identifying the early warning signs of distressed ...©2013 gerbsman partners. all rights reserved....

©2013 Gerbsman Partners. All Rights Reserved.

Gerbsman Partners

Identifying the Early Warning Signs of Distressed Companies Strategies for Maximizing Value for Underperforming Loans & Grants

January 2013

Portfolio Advisory Services Assisting Investors and Lenders Identify the Early Warning Signs &

Maximizing Value of Distressed Portfolio Companies

July, 2014 ©2014 Gerbsman Partners. All Rights Reserved.


Strategic Advisory Services Overview

X

X

Discussion Topics

2

Diagnosing the Early Warning Signs of Distress

I

II

III Proprietary “Date Certain M&A Process”


Strategic Advisory Services Overview Section I


Experience ●  32 years maximizing enterprise value for

highly-leveraged, underperforming, under valued, and under-capitalized companies and their intellectual property

●  Crisis/Turnaround Management

●  Portfolio Advisory

●  Private Investment Banking

●  Balance Sheet Restructuring

●  IP Value Maximization

●  Board of Intellectual Capital

Capabilities

Results

75 Life Science & Deals $ X

X X X

X X

$810M Value of terminated leases, sub-

debt and credit issues for companies

$2.3B Value of restructurings, M&A

and financing transactions

82 Technology, medical device, life

sciences, security, and solar portfolio companies assisted

Relationships ●  Strong relationships with key stakeholders

including senior, subordinated and mezzanine debt lenders, venture capital firms and private equity investors.

Company Overview

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Capability Snapshot

Gerbsman Partners’ Portfolio Advisory Service helps senior lenders and institutional investors uncover the early warning signs of distressed companies in their existing portfolios. We help our clients limit their downside risk by providing them with the information and strategies needed to intervene in advance of dissolution.

$ X

X X X

X X

Benefits

ü  Detailed audit report identifying potential risks in investment and loan portfolios

ü  Customized action plan to guide intervening parties

ü  Maximize shareholder value and limit downside risk

Portfolio Advisory Service

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Representative Clients


Process Overview

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Phase I

Audit 2-3 day on sight visit by

Gerbsman Partners to perform audit and analysis of existing

portfolio companies

2-3 Days

Phase II

Review In person meetings with client to present findings, discuss risks and review recommendations

with management

1-2 Days

Phase III

Report Client receives written report highlighting underperforming

companies and recommendations for mitigating

losses 1 Day


Diagnosing the Early Warning Signs of Distress Section II


“Forget about profits, forget about the bottom line, forget about everything except CASH! There isn’t going to be any turnaround if there isn’t any cash.”

John O. Whitney (Inc. Magazine, March 1991)

Why Companies Fail

CA$H

Failure to Control

Failure to Preserve

Failure to Forecast

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•  Lack of leadership, motivation & management

•  Broken or non-existent business model

•  Malfeasance

•  Technology failure

•  Failure of board and/or lender oversight

•  Uncontrolled growth

•  Failure to respond to marketplace

•  Diversification into non-core activities

•  Failure to plan and budget

•  Inadequate capital planning

•  Excessive leverage

•  Neglect of human resources

Other Explanations

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Lack of accountability and responsibility by

management


Symptoms of Distress

Undercapitalization

Financial Performance

Operating Performance

Asset Utilization

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Symptom 1 – Financial Performance

Sales

Profits

Profit Margins

Fixed Costs Debt Burden

Investors and lenders can start to identify trends on the income statement and balance sheet. The company starts missing sales goals, costs begin to rise and financial assumptions become invalid.

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Symptom 2 – Asset Utilization

The company’s cash and working capital start deteriorating, they start paying their bills late, collections slow, loan balances begin to creep upward, and the company stops all unnecessary capital expenditures.

Cash

Working Capital

Quick Asset Ratio

Debt-to-Equity Ratio

Asset Turnover Rate

AR Rate

AR Aging

AP Aging

Capital Expenditures

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Symptom 3 – Operating Performance

§  Missed projections

§  Market issues, gross margin, product positioning issues

§  Poor planning

§  Quality control problems

§  Late or slow delivery

§  Product unavailable

§  Management and personnel turnover

§  Lack of communication

§  Delay in preparing financial statements

§  Increasing stress felt by management

§  Failure of Board / Advisor oversight

§  Deliberate lack of transparency

§  Inability or unwillingness to explain financial situation simply & clearly

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What Can You Do?

Expose management to crisis/turnaround management situations when symptoms start appearing and before

crisis situation exists.

Ask timely and direct questions to

key managers and employees

Hold company and management to

frequent reporting schedule. Make them

accountable and responsible for results.

Make management “Earn the Right” to

do business with lenders and investors

GOAL

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Review of Business Model

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Management & Board of Directors Review &Controls

Key Partnerships

Distribution Strategy

Product & Product Positioning

Architecture of a Sale

Gross Margin Analysis

Competition (Feature/Function/Benefit)

Market & Market Opportunity


Questions to Ask

Provide management, board, investors and lenders with information needed to determine what (if any) actions need to

be taken and how long the company can remain solvent

“Bottoms Up” Go Forward Cash Flow

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Contingent Liabilities Liquidation Analysis

Accounts Receivable/Payables Aging Analysis

Status Update and Location of all IP and

Patents

Review of all Bank Covenants / Defaults

Board Member Involvement

Management Communications

Market, product, gross margin review

GOAL


Financial Tactics Emergency

Stage Stabilization

Stage Return to Growth

Stage Business Objective Manage for Immediate

Cash. Manage for Earnings. Manage for Future Growth.

Cash Flow Close the cash flow pipeline. Daily control to get positive flow.

Squeeze cash out of loose systems to become more liquid.

Redirect surplus to growth areas.

Profitability Not as important as cash flow. Achieved by divestment and drastic cost cutting.

Short-term ability becomes important. Achieve by running retained operations better.

Some trade-off versus short term against long term growth.

Balance Sheet Minimize debt service requirements and get bridge financing.

Restructure debt and get into short/long term balance.

Begin external financing.

Working Capital Squeeze cash and receivables, cut inventory, and collect payables.

Squeeze cash out of loose systems. Minimize float. Maintain tight discipline.

Capital Investment Curtail except in the core business.

Modest, constrained by internal sources.

Increase in strategic growth areas.

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Partial Industry and Client Summary

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Technology Software Emergent Game Technologies Capital Thinking Gentiae Inc. Metreo Inc. Neohapsis Inc Technion University Telecom Dialpad, Inc. Simpler Networks Storage Cornice Inc. PhaseMetrics Inc. Plasmon, Inc. Networking/Optical Networking Cambridge NanoTech, Inc. Transparent Networks, Inc Network Photonics, Inc. Mobile eBiz mobility YPS Software Teleflip

Medical Devices Cardiovascular, Vascular, Endoscopy Cardiomind inc. Myocor Inc NDO Surgical, Inc. XTENT Inc. Spine Applied Spine Technologies Inc . Respiratory Emphasis Medical Inc. Orthopeadics NovaLign Orthopedic Inc. Opthomology Optobionics - Retinal degeneration. Refractec, Inc Obesity Satiety Inc. - Obesity product

Media/Advertising/Internet Syncapse Active Response Group Inc. MeMedia Inc. Holographic & Biometric Technology Aprilis, Inc./Dow Corning Security NeoScale Inc. Oviso Inc. SciCortex, Inc.

Life Science Puristem, Inc Barnev Inc. Pegasus Biologics Inc Radiant Medical, Inc. Valentis, Inc.

Solar Nanosolar AQT Solar SVTC Solar


Date Certain M&A Process Section III


§  Stakeholders/shareholders made a strategic decision that access to future capital would be limited either by the initial investment group(s) or by market conditions

§  A decision was made or implied that existing management could not take the

company forward and/or there were major issues with the business model. §  The company(s) typically had 0-6 months of CASH available §  The Board of Directors and Shareholders wanted a "Clean" exit (no formal

bankruptcy, settlement of outstanding issues that demonstrate the Board is meeting/has met their fiduciary responsibilities, no potential lawsuits against" Deep Pocket" equity investors and a reduction of the significant time the Board and Shareholders were spending at/on the company)

§  Board of Directors wanted to maximize the value of the Intellectual Property

and other associated assets.

Typical Situation


Example: §  Lack of hard assets §  Intellectual property (e.g. patents, process) §  Senior lender and/or other debt sources §  Inexperienced entrepreneurs possibly with little or no operating

experience §  No visibility to get to cash break-even in a reasonable timeframe §  Unable to access debt or equity financing §  The equity sponsor(s) has made the decision that they will no longer

fund the company

Maximizing Value of Intellectual Property


What is it worth? §  "The Market" will determine the value. Who cares? §  Customers, Competitors, Strategics and VC/Equity groups for portfolio

companies

Critical factors for success? §  Domain expertise §  Relevant IP/process §  Resources and time available for date certain M&A process §  Documented due diligence “war room” §  Ownership and protection of IP/process

Maximizing Value of Intellectual Property


Action Plan Timeline

WEEK 0 1 2 3 4 5 6

STEP

S IN

TH

E P

RO

CESS

Bid Date

Package Business and IP

Summary

Create Due Diligence “War Room”

Populate “Deal Tracker”

Go-to-Market

Phase out use of IP

Identify and qualify prospects

Send out asset purchase agreement

Send deposit info

Bid Date


Contact Us

Gerbsman Partners

http://gerbsmanpartners.com [email protected]

http://blog.gerbsmanpartners.com 415-505-4991

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identifying the early warning signs of distressed ...©2013 gerbsman partners. all rights reserved....

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