Azu Etd Mr 2011 0062 Sip1 M.Pdf

The University of Arizona Electronic Theses and Dissertations Reproduction and Distribution Rights Form

Name (Last, First, Middle)

Degree title (eg BA, BS, BSE, BSB, BFA): Honors area (eg Molecular and Cellular Biology, English, Studio Art): Date thesis submitted to Honors College: Title of Honors thesis:

:The University of I hereby grant to the University of Arizona Library the nonexclusive Arizona Library Release worldwide right to reproduce and distribute my dissertation or thesis and abstract (herein, the "licensed materials"), in whole or in part, in any and all media of distribution and in any format in existence now or developed in the future. I represent and warrant to the University of Arizona that the licensed materials are my original work, that I am the sole owner of all rights in and to the licensed materials, and that none of the licensed materials infringe or violate the rights of others. I further represent that I have obtained all necessary rights to permit the University of Arizona Library to reproduce and distribute any nonpublic third party software necessary to access, display, run or print my dissertation or thesis. I acknowledge that University of Arizona Library may elect not to distribute my dissertation or thesis in digital format if, in its reasonable judgment, it believes all such rights have not been secured. Signed:______Date: ______

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[TABLE OF CONTENTS] 1

TABLE OF CONTENTS

EXECUTIVE SUMMARY ...... 4

E-BIKE LINGO ...... 5

INDUSTRY ...... 6

NASCENT INDUSTRY ...... 6 GROWTH DRIVERS ...... 6

COMPETITION ...... 7

TRADITIONAL BICYCLE MANUFACTURERS ...... 7 TYPES OF BIKES ...... 9 RECREATIONAL E-BIKES ...... 9 COMMUTER E-BIKES ...... 9 HIGH-END ELECTRIC MOUNTAIN BIKES ...... 10 TYPES OF COMPETITION ...... 10 BABY BOOMERS ...... 10 COMMUTERS ...... 10 INTERNATIONAL THREATS ...... 10 DEGREE OF CONCENTRATION ...... 10

COMPETITIVE ADVANTAGE ...... 11

DESIGN ...... 11 SERVICE ...... ERROR! BOOKMARK NOT DEFINED. CUSTOMIZATION ...... 12 BUILDING A VELOCIS BIKE ...... ERROR! BOOKMARK NOT DEFINED.

PRODUCT ...... 13

DESIGN SPECIFICATIONS ...... 13 PROTOTYPE DESCRIPTION ...... 13 COMPONENTS: ...... 13 FUNCTIONAL SPECIFICATIONS ...... 13 CUSTOMIZATION LINES ...... 14 CUSTOMIZATION PRODUCT CATEGORIES ...... 14 PRICING ...... 14 MARGINS ...... 14 PRODUCT PERFORMANCE VS. COMPETITION ...... 14 MINIMUM PRODUCT SPECIFICATIONS ...... 14 WARRANTIES ...... 14 VALUE-ADDED PRODUCTS AND SERVICES ...... 15 FUTURE PRODUCT LINES AND SERVICES ...... 15

CUSTOMER PAIN ...... 15

END USERS ...... 15 BICYCLE RETAILERS ...... 15

TARGET MARKET ...... 16

BICYCLE RETAILERS ...... 16 BICYCLE RETAILER DEMOGRAPHICS: ...... 16 BICYCLE RETAILER PSYCHOGRAPHICS: ...... 16 END USERS ...... 16 END USER DEMOGRAPHICS: ...... 17 END USER PSYCHOGRAPHICS: ...... 17

BUSINESS MODEL AND VALUE PROPOSITION ...... 18

MARKETING STRATEGY...... 19

END USERS ...... 19 ADVERTISING...... 19 BICYCLE RETAILERS ...... 20 ADVERTISING...... 20

SALES STRATEGY ...... 21

PERSONAL SELLING ...... 21 IDENTIFYING CUSTOMER NEEDS ...... 21 GOODWILL ...... 21 SALES ORGANIZATION ...... 21 HOW WE SELL ...... 21 SELLING TO THE RETAILERS ...... 21 HOW WE SUPPORT ...... 22 MAJOR VS. MINOR ACCOUNT MANAGEMENT ...... 22 MINOR ACCOUNT MANAGEMENT ...... 22 MAJOR ACCOUNTS ...... 22 SALES PERFORMANCE MEASURES AND REWARDS ...... 22

OPERATIONS ...... 23

SUPPLIERS ...... 23 INITIAL STRATEGY ...... ERROR! BOOKMARK NOT DEFINED. OVERVIEW ...... ERROR! BOOKMARK NOT DEFINED. LEGAL ...... 23 INTELLECTUAL PROPERTY ...... 23 IMPORTATION ...... ERROR! BOOKMARK NOT DEFINED. GOVERNMENT ...... 23 LIABILITY ...... 23 TAX ...... ERROR! BOOKMARK NOT DEFINED.

RESEARCH AND DEVELOPMENT ...... 24

FUNDING ...... 24

FUNDING CONSIDERATIONS ...... 24 NECESSITY FOR RAPID EXPANSION ...... 24

[TABLE OF CONTENTS] 3

IMPORTANCE OF QUALITY COMPONENTRY ...... 24 WE ARE READY TO GO ...... 24 EXIT STRATEGY ...... ERROR! BOOKMARK NOT DEFINED. CALL TO ACTION ...... 25

FINANCIAL PROJECTIONS ...... 27

ASSUMPTIONS FOR PROJECTING FINANCIALS ...... 27 AMERICAN E-BIKE RETAILERS ...... 27 LONG-TERM SALES GROWTH DRIVERS...... 27 FINANCIAL ASSUMPTIONS ...... 27 REVENUES ...... 28 OPERATING EXPENSES ...... 29 PRO FORMA FINANCIAL STATEMENTS ...... 30

VALUATION ...... 30

CEQ METHOD ...... 30 RADR METHOD ...... 30 VENTURE CAPITAL METHOD ...... 30

RISK ANALYSIS...... 32

PRICE SENSITIVITY ...... 32 SUPPLIERS ...... 32 RETAILERS ...... 32 END-USERS ...... 32 TECHNOLOGY AND INTELLECTUAL PROPERTY RISK ...... 32

MANAGEMENT TEAM...... 33

ADVISORY BOARD ...... 34

WORKS CITED ...... 36

APPENDICES: ...... 37 VALUATION ...... 37 FINANCIAL PROJECTIONS ...... 38 SUMMARY OF PRIMARY RESEARCH ...... 40 PRIMARY CUSTOMER RESEARCH ...... 40 SURVEY RESULTS AVAILABLE UPON REQUEST: ...... 40 COMPETITION...... 41 PRODUCT POSITIONING CHART BY MANUFACTURER ...... 42 MANAGEMENT TEAM RESUMES ...... 43

[EXECUTIVE SUMMARY] 4

EXECUTIVE SUMMARY The U.S. electric bike industry is growing at a rate of 34% per year. In 2010, more than 300,000 e-bikes were sold in the U.S. alone, creating a $525M market. This industry is expected to grow to $1.77B (1,012,500 units) by 2016. Despite high demand, U.S. bike retailers are hesitant to stock electric bikes because current products are bland, low quality, hard to service, and have warranties that are not backed by U.S. manufacturers.

Customizable Electric Bikes and Superior Support

At Velocis, we design, manufacture, and distribute high-quality, stylish, customizable electric bikes that are locally serviceable by independent retailers. We integrate top-of- the-line electric bike components with customizable frame designs. These high-end, trendy, electric bikes are light, easy to pedal, and ideal for fast and efficient commuting. Our high quality and commitment to local service empower bicycle retailers to offer superior customer support, which is difficult to provide with current industry standards.

Market Penetration Through Independent Retailers Figure 1. Velocis V1 Electric Bicycle Our target market is the 3,000+ independent bicycle retailers in metropolitan areas across the U.S. We will start in Tucson, and expand to Denver, Boulder, Sacramento, San Francisco, Portland, and Seattle, acquiring 100 dealers in our first 18 months of operation. After establishing a presence in the west, we will move into the eastern U.S. by 2013. We have interviewed more than 100 retailers and have found that 14 % are seriously interested in purchasing our product. We will allocate a substantial portion of our budget to customer relationship management, which will include a product support intranet to ensure customer satisfaction, retention, and repeat sales.

Young, Active Professionals Design Their Bikes Online Our target end users are young, active professionals living in bike-friendly metropolitan areas who are looking for a trendy, green, efficient way to commute. In addition to access to retailers stocking our bike, these individuals can design and customize their bike online. Through our network of partners, we can build and deliver a custom order in less than three weeks. Fragmented Market

There are at least 35 electric bicycle companies operating in the U.S. Trek Most are small start-ups less than three years old. Our five largest e- Dorel bike competitors, Currie Technologies, Ultra Motor, Trek, Giant, and Currie Tech Dorel Industries, have an approximate collective 35% market share. Ultra Motor Similar to the highly fragmented traditional bicycle industry with more Giant than 400 U.S. manufacturers, the e-bike industry offers opportunity Small Firms for growth in multiple niches.

FIGURE 2. AMERICAN E-BIKE MARKET FRAGMENTATION

Year 1 Year2 Year 3 Year 4 Year 5 Units 160 1,300 4,000 7,250 10,300 Revenue ($) $360,000 $3,060,000 $9,500,000 $15,400,000 $21,700,000 EBTDA ($) ($54,000) $940,000 $1,500,000 $3,500,000 $5,300,000

TABLE 1. PROJECTED FINANCIALS

[E-BIKE LINGO] 5

E-BIKE LINGO

Electric Bicycle (e-bike): A two- or three-wheeled vehicle with fully operable pedals and an electric motor of less than 750 watts (1 H.P.), whose maximum speed on a paved level surface, when powered solely by such a motor while ridden by an operator who weighs 170 pounds, is less than 20 mph.

FIGURE 3. VELOCIS V1 ELECTRIC BIKE, LABELED.

Watts: the average rider can produce approximately 100 watts for sustained periods.

E-bike Kit: an add-on electric motor and controls that can be installed on a traditional bicycle to turn it into an electric bicycle.

Unassisted Electric Bicycle: an electric bicycle that can be ridden solely with a throttle and no peddling.

Electric assist: an electric bicycle that aides the rider in generating torque after sensing rider input.

WARNING AND DISCLOSURE: This document (including any appendices or attached files) contains confidential information intended for a specific individual and purpose, and is protected by law. If you are not the intended recipient, you should cease reading and destroy the document. Any disclosure, copying, or distribution of this message, or the taking of any action based on it, is strictly prohibited by law and will be enforced by Velo Systems, L.L.C. and its associates.

[INDUSTRY] 6

INDUSTRY

In 2010, more than 300,000 e-bikes were sold in the U.S. alone, creating a $525M market. This industry is expected to grow an average of 34% annually, creating a $1.77B (1,012,500 unit) market by 2016.

NASCENT INDUSTRY

Growth of the U.S. Electric Bicycle Market! 1,200,000!

' #"' ! #*""$ 1,000,000! ++%#%%%$

800,000! ) ( ( #( ( ) $

( *"#"""$

Sales ! 600,000! Volume! *%%#%%%$

&' ( #( ( ) $ 400,000! %""#"""$

! ""#"""$ 200,000!

0! 2009! 2010! 2011! 2012! 2013! 2014! 2015! 2016! FIGURE 4: GROWTH OF THE U.S. ELECTRIC BICYCLE MARKET The emerging American electric bike industry is experiencing rapid growth. While the average annual growth rate is 34%, our primary research indicates that bike-friendly metropolitan areas in the western United States are expanding at a significantly higher rate.

GROWTH DRIVERS The average American faces stagnant wages, rising healthcare costs, rising transportation costs and uncertain job prospects. Now more than ever, people are looking for ways to live affordably without sacrificing their lifestyle.

In 2009, the total cost of traffic congestion in America reached $87.2 billion in wasted fuel and lost productivity, which translates to more than $750 per commuter. With average gas prices at $2.50 per gallon, Americans spent 4.8% of their annual income at the pump. Fuel prices are expected to rise above $5.00 by the end of 2011, increasing the burden of these costs to approximately 10% of their annual income. Increasingly, people are turning to alternate means of transportation to save on transportation costs.

For the first time, large businesses are actively embracing environmental stewardship. Companies like Genentech, Google, and Walmart are going beyond lip service to implement major sustainability programs that take advantage of tax breaks, create employee incentives, and reduce energy costs. For example, Genentech offers cash incentives to employees for almost $1,000 per year to commute to work via an alternative mode of transportation. They also offer shower facilities and other fringe benefits for employees commuting to work by bike. Employees cite these benefits as factors in their decision to work at Genentech and choice of residence location.

[COMPETITION] 7

Walmart initiated a sustainability drive to install low-energy bulbs and water-conserving taps. While there is an obvious brand management component to such programs, Walmart CEO Lee Scott also cited the value of promoting sustainability in stores to reduce costs in the 2010 annual report to investors. Environmental consciousness is no longer just an ideology embraced by liberal west coast residents. It influences strategic decisions, reduces business costs, and is a pragmatic way to attract and retain customers. Like businesses, consumers are also finding the benefits of going green to not only be a lifestyle choice but also a practical way to reduce expenses.

With the advent of new battery technology that extends range and reliability, e-bikes are becoming a practical way for commuters to lower their transportation costs while reducing their environmental impact. Over the past five years, dozens of new electric bike companies in the U.S. have demonstrated clear industry growth. Unlike our competition, Velocis offers individuals a way to turn a frustrating, mundane, and expensive commute into an efficient, stylish, and unique experience.

COMPETITION

As described in the executive summary, there are at least 35 electric bicycle companies operating in the United States. Generally, the industry can be segmented into three types of manufacturers: traditional bicycle manufacturers, mass- market electric bicycle manufacturers, and niche e-bike manufacturers. Most companies are small start-ups less than three years old and fall into the niche category. While the vast majority of these firms are privately owned and have no public financial or sales information, our primary research indicates that the five largest U.S. producers of e-bikes are Currie Technologies, Ultra Motor, Giant, and Trek who have an approximate collective market share of 35%.

TRADITIONAL BICYCLE MANUFACTURERS

Traditional bicycle manufacturers include Trek, Giant, and Dorel Industries (Cannondale and Schwinn). While these companies have Trek significant capital resources, they do not have a significant market Dorel share in the e-bike industry. The majority of their electric bikes have Currie Tech limited features and mediocre industry performance. They are Ultra Motor primarily distributed through their existing sales channels and rely Giant on brand equity to sell. Small Firms Dorel Industries Dorel Industries, a multinational conglomerate headquartered in FIGURE 2. AMERICAN E-BIKE Montreal, Canada, entered the electric bicycle market through their subsidiary Pacific Cycles, producers of Cannondale and Schwinn MARKET FRAGMENTATION bikes. Currently, Schwinn has three e-bike models, all of which retail for $2700. Their bikes have external rear rack batteries, no gears, 250-watt motors, and are available in brown, silver, or white.

Giant 'ŝĂŶƚDĂŶƵĨĂĐƚƵƌŝŶŐŝƐƚŚĞǁŽƌůĚ͛Ɛ largest bicycle manufacturer. Headquartered in Taiwan, Giant was originally an original equipment manufacturer (OEM) for other brands, such as Schwinn. They have approximately four e-bike models (selection varies) that retail for an FIGURE 5. SCHWINN TAILWIND average price of $2000. FIGURE 6. GIANT LITE ©2011 Velo Systems, L.L.C.

[COMPETITION] 8

Trek Trek released their first e-bike in the 1990s but it failed to gain traction. After the widespread emergence of the electric bike industry and adoption of innovations in motor and battery technology, Trek re-entered the market. Their e-bikes are now sold in 500 of the 2,300 retail stores that stock their traditional bicycles and sell for $2,000-$2,500.

Mass Market E-Bike Manufacturers Several e-bike companies have emerged with a focus on mass-market e-bike FIGURE 7. TREK RIDE+ sales, such as Ultra Motor, Currie Technologies, and Bionx. These companies formed in direct response to the growing demand for e-bikes worldwide.

Ultra Motor Ultra Motor is a large international bicycle manufacturer. While they do not have much of a presence in the regular bicycle market in the United States, they have started to dominate the higher end spectrum of electric bicycles with their A2B product line which sells for $3000-$3,500. Their bicycles are known to be of excellent quality and are the bicycle of choice for companies that rent bicycles. They have operated in the United States since 2006, making them a veteran in this market. hůƚƌĂDŽƚŽƌ͛ƐĞůĞĐƚƌŝc bikes are currently sold in fourteen countries around the world. In the United States their electric bikes are sold in about two hundred stores including select Best Buy stores on the west coast.

Currie Technologies Currie Technologies is the e-bike market leader in the United States by volume. They were founded in 1997 and market their technology under various brand names. They have also licensed their technology to Shwinn, which is owned by Dorrel Industries. Currie Technologies is the low-cost leader. Most of their electric bikes sell for about $1,000.

Bionx Bionx manufactures e-bike conversion kits sold directly to consumers. They also have several e-bike product lines sold internationally through distributors in Europe. Bionx e-bikes have the most technologically advanced interface in their category and are sold at a premium price point ($2,000 per kit).

Niche E-Bike Manufacturers While there are several large companies in the electric bicycle industry in terms of market capitalization and/or sales, they do not dominate the e-bike market. The majority of electric bikes are manufactured by comparatively small, independent firms. These firms have a collective market share of approximately 65%. As stated above, this is analogous to the traditional bicycle industry, where no further significant consolidation has occurred over the several decades.

Pedego Pedgo was founded in 2007 and is based in Irvine, California. They focus on cruiser style e-bikes that retail for approximately $1,500. They are currently partnered with designer Tommy Bahama and focus on creating relaxed and comfortable rides.

Prodeco Technologies Prodeco is new to the e-bike market. They develop affordable electric bikes that are assembled in the United States and directly compete with Currie Technologies͛ƉƌŽĚƵĐƚƐ. Prodeco bikes have baseline MSRPs ranging from $699 to $1,099.

[COMPETITION] 9

TYPES OF BIKES RECREATIONAL E-BIKES Recreational electric bike riders are usually baby boomers looking for a comfortable bicycle for leisurely rides. They are less concerned with performance and weight. Recreational riders also include younger generations looking to ride down to a beach, park or school. Pedego targets this audience with its cruiser style e-bikes (pictured below).

FIGURE 8. TYPICAL RECREATIONAL E- FIGURE 9. CRUISER STYLE E-BIKE BIKE

COMMUTER E-BIKES While some commuters prefer riding cruiser-style e-bikes, our primary research has demonstrated that many commuters want an efficient electric bicycle that more closely mirrors the traditional commuter bike style. Currently, there are no commuter-style electric bikes on the market, and other e-bikes cannot be pedaled efficiently without motor assistance.

FIGURE 1. VELOCIS V1 PERFORMANCE COMMUTER E-BIKE

[COMPETITION] 10

HIGH-END ELECTRIC MOUNTAIN BIKES High-end electric mountain bike riders account for a very small portion of total electric bicycle riders in the United States. Only two companies, Optibike and Stromer, cater to this market.

TYPES OF COMPETITION BABY BOOMERS Within this industry there are multiple target markets. The most prominent is baby boomers, who usually prefer to purchase bikes for recreational purposes and value comfortable and relaxed bicycle styles. Baby boomers FIGURE 10. OPTIBIKE 850R are the primary target market for major industry players like Trek, Giant, MOUNTAIN BIKE Schwinn, and Ultra Motor.

Other companies like Optibike and Grace occupy the specialty high-end market and target baby boomers. Their electric bicycles sell for upwards of $7,000 and incorporate unique materials and cutting-edge technology. COMMUTERS Commuters are a rapidly growing niche market in the U.S. Currently, Cytronics, Surosa Cycles, and few other European e- bike companies are the only firms actively pursuing commuters as a demographic, but our primary research has indicated that they do not have significant interest in expanding to the United States at this time.

As discussed above, there are approximately 35 electric bicycle companies in the U.S. However, this market is far from saturated: only 1,500 out of 4,500 retailers currently stock electric bikes, but this number is growing rapidly. (See Figure 2.1 below for degree of retailer concentration by state.)

INTERNATIONAL THREATS European companies are the primary threats in the international market. The most significant threat is Derby Cycle, the largest bicycle manufacturer in Germany and current electric bike market leader in Europe. Last year, they sold more than 44,000 electric bicycles in Europe alone. They went public on the German stock exchange on February 4, 2011 to facilitate expansion to the United States. Other European companies with proven products include Stromer, a Swiss manufacturer that expanded to the U.S. in 2010, and Aerocell, a Danish and Taiwanese joint venture with plans of expansion to the U.S. In terms of product offering, our closest competitors are Surosa Cycles, an English firm with no plans of distributing in the United States. DEGREE OF CONCENTRATION Geographically, there are ƐƚƌŽŶŐ͞ŚŽƚƐƉŽƚƐ͟ California where electric bicycles are selling much quicker. These locations are in warmer regions that are 28% Florida less affected by seasons or inclement weather. 32% Dense urban areas and bicycle friendly routes Texas are also important factors that determine adoption of electric bicycles. For example, the New York California bay area e-bike market is growing at a Washington rate of 300-400% per year. New York and Arizona are two emerging e-bike market regions. 4% 10% Colorado 4% Oregon 4% 7% 5% 6% Arizona Other FIGURE 11: GEOGRAPHIC CONCENTRATION ©2011 Velo Systems, L.L.C.

[COMPETITIVE ADVANTAGE] 11

COMPETITIVE ADVANTAGE

At a recent public event user test riding our bike said, ͞/ŽǁŶĞĚĂ'ŝĂŶƚĞůĞĐƚƌŝĐďŝŬĞ͕ƚŚŝƐŝƐ so ŵƵĐŚďĞƚƚĞƌ͊͟

Traditional bicycle manufacturers and mass-market e-bike manufacturers possess vast financial resources, massive economies of scales, established supply chains, and large distribution channels. However, these attributes also make it difficult for companies like Giant, Trek, and Ultra Motors to effectively service emerging niche markets.

As a boutique electric bicycle manufacturer, Velocis offers superior design, service, and customization. By designing high- quality, stylish, and customizable electric bikes, we give consumers the ability to exercise their personal style and express their individuality. Because we assemble our bikes with a wide array of parts, we can source best-of-breed components and give consumers the ability to design their bikes to the highest standards.

DESIGN We stay ahead of the competition by maintaining constant contact with our network of independent bicycle retailers, suppliers, and custom bike builders. We have established a proprietary customer research database with design and performance preferences through phone interviews with over 100 store owners, personal interviews with hundreds of end users, dozens of custom bike builder site visits, and catalogs of over 500 popular bicycle styles at college campuses.

[COMPETITIVE ADVANTAGE] 12

Large manufacturers do not provide the personalized interactions and depth of service that Velocis offers. The historic imbalance between the size of large bicycle manufacturers and small independent bike retailers has created distinctive business practices in the bicycle industry, and by extension the e-bike industry.

Our surveys of independent retailers also indicate that it can be difficult for them to reach large manufacturers, whose call centers are often based overseas, and have customer service representatives that fail to offer adequate support. In the case of e-bikes, they often lack the training to address their problems. By focusing on solving these retailer frustrations, Velocis can build deeper and more effective relationships than larger manufacturers, thus strengthening bonds and encouraging brand loyalty and repeat sales.

CUSTOMIZATION

Mass-market traditional and e-bike manufacturers do not offer customized bicycles. Niche companies provide narrow, targeted solutions that focus on one type of consumer, but do not address wider markets.

[PRODUCT] 13

PRODUCT DESIGN SPECIFICATIONS

FIGURE 1. VELOCIS V1 PERFORMANCE COMMUTER E-BIKE PROTOTYPE DESCRIPTION Our prototype (pictured above) is built with the following components sourced through our partners in Tucson. We are in the process of formalizing relationships with their distributors to reduce component costs (see Partners and Suppliers sections below). COMPONENTS: Rims: Velocity Deep V Brakes: Tektro Caliper Pedals: Wellgo SPD/platform Spokes: 14 gauge Shifters: Shimano Crank: Origin 8 Hub: Origin 8 Derailleur: Shimano Acera Seat Post: Origin 8 with shock Frame: Origin 8 CX700 Casset: Shimano 6-speed freewheel Seat: Origin 8 red road seat Headset: Origin 8 Chain: Shimano 8-speed Handle Bar: Origin 8 Grips: Origin 8 Motor: Magic Pie Battery: Lithium Ion Phosphate

FUNCTIONAL SPECIFICATIONS By law, the motor speed must be limited to an unassisted top speed of 20 mph to be considered a bicycle. However, we offer customers the option to set a higher speed cap of 25 mph if they wish to register their bike as a moped. Customers can also have a top speed greater than 25 mph if they wish to register as a motorcycle. With no speed caps, a 48-volt battery, and a 170-pound rider, our bikes have an unassisted top speed of 30 mph on flat terrain. Higher top speeds vary with rider weight and ability. The bike will also meet all standards outlined in tŚĞƌĞŐƵůĂƚŽƌǇĚŽĐƵŵĞŶƚ͞ϭϲ͘&͘Z͘WĂƌƚ 1512ͶRequiƌĞŵĞŶƚƐĨŽƌŝĐǇĐůĞƐ͕͟ǁŚŝĐŚŝƐĂǀĂŝůĂďůĞƵƉŽŶƌĞƋƵĞƐƚ.

[PRODUCT] 14

CUSTOMIZATION LINES During the first six months of operations, we will only produce custom bicycles so that we can establish production best practices, enhance retailer relationships, and gather customer feedback on style and performance preferences. After aggregating and analyzing this feedback, we will create our first mass-produced retailer line for sale in January 2012.

CUSTOMIZATION PRODUCT CATEGORIES The customization division has four main product categories: retrofits, mid-range catalog custom, high-end catalog custom, and full custom. Because each product will have a unique cost dependent on customer preferences, we have approximated costs from our primary research and interactions with potential customers in our target market (mid-range catalog custom and high-end catalog custom). Mid-range catalog custom and high-end catalog custom bikes are the bicycles that customers can create in the onliŶĞ͞ďƵŝůĚŵǇďŝŬĞ͟ĨĞĂƚƵƌĞĚŝƐĐƵƐƐĞĚĂďŽǀĞ͘The MSRPs for mass-ƉƌŽĚƵĐĞĚůŝŶĞƐ;DĞŶ͛ƐsĞƌƐŝŽŶϭĂŶĚ tŽŵĞŶ͛ƐsĞƌƐŝŽŶϭͿǁĞƌĞĂůƐŽĞǆƚƌĂƉŽůĂƚĞĚĨƌŽŵƚŚŝƐƌĞƐĞĂƌĐŚ͘ Our final product category, full custom, allows customers to work with our designers to create a fully custom-built, unique bicycle. The pricing is completely dependent on time spent with designers, components and materials selected, and time taken to build.

PRICING Pricing is discussed in further detail below (see Business Model section).

MARGINS We have 50% margins on all custom builds, aligning our price with existing standard e-bikes of similar quality and performance. The forecasted 25% margin is an industry standard for frame builders (assemblers).

PRODUCT PERFORMANCE VS. COMPETITION Our retailer wholesale product line will be powered with Motor Excellence brand motors, which are currently in development and scheduled to be released in late 2012. Motor Excellence is an American company headquartered in Flagstaff, Arizona. Their current motor is predicted to be the most efficient, highest quality motor in mainstream production. It has 3x the torque and 10% greater efficiency than the current market leader.

MINIMUM PRODUCT SPECIFICATIONS The below chart indicates the minimum product specifications allowed in our bicycles.

Component group: Shimano Tiagra or better Minimum Material Density: 0.1 lb./in.3 Battery Chemistry: Lithium Ion phosphate Weight: <45lbs (with 10AH battery and 500w motor) Frame: Aluminum

TABLE 3. MIMIMUM PRODUCT SPECIFICATIONS

WARRANTIES Our battery, motor, and frame are warrantied for two years, which is in line with the industry standard. These warranties are partially held by the component manufacturers. Nondurable parts, like tires and tubes, are not warrantied.

[CUSTOMER PAIN] 15

VALUE-ADDED PRODUCTS AND SERVICES We will offer a variety of value-added products through our website. These include standard bicycle accessories, like helmets, locks, lights, and cargo gear. We will also offer electric bicycle add-ons like extended batteries and full do-it- yourself (DIY) conversion kits. Other potential value-added product lines include Velocis apparel and accessories, bumper stickers, and water bottles. These product lines typically have high margins (greater than 50%).

FUTURE PRODUCT LINES AND SERVICES Looking forward we anticipate adding a number of products and services. Our first addition we be a service for independent custom frame builders. Our second addition will be e-bike rental stations.

It is not uncommon to find a mismatch of supply and demand for custom frame builds. We will offer a service whereby custom frame builder customers can virtually design their bike on our website. We will then be able to match the build with the most proximate frame builders with the shortest wait list.

CUSTOMER PAIN END USERS Traffic and transportation costs continue to rise and commuters spend an increasing amount of time in their daily commute.

x Growing traffic and congestion results in an $87.2 billion societal burden per year in wasted fuel and lost productivity, which measures out to $750 per traveler (TIME). This cost has more than doubled since 1982 and continues to rise.

x The average consumer spends $3,452 or 6.2% of their annual income on gas; extrapolated from Consumer Expenditures, U.S. Dept. of Labor, U.S. Bureau of Labor Statistics, 2009.

x Gas prices in the U.S. are expected to rise to over $5 per gallon by Summer 2011 (gasbuddy.com)

x Regular bicycles are not ideal for many active commuters because it requires too much exertion and effort resulting in an uncomfortable situation once they reach the final destination.

The need for an alternate mode for transportation is apparent through the growing cost and ineffectiveness of the current transportation options. BICYCLE RETAILERS From our primary research, retailers are facing three key problems with current electric bicycles surrounding why retailers are uncertain about whether to continue stocking electric bicycles.

ELECTRIC BICYCLES ON THE MARKET ARE:

x LOW QUALITY x DIFFICULT TO SERVICE x NOT BACKED BY U.S. MANUFACTURER WARRANTIES

[TARGET MARKET] 16

TARGET MARKET BICYCLE RETAILERS While electric bicycles are a national industry, bicycle retailers that sell electric bicycles are primarily local shops with a community-centered culture. Through our primary research, we found that customer satisfaction is the top priority for most retailers across the country. Because customer retention is so important, these retailers only sell products that they are able to service and stand behind. After in-depth interviews with more than 100 retailers, we have found that many retailers are holding out for a high quality electric bicycle that is easily serviceable. To effectively reach these retailers it is important to understand their key demographics and psychographics.

BICYCLE RETAILER DEMOGRAPHICS: There are two main channels for distribution of bicycles and bicycle products, independent bicycle dealers and mass retailers (such as Best Buy and Walmart). We will initially target independent bicycle dealers who account for 18% of unit sales but more than 50% of the revenue this industry generates. We have interviewed more than 100 electric bicycle retailers so far and have identified hundreds more who are likely to be interested in our product. We will initially target retailers on the west coast in: Arizona, California, Washington, Oregon, and Colorado. These states account for approximately half of all retailers currently stocking electric bikes.

BICYCLE RETAILER PSYCHOGRAPHICS: After talking with the over 100 retailers across the west coast, we have identified three primary needs for the retailers:

1. LOCAL SERVICEABILITY 2. QUALITY CUSTOMER SERVICE 3. DOMESTICALLY CENTERED COMPANY

According to the US Market for Bicycles and Bicycle Accessories by SBI, Independent bike shops are usually run by bicycle enthusiasts and are closely knit to the community they serve, which is apparent through the survival of specialty bicycle stores through the recession and introductions of large category killers in the market (SBI US Market for Bicycles and Accessories). Since these stores strive to service their customers and are a part of their community, they want to offer a product that they back and can honestly recommend to their customers. Retailers want to understand everything about the electric bicycle and be confident that the product is made with quality components.

END USERS Our product and comprehensive service is targeted to both the end user and bicycle retailers. Our end users are young active professionals who commute to work in bicycle friendly urban areas where traffic is heavy. This group is largely neglected, as most electric bicycle manufacturers target the baby boomer population. While we acknowledge that the baby boomer population is a large viable market, we believe that we can carve out a niche for ourselves by creating a trendy electric bike for young commuters to gain a following of this growing demographic.

[TARGET MARKET] 17

END USER DEMOGRAPHICS: Initially we are targeting the educated young active professionals in bike friendly metropolitan areas. According to the U.S. 2000 Census, young adults between 25 and 34 accounted for approximately 39.9 million people, 14.2% of the U.S. population as a whole.

Additionally, we will target the Generation X men and women that do not have children, as they will be more likely to commute via electric bicycle since children require car seats, toys, food, and more that would be difficult to fit in a bicycle child carrier. As stated by the U.S. Census, 25 to 34 year old women who are professionals and achiĞǀĞĚĂďĂĐŚĞůŽƌ͛ƐĚĞŐƌĞĞ or higher, live in metropolitan areas, and earn an above average income are likely to be childless. dŚĞƐĞǁŽŵĞŶĂƌĞǁĞůůĞĚƵĐĂƚĞĚǁŝƚŚĞŝƚŚĞƌĂďĂĐŚĞůŽƌ͛ƐŽƌŐƌĂĚƵĂƚĞĚĞŐƌĞĞ͕ϰϴ͘ϰйŽĨƚŚŽƐĞǁŝƚŚŝŶĐŽŵĞƐŽǀĞƌΨϳϱ͕ϬϬϬĂƌĞ childless, and 52.6% of 25 to 34 year old women with managerial or professional jobs have not had children. See Table 2-16 in Appendix for more detailed information.

In these metropolitan areas, according to a study done by Packaged Facts in 2001 on The Young Adult Market: Generation X Grows Up, one in four young adults have a professional or managerial job and make an average $30,000 annual salary. This segment is one of the fastest growth segments, with the influx of Generation X; therefore, the buying power for the 25 to 29 year-old segment will increase by 25% in 5 years.

END USER PSYCHOGRAPHICS: According to a study by Simmons Market Research Bureau, the young adult population of 25 to 34 year-olds view themselves as impulsive buyers who do not learn about the product from product labels. They are not brand loyal and are less likely than the general population to look for a national label or manufacturers name before buying the product. These young adults have a tendency to change brands often and are now identiĨŝĞĚĂƐ͞ĞŶƚƌĞƉƌĞŶĞƵƌŝĂů͕ƌŝƐŬ-taking, practical, and ĂĚĂƉƚĂďůĞ͟;DĂƌŬĞƚŝŶŐƚŽtŽŵĞŶ͕^ĞƉƚĞŵďĞƌϮϬϬϬͿ͘dŚŝƐŝƐďĞŶĞĨŝĐŝĂůĨŽƌsĞůŽĐŝƐĂƐŝƚĂůůŽǁƐƵƐƚŽĞĂƐŝůǇ enter into the market and not face extensive brand loyalty and gain new customers.

[BUSINESS MODEL AND VALUE PROPOSITION] 18

BUSINESS MODEL AND VALUE PROPOSITION Velocis has a two-pronged business model focused on retail and wholesale operations. As a retailer, we sell directly to individual customers online. Our retail division sells quality mid-range to high-end bikes wholesale to retailers.

TABLE 2. PRODUCT PRICINGS Further product offering details and descriptions of custom line offerings are in the Product section (see above).

Product Retrofit Mid-Range High-End Custom DĞŶ͛ƐZĞƚĂŝů tŽŵĞŶ͛ƐZĞƚĂŝů Custom Model 1 Model 1 COGS ($) 600 1,300 2,000 1,600 1,600 Wholesale ($) N/A N/A N/A 2,000 2,000 MSRP ($) 900 1,950 3,000 3,075 3,075 Velocis Margin (~%) 33 33 33 201 201 Retailer Margin (~%) NA N/A N/A 352 352 1In line with industry standards of 19-21% in 2010; benchmarked to Dorel Industries, producer of mass-market bicycles. (see Competitors section above). 2In line with the industry standard.

FIGURE 14. SIMPLIFIED DISTRIBUTION STRUCTURE

[MARKETING STRATEGY] 19

MARKETING STRATEGY END USERS Generation X, young commuting professionals, according to Packaged Facts are exhibiting a tendency to buy and use products that promise simple, basic, and natural ingredients.

ǇůĞǀĞƌĂŐŝŶŐŽƵƌĞůĞĐƚƌŝĐďŝĐǇĐůĞ͛ƐƋƵĂůŝƚǇĐŽŵƉŽŶĞŶƚƐ͕ǁĂƌƌĂŶƚǇ͕ĂŶĚsĞůŽĐŝƐ͛ĚĞĚŝĐĂƚŝŽŶƚŽƐĞƌǀŝĐĞǁĞǁŝůůĐĂƚĞƌƚŽƚŚĞ ĂĐƚŝǀĞĐŽŵŵƵƚĞƌƐ͛ĚĞƐŝƌĞƚŽďƵǇƉƌŽĚƵĐƚƐƚŚĂƚĂƌĞǁĞůů-crafted beginning from the basics. In addition to their desire for the ďĂƐŝĐƐ͕ǇŽƵŶŐĂĚƵůƚƐŝŶ'ĞŶĞƌĂƚŝŽŶyĂůƐŽƌĞƐƉŽŶĚƚŽĂ͞^ĞŶƐĞŽĨĚǀĞŶƚƵƌĞ͘͟dŚƌŽƵŐŚŽƵƌƌĞƐĞĂƌĐŚǁĞĨŽƵŶĚƚŚĂƚ successful campaigns encourage new experiences and excitement surrounding the product to make the consumer feel as if they are in fact adventurous through their purchase. This need for excitement and quality components by our target market fits well with the product design. The Velocis electric bicycle is a mode of transportation created from the finest quality components (simple and basic parts) that combine together to form an electric bicycle that allows the user to be adventurous and rediscover their city.

ADVERTISING Our campaign is directed to young commuting professionals and will run primarily online. Videos detailing the quality components that serve as the foundation for the bicycle will run on the Velocis YouTube channel. The channel will feature user profiles identifying different Velocis e-bike riders. The Velocis website and social media channels will update end users on the features and connect them with other users.

VELOCIS YOUTUBE CHANNEL Since e-bikes are relatively new to the U.S. market, we would utilize video ad campaigns that would reveal a fun, innovative, and eco-friendly way to commute on our own Velocis YouTube channel. Ad campaigns would be similar to the Old Spice commercials that are fun, humorous and attract viewers, which will build hype for e-bikes while also increasing awareness of e-bikes in the U.S. (since many retailers believe that awareness is one of the biggest problems on why they are not selling as many e-bikes as China or Europe). The Velocis YouTube channel will provide consumers the opportunity to gain personable feedback and provide an outlet for customer narratives. These narratives allow prospective customers the ĂďŝůŝƚǇƚŽůĞĂƌŶĨƌŽŵŽƚŚĞƌƐ͛ĞǆƉĞƌŝĞŶĐĞƐ͘dŚĞsĞůŽĐŝƐzŽƵdƵďĞŚĂŶŶĞůǁŝůůĂůƐŽŽĨĨĞƌĂĨƵŶ͕ŚƵŵŽƌŽƵƐ͕ĂŶĚŝŶƚĞƌĂĐƚŝǀĞǁĂǇ for people to get to know the Velocis bike, brand, and personality.

TARGETED ONLINE ADS To complement the Velocis YouTube Channel, online-targeted advertisements will run to maximize advertising effectiveness. The primary online channels will be Facebook sponsored ads and Google adwords. These channels will enable us to target specific consumers who reveal that they are active, environmentally aware, ride bicycles, are curious about electric bicycles, or other similar interests, these attributes qualify viewers before they see our ad.

PUBLIC RELATIONS Through press releases and media contacts we will gain consumer credibility and awareness through media coverage. At the Idea Funding Conference, we met and have already built a relationship with Becky Pallack, the University of Arizona and Community reporter for the Arizona Daily Star. By leveraging our relationship with the Arizona Daily Star we can gain contacts to other local publications and start to build up our brand awareness, recognition, and credibility. Becky Pallack has been very responsive to our communication and is interested in covering our business concept. In addition to media recognition through newspapers, we will utilize industry specific online and print publications, which will enable industry and target specific press and build our brand credibility.

[MARKETING STRATEGY] 20

BICYCLE RETAILERS ADVERTISING

VELOCISBIKES.COM To gain brand credibility with retailers we will provide comprehensive information about our company, product, and service through www.velocisbikes.com. On the website we will offer video and written tutorials detailing how to service the bike and explaining the benefits of our bicycle. It will also offer access to all contact information and provide a platform for easy personable support.

ONLINE ADS Targeted online advertisements help spread awareness of Velocis to the retailers and end-users. Targeted ads to retailers reveal how Velocis is more appealing to end consumers and is backed by a comprehensive service warranty unlike our competitors. There will be less retailer online ads than end user online ads because retailers are driven more by personal sales.

DIRECT CONTACT We will continue reaching out to electric bicycle retailers across the country. Velocis has already contacted over 100 retailers across the west and has qualified many promising leads for stores wanting to carry the Velocis electric bicycle.

PUBLIC RELATIONS Through press releases and media contacts we will gain consumer credibility and awareness through media coverage. At the Idea Funding Conference, we met and have already built a relationship with Becky Pallack, the University of Arizona and Community reporter for the Arizona Daily Star. By leveraging our relationship with the Arizona Daily Star we can gain contacts to other local publications and start to build our brand awareness, recognition, and credibility. Becky Pallack has been very responsive to our communication and is interested in covering our business concept. In addition to media recognition through newspapers, we will utilize industry specific online and print publications, which will enable industry and target specific press and build our brand credibility.

[SALES STRATEGY] 21

SALES STRATEGY PERSONAL SELLING The preferred selling technique for our primary customers - independent bicycle retailers is direct sales. Independent retailers are very engaged with their customers and products they carry. Retailers want to experience, engage, and involve themselves with the product before offering and stocking the product at their retail store.

IDENTIFYING CUSTOMER NEEDS Through personal selling and visiting individual bicycle retailers, we are able to connect and work with retailers as a personal consultant. By establishing personal relationships with independent retailers, we will identify opportunities and quality products that will enable a win-win negotiation.

Our primary research indicates that independent bicycle retailers want to buy from a person and will recommend a product when they honestly believe in the performance of the product and have tested the product themselves. In addition to testing the product in Tucson, our primary research of interviewing retailers reveals that many retailers want to inspect the manufacturing process. Retailers want to make sure that all components are of the utmost highest quality. We welcome this inspection, and also ensure that Velocis products and components pass caliber and stiffness standards before being assembled and distributed to customers.

GOODWILL Velocis will establish goodwill in our communities through consistently providing quality products and comprehensive service. In addition to our high caliber components, we also believe in supporting sustainable practices and will source eco- friendly components when possible to help save in carbon dioxide output while also sourcing products that promote a sustainable environment. In addition, we will be active in our communities by sponsoring and attending community events related to bicycle commuting. For example, Sunday March 27, 2011 Velocis attended Cyclovia, a local Tucson community bike event. This event allowed us to promote active lifestyles in the Tucson community in addition to gaining brand credibility and spreading awareness about our product.

SALES ORGANIZATION Our in-depth interviews with over 100 electric bicycle retailers across the west coast revealed that retailers on average stock four electric bicycle brands. Retailers primarily stock demo bikes and sell four to five electric bicycles per month and about forty percent of these retailers who stock electric bicycles are actively looking to stock an additional brand. There are over 800 electric bicycle retailers on our customer list, from this we expect to close 240 retailer sales initially. As the newest electric bicycle brand in the 240 stores, we anticipate on being one of the five sales made per month by working closely with the retailer, creating a bicycle tailored to the American consumer, and backing our product.

HOW WE SELL SELLING TO THE RETAILERS Our primary research reveals that e-bike retailers are more likely to buy a bike in person. To reach these retailers we will make personal sales to the retailers and then let retailers sell it to their customers.

This strategy is initially resource intensive and will require two sales people who will travel first to the 240 retailers that we have already identified as highly probable to buy. Local sales representatives will be assigned specific retailers to visit and follow-up with to develop a one on one relationship. These representatives will have prior sales experience and be trained in the technical knowledge relating to our electric bicycles, and will understand retailers concerns enabling them to address situations in a clear, concise, and relate-able manner.

[SALES STRATEGY] 22

HOW WE SUPPORT We will be adequately capitalized to deliver unparalleled customer service. We will pioneer the "Apple model" of superior design and unmatched service in our industry. Our goal is to be there for our retailers whenever they need us and to offer support, order replacement parts, and provide feedback.

MAJOR VS. MINOR ACCOUNT MANAGEMENT For all accounts, we will service the retailer with quality customer service, support, and advice. Marketing to the customer to spread and build awareness will be the first step to making the sale, since awareness is the first part of the sale. This will be done through our marketing communications plan, which includes Internet video ads, print and online electric bicycle and bicycle magazines, and targeted online ads.

We will approach the retailers and bicycle shops as a quality electric bicycle manufacturer that will stand behind the product. In addition, our company will also provide a product that has been developed and continually is revised and redeveloped with the customer in mind, we will continue to do market research on the customer and the retailers.

MINOR ACCOUNT MANAGEMENT Our company will initially focus on small independent retailers. We will have regionally centered sales people that will be trained to answer all questions and concerns that the retailer may have.

MAJOR ACCOUNTS Although we will begin targeting small independent retailers, we plan on expanding our reach to distribute to large mass retailers that currently stock electric bicycles, such as Best Buy. By showing the traction and turnover rates for the independent retailers we will be able to prove the quality and popularity of our product.

SALES PERFORMANCE MEASURES AND REWARDS Since independent direct sales are such a huge portion of gaining traction in the independent electric bicycle retailer market, we have allotted a large portion of our financials to incentivizing sales representatives to effectively communicate the value of the product and close the sale. We will measure performance based on how many e-bikes the sales representatives sell to their stores, how often they communicate with the retailers, and feedback from the retailer. See Financials for details.

[OPERATIONS] 23

OPERATIONS SUPPLIERS We source our components through major US bike suppliers.

LEGAL INTELLECTUAL PROPERTY Bicycle design is patentable under U.S. law. As our company grows, we will more aggressively seek and enforce design patents. However, our most valuable information is our proprietary customer database, which will remain protected as a trade secret.

GOVERNMENT While each state and local jurisdiction has their own laws, this industry is not very regulated in the United States. Bicycles are limited to the following:

x TRAVELING 20 MPH WITHOUT A LICENSE ON PUBLIC ROADS x THE MOTORS IN MANY JURISDICTIONS ARE ALSO LIMITED TO 750 WATTS. x SOME LOCAL MUNICIPALITIES ALLOW BICYCLES ON ROADSIDE PATHWAYS AND BICYCLE LANES WHILE OTHERS DO NOT. x ELECTRIC BICYCLE RIDERS ARE EXPECTED TO ABIDE BY ALL THE OTHER LAWS APPLICABLE TO REGULAR BICYCLE RIDERS.

Legal trends lead us to believe that this industry is going to continue to receive support from government. For example many cities, including New York are considering implementing city-wide bike share programs similar to Paris and others like Tucson are revamping roadways to better accommodate cyclists. While all these measures are steps in the right direction, with increasing numbers of cyclists on the road necessitates increased enforcement of existing laws, especially in larger cities where accidents have been reported more frequently.

LIABILITY Each state has its own laws for dealing with lawsuits pertaining to bicycles. Some place the responsibility on the manufacturer, while others hold the distributor or retailer liable. Arizona is a unique state. All cases involving a lawsuit go to trail where a jury decides which parties, and to what extent, each is liable. We have budgeted for a four million dollar policy.

[FUNDING] 24

RESEARCH AND DEVELOPMENT Our customers will fuel our research and development. By having two divisions of the company we will be able to capitalize on the latest trends coming out of the custom division. We will do our part to make available all new products that come to market. Users will then be able to assemble and design their ideal bicycles virtually with the tools we make available to them. By doing this we can effectively outsource our design work to the very people who will buy our products. When we expand to include a platform for custom frame manufacturers to interact virtually with their customers we will have access to some of the best minds in frame design. While we will not be able to implement their designs without proper permissions we plan to take note of these trends and ideas for incorporation into our wholesale brand designs if we do not purchase the designs outright.

Technologically we have adopted a hands-off approach to innovation for our first few years. We will rely on the R&D efforts of companies specializing in their respective domains like batteries or motor technology to develop better products which we will then source. This will allow us to implement the latest technologies as they become available and concentrate on customer service and sales. FUNDING FUNDING CONSIDERATIONS

NECESSITY FOR RAPID EXPANSION The design of the bicycle has not seen significant change in the hundreds of years of its use, leaving competitors within this industry with relatively weak intellectual property. The U.S. e-bike market however is very young and fragmented, leaving room for new entrants to establish a strong foothold in the market, or even market dominance. While our unique business model and agility to source the latest high-quality e-bike technology mitigates a great deal of risk, we need sufficient capital to expand quickly within the market. Expanding quickly allows us to rapidly build brand equity, which effectually deters direct competition.

IMPORTANCE OF QUALITY COMPONENTRY When we interviewed over 100 current electric bicycle retailers, we found that quality and ease of service were their most important considerations when deciding to stock a brand. Their customers are often attracted by less expensive e-bikes, but many retailers reported similar stories about component failures after mere months of use. We realize that a poor quality product reflects badly on our retailers. Accordingly, we aim to position Velocis as the leading producer of quality customizable electric bikes with superior service. Like Apple, we realize that our target customer is unique and is willing to pay a premium for higher quality, style, and service. We also realize that customization, style and service translate to higher costs. Capital investment enables us to make our initial inventory purchases, hire the personnel necessary to expand rapidly, and build a fully operational website.

WE ARE READY TO GO Operationally, we are ready to begin mass production and sales distribution within months of raising funds. Because of overwhelming positive reactions to our first prototype, we began custom building electric bicycles Tucson locals. By December of 2011 when we seek funding, we will have constructed many electric bicycles. Guided by the advice and feedback of our four partnering Tucson retailers, we will have sourced components from our five reputable suppliers, modified frames with our custom frame builder, attached wire harnesses to ensure ease-of-service for our retailers, and powder-coat painted our bikes many times over.

[FUNDING] 25

CALL TO ACTION We request an investment of $225,000 broken into two stages based on value-added benchmarks. With capital investment, we can expand on our existing supply-chain infrastructure, allowing us to initiate full-scale production and national sales distribution of our products. We are fully confident in our ability to use this investment to establish a strong foothold within the industry, generate strong brand equity and become a prime target for acquisition.

Series A $75,000 Supply Chain Set-up and R&D 1/1/2012 Exit

Series B 5-Year Valuation $175,000 $23,187,815 Initial Inventory Purchases and Expansion 7/1/2011

FIGURE 15. FUNDING SCHEDULE 2012 2013 2014 2015 2016 2017 Funding Schedule

[FUNDING] 26

Series A: Series A financing has the most risk associated with it, since funds will largely be used on illiquid expenditures like setting up contracts with suppliers, building an operational website, and finalizing R&D. Essentially, Series A Investment Opportunity: Total investment requested: $75,000 finances setting up the foundation for our operations, allowing us to have a Equity percentage: 20% system in place to begin sourcing components, assembling our product, and fulfilling orders from our retailers. In order to maintain 20% ownership Projected ROI: 42X throughout the two rounds of financing, our Series A investor would need to purchase $35,200 in shares in Series B. Investors that participate in this round of financing however receive significantly higher ROI to compensate the risk associated with early stage investment. Series B: Series B Financing has significantly less risk, because funds will primarily be used to purchase our inventory. Assets purchased with this round of financing Investment Opportunity: have high resale values to recover costs, reducing the risk of loss on Total investment requested: $175,000 investment. More importantly, these initial inventory purchases help jump- Equity percentage: 11.9% start our generation of cash flows, allowing us to begin full-scale production Projected ROI: 20X and expand within the market. Over fourteen retailers that we contacted indicated serious interest in stocking our product, and paired with our initial sales strategy, sales driven cash flows will quickly grow to support future inventory purchases. Because of the pre-emptive rights of our Series A investors, they are entitled to purchase $35,200 of shares in Series B, leaving an opportunity to invest $139,800 for another investment group. In exchange, this group of investors would obtain 11.9% ownership of Velocis, earning an expected 30X return on investment after a five-year exit.

Series A Use of Funds Series B Use of Funds Website 7%

Initial Inventory Purchases Marketing 13% 7%

Website 40% Salaries 24% Set-up Supply Chain Initial 20% Inventory Purchases R&D 69% 20%

FIGURE 16. USE OF FUNDS

[EXECUTIVE SUMMARY] 27

FINANCIAL PROJECTIONS ASSUMPTIONS FOR PROJECTING FINANCIALS Our projected financial performance throughout five years of operations relies on a series of assumptions that are supported by both primary and secondary research. We created a list of over 1700 American bicycle FIGURE 17. SUMMARY OF ASSUMPTIONS retailers currently selling electric bikes in the United States and interviewed over 100 of them to help validate our American E-bike Long-Term Sales Financials assumptions. Paired with secondary Retailers Growth Drivers research from reputable resources like Pike Research and the National Bicycle Dealers Association, we are confident 240 of 1700 highly COGS priced at Average annual that our assumptions are as accurate as likely to stock a retail prices instead market growth of possible. Velocis Bike. of wholesale 24% AMERICAN E-BIKE RETAILERS Omit sales of misc. Stock three brands Entrance of new (1) 30% of the 100 retailers interviewed items and sales of e-bikes on electric bike from the website indicated that they were likely to stock a average retailers Velocis bike. Assuming this is a and tradeshows representative sample, 240 of the Sell four to five e- No aging of retailers we identified are likely to stock a Expansion of our bikes each month payables or sales force Velocis bike. (2) Retailers also indicated on average operating expenses that they stock on average three brands of electric bikes and (3) sell about four to five a month. Our pro- forma financials assume that for every retailer that agrees to stock No prepayment for Increased customer our bike, we will be one of those three brands, and that they will sell sales retention one of our bikes each month. LONG-TERM SALES GROWTH DRIVERS (4) After saturating the 240 retailers most likely to stock our product, our sales growth becomes Brand equity a function of five variables. (a) Pike research estimates an average annual sales growth of 38% in the US electric bicycle market for the next five years, growing from 300,000 sales in 2010, to over one million sales in 2016. As the market expands, retailers stocking our bikes presumably will begin selling more than four to five e-bikes per month, and accordingly, more of our bikes. (b) Market growth also should translate into more independent retailers selling electric bikes. Our strategy to expand rapidly allows us to pursue secondary markets and new e-bike retailers while also prioritizing customer retention. (c) Our expanded sales team will pursue secondary markets and new bike retailers, leaving more resources free to (d) prioritize customer retention through superior value-added services. FINANCIAL ASSUMPTIONS (5) Another conservative assumption we adopted is pricing initial inventory purchases at the retail costs of the componentry. When we first begin selling, we may have to purchase components at the retail cost because of the lower volume of our orders, but very quickly we should qualify for wholesale pricing. Attesting to the robustness of our business plan, even with these overstated COGS, we generate strong firm value. (6) Furthermore, there are five large annual bicycle tradeshows in America. We attended the 2010 Interbike conference, the largest of the five tradeshows, and found that some manufacturers had over 1,000 orders placed within the three-day period. In our pro-forma financials, we recognized costs involved with attending these tradeshows, but we did not accommodate for the potential large influxes of orders. (7) After a few years of operations, many of our suppliers may feel much more comfortable with our ability to repay debt obligations, opening the possibility for trade terms that allow us to age our accounts payable and operating expenses. To remain conservative, our pro-forma financials do not take aging of payables or expenses into account. (8) Finally, the independent bike retail market is surprisingly unique in that retailers often pay for products immediately upon delivery and in some cases, before the product has even shipped. Not only does this translate into minimal accounts receivable for Velocis, but also it shortens the length of our cash conversion cycle substantially

[EXECUTIVE SUMMARY] 28

REVENUES

FIGURE 18. 60 MONTHREVENUE PROJECTIONS 60 Month Revenue Projections (Total Revenues Per Month) $3,000,000.00

$2,500,000.00

High Demand $2,000,000.00 240 "Low Hanging Fruit" Stores Penetrated Medium Demand $1,500,000.00

Low Demand $1,000,000.00

Product and Sales $500,000.00 Development

$0.00 2 2 2 2 2 2 3 3 3 3 3 3 4 4 4 4 4 4 5 5 5 5 5 5 6 6 6 6 6 6 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 n r y l p v n r y l p v n r y l p v n r y l p v n r y l p v a a a Ju e o a a a Ju e o a a a Ju e o a a a Ju e o a a a Ju e o J M M S N J M M S N J M M S N J M M S N J M M S N

FIGURE 19. 5 YEAR REVENUE PROJECTIONS 5 Year Revenue Projections

$30,000,000.00

$25,000,000.00 High Demand

$20,000,000.00 Medium Demand

$15,000,000.00

Low Demand $10,000,000.00

$5,000,000.00

$0.00 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

[EXECUTIVE SUMMARY] 29

Exhibits A and B depict our growth in revenue under three different demand scenarios. Our initial tactical sales strategy involves campaigning across the west coast to set up sales relationships with retailers currently on our list of TABLE 4. U.S. & VELOCIS E-BIKE GROWTH 240 target customers. Personal selling is U.S. E-bike Market Velocis both costly and time-consuming, but is the E-bikes Market strongest contributor to brand equity, E-bikes Sold % Growth Sold Share % Growth

customer retention, and retailers agreeing t 2009 200,000 s to stock our products. By month eighteen, a 2010 300,000 50.0% P cash flows generated using capital financing 2011 416,667 38.9% allow us to hire more personnel, supporting 2012 533,333 28.0% 179 0.03% d e rapid expansion. Fueled by growth in the t 2013 650,000 21.9% 1,529 0.24% 754.29% c e

j 2014 766,667 17.9% 4,531 0.59% 196.40%

American e-bike market, increased product o r 2015 883,333 15.2% 7,678 0.87% 69.48% awareness, and an expanding sales force, P 2016 1,012,500 14.6% 10,826 1.07% 41.00% we steadily expand within the market reaching over $20 million in annual revenue by year five of operations. Exhibit C details historical and projected market growth as well as our growth within the market. OPERATING EXPENSES There are six cost centers that provide an operating infrastructure for us to manufacture, assemble and distribute our products. We are currently insured under a $2 million liability plan, but will need to expand our coverage after we begin full-scale production. We also require a shop for our engineers to assemble and service our products. This shop will also have space dedicated to retail sales, increasing the accessibility of our brand to our retailers and end-users. Since we ĞŵƉůŽǇĂ͞ďĞƐƚŽĨďƌĞĞĚ͟ŵŽĚĞůŽĨĐŽŵƉŽŶĞŶƚƌǇƐŽƵƌĐŝŶŐ͕ǁĞĂůƐŽďƵĚŐĞƚĨŽƌĨŝŶĚŝŶŐƚŚĞůĂƚĞƐƚĞ-bike technologies and testing their compatibility with our products. Our R&D budget also enables us to establish exclusive licensing agreements with various e-bike technology manufacturers, providing natural barriers to entry and sustainable competitive advantage. Our emphasis on personal selling to retailers requires budgeting for travel expenses for our sales force. We also will incur periodic expenses for our other two sales Insurance R&D channels. Maintaining and updating the design and functionality of our website is very important to preserve our brand Sales Team image and create an easy interface for our Lease Travel customers to custom-build their own Expenses Velocis bikes. Trade shows are effective means for manufacturers in the bicycle industry to interact with retailers. Manufacturers also enjoy large influxes of sales orders during trade Website Marketing/ shows. At the 2010 Interbike Development Operating conference, some bike Expenses Expenses Tradeshows manufacturers reported over 1,000 sales orders placed within three days.

FIGURE 20. OPERATING EXPENSES

[EXECUTIVE SUMMARY] 30

TABLE 5. DETAILED INCOME STATEMENT

PRO FORMA FINANCIAL Detailed Income Statement STATEMENTS Y1 Y2 Y3 Y4 Y5 Capital investment allows us to set our Net Sales: $ 354,270 $ 3,026,480 $ 8,970,412 $ 15,203,255 $ 21,436,098 sales strategy in motion and begin Units 179 1,529 4,531 7,678 10,826 generating cash flows. Over the course of Market Share 0.03% 0.24% 0.59% 0.87% 1.07% five years, sales driven by both website Retailer Sales $ 336,557 $ 2,421,184 $ 6,279,289 $ 10,338,214 $ 14,576,547 Website Sales $ 17,714 $ 605,296 $ 2,691,124 $ 4,865,042 $ 6,859,551 orders and penetrating the market Cost of Goods Sold $ 286,300 $ 2,445,820 $ 7,249,350 $ 10,784,360 $ 15,205,599 through independent retailers are Gross Margin $ 67,970 $ 580,660 $ 1,721,063 $ 4,418,895 $ 6,230,499 reinforced by rapid market growth to help us steadily increase our net Operating Expenses: Lease $ 24,000 $ 24,000 $ 48,000 $ 72,000 $ 96,000 earnings. We reinvest earnings to Research and Development $ 9,000 $ 6,000 $ 8,876 $ 25,000 $ 30,000 optimize our website, expand our Insurance $ 3,200 $ 4,800 $ 4,800 $ 4,800 $ 4,800 sales/support personnel, improve our Website Development $ 20,000 $ 30,000 $ 15,000 $ 15,000 $ 15,000 product line and make our supply chain Trade Shows /Marketing $ 15,000 $ 5,000 $ 35,000 $ 20,000 $ 20,000 Sales Travel $ 14,000 $ 66,000 $ 120,000 $ 116,000 $ 96,000 ǇĞƚŵŽƌĞĞĨĨŝĐŝĞŶƚ͘KƵƌ͞ďĞƐƚŽĨďƌĞĞĚ͟ Salaries $ 46,032 $ 259,706 $ 549,138 $ 622,526 $ 627,406 style of component sourcing affords us Bad Debt Expense $ 895 $ 7,643 $ 22,653 $ 38,392 $ 54,132 the agility to capitalize on technological Total Operating Expenses: $ 132,127 $ 403,149 $ 803,466 $ 913,718 $ 943,338 opportunities, while our attention to EBITDA $ (64,156) $ 177,511 $ 917,597 $ 3,505,177 $ 5,287,161 service, customization and style help us retain customers and build brand equity. Net Earnings $ (64,156) $ 149,615 $ 691,776 $ 2,642,553 $ 3,982,222 Table 5 is a detailed income statement demonstrating our sales growth and ability to generate earnings. Additional pro forma financial statements can be found in the appendices. VALUATION

Determining firm valuation based on financial projections can be really difficult and there are many different methods to use. We chose to create pro forma financials for three different demand scenarios, weigh them according to the likelihood of their occurrence, and then use their weighted expected cash flows to calculate firm valuation under three different methods. Finally, we averaged the calculated firm valuation under the three different valuation methods to determine our final year five firm value. We feel that this gives us the most accurate firm valuation since it is validated by historical performance of comparable firms, actual market data, and conservative discounting of our cash flows. CEQ METHOD We first calculated our firm value using the CEQ method, which uses actual market data like the market risk premium and ƚŚĞƐƚĂŶĚĂƌĚĚĞǀŝĂƚŝŽŶŽĨŵĂƌŬĞƚƌĞƚƵƌŶƐĂŶĚƌĞůĂƚĞƐƚŚĞŵƚŽƚŚĞĨŝƌŵ͛ƐĐĂƐŚĨůŽǁŐĞŶĞƌĂƚŝŽŶĞĂĐŚǇĞĂƌ͘tĞĐĂůĐƵůĂƚĞĚĂ continuing firm value in year 5 based on ĂǀĞƌĂŐŝŶŐƚŚĞ͞ǀĞƌĂŐĞDĂƌŬĞƚĂƉͬ/d͟ƌĂƚŝŽƐŽĨĨŽƵƌĐŽŵƉĂƌĂďůĞĨŝƌŵƐ͕ĂŶĚ multiplying this average ratio with our year five expected cash flows. Table 6 shows a summary of the valuation calculations, and a more detailed look into the calculations can be found in the appendices. RADR METHOD Next we calculated our firm value using the RADR method, which relies on averaging beta values of comparable firms and relating them to expected cash flows to determine firm valuation. Table 6 also shows our summary of these valuation calculations, with more details provided in the appendices. VENTURE CAPITAL METHOD Finally we used a valuation method preferred by venture capitalist that takes expected cash flows from our high-demand scenario and discounts the cash flows at both 10%, 20% and 30%. Similar to the other methods of valuation, we included a summary of our calculations in Table 6, and details in the appendices.

[EXECUTIVE SUMMARY] 31 TABLE 6. VALUATION Comparable Firm Weights for Calculating Beta and Avg. Market Cap / Probabilities of Demand EBITDA Low Medium High Brunswick Corporation Polaris Arctic Cat Toyota 30% 45% 25% 50.0% 22.5% 22.5% 5.0% Historical 1-year risk-free rate 4% Comparable firm Betas Historical 1-year market rate 13% Brunswick Corporation Polaris Arctic Cat Toyota Historical 1-year market variance 4% 3.33 1.86 2.24 0.71 Correlation between cashflows and market returns 20% Average Beta: 2.623

Average Market Cap / EBITDA Brunswick Corporation Polaris Arctic Cat Toyota Market Cap $1.55 Market Cap $2.45 Market Cap $258.62 Market Cap $113,900 EBITDA $0.15 EBITDA $0.28 EBITDA $25.31 EBITDA $23,870 10.19736842 8.762517883 10.21809561 4.77168 Average Market Cap / EBITDA: 9.60790624

CEQ and RADR Valuation Method Year 5 Continuing Liquidity Year: 1 2 3 4 5 Value Discount Expected Cashflow $153,735.69 $8,397.25 $468,332.53 $2,340,314.38 $3,717,757.96 $37,422,035.54 25%

CEQ-PV of CFs $0.00 $0.00 $370,407.43 $1,858,029.59 $25,202,968.80

Firm Value CEQ $27,431,405.82 1 2 3 4 5 RADR-PV of CFs $120,475.91 $5,268.46 $239,065.43 $983,928.67 $14,395,057.11

Firm Value RADR $15,743,795.58

Venture Capital Valuation Method Year 5 Continuing Liquidity Year: 1 2 3 4 5 Value Discount VC Method (High Demand) $ - $ 11 3,643.20 $ 843,181.28 $ 3,297,146.51 $42,446,804.77 $56,071,957.62 25% VC Method (20% Discount) $ - $ 78,918.89 $ 487,952.13 $ 1,590,059.08 $ 17,058,418.84 VC Method (30% Discount) $ - $ 67,244.50 $ 383,787.56 $ 1,154,422.64 $ 11,432,158.64

Averages $ - $ 86,602.20 $ 571,640.32 $ 2,013,876.08 $ 23,645,794.08

Firm Value VC $ 26,317,912.68

$ 40,158.64 $ 30,623.55 $ 393,704.40 $ 1,618,61 1.45 $ 21,081,273.33

FINAL AVERAGED FIRM VALUE = $23,165,000$ 23,164,371.36

[EXECUTIVE SUMMARY] 32

RISK ANALYSIS PRICE SENSITIVITY

SUPPLIERS We have focused a great deal of attention on establishing relationships with suppliers for our bicycle componentry. Our primary suppliers, JB Importers, Security Bicycle Accessories, Quality Bicycle Products and Golden Motor USA are large reputable firms with a proven track record for reliability and quick lead times. Sudden or large shifts in the prices of our components however could adversely affect our profit margins, impressing the necessity to also establish secondary sources for our components. To mitigate this risk, we have entered relationships with the direct manufacturers of each of our components. While these secondary sources may have longer lead times, it helps reduce our price sensitivity risk and gives us the time necessary to respond to changes in our cost structure.

RETAILERS Our retailers are also sensitive to prices. Retailers weigh a wide variety of factors when deciding to stock a product. One of the most important factors is the cost of holding a product. The slower a product sells on their show-room floor, the longer their inventory turnover, which can adversely affect their ability to generate cash flows. Accordingly, it is very important to ƉƌŽǀŝĚĞĂƉƌŽĚƵĐƚƚŚĂƚĂƉƉĞĂůƐƚŽƚŚĞƌĞƚĂŝůĞƌ͛ƐĐƵƐƚŽŵĞƌďĂƐĞ͕ƐĞůůƐĂƚĂƌĞĂƐŽŶĂďůĞƉƌŽĨŝƚŵĂƌŐŝŶ͕ĂŶĚŝƐĂĨĨŽƌĚĂďůĞƚŽ stock. Our unique customization feature will allow retailers to control all of these factors. They can choose the exact style that appeals to their customers and the componentry that fits their price threshold, ensuring that their inventory purchase has quick turnover with minimal risk.

END-USERS Finally, while many consumers may consider purchasing an electric bike because of the anticipated savings in transportation costs, they have options to choose from in the electric bike industry. We realize the need to remain competitively priced and offer our customers the ability to design a bike that fits their financial needs.

TECHNOLOGY AND INTELLECTUAL PROPERTY RISK Our technology risk and intellectual property risk are intertwined, since the majority of manufacturers in the electric bicycle industry lack strong intellectual property. Most components specific to electric bikes are manufactured by companies that specialize in the specific type of technology. This lack of intellectual property leaves many manufacturers in the electric bicycle industry vulnerable to competitors entering exclusive contracts with key componentry manufacturers, effectively ďůŽĐŬŝŶŐƚŚĞŵŽƵƚĨƌŽŵƚĞĐŚŶŽůŽŐǇ͘dŽŵŝƚŝŐĂƚĞƚŚŝƐĐŽŵƉŽƵŶĚƌŝƐŬ͕ǁĞĞŵƉůŽǇĂ͞ďĞƐƚ-of-ďƌĞĞĚ͟ĐŽŵƉŽŶĞŶƚƐŽƵƌĐŝŶŐ method where we source the best available components and design our products to be compatible with multiple component configurations. While other companies that focus on inventing e-bike technology are pressured to continuously innovate their technology, we have the agility to adopt the latest in e-bike technology quickly and seamlessly.

[EXECUTIVE SUMMARY] 33

MANAGEMENT TEAM Our award-winning management team has diverse experience in sales, marketing, customer relations, web development, research, and the outdoors. From representing our brand at Cyclovia to winning the First Place Sanofi-Aventis Innovation Award, we have a reputation as an energetic, highly motivated, dynamic team.

John-Mark Bantock, General Director Originally from South Africa, John-Mark is a widely traveled, enterprising individual who currently resides in Tucson. He founded a student service club, Arizona Refugee Connection, at the University of Arizona where he will be graduating in May with a BS in Accounting and Entrepreneurship. He is an enthusiastic outdoorsman with an innate interest in entrepreneurship and plans to launch Velocis Bikes this year.

Sam Ellis, Financial Director Sam will be graduating with degrees in both accounting and entrepreneurship. In 2008, Sam helped launch NoteHall.com, a McGuire success story. He is currently employed as the recruiting manager for another successful McGuire startup, Student Experts, and looks forward to launching Velocis in the near future. Outside of school and work, he founded U of ͛ƐĨŝƌƐƚŵĞŶ͛ƐĂĐĂƉƉĞůůĂŐƌŽƵƉ͕ĂƚĂůů͕ĂŶĚŝƐůŽŽŬŝŶŐƚŽƌĞĐŽƌĚŚŝƐƐĞĐŽŶĚǁŝƚŚƚŚĞŵ this summer.

Lindsey Erlick, Marketing Director Lindsey is the Vice President of the American Marketing Association; she led the UA Chapter to rank Top 25 Internationally this year at the International Collegiate AMA Conference. She is also the Co-President/Co-Founder of Students Supporting Brain Tumor Research, where she has three events that raised over $27,000. She was recently awarded the Thinking Forward for Innovation and Leadership in Marketing award by the Eller College Marketing Department and was the Honorable Mention for the International AMA Collegiate Student Marketer of the Year.

Taylor Hedberg, Operations Director Taylor is a published author and researcher at the Nexus of Entrepreneurship and Technology (NEXT) Initiative, where he studies outsourcing, offshoring, telemedicine, and other areas in business, IT, healthcare, and law. He is also the President-Elect of the Arizona Refugee Connection, where he oversees 125 students and manages 25 cross-functional project s, including marketing campaigns, strategic business consulting for three businesses, city-wide fairs with over 25 community partners, and donation drives that have raised over $15,000 in the past six months, and many other events. In his spare time, he cycles, hikes, and backpacks and plans on launching Velocis Bikes this year.

[EXECUTIVE SUMMARY] 34

ADVISORY BOARD

MICKY THOMPSON, CEO, TRUCKITNOW, INC. WEB DEVELOPMENT AND STRATEGIC GROWTH ADVISOR

Micky Thompson embodies a passion for entrepreneurship and continual learning. He has successfully launched three successful technology companies: ACT! Certified, Think Outsource, Inc. and Jennex, LLC. Micky now serves as the CEO of his 4th technology startup TruckItNow, Inc. He and business partner, Jarret Hamstreet, have completed securing $300,000 in start-up capital for their award winning venture. In his previous company, Jennex LLC, Micky successfully raised a total of $1.2 million in startup funding.

Micky holds an MBA in Entrepreneurship from The University of Arizona and is a graduate of the Venture Capital Executive Program from the University of California, Berkeley. Micky volunteers as a business mentor at the Arizona Center for Innovation where he advises start-up entrepreneurs and their staffs. He also serves as the technology advisor for the Desert ŶŐĞůƐ͕ŽŶĞŽĨƚŚĞŶĂƚŝŽŶ͛s largest and most active angel investment groups. Micky resides in Tucson, Arizona with his wife, Layla, and daughter, Amelia.

EMRE TOKER, ANGEL INVESTOR, DESERT ANGELS EARLY-STAGE VENTURE DVELOPMENT AND STRATEGIC ADVISOR

After studying physics at Reed College and Electrical Engineering at the California Institute of Technology and the University of Arizona, Emre founded two biomedical technology companies in Tucson, MedOptics and Bioptics Corporations, and co- founded one in Santa Clara, California, Radicon Imaging Corporation. Each company was acquired by larger firms within six years of founding.

Emre is currently a member of the Desert Angels and Desert Tech, two Tucson-based angel investment groups; a member of Lab-X, an angel investment group based in Istanbul, Turkey; and a partner in Arch Partners, a local micro-seed fund.

ED FOSTER, OWNER, LA SUPREMA CYCLES DESIGN AND CUSTOMIZATION ADVISOR

Ed is our technical advisor on frame design and kit installation. Ed has an engineering background with a masteƌ͛Ɛ degree in fine arts. He has years of experience drafting technical drawings and working as a machinist. Ed worked as a bicycle mechanic for a many years and has been building custom bicycle frames for the past 5 years under. He has a true passion for the industry and for building bikes.

BILL CLEVELAND, OWNER, ECO RIDER AND USA BIKE MOTOR INDUSTRY AND RETAIL ADVISOR

Bill is our industry advisor. He has an electrical engineering background and decades of experience in the corporate environment before opening his own retail space. He has sold motor-assisted bikes for more than five years, making him a veteran in the industry.

JASON WAZNICK, GNERAL MANAGER, FAIRWHEEL BIKES HIGH-END MARKET AND INDUSTRY ADVISOR

Jason is the general manager of Fairwheel Bikes, a local high end bicycle retailer and distributor. He advises us on industry best practices and managing supply chain relationships.

[APPENDICES] 35

STEVE VEIHL, THERE AND BACK BIKES RETAIL ADVISOR

Steve is the owner of a small independent bike store which focuses on commuters. He has been helping us develop our sales and support strategy for small retailers. He also advises on product design as it pertains to serviceability by bicycle mechanics.

BRUCE BOBELL, VICE PRESIDENT, CREST INSURANCE MANUFACTURER LIABILITY ADVISOR

Bruce is a VP at crest insurance who has been working with us to limit our legal exposure and develop an insurance plan that adequately covers our operations and sales.

RUSSELL KRONE, PARTNER, THOMPSON AND KRONE LEGAL ADVISOR

Russel is our legal representative who has helped us manage the operating structure of our company and advises on legal exposure.

[WORKS CITED] 36

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[APPENDICES] 37

APPENDICES: VALUATION Comparable Firm Weights for calculating Beta and Avg. Market Cap / Probabilities of Demand EBITDA Low Medium High Brunswick Corporation Polaris Arctic Cat Toyota 30% 45% 25% 50.0% 22.5% 22.5% 5.0% Historical 1-year risk-free rate 4% Comparable firm Betas Historical 1-year market rate 13% Brunswick Corporation Polaris Arctic Cat Toyota Historical 1-year market variance 4% 3.33 1.86 2.24 0.71 Correlation between cashflows and market returns 20% Average Beta: 2.623

CEQ Valuation Method Year 5 Continuing Liquidity Year: 1 2 3 4 5 Value Discount Expected Cashflow $156,435.69 $5,697.25 $463,987.81 $2,313,965.58 $3,666,530.46 $36,932,392.62 25% Cashflow Variance 5.65E+07 3.89E+09 8.06E+10 5.29E+11 1.36E+15 Cashflow Standard Deviation 7.52E+03 6.23E+04 2.84E+05 7.27E+05 3.69E+07 Risk-free rate 0.04 0.0816 0.1249 0.1696 0.2167 Market rate 0.13 0.2769 0.4429 0.6305 0.8424 Market risk premium 0.09 0.1953 0.318 0.4609 0.6257

Variance of market returns 0.04 0.08 0.12 0.16 0.2 Standard deviation of market returns 0.2 0.2828 0.3464 0.4 0.4472 Correlation of firm cashflows with market returns 0.2 0.2 0.2 0.2 0.2

CEQ-PV of CFs $0.00 $0.00 $366,134.90 $1,835,153.79 $24,871,002.21

Firm Value CEQ $27,072,290.91 1 2 3 4 5 RADR Valuation Method Year 5 Continuing Liquidity Year: 1 2 3 4 5 Value Discount Expected Cashflow $156,435.69 $5,697.25 $463,987.81 $2,313,965.58 $3,666,530.46 $36,932,392.62 25% Risk-free rate 0.04 0.0816 0.1249 0.1696 0.2167 Market risk premium 0.09 0.1953 0.318 0.4609 0.6257

Average Beta: 2.623

RADR-PV of CFs $122,591.78 $3,574.47 $236,847.62 $972,850.95 $14,205,803.35

Firm Value RADR $15,541,668.17

Venture Capital Valuation Method Year 5 Continuing Liquidity Year: 1 2 3 4 5 Value Discount VC Method (High Demand) $ - $ 11 3,643.20 $ 825,992.36 $ 3,260,959.31 $41,902,881.05 $36,932,392.62 25% VC Method (20% Discount) $ - $ 78,918.89 $ 478,004.84 $ 1,572,607.69 $ 16,839,828.10 VC Method (30% Discount) $ - $ 67,244.50 $ 375,963.75 $ 1,141,752.50 $ 11,285,664.16

Averages $ - $ 86,602.20 $ 559,986.98 $ 1,991,773.17 $ 23,342,791.10

Firm Value VC $ 25,981,153.45

$ 40,863.93 $ 30,058.89 $ 387,656.50 $ 1,599,925.97 $ 20,806,532.22 FINAL AVERAGED FIRM VALUE = $ 22,865,037.51

[APPENDICES] 38

FINANCIAL PROJECTIONS

Year 1 2 3 4 5 Ending Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Projected Balance Sheets ($s) ASSETS Current Assets Cash 160,890 131,709 656,161 3,106,423 6,918,507 Accounts Receivable 5,099 23,287 49,653 75,820 101,987 Inventory 47,717 205,863 364,915 549,133 714,967 Other - - - - - Total Current Assets 213,706 360,859 1,070,729 3,731,376 7,735,460

Property and Equipment - - - - - (less accumulated depreciation) - - - - - Net Property and Equipment - - - - - Other Assets - - - - - TOTAL ASSETS 213,706 360,859 1,070,729 3,731,376 7,735,460

LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities

Current Liabilities Accounts Payable - - - - - Other Current Payables - - - - - Pre-Existing Debt - - - - - Current Portion of L-T Debt - - - - - Total Current Liabilities - - - - -

Long-Term Debt - - - - -

Total Liabilities - - - - -

Shareholders' Equity Paid-In Capital 267,862 267,862 267,862 267,862 267,862 Retained Earnings (54,156) 92,997 802,867 3,463,514 7,467,598 Less: Treasury Stock - - - - -

Total Shareholders' Equity 213,706 360,859 1,070,729 3,731,376 7,735,460

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 213,706 360,859 1,070,729 3,731,376 7,735,460

[APPENDICES] 39

Year 1 2 3 4 5 Ending Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Projected Cash Flows ($s)

CASH FLOWS FROM OPERATIONS Net income (54,156) 147,154 709,870 2,660,647 4,004,085 Adjustments to reconcile net income to cash flows from operations Year 1 2 3 4 5 Depreciation Ending D e c -1 2 - D e c -1 3 - D e c -1 4 - D e c -1 5 - D e c -1 6 - ProjecCtehadn gIensc ion mceert aStain atessemtse anntsd ($s) liabilities Accounts receivable (5,099) (18,188) (26,366) (26,167) (2 6,167) SALES Inventory (47,717) (158,147) (159,052) (184,218) (165,833) Gross Sales 357,849 3,057,051 9,061,022 15,356,824 21,652,625 Other current assets - - - - - Returns and Allowances (3,578) (30,571) (90,610) (153,568) (216,526) Accounts payable - - - - - NET SALES 354,270 3,026,480 8,970,412 15,203,255 21,436,098 Other current payables - - - - - Pre-existing debt - - - - - COST OF SALES Materials 286,300 2,445,820 7,249,350 10,784,360 15,205,599 TOTAL CASH FLOWS FROM Labor (Inc Taxes & Benefits) - - - - - OPERATIONS (106,972) (29,181) 524,452 2,450,262 3,812,084 Other - - - - - TOTAL COST OF SALES 286,300 2,445,820 7,249,350 10,784,360 15,205,599 CASH FLOWS FROM INVESTING ACTIVITIES GROSS MARGIN 67,970 580,660 1,721,063 4,418,895 6,230,499 Purchase of equipment - - - - - Other Assets - - - - - OPERATING EXPENSES Salaries and wages 42,000 236,958 501,038 567,998 572,451 TOTAL CASH FLOWS FROM Payroll taxes 4,032 22,748 48,100 54,528 54,955 INVESTING ACTIVITIES - - - - - Employee benefits - - - - - Depreciation - - - - - CASH FLOW BEFORE Bad debt expense 895 7,643 22,653 38,392 54,132 FINANCING (106,972) (29,181) 524,452 2,450,262 3,812,084 Additional Operating Expenses 75,200 135,800 207,676 228,800 237,800 TOTAL OPERATING EXPENSES 122,127 403,149 779,466 889,718 919,338 CASH FLOWS FROM FINANCING ACTIVITIES OPERATING PROFIT (LOSS) Borrowing of long-term debt - - - - - BEFORE INTEREST AND TAXES (54,156) 177,51 1 941,597 3,529,177 5,311,161 Repayment of long-term debt - - - - - INTEREST EXPENSE - - - - - CASH FLOW BEFORE EQUITY FINANCING (106,972) (29,181) 524,452 2,450,262 3,812,084 PROFIT (LOSS) BEFORE TAXES (54,156) 177,51 1 941,597 3,529,177 5,311,161 Sales of Stock 267,862 - - - - INCOME TAXES - (30,358) (231,727) (868,531) (1 ,307,077) Repurchase of Stock - - - - - NET PROFIT (LOSS) (54,156) 147,154 709,870 2,660,647 4,004,085 TOTAL CASH FLOWS FROM FINANCING ACTIVITIES 267,862 - - - - EBITDA (54,156) 177,51 1 941,597 3,529,177 5,311,161

NET CASH FLOWS 160,890 (29,181) 524,452 2,450,262 3,812,084

CASH, BEGINNING OF PERIOD - 160,890 131,709 656,161 3,106,423

CASH, END OF PERIOD 160,890 131,709 656,161 3,106,423 6,918,507

[APPENDICES] 40

SUMMARY OF PRIMARY RESEARCH PRIMARY CUSTOMER RESEARCH

We have had discussions with more than 100 retailers across the country. Below is an excerpt from our customer database which we used to record information about our potential customers. The full database includes all contact information, retailer classifications, affiliations, plans for expansion, supplier information, product information, regional trends, product and industry problems, price points, sales information and general notes taken from discussions.

Retailers name Which Brands do you stock How many do What price will What does the future look like for Would you consider stocking you sell per people starting electic bicycles another brand HB Scooters Ultra motor and pedego month5 buying?ǯ Growing market. Yes, but most are crap - imported from china

In-Cycle 2 ultra cycles two models 1400 and 2500 0.3 NA Stagnant YES! Said to sell more stock more

Segway of Santa Barbara ultra motor, velocity metro 0.5 NA Inverse relationship with gas Definitelty - Looking for better bikes all the time.

San uis Rides Izip ultra motor urban mover bionic amp torker 20 max 1,500 Growing Have to be crazy deal or new bike or great terms ǯ ELV Motors ultra motor electric motion systems pedago velo 10 1000 Growing, gas price and awareness Always looking mini and urban mover hebb Scooterland US (tiala sbike ebike)lead acid ecruiser-lithium bumble 50-120 500 really really good When the economy picks up bees Metropolis Bikes pedego swim 2 1500 stag now growth in the future yes - call me when you have a bike

Electric Bicycle Outlet pedego hebb cyclone yuba columbia giant zuumer 15 2,000 good yes

Small Planet E Vehicles Sanyo, UltraMotors, Pedego, Strommer, Hebb bikes, 25 1,500-3,500 getting better always looking for better bikes Currie Technologies Pete's Electric Bikes Kalkoff, UltraMotor, pathfinder, Hebb, own line 15 1,500-4,500 Iincrease by 10k by 2012 and 50-100k units by 2015 If it meets my specs

ǯ Bionics kits ohm pathfinder 4 1,000 When prices fall they will take off yes

The electric bike store trek, emoto, eg, pedego, ultra motor, swinn, 40 499-5,000. Bright - indicators best buy invested heavily in it. yes boomer, e+, sanyo, gett cycle, currie tech, wentz,

SURVEY RESULTS AVAILABLE UPON REQUEST:

CYCLOVIA SURVEY RESULTS We attended Cyclovia Tucson in March, 2011. Over 50 people test rode our bike and we surveyed 24. Results describe preliminary demographics, psychographics, evaluation of bike performance, design, handling, and power, and other market research information.

STUDENT SURVEY ON COMMUTING We surveyed over 200 University of Arizona students on their commuting behavior and preferences. Results of this survey indicate that electric bike-share programs on college campuses would not be a viable business strategy, leading us to adopt our current venture. It also illustrates current perceptions, attitudes, and feelings surrounding electric bicycles in the college student market.

FOCUS GROUP

This report examines the perceptions and opinions people have on electric bikes in depth. While it is qualitative, it provides a level of analysis that is deeper than market surveys.

[APPENDICES] 41

COMPETITION

Brand Name power (watts) btry. type gearing motor cntrl. price Charger Bicycles 400 SLA varies pedal < $1000 Currie/IZIP/EZIP Bicycles 400 SLA fixed both < $1000 Rayos (was ElecTrec) 600 SLA fixed throttle < $1500 Ultra Motor 350-500 SLA, LFP none throttle $1000-$3000 R Martin 350 Li-Ion varies both $1500-$2000 Prima Power Bikes 250 SLA, NiMH none both $1500-$2000 Urban Mover Bikes 250 Li-Ion, LFP fixed both $1500-$2000 %HWWHUELNHV IDUIDVWFRPI\ 500-1200 SLA, LFP fixed, varies throttle $1500-$3500 Currie/IZIP/EZIP Bicycles 400-750 LFP fixed both $1500-$3000 Pedego 500 LFP none throttle $1700-$1900 DreamE betterbike 350, 500 SLA, LFP varies throttle $1700-$2400 EcoBike 300-360 LFP fixed both < $2000 eZeebike 300-360 LFP fixed both < $2000 Shadow Ebike 350 LFP fixed both $2,000 eGO (moped-like scooter) 1500 SLA fixed throttle $2,000 Giant Twist 600 SLA fixed pedal assist $2,000 Hebb E-Bikes 350 Li-Ion fixed throttle $2,200 OHM Cycles 250-350 Li-Ion fixed both $2400-$3500 Pi Mobility 400-750 Li-Ion varies throttle $3000-5000 Electric Motion E+ bikes 1000 NiMH none both $2500-6500 Optibike 400-850 NiMH, Li-Ion varies both $5000-$14000

Watts: average Joe or Jane = 100- 150W, Lance Armstrong = 300W, pushing air out of the way on an upright bike at 25 mph = 700W.

Battery Chemistry: SLA = Sealed Lead- Acid, NiMH = Nickel- Metal Hydride, Li- Ion = Lithium Ion, LFP = Lithium Iron Phosphate.

Gearing: none (many hub motors, one motor revolution = one wheel revolution), fixed gear reduc tion for more torque, varies when geared motor drives the chain through the bicycle gears which increases torque about 50% (in low gear) for better hill- climbing and offers better top- end speed (in high gear) than direct drive systems using motors of similar wattage. Motor Control: pedal- assist (assists when you pedal), throttle (thumb or twist throttle on handlebar), or both. Source: www.electric-bikes.com

[APPENDICES] 42

PRODUCT POSITIONING CHART BY MANUFACTURER

$12,000 Optibike $11,000 $10,000 Grace $9,000 $8,000 Cytronex $7,000 $6,000 Optibike $5,000 Panasonic

$4,500

Stromer

$4,000

Ohm

$3,500 Izip

Ohm

$3,000

Schwinn Trek

$2,500 Sanyo Ultra Motor Cytronex Hebb Trek Hebb Trek

$2,000 Pedego Izip Izip Izip Schwinn Giant Pedego Ezee Ezee Torker Torker $1,500 Izip Solex Aerocell Liberty Izip Liberty Liberty Rayos X-treme $1,000 Izip Prodecotech Prodecotech Ezip

Liberty Ezip

< $500 Ezip Mongoos e Small Wheel European Cruiser American Cruiser Mountain Bike Hybrid commuter Road Bike

[APPENDICES] 43

MANAGEMENT TEAM RESUMES

[APPENDICES] 44

Samuel J. Ellis [email protected] 3522 North Boyce Spring Lane Tucson, AZ 85745 816-678-6781 Education: The University of Arizona Tucson, AZ McGuire Center for Entrepreneurship (Ranked 6th Nationally) Eller College of Management Bachelor of Science in Accounting and Entrepreneurship, Aug. 2011 Honors College Entrepreneurship GPA: 4.0 | Cumulative GPA: 3.66 Awards: 08/07 ² Present Wildcat Excellence Award for Academic Merit 11/09 1st Place - Eller Case Competition 01/08 and 08/08 Dean·s List ² Honorable Mention Experience: 8/10 ² Present Velocis Bicycle Company LLC² Finance Director Tucson, AZ Research and validate potential financing sources, tax information, projected sales growth, materials and labor suppliers, operating expenses and other financial information. Integrate all validated financial information into 5 year pro-forma financial statements with three different demand scenarios. Contribute to the strategic planning of this start-up venture 08/08 ² 03/09 Notehall LLC ² Field Director Tucson, AZ Consulted on strategic marketing and operational objectives for the Notehall.com site as one of the company·s founding members Managed marketing team, public relations, and website functionality Directed a month long marketing campaign resulting in an increase of 5,000 website users Notehall was recently featured on ABC·s Shark Tank Reference: Sean Conway ² President of Operations ² (520)-591-5713 1/09 ² 3/10 ASUA Student Government - Director of Academic Affairs Tucson, AZ Represented and advocated student interests in administrative policy making committees for the University of Arizona Created a ´Be the Changeµ Scholarship for students committed to involvement in campus affairs Directed student outreach programs to increase involvement in policy discussions 10/08 - Present CatCall A Cappella ² President Tucson, AZ Compose and arrange music for the ensemble Coordinate over ten paid events and market one large concert each semester Manage group budget including CD production expenses and sales revenues 1/09 ² 5/09 University of Arizona Earth Day Event ² Marketing Director Tucson, AZ Managed marketing team of 7 and a $3,200 budget Attracted over 3,000 event participants and 100 local vendors 12/10 ² Present Student Experts ² Recruiting Manager Tucson, AZ Create a system to efficiently hire around 17 new employees each month Evaluate the cost-efficiency of each recruiting initiative and maintain performance metrics. 2/11 ² Present Stephen Gilsdorf CPA² Tax Return Preparer Tucson, AZ Aggregate and analyze financial information to compute taxes owed or taxes refundable Utilize ATX software to e-file tax returns Activities: - UA Symphonic Choir ² Treasurer - August 2007 ² August 2010 - Cello ² Age 5 - Present - Entrepreneurship Students Association ² member Aug 2008 ² May 2009 - Delegate ² Anytown Arizona Social Justice Camp ² Jan. 2009 - Preceptor ² Eller Business Communications ² Spring 2010 Proficiencies: - Experienced with MS Access, MS Project, MS Visio, Windows 7, WebEx, and Skype - Mastery of MS Excel, MS Word, MS Powerpoint, Mac Snow Leopard, Finale, Basecamp, Adobe Creative Suite, and ATX Tax Software

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