UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form
10-K
(Mark
One)
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þ
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For
the fiscal year ended December 31, 2008
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or
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For
the transition period from to
_________
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Commission
file number: 000-27549
(Exact
name of registrant as specified in its charter)
Nevada
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88-0362112
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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7701
E. Gray Rd., Suite 104
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Scottsdale,
Arizona
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code:
(480)
993-2300
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $0.001 par value
(Title
of class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
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o |
Accelerated
filer
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o |
Non-accelerated
filer
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o |
Smaller
reporting company
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þ |
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes o No þ
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity, as of the last
business day of the registrant’s most recently completed second fiscal quarter:
$2,040,884 as of June 30, 2008.
As of
December 31, 2008 and March 10, 2009, the registrant had 13,927,915 shares
of common stock outstanding.
FORWARD-LOOKING
STATEMENTS
This
report contains “forward-looking statements”. 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 Item 7. “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” in this document.
Throughout
this Form 10-K, references to “we”, “our”, “us”, “the Company”, and similar
terms refer to SKYE International Inc. and its former 100% owned subsidiaries,
Envirotech Systems Worldwide Inc., Valeo Industries Inc. and ION Tankless
Inc.
SKYE
INTERNATIONAL, INC.
FORM 10-K
FOR
THE FISCAL YEAR ENDED
DECEMBER
31, 2008
INDEX
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Page
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PART I
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Item
1.
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Business
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4
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Item
1A.
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Risk
Factors
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11
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Item
1B.
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Unresolved
Staff Comments
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11
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Item
2.
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Properties
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11
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Item
3.
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Legal
Proceedings
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11
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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13
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PART II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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13
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Item
6.
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Selected
Financial Data
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15
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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15
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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19
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Item
8.
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Financial
Statements and Supplementary Data.
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19
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Item
9.
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Changes
In and Disagreements With Accountants on Accounting and Financial
Disclosure
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20
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Item
9A(T).
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Controls
and Procedures
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20
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Item
9B.
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Other
Information
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21
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PART III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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21
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Item
11.
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Executive Compensation
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23
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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25
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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26
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Item
14.
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Principal
Accounting Fees and Services
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27
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PART IV
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Item
15.
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Exhibits,
Financial Statement Schedules
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28
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PART I
Corporate
Overview
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., and the
commencement of the Company’s current line of business, it changed its name to
Tankless Systems Worldwide, Inc. The Company’s acquisition of Envirotech Systems
Worldwide, Inc. was completed on November 7, 2003, in a share exchange that
resulted in the Company acquiring 100% of the issued and outstanding common
shares of Envirotech Systems Worldwide, Inc. On October 21,
2005, as part of its overall plan to create a brand name for its revised
business plan and expanded product lines, the Company changed its name to SKYE
International, Inc.
SKYE had
three subsidiary corporations, all of which were wholly-owned and all of which
were wound-up or administratively dissolved during the fiscal year ended
December 31, 2008:
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·
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Envirotech
Systems Worldwide, Inc., an Arizona corporation
(“Envirotech”);
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·
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ION
Tankless, Inc., an Arizona corporation (“ION”);
and
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·
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Valeo
Industries, Inc., a Nevada corporation
(“Valeo”).
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As of the
date of this Report, the Company has no subsidiaries or affiliates.
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., Suite104,
Scottsdale, Arizona 85260. The Company’s fiscal year ends on December
31.
Envirotech
Envirotech
was formed December 9, 1998, in Arizona and had a limited history of operations.
The initial period of its existence involved research and development of a line
of electric tankless water heaters. The first sales of its products occurred in
2000. 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”). Envirotech
subsequently withdrew from voluntary bankruptcy protection pursuant to an order
of the Bankruptcy court on February 24, 2006, that granted Envirotech’s motion
to dismiss its voluntary petition in bankruptcy with
prejudice. Envirotech later filed for bankruptcy under Chapter 7 of
the United States Bankruptcy Code in the United States Bankruptcy Court for the
District of Arizona, on June 24, 2008 (the “Chapter 7
Proceedings”). The filing of the Chapter 7 proceedings stayed all
then-existing litigation, judgments and efforts to collect on judgments entered
against Envirotech. As of the date of the filing of the Chapter 7 Bankruptcy
Petition, Envirotech had liabilities in excess of approximately $1.6 million,
and non-liquidated contingent liabilities in connection with the Seitz Suit (as
defined and explained under “Legal Proceedings” below). On January 7,
2009, the Bankruptcy Court partially lifted the stay of proceedings to permit
the Seitz Suit to proceed. On January 20, 2009, S. William Manera,
the Chapter 7 Trustee appointed by the Bankruptcy Court to administer the
bankrupt estate of Envirotech, filed a Notice of Intention to Abandon the
remaining assets of Envirotech comprising US Patent No. 6,389,226 and
miscellaneous inventory to the Company on the grounds that the remaining assets
in the estate were of negligible value to the
estate. Envirotech’s assets were subsequently abandoned to the
Company. Envirotech was administratively dissolved by the State of
Arizona in 2008. As of the date of this Report the Chapter 7
proceedings continue and the Company expects the matter will be concluded in
2009. All accounting entries to reflect the dissolution of Envirotech
are contained in the Company’s consolidated financial statements.
ITEM 1.
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BUSINESS -
continued
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ION
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 had conducted research and
development of alternative heating technologies and products. SKYE invested
heavily through ION in a research and development program to develop new and
innovative methods of heating fluids and such efforts have resulted in the
issuance of several US patents and several more that remain pending as of the
date of this Report. All of the assets of ION were transferred to the Company
during the 2008 fiscal year and ION was dissolved. All accounting
entries to reflect the dissolution of ION are contained in the Company’s
consolidated financial statements.
Valeo
Valeo was
formed by SKYE in January 2005 as a wholly-owned operating subsidiary. It was
intended that Valeo would become the manufacturing entity for the
Company. Consistent with a Board of Directors decision in 2007, the
Company has elected to pursue a “Fabrication Free” business plan and outsource
all production to qualified contract manufacturers. As a result Valeo
was wound up and dissolved in the 2008 fiscal period, and all accounting entries
to reflect the dissolution are contained in the Company’s consolidated financial
statements.
Business
of the Company
The
Company is in the business of designing, developing, and marketing consumer
heating appliance products. All of the Company’s products are
produced for the Company by third party contract manufacturers. The
Company entered its current line of business through the acquisition of
Envirotech and its product line - the ESI-2000 electric tankless water
heater. Though viewed by many to be a significant advancement in
whole house electric tankless, the ESI-2000 product line never achieved critical
sales levels, and thus production of the ESI-2000 product line concluded in late
2005. In response to lackluster ESI-2000 product sales, the Company engaged in a
substantial research and development program to design a line of replacement
heating appliances. The first product that the Company released to
the market in October 2008 was the FORTIS™ electric tankless
whole house water heater. The FORTIS™ tankless water heater
is small, easy to install and supplies virtually endless amounts of hot water
with energy savings. The FORTIS™ uses advanced
technology and high quality stainless steel components that are expected to
provide increased reliability and longevity. The FORTIS™ series heats
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 can be reduced by as much as 30%. Because the FORTIS™ series is compact,
durable, self-contained and safe, it can be easily installed close to where hot
water is being used, and it is ideal for condos, apartments, multifamily
residences and homes where space is at a premium.
Additionally,
the Company has continued to focus development efforts on the commercialization
of its new Paradigm™ technology. The Company has worked hard
to introduce its Paradigm™ line of
point-of-use water heaters. As of the date of this Report the Company
has completed the engineering phase of the project and has begun preliminary
steps to obtain product certification to the requisite UL 499
standard. The Company expects that a series of Paradigm™ product will be certified and
commercially available for sale during fiscal 2009.
In late
2008 the Company entered into an Agreement with a supplier to produce the
Company’s Heatwave™ line of point-of-use water heating
products. Utilizing revolutionary thin-film on quartz technology the
Heatwave™ line is an inexpensive commercial point-of-use heating
solution. Ideally suited for small lavatory and bathroom
applications, the Heatwave™ provides a commercial building project with an
inexpensive solution to the code requirement for heated water. The
Company received UL 499 and CSA 22.2 No. 64 certification in January 2009 and
expects to commence commercial sale and distribution of the Heatwave in the
second quarter of fiscal 2009.
We have
expended considerable efforts to develop a sales and distribution network in
North America. We have chosen to sell our products through wholesale
distribution utilizing manufacturer representatives. As of December 31, 2008, we
have appointed a number of manufacturer representatives covering a number of
states, primarily in the southwest and southeast portions of the United States.
We continue to review opportunities for the appointment of additional
manufacturer representatives in territories across the United States, and we
anticipate hiring a VP Sales and Marketing to coordinate all of the Company’s
sales and marketing programs.
ITEM 1.
|
BUSINESS -
continued
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The Marketplace for Tankless Water
Heaters.
Historically,
in the U.S., electric tankless water heaters have suffered from poor design and
had problems such as water flow limits, overheating at low flow, shut downs, and
burnout of elements at low flow rates. As a result, some plumbing contractors
and specifying engineers believe tankless heaters do not perform well and they
discourage consumers from buying tankless systems. There is a common perception
that tankless heaters are expensive, more complicated and more time consuming to
install. In the past, tankless water heaters have not provided a viable option
for heating water for a whole house. In addition, conventional tank water
heaters today are more efficient and reliable than in the past. As
tankless heaters continue to gain market acceptance in the U.S., management
expects that consumer sentiment will change and become more favorable to
tankless as the “green” cost-saving benefits of the technology become more
widely known to the public.
The
conventional water heater market is highly competitive, highly concentrated, and
mature, and dominated by a small number of manufacturers. Conventional tank
water heaters maintain approximately 92% market share of residential water
heater sales (Frost &
Sullivan, 2004). Management believes that tankless products comprise
nearly 8% of the U.S. marketplace as of the end of 2008. Some
contractors are loyal to their favorite brands and are comfortable installing
what they know. The five dominant U.S. manufacturers have substantial resources,
well known brand names, established distribution networks, worldwide
manufacturing capabilities, and sizeable engineering, research and development
resources to protect and increase their market share and profitability. Studies
report that sales growth in tankless water heaters will require better tankless
products than in the past and educating both representatives and installers in
the plumbing industry as well as consumers and builders in the advancements in
products.
Until
just a few years ago, there were only a few tankless water heater manufacturers
with a presence in the United States. Today, there are no electric
water heaters manufactured in Japan. The Japanese have a 40-year history of
using gas-based instant water heaters, and leverage that experience in the U.S.
marketplace. These Japanese manufacturers include Takagi, Noritz, and Rinnai.
The European competitors in the U.S. marketplace in gas, and to a lesser extent
electric-based heaters include Bosch and Steibel Eltron, both of which gained
their market experience in Europe where point-of-use instant use water heaters
are commonplace.
One of
the significant barriers to the entry of an electric tankless unit has been the
inability of an electrically powered unit to generate enough heated water flow
for the average U.S. household. The Company’s FORTIS™ product
addresses this problem by incorporating a “multi-pass” serpentine heating
technology that keeps incoming water in contact with a large heating surface for
a longer time period of time when compared to many other electric models. The
greater contact with a larger heating surface results in the ability to produce
greater volumes of heated water because of the added operating efficiency of the
product. Additionally, SKYE’s control algorithms are capable of very precise
temperature control even under fluctuating flow conditions. This new
level of functionality afforded by the Company’s patented technology we believe
will give SKYE a competitive advantage over many other electrically powered
tankless water heaters, and for the first time provide what SKYE believes to be
a truly viable alternative for the consumer that demands higher flows of heated
water.
Product
Overview
The FORTIS™ series.
The
Company has developed what it believes will be the world’s most advanced,
efficient, reliable, safe and durable electric tankless whole house water
heater. The FORTIS™ series has
substantially all stainless steel metal construction and features a backlit LCD
display for ease of use. The units offer remote controls for home automation,
programmable processor to allow easy installation of the latest software, a
modular design for ease of expansion of heating capacity, easy replacement of
immersion elements, and industry-standard non-proprietary components for
cost-effective replacement parts.
Safety
features include mechanical power breakers (included within the heater
eliminating the need for an external sub-panel), wet sensor-leak detection, a
valve to flush any sediment that may have accumulated in the system, an optional
self-cleaning mode, and mechanical over temp switch that will shut off the unit
in the event other safety devices
fail. The units also feature a built-in USB port to ease
troubleshooting and allow the user to download performance logs or updated
firmware. The sophisticated FORTIS™ controller provides
functionality not included in many other electric tankless products including
remote bath fill, remote temperature set point, auto shut-off leak detection,
remote wireless communication, real-time voltage and current detection, usage
data logging, as well as communication with other ZigBee™ enabled devices
operating on the IEEE 802.15.4 standard so as to allow whole house electric load
controlling and other energy-saving functions. The FORTIS™ has been designed
with both energy efficiency and ease of use in mind. The controller
allows the user to program “time of day” or demand-based savings programs so as
to reduce day to day operating costs.
ITEM 1.
|
BUSINESS -
continued
|
Product Overview -
continued
The FORTIS™ is a durable
tank-replacement product that is capable of meeting the needs of most whole
house applications. The Company believes that endless hot water,
energy savings, compact design and redundant safety systems make this tankless
water heater one of the “best in class”.
The Paradigm™ Series.
The Paradigm™ series
point-of-use water heaters heat water using new innovative thick-film on steel
technology. Essentially, instead of putting the heater in the water, the Paradigm™ series water
heaters pass the water through the heater. As a result, the
Paradigm™ technology
provides virtually instantaneous hot water and is nearly 100% efficient in
operation. The Paradigm™ series can heat
water to over 100°F in only seconds and, like the FORTIS™, does not require a
tank. With a standard point-of-use heating element weighing less than
10 ounces, there is little thermal mass to heat or cool, so that a 30-amp
version of this heater can provide up to 3.0 gallons per minute of heated flow
under the average sink. The Paradigm™ series is a
complement to the FORTIS™ in that it provides
the “instant” hot water, and the FORTIS™ provides the
“endless” hot water.
Included
in the Paradigm™ series of
heaters are planned whole house boost and under-the-sink versions of tankless
water heaters. Moreover, the Company believes that this Paradigm™ technology will
likely find a significant market owing to its small size, low cost and efficient
operation. Management believes that the Paradigm™ will do
particularly well in the multi-family and condo market where space is a
premium. Additionally, given its overall efficiency, management
believes that homes and building products that seek LEEDS or other “green”
certifications will likely be consumers of this new product line.
The Heatwave™
Series.
The
Company’s Heatwave™ line of commercial point-of-use water heaters incorporates
revolutionary thin-film on quartz technology to provide compact, inexpensive and
practical heating solutions for commercial installations. Wherever
local codes require heated water, the Heatwave™ is capable of providing heated
water to meet code. Additionally, given its compact size, commercial
builders are expected to benefit from space savings, low install costs and
industry leading product longevity. The Heatwave™ product line is
currently in 5.5Kw and 8.7Kw versions suitable for most small sized commercial
applications. The Company expects to expand this product line by
fiscal 2010 to include smaller 120V versions, as well as larger 11.0Kw – 14.4Kw
version for larger commercial installations.
On-Going Product
Research.
The
Company intends to continue to research and develop new products that either
incorporate existing SKYE technologies, or that complement existing product
lines. Current development efforts include, to name a few, a
fully-integrated load controller to work in tandem with the FORTIS™ series, a new small space hydronic
heating mechanism, and a whole house electric monitoring system capable of
detecting household appliance failures or service needs.
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.
ITEM 1.
|
BUSINESS -
continued
|
Governmental
Approvals, Effect of Regulations
SKYE’s
products are tested to ensure compliance with applicable code requirements.
Additionally, SKYE submits many of its products to other agencies for
certifications, including:
|
·
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NSF
(National Sanitation Foundation – for compliance with NSF standard
61
|
|
·
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IAPMO
(International Association of Plumbing and Mechanical Officers – for UPC
certification)
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·
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Intertek
Testing – for CE (European Standards Certification
Mark)
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|
·
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Intertek
Testing for UL499 and CSA 22.2 No.
64
|
On
September 4, 2007, the Company opened an investigation of its proposed FORTIS™ line of water heating
product with Intertek Testing Services NA, Inc. (“Intertek”) in order to
determine its compliance with ANSI/UL standard 499 for Electric Heating
Devices. On October 12, 2007, the Company was advised that Intertek
had issued its Listing Report in connection with the investigation and approval
for listing of the FORTIS™ product
series. The testing confirmed compliance with UL standard 499 and
received “Approval to Mark” the trademarked “ETL” certification mark on the
FORTIS™ product
series.
On
January 13, 2009, the Company was advised that Intertek had completed testing of
its Heatwave™ product series and found that it complied with the requirements of
UL standard 499 for electric heating appliances, and CSA standard 22.2 No. 64
for instantaneous water heaters. The Listing Report in connection
with such investigation was issued on March 6, 2009, and the Heatwave™ product
line is currently in production for expected delivery in the early second
quarter of 2009.
Consumer
safety, building, electric and plumbing codes are in a constant state of change
and thus SKYE is always subject to the potentially negative impacts of any
adverse legislation, including legislation that could require changes, including
significant changes, to existing product specifications and components. SKYE is
not currently aware of any pending legislation that will adversely affect the
ability of SKYE to conduct its business.
Cost 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.
Sales
and Distribution
Because
tankless water heaters are still relatively new in the U.S., SKYE will use
wholesale distribution through appointed manufacturer representatives to enter
the market place. As consumer knowledge of tankless is still quite low, SKYE
believes that a “push” style distribution through wholesale distribution is
needed. Utilizing the resources of wholesalers to make sales calls and stock
inventory locally will help to reduce initial capital needs and expedite a
broader distribution network. SKYE has appointed manufacturer representatives in
many states and expects that it will continue to appoint more representatives
over the balance of 2009 and 2010, including manufacturer representatives in
Canada, Mexico and Europe.
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 37%, and 7% commissions to
manufacturer representatives; (b) 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.
In
addition, the Company is also hiring and appointing “factory sales managers” to
deal with sales territories across the U.S. As of the date of this
Report the Company has hired three factory sales managers covering the following
states: CA, OR, WA, ID, AK. HI, AZ, NV, NM, CO, MT, WY, UT, TX, OK, AR, LA, TN,
KY, NC, SC, MS, AL, GA, FL. The Company expects to hire additional
managers as sales and revenues warrant. Factory sales managers are responsible
for supporting the wholesale channel, as well as installer and service
technician training for all wholesalers and retailers of the Company’s
products. In order to accelerate training of installers in the U.S.
the Company has created “SKYE University” that conducts both in-house training
at its facilities in AZ, as well as remote field
training across the U.S. The Company plans to hire a Vice President
of Sales and Marketing with overall responsibility to oversee the sales, service
and training functions of the Company.
ITEM 1.
|
BUSINESS -
continued
|
Sales and
Distribution -
continued
The
wholesale distribution model is favored by SKYE because, among other reasons,
according to Frost & Sullivan over
60% of plumbing sales are made by wholesale distributors. Many of the wholesale
distributors add value to SKYE’s distribution because, in addition to providing
local sales they also work closely with the trades that install the product as
well. As awareness of tankless grows, a local presence is essential to convert
home building, architects and other key decision makers to adopt tankless
technology.
The
Company is currently undertaking a review of its current distribution plans with
a view to increasing sales through the addition of a comprehensive direct
marketing and product branding campaign to generate pull through sales from
homeowners and installers. The Company considers the addition of this
program to be complementary to its wholesale channel as all sales will continue
to be sold and serviced through the wholesale channel. The Company is
currently developing its product branding and awareness campaign and hopes to
retain nationally recognized talent to be a keystone of the
campaign. As no such campaign has been fully-developed or
implemented, there can be no assurance that the campaign will be implemented, or
if implemented, that it will be effective in generating sufficient sales of
product to off-set the significant costs of such a campaign.
Manufacturing
FORTIS™
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 FORTIS™ tankless water heater product.
Although the Company commenced early prototype production of the FORTIS™ in 2006 and 2007, the Company was
unable to commence full scale commercial production due to re-engineering
required to reduce manufacturing costs and reduce the likelihood of field
failures of certain components. As a result of such engineering
efforts, the FORTIS™
design was not sufficiently stable to warrant continued efforts with Jabil at
such time. As a result the Company engaged Electrosem, LLC of Tempe,
AZ (“Electrosem”) to complete further engineering for manufacturing steps,
design stabilization and first run commercial production. By January
2009 the Company achieved an annualized production rate of 12,000 units and
issued a press release on February 26, 2009, announcing such production
milestone and further stating that production volumes of the FORTIS™ are expected to reach
the target annualized rate of 20,000 units by the end of fiscal
2009.
Paradigm™
As the
design of the Paradigm™
is still awaiting final safety certification from Intertek Testing Labs, the
Company cannot, as of the date of this Report, advise when production of Paradigm™ product will commence, though it is
likely that such production will be during the 2009 fiscal year. All
such product will be entirely outsourced to third party contract manufacturers
qualified by the Company.
Heatwave™
The
Company’s original equipment manufactured Heatwave™ product line gained UL/CSA
standard certification in early 2009. Production and first shipments
of Heatwave™ product to the Company is expected during the second quarter of
2009.
Materials and Principal
Suppliers.
All of
the Company’s products are manufactured by third party contract manufacturers in
keeping with the Company’s fabrication-free business
strategy. Although the company currently sources some critical
components directly from suppliers, it is expected that all such procurement
will be transferred to the contract manufacturers in 2009. The Company maintains
a policy of having at least two suppliers for all critical or long-lead
components. The Company’s current list of critical suppliers includes
Siemens, AG (electrical components), Tru-Heat (heating elements), and Arnold
Bros. (stainless steel sheet metal and components), Electrosem, LLC and IRC/TT
Electronics (Paradigm™ heating
components and Zhijiang Riches Electric Appliance Co. Ltd.
(Heatwave™).
ITEM 1.
|
BUSINESS -
continued
|
Research
and Development
From 2004
through 2006, the Company conducted all of its research and development
activities through ION. During the 2007 year, research and
development activities were conducted through the Company
directly. All employees, contractors and consultants engaged in the
research and development were required to execute non-disclosure,
non-competition agreements covering the subject, scope and work product of the
program. The Company expended $231,624 in 2008 and $629,299 in 2007 on research
and development.
Intellectual
Property
The
Company currently holds a number of patents:
|
·
|
US
Patent No. 6,389,226 issued May 14,
2002;
|
|
·
|
US
Patent No. 7,088,915 issued August 8,
2006;
|
|
·
|
US
Patent No. 7,046,922 issued May 16,
2006;
|
|
·
|
US
Patent No. 7,164,851 issued January 16, 2007;
and
|
|
·
|
US
Patent No. 7,206,506 issued April 17,
2007
|
Additionally,
the Company has both provisional patent applications and other patent
applications pending. While there can be no assurances that the other
patents sought will be granted or that the technology will be considered
proprietary to the Company, the Company believes that is applications are
meritorious and will be granted at least in part.
On
September 16, 2008, we were advised that the United States Patent and Trademark
Office registered the trademark “SKYE and logo” as a registered
trademark.
Competition
The water
heater market is mature, highly concentrated and highly
competitive. Steep discounts and rebates to builders and installers
are standard. Some contractors are loyal to favorite brands and on occasion
resistant to tankless systems. Pricing competition has increased in recent years
and major manufacturers are increasing their expenditures on research and
development. Conventional water heaters (tank heaters) are more efficient and
reliable than conventional tank water heaters in the past. 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 it is likely this competition will increase as
consumers continue to adopt tankless products. 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
market segment. 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.
ITEM 1.
|
BUSINESS -
continued
|
Competition -
continued
The
Company believes that future competition may come from the manufacturers of
conventional tank water heaters who are firmly established within 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
92% 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. The Company competes
directly with several manufacturers of electric tankless water heaters
including, among others, Steibel Eltron, Bosch AG, Eemax Inc., Seisco
International Limited, Dolphin Industries Inc. and Titan Tankless Inc., many of
whom have been selling electric tankless product in greater volumes and for
longer periods of time than the Company. Although the Company
believes it has a competitive product offering, there can be no assurance that
it will be successful in shifting market share away from the larger established
electric tankless manufacturers or that third party manufacturers may seek to
improperly utilize certain of the Company's proprietary technologies that
provide such competitive advantages. In the event that the Company is
unwilling or unable to adequately protect its intellectual property it is likely
it will lose competitive advantages associated with such
property.
Employees
As of the
date of this Report the Company has 8 full-time and 5 part-time contract
employees, The Company retains 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, sales and technical
support. Additional employees are expected to be engaged as revenues
from operations permit.
Not
required by Form 10-K for smaller reporting companies.
ITEM 1B.
|
UNRESOLVED STAFF
COMMENTS
|
Not
required by Form 10-K for smaller reporting companies.
ITEM 2.
|
DESCRIPTION OF
PROPERTY
|
The
Company leases offices comprising a total of approximately 2,180 square feet
located at 7701 E. Gray Rd., Suite 104, Scottsdale, AZ 85260. The
Company entered into a one-year lease effective April 11, 2007, at a monthly
lease cost of approximately $3,118, with a one year option at a reduced monthly
cost of $2,672 per month through April 30, 2009. In January 2009, the
Company amended the lease with a three-year option to extend through April 30,
2011, with the option for the Company to provide 90 days notice of its
intention to vacate. Given the recent expansion of operations the
Company intends to move to larger premises at some point during fiscal
2009.
ITEM 3.
|
LEGAL
PROCEEDINGS
|
Distributor Claim.
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
recorded unless there was a default. On May 3, 2004, the distributor claimed a
breach and filed the Stipulated Judgment. In June 2007, the trustee and
beneficiary of the estate of the deceased plaintiff and Larry M. Reynolds (the
“Reynolds Trustee”) made written demand for payment of the sums owed under the
Stipulated Judgment. With the filing of the Chapter 7 Bankruptcy
Petition by Envirotech in late 2008 (see
below), this action was stayed. On January 22, 2009, the Reynolds
Trustee filed a motion with the Maricopa County, AZ Court to “Re-Order the
Judgment on case CV2001-021277”. That motion is also stayed pending
the Chapter 7 Bankruptcy Proceedings discussed below.
ITEM 3.
|
LEGAL
PROCEEDINGS -
continued
|
Seitz Suit. In 2002,
Envirotech was named as a Defendant in a lawsuit 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”). Envirotech of Texas,
Inc. was an independent distributor of the Envirotech ESI-2000 product line not
affiliated with Envirotech. 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. On December 5, 2005, the 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
[sic] any technology embodied in the Model ESI 2000 heater. The injunction was
dissolved. SKYE is not a party to this case. Envirotech
filed a motion to enforce a settlement that was reached between the parties and
a hearing regarding this matter is pending.
Chapter 11 and Chapter 7
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. All claims and judgments of creditors of Envirotech may be
renewed in the future. The Bankruptcy Court retained jurisdiction to
rule on a pending sanctions motion against Envirotech wherein David Seitz and
Microtherm are claiming approximately $70,000 in legal fees. Prior to
the Bankruptcy Court ruling on the sanctions motion, Envirotech and Microtherm
reached a settlement, the confidential terms of which were read into the record
with the Federal Court in Houston. Unable to complete the settlement
with Microtherm, Envirotech filed a motion to enforce the settlement and later
filed for Chapter 7 bankruptcy with the Bankruptcy Court for the District of
Arizona when progress in concluding a settlement with Microtherm became
impossible to further pursue. The Bankruptcy Court later issued a Minute Entry
awarding sanctions against Envirotech and its principals in the amount of
$40,000. Envirotech and several individuals objected to the Minute
Entry and a hearing proceeded in the Arizona Bankruptcy Court to determine
whether such sanctions would be reduced to a final Order. The Arizona
Bankruptcy Court, in the face of objections from multiple parties quashed the
Minute Entry assessing such sanctions and granted additional time to Microtherm
to serve certain individuals that Microtherm believed ought to form a part of
the sanctions. As of the date of this Report no individuals were
served in the matter. In January 2009, the Trustee in the
Envirotech Chapter 7 proceedings filed a “Notice of Intention to Abandon” all of
Envirotech’s assets to the Company. No objection to the abandonment
was received from any parties and the assets of Envirotech were abandoned to the
Company. The sanctions matter and the remaining Chapter 7 proceedings
are pending.
Shareholder Derivative
Suit. 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 (Stebbins v. Johnson, et al.
Case No. CV06-1291-PHX-ROS) as a derivative action seeking injunctive and
declaratory relief. The Company was named as a nominal defendant although there
are no claims for monetary damages against the Company. The primary claims
involve the prior issuance of the Company’s common stock to one former member of
management and to former consultants to the Company. Plaintiffs sought to
prevent these individuals from using their stock and related voting rights to
solicit proxies and notice shareholder meetings, and have demanded return of
the
shares to the Company. On May 2, 2007, the Court issued an Order rejecting the
Plaintiffs’ requested Preliminary Injunction dissolving all
restrictions imposed by a prior Temporary Restraining Order and Stipulated
Order, which permitted the Company to conduct its corporate business without any
further interference or restraint by the Court or the Plaintiffs. The
original claims asserted by plaintiffs are moot and dismissal of those claims is
pending. After an
investigation into the matter following the filing of the lawsuit, the Company
and its counsel determined that counterclaims against the plaintiffs and
third-party claims against one of the Company’s former directors should be
asserted. Those claims were added to the lawsuit and motions to
dismiss were submitted by all of the Counter defendants and third-party
defendants. The motions were granted (in part), resulting in the
refilling of those claims. Additional motions for dismissal
followed. In mid-January 2009, a stipulation for Dismissal of all
remaining claims by and against all named parties with prejudice was filed with
the Court and subsequently the Court granted the dismissal with
prejudice.
ITEM 3.
|
LEGAL
PROCEEDINGS -
continued
|
Papazian Suit. The
Company is a party to an action seeking to require SKYE to both “defend” and
“indemnify” Director William Papazian from and against costs and liabilities
associated with a counterclaim filed by SKYE against Mr. Papazian with the
Shareholder Derivative Action described above. The Company settled
the matter with Mr. Papazian.
Promissory Note Suit.
In August 2007, three former consultants to the Company purporting to have
loaned $75,000 to the Company filed a lawsuit in the Maricopa County Superior
Court (Stebbins, Jones and
DeSade v. Skye, Case No. CV 2007-014972). The case was
dismissed with prejudice concomitant with the Federal Court Shareholder
Derivative Suit.
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 4.
|
SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
|
None.
PART II
ITEM 5.
|
MARKET FOR
REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY
SECURITIES
|
Market
Information.
Except as
otherwise disclosed, SKYE’s common stock has been traded on the NASD Over the
Counter Bulletin Board since 1998 under various symbols, including:
CRRZ -
1998 to December 12, 2002
ELUT -
December 12, 2002 to July 25, 2003
TSYW -
July 25, 2003 to November 11, 2005
SKYY -
November 11, 2005 to May 19, 2006
SKYYE -
May 19, 2006 to June 5, 2006
SKYY
-June 5, 2006 to January 8, 2007 (as traded on the Pink Sheets)
SKYI -
January 8, 2007 to present
The
following table sets forth the range of high and low bid quotations for each
fiscal quarter for the last two fiscal years. These quotations reflect
inter-dealer prices without retail mark-up, markdown, or commissions and may not
necessarily represent actual transactions.
ITEM 5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES -
continued
|
Per
Share Common Stock Bid Prices by Quarter
For
the Fiscal Year Ending on December 31, 2008
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
Quarter
ended December 31, 2008
|
|
$ |
0.30 |
|
|
$ |
0.07 |
|
Quarter
ended September 30, 2008
|
|
|
0.40 |
|
|
|
0.15 |
|
Quarter
ended June 30, 2008
|
|
|
0.60 |
|
|
|
0.22 |
|
Quarter
ended March 31, 2008
|
|
|
0.60 |
|
|
|
0.27 |
|
|
|
|
|
|
|
|
|
|
For
the Fiscal Year Ending on December 31, 2007
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
Quarter
Ended December 31, 2007
|
|
$ |
0.29 |
|
|
$ |
0.08 |
|
Quarter
Ended September 30, 2007
|
|
|
0.37 |
|
|
|
0.20 |
|
Quarter
Ended June 30, 2007
|
|
|
0.37 |
|
|
|
0.11 |
|
Quarter
Ended March 31, 2007
|
|
|
0.38 |
|
|
|
0.18 |
|
Holders
of Common Equity
As of
February 18, 2009, there were 243 shareholders of record of the Registrant’s
Common Stock and there were 13,927,915 shares of Common Stock issued and
outstanding after giving effect to the 4 to 1 reverse split that was affected on
the common stock on May 16, 2008.
Dividends
SKYE has
not declared or paid a cash dividend to stockholders since it became a “C”
corporation. The Board of Directors presently intends to retain any earnings to
finance the Company’s operations and does not expect to authorize cash dividends
in the foreseeable future. Any payment of cash dividends in the future will
depend upon the Company’s earnings, capital requirements and other
factors.
Sale
of Unregistered Securities
During
2008, we issued shares of our common stock in transactions that were not
registered under the Securities Act of 1933 as follows:
Persons
or Class of Persons
|
Date
of Issue
|
Securities
|
Consideration
|
|
|
|
|
Arnold
Weintraub,
|
4/20/2008
|
6,712
shares
|
Legal
services valued at $ 5,370
|
|
|
|
|
O’Connor
& Campbell
|
6/30/2006
|
12,500
shares
|
Legal
services valued at $24,963
|
|
|
|
|
D.
Scott Hemingway, Jennings, Strouss & Salmon, Mark D.
Chester
|
6/30/2008
|
511,713
shares
|
Legal
services valued at $379,920
|
|
|
|
|
Arnold
Weintraub
|
8/18/2008
|
39,454
shares
|
Legal
services valued at $31,563
|
|
|
|
|
Directors
of the Company
|
4/9/2008
|
187,500
shares
|
Directors’
fees for 3rd
& 4th
Quarter 2007
and 1st
Quarter 2008 valued at $150,000
|
|
|
|
|
Directors
of the Company
|
6/30/2008
|
62,500
shares
|
Directors’
fees for 2nd
Quarter 2008 valued at $50,000
|
|
|
|
|
Wesley
G. Sprunk, Ted Marek, Perry Logan
|
4/9/2008
|
2,939,750
shares
|
Compensation
for payment of loans made to the Company valued at
$940,720
|
|
|
|
|
Gregg
Johnson
|
7/3/2008
|
448,500
shares
|
Compensation
for payment of loans made to the Company valued at
$143,520
|
ITEM 5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES -
continued
|
Sale of Unregistered
Securities -
continued
Ted
Marek and Perry Logan
|
11/1/2008
|
250,000
shares
|
Compensation
under services agreement valued at $ 80,000
|
|
|
|
|
Ted
Marek and Perry Logan
|
12/1/2008
|
250,000
shares
|
Compensation
under services agreement valued at $80,000
|
|
|
|
|
Richard
Ankrom,
|
4/30/2008
|
19,174
shares
|
Engineering
services valued at $ 15,335
|
|
|
|
|
Kenneth
McRobbie
|
10/23/2008
|
35,706
shares
|
Promotional
material services valued at $11,426
|
|
|
|
|
Ronald
Stultz
|
12/4/2008
|
10,000
shares
|
Research
and development services valued at $2,000
|
|
|
|
|
Stephen
D. Neale
|
5/12/2008
|
31,250
shares
|
Private
Placement of $10,000
|
|
|
|
|
Leslie
W. Griffith
|
6/27/2008
|
250,000
shares
|
Private
Placement of $80,000
|
|
|
|
|
Ted
Marek Real Estate Defined Benefit Plan
|
6/27/2008
|
316,406
shares
|
Private
Placement of $101,250
|
|
|
|
|
Stephen
D. Mihaylo
|
9/17/2008
|
1,000,000
shares
|
Private
Placement of $320,000
|
|
|
|
|
Robert
Berry
|
11/18/2008
|
75,000
shares
|
Private
Placement of
$24,000
|
No
underwriters were used in the above stock transactions. The
registrant relied upon the exemption from registration contained in Section 4(2)
as to both of the transactions, as the investors were either deemed to be
sophisticated with respect to the investment in the securities due to their
financial condition and involvement in the Company’s business or accredited
investors. Restrictive legends were placed on the certificates
evidencing the securities issued in all of the above transactions.
ITEM 6.
|
SELECTED FINANCIAL
DATA
|
Not
required by Form 10-K for smaller reporting companies
ITEM 7.
|
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-K.
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 ™ through an
established and growing list of manufacturer 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. Having recently received
Intertek safety certification to the UL 499 and CSA C22.2 No. 64 standards, SKYE
expects to commence sales of its Heatwave™ product line during the second
quarter of 2009. The Heatwave™ product utilizes the Company’s
proprietary heating technology to provide an innovative, powerful and
inexpensive commercial point-of-use solution for local hot water code compliance
in commercial buildings.
The
Company has established relationships with contract manufacturers Electrosem,
LLC. to produce its FORTIS™ line of
products and Zhijiang Riches Electric Appliance Co. Ltd. to produce its
Heatwave™ product line. With respect the Paradigm™ product line, the Company expects
that it will appoint a contract manufacturer during the second quarter of 2009
upon completion of current due-diligence investigations. The Company
expects that it may take up to one year for the production design and processes
to stabilize for each product line. Once such processes
and designs have stabilized the Company will seek and implement product cost
reductions accordingly.
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -
continued
|
Executive
Summary -
continued
Now that
the Company is able to manufacture and inventory saleable product, much of the
Company’s focus has shifted to building and growing our sales, service and
training networks. The Company sells its products exclusively through
the wholesale distribution channel via manufacturer representatives appointed to
sales territories across the U.S. In addition, the Company is also
hiring and appointing “factory sales managers” to deal with sales territories
across the U.S. As of the date of this Report the Company has hired
three factory sales managers covering the following states: CA, OR, WA, ID, AK.
HI, AZ, NV, NM, CO, MT, WY, UT, TX, OK, AR, LA, TN, KY, NC, SC, MS, AL, GA,
FL. The Company expects to hire additional managers as sales and
revenues warrant. Factory sales managers are responsible for supporting the
wholesale channel as well as installer and service technician training for all
wholesalers and retailers of the Company’s products. In order to
accelerate training of installers in the U.S., the Company has created “SKYE
University” that conducts both in-house training at its facilities in AZ as well
as remote field training across the U.S. The Company plans to hire a
Vice President of Sales and Marketing with overall responsibility to oversee the
sales, service and training functions of the Company. Current
interviews and due-diligence investigations are pending and the Company expects
to fill the position in the near future.
Access to
capital remains one of the most pressing considerations for the Company. The
Company has continued to fund operations with loans from, and equity private
placements made to, the Company’s directors, as well as certain accredited
investors. 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 business plan. Given the current business climate,
and, in particular, the poor state of the credit and equity markets in the U.S.
and worldwide, 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. In order to build a successful sales and marketing organization, it is
necessary for the Company to be positioned not only as a quality supplier of
product but also as a trusted and timely supplier as well. As such,
management believes that the Company must be in a position to carry product
inventory levels necessary to ensure timely delivery in its
markets. Additionally, as further support in the markets, the Company
must also be seen as having broad customer service and technical support for its
products. All of these needs have associated cash requirements as the
Company grows its business. 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 2009 we will continue to focus our efforts on expanding production of
the FORTIS™ and adding the availability
of the Paradigm™ and Heatwave™ brands in
our markets. Additionally, we will also work to build our sales and
customer service infrastructure to support product sales and revenue for the
Company. 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. The economic outlook globally is challenging for every business
and we are no exception. Since late 2007, the new home building
market has seen unprecedented declines in new home starts and recent credit
squeezes and lack of available credit has all but choked off a great portion of
new commercial construction as well. Recent U.S. government efforts
to add liquidity and overall economic stimulus into the broader economy have not
yet created expanded opportunities for the Company and thus we expect sales
opportunities to continue to be challenging for all of 2009 and likely into 2010
as well.
Results of
Operations
Comparison
of the Years Ended December 31, 2008 and 2007 Revenues
For
the Twelve months ended December 31:
|
2008
|
2007
|
Increase/(decrease)
|
$
|
%
|
|
|
|
|
|
Revenues
for the year ended December 31, 2008 were $73,203 compared to revenues of
$NIL in the year ended December 31, 2007, as we commenced sales of our
FORTIS™ product during the 2008 fiscal
year.
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -
continued
|
General and Administrative
expenses
For
the Twelve months ended December 31:
|
2008
|
2007
|
Increase/(decrease)
|
$
|
%
|
General
& Administrative expenses
|
|
|
|
|
General
and administrative expenses increased by 26% reflecting the fact that
the Company began to add more operational and administrative personnel and
continue professional assistance with our continued efforts to execute our
business plan and market our products during fiscal 2008.
Total
Operating Expenses
For
the Twelve months ended December 31:
|
2008
|
2007
|
Increase/(decrease)
|
$
|
%
|
|
|
|
|
|
Overall
operating expenses increased by approximately 15% as a result of increased
legal, professional, and general and administrative costs. Legal and
professional fees increased $545,559 or 57% from the prior year, whereas
research and development expenses decreased $397,675 or 64% from the prior year
ended December 31, 2007.
Other
Income (Expense)
For
the Twelve months ended December 31:
|
2008
|
2007
|
Increase/(decrease)
|
$
|
%
|
Total
other income (expense)
|
|
|
|
|
The
Company dissolved several of its subsidiaries during 2008. These subsidiaries
had no assets and $1,228,761 of liabilities. When the subsidiaries were
dissolved the Company ceased to consolidate them. Accordingly, the Company
recognized a gain for the liabilities that were relieved from the financial
statements upon the deconsolidation of the subsidiaries. The
remaining gain on extinguishment of debt was through related
parties.
Net
Loss
For
the Twelve months ended December 31:
|
2008
|
2007
|
Increase/(decrease)
|
$
|
|
|
|
|
The net
loss for the year ended December 31, 2008 improved (reduced) by $1,479,170 or
74%, primarily due to the non-recurring Other Income of $1,823,955 for gain on
extinguishment of debt.
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 may
continue to experience net negative cash flows from operations, pending receipt
of significant revenues. Throughout the entire fiscal year 2008, all
of the Company’s cash needs were met through loans advanced to the Company by
certain of its related party directors and some private placement
purchases.
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 working capital
for general operations as well as to build commercial inventories of FORTIS™ product, to purchase
inventory of its Heatwave™ product line, to continue the certification and
subsequent production of the Paradigm™
product line and otherwise to implement its sales and marketing
plans. 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
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -
continued
|
Liquidity and Capital
Resources -
continued
As of
December 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. Although the Company commenced full commercial sales of
FORTIS™ product during the first quarter
of 2009, it is unlikely that cash flow from such sales will be sufficient to
fund continuing operations in the near term. As such, we anticipate
substantial increases in our cash requirements as we build our sales and
distribution network 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.
At
December 31, 2008, we had cash and a working capital deficit of $37,822 and
$411,214, respectively, as compared to cash of $35,331 and a working capital
deficit of $3,316,616 at December 31, 2007. The primary reason for
the improvement in working capital is the reduction in accounts payable and
notes payable to related parties. As described above, debt of
$1,823,955 was extinguished through the deconsolidation of our dissolved former
subsidiaries. We also issued 3,388,250 shares of our common stock to
retire related party debt in the amount of $1,084,290. We sold
1,672,656 shares for proceeds of $511,250. We issued a total for
1,267,405 shares for $743,795 of services, thereby conserving cash.
Net cash
change for the twelve months ending December 31, 2008, was an increase of $2,491
as compared to an increase of $26,659 for 2007. Net cash used in
operating activities was $1,703,195 for 2008 as compared to $1,239,107 for
2007. The largest adjustment to reconcile cash used for operating
activities was $1,823,955 for the gain on extinguishment of
debt. Operations were financed primarily by proceeds from borrowing
and from the sale of common stock in the aggregate amount of $1,755,662 in
2008 as compared to $1,271,360 in 2007.
Going
Concern
The
report of our independent registered public accounting firm on the financial
statements for the year ended December 31, 2008, includes an explanatory
paragraph indicating substantial doubt as to our ability to continue as a going
concern. We have an accumulated deficit of $15,065,970 and working
capital deficit of $411,214 as of December 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.
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements.
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
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 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 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 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 had $72,949 in revenue from sales of products during
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 December 31, 2008, a total of $43,486 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 $231,624 and $629,299 during the years ended December 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 7A.
|
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET
RISK
|
Not
required by Form 10-K for smaller reporting companies
ITEM 8.
|
FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
|
Financial
statements as of and for the years ended December 31, 2008 and 2007 are
presented in a separate section of this report following Part IV.
ITEM 9.
|
CHANGES IN
AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
ITEM 9A
(T).
|
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, 2008, our disclosure
controls and procedures were effective 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.
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.
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 December 31, 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
December 31, 2008.
As of
December 31, 2007, the Company determined that it had a deficiency in internal
controls over the application of current U.S. 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
annual 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 annual report.
ITEM
9B.
|
OTHER
INFORMATION
|
None.
PART III
ITEM 10.
|
DIRECTORS, EXECUTIVE OFFICERS
AND CORPORATE GOVERNANCE
|
Executive
Officers and Directors
Our
officers, directors and key employees are as follows:
Name
|
Age
|
Position
|
Perry
D. Logan
|
80
|
Chief
Executive Officer, President, and Director
|
Steven
G. Mihaylo
|
67
|
Chairman
of the Board of Directors
|
Wesley
G. Sprunk
|
73
|
Director
|
Thaddeus
(Ted) F. Marek
|
67
|
Director,
Secretary/Treasurer, CFO & CAO
|
Gregg
C. Johnson
|
44
|
Executive
VP and COO
|
|
|
|
Directors
are elected to serve for a one-year term. Officers hold their positions at the
will of the Board of Directors. There are no arrangements, agreements or
understandings between non-management shareholders and management under which
non-management shareholders may directly or indirectly participate in or
influence the management of the Company’s affairs.
Perry
D. Logan, President and CEO, Director and Member of Corporate Governance
Committee
Perry
Logan has been a director of the Company since January 2007 and became an
officer of the Company in May 2007. His business career is centered
predominantly in the automotive industry as an owner of several major
dealerships in the greater Phoenix area, as well as interests in dealerships in
other regions since 1965.
Steven
G. Mihaylo, Chairman of the Board and ad-hoc member of all Board
Committees
Mr.
Mihaylo has been a director of the Company since October 2008. He was
the founder, Chairman and CEO of Inter-Tel, Incorporated and served in such
capacity from inception in 1969 through February 2006, and then as a director of
Inter-Tel Incorporated until its sale to a private equity group in
2007. Mr. Mihaylo holds a Bachelor of Business Administration from
Cal State Fullerton 1969.
Wesley
G. Sprunk, Director, Member of Corporate Governance and Audit
Committees
Wes
Sprunk has been a director of the Company since May 2006. He has been
the President of Tire Service Equipment Mfg., Inc. and Saf-Tee Siping &
Grooving, Inc. since September 1998. The main office for these companies is in
Phoenix, Arizona with manufacturing plants in Alamogordo, New Mexico and
Monticello, Minnesota. Tire Service Equipment Mfg., Inc./Saf-Tee Siping &
Grooving, Inc. manufactures automotive wheel service equipment and recycling
equipment. It markets these products in the U.S. and foreign countries and
presently has 300+ distributors. Wes Sprunk is also a Board member with
Amerityre Corporation, a NASDAQ public company (Nasdaq: AMTY) located in Boulder
City, Nevada. Amerityre specializes in urethane polycomposites and the company’s
mission is to replace rubber in most applications, including tires.
Thaddeus
(Ted) F. Marek, Secretary/Treasurer, CFO, CAO, Director and Member of Audit
Committee and chair of Corporate Governance Committee
Ted Marek
has been a director of the Company since January 2007 and became an officer of
the Company in October 2007. He is the currently the Principal and
Designated Broker of Ted Marek Real Estate Co., Inc. in Scottsdale,
Arizona. Mr. Marek has been active in the Phoenix commercial real
estate market for over 30 years. He has been
very instrumental in the movement and placement of automotive dealerships, site
selection, sales and acquisition in the Phoenix Metro area.
ITEM 10.
|
DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE -
continued
|
Executive Officers and
Directors -
continued
Gregg
C. Johnson, Executive Vice President & C.O.O.
Gregg
Johnson has been with SKYE since late 2004 and has been responsible for many
functions, including the development of the Fortis™ and Paradigm™ products and
technologies. Mr. Johnson is also a lawyer (not admitted in AZ) with
extensive experience in management of entrepreneurial companies. He received his
law degree in 1988 from Osgoode Hall Law School in Toronto, Canada and was
admitted as a lawyer in Alberta in 1989. His extensive legal career has included
private practice in Tokyo, Japan with Aoki, Christensen & Nomoto (now Baker
& McKenzie), where his practice focused on Japanese securities regulation
and international debt instruments, and in Jeddah, Saudi Arabia, with the Law
Offices of Dr. Mujahid M. Al-Sawwaf, where he acted as Outside Middle East
Counsel to many fortune 500 companies. His career has included experience in
corporate finance and venture capital for emerging growth companies across
Canada and the United States. He was instrumental in building and growing many
successful companies and he has been an officer and director of numerous
Canadian and U.S. public companies over his career. Additionally Mr. Johnson was
elected as a Councilor and later Mayor of Red Deer County, AB from October 1998
to October 2004. In October 2004 Mr. Johnson was appointed as an Appeals
Commissioner (Administrative Law Judge) with the Alberta Appeals Commission
where he served part-time until April 2007.
Section
16(a) Beneficial Ownership Reporting Compliance
Officers
and directors, and persons who own more than 10% of a registered class of the
Company’s equity securities, are required to file reports of ownership and
changes in ownership with the Securities and Exchange Commission pursuant to
Section 16(a) of the Securities Exchange Act of 1934. The following
table sets forth reports that were not filed on a timely basis during the most
recently completed fiscal year:
Reporting
Person
|
Date
Report Due
|
Date
Report Filed
|
Perry
D. Logan
|
Form
4 due July 2, 2008
|
July
3, 2008
|
Perry
D. Logan
|
Form
4 due October 3, 2008
|
October
23, 2008
|
Perry
D. Logan
|
Form
4 due November 18, 2008
|
December
1, 2008
|
Ted
Marek
|
Form
4 due March 5, 2008
|
March
10, 2008
|
Ted
Marek
|
Form
4 due March 13, 2008
|
March
20, 2008
|
Ted
Marek
|
Form
4 due March 13, 2008
|
March
26, 2008
|
Ted
Marek
|
Form
4 due June 2, 2008
|
June
9, 2008
|
Ted
Marek
|
Form
4 due June 6, 2008
|
June
12, 2008
|
Ted
Marek
|
Form
4 due June 18, 2008
|
June
24, 2008
|
Ted
Marek
|
Form
4 due July 2, 2008
|
July
3, 2008
|
Ted
Marek
|
Form
4 due August 1, 2008
|
August
4, 2008
|
Ted
Marek
|
Form
4 due August 20, 2008
|
August
21, 2008
|
Ted
Marek
|
Form
4 due September 29, 2008
|
October
2, 2008
|
Ted
Marek
|
Form
4 due October 3, 2008
|
October
23, 2008
|
Ted
Marek
|
Form
4 due November 3, 2008
|
November
12, 2008
|
Ted
Marek
|
Form
4 due November 18, 2008
|
December
1, 2008
|
Ted
Marek
|
Form
4 due December 5, 2008
|
December
11, 2008
|
Ted
Marek
|
Form
4 due December 18, 2008
|
December
22, 2008
|
Ted
Marek
|
Form
4 due December 30, 2008
|
January
6, 2009
|
Wesley
G. Sprunk
|
Form
4 due July 2, 2008
|
July
3,
2008
|
Code
of Ethics
The
Company maintains a Code of Ethics that was filed with its Annual Report on Form
10-KSB for the financial year ended December 31, 2007. That code applies to the
chief executive, senior management, directors, financial and accounting
officers, controller and persons performing similar functions.
ITEM 10.
|
DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE -
continued
|
Audit
Committee
The
Company’s Audit Committee consists of Directors: Logan (Chairman), Sprunk and
Marek. Mr. Marek has been designated by the Audit Committee as an “audit
committee financial expert.” As Mr. Marek is an officer of the
Company, he is not independent.
The
Company adopted a Corporate Governance Charter and Code of Ethics on March 1,
2007. The Corporate Governance Committee consists of: Logan
(Chairman), Sprunk and Marek. The Corporate Governance Charter adopted a
procedure whereby the Corporate Governance Committee of the Board must consider
nominations of potential directors to its board from shareholders and interested
parties alike.
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The table
below sets forth the remuneration of our chief executive officer during our last
two completed fiscal years (the years ended December 31, 2008 and December 31,
2007), as well as other executive officers whose total annual compensation
equaled or exceeded $100,000.
Summary
Compensation Table
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards ($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan Compensation ($)
|
Nonqualified
Deferred Compensation Earnings ($)
|
All
Other Compensation ($)
|
Total
($)
|
Perry
Logan, Chief Executive Officer, President (1)
|
2008
2007
|
-0-
-0-
|
-0-
-0-
|
120,000(2)
27,400
|
77,192(3)
-0-
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
197,192
27,400
|
Thaddeus
(Ted) F. Marek, Chief Financial Officer, Secretary-Treasurer, Chief
Accounting Office (4)
|
2008
2007
|
-0-
-0-
|
-0-
-0-
|
120,000(2)
27,400
|
77,192(3)
-0-
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
197,192
27,400
|
Gregg
C. Johnson, Executive Vice
President
|
2008
2007
|
135,074
95,500
|
5,073
-0-
|
-0-
-0-
|
77,192(3)
-0-
|
-0-
-0-
|
-0-
-0-
|
847
-0-
|
218,186
95,500
|
|
(1)
|
Mr.
Logan became our Chief Executive Officer and President on May 3,
2007.
|
|
(2)
|
Mr.
Marek and Mr. Logan received 50,000 shares each for service as director
and 250,000 shares each for consulting services.
|
|
(3)
|
On
October 1, 2008, each officer received an option to purchase 500,000
shares at $0.50 per share which is exercisable through October 1,
2013. The options were valued using the Black-Scholes model
with the following assumptions: a discounted stock price of
$0.18, exercise price of $0.50, 5-year option, risk-free rate of 3.3 and a
volatility rate of
149%.
|
|
(4)
|
Mr.
Marek became Secretary-Treasurer on May 3, 2007 and assumed the additional
roles as Chief Financial Officer and Chief Accounting Officer on October
28, 2008.
|
We
entered into Personal Services Agreements with Perry Logan and Ted Marek dated
May 15, 2008, that ended on December 31, 2008, and provided for automatic
renewals for successive 12-month periods unless earlier
terminated. Under the terms of the agreements, we are obligated to
pay each of them annual cash compensation of $120,000 and reimburse them for
vehicle operating and insurance costs. At the discretion of Mr. Logan
or Mr. Marek, the cash compensation may be paid in the form of shares of our
common stock priced at the lowest closing bid price of the stock over the ten
trading days prior to the issuance of the shares. Each received
options to purchase 500,000 shares of common stock exercisable at $0.50 per
share for a period of five years and piggy-back registration rights with respect
to the shares. The agreement may be terminated by us for cause or in
the event of death or disability or by Mr. Logan or Mr. Marek upon 90 days prior
written notice. The agreements include a two-year non-compete
provision.
ITEM 11.
|
EXECUTIVE
COMPENSATION -
continued
|
For the
2009 fiscal year, we pay Gregg Johnson annual cash compensation of $150,000 and
provide a monthly car allowance of $500 per month, as well as reimbursement of
vehicle operating and insurance costs. At our discretion, we may pay
up to $30,000 of the cash compensation in the form of shares of our common
stock, priced at the lowest closing bid price of the stock over the ten trading
days prior to the issuance of the shares. Mr. Johnson received options to
purchase 500,000 shares of common stock, exercisable at $0.50 per share for a
period of five years, and piggy-back registration rights with respect to the
shares. The agreement may be terminated by us for cause or in the
event of death or disability, or by Mr. Johnson upon 90 days prior written
notice. The agreement includes a two-year non-compete
provision.
Outstanding
Equity Awards at Fiscal Year-End
Name
|
OPTION
AWARDS
|
STOCK
AWARDS
|
Number
of Securities Underlying Unexercised Options (#)
Exercisable
|
Number
of Securities Underlying Unexercised Options (#)
Unexercisable
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options (#)
|
Option
Exercise Price ($)
|
Option
Expiration Date
|
Number
of Shares or Units of Stock that have not Vested(#)
|
Market
Value of Shares or Units of Stock that have not Vested($)
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights
that have not Vested (#)
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or
Other Rights that have not Vested ($)
|
Perry
Logan
|
500,000
|
-0-
|
-0-
|
0.50
|
10/1/2013
|
-0-
|
-0-
|
-0-
|
-0-
|
Thaddeus
(Ted) Marek
|
500,000
|
-0-
|
-0-
|
0.50
|
10/1/2013
|
-0-
|
-0-
|
-0-
|
-0-
|
Gregg
C. Johnson
|
500,000
|
-0-
|
-0-
|
0.50
|
10/1/2013
|
-0-
|
-0-
|
-0-
|
-0-
|
Each of
our non-employee directors receives reimbursement for expenses of attendance for
each scheduled meeting that requires physical attendance.
Compensation
for our directors for our last completed fiscal year is set forth below, with
the exception of Perry Logan and Ted Marek, whose compensation is disclosed
above.
Director
Compensation
Name
|
Fees
Earned or Paid in Cash ($)
|
Stock
Awards ($)
|
Option
Awards ($)
|
Non-Equity
Incentive Plan Compensation ($)
|
Non-qualified
Deferred
Compensation
Earnings
($)
|
All
Other Compensation ($)
|
Total
($)
|
Mark
D. Chester
|
-0-
|
40,000(1)
|
-0-
|
-0-
|
-0-
|
-0-
|
40,000
|
Barry
M. Goldwater, Jr.
|
-0-
|
40,000
|
-0-
|
-0-
|
-0-
|
-0-
|
40,000
|
Steven
G. Mihaylo
|
-0-
|
-0-
(2)
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
Wesley
G. Sprunk
|
-0-
|
40,000
|
-0-
|
-0-
|
-0-
|
-0-
|
40,000
|
(1)
|
Mr.
Chester’s awards do not include shares issued for legal services performed
for the Company.
|
(2)
|
Mr.
Mihaylo joined the Board in October, 2008 but did not serve long enough to
warrant payment at year end December 31,
2008.
|
Each
Director is entitled to receive 50,000 restricted common shares for each quarter
year of service to the Company.
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
The
following table sets forth certain information, as of March 10, 2009, concerning
shares of the Company’s common stock, the only class of securities that are
issued and outstanding, held by (1) each stockholder known to own beneficially
more than five percent of the common stock, (2) each of the directors, (3) each
of the executive officers, and (4) all of the directors and executive officers
as a group:
Name
and Address of Beneficial Owner (1)
|
Amount
and Nature of Beneficial Ownership
|
Percent
of Class (2)
|
Ted
F. Marek
9977
N. 90th Street,
Suite 220
Scottsdale,
AZ 85258
|
3,837,906
(3,5)
|
25.71%
|
Perry
D. Logan
PO
Box 35080
Las
Vegas, NV 89144
|
2,856,416
(4,5)
|
19.13%
|
D.
Scott Hemingway
1717
Main Street, Suite 2500
Dallas,
TX 75201
|
880,596
|
6.32%
|
Gregg
C. Johnson
7701
E. Gray Rd., Ste 104
Scottsdale,
AZ 85260
|
1,708,639
(5)
|
11.45%
|
Wesley
G. Sprunk
3451
S. 40th
Street
Phoenix,
AZ 85040
|
320,463
|
2.30%
|
Steven
G. Mihaylo
7701
E. Gray Rd., Ste 104
Scottsdale,
AZ 85260
|
6,100,000
(6)
|
32.06%
|
Barry
M. Goldwater, Jr.
3104
E. Camelback Road, Suite 274
Phoenix,
AZ 85106
|
134,027(7)
|
0.96%
|
Mark
D. Chester
8777
N. Gainey Ctr. Dr. Suite 191
Scottsdale,
AZ 85258
|
550,151(8)
|
3.94%
|
All
officers and directors as a group (7 persons)
|
15,507,602
(9)
|
70.40%
|
(1)
|
To
our knowledge, except as set forth in the footnotes to this table and
subject to applicable community property laws, each person named in the
table has sole voting and investment power with respect to the shares set
forth opposite such person’s name.
|
(2)
|
This
table is based on 13,927,915 shares of Common Stock outstanding as of
March 10, 2009. If a person listed on this table has the right
to obtain additional shares of Common Stock within sixty (60) days from
March 10, 2009, the additional shares are deemed to be outstanding for the
purpose of computing the percentage of class owned by such person, but are
not deemed to be outstanding for the purpose of computing the percentage
of any other person.
|
(3)
|
Includes
shares held of record by Ted Marek Family Trust and shares held of record
by Ted Marek Real Estate Defined Benefit Pension
Plan,
|
(4)
|
Includes
shares held of record by Perry and Rose Logan as Joint
Tenants.
|
(5)
|
Includes
1,000,000 shares issuable upon exercise of vested stock
options.
|
(6)
|
Includes
5,100,000 shares issuable upon conversion of amounts owed under the
Convertible Debenture between the Company and the Steven G. Mihaylo, Trust
(beneficially owned by Steven G.
Mihaylo).
|
(7)
|
Mr.
Goldwater ceased to be a Director on June 23,
2008.
|
(8)
|
Mr.
Chester ceased to be a Director on December 30,
2008.
|
(9)
|
Includes
8,100,000 shares issuable upon exercise of vested options or upon
conversion of debt to common shares under existing
debentures.
|
Changes
in Control
The
Company is not aware of any arrangements which may result in a change in control
of the Company, other than the possible issuance of shares upon conversion of
amounts owed under the convertible debenture between the Company and the Steven
G. Mihaylo Trust.
Equity
Compensation Plans
As of
December 31, 2008 our equity compensation plans were as follows:
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans
|
Equity
compensation plans approved by security holders
|
|
|
|
Equity
compensation plans not approved by security holders
|
|
|
|
|
|
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS -
continued
|
Equity Compensation
Plans -
continued
The
Company has granted options to (1) Sundance Financial Corp. and Digital
Crossing, LLC, to purchase 75,000 shares each of common stock at an exercise
price of $2.00 per share. The option may be exercised, in whole or in part, at
any time within a ten-year period beginning February 11, 2004, and ending
February 11, 2014; and to (2) Ted Marek, Perry Logan and Gregg Johnson to
purchase 500,000 shares each of common stock at an exercise price of $0.50 per
share. The option may be exercised, in whole or in part, at any time within a
five-year period beginning October 1, 2008, and ending October 1, 2013; and to
(3) Ted Marek, Perry Logan and Gregg Johnson to purchase 500,000
shares each of common stock at an exercise price of $0.50 per share. The option
may be exercised, in whole or in part, at any time within a five-year period
beginning March, 2009, and ending February 28, 2014; and to
(4) Ronald O. Abernathy to purchase 12,500 shares of common
stock at an exercise price of $2.00 per share. The option may be
exercised, in whole or in part, at any time within a five-year period beginning
September 8, 2006, and ending September 7, 2011; and to (5) Mark D. Chester to
purchase 37,500 shares at an exercise price of $2.00 per share. The options may
be exercised, in whole or in part, at any time within a five-year period
beginning September 8, 2006 and ending September 7, 2011. All outstanding
options are fully exercisable as of the grant date, and require that the
exercise price be paid in cash. The number of shares purchasable upon exercise
of such option are subject to certain adjustments, and in certain circumstances
the price per share may also be adjusted. The grantees have unlimited piggy-back
registration rights to have shares purchased pursuant to the option included in
any registration statement filed by the Company.
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|
Other
than as disclosed below, none of the Company’s present directors, officers or
principal shareholders, nor any family member of the foregoing, nor, to the best
of the Company’s information and belief, any of its former directors, senior
officers or principal shareholders, nor any family member of such former
directors, officers or principal shareholders, has or had any material interest,
direct or indirect, in any transaction, or in any proposed transaction
which has materially affected or will materially affect the
Company.
Professional
Fee Retainer Agreements
The
Company entered into professional fee retainer agreement with Chester &
Schein, PLLC, a law firm partnership among Mark Chester and
others. Mark Chester was a director of the Company from September
2006 until his resignation on December 30, 2008. Mr. Chester’s firm
provided outside legal counsel services to the Company during the year until the
termination of the agreement effective November 1, 2008. During
the duration of the agreement Chester & Schein, PLLC was compensated at
a variable rate of $10,000 per month and $7,500 per month, with all such fees
paid in the Company’s common stock at the rate of $0.80 per common
share.
During
the year ended December 31, 2008, the Company issued 137,500 shares to Mark D.
Chester, the director, for legal services valued at $110,000.
Other
Amounts Owed to Related Parties
At
December 31, 2008, the following amounts were owed to related
parties:
Name
|
Relationship
|
Amount
|
Factual
Background
|
Steven
D. Mihaylo
|
Chairman
and director
|
$900,000
|
Unsecured
convertible debenture issued in 2008 that accrues interest at 10% per
annum(1)
|
Ted
F. Marek
|
Officer
and director
|
$140,000
|
Short
Term note issued in 2008 that accrues interest at 15% per
annum.
|
(1)
|
As
of March 10, 2009 the debenture indebtedness was
$1,275,000.
|
(2)
|
As
of March 10, 2009 the principal balance of the short term note was
$120,000.
|
On
September 17, 2008, we executed a convertible debenture in favor of the Steven
G. Mihaylo Trust, as restated, dated December 13, 2001 the (“Mihaylo
Trust”), pursuant to which we received a working capital facility of up to
$1,500,000. We have been using the working capital facility for
general working capital purposes including, specifically, funds to enable us to
commence the commercial production and sale of our patented FORTIS™ line of electric
tankless water heaters, as well as the certification and commercialization of a
suite of products utilizing our patented Paradigm™
technology.
We may
draw up to $1,500,000 during the term of the Debenture that expires on September
16, 2013 (the “Maturity Date”). We have 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. We have reserved the right to prepay the Debenture without
penalty upon the giving of Notice. The Mihaylo Trust has the right to
convert, at any time, all or any portion of the Debenture into shares of our
common stock 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.
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 when due of principal and interest or of
any other payment as provided in the Debenture; (b) if we, excluding any
subsidiary or affiliate of ours (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 us or any of our property; (ii) become generally
unable to pay our debts as they become due; (iii) make a general assignment for
the benefit of creditors or becomes insolvent; (iv) file or are served with any
petition for relief under the Bankruptcy Code or any
similar federal or state statute; or (v) default 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 us issue and deliver
shares of common stock as provided in the Debenture.
Mr.
Mihaylo was not a director at the time of this transaction. He became
a director on October 24, 2008.
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE -
continued
|
Purchase
of Common Stock
During
the year ended December 31, 2008, Ted Marek and Steven Mihaylo purchased 316,400
and 1,000,000 shares, respectively, for total cash consideration of
$421,250.
Issuance
of Common Stock to Repay Debt
During
the year ended December 31, 2008, we issued shares of our common stock to the
following for the repayment of debt:
Name
|
|
Number
of Shares Issued
|
|
|
Amount
of Debt Repaid
|
|
Wesley
G. Sprunk
|
|
196,000
|
|
|
$ |
62,720
|
|
Ted
Marek
|
|
1,371,875
|
|
|
$ |
439,000
|
|
Perry
Logan
|
|
1,371,875
|
|
|
$ |
439,000
|
|
Gregg
Johnson
|
|
|
448,500 |
|
|
$ |
143,520 |
|
Future
Transactions
All
future affiliated transactions are expected to be made or entered into on terms
that are no less favorable to the Company than those that can be obtained from
any unaffiliated third party. A majority of the independent, disinterested
members of the Company’s Board of Directors are asked to approve future
affiliated transactions. The Company believes that of the transactions described
above have been on terms as favorable to it as could have been obtained from
unaffiliated third parties as a result of arm’s length
negotiations.
Conflicts
of Interest
In
accordance with the laws applicable to the Company, its directors are required
to act honestly and in good faith with a view to the Company’s best interests.
In the event that a conflict of interest arises at a meeting of the Board of
Directors, a director who has such a conflict is expected to disclose the nature
and extent of his interest to those present at the meeting and to abstain from
voting for or against the approval of the matter in which he has a
conflict.
Director
Independence
Our
common stock trades in the OTC Bulletin Board. As such, we are not
currently subject to corporate governance standards of listed companies, which
require, among other things, that the majority of the board of directors be
independent.
Since we
are not currently subject to corporate governance standards relating to the
independence of our directors, we choose to define an “independent” director in
accordance with the NASDAQ Global Market’s requirements for independent
directors (NASDAQ Marketplace Rule 4200). The NASDAQ independence
definition includes a series of objective tests, such as that the director is
not an employee of the company and has not engaged in various types of business
dealings with the company.
Wesley G.
Sprunk and Steven G. Mihaylo are independent directors under the above
definition. We do not list that definition on our Internet
website.
We
presently do not have a compensation committee, nominating committee, executive
committee of our Board of Directors, stock plan committee or any other
committees, except for an Audit Committee and Corporate Governance Committee
that performs all of the functions of a compensation, nominating, stock plan and
executive committee of the Board of Directors.
ITEM 14.
|
PRINCIPAL ACCOUNTING FEES AND
SERVICES
|
Audit
Fees
Moore and
Associates, Chartered, billed the Company $12,500 for the audit of the 2008
annual financial statement. For the fiscal year ended December 31, 2007, Moore
and Associates, Chartered billed $20,000 for the 2007 annual audit and reviews
of its quarterly financial statements.
Audit-Related
Fees
There
were no fees billed for services reasonably related to the performance of the
audit or review of our financial statements outside of those fees disclosed
above under “Audit Fees” for fiscal years 2008 and 2007.
Tax
Fees
There
were no fees billed for tax compliance, tax advice, and tax planning services
for the fiscal years ended December 31, 2008 and 2007.
All
Other Fees
There
were no fees billed for other services for the fiscal years ended December 31,
2008 and 2007.
ITEM 14.
|
PRINCIPAL ACCOUNTING
FEES AND SERVICES -
continued
|
Pre-Approval
Policies and Procedures
Prior to
engaging the accountants or auditors to perform a particular service, the
Company’s Board of Directors obtains an estimate for the service to be
performed. The Board in accordance with Company procedures approved all of the
services described above.
PART IV
ITEM
15.
|
EXHIBITS, FINANCIAL STATEMENT
SCHEDULES
|
|
|
|
Agreement
of Share Exchange and Plan of Reorganization dated November 4, 2003
(1)
|
|
Articles
of Incorporation of Amexan, Inc (2)
|
|
Articles
of Amendment of Articles of Incorporation of Amexan, Inc.
(2)
|
|
Articles
of Amendment of Articles of Incorporation of Nostalgia Motors, Inc.
(3)
|
|
Articles
of Amendment of Articles of Incorporation of Elution Technologies, Inc.
(4)
|
|
Articles
of Amendment of Articles of Incorporation of Tankless Systems Worldwide,
Inc. (5)
|
|
|
|
Certificate
of Change Pursuant to NRS 78.209, as corrected
(7)
|
|
2003
Stock Incentive Plan (8)
|
|
2003
Stock Incentive Plan #2 (9)
|
|
2005
Stock Incentive Plan (10)
|
|
Manufacturing
Services Agreement between Jabil Circuit, Inc., and Skye International,
Inc. (11)
|
|
Consulting
Agreement between Skye International, Inc., and Sundance Financial Corp,
including amendments (5)
|
|
Consulting
Agreement between Skye International, Inc., and Digital Crossing, LLC,
including amendments (5)
|
|
Stock
Option Agreement between Skye International, Inc., and Sundance Financial
Corp., including amendments (5)
|
|
Stock
Option Agreement between Skye International, Inc., and Digital Crossing,
LLC, including amendments (5)
|
|
Steven
G. Mihaylo Trust Convertible Debenture (12)
|
|
Loan
Agreement with Thaddeus (Ted) F. Marek dated October 12,
2007
|
|
Loan
Agreement with Perry Logan dated October 12,
2007
|
10.12 |
Security
Agreement with Thaddeus (Ted) F. Marek dated October 12, 2007 |
10.13 |
Security
Agreement with Perry Logan dated October 12, 2007 |
10.14 |
15%
Secured Convertible Promissory Note with Thaddeus (Ted) F. Marek
dated October 12, 2007 |
10.15 |
15%
Secured Convertible Promissory Note with Perry Logan dated October
12, 2007 |
|
Personal
Services Agreement with Perry D. Logan dated May 15,
2008
|
|
Personal
Services Agreement with Thaddeus (Ted) F. Marek dated May 15,
2008
|
|
|
|
Letter
from Shelley International, CPA (14)
|
|
Letter
from Semple & Cooper, CPA (15)
|
|
Subsidiaries
of Skye International, Inc. (5)
|
23.1 |
Consent
of Moore & Associates, Chartered |
|
Rule
13a-14(a) Certification of Chief Executive
Officer
|
|
Rule
13a-14(a) Certification of Chief Financial
Officer
|
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 of Chief Executive
Officer
|
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 of Chief Financial
Officer
|