Accounting & Projections February 26, 2010

1. Sabin Environmental Prize Accounting & Projections February 26, 2010

2. Sabin Application Requirements • One year of financial projections • Explanation of use of prize money

3. Workshop Topics • How to do financial projections • Figure out how much $ you need

4. Purpose of Financial Projections • Can the business make money? • How much $ do you need? > to start? > to grow? • Have you thought about the details?

5. The Details • Sales: Price? First sale? How do sales grow? What makes them grow? • Costs: What do you need to make the product? Sell it? Who will you hire? When? Do you buy ads? Make brochures? • More costs: Where will your office be? Costs of running it? Who does the hiring? How do you pay people? Health insurance?

6. Stages of Financing

7. Projection Milestones In the life of a business: 1. Achieve some sales 2. Reach cash flow break-even 3. Exit -- for investors

8. Example: Timing of Milestones Exit Sales Break Even

9. Types of Statements • Income Statement • Balance Sheet • Sources and Uses of Funds .

10. Start with an Income Statement

11. Income Statement Definitions Revenues: > $ value exchanged > for products or services Expenses: > $ value of resources used > to earn those revenues

12. Your “Income Statement”

13. Company Income Statement

14. Expenses: Examples Divide expenses into: Direct Costs/Expenses and Indirect Costs/Expenses

15. Direct Costs or “Cost of Goods Sold” Direct Costs Materials Labor Packaging Costs of Making a Product/Service Inspection Shipping Customer Service Revenues – Cost of Goods Sold = Gross Profit

16. Operating Expenses (Sales & Marketing, General & Administrative, R&D or “S,G&A”) Other Costs – to run the Company Indirect Costs Rent Accounting Insurance Sales Expense CEO IT, HR, Legal, etc. Gross Profit – Operating Costs = EBITDA

17. Key Measure -- for Startups EBITDA Earnings Before Interest, Taxes, Depreciation & Amortization Measures -- earning power E - BIT - DA 17

18. Net Income (Loss) EBITDA minus: • Depreciation • Interest expense • Taxes • “One time events”

19. Depreciation 19

20. Depreciation Property, Plant & Equipment (Fixed Assets) • Long term assets of the company • Not for sale • Things that have or create value – over time

21. Examples of PP&E Buildings Factories Vehicles Equipment Computers Furniture

22. Depreciation • Fixed Assets provides valueover time • Also, wears out over time • Depreciationspreads these costs • Over their useful life

23. Example: A Company buys a wind turbine to generate its electricity. It pays $750,000 for the turbine. It expects the turbine to: • Last for 25 years, • Wear out evenly, and • Then be worth $0

24. Example: What is the “depreciation” of this asset? • $750,000/25 years = $30,000 year • $30,000 = annual depreciation expense This is called: “straight line” depreciation

25. Depreciation 25

26. Quick Review What Gets Depreciated? Green Wind Co. sells and installs wind turbines for customers. Are the following: Direct costs, Indirect Costs or Property, Plant & Equipment? Wind turbine? Delivery trucks? Finance staff? Installation? Sales people? Billing IT system?

27. Back to Building Projections

28. Start “ Big Picture ” > People ? > Machines ? > Advertising? > Locations? • What are the key sales drivers ?

29. Example > How many sales calls per month? > Success rate of sales calls? > Time till sale is completed? > Average price of a sale? • Sales require a sales force

31. The Product • Fresh farmed tilapia fillets • “Seafood Safe” and Organic • 100% organic feed • Purified and filtered re-circulated water

32. Evidence of Opportunity - over 3 years: • US seafood consumption up 12% - $12 billion • US tilapia consumption up 110% - $400 million • Demand for organic meat & fish up 120% Over 70% of Americans would by organic seafood if available; 60% ‘strongly prefer’ domestic

33. Customers • Suppliers of restaurants, grocery & fish stores • Also, Trader Joe’s, Whole Foods

34. Talking to customers: • 450 chefs and 150 retailers • Most prefer environmentally friendly fish • Local restaurant owner: “customers care” • Distributor: “Not enough good farms” • EcoFish: I will buy all you have to sell

35. Think “ Big Picture ” > Systems that grow fish • The Good Fish key sales driver:

36. Sales depend on “Pod Systems” • A Pod System produces 50,000 lbs fish/yr • Fresh organic tilapia sells for $5.63/lb • One Pod System in Year 1 • Couple of months to get going • Couple of months to ramp up

37. First 12 Month’s Projections Do this for 12 months

38. First Year 35 197

39. Next Step -- Costs Direct Costs (Cost of Goods Sold) – materials, labor, delivery Operating costs – sales people, travel, ads, CEO, rent, supplies • Going forward, 12 months

40. Cost of Goods Sold • Baby fish • Facilities: Rent & heating • Feed: Organic vegetarian • Staff: Monitor, move, clean, fillet, package fish • Delivery to customers • Byproducts: Waste and offal

41. Operating (S,G&A) Costs • Sales Force • List in organic seafood directories • Advertise with trade associations • Host events, tours, tastings • CEO, accounting, IT, office rent

42. Depreciation – from Equipment purchases • “Pod System” • Filleting machine • $60,000 total • Last 10 years • (120 months)

43. Cost Projections Do this for 12 months

44. Add up the First Year

45. Exercise – Make Lists • What drives sales? • Cost items for: • Making your product • Selling your product • Running your company • Equipment you will need

46. Next – Building a Balance Sheet

47. $60k Pod

48. Assets Cash 9.9 Accounts Receivable 32.7 Property & Equipment 60.0 Less Depreciation (6.0) Other Assets 2.0 Total Assets $125.6 Liabilities Accounts Payable 26.9 Accrued Expenses 24.4 Total Liabilities 51.3 Shareholders’ Equity Common Stock 450.3 Retained Earnings (376) Total Liabilities & Shareholders’ Equity $125.6 Good Fish Balance Sheet as of 12/31/10

49. Balance Sheet Assets = Liabilities + Shareholders’ Equity

50. Balance Sheet Definitions Assets: > What the company owns Liabilities & Shareholders’ Equity > How the company pays for what it owns