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 June 30, 2008
o TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the
transition period from ________________ to
________________
Commission
file number 0-27549
(Exact
name of registrant as specified in its charter)
Nevada
|
88-0362112
|
(State
or other jurisdiction of
incorporation
or organization)
|
(IRS
Employer
Identification
No.)
|
7701
E. Gray Rd, Suite 4 Scottsdale, AZ 85260
(Address
of principal executive offices) (Zip Code)
(480)
993-2300
(Registrant’s
telephone number, including area code)
Not
applicable
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. x
Yes o No
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: 12,819,255 shares of Common Stock, $0.001 par
value, as of June 30, 2008 (after giving effect to the four old common shares
for one new common share reverse stock split).
|
Index
|
Page
Number
|
|
|
|
PART
I
|
FINANCIAL
INFORMATION
|
3
|
|
|
|
ITEM
1.
|
Financial
Statements (unaudited)
|
3
|
|
|
|
|
Consolidated
Balance Sheets as of June 30, 2008 (unaudited) and December 31,
2007
|
3
|
|
|
|
|
Consolidated
Statements of Operations for the three and six months ended June
30, 2008 and 2007 (unaudited)
|
4
|
|
|
|
|
Consolidated
Statements of Stockholders' Deficit cumulative from December 31, 2006
to June 30, 2008 (unaudited)
|
5
|
|
|
|
|
Consolidated
Statements of Cash Flows for the six months ended June 30, 2008
and 2007 (unaudited)
|
6
|
|
|
|
|
Notes
to Financial Statements (unaudited)
|
7
|
|
|
|
ITEM
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
8
|
|
|
|
ITEM
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
13
|
|
|
|
ITEM
4T.
|
Controls
and Procedures
|
13
|
|
|
|
PART
II
|
OTHER
INFORMATION
|
14
|
|
|
|
ITEM
1.
|
Legal
Proceedings
|
14
|
|
|
|
ITEM
1A. |
Risk
Factors |
14
|
|
|
|
ITEM
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
17
|
|
|
|
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
ITEM
1.
|
FINANCIAL
INFORMATION
|
Skye
International, Inc. and Subsidiaries
|
CONSOLIDATED BALANCE
SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
|
|
$ |
20,276 |
|
|
$ |
35,331 |
|
Accounts
Receivable
|
|
|
30,933 |
|
|
|
- |
|
Inventory
|
|
|
106,944 |
|
|
|
119,668 |
|
Prepaid
Expenses
|
|
|
236,539 |
|
|
|
82,510 |
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
394,692 |
|
|
|
237,509 |
|
|
|
|
|
|
|
|
|
|
EQUIPMENT,
NET
|
|
|
52,073 |
|
|
|
46,754 |
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
|
Patents
|
|
|
11,662 |
|
|
|
- |
|
Deposits
|
|
|
2,460 |
|
|
|
2,460 |
|
|
|
|
|
|
|
|
|
|
Total
Other Assets
|
|
|
14,122 |
|
|
|
2,460 |
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
460,887 |
|
|
$ |
286,723 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
$ |
310,138 |
|
|
$ |
1,227,923 |
|
Accrued
Expenses
|
|
|
45,313 |
|
|
|
206,231 |
|
Notes
Payable - Related Parties
|
|
|
434,584 |
|
|
|
1,905,763 |
|
Accrued
Interest Payable
|
|
|
118,117 |
|
|
|
76,267 |
|
Warranty
Accrual
|
|
|
42,913 |
|
|
|
34,570 |
|
Customer
Deposits
|
|
|
- |
|
|
|
103,371 |
|
Total
Current Liabilities
|
|
|
951,065 |
|
|
|
3,554,125 |
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
951,065 |
|
|
|
3,554,125 |
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
Common
Stock: 25,000,000 shares
|
|
|
|
|
|
|
|
|
authorized
at $0.001par value;
|
|
|
|
|
|
|
|
|
Issued
and outstanding 12,819,255 and
|
|
|
|
|
|
|
|
|
7,481,813 shares,
respectively
|
|
|
12,819 |
|
|
|
7,482 |
|
Common
Stock Subscribed
|
|
|
- |
|
|
|
108,675 |
|
Additional
Paid in Capital
|
|
|
13,195,000 |
|
|
|
11,152,911 |
|
Accumulated
Deficit
|
|
|
(13,697,997 |
) |
|
|
(14,536,470 |
) |
|
|
|
|
|
|
|
|
|
Total
Stockholders' Equity (Deficit)
|
|
|
(490,178 |
) |
|
|
(3,267,403 |
) |
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND
|
|
|
|
|
|
|
|
|
STOCKHOLDERS
EQUITY (DEFICIT)
|
|
$ |
460,887 |
|
|
$ |
286,723 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are
an integral part of these statements.
Skye
International, Inc. and Subsidiaries
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
Sales
|
|
$ |
23,531 |
|
|
$ |
- |
|
|
$ |
47,281 |
|
|
$ |
- |
|
Other
Income
|
|
|
58 |
|
|
|
- |
|
|
|
58 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Revenues
|
|
|
23,589 |
|
|
|
- |
|
|
|
47,339 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Goods Sold
|
|
|
17,500 |
|
|
|
27,974 |
|
|
|
35,000 |
|
|
|
52,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
6,089 |
|
|
|
(27,974 |
) |
|
|
12,339 |
|
|
|
(52,117 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal
and Professional
|
|
|
16,106 |
|
|
|
535,455 |
|
|
|
83,114 |
|
|
|
644,490 |
|
General
and Administrative
|
|
|
661,293 |
|
|
|
170,799 |
|
|
|
780,949 |
|
|
|
193,565 |
|
Research
and Development
|
|
|
12,535 |
|
|
|
- |
|
|
|
21,334 |
|
|
|
30,000 |
|
Advertising
and Marketing
|
|
|
405 |
|
|
|
- |
|
|
|
3,742 |
|
|
|
- |
|
Depreciation
|
|
|
3,231 |
|
|
|
2,761 |
|
|
|
5,944 |
|
|
|
5,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Expenses
|
|
|
693,570 |
|
|
|
709,015 |
|
|
|
895,083 |
|
|
|
873,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss) from Operations
|
|
|
(687,481 |
) |
|
|
(736,989 |
) |
|
|
(882,744 |
) |
|
|
(925,694 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME AND (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on Extinguishment of Debt
|
|
|
1,344,032 |
|
|
|
- |
|
|
|
1,823,954 |
|
|
|
2,153 |
|
Interest
Expense
|
|
|
(51,368 |
) |
|
|
(23,968 |
) |
|
|
(102,737 |
) |
|
|
(42,446 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Other Income (Expense)
|
|
|
1,292,664 |
|
|
|
(23,968 |
) |
|
|
1,721,217 |
|
|
|
(40,293 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) before Income Taxes
|
|
|
605,183 |
|
|
|
(760,957 |
) |
|
|
838,473 |
|
|
|
(965,987 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Tax Expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$ |
605,183 |
|
|
$ |
(760,957 |
) |
|
$ |
838,473 |
|
|
$ |
(965,987 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted income (loss) per new common share
|
|
$ |
0.06 |
|
|
$ |
(0.13 |
) |
|
$ |
0.09 |
|
|
$ |
(0.17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
|
10,150,534 |
|
|
|
5,790,904 |
|
|
|
9,260,960 |
|
|
|
5,790,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are
an integral part of these statements.
Skye
International, Inc., and Subsidiaries
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Common
Stock
|
|
|
Paid
in
|
|
|
Accumulated
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Subscribed
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2006
|
|
|
5,405,561 |
|
|
$ |
5,406 |
|
|
$ |
108,675 |
|
|
$ |
9,272,525 |
|
|
$ |
(12,527,800 |
) |
|
$ |
(3,141,194 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for related party services
|
|
|
147,750 |
|
|
|
148 |
|
|
|
|
|
|
|
154,562 |
|
|
|
|
|
|
|
154,710 |
|
Common
stock issued for consulting services
|
|
|
1,635,752 |
|
|
|
1,636 |
|
|
|
|
|
|
|
1,421,186 |
|
|
|
|
|
|
|
1,422,822 |
|
Common
stock issued for debt
|
|
|
27,500 |
|
|
|
28 |
|
|
|
|
|
|
|
18,872 |
|
|
|
|
|
|
|
18,900 |
|
Common
stock issued for cash
|
|
|
265,250 |
|
|
|
265 |
|
|
|
|
|
|
|
285,765 |
|
|
|
|
|
|
|
286,030 |
|
Net
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,008,670 |
) |
|
|
(2,008,670 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
659,199 |
|
|
|
659 |
|
|
|
|
|
|
|
519,710 |
|
|
|
|
|
|
|
520,369 |
|
Common
stock issued for cash
|
|
|
1,597,656 |
|
|
|
1,598 |
|
|
|
|
|
|
|
509,652 |
|
|
|
|
|
|
|
511,250 |
|
Common
stock issued for related party debt
|
|
|
3,018,150 |
|
|
|
3,018 |
|
|
|
(108,675 |
) |
|
|
962,790 |
|
|
|
|
|
|
|
857,133 |
|
Fractional
shares cancelled in reverse stock split
|
|
|
(63 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
838,473 |
|
|
|
838,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
June 30, 2008
|
|
|
12,819,255 |
|
|
$ |
12,819 |
|
|
$ |
- |
|
|
$ |
13,195,000 |
|
|
$ |
(13,697,997 |
) |
|
$ |
(490,178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are
an integral part of these statements.
Skye
international, Inc. and Subsidiaries
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$ |
838,473 |
|
|
$ |
(965,987 |
) |
Gain
on Extinguishment of Debt
|
|
|
(1,823,954 |
) |
|
|
- |
|
Depreciation
Expense
|
|
|
5,944 |
|
|
|
5,522 |
|
Shares
and options issued for services rendered
|
|
|
570,369 |
|
|
|
596,550 |
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
12,724 |
|
|
|
(60,929 |
) |
Accounts
Receivable
|
|
|
(30,933 |
) |
|
|
- |
|
Prepaid
Expense
|
|
|
(154,029 |
) |
|
|
99,379 |
|
Deposits
|
|
|
- |
|
|
|
(2,460 |
) |
Accrued
Interest Payable
|
|
|
43,100 |
|
|
|
11,125 |
|
Accounts
Payable and Accrued Expenses
|
|
|
24,051 |
|
|
|
104,549 |
|
|
|
|
|
|
|
|
|
|
Net
Cash (Used) by Operating Activities
|
|
|
(514,255 |
) |
|
|
(212,251 |
) |
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment
for Patents
|
|
|
(11,662 |
) |
|
|
- |
|
Purchase of
Assets
|
|
|
(11,263 |
) |
|
|
(5,594 |
) |
|
|
|
|
|
|
|
|
|
Net
Cash (Used) by Investing Activities
|
|
|
(22,925 |
) |
|
|
(5,594 |
) |
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from Common Stock
|
|
|
511,250 |
|
|
|
- |
|
Proceeds
from Notes Payable
|
|
|
10,875 |
|
|
|
212,461 |
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by Financing Activities
|
|
|
522,125 |
|
|
|
212,461 |
|
|
|
|
|
|
|
|
|
|
Net
Increase/(Decrease) in Cash
|
|
|
(15,055 |
) |
|
|
(5,384 |
) |
|
|
|
|
|
|
|
|
|
Cash,
Beginning of Period
|
|
|
35,331 |
|
|
|
8,672 |
|
|
|
|
|
|
|
|
|
|
Cash,
End of Period
|
|
$ |
20,276 |
|
|
$ |
3,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Information:
|
|
|
|
|
|
|
|
|
Income
Taxes
|
|
$ |
- |
|
|
$ |
- |
|
Interest
Expense
|
|
$ |
58,387 |
|
|
$ |
42,444 |
|
|
|
|
|
|
|
|
|
|
Non
Cash Financing Activities:
|
|
|
|
|
|
|
|
|
Common
Stock Issued for Debt
|
|
$ |
857,133 |
|
|
$ |
100,000 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are
an integral part of these statements.
SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to
the Condensed Financial Statements
June 30,
2008 (unaudited) and December 31, 2007
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 June 30, 2008, and for all
periods presented herein, have been made.
Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted. It is
suggested that these condensed financial statements be read in conjunction with
the financial statements and notes thereto included in the Company’s December
31, 2007 audited financial statements. The results of operations for
the periods ended June 30, 2008 and 2007 are not necessarily indicative of the
operating results for the full years.
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 $13,697,997 at
June 30, 2008 which raises substantial doubt about the Company’s ability to
continue as a going concern. The ability of the Company to continue
as a going concern is dependent on the Company increasing sales to the point it
becomes profitable. The Company may need to raise additional capital
for marketing to increase its sales. If the Company is unable to increase sales
sufficiently or obtain adequate capital, it could be forced to cease
operation. The accompanying financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result from
the outcome of this uncertainty.
Management
plans to increase sales by increasing its marketing program and to obtain
additional capital from the private placement of shares of its common stock.
However, management cannot provide any assurances that the Company will be
successful in accomplishing any of its plans.
NOTE
3 -
|
GAIN
ON THE EXTINGUISHMENT OF DEBT
|
During
the six months ended June 30, 2008, the Company determined that the statute of
limitations under the laws of the state of Arizona had expired on certain debts
previously carried on its financial statements. Also two of the Company’s
subsidiaries were involuntarily dissolved by the state of Arizona and ceased to
be consolidated with the Company. A third subsidiary filed chapter 7 bankruptcy
and its debts were discharged by the bankruptcy court. Accordingly, the Company
recognized a gain of $1,823,954 for the extinguishment of those
debts.
NOTE
4 -
|
SIGNIFICANT
EVENTS
|
During
the three months ended June 30, 2008, the Company issued 62,500 shares of its
common stock to directors at $0.80 per share and 659,199 shares to consultants
at $0.79 per share for services performed. During the three months ended June
30, 2008 the Company issued 3,018,150 shares of its common stock at $0.28 per
share for debt. During the three months ended June 30, 2008 the Company issued
1,597,656 shares of its common stock at $0.32 per share for cash.
During
the three months ended June 30, 2008, the Company’s common stock was reverse
split on a 1 share for 4 shares basis. The financial statements have been
restated to reflect the reverse stock split on a retro-active
basis.
The Company contracts with several
third parties to manufacture Fortis unit sub and final assemblies. Parts and
material inventory is stated at the lower of cost (first-in, first-out) or net
realizable value of $106,944 at June 30, 2008. Parts and
materials purchased for development and testing are directly expensed to
Research and Development.
As
of June 30, 2008, inventory consisted of the following:
Raw
Materials |
|
$ |
67,969 |
|
Work In
Process |
|
|
28,475 |
|
Finished
Goods |
|
|
10,500 |
|
|
|
|
|
|
Total
Inventory |
|
$ |
106,944 |
|
NOTE
6 -
|
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.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
|
The
following discussion should be read in conjunction with the financial statements
and accompanying notes included in this Form 10-Q.
Plan
of Operation.
The
Company is in the business of designing, developing, manufacturing and marketing
consumer lifestyle products, including, initially, several models of electronic,
tankless water heaters. Previously the Company produced, marketed and sold its
electronic tankless water heater products directly through the internet. The
Fortis™ and Paradigm™ units, and future products, however, are proposed to
be sold primarily through manufacturer’s representatives in the wholesale
market.
Liquidity
and Capital Resources.
A
critical component of our operating plan impacting our continued existence is
the ability to obtain additional capital through equity and/or debt financing.
Since inception, we have financed our cash flow requirements through issuances
of 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 second quarter, all of the Company’s cash needs were
met through loans advanced to the Company by certain of its related party
directors, as well as private placements of common stock.
The
Company expects that additional operating losses will occur until net margins
gained from sales revenue is sufficient to offset the costs incurred for
marketing, sales and product development. Until the Company has achieved a sales
level sufficient to break even, it will not be self-sustaining or be competitive
in the areas in which it intends to operate. The Company will require
additional funds to complete the ramping up for production of the FORTIS™, and to fully
implement its marketing plans and for continued
operations. Additionally, the Company will also require further
development funds in order to finalize a commercialized version of its consumer
product utilizing the patented Paradigm™ technology. We
anticipate obtaining additional financing to fund operations through common
stock offerings, debt offerings and bank borrowings, to the extent available, or
to obtain additional financing to the extent necessary to augment our working
capital. In the event we cannot obtain the necessary capital to
pursue our strategic plan, we may have to significantly curtail our
operations. This would materially impact our ability to continue
operations. There is no assurance that the Company will be able to obtain
additional funding when needed, or that such funding, if available, can be
obtained on terms acceptable to the Company.
As of
December 31, 2007 and continuing through June 30, 2008, the existing capital and
anticipated funds from operations were not sufficient to sustain Company
operations or the business plan over the next twelve months. We anticipate
substantial increases in our cash requirements; which will require additional
capital generated from the sale of common stock, the sale of preferred stock, or
debt financing. No assurance can be made that such financing will be available,
or available on terms acceptable to the Company and if available it may take
either the form of debt or equity. In either case, any financing will have a
negative impact on our financial condition and will likely result in an
immediate and substantial dilution to our existing stockholders.
Executive
Summary
The
Company’s business is the design production, marketing and sale of consumer
appliances. Skye’s premier consumer product is the FORTIS ™, a new series of
electric tankless water heater. Skye will market the FORTIS ™ tankless water
heater shortly through an established and growing list of manufacturer’s
representatives located in many states across the United States. On the heels of
FORTIS™ will be a
new technology that Skye refers to as Paradigm™. This technology
ushers in an entirely new method of heating water that is both fast and
extremely efficient. The primary application for the Paradigm™ technology
will be for the point-of-use instantaneous water heating market. Skye is
currently working to commercialize this technology into a suite of products to
be manufactured under the brand HotSpot™ that can be used in homes across North
America and Europe.
Once
FORTIS™ is ready
for commercial production and distribution, in late 2008, the Company’s success
will be dependent upon its ability to attract high quality distributors and
manufacturer’s representatives to market its products. To date, the Company has
been able to attract distributors and manufacturer’s representative groups with
a solid track record selling tankless water heating devices to home
builders and the wholesale plumbing trade. The Company is unable to provide
forecasts as to the amount of product it anticipates selling. As of June 30,
2008, the Company has entered into contracts with a number of manufacturer’s
representatives located in states across the Southwest and Southeast of the U.S.
Although existing agreements are currently under review by management, the
current major terms of the contracts are: (a) distributors receive a
graduated discount based on volume with the greatest discount being 35%, and 7%
commissions to manufacturer’s representatives; (b) non-exclusive
territories; (c) termination upon 30 days’ notice and; (d) no
maximum purchase requirements and sales goals to be mutually agreed, or in
default, $1,000,000 per territory. The Company plans on assisting in the
training of its U.S. distributors and manufacturers representatives in the safe
installation and use of its products. The Company has, as of July 2,
2008, hired, on a probationary basis, a National Sales Manager to prepare the
Company for the sale of its product. The National Sales Manager is
also responsible for, among other duties, hiring regional sales representatives,
appoint additional manufacturer’s representatives, establish and train a sales
and marketing staff and develop and distribute sales and marketing information
to the market.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -
continued
|
Going
Forward
The
Company has established relationships with a contract manufacturer Electrosem,
LLC, to produce its FORTIS™ line of
products. Electrosem has recently passed a site inspection by
Intertek Testing Services and is thus authorized to mark Skye products with
the ETL safety mark evidencing compliance of the products with UL
Standard 499. Despite commencing commercial production late in late
2008, the Company expects that it may take up to one year for the production
design and processes to stabilize and all cost reductions to be effectively
implemented.
The
Company has also continued to focus development efforts on the commercialization
of its new Paradigm™
technology. Although we have been very excited about the
functionality that the Paradigm™ technology
offers, we have not been successful in developing a cost effective means to
commercialize the technology into a consumer product line. We are currently
engaged in a joint engineering and product development project with a critical
supplier to jointly complete the engineering and commercialization process, and
then subsequently the engineering for manufacturing phase. In the event we are
successful in concluding the engineering phases of this project, the Company
expects that it will have first delivery of prototype product utilizing the
Paradigm™ technology by
late 2008 or early 2009, with commercial availability in 2009. The Company has
made significant progress towards the completion of a commercial design for a
product to be marketed as the HotSpot™, however, as we have not yet completed
the engineering phase of the project there can be no assurance that we will be
successful in developing a commercialized product for that will be available for
sale and distribution within a reasonable period of time.
Access to
capital remains one of the most pressing considerations for the Company.
Although we have been successful in the past in raising capital to fund Company
operations, such funds were not sufficient to provide adequate working capital
to meet the needs of the Company. As such, the Company has continued to fund
operations with loans from, and equity private placements made to, the Company’s
related party directors and others. In order to execute our business
strategy, the Company must raise in excess of $3 million over the next 12-month
period in order to fully execute our current production and business plan. There
can be no assurance that we will be able to raise such additional funding by way
of either new debt or equity, and, in the event we are unable to raise the funds
necessary to fund our business plan, it will be necessary to curtail such plans
and this could have a detrimental impact on our business. Management believes
that, in order to properly exploit the introduction of both the FORTIS™ and Paradigm™ HotSpot™
technologies, it will be necessary that we be positioned not only as a quality
supplier of products, but that we also be able to supply a sufficient volume of
product to meet wholesale demand. We believe that, relative to the wholesale
market, there is a very high expectation that product be available in a timely
fashion when ordered. In order to meet this expectation, we must be capable of
not only producing our products in sufficient volume, but expand our management
team, corporate infrastructure, and working capital base. These goals all
require additional capital and we must be successful in our efforts to obtain
this funding if we are to be successful in the wholesale sales and distribution
channel.
Over the
balance of the year we will continue to focus our efforts on initiating
production of the FORTIS™
product line and in getting it into the market to be sold. We will
continue to develop the HotSpot™ product line and deliver such products for the
required UL 499 safety compliance testing. We will continue also to
develop our markets and train installers and field service personnel in
cooperation with our appointed manufacturer’s representatives. This is no small
task and it will require a significant investment of capital, as well as a
greatly expanded staff in order to execute the business plan resulting in
effective sales and service of the FORTIS™ product line.
Over the
balance of 2008, we will continue to focus on completing the Paradigm™ technology and
developing a suite of products utilizing this powerful technology. While Paradigm™ will require a
significant investment of time and capital in order to yield a line of
marketable products, we are confident that products based on this technology
will be amongst the most efficient and technologically advanced in the
market.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -
continued
|
Results of
Operations
Revenues
For
the six months ended June 30:
|
2008
|
2007
|
Increase/(decrease)
|
$
|
%
|
Revenue
|
$47,339
|
$0
|
$47,339
|
100
|
Revenues
for the second quarter ended June 30, 2008 were $23,589, compared to revenues of
$0 for the three months ended June 30, 2007. Revenues for the six-month
period were $47,339 as compared to revenues of $0 in the same period ended in
2007. The Company recorded its first revenues from the commercial sales of its
FORTIS™ product line in late March
2008,
however, commercial volumes of product sales are not expected until late third
quarter 2008. Revenues recorded are for product sold, shipped and for
which payment was received during the quarter.
General and Administrative
expenses
For
the three months ended June 30:
|
2008
|
2007
|
Increase/(decrease)
|
$
|
%
|
General
& Administrative expenses
|
$661,293
|
$170,799
|
$490,494
|
287
|
General
and administrative expenses increased by $490,494 during the three-month period
ended June 30, 2008 as compared to the same period in 2007 reflecting the fact
that the Company had begun to staff up for business operations, including
the payment of rent for its 2,189 square foot leased premises in Scottsdale,
Arizona, as well as the addition of administrative, legal, marketing and sales
personnel during the period. During the six-month period ended June
30, 2008, general and administrative expenses increased $587,384 over the
comparable period during 2007. The Company also incurred $351,808 in consulting
and legal expenses associated with the value of shares issued to
consultants for services and legal services performed. General and
Administrative expenses are likely to continue to escalate as the Company
continues to expand its sales and marketing presence, and as we add more
operational and administrative personnel, and professional assistance with our
continued efforts to execute our business plan and market our
products.
Total
Operating Expenses
For
the three months ended June 30:
|
2008
|
2007
|
Increase/(decrease)
|
$
|
%
|
Total
operating expenses
|
$693,570
|
$709,015
|
$(15,445)
|
2
|
Overall
operating expenses during the quarter ended June 30, 2008 decreased
marginally by approximately 2% despite additional costs incurred in
connection with the addition of sales and marketing personnel, as well as the
addition of certain administrative personnel. During the six-month
period ended June 30, 2008 overall operating expenses increased by 2% as
compared to the six-month period ended June 30, 2007. The marginal
increase is mostly attributable to legal fees to conclude much of the Company’s
outstanding litigation. During the quarter the Company also incurred costs in
connection with sales and marketing initiatives targeted towards the wholesale
market for the Company’s FORTIS™ product line. Legal and professional fees
declined $519,349 or 97% as compared to the same period in the prior year,
and research and development expenses also increased by $12,535 from the
three-month period ended June 30, 2007 reflecting the near completion of
research and development activities in connection with the FORTIS™ product
line. Research and Development expenses are again expected to
increase in the successive quarters of 2008 as the Company emphasizes
the completion of the Paradigm™ engineering project and moves to commercialize
the HotSpot™ product line as well as other product lines utilizing the Paradigm™
technology.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -
continued
|
Loss
from Operations
For
the three months ended June 30:
|
2008
|
2007
|
Increase/(decrease)
|
$
|
Net
Income (Loss)
|
$605,183
|
$(760,957)
|
$1,366,140
|
The net
income for the three months ended June 30, 2008 was $605,183 which is a reversal
from the loss recorded in the June 30, 2007 period of ($760,957). During the
six-month period ended June 30, 2008 the Company recorded a gain of $838,473
which is a reversal from a loss recorded in the comparable six-month period in
2007 of ($965,987). The income in 2008 was the result of a gain on
extinguishment of debt of $1,823,954 as
more fully explained in Note 3 of the Notes to the Financial Statements.
Excluding this onetime gain the Company would have incurred a loss of $985,481
for the six months ended June 30, 2008. The Company recorded its first revenues
from the sale of FORTIS™ product in the period ended March 31, 2008 and further
revenues are likely to continue throughout the fiscal year as the Company
anticipates commercial production of the FORTIS™ product line during the latter
part of the third quarter 2008.
The
Company recorded an increase in interest expense of $60,291 for the six-month
2008 period.
Liquidity
and Capital Resources
A
critical component of our operating plan impacting our continued existence is
the ability to obtain additional capital through equity and/or debt financing.
Since inception, we have financed our cash flow requirements primarily through
issuances of common stock and debt and
most of these transactions were with related parties. As we continue our
activities, we will likely continue to experience net negative cash flows from
operations, pending receipt of significant revenues. Throughout the
entire fiscal year 2007, and continuing through June 30, 2008 all of the
Company’s cash needs were met through loans advanced to the Company by certain
of its related party directors and other third parties.
At June
30, 2008, our working capital deficit was $556,373, as compared to $3,316,616 at
December 31, 2007. The improvement was due primarily to the debt
extinguishment of $1,823,954 and the repayment of related party debt of $857,133
through the issuance of 3,018,150 shares of common stock.
Net cash
change for the six months ending June 30, 2008 was a decrease of $15,055 as
compared to a decrease of $5,384 for June 30, 2007 period. Net cash
used in operating activities was $514,255 for the six months ended June 30,
2008, as compared to $212,251 for the same six-month period ended in 2007
reflecting greater expenditures in connection with an expansion of
administrative costs, as well as the addition of sales and marketing functions
in connection with the marketing of the Company’s FORTIS™ product
line. Cash provided by financing activities increased during the
six-months ended June 30, 2008 to $522,125 from $212,461 as recorded in the same
period in 2007.
Going
Concern
The
report of our independent registered public accounting firm on the financial
statements for the year ended December 31, 2007, includes an explanatory
paragraph indicating substantial doubt as to our ability to continue as a going
concern. We have an accumulated deficit of $13,697,997 and working
capital deficit of $556,373 as of June 30, 2008. We have not
generated meaningful revenues in the last two fiscal years. Our
ability to establish the Company as a going concern is dependent upon our
ability to obtain additional financing, in order to fund our planned operations
and ultimately, to achieve profitable operations.
Intangible
Assets
The
Company’s intangible assets consist of two pending patents and four patents for
tankless water heater technology. Generally a patent has a life of 17 to
20 years.
The
Company performed an impairment test in accordance with the guidance provided in
SFAS 142, “Goodwill and Other Intangible Assets”, and has determined that, as of
December 31, 2007 no impairment exists on any of the Company’s assets based on
the present value of future cash flows generated from Company
assets.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -
continued
|
Critical Accounting
Policies
We have
identified the following policies as critical to our business operations and the
understanding of our results of operations. The preparation of these financial
statements require us to make estimates and assumptions that effect the reported
amount of assets and liabilities, disclosure of contingent assets and
liabilities at the date of our financial statements, and the reported amounts of
revenue and expenses during the reporting period. There can be no assurance that
actual results will not differ from those estimates. The effect of these
policies on our business operations is discussed below where such policies
affect our reported and expected financial results.
Revenue Recognition.
We record sales when revenue is earned. We sell on credit to our
distributors and manufacturer’s representatives. Due to our Warranty
and Right to Return policy, 6% of the sales are recognized immediately and the
balance is recognized 25 – 40 days after shipment of the product to the
customer. All shipments are FOB shipping point. Sales to
distributors and manufacturer’s representatives are sold FOB shipping point with
receivables recorded 25 to 40 days post shipping. We no longer
manufacture the ESI-2000 product lines. Accordingly, we plan to
refund the purchase price paid for undelivered heaters or, alternatively, to
ship new heaters to those customers that did not receive delivery of an ESI-2000
heater. We recorded our first revenues from sales of the Company’s
FORTIS™ product line during the first quarter of 2008.
Warranty and Right of
Return. In connection with the sale of each product, we provide a limited
30-day money back guarantee less a 6% restocking charge. After the 30
days, we provide a five-year 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 June 30, 2008, a total of $42,913 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 $21,334 and $30,000 during the six months ended June 30,
2008 and 2007, respectively.
Stock Based
Compensation. In December 2004, the FASB issued FAS
No. 123R, “Share-Based Payment.” This statement is a revision to FAS
No. 123, “Accounting for Stock-Based Compensation,” and it supersedes APB
Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends FAS
No. 95, “Statement of Cash Flows.” FAS No. 123R requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair values. We use the
Black-Scholes pricing model for determining the fair value of stock based
compensation.
Equity
instruments issued to non-employees for goods or services are accounted for at
fair value and are marked to market until service is complete or a performance
commitment date is reached.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not
required.
ITEM
4T. CONTROLS AND PROCEDURES
Evaluation
of disclosure controls and procedures
Management,
with the participation of our Chief Executive Officer and the Chief Financial
Officer, carried out an evaluation of the effectiveness of our “disclosure
controls and procedures” (as defined in the Exchange Act, Rules 13a-15(e) and
15d-15(e)) as of the end of the period covered by this report (the “Evaluation
Date”). Based upon that evaluation, the Company’s Chief Executive Officer and
Chief Financial Officer concluded that, as of June 30, 2008, our disclosure
controls and procedures were ineffective to ensure that the information we were
required to disclose in reports that we file or submit under the Securities and
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in Securities and Exchange Commission rules and forms.
More specifically, the company identified a material weakness due to a lack of
sufficient personnel with appropriate knowledge in U.S. GAAP and lack of timely
recording of transactions, supporting documentation and sufficient analysis
of the application of U.S. GAAP to transactions, including but not limited to
equity transactions. During the three months ended June 30, 2008, there was no
change in our internal control over financial reporting identified in connection
with the evaluation that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Internal
Control over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting for the Company. Management used the framework of conducting
an extensive review of existing documentation and transactions to make that
evaluation.
The
Company’s management is reviewing the Company’s internal controls over financial
reporting to determine the most suitable recognized control framework. The
Company will give great weight and deference to the product of the discussions
of the SEC’s Advisory Committee on Smaller Public Companies (the “Advisory
Committee”) and the Committee of Sponsoring Organizations’ task force entitled
Implementing the COSO Control Framework in Smaller Businesses (the “Task
Force”). Both the Advisory Committee and the Task Force are expected to provide
practical, needed guidance regarding the applicability of Section 404 of the
Sarbanes-Oxley Act to small business issuers. The Company’s management intends
to perform the evaluation required by Section 404 of the Sarbanes-Oxley Act at
such time as the Company adopts a framework. For the same reason, the Company’s
independent registered public accounting firm has not issued an “attestation
report” on the Company management’s assessment of internal
controls.
PART
II - OTHER INFORMATION
ITEM
1.
|
LEGAL
PROCEEDINGS
|
Since the
Company’s quarterly report on Form 10Q for the period ended March 31,
2008 until the date of this Report, there have been no actions initiated,
terminated or that have resulted in material changes from the status as reported
for such period other than in connection with the Envirotech Bankruptcy matter
detailed below:
Envirotech Bankruptcy –
Material Change: Envirotech Systems Worldwide Inc. filed a
voluntary petition into Chapter 7 Bankruptcy on June 24, 2008 in the Bankruptcy
Court for the District of Arizona. The matter was assigned case number
2:08-bk-07554. The trustee assigned by the Bankruptcy Court in the
matter is: S. William Manera, Trustee of P.O. Box 44350 Phoenix, AZ
85064. The meeting of creditors in the matter is scheduled for July
31, 2008. All pending litigation and collections of prior judgments
against Envirotech have been stayed by the filing of the chapter 7 bankruptcy
proceedings.
Envirotech – Sanctions
Minute Entry: On May 2, 2008 the court issued sanctions against
Envirotech, Skye, Valeo and their principals in the amount of $40,000 in
connection with the prior Chapter 11 proceedings. The Company and
certain of the principals and third parties have filed motions to reconsider and
objections to jurisdiction with respect to the individuals and parties other
than Envirotech. The motions and the objections have not yet been heard by the
Bankruptcy Court as of the date of this Report.
Papazian Suit. The
Company has settled the lawsuit involving former director William Papazian that
was previously pending in Maricopa County Superior Court under case number:
CV2007- 002890. The Company agreed to pay Mr. Papazian legal fees and settlement
costs totaling $175,000.
Our
future existence remains uncertain and the report of our independent registered
public accounting firm on our December 31, 2007 financial statements contain a
“going concern” qualification.
The
report of the independent registered public accounting firm on our financial
statements for the years ended December 31, 2007 and 2006, includes an
explanatory paragraph relating to our ability to continue as a going concern. We
have suffered substantial losses from operations, we require substantial
additional financing, we are subject to significant and costly litigation and we
need to continue the development and marketing of our products. Ultimately we
need to generate additional revenues and attain profitable operations. These
factors raise substantial doubt about our ability to continue as a going
concern. There can be no assurance that we will ever be able to develop
commercially viable products or an effective marketing system. Even if we are
able to develop commercially viable products, there is no assurance that we will
ever be able to attain profitable operations.
We have incurred
losses and may continue to incur losses in the future.
At June
30, 2008, our accumulated deficit was $13,697,997. We have not been able to
generate enough revenues to cover our expenses and have survived only by raising
funds through the sale of debt and equity securities. We must continue to raise
funds in the near future to continue operations. While management has been
successful in the past in raising these funds, there is no assurance that
management will be successful in raising sufficient funds to continue operations
and thus the Company may fail.
Limited
Capital and Need for Additional Financing.
The
Company does not have sufficient capital to execute its existing business plan
and until the Company has achieved a sales and net margin level sufficient to
break even, it will not be self-sustaining or be competitive in the areas in
which it intends to operate. We believe that current cash on hand and the
other sources of liquidity will not be sufficient enough to fund our anticipated
expansion of operations through fiscal 2008. We anticipate that we will require
up to approximately $3,000,000 to fund our anticipated
expansion of operations over the next twelve months. Additional capital will be
required to effectively support the operations and to otherwise implement our
overall business strategy.
The
Company will require additional funding for continued operations, and will
therefore be dependent upon its ability to raise additional funds through bank
borrowings, equity or debt financing, or asset sales. We expect to access
the public and private equity or debt markets periodically to obtain the funds
we need to support our operations and continued growth. There is no assurance
that the Company will be able to obtain additional funding when needed, or that
such funding, if available, can be obtained on terms acceptable to the Company.
If we require, but are unable to obtain, additional financing in the
future on acceptable terms, or at all, we will not be able to continue our
business strategy, respond to changing business or economic conditions,
withstand adverse operating results or compete effectively. If the Company
cannot obtain needed funds, the Company may be forced to curtail; as it has of
late, or cease all together, its activities. If additional shares are issued to
obtain financing, current shareholders will suffer a dilutive effect on their
percentage of stock ownership in the Company and this dilutive effect may be
substantial. Insufficient financial resources may require the Company
to delay or eliminate all or some of its development, marketing and sales plans,
as it has of late, which will have a material adverse effect on the Company's
business, financial condition and results of operations. There is no certainty
that the expenditures to be made by the Company will result in a profitable
business.
ITEM
1A
|
RISK FACTORS -
continued
|
The
markets for our products are highly competitive and revenues could decline if we
are unable to respond to competition.
Our
products are sold in highly competitive markets and we compete based on product
design, quality of products and services, product performance, maintenance
costs, and overall price. We compete with manufacturers and distributors located
in the United States and throughout the world. Some of our competitors have
greater financial, marketing, manufacturing, and distribution resources than we
do. We cannot assure that our products and services will compete successfully
with those of our competitors or that we will be able to acquire a strong
customer base to establish profit margins. These risks could materially and
adversely affect our financial condition, results of operations, and cash
flows.
Our products are
sold to new residential and commercial construction so our operations could be
adversely affected by a decline in residential and commercial
construction.
Our
products are marketed and sold to new residential and commercial construction.
The strength of residential and commercial construction depends on new housing
starts and business investment, which are a function of many factors beyond our
control, including interest rates, employment levels, availability of credit and
consumer confidence. Downturns in these markets could result in lower revenues
and lower profitability. New housing starts declined in 2006, which have
continued through 2008 and the pace may continue at lower levels than previously
expected or decline further.
Our
results of operations may be negatively impacted by product liability
lawsuits.
Our
business exposes us to potential product liability risks that are inherent in
the design, manufacture, and sale of our products. While we intend to obtain
what we believe to be suitable product liability insurance, we cannot assure you
that we will be able to obtain or maintain this insurance on acceptable terms or
that this insurance will provide adequate protection against potential
liabilities. In addition, we currently self-insure a portion of product
liability claims. A series of successful claims against us could materially and
adversely affect our reputation and our financial condition, results of
operations, and cash flows.
Our
results of operations could be adversely affected by fluctuations in the cost of
raw materials.
As a
manufacturer we are subject to world commodity pricing for many of the raw
materials used in the manufacture of our products. Such raw materials are often
subject to price fluctuations, frequently due to factors beyond our control,
including changes in supply and demand, general U.S. and international economic
conditions, labor costs, competition, and government regulation. Inflationary
and other increases in the costs of raw materials have occurred in the past and
may recur in the future. Any significant increase in the cost of raw materials
could reduce our profitability and have a material adverse effect on our
business, results of operations and financial condition.
Risks Relating To Our Common
Stock
Because
our common stock is deemed a low-priced “Penny” stock, an investment in our
common stock should be considered high risk and subject to marketability
restrictions.
Since our
common stock is a penny stock, as defined in Rule 3a51-1 under the Securities
Exchange Act, it will be more difficult for investors to liquidate their
investment in the limited market which has developed for the common stock. Until
the trading price of the common stock rises above $5.00 per share, if ever,
trading in the common stock is subject to the penny stock rules of the
Securities Exchange Act specified in Rules 15g-1 through 15g-10. Those rules
require broker-dealers, before effecting transactions in any penny stock,
to:
|
•
|
Deliver
to the customer, and obtain a written receipt for, a disclosure
document;
|
|
•
|
Disclose
certain price information about the
stock;
|
|
•
|
Disclose
the amount of compensation received by the broker-dealer or any associated
person of the broker-dealer;
|
|
•
|
Send
monthly statements to customers with market and price information about
the penny stock; and
|
|
•
|
In
some circumstances, approve the purchaser’s account under certain
standards and deliver written statements to the customer with information
specified in the rules.
|
Consequently,
the penny stock rules may restrict the ability or willingness of broker-dealers
to sell the common stock and may affect the ability of holders to sell their
common stock in the secondary market and the price at which such holders can
sell any such securities. These additional procedures could also limit our
ability to raise additional capital in the future.
ITEM
1A
|
RISK FACTORS -
continued
|
If
we fail to remain current on our reporting requirements, we could be removed
from the OTC Bulletin Board which would limit the ability of broker-dealers to
sell our securities and the ability of stockholders to sell their securities in
the secondary market.
Companies
trading on the OTC Bulletin Board, such as us, must be reporting issuers under
Section 12 of the Securities Exchange Act of 1934, as amended, and must be
current in their reports under Section 13, in order to maintain price quotation
privileges on the OTC Bulletin Board. More specifically, FINRA has enacted Rule
6530, which determines eligibility of issuers quoted on the OTC Bulletin Board
by requiring an issuer to be current in its filings with the Commission.
Pursuant to Rule 6530(e), if we file our reports late with the Commission three
times in a two-year period then we will be ineligible for quotation on the OTC
Bulletin Board. As a result, the market liquidity for our securities could be
severely adversely affected by limiting the ability of broker-dealers to sell
our securities and the ability of stockholders to sell their securities in the
secondary market. As of the date of this filing, we have one late filing
reported by FINRA.
FINRA
sales practice requirements may also limit a stockholder's ability to buy and
sell our stock.
In
addition to the “penny stock” rules described above, the Financial Industry
Regulatory Authority (FINRA) has adopted rules that require that in recommending
an investment to a customer, a broker-dealer must have reasonable grounds for
believing that the investment is suitable for that customer. Prior to
recommending speculative low priced securities to their non-institutional
customers, broker-dealers must make reasonable efforts to obtain information
about the customer's financial status, tax status, investment objectives and
other information. Under interpretations of these rules, the FINRA believes that
there is a high probability that speculative low priced securities will not be
suitable for at least some customers. The FINRA requirements make it more
difficult for broker-dealers to recommend that their customers buy our common
stock, which may limit your ability to buy and sell our stock and have an
adverse effect on the market for our shares.
Our
internal controls may be inadequate, which could cause our financial reporting
to be unreliable and lead to misinformation being disseminated to the
public.
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. As defined in Exchange Act Rule 13a-15(f),
internal control over financial reporting is a process designed by, or under the
supervision of, the principal executive and principal financial officer and
effected by the board of directors, management and other personnel, 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 and includes those policies and
procedures that: (i) pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and dispositions of the
assets of the Company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company, and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that could have a
material effect on the financial statements.
Our
future operating results may fluctuate and cause the price of our common stock
to decline, which could result in substantial losses for investors.
Our
limited operating history, the lack of established products and the substantial
litigation in which the Company and certain of its officers and consultants is
involved make it difficult to predict accurately our future operations. We
expect that our operating results will fluctuate significantly from quarter to
quarter, due to a variety of factors, many of which are beyond our control. If
our operating results fall below the expectations of investors or securities
analysts, the price of our common stock will decline significantly. The factors
that will cause our operating results to fluctuate include, but are not limited
to:
|
·
|
ability
to commercialize new products from ongoing research and development
activities;
|
|
·
|
developments
in tankless water heating
technology;
|
|
·
|
price
and availability of alternative solutions for water heating
systems;
|
|
·
|
availability
and cost of technology and marketing
personnel;
|
|
·
|
our
ability to establish and maintain key relationships with industry
partners;
|
|
·
|
the
amount and timing of operating costs and capital expenditures relating to
maintaining our business, operations, and
infrastructure;
|
|
·
|
general
economic conditions and economic conditions specific to the cost of
electricity and water; and
|
|
·
|
the
ability to maintain a product margin on sales, given the early stage of
our market for our products.
|
These and
other external factors have caused and may continue to cause the market price
and demand for our common stock to fluctuate substantially, which may limit or
prevent investors from readily selling their shares of common stock and may
otherwise negatively affect the liquidity of our common stock. In the past,
securities class action litigation or shareholder derivative litigation has
often been brought against companies following periods of volatility in the
market price of their securities, as happened in the case of the Company. If
additional derivative litigation or securities class action litigation were to
be brought against us it could result in substantial costs and a diversion of
our management’s attention and resources. Such adverse events, will hurt our
business and may result in the inability to continue operations, and in such a
case, investors will face the risk of an entire loss of their
investment.
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
During
the second quarter ended June 30, 2008, the Company engaged in the following
sales or issuances of equity during the period:
Equity Private Placements
and Debt for Equity Exchange: The Company issued (1) 1,597,656
new common shares at $0.32 per new common share for gross cash proceeds to the
Company of $511,250, and (2) 3,018,150 new common shares as payment of debt for
equity of an amount totaling $857,133.
Common Shares for Legal Fees
and Design Services: The Company issued 471,699 new common
shares to extinguish accrued legal fees and design fees totaling
$351,808. Of such issued new common shares, 455,574 were issued at
$0.80 per new common share (187,500 new common shares of which had been reported
as issued during the period ended March 31, 2008 but were not, in fact, issued
until the period ended June 30, 2008) and 16,125 were issued at $0.37 per new
common share.
Director’s
Fees: As a part of the Company’s Director Compensation Plan,
directors were each issued 12,500 new common shares at $0.80 per new common
share for services during the second quarter ended June 30, 2008, as
well, an additional 37,500 new common shares were issued to each director
for services rendered to the Company during the prior three
quarters. As such, a total of 250,000 new common shares in payment of
Director Fees of $200,000 were issued during the second quarter ended June 30,
2008.
We
believe the issuance of the shares listed in this Item 2 are exempt from the
registration and prospectus delivery requirement of the Securities Act of 1933
by virtue of Section 4(2). The shares were issued directly by us and did not
involve a public offering or general solicitation. The recipients of the shares
were afforded an opportunity for effective access to our files and records of
that contained the relevant information needed to make their investment
decision, including our financial statements and reports filed under the
Securities Exchange Act of 1934. We reasonably believed that the recipients had
such knowledge and experience in the Company’s financial and business matters
that they were capable of evaluating the merits and risks of their
investment.
Funds
received by the Company of $191,250 received from private placements made during
the second quarter ended June 30, 2008 were expended during the period for
research and development costs, parts and components costs and other general
operating purposes.
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
None.
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None.
ITEM
5.
|
OTHER
INFORMATION
|
The
Company filed a Certificate of Dissolution of its subsidiary Valeo Industries,
Inc. on June 26, 2008 with the Nevada Secretary of State. As of the
date of dissolution, Valeo had no assets and no payables other than intercompany
amounts. Valeo was created in 2006 to engage in product manufacturing
for the Company. Because the Company has decided to proceed as a
“fabrication free” entity, Valeo was no longer required and thus
dissolved.
As a part
of an ongoing review of the need to maintain corporate subsidiaries, the Company
has elected to not file requisite documents with the Arizona Corporations
Commission (the “ACC”) needed to rehabilitate the corporate status of Envirotech
Systems Worldwide, Inc. and ION Tankless, Inc. Accordingly,
Envirotech (now in Chapter 7 Bankruptcy proceedings) was administratively
dissolved by the ACC on February 15, 2007 and ION Tankless was administratively
dissolved by the ACC on March 28, 2008. Envirotech has no meaningful
assets other than a single patent over which the Company has a secured
position. ION Tankless had several issued patents, all of which have
been assigned to the Company in exchange for the extinguishment of intercompany
debt. The accounting effect of the Envirotech bankruptcy and the
Valeo and ION Tankless dissolutions have been fully reflected in the financial
statements contained in this Report.
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)
|
|
|
|
|
(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.
|
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:
July 17, 2008
|
By:
|
/s/ Perry
Logan |
|
|
|
Perry
Logan |
|
|
|
Chief
Financial Officer |
|
|
|
|
|