, all claims
and
judgments of creditors of Envirotech may be renewed.
SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2007 and December 31, 2006
Note
8. PENDING
LITIGATION - continued
Shareholder
Inspection Claim .
In
April 2006 a shareholder purporting to have obtained consent from at
least 15%
of the Company’s shareholders filed a lawsuit in the United States District
Court for the District of Nevada (Case No. 2:06-CV-0541-RLH-GWF) seeking
inspection of the Company’s books and records pursuant to Nevada corporate law.
The Court denied plaintiff’s initial request. The Company has asserted several
counterclaims against the plaintiff for tortious conduct and for abuse
of the
legal process in connection with the lawsuit. The matter is currently
pending.
Shareholder
Derivative Action.
In May
2006 a small group of dissident shareholders (including the plaintiff
from the
Shareholder Inspection Claim) filed a lawsuit in the United States District
Court for the District of Arizona (Case No. CV06-1291-PHX-ROS) as a derivative
action seeking injunctive and declaratory relief. The Company was named
as a
nominal defendant and there are no claims for monetary damages against
the
Company. The primary claims involve the prior issuance of the Company’s common
stock to former consultants to the Company, as well as prior issuances
of stock
to certain members of current management. Among other things the plaintiffs
seek
to prevent these individuals from using their stock and related voting
rights to
solicit proxies and notice shareholder meetings, and have demanded that
they
return the shares to the Company. The costs likely to be incurred by
the Company
in connection with such indemnities will be significant. The Company
has filed
extensive counter and third party claims. The matter came before the
Court in a
Hearing on February 21-22, 2007 for a Temporary Restraining Order sought
by the
Plaintiff’s.
On
May 2,
2007, Judge Roslyn O. Silver of the United States District Court for
the
District of Arizona issued an Order rejecting the Plaintiffs’ requested
Preliminary Injunction relief in the pending Skye Shareholder’s Derivative
Lawsuit, Stebbins
v. Johnson, Civil
Action No. 06-1291-PHX-ROS. The Court also dissolved all restrictions
imposed by
a prior Temporary Restraining Order and Stipulated Order, which frees
the
Company to conduct its corporate business without any further interference
or
restraint by the Court or the Plaintiffs. In
the
Order, the District of Arizona found that none of the Plaintiffs’ arguments were
convincing, the Plaintiffs failed to present any evidence that would
support a
finding of corporate fraud or waste, and the Plaintiffs had made no showing
of
likelihood of success on the merits of their claims. During a ten month
investigation into the matter following the filing of the lawsuit, the
Company
and its counsel determined that there was no merit to the claims made
by
Plaintiffs. After reporting the results of this investigation to the
Board of
Directors, the Company’s Board of Directors took affirmative actions to ratify
the Company’s prior actions. After hearing the testimony from five of the Board
of Directors and other Skye personnel and consultants at the Preliminary
Injunction Hearing on February 21-22, 2007, the District of Arizona accepted
the
ratification actions of the Skye Board of Directors, which were based
on the
Board’s reasonable investigation. As a summary of the case, the District of
Arizona found that a vast majority of the Stebbins Plaintiffs’ complaint has
been rendered moot. Based on the Court’s May 2, 2007 rulings, Judge Silver
stated “it is not clear that Plaintiffs have any viable claims remaining” in
this case.
Berry-Shino
Claim .
The
Company has on several occasions during the past three years utilized
the
services of Berry-Shino Securities, Inc., Scottsdale, Arizona, in raising
various forms of financing to further its business plan and operations.
In the
course of each of these engagements, the Company has paid Berry-Shino
various
fees and expenses and has issued a certain number of shares of its Common
Stock
to Berry-Shino. The Company has recently received correspondence from
Berry-Shino stating that it believes it is entitled to be issued an additional
456,500 shares of Common Stock as additional consideration for its services.
The
Company has reviewed the validity of the entitlement and has negotiated
a
settlement of this matter with Berry-Shino resolving this matter.
Pending
Arbitrations.
The
Company is party to two separate arbitrations. The first matter involves
Skye
and Lawrence K. White in an action first filed in Arizona State Court
and later
removed to arbitration. Mr. White seeks payment to him of fees in the
amount of
approximately $7,000, and punitive and other damages in an amount totalling
approximately $100,000 in a matter related to certain accounting consulting
services rendered to Skye in 2006. The second matter involves Skye and
its
former independent auditors, Semple & Cooper, LLP relating to unpaid audit
and accounting fees in the amount of approximately $39,000. The Company
intends
to vigorously defend both actions and may file counterclaims in either
or both
actions. Both matters are pending and arbitrations are expected to be
held
before the end of the third quarter 2007.
Claim
by Director William Papazian for Legal Defense and Indemnity.
The
Company is a party to an action seeking to require Skye to submit his
claim for
defense to the D&O carrier, and to both “defend” and “indemnify” Director
William Papazian from and against costs and liabilities arising in connection
with a third party claim filed by Skye against Mr. Papazian in connection
with
the Shareholder Derivative Action described above. Though filed by Mr.
Papazian
in Arizona State Court, the lawsuit has been removed to the jurisdiction
of the
Federal District Court. The Company seeks an interjudicial transfer of
the
matter to Federal Judge Roslyn O. Silver, the Judge hearing the Shareholder
Derivative Action. The Company’s motion is being opposed by Mr. Papazian and the
matter remains pending. The Company’s D&O insurance carrier has denied Mr.
Papazian’s claim for coverage.
Quick
& Confidential Claim.
On
January 23, 2007, Skye was served with a complaint filed in Arizona State
Court
by Quick & Confidential Inc. who seeks the payment of fees to it in the
amount of approximately $13,000 in connection with legal copying services.
The
Company intends to seek a settlement of this matter.
Except
as
noted above, to the best knowledge of the officers and directors of the
Company,
neither the Company nor its subsidiaries, nor any of their respective
officers
or directors is a party to any material legal proceeding or litigation.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The
following is a discussion of the Company’s financial condition and results of
operations for the three months ended March 31, 2007 and March 31, 2006. The
following discussion may be understood more fully by reference to the financial
statements, notes to the financial statements, and in the Company’s Annual
Report on Form 10-KSB filed on April 10, 2007, as well as with regard to the
Company’s other public filings with the United States Securities and Exchange
Commission.
Forward-Looking
Statements
This
report contains “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995. All statements, other than statements
of historical fact, are “forward-looking statements” for purposes of federal and
state securities laws, including statements regarding, among other items, the
Company’s business strategies, continued growth in the Company’s markets,
projections, and anticipated trends in the Company’s business and the industry
in which it operates. Forward-looking statements generally can be identified
by
phrases such as the Company or its management “believes,” “expects,”
“anticipates,” “foresees,” “forecasts,” “estimates” or other words or phrases of
similar import. Similarly, statements in this report describe the Company’s
business strategy, outlook, objectives, plans, intentions or goals also are
forward-looking statements. Although we believe that the expectations reflected
in any of our forward-looking statements are reasonable, actual results could
differ materially from those projected or assumed in any of our forward-looking
statements. Our future financial condition and results of operations, as well
as
any forward-looking statements, are subject to change and subject to inherent
risks and uncertainties. The factors impacting these risks and uncertainties
include, but are not limited to: the substantial losses the Company has incurred
to date; demand for and market acceptance of new products; successful
development of new products; the timing of new product introductions and product
quality; the Company’s ability to anticipate trends and develop products for
which there will be market demand; the availability of manufacturing capacity;
pricing pressures and other competitive factors; changes in product mix; product
obsolescence; the ability of our customers to manage inventory; the ability
to
develop and implement new technologies and to obtain protection for the related
intellectual property; the uncertainties of litigation and the demands it may
place on the time and attention of company management, general economic
conditions and conditions in the markets addressed by the Company; as well
as
other risks and uncertainties, including those detailed from time to time in
our
other Securities and Exchange Commission filings. The forward-looking statements
are made only as of the date hereof. The Company does not undertake any
obligation to update or revise the forward-looking statements, whether as a
result of new information, future events or otherwise.
For
a
detailed description of these and other factors that could cause actual results
to differ materially from those expressed in any forward-looking statement,
please see “Factors That May Affect Our Results of Operation” in this
document.
Throughout
this report, references to “we”, “our”, “us”, “the Company”, and similar terms
refer to SKYE International Inc. and its 100% owned Envirotech Systems Worldwide
Inc., Valeo Industries Inc. and ION Tankless Inc.
Business
Development
Skye
International, Inc., a Nevada corporation (“Skye”), was originally organized on
November 23, 1993 as Amexan, Inc. The name was changed on June 1, 1998 to
Nostalgia Motorcars, Inc. Prior to the name change, Amexan was an inactive
company from the date of incorporation. On June 11, 2002, the name was changed
to Elution Technologies, Inc. On June 4, 2003, in connection with the pending
acquisition of Envirotech Systems Worldwide, Inc., it changed its name to
Tankless Systems Worldwide, Inc. On October 21, 2005, it changed its name to
Skye International, Inc., as part of its overall plan to create a brand name
for
its revised business plan and expanded product lines.
Skye
has
three subsidiary corporations, all wholly-owned:
|
·
|
Envirotech
Systems Worldwide, Inc., an Arizona corporation
(“Envirotech”);
|
|
·
|
ION
Tankless, Inc., an Arizona corporation (“ION”);
and
|
|
·
|
Valeo
Industries, Inc., a Nevada corporation
(“Valeo”).
|
On
November 7, 2003, Skye acquired Envirotech in a one-for-one share exchange.
On
that date, Skye issued 8,366,778 shares of its common stock to the Envirotech
shareholders. Subsequently, in December 2004, 2,075,000 of those shares were
returned to Skye by the former principals of Envirotech and cancelled, and
the
number of Skye’s issued and outstanding shares was correspondingly reduced,
pursuant to a settlement of litigation brought by Skye.
In
January 2004, Skye formed ION to perform research, development and marketing
of
new heating technologies. In January 2005, it created Valeo to license ION
technologies and to manufacture products using those technologies.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
Except
as
otherwise specified, all references herein to the “Company”, “we” our”, “us”
refer to Skye and its wholly-owned subsidiaries, Envirotech, ION and Valeo.
The
business office of the Company is located at 7701 E. Gray Rd., Suite 4
Scottsdale, Arizona 85260. The Company’s fiscal year ends on December 31.
Envirotech
Envirotech
was formed December 9, 1998 and has a limited history of operations. The initial
period of its existence involved research and development of a line of
electronic, tankless water heaters. The first sales of its products occurred
in
calendar year 2000.
The
United States Patent and Trademark Office granted a patent to Envirotech for
its
Modular Electronic Tankless Water Heater (ETWH) (Patent No. US 6,389,226).
Proprietary rights to the design of the ETWH were Envirotech’s principal assets.
The existing patent and intellectual property of Envirotech were assigned as
collateral security for debts owed by Envirotech for legal services arising
prior to the acquisition of Envirotech by Skye.
In
2002,
Envirotech was named as a defendant in a patent infringement suit alleging
that
Envirotech’s product infringed upon a patent owned by David Seitz and
Microtherm, Inc. (the “Seitz Suit”),
discussed more fully in “Item 3. Legal Proceedings, Seitz Suit” below.
Envirotech
filed for relief under Chapter 11 of the United States Bankruptcy Code in
the
United States Bankruptcy Court for the District of Arizona, on August 6,
2004
(the “Chapter 11 Proceedings”). The Seitz Suit was initially stayed pending the
disposition of the Chapter 11 Proceedings, but on September 30, 2005, the
Court
allowed the plaintiff to re-open the suit. On December 5, 2005, the Court
issued
a preliminary injunction against Envirotech and its affiliated entities,
including Skye, enjoining them from further marketing, advertising or offering
for sale, or accepting any orders for (i) the Envirotech ESI 2000 heater,
(ii)
any other heater, regardless of its model, using parts of the Model ESI 2000
heater, and (iii) any other heater, regardless of model number, utilizing
in
whole any part (sic) any technology embodied in the Model ESI 2000 heater.
At a
hearing on February 28, 2007, the Court indicated that it would re-examine
the
wording of this injunction, and this remains under review by the Court. At
a
hearing on May 17, 2006 the Judge issued a direction to Skye requiring it
to
engage in the discovery process relative to the FORTIS™ and Paradigm™ products
developed by Skye and Ion Tankless. Skye has complied with this direction
for
additional discovery. On May 16, 2006 the U.S. Patent and Trademark Office
issued patent no. 7,046,922 to Ion Tankless, Inc. in connection with its
modular
tankless water heater technology.
The
filing of the petition with the Bankruptcy Court stayed all then-existing
litigation, judgments and efforts to collect on judgments entered against
Envirotech. With the exception of a guarantee to one critical supplier in the
current amount of approximately $42,500, Skye did not assume any liability
for
the obligations of Envirotech. As of the date of the filing of the Chapter
11
Bankruptcy Petition, Envirotech had liabilities of approximately $1.6 million,
which are reflected in the consolidated financial statements. During the
pendency of the Chapter 11 Proceedings, Envirotech continued selling its water
heater products. Subsequently, in the first quarter of 2005, due to the lack
of
working capital and other factors, Envirotech ceased production of its products.
The Chapter 11 Proceedings were dismissed by the Court, with prejudice, on
February 28, 2006, at the request of Envirotech. In connection with incurring
legal fees to the law firm of Jennings Strouss & Salmon, PLC (“JSS”),
Envirotech granted a security interest in all of its tangible and intangible
assets
in 2001
and 2002,
including its intellectual property (the “Envirotech Security”), to JSS (the
“Senior Secured Creditor”). After
Envirotech filed for bankruptcy as noted above, JSS sold its claim and the
related security interests to Sundance Financial Corporation. On June 1, 2006
Sundance Financial Corporation entered into an agreement with the Company’s
subsidiary, ION Tankless, in which it assigned the Envirotech Security to Ion
Tankless, Inc. Because
Envirotech has ceased operations, its only asset of any anticipated value is
its
intellectual property, including the patent as discussed above.
ION
Recognizing
the dynamic state of the industry and the need for an improved product line,
Skye made a decision in early 2004 to pursue its own research and development
for new water heating technologies, out of which it could develop a completely
new line of products. In January 2004, Skye formed a wholly-owned, non-operating
subsidiary, ION Tankless, Inc., through which it has since conducted research
and development of alternative heating technologies and products. Skye has
invested heavily in a research and development program to develop new and
innovative methods of heating water, which has resulted in the filing of
several
applications for patents with the U.S. Patent and Trademark Office involving
dozens of claims. As of the date of this report, several patents have been
issued to the company and several more remain pending in the United States
and
in certain foreign countries, all as more fully detailed elsewhere in this
report.. While there can be no assurances that the other patents sought will
be
granted or that the technology will be considered proprietary to Skye or
ION,
the Company believes that its applications are meritorious and will be granted
at least in part.
Recognizing
the dynamic state of the industry and the need for an improved product line,
Skye made a decision in early 2004 to pursue its own research and development
for new water heating technologies, out of which it could develop a completely
new line of products. In January 2004, Skye formed a wholly-owned, non-operating
subsidiary, ION Tankless, Inc., through which it has since conducted research
and development of alternative heating technologies and products. Skye has
invested heavily in a research and development program to develop new and
innovative methods of heating water, which has resulted in the filing of several
applications for patents with the U.S. Patent and Trademark Office involving
dozens of claims. In November 2005, the Company received notice from the USPTO
that the first such patent request had been allowed, which was issued after
year-end on May 16, 2006 as US Patent No. 7,046,922. While there can be no
assurances that the other patents sought will be granted or that the technology
will be considered proprietary to Skye or ION, the Company believes that its
applications are meritorious and will be granted at least in part.
With
the
exception of one patent held by Envirotech (discussed above), ION holds all
patents and intellectual property of the Company and it may license that
property to an affiliated or third party entity for manufacturing and
distribution. The assets of ION are included in the consolidated financial
statements for the Company.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
Valeo
Valeo
was
formed by Skye in January 2005 as a wholly-owned operating subsidiary. Valeo
will license technology from ION and manufacture or contract for the manufacture
of several lines of water heating products, as well as other products embodying
ION patent technology. These new products, based on proprietary technology,
are
expected to serve as the foundation for the future growth of the Company.
Company
Headquarters and Capitalization
The
business office of the Company is located 7701 E. Gray Rd., Suite 4 Scottsdale,
AZ 85260 where it occupies leased offices that
commenced operation on May 1, 2007.
As
of
March 31, 2007 there were approximately 22,569,243 shares of common stock
outstanding and the Company had approximately 259 shareholders of record on
that
date. As of January 8, 2007 the shares of common stock of the Company are traded
on the OTC Bulletin Board under the ticker symbol SKYY. From June 5, 2006
through January 7, 2007 the shares of common stock of the Company were traded
on
the OTC Pink Sheets under the symbol SKYY. Prior to June 5, 2006, the shares
of
common stock of the Company were traded on the OTC Bulletin Board under the
ticker symbols: SKYY, SKYYE, TSYW, TSYWE, CRRZ and ELUT.
Our
Business and Prospects
The
Company is in the business of designing, developing, manufacturing and marketing
consumer lifestyle products, including, initially, several models of an
electronic, tankless water heater. The tankless water heater is small, easy
to
install and supplies virtually endless amounts of hot water with energy savings.
The unit is a microprocessor controlled electric water heater contained in
a
compact unit, eliminating the space demands of conventional water heaters.
It
incorporates automatic, precise temperature controls. It saves energy, space,
and water and is suitable to most areas of the U.S. and worldwide. Prior to
the
development of new technology, which is discussed later in this section, the
Company was dependent upon the operations of Envirotech for its revenue.
Beginning in 2004 and continuing throughout 2005, Envirotech’s production and
sales steadily declined while the Company embarked on an aggressive research
and
development program to develop new technologies and products for the tankless
water heater market. In January 2004, SKYE formed ION through which it has
since
conducted research and development on alternative heating technologies and
products. SKYE has invested heavily in a concerted R&D program to develop
new and innovative methods of heating water which has resulted in the filing
of
applications for several patents involving dozens of claims. As a result of
the
20 month research and development program, several patents have been issued
and
other patent applications are pending, and new products have been developed
and
will be ready for limited production in mid-2007.
The
Company has ceased to manufacture the ESI-2000 water heater line of products
developed by Envirotech. Our FORTIS™
brand
product line, which is expected to be delivered to the market during 2007,
is
the result of the R&D program discussed above. SKYE’s FORTIS™
series
is scalable from 40 amps to 120 amps of heating power and is a
microprocessor-controlled electric water heater contained in a compact unit,
which is designed to operate in most any climate. SKYE’s new and innovative way
of heating water for home and business is contained in a small and easy to
install unit.. The FORTIS™
series
saves energy, space, water, and is suitable for most areas of the world.
SKYE
uses advanced technology and high quality parts in the construction of the
FORTIS™
series,
which provides reliability and longevity. Most anywhere hot water is now
being
used, SKYE’s electric instantaneous water heaters can likely perform the task
more effectively than most other appliances. The FORTIS™
series
will heat water only as long as you require hot water, and only at the
temperature you desire. Electricity is only used when heated water is required,
therefore the cost of heating water could be calculated to be reduced by
as much
as 20% - 40%. Because the FORTIS™
series
is compact it can be easily installed close to where hot water is being used,
and it is ideal for hotels, motels, apartments, and homes where space is
at a
premium. SKYE believes its FORTIS™
series
heaters offers one of the most efficient solutions for on-demand hot water
available today.
The
Company has expended considerable efforts in working with its contract
manufacturer, Jabil Circuit, Inc., in order to begin the production of the
FORTIS™
line of
products. As of March 31, 2007, much of the prepatory work to commence
production has been completed and Jabil has completed the manufacturing work
cell to commence production. The Company expects that the first FORTIS™
production units will be produced during 2007 with sales and delivery to
commence thereafter. Despite commencing production, the Company expects that
it
may take up to one year for the production design and processes to stabilize.
Once the production and processes have stabilized the Company anticipates
that
it will seek to move production of the FORTIS™
to
a
lower cost center in Mexico or China in order to gain additional
margin.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
The
Company has also continued to develop its new Paradigm™
technology.
Although we have been very excited about the functionality that the Paradigm™
technology offers, we have not been successful in developing a cost effective
means to commercialize the technology into a consumer product line. We are
currently in final negotiations with a critical supplier to (i) jointly complete
the engineering and commercialization process, and then (ii) engage in an
engineering for manufacturing phase. As we have not yet completed our
negotiations there can be no assurance that we will finalize any such agreement,
or if we do finalize the agreement, that we will be successful in developing
a
commercialized product for distribution within a reasonable period of
time.
Access
to
capital remains one of the most pressing considerations for the Company. We
have
recently funded our operations through the issuance of convertible notes to
certain of the Company’s officers and directors. Additionally, we have commenced
a brokered private placement of convertible notes for total gross proceeds
of up
to $1.5 million. Our business strategy will require us to raise in excess of
an
additional $2 million over the next 12 month period in order to fully execute
our current business plan. There can be no assurance that we will be able to
raise such additional funding by way of either new debt or equity, and in the
event we are unable to raise the funds necessary to fund our business plan
it
will be necessary to curtail such plans and this could have a detrimental impact
on our business. Management believes that, in order to properly exploit the
introduction of both the FORTIS™
and
Paradigm™
technologies, it will be necessary that we be positioned not only as a quality
supplier of products, but that we also be able to supply a sufficient volume
of
product to meet wholesale demand. We believe that, relative to the wholesale
market, there is a very high expectation that product be available in a timely
fashion when ordered. In order to meet this expectation we must be capable
of
not only producing our products in sufficient volume, but holding quantities
of
product in inventory as well. These things all require capital and we must
be
successful in our efforts to obtain this funding if we are to be successful
in
the wholesale sales and distribution channel.
Over
the
balance of the year we will continue to focus our efforts on initiating
production of the FORTIS™
product
line and in getting it into the market to be sold. We will continue to develop
our markets and train installers and field service personnel in cooperation
with
our appointed manufacturer’s representatives. This is no small task and it will
require a significant effort on the part of our existing staff, as well as
new
staff that must be hired in order to provide sales and customer service to
the
field. We will also focus our efforts on completing the Paradigm™
technology
and we are challenged by the opportunity to introduce this powerful technology
to the US marketplace. While Paradigm™
will
require a significant investment of time and capital in order to yield a line
of
marketable products, we are confident that products based on this technology
will be amongst the most efficient and technologically advanced in the market.
Many challenges remain and Skye’s Board, Management and Staff are committed to
the challenge.
Manufacturing
On
February 15, 2006, SKYE entered into a Manufacturing Services Agreement with
Jabil Circuit, Inc. (“Jabil”) pursuant to which Jabil has agreed to manufacture
certain components and to assemble SKYE’s tankless water heater products as
specified by SKYE from time to time. The agreement has an effective date of
January 30, 2006. SKYE anticipates that Jabil will become SKYE’s primary
manufacturer and is currently completing the engineering for manufacturing.
Additionally, SKYE is also actively negotiating with critical suppliers to
quality them to supply Paradigm™
components, as well as potentially expedite the earlier market availability
of
products utilizing the new Paradigm™
technology.
Intellectual
Property
In
May
2002, Envirotech was granted a patent by the United States Patent Office for
its
Modular Electronic Tankless Water Heater (ETWH) (Patent No. US 6,389,226).
The
Founders of Envirotech and Steve Onder, and each of the contractors or
consultants who have performed research and development services for and on
behalf of Envirotech made written assignments to Envirotech of proprietary
and
intellectual property rights relating to the ETWH and that research and
development, and have signed non-disclosure, non-competition agreements with
Envirotech.
During
the past two years, based on newly developed technology, ION has filed several
applications for patents with the United States Patent and Trademark Office,
and
expects the products offered using this new technology to replace the products
previously manufactured by Envirotech. All persons deemed inventors have
executed written assignments to ION of proprietary and intellectual property
rights relating to the inventions forming the basis of the various applications
for patents and the attendant research and development. In November 2005, the
Company received notice from the USPTO that the first such patent request has
been allowed, which was issued on May 16, 2006 as US Patent No. 7,046,922.
On
August 8, 2006, the USPTO issued a method patent No, 7,088,915 to ION on the
Company’s modular tankless water heater technology. On
January 16, 2007, the Company was advised that its wholly owned subsidiary,
ION
Tankless, Inc., received US Patent No. 7,164,851 entitled "Modular Tankless
Water Heater Control Circuitry and Method of Operation" as issued and published
by the United States Patent and Trademark Office. On April 17, 2007, the Company
received US Patent No. 7,206,506 entitled “Fluid Heating System”. The patent is
related to a tube based fluid heating system developed in connection with the
Company’s previously announced research and development program.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
While
there can be no assurances that the other patents sought will be granted or
that
the technology will be considered proprietary to SKYE or ION, the Company
believes that its applications are meritorious and will be granted at least
in
part.
Materials
and Principal Suppliers.
SKYE
has
retained Jabil Circuit, Inc. (NYSE: JBL) to manufacture its FORTIS™ products,
and, as such, is heavily dependent upon Jabil to perform satisfactorily so
as to
ensure the availability of product for sale. Jabil is required to buy components
for SKYE’s products from the market at large, as well as from an approved list
of suppliers, including Siemens, AG (electrical components), Lake Monitors
(flow
sensors), Tru-Heat (heating elements), Hydro Aluminum (extruded heating
chamber), and Arnold Bros. (stainless steel sheet metal and components).
Although limited production experience has been obtained, SKYE is satisfied
that
Jabil has the necessary experience to avoid supplier delivery problems. In
order
to avoid losses associated with lack of production components, SKYE has worked
closely with Jabil to identify suppliers that have traditionally performed
well
in addition to ensuring that multiple suppliers for most components are
available. With the exception of certain proprietary components manufactured
by
Jabil, and the preferred vendors noted above, the balance of components are
readily available from a variety of sources both domestically and
internationally. SKYE is satisfied that it and Jabil have adequately planned
to
avoid production disruption resulting from a breakdown in its supply
chain.
The
Company conducts all of its research and development activities through ION.
All
employees, contractors and consultants engaged in the research and development
process by ION were required to execute non-disclosure, non-competition
agreements covering the subject, scope and work product of the program. The
Company expended approximately $30,000 during the three-month period ended
march
31, 2007; $26,878 in 2006 and $450,000 in 2005 on research and development.
Employees
At
March
31, 2007, Skye had one full-time and one part-time employee. Additionally,
the
Company retained the services of consulting professionals to provide on-going
management, legal, accounting and engineering research and development work.
The
Company anticipates adding several full time employees in the near future in
management and for administrative and technical support. Additional employees
are expected to be engaged as revenues from operations permit.
Dependence
on Major Customer
Skye
expects to commence the wholesale introduction of its products sometime during
the second quarter 2007 or later. It has not developed a dependence upon any
single customer or group of customers. By necessity, initial sales of Skye’s
products may be concentrated with certain distributors or retailers until a
broader distribution network can be achieved. Skye will monitor its sales and
distribution activities closely to avoid such reliances.
Costs
of Environmental Compliance
Because
Skye does not manufacture any of its products, it does not anticipate incurring
material costs related to environmental compliance, which is the responsibility
of the manufacturer.
Recent
Developments
|
·
|
On
January 5, 2007, the Company was advised that its securities had
been
cleared by the compliance unit of the National Association of Securities
Dealers ("NASD") for quotation on the OTC Bulletin Board. Accordingly,
the
Company commenced trading on the OTCBB under the trading symbol SKYY
effective on the opening on January 8, 2007.
|
|
·
|
On
January 16, 2007, the Company was advised that its wholly owned
subsidiary, ION, received US Patent No. 7,164,851 entitled "Modular
Tankless Water Heater Control Circuitry and Method of Operation".
|
|
·
|
On
January 19, 2007 the Company issued a President’s letter to shareholders
providing shareholders with an update of events in 2006 and an outlook
for
2007.
|
|
·
|
On
January 30, 2007, the Board of Directors of the Registrant filled
two
vacancies on the Board with the election of Mr. Perry Logan and Mr.
Ted
Marek. Both Mr. Logan and Mr. Marek will serve as directors until
the next
Annual General Meeting of the Registrant's shareholders. Mr. Logan
and Mr.
Marek were also appointed to serve as independent Directors on the
Company's Audit Committee and Corporate Governance Committee and
will
serve in such capacity until the next Annual General Meeting of
shareholders.
|
|
·
|
On
April 12, William Papazian resigned as a
director.
|
|
·
|
On
April 17, 2007, the United States Patent and Trademark Office published
the Registrant’s patent entitled “Fluid Heating System” as US Patent No.
7,206,506. The patent is related to a tube based fluid heating system
developed in connection with the Registrant’s previously announced
research and development program.
|
|
·
|
In
late April, 2007 the Company reached a settlement with Lawrence K.
White
after the completion of an arbitration of the dispute, but prior
to a
decision being rendered in the
matter.
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
continued
|
·
|
Effective
may 1, 2007 the Company moved its principal offices to: 7701 E. Gray
Rd.,
Suite 4 Scottsdale, AZ 85260
|
|
·
|
At
a meeting of the Registrant’s Board of Directors on May 3, 2007 a
management reorganization was approved that resulted in the appointment
of
Perry Logan as the Company’s interim President and Chief Executive
Officer. Mr.
Logan replaced Ronald O. Abernathy, who stepped down as the Registrant’s
President to accept an appointment as the Registrant’s Vice President.
|
|
·
|
On
May 2, 2007, Judge Roslyn O. Silver of the United States District
Court
for the District of Arizona issued an Order rejecting the Plaintiffs’
requested Preliminary Injunction relief in the pending Skye Shareholder’s
Derivative Lawsuit, Stebbins
v. Johnson, Civil
Action No. 06-1291-PHX-ROS. The Court also dissolved all restrictions
imposed by a prior Temporary Restraining Order and Stipulated Order,
which
frees the Company to conduct its corporate business without any further
interference or restraint by the Court or the Stebbins Plaintiffs.
As a
summary of the case, the District of Arizona found that a vast majority
of
the Stebbins Plaintiffs’ complaint has been rendered moot. Based on the
Court’s May 2, 2007 rulings, Judge Silver stated “it is not clear that
Plaintiffs have any viable claims remaining” in this case. The District of
Arizona also ruled on other matters, including a ruling that the
prior
Answer and Counterclaim filed by Skye did not comply with the proper
form
of such a pleading under Rule 8 of the Federal Rules of Civil Procedure.
|
Results
of Operations
Results
of Operations for the Three Months Ended March 31, 2007 and 2006
Compared.
The
following table is a summary of our operations for the three months ended March
31, 2007 as compared to the three months ended March 31, 2006
|
|
|
For
the Three Months Ended
Mar
31, 2007
|
|
|
For
the Three
Months
Ended Mar. 31, 2006
|
|
Revenues
|
|
$
|
-
|
|
$
|
10,632
|
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
$
|
24,142
|
|
$
|
1,074
|
|
|
|
|
|
|
|
|
|
General
and Administrative Expenses
|
|
$
|
131,802
|
|
$
|
193,611
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$
|
30,000
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
$
|
164,563
|
|
$
|
680,387
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$
|
(205,030
|
)
|
$
|
(679,460
|
)
|
Revenues
For
the Three months ended March 31:
|
2007
|
2006
|
Increase/(decrease)
|
$
|
%
|
Revenue
|
$
-
|
$
10,632
|
$
(10,632)
|
(100%)
|
Revenues
for the three months ended march 31, 2007 were $NIL, compared to revenues of
$10,632 in the three months ended March 31, 2006. The decreases in revenue
is
attributable to the cessation all sales of ESI-2000 products and parts pending
the launch of the Company’s FORTIS™ product line.
General
and Administrative expenses
For
the three months ended March 31:
|
2007
|
2006
|
Increase/(decrease)
|
$
|
%
|
General
& Administrative expenses
|
$
131,802
|
$
193,611
|
$
(61,809)
|
(32%)
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
General
and administrative expenses reduced by 32% reflecting the fact that the Company
no longer made lease payments for its principal offices. During the period
the
Company’s operations were conducted from sub-leased premises offered to the
Company at no-charge. During the three month period ended March 31, 2007 the
Company continued to operate at minimal staffing levels as it completed the
balance of development work on its pending FORTIS™ product line. We anticipate
an increase in the general and administrative expenses by the Company as we
add
more operational and administrative personnel, legal and other professional
assistance with our continued efforts to execute our business plan and market
our products in the US and Canada. We anticipate this transition to create
up-front costs, as well as continuing costs for additional personnel.
Total
Operating Expenses
For
the three months ended March 31:
|
2007
|
2006
|
Increase/(decrease)
|
$
|
%
|
Total
operating expenses
|
$
164,563
|
$
680,387
|
$(515,824)
|
(76%)
|
Overall
operating expenses decreased by approximately 76% as a result of decreased
legal
fees in connection with various legal matters described in this report.
Additionally, minimal expenses were incurred during the first three months
of
2007 as the Company focused its principal efforts on completing the FORTIS™
product line and readying it for production. Legal and professional fees
accounted for $109,035 of the total operating expenses of $164,563.
Net
Loss
For
the three months ended March 31:
|
2007
|
2006
|
Increase/(decrease)
|
$
|
Net
Profit (Loss)
|
$
(205,030)
|
$
(679,460)
|
($474,430)
|
The
net
loss for the three months ended March 31, 2007 was $205,030, versus a net loss
of $679,460 for the three months ended March 31, 2006. The significant decreases
resulted from a reduction in legal expenses in connection with legal matters
discussed elsewhere in this report, as well as a reduction for personnel and
lease/occupancy costs while the company occupied sub-leased offices awaiting
its
move to its new offices effective May 1, 2007. The Company expects to commence
sales of its FORTIS™ product during 2007.
Liquidity
and Capital Resources at March 31, 2007 and December 31,
2006.
The
following table summarizes total assets, accumulated deficit and stockholders’
equity.
|
|
March
31,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Total
Assets
|
|
$
|
341,215
|
|
$
|
315,034
|
|
Accumulated
Deficit
|
|
$
|
(12,732,830
|
)
|
$
|
(12,527,800
|
)
|
Stockholders’
Equity (Deficit)
|
|
$
|
(3,156,824
|
)
|
$
|
(3,141,194
|
)
|
|
|
|
|
|
|
|
|
Working
Capital (Deficit)
|
|
$
|
(3,199,379
|
)
|
$
|
(3,185,116
|
)
|
A
critical component of our operating plan impacting our continued existence
is
the ability to obtain additional capital through equity and/or debt financing.
Since inception, we have financed our cash flow requirements through issuances
of common stock and cash generated from our operations. As we continue our
activities, we may continue to experience net negative cash flows from
operations, pending receipt of significant revenues. The Company expects to
commence limited sales of its FORTIS™ product line during the third quarter of
2007.
The
Company expects that additional operating losses will occur until revenue is
sufficient to offset the costs incurred for marketing, sales and product
development. Until the Company has achieved a sales level sufficient to break
even, it will not be self-sustaining or be competitive in the areas in which
it
intends to operate. The Company will require additional funds to complete
the ramping up for production of the FORTIS™,
and to
fully implement its marketing plans and for continued operations. Additionally,
the Company will also require further development funds in order to finalize
a
commercialized version of its consumer product utilizing the patented
Paradigm™
technology. We anticipate obtaining additional financing to fund operations
through common stock offerings, debt offerings and bank borrowings, to the
extent available, or to obtain additional financing to the extent necessary
to
augment our working capital. In the event we cannot obtain the necessary capital
to pursue our strategic plan, we may have to significantly curtail our
operations. This would materially impact our ability to continue operations.
There is no assurance that the Company will be able to obtain additional funding
when needed, or that such funding, if available, can be obtained on terms
acceptable to the Company.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
continued
As
of
March 31, 2007, the existing capital and anticipated funds from operations
were
not sufficient to sustain normal operations, or the business plan over the
next
twelve months. We anticipate substantial increases in our cash requirements;
which will require additional capital generated from either the sale of common
stock, the sale of preferred stock, or debt financing. No assurance can be
made
that such financing would be available, and if available it may take either
the
form of debt or equity. In either case, the financing will likely have a
negative impact on our financial condition and our stockholders.
We
anticipate that we will incur operating losses in the next twelve months. Our
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of development. Such
risks for us include, but are not limited to, an evolving and unpredictable
business model and the management of growth. To address these risks, we must,
among other things, expand our customer base, implement and successfully execute
our business and marketing strategy, respond to competitive developments, and
attract, retain and motivate qualified personnel. There can be no assurance
that
we will be successful in addressing such risks, and the failure to do so can
have a material adverse effect on our business prospects, financial condition
and results of operations.
Critical
Accounting Policies
We
have
identified the following policies as critical to our business operations and
the
understanding of our results of operations. The preparation of these financial
statements require us to make estimates and assumptions that effect the reported
amount of assets and liabilities, disclosure of contingent assets and
liabilities at the date of our financial statements, and the reported amounts
of
revenue and expenses during the reporting period. There can be no assurance
that
actual results will not differ from those estimates. The effect of these
policies on our business operations is discussed below where such policies
affect our reported and expected financial results.
Revenue
Recognition.
Our
revenue recognition policy is significant because our revenue is a key component
of our results of operations. We recognize revenue when delivery of the product
has occurred or services have been rendered, title has been transferred, the
price is fixed and collectability is reasonably assured. Sales of goods are
final with no right of return.
Warranty
Costs.
We
warrant our products against manufacturing defects for a period of five years
on
electrical components and 10 years on other components. Once sales of our new
products commence, we expect to make an accrual for warranty claims based on
our
sales.
Intangible
Assets.
We have
intangible assets in the form of patents issued and pending. Our estimate of
the
remaining useful life of these assets and the amortization of these assets
will
affect our gain from operations. Since we do not have a method of quantifying
the estimated number of units that may be sold we have elected to amortize
these
intangibles over a seven year period beginning in the first quarter of 2006.
Purchase
Accounting.
Our
purchase accounting policy is to record any acquisitions in accordance with
current accounting pronouncements and allocate the purchase price to the net
assets. The Company evaluates the fair market values of tangible and intangible
assets based on current market conditions, and financial and economic factors.
Intangible assets are valued using several cash flow projection models and
financial models to establish a baseline for their respective valuations. The
Company’s policy is to expense in-process research and development costs at
acquisition.
Stock
Options.
We have
a stock option plan under which options to purchase shares of our common stock
may be granted to employees, consultants and directors at a price no less than
the fair market value on the date of grant. We account for grants to employees
in accordance with the provisions of APB No. 25, Accounting
for Stock Issued to Employees (“APB
No. 25”). Under APB No. 25, compensation expense is based on the
difference, if any, on the date of the grant between the fair value of our
stock
and the exercise price of the option and is recognized ratably over the vesting
period of the option. Because our options must be granted with an exercise
price
equal to the quoted market value of our common stock at the date of grant,
we
recognize no stock compensation expense at the time of the grant in accordance
with APB No. 25. On January 1, 2006 we adopted the fair value based method
set forth in Statement of Financial Accounting Standards (“SFAS”) No. 123,
Accounting
for Stock-Based Compensation (“SFAS
No. 123”), we would recognize compensation expense based upon the fair
value at the grant date for awards under the plans. The amount of compensation
expense recognized using the fair value method requires us to exercise judgment
and make assumptions relating to the factors that determine the fair value
of
our stock option grants. We account for equity instruments issued to
non-employees in accordance with SFAS No. 123 and Emerging Issues Task
Force Issue No. 96-18, Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
or
in Conjunction with Selling Goods or Services.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
Going
Concern
The
financial statements included in this filing have been prepared in conformity
with generally accepted accounting principles that contemplate the
continuance of us as a going concern. Our cash position may be inadequate
to pay
all of the costs associated with our operations. We intend to use borrowings
and
security sales to mitigate the effects of our cash position, however no
assurance can be given that debt or equity financing, if and when required
will
be available. The financial statements do not include any adjustments relating
to the recoverability and classification of recorded assets and classification
of liabilities that might be necessary should we be unable to continue
existence.
Off-Balance
Sheet Arrangements.
During
the three-month period ended March 31, 2007, the Company did not enter into
nor
was it a party to any off-balance sheet arrangement other than as previously
disclosed in prior filings, including the Company’s Annual Report on form 10KSB
for the period ending December 31, 2006. Other than as previously disclosed,
we
have no other off-balance sheet arrangements that have or are reasonably likely
to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to
investors.
FACTORS
THAT MAY AFFECT OUR RESULTS OF OPERATIONS
Risks
Relating To Our Business and Our Marketplace
History
of Operations and Dependence on Future Development.
SKYE
International, Inc. (“SKYE”) was organized November 23, 1993 and existed as a
development stage company until its acquisition of Envirotech Systems Worldwide,
Inc. (“Envirotech”), on November 7, 2003. Envirotech was organized December 9,
1998. Envirotech has a limited history of operations. The first sales of its
products occurred in calendar year 2000. The Company, on an operating and
consolidated basis, has continued to incur substantial losses from operations
since the date of acquisition. The Company did not generate significant revenue
from sales of its discontinued ESI-2000 product line and has not generated
any
revenues yet from the sale of other products, including FORTIS™, developed in
conjunction with the Company’s research and development
initiatives.
Prior
to
the development of new technology, the Company was dependent upon the operations
of Envirotech for its revenue. The Company expects that additional operating
losses will occur until new product sales in the market commence and the
resulting revenue is sufficient to offset the level of costs incurred for
ongoing marketing, sales and product development. The Company is subject to
all
of the risks inherent in establishing a new business enterprise. Since the
Company has a very limited record of operations, there can be no assurance
that
its business plan will be successful. The potential for success of the Company
must be considered in light of the significant problems, expenses, difficulties,
complications and delays experienced by the Company to date; and as are
frequently encountered with the start-up of new businesses. A prospective
investor should be aware that if the Company is not successful in achieving
its
goals and achieving profitability, any money invested in the Company will be
lost. The Company’s management team believes that its success depends on the
Company’s ability to complete product development and obtain regulatory
approval, then in manufacturing, marketing and selling its products and, over
the longer term, in developing new products for which larger markets are
possible.
The
Company has not had sufficient funds to date with which to even partially
implement its business plans. We cannot be certain that our business strategy
will be successful because these strategies are unproven. There can be no
assurance that the Company will generate sufficient revenues to the extent
necessary to render it profitable. There can be no assurance that management
has
accurately forecast the Company's performance or that planned operations will
lead to profits in the future. In addition, outside of product know-how,
intellectual property and contractual relationships, the Company has only very
limited hard assets, the value of which is far less than the accrued payables
of
the Company as of the date of this report. If the Company is unable to develop
marketable products, obtain customers and/or generate sufficient revenues so
that it can profitably operate, the Company's business will not succeed. We
will
be particularly susceptible to the significant risks and uncertainties as
described in these risk factors, and we will be more likely to incur the
expenses associated with addressing such risks. Our business and prospects
must
be considered in light of the risks, expenses and difficulties frequently
encountered by companies in the early stages of development. These risks are
particularly severe among companies in new and rapidly evolving markets such
as
those that we expect will serve as our target markets. Accordingly, purchasers
of Units must be in a financial position to bear the risk of loss of their
entire investment in the Company.
Awaiting
SEC Response to Amended Financial Filings for the Year Ended December 31,
2004
On
September 15, 2005 the Company received a letter from the U.S. Securities and
Exchange Commission (“SEC”) relating to information provided by the Company in
its financial filings for the year ended December 31, 2004 (the “2004 10KSB”),
as well as the interim quarterly filings preceding such date. The SEC has
requested, among other things, that we clarify and restate certain disclosures
in the 2004 10KSB and possibly some related quarterly disclosures on form 10QSB
during such year. On June 14, 2006 the Company filed an amended and restated
10KSB for the year ended December 31, 2004, and, to date, we have not received
any comments thereon from the SEC. Other than filing an amended and restated
financial as discussed above we have not formally responded in writing to the
SEC, and thus we have not yet concluded such matters with the SEC and the
Company may be required to undertake further actions or financial restatements
as a result of further enquiries or actions by the SEC and the Company’s Board
of Directors.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
Limited
Capital and Need for Additional Financing.
The
Company does not have sufficient capital to execute its existing business plan
and until the Company has achieved a sales and net margin level sufficient
to
break even, it will not be self-sustaining or be competitive in the areas in
which it intends to operate. The Company will require additional funding
for continued operations, and will therefore be dependent upon its ability
to
raise additional funds through bank borrowings, equity or debt financing, or
asset sales. We expect to access the public and private equity or debt
markets periodically to obtain the funds we need to support our operations
and
continued growth. There is no assurance that the Company will be able to obtain
additional funding when needed, or that such funding, if available, can be
obtained on terms acceptable to the Company. If we require, but are unable
to obtain, additional financing in the future on acceptable terms, or at all,
we
will not be able to continue our business strategy, respond to changing business
or economic conditions, withstand adverse operating results or compete
effectively. If the Company cannot obtain needed funds, the Company may be
forced to curtail or cease its activities. If additional shares are issued
to
obtain financing, current shareholders will suffer a dilutive effect on their
percentage of stock ownership in the Company and this dilutive effect may be
substantial. The
Company has no commitments or plans for any additional funding at the present
time. Insufficient financial resources may require the Company to delay or
eliminate all or some of its development, marketing and sales plans, which
will
have a material adverse effect on the Company's business, financial condition
and results of operations. There
is
no certainty that the expenditures to be made by the Company will result in
a
profitable business.
Lack
of Diversification.
The
size
of the Company makes it unlikely that the Company will be able to commit its
funds to diversify the business until it has a proven track record of profitable
operations, and the Company may not be able to achieve the same level of
diversification as larger entities engaged in this type of
business.
Competition.
The
water
heater market is mature, highly concentrated and highly competitive, and steep
discounts and rebates as high as 30% or more are standard. Some contractors
are
loyal to favorite brands and on occasion resistant to tankless systems, and
the
plumbing industry is on occasion also resistant to tankless systems,
particularly electric powered tankless units. Pricing competition has increased
in recent years, and major manufacturers are increasing their expenditures
on
research and development. Conventional water heaters (tank heaters) are slightly
more efficient and reliable than conventional tank water heaters in previous
years. There are several companies around the world who manufacture water
heaters, conventional and tankless. It is reasonable to expect to encounter
intense competition in all aspects of our business and that such competition
would increase. Substantial competition could emerge at any time. Many of our
competitors and potential competitors have longer operating histories and
significantly greater experience, resources, and managerial, financial,
technical, and marketing capabilities than us. In addition, many of these
competitors offer a wider range of products and services than we contemplate
offering. Many current and potential competitors also have greater name
recognition, industry contacts and more extensive customer bases that could
be
leveraged to accelerate their competitive activity. Moreover, current and
potential competitors have established and may establish future cooperative
relationships among themselves and also with third parties to enhance their
products and services in this space. Consequently, new competitors or alliances
may emerge and rapidly acquire significant market share. We cannot assure you
that we will be able to compete effectively with current or future competitors
or that the competitive pressures faced by us will not harm our business.
This
intense competition, and the impact it has on the valuation of companies of
this
nature, could limit our opportunities and have a materially adverse effect
on
the Company’s profitability or viability.
The
Company believes that its primary competition will be the manufacturers of
conventional tank water heaters, who are firmly established with the plumbing
industry. There are a large number of manufacturers of tank water heaters,
both
domestic and foreign. The dominant manufacturers are five large, multinational,
established companies with significantly more resources than the Company
(Bradford-White, Rheem, A. O. Smith, State Industries and American Standard).
Manufacturers of tank water heaters dominate the U.S. market, maintaining over
96% market share of residential water heater sales. The Company cannot predict
the likelihood that it will take market share away from those manufacturers,
or
whether or how long it will take the Company to build up sales of its tankless
product line. In addition, there can be no assurance that larger, more
established companies with significantly more financial, technical, research,
engineering, development and marketing resources; with established distribution
networks and worldwide manufacturing capabilities; and with greater revenues
and
greater name recognition than the Company; will not develop competing systems
and products which will surpass the Company’s business.
Performance;
Market Acceptance.
The
quality of the Company’s products, manufacturing capability, and marketing and
sales ability, and the quality and abilities of its personnel, are among the
operational keys to the Company’s success. A primary management challenge will
be to penetrate the market for water heaters, a mature, highly competitive
and
concentrated market. Also, distributors and users of water heaters may resist
or
be slow to accept an electric tankless water heater. Other important factors
to
the success of the Company will be the ability to complete the development
process for new products in a timely manner and the ability to attract an
adequate number of buyers, distributors and investors. There can be no assurance
that the Company can complete development of new technology so that other
companies possessing greater resources will not surpass it. There can be no
assurance that the Company can achieve its planned levels of performance, or
can
be successful in establishing relationships with the number and quality of
distributors it needs to be successful, in a timely way. If the Company is
unsuccessful in these areas, it could have a material adverse effect on the
Company's business, results of operations, financial condition and forecasted
financial results.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
Dependence
on Intellectual Property - Design and Proprietary Rights.
Our
success and ability to compete depend to a significant degree on our
intellectual property. We will rely on patent, copyright and trademark law,
as
well as confidentiality arrangements, to protect our intellectual property.
Even
if legal actions are initiated by the Company to enforce our intellectual
property rights however there can be no guarantee that such actions will be
successful in protecting our intellectual property adequately.
Envirotech
was granted a patent by the United States Patent and Trademark Office for
its
Modular Electronic Water Heater (ETWH) (Patent No. US 6,389,226 B1). Proprietary
rights to the design of the ETWH were Envirotech’s principal assets. The
existing patent and intellectual property of Envirotech were assigned as
collateral for debts owed by Envirotech for legal services arising prior
to the
acquisition of Envirotech by SKYE. Envirotech, in 2005, discontinued production
of all models of the ESI-2000 tankless water heater previously manufactured
by
it. On December 5, 2005 by order of Judge Lee Rosenthal of the US District
Court
for the Southern District of Texas in Houston a preliminary injunction against
the Company was issued in connection with the civil action H-02-4782 between
David Seitz and Microtherm (as Plaintiff) and Envirotech (as Defendant and
Plaintiff by counterclaim) enjoining the Company and others from manufacturing,
assembling, selling or offering for sale, any Product (as defined in the
order)
including the Envirotech ESI-2000 heater, any other heater regardless of
its
model number utilizing parts from the ESI-2000 or any other heater, regardless
of its model number, utilizing in whole any part any technology embodied
in the
ESI-2000 heater (sic). The Court has indicated that it is considering re-wording
of the preliminary injunction, which is still under
advisement.
The
new
line of tankless water heaters designed by the Company do not, in the opinion
of
the Company, utilize the technology embodied in the Envirotech patent or
technology related to the ESI-2000 product, and are constructed using parts
and
operational methodologies distinct from the Envirotech ESI-2000 heater. The
Company does not intend to produce any further ESI-2000 heaters and believes
all
future water heaters will embody designs and technologies related to newly
developed intellectual property of the Company’s research and design subsidiary
Ion Tankless, Inc. There can, however, be no assurance that a third party may
claim or continue to claim that the Company’s products infringe any of such
third party’s patents or intellectual property. During the past year, based on
newly developed technology, SKYE has filed several applications for patents
with
the United States Patent and Trademark Office, and expects that a range of
products using this new technology will replace the products previously
manufactured by Envirotech. In
November 2005, the Company received notice from the USPTO that the first such
patent request had been allowed, which was issued on May 16, 2006 as US Patent
No. 7,046,922. On August 8, 2006, the USPTO issued a method patent (No,
7,088,915) to ION on the modular tankless water heater technology. On
January 16, 2007, the Company was advised that its wholly owned subsidiary,
ION
Tankless, Inc., received US Patent No. 7,164,851 entitled "Modular Tankless
Water Heater Control Circuitry and Method of Operation" as issued and published.
On April 17, 2007, the United States Patent and Trademark Office published
the
Company’s patent entitled “Fluid Heating System” as US Patent No. 7,206,506. The
patent is related to a tube based fluid heating system developed in connection
with the previously announced research and development program. The
Company has filed other patent applications both within and outside the United
States and such applications are currently pending before the United States
Patent and Trademark Office, as well as other such regulatory bodies in other
countries. While there can be no assurances that the other patents sought will
be granted or that the technology will be considered proprietary to SKYE or
ION,
the Company believes that its applications are meritorious and will be granted
at least in part. It is expected that further research and development
undertaken by the Company through its subsidiary, ION Tankless, Inc., will
result in the issuance of more patents. However, there is no guarantee that
the
concepts and technologies we use in the future will be patentable.
Effective
Protection may not be available for our Trademarks.
Although
we have recently
applied to register our trademarks in the United States, we cannot assure you
that we will be able to secure significant protection for these marks. Our
competitors or others may adopt product or service names similar to "SKYE",
thereby impeding our ability to build brand identity and possibly leading to
client confusion. Our inability to adequately protect the name "SKYE” could
seriously harm our business.
Policing
Efforts to Protect Intellectual Property may not be
successful.
Policing
unauthorized use of our intellectual property is made especially difficult
by
the global nature of the high technology industry and difficulty in controlling
hardware and software. The laws of other countries may afford us little or
no
effective protection for our intellectual property. We intend to make all
reasonable and practical efforts to enforce our rights but we cannot assure
you
that the steps we take will prevent misappropriation of our intellectual
property or that agreements entered into for that purpose will be enforceable.
In addition, litigation may be necessary in the future to: enforce our
intellectual property rights; determine the validity and scope of the
proprietary rights of others; or defend against claims of infringement or
invalidity. Such litigation, whether successful or unsuccessful, could result
in
substantial costs and diversions of resources, either of which could seriously
harm our business. There can be no assurance that competitors of the Company,
some of which have substantially greater resources, will not obtain patents
or
other intellectual property protection that will restrict the Company’s ability
to make, use and sell its products. If the Company were unsuccessful in
protection of proprietary and intellectual property rights, it could have a
material adverse effect on the Company's business, results of operations,
financial condition and value, and forecasted financial
results.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
Some
of our markets are cyclical, and a decline in any of these markets could have
a
material adverse effect on our operating performance.
Our
business is cyclical and dependent on consumer spending and is therefore
impacted by the strength of the economy generally, interest rates, and other
factors, including
national, regional and local slowdowns in economic activity and job markets,
which can result in a general decrease in product demand from professional
contractors and specialty distributors. For example, a slowdown in economic
activity that results in less home renovations can have an adverse effect on
the
demand for some of our products.
In
addition, unforeseen events, such as terrorist attacks or armed hostilities,
could negatively affect our industry or the industries in which our customers
operate, resulting in a material adverse effect on our business, results of
operations and financial condition.
Disaster.
A
disaster that disables the Company’s operations will negatively impact the
Company’s ability to perform for a period of time. The Company’s disaster
recovery plan includes future multiple-site storage of inventory and the
possibility of multiple manufacturing facilities.
We
increasingly manufacture and/or source critical components for our products
outside the United States, which may present additional risks to our business.
A
significant portion of our future production will likely be manufactured outside
of the United States, principally in China and/or Mexico, and expanding
international manufacturing capacity in China and Mexico is part of our strategy
to reduce costs. International operations generally are subject to various
risks, including political, religious and economic instability, local labor
market conditions, the imposition of foreign tariffs and other trade
restrictions, the impact of foreign government regulations, and the effects
of
income and withholding tax, governmental expropriation, and differences in
business practices. We may incur increased costs and experience delays or
disruptions in product deliveries and payments in connection with international
manufacturing and sales that could cause loss of revenue. Unfavorable changes
in
the political, regulatory, and business climate could have a material adverse
effect on our financial condition, results of operations, and cash flows.
Our
operations will suffer if we are unable to complete our internal cost reduction
programs.
We
are
proposing a cost reduction program in our business, which includes a transfer
of
portions of our manufacturing and assembly work from of existing United States
operations to proposed operations in China or Mexico. In implementing this
program, we may not be able to successfully consolidate management, operations,
product lines, distribution networks, and manufacturing facilities, and we
could
experience a disruption in our inventory and product supply or in administrative
services. In addition, we may not be able to complete this program without
unexpected costs or delays, or the need for increased management time and
effort. If we do not successfully implement this program on a timely basis,
we
will not achieve the planned operational efficiencies and cost savings, and
there could be an adverse impact on ongoing relationships with our customers,
all of which would impact our profitability.
Our
results of operations may be negatively impacted by product liability lawsuits.
Our
business exposes us to potential product liability risks that are inherent
in
the design, manufacture, and sale of our products. While we intend to obtain
what we believe to be suitable product liability insurance, we cannot assure
you
that we will be able to obtain or maintain this insurance on acceptable terms
or
that this insurance will provide adequate protection against potential
liabilities. In addition, we currently self-insure a portion of product
liability claims. A series of successful claims against us could materially
and
adversely affect our reputation and our financial condition, results of
operations, and cash flows.
Loss
of key suppliers, lack of product availability or loss of delivery sources
could
decrease sales and earnings.
Our
ability to manufacture a variety of products is dependent upon our ability
to
obtain adequate product supply from manufacturers or other suppliers. While
in
many instances we have agreements, including supply agreements, with our
suppliers, these agreements are generally terminable by either party on limited
notice. The loss of, or a substantial decrease in the availability of, products
from certain of our suppliers, or the loss of key supplier agreements, could
have a material adverse effect on our business, results of operations and
financial condition. In addition, supply interruptions could arise from
shortages of raw materials, labor disputes or weather conditions affecting
products or shipments, transportation disruptions or other factors beyond our
control. Furthermore, since we acquire a portion of our supply from foreign
manufacturers, our ability to obtain supply is subject to the risks inherent
in
dealing with foreign suppliers, such as potential adverse changes in laws and
regulatory practices, including trade barriers and tariffs, and the general
economic and political conditions in these foreign markets.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
continued
Our
ability to both maintain our existing customer base and to attract new customers
is dependent in many cases upon our ability to deliver products and fulfill
orders in a timely and cost-effective manner.
To
ensure
timely delivery of our products to our customers, we frequently rely on third
parties, including couriers such as UPS, DHL and other national shippers as
well
as various local and regional trucking contractors. Outsourcing this activity
generates a number of risks, including decreased control over the delivery
process and service timeliness and quality. Any sustained inability of these
third parties to deliver our products to our customers could result in the
loss
of customers or require us to seek alternative delivery sources, if they are
available, which may result in significantly increased costs and delivery
delays. Furthermore, the need to identify and qualify substitute service
providers or increase our internal capacity could result in unforeseen
operations problems and additional costs. Moreover, if customer demands for
our
products increases, we may be unable to secure sufficient additional capacity
from our current service providers, or others, on commercially reasonable terms,
if at all.
In
some cases we are dependent on long supply chains, which may subject us to
interruptions in the supply of many of the products that we distribute.
An
increasing portion of the products that we manufacture and distribute are
imported from foreign countries, including China and Mexico. We are thus
dependent on long supply chains for the successful delivery of many of our
products. The length and complexity of these supply chains make them vulnerable
to numerous risks, many of which are beyond our control, which could cause
significant interruptions or delays in delivery of our products. Factors such
as
labor disputes, changes in tariff or import policies, severe weather or
terrorist attacks or armed hostilities may disrupt these supply chains. We
expect more of our name brand and private label products will be imported in
the
future, which will further increase these risks. A significant interruption
in
our supply chains caused by any of the above factors could result in increased
costs or delivery delays and have a material adverse effect on our business,
results of operations and financial condition.
Our
results of operations could be adversely affected by fluctuations in the cost
of
raw materials.
As
a
manufacturer we are subject to world commodity pricing for many of the raw
materials used in the manufacture of our products. Such raw materials are often
subject to price fluctuations, frequently due to factors beyond our control,
including changes in supply and demand, general U.S. and international economic
conditions, labor costs, competition, and government regulation. Inflationary
and other increases in the costs of raw materials have occurred in the past
and
may recur in the future. Any significant increase in the cost of raw materials
could reduce our profitability and have a material adverse effect on our
business, results of operations and financial condition.
Dilution
and Board Action To Ratify Prior Share Issuances.
As
at
March 31, 2007 the Company had 22,569,243
shares
issued and outstanding. If the Company issues additional shares either outright
or through any future options or warrant programs, or if it requires additional
financing, further dilution in value and in the percentage ownership will occur
and the dilutive effect could be significant. On February 5, 2007, the Board
of
Directors passed a resolution to reaffirm and ratify the issuance of a total
of
2,250,000 common shares (the “Disputed Shares”) to certain officers and
consultants to the Company. Such Disputed Shares had previously been recorded
as
issued and outstanding and so the Board action will not increase the total
issued shares as at the date of this report
Expect
to Incur Losses for the Foreseeable Future.
We
expect
to incur losses for the foreseeable future and
we
may never become profitable. Although our current revenue model contemplates
revenues from sale of products sufficient to break-even within 12 to 24 months
from the date of this Private Placement Memorandum, there is no assurance that
these revenues will occur. Because technology companies, even if successful,
typically generate significant losses while they grow, we do not expect to
generate profits for the foreseeable future, and we may never generate profits.
In addition, we expect our expenses to increase significantly as we develop
the
infrastructure necessary to implement our business strategy. Our expenses will
continue to increase as we: hire
additional employees; pursue research and development; expand our information
technology systems; and lease and purchase more space to accommodate our
operations.
Possible
Claims That the Company Has Violated Intellectual Property Rights of Others.
In
2002,
Envirotech was named as a Defendant in a law suit filed in the U.S. District
Court for the Southern District of Texas, Houston, Texas (Civil Action No.
H-02-4782, David Seitz and Microtherm, Inc., vs. Envirotech Systems Worldwide,
Inc., and Envirotech of Texas, Inc., the “Seitz Suit”). The Company is not
directly affiliated with Envirotech of Texas, Inc., which was a distributor
of
Envirotech’s products. The suit alleges that Envirotech infringed patent rights
of others and seeks damages and an order to cease and desist. Management
believes the suit is without merit. The suit was stayed pending the disposition
of the Chapter 11 Bankruptcy Petition filed by Envirotech in August 2004.
On
September 30, 2005, however, the Bankruptcy Court allowed the plaintiff to
re-open the Seitz Suit and he has done so. The suit is in the discovery stage
and the Company is vigorously engaged in the discovery process. On December
5,
2005, the Houston Court issued an injunction against Envirotech and its
affiliated entities, including SKYE, enjoining them from further marketing,
advertising or offering for sale, or accepting any orders for (i) the Envirotech
ESI 2000 heater, (ii) any other heater, regardless of its model, using parts
of
the Model ESI 2000 heater, and (iii) any other heater, regardless of model
number, utilizing in whole any part any technology embodied in the Model
ESI
2000 heater. At a hearing on May 18, 2006, the Court directed that discovery
be
expanded to include the technology and products of SKYE, including, specifically
the FORTIS™
and
Paradigm™
technologies. On July 26, 2006 Envirotech retained the Dallas, TX firm
Hemingway, Hansen, LLP to continue the defense and prosecution of this
litigation. At a subsequent hearing on February 28, 2007, the Court indicated
that it would reconsider and modify the wording on the scope of the preliminary
injunction. Additionally, the Court allowed Seitz to amend his complaint.
Seitz
filed his amended complaint attempting to expand the complaint, which the
Court
is considering. Skye and Valeo filed motions to dismiss this amended complaint
but the Court granted Seitz’s motion to include Skye and Valeo as parties to the
litigation. Envirotech has filed a ten count counterclaim against Seitz.
Envirotech continues to aggressively defend the Seitz suit and will pursue
this
litigation to conclusion.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
Except
as
described above, neither SKYE nor Envirotech is the subject of any other
dispute, claim or lawsuit or threatened law suit alleging the violation of
intellectual property rights of a third party. To the extent that the Company
is
alleged, or may in the future be alleged to have violated a patent or other
intellectual property right of a third party, it may be prevented from operating
its business as planned, and it may be required to pay damages, to obtain a
license, if available, to use the patent or other right or to use a
non-infringing method, if possible, to accomplish its objectives. Any of these
claims, with or without merit, could subject the Company to costly litigation
and the diversion of the Company’s technical and management personnel. If the
Company incurs costly litigation and its personnel are not effectively deployed,
the resulting expenses and management time losses will likely result in a
significant impairment of the Company’s ability to achieve its business plan or
achieve profitability from operations.
Business
Plans and Operational Structure May Change.
We
continually analyze our business plans and internal operations in light of
market developments. As a result of this ongoing analysis, we may decide to
make
substantial changes in our business plan and organization. In the future, as
we
continue our internal analysis and as market conditions and our available
capital changes, we may decide to make organizational changes and/or alter
some
or entirely all of our overall business plans.
Reliance
on Management.
The
Company believes that it currently lacks certain key management in order to
fully execute its business plan. It has undertaken to recruit additional persons
to key Board of Directors and management positions, including engineering and
finance. Should the Company be unsuccessful in recruiting persons to fill the
key management positions, or in the event any of the existing key management
should cease to be affiliated with the Company for any reason before qualified
replacements could be found, there could be material adverse effects on the
Company's business and prospects. Each of the officers and other key personnel,
has an agreement with the Company, that contains provisions dealing with
confidentiality of trade secrets, ownership of patents, copyrights and other
work product, and non-competition. Nonetheless, there can be no assurance that
these personnel will remain employed for the entire duration of the respective
terms of such agreements or that any employee or consultant will not breach
covenants and obligations owed to the Company.
In
addition, all decisions with respect to the management of the Company will
be
made exclusively by the officers and directors of the Company. Investors will
only have rights associated with minority ownership interest rights to make
decision that affect the Company. The success of the Company, to a large extent,
will depend on the quality of the directors and officers of the Company.
Accordingly, no person should invest in the Units unless he is willing to
entrust all aspects of the management of the Company to the officers and
directors.
Inability
to Attract and Retain Qualified Personnel.
The
future success of the Company depends in significant part on its ability to
attract and retain key management, technical and marketing personnel.
As
we
grow, we will also need to continue to hire additional technical, marketing,
financial and other key personnel. Competition
for highly qualified professional, technical, business development, and
management and marketing personnel is intense. We may experience difficulty
in
attracting new personnel, may not be able to hire the necessary personnel to
implement our business strategy, or we may need to pay higher compensation
for
employees than we currently expect. A
shortage in the availability of required personnel could limit the ability
of
the Company to grow, sell its existing products and services and launch new
products and services.
We
cannot assure you that we will succeed in attracting and retaining the personnel
we need to grow.
Inability
to Manage Rapid Growth.
The
Company expects to grow very rapidly. Rapid growth often places considerable
operational, managerial and financial strain on a business. To successfully
manage rapid growth, the Company must accurately project its rate of growth
and:
·
rapidly
improve, upgrade and expand its business
infrastructures;
· deliver
products and services on a timely basis;
· maintain
levels of service expected by clients and customers;
· maintain
appropriate levels of staffing;
· maintain
adequate levels of liquidity; and
· expand
and upgrade its technology, transaction processing systems and network hardware
or software or find third parties to provide these services.
Our
business will suffer and may ultimately fail if the Company is unable to
successfully manage its growth.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
Regulatory
Factors.
The
Federal Government, a State Government or any Local Government could at any
time
enact, repeal or change law in such a way as to eliminate, reduce or postpone
certain advantages available to the water heater industry. In addition, possible
future consumer legislation, regulations and actions could cause additional
expense, capital expenditures, restrictions and delays in the activities
undertaken in connection with the business, the extent of which cannot be
predicted. The exact affect of such legislation cannot be predicted until it
is
proposed. Additionally, much
of
the Company’s business is regulated by National, State and Municipal codes that
affect the manner in which the Company’s products are installed and used.
Although the Company believes it is aware of existing practices around the
United States, there can be no assurance that one or more governing
jurisdictions could make changes to such codes, the effect of which could be
detrimental to the Company and its business in such jurisdictions.
Effects
of Amortization Charges.
Our
losses will be increased, or our earnings, if we have them in the future, will
be reduced, by charges associated with our issuances of options. The options
and
restricted stock granted under this plan, as amended, may have exercise prices
lower than the fair value of our common stock at the dates of grant. The total
unearned stock-based compensation will be amortized as stock-based compensation
expense in our consolidated financial statements over the vesting period of
the
applicable options or shares, generally five years in the case of options
granted to employees and one year in the case of options granted to non-employee
directors and restricted stock issued to employees. These types of charges
may
increase in the future. Future
unearned stock-based compensation charges may also include potential additional
charges associated with options granted to consultants. The future value of
these potential charges cannot be estimated at this time because the charges
will be based on the future value of our stock.
Dividend
Policy.
There
can
be no assurance that the proposed operations of the Company will result in
significant revenues or any level of profitability. We
do not
anticipate paying cash dividends on our capital stock in the foreseeable future.
We plan to retain all future earnings, if any, to finance our operations and
the
acquisitions of interests in other companies and for general corporate purposes.
Any future determination as to the payment of dividends will be at our Board
of
Directors’ discretion and will depend on our financial condition, operating
results, current and anticipated cash needs, plans for expansion and other
factors that our Board of Directors considers relevant. No
dividends have been declared or paid by the Company, and the Company does not
contemplate paying dividends in the foreseeable future.
Conflicts
of Interest.
Existing
and future officers and directors may have other interests to which they
devote
time, either individually or through partnerships and corporations in which
they
have an interest, hold an office, or serve on boards of directors, and each
may
continue to do so. As a result, certain conflicts of interest may exist (or
may
be alleged by others to exist) between the Company and its officers and/or
directors that may not be susceptible to resolution. All potential conflicts
of
interest will be resolved only through exercise by the directors of such
judgment as is consistent with their fiduciary duties to the Company and
it is
the intention of management to minimize any potential conflicts of interest
or
allegations thereof.
Tax
Risks.
There
may
be tax considerations, risks and uncertainties associated with an investment
in
the Company’s Shares. Prospective investors should consult their own tax
advisors with respect to the tax considerations of making an investment in
the
Company.
Terms
of subsequent financings will adversely impact your
investment.
The
Company will engage in common equity, debt, or preferred stock financings in
the
future. Your rights and the value of your investment in the common stock will
be
reduced. Interest on debt securities could increase costs and negatively impacts
operating results. Shares of our preferred stock are likely to be issued in
series from time to time with such designations, rights, preferences, and
limitations as needed to raise capital. The terms of preferred stock are likely
to be more advantageous to those investors than to the holders of common stock.
In addition, if we need to raise more equity capital from sale of common stock,
institutional or other investors may negotiate terms at least as, and likely
more favorable than the terms of your investment. Shares of common stock which
we sell will, at some point, be sold into the market and such market sales
will
likely adversely affect market price.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
continued
The
industry in which we operate is characterized by rapid technological change
that
requires us to develop new technologies and products.
Our
future will depend upon our ability to successfully develop and market
innovative products in a rapidly changing technological environment. We will
likely require significant capital to develop new technologies and products
to
meet changing customer demands that, in turn, may result in shortened product
lifecycles. Moreover, expenditures for technology and product development are
generally made before the commercial viability for such developments can be
assured. As a result, we cannot assure you that we will successfully develop
and
market these new products that the products we do develop and market will be
well received by customers, or that we will realize a return on the capital
expended to develop such products.
Our
future operating results may fluctuate and cause the price of our common stock
to decline, which could result in substantial losses for
investors.
Our
limited operating history, the lack of established products and the substantial
litigation in which the company and certain of its officers and consultants
is
involved make it difficult to predict accurately our future operations. We
expect that our operating results will fluctuate significantly from quarter
to
quarter, due to a variety of factors, many of which are beyond our control.
If
our operating results fall below the expectations of investors or securities
analysts, the price of our common stock will decline significantly. The factors
that will cause our operating results to fluctuate include, but are not limited
to:
|
·
|
ability
to commercialize new products from ongoing research and development
activities;
|
|
·
|
developments
in tankless water heating
technology;
|
|
·
|
price
and availability of alternative solutions for water heating systems;
|
|
·
|
availability
and cost of technology and marketing
personnel;
|
|
·
|
our
ability to establish and maintain key relationships with industry
partners;
|
|
·
|
the
amount and timing of operating costs and capital expenditures relating
to
maintaining our business, operations, and infrastructure;
|
|
·
|
general
economic conditions and economic conditions specific to the cost
of
electricity and water; and
|
|
·
|
the
ability to maintain a product margin on sales, given the early stage
of
our market for our products.
|
These
and
other external factors have caused and may continue to cause the market price
and demand for our common stock to fluctuate substantially, which may limit
or
prevent investors from readily selling their shares of common stock and may
otherwise negatively affect the liquidity of our common stock. In the past,
securities class action litigation or shareholder derivative litigation has
often been brought against companies following periods of volatility in the
market price of their securities, as happened in the case of the Company. If
additional derivative litigation or securities class action litigation were
to
be brought against us it could result in substantial costs and a diversion
of
our management’s attention and resources. Such adverse events, will hurt our
business and may result in the inability to continue operations, and in such
a
case, investors will face the risk of an entire loss of their
investment.
Our
common stock is subject to penny stock regulation that may affect the liquidity
for our common stock.
Our
common stock is subject to regulations of the Securities and Exchange Commission
relating to the market for penny stocks. These regulations generally require
that a disclosure schedule explaining the penny stock market and the risks
associated therewith be delivered to purchasers of penny stocks and impose
various sales practice requirements on broker-dealers who sell penny stocks
to
persons other than established customers and accredited investors. The
regulations applicable to penny stocks may severely affect the market liquidity
for our common stock and could limit your ability to sell your securities in
the
secondary market.
Future
equity transactions, including exercise of options or warrants, could result
in
dilution.
From
time
to time, we sell restricted stock, warrants, and convertible debt to investors
in other private placements. Because the stock is restricted, the stock is
sold
at a greater discount to market prices compared to a public stock offering,
and
the exercise price of the warrants sometimes is at or even lower than market
prices. These transactions cause dilution to existing stockholders. Also, from
time to time, options are issued to officers, directors, or employees, with
exercise prices equal to market. Exercise of in-the-money options and warrants
will result in dilution to existing stockholders. The amount of dilution will
depend on the spread between the market and the exercise price, and the number
of shares, options or warrants involved. Such dilution is very likely to be
significant.
We
have incurred losses and may continue to incur losses in the
future.
At
March
31, 2007, our accumulated deficit was $12,732,830.
We have
not been able to generate enough sales to cover our expenses and have survived
only by raising funds through the sale of debt and equity securities. We must
continue to raise funds in the near future to continue operations. While
management has been successful in the past in raising these funds, there is
no
assurance that management will be successful in raising sufficient funds to
continue operations and thus the Company may fail.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
Our
future existence remains uncertain and the report of our auditors on our
December 31, 2004; 2005 and 2006 financial statements contain a “going concern”
qualification.
The
report of the independent auditors on our financial statements for the years
ended December 31, 2004, 2005 and 2006, includes an explanatory paragraph
relating to our ability to continue as a going concern. We have suffered
substantial losses from operations, require additional financing, are subject
to
significant and costly litigation and need to continue the development and
marketing of our products. Ultimately we need to generate additional revenues
and attain profitable operations. These factors raise substantial doubt about
our ability to continue as a going concern. There can be no assurance that
we
will ever be able to develop commercially viable products or an effective
marketing system. Even if we are able to develop commercially viable products,
there is no assurance that we will ever be able to attain profitable operations.
ITEM
3. CONTROLS AND PROCEDURES
Evaluation
of disclosure controls and procedures.
Our
Chief
Executive Officer and Chief Financial Officer evaluated the effectiveness of
our
disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the
end
of the period covered by this Quarterly Report on Form 10-Q. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures were effective as of
September 30, 2006 to ensure that information we are required to disclose in
reports that we file or submit under the Securities Exchange Act of 1934
(i) is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms and (ii) is
accumulated and communicated to our management, including our Chief Executive
Officer and our Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure. Our disclosure controls and procedures
are designed to provide reasonable assurance that such information is
accumulated and communicated to our management. Our disclosure controls and
procedures include components of our internal control over financial reporting.
During
the period covered by this report, there were no changes in internal controls
that materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
PART
II
ITEM
1. LEGAL PROCEEDINGS
The
Company is currently engaged in a significant amount of costly and burdensome
litigation, including:
Distributor
Suit.
Prior
to the acquisition of Envirotech, by the Company, Envirotech was the defendant
in a lawsuit filed by a former distributor alleging a breach of a Distributor
Agreement entered into with Envirotech in May, 1998. On August 13, 2003,
Envirotech entered into a Settlement Agreement and Release pursuant to which
Envirotech agreed to pay the distributor the sum of $520,500 in installments
over a period of ten years. The obligations under this Settlement Agreement
are
secured by a Security Agreement covering all assets of Envirotech except its
intellectual properties, as defined therein, subordinated, however, to a first
lien on all assets of Envirotech, tangible and intangible, granted to the Senior
Secured Creditor in 2001 and 2002 by Envirotech to secure two promissory notes
given in satisfaction of legal fees. As part of the settlement, Envirotech
granted the distributor a Stipulated Judgment which was not to be filed of
record so long as no default existed. On May 3, 2004, the distributor claimed
a
breach and filed the Stipulated Judgment. Management believes no default existed
to warrant the filing of the judgment. With the filing of the Bankruptcy
Petition by Envirotech (see below), this action was stayed. However, with the
dismissal of the Chapter 11 Proceedings on February 28, 2006, this judgment
is
once again a claim against the assets of Envirotech, subject, however, to the
claims and rights of the Senior Secured Creditor.
Seitz
Suit.
In 2002, Envirotech was named as a Defendant in a law suit filed in the U.S.
District Court for the Southern District of Texas, Houston, Texas (Civil
Action
No. H-02-4782, David Seitz and Microtherm, Inc., vs. Envirotech Systems
Worldwide, Inc., and Envirotech of Texas, Inc., the “Seitz Suit”). The Company
is not directly affiliated with Envirotech of Texas, Inc., which was a
distributor of Envirotech’s products. The suit alleges that Envirotech infringed
patent rights of others and seeks damages and an order to cease and desist.
Management believes the suit is without merit. The suit was stayed pending
the
disposition of the Chapter 11 Bankruptcy Petition filed by Envirotech in
August
2004. On September 30, 2005, however, the Bankruptcy Court allowed the plaintiff
to re-open the Seitz Suit and he has done so. The suit is in the discovery
stage
and the Company is vigorously engaged in the discovery process. On December
5,
2005, the Houston Court issued an injunction against Envirotech and its
affiliated entities, including SKYE, enjoining them from further marketing,
advertising or offering for sale, or accepting any orders for (i) the Envirotech
ESI 2000 heater, (ii) any other heater, regardless of its model, using parts
of
the Model ESI 2000 heater, and (iii) any other heater, regardless of model
number, utilizing in whole any part any technology embodied in the Model
ESI
2000 heater. At a hearing on May 18, 2006, the Court directed that discovery
be
expanded to include the technology and products of SKYE, including, specifically
the FORTIS™
and
Paradigm™
technologies. On July 26, 2006 Envirotech retained the Dallas, TX firm
Hemingway, Hansen, LLP to continue the defense and prosecution of this
litigation. At a subsequent hearing on February 28, 2007, the Court indicated
that it would reconsider and modify the wording on the scope of the preliminary
injunction. Additionally, the Court allowed Seitz to amend his complaint.
Seitz
filed his amended complaint to expand the complaint to also cover Skye, Valeo
and the FORTIS™ product. The Company has filed motions to dismiss Skye and Valeo
which are being considered by the Court. Envirotech has filed a ten count
counterclaim against Seitz. Envirotech and Skye continue to aggressively
defend
the Seitz suit and will pursue this litigation to conclusion.
ITEM
1. LEGAL PROCEEDINGS - continued
Unpaid
Fees.
Subsequent to December 31, 2003, Envirotech has been named in five separate
lawsuits for unpaid legal and consulting fees totaling $280,000. These include
the Myers and Jenkins Suit and the Sensor Technologies Suit discussed below.
On
May 3, 2004, Envirotech settled one of these suits claiming fees of $112,500.
In
connection with that settlement, Envirotech reimbursed the plaintiff for alleged
out-of-pocket expenses and the Company issued 10,000 shares of common stock,
restricted under SEC Rule 144, to the plaintiff on the basis of a loan from
the
Company to Envirotech. The settlement, and any settlements of the other suits,
will be reflected as a charge in the year of the settlement. In two of the
other
three suits judgments have been granted in the aggregate amount of approximately
$155,500, both of which were stayed by the bankruptcy filing discussed above.
The fourth suit is on behalf of a law firm that served as a contract arbitrator
in Envirotech’s dispute with the Distributor noted above. With the dismissal of
the Chapter 11 proceedings, the Company has received notice from the plaintiff
that it intends to resume the suit, which seeks approximately $3,500 in
fees.
Myers
and Jenkins Suit.
On May
24, 2006, Envirotech was served with a Motion for Entry of Default in connection
with an action filed in Arizona Superior Court, case number CV-2006-003671
by
Envirotech’s prior legal counsel, Myers and Jenkins. The motion seeks judgment
for the payment of the principal sum of $103,830, together with interest and
costs. Envirotech has not defended the action.
Sensor
Technologies Suit.
On May
24, 2006, Envirotech was served with an Application for Entry of Default in
connection with an action filed in the Arizona Superior Court, case number
CV-2006-0060632, by Sensor Technologies & Systems, Inc., an engineering firm
that provided engineering consulting services in connection with Envirotech’s
ESI-2000 product. The application seeks judgment for the payment of $72,391,
together with interest and costs. Envirotech has not defended the
action.
Bankruptcy
Proceedings.
On
August 6, 2004, Envirotech filed a Voluntary Petition for protection under
Chapter 11 of the United States Bankruptcy Code in Phoenix, Arizona. The filing
of this Petition with the Bankruptcy Court stayed all existing litigation,
judgments and efforts to collect on the judgments. Envirotech was acquired
by
the Company in November 2003 in a stock-for-stock transaction and has been
held
and operated by the Company as an operating subsidiary. With the exception
of a
guarantee to one critical supplier in the current amount of approximately
$42,500, SKYE has not assumed any liability for the Obligations of Envirotech.
As of the date of the filing of the Chapter 11 Bankruptcy Petition, Envirotech
had liabilities of approximately $1.6 million. Several creditors, not related
to
the supply of parts or the assembly of products, have obtained judgments against
Envirotech and an action was pending in the U.S. District Court, Southern
District of Texas, alleging patent infringement (see above). All claims of
creditors, including the above-mentioned judgments, and efforts to collect
same,
together with the litigation pending in the U.S. District Court in Houston,
were
stayed during the pendency of the Bankruptcy Proceedings. Envirotech filed
a
Disclosure Statement and Plan of Reorganization on November 7, 2004 and the
Court approved its request to submit the plan to the creditors for approval.
The
Plan, however, did not receive approval of the Court and Envirotech subsequently
filed a Motion to Dismiss the Chapter 11 proceedings which was granted, with
prejudice, on February 28, 2006. As a result of this dismissal, all claims
and
judgments of creditors of Envirotech are likely to be renewed. The Company
is
currently awaiting a decision of the Bankruptcy Court relating to an application
by David Seitz and Microtherm Inc. for sanctions against Envirotech and certain
of its officers pertaining to alleged misconduct during the pendency of
Envirotech’s bankruptcy.
Shareholder
Inspection Claim.
In
April 2006 a shareholder purporting to have obtained consent from at least
15%
of the Company’s shareholders filed a lawsuit in the United States District
Court for the District of Nevada (Case No. 2:06-CV-0541-RLH-GWF) seeking
inspection of the Company’s books and records pursuant to Nevada corporate law.
The Court denied plaintiff’s initial request. The Company has asserted several
counterclaims against the plaintiff for tortious conduct and for abuse of the
legal process in connection with the lawsuit. The
complaint was dismissed by the Court on May 22, 2006, but the plaintiffs were
granted leave to re-file the complaint if certain technical deficiencies are
corrected. The
matter is currently pending.
Shareholder
Derivative Action.
In May 2006 a small group of dissident shareholders (including the plaintiff
from the Shareholder Inspection Claim) filed a lawsuit in the United States
District Court for the District of Arizona (Case No. CV06-1291-PHX-ROS) as
a
derivative action seeking injunctive and declaratory relief. The Company
was
named as a nominal defendant and there are no claims for monetary damages
against the Company. The primary claims involve the prior issuance of the
Company’s common stock to former consultants to the Company, as well as prior
issuances of stock to certain members of current management. Among other
things
the plaintiffs seek to prevent these individuals from using their stock and
related voting rights to solicit proxies and notice shareholder meetings,
and
have demanded that they return the shares to the Company. The costs likely
to be
incurred by the Company in connection with such indemnities will be significant.
The Company has filed extensive counter and third party claims. On May 2,
2007,
Judge Roslyn O. Silver of the United States District Court for the District
of
Arizona issued an Order rejecting the Plaintiffs’ requested Preliminary
Injunction relief in the pending Skye Shareholder’s Derivative Lawsuit,
Stebbins
v. Johnson, Civil
Action No. 06-1291-PHX-ROS. The Court also dissolved all restrictions imposed
by
a prior Temporary Restraining Order and Stipulated Order, which frees the
Company to conduct its corporate business without any further interference
or
restraint by the Court or the Stebbins Plaintiffs. As a summary of the case,
the
District of Arizona found that a vast majority of the Stebbins Plaintiffs’
complaint has been rendered moot. Based on the Court’s May 2, 2007 rulings,
Judge Silver stated “it is not clear that Plaintiffs have any viable claims
remaining” in this case. The District of Arizona also ruled on other matters,
including a ruling that the prior Answer and Counterclaim filed by Skye did
not
comply with the proper form of such a pleading under Rule 8 of the Federal
Rules
of Civil Procedure. The Company has re-filed the counterclaims in a form
it
believes to be in compliance with such Rule 8.
ITEM
1. LEGAL PROCEEDINGS - continued
Berry-Shino
Claim.
The
Company has on several occasions during the past three years utilized the
services of Berry-Shino Securities, Inc., Scottsdale, Arizona, in raising
various forms of financing to further its business plan and operations. In
the
course of each of these engagements, the Company has paid Berry-Shino various
fees and expenses and has issued a certain number of shares of its Common Stock
to Berry-Shino. The Company has received correspondence from Berry-Shino stating
that it believes it is entitled to be issued an additional 456,500 shares of
Common Stock as additional consideration for its services. The Company has
negotiated a settlement of this matter directly with Berry-Shino thereby
resolving this matter.
Pending
Arbitration.
The
Company is party to an arbitration between Skye and its former independent
auditors, Semple & Cooper, LLP relating to unpaid audit and accounting fees
in the amount of approximately $39,000. The Company intends to vigorously defend
the matter and may file a counterclaims in the action for, among other things,
breach of fiduciary duty, tortious interference, negligent misconduct. The
arbitration is expected to be conducted during the third quarter of
2007.
Claim
by former Director William Papazian for Legal Defense and
Indemnity.
The Company is a party to an action seeking to require Skye to submit his
claim
for defense to the Company’s insurance carrier, and both “defend” and
“indemnify” former Director William Papazian from and against costs and
liabilities arising in connection with a third party claim filed by Skye
against
Mr. Papazian in connection with the Shareholder Derivative Action described
above. Though filed by Mr. Papazian in Arizona State Court, the lawsuit has
been
removed to the jurisdiction of the Federal District Court. The Company seeks
an
interjudicial transfer of the matter to Federal Judge Roslyn O. Silver, the
Judge hearing the Shareholder Derivative Action. The Company’s motion is being
opposed by Mr. Papazian and the matter remains pending. The Company’s insurance
carrier has denied Mr. Papazian’s claim for coverage.
Quick
& Confidential Claim.
On
January 23, 2007, Skye was served with a complaint filed in Arizona State Court
by Quick & Confidential Inc. who seeks the payment of fees to it in the
amount of approximately $13,000 in connection with legal copying services.
The
Company intends to settle this matter.
Except
as
noted above, to the best knowledge of the officers and directors of the Company,
neither the Company nor its subsidiaries, nor any of their respective officers
or directors is a party to any material legal proceeding or litigation.
ITEM
2. CHANGES IN SECURITIES
None
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
(a)
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During
the year ended December 31, 2000, the Company issued five convertible
notes payable, totaling $100,000, which matured in March 2001. These
notes bear interest at the rate of 12.5% per annum. Each note is
subject to automatic conversion at the maturity date. One of these
notes, with a principal amount of $30,000, was converted in November
2006.
As of the date of this filing, the remaining four notes, totaling
$70,000,
have not yet been converted and are in default.
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(b)
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Between
January 2004 and January 2005, the Company issued forty notes in
connection with bridge loans made through private placements. The
notes
bear interest at 10%, interest payable quarterly, principal and interest
convertible into one common share for each outstanding $1.00 of principal
and interest. Of these notes, thirty-six have been either repaid
or
converted at December 31, 2005. Of the remaining four notes, three
were
converted in April 2006. The sole remaining note, in the principal
amount
of $15,000 has not been converted or repaid and is in
default.
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(c)
|
Envirotech
has five notes with an aggregate principal amount of $833,240, that
are in
default, as follows:
|
Demand
Note with Attorneys, 6% Interest, All Assets of Subsidiary, Envirotech,
pledged as Collateral.
|
194,895
|
|
|
Demand
Note with Former Distributor of Subsidiary, Envirotech, in Settlement
and
Repurchase of Distributorship Territory, 7% Interest.
|
519,074
|
|
|
Demand
Note Made by Subsidiary, Envirotech, 10% Interest, Payable
Monthly.
|
11,880
|
|
|
Demand
Note Made by Subsidiary, Envirotech, 6% Interest.
|
35,000
|
|
|
Demand
Note Made by Subsidiary, Envirotech.
|
72,391
|
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None
during the three-month period ended March 31, 2007.
ITEM
5. OTHER INFORMATION
None
ITEM
6. EXHIBITS
(a)
Exhibits
31.1
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification
Pursuant to U.S.C. 18 Section 1350
SIGNATURES
In
accordance with Section 13 of the Exchange Act, the Company has caused this
report to be signed on its behalf by the undersigned, hereunto duly authorized
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|
|
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SKYE
INTERNATIONAL, INC.
|
|
|
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Date:
May 21, 2007
|
|
/s/
Perry D. Logan
|
|
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Perry
D. Logan
|
|
Title:
Chief Executive Officer (Interim) and Chief Accounting Officer
(Interim)
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40