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Question;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.


Paper#38892 | Written in 18-Jul-2015

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