ASC & CSA Disclosure Summary: Comments and Hot Buttons

We recently attended the ASC Connect Conference and thought our current and past client partners may be interested in what the hot button issues were.

In light of increasing regulatory scrutiny on company communications, which is relevant for public companies but also good for private companies to keep in mind we have prepared a summary outlining key highlights from the ASC conference as well as highlights from the recent CSA Staff Meeting Notice regarding the Cannabis Industry.

You’ll note there are comments that impact companies across various sectors, including governance issues, presentation of non-IFRS/non-GAAP financial measures, as well as highlights surrounding recent disclosures in the cannabis space.  If you have any questions or wish to receive the full slide deck from the ASC, or the full CSA Staff Meeting Notice, please don’t hesitate to contact one of us on the 5QIR team.

ASC Connect Conference highlights – OCTOBER 9, 2018

Got Pot?:

Continuous disclosure issues raised regarding Cannabis companies:

  • Overly promotional, particularly in press releases
  • Concerned with multiple press releases that don’t contain new material information
  • Disclosure regarding status of licensing process and articulating potential risk that a license is not granted
  • Do you have a business plan? Where are you in this plan?  (major milestones, timelines, expenditures)
  • Important to describe nature of US activities and indicate that under US Federal Law cannabis is still illegal
  • Need to disclose impact of financing options, relevant risks of not obtaining financing or licensing, etc.
  • Provide sufficient information in Financial Statements and MD&A to communicate financial performance, including accounting treatment of biological assets and fair value measurement processes

Board Gender Diversity:

Comply or explain disclosure on board renewal and gender – provide transparency on policies regarding board renewal process

  • Disclosure whether board term limits have been adopted. If the use of “other mechanisms” has been indicated, be clear on what those are.  Describe mechanisms for board renewal: Focus on the Reporting Issuer’s why and how, not just the what.
  • Gender Policy: a written policy for identification.  Disclosure of a general “Diversity” policy is NOT  What specific measures have been taken for recruiting / appointing female board members?
  • Gender diversity requirements applicable at both the board level and management level
  • Be specific on how the diversity policies will be implemented (or have been implemented)
  • Disclose both Number of female board numbers as well as Percentage (%) of the board that is female
    • The same disclosure should be provided for management

Non-GAAP Measures:

  • Ensure non-GAAP measures are not obscuring or overshadowing the GAAP measures e. caution against making non-GAAP measures more prominent
  • Ensure the reader is able to reconcile Non-GAAP back to GAAP
  • Correctly label relevant items as Non-GAAP
  • Be mindful of how many Non-GAAP measures are presented in the communication
  • Maintain consistency between the various reporting documents and between reporting periods (ie Quarters) for all Non-GAAP measures

Caution Around Promotional Disclosure:

  • Unsubstantiated / unsupported assertions about growth
  • Issuing press releases that do NOT contain any NEW material facts
  • Ensure there is sufficient disclosure and clarity regarding the company’s business plan as well as comprehensive risk disclosure in all public documents

CSA Staff Meeting Notice 51-357 (October 10, 2018) – Cannabis Industry focused

Levels of Information in Financial Statements

  • Found licensed cannabis producers (LPs) often did not provide sufficient information in their FS and MD&A for an investor to understand financial performance
  • IFRS requires issuers to record growing cannabis plants at their fair value. LPs need to improve their fair value and fair value related disclosures. For example, Profit & Loss including unrealized fair value gains related to the growth of biological assets which have not yet been sold.
    • Issuers should separately disclose:
      • Unrealized gains/losses resulting from fair value changes on growth of biological assets;
      • Realized fair value amounts included in the cost of inventory sold.
    • Issuers should clearly disclose:
      • What they consider to be the direct and indirect costs of production associated with biological assets,
      • Which P&L line item(s) these direct and indirect costs are recorded in, and
      • Whether the direct and indirect costs of biological assets are capitalized, or whether they are expensed as incurred.

US Activities & Forward-Looking Information

  • Complying with securities requirements for forward looking information
  • Issuers with cannabis operations in the US did not provide sufficient disclosure about the risks related to their US operations to satisfy the disclosure expectations

Fair value Measurement Process

  • LPs were not providing:
  • A description of the valuation techniques and processes,
  • A description of the inputs used in the fair value measurement including quantitative information about significant unobservable inputs,
  • The level of the fair value hierarchy within which the fair value measurement is categorized,
  • The sensitivity of the fair value measurement to changes in certain inputs, and
  • A discussion of any interrelationships between significant unobservable inputs and how they may affect fair value measurement.

Non-GAAP Measures:

  • LPs disclose a non-GAAP financial measure similar to ‘cash cost per gram’ to portray their cost of production, after excluding non-cash fair value adjustments.  While this measure is often calculated differently by individual LPs, the way in which it has been calculated should be understandable to investors. In many cases, the composition of a non-GAAP financial measure was unclear because it was difficult to understand what costs had been included in the GAAP measure that formed the starting point in calculating cash cost per gram.
  • Must provide sufficient explanation when reconciling items and disclose significant judgments made to quantify the reconciling item when explaining the calculation for Non-GAAP measures.

Production Estimates:

  • Issuers who make announcements about anticipated production capacity in a new facility under construction should disclose the material factors and assumptions inherent in that projection. Assumptions for financial projections should be specific and comprehensive, particularly with respect to quantitative details, such that an investor is able to clearly understand how each assumption contributes to the projection.

Misleading or Unbalanced Disclosure (Discuss Relevant Risks):

  • Issuers considering entering the cannabis industry, or issuers considering new investments in the cannabis industry, should ensure that announcements about these new opportunities are balanced, factual and not misleading to investors.

Best Practices: Is Your Investor Relations Collateral Telling the Right Story?

Introduction 
At some juncture, your company developed a website and a corporate presentation, allocating human and financial resources to ensure that those two key pieces of investor relations material were telling the right story. Since then, subsequent iterations have more or less been variations on the same theme.

When is it time to embark on a wholesale review of your front-line collateral to ensure that it reflects the company’s best possible story? We’re not talking about regular updates (which should be often); but material changes to reflect what the narrative is and how it’s being told.

All C-Suite executives have had multiple iterations of their résumés: the one that got them the summer job as a lifeguard in high school is different from the one that got them the summer job as an intern for an up-and-coming tech company; and the one that got them the full-time job as a software engineer after graduation was different yet again. Twenty-five years on, and now at the pinnacle of the executive’s career, the résumé currently focuses on qualities like leadership, strategic planning and governance. Along the way, a number of independent eyes – trusted friends or colleagues – have likely provided advice on form and content.
Front-line corporate collateral is no different than a résumé: as marketing documents, they need to evolve to take into account important changes to a story in order to be effective.
Here are some questions to ask to determine whether it’s time to consider a wholesale re-vamp.

Has the Corporation Grown Materially?
While growth is frequently mentioned in front-line collateral as a measure of success (a questionable thesis), its practical impact on how the company tells its story is often over-looked. The most common mistake we see in the collateral of small and medium-sized businesses is a reflected in an inability to focus on core services/assets/projects, while dismissing the rest as immaterial (to the investor relations story). Rather than cull non-core material from the narrative, the tendency is to keep it in and then simply add new content to reflect the growth piece. While legacy assets or clients that are smaller in scale will contribute to the bottom line, their materiality needs to be assessed carefully to determine worthiness of mention on the website or corporate presentation. Giving equal line space to a project that contributes 5% to revenue as one which contributes 20% risks the inference that the company is unfocused.

Has the Business Plan Changed Materially?
New products and services, geographic diversification and responses to financial or operating challenges are often catalysts to promote material changes to the company’s business plan. Rather than try and fit a new narrative into the old story, consideration should be given to re-writing the script.

Has the Target Audience Changed?
There are many factors that impact the make-up of a public company’s investor base (both current and prospective). These include items that are related both specifically to the company (revenue sources, market capitalization); as well as more general market factors (is the sector more/less out of favour). What might have been a retail-focused, Canadian story might now be one that attracts institutions outside the country. Understanding the primary constituency – and tailoring form and content accordingly – is critical to telling the best possible story.

Is the “User Experience” Optimized?
User experience is important and begins with the efficiency of what can be accessed on-line; and then moves to the quality of the content. To this extent, is the company’s website – and the corporate presentation loaded on the website – optimized? Investors have become accustomed to fast and mobile-compatible access to data that depicts accurate and graphically intensive information. A deficiency in any of these can led to a poor user experience. Broken links, unintuitive navigation, slow-loading pages and a bland slide show do not project a professional image.

Conclusion
Conducting the occasional audit of front line collateral is an important exercise. This should not be done in the context of regular updates coinciding with continuous disclosure events (such as issuing news releases or publishing interim/annual results); nor should it be undertaken by the individuals who are primarily responsible for their production and maintenance. While it’s impossible to adopt a hard-and-fast rule about when that audit should occur, asking – and answering – the four questions posed above should provide the appropriate guidance.

Public Companies: Are You Ready for this Year’s Proxy Voting?

At the beginning of a Canadian winter, spring 2018 seems awfully far away. Hockey, skiing and curling have not yet yielded to thoughts of golfing, cycling, hiking and… annual general meetings (“AGMs”).

While some issuers are already into the process of at least preparing their thoughts on what governance-related matters need to be addressed at their AGMs, most are more occupied with year-end operational matters, budgeting and preparing for auditors. Although the C-Suite and board members intuitively recognize the importance of effective governance and are happy to insert state-of-the-art boiler plate into their collateral, surprisingly few actuate that into a value-added, introspective exercise that makes the organization really better.

Board independence and diversity, executive compensation, director overboarding, corporate social responsibility and a number of other elements are up for scrutiny not only by shareholders, but by other stakeholders who have the ability to impact an issuer’s business. While the optimal scenario would have seen a company adopt a proactive approach to ensuring effective governance, internal human resources are often not available to champion and discharge that function, particularly in the small and mid-cap spaces. The best result is that the issuer ends up with benign governance that does nothing to increase value for stakeholders. The worst result is that an issuer is left with the defensive (or even mortal) wounds of having ignored a critical component of their corporate health and is then required to take valuable time away from profitably growing the business and instead spend it on damage control and healing.

The good news is that it’s never too late for some governance introspection. Investing time before that information circular goes out (and building some messaging around a potentially contentious proposal) can make all the difference.

-Steve Cloutier, Senior Advisor

Managing for Success

Albert Einstein is credited for saying that the definition of insanity is “doing the same thing over and over again and expecting different results.” Whether or not he’s actually responsible for the quote, the ideology behind the statement is sound in business – trying to solve a problem by using the same strategy that didn’t work before and expecting it to work this time is unrealistic at best.

More for less

What we see often in the marketplace is demand to receive “more for less”. Isn’t that what we all want? More value, more time, more productivity for a really low price. At first it can be relatively easy to demand more and spend less but over time, companies are subject to the law of diminishing returns. When companies fall into this trap they lose focus, their brand goes astray and they begin to lose out to competitors who may be more focused.

Anyone who works or has worked in a typical corporate environment has likely been requested to do more with less. This is particularly true for those in the oil and gas sector where performance is so closely tied to commodity prices, and during periods of volatility teams must deal with layoffs, higher internal frustrations and greater stress. As a result, businesses are forced to push for more productivity within their organizations, and employees are often expected to deliver as much or more with even fewer resources.

However, does “more” activity always bring the desired result? Not necessarily, as output then tends to focus on quantity over quality.

Higher quality with enhanced efficiency

Is it possible for public oil and gas companies to achieve their goals in a volatile market without breaking the bank? The answer is a resounding “Yes”. Thinking outside the box and identifying creative solutions ensures Einstein’s insanity definition is not at play. One such solution to continue achieving goals may be to work with an external organization that offers expertise, focus and flexibility (typically at a lower overall cost). By taking this approach, public companies can realize value from external support, advice and expertise, which supplements existing initiatives. This allows management teams to focus on execution of the corporate strategy while remaining connected with shareholders and other stakeholders – critical for those active in the capital markets.

Many underestimate the time and energy it takes to service the obligations inherent with being public. Boards and management teams need to strike a balance between effectively navigating the capital markets, ensuring continued legal and regulatory compliance as well as building and maintaining relationships with their key stakeholders.

As experienced capital markets consultants, the 5QIR team has the business intelligence complemented by a diverse wealth of industry knowledge; we have the ability to create trust and rapport on a personal level while providing a sound structure and methodology that facilitate strategic discussions. We are an excellent, high-quality and value-added replacement or supplement to a host of in-house resources, which can help companies stay the course of their goals and objectives while maintaining optimal efficiencies.

Our value proposition involves the full positioning of a company’s capital markets and corporate ‘branding’ in a highly efficient and effective manner. 5QIR provides a combination of benefits that we tailor specifically for each client dependent on their corporate strategy, objectives and available resources.

Investor Relations and the Bear

Every sector has its ups and downs. In Alberta we are all too familiar with the vertigo brought on by whipsawing commodity prices. While a glance south has U.S. markets rubbing up against record highs, as of mid-February the capital budgets of energy exploration and production companies continue to see red ink, and dividends that appeared safe six months ago have been cut to protect balance sheets. Recent conversations have revealed that some energy clients are redoing budgets on a weekly basis in advance of year-end reporting.

So what are we telling clients? We understand that the first inclination is to limit investor relations activity and reduce interactions with a chilly investment community. We get it. It almost seems common sense to adopt the “If-no-one’s-buying-it’s-not-worth-the-time-and-expense-to-put-ourselves-out-there-approach”, right? Wrong.  Now is the time to focus on the long game, do some work-overs, invest in facilities and build your 12-to-24 month capital markets plan. We encourage companies to continue, or in some cases start, proactively communicating with their audiences, and to actively manage market expectations. Following are some tips on where to begin.

Create a Bear Attack Plan:Startup Stock Photo

An effective investor engagement strategy keeps you in front of your audience, outlines and reinforces the corporate strategy, provides tangible milestones, and sets expectations of future prospects and financial performance. An investor relations strategy should also contain the tactics used for delivering messages, and the goals of the issuer over the short and medium term. Whether or not the oil price has hit bottom, companies need to be on investors’ radar screens, so when a clear trough develops and bears start giving way to bulls, your story is top of mind.

Keep Talking:

Never sneak-up or catch a bear unaware. Living in the foothills, most of us can embrace this simple concept. We make noise and we buy colorful bells for our boots or bags when hiking or camping. The key is not to remain quiet. Similarly in the capital markets, you need to maintain an open dialogue with investors and anticipate their concerns; a proactive company will answer questions before they are even asked on a conference call. Deciding on how to frame your conversations often comes down to identifying and understanding what your key messages are. Elements such as how you are going to add value, stand out from your peers, and provide attractive returns should always be easy to take away from your communications. If it isn’t clear, then its time to start looking at adjusting your messages and/or your tactics. Your plan will have laid out some of these delivery vehicles that may include news releases, conference calls, in-house broker meetings, event-driven or planned road shows, or presentations at conferences. The goal is keep nervous investors informed and never allow yourself to hibernate.

When Aiming at a Bear… Don’t Miss:

While companies have very little control over commodity prices, they can and need to control and manage expectations. Although not particularly catchy, there is a reason that “Missed Expectations” is a common headline in the business news.

As stock prices slide, there14201997467_19a1befaab_k is a temptation to overcompensate for negative sentiments towards a company or its sector. Over promising however has the same result time after time: It damages credibility. Successful management teams receive a premium because they predictably deliver on expectations. They ensure milestones and timelines they set are achievable. We counsel companies that it’s okay to be candid and transparent about your challenges in light of commodity price adjustments. After all, your peers are in a similar boat. By doing so you are providing investors with the yardstick they need to measure your performance by. It is also important to be open to polling your audience. Knowing what is on their minds and under their skin may give you the foresight on how you need to adjust your message. It may go without saying, but companies that are honest with themselves and the Street will always do better in the long-term.

So let’s be honest, investor relations are not as fun in a down market. The work is harder, and less likely to be immediately gratifying, but the stakes are just as high. How companies position themselves today will dictate how well they do when the bear becomes a bull. Maximizing the value and utility of your listing is your ultimate goal and that means proactively managing for the long-term.