Swifton - TechStars - Aug 7 2015

1. August 7 2015

2. ABC Company, Inc. Estimated Statement of Operations For The Years Ended December 31, 2010. 2011, 2012, and 2013 2010 2011 2012 2013 2010 2011 2012 2013 Revenue: Installation Revenue 450$ 3,825$ 21,038$ 73,633$ 77.1% 84.3% 82.3% 80.6% Non-Installation Revenue Service Fees 89$ 623$ 4,361$ 17,444$ 15.2% 13.7% 17.1% 19.1% Other Non-Installation Revenue 45$ 90$ 158$ 237$ 7.7% 2.0% 0.6% 0.3% Total Revenue: 584$ 4,538$ 25,557$ 91,314$ 100.0% 100.0% 100.0% 100.0% Direct Costs: Installation Costs 338$ 2,678$ 12,623$ 36,817$ 57.9% 59.0% 49.4% 40.3% Non-Installation Costs 38$ 193$ 1,175$ 4,420$ 6.5% 4.3% 4.6% 4.8% Direct Costs: 376$ 2,871$ 13,798$ 41,237$ 64.4% 63.3% 54.0% 45.2% Other Cost of Services 88$ 567$ 2,556$ 6,849$ 15.1% 12.5% 10.0% 7.5% Gross Margin ($) 120$ 1,100$ 9,203$ 43,228$ 20.5% 24.2% 36.0% 47.3% Gross Margin (%) 20.5% 24.2% 36.0% 47.3% Operating Expenses: Sales 292$ 1,588$ 6,389$ 18,263$ 50.0% 35.0% 25.0% 20.0% Marketing 263$ 1,361$ 5,111$ 13,697$ 45.0% 30.0% 20.0% 15.0% Research & Development 175$ 998$ 2,811$ 8,218$ 30.0% 22.0% 11.0% 9.0% General & Administration 44$ 295$ 1,533$ 4,566$ 7.5% 6.5% 6.0% 5.0% Total Operating Expenses: 774$ 4,242$ 15,844$ 44,744$ 132.5% 93.5% 62.0% 49.0% EBITDA (654)$ (3,142)$ (6,641)$ (1,516)$ -112.0% -69.2% -26.0% -1.7% Other (Revenue) & Expenses: Interest 80$ 156$ 32$ 80$ 13.7% 3.4% 0.1% 0.1% Taxes 8$ 9$ 11$ 15$ 1.4% 0.2% 0.0% 0.0% Depreciation & Amortization 13$ 67$ 268$ 874$ 2.2% 1.5% 1.0% 1.0% Total Other (Revenue) & Expenses 101$ 232$ 311$ 969$ 17.3% 5.1% 1.2% 1.1% Net Income (Loss) (755)$ (3,374)$ (6,952)$ (2,485)$ -129.3% -74.3% -27.2% -2.7% Statement Notes: Revenue Market 1 43$ 2,320$ 12,205$ 46,232$ 7.4% 51.1% 47.8% 50.6% Market 2 230$ 1,201$ 7,652$ 26,450$ 39.4% 26.5% 29.9% 29.0% Market 3 256$ 932$ 3,250$ 12,658$ 43.8% 20.5% 12.7% 13.9% Market 4 55$ 85$ 2,450$ 5,974$ 9.4% 1.9% 9.6% 6.5% Total Revenue 584$ 4,538$ 25,557$ 91,314$ Headcount Existing 13.00$ 18.00$ 61.00$ 298.00$ New Hires 5.00$ 43.00$ 237.00$ 830.00$ Total Headcount 18.00$ 61.00$ 298.00$ 1,128.00$ Capital Expenditures 126.00$ 424.00$ 1,584.00$ 4,474.00$ Dollars (000's omitted) Percent (%) of Revenue COPYRIGHT © 2010 COPYRIGHT © 2014

4. ABC Company, Inc. Projected Statement of Operations For The Years Ended December 31, 2010. 2011, 2012, and 2013 2010 2011 2012 2013 Revenue: Market 1 43.00$ 2,320.00$ 12,205.00$ 46,232.00$ Market 2 230.00$ 1,201.00$ 7,652.00$ 26,450.00$ Market 3 256.00$ 932.00$ 3,250.00$ 12,658.00$ Market 4 55.00$ 85.00$ 2,450.00$ 5,974.00$ Total Revenue 584.00$ 4,538.00$ 25,557.00$ 91,314.00$ Gross Margin ($) 120.00$ 1,100.00$ 9,203.00$ 43,228.00$ Gross Margin (%) 20.5% 24.2% 36.0% 47.3% Operating Expenses: Sales & Marketing 555.00$ 2,949.00$ 11,500.00$ 31,960.00$ Research & Development 175.00$ 998.00$ 2,811.00$ 8,218.00$ General & Administration 44.00$ 295.00$ 1,533.00$ 4,566.00$ Total Operating Expenses: 774.00$ 4,242.00$ 15,844.00$ 44,744.00$ Other Expense/(Income) 101.00$ 232.00$ 311.00$ 969.00$ Net Income (Loss) (755.00)$ (3,374.00)$ (6,952.00)$ (2,485.00)$ Statement Notes: Headcount Existing 13.00$ 18.00$ 61.00$ 298.00$ New Hires 5.00$ 43.00$ 237.00$ 830.00$ Total Headcount 18.00$ 61.00$ 298.00$ 1,128.00$ Capital Expenditures 126.00$ 424.00$ 1,584.00$ 4,474.00$ Dollars (000's omitted) COPYRIGHT © 2014

6. ABC Company, Inc. Estimated Statement of Operations For The Years Ended December 31, 2010. 2011, 2012, and 2013 2010 2011 2012 2013 Revenue: Market 1 43$ 2,320$ 12,205$ 46,232$ Market 2 230$ 1,201$ 7,652$ 26,450$ Market 3 256$ 932$ 3,250$ 12,658$ Market 4 55$ 85$ 2,450$ 5,974$ Total Revenue 584$ 4,538$ 25,557$ 91,314$ Gross Margin ($) 120$ 1,100$ 9,203$ 43,228$ Gross Margin (%) 20.5% 24.2% 36.0% 47.3% Operating Expenses: Sales & Marketing 555$ 2,949$ 11,500$ 31,960$ Research & Development 175$ 998$ 2,811$ 8,218$ General & Administration 44$ 295$ 1,533$ 4,566$ Total Operating Expenses: 774$ 4,242$ 15,844$ 44,744$ Other Expense/(Income) 101$ 232$ 311$ 969$ Net Income (Loss) (755)$ (3,374)$ (6,952)$ (2,485)$ Statement Notes: Headcount Existing 13$ 18$ 61$ 298$ New Hires 5$ 43$ 237$ 830$ Total Headcount 18$ 61$ 298$ 1,128$ Capital Expenditures 126$ 424$ 1,584$ 4,474$ Dollars (000's omitted) COPYRIGHT © 2014

9. ABC Company, Inc. Projected Statement of Operations For The Years Ended December 31, 2010 through 2013 Revenue: Market 1 43$ 2,320$ 12,205$ 46,232$ Market 2 230 1201 7652 26450 Market 3 256 932 3250 12658 Market 4 55 85 2450 5974 Total Revenue 584 4538 25557 91314 Gross Margin ($) 120 1100 9203 43228 Gross Margin (%) 20.5% 24.2% 36.0% 47.3% Operating Expenses: Sales & Marketing 555 2949 11500 31960 Research & Development 175 998 2811 8218 General & Administration 44 295 1533 4566 Total Operating Expenses: 774 4242 15844 44744 Other Expense/(Income) 101 232 311 969 Net Income (Loss) (755)$ (3,374)$ (6,952)$ (2,485)$ Statement Notes: Headcount Existing 13 18 61 298 New Hires 5 43 237 830 Total Headcount 18 61 298 1,128 Capital Expenditures 126$ 424$ 1,584$ 4,474$ Dollars COPYRIGHT © 2014

18. Income Statement Cash Flow Statement COPYRIGHT © 2014 ABC Co. ($ 000's omitted) 2010 2011 2012 2013 2014 Pro Forma Financial Statement Revenue -$ 1,875$ 44,953$ 108,238$ 180,161$ Cost of Service - 1,162 12,739 5,369 - Gross Margin - 712 32,214 102,868 180,161 38% 72% 95% 100% Operating Expenses Research & Development 1,303 2,972 3,587 4,198 4,379 Sales & Marketing 662 1,456 2,041 2,195 2,868 General & Administrative 316 1,380 3,778 1,947 2,729 Total Expenses 2,282 5,807 9,407 8,340 9,976 Depreciation & Amortization 42 98 301 590 791 EBIT (2,324) (5,193) 22,507 93,939 169,394 Net Income (2,639) (5,411) 16,893 55,530 100,603 0% -289% 38% 51% 56% Pro Forma Cash Flow Depr & Amort 42 98 301 590 791 Cash from Operations (2,597) (5,313) 17,193 56,120 101,393 Change in Working Capital Decrease in Accounts Receivable - (1,125) (4,894) (5,573) (6,324) Increase in Accounts Payable (31) 189 2,015 2,819 2,887 Cash from Working Capital (31) (936) (2,879) (2,754) (3,437) Change in Investments Capital Equipment Purchases (57) (297) (1,052) (607) (600) Cash from Financing Series A Preferred 7,000 - - - - Series B Preferred - - 42,000 - - Cash from Financing 7,000 - 42,000 - - Net Cash Flow 4,315 (6,545) 55,262 52,759 97,357 Ending Cash 6,644$ 99$ 55,360$ 108,119$ 205,476$

19. ABC Company – Financials by Year ($000’s omitted) COPYRIGHT © 2014 ($25,000) $25,000 $75,000 $125,000 $175,000 $225,000 2015 2016 2017 2018 2019 Revenue Income Cash Milestone #1 Prototype Milestone #2 Pilots Milestone #3 Commercialization Seeking $250k Investment

20. David A. Fogel, CPA  Serial entrepreneurial CFO  Managing Director of Swifton CFOs LLC (since 2009)  Experience with high tech companies ranging from biotech to telecom to healthcare IT to social media to…  Adjunct Instructor of Master’s Program:  Presenter & Mentor:  Member: COPYRIGHT © 2014

21. Provide cost-effective outsourced CFO support Clients range from pre-revenue startups to later stage privately held companies Goals (1) educate entrepreneurs to understand and consider financial opportunities and implications (2) handle all accounting/ financial matters so the entrepreneurs can focus on driving the business COPYRIGHT © 2014

22. Can we just forecast revenue annually? Why do we have to forecast revenue monthly?

23. Customers Year # new clients # total clients Year 0 - - Year 1 3 3 Year 2 9 12 Year 3 25 37

24. Customers Year # new clients # total clients J F M A M J J A S O N D Year 0 - - - - - - - - - - - - - - Year 1 3 3 3 3 3 3 3 3 3 3 3 3 3 3 Year 2 9 12 12 12 12 12 12 12 12 12 12 12 12 12 Year 3 25 37 37 37 37 37 37 37 37 37 37 37 37 37

25. Customers Year # new clients # total clients J F M A M J J A S O N D Year 0 - - - - - - - - - - - - - - Year 1 3 3 3 3 3 3 3 3 3 3 3 3 3 3 Year 2 9 12 12 12 12 12 12 12 12 12 12 12 12 12 Year 3 25 37 37 37 37 37 37 37 37 37 37 37 37 37 • Are you really going to jump from 12 to 37 customers from Year 2 December to Year 3 January? Then why would you forecast it? Other reasons: • Timing and seasonality • Basis for cash forecasting

27. Balance Sheet  What you own/owe – point in time  Assets = Liabilities + Equity  Assets are good?  Capital expenditures (Fixed Asset) rule  Amount => $5,000 AND useful life > one year  Liabilities – Disclose, disclose, disclose COPYRIGHT © 2014

28. Profit and Loss Statement (Statement of Operations) • What you earned • Could represent cash activities but usually much more…… • Management accounting can be more informative, but need to have GAAP • Earnings can be managed, but cash is a reality… COPYRIGHT © 2014

32. Developing The Financial Forecast 1.What are financial projections? Collection of statements that present your business in numbers (IS, BS, CF, Cap) “Does the story make sense?” “Does the story add up?” COPYRIGHT © 2014

34. Developing The Financial Forecast 2. What about the assumptions? Document the source of each number you produce - Why? - Knowledge of the assumptions proves that the entrepreneur understands the business - Prove it to yourself Sources of assumptions - Desired goal to be obtained - Primary market research – surveys, vendor quotes - Second market research – purchased or gov’t information - Estimated or best guess (really try not to SWAG) COPYRIGHT © 2014

35. Developing The Financial Forecast 2. What about the assumptions? (part 2) Start-up costs (uses of $) Financing (sources of $) Capital expenditures (costs with >1 yr life) Fixed expense (cost of being in business) Variable expense (cost of doing business) Projected sales (anticipated revenue earned) Cash flow (anticipated $ received and spent) COPYRIGHT © 2014

36. • Expenses up to the point when you are open for business…….which is when? • List uses of money – describe how spent • Like: Fixed assets & Working Capital • Examples?  Fixed Assets = Equipment, Furniture  Working Capital = Rental deposits, Insurance Start-up cost assumptions COPYRIGHT © 2014

37. • Sources where $ will come from • Where?  Entrepreneur and team  F&F  Bank loan (though not likely for start-ups)  Debt from owner or outside creditor  Non-dilutive financing (maybe )  Equity capital • For loan – know amount, terms of repayment (mos), and rate of interest or return Financing assumptions COPYRIGHT © 2014

38. • Costs that have a “lifetime” greater than one year AND an individual or collective cost greater than $5k • Predict some fixed assets by headcount, some by significant changes in sales volume, some by changes in product lines, etc. • Examples: Leasehold improvements, Furniture & fixtures, Machinery • Note: Expense the PCs & Macs & iPads & iPhones (but keep track of them anyway) Capital Expenditures (Fixed Assets) COPYRIGHT © 2014

39. • Costs of being in business • Do not vary by sales volume (i.e. day-to-day) • But DO increase as the business scales • Create fixed cost projections on monthly basis • Research through correspondence with outside vendors • Record the source & amount from each vendor…….. • Examples: Rent, Utilities, Salaries, Benefits, Marketing expenses, Administrative expenses Fixed cost assumptions COPYRIGHT © 2014

40. • Costs of doing business • May vary directly with sales volume • DO increase as the business scales • Expenses incurred with the next “unit” of product or service • Research through correspondence with outside vendors • Examples: Materials, direct/indirect labor, and shipping costs Variable cost assumptions COPYRIGHT © 2014

42. • Convert your business activity to cash activity • When will cash be collected from customers?  May vary by product line and by customer  Generally assume 45 days---though currently customers are extending to 60 days • When do you pay your vendor’s invoices?  May vary by product line and by vendor  Generally assume 30-45 days  Need to create “referenceable” vendors Cash flow assumptions COPYRIGHT © 2014

43. Ben Littauer Member, Boston Harbor Angels Member, LaunchPad "I like to see a business model spreadsheet with the assumptions clearly called out as variables. Then I can twiddle the knobs and see how sensitive profits are to the assumptions." COPYRIGHT © 2014

45. Developing The Financial Forecast 3. Creating the sales forecast (part 2) How do I start? Market research! • Trade associations • Primary & secondary research • Gov’t resources US Census Bureau IRS Statistical Data Select your geography COPYRIGHT © 2014

46. Developing The Financial Forecast 3. Creating the sales forecast (part 3) Small Client Medium Client Large Client Average Hours Per Week 4 Hours 8 Hours 16 Hours Average Contract $ Per Week $500 $1,250 $2,500 Predict by client (customer) types • By market • By size Then ID certain characteristics COPYRIGHT © 2014

51. Tip: Project payroll & benefits in detail • Payroll & benefits are often the most costly expense yet they are often neglected • Project monthly to handle start dates correctly (everyone cannot start in January) • Match people adds with milestones COPYRIGHT © 2014

53. Multiple Model Trap: One investor model, Multiple options (triggers) Fundamental changes made in base model must be duplicated in the clones---and you will forget. If multiple scenarios are mandated do create at only a high level COPYRIGHT © 2014

54. Tip: Don’t forget the….. Sales commissions – Direct connect them to your sales staff’s (or sales rep) sales Bonuses – Include with payroll Recruiting expenses – Peg them to change in new employees Debt - Many forget to include Interest Expense on the income statement even though the Company has incurred Debt COPYRIGHT © 2014

55. Tip: Reasonableness 1. Once you think you are done take the smell test --- Do the numbers really make sense (i.e. can you really increase revenue w/o an increase in costs)? 2. Do the Like-Kind test. Compare your “metrics” versus your competition COPYRIGHT © 2014

61. Even More Universal Truths: • Be consistent – Don’t portray cost categories (or individuals) differently by year • Have “Checks” • Do not need to be hung up with GAAP, but….don’t go rogue COPYRIGHT © 2015

Swifton - TechStars - Aug 7 2015

Swifton - TechStars - Aug 7 2015

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