Medquip, Inc.

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Medical Equipment Developer Business Plan

Financial Plan

The value of the patents and the size of their potential markets enables several back-up plans of action if this plan doesn't work as indicated. Venture funds are available early on and historically investments of $3 to $5 million are common for similar companies.

Even after successfully completing the start and seed stage as indicated, second round venture or mezzanine funding is potentially available in the $5 million range. We have planned for additional capital input in years two and three as a safety net for cash flow/cash balance. 

However, cash flow achievement within the parameters of the indicated plan plus further funding on the senior debt side will lead to the best value for shareholders. Then, strategy can dictate the best valuation for ramp-up and roll-out.

Important Assumptions

The following are the key financial assumptions for this plan. However, it's important to note that several of the assumptions could be considerably less than those indicated if the business is located in Puerto Rico. The personnel burden could go from 22% to 12%. The short term interest rate could go from 10% to 5% or less. The tax rate could go from 25% to less than 10%. So, all of the bottom line projections in this plan could improve appreciably.

However, the plan is still based on the following assumptions as if it were a U.S. based Georgia operation.

General Assumptions
Year 1 Year 2 Year 3
Plan Month 1 2 3
Current Interest Rate 10.00% 10.00% 10.00%
Long-term Interest Rate 10.00% 10.00% 10.00%
Tax Rate 0.00% 30.00% 30.00%
Other 0 0 0

Key Financial Indicators

All of our benchmarks being attained will allow expansion strategies of merger, acquisition, roll-up or IPO. The following chart illustrates our planned performance in the most critical profit variables.

Break-even Analysis

Medquip, Inc. has calculated a break-even maintenance point for sales once full management staffing and facility costs are reached. Included are payroll and rent considerations.

The break-even target can sustain Medquip, Inc. in operation in late '98 and throughout '99 even if expansion and capitalization plans are late in materializing. It is anticipated that direct sales can produce these numbers and more in Europe, Middle Eastern, and African markets since those markets are not as dominated by managed care, there is more direct purchasing. A distributor has been identified for those markets as well as a distributor for Latin and South America, and a distributor for Japan. No Japanese sales are included, however, since regulatory barriers are more pronounced there.

The break-even analysis is restricted to this late '98 and early '99 time frame since the early ramp-up phase in business development is characteristic of most cash-flow shortages that represent exposure to early stage investors.

Break-even Analysis
Monthly Revenue Break-even $198,088
Assumptions:
Average Percent Variable Cost 32%
Estimated Monthly Fixed Cost $135,284

Projected Profit and Loss

The profit in each of the first two years of operation is expected to be minimal. However that includes $1 million in revenue in the first year from the sale of a license. If that does not occur, then over $800k will be burned in year one. That must come from investment infusion. The third year profit reflects the performance of a mature company. Over-all gross margins are excellent.

Pro Forma Profit and Loss
Year 1 Year 2 Year 3
Sales $198,250 $4,900,000 $21,450,000
Direct Cost of Sales $62,855 $1,592,000 $7,052,500
Production Payroll $44,000 $132,000 $154,000
Other Costs of Sales $0 $0 $0
Total Cost of Sales $106,855 $1,724,000 $7,206,500
Gross Margin $91,395 $3,176,000 $14,243,500
Gross Margin % 46.10% 64.82% 66.40%
Operating Expenses
Sales and Marketing Expenses
Sales and Marketing Payroll $58,000 $134,000 $402,500
Advertising/Promotion $16,000 $150,000 $700,000
Travel $13,000 $66,000 $88,000
Miscellaneous $6,000 $15,000 $24,000
Total Sales and Marketing Expenses $93,000 $365,000 $1,214,500
Sales and Marketing % 46.91% 7.45% 5.66%
General and Administrative Expenses
General and Administrative Payroll $140,000 $310,000 $452,000
Marketing/Promotion $0 $0 $0
Depreciation $0 $0 $0
Leased Equipment $1,000,000 $0 $500,000
Rent $58,950 $75,000 $95,000
Utilities $5,000 $6,000 $7,000
Insurance $39,000 $45,000 $51,000
Legal Expenses $93,563 $36,000 $36,000
Payroll Taxes $54,900 $120,300 $208,725
Other General and Administrative Expenses $0 $0 $0
Total General and Administrative Expenses $1,391,413 $592,300 $1,349,725
General and Administrative % 701.85% 12.09% 6.29%
Other Expenses:
Other Payroll $124,000 $226,000 $383,000
Consultants $0 $0 $0
Contract/Consultants $15,000 $30,000 $60,000
Total Other Expenses $139,000 $256,000 $443,000
Other % 70.11% 5.22% 2.07%
Total Operating Expenses $1,623,413 $1,213,300 $3,007,225
Profit Before Interest and Taxes ($1,532,018) $1,962,700 $11,236,275
EBITDA ($1,532,018) $1,962,700 $11,236,275
Interest Expense $5,000 $55,000 $51,250
Taxes Incurred $0 $572,310 $3,355,508
Net Profit ($1,537,018) $1,335,390 $7,829,518
Net Profit/Sales -775.29% 27.25% 36.50%

Projected Cash Flow

We began the year with $128,000 in cash from initial sales of shares to investors. This provided our start-up capital. The private placement to 13 or fewer investors is expected to bring in another $450,000 in May and $400,000 in June. We are targeting an additional equity investment from Puerto Rico and long term loans.

Thus, our cash flow will be sufficient in year one even if we can't conclude a licensing agreement.

Second round financing will include venture, mezzanine, or IPO options. If sales and profits hit targets then further investment needs will be limited to higher value options to roll-up a national level and world-wide company.

Pro Forma Cash Flow
Year 1 Year 2 Year 3
Cash Received
Cash from Operations
Cash Sales $69,388 $1,715,000 $7,507,500
Cash from Receivables $32,955 $910,432 $5,936,098
Subtotal Cash from Operations $102,343 $2,625,432 $13,443,598
Additional Cash Received
Sales Tax, VAT, HST/GST Received $0 $0 $0
New Current Borrowing $0 $0 $125,000
New Other Liabilities (interest-free) $600,000 $0 $0
New Long-term Liabilities $600,000 $0 $0
Sales of Other Current Assets $0 $0 $0
Sales of Long-term Assets $0 $0 $0
New Investment Received $850,000 $1,869,000 $0
Subtotal Cash Received $2,152,343 $4,494,432 $13,568,598
Expenditures Year 1 Year 2 Year 3
Expenditures from Operations
Cash Spending $366,000 $802,000 $1,391,500
Bill Payments $734,012 $3,853,163 $12,379,035
Subtotal Spent on Operations $1,100,012 $4,655,163 $13,770,535
Additional Cash Spent
Sales Tax, VAT, HST/GST Paid Out $0 $0 $0
Principal Repayment of Current Borrowing $0 $0 $0
Other Liabilities Principal Repayment $0 $600,000 $0
Long-term Liabilities Principal Repayment $0 $100,000 $100,000
Purchase Other Current Assets $0 $0 $0
Purchase Long-term Assets $0 $0 $0
Dividends $0 $0 $0
Subtotal Cash Spent $1,100,012 $5,355,163 $13,870,535
Net Cash Flow $1,052,331 ($860,731) ($301,937)
Cash Balance $1,180,331 $319,600 $17,663

Projected Balance Sheet

The highlights of the balance sheets are a solid cash position and net worth at the end of year three.

Pro Forma Balance Sheet
Year 1 Year 2 Year 3
Assets
Current Assets
Cash $1,180,331 $319,600 $17,663
Accounts Receivable $95,908 $2,370,475 $10,376,877
Inventory $29,250 $740,848 $1,688,348
Other Current Assets $0 $0 $0
Total Current Assets $1,305,488 $3,430,923 $12,082,888
Long-term Assets
Long-term Assets $0 $0 $0
Accumulated Depreciation $0 $0 $0
Total Long-term Assets $0 $0 $0
Total Assets $1,305,488 $3,430,923 $12,082,888
Liabilities and Capital Year 1 Year 2 Year 3
Current Liabilities
Accounts Payable $664,506 $285,551 $1,082,999
Current Borrowing $0 $0 $125,000
Other Current Liabilities $600,000 $0 $0
Subtotal Current Liabilities $1,264,506 $285,551 $1,207,999
Long-term Liabilities $600,000 $500,000 $400,000
Total Liabilities $1,864,506 $785,551 $1,607,999
Paid-in Capital $1,108,000 $2,977,000 $2,977,000
Retained Earnings ($130,000) ($1,667,018) ($331,628)
Earnings ($1,537,018) $1,335,390 $7,829,518
Total Capital ($559,018) $2,645,372 $10,474,890
Total Liabilities and Capital $1,305,488 $3,430,923 $12,082,888
Net Worth ($559,018) $2,645,372 $10,474,890

Business Ratios

By year three the return on equity should be very attractive to early investors. All ratios are in good shape for traditional borrowing to fund further growth. Industry profile ratios based on the Standard Industrial Classification (SIC) code 3841, Surgical and Medical Instruments, are shown for comparison.

Ratio Analysis
Year 1 Year 2 Year 3 Industry Profile
Sales Growth n.a. 2371.63% 337.76% 4.20%
Percent of Total Assets
Accounts Receivable 7.35% 69.09% 85.88% 25.30%
Inventory 2.24% 21.59% 13.97% 14.90%
Other Current Assets 0.00% 0.00% 0.00% 42.70%
Total Current Assets 100.00% 100.00% 100.00% 82.90%
Long-term Assets 0.00% 0.00% 0.00% 17.10%
Total Assets 100.00% 100.00% 100.00% 100.00%
Current Liabilities 96.86% 8.32% 10.00% 39.60%
Long-term Liabilities 45.96% 14.57% 3.31% 18.10%
Total Liabilities 142.82% 22.90% 13.31% 57.70%
Net Worth -42.82% 77.10% 86.69% 42.30%
Percent of Sales
Sales 100.00% 100.00% 100.00% 100.00%
Gross Margin 46.10% 64.82% 66.40% 53.30%
Selling, General & Administrative Expenses 821.39% 37.56% 29.90% 34.40%
Advertising Expenses 8.07% 3.06% 3.26% 1.50%
Profit Before Interest and Taxes -772.77% 40.06% 52.38% 5.10%
Main Ratios
Current 1.03 12.02 10.00 2.00
Quick 1.01 9.42 8.60 1.33
Total Debt to Total Assets 142.82% 22.90% 13.31% 57.70%
Pre-tax Return on Net Worth 274.95% 72.11% 106.78% 5.80%
Pre-tax Return on Assets -117.74% 55.60% 92.57% 13.80%
Additional Ratios Year 1 Year 2 Year 3
Net Profit Margin -775.29% 27.25% 36.50% n.a
Return on Equity 0.00% 50.48% 74.75% n.a
Activity Ratios
Accounts Receivable Turnover 1.34 1.34 1.34 n.a
Collection Days 46 141 167 n.a
Inventory Turnover 12.00 4.13 5.81 n.a
Accounts Payable Turnover 2.10 12.17 12.17 n.a
Payment Days 27 50 19 n.a
Total Asset Turnover 0.15 1.43 1.78 n.a
Debt Ratios
Debt to Net Worth 0.00 0.30 0.15 n.a
Current Liab. to Liab. 0.68 0.36 0.75 n.a
Liquidity Ratios
Net Working Capital $40,982 $3,145,372 $10,874,890 n.a
Interest Coverage -306.40 35.69 219.24 n.a
Additional Ratios
Assets to Sales 6.59 0.70 0.56 n.a
Current Debt/Total Assets 97% 8% 10% n.a
Acid Test 0.93 1.12 0.01 n.a
Sales/Net Worth 0.00 1.85 2.05 n.a
Dividend Payout 0.00 0.00 0.00 n.a