Financial Planning Case Study Metastasis Magnetics Corp.

BUS 170Financial PlanningCase StudyMetastasisMagnetics Corp.Three co-founders formed Metastasis Magnetics Corp. (“MMC”) acompany that has created a cancer detection device that uses magnetics to pullcancerous cells from the blood stream. Thiswill revolutionize the ability to early detect a wide range of cancers muchsooner than current methods. To make theirbusiness a reality they need to raise enough capital through debt and equity tosupport the company from inception until cash break-even. As a part of the process of raising thecapital, they originally hired a temp CFO to help them to create a financialplan to include in their fund-raising pitch deck and to help them work out apro forma capitalization table to assess any potential inbound investor termsheet. But that temp CFO having beeninspired by the Alex Honnold movie, “Free Solo” has run off to San Francisco tofree solo the Salesforce building and left behind a financial plan that wasincomplete. The founders, being Spartanalums, 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 salariesSundry costs per headcount are $200/month (food, coffee,office supplies, travel etc.)Recruiting cost will be a flat $15,000 for each new hire.RevenuesThe company anticipates building two products, a hospitalversion (H1) that will sell for $250,000 and a smaller doctor office unit (D1) for$50,000. The ratio of H1 to D1 unit saleswill be 1 to 10. When they areavailable, the initial number of H1 units sold will be two for the first monthand then the company will increase the number of units per month by one unitper month thereafter (e.g. month 2 will be 3, month 3 will be 4).Cost of GoodsThe company will use a contract manufacturer for both the H1and D1 products. Gross margins will be65% and 55% for H1 and D1 respectively.Sales and MarketingEach salesperson will be able to sell $9 million worth ofproduct each year. A salesperson needsto be on staff three months before they start selling for trainingpurposes. Base salary is $100,000 peryear with an 8% commission. Commissionsare earned and paid in the same month.Marketing program expense will run $200,000 per month for 3months prior to initial sales, then will drop to $40,000 per month thereafter.
Research andDevelopmentMMC has determined that they will ultimately need an R&Dteam of 10 scientists and engineers who will collectively need 70 person monthsof work before producing a commercially viable product. Given the constraints of a very tight jobmarket, MMC expects that they cannot hire more than 2 new R&D staff membersper month. Once they reach 10 staff, theywill stop hiring. The average cost ofthese 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 toother employees.In R&D they also estimate spending $20,000 per month innoncapitalizable prototypes.General andAdministrationRent for manufacturing space will be $3.50 per square footper month. Businesses of similar typerequire need 250 sq. ft. per headcount. Dueto the rental market for this type of space, they need to rent the maximumspace up front. Additionally, thelandlord 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 beginto sell product. Then the add-on ofproduct liability insurance with triple the monthly cost.Legal costs are in two parts, $1,000 per month in generalcorporate legal matters (IP, contacts, board assistance etc.) and issuancecosts. Counsel estimates issuance coststo be $80,000 for the Series A round and will be an offset against the proceedsin the equity section of the balance sheet.From inception, the company will need to hire a half-timeoffice manager/bookkeeper for $90,000 per year annualized (or $3,750/month). The office manager/bookkeeper is a friend ofone of the founders so there is no recruiting cost.Videoconferencing for the three founders and eachsalesperson is estimated to be $1,000 each per month.There will a once per year cost of $5,000 by the outsideCPAs to produce the company’s tax return due and payable in April.The cofounders each will take a $200,000 per yearsalary. They will have titles of CEO,CTO and CFO respectively.Taxes will be at 21% of net incomeNo interest will be earned on excess cashBalance SheetAccounts Receivable:will average 30 days.Inventory: The company will need to have 2 months ofinventory on hand and its contract manufacturer does not need any advancenotice for ordersFixed Assets: Eachnew headcount will require $5,000 in additional capitalizable furniture andcomputing equipment. Assume depreciationis straight-line over 3 years with no salvage value.Accounts Payablewill be equal to the total monthly operating expenses exclusive of salaries andbenefits plus the current month of cost of goods.Equity and Debt: The company will be founded on 1/1/xx at the sametime of its closing a Series A round.Simultaneously with the Series A, a venture debt round is placed for 1/3of 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 havean annual interest rate of 7.25% with interest only for 6 months, thenamortized over 30 months. There will beno 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 millionSeries A investment at a pre-money valuation of $5 million provided thefounders set aside 15% of the company’s ownership as an option pool for currentand future employees.
1) Using the template left behind by the temp CFO, finishthe 12-month plan (10 pts).2) Also, pro forma the post money capital schedule based onthe Series A terms offered (2 pts).
Q1) In rounded millions, how much combined debt and equityneeds to be raised to reach cash break-even sometime in the first year? (2 pts)Q2) What is post money combined ownership percentage ofthe three founders at the time of the Series A? (2 pts)
Q3) If there no other changes in the capital structure andthe Series A investors have a required return of 50% in 5 years, what will thevalue of the company need to be in year 5? (2 pts)Q4) Using sensitivity analysis, which of the followingvariables will have the greatest impact on cash? Show proof of your position (2pts)a.Price per unit of H1/D1b.DSOc.Engineering salariesd.Debt/equity ratio
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