================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008 OR [ ] 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: 000-50302 TREY RESOURCES, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 16-1633636 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5 REGENT STREET, SUITE 520 LIVINGSTON, NJ 07039 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (973) 758-9555 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer" and "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [ ] Smaller reporting company [X] (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Number of shares of Class A, common stock, par value $.00001, outstanding as of November 14, 2008: 4,105,473,533 ================================================================================
TREY RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 TABLE OF CONTENTS ----------------- Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Balance Sheets - September 30, 2008 (unaudited) and December 31, 2007 (audited) 2-3 Statements of Operations - For the nine months and three months ended September 30, 2008 and 2007 (unaudited) 4 Statements of Cash Flows - For the nine months ended September 30, 2008 and 2007 (unaudited) 5-6 Notes to Condensed Consolidated Financial Statements (unaudited) 7-17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18-22 Item 4T. Controls and Procedures 23 PART II. OTHER INFORMATION Item 3. Defaults Upon Senior Securities 24 Item 5. Other Information 24 Item 6. Exhibits 24 1
TREY RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE><CAPTION> September 30, December 31, 2008 2007 ---------- ---------- (unaudited) (audited) ASSETS CURRENT ASSETS <S> <C> <C> Cash and cash equivalents $ 268,740 $ 146,443 Accounts receivable, net of allowance for doubtful accounts of $146,162 and $147,647, respectively 754,142 687,282 Notes receivable -- 66,471 Inventory 34,565 45,647 Prepaid expenses and other current assets 62,833 106,722 ---------- ---------- Total current assets 1,120,280 1,052,565 ---------- ---------- PROPERTY AND EQUIPMENT, net of accumulated depreciation of $313,143 and $237,857, respectively 206,146 270,177 ---------- ---------- OTHER ASSETS Intangible assets, net of accumulated amortization of $442,278 and $294,550, respectively 150,953 298,681 Deposits and other assets 24,672 32,267 ---------- ---------- Total other assets 175,625 330,948 ---------- ---------- TOTAL ASSETS $1,502,051 $1,653,690 ========== ========== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable and accrued expenses $1,751,408 $1,385,998 Due to related parties 1,634,389 1,408,393 Convertible debentures payable, net of discounts of $0 and $73,393, respectively 1,574,100 1,603,207 Derivative liability 1,502,609 216,497 Current portion of notes payable and capital leases 69,553 268,550 Warrant liability 75,450 75,450 Notes payable to related parties 366,107 407,112 Deferred revenue 145,334 127,809 ---------- ---------- Total current liabilities 7,118,950 5,493,016 ---------- ---------- LONG TERM DEBT Notes payable and capital leases - non-current 20,791 74,261 ---------- ---------- Total long term liabilities 20,791 74,261 ---------- ---------- TOTAL LIABILITIES 7,139,741 5,567,277 ---------- ---------- COMMITMENTS AND CONTINGENCIES </TABLE> See accompanying footnotes to the condensed consolidated financial statements. 2
TREY RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED) <TABLE><CAPTION> September 30, December 31, 2008 2007 ------------ ------------ (unaudited) (audited) <S> <C> <C> STOCKHOLDERS' DEFICIT Preferred stock, $1.00 par value; authorized 1,000,000 shares; no shares issued and outstanding -- -- Common stock: Class A - par value $.00001; authorized 10,000,000,000 shares; 4,105,473,533 and 3,119,362,422 shares issued and outstanding, respectively 41,055 31,194 Class B - par value $.00001; authorized 50,000,000 shares; no shares issued and outstanding -- -- Class C - par value $.00001; authorized 20,000,000 shares; no shares issued and outstanding -- -- Additional paid in capital 5,483,389 5,347,666 Additional paid in capital - warrants 125,166 125,166 Accumulated deficit (11,287,300) (9,417,613) ------------ ------------ Total stockholders' deficit (5,637,690) (3,913,587) ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,502,051 $ 1,653,690 ============ ============ </TABLE> See accompanying footnotes to the condensed consolidated financial statements. 3
TREY RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) <TABLE><CAPTION> For the nine months For the three months ended September 30, ended September 30, 2008 2007 2008 2007 --------------- --------------- --------------- --------------- <S> <C> <C> <C> <C> SALES, net $ 5,711,263 $ 5,562,447 $ 1,833,669 $ 1,648,227 COST OF SALES 3,701,414 3,579,481 1,239,666 1,004,515 --------------- --------------- --------------- --------------- GROSS PROFIT 2,009,849 1,982,966 594,003 643,712 --------------- --------------- --------------- --------------- SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling expenses 877,060 947,650 266,689 341,431 General and administrative expenses 1,259,402 1,377,390 399,832 363,731 Depreciation and amortization 227,234 251,309 74,316 99,925 --------------- --------------- --------------- --------------- Total selling, general and administrative expenses 2,363,696 2,576,349 740,837 805,087 --------------- --------------- --------------- --------------- LOSS FROM OPERATIONS (353,837) (593,383) (146,834) (161,375) --------------- --------------- --------------- --------------- OTHER INCOME (EXPENSE) Gain (loss) on revaluation of derivatives (1,286,112) 404,975 93,775 206,861 Amortization of discount on debt conversion (73,393) (730,101) -- (243,367) Gain on sales of securities available for sale -- 71,413 -- -- Other income (expense) 10,873 (188,000) 3,113 (51,119) Interest expense (167,218) (176,330) (76,164) (54,167) --------------- --------------- --------------- --------------- Total other income (expense) (1,515,850) (618,030) 20,724 (141,792) --------------- --------------- --------------- --------------- LOSS BEFORE PROVISION FOR INCOME TAXES (1,869,687) (1,211,426) (126,110) (303,167) PROVISION FOR INCOME TAXES -- -- -- -- --------------- --------------- --------------- --------------- NET LOSS APPLICABLE TO COMMON SHARES $ (1,869,687) $ (1,211,426) $ (126,110) $ (303,167) --------------- --------------- --------------- --------------- NET LOSS PER COMMON SHARE Basic and Diluted $ (0.00) $ (0.00) $ (0.00) $ (0.00) --------------- --------------- --------------- --------------- WEIGHTED AVERAGE SHARES OUTSTANDING Basic and Diluted 3,709,301,595 568,465,853 3,851,029,089 1,074,619,187 =============== =============== =============== =============== </TABLE> See accompanying footnotes to the condensed consolidated financial statements. 4
TREY RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, <TABLE><CAPTION> 2008 2007 ----------- ----------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(1,869,687) $(1,211,426) Adjustments to reconcile net loss to net cash provided by (used in) operating activities Depreciation and amortization 223,014 103,773 Amortization of debt discounts 73,393 730,101 Amortization of other intangibles -- 147,536 (Gain) loss on revaluation of derivatives 1,286,112 (404,975) Net gain on sale of securities available for sale -- (71,663) Common stock issued for services and compensation -- 227,264 Common stock issued for debt conversion discount 43,084 200,628 Deferred interest income on notes receivable (908) -- Changes in certain assets and liabilities: Accounts receivable (66,860) (68,997) Inventory 11,082 (13,977) Prepaid expenses and other assets 51,484 (42,345) Accounts payable and accrued liabilities 365,410 137,513 Deferred revenue 17,525 19,102 Related party accounts 225,996 108,355 ----------- ----------- Total cash provided by (used in) operating activities 359,645 (139,111) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (11,255) (90,824) Software development costs -- (136,333) Purchase of intangible assets -- (7,000) Net proceeds of sale of securities available for sale -- 201,911 Redemption of notes receivable 67,379 -- ----------- ----------- Total cash provided by (used in) investing activities 56,124 (32,246) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from (repayment of) related party loans (41,005) 3,932 Proceeds from notes payable, capital leases and convertible debentures -- 340,000 Repayment of notes payable, capital leases and convertible debentures (252,467) (222,912) ----------- ----------- Total cash provided by (used in) financing activities (293,472) 121,020 ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 122,297 (50,337) CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 146,443 373,437 ----------- ----------- CASH AND CASH EQUIVALENTS - END OF PERIOD $ 268,740 $ 323,100 =========== =========== CASH PAID DURING THE PERIOD FOR: Interest expense $ -- $ 40,010 =========== =========== Income taxes $ -- $ -- =========== =========== </TABLE> See accompanying footnotes to the condensed consolidated financial statements. 5
TREY RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES For the nine months ended September 30, 2008, the Company: a) Issued 986,111,111 shares of Class A Common Stock with a total value of $145,584 for conversion of $102,500 of principal on outstanding debentures with YA Global Investments, (f/k/a Cornell Capital Partners). For the nine months ended September 30, 2007, the Company: a) Issued 170,000,000 shares of Class A common stock with a value of $88,471 for a conversion of $44,236 for repayment of accrued salaries for two officers of the Company. b) Issued 798,998,473 shares of Class A Common Stock with a total value of $488,504 for conversion of $427,147 of principal on outstanding debentures with YA Global Investments (f.k.a. Cornell Capital Partners) c) Issued 170,000,000 shares of Class A common stock with a value of $79,638 for compensation and bonuses to employees of SWK Technologies, Inc. d) Issued 175,866,802 shares of Class A common stock with a value of $129,031 for conversion of $64,516 of debt for legal services. e) The Company issued 159,724,544 shares of Class A common stock with a value of $60,896 for a conversion of $30,375 to an officer of the Company for repayment of a note payable. f) Issued 2,500,000 shares of Class A common stock with a value of $8,500 for investor relation services to Wall Street Savant Corporation. See accompanying footnotes to the condensed consolidated financial statements. 6
TREY RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2008 AND 2007 NOTE 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Description of business - ----------------------- Trey Resources, Inc. (the "Company"), was incorporated in Delaware on October 3, 2002 as a wholly owned subsidiary of iVoice Inc. On February 11, 2004, the Company was spun off from iVoice, Inc. and is now an independent publicly traded company. On June 2, 2004, the Company acquired SWK, Inc. which is focusing on the business software and information technology consulting market SWK Technologies, Inc., ("SWK"), the surviving entity in the merger and acquisition of SWK, Inc., is a New Jersey-based information technology company, value added reseller, and master developer of licensed accounting software. The Company also publishes its own proprietary supply-chain software, "MAPADOC." The Company sells services and products to various end users, manufacturers, wholesalers and distributor industry clients located throughout the United States. The Company is publicly traded and is currently traded on the NASD Over The Counter Bulletin Board ("OTCBB") under the symbol "TYRIA." Basis of presentation - --------------------- The accompanying unaudited condensed consolidated financial statements include the accounts of Trey Resources, Inc. (the "Company" or "Trey") and its wholly owned subsidiaries, SWK Technologies, Inc. and BTSG Acquisition Corp. On February 11, 2004, the Company was spun off from iVoice, Inc. and is now an independent publicly traded company. These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. It is suggested that these condensed consolidated financial statements be read in conjunction with the December 31, 2007 audited financial statements and the accompanying notes thereto filed with the Securities and Exchange Commission on Form 10-KSB. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation - --------------------------- The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. Use of Estimates - ---------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 7
TREY RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2008 AND 2007 Cash and Cash Equivalents - ------------------------- The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company had cash equivalents at September 30, 2008 and December 31, 2007 of $76,840 and $112,547, respectively. The cash equivalents represent investments in Triple A credit rated money market funds that have 7 day auction rates competitive with current market conditions. The Company maintains cash balances at a financial institution that is insured by the Federal Deposit Insurance Corporation. The Company has no uninsured cash balances at September 30, 2008 and December 31, 2007, respectively. Revenue Recognition - ------------------- Revenue is recognized when persuasive evidence of an agreement exists, delivery has occurred, the amount is fixed or determinable, and cash is received. The Company recognizes revenues from consulting and support services as the services are performed. The assessment of collectability is critical in determining whether revenue should be recognized. As part of the revenue recognition process, we determine whether trade receivables are reasonably assured of collection based on various factors. Revenue and related costs are deferred if we are uncertain as to whether the receivable can be collected. Revenue is deferred but costs are recognized when we determine that the collection of the receivable is unlikely. Hardware and software revenues are recognized when the product is shipped to the customer. The Company separates the software component and the professional services component into two distinct parts for purposes of determining revenue recognition. In that situation where both components are present, software sales revenue is recognized when the cash is received and the product is delivered, and professional service revenue is recognized as the service time is incurred. Commissions are recognized when payments are received, since the Company has no obligation to perform any future services. With respect to the sale of software license fees, the Company recognizes revenue in accordance with Statement of Position 97-2, software Revenue Recognition (SOP 97-2), as amended, and generally recognizes revenue when all of the following criteria are met: (1) persuasive evidence of an arrangement exists generally evidenced by a signed, written purchase order from the customer, (2) delivery of the software product on Compact Disk (CD) or other means to the customer has occurred, (3) the perpetual license fee is fixed or determinable and (4) collectability, which is assessed on a customer-by-customer basis, is probable. With respect to customer support services, upon the completion of one year from the date of sale, considered to be the warranty period, the Company offers customers an optional annual software maintenance and support agreement for subsequent one-year periods. Sales of purchased maintenance and support agreements are recorded as deferred revenue and recognized over the respective terms of the agreements. 8
TREY RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2008 AND 2007 Accounts Receivable - ------------------- Accounts receivables consist primarily of uncollected invoices for maintenance and professional services. Payments for software sales are due in advance of ordering from the software supplier. Payments for maintenance and support plan renewals are due before the beginning of the maintenance period. Payments for professional services are due 50% in advance and the balance on completion of the services. The Company maintains a small provision for bad debts and reviews the provision quarterly. Deferred Revenues - ----------------- Deferred revenues consist primarily of annual telephone support plan revenues that will be earned in future periods. Fair Value of Financial Instruments - ----------------------------------- The Company estimates that the fair value of all financial instruments at September 30, 2008 and December 31, 2007, as defined in FASB 107, does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying condensed consolidated balance sheets. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value, and accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange. Loss Per Common Share - --------------------- SFAS No. 128, "Earnings per Share" requires presentation of basic earnings per share ("basic EPS") and diluted earnings per share ("diluted EPS"). The computation of basic EPS is computed by dividing income available to common stockholders by weighted average number of common shares during the period. Diluted earnings per share gives effect to all dilutive potential common shares outstanding during the period. The computation of diluted EPS does not assume conversion, exercise, or contingent exercise of securities that would have an anti-dilutive effect on earnings resulting from the Company's net loss position. For the nine Months ending September 30, ------------------------------- 2008 2007 -------------- -------------- Net loss from operations $ (1,869,687) $ (1,211,426) ============== ============== Basic and Diluted EPS Purposes 3,709,301,595 568,465,853 ============== ============== Net loss per common share from operations $ (0.00) $ (0.00) ============== ============== 9
TREY RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2008 AND 2007 For the three Months ending September 30, ------------------------------- 2008 2007 -------------- -------------- Net loss from operations $ (126,110) $ (303,167) ============== ============== Basic and Diluted EPS Purposes 3,851,029,089 1,074,619,187 ============== ============== Net loss per common share from operations $ (0.00) $ (0.00) ============== ============== The Company had common stock equivalents of 3,075,000 and 7,075,000 at September 30, 2008 and 2007, respectively. Derivative Liabilities - ---------------------- During April 2003, the Financial Accounting Standards Board issued SFAS 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." The statement requires that contracts with comparable characteristics be accounted for similarly and clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, except in certain circumstances, and for hedging relationships designated after June 30, 2003. The financial statements for the nine months ended September 30, 2008 include the recognition of the derivative liability on the underlying securities issuable upon conversion of the Cornell Convertible Debentures (see note 8). Recent Accounting Pronouncements - -------------------------------- In February 2008, FASB Staff Position ("FSP") FAS No. 157-2, "Effective Date of FASB Statement No. 157" ("FSP No. 157-2") was issued. FSP No. 157-2 defers the effective date of SFAS No. 157 to fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Examples of items within the scope of FSP No. 157-2 are nonfinancial assets and nonfinancial liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods), and long-lived assets, such as property, plant and equipment and intangible assets measured at fair value for an impairment assessment under SFAS No. 144. The partial adoption of SFAS No. 157 on January 1, 2008 with respect to financial assets and financial liabilities recognized or disclosed at fair value in the financial statements on a recurring basis did not have a material impact on the Company's financial statements. See Note 3 for the fair value measurement disclosures for these assets and liabilities. The Company is in the process of analyzing the potential impact of SFAS No. 157 relating to its planned January 1, 2009 adoption of the remainder of the standard. 10
TREY RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2008 AND 2007 In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements -- an amendment of ARB No. 51 ("SFAS 160"). SFAS 160 requires that ownership interests in subsidiaries held by parties other than the parent, and the amount of consolidated net income, be clearly identified, labeled, and presented in the consolidated financial statements within equity, but separate from the parent's equity. It also requires once a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary be initially measured at fair value. Sufficient disclosures are required to clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. SFAS 160 will be effective for the Trust beginning January 1, 2009. Management anticipates that the adoption of SFAS 160 will not have a material impact on the Company's financial statements. In June 2007, the FASB ratified the consensus in EITF Issue No. 07-3 "Accounting for Nonrefundable Payments for Goods and Services to be Used in Future Research and Development Activities" (ETIF 07-04), requiring that nonrefundable advance payments for future research and development activities be deferred and capitalized. Such amounts should be expensed as the related goods are delivered or the related services performed. The statement is effective for fiscal years beginning after December 15, 2007. The adoption of EITF Issue No. 07-3 did not have a material impact on the Company's financial position or results of operations. In June 2007, the FASB ratified Issue No. 06-11 "Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards (ETIF 06-11), which requires entities to record tax benefits on dividends or dividend equivalents that are charged to retained earnings for certain share-based awards to additional paid-in capital. In a share-based payment arrangement, employees may receive dividends or dividend equivalents on awards of non-vested equity shares, non-vested equity share units during the vesting period, and share options until the exercise date. Generally, the payment of such dividends can be treated as deductible compensation for tax purposes. The amount of tax benefits recognized in additional paid-in capital should be included in the pool of excess tax benefits available to absorb tax deficiencies on share-based payment awards. EITF-06-11 is effective for fiscal years beginning after December 15, 2007, and interim periods within those years. The adoption of EITF Issue No. 06-11 did not have a material impact on the Company's financial statements. In December 2007, the FASB issued SFAC No 141(R), "Business Combinations." This statement provides new accounting guidance and disclosure requirements for business combinations. SFAS No 141(R) is effective for business combinations which occur in the first fiscal year beginning on or after December 15, 2008. The Company is currently assessing the effect of EITF Issue No. 07-1 on its financial statements, but it is not expected to be material. In December 2007, the FASB finalized the provisions of the Emerging Issues Task Force (EITF) Issue No. 07-1, "Accounting for Collaborative Arrangements." This EITF Issue provides guidance and requires financial statement disclosures for collaborative arrangements. EITF Issue No. 07-1 is effect for financial statements issued for fiscal years beginning after December15, 2008. The Company is currently assessing the effect of EITF Issue No. 07-1 on its financial statements, but it is not expected to be material. 11
TREY RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2008 AND 2007 In March 2008, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133" ("SFAS 161"), which modifies and expands the disclosure requirements for derivative instruments and hedging activities. SFAS 161 requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation and requires quantitative disclosures about fair value amounts and gains and losses on derivative instruments. It also requires disclosures about credit-related contingent features in derivative agreements. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. SFAS 161 encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The adoption of SFAS 161 is not expected to have a material impact on our consolidated financial condition or results of operations. In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible Assets. FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under SFAS 142, Goodwill and Other Intangible Assets, and adds certain disclosures for an entity's accounting policy of the treatment of the costs, period of extension, and total costs incurred. FSP 143-3 must be applied prospectively to intangible assets acquired after January 1, 2009. The Company is currently evaluating the impact that FSP 142-3 will have on its financial position or results of operations. In May 2008, the Financial Accounting Standards Board (the "FASB") issued FAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("FAS 162"). This statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in accordance with GAAP. With the issuance of this statement, the FASB concluded that the GAAP hierarchy should be directed toward the entity and not its auditor, and reside in the accounting literature established by the FASB as opposed to the American Institute of Certified Public Accountants (AICPA) Statement on Auditing Standards No. 69, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles." This statement is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles." The adoption of FAS 162 is not expected to have a material impact on the Company's results from operations or financial position. NOTE 3 - FAIR VALUE MEASUREMENTS On January 1, 2008, the Company adopted SFAS No. 157 "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, provides a consistent framework for measuring fair value under Generally Accepted Accounting Principles and expands fair value financial statement disclosure requirements. SFAS 157's valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, 12
TREY RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2008 AND 2007 while unobservable inputs reflect our market assumptions. SFAS 157 classifies these inputs into the following hierarchy: Level 1 Inputs- Quoted prices for identical instruments in active markets. Level 2 Inputs- Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. Level 3 Inputs- Instruments with primarily unobservable value drivers. The following table represents the fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2008. <TABLE><CAPTION> Level I Level II Level III Total ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Convertible debentures $ -- $1,574,100 $ -- $1,574,100 Notes payable and capital leases -- 90,344 -- 90,344 Notes payable to related parties -- 366,107 -- 366,107 Derivative liabilities -- 1,502,609 -- 1,502,609 Warrant liabilities -- 75,450 -- 75,450 ---------- ---------- ---------- ---------- Total Liabilities $ -- $3,608,610 $ -- $3,608,610 ========== ========== ========== ========== </TABLE> NOTE 4 - NOTES RECEIVABLE In January 2005, the Company purchased $328,695 of Voyager One, Inc. convertible debentures from YA Global (f/k/a Cornell Capital Partners). The debentures, which bear interest at the rate of 5% per annum, have a three year term, and are convertible into shares of Voyager One, Inc. Common Stock at a conversion price equal to the lower of (i) 150% of the lowest initial bid price of the common stock as submitted by a market maker and approved by the NASD or (ii) 50% of the lowest closing bid price of the common stock for the five trading days immediately preceding the conversion date. The convertible debentures are convertible at the holder's option any time up to the maturity date. In May 2007 the Company assigned all of its rights to the Voyager securities to THI, Inc. During the nine months ended September 30, 2008, THI, Inc. paid down the balance of the promissory note in the amount of $67,379, which included accrued interest of $4,349. In November 2004, the Company sold certain intellectual property, representing the software codes of the Automatic Reminder to Laser Energetics, Inc. (LEI), a New Jersey based technology company. As part of the sale, the Company was issued a convertible debenture in the amount of $250,000. The debenture, which bears interest at the rate of 3% per annum, has a five year term, and is convertible into shares of LEI Class A Common Stock at a rate equal to fifty percent (50%) of the average closing bid price of the Class A Common Stock for the four trading days immediately preceding the conversion date. The convertible debenture is convertible at the holder's option. At December 31, 2007, the Company determined that value of the debenture was 13
TREY RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2008 AND 2007 significantly impaired and the entire debenture, including the accrued interest income for 2007 and 2006, were written down to zero as a provision for doubtful accounts. On September 15, 2008, the Board of Directors authorized the Company to assign to Mr. Mahoney and Mr. Meller the Note in consideration for their agreement to reduce their accrued compensation by $500 each. NOTE 5 - INTANGIBLE ASSETS The acquisition of the client lists of Wolen Katz and AMP-Best Consulting in 2006 is currently valued at $150,953, which is net of accumulated amortization of $442,278. These intangible assets are being amortized over a three-year period. The amortization expense for the nine months ended September 30, 2008 is $147,728. Management reviewed these intangible assets for impairment at September 30, 2008 and December 31, 2007 and has determined that no further write-down for impairment is required. SWK Technologies capitalizes ongoing development costs of their MAPADOC product. At September 30, 2008, intangible assets totaled $14,669 net of accumulated amortization of $16,656. This is included in deposits and other assets on the balance sheet. NOTE 6 - GOING CONCERN The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern. The Company has suffered recurring losses and current liabilities exceeded current assets by approximately $6.0 million, as of September 30, 2008. These matters raise substantial doubt about the Company's ability to continue as a going concern. The recoverability of a major portion of the recorded asset amounts shown in the accompanying condensed consolidated balance sheet is dependent upon continued operations of the Company, which in turn, is dependent upon the Company's ability to raise capital and/or generate positive cash flows from operations. In addition to developing new products, obtaining new customers and increasing sales to existing customers, management plans to achieve profitability through acquisitions of companies in the business software and information technology consulting market with solid revenue streams, established customer bases, and generate positive cash flow. These condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence. NOTE 7 - NOTES PAYABLE During the nine months ended September 30, 2008, SWK Technologies, Inc. drew down $290,000 and repaid $325,000 on its line of credit with Fleet National Bank, a Bank of America company. The secured line of credit bears interest at prime plus 1% (6.00% at September 30, 14
2008) per annum, which can change with the fluctuations in the prime rate. Monthly payments of interest only in arrears shall be due and payable on the 4th of each month and these have been paid. Principal shall be due and payable on demand from Fleet National Bank. As of September 30, 2008, the aggregate balance of the line of credit is $0. Interest payments during the nine months ending September 30, 2008 were $2,875. NOTE 8 - CONVERTIBLE DEBENTURES PAYABLE On June 30, 2003, the Company issued $40,000 and on September 19, 2003, the Company issued an additional $100,000 in 5% convertible debentures to the private investors under a subscription agreement. During the nine months September 30, 2008, no additional payments have been made. Total outstanding principal balance of the convertible debentures at September 30, 2008 as $15,000, plus accrued interest of $5,246. The notes were due March 25, 2005. In the event of default and/or on non-performance pursuant to the Securities Purchase Agreement, Registration Rights Agreement, this Convertible Debenture, the Escrow Agreement, or the Transfer Agent Agreement, this Convertible Debenture shall be immediately due and payable and repayment shall be guaranteed pursuant to the Guaranty Agreement dated January 27, 2003. On December 30, 2005, the Company entered into a Securities Purchase Agreement with Cornell Capital Partners, LP ("Cornell"). Pursuant to such purchase agreement, Cornell shall purchase up to $2,359,047 of secured convertible debentures which shall be convertible into shares of the Company's Class A common stock. Pursuant to the Securities Purchase Agreement, two Secured Convertible Debentures were issued on December 30, 2005 for an aggregate of $1,759,047. A portion of this financing was used to convert promissory notes and accrued interest therefrom equal to $1,159,047 into new secured convertible debentures and the balance was new financing in the form of secured convertible debentures equal to $600,000 with interest payable at the rate of 7.5% per annum to be issued and sold on the closing of this Securities Purchase Agreement and a second secured convertible debenture equal to $600,000 with interest payable at the rate of 7.5% per annum to be issued and sold two business days prior to the filing of the registration statement that will register the common stock shares issuable upon conversion of the secured convertible debentures. On May 2, 2006, the second $600,000 was funded 2 business days prior to the date the registration statement was filed with the United States Securities and Exchange Commission. Interest on the outstanding principal balance of the Secured Convertible Debentures accrues at the annual rate of 7.5%. Payment of principal and accrued interest shall be paid on or before December 30, 2007 on the 2005 debentures and May 2, 2008 for the 2006 debenture. The Company has the option to redeem a portion or all of the outstanding debentures at 120% of the amount redeemed plus accrued interest. The holder shall be entitled to convert in whole or in part at any time and from time to time, any amount of principal and accrued interest at a price equal to 90% of the lowest closing bid price of the Common Stock during the 30 trading days immediately preceding the conversion date, as quoted by Bloomberg, LP ("Conversion Price"). In the event of a default, the full principal amount of this Debenture, together with interest and other amounts owing, shall be due and payable in cash, provided however, the holder of the debenture may request payment of such amounts in Common Stock of the Obligor at the Conversion Price then in-effect. A holder of the debenture may not convert this 15
TREY RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2008 AND 2007 Debenture or receive shares of Common Stock as payment of interest hereunder to the extent such conversion or receipt of such interest payment would result in the holder of the debenture beneficially owning in excess of 4.9% of the then issued and outstanding shares of Common Stock, including shares issuable upon conversion of, and payment of interest on, this Debenture. During the nine months ended September 30, 2008, the Company issued 986,111,111 shares of Class A common stock for repayment of $102,500 of principal on the convertible debenture held by YA Global Investments, f/k/a Cornell Capital Partners. The aggregate principal value of the debentures at September 30, 2008 is $1,559,100. Debt discount has been fully amortized. This discount is being amortized over the life of the debenture and is being recorded as a charge to amortization of discount on debt conversion on the statement of operations. As of September 30, 2008, the Company is in default on all of the debentures and is currently in negotiations with YA Global to cure the default. NOTE 9 - DERIVATIVE LIABILITY In accordance with SFAS 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" and EITF 00-19, "ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS INDEXED TO, AND POTENTIALLY SETTLED IN, A COMPANY'S OWN STOCK," the conversion feature associated with the Cornell Secured Convertible Debentures represents embedded derivatives. As such, the Company had recognized embedded derivatives in the amount of $1,946,936 as a liability in the accompanying condensed consolidated balance sheet, and it is now measured at its estimated fair value of $213,935. In addition the Company issued 4 million warrants which were valued at $75,450 and are not subject to revaluation. These warrants are included in the condensed consolidated balance sheets as warrant liability. The estimated fair value of the embedded derivative has been calculated based on a Black-Scholes pricing model using the following assumptions: Fair market value of stock $0.000125 Exercise price $0.000113 Dividend yield 0.00% Risk free interest rate 4.00% Expected volatility 166.79% Expected life 3 Years NOTE 10 - DUE TO RELATED PARTIES Pursuant to the Spin-off from iVoice, the Company has assumed a promissory note totaling $250,000 payable to Jerome Mahoney, President and Chief Executive Officer of iVoice and Non- Executive Chairman of the Board of Trey Resources. At September 30, 2008 the principal on this note was $89,125 and accrued interest was $72,972. This is included in notes payable to related parties on the balance sheet. Pursuant to the employment contract dated January 1, 2003 between the Company and Jerome 16
TREY RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2008 AND 2007 Mahoney, the Non-Executive Chairman of the Board, Mr. Mahoney is to receive a salary of $180,000 per year subject to 10% increases every year thereafter, as well as a monthly unaccountable travel expense allowance of $725, an auto allowance of $800 and a health insurance allowance of $1,400 per month. Also, pursuant to the employment contract with Mr. Mahoney, following the completion of the Spin-off from its former parent company, iVoice Inc., which occurred on February 11, 2004, Mr. Mahoney is entitled to receive a one-time payment of $350,000. Total amounts owed to Mr. Mahoney at September 30, 2008, representing unpaid salary, unpaid expense and auto allowances, the one-time payment in connection with the Spin-off, liabilities assumed in the Spin-off and interest on the liabilities assumed in the Spin-off totaled $925,585. Pursuant to the employment contract dated September 15, 2003 between the Company and Mark Meller, the President, Chief Executive Officer and Chief Financial Officer of Trey Resources, Mr. Meller is to receive a salary of $180,000 per year subject to 10% increases every year thereafter, as well as a monthly unaccountable travel expense allowance of $600 and an auto allowance of $800. Also, pursuant to the employment contract dated September 15, 2003 between the Company and Mr. Meller, following the completion of the Spin-off from its former parent company, iVoice Inc., which occurred on February 11, 2004, Mr. Meller is entitled to receive a one-time payment of $350,000. In addition, Mr. Meller was awarded a cash bonus of $114,800 on September 14, 2004. Total amounts owed to Mr. Meller at September 30, 2008, representing unpaid salary, unpaid expense and auto allowances, and the one-time payment in connection with the Spin-off, totaled $708,804. Mr. Mahoney and Mr. Meller have agreed to defer payment of any monies due and owing them representing fixed compensation, which have been accrued on the Company's balance sheet, and the one-time payment in connection with the Spin-off, until such time as the Board of Directors determines that the Company has sufficient capital and liquidity to make such payments. Mr. Mahoney and Mr. Meller have further agreed, however, to accept payment or partial payment, from time to time, as determined in the sole discretion of the Board of Directors in the form of cash, the Company's Class A Common Stock and/or the Company's Class B Common Stock. In connection with the acquisition of SWK, Inc, the Company assumed a note payable to Gary Berman, VP - MAPADOC EDI Service of SWK Technologies, Inc., our wholly owned subsidiary. On April 1, 2004, Mr. Berman loaned the company $25,000 pursuant to the Agreement and Plan of Merger and Reorganization among Trey, SWK and SWK Technologies, Inc. The unsecured note bears interest at 5% per annum and is payable in bi-weekly amounts of $217. At September 30, 2008, the outstanding balance to Mr. Berman was $4,259. This is included in notes payable to related parties on the balance sheet. In connection with the acquisition of SWK, Inc, the Company assumed a note payable to Lynn Berman, President of SWK Technologies, Inc., our wholly owned subsidiary. On April 1, 2004, Ms. Berman loaned the company $25,000 pursuant to the Agreement and Plan of Merger and Reorganization among Trey, SWK and SWK Technologies, Inc. The unsecured note bears interest at 5% per annum and is payable in bi-weekly amounts of $217. At September 30, 2008, the outstanding balance to Ms. Berman was $4,260. This is included in notes payable to related parties on the balance sheet. 17
TREY RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2008 AND 2007 Pursuant to the asset purchase agreement with AMP-Best, SWK Technologies, Inc. issued a $380,000 promissory note to Crandall Melvin III, former officer of AMP-Best and current Chief Financial Officer of SWK Technologies, Inc. The note carries an interest rate of 7.75% and is payable in 60 monthly payments, commencing 120 days from the closing. As of September 30, 2008, the principal balance on the note is $268,463. This is included in notes payable to related parties on the balance sheet. NOTE 11 - CAPITAL STOCK In accordance with its Certificate of Incorporation as amended on April 24, 2003, the Company is authorized to issue 10,000,000,000 shares of Class A common stock at $.00001 par value; 50,000,000 shares of Class B Common Stock, par value $.00001; and 20,000,000 shares of Class C Common Stock, par value $.00001. Additionally, the board of directors has the right to prescribe and authorize the issuance of 1,000,000 preferred shares, $1.00 par value. PREFERRED STOCK Preferred Stock consists of 1,000,000 shares of authorized preferred stock with $1.00 par value. As of September 30, 2008, no shares were issued or outstanding. CLASS A COMMON STOCK Class A Common Stock consists of the following as of September 30, 2008: 10,000,000,000 shares of authorized common stock with a par value of $.00001, 3,745,473,533 shares were issued and outstanding. Each holder of Class A common stock is entitled to receive ratably dividends, if any, as may be declared by the Board of Directors out of funds legally available for the payment of dividends. The Company has never paid any dividends on its common stock and does not contemplate doing so in the foreseeable future. The Company anticipates that any earnings generated from operations will be used to finance the growth objectives. For the nine months ending September 30, 2008, the company had the following transactions in its Class A common stock: >> The Company issued 986,111,111 shares of Class A common stock with a total value of $145,584 for conversion of $102,500 of principal on convertible debentures with YA Global Investments, f/k/a Cornell Capital Partners. CLASS B COMMON STOCK Class B Common Stock consists of 50,000,000 shares of authorized common stock with a par value of $0.00001. Class B stock has voting rights of 1 to 100 with respect to Class A Common Stock. As of September 30, 2008, no shares were issued and outstanding; Class B common 18
TREY RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2008 AND 2007 stockholders are entitled to receive dividends in the same proportion as the Class B Common Stock conversion and voting rights have to Class A Common Stock. A holder of Class B Common Stock has the right to convert each share of Class B Common Stock into the number of shares of Class A Common Stock determined by dividing the number of Class B Common Stock being converted by a 50% discount of the lowest price that Trey had ever issued its Class A Common Stock. Upon the liquidation, dissolution, or winding - up of the Company, holders of Class B Common Stock will be entitled to receive distributions. CLASS C COMMON STOCK Class C Common Stock consists of 20,000,000 shares of authorized common stock with a par value of $0.00001. Class C stock has voting rights of 1 vote for every 1,000 shares with respect to Class A Common Stock. As of September 30, 2008, no shares were issued or outstanding. 19
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Readers should read the following discussion in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this filing as well as our audited consolidated financial statements and related notes for the year ending December 31, 2007 filed with Form 10-KSB. The following discussion contains forward-looking statements. Please see "Forward Looking Statements - Cautionary Factors" for a discussion of uncertainties, risks and assumptions associated with these financial statements OVERVIEW - -------- With the acquisition of SWK in 2004, the Board of Directors decided that Trey will focus on the business software and information technology consulting market, and is looking to acquire other companies in this industry. SWK Technologies, Inc., Trey's wholly owned subsidiary and the surviving company from the acquisition and merger with SWK, Inc., is a New Jersey-based information technology company, value added reseller, and master developer of licensed accounting software published by Sage Software. SWK Technologies also publishes its own proprietary supply-chain software, the Electronic Data Interchange (EDI) solution "MAPADOC." SWK Technologies sells services and products to various end users, manufacturers, wholesalers and distribution industry clients located throughout the United States, along with network services provided by the Company. On June 2, 2006, SWK Technologies, Inc. completed the acquisition of certain assets of AMP-Best Consulting, Inc. of Syracuse, New York. AMP-Best Consulting, Inc. is an information technology company and value added reseller of licensed accounting software published by Sage Software. AMP-Best Consulting, Inc. sells services and products to various end users, manufacturers, wholesalers and distribution industry clients located throughout the United States, with special emphasis on companies located in the upstate New York region. Management is uncertain that it can generate sufficient cash to sustain its operations in the next twelve months, or beyond. It is unclear whether the acquisition of SWK, Inc, will result in a reasonably successful operating business and can give no assurances that we will be able to generate sufficient revenues to be profitable, obtain adequate capital funding or continue as a going concern. NINE MONTHS ENDING SEPTEMBER 30, 2008 COMPARED TO NINE MONTHS ENDING SEPTEMBER - ------------------------------------------------------------------------------ 30, 2007 - -------- Since the acquisition of SWK, Inc., on June 2, 2004, all revenues reported by Trey are derived from the sales and service of Sage Software and MAPADOC products to various end users, manufacturers, wholesalers and distribution industry clients located throughout the United States, along with network services provided by the Company. Revenues for the nine-month period ended September 30, 2008 were $5,711,263 as compared to sales of $5,562,447 for the nine-month period ending September 30, 2007, an increase of $148,816 (2.7%). These sales were all generated by the Company's operating subsidiary, SWK 20
Technologies ("SWKT"). This increase is primarily due to increased focus by management on marketing and sales across all its product lines. The gross profit for the nine months ended September 30, 2008 of $2,009,849, which is 35.2% of sales, increased $26,883 (1.4%) when compared to the nine months ended September 30, 2007, which totaled $1,982,966, which is 35.7% of sales. The mix of products being sold by the company changes from time to time, and sometimes causes the overall gross margin percentage to vary. Sales of the larger Sage Software products carries lower gross margin percentage as the relative discount percentage from the supplier decreases. There was no significant variation in the gross margin percentage for the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007. Total operating expenses were $2,363,696 for the nine months ended September 30, 2008, a decrease of $212,653 (8.3%) as compared to $2,576,349 for the nine months ended September 30, 2007. This decrease is attributed to management's efforts to reduce expenses in all areas. Total other income (expense) for the nine months ended September 30, 2008 was an expense of $1,515,850 as compared to an expense of $618,030 for the nine months ended September 30, 2007, an increase of $897,820. The increase in other expenses primarily reflects an increase in loss on revaluation of derivatives of $1,691,087 offset partially by lower amortization of discount on debt conversion of $656,708. Net loss for the nine months ended September 30, 2008 was $1,869,687 as compared to net loss of $1,211,426 for the nine months ended September 30, 2007. The change in net loss of was the result of the factors discussed above. THREE MONTHS ENDING SEPTEMBER 30, 2008 COMPARED TO THREE MONTHS ENDING SEPTEMBER - -------------------------------------------------------------------------------- 30, 2007 - -------- Revenues for the three-month period ended September 30, 2008 were $1,833,669 as compared to sales of $1,648,227 for the three-month period ending September 30, 2007, an increase of $185,442 (11.3%). This increase is primarily due to increased management focus on closing new deals. The gross profit for the three months ended September 30, 2008 of $594,003, which is 32.4% of sales, decreased $49,709 (7.7%) when compared three months ended September 30, 2007, which totaled $643,712, or 39.0% of sales. Small variations in the gross profit % percentage can be expected from time to time based on the configuration of the installations. As an example, sales of the larger Sage Software products carries lower gross margin percentage as the relative discount percentage from the supplier decreases. Total operating expenses were $740,837 for the three months ended September 30, 2008, a decrease of $64,250 (8.0%) over the three month period ending September 30, 2007, which totaled $805,087. This decrease is attributed to management's efforts to reduce expenses in all areas. 21
Total other income (expense) for the three months ended September 30, 2008 was income of $20,724, an increase of $162,516 over the expense of $141,792 for the three months ended September 30, 2007. The increase in other income primarily reflects the lower amortization of discount on debt conversion of $243,367. Net loss for the three months period ended September 30, 2008 was $126,110 as compared to net loss of $303,167 for the three months ended September 30, 2007. The change in net loss of was the result of the factors discussed above. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- We are currently seeking additional operating income opportunities through potential acquisitions or investments. Such acquisitions or investments may consume cash reserves or require additional cash or equity. Our working capital and additional funding requirements will depend upon numerous factors, including: (i) strategic acquisitions or investments; (ii) an increase to current company personnel; (iii) the level of resources that we devote to sales and marketing capabilities; (iv) technological advances; and (v) the activities of competitors. To date, Trey has incurred substantial losses, and will require financing for working capital to meet its operating obligations. The current cash provided by operations have been positive and while we believe that we have capital sufficient for the next 6 months, we will subsequently need to raise additional capital to fund our future operations. We anticipate that we will require financing on an ongoing basis for the foreseeable future. On December 30, 2005, the Company entered into a Securities Purchase Agreement with Cornell Capital Partners, LP (n/k/a/ YA Global Investments "YA Global"). Pursuant to such purchase agreement, YA Global purchased $2,359,047 of secured convertible debentures which shall be convertible into shares of the Company's Class A common stock. Pursuant to the Securities Purchase Agreement, two Secured Convertible Debentures were issued on December 30, 2005 for an aggregate of $1,759,047. A portion of this financing was used to convert promissory notes and accrued interest therefrom equal to $1,159,047 into new secured convertible debentures and the balance was new financing in the form of secured convertible debentures equal to $600,000 with interest payable at the rate of 7.5% per annum to be issued and sold on the closing of this Securities Purchase Agreement and a second secured convertible debenture equal to $600,000 with interest payable at the rate of 7.5% per annum to be issued and sold two business days prior to the filing of the registration statement that will register the common stock shares issuable upon conversion of the secured convertible debentures. The debentures were due on December 30, 2007 and May 2, 2008, respectively, and carry an interest rate of 7.5% per annum. The principal and accrued interest on the debentures are convertible into shares of Class A Common Stock at a price per share equal to 90% of the lowest closing bid price of our Class A Common Stock for the thirty trading days immediately preceding conversion. The aggregate balance due of the YA Global debentures at September 30, 2008 is $1,559,100 for principal and $399,898 for interest. As of September 30, 2008, the Company is in default of all the YA Global debentures and is currently in negotiations with YA Global to cure the default. During the nine-month period ending September 30, 2008, SWK Technologies, Inc. drew down 22
$290,000 and repaid $325,000 on its line of credit with Fleet National Bank, a Bank of America company. The secured line of credit bears interest at prime plus 1% per annum, which can change with the fluctuations in the prime rate. Monthly payments of interest only in arrears shall be due and payable on the 4th of each month and these have been paid. Principal shall be due and payable on demand from Fleet National Bank. As of September 30, 2008, the outstanding balance payable to Fleet totaled $0 and there remains $250,000 of borrowing availability. During the nine months ended September 30, 2008, Trey had a net increase in cash of $122,297. Trey's principal sources and uses of funds were as follows: CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES. Trey had cash provided by operating activities of $359,645 for the nine months ended September 30, 2008, an increase of $498,756 as compared to cash used for operating activities of $139,111 for the nine months ended September 30, 2007. This increase in primarily attributed to the increase in accounts payable and accrued expenses. Management has been keeping tight control on the cash and expenses and has been leveraging their funding needs through related party accounts. CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES. Investing activities for the nine months ended September 30, 2008 provided cash of $56,124 from cash redemptions of the notes receivable offset partially by purchases of property and equipment. For the nine months ended September 30, 2007, the Company used $32,246 in investing activities from net proceeds of $201,911 from the sales of securities offset by $90,824 was used to purchase of equipment and $136,333 for software development costs. CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES. Financing activities in the nine months ended September 30, 2008 used a total of $293,472 in cash as compared to providing $121,020 of cash for the nine months ended September 30, 2007. This decline in cash used in financing activities is the result of lower proceeds from notes payable, convertible debentures and capital leases of $340,000. OFF BALANCE SHEET ARRANGEMENTS - ------------------------------ During the nine months ended September 30, 2008, we did not engage in any material off-balance sheet activities nor have any relationships or arrangements with unconsolidated entities established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities nor do we have any commitment or intent to provide additional funding to any such entities. FORWARD LOOKING STATEMENTS - CAUTIONARY FACTORS - ----------------------------------------------- Certain information included in this Form 10-Q and other materials filed or to be filed by us with the Securities and Exchange Commission (as well as information included in oral or written statements made by us or on our behalf), may contain forward-looking statements about our current and expected performance trends, growth plans, business goals and other matters. These statements may be contained in our filings with the Securities and Exchange Commission, in our 23
press releases, in other written communications, and in oral statements made by or with the approval of one of our authorized officers. Information set forth in this discussion and analysis contains various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Private Securities Litigation Reform Act of 1995 (the "Act") provides certain "safe harbor" provisions for forward-looking statements. The reader is cautioned that such forward-looking statements are based on information available at the time and/or management's good faith belief with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Forward-looking statements speak only as of the date the statement was made. We assume no obligation to update forward-looking information to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information. Forward-looking statements are typically identified by the use of terms such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "might," "plan," "predict," "project," "should," "will," and similar words, although some forward-looking statements are expressed differently. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. 24
ITEM 4(T). CONTROLS AND PROCEDURES MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING. Management of the Company has evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer of the Company had concluded that the Company's disclosure controls and procedures as of the period covered by this Quarterly Report on Form 10-Q were not effective for the following reasons: a) The deficiency was identified as the Company's limited segregation of duties amongst the Company's employees with respect to the Company's control activities. This deficiency is the result of the Company's limited number of employees. This deficiency may affect management's ability to determine if errors or inappropriate actions have taken place. Management is required to apply its judgment in evaluating the cost-benefit relationship of possible changes in our disclosure controls and procedures. b) The deficiency was identified in respect to the Company's Board of Directors. This deficiency is the result of the Company's limited number of external board members. This deficiency may give the impression to the investors that the board is not independent from management. Management and the Board of Directors are required to apply their judgment in evaluating the cost-benefit relationship of possible changes in the organization of the Board of Directors. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. Management of the Company has also evaluated, with the participation of the Chief Executive Officer of the Company, any change in the Company's internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q and determined that there was no change in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 25
PART II - OTHER INFORMATION ITEM 3. DEFAULTS UPON SENIOR SECURITIES As of September 30, 2008, the Company was in default of all of the Secured Convertible Debentures held by YA Global Investments LP. As of September 30, 2008, the total principal amount due on these debentures was $1,559,100 and the total accrued interest was $399,898. As of the date of this filing, management is currently in negotiations with holder of these debentures to cure the default. ITEM 5. OTHER INFORMATION (b) The Company does not have a standing nominating committee or a committee performing similar functions as the Company's Board of Directors consists of only two members and therefore there would be no benefit in having a separate nominating committee that would consist of the same number of members as the full board of directors. Both members of the Board of Directors participate in the consideration of director nominees. ITEM 6. EXHIBITS 31.1 Rule 13a-14(a)/15d-14(a) Certifications. 32.1 Certification of Chief Executive and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 26
SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized. Trey Resources, Inc. By: /s/ Mark Meller Date: November 19, 2008 -------------------- Mark Meller, President, Chief Executive Officer and Principal Financial Officer In accordance with the Exchange Act, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By: /s/ Mark Meller Date: November 19, 2008 -------------------- Mark Meller, President, Chief Executive Officer and Principal Financial Officer 27
INDEX OF EXHIBITS 31.1 Rule 13a-14(a)/15d-14(a) Certifications. 32.1 Certification of Chief Executive and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 28