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[ENTREPRENEURIAL FINANCE]
Eco-Products, Inc.
Study case
Eco-Products, Inc.
A. Describe Eco-Products early history (19902003). Would you view the firm during that
period as being a lifestyle business, an entrepreneurial venture, or something else? Why?
During the period 1990-2003 the company Eco-Products, Inc was a lifestyle business.
The founders Steve Savage and his father, Kent Savage entered the business environment
with the mission of providing eco-friendly paper and janitorial supplies to a community
(Boulder, Colorado) known for its support of environmental initiatives and natural
products. Also, the funds required for operating the business were supplied by family
members and friends until 2005. All this leads us to believe that the company is a
lifestyle business.
B. Discuss Eco-Products revenue growthbased business model that evolved over the
2004 through early 2008 period in terms of (a) production versus distribution, (b) product
line development, (c) branding, etc.
The company remained a local marketer of green janitorial paper and building supplies
until 2004 when the company was set on a new course with both business supply and
building supply divisions. The management team was expanded and sales in the business
supply division grew rapidly as a result of a focus on brand and Internet strategies.
a) During 2004-2005 Eco-Products remained the main distributor of eco-friendly
products, the inventory was purchased from diverse manufacturers (Fabri-Kal,
International Paper), even if the quality of the products wasnt the best, they were the
only one. The growing reputation exposed the company to a new market and led to a
change in the business model from retail sale to wholesale distribution. During 20052007 forced by circumstances they decided to manufacture their own products.
b) During 2005-2007, Eco-Products made the transition from marketing and distribution
to manufacturing and distributing their own product. Steve came with the idea to
develop a product line from a polyactide (PLA) resin. Product suppliers were selected
in China and Taiwan. In 2007 they had a wide array of uniquely designed, qualitative
line of friendly environment products.
c) The Eco-Products branded line of compostable cups and food containers entered the
market in March, 2007. Their logo was 100% Compostable. They could build their
brand based on the competitive advantage offered by a better quality, competitive
price and recognition.
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C. What is the size of the domestic and global markets for food service disposable
packaging? Who are the major competitors producing/selling environmentally-friendly
food service products. What intellectual property or competitive advantages does EcoProducts, Inc., possess?
The global food service disposable industry produces an estimated $30 billion in sales
annually. Biodegradable products represented the fastest growing segment of the industry
and had sales estimated to exceed $700 million in 2008.
Eco-Products main competitors are Fabri-Kal, International Paper, and Georgia Pacific
paper product lines. These firms became competitors after the company decided to
manufacture their own eco products.
Its difficult to gain a competitive advantage in such an industry because the production
technology is simple and there are just a few major competitors, but Eco-Products, Inc
did it by launching its own brand. Their products were more qualitative and more
accessible. Also, by using a very friendly environment material, polyactide resin (PLA),
in manufacturing its products. They never drifted from their mission in order to be more
profitable.
D. Tables 2 and 3 present Eco-Products financial statement information for 2005, 2006, and
2007. Prepare a ratio analysis of the firms financial performance over the 20052007
periods.
Short-term Solvency Ratios
1. Current ratio = Total current assets / Total liabilities
2005 Current ratio = 625,152 / 435, 696 = 1.43
2006 Current ratio = 1,352,875 / 1,781,218 = 0.75
2007 Current ratio = 4,633,427 / 4,111,887 = 1.12
2. Quick ratio = (Total current assets Inventory) / Total liabilities
2005 Quick ratio = (625,152 361,906) / 435, 696 = 0.60
2006 Quick ratio = (1,352,875 862,728) / 1,781,218 = 0.27
2007 Quick ratio = (4,633,427 2,415,916) / 4,111,887 = 0.53
Asset Management Ratios
3. Receivables Turnover = Sales / Accounts receivable
2005 Receivables Turnover = 3,649,799 / 101,690 = 35.89
2006 Receivables Turnover = 5,751,787 / 364,879 = 15.76
2007 Receivables Turnover = 10,867,104 / 1,330,562 = 8.16
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shows a poor management of assets. Also, the inventory turnover ratio shows that the company
is experiencing difficulties in turning its inventories in sales.
E. Table 4 presents Eco-Products statement of cash flows for 2007. Was the firm building
or burning cash in its operating activities? When also considering cash flows from
investing activities, was Eco-Products in net cash build or burn position in 2007?
Using the equation from Chapter 5 we can compute the cash build/ burn for Eco-Products. The
general equation for measuring cash burn is:
Cash burn = Income statement Based operating, Interest and Tax expenses + Increases in
Inventory (Changes in payables and accrued liabilities) + Capital expenditures
First we calculate the cash operating expenses using the amount from the income
statement (Table 2).
Cash operating expenses = COGS + Administrative expenses + Sales and Marketing
Expenses
= 7,726,455 + 1,102,437 + 1,822,206
= 10,651,098
To this amount we add interest expenses and tax expenses to compute the value of
income statement.
Income statement = 10,651,098 + 186,726 + 187,918
= 11,025,742
Then from the balance sheet we compute the changes for inventories, payables and
accrued expenses and capital expenditure.
The change in inventories = 2,415,916 862,728
= 1,553,188
The change in payables and accrued liabilities = 568,131 526,555
= 41, 576
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Taking into consideration the investing activities the results are the following:
Net cash build/burn = Net cash from operating activities Net cash from investing activities
= (-2,891,887) (-356,745)
= -3,248,632
F. Describe the early rounds of financing that occurred from Eco-Products inception
in1990 through 2006. Beginning in 2007, the need for external financing began to
increase. Describe the sources, amounts, and types of financing obtained during 2007 and
the early part of 2008.
At the beginning of the business friends and family provided financial support for business
operations until 2005. In 2005 Steve wanted to buy more stocks and develop the business
supply division. So, he resorted to debt financing and opened a credit line in 2005 with his
personal guarantee, borrowing $30,000 which increased by 2007 to 4 million dollars.
The sources, amounts and types of financing during 2007 2008 are:
Date
2007
2007 2008
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Sources
Type of financing
14 Investors
Friends and family,
Equity financing
Angels
30 Angel investors
during the PPM
Equity financing
Local and out of state
Amount
$220,000
$2,500,000
Using the amounts of the net sales projected in Table 1 the annual rates of growth are:
Year
2007
2008
2009
2010
2011
Forecasted Sales
$9,200
$22,000
$38,000
$55,000
$78,000
In order to find out the additional amount of needed assets we have to compute the sales
to total assets ratio.
Sales to total assets ratio =
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Sales
10,867
22,000
38,000
55,000
78,000
Change in Sales
11,333
16,000
17,000
23,000
Assets/Sales
x
x
x
x
0.52
0.52
0.52
0.52
Change in assets
=
=
=
=
5,789
8,320
8,840
11,960
So, in 2008 Eco Products will have to acquire $5,789,000 in assets, in 2009 app. 8 mil, in
2010 $9mil and in 2011 $12 mill, in order to support the forecasted sales.
A part of financing for the additional assets that it needs to support the forecasted sales
will come from the income, but will not be enough. So the remaining part can be financed
through debt and equity.
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Taking in consideration that Eco - Products needs the money quickly to buy
inventory in order to make sales, raising money in small amounts like $50,000
will take time, effort and costs.
By raising just $3.5 mil can benefit from the Regulation D, which states that the
limit offering is of $5 mil.
Because the limited number of unaccredited investors is of 35, they will only raise
from the $1,750,000 (50,000*35). The rest will have to be raised from accredited
investors.
I. Identify and discuss the factors and developments that led to the previously unexpected
revenue growth during the first-half of 2008 by Eco-Products. Is such growth likely to be
sustainable in the near future? What possible developments might interrupt or change this
rapid rate of sales growth?
The factors and developments that led to the revenue growth of Eco-Products in the early
2008 are:
Consumer trends and needs turned to the green industry, so the demand for
ecological products increased.
The price of the oil increased, this led to an increase in the price of plastic based
products resulting in a higher demand for substitute products, eco-products.
Eco Products built a stronger brand than the competition, offering qualitative
products at competitive prices.
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This king of abrupt growth is difficult to maintain in the long-term without the
necessary resources. As it happened in 2008 for Eco-products, even if the sales
skyrocketed they experienced a cash shortfall because of the higher demand and low
inventory stocks. Also, they intended to finance product development to gain
competitive advantage.
Other developments that could lead to a change in the rapid growth of the sales could
be: competition, changes in consumer attitude and preferences, recession etc.
J. Explain Eco-Products supply chain model that existed in early 2008. Describe the
strengths and weaknesses of such a model from an operations viewpoint. What are the
implications of this supply chain model on Eco-Products working capital financing
needs and its cash conversion cycle?
To see the changes that the new model of supply we compute the Assets to Sales ratio
and Inventory to sales ratio for 2005, 2006, 2007 and 2008.
Total Assets to sales ratio =
2005 Total assets to sales ratio = 795,465 / 3,649,799 = 0.2179 = 22%
2006 Total assets to sales ratio = 2,103,478 / 5,751,787 = 0.365 = 37%
2007 Total assets to sales ratio = 5,647,016 / 10,867,104 = 0.5196 = 52%
2008 Total assets to sales ratio = 18,903,838 / 34,378,138 = 0.5499 = 55%
Inventory to sales ratio =
2005 Inventory to sales ratio = 361,906 / 3,649,799 = 0.099 = 10%
2006 Inventory to sales ratio = 862,728 / 5,751,787 = 0.1495 = 15%
2007 Inventory to sales ratio = 2,415,916 / 10,867,104 = 0.222 = 22%
2008 Inventory to sales ratio = 12,222,801 / 34,278,138 = 0.355 = 36%
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We can observe that between 2005 and 2008 total assets to sales ratio increased from 22% to
55% and also, the inventory to sales ratio increased from 10% in 2005 to 36% in 2008. All these
results suggest a poor management of inventory caused by the supply chain.
2005 Purchase to payment conversion period = 123,429 / (2,584,326 / 365) = 17.4 days
2006 Purchase to payment conversion period = 526,555 / (3,684,492 / 365) = 52.2 days
2007 Purchase to payment conversion period = 568,131 / (7,726,455 / 365) = 26.8 days
Cash conversion cycle = Inventory to sale conversion period + Sale to cash conversion
period Purchase to payment conversion period
2005 CCC = 51.1 + 10.2 17.4 = 43.9 days
2006 CCC = 85.5 + 54.8 52.2 = 88.1 days
2007 CCC = 114.1 + 44.7 26.8 = 132 days
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The cash conversion cycle increased from 43.9 days in 2005 to 132 days in 2007. This is
a consequence of the change in the business model from distribution and seller to a
manufacturer and wholesaler.
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Warrants I would modify the amount of warrants that Greenmont wants to be offered,
that is 25% warrant coverage, which will give Greenmont the right to purchase 333,333
additional series A Preferred shares at a price of $1.5.
Dividends I would modify the dividends provision too, which provides cumulative
dividends of 8% per year.
Anti dilution This provision interferes with Eco-Products future needs of financing.
In case of the Greenmont Capital for protecting the investment I would stick to the warrants
provision and dividends provision.
3. The enterprise value of Eco-Products using enterprise value to sales multiple of 1.57 is:
The value of the enterprise = Sales x Multiple
12 Months trailing sales Value = 19,700,000 x 1.57 = $30,929,000
Managements Forecast Value = 45,000,000 x 1.57 = $70,650,000
The portion of equity ownership that Eco-Products be willing to give up for the $2
million Greenmont Capital investment is of 6.33%.
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