Investor Report Report for Year 2013 Team 20 - Project Version A Mengdi Tan Ululani McFall Sidhaant Savara Timothy Dreckman
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Contents
Executive Summary ............................................................................ 2 Financial Statements .......................................................................... 3 Income Statement ........................................................................... 3 Balance Sheet ................................................................................ 4 Statement of Cash Flow ..................................................................... 5 Business Analysis ............................................................................ 11 Projected Income Statement for 2014 .................................................... 13 Journal Entries for 2013 ..................................................................... 16 T-Accounts for 2013 ......................................................................... 19 Appendix....................................................................................... 27
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Executive Summary
Zap Inc. (the Company) is a Boston based overhead projector retailer and service provider. The Company was founded in 2008 and had its Initial Public Offering in January 2010 at the NYSE.
The Company generates revenue through the sales of projectors that to educational and corporate institutes. In addition to the sales, the Company also provides its customers with additional services that help maintain the quality and increase the life span of the projector.
The Company received funding from three venture funds that also provide strategic partnerships to the management team. To improve the efficiency and sales an addition of a new Chief Sales and Marketing Officer occurred over the year of 2013. This new addition has helped the Company secure contracts with multiple universities for long-term projector service and maintenance. The Company has used this new strategic approach to perform better and give itself better opportunity to increase its customer base.
The following report consists of a detailed report of the transactions that the Company undertook during the year 2013. Along with the list of accounting transactions, the financial analysts have also analyzed the Companys position in the market and predicted the outlook of the Company.
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Financial Statements
Income Statement The following table is the Income Statement from 2011 to 2013.
The Company has experienced a 201% increase in Net Income from the previous year and has done so due to increase in sales. 2013 2012 2011 Sales 4,186,925 $ 2,280,000 $ 2,500,000 $ COGS 2,549,150 $ 850,000 $ 780,000 $ Wages 1,057,000 $ 565,000 $ 785,000 $ Utility 51,000 $ 37,050 $ 37,500 $ Insurance 168,250 $ 23,905 $ 21,097 $ Rent 61,717 $ 18,009 $ 17,080 $ Fuel 13,900 $ 2,900 $ 1,400 $ Office Supplies 19,800 $ 6,000 $ 5,000 $ Advertising 42,442 $ 23,000 $ 25,000 $ Bad Debt 247,875 $ 60,750 $ 45,000 $ Depreciation 678,700 $ 500,000 $ 500,000 $ Amortization Expense 3,708 $ - $ - $ Bond Interst Expense 15,856 $ - $ - $ Total Expense 4,909,398 $ 2,086,614 $ 2,217,077 $ Operating Income (722,473) $ 193,386 $ 282,923 $ Interest Income 90,892 $ 23,676 $ 21,574 $ Interest Expense (87,917) $ (56,250) $ (56,250) $ Loss on Sale - - $ 34,900 $ Gain on Sale 1,195,000 $ - $ 120,000 $ Unrealized Gain 8,000 $ - $ - $ Income Before Tax 483,502 $ 160,812 $ 368,247 $ Income Tax Expense - - - Net Income 483,502 $ 160,812 $ 368,247 $ Income Statement Revenue Expenses
Net income 160,812 $ Adjustments to Reconcile Depreciation Expense 500,000 $ Loss On Sale - $ Bad Debt Expenses (80,000) $ Change in Currnet Accounts Accounts Receivable 70,000 $ Interenst Receivable (2,102) $ Inventory (200,000) $ Office Expenses 1,880 $ Prepaid Expenses 15,041 $ Accounts Payable (120,000) $ Wages Payable 2,000 $ Net Cash Flow from Operating Activities 347,631 $ Cash Flow from Investing Activites Outflow to Purchase Marketable Securities (60,000) $ Long Term Notes Receivable (285,000) $ Net Cash Flow from Investing Activities (345,000) $ Cash Flow from Financing Activites Outflow for Dividends Paid in 2012 (135,000) $ Net Cash Flow from Financing Activites (135,000) $ Net Decrease in Cash (132,369) $ Beginning Cash Balance 658,079 $ Ending Cash Balance 525,710 $ For the year ended December 31,2012 Cash Flow from Operating Activities Statement of Cash Flow
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YEAR 2013
Cash Flow from Operating Activities Net income 483,502 $ Adjustments to Reconcile Depreciation and Amoritization Expense 682,408 $ Gain On Sale (1,195,000) $ Bad Debt Expenses 199,375 $ Amoritization of Bond Premium (2,143) $ Unrealized Gain (8,000) $ Change in Currnet Accounts Accounts Receivable (1,270,963) $ Interest Receivable (67,216) $ Inventory 257,275 $ Office Expense (6,200) $ Prepaid Expenses (260,892) $ Accounts Payable 556,063 $ Wages Payable 5,000 $ Other Payables 540,167 $ Deferred Revenue 787,825 $ Net Cash Flow from Operating Activities 701,201 $ Cash Flow from Investing Activites Inflow: Sale of Equipment 750,000 $ Sale of Land 2,000,000 $ Outflow: Purchase of Office Furniture (102,000) $ Purchase of Patent (89,000) $ Purchse of Equipment (230,000) $ Purchase of Land (970,000) $ Purchase Marketable Securities (47,000) $ Net Cash Flow from Investing Activities 1,312,000 $ Cash Flow from Financing Activites Inflow: Long Term Notes 88,000 $ Bond Issuance 1,022,995 $ Contributed Capital 29,000 $ Issuance of Stock 950,000 $ Outflow: Purchase of Treasury Stock (455,000) $ Dividends (155,000) $ Net Cash Flow from Financing Activites 1,479,995 $ Net Increase in Cash 3,493,196 $ Beginning Cash Balance 525,710 $ Ending Cash Balance 4,018,906 $ Statement of Cash Flow For the Year ended December 31,2013
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Ratio Analysis
The following analysis computes the key ratios of the Company and through a horizontal comparison; it depicts the trends in the Company. These ratios also help investors make informed decision before investing in the Company. The management team tracks these ratios monthly to ensure that all milestones are met and that there is no imminent threat to the Company. All calculation work done for the below calculations are in the Appendix.
GROSS PROFITS The Gross Profits have increased over the last year due to an increase in the number of products sold. The increase in the Cost of Goods (COG) produced has led to a lower Gross Profit in the year 2013. The Company has switched manufactures and has begun selling higher quality products thereby incurring higher COG sold in 2013. Year 2013 2012 2011 Gross Profits $ 1,637,775 $ 1,430,000 $ 1,720,000
Gross Profit Ratio A decrease in the Gross Profit Ratio is due to higher COG sold. This ratio helps determine the amount of profit generated as a percent of net sales. Year 2013 2012 2011 Gross Profit Ratio 39% 63% 69%
OPERATING INCOME Profit or Loss realized after the deduction of operating expenses from the revenue. Therefore, in 2013 the Company incurred higher expenses when compared to the revenue Year 2013 2012 2011 Operating Income $ (722,473) $ 193,386 $ 282,923
OPERATING MARGIN This percentage measures the amount of companys revenue left after subtracting out the operating expenses. A high positive number would indicate that the Company is able to pay for its fixed costs. Therefore, over the last 2 years, the company made $0.08 and $0.11 for every dollar in sales. However, in 2013 the Company was losing $0.17 for every dollar in sales. Year 2013 2012 2011 Operating Margin -17% 8% 11%
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RETURN ON EQUITY The Return on Equity or ROE is the amount of net income returned as a percentage of shareholders equity. Based on the number for the year 2013 it can be concluded that the Company is generating $0.10 in profits for every dollar of shareholder money invested. This also indicates the profitability of the company and shows a strong growth over the past two years. Year 2013 2012 2011 ROE 7.6% 1.2% 3.6%
WORKING CAPITAL Current Assets less Current Liabilities gives the Working Capital. This is the amount of money the Company utilizes to fund operations and purchase more inventory to meet the demand. An increasing amount over the past three years indicates an increase in the number of products sold and the decrease of debt or payable that the Company has. Year 2013 2012 2011 Working Capital $ 3,538,154 $ 1,561,792 $ 1,340,980
CURRENT RATIO This ratio measures the Companys ability to pay short-term obligations. Although this amount has decreased since the last two years, it is still a strong indication of the ability to pay off any obligations that may arise in the short term. The ratio for 2013 indicates that the Company is 2 times capable of paying any immediate debt if it may arise. Year 2013 2012 2011 Current Ratio 2.05 3.44 2.82
QUICK RATIO Similar to the Current Ratio, the Quick Ratio measures the short-term liquidity of the Company. This ratio reduces the Inventory amount from Current Assets before deriving the number. This includes assets that the Company can immediately turn into cash if the need arises. In 2013, the Company has $1.84 in liquid assets to cover $1 in current liabilities. A growth over the past two years has helped the Company become more stable in paying off any liabilities that may arise. Year 2013 2012 2011 Quick Ratio 1.98 0.97 1.63
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ACCOUNTS RECEIVABLE TURNOVER This ratio indicates the ability of the Company to collect on its debt. Not all customers pay for the services and products upfront. But in order the do business with such clients the Company allows them to utilize or purchase a service or product on credit and then works towards collecting this amount from the client in the near future. This number indicates that the Company is efficient at collecting its debts. Year 2013 2012 2011 AR Turnover 3.84 4.65 4.76
INVENTORY TURNOVER This ratio helps determine how many times the inventory is sold and replaced. Due to the current nature of the business, it takes longer to sell projectors and manufacture new ones. Based on industry averages an Inventory Turnover ratio for the electronic consumer goods industry is 10 days. Based on the industry average the Company is doing perfectly well in terms of selling the product and manufacturing new ones. Although this number is higher than last year, it is mainly due to saturation of the market and limited number of projectors that customers purchase. Year 2013 2012 2011 Inventory Turnover 5.83 2.34 3.23
DEBT-TO-EQUITY RATIO This ratio measures the proportion of equity and debt that is used to finance the assets. An increase in this ratio over the years indicates the Companys aggressiveness in expanding and purchasing more assets to grow. Based on Industry Averages of Electronic Consumer Goods the average is between 1 and 1.5 thereby keeping the Company in good standing. Year 2013 2012 2011 D/E Ratio 1.13 0.37 0.39
BOOK VALUE PER SHARE This ratio helps investors determine the level of safety associated with each individual share after all debts are paid off. The Company has been able to maintain a steady amount over the past 3 years. This indicates the dollar value remaining for common shareholders after all assets are liquidates and all debts are paid. Year 2013 2012 2011 Book Value 4.77 5.05 5.04
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EARNINGS PER SHARE This is a key ratio that helps determine the profitability of the Company. This ratio helps with computation that make it easier for investors to determine which a more viable company is. Year 2013 2012 2011 EPS 0.12 0.04 0.08
PRICE EARNINGS RATIO This ratio utilizes the EPS ratio to determine the valuation ratio of a company. This ratio helps investors realize what earnings can be expected from a given company. The PE multiple for the Company in 2013 is 45.45 which means that an investor is paying $45.45 for $1 in current earning. A growing PE ratio depicts the higher earning potential of the company, which has been the trend over the past 3 years. Year 2013 2012 2011 Price Earnings Ratio 4.16 94.52 34.81
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Business Analysis The Company has shown a growth of 84% in sales in 2013. During 2013, the Company acquired new clients and secured more long-term contracts that will be beneficial to the sales for 2014. Due to the massive increase in sales, additional people joined the Zap Team. This allowed the Company to double its work force thereby increase the employment rate in the area.
In order to meet the high demand and still deliver quality product the Company has a new manufacturer that has resulted in the increase of COGS in 2013. As seen in the below graphs the COGS currently constitute towards 60% of Sales as compared to 37% in 2012. The purchase of a new Patent in 2013 is what has helped improve the quality of the product by retrofitting all Zap Projectors with a new type of motherboard that prevents overheating and burning out of the projector bulb. This motherboard also allows for a LCD display on the product, which is one of the contributing, factors the increase in COGS. The patent also allowed the Company to redesign its product, which therefore resulted in the sale of the current manufacturing machine that was sold at a premium of USD $1.2M.
A bond issuance of USD $1M funded the new sales team. This source of funding was a better alternative to receiving a debt from a bank to reduce our Interest Expenses. This sales team helped the Company increase its Inventory Turnover by 150%. This extraordinary turnover has resulted in an average of USD $ 2M in service revenue for 2014.
$- $1 $2 $3 $4 $5 2013 2012 2011 M i l l i o n s Sales vs COGS Sales COGS
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In order to provide better customer service the Company has increased its on credit sales function since schools have a fixed payment process in place that takes on average 30 days to clear the accounting office. This has increase the AR amount to USD $1.7M but the Company expects a 100% payment from all its educational institute clients.
All the above improvements have led to an ROE of 7.6% in 2013, which is an all-time high since the inception of the Company. Our current Investors are very pleased with the Company have therefore purchased 250,000 new shares that were issued in 2013. Since this is a growing sector, our equity investors see the potential of the business with a high ROE number compared to the overall industry.
The Company has proved itself in the market place by bouncing back this year after a poor performance in 2012. This trend shows the nature of the current business model of marketing and selling products heavily in one year and then locking in servicing contracts with the clients for the following years.
Over the past 3 years, the Company has seen a trend in the market place and as it works towards creating a better brand in the market, the share prices are expected to increase. After closing at $5 per share on Dec 31, 2013, the Company is expecting to have an average share price at around $6 in 2014.
$484 $161 $368 $- $100 $200 $300 $400 $500 $600 2013 2012 2011 T h o u s a n d s Net Income
The previous figure consists of the projections for the Year 2014. The Company and Management Team have been conservative with the projections. Due to the nature of the business, sales occur in alternating cycles since customers do not purchase new projectors every year. Market research however shows that people upgrade their system every 2 4 years. Services to products sold in 2013 and securing corporate contracts will drive revenue in 2014.
Based on the current contracts and average service cost, the Company estimates that revenue will be USD $ 3.5M. The expenses are approximately an average of the previous years percent of sales. The Cost of Goods Sold in 2014 is 30% of the sales based on decrease in new products sold and mainly services provided by the Company on existing products, which consists of on-site repairs and small part replacements. The Wages will remain the same in 2014 due to no new hires by the Company, as we are not planning on expanding the sales and marketing team but focusing on providing our clients with quality service. Utilities, Insurance, Rent and Fuel are adjusted accordingly since there are no new expansions.
Based on previous year records of the Company being able to collect 87% of its Accounts Receivables, which is approximately 30% of sales, the Bad Debt Expenses is adjusted accordingly. A reduction in Advertising Expenses by 50% of 2013 since the Company is not actively seeking new clients.
The Management has agreed on a conservative approach to 2014 with more focus towards providing quality customer service. By utilizing the successful year of 2013 to follow up with existing clients and provide them with the services that they may require. Based on the success of 2013 financial analyst assume stock prices to rise by $3 to $4. Since the Company had previously repurchased some of its shares the Unrealized Gain would be USD $420,000 over the course of 2014.
This projection is based on the increase in college and university spending budgets to retrofit classrooms with state of the art learning tools. Additionally corporations are also increasing their need for a conference room that is fully equipped with projectors, poly-coms and monitors.
Although the Management foresees a decrease in net income for 2014. However, it assures its investors that it is only the nature of the business and an increase in 2015 is highly probable.
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Actual vs Predicted EPS Evaluation Analysts' projections for Earnings per Share (EPS) to be $0.13 at the end of 2013. The actual EPS for 2013 was $0.12. The difference is $0.01, making the actual EPS very close to the predicted. The Company was able to meet the expected projection of analysts. This difference was small, possible course of action include- 1. Issuing less stock 2. Repurchasing more treasury stock 3. Decreasing average outstanding shares 4. Increasing our EPS 5. Reduction in expenses
Based on initial market research and Bloomberg Averages, a horizontal comparison along similar companies in the market indicated an EPS of 0.10 to 0.69. Based on the early stage of the Company and heavy competition in the Electronic Consumer Goods industry the EPS is on the lower end. This however is compared to companies that have been in operation for over a decade with a 4x Zap revenue. Since this is a growing company capital is required to fund the growth thereby reducing the amount of capital that flows down to shareholders.
The Management Team believes that once the Company establishes itself in this industry with its high quality service and state-of-the-art projectors it will be less capital intensive and therefore return more earnings to its shareholders.
Below are the Balance Sheet and Income Statement broken down into T-Accounts for 2013. Assets, Liabilities, Equity, Revenue and Expenses further break them down for simplification. The Company is happy to provide serious investors with the audited version of the financial that will be easier to read. Please note that the Company is currently looking for an equity investor for a Series C round at a Pre-Money Valuation of USD $9M. Please email us for a digital copy of the T-Accounts.
Return on Equity Net Income/Avg. Equity Avg. Equity-(5,067,894+6,936,792+7,028,980)/3=6,344,555 2013-483,502/6,344,555=.076 2012-79,926/6,344,555=.0126 2011-232,724/6,344,555=.0367
Working Capital Current Assets-Current Liabilities 2013-6,898,608-3,360,454=3,538,154 2012-2,201,792-640,000=1,561,792 2011-2,078,980-738,000=1,340,980
Current Ratio Current Assets/Current Liabilities 2013-6,898,608/3,360,454=2.053 2012-2,201,792/640,000=3.44 2011-2,078,980/738,000=2.817
Quick Ratio (Cash+Short Term Investments+Receivables)/Current Liabilities 2013-(4,018,906+1,725,963,908,012)/3,360,454=1.98 2012-(525,710+750,000+23,676)/640,000=.976 2011-(658,079+525,000+21,574)/738,000=1.63
Debt to Equity Ratio Total Liabilities/Total Equity 2013-5,719,306/5,067,894=1.129 2012-1,890,000/5,046,792=.374 2011-1,988,000/5,040,980=.394
Book Value Per Share Value of Common Equity/Number of Shares Outstanding Value of Common Equity=Common Stock+APIC+Retained Earnings 2013-(1,062,500+2,711,906+1,219,488)/4,000,000=1.248 2012-(1,000,000+1,824,406+1,722,386)/4,000,000=1.135 2011-(1,000,000+1,824,406+1,716,574)/4,000,000=1.135
Earning Per Share (EPS)= Net income-Preferred Dividend / Average Number of common shares Outstanding EPS(2011)=(333,347-0)/4,000,000= 8.33% EPS(2012)=(160812-0)/4,000,000= 4.02% EPS(2013)=(483,502.4-0)/4,000,000= 12%
Price Earnings Ratio Price Earning Ratio= Market Value per Share/ Earnings per Share (EPS) P/ E Ratio(Dec.31,2013)=5/0.12=4.167 P/ E Ratio(2012)=3.8/0.0402=94.52 P/ E Ratio(2011)=2.9/0.0833=34.81