Get IPO-Ready | Preparing Your Company for a Successful Transaction

Rich Cleaveland:That's great. Thank you Leslie. Andy, why don't we move to you? Tell us a little bit about your background.

Andy Drechsler:Sure. So Andy Drexler, I've been in biotech for 27, just over 27 years now. I think a half dozen companies. Four of those were acquired along the way, one still thriving and one died a slow death on the vine, which is not uncommon in biotech. I'd say for the most of that time, other than five or six years, they were all with public companies. So I've taken two companies public via an IPO one through an underwritten offering and one through actually a best efforts offering and then also done a lot of fundraising in the public markets through debt and equity offerings at probably over a billion dollars over that 27 years.

Rich Cleaveland:That's great, thank you. And finally, John, my partner, and I know you do a lot of things to help companies go public. So tell us a little bit about your background.

John Pennett:Yeah, thanks Rich. Yeah, so I've been with the firm about 20 years. I grew up on the audit side of the house and I've kind of moved towards the IPO readiness and audit readiness side of the house for about the last 10 years or so. I've worked on a couple of dozen going public transactions over the course of my career, whether it be an IPO reverse merger, a D spac, or any number of other various assorted transactions that help companies get to be a public company. So I've got to work with companies from the very, very formation and going through that process, which is always kind of the exciting part of watching the journey and being able to help support the companies through that journey.

Rich Cleaveland:That's great. Well, I'm again thrilled that all of you're here with us. I'm really excited about the content we have. So why don't we jump right in and Andy, I guess I'll start with you and just to kind of frame our discussion here today, I think of going public an IPO, it could be done for various different reasons, whether to finance a company as it continues to scale or as an exit or a combination of both founders maybe want to take some money off the table and continue to raise money to scale. And I think there's lots of different ways to do it. I mean, you could do a private equity round or VC or raise debt or as we're going to talk about today, the IPO An IPO. And so you've got a background that you've gone through several of these different types of financing transactions. So I guess maybe start us out, what kinds of things as a management team within a private company do you consider or think about when choosing to go public?

Andy Drechsler:Public? Yeah, as you mentioned, there are a lot of alternatives. So really the way we looked at it at my prior companies was you have your five or seven year long-term forecast and you're looking at your capital needs and being in biotech and my experience have mainly been in development stage biotech looking to become commercial biotech. So you're making big investments not only in the r and d but also in the commercialization stage and then building out a Salesforce. So we always thought the public markets were the right spot for us because of the amount of capital needed. And quite frankly, over the last 16 years or so, really since oh nine, capital markets have been great absent a couple recent years, but hopefully that's back on track. So we did investigate private equity at a couple different places.

You got to be careful with debt, especially in the stage of the companies that I was at development stage, because one, if things go wrong or even in early commercialization stage, you got to make sure that launch is on a good trajectory before you take down debt because you want to make sure you're in good spot with the creditors. But ultimately IPO public markets just because the amount of capital in talking hundreds of millions or even over an excess of a billion over a long period of time of capital that we're going to need to run the business, acquire products, develop products, and so on.

Rich Cleaveland:Leslie, as an attorney, you're typically getting involved pretty early in the decision making process. I got to believe also, I mean, do you have any other kind of perspective on this as you're advising clients or things that you help them think through when they make that decision to go public?

Leslie Marlow:So the first thing I always say to clients is why do you want to go public, right? Because to me it's very expensive and you can't really freely sell your stock as an insider as easily as you think. You have blackout windows, you can't get the liquidity event that you think you might be getting. So if you're telling me like Andy said, you're going public because you're a life science company, you're going to keep doing RD, you're going to keep needing money and you think that you'll get funding from the capital markets, that's the reason to go public. But if you're doing it as an exit, as an insider, as an exit, it's going to be a little harder for you to do that and add it on that everything now is public. After you're a public company, you have disclosure obligations, your salary, your employment agreement, your personal life is public at that point. So I always ask the question first, do you really want to go public and why are you going public? And if the answer, like I said, is because we need to access the capital markets, that's a good reason. If it's for a liquidity event, personally, it might not be what they think.

John Pennett:That's great. Yeah, I was going to jump in there. Was going to jump in real quick, rich to say, I think you also have to have a strategy to become a public company and to stay a public company. So if you just are doing it just for the capital or just for the exit, that is a consideration. But if you're not going to have any sizzle and any story, any growth and anything that's going to make the story an interesting one, eventually your stock price is going to dwindle to zero and you'll be stuck as a public company with no real liquidity in the stock anyhow. So you have to really have a strategy, whatever that may be, acquisitions new products in Andy's world in biotech, you have to have some data readouts and things like that that's going to keep the world interested in your company because once people become disinterested, then you're stuck with an illiquid stock and you've not accomplished at least one of your objectives as being a public company.

Andy Drechsler:John, that's a great,

Rich Cleaveland:Yeah, great point. Go ahead.

Andy Drechsler:That was a good point because I'm actually working with a small company now that's venture backed and they're going to do another venture round, but they're starting to think about going public. And one of the bigger conversations we're having is, okay, let's look at when that big data readout is and they're going to run a phase two B clinical trial and it's kind of worked back. And you say, okay, well we can go public within 12 months of that, ideally probably even closer, maybe nine months or even six months so that the public has something to pay attention to and hopefully has the upside of the positive data readout.

Rich Cleaveland:And to your point, Leslie, with going public, it's all out in the public domain then your quarterly results, what you're doing from a financial perspective. I think that's great perspective from all of you. Let's just move on to, let's assume we've made the decision to go public here. Now there's a few different ways you could accomplish that direct underwritten offering. As Andy had mentioned, his experience, maybe a merger with a SPAC or a reverse merger. Leslie, you, I'll ask you because you kind of get involved with the legal aspects of these different types of transactions. Why don't you just a level set for everybody that's on the call, what are the different paths that those three paths, how do they differ? What's some of the characteristics of those? I think Leslie, we've lost your sound.

Leslie Marlow:Oh no. Can you hear me now?

Rich Cleaveland:Yeah, there you go. Perfect.

Leslie Marlow:Okay. Alright,

Rich Cleaveland:Great. Go.

Leslie Marlow:My preference would always be to do a direct listing. And the reason I'll say that is because I am listing my company, I'm not merging into somebody else's company. I know all the skeletons in the closet. I'm not getting stuck with somebody else's problem that I don't know about. That might come years later. So my preference would be the direct listing, but that is usually a longer process because you're going through the entire SEC process, you're going through a listing, usually it's on NASDAQ or NYSE, and that could take a much longer period of time, a reverse merger into an already public company. That problem is you're merging into another company, you're going to do diligence, but you're not going to ever know that company the way your own company as well as in your own company. And there could be surprises down the road.

Leslie Marlow:The other thing about the reverse merger is unless there's money sitting in that company, it can be very expensive for you to reverse merge in and then not end up with money to keep supporting the company. And then you're hearing about the last couple of years, a lot of SPAC mergers, but with the SPAC mergers, those are cleaner companies. And when I say cleaner, I mean you're not going to end up with somebody else's headache because those companies don't even have a business yet. It's just a management team really. And a board of directors, however you do give up, warrants the sponsor. So you're giving up a big percentage of the company before you even right away at starting out being public. And then if you need financing later on down the road, you're constantly diluting yourself out. So if you're starting out giving a big percentage and then you're diluting yourself even further later on, you don't end up with very much. So my preference would always be to start out owning the whole company, going in with my company alone. I know all my hurdles, all my things I have to get past and doing a little bit longer, maybe a little more expensive, but a direct listing.

Rich Cleaveland:It's funny, as you mentioned, the merger with another company, not a spac where there's no money in that entity you're emerging with. I think Andy and John, you both also alluded to the cost of being public and now if you're all of a sudden find yourself a public company and don't have the money to pay for the new reporting obligations and the resources, that could be a significant issue. No, for

Andy Drechsler:Sure. I would probably piggyback on the Leslie's answer. I just was involved in a reverse merger a couple months ago and it's definitely not the cleanest. You got to get comfortable with the history. Now this company, I've been public for a decade, so you got comfortable through all their filings with the history and each situation's unique at the end of the day. So these two companies had common shareholder base, their two or three shareholders, and they were interested in their private holding company to get public, so they helped push it along. And before we got to the merger agreement between the two companies, they did a roadshow and put together a pipe. And so they knew they had, it was pretty close to a hundred million of financing before they were going to go public. So the concurrent with the closing of the merger was the financing. So they were well-funded, but no doubt you got to do a lot of diligence in our world, IP litigation and other things that typically come with biotech companies.

Leslie Marlow:In addition, sometimes you can end up in a situation where NASDAQ or the New York Stock Exchange doesn't like the merger and they don't approve it. And we had that happen two years ago to another company. We represented the agent on where they could not get approval after spending all this money entering into merger agreements, and they still could not get approved to list even though one of the companies was a public company.

John Pennett:So I think it gets back a little bit to the concept of why do you want to be a public company and are you ready to be a public company? So you have to think about the amount of capital you need to raise to accomplish your objectives, to accomplish those next milestones, and then will the stock have some liquidity in it, be able to help the investors through the process. So again, there's often lockups, sometimes the investor base is old and tired if you do a reverse merger or thing like that. So you don't kind of get the whole story when you do action as opposed to an IPO type transaction. So those things definitely happen and so you have to have a good strategy for that.

Andy Drechsler:And actually John, that's a good point and I'll keep going down this reverse merger path for a few minutes here. The one I was advising with their trading volume was so minimal, first couple of weeks fraction. And so now post JP Morgan, they were able to get in front of a lot of new investors, get the word out there, they got some coverage from the street. So now it's picking up. But to your point, if you don't have those things, if you're not ready with those things, that liquidity may not be there for the folks that are looking to liquidate

Leslie Marlow:Plus, sorry, the last couple of years is people don't want to invest. Years ago they used to invest early stage and say, I'm going to get in really cheap and I'm going to hope one of my 10 investments hits a big, and that's great. Now we're seeing people holding back on the investment until a data readout. They don't want to come in early.

Rich Cleaveland:Switching gears a little bit, and John, I'll ask you this question. So say we're deciding, okay, we decided we're going to do one of these three paths and we'll use the underwritten offering, that sounds like that's the most lengthy process. There's a lot of moving parts, and what should management teams be thinking about as they embark on this process?

John Pennett:So to me, I think the key thing, and I'll give you a quick example here. The key thing is project planning. So the fastest example I've ever been associated with was a company that we took from the time that they said that we're going to go public. And they had no preparation in advance of this until the time they got the cash was actually just over three months. And the reason why it went so fast that is two or three X shorter than usual is because they had a great project planner, they had all the resources of the company and outside advisors available to help them, and this was the full-time job for everybody associated with this during that process. So that project plan, because there's a whole bunch of sections, financial management, risk factors, we will talk about a number of those during the course of the session today, but there's a lot of things that have to be gathered, reviewed, approved. A lot of outside parties have to approve these things, A lot of negotiations and renegotiations that have to be done. So it's a very, very lengthy project plan. And without having somebody who's been there done that and knows how to run a significant project like that, it will take you a long time. So that really is the key to success in my mind.

Leslie Marlow:But one thing you said is that you had people devoting their full-time and attention to doing this. Most of the time people are running a company too, and so they can't devote their full-time and attention to just going public.

Rich Cleaveland:Absolutely. That's a great point. And I'll ask you, Annie, because you and I have been through this process at least once, and I'll pay you a compliment here. I feel like you do probably one of the best jobs of staging that plan and resources both with the internal and external. How do you decide what mix of, Hey, I'm going to build internally in a finance or other group, legal group even versus hiring externally the advisors to help you with that process?

Andy Drechsler:Yeah, I think most early stage well run biotechs are super cost conscious. They don't have the capital, they want to be capital efficient. So prevention bio, which is the example that you just referenced, where Eisner was our auditors, I was a one man shop when the company started and even for the filing of the S one. And then we kind of just had gating events. So I said, okay, once the minute we go public and we raise the money via the IPO, I'm a controller and that will take us for a certain period of time. And then once we get a couple more products in the pipeline, then we're going to hire an accounting manager to help with the SEC filings and IT support the controller in the day-to-day. But we outsource bookkeeping, accounts payable, we outsourced the technical accounting stuff, which can get very complicated.

Andy Drechsler:So we leaned on a lot of outside resources and then built out the internal team as we needed to. When we were about to burst, we waited, then hired the person. And then ultimately too, when you think about prevention, when we got good data and we knew we were going to file with the FDA, that's when we hired an fp and a person and that's when we hired a person who was devoted to internal controls and systems. And so we kind of staged it along the way, but early days, you lean a lot on the outside resources and then as you grow and have the capital, then you can start to bring those folks.

Rich Cleaveland:Great. And John, I mean it sounds like because done some of these projects where you've been that outsource resource, is that kind how you see your role from the beginning in transitioning into those internal roles eventually?

John Pennett:Yeah, definitely. So most companies, even if they have the skill sets, they don't have the time requirements. So my example, most people can't do this full time. They have a business to run, so they need resources to help them. So having some outside resources who can help organize things and get all these specialty groups and disclosures together that sometimes they're maybe being done for the first time. So you're gathering data from different folks within your organization who maybe are not typically involved in year end and disclosure type information. And there's a natural progression where the company will eventually sort of insource this and then just leave certain things like the specialty items like highly technical accounting or some sarbanes oxley type testing to the outsiders, but they'll eventually move that to their internal resources because of course, one of the things that always happens, and no offense rich, but the auditors are always the bad guy in this, right? Because you're always the last one that's holding up the whole thing. But it's a long process and many times these companies have never gone through an audit before. So first time audits are really hard. They take a long time as well prepared as you think you are. And I, I'm positive we're exactly where we're supposed to be. There won't be any audit adjustments. That is never true. So that becomes one of the gating items

Rich Cleaveland:That another, I want to jump off into that whole kind of the financials and stuff that go into it. But first before we get there, I mean just in general, the big lift around all of this is disclosure is the registration statement is everything that needs to go into that. And I dunno, Leslie maybe help us. How does a company start from that perspective? Are they just going to start writing things from other documents? Is that something where you guys step in and kind of help from the inception and tell us a little bit about that process?

Leslie Marlow:So our goal at the beginning actually is to learn a company as well as the CEO and the CFO know their company. We will look at every single contract they have their cap table. We are working right now on taking a company public and they actually over issued some shares of preferred stock that they didn't have authority to do. We have to clean that up. We also are looking at their agreements, right? Because once you're public, your material agreements are disclosed. Are you allowed to disclose those agreements? Did you sign an agreement years before you were public that would not allow you to actually disclose the agreement? Do you need a waiver to disclose the agreement? Do you need to take confidential treatment of sections of the agreement? Maybe you don't want your royalty rate for instance known and you're allowed to redact certain things within limits.

Leslie Marlow:So we get in there very early on because that can take a lot of time. If I have somebody overseas and I need to get a waiver, I need to get them comfortable with disclosure, I need to make sure I start that process very early. The other thing which people tend to forget about also is data that you want to use. Let's just say you want to quote the New England Journal of Medicine. You're not really allowed to do that a lot of times without getting, again, consent from the journals that you want to cite data from that they will allow you to cite that. That can take weeks and months. So when we get in there, we get a team in there, we look at everything, which like I said, try to know the company as well as the CEO and the CFO. And then we start usually drafting.

And you'd be very surprised. There are times that I will get a two page outline from a client on what they think is material and then we'll go to work drafting what we think is the description of the company. And there's a lot of give and take. That first paragraph in your summary is the one that's the hardest and takes the most time honestly to really draft because that's what people don't read 120 pages, but they see that first paragraph and that will take the most time. But usually it's us drafting and it's a give and take. We go back and forth, we'll draft, we send it to the client, then they correct it or they draft it and they send it back to us and we go back and forth. And as that's happening, the audit's going on and that's underway and we kind of divide the document into two sections, the legal section which we handle, and then the audit and accounting section. And we review. Obviously we have to review that also because the auditors might find related party transactions, something we don't know about. So we will always review that, but usually we focus on the legal disclosure first and as the auditors are doing their job and then we put it all together.

Rich Cleaveland:It's funny you say that. We often like to see that document as we're completing our audit. There's always things that kind of come out in that document that we're like, Hey, wait a minute, we got to go back and make sure we've got this buttoned up and accounted for correctly. So Andy, you're on the other side of that table, and so you're kind of feeding Leslie information, you're trying to write the business section and think about risk factors. Who else do you get involved from your side and how do you kind of go through that?

Andy Drechsler:Yeah, no, Leslie did a good job hit the nail on the head there. And typically we do rely on outside counsel to be the quarterback. And it's typically not the Leslie's the partners, but it's more, it's a junior person and you're going to be working with them lockstep and getting through these sections and whatnot. But I've been lucky over the years to have some really talented CMOs and CSOs, chief scientific officers and chief medical officers who are great writers and good storytellers. They've gone on the roadshows with us and whatnot. So quite frankly, they write all the product sections and then we'll summarize those. And one of the things we always like to do, I remember doing this at in smed and then again at prevention, was putting in a table upfront in that first page or two that summarizes our products, the stage, the next milestone.

Because like Leslie said, to find somebody who's going to read all a hundred or 200 pages is pretty rare. So you want to hit 'em up front with, okay, this is what we got, this is what's next. And then you get into a detailed description of the products. And then same thing with risk factors for sure. You're going to spend a lot of time on, you're going to sit down with the executive team and with council and say, okay, hey, you don't want 'em to be cookie cutter, you want 'em to be specific to your products and are you filing in Europe or are you on file in the us? And the geographies and the regulatory agencies have differences. So it's a team effort, no doubt everybody's involved.

Rich Cleaveland:So I just saw an interesting question in the chat related to risk assessment or risk management strategy and DNO insurance. And I know that's a little bit off, but you were talking about risk factors. I mean, do you go and do a formal kind of risk assessment or kind of think of that and a hundred percent

Andy Drechsler:Leslie? Yeah, Leslie could probably talk better on, but just real quick, when you're going public and as a management team, executive officer and a person signing the Ks and the queues and whatnot, you want to understand your d and o policy for sure. You want to understand the indemnification agreement that you have in place with the company because unfortunately in biotech, you put out bad news, stock drops, and next thing you know, see all the things on Yahoo Finance of so-and-so is suing X, Y, Z company. And it's just part of what we do. But if you go back and look, it's disclosed in the risk factors, right? It's disclosed in the summary of what you're doing that hey, yeah, we're applying for this or that, or we filed hoping to get approval, but you know what? There's a good chance we might not, right? And you lay all that out, but Leslie, you could probably talk to this better than I.

Leslie Marlow:Yeah, one thing I want to say is that the registration statement from our point of view is your protection. And it's very hard for people to understand that this is not a selling document, purely selling. You don't want to tout too much and make yourself look better than you really are because then you don't get any protection. And as Andy said, also, those risk factors have to be very specific to you. If they're not, they're really not worth anything. I mean, if you only have one product, that's your risk. You only have one product if it fails, you have nothing, right? Or if you have one manufacturing facility and if something happens there that's specific to you, there are generic risk factors that you'll see. But the most important ones are really the ones that are specific to the particular company. But again, we are going into this making sure that we are very factual, very careful on what we say. And a good example for Andy is on the life science companies right now, the SEC is generating comments. You can't say that something was well tolerated or safe or efficacious. What you have to do is give the results. We had no adverse events, we had this adverse event, but you can't even make conclusions even after having a wonderful trial because they don't feel that's appropriate. So that gives you some guidance on what you really should be saying in the registration statement.

John Pennett:And also you'll see when the underwriters and underwriter counsel go through the disclosures and they'll say, what's your support for saying various things? So if you put a disclosure in there, maybe the marketing department did something a little flowery saying, we are the best at whatever particular thing you want to tout. You have to be able to support it. So where does the numbers come from? What's the data? And so to your point, it's not a selling document, it's a protective document. So you have to tell the story and you want to tell it in obviously as positive a way as you can, but everything has to be completely supportable.

Leslie Marlow:That's one thing we do a circle up of every single line in the registration statement, and we need support for every single thing that is being said.

Rich Cleaveland:So we talked about the business section a little bit, risk factors, I'll jump right into the financials then a little bit here. John, you get involved a lot of times with helping companies prepare those financials and MDNA, maybe let's start with MD NA. How does the company go about starting to think about MDNA within one of these documents?

John Pennett:So there's a whole bunch of sections of MDNA. And so oftentimes what we'll do is we'll suggest and maybe even do a walkthrough of some comparable companies with the management team and say, here's some examples of how other disclosures of some comparable companies look like. And you start to think about how do we prepare this data? Where are the key things that we need to disclose? So you're starting out, people think of MD and A as the comparison of the p and l. So sales went up 5% because we sold more, we increased our price 5%. And that is a part of it for sure, but only one part of it. So I look at the other parts in terms of what are the key transactions for the quarter, what is the critical accounting policies that are driving the numbers? And really, really important is liquidity.

John Pennett:So what is the liquidity story that you need to tell? So even as you go through and you go through the various quarters, those things update and they change all the time. So it has to be a really thoughtful process. It's not a regurgitation of numbers, it's not a copy paste job from your financial statements. It's a fresh thought and a fresh look at really telling the story of the financial shop for the company. And a good example is that we see this sometimes with SEC comments, but it's really just a practical as well where the thought process is. So don't just say that sales went up 5%, but actually put some context behind it. So why is it new product offerings? Is it sales increases? Is there new channels that are offered there? New channel partners you may have new markets that you've entered into.

John Pennett:Is this going to be sort of a sustainable they one-off? So really putting some analysis behind it. So I think the MD and a circle A in big letters, that's the part that takes time, it takes thoughtfulness, and that's really what you're trying to get to. So you need kind of the whole team to pull together. So I like the idea of having a disclosure committee in addition to kind of being a best practice. It also gets input from your operational team, your sales team, your executive team, all the different departments within the organization. And everybody should read this and everybody should be comfortable with the disclosures. It all correlates together. And then obviously it should tie back to what the financial statements are saying as well

Leslie Marlow:As John said, shouldn't be something I can just read off of the financial statements because anybody can do that. And usually you're also putting forward trends if you know that there are trends. For instance, you're going to have a huge clinical trial coming up. You absolutely know that you're going to be spending more money than you did in the past. That's pretty easy to add into your figures there, how long the cash is going to last, what your burn rate is, those kind of things.

Andy Drechsler:And rich, I would piggyback onto what John said. Two things. One is disclosure controls committee. You better believe it because again, as the signer of the financial statements, the K and the Q and the certifications that go at the back, you better believe we're having the CMO, the CSO council, the next level of folks who are in the trenches doing the work. They're signing similar documents before we sign, right? We want to make sure because there's no way we can know everything. They're dealing with the clinical sites or they're dealing with the FDA or the EMA, right? And we're not privy to or party to all those conversations. So we definitely have a disclosure controls committee. That's one. And then two, John, I really like that you referenced looking at other companies, some companies out there that do a great job with disclosures. And so we would always go look at a handful. We always had a number of companies we like to read their cues or Ks because they might've done something that presented their MD a certain tables in a certain way and we're like, oh, that's a great idea. Let's do that with ours. So kind of beg, borrow and steal from folks that are on the cutting edge. And we always like to do that.

Rich Cleaveland:I think that's great insight and I think just the disclosure committee, so that definitely something that you're going to want post being public for every quarterly filing, annual filing. And you talked a little bit about the roles within a biotech, and I think for our broader audience too, that would mean a VP of operations, head of sales across all the different functions of the organization, getting them in the room or virtually in this environment to read the document because they'll more than likely than not pick up things, Hey, we're actually doing this, so we're not,

Andy Drechsler:No, and I think he, he's making a good point because there are times specifically, again, I hate to keep hammering home the biotech part of this, but have your chief medical officer reading about the product and the balance of efficacy and safety and what you can say, and they know, oh, hey, we just had a couple adverse events that were serious adverse events, and so we make sure we got the right balance disclosure, but they don't, unless they're reading the whole document, they can't help you with that.

Leslie Marlow:We typically attend those meetings, by the way, the disclosure committee, and it's helpful for me to attend because I get to hear things that they're saying and make sure also that I think the document is well balanced.

John Pennett:I was going to add one of the disclosures again for the broader audience beyond just the biotech crowd, is in your financial statements, you now have disclosures around revenue in disaggregation, right? So revenues by region, revenues by product, different categorizations depending on the type of company that you have. And that's like a very natural correlation to bring into the MDNA. Again, as you're digging into the analysis side of things, you've got the disclosures there already and you should be able to analyze that and provide some insights to the readers so they can understand what's going on and whether those trends may potentially continue or there'll be some changes. So you use the information that you have and you can pull that into your MDNA as providing that insight to the reader.

Rich Cleaveland:John, that's a great segue into the financial statements and what needs to be included in the document for financial statements. Companies that are going public, they may or may not have had audited financials. Maybe talk a little bit about what goes into that financial statement section and then maybe we'll jump off and discuss a little bit, like you said, the disaggregated revenue and some of those other unique disclosures for public companies.

John Pennett:So most people know the rule. You have to have two years of A-P-C-A-O-B audit in place. So that's sort of like your starting point. So you have to go through and get your, the most recent two years audited together companies who may have had audits in the past under a private company scenario. That's a great starting point, and you can uplift it from sort of like what we would call an A-I-C-P-A audit to A-P-C-A-O-B audit, assuming that your auditors are qualified to do P-C-A-O-B audits. So the P-C-A-O-B is the public company oversight board. They govern the accounting side and the auditing side, really the auditing side of those financial statements. That's what the auditors have to follow. But you also have to follow the SEC disclosure rules. So what you had, the disclosures you had for your private company would follow the A-I-C-P-A rules and requirements, and there are more things that you have to add into those in order for them to be SEC compliant.

The easiest one to sort of think of conceptually is earnings or loss per share. It's not obviously required for private companies. It is definitely required for public companies and there's disclosures that go around it. There's a series of a whole bunch of other things that need to be done as well. So there's a checklist which your auditors and your accounting advisors would have and be able to guide you through to kind of uplift you from that private company, financial statements to the public company financial statements. And then the auditors would have to obviously audit that and do whatever auditing procedures they would feel appropriate to go from that A-I-C-P-A level opinion to that P-C-A-O-B opinion. So that uplift process can occur, takes some time. Obviously if you've already got the private company audits done here, you're way more than halfway through the process already. So that shortens the timeline significantly, but you still have to go through that process.

If you're going through the audit for the first time, then you have a different challenge, which is to be audit ready. So think about things like your cap table if you're depending on the type of company items that build up over time, let's say like fixed assets and stock options and things like that, that build over time, capitalize software, you have to kind of go back and be able to have all those audit ready. So you have to do two years. It means you have to do your opening balance sheet testing, you have to put together all your accounting policies, your internal control procedures, and you have to go through that testing process. You have to budget a long time for that. You have to have all those items. And contemporaneous documentation is super critical, so your auditors are going to require it. The SEC may ask some questions. I know we'll talk about the SEC review later on. And to the extent that you have that information readily available, that makes the process go significantly faster than if you're going to go like, oh crap, I better put together some documentation as to why we decided to call this particular transaction an apple instead of a banana. We should have that documentation ready to go.

Rich Cleaveland:I think great points, John, and as the auditor here on the panel, it all builds upon things that I think, Leslie, you even started at the very beginning. I'm going back and making sure the cap table is right and we didn't over authorize shares or we've got agreements and what are those agreements? And organizing all that stuff from the very beginning just helps get through that audit process more smoothly. I guess we've got the, so we talked about the annual audits. There's interim financial statements also that you need to include. So for every quarter, and those will get updated as you move along the

Every 90 days. Yeah. I guess I got another point on that when we get to a little bit later in the process, but I guess we've got the, as I said, we're up to the financials. I look at executive comp as kind of another big aspect to this document. Now, as you said it, Leslie, you're going to start showing the world what this is, how should companies think about organizing that? And then Andy, you've probably got a good perspective on this as being one of the people that's in that disclosure.

Leslie Marlow:So one thing we always say is, I wouldn't wait to make changes to my compensation or to who my offices are. Wait, go public. And then the minute you're public make some changes. Unless you're going to disclose that, that's the first thing. Because I don't think that if you're making a salary of 200,000 and you jump to 500,000, all of a sudden people are going to be too happy with you. So you have to kind of know where you're at today and where you're going. A lot of times we'll see that companies don't have employment agreements or they don't have protective covenants against competing and solicitation and things like that, keeping confidential information confidential, assigning inventions to the company, not in somebody's personal name. So that's part of talking about the compensation. To me, they go hand in hand with the biographies that we have to put out there describing the employment agreements.

If there aren't and if there are some, and if they're not putting those all into place and then you are required to disclose salary, bonuses, equity grants, all of that. There are certain tables that you have to complete that are not easy to complete honestly. But with the help of the team, the internal team and us, we usually can get them through later on. Once public companies are public, they usually will hire an outside consultant to help them with compensation, but we don't see that usually when we're taking somebody public that they have done that. That's usually only for the public companies, honestly.

Rich Cleaveland:I was just thinking as you were going through that idea of benchmarking against other public companies, and Andy, is that your perspective too? You normally aren't doing that during this phase, but it's after you get public.

Andy Drechsler:Yeah, I mean you're bringing those outside experts kind of right as you're about to go. But to Leslie's point early enough that if you do have some changes, you make 'em while you're still private and before you go public. But the other thing I was thinking about was that the CDNA, which is the compensation discussion is more complicated than the end DNA. It really evolved over time and because of past transgressions by some that they really revamped and increased the rules and regulations around the disclosures there. So having that outside expert, having counsel that's very knowledgeable on this is really important. But then too, as again, one of the management team, you're always looking at the proxies or merger agreements or whatnot about, okay, what are similar size CFOs or CEOs or executive teams making, because you're going to have your own peer company list, but you're also going to rely on these outside experts to come up with, Hey, what's market and why, and all those things. So a complex area, we could probably spend an hour on this one alone.

Rich Cleaveland:Well, it is interesting. Great points. And I see a question in the chat here about equity plans and challenges. And I'm going to ask a first initial question that has legs into the financial reporting area, and maybe then we'll ask about any other general challenges. But as a private company, you're generally, if you've got a stock option plan or a plan that's got restricted stock or stock options, you're generally getting the valuation maybe annually to support how you price those awards that you're given to your employees. And then that in turn has an effect on how you're accounting for them. Once you get into this IPO process, you may be several months, almost a year away from that last valuation you've done. How do you go, especially as you're thinking about this disclosure here and in the financials, think about updating, refreshing that valuation, thinking about it in terms of relative to where you might be pricing your IPO, I guess maybe starting with you, Andy, I know you've been through that a few times. Any thoughts around that?

Andy Drechsler:Yeah, we would always get valuations whenever there was a milestone, whenever there was a significant event, usually on the clinical side or maybe we acquired a product. But when you're talking about getting closer to the S one or going public, the bankers are going to start feeding you a lot of valuation stuff as well. And we may talk about bankers here. I know we only have 10 minutes left, but the bankers are going to be saying, Hey, this is where we see you guys going public. This is your range of values based upon peers and the data you have coming and whatnot. And so you need to factor that in as well as you price the equity you're giving to your team or your board as a private company. So that all has to match up, otherwise the SEC is going to be all over you for cheap stock or other issues. So that's kind of the way we would look at it is, yeah, 4 0 9 a's are nice, but as you get close to being public, look at the banker information and any other information you can glean to make sure you're representing a fair value for that equity.

Leslie Marlow:And the 4 0 9 A should take into account the fact and the likelihood of you going public. So that should have some factor in there.

John Pennett:And certainly over the course of, I was just going to say Rich, over the course of time, we've seen many examples, especially with first time audits, where as part of this whole process, they've realized that maybe they haven't done such a good job with their 4 0 9 A or their documentation. And now you wind up with scenarios where you have invalid issuances of options and you create an enormous amount of bad will with your employee base when you say, well, those penny options that we gave you back in 2018, we're going to have to reissue those today at $27 and today's price. So that whole process becomes really troublesome. So you've got to keep a really careful watch on there. And I always advise companies, if you're going to do any sort of an equity issue and do it at the earliest possible date, document it really clearly and put it in the vault so you can't go back. There's no back dating. None of that stuff is allowed. So you got to be really careful, do it right from the beginning. Sometimes very early stage companies will say, I don't want to take the time, or maybe the expense it is by far something that's well worth the effort.

Andy Drechsler:But one last point, rich, I do see the question that's in the q and a there. You want to get your equity plans in shape and approved while you're private, so make sure you have enough shares available to issue for the next year or two or whatever it is, because when you are public and then you go to your shareholders for a re-up of the equity plan and ask for a couple million more shares to go into the option pool, it's not an easy process. And the default is probably no. And then you got to convince 'em why it's a good idea and why you need those shares. So you can do a little bit of that cleanup in those last few months before you go public and say, okay, hey, we're going to increase the equity plan from 2 million to 4 million shares available, and so we have enough runway for the next two, three years or whatever the timeframe is.

Rich Cleaveland:That's a great perspective also. And I think this whole area, we could probably do a whole separate webinar on it. It's got so much, you mentioned bankers. So let's push forward here a little bit and let's talk a little bit about bankers. How do you as a management team think about the right bankers to do the underwritten offering? What kinds of things do you think about in that process?

Andy Drechsler:Yeah, there's a few things. First of all, the banker relationships develop over years, right? They call on you when you're private. You probably dealt with them at prior public companies. So you've got a dozen bankers that you're probably close to, and that's from boutique banks up to the big guys. So you know them, you got to take into account board relationships. That always comes into play. You might have a director who says, Hey, we've got to use X, Y, or Z, and you got to figure out, okay, can we use them and doesn't make sense. But ultimately the way I look at bankers is a couple of things. What's the syndicate going to be? Because you want a mix of usually a bulge bracket and a boutique, and how do they all play together and have they done prior transactions together and who's going to be the lead and the economics and all that stuff.

And that gets, you get into the nitty gritty there, and it could be some interesting conversations. But I would say the most important thing to me as the CFO was always look at the cell side part of their house, look at the equity research analyst and say, who knows our space? Go back to prevention bio. Who knows the autoimmune or immunology space the best, and who understands our competitors or maybe covers our competitors. I want to work with them because they understand it, they get it. They can write the best research so that when investors call in, they've got good answers or can do a deep dive with them. So it's a big part of how I look at it.

John Pennett:And I'll just add one comment on there. So you look at IPOs, especially over the last couple of years with the capital markets has been a little bit challenging, is there is a very heavy component of insider participation in an IPO. So it's almost more like a private placement than an IPO in many cases. So you have to think about this way in advance, right? So which investors do you have who could participate in an IPO? So you hear the term crossover round and the crossover round investors. So Andy, I'd love to get your kind of view on thinking about you're building your cap table and who's on your cap table and how can they support you through the whole IPO process?

Andy Drechsler:No, for sure. You make a very good point. And that has shifted to more insider participation in that IPO step. You've got to have folks that have the long-term interest in you, so they're not going to flip it once the lockup expires, but they also have the dry powder so that they're going to participate in the S one in that offering. But they're also have the dry powder to buy shares in the open market to support you once you go public. And that's the same for when you're doing a secondary offering and you're going to raise additional money once you're public. You want to build a book well over subscribed because folks that get cut back in that process are going to buy hopefully in the aftermarket to support the price, support, the deal, and so on.

Rich Cleaveland:I know we're coming up close to the end of time here, but I think we can stay a little bit longer, maybe a couple minutes just to cover additional topics. It's been a great discussion so far. But Andy, you mentioned board, board relationships with the bankers, and we didn't really talk about how that evolves also over this process. And there's new committees, there's new responsibilities. I mean, maybe Leslie, actually, maybe I'll ask you first what changes, what kind of committees are required? And then Andy maybe get your perspective on who's a good board member for your entity, for your company.

Leslie Marlow:So your committees should have only independent directors on them to start with. They can't be employees of the company. They're not independent, and the audit committee is probably the one that typically will meet the most. It has to meet quarterly because it has to review the 10 Qs and the 10 K, and that is the committee where you really need an expertise, right on somebody who understands gap, who understands what is required in the financial statements, can read financial statements. The other committees that you see are the compensation committee and the nomination and Governance and Governance Committee. Those are two other committees, not always required depending on what exchange you're on, but if you have them, they need to have independent directors on them as well.

Rich Cleaveland:And Andy, back to the, who's a good board member, how do you go about selecting someone to join?

Andy Drechsler:Yeah, so the challenge usually is, like Leslie said, they have to be independent. So many of these VCs are going to roll off because they own too much of the company, so they're not independent or they want to be able to liquidate at some point down the road. So they don't want to be on the board. They don't want to be an insider. So we always would look to, we want a couple subject matter experts, the board. So again, immunology, the space we were in, we want a high profile immunologist on the board to help advise our CMO and CSO. We want a mix of people, and I guess the key point, I know we're ahead of time is get people who have operated companies before. You want people who have sat in your seat and lived through the highs and lows and the challenges and have dealt with it so they know what you're going through and they can be very helpful when things get challenging or when you want to make a push and expand or acquire a new product. So get people who have been CFOs or CEOs or CMOs of prior other companies. I think they're the best board candidates, quite frankly.

Rich Cleaveland:I think, again, we're at one o'clock. What I'd like to do is just ask each of you, if there's one last kind of thought piece of advice, something that you would tell our audience out there as they're considering doing an IPO, or is there an important takeaway? Either we've talked about it or it's something that we haven't talked about that you think they should think about.

Leslie Marlow:Okay. I could say, I would advise that you get the outside advisors in early. They don't have to be in full speed ahead early, but it's good to have the advisors in early so that they can guide you on what you will need to do going forward.

Rich Cleaveland:Great advice.

Andy Drechsler:My one piece of advice whenever I talk to other CFOs is get a great controller, right? Because as a CFO, you're going to be so busy running around doing your investor relations stuff knee deep in operations or strategic stuff that you need a great controller. And I've been lucky to have a handful of them over the 20 something years. So having somebody really strong in that position.

John Pennett:Yeah, and I'll just finish up by saying, make sure you have a good strategy to become a public company. It really makes sense for you to be a public company at this point in time. And then if you do decide that the time is now, that you dedicate the resources to that project plan and carefully plan out the activities and have a hard drive towards that goal with the resources that you need to be able to accomplish the goal of getting the transaction completed.

Rich Cleaveland:Well, I want to thank each of you. I mean, great discussion. A lot of great content, and just, there's a lot of other things. If anyone's out there, they have questions that didn't get answered, just please reach out to one of us. We'd be thrilled to help you through the process.

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