ENTR 4005 Spring Semester 2023

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ENTR 4005 Spring Semester 2023

Pro Forma Project

Bearcat Autonomous Machines, Inc.

A.   You have extensive experience in electrical engineering, and have assembled a team with

expertise in electronic, manufacturing, finance, sales and marketing. You form Bearcat

Autonomous Machines, Inc. to manufacture and distribute innovative new autonomous lawn mowers called the Bearcat 315 X, the Bearcat 435 AWD, and the Bearcat 450 RPOS in the

United States beginning in 2025.

B.   This product was engineered, patented and will be manufactured by your company.

C.   You patent the designs and underlying technology at a cost to you of $85,000. Your patent will be booked as an intangible asset at cost, which can be amortized over a 15 year period.

D.   You form the Bearcat Autonomous Machines, Inc. in Cincinnati, along with three other co- founders.

a.    Each co-founder has a specific area of expertise and will eventually work in or consult to the company as executives/managers at market rates.

b.    Each of the four founders make equity contributions in the amount of $250,000

c.    You issue 1,000,000 shares of common stock at $1.00 par value which is distributed among the founders.

E.    Bearcat Autonomous Lawn Mowers will be producing three variants as follows:

a.    75% of your sales will come from WHOLESALE sales of the Bearcat 415X units

b.    15% of your sales will come from WHOLESALE sales the Bearcat 435 AWD units

c.    10% of your sales will come from WHOLESALE sales the Bearcat 450 EPOS units

F.    You will sell the Bearcat Autonomous Lawn Mowers to existing retailers at a lower WHOLESALE price that allows them to add a 50% mark-up.

a.    You will sell the Bearcat 415X units at a WHOLESALE selling price of $975.00/each in 2025.

b.   You will sell the Bearcat 435 AWD units at a WHOLESALE selling price of $1,625.00/each in 2025.

c.    You will sell the Bearcat 450 EPOS units at a WHOLESALE selling price of $3,250.00/each in 2025.

G.   Bearcat Autonomous Machines applied for and was awarded a two grants from the state of Ohio as follows:.

a.    The Third Frontier MFG grant will award $300,000 in 2025

b.   The Ohio JOBS grant will award $120,000 in 2026

c.    Grant monies are considered taxable income

H.   You have received a commitment of investment from an Angel Investor cover operating expenses for the first few years.

a.    The Angel Investor will issue a convertible note in the amount of $500,000 that can

convert into equity in the next liquidity event that will grant them a 20% discount to the pre-money valuation of the priced round. This will not be calculated until there is a liquidity event.

b.   The convertible note will tranche $250,000 in 2025 and $250,000 in 2026

c.    The convertible note will accrue interest, but not require payment during the first 5 years

d.    Interest will accrue as 8% simple interest on the outstanding balance of the convertible note, and book it as a note payable on your Balance Sheet.

e.    The long term liability of the convertible note will increase by the amount of the accrued interest each year, on the first day of the following year.

f.    The convertible note should be calculated as part of the pre-money valuation.

I.     You are negotiating for an investment from a Venture Capital firm to add additional runway to your operating expenses and to explore line extensions for production in your manufacturing facility.

a.    The Venture Capital firm is considering making an equity investment of $1,000,000 and your pro forma financial statements will determine the necessity of this.

b.   The Investors have declared that their expected rate of return is 30%, they expect a 6% rate of return in the terminal period, and a 2% terminal period growth rate.

c.    You have projected your terminal period cash flows to be $600,000 in the terminal period.

d.   This equity investment should not be calculated as part of the pre-money valuation, and should only be considered in post-money valuation.

e.    It is critical that your projections to the Venture Capital firm be as realistic as possible.

They will be suspicious of “blue sky” projections, and may not make the investment.

J.     In 2025, your firm will purchase new manufacturing machinery at a cost of $2,000,000.

a.    Depreciate this equipment using straight line depreciation (10 year life, $10,000 salvage value)

K.   The manufacturer of the equipment that you are buying has agreed to finance $1,500,000 of the cost of the equipment.

a.    The manufacturer will charge 7% simple interest on the outstanding principle amount.

b.   This equipment loan requires that you make annual principal payments of $150,000 on the loan beginning in 2025.

L.    You and your ownership team have personally guaranteed a bank revolving line of credit with a limit of $500,000. You may use this RLOC as needed, and will only book a liability when you use it.

a.    You will pay 7.5% simple interest on the outstanding loan balance, and book it as a short term liability on your Balance Sheet.

M.  The sales at start-up firms usually begin slowly in the launch stage, climb rapidly in the rapid growth stage, and level out as sales approach production capacity.

a.    Barring further investment, you believe that Bearcat Autonomous Machines will reach a production capacity plateau by year five.

b.   You calculate that your sales volumes will follow a sigmoid curve, using a projected full production capacity of 5,600 total Bearcat Autonomous Lawn Mowers per year which you project to reach by year 5.

c.    Because you have no pre-sales, you should set the starting point on your sigmoid sales curve at 0%

d.    Use the inputs to create a sales curve that you feel will reflect the uptake of your product in the market, but also one can you defend as reasonable to the VC’s.

N.   You have calculated that the cost of plastic component materials will be 9.74% of revenue, the cost of metal components will be 11.58% of revenues, the cost of electronic components will be 9.95% of revenue, the cost of sensor components will be 11.86% of revenue, the cost of battery components will be 12.68% of revenue and direct labor will be 8.73% of revenue in 2025.

a.    Keep in mind that direct labor is subject to the same rate of payroll taxes as described below.

O.   You wish to peg certain expenses like Salaries & Wages (Schedule 4 in the ProForma) to the

average in the industry as reported in the BizMiner report. Attempt to replicate your Salaries & Wages in the same proportion given in the BizMiner using Officers Compensation, Salary-Wages, and Benefits-Pension.

P.   You need to properly budget for the result of payroll taxes. These are the taxes that are paid by the employer for the benefit of the employee, and do not include federal, state or local income  tax, which is paid by the employee.  Include in your budget: 6.2% for Social Security, 1.45% for Medicare, 0.60% for Federal unemployment, 3.0% for Ohio unemployment, and 2.7% for Ohio Workers Compensation. All of these are paid as a percentage of earnings or wages.

Q.   You will set aside 3.73% of all wages (including direct labor) to accommodate the cost of pensions and benefits to employees

R.    Because fixed and non-operating costs tend not to stay fixed in the rapid growth stage of start-up companies, and tend to increase in a “stair-step” fashion, you decide to increase certain costs using “multipliers” that will multiply fixed costs times some “stair-step” multiplier.

a.    Increase salary expenses by using 1x, 1.5x, 2x, 2.5x, and 2.75x multipliers. (Year 1 thru 5 respectively, multiplying against the Year 1 costs)

b.    Increase certain operating fixed costs (any listed as a cost per month (not rent or costs stated as a percentage of some other measure)) by using 1x, 1.5x, 2x, 2.5x, and 2.75x multipliers. (Year 1 thru 5 respectively, multiplying the Year 1 costs)

S.    Increase certain non-operating expenses by using 1x, 1.5x, 2x, 2.5x, and 2.75x multipliers. (Year

1 thru 5 respectively, multiplying the Year 1 costs)

T.    In order to raise awareness of your product, you will budget 3% of revenues to pay for marketing expenditures.

U.   The company will rent a 9,000 square foot office/production facility for $14.00 per square foot.

V.    Manufacturers of a hard goods usually encounter inflationary pressures on Cost of Goods, and  Direct Labor, and would reflect these by raising the wholesale and retail price of your product.

a.    You elect to recognize a 4.0% inflation rate on your wholesale and retail prices during the forecast period.

b.    Because of the proportional relationship between COGS and revenue, increasing your prices for inflation will have a same effect on COGS.

W.  You have determined that for your balance sheet projections you need to carry the following amounts in your asset accounts;

a.    Accounts Receivable – 1.5 month of revenue

b.    Inventories – 3 month of COGS

c.    Prepaid Expenses – 4 months of insurance expense

X.   You have determined that for your balance sheet projections you need to carry the following amounts in your liability accounts;

a.    Accounts Payable – 1.5 months of SG&A+COGS

b.   Accruals – 1 month of salary expense

Y.    Different expense accounts are categorized to the Income Statement accounts as indicated at the right of the pro forma in the pro forma tab of the spreadsheet.

Z.    Following your extensive research, you have determined starting levels for all operating and non-operating expenses.  These have been input into your pro formas.

AA. As long as Net Income is positive, you will pay out a dividend equal to 20%. BB. You will pay taxes equal to 15% of EBT as long as EBT is positive.

Your job is to fill in the attached spreadsheet to reflect this projection scenario. On a separate document, please provide your analysis of this start-up opportunity.  Be sure that you answer the questions below.  You must answer the questions thoroughly, in complete sentences.  Each answer should be approximately one paragraph, offering detailed analysis, and demonstrating critical thinking.

in your written word document, please provide your analysis of this start-up opportunity.  Be sure that you answer these questions.

1.    Between the $1,000,000 founder capital contribution, the Ohio grants, and the convertible note as outlined, will the firm have enough cash at all times? Will the company need to complete the equity investment, and will that be enough to fulfill the capital needs of the company? What is your evidence? If not, how much more would they need? What might be an appropriate source for any additional capital needed, now and into the future? Would a different tranching schedule for disbursement of the convertible note proceeds ease issues with cash flow? Explain.

2.    If the sales curve were to start at 10% as opposed to 0%, assuming some additional pre-orders, what observations can you make about cash flow? Valuation? What happens to the sigmoid curve when you make other adjustments to its inputs?

3.    If the investor were to declare that their expected rate of return should be 25% instead, what

are the observable effects of that?  What would happen if the expected rate of return was 50%? How can you explain this relationship?

4.    Understanding that the underlying motive in the free market is to buy low and sell high, which

of the three valuation methods outlined on the Cap Compare tab would be preferred by you the entrepreneur and why?  Which would be preferred by the investor and why?

5.    Based on an examination of the attached BizMiner report, do you think that the 6% Investor

expected rate of return, and the 2% terminal period growth rate are appropriate?  What metric in the BizMiner report do you think would approximate this?  What observations can you make if these are raised?  What observations can you make if these are lowered?

6.    Compare key metrics of Bearcat Autonomous Machines with those of the average firm shown

on the attached BizMiner report.  How do percentages relative to sales compare with the rest of the industry? Which ones stand out as being large departures from the industry?  Should Bearcat Autonomous Machines be concerned about any of these?  Explain.

7.   Take a look at the profitability ratios for Bearcat Autonomous Machines, and make some observations and analysis that explains what is happening and why.

8.    If the Contribution Margin is relatively flat from year to year, how do you explain the changes to the various breakeven revenues?  How many units are needed in each of the years to meet the breakeven revenues?

9.    By using the BizMiner report (most recent period), and some additional information below, you should be able to calculate and answer the following questions: If the investor had invested the $1,000,000 in stock in year 1, what number of shares would need to be issued to the investor?

What would the price per share be?  What would the pre-money and post-money valuations be?  If the P/E ratio of the industry were applied to Bearcat Autonomous Machines, and reflected as an actual liquidity event after year 5, what would the payout be to the investors and founders, and what would their respective ROI’s be? How do your calculated multiples compare  with the Valuation Multiples given in the BizMiner report?  How would you defend this methodology to the Investor?

a.    The price for a comparable firm is equal to 1X revenue of the average firm in BizMiner as the average of all listed periods. (populate these for each reported year in cells K5:P5 in the Cap Table tab to calculate the average).

b.   The earnings for a comparable firm is equal to the Discretionary Owner Earnings of the average firm in BizMiner as the average of all listed periods. (populate these for each reported year in cells K6:P6 in the Cap Table tab to calculate the average).

c.    There is no provision for liquidation preference or participation in your calculations

10.  If the data coming from your Proformas was accurate, would you undertake this opportunity?  If so, why?  If not, what variables are preventing you from saying yes to this opportunity?

This is an individual project, so collaborating with your classmates is forbidden. You will upload

your completed spreadsheet in the Pro Forma Project Spreadsheet assignment in Canvas, and the written case analysis in the Pro Forma Project Written Analysis assignment in Canvas by Tuesday April 23rd by 11:59PM