UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB
(Mark
One)
|
[X]
|
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the fiscal year ended December 31, 2005
| [ ] |
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the
transition period from ____ to _____
Commission
File Number: 000-28083
SKYE
INTERNATIONAL, INC.
(Exact
name of small business issuer in its charter)
|
Nevada
(State
or other jurisdiction of incorporation
or organization)
|
88-0362112
(I.R.S.
Employer Identification No.)
|
7150
W. Erie Street, Chandler, AZ 85226
(Address
of principal executive offices) (Zip Code)
Issuer’s
telephone number: (480)
609-7575
Securities
registered under Section 12(b) of the Exchange Act: None
Securities
registered under Section 12(g) of the Exchange Act:
Common
Stock, $0.001 Par Value
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. [ ]
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 registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No [ ]
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB. [
]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
[
] No
[X]
1
State
issuer’s revenues for its most recent fiscal year. $172,424
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the average bid and asked price of
the
issuer’s common stock as of June 22, 2006 was $ 8,955,994.
There
were approximately 20,588,493 shares of the issuer’s common stock outstanding as
of June 30, 2006 and the Company had approximately 250 shareholders of record
on
that date.
If
the
following documents are incorporated by reference, briefly describe them and
identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into which
the document is incorporated: (1) any annual report to security holders; (2)
any
proxy or information statement; and (3) any prospectus filed pursuant to Rule
424(b) or (c) of the Securities Act of 1933 (“Securities Act”). The listed
documents should be clearly described for identification purposes (e.g., annual
report to security holders for fiscal year ended December 24, 1990).
None
Transitional
Small Business Disclosure Format (Check one): Yes
[ ];
No [X]
2
SKYE
INTERNATIONAL INC.
FOR
THE FISCAL YEAR ENDED
December
31, 2005
Index
to Report
on
Form 10-KSB
|
PART
I
|
Page(s)
|
|
Item
1.
|
Description
of Business
|
5
|
|
Item
2.
|
Description
of Property
|
15
|
|
Item
3.
|
Legal
Proceedings
|
16
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
19
|
|
PART
II
|
||
|
Item
5.
|
Market
for Common Equity and Related Stockholder Matters
|
20
|
|
Item
6.
|
Managements
Discussion and Analysis of Financial Conditions and Result of
Operations
|
22
|
|
Item
7.
|
Financial
Statements
|
46
|
|
Item
8.
|
Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
|
46
|
|
Item
8A.
|
Controls
and Procedures
|
48
|
|
Item
8B
|
Other
Information
|
49
|
|
|
||
|
PART
III
|
||
|
|
||
|
Item
9.
|
Directors,
Executive Officers, Promoters and Control Persons; Compliance With
Section
16(a) of the Exchange Act
|
50
|
|
Item
10.
|
Executive
Compensation
|
53
|
|
Item
11.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
54
|
|
Item
12.
|
Certain
Relationships and Related Transactions
|
56
|
|
Item
13.
|
Exhibits
|
57
|
|
Item
14.
|
Principal
Accountant Fees and Services
|
58
|
| Signatures | 60 | |
3
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.
Throughout
this Form 10-KSB, references to “we”, “our”, “us”, or “the Company”, and similar
terms refer to SKYE International Inc. and its 100% owned subsidiaries,
Envirotech Systems Worldwide Inc., Valeo Industries Inc. and ION Tankless
Inc.
4
ITEM
1. DESCRIPTION
OF BUSINESS
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. 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 was 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, formed created Valeo to license
ION
technologies and to manufacture products using those technologies.
Envirotech
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. 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.
5
ITEM
1. DESCRIPTION OF BUSINESS - continued
Business Development - continued
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.
As
a
result of several lawsuits and adverse judgments obtained by third party
creditors against Envirotech, including the possibility of a default judgment
in
the Seitz suit, 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”).
The
Seitz
Suit was initially stayed pending the disposition of the Chapter 11 Proceedings,
but on September 30, 2005, the Court allowed the plaintiff to re-open the
suit.
On
December 5, 2005, the Court issued a preliminary injunction against Envirotech
and its affiliated entities, including Skye, enjoining them from further
marketing, advertising or offering for sale, or accepting any orders for (i)
the
Envirotech ESI 2000 heater, (ii) any other heater, regardless of its model,
using parts of the Model ESI 2000 heater, and (iii) any other heater, regardless
of model number, utilizing in whole any part (sic) any technology embodied
in
the Model ESI 2000 heater. The Company does not consider this injunction
detrimental to its ongoing business activities, as it had already discontinued
production of the alleged offending product and the new products have been
developed with specific attention to avoiding infringement on any existing
patents of third parties. At a hearing on May 17, 2006 the Judge issued a
direction to Skye requiring it to engage in the discovery process relative
to
the FORTIS™ and Paradigm™ products developed by Skye and Ion Tankless. Skye has
complied with this direction for additional discovery. On May 16, 2006 the
U.S.
Patent and Trademark Office issued patent no. 7,046,922 to Ion Tankless, Inc.
in
connection with its modular tankless water heater technology. Skye believes
that
this patent forms the basis for the FORTIS™ line of products that are currently
entering production.
The
Seitz
Suit was initially stayed pending the disposition of the Chapter 11 Proceedings,
but on September 30, 2005, the Bankruptcy Court allowed the plaintiff to
re-open
the suit. On December 5, 2005, the Houston Court issued a preliminary injunction
against Envirotech and its affiliated entities, including Skye, enjoining
them
from further marketing, advertising or offering for sale, or accepting any
orders for (i) the Envirotech ESI 2000 heater, (ii) any other heater, regardless
of its model, using parts of the Model ESI 2000 heater, and (iii) any other
heater, regardless of model number, utilizing in whole any part (sic) any
technology embodied in the Model ESI 2000 heater. The Company does not consider
this injunction detrimental to its ongoing business activities, as it had
already discontinued production of the alleged offending product and the
new
products have been developed with specific attention to avoiding infringement
on
any existing patents of third parties. At a hearing on May 17, 2006 the Houston
Court issued a direction to Skye requiring it to engage in the discovery
process
relative to the FORTIS™
and
Paradigm™
products developed by Skye and Ion Tankless. Skye has complied with this
direction for additional discovery. On May 16, 2006 the U.S. Patent and
Trademark Office issued patent no. 7,046,922 to Ion Tankless, Inc. in connection
with its modular tankless water heater technology. Skye believes that this
patent forms the basis for the FORTIS™
line
of
products that are currently entering production.
After
Envirotech filed for bankruptcy as noted above, JSS sold its claim and the
related security interests to Sundance Financial Corporation, an entity
controlled by Larry Ryckman, who is a shareholder of Skye. On June 1, 2006
Sundance Financial Corporation entered into an agreement with the Company’s
subsidiary, ION Tankless, Inc. 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. The patent is being contested in the Seitz suit.
ION
Recognizing
the dynamic state of the industry and the need for an improved product line,
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. In November 2005, the Company received notice from the
USPTO
that the first such patent request had been allowed, which was issued after
year-end on May 16, 2006 as US Patent No. 7,046,922. 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.
6
ITEM
1. DESCRIPTION
OF BUSINESS - continued
Business
Development - continued
With
the
exception of one patent held by Envirotech (discussed above), ION holds
all
patents and intellectual property of the Company and may license that property
to an affiliated or unrelated entity for manufacturing and distribution.
The
assets of ION are included in the consolidated financial statements for
the
Company.
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. Valeo has leased approximately 28,000 square feet
of
industrial space and has begun to oversee the production and distribution
of our
two new product lines, FORTIS™
and
Paradigm™,
that
incorporate innovative technology not previously used in the water heating
market. These new products, based on proprietary technology, are expected
to
serve as the foundation for the future growth of the Company.
Financing
The
Company, after the acquisition of Envirotech, has met its financial needs
through its limited operations, debt financing and through the sales and
issuances of its securities. Since January, 2004, the Company has undertaken
the
following sales of non-registered securities in a series of private investment
transactions:
| · |
For
the year ended December 31, 2004, the Company sold $1,075,000 principal
amount of 10% senior notes due one year from date of issue and 537,500
unregistered common shares of common stock in private placements
in
connection with such Notes. The shares were restricted pursuant to
the provisions of Section 144 of the Securities Exchange Act of 1933.
The securities were sold only to persons who met the Accredited
Investor requirements and other requirements set forth in the offering
memorandum. In addition, in 2004 the Company issued 172,354
unregistered shares to retire $990,911 in debt and associated interest;
695,000 shares for services rendered valued at $146,330, and 2,250,000
shares for prepaid services to consultants valued at
$112,500.
|
|||
| · |
On
January 14, 2005 the Company closed the sale of $100,000 principal
amount
of 10% senior notes due one year from date of issue and 50,000
unregistered common shares of common stock in private placements
in
connection with such Notes. The shares were restricted pursuant to
the provisions of Section 144 of the Securities Exchange Act of 1933.
The securities were sold only to persons who met the Accredited
Investor requirements and other requirements set forth in the offering
memorandum.
|
|||
| · |
Between
June 1, 2005 and July 28, 2005, the Company issued 1,999,819 shares
of
common stock at $0.55 per common share in private placements for
total
gross proceeds of $1,099,900. The shares were restricted pursuant
to the
provisions of Section 144 of the Securities Exchange Act of 1933.
The securities were sold only to persons who met the Accredited
Investor requirements and other requirements set forth in the offering
memorandum.
|
|||
| · |
Between
July 29, 2005 and August 15, 2005, the Company issued 565,000 shares
of
common stock at $0.55 per common share in private placements for
total
gross proceeds of $310,750. The shares were restricted pursuant to
the
provisions of Section 144 of the Securities Exchange Act of 1933.
The
securities were sold only to persons who met the Accredited Investor
requirements and other requirements set forth in the offering
memorandum.
|
|||
| · |
During
2005, the Company also issued 50,000 shares in connection with
Bridge Loan
Financing arranged in January 2005, 252,357 registered shares and
400,000
unregistered shares for consulting, legal and other services rendered
valued at $651,943, 524,500 unregistered shares as employee stock
awards
valued at $536,170, and 920,578 unregistered shares to retire $515,725
in
debt and associated interest. In addition, between September 7
and
December 15, 2005, the Company accepted subscriptions for 470,000
unregistered shares at an average price of $0.54 per share for
a total of
$275,000 and agreed to issue 20,000 shares for outside services
rendered
valued at $11,000. With the exception of the registered shares,
all shares
issued were subject to the restrictions set forth in Section 144
of the
Securities Exchange Act of 1933.
|
|||
7
ITEM 1. DESCRIPTION
OF BUSINESS - continued
Financing - continued
| · |
On
March 22, 2006, the company issued 100,000 shares of common stock
at $0.55
per common share in a non-brokered direct private placement for total
net
proceeds of $55,000. The shares were restricted pursuant to the provisions
of Section 144 of the Securities Exchange Act of 1933. The securities
were
sold only to persons who met the Accredited Investor requirements
and
other requirements set forth in the offering memorandum.
|
|||
| · |
Between
April 10, 2006 and April 25, 2006, the Company issued 1,714,260
shares of
common stock at $0.35 per common share in a non-brokered direct
private
placements for total net proceeds of $600,000. The shares were
restricted
pursuant to the provisions of Section 144 of the Securities Exchange
Act
of 1933. The securities were sold only to persons who met the Accredited
Investor requirements and other requirements set forth in the offering
memorandum. No commissions or other fees were payable in connection
with
this private placement. The funds were allocated for general working
capital purposes, as well as to fund the initial production of
the
FORTIS™
product by Jabil Circuit, Inc. pursuant to Skye’s Manufacturing Services
Agreement with Jabil of January
2006.
|
|||
Business
of the Company
As
a
result of the completion of the acquisition of Envirotech and the formation
of
ION and Valeo, the Company is in the business of designing and marketing
innovative consumer appliances and products incorporating leading edge
technologies and delivering unparalleled functionality. Skye’s first products
are the FORTIS™
series
of tankless water heaters expected in 2006 and the Paradigm™
series
of point-of-use fluid heaters expected in late 2006 or early
2007.
Market
Overview; Competition
Extensive
study of the tankless water heater market and strategies for penetrating that
market show that:
| • |
The
water heater replacement market in the U. S. is 9 to 10 million units
annually.
|
| • |
Government
tax credits and sale incentives for energy efficiency are
increasing.
|
| • |
New
home sales and home improvement spending are
increasing.
|
| • |
As
incentives from energy companies beginning to enter the competitive
market
place, utility de-regulation offers an opportunity for manufacturers
of
energy saving
appliances.
|
| • |
The
market for tankless water heaters is expected to grow in excess of
60% in
2006.
|
The
Company believes that recent increases in energy costs are sensitizing consumers
to energy efficiency, which is expected to help promote sales of the Company’s
products, due to their anticipated ability to more than offset their cost in
energy savings over their useful lives.
Historically,
in the U.S., tankless water heaters have suffered from poor design and had
problems such as water flow limits, overheating at low flow, shut downs, and
burnout of elements at low flow rates. As a result, some plumbing contractors
and specifying engineers believe tankless heaters do not perform well, and
they
discourage consumers from buying tankless systems. There is a common perception
that tankless heaters are expensive, more complicated and more time consuming
to
install. In the past, tankless water heaters have not provided a viable option
for heating water for a whole house. In addition, conventional tank water
heaters today are somewhat more efficient and reliable than in the
past.
The
conventional water heater market is highly competitive, highly concentrated,
and
mature, and dominated by a small number of manufacturers. Conventional tank
water heaters maintain approximately 97% market share of residential water
heater sales. Steep discounts and rebates as high as 20% or more are standard.
Some contractors are loyal to their favorite brands and are opposed to tankless
systems. The five dominant U.S. manufacturers have substantial resources, well
known brand names, established distribution networks, worldwide manufacturing
capabilities, and sizeable engineering, research and development resources
to
protect and increase their market share and profitability. Further, price
competition has increased in recent years, and major manufacturers have been
increasing research and development activities. Contractors do not want to
lose
the “guaranteed” replacement business provided by the shorter life of tank
heaters, and the plumbing industry is somewhat resistant to tankless
heaters.
Studies
show that most consumers are not aware of tankless systems or their benefits,
and do not evaluate whether to change from tank water heaters. Studies report
that sales growth in tankless water heaters will require extensive education
to
change opinions in the plumbing industry, better tankless products than in
the
past, and a major consumer education campaign to increase awareness and motivate
them to change.
8
ITEM 1. DESCRIPTION
OF BUSINESS - continued
Business
of the Company - continued
Until
just a few years ago, there were only a few tankless water heater manufacturers
with a presence in
the
United States. But that has changed. Now, all the major players from Japan,
as
well as many European manufacturers, are all in the United States, and they
all
are experiencing dramatic growth. The differences between Japanese and American
products vary in the way they heat the water. Demand for space savings and
efficiency has driven the Japanese market, while in America, the additional
functionality of endless hot water, particularly driven by the custom home
market, continues to increase demand for instant water heaters. Today, there
are
no electric water heaters manufactured in Japan. The Japanese have a 40-year
history of using gas-based instant water heaters, primarily in the Ofuro tub
market, and they are now leveraging that experience in the US marketplace.
These
Japanese manufactures include Takagi, Noritz, and Rinnai. The European
competitors in the US marketplace in gas, and to a lesser extent, electric-based
heaters, include Bosch and Steibel, both of which gained their market experience
in Europe where point-of-use instant use water heaters are
commonplace.
Currently
in the US, American manufacturers actually source their gas-based heaters from
Japanese suppliers and there are only a few electric manufacturers in the US,
none of whom have any significant sales. The gas-based market is dominated
by
large Japanese manufacturers, but on the electric side, there are no dominant
manufacturers.
One
of
the significant barriers to the entry of an electric tankless unit has been
the
inability of an electrically powered unit to generate enough heated water flow
for the average U.S. household. Skye’s
FORTIS™
product addresses this problem by incorporating its patented “multi-pass”
heating technology that keeps incoming water in contact with the heating
surface
for a longer time when compared to other electric models. The
greater contact with a heating surface results in
the
ability to produce greater volumes of heated water. This new level of
functionality afforded by Skye’s patented technology we believe will give Skye a
competitive advantage over other electrically powered tankless water heaters,
and for the first time provide a viable
alternative to the consumer that demands higher flows of heated
water.
Description
of the Business, Its Products and Services.
Advantages
of the FORTIS™
and
Paradigm™
Products
The
FORTIS™
and
Paradigm™
designs
seek to achieve several advantages over conventional tank water heaters and
other tankless water heaters, including low cost of production (based on
short
assembly time, mass production capability and design versatility), reasonable
purchase price, enhanced performance (emphasizing safety, dependability and
convenience), operating and energy cost savings, space savings, environmental
friendliness and the ability to deliver greater quantities of heated
water.
Skye’s
business is to design and market innovative appliances that deliver industry
leading functionality to consumers. Skye’s first products to be introduced to
the market place are the FORTIS™
whole
house tankless water heater and the Paradigm™
point-of-use water (fluid) heater. The FORTIS™
will
be
the first product to enter the market place. The FORTIS™
has
many key features designed to:
9
ITEM 1. DESCRIPTION
OF BUSINESS - continued
Description
of the Business, Its Products and Services - continued
•
maintain a pre-determined water temperature, which will not exceed the set
point;
•
conserve water (by eliminating the need to blend over-heated hot water with
cold
water until the desired temperature is achieved);
•
conserve energy (by heating water only when needed and/or heating it at the
point of use);
•
have
a
greater life span than other tank-based water heaters;
•
be
competitive with the purchase price and operating cost of other water heaters,
particularly when offset by anticipated energy savings;
•
save
space (by making the unit 22” high x 12” wide x 4.5” deep, which is small enough
to fit in a wall cavity or be surface mounted inside a closet or under a
cabinet).
Skye’s
products incorporate leading edge components of the highest quality, including
backlit color LCD screens, avionic grade solid-state relays, 316 series surgical
grade stainless steel components, extruded aluminum heating chamber coated
with
xylan to reduce the effects of mineralization and incoloy heating elements
for
long life. FORTIS™
also incorporates many new features, including automatic self-cleaning option,
auto-shut-off option to prevent flooding, child scald protection, as well as
multiple redundant mechanical and software safety mechanisms.
For
hotel owners, commercial building managers and apartment
tenants,
this
means lower operating costs for water and power, longer water heater life,
very
limited maintenance costs and valuable space saving advantages.
For
homeowners and other users,
this
means safety, lower operating costs for water and power, longer water heater
life, and the convenience of many power saving settings and the convenience
of a
color LCD screen display. Environmental friendliness is likely to appeal to
many
owners and users.
For
distributors,
this
means competitive pricing, state of the art technology and less warehouse space
needed for inventory. Distributors will also be provided with support materials,
such as a sales manual, a technical manual, a cooperative marketing plan and
promotional materials.
For
plumbers and installers,
this
means less labor cost to install, the ability to carry several models as stock
items on vehicles, product advantages to offer customers and ease of
installation.
Product
Overview
The
Company has developed two series of what it believes to be the world’s most
advanced, efficient and reliable electric tankless water heaters: FORTIS™
and
Paradigm™.
The
FORTIS™
and
Paradigm™
series
have substantially all metal construction and feature a bright LCD display
for
ease of use. The units also offer up to 6 remote controls for home automation,
programmable processor to allow easy installation of the latest software,
a
modular design for ease of expansion of heating capacity, easy replacement
of
immersion elements, and industry-standard non-proprietary components for
cost-effective part replacement.
Safety
features include mechanical power breakers (included within the heater
eliminating the need for an external sub-panel), wet sensor-leak detection,
a
valve to flush any sediment that may have accumulated in the system, an optional
self-cleaning mode, and mechanical over temp switch that will shut off the
unit
in the event other safety devices fail. The units also feature a function that
allows the consumer to program time-of-day energy savings modes, and even limit
how long a user can get hot water in the shower.
10
ITEM 1. DESCRIPTION
OF BUSINESS - continued
Product
Overview - continued
FORTIS™.
Skye
expects to offer five power models of the FORTIS™
unit, with different combinations of heating elements. The Company believes
all
models have the following characteristics:
• 304
series stainless steel housing
• paddle
wheel flow sensor that can be cleaned if necessary
• solid
aluminum heating chamber coated with xylan to prevent mineralization
build-up
• Incoloy
sheathed immersion heating elements for longevity
• Surgical
grade stainless steel end-caps to move heated water within heating
chamber
• Custom
microprocessor controller with backlit color LCD interface
• Avionic
grade solid state relays
• Breaker
sub-panel included inside each appliance
• Redundant
mechanical power breakers
• Wet
sensor
• Optional
automatic flush cleaning system
The
FORTIS™
is a
durable tank-replacement product that is capable of meeting the needs of
most
U.S. households. Endless hot water, energy savings, compact design and redundant
safety systems make this tankless water heater a viable choice for most
residential applications.
Paradigm™.
The
Paradigm™
series
water heaters heat water using new and patented technology never before used
in
heating water. Essentially, instead of putting the heater in the water, the
Paradigm™
series
water heaters put the water through the heater.
The
Paradigm™
technology offers virtually instantaneous hot water and is extremely efficient.
The Paradigm™
series
can heat water over 100° F in only seconds. The Paradigm™
technology is even more energy efficient than FORTIS™.
Like
FORTIS™,
Paradigm™
requires
no tank. In Paradigm™,
there
is no impediment in the water flow, whatsoever, so it does not need an external
cleaning system. Paradigm™
technology provides virtually instantaneous heat response upon
demand.
Included
in the Paradigm™
series
of heaters is a whole house, point-of-use and under-the-sink tankless water
heater. Moreover, the Company believes that this smaller unit will find a
market
much larger than the whole-house unit and that the volume of smaller units
will
likely exceed the whole-house units.
FORTIS™ and
Paradigm™ Status
FORTIS™. As
of May
30, 2006 Skye expects that it will commence initial production of the
FORTIS™
series
of products in 2006. Jabil Circuit has agreed to manufacture the first
run of
product at its Tempe, Arizona facility and later larger volumes of product
are
expected to be manufactured at Jabil Circuits, Poway, California facility.
Skye
expects to grow production and inventory levels of the FORTIS™
product
over the balance of 2006 and beyond.
Paradigm™. Skye
is
completing the engineering for manufacturing phase for a line of point-of-use
and whole-house water heaters. Once this engineering phase is complete, expected
in
late
third-quarter of 2006, Skye intends to seek the approvals noted below and
anticipates that initial production will commence in late 2006 for an
early
2007 market introduction. Skye is currently in negotiations with key
suppliers to
establish strategic relationships with certain component vendors that may be
able to assist in reducing the time to market.
11
ITEM 1. DESCRIPTION
OF BUSINESS - continued
Product
Overview - continued
Other.
Skye
intends to conduct further research and development to design other value-added
consumer products to incorporate the Paradigm™
thick-film resistive technology. Current efforts include an ultra-efficient
space heater, as well as a new generation ceiling fan to cool in the summer
and
provide heat in the winter. Using the FORTIS™
and
Paradigm™
technology, along with other proprietary technology, the Company seeks
to
develop additional products for recreational vehicles, marine applications
and
swimming pools and spas.
Governmental Approvals, Effect of Regulations. All of Skye’s products are currently being tested to ensure compliance with applicable code requirements. Additionally, Skye is submitting its products for testing and/or approval by the following agencies:
Governmental Approvals, Effect of Regulations. All of Skye’s products are currently being tested to ensure compliance with applicable code requirements. Additionally, Skye is submitting its products for testing and/or approval by the following agencies:
• UL/CUL
• NSF
• IAPMO/UPC
Skye
intends to obtain all those certifications
but there can be no assurance that any of
these
certifications will be obtained or, if obtained, that the certifications
will be maintained.
Other
than compliance with the certifications listed above, Skye believes it need
not
obtain
significant other
governmental approvals
to
market is products,
although
consumer safety, building and plumbing codes are in a constant state of
change.
Nevertheless, Skye is not aware that it needs to obtain individual approval
of
its units pursuant to general industry standard codes. Skye
is
not of any pending legislation that will adversely affect the ability of Skye
to
conduct business.
Target
Markets and Distributors
According
to the Appliance Manufacturers Association, 10 million tank water heaters were
sold in the United States in 1997, at an average cost per unit of $210, for
total gross sales of $3.15 billion. Annual tankless water heater sales in the
United States exceed $100 million in gross sales, as of 2004. The worldwide
market for tankless water heaters is more than $10 billion in gross annual
sales.
Skye
believes that the U.S. market for tankless water heaters, that comprised less
than 2% of total water heater sales in 2004, is poised for significant growth.
According to a 2003 Frost & Sullivan report, tankless water heater sales
were experiencing a significant growth rate exceeding 57% per year, as compared
to only a 2% growth rate for traditional tank-based water heaters.
Because
tankless water heaters are still relatively new in the U.S., Skye has determined
it will use wholesale distribution through appointed manufacturer’s
representatives to
enter
the market place. As consumer knowledge of tankless is still quite low, Skye
believes that a “push” style distribution through wholesale distribution is
needed. Utilizing the resources of wholesalers to make sales calls and stock
inventory locally will help to reduce initial capital needs and expedite a
broader distribution network. To date,
Skye has
appointed manufacturer’s representatives in 22 states and expects that it will
continue to appoint more representatives over the balance of 2006, including
manufacturer’s representatives in Canada and Mexico.
12
ITEM 1. DESCRIPTION
OF BUSINESS - continued
Target
Markets and Distributors - continued
The
wholesale distribution model is favored by Skye because, among other reasons,
according to the 2003 Frost & Sullivan report, over 60% of plumbing sales
are made by wholesale distributors. Many of the wholesale distributors add
value
to Skye’s distribution because, in addition to providing the local sales and
installation force, they also are able to inventory both units and parts. As
awareness of tankless grows, a local presence is essential to convert home
building, architects and other key decision makers to adopt tankless
technology.
Over
time
Skye believes that certain of its products, particularly the Paradigm™
point-of-use water heaters will likely be sold through traditional and “big-box”
retailers. Although retailers typically drive somewhat higher margins for
Skye
as compared to wholesale distribution, the infrastructure necessary to support
this sales channel is significantly higher and Skye is not currently staffed
or
capitalized to do this. We will continue to monitor our distribution and
determine on a product-by-product basis, which method of distribution or
sales
channel best serves Skye’s interests.
Skye
has
also established a relationship with Siemens, AG, our supplier of certain
critical electrical components. Skye is currently working with Siemens, AG
to
develop critical electrical components to enhance the safety and functionality
of Skye’s products, as well as to develop the necessary component to
commercialize the Paradigm™
product
lines.
Manufacturing
On
February 15, 2006, Skye entered into a Manufacturing Services Agreement with
Jabil Circuit, Inc. (“Jabil”) pursuant to which Jabil has agreed to manufacture
certain components and to assemble Skye’s 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
Paradigm™
product.
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).
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.
Over
time
Skye believes that certain of its products, particularly the Paradigm™
point-of-use water heaters will likely be sold through traditional and
“big-box” retailers.
Although retailers typically drive somewhat higher margins for Skye as compared
to wholesale distribution, the infrastructure necessary to support this sales
channel is significantly higher and Skye is not currently staffed or capitalized
to do this. We will continue to monitor our distribution and determine on a
product-by-product basis, which method of distribution or sales channel best
serves Skye’s interests.
Skye
has
also established a relationship with Siemens, AG, our supplier of
certain
critical
electrical components. Skye is currently working with Siemens, AG to develop
critical electrical components to enhance the safety and functionality of Skye’s
products, as well as to develop the necessary component to commercialize the
Paradigm™ product lines.
13
ITEM 1. DESCRIPTION
OF BUSINESS - continued
Target
Markets and Distributors - continued
Manufacturing
On
February 15, 2006, Skye entered into a Manufacturing Services Agreement with
Jabil Circuit, Inc. (“Jabil”) pursuant to which Jabil has agreed to manufacture
certain components and to assemble Skye’s 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 Paradigm™ product.
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.
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.
In
addition to the applications of patents filed by the Company, Skye has
also
registered its name and graphics art logo with the U.S. Patent and Trademark
Office. Effective protection may not be available for our service marks.
Although we have registered our service marks in the United States and
in
certain countries in which we do business or expect to do business, 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 adversely affect our business, but would not detract from the Company’s
proprietary ownership of its other intellectual property.
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. The
Company expended approximately $450,000 in 2005 and $285,000 in 2004 on research
and development.
Employees
At
December 31, 2005, Skye had two part time employees, both of whom served
with
nominal compensation, and Valeo had six full-time employees. 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
is
just beginning the wholesale introduction of its products. It 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.
14
ITEM 1. DESCRIPTION
OF BUSINESS - 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.
Materials
and Principal Suppliers.
Sky
has
retained Jabil Circuit, Inc. to manufacture its products, and, as such, is
heavily dependent upon Jabil to perform satisfactorily so as to ensure the
availability of product for sale. Jabil is required to buy components for
Skye’s
products from the market at large, as well as an approved list of suppliers,
including Siemans, AG (electrical components), Lake Monitors (flow sensors),
Tru Heat (heating elements), Hydro Aluminum (extruded heating chamber), and
Arnold Bros. (stainless steel sheet metal and components). 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
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.
Recent
Developments
On
May
16, 2006, the USPTO issued a patent to ION on the modular tankless water
heater,
the core technology of the FORTIS™
tankless
water heater. The Company completed engineering on the FORTIS™
series
of products in October 2005. Initial samples were produced in December
2005. On
February 15, 2006, the Company entered into a Manufacturing Services Agreement
with Jabil Circuit, Inc., pursuant to which Jabil will manufacture certain
parts
and assemble the Company’s products. A copy of that agreement was filed with the
Company’s current report on Form 8-K dated February 23,
2006.
Meanwhile,
in November 2005, the Company completed the Paradigm™ proof of concept and has
commenced preparation of certain patent applications to protect the related
inventions. It has produced sample models of the Paradigm™ for testing and is
currently completing engineering for manufacturing. Additionally, Skye is also
actively negotiating with critical suppliers to qualify them to supply
Paradigm™
components, as well as potentially expedite the earlier market availability
of
Paradigm™
products.
Certain
litigation commenced after year-end is discussed in “Item 3. Legal Proceedings”
below.
ITEM
2. DESCRIPTION
OF PROPERTY
At
December 31, 2005, the Company owned no real property. The Company leases
space
at 7150 West Erie Street, Chandler Arizona 85226. These offices are leased
by
the Company pursuant to a lease agreement which operates month-to-month.
The
monthly lease obligation is approximately $20,000. There is no option to
renew
or extend the term of the lease. This facility consists of approximately
28,000
square feet and includes both 8,000 square feet of office space and 20,000
square feet of warehouse space. The Company has entered into a conditional
purchase agreement for the building it currently occupies. Under the terms
of
the agreement the Company may, at its option prior to August 2, 2006, proceed
to
purchase the real estate for the full purchase amount of $2,800,000. On August
18, 2005, the Company paid a non-refundable deposit of $50,000 towards the
purchase of the building to be applied to the purchase price if Skye elects
to
purchase the building or to be forfeited if it chooses not to purchase the
building. Skye believes that the value of the building may exceed the purchase
option price. Skye is determining whether or not to proceed with the purchase
and is examining the possibility of selling the current option to a third
party
and relocating to a smaller facility.
15
ITEM
2. DESCRIPTION OF PROPERTY - continued
Investments
The
Company uses available capital to fund its current operating expense and product
research and development. Accordingly, it does not have a long-term investment
plan. Short-term investments are invested in bank deposits and other liquid
secure investments.
ITEM
3. LEGAL
PROCEEDINGS.
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. The promissory notes and
security interests of the Senior Secured Creditor were purchased by and assigned
to Sundance Financial Corporation in 2005.
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”). The Company
is not affiliated with Envirotech of Texas, Inc. 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 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 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 embodied
in the Model ESI 2000 heater. The Company does not consider this injunction
detrimental to its ongoing business activities, as it had already discontinued
production of the alleged offending product and the new products have been
developed with specific attention to avoiding infringement on any existing
patents of third parties. Trial in the Seitz Suit has been scheduled for
November 2006. 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. Envirotech and Skye intend to aggressively pursue this litigation
to conclusion. On June 28, 2006 counsel for Envirotech withdrew from the
action.
As a result, Envirotech is currently seeking new counsel to pursue the
litigation.
16
ITEM 3. LEGAL
PROCEEDINGS - continued
Unpaid
Legal Fees. Subsequent to December 31, 2003, Envirotech has been named in
four separate lawsuits for unpaid legal and consulting fees totaling $268,000.
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.
As a
result of several claims arising out of decisions by Envirotech’s management
prior to its acquisition by Skye that resulted in a number of lawsuits and
judgments (see above), 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.
As a result of this dismissal, all claims and judgments of creditors of
Envirotech may be renewed.
17
ITEM 3. LEGAL
PROCEEDINGS - continued
Claims
by the Company Against Former Executives. On August 13, 2004, Skye filed a
verified complaint in the United States District Court in and for the District
of Arizona against three former officers, directors and principal shareholders
of Envirotech, and Ronald Jay Edwin, a/k/a Ryan Edelstein, and others (Case
No.:
CV04-1682-PHX-EHC). The suit alleged, against various defendants, Breach of
Fiduciary Duty, Aiding and Abetting Breach of Fiduciary Duty, Breach of
Contract, Breach of Implied Covenant of Good Faith and Fair Dealing, Fraud
and
Intentional Misrepresentation, Conspiracy to Defraud, Arizona Securities
Fraud,
Federal Securities Fraud, Negligent Misrepresentation, Misappropriation of
Trade
Secrets and Confidential Business Information, Conversion/Embezzlement,
Intentional Interference with Business Relations and Prospective Economic
Advantage, Unjust Enrichment, and Promissory Estoppel. The Company sought
various forms of relief including, but not limited to, Damages, Constructive
Trust, Rescission and Injunctive Relief. A copy of this Complaint is available
upon request made to the Company. Subsequently, the suit was voluntarily
dismissed by the Company to facilitate settlement negotiations with each
of the
defendant parties. A settlement was signed with Ronald J. Edwin the terms
of
which include, among other things, a permanent injunction against Mr. Edwin
for
the actions alleged. Settlements with each of the remaining defendants were
achieved in the fourth quarter of 2004, resulting in the return and cancellation
of 2,075,000 shares of common stock of the Company that had been issued in
connection with the acquisition of Envirotech. In addition, all three defendants
entered into non-compete agreements with the Company and agreed to various
other
terms sought by the Company. In connection with one of the settlements where
the
defendant returned a substantial block of his shares, the defendant was granted
an option by the Company to acquire up to 100,000 shares of common stock
at a
price of $0.55, for a period of one year. The option expired December 31,
2005.
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 only 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. Plaintiffs seek
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 parties have entered into a “standstill”
arrangement in which the parties agreed to refrain from using their stock
and
voting rights in connection with proxy solicitations, shareholder consents,
and
the noticing of special shareholder meetings. The matter is currently pending.
In addition to the foregoing claims, three of the defendants have demanded
that
the Company defend and indemnify them from the plaintiffs’ claims.
Delisting.
Because
the Company has been unable to file this report and its Quarterly Report on
form
10-QSB for the quarter ended March 31, 2006, on a timely basis, including the
grace period permitted by the NASD Over the Counter Bulletin Board (“OTCBB”), it
has been delisted from the OTC:BB. As a result, the Company’s securities now
trade on the pink sheets until all reports are current. There is no assurance
that the Company will be admitted to trade again on the OTC:BB. Due to past
delinquencies in its filings, the Company may be restricted from applying for
listing on the OTC:BB for at least a year.
18
ITEM
3. LEGAL
PROCEEDINGS - continued
Berry-Shino
Claim.
The
Company has on several occasions during the past three years utilized the
services of Berry-Shino Securities, Inc., Scottsdale, Arizona, in raising
various forms of financing to further its business plan and operations. In
the
course of each of these engagements, the Company has paid Berry-Shino various
fees and expenses and has issued a certain number of shares of its Common Stock
to Berry-Shino. The Company has recently received correspondence from
Berry-Shino stating that it believes it is entitled to be issued an additional
456,500 shares of Common Stock as additional consideration for its services.
The
Company is currently reviewing of validity of the entitlement.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
On
October 21, 2005, through a written consent without a meeting, a majority of
the
shareholders approved a change in
the
name of Tankless Systems Worldwide, Inc. to SKYE International, Inc.
In
March
2006, the Company was served with a demand by Dan DeSade, acting on behalf
of
himself and certain other shareholders, purporting to represent shareholders
of
record holding in excess of 15% of the outstanding shares of the Company
(collectively, the “Demand Shareholders”). The Demand Shareholders had signed
authorizations giving Mr. DeSade the authority to demand that the Company permit
an inspection of its books and records pursuant to relevant provisions of Nevada
law. The Company’s Board of Directors denied such demand and took the position
that the actions of Mr. DeSade, specifically, the solicitation of proxies,
were
in contravention of Federal Securities laws, and further, that the demand itself
could not be supported under applicable Nevada law. Subsequently, in April
2006,
Mr. DeSade, representing the Demand Shareholders, filed a petition in the U.S.
District Court for the District of Nevada, case number 2:06-cv-00541-RLH-GWE,
seeking an inspection of the Company’s financial and other records pursuant to
Nevada corporate law. The Company believes the request was not properly made
and
contested that request. The complaint was dismissed on May 22, 2006, but the
plaintiffs were granted leave to re-file the complaint if certain technical
deficiencies are corrected.
On
April
20, 2006, the President of the Company, acting pursuant to Article II section
2
of the Company’s By-laws, having received a demand of shareholders holding in
excess of 15% of the issued and outstanding shares of the Registrant, called
a
Special Meeting of the common shareholders of the company that was to be held
on
May 31, 2006. The purpose of the special meeting was to:
|
a.
|
To
elect directors of Skye to hold office until the succeeding Annual
General
Meeting of Shareholders.
|
|
b.
|
To
transact such other business as may properly come before the Meeting
or
any adjournment or adjournments
thereof.
|
At
its
meeting on May 11, 2006, the Board of Directors postponed the special
shareholders’ meeting until a future date to be established after the Company
has brought its SEC filings current. The Board did not evaluate whether the
meeting was duly called.
19
PART
II
ITEM
5. MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information.
Skye’s
common stock has been
traded on the Over the Counter Bulletin Board since 1998 under various
symbols:
CRRZ
- 1998
to December 12, 2002
ELUT
-
December 12, 2002 to July 25, 2003
TSYW
- July
25, 2003 to November 11, 2005
SKYY
-
November 11, 2005 to May 19, 2006
SKYYE
- May
19, 2006 to June 5, 2006
SKYY.PK
-
Since June 5, 2006
The
following table sets forth the range of high and low bid quotations for each
fiscal quarter for the last two fiscal years. These quotations reflect
inter-dealer prices without retail mark-up, markdown, or commissions and may
not
necessarily represent actual transactions.
Per
Share Common Stock Bid Prices by Quarter
| For the Fiscal Year Ending on December 31, 2005 |
High
|
Low
|
| Quarter Ended December 31, 2005 |
1.12
|
0.62
|
| Quarter Ended September 30, 2005 |
1.40
|
0.66
|
| Quarter Ended June 30, 2005 |
1.05
|
0.57
|
| Quarter Ended March 31, 2005 |
1.40
|
0.75
|
| For the Fiscal Year Ending on December 31, 2004 |
High
|
Low
|
| Quarter Ended December 31, 2004 |
0.91
|
0.88
|
| Quarter Ended September 30, 2004 |
0.73
|
0.73
|
| Quarter Ended June 30, 2004 |
0.80
|
0.65
|
| Quarter Ended March 31, 2004 |
1.05
|
1.20
|
Holders
of Common Equity
As
of
June 22, 2006, there were approximately 254
shareholders of record of the Registrant’s Common Stock and there were
approximately 20,588,493 shares of Common Stock issued and outstanding.
Dividends
Skye
has never declared or paid a cash dividend to stockholders. The Board of
Directors presently intends to retain any earnings to finance the Company’s
operations and does not expect to authorize cash dividends in the foreseeable
future. Any payment of cash dividends in the future will depend upon the
Company’s earnings, capital requirements and other factors.
20
ITEM
5. MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - continued
As
of
December 31, 2005, our equity compensation plans were as follows:
|
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
Weighted
average exercise price of outstanding options, warrants and
rights
|
Number
of securities remaining available for future issuance
(1)
|
|
Equity
compensation plans approved by security holders
|
None
|
N/A
|
None
|
|
Equity
compensation plans not approved by security holders
|
700,000
|
$0.51
|
247,643
|
|
Total
|
700,000
|
$0.51
|
247,643
|
(1)
Excluding securities reflected in column (a)
The
Company has granted options to Sundance Financial Corp., and Digital Crossing,
LLC, to
purchase 600,000 shares of common stock at an exercise price of $0.50 per share.
The option may be exercised, in whole or in part, at any time within a ten-year
period beginning February 11, 2004 and ending February 11, 2014. The options
are
fully exercisable as of the grant date, February 11, 2004, and require that
the
exercise price be paid in cash. The number of shares purchasable upon exercise
of the option are subject to certain adjustments, and in certain circumstances
the price per share may also be adjusted. The grantees have unlimited piggy-back
registration rights to have shares purchased pursuant to the option included
in
any registration statement filed by the Company. Copies of the Option Agreements
with Sundance and Digital Crossing, and amendments thereto, are attached as
Exhibits 10.7 and 10.8, respectively, of this Report.
In
connection with the settlement of claims asserted against one of the principal
officers and directors of Envirotech, the Company and granted a one-year option
to purchase up to 100,000 shares of common stock of the Company at a price
of
$0.50 per share. The option did not grant any registration rights to the grantee
and there were no provisions for adjustments either in number of shares or
price. This option expired on December 31, 2005 and was not exercised.
The
Company also granted its web site developer the option, for a period of one
year, to purchase up to 100,000 shares of common stock of the Company at a
purchase price equal to the 50 day moving average as of the Effective Date,
August 24, 2005. The option did not grant any registration rights to the grantee
and there were no provisions for adjustments either in number of shares or
price. As of December 31, 2005, and
as of
the date of this Report, this option has not been exercised.
Changes
in Control
The
Company is not aware of any arrangements which may result in a change in control
of the Company. While it would not necessarily constitute a change in control,
the Company is in receipt of a shareholder consent that would purport to elect
five directors and to ratify the appointment of Semple & Cooper. Two of the
directors to be appointed have already been appointed to the Board by the
existing directors on May 11, 2006. They are Messrs. Cannerelli and Sprunk.
The
stipulated agreement among the parties noted in “Item 3. Legal Proceedings,
Shareholder Derivative Action” above prevents the Company from implementing that
consent, and the Board of Skye has not had an opportunity to evaluate the
efficacy of that shareholder consent.
21
ITEM
5.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS -
continued
Sale
of Unregistered Securities
Information
on the sales of unregistered securities is noted in “Item 1. Description of
Business, Financing” above. Information on purchases of the Company’s securities
in connection with the settlement of litigation against certain former
executives of the Company is discussed more fully in “Item 3. Legal Proceedings”
above.
ITEM
6. MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The
following discussion should be read in conjunction with the financial statements
and accompanying notes included in this Form 10-KSB.
Plan
of Operation.
Skye
has
three subsidiary corporations. On November 7, 2003, the Company acquired
Envirotech Systems Worldwide, Inc. (Envirotech), a private Arizona corporation,
as a wholly owned subsidiary. In January 2004, Skye formed ION Tankless,
Inc.(ION), an Arizona corporation, to do research, development and marketing
of
new tankless heating technologies. In January, 2005, it created Valeo
Industries, Inc. (Valeo), a Nevada corporation, to license ION technologies
and
to manufacture and distribute products using those technologies.
In
2004,
the Company initiated its management transition plan as a result of its
acquisition of Envirotech. The Company entered into several consulting
agreements to assist in day-to-day operations and provide financial, management
and other consulting services to the Company and its subsidiaries. Certain
of
those agreements have been completed and others have been entered into with
the
same objective in mind. [See Exhibits 10.5, 10.6 and 10.9 to this Report.]
These
persons serve as part of the management team during the periods of their
engagement and will perform a variety of services to include:
|
1.
|
The
evaluation of potential business
opportunities
|
|
2.
|
The
business operations and management
|
|
3.
|
The
development of business strategies
|
|
4.
|
Raising
public and private capital
|
The
Company is in the business of designing, developing, manufacturing and marketing
consumer lifestyle products, including, initially, several models of electronic,
tankless water heaters. Management feels that the industry trends are
encouraging and it expects increased sales each year of operation. Advertising
will continue through the printed media, cable television and the Internet.
As
new homebuilders become aware of the product it will be included in original
house plans.
Previously
the Company produced, marketed and sold its electronic tankless water heater
products directly through the internet. The FORTIS™
and
Paradigm™
units,
and future products, however, will be sold primarily through distributors.
It
also has established its own sales team that handles retail sales generated
by
advertising and Internet marketing. The FORTIS™
design
seeks to achieve several advantages over tank water heaters and other tankless
water heaters, including low cost of production (based on short assembly
time,
mass production capability and design versatility), reasonable purchase price,
enhanced performance (emphasizing safety, dependability and convenience),
operating cost savings, space savings and environmental friendliness. For
more
information, see Description of Business, Part I, Item I above.
22
ITEM
6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -
continued
Summary
of Products
FORTIS™.
Skye
expects to offer five power models of the FORTIS™
unit,
with different combinations of heating elements. The Company believes all models
have the following characteristics:
• 304
series stainless steel housing
• paddle
wheel flow sensor that can be cleaned if necessary
• solid
aluminum heating chamber coated with xylan to prevent mineralization
build-up
• Incoloy
sheathed immersion heating elements for longevity
• Surgical
grade stainless steel end-caps to move heated water within heating
chamber
• Custom
microprocessor controller with backlit color LCD interface
• Avionic
grade solid state relays
• Breaker
sub-panel included inside each appliance
• Redundant
mechanical power breakers
• Wet
sensor
• Optional
automatic flush cleaning system
• Wall
brackets for easy installation
The
Manufacturer’s Suggested Retail Price for the units will average approximately
$1,499.00.
Using
the
FORTIS™
technology or other proprietary technology, the Company expects to develop
additional products for recreational vehicle and marine applications and for
swimming pools and spas.
Revenue
Generation Strategy and Potential
Initial
manufacturing will focus on the FORTIS™
series.
Each model will be capable of five different configurations, ranging in power
output from 40 Amps to 120 Amps. Later this year, the Company expects to bring
the Paradigm™
product line to the market.
The
Company expects to market its products through established wholesale
distribution channels, direct retail market through large national retailers
such as Home Depot and Lowes, and through Company based internet
sales.
The
Company anticipates pre tax gross profit margins from the sale of the
FORTIS™
in a
range of 25% to 30%. The Company believes that the quality, safety and other
characteristics of the
FORTIS™
and
Paradigm™
will
make them attractive to distributors and buyers. Margins are expected to
improve
as production and sales volumes increase, and as the higher margin Paradigm™
product
line is added in 2007.
23
ITEM
6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION - continued
Liquidity
and Capital
Resources
As
of
December 31, 2005 the Company’s only source of established revenue was from the
sales of product through its subsidiary, Envirotech. That product line was
discontinued in 2005. Future revenues are expected to derive from the
manufacture and marketing of the FORTIS™
and
Paradigm™
series
of products. The consolidated financial statements for the Company disclosed
that the Company has working capital deficiency of $2,411,601, and has
accumulated losses of $10,064,513. Without realization of additional capital,
it
would be unlikely for the Company to continue as a going concern.
On
March
22, 2006, the company issued 100,000 shares of common stock at $0.55 per common
share in a non-brokered direct private placement for total net proceeds of
$55,000. The shares were restricted pursuant to the provisions of Section 144
of
the Securities Exchange Act of 1933. The securities were sold only to persons
who met the Accredited Investor requirements and other requirements set forth
in
the offering memorandum.
Between
April 10, 2006 and April 25, 2006, the Company issued 1,714,260 shares of common
stock at $0.35 per common share in a non-brokered direct private placements
for
total net proceeds of $600,000. The shares were restricted pursuant to the
provisions of Section 144 of the Securities Exchange Act of 1933. The securities
were sold only to persons who met the Accredited Investor requirements and
other
requirements set forth in the offering memorandum. No commissions or other
fees
were payable in connection with this private placement. The funds were allocated
for general working capital purposes, as well as to fund the initial production
of the FORTIS™
product
by Jabil Circuit, Inc. pursuant to Skye’s Manufacturing Services Agreement of
January 2006.
Except
as
set forth above, the Company has not received any additional financing
subsequent to the date of the issuance of the Financial Statements for the
year
ended December 31, 2005. For more information concerning financing received
in
2005, see Part I, Item I, Financing, above.
Executive
Summary
The
Company’s business is the design production, marketing and sale of value-added
consumer appliances that integrate leading technologies to deliver increased
functionality and energy efficiency to appliances and commercial products used
by consumers. Skye’s premier consumer product is the FORTIS ™, a new
patented series of electric instantaneous water heater. Skye will market the
FORTIS ™ tankless water heater which it believes: (i) maintains a
pre-determined water temperature which will not exceed the set point (ii)
conserves water (by installing the electronic tankless water heater close to
the
use point or by heating water at the tap, rather than drawing cold water before
the hot water travels from a tank to the tap) (iii) conserves energy (by heating
water only when it is needed) (iv) have a greater life span than other water
heaters (v) be competitive with the purchase price of other water heaters,
(vi)
saves space, and (vii) is powerful and versatile (for example, making the heater
able to heat water for an entire house in any climate). The electronic tankless
water heater is microprocessor controlled with a color backlit LCD display,
allowing for programmable settings and a variety of convenience features not
widely available on other water heaters. An extruded aluminum housing for the
heating chamber, together with stainless steel patented end-caps to efficiently
move the heated water through the device is expected to provide the versatility
and dependability needed for a durable consumer application. Other features
of
the design include the use of solid state relays, redundant mechanical relays,
embodying the power breakers inside the device thus eliminating the need to
install a separate electrical sub-panel, as well as a host of convenience
features such as energy saving modes, automatic clean functions (optional),
automatic flood prevention (optional), use limiter and remote temperature reset
functions. On the heels of FORTIS™ will be a new patent pending
technology that Skye refers to as Paradigm™. This technology ushers in
an entirely new method of heating water that is both fast and extremely
efficient. The primary application for the
Paradigm™
technology will be for the point-of-use instantaneous heating market. Skye
is
currently working to commercialize this technology into a suite of products
that
can be used in homes across America.
24
ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION - continued
Executive Summary -
continued
As
the
initial focus of Skye’s research and development was the creation of improved
fluid heating devices. Skye has currently focused its initial efforts to produce
and market a line of water heating products. Skye’s success is largely dependant
upon its ability to commercialize the products resulting from the research
and
design initiative, such as FORTIS™
and
Paradigm™.
Additionally, since Skye has no other source of revenue currently, the success
of the Company will depend upon the ability of Skye to market and sell its
products.
After
acquiring Envirotech in November 2004, Skye was engaged in the business of
producing and selling a line of electric tankless water heaters called the
“ESI-2000”. In October 2004 Skye resolved to discontinue Envirotech’s further
production of the ESI-2000 in favor of a new line of products then being
developed by Skye’s subsidiary, Ion Tankless, Inc. Having been voluntarily
petitioned into Chapter 11 bankruptcy on August 6, 2004, Envirotech sought
to
prepare a plan of reorganization to rehabilitate itself. A Plan of
Reorganization (the “Plan”) was timely filed in December of 2004. The key
aspects of the Plan called for Envirotech to (i) deplete remaining parts
inventories and deliver ESI-2000 product that had been pre-sold (ii) engage
in a
final production run of 250 to 300 units, and (iii) reposition itself as the
manufacturing arm for Skye so as to produce the technologies that resulted
from
the research then being conducted by Ion Tankless. The Plan was predicated
on
receiving working capital from Skye pursuant to the terms of the Plan.
Envirotech
was riddled with financial troubles as it awaited approval of the Plan. Monies
were not readily available to complete the final production run of the ESI-2000
product line and sales of the ESI-2000 were not sufficient to sustain
Envirotech. Hence, in March 2004 Envirotech granted a limited license (the
“License”) to a newly formed entity, Valeo Industries Inc. (“Valeo”) that would
then be responsible for producing the final run of ESI-2000 product. In exchange
for the limited license from Envirotech to produce up to 300 units, Valeo
assumed the obligation to supply ESI-2000 to all persons who had purchased
the
ESI-2000 from Envirotech.
Valeo
had
a difficult time completing the production of the ESI-2000 product. Creditors
of
Envirotech had repossessed certain key components or were simply unwilling
to do
any further component production runs associated with the ESI-2000. Valeo slowly
began to produce the ESI-2000 as monies were available from the margin generated
from sales of the ESI-2000 that were not otherwise bound to be delivered in
accordance with the License. Deliveries of ESI-2000 product were made both
to
persons that ordered product from Valeo, as well as those persons that had
ordered product previously from Envirotech. 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 Envirotech and Skye was issued
in
connection with the Seitz Patent Suit (See
Legal Proceedings)
enjoining Skye and its affiliates 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 embodied in the ESI-2000
heater (sic). Production and distribution of the ESI-2000 was immediately
stopped and no further deliveries of completed product were made. Since December
5, 2005 the only source of revenue was in connection with the sale of ESI-2000
parts and the provision of certain paid repair services.
25
ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION - continued
Executive Summary -
continued
Having
engaged in a significant research and development program commencing initially
from March to May 2004, then recommencing in late October 2004, and continuing
through November 2005, Skye expended a total of $285,544 in fiscal 2004 and
$447,657 in fiscal 2005 on research and development activities through its
subsidiary, Ion Tankless to develop new and innovative heating technologies.
Research and Development activities were contracted to Alliance Engineered
Systems of Mesa, AZ and were overseen by a consultant to Ion Tankless. After
producing numerous versions of the FORTIS™
whole
house tankless water heater and concept prototypes of the Paradigm™
point-of-use water heater, Skye resolved to introduce FORTIS™
as the
first product to market. In late October 2005 the Board of Skye determined
that
in order to ensure larger production volumes and consistent quality that it
would amend its business plan, and instead of manufacturing its own products
at
its new facility in Chandler, AZ, that it would instead contract out the
manufacture of all products to a third party manufacturer. Skye then engaged
in
a rigorous review in order to find a suitable third party manufacturer. In
February, 2006 Skye announced that it entered into a Manufacturing Services
Agreement with Jabil Circuit, Inc. (“Jabil”) pursuant to the terms of which
Jabil will manufacture certain product lines, including the FORTIS™,
on
behalf of Skye.
A
limited
production of 250 units of the FORTIS™
whole
house tankless water heater commenced in late April 2006 and is currently
underway as of the date of this filing. Skye expects to begin volume commercial
production and shipment of the FORTIS™
during
the third quarter of 2006. The Company’s ability to generate future revenues is
dependent upon the overall market reception of the FORTIS™
product
(and Paradigm™
when
introduced) and the volume of production and sales that the Company is able
to
generate. However, additional engineering and testing is required and final
testing of the product can only be conducted once production commences. The
Company also expects to incur significant marketing costs over the next twelve
months. It is possible that the FORTIS™
(and
Paradigm™
when
introduced) will require further modifications before commercial shipments
are
possible. As a result, the Company can give no definitive assurances that it
will be able to achieve commercial production of the FORTIS™
or
Paradigm™ on the anticipated timeline.
The
Company plans to use third parties to manufacture certain components for its
products, and Jabil to assemble the final products. The Company is under
contractual obligations with certain critical component suppliers, as well
as
with Jabil. While Skye hopes to manufacture its completed products and the
majority of its components in the United States, there can be no assurances
that
it will be able to do so. The Company believes that electronics and metal
components are easily sourced throughout the world and the Company will
continually seek best pricing and highest quality components for its products.
The Company expects to continue handling the shipment of its products.
Once
FORTIS™
(and
later Paradigm™)
is
ready for commercial production and distribution is likely to begin during
the
third quarter of 2006, the Company’s success will be dependent upon its ability
to attract high quality distributors and manufacturer’s representatives to
market its products. To date, the Company has been able to attract distributors
and manufacturer’s representative groups with a solid track record selling
tankless water heating devices to home builders and the wholesale plumbing
trade. The Company is unable to provide forecasts as to the amount of product
it
anticipates selling. As of June 30, 2006, the Company has contracts with twelve
(12) U.S. manufacturers’ representative groups with operations in 22
States. The major terms of the contracts are: (a) distributors receive a
graduated discount based on volume with the greatest discount being 35%, and
10%
commissions to manufacturer’s representatives; (b) non-exclusive
territories; (c) termination upon 30 day notice and; (d) no
maximum purchase requirements and sales goals to be mutually agreed, or in
default, $1,000,000 per territory. The Company is currently training all its
U.S. distributors and manufacturers representatives in the use of its products.
26
ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION - continued
Executive Summary -
continued
Due
to
the limited sales volume of its existing products, the Company reported a net
loss of $4,051,870,
including in that amount a non-recurring non-cash charge of $2,441,869 related
to depreciation and the issuance of stock for consulting services rendered,
for
the year ending December 31, 2005 (net loss of $0.27per
share) and a net loss of $1,893,331
for
the
year ending December 31, 2004 (net loss of $0.16 per share).
At
the
present time, the Company does not generate sufficient revenues from its
operations to pay its operating costs. Management believes that the Company
will
need additional outside sources of funding in the future to continue the
production and promotion of its products.
The
Company has ceased to manufacture the ESI-2000 water heater line of products
developed by Envirotech. Our FORTIS™
brand
product line, which is expected to be delivered to the market during the
third
quarter of 2006, is the result of the R&D program discussed above. Skye’s
FORTIS™
series
is scalable from 40 to 120 amps of heating power and is a
microprocessor-controlled electric water heater contained in a compact unit,
which is designed to operate in most any climate. Skye’s new and innovative way
of heating water for home and business is contained in a small and easy to
install unit. Not only does it supply endless amounts of hot water but it
also
offers substantial energy savings. The FORTIS™
series
saves energy, space, water, and is suitable for all areas of the world. Skye
uses advanced technology and high quality parts in the construction of the
FORTIS™
series,
which provides reliability and longevity in the unit. Anywhere hot water
is now
being used or generated, Skye’s electric instantaneous water heaters can perform
the task more effectively than conventional tank-based systems. The FORTIS™
series
will heat the water only as long as you require and at the temperature you
desire, and will continue to maintain a precise temperature even if other
hot
water faucets are opened. Electricity is only used when water is required,
therefore the cost of heating water is reduced by 20% - 40%. Because the
FORTIS™
series
is compact it can be easily installed close to where hot water is being used
and
is ideal for hotels, motels, apartments, and homes where space is at a premium.
Skye believes its FORTIS™
series
heaters offers one of the most efficient solutions for on-demand endless
hot
water available today.
Going
Forward
The
Company has expended considerable efforts in working with its contract
manufacturer, Jabil Circuit, Inc., in order to begin the production of the
FORTIS™
line of
products. As of June 30, 2006, much of the prepatory work to commence production
has been completed and Jabil has begun to develop the manufacturing work cell
to
commence production. The Company expects that the first FORTIS™
units
will be produced in the early third quarter of 2006 with sales and delivery
to
also commence during such period. Despite commencing production, the Company
expects that it may take up to one year for the production design and processes
to stabilize. During this initial period of production the Company has been
advised by Jabil Circuit that it is likely that changes will be made to the
FORTIS™
product
in order to improve either the product itself or the manufacturability of the
product. 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.
27
ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION - continued
Executive Summary -
continued
The
Company has continued to focus development efforts on the commercialization
of
its patent pending 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 in final negotiations with a critical supplier to jointly complete
the
engineering and commercialization process and then subsequently engage in an
engineering for manufacturing phase. In the event we are successful in
concluding a strategic relationship in this regard, the Company expects that
it
will have first delivery of product utilizing the Paradigm™
technology
by the end of 2006 or early 2007. As 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 one of the most pressing considerations for the Company.
Although we were successful in concluding a $600,000 non-brokered private
placement in April 2006, such funds were not sufficient to provide adequate
working capital to meet the needs of the Company beyond the beginning of the
third quarter 2006. As such, the Company expects to be working diligently to
access additional funding likely by way of further private placements of equity.
We have commenced negotiations with several broker-dealers with a view to
completing further private placements to fund our business strategy, but to
date
we have not yet concluded any such arrangement. Our business strategy will
require us to raise in excess of $3 million 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 producing the
FORTIS™
product
line and in getting such product 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 our staff is committed to the challenge.
28
ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION - continued
Equity
Issuances
The
Company, after the acquisition of Envirotech, required funds to support current
operations and to provide future working capital. The Company has met its
financial needs through its limited operations, debt financing and through
the
sales of its securities. Since January, 2004, the Company has undertaken the
following sales of non-registered securities in a series of private
transactions:
|
·
|
For
the year ended December 31, 2004, the Company sold $1,075,000 principal
amount of 10% senior notes due one year from date of issue and 537,500
unregistered common shares of common stock in private placements
in
connection with such Notes. The shares were restricted pursuant to
the provisions of Section 144 of the Securities Exchange Act of 1933.
The securities were sold only to persons who met the Accredited
Investor requirements and other requirements set forth in the offering
memorandum. In addition, in 2004 the Company issued 172,354
unregistered shares to retire $990,911 in debt and associated interest;
695,000 shares for services rendered valued at $146,330, and 2,250,000
shares for services rendered and prepaid services to consultants
valued at
$112,500.
|
||
| · |
On
January 14, 2005 the Company closed the sale of $100,000 principal
amount
of 10% senior notes due
one year from date of issue and 50,000 unregistered common shares
of
common stock in private placements in connection with such Notes.
The shares were restricted pursuant to the provisions of Section
144
of the Securities Exchange Act of 1933. The securities were sold
only to persons who met the Accredited Investor requirements and
other
requirements set forth in the offering memorandum.
|
||
|
·
|
Between
June 1, 2005 and July 28, 2005, the Company issued 1,998,819 shares
of
common stock at $0.55 per common share in private placements for
total
gross proceeds of $1,099,900. The
shares were restricted pursuant to the provisions of Section 144
of the
Securities Exchange Act of 1933. The securities were sold only to
persons who met the Accredited Investor requirements and other
requirements set forth in the offering memorandum.
|
||
|
·
|
Between
July 29, 2005 and August 15, 2005, the Company issued 565,000 shares
of
common stock at $0.55 per common share in private placements for
total
gross proceeds of $310,750. The
shares were restricted pursuant to the provisions of Section 144
of the
Securities Exchange Act of 1933. The securities were sold only to
persons
who met the Accredited Investor requirements and other requirements
set
forth in the offering memorandum.
|
||
|
·
|
During
2005, the Company also issued 50,000 shares in connection with Bridge
Loan
Financing arranged in January 2005, 252,357 registered shares and
400,000
unregistered shares for consulting, legal and other services rendered
valued at $651,943, 524,500 unregistered shares as employee stock
awards
valued at $536,170, 920,578 unregistered shares to retire $515,725
in debt
and associated interest. In addition, between September 7 and December
15,
2005, the Company accepted subscriptions for 470,000 unregistered
shares
at an average price of $.54 per share for a total of $275,000 and
agreed
to issue 20,000 shares for outside services rendered valued at $11,000.
With the exception of the registered shares, all shares issued were
subject to the restrictions set forth in Section 144 of the Securities
Exchange Act of 1933.
|
||
|
·
|
On
March 22, 2006, the company issued 100,000 shares of common
stock at $0.55 per common share in a non-brokered direct private
placement
for total net proceeds of $55,000. The
shares were restricted pursuant to the provisions of Section 144
of the
Securities Exchange Act of 1933. The securities were sold only to
persons
who met the Accredited Investor requirements and other requirements
set
forth in the offering memorandum.
|
||
| · |
Between
April 10, 2006 and April 25, 2006, the Company issued 1,714,260 shares
of
common stock at $0.55 per common share in a non-brokered direct private
placements for total net proceeds of $600,000. The
shares were restricted pursuant to the provisions of Section 144
of the
Securities Exchange Act of 1933. The securities were sold only to
persons
who met the Accredited Investor requirements and other requirements
set
forth in the offering memorandum.
|
Results
of Operations
The
following discussion and analysis of the financial condition and results of
our
operations should be read in conjunction with the financial statements and
the
notes to those statements included elsewhere in this document. This discussion
contains forward-looking statements that are based on our current expectations
and involve risks and uncertainties. Skye’s actual results could differ
materially from those discussed below. Factors that could cause or contribute
to
such differences include, but are not limited to, those identified below, and
those discussed in the section titled “Risk Factors” included elsewhere in this
Annual Report on Form 10-KSB.
29
ITEM
6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -
continued
Comparison
of the Years Ended December 31, 2005 and 2004
Revenues.
Revenue
decreased by $33,467 or 16% to $172,424 for 2005 compared to $205,891 for
2004.
We believe the decrease was attributable to a number of management changes
during the year, as well as a suspension of product sales due to the
unavailability of product arising from both the lack of working capital,
as well
as the preliminary injunction granted in December 2005 prohibiting the further
sales of the Envirotech ESI-2000 product line.
Cost
of Goods Sold and Gross Margin.
Cost
of
Goods Sold decreased by $29,837 to $172,651 for 2005 compared to $205,488
for
2004. Gross margin decreased to $(226) for 2005 compared to $403 for 2004.
The
gross margin variance is related to smaller production volumes and added
costs
in obtaining component parts from suppliers as a result of the Envirotech
Chapter 11 proceedings.
General
and Administrative Expenses.
Legal
and
Professional costs, which includes fees paid to outside consultants for
management services, increased significantly in 2005 to $2,032,825 as compared
to $711,916 in 2004. The increase is mostly attributable to the valuation
accounting relative to shares paid to certain consultants for services rendered
during 2005, expenses incurred in connection an accelerated research &
development campaign to complete the FORTIS™
and
Paradigm™
technologies, the Chapter 11 proceedings of Envirotech, SKYE patent fees
and
on-going patent litigation costs. Advertising/Marketing Expenses increased
to
$44,147 in 2005 as compared to $27,431 in 2004 as a result of management
engaging in test marketing using print media and direct response promotions.
General and Administrative (G&A) expenses increased by $748,963 to
$1,253,029 for 2005 compared to $504,066 for 2004. The majority of the increases
reflect additional expenses incurred in connection with developing a new
business for the company as a result of the Chapter 11 proceedings of
Envirotech. The Company incurred non-cash charges in the amount of $2,408,114
for the value of stock grants to employees, key consultants and for the value
of
stock granted to a new consultant which became fully vested in 2005.
Research
and Development Expenses.
Research
and Development (R&D) expenses increased to $447,657 for 2005 compared to
$285,544 for 2004. The Company’s increase in R&D expenses is attributable to
engineering costs associated with the betterment of the FORTIS™
design,
as well as prototype costs associated with Paradigm™
and
the
costs of developing new controller technology.
Net
Loss.
Net
loss
increased $2,097,767 to $(4,051,870) or $(0.27) per common share for 2005
compared to a net loss of $(1,893,331) or $(0.16) per common share for 2004.
This increased loss was due primarily to the increased R&D costs invested in
bringing the FORTIS™
to the
market, the ramp up in G&A expenses in preparation for the anticipated
growth of the Company’s operations, litigation costs in 2005 and the non-cash
expense in connection with shares issued to consultants as prepaid services
during 2005.
Liquidity
and Capital Resources
Based
on
the Company’s current plans and market conditions, management does not believe
that the Company’s existing cash and current operations will be sufficient to
satisfy its anticipated cash requirements for the next twelve months. In
addition, the Company is unable to provide assurance that its planned levels
of
revenue, costs and expenses will be achieved. If the Company’s operating results
fail to meet its expectations or if the Company fails to manage its inventory,
accounts receivable or other assets, it will have a negative impact on the
Company’s liquidity and the Company will be required to seek additional funding
through public or private financings or other arrangements. In addition, due
to
the planned expansion of its product offerings, marketing efforts, channels
and
geographic presence, the Company may require additional working capital. If
this
were to occur, it is possible that adequate funds may not be available when
needed or may not be available on favorable or commercially acceptable terms,
which could have a negative effect on the Company’s business and results of
operations.
30
ITEM
6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION - continued
Liquidity and Capital Resources - continued
At
December 31, 2005 the Company had total current assets of $31,310,
including a cash balance of $2,711. These funds are not sufficient to meet
the
Company’s operational and liquidity needs for the next twelve months and thus
additional debt or equity financing will be required. The Company’s working
capital at December 31, 2005 was $2,411,601. This represents a increase in
working capital of approximately $266,507 from working capital of $2,678,108
at
December 31, 2004. This increase is attributed to the receipt of $1,410,650
in proceeds from the sale of shares of common stock during 2005 and from the
conversion of $528,226 in principal and interest to equity by various
noteholders. Operating activities used cash of $1,383,896 and $1,025,039 during
2005 and 2004, respectively.
The
Company reported negative operating cash flows from operations of $1,383,896
for
the twelve months ended December 31, 2005. The net loss of $3,806,439 was
offset by non-cash charges of $2,936,340 which represented the value of stock
issuances and stock options exchanged for services rendered and $33,755 in
depreciation and amortization expenses. At December 31, 2005, the Company
had no inventory purchase commitments.
The
long-term continuation of the Company’s business plans is dependent upon
generation of sufficient revenues from its products to offset expenses.
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 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 need 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 may suffer a dilutive effect on their percentage
of stock ownership in the Company and this dilutive effect may 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
could
have a material adverse effect on the Company's business, financial condition
and results of operations. There
is
no certainty that the expenditures to be made by the Company will result in
a
profitable business.
Contractual
Obligations
The
Company has entered into leases for office and warehouse space, which runs
through August 2006. Future lease payments under operating leases are
approximately $140,000 in 2006. There are no commitments for office and
warehouse space beyond August 2006, and, accordingly the Company must either
purchase the facility in which it currently operates for the total sum of
$2,800,000 (less the $50,000 non-refundable deposit paid in August 2005), or
locate other leased facilities from which to operate.
Intangible
Assets
The
Company’s intangible assets consist of two pending patents and two patents for
tankless water heater technology with a carrying value of $NIL. Generally a
patent has a life of 17
to
20 years. The Envirotech patent for a modular tankless water heater, Patent
No. 6,389,226 was granted on May 14, 2004 (the “Envirotech Patent”), and the Ion
Tankless Patent No. 7,046,922 for a modular tankless water heater was granted
on
May 16, 2006 (the “Ion Patent”).
31
ITEM
6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION - continued
Intangible Assets - continued
The
Company performed an impairment test in accordance with the guidance provided
in
SFAS 142, “Goodwill and Other Intangible Assets”, and has determined that, as of
December 31, 2005 no impairment exists on any of the Company’s assets based on
the present value of future cash flows generated from Company assets. The
Company recognized an impairment of $39,778 related to the Envirotech Patent
in
2004.
The
Envirotech Patent is subject to a lien registered against it by the Law Firm
of
Jennings, Strouss & Salmon (“JSS”) relating to an outstanding claim against
Envirotech for unpaid legal services. In 2001, JSS obtained security from
Envirotech in the form of a U.C.C 1 registration over all the tangible and
intangible assets and receivables of Envirotech. In 2002 the security was
amended to include a specific lien against the Envirotech Patent that was
subsequently registered by JSS with the U.S. Patent & Trademark Office
(collectively, the JSS Security”). After the filing for Chapter 11 bankruptcy
protection by Envirotech on August 6, 2004, Envirotech commenced negotiations
with JSS, as Envirotech’s sole secured creditor, to acquire the JSS security.
Envirotech was unable to reach an agreement with JSS. Subsequently the JSS
Security was purchased by Sundance Financial Corp. (“Sundance”). Envirotech was
successful in reaching a verbal agreement to acquire the JSS Security by way
of
the payment of Sundance’s actual costs to acquire the JSS Security, together
with an amount of $2,000, an amount reflective of Sundance’s legal fees and
expenses in connection with acquiring the JSS Security. Between July and October
2005, the Company made a series of payments to Sundance totaling $83,000 in
order to acquire the JSS Security. By way of an agreement dated and effective
as
of June 1, 2006, between Sundance and Ion Tankless, Inc. we acquired the JSS
Security. By way of the conclusion of this agreement, Sundance acknowledged
the
prior repayment to it of $83,000 by the Company, and with the payment of the
sum
of $2,000 reflective of Sundance’s legal expenses and fees, Ion Tankless, Inc.
acquired all of the JSS Security.
Critical
Accounting Policies
We
have
identified the following policies as critical to our business operations and
the
understanding of our results of operations. The preparation of these financial
statements require us to make estimates and assumptions that effect the reported
amount of assets and liabilities, disclosure of contingent assets and
liabilities at the date of our financial statements, and the reported amounts
of
revenue and expenses during the reporting period. There can be no assurance
that
actual results will not differ from those estimates. The effect of these
policies on our business operations is discussed below where such policies
affect our reported and expected financial results.
Revenue
Recognition.
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. As of December 31,
2005, we have had no significant warranty claims on ESI-2000 products sold.
Once
sales of our new products commence, we expect to make an accrual for warranty
claims based on our sales.
32
ITEM
6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION - continued
Critical
Accounting Policies - continued
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.
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. Subsequent to its formation, the
Company has generated approximately $4,043,572 in losses through November 7,
2003, the date of acquisition by Skye. However, $489,658 of this loss occurring
in 2003 was attributable to a re-purchase of a distributorship in a major market
where Envirotech believed the distributor was not performing as well as the
market would justify. The Company on an operating and consolidated basis has
continued to incur losses from operations since the date of acquisition. The
Company has yet to generate significant revenue from sales of product and has
not generated any revenues yet from the sale of the products from its research
and development initiatives.
33
ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION - continued
History of Operations and Dependence on Future Development
-
continued
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 revenue is sufficient to offset the level of costs
to be
incurred for 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 problems, expenses, difficulties,
complications and delays frequently encountered with the start-up of new
businesses and the competitive environment in which the Company will operate.
A
prospective investor should be aware that if the Company is not successful
in
achieving its goals and achieving profitability, any money invested in the
Company might be lost. The Company’s management team believes that its potential
near-term success depends on the Company’s success in completing product
development, then in manufacturing, marketing and selling its products and
in
developing new products.
The
Company has not had sufficient funds to date with which to fully implement
its
marketing 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. Many of Envirotech’s activities during its early years have
involved research and development concerning tankless water heaters. This has
required the investment of substantial capital with no period in which to
realize the benefits of such activities. 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 limited hard assets. If the Company is unable to develop marketable
products, obtain customers and/or generate sufficient revenues so that it can
profitably operate, the Company's business will not succeed. We will be
particularly susceptible to the risks and uncertainties described in these
risk
factors and will be more likely to incur the expenses associated with addressing
them. Our business and prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in 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. Accordingly, purchasers of Units will bear the risk of loss of their
entire investment in the Company.
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 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/A for
the
year ended December 31, 2004, and, to date, we have not received any comments
thereon from the SEC.
Company’s
Shares Quoted on the Pink Sheets
Because
the Company did not file its 2005 10KSB within such grace period it did not
maintain its quotation on the NASD OTC Bulletin Board. On June 5, 2006 the
Company’s shares began trading on the largely unregulated Pink Sheet market.
Although the Company has committed to rectifying its regulatory compliance
so as
to qualify for quotation on the OTC Bulleting Board there can be no assurance
that the Company’s shares will resume quotation on the OTC Bulletin Board, or if
they resume, that such quotation can be maintained.
34
ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION - continued
Limited
Capital and Need for Additional Financing.
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 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 need 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 were issued to
obtain financing, current shareholders may suffer a dilutive effect on their
percentage of stock ownership in the Company and this dilutive effect may 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
could
have a material adverse effect on the Company's business, financial condition
and results of operations. There
is
no certainty that the expenditures to be made by the Company will result in
a
profitable business.
On-Going
Litigation
The
Company is currently engaged in a significant amount of litigation. For a
discussion of these items of litigation, see “Item
3. Legal Proceedings”
above.
The cost of this litigation is significant and it is expected that associated
costs will continued to be incurred until such matters are concluded. The
Company expects that such continuing costs could be significant if all matters
proceed to trial. Although management is attempting to settle or otherwise
expeditiously resolve such matters there can be no assurance that such early
resolution can be achieved, and, if not expeditiously resolved, substantial
costs and a diversion of our management’s attention and resources will likely
occur and this could hurt our business.
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, and the
Company may not be able to achieve the same level of diversification as larger
entities engaged in this type of business.
35
ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION - continued
Competition.
The
water
heater market is mature, highly concentrated and highly competitive. Steep
discounts and rebates as high as 20% 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. 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 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
99% 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 the ETWH.
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.
To
the
Company's knowledge, the competition in electric tankless water heaters in
the
United States consists primarily of five companies that have done business
mostly in North America, Central America and South America, with combined annual
revenue in excess of $10 million. The Company expects it will encounter greater
competition from tankless manufacturers in other countries, where tankless
water
heaters have a longer history of sales and greater acceptance in the
marketplace. Competitive factors, including competitors entering the tankless
water heater market, could have a material adverse effect on the Company's
business, results of operations, financial condition and forecasted financial
results.
36
ITEM
6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION - continued
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 a 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.
Dependence
on Intellectual Property - Design and Proprietary Rights.
Our
success and ability to compete depend to a significant degree on our
intellectual property. Others could use our intellectual property without our
consent because we may not be able to protect our intellectual property
adequately. We will rely on copyright and trademark law, as well as
confidentiality arrangements, to protect our intellectual property.
Envirotech
was granted a patent by the United States Patent and Trademark Office for its
Modular Skye 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 embodied in
the
ESI-2000 heater (sic).
The
new
line of tankless water heaters designed by the Company do not utilize the
Envirotech patent or technology related to the ESI-2000 product, and are
constructed entirely 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.
37
ITEM
6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION - continued
Dependence on Intellectual Property - Design and Proprietary
Rights - continued
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. On May 16, 2006, the Company’s
subsidiary, ION Tankless, Inc. received notice from the USPTO that the first
such patent had been published as Patent No. 7,046,922 for a Modular Tankless
Water Heater. 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, the concepts and technologies
we use in the future may not be patentable.
Effective
Protection may not be available for our Trademarks.
Although
we have applied to register our trade marks 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.
Policing
unauthorized use of our intellectual property is made especially 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 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 and sell its
products. If the Company were unsuccessful in protection of proprietary and
intellectual property rights to the ETWH, 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, 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.
38
ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION - continued
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 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
implementing a cost reduction program in our water heating products 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.
Our
results of operations may be negatively impacted by product liability lawsuits.
Our
residential water heater business exposes us to potential product liability
risks that are inherent in the design, manufacture, and sale of our products
in
that business. While we currently maintain what we believe to be suitable
product liability insurance, we cannot assure you that we will be able to
maintain this insurance on acceptable terms or that this insurance will provide
adequate protection against potential liabilities. In addition, we 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 a variety of 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.
39
ITEM
6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION - continued
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 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 distribute.
An
increasing portion of the products that we manufacture and distribute 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
products. 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
may recur in the future. Any significant increase in the cost of raw materials
could reduce our profitability and have a material adverse effect on our
business, results of operations and financial condition.
Dilution.
The
Company presently has 20,588,493 shares issued and outstanding. If the Company
issues additional shares either outright or through any future options or
warrants programs or requires additional financing, further dilution in value
and in the percentage ownership represented by the purchaser’s Units or Shares
will occur and the dilutive effect could be significant.
40
ITEM
6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION - continued
Expect
to Incur Losses for the Foreseeable Future.
We
expect
to incur losses for the foreseeable future and
we
may never become profitable. Although our current revenue model contemplates
revenues from sale of products sufficient to break-even within nine to twelve
months, there is no assurance that these revenues will occur. 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.
Costs
associated with designing, developing, manufacturing and marketing products
to
our target markets and developing the infrastructure we will need to support
our
customers will depend upon many factors, including the number of customers,
and
the size, nature, market, and financial capabilities of each. Therefore, we
cannot now determine the amount by which our expenses will increase as we
grow.
Possible
Claims That the Company Has Violated Intellectual Property Rights of
Others.
Envirotech
has been 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., referred to herein as the “Seitz Patent Suit”). The
Company is not affiliated with Envirotech of Texas, Inc. The suit alleges that
Envirotech has infringed upon patent rights of others and seeks damages and
an
order to cease and desist. Envirotech has engaged counsel to represent it in
the
matter. Management believes the suit is without merit and that Envirotech will
prevail in the matter. The suit was stayed pending the disposition of the
Chapter 11 Bankruptcy Petition filed by Envirotech in August 2004, but the
Court
has allowed the plaintiff to re-open the Houston suit and a motion to that
effect has been filed by the Plaintiff. The Company has engaged the law firm
of
Susman Godfrey, LLP, Dallas, Texas to represent it in defending this matter
and
in prosecuting its counterclaim. The suit is in the discovery stage and the
Company is vigorously engaged in the process. On December 05, 2005, the Court
issued an injunction against Envirotech and its affiliated entities, including
Skye, enjoining them from further marketing, advertising or offering for sale,
or accepting any orders for (i) the Envirotech ESI 2000 heater, (ii) any other
heater, regardless of its model, using parts of the Model ESI 2000 heater,
and
(iii) any other heater, regardless of model number, utilizing in whole any
part
any technology embodied in the Model ESI 2000 heater. The Company does not
consider this injunction detrimental to its ongoing business activities, as
it
had already discontinued production of the alleged offending product and the
new
products have been developed with specific attention to avoiding infringement
on
any existing patents of third parties. The Seitz Patent Suit involves Envirotech
and, except to the limited extent covered by the injunction and the discovery
matters in connection with technology used in connection with FORTIS™
and
Paradigm™,
neither Skye nor any of its others subsidiaries are
defendants/counter-plaintiffs in the matter.
41
ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION - continued
Possible Claims That the Company Has Violated Intellectual
Property Rights of Others - continued
Except
as
described above, neither Skye nor 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. With respect to the
FORTIS™
and other new products the Company expects to bring to the market, management
believes they are not in violation of any patents claimed by others. To the
extent that the Company is 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, could subject the Company to costly litigation
and the diversion of their technical and management personnel. If the Company
incurs costly litigation and its personnel are not effectively deployed, the
expenses and losses incurred by them will increase, and their profits, if any,
will decrease.
Business
Plans and Operational Structure May Change.
We
will
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 change, we may decide to make organizational changes and/or alter some
of our overall business plans.
Reliance
on Management.
The
Company believes that it has management in-place, capable of executing its
business plan. It has also undertaken to recruit additional persons to key
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 these individuals 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 employment agreement with the Company,
which 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 will not breach covenants and obligations owed to the Company.
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.
42
ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION - continued
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 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. 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. We have adopted
the 2005 Stock Incentive for the benefit of our directors and employees. The
options and restricted stock granted under this plan, as amended, may have
exercise prices lower than the fair value of our common stock at the dates
of
grant. 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 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.
43
ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION - 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 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.
Terms
of subsequent financings may adversely impact your
investment.
We
may
have to engage in common equity, debt, or preferred stock financings in the
future. In such an event, rights of the then-existing shareholders and the
value
of their investment in the common stock could 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 preferred stock could be more advantageous to those
investors than to the 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 will, at some point,
be
sold into the market, which could 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 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.
44
ITEM
6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION - continued
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 and the lack of established products 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 could decline significantly. The factors that could cause our
operating results to fluctuate include, but are not limited to:
|
·
|
ability
to commercialize new products from ongoing research and development
activities;
|
|
·
|
developments
in tankless water heating
technology;
|
|
·
|
price
and availability of alternative solutions for water heating systems;
|
|
·
|
availability
and cost of technology and marketing
personnel;
|
|
·
|
our
ability to establish and maintain key relationships with industry
partners;
|
|
·
|
the
amount and timing of operating costs and capital expenditures relating
to
maintaining our business, operations, and infrastructure;
|
|
·
|
general
economic conditions and economic conditions specific to the cost
of
electricity and water; and
|
|
·
|
the
ability to maintain a product margin on sales, given the early stage
of
our market for our products.
|
These
and
other external factors have caused and may continue to cause the market price
and demand for our common stock to fluctuate substantially, which may limit
or
prevent investors from readily selling their shares of common stock and may
otherwise negatively affect the liquidity of our common stock. In the past,
securities class action litigation has often been brought against companies
following periods of volatility in the market price of their securities. If
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, which could hurt our business.
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 exercise price, and the number of shares involved but this dilution
could be significant.
45
ITEM
6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION - continued
We
have incurred losses and may continue to incur losses in the
future.
At
December 31, 2005, our accumulated deficit was $10,064,513.
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 survive. While management has
been
successful in the past in raising these funds, there is no assurance that
management can continue to find investors to fund operations.
Our
future existence remains uncertain and the report of our auditors on our
December 31, 2004 and 2005 financial statements contains a “going concern”
qualification.
The
report of the independent auditors on our financial statements for the years
ended December 31, 2004 and 2005, includes an explanatory paragraph relating
to
our ability to continue as a going concern. We have suffered substantial losses
from operations, require additional financing, 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 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 be able to attain profitable
operations.
Our
results of operations may be negatively impacted by product liability lawsuits.
Our
residential water heater business exposes us to potential product liability
risks that are inherent in the design, manufacture, and sale of our products
in
that business. While we currently maintain what we believe to be suitable
product liability insurance, we cannot assure you that we will be able to
maintain this insurance on acceptable terms or that this insurance will provide
adequate protection against potential liabilities. In addition, we 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.
ITEM
7. FINANCIAL
STATEMENTS
Financial
statements as of and for the year ended December 31, 2005, and for the year
ended December 31, 2004 are presented in a separate section of this report
following Part IV.
ITEM
8. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On
February 24, 2006, Shelley International, CPA (“Shelley”) withdrew as the
Company’s independent registered public accounting firm. The reason for the
withdrawal was the retirement of the firm’s principal. Shelley had audited the
registrant’s financial statements for the fiscal years ended December 31, 2004
and 2003.
On
February 24, 2006, the registrant engaged Semple & Cooper, LLP to serve as
the Company’s independent registered public accountants for the fiscal year
ending December 31, 2005. The Company’s board of directors approved the
engagement of Semple & Cooper.
46
ITEM
8. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
-
continued
On
June
2, 2006, Semple and Cooper resigned as auditors for the Company and on the
same
date the Board of Directors approved the engagement of Moore & Associates,
Chartered, Las Vegas, Nevada to be its independent registered public accountants
for the fiscal year ending December 31, 2005. During the short time that
Semple
and Cooper were the Company’s auditors, there were disagreements on certain
matters. Semple and Cooper furnish the Company a letter addressed to the
Commission setting forth its understanding of such matters. A copy of that
letter was filed as an exhibit to the report on Form 8-K/A dated June 15,
2006.
Moore
and
Associates, Chartered, audited the restatement of the 2004 financial
statements filed
in
connection with the Amended Annual Report on SEC Form 10-KSB/A which was
filed
by the Company on June 14, 2006 (as amended, the “2004 10-KSB/A”). In connection
with that restatement, Moore filed a consent with the 2004
10-KSB/A.
During
the registrant’s two most recent fiscal years and through June 2, 2006, the date
prior to the engagement of Moore and Associates, neither the Company nor
anyone
on its behalf consulted Moore and Associates regarding the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the registrant’s
consolidated financial statements.
The
resignation of Semple & Cooper was accepted, but was not encouraged or
recommended, by Skye’s Board of Directors and Audit Committee. As noted above,
the engagement of Moore and Associates has been approved by both the Skye
Board
and Audit Committee.
On
June
13, 2006, Semple & Cooper provided the Company with a letter to the SEC
dated June 9, 2006. A copy of that letter is filed with this Current Report
as
Exhibit 16.2. That letter noted certain issues that if further investigated
might materially impact the fairness or reliability of the financial statements
of the Company for 2004 and 2005. In particular, the auditors noted the receipt
of a letter from an attorney representing certain shareholders that contained
allegations of financial and accounting improprieties and accusations of
possible bankruptcy and securities fraud. The Board of Directors had not
concluded its investigation of those allegations at the time Semple & Cooper
resigned.
The
matters noted in that letter are the subject of the Shareholder Derivative
Action discussed in “Item 3, Legal Proceedings”, above
47
ITEM
8. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
-
continued
Semple
& Cooper also noted that it had questions regarding the propriety of certain
arrangements relating to a patent owned by a subsidiary of the Company that
were
not addressed to the auditor’s satisfaction before it resigned. Documentation of
those arrangements was completed after the firm’s resignation. The Board has not
concluded its investigation of the propriety of the transactions and the
related
disclosures.
The
audit
reports of Shelley on the financial statements for each of the past two years
as
of December 31, 2004 and December 31, 2003 contained a separate paragraph
stating: “The accompanying financial statements have been prepared assuming that
the company will continue as a going concern. The Company has experienced
losses
since inception. This raises substantial doubt about the Company’s ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from this uncertainty.” There were no other
adverse opinions, disclaimers of opinions, or qualifications or modifications
as
to uncertainty, audit scope, or accounting principles.
During
the two most recent fiscal years and the subsequent interim period through
February 24, 2006, there were no disagreements with Shelley on any matter
of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure which, if not resolved to the satisfaction of Shelley,
would
have caused it to make reference to the subject matter of the disagreement
in
connection with its report. The registrant requested Shelley to furnish it
a
letter addressed to the Commission stating whether it agrees with the above
statements. A copy of that letter was filed as an exhibit to the report on
Form
8-K dated February 24, 2006.
There
were no other “reportable events” as that term is described in Item
304(a)(1)(iv) of Regulation S-B occurring within the registrant’s two most
recent fiscal years and the subsequent interim period ending February 24,
2006.
During
the registrant’s two most recent fiscal years and through February 24, 2006, the
date prior to the engagement of Semple & Cooper, LLP, neither the registrant
nor anyone on its behalf consulted Semple & Cooper, LLP regarding the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered
on
the registrant’s consolidated financial statements.
ITEM
8A. CONTROLS
AND PROCEDURES
Evaluation
of disclosure controls and procedures
Management,
with the participation of our Chief Executive Officer and the Chief Financial
Officer, carried out an evaluation of the effectiveness of our “disclosure
controls and procedures” (as defined
in the Exchange Act, Rules 13a-15(e) and 15-d-15(e)) as of the end of each
of
the periods covered by this report (the “Evaluation Date”). Based upon that
evaluation, the Company’s Chief Executive Officer and Chief Financial Officer
concluded that, as of December 31, 2004, our disclosure controls and procedures
were ineffective to ensure that the information we were required to disclose
in
reports that we file or submit under the Securities and Exchange Act of 1934
is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms. More specifically,
the
company identified a material weakness due to a lack of sufficient personnel
with appropriate knowledge in U.S. GAAP and lack of sufficient analysis and
documentation of the application of U.S. GAAP to transactions, including
but not
limited to equity transactions. During either of the years ended December
31,
2004 and December 31, 2005, there was no change in our internal control over
financial reporting identified in connection with the evaluation that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
48
ITEM 8A. CONTROLS AND PROCEDURES - continued
Internal
Control over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control
over
financial reporting for the Company. Management used the framework
of conducting an extensive review of existing documentation and transactions
to
make that evaluation. As of December 31, 2004, the Company had a deficiency
in
internal controls over the application of current US GAAP principles.
Specifically, an effective review of the Balance Sheet was not performed.
As a
result of the ineffective review, errors in the year-end 2004 were not detected
prior to the issuance of the annual 2004 consolidated financial statements.
This
control deficiency resulted in the restatement of our annual 2004 consolidated
financial statements as set forth in Form 10-KSB/A filed June 14, 2006.
Management has concluded that this control deficiency constituted a material
weakness that continued throughout 2005.
There
were changes in our internal controls implemented during the first quarter
of
2006, including, specifically, a process to review the balance sheet of
the
company by persons with significant experience with US GAAP principles.
Additionally, internal controls were adopted to separate accounting tasks
within
the company so as to ensure the separation of duties between those persons
who
approve and issue payment from those persons who are responsible to record
and
reconcile such transactions within the Company’s accounting system. Such
internal controls were implemented during the first quarter period ending
March
31, 2006, and, accordingly, as of the end of the first quarter 2006, management
found the internal control over financial reporting to be effective, with
no
material weaknesses. There were no changes in our internal control over
financial reporting that occurred during our most recent fiscal quarter
that
have materially affected, or are reasonably likely to materially affect,
internal control over financial reporting.
The
Company’s management is reviewing the Company’s internal controls over financial
reporting to determine the most suitable recognized control framework. The
Company will give great weight and deference to the product of the discussions
of the SEC’s Advisory Committee on Smaller Public Companies (the “Advisory
Committee”) and the Committee of Sponsoring Organizations’ task force entitled
Implementing the COSO Control Framework in Smaller Businesses (the “Task
Force”). Both the Advisory Committee and the Task Force are expected to provide
practical, needed guidance regarding the applicability of Section 404 of
the
Sarbanes-Oxley Act to small business issuers. The Company’s management intends
to perform the evaluation required by Section 404 of the Sarbanes-Oxley Act
at
such time as the Company adopts a framework. For the same reason, the Company’s
independent registered public accounting firm has not issued an “attestation
report” on the Company management’s assessment of internal controls.
ITEM
8B. OTHER
INFORMATION
None.
49
ITEM
9. DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a)
OF THE EXCHANGE ACT
Executive
Officers and Directors
As
of the
date of this filing, the Skye Board of Directors consists of the following
members:
Mark
D.
Chester, Chairman.
Kenneth
A. Cannerelli, Director
Gregg
C.
Johnson, Director and Secretary
William
S. Papazian, Director
Wesley
G.
Sprunk, Director
Mr.
Thomas Kreitzer serves as Skye’s Chief Executive Officer,
Treasurer and Chief Financial Officer. He
has
held his respective positions since June 13, 2002. Mark Chester and Kenneth
Pinckard became directors on September
19, 2005. David Kreitzer, who had served as a director since July 25,
2002, resigned on September 19, 2005.
Gregg
Johnson and William Papazian were appointed directors on February 13, 2006
to
fill vacant positions.
On
February 16, 2006, Kenneth Pinckard resigned as a director and on February
24,
2006, Thomas Kreitzer resigned as director, but he retained his positions
as an
officer noted above. Kenneth Cannerelli and Wesley Sprunk were appointed
as
directors on May 11, 2006.
Directors
are elected to serve for a one-year term. Officers hold their positions at
the
will of the board of directors. There are no arrangements, agreements or
understandings between non-management shareholders and management under which
non-management shareholders may directly or indirectly participate in or
influence the management of the Registrant’s affairs.
The
names, ages, and respective positions of the directors and executive
officers
of the Company as of June 30, 2006 are set forth below.
| Thomas Kreitzer | 39 | Chief Executive Officer, Treasurer, and Chief Financial Officer, Director of Envirotech |
| Mark D. Chester | 45 | Director of Skye |
| Gregg C. Johnson | 41 | Director of Skye, Valeo, ION and Envirotech, Chief Executive Officer of Envirotech, Valeo and ION and Director and Secretary of Skye |
| Wesley G. Sprunk | 70 | Director of Skye |
| Kenneth A. Cannerelli | 58 | Director of Skye |
| William S. Papazian | 48 | Director of Skye |
50
ITEM
9. DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a)
OF THE EXCHANGE ACT - continued
Thomas Kreitzer
Thomas
Kreitzer, age 39, graduated from Indiana University in 1989. In 1993 he
co-founded Enanti Software Ltd., a software development company geared toward
the development of customized application specific software. In 1996 Mr.
Kreitzer along with his brother David Kreitzer acquired fifty percent interest
in Designer Products, a Phoenix based industrial design firm, which has grown
to
be well known in the hardware industry for its revolutionary product designs.
Designer Products develops and patents innovative products, then coordinates
manufacturing of the products overseas for distribution through industry
recognized corporations. Key accounts include Stanley Tool Company, 3M
Corporation, Bondex International, American Tool Company/Irwin, RPM Group,
Ames,
Bay Mills Company, BreathRight, DAP and numerous others. In 2003 the Kreitzer’s
sold their equity in Designer Products and formed a new company Hause Products
Ltd. of which they are the majority shareholders. Hause provides product
design
and contract manufacturing services. Thomas Kreitzer also is a stockholder
and
Director of Gold Coast Holding, Inc. a Delaware company that does celebrity
licensing to promote various products. The company currently holds the rights
to
Darrell Waltrip’s meat line.
Mark
D. Chester
Mark
Chester, age 45, is a licensed attorney in the State of Arizona and former
Chairman of the State Bar’s Securities Regulation Section and its Executive
Council. He practices in Scottsdale at the law firm of Chester & Shein,
P.C., which focuses on business and real estate transactions and litigation.
Mr.
Chester was formerly a shareholder at the Phoenix law firm of Gallagher and
Kennedy where he represented local businesses, broker-dealers and homebuilders
in arbitration, state and federal court, and administrative agency cases.
He is
a member of the Board of Arbitrators for the National Association of Securities
Dealers and has served on numerous arbitration panels in a variety of securities
industry disputes. Mr. Chester currently has matters before the SEC, NASD,
the
Arizona Securities Division and the NYSE. He received his B.S. in commerce
at
the University of Virginia and his J.D. from the Arizona State College of
Law
with honors.
Gregg
C. Johnson
Gregg
Johnson is a lawyer with extensive experience in management of entrepreneurial
companies. He received his law degree in 1988 from Osgoode Hall Law School
in
Toronto and was admitted as a lawyer in Alberta in 1989. His extensive legal
career has included practice in Tokyo, Japan, where his practice focused
on
Japanese securities regulation and international debt instruments, and in
Jeddah, Saudi Arabia, where he acted as Outside Middle East Counsel to many
fortune 500 companies. His career has included experience in corporate finance
and venture capital for emerging growth companies across Canada. He was
instrumental in building and growing many successful companies and he has
been
an officer and director of numerous Canadian and U.S. public companies over
his
career.
Wes
Sprunk
Wes
Sprunk resides in Scottsdale, Arizona and is President of Tire Service Equipment
Mfg., Inc. and Saf-Tee Siping & Grooving, Inc. The main office for these
companies is in Phoenix, Arizona with manufacturing plants in Alamogordo,
New
Mexico and Monticello, Minnesota. Tire Service Equipment Mfg., Inc./Saf-Tee
Siping & Grooving, Inc. manufactures automotive wheel service equipment and
recycling equipment. It markets these products in the U.S. and foreign countries
and presently has 300+ distributors. Wes Sprunk is also a board member with
Amerityre Corporation, a NASDAQ public company (Nasdaq: AMTY) located in
Boulder
City, Nevada. Amerityre specializes in urethane polycomposites and the company’s
mission is to replace rubber in most applications, including tires. Wes Sprunk
is married to Jody Ann Zadra, and has three children.
51
ITEM
9. DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a)
OF THE EXCHANGE ACT - continued
Kenneth
A. Cannerelli
Ken
Cannerelli has been with The Dial Corporation for over 33 years holding several
key management positions. Dial is a Fortune 500 Company in the consumer package
goods industry with household names like Dial Soap, Purex Detergent, Renuzit
Air
Fresheners, and Armour Canned Meats. His experience covers sales, marketing,
business development, training, and sales planning. Here is a brief list
of
positions held:
*
Key
Account Sales Manager
*
Region
Business Development Manager
*
District Sales Manager
*
Zone
Sales Manager
*
Director of National Accounts
*
Vice
President of Sales Non-Food Accounts
*
Vice
President and General Manager Central Division
*
Vice
President of Sales Specialty Channels (Current Position)
Sales
and
Management experience covers all channels — i.e. Drug, Grocery, Mass, Wholesale
Clubs, Home/Hardware, and Dollar Stores. Ken has extensive experience in
managing a direct sales force, brokers, manufacturer reps, and distributors
along with direct involvement in mergers and acquisitions. In addition to
attending several key business seminars i.e. Sales and Marketing Executives
International at the Graduate School of Syracuse University, he holds a BSBA
from the University of Phoenix. He also served in the United States Air Force
as
an Accounting and Finance NCO from 1969 through 1973.
William
S. Papazian
William
Papazian has been practicing law since 1986, specifically in the areas of
corporate securities, regulatory and transactional work. In addition, since
2001, he has been the President, Chief Executive Officer and General Counsel
of
Spinelli Corporation, a privately-held litigation support and investigative
firm
located in Scottsdale, Arizona. Prior to that, he spent seven years as a
Board
Director, Executive Vice President and General Counsel of a public company
that
developed and managed projects in the hospitality and gaming sectors. Mr.
Papazian received his Juris Doctor degree from McGeorge School of Law,
University of Pacific in 1986 and his Bachelor of Arts degree from New York
University in 1983. He has been backgrounded and licensed by several federal
and
state regulatory agencies.
Compliance
with Section 16(a) of the Exchange Act.
Section
16(a) of the Securities Exchange Act of 1934 requires executive officers
and
directors, and persons who beneficially own more than 10% of any class of
the
Registrant’s equity securities to file initial reports of ownership and reports
of changes in ownership with the Securities and Exchange Commission (“SEC”).
Executive officers, directors and beneficial owners of more than 10% of any
class of the Registrant’s equity securities are required by SEC regulations to
furnish the Registrant with copies of all Section 16(a) forms they
file.
Based
solely on a review of the copies of such forms furnished to the Registrant
during or with respect to fiscal 2005, and certain written representations
from
executive officers and directors, the Registrant is aware that Messrs
Chester
and
Papazian
inadvertently failed to file a Form 3 at the time of their election to
the
Board. They are in the process of preparing those forms and obtaining the
required EDGAR ID’s.
52
ITEM
9. DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a)
OF THE EXCHANGE ACT - continued
Code
of Ethics
The
Company maintains a Code of Ethics that was filed with its Annual Report
on Form
10-KSB for 2003 filed on April 22, 2004. That code applies to the chief
executive, financial and accounting officers, controller and persons performing
similar functions. If the Company amends the code or grants a waive from
the
code with respect to the foregoing persons, it will post that amendment or
waiver on its website, www.skye-betterliving.com.
Audit
Committee
The
Company’s Audit Committee consists of Messrs. Chester, Johnson and Papazian.
None of those members has been designated by the Board or the Audit Committee
as
an “audit committee financial expert.” The Board is seeking to fill a board seat
with a member that will fulfill that qualification and is currently engaged
in a
director search.
The
following table sets forth information about the remuneration of the Company’s
officers.
SUMMARY
COMPENSATION TABLE
|
Name
and Principal Position
|
Annual
Compensation
|
Long
Term Compensation
|
All
Other Compensa-tion($)
|
|||||
|
Awards
|
Payouts
|
|||||||
|
Fiscal
Year
|
Salary
($)
|
Bonus
($)
|
Other
Annual Compensation ($)
|
Restricted
Stock Award(s)
($)
|
Securities
Underlying Options/
SARs
(#)
|
LTIP
Payouts
($)
|
||
|
Thomas
Kreitzer,
Chief
Executive Officer, Treasurer and
Chief
Financial Officer
|
2004
2005
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
$5,000
$17,550
|
-0-
-0-
|
-0-
-0-
|
$9,100
$6,000
|
| David Kreitzer, President |
2004
2005
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
-0-
$7,000
|
-0-
-0-
|
-0-
-0-
|
$11,700
$6,000
|
|
Gregg
Johnson,
Secretary
|
2004
2005
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
$37,500
$80,000
|
-0-
-0-
|
-0-
-0-
|
$51,150
$48,150
|
|
Kenneth
Pickard,
Vice
President, Valeo (1)
|
2004
2005
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
$43,500,(1)
$109,900
(1)
|
-0-
-0-
|
-0-
-0-
|
$51,500,(1)
$72,000
(1)
|
(1)
Kenneth Pinckard became a vice president of Valeo in February 2005. He was
not
compensated directly as an executive. All payments reflected in this table
were
made to Digital Crossing, LLC, pursuant to a consulting agreement. Kenneth
Pinckard is an employee or consultant of Digital Crossing. The Company has
no
information concerning how much compensation Mr. Pinckard received from Digital
Crossing relating to the services rendered by him to the Company.
53
ITEM
10.
EXECUTIVE
COMPENSATION - continued
Employment
and Consulting Agreements
There
are
no employment agreements with any of the executive officers.
The
Company has entered into consulting agreements with Sundance Financial Corp.,
Digital Crossing, LLC, and Gregg C. Johnson. Copies of those agreements,
together with any amendments thereto, are attached as Exhibits 10.5, 10.6
and
10.9, respectively, to this Report.
The
consulting agreements with Sundance and Digital Crossing commenced February
1,
2004 and will terminate on January 31, 2008. As amended, each provides
for
payments in the amount of $10,000 per month, with the Company having the
option
to pay any fee in excess of $5,000 per month, in the form of common stock
of the
Company. In addition, each of the agreements provides for the issuance
of shares
of common stock as additional compensation, including 750,000 shares issued
pursuant to amendments dated September 6, 2005, and grants options to purchase
300,000 shares of common stock at any time prior to February 11, 2014 at
a price
of $0.50 (See Exhibits 10.7 and 10.8 attached to this Report). At December
31,
2005, Sundance and Digital allege that the Company was delinquent with
respect
to payments owing under these agreements and the Company has accrued the
following amounts as of that date: Sundance, $87,100; Digital Crossing,
$46,170.
The
consulting agreement with Gregg C. Johnson, who is a director, secretary
and
acting general counsel for the Company, provides for the payment of a monthly
fee in the amount of $10,000. As additional compensation, Mr. Johnson has
been
issued 750,000 shares of common stock of the Company. The agreement with
Mr.
Johnson commenced August 2004 and continues until July 31, 2007 (See Exhibit
10.9 to this Report). Mr. Johnson alleges that he has provided services
on a
full-time basis in a timely and efficient manner and the contract remains
in
full force and effect.
The
plaintiff’s in the Shareholder Derivative Action (see Item 3, Legal Proceedings,
above) contest, among other things, the validity of the consulting agreements
discussed above.
Compensation
of Directors
There
are
no compensation arrangements in place.
ITEM
11. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
following table sets forth certain information, as of June 30, 2006, concerning
shares of the Company’s common stock, the only class of securities that are
issued and outstanding, held by (1) each stockholder known to own beneficially
more than five percent of the common stock, (2) each of the directors,
(3) each
of the executive officers, and (4) all of the directors and executive officers
as a group:
54
|
Name
and Address of Beneficial Owner (1)
|
Amount
and Nature of Beneficial
Ownership
|
Percent
of Class (2)
|
|
Sundance
Financial Corp.
13470
N. 85th Place
Scottsdale,
AZ 85260
|
1,380,000
(3) direct
|
6.71%
|
|
Digital
Crossing, LLC
13835
N. Tatum Blvd., Ste. 9-170
Phoenix,
AZ 85032
|
1,370,000
(4) direct
|
6.65%
|
|
Thomas
Kreitzer
7904
E. Chaparral Rd., #A110-490
Scottsdale,
AZ 85253
|
5,000
direct
|
N/A
|
|
Mark
D. Chester
8777
N. Gainey Center Dr., Suite 191
Scottsdale,
AZ 85258
|
200,000
direct
|
0.97%
|
|
Gregg
C. Johnson
6081
West Park Ave.
Chandler,
AZ 85226
|
796,000
direct
|
3.84%
|
|
William
S. Papazian
4901
E. Calle Del Medio
Phoenix,
AZ 85018
|
-0-
|
-0-
|
|
Kenneth
A. Cannerelli
4618
East Tumbleweed Dr.
Cave
Creek, AZ 85331
|
-0-
|
-0-
|
|
Wesley
G. Sprunk
3451
S. 40th
St.
Phoenix,
Az 85040
|
142,855
direct
|
0.69%
|
|
Officers
and Directors as a group (6 persons)
|
1,138,855
|
5.53%
|
|
(1)
|
To
the Company’s knowledge, except as set forth in the footnotes to this
table and subject to applicable community property laws, each person
named
in the table has sole voting and investment power with respect
to the
shares set forth opposite the person’s name.
|
|
(2)
|
This
table is based on 20,588,493 shares of Common Stock outstanding
as of June
30, 2006. If a person listed on this table has the right to obtain
additional shares of Common Stock within sixty (60) days from June
30,
2006, the additional shares are deemed to be outstanding for the
purpose
of computing the percentage of class owned by that person, but
are not
deemed to be outstanding for the purpose of computing the percentage
of
any other person.
|
|
(3)
|
Sundance
Financial Corp., and affiliated persons own 1,080,000 shares of
Common
Stock of the Company. Lawrence G. Ryckman is a director of Sundance
Financial Corp. Sundance has the right to acquire up to 300,000
shares of
common stock pursuant to Options granted February 2004 at any time
prior
to February 11, 2009, at an exercise price of $0.55 per
share.
|
|
(4)
|
Digital
Crossing LLC, a Delaware limited liability company, owns 1,070,000
shares
of Common Stock of the Company. Digital Crossing has the right
to acquire
up to 300,000 shares of common stock pursuant to Options granted
February
2004 at any time prior to February 11, 2009, at an exercise price
of $0.55
per share.
|
Information
on Equity Compensation Plans is noted in “Item 5. Equity Compensation Plans”
above.
55
ITEM
12. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Other
than as disclosed below, none of the Company’s present directors, officers or
principal shareholders, nor any family member of the foregoing, nor, to
the best
of the Company’s information and belief, any of its former directors, senior
officers or principal shareholders, nor any family member of such former
directors, officers or principal shareholders, has or had any material
interest,
direct or indirect, in any transaction, or in any proposed transaction
which has
materially affected or will materially affect the Company.
Accrued
Salaries and other Expenses to Officers and Directors
During
the year ended December 31, 2005 and 2004, the Company had incurred the
following charges with directors and officers of the Company or companies
with
common directors:
|
|
2005
|
2004
|
|||||
|
General
and Administrative
|
$
|
|
$
|
||||
|
Accounting
|
|||||||
|
Consulting
|
260,950
|
(1)
|
235,650
|
(1)
|
|||
|
Rent
|
|||||||
|
Salaries
|
|||||||
|
|
|
||||||
|
|
$
|
260,950
|
$
|
235,650
|
|||
|
|
|
(1)
Includes payments made to Digital Crossing, LLC, pursuant to consulting
agreement. Kenneth Pinckard is an employee or consultant of Digital
Crossing. The Company has no information concerning how much compensation
Mr. Pinckard received from Digital Crossing relating to the services
rendered by him to the Company.
|
These
charges were measured by the exchange amount, which is the amount agreed
upon by
the transacting parties and include amounts paid to persons who were officers
or
directors of the Company or any of its affiliates at any time during the
respective fiscal years, even amounts paid prior to the time when they may
have
taken office.
Related
Party Transactions
During
2005, Studio One Entertainment, Inc. whose President is Lawrence Ryckman,
transferred a paid credit of $150,000 to ION Tankless, Inc., to enable
ION to
continue research and development work contracted by Ion with Alliance
Engineered Services, Inc. At December 31, 2005, only $30,000 of this loan
had
been repaid by the Company. The balance is carried in related party
payables.
During
2005, Sundance Financial Corp., advanced a total of $93,000 to the Company
to
enable it to meet short term obligations. At December 31, only $10,000
of this
loan had been repaid. The balance is carried in related party
payables
Future
Transactions
All
future affiliated transactions are expected to be made or entered into on
terms
that are no less favorable to the Company than those that can be obtained
from
any unaffiliated third party. A majority of the independent, disinterested
members of the Company’s board of directors are asked to approve future
affiliated transactions. The Company believes that of the transactions described
above have been on terms as favorable to it as could have been obtained from
unaffiliated third parties as a result of arm’s length negotiations.
Conflicts
of Interest
In
accordance with the laws applicable to the Company, its directors are required
to act honestly and in good faith with a view to the Company’s best interests.
In the event that a conflict of interest arises at a meeting of the board
of
directors, a director who has such a conflict is expected to disclose the
nature
and extent of his interest to those present at the meeting and to abstain
from
voting for or against the approval of the matter in which he has a
conflict.
56
ITEM
13. EXHIBITS.
Regulation
S-B
Number Exhibit
|
2.1
|
Agreement
of Share Exchange and Plan of Reorganization dated November 4,
2003
(1)
|
|
3.1
|
Articles
of Incorporation of Amexan, Inc (2)
|
|
3.2
|
Articles
of Amendment of Articles of Incorporation of Amexan, Inc.
(2)
|
|
3.3
|
Articles
of Amendment of Articles of Incorporation of Nostalgia Motors,
Inc.
(3)
|
|
3.4
|
Articles
of Amendment of Articles of Incorporation of Elution Technologies,
Inc.
(4)
|
|
3.5
|
Articles
of Amendment of Articles of Incorporation of Tankless Systems Worldwide,
Inc. *
|
|
3.6
|
Bylaws,
as Amended (5)
|
|
4.1
|
Form
of Notes issued in 2004 and 2005 Private Placement Offerings
*
|
|
10.1
|
2003
Stock Incentive Plan (6)
|
|
10.2
|
2003
Stock Incentive Plan #2 (7)
|
|
10.3
|
2005
Stock Incentive Plan (8)
|
|
10.4
|
Manufacturing
Services Agreement between Jabil Circuit, Inc., and Skye International,
Inc. (9)
|
|
10.5
|
Consulting
Agreement between Skye International, Inc., and Sundance Financial
Corp,
including amendments *
|
|
10.6
|
Consulting
Agreement between Skye International, Inc., and Digital Crossing,
LLC,
including amendments *
|
|
10.7
|
Stock
Option Agreement between Skye International, Inc., and Sundance
Financial
Corp., including amendments *
|
|
10.8
|
Stock
Option Agreement between Skye International, Inc., and Digital
Crossing,
LLC, including amendments *
|
|
10.9
|
Personal
Services Consulting Agreement between Skye International, Inc.,
and Gregg
C. Johnson *#
|
|
10.10
|
Employment
Agreement between Eric Stebbins and Skye International, Inc.
*
|
|
10.11
|
Separation
Agreement between Michael Stebbins and Skye International, Inc.
*
|
|
14.1
|
Code
of Ethics (10)
|
57
ITEM
13. EXHIBITS
- continued
| 16.1 |
Letterfrom
Shelley International, CPA
(11)
|
|
16.2
|
Letter
from Semple & Cooper, CPA (12)
|
|
21.1
|
Subsidiaries
of Skye International, Inc. *
|
|
23.1
|
Consents
of Moore and Associates, Chartered
*
|
|
31.1
|
Rule
13a-14(a) Certification of Chief Executive Officer and Chief Financial
Officer *
|
|
32.1
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002 of Chief Executive Officer and Chief
Financial Officer *
|
*
Filed
with this Annual Report
#
Relates
to executive compensation
________________________
|
(1)
|
Incorporated
by reference to the exhibits to the registrant’s current report on Form
8-K, filed November 7, 2003.
|
|
(2)
|
Incorporated
by reference to the exhibits to the registrant’s registration statement on
Form 10-SB, filed October 5, 1999.
|
|
(3)
|
Incorporated
by reference to the exhibits to the registrant’s annual report on Form
10-KSB for the fiscal year ended December 31, 2002, filed May 15,
2003
|
|
(4)
|
Incorporated
by reference to the exhibits to the registrant’s quarterly report on Form
10-QSB for the fiscal quarter ended June 30, 2003, filed August
21,
2003.
|
|
(5)
|
Incorporated
by reference to the exhibits to the registrant’s annual report on Form
10-KSB for the fiscal year ended December 31,
2002.
|
|
(5)
|
Incorporated
by reference to the exhibits to the registrant’s current report on Form
8-K, filed February 24, 2006.
|
|
(6)
|
Incorporated
by reference to the exhibits to the registrant’s registration statement on
Form S-8, file number 333-108728, filed September 12,
2003.
|
|
(7)
|
Incorporated
by reference to the exhibits to the registrant’s registration statement on
Form S-8, file number 333-111348, filed December 19,
2003.
|
|
(8)
|
Incorporated
by reference to the exhibits to the registrant’s registration statement on
Form S-8, file number 333-123663, filed March 30,
2005.
|
|
(9)
|
Incorporated
by reference to the exhibits to the registrant’s current report on Form
8-K, filed February 23, 2006
|
|
(10)
|
Incorporated
by reference to the exhibits to the registrant’s annual report on Form
10-KSB for the fiscal year ended December 31, 2003, filed April
22,
2004.
|
|
(11)
|
Incorporated
by reference to the exhibits to the registrant’s current report on Form
8-K/A, filed March 7, 2006.
|
ITEM
14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES.
On
February 24, 2006, Shelley International, CPA (“Shelley”) withdrew as the
registrant’s independent registered public accounting firm, since the firm’s
principal retired. Shelley had audited the Company’s financial statements for
the fiscal years ended December 31, 2004 and 2003. On February 24, 2006,
Semple
& Cooper, LLP was engaged to serve as the Company’s independent public
accountants for the fiscal year ending December 31, 2005. On June 2, 2006,
Semple and Cooper, LLP, withdrew as auditor for the Company and Moore and
Associates, Chartered was engaged to serve as the Company’s independent public
accountants for the fiscal year ended December 31, 2005 and with respect
to the
restatement of financial statements for the fiscal year ended December 31,
2004.
58
ITEM
14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES - continued
Audit
Fees
Moore
and
Associates, Chartered, is expected to bill $10,000 for the audit of the 2005
annual financial statements and the audit of the restated financial statements
for the year ended December 31, 2004. Semple & Cooper, LLC, has been paid
$21,761 for the work it performed on the audit of the 2005 annual financial
statements prior to its resignation and the Company has deposited an additional
$10,000 as a retainer which it expects to be refunded. For the fiscal years
ended December 31, 2005 and 2004, Shelley billed $10,000 and $18,000,
respectively, for the audit of the annual financial statements and review
of
Form 10-QSB filings and $5,200 in connection with the restatement of the
financial statements for the fiscal year ended 12-31-04.
Audit-Related
Fees
There
were no fees billed for services reasonably related to the performance of
the
audit or review of our financial statements outside of those fees disclosed
above under “Audit Fees” for fiscal years 2005 and 2004.
Tax
Fees
There
were no fees billed for tax compliance, tax advice, and tax planning services
for the fiscal years ended December 31, 2005 and 2004.
All
Other Fees
There
were no fees billed for other services for the fiscal years ended December
31,
2005 and 2004.
Pre-Approval
Policies and Procedures
Prior
to
engaging the accountants to perform a particular service, the Company’s board of
directors obtains an estimate for the service to be performed. The board
in
accordance with procedures for the Company approved all of the services
described above.
59
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
| SKYE INTERNATIONAL, INC. | ||
| |
|
|
| Date: June 30, 2006 | By: | /s/ Thomas Kreitzer |
|
Thomas Kreitzer |
||
| Title Chief Executive Officer | ||
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the
dates indicated.
|
Signature
|
Title
|
Date
|
|
/s/ John
Thomas Kreitzer
John
Thomas Kreitzer
|
Chief
Executive Officer, Treasurer and Chief Financial Officer
|
June
30, 2006
|
|
/s/
Mark
D. Chester
Mark
D. Chester
|
Director
|
June
30, 2006
|
|
/s/ Kenneth
A.
Cannerelli
Kenneth
A.
Cannerelli
|
Director
|
June
30, 2006
|
|
/s/
Gregg
C. Johnson
Gregg
C. Johnson
|
Director
and Corporate Secretary
|
June
30, 2006
|
|
/s/ Wesley
G. Sprunk
Wesley
G. Sprunk
|
Director
|
June
30, 2006
|
60
Part IV
FINANCIAL
STATEMENTS
ANNEX
A
SKYE
INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX
TO FINANCIAL STATEMENTS
|
Page
No.
|
|
| REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS |
F-2
- F-3
|
| CONSOLIDATED FINANCIAL STATEMENTS | |
| CONSOLIDATED BALANCE SHEETS |
F-4
|
| CONSOLIDATED STATEMENTS OF OPERATIONS |
F-5
|
| CONSOLIDATED STATEMENTS OF STOCKHOLDER’S DEFICIT |
F-6
|
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
F-7
|
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
F-8
-
F-19
|
61
MOORE
& ASSOCIATES, CHARTERED
ACCOUNTANTS
AND ADVISORS
PCAOB
REGISTERED
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors
Skye
International Inc (Formerly Tankless Systems Worldwide Inc)
Las
Vegas, Nevada
We
have
audited the accompanying balance sheet of Skye International Inc (Formerly
Tankless Systems Worldwide Inc) as of December 31, 2004, and the related
statements of operations, stockholders’ equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as
evaluating the overall financial statement presentation. We believe that
our
audits provide a reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in
all
material respects, the financial position of Skye International Inc (Formerly
Tankless Systems Worldwide Inc) as of December 31, 2004 and the results
of its
operations and its cash flows for the year then ended, in conformity
with
accounting principles generally accepted in the United States of
America.
The
accompanying financial statements have been prepared assuming that the
Company
will continue as a going concern. As discussed in Note 9 to the financial
statements, the Company’s net losses and accumulated deficit of $6,012,643 as of
December 31, 2004 raise substantial doubt about its ability to continue
as a
going concern. Management’s plans concerning these matters are also described in
Note 9. The financial statements do not include any adjustments that
might
result from the outcome of this uncertainty.
/s/
Moore & Associates Chartered
Moore
& Associates Chartered
Las
Vegas, Nevada
June
9,
2006
Except
as to Note 12 the date is June 23, 2006
2675
S. Jones Blvd. Suite 109, Las Vegas, NV 89146 (702) 253-7511 Fax (702)
253-7501
F-2
62
MOORE
& ASSOCIATES, CHARTERED
ACCOUNTANTS
AND ADVISORS
PCAOB
REGISTERED
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors
Skye
International Inc (Formerly Tankless Systems Worldwide Inc)
Las
Vegas, Nevada
We
have
audited the accompanying balance sheets of Skye International Inc (Formerly
Tankless Systems Worldwide Inc) as of December 31, 2005, and the related
statements of operations, stockholders’ equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our
audits provide a reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in
all
material respects, the financial position of Skye International Inc (Formerly
Tankless Systems Worldwide Inc) as of December 31, 2005 and the results
of its
operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of
America.
The
accompanying financial statements have been prepared assuming that the
Company
will continue as a going concern. As discussed in Note 9 to the financial
statements, the Company’s net losses and accumulated deficit of $10,064,513 as
of December 31, 2005 and working capital deficit of $2,411,601 as of December
31, 2005 raises substantial doubt about its ability to continue as a going
concern. Management’s plans concerning these matters are also described in Note
9. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
/s/
Moore & Associates Chartered
Moore
& Associates Chartered
Las
Vegas, Nevada
June
23,
2006
2675
S. Jones Blvd. Suite 109, Las Vegas, NV 89146 (702) 253-7511 Fax (702)
253-7501
F-3
63
|
CONSOLIDATED
BALANCE SHEETS
|
||||
|
|
|
|
||
|
ASSETS
|
||||
|
|
|
Years
Ended December 31,
|
||
|
|
|
2005
|
2004
|
|
|
CURRENT
ASSETS
|
||||
|
|
Cash
|
2,711
|
18,690
|
|
|
|
Accounts
Receivable, Net
|
2,773
|
111
|
|
|
|
Inventory
at Cost
|
25,069
|
54,170
|
|
|
|
Prepaid
Expenses
|
757
|
115,000
|
|
|
|
Total
Current Assets
|
31,310
|
187,970
|
|
|
EQUIPMENT,
NET
|
56,626
|
47,648
|
||
|
OTHER
ASSETS
|
|
|
||
|
|
Patents
and Software, Net
|
-
|
-
|
|
|
|
Deposits
|
20,000
|
-
|
|
|
|
Total
Other Assets
|
20,000
|
-
|
|
|
|
Total
Assets
|
107,937
|
235,618
|
|
|
|
|
|
||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
||||
|
|
|
|
||
|
LIABILITIES
|
||||
|
|
CURRENT
LIABILITIES
Accounts
Payable
|
234,190
|
87,478
|
|
|
|
Other
Payables
|
870,914
|
709,389
|
|
|
|
Notes
Payable
|
1,118,240
|
1,978,061
|
|
|
|
Accrued
Interest Payable
|
81,626
|
75,874
|
|
|
Warranty
Accrual
|
34,570
|
15,276
|
||
|
|
Customer
Deposits
|
103,371
|
-
|
|
|
|
Total Current Liabilities
|
2,442,911
|
2,866,078
|
|
|
Non-Current
Liabilities
|
-
|
-
|
||
|
|
Total
Liabilities
|
2,442,911
|
2,866,078
|
|
|
|
|
|||
|
STOCKHOLDERS'
EQUITY (DEFICIT)
|
||||
|
|
Common
Stock authorized is
|
|
||
|
|
100,000,000
shares at $0.001par value.
|
|
||
|
|
Issued
and outstanding on December 31,
|
|
||
|
2005
were 17,838,231 shares, December 31,
|
||||
|
|
2004
were 13,125,977
|
17,838
|
13,126
|
|
|
Common
Stock Subscribed
|
275,000
|
-
|
||
|
|
Paid
in Capital
|
7,436,333
|
3,369,057
|
|
|
|
Accumulated
Deficit
|
(10,064,513)
|
(6,012,643)
|
|
|
|
Total
Stockholders' Equity (Deficit)
|
(2,335,342)
|
(2,630,460)
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND
|
||||
|
|
STOCKHOLDERS
EQUITY (DEFICIT)
|
107,937
|
235,618
|
|
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
F-4
64
|
Skye
International, Inc.
|
||||||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||||
|
|
||||||||||
|
|
Years
Ended December 31,
|
|||||||||
|
|
2005
|
2004
|
||||||||
|
INCOME
|
||||||||||
|
Product
Sales
|
$
|
172,169
|
$
|
205,640
|
||||||
|
Other
Income
|
255
|
251
|
||||||||
|
|
||||||||||
|
Total
Income
|
172,424
|
205,891
|
||||||||
|
|
||||||||||
|
Cost
of Goods Sold
|
172,651
|
205,488
|
||||||||
|
|
||||||||||
|
Gross
Income (Loss)
|
(226
|
)
|
403
|
|||||||
|
|
||||||||||
|
EXPENSES
|
||||||||||
|
Legal
and Professional
|
2,032,825
|
711,916
|
||||||||
|
General
and Administrative
|
1,253,029
|
504,066
|
||||||||
|
Research
and Development
|
447,657
|
285,544
|
||||||||
|
Advertising/Marketing
|
44,147
|
27,431
|
||||||||
|
Loss
on Disposal of Assets
|
17,253
|
89,076
|
||||||||
|
Impairment
Loss
|
-
|
39,778
|
||||||||
|
Depreciation
|
33,755
|
29,579
|
||||||||
|
Amortization
|
-
|
23,685
|
||||||||
|
Total
Expenses
|
3,879,816
|
1,711,075
|
||||||||
|
OTHER
INCOME AND (EXPENSE):
|
||||||||||
|
Interest
Income/(Expense)
|
(171,828
|
)
|
(182,659
|
)
|
||||||
|
(171,828
|
)
|
(182,659
|
)
|
|||||||
|
Net
(Loss) before Income Taxes
|
(4,051,870
|
)
|
(1,893,331
|
)
|
||||||
|
|
||||||||||
|
Provision
for Income Taxes
|
-
|
-
|
||||||||
|
NET
(LOSS)
|
(4,051,870
|
)
|
(1,893,331
|
)
|
||||||
|
Basic
and diluted (loss) per share
|
$
|
(0.27
|
)
|
$
|
(0.16
|
)
|
||||
|
Weighted
Average Number of Common
|
||||||||||
|
Shares
Outstanding
|
14,814,630
|
12,016,132
|
||||||||
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
F-5
Tankless
Systems Worldwide, Inc. and Subsidiaries
65
CONSOLIDATED
STATEMENTS OF STOCKHOLDER’S DEFICIT
|
|
Common
Stock
|
Common
Stock
|
Paid
in
|
Accumulated
|
Total
|
||||||||||||||
|
|
Shares
|
Amount
|
Subscribed
|
Capital
|
Deficit
|
Equity
|
|||||||||||||
|
|
|||||||||||||||||||
|
Balance
December 31, 2000
|
580,000
|
$
|
580
|
$
|
333,920
|
$
|
(828,006
|
)
|
$
|
(493,506
|
)
|
||||||||
|
|
|||||||||||||||||||
|
Common
Shares issued for Services
|
52,500
|
53
|
52,447
|
52,500
|
|||||||||||||||
|
Contribution
to Capital
|
24,265
|
24,265
|
|||||||||||||||||
|
Common
Shares issued to retire
|
|||||||||||||||||||
|
Convertible
Note and accrued Interest
|
60,000
|
60
|
187,022
|
187,082
|
|||||||||||||||
|
Net
(Loss)
|
-
|
-
|
-
|
- |
(120,900
|
)
|
(120,900
|
)
|
|||||||||||
|
|
|
|
|||||||||||||||||
|
Balance
December 31, 2001
|
692,500
|
$
|
693
|
$
|
597,654
|
$
|
(948,906
|
)
|
$
|
(350,559
|
)
|
||||||||
|
|
|||||||||||||||||||
|
Common
Shares issued for cash
|
104,778
|
105
|
96,895
|
97,000
|
|||||||||||||||
|
Common
Shares issued for services
|
455,800
|
455
|
110,045
|
110,500
|
|||||||||||||||
|
Common
Shares issued for prepaid
|
|||||||||||||||||||
|
service
|
162,500
|
163
|
16,087
|
16,250
|
|||||||||||||||
|
Common
Shares issued for proposed
|
|||||||||||||||||||
|
business
acquisition
|
6,433,406
|
6,433
|
896,997
|
903,430
|
|||||||||||||||
|
Common
Shares issued to retire
|
|||||||||||||||||||
|
convertible
note and accrued Interest
|
60,000
|
60
|
200,670
|
200,730
|
|||||||||||||||
|
Common
Shares issued to retire debt
|
22,500
|
22
|
23,272
|
23,294
|
|||||||||||||||
|
Net
(Loss)
|
-
|
- |
-
|
- |
-2,798,586
|
(2,798,586
|
)
|
||||||||||||
|
|
|
|
|||||||||||||||||
|
Balance
December 31, 2002
|
7,931,484
|
7,931
|
1,941,620
|
(3,747,492
|
)
|
(1,797,941
|
) | ||||||||||||
|
Common
Shares issued for Cash
|
434,894
|
435
|
967,925
|
968,360
|
|||||||||||||||
|
Common
Shares issued in recapitalization
|
3,008,078
|
3,008
|
(166,940
|
)
|
(163,932
|
)
|
|||||||||||||
|
Net
(Loss)
|
- | - |
-
|
- |
(371,821
|
)
|
(371,821
|
)
|
|||||||||||
|
Balance
December 31, 2003
|
11,374,456
|
11,374
|
2,742,605
|
(4,119,313
|
)
|
(1,365,334
|
)
|
||||||||||||
|
|
|||||||||||||||||||
|
Common
Shares issued for services
|
800,000
|
800
|
228,080
|
228,880
|
|||||||||||||||
|
|
|
|
|||||||||||||||||
|
Common
Shares issued to retire Debt and interest of $91,281
|
172,354
|
172
|
91,109
|
91,281
|
|||||||||||||||
|
Common
Shares issued for cash through exercise of warrants
|
66,667
|
67
|
16,600
|
16,667
|
|||||||||||||||
|
Common
Shares cancelled in
settlement
|
(2,075,000
|
)
|
-2,075
|
2,075
|
-
|
||||||||||||||
|
Common
Stock Options issued for services
|
19,000
|
19,000
|
|||||||||||||||||
|
Common
Stock issued for prepaid services
|
2,250,000
|
2,250
|
110,250
|
112,500
|
|||||||||||||||
|
Common
Shares valued at $159,876
|
537,500
|
538
|
159,338
|
159,876
|
|||||||||||||||
|
Issued to obtain $1,075,000 debt
|
|
||||||||||||||||||
|
Net
(Loss)
|
- | - |
-
|
- |
(1,893,330
|
)
|
(1,893,330
|
)
|
|||||||||||
|
Balance
December 31, 2004
|
13,125,977
|
13,126
|
-
|
3,369,057
|
(6,012,643
|
)
|
(2,630,460
|
)
|
|||||||||||
66
CONSOLIDATED
STATEMENTS OF STOCKHOLDER’S
DEFICIT - continued
|
|
Common
Stock
|
Common
Stock
|
Paid
in
|
Accumulated
|
Total
|
||||||||||||||
|
|
Shares
|
Amount
|
Subscribed
|
Capital
|
Deficit
|
Equity
|
|||||||||||||
|
Common
Stock granted but not issued until 2006
|
275,000
|
275,000
|
|||||||||||||||||
|
Common
Stock granted in 2004 but
|
945,000
|
945,000
|
|||||||||||||||||
|
not
earned by related party
|
|||||||||||||||||||
|
consulting
agreements until 2005
|
|||||||||||||||||||
|
Common
Shares issued for consulting
and
outside services
|
260,525
|
261
|
237,162
|
237,423
|
|||||||||||||||
|
Common
Shares issued in conjunction with related party consulting
contracts
|
391,832
|
392
|
414,129
|
414,521
|
|||||||||||||||
|
Issuance
of common stock for
employee
stock Awards
|
524,500
|
525
|
535,646
|
536,170
|
|||||||||||||||
|
Issuance
of common stock to reduce
existing
debt
|
78,067
|
78
|
52,266
|
52,344
|
|||||||||||||||
|
Common
stock issued in
|
50,000
|
50
|
12,450
|
12,500
|
|||||||||||||||
|
Connection
with debt
|
|||||||||||||||||||
|
Conversion
of convertible bridge
notes
into common stock
|
842,511
|
843
|
462,539
|
463,382
|
|||||||||||||||
|
Issuance
of common stock in private
placements
|
2,564,819
|
2,565
|
1,408,085
|
1,410,650
|
|||||||||||||||
|
Net
(Loss)
|
-
|
-
|
-
|
-
|
(4,051,870
|
)
|
(4,051,870
|
)
|
|||||||||||
|
Balance
December 31, 2005
|
17,838,231
|
17,838
|
275,000
|
7,436,333
|
(10,064,513
|
)
|
(2,335,341
|
)
|
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
F-6
67
|
Skye
International, Inc. and Subsidiaries
|
|||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|||||||
|
|
|||||||
|
Years
Ended December 31,
|
Years
Ended December 31,
|
||||||
|
|
2005
|
2004
|
|||||
|
Cash
Flows from Operating Activities:
|
|||||||
|
Net
(Loss)
|
$
|
(4,051,870
|
)
|
$
|
(1,893,330
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|||||||
|
Common
Share Options issued for service
|
19,000
|
||||||
|
Shares
issued for services rendered
|
2,408,114
|
388,756
|
|||||
|
Shares
issued to retire debt and interest
|
528,226
|
91,281
|
|||||
|
Amortization
of intangible assets
|
23,685
|
||||||
|
Depreciation
Expense
|
33,755
|
29,579
|
|||||
|
Loss
on disposal of capital assets
|
89,076
|
||||||
|
Impairment
Loss
|
39,778
|
||||||
|
Changes
in operating assets and liabilities:
|
|||||||
|
Inventory
|
29,468
|
44,643
|
|||||
|
Accounts
Receivable
|
(2,663
|
)
|
58,615
|
||||
|
Prepaid
Expense
|
114,243
|
(64,340
|
)
|
||||
|
Deposits
|
(20,000
|
)
|
7,514
|
||||
|
Accrued
Interest Payable
|
(6,001
|
)
|
8,918
|
||||
|
Accounts
Payable & Other Payables
|
375,344
|
77,369
|
|||||
|
Notes
Payable
|
(895,883
|
)
|
(104,668
|
)
|
|||
|
Customer
Deposits
|
103,371
|
159,084
|
|||||
|
|
|
||||||
|
Net
Cash Provided (Used) by Operating Activities
|
(1,383,896
|
)
|
(1,025,039
|
)
|
|||
|
|
|||||||
|
Cash
Flow From Investing Activities
|
|||||||
|
|
|||||||
|
Purchase
of Equipment
|
(42,733
|
)
|
(11,503
|
)
|
|||
|
Option
to Purchase JSS Security
|
(37,526
|
)
|
|||||
|
|
|||||||
|
Net
Cash Provided (Used) by Investing Activities
|
(42,733
|
)
|
(49,029
|
)
|
|||
|
|
|||||||
|
Cash
Flow From Financing Activities
|
|||||||
|
Principle
Received on convertible debentures
|
1,075,679
|
||||||
|
Proceeds
from sale of Common Stock
|
1,410,650
|
16,667
|
|||||
|
Net
Cash Provided by Financing Activities
|
1,410,650
|
1,092,346
|
|||||
|
|
|||||||
|
Net
Increase/(Decrease) in Cash and Cash Equivalents
|
(15,979
|
)
|
18,278
|
||||
|
|
|||||||
|
Cash,
Beginning of Period
|
18,690
|
412
|
|||||
|
|
|||||||
|
Cash,
End of Year
|
2,711
|
$
|
18,690
|
||||
|
|
|||||||
|
Supplemental
Disclosure of Information:
|
|||||||
|
Taxes
|
$
|
-
|
|||||
|
Interest
|
191,093
|
$
|
182,659
|
||||
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
F-7
68
SKYE
INTERNATIONAL, INC.
NOTES
TO
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2005 and December 31, 2004
Note
1. THE
COMPANY
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.
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 Merger is accounted for as a reverse merger with Envirotech
being the accounting acquirer of Tankless. Accordingly, the Financial Statements
present the historic financial position, operations and cash flows of Envirotech
for all periods presented with the December 31, 2003 balance sheet adjusted
to
consolidate and reflect the fair values assigned to the acquisition balance
sheet of Tankless. Refer to Note 4, Acquisition of Subsidiary for additional
information and disclosures related to the merger.
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. The first sales of its products occurred
in
calendar year 2000.
With
the
acquisition of Envirotech, the Company is in the business of designing,
developing, manufacturing and marketing several models of electronic, tankless
water heaters.
During
January 2004 the Company organized ION Tankless, Inc. (Ion) an Arizona
Corporation as a wholly owned subsidiary. ION is organized to do research,
development and marketing of new tankless technologies.
Nature
of Business
The
Company produces and markets tankless electronic water heaters. The company’s
products, together with a limited quantity of related parts purchased for
resale, are sold primarily through Internet and wholesale distributors and
major
retailers 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 owed subsidiaries.
In
January 2006, the Company withdrew its Chapter 11 filing without prejudice
or
relief from any of its liabilities previously classified as Subject to
Compromise.
As
such
the
accompanying Consolidated Financial Statement for the years ended December
31,
2005 and 2004 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.
F-8
69
SKYE
INTERNATIONAL, INC.
NOTES
TO
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2005 and December 31, 2004
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 Statement for the year ended
December 31, 2004 has been restated 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.
SFAS
123(R) Share-Based
Payment
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,” it supersedes APB Opinion No. 25, “Accounting for Stock Issued to
Employees,” and amends FAS No. 95, “Statement of Cash Flows.” Generally the
approach in FAS No. 123R is similar to the approach described in FAS
No. 123. However, 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. Pro forma disclosure is no longer
an alternative. This statement also provides guidance on valuing and expensing
these awards, as well as disclosure requirements of these equity arrangements.
FAS
No. 123R must be adopted for the year ending December 31, 2006. Early
adoption will be permitted in periods in which financial statements have
not yet
been issued.
As
permitted by FAS No. 123, the Company currently accounts for share-based
payments to employees using the Fair Market Value method and the Company
recognizes compensation cost for employee stock options at fair market Value.
Accordingly, the adoption of FAS No. 123R’s fair value method is expected
to have a material impact on the Company’s results of operations, although it is
not expected to have an impact on the Company’s overall financial position.
[However, had the Company adopted FAS No 123R in prior periods using the
Black-Scholes valuation model, the impact of that standard would have
approximated the impact of FAS No. 123 as described in the disclosure of
pro
forma net loss and net loss per share in Note 3 to our consolidated financial
statements.]
FAS
No. 123R will also require the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow as required under current literature. The
Company
cannot estimate what those amounts will be in the future (because they depend
on, among other things, when employees exercise stock options, and whether
the
Company will be in a taxable position). There is no tax impact related to
the
prior periods since we are in a net loss position.
SFAS
149 Amendment of Statement 133 on Derivative Instruments and Hedging
Activities
This
Statement amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities
under FASB Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities.
SFAS
150 Financial Instruments with Characteristics of both Liabilities and
Equity
This
statement requires that such instruments be classified as liabilities in
the
balance sheet. SFAS 150 is effective for financial instruments entered into
or
modified after May 31, 2003.
F-9
70
SKYE
INTERNATIONAL, INC.
NOTES
TO
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2005 and December 31, 2004
Note 1. THE
COMPANY -
continued
[FIN
46 Consolidation of Variable Interest Entities
Interpretation
No. 46 (FIN46)
In
January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51,
which addresses consolidation by business enterprises of variable interest
entities ("VIEs"). In December 2003, the FASB completed deliberations of
proposed modifications to FIN 46 (Revised Interpretations) resulting in multiple
effective dates based on the nature as well as the creation date of the VIE.
The
Revised Interpretations must be applied no later than the second quarter
of
fiscal year 2004. The adoption of FIN 46 had no impact on the Company's
consolidated financial statements as of December 31, 2004.
The
adoption of these new Statements is not expected to have a material effect
on
the Company’s current financial position, results or operations, or cash flows.
Note
2.
SUBSIDIARY’S
PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
The
Company’s wholly-owned subsidiary, Envirotech, filed for reorganization under
Chapter 11, as it offered the most efficient alternative to restructure the
Company’s balance sheet and access new working capital while continuing to sells
its products and work with its parent to explore alternative business objectives
to become financially viable. 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.
With
the
exception of a guarantee to one critical supplier in the approximate amount
of
$42,500, the Registrant 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 assemblies of products have obtained
judgments against Envirotech and were seeking to collect such judgments,
and an
action was pending in the U.S. District Court, Southern District of Texas,
alleging patent infringement. The filing of the Bankruptcy Petition temporarily
stayed all creditors and lawsuits.
AICPA
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
under the Bankruptcy Code" ("SOP 90-7") provides financial reporting guidance
for entities that are reorganizing under the Bankruptcy Code. The Company
implemented this guidance in the consolidated financial statements for periods
subsequent to September 30, 2004.
Pursuant
to SOP 90-7, companies are required to segregate pre-petition liabilities
that
are subject to compromise and report them separately on the balance sheet.
Liabilities that may be affected by a plan of reorganization are recorded
at the
amount of the expected allowed claims, even if they may be settled for lesser
amounts. Obligations arising post-petition, and pre-petition obligations
that
are secured are not classified as liabilities subject to compromise.
Additional
pre-petition claims (liabilities subject to compromise) may arise due to
the
rejection of executory contracts or unexpired leases, or as a result of the
allowance of contingent or disputed claims.
As
of
December 31, 2004 and December 31, 2005, Tankless and its subsidiaries
(including Envirotech the “Debtor”) operated their business as
debtors-in-position pursuant to the Bankruptcy Code.
In
January 2006, the Company withdrew its Chapter 11 filing without prejudice
or
relief from any of its liabilities previously classified as Subject to
Compromise.
F-10
71
SKYE
INTERNATIONAL, INC.
NOTES
TO
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2005 and December 31, 2004
Note
3. 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.
The
accompanying balance sheets as of December 31, 2005 and December 31, 2004,
and
the related statements of operations, stockholders’ equity, and cash flows for
the periods ended December 31, 2005, and 2004 reports the activity of its
subsidiary Envirotech up to the date of purchase November 7, 2003 and
consolidates the activity of the Company for all reported periods from the
date
of purchase to December 31, 2004 and its subsidiary ION from inception (January
2004) to December 31, 2005.
The
Consolidated Financial Statements for fiscal 2005 contained herein have been
prepared in accordance with Statement of Position 90-7, “Financial Reporting by
Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”). The
Consolidated Financial Statements for fiscal 2003 are not prepared in accordance
with SOP 90-7 because the Chapter 11 case was filed in fiscal 2005. See Note
2
to the Consolidated Financial Statements. The amounts reported in subsequent
financial statements will materially change due to the restructuring of the
Company’s assets and liabilities as a result of the Plan and the application of
the provisions of SOP 90-7 with respect to reporting upon emergence from
Chapter
11 (“fresh start” accounting). Financial statements for periods subsequent to
the Company’s emergence from Chapter 11 will not be comparable with those of
prior periods.
Cash
Equivalent
Cash
and
Cash Equivalents - All highly liquid debt instruments with a maturity of
three
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 December 31,
2005 and 2004 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 new subsidiary ION,
the
Company continues to expense research and development costs as incurred in
developing additional products based on new technologies.
Marketing
Strategy
The
Company sells directly to individuals through the Internet, through
distributors, and through high volume retailers. The Company periodically
advertises on cable television stations, at trade shows and through trade
magazines and it maintains an extensive website.
F-11
72
SKYE
INTERNATIONAL, INC.
NOTES
TO
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2005 and December 31, 2004
Note
3. SIGNIFICANT
ACCOUNTING POLICIES - continued
Revenue Recognition
The
Company records sales when revenue is earned. The Company usually sells its
units through credit card sales to individuals and normally does not maintain
receivables. However, the Company does sell on credit to distributors. Due
to
the company’s Warranty and Right of Return policy, six percent of the sales are
recognized immediately and the balance is recognized 30 days after shipment
of
the product to the customer. All shipments are FOB shipping point. Sales
to
distributorships are sold FOB shipping point with 30-day terms on receivables.
In 2005, substantially all of the Company’s gross revenues of $172,169 were
generated by the Valeo subsidiary.
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:
|
Year Ended December 31
|
2005 | 2004 | |||||
| Accounts Receivable | $ | 4,056 | $ | 111 | |||
| Less Allowance for Doubtful Accounts | (1,283 | ) | - | ||||
| Net Accounts Receivable | $ | 2,773 | $ | 111 |
Allowance
for Doubtful Accounts
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. As of December 31,
2005 the
allowance was $1,283
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 years
ended
December 31, 2005, and December 31, 2004 and is $44,147, and $27,431
respectively.
Inventory
The
Company contracts with a third party to manufacture the units 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:
|
Year Ended December 31
|
2005 | 2004 | |||||
| Tooling, machinery, furniture and fixtures | $ | 64,457 | $ | 163,429 | |||
| Less: Accumulated depreciation | (7,831 | ) | (115,781 | ) | |||
| Net Accounts Receivable | $ | 56,626 | $ | 47,648 |
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.
F-12
73
SKYE
INTERNATIONAL, INC.
NOTES
TO
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2005 and December 31, 2004
Note
3. SIGNIFICANT
ACCOUNTING POLICIES - continued
Patent and software costs include direct costs of obtaining patents. Costs for new patents are capitalized and amortized over the estimated useful lives of seventeen years and software over five years. The Company determined that the current patents and software were impaired due to uncertainty in connection with the pending patent litigation, as well as the efforts to develop a new product line as of December 31, 2004.
Patent and software costs include direct costs of obtaining patents. Costs for new patents are capitalized and amortized over the estimated useful lives of seventeen years and software over five years. The Company determined that the current patents and software were impaired due to uncertainty in connection with the pending patent litigation, as well as the efforts to develop a new product line as of December 31, 2004.
|
Year Ended December 31
|
2005 | 2004 | |||||
| Patents and Heater Software | $ | - | $ | 132,274 | |||
| Accumulated Amortization | - | (92,496 | ) | ||||
| Impairment Loss | - | (39,778 | ) | ||||
| Net Patents and Heater Software | $ | - | $ | - |
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 no 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 700,000
options at $.50 and $.55 per share available at this time. All outstanding
warrants were either exercised or cancelled and convertible debt is
anti-dilutive.
Stock
Based Compensation
The
Company accounts for its stock based compensation based upon provisions in
SFAS
No. 123, Accounting
for Stock-Based Compensation.
In this
statement stock based compensation is divided into two general categories,
based
upon who the stock receiver is, namely: employees/directors and
non-employees/directors. The employees/directors category is further divided
based upon the particular stock issuance plan, namely compensatory and
non-compensatory. The employee/directors non-compensatory securities are
recorded at the sales price when the stock is sold. The compensatory stock
is
calculated and recorded at the securities’ fair value at the time the stock is
given. SFAS 123 also provides that stock compensation paid to non-employees
be
recorded with a value which is based upon the fair value of the services
rendered or the value of the stock given, whichever is more reliable. The
common
stock paid to non-employees was valued at the value of the services rendered.
Because the Company establishes the exercise price based on the fair market
value of the Company’s stock at the date of grant, the options have no intrinsic
value upon grant, and therefore no expense is recorded.
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.
We
measure stock-based employee compensation based on FASB Statement No. 123r,
Accounting for Stock-Based Compensation, therefore, we establish the price
based
on the fair market value of our common stock at the date of grant.
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.”
Generally the approach in FAS No. 123R is similar to the approach described
in FAS No. 123. However, FAS No. 123R will require all share-based payments
to employees, including grants of employee stock options, to be recognized
in
the income statement based on their fair values.
FAS
No. 123R must be adopted no later than January 1, 2006. We have
adopted FAS No. 123R on January 1, 2005. FAS No. 123R permits
public companies to adopt its requirements using one of two methods, the
modified prospective or the modified retrospective method. We have chosen
to
adopt the modified prospective method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of FAS
No. 123R for all share-based payments granted after the effective date and
(b) based on the requirements of FAS No. 123 for all awards granted to
employees before the effective date of FAS No. 123R that remain unvested on
the effective date.
F-13
74
SKYE
INTERNATIONAL, INC.
NOTES
TO
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2005 and December 31, 2004
Note
3. SIGNIFICANT
ACCOUNTING POLICIES - continued
Warranty
and Right of Return
In
connection with the sale of each product, the Company provides a 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 20 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 December 31, 2005 a total of $15,276 in refunds and warranty allowances
were
recorded against Product Sales.
|
Balance of Warranty Accrual for
2003
|
$ | 3,220 | ||
| Balance of Warranty Accrual for 2004 | 9,725 | |||
| Balance of Warranty Accrual for 2005 | 21,625 | |||
| Total Warranty Accrual as of December 31, 2005 | $ | 34,570 |
Note
4. ACQUISITION
OF SUBSIDIARY
On
November 7, 2003, the Company acquired Envirotech Systems Worldwide, Inc.
a
private Arizona corporation (Envirotech), as a wholly owned subsidiary. On
the
date of purchase the Company had 3,008,078 common shares issued and outstanding.
The purchase was made in a one-for-one stock exchange of 8,366,778 shares
of the
Company’s common stock for all of the issued and outstanding shares of
Envirotech. The Statement of Stockholders’ Equity has been retroactively
restated to reflect the affect of a recapitalization of Envirotech at the
time
of purchase.
Note
5. NOTES
PAYABLE AND CAPITAL LEASE OBLIGATIONS
During
the years ended December 31, 2004 and December 31, 2005, the Company received
$1,075,000 and $100,000, respectively, through private placements to accredited
investors. The investor received a one-year debenture with an interest rate
of
10% per annum, payable, quarterly. Additionally, the investor received one
(1)
share of the Company’s restricted common stock for each Two Dollar ($2.00)
amount of debentures purchased. The principle and unpaid interest is convertible
at the option of the Company to common stock at the rate of one share of
stock
for every One Dollar ($1.00) outstanding at the due date. Rather than enforcing
conversion as provided by the language of the notes the Company made offers
of
conversion to the note holders to accept conversion based on current stock
values (i.e., $0.55) or repayment of the note. During 2004 a $30,000 and
a
$50,000 note including associated interest were converted to common stock.
During 2005, $515,725 in notes and accrued interest were converted to common
stock.
Notes
payable and capital lease obligations consist of the following:
| Year Ended December 31 |
2005
|
2004
|
|||||
| 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 | $ | 100,000 | |||
| Convertible Notes, Unsecured, Matured March 2002 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 note has been converted. | --- | $ | 30,000 |
F-14
75
SKYE
INTERNATIONAL, INC.
NOTES
TO
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2005 and December 31, 2004
Note
5. NOTES
PAYABLE AND CAPITAL LEASE OBLIGATIONS
-
continued
Notes
payable and capital lease obligations - continued
|
Year
Ended December 31
|
2005 | 2004 | |||||
|
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. Thirty-six notes that
were issued between January 23 and December 14,
2004, are outstanding at 12-31-04 and four notes issued
between May 6, 2004 and December 14, 2004, are
outstanding at December 31, 2005. The four notes outstanding
December 31, 2005, have not been converted or
repaid and are in default. Aggregate Amount:
|
215,000 | 1,025,000 | |||||
|
Demand
Note with Attorneys, 6% Interest, All Assets of
Subsidiary, Envirotech, pledged as Collateral; Note is
in default
|
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 default35
|
35,000
|
35,000
|
|||||
|
Demand
Note Made by Subsidiary, Envirotech; Note
is in default
|
72,391
|
62,212
|
|||||
| Total |
1,118,240
|
1,978,061
|
|||||
| Accrued Interest Payable |
81,626
|
75,874
|
|||||
| Total Notes Payable | $ | 1,199,866 | $ | 2,053,935 |
Note
6. STOCKHOLDERS’
EQUITY
On
December 31, 2005 and 2004 common stock issued and outstanding were 17,838,231
and 13,125,977 shares respectively.
On
December 1, 2003, the Company adopted an employee stock incentive plan setting
aside 165,000 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, or, if none,
the
entire Board of Directors has the right to grant awards or stock options
as
administers the plan.
On
December 19, 2003, the Company filed a Registration on Form S-8 with the
Securities Exchange Commission covering the 165,000 shares provided by this
plan, at a maximum offering price of $1.00 per share.
F-15
76
SKYE
INTERNATIONAL, INC.
NOTES
TO
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2005 and December 31, 2004
Note
6. STOCKHOLDERS’
EQUITY - continued
As
of
March 31, 2004, the Company has issued all of the shares covered by the 2003
Stock Incentive Plan adopted by the Company on December 1, 2003.
On
December 23, 2004, the Company accepted the return and cancellation of 2,075,000
common shares in settlement of action taken by the company against prior
officers, directors and shareholders of Envirotech in connection with claims
made during its purchase.
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 who shall have
the
right to grant awards or stock options 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
December 31, 2005, the Company has issued 252,357 shares covered by the
2005
Stock Incentive Plan adopted by the Company on March 24, 2005, at a total
amount
of $247,768.
The
Company was initially capitalized on November 30, 1993 with the issue of
500,000
shares for $5,000. During 2004 the Company issued 537,500 common shares valued
at $159,876 for debenture purchase incentives; 800,000 common shares for
services valued at $228,880; 66,667 common shares for $16,667 cash in exercise
of outstanding warrants; 172,354 common shares to retire $80,000 in debt
and
11,281 interest; 2,250,000 shares were issued for prepaid expenses of $112,500;
2,075,000 shares were surrendered and cancelled in settlement of Envirotech
acquisition dispute; and 537,500 shares were issued to retire $1,075,000
convertible debt at $159,876. In 2004, the Company also issued 2,250,000
shares
as prepayment for services valued at $945,000 which were performed in 2005.
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.
The
total common stock issued and outstanding at December 31, 2005 is 17,838,231
shares.
Warrants
On
December 31, 2003 there were 66,667 share purchase warrants outstanding
entitling the holders the right to purchase one common share for each warrant
held at $0.75 per share. On May 19, 2004, the Company revised the exercise
price
to $0.25 per share and accepted $16,667 in exercise of these warrants for
66,667
common shares. No additional warrants are outstanding.
Stock
Options
In
connection with the acquisition of Envirotech Systems Worldwide, Inc.,
the
Company issued immediately vested stock options on October 29, 2003 to
one of
the principal shareholders of Envirotech. He was granted the right to purchase
300,000 restricted common shares at $0.55 per share until October 29, 2004
which
was extended to December 31, 2004. This option expired without exercise
on
December 31, 2004.
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.
On
December 31, 2004 options to purchase 100,000 restricted common shares were
granted as part of a settlement agreement. The options are immediately vested
and the holder has the right to purchase 100,000 restricted shares at an
exercise price of $0.55 per share and will expire in one year (December 31,
2005). Using a discounted stock price of $0.44, exercise price of $0.55,
1-year
option, risk-free rate of 4.1% and a volatility rate of .038 the value of
these
options is calculated at $0.01 using the Black-Scholes model. The aggregate
value of 100,000 options is $1,000.
F-16
77
SKYE
INTERNATIONAL, INC.
NOTES
TO
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2005 and December 31, 2004
Note 6. STOCKHOLDERS’
EQUITY - continued
In
October 2005, the Company granted an option to its website developer to purchase
100,000 shares of common stock at a variable price based on market price,
exercisable within one year.
At
December 31, 2005, none of the options have been exercised.
Outstanding
stock options are as follows:
|
Shares
|
||||
| Balance, December 31, 2003 | 300,000 | |||
| Granted | 600,000 | |||
| Expired | (300,000 | ) | ||
| Balance, December 31, 2004 | 600,000 | |||
| Granted | 100,000 | |||
| Expired | (100,000 | ) | ||
| Granted | 100,000 | |||
| Balance, December 31, 2005 | 700,000 |
Note
7. INCOME
TAXES
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 NOL of $10,064,513. The total valuation allowance is equal to
the
total deferred tax asset.
| Year Ended December 31 | 2005 | 2004 | |||||
| Deferred Tax Asset | $ | 3,522,580 | $ | 2,104,425 | |||
| Valuation Allowance | (3,522,580 | ) | (2,104,425 | ) | |||
| Current Taxes Payable | - | - | |||||
| Income Tax Expense | - | - |
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 | 2013-2023 | |||||
| 2004 | 1,893,331 | 2024 | |||||
| 2005 | 4,051,870 | 2025 | |||||
| Total | $ | 10,064,513 |
Note
8. LEASES
AND OTHER COMMITMENTS
The
Company leases certain office facilities and equipment under leases with
varying
terms. Certain leases contain rent escalation clauses. These rent expenses
are
recognized on a straight-line basis over the respective term of the lease.
The
lease is a month-to-month lease costing $20,236 per month.
F-17
78
SKYE
INTERNATIONAL, INC.
NOTES
TO
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2005 and December 31, 2004
Note
9. GOING
CONCERN
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 $10,064,513 as of December 31, 2005.
The Company will probably not generate meaningful revenues in the foreseeable
future. The Company has a working capital deficit of $2,411,601 as of December
31, 2005. These factors, among others, raise substantial doubt about the
Company’s ability to continue as a going concern.
Listed
below are some of the other factors that contribute to the Company’s assumed
inability to continue as a going concern. Also described are management’s plans
for the future of the Company.
Company’s
Challenges
The
Company has a substantial deficit in retained earnings from losses for the
previous years. Its subsidiary, Envirotech has not been able to generate
enough
sales to cover annual expenses and has survived only by raising funds. The
Company must continue to raise funds in the near future to survive. Management
has been successful in the past in raising these funds. There is no assurance
that management can continue to find investors to cover the losses
generated.
Management’s
Plans
Management
feels that industry trends are encouraging. Advertising will likely continue
through the printed media, cable television and the Internet. As new
homebuilders become aware of the product it will be included in original
house
plans.
On
February 1, 2004, the company initiated its management transition plan as
a
result of its acquisition of its subsidiary Envirotech. The Company entered
into
several consulting agreements to assist in day-to-day operations and provide
financial, management and other consulting services to the Company and its
subsidiaries. These persons will serve as part of the management team during
the
periods of their engagement and will perform a variety of services to
include:
The
evaluation of potential business opportunities
The
business operations and management
The
development of business strategies
Raising
public and private capital
Pursuant
to these agreements, the company committed to issue 700,000 shares of common
stock and has granted options to purchase an additional 600,000 restricted
shares at a price of $0.50 per share at any time prior to February 1, 2009.
All
stock issued or to be issued is subject to the limitations imposed by Rule
144.
Management believes these individuals and entities are crucial to the future
of
the Company and that the consideration paid for their services is fair and
reasonable.
Note
10. PENDING
LITIGATION
The
Company’s subsidiary Envirotech is currently a defendant in a patent
infringement lawsuit. Management feels that this action is baseless and that
the
Company will prevail. No contingent liability has been recorded nor contemplated
at this point. The action was temporarily stayed through a Bankruptcy Petition.
However, such action proved futile and the Bankruptcy Petition was withdrawn
without prejudice.
In
2004
Envirotech was named in three separate lawsuits for unpaid legal and consulting
fees totaling $268,000. Envirotech believed it had meritorious defenses to
each
of these suits. On April 14, 2004, Envirotech settled one suit, considering
it a
nuisance claim. 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 Rule 144, to the plaintiff on the
basis
of a loan from the Company to Envirotech. In the other two suits Envirotech
elected not to expend funds to defend the actions and judgments were granted
in
the aggregate amount of approximately $155,500. These judgments were temporarily
stayed through a Bankruptcy Petition (see Note 3). Any settlements of these
suits will be reflected as a charge in the year of the settlement.
F-18
79
SKYE
INTERNATIONAL, INC.
NOTES
TO
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2005 and December 31, 2004
Note
10. PENDING
LITIGATION - continued
On
August
13, 2004, the Company filed a verified complaint in the United States District
Court in and for the District of Arizona against certain key individuals
who
were principles of Envirotech prior to its acquisition. The action alleged
against various defendants, Breach of Fiduciary Duty, Aiding and Abetting
Breach
of Fiduciary Duty, Breach of Contract, Breach of Implied Covenant of Good
Faith
and Fair Dealing, Fraud and Intentional Misrepresentation, Conspiracy to
Defraud, Arizona Securities Fraud, Federal Securities Fraud, Negligent
Misrepresentation, Misappropriation of Trade Secrets and Confidential Business
Information, Conversion/Embezzlement, Intentional Interference with Business
Relations and Prospective Economic Advantage, Unjust Enrichment, and Promissory
Estoppel. The Company sought relief, which included, but was not limited
to,
Damages, Constructive Trust, Rescission and Injunctive Relief. This action
has
been settled with the return and cancellation of 2,075,000 shares of common
stock and the agreement of the defendants to other conditions, including
agreements not to compete for specified periods of time.
Note
11.
COMMON
STOCK TO BE GRANTED
On
December 24, 2004 the Company issued 2,250,000 shares of common stock for
$112,500 in anticipation of executing various consulting agreements for services
to be performed in 2005. This transaction was recorded in the 2004 financial
statements as a prepaid expense and subsequently recorded as an operating
expense in the 2005 financial statements.
Note
12. LIABILITIES SUBJECT
TO COMPROMISE
As
a
result of the Company's Chapter 11 filing (see Notes 1 and 2), pursuant to
SOP
90-7, the Company was required to segregate pre-petition liabilities that
are
subject to compromise and report them separately on the consolidated balance
sheet. Liabilities that may be affected by a plan of reorganization are recorded
at the amount of the expected allowed claims, even if they may be settled
for
lesser amounts. Substantially all of the Company's pre-petition debt was
recorded at face value and was classified liabilities subject to compromise.
The
Company’s subsequent withdrawal of its Chapter 11 filing resulting in a
reclassification of the Company’s liabilities from Subject to Compromise to
ordinary liabilities. The Company’s 2004 financial statements have been restated
to reflect this change.
Note
13. CONTROLS
AND PROCEDURES
Disclosure
Controls and Procedures
An
evaluation was carried out under the supervision and with the participation
of
management, including the Chief Executive Officer (“CEO”) and Chief Financial
Officer (“CFO”), regarding effectiveness of disclosure controls and procedures
as of December 31,
2004.
Disclosure controls and procedures are procedures that are designed with
the
objective of ensuring that information required to be disclosed in reports
filed
under the Securities Exchange Act of 1934, such as this Form 10-KSB, is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s rules and regulations. Based on a
material weakness in internal control over financial reporting discussed
below,
management, including the Chief Executive Officer and Chief Financial Officer,
concluded that the disclosure controls and procedures were not effective
as of
the end of the period covered by that report.
Internal
Control Over Financial Reporting
The
Company had a deficiency in internal controls over the accounting treatment
of
the reverse merger and subsidiary bankruptcy. Specifically, an effective
review
of the documents related to these two events was made. As a result of the
ineffective initial review, an error in the year-end 2004 calculation was
not
detected prior to the issuance of the annual 2004 consolidated financial
statements. This control deficiency resulted in the restatement of our annual
2004 consolidated financial statements. Management has concluded that this
control deficiency constitutes a material weakness.
Management
Remediation Plan
The
Company has undertaken remedial action to address and correct the weakness
in
internal controls and disclosure controls identified subsequent to the end
of
2004. These actions include adopting an adequate review of the accounting
treatment of significant events and adding qualified accounting personnel.
These
actions were put into place during the quarter beginning January 1,
2006.
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80