Thermix Business Plan

8/14/2019 Thermix Business Plan

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ThermixZachary Scott Telschow


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Executive Summary

Thermix is seeking $550,000 in exchange for 10% equity to complete researchand development on an exclusively licensed patent that will allow for production of anew, energy efficient, and affordable radiant heat system.

The Thermix radiant heat system, a clear advancement over current heatingtechnologies, utilizes electrically conductive ceramic tiles arranged in a circuit to produceheat through resistance. Electricity passes through the tile itself, eliminating the need forthe additional subflooring materials associated with water based or electric mat radiantheat installations. Numerous safety features protect the end user from the risk of electricshock. Minor engineering tasks remain, including raising the conductivity of the ceramiccomposition, developing an electrically insulating glaze, and creating a method ofconnecting the tiles.

Due to an innovative configuration, the Thermix radiant heat system is a clearlysuperior product offering the same benefits as other radiant heat systems at a loweroverall cost. The Thermix system, which is retrofittable and highly efficient, can be

installed in new construction or existing buildings. In addition, because it is priced at just$5 per square foot, the Thermix radiant heat system is an affordable option that willenable more people to choose the comfort of radiant heat to augment or replace currentheating systems.

Exhaustive and complete market research has affirmed that consumers want theThermix radiant heat system and architects will endorse it. The 48 respondents to thearchitect survey showed a strong general interest in the Thermix system and indicated anexpected price. In addition, the 343 respondents to the homeowners survey indicatedwhat features they want in their flooring products and how they preferred to receivethem. Thermixs strengths align directly with current market priorities.

A two-pronged marketing campaign will be used to ensure that decision makers

hear about the Thermix system. Architects, the gatekeepers of the building materialsindustry, will be convinced of the merits of the Thermix system through direct selling aswell as exposure to the Thermix radiant heat system at two prominent annualconferences: Greenbuild and the American Institute of Architects convention. Inaddition, Thermix will partner with flooring specialty stores to offer the Thermix radiantheat system directly to consumers and contractors.

Thermix will mitigate risk using preventative measures in addition to havingcontingency plans in place. For example, the risk of product misuse will be reduced by aclear owners manual, third party quality control and assurance, and certified installation.In addition, money saved through self-insurance will be used if a legal dispute arises.

Thermix will be formed in the state of Wisconsin as an LLC and will be

comprised of three functional units: research and development, warehousing, and officesupport. ASE Impex of FuZhou, China will produce the tile, which will be shipped to theUnited States using intermodal shipping. After experiencing consistent rapid annual salesgrowth, Thermix will seek an IPO to fund construction of a factory and sales networkexpansion, allowing Thermix to drop production cost per tile and increase sales.

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Table of Contents

Sections: Page:I. Product.. 1

I.I General Description 1

I.II Intellectual Property 2I.III Applications and Benefits 2I.IV Safety Features 2I.V Alternative Tile Configuration 3I.VI Installation 3I.VII Remaining Engineering 3

II. Competition.. 6II.I Direct Competition 6II.II Indirect Competition 8II.III Pricing and Costs 9

III. Market Research. 10

III.I Target Markets 10III.II Greenbuild 10III.III Residential Survey 10III.IV Builder and Contractor Survey 14III.V Architect Survey 14III.VI Market Size 16

IV. Marketing18IV.I Overview 18IV.II Conventions 18IV.III Tax Credits 18IV.IV Website 19

V. Risks20V.I Product Development 20V.II Disruptive Technologies 20V.III Supply Chain/Manufacturing Interruptions 20V.IV Product Misuse 21V.V Regulator Changes 21

VI. Organizational Plan.22VI.I Business Form 22VI.II Business Structure 22VI.III Production and Shipping 22VI.IV Exit Strategy 23

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VII. Financial Outline.24VII.I Overview 24VII.II Requested Investment 24VII.III Sales Projections 24VII.IV Production 24

VII.V Research and Development 24VII.VI Warehouse 25VII.VII Inventory 25VII.VIII Office 25VII.IX Taxes and Benefits 25VII.X Quality Control/Quality Assurance 25VII.XI Travel 26VII.XII Salaries 26

Appendices:Appendix A Full text of U.S. patent 5,601,853

Appendix B Five year cash flow projection

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Product

I.I General Description

The Thermix radiant heat system, utilizing an exclusive license to U.S. patent

#5,601,853, is a clear advancement over current heating technologies. This systemutilizes electricity run through electrically conductive tiles in order to produce heat, asdepicted in Figure 1.

Figure 1: Current flowing through a Thermix tile

The tiles, which are arranged in a circuit (as shown in Figure 2), produce heatthrough resistance. Since electricity passes through the tile itself, no additionalsubflooring structure is required, reducing time and materials used in installation.

Figure 2: Layout of a sample 4'x4' floor

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A digital, programmable thermostat will control the temperature of the floor andzone heating, while a separate monitoring station will contain the necessary safetyfeatures. This highly efficient, retrofittable system is designed to augment or replace anyexisting heating system in homes as well as commercial office and retail spaces.

I.II Intellectual Property

Thermix has exclusive rights to U.S. patent #5,601,853, which protects theelectrically conductive ceramic necessary to produce Thermix ceramic tiles. Thecomposition protected by the patent was originally developed by DuPont and laterdonated to the state of Delaware. Through an agreement with the state of Delaware,using the Center for Advance Technology and Innovation (CATI) as an intermediary,Thermix has obtained the ability to license exclusive rights to this patent for a nominalroyalty fee of 3% of gross revenue. The full text of the patent is attached as Appendix A.

The ceramic composition is comprised of 90% ceramic powder, with theremaining 10% made up of three metal oxides: magnesia, chromia, and alumina. Altering

the concentration of the metal oxides can vary the conductivity of the ceramiccomposition.In order to create the fully dense composition required for electrical conductivity,

the ceramic must be fired at a temperature of ~1550 C. This firing temperature,

markedly higher than most ceramic tiles, produces a much more durable tile.

I.III Applications and Benefits

The Thermix radiant heat system augments or replaces current heat choices innew construction and existing buildings. Due to the lower overall cost of the Thermixradiant heat system, a greater number of consumers and businesses will choose this

retrofittable, comfortable, and energy efficient option.Homeowners living in old, drafty farmhouses will appreciate the comfort theThermix radiant heat system will bring to their bedroom. Since the Thermix system isretrofittable, owners of old homes will be able to add radiant heat to select sections oftheir home for just $5 per square foot plus installation.

Office workers will enjoy their new building even more as radiant heat keeps theirdesk area comfortable all day. Instead of adapting to the building temperature, anemployee will adjust the thermostat for their heating zone, allowing for increasedcomfort.

With the Thermix radiant heat system, homeowners can step out of the showeronto a warm tile floor. Installing the Thermix radiant heat system in wet areas, such as

bathrooms, showers, and pool areas, will help people stay warm even when they are wet.

I.IV Safety Features

The electricity traveling through the tile, in combination with the composition ofthe ceramic itself, necessitates the inclusion of numerous safety features in the tiles andmonitoring station.

Thermal runaway, or uncontrolled and continuous increases in temperature, is

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possible due to the positive thermal coefficient of the ceramic composition and will beprevented by a temperature-monitoring device in the monitoring station. Once thetemperature of the floor reaches a preset threshold, the power to the floor will beautomatically shut off until it has cooled.

Two precautions will be put into place to prevent the possibility of electric shock.

Thermix ceramic tiles will be coated in a durable, electrically insulating glaze. Inaddition, a residual current device, also known as a ground fault circuit interrupter(GFCI), will be built into the monitoring station. These devices, common in bathroomsand kitchens, immediately break a circuit upon detection of a difference in currentbetween charged and neutral wires. If electricity were passing from the floor through aperson, the GFCI will cut power to the floor instantly.

I.V Alternative Tile Configuration

Another possible design for the Thermix radiant heat ceramic tiles is to layer aregular ceramic tile on top of the electrically conductive ceramic composition. In this

setup, the electrically conductive portion and the regular ceramic tile will each make uphalf of the hybrid tile. There are two primary advantages that will occur if this layeringconfiguration is feasible.

First, production costs of the hybrid tile will be significantly less than the costs ofthe tile composed entirely of electrically conductive ceramic. The highest cost in theproduction of the electrically conductive ceramic composition is the high purity metalsrequired. By reducing the volume of the electrically conductive ceramic composition,lower production costs can be realized. In addition, there will be no need for anelectrically insulating glaze, as regular ceramic tile acts as a natural electrical insulator.

The drawback of this hybrid configuration, however, is that the conductivity ofthe electrically conductive half of the tile will need to be proportionally higher than theconductivity in tiles made completely of the electrically conductive composition due to areduced cross sectional area.

I.VI Installation

The differences between installing a Thermix radiant heat system and a traditionalceramic floor will be minimal. Installation will utilize a ceramic tile installer working inconjunction with a state certified electrician. The use of an electrician for half a day, inaddition to the purchase and installation of the monitoring station, constitute the costdiscrepancy in installation of a Thermix floor compared to a regular ceramic tile floor.

After planning out tile circuits of the appropriate length using the Thermixinstallation guide, the installer will lay down all tiles on a foam underlayment andconnect the tiles into a circuit. Once the tile circuits have been approved by a statecertified electrician, the grout will be put into place.

The electrician will inspect the tile circuits and then install the thermostat. Afterall facets of the installation process are complete, the electrician will test the performanceof the system to verify that it is operating within accepted standards.

The Thermix system can be installed by anyone who is comfortable withinstalling regular ceramic tile, including family or friends. However, an electrician will

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still be needed to verify and test the setup of the system.

I.VII Remaining Engineering

There are several achievable, yet sizeable, engineering goals that must be met in

order to implement the Thermix radiant heat system. First, the conductivity of theelectrically conductive composition must be increased; the required amount ofconductivity will be determined by whether the standard or hybrid configuration ischosen.

In addition, if the standard configuration is chosen, an electrically insulating glazemust be developed. One possible glaze that may be used is an electrically insulatingepoxy.

The monitoring station, which contains the ground fault current interrupter andautomatic temperature limiting shutoff, also needs to be developed. This box will requiremostly off the shelf parts and will not present a large engineering challenge.

Lastly, a method of connecting the tiles must be selected and fully developed. In

any of the connection methods being considered, an electrically conductive epoxy will beused to attach the metal connector to the ceramic tile. Some methods under considerationare depicted in Figures 3 and 4.

Figure 3: Side view of interlocking plate connectors.

Figure 4: Side view of interlocking hook connectors.

Another connection option is the use of an electrically conductive metal tape laidbeneath the tile, as depicted in Figure 5.

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Figure 5: Bottom view of tiles connected using an electrically conductive metal tape.

Competition

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The Thermix radiant heat system will establish a competitive advantage overdirect and indirect competition through a clearly superior product offered at a loweroverall cost. The lower initial cost of the Thermix system is achieved using a newheating technology in addition to manufacturing the tiles in FuZhou, China.

II.I Direct Competition

The innovative configuration of the Thermix radiant heat system provides lowerinstallation and operation costs than other radiant systems while maintaining the samebenefits. Thermix will be in direct competition with two predominant forms of radiantheat: electric mat and hydronic. Although these technologies have expanded the marketfor radiant heating and improved their product offerings, the Thermix system is adisruptive technology that will capture a significant share of the existing market inaddition to expanding the market for radiant heating.

Electric mat radiant floor heating systems, from makers such as SunTouch,Honeywell, and Nuheat, are retrofittable just as the Thermix system is; however, these

mats typically cost between $10-$14 per square foot and also require the purchase oftraditional flooring such as hardwood or ceramic tile (as depicted in Figure 6). 1, 2, 3 Inaddition to higher installation costs, these mats have higher operating costs arising fromlow efficiency. The inhibitive cost of electric mat radiant floor heating systems hasprevented many consumers from choosing this option.

Figure 6: Standard electric mat and ceramic tile configuration.

A variation of the electric mat system is the use of wires put beneath the flooringto produce heat. Currently offered by just one manufacturer, this concept has had troublegathering market share due to pricing very comparable to electric mats at $9.44 to $14.24

1 Warm Your Floor. (2002). Retrieved on April 8, 2008 fromwww.warmyourfloor.com2 BobVila. (2008). Retrieved on April 8, 2008 from www.bobvila.com3 Nuheat Industries. (2008). Retrieved on April 8, 2008 from www.nuheat.com

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radiant heat systems, resulting in low operating and installation costs.

Table 1: Primary advantages of radiant heat systems.

Hydronic Electric Mat Thermix

High Efficiency X XRetrofittable X X

Minimal Materials X

II.II Indirect Competition

There are two markets in which Thermix will be competitive: heating andflooring. The Thermix radiant heat system can be used to augment or replace all currentheating technologies. The form of heat over which the Thermix system experiences thelargest advantage, however, is forced air heat, the most common form of heat on themarket today. When the Thermix radiant heat system is used to augment forced air

heating, the forced air system can be run at a significantly lower temperature whileallowing occupants to experience the same comfort, saving the owner money over timethrough lower operating costs.

By transmitting heat through infrared waves instead of hot air and allowing forzone heating, radiant heat eliminates several inefficiencies inherent in forced air heating.The first inefficiency arises from the standard configuration of a single thermostat for anentire home or business, forcing the owner to heat all areas of the building evenly insteadof heating the most heavily trafficked areas. Another inefficiency inherent in forced airheat is that hot air to rises, causing building owners to heat their ceilings instead of aircloser to ground level in addition to heating rooms unevenly, as depicted in Figure 8.

Figure 8: Efficiency of forced air and radiant heat.

The Thermix radiant heat system addresses these inefficiencies. Theprogrammable thermostat allows for zone heating, letting owners direct more heattowards heavily occupied or uncomfortable areas, such as the kitchen and bathroom in ahome. In a business, heat can be directed to employee desks while leaving islesnoticeably cooler. In addition, radiant heat is transmitted through convection from thefloor, thereby evenly heating people, not ceilings, first.

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Radiant heat technologies have several significant advantages over forced airheat. Since radiant heat does not require fans or blowers, it operates silently and reducesdust and allergens. In addition, since the heat in a radiant system rises from the groundup, heat loss through the roof is minimized.

Thermix will have difficulty capturing customers who would otherwise buy low

cost flooring products, such as laminate and vinyl. Traditional ceramic tile, which is verydurable and easy to clean, cannot offer the owner the benefits of the Thermix system,such as comfort and lower heating costs. These advantages will convince consumers tochoose a Thermix radiant heat system over a traditional ceramic tile floor for a moderateprice premium.

II.III Pricing and Costs

The Thermix radiant heat system, a clear advancement over current heatingtechnologies, will bring radiant heat to the masses due to lower overall costs. Initialinvestment and operating costs will be significantly lower than existing radiant

technologies. Additionally, the sale price of Thermix ceramic tiles will be comparable tothe price of premium ceramic tiles.Electric mats are the most expensive radiant heat choice on the market. Although

the system is retrofittable, the mats themselves cost between $10-$14 per square foot. Inaddition, the operating costs are significantly higher than hydronic systems.

Hydronic radiant heat systems, which are very difficult to install in existinghomes, cost between $5-$10 per square foot installed. Although it is difficult to estimatethe cost savings of operating a hydronic system due to the number of variables, mostconsumers experience savings between 10%-40% in their heating costs, with savings of30% being very common.6

Premium ceramic tiles, found in big box retailers such as Home Depot, Lowes,and Menards, typically cost between $3-$5 per square foot. These tiles are often thicker,and as a result, more durable than their cheaper counterparts.

The Thermix ceramic tiles will be priced at $5 per square foot. This price point,marginally more expensive than premium ceramic tile, will price Thermix below existingelectric mat and hydronic radiant heat systems. In addition, $5 is less than the medianprice architects requested for this material (for more information about what architectsthought of the Thermix system, please see section III.V). Operating costs of the Thermixradiant heat system will vary by configuration and area due to the price of electricity, butmay be cheaper than hydronic systems if off-peak energy rates are utilized.

Market Research

III.I Target Markets

By offering an energy efficient and retrofittable heating system with low up front

6 Builder New Magazine. (2004). Retrieved on April 4th, 2008 fromwww.buildernewsmag.com

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costs, Thermix will bring radiant heat to a broader audience. As with many other energyefficient products, two of the primary target markets for the Thermix radiant heat systemare green and cost conscious consumers and businesses. The largest markets Thermixwill enter, however, are existing homes, offices, and retail spaces. Due to high pricepoints and impracticality of installing current products, many of these potential customers

have not considered radiant heat; Thermix will allow a greater number of people tochoose this comfortable and energy efficient option at a lower cost.

III.II Greenbuild

In order to explore the current climate of the green market, I attended Greenbuild,the annual conference of the United States Green Building Council (USGBC), which washeld in Chicago this year. The USGBC is a non-profit organization working to makegreen building accessible to everyone within a generation. While there, I learned twovery important trends.

First, in order to compete as a green product in the United States, official

credentials as a green product are a prerequisite. Each company that I spoke with thathad green credentials had plenty of business to keep them busy, while companies thatlacked some form of recognition were struggling to stay afloat. Thermix will becomerecognized as a green company by becoming a staple flooring product in greenconstruction projects, such as Leadership in Energy and Environmental Design (LEED)certified buildings.

Another important trend I became aware of at Greenbuild was that manyinternational companies were experiencing a heavy volume of sales in Europe. Europeanconsumers and governments are proactive in reducing pollution and protecting theenvironment. Jacqueline McGlade, Executive Director of the European EnvironmentAgency, exemplified this attitude when she stated: A gradual shift of todays taxes awayfrom personal income and capital towards taxes on consumption, pollution, andinefficient use of energy and resources can boost employment, eco-innovation, andprotect the environment. European consumers, who dont select products based solelyon price and value the environment, are likely early adopters of the Thermix system.Further market research on the European market will be pursued.

III.III Residential Survey

Using an online tool called SurveyMonkey, a survey instrument that collectsresponses via the internet, a survey of homeowners was conducted and 343 responseswere received. Since Carthage alumni and current Carthage students parents werepolled, most respondents resided between Green Bay and Chicago, as depicted in Figure9. The mean household size was 3.17, while the median household size was 3.

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Figure 9: Respondents to the residential survey.

The responses rank durability as the most important factor in flooring selection; Thermixtiles, due to a higher firing temperature, are more durable than other tiles (as mentionedin section I.II). Long term energy savings, comfort of warm floors, and silent operation,

all features of the Thermix system, were rated as the most important features of heatedfloors. Current market priorities align directly with areas in which Thermix excels.

Figure 10: Annual household home improvement spending.

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In addition to questions about current flooring and factors in flooring selection,respondents were asked a handful of demographic questions. Figure 10 depicts annualhome improvement spending by household. The chart illustrates that 30% of respondentsspent $2,500 or more on home improvement spending, while another 38% spent between

$1,000 and $2,499. This level of annual home improvement spending will support theinstallation of the Thermix radiant heat system in large areas if spread out over severalyears, or putting it in small areas of the home within a single year.

Figure 11: Age of residential survey respondents.

Figure 12: Year the residential survey respondent's home was built in.

Figures 11 and 12, which depict respondent age and the year in which their homewas built, respectively, demonstrate that the residential survey respondents were arepresentative sample. In addition, 52% of respondents live in homes built prior to 1984and are prime candidates for home improvement spending and increases in heating

efficiency.An aggregate of the residential survey responses follows. Please note that forsome questions, a respondent could check more than one answer, leading to responsecounts greater than the number of respondents. For example, a respondent may havepurchased more than one type of flooring through their builder.

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Table 2: Types of flooring respondents have in the rooms in their home.

Homeowners were asked what type of flooring they have in their home as amethod of gauging how common ceramic tile is in various rooms in the house; theirresponses are in Table 2. Unsurprisingly, ceramic tile is the most popular flooring forbathrooms, but also is used for close to 25% of kitchens and foyers.

Table 3: Purchase location by flooring type.

In order to find out where and from whom consumers purchased their flooringproducts, homeowners were asked to indicate where they bought each type of flooring

that they have. As shown in Table 3, purchases made at flooring specialty storesrepresented 45.6% of all new ceramic tile purchases, with big box retailers and buildersmaking up the remainder. This illustrates that selling through flooring specialty stores inaddition to selling directly to architects will allow Thermix to reach a significant portionof the market.

Table 4: Flooring installer by flooring type.

Friends, family members, or the homeowners themselves installed nearly 40% ofall new ceramic tile floors, as illustrated in Table 4. This indicated that the Thermixsystem must be designed so that the average handyman can install it.

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Foyer Living Room Dining Room Kitchen Bathroom(s) Bedroom(s)

Carpet 37 225 118 2 31 222

Wood 120 108 128 96 40 65

Ceramic 79 10 21 73 153 34

Stone 21 2 2 9 18 1

Laminate 27 5 31 48 28 13

Vinyl 42 3 31 114 126 20

Respondents 322 340 329 341 340 331

Bou ht existin home Bi box retailer Floorin com an Throu h m builder Online

Carpet 125 21 111 40 0

Wood 117 18 34 32 1

Ceramic 82 32 47 26 1

Stone 19 2 13 6 0

Laminate 26 21 13 7 0

Vinyl 70 28 39 21 1

Respondents 206 89 148 62 3

Bought existing home Big box retailer My builder Flooring company I did (DIY project) Friend/family

Carpet 117 14 39 114 10 7

Wood 107 4 32 33 23 9

Ceramic 72 2 27 41 30 13

Stone 17 0 7 8 2 3

Laminate 27 3 10 9 22 6

Vinyl 63 2 20 33 26 12

Respondents 195 21 62 140 80 33


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Table 5: Importance of factors in flooring selection.

Importance: 5 4 3 2 1 Respondents

Comfort 148 127 45 8 1 329

Cost 144 133 45 5 3 330Durability 187 124 17 1 0 329

Ease of cleaning 147 137 41 4 1 330

Effect on home value 100 111 72 22 12 317

Homeowners were asked how important various factors were in their flooringselection. As show in Table 5, durability was the single most important featureconsumers sought; Thermix ceramic tiles are more durable than conventional ceramictiles. In addition, comfort, cost, and ease of cleaning, all features of Thermix tiles, werevery important to homeowners as well.

Table 6: Importance of factors in radiant heat selection.

Importance: 5 4 3 2 1 Responses

Long-term energy savings 149 88 38 10 28 313

Comfort of warm floors 145 100 41 10 22 318

Zone heating 81 91 79 22 29 302

Even heating (vs. vent) 91 110 62 15 25 303

Silent operation 106 98 43 23 34 304

Long-term energy savings and the comfort of warm floors, both features of theThermix radiant heat system, were ranked as the most important factors in selection of

heated floors. Silent operation ranked surprisingly high as a factor in flooring selection,especially among older respondents. Retirees concerned with comfort, long term costs,and silent operation is a niche Thermix will pursue through condominium builders insouthern states.

III.IV Builder and Contractor Survey

In order to understand the current climate of radiant heat installations in homesand businesses, a phone survey of local builders and contractors randomly selected fromthe yellow pages was conducted. After several conversations with a handful of firms, onefact became very clear: architects, not builders, make decisions about what building

materials are used in structures. Architects were then surveyed.

III.V Architect Survey

Using SurveyMonkey, a survey with predominately open-ended questions wasconducted of residential and commercial architectural firms listed as members of theAmerican Institute of Architecture and the United States Green Building Council. Thefirms contacted were scattered across the United States and 48 responses were received.

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A disproportionately large number of architecture firms from the Flagstaff, Arizona arearesponded, as you can see in Figure 13.

Figure 13: Respondents of the architectural survey.

The 48 residential and commercial architectural firms that responded designedbetween 10,000 square feet and 20,000,000 square feet of buildings each year. The meansize was 1.65 million square feet; the median size was 200,000 square feet; the mode size

was 1 million square feet. Figure 14 illustrates the size of responding firms.

Figure 14: Size of responding architecture firms by square feet designed per year.

First and foremost, the responses given to the architect survey showed that architectsare very interested in implementing the Thermix system in their projects. Someresponses included:

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If you get further with this project, keep us posted.

I would like to learn more about this product. It sounds doable.

I would like to see specifications for your system.

Innovative idea.

I would love to see an alternative that is competitive and easy to install as part ofthe standard tile installation.

We will use the product in commercial settings.

Architects were asked, At what price per square foot would your firmrecommend and use this product? Although the range varied widely from $1 per squarefoot to $20 per square foot, the median price was $6.50 and the mode was $5. A handfulof architects saying they would be interested near the $20 price point raised the meanprice to $8.64.

Responses to this survey established that the Thermix radiant heat system requiresUnderwriters Laboratory or other equivalent certification; it also affirmed the necessityof green credentials. One respondent suggested that the Thermix system should have UL, and ideally, LEED certification. The majority of architects echoed that sentiment.

Despite open-ended questions, a relatively large number of architects requestedthe inclusion of two different features. Some form of automatic, temperature limitingshut-off was requested by eight of 39 architects and will be included, as detailed insection I.III. A non-slip surface, suggested by five of 39 architects, will be included inthe product as well.

It was also suggested that the Thermix radiant floor heating system combine withsome means of electricity production such as solar panels or windmills, allowing a hometo draw little or no electricity from the electrical grid. If the Thermix system werecombined with solar panels, for example, the panels would produce electricity to heat thefloors during the day while off-peak electricity would be used at night. An officialpartnership with an alternative energy supplier will be explored.

III.VI Market Size

Two markets Thermix will enter, the domestic ceramic tile and radiant heatingmarkets, are large markets currently static in size due to the subprime mortgage crisis.According to HighBeam Research, as of 2004, the ceramic tile market was experiencingannual growth of 10% and had reached ~3.13 billion square feet in annual sales. TheRadiant Panel Association stated that approximately 100,000 hydronic radiant floorheating systems were installed in residences in 2003, while in 2006, there were

approximately 135,000 installations. For the first time in sixteen years, sales of hydronicradiant tubing fell in 2006 (by a modest 1.1%).

Despite the housing slowdown in the United States, sales of Thermix radiant heatsystems will be strong due to their retrofittability. In a slow economy, homeimprovement spending rises as people look to improve existing homes instead ofpurchasing new ones.

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Marketing

IV.I Overview

In order to establish Thermix as a premier product and gain market share,

Thermix will convince architects of the merits of the Thermix system as well as reachconsumers directly through flooring specialty stores.

The Thermix sales team will make advocates of architects, who act as thegatekeepers of the building materials industry. Through phone conversations andsurveys, it has been made clear that architects steer decision making in what buildingmaterials are used in construction projects. Producing customers of influential architectswill be the most cost effective way to build market share and product awareness in theconstruction industry.

In order to gain initial traction in the home renovation market, Thermix will sellthrough flooring products specialty stores. Flooring specialty stores, which sold 44.3%of all new ceramic tile purchases in our residential survey, typically have better service

and more specialized staff. This will allow those considering the Thermix system fortheir home to completely understand the benefits before making an educated decision.

IV.II Conventions

To allow the Thermix sales team to meet with customers and architects in person,the sales team will attend two annual conventions. Due to the large importance ofarchitects in selecting building materials as discussed in Section IV.I, the Thermix salesteam will attend the annual national conference of the American Institute of Architects,which is held in May each year.

In addition, each November the sales team will attend Greenbuild, which is held

in a different city and has drawn crowds of more than 20,000 in a single day. Thermixwill be hosting a booth at Greenbuild in order to interact with this multitude ofenvironmentally aware consumers, architects, and builders. For a summary ofexperiences with Greenbuild Chicago 2007, please see section III.II.

IV.III Tax Credits

Construction and architectural firms will be compelled to use the Thermix systemdue to tax credits available for energy efficient heating products. Homebuilders areeligible for a $2,000 tax credit for a home that achieves a 50% energy savings for heatingand cooling over the 2004 International Energy Conservation Code (IECC). Similarly,

there is a $1,000 tax credit for new homes achieving a 30% energy savings over the 2004IECC standard. These tax credits will minimize the premium necessary to upgrade froma traditional ceramic floor to a Thermix radiant heat system, inducing more constructioncompanies to install and endorse the Thermix system to end users.

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IV.IV Website

Thermix will form a web presence to allow customers access to information andproducts 24 hours a day. The domains thermixheat.com and thermixtiles.com will beutilized for the Thermix webpage. The site will contain product specifications as well as

the ability to order tiles via the internet. In addition to their own webpage, Thermix willplace bids on Google AdWords, causing links to the Thermix website appear in sidebarswhen phrases such as radiant heat or under floor heating are searched.

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impacts of such interruptions, which left unaddressed, could lead to missed salesopportunities.

First, Thermix will line up backup manufacturers, suppliers, and transportation. Ifthere are problems of a localized nature, affecting a small number of manufacturers orareas, Thermix will be prepared for this contingency and continue production and

shipping using backups.An inventory of two months of projected annual sales will likewise be used toprotect against a long-term disruption in production or shipping. This inventory can alsobe used to deal with fluctuations in orders from month to month. For more informationon inventory, please refer to section VII.VI.

V.IV Product Misuse

Given enough time and tiles on the market, someone will undoubtedly misuse ourproduct and sue Thermix as a result. There are several strategies that will be used tomitigate this risk.

First, operating instructions will be clearly spelled out in owners manuals thatwill be distributed with the installation of each Thermix radiant floor heating system.These manuals will cover topics such as safety instructions and warning signs of possiblesafety hazards.

Thermix tiles will also undergo stringent third party testing and certification toassure uniform levels of quality. SGS, the worlds largest inspection, verification, testing,and certification company will be performing our quality control and quality assurance onsite in FuZhou, China.

In addition, installation of our tiles will be verified by a state certified electrician.This will ensure that the Thermix system has been set up correctly and is functional.Clear owners manuals, third party quality control and assurance, and verification by astate certified electrician should provide legal protection in the event of product misuselitigation.

Thermix will set aside five cents for each tile sold to self-insure against the costsof possible legal action. This savings will result in slightly less than $3.4 million at theend of year five, as shown in the cash flow attached as Appendix B.

V.V Regulatory Changes

There is very little Thermix can do to prevent or cause regulatory change. As aresult, Thermix will remain aware of regulatory alterations in a variety of areas, includingceramic import tariffs, UL certification requirements, green rating systems, and domesticelectricity laws. Every effort will be made to learn about and plan for regulatory changesearly.

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Organizational Plan

VI.I Business Form

Thermix will form in the state of Wisconsin as an LLC to allow easy formation of

partnerships. Several kinds of companies may make useful partners, including floorspecialty stores and producers of alternative energy sources.

In order to raise capital, Thermix must sell equity for cash according to thepartnership agreement. Raising capital will be a necessity at two critical junctures: whenhiring scientists, buying materials, and renting out lab space for initial research anddevelopment, and when engineering is completed and Thermix begins producing andselling their radiant floor heating systems.

VI.II Business Structure

Thermix will be comprised of three functional business units based in

different locales. The first, research and development, will be based in the San DiegoScience Center. This unit, comprised of five doctorate-level scientists will complete theproduct development challenges described in section I.VII then seek incremental productimprovements as well as an improved method for producing purified metallic powders.

The second functional unit is the warehouse team, which will be located in theLos Angeles, California area. This unit, made up of two forklift drivers and a manager,will be put into place as soon as the R&D team has completed product development.Through the first few months, they will set up the shelving units and prepare thewarehouse for inventory.

The last unit will be the office support unit, which will operate out of Kenosha,Wisconsin. This group, made up of two salesman and the CEO, will produce the user

manual in addition to selling directly to architectural firms, seeking flooring specialtystores to carry the Thermix system, and conducting further market research on theEuropean radiant heat and flooring markets. The office support unit will also investigatepartnership opportunities with producers of solar panels, windmills, and other alternativeenergy suppliers. Coupling with a source of energy production will allow the Thermixradiant heat system to draw little or no power off the grid.

VI.III Production and Shipping

Thermix tiles will be produced by ASE Impex of FuZhou, China. A quote forcurrent ASE ceramic tiles was used as a proxy in determining the costs of the Thermix

tiles. After converting the ASE Impex tile to the proper size, quotes for alumina powderwere taken into account.

SGS has agreed to perform quality control and assurance onsite in China. Initialtesting and certification will require 300 tiles, while ongoing testing will use of everythousandth tile of production.

Shipping estimates for initial production volumes have been quoted usingwww.freight-calculator.com. Initially, Thermix tiles will be shipped in 45 standard 20intermodal containers weighing approximately 54,000 lbs. each and containing 1749

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sqaure yards of ceramic tile each month. The shipping company will transport our tilesfrom FuZhou, China to our warehouse in Los Angeles. Their quote includes assistance inclearing customs in addition to insurance against loss of the product at production costs.

VI.IV Exit Strategy

In order to produce proper returns for investors, and to expand the scope and sizeof the company, Thermix will reform as a C corporation and seek an initial publicoffering in its fifth year. Due to a superior and exclusive product, Thermix will ramp upsales and production aggressively throughout its formative years. In the fifth year of thecompany, a projected earnings of $18.5 million combined with a P/E of ten, which is verycommon in the flooring industry, will produce a company valuation of $185 million.This will allow a ten times return for both angel and venture investors.

In addition, the money raised from the IPO will be used to build a factory,dropping the cost per tile and raising profit margins. Sales branches will be expanded inthe United States and established throughout Europe.

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Financial Outline

VII.I Overview

A complete five-year financial projection is attached as Appendix B. Recurringand one time costs, in addition to salaries, taxes, and benefits can be found in theparameters page. The structure of the workbook allows any change made in theparameters page to carry through to the entire five-year cash flow, enabling changes tothe business structure as circumstances dictate.

VII.II Requested Investment

Thermix is seeking $550,000 in exchange for 10% equity to complete researchand development on an exclusively licensed patent that will allow production of a new,energy efficient, and affordable radiant heat system. Upon meeting the engineering

challenges set forth in I.VII, Thermix will seek an additional $13,000,000 investment inexchange for 70% equity to begin production and sales of its radiant heat system.

VII.III Sales Projections

The Thermix initial sales rate of 10,000,000 square feet per year, which isestimated based on end-user and architect feedback, can be supported by the size of thecurrent market (which is outlined in III.VI). Through a clearly superior product offering,as discussed in section II, Thermixwill quickly capture market share. Due to strong end-user demand, sales will grow at a rate of 20% per year.

In addition, the features of the Thermix radiant heat system align directly withresidential priorities, as discussed in section III.III. Architects have also expressed stronginterest in using this product in residential as well as commercial applications, asdiscussed in section III.V.

VII.IV Production

In order to meet customer orders, in addition to inventory and quality controlneeds, Thermix will order more tiles than customer orders require each month. After thefirst 300 tiles, every thousandth tile will be used in quality control and assurance. Inaddition, 8.75% of each months delivery will be stored in the warehouse until inventoryreaches two months of projected annual sales.

VII.V Research and Development

Research and development, an integral part of the Thermix business plan, will bewell equipped and staffed. An initial investment of $100,000 will be used to purchaselaboratory equipment while monthly costs of $56,990 will finance a proper salary andresearch materials for five doctorate-level scientists. In order to make the Thermixsystem viable, the research and development team will have to solve several engineering

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challenges, as set forth in I.VII. Upon completion of those tasks, research will focus onimproving the current technology as well as extending the use of this conductive tile toother platforms.

VII.VI Warehouse

Thermix will rent a warehouse for $8.40 per square foot in the greater LosAngeles area. The warehouse will be 14,850 square feet and will be large enough tohouse approximately 2.28 million tiles, which will be large enough to cover our inventoryneeds until the middle of the third year. The warehouse will have pallet racks (heavy-duty shelving) that will be assembled by the warehouse team, which is comprised of twoforklift drivers and a manager. The shelving, purchased from Gilmore-Kramer for$295,000, will be assembled during the early stages of the warehouses operation whilebuilding up initial inventory. In the warehouse, ceramic tiles that had been shipped onpallets will be stored in stacks of two; there will be one stack on the floor with the otherstack on the shelf directly above it.

VII.VII Inventory

As discussed in section V.III, inventory will be kept on hand to protect againstorder fluctuations and supply chain interruptions. When production begins, 8.75% moretiles than are needed to fulfill customer orders will be produced each month; onceinventory reaches two months (or 16.67%) of projected annual sales, this additional tileorder will not resume until January of the following year.

VII.VIII Office

The Thermix office, located in Kenosha, Wisconsin, will handle all sales and legalissues. Employed at the office will be two salesmen and the CEO. The salesmen will selldirectly to architectural firms as well as attend two conventions each year (please reviewIV.II for additional details). A contracted lawyer will be responsible for drafting allcontracts, answering day-to-day legal questions, and verifying the wording and legality ofthe owners manual for the radiant heat system.

VII.IX Taxes and Benefits

In addition to paying state and federal payroll taxes, the company will set asidemoney equal to 14% of employee salaries for benefits, including insurance health, dental,and vision insurance. Since Thermix will be an LLC and owners will be taxed oncompany earnings, a cash disbursement will be paid in December of each year to coverthe owners personal income taxes.

VII.X Quality Control/Quality Assurance

As a company with potentially severe liability issues, quality control andassurance testing will be used to ensure consistent quality in our product. SGS account

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manager Clara Pflueger has assured me that SGS will be able to handle all of our testingneeds, from UL certification to durability testing. Initial testing will requireapproximately 300 tiles; continued testing will use every thousandth tile. The admittedlyrough estimates she emailed after a phone conversation served as the budget numbersused in the financial projections.

VII.XI Travel

In order to make useful connections and meet potential customers, the office unitwill attend Greenbuild and the annual conference of the American Institute of Architects(AIA), as discussed in section IV.II. At Greenbuild, Thermix will host a booth in order tomeet with environmentally minded architects, builders, and consumers. Since architectsmake most purchasing decisions regarding building materials (see III.IV), attending theannual AIA conference will allow Thermix representatives to meet with their largest andmost influential potential customers.

VII.XII Salaries

Salaries, outlined in the parameters page, are based on median incomes byoccupation from the Occupational Outlook Handbook published by the United Bureau ofLabor Statistics. In addition, employees will receive health, vision, and dental insurance.

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Thermix Business Plan

Documents

Transcript of Thermix Business Plan