skye_international-10qsb.htm

 
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-QSB
 
(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to __________

COMMISSION FILE NUMBER: 000-27549
 
 
SKYE INTERNATIONAL, INC. 
(Exact name of Company as specified in its charter)

NEVADA  
88-0362112 
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)


 
 7701 E. Gray Road, Suite 4 Scottsdale, AZ 85260
 
 
 (Address of principal executive offices) (Zip Code)
 
 
 
 
 
 Company's telephone number: (480) 993-2300
 
 
 
 
 
 N/A
 
 
 (Former name, address and phone number if changed since last report)
 

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Company was required to file such reports),  and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in exchange A Rule 12b-2)  Yes ¨    No x 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨    No x 

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common equity:

 As of September 30, 2007 – 28,662,897 common shares of $0.001 par value.


Transitional Small Business Disclosure Format (check one):  Yes o No x

1


 
 Index
 Page Number
 
 
 
 PART I
 FINANCIAL INFORMATION
 3
 
 
 
 ITEM 1.
 Financial Statements (unaudited)
 3
 
 
 
 
 Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006
 3
 
 
 
 
 Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006
 4
 
 
 
 
 Consolidated Statements of Operations for the nine months ended September 30, 2007 and 2006
5
 
 
 
 
 Consolidated Statements of Stockholders' Deficit cumulative from December 31, 2000 to September 30,  2007
 6 - 8
 
 
 
 
 Notes to Financial Statements
 9 - 19
 
 
 
 ITEM 2.   
 Managements Discussion and Analysis of Financial Condition and Results of Operations/Plan of  Operation
 20-38
 
 
 
 ITEM 3.
 Controls and Procedures
 39
 
 
 
 PART II   
 OTHER INFORMATION
 39
 
 
 
 ITEM 1.   
 Legal Proceedings
 39
 
 
 
 ITEM 2.
 Unregistered Sales of Equity Securities and Use of Proceeds
 41
 
 
 
 ITEM 3.
 Defaults Upon Senior Securities
41
 
 
 
 ITEM 4.  
 Submission of Matters to Vote of Security Holders
42
 
 
 
 ITEM 5.
 Other Information
42
 
 
 
 ITEM 6.
 Exhibits
42
 
 
 
 SIGNATURES
 
42
  






2


PART I.   FINANCIAL INFORMATION
 
ITEM 1. Financial Statements (unaudited) 
 
Skye International, Inc. and Subsidiaries
 
CONSOLIDATED BALANCE SHEETS
 
 
 
 
       
 
 
September 30
   
December 31
 
 
 
2007
   
2006
 
 
 
(Unaudited)
   
(Audited)
 
 
 
 
   
 
 
ASSETS
 
 
 
   
 
 
CURRENT ASSETS
 
 
   
 
 
Cash
   
8,340
     
8,672
 
Accounts Receivable, Net
   
-
     
-
 
Inventory at Cost
   
99,021
     
163,062
 
Prepaid Expenses
   
85,379
     
99,379
 
 
               
Total Current Assets
   
192,740
     
271,112
 
 
               
EQUIPMENT, NET
   
41,513
     
43,921
 
 
               
OTHER ASSETS
               
Patents and Software, Net
   
-
     
-
 
Deposits
   
2,460
     
-
 
Intangible Assets
   
-
     
-
 
 
               
Total Other Assets
   
2,460
     
-
 
 
               
Total Assets
   
236,712
     
315,034
 
 
               
LIABILITIES AND STOCKHOLDERS' EQUITY        
 
               
LIABILITIES
               
Accounts Payable
   
1,685,099
     
2,160,624
 
Other Payables
   
12,986
     
31,132
 
Notes Payable
   
1,562,237
     
1,053,615
 
Accrued Interest Payable
   
84,042
     
72,917
 
Warranty Accrual
   
34,570
     
34,570
 
Customer Deposits
   
103,371
     
103,371
 
 
   
3,482,305
     
3,456,228
 
 
               
Total Liabilities
   
3,482,305
     
3,456,228
 
 
               
STOCKHOLDERS' EQUITY                
                 
Common Stock authorized is 100,000,000 shares at $0.001 par value.  Issued and outstanding on September  30,  2007 were 28, 662,897 shares, and December 31,  2006 were 21,622,243 shares
   
28,663 
     
21,622 
 
                 
Common Stock Subscribed
   
108,675 
     
108,675 
 
                 
Paid in Capital
   
10,741,356 
     
9,256,308 
 
 
               
Accumulated Deficit
   
(14,124,287
   
(12,527,800
                 
Total Stockholders' Equity (Deficit)
   
(3,245,593
   
(3,141,194
                 
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
   
236,712
     
315,034
 

The accompanying notes are an integral part of these statements.
 
 
3

 

Skye international, Inc. and Subsidiaries
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
   
 
       
 
   
 
   
 
 
 
   
Nine Months 
   
Nine Months
 
 
   
Ended
   
Ended
 
 
   
September 30,
   
September 30,
 
 
   
2007
   
2006
 
 
   
 
   
 
 
Operating Activities
   
 
   
 
 
 
   
 
   
 
 
Net (Loss)
      (1,596,487 )     (1,879,533 )
 
                 
Depreciation Expense.
     
8,002
     
7,109
 
Changes in assets and liabilities:
                 
Inventory
     
64,042
      (116,768 )
Accounts Receivable
     
-
      (93,732 )
Prepaid Expense
     
14,000
      (266,356 )
Deposits
      (2,460 )     (100,000 )
Accrued Interest Payable
     
11,125
      (11,168 )
Accounts Payable and Other Payables
      (493,671 )    
899,650
 
Notes Payable
     
508,622
      (15,000 )
Intangible Assets
     
-
      (3,982 )
                    
Net Cash (Used) by Operating Activities
      (1,486,827 )     (1,579,780 )
                    
Investing Activities
                 
                    
Purchase/Disposal of Assets
      (5,594 )     (318 )
                    
Net Cash (Used) by Investing Activities
      (5,594 )     (318 )
                    
Financing Activities
                 
                    
Shares issued for services rendered.
     
1,392,089
     
684,127
 
Shares issued to retire debt and interest.
     
100,000
     
226,493
 
Stock Subscriptions
     
-
     
21,838
 
Proceeds from sale of Common Stock
     
-
     
655,000
 
Discount on Convertible Debt
     
-
     
-
 
Stock Options Granted
     
-
     
-
 
                    
Net Cash Provided by Financing Activities
     
1,492,089
     
1,587,458
 
                    
Net Increase/(Decrease) in Cash
      (332 )    
7,360
 
                    
Cash, Beginning of Period
     
8,672
     
2,711
 
                    
Cash, End of Period
     
8,340
     
10,071
 
                    
                    
Supplemental Information:
                 
Taxes
     
-
     
-
 
Interest Expense
     
42,444
     
37,825
 
 
 
The accompanying notes are an integral part of these statements
 
4

 
 
Skye International, Inc. and Subsidiaries
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
 
   
 
 
 
 
 
   
 
 
 
 
Nine Months Ended
 
 
 
September 30, 
 
 
 
2007
   
2006
 
INCOME
 
 
   
 
 
Product Sales
   
-
    $
16,457
 
Other Income
   
-
     
-
 
 
               
Total Income
   
-
     
16,457
 
 
               
Cost of Goods Sold
   
-
     
17,982
 
 
               
Gross Income
    -       (1,525 )
 
               
EXPENSES
               
Legal and Professional
   
548,966
     
1,171,806
 
General and Administrative
   
346,947
     
590,622
 
Research and Development
   
616,210
     
26,928
 
Advertising/Marketing
   
-
     
38,406
 
Loss on Disposal of Assets
   
-
     
5,312
 
Depreciation
   
8,002
     
7,109
 
 
               
Total Expenses
   
1,520,125
     
1,840,183
 
 
               
OTHER INCOME AND (EXPENSE):
               
Interest Expense
    (78,515 )     (37,825 )
Gain on Extinguishment of Indebtedness
   
2,153
     
-
 
 
    (76,362 )     (37,825 )
 
               
Net (Loss) before Income Taxes
    (1,596,487 )     (1,879,533 )
 
               
Income Tax Expense
   
-
     
-
 
 
               
NET (LOSS)
    (1,596,487 )     (1,879,533 )
 
               
Basic and diluted (loss) per share
  $ (0.06 )   $ (0.09 )
 
               
Weighted Average Number of Common
               
Shares Outstanding
   
25,142,570
     
19,871,754
 

The accompanying notes are an integral part of these statements.
 
 

5

 

Skye International, Inc., and Subsidiaries 
STATEMENT 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 acquisition 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 Issued to obtain $1,075,000 debt
   
537,500
     
538
             
159,338
             
159,876
 
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 )

6


STATEMENT OF STOCKHOLDER'S DEFICIT - continued
 
Common Stock granted but not
 
 
   
 
     
275,000
   
 
   
 
     
275,000
 
issued until 2006
 
 
   
 
           
 
   
 
         
 
 
 
   
 
           
 
   
 
         
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
   
391,832
     
392
             
414,129
   
 
     
414,521
 
conjunction with related party consulting contracts
                                 
 
         
 
                                 
 
         
Issuance of common stock for
   
524,500
     
525
             
535,646
   
 
     
536,170
 
employee stock Awards
                                 
 
         
 
                                 
 
         
Issuance of common stock to reduce
   
78,067
     
78
             
52,266
   
 
     
52,344
 
existing debt
                                 
 
         
 
                                 
 
         
Common Shares Issued in
                                 
 
         
connection with Debt
   
50000
     
50
             
12450
   
 
     
12,500
 
 
                                 
 
         
Conversion of convertible bridge
   
842,511
     
843
             
462,539
   
 
     
463,382
 
notes into common stock
                                 
 
         
 
                                 
 
         
Issuance of common stock in private
   
2,564,819
     
2,565
             
1,408,085
   
 
     
1,410,650
 
placements
                                 
 
         
 
                                 
 
         
Net (Loss)
                                    (4,051,870 )     (4,051,870 )
 
                                               
Balance December 31, 2005
   
17,838,231
     
17,839
     
275,000
     
7,436,333
      (10,064,513 )     (2,335,340 )
 
                                               
Common Shares issued in conjunction with
   
378,750
     
379
             
262,496
             
262,875
 
related party consulting services and to
                                               
employees for services
                                               
 
                                               
Common Shares issued for
   
808,100
     
808
             
420,444
             
421,252
 
consulting and outside services
                                               
 
                                               
Common Shares issued in private
   
370,000
     
370
     
(210,000
   
209,630
             
0
 
placements, previously subscribed
                                               
 
                                               
Common Shares subscribed
                   
43,675
                     
43,675
 
 
                                               
Common Stock options issued for services
                           
32,216
             
32,216
 
 
                                               
Discount on Convertible Debt
                           
15,922
             
15,922
 
 
                                               
Common Shares issued to retire debt and interest
   
412,902
     
413
             
226,080
             
226,493
 
 
                                               
Common Shares issued in private stock placements
   
1,814,260
     
1,814
             
653,186
             
655,000
 
 
                                               
Net (Loss)
                                    (2,463,287 )     (2,463,287 )
 
                                               
Balance December 31, 2006
   
21,622,243
     
21,623
     
108,675
     
9,256,308
      (12,527,800 )     (3,141,194 )

7

 
STATEMENT OF STOCKHOLDER'S DEFICIT - continued
 
Common Shares issued in conjunction with
 
 
   
 
     
 
   
 
   
 
   
 
 
related party consulting services and to
 
 
   
 
           
 
   
 
   
 
 
employees for services
   
250,000
     
250
             
49,750
   
 
     
50,000
 
 
                                 
 
         
Common Shares issued for
                                 
 
         
consulting and outside services
   
6,690,654
     
6,690
             
1,335,398
   
 
     
1,342,088
 
 
                                 
 
         
Common Shares issued to retire debt
                                 
 
         
and interest
   
100,000
     
100
             
99,900
   
 
     
100,000
 
 
                                 
 
         
Net (Loss)
                                    (1,596,487 )     (1,596,487 )
 
                                               
Balance September 30, 2007
   
28,662,897
     
28,663
     
108,675
     
10,741,356
      (14,124,287 )     (3,245,592 )

 
The accompanying notes are an integral part of these statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

8

SKYE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007 and December 31, 2006

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.  Skye has three subsidiary corporations, all wholly-owned:
 
 
·
Envirotech Systems Worldwide, Inc., an Arizona corporation (“Envirotech”);
 
·
ION Tankless, Inc., an Arizona corporation (“ION”); and
 
·
Valeo Industries, Inc., a Nevada corporation (“Valeo”).

On November 7, 2003, the Company acquired Envirotech Systems Worldwide, Inc. (Envirotech), a private Arizona corporation, as a wholly owned subsidiary. Through this merger, the former shareholders of Envirotech acquired a controlling interest in Tankless Systems Worldwide, Inc. (Tankless) and, accordingly, the acquisition is accounted for as a reverse merger with Envirotech being the accounting acquirer of Tankless. Envirotech was organized December 9, 1998 and has a limited history of operations. The initial period of its existence involved research and development of a line of electronic, tankless water heaters. With the acquisition of Envirotech, the Company is in the business of designing, developing, manufacturing and marketing several models of electronic, tankless water heaters.

 With the adoption of the SKYE name in October 2005 the business of the Company was expanded to include the manufacture and sale of consumer lifestyle appliances, including tankless water heaters.  Envirotech suspended and has not restarted production of its only product, the ESI-2000 water heater.  Envirotech is not currently engaged in active business and its primary asset consists of a patent and intellectual property related to the ESI-2000 product line.

In January 2004, Skye formed ION to perform research, development of new heating technologies. In January 2005, it created Valeo to license certain ION technologies and to manufacture products using those licensed technologies.

Nature of Business

The Company is in the business of designing, developing, manufacturing and marketing consumer lifestyle products, including, initially, several models of an electronic, tankless water heater. The Company’s products, together with a limited quantity of related parts purchased for resale, will be sold primarily through manufacturer’s representatives and wholesale distributors in the United States and Canada. Based upon the nature of the Company’s operations, facilities and management structure, the Company considers its business to constitute a single segment for financial reporting purposes.

Basis of Consolidation

The accompanying consolidated financial statements reflect the operations, financial position and cash flows of the Company and include the accounts of the Company and its subsidiaries after elimination of all significant inter-company transactions in consolidation.

Basis of Presentation  

The Consolidated Financial Statements of Skye International include all of its wholly-owned subsidiaries.
 
On August 6, 2004, Envirotech filed a voluntary petition with the United States Bankruptcy Court for the District of Arizona (Case No. 2:04-13908-RTB ) seeking relief under Chapter 11 of the Bankruptcy Code as a means to resolve all existing litigation, judgments and efforts to collect on judgments entered against Envirotech. On December 2004, the Company filed its proposed plan of reorganization and disclosure statement with the Bankruptcy Court. This Plan was not approved and in January 2006, the Company’s motion to withdraw its Chapter 11 filing was granted by the Bankruptcy Court for the District of Arizona without prejudice or relief from any of its liabilities previously classified as Subject to Compromise,
 
As such, the accompanying Consolidated Financial Statement for the nine months ended September 30, 2007 and the year ended December 31, 2006 were not prepared in accordance with Statement of Position 90-7 (“SOP 90-7”), “Financial Reporting by Entities in Reorganization under the Bankruptcy Code” (See Note 2) which requires that all pre-petition liabilities subject to compromise are segregated in the consolidated balance sheets as of end of the respective years and classified as Liabilities Subject to Compromise, at the estimated amount of allowable claims with liabilities not subject to compromise being separately classified.

9

SKYE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007 and December 31, 2006

Note 1.
THE COMPANY - continued

These Consolidated Financial Statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Accordingly, the financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. As described more fully below, there is substantial doubt about the Company's ability to continue as a going concern which is predicated upon, among other things, the ability to generate cash flows from operations and, when necessary, obtaining financing sources sufficient to satisfy the Company’s future obligations.
 
The accompanying comparative Consolidated Financial Statements for the nine months ended September 30, 2007 and the year ended December 31, 2006 have been stated to reflect the Company’s withdrawal of its bankruptcy court petition.
 
Recently Issued Accounting Standards

Below is a listing of the most recent accounting standards and their effect on the Company.

In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. Where applicable, SFAS No. 157 simplifies and codifies related guidance within GAAP and does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier adoption is encouraged. The Company does not expect the adoption of SFAS No. 157 to have a significant effect on its financial position or results of operation.

In June 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109”, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company does not expect the adoption of FIN 48 to have a material impact on its financial reporting, and the Company is currently evaluating the impact, if any, the adoption of FIN 48 will have on its disclosure requirements.

In March 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 156, “Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140.” This statement requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in any of the following situations: a transfer of the servicer’s financial assets that meets the requirements for sale accounting; a transfer of the servicer’s financial assets to a qualifying special-purpose entity in a guaranteed mortgage securitization in which the transferor retains all of the resulting securities and classifies them as either available-for-sale securities or trading securities; or an acquisition or assumption of an obligation to service a financial asset that does not relate to financial assets of the servicer or its consolidated affiliates. The statement also requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable, and permits an entity to choose either the amortization or fair value method for subsequent measurement of each class of servicing assets and liabilities. The statement further permits, at its initial adoption, a one-time reclassification of available for sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available for sale securities under Statement 115, provided that the available for sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value and requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. This statement is effective for fiscal years beginning after September 15, 2006, with early adoption permitted as of the beginning of an entity’s fiscal year. Management believes the adoption of this statement will have no immediate impact on the Company’s financial condition or results of operations.
 
Note 2.
SIGNIFICANT ACCOUNTING POLICIES
 
Use of Estimates and Assumptions

The discussion and analysis of the Company's financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires making estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies are defined as those that entail significant judgments and estimates, and could potentially result in materially different results under different assumptions and conditions.

10

SKYE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007 and December 31, 2006

Note 2.
SIGNIFICANT ACCOUNTING POLICIES - continued

Cash and Cash Equivalents

All highly liquid debt instruments with a maturity of six months or less at the time of purchase are considered to be cash equivalents. Cash equivalents are stated at cost, which approximates fair value because of the short-term maturity of these instruments.

Fair Value of Financial Instruments

Financial instruments consist of cash and cash equivalents, accounts payable, accrued expenses and short-term and long-term convertible debt obligations. Including promissory notes, and related party liabilities, the fair value of these financial instruments approximates their carrying amount as of September 30, 2007 and September 30, 2006 due to the nature of or the short maturity of these instruments.

Research and Development

The Company's research and development efforts concentrate on new product development, improving product durability and expanding technical expertise in the manufacturing process. The Company expenses product research and development costs as they are incurred. With the organization of its subsidiary ION, the Company continues to expense research and development costs as incurred.

Marketing Strategy

Although in the past most sales were made directly to consumers, the Company now intends to sell its products to large wholesale distributors through its network of manufacturer’s representatives. The Company, through its Envirotech subsidiary, has periodically advertised on cable television stations, at trade shows and through trade magazines.  The Company maintains a website at www.skye-betterliving.com and www.tankless.com.

Revenue Recognition

The Company records sales when revenue is earned. The Company sells on credit to its distributors and manufacturer’s representatives. Due to the Company’s Warranty and Right of Return policy, nine percent of the sales are recognized immediately and the balance is recognized 25 - 40 days after shipment of the product to the customer. All shipments are FOB shipping point. Sales to distributors and manufacturer’s representatives are sold FOB shipping point with receivables recorded 25 to 40 days post shipping. In 2005, substantially all of the Company’s gross revenues of $172,169 were generated by the Valeo subsidiary and were generated through sales of the ESI-2000 unit to individuals over the internet, the majority of whom paid in advance by credit card payments. The Company no longer manufactures the ESI-2000 product lines and so the Company plans to refund the purchase price paid for undelivered heaters or, alternatively, to ship new heaters to those customers that did not receive delivery of an ESI-2000 heater. The Company had only $2,071 revenue from sales during 2006 and has had no revenue from the sale of product during the first nine months of 2007.

Accounts Receivable

Accounts receivable are recorded when an order is received from a distributor and shipped. An allowance for doubtful accounts was set up based on the actual rate of uncollected accounts.  Net accounts receivable is as follows:
 
 
 
September 30, 2007
   
Dec. 31, 2006
 
  Accounts Receivable
  $
-0-
    $
-0-
 
 Less: Allowance for Doubtful Accounts
    (-0- )     (-0- )
 Net Accounts Receivable
  $
-0-
    $
-0-
 
 

11

SKYE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007 and December 31, 2006

Note 2.
SIGNIFICANT ACCOUNTING POLICIES - continued

The Company maintains allowances for doubtful accounts for estimated probable losses resulting from inability of the company’s customers to make the required payments. The company continues to assess the adequacy of the reserves for doubtful accounts based on the financial condition of the Company’s customers and external factors that may impact collectability.

Advertising

Advertising expense included the cost of sales brochures, print advertising in trade publications, displays at trade shows and maintenance of an Internet site. Advertising is expensed when incurred. Advertising expense for the nine months ended September 30, 2007 and the year ended December 31, 2006, was $3,179 and $38,406 respectively.

Inventory

The Company contracts with third parties to manufacture its products and is neither billed for nor obligated for any work-in-process. The Company only supplies certain parts and materials and is then billed for completed products. Parts and material inventory is stated at the lower of cost (first-in, first-out) or net realizable value.
 
Property and Equipment

Property and equipment are depreciated or amortized using the straight-line method over their estimated useful lives, which range from two to seven years. Fixed assets consist of the following:
 
 
 
Sept. 30, 2007
   
Dec. 31, 2006
 
Property, Equipment, furniture and Fixtures
  $
67,216
    $
61,622
 
Less: Accumulated Depreciation
    (25,703 )     (17,701 )
Net Fixed Assets
  $
41,513
    $
43,921
 

 Patents

We evaluate potential impairment of long-lived assets in accordance with FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” FAS No. 144 requires that certain long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable based on expected undiscounted cash flows that result from the use and eventual disposition of the asset. The amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. Patent and software costs include direct costs of obtaining patents. Costs for new patents are either expensed as they are incurred or capitalized and amortized over the estimated useful lives of seventeen years and software over five years.
 
Earnings per Share

The basic (loss) per share is calculated by dividing the Company’s net loss available to common shareholders by the weighted average number of common shares outstanding during the year.

The Company has potentially dilutive securities outstanding at the end of the statement periods. Therefore, the basic and diluted earnings (loss) per share are presented on the face of the statement of operations. There are 600,000 options at $0.55 and 300,000 options at $0.50 per share outstanding as of the date of this report. There are also $100,000 of outstanding convertible debentures which within 12 months may be converted into restricted common shares of the Company at a 30% discount to the then current 10-day moving average of the Company’s common stock. All outstanding warrants were either exercised or cancelled and convertible debt is anti-dilutive.  As of September 30, 2007, the Company has issued $400,000 in 15% convertible demand notes and a further $53,000 remains outstanding as an unsecured demand loan to related party directors.  Some or all of such amount may be converted at any time or from time to time into common shares of the Company resulting in additional dilution.

 

12

SKYE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007 and December 31, 2006

Note 2.
SIGNIFICANT ACCOUNTING POLICIES - continued

Stock Based Compensation

In December 2004, the FASB issued FAS No. 123R, “Share-Based Payment.” This statement is a revision to FAS No. 123, “Accounting for Stock-Based Compensation,” and it supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends FAS No. 95, “Statement of Cash Flows.” FAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. The Company uses the Black-Scholes pricing model for determining the fair value of stock based compensation.

Equity instruments issued to non-employees for goods or services are accounted for at fair value and are marked to market until service is complete or a performance commitment date is reached.

Warranty and Right of Return

In connection with the sale of each product, the Company provides a limited 30-day money back guarantee less a 6% restocking charge. After the 30 days the Company provides a five year warranty on replacement of parts. The tank chamber is warranted not to leak for 10 years. The Company has limited history with claims against its warranty. The Company defers a portion of the revenue as would generally be required for post-contract customer support ("PCS") arrangements under SOP 97-2. Accordingly, the revenue allocated to the warranty portion of such sales is deferred and recognized ratably over the life of the warranty. As of September 30, 2007 a total of $34,570 in refunds and warranty allowances were recorded against Product Sales.

Balance of Warranty Accrual for 2003
$
3,240
 
Balance of Warranty Accrual for 2004
 
9,725
 
Balance of Warranty Accrual for 2005
 
21,625
 
Balance of Warranty Accrual for 2006
 
0
 
Balance of Warranty Accrual for 2007
 
0
 
Total Warranty Accrual as of September 30, 2007
 
34,570
 

 

Note 3.
NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS  

In the third quarter of 2007 the Company received $400,000 of funds in exchange for the issuance of $400,000 of principal 15% convertible notes (the “Notes”). The Notes, together with accrued interest thereon are convertible at the option of the holder any time during the 12 months from issuance thereof into restricted common stock of the Company at a price equal to a 30% discount to the then current 10-day moving average of the Company’s common stock. Additionally, the investor received one (1) share of the Company’s restricted common stock for each One Dollar ($1.00) amount of Notes purchased.  A further $53,000 remains outstanding as an unsecured demand loan to related party directors
 
 
 
 

 
13

 

Note 3.
NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS - continued
 
Notes payable and capital lease obligations consist of the following:
 
 
 
Nine Mos. Ended
   
Yr. Ended
 
 
 
Sept 30,
   
Dec. 31,
 
 
 
2007
   
2006
 
Convertible Notes, Unsecured, Matured March 2001 bear 12.5% Interest, principle and interest convertible into one common share and one warrant at 75% of the average closing price over the 10-day period prior to conversion.  Warrants have expired and notes have not been converted and are in default.
  $
70,000
    $
70,000
 
 
               
Convertible Notes, Unsecured, Matured one-year from issue date, bear 10% Interest payable quarterly, principle and interest convertible into one common share for each outstanding $1.00.  Forty notes were issued between January 23, 2004 and January 15, 2005. Of these notes, thirty nine had been either repaid or converted at December 31, 2005. Of the remaining four notes, three were converted in April 2006; the fourth has not been converted or repaid and is in default. Aggregate Amount:
  $
15,000
    $
215,000
 
 
               
Demand Note with Attorneys, 6% Interest, All Assets of Subsidiary, Envirotech, pledged as Collateral; Note is in default.   Note has been acquired by Envirotech’s parent, Skye
  $
194,895
    $
194,895
 
 
               
Demand Note with Former Distributor of Subsidiary, Envirotech, in Settlement and Repurchase of  Distributorship Territory, 7% Interest; Note is in default
  $
519,074
    $
519,074
 
 
               
Demand Note Made by Subsidiary, Envirotech, 10% Interest, Payable Monthly; Note is in default
  $
11,880
    $
11,880
 
 
               
Demand Note Made by Subsidiary, Envirotech, 6% Interest; Note is in default
  $
35,000
    $
35,000
 
 
               
Demand Note Made by Subsidiary, Envirotech; Note is in default
  $
72,391
    $
72,391
 
 
               
Demand Note Made by ION Tankless in favor of related party;
  $
120,000
    $
120,000-
 
 
               
Demand Note Made by Valeo in favor of related party;
  $
13,000
    $
13,000-
 
 
               
Demand Note Made by Skye in favor of related party;
  $
65,000
    $
65,000-
 
 
               
Convertible Notes, Unsecured, Issued March 2006, Matured March 2007, bear 5% Interest, principle and interest convertible into one common share $0.55 per share. Notes have not been converted and are now in default.
  $
75,000
    $
75,000
 
 
               
Demand Note Made by SKYE in favor of consultants; Note is in default
  $
10,000
    $
10,000
 
Demand Note Made by Skye, 15% Interest; in favor of related party
  $
400,000
    $
-0-
 

During the nine months ended September 30, 2007, the Company received interim financing of $553,000 from related party directors.  $100,000 of such amount was converted to common shares at $0.20 per share resulting in the issuance of 500,000 shares; a further 200,000 shares were issued as an inducement to loan $400,000 to the Company by means of demand notes bearing simple interest of 15% per annum and the balance of $53,000 remains in the form of  unsecured advances from a related party director.
 
 
 
 
 

14

SKYE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007 and December 31, 2006

Note 4.
STOCKHOLDERS’ EQUITY  

On March 24, 2005, the Company adopted an employee stock incentive plan setting aside 500,000 shares of the Company’s common stock for issuance to officers, employees, directors and consultants for services rendered or to be rendered. The proposed maximum offering price of such shares is $1.00 per share.   A compensation committee appointed by the Board of Directors has the right to grant awards or stock options and administers the plan. On March 30, 2005, the Company filed a Registration on Form S-8 with the Securities Exchange Commission covering the 500,000 shares provided by this plan, at a maximum offering price of $1.00 per share. As of September 30, 2007 and December 31, 2006, the Company has issued 462,541 shares under the 2005 Stock Incentive Plan. No shares were issued under the Plan during the nine months ended September 30, 2006. As of September 30, 2007, a total of 37,459 shares remain unissued under this Plan.

The Company was initially capitalized on November 30, 1993 with the issue of 500,000 shares for $5,000. During 2005 the Company issued 652,357 shares for $651,943 in consulting services; 524,500 shares at $536,170 for employee stock awards; 78,067 shares for $54,647 in debt reduction; 842,511 shares to retire $881,536 in convertible notes; and 2,564,819 shares for $296,483 in cash in private placements.

During 2006, the Company issued 205,000 shares for consulting and legal services valued at $230,753; 370,000 shares previously subscribed for cash in private placements; 412,902 shares to retire principal and interest on outstanding bridge loans; 1,814,260 shares in private placements for $655,000; 110,000 shares for legal fees valued at $48,000; 600,000 shares for consultants for fees valued at $330,000; 50,000 shares for investment banking fees and services valued at $17,500; 173,750 shares for employees in lieu of pay and for signing bonuses valued at $57,375, and 100,000 shares to be issued in connection with the receipt of $100,000 in convertible bridge notes. The total common stock issued and outstanding at December 31, 2006 was 21,622,243 shares.

During the nine months ended September 30, 2007, the Company issued a total of 7,040,654 shares of which 4,973,172 were issued in payment of legal services valued at $1,008,884; 250,000 shares issued to employees, directors and officers as payment for services rendered during the period and for services in 2006; 541,000 shares issued to employees, directors and officers as payment for services rendered during the period from January 1, 2007 through September 30, 2007; 20,000 shares to retire debt of $12,500 to a vendor; 456,482 shares issued to Berry-Shino Securities, Inc. in settlement of pending litigation for unpaid fees; and 100,000 shares  issued in connection with the $100,000 in convertible notes received by the Company in 2006. In the first nine months of 2007 the Company has received $553,000 in interim financing from related party directors.  In connection with such $553,000, the Company has issued 500,000 shares to a related party director at $0.20 per share for total private placement of $100,000 ; 200,000 shares as inducement to related party directors to lend the Company $400,000.  Additionally, as of September 30, 2007, the Company has issued demand notes totaling $400,000 to related party directors.  Such notes are payable on demand and bear simple interest at 15% per annum.  The Company has not yet issued any notes in connection with $53,000 loaned to the Company by a related party director.

Warrants

No warrants are outstanding.

Stock Options

On February 11, 2004 the company granted 5-year stock options to purchase 600,000 shares of restricted common stock at $0.50 per share to consultants assisting in company operations. Using a discounted stock price of $0.43, exercise price of $0.50, 5-year option, risk-free rate of 4.1% and a volatility rate of .038 the value of these options is calculated at $0.03 using the Black-Scholes model. The aggregate value of 600,000 options is $18,000. By amendment dated September 6, 2005, the option period has been extended for an additional 5 years, to expire February 11, 2014. At September 30, 2007 and December 31, 2006, none of the options have been exercised.

In September 2006, the Company granted options to each of its directors to purchase 50,000 shares at $0.50. In addition it granted an option to its Chairman, to purchase 150,000 shares at $0.50. The options may be exercised at any time within five (5) years of the date of grant. Using a discounted stock price of $0.49, exercise price of $0.50, 5-year option, risk-free rate of 5.35% and a volatility rate of .052 the value of these options is calculated at $0.03 using the Black-Scholes model. The aggregate value of 300,000 options is $32,216. At September 30, 2007 and December 31, 2006, none of the options have been exercised.
 

15

SKYE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007 and December 31, 2006

Note 4.
STOCKHOLDERS’ EQUITY - continued

Outstanding stock options are as follows:

 
Shares
Balance, December 31, 2004
700,000
Granted, 2005
0
Expired, 2005
(100,000)
Balance, December 31, 2005
600,000
Granted, 2006
300,000
Expired, 2006
0
Balance, December 31, 2006
900,000
Granted 2007
0
Expired 2007
0
Balance September 30, 2007
900,000


Note 5.
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 Net Operating Loss of $14,124,287. The total valuation allowance is equal to the total deferred tax asset.
 
 
 
Nine Months
Ended
Sept. 30,
2007
   
Year Ended
Dec. 31,
2006
 
 
 
 
   
 
 
Deferred Tax Asset
  $
4,927,536
    $
4,384,730
 
Valuation Allowance
  $ (4,927,536 )   $ (4,384,730 )
Current Taxes Payable
  $
0
    $
0
 
Income Tax Expense
  $
0
    $
0
 


Below is a chart showing the estimated federal net operating losses and the years in which they will expire.  
 
Year
   
Amount
   
Expiration
 
1993-2003     $
4,119,312
     
2013-2023
 
2004
    $
1,893,331
   
2024
 
2005
    $
4,051,870
   
2025
 
2006
    $
2,463,287
   
2026
 
2007
    $
1,596,487
   
2027
 
Total
    $
14,124,287
         
 


16

SKYE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007 and December 31, 2006

Note 6.
LEASES AND OTHER COMMITMENTS

The Company occupies 2,500 square feet of leased space pursuant to an annual lease that commenced May 1, 2007.  

Note 7.
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 $12,527,800 as of December 31, 2006. The Company has not generated meaningful revenues in the last year. The Company has a working capital deficit of $3,088,278 as of September 30, 2007. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.

Management’s Plans

The Company has expended considerable efforts in working with its contract manufacturer in order to begin the production of its new line of products. The Company expects that the first units will be produced in 2007 with sales and delivery to also commence during such period. After commencing production, the Company expects that it may take up to one year for the production design and processes to stabilize. The Company has continued development efforts on its patented Paradigm™ technology. The Company is currently working closely with a critical supplier to jointly complete the engineering and commercialization process of this technology. The Company has developed a sales and distribution network relying on manufacturer’s representatives to sell the Company’s products through wholesale distribution.

The Company currently funds all its operations from loans from the Company’s officers and directors.  Additionally, the Company is negotiating with several broker-dealers with a view to completing further private placements to fund the business strategy, but to date the Company has not yet concluded any such arrangement. While not yet achieved to date, the Company’s business strategy anticipates that it will need to raise in excess of $2 million over the next 12 month period in order to fully execute its business plan. Management believes that, in order to properly exploit the introduction of its products, it will be necessary to be positioned not only as a quality supplier of products, but also able to supply a sufficient volume of product to meet wholesale demand.