v35 turbo trac marketing materials cim 2-2014
TRANSCRIPT
PREPARED FOR
ConfidentialInformation Memorandum
Winter 2014
2
DISCLAIMER
These materials were compiled on a confidential basis for use solely by client personnel and may not be used for any other purpose without the prior written approval of MHT MidSpan Securities. These materials were prepared from information supplied by the client and other sources without independent verification by MHT MidSpan Securities, and therefore neither MHT MidSpan Securities nor any of its partners, directors, officers, employees or affiliates warrants the accuracy or completeness of these materials, including without limitation the accuracy or achievability of any valuations, projections, estimates or assumptions, all of which are necessarily preliminary and subject to further analysis. Actual results may vary from such valuations, projections, estimates and assumptions, and such variations may be material.
For any further questions, please contact the MHT MidSpan team directly.
MHT MidSpan L.P.2000 McKinney Ave.
Suite 1200Dallas, TX 75201
Phone: (214) 661-1290Fax: (214) 954-9995
Taylor CurtisDirector
Phone: (214) [email protected]
Drew McWayAssociate
Phone: (214) [email protected]
Connor RyanAnalyst
Phone: (972) 630-6311 [email protected]
1. Executive Summary
2. Company Overview
3. Industry
4. Financial Review
Appendix: Leadership Team Biographical Information
3
TABLE OF CONTENTS
Section Contents
Executive Summary
5
INVESTMENT OVERVIEW
Turbo-Trac USA, Inc. (“Turbo Trac” or the “Company”) is a private Texas corporation that manufactures, distributes, installs and services an industrial product referred to as a mechanical variable speed drive (M-VSD).
While the M-VSD technology can be applied to diverse applications and industry verticals, the Company has first focused on oil and gas (“O&G”) pump jack applications
The Company’s proprietary and patented M-VSD technology maximizes production, reduces operating and maintenance costs, and minimizes capital expenditures
Turbo Trac’s M-VSD is the only pump jack speed control system that can be powered directly by an internal combustion engine
Initial customer / product pilots have been conducted with producers such as Cimarex, EPCo, Pioneer and Linn Energy
Turbo Trac Description
Investment Structure Turbo Trac is seeking to raise $3.0 million through a Series “B” preferred equity offering with a focus on
completing product commercialization and achieving an initial backlog of customer orders over a period of approximately12 months
Subsequent raises are expected to target an additional $5.0 million in growth capital to finance product, regional facilities and customer expansions
Technology The primary purpose of the Turbo Trac M-VSD is to optimize the performance of the overall system, from
the prime mover to the specific piece of industrial equipment that performs the actual work Performance is optimized by increasing equipment up-time/productivity while lowering
operations/maintenance costs and capital investments Turbo Trac has 2 issued patents that protect key intellectual property and plans to expand its IP portfolio
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$ in ThousandsProjected sources and uses of funds; actual breakdown may differ
Note:
SOURCES & USES
Management plans to raise a total of $8.0 million for a combination of sales, marketing, design, engineering and manufacturing uses and opportunities. The initial capital sought via the Series B offering is $3.0 million.
Sources
Series B Capital Raise $3,000 37.5%
Subsequent Capital Raise(s) 5,000 62.5%
Total Sources $8,000 100.0%
Uses
MK-10 Re-Design $375 4.7% Design changes to current model to reduce cost and improve performance
3,600 RPM Capability for Pumps 250 3.1% Develop 3,600 RPM capable unit for applications in O&G and other markets
MK-12 Development 425 5.3% Develop MK-12 unit for larger HP prime movers
Market Studies 300 3.8% Comprehensive market studies of new O&G applications / industry verticals
Additional Sales and Marketing 1,250 15.6% Additional sales and marketing spending beyond the market studies will include items such as advertising, travel, and incremental sales and marketing staff
New Space 400 2.5% The Company anticipates moving to a new facility starting in 2015
Test Equipment 450 5.6% Purchase sophisticated product testing equipment to allow in-house testing of the developed models
Transaction Expense 480 6.0% MHT MIdSpan Transaction Fees
Legal Fees and Other 100 1.3% Legal and Other Fees Associated with the Transaction
Cash to Support Operations 3,970 52.1% Cash used to expand in-house capabilities in engineering, operations, accounting and support. Also for working capital.
Total Uses $8,000 100.0%
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VALUE PROPOSITION
Turbo Trac presents a powerful value proposition for pump jack operators because M-VSDs maximize production, reduce operating and maintenance costs, and reduce capital expenditure.
Improved production. In order to optimize oil production, each well must operate at the highest possible pumping rate while avoiding a “pump-off” situation. To avoid these “pump-off” situations, most well operators run their pump jacks well below the optimal pumping rate as a safety factor, or they shut the wells down periodically in order to give the reservoir time to recharge. This leads to wells that are “under-produced”
The solution is Turbo Trac’s M-VSD in combination with a “rod pump controller” (RPC) Field tests have demonstrated production rate improvements between 10% to 30% The value to an operator with a well producing crude at an average rate of 15 barrels of oil per day
is estimated to be $54,750 - $164,250 annually (assuming crude price of $100 / barrel), which results in a payback period between 2 to 6 months on the investment in production optimization technology
Increase Revenue
Lower energy costs. Turbo Trac’s M-VSD allows the prime mover to be continuously run at its most efficient rate of operation
Lower maintenance costs. Constant stops / starts to avoid pump-off cause tremendous strain on the pumping system and lead to an increased failure rate in the pumping system and rod string. This leads to extended shutdown periods to repair the rod string, excess labor and material costs and lost production
Reduce Operating and Maintenance Costs
Reduced initial capex. Turbo Trac’s M-VSD can start pumping action from a “neutral” transmission position (i.e. zero rpm output speed) and very gradually increase the pumping rate enabling the selection of properly sized prime movers
– In contrast, the prime mover for wells that are constantly stopped / started must be sized for conditions of “peak load” which occurs during startup as the motor / engine must begin to lift 5,000 + feet of steel rods and a full sub-surface pump from a dead stop. This results in purchasing more expensive prime movers that are often sized 25% - 50% above the average loads faced, resulting in capital costs that are substantially higher than necessary
Reduced replacement capex. Eliminating stops / starts removes the strain on the rod string and pumping system and leads to fewer replacement system parts
Reduce Capital Expenditures
Production increase of 10%-30%
Cost reduction of 15% or more
Expenditure reduction of 15% or more
8
FINANCIAL SUMMARY
Management anticipates that Turbo Trac will become cash-flow positive shortly after Year 2 and expects meaningful cash flow thereafter.
Projected Financial Performance
$ in thousands TTM For the Twelve Month Periods Post-Funding12/31/2013 Year 1 Year 2 Year 3 Year 4 Year 5
1 2 3 4 5Revenue $183 $1,177 $6,501 $17,387 $37,969 $70,615
Growth 452.1% 167.5% 118.4% 86.0%
COGS 313 966 4,689 10,795 22,393 42,298Gross Profit ($130) $211 $1,812 $6,592 $15,576 $28,317
Gross Margin (71.0%) 18.0% 27.9% 37.9% 41.0% 40.1%
Operating Expenses $1,247 $1,584 $3,985 $6,127 $8,360 $10,658Development Expenses - 100 675 363 713 750
EBIT ($1,377) ($1,473) ($2,849) $102 $6,503 $16,909EBIT Margin NM (125.1%) (43.8%) 0.6% 17.1% 23.9%
Depreciation and Amortization $103 $60 $150 $186 $198 $222EBITDA ($1,274) ($1,413) ($2,699) $288 $6,701 $17,131
EBITDA Margin (696.9%) (120.0%) (41.5%) 1.7% 17.6% 24.3%
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LEADERSHIP TEAM
Turbo Trac has assembled a highly experienced leadership team.
Robert RoughCFO (fractional)
Managing Director of Pillar Capital More than twenty years of experience as an investor, senior executive, consultant and board member in technology,
service, manufacturing, distribution, and retail companies Prior Experience includes serving in management and consulting capacities for Deloitte and for portfolio companies of
Kleiner Perkins, Ballast Point Ventures and Thompson Investments Graduated from Dartmouth College and earned an MBA from the Harvard Business School
Blake SellersCOO
Responsible for the Turbo Trac’s supply chain operations and internal functions including financial reporting, HR and IT Prior experience includes co-founding and serving as the CEO of Avalion and achieving the level of Partner at Deloitte
Consulting MBA from the University of Texas at Austin, B.S. in Operations Research and Industrial Engineering from Cornell
University, and co-author of 3 software patents
David HoughtonVP Engineering/Production
Guided Turbo Trac’s product development from prototype assembly through first unit production and installation Prior experience includes twenty-four years of experience in various engineering and management roles in the paper
and steel industries, for example serving as Director of Engineering for 14 US Steel tubular facilities B.S. in Computer Engineering from Texas A&M University and documented patents for various functioning applications
Richard DarlowVP Business Development
Responsible for development and managing North American sales and service channels including lead generation and account management
Prior experience includes leading sales and marketing functions for early stage companies as well as divisions of global corporations for highly technical products, for example serving as President of a division of Nippon Sanso
Degree in Civil Engineering from the University of Florida and attendee of Stanford’s Executive Institute
Allen SwensonCEO
Joined Turbo Trac as CEO in 2006 raising substantial new capital from angels, the State of Texas and others Successfully transitioned the technology from concept through design and prototyping to a commercial product Prior Experience:
-Member of PAICE LLC management team and CEO of P2 HEV, an affiliate of PAICE LLC-Led US Sales and Marketing for Volvo’s marine / industrial engine group
BS in Engineering from the US Merchant Marine Academy
Company Overview
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COMPANY OVERVIEW
Turbo Trac has developed a unique infinitely variable transmission system that provides a full, mechanical variable speed drive (M-VSD) solution to pump jacks and other applications.
Technology Turbo Trac’s M-VSD uses a series of parallel cones and a disc to
allow infinitely variable speed The split power path differentiates the M-VSD from other
continuously variable traction devices and gives Turbo Trac a sustainable competitive advantage
The M-VSD is the best choice in areas where there is limited grid supply and dirty power because the unit is not concerned with the quality of the power supply
Turbo Trac is the only VSD solution for situations with an internal combustion engine as the prime mover
Advantages
Turbo Trac’s unique product allows the customer to realize higher revenue and lower costs-Revenue enhanced by pumping optimization-Cost savings from reduced energy costs-Cost savings from reduced maintenance costs-Reduced capital expenditures-Payback achieved in as little as 2 to less than 6 months
Reduces greenhouse gas emissions from internal combustion engines and electric motors More efficient across speed range than alternative solutions Rugged unit resistant to heat, cold, dust build-up and lightning Applicable to new and existing pump jack applications Technology broadly applicable to diverse applications and vertical markets The only pump jack speed control system in the market that can be powered directly by an internal
combustion engine
Turbo Trac manufactures the M-VSD which optimizes the performance of industrial and manufacturing systems
Envisioned in the late 1990s, the M-VSD has evolved from an idea into a highly efficient infinitely variable transmission device
The Company’s technology has garnered strong interest across the industry. Pilot / trial programs have been conducted with several customers demonstrating the products performance in the targeted application thus resulting in key gains in experience with both the technology and the application. Phase 2 customer trials are expected to be launched within 3+ months of the receipt of the Series B capital.
Currently, Turbo Trac operates out of a manufacturing facility in Frisco, TX, which was designed by the Texas Manufacturing Assistance Center (TMAC)
Overview
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COMPANY HISTORY
Turbo Trac’s proprietary technology has evolved from prototype to field-tested commercialized product and the Company is now poised for substantial growth.
Year Company Milestones
1999 Angel investors fund in-depth review by two independent professional engineering teams and file first patent application
2001 Turbo Trac is established
2003 After initial demonstration at a technical conference at University of California, Davis, the device is tested extensively at Southwest Research Institute with exceptionally good results
2003 Turbo Trac’s investor/manager, using the body of test results, focuses on licensing the technology to commercial transmission manufacturers
2005 After investing approximately $1.1 million and recognizing the significant investment of time and capital that would be required to convince established transmission manufacturers to reengineer their businesses, the company temporarily goes dormant
2006 Allen Swenson joins Turbo Trac Technology modified to develop a M-VSD that has broad applications to numerous industrial applications that use pumps,
compressors, fans and blowers, and initially focused on the O&G industry for pump jack applications In the two years following Mr. Swenson’s arrival, Turbo Trac executes a series of capital raises from Angel investors totaling $2.4
million
2008 Turbo Trac executes a series of successful capital raises including an investment of $2.0 million from the State of Texas Emerging Technology Fund (ETF)
Alpha prototype is designed and tested in both laboratory and field studies
2010 Alpha testing results in the reduction of 45% in parts count and first generation Beta prototype is created Testing of Beta prototype proves that the design is highly efficient across all output speeds Term sheet signed between Turbo Trac and Pillar Capital for a $2.5 million Series A capital raise
2011 Beta prototype begins field testing on both electric and internal combustion engine prime movers $0.5 million raised from Angel investors to bring total equity capitalization to $8.5 million
2012 Construction of manufacturing facility is completed and pilot production begins
2013 Company begins initial customer field trials and commercial operations Turbo Trac is awarded “Most Promising Company” at the 11th Annual Rice Alliance Venture Forum and receives the Energy & Clean
Technology Venture Award in recognition
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CULTURE OF INNOVATION AND EXECUTION EXCELLENCE
Turbo Trac has achieved significant success over the past five years and anticipates many lucrative developments within the next five years.
Strategic Innovation
Nimble Execution
Exceptional Management
1. Design evolution from prototype Alpha Beta commercial grade industrial product
2. Secured intellectual property
3. Gained significant field-based knowledge with a group of initial “lighthouse customers” (early adopters)
Last Five Years
1. Expand sales and distribution within the O&G vertical
2. Enhance R&D to optimize product costs and increase product capabilities and market coverage
3. Expand sales to new applications
4. Develop licensing agreement with a strategic distribution partner
Next Five Years
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VALUE PROPOSITION
Turbo Trac offers customers a compelling three-pronged value proposition
Increased Revenue Decreased Operating and Maintenance Expenses
Decreased Capital Expenditures
Eliminates under-production
Produce the maximum amount of liquids available
Provide the longest run time possible
Increase production by 10 - 30%
Avoid pump off situations by continuously running at optimal speeds
Reduce expenses associated with maintenance and repair
Reduce peak demand charges
Reduce operating and maintenance costs by 15% or more
Reduces prime mover horsepower requirement
Reduces rod stress Lengthens equipment life Reduced capital costs by
15% or more
Value Proposition
Payback in 2-6 months
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VALUE PROPOSITION – INCREASING REVENUE
In the preliminary pilot programs, Turbo Trac has generated production rate improvement of 10 – 30% in each of the installed pump jacks.
Given the current market price for crude oil as well as the costs associated with drilling, there is a growing demand to optimize production from each oil well
To achieve this, each well must operate at the highest possible pumping rate while avoiding a “pump-off” situation
“Pump-off” refers to a situation in which the well’s pumping rate (output) exceeds the well’s down-hole recharge rate (input). This is complicated by the fact that a well’s recharge rate is not constant, and in fact tends to slow down over time
To avoid these “pump-off” situations, most well operators run their pump jacks well below the optimal pumping rate as a safety factor, or they shut the wells down periodically in order to give the reservoir time to recharge
This leads to wells that are “under-produced” and / or experience frequent “stop / start” situations which contribute to higher costs than are necessary for operations and maintenance
Problem
The solution to this challenge is to implement a “rod pump controller” (RPC) in combination with a variable speed drive
An RPC collects key metrics of the well’s operation in order to monitor the balance between the pumping rates (output) with the recharge rates (input). In combination with Turbo Trac’s M-VSD, this data can be used to slow down or speed up the well’s operating rate in order to optimize the overall rate of production
Assuming production rate improvements of 10 - 30% as Management estimates, the value to an operator with a well producing crude at an average rate of 15 barrels of oil per day is estimated at $54,750 to $164,250 annually (assuming crude price of $100 / barrel)
This results in a payback period from between 2 to 6 months on the investment in production optimization technology
Solution
Production – Illustrative
3.0
0
5
10
15
20
15.0
1.5
Before Turbo Trac
15.0
ImprovesProduction10 – 30%
After Turbo Trac
Barrels/Day
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VALUE PROPOSITION – REDUCING OPERATING AND MAINTENANCE COSTS AND CAPITAL COSTS
Most wells are operated conservatively in order to avoid “pump-off” situations, which produces significant unintended financial costs. Oil producers that install a Turbo Trac M-VSD along with an RPC can eliminate or dramatically reduce these costs.
Reduced Operating and Maintenance Costs
Reduced Capital Costs Wells that are constantly stopped / started must have prime movers that are sized for
conditions of “peak load” which occur during startup when the motor / engine must begin to lift 5,000 + feet of steel rods and a full sub-surface pump from a dead stop
– This is in contrast to “average load” which occurs when the overall system is in motion– This results in prime movers that are often sized 25% - 50% above the average loads
they will face, resulting in capital costs that are substantially higher than necessary The ability of Turbo Trac’s M-VSD to start the pumping action from a “neutral” transmission
position (e.g. zero RPM output speed) and very gradually increase the pumping rate enables this value component
Reduced energy costs. Energy costs are reduced primarily because 1)Turbo Trac’s M-VSD allows the prime mover to be continuously run at its most efficient rate of operation and 2) the prime mover is favorably sized to be a smaller unit (e.g. 50 HP vs. 75 HP)
Reduced maintenance costs. Constant stops / starts to avoid pump-off situations cause tremendous strain on the rod strings and pumping system which result in an increased failure rate in the unit’s rod strings leading to excess labor and material costs
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CASE STUDY: THE PERMIAN BASIN, NEW MEXICO
In New Mexico’s Permian Basin, a deployed Turbo Trac M-VSD increased annualized revenue by $345,000, decreased annualized operating and maintenance costs by $13,900, and saved $27,000 in capital costs.
Pre - Installation Post - Installation
Financial Results of The Permian Basin Field Test
Annually Recurring ItemsRevenue Improvement $345,000Reduced Operating Costs
Power Factor Savings $2,000Peak Demand Savings 900Energy Savings 5,000Savings from Two Less Sheave Changes 6,000
Total Operating Cost Savings $13,900
One Time Capital Cost SavingsSavings Due to Decreased Motor Size $12,000Savings Due to Not Using 18 Pulse VFD Transformer 15,000
Total Capital Cost Savings $27,000
Assuming the M-VSD and installation cost ~$45K, the payback period was less than 2 months
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PRODUCT AND TECHNOLOGY OVERVIEW
Turbo Trac‘s technology consists of a patented, mechanical “traction” device that utilizes a parallel, split-power path configuration.
A central disc(s) is mounted on a central, outer, co-axial shaft. The inner co-axial shaft is the second power path
The disc(s) engages the outer central, splined shaft and is moved from one end of the shaft to the other by a single lever device. Use of multiple discs (the key claim in the Company’s second patent) further increases power density
Surrounding the disc(s) is an array of conical cylinders whose inner face is configured parallel to the central axis of the disc(s). The disc(s) contacts the inner-facing surface of the cones on its outer diameter via traction fluid which transmits power from the disc to the cones without the two surfaces actually touching each other
Continuous ratio variation is enabled as the diameter of the cones at the contact point changes continuously as the disc(s) moves along the surface of the cones
Output speed and torque are managed by adaptive control software
Product Description
Speed Changer
Planetary Gear
Output
Disc
Input
Cones
Turbo Trac M-VSD
The epicyclical gear set allows for continuous and infinite speed and torque variation
Unlike typical traction devices, the split power path allows exceptionally high power density
– This key IP claim from Turbo Trac’s first patent makes the product capable of handling high power and torque through-put that is scalable from 20 HP to 5000 HP
– This is the key differentiating factor between the Turbo Trac device and other continuously variable traction devices
Key Differentiators and Competitive Advantages Patents
Continuously Variable Transmission with Ratio Synchronizing System US Patent Number: 6,001,042 Description: The invention varies the speed ratio of an output shaft
relative to input shaftVariable Transmission US Patent Number: 7,856,902 B2 Description: Drive system for a variable transmission with a gear
system adapted for contact with a plurality of disks
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COMPETITIVE ANALYSIS
Turbo Trac’s M-VSD offers an unmatched combination of compatibility, ease of use and cost reduction that makes it the most attractive product in the pump jack speed control market.
Electric Prime Mover Compatible
Engine Prime Mover Compatible
Eliminates Harmonic Issues
Simple to Use
Gen Set / VFD
SPOC
LRP
Eliminates Dirty Grid Power Issues
Operating Costs Capital CostsApplicable to Retrofit Market
Low
Low
Low
Low
Medium
Medium
Medium
Medium
MediumHigh
High
High
Turbo Trac
VFD
Regen VFD
Turbo Trac
VFD
Regen VFD
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PRODUCT DEPLOYMENT
Prior/Current Deployment
Scheduled Installation
Field Tests
Occidental PetroleumLocation: Bakken FormationStatus: Phase 2 trial pending – W. TX
3 units
CimarexLocation: Permian BasinStatus: Initial trial complete
1 unit
EPCo Location: Haynesville ShaleStatus: Initial trial complete
1 unit
PioneerLocation: Eagle Ford ShaleStatus: Phase 2 trial pending
1 unit
Newfield EnergyLocation: Uinta BasinStatus: Phase 2 trial pending
1 unit
Linn EnergyLocation: Permian BasinStatus: Initial trial complete
1 unit
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COMPANY ORGANIZATION
Turbo Trac’s management team has extensive prior experience with both early stage and established manufacturing / technology organizations.
Turbo Trac is led by a talented, committed and seasoned senior management with impressive track records Each member of the management team has either spent time running their own companies or in senior leadership roles within large, successful businesses
– Allen Swenson: Former President of The Compliance Group and CEO of P2 HEV – Rick Darlow: Former President of a division of Nippon Sanso– Blake Sellers: Former co-founder and CEO of Avalion and Partner at Deloitte Consulting– David Houghton: Former Director of Engineering for 14 US Steel tubular facilities
Allen SwensonCEO
Rick DarlowVP Business Development
Sales & Marketing
Strategic Partnerships
Customer Relationship Management
Blake SellersCOO
David Houghton VPProduction - Engineering
Supply Chain
Finance and Accounting
HR & IT
Production
Engineering
Field Installations
Industry
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Management estimatesNote:
OIL AND GAS PUMP JACK MARKET SIZE
Management estimates the overall potential retrofit market of the O&G pump jack vertical alone to be approximately $11 billion.
30%
2013
1.0 MM
60%
10%
2013
400K
2013
$11 Billion
Total North American Pump Jacks
30% utilize internal combustion engines (ICE’s) as their prime mover, and the Turbo Trac M-VSD is the only product that enables production optimization in these situations
10% of pump jacks are in locations where local power conditions will not allow a variable frequency drive (VFD) to effectively utilize the grid due to issues around power conditioning (e.g. harmonics / dirty power)
Turbo Trac’s M-VSD units currently sell for ~$28,000, on average
AddressablePump Jacks Market Size
40%Addressable
ICE’sPoor Grid Quality
Non-Addressable
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Management estimatesNote:
OIL AND GAS PUMP JACK MARKET SIZE GROWTH
Management estimates another $840 million of additional market opportunity each year, which suggests annual market growth of approximately 7.5%.
50%
Addressable 50%
60K
30K $840MM
Annually InstalledNew N.A. Pump Jacks
An estimated 50% of these new wells are in locations that are strong candidates for Turbo Trac’s value proposition
Turbo Trac’s M-VSD units currently sell for ~$28,000, on average
New AddressablePump Jacks
Annual Market Size Growth
25
ADDITIONAL MARKET OPPORTUNITIES
The Turbo Trac technology is economically scalable from 20 HP to 5,000 HP, and adaptable to a wide variety of industrial applications.
Gas Compression
Steel ProductionWater / Wastewater
Industrial Chemicals/GasesMining
SaltwaterDisposalPulp / Paper
Fluid Transfer“Frack” and Mud Pumps
Additional Markets
The Company has established itself for the application to pump jack wells, Management will seek to expand the Company’s coverage into these added oil field applications
Industrial applications (green) that make significant use of pumps, compressors, fans or blowers are also candidates for Turbo Trac technology
While the production optimization opportunities will be different in new markets and applications, the value proposition related to cost reduction for capital equipment and for operations / maintenance is significant
Financial Review
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FINANCIAL REVIEW
Management anticipates that Turbo Trac will become cash-flow positive shortly after Year 2 and expects meaningful cash flow thereafter.
Projected Financial Performance
$ in thousands TTM For the Twelve Month Periods Post-Funding12/31/2013 Year 1 Year 2 Year 3 Year 4 Year 5
1 2 3 4 5Revenue $183 $1,177 $6,501 $17,387 $37,969 $70,615
Growth 452.1% 167.5% 118.4% 86.0%
COGS 313 966 4,689 10,795 22,393 42,298Gross Profit ($130) $211 $1,812 $6,592 $15,576 $28,317
Gross Margin (71.0%) 18.0% 27.9% 37.9% 41.0% 40.1%
Operating Expenses $1,247 $1,584 $3,985 $6,127 $8,360 $10,658Development Expenses - 100 675 363 713 750
EBIT ($1,377) ($1,473) ($2,849) $102 $6,503 $16,909EBIT Margin NM (125.1%) (43.8%) 0.6% 17.1% 23.9%
Depreciation and Amortization $103 $60 $150 $186 $198 $222EBITDA ($1,274) ($1,413) ($2,699) $288 $6,701 $17,131
EBITDA Margin (696.9%) (120.0%) (41.5%) 1.7% 17.6% 24.3%
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FINANCIAL REVIEW
Projected Financial Performance
$ in thousands As of the End of the Twelve Month Period Post-FundingYear 1 Year 2 Year 3 Year 4 Year 5
Assets 1 2 3 4 5Current Assets
Cash $189 $841 $502 $3,883 $16,530Accounts Receivable 667 1,309 2,807 5,983 10,304 Inventory 564 1,105 1,776 3,761 6,549 Prepaid Expenses 5 5 5 5 5
Total Current Assets $1,425 $3,260 $5,090 $13,632 $33,388
Fixed Assets 426 474 798 678 552 Other Assets
Amortizable Pre-Opening Expenses, Net 750 750 750 750 750 Total Other Assets 750 750 750 750 750
Total Assets $2,601 $4,484 $6,638 $15,060 $34,690
Liabilities and EquityLiabilities
Current LiabilitiesAccounts Payable 564 1,105 1,776 3,761 6,549 Current Portion of Bank Loan 450 900 1,400 1,400 1,400 Accrued Liabilities 15 34 50 67 85
Total Current Liabilities 1,030 2,039 3,226 5,228 8,033
Long-Term LiabilitiesBridge Loan - - - - -
Total Long-Term Liabilities - - - - - Total Liabilities $1,030 $2,039 $3,226 $5,228 $8,033
EquityCommon Stock 729 729 729 729 729 Pref Stock - Series A 2,375 2,375 2,375 2,375 2,375 Pref Stock - Series A (ETF) 2,000 2,000 2,000 2,000 2,000 Pref Stock - Series B 3,000 7,000 8,000 8,000 8,000 Bridge Loan Conversion 1,250 1,250 1,250 1,250 1,250 Preferred Stock Dividend Payable - Other 931 1,335 1,765 2,220 2,704 Preferred Stock Dividend Payable - Series B 185 576 1,105 1,666 2,263 Retained Earnings (8,898) (12,821) (13,811) (8,409) 7,335
Total Equity $1,572 $2,444 $3,412 $9,832 $26,656
Total Liabilities and Equity $2,601 $4,484 $6,638 $15,060 $34,690
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FINANCIAL MODEL ASSUMPTIONS – REVENUE
Unit volume is expected to ramp up steadily following the completion of the Series B funding as a result of additional marketing efforts, hiring of additional salespeople and success in procuring large, long-term blanket orders from a percentage of current customer trials.
Turbo Trac will establish its own field sales, service and installation facilities in five regions in North America. The first and second facilities will be established in West and South Texas during Year 1 and Year 2 after completion of the Series B financing. Others will be brought online as the market dictates. Revenue from new regional capabilities is estimated at $1.0 million in sales in Year 2. By Year 5, regional facility revenue is expected to approach $6.0 million.
Turbo Trac is expected to sell 36 units in Year 1, with production of the MK10 for the O&G vertical starting in Month 5 and ramping up to an annual rate of approximately 275 units (about 23 units / month) by Month 24.
In Year 2, total production of the MK10 for the O&G market is approximately 194 units, an increase of 493% over Year 1. Sales of the 3600 RPM product are conservatively projected to begin at the end of Year 2, with units sales ramping to 10 units per month by month 36.
Total unit volume in Year 3 is projected to be 528 units, a year-over-year increase of 170%, with the growth supported by unit sales of the MK-10 in a second industry vertical / application as well as continued growth of the 3600 RPM unit. In Year 4, Management anticipates selling 1,143 units, an increase of 117% over Year 3. Year 5 growth is estimated to be 84%, resulting in the sale of 2,103 units.
Revenue Assumptions
Projected Unit Production
For the Twelve Month Periods Post-FundingYear 1 Year 2 Year 3 Year 4 Year 5
1 2 3 4 5Projected Units 36 196 528 1,143 2,103
Growth - 443.1% 170.1% 116.5% 84.0%
30
FINANCIAL MODEL ASSUMPTIONS – EXPENSES
The Company expects to generate gross profit from sales of new units beginning in Month 11. Low gross margins during the initial months are the result of low volume and consumption of existing inventory.
For all products and applications, Management estimates gross margins improving from 15% to 35% over time due to design improvements and volume growth.
Based on the results of a third-party design for manufacturability (DFM) analysis, Management believes a trained operations technician can produce, assemble and test 15 units per month.
Cost of Goods Sold
As soon as the Series B investment is secured, Management intends to invest rapidly in additional sales capacity. In total, the 5 year plan includes the addition of 14 new sales associates.
Management plans to hire a Marketing Lead in Month 13. The Marketing Lead will have a marketing budget of $120,000 in Year 2. In order to support the Company’s continued expansion into additional applications and markets, the marketing budget will increase steadily each year reaching approximately $360,000 in Year 5.
Management has budgeted for additional Accounting (6 FTE) and Operations (5 FTE) personnel who will be added steadily as the Company’s growth targets are achieved
SG&A expenses capture the salaries and benefits associated with the necessary support, administrative and clerical staff.
Regional facilities are designed to enhance customer satisfaction and are financially supported by revenue generated by field service and installations. These facilities drive additional expenses for personnel, equipment, rent and materials related to warranty expense. In Year 1, operating expenses associated with one (1) regional facility will be approximately $222,000, and will increase to $2.5 million for five (5) regional facilities during Year 5.
SG&A Expenses
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FINANCIAL MODEL ASSUMPTIONS – EXPENSES (CONTINUED)
Turbo Trac has defined 3 key engineering projects to be executed during the first 3 years following the close of the Series B investment. Each of these projects is expected to make considerable use of the existing design and components of the current MK10 family of Mechanical – VSDs. Accordingly, none of these projects should be viewed as “ground up” or “clean sheet” new product development efforts.
Management believes it is important that it develops and enhances its in-house engineering expertise as a part of these projects. To that end, the majority of the budgeted hours for these projects will come from in-house engineering personnel, and these hours will be complemented by contracting engineering resources that possess certain specialized skills and expertise. Overall, the Engineering staff is expected to be increased by five (5) full time personnel.
MK10 Redesign. To compete most effectively in the market for both new and existing wells Management has determined that it must reduce current MK10 costs by approximately 50%. The cost reduction effort will be conducted in two key phases.
– Phase 1 - Reliability Improvements. Already underway, Phase 1 will focus primarily on addressing engineering changes identified during the evaluation of a trial unit that had achieved approximately 2,000 hours of continuous run-time. Key examples include changes to several of the unit’s bearings and improvements to the hydraulic system. Management expects to implement these changes in order to enable the launch of Phase 2 customer trials by Month 5 after the receipt of the Series B capital.
– Phase 2 Design Improvements. Phase 2 will focus primarily on design changes, including changes to component design and/or materials used, fabrication process improvements, and component elimination. Initial planning for this initiative is already underway. The project is expected to require 6 months to complete, and is budgeted to start during Month 13 after the receipt of the Series B investment.
3,600 RPM M-VSD. The 3,600 RPM family of M – VSDs are designed for those applications that most typically utilize a prime mover with optimized performance at 3,600 RPM (in contrast, the MK10 and MK12 Series are designed for prime movers ranging from 1,200 to 1,800 RPM). New pump applications will be the primary target for the higher RPM speed family of M-VSDs.
Market Studies – New Verticals / Applications. Turbo Trac’s M–VSD can provide a disruptive technology into the numerous vertical markets or applications that utilize equipment such as pumps, compressors, fans, etc. To effectively address and prioritize new market opportunities, Turbo Trac must gain a more comprehensive understanding of new industry verticals and applications. Management estimates that the analysis will require approximately six months each to complete in two phases, with the first phase completed during Year 2 and the second during Year 3. The results of these studies will be used to inform decisions related to both product R&D and the potential pursuit of new markets and/or applications.
Additional Testing Equipment. The Company has sufficient capital equipment to build the projected units and operate the business through the next two years. This includes work stations, material handling equipment, etc. Test equipment to support more extensive in-house testing and projected volume growth is budgeted at $150,000 per year during Years 1, 2 and 3 following the close of the Series B investment.
New Expanded Facilities. The current assembly space and equipment is sufficient to support the projected unit sales through Year 1. At that time, the current lease agreement with NTEC will be completed and the company expects to move to a new facility by the start of 2015. A total of $400,000 is budgeted for the build out of the new facility, additional equipment and the move, separated into 2 phases.
DevelopmentExpenses
Appendix: Leadership Team Biographical Information
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ALLEN SWENSON – CEO Mr. Swenson has over 35 years of varied leadership, engineering, marketing/sales and general management experience in both domestic
and international corporate and entrepreneurial roles.
After varied military career assignments, he joined a European manufacturer in a new North American division start-up selling marine and industrial engines. Promoted through several key engineering management positions, he managed its North American distributor network focusing it on industrial/commercial marine systems, moved to Sales Manager where he doubled direct key account sales and became Director of Sales. Recruited by another Swedish company to do a US start-up, Mr. Swenson, as head of business development, recruited trained and fielded a nationwide, 75 person sales and service staff, drove sales to near $20 million. Taking over as GM at the start of the 3rd year, he negotiated the sale of the company to a competitor, returning 4x the invested capital.
For the last 25 years, he leveraged these experiences to become a key management member of several start-up organizations. In his first, Mr. Swenson spent five years building a boutique consulting firm focused on sales/marketing strategy development and implementation in companies selling through dealer/distributor organizations. The client list included companies with annual revenues from $20 million to major names like the Coleman Company, Coachmen Industries, and Blue Bird Body Co. Selling to a co-founder, Mr. Swenson founded a new company focused on solving regulatory problems in the secondary automotive market. Building a product line around newly implemented automotive safety standards, Mr. Swenson’s implemented a high value-added strategy, using high quality components sourced world-wide that he combined with unique professional services. This drove the company to a 40% market share with pricing 25% above the competition. Reaching near $25 million in revenue, he sold the company to a Tier One Automotive Supplier for 25x invested capital and further doubled revenue.
Mr. Swenson subsequently joined an HEV technology company where he negotiated IP licenses with US and European auto manufacturers and subsequently became CEO of an affiliated company.
When IP litigation between the HEV company and a major Japanese auto manufacturer erupted in 2004 (successfully settled in 2012), Mr. Swenson leveraged his knowledge of power train design to identify the potential of a new transmission concept from a dormant Turbo Trac. Taking control in 2006, he recapitalized the company, migrated the technology to the industrial space and focused clean sheet design on the first vertical, Oil & Gas. Raising more than $4 million from angel investors, he went on to build a lean in-house and contract staff and complete product design. Mr. Swenson drove multi-iteration prototyping and early trials through acquisition of $2 million in funding from the State of Texas. And, to start the first steps of commercialization, he raised an additional $2.5 million through a Series A equity round which funded tooling and pilot manufacturing capability as well as establishing trial programs with well-known Oil & Gas producers.
Mr. Swenson graduated from the United States Merchant Marine Academy with a BS in Engineering and commissioned in the US Coast Guard reaching the rank of Lieutenant Commander. He specialized in maritime safety, ship construction and repair and hazardous cargo transportation. He is licensed as a Professional Engineer in the State of Missouri and a US Merchant Marine Officer.
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BLAKE SELLERS – COO Mr. Sellers currently holds the position of Senior VP / Chief Operating Officer for Turbo Trac. In this role, his primary operating
responsibility is for the company’s supply chain functions, including vendor management, material planning, purchasing, production and distribution. He is also responsible for Turbo Trac’s internal support functions including financial management, accounting, general administration, HR and IT. He also serves on the company’s Board of Directors as Secretary.
Prior to joining Turbo Trac, Mr. Sellers was a Principal in the Business Advisory Services (BAS) practice of Grant Thornton. He joined Grant Thornton as a result of their acquisition of Avalion Consulting (Avalion) for whom he was CEO / Chairman. During his tenure with Grant Thornton, Mr. Sellers served as the National Solution Lead for Merger Integration services, and as the Central Region Lead for Business Consulting.
Prior to its acquisition by Grant Thornton, Mr. Sellers was CEO and Chairman for Avalion Consulting. Avalion is a boutique software / consulting business, and the transaction with Grant Thornton resulted in ROE to Avalion shareholders in excess of 400% over a 5 year period. At Avalion, he held strategic responsibility for all aspects of the business including raising capital, sales / marketing, product innovation, operations, financial management and talent acquisition / development. Under his leadership, Avalion developed ComplianceSet®, a SaaS-based software solution enabling effective management of Sox compliance. Mr. Sellers was co-author on 3 US patents that were issued in relation to CompliaceSet®.
Before co-founding Avalion, Mr. Sellers was a consultant with Deloitte for 17 years, including 8 years as a partner. During this time period, he helped his clients in a variety of industries to implement sustainable business improvements through practical application of IT, business processes and organizational change management. His client-facing responsibilities included client relationship management, business development, project scoping and planning, project execution, quality assurance, pricing and profitability, and overall accountability for expected results. During his time as a Deloitte Partner, he gained substantial supply chain experience serving as Advanced Planning & Scheduling Solution Lead and international experience while based in Milan, Italy for two years.
Mr. Sellers began his career as Manufacturing Engineer and Production Supervisor with Texas Instruments – Equipment Group. In his role as a Production Supervisor, he was responsible for all 2nd and 3rd shift operations for a defense program, including PCB insertion, wave soldering, encapsulation, repairs, QA and test. In his role as a Manufacturing Engineer, he was responsible for bill of materials management, procurement, production scheduling, shipping/billing, and contract management.
Mr. Sellers earned his MBA at the University of Texas at Austin, McCombs School of Business with concentrations in finance and operations. He currently serves McCombs as Chairman for the Giving Committee on the Dean’s MBA Advisory Board. He earned his Bachelor of Science in Operations Research and Industrial Engineering from Cornell University. Mr. Sellers has achieved the follow professional certifications: Certified Management Accountant (CMA); Certified Management Consultant (CMC); Certified in Production and Inventory Management (CPIM).
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RICHARD DARLOW – VP BUSINESS DEVELOPMENT Mr. Darlow serves as VP Business development for Turbo Trac. He is responsible for setting up and managing the U.S. and Canadian
sales and service channels plus lead generation, account management and customer service. Mr. Darlow has over 25 years of executive management experience focused on top line growth as well as operational excellence, serving as vice president sales & marketing, COO, division president and CEO. Mr. Darlow has led sales and marketing functions for both early stage companies as well as divisions of global corporations for highly technical products requiring consultative sales.
As VP Sales & Marketing for venture backed Asyst Technologies, Mr. Darlow led the early stage efforts to penetrate firms such as IBM and Taiwan Semiconductor, with system level contract values in excess of $12 million. This resulted in a paradigm shift in the automation of the semiconductor industry and led to Asyst being ranked as the 5th fastest growing hi-tech company in the U.S. by Business Week, and later to an IPO.
Recruited as VP Sales & Marketing (and later President) to merge the business development efforts of the newly acquired Semi-Gas Systems with Nippon Sanso’s Matheson subsidiary, Mr. Darlow refocused the firm into new markets driving sales from $40 million to $135 million in three years. As President he achieved a 435% increase in operating income.
Besides early stage growth company experience Mr. Darlow has also led two business units for Fortune 500 companies, L-3 Communications and Pacific Scientific. At L-3’s Infrared Division he redefined the mission from a me-too OEM supplier to a viable player in cutting edge technology, bringing the division to first time profitability. As Group President at Pacific Scientific he led the instruments group of companies, consolidating three companies into one, doubling shareholder value through acquisition.
Most recently Mr. Darlow was affiliated with Efficiency Energy providing business development for this firm offering energy efficient upgrade services. In 2011 he was appointed CEO by the board to help guide the young founders to a business model leading to a doubling of revenue and first time profitability in 2012. Mr. Darlow remains an active member of the board.
Mr. Darlow holds a Bachelor of Science Degree in Civil Engineering from the University of Florida and attended Stanford University’s Executive Institute For Management of High-Tech Companies. Mr. Darlow has held Professional Engineering Licenses in Florida and Colorado and also is a certified Lean 6-Sigma Green Belt.
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DAVID HOUGHTON – VP ENGINEERING/ PRODUCTION Mr. Houghton has an extensive and varied background in manufacturing systems design, operation, and engineering in
markets related to Turbo Trac’s product line.
Mr. Houghton joined Turbo Trac at the start of the company’s transition from design to commercialization, managing the assembly and testing of the iterative prototype process. Mr. Houghton brought a unique combination of skills for this transition stage. With a background in micro-processor controls for industrial systems, strong industrial systems engineering experience and manufacturing processes management, he effectively led the product engineering and commercialization process from design into production.
Prior to joining Turbo Trac, Mr. Houghton held several engineering management positions with the nation’ largest tubular steel products producer for 14 years. Starting as an electrical engineer in project engineering, he quickly advanced through the ranks to become Superintendent of Plant Engineering. His knowledge and engineering skills led him to become Manager of Operations Engineering and then Director of Engineering for 14 plants.
Prior to his entry into the steel industry, Mr. Houghton spent five years in the paper industry, during which time he held positions in operations supervision, plant maintenance management and power plant management.
Throughout his career, he has developed an in-depth knowledge of manufacturing systems, processes and their components. This critical product knowledge has been supplemented by management skills in the engineering landscape making him a valuable Turbo Trac executive.
Mr. Houghton received his B.S in Computer Engineering from Texas A & M University. After graduation he was commissioned in the US Navy, serving both afloat and ashore, and attained the rank of Lieutenant Commander.
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ROBERT ROUGH – CFO (FRACTIONAL) Mr. Rough has been an investor, senior executive, consultant and board member in technology, service, manufacturing, distribution, and
retail companies for more than thirty years. In addition to founding and managing a $100 million private equity fund, Mr. Rough has been involved with the formation and development of several start-up and early stage companies. The majority of Mr. Rough’s consulting and management experience has been with portfolio companies of venture capital and private equity funds. These companies cover industries as diverse as retail grocery, international manufacturing, for profit education and healthcare technology.
In 2009, Mr. Rough was a founding partner in Pillar Capital Management, LLC. Pillar Capital is a sponsor of venture capital investments allowing smaller, individual accredited investors access to deeply researched, well-structured venture investments combined with active post investment management, similar to what large institutional investors have access to through large venture capital funds. Mr. Rough also was a founding partner in Pillar Solutions Group, LLC. Pillar Solutions is a consulting firm providing financial and systems expertise to companies ranging from pre-revenue up to $1 billion public companies.
Prior to founding the two Pillar entities, Mr. Rough held the position of Chief Financial Officer and Chief Operating Officer for GHN-Online, Inc. a small software company in the healthcare space. At GHN, Mr. Rough restructured the customer service area, leading to a significant increase in the number of client calls handled within service level objectives. While Chief Information Officer, Mr. Rough oversaw the completion and implementation of GHN’s second generation software product, developing the processes and procedures for conversion of 1,800 clients to the new web-based product. As Chief Financial Officer, Mr. Rough developed a new financial reporting structure to better support the company’s growth, led two convertible debt offerings and obtained the company’s first revolving bank credit facility. GHN-Online was a portfolio company of Ballast Point Ventures, the venture capital affiliate of Raymond James Financial.
Prior to joining GHN, Mr. Rough was President and COO of Chippenhook Corporation, a manufacturing company with Asian operations. The company was experiencing losses and declining sales when Mr. Rough joined. Mr. Rough restructured all the operations of the company, implemented a new enterprise resource planning (ERP) computer system to support the new structure and enable growth, recruited key management, and reduced expenses. In three years the company’s revenues almost doubled and it became both profitable and cash flow positive.
Earlier in his career, Mr. Rough was Chief Financial Officer of an Internet retailer, Wine.com. Mr. Rough joined the company at the time of a merger with a similar entity, being hired by Kleiner Perkins Caufield and Byers and T.H. Lee/Putnam Internet Partners, the two major investors. Previously Mr. Rough was Chief Financial Officer of a for- profit education company and a grocery wholesaler and retailer in addition to operations and financial consulting with Deloitte Consulting. Mr. Rough started his career as a commercial lending officer with the Shawmut Bank of Boston, now part of Bank of America. Mr. Rough has consummated more than twenty corporate transactions and raised equity and debt of almost every type. While most of his experience has been with successful, high growth enterprises, Mr. Rough has also been responsible for turnarounds and has worked with companies in bankruptcy.
Mr. Rough graduated from Dartmouth College in Hanover, NH and earned his MBA from the Harvard Business School in Boston, MA.