Auris Solutions, LLC

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Hearing Testing Systems Business Plan

Financial Plan

Auris is seeking $250,00 in funding to finance the start-up cost of the Company, which includes exclusively licensing CRISP technology from WARF, and making the necessary software enhancements to make CRISP ready for delivery, which would include packaging, an instruction manual, demos, and tech support. Additional funding is necessary for research and development of future hearing systems, as mentioned in the Future Products and Services Section. Finally, the additional financing will be used by Auris Solutions to purchase the necessary capital equipment needed to expand the business especially as regards to international opportunities.

Structuring Control of Auris Solutions' Board

Auris proposes a Board consisting of three members, where one director is elected by the founders, one director elected by the investors, and a third neutral director selected by both founders and external investors or by a designated third party.

8.1 Start-up Funding

Auris is seeking $250,00 in investment funding to finance the start-up cost of the company.

Start-up Funding
Start-up Expenses to Fund $203,100
Start-up Assets to Fund $46,900
Total Funding Required $250,000
Assets
Non-cash Assets from Start-up $0
Cash Requirements from Start-up $46,900
Additional Cash Raised $0
Cash Balance on Starting Date $46,900
Total Assets $46,900
Liabilities and Capital
Liabilities
Current Borrowing $0
Long-term Liabilities $0
Accounts Payable (Outstanding Bills) $0
Other Current Liabilities (interest-free) $0
Total Liabilities $0
Capital
Planned Investment
Investor 1 $250,000
Investor 2 $0
Other $0
Additional Investment Requirement $0
Total Planned Investment $250,000
Loss at Start-up (Start-up Expenses) ($203,100)
Total Capital $46,900
Total Capital and Liabilities $46,900
Total Funding $250,000

8.2 The Investment Offering

Auris Solutions plans to be a privately-held, Limited Liability Corporation, with Dr. Plauger as one of the owners and the key driver of research and new product development. However, we believe that in order to attract talented management, we will need to create a stock option pool not higher than 45% of the total shares. See the table below for an ownership breakdown.

Owners

% Ownership

Dr. Plauger

20% Max

Stock Option Pool

45% Max

Investors

35% Max

Auris proposes participating shares for our external investors in exchange for $250,000 funding. The Company is willing to offer up to 35% of equity stake in the company for the requested funding. In addition to funding, we are looking for investors with business, management and industry experience.

Auris understands that the investor's goal is to liquefy the investment at a substantial profit when the company's value has been maximized through astute management and careful supervision. Auris Solutions' exit strategy is a sale of the Company within five to seven years, where the investor's preferred participating stock would be entitled to a double dip provision. We believe that Auris Solutions could be sold for 7 to 10 times EBIT in year 5, based on comparable deals in the hearing care industry.

Investment Offering
Proposed Year: 2004 2005 2006 2009
Valuation, Investment, Shares
Investment Amount $250,000 $0 $0
Equity Share Offering Percentage 35.00% 0.00% 0.00%
Valuation $714,286 $0 $0 $91,000,000
Investor Exit Payout $31,850,000 $0 $0
Investor Years Until Exit 5 4 3
Investor IRR 163.65% 0.00% 0.00%
Share Ownership Year 2004 Year 2005 Year 2006 Year 2009
Founders' Shares 100,000 100,000 100,000 100,000
Stock Split Multiple 0 0 0
Stock Options Issued 20,000 0 0 0
Investor Shares Issued 64,615 0 0
Price per share $3.87 $0.00 $0.00 $492.92
Options Holders' Shares 20,000 20,000 20,000 20,000
Year 2004 Investors' Shares 64,615 64,615 64,615 64,615
Year 2005 Investors' Shares 0 0 0
Year 2006 Investors' Shares 0 0
Total Shares Outstanding 184,615 184,615 184,615 184,615
Equity Ownership Percentage Year 2004 Year 2005 Year 2006 Year 2009
Founders' Equity 54.17% 54.17% 54.17% 54.17%
Option Holders' Equity 10.83% 10.83% 10.83% 10.83%
Year 2004 Investors' Equity 35.00% 35.00% 35.00% 35.00%
Year 2005 Investors' Equity 0.00% 0.00% 0.00%
Year 2006 Investors' Equity 0.00% 0.00%
Total Equity 100.00% 100.00% 100.00% 100.00%
Investors' Equity 35.00% 35.00% 35.00% 35.00%
Founders' & Employees' Equity 65.00% 65.00% 65.00% 65.00%

8.3 Funding History

To date, Auris Solutions has depended primarily on grants to finance research and operations. Auris Solutions' CRISP has been awarded competitive grants from various federal agencies, including the National Institutes of Health (NIH), National Science Foundation (NSF), and the U.S. Department of Energy (DOE), totaling $550,000. These grants are typically awarded to companies or scientists with technology that has high potential for development and commercialization. Dr. Plauger has also applied for additional grants, in particular, the Small Business Innovation Research (SBIR) grant. The table below outlines the grants that she has received or that are currently pending:

Granting Agency

Amount Received

Year Received

National Organization For Hearing Research

$10K

1997

Deafness Research Foundation

$20K

2001

National Institute of Health (NIH)

$30K

1999 – 2001

National Institute of Health (NIH)

$145K

2001 – 2003

UIR – WARF

$70K

2002 – 2003

National Institute of Health (NIH)

$275K

2004 – 2005

Small Business Innovation Research (SBIR)

(pending)

TOTAL

$550K

8.4 Important Assumptions

  • The CRISP hearing tests have been priced between $2,000 and $2,500, based on a market reference value plus a differentiation value. We used a price of $2,500 in our projected income statement.

  • Cost of sales includes the cost of copying, packaging and printing the software and instruction manual. Cost of sales also includes per copy royalty paid to WARF, which is estimated at 10% of the retail price of the software.

  • The financial projections include $100,000 of external seed funding.

  • In addition to salary, the key employees of Auris Solutions, LLC will be granted stock options from the stock option pool; Dr. Plauger (also equity stakeholder) and Dr. Yu are acting as the company's scientific officer and software developer accordingly.

  • Auris Solutions plans to launch Minimum Audible Angle (MAA) and Elder's Realistic Intelligibility and Seech Perception (ERISP) in year 2005, and software for Children with Developmental Disabilities (DD) & Mental Retardation (MR) in 2006.

  • Operating expenses includes Research and Development costs of $2 million over five years. Patent amortization is straight line over 17 years.

  • Income tax is assumed at 30%.
General Assumptions
Year 1 Year 2 Year 3 Year 4 Year 5
Plan Month 1 2 3 4 5
Current Interest Rate 10.00% 10.00% 10.00% 10.00% 10.00%
Long-term Interest Rate 10.00% 10.00% 10.00% 10.00% 10.00%
Tax Rate 30.00% 30.00% 30.00% 30.00% 30.00%
Other 0 0 0 0 0

8.5 Break-even Analysis

Please note that we have calculated the cost of the proprietary software and the packaging at $418.82, with an average sale price of $2,094.12. We are not using a mark-up approach for the software pricing because the costs of developing the software are considerably low. We based our sale price of the software on comparable software available on the market (reference value) as well as testimony of various audiologists during our market research process (differentiation value).

Based on the above assumptions, the company would have to sell units as detailed in the breakeven analysis table.

Break-even Analysis
Monthly Units Break-even 18
Monthly Revenue Break-even $37,364
Assumptions:
Average Per-Unit Revenue $2,094.12
Average Per-Unit Variable Cost $418.82
Estimated Monthly Fixed Cost $29,891

8.6 Projected Profit and Loss

We plan to properly use our funding. Auris Solutions' products are now being developed by Dr. Plauger at the Waisman Center of UW-Madison. For that reason our Research and Development expenses for 2005 are $0, which assists in minimizing costs associated with creating our future products, consequently maintaining competitive profit ratios. As shown in the Profit and Loss Statement, below, the founders will postpone their compensations, which will help in creating positive profits for the 1st year. We plan to use our consultants' services as required.

Pro Forma Profit and Loss
Year 1 Year 2 Year 3 Year 4 Year 5
Sales $890,000 $3,402,000 $6,123,600 $11,022,480 $19,840,464
Direct Cost of Sales $178,000 $500,400 $900,720 $1,621,296 $2,918,333
Other Costs of Goods $0 $0 $0 $0 $0
Total Cost of Sales $178,000 $500,400 $900,720 $1,621,296 $2,918,333
Gross Margin $712,000 $2,901,600 $5,222,880 $9,401,184 $16,922,131
Gross Margin % 80.00% 85.29% 85.29% 85.29% 85.29%
Expenses
Payroll $147,000 $444,000 $722,000 $1,047,700 $1,261,625
Sales and Marketing and Other Expenses $113,654 $227,309 $454,617 $909,234 $1,818,469
Depreciation $60,187 $62,441 $81,841 $81,841 $121,841
Rent $5,000 $9,000 $16,200 $29,160 $52,488
Utilities $800 $920 $1,058 $1,217 $1,399
Insurance $10,000 $10,000 $10,000 $10,000 $10,000
Payroll Taxes $22,050 $66,600 $108,300 $157,155 $189,244
Other $0 $0 $0 $0 $0
Total Operating Expenses $358,691 $820,270 $1,394,016 $2,236,307 $3,455,066
Profit Before Interest and Taxes $264,309 $1,241,130 $2,216,504 $4,562,629 $9,483,019
EBITDA $324,496 $1,303,571 $2,298,345 $4,644,470 $9,604,860
Interest Expense $0 $0 $0 $0 $0
Taxes Incurred $79,293 $372,339 $664,951 $1,368,789 $2,844,906
Other Income
Interest Income $0 $0 $0 $0 $0
Other Income Account Name $0 $0 $0 $0 $0
Total Other Income $0 $0 $0 $0 $0
Other Expense
R&D $0 $500,000 $1,000,000 $1,500,000 $2,000,000
Licensing & Royalties $89,000 $340,200 $612,360 $1,102,248 $1,984,046
Total Other Expense $89,000 $840,200 $1,612,360 $2,602,248 $3,984,046
Net Other Income ($89,000) ($840,200) ($1,612,360) ($2,602,248) ($3,984,046)
Net Profit $185,016 $868,791 $1,551,553 $3,193,840 $6,638,113
Net Profit/Sales 20.79% 25.54% 25.34% 28.98% 33.46%

8.7 Projected Cash Flow

Detailed projected income statements, balance sheets and cash flows for years 2004 through 2008 are included in Appendix 2. We believe that by year-end 2004 we should be able to sell 45 copies of the software, which is a very conservative estimate, as the company has already encountered a substantial amount of interest in CRISP at the various conferences and tradeshows attended by Dr. Plauger. This number is also conservative based on the number of speech therapists and audiologists, HMO Medical Centers and hospitals there are in the United States, according to the latest year 2000 census.

We believe that the majority of revenue will come from software sales. Software sales are projected to grow from 425 units for the partial-year 2004 to over 11,000 units within five years. This figure includes the introduction of ERISP and the MAA tests in year two, and the DD and MR test in year three.

An additional $4.5M (max) will be spent on Research and Development activities over the next 5 years to develop future products. Auris Solutions' R&D effort is focused on two main areas: extension and expansion of the current proprietary technology, and research and development of new product lines. Sales and marketing expenses are expected to increase over 10% every year. This includes advertising and promotional spending to support growing product sales, as well as website maintenance; we believe that marketing will play an important role in our sales. Sales and marketing expenses exclude the travel costs for Dr. Plauger to promote her technology at various conferences.

*Note: The 'Dividends' row currently shows $0 for all years; actual dividend amounts will be negotiated with the investors.

Pro Forma Cash Flow
Year 1 Year 2 Year 3 Year 4 Year 5
Cash Received
Cash from Operations
Cash Sales $356,000 $1,360,800 $2,449,440 $4,408,992 $7,936,186
Cash from Receivables $249,600 $1,238,489 $2,804,471 $5,048,048 $9,086,487
Subtotal Cash from Operations $605,600 $2,599,289 $5,253,911 $9,457,040 $17,022,672
Additional Cash Received
Non Operating (Other) Income $0 $0 $0 $0 $0
Sales Tax, VAT, HST/GST Received $0 $0 $0 $0 $0
New Current Borrowing $0 $0 $0 $0 $0
New Other Liabilities (interest-free) $0 $0 $0 $0 $0
New Long-term Liabilities $0 $0 $0 $0 $0
Sales of Other Current Assets $0 $0 $0 $0 $0
Sales of Long-term Assets $0 $0 $0 $0 $0
New Investment Received $0 $0 $0 $0 $0
Subtotal Cash Received $605,600 $2,599,289 $5,253,911 $9,457,040 $17,022,672
Expenditures Year 1 Year 2 Year 3 Year 4 Year 5
Expenditures from Operations
Cash Spending $147,000 $444,000 $722,000 $1,047,700 $1,261,625
Bill Payments $292,178 $1,205,661 $2,076,180 $3,937,316 $7,527,606
Subtotal Spent on Operations $439,178 $1,649,661 $2,798,180 $4,985,016 $8,789,231
Additional Cash Spent
Non Operating (Other) Expense $89,000 $840,200 $1,612,360 $2,602,248 $3,984,046
Sales Tax, VAT, HST/GST Paid Out $0 $0 $0 $0 $0
Principal Repayment of Current Borrowing $0 $0 $0 $0 $0
Other Liabilities Principal Repayment $0 $0 $0 $0 $0
Long-term Liabilities Principal Repayment $0 $0 $0 $0 $0
Purchase Other Current Assets $0 $0 $0 $0 $0
Purchase Long-term Assets $0 $0 $0 $0 $0
Dividends $0 $0 $0 $0 $0
Subtotal Cash Spent $528,178 $2,489,861 $4,410,540 $7,587,264 $12,773,278
Net Cash Flow $77,422 $109,428 $843,372 $1,869,776 $4,249,394
Cash Balance $124,322 $233,750 $1,077,122 $2,946,898 $7,196,293

8.8 Projected Balance Sheet

As shown in the balance sheet in the following table, we expect a healthy growth in net worth by the end of the plan period. The monthly projections are in the appendices.

Pro Forma Balance Sheet
Year 1 Year 2 Year 3 Year 4 Year 5
Assets
Current Assets
Cash $124,322 $233,750 $1,077,122 $2,946,898 $7,196,293
Accounts Receivable $284,400 $1,087,111 $1,956,800 $3,522,240 $6,340,031
Other Current Assets $0 $0 $0 $0 $0
Total Current Assets $408,722 $1,320,861 $3,033,922 $6,469,138 $13,536,324
Long-term Assets
Long-term Assets $0 $0 $0 $0 $0
Accumulated Depreciation $60,187 $122,628 $204,469 $286,310 $408,151
Total Long-term Assets ($60,187) ($122,628) ($204,469) ($286,310) ($408,151)
Total Assets $348,535 $1,198,233 $2,829,453 $6,182,828 $13,128,173
Liabilities and Capital Year 1 Year 2 Year 3 Year 4 Year 5
Current Liabilities
Accounts Payable $116,619 $97,526 $177,193 $336,727 $643,959
Current Borrowing $0 $0 $0 $0 $0
Other Current Liabilities $0 $0 $0 $0 $0
Subtotal Current Liabilities $116,619 $97,526 $177,193 $336,727 $643,959
Long-term Liabilities $0 $0 $0 $0 $0
Total Liabilities $116,619 $97,526 $177,193 $336,727 $643,959
Paid-in Capital $250,000 $250,000 $250,000 $250,000 $250,000
Retained Earnings ($203,100) ($18,084) $850,707 $2,402,260 $5,596,100
Earnings $185,016 $868,791 $1,551,553 $3,193,840 $6,638,113
Total Capital $231,916 $1,100,707 $2,652,260 $5,846,100 $12,484,214
Total Liabilities and Capital $348,535 $1,198,233 $2,829,453 $6,182,828 $13,128,173
Net Worth $231,916 $1,100,707 $2,652,260 $5,846,100 $12,484,214

8.9 Business Ratios

Standard business are included in the following table. These ratios correspond to the selected industry category (Application computer software, SIC code 7372.9901), which was selected to match our business.  Any discrepancy with the industry standard might be explained by our low capital needs and liabilities as well as by our low initial investment to develop our products; products are being develop by consultants at UW-Madison. However, the ratios show a plan for balanced, healthy growth. Special attention will be paid to our collection days in order to minimize the amount of days we are awaiting payment.

Ratio Analysis
Year 1 Year 2 Year 3 Year 4 Year 5 Industry Profile
Sales Growth 0.00% 282.25% 80.00% 80.00% 80.00% 10.27%
Percent of Total Assets
Accounts Receivable 81.60% 90.73% 69.16% 56.97% 48.29% 23.57%
Other Current Assets 0.00% 0.00% 0.00% 0.00% 0.00% 41.50%
Total Current Assets 117.27% 110.23% 107.23% 104.63% 103.11% 68.84%
Long-term Assets -17.27% -10.23% -7.23% -4.63% -3.11% 31.16%
Total Assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Current Liabilities 33.46% 8.14% 6.26% 5.45% 4.91% 35.07%
Long-term Liabilities 0.00% 0.00% 0.00% 0.00% 0.00% 20.22%
Total Liabilities 33.46% 8.14% 6.26% 5.45% 4.91% 55.29%
Net Worth 66.54% 91.86% 93.74% 94.55% 95.09% 44.71%
Percent of Sales
Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Gross Margin 80.00% 85.29% 85.29% 85.29% 85.29% 100.00%
Selling, General & Administrative Expenses 62.21% 67.16% 67.85% 63.40% 57.86% 81.88%
Advertising Expenses 6.39% 3.34% 3.71% 4.12% 4.58% 1.23%
Profit Before Interest and Taxes 29.70% 36.48% 36.20% 41.39% 47.80% 1.18%
Main Ratios
Current 3.50 13.54 17.12 19.21 21.02 1.46
Quick 3.50 13.54 17.12 19.21 21.02 1.12
Total Debt to Total Assets 33.46% 8.14% 6.26% 5.45% 4.91% 1.98%
Pre-tax Return on Net Worth 113.97% 112.76% 83.57% 78.05% 75.96% 64.10%
Pre-tax Return on Assets 75.83% 103.58% 78.34% 73.80% 72.23% 5.51%
Additional Ratios Year 1 Year 2 Year 3 Year 4 Year 5
Net Profit Margin 20.79% 25.54% 25.34% 28.98% 33.46% n.a
Return on Equity 79.78% 78.93% 58.50% 54.63% 53.17% n.a
Activity Ratios
Accounts Receivable Turnover 1.88 1.88 1.88 1.88 1.88 n.a
Collection Days 50 123 151 151 151 n.a
Accounts Payable Turnover 3.51 12.17 12.17 12.17 12.17 n.a
Payment Days 27 33 23 23 23 n.a
Total Asset Turnover 2.55 2.84 2.16 1.78 1.51 n.a
Debt Ratios
Debt to Net Worth 0.50 0.09 0.07 0.06 0.05 n.a
Current Liab. to Liab. 1.00 1.00 1.00 1.00 1.00 n.a
Liquidity Ratios
Net Working Capital $292,103 $1,223,335 $2,856,729 $6,132,410 $12,892,365 n.a
Interest Coverage 0.00 0.00 0.00 0.00 0.00 n.a
Additional Ratios
Assets to Sales 0.39 0.35 0.46 0.56 0.66 n.a
Current Debt/Total Assets 33% 8% 6% 5% 5% n.a
Acid Test 1.07 2.40 6.08 8.75 11.18 n.a
Sales/Net Worth 3.84 3.09 2.31 1.89 1.59 n.a
Dividend Payout 0.00 0.00 0.00 0.00 0.00 n.a