2016 Review

2016 ReviewPrepared for the Chronos Board of Directors

April 23, 2014

Agenda

• 2016 Summary

• Finance

• Marketing

• Operations

• 2017 Overview and Future Outlook

• Compensation Plan

• Game Wrap-Up

2016 Summary

Products

• Sprout: High End

• Evergreen: Low End

Business

• Sales: 1st in world 4, 2nd in all worlds

• Profits: 3rd in world 4, 4th in all worlds

Competition Landscape

• C3 & C5 specializing in P2

• C1 in the middle ground for P1 & P2

• C4 is closely positioned but inferior to Chronos

Items that require Board Approval

• Dividend policy: $3MM/quarter

• Debt policy: $1MM/quarter

Jason Chen

Finance

2016 Financial Performance2014 2015 2016

Annual Sales $161MM $178MM $200MM

Economic Profit $10MM $12.7MM $15.9MM

Ann. Net Income $9.8MM $15MM $17.7MM

Ann. Net Income % of Total Rev

6.1% 8.4% 8.9%

Ann. ROIC 30% 36% 44%

Avg Contr. Margin 29.87% 38% 42%

Annualized ROE 38% 60% 55%

Avg Market Share 20% 20% 21%

Balance Sheet

Income Statement

Cash Flow Statement

Value created

• 3 yr annuity of NI: $35.5MM

• 3 yr annuity of Econ Profit: $32.5MM

• 3 year annuity of NOPAT: $44MM

• Perpetuity of business: $147.5MM

• Perpetuity of net income: $4.3B

2017 Financial Goals

2014 2015 2016 2017 2018 2019

Annual Sales $161MM $178MM $200MM $236MM $244MM $253MM

Economic Profit $10MM $12.7MM $15.9MM $20MM $20.6MM $21.5MM

Ann. Net Income $9.8MM $15MM $17.7MM $20.5MM $21.5MM $22.5MM

Ann. Net Income % of Total Rev

6.1% 8.4% 8.9% 9% 9% 9%

Ann. ROIC 30% 36% 44% 51% 56% 62%

Annualized ROE 38% 60% 55% 62% 62% 63%

Madison Rabson & Eric Bae

Marketing

Goals for 2016

• Push Sprout as a winning product

• Increase marketing consulting by 15% by Q4

• Continue to occupy the lower quality market for product 2 with Evergreen

• Increase marketing expenses in Europe and the U.S. in order to increase market share

• Adjust marketing expenses every quarter so as to stay above 20% in Japan

• Focus on winning government contracts

Notable Achievements of 2016

• Won ¾ Government contracts for Sprout

• Evergreen green value 98.73%

• Highest quality for P1 across all companies

• Gained 26% of P1 market share in Japan

• 2nd highest overall total sales across all companies

Sprout Sales and Marketing

Japan Mexico China U.K. Germany U.S.

Sprout Sales

26% 14% 21% 18% 21% 19%

Contribution Margin

46% 29% 41% 35% 43% 27%

Marketing 22% 19% 20% 19% 19% 18%

Evergreen Sales and Marketing

Japan Mexico China U.K. Germany U.S.

Evergreen Sales

18% 14% 21% 17% 20% 19%

Contribution Margin

54% 44% 50% 43% 49% 49%

Marketing 16% 16% 22% 15% 16% 19%

Sprout Quality and Green v World Averages

Product Positioning for SproutHigh Quality

Low Quality

Least Green Most Green

S

S

S

S

2013201420152016

2016 Sprout is High-End Product

Evergreen Quality and Green v World Averages

Product Positioning for EvergreenHigh Quality

Low Quality

Most GreenLeast Green E

E

2013201420152016

E

E

2016 Evergreen is Low-End Product

Characteristics of Competition

• Company 3o Highest overall sales (Chronos #2)o Lowest prices in most countries for product 1 (C5)o Lowest quality in product 1 (76.7% below Chronos)o Highest prices in every country for product 2o Highest quality in product 2 (21.4% above Chronos)o Spending well over $6 million for quality of product 2o Have essentially abandoned quality of product 1o Green values are unknown

Characteristics of Competition

• Company 4o Unstable sales record, although currently in 3rd

placeo Highest quality of product 1 (0.4% above Chronos)o Prices very competitive with Chronos in P1o Low quality of product 1 (7.8% above Chronos)o Prices competitive with Chronos in P2o Never wins government contractso Green values are unknown

Chronos v. Competition

Long Term Plans for Future Management

• Build up Evergreen and develop the product through more R&D

• Maintain competitive advantage of Sprout through marketing and green

• Continue to invest in marketing consultants

• Promote Chronos as an environmentally friendly and green brand

Lisa Cherkassky & Sophy Chu

Operations

Goals for 2016

• Inventory control: 15% goal

• Production consulting: gradual increaseSprout: 80%

Evergreen: 20%

• Purchase more shipping containers to stay at 110% of sales

• Capacity utilization: 100% capacity goal

2016 Strategy Results

• Inventory control:o No stockouts o Sprout jumps at Q4

• Production consulting increased to 600,000:o Variable costs minimally affectedo For Sprout: variable cost correlated with Quality

• Shipping capacity with respect to demand:o No emergency purchases

• Capacity utilization: Closer to 100% utilization

2016 Inventory

Higher Quality Higher Variable Costs⇒

Higher Quality for Evergreen

Shipping Containers

Capacity Utilization Recap (2014-2016)

Sprout Evergreen

Production Budget Projections

Year Sprout Evergreen

2017 $18 $20.9

2018 $17 $20.5

2019 $16 $20.0

Variable Cost Assumptions:

(Holding fixed costs constant)

Total Production Costs: $266,523,000

Total Construction Costs: $2,812,385

Operations Recommendations

• Prevent Stockouts: Spend on production and construction costs to prevent stockouts

• Capacity Control: Do not decrease units of capacity unless capacity utilization is significantly low

• Shipping Containers: 110% of demand; prioritize shipping destinations based on higher opportunity

• Consultants: Countries with variable costs that depend on the quality have variable costs correlated positively with quality

Germany for Thought

Consider expanding Evergreen to Germany:

• R&D efficiency

• High quality

• Advantage in German and UK markets (no tariffs)

• Great profit margin

Jason Chen

Future Outlook

Defendable Position?

• Sprout has no competitors with a similar position

• Evergreen occupies a profitable market segment

Possible Merger

• Merge with Company 3o Company 3

Premium P2 product Possibly consider dropping economy P1 product

o Chronos: Premium P1 product

Items that require Board Approval

• Dividend policy: $3MM/quarter

• Debt policy: $1MM/quarter

Jason Chen

2016 Compensation

Salary Increase

Bonus

Modifications and Improvements

• Financial measures: LT vs. STo Fwd looking/predictive vs. backward looking

• Alternative strategyo Golden strategy: High quality/price/profit margin

premium product strategyo Strategically wage price war in economy market

• Trade payables: Operating Costs

• Super cheap P1: max profit in contracts

Modifications and Improvements

Appendices

3 year forward income statement

3 year forward balance sheet

3 year forward cash flow statement

Stock Price