skye_international-10q.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
(Mark
One)
x QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended March 31, 2009
o TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from ________________ to
________________
Commission
file number 0-27549
(Exact
name of registrant as specified in its charter)
Nevada
|
88-0362112
|
(State
or other jurisdiction of
incorporation
or organization)
|
(IRS
Employer
Identification
No.)
|
7701
E. Gray Rd, Suite 104 Scottsdale, AZ 85260
(Address
of principal executive offices) (Zip Code)
(480)
993-2300
(Registrant’s
telephone number, including area code)
Not
applicable
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. x
Yes o No
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such
files). o Yes
o No (Not
required)
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer
|
o
|
Accelerated
filer
|
o
|
Non-accelerated
filer
|
o
|
Smaller
reporting company
|
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). o
Yes x No
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: 14,565,015 shares of Common Stock, $0.001 par value,
as of April 21, 2009.
|
Index
|
Page
Number
|
|
|
|
PART
I
|
FINANCIAL
INFORMATION
|
3
|
|
|
|
ITEM
1.
|
Financial
Statements (unaudited)
|
3
|
|
|
|
|
Consolidated
Balance Sheets as of March 31, 2009 (unaudited) and December 31,
2008
|
3
|
|
|
|
|
Consolidated
Statements of Operations for the three months ended March 31,
2009 and 2008 (unaudited)
|
4
|
|
|
|
|
Consolidated
Statements of Stockholders' Deficit cumulative from December 31, 2007
to March 31, 2009 (unaudited)
|
5
|
|
|
|
|
Consolidated
Statements of Cash Flows for three months ended March 31, 2009 and
2008 (unaudited)
|
6
|
|
|
|
|
Notes
to Financial Statements (unaudited)
|
7
|
|
|
|
ITEM
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
9
|
|
|
|
ITEM
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
14
|
|
|
|
ITEM
4T.
|
Controls
and Procedures
|
14
|
|
|
|
PART
II
|
OTHER
INFORMATION
|
15
|
|
|
|
ITEM
1.
|
Legal
Proceedings
|
15
|
|
|
|
ITEM
1A.
|
Risk
Factors
|
15
|
|
|
|
ITEM
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
16
|
|
|
|
ITEM
3.
|
Defaults
Upon Senior Securities
|
17
|
|
|
|
ITEM
4.
|
Submission
of Matters to Vote of Security Holders
|
17
|
|
|
|
ITEM
5.
|
Other
Information
|
17
|
|
|
|
ITEM
6.
|
Exhibits
|
18
|
|
|
|
SIGNATURES
|
|
18
|
PART
I - FINANCIAL INFORMATION
Skye
International, Inc. and Subsidiaries
|
CONSOLIDATED BALANCE
SHEETS
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
|
|
$ |
973 |
|
|
$ |
37,822 |
|
Accounts
Receivable
|
|
|
26,060 |
|
|
|
4,852 |
|
Inventory
|
|
|
541,874 |
|
|
|
443,978 |
|
Prepaid
Expenses
|
|
|
93,847 |
|
|
|
91,671 |
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
662,754 |
|
|
|
578,323 |
|
|
|
|
|
|
|
|
|
|
EQUIPMENT,
NET
|
|
|
74,516 |
|
|
|
77,638 |
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
2,460 |
|
|
|
2,460 |
|
|
|
|
|
|
|
|
|
|
Total
Other Assets
|
|
|
2,460 |
|
|
|
2,460 |
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
739,730 |
|
|
$ |
658,421 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
$ |
345,963 |
|
|
$ |
312,189 |
|
Accrued
Expenses
|
|
|
40,018 |
|
|
|
82,041 |
|
Notes
Payable - Related Parties
|
|
|
400,500 |
|
|
|
413,000 |
|
Current
portion, Long term debt
|
|
|
3.305 |
|
|
|
4,407 |
|
Accrued
Interest Payable
|
|
|
172,141 |
|
|
|
134,414 |
|
Warranty
Accrual
|
|
|
41,584 |
|
|
|
43,486 |
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
1,003,511 |
|
|
|
989,537 |
|
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
|
8,636 |
|
|
|
8,814 |
|
Convertible
Notes Payable, net
|
|
|
387,777 |
|
|
|
8,055 |
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
1,399,924 |
|
|
|
1,006,406 |
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
Common
Stock: 25,000,000 shares
|
|
|
|
|
|
|
|
|
authorized
at $0.001par value;
|
|
|
|
|
|
|
|
|
Issued
and outstanding 13,927,915 and
|
|
|
|
|
|
|
|
|
13,927,915
shares, respectively
|
|
|
13,928 |
|
|
|
13,928 |
|
Common
Stock Subscribed
|
|
|
92,000 |
|
|
|
(24,000 |
) |
Additional
Paid in Capital
|
|
|
14,728,057 |
|
|
|
14,728,057 |
|
Accumulated
Deficit
|
|
|
(15,494,179
|
) |
|
|
(15,065,970
|
) |
|
|
|
|
|
|
|
|
|
Total
Stockholders' Equity (Deficit)
|
|
|
(660,194
|
) |
|
|
(347,985
|
) |
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND
|
|
|
|
|
|
|
|
|
STOCKHOLDERS
EQUITY (DEFICIT)
|
|
$ |
739,730 |
|
|
$ |
658,421 |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these statements.
Skye
International, Inc. and Subsidiaries
|
|
CONSOLIDATED STATEMENTS OF
OPERATIONS
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
REVENUES
|
|
|
|
|
|
|
Product
Sales
|
|
$ |
44,989 |
|
|
$ |
23,750 |
|
Other
Income
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Total
Revenues
|
|
|
44,989 |
|
|
|
23,750 |
|
|
|
|
|
|
|
|
|
|
Cost
of Goods Sold
|
|
|
42,451 |
|
|
|
17,500 |
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
2,538 |
|
|
|
6,250 |
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
Legal
and Professional
|
|
|
130,515 |
|
|
|
67,008 |
|
General
and Administrative
|
|
|
192,426 |
|
|
|
119,656 |
|
Research
and Development
|
|
|
6,728 |
|
|
|
8,799 |
|
Advertising
and Marketing
|
|
|
47,540 |
|
|
|
3,337 |
|
Depreciation
|
|
|
6,052 |
|
|
|
2,713 |
|
|
|
|
|
|
|
|
|
|
Total
Expenses
|
|
|
383,261 |
|
|
|
201,513 |
|
|
|
|
|
|
|
|
|
|
Net
(Loss) from Operations
|
|
|
(380,723
|
) |
|
|
(195,263
|
) |
|
|
|
|
|
|
|
|
|
OTHER
INCOME AND (EXPENSE)
|
|
|
|
|
|
|
|
|
Gain
on Extinguishment of Debt
|
|
|
- |
|
|
|
479,922 |
|
Interest
Expense
|
|
|
(47,486
|
) |
|
|
(51,369
|
) |
|
|
|
|
|
|
|
|
|
Total
Other Income (Expense)
|
|
|
(47,486 |
) |
|
|
428,553 |
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) before Income Taxes
|
|
|
(428,209 |
) |
|
|
233,290 |
|
|
|
|
|
|
|
|
|
|
Income
Tax Expense
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$ |
(428,209 |
) |
|
$ |
233,290 |
|
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings (loss) per common share
|
|
$ |
(0.03 |
) |
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Common
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
|
13,927,915 |
|
|
|
7,481,813 |
|
The
accompanying notes are an integral part of these statements.
Skye
International, Inc., and Subsidiaries
|
|
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(DEFICIT)
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Common
Stock
|
|
|
Paid
in
|
|
|
Accumulated
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Subscribed
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2007
|
|
|
7,481,813 |
|
|
$ |
7,482 |
|
|
$ |
108,675 |
|
|
$ |
11,152,910 |
|
|
$ |
(14,536,470 |
) |
|
$ |
(3,267,403 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for related party services
|
|
|
62,500 |
|
|
|
62 |
|
|
|
|
|
|
|
49,938 |
|
|
|
|
|
|
|
50,000 |
|
Common
stock issued for consulting services
|
|
|
1,204,905 |
|
|
|
1,205 |
|
|
|
|
|
|
|
692,590 |
|
|
|
|
|
|
|
693,795 |
|
Common
stock issued for cash
|
|
|
1,672,656 |
|
|
|
1,673 |
|
|
|
(24,000 |
) |
|
|
533,577 |
|
|
|
|
|
|
|
511,250 |
|
Common
stock issued for related party debt
|
|
|
3,506,104 |
|
|
|
3,506 |
|
|
|
(108,675 |
) |
|
|
1,167,465 |
|
|
|
|
|
|
|
1,062,296 |
|
Beneficial
conversion feature
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
900,000 |
|
|
|
|
|
|
|
900,000 |
|
Fair
Value Options Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
231,577 |
|
|
|
|
|
|
|
231,577
|
|
Fractional
shares cancelled in reverse stock split
|
|
|
(63 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(529,500 |
) |
|
|
(529,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2008
|
|
|
13,927,915 |
|
|
|
13,928 |
|
|
|
(24,000 |
) |
|
|
14,728,057 |
|
|
|
(15,065,970 |
) |
|
|
(347.985 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Subscribed To Be Issued
|
|
|
|
|
|
|
|
|
|
|
116,000 |
|
|
|
|
|
|
|
|
|
|
|
116,000 |
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(428,209 |
) |
|
|
(428,209 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
March 31, 2009
|
|
|
13,927,915 |
|
|
$ |
13,928 |
|
|
$ |
92,000 |
|
|
$ |
14,728,057 |
|
|
$ |
(15,494,179 |
) |
|
$ |
(660,194 |
) |
The
accompanying notes are an integral part of these statements.
Skye
international, Inc. and Subsidiaries
|
|
CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$ |
(428,209 |
) |
|
$ |
233,290 |
|
Gain
on Extinguishment of Debt
|
|
|
|
|
|
|
(479,922 |
) |
Depreciation
Expense
|
|
|
6,052 |
|
|
|
2,713 |
|
Amortization
of Discount on Notes Payable
|
|
|
4,722 |
|
|
|
- |
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
(97,896
|
) |
|
|
10,596 |
|
Accounts
Receivable
|
|
|
(21,208
|
) |
|
|
(23,750 |
) |
Prepaid
Expense
|
|
|
(2,176 |
) |
|
|
(3,117 |
) |
|
|
|
|
|
|
|
|
|
Accrued
Interest Payable
|
|
|
37,727 |
|
|
|
(7,500 |
) |
Accounts
Payable and Accrued Expenses
|
|
|
(10,151 |
) |
|
|
24,507 |
|
|
|
|
|
|
|
|
|
|
Net
Cash (Used) in Operating Activities
|
|
|
(511,139
|
) |
|
|
(243,183
|
) |
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of
Assets
|
|
|
(2,930
|
) |
|
|
(8,425
|
) |
|
|
|
|
|
|
|
|
|
Net
Cash (Used) in Investing Activities
|
|
|
(2,930
|
) |
|
|
(8,425
|
) |
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Subscriptions
|
|
|
116,000 |
|
|
|
2,034 |
|
Repayment
of Notes Payable
|
|
|
(13,780
|
) |
|
|
- |
|
Proceeds
from Notes Payable
|
|
|
375,000 |
|
|
|
240,000 |
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by Financing Activities
|
|
|
477,220 |
|
|
|
242,034 |
|
|
|
|
|
|
|
|
|
|
Net
Increase/(Decrease) in Cash
|
|
|
(36,849 |
) |
|
|
(9,574
|
) |
|
|
|
|
|
|
|
|
|
Cash,
Beginning of Period
|
|
|
37,822 |
|
|
|
35,331 |
|
|
|
|
|
|
|
|
|
|
Cash,
End of Period
|
|
$ |
973 |
|
|
$ |
25,757 |
|
|
|
|
|
|
|
|
|
|
Supplemental
Information:
|
|
|
|
|
|
|
|
|
Cash
Paid for:
|
|
|
|
|
|
|
|
|
Income
Taxes
|
|
$ |
- |
|
|
$ |
- |
|
Interest
Expense
|
|
$ |
4,667 |
|
|
$ |
58,869 |
|
|
|
|
|
|
|
|
|
|
Non
Cash Financing Activities:
|
|
|
|
|
|
|
|
|
Common
Stock Issued for Debt
|
|
$ |
- |
|
|
$ |
- |
|
The
accompanying notes are an integral part of these statements.
SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to
the Condensed Financial Statements
March 31,
2009 (unaudited)
NOTE
1 -
|
CONDENSED
FINANCIAL STATEMENTS
The
accompanying financial statements have been prepared by the Company
without audit. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present
fairly the financial position, results of operations, and cash flows at
March 31, 2009, and for all periods presented herein, have been
made.
Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or
omitted. It is suggested that these condensed financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company’s December 31, 2008 audited financial
statements. The results of operations for the periods ended
March 31, 2009 and 2008 are not necessarily indicative of the operating
results for the full years.
|
NOTE
2 -
|
GOING
CONCERN
The
Company’s financial statements are prepared using generally accepted
accounting principles applicable to a going concern, which contemplates
the realization of assets and liquidation of liabilities in the normal
course of business. The Company has not yet established an
ongoing source of revenues sufficient to cover its operating costs and
allow it to continue as a going concern. Historically, the
Company has incurred significant annual losses, which have resulted in an
accumulated deficit of $15,494,179 at March 31, 2009 and raises
substantial doubt about the Company’s ability to continue as a going
concern. The ability of the Company to continue as a going
concern is dependent on the Company increasing sales to the point it
becomes profitable. The Company may need to raise additional
capital for marketing to increase its sales. If the Company is unable to
increase sales sufficiently or obtain adequate capital, it could be forced
to cease operation. The accompanying financial statements do
not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification
of liabilities that might result from the outcome of this
uncertainty.
Management
plans to increase sales by increasing its marketing program and to obtain
additional capital from the private placement of shares of its common
stock. However, management cannot provide any assurances that the Company
will be successful in accomplishing any of its
plans.
|
NOTE
3 -
|
SUBSEQUENT
EVENTS
Subsequent to March 31, 2009, the Company
issued 277,100 shares of its common stock at $.25 per share for services
performed, 260,000 shares of its common stock at $.25 per share for cash,
and 100,000 shares of its common stock at $.27 per share for
cash.
|
NOTE
4 -
|
INVENTORY
The Company contracts with several third
parties to manufacture Fortis units, sub and final assemblies. Parts and
material inventory is stated at the lower of cost (first-in, first-out) or
net realizable value of $541,874 at March 31, 2009. Parts
and materials purchased for development and testing are directly expensed
to Research and Development.
|
NOTE
5 -
|
USE
OF ESTIMATES
The discussion and analysis of the Company's
financial condition and results of operations are based upon the Company's
consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires making estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from these
estimates under different assumptions or conditions. Critical accounting
policies are defined as those that entail significant judgments and
estimates, and could potentially result in materially different results
under different assumptions and
conditions.
|
FORWARD-LOOKING
STATEMENTS
This
document 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, but not limited to, any
projections of earnings, revenue or other financial items; any statements of the
plans, strategies and objections of management for future operations; any
statements concerning proposed new services or developments; any statements
regarding future economic conditions or performance; any statements or belief;
and any statements of assumptions underlying any of the foregoing.
Forward-looking
statements may include the words “may,” “could,” “estimate,” “intend,”
“continue,” “believe,” “expect” or “anticipate” or other similar words. These
forward-looking statements present our estimates and assumptions only as of the
date of this report. Accordingly, readers are cautioned not to place undue
reliance on forward-looking statements, which speak only as of the dates on
which they are made. Except for our ongoing securities laws, we do not intend,
and undertake no obligation, to update any forward-looking
statement. Additionally, the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 most likely do not apply to our
forward-looking statements as a result of being a penny stock
issuer. You should, however, consult further disclosures we make in
future filings of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q
and Current Reports on Form 8-K.
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 inherent risks and
uncertainties. The factors impacting these risks and uncertainties
include, but are not limited to:
o
|
our
ability to diversify our operations;
|
o
|
our
ability to successfully compete in the energy efficient
industry;
|
o
|
inability
to raise additional financing for working capital;
|
o
|
the
fact that our accounting policies and methods are fundamental to how we
report our financial condition and results of operation which may require
management to make estimates about matters that are inherently
uncertain;
|
o
|
our
ability to attract key personnel;
|
o
|
our
ability to operate profitably;
|
o
|
deterioration
in general or regional economic conditions;
|
o
|
changes
in U.S. GAAP or in the legal, regulatory and legislative environments in
the markets in which we operate;
|
o
|
adverse
state or federal legislation or regulation that increases the costs of
compliance, or adverse findings by a regulator with respect to existing
operations;
|
o
|
inability
to achieve future sales levels or other operating
results;
|
o
|
the
inability of management to effectively implement our strategies and
business plans;
|
o
|
the
unavailability of funds for capital
expenditures.
|
AVAILABLE
INFORMATION
We file
annual, quarterly and special reports and other information with the SEC that
can be inspected and copied at the public reference facility maintained by the
SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549-0405. Information
regarding the public reference facilities may be obtained from the SEC by
telephoning 1-800-SEC-0330. The Company’s filings are also available through the
SEC’s Electronic Data Gathering Analysis and Retrieval System which is publicly
available through the SEC’s website (www.sec.gov). Copies of such materials may
also be obtained by mail from the public reference section of the SEC at 100 F
Street, N.E., Room 1580, Washington, D.C. 20549-0405 at prescribed
rates.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
following discussion should be read in conjunction with the financial statements
and accompanying notes included in this Form 10-Q.
Plan
of Operation
The
Company is in the business of designing, developing, manufacturing and marketing
consumer lifestyle products including, initially, several models of electric
tankless and point-of-use water heaters. The FORTIS™, Paradigm™ and HeatWave™ product lines, as
well as future product lines, are sold primarily through manufacturer
representatives in the wholesale market.
A
critical component of our operating plan impacting our continued existence is
the ability to obtain additional capital through equity and/or debt financing.
Since inception, we have financed our cash flow requirements through issuances
of debt and common stock and cash generated from our limited operations. As we
continue our activities, we will continue to experience net negative cash flows
from operations, pending receipt of significant revenues that generate a
positive sales margin. Commencing in the first quarter of 2007 and
continuing throughout the first quarter of 2009, all of the Company’s cash
needs were met through loans advanced to the Company by certain of
its directors as well as private placements of common stock to third
parties.
The
Company expects that additional operating losses will occur until net margins
gained from sales revenue is sufficient to offset the costs incurred for
marketing, sales and product development. Until the Company has achieved a sales
level sufficient to break even, it will not be self-sustaining nor be
competitive in the areas in which it intends to operate. The Company will
require additional funds to continue commercial production of the FORTIS™, to tool up for
production of the Paradigm™, to commence
distribution of the HeatWave™ product line, and
to fully implement its marketing plans. Additionally, the Company
will also require further development funds in order to engineer additional
product lines utilizing the patented Paradigm™ technology. We
anticipate obtaining additional financing to fund operations through common
stock offerings, debt offerings and bank borrowings, to the extent available, or
to obtain additional financing, to the extent necessary, to augment our working
capital. In the event we cannot obtain the necessary capital to
pursue our strategic business plan, we may have to significantly curtail our
operations. This would materially impact our ability to continue
operations. There is no assurance that the Company will be able to obtain
additional funding when needed, or that such funding, if available, can be
obtained on terms acceptable to the Company.
As of
December 31, 2008 and continuing through March 31, 2009, the existing capital
and anticipated funds from operations were not sufficient to sustain Company
operations or the business plan over the next twelve months. We anticipate
substantial increases in our cash requirements which will require additional
capital generated from the sale of common stock, the sale of preferred stock, or
debt financing. Recent global events, as well as domestic economic factors, have
recently limited the access of many companies to both debt and equity
financings. As such, no assurance can be made that financing will be available
or available on terms acceptable to the Company, and, if available, it may take
either the form of debt or equity. In either case, any financing will have a
negative impact on our financial condition and will likely result in an
immediate and substantial dilution to our existing
stockholders.
Satisfaction
of our cash obligations for the next 12 months.
As of
March 31, 2009, we had available cash of $973, which will not be enough to
pursue our business plan. With the intention to continue to expand
FORTIS™ production and
add both the Paradigm™ and HeatWave™ product lines to
our sales during the next twelve months we plan to seek financing opportunities,
including further draws on the established debenture financing with our
Chairman, Steven G. Mihaylo. We plan to seek additional funding for
operations through equity and/or debt or other means that may become available
to us. If we are not able to receive any additional funds, we cannot
continue our proposed business operations.
Summary
of any product research and development that we will perform for the term of the
plan.
We
anticipate contracting with outside engineering firms to provide the necessary
research and development for new product lines incorporating the Company’s Paradigm™
technology. However, at this point in time, we are unable to estimate
how much those costs will be.
Expected
purchase or sale of plant and significant equipment.
As we
continue to grow our sales force we expect that it will be necessary to relocate
into larger facilities capable of accommodating limited trans-shipping of parts
and components used in the manufacturing process of our
products. Additionally, as we add new sales territories we expect
that it will be necessary to add new computer hardware and software capable of
assisting in the sales and customer service process. We will also
work to integrate our accounting and inventory systems so as to provide real
time access to critical product inventory information to aide in the timely
distribution of our products to our customers.
Significant
changes in number of employees.
We
entered into personal services agreements with our Chief Executive Officer,
Perry Logan and our Chief Financial Officer and Secretary, Ted Marek during the
second quarter of 2008. The agreements are for a one year term and
are automatically renewed. The Company agrees to pay Messrs.
Logan and Marek a base salary of $120,000 per annum payable in common stock of
the Company. Also, during the first quarter of 2009, we executed an
employment agreement with L. Fred Huggins, to serve as our Vice President of
Sales and Marketing. Mr. Huggins agreed to serve in this position for
two years at a base
salary of $120,000 per year and an additional stock-based compensation of
$30,000 per year.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-
continued
|
Executive
Summary
The
Company’s business is the design production, marketing and sale of consumer
appliances. The Company’s premier consumer product is the FORTIS ™, a new series of
electric tankless water heater. The Company markets the FORTIS ™ tankless water
heater 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
technology that the Company refers to as the 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 UL499 and CSA C22.2 No.
64 standards, the Company 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 relationship with contract manufacturers – Electrosem,
LLC to produce its FORTIS
™ product line and Zhijiang
Riches Electric Appliance Co. Ltd. to produce its HeatWave™ product line. With
respect to 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
investigation. 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.
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 HeatWave™ brand in our
markets. We expect that commercial volumes of our HeatWave™ branded
point-of-use water heaters will be available to the market in the second quarter
2009. We will also focus our efforts on completing the safety
certification of our Paradigm™ series of
residential point-of-use water heaters with an expectation that such
certification will be received during the second quarter of
2009. Once the safety certification is complete we will work to
commence production of the Paradigm™ product series, and
it is likely we will commence such production in the late third quarter or early
fourth quarter of 2009.
Additionally,
we will continue to work and build our sales and customer service infrastructure
to support product sales and revenue for the Company. Having recently appointed
a VP of Sales & Marketing, we are now positioned to build out the sales and
service infrastructure necessary to distribute our products on a national
level. We are currently engaged in a concerted effort to appoint
Manufacturer Representatives over the balance of states in which we initially
intend to focus our sales efforts. We expect to complete this
appointment process by the end of the second quarter of 2009. On a
parallel track we have worked to increase our web presence at www.tankless.com.
Over the course of the next few months we expect to add new features and
functionality to our website including streaming video guides for installation,
as well as direct EDI connections to our largest customers. All of
our efforts are being done with a view to building a high quality brand that
will continue to garner recognition in the industry as a premier supplier of
high-end appliances. We will continue to support our wholesale
distribution channel and work with our customers and wholesale partners to grow
our business into a respected and trusted manufacturer of high-quality
appliances.
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 our 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 the 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.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-
continued
|
Results of
Operations
Revenues
For
three months ended March 31:
|
2009
|
2008
|
Increase/(decrease)
|
$
|
%
|
Revenue
|
$44,989
|
$23,750
|
$21,239
|
89
|
Revenues
for the first quarter ended March 31, 2009 were $44,989 compared to revenues of
$23,750 for the three months ended March 31, 2008. Revenues
recorded are for product sold and shipped.
General and Administrative
expenses
For
three months ended March 31:
|
2009
|
2008
|
Increase/(decrease)
|
$
|
%
|
General
& Administrative expenses
|
$192,426
|
$119,656
|
$72,770
|
61
|
General
and administrative expenses increased by $72,770 during the three-month period
ended March 31, 2009 as compared to the same period in 2008 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 2009.
Total
Operating Expenses
For
three months ended March 31:
|
2009
|
2008
|
Increase/(decrease)
|
$
|
%
|
Total
operating expenses
|
$383,261
|
$201,513
|
$181,748
|
90
|
Overall
operating expenses during the quarter ended March 31,
2009 increased by $181,748 or approximately 90% because of
additional costs incurred in connection with the addition of sales and marketing
personnel as well as the addition of certain administrative
personnel.
Other
Income (Expense)
For
three months ended March 31:
|
2009
|
2008
|
Increase/(decrease)
|
$
|
%
|
Total
other income (expense)
|
$
(47,486)
|
$
428,553
|
$(476,039)
|
111
|
The
Company began winding-up several of its subsidiaries during the first quarter of
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 during the quarter ended March 31, 2008. For the three
months ended March 31, 2009, there was no extinguishment gain, only interest
expense.
ITEM
2.
|
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
continued
|
Loss
from Operations
For
three months ended March 31:
|
2009
|
2008
|
Increase/(decrease)
|
$
|
Net
Income (Loss)
|
$(428,209)
|
$233,290
|
$(661,499)
|
The net
loss for the three months ended March 31, 2009 was ($428,209) which is a 283%
decline in the income recorded in the March 31, 2008 of $233,290. The income in
2008 was the result of a gain on extinguishment of debt of $479,922. Excluding
this one-time gain the Company would have incurred a loss of $246,632 for the
three months ended March 31, 2008.
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
issuance of common stock and debt. As we continue our activities, we
will likely continue to experience net negative cash flows from operations,
pending receipt of significant revenues. Throughout the entire fiscal
year 2008 and continuing through March 31, 2009 all of the Company’s cash needs
were met through loans advanced to the Company by certain of its directors
and other third parties, as well as cash flow from product
sales.
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.
Although
the Company commenced full commercial sales of FORTIS™ product during the
first quarter of 2009, the sales were not sufficient to fund continuing
operations. 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 March
31, 2009, our working capital deficit was $340,757, as compared to $411,214 at
December 31, 2008. The improvement was due primarily to the receipt of
related party debt of $375,000. As of March 31, 2009, the principal
balance of related party loans to the Company was $400,500.
Net cash
change for the three months ending March 31, 2009 was a decrease of $36,849 as
compared to a decrease of $9,574 for the March 31, 2008 period. Net
cash used in operating activities was $511,139 for the three months ended March
31, 2009, as compared to $243,183 for the same three month period ended in
2008. Cash provided by financing activities
increased during the three months ended March 31, 2009 to
$477,220 from $242,034 as recorded in the same period in
2008.
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 $15,494,179 and working
capital deficit of $340,757 as of March 31, 2009. 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.
ITEM
2.
|
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
continued
|
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, 2008 no impairment exists on any of the Company’s assets based on
the present value of future cash flows generated from Company
assets.
Critical Accounting
Policies
We have
identified the following policies as critical to our business operations and the
understanding of our results of operations. The preparation of these financial
statements require us to make estimates and assumptions that effect the reported
amount of assets and liabilities, disclosure of contingent assets and
liabilities at the date of our financial statements, and the reported amounts of
revenue and expenses during the reporting period. There can be no assurance that
actual results will not differ from those estimates. The effect of these
policies on our business operations is discussed below where such policies
affect our reported and expected financial results.
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 $44,989 in revenue from sales of products during the
three months ended March 31, 2009.
Warranty and Right of
Return. In connection with the sale of each product, we provide a limited
30-day money back guarantee less a 6% restocking charge. After the 30
days, we provide a five-year limited warranty on replacement of
parts. The tank chamber is warranted not to leak for 10
years. We have limited history with claims against our
warranty. We defer a portion of the revenue as would generally be
required for post-contract customer support arrangements under SOP
97-2. Accordingly, the revenue allocated to the warranty portion of
such sales is deferred and recognized ratably over the life of the
warranty. As of March 31, 2009, a total of $41,584 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 $6,728 and $8,799 during the three months
ended March 31, 2009 and 2008, respectively.
Stock Based
Compensation. In December 2004, the FASB issued FAS No. 123R,
“Share-Based Payment.” This statement is a revision to FAS No. 123,
“Accounting for Stock-Based Compensation,” and it supersedes APB Opinion
No. 25, “Accounting for Stock Issued to Employees,” and amends FAS
No. 95, “Statement of Cash Flows.” FAS No. 123R requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair values. We use the
Black-Scholes pricing model for determining the fair value of stock based
compensation.
Equity
instruments issued to non-employees for goods or services are accounted for at
fair value and are marked to market until service is complete or a performance
commitment date is reached.
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Not
required for smaller reporting companies.
ITEM
4T.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of disclosure controls and procedures
Management,
with the participation of our Chief Executive Officer and the Chief Financial
Officer, carried out an evaluation of the effectiveness of our “disclosure
controls and procedures” (as defined in the Exchange Act, Rules 13a-15(e) and
15d-15(e)) as of the end of the period covered by this report (the “Evaluation
Date”). Based upon that evaluation, the Company’s Chief Executive Officer and
Chief Financial Officer concluded that, as of March 31, 2009, 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 March 31, 2009. 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 March
31, 2009.
As of
December 31, 2007, the Company determined that it had a deficiency in internal
controls over the application of current US GAAP principles originating in 2004
when an effective review of the Balance Sheet was not performed. As a result of
the ineffective review, errors in the year-end 2004 were not detected prior to
the issuance of the annual 2004 consolidated financial statements. This control
deficiency resulted in the restatement of our annual 2004 consolidated financial
statements as set forth in Form 10-KSB/A filed June 14, 2006. Management
concluded that this and other control deficiencies constituted a material
weakness that continued throughout 2005, 2006 and 2007.
During
the 2008 fiscal year, the Company implemented a new secure accounting system,
separated internal responsibilities for accounting, record keeping, check
writing and reconciliation between different parties with the Company and also
adopted various policies and procedures designed to implement the Integrated
Framework issued by COSO. These actions constituted changes in the
Company’s internal control over financial reporting that are reasonably likely
to affect the Company’s internal control over financial reporting.
This
quarterly report does not include an attestation report of the Company’s
registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this quarterly report.
PART
II - OTHER INFORMATION
ITEM
1.
|
LEGAL
PROCEEDINGS
|
Since the
Company’s Annual Report on Form 10-K for the period ended December 31, 2008,
until the date of this Report there have been material changes as
follows:
The Seitz Suit and the
Envirotech Chapter 7 and Chapter 11Bankruptcy proceedings:
On April
21, 2009, we entered into a Confidential Settlement Agreement with David Seitz
and Microtherm, as plaintiffs and Envirotech as defendant, together with Valeo
Industries Inc. and Skye International Inc. (as parties to the agreement only)
and Ted Marek and Perry Logan, as Guarantors (the “Settlement
Agreement”). The terms of the Settlement Agreement are sealed by
stipulation of the parties and by order of the court and thus are bound to
remain confidential. The terms of the Settlement Agreement are not
deemed by management to be material to our business and
operations. The terms of the Settlement Agreement operate so as to,
among other things, enter a dismissal with prejudice of the Seitz Suit, as well
as a dismissal with prejudice of any and all claims by David Seitz and
Microtherm in the Envirotech Chapter 7 and Chapter 11Bankruptcy proceedings, the
details of which matters are reported by us in our Annual Report on form 10-K
for the period ended December 31, 2008. Pending the completion of
certain conditions precedent, as set forth in the Settlement Agreement, the
Seitz Suit will be dismissed with prejudice within the 90 day period from and
after April 21, 2009.
The
Envirotech Chapter 7 and Chapter 11Bankruptcy proceedings have progressed
through the Bankruptcy Court and have resulted in the Trustee abandoning all the
assets of Envirotech to us effective April 5, 2009. The Envirotech
Chapter 7 proceedings were closed by the Bankruptcy court effective April 21,
2009. The Bankruptcy Court retained jurisdiction over Envirotech in
the Chapter 11 proceedings with respect only to the pending Seitz motion for
sanctions against Envirotech and its principals. The Bankruptcy Court
has taken judicial notice of the Settlement Agreement and has entered July 14,
2009, as the next hearing date to close the Chapter 11 proceedings in the event
all the conditions of the Settlement Agreement are completed on a timely
basis.
The Shareholder Derivative
Suit and the Promissory Note Suit:
As we
reported in our Annual Report on form 10-K for the period ended December 31,
2008, both the Shareholder Derivative Suit and the Promissory Note Suit have
been dismissed with prejudice by the Arizona District Court and the Maricopa
Superior Court, respectively in January 2009 upon the filing of a stipulation
for Dismissal with prejudice of all remaining claims by and against all named
parties.
Distributor
Claim:
Although
the judgment holder in this matter has renewed its judgment with the Maricopa
County Recorder for an award of approximately $520,500 plus interest, the matter
was stayed during the pendency of the Envirotech Chapter 7
proceedings. As reported above, the Arizona Bankruptcy Court has
closed the matter after the receipt by the Court of the report of the Trustee in
the matter wherein the remaining assets of Envirotech were considered to hold no
recoverable value and thus were abandoned to Skye International,
Inc. As of the date of this Report we have not received any further
communication from the judgment holder in this matter.
Since the
Company’s Annual Report on Form 10-K for the period ended December 31, 2008,
until the date of this Report, other than as reported above, there
have been no actions initiated, terminated or that have resulted in
material changes from the status as reported for such period.
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.
Not
required for smaller reporting companies
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
During
the quarter ended March 31, 2009, we did not sell or issue any common or
preferred shares to any parties.
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 (the “Mihaylo Debenture”). 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.
During
the quarter ended March 31, 2009, we drew down against the Mihaylo Debenture by
$375,000 bringing the total indebtedness due under the Mihaylo Debenture to
$1,275,000 as of the date of this Report.
Issuance of
Options
On March
1, 2009 we issued options to Ted Marek, Perry Logan and Gregg Johnson entitling
each to purchase up to 500,000 shares of common stock at an exercise price of
$0.50 per share. Such options are deemed to be fully vested and may be
exercised, in whole or in part, at any time within a five-year period beginning
March 1, 2009, and ending February 28, 2014.
We
believe the issuance of the options is exempt from the registration and
prospectus delivery requirement of the Securities Act of 1933 by virtue of
Section 4(2). The options were issued directly by us and did not
involve a public offering or general solicitation. The recipients of
the options were afforded an opportunity for effective access to our files and
records of that contained the relevant information needed to make their
investment decision, including our financial statements and 34 Act reports. We
reasonably believed that the recipients had such knowledge and experience in the
Company’s financial and business matters that they were capable of evaluating
the merits and risks of their investment.
Subsequent Event – Issuance
of Options
On April
8, 2009 we issued options to (i) William and Dolores Watkins, JTWROS, and (ii)
Watkins Family Trust, entitling each to purchase up to 100,000 and 60,000 shares
of common stock, respectively, at an exercise price of $2.50 per share. Such
options are deemed to be fully vested and may be exercised, in whole or in part,
at any time within a one-year period beginning April 8, 2009, and ending April
7, 2010.
We
believe the issuance of the options is exempt from the registration and
prospectus delivery requirement of the Securities Act of 1933 by virtue of
Section 4(2). The options were issued directly by us and did not
involve a public offering or general solicitation. The recipients of
the options were afforded an opportunity for effective access to our files and
records of that contained the relevant information needed to make their
investment decision, including our financial statements and 34 Act reports. We
reasonably believed that the recipients had such knowledge and experience in the
Company’s financial and business matters that they were capable of evaluating
the merits and risks of their investment.
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS -
continued
|
Subsequent
Issuances - Sale of Unregistered Securities
During
the quarter ended March 31, 2009, we did not issue or sell any common
shares. During the second quarter period 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
(common shares)
|
Consideration
|
|
|
|
|
Leslie
Griffith,
|
4/09/2009
|
100,000
shares
|
Private
Placement of $25,000
|
|
|
|
|
Leslie
Griffith
|
4/09/2009
|
100,000
shares
|
Private
Placement of $27,000
|
|
|
|
|
William
and Dolores Watkins
|
4/09/2009
|
100,000
shares
|
Private
Placement of $25,000
|
|
|
|
|
Watkins
Family Trust
|
4/09/2009
|
60,000
shares
|
Private
Placement of $15,000
|
|
|
|
|
Perry
D. Logan
President
& CEO – related party
|
4/02/2009
|
120,000
shares
|
Compensation
under personal services agreement valued at $ 30,000
|
|
|
|
|
Ted
F. Marek
CFO
and Secretary – related party
|
4/02/2009
|
120,000
shares
|
Compensation
under personal services agreement valued at $ 30,000
|
|
|
|
|
Gregg
C. Johnson
EVP
& COO – related party
|
4/02/2009
|
30,000
shares
|
Compensation
under employment agreement valued at $ 7,500 (Q1 services – stock portion
of salary)
|
|
|
|
|
L.
Fred Huggins, Jr.
VP
Sales & Marketing – related party
|
4/02/2009
|
7,100
shares
|
Compensation
under employment agreement valued at $ 1,775 (Q1 services – 03/09/2009 –
03/31/2009 - stock portion of
salary)
|
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. The recipients of the common shares were afforded
an opportunity for effective access to our files and records of that contained
the relevant information needed to make their investment decision, including our
financial statements and 34 Act reports. We reasonably believed that the
recipients had such knowledge and experience in the Company’s financial and
business matters that they were capable of evaluating the merits and risks of
their investment.
Issuer
Purchases of Equity Securities
We did
not repurchase any of our securities during the quarter ended March 31,
2009.
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
None.
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
We did
not submit any matters to a vote of our security holders during the quarter
ended March 31, 2009
ITEM
5.
|
OTHER
INFORMATION
|
Item
8.01 Other Events
We lease
offices comprising a total of approximately 2,180 square feet located at 7701 E.
Gray Rd., Suite 104, Scottsdale, AZ 85260. We 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, we amended the lease with a
three-year option to extend through April 30, 2011, with the option for us
to provide 90 days notice of our intention to vacate. Given the
recent expansion of operations the Company intends to move to larger premises at
some point during fiscal 2009.
On
February 18, 2009, the Company issued a President’s Letter to
Shareholders. A copy of the President’s Letter is attached hereto as
Exhibit 99.1.
On
February 26, 2009, the Company issued a press release confirming that it
had achieved a production capacity of 1,000 FORTIS™ water heaters per month. A
copy of the press release is attached as Exhibit 99.2.
On March
10, 2009, the Company issued a press release announcing the appointment of L.
Fred Huggins to serve as the Vice President of Sales and Marketing. A
copy of the press release is attached as Exhibit 99.3
Regulation
S-K Number
|
Exhibit
|
2.1
|
Agreement
of Share Exchange and Plan of Reorganization dated November 4, 2003
(1)
|
3.1
|
Articles
of Incorporation of Amexan, Inc. (2)
|
3.2
|
Articles
of Amendment of Articles of Incorporation of Amexan, Inc.
(2)
|
3.3
|
Articles
of Amendment of Articles of Incorporation of Nostalgia Motors, Inc.
(3)
|
3.4
|
Articles
of Amendment of Articles of Incorporation of Elution Technologies, Inc.
(4)
|
3.5
|
Articles
of Amendment of Articles of Incorporation of Tankless systems Worldwide,
Inc. (5)
|
3.6
|
Certificate
of Change Pursuant to NRS 78.209 (6)
|
3.7
|
Certificate
of Correction (6)
|
3.8
|
Bylaws,
as Amended (7)
|
10.1
|
2003
Stock Incentive Plan (8)
|
10.2
|
2003
Stock Incentive Plan (9)
|
10.3
|
2005
Stock Incentive Plan (10)
|
10.4
|
Manufacturing
Services Agreement between Jabil Circuit, Inc. and Skye International,
Inc. (11)
|
10.5
|
Consulting
Agreement between Skye International, Inc. and Sundance Financial Corp.,
including amendments (5)
|
10.6
|
Consulting
Agreement between Skye International, Inc. and Digital Crossing, LLC,
including amendments (5)
|
10.7
|
Stock
Option Agreement between Skye International, Inc. and Sundance Financial
Corp., including amendments (5)
|
10.8
|
Stock
Option Agreement between Skye International, Inc. and Digital Crossing,
LLC, including amendments (5)
|
10.9
|
Personal
Services Consulting Agreement between Skye International, Inc. and Gregg
Johnson (5)
|
10.10
|
Convertible
notes to Ted Marek (12)
|
10.11
|
Convertible
notes to Perry Logan (12)
|
10.12
|
SKYE/Steven
G. Mihaylo Trust Debenture(13)
|
23.1 |
Consent
of Moore & Associates, Chartered |
31.1
|
Certification of Chief Executive
Officer Pursuant to Securities Exchange Act of 1934, Rule 13a-14(a) or
15d-14(a)
|
31.2 |
Certification of
Chief Financial Officer Pursuant to Securities Exchange Act of 1934,
Rule 13a-14(a) or 15d-14(a)
|
32.1
|
Certification of Chief Executive
Officer Pursuant to 18 U.S.C. 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
32.2 |
Certification of
Chief Financial Officer Pursuant to 18 U.S.C. 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
99.1 |
President's
Letter to Shareholders, dated February 18, 2009
|
99.2 |
Press
Release Announcing Commencement of Commercial Sales of Tankless Water
Heaters, dated February 26, 2009
|
99.3 |
Press
Release Announcing Appointment of New Vice President of Sales and
Marketing, dated March 10,
2009
|
(1)
|
Incorporated
by reference to the exhibits to the registrant’s current report on Form
8-K, filed November 7, 2003.
|
(2)
|
Incorporated
by reference to the exhibits to the registrant’s registration statement on
Form 10-SB, filed October 5, 1999.
|
(3)
|
Incorporated
by reference to the exhibits to the registrant’s annual report on Form
10-KSB for the fiscal year ended December 31, 2002, filed May 15,
2003.
|
(4)
|
Incorporated
by reference to the exhibits to the registrant’s quarterly report on Form
10-QSB for the fiscal quarter ended June 30, 2003, filed August 21,
2003.
|
(5)
|
Incorporated
by reference to the exhibits to the registrant’s annual report on Form
10-KSB for the fiscal year ended December 31, 2005, filed July 11,
2006.
|
(6)
|
Incorporated
by reference to the exhibits to the registrant's amended current report on
Form 8-K, filed May 20, 2008.
|
(7)
|
Incorporated
by reference to the exhibits to the registrant’s current report on Form
8-K, filed February 24, 2006.
|
(8)
|
Incorporated
by reference to the exhibits to the registrant’s registration statement on
Form S-8, file number 333-108728, filed September 12,
2003.
|
(9)
|
Incorporated
by reference to the exhibits to the registrant’s registration statement on
Form S-8, file number 333-111-348, filed December 19,
2003.
|
(10)
|
Incorporated
by reference to the exhibits to the registrant’s registration statement on
Form S-8, file number 333-123663, filed March 30,
2005.
|
(11)
|
Incorporated
by reference to the exhibits to the registrant’s current report on Form
8-K, filed February 23, 2006.
|
(12)
|
To
be filed by amendment.
|
(13)
|
Incorporated
by reference to the exhibits to the registrant's current report on Form
8-K, filed September 22,
2008.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
SKYE
INTERNATIONAL, INC.
|
|
|
|
|
|
Date:
April 24, 2009
|
By:
|
/s/ Perry
Logan
|
|
|
|
Perry
Logan
|
|
|
|
Chief
Executive Officer
|
|
|
|
|
|