Surfect 10-Q 2008 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

———————

FORM 10-Q

———————

þ	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 _____________

———————

SURFECT HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

———————

Delaware	00-53422	88-0513176
(State or Other Jurisdiction	(Commission	(I.R.S. Employer
of Incorporation)	File Number)	Identification No.)

1800 West Broadway Road

Tempe, Arizona 85282

(Address of Principal Executive Office) (Zip Code)

(480) 968-2897

(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.			þ	Yes	¨	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.
Large accelerated filer	¨	Accelerated filer			¨
Non-accelerated filer	¨	Smaller reporting company			þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).			¨	Yes	þ	No
As of November 10, 2008 there were 152,333,309 shares of the issuer’s common stock, par value $0.0001 per share outstanding.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by
a court.			¨	Yes	¨	No

Table of Contents

Page

Part I          FINANCIAL INFORMATION

Part II         OTHER INFORMATION

- i-

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

Surfect Holdings, Inc. and Subsidiary

(A development stage company)

Condensed Consolidated Balance Sheets

	September 30, 2008			December 31, 2007
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	816,382		$	12,373
Cash escrowed in advance of equity financing		––			765,000
Inventory		382,410			373,366
Prepaid expenses and other current assets		69,079			121,123
Total current assets		1,267,871			1,271,862
Fixed assets
Furniture and machinery		467,854			467,854
Office and computer equipment		140,014			140,014
Leasehold improvements		37,377			36,697
		645,245			644,565
Less accumulated depreciation and amortization		(317,448	)		(236,106	)
Total fixed assets		327,797			408,459
Intangibles
Pending patents		169,966			169,966
Issued patents, net of accumulated amortization of  $7,223 and    $5,508 as of September 30, 2008 and December 31, 2007, respectively		38,591			40,305
Total intangibles		208,557			210,271
Total assets	$	1,804,225		$	1,890,592

The accompanying notes are an integral part of these statements.

1

Surfect Holdings, Inc. and Subsidiary

(A development stage company)

Condensed Consolidated Balance Sheets

	September 30, 2008			December 31, 2007
	(unaudited)
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable	$	307,961		$	348,326
Escrowed proceeds from equity offering		––			765,000
Notes payable		––			240,036
Current portion of capital lease		2,654			2,375
Other accrued liabilities		28,013			217,886
Total current liabilities		338,628			1,573,623
Long-term liabilities, less current portion
Capital lease		475			2,472
Total long term liabilities		475			2,472
Total liabilities		339,103			1,576,095
Stockholders' equity
Preferred stock, 10,000,000 shares authorized, none outstanding
Common stock, par value $0.0001; 500,000,000 authorized, 152,333,309    issued at September 30, 2008		15,233			6,595
Additional paid-in capital		17,172,394			12,822,707
Deficit accumulated during development stage		(15,722,505	)		(12,514,805	)
Total stockholders' equity		1,465,122			314,497
Total liabilities and stockholders' equity	$	1,804,225		$	1,890,592

The accompanying notes are an integral part of these statements.

2

Surfect Holdings, Inc. and Subsidiary

(A development stage company)

Un-audited Condensed Consolidated Statements of Operations

	Three Months Ended September 30,				Nine Months Ended September 30,				For the Period from December 26, 2000 (Inception) to September 30,
	2008		2007		2008		2007		2008
Sales revenue	$	––	$	––	$	––	$	––	$	220,939
Cost of sales		––		––		––		––		345,173
Gross Profit		––		––		––		––		(124,234	)
Expenses
Payroll and employee benefits		412,771		467,108		1,491,827		1,362,703		6,178,734
Research and development		23,448		86,964		89,062		282,352		2,181,997
General and administrative		370,588		481,184		1,423,167		1,328,776		5,319,186
Sales and marketing		59,548		56,086		128,199		175,977		670,538
Depreciation and amortization		27,683		25,062		83,057		67,167		418,299
Interest and debt discount amortization		1,374		507,330		2,584		650,171		1,012,686
Total expenses	��	895,412		1,623,734		3,217,896		3,867,146		15,781,440
Other income		3,264		4,671		10,195		31,622		183,169
Net loss	$	892,148	$	1,619,063	$	3,207,701	$	3,835,524	$	15,722,505
Net loss per share attributable to common stockholders, basic and diluted	$	0.01	$	0.11	$	0.03	$	0.26	$	0.84
Shares used in computing basic and diluted net loss per share attributable to common stockholders		141,698,526		15,074,942		126,029,369		14,592,358		18,686,595

The accompanying notes are an integral part of these statements.

3

Surfect Holdings, Inc. and Subsidiary

(a development stage company)

Condensed Consolidated Statements of Stockholders’ Equity

For the Period From December 26, 2000 (Inception) to September 30, 2008

	Common Stock						Preferred Stock Series A						Additional Paid-In			Deficit Accumulated During Development			Total Stockholders'
	Shares			Amount			Shares			Amount			Capital			Stage			Equity
December 26, 2000 - initial issuance of shares at $0.02 per share		5,020,000		$	100,400			––		$	––		$	918		$	––		$	101,318
Net loss from inception to December 31, 2003		––			––			––			––			––			(777,717	)		(777,717	)
Balance at December 31, 2003		5,020,000			100,400			––			––			918			(777,717	)		(676,399	)
Issuance of Series A preferred stock for $2,954,832 cash consideration, conversion of convertible notes and accrued interest		––			––			12,549,568			4,113,879			––			––			4,113,879
Net loss for the year ended December 31, 2004		––			––			––			––			––			(1,444,557	)		(1,444,557	)
Balance at December 31, 2004		5,020,000			100,400			12,549,568			4,113,879			918			(2,222,274	)		1,992,923
Share-based compensation - employee		––			––			––			––			14,000			––			14,000
Share-based compensation - non-employee		––			––			––			––			5,000			––			5,000
Net loss for the year ended December 31, 2005		––			––			––			––			––			(2,497,019	)		(2,497,019	)
Balance at December 31, 2005		5,020,000			100,400			12,549,568			4,113,879			19,918			(4,719,293	)		(485,096	)
Issuance of Series A-1 preferred stock for $1,993,453 cash consideration, conversion of convertible notes and accrued interest in January and May 2006		––			––			16,666,667			2,500,000			––			––			2,500,000
Issuance of Common Stock at $0.02 upon exercise of options		302,679			6,054			––			––			(248	)		––			5,806
Grant date fair value of stock options granted to employees		––			––			––			––			52,267			––			52,267
Grant date fair value of stock options granted to non-employees		––			––			––			––			5,096			––			5,096
Compensation resulting from management exercise of option bonus		4,599,626			197,785			––			––			(52,267	)		––			145,518
Balance prior to September 27, 2006 Recapitalization		9,922,305			304,239			29,216,235			6,613,879			24,766			(4,719,293	)		2,223,591
Conversion of preferred shares to common		45,948,992			6,613,879			(29,216,235	)		(6,613,879	)		––			––			––
Cancellation of Surfect Technologies, Inc. (STI) Common Stock		(55,548,618	)		(6,904,243	)		––			––			6,904,243			––			––
Conversion of Windy Creek Developments Common Stock upon merger with Windy Creek-DE		2,500,001			250			––			––			41,750			––			42,000

The accompanying notes are an integral part of these statements.

4

Surfect Holdings, Inc. and Subsidiary

(a development stage company)

Condensed Consolidated Statements of Stockholders’ Equity

For the Period From December 26, 2000 (Inception) to September 30, 2008 (continued)

	Common Stock						Preferred Stock				Additional Paid-In			Deficit Accumulated During the Development			Total Stockholders'
	Shares			Amount			Shares		Amount		Capital			Stage			Equity
Purchase and cancellation of STI non-qualified investor common shares		(322,679	)	$	(13,875	)		––	$	––	$	––		$	––		$	(13,875	)
Issuance of SHI Common Stock to STI Holders		8,001,666			800			––		––		––			––			800
Issuance of Common stock for net proceeds of $2,950,630 cash, and    including conversion of a $500,000 demand note payable to a principal    shareholder		3,700,000			370			––		––		2,950,260			––			2,950,630
Net loss for the year ended December 31, 2006		––			––			––		––		––			(2,950,114	)		(2,950,114	)
Balance at December 31, 2006		14,201,667			1,420			––		––		9,921,019			(7,669,407	)		2,253,032
Penalty shares issued due to delayed registration		112,000			11			––		––		(11	)		––			––
Issuance of common stock to originate $1,500,000 convertible promissory notes payable		660,000			66			––		––		620,334			––			620,400
Issuance of common stock to originate $300,000 convertible promissory notes payable		144,000			14			––		––		136,786			––			136,800
Issuance of common stock as a portion of severance to employee		50,000			5			––		––		29,995			––			30,000
Issuance of common stock to a consultant		75,000			8			––		––		15,750			––			15,758
Net proceeds from issuance of common stock at $0.04 per share		21,500,000			2,150			––		––		764,869			––			767,019
Issuance of common stock to a bridge loan holder in exchange for $188,750 demand note		200,000			20			––		––		188,730			––			188,750
Issuance of common stock to bridge loan holders to convert $995,000 of debt plus related accrued interest		29,007,282			2,901			––		––		1,038,494			––			1,041,395
Share-based compensation - employee		––			––			––		––		46,470			––			46,470
Share-based compensation - non-employee		––			––			––		––		60,271			––			60,271
Net loss for the year ended December 31, 2007		––			––			––		––		––			(4,845,398	)		(4,845,398	)
Balance at December 31, 2007		65,949,949			6,595			––		––		12,822,707			(12,514,805	)		314,497

The accompanying notes are an integral part of these statements.

5

Surfect Holdings, Inc. and Subsidiary

(a development stage company)

Condensed Consolidated Statements of Stockholders’ Equity

For the Period From December 26, 2000 (Inception) to September 30, 2008 (continued)

	Common Stock				Preferred Stock				Additional Paid-In			Deficit Accumulated During the Development			Total Stockholders'
	Shares		Amount		Shares		Amount		Capital			Stage			Equity
Balance at December 31, 2007		65,949,949	$	6,595		––		––	$	12,822,707		$	(12,514,805	)	$	314,497
Issuance of common stock to bridge loan holder to convert $50,000 of debt plus related accrued interest		1,530,860		153		––		––		51,512			––			51,665
Issuance of common stock to short term note holders to convert $140,000 of debt		7,000,000		700		––		––		139,300			––			140,000
Net proceeds of $1,697,880 from issuance of common stock at $0.04 per share		47,065,000		4,707		––		––		1,693,173			––			1,697,880
Issuance of common stock as a portion of severance to employee		112,500		11		––		––		13,489			––			13,500
Issuance of common stock to a consultant		150,000		15		––		––		17,985			––			18,000
Share-based compensation - employee		––		––		––		––		472,681			––			472,681
Share-based compensation - non-employee		––		––		––		––		239,304			––			239,304
Net loss for the quarter ended March 31, 2008		––		––		––		––		––			(1,460,413	)		(1,460,413	)
Balance at March 31, 2008(1)		121,808,309		12,181		––		––		15,450,151			(13,975,218	)		1,487,114
Issuance of common stock upon exercise of warrants at $0.08 per share		125,000		12		––				9,988						10,000
Share-based compensation - employee		––		––		––		––		130,408						130,408
Share-based compensation - non-employee		––		––		––		––		16,693						16,693
Net loss for the quarter ended June 30, 2008		––		––		––		––		––			(855,139	)		(855,139	)
Balance at June 30, 2008(1)		121,933,309		12,193		––		––		15,607,240			(14,830,357	)		789,076
Gross proceeds of $1,520,000 from issuance of common stock at $0.05 per share		30,400,000		3,040						1,516,960						1,520,000
Financing Fee incurred in connection with fundraising concluded in August 2008										(106,400	)					(106,400	)
Share-based compensation - employee										129,242						129,242
Share-based compensation - non-employee										25,352						25,352
Net loss for the quarter ended September 30, 2008		––		––		––		––		––			(892,148	)		(892,148	)
Balance at September 30, 2008(1)		152,333,309		15,233		––		––		17,172,394			(15,722,505	)		1,465,122

—————

(1) The period from January 1 through September 30, 2008 is unaudited.

The accompanying notes are an integral part of these statements.

6

Surfect Holdings, Inc. and Subsidiary

(a development stage company)

Unaudited Condensed Consolidated Statements of Cash Flows

	Nine Months Ended September 30,						For the Period from December 26, 2000 (Inception) to September 30,
	2008			2007			2008
Operating activities
Net loss	$	(3,207,701	)	$	(3,835,524	)	$	(15,722,506	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization		82,485			67,167			417,727
Loss on disposal of assets		––			––			26,873
Stock based compensation		1,045,180			102,503			1,454,291
Interest accrued converted to preferred stock		––			––			120,426
Interest accrued converted to common stock		––			––			46,395
Expenses payable converted to preferred stock		––			––			45,168
Warranty recovery		––			––			(44,189	)
Inventory impairment charged to cost of sales		––			––			278,628
Amortization of debt discount		––			587,520			757,200
Changes in operating assets and liabilities
Inventory		(9,044	)		(545,693	)		(872,413	)
Prepaid expenses and other current assets		52,044			29,162			(69,080	)
Accounts payable		(40,365	)		(214,406	)		307,961
Other accrued liabilities		(188,207	)		94,352			73,868
Net cash used in operating activities		(2,265,608	)		(3,714,919	)		(13,179,651	)
Investing activities
Investment in intangibles		571			(17,016	)		(215,209	)
Investment in fixed assets		(680	)		(63,545	)		(496,518	)
Net cash used in investing activities		(109	)		(80,561	)		(711,727	)
Financing activities
Proceeds from notes payable		––			1,935,656			4,379,506
Repayments on notes payable		(50,036	)		(45,602	)		(1,005,755	)
Proceeds from loans from officers		––			––			86,769
Repayments on loans from officers		––			––			(86,769	)
Net proceeds from issuance of common stock		3,121,480			––			6,440,447
Proceeds from issuance of preferred stock		––			––			4,948,285
Net payments against capital lease		(1,718	)		(951	)		(8,562	)
Repayments on leasehold improvement notes		––			––			(46,161	)
Net cash provided (and used) by financing activities		3,069,726			1,889,103			14,707,760
Net increase (decrease) in cash and cash equivalents		804,009			(1,906,377	)		816,382
Cash and cash equivalents at beginning of period		12,373			1,983,325			––
Cash and cash equivalents at end of period	$	816,382		$	76,948		$	816,382

The accompanying notes are an integral part of these statements.

7

Surfect Holdings, Inc. and Subsidiary

(a development stage company)

Unaudited Condensed Consolidated Statements of Cash Flows (continued)

	Nine Months Ended September 30,				For the Period from December 26, 2000 (Inception) to December 30,
	2008		2007		2007
Interest paid	$	2,584	$	6,643	$	79,574
Supplemental Schedule of Noncash Investing and Financing Activities
Copier acquired under capital lease	$	––	$	––	$	11,691
Leasehold improvements acquired via notes payable		––		––		46,161
Series A preferred stock issued for $1,000,000 in demand notes payable, $113,879 of accrued interest and $45,168 related accounts payable		––		––		1,159,047
Series A-1 preferred stock issued for $1,993,453 in cash consideration, convertible demand notes payable of $500,000 and accrued interest		––		––		500,000
Conversion of $500,000 demand note for 500,000 shares of common stock and warrants to purchase 250,000 shares (See Note 12 below)		––		––		500,000
Issuance of 400,000 shares of common stock to investor relations consultants as part of recapitalization		––		––		400,000
Debt discount in connection with issuance of 660,000 shares of common stock and bridge loan of $1,500,000		––		620,400		620,400
Debt discount in connection with issuance of 144,000 shares of common stock and bridge loan of $300,000		––		136,800		136,800
Conversion of $188,750 demand note for 200,000 shares of common stock		––		––		188,750
Common stock issued in exchange for $995,000 bridge loans plus accrued interest		––		––		1,041,395
Transfer of inventory to fixed assets		––		240,025		240,025
Writeoff of fully depreciated fixed assets		––		––		68,745
Issuance of common stock to bridge loan holder to convert $50,000 of debt plus related accrued interest		51,665		––		51,665
Issuance of common stock to short term note holders to convert $140,000 of debt.		140,000		––		140,000

The accompanying notes are an integral part of these statements.

8

Surfect Holdings, Inc. and Subsidiary

(a development stage company)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2008

1.

Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements of Surfect Holdings, Inc. and Subsidiary (the Company) have been prepared in conformity with accounting principles generally accepted in the United States (US GAAP). The preparation of these financial statements requires management to make estimates and assumptions, which could differ materially from actual results. In addition, certain information or footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Operating results for the nine month period ended September 30, 2008 is not necessarily indicative of the results that may be expected for the year ending December 31, 2008, or any future period. The preparation of these condensed consolidated financial statements in conformi ty with accounting principles generally accepted for reporting on interim periods in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period.

In the opinion of management, the financial statements include all adjustments (which are of a normal and recurring nature) necessary for the fair presentation of the results of the period presented. These condensed consolidated financial statements should be read in conjunction with the Company’s audited December 31, 2007 consolidated financial statements and notes thereto included in the Company’s Report on Form 10-KSB dated March 26, 2008.

The unaudited condensed consolidated financial statements as of September 30, 2008 for the nine month period then ended include the financial position and historical operating results of Surfect Holdings, Inc. (fka Windy Creek Developments, Inc.) and its wholly-owned subsidiary, Surfect Technologies, Inc. The Company has been in the development stage since its formation. All losses accumulated since the inception of the Company have been considered as part of the Company’s development stage activities.

Going Concern

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has experienced net losses since its inception through September 30, 2008 and expects such losses to continue as it begins commercializing its products. The Company also anticipates further research and development programs as it continues to develop its products.

As shown in the accompanying financial statements, Surfect has incurred net losses since its inception and net losses have continued to the date of these financial statements. During 2007, Surfect received net proceeds of $767,019 from equity funding, a $1,800,000 bridge financing and $140,000 of short-term convertible notes to meet its short-term working capital needs. On January 11, 2008 and January 16, 2008, the Company sold additional equity securities and received gross proceeds of $1,430,000 and $395,000, respectively. On July 31, 2008 and August 15, 2008, the Company received gross proceeds of $1,400,000 and $120,000 from additional sales of its equity securities. However, Surfect remains in the development stage and its ability to continue as a going concern is initially dependent on its ability to raise adequate capital to fund necessary market entry activities and subsequently on sufficient inflow of operating revenue derived from sale of its products at sufficient profit margin to cover operating expenses. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Endeavoring to secure the Company’s ability to continue as a going concern, management is continuing to pursue additional working capital to fund operations until the Company has reached a point where its cash requirements can be met by the cash generated from ongoing operations. No assurances can be made that the Company will be successful in obtaining such additional working capital.

9

Surfect Holdings, Inc. and Subsidiary

(a development stage company)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2008

1.

Basis of Presentation and Summary of Significant Accounting Policies (continued)

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiary, Surfect Technologies, Inc. All significant inter-company accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported revenues and expenses during the reported periods. Management bases its estimates and assumptions on historical experience and on various other assumptions that it believes are reasonable under the circumstances. Actual results could differ from those estimates.

Concentration of Risk

Credit Concentration—Financial instruments potentially subjecting the Company to concentrations of credit risk consist primarily of deposits in excess of FDIC limits. The Company’s demand deposits are placed with major financial institutions, and management believes that it is not exposed to undue credit risk for any demand deposits that may, from time to time, exceed the federally insured limits.

Financing Concentration—The Company remains in the development (preoperational) stage and the majority of its debt and equity financing has come from a limited number of investors.

Supplier Concentration—The Company is heavily reliant on outsourcing firms to develop tooling and manufacturing processes to bring its products to market. The Company is attempting to develop additional alternate relationships to diversify its risk concentration.

Cash and Cash Equivalents

For purposes of the statement of cash flows, the Company considers all short-term debt securities purchased with a maturity of three months or less to be cash equivalents.

Inventories

Inventories are carried at the lower of first-in, first out (FIFO) cost or net realizable value. The Company reviewed its inventories to identify items with cost in excess of estimated net realizable value and recorded an impairment allowance of $278,628 as a cost of sales at December 31, 2007. During the quarter ended September 30, 2008, the Company again reviewed its inventory valuation and determined that no additional impairment allowance was needed. It is reasonably possible that the company’s estimates of net realizable values could be revised again in the near term due to technological and other changes.

Fixed Assets, Depreciation and Amortization

Fixed assets are carried at cost. Costs are reviewed regularly for idle and obsolete items. No assets are considered impaired in value at any balance sheet date reported herein.

Depreciation and amortization have been provided by the Company in order to reduce the net value of equipment over their estimated useful lives. The Company uses the straight-line method for financial reporting purposes for all classes of assets. Office and computer equipment, including computer software, are depreciated and amortized over five and three year lives, respectively. Furniture and machinery are depreciated over seven year lives. Leasehold improvements are amortized over the original term of the lease or the remaining life of the lease improvements, whichever is shorter.

10

Surfect Holdings, Inc. and Subsidiary

(a development stage company)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2008

1.

Basis of Presentation and Summary of Significant Accounting Policies (continued)

Loss per Common Share

Loss per share has been calculated in accordance with Statement of Financial Accounting Standards No. 128 “Earnings Per Share,” which provides for the calculation of “Basic” and “Diluted” earnings per share. Basic loss per share includes no dilution and is computed by dividing (loss) to common shareholders by the number of common shares outstanding at the end of each period. Diluted loss per share excludes common shares potentially issuable as a result of possible exercise or conversion of promissory notes, warrants and stock options, since their impact would be anti-dilutive.

Share-based Compensation

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Compensation for calculating employee stock-based compensation expense. The standard was adopted using the modified prospective transition method which does not require restatement of prior periods’ results. The standard involves fair value determination of options at the grant date using various factors including weighted average future expected volatility of the stock, grantee turnover rates, risk-free interest rate and expected terms of the options. The calculated employee compensation cost is expensed over the requisite service period of the award, which is generally the vesting term of the options. As the Company was privately-held prior to the merger in September 2006, the volatility of its common stock has been based upon a study of the historical volatility of five similar high tech companies in their first five years of public trading. Limited comparable entities or indexes were available for comparison.

The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS 123(R) and the Emerging Issues Task Force (“EITF”) Issue No. 96-18. “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or In Conjunction with Selling Goods or Services” (EITF 96-18) which require that such equity instruments are recorded at their fair value on the measurement date, which date is typically upon the inception of the services that will be performed.

Other Comprehensive Income

From inception through December 31, 2007 and September 30, 2008, the Company had no changes in equity which constitute components of other comprehensive income.

Research and Development Expenses

Research and Development (R&D) expense consists of project materials, laboratory costs, consulting fees and other costs associated with product development efforts. Research and development costs are expensed as incurred. Research and development expense amounts reported include non payroll amounts. Payroll costs of research and development are reported as payroll expense.

Recently Issued Accounting Standards

On January 1, 2008, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements. In February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position, “FSP FAS 157-2—Effective Date of FASB Statement No. 157” (“FSP 157-2”), which delays the effective date of SFAS 157 for one year for certain nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Excluded from the scope of SFAS 157 are certain leasing transactions accounted for under SFAS No. 13, “Accounting for Leases.” The exclusion does not apply to fair value measurements of assets and liabilities recorded as a result of a lease transaction but measured pursuant to other pronouncements within the scope of SFAS 157. The Company does not expect that the adoption of the provisions of FSP 157-2 will have a material impact on its financial position, cash flows or results of operations.

11

1.

Basis of Presentation and Summary of Significant Accounting Policies (continued)

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”). This statement requires companies to provide enhanced disclosures about (a) how and why they use derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect a company’s financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company will adopt the new disclosure requirements on or before the required effective date and thus will provide additional disclosures in its financial statements when adopted.

In April 2008, FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets (FSP 142-3) was issued. This standard amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company has not determined the impact on its financial statements of this accounting standard.

In October 2008, the FASB issuedFSPFAS157-3, “Determining the Fair Value of a Financial Asset When the Market For That Asset Is Not Active”(“FSPFAS157-3”), with an immediate effective date, including prior periods for which financial statements have not been issued.FSPFAS157-3 amends FAS 157 to clarify the application of fair value in inactive markets and allows for the use of management’s internal assumptions about future cash flows with appropriately risk-adjusted discount rates when relevant observable market data does not exist. The objective of FAS 157 has not changed and continues to be the determination of the price that would be received in an orderly transaction that is not a forced liquidati on or distressed sale at the measurement date. The adoption ofFSPFAS157-3 is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.

2.

Issuance of New Securities

(a) 2007 Equity Transactions

Equity Raise - On November 30, 2007, the Company accepted subscriptions in a private offering for (i) 21,500,000 shares of Common Stock, and (ii) five-year warrants to purchase 21,500,000 shares of Common Stock at an exercise price of $0.08 per share, for which the Company received gross proceeds of $860,000 and net proceeds of $767,019. The warrants may be exercised, at the option of the holder, by cash payment of the exercise price or by “cashless exercise”

Agreement with Certain Bridge Investors - On December 14, 2007 the Company entered into a Waiver and Investment Agreement and an Acknowledgement and Agreement to Modification of Waiver and Investment Agreement (collectively, the “Waiver”) with the holders of the Company’s outstanding 10% senior secured convertible notes (the “Bridge Notes”) in the principal amount of $995,000 (“Bridge Investors”). Pursuant to the Waiver, the Bridge Investors agreed to cancel the Bridge Notes which matured on October 29, 2007 and to waive any and all existing or prior breaches or defaults under the Bridge Notes and any other rights, including the penalties to which the Bridge Investors were entitled in exchange for the right to convert the outstanding principal amount of the Bridge Notes, plus all accrued and unpaid interest through November 30, 2007 into (i) shares of the Company’s common stock par value $0.0001 per share (“Common Stock”) at a conversion price of $0.04 per share and (ii) a five-year year warrant to purchase the same number of shares of Common Stock issued upon conversion of the Bridge Notes, at an exercise price of $0.08 per share.

Pursuant to the terms of the Waiver, on December 14, 2007 the Company issued (i) 25,658,000 shares of Common Stock, and (ii) five-year warrants to purchase 26,034,863 shares of Common Stock at an exercise price of $0.08 per share (the “Warrant Shares”), to the Bridge Investors. The warrants provide the holder with anti-dilution price protection. The Common Stock and warrants were offered and sold solely to “accredited investors” in reliance on the exemption from registration afforded by Rule 506 of Regulation D promulgated under Section 4(2) of the Securities Act of 1933.

In addition, pursuant to the terms of the Waiver and the Bridge Investors agreeing to convert the Bridge Notes, the Company issued an additional 3,349,282 shares of Common Stock to these Bridge Investors pro rata with their Bridge Note investment. These shares represent a distribution of 5,000,000 shares overall as a condition of the bridge loan conversion, 239,234 of which were distributed to the remaining bridge holder in January, 2008 and a Substitute Warrant for 1,411,483 shares which was distributed to an investor to purchase shares of the Company’s stock at $0.0001. Except for the exercise price, the Substitute Warrant has the same terms as the Bridge Investor Warrants.

12

Surfect Holdings, Inc. and Subsidiary

(a development stage company)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2008

(b) 2008 Equity Transactions

On January 11, 2008 and January 16, 2008, the Company accepted subscriptions from accredited investors in a private offering for (i) 35,750,000 and 9,875,000 shares of Common Stock, respectively, and (ii) five-year warrants to purchase 35,750,000 and 9,875,000 shares of Common Stock, respectively, at an exercise price of $0.08 per share, for which the Company received gross proceeds of $1,430,000 and $395,000, respectively and resulted in net proceeds of $1,697,880 after placement agent fees of $127,120 .These funds included $765,000 received through December 31, 2007.

This equity funding also included issuing 1,530,860 of Common Stock in exchange for the remaining $50,000 of Bridge Note outstanding which converted to 1,530,860 shares of Common Stock at $0.04 per share and 1,291,625 warrants to purchase shares of Common Stock at $0.08 per share, as well as $140,000 of Short Term Notes which were converted into 7,000,000 shares of Common Stock at $0.02 per share and 7,000,000 warrants to purchase shares at $0.08.

In February, 2008 the Company issued 1,440,000 shares of Common Stock to a placement agent for services provided to the Company in connection with the Company’s Bridge Loan and the obtaining of waivers from the Bridge Investors.

On April 18, 2008, the Company issued 125,000 shares of Common Stock in connection with an investor’s exercise of a warrant to purchase these shares at an exercise price of $0.08, for which the Company received gross proceeds of $10,000.

 On July 31, 2008 and August 15, 2008, the Company accepted subscriptions from accredited investors in a private offering for 28,000,000 and 2,400,000 shares of Common Stock, respectively, for which the Company received gross proceeds of $1,400,000 and $120,000 respectively and resulted in net proceeds of $1,413,600 after placement agent fees of $106,400. One of our directors is chief executive officer of two of the funds which purchased shares in this offering. As a result of our private placement at $0.05 per share, the exercise price of our $0.08 warrants, which had anti-dilution protection, was reduced to $0.05 per share and warrants to exercise an additional 60,870,892 shares at an exercise price of $0.05 per share were issued to existing warrant holders.

Pursuant to a Registration Rights Agreement, the Company agreed to file a registration statement covering the resale of certain shares of its Common Stock no later than January 25, 2008 (the “Filing Date”). The Company completed the filing of the registration statement on January 25, 2008, as required.

In addition, the Registration Rights Agreement required the registration statement to be declared effective on or before 60 days from the Filing Date, which did not occur. Due to the delay, each investor in the offering is entitled to liquidated damages, payable in cash or Common Stock, at the company’s option, equal to 1% of the aggregate purchase price paid by such investor for the securities to be registered, and an additional 1% for each additional month that the Company does not cause the registration to be declared effective. Notwithstanding the foregoing, in no event shall liquidated damages pursuant to such delay exceed 10% of the aggregate gross proceeds of the offering. The penalty is limited to the 2,764,507 shares contained in the registration statement, which was declared effective on September 22, 2008. During the fourth quarter of 2008, the Company issued these investors a total of 64,613 penalty shares as compensation for the delay.

On April 16, 2008, the board of directors resolved to ratify the action of the Company in entering into an amendment to the Company’s agreement with Westminster Securities Corporation (“Westminster”) in conjunction with the equity financing completed in January 2008. The amendment provided for 9% warrant coverage for certain third party investment banking transactions, resulting in the issuance of 2,497,500 additional warrants to Westminster on the same terms and conditions as if they had been issued as of the date of the original warrants. As a result, Westminster received a total of 11,487,500 warrants to purchase shares of the Company’s Common Stock at $0.04 per share, some of which were then disbursed to third party investment banking groups who assisted in the financing.

3.

Inventories

The Company outsources all of its inventory manufacturing except for final assembly and as such generally carries finished goods inventory, as well as some work in process sub-assemblies obtained from vendors in advance of final assembly. At September 30, 2008, the Company’s inventory consisted of two finished tools and certain associated replacement parts. These tools and replacement parts have both hardware and/or programming considered by the Company to be marketable to end customers in their present form. During the first quarter of 2008, the Company shipped and placed one tool with a potential customer, per a conditional purchase order. Sales will be recognized if and when customer acceptance of this tool is confirmed. The Company anticipated shipment and placement of a second tool prior to June 30, 2008, but the purchase order was canceled by the customer prior to tool shipment. The Company is seeking placement of this tool with other cust omers, but does not yet possess a replacement purchase order.

13

Surfect Holdings, Inc. and Subsidiary

(a development stage company)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2008

3.

Inventories(continued)

During 2007, the Company transferred its oldest production tool from finished goods inventory into fixed assets at its Tempe, Arizona facility and began utilizing this tool for customer service related tasks anticipated to generate future revenue from plating activities. As a result, the value of this tool, $211,374, was reclassified as a fixed asset, to be depreciated over its useful life.

4.

Intangibles

Patents at September 30, 2008 and December 31, 2007, include capitalized costs of $38,591 and $40,305, respectively, net of accumulated amortization of $7,223 and $5,508, respectively. These balances consist of filing fees and executory costs related to acquiring a trademark and U.S. and international patents. Costs incurred to acquire trademarks and pending patents with related costs of $169,966 have not commenced amortization pending receipt of the related trademarks and patents. None of these costs are considered impaired at any balance sheet date reported herein.

Filing fees and executory costs associated with patent applications are capitalized at the time incurred. Upon acceptance of a patent filing, the Company amortizes the costs over the associated life of the patent. In the event of denial or in the event a capitalized patent is deemed to be without worth, the unamortized balance is expensed.

5.

Notes Payable

	September 30,  2008		December 31, 2007
Bridge note, 10% per annum, interest accrued monthly, subsequently converted to equity	$	—	$	50,000
12% senior secured convertible note, converted to equity in January 2008		—		140,000
Note to insurance carrier, 8.5% interest (cleared in June, 2008)		—		50,036
	$	—	$	240,036

Bridge Financing - On June 1, 2007, the Company issued 10% senior secured convertible promissory notes due October 29, 2007 (“Bridge Notes”), to certain accredited investors in the principal amount of $1,500,000 for which the Company received net proceeds of $1,475,000. The Bridge Notes were collateralized by all of the Company’s assets and the assets of its subsidiary. On July 20, 2007 the Company issued additional Bridge Notes in the principal amount of $300,000, all of which the Company received as net proceeds. A total of 804,000 shares of the Company’s Common Stock were issued as additional consideration to lenders.

During the final quarter of 2007, all but $50,000 of the Bridge Notes were either repaid in cash or were converted to Common Stock plus warrants. On January 11, 2008, the remaining $50,000 Bridge Notes were converted to common shares and warrants in the same manner as the other Bridge Notes.

On December 6, 2007 and December 14, 2007 the Company issued short-term promissory notes (“Short-Term Notes”), in the aggregate principal amounts of $100,000 and $40,000, respectively, which notes bear interest at the rate of 12% per annum, and which outstanding principal and accrued interest, pursuant to the terms of the Short-Term Notes, automatically converted on January 11, 2008 into the same securities offered in our private placement offering at a 50% discount to the offering price.

6.

Income Taxes

The Company had no taxable income and no income tax liability during the periods reported.

Through June 30, 2004, the Company was an S corporation and its taxable income and losses flowed through to its shareholders. Effective July 1, 2004, as a result of venture capital investment, the Company was required to file its tax returns as a C corporation whereby the Company became responsible for paying its income tax liabilities. For the period from July 1, 2004 through September 30, 2008, the Company incurred taxable losses totaling approximately $14,173,000, which are available to offset future taxable income through 2026, subject to ownership change limitations.

14

Surfect Holdings, Inc. and Subsidiary

(a development stage company)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2008

7.

Stock Options

On September 30, 2008, the Company had two share-based compensation plans which are described below. The compensation cost that has been charged to operations for those plans was approximately $1,013,680 for the nine months ended September 30, 2008.

The Company’s 2006 Stock Plan was adopted by the directors and stockholders on September 25, 2006. The purpose of the Plan was to provide an incentive to retain directors, officers, consultants and employees of the Company and its affiliates whose services are considered valuable. Under the Plan, the Company was authorized to issue incentive stock options intended to qualify under Section 422 of the Internal Revenue Code, non-qualified stock options, and restricted stock. The Plan was administered by the Company’s board of directors. Option awards were granted at an exercise price equal to the average closing price of the Company’s Common Stock for the 10 trading days immediately prior to the grant; those options generally vest based upon a one to three-year period of continuous service and have a 10 year term. As of September 30, 2008, options to purchase 1,115,452 shares of Common Stock were outstanding, of which 540,326 are ves ted, and 384,548 shares of Common Stock remain unissued under this Plan.

On March 22, 2008, the Board of Directors adopted the 2008 Equity Incentive Plan. A total of 58,000,000 shares of Common Stock were reserved for issuance under the 2008 Equity Incentive Plan. This Plan is intended to advance the interests of the Company by enhancing the ability of the Company to attract and retain qualified employees, consultants, officers, and directors by creating incentives and rewards for their contributions to the success of the Company. This Plan is administered by the Company’s board of directors, with the advice and recommendation of the compensation committee. Option awards are granted at an exercise price equal to the closing price of the Company’s Common Stock for the last trading day immediately prior to the grant; those options generally vest over a three-year period of continuous service in three month increments and have a five year term. As of September 30, 2008, options to purchase 53,151,929 shares of Com mon Stock were outstanding, of which 15,146,304 are vested and 4,848,071 shares of Common Stock remain unissued under this Plan.

Additionally, certain members of the Company’s management held 1,998,334 options granted or converted when the Company completed its Merger and Recapitalization in September 2006. Of this amount, a total of 955,462 options remain outstanding at September 30, 2008 and 700,004 are vested.

A summary of the status of the outstanding options (which includes employees and non-employees) and the changes during the nine months ended September 30, 2008 is presented in the table below:

	Number of Options								Weighted
	Employee			Non-Employee		Total			Average Exercise Price
Balance December 31, 2007		2,085,368			410,392		2,495,760		$	0.54
Granted		49,742,274			3,409,655		53,151,929			0.15
Exercised		—			—		—			—
Forfeited		(424,846	)		—		(424,846	)		0.58
Balance September 30, 2008		51,402,796			3,820,047		55,222,843		$	0.16

	Number of Options Vested
	Employee			Non-Employee		Total
Vested at December 31, 2007		579,872			231,901		811,773
Vested during period		13,077,872			2,609,411		15,687,283
Exercised during period		—			—		—
Forfeited during period		(112,423	)		—		(112,423	)
Vested at September 30, 2008		13,545,321			2,841,312		16,386,633

15

Surfect Holdings, Inc. and Subsidiary

(a development stage company)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2008

7.

Stock Options (continued)

On March 22, 2008 the board of directors granted 7,540,179 five year fully vested options to key management personnel in recognition of exceptional support to the Company. Also, on that same day, in conjunction with terms of the equity financing completed in January 2008, the board granted 45,611,750 options to employees, key consultants and non-management board members under the 2008 Equity Incentive Plan.

A summary of the Company’s stock options outstanding and exercisable at September 30, 2008 is presented in the table below:

	Option exercise price																	Total		Intrinsic Value
	$	0.12	$	0.14	$	0.15	$	0.22	$	0.30	$	0.90		$	1.13	$	2.27
Outstanding		8,390,179		348,452		44,761,750		72,000		955,462		325,000			345,000		25,000		55,222,843	$	—
													&nb sp;
Weighted average remaining contractual life of options outstanding (in years)		4.47		5.25		4.47		9.11		7.56		8.78			8.51		8.16		4.59
Exercisable		7,681,846		308,682		7,464,458		—		700,004		108,322			114,989		8,332		16,386,633	$	—

7.

Stock Options (continued)

The Company has determined that shares of Common Stock for future exercise shall be from authorized but unissued shares of stock.

Accounting for option grants to employees

The fair value of each option award is estimated on the date of grant using the Black-Sholes option valuation model. Because option valuation models incorporate ranges of assumptions for inputs, those ranges are disclosed. As the Company was privately held prior to its recent recapitalization, its volatility has been based upon a study of the historical volatility of five similar high tech companies in their first five years of public trading. Limited comparable entities or indexes were available for comparison. The selected companies were semiconductor and healthcare equipment manufacturers who have become public entities during the last ten years and progressed through a startup process similar to the Company’s. Weighted average volatility was calculated using the first five years of trading history for the mean company within this representative group.

The Company uses historical data to estimate option exercise and employee forfeiture within the valuation model; separate groups of employees that have similar exercise and/or termination behavior (such as management vs. non-management labor) are treated independently for valuation purposes. Considering the startup mode under which the Company has functioned to date, it is believed that the forfeiture rate of management and employees will decrease from historic rates. As a result, historic forfeiture rates have been reduced by one half to estimate future behavior. The risk free rate for the periods within the contractual life of the option are based upon the US Treasury yield curve at the time of the grant.

As a result of adopting SFAS 123(R), share-based employee compensation expense of $129,242 was recorded during the quarter ended September 30, 2008. At September 30, 2008, the unamortized amount of stock-based compensation to employees under SFAS 123(R) was approximately $1,209,291 and will continue to be amortized quarterly over a period of less than three years.

Option Grants to Non-employees

For non-employees, the rate of non-exercise was assumed to be zero, since there is no forfeiture provision assigned to these options. Although these options expire five to ten years from the date of grant, an expected life of approximately 3 years was utilized in the calculation to account for the fact that their exercise will likely occur in a more expedited fashion, with limited forfeiture.

16

Surfect Holdings, Inc. and Subsidiary

(a development stage company)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2008

7.

Stock Options (continued)

For the quarter ended September 30, 2008, stock based compensation expense of $25,352 was recorded for non-employees related to the grant of non-transferable stock options to purchase 3,820,047 shares of the Common Stock issued in connection with ongoing consulting service arrangements begun at various dates. At September 30, 2008, the unamortized amount of non-employee share-based expense was $184,670 which will continue to be amortized quarterly over a period of less than three years.

8.

Commitments

In February 2007, the Company entered into a two year facility lease for a 5,250 square foot customer sales and service center located in Tempe, Arizona which later in the year was designated as the corporate headquarters. Monthly lease expense is approximately $5,400, including fees and taxes. Rent expense including required facility maintenance for the period ended September 30, 2008 and fiscal year 2007 were approximately $49,900 and $54,600 respectively. The remaining obligation on the lease through January 2009 is approximately $29,700.

During 2007, the Company entered into a 48 month operating lease for office equipment, with monthly payments of $605 (approximately $3,600 for the period ending September 30, 2008 and $5,000 total payments in 2007). The remaining obligation on the lease through April 2010 is approximately $20,400.

In January 2008, the Company entered into a severance agreement with an ex-employee which included the issuance of 112,500 shares of its restricted Common Stock. This award was approved by the board of directors on March 22, 2008 and these shares are reflected in the Statement of Stockholders Equity at their value on the award date at a price of $0.12 per share.

In addition, in January, 2008, the Company entered into a six month agreement with a public relations consultant which included the award of 150,000 shares of its restricted Common Stock. This award was approved by the board of directors on March 22, 2008 and these shares are reflected in the Statement of Stockholders Equity at their value on the award date which was $0.12 per share.

On May 6, 2008, the Company announced the appointment of Innovator Capital Limited (London, UK) as a financial advisor to the company to provide expert strategic and international capital market advice, transaction arrangement, and merger and acquisition services at a monthly fee of $20,000 for a 12 month period. In addition, Innovator will assist the Company with efforts to list the Company’s securities for trading on a European exchange.

In July 2008, the Company entered into six month service agreements with Crescendo Investor Relations and Rooney Public Relations at monthly fees of $12,000 and $10,000 respectively to assist with investment and marketing efforts. Both agreements are renewable at the expiration of their six month terms.

9.

Subsequent Events

Pursuant to the delay in the declaration of the effective date of the Company’s S-1/A Registration Statement, the Company issued an aggregate of 64,613 penalty shares to certain existing investors during the fourth quarter of the current year.

 During the third quarter it was determined that the Company’s first tool placement will not be accepted by the customer as was previously anticipated. As a result, this tool will be returned to the Company and no revenue will be recognized. The carrying value of the tool was previously and continues to be reflected in inventory.

During the fourth quarter the Company received a $23,000 order for a solar module from a company based in the United Kingdom. This order will be shipped and invoiced in the fourth quarter.

The Company entered into an agreement with MC – Services during the fourth quarter, pursuant to which MC – Services will provide investor relations and public relations services to the Company in German speaking Europe in addition to translation services for the Company’s marketing efforts.

17

Item 2.

Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

The following discussion and plan of operation should be read in conjunction with our financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q for the quarterly period endedSeptember 30, 2008.

Overview

We are an early stage developer of automated electroplating tools for the solar energy and semiconductor assembly industries. Our current focus is on the solar industry. Surfect Technologies, Inc., our wholly-owned subsidiary, was formed on December 26, 2000 to develop and commercialize patented automated electroplating deposition tools which apply proprietary combinatorial deposits on wafers through a unique process. Our tools are designed to deposit conductive metals on wafers through a proprietary electroplating process.

Electroplating involves the coating of an electrically conductive object with a layer of metal using electrical current. Usually, the process is used to deposit an adherent surface layer of a metal having a desired property (generally conductivity in the semiconductor and solar industries) onto a substrate lacking that property.

Highlights for the third quarter consisted of:

·

Our management traveled overseas for much of the quarter seeking to establish relationships with potential customers and emphasize the Company’s solution for the solar industry which has a major presence in Europe, particularly in Germany.

·

We raised $1,520,000 of gross proceeds from the sale of our common stock.

·

We significantly reduced our operating expenses, primarily through reductions in research and development and general and administrative expenses. This reduction occurred as we were depleting our cash balances and had not received any financing commitments.

·

Purchase order cancellation by our second potential customer.

Results of Operations

To date, our operating activities have been primarily limited to ongoing research and product development. Through the end of the third quarter of 2008, our only operating revenue occurred in November 2006 when we realized $220,939 of revenue from the sale of a pre-production tool.

At September 30, 2008, our inventory consisted of two finished tools and certain associated replacement parts. These tools and replacement parts have both hardware and/or programming considered by us to be marketable to end customers in their present form. During the first quarter of 2008, we shipped and placed one tool with a potential customer, under a conditional purchase order. The purchase order was subsequently cancelled.

Total net loss for the quarter ended September 30, 2008, was $892,148 compared with $1,619,063 for the quarter ended September 30, 2007. General and administrative costs, payroll costs, and research and development costs were all considerably lower while sales and marketing and depreciation and amortization increased slightly, as we had limited equipment acquisitions and increased marketing-related travel expense. Interest and debt discount amortization decreased significantly compared to the 3^rd quarter of 2007, as we no longer are carrying the $1,500,000 Bridge Loan that we initiated in June 2007. In spite of the comparative reduction in expenses, we anticipate that operating costs will increase as we move toward revenue producing operations.

18

Liquidity and Capital Resources

We have been in the development stage since our inception on December 26, 2000. As such, we have had limited operating revenue to date. Operating activities for the nine months ended September 30, 2008 used cash of $2.266 million, compared to $3.715 million used in the comparable 2007 period. While net loss was somewhat reduced during the period, reductions in prepaid expenses, plus reductions of current liabilities were more than offset by increases in stock based compensation.

Net cash used in investing activities for the nine months ended September 30, 2008 was $109 compared to net cash used of $80,561 for the comparable 2007 period. This decrease in net cash used was attributable to very limited additions of fixed assets, and no additions to intangibles. We do not currently anticipate significant equipment expenditures during the remainder of 2008. However, when necessary, we intend to utilize capital leasing arrangements whenever possible.

Net cash provided by financing activities during the nine months ended September 30, 2008 of approximately $3.1 million resulted primarily from issuance of Common Stock in conjunction with private offering subscriptions. Our net cash provided by financing activities for the first nine months of 2007 was $1.9 million, consisting primarily of a Bridge Loan.

We have funded our operations to date through sales of equity and debt securities. In January 2008, we closed a financing which commenced in December 2007 and enabled us to eliminate the major remaining debt obligations from our balance sheet as well as provided us with funding for operations during the first and second quarters of 2008. A subsequent financing was closed during July and August 2008, which will provide funding for operations for the remainder of the calendar year. We will require further financing to fund our drive to commercialization.

As of November 11, 2008, we had $434,585 in available cash, with net working capital of $559,287. We are currently experiencing a cash burn rate of approximately $150,000 per month.

We are currently undertaking additional efforts to complete additional financing activities with the support of our financial advisors. We are confident that we will be successful in completing the necessary additional financing but no assurances can be given.

If we are able to obtain additional equity financing, it will be dilutive and may not be obtained on favorable terms. Our future capital requirements may differ materially from those currently anticipated and will depend on many factors, including, but not limited to, market acceptance of our products, volume pricing concessions, capital improvements, demand for our products, technological advances and our relationships with suppliers and prospective customers.

Critical Accounting Estimates

Basis of Presentation – Our financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”), which contemplate our continuation as a going concern. However, we are subject to risks and uncertainties associated with a new business, have no established source of revenue, and have incurred significant losses from operations. These matters raise substantial doubt about our ability to continue as a going concern. There can be no assurance that we will ever generate income or positive cash flows from our operating activities or that we will achieve and sustain a profit during any future period. Failure to achieve significant revenues or profitability would materially affect our business, financial condition, and results of operations. Our financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or amounts and classification of liabilities that may be necessary should we be unable to continue as a going concern.

Share-based Compensation – Commencing January 1, 2006, we adopted a newly required accounting standard for calculating employee stock-based compensation expense. The standard was adopted using the modified prospective transition method which does not require restatement of prior periods’ results. The standard involves fair value determination of options at the grant date using various factors including dividend yield, weighted average future expected volatility of the stock, grantee turnover rates, risk-free interest rate and expected lives of the options. The calculated employee compensation cost is expensed over the requisite service period of the award, which is generally the vesting term of the options. As the Company was privately-held prior to the Merger, the volatility of its Common Stock has been based upon a study of the historical volatility of five similar high tech companies in their first five years of publi c trading. Limited comparable entities or indexes were available for comparison.

19

Forward-Looking Statements

The statements in this Report relating to our liquidity and our ability to raise working capital are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Additionally, words such as “expects,” “anticipates,” “intends,” “believes,” “will” and similar words are used to identify forward-looking statements.

Some or all of the results anticipated by these forward-looking statements may not occur. Important factors, uncertainties and risks that may cause actual results to differ materially from these forward-looking statements include, but are not limited to, our ability to raise capital, the condition of the global credit and capital markets, economic conditions affecting the semiconductor and solar industries and the impact of technological developments and competition. For more information regarding some of the ongoing risks and uncertainties of our business, see the Risk Factors contained in our Form 10-KSB for the year ended December 31, 2007 and final prospectus dated September 22, 2008.

These forward-looking statements speak only as of the date of this report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. As a result, you should not place undue reliance on these forward-looking statements.

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

Not applicable for smaller reporting companies

Item 4.

Controls and Procedures

Not applicable for smaller reporting companies

Item 4T.

Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

As of September 30, 2008, we performed an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our reports filed or submitted under the Exchange Act.

(b) Changes in Internal Controls

During the most recent fiscal quarter, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

20

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

Not applicable

Item 1A.

Risk Factors

Not required for smaller reporting companies

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

During the last quarter, we sold securities without registration under the Securities Act of 1933 in reliance upon the exemption provided in Section 4(2) and Rule 506 and Regulation S thereunder as described below. Each United States investor purchased for investment and without a view to distribution. Each foreign investor signed a subscription agreement acknowledging that it was not a United States Person within the meaning of Regulation S.

Name or Class	Date Issued	Number of Securities	Reason for Issuance
Investor	August 15, 2008	2,400,000	Issued shares of Common Stock pursuant to a private offering from which the Company realized $120,000 in gross proceeds.

Item 3.

Defaults Upon Senior Securities

Not applicable

Item 4.

Submission of Matters to a Vote of Security Holders

Not applicable

Item 5.

Other Information.

Not applicable

Item 6.

Exhibits

Exhibit  Number	Description
3.1	Certificate of Incorporation (1)
3.2	Certificate of Amendment(1)
3.3	Certificate of Amendment(2)
3.4	Certificate of Amendment(3)
3.5	Bylaws(4)
4.1	Form of Warrant(5)
10.1	Form of Subscription Agreement(6)
10.2	Form of Registration Rights Agreement(5)
10.3	2008 Equity Incentive Plan(7)
10.4	Form of Waiver and Investment Agreement with the Bridge Investors(2)
10.5	Form of Acknowledgment & Agreement to Modification of Waiver and Investment Agreement(2)
10.6	Separation and Release Agreement with Mark Eichhorn(8)
31.1	Certification of Chief Executive Officer (Section 302)
31.2	Certification of Chief Financial Officer (Section 302)
32.1	Certification of Chief Executive Officer (Section 906)
32.2	Certification of Chief Financial Officer (Section 906)

———————

(1)

Contained in Form 8-K filed on October 3, 2006.

(2)

Contained in Form 8-K filed on December 14, 2007.

(3)

Contained in Form 8-K filed on March 5, 2008.

(4)

Contained in Form 8-K filed on September 18, 2006.

(5)

Contained in Form 8-K filed on November 30, 2007.

(6)

Contained in Form 8-K filed January 11, 2008.

(7)

Contained in Form 8-K filed March 27, 2008.

(8)

Contained in the SB-2 filed on January 25, 2008.

21

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Surfect Holdings, Inc.
Date: November 14, 2008	By	/s/ STEVEN ANDERSON
		Steven Anderson
		President, Chief Executive Officer and Secretary (Principal Executive Officer)
Date: November 14, 2008	By:	/s/ TOM D. BENSCOTER
		Tom D. Benscoter
		Chief Financial Officer
		(Principal Financial Officer)

22

Exhibit Index

Exhibit  Number	Description
3.1	Certificate of Incorporation (1)
3.2	Certificate of Amendment(1)
3.3	Certificate of Amendment(2)
3.4	Certificate of Amendment(3)
3.5	Bylaws(4)
4.1	Form of Warrant(5)
10.1	Form of Subscription Agreement(6)
10.2	Form of Registration Rights Agreement(5)
10.3	2008 Equity Incentive Plan(7)
10.4	Form of Waiver and Investment Agreement with the Bridge Investors(2)
10.5	Form of Acknowledgment & Agreement to Modification of Waiver and Investment Agreement(2)
10.6	Separation and Release Agreement with Mark Eichhorn(8)
31.1	Certification of Chief Executive Officer (Section 302)
31.2	Certification of Chief Financial Officer (Section 302)
32.1	Certification of Chief Executive Officer (Section 906)
32.2	Certification of Chief Financial Officer (Section 906)

———————

(1)

Contained in Form 8-K filed on October 3, 2006.

(2)

Contained in Form 8-K filed on December 14, 2007.

(3)

Contained in Form 8-K filed on March 5, 2008.

(4)

Contained in Form 8-K filed on September 18, 2006.

(5)

Contained in Form 8-K filed on November 30, 2007.

(6)

Contained in Form 8-K filed January 11, 2008.

(7)

Contained in Form 8-K filed March 27, 2008.

(8)

Contained in the SB-2 filed on January 25, 2008.