Cannapowder (CAVG) 10-Q 2008 Q3 Quarterly report

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

o TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File Number: 000-26027

SMART ENERGY SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

Nevada	20-3353835
(State or other jurisdiction of incorporation)	(I.R.S. Employer Identification Number)

210 West Parkway, #7, Pompton Plains, NJ 07444

(Address of principal executive offices)

(973) 248-8008

(Registrant's telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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 o

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer           o
Non-accelerated filer   o	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 o No x

The number of shares of common stock outstanding as of November 10, 2008 was 106,191,313.

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	14
Item 4T.	Controls and Procedures	14
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	14
Item 1A.	Risk Factors	15
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	15
Item 3.	Defaults Upon Senior Securities	15
Item 4.	Submission of Matters to a Vote of Security Holders	15
Item 5.	Other Information	15
Item 6.	Exhibits	15
SIGNATURES		16
CERTIFICATIONS

2

PART I.

FINANCIAL INFORMATION

Item 1. Financial Statements.

SMART ENERGY SOLUTIONS, INC.
Balance Sheets
ASSETS
	June 30,			December 31,
	2008			2007
	(Unaudited)
CURRENT ASSETS
Cash	$	293,182		$	70,902
Accounts receivable, net		395,289			259,552
Inventory		773,371			955,912
Prepaid expenses		485			485
Total Current Assets		1,462,327			1,286,851
PROPERTY AND EQUIPMENT, net		34,595			42,062
OTHER ASSETS
Trademark, net		572			715
Deposits		23,700			23,700
Battery Brain technology, net		18,238			23,449
Total Other Assets		42,510			47,864
TOTAL ASSETS	$	1,539,432		$	1,376,777
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses	$	648,858		$	481,060
Bank overdraft		-			52,294
Deferred revenue		-			140,000
Convertible debt, net		-			1,475,613
Total Current Liabilities		648,858			2,148,967
TOTAL LIABILITIES		648,858			2,148,967
COMMITMENTS		-			-
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock:no par value;1,000,000 shares
authorized; none outstanding
Common stock, no par value; 500,000,000 shares authorized; 104,724,950
and 82,022,679 shares issued and outstanding, respectively		20,698,819			15,722,872
Accumulated deficit		(19,808,245	)		(16,495,062	)
Total Stockholders' Equity (Deficit)		890,574			(772,190	)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)	$	1,539,432		$	1,376,777
The accompanying notes are an integral part of these condensed financial statements.

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SMART ENERGY SOLUTIONS, INC.
Statements of Operations
(Unaudited)
	For the Three						For the Six
	Months Ended						Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
REVENUES	$	492,828		$	190,014		$	890,173		$	827,836
COST OF GOODS SOLD		204,916			68,080			463,190			465,699
GROSS PROFIT		287,912			121,934			426,983			362,137
OPERATING EXPENSES
General and administrative		471,227			799,294			845,183			1,487,046
Marketing and advertising		40,358			71,853			100,232			248,687
Consultation fees		1,197,681			1,761,317			1,597,937			2,949,881
Total Expenses		1,709,266			2,632,464			2,543,352			4,685,614
LOSS FROM OPERATIONS		(1,421,354	)		(2,510,530	)		(2,116,369	)		(4,323,477	)
OTHER INCOME (EXPENSES)
Interest expense		(373,441	)		(144,725	)		(432,038	)		(289,451	)
Loss on extinguishment of debt		(768,990	)		-			(768,990	)		-
Interest income		2,205			11,736			4,214			25,081
Total Other Income (Expenses)		(1,140,226	)		(132,989	)		(1,196,814	)		(264,370	)
NET LOSS BEFORE INCOME TAXES		(2,561,580	)		(2,643,519	)		(3,313,183	)		(4,587,847	)
PROVISION FOR INCOME TAXES		-			-			-			-
NET LOSS	$	(2,561,580	)	$	(2,643,519	)	$	(3,313,183	)	$	(4,587,847	)
BASIC LOSS PER SHARE	$	(0.03	)	$	(0.03	)	$	(0.04	)	$	(0.06	)
BASIC WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING		87,020,861			77,967,636			85,187,914			76,770,493
The accompanying notes are an integral part of these condensed financial statements.

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SMART ENERGY SOLUTIONS, INC.
Statements of Cash Flows
(Unaudited)
	For the Six
	Months Ended
	June 30,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(3,313,183	)	$	(4,587,847	)
Adjustments to reconcile net loss to
net cash used by operating activities:
Warrants and options issued for services		997,735			1,044,589
Common stock issued for services		50,000			1,643,873
Amortization of debt discount		349,859			184,451
Depreciation and amortization		12,821			94,049
Loss on extinguishment of debt		768,990			-
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses		-			144,587
(Increase) decrease in accounts receivable		(135,737	)		845,557
(Increase) decrease in inventory		182,541			(716,869	)
Increase (decrease) in deferred revenue		(140,000	)		-
Increase (decrease) in accounts payable and
and accrued expenses		351,548			(74,828	)
Net Cash Used by Operating Activities		(875,426	)		(1,422,438	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment		-			(2,000	)
Net Cash Used by Operating Activities		-			(2,000	)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of bank overdraft		(52,294	)		(80,255	)
Proceeds from notes payable		500,000			-
Common stock issued for cash		650,000			1,464,917
Net Cash Provided by Financing Activities		1,097,706			1,384,662
NET INCREASE (DECREASE) IN CASH		222,280			(39,776	)
CASH AT BEGINNING OF PERIOD		70,902			963,627
CASH AT END OF PERIOD	$	293,182		$	923,851
The accompanying notes are an integral part of these condensed financial statements.

5

SMART ENERGY SOLUTIONS, INC.

Statements of Cash Flows (Continued)

(Unaudited)

	For the Six
	Months Ended
	June 30,
	2008		2007
SUPPLIMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Common stock issued for debt conversion	$	2,000,000	$	-
Warrants and options issued for services	$	997,735	$	1,044,589
Common stock issued for services	$	50,000	$	1,643,873
Common stock issued for accrued interest	$	183,750	$	-
Cash Paid for:
Interest	$	-	$	150,000
Income taxes	$	-	$	-

The accompanying notes are an integral part of these condensed financial statements.

6

SMART ENERGY SOLUTIONS, INC.

Notes to the Condensed Financial Statements

June 30, 2008 and December 31, 2007

NOTE 1 - 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 June 30, 2008, and for all periods presented herein, have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted 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 December 31, 2007 audited financial statements. The results of operations for the periods ended June 30, 2008 and 2007 are not necessarily indicative of the operating results for the full years.

NOTE 2 -GOING CONCERN

The Company’s financial statements are prepared using generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet established an ongoing source of revenues sufficient to cover its operating costs and allow it to continue as a going concern. Historically, the Company has incurred significant annual losses, which have resulted in an accumulated deficit of $19,808,245 at June 30, 2008 which raises substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company increasing sales to the point it becomes profitable. The Company may need to raise additional capital for marketing to increase its sales. If the Company is unable to increase sales sufficiently or obtain adequate capital, it could be forced to cease operations. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty.

Management plans to increase sales by increasing its marketing program and to obtain additional capital from the private placement of shares of its common stock. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans.

NOTE 3 -EQUITY ACTIVITY

During the three months ended June 30, 2008, the Company issued 4,545,453 shares of its common stock at $0.11 per share, with a warrant attached to each 4 shares for the purchase of an additional share at $0.11, for an aggregate cash inflow of $500,000 through debt conversion. During the three months ended June 30, 2008, the Company issued 250,000 shares of its common stock valued at $0.20 per share to a consultant for services totaling $50,000. During the three months ended June 30, 2008, the Company issued 15,306,818 shares of its common stock at $0.11 per share, with a warrant attached to each 4 shares for the purchase of an additional share at $0.11, in satisfaction of convertible notes payable of $1,500,000 and accrued interest of $183,750. During the three months ended June 30, 2008 the Company recorded an expense of $661,052 for the value of the options and warrants as computed using the Black-Scholes model.

7

SMART ENERGY SOLUTIONS, INC.

Notes to the Condensed Financial Statements

June 30, 2008 and December 31, 2007

NOTE 4 - BASIC LOSS PER SHARE

The computation of basic and diluted loss per common share is based on the weighted average number of shares outstanding during each period.

		June 30,
		2008			2007
		(unaudited)
NET LOSS	$	(3,313,183	)	$	(4,587,847	)
BASIC LOSS PER COMMON SHARE	$	(0.04	)	$	(0.06	)
BASIC WEIGHTED AVERAGE
NUMBER OF SHARES OUTSTANDING		85,187,914			76,770,493

The computation of loss per common share is based on the weighted average number of shares outstanding during the year plus the common stock equivalents which would arise from the exercise of stock options and warrants outstanding using the treasury stock method and the average market price per share during the year. Common stock equivalents, consisting of 7,854,350 and 10,763,665 in options and 10,383,105 and 19,545,522 in warrants were considered but were not included in the computation of loss per share at June 30, 2008 and 2007, respectively, because they would have been anti-dilutive.

NOTE 5- COMMON STOCK PURCHASE WARRANTS AND OPTIONS

Warrants

The Company has determined the estimated value of the compensatory warrants granted to non-employees in exchange for services and financing expenses using the Black-Scholes pricing model and the following assumptions: expected term of 1year, a risk free interest rate of 3.25%, a dividend yield of 0% and volatility of 63% in 2008. The amount of the expense charged to operations for compensatory warrants granted in exchange for services was $46,787 for the six months ended June 30, 2008. During May 2008, the Company granted 4,963,068 common stock purchase warrants to the holders of convertible debt as consideration for the conversion of the debt. The Company recorded $354,583 in expense for the fair value of the warrants granted.

The following table summarizes the changes in warrants outstanding and the related prices for the shares of the Company’s common stock issued to non-employees of the Company. These warrants were granted in lieu of cash compensation for services performed or financing expenses.

	Warrants Outstanding						Warrants Exercisable
Year	Exercise Price		Number warrants outstanding		Weighted Average Contractual Life (Years)		Number Exercisable		Weighted Average Exercise Price
2006	$	0.75		125,000		1.00		125,000	$	0.75
2007	$	0.45		2,695,037		.43		2,695,037	$	0.45
2008	$	0.11		4,963,068		1.00		4,963,068	$	0.11
2008	$	0.40		2,600,000		.50		2,600,000	$	0.40
Total				10,383,105				10,383,105

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SMART ENERGY SOLUTIONS, INC.

Notes to the Condensed Financial Statements

June 30, 2008 and December 31, 2007

NOTE 5-COMMON STOCK PURCHASE WARRANTS AND OPTIONS (Continued)

Transactions involving the Company’s warrant issuance are summarized as follows:

	Number of Warrants			Weighted Average Exercise Price
Outstanding as of January 1, 2007		16,850,518		$	0.70
Granted		2,695,037			0.45
Exercised		-			0.00
Cancelled		(2,985,518	)		0.45
Outstanding and exercisable at December 31, 2007		16,560,037			0.70
Granted		7,563,068			0.21
Exercised		-			0.00
Cancelled		(13,740,000	)		0.75
Outstanding and exercisable at June 30, 2008 (unaudited)		10,383,105		$	0.40

Options

The Company has granted common stock purchase options to certain of its employees, directors and consultants. The options vest according to the terms of the employment contracts with the employees and consulting agreements with directors and consultants (usually 1 to 3 years). The option price is also determined in accordance with the terms of the contracts (between $0.00 to $0.75 per share).

During the year ended December 31, 2007, the estimated value of the compensatory common stock purchase options granted to non-employees in exchange for services and financing expenses was determined using the Black-Scholes pricing model and the following assumptions: expected term of 1 to 3 years, a risk free interest rate of 4.69% to 5.85%, a dividend yield of 0% and volatility of 98%. The amount of the expense charged to operations for compensatory options granted in exchange for services was $596,365 for the six months ended June 30, 2008. The following table summarizes the changes in options outstanding:

	Number of Options			Weighted Average Exercise Price
Outstanding as of January 1, 2007		10,223,665		$	0.15
Granted		1,341,000			0.41
Exercised		(278,250	)		0.23
Cancelled		(351,750	)		0.40
Outstanding at December 31, 2007		10,934,665		$	0.17
Granted		400,000			0.25
Exercised		-			0.00
Cancelled		-			0.00
Outstanding at June 30, 2008 (unaudited)		11,354,665		$	0.17

At June 30, 2008 and December 31, 2007, 7,854,350 and 6,972,137 options were exercisable, respectively.

9

SMART ENERGY SOLUTIONS, INC.

Notes to the Condensed Financial Statements

June 30, 2008 and December 31, 2007

NOTE 5-COMMON STOCK PURCHASE WARRANTS AND OPTIONS (Continued)

The following table summarizes the changes in options outstanding and the related prices for the shares of the Company’s common stock issued to non-employees of the Company. These options were granted in lieu of cash compensation for services performed or financing expenses.

	Options Outstanding			Options Exercisable
Year	Exercise Price	Number shares outstanding	Weighted Average Contractual Life (Years)	Number Exercisable	Weighted Average Exercise Price
2005	$0.15	4,035,000	1.50	3,172,000	$0.15
2005	$0.00	2,650,000	1.50	1,987,500	$0.00
2005	$0.05	1,000,000	3.50	750,000	$0.05
2006	$0.15	242,000	.50	242,000	$0.15
2006	$0.45	1,166,665	3.50	481,850	$0.45
2006	$0.35	540,000	1.50	360,000	$0.35
2006	$0.30	50,000	3.50	50,000	$0.30
2007	$0.35	990,000	1.23	450,000	$0.35
2007	$0.35	40,000	4.83	40,000	$0.35
2007	$0.15	60,000	3.50	60,000	$0.15
2007	$0.15	11,000	3.50	11,000	$0.15
2007	$1.00	150,000	.83	150,000	$1.00
2008	$0.25	350,000	.50	50,000	$0.25
2008	$0.15	50,000	1.75	50,000	$0.15
Total		11,354,665		7,854,350

NOTE 6-CONVERTIBLE DEBT

During the six months ended June 30, 2008, the Company entered into 52 convertible notes of $250,000. The notes are convertible at 60% of the average closing price of the Company’s common stock for the 15 days immediately preceding the date of conversion. The Company also amended the terms of the $500,000 15% convertible promissory note dated June 18, 2006, the $500,000 15% convertible promissory note dated May 22, 2006, the $500,000 amended and restated 12% promissory note dated April 27, 2008. The conversion price of the $1,500,000 of prior notes was amended from 95% of the average bid and ask on the day prior to conversion as an incentive to the note holders to convert. The Company recorded a loss on extinguishment of debt of $768,990 for the fair value of the beneficial conversion feature associated with the amended conversion price.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

As used in this Quarterly Report on Form 10-Q, references to the “Company,” “we,” “our” or “us” refer to Smart Energy Solutions Inc., unless the context otherwise indicates.

This Management’s Discussion and Analysis or Financial Condition and Results of Operations (this “MD&A”) section of our Quarterly Report on Form 10-Q discusses our results of operations, liquidity and financial condition, and certain factors that may affect our future results. You should read this MD&A in conjunction with our consolidated financial statements and accompanying notes included in this Quarterly Report.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking information. Forward-looking information includes statements relating to future actions, future performance, costs and expenses, interest rates, the outcome of contingencies, financial condition, results of operations, liquidity, business strategies, cost savings, objectives of management, and other such matters regarding the Company. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking information to encourage companies to provide prospective information about themselves without fear of litigation, so long as that information is identified as forward-looking and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the information. Forward-looking information may be included in this Quarterly Report on Form 10-Q or may be incorporated by reference from other documents filed with the Securities and Exchange Commission (the “SEC”) by the Company. You can find many of these statements by looking for words including, for example, “believes,” “expects,” “anticipates,” “estimates” or similar expressions in this Quarterly Report on Form 10-Q or in documents incorporated by reference in this Quarterly Report on Form 10-Q. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or future events.

The Company has based the forward-looking statements relating to the Company’s operations on management’s current expectations, estimates and projections about the Company and the industry in which it operates. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that we cannot predict. In particular, we have based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, the Company’s actual results may differ materially from those contemplated by these forward-looking statements. Any differences could result from a variety of factors, including, but not limited to the following:

· the Company’s ability to manufacture, market, and price the Battery Brain product;

· the Company’s ability to hire and maintain the personnel necessary to run the operations of the Company;

· the level of consumer spending for the Company’s product;

· the success of the Company’s marketing and promotion programs in obtaining market acceptance for its product;

11

· market conditions affecting the prices of the Company’s product; and

  ·   responsiveness of both the trade and consumers to the Company’s new product and marketing and promotion programs.

General

We were incorporated in the State of Utah on February 10, 1999. On August 25, 2005 we changed our state of incorporation from Utah to Nevada, by the merger of our Company with and into our wholly-owned subsidiary, Smart Energy Solutions, Inc., a Nevada corporation. As a result of such merger, our Company’s name was changed to Smart Energy Solutions, Inc. in order to better reflect our business operations.

On March 23, 2005, we purchased inventory, manufacturing molds and technology from Purisys, Inc., whereby we became a producer of an electronic control for vehicle batteries, known as the “Battery Brain”, which is intended to keep batteries from discharging to the point that the vehicle cannot be started. It is also intended to prevent the vehicle from being started without using the ignition system by what is commonly known as hot wiring. We have been selling the Battery Brain since then, on a wholesale basis through distributors and on a retail basis over the internet.

The Battery Brain is manufactured on behalf of the Company by third party manufacturers. The Company has expanded its manufacturing capabilities by adding additional third party manufacturing facilities in China and Israel. The Company is also reviewing opportunities to expand its facilities in Italy and establish manufacturing facilities in North America. Such third party arrangements give the Company access to state of the art manufacturing facilities while maintaining strict protection of our proprietary property. They also enable the Company to meet the strictest regulation, and provide flexibility to meet the growing demands in each market segment.

The Company has contracted with various distributors for distribution of the Battery Brain products in the United States, Canada, Italy, and Israel. The Company’s marketing activities have been focused on the following nine market segments, each of which have unique requirements: Automotive Retail; Automotive Dealers; Automotive Original Equipment Manufacturers; Automotive Specialty; Fleets; Military; Heavy Truck/Bus; Motor Home/Recreational Vehicle; and Marine.

Results of Operation

For the nine months ended September 30, 2008 the Company’s sales of the Battery Brain product increased, resulting in revenues of $1,397,008, approximately 28.6% above revenues of $1,086,311 for the nine months ended September 30, 2007. For the three months ended September 30, 2008 the Company recorded revenues of $506,835, an increase of approximately 96.1% as compared to revenues of $258,475 for the three months ended September 30, 2007. The Company continues with an aggressive marketing program which includes advertising in trade publications, the internet, marketing in trade shows and direct sales to wholesalers.

The cost of goods sold increased by smaller margins, resulting in gross profits in the nine months ended September 30, 2008 of $720,941, an increase of approximately 51.5% from gross profits of $475,832 for the nine months ended September 30, 2007. For the three months ended September 30, 2008 the Company recorded gross profits of $293,958, an increase of approximately 158.5% from gross profits of $113,695 for the three months ended September 30, 2007. The increased gross profits were the result of less discounting of our products to our customers.

Total operating expenses in the nine months ended September 30, 2008 dropped to $3,438,075, approximately 46.0% below total operating expenses of $6,368,212 in the nine months ended September 30, 2007. General and administrative expenses in the nine months ended September 30, 2008 were $1,242,521, as compared to $2,105,141in the nine months ended September 30, 2007. Marketing and advertising expenses in the nine months ended September 30, 2008 were $122,880, as compared to $298,311in the nine months ended September 30, 2007. Consulting fees in the nine months ended September 30, 2008 were $2,072,674, as compared to $3,964,760 in the nine months ended September 30, 2007. These decreases in operating expenses resulted primarily from a reduction in shares issued for services.

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Total operating expenses in the three months ended September 30, 2008 dropped to $894,723, approximately 46.8% below total operating expenses of $1,682,598 in the three months ended September 30, 2007. General and administrative expenses in the three months ended September 30, 2008 were $397,338, as compared to $618,095 in the three months ended September 30, 2007. Marketing and advertising expenses in the three months ended September 30, 2008 were $22,648, as compared to $49,624 in the three months ended September 30, 2007. Consulting fees in the three months ended September 30, 2008 were $474,737, as compared to $1,014,879 in the three months ended September 30, 2007. These decreases in operating expenses resulted primarily from a reduction in shares issued for services.

Interest expense in the nine months ended September 30, 2008 was $445,235, as compared to $434,177 in the nine months ended September 30, 2007. In the three months ended September 30, 2008 interest expense dropped to $13,197, a decrease of approximately 91% from interest expense of $144,726 in the three months ended September 30, 2007. The decrease in interest expense in the three months ended September 30, 2008 resulted primarily from the conversion, on May 19, 2008, of promissory notes in the aggregate principal amount of $2 million into shares of our common stock. Interest incomealso decreased from $7,680 and $32,761 in the three and nine month periods ended September 30, 2007, respectively, to $1,858 and $6,072 in the three and nine month periods ended September 30, 2008, respectively. The decrease in interest income resulted primarily from reduced cash on hand.

In addition, in the nine months ended September 30, 2008 we recorded a loss on the extinguishment of debt in the amount of $768,990, following an amendment in the conversion terms of outstanding promissory notes in the principal amount of $1.5 million. As an incentive to the note holders to convert, the conversion price of these notes was reduced from 95% of the average of the bid and ask prices of the Company’s common stock on the day prior to conversion to 60% of the average closing price for the 15 days immediately preceding the date of conversion. As a result, total other expenses in the nine months ended September 30, 2008 increased by approximately 201%, to $1,208,153 from $401,416 in the nine months ended September 30, 2007. In the three months ended September 30, 2008 total other expenses decrease by approximately 91.7%, to $11,339 from $137,046 in the three months ended September 30, 2007. The decrease in total other expenses in the third quarter resulted primarily from the decrease in interest expense in the period.

The Company recorded a net loss of $3,925,287, or $0.04 per share, for the nine months ended September 30, 2008, as compared to a net loss of $6,293,796, or $0.08 per share, in the same period in 2007. For the three months ended September 30, 2008 the Company recorded a net loss of $612,104, or $0.01 per share, as compared to a net loss of $1,705,949, or $0.02 per share, for the three months ended September 30, 2007.

Liquidity and Capital

On September 30, 2008 the Company had $388,525 in cash and cash equivalents, an increase of almost 448% as compared to cash and cash equivalents of $70,902 on December 31, 2007. The increase resulted primarily from the receipt of $125,000 in gross proceeds from the sale of our securities in the three months ended September 30, 2008, and an aggregate of $775,000 in gross proceeds from the sale of securities and $500,000 in gross proceeds from notes payable since December 31, 2007.

Total current assets on September 30, 2008 were $1,674,345, an increase of approximately 30% as compared to total current assets on December 31, 2007 of $1,286,851. This increase results primarily from the increase in cash and cash equivalents described above, and an increase in net accounts receivable, from $259,552 on December 31, 2007 to $533,882 on September 30, 2008, which was partially offset by a decrease in inventory, from $955,912 on December 31, 2007 to $751,453 on September 30, 2008.

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The Company believes that it will need approximately $3,000,000 for its operations over the next twelve months. The Company intends to raise additional capital from the exercise of the warrants issued during its private placement and from the issuance of additional securities of the Company.

There is no assurance that the warrant holders will exercise the warrants or that the funds needed will be raised. Our plans to deal with this uncertainty include raising additional capital or entering into a strategic arrangement with a third party. There can be no assurance that our plans can be realized. There can be no assurance that we will be able to obtain additional financing if and when needed or that, if available, financing will be on acceptable terms. Additional equity financings may be dilutive to holders of our common stock and debt financing, if available, and may involve significant payment obligations and covenants that restrict how we operate our business.

Going Concern Consideration

The financial statements contained herein for the period ending September 30, 2008, have been prepared on a “going concern” basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. For the reasons discussed herein and in the footnotes to our financial statements included herein, there is a significant risk that we will be unable to continue as a going concern. Our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2007, filed with the SEC on March 31, 2008, contain additional note disclosures describing the circumstances that lead to this disclosure.

Off-Balance Sheet Arrangements.

None.

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

Smaller reporting companies are not required to provide the information required by this Item.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures are designed to ensure that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the United States Securities and Exchange Commission. Our Chief Executive Officer and Chief Financial Officer has reviewed the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q and have concluded that the disclosure controls and procedures are effective to ensure that material information relating to the Company is recorded, processed, summarized, and reported in a timely manner.

Changes in Internal Controls over Financial Reporting

There have been no changes in the Company's internal control over financial reporting during the last quarterly period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II.

OTHER INFORMATION

Item 1. Legal Proceedings.

None.

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Item 1A. Risk Factors

Smaller reporting companies are not required to provide disclosure pursuant to this Item.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

From July 3, 2008 to July 14, 2008 we accepted subscription for an aggregate of 1,136,363 units, each consisting of one share of common stock and one-quarter warrant. Each whole warrant entitles the holder to purchase one share of common stock at an exercise price of $0.11 for a term of 5 years. Aggregate gross proceeds from the sale of the units amounted to $125,000. The units were issued and sold pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), under Rule 506 of Regulation D. The subscribers represented that they are accredited investors, as defined in Regulation D, that they acquired the securities for their own accounts as principals, not as nominees or agents, for investment purposes only and not with a view to or for resale or distribution, and we did not make any public solicitations of offers to purchase the units.

On July 3, 2008 we issued 330,000 shares of common stock to Pete Mateja, our former chief executive officer, as consideration for services provided to the Company. The shares were issued pursuant to an exemption from the registration requirements of the Securities Act, under Section 4(2) of the Securities Act. Mr. Mateja had access to all of the information that would be required to be included in a registration statement, and the transaction did not involve a public offering.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibit  Number	Description
31.1	Rule 13a-14(a)/15d14(a) Certification of Chief Executive and Financial Officer
32.1	Section 1350 Certification

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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.

Dated: November 10, 2008	By:	/s/ Edward Braniff
		Name: Title:	Edward Braniff Interim Chief Executive Officer and Chief Financial Officer (Principal Executive and Accounting Officer)

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