Decision Time Bright Light Shine Corporation

Questions

1. After reading the case and analyzing the financial data; would you accept the position as the CFO of BLS? Please justify your decision utilizing facts and financial datano more than 200 words

2. After completing your research would you agree or disagree with Joes assessment of

BLS (possibility of IPO or buyout)no more than 200 words

All characters and company information and names in this case are fictitious. Any resemblance to real persons living or dead or companies is purely coincidental

Background

After graduating from a prestigious college, Graduated in 2007, with a Masters in Accounting, you were hired by a Big Four firm. By the end of 2007, you passed the CPA exam. Your diligent work ethic has been noticed at the firm and in September 2017 you received an offer to become a partner. Just as you were about to sign the partnership agreement, your childhood friend, Joe Shine, a successful MIT engineering graduate called you. He has been an employee and shareholder of a small innovative company for the last three years. The company has experienced 50% growth in revenue annually.

Joe offers you the following position, Chief Financial Officer (CFO) at Bright Light Shine Corporation (BLS). Your employment package would include a very generous salary of $200,000, excellent benefits and a 12% equity interest in the company. Joe stated that the company has real potential. According to the companys projections, they are on track to complete an Initial Public Offering (IPO) within the next few years. However, if the IPO does not happen, they will most likely be acquired by a public company.

You respectfully requested an extension concerning the signing of the partnership agreement with the Big Four firm. Additionally, you asked for a three-week vacation so that you can make a very important decision concerning the future of your career. You must decide; do I take the safe and secure route of staying at a very successful firm as a partner or do I step out of my comfort zone and take the job as a CFO at a start-up venture? Your friend Joe is an engineer and he has always been an optimistic dreamer, so you cannot just rely on his assessment of the company. Therefore, to make an informed decision, you requested the following documents by October 1st:

The history of the company, including industry and product information

Background of the Founders/Officers

Corporation documents, including the articles of organization and the minutes from the Board of Directors meetings

Agreement with the Venture Capitalist (VC)

Copies of all patents issued and patents pending with the US Patent Office

All correspondence with attorneys

Human Resource information

List of all contracts/customers

List of potential competitors

List of vendors

Access to all Financial Statements and documents from inception to August 31, 2017

Access to the corporate tax returns for the years ending June 30, 2014 to 2017

Decision Time Bright Light Shine Corporation

You received the following information and documents on October 1st.

Company History

BLS was founded on July 2, 2014, by Joe Shine (your friend), Ray Bright and Bill Light, to design and produce transportation safety equipment. All three founders are graduates of MIT.Please reference Background of Founders for further information. Ray Bright became the President, Bill Light was appointed the Chief Financial Officer/Treasurer and Joe Shine assumed the responsibilities of the Vice President/Secretary of the corporation. Funding for the corporation was as follows; $50,000 common stock investment from each of the three founders and a Venture Capital Group (VC), totaling $200,000. The three founders and the VC each had a 25% interest at the inception of the corporation. Additionally, the VC loaned the corporation $500,000. Reference VC agreement, for more information concerning the loan and the loan covenants.

The company designs and manufactures transportation safety equipment. Its Standard Industrial Classification (SIC) Code is 36120300, manufactures of specialty transformers. During the initial year of operation, fiscal year 2015, the first product was introduced, a safety transponder. This device is a portable version of the expensive Backup Sensing Systems which are currently equipped in motor vehicles. The major difference between BLS Corporations product is that it does not have to be factory installed and it detects all activity concerning the movement of an automobile or small truck, not just when the vehicles is backing up. Since the device is not factory installed, the price is significantly less than products currently offered in the marketplace. Equipped with both a warning alarm system and a speed reduction device, the transponder makes any automobile or small truck safer. Technology utilized in the transponder is like the technology developed by Tesla. However, the device is portable and the manufacturing costs are a fraction of the cost of Teslas system. During the initial year of operation, fiscal year ending June 30, 2015: BLS designed, produced and marketed the safety transponder, earning revenue of approximately $1,500,000. In years two and three, revenues continued to be strong with the introduction of a new product line, the motorcycle transponder. However, R&D costs as well as, administrative costs were more than anticipated. This in turn caused a cash flow problem resulting in a current ratio of less than 2.5 to 1.0 at the end of fiscal year 2016. The breach of the covenant, resulted in the VC converting a portion of the loan to equity. Equity ownership as of September 2017 is; Joe Shine 23%, Ray Bright 23%, Bill Light 23% and VC 31%. As of September 2017, the three founders still have a combined majority interest of 69%. Year to date sales for fiscal year 2018 are exceeding the revenue forecast. Additionally, the products continue to be in demand and the product has gained brand recognition with the transportation transponder industry. Currently, the company is developing a safety stick transponder, a product that will be install along streets and highways. Marketing efforts for the stick transponder will shift from mainly Business to Consumer (BTC) to Business to Business (BTB), with the majority of buyers being government entities.

Decision Time Bright Light Shine Corporation

The development of the new product is the major reason why the founders of BLS have asked you to join the firm. Until now, the officers have been wearing many hats and the time has come for them to reorganize duties, particularly accounting/finance and marketing. Both the VC and the officers feel that it would be wise to enlist the talent of a Certified Public Accountant who has a Big Four background. Rather than issuing new stock, they are willing to each transfer 3% of their stock to you for a total of 12%.

Background of Founders

President - Ray Bright graduated from MIT with an undergraduate and graduate degree in

Engineering and a PhD in Physics. He completed his education at MIT in 2002. He worked at

Ford Motors as a product development manager for ten years. In 2014, he started a consulting

firm and began researching various safety products. Both Joe Shine, his former co-worker at

Ford and Bill Light, concurred that Ray had the appropriate credentials to be President of the

newly formed company

Vice President/Secretary - Joe Shine holds both an undergraduate degree from MIT in Computer

Technology and a Masters degree in Engineering. After graduating from MIT in 2007, he

secured a position at Ford Motors as a development engineer. In January 2014, he reconnected

with Ray Bright at a networking event. Convinced by Ray, that there was a market for low cost

automobile safety devices, he left Ford Motors in June 2014 and invested his life savings of

$50,000 in BLS.

Chief Financial Officer/Treasurer - Bill Light graduated from MIT with a Bachelor of Science in

Engineering in 2005 and a Masters in Business Administration from MIT Sloan Business

School in 2007. From 2007 to 2010 he worked for IBM as a Financial Analyst. In 2011, he

secured a position as a Controller at a small high technology firm. In 2014, after meeting Joe and

Bill at a MIT alumni event, he decided to invest his money in the BLS start up.

Investors - The Venture Capitalist is listed in the top ten most successful investors specializing in

start-up firms.

Corporate Documents

You reviewed the articles of organization, stock certificates issued to shareholders, the annual

corporate filings, and the Board of Directors minutes for the period of July 2014 to present. You

did not discover any irregularities. However, you do have a few questions concerning items in

the Board of Director minutes regarding the covenant breach and the shifting of 6% ownership to

the VC.

VC Agreement

At the inception of the organization, the VC purchased 50 shares of common stock at a cost of

$1,000 per share for a total of $50,000. Additionally, the VC loaned the corporation $500,000.

The loan has the following terms, covenants and provisions.

Annual Interest rate of One (1) percent above the prime rate

Decision Time Bright Light Shine Corporation

Interest only payments for the first three years Principal payments to commence July 1,

2017. The note matures on June 30, 2022

The company must maintain a current ratio of 4.0 to 1.0

If the covenants are not maintained, the VC at their discretion may demand principle

payment to commence immediately or they may convert a portion of the loan to stock.

As noted in the Company History above, the VC exercised its right to convert a portion of the

loan to equity. In July of 2016, $15,000 of the loan principal was converted to six shares of stock

with a market value of $2,500 per share. The amount of $15,000 was negotiated based on the

perceived increased value of the company.

Copies of all patents issued and patents pending with the US Patent Office

Fortunately, for just the cost of a dinner, you had a friend who is a Patent Attorney review the

patents and pending patents. He said that all documents were properly filed and that he did not

see any potential risks in this area,

All correspondence with attorneys

Upon reviewing the correspondence, you made note of the following;

Some of the patents had been challenged by Tesla,

Ford Motors had also sued BLS and Ray Bright, as co-defendants

BLS prevailed in both court cases and were found not guilty the main reason for the acquittal

was that although the products may have similarities, the technology to develop was completely

different, remote power versus hard wired to a system.

Even though the courts dismissed the cases in BLSs favor, the legal bills were a major financial

set back to the firm.

Human Resource Historical Information

FY 2015 FY 2016 FY 2017 FY 2017 FY 2017 Total FY 2017

Position Salaries Salaries Salaries PR Taxes Benefits HR Expense

President $ 160,000 $ 208,000 $ 260,000 $ 11,117 $ 20,400 291,517

CFO/Treasurer 123,500 160,550 200,688 10,257 20,400 231,344

Vice Pres/Secretary 123,500 160,550 200,688 10,257 20,400 231,344

Admin Assistant 45,000 46,350 47,741 3,652 20,400 71,793

Development Engineer 100,000 110,000 121,000 9,257 20,400 150,657

Production Supervisor 60,000 66,000 72,600 5,554 20,400 98,554

Assemblers 35,000 36,750 38,588 2,952 20,400 61,939

Quality Control 40,000 42,000 44,100 3,374 20,400 67,874

Shipper/Receiver 35,000 36,050 37,132 2,841 20,400 60,372

$ 722,000 $ 866,250 $ 1,022,535 $ 59,260 $ 183,600 $ 1,265,394

List of Contracts and Customers

Upon reviewing the contracts and customers, you noted that three customers constituted

approximately 40% of the total revenue in fiscal year 2017. Additionally, you recognized the

Decision Time Bright Light Shine Corporation

name of a former client of the Big Four firm, your current employer. This company was no

longer a client of the firm because they had failed to pay their audit fee in 2016. Currently, they

owe BLS $10,000.

List of Potential Competitors

The competition consisted mainly of small start-up companies that the founders and VC had read

about in trade magazines. However, when you conducted your own research of articles and

periodicals, you discovered an item about Toyota and their possible expansion to the low cost

transformer industry. Toyota is a large foreign company that could make the product at a lower

cost.

List of Vendors

The list of vendors was comprehensive and included a primary and secondary vendor for each

major component of the product. However, you noted that one of the major parts for the

prototype of the new stick product was only available from one vendor.

Reference the attached Excel file for financial information

Corporate Tax Return you reviewed the corporate tax return and you did not find any

improprieties. You reconciled the tax returns to the financial statements

Additional Information:

BLS financial statements were audited by a regional firm.

By making a few inquiries you

discovered that one of the partners of the firm was Bill Lights cousin. You also questioned

whether there was a Going Concern issue overlooked by the audit firm.

Questions

1. After reading the case and analyzing the financial data; would you accept the position as the CFO of BLS? Please justify your decision utilizing facts and financial datano more than 200 words

2. After completing your research would you agree or disagree with Joes assessment of

BLS (possibility of IPO or buyout)no more than 200 words

Questions

1. After reading the case and analyzing the financial data; would you accept the position as the CFO of BLS? Please justify your decision utilizing facts and financial datano more than 200 words

2. After completing your research would you agree or disagree with Joes assessment of

BLS (possibility of IPO or buyout)no more than 200 words

Fiscal Year 2015 Salaries Fiscal Year 2016 Salaries Fiscal Year 2017 Salaries Fiscal Year 2017 PR Taxes Fiscal Year 2017 Fiscal Year 2017 PR Taxes PR Taxes Benefits HR Expense President CFO/Treasurer Vice Pres/Secretary Admin Assistant Development Engineer Production Supervisor Assemblers Quality Control Shipper/Receiver 20,400 S 20.400 20,400 20,400 20,400 20.400 20,400 20,400 20,400 291,517 231.344 231,344 71,793 150,657 98.554 61,939 67.874 S 160,000 S 9,667 S 208,000 10,363 260,000 ,117 S 9,138 9,138 123.500 123,500 45,000 100,000 60,000 35,000 40,000 35,000 $ 722,000 9.675 9,675 3,546 160.550 200,688 10,257 160.550 200,688 10,257 110,000 66,000 36,750 42,000 36,050 121,000 72.600 38,588 9,257 2,811 3,213 2,758 2,952 37,132 2,841 52,040 866,250 $ 55,505 1.022,535 $ 59,260 $ 183,600 1,265,394 Allocations R&D Selling Expense Administration Manufacturing 3396 $ 241,750 $ 17,052 $ 294,275 $ 18,434 $ 351,344 $ 19,943 $ 40,800 $ 412,087 115,672 448,896 288,739 100% $ 722,000 $ 52,040 $ 866,250 $ 55,505 $ 1,022,535 $ 59,260 $ 183,600 $ 1,265,394 61,750 248,500 170,000 4,569 17,414 13,005 80,275 310,900 180,800 5,128 19,468 14,720 10,200 51,000 81,600 996 4,837 18,402 13,831 100,344 378,428 192,419 Financial Information HR Info