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