In the sale or purchase of a private company its still necessary to use best practices in order to have the parties feel good about the transaction. Using the services of a corporate financial advisor, a tax accountant, a corporate lawyer who work together as a team from the beginning will provide you with the ability to see things that are often overlooked by purchaser in a company.
In a past transaction the sole shareholder(owner) of a private company sold his shares to an independent purchaser and the capital gain realized was eligible for the small business corporation shares capital gains deduction. So far so good for both parties.
However, one of the most common issues which is misunderstood by both the purchase & seller is the “Due to/from shareholder” account. On the surface it seems like a fairly straight forward liability account, the credit balance in the account is owed to the shareholder. Here is where the 3 professional advisors, a corporate finance lawyer, the tax accountant, and the corporate financial advisor know that this is a liability like any other liability and is owed to the shareholder. Some accountants have trouble understanding this because they assume that the company had sold its shares, but the shares are separate from its liabilities.
Another effect of this “credit balance” in the Due to Shareholder account is when the new owner decides to draw money out of this account he will have been deemed to have received a “taxable benefit” under Section 15 of the Income Tax Act. Why? The withdrawal transaction isn’t a return of capital it’s a debt owed to its the former owner. The capital gain for the seller of the business in this situation is also overstated which the capital gains exemption the owner has here.
An example might help here: the seller of the business sells her business for $500,000 and the owner has a credit balance of $150,000 in the Due to Shareholder account. In the sales agreement the buyer of the business should ensure that the agreement reflects an allocation of the purchase price of $150,000 to purchasing the debt of the Due to shareholder account and the remainder allocated to the purchase of the seller’s shares. The reason is that the purchaser has a debt owed by the company to herself and when she wants to withdraw some of it, it will be tax free unlike the prior situation.
This unfortunate situation can be reversed, but if the parties use best practices and have a coordinated team of advisors working from the beginning it will save time and money for both the buyer and the seller. But sometimes, the transaction go through due to no advice for either party and the consequences are a tax project case resulting in more money spent on a tax advisor later. In a case documented in CMA magazine an accountant figured they fixed this by exchanging the debt for more shares, but caused more tax problems in the allowable business investment loss issues and failed to take into account subsection 80(2) of the income tax act which allows the debt to be settled for the fair market values of shares issued.
The lesson here is that it is easier to have a team in place before you decide to do a sale or purchase of a private business to advise you on the issues, because they’re not as straight forward as you may think. You can’t substitute the expertise of a group of advisors to help you save you money and headaches in the long run.
Written by Richard Wong, CMA rwong@firstchoicecapital.ca
Part 2: Simon Pimstone, President & CEO of Xenon Pharmaceuticals Interview
As a large part of the life sciences group in BC Simon Pimstone met with Liberal leader Michael Ignatieff on life sciences and explained the issues of funding, and you would think that it would fit in with Ignatieff’s desire to build a larger knowledge based economy and a louder opposition to the Canadian federal government’s budget would have sent that message on behalf of the life sciences community that it does have greater support, especially in the downgrade in future funding in this area.
The Canadian TV & film industry according to industry reports employed 126,900 FTE’s (full time equivalents) and the value of production was $5 billion in the 2006/2007 years. This compares to the Life Sciences industry in Canada which produced sales of $1.9 billion but the tax breaks are not equal with the Canadian federal government and provincial government film and TV tax credits allowing up to 53.5% of BC labour expenditures on a yearly basis.
BC universities produce between 3,000 to 4,000 science graduates of which many do not find employment in Canada, yet all the life sciences is asking for is a fair share of funding to continue to find cures for different diseases that helps all Canadians and the world. The public cost of educating students who end up working in another country is approximately $48 million (3,000 students * $40,000 expected cost of education * 40% funding from governments, estimated) . This a huge cost only for a single province, not the entire country where the Canadian people are funding scientists to work in other countries at the end of the day.
What’s important is not providing funding on an ad hoc basis but continued basis even if its smaller amounts to foster an environment of innovation and then onto commercialization opportunities through Genome Canada, CIHR (Canadian Institutional Health Research) and tax incentives.
Our health system is arguably one of the best in the world, some say the United States, but only if you’re willing to pay $2,000 per month.
SRED is a good funding tool starting from 1995, but really now inadequate for Canada’s life sciences sector as drug development takes much more time and money in order to recoup research funding. It is only good for Canadian controlled private corporations, (CCPC’s) which many are not anymore because they’re too large and Aspreva Pharmaceuticals & Biovail Pharmaceuticals are some of the few companies which have profits in order to recoup some of these research that takes several years to make create a single drug. A cap limit on SRED would even be more palatable to the sector ie. $100 million if they took off the CCPC eligibility requirement and the threshold are too low with barely any increases since 1995.
Even if tax incentives, to entice offices in Canada such as providing tax holidays for bringing in new manufacturing facilities where they employ 200 people which are paying income tax now where they don’t pay personal income tax for the first 2 years with a commitment for 5 years residency then people would be paying taxes and spending that income in the country and province.
Allow investments earned from life science investments in 2009 and 2010 to be exempt from capital gains tax but was ignored by the federal government in the budget. Use some of the carry forward losses that life science companies have accrued and provide a formula where say 1/2 of all carry forwards are eligible ie. 40 million and provide a cash reimbursement for 25% of the 1/2 which would result in needed funding to continue doing research to reaching the milestones.
The facts are that SRED was really designed for large company models, large drug companies, large aerospace companies, not really the Canadian life sciences sector which the majority are small companies from 5 to 150 people. The inadequacy of updating the Canadian Scientific Research & Exploration Development tax credit system is costing the Canadian economy jobs in the short and long term, but more importantly the potential cures to the various diseases and cancers out in the world.
Written by Richard Wong, CMA rwong@firstchoicecapital.ca
Orthocon, Inc.: Series B $25M
Orthocon (North Brunswick, NJ) a preclinical-stage company focused on implantable devices that deliver therapeutics to bone, closed a $25M Series B financing.
Aerovance, Inc.: Series C $38M
Aerovance (Berkeley, CA) a clinical-stage company focused on respiratory and allergic diseases, closed a $38M Series C financing. Participants include ProQuest Investments, BB Biotech Ventures, Apax Partners, Clarus Ventures, Alta Partners, Lehman Brothers, NGN Capital and Burrill & Co.
OPX Biotechnologies, Inc.: Series B $17.5M
OPX Biotechnologies (Boulder, CO) a research-stage biofuels company using synthetic biology to engineer the microbes as a renewable fuel source, added to their Series B financing bringing the round up to $17.5M. Participants include Braemar Energy Ventures, Altira Group, Mohr Davidow Ventures and X/Seed Capital.
Traversa Therapeutics, Inc.: Series B $5M
Traversa Therapeutics (La Jolla, CA) a preclinical-stage biopharmaceutical company developing RNAi delivery technologies, closed a $5M Series B financing. Participants include Morningside, Mesa Verde Venture Partners and Tech Coast Angels.
CeraPedics, Inc.: Series B $15M
CeraPedics (Broomfield, CO) a clinical stage device company focused on osteobiologic products for bony voids, closed a $15M Series B financing. Participants include NGN Capital and OrbiMed Advisors.
KeyNeurotek Pharmaceuticals, AG: Series C $10.9M
KeyNeurotek Pharmaceuticals (Germany) a clinical-stage small molecule company focused on autoimmune and CNS diseases, closed a $10.9M Series C financing. Participants include DVC Deutsche Venture Capital, IBG Beteiligungsgesellschaft and KfW Bankengruppe.
Ambrx, Inc.: Series D $10M
Ambrx (La Jolla, CA) a clinical-stage protein therapeutic company focused growth deficiency, closed a $10M Series D financing. Participants include 5AM Ventures, Aravis Ventures, CMEA Capital, Maverick Capital, Versant Ventures and Tavistock Life Sciences
Part 1: Simon Pimstone, President & CEO of Xenon Pharmaceuticals Interview
Canadian government’s announcement on reduction of future funding for Genome Canada affects life sciences companies in British Columbia, including larger start ups such as Xenon Pharmaceuticals.
Affects of this including having fewer jobs and hindering the ability of companies to commercialize their intellectual property they have created in Canada because of the cost to do this, hence the need for Canadian life sciences companies needing to partner up with large American and European pharmaceutical companies in order to get these discoveries to market.
For start-up companies Genome Canada has provided bio-tech companies with the ability to do research and keep our science graduates from our universities to bolt to the United States & Europe with the so called brain drain.
A current Xenon Genome BC project has 10 to 15 scientists working on the project currently, which if Genome Canada funding wasn’t available, these high paying jobs would not exist in British Columbia.
Because Canada has such a tiny venture capital pool for life sciences, life sciences funding is largely dependent on foreign venture capital funding as the primary source of funding as well as Canadian federal and provincial funding.
While in the United States the National Health Institute (NIH) funding will be increasing by $3 billion announced by President Obama whereas the funding from the Canadian government has decreased. The government is doing exactly the opposite and sending a statement on the importance or lack of it on science and technology in British Columbia.
President Obama has announced already funding for green energy grids, health and innovation, whereas in Canada we are still focused on the old school infrastructure is an opinion in the life sciences community.
Simon Pimstone commented that if you’re putting money into infrastructure which will build a knowledge based economy, such as technology parks for Pharma companies. Companies like GlaxoSmithKline or Johnson & Johnson will be enticed to build manufacturing vaccine facilities which provides high paying opportunities for science students for years to come.
Continued in Part 2 of Interview with President & CEO Simon Pimstone
According to the BDC small medium sized businesses spend 45 to 65% of their revenue on purchasing materials and services. This large percentage of the total costs of a business means that small savings, even 1% can mean instant addition to the bottom line but in today’s economy you can achieve even greater savings in the 10% to 20% range is possible.
Try some of the following to cut your spending:
- Have your controller or hire a consultant do an expenses analysis
- Review all parts of the product or service cost, break them down individually into:
- Raw materials costs
- Taxes, brokerage, tariffs, duties
- Freight
- 3rd party warehousing/logistics handling costs
- Extra vendor charges
- Vendor payment terms
- Review your purchasing process on how to evaluate the best choice
- What type of process is used for deciding to use one supplier over another?
- How many people need to be in the decision making process, the fewer the number of people, the less the overall internal cost?
- When deciding to purchase equipment is there a “Net Present Value” analysis of the different choices which examines the benefits over the asset’s life?
- Have your staff included used equipment purchases as an alternative to purchasing new? Have they visited auctions?
- Potentially sources from offshore countries
- Start looking to buying from other countries to compare suppliers. BDC studies show that only 42% of Canadian companies are saving money, but you could be one of them.
- Review standardizing the number of parts in your product
- Reduce the number of suppliers & forge strategic partnerships with a few to get better pricing, terms, or delivery.
- Think about using technology to help track your business
Written by Richard Wong, CMA email: rwong@firstchoicecapital.ca
Vancouver, B.C. based Cardiome Pharma shares skyrocket on a $700 million licensing agreement with Merck based out of Whitestation, New Jersey for Vernakalant, an investigational drug for treatment of atrial ibrillation. The agreement provides Merck with exclusive global rights to the oral formulation of vernakalant (vernakalant [oral]) for maintaining of normal heart rhythm in patients with atrial fibrillation, and provides a Merck affiliate, Merck Sharp & Dohme (Switzerland) GmbH, with exclusive rights outside of the United States, Canada and Mexico to the intravenous (IV) formulation of vernakalant (vernakalant [IV]) for rapid conversion of acute atrial ffibrillation to normal heart rhythm.
Cardiome to receive initial fee of US$60M and up to $300M in milestones. Cardiome, a Canadian biotech which currently does not have any drugs approved for marketing, will get up to $200 million for achieving development and regulatory goals and another $100 million for approvals related to other heart conditions. And there’s $340 million available in sales milestones. Cardiome retains U.S. co-marketing rights in the deal and gets a $100 million credit facility from Merck that is available in 2010 in several tranches.
“Given Merck’s long-established leadership in the cardiovascular space, we believe there is no company better suited to advance Vernakalant,” said Bob Rieder, chairman and chief executive officer of Cardiome. “This collaboration places Cardiome in a strong financial position as we conclude our strategic review, and moves the Company closer to providing doctors with an important tool to address this critical unmet medical need.”
This deal also shows Merck continuing it direction of finding other external partners to help lead its drug pipeline for the future.
The effectiveness of the collaboration agreement is subject to the expiration or earlier termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act, if applicable, as well as other customary closing conditions. The agreement between Cardiome and Astellas Pharma U.S., Inc. for vernakalant (IV) in the United States, Canada and Mexico is unaffected by this agreement.
Written by Richard Wong, CMA rwong@firstchoicecapital.ca
Polaroid known as a maker of instant cameras and film was finally auctioned off for $59.1 million in a bankrupty protection. This famous company had come upon hard times, but it’s interesting to note that the price tag was for the intellectual property, company, and digital and hard film collection.
Question is that does Patriarch think the company’s digital assets are worth more than the Polaroid name? When you’ve had companies such a Sony, Hewlett Packard, and a host of camera phone makers enter in the space along with Polaroid and Kodak you would think that the Patriarch the private equity firm known for its reputation as a turn around artist it would try to leverage more of its digital assets than the previous management of Polaroid.
Written by Richard Wong, CMA rwong@firstchoicecapital.ca
Short updates on Life Sciences funding for March 2009.
BiOptix Diagnostics, Inc.: Series A $3M
BiOptix (Boulder, CO) a commercial focused developer of an array-based biomolecule detection system that addresses many markets that currently cannot obtain the needed sensitivity and throughput in a single solution, closed a $3M Series A finacing.
NeoVista, Inc.: Series D $18M
NeoVista (Fremont, CA) a clinical-stage device company focused on epimacular beta radiation for the treatment of wet age-related macular degeneration, closed a $18M Series D financing.
Neuraltus Pharmaceuticals, Inc.: Series A $17M
Neuraltus Pharmaceuticals (Menlo Park, CA) a preclinical-stage developer of small-molecule drugs focused on Amyotropic Lateral Sclerosis and dyskinesia, closed a $17M Series A financing.
Nexstim, Oy: Series C $7.9M
Nexstim (Finland) a commercial-stage developer of non-invasive brain imaging technologies focused on cortical mapping prior to surgery, closed a $7.9M Series C financing.
Atritech, Inc.: Series E $30M
Atritech (Plymouth, MN) a clinical-stage medical device company focused on developing minimally invasive technologies designed for the prevention of atrial fibrillation related stroke, closed a $30M Series E financing.
Ikano Therapeutics, Inc.: Series B $9M
Ikano Therapeutics (Lexington, KY) a clinical-stage nasal delivery platform company focused on seizures and pain, closed a $9M Series B financing, the final tranche of a $18M round.
GetWellNetwork, Inc.: Series C $10M
GetWellNetwork (Bethesda, MD) a commercial stage telemedicine provider of interactive patient care solutions, closed a $10M Series C financing.
GlycoVaxyn, AG: Series B $22M
GlycoVaxyn (Switzerland) a preclinical-stage company developing vaccines focused on bacterial caused disease, closed a $22M Series B financing.
Surface Logix, Inc.: Series E $15M
Surface Logix (Brighton, MA) a clinical-stage small molecule company focused on metabolic and cardiovascular disease, closed a $15M Series E financing.
Proteon Therapeutics, Inc.: Series B $38M
Proteon Therapeutics (Waltham, MA) a clinical stage biopharmaceutical company focused on renal and vascular disease, closed a $38M Series B financing.
The economy has caused a credit crunch for businesses large and small so the one thing that all businesses should do is to get cozier with your banker. This can take the form of calling more often, visiting, inviting your account manager to your business premises, anything which will provide more real world contact with your banker.
The one thing that is definite right now and that account managers are under more pressure to ensure their clients are worthy credit risks and are up to date in their monthly bank reports. So now more than ever, its important to better your relationship with your banker, even if you don’t need more financing at this time, but very important if you think you may need to re-finance, get waivers, or get amendments to their current financing.
Banks through their own databases, but also through credit bureaus have statistics on every industry and if you’re an underperforming company compared to the average in your industry, you may have already gotten a call to ask you whether you really do need for example a $4 million credit line, when you’ve only used $1 million for the past 3 years, yet your debt to equity ratio is higher than the industry average. Not a good sign, but manageable if you take the time to provide comfort to your banker.
It’s hard to think of your banker as a partner, but they really are, they want to see you succeed, not fail, so having them understand your business and your competitive advantage compared to your competition is very much smart business. So here are some steps to take to improve your banking relationship:
- Make Verbal Contact with Your Banker
- Call your account/relationship manager at least once a month or even better twice.
- If your company isn’t doing well it’s even more important to outline your strategy to your banker to improve and give them comfort in what’s your business direction.
- Build Trust with Your Banker
- Private companies have quite often reported the bare minimum information to their banks, because they have wanted to remain private in all respects. In today’s economy, in order to get help either re-financing or potentially finance acquisitions its time to bring down the curtains and let the bank see what you’re doing well.
- Prepared Detailed Forecast Information
- Public companies are used to sharing information with their banks so for them this less of an issue because of the quarterly presentation done by CFO’s for their public companies, but some have gotten away from this practice in the last few years but should think about re-instituting it only for the confidence it shows to stakeholders about their business direction.
- These forecasts should include various scenarios of financial, operational, and employee headcount variables.
- The forecasts should include worst to best case scenarios going out at least 2 years.
- Hire Reliable, Knowledgeable Financial Advisors
- Today its a good practice to ensure that information is presented accurately and consistently by advisors who understand your industry, your business, and advisors who have gone through economic downturns before where maybe your current management haven’t. In today’s times, you better know you’re making decisions on good reliable financial information.
- Communicate, Communicate, Communicate!
- Now is the time to be proactive, treat your banker as your partner in business, keep them informed of major milestones, and what you’re doing to beat the current economic environment. Be a leader, manage your banker rather than have the bank manager you!
Written by Richard Wong, CMA rwong@firstchoicecapital.ca
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Richard Wong on March 25, 2009
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A Vancouver, B.C. based company A Better Life Brands International specializes in selling delicious coffee and chocolate with a twist, 5 to 10% of all revenues go to the Give a Better Life Foundation where charitable projects are undertaken. The current projects include building a clean water system in Bulate, Ethiopia a village of 850 people, winter shelter for homeless in Vancouver, and a safe shelter for women and children rescued from the human trafficking trade in Vancouver.
You can vote on which cause you want to help and what a better way to than to buy from a corporate socially responsible company whose founders Sara Davis and Darryl Davis talk the talk and walk the walk. The coffee is fantastic, I tasted it at a Costco Wholesale a few weeks ago and was impressed with their company and thought wow, another great Vancouver socially corporate responsible company to talk about in today’s economy.
Better Life Brands has appeared on Urban Rush TV show on Shaw Cable, written up in Glow Magazine, but its great where a company like this helps take the lead in this still evolving world of corporate social responsibility. Another corporate social responsible coffee company is Ethical Bean Coffee, and Frogfile Office Essentials, in Vancouver if you want another example of small companies making a difference here in Vancouver and elsewhere in the world.
The company websites are www.betterlifebrands.com and www.frogfile.ca
Written by Richard Wong, CMA rwong@firstchoicecapital.ca
