ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
following discussion should be read in conjunction with the financial statements
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 and point-of-use water heaters. The Fortis™, Paradigm™ and HeatWave™ product lines, as
well as future product lines, are expected 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 debt and common stock and cash generated from our limited 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 of 2008, all of the Company’s cash
needs were met through loans advanced to the Company by certain of
its directors, as well as private placements of common stock to third
parties.
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 continue commercial production of the FORTIS™, to tool up for
production of the Paradigm™, to commence
distribution of the HeatWave™ product line, and
to fully implement its marketing plans. Additionally, the Company
will also require further development funds in order to engineer additional
product lines 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 business 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 September 30, 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, or debt financing. Recent global events, as well as domestic
economic factors, have recently limited the access of many companies to both
debt and equity financings. As such, no assurance can be made that financing
will be available, or available on terms acceptable to the Company, and, if
available, it may take either the form of debt or equity. In either case, any
financing will 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 markets the FORTIS ™ tankless water
heater 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
suite of products that will incorporate Skye’s innovative technology that Skye
refers to as Paradigm™
technology. 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. Additionally,
the Company also expects to commence marketing in the near term, a new line of
commercial point-of-use water heaters to be branded under the “HeatWave™”
name. This powerful and efficient infrared water heater
delivers heated water in less than three seconds. The Company expects
the HeatWave™ product
line to provide a new level of functionality to commercial users.
The
Company’s success is 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. As of
September 30, 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 has hired a National Sales Manager to prepare the Company for the sale
of its products. The National Sales Manager is also responsible for,
among other duties, hiring regional sales representatives, appointing additional
manufacturer’s representatives, establishing and training a sales and marketing
staff and developing and distributing sales and marketing information to the
market. The Company anticipates hiring a Vice President of Sales and
Marketing at some point in the future as need dictates. This position
will be responsible for overseeing the overall sales and marketing efforts of
the Company, and also responsible for ensuring Skye product placement in the
wholesale channel.
ITEM
2.
|
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
continued
|
Going
Forward
The
Company has established relationships with a contract manufacturer, Electrosem,
LLC, to produce its FORTIS™ line of
products. Electrosem has recently passed a site inspection by
Intertek Testing Services and is thus authorized to mark Skye products with
the ETL safety mark evidencing compliance of the products with UL Standard
499. Despite commencing commercial production late in October 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 is 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 for a suite of point-of-use water heating products utilizing
the patented Paradigm™
technology. The Company expects that it will have first delivery of prototype
products utilizing the Paradigm™ technology by
late October 2008, and thereafter, the Company will seek to obtain a safety
certification of this product pursuant to the UL499 standard. As of the date of
this Report, the Company has made significant progress towards the completion of
a commercial design and prototype for a point-of-use application, however, as we
have not yet completed the engineering phase of the project, there can be no
assurance that we will be successful in developing a commercialized product or
that it will be available for sale and distribution within a reasonable period
of time.
In late
August 2008, the Company reached an agreement with an original equipment
manufacturer to produce a line of infrared point-of-use water heaters that are
expected to be sold in the commercial wholesale channel. This new
suite of Skye products are expected to be marketed under the HeatWave™ brand and it is
anticipated that such products will be ready for market introduction during the
first quarter of 2009 pending a final evaluation and safety certification under
Ul 499. Intended specifically for the commercial market, the Company
expects that the HeatWave™
product line will provide a viable alternative to existing product
offerings utilizing standard immersion heating elements. With its
industry leading ability to deliver heated water in less than three seconds and
with an efficiency rating of almost 100%, the Company believes many commercial
customers will be enticed by the new level of functionality the HeatWave™ is expected to
offer.
Access to
capital remains one of the most pressing issues for the Company. Although we
have been successful in the past in raising 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 directors
and others. In order to execute our business strategy, the Company
must raise in excess of $3 million over the next 12-month period in order to
fully execute our current production and business plan. Although the Company
recently concluded a private convertible debenture financing whereby the Company
is entitled to borrow up to $1.5 million, only $400,000 has been drawn to
date. Given current economic conditions and the increased difficulty
many companies are experiencing when attempting to access either the public or
private equity/debt markets, there can be no assurance that the Company 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 its product
lines, 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 on a timely basis. 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 additional 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 expanding
production of the FORTIS™
product line and in getting it into the market to be sold. We will
continue to develop products utilizing our patented Paradigm™ technology and
deliver such products for the required UL 499 safety compliance
testing. Additionally we will work to develop a strong network for
the sale and distribution of our newly acquired HeatWave™ line of products.
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 our product
lines.
ITEM
2.
|
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
continued
|
Results of
Operations
Revenues
For
the three months ended September 30:
|
2008
|
2007
|
Increase/(decrease)
|
$
|
%
|
Revenue
|
$6,142
|
$0
|
$6,142
|
100
|
Revenues
for the third quarter ended September 30, 2008 were $6,142, compared to revenues
of $0 for the three months ended September 30, 2007. Revenues for the
nine-month period were $53,481 as compared to revenues of $0 in the same period
ended in 2007. The Company recorded its first revenues from the commercial sales
of its FORTIS™ product
line in late March 2008, however, commercial volumes of product sales are not
expected until late October 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 September 30:
|
2008
|
2007
|
Increase/(decrease)
|
$
|
%
|
General
& Administrative expenses
|
$123,794
|
$153,381
|
$(29,587)
|
(19.29)
|
General
and administrative expenses decreased by $29,587 during the three-month period
ended September 30, 2008 as compared to the same period in 2007 as the Company
maintained operations, including sales and marketing initiatives as it prepared
for commercial volumes of saleable product in October 2008. During
the nine-month period ended September 30, 2008, general and administrative
expenses increased $557,796 over the comparable period during 2007. The Company
also incurred $156,056 in consulting and legal expenses associated with the
value of cash and shares issued to consultants for services and legal services
performed. 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 September 30:
|
2008
|
2007
|
Increase/(decrease)
|
$
|
%
|
Total
operating expenses
|
$323,101
|
$594,432
|
$(271,331)
|
(45.65)
|
Overall
operating expenses during the quarter ended September 30,
2008 decreased by $271,331 or approximately 45% despite
additional costs incurred in connection with the addition of sales and marketing
personnel, as well as the addition of certain administrative
personnel. The decrease in total operating expenses during the
three-month period reflected an overall decline in costs associated with
on-going litigation. During the nine-month period ended September 30, 2008
overall operating expenses decreased by $301,941 as compared to the nine-month
period ended September 30, 2007. The decrease is mostly attributable
to a reduction in litigation expenses during the period. 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.
Although legal and professional fees remained relatively constant as compared to
the same period in 2007, on a nine month comparative basis legal and
professional fees declined by $309,796 as compared to the same period in the
prior year, and research and development expenses also decreased significantly
by $265,284 from the three-month period ended September 30, 2007 reflecting the
near completion of research and development activities in connection with the
FORTIS™ product
line. Research and Development expenses are again expected to
increase in 2009 as the Company emphasizes the completion of the Paradigm™ engineering project
and moves to commercialize the product lines utilizing the Paradigm™
technology.
ITEM
2.
|
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
continued
|
Loss
from Operations
For
the three months ended September 30:
|
2008
|
2007
|
Increase/(decrease)
|
$
|
Net
Income (Loss)
|
$(367,208)
|
$(630,500)
|
$(263,292)
|
The net
loss for the three months ended September 30, 2008 was ($367,208) which is a
41.76% decline in the loss recorded in the September 30, 2007 period of
($630,500). During the nine-month period ended September 30, 2008 the Company
recorded net income of $471,265 which is a reversal from a loss recorded in the
comparable nine-month period in 2007 of ($1,596,487). The income in 2008 was the
result of a gain on extinguishment of debt of $1,833,954 as more fully
explained in Note 3 of the Notes to the Financial Statements. Excluding this
one-time gain the Company would have incurred a loss of $1,362,689 for the nine
months ended September 30, 2008. 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 be
recorded as a result of commercial production commencing late October
2008.
The
Company recorded an interest expense of $158,363 for the nine-month 2008
period, an increase of $79,848 from $78,515 recorded in the same nine-month 2007
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 and most of these transactions were with
related parties. 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, and
continuing through September 30, 2008 all of the Company’s cash needs were met
through loans advanced to the Company by certain of its directors and other
third parties.
At
September 30, 2008, our working capital deficit was $327,017, as compared to
$3,316,616 at December 31, 2007. The improvement was due primarily to the
debt extinguishment of $1,833,954 and the repayment of related party debt of
$857,133 through the issuance of 3,018,150 shares of common stock, repayment of
fees due to an employee and consultant of $148,600 through the issuance of
448,500 shares of common stock and the repayment of $53,000 in related party
loans. As of September 30, 2008 the principal balance of related
party loans to the Company was $462,868.
Net cash
change for the nine months ending September 30, 2008 was an increase of $57,675
as compared to a decrease of $332 for September 30, 2007 period. Net
cash used in operating activities was $434,888 for the nine months ended
September 30, 2008, as compared to $503,360 for the same nine-month period ended
in 2007 reflecting a slight decline in operating expenses in the comparative
periods mostly related to decreased litigation costs. Cash provided
by financing activities increased slightly during the nine-months ended
September 30, 2008 to $546,004 from $508,622 as recorded in the same period 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 $14,065,205 and working
capital deficit of $327,017 as of September 30, 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.
ITEM
2.
|
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
continued
|
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.
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 limited 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 September 30, 2008, a total of $43,244 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 $40,145 and $616,210 during the nine months
ended September 30, 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 December 31, 2007, 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 nine months ended September
30, 2008, there were changes 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 – see “Internal Control over Financial Reporting” below.
Internal
Control over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the Company. Our internal control system is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles.
Management
has assessed the effectiveness of the Company’s internal controls over financial
reporting as of September 30, 2008. In making this assessment,
management used the criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on this evaluation, management has concluded
that the Company’s internal control over financial reporting was effective as of
September 17, 2008.
As of
December 31, 2007, the Company determined that it had a deficiency in internal
controls over the application of current US GAAP principles originating in 2004
when an effective review of the Balance Sheet was not performed. As a result of
the ineffective review, errors in the year-end 2004 were not detected prior to
the issuance of the annual 2004 consolidated financial statements. This control
deficiency resulted in the restatement of our annual 2004 consolidated financial
statements as set forth in Form 10-KSB/A filed June 14, 2006. Management
concluded that this and other control deficiencies constituted a material
weakness that continued throughout 2005, 2006 and 2007.
During
the 2008 fiscal year, the Company implemented a new secure accounting system,
separated internal responsibilities for accounting, record keeping, check
writing and reconciliation between different parties with the Company and also
adopted various policies and procedures designed to implement the Integrated
Framework issued by COSO. These actions constituted changes in the
Company’s internal control over financial reporting that are reasonably likely
to affect the Company’s internal control over financial reporting.
This
quarterly report does not include an attestation report of the Company’s
registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this quarterly report.
PART
II - OTHER INFORMATION
ITEM
1.
|
LEGAL
PROCEEDINGS
|
Since the
Company’s quarterly report on Form 10Q for the period ended June 30, 2008 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 as set forth below:
|
1.
|
Settlement and General
Release with Danial De Sade: The Company was actively
involved in litigation with Danial De Sade in connection with (i) Maricopa
County Superior Court case (Stebbins, Jones and DeSade v.
Skye, Case No. CV
2007-014972); (ii) United States District Court for the District of
Arizona (Stebbins v.
Johnson, et al. Case No. CV06-1291-PHX-ROS), and (iii) United
States District Court for the District of Nevada (Case No.
2:06-CV-0541-RLH-GWF), collectively referred to as the “De Sade
Litigation”), all as more fully disclosed in the Company’s filing on form
10KSB for the period ended December 31, 2007. On September 12,
2008 the Company and certain other parties entered into a mutual General
Settlement and Release of all claims in connection
with the De Sade Litigation. The terms of the agreement
included, among other things, the payment by the Company of $15,000 to De
Sade and the cancellation by De Sade of the $25,000 amount claimed by De
Sade to be owing to him from the Company. Additionally, De Sade
also agreed to testify truthfully and fully cooperate with the Company’s
reasonable request to take Mr. De Sade’s deposition and to provide trial
testimony as it relates to the remaining parties and issues in connection
with ongoing Arizona State and Arizona Federal cases described
above.
|
None.
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
During
the third quarter ended September 30, 2008, the Company engaged in the following
sales or issuances of equity during the period:
Convertible
Debenture:
On
September 17, 2008, the Company entered into a direct financial obligation with
the Steven G. Mihaylo Trust, as restated, dated December 13, 2001 the
(“Mihaylo Trust”) whereby the Company, by way of the execution of a convertible
debenture in favor of the Mihaylo Trust, has received a working capital facility
of up to $1,500,000 (the “Debenture”).
The
working capital facility will be used by the Company for general working capital
purposes including, specifically, funds to enable the Company to commence the
commercial production and sale of its patented FORTIS™ line of electric
tankless water heaters, as well as the certification and commercialization of a
suite of products utilizing its patented Paradigm™
technology.
The
Debenture provides that the Company may draw up to $1,500,000 during the term of
the Debenture that expires on September 16, 2013 (the “Maturity
Date”). The Company has agreed to pay interest on any outstanding
principal amount under the Debenture at the rate of 10% per annum, compounded
annually from the date of each draw, and payable on the Maturity
Date.
The
Company has reserved the right to prepay the Debenture without penalty upon the
giving of Notice. The Mihaylo Trust has received the right to
convert, at any time, all or any portion of the Debenture into shares of common
stock of the Company at the conversion rate of $0.25 per share (subject to
adjustment in the event of certain corporate restructuring events as described
in the terms of the Debenture). All such shares of common stock to be
issued pursuant to such conversion shall be restricted securities and thus will
not be registered under the Securities Act of 1933.
ITEM
2.
|
UNREGISTERED SALES
OF EQUITY SECURITIES AND USE OF PROCEEDS -
continued
|
The
entire unpaid and unredeemed balance of the Debenture and all interest accrued
and unpaid shall, at the election of the Mihaylo Trust, be and become
immediately due and payable upon the occurrence of certain events of
default including: (a) the non-payment by the Registrant when due of principal
and interest or of any other payment as provided in the Debenture; (b) if the
Company, excluding any subsidiary or affiliate thereof (i) applies for or
consents to the appointment of, or if there shall be a taking of possession by,
a receiver, custodian, trustee or liquidator for the Company or any of its
property; (ii) becomes generally unable to pay its debts as they become due;
(iii) makes a general assignment for the benefit of creditors or becomes
insolvent; (iv) files or is served with any petition for relief under the Bankruptcy Code or any
similar federal or state statute; or (v) defaults with respect to any evidence
of indebtedness or liability for borrowed money, or any such indebtedness shall
not be paid as and when due and payable, and (c) any failure by the Company to
issue and deliver shares of common stock as provided in the
Debenture.
As of the
date of this Report the Company has drawn $400,000 under the Debenture
facility.
Common shares for legal fees
and debt to consultant/employee:
The
Company issued 487,954 new common shares to extinguish accrued legal fees and
consulting fees totaling $175,083. Of such issued new common shares,
448,500 were issued at $0.32 per new common share and 39,454 were issued at
$0.80 per new common share.
We
believe the issuance of the shares listed in this Item 2 are exempt from the
registration and prospectus delivery requirement of the Securities Act of 1933
by virtue of Section 4(2). The shares were issued directly by us and did not
involve a public offering or general solicitation. The recipients of the shares
were afforded an opportunity for effective access to our files and records that
contained the relevant information needed to make their investment decision,
including our financial statements and reports filed under the Securities
Exchange Act of 1934. We reasonably believed that the recipients had such
knowledge and experience in the Company’s financial and business matters that
they were capable of evaluating the merits and risks of their
investment.
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
None.
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None.
ITEM
5.
|
OTHER
INFORMATION
|
None