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Mintpond

Consulting
Enerkem Inc.

Mintpond
Consulting
Enerkem Inc.

Funding Proposal
FINS3623
Matthew Pirrottina
Paul Essing
Raymond Smith
Nicholas White

Table of Contents

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Mintpond
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Enerkem Inc.
1 EXECUTIVE SUMMARY / INFORMATION MEMORANDUM3
2 BACKGROUND..........................................................4
2.1 BUSINESS AND PRODUCT DESCRIPTION.......................................4
2.2 CURRENT OWNERS AND MANAGEMENT TEAM................................4
2.3 MARKET AND INDUSTRY COMPETITIVENESS ANALYSIS......................6
2.4 PRODUCTION AND OPERATIONAL STRATEGY..................................7
2.5 USE OF PROCEEDS..................................................................7
3 FINANCIAL ANALYSIS AND PROJECTIONS....................8
3.1 HISTORICAL FINANCIAL ANALYSIS................................................8
3.2 KEY VALUATION ASSUMPTIONS...................................................8
3.3 FORECASTING OF FUTURE PROFITABILITY AND CASH FLOWS.............9
3.4 COMPANY VALUE USING THE VENTURE CAPITAL METHOD OF
VALUATION................................................................................ 11
3.5 PEERS COMPARISON..............................................................12
3.6 PRE MONEY AND POST MONEY VALUATIONS................................12
3.7 DILUTION IMPACTS................................................................13
4 THE DEAL...............................................................14
4.1 PRICING AND JUSTIFICATION....................................................14
4.2 TYPES OF SECURITIES AND KEY FUNDING TERMS AND THEIR
JUSTIFICATION............................................................................ 15
4.3 PROPOSED EXIT STRATEGIES...................................................16
5 TERM SHEET ENERKEM INC.....................................18
6 CONCLUSION..........................................................19
7 APPENDIX 1...........................................................20
8 APPENDIX 2...........................................................22
9 APPENDIX 3...........................................................24
10 BIBLIOGRAPHY......................................................30

1 Executive summary / information memorandum


2

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Enerkem Inc.
This report provides information for venture capitalists that are looking to
evaluate Enerkem Inc. as a possible investment. The following pages contain
information relating to the current and future financial position of the firm. The
key methods of analysis employed include: SWOT comparisons; historical
financial analysis with relevant financial ratios; valuation assumptions; revenue
projection models based on statistical observance; the use of net present values
and internal rates of return; and the Venture Capital method of valuation.
The report also takes into consideration the limitations imposed on an early
stage company such as Enerkem. Valuation assumptions are used
conservatively, and as many variables have been assessed as possible, in order
to present the most accurate depiction of the firm.
The results of the data analysed show Enerkem is expected to deliver
exceptional returns to investors, despite existing in the third round funding or
bridge-to-IPO stage. Based on a realistic series of calculations the share price of
Enerkem is estimated to be $17.75 post-dilution, and $24.83 pre-dilution. The
firm aims to raise $125,000,000 in venture capital funding, and plans to exit
through IPO or potential acquisition, depending on the market situation. The
requirement for funding stems from Enerkems plans to build a number of new
waste management plants over the next decade. These plans are essential for
the firms strategy. The associated benefits, especially economies of scale,
represent a true competitive advantage that Enerkem expects to maintain
indefinitely.
Throughout consideration of the company there are several key risks and merits
reflected in the investment opportunity. A breakdown of Enerkems market
position is available in the SWOT analysis, however the most important of these
features are the companys relatively unproven financial history, and the nature
of its product.
Enerkems lack of revenue has resulted in the company being in deficit. This
leads to difficulty in evaluating the future profitability and cash flows within the
firm. In order to effectively provide quantitative data a number of assumptions
have been made to project the companys expected performance. The
assumptions used are highly conservative in nature while a number of the
figures presented in this report may be estimates, there is little chance of
Enerkem being overvalued.
The aspect of Enerkems business deserving of the most focus is its product.
According to its prospectus, Enerkem develops renewable biofuels and
chemicals from waste, or more specifically it converts municipal solid waste into
cellulosic biofuel. The current market for environmental and renewable energy
products is colossal. The attention from the government, public and private
sectors is unlikely to change in the future, and assures Enerkem of a strong
position in an untapped market. Not only is there substantial demand for
Enerkems waste conversion technology from customers and competitors alike,
but a great deal of support from the Canadian and U.S. government.
1

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2 Background
2.1 Business and product description
Enerkem is a Canadian company founded in 2000, maintaining
two subsidiaries in Quebec Westbury and in Sheerbrook. The
waste management company is constructing a full scale plant
in Alberta. Its primary function is the development of renewable
energies and chemicals from household and municipal solid
waste. Operating as a development stage company, Enerkem
converts waste into chemical grade synthesis gas. This is then
transformed into biofuels and chemicals. It focuses on cutting

Solid Municipal
Waste

Enerkem's
Thermochemical
Platform

Biofuels and
Household
Chemicals

edge technology to deliver the most efficient and


environmentally friendly product possible.

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2.2 Current owners and management team

Ownership Stakes in Enerkem Inc.

26%
53%
14%

7%

Rho Ventures
Braemar Energy Ventures

Waste Management of Canad


Corporation

All executive officers and direc


as a group

Thus far, Enerkem Inc. has received equity funding from Rho
Ventures (and its affiliates), Braemar Energy Ventures and
Waste Management of Canada Corporation. The following
diagram demonstrates each companys ownership stake.

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The diagram below represents the relationship between Enerkems investors and its management
team.

Braemar Energy
Ventures LLC

Waste Management of
Canada Corporation

Venture Capitalists

Rho Ventures

Vincent
Chornet
(CEO)

Patrice
Ouimet
(CFO)

Esteban
Chornet
(CTO)

Executive Officers

Dirk Andreas
(Business
Developmen
t)

Anton De
Larry A.
Joshua Ruch
Non-Employee
directors
Vries
MacDonald

Bruce Aitken

Denis
Arguin
(Engineerin
g and
Operations)

Phillipe
Burton
(Human
Resources)

Key Employees

MarieHlne
Labrie
(Governmen
t Affairs)

James A.
Conner
(Operations)

Carl Rush

JeanFranois
Normand
(Project
Managemen
t)

Jocelyn
Auger (Legal
and General
Counsel)

Neil S.
Suslack

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Enerkem Inc.
2.3 Market and industry competitiveness analysis
Enerkem operates in the industrial sector: the industry being
environmental control and the sub-industry is alternative waste
technology. It faces competitors in all levels, but works in a
relatively unestablished market. This, combined with superior
economies of scale, represents a significant competitive advantage
Strengths

Market leaders:
ahead of the industry in
production of biofuels

Demand for
product: strong public awareness
for environmentally friendly
products, which is highly unlikely
to change

A large amount of
tangible assets compared to
other companies of similar size

History of debt
financing

Weaknesses

Poor financial history: lack of


revenue has resulted in a
company in deficit
o However this is the absolute
norm for companies in
Enerkems position
Uncertain cost of finishing project
Lack of experience in producing
biofuel at a scale necessary to
sustain commercial business
Unproven product: experimental
business model and process
o Has shown positive signs
thus far (provide evidence)

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Opportunities

Option to sell systems to


strategic partners
o Sends a very positive signal
to investors about
Enerkems confidence in
their product
Untapped market
Greater access to municipal
waste through reduced
availability of waste management
facilities (which are increasing
costs) (Enerkem Inc Preliminary
Prospectus 2012)
Potential for continued
government support (e.g. through
subsidies): very likely due to
great support for environmental
products

Threats

Emergence of more competitors


o Countered by Enerkems
confidence that their
technology is so cutting
edge that they will stay
ahead indefinitely
Changes in government
regulations: Enerkem relies
heavily on subsidies
Strong reliance on long term
relationships: suppliers,
customers, manufacturers
Overdependence on suppliers:
tied to untapped market
o Threat shared by Enerkems
competitors
Non-binding arrangements that
are still under negotiation

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S o u rcin g a n d
So rtin g of
M u n icip a l
ste receival
WUapon
of the
m u nicipal
w a ste it is
then sorted
and re cycled
to rem ove a ny
com pone nts
not suitable fo r
the conversion
process

C o n ve rsion
P ro ce ss
The process
know n as
therm al
cracking
breaks dow n
the so rte d
com pone nts of
w a ste into
syngas w h ich
is com psoed of
both h ydrogen
and carb on
m o noxide

Syngas
R e fi n e m e n t
and
P re pThe
a ra tio
n
initial
form of syngas
pro duced is
then clea ned
and refined to
rem ove
im puritie s an d
also en sure its
purity. Waste
pro ducts
pro duced in
this process
are the n
disp osed off in
accord en ce
w ith
enviro nm ental
regula tion

2.4 Production and operational strategy


Production process:

C o n ve rsion to
F In a l P rod u cts
W ith the
addition of
spe cific
com ponents,
the pure
syn gas is then
converted in to
both
renew able
bio fu els and
chem icals.
Such products
includ e
ethanol,
com m on in
fuels a nd
m ethanol
w hich is the
building block
of oth er
consum er and
ind ustrial
chem icals

Operational strategy:
Use of funds is directed towards increasing production through
the construction of two new facilities in Mississippi and Quebec.
Expected output is 10 million gallons per year from each of the
two new facilities.

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2.5 Use of proceeds

Breakdown of Expenses
$35,000,000
$30,000,000
$25,000,000
Operating and Administration
$20,000,000

Research and Development

Depreciation

$15,000,000
$10,000,000
$5,000,000
$-

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Proceeds are also geared towards research and development.


Enerkem focuses on putting a portion of the proceeds towards
reducing the costs involved in production.
3 Financial analysis and projections
3.1 Historical financial analysis
To provide for the best representation of Enerkems value as a
financial entity a number of ratios have been used to showcase
the companys performance and position:

Debt to equity (assuming all equity has been


converted): Total Debt / Total Equity
o D = 151,935,618 135,955,230 + 11,339,002 =
$27,319,390
o E = 3,136,822 + 1,008,676 + 135,955,230 =
$140,100,728
o Therefore D/E = 19.50%
Liquity ratio: Current Assets / Current Liabilities
o CA = $67,041,900
o CL = $11,339,002
o Liquidity ratio = 5.9125

2023

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Enterprise value: [market value of equity] + [book


value of debt] [cash balance]
o 167,420,118 55,554,142 = $111,865,976

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3.2 Key valuation assumptions
Since the companys first full production facility began processing
in 2013 (Edmonton) it is planned that it will have two more of
these fully operational production facilities completed by 2016
(Pototoc) and 2017 (Varennes). With three new production
facilities between 2010 and 2016, it is conservatively estimated
that between 2015 and 2023 technological improvements to
production capacity and efficiency; and/or the actual physical
construction of new facilities, that the equivalent of three more
facilities with a capacity of 350 tonnes of MSW per day will be
established. This assumption has been accounted for in the
revenue projections.
$47.03 tipping fees (average tipping fee for
landfill in the US)
Revenue of $0.12 per gallon of cellulosic
ethanol produced (100 gallons p/tonne)1

From the time production begins in 2013, depreciation expense


per annum will be calculated using the units of production
method. Depreciation expense is $0.37 which is allocated per
gallon of production. Operating Expenses as well as research and
development costs are expected to increase at average US
inflation over the last decade.

The tax credit offered by the US government set to expire in


2012 is expected to be renewed and is therefore applicable to
our revenue projection model.

Capital expenditure is classified as maintenance CAPX and


therefore replaces depreciation.
1 Enerkems target yield is 100 gallons of cellulosic ethanol per metric tonne
(Enerkem Inc Preliminary Prospectus 2012)

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Net working capital was calculated by subtracting the current


assets and current liabilities in 2011 ($67,041,900 - $11,339,002).
The change in net working capital was then calculated by
increasing this figure by the level of US inflation, with the
difference between the two figures calculated. This figure was
then projected to increase at this same rate of inflation
throughout the cash flow projection.
Terminal value is calculated through inflation.

3.3 Forecasting of future profitability and cash flows


Forecasted cash flows have been constructed through the
following statistical observations:
The revenue projections for Enerkem are based upon the number
of facilities in operation as well as the capacity of each facility to
produce cellulosic ethanol.
Facility
Sherbrooke

Production
Commencement
2012

Westbury

2012

Edmonton

2013

Pototoc,
Missisippi
Varennes, Canada

2016

*based on a 365 day year

2017

Capacity
4.8 tonnes/day (1,752
tonnes/yr)*
48 tonnes/day (17,520
tonnes/yr)*
350 tonnes/day
(127,750 tonnes/yr)*
350 tonnes/day
(127,750 tonnes/yr)*
350 tonnes/day
(127,750 tonnes/yr)*

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Capital budgeting for the investment proposal: analyses of
funding requirements and valuation (e.g. discounted fee
cash flows, IRR, etc)
The model highlighting the projection of Enerkems free cash
flows over the following decades (commencing in 2012) is
calculated prior to an investment from a third party venture
capitalist. This allowed for the calculation of both net present
value (NPV) and internal rate of return (IRR). It is notable that the
free cash flows are achieved without additional venture capital
funding.
When calculating NPV (Appendix 2), the existing cash flows still
generate a positive net present value should the venture
capitalists investment be accounted for. Hence we infer this
added investment will have a further positive effect on free cash
flows and will allow the newly introduced investor to achieve their
desired return on their investment.
Further, the revenue projection model also allowed for the
calculation of internal rate of return (appendix 2). This was again
completed with data prior to the proposed funding from an
external third party. The calculation of this figure again included
the venture capitalists investment as a means of highlighting the
high level of potential return should they participate in the
investment. The positive funding IRR that includes a terminal
value indicates that a positive return would still be realised for the
VC. Therefore, it is safe to assume that with the additional
investment sourced from a venture fund there will be a further
increase along with overall investment return.
3.4 Company value using the Venture Capital method of
valuation
Should a potential venture capitalist invest a sum of $125 000
000 into Enerkem, we have calculated the following share prices

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and number of shares. This has been completed through a
venture capital method of valuation.
When considering company life cycle, Enerkem currently exists in
either the third round funding stage or a bridge-to-IPO funding
stage. If Enerkem was in the third round funding then this would
correspond to a share price of $24.83 and the number of shares
that the venture capitalist would receive (pre dilution) would be 5
033 739. The bridge-to-IPO stage of funding would correspond to
a share price of $27.34 and the number of share that the Venture
Capitalist would receive would be 4 572 273 (pre dilution).

The bridge-to-IPO share price is higher due to an overall lower


level of inherent risk associated with investing in Enerkem at this
time because the potential venture capitalists would be closer to
receiving a return from their investment. However the expected
return would be higher if Enerkem was in third round funding as
the venture capitalists would experience a greater level of growth:
from the time they invest to the event of a potential IPO which
can be seen as the ideal exit strategy for the venture capitalists
involved in this branch of investment.

3.5 Peers comparison


Company
Price
to
Book
Waste Mgmt
Inc.
Waste
Connections
Inc.
Progressive
Waste
Solutions
Enerkem Inc.

Curre
nt
Ratio

EPS

PE

2.55

Debt
to
Equit
y
159.31

0.77

$2.04

17.22

2.21

54.69

1.28

$1.45

21.83

1.94

109.47

0.91

$0.69

13.26

3.01

39.39

5.91

N/A

N/A

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The above table reflects how Enerkem compares to others in the
same sector. Its price to book ratio was similar to the others, and
its debt to equity ratio was much lower. This is a positive sign that
Enerkem is in a strong and stable position in relation to the level
of debt owed. The high liquidity ratio means that they will also be
able to meet all of there short term debt obligations without
problem, leading to a greatly reduced default risk. As Enerkem
currently has no revenue, and the earliest positive cash flow is
conservatively estimated to be in two years time, we were
unable to calculate earnings per share or price to earnings ratio.
However we estimate these to be around the average if not
slightly higher due to expected high demand for their products.
The EPS would be around $1.39 and the PE would be about 17.44
once Enerkems production facilities are all completed and fully
operational.

3.6 Pre money and Post money valuations


When examining Enerkem, the implied pre money valuation
would be between $518 947 000 and $571 406 000. This is our
best-estimated valuation based on the venture capitalists method
of company valuation. The post money valuation of Enerkem is
estimated to be between $643 934 739 and $696 411 944, based
on a venture capital contribution of $125 000 000. Comparing
Enerkem pre and post money shows overall equity in the
company will increase significantly, giving the company increased
access to funds which will then allow them to complete their
proposed industrial facilities. The proposed venture capitalist
investment will push the firm to market leader status in the
production of bio fuels.

3.7 Dilution Impacts


The ideal exit strategy for the venture capitalists would be for
Enerkem to be taken public: leading to a dilution of the shares of

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existing shareholders. In order to combat this dilution impact the
venture capitalists would need additional shares: estimating that
an additional 30% of common shares will be issued when the firm
goes public. This will cover a variety of changes in net working
capital and expand the production processes of Enerkem by
building new plants. The venture capitalists would be expected to
receive 6 352 575 shares (assuming funding is provided for bridge
to IPO), implying a share price of $19.68. If the venture capitalists
provide third round funding then they would expect to receive 7
041 176 shares with an implied share price of $17.75. Each of
these values assume a venture capital investment of $125 000
000 into Enerkem. Going public later on will mean a dilution of
venture capitalist ownership. To compensate, the reduced
ownership percentage would be artificially increased.

4 The deal
4.1 Pricing and justification
Based on our calculations the share price of Enerkem is estimated
to be between $24.83 and $27.24 which we consider a very
conservative valuation. We believe this is appropriate for an
investment with the relevant level of risk particularly in regards
to the variability of expected future revenue, and the threat of
increased levels of competition that may emerge as Enerkem
develops.
This share pricing is a pre dilution estimate for share price, and
we take this into account. Further we involve an IPO as the most
likely exit strategy for a potential venture capitalist. Through this
a post dilution share price has also been calculated in order to
compensate the venture capitalist for the likely chance that there
is a future dilution of shares in the future. This new share price is
estimated to be between $17.75 and $19.68. It can be observed
that this new share price is quite a bit lower than pre dilution
price relating to the new price accounts for the dilution of
venture capitalists existing shares in the event of an IPO. We have

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also calculated the net present value of Enerkem using a number
of different WACCs (for full statements see Appendix 2):
A WACC equal to 4% gave a net present value of $160 830 691,
7% gave an NPV of $13 900 321 and finally 10% resulted in an
NPV of ($41 680 248). We believe that the most accurate NPV
would be $13 900 321, as a WACC of 7% is the most pertinent.
Assuming this, it bears reminding that these estimates were
based on very conservative estimates for future revenue growth
as well as a very high variable cost base per tonne (see
appendices for more details and clarification). Enerkems true
value would thus be expected much higher. However, Enerkem is
targeting venture capitalists to provide funding, so we believe
that these projections perform as a safety net the expected
future returns would be much higher especially once economies
of scale can be fully employed. When all plants are fully
operational and running at full capacity, we anticipate an
exceptionally high level of demand.

10 Year Cash Flows vs Capacity Production


8,000,000
6,000,000
4,000,000
Capacity Production
Dollars ($)

Cash Flows

Cash Flows

2,000,000
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
(2,000,000)
(4,000,000)

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4.2 Types of securities and key funding terms and their


justification
When facing the question of venture financing instruments,
Enerkem has a number of options:
Common stock is a basic type of security. It gives the holder the
most basic ownership right to a portion of the company. It is
subordinate to all of the financial claims to the company.
A critical agency problem associated with this type of stock is that
the entrepreneur has an incentive to take advantage of the VC.
The entrepreneur does so through accepting offers lower than
which the VC would be willing to take. This could result in a loss
for the VC, but a profit for the entrepreneur. Due to this we
strongly advise against this type of security being issued.
Redeemable preferred stock is a combination of preferred stock
and common stock. In the event of entrepreneur liquidation, this
security ensures the VC funds will be returned. However with this
being used in conjunction with common stock, it also allows the
VC to gain the benefits of any large increases in company
valuation.

However, the main problem with this type of security is that it is


heavily skewed in favour of the VC. Later on this could cause
tension between the VC and entrepreneur. The benefit of this type
of security doesnt outweigh the cost of the issues raised by
tension between the two entities.

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Convertible preferred stock can be converted to common stock at
the discretion of the VC. This allows the entrepreneur to have
priority claims over the return of capital in the event of
liquidation. The option to convert will only be exercised if the
valuation of the firm is greater than the invested capital. The
stock is converted at the realisation of a profit that is greater than
their initial investment when distributed on a pro-rata basis.
The way this stock is structured favours early round investors due
to anti-dilution covenants and lower share prices for early
investors. This represents a disincentive and is a negative signal
to future investors.

The superior form of security for Enerkem is participating


convertible preferred stock. This is a combination of the previous
two securities: in the event of private sale or liquidation of the
company, the security would perform as if it were redeemable
preferred stock. However, should an IPO occur, the stock would
have the characteristics of convertible preferred stock. This type
of security has an overall advantage over the above two as it
incorporates the most relevant and likely strengths (required)
from the other two. For that reason we would suggest the
engagement of this form of security. Previous VC investors have
also used participating convertible preferred stock when investing
in Enerkem.

4.3 Proposed exit strategies


The strucuture of this funding proposal through the use of
participating convertible preferred stock makes the exit strategies

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of an IPO and acquisition mutually beneficial to late round VC, and
those with an existing investment stake.

IPO
Despite the initial unsuccessful attempt at an IPO, it is the
companys hope that with improvement in the market economy
and increased investor confidence, another opportunity will arise
over the next 5 years for the stock to become publicly available.
This, along with the continued improvement in conversion
technology, and the expansion of operations should see
Enerkems net worth increase. Further, there should be potential
for venture capital returns in excess of the original investment.

Acquisition
Another exit strategy judged to be a realistic alternative by
Enerkem is the possibility of a sale to a third party. The existing
management team is confident and positive about the companys
future prospects, especially in relation to annual increments in
profitability. However the added input of venture capital investors
on the board of directors could result in the sale of the company.
This decision, which would be contingent on the voting preference
of those individuals with an ownership stake would see the
dispersal of the proprietary listed technology and thus should also
experience significant returns on top of initial investments.

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5 Term sheet Enerkem inc.
Issuer

Enerkem inc.

Amount

$125,000,000

Price per share (Predilution)

$24.83. This represents a pre


dilution value when using a
discount rate of 30% for a pre
money valuation of
$518,947,000 based on
7,041,176 shares available.

Price per share (Postdilution)

$17.75. This represents a post


dilution value when using a
discount rate of 30% for a
post-money valuation of
$643,934,739 based on
7,041,176 shares available.

Security

Participating Convertible
Preferred Stock

Investors

Waste Management inc.


invested $7.5 million, Rho
Ventures have invested $26.99
million and Braemar Energy
Ventures have invested $15.01
million each receiving
268,679 , 966,838 , 537,800
shares respectively.

Board Representation

Each of the companies who


have already invested have
each been granted a seat on
the board in which any future

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investors will also be given this
opportunity.
Dividend

For participating convertible


preferred stocks held by
investors, dependent on profits
generated, a percentage will
be issued in the form of
dividends. However, in the
event of IPO holders of
common stock will not receive
dividends as we deem it more
beneficial to reinvest these
funds into the firm.

Liquidation

Upon liquidation of the


company, holders of
participating convertible
preferred stock will be paid out
of the assets of the company
equal to the purchase price.
The remainder of the funds will
then be paid to holders of
other preferred shareholders
equal to the purchase price
paid. Once all preferred
shareholders are paid, the
remainder of the funds will be
split on a pro rata basis
amongst common stock
holders.

Expenses

The company plans to


reimburse potential investors
its legal and due diligence
expenses.

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Financial statements

The company will release


financial statements to all
investors holding a minimum
of 500,000 shares in the
company. The financial
statements released include
balance sheets, income
statements and cash flow
statements and will be
provided at the end of each
quarter.

Exits

The company plans to exit


through IPO or potential
acquisition depending on the
economic climate.

Mintpond
Consulting
Enerkem Inc.

6 Conclusion
Through our extensive analysis of Enerkem Inc, we have found
that the company has incredible growth potential, as a result of
its position in a relatively untapped market. While several
assumptions were employed we feel that none of them are
abnormally inconsistent with similar companies in similar
industries. Despite the riskiness of the venture owing to lack of
modern revenue and extensive start-up costs our projections
based on the productive capacity of the plants and available
resources lead us to believe that the potential returns associated
with an investment in Enerkem Inc. will adequately compensate
any investor for bearing risk

Mintpond
Consulting
Enerkem Inc.
7 Appendix 1
30% discount rate

Discount terminal value = 624,034 x 17.44 (1 + 3)-2


= $6,439,735.48

Requested percentage ownership = 125,000,000 /


6,439,735
1.
= 19.41%
New shares
= 20,900,000 / (1 0.1941) 20,900,000
2.
= 5,033,739
Price per new share = 125,000,000 / 5,033,739
3.
= $24.83
Pre money valuation
= 2,900,000 x 24.83
4.
= $518,947,000
Post money valuation
= 25,933,739 x 24.83
5.
= $643,934,739

Dilution impact

Retention ratio = 1 / (1 + 0.3) = 0.77


New required percentage ownership
= 19.41% / 77%
6.
= 25.2%
Number of new shares
= (20,900,00 / (1 0.252))
20,900,00
7.
= 7,041,176
Price of new shares = $125,000,000 / 7,041,176
8.
= $17.75

Mintpond
Consulting
Enerkem Inc.
25% discount rate

Discount terminal value = 6,965,218


Percentage ownership
= 125,000,000 / 6,965,218
9.
= 17.95%
New shares
= 20,900,000 / (1 0.1795) 20,900,00
10. = 4,572,273
Price per new share = $125,000,000 / 4,572,273
11. = $27.34
Pre money valuation
= 20,900,000 x 27.34
12. = $571,406,000
Post money valuation
= 25,472,273 x 27.34
13. = $696,411,944

Dilution impact

R ratio = 1 / (1 + 0.3) = 0.77


New percentage ownership
= 17.95% / 77%
14. = 23.31%
Number of new shares
= 20,900,000 / (1 0.2331)
20,900,000
15. = 6,352,575
Price of new shares = 125,000,000 / 6,352,575
16. = $19.68

Mintpond
Consulting
Enerkem Inc.
8 Appendix 2
Sensitivity
Analysis
Comparable
Companies

Share Price
($)

Waste
Management Inc.
Waste
Connections Inc.
Progressive
Waste Solution
Total

$
33.99
$
29.44
$
20.85

17.22
21.83
13.26
52.31

Industry
Benchmark
Median

17.44
17.22

Enerkem Inc.
PV Earnings
Shares
Outstanding
EPS
Industry
Benchmark PE
Indicative Price
Liquidity
Discount
Indicative Price
(adjusted)

P/E Ratio

$
41,266,944
20,900,000
$
1.97
17.44
$
34.36
30%
$
24.05

Mintpond
Consulting
Enerkem Inc.

Indicative Price
(adjusted)
PV
Earnings
Industry
Benchmark
$
27.49
$
25.76
$
24.05
$
22.33
$
20.62

Liquidity
Discount
20%
25%
30%
35%
40%

Median
$
27.14
$
25.44
$
23.74
$
22.05
$
20.35

Sensitivity
Analysis
NPV
NPV
WACC
(discount
values)
4%
7%
10%

$
285,830,691
$
138,900,321
$

Including Potential
VC Investment

$
160,830,691
$
13,900,321
$

83,319,752

Mintpond
Consulting
Enerkem Inc.
(41,680,248)

Mintpond
Consulting
Enerkem Inc.
9 Appendix 3
Enerkem Cash Flow
Projection
(2012-2016)
Year
Capacity Production
p/year (tonnes)
Revenue from Tipping
Fees
Revenue from Production
Total Revenue
Operating Expenses:
Operating and
Administrative Costs
Research and
Development Expenses
Depreciation

EBITDA

2012

2013

2014

2015

2016

19,272

147,022

147,022

274,772

$-

$829,274

6,914,445

6,914,445

12,922,527

$-

$231,264
$1,060,53
8

1,764,264
$8,678,70
9

1,764,264
$8,678,70
9

3,297,264
$16,219,7
91

$500,337

$526,385

$539,913

$553,789

$568,021

562,129

$591,394

$606,593

$622,182

$638,172

562,466

$713,064

$5,439,814

$5,439,814

$10,166,56
4

$(57,240)

$7,532,203

$7,502,738

$15,013,59
8

$-

Mintpond
Consulting
Enerkem Inc.
Total EBIT
(minus tax @30%)

$-

$(770,304)

$2,092,389

$2,062,924

$4,847,034

$(269,607)

$358,110

$618,877

$1,454,110

$14,849,22
2
$-

$14,849,22
2
$-

$27,751,97
2
$$4,847,03
4
30%

Tax Credit

$1,946,472

Tax Paid After Tax Credit

$-

Gross CF

$-

$(770,304
)

$2,092,38
9
24%

$2,062,92
4
24%

$562,466

$713,064

$5,439,814

$5,439,814

$713,064

$5,439,814

$5,439,814

$1,431,564

$1,468,355

$1,506,092

$1,544,798

$(2,201,8
68)

$624,034

$556,832

$3,302,23
6

Gross Margin
Depreciation
(minus CAPX)
(minus change NWC)
Venture Capitalist
Investment
Free Cash Flows
Terminal Value
Discounted Terminal Value

$(55,702,8
98)
$(125,000,
000)
$(125,000,
000)

$10,166,56
4
$10,166,56
4

Discounted Cash Flows

Mintpond
Consulting
Enerkem Inc.
$(2,057,82
$545,056
1)

$454,541

$2,519,260

Mintpond
Consulting
Enerkem Inc.
Enerkem Cash Flow Projection
(2017-2020)
Year
Capacity Production p/year
(tonnes)
Revenue from Tipping Fees
Revenue from Production
Total Revenue

2017
402,522

2018
466,397

2019
530,272

2020
594,147

18,930,610
4,830,264
$23,760,87
4

21,934,651
5,596,764
$27,531,41
5

24,938,692
6,363,264
$31,301,95
6

27,942,733
7,129,764
$35,072,49
7

Operating Expenses:
Operating and Administrative
Costs
Research and Development
Expenses
Depreciation

$14,893,314

$17,256,689

$19,620,064

$21,983,439

EBITDA
Total EBIT

$22,523,681
$7,630,367

$26,262,427
$9,005,738

$30,000,355
$10,380,291

$33,737,445
$11,754,006

$2,289,110

$2,701,721

$3,114,087

$3,526,202

$40,654,722
$-

$47,106,097
$-

$53,557,472
$-

$60,008,847
$-

(minus tax @30%)


Tax Credit
Tax Paid After Tax Credit

$582,619

$597,592

$612,951

$628,703

$654,573

$671,396

$688,650

$706,349

Gross Margin

Mintpond
Consulting
Enerkem Inc.
$7,630,367 $9,005,738 $10,380,29
1
32%
33%
33%

$11,754,00
6
34%

Depreciation
(minus CAPX)
(minus change NWC)

$14,893,314
$14,893,314
$1,584,500

$17,256,689
$17,256,689
$1,625,221

$19,620,064
$19,620,064
$1,666,990

$21,983,439
$21,983,439
$1,709,831

Venture Capitalist Investment


Free Cash Flows

$6,045,868

$7,380,516

$8,713,301

$10,044,17
5

Terminal Value
Discounted Terminal Value
Discounted Cash Flows

$4,310,620

$4,917,950

$5,426,206

$5,845,801

Gross CF

Mintpond
Consulting
Enerkem Inc.
Enerkem Cash Flow
Projection
(2021-2023)
Year
Capacity Production
p/year (tonnes)
Revenue from Tipping
Fees
Revenue from Production
Total Revenue

Operating Expenses:
Operating and
Administrative Costs
Research and
Development Expenses
Depreciation

2021
658,022

2022
721,897

2023
785,772

30,946,775

33,950,816

36,954,857

7,896,264
$38,843,03
9

8,662,764
$42,613,58
0

9,429,264
$46,384,121

$644,861

$661,434

$678,433

$724,502

$743,122

$762,220

$24,346,814

$26,710,189

$29,073,564

EBITDA
Total EBIT

$37,473,676
$13,126,862

$41,209,024
$14,498,835

$44,943,468
$15,869,904

(minus tax @30%)


Tax Credit
Tax Paid After Tax Credit

$3,938,058
$66,460,222
$-

$4,349,651
$72,911,597
$-

$4,760,971
$79,362,972
$-

Mintpond
Consulting
Enerkem Inc.
Gross CF
Gross Margin

$13,126,86
2
34%

$14,498,83
5
34%

FCF Analysis:
Depreciation
$24,346,814 $26,710,189
(minus CAPX)
$24,346,814 $26,710,189
NPV @ WACC of 7%
$138,900,321
(minus change NWC)
$1,753,774
$1,798,846
NPV including potential VC
$13,900,321
investment
Venture Capitalist
Investment
IRR
Free Cash Flows
$11,373,08
Fund IRR (including
8
terminal value)

-10%
$12,699,98
6%
9

Terminal Value
Discounted Terminal Value
Discounted Cash Flows

$6,186,206

$6,456,031

$15,869,904
34%
$29,073,564
$29,073,564
$1,845,076

$14,024,828

$205,503,80
3
$97,633,377
$6,663,095

$97,633,377.00

$41,266,944

Mintpond
Consulting
Enerkem Inc.
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Mintpond
Consulting
Enerkem Inc.
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Mintpond
Consulting
Enerkem Inc.