10QSB 1 form10-qsb_14711.txt TREY RESOURCES, INC. FORM 10-QSB ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2006 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission file number: 000-50302 TREY RESOURCES, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 16-1633636 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5 REGENT STREET, SUITE 520 LIVINGSTON, NJ 07039 -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (973) 758-9555 Securities registered under Section 12(b) of the Exchange Act: NONE. Securities registered under Section 12(g) of the Exchange Act: CLASS A COMMON, $.00001 PAR VALUE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Number of shares of Class A, common stock, par value $.00001, outstanding as of November 10, 2006: 154,514,126 ================================================================================ TREY RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 TABLE OF CONTENTS ----------------- Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) Balance Sheet - September 30, 2006 2-3 Statements of Operations - For the nine months and three months ended September 30, 2006 and 2005 4 Statement of Accumulated Other Comprehensive Income (Loss) - For the nine months ended September 30, 2006 and 2005 5 Statements of Cash Flows - For the nine months ended September 30, 2006 and 2005 6-8 Notes to Condensed Consolidated Financial Statements 9-27 Item 2. Management's Discussion and Analysis or Plan of Operation 28-34 Item 3. Controls and Procedures 34 PART II. OTHER INFORMATION Item 6. Exhibits 35 1 TREY RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) SEPTEMBER 30, 2006
ASSETS ------ CURRENT ASSETS Cash and cash equivalents $ 485,643 Securities available for sale 69,308 Accounts receivable, net of allowance for doubtful accounts of $30,300 809,108 Inventory 45,474 Prepaid expenses and other current assets 128,092 ------------ Total current assets 1,537,625 ------------ PROPERTY AND EQUIPMENT, net of accumulated depreciation of $99,588 296,909 OTHER ASSETS Goodwill 1,286,421 Convertible debentures, net of allowance for doubtful accounts of $264,034 290,999 Deposits and other assets 38,829 ------------ Total other assets 1,616,249 ------------ TOTAL ASSETS $ 3,450,783 ============ LIABILITIES AND STOCKHOLDERS' DEFICIT ------------------------------------- CURRENT LIABILITIES Accounts payable and accrued expenses $ 1,380,710 Deferred revenue 94,612 Obligations under capital leases - current 52,755 Convertible debentures payable - current 15,000 Warrant liability 6,123 Notes payable to related parties - current 141,292 Notes payable 173,000 Due to related parties 1,279,762 ------------ Total current liabilities 3,143,254 ------------ LONG TERM DEBT Convertible debentures payable, net of discounts of $1,290,228 1,043,819 Derivative liability 1,243,321 Notes payable to related parties - non-current 336,936 Obligations under capital leases - non-current 109,123 ------------ Total long term liabilities 2,733,199 ------------ TOTAL LIABILITIES 5,876,453 ------------ COMMITMENTS AND CONTINGENCIES
The accompanying notes are an integral part of the condensed consolidated financial statements. 2 TREY RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) (CONTINUED) SEPTEMBER 30, 2006
STOCKHOLDERS' DEFICIT Preferred stock, $1.00 par value; authorized 1,000,000 shares; no shares issued and outstanding $ -- Common stock: Class A - par value $.00001; authorized 10,000,000,000 shares; 154,514,126 shares issued and outstanding 1,545 Class B - par value $.00001; authorized 50,000,000 shares; no shares issued and outstanding -- Class C - par value $.00001; authorized 20,000,000 shares; no shares issued and outstanding -- Additional paid in capital 3,984,896 Additional paid in capital - debt conversions and options 108,036 Accumulated other comprehensive gain 39,650 Accumulated deficit (6,559,797) ------------ Total stockholders' deficit (2,425,670) ------------ TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 3,450,783 ============
The accompanying notes are an integral part of the condensed consolidated financial statements. 3 TREY RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Nine months Ended For the Three Months Ended September 30, September 30, ------------------------------ ------------------------------ 2006 2005 2006 2005 ------------ ------------ ------------ ------------ SALES, net $ 4,695,655 $ 3,104,035 $ 1,787,949 $ 1,139,094 COST OF SALES 2,952,446 1,970,263 1,131,908 746,383 ------------ ------------ ------------ ------------ GROSS PROFIT 1,743,209 1,133,772 656,041 392,711 ------------ ------------ ------------ ------------ SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling expenses 976,731 554,973 309,515 190,971 General and administrative expenses 1,500,151 1,410,645 536,096 537,461 Depreciation and amortization 47,707 28,586 17,844 9,029 ------------ ------------ ------------ ------------ Total selling, general and administrative expenses 2,524,589 1,994,204 863,455 737,461 ------------ ------------ ------------ ------------ (LOSS) FROM OPERATIONS (781,380) (860,432) (207,414) (344,750) ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE) Gain on revaluation of derivatives 755,409 -- 358,761 -- Amortization of discount on debt conversion (793,454) (285,695) (254,707) (113,576) Gain (loss) on sales of securities available for sale 71,578 (35,109) 45,167 -- Write-off of financing costs (60,000) (133,805) -- (20,000) Other income (expense), net (130,321) 31,728 (38,486) 14,208 Interest expense (139,597) (79,992) (50,637) (46,696) ------------ ------------ ------------ ------------ Total other income (expense) (296,385) (502,873) 60,098 (166,064) ------------ ------------ ------------ ------------ (LOSS) FROM OPERATIONS BEFORE PROVISION FOR INCOME TAXES (1,077,765) (1,363,305) (147,316) (510,814) PROVISION FOR INCOME TAXES -- -- -- -- ------------ ------------ ------------ ------------ NET (LOSS) APPLICABLE TO COMMON SHARES $ (1,077,765) $ (1,363,305) $ (147,316) $ (510,814) ============ ============ ============ ============ NET (LOSS) PER COMMON SHARE Basic and diluted $ (0.01) $ (0.02) $ (0.00) $ (0.01) ============ ============ ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING Basic and diluted 138,947,549 60,262,726 150,976,083 66,178,395 ============ ============ ============ ============
The accompanying notes are an integral part of the condensed consolidated financial statements. 4 TREY RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 Comprehensive Income (Loss) ---------- Balance at January 1, 2005 $ (50,000) Recapture unrealized loss on securities available for sale 50,000 ---------- Balance at September 30, 2005 $ -- ========== Balance at January 1, 2006 $ -- Unrealized gain on securities available for sale 39,650 ---------- Balance at September 30, 2006 $ 39,650 ========== The accompanying notes are an integral part of the condensed consolidated financial statements. 5 TREY RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the nine months ended Sept 30, 2006 Sept 30, 2005 ------------ ------------ CASH FLOW (USED IN) OPERATING ACTIVITIES Net (loss) $ (1,077,765) $ (1,363,305) Adjustments to reconcile net (loss) to net cash (used in) operating activities, net of effects of acquisition Net loss (gain) on sale of securities available for sale (71,578) 35,109 (Gain) on revaluation of derivatives (755,409) -- Depreciation 43,107 24,000 Amortization of other intangibles 4,600 4,586 Amortization of debt discounts 656,708 -- Common stock issued for services and compensation 81,000 155,342 Common stock issued for debt conversion discount 136,746 285,696 Deferred interest income on convertible debentures (11,627) (11,077) Accrued interest expense on notes payable -- 50,946 Accrued interest expense on debentures payable -- 515 Write off of debt issue costs 60,000 133,805 Changes in certain assets and liabilities: Accounts receivable (408,081) (232,986) Inventory 5,201 -- Prepaid expenses and other assets 5,225 (79,462) Accounts payable and accrued liabilities 348,071 50,221 Deferred revenue 70,858 11,955 Related party accounts (43,557) 76,691 ------------ ------------ Total cash (used in) operating activities (956,501) (857,964) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (94,847) (96,988) Business acquisition costs (97,000) -- Net proceeds from sale of securities available for sale 106,462 -- Purchase of convertible debentures -- (328,695) ------------ ------------ Total cash (used in) financing activities (85,385) (425,683) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Repayment of related party loans (90,639) (6,786) Proceeds from notes payable & convertible debentures 803,000 1,361,195 Repayment of notes payable & convertible debentures (235,000) (28,709) Proceeds of capital leases 60,835 27,344 Repayment of capital leases (27,660) (16,884) ------------ ------------ Total cash provided by financing activities 510,536 1,336,160 ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (531,350) 52,513 CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 1,016,993 346,635 ------------ ------------ CASH AND CASH EQUIVALENTS - END OF PERIOD $ 485,643 $ 399,148 ============ ============ CASH PAID DURING THE PERIOD FOR: Interest expense $ 20,652 $ 9,223 ============ ============ Income taxes $ 250,712 $ -- ============ ============
The accompanying notes are an integral part of the condensed consolidated financial statements. 6 TREY RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES For the nine months ended September 30, 2006: --------------------------------------------- a) Issued 3,703,704 shares of Class A Common Stock with a total value of $40,741 for conversion of $25,000 of principal on outstanding debentures with Cornell Capital Partners, LP. b) Issued 4,347,826 shares of Class A common stock valued at $40,000 pursuant to the asset purchase agreement with Jodi Katz. c) Issued 16,212,208 shares of Class A common stock with a value of $176,622 for repayment of $74,577 of loans and accrued salaries for two officers of the Company. d) Issued 2,400,000 shares of Class A common stock with a value of $30,000 for conversion of $11,040 of debt for legal services. e) Issued 6,900,000 shares of Class A common stock with a value of $81,000 for compensation and bonuses to employees of SWK Technologies, Inc. f) On June 2, 2006, the Company concluded the acquisition of AMP-Best Consulting, Inc. Pursuant to the asset purchase agreement, Trey issued 6,000,000 shares of Class A common stock valued at $75,000 to Patrick J. Anson, Crandall Melvin III and Michelle Paparo. The net effect on cash flows is as follows: Cash at closing $ (85,000) Inventory 5,058 Prepaid expenses & security deposit 1,461 Property and equipment 88,153 Goodwill 533,481 Lease obligations (88,153) Promissory notes (380,000) Common stock (75,000) ----------- Total $ -- =========== The accompanying notes are an integral part of the condensed consolidated financial statements. 7 TREY RESOURCES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES (Continued) For the nine months ended September 30, 2005: --------------------------------------------- a) Issued 25,556,400 shares of Class A Common Stock with a total value of $578,378 for repayment of principal on outstanding notes payable, issued as advances on the equity line financing with Cornell Capital Partners, LP. b) Issued 2,010,724 shares of Class A common stock valued at $75,000 pursuant to the employment agreement with A. Rudin. c) Issued 4,290,113 shares of Class A common stock with a total value of $84,738 for interest due on the equity line financing with Cornell Capital Partners, LP. d) Issued 11,662,792 shares of Class A common stock with a value of $317,902 for repayment of accrued salaries for two officers of the Company. e) Issued 1,367,292 shares of Class A common stock with a value of $54,692 for compensation and bonuses to employees of SWK Technologies, Inc. f) Issued 350,000 shares of Class A common stock with a value of $13,650 for marketing services. g) Issued 270,270 shares of Class A common stock with a value of $10,000 for a partial repayment of an obligation to a previous officer of iVoice, Inc. h) Issued 2,223,746 shares of Class A common stock with a value of $66,712 for a partial repayment of an obligation to an unrelated party for legal services provided in a prior period. i) Issued 3,000,000 warrants for Class A common stock with a value of $87,000 pursuant to the consulting agreement with Thornhill Capital LLC to advise and assist the Company in mergers, acquisitions and in developing an effective business strategy to increase shareholder value. j) On May 16, 2005, the 10 million shares of Laser Energetics Class A Common Stock were assigned to iVoice, Inc. as settlement of all Administrative Fees owed by the Company to iVoice. The value of the exchanged securities was determined to be $64,891. The accompanying notes are an integral part of the condensed consolidated financial statements. 8 TREY RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2006 AND 2005 NOTE 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Description of business ----------------------- Trey Resources, Inc. (the "Company"), was incorporated in Delaware on October 3, 2002 as a wholly owned subsidiary of iVoice Inc. On February 11, 2004, the Company was spun off from iVoice, Inc. and is now an independent publicly traded company. The spin off transaction was accomplished by the distribution of certain intellectual property, representing the software codes of the Automatic Reminder, and certain accrued liabilities and related party debt into a wholly-owned subsidiary of iVoice., Trey Resources, Inc. ("Trey", formerly known as iVoice Acquisition 1, Inc. and Trey Industries, Inc.) and subsequently distributed on a pro-rata basis to iVoice shareholders in the form of a taxable dividend (the "Spin-off"). Up until its acquisition of SWK, Inc. on June 2, 2004, the Company was engaged in the design, manufacture, and marketing of specialized telecommunication equipment. With the acquisition of SWK and as part of its plan to expand into new markets, Trey is focusing on the business software and information technology consulting market, and is looking to acquire other companies in this industry. SWK Technologies, Inc., ("SWK") the surviving entity in the merger and acquisition of SWK, Inc., is a New Jersey-based information technology company, value added reseller, and master developer of licensed accounting software. The Company also publishes its own proprietary supply-chain software, "MAPADOC". The Company sells services and products to various end users, manufacturers, wholesalers and distributor industry clients located throughout the United States. Certain intellectual property, representing the software codes of the Automatic Reminder, was sold in November 2004 to Laser Energetics, Inc. (LEI), a New Jersey based technology company. The Company received 10 million shares of Laser Energetics Class A Common Stock and was further issued a convertible debenture by Laser Energetics, Inc. in the amount of $250,000. The debenture, which bears interest at the rate of 3% per annum, has a five year term, and is convertible into shares of LEI Class A Common Stock at a rate equal to fifty percent (50%) of the average closing bid price of the Class A Common Stock for the four trading days immediately preceding the conversion date. The convertible debenture is convertible at the holder's option. On May 16, 2005, the 10 million shares of Laser Energetics Class A Common Stock were assigned to iVoice, Inc. as settlement of all Administrative Fees owed by the Company to iVoice. As of September 30, 2006, the Company has determined that the value of the debenture was significantly impaired and the entire debenture, including the accrued interest income for 2005 and 2006, were written down to zero as a provision for doubtful accounts. The Company is publicly traded and is currently traded on the NASD Over The Counter Bulletin Board ("OTCBB") under the symbol "TYRIA". 9 TREY RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2006 AND 2005 Basis of presentation --------------------- The accompanying condensed consolidated financial statements include the accounts of Trey Resources, Inc. (the "Company" or "Trey") and its wholly owned subsidiaries, SWK Technologies, Inc. and BTSG Acquisition Corp. On February 11, 2004, the Company was spun off from iVoice, Inc. and is now an independent publicly traded company. These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-QSB and Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. It is suggested that these condensed consolidated financial statements be read in conjunction with the December 31, 2005 audited financial statements and the accompanying notes thereto filed with the Securities and Exchange Commission on Form 10-KSB. On March 1, 2005, Trey Resources' wholly-owned subsidiary, SWK Technologies, Inc., executed an employment agreement with Mr. Andrew Rudin of Business Consulting Solutions LLC ("BCS"), whereby Mr. Rudin was to be paid a commission in cash and stock of Trey Resources in the event he was successful in arranging for the clients of BCS to transfer over to SWKT. On March 25, 2005, this employment agreement was amended that made the commission payable to Mr. Rudin contingent upon the retention of the clients transferred from BCS through March 1, 2007 and payable over a thirty-six month period from the employment agreement's commencement date. Following the successful transfer of BCS clients to SWKT, SWKT will assume responsibility for maintenance and support of the BCS clients. On February 7, 2006, Trey Resources' wholly-owned subsidiary, SWK Technologies, Inc., executed an asset purchase agreement and employment agreement with Ms. Jodie Katz of Wolen Katz Associates ("Wolen Katz"), whereby Ms. Katz was paid compensation in cash and stock of Trey Resources for successfully arranging for the clients of Wolen Katz to transfer over to SWKT. The cash portion of the compensation is payable in twelve (12) equal monthly installments commencing on the 90th day following the Closing Date. Following the successful transfer of Wolen Katz clients to SWKT, SWKT assumed responsibility for maintenance and support of the BCS clients. On June 2, 2006, Trey Resources' wholly-owned subsidiary, SWK Technologies, Inc., executed an asset purchase agreement between and among AMP-Best Consulting, Inc. ("AMP-Best"), a New York Corporation, Patrick Anson, Crandall Melvin III and Michelle Paparo for acquisition of certain assets, the customer list and business name of AMP-Best. Terms of the agreement provided for a cash payment at closing of $85,000, issuance of a $380,000 promissory note to Crandall Melvin III, the issuance of 6,000,000 shares of Trey Resource's Class A Common Stock and employment agreements for Patrick Anson, Crandall Melvin III and Michelle Paparo. Payments on the promissory note are to commence 120 days after the closing for a term of 5 years. 10 TREY RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2006 AND 2005 The result of operations for the nine months ended September 30, 2006 and 2005 are not necessarily indicative of the results to be expected for the full year. For further information, refer to the financial statements and footnotes included in Form 10-KSB for the year ended December 31, 2005. References to the "Company," "we," "us" and "our" refer to Trey Resources Inc. and its subsidiaries. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation --------------------------- The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. Use of Estimates ---------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents ------------------------- The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The cash equivalents represent investments in Triple A credit rated money market funds that have 7 day auction rates competitive with current market conditions. The Company maintains cash and cash equivalent balances in financial institutions that are insured by the Federal Deposit Insurance Corporation up to $100,000. The uninsured cash balances at September 30, 2006 were $300,003. Revenue Recognition ------------------- The Company recognizes revenues from consulting and support services as the services are performed. Hardware and software revenues are recognized when the product is shipped to the customer. Commissions are recognized when payments are received, since the Company has no obligation to perform any future services. Marketable Securities --------------------- The Company has evaluated its investment policies consistent with Financial Accounting Standards Board Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities ("FASB 115"), and determined that all of its investment securities are to be classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in the Statement of Accumulated Other Comprehensive Income (Loss). 11 TREY RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2006 AND 2005 Accounts Receivables -------------------- Accounts receivables consist primarily of uncollected invoices for maintenance and professional services. Payment for software sales are due in advance of ordering from the software supplier. Payment for maintenance and support plan renewals are due before the beginning of the maintenance period. Payment for professional services are due 50% in advance and the balance on completion of the services. The Company maintains a small provision for bad debts and reviews the provision quarterly. Inventory --------- Inventory consists primarily of pre-packaged software programs that are held for resale to customers. Cost is determined by specific identification tied back to the purchase order from the software supplier. Property and Equipment ---------------------- Property and equipment is stated at cost. Depreciation is computed using the straight-line method based upon the estimated useful lives of the assets, generally five to seven years. Maintenance and repairs are charged to expense as incurred. Deferred Revenues ----------------- Deferred revenues consist primarily of annual telephone support plan revenues that will be earned in future periods. Financing Costs --------------- Financing costs consist primarily of professional fees and various paid commissions relating to the issuance of the Company's convertible debentures and equity credit lines. These costs are expensed as incurred. Income Taxes ------------ The Company accounts for income taxes in accordance with Statements of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income taxes and liabilities are computed annually for differences between the financial statement and the tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Stock-Based Compensation ------------------------ SFAS No. 123R, "Accounting for Stock-Based Compensation" establishes financial accounting and reporting standards for stock-based employee compensation plans. This statement also applies to transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. Those transactions must be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. For stock options, fair value is determined using an option-pricing model that takes into account the 12 TREY RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2006 AND 2005 stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock and the expected dividends on it, and the risk-free interest rate over the expected life of the option. The Company has adopted this statement and recorded the option value as outlined above. Earnings (Loss) Per Share ------------------------- SFAS No. 128, "Earnings per Share" requires presentation of basic earnings per share ("basic EPS") and diluted earnings per share ("diluted EPS"). The computation of basic EPS is computed by dividing income (loss) available to common stockholders by weighted average number of common shares during the period. Diluted earnings per share gives effect to all dilutive potential common shares outstanding during the period. The computation of diluted EPS does not assume conversion, exercise, or contingent exercise of securities that would have an anti-dilutive effect on earnings resulting from the Company's net loss position. The Company had common stock equivalents of 7,075,000 at September 30, 2006 and 2005, respectively. The shares used in the computations are as follows:
For the nine For the three Months ending September 30, Months ending September 30, ---------------------------- ---------------------------- 2006 2005 2006 2005 ----------- ---------- ----------- ---------- Basic and Diluted EPS Purposes 138,947,549 60,262,276 150,976,083 66,178,395 =========== ========== =========== ==========
Derivative Liabilities ---------------------- During April 2003, the Financial Accounting Standards Board issued SFAS 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." The statement requires that contracts with comparable characteristics be accounted for similarly and clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, except in certain circumstances, and for hedging relationships designated after June 30, 2003. The financial statements for the nine months ended September 30, 2006 include the recognition of the derivative liability on the underlying securities issuable upon conversion of the Cornell Convertible Debentures. Comprehensive Income -------------------- SFAS No. 130, "Reporting Comprehensive Income", establishes standards for the reporting and display of comprehensive income and its components in the financial statements. The items of other comprehensive income that typically are required to be displayed are foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on certain investments indebt and equity securities. As of September 30, 2005, the Company recaptured its unrealized loss on securities available for sale from the year ended December 30, 2004. As of September 30, 2006, the Company recorded $39,650 for unrealized gains on Voyager One securities held for sale. 13 TREY RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2006 AND 2005 Recent Accounting Pronouncements -------------------------------- On December 16, 2004, the Financial Accounting Standards Board ("FASB") published Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment ("SFAS 123R"). SFAS 123R requires that compensation cost related to share-based payment transactions be recognized in the financial statements. Share-based payment transactions within the scope of SFAS 123R include stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee share purchase plans. The provisions of SFAS 123R are effective for small business issuers as of the first interim period that begins after December 15, 2005. Accordingly, the Company implemented the revised standard in the fourth quarter of fiscal year 2005. For the nine months ended September 30, 2006, FAS 126R did not have any impact on the financial statements. On December 16, 2004, FASB issued Financial Accounting Standards No. 153, Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29, Accounting for Non-monetary Transactions ("FAS 153"). This statement amends APB Opinion 29 to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. Under FAS 153, if a non-monetary exchange of similar productive assets meets a commercial-substance criterion and fair value is determinable, the transaction must be accounted for at fair value resulting in recognition of any gain or loss. FAS153 is effective for non-monetary transactions in fiscal periods that begin after June 15, 2005. The implementation of this standard did not have a material impact on its financial position, results of operations or cash flows. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections." SFAS No. 154 replaces Accounting Principles Board ("APB") Opinion No. 20, "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements." SFAS No. 154 requires retrospective application to prior periods' financial statements of a voluntary change in accounting principle unless it is impracticable. APB No. 20 previously required that most voluntary changes in accounting principle be recognized by including the cumulative effect of changing to the new accounting principle in net income in the period of the change. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 did not have a material impact on the Company's financial position, results of operations, or cash flows for the nine months ended September 30, 2006. In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140." SFAS No. 155 resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, "Application of Statement 133 to Beneficial Interests in Securitized Financial Assets," and permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that 14 TREY RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2006 AND 2005 concentrations of credit risk in the form of subordination are not embedded derivatives and amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of the first fiscal year that begins after September 15, 2006. The Company is currently evaluating the effect the adoption of SFAS No. 155 will have on its financial position, results of operations, and cash flows. In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140." SFAS No. 156 requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract under a transfer of the servicer's financial assets that meets the requirements for sale accounting, a transfer of the servicer's financial assets to a qualified special-purpose entity in a guaranteed mortgage securitization in which the transferor retains all of the resulting securities and classifies them as either available-for-sale or trading securities in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and an acquisition or assumption of an obligation to service a financial asset that does not relate to financial assets of the servicer or its consolidated affiliates. Additionally, SFAS No. 156 requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, permits an entity to choose either the use of an amortization or fair value method for subsequent measurements, permits at initial adoption a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights and requires separate presentation of servicing assets and liabilities subsequently measured at fair value and additional disclosures for all separately recognized servicing assets and liabilities. SFAS No. 156 is effective for transactions entered into after the beginning of the first fiscal year that begins after September 15, 2006. The Company is currently evaluating the effect the adoption of SFAS No. 156 will have on its financial position, results of operations, and cash flows. In September 2006, The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurement" ("SFAS No. 157"). This standard provides guidance for using fair value to measure assets and liabilities. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. Prior to SFAS No. 157, the methods for measuring fair value were diverse and inconsistent, especially for items that are not actively traded. The standard clarifies that for items that are not actively traded, such as certain kinds of derivatives, fair value should reflect the price in a transaction with a market participant, including an adjustment for risk, not just the company's mark-to-model value. SFAS No. 157 also requires expanded disclosure of the effect on earnings for items measured using unobservable data. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact of this statement on its financial statements and expects to adopt SFAS No.157 on December 31, 2007. 15 TREY RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2006 AND 2005 In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans -- An Amendment of FASB Statements No. 87, 88, 106, and 132R." This standard requires an employer to: (a) recognize in its statement of financial position an asset for a plan's overfunded status or a liability for a plan's underfunded status; (b) measure a plan's assets and its obligations that determine its funded status as of the end of the employer's fiscal year (with limited exceptions); and (c) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in comprehensive income. The requirement to recognize the funded status of a benefit plan and the disclosure requirements are effective as of the end of the fiscal year ending after December 15, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employer's fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The adoption of FAS 158 is not anticipated to have a material impact on the Company's financial position or results of operations. NOTE 3 - GOODWILL AND INTANGIBLES In June 2004, Trey Resources' wholly-owned subsidiary, SWK Technologies, Inc., completed a merger with SWK, Inc. The Company recorded total consideration for the acquisition of $577,437 comprised of acquisition costs of $27,437 and 2,750,000 Class A common stock of Trey Resources, Inc. valued at $550,000. This consideration has been allocated to the tangible and identifiable intangible assets acquired according to their respective estimated fair values, with the excess purchase consideration being allocated to goodwill at the closing of the transaction. Goodwill on this transaction amounted to $1,008,040, which represented amounts paid in excess of the fair market value of the acquired assets and liabilities assumed of SWK, Inc. On November 11, 2004, Trey Resources' wholly-owned subsidiary, BTSG Acquisition Corp. completed the acquisition of certain assets of Business Tech Solutions Group, Inc. Business Tech Solutions Group, Inc. was a value added reseller for Sage Software's BusinessWorks financial accounting software. As a result of the acquisition, Business Tech Solutions Group, Inc.'s sole shareholder was issued, in exchange for certain assets of Business Tech Solutions Group, Inc., 648,149 unregistered shares of Trey Resources' Class A Common Stock. In addition, Business Tech also received $19,000 of cash at the closing. The aggregate amount of this transaction, $54,000, was recorded as Goodwill. On February 27, 2006, Trey Resources' wholly owned subsidiary, SWK Technologies, Inc. completed the acquisition of certain assets of Wolen Katz. Wolen Katz was an authorized reseller for Sage Software's ABRA HRMS software solution and an authorized reseller of Employee Based Systems' E-Z Product line. As a result of the acquisition, Ms. Jodie Katz, the sole proprietor of Wolen Katz Associates, was issued, in exchange for certain assets of Wolen Katz, 4,347,825 unregistered shares of Trey Resources' Class A Common Stock, valued at $40,000. In addition, Ms. Katz will also receive $12,000 in cash payable in twelve (12) equal monthly installments commencing on the 90th day following the Closing Date. 16 TREY RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2006 AND 2005 On June 2, 2006, Trey Resources' wholly owned subsidiary, SWK Technologies, Inc. completed the acquisition of certain assets of AMP-Best Consulting. AMP-Best Consulting was an information technology company, a value added reseller, and master developer of the Sage Software family of products. Among the solutions they sold and supported are: Sage MAS 500 ERP, Sage MAS 90, 200, and 200 SQL, Sage BusinessWorks, Sage MIP, Sage Abra, ACT! by Sage, Sage CRM, Sage FAS Asset Accounting and JobOps. As a result of the acquisition, Patrick Anson, Crandall Melvin III and Michelle Paparo collectively were issued 6,000,000 unregistered shares of Trey Resources' Class A Common Stock, valued at $75,000. In addition, the SWK Technologies paid an aggregate of $85,000 at the closing and issued a $380,000 promissory note to Crandall Melvin III. Payments on the promissory note commence 120 days from the closing and are for a term of 5 years. The aggregate amount of consideration paid at the closing of $540,000 was reduced by assets acquired of $6,519 and $533,481 was recorded as Goodwill. These acquisitions have been valued by the strength of the client lists, and as such, have been reviewed for impairment at December 31, 2005. At December 31, 2005, management determined that the goodwill acquired in 2005 and prior periods should be impaired by $361,100 based on the reduced repeat sales from the clients. At September 30, 2006, management has determined that no further write-down for impairment is required. NOTE 4 - GOING CONCERN The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern. The Company has suffered recurring losses, experiences a deficiency of cash flow from operations, and current liabilities exceed current assets by approximately $4 million as of September 30, 2006. These matters raise substantial doubt about the Company's ability to continue as a going concern. The recoverability of a major portion of the recorded asset amounts shown in the accompanying condensed consolidated balance sheet is dependent upon continued operations of the Company, which in turn, is dependent upon the Company's ability to raise capital and/or generate positive cash flows from operations. In addition to developing new products, obtaining new customers and increasing sales to existing customers, management plans to achieve profitability through acquisitions of companies in the business software and information technology consulting market with solid revenue streams, established customer bases, and generate positive cash flow. These condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence. 17 TREY RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2006 AND 2005 NOTE 5 - SECURITIES AVAILABLE FOR SALE On August 10, 2006, the Company converted $35,000 of its Voyager Convertible Debenture into 1 million shares of Voyager Class A common stock. During the current period, the Company sold 390,000 of these shares and a balance of 610,000 shares remained at September 30, 2006. The market value of these shares at September 30, 2006 was $61,000. The unrealized gain of $39,650 is recorded as "Unrealized gain on securities available for sale" on the Consolidated Statement of Accumulated Other Comprehensive Income (Loss). NOTE 6 - CONVERTIBLE DEBENTURES RECEIVABLE In November 2004, the Company sold certain intellectual property, representing the software codes of the Automatic Reminder to Laser Energetics, Inc. (LEI), a New Jersey based technology company. As part of the sale, the Company was issued a convertible debenture in the amount of $250,000. The debenture, which bears interest at the rate of 3% per annum, has a five year term, and is convertible into shares of LEI Class A Common Stock at a rate equal to fifty percent (50%) of the average closing bid price of the Class A Common Stock for the four trading days immediately preceding the conversion date. The convertible debenture is convertible at the holder's option. As of September 30, 2006, the Company has determined that value of the debenture was significantly impaired and the entire debenture, including the accrued interest income for 2005 and 2006, were written down to zero as a provision for doubtful accounts. In January 2005, the Company purchased $328,695 of Voyager One, Inc. convertible debentures from Cornell Capital Partners. The debentures, which bear interest at the rate of 5% per annum, have a three year term, and are convertible into shares of Voyager One, Inc. Common Stock at a conversion price equal to the lower of (i) 150% of the lowest initial bid price of the common stock as submitted by a market maker and approved by the NASD or (ii) 50% of the lowest closing bid price of the common stock for the five trading days immediately preceding the conversion date. The convertible debentures are convertible at the holder's option any time up to the maturity date. During the nine months ending September 30, 2006, the company converted $53,000 of principal into 2,154,286 share of Class A Common Stock of Voyager One. Of this amount, 1,544,286 shares were sold in the open market for a gain of $66,231. We also exercised a conversion for $10,695 on August 15, 2006 that Voyager paid in cash for the net proceeds of $16,802, for a realized gain of $5,347. At September 30, 2006, the aggregate value of the debentures plus deferred interest income is $290,999. The balance of the Voyager One Common Stock that is unsold, $21,350, is recorded as Securities available for sale. 18 TREY RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2006 AND 2005 NOTE 7 - INCOME TAXES Deferred income taxes are determined using the liability method for the temporary differences between the financial reporting basis and income tax basis of the Company's assets and liabilities. Deferred income taxes will be measured based on the tax rates expected to be in effect when the temporary differences are included in the Company's tax return. Deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. At September 30, 2006, deferred tax assets consist of the following: Deferred tax assets $ 1,963,000 Less: Valuation allowance (1,963,000) ------------ Net deferred tax assets $ -0- ============ At September 30, 2006, the Company had a federal net operating loss carry forward in the approximate amounts of $5,775,000 available to offset future taxable income. The Company established valuation allowances equal to the full amount of the deferred tax assets due to the uncertainty of the utilization of the operating losses in future periods. NOTE 8 - NOTES PAYABLE In January 2005, the Company issued a promissory note payable to Cornell Capital Partners, LP for $1,150,000 for advances on the equity-line financing agreement entered into with Cornell in January 2003. As of December 31, 2005, $325,000 was repaid for principal through the issuance of 32,559,098 shares of Class A common stock. On December 30, 2005, the balance of the principal ($825,000) and accrued interest ($126,091) was transferred to a Secured Convertible Debenture as discussed in Note 9. In August 2005, the Company issued a promissory note payable to Cornell Capital Partners, LP for $200,000 for advances on the equity-line financing agreement entered into with Cornell in January 2003. On December 30, 2005, the balance of the principal ($200,000) and accrued interest ($7,956) was transferred to a Secured Convertible Debenture as discussed in Note 9. During the nine months ended September 30, 2006, SWK Technologies, Inc. drew an additional $28,000 from its line of credit with Fleet National Bank, a Bank of America company. The secured line of credit bears interest at prime plus 1% (9.25% at September 30, 2006) per annum, which can change with the fluctuations in the prime rate. Monthly payments of interest only in arrears shall be due and payable on the 4th of each month and these have been paid. Principal shall be due and payable on demand from Fleet National Bank. As of September 30, 2006, the aggregate balance of the line of credit is $173,000. Interest payments during the nine months ending September 30, 2006 were $7,951. 19 TREY RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2006 AND 2005 NOTE 9 - CONVERTIBLE DEBENTURES PAYABLE In January 2003, the Company entered into subscription agreements with certain purchasers to issue $140,000 in convertible debentures, with interest payable at 5% annum. The notes are convertible into the Company's Class A common stock at a price equal to either (a) an amount equal to one hundred twenty percent (120%) of the closing bid price for the Common Stock on the Closing Date, or (b) an amount equal to eighty percent (80%) of the average of the four (4) lowest Closing Bid Prices of the Common Stock for the five (5) trading days immediately preceding the Conversion Date. Pursuant to the subscription agreements set forth above, on March 25, 2003, the Company issued $40,000 in 5% convertible debentures and on September 19, 2003, the Company issued an additional $100,000 in 5% convertible debentures to the private investors under the subscription agreement. The 20% beneficial conversion feature was previously recorded as prepaid financing costs, until such time as the Company's Class A common stock into which the debentures are convertible was registered and deemed effective by the U.S Securities and Exchange Commission. The Company completed the effective registration of the Company's common stock, and any amounts capitalized have been charged to expense in accordance with EITF Issue 98-5. During the nine months ended September 30, 2006, no additional payments have been made on these outstanding convertible debentures. Total outstanding principal balance of the convertible debentures at September 30, 2006 was $15,000, plus accrued interest of $3,734. On December 30, 2005, the Company entered into a Securities Purchase Agreement with Cornell Capital Partners, LP ("Cornell"). Pursuant to such purchase agreement, Cornell shall purchase up to $2,359,047 of secured convertible debentures which shall be convertible into shares of the Company's Class A common stock. Pursuant to the Securities Purchase Agreement, two Secured Convertible Debentures were issued on December 30, 2005 for an aggregate of $1,759,047. A portion of this financing was used to convert promissory notes and accrued interest therefrom equal to $1,159,047 into new secured convertible debentures and the balance was new financing in the form of secured convertible debentures equal to $600,000 with interest payable at the rate of 7.5% per annum to be issued and sold on the closing of this Securities Purchase Agreement and a second secured convertible debenture equal to $600,000 with interest payable at the rate of 7.5% per annum to be issued and sold two business days prior to the filing of the registration statement that will register the common stock shares issuable upon conversion of the secured convertible debentures. On May 2, 2006, the second $600,000 was funded 2 business days prior to the date the registration statement was filed with the United States Securities and Exchange Commission. Interest on the outstanding principal balance of the Secured Convertible Debentures accrues at the annual rate of 7.5%. Payment of principal and accrued interest shall be paid on or before December 30, 2007 on the 2005 debentures and May 2, 2008 for the 2006 debenture. The Company has the option to redeem a portion or all of the outstanding debentures at 120% of the amount redeemed plus accrued interest. The holder shall be entitled to convert in whole or in part at any time and from time to time, any amount of principal and accrued interest at a price equal to 20 TREY RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2006 AND 2005 90% of the lowest closing bid price of the Common Stock during the 30 trading days immediately preceding the conversion date, as quoted by Bloomberg, LP ("Conversion Price"). In the event of a default, the full principal amount of this Debenture, together with interest and other amounts owing, shall be due and payable in cash, provided however, the holder of the debenture may request payment of such amounts in Common Stock of the Obligor at the Conversion Price then in-effect. A holder of the debenture may not convert this Debenture or receive shares of Common Stock as payment of interest hereunder to the extent such conversion or receipt of such interest payment would result in the holder of the debenture beneficially owning in excess of 4.9% of the then issued and outstanding shares of Common Stock, including shares issuable upon conversion of, and payment of interest on, this Debenture. Providing that the holder of the debenture meets all restrictions and that the Company does not enter into default, then the Company would expect to issue approximately 344,000,000 shares of Common Stock in settlement of the three secured convertible debentures, over the life of these debentures at the current Conversion Price of $.0075. During the nine months ended September 30, 2006, the Company issued 3,703,704 shares of Class A common stock for repayment of $25,000 of principal on the convertible debenture held by Cornell Capital Partners, LP. The aggregate principal value of the Cornell debentures is $2,334,047. This amount is shown net of the unamortized portion of the discount on conversion of $1,290,228. This discount is being amortized over the life of the debenture and is being recorded as a charge to amortization of discount on debt conversion on the statement of operations. NOTE 10 - DERIVATIVE LIABILITY In accordance with SFAS 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" and EITF 00-19, "ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS INDEXED TO, AND POTENTIALLY SETTLED IN, A COMPANY'S OWN STOCK", the conversion feature associated with the Cornell Secured Convertible Debentures represents embedded derivatives. As such, the Company had recognized embedded derivatives in the amount of $1,946,936 as a liability in the accompanying condensed consolidated balance sheet, and it is now measured at its estimated fair value of $1,243,321. The estimated fair value of the embedded derivative has been calculated based on a Black-Scholes pricing model using the following assumptions: Fair market value of stock $0.00750 Exercise price $0.00675 Dividend yield 0.00% Risk free interest rate 4.00% Expected volatility 99.69% Expected life 1.25 to 1.58 Years 21 TREY RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2006 AND 2005 NOTE 11 - DUE TO RELATED PARTIES Pursuant to the employment contract dated January 1, 2003 between the Company and Jerome Mahoney, the Non-Executive Chairman of the Board, Mr. Mahoney is to receive a salary of $180,000 per year subject to 10% increases every year thereafter, as well as a monthly unaccountable travel expense allowance of $725, an auto allowance of $800 and a health insurance allowance of $1,400 per month. Also, pursuant to the employment contract with Mr. Mahoney, following the completion of the Spin-off from its former parent company, iVoice Inc., which occurred on February 11, 2004, Mr. Mahoney is entitled to receive a one-time payment of $350,000. Total amounts owed to Mr. Mahoney at September 30, 2006, representing unpaid salary, unpaid expense and auto allowances and the one-time payment in connection with the Spin-off totaled $764,550. Pursuant to the employment contract dated September 15, 2003 between the Company and Mark Meller, the President, Chief Executive Officer and Chief Financial Officer of Trey Resources, Mr. Meller is to receive a salary of $180,000 per year subject to 10% increases every year thereafter, as well as a monthly unaccountable travel expense allowance of $600 and an auto allowance of $800. Also, pursuant to the employment contract dated September 15, 2003 between the Company and Mr. Meller, following the completion of the Spin-off from its former parent company, iVoice Inc., which occurred on February 11, 2004, Mr. Meller is entitled to receive a one-time payment of $350,000. In addition, Mr. Meller was awarded a cash bonus of $114,800 on September 14, 2004. During the nine months ending September 30, 2006, Mr. Meller received $125,000 cash payments and $37,289 of the Company's Class A Common Stock as approved by the Board of Directors as repayment of his accrued compensation. Total amounts owed to Mr. Meller at September 30, 2006, representing unpaid salary, unpaid expense and auto allowances, and the one-time payment in connection with the Spin-off, totaled $515,212. Mr. Mahoney and Mr. Meller have agreed to defer payment of any monies due and owing them representing fixed compensation, which have been accrued on the Company's balance sheet, and the one-time payment in connection with the Spin-off, until such time as the Board of Directors determines that the Company has sufficient capital and liquidity to make such payments. Mr. Mahoney and Mr. Meller have further agreed, however, to accept payment or partial payment, from time to time, as determined in the sole discretion of the Board of Directors in the form of cash, the Company's Class A Common Stock and/or the Company's Class B Common Stock. 22 TREY RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2006 AND 2005 NOTE 12 - NOTES PAYABLE TO RELATED PARTIES Pursuant to the Spin-off, the Company entered into an Administrative Services Agreement whereby iVoice will provide the Company with services in such areas as information management and technology, employee benefits administration, payroll, financial accounting and reporting, and other areas where the Company may need transitional assistance and support following the Spin-off distribution. The term of the agreement commences upon the effective date of the Spin-off and continues for two years, but may be terminated earlier under certain circumstances, including a default, and may be renewed for additional one-year terms. In exchange for services under the administrative services agreement, Trey Resources has agreed to pay iVoice an annual fee of $95,000. On May 16, 2005, the iVoice, Inc terminated its administrative services agreement with the Company and iVoice agreed to accept the assignment of 10 million shares of Laser Energetics Class A Common Stock as settlement of all Administrative Fees owed by the Company. The value of the exchanged securities was determined to be $64,891. Pursuant to the Spin-off from iVoice, the Company has assumed a promissory note totaling $250,000 payable to Jerry Mahoney, President and Chief Executive Officer of iVoice and Non- Executive Chairman of the Board of Trey Resources. This amount is related to funds loaned to iVoice and is unrelated to the operations of Trey. The note bears interest at the rate of 9.5% per annum on the unpaid balance until paid or until default. At the time of default (if any) the interest rate shall increase to 20% until the principal balance has been paid. Under the terms of the Promissory Note, at the option of the Note holder, principal and interest can be converted into either (i) one Class B common stock share of Trey Resources, Inc., par value $0.00001, for each dollar owed, (ii) the number of Class A common stock shares of iVoice, Inc. calculated by dividing (x) the sum of the principal and interest that the Note holder has decided to prepay by (y) fifty percent (50%) of the lowest issue price of Series A common stock since the first advance of funds under this Note, or (iii) payment of the principal of this Note, before any repayment of interest. During the nine months ending September 30, 2006, Mr. Mahoney received $125,000 cash payment and $37,289 of the Company's Class A Common Stock, both of which were applied to the principal of the loan. At September 30, 2006 the principal balance on this note was $29,819 and accrued interest was $47,879. In connection with the acquisition of SWK, Inc, the Company assumed a note payable to Gary Berman, a former shareholder of SWK, Inc. and current shareholder of Trey. On April 1, 2004, Mr. Berman loaned the company $25,000 pursuant to the Agreement and Plan of Merger and Reorganization among Trey, SWK and SWK Technologies, Inc. The unsecured note bears interest at 5% per annum and is payable in bi-weekly amounts of $217. At September 30, 2006, the outstanding balance to Mr. Berman was $13,456. In connection with the acquisition of SWK, Inc, the Company assumed a note payable to Lynn Berman, a former shareholder of SWK, Inc. and current shareholder of Trey. On April 1, 2004, Ms. Berman loaned the company $25,000 pursuant to the Agreement and Plan of Merger and Reorganization among Trey, SWK and SWK Technologies, Inc. The unsecured note bears interest at 5% per annum and is payable in bi-weekly amounts of $217. At September 30, 2006, the outstanding balance to Ms. Berman was $13,456. 23 TREY RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2006 AND 2005 In connection with the acquisition of Wolen Katz, the Company agreed to pay Ms. Katz $12,000 payable in twelve (12) equal monthly installments commencing on the 90th day following the Closing Date. At September 30, 2006, the outstanding balance to Ms. Katz was $8,000. In connection with the acquisition of AMP-Best, the Company agreed to collect some outstanding receivables and to pay some outstanding payables of the previous company. At September 30, 2006, the outstanding balance due to the previous owners of AMP-Best was $33,497. Pursuant to the asset purchase agreement with AMP-Best, SWK Technologies, Inc. issued a $380,000 promissory note to Crandall Melvin III. The note carries an interest rate of 7.75% and is payable in 60 monthly payments, commencing 120 days from the closing. As of September 30, 2006, the principal balance on the note is $380,000 and accrued interest is $9,816. NOTE 13 - COMMITMENTS AND CONTINGENCIES o On June 10, 2005, we consolidated our two New Jersey offices and moved into 6,986 square feet of space at 5 Regent Street, Livingston, NJ 07039 at a monthly rent of $7,423. In addition, we sublet 1,090 square feet of space in Clifton, NJ at a monthly rent of $1,998. Effective March 15, 2005, we entered into a lease for 621 square feet of space at 900 Walt Whitman Road, Melville, NY 11747, at a monthly rent of $932. On October 30, 2005, we entered into a one-year lease for office space at 1902 Wright Place, Carlsbad, CA 92008, at a monthly rent of $567. On June 2, 2006, we entered into a two-year lease for office space at 6834 Buckley Road, North Syracuse, New York, at a monthly rent of $1,800. We use our facilities to house our corporate headquarters and operations and believe our facilities are suitable for such purpose. The Company maintains a good relationship with its landlords and believes that these facilities will be adequate for the foreseeable future. o See Note 11 to the Financial Statements for information related to the employment agreements between Jerome Mahoney and Mark Meller. o The Company has entered into subscription agreements with certain purchasers for the sale of $140,000 in convertible debentures. The convertible debentures are convertible into Class A common stock at the discretion of the holders. During 2004, the Company issued 2,444,177 shares of Trey's Class A common stock for repayment of $125,000 of principal. As of September 30, 2006, $15,000 remained due on the principal and $3,734 was due for accrued interest on these debentures. o The Company assumed a total of $324,000 in accrued liabilities and related party debt outstanding and incurred by iVoice. The terms and conditions of the liabilities and debt being assumed are as follows: 24 TREY RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2006 AND 2005 Kevin Whalen, a former officer of iVoice, is owed $74,000 in amounts due for unpaid salary from iVoice and is unrelated to the operations of Trey. A portion of this amount is convertible into Class A Common Stock of Trey calculated by dividing (x) the sum of the principal the obligee requests to be converted by (y) the average closing bid price of Class A Common Stock of Trey for the five (5) business days immediately preceding the conversion date. As of September 30, 2006, Mr. Whalen has received $4,500 in cash and $20,000 in Class A Common Stock leaving a balance due of $49,500. o On December 30, 2005, the Company entered an Investor Registration Rights Agreement with Cornell Capital Partners, LP. Pursuant to the terms of the agreement, the Company was to file a registration statement with the SEC within 60 calendar days and to use its best efforts to have the Initial Registration Statement declared effective by the SEC no later than 120 calendar days after the date of the agreement. In the event of default of the registration rights agreement, the Company will pay liquidated damages, either in cash or shares of the Company's Common Stock, at 2% of the liquidated value of the Convertible Debentures outstanding for each thirty (30) day period after the Scheduled Filing Deadline or the Scheduled Effective Deadline as the case may be. Any Liquidated Damages payable hereunder shall not limit, prohibit or preclude the Investor from seeking any other remedy available to it under contract, at law or in equity. As of September 30, 2006, the Company has incurred $152,224 in Liquidated Damages and there is no maximum stipulated in the agreement. NOTE 14 - CAPITAL STOCK In accordance with its Certificate of Incorporation as amended on April 24, 2003, the Company is authorized to issue 10,000,000,000 shares of Class A common stock at $.00001 par value; 50,000,000 shares of Class B Common Stock, par value $.00001; and 20,000,000 shares of Class C Common Stock, par value $.00001. Additionally, the board of directors has the rights to prescribe and authorize the issuance of 1,000,000 preferred shares, $1.00 par value. PREFERRED STOCK Preferred Stock consists of 1,000,000 shares of authorized preferred stock with $1.00 par value. As of September 30, 2006, no shares were issued or outstanding. CLASS A COMMON STOCK Class A Common Stock consists of the following as of September 30, 2006: 10,000,000,000 shares of authorized common stock with a par value of $.00001, 154,514,126 shares were issued and outstanding. Each holder of Class A common stock is entitled to receive ratably dividends, if any, as may be declared by the Board of Directors out of funds legally available for the payment of dividends. The Company has never paid any dividends on its common stock and does not contemplate doing so in the foreseeable future. The Company anticipates that any earnings generated from operations will be used to finance the growth objectives. 25 TREY RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2006 AND 2005 For the nine months ending September 30, 2006, the Company had the following transactions in its Class A common stock: >> The Company issued 3,703,704 shares of Class A common stock with a total value of $40,741. Of this amount, $25,000 was for repayment of principal on the convertible debenture with Cornell Capital Partners, LP. The balance of $15,741 represents discount on conversions of the principal. >> The Company issued 4,347,826 shares of Class A common stock pursuant to the asset purchase agreement with Jodie Katz, valued at $40,000. >> The Company issued 6,000,000 shares of Class A common stock pursuant to the asset purchase agreement with Patrick J. Anson, Crandall Melvin III and Michelle Paparo, valued at $75,000. >> The Company issued 16,212,208 shares of its Class A common stock with a total value of $176,622 to officers of the Company as repayment of loans and accrued salaries. Of this amount, $74,577 was for repayment of principal and $102,045 represents discount on conversions. >> The Company issued 2,400,000 shares of Class A common stock with a total value of $30,000. Of this amount, $11,040 was for repayment legal services. The balance of $18,960 represents discount on conversions. >> The Company issued 6,900,000 shares of Class A common stock for compensation and bonuses to employees of SWK Technologies, Inc, valued at $81,000. CLASS B COMMON STOCK Class B Common Stock consists of 50,000,000 shares of authorized common stock with a par value of $0.00001. Each share of Class B stock has voting rights equal to 100 Class A Common Stock shares. As of September 30, 2006, no shares were issued and outstanding; Class B common stockholders are entitled to receive dividends in the same proportion as the Class B Common Stock conversion and voting rights have to Class A Common Stock. A holder of Class B Common Stock has the right to convert each share of Class B Common Stock into the number of shares of Class A Common Stock determined by dividing the number of Class B Common Stock being converted by a 50% discount of the lowest price that Trey had ever issued its Class A Common Stock. Upon the liquidation, dissolution, or winding - up of the Company, holders of Class B Common Stock will be entitled to receive distributions. 26 TREY RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2006 AND 2005 CLASS C COMMON STOCK Class C Common Stock consists of 20,000,000 shares of authorized common stock with a par value of $0.00001. Class C stock has voting rights of 1,000 to 1 with respect to Class A Common Stock. As of September 30, 2006, no shares were issued or outstanding. NOTE 15 - ACQUISITIONS AND MERGERS On June 2, 2006, Trey Resources' wholly-owned subsidiary, SWK Technologies, Inc., executed an asset purchase agreement between and among AMP-Best Consulting, Inc. ("AMP-Best"), a New York Corporation, Patrick Anson, Crandall Melvin III and Michelle Paparo for acquisition of certain assets, the customer list and business name of AMP-Best. Terms of the agreement provided for a cash payment at closing of $85,000, issuance of a $380,000 promissory note to Crandall Melvin III, the issuance of 6,000,000 shares to Trey Resource's Class A Common Stock, valued at $75,000, and employment agreements for Patrick Anson, Crandall Melvin III and Michelle Paparo. In addition, SWK Technologies assumed certain assets and liabilities of AMP-Best with an aggregate value of $6,591. The aggregate amount of consideration paid at the closing of $540,000 was reduced by the assets acquired and the balance of $533,481 was recorded as Goodwill. NOTE 16 - SUBSEQUENT EVENTS >> On October 10, 2006, the Company sent notice to Voyager One of its intent to convert $50,000 of principal on the Voyager One Debenture into 1,639,344 shares of Class A Common Stock of Voyager One. 27 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION You should read the following discussion in conjunction with our financial statements and related notes included elsewhere in this filing as well as our audited statements and related notes for the fiscal year ended December 31, 2005 filed with Form 10-KSB. The following discussion contains forward-looking statements. Please see "Forward Looking Statements - Cautionary Factors" for a discussion of uncertainties, risks and assumptions associated with these statements MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Up until its acquisition of SWK, Inc. ("SWK") on June 2, 2004, the Company was solely engaged in the design, manufacture, and marketing of specialized telecommunication equipment. As a result of a Spin-off, Trey was assigned the iVoice corporate assets, liabilities and expenses related to the Automatic Reminder software business. Trey Resources' plan of operation pursuant to its spin-off from its former parent company was to market and sell the Automatic Reminder software product. With the acquisition of SWK and as part of its plan to expand into new markets, the Board of Directors decided that Trey will focus on the business software and information technology consulting market, and is looking to acquire other companies in this industry. SWK Technologies, Inc., Trey's wholly owned subsidiary and the surviving company from the acquisition and merger with SWK, Inc., is a New Jersey-based information technology company, value added reseller, and master developer of licensed accounting software published by Sage Software. SWK Technologies also publishes its own proprietary supply-chain software, the Electronic Data Interchange (EDI) solution "MAPADOC". SWK Technologies sells services and products to various end users, manufacturers, wholesalers and distribution industry clients located throughout the United States. On June 2, 2006, SWK Technologies, Inc. completed the acquisition of certain assets of AMP-Best Consulting, Inc. of Syracuse, New York. AMP-Best Consulting, Inc. is an information technology company and value added reseller of licensed accounting software published by Sage Software. AMP-Best Consulting, Inc. sells services and products to various end users, manufacturers, wholesalers and distribution industry clients located throughout the United States, with special emphasis on companies located in the upstate New York region. Management is uncertain that it can generate sufficient cash to sustain its operations in the next twelve months, or beyond. It is unclear whether the acquisition of SWK, Inc, will result in a reasonably successful operating business and can give no assurances that we will be able to generate sufficient revenues to be profitable, obtain adequate capital funding or continue as a going concern. NINE MONTHS ENDING SEPTEMBER 30, 2006 COMPARED TO NINE MONTHS ENDING SEPTEMBER ------------------------------------------------------------------------------ 30, 2005 -------- Prior to our acquisition of SWK, Inc., on June 2, 2004, all revenues reported by Trey were derived from the license of our automatic reminder and call initiating software products which address a business or professional organization's need to automatically confirm pre-set appointments or meetings with customers or clients. Until February 11, 2004, the Automatic Reminder business had only operated as a division of iVoice, Inc. and had never operated on a 28 stand-alone basis. All rights, title, and interest to the Automatic Reminder software source code and product line was sold in November 2004 to a technology company for a $250,000 note and stock. Revenues for the nine-month period ended September 30, 2006 were $4,695,655 as compared to sales of $3,104,035 for the nine-month period ending September 30, 2005, an increase of $1,591,620, or 51.3%. These sales were all generated by the Company's operating subsidiary, SWK Technologies ("SWKT"). SWKT sales increased as the result of increased focus by management on marketing and sales across all its product lines, as well as a contribution to sales from AMP-Best Consulting, Inc, which SWKT acquired on June 2, 2006. The gross profit for the nine months ended September 30, 2006 of $1,743,209 represents the gross profit of SWKT. As a percentage of sales, gross margin was 37.1% for the nine-month period ending September 30, 2006. Gross profit for the nine months ended September 30, 2005 was $1,133,772, which was 36.5% of sales. Total gross profit increased by $609,437 when compared to the prior year. The mix of products being sold by the company changes from time to time, such that the overall gross margin percentage marginally increased. Sales of the larger Sage Software products carries lower gross margin percentage as the relative discount percentage from the supplier decreases, while consulting and network services typically carry higher gross margins. Total operating expenses were $2,524,589 for the nine-month period ending September 30, 2006, an increase of $530,385 over the nine-month period ending September 30, 2005, which totaled $1,994,204. The increase is primarily a result of SWKT increased selling and marketing expenses for salaries and benefits as management increased headcount necessary to increase sales and to support higher sales volumes. Total other income (expense) for the nine months ended September 30, 2006 were an expense of $296,385, a decrease of $206,488 in other expenses over the nine-month period ending September 30, 2005. The decrease in other expenses primarily reflects the gain on the revaluation of derivatives of $755,409, an increase $106,687 in the gain on sales of securities available for sale, and a decrease in the write off of financing costs in the amount of $73,805. These changes were offset by an increase of $59,605 in interest expense on outstanding indebtedness, an increase of $507,759 in amortization of debt conversion discounts and a decrease of $162,049 in other income, due to the write-off of liquidated damages on the Cornell Investor Registration Rights Agreement. Net loss for the nine-month period ending September 30, 2006 was $1,077,765 as compared to net loss of $1,363,305 for the nine-month period ending September 30, 2005. The decrease in net loss of $285,540 for the respective periods was a result of the factors discussed above. THREE MONTHS ENDING SEPTEMBER 30, 2006 COMPARED TO THREE MONTHS ENDING SEPTEMBER -------------------------------------------------------------------------------- 30, 2005 -------- Prior to our acquisition of SWK, Inc., on June 2, 2004, all revenues reported by Trey were derived from the license of our automatic reminder and call initiating software products which address a business or professional organization's need to automatically confirm pre-set appointments or meetings with customers or clients. Until February 11, 2004, the Automatic 29 Reminder business had only operated as a division of iVoice, Inc. and had never operated on a stand-alone basis. All rights, title, and interest to the Automatic Reminder software source code and product line was sold in November 2004 to a technology company for a $250,000 note and stock Revenues for the three month period ended September 30, 2006 were $1,787,949 as compared to sales of $1,139,094 for the three-month period ending September 30, 2005, an increase of $648,855, or 57.0%. These sales were all generated by the Company's operating subsidiary, SWKT. SWKT sales increased as the result of increased focus by management on marketing and sales across all its product lines, as well as a contribution to sales from AMP-Best Consulting, Inc, which SWKT acquired on June 2, 2006. The gross profit for the three months ended September 30, 2006 of $656,041 represents the gross profit of SWKT. As a percentage of sales, gross margin was 36.7% for the three-month period ending September 30, 2006. Gross profit for the three months ended September 30, 2005 was $392,711, which was 34.5% of sales. Total gross profit increased by $263,330 when compared to the prior year. The mix of products being sold by the company changes from time to time, such that the overall gross margin percentage marginally increased. Sales of the larger Sage Software products carries lower gross margin percentage as the relative discount percentage from the supplier decreases, while consulting and network services typically carry higher gross margins. Total operating expenses were $863,455 for the three-month period ending September 30, 2006, an increase of $125,994 over the three-month period ending September 30, 2005, which totaled $737,461. The increase is primarily a result of SWKT increased selling and marketing expenses for salaries and benefits as management increased headcount necessary to increase sales and to support higher sales volumes. Total other income (expense) for the three months ended September 30, 2006 were an income of $60,098, a net increase of $226,162 in other income over the three-month period ending September 30, 2005. The increase in other income primarily reflects a gain on revaluation of derivatives of $358,761, an increase of $45,167 in the gain on sales of securities available for sale and a decrease of $20,000 on the write off of financing costs. These changes were offset by an increase of $141,131 in amortization of debt conversion discounts, an increase of $3,941 in interest expense on outstanding indebtedness and a decrease of $52,694 in other income due to the write-off of liquidated damages on the Cornell Investor Registration Rights Agreement. Net loss for the three-month period ending September 30, 2006 was $147,316 as compared to net loss of $510,814 for the three-month period ending September 30, 2005. The decrease in net loss of $363,498 for the respective periods was a result of the factors discussed above. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- We are currently seeking additional operating income opportunities through potential acquisitions or investments similar to the transaction with SWK, Inc., Business Tech Solutions Group, and AMP-Best Consulting, Inc. Such acquisitions or investments may consume cash reserves or require additional cash or equity. Our working capital and additional funding requirements will depend upon numerous factors, including: (i) strategic acquisitions or 30 investments; (ii) an increase to current company personnel; (iii) the level of resources that we devote to sales and marketing capabilities; (iv) technological advances; and (v) the activities of competitors. To date, Trey has incurred substantial losses, and will require financing for working capital to meet its operating obligations. While we have recently raised sufficient working capital to fund our operations for what we believe should be sufficient for the next six months, we will subsequently need to raise additional capital to fund our future operations. We anticipate that we will require financing on an ongoing basis for the foreseeable future. In January 2003, the Company entered into a subscription agreement with certain accredited investors to issue $250,000 in convertible debentures, with interest payable at 5% per annum. On March 31, 2003, Trey issued $40,000 in convertible debentures to 4 individual investors under the subscription agreement. On September 19, 2003, Trey issued $100,000 in convertible debentures to Cornell Capital Partners pursuant to the subscription agreement. The debentures are convertible into shares of Class A Common Stock at a price equal to either (a) an amount equal to one hundred twenty percent (120%) of the closing bid price of the Class A Common Stock as of the closing date of the registration of shares or (b) an amount equal to eighty percent (80%) of the average closing bid price of the Class A Common Stock for the four trading days immediately preceding the conversion date. The convertible debentures have a term of two years with all accrued interest due at the expiration of the term. At our option, these debentures may be paid in cash or redeemed at a 20% premium prior to April 2004. As of September 30, 2006, $15,000 remained due on the principal and $3,734 was due for accrued interest on these debentures. On December 30, 2005, the Company entered into a Securities Purchase Agreement with Cornell Capital Partners, LP ("Cornell"). Pursuant to such purchase agreement, Cornell shall purchase up to $2,359,047 of secured convertible debentures which shall be convertible into shares of the Company's Class A common stock. Pursuant to the Securities Purchase Agreement, two Secured Convertible Debentures were issued on December 30, 2005 for an aggregate of $1,759,047. A portion of this financing was used to convert promissory notes and accrued interest therefrom equal to $1,159,047 into new secured convertible debentures and the balance was new financing in the form of secured convertible debentures equal to $600,000 with interest payable at the rate of 7.5% per annum to be issued and sold on the closing of this Securities Purchase Agreement and a second secured convertible debenture equal to $600,000 with interest payable at the rate of 7.5% per annum to be issued and sold two business days prior to the filing of the registration statement that will register the common stock shares issuable upon conversion of the secured convertible debentures. The debentures are due on December 30, 2007 and May 2, 2008, respectively, and carry an interest rate of 7.5% per annum. The principal and accrued interest on the debentures are convertible into shares of Class A Common Stock at a price per share equal to 90% of the lowest closing bid price of our Class A Common Stock for the thirty trading days immediately preceding conversion. The aggregate balance due of the Cornell debentures at September 30, 2006 is $2,451,949 for principal and interest. In connection with the acquisition of SWK, Inc. Trey has assumed a total of $664,642 in liabilities and has borrowed an additional $35,000 from an unrelated third party. Of the liabilities assumed, a total of $216,372 has been repaid by Trey at the closing and the $35,000 note is being paid at the rate of $1,500 per week. As of September 30, 2006, the entire balance 31 on this note was paid in full. On its audited financial statements for the year ending December 31, 2003, SWK, Inc., was issued a going concern opinion by its auditors who cited recurring losses, a deficiency of cash flows from operations and the lack of liquidity as the basis of their opinion. Pursuant to the Spin-Off from iVoice, Trey assumed an aggregate of $324,000 in liabilities from iVoice and iVoice assigned to Trey assets having an aggregate book value of $9,000. Trey believes that the fair value of these assets may be greater than the book value, although it has not undertaken an appraisal. The aggregate balance of these obligations at September 30, 2006 is $127,198. The assumed obligations are described below. Trey assumed an outstanding promissory note in the amount of $250,000 payable to Jerry Mahoney in exchange for the assets it received pursuant to the Spin-Off of the Automatic Reminder business. This amount is related to funds loaned to iVoice and unrelated to the operations of Trey. Trey, for value received, promised to pay Mr. Mahoney the principal sum of $250,000 at the rate of 9.5% per annum on the unpaid balance until paid or until default. Interest payments are due annually. At the time of default (if any) the interest rate shall increase to 20% until the principal balance has been paid. Under the terms of the Promissory Note, at the option of the Note holder, principal and interest can be converted into either (i) one share of Class B Common Stock of Trey, par value $0.00001, for each dollar owed, (ii) the number of shares of Class A Common Stock of Trey calculated by dividing (x) the sum of the principal and interest that the Note holder has decided to prepay by (y) fifty percent (50%) of the lowest issue price of Series A Common Stock since the first advance of funds under this Note, or (iii) payment of the principal of this Note, before any repayment of interest. At September 30, 2006, the principal on this note was $29,819 and accrued interest was $47,879. Mr. Mahoney agreed to forego receiving any shares he would have been entitled to receive in the Spin-Off by virtue of his ownership of either iVoice Class A or Class B Common Stock. Trey assumed an outstanding obligation to Kevin Whalen of $74,000 for amounts due for unpaid salary from iVoice. This amount is related to services provided to iVoice and unrelated to the operations of Trey. However, because Mr. Whalen assisted in the preparation of the financial statements and footnotes related to the spin-off, Trey assumed this obligation to Kevin Whalen. A portion of the obligation is convertible into Class A Common Stock of Trey calculated by dividing (x) the sum of the principal the obligee requests to be converted by (y) the average closing bid price of Class A Common Stock of Trey for the five (5) business days immediately preceding the conversion date. As of September 30, 2006, Mr. Whalen has received $4,500 in cash and $20,000 in Class A Common Stock leaving a balance due of $49,500. During the nine-month period ending September 30, 2006, SWK Technologies, Inc. drew down an additional $28,000 from its line of credit with Fleet National Bank, a Bank of America company. The secured line of credit bears interest at prime plus 1% per annum, which can change with the fluctuations in the prime rate. Monthly payments of interest only in arrears shall be due and payable on the 4th of each month and these have been paid. Principal shall be due and payable on demand from Fleet National Bank. As of September 30, 2006, the aggregate balance of the line of credit is $173,000. In connection with the acquisition of AMP-Best consulting, Inc., SWKT issued a note in the 32 amount of $380,000 to Crandall Melvin III and further assumed a capitalized lease with M&T Bank in the amount of $88,153 for certain furniture, fixtures, and equipment. During the nine months ended September 30, 2006, Trey had a net decrease in cash of $531,350. Trey's principal sources and uses of funds were as follows: CASH USED BY OPERATING ACTIVITIES. Trey used $956,501 in cash for operating activities in the nine months ended September 30, 2006, an increase of $98,537 in cash used in operations as compared to cash used for operating activities of $857,964 in the nine months ended September 30, 2005. The increase is primarily the result of the increased accounts receivables on higher sales, payments of prior year franchise taxes and the cash payments on related party accounts. CASH USED BY INVESTING ACTIVITIES. Investing activities for the nine months ended September 30, 2006 used $85,385 for the purchase and upgrade of computers and network equipment, and business acquisition costs, offset by $106,462 net proceeds realized from the sale of securities. Investing activities for the nine months ended September 30, 2005 used $425,683. Of this amount, $96,988 was used make leasehold improvements and to purchase furniture and equipment during the move to the new facility and $328,695 was used to purchase convertible debentures from Cornell Capital. CASH PROVIDED BY FINANCING ACTIVITIES. Financing activities in the nine months ended September 30, 2006 resulted in the Company receiving a total of $510,536 in cash. This total primarily consisted of net proceeds from the issuance of convertible debentures in the amount of $540,000, $28,000 net advances on the SWKT line of credit and proceeds from capital leases of $60,835. This was offset by repayments of related party loans of $90,639 and repayment of capital leases of $27,660. Financing activities in the nine months ended September 30, 2005 provided a total of $1,336,160 in cash. This total primarily consisted of $1,216,195 in note payable proceeds representing advances under the equity line of credit with Cornell Capital Partners and an additional borrowing of $145,000 from the SWKT line of credit. In addition, some of the new equipment purchases were financed by the supplier for a total of $27,344. While we have recently raised sufficient working capital to fund our operations for what we believe should be sufficient for the next six months, management is uncertain that it can generate sufficient cash to sustain its operations thereafter. Management can give no assurances that we will be able to generate sufficient revenues to be profitable, obtain adequate capital funding or continue as a going concern. FORWARD LOOKING STATEMENTS - CAUTIONARY FACTORS Certain information included in this Form 10-QSB and other materials filed or to be filed by us with the Securities and Exchange Commission (as well as information included in oral or written statements made by us or on our behalf), may contain forward-looking statements about our current and expected performance trends, growth plans, business goals and other matters. These statements may be contained in our filings with the Securities and Exchange Commission, in our press releases, in other written communications, and in oral statements made by or with the approval of one of our authorized officers. Information set forth in this discussion and analysis contains various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Private 33 Securities Litigation Reform Act of 1995 (the "Act") provides certain "safe harbor" provisions for forward-looking statements. The reader is cautioned that such forward-looking statements are based on information available at the time and/or management's good faith belief with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Forward-looking statements speak only as of the date the statement was made. We assume no obligation to update forward-looking information to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information. Forward-looking statements are typically identified by the use of terms such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "might," "plan," "predict," "project," "should," "will," and similar words, although some forward-looking statements are expressed differently. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. ITEM 3. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. ------------------------------------------------- Management of the Company has evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the fiscal quarter covered by this Quarterly Report on Form 10-QSB. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer of the Company have concluded that the Company's disclosure controls and procedures as of the end of the fiscal quarter covered by this Quarterly Report on Form 10-QSB are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that the information required to be disclosed in the reports is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. CHANGES IN INTERNAL CONTROLS. ----------------------------- Management of the Company has also evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, any change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-QSB. There was no change in the Company's internal control over financial reporting identified in that evaluation that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-QSB that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 34 PART II - OTHER INFORMATION ITEM 6. EXHIBITS 31.1 Certification of Chief Executive and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 35 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. Trey Resources, Inc. By: /s/ Mark Meller Date: November 16, 2006 ---------------------------- Mark Meller, President, Chief Executive Officer and Principal Accounting Officer 36 INDEX OF EXHIBITS 31.1 Certification of Chief Executive and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 37