Good morning to you all. I’m sitting in on the China Management Forum here at the ROTH Capital OC Growth Conference. Â Panel being led by Jonathan Mork and includes 6 important players in the space. Â 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. Â Financial crisis created an environment in which investors preferred registered securities (i.e. public offerings) vs. PIPES financing. Â 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. Â 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. Â 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. Â 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. Â One of the reasons for DD in an underwritten deal is “due diligence defense” the underwriter wants to rely on. Â It’s an investment. Â 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”. Â 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. Â Often, companies will file a shelf and expect the process to be complete in a week. Â In reality, it takes about a month. Â 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. Â 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. Â 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 Gears – A 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. Â Often pitch speed at the expense of due diligence. Â 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. Â It is tempting to tell investors what they want to hear – but responsible players tell clients the truth at the risk of disappointing them. Â You have to ask yourself – what is the real cost of the deal? Â To determine that, you have to determine the actual costs and benefits. Â 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. Â 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. Â 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. Â Too many warrants and options give investors pause. Â 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. Â 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. Â Don’t look at the process as dire, expensive or lengthy. Â Look at it as graduating to the next step in your growth.
END
FYI, here is a shot of the view from the panel. Â It sure makes getting up at 6AM a lot easier 🙂
