Electric Tankless Water Heaters
Corporate Milestones
MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION for the period ending December 31, 2008 will be available shortly.
February 18, 2009
President’s Letter to Shareholders
Dear Shareholder:
As many of you know, the Company has said very little about its operations over the past 12 months since the mailing of my last update to you. This lapse in reporting was due to our belief that it is better to report on what we actually accomplished rather than what we only hoped to accomplish.
As some of you may know, transitioning a development-stage company to a company actively engaged in sales and revenue generation involves many challenges. I am pleased to share with you today that since my last update to you, we have achieved many successes, including the launch of our FORTIS™ whole-house electric tankless, as well as the successful commercialization and pending production of the Heatwave™ and Paradigm™ product lines both utilizing our revolutionary patented Paradigm™ technology – a technology platform that may literally change the way we all heat water! Recently, we attended the International Builder’s Show in Las Vegas, NV where we featured our FORTIS™ product line and also introduced our point-of-use water heaters to rave reviews. With FORTIS™ in full commercial production in Tempe, AZ, and our point-of-use product lines commencing production and sales in the 2nd quarter of 2009, we believe that SKYE has turned the corner, and we will now work to grow the company and attain profitable operations – even in this challenging economy.
We believe that not only has the time come for our products, but that the demand for tankless water heaters is growing rapidly also. Around the world tankless water heaters are the primary method of heating water – except in the United States and Canada, where water and energy have historically been cheap and abundant. However, with a renewed focus on energy and water conservation, many consumers are now switching to tankless water heaters that use up to 40% less energy than storage tank systems in an effort to both save money and the environment. As a result the market for tankless continues to grow at a staggering rate in the US in excess of 50% per year even despite recent economic difficulties. How big is the market opportunity? Over 9.8 million water heaters are replaced in homes across the United States every year and millions more were installed in new U.S. construction.
We recently began selling our products, exclusively through the wholesale channel to plumbing and home supply warehouses. Our current customer list includes, among others, names like Ferguson, Moore Supply (a member of the Hajoca group) and Winnelson, putting our product directly in the hands of the professionals who understand and appreciate these remarkable technological advancements best.
Corporately there have been several advancements as well. The Derivative lawsuit against us was recently dismissed and for the first time in many years we do not face a mountain of litigation. We recently welcomed Mr. Steven G. Mihaylo as our new Chairman, and we believe his history of business success will provide the guidance and leadership we need to grow our business. We were successful over 2008 in raising the capital required to achieve our many successes and this year we will seek to raise additional working capital to fund our growth and expanded product line. Additionally, we have recently made the decision to seek a listing of our common shares on another exchange. This goal is not without difficulty and we will have to make significant advances to make this move possible.
We appreciate the patience that you, our shareholders, have had with us over this past year. We realize that many of you have been frustrated by the lack of news from us, but we now renew our commitment to better communication in the future. With much of the development work now completed, we believe the time is right to communicate our story to the investment community. We recognize that investors are looking for companies that offer growth and profitability, and we believe we are now on this path. We look forward to sharing our successes with you in the coming months.
Sincerely,
SKYE INTERNATIONAL INC.
Perry D. Logan
President
The President’s Letter to Shareholders is neither an offer to sell, nor a solicitation of offers to purchase securities. This Shareholder Letter contains forward-looking statements within the meaning of the federal securities laws, including statements concerning product development activities and sales and licensing activities. Such forward-looking statements are not guarantees of future performance, are sometimes identified by words of condition such as “should,”“may,” “expects” or “intends,” and are subject to a number of risks and uncertainties, known and unknown, that could cause actual results to differ materially from those intended or anticipated. Such risks include, without limitation: the possibility that the market will not respond positively to the Company’s products, that early interest in the Company or its products will fail to result in commercially viable products, challenges arising from competition, problems encountered in commercializing technologies, such as the Company’s Paradigm technology, the potential of undetected infringing technology or non-infringing competitive technologies, difficulties experienced in product development, roadblocks experienced in sales and marketing activities, longer than expected sales processes, difficulties in recruiting knowledgeable and experienced personnel, possible problems in ramping up product production, potential problems in protecting the Company’s intellectual property, and problems securing the necessary financing to continue business operations. Further information concerning these and other risks are included in the Company’s filings with the Securities and Exchange Commission, including the Company’s most recent Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2008. The Company undertakes no obligation to update or revise such forward-looking statements to reflect events or circumstances occurring after the date of this Shareholder Letter.
MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (As taken from the form 10KSB filing for the period ending December 31, 2007)
The following discussion should be read in conjunction with the financial statements and accompanying notes included in this Form 10-KSB.
Plan of Operation.
The Company is in the business of designing, developing, manufacturing and marketing consumer lifestyle products, including, initially, several models of electronic, tankless water heaters. Previously the Company produced, marketed and sold its electronic tankless water heater products directly through the internet. The Fortis™ and Paradigm™ units, and future products, however, are proposed to be sold primarily through manufacturer’s representatives in the wholesale market.
Liquidity and Capital Resources.
A critical component of our operating plan impacting our continued existence is the ability to obtain additional capital through equity and/or debt financing. Since inception, we have financed our cash flow requirements through issuances of common stock and cash generated from our operations. As we continue our activities, we may continue to experience net negative cash flows from operations, pending receipt of significant revenues. Commencing in the first quarter of 2007 and continuing throughout the third quarter, all of the Company’s cash needs were met through loans advanced to the Company by certain of its related party directors.
The Company expects that additional operating losses will occur until revenue is sufficient to offset the costs incurred for marketing, sales and product development. Until the Company has achieved a sales level sufficient to break even, it will not be self-sustaining or be competitive in the areas in which it intends to operate. The Company will require additional funds to complete the ramping up for production of the FORTIS™, and to fully implement its marketing plans and for continued operations. Additionally, the Company will also require further development funds in order to finalize a commercialized version of its consumer product utilizing the patented Paradigm™ technology. We anticipate obtaining additional financing to fund operations through common stock offerings, debt offerings and bank borrowings, to the extent available, or to obtain additional financing to the extent necessary to augment our working capital. In the event we cannot obtain the necessary capital to pursue our strategic plan, we may have to significantly curtail our operations. This would materially impact our ability to continue operations. There is no assurance that the Company will be able to obtain additional funding when needed, or that such funding, if available, can be obtained on terms acceptable to the Company.
As of December 31, 2007, the existing capital and anticipated funds from operations were not sufficient to sustain Company operations or the business plan over the next twelve months. We anticipate substantial increases in our cash requirements; which will require additional capital generated from either the sale of common stock, the sale of preferred stock, or debt financing. No assurance can be made that such financing would be available, and if available it may take either the form of debt or equity. In either case, the financing will likely have a negative impact on our financial condition and our stockholders.
Executive Summary
The Company’s business is the design production, marketing and sale of consumer appliances. Skye’s premier consumer product is the FORTIS ™, a new series of electric tankless water heater. Skye will market the FORTIS ™ tankless water heater shortly through an established and growing list of manufacturer’s representatives located in many states across the United States. On the heels of FORTIS™ will be a new technology that Skye refers to as Paradigm™. This technology ushers in an entirely new method of heating water that is both fast and extremely efficient. The primary application for the Paradigm™ technology will be for the point-of-use instantaneous water heating market. Skye is currently working to commercialize this technology into a suite of products that can be used in homes across North America and Europe.
Once FORTIS™ is ready for commercial production and distribution, in late 2008, the Company’s success will be dependent upon its ability to attract high quality distributors and manufacturer’s representatives to market its products. To date, the Company has been able to attract distributors and manufacturer’s representative groups with a solid track record selling tankless water heating devices to home builders and the wholesale plumbing trade. The Company is unable to provide forecasts as to the amount of product it anticipates selling. As of December 31, 2007, the Company has entered into contracts with a number of manufacturer’s representatives located in states across the Southwest and Southeast of the U.S. Although existing agreements are currently under review by management, the current major terms of the contracts are: (a) distributors receive a graduated discount based on volume with the greatest discount being 35%, and 7% commissions to manufacturer’s representatives; (b) non-exclusive territories; © termination upon 30 days’ notice and; (d) no maximum purchase requirements and sales goals to be mutually agreed, or in default, $1,000,000 per territory. The Company plans on assisting in the training of its U.S. distributors and manufacturers representatives in the safe use of its products.
Going Forward
The Company has established relationships with contract manufacturers, Jabil Circuit, Inc., and Electrosem, LLC. to produce its FORTIS™ line of products.. Despite commencing commercial production late in the first quarter of 2008, the Company expects that it may take up to one year for the production design and processes to stabilize and all cost reductions to be effectively implemented.
The Company has also continued to focus development efforts on the commercialization of its new Paradigm™ technology. Although we have been very excited about the functionality that the Paradigm™ technology offers, we have not been successful in developing a cost effective means to commercialize the technology into a consumer product line. We are currently negotiating with a critical supplier to jointly complete the engineering and commercialization process, and then subsequently the engineering for manufacturing phase. In the event we are successful in concluding a strategic relationship in this regard, the Company expects that it will have first delivery of prototype product utilizing the Paradigm™ technology by late 2008 or early 2009, and commercial availability in 2009. As we have not yet completed our negotiations there can be no assurance that we will finalize any such agreement, or if we do finalize the agreement, that we will be successful in developing a commercialized product for distribution within a reasonable period of time.
Access to capital remains one of the most pressing considerations for the Company. Although we were successful in concluding a $600,000 non-brokered private placement in April 2006, and a further $100,000 as of September 30, 2006, such funds were not sufficient to provide adequate working capital to meet the needs of the Company beyond the beginning of the third quarter 2006. As such, the Company has continued to fund operations with loans from, and equity private placements made to, the Company’s directors. In order to execute our business strategy, the Company must raise in excess of $2 million over the next 12-month period in order to fully execute our current production and business plan. There can be no assurance that we will be able to raise such additional funding by way of either new debt or equity, and, in the event we are unable to raise the funds necessary to fund our business plan, it will be necessary to curtail such plans and this could have a detrimental impact on our business. Management believes that, in order to properly exploit the introduction of both the FORTIS™ and Paradigm™ technologies, it will be necessary that we be positioned not only as a quality supplier of products, but that we also be able to supply a sufficient volume of product to meet wholesale demand. We believe that, relative to the wholesale market, there is a very high expectation that product be available in a timely fashion when ordered. In order to meet this expectation, we must be capable of not only producing our products in sufficient volume, but expand our management team, corporate infrastructure, and working capital base. These goals all require capital and we must be successful in our efforts to obtain this funding if we are to be successful in the wholesale sales and distribution channel.
Over the balance of the year we will continue to focus our efforts on initiating production of the FORTIS™ product line and in getting it into the market to be sold. We will continue to develop our markets and train installers and field service personnel in cooperation with our appointed manufacturer’s representatives. This is no small task and it will require a significant investment of capital, as well as a greatly expanded staff in order to execute the business plan resulting in effective sales and service of the FORTIS™ product line.
Over the balance of 2008, we will continue to focus on completing the Paradigm™ technology and we are challenged by the opportunity to introduce this powerful technology to the US marketplace. While Paradigm™ will require a significant investment of time and capital in order to yield a line of marketable products, we are confident that products based on this technology will be amongst the most efficient and technologically advanced in the market. Many challenges remain and Skye’s Board, Management and Staff are committed to the challenge.
