Agoracom Blog

Notes: China Management Forum At ROTH Capital OC Growth Conference 2010

Posted by AGORACOM at 11:01 AM on Tuesday, March 16th, 2010

Good morning to you all. I’m sitting in on the China Management Forum here at the ROTH Capital OC Growth Conference.  Panel being led by Jonathan Mork and includes 6 important players in the space.  I’ll refer to them below as they make statements.

Bob Stephenson (ROTH Capital): Universe of buyers of Chinese stocks has grown substantially this past year.  Financial crisis created an environment in which investors preferred registered securities (i.e. public offerings) vs. PIPES financing.  Those public offerings broadened the base of potential investors. Investors prefer public offerings because they received free trading stock.

Another factor was China’s growth.  Many companies remained strong through the financial crisis, which further attracted investors that came off the sidelines and were looking for cash flow and earnings.

Jonathan Mork (ROTH Capital): Public offerings are significantly different from PIPEs.  Going to cover some of the major differences.

Mitch Nussbaum (Loeb & Loeb): Issuers that have graduated to a senior exchange, public for a year and market cap greater than $75 million, can file an S3. S3 provides flexibility that S1 does not.  It can be filed but not go effective right away until you are ready for a public offering or take down money.

Louis Bevilacqua (Pillsbury Law): Amount of due diligence in a public offering or “registered direct” surprises most companies.  One of the reasons for DD in an underwritten deal is “due diligence defense” the underwriter wants to rely on.  It’s an investment.  Done once and correctly, they can simply continue to update and be ready to quickly move in the future.

Eddie Wong (Friedman LLP): In almost every IPO we audit, underwriter requests the auditor for a “comfort letter”.  To provide that, auditor needs to make sure the underwriter has undertaken their own due diligence.

Jonathan Mork (ROTH Capital): Unfortunately, what we see a lot is that companies are not putting all the pieces in place so the banker, underwriter, auditors and legal can get their work done.  Often, companies will file a shelf and expect the process to be complete in a week.  In reality, it takes about a month.  As such, companies need to prepare more and adjust their expectations.

Brandi Piacente (Piacente Group): After this entire process, everybody is tired and very little time is given to the communications component.  90% of stocks in the small-cap universe get sold on deliverables promised by CEO’s. 2 important components are the message and perception. With respect to the message. Training and polish is critical prior to staff heading out on a road show.

John Ma (ROTH Capital): Quite often, institutional investors want to speak with research analysts prior to making their investments.  They not only want to know their opinion, they also want to know how closely the analyst tracks the company and speaks with management.

Jonathan Mork (ROTH Capital): Switching GearsA lot of bankers are pitching companies on different financing vehicles. Problem is they are making them all appear the same and taking advantage of new management teams.  Often pitch speed at the expense of due diligence.  At the end, this hurts companies as big investors won’t invest in deals in which due diligence has not been completed.

Mitch Nussbaum (Loeb & Loeb): Clients focus too much on how fast and how cheap they can get a deal done.  It is tempting to tell investors what they want to hear – but responsible players tell clients the truth at the risk of disappointing them.  You have to ask yourself – what is the real cost of the deal?  To determine that, you have to determine the actual costs and benefits.  The more you hurt yourself, the greater the cost in the long-run.

Eddie Wong (Friedman LLP): For example, if a banker tells you they can get $.25 more from investors – but adds warrants onto the deal – you actually hurt yourself because it is a non-cash expense that hits your bottom line, translating into lower P/E and lower valuation.

Convertible instruments may have hidden costs subsequent to their issuance.  Specifically, they may have to be treated as a derivative that needs to be valued every quarter, adding further accounting expense.

Brandi Piacente (Piacente Group): The quality of these decisions will dramatically impact your after-market support from the investment community.  A poor structure can negatively impact the perception from the street.

John Ma (ROTH Capital): If you are a small-cap company, keep your capital structure simple.  Too many warrants and options give investors pause.  Some convertible instruments can make investors particularly weary.

Jonathan Mork (ROTH Capital): Warrants give the street “fits” because it makes valuing the company that much harder.  Warrants are often the mark of a weaker company and a weak banker that had to throw them in to sweeten the deal for investors.

Byron Roth (ROTH Capital): Financing gets easier and easier as you move up the food chain, as long as you do the work in your early stages.  Don’t look at the process as dire, expensive or lengthy.  Look at it as graduating to the next step in your growth.


FYI, here is a shot of the view from the panel.  It sure makes getting up at 6AM a lot easier 🙂

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