The following subtopics highlight the financial plan for AgaMatrix.
8.1 Break-even Analysis
The break-even analysis demonstrates that AgaMatrix will have a sales level running comfortably above break-even starting in year two. Depending on which pricing model is used – either royalties, licensing, or both – average revenue could vary significantly, but the table shows a fair estimate given our revenue projections.
The business will have very few fixed costs – most laboratory equipment can be leased, as will the real estate for our offices. All costs are expected to be variable for modeling purposes, giving the company flexibility to adapt as needs and environmental conditions may change. Because AgaMatrix technology is software-based and is optimized for minimal hardware requirements, it can be easily distributed and integrated into biosensor devices with advantages of economies of scale. As volume increases, average variable costs will significantly decrease.
|Monthly Revenue Break-even||$583,407|
|Average Percent Variable Cost||15%|
|Estimated Monthly Fixed Cost||$497,947|
8.2 Important Assumptions
The financial plan depends on important assumptions, most of which are shown in the following table. The key underlying assumptions are:
- We assume a slow-growth economy, without major recession.
- We assume of course that there are no unforeseen changes in technology to make our products immediately obsolete.
- We assume access to equity capital and financing sufficient to maintain our financial plan as shown in the tables.
Financial projections are predicated upon targeting the life sciences vertical exclusively. Within the life sciences market, blood glucose will drive the majority of revenue. However, the point-of-care testing market will contribute modest revenue in the near term, accompanied by a substantial contribution from the implantable market in the medium and long term.
|Year 1||Year 2||Year 3|
|Current Interest Rate||8.00%||8.00%||8.00%|
|Long-term Interest Rate||10.00%||10.00%||10.00%|
8.3 Projected Profit and Loss
Gross and operating margins
Gross margins will be approximately 85% on the core product offering, which will be delivered in the form of software. Such margins are typical in the software industry; we have not modeled in support revenue streams for our products, assuming this will be handled entirely by our OEM customers. In year one, we expect a loss, as we grow the business from a small base by conserving cash. Beginning in year two (post-institutional funding), as we ramp up the business more aggressively, operating expenses as a percent of revenue will fall as we hire a critical mass of personnel for marketing, sales, and research and development. By the end of the forecast horizon, operating margins will once again exceed 30%.
Profit potential and durability
AgaMatrix is expected to be net income positive beginning in its second full year of operations. Profitability is expected to grow rapidly following year two, once the business is able to leverage the investment from the year two ramp-up. AgaMatrix has the potential to be an enduring standalone business, supported by a diversified revenue stream within the life sciences vertical (blood glucose, point-of-care testing and minimally invasive/implantable devices), with the opportunity to expand into other sub-segments in the healthcare sector and new verticals for long-term growth.
|Pro Forma Profit and Loss|
|Year 1||Year 2||Year 3|
|Direct Cost of Sales||$37,500||$1,500,000||$6,270,000|
|Other Production Expenses||$0||$0||$0|
|Total Cost of Sales||$37,500||$1,500,000||$6,270,000|
|Gross Margin %||85.35%||84.93%||86.01%|
|Sales and Marketing and Other Expenses||$4,915,400||$245,000||$450,000|
|Total Operating Expenses||$5,975,363||$5,244,514||$7,573,164|
|Profit Before Interest and Taxes||($5,756,863)||$3,209,486||$30,972,836|
8.4 Projected Cash Flow
The financial outlook is positive as the company rolls out and meets its milestones. After financing, cash flow will be negative for year one. By year two, AgaMatrix expects to be cash flow positive.
|Pro Forma Cash Flow|
|Year 1||Year 2||Year 3|
|Cash from Operations|
|Subtotal Cash from Operations||$256,000||$9,954,000||$44,816,000|
|Additional Cash Received|
|Sales Tax, VAT, HST/GST Received||$0||$0||$0|
|New Current Borrowing||$0||$0||$0|
|New Other Liabilities (interest-free)||$0||$0||$0|
|New Long-term Liabilities||$0||$0||$0|
|Sales of Other Current Assets||$0||$0||$0|
|Sales of Long-term Assets||$0||$0||$0|
|New Investment Received||$4,075,000||$0||$0|
|Subtotal Cash Received||$4,331,000||$9,954,000||$44,816,000|
|Expenditures||Year 1||Year 2||Year 3|
|Expenditures from Operations|
|Subtotal Spent on Operations||$5,593,407||$7,844,205||$22,018,305|
|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||$0||$0|
|Long-term Liabilities Principal Repayment||$1,500||$2,000||$2,500|
|Purchase Other Current Assets||$0||$0||$0|
|Purchase Long-term Assets||$0||$0||$0|
|Subtotal Cash Spent||$5,594,907||$7,846,205||$22,020,805|
|Net Cash Flow||($1,263,907)||$2,107,795||$22,795,195|
8.5 Projected Balance Sheet
Our projected balance sheet shows an increase in net worth. The monthly projections for the first year are in the appendix. Net worth is negative initially because the company does not expect to secure its first paying customer until end of year one.
|Pro Forma Balance Sheet|
|Year 1||Year 2||Year 3|
|Other Current Assets||$0||$0||$0|
|Total Current Assets||$251,193||$2,358,989||$25,154,184|
|Total Long-term Assets||$0||$0||$0|
|Liabilities and Capital||Year 1||Year 2||Year 3|
|Other Current Liabilities||$0||$0||$0|
|Subtotal Current Liabilities||$425,875||$289,905||$1,407,333|
|Total Liabilities and Capital||$251,193||$2,358,989||$25,154,184|
8.6 Financial Risks and Contingencies
We have identified several critical risks and assumptions that must be addressed to ensure AgaMatrix’s success.
Risk #1: Corporate R&D labs of our customers/partners may develop competing DSP-based technologies to enhance their own electrochemical sensors based products.
See section 4 for a detailed discussion of competition and AgaMatrix’s sustainable competitive advantages.
Risk #2: Other technologies may be developed to improve sensor performance.
Other technology solutions designed to improve sensor performance have been generally hardware-based introducing additional costs and at times toxic chemicals. For example, MEMS-based infrared sensors, being developed as an alternative to electrochemical sensors, are expected to be much more costly despite increased performance. Similarly, mediators such as ferrocene are used to deliver accurate readings, but are toxic and less effective than AgaMatrix’s solution. AgaMatrix software-based solution improves performance while being cost effective and safe.
Risk #3: As a pioneer in electrochemical applications for DSP algorithms, AgaMatrix may not be able to convince customers to adopt such a revolutionary solution.
Developers of blood glucose monitors and portable blood analyzers have never considered using a software-based approach to solving their accuracy and cross-interference problems. There is thus a psychological barrier that we believe can be overcome through a simple, concrete demonstration of low-cost performance gains which we can provide.
Risk #4: There may not be enough computing power and memory on blood glucose monitoring devices and portable blood analyzers to support AgaMatrix’s software.
The algorithms have been optimized for computational speed and are designed for use on devices with very little CPU resources. Initial customer feed back shows that AgaMatrix’s algorithms can be incorporated in next-generation ASICS designs for blood glucose monitoring devices, as well as into current microprocessor-powered portable blood analyzers.
Risk #5: Implantable blood glucose sensors may be prolonged from the marketplace indefinitely.
Although most blood glucose monitoring device companies are trying to develop implantable sensors, other technical and marketing issues may prevent the eventual adoption of the artificial pancreas. AgaMatrix’s technology will accelerate the development of the artificial pancreas by not requiring toxic mediators. However, AgaMatrix cannot solely depend on this market’s development, and has thus chosen to focus on existing markets to drive short to medium term revenue.
Risk #6: AgaMatrix must prove out the technology on blood samples.
Despite a high confidence in the technology, we must still create experimental data sets created from tests using actual blood samples. These data sets will be shown to customers as proof of the technology’s effectiveness. AgaMatrix is confident that after initial funding, lab space and equipment can be quickly secured to produce these data sets.
Risk #7: AgaMatrix may face regulatory delays from FDA approval.
We will work with our customers to ensure that the technologies that are deployed into their devices will incur minimal regulatory risks thereby complying with the FDA’s less onerous regulations for a “derivative device” (compared to the approval process for a completely new device).
Risk #8: AgaMatrix needs to determine customer willingness to pay and secure concrete deals with customers.
Several conversations with potential customers have already reached the level of discussing potential pricing structures so we believe there is some genuine interest.
Risk #9: Each OEM customer will require a custom-built version of the AgaMatrix software.
The software suite will be designed to be a modular and scalable platform technology. We will construct a set of configuration and integration tools designed to translate our core technology into suitable deployment formats.
Risk #10: University of Cambridge may have claims to AgaMatrix’s technologies.
The technology is based on 3rd generation algorithms that AgaMatrix alone has been developing for two years. 1st and 2nd generation technologies were developed at the University of Cambridge and validated the proof of concept of using a DSP approach to solving many of the outstanding problems in biosensors. Our 3rd generation technology is fundamentally different from the earlier technologies and has overcome a number of critical limitations, on both the theoretical and empirical sides, that prevent commercialization. AgaMatrix owns all rights to these 3rd generation technologies. The 1st and 2nd generation technologies, while illustrative of the concept, do not pose any commercial threat due to fundamental technological limitations
Risk #1: Working Capital Management – We expect to be running a significant working capital deficit because of the time it will take to establish payment schedules (e.g. quarterly royalties from partners) and receive payments from large OEM vendors while, as an early-stage company, we will simultaneously have to make payments on our supplies on a short-term basis. Managing the cash conversion cycle will be critical to ensuring liquidity and solvency.
Risk #2: Seasonal, Cyclical, or Highly Volatile Cash Flows – at this time, we expect there to be volatility in our cash flows based primarily on the new product introduction cycles of major medical devices manufacturers. Therefore our revenue and cash flow streams will not be smooth throughout the year, but will be stronger during times of new product introduction. By targeting three different market segments early on (blood glucose, point-of-care, and implantable devices) we aim to mitigate this risk.
Risk #3: Concentration of Customers – The blood glucose market and portable blood analyzer markets are dominated by an oligopoly of a handful of companies. It may be difficult to diversify our customer base sufficiently to prevent large swings in our revenue and cash flow based upon the actions of a small number of customers. To diminish this risk, we will initially target smaller players who will move more quickly and provide us with greater leverage when we go to negotiate with larger customers.
8.7 Business Ratios
Business ratios for the years of this plan are shown below. Industry profile ratios based on the Standard Industrial Classification (SIC) code 7373 or NAICS code 541512, Computer Systems Design Services, are shown for comparison.
|Year 1||Year 2||Year 3||Industry Profile|
|Percent of Total Assets|
|Other Current Assets||0.00%||0.00%||0.00%||63.87%|
|Total Current Assets||100.00%||100.00%||100.00%||94.15%|
|Percent of Sales|
|Selling, General & Administrative Expenses||1351.46%||57.96%||36.23%||77.82%|
|Profit Before Interest and Taxes||-2248.77%||32.24%||69.11%||0.36%|
|Total Debt to Total Assets||174.91%||12.78%||5.63%||65.50%|
|Pre-tax Return on Net Worth||3059.97%||155.92%||130.47%||0.53%|
|Pre-tax Return on Assets||-2292.37%||136.00%||123.13%||1.52%|
|Additional Ratios||Year 1||Year 2||Year 3|
|Net Profit Margin||-2249.33%||22.56%||48.38%||n.a|
|Return on Equity||0.00%||109.15%||91.33%||n.a|
|Accounts Payable Turnover||12.29||12.17||12.17||n.a|
|Total Asset Turnover||1.02||4.22||1.78||n.a|
|Debt to Net Worth||0.00||0.15||0.06||n.a|
|Current Liab. to Liab.||0.97||0.96||0.99||n.a|
|Net Working Capital||($174,681)||$2,069,084||$23,746,851||n.a|
|Assets to Sales||0.98||0.24||0.56||n.a|
|Current Debt/Total Assets||170%||12%||6%||n.a|