skye_international-10q.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
(Mark
One)
x QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the
quarterly period ended March 31, 2008
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 0-27549
(Exact
name of registrant as specified in its charter)
Nevada
|
88-0362112
|
(State
or other jurisdiction of incorporation
or organization)
|
(IRS
Employer Identification
No.)
|
7701
E. Gray Rd, Suite 4 Scottsdale, AZ 85260
(Address
of principal executive offices) (Zip Code)
(480)
993-2300
(Registrant’s
telephone number, including area code)
Not
applicable
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. xYes
oNo
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large accelerated
filer
|
o |
Accelerated filer
|
o |
Non-accelerated
filer
|
o |
Smaller reporting
company
|
x |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). oYes
xNo
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: 46,853,397 shares of Common Stock, $0.001 par
value, as of April 23, 2008
|
Index
|
Page
Number
|
|
|
|
PART
I
|
FINANCIAL
INFORMATION
|
3
|
|
|
|
ITEM
1.
|
Financial
Statements (unaudited)
|
3
|
|
|
|
|
Consolidated
Balance Sheets as of March 31, 2008 and December 31,
2007
|
3
|
|
|
|
|
Consolidated
Statements of Cash Flows for the three months ended March 31,
2008 and 2007
|
4
|
|
|
|
|
Consolidated
Statements of Operations for the three months ended March 31,
2008 and 2007
|
5
|
|
|
|
|
Consolidated
Statements of Stockholders' Deficit cumulative from December 31, 2006 to
March 31, 2008
|
6
|
|
|
|
|
Notes
to Financial Statements
|
7
|
|
|
|
ITEM
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
8
|
|
|
|
ITEM
3. |
Quantitative
and Qualitative Disclosures About Market Risk |
12
|
|
|
|
ITEM
4T.
|
Controls
and Procedures
|
13
|
|
|
|
PART
II
|
OTHER
INFORMATION
|
14
|
|
|
|
ITEM
1.
|
Legal
Proceedings
|
14
|
|
|
|
ITEM
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
14
|
|
|
|
ITEM
3.
|
Defaults
Upon Senior Securities
|
14
|
|
|
|
ITEM
4.
|
Submission
of Matters to Vote of Security Holders
|
14
|
|
|
|
ITEM
5.
|
Other
Information
|
14
|
|
|
|
ITEM
6.
|
Exhibits
|
14
|
|
|
|
SIGNATURES
|
|
15
|
PART I
- FINANCIAL INFORMATION
ITEM
1.
|
FINANCIAL
INFORMATION
|
Skye
International, Inc. and Subsidiaries
|
CONSOLIDATED BALANCE
SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
|
|
$ |
25,757 |
|
|
$ |
35,331 |
|
Accounts
Receivable
|
|
|
23,750 |
|
|
|
- |
|
Inventory
|
|
|
109,072 |
|
|
|
119,668 |
|
Prepaid
Expenses
|
|
|
85,627 |
|
|
|
82,510 |
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
244,206 |
|
|
|
237,509 |
|
|
|
|
|
|
|
|
|
|
EQUIPMENT,
NET
|
|
|
40,804 |
|
|
|
46,754 |
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
|
Patents
|
|
|
11,662 |
|
|
|
- |
|
Deposits
|
|
|
2,460 |
|
|
|
2,460 |
|
|
|
|
|
|
|
|
|
|
Total
Other Assets
|
|
|
14,122 |
|
|
|
2,460 |
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
299,132 |
|
|
$ |
286,723 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
$ |
858,768 |
|
|
$ |
1,227,923 |
|
Accrued
Expenses
|
|
|
211,913 |
|
|
|
206,231 |
|
Notes
Payable - Related Parties
|
|
|
2,053,821 |
|
|
|
1,905,763 |
|
Accrued
Interest Payable
|
|
|
68,767 |
|
|
|
76,267 |
|
Warranty
Accrual
|
|
|
34,570 |
|
|
|
34,570 |
|
Customer
Deposits
|
|
|
103,371 |
|
|
|
103,371 |
|
Total
Current Liabilities
|
|
|
3,331,210 |
|
|
|
3,554,125 |
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
3,331,210 |
|
|
|
3,554,125 |
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Common
Stock: 100,000,000 shares
|
|
|
|
|
|
|
|
|
authorized
at $0.001par value;
|
|
|
|
|
|
|
|
|
Issued
and outstanding 29,927,252 and
|
|
|
|
|
|
|
|
|
29,927,252
shares, respectively
|
|
|
29,927 |
|
|
|
29,927 |
|
Common
Stock Subscribed
|
|
|
110,709 |
|
|
|
108,675 |
|
Paid
in Capital
|
|
|
11,130,466 |
|
|
|
11,130,466 |
|
Accumulated
Deficit
|
|
|
(14,303,180 |
) |
|
|
(14,536,470 |
) |
|
|
|
|
|
|
|
|
|
Total
Stockholders' Equity (Deficit)
|
|
|
(3,032,078 |
) |
|
|
(3,267,402 |
) |
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND
|
|
|
|
|
|
|
|
|
STOCKHOLDERS
EQUITY (DEFICIT)
|
|
$ |
299,132 |
|
|
$ |
286,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are
an integral part of these statements.
Skye
international, Inc. and Subsidiaries
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$ |
233,290 |
|
|
$ |
(205,030 |
) |
Gain
on Extinguishment of Debt
|
|
|
(479,922 |
) |
|
|
(2,153 |
) |
Depreciation
Expense
|
|
|
2,713 |
|
|
|
2,761 |
|
Shares
and options issued for services rendered
|
|
|
- |
|
|
|
188,400 |
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
10,596 |
|
|
|
52 |
|
Accounts
Receivable
|
|
|
(23,750 |
) |
|
|
- |
|
Prepaid
Expense
|
|
|
(3,117 |
) |
|
|
- |
|
Deposits
|
|
|
- |
|
|
|
- |
|
Accrued
Interest Payable
|
|
|
(7,500 |
) |
|
|
3,350 |
|
Accounts
Payable
|
|
|
18,825 |
|
|
|
(104,283 |
) |
Accrued
Expenses
|
|
|
5,682 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Net
Cash (Used) by Operating Activities
|
|
|
(243,183 |
) |
|
|
(116,903 |
) |
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of
Assets
|
|
|
(8,425 |
) |
|
|
(1,394 |
) |
|
|
|
|
|
|
|
|
|
Net
Cash Provided (Used) by Investing Activities
|
|
|
(8,425 |
) |
|
|
(1,394 |
) |
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Subscriptions
|
|
|
2,034 |
|
|
|
- |
|
Proceeds
from Notes Payable
|
|
|
240,000 |
|
|
|
145,897 |
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by Financing Activities
|
|
|
242,034 |
|
|
|
145,897 |
|
|
|
|
|
|
|
|
|
|
Net
Increase/(Decrease) in Cash
|
|
|
(9,574 |
) |
|
|
27,600 |
|
|
|
|
|
|
|
|
|
|
Cash,
Beginning of Year
|
|
|
35,331 |
|
|
|
8,672 |
|
|
|
|
|
|
|
|
|
|
Cash,
End of Year
|
|
$ |
25,757 |
|
|
$ |
36,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Information:
|
|
|
|
|
|
|
|
|
Taxes
|
|
$ |
- |
|
|
$ |
- |
|
Interest
Expense
|
|
$ |
58,869 |
|
|
$ |
18,476 |
|
|
|
|
|
|
|
|
|
|
Non
Cash Financing Activities:
|
|
|
|
|
|
|
|
|
Common
Stock Issued for Debt
|
|
$ |
- |
|
|
$ |
1,000 |
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
|
2008
|
|
|
2007
|
|
REVENUES
|
|
|
|
|
|
|
Product
Sales
|
|
$ |
23,750 |
|
|
$ |
- |
|
Other
Income
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Total
Revenues
|
|
|
23,750 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Cost
of Goods Sold
|
|
|
17,500 |
|
|
|
24,142 |
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
6,250 |
|
|
|
(24,142 |
) |
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
Legal
and Professional
|
|
|
67,008 |
|
|
|
109,035 |
|
General
and Administrative
|
|
|
119,656 |
|
|
|
22,767 |
|
Research
and Development
|
|
|
8,799 |
|
|
|
30,000 |
|
Advertising
and Marketing
|
|
|
3,337 |
|
|
|
- |
|
Depreciation
|
|
|
2,713 |
|
|
|
2,761 |
|
|
|
|
|
|
|
|
|
|
Total
Expenses
|
|
|
201,513 |
|
|
|
164,563 |
|
|
|
|
|
|
|
|
|
|
Net
(Loss) from Operations
|
|
|
(195,263 |
) |
|
|
(188,705 |
) |
|
|
|
|
|
|
|
|
|
OTHER
INCOME AND (EXPENSE)
|
|
|
|
|
|
|
|
|
Gain
on Extinguishment of Debt
|
|
|
479,922 |
|
|
|
2,153 |
|
Interest
Expense
|
|
|
(51,369 |
) |
|
|
(18,478 |
) |
|
|
|
|
|
|
|
|
|
Total
Other Income (Expense)
|
|
|
428,553 |
|
|
|
(16,325 |
) |
|
|
|
|
|
|
|
|
|
Net
Income (Loss) before Income Taxes
|
|
|
233,290 |
|
|
|
(205,030 |
) |
|
|
|
|
|
|
|
|
|
Income
Tax Expense
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$ |
233,290 |
|
|
$ |
(205,030 |
) |
|
|
|
|
|
|
|
|
|
Basic
and diluted income (loss) per share
|
|
$ |
0.01 |
|
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Common
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
|
29,927,252 |
|
|
|
21,622,243 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are
an integral part of these statements.
Skye
International, Inc., and Subsidiaries
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Common
Stock
|
|
|
Paid
in
|
|
|
Accumulated
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Subscribed
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2006
|
|
|
21,622,243 |
|
|
$ |
21,623 |
|
|
$ |
108,675 |
|
|
$ |
9,256,308 |
|
|
$ |
(12,527,800 |
) |
|
$ |
(3,141,194 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for related party services
|
|
|
591,000 |
|
|
|
591 |
|
|
|
|
|
|
|
154,119 |
|
|
|
|
|
|
|
154,710 |
|
Common
stock issued for consulting services
|
|
|
6,543,009 |
|
|
|
6,542 |
|
|
|
|
|
|
|
1,416,280 |
|
|
|
|
|
|
|
1,422,822 |
|
Common
stock issued for debt
|
|
|
110,000 |
|
|
|
110 |
|
|
|
|
|
|
|
18,790 |
|
|
|
|
|
|
|
18,900 |
|
Common
stock issued for cash
|
|
|
1,061,000 |
|
|
|
1,061 |
|
|
|
|
|
|
|
284,969 |
|
|
|
|
|
|
|
286,030 |
|
Net
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,008,670 |
) |
|
|
(2,008,670 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2007
|
|
|
29,927,252 |
|
|
|
29,927 |
|
|
|
108,675 |
|
|
|
11,130,466 |
|
|
|
(14,536,470 |
) |
|
|
(3,267,402 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock subscribed for consulting services
|
|
|
|
|
|
|
|
|
|
|
2,034 |
|
|
|
|
|
|
|
|
|
|
|
2,034 |
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
233,290 |
|
|
|
233,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
March 31, 2008
|
|
|
29,927,252 |
|
|
$ |
29,927 |
|
|
$ |
110,709 |
|
|
$ |
11,130,466 |
|
|
$ |
(14,303,180 |
) |
|
$ |
(3,032,078 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are
an integral part of these statements.
SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
Notes
to the Condensed Financial Statements
March
31, 2008 (Unaudited)
NOTE 1
- CONDENSED
FINANCIAL STATEMENTS
The
accompanying financial statements have been prepared by the Company without
audit. In the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present fairly the financial
position, results of operations, and cash flows at March 31, 2008, and for all
periods presented herein, have been made.
Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted. It is
suggested that these condensed financial statements be read in conjunction with
the financial statements and notes thereto included in the Company’s December
31, 2007 audited financial statements. The results of operations for
the periods ended March 31, 2008 and 2007 are not necessarily indicative of the
operating results for the full years.
NOTE 2
- GOING
CONCERN
The
Company’s financial statements are prepared using generally accepted accounting
principles applicable to a going concern, which contemplates the realization of
assets and liquidation of liabilities in the normal course of
business. The Company has not yet established an ongoing source of
revenues sufficient to cover its operating costs and allow it to continue as a
going concern. Historically, the Company has incurred significant
annual losses, which have resulted in an accumulated deficit of $14,303,180 at
March 31, 2008 which raises substantial doubt about the Company’s ability to
continue as a going concern. The ability of the Company to continue
as a going concern is dependent on the Company increasing sales to the point it
becomes profitable. The Company may need to raise additional capital
for marketing to increase its sales. If the Company is unable to increase sales
sufficiently or obtain adequate capital, it could be forced to cease
operation. The accompanying financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result from
the outcome of this uncertainty.
Management
plans to increase sales by increasing its marketing program and to obtain
additional capital from the private placement of shares of its common stock.
However, management cannot provide any assurances that the Company will be
successful in accomplishing any of its plans.
NOTE 3
- GAIN
ON EXTINGUISHMENT OF DEBT
During
the three months ended March 31, 2008, the Company determined that the Statute
of Limitations under the laws of the State of Arizona had expired on certain
debts of its subsidiary Envirotech Systems Worldwide, Inc. as previously carried
on its financial statements. Accordingly, the Company recognized a gain of
$479,922 for the extinguishment of those debts.
NOTE 4
- SUBSEQUENT
EVENTS
Subsequent
to March 31, 2008, the Company issued 853,545 shares of its common stock at
$0.20 per share for services performed. Subsequent to March 31, 2008 the Company
issued 12,072,600 shares of its common stock at $0.08 for debt. Subsequent to
March 31, 2008 the Company issued 4,000,000 shares of its common stock at $0.08
for cash.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIALCONDITION
AND RESULTS OF OPERATIONS
|
The
following discussion should be read in conjunction with the financial statements
and accompanying notes included in this Form 10-Q.
Plan
of Operation.
The
Company is in the business of designing, developing, manufacturing and marketing
consumer lifestyle products, including, initially, several models of electronic,
tankless water heaters. Previously the Company produced, marketed and sold its
electronic tankless water heater products directly through the internet. The
Fortis™ and Paradigm™ units, and future products, however, are proposed to be
sold primarily through manufacturer’s representatives in the wholesale
market.
Liquidity
and Capital Resources.
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 will continue to experience net negative cash flows from
operations, pending receipt of significant revenues that generate a positive
sales margin. Commencing in the first quarter of 2007 and continuing
throughout the third quarter, all of the Company’s cash needs were met through
loans advanced to the Company by certain of its related party
directors.
The
Company expects that additional operating losses will occur until net margins
gained from sales 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.
As of
December 31, 2007 and continuing through March 31, 2008, the existing capital
and anticipated funds from operations were not sufficient to sustain Company
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 the sale of common stock, the sale of preferred stock,
and/or debt financing. No assurance can be made that such financing will be
available, or available on terms acceptable to the Company. In any case,
any financing may have a negative impact on our financial condition and
will likely result in an immediate and substantial dilution to our existing
stockholders.
Executive
Summary
The
Company’s business is the design production, marketing and sale of consumer
appliances. Skye’s premier consumer product is the FORTIS ™, a new series of
electric tankless water heater. Skye will market the FORTIS ™ tankless water
heater shortly through an established and growing list of manufacturer’s
representatives located in many states across the United States. On the heels of
FORTIS™ will be a
new technology that Skye refers to as Paradigm™. This technology
ushers in an entirely new method of heating water that is both fast and
extremely efficient. The primary application for the Paradigm™ technology
will be for the point-of-use instantaneous water heating market. Skye is
currently working to commercialize this technology into a suite of products that
can be used in homes across North America and Europe.
Once
FORTIS™ is ready
for commercial production and distribution, in late 2008, the Company’s success
will be dependent upon its ability to attract high quality distributors and
manufacturer’s representatives to market its products. To date, the Company has
been able to attract distributors and manufacturer’s representative groups with
a solid track record selling tankless water heating devices to home
builders and the wholesale plumbing trade. The Company is unable to provide
forecasts as to the amount of product it anticipates selling. As of March 31,
2008, the Company has entered into contracts with a number of manufacturer’s
representatives located in states across the Southwest and Southeast of the U.S.
Although existing agreements are currently under review by management, the
current major terms of the contracts are: (a) distributors receive a
graduated discount based on volume with the greatest discount being 35%, and 7%
commissions to manufacturer’s representatives; (b) non-exclusive
territories; (c) termination upon 30 days’ notice and; (d) no
maximum purchase requirements and sales goals to be mutually agreed, or in
default, $1,000,000 per territory. The Company plans on assisting in the
training of its U.S. distributors and manufacturers representatives in the safe
installation and use of its products. The Company is also currently
interviewing persons to fill positions for National Sales Manager, as well as
regional sales representatives.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIALCONDITION
AND RESULTS OF OPERATIONS - continued
|
Going
Forward
The
Company has established relationships with contract manufacturers, Jabil
Circuit, Inc. and Electrosem, LLC, to produce its FORTIS™ line of
products. Despite commencing commercial production late in the first
quarter of 2008, the Company expects that it may take up to one year for the
production design and processes to stabilize and all cost reductions to be
effectively implemented.
The
Company has also continued to focus development efforts on the commercialization
of 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
engaged in a joint engineering and product development project with a critical
supplier to jointly complete the engineering and commercialization process, and
then subsequently the engineering for manufacturing phase. In the event we are
successful in concluding the engineering phases of this project, the Company
expects that it will have first delivery of prototype product utilizing the
Paradigm™ technology by
late 2008 or early 2009, with commercial availability in 2009. As we have not
yet completed the engineering phase of the Paradigm™ project there can be no
assurance 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.
Although we have been successful in the past in raising the capital to fund
Company operations, such funds were not sufficient to provide adequate working
capital to meet the needs of the Company. As such, the Company has continued to
fund operations with loans from, and equity private placements made to, the
Company’s related party directors. In order to execute our business
strategy, the Company must raise in excess of $2 million over the next 12-month
period in order to fully execute our current production and 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 expand our management team,
corporate infrastructure, and working capital base. These goals 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 investment of capital, as well as a
greatly expanded staff in order to execute the business plan resulting in
effective sales and service of the FORTIS™ product line.
Over the
balance of 2008, we will continue to focus 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.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIALCONDITION
AND RESULTS OF OPERATIONS - continued
|
Results of
Operations
Comparison
of Revenues for the Three Months Ended March 31, 2008 and 2007
For
the three months ended March 31:
|
2008
|
2007
|
Increase/(decrease)
|
$
|
%
|
Revenue
|
$
23,750
|
$0
|
$23,750
|
100
|
Revenues
for the year ended March 31, 2008 were $23,750, compared to revenues of
$0 for the three months ended March 31, 2007. The Company recorded its
first revenues from the commercial sales of its FORTIS™ product line in late
March 2008. Revenues recorded are for product sold, shipped and for
which payment was received during the quarter.
General and Administrative
expenses
For
the three months ended March 31:
|
2008
|
2007
|
Increase/(decrease)
|
$
|
%
|
General
& Administrative expenses
|
$119,656
|
$22,767
|
$96,889
|
426
|
General
and administrative expenses increased by $96,889 reflecting the fact that
the Company had begun to staff up for business operations, including the
payment of rent for its 2,189 square foot leased premises in Scottsdale,
Arizona, as well as the addition of administrative, marketing and sales
personnel during the period. Additionally, the Company has also
incurred sales costs associated with attendance at trade shows and
other marketing venues . General and Administrative expenses are likely to
continue to escalate as the Company continues to expand its sales and marketing
presence, and as we add more operational and administrative personnel, and
professional assistance with our continued efforts to execute our business plan
and market our products.
Total
Operating Expenses
For
the three months ended March 31:
|
2008
|
2007
|
Increase/(decrease)
|
$
|
%
|
Total
operating expenses
|
$201,513
|
$164,563
|
$36,950
|
22
|
Overall
operating expenses increased by approximately 22% as a result of costs incurred
in connection with the addition of sales and marketing personnel, as well as the
addition of certain administrative personnel. During the quarter the
Company also incurred costs in connection with sales and marketing initiatives
targeted towards the wholesale market for the Company’s FORTIS™ product line.
Legal and professional fees declined $42,027 or 39% from the prior year, and
research and development expenses also decreased by $21,201 or 71% from the
three-month period ended March 31, 2007, reflecting the near completion of
research and development activities in connection with the FORTIS™ product
line. Research and Development expenses are expected to increase in
the successive quarters of 2008n and the Company emphasizes the completion of
the Paradigm™ engineering project.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIALCONDITION
AND RESULTS OF OPERATIONS - continued
|
Loss
from Operations
For
the three months ended March 31:
|
2008
|
2007
|
Increase/(decrease)
|
$
|
Net
(Loss) from Operations
|
$(195,263)
|
$(188,705)
|
$6,558
|
The net
loss from operations for the three months ended March 31, 2008 was ($195,263)
which is only marginally higher than the loss recorded in the March 31, 2007
period of ($188,705) despite significantly higher expenditures for sales and
marketing as well as operating and administrative expenses. The
Company recorded its first revenues from the sale of FORTIS™ product in the
period ended March 31, 2008 and further revenues are likely to continue
throughout the fiscal year as the Company seeks to expand the production and
sale of its FORTIS™ product line.
Due to a
gain on extinguishment of debt in the amount of $479,922 for the 2008 period, we
reported net income of $233,290, as compared to a net loss of $(205,030) for the
2007 period. This gain more than offset an increase in interest
expense of $32,891 for the 2008 period.
Liquidity
and Capital Resources.
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 primarily through
issuances of common stock and debt. As we continue our activities, we will
likely continue to experience net negative cash flows from operations, pending
receipt of significant revenues. Throughout the entire fiscal year
2007, all of the Company’s cash needs were met through loans advanced to the
Company by certain of its related party directors.
Net cash
change for the three months ending March 31, 2008 was a decrease of ($9,574) as
compared to an increase of $27,600 for March 31, 2007 period. Net
cash used in operating activities was $243,183 for the three months ended March
31, 2008, as compared to $116,903 for the same three month period ended in 2007
reflecting greater expenditures in connection with an expansion of
administrative costs, as well as the addition of sales and marketing functions
in connection with the marketing of the Company’s FORTIS™ product
line. Cash provided by financing activities increased slightly during
the quarter ended March 31, 2008 to $242,034 from $145,897 as recorded in
2007.
Going
Concern
The
report of our independent registered public accounting firm on the financial
statements for the year ended December 31, 2007, includes an explanatory
paragraph indicating substantial doubt as to our ability to continue as a going
concern. We have an accumulated deficit of $14,303,180 and a working
capital deficit of $3,087,004 as of March 31, 2008. We have not
generated meaningful revenues in the last two fiscal years. Our
ability to establish the Company as a going concern is dependent upon our
ability to obtain additional financing, in order to fund our planned operations
and ultimately, to achieve profitable operations.
Intangible
Assets
The
Company’s intangible assets consist of two pending patents and four patents for
tankless water heater technology. Generally a patent has a life of 17 to
20 years.
The
Company performed an impairment test in accordance with the guidance provided in
SFAS 142, “Goodwill and Other Intangible Assets”, and has determined that, as of
December 31, 2007 no impairment exists on any of the Company’s assets based on
the present value of future cash flows generated from Company
assets.
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.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIALCONDITION
AND RESULTS OF OPERATIONS - continued
|
Critical Accounting
Policies - continued
Revenue Recognition.
We record sales when revenue is earned. We sell on credit to our
distributors and manufacturer’s representatives. Due to our Warranty
and Right to Return policy, 6% 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. We no longer
manufacture the ESI-2000 product lines. Accordingly, we plan 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. We recorded our first revenues from sales of the Company’s
FORTIS™ product line during the first quarter of 2008.
Warranty and Right of
Return. In connection with the sale of each product, we provide a limited
30-day money back guarantee less a 6% restocking charge. After the 30
days, we provide a five-year warranty on replacement of parts. The
tank chamber is warranted not to leak for 10 years. We have limited
history with claims against our warranty. We defer a portion of the
revenue as would generally be required for post-contract customer support
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, 2008, a total of $34,570 in
refunds and warranty allowances were recorded against product
sales.
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.
Research and
Development. Our research and development efforts concentrate on new
product development, improving product durability and expanding technical
expertise in the manufacturing process. We expense product research and
development costs as they are incurred. We incurred research and
development expense of $8,799 and $30,000 during the quarters ended March 31,
2008 and 2007, respectively.
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. We use 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.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not
required.
ITEM
4T. CONTROLS AND PROCEDURES
Evaluation
of disclosure controls and procedures
Management,
with the participation of our Chief Executive Officer and the Chief Financial
Officer, carried out an evaluation of the effectiveness of our “disclosure
controls and procedures” (as defined in the Exchange Act, Rules 13a-15(e) and
15d-15(e)) as of the end of the period covered by this report (the “Evaluation
Date”). Based upon that evaluation, the Company’s Chief Executive Officer and
Chief Financial Officer concluded that, as of March 31, 2008, our
disclosure controls and procedures were ineffective to ensure that the
information we were required to disclose in reports that we file or submit under
the Securities and Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms. More specifically, the company identified a material weakness
due to a lack of sufficient personnel with appropriate knowledge in U.S. GAAP
and lack of timely recording of transactions, supporting documentation and
sufficient analysis of the application of U.S. GAAP to transactions, including
but not limited to equity transactions. During the three months ended March 31,
2008, there was no change in our internal control over financial reporting
identified in connection with the evaluation that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
Internal
Control over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting for the Company. Management used the framework of conducting
an extensive review of existing documentation and transactions to make that
evaluation.
The
Company’s management is reviewing the Company’s internal controls over financial
reporting to determine the most suitable recognized control framework. The
Company will give great weight and deference to the product of the discussions
of the SEC’s Advisory Committee on Smaller Public Companies (the “Advisory
Committee”) and the Committee of Sponsoring Organizations’ task force entitled
Implementing the COSO Control Framework in Smaller Businesses (the “Task
Force”). Both the Advisory Committee and the Task Force are expected to provide
practical, needed guidance regarding the applicability of Section 404 of the
Sarbanes-Oxley Act to small business issuers. The Company’s management intends
to perform the evaluation required by Section 404 of the Sarbanes-Oxley Act at
such time as the Company adopts a framework. For the same reason, the Company’s
independent registered public accounting firm has not issued an “attestation
report” on the Company management’s assessment of internal
controls.
PART
II - OTHER INFORMATION
ITEM
1.
|
LEGAL
PROCEEDINGS
|
Since the
Company’s annual report on Form 10KSB for the period ended December 31, 2007
until the date of this Report, there have been no actions initiated, terminated
or that have resulted in material changes from the status as reported for such
period other than in connection with the Envirotech Bankruptcy
matter.
Envirotech Bankruptcy –
Material Change: Envirotech filed a Motion to Dismiss its
Chapter 11 proceedings which was granted, with prejudice, on February 28, 2006.
The Bankruptcy Court retained jurisdiction to rule on a pending sanctions motion
against Envirotech wherein David Seitz and Microtherm claimed approximately
$70,000 in legal fees. On May 2, 2008 the court issued sanctions
against Envirotech, Skye, Valeo and their principals in the amount of
$40,000.
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
There
were no sales of unregistered equity securities of the registrant during the
quarter ended March 31, 2008 that have not already been disclosed in the
registrant’s current reports on Form 8-K.
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
None.
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None.
ITEM
5.
|
OTHER
INFORMATION
|
None.
Regulation
S-K Number
|
Exhibit
|
2.1
|
Agreement
of Share Exchange and Plan of Reorganization dated November 4, 2003
(1)
|
3.1
|
Articles
of Incorporation of Amexan, Inc. (2)
|
3.2
|
Articles
of Amendment of Articles of Incorporation of Amexan, Inc.
(2)
|
3.3
|
Articles
of Amendment of Articles of Incorporation of Nostalgia Motors, Inc.
(3)
|
3.4
|
Articles
of Amendment of Articles of Incorporation of Elution Technologies, Inc.
(4)
|
3.5
|
Articles
of Amendment of Articles of Incorporation of Tankless systems Worldwide,
Inc. (5)
|
3.6
|
Bylaws,
as Amended (6)
|
10.1
|
2003
Stock Incentive Plan (7)
|
10.2
|
2003
Stock Incentive Plan (8)
|
10.3
|
2005
Stock Incentive Plan (9)
|
10.4
|
Manufacturing
Services Agreement between Jabil Circuit, Inc. and Skye International,
Inc. (10)
|
10.5
|
Consulting
Agreement between Skye International, Inc. and Sundance Financial Corp.,
including amendments (5)
|
10.6
|
Consulting
Agreement between Skye International, Inc. and Digital Crossing, LLC,
including amendments (5)
|
10.7
|
Stock
Option Agreement between Skye International, Inc. and Sundance Financial
Corp., including amendments (5)
|
10.8
|
Stock
Option Agreement between Skye International, Inc. and Digital Crossing,
LLC, including amendments (5)
|
10.9
|
Personal
Services Consulting Agreement between Skye International, Inc. and Gregg
Johnson (5)
|
10.10
|
Convertible
notes to Ted Marek (11)
|
10.11
|
Convertible
notes to Perry Logan (11)
|
|
|
|
|
(1)
|
Incorporated
by reference to the exhibits to the registrant’s current report on Form
8-K, filed November 7, 2003.
|
(2)
|
Incorporated
by reference to the exhibits to the registrant’s registration statement on
Form 10-SB, filed October 5, 1999.
|
(3)
|
Incorporated
by reference to the exhibits to the registrant’s annual report on Form
10-KSB for the fiscal year ended December 31, 2002, filed May 15, 2003.
|
(4)
|
Incorporated
by reference to the exhibits to the registrant’s quarterly report on Form
10-QSB for the fiscal quarter ended June 30, 2003, filed August 21,
2003.
|
(5)
|
Incorporated
by reference to the exhibits to the registrant’s annual report on Form
10-KSB for the fiscal year ended December 31, 2005, filed July 11,
2006.
|
(6)
|
Incorporated
by reference to the exhibits to the registrant’s current report on Form
8-K, filed February 24, 2006.
|
(7)
|
Incorporated
by reference to the exhibits to the registrant’s registration statement on
Form S-8, file number 333-108728, filed September 12,
2003.
|
(8)
|
Incorporated
by reference to the exhibits to the registrant’s registration statement on
Form S-8, file number 333-111-348, filed December 19,
2003.
|
(9)
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Incorporated
by reference to the exhibits to the registrant’s registration statement on
Form S-8, file number 333-123663, filed March 30,
2005.
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(10)
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Incorporated
by reference to the exhibits to the registrant’s current report on Form
8-K, filed February 23, 2006.
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(11)
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To
be filed by amendment.
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SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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SKYE INTERNATIONAL,
INC. |
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May
9, 2008
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By:
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/s/
Perry Logan |
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Perry
Logan |
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|
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Chief
Financial Officer |
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