skye_international-10qsb.htm
U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-QSB
(Mark
One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended September 30, 2007
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: 000-27549
SKYE
INTERNATIONAL, INC.
(Exact
name of Company as specified in its charter)
NEVADA
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88-0362112
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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7701
E. Gray Road, Suite 4 Scottsdale, AZ 85260
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(Address
of principal executive offices) (Zip Code)
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Company's
telephone number: (480) 993-2300
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(Former
name, address and phone number if changed since last
report)
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Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the Company was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x No o
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
exchange A Rule 12b-2) Yes ¨ No
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No
x
APPLICABLE
ONLY TO CORPORATE ISSUERS
State
the
number of shares outstanding of each of the issuer's classes of common
equity:
As
of September 30, 2007 – 28,662,897 common shares of $0.001 par
value.
Transitional
Small Business Disclosure Format (check one): Yes o No x
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Index
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Page
Number
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Financial
Statements (unaudited)
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Consolidated
Balance Sheets as of September 30, 2007 and December 31,
2006
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Consolidated
Statements of Cash Flows for the nine months ended September 30,
2007 and
2006
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Consolidated
Statements of Operations for the nine months ended September 30,
2007 and
2006
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Consolidated
Statements of Stockholders' Deficit cumulative from December 31,
2000 to
September 30, 2007
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Notes
to Financial Statements
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Managements
Discussion and Analysis of Financial Condition and Results of
Operations/Plan of Operation
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Unregistered
Sales of Equity Securities and Use of Proceeds
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Defaults
Upon Senior Securities
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Submission
of Matters to Vote of Security Holders
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PART
I.
FINANCIAL INFORMATION
ITEM
1. Financial Statements
(unaudited)
Skye
International, Inc. and Subsidiaries
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CONSOLIDATED
BALANCE SHEETS
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September
30
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December
31
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2007
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2006
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(Unaudited)
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(Audited)
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Patents
and Software, Net
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LIABILITIES
AND STOCKHOLDERS' EQUITY
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STOCKHOLDERS'
EQUITY |
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Common
Stock authorized is 100,000,000 shares at $0.001 par value.
Issued and outstanding on September 30, 2007 were
28, 662,897 shares, and December 31, 2006 were 21,622,243
shares
|
|
|
28,663
|
|
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|
21,622
|
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Common
Stock Subscribed
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108,675
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108,675
|
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Paid
in Capital
|
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|
10,741,356
|
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9,256,308
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Accumulated
Deficit
|
|
|
(14,124,287
|
) |
|
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(12,527,800
|
) |
|
|
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Total
Stockholders' Equity (Deficit)
|
|
|
(3,245,593
|
) |
|
|
(3,141,194
|
) |
|
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TOTAL
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
236,712
|
|
|
|
315,034
|
|
The
accompanying notes are an integral part of these statements.
Skye
international, Inc. and Subsidiaries
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
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|
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Nine
Months
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Nine
Months
|
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Ended
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Ended
|
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|
September
30,
|
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|
September
30,
|
|
|
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|
2007
|
|
|
2006
|
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|
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|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
(1,596,487 |
) |
|
|
(1,879,533 |
) |
|
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Changes
in assets and liabilities:
|
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|
|
|
|
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|
|
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|
|
|
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(116,768 |
) |
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(93,732 |
) |
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|
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(266,356 |
) |
|
|
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(2,460 |
) |
|
|
(100,000 |
) |
|
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|
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(11,168 |
) |
Accounts
Payable and Other Payables
|
|
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|
(493,671 |
) |
|
|
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|
|
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(15,000 |
) |
|
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(3,982 |
) |
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Net
Cash (Used) by Operating Activities
|
|
|
|
(1,486,827 |
) |
|
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(1,579,780 |
) |
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Purchase/Disposal
of Assets
|
|
|
|
(5,594 |
) |
|
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(318 |
) |
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|
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|
|
|
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Net
Cash (Used) by Investing Activities
|
|
|
|
(5,594 |
) |
|
|
(318 |
) |
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Shares
issued for services rendered.
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Shares
issued to retire debt and interest.
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Proceeds
from sale of Common Stock
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Discount
on Convertible Debt
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Net
Cash Provided by Financing Activities
|
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|
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Net
Increase/(Decrease) in Cash
|
|
|
|
(332 |
) |
|
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Cash,
Beginning of Period
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Supplemental
Information:
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The
accompanying notes are an integral part of these statements
Skye
International, Inc. and Subsidiaries
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Nine
Months
Ended
|
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
16,457
|
|
|
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- |
|
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|
(1,525 |
) |
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General
and Administrative
|
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Loss
on Disposal of Assets
|
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|
|
|
|
|
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OTHER
INCOME AND (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
(78,515 |
) |
|
|
(37,825 |
) |
Gain on Extinguishment
of Indebtedness
|
|
|
|
|
|
|
|
|
|
|
|
(76,362 |
) |
|
|
(37,825 |
) |
|
|
|
|
|
|
|
|
|
Net
(Loss) before Income Taxes
|
|
|
(1,596,487 |
) |
|
|
(1,879,533 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,596,487 |
) |
|
|
(1,879,533 |
) |
|
|
|
|
|
|
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|
Basic
and diluted (loss) per share
|
|
$ |
(0.06 |
) |
|
$ |
(0.09 |
) |
|
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|
Weighted
Average Number of Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
The
accompanying notes are an integral part of these statements.
Skye
International, Inc., and Subsidiaries
|
STATEMENT
OF STOCKHOLDER'S DEFICIT
|
|
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|
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|
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|
|
|
|
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|
|
Common
Stock
|
|
|
Common
Stock
|
|
|
Paid
in
|
|
|
Accumulated
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Subscribed
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
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|
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|
Balance
December 31, 2000
|
|
|
|
|
|
$ |
580
|
|
|
|
|
|
|
$ |
333,920
|
|
|
$ |
(828,006 |
) |
|
$ |
(493,506 |
) |
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
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|
Common
Shares issued for Services
|
|
|
|
|
|
|
|
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|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares issued to retire
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Note and accrued Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(120,900 |
) |
|
|
(120,900 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
Balance
December 31, 2001
|
|
|
|
|
|
$ |
693
|
|
|
|
|
|
|
$ |
597,654
|
|
|
$ |
(948,906 |
) |
|
$ |
(350,559 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares issued for cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares issued for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares issued for prepaid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
|
|
|
Common
Shares issued for proposed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
Common
Shares issued to retire
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
note and accrued Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Common
Shares issued to retire debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
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|
|
|
|
|
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|
|
|
) |
|
|
(2,798,586 |
) |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2002
|
|
|
|
|
|
$ |
7,931
|
|
|
|
|
|
|
$ |
1,941,620
|
|
|
$ |
(3,747,492 |
) |
|
$ |
(1,797,941 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares issued for Cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares issued in recapitalization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(166,940 |
) |
|
|
|
|
|
|
(163,932 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(371,821 |
) |
|
|
(371,821 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
) |
|
|
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares issued for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares issued to retire Debt and interest of $91,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares issued for cash through exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares cancelled in acquisition settlement
|
|
|
(2,075,000 |
) |
|
|
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Options issued for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock issued for prepaid services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares valued at $159,876 Issued to obtain $1,075,000
debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,893,330 |
) |
|
|
(1,893,330 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,012,643 |
) |
|
|
(2,630,460 |
) |
STATEMENT
OF STOCKHOLDER'S DEFICIT - continued
Common
Stock granted but not
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock granted in 2004 but
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
not
earned by related party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consulting
agreements until 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consulting
and outside services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
conjunction
with related party consulting contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock to reduce
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of convertible bridge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in private
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,051,870 |
) |
|
|
(4,051,870 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,064,513 |
) |
|
|
(2,335,340 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares issued in conjunction with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related
party consulting services and to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consulting
and outside services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares issued in private
|
|
|
|
|
|
|
|
|
|
|
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
placements,
previously subscribed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock options issued for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
on Convertible Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares issued to retire debt and interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares issued in private stock placements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,463,287 |
) |
|
|
(2,463,287 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,527,800 |
) |
|
|
(3,141,194 |
) |
STATEMENT
OF STOCKHOLDER'S DEFICIT - continued
Common
Shares issued in conjunction with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related
party consulting services and to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consulting
and outside services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares issued to retire debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,596,487 |
) |
|
|
(1,596,487 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,124,287 |
) |
|
|
(3,245,592 |
) |
The
accompanying notes are an integral part of these statements
SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2007 and December 31, 2006
The
Company
Skye
International, Inc., a Nevada corporation, was originally organized on November
23, 1993 as Amexan, Inc. On June 1, 1998, the name was changed to Nostalgia
Motorcars, Inc. On June 11, 2002, the Company changed its name to Elution
Technologies, Inc. It changed its name to Tankless Systems Worldwide, Inc.
on
June 4, 2003 and to Skye International, Inc. on October 21,
2005. Skye has three subsidiary corporations, all
wholly-owned:
|
·
|
Envirotech
Systems Worldwide,
Inc., an Arizona corporation
(“Envirotech”);
|
|
·
|
ION
Tankless, Inc., an Arizona
corporation (“ION”); and
|
|
·
|
Valeo
Industries, Inc., a Nevada
corporation (“Valeo”).
|
On
November 7, 2003, the Company acquired Envirotech Systems Worldwide, Inc.
(Envirotech), a private Arizona corporation, as a wholly owned subsidiary.
Through this merger, the former shareholders of Envirotech acquired a
controlling interest in Tankless Systems Worldwide, Inc. (Tankless) and,
accordingly, the acquisition is accounted for as a reverse merger with
Envirotech being the accounting acquirer of Tankless. Envirotech was organized
December 9, 1998 and has a limited history of operations. The initial period
of
its existence involved research and development of a line of electronic,
tankless water heaters. With the acquisition of Envirotech, the Company is
in
the business of designing, developing, manufacturing and marketing several
models of electronic, tankless water heaters.
With
the adoption of the SKYE name in October 2005 the business of the Company was
expanded to include the manufacture and sale of consumer lifestyle appliances,
including tankless water heaters. Envirotech suspended and has not
restarted production of its only product, the ESI-2000 water
heater. Envirotech is not currently engaged in active business and
its primary asset consists of a patent and intellectual property related to
the
ESI-2000 product line.
In
January 2004, Skye formed ION to perform research, development of new heating
technologies. In January 2005, it created Valeo to license certain ION
technologies and to manufacture products using those licensed
technologies.
Nature
of Business
The
Company is in the business of designing, developing, manufacturing and marketing
consumer lifestyle products, including, initially, several models of an
electronic, tankless water heater. The Company’s products, together with a
limited quantity of related parts purchased for resale, will be sold primarily
through manufacturer’s representatives and wholesale distributors in the United
States and Canada. Based upon the nature of the Company’s operations, facilities
and management structure, the Company considers its business to constitute
a
single segment for financial reporting purposes.
Basis
of Consolidation
The
accompanying consolidated financial statements reflect the operations, financial
position and cash flows of the Company and include the accounts of the Company
and its subsidiaries after elimination of all significant inter-company
transactions in consolidation.
Basis
of Presentation
The
Consolidated Financial Statements of Skye International include all of its
wholly-owned subsidiaries.
On
August
6, 2004, Envirotech filed a voluntary petition with the United States Bankruptcy
Court for the District of Arizona (Case No. 2:04-13908-RTB ) seeking relief
under Chapter 11 of the Bankruptcy Code as a means to resolve all existing
litigation, judgments and efforts to collect on judgments entered against
Envirotech. On December 2004, the Company filed its proposed plan of
reorganization and disclosure statement with the Bankruptcy Court. This Plan
was
not approved and in January 2006, the Company’s motion to withdraw its Chapter
11 filing was granted by the Bankruptcy Court for the District of Arizona
without prejudice or relief from any of its liabilities previously classified
as
Subject to Compromise,
As
such,
the accompanying Consolidated Financial Statement for the nine months ended
September 30, 2007 and the year ended December 31, 2006 were not prepared in
accordance with Statement of Position 90-7 (“SOP 90-7”), “Financial Reporting by
Entities in Reorganization under the Bankruptcy Code” (See Note 2) which
requires that all pre-petition liabilities subject to compromise are segregated
in the consolidated balance sheets as of end of the respective years and
classified as Liabilities Subject to Compromise, at the estimated amount of
allowable claims with liabilities not subject to compromise being separately
classified.
SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2007 and December 31, 2006
Note
1.
|
THE
COMPANY - continued
|
These
Consolidated Financial Statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. Accordingly, the financial statements do
not
include any adjustments that might be necessary should the Company be unable
to
continue as a going concern. As described more fully below, there is substantial
doubt about the Company's ability to continue as a going concern which is
predicated upon, among other things, the ability to generate cash flows from
operations and, when necessary, obtaining financing sources sufficient to
satisfy the Company’s future obligations.
The
accompanying comparative Consolidated Financial Statements for the nine months
ended September 30, 2007 and the year ended December 31, 2006 have been stated
to reflect the Company’s withdrawal of its bankruptcy court
petition.
Recently
Issued Accounting Standards
Below
is
a listing of the most recent accounting standards and their effect on the
Company.
In
September 2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 157, “Fair Value Measurements” which defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles (GAAP), and expands disclosures about fair value
measurements. Where applicable, SFAS No. 157 simplifies and codifies
related guidance within GAAP and does not require any new fair value
measurements. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. Earlier adoption is encouraged. The Company does
not expect the adoption of SFAS No. 157 to have a significant effect on its
financial position or results of operation.
In
June
2006, the Financial Accounting Standards Board issued FASB Interpretation No.
48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109”, which prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The Company does not expect the
adoption of FIN 48 to have a material impact on its financial reporting, and
the
Company is currently evaluating the impact, if any, the adoption of FIN 48
will
have on its disclosure requirements.
In
March
2006, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 156, “Accounting for Servicing of Financial Assets—an
amendment of FASB Statement No. 140.” This statement requires an entity to
recognize a servicing asset or servicing liability each time it undertakes
an
obligation to service a financial asset by entering into a servicing contract
in
any of the following situations: a transfer of the servicer’s financial assets
that meets the requirements for sale accounting; a transfer of the servicer’s
financial assets to a qualifying special-purpose entity in a guaranteed mortgage
securitization in which the transferor retains all of the resulting securities
and classifies them as either available-for-sale securities or trading
securities; or an acquisition or assumption of an obligation to service a
financial asset that does not relate to financial assets of the servicer or
its
consolidated affiliates. The statement also requires all separately recognized
servicing assets and servicing liabilities to be initially measured at fair
value, if practicable, and permits an entity to choose either the amortization
or fair value method for subsequent measurement of each class of servicing
assets and liabilities. The statement further permits, at its initial adoption,
a one-time reclassification of available for sale securities to trading
securities by entities with recognized servicing rights, without calling into
question the treatment of other available for sale securities under Statement
115, provided that the available for sale securities are identified in some
manner as offsetting the entity’s exposure to changes in fair value of servicing
assets or servicing liabilities that a servicer elects to subsequently measure
at fair value and requires separate presentation of servicing assets and
servicing liabilities subsequently measured at fair value in the statement
of
financial position and additional disclosures for all separately recognized
servicing assets and servicing liabilities. This statement is effective for
fiscal years beginning after September 15, 2006, with early adoption permitted
as of the beginning of an entity’s fiscal year. Management believes the adoption
of this statement will have no immediate impact on the Company’s financial
condition or results of operations.
Note
2.
|
SIGNIFICANT
ACCOUNTING
POLICIES
|
Use
of
Estimates and Assumptions
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.
SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2007 and December 31, 2006
Note
2.
|
SIGNIFICANT
ACCOUNTING POLICIES -
continued
|
Cash
and Cash Equivalents
All
highly liquid debt instruments with a maturity of six months or less at the
time
of purchase are considered to be cash equivalents. Cash equivalents are stated
at cost, which approximates fair value because of the short-term maturity of
these instruments.
Fair
Value of Financial Instruments
Financial
instruments consist of cash and cash equivalents, accounts payable, accrued
expenses and short-term and long-term convertible debt obligations. Including
promissory notes, and related party liabilities, the fair value of these
financial instruments approximates their carrying amount as of September 30,
2007 and September 30, 2006 due to the nature of or the short maturity of these
instruments.
Research
and Development
The
Company's research and development efforts concentrate on new product
development, improving product durability and expanding technical expertise
in
the manufacturing process. The Company expenses product research and development
costs as they are incurred. With the organization of its subsidiary ION, the
Company continues to expense research and development costs as
incurred.
Marketing
Strategy
Although
in the past most sales were
made directly to consumers, the Company now intends to sell its products to
large wholesale distributors through its network of manufacturer’s
representatives. The Company, through its Envirotech subsidiary, has
periodically advertised on cable television stations, at trade shows and through
trade magazines. The Company maintains a website at www.skye-betterliving.com
and www.tankless.com.
Revenue
Recognition
The
Company records sales when revenue is earned. The Company sells on credit to
its
distributors and manufacturer’s representatives. Due to the Company’s Warranty
and Right of Return policy, nine percent 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. In 2005, substantially all of the
Company’s gross revenues of $172,169 were generated by the Valeo subsidiary and
were generated through sales of the ESI-2000 unit to individuals over the
internet, the majority of whom paid in advance by credit card payments. The
Company no longer manufactures the ESI-2000 product lines and so the Company
plans 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. The Company had only $2,071 revenue from sales
during 2006 and has had no revenue from the sale of product during the first
nine months of 2007.
Accounts
Receivable
Accounts
receivable are recorded when an order is received from a distributor and
shipped. An allowance for doubtful accounts was set up based on the actual
rate
of uncollected accounts. Net accounts receivable is as
follows:
|
|
September
30, 2007
|
|
|
Dec.
31, 2006
|
|
|
|
$ |
-0-
|
|
|
$ |
-0-
|
|
Less:
Allowance for Doubtful Accounts
|
|
|
(-0- |
) |
|
|
(-0- |
) |
|
|
$ |
-0-
|
|
|
$ |
-0-
|
|
SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2007 and December 31, 2006
Note
2.
|
SIGNIFICANT
ACCOUNTING POLICIES -
continued
|
The
Company maintains allowances for doubtful accounts for estimated probable losses
resulting from inability of the company’s customers to make the required
payments. The company continues to assess the adequacy of the reserves for
doubtful accounts based on the financial condition of the Company’s customers
and external factors that may impact collectability.
Advertising
Advertising
expense included the cost of sales brochures, print advertising in trade
publications, displays at trade shows and maintenance of an Internet site.
Advertising is expensed when incurred. Advertising expense for the nine months
ended September 30, 2007 and the year ended December 31, 2006, was $3,179 and
$38,406 respectively.
Inventory
The
Company contracts with third parties to manufacture its products and is neither
billed for nor obligated for any work-in-process. The Company only supplies
certain parts and materials and is then billed for completed products. Parts
and
material inventory is stated at the lower of cost (first-in, first-out) or
net
realizable value.
Property
and Equipment
Property
and equipment are depreciated or amortized using the straight-line method over
their estimated useful lives, which range from two to seven years. Fixed assets
consist of the following:
|
|
Sept.
30, 2007
|
|
|
Dec.
31, 2006
|
|
Property,
Equipment, furniture and Fixtures
|
|
$ |
67,216
|
|
|
$ |
61,622
|
|
Less:
Accumulated Depreciation
|
|
|
(25,703 |
) |
|
|
(17,701 |
) |
|
|
$ |
41,513
|
|
|
$ |
43,921
|
|
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.
Earnings
per Share
The
basic
(loss) per share is calculated by dividing the Company’s net loss available to
common shareholders by the weighted average number of common shares outstanding
during the year.
The
Company has potentially dilutive securities outstanding at the end of the
statement periods. Therefore, the basic and diluted earnings (loss) per share
are presented on the face of the statement of operations. There are 600,000
options at $0.55 and 300,000 options at $0.50 per share outstanding as of the
date of this report. There are also $100,000 of outstanding convertible
debentures which within 12 months may be converted into restricted common shares
of the Company at a 30% discount to the then current 10-day moving average
of
the Company’s common stock. All outstanding warrants were either exercised or
cancelled and convertible debt is anti-dilutive. As of September 30,
2007, the Company has issued $400,000 in 15% convertible demand notes and a
further $53,000 remains outstanding as an unsecured demand loan to related
party
directors. Some or all of such amount may be converted at any time or
from time to time into common shares of the Company resulting in additional
dilution.
SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2007 and December 31, 2006
Note
2.
|
SIGNIFICANT
ACCOUNTING POLICIES -
continued
|
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. The Company uses 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.
Warranty
and Right of Return
In
connection with the sale of each product, the Company provides a limited 30-day
money back guarantee less a 6% restocking charge. After the 30 days the Company
provides a five year warranty on replacement of parts. The tank chamber is
warranted not to leak for 10 years. The Company has limited history with claims
against its warranty. The Company defers a portion of the revenue as would
generally be required for post-contract customer support ("PCS") arrangements
under SOP 97-2. Accordingly, the revenue allocated to the warranty portion
of
such sales is deferred and recognized ratably over the life of the warranty.
As
of September 30, 2007 a total of $34,570 in refunds and warranty allowances
were
recorded against Product Sales.
Balance
of Warranty Accrual for 2003
|
$ |
3,240
|
|
Balance
of Warranty Accrual for 2004
|
|
|
|
Balance
of Warranty Accrual for 2005
|
|
|
|
Balance
of Warranty Accrual for 2006
|
|
|
|
Balance
of Warranty Accrual for 2007
|
|
|
|
Total
Warranty Accrual as of September 30, 2007
|
|
|
|
Note
3.
|
NOTES
PAYABLE AND CAPITAL
LEASE OBLIGATIONS
|
In
the
third quarter of 2007 the Company received $400,000 of funds in exchange for
the
issuance of $400,000 of principal 15% convertible notes (the “Notes”). The
Notes, together with accrued interest thereon are convertible at the option
of
the holder any time during the 12 months from issuance thereof into restricted
common stock of the Company at a price equal to a 30% discount to the then
current 10-day moving average of the Company’s common stock. Additionally, the
investor received one (1) share of the Company’s restricted common stock for
each One Dollar ($1.00) amount of Notes purchased. A further $53,000
remains outstanding as an unsecured demand loan to related party
directors
Note
3.
|
NOTES
PAYABLE AND CAPITAL
LEASE OBLIGATIONS -
continued
|
Notes
payable and capital lease obligations consist of the
following:
|
|
Nine Mos.
Ended
|
|
|
Yr.
Ended
|
|
|
|
Sept
30,
|
|
|
Dec.
31,
|
|
|
|
2007
|
|
|
2006
|
|
Convertible
Notes, Unsecured, Matured March 2001 bear 12.5% Interest, principle
and
interest convertible into one common share and one warrant at 75%
of the
average closing price over the 10-day period prior to conversion.
Warrants have expired and notes have not been converted and are
in
default.
|
|
$ |
70,000
|
|
|
$ |
70,000
|
|
|
|
|
|
|
|
|
|
|
Convertible
Notes, Unsecured, Matured one-year from issue date, bear 10% Interest
payable quarterly, principle and interest convertible into one
common
share for each outstanding $1.00. Forty notes were issued between
January 23, 2004 and January 15, 2005. Of these notes, thirty nine
had
been either repaid or converted at December 31, 2005. Of the remaining
four notes, three were converted in April 2006; the fourth has
not been
converted or repaid and is in default. Aggregate
Amount:
|
|
$ |
15,000
|
|
|
$ |
215,000
|
|
|
|
|
|
|
|
|
|
|
Demand
Note with Attorneys, 6% Interest, All Assets of Subsidiary,
Envirotech, pledged as Collateral; Note is in
default. Note has been acquired by Envirotech’s parent,
Skye
|
|
$ |
194,895
|
|
|
$ |
194,895
|
|
|
|
|
|
|
|
|
|
|
Demand
Note with Former Distributor of Subsidiary, Envirotech, in Settlement
and
Repurchase of Distributorship Territory, 7% Interest; Note is in
default
|
|
$ |
519,074
|
|
|
$ |
519,074
|
|
|
|
|
|
|
|
|
|
|
Demand
Note Made by Subsidiary, Envirotech, 10% Interest, Payable Monthly;
Note
is in default
|
|
$ |
11,880
|
|
|
$ |
11,880
|
|
|
|
|
|
|
|
|
|
|
Demand
Note Made by Subsidiary, Envirotech, 6% Interest; Note is in
default
|
|
$ |
35,000
|
|
|
$ |
35,000
|
|
|
|
|
|
|
|
|
|
|
Demand
Note Made by Subsidiary, Envirotech; Note is in
default
|
|
$ |
72,391
|
|
|
$ |
72,391
|
|
|
|
|
|
|
|
|
|
|
Demand
Note Made by ION Tankless in favor of related party;
|
|
$ |
120,000
|
|
|
$ |
120,000-
|
|
|
|
|
|
|
|
|
|
|
Demand
Note Made by Valeo in favor of related party;
|
|
$ |
13,000
|
|
|
$ |
13,000-
|
|
|
|
|
|
|
|
|
|
|
Demand
Note Made by Skye in favor of related party;
|
|
$ |
65,000
|
|
|
$ |
65,000-
|
|
|
|
|
|
|
|
|
|
|
Convertible
Notes, Unsecured, Issued March 2006, Matured March 2007, bear 5%
Interest,
principle and interest convertible into one common share $0.55
per share.
Notes have not been converted and are now in
default.
|
|
$ |
75,000
|
|
|
$ |
75,000
|
|
|
|
|
|
|
|
|
|
|
Demand
Note Made by SKYE in favor of consultants; Note is in
default
|
|
$ |
10,000
|
|
|
$ |
10,000
|
|
Demand
Note Made by Skye, 15% Interest; in favor of related
party
|
|
$ |
400,000
|
|
|
$ |
-0-
|
|
During
the nine months ended September 30, 2007, the Company received interim financing
of $553,000 from related party directors. $100,000 of such amount was
converted to common shares at $0.20 per share resulting in the issuance of
500,000 shares; a further 200,000 shares were issued as an inducement to loan
$400,000 to the Company by means of demand notes bearing simple interest of
15%
per annum and the balance of $53,000 remains in the form of unsecured
advances from a related party director.
SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2007 and December 31, 2006
Note
4.
|
STOCKHOLDERS’
EQUITY
|
On
March
24, 2005, the Company adopted an employee stock incentive plan setting aside
500,000 shares of the Company’s common stock for issuance to officers,
employees, directors and consultants for services rendered or to be rendered.
The proposed maximum offering price of such shares is $1.00 per share. A
compensation committee appointed by the Board of Directors has the right to
grant awards or stock options and administers the plan. On March 30, 2005,
the
Company filed a Registration on Form S-8 with the Securities Exchange Commission
covering the 500,000 shares provided by this plan, at a maximum offering price
of $1.00 per share. As of September 30, 2007 and December 31, 2006, the Company
has issued 462,541 shares under the 2005 Stock Incentive Plan. No shares were
issued under the Plan during the nine months ended September 30, 2006. As of
September 30, 2007, a total of 37,459 shares remain unissued under this
Plan.
The
Company was initially capitalized on November 30, 1993 with the issue of 500,000
shares for $5,000. During 2005 the Company issued 652,357 shares for $651,943
in
consulting services; 524,500 shares at $536,170 for employee stock awards;
78,067 shares for $54,647 in debt reduction; 842,511 shares to retire $881,536
in convertible notes; and 2,564,819 shares for $296,483 in cash in private
placements.
During
2006, the Company issued 205,000 shares for consulting and legal services valued
at $230,753; 370,000 shares previously subscribed for cash in private
placements; 412,902 shares to retire principal and interest on outstanding
bridge loans; 1,814,260 shares in private placements for $655,000; 110,000
shares for legal fees valued at $48,000; 600,000 shares for consultants for
fees
valued at $330,000; 50,000 shares for investment banking fees and services
valued at $17,500; 173,750 shares for employees in lieu of pay and for signing
bonuses valued at $57,375, and 100,000 shares to be issued in connection with
the receipt of $100,000 in convertible bridge notes. The total common stock
issued and outstanding at December 31, 2006 was 21,622,243 shares.
During
the nine months ended September 30, 2007, the Company issued a total of
7,040,654 shares of which 4,973,172 were issued in payment of legal services
valued at $1,008,884; 250,000 shares issued to employees, directors and officers
as payment for services rendered during the period and for services in 2006;
541,000 shares issued to employees, directors and officers as payment for
services rendered during the period from January 1, 2007 through September
30,
2007; 20,000 shares to retire debt of $12,500 to a vendor; 456,482 shares issued
to Berry-Shino Securities, Inc. in settlement of pending litigation for unpaid
fees; and 100,000 shares issued in connection with the $100,000 in
convertible notes received by the Company in 2006. In the first nine months
of
2007 the Company has received $553,000 in interim financing from related party
directors. In connection with such $553,000, the Company has issued
500,000 shares to a related party director at $0.20 per share for total private
placement of $100,000 ; 200,000 shares as inducement to related party directors
to lend the Company $400,000. Additionally, as of September 30, 2007,
the Company has issued demand notes totaling $400,000 to related party
directors. Such notes are payable on demand and bear simple interest
at 15% per annum. The Company has not yet issued any notes in
connection with $53,000 loaned to the Company by a related party
director.
Warrants
No
warrants are outstanding.
Stock
Options
On
February 11, 2004 the company granted 5-year stock options to purchase 600,000
shares of restricted common stock at $0.50 per share to consultants assisting
in
company operations. Using a discounted stock price of $0.43, exercise price
of
$0.50, 5-year option, risk-free rate of 4.1% and a volatility rate of .038
the
value of these options is calculated at $0.03 using the Black-Scholes model.
The
aggregate value of 600,000 options is $18,000. By amendment dated September
6,
2005, the option period has been extended for an additional 5 years, to expire
February 11, 2014. At September 30, 2007 and December 31, 2006, none of the
options have been exercised.
In
September 2006, the Company granted options to each of its directors to purchase
50,000 shares at $0.50. In addition it granted an option to its Chairman, to
purchase 150,000 shares at $0.50. The options may be exercised at any time
within five (5) years of the date of grant. Using a discounted stock price
of
$0.49, exercise price of $0.50, 5-year option, risk-free rate of 5.35% and
a
volatility rate of .052 the value of these options is calculated at $0.03 using
the Black-Scholes model. The aggregate value of 300,000 options is $32,216.
At
September 30, 2007 and December 31, 2006, none of the options have been
exercised.
SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2007 and December 31, 2006
Note
4.
|
STOCKHOLDERS’
EQUITY
-
continued
|
Outstanding
stock options are as follows:
|
Shares
|
Balance,
December 31, 2004
|
|
|
|
|
|
Balance,
December 31, 2005
|
|
|
|
|
|
Balance,
December 31, 2006
|
|
|
|
|
|
Balance
September 30, 2007
|
|
The
Company provides for income taxes under Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes . SFAS No. 109. Under
SFAS No. 109, deferred tax assets and liabilities are recognized based on
temporary differences between the financial statement and tax basis of assets
and liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. SFAS No. 109 requires current recognition
of net deferred tax assets to the extent that it is more likely than not such
net assets will be realized. To the extent that the Company believes that its
net deferred tax assets will not be realized, a valuation allowance must be
recorded against those assets.
SFAS
No.
109 requires the reduction of deferred tax assets by a valuation allowance
if,
based on the weight of available evidence, it is more likely than not that
some
or all of the deferred tax assets will not be realized. In the Company’s
opinion, it is uncertain whether they will generate sufficient taxable income
in
the future to fully utilize the net deferred tax asset. Accordingly, a valuation
allowance equal to the deferred tax asset has been recorded. The total deferred
tax asset is calculated by multiplying a 35% estimated tax rate by the
cumulative Net Operating Loss of $14,124,287. The total valuation allowance
is
equal to the total deferred tax asset.
|
|
Nine
Months
Ended
Sept.
30,
2007
|
|
|
Year
Ended
Dec.
31,
2006
|
|
|
|
|
|
|
|
|
|
|
$ |
4,927,536
|
|
|
$ |
4,384,730
|
|
|
|
$ |
(4,927,536 |
) |
|
$ |
(4,384,730 |
) |
|
|
$ |
0
|
|
|
$ |
0
|
|
|
|
$ |
0
|
|
|
$ |
0
|
|
Below
is
a chart showing the estimated federal net operating losses and the years in
which they will expire.
Year
|
|
|
Amount
|
|
|
Expiration
|
|
1993-2003 |
|
|
$ |
4,119,312
|
|
|
|
|
|
|
|
|
$ |
1,893,331
|
|
|
|
|
|
|
|
$ |
4,051,870
|
|
|
|
|
|
|
|
$ |
2,463,287
|
|
|
|
|
|
|
|
$ |
1,596,487
|
|
|
|
|
|
|
|
$ |
14,124,287
|
|
|
|
|
|
SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2007 and December 31, 2006
Note
6.
|
LEASES
AND OTHER
COMMITMENTS
|
The
Company occupies 2,500 square feet of leased space pursuant to an annual lease
that commenced May 1, 2007.
The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The Company has incurred net losses since
inception with an accumulated deficit of $12,527,800 as of December 31, 2006.
The Company has not generated meaningful revenues in the last year. The Company
has a working capital deficit of $3,088,278 as of September 30, 2007. These
factors, among others, raise substantial doubt about the Company’s ability to
continue as a going concern.
Management’s
Plans
The
Company has expended considerable efforts in working with its contract
manufacturer in order to begin the production of its new line of products.
The
Company expects that the first units will be produced in 2007 with sales and
delivery to also commence during such period. After commencing production,
the
Company expects that it may take up to one year for the production design and
processes to stabilize. The Company has continued development efforts on its
patented Paradigm™ technology. The Company is currently working closely
with a critical supplier to jointly complete the engineering and
commercialization process of this technology. The Company has developed a sales
and distribution network relying on manufacturer’s representatives to sell the
Company’s products through wholesale distribution.
The
Company currently funds all its operations from loans from the Company’s
officers and directors. Additionally, the Company is negotiating with
several broker-dealers with a view to completing further private placements
to
fund the business strategy, but to date the Company has not yet concluded any
such arrangement. While not yet achieved to date, the Company’s business
strategy anticipates that it will need to raise in excess of $2 million over
the
next 12 month period in order to fully execute its business plan. Management
believes that, in order to properly exploit the introduction of its products,
it
will be necessary to be positioned not only as a quality supplier of products,
but also able to supply a sufficient volume of product to meet wholesale
demand.
Note
8.
|
PENDING
LITIGATION
|
Distributor
Suit. Prior to the acquisition of Envirotech by the Company, Envirotech was
the defendant in a lawsuit filed by a former distributor alleging a breach
of a
Distributor Agreement entered into with Envirotech in May, 1998. On August
13,
2003, Envirotech entered into a Settlement Agreement and Release pursuant to
which Envirotech agreed to pay the distributor the sum of $520,500 in
installments over a period of ten years. The obligations under this Settlement
Agreement are secured by a Security Agreement covering all assets of Envirotech
except its intellectual properties, as defined therein, subordinated, however,
to a first lien on all assets of Envirotech, tangible and intangible, granted
to
the Senior Secured Creditor in 2001 and 2002 by Envirotech to secure two
promissory notes given in satisfaction of legal fees. As part of the settlement,
Envirotech granted the distributor a Stipulated Judgment which was not to be
filed of record so long as no default existed. On May 3, 2004, the distributor
claimed a breach and filed the Stipulated Judgment. Management believes no
default existed to warrant the filing of the judgment. With the filing of the
Bankruptcy Petition by Envirotech (see below), this action was stayed. However,
with the dismissal of the Chapter 11 Proceedings on February 28, 2006, this
judgment is once again a claim against the assets of Envirotech, subject,
however, to the claims and rights of the Senior Secured Creditor. In June 2007
the executor and beneficiary of the estate of the deceased plaintiff made
written demand for payment of the sums owed under the Stipulated
Judgment. The Company is currently investigating a course of action
and response to such written demand, and the Company has received no further
communication from the executor of the estate.
Seitz
Suit. In 2002, Envirotech was named as a Defendant in a law suit filed in
the U.S. District Court for the Southern District of Texas, Houston, Texas
(Civil Action No. H-02-4782, David Seitz and Microtherm, Inc. vs. Envirotech
Systems Worldwide, Inc., and Envirotech of Texas, Inc. (the “Seitz Suit”).
Envirotech of Texas, Inc. was an independent distributor of the Envirotech
ESI-2000 product line not affiliated with the company. The suit alleges that
Envirotech has infringed upon patent rights of others and seeks damages and
an
order to cease and desist. Management believes the suit is without merit. The
suit is in the discovery and pre-trial motion stage and the Company is
vigorously engaged in the defense of the action. On December 5, 2005, the
Houston Court issued an injunction against Envirotech and its affiliated
entities, including Skye, enjoining them from further marketing, advertising
or
offering for sale, or accepting any orders for (i) the Envirotech ESI 2000
heater, (ii) any other heater, regardless of its model, using parts of the
Model
ESI 2000 heater, and (iii) any other heater, regardless of model number,
utilizing in whole any part [sic] any technology embodied in the Model ESI
2000
heater. On July 26, 2006 Envirotech retained the Dallas, TX firm Hemingway,
Hansen, LLP to continue the defense and prosecution of this litigation. The
Court is reconsidering the scope of the injunction and may modify the wording
on
the scope of the preliminary injunction. Additionally, the Court allowed Seitz
to amend his complaint. Seitz filed his amended complaint attempting to expand
the complaint to also cover Skye, Valeo and the FORTIS™ product. Skye and Valeo
filed motions to dismiss this amended complaint as to Skye, Valeo and the
Fortis, all of which were granted. As such, the only product believed to be
at
issue in the matter (as confirmed by discussions with Seitz’s counsel) is the
Envirotech ESI-2000 product; which has not been manufactured or sold since
the
issuance of the preliminary injunction
in late 2005, and which the Company does not intend to produce in the
future. Envirotech filed counterclaims against Seitz, which the Court
has indicated will go forward with several of the filed
counts. Envirotech continues to defend the Seitz
suit.
SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2007 and December 31, 2006
Note
8.
|
PENDING
LITIGATION - continued
|
Unpaid
Legal Fees . Subsequent to December 31, 2003, Envirotech has been named in
five separate lawsuits for unpaid legal and consulting fees totaling $280,000.
These include the Myers and Jenkins Suit and the Sensor Technologies Suit
discussed below. On May 3, 2004, Envirotech settled one of these suits claiming
fees of $112,500. In connection with that settlement, Envirotech reimbursed
the
plaintiff for alleged out-of-pocket expenses and the Company issued 10,000
shares of common stock, restricted under SEC Rule 144, to the plaintiff on
the
basis of a loan from the Company to Envirotech. The settlement, and any
settlements of the other suits, will be reflected as a charge in the year of
the
settlement. In two of the other three suits judgments have been granted in
the
aggregate amount of approximately $155,500, both of which were stayed by the
bankruptcy filing discussed above. The fourth suit is on behalf of a law firm
that served as a contract arbitrator in Envirotech’s dispute with the
Distributor noted above. With the dismissal of the Chapter 11 proceedings,
the
Company has received notice from the plaintiff that it intends to resume the
suit, which seeks approximately $3,500 in fees.
Myers
and Jenkins Suit . On May 24, 2006, Envirotech was served with a Motion for
Entry of Default in connection with an action filed in Arizona Superior Court,
case number CV-2006-003671 by Envirotech’s prior legal counsel, Myers and
Jenkins. The motion seeks judgment for the payment of the principal sum of
$103,830, together with interest and costs. Envirotech has not defended the
action.
Sensor
Technologies Suit . On May 24, 2006, Envirotech was served with an
Application for Entry of Default in connection with an action filed in the
Arizona Superior Court, case number CV-2006-0060632, by Sensor Technologies
& Systems, Inc., an engineering firm that provided engineering consulting
services in connection with Envirotech’s ESI-2000 product. The application seeks
judgment for the payment of $72,391, together with interest and costs.
Envirotech has not defended the action.
Bankruptcy
Proceedings . On August 6, 2004, Envirotech filed a Voluntary Petition for
protection under Chapter 11 of the United States Bankruptcy Code in Phoenix,
Arizona. The filing of this Petition with the Bankruptcy Court stayed all
existing litigation, judgments and efforts to collect on the judgments.
Envirotech was acquired by the Company in November 2003 in a stock-for-stock
transaction and has been held and operated by the Company as an operating
subsidiary. With the exception of a guarantee to one critical supplier in the
current amount of approximately $42,500, Skye has not assumed any liability
for
the obligations of Envirotech. As of the date of the filing of the Chapter
11
Bankruptcy Petition, Envirotech had liabilities of approximately $1.6 million.
Several creditors, not related to the supply of parts or the assembly of
products, have obtained judgments against Envirotech and an action was pending
in the U.S. District Court, Southern District of Texas, alleging patent
infringement (see above). All claims of creditors, including the above-mentioned
judgments, and efforts to collect same, together with the litigation pending
in
the U.S. District Court in Houston, were stayed during the pendency of the
Bankruptcy Proceedings. Envirotech filed a Disclosure Statement and Plan of
Reorganization on November 7, 2004 and the Court approved its request to submit
the plan to the creditors for approval. The Plan, however, did not receive
approval of the Court and Envirotech subsequently filed a Motion to Dismiss
the
Chapter 11 proceedings which was granted, with prejudice, on February 28, 2006.
All claims and judgments of creditors of Envirotech may be renewed in the
future. The Bankruptcy Court retained jurisdiction to rule on a
pending sanctions motion against Envirotech wherein David Seitz and Microtherm
are claiming approximately $70,000 in legal fees. The Court has not
yet ruled on the matter.
Shareholder
Inspection Claim . In April 2006 a shareholder purporting to have obtained
consent from at least 15% of the Company’s shareholders filed a lawsuit in the
United States District Court for the District of Nevada (Case No.
2:06-CV-0541-RLH-GWF) seeking inspection of the Company’s books and records
pursuant to Nevada corporate law. The Court denied plaintiff’s initial request.
The Company has asserted several counterclaims against the plaintiff for
tortious conduct and for abuse of the legal process in connection with the
lawsuit. The matter is currently pending.
Shareholder
Derivative Action. In May 2006 a small group of dissident shareholders
(including the plaintiff from the Shareholder Inspection Claim) filed a lawsuit
in the United States District Court for the District of Arizona (Case No.
CV06-1291-PHX-ROS) as a derivative action seeking injunctive and declaratory
relief. The Company was named as a nominal defendant and there are no claims
for
monetary damages against the Company. The primary claims involve the prior
issuance of the Company’s common stock to former consultants to the Company, as
well as prior issuances of stock to certain members of current management.
Among
other things the plaintiffs sought to prevent these individuals from using
their
stock and related voting rights to solicit proxies and notice shareholder
meetings, and have demanded that they return the shares to the Company. The
Company has filed extensive counter and cross-claims. The matter came before
the
Court in a Hearing on February 21-22, 2007 for a Temporary Restraining Order
sought by the Plaintiff’s.
SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2007 and December 31, 2006
Note
8.
|
PENDING
LITIGATION - continued
|
On
May 2,
2007, Judge Roslyn O. Silver of the United States District Court for the
District of Arizona issued an Order rejecting the Plaintiffs’ requested
Preliminary Injunction relief in the pending Skye Shareholder’s Derivative
Lawsuit, Stebbins v. Johnson, Civil Action No. 06-1291-PHX-ROS. The
Court also dissolved all restrictions imposed by a prior Temporary Restraining
Order and Stipulated Order, which frees the Company to conduct its corporate
business without any further interference or restraint by the Court or the
Plaintiffs. In the Order, the District of Arizona found that none of the
Plaintiffs’ arguments were convincing, the Plaintiffs failed to present any
evidence that would support a finding of corporate fraud or waste, and the
Plaintiffs had made no showing of likelihood of success on the merits of their
claims. During a ten month investigation into the matter following the filing
of
the lawsuit, the Company and its counsel determined that there was no merit
to
the claims made by Plaintiffs. After reporting the results of this investigation
to the Board of Directors, the Company’s Board of Directors took affirmative
actions to ratify the Company’s prior actions. After hearing the testimony from
five of the Board of Directors and other Skye personnel and consultants at
the
Preliminary Injunction Hearing on February 21-22, 2007, the District of Arizona
accepted the ratification actions of the Skye Board of Directors, which were
based on the Board’s reasonable investigation. Based on the Court’s
May 2, 2007 rulings, Judge Silver stated “it is not clear that Plaintiffs have
any viable claims remaining” in this case. The Plaintiffs have since
requested that their claims be dismissed from the case without
prejudice. The Company has requested that any dismissal of these
claims be with prejudice and with an award of attorney’s fees to the Company by
the Plaintiff’s. The court is considering the type of dismissal that
will be granted, and what, if any counterclaims by the Company will be allowed
to proceed.
Pending
Arbitration. The Company has settled its dispute with Semple and Cooper by
way of the payment of $27,000.
Claim
by Director William Papazian for Legal Defense and Indemnity. The Company is
a party to an action seeking to require Skye to both “defend” and “indemnify”
Director William Papazian from and against costs and liabilities arising in
connection with a counterclaim filed by Skye against Mr. Papazian in connection
with the Shareholder Derivative Action described above. Though filed by Mr.
Papazian in Arizona State Court, the lawsuit was removed to the jurisdiction
of
the Federal District Court and has since been remanded back to State
court. The State court is currently considering the Company’s motion
to dismiss.
Quick
& Confidential Claim. The Company has settled this matter by way of the
payment to Quick & Confidential of $12,000.
Except
as
noted above, to the best knowledge of the officers and directors of the Company,
neither the Company nor its subsidiaries, nor any of their respective officers
or directors is a party to any material legal proceeding or
litigation.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The
following is a discussion of the Company’s financial condition and results of
operations for the nine months ended September 30, 2007 and September 30, 2006.
The following discussion may be understood more fully by reference to the
financial statements, notes to the financial statements, and in the Company’s
Annual Report on Form 10-KSB filed on April 10, 2007, as well as with regard
to
the Company’s other public filings with the United States Securities and
Exchange Commission.
Forward-Looking
Statements
This
report contains “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995. All statements, other than statements
of historical fact, are “forward-looking statements” for purposes of federal and
state securities laws, including statements regarding, among other items, the
Company’s business strategies, continued growth in the Company’s markets,
projections, and anticipated trends in the Company’s business and the industry
in which it operates. Forward-looking statements generally can be identified
by
phrases such as the Company or its management “believes,” “expects,”
“anticipates,” “foresees,” “forecasts,” “estimates” or other words or phrases of
similar import. Similarly, statements in this report describe the Company’s
business strategy, outlook, objectives, plans, intentions or goals also are
forward-looking statements. Although we believe that the expectations reflected
in any of our forward-looking statements are reasonable, actual results could
differ materially from those projected or assumed in any of our forward-looking
statements. Our future financial condition and results of operations, as well
as
any forward-looking statements, are subject to change and subject to inherent
risks and uncertainties. The factors impacting these risks and uncertainties
include, but are not limited to: the substantial losses the Company has incurred
to date; demand for and market acceptance of new products; successful
development of new products; the timing of new product introductions and product
quality; the Company’s ability to anticipate trends and develop products for
which there will be market demand; the availability of manufacturing capacity;
pricing pressures and other competitive factors; changes in product mix; product
obsolescence; the ability of our customers to manage inventory; the ability
to
develop and implement new technologies and to obtain protection for the related
intellectual property; the uncertainties of litigation and the demands it may
place on the time and attention of company management, general economic
conditions and conditions in the markets addressed by the Company; as well
as
other risks and uncertainties, including those detailed from time to time in
our
other Securities and Exchange Commission filings. The forward-looking statements
are made only as of the date hereof. The Company does not undertake any
obligation to update or revise the forward-looking statements, whether as a
result of new information, future events or otherwise.
For
a
detailed description of these and other factors that could cause actual results
to differ materially from those expressed in any forward-looking statement,
please see “Factors That May Affect Our Results of Operation” in this
document.
Business
Development
Skye
International, Inc., a Nevada corporation (“Skye”), was originally organized on
November 23, 1993 as Amexan, Inc. The name was changed on June 1, 1998 to
Nostalgia Motorcars, Inc. Prior to the name change, Amexan was an
inactive company from the date of incorporation. On June 11, 2002, the name
was
changed to Elution Technologies, Inc. On June 4, 2003, in connection
with the pending acquisition of Envirotech Systems Worldwide, Inc., it changed
its name to Tankless Systems Worldwide, Inc. and on October 21, 2005, it changed
its name to Skye International, Inc., as part of its overall plan to create
a
brand name for its revised business plan and expanded product
lines.
Skye
has
three subsidiary corporations, all wholly-owned:
|
·
|
Envirotech
Systems Worldwide,
Inc., an Arizona corporation
(“Envirotech”);
|
|
·
|
ION
Tankless, Inc., an Arizona
corporation (“ION”); and
|
|
·
|
Valeo
Industries, Inc., a Nevada
corporation (“Valeo”).
|
On
November 7, 2003, Skye acquired Envirotech in a one-for-one share exchange.
On
that date, Skye issued 8,366,778 shares of its common stock to the Envirotech
shareholders. Subsequently, in December 2004, 2,075,000 of those shares were
returned to Skye by the former principals of Envirotech and cancelled, and
the
number of Skye’s issued and outstanding shares were correspondingly reduced,
pursuant to a settlement of litigation brought by Skye.
In
January 2004, Skye formed ION to
perform research, development and marketing of new heating technologies. In
January 2005, it created Valeo to license ION technologies and to manufacture
products using those technologies.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
Except
as
otherwise specified, all references herein to the “Company”, “we” our”, “us”
refer to Skye and its wholly-owned subsidiaries, Envirotech, ION and Valeo.
The
business office of the Company is located at 7701 E. Gray Rd., Suite 4
Scottsdale, Arizona 85260. The Company’s fiscal year ends on December
31.
Envirotech
Envirotech
was formed December 9, 1998 and has a limited history of operations. The initial
period of its existence involved research and development of a line of
electronic, tankless water heaters. The first sales of its products occurred
in
calendar year 2000.
The
United States Patent and Trademark Office granted a patent to Envirotech for
its
Modular Electronic Tankless Water Heater (ETWH) (Patent No. US 6,389,226).
Proprietary rights to the design of the ETWH were Envirotech’s principal assets.
The existing patent and intellectual property of Envirotech were assigned as
collateral security for debts owed by Envirotech for legal services arising
prior to the acquisition of Envirotech by Skye.
In
2002,
Envirotech was named as a defendant in a patent infringement suit alleging
that
Envirotech’s product infringed upon a patent owned by David Seitz and
Microtherm, Inc. (the “Seitz Suit”), discussed more fully in “Item 3. Legal
Proceedings, Seitz Suit” below.
Envirotech
filed for relief under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the District of Arizona, on August 6, 2004
(the “Chapter 11 Proceedings”). Envirotech subsequently withdrew from voluntary
bankruptcy protection pursuant to an order of the Bankruptcy court on February
24, 2006, that granted Envirotech’s motion to dismiss its voluntary petition in
bankruptcy with prejudice.
The
filing of the petition with the Bankruptcy Court stayed all then-existing
litigation, judgments and efforts to collect on judgments entered against
Envirotech. With the exception of a guarantee to one critical supplier in the
current amount of approximately $42,500, Skye did not assume any liability
for
the obligations of Envirotech. As of the date of the filing of the Chapter
11
Bankruptcy Petition, Envirotech had liabilities of approximately $1.6 million,
which are reflected in the consolidated financial statements. During the
pendency of the Chapter 11 Proceedings, Envirotech continued selling its water
heater products. Subsequently, in the first quarter of 2005, due to the lack
of
working capital and other factors, Envirotech ceased production of its products.
The Chapter 11 Proceedings were dismissed by the Court, with prejudice, on
February 28, 2006, at the request of Envirotech. In connection with incurring
legal fees to the law firm of Jennings Strouss & Salmon, PLC (“JSS”),
Envirotech granted a security interest in all of its tangible and intangible
assets in 2001 and 2002, including its intellectual property (the “Envirotech
Security”), to JSS (the “Senior Secured Creditor”). After Envirotech filed for
bankruptcy as noted above, JSS sold its claim and the related security interests
to Sundance Financial Corporation. On June 1, 2006 Sundance Financial
Corporation entered into an agreement with the Company’s subsidiary, ION
Tankless, in which it assigned the Envirotech Security to Ion Tankless, Inc.
Because Envirotech has ceased operations, its only asset of any anticipated
value is its intellectual property, including the patent as discussed
above.
ION
Skye
made
a decision in early 2004 to pursue its own research and development for new
water heating technologies, out of which it could develop a completely new
line
of products. In January 2004, Skye formed a wholly-owned, non-operating
subsidiary, ION Tankless, Inc., through which it has since conducted research
and development of alternative heating technologies and products. Skye has
invested heavily in a research and development program to develop new and
innovative methods of heating water, which has resulted in the filing of several
applications for patents with the U.S. Patent and Trademark Office involving
dozens of claims. As of the date of this report, several patents have been
issued to the company and several more remain pending in the United States
and
in certain foreign countries, all as more fully detailed elsewhere in this
report. While there can be no assurances that the other patents sought will
be
granted, the Company believes that its current applications are
meritorious and will be granted at least in part.
With
the
exception of one patent held by Envirotech (discussed above), as well as other
patents pending or awaiting assignment to ION in due course, ION holds all
patents and intellectual property of the Company and it may license that
property to an affiliated or third party entity for manufacturing and
distribution. The assets of ION are included in the consolidated financial
statements for the Company.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
Valeo
Valeo
was
formed by Skye in January 2005 as a wholly-owned operating subsidiary. Valeo
will license technology from ION and manufacture or contract for the manufacture
of several lines of water heating products, as well as other products embodying
ION patent technology. These new products, based on proprietary technology,
are
expected to serve as the foundation for the future growth of the
Company.
Company
Headquarters
The
business office of the Company is located 7701 E. Gray Rd., Suite 4 Scottsdale,
AZ 85260 where it occupies leased offices that commenced on May 1,
2007.
Capitalization
As
of
September 30, 2007, there were approximately 28.662,897 shares of common stock
outstanding and the Company had approximately 439 shareholders of record on
that
date. As of January 8, 2007, the shares of common stock of the
Company are traded on the OTC Bulletin Board under the ticker symbol SKYY.
From
June 5, 2006 through January 7, 2007 the shares of common stock of the Company
were traded on the OTC Pink Sheets under the symbol SKYY. Prior to June 5,
2006,
the shares of common stock of the Company were traded on the OTC Bulletin Board
under the ticker symbols: SKYY, SKYYE, TSYW, TSYWE, CRRZ and ELUT.
Our
Business and Prospects
The
Company is in the business of designing, developing, manufacturing and marketing
consumer lifestyle products, including, initially, several models of an
electronic, tankless water heater. The tankless water heater is small, easy
to
install and supplies hot water on demand. The unit is a microprocessor
controlled electric water heater contained in a compact housing thus eliminating
the large space demands of conventional tank-based water heaters. Skye’s
tankless water heater incorporates precise microprocessor-controlled
temperature. It saves energy and valuable floor space as compared to
conventional tank systems. Tankless systems are suitable for most
areas of the U.S. and worldwide. Prior to the development of new technology,
which is discussed later in this section, the Company was dependent upon the
operations of Envirotech for its revenue. Beginning in 2004 and continuing
throughout 2005, Envirotech’s production and sales steadily declined while the
Company embarked on an aggressive research and development program to develop
new technologies and products for the tankless water heater market. In January
2004, SKYE formed ION through which it has since conducted research and
development on alternative heating technologies and products. SKYE has invested
heavily in a concerted Research & Development program to develop new and
innovative methods of heating water which has resulted in the filing of
applications for several patents involving dozens of claims. As a result of
the
ongoing research and development program, several patents have been issued
and
other patent applications are pending, and new products have been developed
and
are expected to be ready for limited production and sale following
approval/certification, as discussed below.
The
Company ceased to manufacture the ESI-2000 water heater line of products
developed by Envirotech. Our FORTIS™ branded product line, which is
expected to be delivered to the market in late November 2007, is scalable from
40 amps to 120 amps of heating power and is a microprocessor-controlled electric
water heater contained in a compact design. SKYE’s new and innovative way of
heating water for home and business is contained in a small and easy to install
unit. The FORTIS™ series saves energy, space, water, and is suitable
for most areas of the world. SKYE uses advanced technology and high quality
parts in the construction of the FORTIS™ series, thus providing
reliability and longevity. Most anywhere hot water is now being used, SKYE’s
electric instantaneous water heaters can likely perform the task more
efficiently than most other water heaters. The FORTIS™ series will heat
water only as long as you require hot water, and only at the temperature you
desire. Electricity is only used when heated water is required, therefore the
cost of heating water could be calculated to be reduced by as much as 20% -
40%
as water is not kept constantly hot as it is with a conventional tank
heater. Because the FORTIS™ series is compact it can be
easily installed close to where hot water is being used, and it is ideal for
hotels, motels, apartments, and homes where space is at a premium. Additionally,
because each FORTIS™ comes with sophisticated leak detectors and
automatic water shut-off mechanisms, it is the appliance of choice for the
discerning buyer. SKYE believes its FORTIS™ series heaters
offers one of the most efficient solutions for on-demand hot water available
today.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
The
Company has expended considerable efforts in working with its contract
manufacturers, Jabil Circuit, Inc. (“Jabil”), and Electrosem, LLC
(“Electrosem”), both located in Tempe, AZ, in order to begin the production of
the FORTIS™ line of products. As of the date of this report, the
FORTIS™ had been submitted to Intertek Testing Services NA, Inc.
(“Intertek”) for compliance investigation, and certification of conformity to UL
Standard 499 and conformance of its proprietary controller pursuant to UL 244A
. Formal certification of the FORTIS™ product series was given by
Intertek on October 12, 2007. The Company expects that the first
FORTIS™ units will be produce, initially in limited production,
commencing late November 2007. The Company believes that full
production is likely to commence during the first quarter
2008. Despite commencing production, the Company expects that it may
take up to one year for the production design and processes to
stabilize. Once the production and processes have
stabilized the Company anticipates that it will seek to move production of
the
FORTIS™ to a lower cost center in Mexico or China in order to gain
additional margin.
The
Company has also continued to develop 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 preparing a written agreement with a critical supplier
to
(i) jointly complete the engineering and commercialization process, and then
(ii) engage in an engineering for manufacturing phase. Although we have
commenced engineering work on the Paradigm as discussed above, we have not
yet
completed our negotiations there can be no assurance that we will finalize
any
such agreement, or if we do finalize the agreement, that we will be successful
in developing a commercialized product for distribution within a reasonable
period of time.
Access
to
capital remains a pressing consideration for the Company. We have recently
funded our operations through the issuance of convertible notes to certain
of
the Company’s related party directors. Funding needs continue to be met by loans
from certain of our officers and directors. Our business strategy will require
us to raise in excess of an additional $2 million of new equity over the next
12
month period in order to fully execute our current business plan. There can
be
no assurance that we will be able to raise such additional funding by way of
either new debt or equity, and in the event we are unable to raise the funds
necessary to fund our business plan it will be necessary to curtail such plans
and this could have a detrimental impact on our business. Management believes
that, in order to properly exploit the introduction of both the FORTIS™
and Paradigm™ technologies, it will be necessary that we be positioned
not only as a quality supplier of products, but that we also be able to supply
a
sufficient volume of product to meet wholesale demand. We believe that, relative
to the wholesale market, there is a very high expectation that product be
available in a timely fashion when ordered. In order to meet this expectation
we
must be capable of not only producing our products in sufficient volume, but
holding quantities of product in inventory as well. These things all require
capital and we must be successful in our efforts to obtain this funding if
we
are to be successful in the wholesale sales and distribution
channel.
Over
the
balance of the year we will continue to focus our efforts on initiating
production of the FORTIS™ product line and in getting it into the
market to be sold. We will continue to develop our markets and train installers
and field service personnel in cooperation with our appointed manufacturer’s
representatives. This is no small task and it will require a significant effort
on the part of our existing staff, as well as new staff that must be hired
in
order to provide sales and customer service to the field. We will also focus
our
efforts on completing the Paradigm™ technology and we are challenged by
the opportunity to introduce this powerful technology to the US marketplace.
While Paradigm™ will require a significant investment of time and
capital in order to yield a line of marketable products, we are confident that
products based on this technology will be amongst the most efficient and
technologically advanced in the market. Many challenges remain and Skye’s Board,
Management and Staff are committed to the challenge.
Manufacturing
On
February 15, 2006, SKYE entered into a Manufacturing Services Agreement with
Jabil pursuant to which Jabil has agreed to manufacture certain components
and
to assemble SKYE’s tankless water heater products as specified by SKYE from time
to time. The agreement has an effective date of January 30, 2006. SKYE
anticipates that Jabil will become SKYE’s primary manufacturer and is currently
completing the engineering for manufacturing. Additionally, SKYE is also
actively negotiating with critical suppliers to quality them to supply
Paradigm™ components, as well as potentially expedite the earlier
market availability of products utilizing the new Paradigm™
technology. Jabil and its secondary manufacturer, Electrosem, LLC
have established work cells for the FORTIS™ production
and are prepared, subject to the satisfactory completion of an on-site
compliance investigation by Intertek, to commence small volume
product builds on short notice. Jabil has advised us that it will
take both time and additional capital to expand production of the
FORTIS™ line, but that Jabil is committed to the processes necessary to
do so. With our receipt of regulatory certification pursuant to UL
Standard 499, the Company is awaiting formal “Approval to Mark” from Intertek to
apply the “ETL” certification mark after which we expect to commence limited
production of the FORTIS™ commencing November 2007. Full production
of the FORTIS™ series is expected during the first quarter 2008.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
Intellectual
Property
In
May
2002, Envirotech was granted a patent by the United States Patent Office for
its
Modular Electronic Tankless Water Heater (ETWH) (Patent No. US 6,389,226).
The
Founders of Envirotech and Steve Onder, and each of the contractors or
consultants who have performed research and development services for and on
behalf of Envirotech made written assignments to Envirotech of proprietary
and
intellectual property rights relating to the ETWH and that research and
development, and have signed non-disclosure, non-competition agreements with
Envirotech.
During
the past two years, based on newly developed technology, ION has filed several
applications for patents with the United States Patent and Trademark Office,
and
expects the products offered using this new technology to replace the products
previously manufactured by Envirotech. All persons deemed inventors have
executed written assignments to ION of proprietary and intellectual property
rights relating to the inventions forming the basis of the various applications
for patents and the attendant research and development. In November 2005, the
Company received notice from the USPTO that the first such patent request has
been allowed, which was issued on May 16, 2006 as US Patent No. 7,046,922.
On
August 8, 2006, the USPTO issued a method patent No, 7,088,915 to ION on the
Company’s modular tankless water heater technology. On January 16, 2007, the
Company was advised that its wholly owned subsidiary, ION Tankless, Inc.,
received US Patent No. 7,164,851 entitled "Modular Tankless Water Heater Control
Circuitry and Method of Operation" as issued and published by the
United States Patent and Trademark Office. On April 17, 2007 (pending assignment
to ION), the Company received US Patent No. 7,206,506 entitled “Fluid Heating
System”. The patent is related to a tube based fluid heating system developed in
connection with the Company’s previously announced research and development
program. The Company continues to expand its suite of intellectual property
and
is currently in process of filing additional patents related to its continuing
research and development program.. While there can be no assurance that the
other patents sought will be granted, the Company believes that its applications
are meritorious.
Materials
and Principal Suppliers.
SKYE
has
retained Jabil Circuit, Inc. (NYSE: JBL)(“Jabil”) to manufacture its FORTIS™
products and Electrosem, LLC (“Electrosem”) to produce pre-production units,
and, as such, is heavily dependent upon Jabil and Electrosem to perform
satisfactorily so as to ensure the availability of product for sale. Jabil
and
Electrosem are required to buy components for SKYE’s products from the market at
large, as well as from an approved list of suppliers, including Siemens, AG,
Lake Monitors, Tru-Heat, RathGibson, Inc., Electrosem, LLC and Arnold Bros.
Although limited production experience has been obtained, SKYE is satisfied
that
Jabil has the necessary experience to avoid supplier delivery problems. In
order
to avoid losses associated with lack of production components, SKYE has worked
closely with Jabil to identify suppliers that have traditionally performed
well
in addition to ensuring that multiple suppliers for most components are
available. With the exception of certain proprietary components manufactured
by
Jabil and Electrosem, and the preferred vendors noted above, the balance of
components are readily available from a variety of sources both domestically
and
internationally. SKYE is satisfied that it and Jabil have adequately planned
to
avoid production disruption resulting from a breakdown in its supply
chain.
Research
and Development
The
Company conducts all of its research and development activities through ION.
All
employees, contractors and consultants engaged in the research and development
process by ION were required to execute non-disclosure, non-competition
agreements covering the subject, scope and work product of the
program. R&D for the nine-month period ended September 30, 2007
reflects the year-to-date reclassification of all materials and consulting
costs
expended in the development and testing of its new products, including
FORTIS™ and Paradigm™ technology. The Company
expended approximately $616,216 during the nine-month period ended September
30,
2007; $26,878 in 2006 and $450,000 in 2005 on research and
development.
Employees
At
September 30, 2007, Skye had one full-time and one part-time employee.
Additionally, the Company retained the services of consulting professionals
to
provide on-going management, legal, accounting and engineering research and
development work. The Company anticipates adding several full time employees
in
the near future in management and for administrative and technical support.
Additional employees are expected to be engaged as revenues from operations
permit.
Dependence
on Major Customer
Skye
has
not developed a dependence upon any single customer or group of customers.
By
necessity, initial sales of Skye’s products may be concentrated with certain
distributors or retailers until a broader distribution network can be achieved.
Skye will monitor its sales and distribution activities closely to avoid such
reliances.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
Costs
of Environmental Compliance
Because
Skye does not manufacture any of its products, it does not anticipate incurring
material costs related to environmental compliance, which is the responsibility
of the manufacturer.
Recent
Developments
|
·
|
On
June 29, 2007 the Company opened an investigation of its proposed
FORTIS™ line of water heating product with
Underwriters Laboratories, Inc. (“UL”) in order to determine its
compliance with ANSI/UL standard
499.
|
|
·
|
In
August 2007, the Company settled the dispute with its former auditors
Semple & Cooper thereby avoiding the need to engage in an arbitration
of the mater.
|
|
·
|
In
August 2007, the Company settled an outstanding collection dispute
with
Quick & Confidential of Phoenix, AZ thereby removing the
matter from its pending litigation.
|
|
·
|
On
September 4, 2007 the Company opened an investigation of its proposed
FORTIS™ line of water heating product with Intertek Testing
Services NA, Inc. (“Intertek”) in order to determine its compliance with
ANSI/UL standard 499.
|
|
·
|
On
October 12, 2007, the Company was advised that Intertek had issued
its
Listing Report in connection with the investigation and approval
for
listing of the FORTIS™ product
series. The testing confirmed compliance with UL standard UL
499. The Company is now awaiting a formal review of its third
party manufacturing facilities as a prerequisite to receiving “Approval to
Mark” the trademarked “ETL” certification mark on the FORTIS™
product series.
|
|
·
|
On
October 12, 2007, the Company’s Board of Directors made the following
changes to its management: Gregg Johnson was removed as the
Company’s Secretary and reappointed as the Company’s Executive Vice
President. Ted Marek was appointed as Secretary and also
continues to serve as a director.
|
|
·
|
On
November 1, 2007 the Company received notice from UL concerning the
successful completion of the Construction Review process. The
Company suspended further investigation of its FORTIS™ product series by
UL.
|
Results
of Operations
Results
of Operations for the Nine Months Ended September 30, 2007 and 2006
Compared.
The
following table is a summary of our operations for the nine months ended
September 30, 2007 as compared to the nine months ended September 30,
2006.
|
|
For
the Nine Months Ended
September
30,
2007
|
|
|
For
the Nine
Months
Ended
September
30,
2006
|
|
|
|
$ |
-
|
|
|
$ |
16,457
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
-
|
|
|
$ |
17,982
|
|
|
|
|
|
|
|
|
|
|
General
and Administrative Expenses
|
|
$ |
346,946
|
|
|
$ |
590,622
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
616,210
|
|
|
$ |
26,928
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,520,125
|
|
|
$ |
1,834,871
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,596,487 |
) |
|
$ |
(1,879,533 |
) |
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
Revenues
For
the Nine months ended September 30:
|
2007
|
2006
|
Increase/(decrease)
|
$
|
%
|
|
|
|
|
|
Revenues
for the nine months ended September 30, 2007 were $NIL, compared to revenues
of
$10,632 in the nine months ended September 30, 2006. The decreases in revenue
is
attributable to the cessation all sales of ESI-2000 products and parts pending
the launch of the Company’s FORTIS™ product line.
General
and Administrative expenses
For
the nine months ended September 30:
|
2007
|
2006
|
Increase/(decrease)
|
$
|
%
|
General
& Administrative expenses
|
|
|
|
|
General
and administrative expenses decreased by 41% reflecting the fact that the
Company is gearing up to begin sales of its water heating product. Commencing
May 1, 2007 the Company’s operations were conducted from 2,500 square foot
leased premises in Scottsdale, AZ. During the nine month period ended September
30, 2007 the Company continued to operate at minimal staffing levels as it
completed the balance of development work on its pending FORTIS™
product line and submitted the product for Nationally Recognized Testing
Laboratory (“NRTL”) investigation for certification/approval by Intertek Testing
Laboratories, Inc. (“Intertek”). We anticipate an increase in the general and
administrative expenses by the Company as we add more operational and
administrative personnel, and continued professional assistance with our
continued efforts to execute our business plan and market our
products
Total
Operating Expenses
For
the nine months ended September 30:
|
2007
|
2006
|
Increase/(decrease)
|
$
|
%
|
|
|
|
|
|
Overall
operating expenses decreased by approximately 17% as a result
of reduced occupancy and G&A costs. Professional fees
pertaining to R&D have been reclassed in 2007. Additionally, minimal
expenses were incurred during the first nine months of 2007 as the Company
focused its principal efforts on completing the FORTIS™ product line
and readying it for NRTL investigation for certification/approval and subsequent
production. Legal and professional fees accounted for $548,966 of the total
operating expenses of $1,520,125 for the nine month period ending September
30,
2007.
Net
Loss
For
the nine months ended September 30:
|
2007
|
2006
|
Increase/(decrease)
|
$
|
|
|
|
|
The
net
loss for the nine months ended September 30, 2007 was $1,596,487, versus a
net
loss of $1,879,533 for the nine months ended September 30, 2006. The significant
decreases resulted from its reduced occupancy and G&A costs.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
Liquidity
and Capital Resources at September 30, 2007 and December 31,
2006.
The
following table summarizes total assets, accumulated deficit and stockholders’
equity.
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
$ |
236,712
|
|
|
$ |
315,034
|
|
|
|
$ |
(14,124,287 |
) |
|
$ |
(12,527,800 |
) |
Stockholders’
Equity (Deficit)
|
|
$ |
(3,245,592 |
) |
|
$ |
(3,141,194 |
) |
|
|
|
|
|
|
|
|
|
Working
Capital (Deficit)
|
|
$ |
(3,285,564 |
) |
|
$ |
(3,185,116 |
) |
A
critical component of our operating plan impacting our continued existence
is
the ability to obtain additional capital through equity and/or debt financing.
Since inception, we have financed our cash flow requirements through issuances
of common stock and cash generated from our operations. As we continue our
activities, we may continue to experience net negative cash flows from
operations, pending receipt of significant revenues. The Company expects to
commence limited sales of its FORTIS™ product line during the fourth
quarter of 2007. Commencing in the first quarter of 2007 and
continuing throughout the third quarter, all of the Company’s cash needs were
met through loans advanced to the Company by certain of its related party
directors.
Net
cash
change for the nine month period ending September 30, 2007 was nearly
flat at a decrease of $332 as compared to an increase of $7,360 a
year ago. Cash used in operating activities for the nine month period
ending September 30, 2007 declined by $92,953 from the same period a year
ago. This use of cash in operations was provided by cash from shares
and stock in financing activities, totaling $1,492,089 for the nine months
ending September 30, 2007 a $95,364 reduction from a year ago.
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 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
September 30, 2007, the existing capital and anticipated funds from operations
were not sufficient to sustain Company operations, nor the business plan over
the next twelve months. We anticipate substantial increases in our cash
requirements; 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.
We
anticipate that we will incur operating losses in the next twelve months. Our
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of development. Such
risks for us include, but are not limited to, an evolving and unpredictable
business model and the management of growth. To address these risks, we must,
among other things, expand our customer base, implement and successfully execute
our business and marketing strategy, respond to competitive developments, and
attract, retain and motivate qualified personnel. There can be no assurance
that
we will be successful in addressing such risks, and the failure to do so can
have a material adverse effect on our business prospects, financial condition
and results of operations.
Critical
Accounting Policies
We
have
identified the following policies as critical to our business operations and
the
understanding of our results of operations. The preparation of these financial
statements require us to make estimates and assumptions that effect the reported
amount of assets and liabilities, disclosure of contingent assets and
liabilities at the date of our financial statements, and the reported amounts
of
revenue and expenses during the reporting period. There can be no assurance
that
actual results will not differ from those estimates. The effect of these
policies on our business operations is discussed below where such policies
affect our reported and expected financial results.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
Revenue
Recognition. Our revenue recognition policy is significant because our
revenue is a key component of our results of operations. We recognize revenue
when delivery of the product has occurred or services have been rendered, title
has been transferred, the price is fixed and collectability is reasonably
assured. Sales of goods are final with no right of return.
Warranty
Costs. We warrant our products against manufacturing defects for a period of
five years on electrical components and 10 years on other components. Once
sales
of our new products commence, we expect to make an accrual for warranty claims
based on our sales.
Intangible
Assets. We have intangible assets in the form of patents issued and pending.
Our estimate of the remaining useful life of these assets and the amortization
of these assets will affect our gain from operations. Since we do not have
a
method of quantifying the estimated number of units that may be sold we have
elected to amortize these intangibles over a seven year period beginning in
the
first quarter of 2006.
Purchase
Accounting. Our purchase accounting policy is to record any acquisitions in
accordance with current accounting pronouncements and allocate the purchase
price to the net assets. The Company evaluates the fair market values of
tangible and intangible assets based on current market conditions, and financial
and economic factors. Intangible assets are valued using several cash flow
projection models and financial models to establish a baseline for their
respective valuations. The Company’s policy is to expense in-process research
and development costs at acquisition.
Stock
Options. We have a stock option plan under which options to purchase shares
of our common stock may be granted to employees, consultants and directors
at a
price no less than the fair market value on the date of grant. We account for
grants to employees in accordance with the provisions of APB No. 25,
Accounting for Stock Issued to Employees (“APB No. 25”). Under APB
No. 25, compensation expense is based on the difference, if any, on the date
of
the grant between the fair value of our stock and the exercise price of the
option and is recognized ratably over the vesting period of the option. Because
our options must be granted with an exercise price equal to the quoted market
value of our common stock at the date of grant, we recognize no stock
compensation expense at the time of the grant in accordance with APB
No. 25. On January 1, 2006 we adopted the fair value based method set forth
in Statement of Financial Accounting Standards (“SFAS”) No. 123,
Accounting for Stock-Based Compensation (“SFAS No. 123”), we would
recognize compensation expense based upon the fair value at the grant date
for
awards under the plans. The amount of compensation expense recognized using
the
fair value method requires us to exercise judgment and make assumptions relating
to the factors that determine the fair value of our stock option grants. We
account for equity instruments issued to non-employees in accordance with SFAS
No. 123 and Emerging Issues Task Force Issue No. 96-18, Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
or
in Conjunction with Selling Goods or Services.
Going
Concern
The
financial statements included in this filing have been prepared in conformity
with generally accepted accounting principles that contemplate the
continuance of us as a going concern. Our cash position may be inadequate to
pay
all of the costs associated with our operations. We intend to use borrowings
and
security sales to mitigate the effects of our cash position, however no
assurance can be given that debt or equity financing, if and when required
will
be available. The financial statements do not include any adjustments relating
to the recoverability and classification of recorded assets and classification
of liabilities that might be necessary should we be unable to continue
existence.
Off-Balance
Sheet Arrangements.
During
the nine-month period ended September 30, 2007, the Company did not enter into
nor was it a party to any off-balance sheet arrangement other than as previously
disclosed in prior filings, including the Company’s Annual Report on form 10KSB
for the period ending December 31, 2006. Other than as previously disclosed,
we
have no other off-balance sheet arrangements that have or are reasonably likely
to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to
investors.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
FACTORS
THAT MAY AFFECT OUR RESULTS OF OPERATIONS
Risks
Relating To Our Business and Our Marketplace
History
of Operations and Dependence on Future Development.
SKYE
International, Inc. (“SKYE”) was organized November 23, 1993 and existed as a
development stage company until its acquisition of Envirotech Systems Worldwide,
Inc. (“Envirotech”), on November 7, 2003. Envirotech was organized December 9,
1998. Envirotech has a limited history of operations. The first sales of its
products occurred in calendar year 2000. The Company, on an operating and
consolidated basis, has continued to incur substantial losses from operations
since the date of acquisition. The Company did not generate significant revenue
from sales of its discontinued ESI-2000 product line and has not generated
any
revenues yet from the sale of other products, including FORTIS™,
developed in conjunction with the Company’s research and development
initiatives.
Prior
to
the development of new technology, the Company was dependent upon the operations
of Envirotech for its revenue. The Company expects that additional operating
losses will occur until new product sales in the market commence and the
resulting revenue is sufficient to offset the level of costs incurred for
ongoing marketing, sales and product development. The Company is subject to
all
of the risks inherent in establishing a new business enterprise. Since the
Company has a very limited record of operations, there can be no assurance
that
its business plan will be successful. The potential for success of the Company
must be considered in light of the significant problems, expenses, difficulties,
complications and delays experienced by the Company to date; and as are
frequently encountered with the start-up of new businesses. The Company’s
management team believes that its success depends on the Company’s ability to
complete product development and obtain NRTL regulatory approval, then in
manufacturing, marketing and selling its products and, over the longer term,
in
developing new products for which larger markets are possible.
The
Company has not had sufficient funds to date to implement its business plans.
We
cannot be certain that our business strategy will be successful because these
strategies are unproven. There can be no assurance that the Company will
generate sufficient revenues to the extent necessary to render it profitable.
There can be no assurance that management has accurately forecast the Company's
performance or that planned operations will lead to profits in the future.
In
addition, outside of product know-how, intellectual property and contractual
relationships, the Company has only very limited hard assets, the value of
which
is far less than the accrued payables of the Company as of the date of this
report. If the Company is unable to develop marketable products, obtain
customers and/or generate sufficient revenues so that it can profitably operate,
there is a risk that the Company's business will not succeed. We will be
particularly susceptible to the significant risks and uncertainties as described
in these risk factors, and we will be more likely to incur the expenses
associated with addressing such risks. Our business and prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in the early stages of development. These risks are
particularly severe among companies in new and rapidly evolving markets such
as
those that we expect will serve as our target markets.
Awaiting
SEC Response to Amended Financial Filings for the Year Ended December 31,
2004
On
September 15, 2005 the Company received a letter from the U.S. Securities and
Exchange Commission (“SEC”) relating to information provided by the Company in
its financial filings for the year ended December 31, 2004 (the “2004 10KSB”),
as well as the interim quarterly filings preceding such date. The SEC has
requested, among other things, that we clarify and restate certain disclosures
in the 2004 10KSB and possibly some related quarterly disclosures on form 10QSB
during such year. On June 14, 2006 the Company filed an amended and restated
10KSB for the year ended December 31, 2004, and, to date, we have not received
any comments thereon from the SEC. Other than filing an amended and restated
financial as discussed above we have not formally responded in writing to the
SEC, and thus we have not yet concluded such matters with the SEC and the
Company may be required to undertake further actions or financial restatements
as a result of further enquiries or actions by the SEC and the Company’s Board
of Directors.
Limited
Capital and Need for Additional Financing.
The
Company does not have sufficient capital to execute its existing business plan
and until the Company achieves 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. 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 or cease its activities. If additional
shares are issued to obtain financing, current shareholders will suffer an
immediate and dilutive effect on their percentage of stock ownership in the
Company, and this dilutive effect will likely be substantial. The Company has
no
commitments or plans for any additional funding at the present time.
Insufficient financial resources may require the Company to delay or eliminate
all or some of its development, marketing and sales plans, which will have
a
material adverse effect on the Company's business, financial condition and
results of operations. There is no certainty that even if capital is available
and the expenditures are made by the Company; that such expenditures
will result in a profitable business.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - FACTORS
THAT MAY AFFECT OUR RESULTS OF OPERATIONS - continued
Lack
of Diversification.
The
size
of the Company makes it unlikely that the Company will be able to commit its
funds to diversify the business until it has a proven track record of profitable
operations, and the Company may not be able to achieve the same level of
diversification as larger entities engaged in this type of
business.
Competition.
The
water
heater market is mature, highly concentrated and highly competitive, and steep
discounts and rebates as high as 30% or more are standard. Some contractors
are
loyal to favorite brands and on occasion resistant to tankless systems, and
the
plumbing industry is on occasion also resistant to tankless systems,
particularly electric powered tankless units. Pricing competition has increased
in recent years, and major manufacturers are increasing their expenditures
on
research and development. Conventional water heaters (tank heaters)
are slightly more efficient and reliable than conventional tank water heaters
in
previous years. There are several companies around the world who manufacture
water heaters, conventional and tankless. It is reasonable to expect to
encounter intense competition in all aspects of our business and that such
competition would increase. Substantial competition could emerge at any
time. Many of our competitors and potential competitors have longer
operating histories and significantly greater experience, resources, and
managerial, financial, technical, and marketing capabilities than
us. In addition, many of these competitors offer a wider range of
products and services than we contemplate offering. Many current and potential
competitors also have greater name recognition, industry contacts and more
extensive customer bases that could be leveraged to accelerate their competitive
activity. Moreover, current and potential competitors have established and
may
establish future cooperative relationships among themselves and also with third
parties to enhance their products and services in this space. Consequently,
new
competitors or alliances may emerge and rapidly acquire significant market
share. We cannot assure you that we will be able to compete effectively with
current or future competitors or that the competitive pressures faced by us
will
not harm our business. This intense competition, and the impact it has on the
valuation of companies of this nature, could limit our opportunities and have
a
materially adverse effect on the Company’s profitability or
viability.
The
Company believes that its primary competition will be the manufacturers of
conventional tank water heaters, who are firmly established with the plumbing
industry. There are a large number of manufacturers of tank water heaters,
both
domestic and foreign. The dominant manufacturers are five large, multinational,
established companies with significantly more resources than the Company
(Bradford-White, Rheem, A. O. Smith, State Industries and American Standard).
Manufacturers of tank water heaters dominate the U.S. market, maintaining over
96% market share of residential water heater sales. The Company cannot predict
the likelihood that it will take market share away from those manufacturers,
or
whether or how long it will take the Company to build up sales of its tankless
product line. In addition, there can be no assurance that larger, more
established companies with significantly more financial, technical, research,
engineering, development and marketing resources; with established distribution
networks and worldwide manufacturing capabilities; and with greater revenues
and
greater name recognition than the Company; will not develop competing systems
and products which will surpass the Company’s business.
Performance;
Market Acceptance.
The
quality of the Company’s products, manufacturing capability, and marketing and
sales ability, and the quality and abilities of its personnel, are among the
operational keys to the Company’s success. A primary management challenge will
be to penetrate the market for water heaters, a mature, highly competitive
and
concentrated market. Also, distributors and users of water heaters may resist
or
be slow to accept an electric tankless water heater. Other important factors
to
the success of the Company will be the ability to complete the development
process for new products in a timely manner and the ability to attract an
adequate number of buyers, distributors and investors. There can be no assurance
that the Company can complete development of new technology so that other
companies possessing greater resources will not surpass it. There can be no
assurance that the Company can achieve its planned levels of performance, or
can
be successful in establishing relationships with the number and quality of
distributors it needs to be successful, in a timely way. If the Company is
unsuccessful in these areas, it could have a material adverse effect on the
Company's business, results of operations, financial condition and forecasted
financial results.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - FACTORS
THAT MAY AFFECT OUR RESULTS OF OPERATIONS -
continued
Dependence
on Intellectual Property -
Design and Proprietary Rights.
Our
success and our ability to compete depend, to a significant degree, on our
intellectual property and our ability to prevent third parties from using such
intellectual property. We will rely on patent, copyright and trademark law,
as
well as confidentiality arrangements, to protect our intellectual property.
Even
if legal actions are initiated by the Company to enforce our intellectual
property rights however there can be no guarantee that such actions will be
successful in protecting our intellectual property adequately.
Envirotech
was granted a patent by the United States Patent and Trademark Office for its
Modular Electronic Water Heater (ETWH) (Patent No. US 6,389,226 B1). Proprietary
rights to the design of the ETWH were Envirotech’s principal assets. The
existing patent and intellectual property of Envirotech were assigned as
collateral for debts owed by Envirotech for legal services arising prior to
the
acquisition of Envirotech by SKYE. Envirotech, in 2005, discontinued production
of all models of the ESI-2000 tankless water heater previously manufactured
by
it. On December 5, 2005 by order of Judge Lee Rosenthal of the US District
Court
for the Southern District of Texas in Houston a preliminary injunction against
the Company was issued in connection with the civil action H-02-4782 between
David Seitz and Microtherm (as Plaintiff) and Envirotech (as Defendant and
Plaintiff by counterclaim) enjoining the Company and others from manufacturing,
assembling, selling or offering for sale, any Product (as defined in the order)
including the Envirotech ESI-2000 heater, any other heater regardless of its
model number utilizing parts from the ESI-2000 or any other heater, regardless
of its model number, utilizing in whole any part any technology [sic] embodied
in the ESI-2000 heater (sic). The Court has indicated that it is considering
re-wording of the preliminary injunction, which is still under
advisement.
The
new
line of tankless water heaters designed by the Company do not, in the opinion
of
the Company, utilize the technology embodied in the Envirotech patent or
technology related to the ESI-2000 product, and are constructed using parts
and
operational methodologies distinct from the Envirotech ESI-2000 heater. The
Company does not intend to produce any further ESI-2000 heaters and believes
all
future water heaters will embody designs and technologies related to newly
developed intellectual property of the Company’s research and design subsidiary
Ion Tankless, Inc. There can, however, be no assurance that a third party may
claim or continue to claim that the Company’s products infringe any of such
third party’s patents or intellectual property. During the past year, based on
newly developed technology, SKYE has filed several applications for patents
with
the United States Patent and Trademark Office, and expects that a range of
products using this new technology will replace the products previously
manufactured by Envirotech. In November 2005, the Company received notice from
the USPTO that the first such patent request had been allowed, which was issued
on May 16, 2006 as US Patent No. 7,046,922. On August 8, 2006, the USPTO issued
a method patent (No, 7,088,915) to ION on the modular tankless water heater
technology. On January 16, 2007, the Company was advised that its wholly owned
subsidiary, ION Tankless, Inc., received US Patent No. 7,164,851 entitled
"Modular Tankless Water Heater Control Circuitry and Method of Operation" as
issued and published. On April 17, 2007 (awaiting assignment to ION in due
course), the United States Patent and Trademark Office published the Company’s
patent entitled “Fluid Heating System” as US Patent No. 7,206,506. The Company
has filed other patent applications in the United States and such applications
are currently pending before the United States Patent and Trademark Office..
While there can be no assurances that the other patents sought will be granted
or that the technology will be considered proprietary to SKYE or ION, the
Company believes that its applications are meritorious and will be granted
at
least in part. It is expected that further research and development undertaken
by the Company through its subsidiary, ION Tankless, Inc., will result in the
issuance of more patents. However, there is no guarantee that the concepts
and
technologies we use in the future will be patentable.
Effective
Protection may not be available for our Trademarks.
Although
we have recently applied to register our trademarks in the United States, we
cannot assure you that we will be able to secure significant protection for
these marks. Our competitors or others may adopt product or service names
similar to "SKYE", thereby impeding our ability to build brand identity and
possibly leading to client confusion. Our inability to adequately protect the
name "SKYE” could seriously harm our business.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - FACTORS
THAT MAY AFFECT OUR RESULTS OF OPERATIONS - continued
Policing
Efforts to Protect Intellectual Property may not be
successful.
Policing
unauthorized use of our intellectual property is difficult by the global nature
of the high technology industry and difficulty in controlling hardware and
software. The laws of other countries may afford us little or no effective
protection for our intellectual property. We intend to make all reasonable
and
practical efforts to enforce our rights but we cannot assure you that the steps
we take will prevent misappropriation of our intellectual property or that
agreements entered into for that purpose will be enforceable. In addition,
litigation may be necessary in the future to: enforce our intellectual property
rights; determine the validity and scope of the proprietary rights of others;
or
defend against claims of infringement or invalidity. Such litigation, whether
successful or unsuccessful, could result in substantial costs and diversions
of
resources, either of which could seriously harm our business. There can be
no
assurance that competitors of the Company, some of which have substantially
greater resources, will not obtain patents or other intellectual property
protection that will restrict the Company’s ability to make, use and sell its
products. If the Company were unsuccessful in protection of proprietary and
intellectual property rights, it could have a material adverse effect on the
Company's business, results of operations, financial condition and value, and
forecasted financial results.
Some
of our markets are cyclical, and a decline in any of these markets could have
a
material adverse effect on our operating performance.
Our
business is cyclical and dependent on consumer spending and is therefore
impacted by the strength of the economy generally, interest rates, housing
starts, consumer spending and other factors, including national, regional and
local slowdowns in economic activity and job markets, which can result in a
general decrease in product demand from professional contractors and specialty
distributors. For example, a slowdown in economic activity that results in
less
home renovations can have an adverse effect on the demand for some of our
products. In addition, unforeseen events, such as terrorist attacks or armed
hostilities, could negatively affect our industry or the industries in which
our
customers operate, resulting in a material adverse effect on our business,
results of operations and financial condition.
Disaster.
A
disaster that disables the Company’s operations will negatively impact the
Company’s ability to perform for a period of time. The Company’s disaster
recovery plan includes future multiple-site storage of inventory and the
possibility of multiple manufacturing facilities.
We
increasingly manufacture and/or source critical components for our products
outside the United States, which may present additional risks to our
business.
A
significant portion of our future production will likely be manufactured outside
of the United States, principally in China and/or Mexico, and expanding
international manufacturing capacity in China and Mexico is part of our strategy
to reduce costs. International operations generally are subject to various
risks, including political, religious and economic instability, local labor
market conditions, the imposition of foreign tariffs and other trade
restrictions, the impact of foreign government regulations, and the effects
of
income and withholding tax, governmental expropriation, and differences in
business practices. We may incur increased costs and experience delays or
disruptions in product deliveries and payments in connection with international
manufacturing and sales that could cause loss of revenue. Unfavorable changes
in
the political, regulatory, and business climate could have a material adverse
effect on our financial condition, results of operations, and cash
flows.
Our
operations will suffer if we are unable to complete our internal cost reduction
programs.
We
are
proposing a cost reduction program in our business, which includes a transfer
of
portions of our manufacturing and assembly work from of existing United States
operations to proposed operations in China or Mexico. In implementing this
program, we may not be able to successfully consolidate management, operations,
product lines, distribution networks, and manufacturing facilities, and we
could
experience a disruption in our inventory and product supply or in administrative
services. In addition, we may not be able to complete this program without
unexpected costs or delays, or the need for increased management time and
effort. If we do not successfully implement this program on a timely basis,
we
will not achieve the planned operational efficiencies and cost savings, and
there could be an adverse impact on ongoing relationships with our customers,
all of which would impact our profitability.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - FACTORS
THAT MAY AFFECT OUR RESULTS OF OPERATIONS -
continued
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 have obtained 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.
Loss
of key suppliers, lack of product availability or loss of delivery sources
could
decrease sales and earnings.
Our
ability to manufacture products is dependent upon our ability to obtain adequate
product supply from manufacturers or other suppliers. While in many instances
we
have agreements, including supply agreements, with our suppliers, these
agreements are generally terminable by either party on limited notice. The
loss
of, or a substantial decrease in the availability of, products from certain
of
our suppliers, or the loss of key supplier agreements, could have a material
adverse effect on our business, results of operations and financial condition.
In addition, supply interruptions could arise from shortages of raw materials,
labor disputes or weather conditions affecting products or shipments,
transportation disruptions or other factors beyond our control. Furthermore,
since we acquire a portion of our supply from foreign manufacturers, our ability
to obtain supply is subject to the risks inherent in dealing with foreign
suppliers, such as potential adverse changes in laws and regulatory practices,
including trade barriers and tariffs, and the general economic and political
conditions in these foreign markets.
Our
ability to both maintain our existing customer base and to attract new customers
is dependent in many cases upon our ability to deliver products and fulfill
orders in a timely and cost-effective manner.
To
ensure
timely delivery of our products to our customers, we frequently rely on third
parties, including couriers such as UPS, DHL and other national shippers and
expediters as well as various local and regional trucking contractors.
Outsourcing this activity generates a number of risks, including decreased
control over the delivery process and service timeliness and quality. Any
sustained inability of these third parties to deliver our products to our
customers could result in the loss of customers or require us to seek
alternative delivery sources, if they are available, which may result in
significantly increased costs and delivery delays. Furthermore, the need to
identify and qualify substitute service providers or increase our internal
capacity could result in unforeseen operations problems and additional costs.
Moreover, if customer demands for our products increases, we may be unable
to
secure sufficient additional capacity from our current service providers, or
others, on commercially reasonable terms, if at all.
In
some cases we are dependent on long supply chains, which may subject us to
interruptions in the supply of many of the products that we manufacture and
distribute.
An
increasing portion of the parts that are incorporated into our products are
imported from foreign countries, including China and Mexico. We are thus
dependent on long supply chains for the successful delivery of many of our
product components. The length and complexity of these supply chains make them
vulnerable to numerous risks, many of which are beyond our control, which could
cause significant interruptions or delays in delivery of our products. Factors
such as labor disputes, changes in tariff or import policies, severe weather
or
terrorist attacks or armed hostilities may disrupt these supply chains. We
expect more of our name brand and private label products will be imported in
the
future, which will further increase these risks. A significant interruption
in
our supply chains caused by any of the above factors could result in increased
costs or delivery delays and have a material adverse effect on our business,
results of operations and financial condition.
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
are likely to 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.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - FACTORS
THAT MAY AFFECT OUR RESULTS OF OPERATIONS -
continued
Expect
to Incur Losses for the Foreseeable Future.
We
expect
to incur losses for the foreseeable future and we may
never become profitable. Because technology companies, even if successful,
typically generate significant losses while they grow, we do not expect to
generate profits for the foreseeable future, and we may never generate profits.
In addition, we expect our expenses to increase significantly as we develop
the
infrastructure necessary to implement our business strategy. Our expenses will
continue to increase as we: hire additional employees; pursue research and
development; expand our information technology systems; and lease and purchase
more space to accommodate our operations.
Possible
Claims That the Company Has Violated Intellectual Property Rights of
Others.
In
2002,
Envirotech was named as a Defendant in a law suit filed in the U.S. District
Court for the Southern District of Texas, Houston, Texas (Civil Action No.
H-02-4782, David Seitz and Microtherm, Inc., vs. Envirotech Systems Worldwide,
Inc., and Envirotech of Texas, Inc. (the “Seitz Suit”). The Company is not
directly affiliated with Envirotech of Texas, Inc., which was a distributor
of
Envirotech’s products. The suit alleges that Envirotech infringed patent rights
of others and seeks damages and an order to cease and desist. Management
believes the suit is without merit. The suit was stayed pending the disposition
of the Chapter 11 Bankruptcy Petition filed by Envirotech in August 2004. On
September 30, 2005, however, the Bankruptcy Court allowed the plaintiff to
re-open the Seitz Suit and he has done so. The suit is in the discovery stage
and the Company is vigorously engaged in the discovery process. On December
5,
2005, the Houston Court issued an injunction against Envirotech and its
affiliated entities, including SKYE, enjoining them from further marketing,
advertising or offering for sale, or accepting any orders for (i) the Envirotech
ESI 2000 heater, (ii) any other heater, regardless of its model, using parts
of
the Model ESI 2000 heater, and (iii) any other heater, regardless of model
number, utilizing in whole any part any technology [sic] embodied in the Model
ESI 2000 heater. At a hearing on May 18, 2006, the Court directed that discovery
be expanded to include the technology and products of SKYE, including,
specifically the FORTIS™ and Paradigm™ technologies. On July
26, 2006 Envirotech retained the Dallas, TX firm Hemingway, Hansen, LLP to
continue the defense and prosecution of this litigation. At a subsequent hearing
on February 28, 2007, the Court indicated that it would reconsider and modify
the wording on the scope of the preliminary injunction. Additionally, the Court
allowed Seitz to amend his complaint. Seitz filed his amended complaint
attempting to expand the complaint. Skye and Valeo filed motions to dismiss
this
amended complaint but Envirotech filed a motion to exclude Skye, Valeo (and
the
FORTIS™ product) as parties to the litigation, which were granted by
the court. Envirotech has filed a ten count counterclaim against Seitz.
Envirotech continues to aggressively defend the Seitz suit and will pursue
this
litigation to conclusion.
Except
as
described above, neither SKYE nor any of its affiliates, including Envirotech,
is the subject of any other dispute, claim or lawsuit or threatened law suit
alleging the violation of intellectual property rights of a third party. To
the
extent that the Company is alleged, or may in the future be alleged to have
violated a patent or other intellectual property right of a third party, it
may
be prevented from operating its business as planned, and it may be required
to
pay damages, to obtain a license, if available, to use the patent or other
right
or to use a non-infringing method, if possible, to accomplish its objectives.
Any of these claims, with or without merit, or any claims by the Company against
third parties for alleged infringement of the Company’s patent rights or
otherwise, could subject the Company to costly litigation and the diversion
of
the Company’s technical and management personnel. If the Company incurs costly
litigation and its personnel are not effectively deployed, the resulting
expenses and management time losses will likely result in a significant
impairment of the Company’s ability to achieve its business plan or achieve
profitability from operations.
Business
Plans and Operational Structure May Change.
We
continually analyze our business plans and internal operations in light of
market developments. As a result of this ongoing analysis, we may decide to
make
substantial changes in our business plan and organization. In the future, as
we
continue our internal analysis and as market conditions and our available
capital changes, we may decide to make organizational changes and/or alter
some
or entirely all of our overall business plans.
Reliance
on Management.
The
Company believes that it currently lacks certain key management in order to
fully execute its business plan. It has undertaken to recruit additional persons
to key Board of Directors and management positions, including engineering and
finance. Should the Company be unsuccessful in recruiting persons to fill the
key management positions, or in the event any of the existing key management
should cease to be affiliated with the Company for any reason before qualified
replacements could be found, there could be material adverse effects on the
Company's business and prospects. Each of the officers and other key personnel,
has an agreement with the Company, that contains provisions dealing with
confidentiality of trade secrets, ownership of patents, copyrights and other
work product, and non-competition. Nonetheless, there can be no assurance that
these personnel will remain employed for the entire duration of the respective
terms of such agreements or that any employee or consultant will not breach
covenants and obligations owed to the Company.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - FACTORS
THAT MAY AFFECT OUR RESULTS OF OPERATIONS -
continued
In
addition, all decisions with respect to the management of the Company will
be
made exclusively by the officers and directors of the Company. Investors will
only have rights associated with minority ownership interest rights to make
decision that affect the Company. The success of the Company, to a large extent,
will depend on the quality of the directors and officers of the Company.
Accordingly, no person should invest in the Units unless he is willing to
entrust all aspects of the management of the Company to the officers and
directors.
Inability
to Attract and Retain Qualified Personnel.
The
future success of the Company depends in significant part on its ability to
attract and retain key management, technical and marketing personnel. As we
grow, we will also need to continue to hire additional technical, marketing,
financial and other key personnel. Competition for highly qualified
professional, technical, business development, and management and marketing
personnel is intense. We may experience difficulty in attracting new personnel,
may not be able to hire the necessary personnel to implement our business
strategy, or we may need to pay higher compensation for employees than we
currently expect. A shortage in the availability of required personnel could
limit the ability of the Company to grow, sell its existing products and
services and launch new products and services. We cannot assure you that we
will
succeed in attracting and retaining the personnel we need to grow.
Inability
to Manage Rapid Growth.
The
Company expects to grow very rapidly. Rapid growth often places considerable
operational, managerial and financial strain on a business. To successfully
manage rapid growth, the Company must accurately project its rate of growth
and:
|
· |
rapidly
improve, upgrade and expand its business
infrastructures; |
|
·
|
deliver
products and services on
a timely basis;
|
|
·
|
maintain
levels of service
expected by clients and
customers;
|
|
·
|
maintain
appropriate levels of
staffing;
|
|
·
|
maintain
adequate levels of
liquidity; and
|
|
·
|
expand
and upgrade its
technology, transaction processing systems and network hardware or
software or find third parties to provide these
services.
|
Our
business will suffer and may ultimately fail if the Company is unable to
successfully manage its growth.
Regulatory
Factors.
The
Federal Government, a State Government or any Local Government could at any
time
enact, repeal or change law in such a way as to eliminate, reduce or postpone
certain advantages available to the water heater industry, and in particular,
the electric powered water heater industry; or to selectively provide such
advantages to classes of water heaters not manufactured by the Company. In
addition, possible future consumer legislation, regulations and actions could
cause additional expense, capital expenditures, restrictions and delays in
the
activities undertaken in connection with the business, the extent of which
cannot be predicted. The exact affect of such legislation cannot be predicted
until it is
proposed. Additionally, much of the
Company’s business is regulated by National, State and Municipal codes that
affect the manner in which the Company’s products are installed and used.
Although the Company believes it is aware of existing practices around the
United States, there can be no assurance that one or more governing
jurisdictions could make changes to such codes, the effect of which could be
detrimental to the Company and its business in such jurisdictions.
Effects
of Amortization Charges.
Our
losses will be increased, or our earnings, if we have them in the future, will
be reduced, by charges associated with our issuances of options. The total
unearned stock-based compensation will be amortized as stock-based compensation
expense in our consolidated financial statements over the vesting period of
the
applicable options or shares, generally five to ten years in the case of options
granted to employees and one year in the case of options granted to non-employee
directors and restricted stock issued to employees. These types of charges
may
increase in the future. Future unearned stock-based compensation charges
may also include potential additional charges associated with options granted
to
consultants. The future value of these potential charges cannot be estimated
at
this time because the charges will be based on the future value of our
stock.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - FACTORS
THAT MAY AFFECT OUR RESULTS OF OPERATIONS -
continued
Dividend
Policy.
There
can
be no assurance that the proposed operations of the Company will result in
significant revenues or any level of profitability. We do not anticipate paying
cash dividends on our capital stock in the foreseeable future. We plan to retain
all future earnings, if any, to finance our operations and the acquisitions
of
interests in other companies and for general corporate purposes. Any future
determination as to the payment of dividends will be at our Board of Directors’
discretion and will depend on our financial condition, operating results,
current and anticipated cash needs, plans for expansion and other factors that
our Board of Directors considers relevant. No dividends have been declared
or
paid by the Company, and the Company does not contemplate paying dividends
in
the foreseeable future.
Conflicts
of Interest.
Existing
and future officers and directors may have other interests to which they devote
time, either individually or through partnerships and corporations in which
they
have an interest, hold an office, or serve on boards of directors, and each
may
continue to do so. As a result, certain conflicts of interest may exist (or
may
be alleged by others to exist) between the Company and its officers and/or
directors that may not be susceptible to resolution. All potential conflicts
of
interest will be resolved only through exercise by the directors of such
judgment as is consistent with their fiduciary duties to the Company and it
is
the intention of management to minimize any potential conflicts of interest
or
allegations thereof.
Terms
of subsequent financings will adversely impact your
investment.
The
Company will engage in common
equity, debt, or preferred stock financings in the future. Your rights and
the
value of your investment in the common stock will be reduced. Interest on debt
securities could increase costs and negatively impacts operating results. Shares
of our preferred stock are likely to be issued in series from time to time
with
such designations, rights, preferences, and limitations as needed to raise
capital. The terms of future common share and/or preferred stock issuances
are
likely to be more advantageous to those investors than to current holders of
common stock. In addition, if we need to raise more equity capital from sale
of
common stock, institutional or other investors may negotiate terms at least
as,
and likely more favorable than the terms of your investment. Shares of common
stock which we sell in private placements will, at some point, be sold into
the
market and such market sales will likely adversely affect market
price.
The
industry in which we operate is characterized by rapid technological change
that
requires us to develop new technologies and
products.
Our
future will depend upon our ability to successfully develop and market
innovative products in a rapidly changing technological environment. We will
likely require significant capital to develop new technologies and products
to
meet changing customer demands that, in turn, may result in shortened product
lifecycles. Moreover, expenditures for technology and product development are
generally made before the commercial viability for such developments can be
assured. As a result, we cannot assure you that we will successfully develop
and
market these new products that the products we do develop and market will be
well received by customers, or that we will realize a return on the capital
expended to develop such products.
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.
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - FACTORS
THAT MAY AFFECT OUR RESULTS OF OPERATIONS -
continued
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.
Our
common stock is subject to penny stock regulation that may affect the liquidity
for our common stock.
Our
common stock is subject to regulations of the Securities and Exchange Commission
relating to the market for penny stocks. These regulations generally require
that a disclosure schedule explaining the penny stock market and the risks
associated therewith be delivered to purchasers of penny stocks and impose
various sales practice requirements on broker-dealers who sell penny stocks
to
persons other than established customers and accredited investors. The
regulations applicable to penny stocks may severely affect the market liquidity
for our common stock and could limit your ability to sell your securities in
the
secondary market.
Future
equity transactions, including exercise of options or warrants, could result
in
dilution.
From
time
to time, we sell restricted stock, warrants, and convertible debt to investors
in other private placements. Because the stock is restricted, the stock is
sold
at a greater discount to market prices compared to a public stock offering,
and
the exercise price of the warrants sometimes is at or even lower than market
prices. These transactions cause dilution to existing stockholders. Also, from
time to time, options are issued to officers, directors, or employees, with
exercise prices equal to market. Exercise of in-the-money options and warrants
will result in dilution to existing stockholders. The amount of dilution will
depend on the spread between the market and the exercise price, and the number
of shares, options or warrants involved. Such dilution is very likely to be
significant.
We
have incurred losses and may continue to incur losses in the
future.
At
September 30, 2007, our accumulated deficit was $13,922,999. We have not been
able to generate enough sales 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.
Risks
associated with rapid growth.
If
the
Company’s products receive favorable sales demand from consumers, the Company
will likely experience significant growth as it retains new employees and
management to oversee the production and distribution of its
products. Inherent in any rapidly growing organization is a risk that
such growth may result in internal stresses and failures as management teams
learn how to work collectively in a new environment and build appropriate
working procedures within the organization. Additionally, it is
typical the most rapidly growing companies face an increased risk of employee
turn-over and the associated costs of training and retraining
employees. During periods of growth it is possible that the Company
mail fail to manage such growth appropriately and such failures may result
in
additional costs and expenses that may affect overall financial
performance.
Risks
associated with new product lines.
As
the
Company prepares to bring its FORTIS™ product line into production it
is likely the Company will experience losses associated with obsolescent parts
inventory as changes to a product line are made to assist in the ease of
manufacture, or to reduce overall cost. The Company typically orders
parts from multiple vendors in large quantities so as to achieve lower parts
costs and assure a stable source of production supply. Though
policies and procedures exist to minimize losses associated with obsolescence,
such as limited production runs until changes are applied, it is nonetheless
common to make several changes during the early phase of a production cycle
to
accommodate unforeseen production issues. Although the Company will
make every effort to minimize expenses associated with obsolete inventory,
there
can be no assurance that such efforts will be effective to prevent such losses;
and in the event the Company is unsuccessful in managing its policies to prevent
losses associated with obsolete inventory, such costs and expenses could be
significant.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - FACTORS
THAT MAY AFFECT OUR RESULTS OF OPERATIONS -
continued
Risk
of failure to achieve commercial acceptance.
Our
FORTIS™ product line is new and untested in the
commercial marketplace. In the event the
FORTIS™ fails to achieve widespread commercial
acceptance, such product line may become obsolete and in such case the company
will experience losses from costs associated with the discontinuation of
production of such product.
We
source a significant number of parts from international suppliers, which may
be
subject to a number of risks and often require more management time and expense
than do suppliers from domestic sources.
We
currently source parts from the following countries: China, India, England,
Germany, Italy, Japan, Mexico, Canada and the
Netherlands,. Such international parts procurement subject us to a number of
risks, including:
|
•
|
political
and economic
instability;
|
|
|
coordinating
our communications and logistics;
|
|
•
|
less
favorable, or relatively undefined, intellectual property
laws;
|
|
•
|
unexpected
changes in regulatory requirements and
laws;
|
|
•
|
export
duties, import controls and trade barriers (including quotas);
and
|
|
•
|
adverse
trade policies, and adverse changes to those
policies.
|
In
addition, several of the countries where we operate have emerging or developing
economies, which may be subject to greater currency volatility, negative growth,
high inflation, limited availability of foreign exchange.
Due
to inherent limitations, there can be no assurance that our system of disclosure
and internal controls and procedures will be successful in preventing all errors
or fraud, or in informing management of all material information in timely
manner.
Our
Management, including our interim CEO and interim CFO, does not expect that
our
disclosure controls and internal controls and procedures will prevent all error
and all fraud. A control system, no matter how well conceived and operated,
can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system reflects that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the company have been
or
will be detected. These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns can occur simply
because of error or mistake. Additionally, controls can be circumvented by
the
individual acts of some persons, by collusion of two or more people, or by
management override of the control. The design of any system of
controls also is based in part upon certain assumptions about the likelihood
of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time,
a
control may become inadequate because of changes in conditions, or the degree
of
compliance with the policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control system, misstatements due
to
error or fraud may occur and may not be detected.
Our
future existence remains uncertain and the report of our auditors on our
December 31, 2004; 2005 and 2006 financial statements contain a “going concern”
qualification.
The
report of the independent auditors on our financial statements for the years
ended December 31, 2004, 2005 and 2006, includes an explanatory paragraph
relating to our ability to continue as a going concern. We have suffered
substantial losses from operations, require additional financing, are subject
to
significant and costly litigation and 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.
ITEM
3. CONTROLS AND PROCEDURES
Evaluation
of disclosure controls and procedures.
Our
Chief
Executive Officer and Chief Financial Officer evaluated the effectiveness of
our
disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the
end
of the period covered by this Quarterly Report on Form 10-Q. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures were effective as of
September 30, 2006 to ensure that information we are required to disclose in
reports that we file or submit under the Securities Exchange Act of 1934
(i) is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms and (ii) is
accumulated and communicated to our management, including our Chief Executive
Officer and our Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure. Our disclosure controls and procedures
are designed to provide reasonable assurance that such information is
accumulated and communicated to our management. Our disclosure controls and
procedures include components of our internal control over financial
reporting.
During
the period covered by this report, there were no changes in internal controls
that materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
PART
II
ITEM
1. LEGAL PROCEEDINGS
The
Company is currently engaged in a significant amount of costly and burdensome
litigation, including:
Distributor
Suit. Prior to the acquisition of Envirotech by the Company, Envirotech was
the defendant in a lawsuit filed by a former distributor alleging a breach
of a
Distributor Agreement entered into with Envirotech in May, 1998. On August
13,
2003, Envirotech entered into a Settlement Agreement and Release pursuant to
which Envirotech agreed to pay the distributor the sum of $520,500 in
installments over a period of ten years. The obligations under this Settlement
Agreement are secured by a Security Agreement covering all assets of Envirotech
except its intellectual properties, as defined therein, subordinated, however,
to a first lien on all assets of Envirotech, tangible and intangible, granted
to
the Senior Secured Creditor in 2001 and 2002 by Envirotech to secure two
promissory notes given in satisfaction of legal fees. As part of the settlement,
Envirotech granted the distributor a Stipulated Judgment which was not to be
filed of record so long as no default existed. On May 3, 2004, the distributor
claimed a breach and filed the Stipulated Judgment. Management believes no
default existed to warrant the filing of the judgment. With the filing of the
Bankruptcy Petition by Envirotech (see below), this action was stayed. However,
with the dismissal of the Chapter 11 Proceedings on February 28, 2006, this
judgment is once again a claim against the assets of Envirotech, subject,
however, to the claims and rights of the Senior Secured Creditor. In June 2007
the executor and beneficiary of the estate of the deceased plaintiff made
written demand for payment of the sums owed under the Stipulated
Judgment. The Company is currently investigating a course of action
and response to such written demand, and the Company has received no further
communication from the executor of the estate.
Seitz
Suit. In 2002, Envirotech was named as a Defendant in a law suit filed in
the U.S. District Court for the Southern District of Texas, Houston, Texas
(Civil Action No. H-02-4782, David Seitz and Microtherm, Inc. vs. Envirotech
Systems Worldwide, Inc., and Envirotech of Texas, Inc. (the “Seitz Suit”).
Envirotech of Texas, Inc. was an independent distributor of the Envirotech
ESI-2000 product line not affiliated with the company. The suit alleges that
Envirotech has infringed upon patent rights of others and seeks damages and
an
order to cease and desist. Management believes the suit is without merit. The
suit is in the discovery and pre-trial motion stage and the Company is
vigorously engaged in the defense of the action. On December 5, 2005, the
Houston Court issued an injunction against Envirotech and its affiliated
entities, including Skye, enjoining them from further marketing, advertising
or
offering for sale, or accepting any orders for (i) the Envirotech ESI 2000
heater, (ii) any other heater, regardless of its model, using parts of the
Model
ESI 2000 heater, and (iii) any other heater, regardless of model number,
utilizing in whole any part [sic] any technology embodied in the Model ESI
2000
heater. On July 26, 2006 Envirotech retained the Dallas, TX firm Hemingway,
Hansen, LLP to continue the defense and prosecution of this litigation. The
Court is reconsidering the scope of the injunction and may modify the wording
on
the scope of the preliminary injunction. Additionally, the Court allowed Seitz
to amend his complaint. Seitz filed his amended complaint attempting to expand
the complaint to also cover Skye, Valeo and the FORTIS™ product. Skye and Valeo
filed motions to dismiss this amended complaint as to Skye, Valeo and the
Fortis, all of which were granted. As such, the only product believed to be
at
issue in the matter (as confirmed by discussions with Seitz’s counsel) is the
Envirotech ESI-2000 product; which has not been manufactured or sold since
the
issuance of the preliminary injunction in late 2005, and which the Company
does
not intend to produce in the future. Envirotech filed counterclaims
against Seitz, which the Court has indicated will go forward with several of
the
filed counts. Envirotech continues to defend the Seitz
suit.
PART
II - ITEM 1. LEGAL PROCEEDINGS - continued
Unpaid
Legal Fees . Subsequent to December 31, 2003, Envirotech has been named in
five separate lawsuits for unpaid legal and consulting fees totaling $280,000.
These include the Myers and Jenkins Suit and the Sensor Technologies Suit
discussed below. On May 3, 2004, Envirotech settled one of these suits claiming
fees of $112,500. In connection with that settlement, Envirotech reimbursed
the
plaintiff for alleged out-of-pocket expenses and the Company issued 10,000
shares of common stock, restricted under SEC Rule 144, to the plaintiff on
the
basis of a loan from the Company to Envirotech. The settlement, and any
settlements of the other suits, will be reflected as a charge in the year of
the
settlement. In two of the other three suits judgments have been granted in
the
aggregate amount of approximately $155,500, both of which were stayed by the
bankruptcy filing discussed above. The fourth suit is on behalf of a law firm
that served as a contract arbitrator in Envirotech’s dispute with the
Distributor noted above. With the dismissal of the Chapter 11 proceedings,
the
Company has received notice from the plaintiff that it intends to resume the
suit, which seeks approximately $3,500 in fees.
Myers
and Jenkins Suit . On May 24, 2006, Envirotech was served with a Motion for
Entry of Default in connection with an action filed in Arizona Superior Court,
case number CV-2006-003671 by Envirotech’s prior legal counsel, Myers and
Jenkins. The motion seeks judgment for the payment of the principal sum of
$103,830, together with interest and costs. Envirotech has not defended the
action.
Sensor
Technologies Suit . On May 24, 2006, Envirotech was served with an
Application for Entry of Default in connection with an action filed in the
Arizona Superior Court, case number CV-2006-0060632, by Sensor Technologies
& Systems, Inc., an engineering firm that provided engineering consulting
services in connection with Envirotech’s ESI-2000 product. The application seeks
judgment for the payment of $72,391, together with interest and costs.
Envirotech has not defended the action.
Bankruptcy
Proceedings . On August 6, 2004, Envirotech filed a Voluntary Petition for
protection under Chapter 11 of the United States Bankruptcy Code in Phoenix,
Arizona. The filing of this Petition with the Bankruptcy Court stayed all
existing litigation, judgments and efforts to collect on the judgments.
Envirotech was acquired by the Company in November 2003 in a stock-for-stock
transaction and has been held and operated by the Company as an operating
subsidiary. With the exception of a guarantee to one critical supplier in the
current amount of approximately $42,500, Skye has not assumed any liability
for
the obligations of Envirotech. As of the date of the filing of the Chapter
11
Bankruptcy Petition, Envirotech had liabilities of approximately $1.6 million.
Several creditors, not related to the supply of parts or the assembly of
products, have obtained judgments against Envirotech and an action was pending
in the U.S. District Court, Southern District of Texas, alleging patent
infringement (see above). All claims of creditors, including the above-mentioned
judgments, and efforts to collect same, together with the litigation pending
in
the U.S. District Court in Houston, were stayed during the pendency of the
Bankruptcy Proceedings. Envirotech filed a Disclosure Statement and Plan of
Reorganization on November 7, 2004 and the Court approved its request to submit
the plan to the creditors for approval. The Plan, however, did not receive
approval of the Court and Envirotech subsequently filed a Motion to Dismiss
the
Chapter 11 proceedings which was granted, with prejudice, on February 28, 2006.
All claims and judgments of creditors of Envirotech may be renewed in the
future. The Bankruptcy Court retained jurisdiction to rule on a
pending sanctions motion against Envirotech wherein David Seitz and Microtherm
are claiming approximately $70,000 in legal fees. The Court has not
yet ruled on the matter.
Shareholder
Inspection Claim . In April 2006 a shareholder purporting to have obtained
consent from at least 15% of the Company’s shareholders filed a lawsuit in the
United States District Court for the District of Nevada (Case No.
2:06-CV-0541-RLH-GWF) seeking inspection of the Company’s books and records
pursuant to Nevada corporate law. The Court denied plaintiff’s initial request.
The Company has asserted several counterclaims against the plaintiff for
tortious conduct and for abuse of the legal process in connection with the
lawsuit. The matter is currently pending.
Shareholder
Derivative Action. In May 2006 a small group of dissident shareholders
(including the plaintiff from the Shareholder Inspection Claim) filed a lawsuit
in the United States District Court for the District of Arizona (Case No.
CV06-1291-PHX-ROS) as a derivative action seeking injunctive and declaratory
relief. The Company was named as a nominal defendant and there are no claims
for
monetary damages against the Company. The primary claims involve the prior
issuance of the Company’s common stock to former consultants to the Company, as
well as prior issuances of stock to certain members of current management. Among
other things the plaintiffs sought to prevent these individuals from using
their
stock and related voting rights to solicit proxies and notice shareholder
meetings, and have demanded that they return the shares to the Company. The
Company has filed extensive counter and cross-claims. The matter came before
the
Court in a Hearing on February 21-22, 2007 for a Temporary Restraining Order
sought by the Plaintiff’s.
On
May 2,
2007, Judge Roslyn O. Silver of the United States District Court for the
District of Arizona issued an Order rejecting the Plaintiffs’ requested
Preliminary Injunction relief in the pending Skye Shareholder’s Derivative
Lawsuit, Stebbins v. Johnson, Civil Action No. 06-1291-PHX-ROS. The
Court also dissolved all restrictions imposed by a prior Temporary Restraining
Order and Stipulated Order, which frees the Company to conduct its corporate
business without any further interference or restraint by the Court or the
Plaintiffs. In the Order, the District of Arizona found that none of the
Plaintiffs’ arguments were convincing, the Plaintiffs failed to present any
evidence that would support a finding of corporate fraud or waste, and the
Plaintiffs had made no showing of likelihood of success on the merits of their
claims. During a ten month investigation into the matter following the filing
of
the lawsuit, the Company and its counsel determined that there was no merit
to
the claims made by Plaintiffs.
PART
II - ITEM 1. LEGAL PROCEEDINGS -
continued
After reporting
the results of this investigation to the Board of Directors, the Company’s Board
of Directors took affirmative action to ratify the Company’s prior actions.
After hearing the testimony from five of the Board of Directors and other Skye
personnel and consultants at the Preliminary Injunction Hearing on February
21-22, 2007, the District of Arizona accepted the ratification actions of the
Skye Board of Directors, which were based on the Board’s reasonable
investigation. Based on the Court’s May 2, 2007 rulings, Judge Silver
stated “it is not clear that Plaintiffs have any viable claims remaining” in
this case. The Plaintiffs have since requested that their claims be
dismissed from the case without prejudice. The Company has requested
that any dismissal of these claims be with prejudice and with an award of
attorney’s fees to the Company by the Plaintiff’s. The court is
considering the type of dismissal that will be granted, and what, if any
counterclaims by the Company will be allowed to proceed.
Pending
Arbitration. The Company has settled its dispute with Semple and Cooper by
way of the payment of $27,000.
Claim
by Director William Papazian for Legal Defense and Indemnity. The Company is
a party to an action seeking to require Skye to both “defend” and “indemnify”
Director William Papazian from and against costs and liabilities arising in
connection with a counterclaim filed by Skye against Mr. Papazian in connection
with the Shareholder Derivative Action described above. Though filed by Mr.
Papazian in Arizona State Court, the lawsuit was removed to the jurisdiction
of
the Federal District Court and has since been remanded back to State
court. The State court is currently considering the Company’s motion
to dismiss.
Quick
& Confidential Claim. The Company has settled this matter by way of the
payment to Quick & Confidential of $12,000.
Except
as
noted above, to the best knowledge of the officers and directors of the Company,
neither the Company nor its subsidiaries, nor any of their respective officers
or directors is a party to any material legal proceeding or litigation.
ITEM
2. CHANGES IN SECURITIES
None
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
(a)
|
During
the year ended December
31, 2000, the Company issued five convertible notes payable, totaling
$100,000, which matured in March 2001. These notes bear interest at
the rate of 12.5% per annum. Each note is subject to automatic
conversion at the maturity date. One of these notes, with a
principal amount of $30,000, was converted in November 2006. As of
the
date of this filing, the remaining four notes, totaling $70,000,
have not
yet been converted and are in
default.
|
(b)
|
Between
January 2004 and January
2005, the Company issued forty notes in connection with bridge loans
made
through private placements. The notes bear interest at 10%, interest
payable quarterly, principal and interest convertible into one common
share for each outstanding $1.00 of principal and interest. Of these
notes, thirty-nine have been either repaid or converted at December
31,
2005. Of the remaining four notes, three were converted in April
2006. The
sole remaining note, in the principal amount of $15,000 has not been
converted or repaid and is in
default.
|
(c)
|
Envirotech
has five notes with an
aggregate principal amount of $833,240 that are in default, as
follows:
|
Demand
Note with Attorneys, 6% Interest, All Assets of Subsidiary, Envirotech,
pledged as Collateral.
|
|
|
|
Demand
Note with Former Distributor of Subsidiary, Envirotech, in Settlement
and
Repurchase of Distributorship Territory, 7%
Interest.
|
|
|
|
Demand
Note Made by Subsidiary, Envirotech, 10% Interest, Payable
Monthly.
|
|
|
|
Demand
Note Made by Subsidiary, Envirotech, 6% Interest.
|
|
|
|
Demand
Note Made by Subsidiary, Envirotech.
|
|
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None
during the nine-month period ended September 30, 2007.
ITEM
5. OTHER INFORMATION
None
ITEM
6. EXHIBITS
SIGNATURES
In
accordance with Section 13 of the Exchange Act, the Company has caused this
report to be signed on its behalf by the undersigned, hereunto duly
authorized
|
SKYE
INTERNATIONAL, INC.
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|
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|
|
Date:
November
7, 2007
|
By:
|
/s/ Perry
D. Logan |
|
|
|
Perry
D. Logan |
|
|
|
Title:
Chief Executive
Officer (Interim) and Chief Accounting Officer
(Interim) |
|
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