Building an Investor-Worthy Financial Model

1. Building an Investor-Worthy Financial Model Suzanne C. Oakley, CPA Business Planning/Interim CFO New England CFO Strategies Joseph McKneely Manager Deloitte Financial Advisory Services LLP June 28, 2011 Cleantech Open Northeast Conference The information expressed herein does not necessarily reflect the views and opinions of Deloitte Touche Tohmatsu, its member firms and their respective subsidiaries, and affiliates (“Deloitte”) or New England CFO Strategies. This publication contains general information only. Deloitte and New England CFO Strategies is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Deloitte, its affiliates, its related entities and New England CFO Strategies shall not be responsible for any loss sustained by any person who relies on this publication.

2. Agenda Building an Investor-Worthy Financial Model

3. What are Financial Statements? Building an Investor-Worthy Financial Model

4. Financial Statements: Key to the Business Plan • Demonstrates “proof” that the B-plan will make $$$$ — puts numbers to your business model theory • Makes your B-plan come alive for the investor — translates technology and market to a financial story • Demonstrates YOU know your milestones, YOU know your market, and YOU know how to make $$$$ Building an Investor-Worthy Financial Model

5. Financial Statements: 3 Main Statements Result of a company’s operations over a specified period of time Measures revenues less expenses Snapshot of a company’s financial condition at a specific point in time Measures assets and liabilities Description of how a company generated or used cash over a period of time Measures CASH Income Statement Balance Sheet Cash Flow Building an Investor-Worthy Financial Model

6. Financial Statements: Basic Elements Building an Investor-Worthy Financial Model

7. Financial Statements: P&L Format Building an Investor-Worthy Financial Model

8. Financial Statements: Cash flow Format Building an Investor-Worthy Financial Model

9. Financial Statements: Balance Sheet Format Building an Investor-Worthy Financial Model

10. Designing a Financial Plan Building an Investor-Worthy Financial Model

11. What business are you in? Manufacturing Software Services Distribution Development Other What are the industry or traditional margins in that business? What is the industry sales cycle (long lead time?) How capital intensive is your business? Why will your business do better or worse than incumbents? Designing a Financial Plan: Focus on Context Building an Investor-Worthy Financial Model

12. Designing a Financial Plan: Financing Milestones Product (Units) Units Profits +$ -$ Later Stage M&A IPO M&A Friends Family Angel Early Stage Angel Early Stage Early Stage Later Stage Product Development Introduction Growth Maturity Decline Expenditures Time Prod Dev Alpha Beta I Beta II Pilots IP Fundable Team Pilots Reg. Launch Nat. Launch Fundable Team IP Repeatable Biz Model Enhancements New Products Operating Efficiencies Courtesy of Paul Sullivan University of Michigan Building an Investor-Worthy Financial Model

13. Detailed, bottoms up approach (build the story) 5 years projection (though 3 yr is focus) Monthly analysis year 1 Quarterly analysis years 2 and 3 Annual analysis years 4 and 5 Monthly perspective to cash flow break even Shows expected additional capital raises Calls out key assumptions and risk Sensitivity analysis Selective market metrics Avg. revenue per customer Avg. cost to acquire customer Days receivable Days payable Inventory turnover Perspective: sources and uses of cash! Designing a Financial Plan: Key Elements Building an Investor-Worthy Financial Model

14. Developing Your Assumptions Building an Investor-Worthy Financial Model

15. Revenue = Units x Price What is your sales unit (device, subscription, royalty, etc.)? How are you determining price? Are you priced in line with competitors? Will you have price pressure in future years? Relationship of Numbers Important Address available market and present realistic market share gains Sales unit growth should relate to market data Recurring revenue should be based on an installed base Sales expense should relate to revenue Hockey stick growth is not believable Determine key milestones FCS (First Customer Ship) Date Developing Your Assumptions: Revenue Building an Investor-Worthy Financial Model

16. Cost of Goods Sold (COGS) = Units x Cost to Produce How much does it cost to produce a sales unit? Materials, Labor or both Review comparable businesses to determine costing Benchmark multiple vendors to attain best product cost Address if your are costs fixed or variable? Build in cost reductions to meet future pricing pressures Other cost of sales Minimum of 5% -15% or more for freight, tech support, warranty, etc… Developing Your Assumptions: COGS Building an Investor-Worthy Financial Model

17. Operating Expenses Salaries, Commissions, Benefits Fringe Benefits (e.g.15%) Merit increase (e.g. 4%) Bonus/Commission Assumptions Recruiting fees e.g. $5k -15k or more per person for every hire or determine to pay only a certain amount per quarter Rent and Utilities Benchmark market rates per square footage Determine space needed (e.g. per head?) Total Lease cost Don’t forget Utility expenses Developing Your Assumptions: Operating Expenses Operating Expenses Marketing, Tradeshow, Advertising Insurance Travel and Entertainment Traveler (e.g. $1,500 per month) Non-traveler (e.g. $100 per month) Research and Development Outside Contractors Shipping Repairs and Maintenance Fees Office Expense Website Building an Investor-Worthy Financial Model

18. Capital Expenditures Furniture and Fixtures (e.g.~$50,000 or per head) Facility Build out Lab Equipment IT Infrastructure Cash Burn or Burn Rate Know on monthly or quarterly basis Runway # of months operating at a loss before all cash is gone Cash Flow Break Even Point at which cash from revenues = or > Cash Burn Developing Your Assumptions: Cash Flow Building an Investor-Worthy Financial Model

19. Developing Your Assumptions: Sensitivities & Metrics Building an Investor-Worthy Financial Model

20. Financial model does not support B-Plan assertions Contradicts total servable market assumptions Time to profitability unrealistic based on industry trends Assumptions, Gross and Operating Margins in outer years not in line with industry standards Seasonality not reflected Financial Metrics Not Relevant Revenue and Cost Models Lack Detail Assumptions not supported by rest of business plan Growth is hockey stick on steroids Financing needs not linked to milestones Developing Your Assumptions – Red Flags Building an Investor-Worthy Financial Model

21. Search the SEC EDGAR Database - http://www.sec.gov Companies and Other Filers Input Company Name or Ticker Symbol 10-K Filing (Annual Report), 10-Q Filing (Quarterly Report) Financial sections (e.g. Income Statement, Balance Sheet, MD&A) Yahoo Finance Company Financials Trade Press Market Research Reports Developing Your Assumptions: How to? Building an Investor-Worthy Financial Model

22. Cleantech Open Team Activity Building an Investor-Worthy Financial Model

23. Conclusions Building an Investor-Worthy Financial Model

24. The Financial Section of the B-Plan is the “happy ending” to your story Investor Mantra: “Show Me the $$$” Reality gets funded Conclusions: Final Thoughts Building an Investor-Worthy Financial Model

25. Contact Information New England CFO Strategies Suzanne C. Oakley, CPA Business Planning/Interim CFO 139A Charles Street #284, Boston, MA 02114 617-840-4766 soakley@necfo.comwww.necfo.com • New England CFO Strategies is led by Suzanne Oakley, CPA. Ms. Oakley has 25+ years experience in business planning, financial modeling, financial management, and strategy development for companies ranging in size from start-up to Fortune 500. A seasoned financial executive, Ms. Oakley is a Certified Public Accountant in Massachusetts. She has extensive experience in: • Providing financial oversight for start-up companies or corporate operating divisions, • Developing and managing annual budgets and quarterly outlooks, • Financial reporting and analysis to Executive management and Boards of Directors, • Sarbanes Oxley compliance, and • Implementing financial planning and reporting systems. • Ms. Oakley earned her MBA in Finance and New Business Development from MIT's Sloan School of Management and her BS in Business Administration, cum laude, from Georgetown University School of Business. Mr. McKneely is a Manager in the Valuation services team at Deloitte Financial Advisory Services LLP. He specializes in the valuation of business interests, intangible assets, closely held securities, privately held companies, and intellectual property. Mr. McKneely focuses on valuation matters associated with Statement of Financial Accounting Standards Nos. 141, 142, and related GAAP. He has also worked on several valuation projects for tax related purposes such as 409A and 280G, as well as valuations for purposes of tax planning, and pre-merger planning. Mr. McKneely has broad experience across a range of industries, having been a significant contributor on projects in the oil and gas, biotechnology, manufacturing, retail, telecommunications, and software industries, among others. Mr. McKneely also has considerable experience in providing SAS review audit support across these industries; including reviews of valuations prepared for IFRS reporting purposes such as asset impairment testing and purchase price allocations for international companies. Education • Texas A&M University, M.S., Finance • Texas A&M University, B.B.A., Accounting Deloitte Financial Advisory Services LLP 200 Berkeley Street Boston, MA 02116 USA Joseph McKneely Manager Tel: +1 617 437 2047 Business Valuation jmckneely@deloitte.com www.deloitte.com Building an Investor-Worthy Financial Model

26. Questions? Building an Investor-Worthy Financial Model