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Case 1 AQI.pdf

Note: This business plan is for a fictitious company, but is based on
a real company and its documents.

AIR QUALITY INDUSTRIES, INC.

BUSINESS PLAN FOR DEVELOPMENT OF:

SYSTEM5™ PROCESSORS

December, 2011

THIS BUSINESS PLAN IS CONFIDENTIAL AND CONTAINS PROPRIETARY
INFORMATION BELONGING EXCLUSIVELY TO AIR QUALITY INDUSTRIES, INC.
NEITHER THE PLAN NOR ANY OF THE INFORMATION CONTAINED IN THIS
PLAN MAY BE REPRODUCED OR DISCLOSED TO ANY PERSON UNDER ANY
CIRCUMSTANCES WITHOUT EXPRESSED WRITTEN PERMISSION OF AIR
QUALITY INDUSTRIES, INC.

PLAN NUMBER:

_____________

2

TABLE OF CONTENTS

I. Executive Summary 4

II. AQI Business Plan 8

A Vision and Mission 8

• Current Vision
• Mission Statement
• Goals

B. Company Overview 10

• Legal Business Description
• Management Team
• Responsibilities
• Management Team Backgrounds

C. Product Information 13

• Theory of Operation
• Performance Data
• Maintenance Requirements
• Production and Assembly
• New Products in Development
• Quality Control
• Ancillary Product Description

D. Market Analysis 19


• Market Background
• Market Defined
• Product Advantages
• User Benefits
• Expanded Market
• Competition

E. Marketing Plan 24

• Products, Services and Prices
• Markets
• Distribution
• Marketing Communications

F. Financial Plan 28

Appendices

3

EXECUTIVE SUMMARY

The Company

Air Quality Industries, Inc. (AQI) is a Colorado Corporation. AQI was created to develop,
manufacture and distribute a patented air purification system known as “Cleen-Aire System5 ™
Processors”. AQI is a “C” Corporation, with corporate offices, a manufacturing plant and a
shipping and packaging facility in Rainier, WA.

Project Status

The project was initiated in 1999. After the issuance of the first patent in 2003 Mr. Searle
determined that additional research and development were warranted to create a unique and
superior product. In March of 2009 AQI, Inc. of Colorado was formed. The Board of Directors
initiated a private placement to raise $125,000. A small manufacturing facility with adjacent
offices was built and outfitted. A production engineer was hired to perform the required pre-
production tooling and manufacturing setup . Currently, all the upgrades to the prototype have
been made and the materials for an initial production run of 25 units have been ordered.
Additionally all the necessary machinery has been purchased installed and the tooling has been
completed. The Corporation is currently undergoing an audit in conjunction with a 10SB filing,
which is now in progress. This will upgrade the status of the Colorado Corporation to a fully
reporting company

For the past nine months Mr. Searle and Mr. Wood have been paid their salaries in stock only
and both officers have loaned the company over $75,000 from their personal funds to keep the
company moving toward production.

Mr. Searle received his founders stock in exchange for $241,000 in development costs that he
had born up until the date of formation of the new AQI Colorado Corporation. Unlike most
companies anticipating a public IPO in their future, the distribution of AQI stock to its founders
and key personnel has been kept low. Because of the limited number of shares outstanding, the
market value of the stock will remain high after introduction into the public markets because the
companies earnings ratio on outstanding shares will be high even if using the most conservative of
PE multipliers. The company’s strategy is long-term and is based upon conservative growth to
maintain stability and cash reserves, incurring minimum debt, and maintaining conscientious
marketing strategies.

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Facilities:

The new production facility is approximately 2000 sq. ft. The corporate offices are contained in a
completely renovated mobile home adjacent to the shop. The packaging and shipping facility
(approximately 2000 sq ft) Is located off site on a major highway to expedite shipping. These
facilities are capable of producing 375 units per month. (A ramp-up period of 90 days and a
larger facility would be required to increase production beyond these amounts).

Financial Position

The company’s financial position remains stable provided the continuous infusions of capital being
provided by Mr. Searle and Mr. Wood, however, in order to accelerate production to the next
phase outside capital will be required. The company hopes to entice investors to support its
objectives through dissemination of its marketing and advertising materials both directly and
through the Internet (www.Cleen-Aire.com). Once an initial level of $250,000 in capitalization is
achieved, the company’s focus will broaden slightly. The remainder of the current private
placement ($750,000) will ultimately provide the capital for expansion of the company’s
production capabilities. During the ramp-up period and while the balance of the funds are being
raised, the company will focus on its initial production runs and marketing strategies. The amount
of funding he company receives will determine which markets it will progressively pursue. To
initiate production and grow it from 25 units to 375 units per month by the end of the first year,
would require an operating budget of approximately $250,000 (1/4 of the projected private
placement of $1M)

The limiting factor to completing the initial production run is the cash needed to complete the
following:

$7,000 Additional patent filings
$6,500 Final UL/CSA Submissions
$14,000 Legal and Accounting expenses
$15,000 balance of materials for initial production run
$25,000 Salaries through January 2012
$67,500

Without the next anticipated traunch of capital, the infusions of cash necessary to move into a
sustained production phase will come from the company officers. This will have to be spread out,
however over the next 4 months which at this time would be less than optimal for the company.
Sooner is better than later here, as in most cases.

Investment Protocol

The company is seeking investment capital from sources familiar with the risks of start-up
investment scenarios or that have interest in the marketing or utilization of this type of technology.
There are currently 8.5 million shares of stock issued in the company. Dilution has been kept at a
minimum. The investment opportunity can be weighed against the projected sales of the company
over the next three years as a function of PE x whatever multiplier the investor feels the market is
currently supporting. It is the company’s belief that its success lies in its organizational and
management abilities and not on stock fluctuations that might occur in the public investment
markets.

5

Current Employees

The company’s current employees include Bruce Searle, Jim Wood, Richard Von Claus, Hartmut
Kuno, Brook Foster, and Benjamin Nasser. All have been working with little or no salary, but with
stock incentives for more or less the past year. An additional two employees have been trained to
begin initial production runs. Capacity production runs in the existing facility would require an
additional 2 employees for a total of 10 employees – full and part-time. This would produce a
gross revenue of $450,000 per month assuming 300 units per month manufactured and sold.

Management Team

President and Chief Technology Officer, Bruce R. Searle

Chief Operating Officer, James H. Wood

Chief of Marketing, Hartmut Kuno

Chief Production Engineer Richard Von Claus

Board of Directors

Chairman, Bruce R. Searle

Board Member, James H. Wood

Board Member, David E. Hulbert

The Product Line

• The CLEEN-AIRE SYSTEM5™ PROCESSOR is a portable, highly effective, five stage forced-air
filtration and purification system that can be relied upon in residential, commercial, civil,
military, and in emergency field applications to remove airborne particulate,
hydrocarbons & VOC’s, ozone, bacteria, virus’, molds and mildew from air in habitable
environments (emergency shelters, homes, offices, medical facilities, hotels, schools, health
clubs, etc.) The system consists of a specially developed electrostatic pre-filter, a large
deep pleated HEPA filter, two exceptionally large proprietary absorption membranes
containing charcoal, potassium permanganate and activated alumina bonded and formed
together into a porous membrane with a proprietary binder and resin; and dual
ultraviolet emitter assemblies for destruction of pathological organisms. The first process
patent for the system was issued in February 1993. Three Additional patents are in
process of being applied for.

• In addition, an aerosol diffuser has been added to some units as an extra feature for

specific applications (see product descriptions in website for diffuser specifications)

• The proprietary resin in the AQI absorption media contains a blend of certain platinum
group elements that increase ionic activity and act as a catalyst to breakdown certain
hydrocarbons. The binder that holds the media together is combined with the resin to
reduce the pore size of the charcoal so as prevent premature absorption of moisture. This
breakthrough allows the media to perform with a selective ionic attraction to smaller
clusters of molecules such as hydrocarbons as opposed to the larger water molecule
clusters, which pass through the system. This feature lends itself to field applications in

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which biological or chemical contaminates are to be removed and the availability of
power is limited. Alternative systems with enhanced ionic mechanisms such as those found in
synthetic zeolites last for only hours, must be placed under vacuum to reactivate the
media, and operate best under a pressure/vacuum system requiring as much as 20 times
more power (desiccant towers) than a Cleen-Aire Processor. Production prototypes have
been produced to run off of 12-volt batteries in the field for prolonged periods of time
(5-10 days)

• Ancillary products include but are not limited to:

a. Service contracts for regularly scheduled maintenance.

b. Environmental evaluation kits to determine the identity and levels of
various contaminants found in the air.

c. Special filter medias designed for other OEM applications.
d. AQI’s proprietary “Fit & Clean” Image Builder Program for Hotels &
Health Clubs.
e. A proprietary aerosol that conditions the purified air by neutralizing the
oxidation-reduction potential of most VOCs or hydrocarbons thereby
eliminating irritation to the respiratory system.

The Steril- Air System 5™ product line comes in two basic configurations consisting of an upright
unit for all residential, commercial, and industrial applications, and a horizontal unit for various
civil, military and emergency field applications. The horizontal field units are configured for either
AC or 12 volt DC operation and will be introduced into the product line sometime in early spring
of 2012.

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SYSTEM 5ä CLEEN-AIRE PROCESSOR

Commercial Unit: AC/500C Specifications:

Dimensions: 82” x 13” Dia. w/ 20” base

Weight: 107 pounds

CFM: 100 – 250

Power Req: 120 – 240 Watt

Pre-Filter: Electrostatic -.5 micron

Particulate Filter: HEPA – .1 micron

Hydrocarbon
Removal: Proprietary Compound

multi-media absorption
membrane

VOC Removal: Proprietary Compound
multi-media absorption
membrane
Bacterial/Viral
Removal: Ultraviolet, 154 NM

Maintenance: Monthly Service Contract
or Owner Maintained

Periodic HEPA Replacement

Periodic Absorption

Membrane Replacement

Performance Specs: 99.99% Particulate to .1 u

(First pass) 99% Viral/Bacterial kill

(First pass @ 80ppm) 95% VOC/HC removal

Benefits & Advantages

The major benefit of AQI’s air purification system ( the Cleen-Aire Processor) is that it
significantly out-performs all other systems including custom duct-mounted appliances.
Simply stated, this portable, cost effective and highly effective air purification unit will soon
become the market standard.

Independent EPA lab analysis of AQI’s air-filtration units as shown in the following chart
below indicate CLEEN-AIRE’s superior performance in removing complex hydrocarbons,
smoke, bacteria and virus’ from the air.

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The Market

It is estimated that the current domestic (U.S.A.) market for portable air-purification approaches
1.5 Billion dollars annually. However the market for Cleen-Aire Processors may actually be
double this figure as the system creates and lends itself to new markets that are rapidly being
created at this moment, including civilian, military, and emergency preparedness markets that
have been activated by recent current events.

At the present time there are no other suitable portable systems on the market that can
effectively eradicate hydrocarbons, ozone, viruses, bacteria, smoke, spores, volatile organic
compounds and chemical and biological contaminants from the air at room temperature
without pressurization or vacuum. These markets cannot be serviced until leading edge
technology such as Steril- Air is properly introduced. Those markets now include the emergency
preparedness and disaster defense markets in both the military and public sectors.

Test Marketing

The product was tested in two selective test markets. As a result, more than five hundred inquires
from Health clubs and Daycare facilities nationwide were received.

Conclusion: Because of its exceptional performance the Cleen-Aire System5™ Processor will
rapidly become the obvious choice in many markets where compliance with EPA “Clean Air”
guidelines is desirable or where power and other limiting factors discourage the use of
conventional technologies that require higher maintenance and power consumption. In addition, its
usefulness for air decontamination in military, disaster relief, medical, dental, and residential
applications make it the ideal product to fill these rapidly expanding markets

9

Air Quality Industries, Inc. Business
Plan

A. VISION AND MISSION

Current Vision

AQI will provide portable air filtration units designed to alleviate or prevent health problems
related to pulmonary or respiratory dysfunction. These problems derive from airborne chemical
and biological environmental contamination. This vision does not necessarily include mass
treatment of industrial contamination in the environment (at present) but rather, AQI’s specific
focus is on all types of localized contamination, industrial, commercial, and general indoor
contamination, that threatens the quality of the air that we breathe. AQI’s product range includes
any and all products that can effectively remove odors, smoke, hydrocarbons, chemical, bacterial
and viral contamination effectively. Initially, AQI does not see itself being involved in
environmental engineering services which involve the installation of non- portable, built-in air
filtration and purification units, as this is a very costly marketing endeavor and in most cases
unnecessary when considering the alternative portability and effectiveness of AQI’s new
technology.

Mission Statement

• AQI is committed to successfully manufacturing and marketing portable air purification
products and accessories to meet specific environmental problems associated with
contaminated air. AQI intends to provide environmental evaluation services and kits to
diagnose specific contaminates in problem situations. This will allow for the design of
tailored Cleen-Aire units that will cure the specific problems found.

• AQI is committed to the satisfaction of its customers and to ensuring that its units are

properly maintained after the sale either through the assistance of its field representatives
and distributors or through customer education and support.

• AQI will support a distributor program which will be augmented with appropriate sales

aids and advertising.

• AQI will maintain a direct sales campaign utilizing the company’s website (www.Cleen-
Aire.com) to reach the general public. This site will target potential customers and will
provide valuable information to potential investors and distributors.

• AQI will strive to accomplish the following, in carrying out its day-to-day business

activities.

1. Treat our employees with respect and fairness
2. Follow the philosophy that the reason our customers buy from us is their belief in

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our products and in the way we operate. Reasons given for not buying from us will
be overcome.

3. Be ethical and fair in all of our business dealings.
4. Be charitable and active in the communities in which we are located.

A long-term commitment to this mission will establish AQI as a standard in the air purification business,
and will provide a pleasant working environment that will contribute to great success.

Goals

In order for AQI to attain its vision in the manner described in the mission statement, the following
primary strategic goals need to be achieved by:

• December, 2011 Completion of first production run
• December, 2011 Completion of first traunch of funding – $250,000
• January, 2012 Open shipping/ packaging facility
• February, 2012 10SB completed and filed.
• March, 2012 Second traunch of funding – $250,000
• April, 2012 Marketing videos completed for three basic markets,

health care, hospitality and disaster
preparedness

June, 2012 Completion of private placement funding $500,000 July,
2013 AQI’s own/lease service program offered

• August, 2013 Expanded manufacturing facility opens

These goals are conservative and we are confident they are attainable.

B. COMPANY OVERVIEW

Legal Business Description

Air Quality Industries Inc. is incorporated in the State of Colorado as a C-Corporation. AQI is in
the business of manufacturing and marketing quality air purification systems that include Cleen-
Aire units and ancillary products directly associated with AQI’s marketing objectives. The
corporate headquarters of AQI is in Rainier, Washington, USA.

Management Team

AQI’s key strengths include individuals with extensive research and development experience,
outstanding leadership and management credentials, excellent sales and marketing backgrounds,
impressive manufacturing skills and business relationships in the environmental field. Together the
management team represents exceptional experience, innovative thinking and personal success.

Officers and Key Employees Age Stock

Bruce R. Searle, President/Chief Technology Officer 51 43%
James H. Wood, Chief Operating Officer 58 15%
Hartmut Kuno, Chief of Marketing 35 <1%
Richard Von Claus, Chief Production Engineer 57 <1%

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Management Team Backgrounds

Bruce Searle – President/CTO

Until Air Quality Industries Inc becomes fully operational, Mr Searle divides his time between
duties as the President of Source Financial, a full-service mortgage banking company located in
Yelm, Washington and his responsibilities as President of AQI. Mr. Searle’s background includes
15 years of experience in real estate development, real estate brokerage, and mortgage
banking. Mr. Searle was previously a partner of Bjorn-Randall Development Co., President of
Equitable Credit Corporation, and a partner of Interwest Mortgage.

Mr. Searle has previous studies in math and physics at University of Utah and independently
through other sources. Mr. Searle developed and holds two (2) U.S. patents for technologies
dealing with commercial ozone generation equipment, and laminar flow – air sterilization
equipment for outpatient surgical and dental applications (Cleen-Aire).

Mr. Searle has two years of corporate organizational training through Lexington Business Alliance
as well as a graduate certificate from the Patey Institute in Human Behavioral Sciences.

Mr. Searle is 51, married, 5 children

Jim Wood, – Chief Operating Officer

Mr. Wood has 33 years of leadership and management experience in the United States Army.
Specifically, he led eight organizations ranging in size from 12 to 2,500 and managed seven
staffs, culminating as the chief of staff of a 350 person staff supporting a U.S. Army Infantry
Division comprised of 18,000 soldiers.

During a distinguished 29-year career in the U.S. Army, where he attained the rank of Colonel,
Mr. Wood was a highly decorated combat leader and he received numerous prestigious awards
from the Army and the Department of Defense for outstanding achievements.

Mr. Wood received a BS in Engineering from the United States Military Academy. His graduate
training was at Syracuse University where he obtained an MS in Education. In addition, Mr. Wood
is a graduate of the Army War College – a year long program of senior management training
for future leaders of the United States Armed Forces and its allied armed forces with emphasis on
budget and program development, executive management and international relations.

Mr. Wood is 58

Hartmut Kuno, Chief of Marketing

Mr. Kuno has 13 years of experience in marketing and advertising. After an apprenticeship-
college combination and graduating as a licensed Advertising Manager IHK (official occupational
title in Germany), he studied for 5 years at the Ludwig-Maximilians-University in Munich achieving
a Master’s degree in Mass Media Communication, Advertising Psychology, and Political Science.

Mr. Kuno has worked in various advertising agencies such as HM1 Direktmarketing/BBDO, one of
the top ten direct marketing agencies in Germany. Over the years he covered all major positions
from account management to the creative department. As a copywriter and conceptionist he
developed direct marketing means within customer/retailer relations management programs for

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companies like Lotus Development, Compaq and Deutsche Telecom.

Mr. Kuno is 35 years old, married to an American and has been living in Washington State for 2
½ years.

Richard Von Claus, Chief Production Engineer

Mr. Claus has ten years of strong leadership background experience. He holds a BS in
Mechanical Engineering from University of Chicago and has been involved in the development
and manufacture of high-tech products and component parts since 1975.

Mr. Clause is an experienced mold and die maker, planning engineer, and project supervisor.
As a planning engineer for Classic Tool and Die in Paramount California he achieved a
changeover from aircraft and missile components to a full line of replacement components for the
high-speed presses of the worldwide cardboard industry and demonstrated the new product line
at 9 trade- shows, resulting in 23% sales increase.

As a consulting engineer for Joy Manufacturing in Gardner, Kansas, Mr. Claus supervised a turn
key operation for the development of a product and a complete manufacturing process for
Tomahawk, Inc. of Shawnee, Kansas

Mr. Claus is 57

C. PRODUCT INFORMATION

Theory of Operation – System5 Cleen-Aire Processor

The Cleen-Aire System5™ Processor is a patented combination of five purification processes that
together provide maximum effectiveness, minimum power consumption, initial low cost, and ease
of service. Each purification process of the Cleen-Aire System5™ Processor has been carefully
developed and tested to meet the above objectives. The major components of the system are as
follows:

• Electrostatic Filter A highly effective three-stage electrostatic filtration process removes
airborne particles down to 3 micron. Two filter panels are electro statically charged and
separated by a non-woven, intermediate fiber filter. The two outside panels consist of a
special fabric media that generate an electrostatic charge as air moves across them. As
airborne particles approach the media containing the electrostatic field, they are
polarized and drawn into the fabric media much like iron filings are attracted to a
magnet. Particles build up on the fabric media, break off and then are pulled into the
inner fiber filter. There, turbulence and electrostatic forces cause them to accumulate into
large particles. These larger particles cannot pass through the second electrostatic
membrane and remain in the fiber filter media to be washed out with clean water or
vacuumed. This process takes advantage of the electrostatic forces generated by the air
itself. The pressure drop is substantially less than in conventional paper filter media, which
is why it is used as a pre-filter to the much denser HEPA medium that follows. This pre-
filter helps to prevent “face-loading” of the HEPA filter that has been maximized for the
smallest particle removal possible.

• HEPA Filter A large, very dense, pleated HEPA filter removes the smallest of particles
while still maintaining adequate airflows through the system. This is accomplished by use of
the pre-filter to prevent “face-loading” and by placement of an initial ultraviolet emitter

13

in the HEPA filter cavity to prevent the growth of bacteria and molds that are captured by
the filters inner surfaces. Normally, captured bacteria and molds breed on the surface of
the HEPA filter that in turn can cause “face-loading”. When this condition occurs in other
systems it usually results in bacteria and molds eventually spilling back into the system and
back into the room air. The huge surface area design of the pleated HEPA filter allows the
system to operate on less power while still maintaining adequate airflows.

• Hydrocarbon & Odor Absorption Membrane The absorption drum is a new technology

component found only in Cleen-Aire processors. The system consists of two very large,
annular, canister type absorption membranes having the ability to totally eliminate odors,
smoke, hydrocarbons, ozone, and other volatile organic compounds. The two membranes
contain a proprietary blend of medias consisting of granular charcoal, potassium
permanganate, activated-alumina particles, and other adsorbents. The various medias are
combined with a special patent pending resin that closes the pores of the media when
applied but opens again upon cooling. The pore size, however, is dramatically reduced
(perhaps 100 times smaller) compared to the pore size of similar untreated medias. As a
result of the reduction in pore size, the absorption membrane is much more effective than
conventional charcoal filter media. The combination of media and resins and the way in
which the media are molded together is unique and proprietary. This process creates a
porous membrane with absorption capacities and a life expectancy exceeding any
other type of absorption filter on the market.

• Air Sterilization Chamber The Cleen-Aire System5™ unit contains two unique 254
nanometer ultraviolet emitters that produce NO OZONE, but effectively disable virus’ and
kill bacteria. Ultraviolet sterilization of air is a recognized proven method to effectively
remove bacteria and viruses in hospital environments. The emitters are located inside the
HEPA filter and inside the hydrocarbon absorption drum. Maximum exposure to ultraviolet
radiation is maintained with minimal power consumption and maintenance. Killing capacity
is approximately 400% more than minimum requirements necessary to effect complete
destruction of bacteria, viruses, and molds.

Conditioning Agent Some Steril-Ai System5™ units contain a fluid reservoir with a conditioning
agent that is wicked into the air from the underside of the fan assembly. AQI has developed a
proprietary formula for a non-toxic area spray that can also be released into the environment
through hydration and then evaporation from a vapor release canister inside the Cleen-Aire unit.
When properly applied, the “conditioner” helps eliminate odors by encapsulating potentially
hazardous molecules (containing but not limited to hydrocarbons and VOC’s) and rendering them
harmless (by virtue of their being bound to the ingredients, i.e. molecules, in the conditioner).
When used as an area spray, the “conditioner” is capable of quickly neutralizing both simple and
complex malodors such as:

Ammonia Allphatic Amines Dimethyl Sulfoxide
Methane Triethylamine Phenyl Acetylene
Butyric Acid Benzylamine Parachlorothiophenol
Thiomolic Acid Trimethylamine Hydrazine Hydrates
Formaldehyde Hydrogen Sulfide Methyl Sulfide

This chart shows the “tested” effectiveness of the CLEEN-AIRE unit versus comparative
systems

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Performance Data

Nelson Labs in Salt Lake City, Utah tested the Cleen-Aire Processor. Nelson labs is considered to
be a premier EPA testing lab for air filtration efficiency testing. These tests were designed to be 10
times more severe than the environmental conditions for which the unit was designed. The CLEEN-AIRE
unit had a first pass kill rate of 95% for bacteria and 98% for virus. The tests were conducted in
10-minute intervals back to back over a 30-minute time period.

Maintenance Requirements

Cleen-Aire System5™ Processors require routine maintenance. In order to be effective, routine
maintenance procedures must be maintained. Unlike other commercial air-filtration and
purification technologies the cost of maintaining the Cleen-Aire system is dramatically less
expensive than its commercial counterparts installed into the ductwork of an air-conditioning or
other purification system.
Maintenance of the Cleen-Aire System5™ processor requires that the electrostatic three-stage
pre-filter be cleaned weekly by removing and then vacuuming or rinsing with clear water. The
ultraviolet emitters should also be wiped clean at least once every ninety days. The dense
pleated HEPA filter will require replacement every 2 to 3 years depending upon the particular
environment and amount of particulate that the system is subjected to. The two absorption
membranes need to be replaced every 12 to 18 months depending once again on the particular
environment and amount of hydrocarbons and VOC’s present in the air.

If the optional conditioning agent is used, then depending upon the application, the reservoir is
filled every 2 to 4 weeks depending upon the required ppm to maintain the effectiveness of the
conditioning agent.

These maintenance steps are tracked by three countdown timers located on the front of the unit
that direct the user and/or the servicing agent to perform the specific services required to
maintain the effectiveness of the unit.

To treat say a 2,000 sq. ft. space with 8 ft. ceilings effectively, the maintenance cost to maintain

15

a Cleen-Aire System5™ unit varies between $250 and $450 per year depending upon who is
servicing the unit. It can be effectively maintained by an owner/user/operator and does not
necessarily require a service contract. The maintenance cost of maintaining a custom system
installed into the ductwork of a forced air ventilation system to treat that same 2000 sq. ft.
normally does require a mechanical engineering company to maintain the system. As an average,
this type of system will run between $2,500 and $9,000 per year to maintain (based upon
average service cost/per sq. foot treated in a minimally equipped clean room installation as
published in literature furnished by the American Association of Mechanical Engineers).

Production and Assembly

AQI’s corporate headquarters, the production and assembly facilities are located in Rainier
Washington. Because of the demand for the unit in the hospitality industry (driven by marketing
and profitability quotients on premium room packages), a Las Vegas manufacturing facility is
contemplated during the second year of operation to service the Las Vegas market exclusively.
Initially the manufacture of most sub-assemblies is being out-sourced to appropriate
subcontractors. Minimal manufacturing capacity is required in-house at present or during the next
12 months of operation. Sub-contractors who are established companies familiar with meeting UL
protocols are being utilized to produce sub-assemblies that meet UL specifications on demand,
fully tested, faster and cheaper than AQI could produce them in the small to medium scale
production range. The ability to subcontract out the various components radically reduces the
start-up funding required. The lower initial start-up costs for manufacturing allows AQI to
aggressively market its products at a time when pre-market and promotional costs can be high.
As orders for units increase beyond the 375 units per month capacity of the existing production
facility, manufacturing will move to a larger complex and the current shop will be used for R&D. It
is anticipated that when production quotas have reached 1,000 units per month, AQI will bring
the manufacture of the sub-components in-house on a systematic component-by- component basis.

New Products in Development

Currently in design are AC and DC portable Cleen-Aire System5™ units for field operations
involving emergency, civilian or military applications. These units have been prototyped ready for
production and introduction into the product line sometime in mid 2012. These units utilize AQI’s
proprietary absorption membrane, and other absorption elements in a special formulation
together with a replaceable filter bag to assist the HEPA in removing lethal components found in
various chemical weapons. One of the units has been designed to run on 12 volts only. The
prototypes are nearly completed. The purchase price will be in the neighborhood of $1,850.

Quality Control

The company intends to seek ISO 9000 acceptance for its manufacturing processes. This will give
AQI world- wide recognition with respect to its quality control. AQI is currently developing a
“Manufacturing Manual”. AQI maintains its contract terms with its subcontractors to make sure that
compliance guidelines are being maintained.

Ancillary Product Descriptions

After-Market Filter Sales In order to maintain the effectiveness of a Cleen-Aire Processor, it is
necessary to replace the respective filter elements in the system on a regular maintenance
schedule which is determined depending upon the rate of saturation for each filter (determined
by pre-sales environmental monitoring). The automatic timing circuits on the unit indicate when
each filtering system is to be replaced and indicates such on an LCD display on the front of the
cabinet housing. The timing circuit is set at time of purchase to reflect the environmental conditions

16

that the unit will be subjected to. Both temperature and humidity affect the rate of absorption so
AQI manufactures several different absorption membranes for specific applications. AQI will
encourage its Distributors and Sales Representatives to obtain service contracts on larger volume
sales to insure proper operation of the units.

Environmental Monitoring Services – Nelson Labs, an independent microbiological air filtration
testing lab in Salt Lake City, Utah have agreed to offer environmental monitoring kits and
evaluation services through AQI. Monitoring of airborne viral and bacterial contamination can be
extremely important in isolating and/or identifying specific environmental problems. The
environmental monitoring program package includes a written standard operating procedure,
forms, monitors, pre-addressed mailers and abbreviated sampling instructions. AQI distributors
will gather the environmental samples, send them off for analysis and brief the customer as to the
existing levels of contamination found. At this point, the internal components of a CLEEN-AIRE unit
can be supplied to remedy the unique problems found in the customer’s environment.

After-Market sales of “Conditioning Agents” and “Homeopathic Aerosols” – AQI’s proprietary
formula for a non-toxic area spray as well as other aerosol formulas can be marketed and sold
for use in the fluid reservoir of the Cleen-Aire Unit. Because the absorption drum is hydrophobic,
the presence of additional humidity does not hamper the effectiveness of the unit’s ability to
absorb hydrocarbons or VOC’s

D. MARKET ANALYSIS

Market Background

Indoor air purification has been a growing concern for the past ten years. The latest EPA research
shows that our inside environments are more seriously polluted than the outdoor air. The fact is, the
air inside our homes and buildings is seriously polluted. Since research indicates that people spend
approximately 90% of their time indoors, it appears that for most people, the risks to health
may be greater due to exposure from inside air pollution than from the outside environment.
As homes, offices and factories become more energy efficient, the air people breathe has
become more contaminated. This contamination is not only a nuisance because of worker health
problems and the concomitant lost work hours, it is deadly because of increasing levels of Volatile
Organic Compounds (VOC’s), as well as bacteria, germs and viruses such as Legionnaires disease,
and TB.

New concerns have surfaced around the effectiveness and availability of portable air sterilization
systems for use in civil, military, and emergency field operations. The real threat of chemical or
biological agents being released into the air through negligence or willful acts of terrorism is a
public and governmental concern than can no longer be ignored. Chemical absorption is a major
concern in any portable filtration system. The proprietary ingredients found in a Cleen-Aire
System5™ absorption membrane, assures effectiveness unequaled in accomplishing this task.

There are some relatively low cost, portable air purification systems for the home and office.
However, these devices, regardless of technology utilized, be it, ionizers, HEPA filters, electrostatic
precipitators, etc. share a common failing — they are only effective on larger sizes of contaminants
and are totally ineffective against VOC’s and small deadly viruses, germs and bacteria. Additional
failings such as “face-loading” on HEPA filters, especially in ductwork of high-velocity centralized
heating systems, actually breeds bacteria and viruses.

Sick Building Syndrome – It is a fact that if too little outdoor air enters our homes or office
buildings, biological organisms and other pollutants accumulate to levels that can pose serious

17

health and discomfort problems. Most office buildings are built with minimal mechanical means for
purifying air in the ventilation system. Our newer homes and offices are designed and constructed
to minimize the amount of outside air that can “leak” into and out of the environment which leads
to even higher levels of pollution than those found in older buildings. The newer type systems, if
not cleaned periodically and thoroughly, become a breeding ground for a host of biological
organisms and a major source of indoor contamination. The solution to this problem is to eliminate
the contaminates in air just prior to ingestion into the lung. This solution is much cheaper and
practical than the cost and maintenance of a centralized system to guarantee the air purity. The
maintenance problem associated with maintaining a centralized system to its original
specifications is rarely if ever successfully accomplished. This year the EPA has begun to
develop specific guidelines for commercial buildings and medical facilities that OSHA will soon be
enforcing.

Bottom line – The need is universal, the market is vast, and the public awareness of the problem
has grown to significant proportions. Cleen-Aire System5™ processors are the economical
solution to this rapidly growing health concern.

Market Defined

It is estimated that the current domestic market for portable air-filtration systems approaches
$1.5 Billion dollars a year. This is generally divided into the following six basic market segments:

1. Medical Market. The U.S. market for medical air-purification is estimated at 200,000

CLEEN-AIRE units as follows:

0 Over 6,900 hospitals with an average of 4 operating room suites each and one
1 Emergency room — totaling over 34,500 units.

2 Approximately 12,000 outpatient surgery centers, which average three O.R. suites
equaling 36,000 units.

3 Other in-office or in-clinic sites for surgical specialists requiring sterile surgical rooms
4 adds 10,000 additional sites.

5 37,000 dental offices with an average of 3 suites per office. This totals over
110,000 sites for Cleen-Aire Units.

6 Veterinary Clinics totaling approximately 7,000 in office or in-clinic sites with
7 potential for a minimum sale of one unit.

0 Commercial Market – The U.S. Commercial Market is estimated at almost twenty two
1 million CLEEN-AIRE units as follows:

2. Hotel/Motel Industry – 9,800 sites, totaling approximately 1.84 Million rooms.

3. Daycare Industry – 24,800 sites, totaling approximately 105,000 rooms.

4. Health Club Industry – There are 3,700 clubs in the United States. The average

number of units required to provide adequate coverage in intense aerobic and
respiratory areas is between 6 and 15 units per facility. An average of 8 units per facility
would equal approximately 29,600 potential sites for Cleen-Aire units.

5. Executive Offices & Suites There are over 4.1 million office buildings in the United

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States and growing daily. At an average of just 5 units per office building this would
create a need for over 20 million units.

6. Residential Market – U.S. Residential Market is estimated at 60 million units as follows:

• According to recent figures published by the AMA, there is currently an average of 86
million Americans under a doctors care for upper respiratory and lung disease. These
include all types of disease including allergies, colds, flu, cancers, and other chronic
conditions. Each of these is a potential candidate for a Cleen-Aire Processor. The most
serious cases would represent a potential market for 60 million units. These sales could be
supported by doctors’ prescriptions that would allow medical insurance to pick up their
related portion of the cost of the unit.

• Sales into markets which might be considered as “preventative” health care markets,

include health conscious baby-boomers who feel a general concern for their respiratory
health maintenance now that many are becoming senior citizens. With this group, Quality
of life is the major concern that could translate into a potential 30 Million in voluntary
sales that are not included in this overall market evaluation.

7. Civil, military, and emergency preparedness and disaster units requiring supplemental
purification systems for overcoming the threat of biological and chemical contamination.

Conclusion: The potential 80 million unit market represented by the above figures is not being
effectively exploited at the present time. AQI need only penetrate a small single digit
percentage of this market to become highly profitable.

Product Advantages

In recent years there have been some significant advancements in technologies used to purify air.
Most of these advancements, however, have been in improvements for larger built in commercial
air-purification systems. The cost of this new technology is usually out of the price range of the
average consumer or commercial establishment. Even if cost was not a major concern the ability of
these units to effectively kill viruses and bacteria and remove VOC’s is heavily dependant upon
costly and very frequent cleaning and maintenance that is often not pursued effectively.

As far as the smaller more affordable units are concerned, no portable air purification system
currently on the market provides an effective means of eradicating viruses and volatile organic
compounds from the air.

The major benefits of Cleen-Aire Sytem5™ processor are its high value ability to remove or kill
these small, deadly viruses, bacteria and germs including the removal of hydrocarbons, ozone
and other VOC’s coupled with the cost effective portability and ease of periodic maintenance. In
short, The CLEEN-AIRE Sytem5™ Processor provides the most practical solution to this serious
health concern.

User Benefits

Cleen-Aire System5™ Processors were conceived as a method for substantially purifying the air
in hospitals and homes so that persons with severe asthma could obtain relief. Asthma is
aggravated by an irritated lining in the throat and lungs caused primarily by foreign materials in

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the air which the body’s immune system fails to cope with adequately. These contaminates include
smoke, bacteria, virus’s, spores, mold, mildew, ozone, radon, and a host of other chemical
compounds referred to as VOC’s. When the lung lining is irritated and aggravated to a point
above its threshold limits, symptoms begin to manifest and the lungs become extremely susceptible
to any bacterial or viral infection.

The same Cleen-Aire System5™ technology that can be used for asthma patients is also the best
technology suited for first stage clean-room environments, laminar-flow room requirements, and
other commercial applications requiring the removal of all foreign substances, including bacteria
and virus’ from the air. For these reasons, the Cleen-Aire System5 ™ Processor is also suitable for
Hotel/Motel Industry applications, Health Clubs, Dental Offices, Doctor Offices, Day Care
Facilities, Hospitals, Schools, Nursing Homes, Outpatient Centers, and Veterinary Clinics.

An overriding social/economic issue for the 21st century is the environment and associated health
and health care costs. Cleen-Aire System5™ Processors helps purify the environment and reduce
health care costs by removing contaminants, odors, bacteria and viruses from the air, thereby
improving the health and well being of everyone and specifically helping the over 80 million
Americans (American Lung Associations current figure) suffering from respiratory illness and
compromised immune systems as a result thereof.

Expanded Market

Additional markets for the Cleen-Aire System5™ processor are obvious by reviewing the
following benefits and applications:

A. Medical
Infection Control
Respiratory relief
Health maintenance
Home care versus in patient treatment
B. Economic
Lower health care costs
Less worker absenteeism
Higher worker moral from a healthy work place

C. Environmental
Reduction of VOC’s, radon and other carcinogens
Reduction of odors
Reduction of pathological organisms

D OEM Companies will benefit from employing Cleen-Aire technology to augment their

existing product lines.

E. International Markets. Because the environment and attendant health problems are

worse in most other parts of the world than they are in the United States, the world-
wide market, once validated in the United States, is unlimited.

Competition

Systems that are currently on the market focus mainly on particulate removal which really only
accounts for about 30% of the total range of contaminates which are found in the air we breathe.
The competition is comprised mostly of cheaper, retail oriented air filtration systems that

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incorporate partial HEPA filters or ozone producing devices (now illegal in some states). The
competition can be broken down into the following general categories:

1) Manufacturers of HEPA filter systems,
2) Manufacturers of Electrostatic Precipitators,
3) Manufacturers of Ozone systems for air purification
4) Manufacturers of Ionizers for air purification

HEPA filter systems: Most of the competitive systems on the market use HEPA type filters or
electrostatic precipitators for particulate removal. HEPA filters will “face load” over a very short
period of time especially when subjected to high velocity environments such as those required in
forced-air ductwork. For this reason the power requirements are substantial — about 5 times
greater than the Cleen-Aire system. HEPA filters also allow bacteria to develop on the surface
creating a potential breeding ground for growth of pathological organisms that “spill over” into
the ductwork and back into the air as the filter becomes saturated. HEPA filters do not remove
viruses from the air. Less expensive air purifiers in this category in fact do not contain true HEPA
filters but use types of filter media or paper that may be 35% HEPA or less. These systems range
in price from $99 to $1200 depending upon capacity and effectiveness.

Electrostatic Precipitators: These units create an electrical charge across opposing plates that act
as an ionizer of particulate matter that passes between the plates. The particulate matter, once
ionized, gravitates to the oppositely charged plate to which it adheres until removed or cleaned.
When the dirt on the plates accumulates to significant levels, the electrostatic charge across the
plates cannot dissipate quickly enough across the dirty plates so the potential energy level across
the plates increases producing a disassociation of electrons, thus forming ozone from the oxygen
in the air. The ozone then is introduced into the air stream which causes detrimental effects
including scaring of the lining of the lungs. These systems range in price from $250 to $1800
depending upon capacity and effectiveness.

Ionizers for air purification: Ionizers put out a negative ion charge into the air that causes
particulates in the air to bond together and then to settle and bond on the nearest surface
therefore causing a permanent layer of dirt to accumulate and bond on the surface. Ionizers are
only effective within close proximity (normally within 4 to 6 feet) to the emitter. Beyond this range
their effectiveness diminishes rapidly. These systems range in price from $50 to $180 depending
upon output capacity and effectiveness (sometimes combined with other systems).

Ozone systems for air purification: Ozone is a powerful oxidant that destroys lung tissue. New
EPA guidelines prohibit the use of Ozone for areas of human habitation. The EPA classifies ozone as
“a poisonous form of oxygen” (See EPA bulletin “The Inside Story” for details). Ozone should only
be used in fumigation situations where people are not able to breath the ozonated air. These
systems range in price from $350 to $1200 depending upon output capacity (sometimes
combined with other systems).

Some manufacturers have touted the benefits of ozone for oxidation of pathological organisms
and the oxidation of complex hydrocarbons or volatile organic compounds. Ozone is not effective
in hydrocarbon destruction. This has been proven in countless testing which has been published in
significant scientific journals as well as tested in AQI’s labs over the past 5 years. In addition, the
use of ozone in breaking down volatile organic compounds usually results in the development of
less complex compounds that are never the less just as toxic to the human system.

E. MARKETING PLAN

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This brief version of the AQI Marketing Plan summarizes and outlines the main aspects of the
intended marketing activities. AQI acknowledges that the only constant in the market is change.
The following statements and objectives will grow with the company and will be adjusted with
each audit cycle.

PRODUCTS, SERVICES AND PRICES

AQI’s product and pricing policies reflect the fact that the company is opening a new product
range, portable air purification units of commercial performance. The product policies in this
entering phase will focus on the main product, filter replacements and the associated services. The
pricing policies, although not directly dictated by an existing market level of prices, will be
moderate.

The AQI products are: the Cleen-Aire System5™ processor priced at $1579
HEPA-filter replacement cartridge priced at $159
Absorption drum replacement priced at $289
AQI Environmental Monitoring Services

AQI services have a double role. They are not only a revenue stream, but also a marketing tool to
generate additional sales. The AQI Maintenance Service is facilitated through AQI Service
Representatives, AQI Authorized Service Retailers, and AQI Authorized Representatives. Since the
Maintenance Service is also a marketing tool, its pricing strategy doesn’t aim for significant profit,
but rather for maximum customer acceptance as an incentive to maximize the performance of
their units through proper maintenance. The optimum price will be evaluated over time.

The AQI Environmental Monitoring Service is facilitated through external laboratories. The prices
depend on the specific test design. The mark-up on these services will vary.

Markets

AQI acknowledges that successfully competing in the Information Age requires more than
marketing products and services. AQI will market its company with all institutions that can
possibly influence its success. The following five markets are of initial importance for AQI:

1. Patients with respiratory diseases. 2. The hospitality industry with hotels, restaurants and
casinos. 3. Medical facilities with general hospitals, outpatient surgical clinics, nursing homes and
dental clinics. 4. Daycare centers, health and fitness clubs. 5. State and Federal Government
agencies such as the military, civil defense, and emergency service management offices.

Additionally, the mass media industry with newspapers, general interest magazines, special
interest magazines, websites, e-zines, radio, and TV must be fully developed.

The opinion leaders in our society and economy will likewise be contacted to market AQI and its
interests. This market contains state and federal politicians and their parties; state and federal
agencies, e.g. OSHA, EPA, FEMA; associations, trade organizations, special interest groups;
insurance companies and their associations are but a few examples.

AQI will market its image and profile also with its affiliates, agents, retailers, distributors and
sales representatives

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DISTRIBUTION

AQI knows that the foundation of a prosperous future rests on the strength its relationship with its
distributors and sales representatives. Therefore AQI distribution policies will focus on two goals:
First, to structure the market multi-dimensionally to create a maximum number of distribution
channels. Secondly, to design a revenue stream for sales representatives and distributors that is
not only fair, but one that will act as a strong incentive for aggressive pursuit of sales.

At present, AQI products and services will be marketed through seven channels:

1. The AQI website (www.Cleen-Aire.com) will generate direct sales and leads.
2. The AQI Sales Department with its sales executives and telemarketing professionals will

actively approach key companies to sell products and services and to cultivate business
relationships.

3. Web retailers (businesses with an e-commerce website only) in the air purification,
associated industries and within the AQI core markets, will be a channel that can easily
participate in an affiliate program of the AQI website.

4. Store retailers, within this industry, with or without an additional web presence, will be an
important partner to provide sales and maintenance service.

5. Distributors (serving independent sales representatives) will be a key channel. AQI will
structure the market geographically and vertically, so as to take advantage of existing
distributorships supporting a complementary product line.

6. Independent sales representatives will be relied upon to aggressively market AQI
products and services in their local areas.

7. AQI service reps will be a complementary channel to ensure a full geographical
coverage of the continental US, especially for maintenance

A major goal of AQI’s distribution policies will be to design the revenue streams for distribution
channels so that they will provide lucrative incentives. Every distribution channel gets commissions
on sales generated by themselves and all maintenance services provided. When AQI generates
prospects, like smaller key accounts, that need the care of a personal customer representative,
AQI will pass them on as a “lead” to the nearest AQI-agent (geographically and vertically). If
customers can’t get a service from their agent, e.g. maintenance service from a web retailer, these
customers will shifted over to the nearest AQI agent offering the desired service.

In order to ensure the highest possible profitability, the e-commerce part of the AQI website will
be conducted as an autonomous profit center that gets the same commission rates as Web
retailers. The AQI Sales Department is not comparable with other channels due to special price
strategies for key accounts, but of course it will be its own profit center.

Marketing Communication

Marketing communication (marcom) will be the main determining factor for the success of AQI’s
marketing strategy. AQI will not do any, so called, classic advertising, i.e. advertising money
spent to improve the image of a company or product in the un-evaluated hope that this might
increase the sales. To the contrary, all marcom activities will be response-oriented dialogue
management as part of a cohesive relationship management. Ads, for example, won’t be only
informational, they will always intend a next step, which could be the visit of the website, a phone
call to the AQI Hotline, etc. In essence all AQI marketing communication could be categorized
under direct marketing. Nevertheless, for a better differentiation of our marketing communication,
we will stick with the common terms of the communication tools: sales promotion, PR, event
marketing, and direct marketing (in the sense of direct sales and lead generation). Right now,

23

there are no sponsorship or product placement activities planned.

The AQI website is the main information platform for communication to all business partners–
distributors, retailers, representatives of all audiences, e.g. opinion leaders and mass media and
of course to all prospects and customers. AQI is very well aware of the fact that a website is just
a passive offer of information. In order to drive traffic to the website AQI will use a mix of
marketing communication tools, especially geared to the specific goals in the different areas.
Following is a brief and rough overview over the campaigns and activities planned:

1. Sales promotion: Agent Support Program

All AQI customer relation management means will be handled centrally by AQI and double-
labeled with AQI and the AQI agent as the common sender. This will be for marcom activities
and correspondence, e.g. the newletter (AIRmail), the filter-change-reminder emails to the
customer, etc.

An additional support for agents is the maintenance-referral: Customers of any distribution
channel that doesn’t offer maintenance service will be referred to the closest agent
geographically and vertically. Also, leads and smaller key accounts generated by AQI’s
marketing communication can be shifted to an agent’s customer basis.

• AQI Website

Search engine submission, e-zines, Web PR, direct mail, print PR.
• AQI Sales Department

Lead generation for key accounts.
• Store Retailers

Sales brochures and promotional material. AQI offers to send out mailing and e-mail
campaigns to the retailer’s database.

• Web Retailers
E-mail campaigns to their customer database, contributions to e-zines and newsletters,
AIRmail as special edition of the e-commerce website with link to it. Filter-change-
reminder.

• Distributors
Sales brochures, layouts for their catalogues, web pages with affiliate program, mailings
and e-mails to their customer base training and info packages for the sales
representatives, incentive campaigns for sales representatives.

• Independent sales representatives
• AQI Service Reps representatives

Sales brochures, server-based web-office solution, referral of leads generated by AQI’s
central marketing communication.

• Free sales representatives
Sales brochures, optional server-based web-office solution, referral of leads generated
by AQI’s central marketing communication.

2. PR and Event Marketing

0 All PR and event activity will refer to the AQI’s website.
0 General interest mass media. Press releases responding and commenting on issues
1 which are on the public agenda, e.g.

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• Special interest mass media. Press releases to magazines in the core market, intended to
establish AQI as new solution for the respective air related problems.

• TV stations Show-time for TV stations, e.g. presentation of Cleen-Aire unit in chemical
warfare scenarios.

• Trade shows, conventions, and congregations. Presentation of Cleen-Aire at events of the
AQI core markets, in talks and with a booth

• Trade associations, unions, and organizations. Cooperation with officials to influence
politics and win “alliances” in the promotion of Cleen-Aire, press releases for their
newsletters

• Insurance companies. Cooperation with officials to influence politics and win “alliances” in
the promotion of Cleen-Aire

• FEMA, OSHA. Cooperation with officials to influence politics and win “alliances” in the
promotion of Cleen-Aire,

• Political parties and congress members. Lobby work to influence legislature about safety
rules etc.

• Emergency Services. Provide information to fire departments and city councils about
Cleen-Aire in civilian defense, e.g. New York

3. Direct Marketing (Sales and lead generation)

All direct marketing activities—in print, online, radio, etc.—will be just an attention getter
for the more comprehensive information on the website.

• Lead generation of key accounts. Developed by and for the AQI Sales Department and
AQI Service Reps. Print mailing campaigns to core markets, e.g. hotel chains, hospitals, etc.

• Direct sales activities. Refer-a-Friend campaigns to existing customer database (e.g. with
filter delivery), print mailing and email campaigns, e-zine and newsletter PR, response ads
in magazines and newspapers.

4. Timeline and Budget

AQI sees marketing communication not as spending money for advertising, but as an
investment for future sales. As a result, all marcom activities will be response oriented and
measured by their return on investment. This will allow AQI to evaluate every single
advertising mean, to modify and correct marcom strategies, and to free up bigger
budgets for lucrative campaigns. More over, this will allow AQI in the long run to get
financing for marketing activities that exceed the limits of profit-generated budgets. In the
beginning phase of its marcom activities AQI will test different strategies on a small scale.
The timeline is planned as follows:

Marcom Phase I (until 1000 units sold or $300,000 in funding)

Depending on financial and human resources, the length of this phase can vary significantly.
Even without further funding these activities can start with the existing budgets and
personnel.

Short-term activities that allow very high ROI and/or instant sales:

• Direct sales campaigns for the AQI website. Search engine submission, e-zines,
newsletters and press releases.

• Key account acquisition through AQI Sales Department. Direct approach of hotel chains,
military, emergency service management agencies.

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• PR contacts with officials of organizations and associations in order to get insider
information about the best marketing approach in their respective markets.

• Acquisition of web-retailers. E-mail campaign with link to special pages on the AQI
website.

Marcom Phase II (after 1000 units sold or $300,000 in funding)
Medium-term activities that enlarge AQI’s access to core markets:

• Acquisition of store-retailers. Serial letter with referral to special pages on the AQI
website and press releases in trade magazines.

• Acquisition of distributors. Serial letter with referral to special pages on the AQI
website, press releases in trade magazines and direct approach.

• Recruiting of AQI Service Reps. Ads in special interest magazines and newspapers.

The description of further phases would be speculation only. Marcom Phase III and
following phases will be developed during Phase II. To update and design new stages of
this market plan will be an ongoing process, based on market research, feedback from
business partners and audiences, and profit projections.

F. FINANCIAL PLAN

The financial projections are made subject to the following assumptions and disclosures.

1. The company received net funding of $76,000 from an initial private placement offering in

November, 2010 with a more substantial funding of $1 Million anticipated to take place as
a result of a secondary private placement that was initiated in December of 2011.

2. The company will commence production of Cleen-Aire units on or about December 1,

2011with initial production units to be made available sometime in January of 2012. The
production date is currently on schedule.

3. The company will be able to maintain production and implement and sustain an effective

sales and marketing program if adequately funded with the first traunch of funding
($250,000) prior to the end of January 2012.

4. The company will not have to borrow or pay interest to sustain its projected growth rate.

5. The economic factors which affect the buying habits of end-users for the targeted markets

will remain adequate to strong throughout the next five (5) years

6. Inflation, Wages, Interest Rates, and Tax levies at the various governmental levels will
remain at current levels or take incremental raises that are in line with current economic trends.

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G. Financial Documents

Preliminary Estimate of Sources and Uses of Funds – December1, 2011
Air Quality Industries, Inc. – Cleen-Aire Manufacturing Scenario

First 180 Days $ Amount % of Total
Sources of Funds
Phase I – Private Placement Stock Offering 1000000 0.7401925
Phase II – Public Stock Offering (July, 2012)
Sales Receipts (180 units – estimated) 351000 0.2598075
Total of Funds from all sources: 1351000 1

Uses of Funds
Accounting Expense 20000 0.0148038
Legal Expense 17500 0.0129534
Offering Expense 15000 0.0111029
Development of Video / Revisions to Brochures, Art Work 17000 0.0125833
Additional Mfring Facility (leasehold improvements) & Offices 42000 0.0310881
Manufacturing Outline / Quality Control Procedures & Manual 6000 0.0044412
Additional plant set-up (including moving costs) 15000 0.0111029
Additional Tooling Set-up Costs (jigs and fixtures) 18000 0.0133235
Aluminum Bezel Molds for Cleen-Aire Cabinets (4 @ $4600,000) 18400 0.0136195
UL Submissions 15000 0.0111029

Materials for Inventories 257000 0.1902295

Capital Expenditures for Acquisition of Plant Equipment & Machinery
1 Production Turet Lathe/Mill (used) 16000 0.0118431
1 Production Lathe (used) 12000 0.0088823
1 Additional Drum Lathe 4000 0.0029608
1 ABS Injection Machine 45000 0.0333087
1 Hand Brake Model HB 12116 2200 0.0016284
1 Stamping Machine 16500 0.0122132
1 Vertical Tool Room Mill & Accessories 4200 0.0031088
1 Contact/Spot Welder 2800 0.0020725
1 Fork Lift – used 8000 0.0059215
2 Plastic Welders 1800 0.0013323
1 Meg Welder 1700 0.0012583
1 Lincoln Welder – Wire Feed 1600 0.0011843
1 Paint Booth and Equipment 18000 0.0133235
12 Bosh – High Speed Routers 4200 0.0031088
16 Additional Fabrication Tables 7000 0.0051813
1 Radial Drill Press 1100 0.0008142
Miscellaneous tools, safety equipment,etc. 12000 0.0088823
1 Delivery Truck with lift gate and product racks 24000 0.0177646
182100
Office Equipment 35000 0.0259067

Total Initial Operating Capital 530000 0.392302

Cost of Sales (Dist. Discounts & Sales Commissions) 75000 0.0555144
Contingencies / Reserve Fund 108000 0.0799408
Total of funds used: 1351000 1

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AIR QUALITY INDUSTRIES, INC.

BALANCE SHEET

as of December 1, 2011

ASSETS
Current Assets
1110 Case 14.00
1120 Key Bank – Checking 224.72
1130 Key Bank – Money Market 98.43
Total Current Assets 337.15

Accounts Receiveable 0.00

Other Current Assets
1310 Inventories 2,355.31
1340 Lease – Deposits 3,000.00
1410 Corporate Organization 30.00
1570 Leasehold Improvements 25,967.77
Total Other Current Assets 31,353.08

Fixed Assets
1510 Office Equip / Computers / Software 3,113.40
1520 Furniture 650.00
1530 Shop Equipment, Tools, Machinery 5,100.10
1550 Vehicles / Trailers 3,627.25
Total Fixed Assets 12,490.75

1580 Accumulated Depreciation 0.00

TOTAL ASSETS 44,180.98

LIABILITIES & EQUITY
Current Liabilities 0.00
Long Term Liabilities 0.00
Total Liabilities 0.00

Owner/Stockholder Equity
Shareholders Equity / Contributions 75,250.00
Retained Earnings (31,069.02)
Total Owners Equity 44,180.98

TOTAL LIABILITIES & EQUITY 44,180.98

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Income Statement (Year 1 by month)
% of Total
Sales Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun -12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Year 1 Sales
SA – AC/500-C $39,500 $39,500 $39,500 $79,000 $79,000 $79,000 $158,000 $158,000 $158,000 $316,000 $316,000 $474,000 $1,935,500 70.33%

SA – AC/500CB $0 $0 $0 $0 $0 $39,500 $39,500 $39,500 $79,000 $79,000 $79,000 $79,000 $434,500 15.79%

SA – DC/500CB $0 $0 $0 $0 $0 $0 $39,500 $39,500 $39,500 $39,500 $39,500 $39,500 $237,000 8.61%

Replacement Filters & Media $0 $0 $0 $4,500 $6,000 $7,500 $12,000 $15,000 $18,000 $21,000 $25,000 $36,000 $145,000 5.27%

0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 0.00%

0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 0.00%

0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 0.00%

0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 0.00%

Total Sales $39,500 $39,500 $39,500 $83,500 $85,000 $126,000 $249,000 $252,000 $294,500 $455,500 $459,500 $628,500 $2,752,000 100.00%

Cost of Goods Sold

Material $9,875 $9,875 $9,875 $21,100 $21,550 $31,875 $62,850 $63,750 $74,525 $114,925 $116,125 $158,925 $695,250 25.26%

Labor $3,160 $3,160 $3,160 $6,545 $6,620 $9,855 $19,560 $19,710 $23,020 $35,810 $36,010 $49,200 $215,810 7.84%

Total Variable COGS $13,035 $13,035 $13,035 $27,645 $28,170 $41,730 $82,410 $83,460 $97,545 $150,735 $152,135 $208,125 $911,060 33.11%

% of Total Sales 33.00% 33.00% 33.00% 33.11% 33.14% 33.12% 33.10% 33.12% 33.12% 33.09% 33.11% 33.11% 33.11%

Total Fixed Cost of $6,450 $6,876 $7,330 $7,813 $8,329 $8,879 $9,466 $10,091 $10,758 $11,470 $12,229 $13,039 $112,730 4.10%
Goods & Services

Total Cost of Goods Sold $19,485 $19,911 $20,365 $35,458 $36,499 $50,609 $91,876 $93,551 $108,303 $162,205 $164,364 $221,164 $1,023,790 37.20%

Gross Profit $20,015 $19,589 $19,135 $48,042 $48,501 $75,391 $157,124 $158,449 $186,197 $293,295 $295,136 $407,336 $1,728,210 62.80%

% of Total Sales 50.67% 49.59% 48.44% 57.54% 57.06% 59.83% 63.10% 62.88% 63.22% 64.39% 64.23% 64.81% 62.80%

Operating Expenses

Sales & Marketing $10,200 $10,573 $10,967 $15,783 $16,375 $20,942 $33,740 $34,565 $39,372 $56,062 $57,087 $74,650 $380,316 13.82%

Research & Development $4,850 $5,267 $5,720 $6,213 $6,749 $7,333 $7,971 $8,665 $9,422 $10,248 $11,148 $12,130 $95,716 3.48%

G & A (without Depreciation) $33,055 $35,948 $39,101 $42,538 $46,287 $50,374 $54,835 $59,701 $65,010 $70,802 $77,125 $84,027 $658,803 23.94%

Depreciation $422 $1,297 $1,631 $1,964 $2,231 $3,397 $3,397 $3,397 $3,397 $3,397 $3,397 $3,397 $31,324 1.14%

Total Operating Expenses $48,527 $53,085 $57,419 $66,498 $71,642 $82,046 $99,943 $106,328 $117,201 $140,509 $148,757 $174,204 $1,166,159 42.37%

% of Total Sales 122.85% 134.39% 145.36% 79.64% 84.28% 65.12% 40.14% 42.19% 39.80% 30.85% 32.37% 27.72% 42.37%

Income From Operations ($28,512) ($33,496) ($38,284) ($18,456) ($23,141) ($6,655) $57,181 $52,121 $68,996 $152,786 $146,379 $233,132 $562,051 20.42%

% of Total Sales -72.18% -84.80% -96.92% -22.10% -27.22% -5.28% 22.96% 20.68% 23.43% 33.54% 31.86% 37.09% 20.42%

Interest Income $100 $110 $121 $133 $146 $160 $175 $192 $210 $230 $252 $276 $2,105 0.08%

Interest Expense $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 0.00%

Income before Taxes ($28,412) ($33,386) ($38,163) ($18,323) ($22,995) ($6,495) $57,356 $52,313 $69,206 $153,016 $146,631 $233,408 $564,156 20.50%

Taxes on Income ($7,671) ($9,014) ($10,304) ($4,947) ($6,209) ($1,754) $15,486 $14,124 $18,686 $41,314 $39,590 $63,021 $152,322 5.53%

Net Income After Taxes ($20,741) ($24,372) ($27,859) ($13,376) ($16,786) ($4,741) $41,870 $38,189 $50,520 $111,702 $107,041 $170,387 $411,834 14.96%

% of Total Sales -52.51% -61.70% -70.53% -16.02% -19.75% -3.76% 16.82% 15.15% 17.15% 24.52% 23.30% 27.11% 14.96%

29

Budget (Year 1 by month)
% of Total
Sales Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Year 1 Sales
SA – AC/500-C $39,500 $39,500 $39,500 $79,000 $79,000 $79,000 $158,000 $158,000 $158,000 $316,000 $316,000 $474,000 $1,935,500 70.33%

SA – AC/500CB $0 $0 $0 $0 $0 $39,500 $39,500 $39,500 $79,000 $79,000 $79,000 $79,000 $434,500 15.79%

SA – DC/500CB $0 $0 $0 $0 $0 $0 $39,500 $39,500 $39,500 $39,500 $39,500 $39,500 $237,000 8.61%

Replacement Filters & Media $0 $0 $0 $4,500 $6,000 $7,500 $12,000 $15,000 $18,000 $21,000 $25,000 $36,000 $145,000 5.27%

0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 0.00%

0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 0.00%

0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 0.00%

0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 0.00%

Total Sales $39,500 $39,500 $39,500 $83,500 $85,000 $126,000 $249,000 $252,000 $294,500 $455,500 $459,500 $628,500 $2,752,000 100.00%

Cost of Goods Sold
Material $9,875 $9,875 $9,875 $21,100 $21,550 $31,875 $62,850 $63,750 $74,525 $114,925 $116,125 $158,925 $695,250 25.26%

Labor $3,160 $3,160 $3,160 $6,545 $6,620 $9,855 $19,560 $19,710 $23,020 $35,810 $36,010 $49,200 $215,810 7.84%

Total Variable COGS $13,035 $13,035 $13,035 $27,645 $28,170 $41,730 $82,410 $83,460 $97,545 $150,735 $152,135 $208,125 $911,060 33.11%

% of Total Sales 33.00% 33.00% 33.00% 33.11% 33.14% 33.12% 33.10% 33.12% 33.12% 33.09% 33.11% 33.11% 33.11%

Fixed Cost of Goods & Services
Production Management Salaries $4,000 $4,280 $4,579 $4,899 $5,242 $5,608 $6,000 $6,419 $6,868 $7,348 $7,862 $8,412 $71,517 2.60%

Production Facility Expense $2,000 $2,119 $2,245 $2,378 $2,519 $2,669 $2,828 $2,996 $3,174 $3,363 $3,563 $3,775 $33,629 1.22%

Production Equipment Rental $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 0.00%

Small Tools / Supplies $250 $265 $281 $298 $316 $335 $355 $376 $398 $422 $447 $474 $4,217 0.15%

Packaging Supplies $200 $212 $225 $238 $252 $267 $283 $300 $318 $337 $357 $378 $3,367 0.12%

Other Production Expenses $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 0.00%

Total Fixed Cost of Goods & Services $6,450 $6,876 $7,330 $7,813 $8,329 $8,879 $9,466 $10,091 $10,758 $11,470 $12,229 $13,039 $112,730 4.10%

% of Total Sales 16.33% 17.41% 18.56% 9.36% 9.80% 7.05% 3.80% 4.00% 3.65% 2.52% 2.66% 2.07% 4.10%

Total Cost of Goods Sold $19,485 $19,911 $20,365 $35,458 $36,499 $50,609 $91,876 $93,551 $108,303 $162,205 $164,364 $221,164 $1,023,790 37.20%

Gross Profit $20,015 $19,589 $19,135 $48,042 $48,501 $75,391 $157,124 $158,449 $186,197 $293,295 $295,136 $407,336 $1,728,210 62.80%

% of Total Sales 50.67% 49.59% 48.44% 57.54% 57.06% 59.83% 63.10% 62.88% 63.22% 64.39% 64.23% 64.81% 62.80%

Operating Expenses
Sales & Marketing
Advertising $500 $530 $562 $595 $630 $667 $707 $749 $794 $841 $891 $944 $8,410 0.31%

Commissions $3,950 $3,950 $3,950 $8,350 $8,500 $12,600 $24,900 $25,200 $29,450 $45,550 $45,950 $62,850 $275,200 10.00%

Entertainment $150 $159 $168 $178 $189 $200 $212 $225 $238 $252 $267 $283 $2,521 0.09%

Literature $300 $318 $337 $357 $378 $400 $424 $449 $476 $504 $534 $566 $5,043 0.18%

Promotions $500 $530 $562 $595 $630 $667 $707 $749 $794 $841 $891 $944 $8,410 0.31%

Salaries $4,000 $4,238 $4,490 $4,757 $5,040 $5,340 $5,658 $5,994 $6,350 $6,728 $7,128 $7,552 $67,275 2.44%

Trade Shows $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 0.00%

Travel $800 $848 $898 $951 $1,008 $1,068 $1,132 $1,199 $1,270 $1,346 $1,426 $1,511 $13,457 0.49%

Total Sales & Marketing Costs $10,200 $10,573 $10,967 $15,783 $16,375 $20,942 $33,740 $34,565 $39,372 $56,062 $57,087 $74,650 $380,316 13.82%

% of Total Sales 25.82% 26.77% 27.76% 18.90% 19.26% 16.62% 13.55% 13.72% 13.37% 12.31% 12.42% 11.88% 13.82%

Research & Development

30

Consulting $750 $795 $842 $892 $945 $1,001 $1,061 $1,124 $1,191 $1,262 $1,337 $1,417 $12,617 0.46%

Equipment (Expensed Purchases) $600 $636 $674 $714 $756 $801 $849 $899 $952 $1,009 $1,069 $1,133 $10,092 0.37%

R & D Materials $1,500 $1,644 $1,802 $1,975 $2,164 $2,371 $2,598 $2,847 $3,120 $3,419 $3,747 $4,106 $31,293 1.14%

R & D Salaries $2,000 $2,192 $2,402 $2,632 $2,884 $3,160 $3,463 $3,795 $4,159 $4,558 $4,995 $5,474 $41,714 1.52%

Total R & D Costs $4,850 $5,267 $5,720 $6,213 $6,749 $7,333 $7,971 $8,665 $9,422 $10,248 $11,148 $12,130 $95,716 3.48%

% of Total Sales 12.28% 13.33% 14.48% 7.44% 7.94% 5.82% 3.20% 3.44% 3.20% 2.25% 2.43% 1.93% 3.48%

General & Administrative
Accounting $3,500 $3,708 $3,928 $4,162 $4,409 $4,671 $4,949 $5,243 $5,555 $5,885 $6,235 $6,606 $58,851 2.14%

Admin Salaries $10,000 $10,959 $12,010 $13,161 $14,423 $15,806 $17,321 $18,982 $20,802 $22,796 $24,982 $27,377 $208,619 7.58%

Bad Debts $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 0.00%

Depreciation $422 $1,297 $1,631 $1,964 $2,231 $3,397 $3,397 $3,397 $3,397 $3,397 $3,397 $3,397 $31,324 1.14%

Equipment Rental/Small Purchases $500 $530 $562 $595 $630 $667 $707 $749 $794 $841 $891 $944 $8,410 0.31%

Insurance $450 $493 $540 $592 $649 $711 $779 $854 $936 $1,026 $1,124 $1,232 $9,386 0.34%

Legal Fees $15,000 $16,438 $18,014 $19,741 $21,634 $23,708 $25,981 $28,472 $31,202 $34,193 $37,471 $41,063 $312,917 11.37%

Licenses and Permits $150 $159 $168 $178 $189 $200 $212 $225 $238 $252 $267 $283 $2,521 0.09%

Office Expenses $600 $636 $674 $714 $756 $801 $849 $899 $952 $1,009 $1,069 $1,133 $10,092 0.37%

Office Rental $2,000 $2,119 $2,245 $2,378 $2,519 $2,669 $2,828 $2,996 $3,174 $3,363 $3,563 $3,775 $33,629 1.22%

Taxes (non-Income Taxes) $180 $191 $202 $214 $227 $240 $254 $269 $285 $302 $320 $339 $3,023 0.11%

Telephone $300 $318 $337 $357 $378 $400 $424 $449 $476 $504 $534 $566 $5,043 0.18%

Utilities $375 $397 $421 $446 $473 $501 $531 $563 $596 $631 $669 $709 $6,312 0.23%

Total G & A Costs $33,477 $37,245 $40,732 $44,502 $48,518 $53,771 $58,232 $63,098 $68,407 $74,199 $80,522 $87,424 $690,127 25.08%

% of Total Sales 84.75% 94.29% 103.12% 53.30% 57.08% 42.68% 23.39% 25.04% 23.23% 16.29% 17.52% 13.91% 25.08%

Total Operating Expenses $48,527 $53,085 $57,419 $66,498 $71,642 $82,046 $99,943 $106,328 $117,201 $140,509 $148,757 $174,204 $1,166,159 42.37%

% of Total Sales 122.85% 134.39% 145.36% 79.64% 84.28% 65.12% 40.14% 42.19% 39.80% 30.85% 32.37% 27.72% 42.37%

Income From Operations ($28,512) ($33,496) ($38,284) ($18,456) ($23,141) ($6,655) $57,181 $52,121 $68,996 $152,786 $146,379 $233,132 $562,051 20.42%

% of Total Sales -72.18% -84.80% -96.92% -22.10% -27.22% -5.28% 22.96% 20.68% 23.43% 33.54% 31.86% 37.09% 20.42%

Interest Income $100 $110 $121 $133 $146 $160 $175 $192 $210 $230 $252 $276 $2,105 0.08%

Interest Expense $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 0.00%

Income before Taxes ($28,412) ($33,386) ($38,163) ($18,323) ($22,995) ($6,495) $57,356 $52,313 $69,206 $153,016 $146,631 $233,408 $564,156 20.50%

Taxes on Income ($7,671) ($9,014) ($10,304) ($4,947) ($6,209) ($1,754) $15,486 $14,124 $18,686 $41,314 $39,590 $63,021 $152,322

Net Income After Taxes ($20,741) ($24,372) ($27,859) ($13,376) ($16,786) ($4,741) $41,870 $38,189 $50,520 $111,702 $107,041 $170,387 $411,834 14.96%

% of Total Sales -52.51% -61.70% -70.53% -16.02% -19.75% -3.76% 16.82% 15.15% 17.15% 24.52% 23.30% 27.11% 14.96%

31

Cash Flows (Statement of Changes in Financial Position: Year 1 by month)

Sources of Cash: Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Year 1
Operations during the year:
Net Income After Taxes ($20,741) ($24,372) ($27,859) ($13,376) ($16,786) ($4,741) $41,870 $38,189 $50,520 $111,702 $107,041 $170,387 $411,834
Add items not decreasing cash
Depreciation $422 $1,297 $1,631 $1,964 $2,231 $3,397 $3,397 $3,397 $3,397 $3,397 $3,397 $3,397 $31,324
Increase in Accounts Payable $16,238 $355 $378 $12,577 $868 $11,758 $34,389 $1,396 $12,294 $44,918 $1,799 $47,333 $184,303
Increase in Other Payables $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Increase in Accrued Liabilities $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Deduct items not increasing cash
Increase in Accounts Receivable $39,500 $0 $0 $22,000 $22,750 $21,250 $82,000 $63,000 $22,750 $101,750 $82,500 $86,500 $544,000
Increase in Inventory $37,486 $10,648 $11,059 $61,018 $56,418 $57,052 $57,694 $70,329 $215,770 $150,482 $40,745 $113,600 $882,301

Cash from Operations ($81,067) ($33,368) ($36,909) ($81,853) ($92,855) ($67,888) ($60,038) ($90,347) ($172,309) ($92,215) ($11,008) $21,017 ($798,840)

Financing & Other:
Sale of Stock $250,000 $0 $250,000 $0 $250,000 $0 $250,000 $0 $0 $0 $0 $0 $1,000,000
Proceeds from Short Term Loans $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Proceeds from Long Term Loans $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Sale of Investments $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Collection of Notes Receivable $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Reduction of Other Current Assets $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Reduction of Other Assets $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Cash from Operations & Financing $168,933 ($33,368) $213,091 ($81,853) $157,145 ($67,888) $189,962 ($90,347) ($172,309) ($92,215) ($11,008) $21,017 $201,160

Applications of Cash:
Payment of Dividends $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Purchases of Fixed Assets $0 $44,000 $35,000 $35,000 $27,000 $125,000 $0 $0 $0 $0 $0 $0 $266,000
Repayment of Short Term Loans $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Repayment of Long Term Loans $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Purchase of Investments $41,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $41,000
Increase in Notes Receivable $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Increase in Other Current Assets $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Increase in Other Assets $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Increase/(Decrease) in Cash $127,933 ($77,368) $178,091 ($116,853) $130,145 ($192,888) $189,962 ($90,347) ($172,309) ($92,215) ($11,008) $21,017 ($105,840)

Change in Cash Balance
Ending Cash Balance $128,270 $50,902 $228,993 $112,140 $242,285 $49,397 $239,359 $149,012 ($23,297) ($115,512) ($126,520) ($105,503) ($105,503)
Beginning Cash Balance $337 $128,270 $50,902 $228,993 $112,140 $242,285 $49,397 $239,359 $149,012 ($23,297) ($115,512) ($126,520) $337
Increase/(Decrease) in Cash $127,933 ($77,368) $178,091 ($116,853) $130,145 ($192,888) $189,962 ($90,347) ($172,309) ($92,215) ($11,008) $21,017 ($105,840)

32

Balance Sheet (Year 1 by month)
As of the Month Ending:

Assets Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12
Current Assets
Cash $128,270 $50,902 $228,993 $112,140 $242,285 $49,397 $239,359 $149,012 ($23,297) ($115,512) ($126,520) ($105,503)
Investments $41,000 $41,000 $41,000 $41,000 $41,000 $41,000 $41,000 $41,000 $41,000 $41,000 $41,000 $41,000
Accounts Receivable $39,500 $39,500 $39,500 $61,500 $84,250 $105,500 $187,500 $250,500 $273,250 $375,000 $457,500 $544,000
Notes Receivable $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Inventory $39,841 $50,489 $61,548 $122,566 $178,984 $236,036 $293,730 $364,059 $579,829 $730,311 $771,056 $884,656
Other Current Assets $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Total Current Assets $248,611 $181,891 $371,041 $337,206 $546,519 $431,933 $761,589 $804,571 $870,782 $1,030,799 $1,143,036 $1,364,153

Plant & Equipment
Land $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Buildings $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Building/Leasehold Improvements $25,967 $25,967 $25,967 $25,967 $47,967 $67,967 $67,967 $67,967 $67,967 $67,967 $67,967 $67,967
Machinery & Equipment $5,100 $20,100 $50,100 $80,100 $80,100 $170,100 $170,100 $170,100 $170,100 $170,100 $170,100 $170,100
Office Equipment $3,764 $8,764 $13,764 $18,764 $23,764 $38,764 $38,764 $38,764 $38,764 $38,764 $38,764 $38,764
Automobiles $3,627 $27,627 $27,627 $27,627 $27,627 $27,627 $27,627 $27,627 $27,627 $27,627 $27,627 $27,627
Accumulated Depreciation ($422) ($1,719) ($3,350) ($5,314) ($7,545) ($10,942) ($14,339) ($17,736) ($21,133) ($24,530) ($27,927) ($31,324)
Total Net Plant & Equipment $38,036 $80,739 $114,108 $147,144 $171,913 $293,516 $290,119 $286,722 $283,325 $279,928 $276,531 $273,134

Other Assets $3,030 $3,030 $3,030 $3,030 $3,030 $3,030 $3,030 $3,030 $3,030 $3,030 $3,030 $3,030
Total Assets $289,677 $265,660 $488,179 $487,380 $721,462 $728,479 $1,054,738 $1,094,323 $1,157,137 $1,313,757 $1,422,597 $1,640,317

Liabilities & Owners’ Equity
Current Liabilities
Short Term Debt $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Accounts Payable $16,238 $16,593 $16,971 $29,548 $30,416 $42,174 $76,563 $77,959 $90,253 $135,171 $136,970 $184,303
Other Payables $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Accrued Liabilities $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Total Current Liabilities $16,238 $16,593 $16,971 $29,548 $30,416 $42,174 $76,563 $77,959 $90,253 $135,171 $136,970 $184,303

Long Term Debt $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Total Liabilities $16,238 $16,593 $16,971 $29,548 $30,416 $42,174 $76,563 $77,959 $90,253 $135,171 $136,970 $184,303

Owner/Stockholder Equity
Common Stock $325,250 $325,250 $575,250 $575,250 $825,250 $825,250 $1,075,250 $1,075,250 $1,075,250 $1,075,250 $1,075,250 $1,075,250
Retained Earnings ($51,811) ($76,183) ($104,042) ($117,418) ($134,204) ($138,945) ($97,075) ($58,886) ($8,366) $103,336 $210,377 $380,764
Dividends Payable $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Total Owners’ Equity $273,439 $249,067 $471,208 $457,832 $691,046 $686,305 $978,175 $1,016,364 $1,066,884 $1,178,586 $1,285,627 $1,456,014

Total Liabilities & Equity $289,677 $265,660 $488,179 $487,380 $721,462 $728,479 $1,054,738 $1,094,323 $1,157,137 $1,313,757 $1,422,597 $1,640,317

33

Balance Sheet (Years 1 – 5)
As of the Year Ending:

Assets Year 1 Year 2 Year 3 Year 4 Year 5
Current Assets
Cash ($105,503) $5,957,415 $4,772,322 $9,442,606 $26,262,559
Investments $41,000 $41,000 $41,000 $41,000 $41,000
Accounts Receivable $544,000 $625,562 $1,856,774 $4,168,346 $9,257,245
Notes Receivable $0 $0 $0 $0 $0
Inventory $884,656 $486,352 $1,421,993 $3,554,984 $7,109,967
Other Current Assets $0 $0 $0 $0 $0
Total Current Assets $1,364,153 $7,110,329 $8,092,089 $17,206,936 $42,670,771

Plant & Equipment
Land $0 $0 $850,000 $850,000 $850,000
Buildings $0 $0 $2,500,000 $2,500,000 $2,500,000
Building/Leasehold Improvements $67,967 $152,967 $1,252,967 $1,252,967 $1,252,967
Machinery & Equipment $170,100 $230,100 $655,100 $895,100 $1,275,100
Office Equipment $38,764 $58,764 $203,764 $363,764 $593,764
Automobiles $27,627 $62,627 $132,627 $227,627 $372,627
Accumulated Depreciation ($31,324) ($102,259) ($440,528) ($866,463) ($1,424,732)
Total Net Plant &
Equipment $273,134 $402,199 $5,153,930 $5,222,995 $5,419,726

Other Assets $3,030 $3,030 $3,030 $3,030 $3,030
Total Assets $1,640,317 $7,515,558 $13,249,049 $22,432,961 $48,093,527

Liabilities & Owners’ Equity
Current Liabilities
Short Term Debt $0 $0 $0 $0 $0
Accounts Payable $184,303 $202,647 $592,497 $1,184,995 $2,369,989
Other Payables $0 $0 $0 $0 $0
Accrued Liabilities $0 $0 $0 $0 $0
Total Current Liabilities $184,303 $202,647 $592,497 $1,184,995 $2,369,989

Long Term Debt $0 $0 $2,740,000 $2,480,000 $2,220,000
Total Liabilities $184,303 $202,647 $3,332,497 $3,664,995 $4,589,989

Owner/Stockholder Equity
Common Stock $1,075,250 $6,075,250 $6,075,250 $6,075,250 $6,075,250
Retained Earnings $380,764 $1,237,661 $3,841,302 $12,692,716 $37,428,288
Dividends Payable $0 $0 $0 $0 $0
Total Owners’ Equity $1,456,014 $7,312,911 $9,916,552 $18,767,966 $43,503,538

Total Liabilities & Equity $1,640,317 $7,515,558 $13,249,049 $22,432,961 $48,093,527

34

Income Statement (Years 1 – 5)
% of Total % of Total % of Total % of Total % of Total
Sales Year 1 Sales Year 2 Sales Year 3 Sales Year 4 Sales Year 5 Sales
SA – AC/500-C $1,935,500 70.33% $5,806,500 76.29% $17,419,500 77.11% $34,839,000 68.70% $69,678,000 61.86%

SA – AC/500CB $434,500 15.79% $869,000 11.42% $1,738,000 7.69% $3,476,000 6.85% $6,952,000 6.17%

SA – DC/500CB $237,000 8.61% $355,500 4.67% $533,250 2.36% $799,875 1.58% $1,199,813 1.07%

Replacement Filters & Media $145,000 5.27% $580,000 7.62% $2,900,000 12.84% $11,600,000 22.87% $34,800,000 30.90%

0 $0 0.00% $0 0.00% $0 0.00% $0 0.00% $0 0.00%

0 $0 0.00% $0 0.00% $0 0.00% $0 0.00% $0 0.00%

0 $0 0.00% $0 0.00% $0 0.00% $0 0.00% $0 0.00%

0 $0 0.00% $0 0.00% $0 0.00% $0 0.00% $0 0.00%

Total Sales $2,752,000 100.00% $7,611,000 100.00% $22,590,750 100.00% $50,714,875 100.00% $112,629,813 100.00%

Cost of Goods Sold

Material $695,250 25.26% $2,085,750 27.40% $6,257,250 27.70% $12,514,500 24.68% $25,029,000 22.22%

Labor $215,810 7.84% $647,430 8.51% $1,942,290 8.60% $3,884,580 7.66% $7,769,160 6.90%

Total Variable COGS $911,060 33.11% $2,733,180 35.91% $8,199,540 36.30% $16,399,080 32.34% $32,798,160 29.12%

Total Fixed Cost of Goods & Services $112,730 4.10% $225,460 2.96% $450,920 2.00% $901,840 1.78% $1,803,680 1.60%

Total Cost of Goods Sold $1,023,790 37.20% $2,958,640 38.87% $8,650,460 38.29% $17,300,920 34.11% $34,601,840 30.72%

Gross Profit $1,728,210 62.80% $4,652,360 61.13% $13,940,290 61.71% $33,413,955 65.89% $78,027,973 69.28%

Operating Expenses

Sales & Marketing $380,316 13.82% $1,140,948 14.99% $3,422,844 15.15% $6,845,688 13.50% $13,691,376 12.16%

Research & Development $95,716 3.48% $191,432 2.52% $382,864 1.69% $1,148,592 2.26% $3,445,776 3.06%

G & A (without Depreciation) $658,803 23.94% $1,976,409 25.97% $5,929,227 26.25% $11,858,454 23.38% $23,716,908 21.06%

Depreciation $31,324 1.14% $70,935 0.93% $338,269 1.50% $425,935 0.84% $558,269 0.50%

Total Operating Expenses $1,166,159 42.37% $3,379,724 44.41% $10,073,204 44.59% $20,278,669 39.99% $41,412,329 36.77%

Income From Operations $562,051 20.42% $1,272,636 16.72% $3,867,086 17.12% $13,135,286 25.90% $36,615,644 32.51%

Interest Income $2,105 0.08% $6,315 0.08% $18,945 0.08% $75,780 0.15% $303,120 0.27%

Interest Expense $0 0.00% $0 0.00% $0 0.00% $0 0.00% $0 0.00%

Income before Taxes $564,156 20.50% $1,278,951 16.80% $3,886,031 17.20% $13,211,066 26.05% $36,918,764 32.78%

Taxes on Income $152,322 5.53% $422,054 5.55% $1,282,390 5.68% $4,359,652 8.60% $12,183,192 10.82%

Net Income After Taxes $411,834 14.96% $856,897 11.26% $2,603,641 11.53% $8,851,414 17.45% $24,735,572 21.96%

35

Cash Flows (Statement of Changes in Financial Position: Years 1 – 5)

Sources of Cash: Year 1 Year 2 Year 3 Year 4 Year 5
Operations during the year:
Net Income After Taxes $411,834 $856,897 $2,603,641 $8,851,414 $24,735,572
Add items not decreasing cash
Depreciation $31,324 $70,935 $338,269 $425,935 $558,269
Increase in Accounts Payable $184,303 $18,344 $389,850 $592,498 $1,184,994
Increase in Other Payables $0 $0 $0 $0 $0
Increase in Accrued Liabilities $0 $0 $0 $0 $0

Deduct items not increasing cash
Increase in Accounts Receivable $544,000 $81,562 $1,231,212 $2,311,572 $5,088,899
Increase in Inventory $882,301 ($398,304) $935,641 $2,132,991 $3,554,983

Cash from Operations ($798,840) $1,262,918 $1,164,907 $5,425,284 $17,834,953

Financing & Other:
Sale of Stock $1,000,000 $5,000,000 $0 $0 $0
Proceeds from Short Term Loans $0 $0 $0 $0 $0
Proceeds from Long Term Loans $0 $0 $3,000,000 $0 $0
Sale of Investments $0 $0 $0 $0 $0
Collection of Notes Receivable $0 $0 $0 $0 $0
Reduction of Other Current Assets $0 $0 $0 $0 $0
Reduction of Other Assets $0 $0 $0 $0 $0

Cash from Operations & Financing $201,160 $6,262,918 $4,164,907 $5,425,284 $17,834,953

Applications of Cash:
Payment of Dividends $0 $0 $0 $0 $0
Purchases of Fixed Assets $266,000 $200,000 $5,090,000 $495,000 $755,000
Repayment of Short Term Loans $0 $0 $0 $0 $0
Repayment of Long Term Loans $0 $0 $260,000 $260,000 $260,000
Purchase of Investments $41,000 $0 $0 $0 $0
Increase in Notes Receivable $0 $0 $0 $0 $0
Increase in Other Current Assets $0 $0 $0 $0 $0
Increase in Other Assets $0 $0 $0 $0 $0

Increase/(Decrease) in Cash ($105,840) $6,062,918 ($1,185,093) $4,670,284 $16,819,953

Change in Cash Balance
Ending Cash Balance ($105,503) $5,957,415 $4,772,322 $9,442,606 $26,262,559
Beginning Cash Balance $337 ($105,503) $5,957,415 $4,772,322 $9,442,606
Increase/(Decrease) in Cash ($105,840) $6,062,918 ($1,185,093) $4,670,284 $16,819,953

requirement.docx

Instructions

4–6 pages (see format below)

12 point type

Times New Roman, Georgia, Garamond

1 .doc(x), or .pdf file accepted

If you make decisions to deviate from these standards, just make sure it improves the legibility of your paper and isn’t a lazy gimmick to achieve page length. As always, concise, thoughtful, well-written content is paramount.

Scenario

For this assignment, 
you will assume the role of an analyst working for an investor client. Your objective is to make a recommendation to your client, on a potential investment, Air Quality Industries. You will prepare a report of your analysis, including a recommendation in the form of a 
BUY (make the investment) or 
SELL (pass on the investment) rating, just as an industry analyst would.

Your report must also contain the key points of your critical analysis, so the client can understand 
why you recommended as you did.

Format 

Case Reports should contain the following 
four areas of analysis, plus an appendix if necessary (the rubric for this assignment is 10 pts. for each section):

1.
Summary & Presentation (1–3 pages)

2.
S.W.O.T. (1 page)

3.
Risk—4 Components (1 page)

4.
Quantitative (1 page)

 

Case Analysis Report Details 

Ensure that your name is on the front page as well as your recommendation. Important: 
you MUST provide an investment recommendation (BUY or SELL) to receive credit for the report.

I.  Summary and Presentation. (1–3 pages)

This section should summarize your analysis, reasoning, and recommendation. 
If this were the only section your client read, he or she should be able to understand why you recommended as you did. For this reason, although this section comes first, I recommend that you prepare it after you have completed the other sections.

This section should also include a review of the overall quality and presentation of the case materials. There is no one way to prepare fundraising documents. However, there are some common themes used by companies that actually get funded.

Some questions you should consider are: Was the plan easy to read? How was the spelling and grammar? Did it convey the opportunity? Was the structure of the investment compelling? Were the assumptions and the financial statements (if any) well laid out and clear to discern?

II.  S.W.O.T. Analysis. (1 page)

This section explores the 
qualitative issues of the case. It should contain 
two parts: a S.W.O.T. (Strengths, Weaknesses, Opportunities, Threats) analysis in 
chart/bullet format, and supportive reasoning of the S.W.O.T. in 
paragraph format.

Try to contain the length of each bullet to one or two sentences. Your supportive narrative should be organized into the four areas and include your rationale for why you saw it as a strength, weakness, etc. You should be able to highlight the most important issues from the investor’s perspective without lengthy discussion.

III.  Risk Analysis (Four Components). (1 page)

This section should include your summary of the four components of risk, which are:

1. Product

2. Market

3. Team & Execution

4. Financial

You should rate the company for each of these risks (High–Med–Low). As you consider the questions below, you won’t have answers to everything. Consider which areas contribute most to you recommendation and list those.

A. Product:

Ask yourself, are the products fully developed and ready for sale? Where are the products in the product life cycle? What is the expected longevity of these products? What is the plan when these products decline? Are there additional products being developed? What are the characteristics of the value chain the company depends on for the production of these products? What is the production capability of the company or the sourcing company?

Are there economies of scale that need to be reached to maximize the growth potential? Are there, or will there be problems with inventory? Does the company have a research and development department? If so, who runs it? Who are the key personnel responsible for the development of the company’s products? What products does the company depend on for its business?

How do the products compare with the competition? Is the product or service 
industry disrupting? Does the company have first-mover or exclusive advantages over the competition? What is the major competitive advantage in terms of utility (product, place, price, promotion, personnel)? What is the unique value proposition of the product or service? Is there a technology risk (imitation, obsolescence, failure) to the product?

Does the company have product liability insurance? Has the product undergone third-party testing? Are the results of such testing available? What are the capital expenditures to produce the product and support it? Does the company financing plan support the production and development of the product? Does it support the development of replacement products if required? Are there patents or other intellectual property rights to the product or service and who owns these rights?

Do other stakeholders of the company have interest in the product, inventory, and intellectual property rights?  Are the products or services too diversified or too concentrated from a risk perspective?

B. Market:

Ask yourself, can the product be sold? Furthermore, has the company proven that customers are willing to buy it? Have they sold one?

Does the company have a fully developed Customer Acquisition Model (CAM)? What is the pricing structure? How does it compare with the competition? Is the pricing in line with the segment of the market that the company is targeting? What is the advertising model? What is the company’s budget for sales and marketing? Is the market scalable? Is there a brand name or names associated with the product or service?

Can the company describe the distribution channel or channels? Have any feasibility studies been performed? Does the product or service serve a niche market? If so, how big is the niche market? Is it expanding or retracting? Does the company have any third-party endorsements? Are the sales and revenue projections reasonable? What are the barriers to entry into the markets? Does the company have a competitive advantage over the competition? Where is break-even for the company in dollars and units?

C. Team & Execution: 

Can management execute to make the company successful? There is a saying in the venture capital business, “Bet on the jockey, not the horse.” The ability to ascertain the inter-personal skills of management is difficult. In this section, you want to discover background like work experience, education and professional achievements. You do this by looking at the bios of key management. How old are they? Is there a nice blend of age to show the excitement of youth and the wisdom of experience? Is management working in the same field as their educational and professional background?

You want to consider the organizational chart of the company. Is the organization too horizontal or too vertical? Are there missing personnel in the organization?

Are there cash flow issues and do you think management has the experience to work and succeed under this type of pressure? What are the financing issues the company is having; is management well equipped to deal with them and utilize assets in the company to solve these problems? What other immediate threats or weakness will pose management issues for the company? Does management have key relationships that will help the company?

Does the CEO have vision and engender confidence? Does management have the skills to run a large organization or do you think that more 
seasoned management needs to eventually be brought in?

Does management look like they have the ability to set budgets, implement and analyze? Has the company laid out a strategic growth plan that looks attainable? What are management’s long term goals? Does the company have a board of directors or advisory board that will aid in the achievement of company potential? Does management own of enough of the company to keep them incentivized to stay through the tough times? Does management have real money invested in the company that will cause them fight as hard for you as the investor as they will for themselves?

D. Financial: 

Can the investor get his/her money back? How? Can he/she get his/her required rate of return? Concerns over getting their money back are not isolated only to venture capitalists but to any person who invests. You must look at the overall business model, structure, management, board of directors and consultants with the company to ascertain if they can provide confidence and security that they can return money to investors with the required rate of return.

IV.  Quantitative Analysis.

Here you will summarize your analysis of the quantitative aspects of the deal. You can draw on what you have learned in other courses, notes, textbooks, online resources etc.

I recommend approaching the quantitative analysis in this order (there is no one way to analyze a company and you will not be docked if you choose to take another equivalent approach):

1.
Valuation and Hurdle Rate. See the valuation formula and hurdle rate section in the videos. I do these first, because if these don’t make sense, then further analysis isn’t going to change the recommendation. Look at the financial information as it pertains to the Valuation Formula, probability of risk and return and required rates of return. If you have a hurdle rate and you can tell that the company won’t meet it, then it’s a no. You are free to suggest changes in terms if you think the deal could be saved.

2.
Cap Table. By attempting to understand the capital structure of the company, who has invested how much and when, and what the distribution of equity is between shareholders, you can get a good understanding of the motivation of the parties.

3.
Simple Analysis. Next, I start by questioning simple things. I’m looking to see if the story of the executive summary matches the projections (and have they cared enough to think this through). For example, How many units must be sold to produce the projected revenue? Are they raising enough money to produce those units? Does a reasonable expectation exist that there is market demand for that many units. How many are they selling? Compare the cap table and projected earnings and chart the EPS—is it reasonable?

4.
Complex Analysis. By now we know whether or not the company has passed a smell test and there may legitimately be an opportunity here. So we look deeper at the accounting. What’s the growth rate been, and do the projections match that? What does the balance sheet, income and cash flow statements look like? Here’s where you pull out your financial accounting and look at the company’s margins, its acid test/quick ratio, its debt to equity and so forth.

The narrative for this section should provide your basic assessment of the qualitative elements of the company. By the numbers, would you recommend investing?

It’s common for young companies to struggle to provide complete financials and strong financial performance. The risk of the deal is often apparent in this section. So, you will need to work with what you have, however scant, and derive whatever you can in order to influence your final recommendation.

If you need to include additional information that supports but does not summarize your quantitative conclusions, please attach it as an appendix, and keep this section to one page for summarizing the quantitative elements and how they impact your recommendation decision.

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