BUS 170 Financial Planning Case Study Metastasis Magnetics Corp. Three co-founde

BUS 170
Financial Planning
Case Study
Metastasis
Magnetics Corp.
Three co-founders formed Metastasis Magnetics Corp. (“MMC”) a
company that has created a cancer detection device that uses magnetics to pull
cancerous cells from the blood stream. This
will revolutionize the ability to early detect a wide range of cancers much
sooner than current methods. To make their
business a reality they need to raise enough capital through debt and equity to
support the company from inception until cash break-even. As a part of the process of raising the
capital, they originally hired a temp CFO to help them to create a financial
plan to include in their fund-raising pitch deck and to help them work out a
pro forma capitalization table to assess any potential inbound investor term
sheet. But that temp CFO having been
inspired by the Alex Honnold movie, “Free Solo” has run off to San Francisco to
free solo the Salesforce building and left behind a financial plan that was
incomplete. The founders, being Spartan
alums, decided to hire BUS 170 students to finish the work. They have provided following information:
Income Statement:
General Assumptions:
Employee benefits and taxes are 25% of salaries
Sundry costs per headcount are $200/month (food, coffee,
office supplies, travel etc.)
Recruiting cost will be a flat $15,000 for each new hire.
Revenues
The company anticipates building two products, a hospital
version (H1) that will sell for $250,000 and a smaller doctor office unit (D1) for
$50,000. The ratio of H1 to D1 unit sales
will be 1 to 10. When they are
available, the initial number of H1 units sold will be two for the first month
and then the company will increase the number of units per month by one unit
per month thereafter (e.g. month 2 will be 3, month 3 will be 4).
Cost of Goods
The company will use a contract manufacturer for both the H1
and D1 products. Gross margins will be
65% and 55% for H1 and D1 respectively.
Sales and Marketing
Each salesperson will be able to sell $9 million worth of
product each year. A salesperson needs
to be on staff three months before they start selling for training
purposes. Base salary is $100,000 per
year with an 8% commission. Commissions
are earned and paid in the same month.
Marketing program expense will run $200,000 per month for 3
months prior to initial sales, then will drop to $40,000 per month thereafter.
Research and
Development
MMC has determined that they will ultimately need an R&D
team of 10 scientists and engineers who will collectively need 70 person months
of work before producing a commercially viable product. Given the constraints of a very tight job
market, MMC expects that they cannot hire more than 2 new R&D staff members
per month. Once they reach 10 staff, they
will stop hiring. The average cost of
these highly skilled individuals is $150,000 per year for salary plus a 0.25%
(.0025) share of post money share of ownership in the form of stock options. At this time no other options are granted to
other employees.
In R&D they also estimate spending $20,000 per month in
noncapitalizable prototypes.
General and
Administration
Rent for manufacturing space will be $3.50 per square foot
per month. Businesses of similar type
require need 250 sq. ft. per headcount. Due
to the rental market for this type of space, they need to rent the maximum
space up front. Additionally, the
landlord will require a large deposit of three month’s rent. Utilities are built into the rent.
Basic business insurance is $500 per month until they begin
to sell product. Then the add-on of
product liability insurance with triple the monthly cost.
Legal costs are in two parts, $1,000 per month in general
corporate legal matters (IP, contacts, board assistance etc.) and issuance
costs. Counsel estimates issuance costs
to be $80,000 for the Series A round and will be an offset against the proceeds
in the equity section of the balance sheet.
From inception, the company will need to hire a half-time
office manager/bookkeeper for $90,000 per year annualized (or $3,750/month). The office manager/bookkeeper is a friend of
one of the founders so there is no recruiting cost.
Videoconferencing for the three founders and each
salesperson is estimated to be $1,000 each per month.
There will a once per year cost of $5,000 by the outside
CPAs to produce the company’s tax return due and payable in April.
The cofounders each will take a $200,000 per year
salary. They will have titles of CEO,
CTO and CFO respectively.
Taxes will be at 21% of net income
No interest will be earned on excess cash
Balance Sheet
Accounts Receivable:
will average 30 days.
Inventory: The company will need to have 2 months of
inventory on hand and its contract manufacturer does not need any advance
notice for orders
Fixed Assets: Each
new headcount will require $5,000 in additional capitalizable furniture and
computing equipment. Assume depreciation
is straight-line over 3 years with no salvage value.
Accounts Payable
will be equal to the total monthly operating expenses exclusive of salaries and
benefits plus the current month of cost of goods.
Equity and Debt: The company will be founded on 1/1/xx at the same
time of its closing a Series A round.
Simultaneously with the Series A, a venture debt round is placed for 1/3
of the total capital (As an example if the company needed $6m in total capital,
the financial mix woulbe $2m in debt with $4m in equity). Venture debt will have
an annual interest rate of 7.25% with interest only for 6 months, then
amortized over 30 months. There will be
no issuance cost for the debt.
At the time of inception, each founder will contribute
$1,000 for 1,000,000 shares of no-par common stock.
The founders have received a term sheet for a $10 million
Series A investment at a pre-money valuation of $5 million provided the
founders set aside 15% of the company’s ownership as an option pool for current
and future employees.
1) Using the template left behind by the temp CFO, finish
the 12-month plan (10 pts).
2) Also, pro forma the post money capital schedule based on
the Series A terms offered (2 pts).
Q1) In rounded millions, how much combined debt and equity
needs to be raised to reach cash break-even sometime in the first year? (2 pts)
Q2) What is post money combined ownership percentage of
the three founders at the time of the Series A? (2 pts)
Q3) If there no other changes in the capital structure and
the Series A investors have a required return of 50% in 5 years, what will the
value of the company need to be in year 5? (2 pts)
Q4) Using sensitivity analysis, which of the following
variables will have the greatest impact on cash? Show proof of your position (2
pts)
a.
Price per unit of H1/D1
b.
DSO
c.
Engineering salaries
d.
Debt/equity ratio
Show it on the Excel