The biotech IPO market is strong, with over 20 biotech IPOs announced this year through May 2018. If your company is considering an IPO, an enormous amount of preparation is needed for the successful execution of this transaction. One aspect to consider is executing the impact of the reverse stock split disclosed throughout the S-1 document. The reverse stock split is necessary to price an IPO in the $13-$17 price range typical of early stage biotech IPOs.
The initial S-1 filed with the Securities and Exchange Commission (SEC) discloses all share amounts pre-split. After the IPO roadshow, the board and underwriters will get together and recommend a stock price and split amount. Shortly thereafter, the entire S-1 document needs to be updated with the new price and share numbers. Sometimes, the stock split and the pricing exercise can be split into two different exercises. I have been a part of the S-1 process twice. One time we did these together, the second time we did them separately. Either way, you need a sufficient model to calculate these amounts.
Having a model ready to handle this tight timeline is imperative. Below I offer a few tips from my experience building a reverse stock split model.
Prepare your capitalization table and stock option data - having an understanding of your capitalization structure and conversion features is critical. Ideally, this data will be in a system (not Excel) that can easily run reports with options outstanding, WA prices and ownership percentages. A tool like Certent is a great option for smaller accounting teams with limited resources. Having organized source data is critical for success.
Clarify with the attorneys how shares and price will be rounded - the stock split will create rounding issues. Given the level of precision required, clarify with your attorney and auditor how they have treated rounding in past deals so you can build the model accordingly. Shareholders could be losing fractional shares. Whether you group all shares from one shareholder together or rounded separately will impact the fractional shares. See the table below as an example. Oftentimes, companies will reimburse shareholders for the value of the lost shares.
Keep your model inputs and outputs in one tab - the inputs required for the model are simple - shares offered, over-allotment shares (almost always 15% of the shares offered), the IPO price, and the IPO expenses (legal, audit, printing fees, etc.). I would recommend creating a named range in Excel that references these four inputs in one spot. For the outputs, I would recommend keeping one tab with each number that will be impacted in one tab and organize them by section (not page number since these will change). I would add a separate tab for each table - the pro-forma balance sheet, capitalization, dilution table, option rollforward, etc. - for easy reference.
Document exactly which numbers the model will be handling - knowing all the numbers impacted is important to ensure completeness of the split. I would recommend having a hard-copy S-1 with each number highlighted and flagged to ensure nothing is missed.
Tie both the pre-split and post-split numbers to the source - keeping the source documents in one file will make it easy for review. Tying the pre-split numbers to the source ensures that the post-split numbers are exactly right. This also creates a nice documentation trail to track where numbers were calculated in the future.
The IPO process is a rewarding accomplishment for any accounting professional. Being prepared will help alleviate the challenges associated with this monumental task. To find out how intheBlk can assist your accounting department with long range planning, headcount and ASC 606 revenue recognition, please fill out the form below. We would love to chat with you.