UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: September 30, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 000-27849
SKYFRAMES, INC.
(Exact name of registrant as specified in its charter)
California 00-001748413
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
555 Anton Boulevard, Suite 1200
Costa Mesa, California
92626
(Address of principal executive offices)
(Zip Code)
(714) 957-1000
(Registrant's telephone number including area code)
(Former name, former address and former fiscal year, if changed since last
report)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURNG THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. YES [ ] NO [_]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: The registrant has 15,003,956 shares
of common stock, $0.10 par value, issued and outstanding as of October 24, 2003.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [ x ]
SKYFRAMES, INC.
INDEX
PAGE
PART I NUMBER
Item 1 - Financial Information
Unaudited Condensed Balance Sheets, 1
September 30, 2003 and June 30, 2003
Unaudited Condensed Statements of Operations, for the 2
three months ended September 30, 2003 and 2002 and for the period from
inception on May 24, 2002 through September 30, 2003
Unaudited Condense Statements of Cash Flows, for the three months 3
ended September 30, 2003 and 2002 and for the period from
inception on May 24, 2002 through September 30, 2003
Notes to Unaudited Condensed to Financial Statements 5
Item 2 - Management's Discussion and Analysis of Financial Condition and 19
Results of Operations
Item 3. - Disclosure Controls and Procedures 25
PART II
Item 1 - Legal Proceedings 25
Item 2 - Changes in Securities 25
Item 3 - Defaults Upon Senior Securities 26
Item 4 - Submission of Matters to a Vote of Security Holders 26
Item 5 - Other Information 26
Item 6 - Exhibits and Reports on Form 8-K 27
Signature Page
PART 1 - ITEM I
SKYFRAMES, INC.
[A Development Stage Company]
UNAUDITED CONDENSED BALANCE SHEETS
ASSETS
September 30, June 30,
2003 2003
----------- -----------
CURRENT ASSETS:
Cash $ - $ 22,905
Accounts receivable, net of allowance for
doubtful accounts of $8,975 and $0, respectively 10,450 24,925
Deferred loan costs 30,833 13,750
Prepaid expenses 14,055 -
----------- -----------
Total Current Assets 55,338 61,580
PROPERTY AND EQUIPMENT, net 3,498 3,916
OTHER ASSETS:
Deposits 8,950 8,950
----------- -----------
$ 67,786 $ 74,446
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Bank overdraft $ 7,224 $ -
Accounts payable 147,481 163,689
Accounts payable - related party 131,149 134,649
Customer deposits and unearned revenue 37,659 23,330
Accrued payroll and related expenses 80,825 39,825
Accrued interest 5,353 955
Notes payable, net 89,705 26,250
----------- -----------
Total Current Liabilities 499,396 388,698
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.10 par value,
20,000,000 shares authorized, 14,973,956
and 14,392,679 shares issued and
outstanding, respectively 1,497,396 1,439,268
Capital in excess of par value 5,741,366 4,822,494
Deficit accumulated during the
development stage (7,670,372) (6,576,014)
----------- -----------
Total Stockholders' Equity (Deficit) (431,610) (314,252)
----------- -----------
$ 67,786 $ 74,446
----------- -----------
Note: The balance sheet as of June 30, 2003 was taken from the
audited financial statements at that date and condensed
The accompanying notes are an integral part of these unaudited condensed
financial statements.
SKYFRAMES, INC.
[A Development Stage Company]
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
For the Three Months From Inception on
Ended September 30, May 24, 2002 Through
------------------------------- September 30,
2003 2002 2003
------------- ------------- -------------
REVENUES:
Subscription services $ 10,425 $ - $ 14,950
Equipment sales 4,950 - 54,350
------------- ------------- -------------
Total Revenues 15,375 - 69,300
EXPENSES:
Cost of equipment sales 5,974 - 44,588
Selling 17,332 - 24,304
General and administrative 995,216 42,827 5,568,512
------------- ------------- -------------
Total Expenses 1,018,522 42,827 5,637,404
------------- ------------- -------------
LOSS BEFORE OTHER INCOME (EXPENSE) (1,003,147) (42,827) (5,568,104)
OTHER INCOME (EXPENSE):
Loss on settlement of potential claims - - (1,350,000)
Loss on extinguishment of debt - - (651,000)
Interest expense (91,211) - (101,268)
------------- ------------- -------------
Total Other Income (Expense) (91,211) - (2,102,268)
------------- ------------- -------------
LOSS BEFORE INCOME TAXES (1,094,358) (42,827) (7,670,372)
CURRENT TAX EXPENSE - - -
DEFERRED TAX EXPENSE - - -
------------- ------------- -------------
NET LOSS $ (1,094,358) $ (42,827) $ (7,670,372)
------------- ------------- -------------
LOSS PER COMMON SHARE $ (.07) $ (.01) $ (.74)
------------- ------------- -------------
The accompanying notes are an integral part of these unaudited condensed
financial statements.
SKYFRAMES, INC.
[A Development Stage Company]
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
For the Three Months From Inception on
Ended September 30, May 24, 2002 Through
------------------------------- September 30,
2003 2002 2003
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,094,358) $ (42,827) $ (7,670,372)
Adjustments to reconcile net loss to net cash
used by operating activities:
Amortization of discounts on notes payable 78,455 - 84,705
Bad debt expense 8,975 - 8,975
Depreciation 418 133 1,627
Loss on settlement of potential claims - - 1,350,000
Loss on extinguishment of debt - - 651,000
Non-cash expenses paid by issuing common stock - 46,063 51,063
Non-cash services paid by issuing common stock 727,000 - 4,057,750
Non-cash services paid by granting options/warrants - - 583,050
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 5,500 - (19,425)
(Increase) in deferred loan costs (17,083) - (30,833)
(Increase) in prepaid expenses (14,054) (1,000) (14,054)
(Increase) in deposits - (6,700) (8,950)
Increase (decrease) in accounts payable (16,208) - 104,380
Increase (decrease) in accounts payable - related party (3,500) (35,863) 131,149
Increase in customer deposits and unearned
revenue 14,328 - 37,658
Increase in accrued payroll and related expenses 41,000 23,421 80,825
Increase in accrued interest 4,398 - 5,353
------------- ------------- -------------
Net Cash (Used) by Operating Activities (265,129) (16,773) (596,099)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property and equipment - (2,480) (5,125)
------------- ------------- -------------
Net Cash (Used) by Investing Activities - (2,480) (5,125)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in bank overdraft 7,224 - 7,224
Proceeds allocated to beneficial conversion feature
of notes payable 125,012 - 176,738
Proceeds from notes payable - - 69,000
Payments on notes payable (15,000) - (20,000)
Proceeds from sale of warrants 124,988 - 223,262
Proceeds from issuance of common stock - 25,000 145,000
------------- ------------- -------------
Net Cash Provided by Financing Activities 242,224 25,000 601,224
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH (22,905) 5,747 -
CASH AT BEGINNING OF PERIOD 22,905 - -
------------- ------------- -------------
CASH AT END OF PERIOD $ - $ 5,747 $ -
------------- ------------- -------------
[Continued]
SKYFRAMES, INC.
[A Development Stage Company]
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
[CONTINUED]
For the Three Months From Inception on
Ended September 30, May 24, 2002 Through
------------------------------- September 30,
2003 2002 2003
------------- ------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ - $ - $ -
Income taxes $ - $ - $ -
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
For the three months ended September 30, 2003:
The Company issued 581,277 shares of common stock for services rendered
valued at $727,000.
The Company sold a $250,000 convertible note payable for cash of $125,012
and recorded a discount of $124,988. The Company also recorded a discount
of $125,012 for the beneficial conversion feature of the note payable.
During the three months ended September 30, 2003, the Company expensed
$41,666 of the discounts.
The Company expensed $36,789 of the discounts on a note payable recorded in
the prior year.
For the three months ended September 30, 2002:
The Company issued 6,000,000 shares of common stock for computers and
related equipment with a carryover basis of $0 and as repayment of expenses
totaling $46,063 which had been paid by a related party on behalf of the
Company.
The accompanying notes are an integral part of these unaudited condensed
financial statements.
SKYFRAMES, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Skyframes, Inc. ("the Company") was organized under the laws
of the State of Utah on June 4, 1926 as M. M. Lead Company. In 1980, the
Company changed its name to Basic Energy, Inc. In March 2003, the Company
changed its name to Skyframes, Inc.
SkyFrames, Inc. ("SFI") was organized under the laws of the State of Texas
on May 24, 2002 as CyberVillage, Inc. In July 2002, SFI changed its name to
SkyFrames, Inc. On January 28, 2003, the Company acquired SFI pursuant to
an Exchange Agreement and SFI was dissolved in the acquisition. The
acquisition of SFI has been accounted for as a recapitalization of SFI in a
manner similar to a reverse purchase [See Note 2].
The Company provides high-speed information access via satellites. The
Company has not yet generated significant revenues from its planned
principal operations and is considered a development stage company as
defined in Statement of Financial Accounting Standards No. 7. The Company
has, at the present time, not paid any dividends and any dividends that may
be paid in the future will depend upon the financial requirements of the
Company and other relevant factors.
CONDENSED FINANCIAL STATEMENTS - The accompanying financial statements have
been prepared by the Company without audit. In the opinion of management,
all adjustments (which include only normal recurring adjustments) necessary
to present fairly the financial position, results of operations and cash
flows at September 30, 2003 and 2002 and for the periods then ended have
been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles in the United States of America have been condensed or omitted.
It is suggested that these condensed financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's June 30, 2003 audited financial statements. The results of
operations for the periods ended September 30, 2003 and 2002 are not
necessarily indicative of the operating results for the full year.
FISCAL YEAR - The Company's fiscal year-end is June 30th.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid debt
investments purchased with a maturity of three months or less to be cash
equivalents.
ACCOUNTS AND LOANS RECEIVABLE - The Company records accounts and loans
receivable at the lower of cost or fair value. The Company determines the
lower of cost or fair value of non-mortgage loans on an individual asset
basis. The Company recognizes interest income on an account receivable
based on the stated interest rate for past-due accounts over the period
that the account is past due. The Company recognizes interest income on a
loan receivable based on the stated interest rate over the term of the
loan. The Company accumulates and defers fees and costs associated with
establishing a receivable to be amortized over the estimated life of the
related receivable. The Company estimates allowances for doubtful accounts
and loan losses based on the aged receivable balances and historical
losses. The Company records interest income on delinquent accounts and
loans receivable only when payment is received. The Company first applies
payments received on delinquent accounts and loans receivable to eliminate
the outstanding principal. The Company charges off uncollectible accounts
and loans receivable when management estimates no possibility of collecting
the related receivable. The Company considers accounts and loans receivable
to be past due or delinquent based on contractual terms.
SKYFRAMES, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
INVENTORY - Inventory is carried at the lower of cost or market using the
first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost or at
the shareholder's carryover basis. Expenditures for major renewals and
betterments that extend the useful lives of property and equipment are
capitalized upon being placed in service. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets of
three to five years. In accordance with Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", the Company periodically reviews its property and equipment for
impairment.
WEBSITE COSTS - The Company has adopted the provisions of Emerging Issues
Task Force 00-2, "Accounting for Web Site Development Costs." Costs
incurred in the planning stage of a website are expensed as research and
development while costs incurred in the development stage are capitalized
and amortized over the life of the asset, estimated to be three years. As
of September 30, 2003, the Company has capitalized a total of $1,075 of
website costs. The Company did not incur any planning costs and did not
record any research and development costs for the three months ended
September 30, 2003 and 2002.
REVENUE RECOGNITION - Revenue from subscription services is recognized in
the period when the related services are provided. Revenue from equipment
sales is recognized when the related equipment is installed and accepted by
the customer.
ADVERTISING COSTS - Advertising costs, except for costs associated with
direct-response advertising, are charged to operations when incurred. The
costs of direct-response advertising are capitalized and amortized over the
period during which future benefits are expected to be received. For the
three months ended September 30, 2003 and 2002, respectively, advertising
costs amounted to $5,974 and $0.
STOCK-BASED COMPENSATION - The Company has two stock-based compensation
plans [See Note 5]. The Company accounts for its plans under the
recognition and measurement principles of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations. The following table illustrates the effect on net income
and loss per share if the Company had applied the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", to the Company's stock-based
employee compensation.
SKYFRAMES, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
From Inception on
For the Three Months May 24, 2002
Ended September 30, Through
------------------------------------ September 30,
2003 2002 2003
---------------- ---------------- ----------------
Net loss, as reported $ (1,094,358) $ (42,827) $ (7,670,372)
Add: Stock-based employee
compensation expense
included in reported net income - - 4,000
Deduct: Total stock-based
employee compensation
expense determined under fair
value based method - - (5,000)
---------------- ---------------- ----------------
Pro forma net loss $ (1,094,358) $ (42,827) $ (7,671,372)
---------------- ---------------- ----------------
Loss per common share,
as reported $ (.07) $ (.01) $ (.74)
Loss per common share,
pro forma $ (.07) $ (.01) $ (.74)
DEBT EXTINGUISHMENT - The Company accounts for extinguishment of debt in
accordance with Statement of Financial Accounting Standards No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections". SFAS No. 145 rescinds the
requirement that gains and losses from extinguishment of debt be classified
as an extraordinary item.
INCOME TAXES - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" [See Note 6].
LOSS PER SHARE - The computation of loss per share is based on the weighted
average number of shares outstanding during the period presented in
accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" [See Note 8].
ACCOUNTING ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosures
of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the
reported period. Actual results could differ from those estimated.
SKYFRAMES, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
RECENTLY ENACTED ACCOUNTING STANDARDS - Statement of Financial Accounting
Standards ("SFAS") No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities", SFAS No. 147, "Acquisitions of Certain Financial
Institutions - an Amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9", SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement
No. 123", SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities", and SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity", were recently issued. SFAS No. 146, 147, 149 and 150 have no
current applicability to the Company or their effect on the financial
statements would not have been significant. The Company adopted SFAS No.
148 during the year ended June 30, 2003.
RECLASSIFICATION - The financial statements for periods prior to September
30, 2003 have been reclassified to conform to the headings and
classifications used in the September 30, 2003 financial statements.
RESTATEMENT - The financial statements have been restated for all periods
presented to reflect the recapitalization of SkyFrames, Inc. [See Note 2]
and to reflect a 1-for-100 reverse stock split effected by the Company on
January 28, 2003 [See Notes 2 and 5].
NOTE 2 - EXCHANGE AGREEMENT
On January 28, 2003, the Company signed an Exchange Agreement with
SkyFrames, Inc. ("SFI"). The agreement called for the Company to issue
8,500,000 post-split shares of its common stock to the former shareholders
of SFI for all 85,000 outstanding shares of SFI's common stock. The
agreement also called for the Company to effect a 1-for-100 reverse stock
split just prior to the acquisition. After the reverse split and just prior
to the acquisition, the Company had 84,679 shares of common stock
outstanding. The acquisition closed on January 28, 2003 and has been
accounted for as a recapitalization of SFI in a manner similar to a reverse
purchase. Accordingly, the equity transactions have been restated to
reflect the recapitalization of SFI and the operations of the Company prior
to the date of acquisition have been eliminated. The financial statements
reflect the operations of SFI from its inception.
SKYFRAMES, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 3 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment recorded at cost or
carryover basis, less accumulated depreciation as of:
September 30,
2003
-------------
Computers and related equipment $ -
Office equipment 1,900
Software 2,150
Website 1,075
-------------
5,125
Less: accumulated depreciation (1,627)
-------------
$ 3,498
-------------
DEPRECIATION EXPENSE FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND
2002 WAS $418 AND $133, RESPECTIVELY.
NOTE 4 - NOTES PAYABLE
NOTES PAYABLE CONSIST OF THE FOLLOWING AT:
September 30,
2003
-------------
ONE-YEAR 8% $150,000 SENIOR CONVERTIBLE PROMISSORY NOTE
PAYABLE TO OCEAN DRIVE HOLDINGS LLC MATURING IN JUNE 2004
CONVERTIBLE WITH ACCRUED INTEREST AT THE CREDITOR'S OPTION INTO
COMMON STOCK AT $.50 PER SHARE, NET OF DISCOUNTS OF $106,961 $ 43,039
ONE-YEAR 8% $250,000 SENIOR CONVERTIBLE PROMISSORY NOTE
PAYABLE TO OCEAN DRIVE HOLDINGS LLC MATURING IN AUGUST 2004
CONVERTIBLE WITH ACCRUED INTEREST AT THE CREDITOR'S OPTION INTO
COMMON STOCK AT $.50 PER SHARE, NET OF DISCOUNTS OF $208,334 41,666
SIX-MONTH UNSECURED 5% NOTE PAYABLE TO KEYVAN SAMINI,
AN INDIVIDUAL, MATURING IN AUGUST 2003, CURRENTLY IN DEFAULT 5,000
-------------
$ 89,705
-------------
In June 2003, the Company sold the $150,000 convertible note payable for
$51,726 and recorded a discount of $98,274. Due to the beneficial
conversion feature of the note, the Company recorded an additional discount
of $51,726. Both discounts are being amortized over the term of the note.
For the three months ended September 30, 2003 and 2002, respectively, the
Company amortized $36,789 and $0 of the discounts.
SKYFRAMES, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 4 - NOTES PAYABLE [Continued]
In August 2003, the Company sold the $250,000 convertible note payable for
$125,012 and recorded a discount of $124,988. Due to the beneficial
conversion feature of the note, the Company recorded an additional discount
of $125,012. Both discounts are being amortized over the term of the note.
For the three months ended September 30, 2003 and 2002, respectively, the
Company amortized $41,666 and $0 of the discounts.
For the three months ended September 30, 2003 and 2002, respectively,
interest expense amounted to $91,211 and $0.
NOTE 5 - CAPITAL STOCK, OPTIONS AND WARRANTS
COMMON STOCK - In September 2003, the Company issued 250,000 shares of its
previously authorized but unissued common stock to the Company's Chief
Executive Officer. The shares were issued for employee services valued at
$307,500 (or $1.23 per share).
In September 2003, the Company issued 10,000 shares of its previously
authorized but unissued common stock. The shares were issued to a vendor
for price discounts valued at $12,300 (or $1.23 per share).
In August 2003, the Company issued 66,777 shares of its previously
authorized but unissued common stock. The shares were issued for consulting
services valued at $80,000 (or approximately $1.20 per share).
In July 2003, the Company issued 100,000 shares of its previously
authorized but unissued common stock. The shares were issued for consulting
services valued at 110,000 (or $1.10 per share).
In July 2003, the Company issued 100,000 shares of its previously
authorized but unissued common stock. The shares were issued for consulting
services valued at $130,000 (or $1.30 per share).
In July 2003, the Company issued 54,500 shares of its previously authorized
but unissued common stock. The shares were issued for consulting services
valued at $87,200 (or $1.60 per share).
In June 2003, the Company issued 50,000 shares of its previously authorized
but unissued common stock. The shares were issued for cash of $50,000 (or
$1.00 per share).
In June 2003, the Company issued 100,000 shares of its previously
authorized but unissued common stock. The shares were issued for consulting
services valued at $195,000 (or $1.95 per share).
In May 2003, the Company issued 135,000 shares of its previously authorized
but unissued common stock of which 100,000 shares were issued as part of an
investment banking agreement with Ocean Drive Capital, LLC [See Note 10].
The shares were issued for consulting services valued at $209,250 (or $1.55
per share).
SKYFRAMES, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 5 - CAPITAL STOCK, OPTIONS AND WARRANTS [CONTINUED]
In May 2003, the Company issued 250,000 shares of its previously authorized
but unissued common stock. The shares were issued for consulting services
valued at $347,500 (or $1.39 per share).
In May 2003, the Company issued 500,000 shares of its previously authorized
but unissued common stock. The shares were issued as collateral valued at
$695,000 (or $1.39 per share) [See Note 9].
In April and May 2003, the Company issued 140,000 shares of its previously
authorized but unissued common stock. The shares were issued for consulting
services valued at $175,000 (or $1.25 per share).
In March 2003, the Company issued 900,000 shares of its previously
authorized but unissued common stock. The shares were issued as a
settlement valued at $1,350,000 (or $1.50 per share) [See Note 9].
In March 2003, the Company issued 150,000 shares of its previously
authorized but unissued common stock. The shares were issued for consulting
services valued at $217,500 (or $1.45 per share).
In March 2003, the Company issued 200,000 shares of its previously
authorized but unissued common stock. The shares were issued for consulting
services valued at $240,000 (or $1.20 per share).
In March 2003, the Company issued 40,000 shares of its previously
authorized but unissued common stock as part of a consulting agreement with
Client Services International LLC [See Note 10]. The shares were issued for
consulting services valued at $64,000 (or $1.60 per share).
In March 2003, the Company issued 40,000 shares of its previously
authorized but unissued common stock as part of a consulting agreement with
thestockpage.com Inc. [See Note 10]. The shares were issued for consulting
services valued at $76,000 (or $1.90 per share).
In February 2003, the Company issued 425,000 shares of its previously
authorized but unissued common stock. The shares were issued for cash of
$20,000 and for consulting services valued at $192,500 (or $.50 per share).
In February 2003, the Company issued 500,000 shares of its previously
authorized but unissued common stock to the Company's Chief Executive
Officer. The shares were issued for employee services valued at $250,000
(or $.50 per share).
In January 2003, the Company issued 2,878,000 shares of its previously
authorized but unissued common stock. The shares were issued for cash of
$75,000 and for consulting services valued at $1,364,000 (or $.50 per
share).
In January 2003, the Company entered into an Exchange Agreement with
SkyFrames, Inc. which has been accounted for as a recapitalization of
SkyFrames, Inc. [See Note 2].
SKYFRAMES, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 5 - CAPITAL STOCK, OPTIONS AND WARRANTS [CONTINUED]
In August 2002, the Company issued 6,000,000 shares of its previously
authorized but unissued common stock. The shares were issued for computers
and related equipment recorded at the shareholder's carryover basis of $0
and as repayment of expenses of $46,063 which had been paid by a related
party (or approximately $.0077). This issuance resulted in a change in
control of the Company.
In May 2002, in connection with its organization, the Company issued
2,500,000 shares of its previously authorized but unissued common stock.
The shares were issued as payment of organization costs of $5,000 (or $.002
per share).
CANCELLATION - In June 2003, the Company's former president contributed
500,000 shares of common stock back to the company for cancellation.
STOCK SPLIT - On January 28, 2003, the Company effected a 1-for-100
reverse stock split. The financial statements for all periods presented
have been restated to reflect the stock split.
ADVISOR COMPENSATION PLAN - In February 2003, the Company's Board of
Directors adopted the Advisor Compensation Plan ("AC Plan"). The AC Plan
provides for issuing up to 3,000,000 shares of common stock to employees,
directors, consultants and advisors. At September 30, 2003, total shares
available to be issued under the AC Plan amounted to 755,803.
STOCK OPTIONS - In February 2003, the Company granted 10,000 options to
purchase common stock at $.10 per share as part of an Employment Agreement
[See Note 9]. The options will vest in February 2004 and will be
exercisable for five years following vesting. The Company recorded
compensation of $4,000 for the intrinsic value of the options.
In March 2003, the Company granted 100,000 options to purchase common stock
at $1.00 per share for consulting services valued at $144,590. The options
vested immediately and are exercisable for two years.
STOCK WARRANTS - In May 2003, the Company granted 300,000 warrants to
purchase common stock at $1.45 per share as part of an engagement agreement
with Grant Bettingen, Inc. [See Note 10] for consulting services valued at
$434,460. The warrants vested immediately and are exercisable for three
years.
In June 2003, the Company sold 150,000 warrants to purchase common stock at
$2.07 per share for cash of $98,274 as part of a note payable arrangement
with Ocean Drive Holdings LLC. The warrants vested immediately and are
exercisable for five years.
In August 2003, the Company sold 200,000 warrants to purchase common stock
at $1.15 per share and 50,000 warrants to purchase common stock at $1.20
per share for cash of $124,988 as part of a note payable arrangement with
Ocean Drive SF Associates LLC. The warrants vested immediately and are
exercisable for five years.
SKYFRAMES, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 5 - CAPITAL STOCK, OPTIONS AND WARRANTS [CONTINUED]
A summary of the status of the options and warrants is presented below.
From Inception on
For the Three Months May 24, 2002
Ended September 30, Through
--------------------------------------- September 30,
2003 2002 2003
------------------ ---------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- ------- ------- ------- ------- -------
Outstanding at beginning of
period 560,000 $ 1.51 - $ - - $ -
Granted 250,000 1.16 - - 810,000 1.40
Exercised - - - - - -
Forfeited - - - - - -
Expired - - - - - -
------- ------- ------- ------- ------- -------
Outstanding at end of period 810,000 $ 1.40 - $ - 810,000 $ 1.40
------- ------- ------- ------- ------- -------
Weighted average fair value
of options and warrants granted
during the period 250,000 $ 1.00 - $ - 810,000 $ 1.44
------- ------- ------- ------- ------- -------
The fair value of each option and warrant granted is estimated on the date
granted using the Black-Scholes option pricing model, with the following
assumptions for grants on February 1, 2003: risk-free interest rate of
3.02%, expected dividend yield of zero, expected lives of five years and
expected volatility of 375%. The following assumptions were used for grants
on March 21, 2003: risk-free interest rate of 1.80%, expected dividend
yield of zero, expected lives of two years and expected volatility of 414%.
The following assumptions were used for grants on May 19, 2003: risk-free
interest rate of 1.66%, expected dividend yield of zero, expected lives of
three years and expected volatility of 372%. The following assumptions were
used for grants on June 16, 2003: risk-free interest rate of 2.14%,
expected dividend yield of zero, expected lives of five years and expected
volatility of 355%. The following assumptions were used for grants on
August 5, 2003: risk-free interest rate of 3.37%, expected dividend yield
of zero, expected lives of five years and expected volatility of 330%.
SKYFRAMES, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 5 - CAPITAL STOCK, OPTIONS AND WARRANTS [CONTINUED]
A summary of the status of the options and warrants outstanding at
September 30, 2003 is presented below:
Options and Warrants Outstanding Options and Warrants Exercisable
------------------------------------------- -------------------------
Range of Weighted-Average Weighted-Average Weighted-Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Exercisable Price
----------- ----------- -------------- -------------- --------- --------------
$ .10 10,000 5.3 years $ .10 - $ -
$ 1.00 100,000 1.5 years 1.00 100,000 1.00
$ 1.15 - 1.20 250,000 4.9 years 1.16 250,000 1.16
$ 1.45 300,000 2.6 years 1.45 300,000 1.45
$ 2.07 150,000 4.7 years 2.07 150,000 2.07
----------- -------------- -------------- --------- --------------
810,000 3.6 years $ 1.40 800,000 $ 1.42
STOCK COMPENSATION PLAN - In September 2003, the Company's Board of
Directors approved a stock compensation plan and reserved 1,000,000 of
common stock to be issued under the plan. As of September 30, 2003, no
shares have been issued from this plan.
NOTE 6 - INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes". SFAS
No. 109 requires the Company to provide a net deferred tax asset or
liability equal to the expected future tax benefit or expense of temporary
reporting differences between book and tax accounting methods and any
available operating loss or tax credit carryforwards. At September 30,
2003, the Company has available unused operating loss carryforwards of
approximately $6,918,000, which may be applied against future taxable
income and which expire in various years through 2024.
At September 30, 2003, the total of all deferred tax assets was
approximately $2,601,000 and the total of all deferred tax liabilities was
approximately $0. The amount of and ultimate realization of the benefits
from the deferred tax assets for income tax purposes is dependent, in part,
upon the tax laws in effect, the future earnings of the Company, and other
future events, the effects of which cannot be determined. Because of the
uncertainty surrounding the realization of the loss carryforwards, the
Company has established a valuation allowance of approximately $2,601,000.
The net change in the valuation allowance was approximately $388,000 during
the three months ended September 30, 2003.
SKYFRAMES, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 6 - INCOME TAXES [CONTINUED]
The temporary differences gave rise to the following deferred tax asset
(liability):
September 30,
2003
------------------
Excess of tax over financial
accounting depreciation $ 1,066
Accrued compensation 15,936
Net operating loss carryover 2,580,573
Bad debt allowance 3,348
The components of federal income tax expense from continuing operations
consisted of the following for the three months ended:
September 30,
2003
------------------
Current income tax expense:
Federal $ -
State -
------------------
Net current tax expense $ -
------------------
Deferred tax expense (benefit) resulted from:
Excess of tax over financial
accounting depreciation $ 56
Accrued compensation (8,774)
Bad debt allowance (3,348)
Net operating loss carryover (376,185)
Valuation allowance 388,251
------------------
Net deferred tax expense $ -
------------------
Deferred income tax expense results primarily from the reversal of
temporary timing differences between tax and financial statement income.
The reconciliation of income tax from continuing operations computed at the
U.S. federal statutory tax rate to the Company's effective rate is as
follows for the three months ended:
September 30,
2003
------------------
Computed tax at the expected
federal statutory rate 34.00%
State income taxes, net of federal benefit 3.30
Other (1.82)
Valuation allowance (35.48)
------------------
Effective income tax rates 0.00%
------------------
SKYFRAMES, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 7 - GOING CONCERN
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles in the United States of America,
which contemplate continuation of the Company as a going concern. However,
the Company was only recently formed and has not yet been successful in
establishing profitable operations. Further, the Company has current
liabilities in excess of current assets. These factors raise substantial
doubt about the ability of the Company to continue as a going concern. In
this regard, management is proposing to raise any necessary additional
funds not provided by operations through loans or through additional sales
of its common stock. There is no assurance that the Company will be
successful in raising this additional capital or in achieving profitable
operations. The financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
NOTE 8 - LOSS PER SHARE
THE FOLLOWING DATA SHOWS THE AMOUNTS USED IN COMPUTING LOSS PER SHARE:
From Inception on
For the Three Months May 24, 2002
Ended September 30, Through
------------------------------------- September 30,
2003 2002 2003
---------------- ---------------- ----------------
Loss available to common
shareholders (numerator) $ (1,094,358) $ (42,827) $ (7,670,372)
---------------- ---------------- ----------------
Weighted average number
of common shares outstanding
used in loss per share during
the period (denominator) 14,663,441 6,282,609 10,324,041
---------------- ---------------- ----------------
At September 30, 2003, the Company had 110,000 outstanding options, 700,000
outstanding warrants and notes payable convertible into 810,166 shares of
common stock which were not used in the computation of dilutive loss per
share because their effect would be anti-dilutive. Dilutive loss per share
was not presented, as the Company had no common stock equivalent shares for
all periods presented that would affect the computation of diluted loss per
share.
NOTE 9 - RELATED PARTY TRANSACTIONS
ACCOUNTS PAYABLE - At September 30, 2003, officers and shareholders of the
Company were owed a total of $131,149 for expenses which they paid on
behalf of the Company and accrued amounts owed to them.
SKYFRAMES, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 9 - RELATED PARTY TRANSACTIONS [CONTINUED]
NOTE PAYABLE AND LOSS OF EXTINGUISHMENT OF DEBT - In May 2003, the Company
issued 500,000 shares of common stock to Bricap, LLC, an entity controlled
by the Company's former President. The shares were issued as collateral
valued at $695,000 [See Note 5] on a $44,000 no-interest unsecured demand
note payable. In June 2003, the Company defaulted on the note and Bricap,
LLC accepted the 500,000 shares of common stock, which had been previously
issued, as payment in full, resulting in a loss on extinguishment of debt
of $651,000.
STOCK ISSUANCES - In September 2003, the Company issued 250,000 shares of
common stock to the Company's Chief Executive Officer for employee services
valued at $307,500 [See Note 5].
In February 2003, the Company issued 500,000 shares of common stock to the
Company's Chief Executive Officer for employee services valued at $250,000
[See Note 5].
In August 2002, the Company issued 6,000,000 shares of common stock for
computers and equipment with a carryover basis of $0 and as repayment of
expenses of $46,063 which had been paid by a related party [See Note 5].
EMPLOYMENT AGREEMENT - In February 2003, the Company signed a one-year
Employment Agreement with the Company's Chief Executive Officer. The
agreement calls for the Company to pay a base salary of $5,000, issue
500,000 shares of common stock vesting at 25,000 shares per month and grant
10,000 options to purchase common stock at $.10 per share exercisable for
five years [See Note 5]. Upon completion of $500,000 in funding, the
agreement provides for the salary to increase to $10,000 per month and for
issuance of an additional 250,000 shares of common stock. The agreement
also provides for three years of extensions. In February 2003, the
Company's Board of Directors amended the agreement so that all 500,000
shares of common stock initially issued to the Company's Chief Executive
Officer vested immediately. In June 2003, the Company's Board of Directors
amended the agreement to increase the Company's Chief Executive Officer's
salary to $10,000 per month effective June 1, 2003. In September 2003, the
Company's Board of Directors determined that the required funding had been
obtained by the Company for the Company's Chief Executive Officer to
receive the 250,000 additional shares of common stock.
DIRECTOR FEES - In April 2003, the Company's Board of Directors determined
that each director should receive $1,000 for each Board meeting attended;
however, this policy has not yet been put into effect.
SETTLEMENT OF POTENTIAL CLAIMS - In March 2003, the Company issued 900,000
shares of common stock to Bricap, LLC, an entity controlled by the
Company's former President. The shares were issued as a settlement valued
at $1,350,000 [See Note 5] for potential claims against the Company related
to the technology used by the Company in its operations.
SKYFRAMES, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 10 - COMMITMENTS AND CONTINGENCIES
EXCHANGE AGREEMENT / RELEASE AND SETTLEMENT AGREEMENT - On August 3, 2002,
SkyFrames, Inc. ("SFI") signed an Exchange Agreement with Helsinki Capital
Partners, Inc. (Helsinki"). The agreement called for Helsinki to issue
8,500,000 shares of Helsinki's common stock to the former shareholders of
SFI for all 85,000 outstanding shares of SFI's common stock. The
acquisition closed on August 31, 2002; however, the acquisition was
subsequently rescinded. On January 28, 2003, SFI signed a Release and
Settlement Agreement with Helsinki. The rescission agreement called for the
former shareholders of SFI to return the 8,500,000 shares of Helsinki's
common stock and to receive back their 85,000 shares of SFI's common stock.
The financial statements have been restated to reflect the acquisition as
having been rescinded.
SATELLITE SERVICE AGREEMENT / PURCHASE OPTION - In October 2002, the
Company signed a Satellite Service Agreement with Clear Channel Satellite
Services ("CCSS") to purchase preemptible satellite bandwidth and power on
a month-to-month basis. The Company paid a $6,000 refundable deposit and
rental payments are 75% of gross revenues derived from use of the CCSS
satellite with monthly minimums of $5,820. The agreement also grants CCSS
the exclusive right to acquire the Company for 24 months after 18 months
operations at the greater of gross annual revenues or fair market value.
The agreement grants the Company first right of refusal to convert to a
non-preemptible status. The agreement also sets minimum prices the Company
can charge for its services and calls for a 3% increase in monthly fees at
each anniversary of the agreement.
OFFICE LEASES - In September 2002, the Company signed a 31-month lease for
office space in Costa Mesa, California beginning March 1, 2003. The Company
paid a $1,836 refundable security deposit and rental payments are initially
$1,751 per month increasing each September 30th and reaching $1,836 per
month during the third year. Minimum future lease payments under this lease
for the twelve month periods ended September 30, 2004 and 2005 are $21,521
and $22,033, respectively.
In October 2002, the Company signed a two-year lease for office space in
Oceanside, California beginning October 1, 2002. The Company paid a $1,114
refundable deposit and rental payments are $1,142 per month during the
first year and $1,189 per month during the second year. Minimum future
lease payments under this lease for the twelve month period ended September
30, 2004 are $14,268.
ENGAGEMENT AGREEMENT - In May 2003, the Company signed a six-month
Engagement Agreement with Grant Bettingen, Inc. The Company granted 300,000
warrants to purchase common stock at $1.45 per share exercisable for three
years [See Note 5]. The Company also pays $1,500 per month and will pay 10%
of the proceeds from any joint venture or acquisition negotiated by Grant
Bettingen. The agreement can be extended up to six additional months.
INVESTMENT BANKING AGREEMENT - In May 2003, the Company signed a
three-month Investment Banking Agreement with Ocean Drive Capital, LLC
("Ocean"). The Company issued 100,000 shares of common stock to Ocean [See
Note 5] and Ocean was to receive 10% of any funds raised for the Company.
If Ocean had been able to raise at least $2,000,000 by the end of the
initial term, then the agreement was to renew for an additional three-month
term.
SKYFRAMES, INC.
[A Development Stage Company]
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 10 - COMMITMENTS AND CONTINGENCIES [CONTINUED]
CONSULTING AGREEMENTS - In March 2003, the Company signed a six-month
consulting agreement with thestockpage.com Inc. The Company issued 40,000
shares of common stock [See Note 5] and will pay 5% of any funds provided
through the efforts of thestockpage.com Inc.
In June 2003, the Company signed a six-month consulting agreement with
Trilogy Capital Partners, Inc. The agreement called for the Company to
grant 180,000 performance-based warrants to purchase common stock at $.01
per share exercisable for five years with 90,000 vesting if the Company's
stock price reached $3.00 per share and 90,000 if the Company's stock price
reached $4.00 per share. The agreement also called for the Company to pay
$5,000 per month for consulting services. Following the initial six-month
term, the agreement was to continue on a month-to-month basis. The
agreement was cancelled prior to the issuance of any warrants.
In July 2003, the Company signed a nine-month Consulting Agreement with
Client Services International LLC. The agreement covers 40,000 shares of
common stock which were issued in March 2003 [See Note 5] and calls for the
Company to make seven payments of $5,000 in exchange for consulting
services.
NOTE 11 - CONCENTRATIONS
ACCOUNTS RECEIVABLE - A significant percent of the Company's accounts
receivable at September 30, 2003 were owed by only two customers. The
following table lists the percent of the receivables owed by those
customers that accounted for 10% or more of the total accounts receivable
at September 30, 2003:
Customer A 55%
Customer B 45%
REVENUES - The Company has just recently commenced operations and all of
the revenues received by the Company are from a limited number of clients,
the loss of which could have a material impact on the operations of the
Company.
NOTE 12 - SUBSEQUENT EVENTS
ASSIGNMENT - In October 2003, a related party assigned the exclusive right
to use patent-pending virtual onboard switching technology to the Company
in exchange for $1,000.
CONSULTING AGREEMENT - In November 2003, the Company signed a three-year
Consulting Agreement with Kevin Woodbridge. The agreement calls for the
Company to pay $3,000 per month plus 6% of any funds provided through the
efforts of Kevin Woodbridge.
PART 1 - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Safe Harbor Statement
This Form 10-QSB contains certain forward-looking statements. For
this purpose any statements contained in this Form 10-QSB that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, words such as "may," "will," "expect,"
"believe," "anticipate," "estimate" or "continue" or comparable terminology are
intended to identify forward-looking statements. These statements by their
nature involve substantial risks and uncertainties, and actual results may
differ materially depending on a variety of factors including, but not limited
to, the absence of long-term financial resources, our ability to find working
capital, technical issues relating to our obtaining satellite time, our ability
to provide timely customer service and shipment of equipment given that we are
short on working capital, and compliance of our customers with contractual
terms. You should not place undue reliance on these forward-looking statements,
which reflect our opinions only as of the date of this Quarterly Report. Except
as required by law, we undertake no obligation to announce publicly revisions we
make to these forward-looking statements to reflect the effect of events or
circumstances that may arise after the date of this report. All written and oral
forward-looking statements made subsequent to the date of this report and
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by this section. You should carefully review the risk factors
described in other documents we file from time to time with the SEC.
Management Discussion and Analysis of Financial Condition and Results of
Operations
Overview
The Company is an early stage provider of low-cost high-speed
secure Internet broadband services. SkyFrames, founded in 2002, delivers
broadband speeds to rural locations that enable applications to be delivered in
a manner that were previously unattainable. This reliable technology platform
delivers speeds equal to or greater than terrestrial broadband in these various
rural areas. There are over 20,000 communities in the U.S. alone that would gain
significant benefit from SkyFrames services. This market continues to grow due
to past events such as 9/11 and unforeseen man-made or natural disasters.
Skyframes presents a viable redundancy or alternate solution to the costly
expansion of broadband installation. Applications for the Company's product and
services include: Corporate data networks, distance learning centers, disaster
recovery, government municipalities applications, information distribution,
rural telecommunications initiatives, and backup terrestrial data support
infrastructure. Even today, the Company is involved in attempting to bring
broadband to the military troops overseas in Iraq.
There are two main product offerings to deliver these services. The
first is VSAT (Very Small Aperture Terminal) systems, which can be deployed
immediately to areas where there is little or no connectivity. SkyFrames is an
ideal system for Internet access for rural communities. This product will also
be used in business continuity and disaster recovery situations, providing a
diverse path backup system. Management believes this system is very competitive
and provides a quality offering above some existing or legacy systems offered
currently in the marketplace. Our proprietary software allows the implementation
of bandwidth on demand protocol with DAMA (Demand Assigned Multiple Access) and
static IP addressing. SkyFrames's advanced satellite product called VOS (Virtual
Onboard Switching) was designed to provide a secure intelligent routing and
switching firmware design that interoperates cohesively with international
standards for uplink and downlink equipment as well as various terrestrial IP
networks. This technology implements a unique deployment of digital video
broadcast (DVB-S) technology for the creation of a mesh Internet backbone with
very low latency. This highly efficient systems major feature is that it is
extremely secure and operates in its own closed environment, thus providing a
true private network, no public switches. Both products allow for the creating
of broadband hotspots in rural areas.
Both these products and the continued subscriber base developed by
each user on the system installed will generate SkyFrames revenue. A typical
installed site will pay monthly user fees for access to the system. Sales are
generated by a direct sales force and through VARs (Value Added Resellers). The
Company has recently begun selling these products and management believes a good
selling effort is under way. Revenues for the first year start up ended June 30,
2003 were limited to $53,925 in sales to only a handful of small VSAT customer,
at a rate of approximately $450 per month. Subsequent to June 30, 2003, we
entered into a number of contracts valued at $200,000. However, delays in
shipping and slow capital development have pushed off some revenue until the
next quarter. A value-added reseller that specializes in Wi-Fi and wireless
technologies is also beginning to work with SkyFrames technology and the initial
results are positive. In March 2003, SkyFrames entered into an agreement with
CompUSA to deliver e-learning content and courseware throughout North America.
This project was designed to give the rural student the same opportunities as
the students in the metropolitan areas by connecting them to the Internet using
Skyframes satellite delivery of Internet to these rural schools. In March 2003,
Skyframes entered into an agreement with Cyberguard; a premier cyber security
company for customers looking for highly secures voice and data transmissions
and we expect to see more of their applications associated with this broadband
offering. Skyframes has entered into an agreement with SSM Technologies, a
value-added reseller in Buffalo, Wyoming to sell Skyframes VSAT units. SSM
Technologies provides broadband solutions to multinational corporations and
governments. No significant sales have developed with SSM Technologies to date.
In September 2003, SkyFrames began an initiative to bring high
speed broadband to the troops in Iraq for the holidays. A non-affiliate of the
Company set up a non-profit foundation with respect to this initiative. To
receive more information interested parties may go to the foundation's website
at WWW.FREEDOMCALLS.ORG. We are awaiting government approval necessary to ship
our system into Iraq. We are hopeful that we will get the needed approval in
time for the Christmas season. We are working with several organizations to try
and make this happen timely. These firms to date are Motorola, Vonage, AreoTech,
Broadband Wireless exchange, Altigen, Intelsat, and Solomon Technology to name
some. This is a military operation and great care must be observed in
introducing technology during a military conflict.
In September 2003, the Company entered into an agreement with
ComGuard CTS to supply high-speed VSAT equipment and broadband Internet
services. ComGuard CTS is a technology company that focuses on
telecommunications, application development, support and education in Canada.
The Company expects to generate revenues in the second quarter from this
agreement.
In October 2003, the Company signed a letter of intent with The
Canadian Hearing Society based in Toronto, Canada to build satellite/wireless
infrastructures that support businesses and citizens of rural communities while
addressing the needs of deaf and hard of hearing people throughout Canada,
Mexico, the Caribbean, the United States and Latin America.
Closer to home, we have begun a state-by-state effort to bring
closed system broadband to certain government agencies. These systems will
provide greater information flow to outlining areas where local government can
be directly online each day 24/7 to state capital offices such as the Secretary
of State. Since each state has many county offices to communicate with, a closed
network system on a high-speed connection at lower costs is needed and provides
us with a new market opportunity.
In June 2003, Skyframes sold wireless broadband systems to Coffman
Cove, Alaska for rural connectivity. Installation took place in the beginning of
June and Management believes installation was successful. However, we need to
revisit the area to make sure the system continues to perform at peak levels in
the winter period. Skyframes has begun to sell to some of the other rural
communities in Alaska that are in need of broadband connectivity. $7.5 million
in grant money in Alaska was allocated for the specific purpose of providing
broadband connectivity to rural communities of Alaska. In May, Skyframes entered
into an agreement with NetWorth Inc., a value-added integrator specializing in
disaster recovery systems. NetWorth has not sold a Skyframes' VSAT solution to
date; however, they are delivering on many WiFi systems and we look forward to
working with them and their customers when a system is needed. NetWorth is
providing backup for the business continuity market and utilize mobile broadband
units. NetWorth's initial focus is on the Florida market where natural disasters
can shut down communications systems for days.
Our sales for the fiscal year ending June 30, 2003 were $53,925 and
additional sales are developing. The further growth of future sales is difficult
to predict because we are in our initial phase of operations and capital raising
activity. We are capital sensitive and market developments have been slow to
grow do to previous competitive company offerings failing as well as several
reorganizations. There are many factors that could impact our ability to
perform, but our limited history makes the level of future revenues extremely
difficult to predict. We could have technical problems; personnel problems and
we do have continuing liquidity problems. One or more of our customers could
fail to perform, and this would adversely impact our results of operations.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results
of operations are based upon our financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosures of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates, including those
related to reserves, impairment of long-lived assets and estimates of costs to
complete contracts. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions; however, we believe that our estimates, including
those for the above-described items, are reasonable.
RESULTS OF START-UP OPERATIONS FOR THE SEPTEMBER 2003 QUARTER AND FISCAL
YEAR-END OF JUNE 30, 2003.
Revenues for the fiscal year ended June 30, 2003 was $53,925 and
for the three months-ended September 30, 2003 was $15,375. The Company expended
most of its resources dealing with post-merger issues and becoming current on
their public reports. The Company expects revenues to continue grow as more
resources are allocated to selling activities. There is no prior sales history
for the Company prior to the January 2003 and the Company had no significant
operations or revenues for the three months-ended September 30, 2002.
Three Month ending Year Ending
SEPTEMBER 30 2003 JUNE 30, 2003
----------------- -------------
Revenues $15,375 $53,925
The Company has entered into a contract with Clear Channel as its
satellite link provider. This contract is on a revenue share basis and we
believe provides a solid financial model on which to project margin. Activity
for the fiscal year-ended June 30, 2003 and for the three months-ended September
30, 2003 was minimal while the Company began its selling activity. A number of
factors will drive costs in the future as well as revenues; however, ratios to
revenue should not fluctuate appreciably. The primary cost expense associated
with providing these services, after the hardware installation, will be the
ongoing satellite broadband service fees, which are directly proportional to the
number of users on the system.
Three Months Ended Year Ending May 24, 2002 through
SEPTEMBER 30, 2003 JUNE 30, 2003 SEPTEMBER 30, 2003
------------------ ------------- ------------------
General & Administrative expenses $995,216 $4,487,025 $5,568,512
Cost of Equipment Sales $ 5,974 $ 38,614 $ 44,588
For the fiscal year-ended of June 30, 2003, general and
administrative expenses increased substantially as the Company activity
increased on a non-cash basis. This trend continued as general and
administrative expenses for the three months-ended September 30, 2003 was
$995,216. Costs of goods for the three months-ended September 30, 2003 was
$5,974. The principal increase was due to the addition to the Company's
management, use of outside consultants, and the sales ramp up activity. We paid
substantially all of our start up costs for services by the issuance of common
stock valued at $3,330,750 post split share values during the fiscal year-ended
June 30, 2003 and approximately $727,000 in stock value for goods and services
for the three months-ended. This has produced a sizable loss carry forward. The
increase in general and administrative costs is expected to continue as more
customers are added. However, these expenses (except for the expenses accrued
for stock compensation, which were more related to start up expenses) should
become more proportionate to revenue as time passes and not adversely effect
margins in the future. Staff increases will be in sales administration, order
entry, quality assurance and customer service support.
LIQUIDITY AND CAPITAL RESOURCES
Management and shareholders are currently funding the Company's
financial requirements with short-term advances and private placements of equity
with non-related parties through September 30, 2003 and by accruing some
expenses. On June 16, 2003, the Company entered in to an Investment banking
agreement with Ocean Drive Capital. This agreement details the plan for rising
on a private basis up to $5 million. This relationship should help the company
in meeting its capital requirements. On June 16, 2003 Ocean began funding a
series of bridge loans beginning with $150,000 and another $250,000 in August
2003 to assist the company in meeting its short-term needs. Both bridge loans
accrue interest at a per annum rate of 8% per year, have maturity dates one year
from the date of the promissory notes and are convertible into shares of our
common stock at a conversion price of $0.50 per share. Given the recent ramp up
of the selling activity, pending orders during the remainder of the September
2003 quarter and the increasing operating expenses the company will require
additional capital. Management intends to continue to seek the funding necessary
to meet all the capital and operating requirements. However, no guarantee to
raise the necessary capital has been entered into, it will be strictly a best
effort basis. We are also investigating the possibility of accounts receivable
financing. There can be no assurance that our efforts to obtain financing will
be successful or that proceeds raised from the sale of our securities or other
financing activates will be sufficient to fund the operating activities or
service any indebtedness as a result of the capital raising activities. If the
funds received are insufficient, then the Company's ability to continue as a
going concern could be adversely affected.
ECONOMIC CONDITIONS AND TRENDS
Management believes current economic conditions and the capital
markets generally will impact the timing and the results of any private sale of
securities or other financing activities. The Company is dependent on timely
financing to support product sales flow and customer deliveries. Accordingly,
management has kept hard costs down and continue to require customers to provide
a (50%) fifty percent down payment with each order. However, the other (50%)
fifty percent is carried by the company until the product is delivered. The
results are a 30 to 45 day carry time before the Company receives the balance of
its payments. This negatively impacts accounts payables timing. This concern for
long term financing may have an adverse effect on the Company performance, if
not resolved in the near future. Management believes it can work through the
short-term issues for some period of time. However, future sales levels, if
substantial, will increase pressure on the need for a long term funding
solution.
We are a development stage company as that term is defined in
paragraphs 8 and 9 of SFAS No. 7. Our activities to date have been limited to
seeking capital; seeking supply contracts and development of a business market
for its products and services. Our auditors have included an explanatory
paragraph in their report on our financial statements, relating to the
uncertainty of our business as a going concern, due to our lack of operating
history, lack of profitable operations and working capital deficit. We do not
believe that conventional financing, such as bank loans, is available to us due
to these factors. Management believes that it will be able to raise the required
funds for operations from one or more future offerings, and to be able to affect
our business plan. However, Management believes that Skyframes ability to raise
significant amounts of financing, will be dependent on favorable capital markets
and also on obtaining either a small supply contract or other validation of our
technology by an independent source, and other risks inherent in the business
may affect the outcome of Management's plans.
New Accounting Standards
In November 2002, the Financial Accounting Standards Board issued Interpretation
No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Guarantees of Indebtedness of Others," ("FIN 45"). FIN 45 requires us
to recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in the issuance of the guarantee. FIN 45 is effective
for guarantees issued or modified after December 31, 2002. The disclosure
requirements effective for the year ending December 31, 2002 expand the
disclosures required by a guarantor about its obligations under a guarantee. The
adoption of the disclosure requirements of this statement did not impact our
financial position, results of operations or cash flows.
In December 2002, Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure," ("SFAS
148") was issued. SFAS 148 amends Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") to provide
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on the reported results. The provisions of SFAS 148 are effective for the
financial statements for fiscal years ending after December 15, 2002 and interim
periods beginning after December 15, 2002. The adoption of the disclosure
requirements of this statement did not impact our financial position, results of
operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS No. 150 is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. It is to be implemented by reporting the cumulative effect
of a change in an accounting principle for financial instruments created before
the issuance date of SFAS No. 150 and still existing at the beginning of the
interim period of adoption. Restatement is not permitted. We do not expect the
adoption of SFAS No. 150 to have a material impact upon our financial position,
cash flows or results of operations.
ITEM 3. DISCLOSURE CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with
the participation of the Company's management, including the Company's President
and Chief Executive Officer (who is also the Company's Chief Financial Officer)
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures as of the end of the period covered by this report. The
evaluation was undertaken in consultation with the Company's accounting
personnel. Based on that evaluation, the President and Chief Executive Officer
concluded that the Company's disclosure controls and procedures were effective
to ensure that information required to be disclosed by the Company in the
reports that it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms. The Company's first
annual report since the completion of a recent reverse merger resulted in an
initial delay in recording, processing and reporting information due to the
change in management.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of their evaluation.
PART II - ITEM 1 LEGAL PROCEEDINGS
Not applicable.
PART II - ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
We issued the following securities during the quarter ended September 30, 2003:
In August 2003, the Company signed a $250,000 Senior Convertible Promissory Grid
Note payable to Ocean Drive SF Associates, LLC, a accredited investor. The
warrants vested immediately, are exercisable for five years. Of the 250,000
warrants, 200,000 are exercisable at $1.15 per share and 50,000 are exercisable
at $1.20 per share. This transaction was exempt from registration pursuant to
Regulation D promulgated under the Securities Act of 1933.
In September 2003, the Company issued 250,000 shares of common stock to an
employee for services valued at $307,500, or $1.23 per share. The securities
were exempt from the registration requirements of the Securities Act of 1933
pursuant to section 4(2) of the Act unless otherwise stated.
In July, August and September 2003, the Company issued 331,277 shares of common
stock to consultants for services valued at $419,500, or approximately $1.27 per
share. The securities were exempt from the registration requirements of the
Securities Act of 1933 pursuant to section 4(2) of the Act unless otherwise
stated.
PART II - ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable
PART II - ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II - ITEM 5 OTHER INFORMATION
On September 29, 2003, the Company adopted its 2003 Consultant Plan that
authorized the issuance of common stock up to 1,000,000 shares all of which the
Company intends to register on an S-8 Registration Statement.
PART II - ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS:
2.1 Exchange Agreement, dated January 29, 2003(1)
3.1 Articles of Incorporation, as amended (2)
3.2 By-laws, as amended (2)
10.1 2003 Consultant Plan
10.2 Securities Purchase Agreement, dated August 5, 2003, by and between the
registrant and Ocean Drive SF Associates, LLC (3)
10.3 Stock Purchase Warrant, dated August 5, 2003, issued to Ocean Drive SF
Associates, LLC (3)
10.4 Senior Convertible Promissory Note, dated August 5, 2003, by and
between the registrant and Ocean Drive SF Associates, LLC (3)
10.5 Registration Rights Agreement, dated August 5, 2003, by and between the
registrant and Ocean Drive SF Associates, LLC (3)
10.6 Stock Purchase Warrant, dated August 5, 2003, by and between the
registrant and Ocean Drive SF Associates LLC (3)
31 Certification Pursuant to Rule 13a-14(a) and 15d-14(a) (3)
32 Certification Pursuant to Section 1350 of Title 18 of the United States
Code (3)
(1) Incorporated by reference from the Company's report on Form 10-KSB filed on
November 26, 2003.
(2) Incorporated by reference from the Company's registration statement on Form
10-SB filed on October 27, 1999.
(3) Filed herewith.
REPORTS ON FORM 8-K
On July 8, 2003 the registrant filed a Form 8-K to disclose it had obtained a
$150,000 financing.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
November 26, 2003
SKYFRAMES, INC.
By: /s/ JAMES W. FRANCE
-------------------------------------
President, Chief Financial Officer and
Duly Authorized Officer
(Principal accounting and financial officer
for the quarter)