Financial Projections Presentation

Financing Options and Preparing Projections for Investors

Cody Apperson

Durham, NC 919.530.1177 New York, NY 212.209.3042 www.sjfund.com

Getting Ready for Equity™ Disney Entrepreneur Center Orlando, FL July 23, 2008 >

SESSION GOALS Understand what financing options are available to fund growth Understand what sources of debt are available and the difference between debt and equity Understand the difference between angel investors and venture capital firms Learn how to present financial projections to investors

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CONSIDERATIONS IN BUSINESS FINANCING Relationships Cost of capital Risk Opportunity for growth Market conditions What else besides capital is needed for your company?

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BUSINESS FINANCING - OPTIONS Owner and founder equity Internal working capital (balance sheet) Profits (income statement) Grants Strategic partners, customers, vendors Debt New equity

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WORKING THE BALANCE SHEET FOR CASH Relationships and Value Drivers

Balance Sheet Accounts

Customers – accelerate payments, discounts, deposits, prepayment or recurring pay

A/R & Collection Period

Suppliers, Customers, Production – reducing inventory while serving customers

Inventory & Turnover

Suppliers, Production, Equipment Vendors – Make vs buy, capacity, efficiency, scheduling, technology, distribution.

Suppliers – Extended terms, JIT shipments, competitive pricing, joint promotions

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Fixed Assets & Efficiency

A/P & Payment Periods

WORKING THE INCOME STATEMENT FOR CASH Relationships and Value Drivers Customers – marketing, sales, volume, pricing, product and service advantages, technology

Income Statement Sales

Suppliers, Customers, Production Team – Proprietary advantages, market pricing, production or service expenses, technology leverage

Cost of Goods Sold/ Gross Margin

Sales and Admin Team – Ability to scale, efficiency, marketing costs, product development, overhead

Operating Expenses – SG&A

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FINANCING ASSETS WITH OPERATIONS, DEBT AND EQUITY

A/R and Inventory – 1) Reduce 2) A/P 3) Line of credit, ST debt Fixed Assets – 1) Reduce 2) Lease 3) LT Debt Other/Start-up Losses – 1) Reduce 2) Founder’s Equity 3) Angels/VC 7

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DEBT FINANCING SOURCES AND TYPES

Commercial Finance Companies

Receivables Financing/ Factoring

Leases

Revolver/ Line of Credit

X

X

X

X

X

Suppliers, Vendors

X

X

Commercial Banks

X

X

Internal & Closely Related Parties Mezzanine Funds

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Junior Secured Loans

X

Leasing Companies Asset‐Based Lenders (ABL)

Short or Long Term Loan

X X

X X

DEBT AND EQUITY ARE VERY DIFFERENT Debt Emphasis on collateral and cash flow to reduce risk Repayment usually starts after funding (some may offer interest only payments) Return not based on company performance Lower risk for lender, higher for borrower Lower cost for borrower if business is successful No ownership dilution Supports short-medium term expansion or capital for a specific reasons Monitoring relationship Fairly standard documentation 9

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Equity Emphasis on future opportunity and return on investments by assuming risk Deferred repayment, usually paid at liquidity event (3-5 years) Repayment dependent on company performance Higher risk for investor, lower for company Higher cost for company if business is successful Ownership dilution Supports long term expansion, provides future support for growth Involved partner relationship Complex issues and documentation

DOES EQUITY FINANCING MATCH YOUR MISSION? Is your growth constrained by access to capital?

Is debt not sufficient or prudent to fund growth?

Is a high growth and an exit consistent with your plan?

Are you willing to share ownership and control?

What do you want from your equity financing partner?

Capital Expertise & guidance?

Management participation & assistance?

Financing and business connections?

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EQUITY SOURCES FOR EARLY STAGE COMPANIES Non-Institutional Friends and Family Angels and wealthy individuals Institutional – Venture Capital

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ANGEL INVESTMENT PROS‌ 9 Often the first outside equity investment 9 Family and friends can be supportive, flexible, and expedient 9 Attractive valuations, may not be interested in management participation/control 9 May have expertise, connections

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ANGEL INVESTMENT PROS… 9 Often the first outside equity investment 9 Family and friends can be supportive, flexible, and expedient 9 Attractive valuations, may not be interested in management participation/control 9 May have expertise, connections

…AND CONS o Personal relationships can interfere with business decision-making and vice-versa o Relatively arbitrary term structures can complicate future financings o May be less able to provide larger amounts of capital or provide follow-on financing o May not be able to offer additional Board support 13

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VENTURE CAPITAL INVESTMENT PROS… 9 9 9 9

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Bring expertise, guidance, connections Can be good partners, resources Have reserves for follow-on financing Can bring in other funds if company needs additional rounds of capital

VENTURE CAPITAL INVESTMENT PROS… 9 9 9 9

Bring expertise, guidance, connections Can be good partners, resources Have reserves for follow-on financing Can bring in other funds if company needs additional rounds of capital

…AND CONS o o o o

Due diligence process requires time and data May be tougher on valuation, expect more ownership, control May conflict with management over company strategy and priorities Syndicates of funds can be problematic if not on the same page

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PREPARING FOR AN EQUITY RAISE: WHAT WORKS Know your personal long-term business goals Come to terms with the issue of control and exit Be aware of the equity market in your industry Know what you want from your financing partner Network, get referrals, find funds/individuals that fit your criteria; understand their criteria Well-developed business plan for growth Credible and compelling financial projections

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PREPARING FOR AN EQUITY RAISE: WHAT WORKS Know your personal long-term business goals Come to terms with the issue of control and exit Be aware of the equity market in your industry Know what you want from your financing partner Network, get referrals, find funds/individuals that fit your criteria; understand their criteria Well-developed business plan for growth Credible and compelling financial projections

FINANCIAL PROJECTIONS: SHOULD TELL A STORY TELL A COMPELLING STORY OF THE PROGRESS TO DATE AND THE ANTICIPATED GROWTH GOING FORWARD QUICKEST WAY FOR INVESTORS TO UNDERSTAND THE BUSINESS o Growth trends o Seasonality o Scalability o Margin stabilization o Capital intensity o Working capital needs PROJECTIONS DEMONSTRATE YOUR THOROUGH UNDERSTANDING OF THE BUSINESS MODEL 18

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FINANCIAL PROJECTIONS: WHAT TO INCLUDE IN PLAN REALISTIC PROJECTIONS o Include your desired financing – forecasts post capital infusion o 3- 5 years of income statements, balance sheets, cash flows, by month for first 2 years, then annual o Include historical statements alongside projections when available

SUMMARY OF STATEMENTS WITH KEY METRICS o Revenue, Month-over-Month or Year-over-Year growth o COGS and Operating expenses – delineate key categories for your business o Gross, EBITDA and Net margin

HAVE BACKUP DETAIL AND PIPELINE INFORMATION READY o Additional worksheets describing top down or bottom up approach o Explanation of assumptions 19

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FINANCIAL PROJECTIONS: TYPICAL P&L Revenue COGS – Costs of Goods Sold o Includes direct product costs: manufacturing, shipping, direct labor Operating Expenses o R&D, sales, marketing, corporate overhead, depreciation, amortization

EBITDA – Earnings before Interest, Tax, Depreciation and Amortization o Common term used by investors to gauge cash flow

EBIT – Earnings before Interest and Taxes o Also called Operating Profit 20

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Revenue

$

50.0 100%

Cost of Goods Sold Gross Margin

$ $

20.0 30.0

40% 60%

Sales & Marketing R&D G&A Operating Expenses

$ $ $ $

15.0 5.0 2.5 22.5

30% 10% 5% 45%

EBITDA

$

7.5

15%

Depreciation/Amortization $

3.0

6%

Operating Profit/EBIT

$

4.5

9%

Interest $ Taxes $

1.0 1.4

2% 3%

$

2.1

4%

Net Income

FINANCIAL PROJECTIONS: WHAT TO AVOID Avoid ultra-conservative projections; they do not make a compelling case for investment Avoid implausibly optimistic projections; they raise credibility issues Avoid too much detail; stick with key metrics and business drivers No need to calculate an investor’s return; we like to do that ourselves!

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FINANCIAL PROJECTIONS: YEAR TO DATE vs. BUDGET INVESTMENT PROCESS CAN TAKE ANYWHERE FROM 3 TO 6 MONTHS ALLOWING TIME FOR INVESTORS TO PLOT YOUR ACTUALS o On track, exceeding or behind – understand drivers o Better to exceed conservative projections than to significantly miss aggressive projections o Several months of missing projections may cause investors to rethink investment

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FINANCIAL PROJECTIONS: CASH FLOW PROJECTIONS BURN RATE o Monthly operating loss plus capital expenditures TOTAL CASH REQUIRED o Cumulative operating losses PLUS o Cumulative capital expenses (including working capital requirements) UNTIL o Your business is consistently cash flow positive

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FINANCIAL PROJECTIONS: BAD EXAMPLE 1 2007 Actual Snacky Crisps Snacky Crisps Snacky Crisps Snacky Crisps Gross Sales

Ranch Blue Corn Red Pepper Cheddar Cheese

Billed Freight Sales Discounts( 2%) Sales Returns & Refunds

2008

2,096,843 49.79% 838,275 19.90% 1,314,185 31.21% 0.00% 4,249,303 100.90% 22,850 (38,993) (21,711)

0.54% -0.93% -0.52%

2009

1,887,159 46.24% 1,047,844 25.68% 1,182,767 28.98% 25,000 0.61% 4,142,769 101.52% 30,848 0.76% (52,641) -1.29% (40,165) -0.98%

2,453,306 1,519,373 1,596,735 200,000 5,769,415 41,644 (71,065) (54,223)

2010 43.15% 26.72% 28.08% 3.52% 101.47% 0.73% -1.25% -0.95%

2,821,302 2,051,154 2,075,755 225,000 7,173,212 56,220 (95,937) (73,201)

39.96% 29.05% 29.40% 3.19% 100.87% 0.80% -1.36% -1.04%

Net Sales

4,211,449 100.00%

4,080,811

100.00%

5,685,771

100.00%

7,060,292

100.00%

Costs of Sales Purchases Freight - In Change In Inventory

1,959,246 73,998 (309,692)

46.52% 1.76% -7.35%

1,900,050 95,000 (509,000)

46.56% 2.33% -12.47%

3,400,000 135,000 (1,500,000)

59.80% 2.37% -26.38%

3,700,000 165,000 (1,500,000)

52.41% 2.34% -21.25%

Cost of Sales

1,726,494

41.00%

1,490,050

36.51%

2,039,000

35.86%

2,369,000

33.55%

Gross Profit

2,484,955

59.00%

2,590,761

63.49%

3,646,771

64.14%

4,691,292

66.45%

Total Administrative Exp

1,262,468

29.98%

1,373,287

33.65%

1,513,115

26.61%

1,734,304

24.56%

86,880 274,559 2,000 237,718

2.06% 6.52% 0.05% 5.64%

78,192 265,253 2,000 150,000

1.92% 6.50% 0.05% 3.68%

86,011 369,575 2,000 75,000

0.02 6.50% 0.04% 1.32%

94,612 458,919 2,000 78,750

1.34% 6.50% 0.03% 1.12%

1,290,739

30.65%

1,219,783

29.89%

1,732,905

30.48%

2,189,291

31.01%

Selling Expenses Travel Commissions Auto Expenses UPS & Fedex Total Selling Expense Operating Income

(68,252)

-1.62%

(2,310)

-0.06%

400,750

7.05%

767,697

10.87%

(7,553)

-0.18%

(30,000)

-0.74%

100,000

1.76%

100,000

1.42%

(175,805)

-4.17%

(132,310)

-3.24%

100,750

1.77%

467,697

6.62%

Other Income & Expense Net Income Before Taxes

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FINANCIAL PROJECTIONS: BAD EXAMPLE 2 ($000's)

2007

2008

2009

2010

2011

2012

2013

Revenues

100.00

5,000.00

20,000.00

50,000.00

10,000.00

150,000.00

200,000.00

Expenses % of Revenue

130.00 130%

3,500.00 70%

14,000.00 70%

35,000.00 70%

7,000.00 70%

105,000.00 70%

140,000.00 70%

EBITDA

(30.00) 1,500.00

6,000.00

15,000.00

3,000.00

45,000.00

60,000.00

Net Income

(30.00) 1,500.00

6,000.00

15,000.00

3,000.00

45,000.00

60,000.00

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FINANCIAL PROJECTIONS: GOOD EXAMPLE Actual 2007 Sales Branded Products Private Label Services Net Sales Growth %

$

2008

2009

Forecast 2010

2011

2012

852,000 $ 221,000 51,000

474,420 145,125 19,775

$

996,840 $ 1,744,470 $ 276,250 400,563 53,550 62,654

5,233,410 $ 9,838,811 $ 17,217,919 1,201,688 1,826,565 2,648,519 187,961 229,312 268,295

$ 1,124,000 $

639,320

$ 1,326,640 $ 2,207,686 $ 18% 66%

6,623,058 $ 11,894,688 $ 20,134,733 200% 80% 69%

666,000

401,940

458,000 $ 41%

237,380 37%

731,000

469,375

Costs of Goods Sold Gross Profit Gross Margin

YTD 2008 June

$

Operating Expenses

785,880.0 $

1,257,408.0

540,760 $ 41% 913,750

950,278 $ 43% 1,215,288

3,772,224.0

6,639,114.2

11,286,494.2

2,850,834 $ 5,255,573 $ 8,848,239 43% 44% 44% 2,369,811

4,147,169

6,013,394

EBITDA EBITDA Margin

$

(248,000) $ (206,995) -22% -32%

$ (347,990) $ -26%

(240,010) $ -11%

506,023 $ 1,133,405 $ 2,859,844 8% 10% 14%

Net Income

$

(382,500) $ (331,244)

$ (507,488) $

(372,512) $

380,820 $

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914,094 $ 2,381,568

2008 Q1 Q2 Q3 Q4

2009 Q1 Q2 Q3 Q4

2010 Q1 Q2 Q3 Q4

9 First sales from Widget 1 9 First sales from Widget 2 9 Achieve profitability 9 First sales from full solution First sales from accessories 3

Funding

Financials

Development

FINANCIAL PROJECTIONS: CONNECT WITH STORY

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2011 Q1 Q2 Q3 Q4

THANK YOU!! QUESTIONS???

Additional Funding Resources: ¾Small Business Administration; list of resources for financing start ups and growth. http://www.sba.gov/smallbusinessplanner/start/financestartup/index.html ¾Community Development Venture Capital Alliance; national network of community development venture capital funds. http://www.cdvca.org ¾List of Community Development Financial Institutions (CDFIs) around the U.S. http://www.cdfifund.gov/what_we_do/need_a_loan.asp ¾National Association of Small Business Investment Companies; search engine for Small Business Investment Companies (SBICs) throughout the United States. http://www.nasbic.org/entrepreneur_center/sbic_financing.cfm ¾Investors' Circle; network of socially responsible, early-stage investors. http://www.investorscircle.net ¾Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) Programs; federal funding program for technological innovation. http://www.sbir.gov ¾ Angel Capital Association; directory of angel groups across the United States. http://www.angelcapitalassociation.org/dir_directory/directory.aspx#12 Credit Acknowledgements: Kenneth Marks at High Rock Partners, www.highrockpartners.com Michael Gurau at CEI community Ventures, www.cei.org Peter Strauss, Bank of America, www.bofa.com

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Cody Apperson

THANK YOU! Durham, NC 919.530.1177 New York, NY 212.209.3042 www.sjfund.com

Getting Ready for Equity™ Disney Entrepreneur Center Orlando, FL July 23, 2008 >