Introduction:

Lovepop is a kirigami manufacturer and retailer selling primarily through kiosks,

ecommerce, and wholesale. They operate in a highly competitive niche market

characterized by product differentiation, cost-competitiveness, and large upfront costs

for manufacturing. The problems challenging their growth are their split dedication to

their degree and the business, a lack of sales, and a declining industry of 5% a year due

to the rise of other substitutes including: electronic cards and other items that could be

used to supplement the role of cards.

Qualitative Analysis:

Four C’s of Credit for Lovepop

Character

Lovepop was founded by Wombi Rose and John Wise and the two owners make

all the major day-to-day decisions together. The two friends are both trained in naval

architecture, and marine engineering. They first discovered kirigami during a January

2014 FIELD excursion in Vietnam. Following the trip, the two decided to start a business

and use their experiential knowledge in engineering to develop pop-up greeting cards,

heavily inspired by kirigami. John and Wombi feel that their products are truly unique,

and that their product differentiation in combination with friendly direct sales approach

could allow them to be successful in the greeting card market.

Relationship with Customers

A significant amount of Lovepop’s customers come from their kiosks, with a

smaller portion coming from E-commerce and other channels. Focusing on direct sales

methods means that payments be received instantaneously opposed to other payment

options. There have been some problems with managing products and other

malfunctions which has been reflected with a decline in the collection period (shown in

Exhibit 2). As Lovepop grows there is going to be an urgent demand to increase

customer relations, which will hopefully increase sales as well as collections of receipts.

Condition

The greeting card industry is highly competitive with an abundance of companies

crowding the market. Operating expenses are steadily increasing, and there is pressure

from consumers to offer new buying options and customization for their products. As a

result, major competitors such as Hallmark, and American Greetings have experienced

decreased revenues and operating income (see case Exhibit 2c and 2d). The decline of

such major retailers is a signal that the industry is in a state of decline and adapting to

the shift towards convenience and price over product differentiation will be the key to

growing market share in the industry (see case Exhibit 2e).

Business goals:

Cash flow management:

Their cash has increased from $40,388 to $72,109 resulting in an increase of

$31,771 towards their net cash holdings (see Exhibit 4). However, this is misleading as

a large amount of cash was raised through short term loans and notes. In addition to

their cash flow from operations being -$14,332 (see Exhibit 4). Moreover, with their

current holdings of $72,109 cash, the available free cash flow will not last two months

without external financing or a significant shift in their cash flow from operations. This is

a result of the burnout rate of $40,000 in addition to the accruing interest payments

needed for their respective loans. Their net working capital has stayed relatively the
same (see Exhibit 2). However, with a slight decline this is problematic as they will not

be able to afford payments that will be needed to extend operations in the future without

either financing, lowering costs, or large increase of sales.

Short Term goals:

Lovepop is a relatively small niche manufacturer and distributor of kirigami, who

is currently expanding operations and thus, incurring a large operation expense

component. This represents problems in financing these capital expenditures.

Lovepop’s inability to generate adequate free cash flow for payments may result in

temporary being unable to resume operations. To increase sales temporarily they could

offer large discounts considering their huge gross margins. Which will increase sales

and reduce their collection period. This option will only work if the discount in price

generated an adequate increase in sales revenues.

Moving on, another couple of areas Lovepop should be focusing on in the short

term are improving their receivable and inventory turnovers. This would also help

generate cash for the urgent demands they need, as they will be receiving cash more

often. It will also help avoid the holding costs per shipment, and ultimately get rid of

obsolete inventory.

Long term goals:

Since Lovepop is operating in a declining industry, they must consider expanding

by integrating into new and innovative sales channels such as e-commerce, and e-

cards. This integration will ultimately help them adapt to new competition and trends.

Establishing a larger portion of market share within the greeting cards industry is

also pivotal for the business’ success. Since the low barriers to entry bring potential
competitors and new entrants, this will emerge the need for high service and quality

assurance. One way Lovepop can withstand the waves of new entrants, is by improving

their current sales channels, and integrating into new distribution channels that would

ultimately help them drive costs down, efficiency up, and grow market share to become

a dominant player in the industry.

Quantitative Analysis:

Liquidity

Lovepop’s current ratio up to April 2015 is 1.49 which is almost one-third the

2014 ratio of 4.43, experiencing a decrease of 2.94 (Refer to Exhibit 2). This decrease

in the current ratio reflects a lower ability to pay back liabilities due to their

proportionately low assets. The increase in liabilities can be mainly attributed to the

short-term loan of $70,000. In addition to the increased sales tax, and credit card

expenses for the expansion of the retail side of the business.

The projected quick ratio for Lovepop in 2015 will be 1.15, which is a decrease

from 3.19 in 2014(Refer to Exhibit 2). This decrease in the quick ratio can be attributed

to most of the current assets being financed by short-term loans. Taking on more loans

reduces their liquidity as they must pay back these loans before liquifying. This is a risk

that is necessary for new companies to be able to expand, and it is average for a new

company to have low liquidity for the first few years.

The cash conversion cycle is 87.14 days in 2014, which decreased to 67.4 days

in April in 2015 (see Exhibit 2). This reflects an increase in their ability to turn their

assets into cash flows. A lower CCC means a faster generation of cash, and allowing

for faster payment of liabilities, and ultimately a better financial position.

Profitability

Although Lovepop may have negative earnings throughout their short period of

operations, the reason is not based on their inability to generate profit on sales. As the

business continually expands, they are incurring large amounts of operating expenses

due to increasing production capacity. The problem is even though each individual sale

is profitable, shown through their increase in gross profit margin from 48.7% to 76.20%

(see Exhibit 2). Profit margin have decreased from -13.68% to -39.64% from their 2014-

April 2015 operating period (see Exhibit 5). The following highlights their inability to

generate sales as quickly as their increase in fixed operating expenses.

Contrary to their inability to induce enough sales for their costs, we believe that

the projected sales will increase shown through both optimistic and pessimistic sales

targets after new production and implementation of kiosks). After the forecasted

increase of sales, profit margins will range between -26.25% to 28.05% (see Exhibit 5).

This is already a significant improvement from 2014-April 2015 as profit margins will

increase in both pessimistic and optimistic circumstances. Moreover, based on the

average of the two profit margins, Lovepop should be profitable within the next year of

operations.

Through sensitivity analysis we have projected that with the current operating

expenses, the breakeven point in sales for the 2015 ending quarter would be

$217,331.23 (see Exhibit 6). The degree of operating leverage which is speculated

using the annual pro forma income statement given optimistic demand is 2.72 (see

Exhibit 6). This means that a 10% increase in sales will result in a 27.2 % increase in
profit. Considering that information, the outlook of the firm will be high margins leading

to large profits from each incremental sale.

Asset Utilization:

Lovepop has been struggling with their ability to utilize their assets to generate

sales and cash receipts. Although, they have been able to defer payments on loans and

debt obligations. This makes the corporation riskier due to potential increase in lending

costs. As their inventory turnover has decreased from 2.88 times to 0.76 times along

with holding period increasing from 126.93 days to 480.26 days (Refer to Exhibit 2).

They have also had difficulty collecting receivables, shown through a decrease in

receivables turnover and an increasing collection period. These factors combined

ultimately lead to the low cash generation issue Lovepop is facing.

They have been able to defer payments on their loans, shown in their increased

payable period and decreased payable turnover throughout 2014-2015. However, it

hasn’t come without a cost, as the most recent loan required a 28% Annual interest

rate. With their following cash flow predicament and current inability to generate profits it

will prove to be more difficult to get outstanding loans without paying higher rates of

returns.

Company proposals:

1. Accept Techstar offer including: a stock purchasing agreement at $18,000 for 6%

of the company equity, and a potential convertible bond for $100,000 at 20%

discount rate.

2. Accept Founder.org offer consisting of a $300,000 convertible loan at an implied

interest rate of 5%, discounted 25% when converting.

Evaluation Criteria:

● Need to raise sufficient amount of cash to pay for short-term debt and notes

payable, or else they may default or get downgraded in credit.

● Need to improve receivable and inventory turnover through having better credit

sales, delivering, and collecting products and payments faster respectively.

● Improve their sales while, keeping their cost of goods sold in proportion to sales

at their relative position.

Option 1: (Techstar’s offer $18,000 for 6%)

Pros: The biggest advantage of going with Techstar is the training. Increasing training

may be effective in reducing variable costs through better productivity, and an increase

in human capital. This will ultimately drive Lovepop’s efficiency up. In addition to

Techstar’s marketing platform, which will result in higher exposure, and collaborations

with other firms. This will increase reliability and create opportunities to expand into new

operations and outlays. Lastly, the ability to raise $118,000 dollars immediately and

have the option to fundraise more will help solve Lovepop’s cash problems.

Cons: Losing a significant portion of market share for a private company. Lovepop is

hoping to retain as much market share as possible. Convertible bonds sold at a

discount. In addition to the loss of equity may be more expensive than other sources of

funding.

Option 2: (Founder’s.org Offer of $300,00 convertible loan)

Pros: Ability to raise $300,000 cash immediately, which will contribute towards paying

off their outstanding debt and the funds they will require for future operations.
Ability to retain a larger portion of equity. Therefore, giving the company a larger value

than 300,000 (18,000/0.06%) which was the price for the share offering in option 1.

Cons: Convertible bonds are once again sold at a discount. The company also loses

the mentorship and marketing channels which would have potentially reduced operating

expenses, increased efficiency, and increased sales. This is essential for Lovepop as

they had past performance issues with delivery and managing receivables & inventory.

Company decision:

Through our progressive analysis of the pros and cons of the two investment

funding options, we have decided to move forward with option 1 with Techstars. The

main reason is we believe that their ability to provide stewardship and mentorship to our

currently new employees will be crucial in improving efficiency, minimizing costs, and

transitioning to better customer satisfaction, and higher sales. Although we may lose a

6% stake in the company, we will still be able to retain the majority share to decide our

own internal decision. In addition to raising $118,000 cash immediately, which is an

adequate amount to secure approximately the next four months of operations. During

which we are expecting to grow our sales and improve our cash flows coming through

our main operations. We also believe that through this funding option we will be able to

improve reputation, allowing for more loans and defer payments. As well as finding

ways to resolve asset management issues, specifically, inventory and receivables; We

anticipate that we can absolve and decrease the amount of days before payments.

Analysis Conclusion:

Lovepop is a small niche company that is very profitable. However, due to large

demands of cash for expansion and improving production capacities for an emerging
business, they have had two successive periods of declining earnings. As their debt

levels are increasing and cash outflows are projected to increase, they need to find

ways to generate cash to pay off debt and future payments.

Our long-term vision is being a lead provider of kirigami and providing high

quality greeting cards. We aim to achieve that by integrating into new distribution

channels and increase our sales while expanding production. Further we need to

improve our ability to utilize assets, debts, and collecting payments from our customers.

We aim to do so by providing better service and options for purchasing.

We believe that Lovepop can increase sales by a significant portion -as

forecasted- and generate profits both in terms of operating cash flows, and net income

after interest & taxes. By working alongside Techstar we will be granted the extra

funding to complete production facilities, increase sales, generate increased profitability,

and continue to grow within our industry.

Appendix

1. Exhibit 1 – SWOT Analysis

Strengths Weaknesses

S1 – Unique: Different style of greeting card that is W1 – Brand Power: Cannot match the
differentiated from standard cards at big box advertising or notoriety that major retailers
retailers already possess

S2 – Relationship Selling: Get to know our W2 – Price/Volume: Alternative products and

customers and encourage repeat purchases and their retailers can sell more cards and afford to
loyalty sell them at a lower price

S3 – Manufacturing: Producing their own W3 – High Debt: Experiencing increased

products reduces COGS in the long-run and Operating Expenses with negative balances for
increases their capacity and ability to meet both EBIT and Retained Earnings
demand
W4 – High Liabilities: Sharp increase in Current
S4 – Increased Sales: Projected to surpass Liabilities in the form of two sizable Short-Term
2014 Sales and achieve a Gross Profit margin Loans
1.6 times higher than the previous year

Opportunities Threats

O1 – New Markets: Several segments can be T1 – Declining Market: Industry sales and
entered that could create brand recognition and revenues are steadily declining over the past 5-6
generate demand years with the biggest decline occurring last year
(2014-15)
O2 – Advertising: Multiple ways of marketing the
brand through mediums such as social media, T2 – Substitutes: Cheaper and more common
trade shows, print, and television greeting cards are more abundant and offer gift
packaging and party goods as well as cards
O3 – Overcome Entry: Breaking through into new
segments would allow for new channels and T3 – Rivalry: Decreasing sales will result in
overcoming the short-term costs increased competition and big box retailers more
aggressively differentiating on price and
O4 – Diversification: Offering accompanying convenience
products that are in-line with the current positioning
and target market T4 – Shifting Tastes: e-Commerce and major
retailers make up over 70% of the market and
could push out small businesses who cannot
adapt to the change in consumer behaviour
 2. Exhibit 2 - Relevant Ratios

2014 2015 (Jan – April)

4.43 1.49
Current Ratio

Lovepop’s current ratio is projected to remain at approximately 1.49 by the end of 2015,
thus decreasing Lovepop’s liquidity.

2014 2015 (Jan – April)

3.19 1.15
Quick Ratio

Lovepop’s quick ratio is projected to remain at approximately 1.15 by the end of 2015,
thus decreasing Lovepop’s liquidity.

2014 2015 (Jan – April)

Cash Conversion Cycle (CCC) 87.14 67.4

Lovepop’s cash conversion cycle is projected to improve by approximately 20 days and

improve their cash flow.

2014 2015 (Jan – April)

48.7% 76.20%
Gross Margin

Lovepop’s gross margin has increased exponentially, resulting from lower unit production
costs and increased sales.
 2014 2015 (Jan – April)

-0.212 -0.330
Return on Assets (ROA)

Return on assets is decreasing due to the high operating expenses, greatly reducing net
income, and yielding a negative return, or a loss.

2014 2015 (Jan – April)

Debt to Equity 0.286 2.014

There is a large change in the Debt to Equity ratio between 2014 and April of 2015,
mainly due to an increase in the dollar amount of leveraged assets.

2014 2015 (Jan – April)

-7.55 -22.65
Times Interest Earned (TIER)

The above shows that they have a large amount of debt outstanding, resulting in
accrued interest expenses that they are unable to pay due to insufficient amount
of cash.

2014 2015 (Jan – April)

Working Capital $46,889 $46,151

Working capital has stayed consistent within 2014 and April 2015 with a slight
decline. However, with a burn rate of 40,000 per month the working capital can
barely withstand one month as well as, over 100% of the working capital is being
financed by debt.
 2014 2015 (Jan – April)

Retained Earnings $(13,133) $(59,974)

Retained earnings has decreased due to subsequent periods of negative profit,

mainly because of the heavy increase in fixed operating expenses.

2014 2015 (Jan – April)

Receivables Turnover 28.48 Times 16.15 Times

Receivable turnover has decreased, which means that they are collecting their
outstanding average receivables less times over the course of the year than in
2014.

2014 2015 (Jan – April)

12.28 Days 22.60 Days

Average Collection Period

Average collection period has increased which indicates that it was taking longer
to collect their debts in 2015.

2014 2015 (Jan – April)

Inventory Turnover 2.88 Times 0.76 Times

Using the pessimistic income statement and cash flow statement to extend the
Inventory turnover for 2015 through the end of the year will result in a value of
5.81. While this is a higher turnover rate this ratio does not account for the higher
liabilities associated with selling more inventory.
 2014 2015 (Jan – April)

Inventory Holding Period 126.93 Days 480.26

The number of days for inventory holding period has increased which means that
the management is holding onto inventory for longer time and that’s because of
the bad financial position.

2014 2015 (Jan – April)

Accounts Payable Turnover 6.94 Times 1.23 Times

Accounts Payable turnover has decreased in 2015 which indicate that the
company being slower paying its suppliers, and that's because of the poor
financial condition of the company.

2014 2015 (Jan – April)

Accounts Payable Period 38.83 Days 296.75 Days

The accounts payable period increased dramatically due to poor net position and
higher liabilities in 2015.

2014 2015 (Jan – April)

5.93 7.16
Capital Asset Turnover

Capital asset turnover has increased which shows that the company is using its
fixed assets more efficiently to generate sales.
 2014 2015 (Jan – April)

Total Asset Turnover 1.54 0.80

While capital asset turnover has increased, total asset turnover has decreased
meaning that they are using their fixed assets efficiently, but their variable assets
are not used efficiently to generate sales.

2014 2015 (Jan – April)

2.05 0.97
Debt to Assets

The decrease in this ratio indicates a decreasing amount of Lovepop’s assets that
are being funded by creditors/debt.

2014 2015 (Jan – April)

0.98 0.32
Fixed Charge Coverage

The fixed charge coverage has decreased which shows the company inability to
pay its fixed costs with its income before interest and taxes.

Assumptions:

• When calculating ratios with an average account, we use 120 days (approximate

days from January through April), rather than 365 days