CASE # 4 ASSIGNMENT: PRO FORMA

CASE # 4 ASSIGNMENT: PRO FORMA
You are a professional accountant who has been employed to
offer advice to a small start up
biotech company with the following details given by the
client in the first meeting.
The pre-IPO company called NewBio Corporation (“NewBio”) has
been operating for the last
four years but has not had the chance to form an accounting
department and has been working
on a cash only basis since inception.
The company has now decided to offer itself for sale given
the difficult market for raising
additional financing to fund continued research and
development.
The company has been researching potential treatments for
various fungal diseases and has
collected approximately $45M over the last 4 years from
equity financings. The company has no
debt other than a convertible note for $5M used for building
a research facility for its employees.
The company has no financial statements although has
provided the following details of how
money was spent over the last 4 years.
$23M on researching and developing patents for the treatment
of certain fungal diseases
• $12M on salary and related expenses
• $5M on capital equipment (all purchased)
• $1M rent and facility costs
• $4M on sundry research expenses
• $1M Other expenses including legal defense fees for
various patents
$5M on corporate and administration expenses
• $2M on corporate officer expenses
• $1M travel and such related expenses
• $1M Legal
• $1M Corporate and business development
The research activities have led to 10 new patents that are
in the process of being filed and there
is a good probability that they will be issued for NewBio.
The company is likely to need to spend considerable amounts
of money on the protection and
maintenance of its current and future IP portfolio. These
costs are estimated to run in excess of
$3M each year for the next 10 years.
The company currently licenses certain technologies but
cross licenses its technologies so there
is minimal cost although upon commercialization of both Xp1
and Xp2 and any future products,
there will be royalties of 1.5% payable annually, in
arrears, on recognized revenues for each of
these products off set by technology license revenues. The
company owns these technology
licenses although it is unclear what costs were associated
with their development as they were
part of the original work that was the genesis of the
company. Off setting license technology
income is estimated at $250,000 in the current year.
A state of the art research facility was custom built with
the proceeds of a $5M senior note, which
is convertible to equity upon any liquidation event.
Interest is accruing at 6% annually payable
upon the commercialization of Xp2. The holder of the note is
the Chairman of the Board of
Directors who also owns 7% of the total outstanding shares
of the company.The founder also owns key intellectual property that is used by
the company with an annual
payment of $250,000 with royalties due of 0.25% payable
annually in advance on projected
revenues of Xp1.
Assignment
1. Your client does not know what rules or regulatory bodies
govern pro
forma reporting and would like you to summarize key guidance
for their
consideration. Required: Find at least 2 different sources.
2. Since NewBio doesn’t have an accounting department, you
have been
hired to write procedures on how to create pro forma
financial statements.
Utilize the guidance you found in Item 1.
3. Your client wants to know which areas would require
significant
assumptions to calculate any amounts that NewBio doesn’t
have data for.
Select a minimum of 2 assumptions/topics to discuss in more
detail
based on the facts provided. Be sure to also include
explanations that
align with generally accepted accounting principles.
4. Finally, your client wants to go public in the future.
The client wants your
opinion on what accounting areas need more focus in order to
consider
going public.
* You should create a professional response to specifically
address each of the
client requests, as noted above. You can make assumptions to
complete your
response. Do not create proforma financial statements.
Maximum document
length is 3 pages.