Flash Memory Inc.
TO: FROM: DATE: SUBJECT:
Mr. Hathaway Browne, CFO of Flash Memory Inc. MP.JAW Consultants October 11, 2010 Analysis of the Investment Opportunity and Financing Options
! As your financial consultants, we have conducted a comprehensive analysis of Flash Memory Inc. (FMI)’s current business situation, its new potential investment opportunity, and financing options. Our recommendations are as follows: 1. Pursue the suggested new product line. 2. Seek additional funding through equity financing and reinvestment of earnings. We proceed to present our findings, analyses, and rationales behind these recommendations.
Current Business Environment
FMI is a small private firm specializing in manufacturing “solid state drives” (SSDs), a growing segment of the technology industry. Its product lines include “flash memory technology” devices and “other high performance” devices. These segments compose 80% and 20% of the company’s revenues respectively. The SSDs market is characterized by fast growth, high competitive pressure, continuous technological transformations and changing consumer preferences. These factors contribute to short product life cycles, high Research and Development (R&D) costs, continuous need for working capital and low profit margins. FMI’s business model is heavily impacted by these issues.
1
FMI attains its competitive advantage by focusing on aggressive R&D investments in order to counteract the short life cycle of its products. In the previous three years, the firm invested on average 78% of its gross margins on R&D and related activities. FMI has funded these expenses through Notes Payable which are secured by its Accounts Receivable. It is projected that by the end of the current year, the company will have difficulty generating enough new cash flows to meet its growing sales. The company is facing the additional problem of having reached its current Notes Payables limit, set at 70% of Accounts Receivable. Management have resorted to
Mr. Hathaway Browne, CFO of Flash Memory Inc. MP.JAW Consultants October 11, 2010 Analysis of the Investment Opportunity and Financing Options
! As your financial consultants, we have conducted a comprehensive analysis of Flash Memory Inc. (FMI)’s current business situation, its new potential investment opportunity, and financing options. Our recommendations are as follows: 1. Pursue the suggested new product line. 2. Seek additional funding through equity financing and reinvestment of earnings. We proceed to present our findings, analyses, and rationales behind these recommendations.
Current Business Environment
FMI is a small private firm specializing in manufacturing “solid state drives” (SSDs), a growing segment of the technology industry. Its product lines include “flash memory technology” devices and “other high performance” devices. These segments compose 80% and 20% of the company’s revenues respectively. The SSDs market is characterized by fast growth, high competitive pressure, continuous technological transformations and changing consumer preferences. These factors contribute to short product life cycles, high Research and Development (R&D) costs, continuous need for working capital and low profit margins. FMI’s business model is heavily impacted by these issues.
1
FMI attains its competitive advantage by focusing on aggressive R&D investments in order to counteract the short life cycle of its products. In the previous three years, the firm invested on average 78% of its gross margins on R&D and related activities. FMI has funded these expenses through Notes Payable which are secured by its Accounts Receivable. It is projected that by the end of the current year, the company will have difficulty generating enough new cash flows to meet its growing sales. The company is facing the additional problem of having reached its current Notes Payables limit, set at 70% of Accounts Receivable. Management have resorted to