› ... › sme_20130605_write-effective-mda.pdf · How to Write an Effective e Management’s...
109
OSC SME Institute Ontario Securities Commission OSC SME Institute Ontario Securities Commission OSC SME How to Write an Effective Management’s Discussion & Analysis Corporate Finance Branch June 5, 2013
Transcript of › ... › sme_20130605_write-effective-mda.pdf · How to Write an Effective e Management’s...
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME
How to Write an EffectiveManagement’s Discussion & Analysis
Corporate Finance BranchJune 5, 2013
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Disclaimer
“The views expressed in this presentation are the personal views of thepresenting staff and do not necessarily represent the views of theCommission or other Commission staff.
The presentation is provided for general information purposes only anddoes not constitute legal or accounting advice.
Information has been summarized and paraphrased for presentationpurposes and the examples have been provided for illustration purposesonly. Responsibility for making sufficient and appropriate disclosure andcomplying with applicable securities legislation remains with the company.
Information in this presentation reflects securities legislation and otherrelevant standards that are in effect as of the date of the presentation.
The contents of this presentation should not be modified without theexpress written permission of the presenters.”
2
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SMEPresentation Outline
3
Time Topic
9:00 – 9:05 Welcome and Introduction to the OSC SME Institute
9:05 – 9:10 Securities Regulation 101
9:10 – 10:10 Management’s Discussion and Analysis (MD&A)
10:10 – 10:15 Helpful Information about the OSC
10:15 – 10:45 Industry Perspective – Ron Schwartz
10:45 – 11:00 Questions
OSC SME Institute
Welcome and Introduction to theOSC SME Institute
4
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SMEOSC SME Institute - Objectives
Our goal is to:
Help SMEs navigate the regulatory waters
Demystify disclosure requirements so companies can focus onbuilding their business
Reduce SMEs’ cost of compliance so that this money can bebetter spent on strategic initiatives
Provide an opportunity for informal dialogue with OSC staff
5
Disclosure requirements, including those for financialreporting, are a cornerstone of investor confidence
OSC SME Institute
Securities Regulation 101
6
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SMESecurities Regulation 101 – Periodic Requirements
7
Document Venture Non-venture
Audited annual financial statementsaccompanied with:
• Annual MD&A
• Annual CEO and CFO Certificates
120 days afteryear-end
90 days afteryear-end
Interim financial report accompanied with
• Interim MD&A
• Interim CEO and CFO Certificates
60 days afterquarter end
45 days afterquarter end
Annual Information Form (AIF) N/A - but mayelect to file
Usually 90 daysafter year-end
Information Circular Generally mail 21 days beforemeeting and file promptly
Executive Compensation File with related document (usuallywith Information Circular or AIF)Corporate Governance (i.e. Board information)
OSC SME Institute
Management’s Discussion & Analysis
8
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME
9
MD&A Background
MD&A is a narrative explanation “through the eyes ofmanagement” which:
• Provides a balanced discussion of a company’s results, financialcondition and future prospects – openly reporting bad news aswell as good news
• Helps current and prospective investors understand what thefinancial statements show and do not show
• Discusses trends and risks that have affected or are reasonablylikely to affect the financial statements in the future
• Provides information about the quality and potential variabilityof company’s earnings and cash flow
The MD&A should complement and supplementthe company’s financial statements
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME
10
Why Should I Write a Good MD&A?
Opportunity to explain events from management’s pointof view
Provide current and new investors with information tomake investment decisions
Help increase knowledge of your business, beyond thenumbers
Facilitate attempts to raise financing
Decrease the likelihood of comments from regulators
Reduce complaints
MD&A goes beyond the numbers in the financial statements to provide agreater understanding of a company’s business
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME
11
Where Do I Start?
Financial statements andother filings
Key performance indicators Minutes Press releases Analyst reports Investor presentations and
annual meetings
Political factors Social issues Economic conditions Competitors Regulatory updates
Approved budget Presentations to Board
Agreements with stakeholders Planned development
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME
12
Tips Before You Start
MD&A quality is not measured by its length,but in the breadth and depth of its analysis.
Use plainlanguage
Focus onmateriality
Providecontext
Identifytrends
Plan forreview time
Considerforward-looking
information
OSC SME Institute
How to Write an Effective MD&A
13
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SMEAnnual MD&A
14
Annual MD&A
Overallperformance Selected
annualinformation
Discussions ofoperations
Summary ofquarterly
results
Liquidity andcapital
resources
Off-balancesheet
arrangements
Transactionsbetweenrelatedparties
Fourthquarteranalysis
Proposedtransactions
Criticalaccountingestimates
Change inaccounting
policy
Financialinstruments
Venture issuerdisclosures
Risks anduncertainties
Forward-looking
information
OSC SME Institute
Discussion of Operations
15
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Discussion of Operations51-102 F1 – Part 2, Item 1.4
Companies should provide an in-depth analysis of:
• Net sales or total revenues by operating segment
• Cost of sales or gross profit
• Significant projects that have not generated operating revenues
• Producing mines or mines under development
• Previous financing
16
Simply repeating variances that can be calculated from the financialstatements does not help investors understand trends. Omitting the analysis of
a material variance or simply qualitatively explaining a variance withoutquantifying the impact of the explanation is not sufficient.
OSC SME Institute
Discussion of OperationsChanges in Revenues and Costs
17
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Discussion of OperationsChanges in Revenues and Costs
18
Discussion of operations is boilerplate and doesnot provide entity-specific disclosure aboutchanges in revenues and cost of sales
Investors require meaningful discussion ofoperations so that they can better understand thereasons for any changes
Provide analysis of operations by discussing whyrevenues and costs have changed
Why important
Observations
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Discussion of Operations Hot ButtonsChanges in Revenues and Costs
19
Areas Considerations
Revenues Have changes caused by the following factorsbeen disclosed? Selling prices Volume / quantity of goods and services Introduction of new products or services Any other factors
Costs Have changes caused by the following factorsbeen disclosed? Labour and material costs Price changes Inventory adjustments
Segments Does the disclosure discuss performance of allreportable segments disclosed in the financialstatements?
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SMEChanges in Revenues and Costs
Example of Boilerplate Disclosure
20
Revenue increased from$900,000 to $1,100,000, a22% increase. Gross profitincreased from $400,000 to$408,000, a 2% increase.
Repetition fromfinancial statements
No discussionof variances
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Changes in Revenues and CostsExample of Entity-Specific Disclosure
21
Revenue increased from $900,000 to $1,100,000, a22% increase. Three factors caused revenue to increaseby $200,000:
the introduction of a new product during the fourthquarter, Product Y $170,000
increased sales volume of Product X $60,000; and
decreased unit price of Product X ($30,000).
Gross profit increased from $400,000 to $408,000, a2% increase. As a percentage of revenue, gross profitdecreased by 7%. In late 2012, we anticipated newcompetition entering our market, so we discounted ourremaining Product X units to encourage their sale andto allow us to focus on its replacement, Product Y.Discounts on Product X caused the reduced gross profitpercentage. We expect to continue discounting ProductX in the first quarter, but expect our gross profit toimprove as Product Y replaces Product X.
Discussion ofvariances
Relationshipwith gross profit
Quantificationof factors
OSC SME Institute
Discussion of OperationsProjects Not Yet Generating Revenue
22
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Discussion of OperationsProjects Not Yet Generating Revenue
Discussion of significant projects that have not yetgenerated revenue often do not include statusupdates against originally projected plans
Investors want information on the progress ofsignificant projects to assess management, thecompany’s performance, as well as futureprospects
Observations
Why Important
23
Project updates should discuss status, expenditures made, and anticipatedtiming and costs to reach the next phase or milestone
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Discussion of Operations Hot ButtonsProjects Not Yet Generating Revenue
24
Areas Considerations
Status Is the current plan for each project disclosed?
Is there disclosure of the project’s progress compared tothe plan?
Have the results from pre-production and field tests beendisclosed?
Expenditures Have the following been disclosed? Expenditures to date Whether the company anticipates spending more than
budget on each project Amounts that need to be spent to get project to next
level Whether financing has been secured to advance the
project
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Projects Not Yet Generating RevenueExample of Boilerplate Disclosure
Lackscomparison
Does notaddress futurespending
25
The Company is developing a medical deviceto treat burn victims. The product willrequire clinical testing and is subject to FDAapproval. The Company has spent $1.2million to date developing and testing thetechnology. The Company expects theproduct to launch in approximately twoyears.
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Projects Not Yet Generating RevenueExample of Entity-specific Disclosure
Achievementto date
Describes theproject
26
The Company is developing a medical device to treat burnvictims. The product will accelerate the victim’s healingprocess, while reducing pain and scarring. The Companyexpects this technology will have other applications such asin cosmetic surgery. The Company intends to market theproduct to hospitals and large care centres, and license theproduct for use internationally.
Before the Company can market the product, it mustreceive regulatory approval. In this past year, the Companysuccessfully completed the preliminary testing of itstechnology. In August of this year, the Company beganclinical trials to obtain FDA approval. Initial test results arepositive, and the Company has provided additionalinformation to the FDA. The Company does not expect toreceive FDA approval for at least 2 years.
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Projects Not Yet Generating RevenueExample of Entity-Specific Disclosure (cont’d)
Status comparedto plan
Additionalfinancing
27
The Company expects to begin shipping the product fourmonths after receiving FDA approval. The Company hasspent approximately $1.2 million to date developing andtesting the technology, and will require an additional $1.3million to complete testing and receive FDA approval.Following FDA approval, the Company expects to incur $2million in production and marketing costs to bring thisproduct to market.
As disclosed in previous MD&A, initial test results requiredthe Company to modify its prototype. As a result, theCompany is currently $500,000 over budget and 6 monthsbehind schedule. Since this initial setback, the Company hasexperienced no additional delays or unexpected costs.
OSC SME Institute
Discussion of OperationsProducing and Development Mines
28
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Discussion of OperationsProducing and Development Mines
Discussion of producing mines or mines underdevelopment do not clearly or adequatelyexplain the scale and status of the project
Investors want information on the progress ofsignificant projects to assess management, thecompany’s performance, as well as futureprospects
Observations
Why Important
29
The MD&A form requires project updates to discuss milestones, expansionplans, productivity improvements, plans to develop a new deposit, production
decisions and the basis for any such milestones
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Discussion of Operations Hot ButtonsProducing and Development Mines
30
Areas Considerations
Milestones Have milestones been identified?
Are there any plans for expansion? If so, what are theplans?
Will the company take any steps to improve productivity?
Are there any plans to develop a new deposit?
What decisions have been made about production?
Are any of the milestones based on a technical report?
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Producing and Development MinesExample of Boilerplate Disclosure
Disclosurenot updated
31
In fiscal 2012, the Company completedstudies on the XYZ Lake project anddecided to proceed with construction tobring the project to production. Additionalfinancing will be required to achieve thisgoal.
Lacks detailof status
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Producing and Development MinesExample of Entity-Specific Disclosure
Expendituresmade
32
In fiscal 2012, the Company completed a feasibility studytechnical report, dated October 1, 2012, on the XYZ Lakeproject. The Company's Board of Directors accepted thefeasibility study and instructed management to initiatedevelopment and construction of the project to bring itinto commercial production by late 2015. The anticipatedcapital cost for mine construction is approximately $850million. In the first half of 2013, the Company plans tocommence construction which will last approximately twoyears. The Company spent $80.5 million in 2012 comparedto $24.5 million in 2011 due to expenditures related to thefeasibility study and environmental assessments. InOctober 2012, the Company completed a $400 millionfinancing with the proceeds to be used for construction ofthe XYZ Lake project. Subsequent to year end, theCompany was able to obtain the additional requiredfinancing to complete construction as discussed in Note 21.
Future plans
Anticipated timeand costs
OSC SME Institute
Discussion of OperationsVariances in the Use of Proceeds
33
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Discussion of OperationsVariances in the Use of Proceeds
Funds raised by way of a prospectus are often forspecific projects or stages of specific projects.Companies do not always adequately explain howproceeds raised in public offerings weresubsequently used and the impact of any changesfrom their originally intended use.
Investors should be made aware of how theirinvestment is being spent. Updating the use ofproceeds in the MD&A will allow investors to assesshow management has ultimately spent the funds.
Observations
Why Important
34
Companies are required to compare, in tabular form, the changes in the use ofproceeds and to explain the impact of the changes on the company’s ability to
achieve its business objectives and milestones
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Discussion of Operations Hot ButtonsVariances in the Use of Proceeds
35
Areas Considerations
Variances How does the nature and amount of expendituresmade by the company compare to the use of proceedsfrom previous financing?
How do variances impact future operations?
How will the variance affect the company’s ability toachieve its business objectives and milestones?
Will the company require additional financing to meetits next milestone?
Disclosure Have the above items been disclosed?
Does the disclosure comply with MD&Arequirements?
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Variances in the Use of ProceedsExample of Boilerplate Disclosure
Disclosure fromprospectus
Disclosurenot updated
36
Although the company intends to expend thenet proceeds from the prospectus as describedin the preceding paragraph, there may becircumstances where for sound businessreasons, a reallocation of funds may be deemedprudent or necessary. While actual expendituresmay differ from the above amounts andallocations, the net proceeds will be used by thecompany in furtherance of its business.
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Variances in the Use of ProceedsExample of Entity-Specific Disclosure
Impact onother projects
Additionalinvestment
37
The following table provides an update on theanticipated use of proceeds raised in the most recentfinancing, along with amounts actually expended anda description of the variances. The company recentlydetermined that additional investment is required toget Project A to the testing phase. The final columnof the table indicates the company’s revised estimateof the total expenditure required to complete theindicated phase. Given the anticipated increasedcosts for Project A, the company was not able to usethe funds for Project B as noted in the prospectus.The expected budget for Project B remainsunchanged from that disclosed in the prospectus andthe company is developing a strategy to ensurefunding is available so that the time of Project B isnot delayed.
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME
Project A – Update of costs expended and project budget
Project B – Update of costs expended and project budget
Variance in the Use of ProceedsExample of Entity-Specific Disclosure (cont’d)
Phase Previouslydisclosed
Spentto date
Variance Reason Total revisedbudget
R&D $4,600 $5,200 $600 Additional designmodifications required
$5,300
Testing $1,200 Nil ($1,200) To be started next fiscal $1,200
Total $5,800 $5,200 ($600) $6,500
Revisedexpenditures
38
Phase Previouslydisclosed
Spentto date
Variance Reason Total revisedbudget
R&D $700 Nil ($700) Deferred project untilfinancing can be secured
$700
Total $700 Nil ($700) $700
OSC SME Institute
Liquidity and Capital Resources
39
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Liquidity51-102 F1 – Part 2, Item 1.6
Companies should discuss the following:
• How they intend on generating sufficient amounts of cash in the shortand long term to maintain capacity or to meet planned growth
• If a working capital deficiency exists, its ability to meet obligations andhow the company intends on remedying the deficiency
• Trends or expected fluctuations in liquidity, including balance sheetconditions or income or cash flow items that may affect company’sliquidity
• Liquidity risks associated with financial instruments
• Significant risks of defaults or arrears
• How the company intends to cure the default or arrears or address therisk
40
Repeating cash flow information that is readily available from the financialstatements is not sufficient
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Capital Resources51-102 F1 – Part 2, Item 1.7
Companies should provide an analysis of capitalresources including:
• Commitments for capital expenditures as of the date of the financialstatements detailing:
• the amount, nature and purpose of these commitments
• the expected source of funds to meet these commitments
• the expenditures not yet committed but required to maintaincapacity, to meet growth or fund development activities
• Known trends or expected fluctuations in company’s capital resources
• Sources of financing that the company has arranged but not yet used
41
Disclosure should include an explanation of the planned activities to meetgrowth and fund development activities, along with a quantification of the
capital expenditures to be incurred for those activities
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SMELiquidity and Capital Resources
A meaningful analysis of the company’s ability togenerate sufficient cash, address its working capitalrequirements and its ability to access financing tomeet its committed expenditures is not alwaysprovided
Investors need to clearly understand any anticipatedfunding shortfalls and financing resources availableto meet spending commitments and continue keyprojects
Companies should explain their current liquidity position andhow they will fund upcoming operating commitments and other obligations
42
Observations
Why Important
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SMELiquidity and Capital Resources Hot Buttons
Areas Considerations
Ability to generatesufficient cash
Is there analysis of the company’s ability to generatesufficient cash in the short term and the long term to: Meet funding needs? Meet planned growth? Fund development activities?
Working capitalrequirements
Are the company’s working capital requirementsdisclosed?
If a working capital deficiency exists, or is expected, isthere a discussion on the company’s: Ability to meet obligations as they become due? Plans, if any, to remedy the deficiency?
43
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SMELiquidity and Capital Resources Hot Buttons
Areas Considerations
Spendingrequirements
Is analysis provided on commitments for:
Capital expenditures?
Any expenditures required to continue key projects?
Has the nature, amount and purpose of commitments,and expected source of funds to meet thesecommitments been disclosed?
Sources offinancing
Is there a discussion on how difficulties in obtainingfinancing could affect:
Status of projects?
Ability to continue as a going concern?
Have the expected sources of financing that are beingpursued been identified?
44
OSC SME Institute
Liquidity and Capital ResourcesWorking Capital Deficiency
45
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Working Capital DeficiencyExample of Boilerplate Disclosure
At year end, the Company had cash of$10,000, total current assets of$200,000 and total current liabilities of$500,000. This resulted in a workingcapital deficiency of $300,000. TheCompany is actively seeking alternativesources of financing.
46
Ability to meetobligations?
Lacks explanationof remedy
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Working Capital DeficiencyExample of Entity-Specific Disclosure
At year end, the Company had cash of $10,000, totalcurrent assets of $200,000 and total current liabilitiesof $500,000. This resulted in a working capitaldeficiency of $300,000. Subsequent to year end, theCompany has entered into discussions to borrow anadditional $350,000 from both private investors andshareholders to meet current and future workingcapital requirements. The Company is also exploringother financing alternatives, such as factoringaccounts receivables and a sale and leaseback ofcapital assets. In the short term, the Company will relyon advances from shareholders and the exercise ofoptions to fund operating costs.
Remedy
Ability to meetobligations
47
OSC SME Institute
Liquidity and Capital ResourcesDebt Covenants
48
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Debt CovenantsExample 1 of Boilerplate Disclosure
The Company's credit facility containscertain covenants that it must complywith; otherwise, the amounts outstandingare payable on demand. As at December31, 2012 the Company violated suchcovenants.
49
Nature ofcovenants
Remediationplan
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Debt CovenantsExample 1 of Entity-Specific Disclosure
The Company's share capital is not subject to anyexternal restrictions; however its credit facility issubject to periodic reviews. The credit facility alsocontains certain covenants, such that the Companycannot, without prior approval of the bank, hedge orcontract petroleum or natural gas volumes, on a fixedprice basis, exceeding 50 per cent of productionvolumes, nor can it monetize or settle any fixed pricefinancial hedge or contract. The credit facility alsocontains a financial covenant that requires theCompany to maintain a working capital ratio of at least1:1. As at December 31, 2012, this ratio was 0.5:1. Thebank waived the breach prior to the year endedDecember 31, 2012 and has allowed the Company sixmonths to remedy the deficiency. The Companyintends to acquire additional financing through privateplacements to fund current working capital needs andremedy the deficiency.
Covenants andrestrictions
Remediationplan
Breach
50
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Debt CovenantsExample 2 of Boilerplate Disclosure
The amount available for borrowingunder the facility is subject to certainfinancial and restrictive covenants asdefined under the credit facilityagreement. As of December 31, 2012, thecompany was not in breach of thesecovenants.
Breach afteryear endnot disclosed
51
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Debt CovenantsExample 2 of Entity-Specific Disclosure
The amount available for borrowing under the Facility issubject to certain financial and restrictive covenants. Theseinclude: (1) a debt-to-equity ratio of not more than 0.50; (2)accounts receivable turnover of not less than 10 times inany 12 month-period; and (3) annual maximum capitalexpenditure of $5.0 million.
As of and during the year of December 31, 2012, thecompany was not in breach of these covenants. However, asof January 31, 2013, the company’s debt-to-equity ratio wasat 0.53, temporarily exceeding the maximum stipulatedunder the Facility. It decreased back to 0.44 as of February28, 2013, and as of the date of this MD&A, the companycontinued to be in compliance with all covenants. The highdebt-to-equity ratio as of January 31, 2013 was a result ofthe strike as mentioned under Discussion of Operations.Management believes the company will comply with allcovenants in the foreseeable future.
Covenants andrestrictions
Potential offuture breach
Breach
52
OSC SME Institute
Liquidity and Capital ResourcesCash Burn Rate
53
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Cash Burn RateExample of Boilerplate Disclosure
During the three months ended March 31,2013, cash flow used in operating activitieswas $656,000.
Management believes the cash and cashequivalents balance of $3,253,000 issufficient for the company’s operations inthe foreseeable future.
No analysis ofburn rate
No explanationof why sufficient
54
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Cash Burn RateExample of Entity-Specific Disclosure
During the three months ended March 31, 2013, cashflow used in operating activities was $656,000. During theperiod from January 1, 2013 to March 31, 2013, thecompany’s average monthly cash burn rate was $198,000.Due to the strategic plans the company expects toexecute in the coming fiscal year, management expectsthe monthly cash burn rate to increase to $265,000,mainly as a result of an increase in marketingexpenditures. Management believes the cash and cashequivalents balance of $3,253,000 is sufficient for thecompany’s operations in the foreseeable future, evenwith the increased cash burn rate. However, managementis also in the process of obtaining an additional operatingline of credit to provide the company with additionalworking capital when necessary.
Current burnrate and trend
Plan in responseto burn rate
55
OSC SME Institute
Liquidity and Capital ResourcesCommitments for Expenditures
56
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Commitments for ExpendituresExample of Boilerplate Disclosure
Contractual Obligations Table at December 31, 2012 (in 000’s)
ContractualObligations
Total < 1 Yr 1-3 Yrs 3 – 5 Yrs > 5 Yrs
Long-term debt 4,567 724 1,320 1,407 1,116
Capital leases 775 236 539 - -
57
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Commitments for ExpendituresExample of Entity-Specific Disclosure
[Contractual Obligation Table]The company has entered into a development and licenseagreement with XYBio Inc. under which the company andXYBio Inc. collaborate in certain research anddevelopment activities to conduct further studies on thecommercialization potential of patent #345. The companyis obligated to provide XYBio Inc. with up to $2,000,000 inresearch funding and milestones payments, of which$500,000 is to be paid over the next 5 years at $100,000per year upon the completion of the activities stipulatedin the agreement, and the remainder is to be paid inthree instalments of $700,000, $400,000 and $400,000respectively upon the achievement of three milestones.The timing of achieving the milestones is uncertain, butthe first milestone is expected to be achieved in thesummer of 2013, and all milestones are expected to beachieved by 2016.
Committedexpenditures
58
OSC SME Institute
Risks and Uncertainties
59
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Risks and Uncertainties51-102F1 – Part 1(a)
Companies should discuss the following:
• Risks and uncertainties that:
• may affect/have affected the company and that would bemost likely to influence an investor’s decision to purchaseits securities
• affect the company’s financial statements and/or arereasonably likely to affect them in the future
• Entity specific disclosure describes:
• the risk in detail
• its potential impact on the company’s business, financialcondition, and results of operations
• the company’s strategy for monitoring and mitigating risks
60
To be meaningful to investors, risk disclosure needs to be entity-specific andcontinuously updated
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SMERisks and Uncertainties
Disclosure of risks and uncertainties is oftenboilerplate in nature and the potential impact ofhow the risks may affect the company is rarelydisclosed
Investors need to understand the entity-specificrisks and how those risks may impact the companyand its business, both of which may affect aninvestment decision or the value of theirinvestment should the risks be realized
61
Throughout each section of the MD&A, companies should discloserisks and uncertainties that are material and entity-specific
Observations
Why Important
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SMERisks and Uncertainties Hot Buttons
Areas Considerations
Enterprise riskmanagement
Has information been sought from industryassociations and competitors to remain abreast ofemerging risks?
Has the Board been informed of the risks that are notbeing actively managed and those that are beingactively managed?
Disclosure Have all risks material to the company been disclosed?
Is there disclosure on how the risk may impact the
company?
Has the risk disclosure been updated to reflect changes
in current and expected conditions?
Note: Do not provide a ‘laundry list’ of every conceivable risk
62
To provide meaningful information, companies shoulddisclose the strategies used to manage its risks
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Competition RiskExample of Boilerplate Disclosure
Competition Risk
Our industry is very competitive. We facesignificant competition from other softwarecompanies in all aspects of our business. Ourcompetitors are larger in size, wellestablished, international in scope and havesignificant financial resources. We continueto actively monitor the activities of ourcompetitors with a view to ensuring that wewill be able to effectively compete in themarketplace and attract new customers.
63
General and notspecific
Potential impactis not disclosed
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Competition RiskExample of Entity-Specific Disclosure
Competition Risk
We face significant competition from othermanufacturers in Canada and Country ABC. Ourcompetitors include Company Calao and CompanyLagos. These competitors are well established,international in scope and have significantfinancial resources that permit them to developnew products, modify existing products, useproprietary software and market products on aglobal basis. Competition is based mainly on price,quality of product and efficiency of production.The increased competition may affect our sales,cash flow and financial condition.
64
Entity-specific
Potential impact
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Competition RiskExample of Entity-Specific Disclosure (cont’d)
Risk Management Strategies
To mitigate competition risk, ourstrategies include creating long-termvalue for our customers andimplementing efficient processes tomanufacture our main productTopProgram.
65
Risk management
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Key Supplier RiskExample of Boilerplate Disclosure
66
The company is reliant on akey supplier for the supplyof component parts forwidgets.
General and notspecific
Potential impactis not disclosed
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Key Supplier RiskExample of Entity-Specific Disclosure
67
Reliance on Supplier XYZ
The company obtains its supply of the component partsfor widgets from Supplier XYZ under the SupplyAgreement dated March 31, 2010 for a five year term.Under the terms of the Supply Agreement, the companyis required to purchase a minimum of 30% of its supplyof component parts of widgets from Supplier XYZ on anannual basis and Supplier XYZ is to also provide thesupplies upon the company’s request. The companyobtains a discount on the supplies of component parts.Should the supplier fail to meet its obligations under theterms, manufacturing operations could be negativelyimpacted as the production process of widgets may beset back. Further, the possible non-renewal of the SupplyAgreement may result in significant increasedproduction costs and a possible compromise on thequality of widgets.
Entity-specific
Potential impact
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME
68
Risk Management Strategy
The company manages the risks of reliance onSupplier XYZ through alternative supplyarrangements with various other suppliers ofcomponent parts. These arrangements providefor similar discounts and are of comparablequality as those provided under the SupplyAgreement.
Key Supplier RiskExample of Entity-Specific Disclosure (cont’d)
Risk management
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Foreign Operational RiskExample of Boilerplate Disclosure
The company’s operations arelocated in Mali. The company issubject to the political risks andeconomic considerations ofoperating in Mali.
69
General and notspecific
Potential impactis not disclosed
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME
Risk Factor
Currently, the company's principal property islocated in Mali. Consequently, the company issubject to certain risks associated with foreignownership, including currency, inflation, politicaland property title risk. On March 21, 2013 a coupwas initiated by members of Malian army, creatinguncertainty within the country. Work on ourprincipal property has been suspended untilsecurity is re-established within Mali for ourpersonnel and assets. Travel and access to theproperty may be curtailed due to politicalinstability or risks to personnel in remote areaswhich may result in project delays.
Potential impact
Entity-Specific
Foreign Operational RiskExample of Entity-Specific Disclosure
70
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME
Operations may be affected in varyingdegrees by government regulations withrespect to community rights, restrictions ondevelopment, price controls, exportcontrols, restriction of earnings, taxationlaws, expropriation of property,environmental legislation, water use andlabour standards.
Foreign Operational RiskExample of Entity-Specific Disclosure (cont’d)
Potential impact
71
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME
Risk Management Strategies
The Board of Directors (the Board) and seniormanagement monitor the political andoperating environment in Mali on an ongoingbasis. The company meets with governmentofficials on a quarterly basis to foster a greaterunderstanding of the value that the Mali projectbrings to the Mali government and localcommunity. Furthermore, the companymaintains the majority of its funds in Canadaand only forwards sufficient funds to meetcurrent obligations, all which must be approvedby the Board.
Risk management
Foreign Operational RiskExample of Entity-Specific Disclosure (cont’d)
72
OSC SME Institute
Transactions Between Related Parties
73
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Transactions between Related Parties51-102 F1 – Part 2, Item 1.9
Companies should discuss transactions between relatedparties including:
• Qualitative and quantitative characteristics
• Relationship and identity of the related person or entities
• Business purpose of the transaction
• Recorded amount and the measurement basis used
• Ongoing contractual or other commitments resulting from thetransaction
74
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SMETransactions between Related Parties
The business purpose and economic substance ofrelated party transactions (RPTs) is sometimes notdisclosed
By virtue of their nature, related party transactionslack the independence inherent in arm’s lengthtransactions. Investors need to understand thebusiness purpose and economic substance of RPTs,so they can understand the rationale fortransactions and impact on the business
Companies should clearly discuss ALL related party transactions, including theidentity of the parties and their relationship to the company, as well as the
business purpose and economic substance of each transaction
75
Why Important
Observations
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Examples of Common Related PartyTransactions
Office space rented from a company with commonofficers and directors to the company
Administrative services provided by a companycontrolled by a director
Advisory fees, management fees or other services tocompanies controlled by officers or directors
Loans and advances provided by a director to thecompany or vice-versa
Equity investments made by the company in otherentities with common officers and directors
76
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Transactions between Related PartiesExample 1 of Boilerplate Disclosure
During the year, the company paid $3,000,000
to a company with common directors for
services and interest on a loan.Lacks detail
77
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Transactions between Related PartiesExample 1 of Entity-Specific Disclosure
During the year, the company paid $3,000,000 to DrugCo, whohas common directors with the company. The company paid$200,000 to DrugCo for the use of laboratory space, and$2,400,000 for materials in connection with Phase 2 of thedevelopment of NewDrug. The laboratory space and materials,which were both provided in the normal course of operationsat rates comparable to what would have been paid tounrelated parties, were measured at the exchange amount.
The company also paid DrugCo $400,000 in interest on a loan itprovided in the principal amount of $4,000,000. The unsecuredloan bears interest at 10% per annum, and matures in fiveyears with an option by the company to extinguish the debt atany time without penalty. The company entered into thisrelated party transaction because alternate sources offinancing were unavailable due to the company’s limitedoperating history, lack of collateral and limited access to publicfinancing due to current market conditions.
Relationship/identity
Business purposeand amount
Measurementbasis used
Business purposeand amount
78
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Transactions between Related PartiesExample 2 of Boilerplate Disclosure
During the year, the Company paid$200,000 of interest on a loan payable toa majority shareholder.
Lacks detail
79
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Transactions between Related PartiesExample 2 of Entity-Specific Disclosure
During the year, the Company paid $200,000 ininterest on a loan of $2,000,000 received from theCEO, who is a majority shareholder. Theunsecured loan bears interest at 10% per annumand matures in five years with an option by theCompany to extinguish the debt at any timewithout penalty. The transaction was recorded inthe Company’s financial statements at theexchange amount. The Company entered into thisrelated party transaction because alternatesources of financing were unavailable due to theCompany’s limited operating history, lack ofcollateral and limited access to public financingdue to current global financial conditions.
Details of amount
Business purpose
80
Measurementbasis used
Relationship/identity
OSC SME Institute
Forward-Looking Information
81
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Forward-Looking Information RequirementsNI 51-102 – Parts 4A and 4B
Companies must have a reasonable basis for the FLI andmust include disclosure that:
• Identifies forward-looking information as such
• Cautions that actual results may vary from FLI and states thematerial factors that could cause actual results to differmaterially from the FLI
• Identifies material risk factors
• States the material factors or assumptions used to develop FLI
• Describes the policy for updating FLI
82
MD&A disclosure should include specific risks and assumptions that may impactfuture performance and these assumptions should be supportable and reasonable
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Forward Looking Information RequirementsNI 51-102 –section 5.8
The MD&A should include disclosure of:
• Events and circumstances that occurred during the period towhich the MD&A relates that are reasonably likely to causeactual results to differ materially from FLI previously disclosedto the public and the expected differences
• Material differences between actual results for the annual orinterim period and any FOFI/financial outlook for the periodthat the company previously disclosed
83
OSC Staff Notice 51-721 Forward-Looking Information,to be published June 2013
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SMEForward-Looking Information
84
Companies are not always aware that disclosure offuture operational activities is considered forward-looking information (FLI) which is subject toadditional disclosure requirements undersecurities legislation
Securities legislation requires companies to discussin their MD&A occurrences that are likely to causeactual results to differ materially from previouslydisclosed FLI. This allows investors to evaluate thecompany’s forecast and see how it is progressingtoward the achievement of its objectives.
If companies choose to disclose FLI, then they are also required to provideupdates in subsequent MD&A
Observations
Why Important
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SMEForward-Looking Information Hot Buttons
85
Areas Considerations
General Is there a reasonable basis for the disclosed FLI?
Are assumptions supportable and entity-specific?
Is the FLI presented for a reasonable period?
Disclosure Is FLI clearly identified?
Are the assumptions used to develop FLIdisclosed?
Has previously disclosed FLI been updated ifactual results differ materially?
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Forward-Looking InformationExample 1 of Boilerplate Disclosure
86
In fiscal 2013, the company anticipatesmeeting the following targets:
Total revenues expected to be between$1.5 - $2 billion
Total sales to increase by 5.0% to 6.0%
FLI not identified
No assumptionsprovided
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Forward-Looking InformationExample 1 of Entity-Specific Disclosure
87
The following represents forward-lookinginformation and users are cautioned that actualresults may vary. In fiscal 2013, the companyexpects total sales to increase by 5.0% to 6.0%,resulting in revenues of $1.5 - $2 billion. Thisexpectation is based on same-store sales growth ofbetween 3.0% and 4.0% and the introduction ofnew brands to our city centre stores. It is expectedthat new brands will contribute to the increase insales and will be offset by increased competitionfrom U.S. retailers. A key performance indicator forthe company includes retail sales per square foot,this target assumes an average sale per square footof $45.
Identification ofFLI
Assumptions
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Forward-Looking InformationExample 2 of Boilerplate Disclosure
88
In order to attain its profitabilityobjectives and ensure its continuedoperation, the Company must continueto increase cash flows from day-to-dayoperations. To do so, the Companyexpects sales to increase in 2013.
FLI not identified
No assumptionsprovided
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Forward-Looking InformationExample 2 of Entity-Specific Disclosure
89
In order to attain its profitability objectives andensure its continued operation, the Company mustcontinue to increase cash flows from day-to-dayoperations. To do so, the Company expects that thelevel of sales in 2013 will increase.
The following factors support management’sassessment about the increase in sales:
• Economic recovery;
• Seller network completed in the course of 2012;
and
• Restructuring of the Western sale territories willresult in securing more sales contracts.
Assumptions
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Forward-Looking InformationExample 2 of Entity-Specific Disclosure (cont’d)
90
Unknown risks and uncertainties could impactour expectation for sales increases such asincreased competition, continued pressure onsales prices and failure to launch new products.We will update our forward-looking statementfor any adverse events that could materiallyimpact management’s expectation of increasedsales.
Assumptions
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Forward-Looking InformationExample of Updating Previously Disclosed FLI
91
2012 objectives Accomplishments in 2012
Sales growth of 3-4% Sales growth of 10.5%• A 6% increase in sales was achieved
during fiscal 2012 due to theintroduction of product X in Q4.
• The remaining 4.5% of sales growthresulted from sales of product Y. Thereduction of product Y’s selling pricedrove an increase in sales volume forproduct Y.
Capital expenditure $25-35million
Capital expenditure of $15 million.Spending was substantially lower thananticipated in 2012 due to lowerinformation technology enhancements as aresult of the delay in the system conversionwhich should be completed by Q2 of 2013.
OSC SME Institute
Venture Issuer Disclosures
92
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Venture Issuer DisclosuresNI 51-102 - section 5.3
A venture issuer that has not had significant revenue fromoperations in either of its last two financial years, mustdisclose in its MD&A, a breakdown of material componentsof:
• Exploration and evaluation assets or expenditures
• Expensed research and development costs
• Intangible assets arising from development
• General and administration expenses and
• Any other material costs, whether expensed or recognized asassets
If the venture issuer’s business primarily involves mining explorationand development, the analysis of exploration and evaluation assets orexpenditures must be presented on a property-by-property basis.
93
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SMEVenture Issuer Disclosures
Venture issuers that have not had significantrevenue from operations do not always provide abreakdown of material costs and expenditures
A breakdown of costs helps investors assess howwell a company is being managed. A presentationof exploration and evaluation assets orexpenditures on a property-by-property basis helpsinvestors evaluate the impact of thoseexpenditures in forwarding the exploration ordevelopment of those properties.
Observations
Why Important
Venture issuers without significant revenue should provide more granulardisclosures of their costs
94
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Venture Issuer DisclosuresHot Buttons
Areas Considerations
Additionaldisclosure forventure issuerswithout significantrevenue
Is there a breakdown of material components of:
Exploration and evaluation assets or expenditures?
General and administration expenses?
Other material costs?
Has the breakdown been provided for each of the lasttwo financial years?
Note: Considered material component of cost if exceeds greater of20% of total amount of class or $25,000
Mining explorationand developmentcompanies
Have exploration and evaluation assets or expendituresbeen presented on a property-by-property basis?
95
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Venture Issuer DisclosuresExample of Boilerplate Disclosure
The following is a detailed list of expendituresincurred on the company’s A and B mineralproperties:
31-Dec-2012 31-Dec-2011
Opening Balance 3,100 2,150
Drilling 505 230
Exploration expenditures 722 420
Closing Balance 4,327 2,800
96
Lacks detail
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME
The following is a detailed list of expendituresincurred on the company’s A and B mineralproperties:
Venture Issuer DisclosuresExample of Entity-Specific Disclosure
Property A Property B
31-Dec-2012 31-Dec-2011 31-Dec-2012 31-Dec-2011
Opening Balance 2,200 1,500 900 650
Drilling 400 200 105 30
Geology/geophysics 200 200 135 40
Equipment Rental 115 0 102 60
Lab analysis 100 100 70 20
Closing Balance 3,015 2,000 1,312 800
97
Presented on aproperty-by-propertybasis
OSC SME Institute
Non-GAAP Financial Measures
98
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Non-GAAP Financial MeasuresCSA Staff Notice 52-306 (Revised)
Companies should clearly define any non-GAAP financialmeasures and explain their relevance
Companies should:
• Explicitly state that the non-GAAP financial measure does not have anystandardized meaning prescribed by the issuer's GAAP
• Present with equal or greater prominence the most directlycomparable measure calculated in accordance with the issuer’s GAAP
• Explain why it provides useful information to investors and howmanagement uses the non-GAAP measure
• Provide a clear quantitative reconciliation from the non-GAAP financialmeasure to the most directly comparable measure calculated inaccordance with the issuer's GAAP
99
Companies need to consider whether the inclusionof a non-GAAP measure provides more clarity
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Non-GAAP Financial Measures
Many companies disclose non-GAAP financialmeasures, such as EBITDA, however they often donot explain why these measures provide usefulinformation to investors. As well, these measuresare not always reconciled to the most directlycomparable GAAP measure.
Since non-GAAP financial measures do not formpart of IFRS and as such do not have astandardized meaning or calculation, it is criticalthat companies explain the composition of themeasure and its relevance so that investors andanalysts are fully informed
When providing non-GAAP financial information, companies should notmislead investors nor obscure the company’s GAAP results
100
Observations
Why Important
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Non-GAAP Financial Measures Hot Buttons
Areas Considerations
Usefulness Has the company disclosed: Why the non-GAAP financial measure is useful to an
investor? Why management considers the non-GAAP financial
measure to be useful?
Reconciliation Is a reconciliation between the non-GAAP financialmeasure and the most directly comparable GAAPmeasure provided?
No standardizedmeaning
Does the disclosure explicitly state that there is nostandardized meaning of the non-GAAP financialmeasure?
Prominence Has the comparable GAAP measure been presented withequal or greater prominence to the non-GAAP financialmeasure?
Explain changesfrom previousyears
If composition of the non-GAAP financial measure haschanged from the previous year, has disclosure of thereasons for these changes been made?
101
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Non-GAAP Financial MeasuresExample of Boilerplate Disclosure
102
Our operating income beforespecific items rose 31%, reaching anew peak of $101 million.
Noreconciliationprovided
No explanationof why useful
Standardizedlanguagemissing
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Non-GAAP Financial MeasuresExample of Entity-Specific Disclosure
103
Our profit for the fiscal year was $50 million comparedto $31 million in the previous fiscal year. Operatingincome before specific items (OIBI) rose 31%, reaching anew peak of $101 million. OIBI of the previous fiscal yearwas $77 million.
OIBI is a non-GAAP measure and is mainly derived fromthe consolidated financial statements but does not haveany standardized meaning prescribed by IFRS. Thereforeit is unlikely to be comparable to similar measurespresented by other companies.
OIBI is used by management to evaluate theperformance of its operations based on a comparablebasis which excludes specific items that are non-recurring. When a specific item occurs in two prior fiscalyears, or is reasonably likely to occur within the next twoyears, it is no longer considered to be non-recurring bymanagement.
Highlights thatthere is nostandardizedmeaning
Why useful
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Non-GAAP Financial MeasuresExample of Entity-Specific Disclosure (cont’d)
104
We believe that a significant number of users of our MD&Aanalyze our results based on OIBI since it is a yearlycomparable measure of the performance of the Company.
Reconciliation of OIBI to profit in thousands of dollars:
Why useful
Presented withequal prominenceto IFRS
OIBI $101 $77
Restructuring of distribution network ($6) $0
Relocation of production $0 ($9)
Gross income as per financial statements $95 $68
Sales and administrative expenses $23 $19
Financial expenses $12 $9
Taxes $10 $9
Net income as per financial statements $50 $31
Quantitativereconciliation
OSC SME Institute
Helpful Information About the OSC
105
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SMEUseful Links for Companies
106
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SME Useful Links for Companies
107
OSC SME Institute
Contact Information
108
OS
CS
ME
Ins
tit
ut
e
On
tari
oSe
curi
ties
Co
mm
issi
on
OSC
SMEContact Information
Kathryn Daniels
Deputy Director, Corporate Finance
Email: [email protected]
Phone: 416-593-8093
Sandra Heldman
Senior Accountant, Corporate Finance
Email: [email protected]
Phone: 416-593-2355
Katie DeBartolo
Accountant, Corporate Finance
Email: [email protected]
Phone: 416-593-2166
Ray Ho
Accountant, Corporate Finance
Email: [email protected]
Phone: 416-593-8106
109
