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Thermix

Zachary Scott Telschow


Executive Summary
Thermix is seeking $550,000 in exchange for 10% equity to complete research
and development on an exclusively licensed patent that will allow for production of a
new, energy efficient, and affordable radiant heat system.
The Thermix radiant heat system, a clear advancement over current heating
technologies, utilizes electrically conductive ceramic tiles arranged in a circuit to produce
heat through resistance. Electricity passes through the tile itself, eliminating the need for
the additional subflooring materials associated with water based or electric mat radiant
heat installations. Numerous safety features protect the end user from the risk of electric
shock. Minor engineering tasks remain, including raising the conductivity of the ceramic
composition, developing an electrically insulating glaze, and creating a method of
connecting the tiles.
Due to an innovative configuration, the Thermix radiant heat system is a clearly
superior product offering the same benefits as other radiant heat systems at a lower
overall 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 will
enable more people to choose the comfort of radiant heat to augment or replace current
heating systems.
Exhaustive and complete market research has affirmed that consumers want the
Thermix radiant heat system and architects will endorse it. The 48 respondents to the
architect survey showed a strong general interest in the Thermix system and indicated an
expected price. In addition, the 343 respondents to the homeowners survey indicated
what features they want in their flooring products and how they preferred to receive
them. Thermix’s 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 materials
industry, will be convinced of the merits of the Thermix system through direct selling as
well as exposure to the Thermix radiant heat system at two prominent annual
conferences: Greenbuild and the American Institute of Architects convention. In
addition, Thermix will partner with flooring specialty stores to offer the Thermix radiant
heat system directly to consumers and contractors.
Thermix will mitigate risk using preventative measures in addition to having
contingency plans in place. For example, the risk of product misuse will be reduced by a
clear 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 office
support. ASE Impex of FuZhou, China will produce the tile, which will be shipped to the
United States using intermodal shipping. After experiencing consistent rapid annual sales
growth, Thermix will seek an IPO to fund construction of a factory and sales network
expansion, 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 2
I.III Applications and Benefits 2
I.IV Safety Features 2
I.V Alternative Tile Configuration 3
I.VI Installation 3
I.VII Remaining Engineering 3
II. Competition…………………………………………………………………….. 6
II.I Direct Competition 6
II.II Indirect Competition 8
II.III Pricing and Costs 9
III. Market Research………………………………………………………………. 10
III.I Target Markets 10
III.II Greenbuild 10
III.III Residential Survey 10
III.IV Builder and Contractor Survey 14
III.V Architect Survey 14
III.VI Market Size 16
IV. Marketing………………………………………………………………………18
IV.I Overview 18
IV.II Conventions 18
IV.III Tax Credits 18
IV.IV Website 19
V. Risks……………………………………………………………………………20
V.I Product Development 20
V.II Disruptive Technologies 20
V.III Supply Chain/Manufacturing Interruptions 20
V.IV Product Misuse 21
V.V Regulator Changes 21
VI. Organizational Plan…………………………………………………………….22
VI.I Business Form 22
VI.II Business Structure 22
VI.III Production and Shipping 22
VI.IV Exit Strategy 23

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VII. Financial Outline……………………………………………………………….24
VII.I Overview 24
VII.II Requested Investment 24
VII.III Sales Projections 24
VII.IV Production 24
VII.V Research and Development 24
VII.VI Warehouse 25
VII.VII Inventory 25
VII.VIII Office 25
VII.IX Taxes and Benefits 25
VII.X Quality Control/Quality Assurance 25
VII.XI Travel 26
VII.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 system
utilizes electricity run through electrically conductive tiles in order to produce heat, as
depicted 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 heat
through resistance. Since electricity passes through the tile itself, no additional
subflooring 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 and
zone heating, while a separate monitoring station will contain the necessary safety
features. This highly efficient, retrofittable system is designed to augment or replace any
existing 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 the
electrically conductive ceramic necessary to produce Thermix ceramic tiles. The
composition protected by the patent was originally developed by DuPont and later
donated 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 nominal
royalty 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 the
remaining 10% made up of three metal oxides: magnesia, chromia, and alumina. Altering
the concentration of the metal oxides can vary the conductivity of the ceramic
composition.
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 in
new construction and existing buildings. Due to the lower overall cost of the Thermix
radiant 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 the
Thermix radiant heat system will bring to their bedroom. Since the Thermix system is
retrofittable, owners of old homes will be able to add radiant heat to select sections of
their home for just $5 per square foot plus installation.
Office workers will enjoy their new building even more as radiant heat keeps their
desk area comfortable all day. Instead of adapting to the building temperature, an
employee will adjust the thermostat for their heating zone, allowing for increased
comfort.
With the Thermix radiant heat system, homeowners can step out of the shower
onto 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 of
the ceramic itself, necessitates the inclusion of numerous safety features in the tiles and
monitoring 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 be
prevented by a temperature-monitoring device in the monitoring station. Once the
temperature of the floor reaches a preset threshold, the power to the floor will be
automatically 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. In
addition, a residual current device, also known as a ground fault circuit interrupter
(GFCI), will be built into the monitoring station. These devices, common in bathrooms
and kitchens, immediately break a circuit upon detection of a difference in current
between charged and neutral wires. If electricity were passing from the floor through a
person, 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 a
regular 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 up
half of the hybrid tile. There are two primary advantages that will occur if this layering
configuration is feasible.
First, production costs of the hybrid tile will be significantly less than the costs of
the tile composed entirely of electrically conductive ceramic. The highest cost in the
production of the electrically conductive ceramic composition is the high purity metals
required. By reducing the volume of the electrically conductive ceramic composition,
lower production costs can be realized. In addition, there will be no need for an
electrically insulating glaze, as regular ceramic tile acts as a natural electrical insulator.
The drawback of this hybrid configuration, however, is that the conductivity of
the electrically conductive half of the tile will need to be proportionally higher than the
conductivity in tiles made completely of the electrically conductive composition due to a
reduced cross sectional area.

I.VI Installation

The differences between installing a Thermix radiant heat system and a traditional
ceramic floor will be minimal. Installation will utilize a ceramic tile installer working in
conjunction with a state certified electrician. The use of an electrician for half a day, in
addition to the purchase and installation of the monitoring station, constitute the cost
discrepancy in installation of a Thermix floor compared to a regular ceramic tile floor.
After planning out tile circuits of the appropriate length using the Thermix
installation guide, the installer will lay down all tiles on a foam underlayment and
connect the tiles into a circuit. Once the tile circuits have been approved by a state
certified electrician, the grout will be put into place.
The electrician will inspect the tile circuits and then install the thermostat. After
all facets of the installation process are complete, the electrician will test the performance
of the system to verify that it is operating within accepted standards.
The Thermix system can be installed by anyone who is comfortable with
installing 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 the
electrically conductive composition must be increased; the required amount of
conductivity will be determined by whether the standard or hybrid configuration is
chosen.
In addition, if the standard configuration is chosen, an electrically insulating glaze
must be developed. One possible glaze that may be used is an electrically insulating
epoxy.
The monitoring station, which contains the ground fault current interrupter and
automatic temperature limiting shutoff, also needs to be developed. This box will require
mostly 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 be
used to attach the metal connector to the ceramic tile. Some methods under consideration
are 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 laid
beneath 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 over
direct and indirect competition through a clearly superior product offered at a lower
overall cost. The lower initial cost of the Thermix system is achieved using a new
heating technology in addition to manufacturing the tiles in FuZhou, China.

II.I Direct Competition

The innovative configuration of the Thermix radiant heat system provides lower
installation and operation costs than other radiant systems while maintaining the same
benefits. Thermix will be in direct competition with two predominant forms of radiant
heat: electric mat and hydronic. Although these technologies have expanded the market
for radiant heating and improved their product offerings, the Thermix system is a
disruptive technology that will capture a significant share of the existing market in
addition 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 of
traditional flooring such as hardwood or ceramic tile (as depicted in Figure 6). 1, 2, 3 In
addition to higher installation costs, these mats have higher operating costs arising from
low efficiency. The inhibitive cost of electric mat radiant floor heating systems has
prevented 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 flooring
to produce heat. Currently offered by just one manufacturer, this concept has had trouble
gathering 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 from www.warmyourfloor.com
2
BobVila. (2008). Retrieved on April 8, 2008 from www.bobvila.com
3
Nuheat Industries. (2008). Retrieved on April 8, 2008 from www.nuheat.com

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per square foot while requiring more labor for installation.4
Another subset of directly competing radiant floor heating technologies is
hydronic, or water based heating. While Thermix and hydronic floors are both highly
efficient, retrofitting a hydronic floor is a very complex process that requires a boiler and
additional subflooring materials, including a polyethylene layer, rebar, tubing, and
concrete (as illustrated in Figure 7).
In order to retrofit a hydronic floor, the existing floor must be removed. Next,
due to the added weight of the materials required for a hydronic installation, the floor
must be reinforced in order to support the additional 12 to 18 pounds per square foot.5
After the floor has been reinforced, an insulating polyethylene layer is put down beneath
rebar. Then, the hydronic tubing is run over the rebar and connected to the boiler. Once
all these tasks have been completed, the rebar and tubing are encased in concrete, which
is leveled and allowed to set. Finally, the ceramic tile can be laid. The extra materials
and labor costs of a hydronic installation, ranging from $5 to $10 per square foot plus the
purchase of the tile itself, place these systems financially out of reach for many
consumers. 5

Figure 7: Standard hydronic and ceramic tile configuration.

The Thermix system has all the benefits of current radiant heat systems while
possessing none of the drawbacks, as depicted in Table 1. In addition to being both
highly efficient and easily retrofittable, Thermix requires fewer materials than existing
54
Warmup. (2008). Retrieved on April 8, 2008 from www.warmup.com
5
Builder New Magazine. (2004). Retrieved on April 4th, 2008 from
www.buildernewsmag.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 X
Retrofittable X X
Minimal Materials X

II.II Indirect Competition

There are two markets in which Thermix will be competitive: heating and
flooring. The Thermix radiant heat system can be used to augment or replace all current
heating technologies. The form of heat over which the Thermix system experiences the
largest advantage, however, is forced air heat, the most common form of heat on the
market 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 while
allowing occupants to experience the same comfort, saving the owner money over time
through lower operating costs.
By transmitting heat through infrared waves instead of hot air and allowing for
zone heating, radiant heat eliminates several inefficiencies inherent in forced air heating.
The first inefficiency arises from the standard configuration of a single thermostat for an
entire home or business, forcing the owner to heat all areas of the building evenly instead
of heating the most heavily trafficked areas. Another inefficiency inherent in forced air
heat is that hot air to rises, causing building owners to heat their ceilings instead of air
closer 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. The
programmable thermostat allows for zone heating, letting owners direct more heat
towards heavily occupied or uncomfortable areas, such as the kitchen and bathroom in a
home. In a business, heat can be directed to employee desks while leaving isles
noticeably cooler. In addition, radiant heat is transmitted through convection from the
floor, thereby evenly heating people, not ceilings, first.

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Radiant heat technologies have several significant advantages over forced air
heat. Since radiant heat does not require fans or blowers, it operates silently and reduces
dust and allergens. In addition, since the heat in a radiant system rises from the ground
up, 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 very
durable 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 to
choose a Thermix radiant heat system over a traditional ceramic tile floor for a moderate
price premium.

II.III Pricing and Costs

The Thermix radiant heat system, a clear advancement over current heating
technologies, will bring radiant heat to the masses due to lower overall costs. Initial
investment and operating costs will be significantly lower than existing radiant
technologies. Additionally, the sale price of Thermix ceramic tiles will be comparable to
the 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. In
addition, the operating costs are significantly higher than hydronic systems.
Hydronic radiant heat systems, which are very difficult to install in existing
homes, cost between $5-$10 per square foot installed. Although it is difficult to estimate
the cost savings of operating a hydronic system due to the number of variables, most
consumers experience savings between 10%-40% in their heating costs, with savings of
30% being very common.6
Premium ceramic tiles, found in big box retailers such as Home Depot, Lowe’s,
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 existing
electric mat and hydronic radiant heat systems. In addition, $5 is less than the median
price architects requested for this material (for more information about what architects
thought of the Thermix system, please see section III.V). Operating costs of the Thermix
radiant heat system will vary by configuration and area due to the price of electricity, but
may 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 from
www.buildernewsmag.com

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costs, Thermix will bring radiant heat to a broader audience. As with many other energy
efficient products, two of the primary target markets for the Thermix radiant heat system
are green and cost conscious consumers and businesses. The largest markets Thermix
will enter, however, are existing homes, offices, and retail spaces. Due to high price
points and impracticality of installing current products, many of these potential customers
have not considered radiant heat; Thermix will allow a greater number of people to
choose 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 was
held in Chicago this year. The USGBC is a non-profit organization working to make
green building accessible to everyone within a generation. While there, I learned two
very 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 that
had green credentials had plenty of business to keep them busy, while companies that
lacked some form of recognition were struggling to stay afloat. Thermix will become
recognized as a green company by becoming a staple flooring product in green
construction projects, such as Leadership in Energy and Environmental Design (LEED)
certified buildings.
Another important trend I became aware of at Greenbuild was that many
international companies were experiencing a heavy volume of sales in Europe. European
consumers and governments are proactive in reducing pollution and protecting the
environment. Jacqueline McGlade, Executive Director of the European Environment
Agency, exemplified this attitude when she stated: “A gradual shift of today’s taxes away
from personal income and capital towards taxes on consumption, pollution, and
inefficient use of energy and resources can boost employment, eco-innovation, and
protect the environment.” European consumers, who don’t select products based solely
on 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 collects


responses via the internet, a survey of homeowners was conducted and 343 responses
were received. Since Carthage alumni and current Carthage students’ parents were
polled, most respondents resided between Green Bay and Chicago, as depicted in Figure
9. 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; Thermix
tiles, due to a higher firing temperature, are more durable than other tiles (as mentioned
in 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 heated
floors. 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 annual
home improvement spending by household. The chart illustrates that 30% of respondents
spent $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 the
installation of the Thermix radiant heat system in large areas if spread out over several
years, 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 home
was built, respectively, demonstrate that the residential survey respondents were a
representative sample. In addition, 52% of respondents live in homes built prior to 1984
and are prime candidates for home improvement spending and increases in heating
efficiency.
An aggregate of the residential survey responses follows. Please note that for
some questions, a respondent could check more than one answer, leading to response
counts greater than the number of respondents. For example, a respondent may have
purchased 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.

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

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

Table 3: Purchase location by flooring type.

Bought existing home Big box retailer Flooring company Through my 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

In order to find out where and from whom consumers purchased their flooring
products, 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 stores
represented 45.6% of all new ceramic tile purchases, with big box retailers and builders
making up the remainder. This illustrates that selling through flooring specialty stores in
addition to selling directly to architects will allow Thermix to reach a significant portion
of the market.

Table 4: Flooring installer by flooring type.

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

Friends, family members, or the homeowners themselves installed nearly 40% of


all new ceramic tile floors, as illustrated in Table 4. This indicated that the Thermix
system must be designed so that the average handyman can install it.

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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 3 330
Durability 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 flooring
selection. As show in Table 5, durability was the single most important feature
consumers sought; Thermix ceramic tiles are more durable than conventional ceramic
tiles. In addition, comfort, cost, and ease of cleaning, all features of Thermix tiles, were
very 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 the
Thermix 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 in
southern states.

III.IV Builder and Contractor Survey

In order to understand the current climate of radiant heat installations in homes


and businesses, a phone survey of local builders and contractors randomly selected from
the yellow pages was conducted. After several conversations with a handful of firms, one
fact 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 was


conducted of residential and commercial architectural firms listed as members of the
American Institute of Architecture and the United States Green Building Council. The
firms 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 area
responded, as you can see in Figure 13.

Figure 13: Respondents of the architectural survey.

The 48 residential and commercial architectural firms that responded designed


between 10,000 square feet and 20,000,000 square feet of buildings each year. The mean
size 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 architects
are very interested in implementing the Thermix system in their projects. Some
responses 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 of
the standard tile installation.”
• “We will use the product in commercial settings.”

Architects were asked, “At what price per square foot would your firm
recommend and use this product?” Although the range varied widely from $1 per square
foot to $20 per square foot, the median price was $6.50 and the mode was $5. A handful
of architects saying they would be interested near the $20 price point raised the mean
price to $8.64.
Responses to this survey established that the Thermix radiant heat system requires
Underwriter’s Laboratory or other equivalent certification; it also affirmed the necessity
of 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 requested
the inclusion of two different features. Some form of automatic, temperature limiting
shut-off was requested by eight of 39 architects and will be included, as detailed in
section I.III. A non-slip surface, suggested by five of 39 architects, will be included in
the product as well.
It was also suggested that the Thermix radiant floor heating system combine with
some means of electricity production such as solar panels or windmills, allowing a home
to draw little or no electricity from the electrical grid. If the Thermix system were
combined with solar panels, for example, the panels would produce electricity to heat the
floors during the day while off-peak electricity would be used at night. An official
partnership with an alternative energy supplier will be explored.

III.VI Market Size

Two markets Thermix will enter, the domestic ceramic tile and radiant heating
markets, 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 experiencing
annual growth of 10% and had reached ~3.13 billion square feet in annual sales. The
Radiant Panel Association stated that approximately 100,000 hydronic radiant floor
heating 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 hydronic
radiant tubing fell in 2006 (by a modest 1.1%).
Despite the housing slowdown in the United States, sales of Thermix radiant heat
systems will be strong due to their retrofittability. In a slow economy, home
improvement spending rises as people look to improve existing homes instead of
purchasing 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 reach
consumers directly through flooring specialty stores.
The Thermix sales team will make advocates of architects, who act as the
gatekeepers of the building materials industry. Through phone conversations and
surveys, it has been made clear that architects steer decision making in what building
materials are used in construction projects. Producing customers of influential architects
will be the most cost effective way to build market share and product awareness in the
construction industry.
In order to gain initial traction in the home renovation market, Thermix will sell
through 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 for
their 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 of
architects in selecting building materials as discussed in Section IV.I, the Thermix sales
team 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. Thermix
will be hosting a booth at Greenbuild in order to interact with this multitude of
environmentally aware consumers, architects, and builders. For a summary of
experiences with Greenbuild Chicago 2007, please see section III.II.

IV.III Tax Credits

Construction and architectural firms will be compelled to use the Thermix system
due to tax credits available for energy efficient heating products. Homebuilders are
eligible for a $2,000 tax credit for a home that achieves a 50% energy savings for heating
and 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 2004
IECC standard. These tax credits will minimize the premium necessary to upgrade from
a traditional ceramic floor to a Thermix radiant heat system, inducing more construction
companies 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 and
products 24 hours a day. The domains thermixheat.com and thermixtiles.com will be
utilized 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 will
place bids on Google AdWords, causing links to the Thermix website appear in sidebars
when phrases such as “radiant heat” or “under floor heating” are searched.

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Risks
Thermix will mitigate risk using preventative measures in addition to having
contingency plans in place.

V.I Product Development

In order to make the Thermix radiant heat system viable, the conductivity of the
tile must be raised, and connectors, a monitoring station, and glaze must be developed (as
detailed in section I.VII).
To meet these engineering goals, Thermix will hire five top-notch doctorate-level
engineers for research and development, including the inventor of the ceramic
composition, Dr. Kurt Mikeska. The research and development team will be given
adequte lab space, materials, and time to resolve these challenges.
Although the conductivity problem is the largest risk facing Thermix, the patent’s
inventor is confident of success. According to Dr. Mikeska (personal communication,
April 10, 2008) finding the solution to the conductivity problem should take less than six
months. Dr. Mikeska conceded that it is possible a solution may not exist, but
discovering if the conductivity problem is solvable will happen in a short time frame.
The conductivity, connector, and glaze problems should prove achievable for a
well-staffed and equipped research and development team. If these engineering goals
cannot be met, moving forward with production will not be a possibility.
There are several ways Thermix will assure success in this critical engineering
venture. In addition to hiring top-notch engineers and granting them adequate time and
materials, bonuses and equity may be used as bargaining chips to incentivize successful
completion of the requisite research and development. If the Thermix research and
development team discovers that any of its engineering tasks are solvable but will require
a long time horizon, a partnership with a top-notch engineering and materials science
graduate program may be sought to complete the remaining work.

V.II Disruptive Technologies

In order to minimize the risk of being unseated by a disruptive technology, as


Thermix will do to current radiant heating systems, the Thermix research and
development team will continue to work on improvements of our current flooring
platform as well as ideate new applications for the technology and any intellectual
property produced during product development.
Since disruptive technologies often originate in other industries, the executive
team and board will remain active in reading current periodicals as well as cultivating
useful business contacts to become aware of attractive business opportunities.

V.III Supply Chain/Manufacturing Interruptions

There are numerous ways supply chain or manufacturing processes could be


halted or delayed, preventing Thermix ceramic tiles from getting to market to meet
customer needs. A two-pronged approach will be used to diminish the potential negative

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impacts of such interruptions, which left unaddressed, could lead to missed sales
opportunities.
First, Thermix will line up backup manufacturers, suppliers, and transportation. If
there are problems of a localized nature, affecting a small number of manufacturers or
areas, 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 to
protect against a long-term disruption in production or shipping. This inventory can also
be used to deal with fluctuations in orders from month to month. For more information
on inventory, please refer to section VII.VI.

V.IV Product Misuse

Given enough time and tiles on the market, someone will undoubtedly misuse our
product and sue Thermix as a result. There are several strategies that will be used to
mitigate this risk.
First, operating instructions will be clearly spelled out in owner’s manuals that
will 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 possible
safety hazards.
Thermix tiles will also undergo stringent third party testing and certification to
assure uniform levels of quality. SGS, the world’s largest inspection, verification, testing,
and certification company will be performing our quality control and quality assurance on
site 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 a
state certified electrician should provide legal protection in the event of product misuse
litigation.
Thermix will set aside five cents for each tile sold to self-insure against the costs
of possible legal action. This savings will result in slightly less than $3.4 million at the
end 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 a


result, Thermix will remain aware of regulatory alterations in a variety of areas, including
ceramic import tariffs, UL certification requirements, green rating systems, and domestic
electricity laws. Every effort will be made to learn about and plan for regulatory changes
early.

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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 floor
specialty stores and producers of alternative energy sources.
In order to raise capital, Thermix must sell equity for cash according to the
partnership agreement. Raising capital will be a necessity at two critical junctures: when
hiring scientists, buying materials, and renting out lab space for initial research and
development, and when engineering is completed and Thermix begins producing and
selling 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 Diego
Science Center. This unit, comprised of five doctorate-level scientists will complete the
product development challenges described in section I.VII then seek incremental product
improvements as well as an improved method for producing purified metallic powders.
The second functional unit is the warehouse team, which will be located in the
Los 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 the
warehouse 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 specialty
stores to carry the Thermix system, and conducting further market research on the
European radiant heat and flooring markets. The office support unit will also investigate
partnership opportunities with producers of solar panels, windmills, and other alternative
energy suppliers. Coupling with a source of energy production will allow the Thermix
radiant 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 for
current 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 powder
were taken into account.
SGS has agreed to perform quality control and assurance onsite in China. Initial
testing and certification will require 300 tiles, while ongoing testing will use of every
thousandth tile of production.
Shipping estimates for initial production volumes have been quoted using
www.freight-calculator.com. Initially, Thermix tiles will be shipped in 45 standard 20’
intermodal 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 tiles
from FuZhou, China to our warehouse in Los Angeles. Their quote includes assistance in
clearing 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 size
of the company, Thermix will reform as a C corporation and seek an initial public
offering in its fifth year. Due to a superior and exclusive product, Thermix will ramp up
sales and production aggressively throughout its formative years. In the fifth year of the
company, a projected earnings of $18.5 million combined with a P/E of ten, which is very
common 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 in
the 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. Recurring


and one time costs, in addition to salaries, taxes, and benefits can be found in the
parameters page. The structure of the workbook allows any change made in the
parameters page to carry through to the entire five-year cash flow, enabling changes to
the business structure as circumstances dictate.

VII.II Requested Investment

Thermix is seeking $550,000 in exchange for 10% equity to complete research


and 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 in
exchange 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 is
estimated based on end-user and architect feedback, can be supported by the size of the
current market (which is outlined in III.VI). Through a clearly superior product offering,
as discussed in section II, Thermix will 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 with
residential priorities, as discussed in section III.III. Architects have also expressed strong
interest in using this product in residential as well as commercial applications, as
discussed in section III.V.

VII.IV Production

In order to meet customer orders, in addition to inventory and quality control


needs, Thermix will order more tiles than customer orders require each month. After the
first 300 tiles, every thousandth tile will be used in quality control and assurance. In
addition, 8.75% of each month’s delivery will be stored in the warehouse until inventory
reaches two months of projected annual sales.

VII.V Research and Development

Research and development, an integral part of the Thermix business plan, will be
well equipped and staffed. An initial investment of $100,000 will be used to purchase
laboratory equipment while monthly costs of $56,990 will finance a proper salary and
research materials for five doctorate-level scientists. In order to make the Thermix
system 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 on
improving the current technology as well as extending the use of this conductive tile to
other platforms.

VII.VI Warehouse

Thermix will rent a warehouse for $8.40 per square foot in the greater Los
Angeles area. The warehouse will be 14,850 square feet and will be large enough to
house approximately 2.28 million tiles, which will be large enough to cover our inventory
needs 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 two
forklift drivers and a manager. The shelving, purchased from Gilmore-Kramer for
$295,000, will be assembled during the early stages of the warehouse’s operation while
building up initial inventory. In the warehouse, ceramic tiles that had been shipped on
pallets will be stored in stacks of two; there will be one stack on the floor with the other
stack on the shelf directly above it.

VII.VII Inventory

As discussed in section V.III, inventory will be kept on hand to protect against


order fluctuations and supply chain interruptions. When production begins, 8.75% more
tiles than are needed to fulfill customer orders will be produced each month; once
inventory reaches two months (or 16.67%) of projected annual sales, this additional tile
order will not resume until January of the following year.

VII.VIII Office

The Thermix office, located in Kenosha, Wisconsin, will handle all sales and legal
issues. Employed at the office will be two salesmen and the CEO. The salesmen will sell
directly to architectural firms as well as attend two conventions each year (please review
IV.II for additional details). A contracted lawyer will be responsible for drafting all
contracts, answering day-to-day legal questions, and verifying the wording and legality of
the owner’s manual for the radiant heat system.

VII.IX Taxes and Benefits

In addition to paying state and federal payroll taxes, the company will set aside
money 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 on
company earnings, a cash disbursement will be paid in December of each year to cover
the owners’ personal income taxes.

VII.X Quality Control/Quality Assurance

As a company with potentially severe liability issues, quality control and


assurance 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 testing
needs, from UL certification to durability testing. Initial testing will require
approximately 300 tiles; continued testing will use every thousandth tile. The admittedly
rough estimates she emailed after a phone conversation served as the budget numbers
used in the financial projections.

VII.XI Travel

In order to make useful connections and meet potential customers, the office unit
will 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 to
meet with environmentally minded architects, builders, and consumers. Since architects
make most purchasing decisions regarding building materials (see III.IV), attending the
annual AIA conference will allow Thermix representatives to meet with their largest and
most influential potential customers.

VII.XII Salaries

Salaries, outlined in the parameters page, are based on median incomes by


occupation from the Occupational Outlook Handbook published by the United Bureau of
Labor Statistics. In addition, employees will receive health, vision, and dental insurance.

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Appendix A

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