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.