Chicharon Foods Co., Ltd

Chicharon Foods Co., Ltd.

Business Plan

2018 - 2022

NOTE: This plan is a sample prepared by Newton Group Marketing where the original business name and other pertinent information have been changed for client privacy

purposes. Any similarities with actual companies are purely coincidental.

Table of Contents 1.0 BUSINESS OVERVIEW ...... 2 1.1 BUSINESS OVERVIEW ...... 2 1.2 INDUSTRY OVERVIEW ...... 3 1.3 CURRENT SITUATION OF THE COMPANY ...... 5 1.4 GOALS AND OBJECTIVES ...... 7 1.5 KEY SUCCESS FACTORS ...... 7 1.6 COMMERCIAL VIABILITY OF THE BUSINESS ...... 8 1.7 STRUCTURE OF THE COMPANY ...... 9 2.0 PRODUCT DESCRIPTION ...... 10 2.1 DETAILED DESCRIPTION OF PRODUCT ...... 10 2.2 STAGE OF DEVELOPMENT OF PRODUCT ...... 11 2.3 CERTIFICATION AND REGULATORY STANDARDS REQUIRED ...... 11 2.4 CUSTOMER BENEFITS PROVIDED BY PRODUCT ...... 12 3.0 MARKET ANALYSIS ...... 13 3.1 TARGET MARKET PROFILE ...... 13 3.2 TRENDS ...... 15 3.3 ESTIMATED COMPANY SALES ...... 16 4.0 COMPETITION ...... 18 4.1 DIRECT COMPETITORS ...... 18 4.2 INDIRECT COMPETITORS ...... 19 4.3 SUBSTITUTE PRODUCTS OR SERVICES ...... 19 4.4 COMPETITIVE ADVANTAGE ...... 19 5.0 MARKETING & SALES ...... 20 5.1 POSITIONING ...... 20 5.2 SALES STRATEGY & TACTICS ...... 20 5.3 PRICING STRATEGY ...... 20 5.4 CHANNELS OF DISTRIBUTION ...... 21 6.0 MANAGEMENT TEAM ...... 22 6.1 OWNER BIOGRAPHY ...... 22 6.2 OWNERSHIP ...... 22 6.3 KEY MANAGEMENT ...... 22 7.0 OPERATIONS ...... 23 7.1 LOCATION & OUTLAY ...... 23 7.2 CAPITAL EQUIPMENT REQUIREMENTS ...... 24 7.3 LABOUR REQUIREMENTS ...... 27 7.4 PRODUCTION PROCESS ...... 28 8.0 KEY RISKS ...... 30 8.1 DESCRIPTION OF KEY RISKS ...... 30 9.0 FINANCIALS ...... 31 9.1 EXPANSION COSTS ...... 31 9.2 PRO FORMA INCOME STATEMENT ...... 34 9.3 PRO FORMA CASH FLOW STATEMENT ...... 36 9.4 PRO FORMA BALANCE SHEET ...... 39 9.5 IMPORTANT NOTES & ASSUMPTIONS TO FINANCIALS ...... 40

Executive Summary

The Business Chicharon Foods is a leading Canadian manufacturer of Fried Pork Rinds, located at 123 Avenue in Victoria, British Columbia. Fried pork rinds are commonly known as “Chicharrones” in the Asian and Spanish communities, and Chicharon specializes in quality “home made style” fried pork rinds that cater to these ethnic palettes. The business was founded by Mr. Mark Clarke in 1998, where he has built an excellent brand reputation for Chicharon over the past 20 years. Today Chicharon is recognized as a leading Canadian Fried Pork Rind brand and producer.

The business has developed an excellent working relationship with Business Development Bank of Canada (BDC), solidifying approximately $500,000 in business loans over the past 20 years. This funding has helped build the company from $10,000 to $150,000 in monthly revenue and streamline operations. Today, however, customer demand has far exceeded its production volume and management is seeking to purchase a new, larger facility in Victoria to begin operations October 1, 2019. Management is seeking $3,004,600 debt financing from BDC for the purpose of: building purchase, facility improvements and the purchase of new equipment.

The Market Chicharon competes in the Canadian Snack Food Production Industry which generates over $3 billion annually, and saw 2.9% annual growth over 2013-2018. Snack Production is one of Canada’s most profitable sectors and Fried Pork Rinds is one of its fastest growing products.

Chicharon sells to 5 major distributors who place products in Bulk Barn, Walmart, grocery stores and Asian grocery/specialty stores throughout the country. The company has also carved out a niche industry in Quebec, which accounts for almost 20% of total sales. Forward looking, management intends to meet demand from Asian and Southeast Asian markets through export sales.

Financial Considerations The proposed loan will be allocated as follows: $2,224,600 for building purchase, $455,000 in facility construction and improvements and $325,000 in new capital equipment. In October 2019 management intends to sell its current facility for $784,000, to a final loan balance of $2,220,600. In return, the business is projected to generate the following revenues:

SALES SUMMARY Year 1 Year 2 Year 3 Revenue $2,400,000 $3,120,000 $4,680,000 Gross Profit $1,008,000 $1,310,400 $1,965,600 Net Income ($100,778) $174,072 $686,767

1.0 Business Overview

1.1 Business Overview Chicharon Foods (www.Chicharon.ca) is a leading Canadian manufacturer of Fried Pork Rinds, founded in 1998 by Mr. Mark Clarke. Our fried pork rinds are commonly known in Asian and Spanish community as “Chicharrones,” and Chicharon has added more variety and flavors over the years, perfecting the process from raw skins to finished product. The business has expanded across Canada, where today it is a brand leader amongst Canadian Pork Rinds consumers. Additionally, the company has received requests for oversea exportation to meet demand for the Southeast Asian and Filipino fried pork rind markets.

The business is currently located at 123 Avenue in Victoria, British Columbia, in a 2,800 sq. ft. warehouse that was transformed to a meat processing plant, with CFIA-accredited (including HACCP) certification.

Business History

In 1998 Mark was operating the business out of a garage, generating a very modest $2,000 per month producing fried pork rinds as an attractive substitute to the imported products that were only available throughout Canada at that time. BDC provided a business loan to Mr. Clarke to begin operations at a new location (the current facility), with sales projections of $10,000 per month. The business quickly reached this sales goal and continued with steady growth each year. The business has obtained several small loans from BDC over the past 20 years to purchase new equipment and streamline processes. In total, Chicharon has received approximately $500,000 loans from BDC, which to date have been paid off save approximately $70,000.

Over these past 20 years, the business has grown from $10,000 per month to reach average $150,000 revenues per month (as of Q1 2018). Today Chicharon is a leading pork rinds brand in Canada, having built up an excellent brand reputation in the marketplace with vendors and distributors alike.

Revenues The business has grown from $565,000 to $1.38 million in annual revenue over the 10-year period 2007-2017, which represents CAGR of 9.4%.

Annual Revenue 2007-2017

$1,600,000

$1,400,000

$1,200,000

$1,000,000

$800,000

$600,000

$400,000

$200,000

$0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Revenue Gross Revenue

Figure 1: Chicharon’s annual sales from 2007-2017, seeing 9.4% CAGR over this 10-year period.

1.2 Industry Overview

Canadian Snack Food Production Industry1 Chicharon competes in the Canadian Snack Food Production Industry, which is made up of 172 companies that produce a wide range of snacks including potato chips, corn chips, popped popcorn, hard pretzels, pork rinds and similar products. The industry generates roughly $3 billion annually and saw positive 2.9% annually growth between 2013-2018. This growth was due to increased demand over the past five years as the economy continued to strengthen and discretionary income levels increased.

• REVENUE: $3 billion annually (6th largest global market) • PROVINCIAL CONCENTRATION: 10% of establishments in BC2 • EXPORTS: US accounts for 90% of all Canadian snack product exports • GROWTH: 2.9% annual growth over past 5 years

Highly Profitable Sector

1 Snack Food Production - Canada Market Research Report by IBISWorld, March 2018. 2 Canada's Snack Food Industry by Agriculture and Agri-Food Canada, Mar. 7, 2016. http://www.agr.gc.ca/eng/industry-markets-and-trade/market-information-by-sector/processed-food-and- beverages/profiles-of-processed-food-and-beverages-industries/canada-s-snack-food- industry/?id=1172692863066 3

In terms of profit margin, Snack Food Production is one of Canada’s most profitable sectors at average profit margins of 16.0% - doubling the overall food manufacturing sector3.

Projected Growth Forward looking, the industry is anticipated to grow at an annualized rate of 3.1%, outpacing Canada’s overall GDP projected to grow only 1.9% during the same period1.

3 Healthy Profit: Three Industries Outperforming Their Overall Sector in Canada by Rory Masterson, Sept. 12, 2017. https://www.ibisworld.com/media/2017/09/12/profit-margins-three-industries-outperforming-their- overall-sector-in-canada/ 4

Snack Segmentation by Sales Pork Rinds are a niche product that fall within the 15.7% market share of “other snacks” in the overall industry.

SME Financial Performance & Export Trade According to Industry Canada, the average Canadian SME in the Snack Food Manufacturing industry generates $392,500 annually where 67.9% of companies are profitable. In 2016 Canada, snack food manufacturers exported $413.2 million of goods4.

1.3 Current Situation of the Company

Demand Exceeding Supply Capacities Chicharon’s current facility is sized to comfortably produce approximately $600,000 per year in goods, yet management has been exceeding its capacity over $1 million for the past 8 years. This has resulted in back orders and the inability to meet growing demand. It has additionally resulted in complaints from distributors on timely order completion and delivery, which unless promptly resolved could cause long-term harm to company reputation and negatively affect sales. As a result, a larger plant facility is required.

4 Snack Food Manufacturing 31191 Summary Canadian Industry Statistics (Industry Canada), 2016. https://www.ic.gc.ca/app/scr/app/cis/summary-sommaire/31191 5

New Facility Acquired Management has solidified a new facility at ABC Street in Victoria, BC. The building is 7,945 sqft, which is 2.8X larger than the current facility. Management has already submitted the Agreement of Purchase for the building with subject of Financial Approval, where the building is currently under construction and will be ready for possession May 2019. This larger facility will allow the business to meet all orders successfully, while increasing gross margins 10-15% due to increased storage space and larger purchase orders. It will also increase Chicharon’s maximum output volume to estimated $5 million annually, which management projects to reach within 4 years.

Seeking Debt Financing Management is seeking $3,004,600 financing for Chicharon Foods in order to purchase the building for the new proposed location, as well as (a) fund building improvement costs to meet CFIA requirement and (b) purchase $325,000 in new capital equipment in order to expand product capacities and enter new market segments. The business needs to acquire funds before May 9, 2018, in order to finance second deposit.

Building Purchase & Improvement Timelines

ACTION BY WHEN

1 Submitted an Purchase Offer Agreement to the developer COMPLETED

2 Purchase offer accepted by the developer at $280 sf COMPLETED

3 Give a $20,000 bank draft to the Realtor as first deposit COMPLETED

4 Submit the Business Plan to BDC IN PROGRESS

Purchase Agreement subject to removal on May 14th. Need BDC loan approval by May May 9th 2018 5 9th to receive $200,000 from BDC for the second deposit

S Begin drawing the improvement plan for the facility May 15th 2018

7 Contact improvement contractor to receive final price quote June 18th 2018

NOTE: We request $200,000 loan immediately for the second deposit for building purchase, and also start to pay this loan monthly payment with a $10,000 payment capital and interest starting June 1, 2018.

1.4 Goals and Objectives

Goals • To be able to properly serve all Chicharon’s existing customers and expand product line to reach the maximum demographic in Canada. • To be capable of supplying major players like Costco without worry of production caps. • To become one of North America’s top 20 Pork Rinds Manufacturers by 2025. • To be able to produce Fried Pork Rinds (Ready Puffed and Pre-Cooked pellets) and Pork Rinds Jelly for domestic and export markets from purchased pork skins from any Canadian slaughterhouse. • To increase production capacity to serve all market segments throughout Canada and begin serving the global marketplace with Pork Rinds Pellets.

Objectives • To be capable of increasing purchase size in truck load to lower raw material purchase price by 20-40%. To cut current cold storage fees. • To be able to ship in larger shipments, lowering shipping costs by minimum 30%. • To control minimum 80% of Canada’s total pork rinds business by 2024. • To generate sales of $2,400,000, $3,120,000 and $4,680,000 in Years 1-3 respectively in the new facility. To maintain average gross margin of 42% during this period.

1.5 Key Success Factors 1) Secure Financing & Larger Facility – Chicharon’s financial survival and future success will hinge on management’s ability to secure funding and begin operations from the new, larger facility. The new plant will allow the business to (a) increase production quantity, (b) produce new products to reach new niche markets, and (c) significantly lower costs and thus increase profitability.

2) Excellent Management – Like any company, Chicharon’s future success and ability to implement expanded operations at the new location will rely on Chicharon’s excellent management team. Mr. Clarke brings 20 years’ experience growing the company from scratch, and together with his management team will be the critical factor in the company’s future success.

3) Maintain Good Relationship and Reputation with Distributors – As Chicharon’s business model is based on sales to a limited number of key distributors, the company must maintain a good relationship with its distributors by producing consistent quality products and delivering orders on time. This will be accomplished through the new location.

4) Niche Expert – After 20 years Chicharon understands the fried pork rind sector and its customer tastes better than any other company in Canada. Future success lies in maintaining this edge through continued quality, deliciousness and product innovation to match consumer preferences.

5) Strong Cash Flow Management – With any company, sales growth and expansion must be coupled with careful cash flow management. Mark and the company’s accountancy team will ensure the business expands sales and orders intelligently within the company’s cash flow situation.

1.6 Commercial Viability of the Business Several factors show the commercial viability of Chicharon overall as a company, and indicate excellent commercial potential with the move to the larger facility in 2019.

1) 20-35% Immediate Unmet Revenue Due to Production Limitations The company has unmet sales due to current production volume limitations; Chicharon only met estimated 63% of total sales demand from existing customers in 2017 and is projected to supply only 82% of demand in 2018. This demonstrates Chicharon’s immediate ability to generate $2.2 million annually with its current customer base.

Current estimated sales demand: $2.2 million sales annually / $183,300 sales monthly

YEAR ANNUAL SALES DEMAND MET 2017 $1,382,209 63% 2018 $1,800,000 82%

2) Consistent Year-on-Year Growth Despite Production Limits Despite the production limitations described above, Chicharon has seen consistent year-on-year sales growth in the past years of operations. The company has already generated $450,000 in the first quarter of 2018 and is on track to reach $1.8 million this year. This is due to innovation, growing customer demand, and production efficiency.

3) Larger Facility to Meet Current Order Demand

Upon moving moving to the larger facility the business will see increased revenues due to multiple factors:

1) Increased production capacity to meet (and exceed) current order demands. 2) New equipment to produce new products for the market (enter new Asian export markets, increase market penetration in Canada). 3) Decrease costs of goods sold – increased storage space will allow high volume orders of raw materials at a significantly lower cost. 4) Ability to sell to major retailers such as CostCo – to meet large sales volume order sizes.

The facility has a projected production capacity of $5 million, which managements expects to reach by Year 4 in the new location.

4) 16% Increase in New Building Valuation by 2019

Management was able to secure the building at an excellent deal, at the price of $280/sqft. After a short couple of months, multiple independent developers have already priced the property value at $325/sqft. Assuming the building reaches this market value at the time of completion, this represents a $357,525 increase in property value upon taking over ownership.

Assuming the property appreciates at this level, this represents 12% of the total BDC loan amount recaptured before even commencing operations in the new facility.

Building Valuation (2019) $2,582,125 Purchase Price (2018) $2,224,600 Difference $357,525

1.7 Structure of The Company Chicharon Foods Co., Ltd. is a limited company based in Victoria, British Columbia.

2.0 Product Description

2.1 Detailed Description of Product Chicharon specializes in fried pork rinds, made from pork skins and pork skins with fat attached. The company offers a variety of flavours outside of the traditional product, with 12 different flavors of fried pork rinds including bacon and hot & spicy. In addition, the business has created a specialty fried pork rind which is produced specifically for the Quebec market. The demand for this product has grown consistently since its introduction to the market, where the 3 product varieties now make up 12% of total company orders. Chicharon currently operates with total 31 SKU’s.

(Product information deleted for client privacy purposes.)

1 - Chicharon Chicharron | Chicharon’s original flavour staple product makes up almost 30% of total orders (options of 12 or 24 units per order). Its simple and delicious taste is a popular choice of customers.

2 – Family Size Chicharron | The large “family size” 250g package of Chicharon’s Chicharron product makes up over 10% of total sales.

3 – Grilled Pork Garlic | The 75g Grilled Pork Garlic flavoured Chicharron product is the the third most popular product, making up 9.1% of total sales.

Product Total Orders (2015-18) Avg Orders / Yr % of Total Orders Chicharon 24 x 70g 25,239 7,766 17.9% Chicharon 12 x 70g 15,983 4,918 11.4% Big Size Chicharon Family Size 7 x 250g 14,637 1,504 10.4% Grilled Pork Garlic Tender Style 24 x 75g 12,798 3,938 9.1% TOTAL 68,657 18,126 48.8%

Product Segments

• Finished Products – Packaged fried pork rind snacks. Sold to local food stores and supermarket chains throughout Canada.

• Precooked Products – Pork rind pellets sold both domestically and for global export. o Domestic market – Chicharon sells to Sysco, who supplies a large number of Canadian restaurants and bars. o Export market – To foreign food distributors and major snack manufacturers, who in turn transform the pellets into finished snack products to package and sell to retail.

2.2 Stage of Development of Product

Pork Rinds: One of Our First Snack Foods - Pork rinds are one of the most traditional snacks the world, where people have been eating pork rinds – or pork skins – as long as they have been eating pigs. It is one of the world’s first snack foods created thousands of years ago, and favored in the southern states of the US, as well as in Asian and Spanish communities (as “Chicharrones”), as a simple combination of fried pork skins and salt. Despite the snack’s simplicity, today’s pork rinds have gained updated formats and new flavors to keep them thriving in today’s snack market.

Chicharon’s Well-Developed Product Line - Chicharon’s current product line is in its mature stage of development, where after 20 years the team has perfected its production process to create a highly consistent product in a wide variety of forms and favours.

Chicharon’s Future Expansion Product Development: Pork Rind Pellets - Upon expansion the team will enter into new product categories, mainly Fried Pork Rinds pellets, to serve to the Southeast Asian market. Management has received a large amount of demand and interest for this product, and new equipment and larger facility size will allow the company to begin supplying this demand.

2.3 Certification and Regulatory Standards Required As a Canadian meat processing plant, Chicharon is required to adhere to all requirements set forth by the Canadian Food Inspection Agency (CFIA) and follow all food standards to meet Hazard

Analysis and Critical Control Points (HACCP) certification to ensure food safety protocols are fully met at the facility. This poses a barrier for new entrants trying to manage complex regulations, whereas Chicharon has been dealing with CFIA since opening 20 years ago and maintains an excellent relationship.

In the new facility, construction and leasehold improvements will be done in coordination with CFIA requirements. Chicharon has a full time HACCP Coordinator on staff (Sarah) to ensure all food safety standards are met.

2.4 Customer Benefits Provided by Product While consumers are growing more health-conscious with their food choices, latest snacking motivation research by Mintel shows that people snack to treat themselves (50%), and more than one quarter (28%) agree that taste is more important than health when choosing a snack5.

• Treat Yourself – 50% of consumers snack to treat themselves, with a focus on taste. • Snacking for Self Care – 37% of consumers say they snack to give themselves a break during the day and 24% snack to relieve stress. • Weight Control – One in six consumers (17%) snack today in order to control their weight.

Fried pork rinds are unique in that they contain 70% protein and contain no carbohydrates, unlike other snacks with a crunch (like potato chips and pretzels). This is very popular for popular high protein / low carbohydrate diets today like Ketogenic, Paleo and Atkins. Customers choose our products for their unique flavour and quality not found in other pork rind brands.

5 TOP REASON US CONSUMERS SAY THEY SNACK IS TO TREAT THEMSELVES by Mintel, 2017. http://www.mintel.com/press-centre/food-and-drink/top-reason-us-consumers-snack-is-to-treat-themselves 12

3.0 Market Analysis

3.1 Target Market Profile

DISTRIBUTORS (CUSTOMERS) Chicharon sells to 5 major distributors in Canada:

1) Uno Foods Inc. (BC) – Uno is the largest Filipino and Asian foods products distributor in Western Canada, and is one of Chicharon’s largest customers. The distributor services all supermarkets, groceries, Asian restaurants in British Columbia and Alberta.

2) Apo Products Ltd. (Ontario) – Also one of Chicharon’s largest customers, Apo is the largest Filipino and Asian foods products distributor in Eastern Canada. The distributor serves all supermarkets, groceries and Asian restaurants throughout Ontario, Manitoba and Saskatchewan (as well as some stores in Quebec and the Maritimes).

3) Demospec Inc. (Quebec) - A meat broker that sells Chicharon products to supermarkets, warehouses and distribution centers throughout Quebec. Demospec purchases our specialty Grilled Pork “s,” that made up roughly 18% of total sales in 2017.

4) Lordford Inc. (Quebec) - An Asian foods distributor in Montreal, where their main customers are Asian supermarkets, groceries and restaurants.

5) Sysco Inc. (BC / Alberta) – A Foods Distributor serving supermarkets, groceries and restaurants throughout Western Canada.

2015 2016 2017 Sales % Sales Sales % Sales Sales % Sales Uno 420,979 37.7% 444,163 36.1% 475,500 34.8% Apo 415,869 37.3% 466,220 37.9% 461,355 33.7% Demospec 178,237 16.0% 209,348 17.0% 245,493 17.9% Lordford 57,038 5.1% 67,790 5.5% 75,385 5.5% Sysco 3,040 0.3% 12,461 1.0% 19,950 1.5%

CUSTOMERS BY PERCENTAGE OF SALES (2017) Other Sysco 7% Lordford 1% 5%

Uno 35%

Demospec 18%

Apo 34%

Expansion: To Triple Quebec Sales Chicharon’s specialty product line is sold in Quebec during the months November to April each year. Demand has grown each year since its introduction. With the investment the business will gain significantly larger production capacity, where Chicharon can finally meet its sales potential and is projected to triple sales of this product line within its first year in the new facility.

RETAILERS Chicharon’s finished products are sold across a variety of retailers across Canada:

• Asian Supermarkets & Grocery Stores – This includes TNT and a wide range Asian specialty stores. • Major Supermarket Chains – Bulk Barn, Superstore, Save-on-Foods, Walmart and 7- Eleven. • Local Food Markets – Small to large grocery stores and food markets throughout Canada that service their community.

CONSUMERS & PRODUCT SEGMENTATION Chicharon Foods offer varieties of pork rinds products which serve different demographic market. The Canadian pork rinds market is divided in five different segments:

1) The Southeast Asian community - which includes consumers from countries like the Philippines, Thailand, Vietnam. Laos, Birma, Cambodia, Malaysia and similar countries. 2) Hispanic community – which includes Latino-Canadians from all parts of South America. 3) French Canadians in Quebec - Grillades de porc or s Bucheron. 4) European Canadians – Canadians from England, Spain and similar European countries. 5) Pork Rind Pellets - For local and exportation (B2B).

Consumer Segmenta.on

Other 20%

Quebecois Asian Community 20% 60%

3.2 Trends 1) Rise in Salty Snacks (incl. Pork Rinds) – Sales for salty snacks have grown 30% between 2011-2016 in the US, reaching estimated $11.6 billion. Growth is primarily driven by innovation in the meat and popcorn snack categories6.

2) Growing Health Conscious Consumers – The health-conscious culture continues to evolve in Canada, as manifested in a wide range of areas. Consumers are increasingly careful of the food and beverages they eat and drink, and constantly examine product labels and ingredient lists7 8.

6 Snacking Motivations and Attitudes US by Mintel, May 2017. 7 Mapping your Future Growth: Five Game-Changing Consumer Trends by BDC, October 2013.https://www.bdc.ca/Resources%20Manager/study_2013/consumer_trends_BDC_report.pdf?ref=shortur l-consumertrends 8 Health and Wellness in Canada by Euromonitor International, May 2017 15

3) Low Carb/Sugar Trends – 2018 continues to see popularity with gluten-free, low carbohydrate diets and the war on sugar. This makes snacks like fried pork rinds an attractive alternative to typical high sugar/carbohydrate snacks.

4) An Increasingly Diversified Canada – Canada’s demographics are constantly becoming more diverse through immigration, where Canada is home to increasingly varied cultures including Southeast Asian countries that commonly eat fried pork rinds.

5) Rising Spending in Southeast Asia – Whereas Southeast Asian countries have been very poor for many years, they are currently undergoing a shift in economic improvement and have greater buying power to pay for imported products they enjoy.

3.3 Estimated Company Sales Q1 2018 sales show the business is on track to generate $1.8 million in 2018. Management expects to begin operations in the new facility October 1, 2019 where this date begins Year 1 of the following revenue projections:

SALES SUMMARY Year 1 Year 2 Year 3 Revenue $2,400,000 $3,120,000 $4,680,000 Gross Profit $1,008,000 $1,310,400 $1,965,600 Net Income -$100,778 $174,072 $686,767 % Full Production Capacity 48% 62% 94%

This represents:

• 30% growth between Years 1-2* • 50% growth between Years 2-3* • 48-94% full production capacity reached over Years 1-3**

* Based on projected earning potential available to Chicharon.

** With $5 million production volume potential at the new facility.

Sales Projec,ons (Years 1-3) $5,000,000

$4,000,000

$3,000,000 Revenue

$2,000,000 Gross Proﬁt Net Income $1,000,000

$0 Year 1 Year 2 Year 3 -$1,000,000

Figure 2 - Three year financial projections upon starting in new facility Oct. 1, 2019.

4.0 Competition

4.1 Direct Competitors

1) Rudolph Foods (rudolphfoods.com) – Rudolph Foods is a US-based industry leader in pork rinds with 6 manufacturing facilities throughout the United States. The company offers a number of different pork rind brands including: Rudolph’s, Southern Recipe, Lee’s Pig Skins, Grandpa John’s, Pepe’s, Rudy’s, Smithfield Farms and Whitefeather Foods (pork rind pellets). Rudolph supplies Frito- Lay/PepsiCo’s $13 billion-a-year snack arm. Rudolph was founded in 1955 and is headquartered in Ohio, US.

2) Evans Food Group (www.macs-snacks.com) - Evans Food Group is one of the world’s largest producers of pork rinds with 5 manufacturing facilities throughout the US. They are partnered with global suppliers and distribution, with a strong foothold throughout the Americas (North, Central, South) focusing on the Hispanic and African-American markets. The business has 3 main product lines - pellets, pork rinds and cracklins – and process over 100 million pounds of raw pork skins each year. Brands include: La Tonita, Porkies, Bills Country Recipe and Mac’s. Evans is headquartered in Chicago, US.

3) Triland Foods (trilandfoods.com) – Triland Foods is an international seller of pork rind pellets and crackling pellets. The business sells to both retailers and private label producers alike, with a focus on customization to strict specifications for each client. Triland was founded in 1989 and is based in Iowa, US.

4) Frito-Lay (www.fritolay.ca) – Frito-Lay’s BAKEN-ETS brand sells a variety of fried pork rind products throughout Canada and the US, including Hot ‘N Spicy, Sweet Southern Heat BBQ and Traditional. Owned by PepsiCo, Frito-Lay is a market leader in snacks and sells over $100 million of “Baken-ets” pork rinds annually9. Frito-Lay is headquartered in Plano, Texas.

5) Old Dutch Foods (www.olddutchfoods.ca) – Founded in 1937, Old Dutch Foods is a market leader throughout North America, with 11 distribution centres across Western Canada alone. Old Dutch’s main pork rind product is their “Bac’n Puffs,” which is sold in mass retailers throughout Canada (e.g. Wal-Mart, Safeway). Old Dutch Canada is headquartered in the city of Winnipeg.

9 Pigging Out on Pork Rinds? by Melissa Schorr, AbcNews, http://abcnews.go.com/Health/story?id=118080&page=1 18

Additional Competitors Other direct competitors include small local producers that sell locally within their respective hometown.

4.2 Indirect Competitors Most major snack producers are focused on fried pork rind being just another “snack” product, and sell largely to the US market. Additionally, many producers focus on the Latino market. By contrast, Chicharon focuses uniquely on the Asian community and niche demographics like Quebec.

4.3 Substitute Products or Services The market is filled with a wide variety of snacks for customers to choose, from chips to pretzels to popcorns of all flavours. However, Chicharon does not compete directly with these customers seeking a tasty snack, and instead focuses on producing a quality Chicharrones meal with unique flavour that stands out from typical North American snacks. This appeals to true Chicharrones lovers, especially within the Asian market.

4.4 Competitive Advantage Chicharon’s main competitive advantage lies in its product where our pork rinds are crunchier and less puffy, with real flavour and style that competitors can’t match. It’s “homemade style” taste combined with Chicharon’s high production volume capacity is very attractive to retailers and customers alike.

Other competitive advantages / differences include:

• A meal versus just a snack – Chicharrones are considered a staple part of the meal for many Asian and Spanish cultures. Chicharon’s products fit to this, versus being marketed and packaged as merely a snack.

• Variety of Flavours – Many of the major players like FritoLay and Old Dutch offer a very limited pork rind selection (1-3 flavours) whereas Chicharon has 31 SKU’s.

• Sole Player in Quebecois Market – Chicharon has carved out a very unique and distinct product for the Quebec market, and currently no other competitors are able to offer the same taste.

• More Point of Sales – Makes our products more accessible to customers, with distribution in Walmart, grocery stores and Asian supermarkets alike.

• Full Raw-to-Finished Product – Chicharon is only Canadian Fried Pork Rind producer that processes the pork skins from raw to finished product. Many Canadian competitors simply import product from the US. The difference is noticed in quality and taste.

5.0 Marketing & Sales

5.1 Positioning Chicharon positions itself around one thing: its product quality and unique taste. For fried pork rinds it matters very little what marketing or promotions you do because the end consumer will select for the product that provides the best taste. Chicharon’s fried pork rinds stand out from the other mainstream pork rinds found commonly on the shelves, and has a unique taste that is difficult to replicate by the major players.

As mentioned, Chicharon is also better catered to its specific markets making Chicharon’s Chicharrones viewed more attractive to respective Asian/Spanish/Quebec markets.

5.2 Sales Strategy & Tactics

Chicharon does not implement any specific marketing strategies to its customers, and actually is currently having difficulties fulfilling the order volume it receives. Through the buying chain, some distributors may offer discount program for their preferred customers for volume purchases. Retail stores use a wide variety of promotional tactics such as coupons, free samples and 2-for-1 offers.

Direct Sales & Asia Expansion Upon moving into the new facility, Mr. Clarke will use his food industry contacts, particularly in Southeast Asia, the Philippines and China, in order to capture the export demand Chicharon currently receives for its fried pork rinds. Chicharrones are a popular dish in this part of the world, and Chicharon produces a specialty taste desirable to this market.

5.3 Pricing Strategy Chicharon’s pricing is determined by the market’s price at any given time, where the product must remain competitive with other fried pork rind products on the shelves. That being said, the company currently maintains 30-40% gross margin on its sales. Additionally, the company is free to dictate price in Quebec with its products, as it is currently the sole product of its kind being sold in the province.

Retail Pricing

The following are approximately retail price ranges, depending on the chain store and the grocery owner:

• 70g bag: $1.99 - $2.49 • 75g bag: $2.29 - $2.59 • (Quebec) 100g bag: $3.49 - $3.99 20

Distributor Pricing

• 70g bag: $1.12 each • 75g bag: $1.25 each • 100g bag: $1.67 each

5.4 Channels of Distribution The company sells 100% of its products to distributors, who in turn sell to retailers throughout Canada.

6.0 Management Team

6.1 Owner Biography Mr. Mark Clarke | Owner - The business is owned and managed by Mr. Mark Clarke, who has a commerce business degree and brings 20 years’ industry experience manufacturing and selling fried pork rinds within the Canadian market. Mark leverages his strong business network of potential buyers both locally and overseas as head of sales and purchasing for the firm.

6.2 Ownership Chicharon Foods Co., Ltd. is owned 50% by Mr. Mark Clarke and 50% by Ms. Diana Sharpe.

6.3 Key Management

Sarah | HACCP Coordinator – Sarah is Mark’ business partner and part-owner of Chicharon. She is in charge of accounting for the business and additionally oversees the HACCP program with the CFIA.

Ryan | Production Manager – Chicharon’s lead production manager has been with the organization for over 15 years, and will play a key role in Chicharon’s successful transfer to the new facility. He is in charge of all employees and production operations.

7.0 Operations

7.1 Location & Outlay

Current Facility • Address: 123 Avenue, Victoria BC • Size: 2,800 sq. ft. • Maximum production capacity: $600,000- $1 million annual sales • Status: Will maintain ownership until September 2019, at which point will sell for estimated selling price of $280/sqft or $784,000.

New Facility • Address: 3757 – 190th Street, Victoria, BC • Size: 7,945 sq. ft. (2.8 times larger than current facility) • Maximum production capacity: $5 million annual sales • Current status: Building is under construction and will be ready for possession in May 2019. (If not purchased by that time, building price will be increased by 15%.)

Timelines to Establish in New Facility Based on May 1, 2019 possession date, new plant will undergo the construction and improvement. This date allows management a year to prepare and finalize all improvement deals and arrangements and begin installation of equipment upon receiving possession.

• Construction and leasehold improvements – 2 months (May 1 – June 30, 2019) • Cooler panels installation and drainage system – 2 months (May 1 – June 30, 2019) • Inspection and final CFIA approval – 2 months (July 1 – Aug 31, 2019) • Training (equipment, new staff), orientation, stocking inventory – 1 month (Sept. 1 – 30, 2019) • October 1, 2019 commence operations.

2018 ACTIVITY MAY JUNE JULY AUG SEPT OCT Possession Date Implement Construction & Improvement Cooler Panels, Drainage System Installation CFIA Inspection and Approval Training Period Commence Operations

7.2 Capital Equipment Requirements The business will require new capital equipment for each area of the new plant, totaling cost $325,000. This equipment will allow the business to increase production volume to reach stated sales objectives.

PLANT AREA ITEM COST

COOLER ROOM REFRIGERATION UNITS 25,000 TOTAL COST OF COOLER ROOM 25,000

PLASTIC BUCKETS / STAINLESS STEEL CARTS 6,000 SCALE 3,000 CUTTING ROOM DISCHARGE CONVEYOR 5,000 STAINLESS STEEL TABLES 3,000 REFER UNIT / COMPRESSOR 10,000 TOTAL COST OF CUTTING ROOM 27,000

25' LONG CONTENIOUS FRYER FOR FIRST COOK AND FINAL PUFF 80,000 CUSTOM MADE RENDERING BATCH FRYERS / 4 UNITS AT $13,500 EACH 54,000 STAINLESS STELL FEEDING CONVEYOR 10,000 STAINLESS STELL DISCHARGE CONVEYOR 10,000 FRYING ROOM MAKE UP AIR / EXHAUST SYSTEM 80,000 FIRE SUPRESSION SYSTEM 15,000 FLAVOURING UNIT 9,000 COOLING CONVEYOR 15,000 TOTAL COST OF FRYING ROOM 273,000

TOTAL NEW EQUIPMENT COSTS $325,000

PRODUCT IMAGES

1. Circular Batch Fryers

The business will purchase 4 additional batch fryers adding to the 2 existing batch fryers. Estimated cost is $54,000 per unit.

2. Continuous Potato Chips Fryer The company will require an additional 25’ long continuous fryer for the first cook and final puff in production process. Estimated cost for equipment is $80,000.

Actual Fryer Setup

The image below shows how the equipment will be setup in alignment, in the new facility.

7.3 Labour Requirements Currently Chicharon has a total of 7 staff (including Mark), where the business operates with 4 production workers. Upon receiving funding and moving to new facility the business will hire 3 additional production workers starting Month 1. This will bring the company size to total 10 employees at $460,000 annual wages.

Owner / GM Mark Clarke

Accounting / HACCP Production Manager Coordinator Ryan Sarah (partner)

Production Staff

Figure 3 – Chicharon organizational chart, where red indicates area of new personnel hiring upon receiving funding.

Personnel Plan Year 1 Year 2 Year 3

Owner (Mark) 70,000 70,000 70,000 Production Manager (Ryan) 70,000 70,000 70,000 HACCP Coordinator (Sarah) 75,000 75,000 75,000 Production Workers (7) 245,000 245,000 245,000

Total People 10 10 10

Total Payroll $460,000 $460,000 $460,000

7.4 Production Process

CUT Feed a sheet of pork skins 1 to a cutting machine to transform the skins to small pieces according to desired size. MIX

2 Mix the skins already cut with a mixing machine FRY

Fry the skins in the Fryer (following the 3 frying procedure) until they skins are ready and puffed

Figure 4 - Showing Chicharon's production process, from raw skins to finished product.

8.0 Key Risks

8.1 Description of Key Risks

1) Rise in Raw Materials - There poses the risk of an increase in the cost of raw pork skins, which could negatively affect company profits. In the case of this event, management will shift its supplier of pork skins and high margin products.

2) Propensity to Substitute - Growing competitiveness and product innovation could encourage customers to switch brands. However, the business sells roughly 20-40% products which are completely unique to its competitors currently, including highly specialized products. Management will mitigate this risk with continued product innovation and testing from customer feedback / purchasing behaviour to optimize customer satisfaction and sales.

3) Economic Decline - In the case of economic decline and drop in consumer disposable income levels, company sales could be negatively affected. This is unlikely as pork rind sales generally fare very well during economic downturn, however, in the case of this event, management will focus on lower cost/priced products more attractive to customers.

4) Rising Labour Costs – The company could be negatively affected by changes in labour costs (e.g. rising minimum wage). In the case of this event management could shift some workers to temporary work basis as needed and focus on high margin products.

5) Cash Flow Problems - As with any fast-growing company there exists the risk of running into cash problems in the upcoming years. Management will mitigate this by: minimizing accounts receivable payment cycles, leveraging payment terms with suppliers, maintaining excellent cash flow management, and maintaining access to additional funds in the case of emergency.

9.0 Financials

9.1 Expansion Costs Management is seeking $3,004,600 (CAD) for the purpose of expanding Chicharon’s operations at the larger facility, where funding will be allocated towards: building purchase, leasehold improvements/construction and new fryer equipment. Management plans to sell the current facility at projected sale price of $784,000, bringing the net loan balance to $2,220,600.

INVESTMENT BUDGET SUMMARY

New Building Purchase 2,224,600 Plant Construction & Improvement 455,000 Capital Equipment Purchases 325,000 Total Loan Request $3,004,600

Less: Sale of Current Facility 784,000

Final Loan Balance $2,220,600

LOAN ALLOCATION

Equipment 11%

Improvements 15%

Building Purchase 74%

BUILDING VALUATION After resilient negotiation management has secured the new building at a purchase price of $280 / sq ft. At building size 7,945 sq ft this is $2,224,600.

• Purchase Value: $280 / sq ft • Future Market value (projected): $325 / sq ft

In only a short number of months Mr. Clarke has received two independent quotes from developers that the property is valued at $325/sq. ft., which would bring the property value to $2,582,125. Assuming $325/sq. ft. value upon building construction completion (May 2019), this would result is an immediate $357,525 profit (12% of total loan amount) at the time of taking ownership of the building.

PLANT IMPROVEMENTS

ITEM COST

1- FLOOR DRAINS INSTALLATION / UNDERGROUD GREASE TRAP 30,000 2- LEVEL UP CONCRETE FLOOR TO SUIT CFIA REQUIREMENT 35,000 3- CONCRETE CURBS TO SUPPORT COOLER PANELS 10,000 4- COOLER PANELS FOR WALLS PARTITION 150,000 5- ELECTRICAL TRANSFORMER 7,000 6- GAS METER TO SUIT NEED 3,000 7- BUILDING PERMIT FOR PLANT AND OFFICE IMPROVEMENT 5,000 8- STRUCTURAL ENGINEERING BLUEPRINT 5,000 9- FLOOR PLAN BLUEPRINT BY ARCHITECH 5,000 10- OFFICE IMPROVEMENT / INCLUDING MEZANINE 80,000 11- LIGHTING INSTALLATION IN PRODUCTION / OFFICE 15,000 12- INSTALLATION SPRINKLER SYS INCLUDING BLUEPRINT 15,000 13- SINKS / WASHROOM / ACCESSORIES 25,000 14- FOOD DIP STATION 5,000 15- OFFICE EQUIPMENT 20,000 16- HEAT & AC SYSTEM 45,000

Total Cost of Plant Improvement $455,000

NEW EQUIPMENT LIST

COOLER ROOM COST

REFER UNITS $25,000

CUTTING ROOM

1- PLASTIC BUCKETS / STAINLESS STEEL CARTS 6,000 2- SCALE 3,000 3- DISCHARGE CONVEYOR 5,000 4- STAINLESS STEEL TABLES 3,000 5- REFER UNIT / COMPRESSOR 10,000

Total Cost of Cutting Room $27,000

FRYING ROOM

1- 25' LONG CONTINUOUS FRYER FOR FIRST COOK AND FINAL PUFF 80,000 2- CUSTOM MADE RENDERING BATCH FRYERS / 4 UNITS @ $13,500 EACH 54,000 3- STAINLESS STELL FEEDING CONVOYOR 10,000 4- STAINLESS STEEL DISCHARGE CONVEYOR 10,000 5- MAKE UP AIR / EXHAUST SYSTEM 80,000 6- FIRE SUPRESSION SYSTEM 15,000 7- FLAVOURING UNIT 9,000 8- COOLING CONVEYOR 15,000

Total Cost of Frying Room $273,000

Total Cost of New Equipment $325,000

9.2 Pro Forma Income Statement Year 1 (Month-by-month)

Chicharon Food Co. Month Month Month Month Month Month Month Month Month Month Month Month Year Year Year Income Statement 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 Revenues Sales 164,000 173,000 190,000 195,000 197,000 200,000 205,000 210,000 215,000 218,000 224,000 230,000 2,421,000 3,348,000 4,686,000 Total Revenues 164,000 173,000 190,000 195,000 197,000 200,000 205,000 210,000 215,000 218,000 224,000 230,000 2,421,000 3,348,000 4,686,000

Cost of Sales COGS 95,120 100,340 110,200 113,100 114,260 116,000 118,900 121,800 124,700 126,440 129,920 133,400 1,404,180 1,941,840 2,717,880 Total Cost of Sales 95,120 100,340 110,200 113,100 114,260 116,000 118,900 121,800 124,700 126,440 129,920 133,400 1,404,180 1,941,840 2,717,880 Gross Profit 68,880 72,660 79,800 81,900 82,740 84,000 86,100 88,200 90,300 91,560 94,080 96,600 1,016,820 1,406,160 1,968,120 Operating Expenses Advertising and promotion 823 823 823 823 823 823 823 823 823 823 823 823 9,873 14,271 19,974 Insurance 1,679 1,679 1,679 1,679 1,679 1,679 1,679 1,679 1,679 1,679 1,679 1,679 20,143 32,578 45,598 Bank charges 1,393 1,393 1,393 1,393 1,393 1,393 1,393 1,393 1,393 1,393 1,393 1,393 16,715 47,078 65,893 Occupancy 2,083 2,083 2,083 2,083 2,083 2,083 2,083 2,083 2,083 2,083 2,083 2,083 25,000 25,000 25,000 Office & miscellaneous 1,389 1,389 1,389 1,389 1,389 1,389 1,389 1,389 1,389 1,389 1,389 1,389 16,666 25,752 27,840 Professional fees 1,241 1,241 1,241 1,241 1,241 1,241 1,241 1,241 1,241 1,241 1,241 1,241 14,892 20,774 29,076 Repairs & maintenance 3,914 3,914 3,914 3,914 3,914 3,914 3,914 3,914 3,914 3,914 3,914 3,914 46,968 46,968 46,968 Telephone 500 500 500 500 500 500 500 500 500 500 500 500 5,998 5,998 9,600 Travel 488 488 488 488 488 488 488 488 488 488 488 488 5,854 5,856 5,856 Utilities 1,450 1,850 1,950 1,950 1,950 2,250 2,250 2,250 2,250 2,250 2,250 2,250 24,900 34,100 45,200 Vehicle 1,294 1,294 1,294 1,294 1,294 1,294 1,294 1,294 1,294 1,294 1,294 1,294 15,530 22,740 22,740 Payroll 29,500 32,500 38,333 38,333 38,333 38,333 38,333 38,333 38,333 38,333 38,333 38,333 445,333 460,000 460,000 Total Operating Expenses 45,753 49,153 55,086 55,086 55,086 55,387 55,387 55,387 55,387 55,387 55,387 55,387 647,872 741,116 803,746 Net Income (EBITDA) 23,127 23,507 24,714 26,814 27,654 28,613 30,713 32,813 34,913 36,173 38,693 41,213 368,948 665,044 1,164,374 Amortization 13,521 13,521 13,521 13,521 13,521 13,521 13,521 13,521 13,521 13,521 13,521 13,521 162,248 141,978 125,299 Interest 9,523 9,487 9,450 9,413 9,376 9,339 9,301 9,264 9,226 9,188 9,150 9,112 111,829 106,285 100,421

Net Income before Income Tax 83 500 1,743 3,880 4,757 5,754 7,891 10,029 12,166 13,464 16,023 18,581 94,870 416,780 938,654 Income Tax ------Net Income 83 500 1,743 3,880 4,757 5,754 7,891 10,029 12,166 13,464 16,023 18,581 94,870 416,780 938,654

Year 2 (Month-by-month)

Chicharon Food Co. Month Month Month Month Month Month Month Month Month Month Month Month Year Income Statement 1 2 3 4 5 6 7 8 9 10 11 12 2 Revenues Sales 235,000 243,000 251,000 259,000 267,000 275,000 283,000 291,000 299,000 307,000 315,000 323,000 3,348,000 Total Revenues 235,000 243,000 251,000 259,000 267,000 275,000 283,000 291,000 299,000 307,000 315,000 323,000 3,348,000

Cost of Sales COGS 136,300 140,940 145,580 150,220 154,860 159,500 164,140 168,780 173,420 178,060 182,700 187,340 1,941,840 Total Cost of Sales 136,300 140,940 145,580 150,220 154,860 159,500 164,140 168,780 173,420 178,060 182,700 187,340 1,941,840 Gross Profit 98,700 102,060 105,420 108,780 112,140 115,500 118,860 122,220 125,580 128,940 132,300 135,660 1,406,160 Operating Expenses Advertising and promotion 1,189 1,189 1,189 1,189 1,189 1,189 1,189 1,189 1,189 1,189 1,189 1,189 14,271 Insurance 2,715 2,715 2,715 2,715 2,715 2,715 2,715 2,715 2,715 2,715 2,715 2,715 32,578 Bank charges 3,923 3,923 3,923 3,923 3,923 3,923 3,923 3,923 3,923 3,923 3,923 3,923 47,078 Occupancy 2,083 2,083 2,083 2,083 2,083 2,083 2,083 2,083 2,083 2,083 2,083 2,083 25,000 Office & miscellaneous 2,146 2,146 2,146 2,146 2,146 2,146 2,146 2,146 2,146 2,146 2,146 2,146 25,752 Professional fees 1,731 1,731 1,731 1,731 1,731 1,731 1,731 1,731 1,731 1,731 1,731 1,731 20,774 Repairs & maintenance 3,914 3,914 3,914 3,914 3,914 3,914 3,914 3,914 3,914 3,914 3,914 3,914 46,968 Telephone 500 500 500 500 500 500 500 500 500 500 500 500 5,998 Travel 488 488 488 488 488 488 488 488 488 488 488 488 5,856 Utilities 2,450 2,550 2,750 2,750 2,750 2,750 2,750 2,750 3,050 3,050 3,250 3,250 34,100 Vehicle 1,895 1,895 1,895 1,895 1,895 1,895 1,895 1,895 1,895 1,895 1,895 1,895 22,740 Payroll 38,333 38,333 38,333 38,333 38,333 38,333 38,333 38,333 38,333 38,333 38,333 38,333 460,000 Total Operating Expenses 61,368 61,468 61,668 61,668 61,668 61,668 61,668 61,668 61,968 61,968 62,168 62,168 741,116 Net Income (EBITDA) 37,332 40,592 43,752 47,112 50,472 53,832 57,192 60,552 63,612 66,972 70,132 73,492 665,044 Amortization 11,832 11,832 11,832 11,832 11,832 11,832 11,832 11,832 11,832 11,832 11,832 11,832 141,978 Interest 9,073 9,035 8,996 8,957 8,917 8,878 8,838 8,799 8,759 8,719 8,678 8,638 106,285 Net Income before Income Tax 16,427 19,726 22,925 26,324 29,723 33,122 36,522 39,922 43,022 46,422 49,622 53,023 416,780 Income Tax ------Net Income 16,427 19,726 22,925 26,324 29,723 33,122 36,522 39,922 43,022 46,422 49,622 53,023 416,780

9.3 Pro Forma Cash Flow Statement Year 1 (Month-by-month)

Chicharon Food Co. Month Month Month Month Month Month Month Month Month Month Month Month Year Cash Flow Statement 1 2 3 4 5 6 7 8 9 10 11 12 1

Opening cash balance 105,000 291,294 284,204 278,038 274,488 271,936 270,340 270,802 273,401 278,139 284,254 292,807 105,000

Cash flow from operating activities Net Income 83 500 1,743 3,880 4,757 5,754 7,891 10,029 12,166 13,464 16,023 18,581 94,870 Amortization 13,521 13,521 13,521 13,521 13,521 13,521 13,521 13,521 13,521 13,521 13,521 13,521 162,248

Changes in non-cash working capital Accounts Receivable -14,760 -810 -1,530 -450 -180 -270 -450 -450 -450 -270 -540 -540 -20,700 Accounts payable 8,200 450 850 250 100 150 250 250 250 150 300 300 11,500 Income taxes payable ------

Investment activities Owners' Investment 200,000 200,000 Loan repayments BDC -20,750 -20,750 -20,750 -20,750 -20,750 -20,750 -20,750 -20,750 -20,750 -20,750 -20,750 -20,750 -249,000 Fixed assets 0 -

Cash Flow 186,294 -7,090 -6,166 -3,549 -2,552 -1,596 462 2,599 4,737 6,115 8,553 11,112 303,918

Closing Cash Balance 291,294 284,204 278,038 274,488 271,936 270,340 270,802 273,401 278,139 284,254 292,807 303,918 303,918

Year 2 (Month-by-month)

Chicharon Food Co. Month Month Month Month Month Month Month Month Month Month Month Month Year Cash Flow Statement 1 2 3 4 5 6 7 8 9 10 11 12 2

Opening cash balance 303,918 311,227 321,715 335,401 352,486 372,971 396,855 424,138 454,822 488,605 525,788 566,172 303,918

Cash flow from operating activities Net Income 16,427 19,726 22,925 26,324 29,723 33,122 36,522 39,922 43,022 46,422 49,622 53,023 416,780 Amortization 11,832 11,832 11,832 11,832 11,832 11,832 11,832 11,832 11,832 11,832 11,832 11,832 141,978

Changes in non-cash working capital Accounts Receivable -450 -720 -720 -720 -720 -720 -720 -720 -720 -720 -720 -720 -8,370 Accounts payable 250 400 400 400 400 400 400 400 400 400 400 400 4,650 Income taxes payable ------

Investment activities Owners' Investment - - Loan repayments BDC -20,750 -20,750 -20,750 -20,750 -20,750 -20,750 -20,750 -20,750 -20,750 -20,750 -20,750 -20,750 -249,000 Fixed assets 0 -

Cash Flow 7,309 10,487 13,686 17,085 20,485 23,884 27,284 30,683 33,783 37,183 40,384 43,784 609,957

Closing Cash Balance 311,227 321,715 335,401 352,486 372,971 396,855 424,138 454,822 488,605 525,788 566,172 609,957 609,957

Year 3 (Month-by-month)

Chicharon Food Co. Month Month Month Month Month Month Month Month Month Month Month Month Year Cash Flow Statement 1 2 3 4 5 6 7 8 9 10 11 12 3

Opening cash balance 609,957 652,367 699,279 750,652 806,686 867,382 932,739 1,002,758 1,077,440 1,156,183 1,239,589 1,327,358 609,957

Cash flow from operating activities Net Income 52,999 57,660 62,121 66,783 71,444 76,106 80,768 85,430 89,492 94,154 98,517 103,180 938,654 Amortization 10,442 10,442 10,442 10,442 10,442 10,442 10,442 10,442 10,442 10,442 10,442 10,442 125,299

Changes in non-cash working capital Accounts Receivable -630 -990 -990 -990 -990 -990 -990 -990 -990 -990 -990 -990 -11,520 Accounts payable 350 550 550 550 550 550 550 550 550 550 550 550 6,400 Income taxes payable ------

Investment activities Owners' Investment - - Loan repayments BDC -20,750 -20,750 -20,750 -20,750 -20,750 -20,750 -20,750 -20,750 -20,750 -20,750 -20,750 -20,750 -249,000 Fixed assets 0 -

Cash Flow 42,411 46,912 51,373 56,034 60,696 65,357 70,019 74,681 78,744 83,406 87,769 92,432 1,419,790

Closing Cash Balance 652,367 699,279 750,652 806,686 867,382 932,739 1,002,758 1,077,440 1,156,183 1,239,589 1,327,358 1,419,790 1,419,790

9.4 Pro Forma Balance Sheet

Chicharon Food Co. Opening Year Year Year Pro-Forma Balance Sheet Bal Sheet 1 2 3

ASSETS Current Assets Cash 305,000 303,918 609,957 1,419,790 Inventory 20,000 20,000 20,000 20,000 Accounts receivable 10,000 30,700 39,070 50,590

Total Current Assets 335,000 354,618 669,027 1,490,380

Fixed Assets Property, Plant, Equipment 3,081,380 3,081,380 3,081,380 3,081,380 Less Amortization 430,615 592,863 734,841 860,141

Total Fixed Assets 2,650,765 2,488,517 2,346,539 2,221,239

Total Assets 2,985,765 2,843,135 3,015,565 3,711,619

LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts Payable 40,000 51,500 56,150 62,550 Income Taxes Payable 60,000 60,000 60,000 60,000 Cheques issued in excess of funds on deposit 30,165 30,165 30,165 30,165

Long-Term Liabilities Loan 2,220,600 1,971,600 1,722,600 1,473,600 Total Liabilities 2,350,765 2,113,265 1,868,915 1,626,315

Shareholders' Equity Invested Capital 200,000 200,000 200,000 200,000 Retained Earnings 435,000 529,870 946,650 1,885,304

Total Shareholders' Equity 635,000 729,870 1,146,650 2,085,304

Total Liabilities and Shareholders' Equity 2,985,765 2,843,135 3,015,565 3,711,619

9.5 Important Notes & Assumptions to Financials 1) Start Date - Month 1 of Year 1 of financial projections commences October 1, 2019, at the point of beginning full operations in the new facility. It is assumed that by this time the business has: completed all equipment installation and training, completed all construction/improvements, has sold the previous plant.

2) Revenue - Assumed the business will generate $2.4 million revenue in Year 1. Assumed the business will see 30% revenue growth over Years 1-2 and 50% revenue growth over Years 2-3.

• Year 1 projections are based on (a) current sales demand estimated to be $2.2 million and (b) that the business will conservatively be able to generate an additional $200,000 in the first year from customers from new production volume capacity. It’s estimated Chicharon will reach 48% of full production capacity over this period. • Management projects Year 2 and 3 growth based on (a) entering business with larger retailers (e.g. like Costco), and (b) entering new Asian markets in Southeast Asia. It is estimated management will reach 62% of full production capacity in Year 2 and 94% in Year 3.

3) Month-by-Monthly Sales Breakdown - Sales projected to be broken down per month as follows:

Monthly Sales Breakdown Year 1 Years 2-3 Month 1 6.0% 7.0% Month 2 7.0% 7.0% Month 3 8.0% 8.0% Month 4 8.0% 8.0% Month 5 8.0% 8.0% Month 6 9.0% 8.0% Month 7 9.0% 8.0% Month 8 9.0% 8.0% Month 9 9.0% 9.0% Month 10 9.0% 9.0% Month 11 9.0% 10.0% Month 12 9.0% 10.0% 100.0% 100.0%

4) COGS - Assumed the business will maintain 58% COGS over Years 1-3. This estimate is based on the projected cost savings due to advantages offered by new facility which will reduce COGS 10-15%. Projections assume a median 12% reduction from current COGS between this range.

5) Notes to Operating Expenses

• Repairs and maintenance projected to maintain an equipment cost – to maintenance expense ratio (5.7% over past 3 years, 2014-2017). • Occupancy costs expected to rise to 25,000 per year at new facility.

• Utilities not projected to see significant rise due to increased efficiencies seen with new manufacturing machinery. • Expenses assumed to follow a similar ratio in relation to revenue over Years 1-3.

6) Amortization - In financial statements Chicharon’s property and equipment are recorded at cost. Amortization is provided over the estimated useful lives of the assets using the declining balance method at the following rates:

• Building: 4% • Manufacturing equipment: 20% • Office equipment: 20% • Computer equipment: 30%

2017 Amortization vs. Projected 2018

2017 2018 Cost Accum. Amort. Cost Accum. Amort. Land 37,850 - 37,850 - Building 236,441 128,637 236,441 132,949 Manufacturing equipment 503,661 381,988 503,661 406,323 Office equipment 9,946 9,040 9,946 9,221 Computer equipment 18,173 13,742 18,173 15,071

TOTAL $806,071 $533,407 $806,071 $563,564

Net Value $272,664 $242,507

Projected Amortization over Years 1-3 (2019-2021)

Assumed that business has sold current facility and existing equipment continues amortization schedule.

Year 1 Year 2 Year 3 Cost Accum. Amort. Cost Accum. Amort. Cost Accum. Amort. Land 306,977 - 306,977 - 306,977 - Building 1,917,623 76,705 1,917,623 150,342 1,917,623 221,033 Manufacturing equipment 828,661 490,790 828,661 558,364 828,661 612,424 Office equipment 9,946 9,366 9,946 9,482 9,946 9,575 Computer equipment 18,173 16,002 18,173 16,653 18,173 17,109

TOTAL 3,081,380 592,863 3,081,380 734,841 3,081,380 860,141

Net Book Value 2,488,517 2,346,539 2,221,239