WHAT ARE THE NEEDS OF YOUR COMPANY?

IPOs and Secondary Offerings

The professionals at Mantyla McReynolds and BDO, a full service assurance, audit, and tax firm, understand that many companies plan on one of the following events within the next 1-4 years:

i.    Companies that plan to go public.

ii.   Companies that are public and plan to complete a secondary offering or private placement.                    

iii.  Companies that have or need a bank loan and are required to have audited or reviewed financial statements.

iv.  Companies that plan on a merger, acquisition, or other exit strategy.

While our firm assists companies with each of these plans, this article is specifically focused on the first two points above.  In a recent conversation, a CFO of a multi-billion dollar market cap company mentioned to me his opinion that the ease of obtaining significant amounts of needed capital in the public arena is second to none.  Though this is not true for every company’s financial situations and needs, we have seen the results of this statement again and again.  Not every company’s business model and operations necessitates a need to become a public company with access to the capital markets.  Many private companies have been able to secure sufficient funding through banking institutions, private equity groups, and other capital sources, all while maintaining close control of the company’s equity.  However, for some companies, becoming a public company has allowed for long-term growth projections to be realized in a significantly accelerated timeframe.  The main reason for this accelerated growth is partially attributable to a public company’s access to capital markets at precisely the moment when significant capital requirements needed to be funded. 

Staying Private or Going Public

A CEO of one of our public clients once said that they could have kept the company private and over a 10-year cycle become a company with a business valuation exceeding $500 million.  However, with an understanding of the public markets, they chose to become a public company with access to significantly more capital resources and were able to more efficiently implement their business plan and growth projections in becoming a company with a growing valuation exceeding $1.5 billion.  This level of growth and resulting valuation occurred in less than 4 years.  The CEO also remarked that though they personally incurred dilution in their equity ownership position in becoming a public company, being able to grow the company at an accelerated rate increased the overall valuation of their original private equity holdings by 4 to 5 times more than if they had remained a private company.

Secondary Offerings

Not every company that goes public experiences this level of success, but the fruits of being a public company are available for the picking.  For some companies, being a public entity has simply provided them with more options in effectively implementing their business plan.  When one of our clients became a public company several years ago they brought to market a revolutionary business concept that was still in its infancy and generally unproven.  Without significant amounts of capital infusions the overall operations and business implementation had little hope of making it off the ground.  Within the last three years we were able to assist this company in raising over $550 million through secondary and follow-on public equity offerings, with one individual offering totaling over $200 million, as well as a $300 million public debt offering.  Each of these offerings were performed in less than two weeks from the initial announcement to the close and funding date.  The short time period from announcement to funding allowed our client to maximize the value of the offerings and the resulting overall value to the company. 

From an accounting firm perspective, the time required in a 7 to 10 business day window to perform necessary comfort letter and bring down letter procedures, respond to underwriter and attorney requests, and review the offering filing is an extensive commitment and usually doesn’t fit into a pre-determined schedule.  However, even when one of our client offerings was announced and completed in the middle of busy season, the ability for a company to access the public capital markets during an advantageous window is one of the primary benefits of being a public company.  A public company needs a team of professionals, from the attorneys to the accountants, that understands how critical it is to be available and able to perform these transactions in the required timeframe that is most advantageous to the client.     

More Than One Way To Go Public

As noted, for some companies there are significant benefits in becoming a public company that were not available to them when they were a private company.  The decision in becoming a public company should not be taken lightly, and there are many potential benefits and detriments that should be considered beyond simply the ease of access to funding through the capital markets.  Additionally, whether a company performs a traditional or non-traditional “going public” transaction should be given significant thought and analysis, particularly as it relates to a company’s immediate funding requirements.  For example, a company not desiring the cost and time of a traditional IPO transaction, might consider a reverse merger or other non-traditional transaction to first become a public entity with access to the capital markets, albeit at a limited level.  However, in performing a non-traditional transaction the new public company might still need to wait a year or more before being able access significant capital at the amounts and levels required by the company.

As with many market realities, though there are benefits to first becoming a public company through a non-traditional process, there are also the drawbacks that a company must consider and apply to their own business needs and growth projections.  A traditional IPO process in many regards is the highest standard, if not the only standard, from the perspective of some investors, while completing a reverse merger with a public entity has had its fair share of both positive success stories and negative press.  In November 2011, the SEC also released a series of new rules as it relates to reverse merger transactions and the eventual qualification of those entities in being listed on a major U.S. stock exchange.  Specifically, a reverse merger public company must complete a one-year “seasoning period” on an over-the-counter or similar exchange and maintain a requisite minimum share price before applying for listing on a major U.S. stock exchange.  The ability to access the amount of public capital identified above is generally not a reality or possibility when the Company is listed on non-major exchange.  Though there are listing rules that must be met by all public companies, whether the company became public through a traditional IPO or a reverse merger transaction, these additional rules for reverse merger companies should be carefully considered by management and consultants early in the going public process.

It should also be noted that IPOs are generally more drawn out and are directly impacted by short term market events.  Once an IPO is announced, companies are frequently impacted by both positive and negative market events, and constantly need to assess whether to delay the IPO process or move forward.  As one example, the first half of 2011 saw IPO activity at a level that was comparable in many regards to pre-recession highs.  Then in the second half of 2011 the U.S. long-term credit rating was downgraded and the impact on potential IPOs was immediate.  IPO activity during the second half of 2011 decreased significantly compared to 2010 and years prior to the recession, and many private companies opted to delay the process indefinitely despite the significant costs and time already incurred.

This one significant event was entirely outside of the control of those companies seeking to perform an IPO, yet it directly impacted how successful an individual IPO transaction might be and many companies opted to defer.  An IPO that has been in process for months, with the related costs and time incurred, is suddenly and unexpectedly delayed due to unfavorable market conditions.  Depending on how far down the IPO road a company has already traveled, there is the potential that a material portion of the costs incurred on the process will not be recouped or even reduce the future costs incurred once the IPO process is restarted. For well established and successful private companies these delays and costs are easier to bear as simply being part of the overall IPO process.  Whereas for startup companies and those poised to experience accelerated growth, the costs required to restart the IPO process at some indefinite point in the future are simply not a cash flow reality.

These same market events also impact follow-on or secondary offerings of existing public entities, however, the cost incurred and time lost in a derailed secondary offering pales in comparison to the extensive cost and time lost in a failed or delayed traditional IPO transaction.  As demonstrated above, the timing on a secondary offering from the initial “over the wall” announcement to the closing of the transaction is potentially significantly shorter than the traditional IPO process.  For some companies, it might make more business sense to first become a public company through a reverse merger or Form 10 process, develop through the seasoning period, and then perform necessary capital raises when the market conditions are in the company’s favor.  Once becoming an established public entity, management has increased flexibility in taking advantage of sensitive market windows in completing secondary and follow capital raises. 

In summary, the most advantageous market windows are sometimes very short.  In light of this, a company should ensure that they have a solid team of professionals and advisors early on that have extensive experience assisting companies in reaching their capital requirements, including: attorneys, accountants, and bankers.   Mantyla McReynolds and BDO have assisted numerous companies in going public, whether through initial SEC registration statements or reverse mergers with subsequent equity and debt offerings.  Throughout each of these transactions, we have never lost sight of the business reality that when client expectations and timelines are met, greater success has generally been the result.    

Through our strong relationship with BDO, the 5^th largest international accounting firm in the world, we are further able to leverage national and international resources with the agility and speed of an experienced local team.  Through BDO, we have available for our clients excellent informational resources at the “IPO Readiness Center” at www.bdo.com/ipo.  Additionally, BDO has prepared a “Guide for Going Public” that is a thorough guide for private company executives that are considering an initial offering (www.bdo.com/download/1577). 

FASB Revises Exposure Draft on Leases

Summary: On May 16, 2013, the FASB and IASB issued a revised joint exposure draft (ED) on leases that, if adopted, would pose significant changes for both lessees and lessors.  The proposal has been updated since it was originally published in August 2010.  Like the 2010 ED, the proposal would end “off-balance sheet” accounting for almost all leases, likely impacting certain key performance indicators and/or debt covenants across companies.  Instead, both parties to a lease would record assets and liabilities to reflect their respective rights and obligations under the contract.  The proposal is intended to result in a more transparent representation of a lease’s economics by eliminating the “bright lines” that distinguish different types of leases under current accounting standards (e.g., operating vs. capital leases).  The revised exposure draft can be accessed here.  Comments are due by September 13, 2013.

The revised ED proposes a dual approach to the recognition, measurement, and presentation of expenses and cash flows arising from a lease, for both lessees and lessors, which is dependent upon whether the lessee is expected to consume more than an insignificant portion of the economic benefits embedded in the underlying asset. For most property leases, a lessee would report a single, straight-line lease expense in its income statement for its use of the underlying asset. For most other leases, such as equipment or vehicles, a lessee would report amortization of the asset separately from interest on the lease liability.  The combination of the asset amortization and financing cost associated with the lease liability will generally result in a “front-loaded” expense recognition pattern in the early years of a lease.  The Boards are also proposing disclosures that should enable investors and other users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases.

Scope:  The proposed guidance would apply to all leases, except leases of intangible assets, leases for the exploration or use of certain natural resources, and leases of biological assets.

Transition and Effective Date:  The effective date of the proposal will be determined after the FASB and IASB consider the feedback received on this and other current projects, but an effective date prior to 2017 is not expected.  The ED would apply to all leases existing at “the beginning of the first comparative period” presented upon adoption. That is, there would be no grandfathering of existing leases.

General:  At commencement of a lease, both the lessee and lessor would evaluate the amount of economic benefits the lessee is expected to consume of the underlying asset.  For practical purposes, this assessment would often depend on the nature of the underlying asset.

Type A leases would consist of most leases of assets other than property (e.g., equipment, aircraft, cars, trucks).  More specifically, a non-property lease is considered Type A unless the lease term is for an insignificant part of the total economic life of the underlying asset or the present value of the lease payments is insignificant relative to the fair value of the underlying asset at commencement.  If either condition is met, the lease is Type B.

Type B leases would consist of most leases of property (e.g., land and/or a building or part of a building).  More specifically, a property lease is considered Type B unless the lease term is for the major part of the remaining economic life of the underlying asset or the present value of the lease payments accounts for substantially all of the fair value of the underlying asset at commencement.  If either condition is met, the lease is Type A.

The accounting for Type A and B leases is summarized below.

Lessees: At the commencement date, a lessee would record a right-of-use asset and corresponding liability for future rental payments for all leases, with an exception for short-term leases, as noted below.  The asset and liability would be measured at the present value of the lease payments, discounted at the lessee’s incremental borrowing rate, or the rate the lessor charges if it can be determined.  The right-of-use asset would also include any recoverable initial direct costs incurred by lessee.

The present value of the lease payments would be based upon two elements: lease term and rentals.  The term would be estimated as the noncancellable period of the lease, combined with periods covered by an option to extend the lease if the lessee has a significant economic incentive to exercise that option. Periods covered by an option to terminate the lease would also be included if the lessee has a significant economic incentive not to exercise that option.

The present value of rentals would include fixed lease payments (less incentives to be paid by the lessor), contingent rentals tied to an index (e.g., the Consumer Price index) or which are in-substance fixed payments, and residual value guarantees.  The amount would also include the exercise price of a purchase option if the lessee has a significant economic incentive to exercise that option, and termination penalties if the lease term reflects the lessee exercising an option to terminate the lease.

After commencement, the accounting for Type A and Type B leases would differ.

Specifically, lessees would do the following for Type A leases:

·         Amortize the right-of-use asset on a straight-line basis, unless another systematic basis is more representative of the pattern in which the lessee expects to consume the right-of-use asset’s future economic benefits. The lessee would amortize the asset over the estimated lease term or the underlying asset’s useful life, whichever is shorter.  If the lessee has a significant economic incentive to exercise a purchase option, the lessee would amortize the right-of-use asset to the end of the useful life of the underlying asset.

·         Separately reflect the accretion of the lease liability as interest and the amortization of the right-of-use asset in profit or loss, as well as variable lease payments incurred after commencement.

Lessees would do the following for Type B leases:

·         Determine the amortization of the right-of-use asset for the period as the difference between the periodic lease cost (as described in the next bullet) and the interest on the  lease liability (the amount that produces a constant periodic discount rate on the remaining balance of the liability, taking into consideration reassessment requirements). In other words, the amount of asset amortization is a residual.

·         Reflect a single lease cost, combining the effective interest on the lease liability with the amortization of the right-of-use asset, calculated so that the remaining cost of the lease is allocated over the remaining lease term on a straight-line basis. However, the periodic lease cost cannot be less than the effective interest charge associated with the lease liability.  Variable lease payments that were not included in the original lease liability would be reflected in the period that they are incurred.

For both types of leases, the right-of-use asset would also be assessed for impairment in accordance with Topic 360.[1]

Lessees would reassess the lease liability for significant changes each period in the lease payments, term, or discount rate; lessees would recognize the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset with the following exceptions: when related to a change in an index or a rate attributable to the current period or when the carrying amount of the right-of-use asset has been reduced to zero, the remeasurement should be reflected in profit or loss.

On the balance sheet, lessees would be permitted to present right-of-use assets separately from other assets, and lease liabilities separately from other financial liabilities or to combine them with the appropriate classes of assets and liabilities while disclosing which line items include them.  In addition, if presenting separately on the balance sheet, the right-of-use assets and lease liabilities arising from Type A and Type B leases would not be commingled.

On the income statement, lessees would display the interest on the lease liability separately from the amortization of the right-of-use asset for Type A leases and the interest on the lease liability together with the amortization of the right-of-use asset for Type B leases.

Lastly, cash payments would be classified within the statement of cash flows as follows:

·         principal repayments on Type A leases within financing activities;

·         interest on the lease liability arising from Type A leases within operating activities;

·         payments arising from Type B leases within operating activities; and

·         variable lease payments and short-term lease payments not included in the lease liability within operating activities.

Lessors: A lessor would apply one of two accounting models based on whether a lease is Type A or Type B.

Lessors - Type A Leases: At the commencement date, a lessor would recognize an asset for the right to receive lease payments (plus any initial direct costs), with a corresponding credit to lease income, and would derecognize a portion of the underlying leased asset, with the corresponding charge to lease expense. The retained portion of the rights in the leased property would be reclassified as a residual asset.

A lessor would initially measure the lease receivable for a Type A lease in a manner consistent with how a lessee would measure the lease liability (i.e., present value of the lease payments, discounted at the lessee’s incremental borrowing rate, or the rate the lessor charges if it can be determined).  The lessor would initially measure the residual asset as the sum of the present value of the amount the lessor expects to derive from the underlying asset following the end of the lease term, discounted using the rate the lessor charges the lessee (gross residual asset), and the present value of expected variable lease payments, less any unearned profit.

A lessor would subsequently measure the lease receivable by increasing the carrying amount to reflect interest accretion and reducing it to reflect the lease payments received during the period. A lessor would determine the interest on the lease receivable in each period during the lease term as the amount that produces a constant periodic discount rate on the remaining balance of the receivable, adjusted for any reassessment and impairment requirements.

Additionally, a lessor would subsequently measure the residual asset at its initial carrying amount plus accretion, adjusted for any reassessment and impairment requirements and for variable lease payments.

After the commencement date, a lessor would reassess the lease receivable for changes to the lease term, lease payments, or discount rate, and remeasure the lease receivable and residual asset accordingly. The lease receivable would also be assessed for impairment in accordance with Topic 310,[2] taking into consideration the collateral relating to the receivable. Similarly, the residual asset would be assessed for impairment in accordance with Topic 360, taking into consideration any residual value guarantees relating to the underlying asset.

On the balance sheet, the lessor would present the lease assets (the sum of receivables and residual assets) separately from other assets.  However, lessors would be permitted to present lease receivables and residual assets separately, or to disclose them separately in the notes. On the income statement, all lessors would present interest income on the receivable separately from other interest income, or separately disclose which line items include the income.  Profit or loss recognized at lease inception may be presented on a gross or net basis, depending on whether the lessor’s business purposes: if the lessor uses leases as an alternative means of realizing value from the goods that it would otherwise sell, revenue and cost of goods sold should be presented separately; if the lessor uses leases for financing purposes, profit or loss may be presented in a single line item. On the cash flow statement, all cash receipts from lease payments would be part of operating activities.

Lessors – Type B Leases: A lessor would continue to measure the underlying asset subject to a Type B lease, both at lease inception and over the lease term, in accordance with other applicable GAAP. This approach would be similar to existing lessor accounting for operating leases.  Presentation within the balance sheet and income statement would be consistent with this approach, and all cash receipts from lease payments would be part of operating activities.

Other Provisions

·         Short-term leases (contracts 12 months or less, including renewals, that do not contain a purchase option): At inception, both lessees and lessors could elect not to recognize assets or liabilities from a short-term lease, nor derecognize a portion of the leased asset and simply recognize lease activity in earnings over the lease term.

·         Sale-leasebacks: A transferor would to assess whether the transferred asset has been sold using the control principle in the 2011 Revenue Recognition Exposure Draft, and account for transactions as either sales or financings accordingly.

·         Separate components: Lessees and lessors would both be required to separately account for lease and nonlease components.  The ED provides separation and allocation guidance for lessees; lessors would apply the allocation guidance in the 2011 Revenue Recognition Exposure Draft. 

Disclosures: The ED proposes numerous new disclosures designed to explain amounts recognized in the financial statements as a result of lease transactions, as well as to describe the amount, timing and uncertainty of future cash flows.  Such disclosures would include many contractual details (lease term, contingent rentals, options, etc.) and related accounting judgments.  Lessees would disclose reconciliations (i.e., rollforwards) of lease liabilities by class of underlying asset.  Lessors would provide similar reconciliations of their right to receive lease payments and residual assets.

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[1] Property, Plant, and Equipment

[2] Receivables

Our Client, VIA Motors unveiled electric truck today

The world's first extended-range electric truck, designed in Utah, was unveiled this morning. It will soon be tested by major companies around the country who want to save on gas and cut down their emissions.  Full article can be found here.

For more information about VIA Motors, check out their website.

SEC Issues Advisory Regarding Investors Use of Social Media

Bulletins include information about avoiding fraud and establishing an account on a social media website such as Facebook or Twitter. Click below for links to these Investor Bulletins.

Investor Bulletin: Social Media and Investing - Understanding Your Accounts

Investor Alert: Social Media and Investing - Avoiding Fraud

Newsletter - BDO Healthcare Practice

Newsletter - BDO Private Equity Practice Summer 2011

Newsletter - BDO Technology & Life Sciences Practice

EnShale featured on Fox News

EnShale, Inc. is a subsidiary company of our client Bullion Monarch Mining, Inc.

Click here to view story.

EnShale’s Oil Plant to be featured tonight on Fox News Channel

EnShale, Inc. is a subsidiary company of our client Bullion Monarch Mining, Inc.

Press Release

Fox News Story

International Services

Earlier this year, Matt McReynolds, assurance manager at Mantyla McReynolds LLC watched the snow fall in downtown Salt Lake as he longed for a nice sunny vacation. While the cold, snowy weather can often remind us of more moderate climates, this wish came true by proxy as he worked with other accounting professionals in the Cayman Islands.


Matt and the assurance team at Mantyla McReynolds LLC completed an audit engagement for an investment fund with a master-feeder structure with operations in the U.S. and in the Cayman Islands. The structure consisted of three entities: a domestic U.S. partnership Master Fund, a domestic U.S. partnership Feeder Fund, and a foreign Cayman Islands Feeder Fund.

Cayman Islands’ laws require that a local Cayman Islands accounting firm opine on the audits that are domiciled within their jurisdiction. Because Mantyla McReynolds is in the BDO Seidman Alliance, we were able to seamlessly team up with BDO Cayman to successfully complete this engagement. Mantyla McReynolds provided the assurance services and the audit reports on the two U.S. entities, while BDO Cayman utilized our services and documentation to perform their procedures and report on the foreign Feeder Fund.


Mark Sperry, the engagement partner for Mantyla McReynolds observed, “We were very impressed with the timeliness and professionalism of BDO Cayman, one of the 600 international office relationships available to us through our membership in the BDO Seidman Alliance.”