התמלול המלא של Preparing for a DESPAC: Audit Readiness, Valuation & Public-Company Reporting with Jonathan Grubbs and Jeffrey Duncan

about 12 years ago and been leading the practice for the last five years. 00:04:51.783 --> 00:04:56.134 I have a blessed, uh, supportive wife of 16 years and two amazing sons. 00:04:56.463 --> 00:05:03.204 And, and really, having children helped me grasp the true value of having a father in their lives. 00:05:03.533 --> 00:05:10.434 And in, in our community, there's too many fathers that are missing really, um, you know, missing from too many lives and too many homes. 00:05:10.783 --> 00:05:20.793 Uh, children who grow up without fathers are five times more likely to end up in poverty, nine times more likely to drop out of school, 20 times more likely to end up in prison. 00:05:21.394 --> 00:05:44.074 And I felt the calling to address that ep- epidemic, and vigorously pursued induction into the 100 Black Men of Atlanta Inc. It's an organization comprised of successful Black men that sacrifice their time, talent and treasure to improve the quality of life by supporting and enhancing educational and economic opportunities, particularly for African American youth in the Atlanta community. 00:05:44.533 --> 00:05:51.824 Now, we do mentorship, we have programs, and we provide a consistent male role model to these children, and we have outcomes. 00:05:52.334 --> 00:06:06.554 Uh, through our project success at Best Academy and in Atlanta Public School, where we have achieved 100% graduation rate, uh, we've awarded $8.5 million in cumulative scholarships to those graduates, and 95% are college-bound. 00:06:07.194 --> 00:06:12.223 So truly making- Oh … an impact to address, uh, what I find to be a major need in our community. 00:06:12.994 --> 00:06:18.564 Dude, and let me just say, like, real quick, you, you said something, and I want to encourage you on it. 00:06:19.043 --> 00:06:23.663 You said that, that, uh, that there's all these Black men that are sacrificing the time. 00:06:24.223 --> 00:06:24.894 No, you're not. 00:06:24.994 --> 00:06:26.364 You're investing it, man. 00:06:26.744 --> 00:06:29.574 Like, you are investing it, and it's paying dividends. 00:06:29.804 --> 00:06:32.903 So just, like, just be proud of that. 00:06:32.903 --> 00:06:35.153 Like, that's so epic what you're doing. 00:06:35.504 --> 00:06:53.213 And, uh, and, and yeah, I mean, just as a guy who, um, I didn't even see my own dad growing up a lot, I know that… Like, I know how much it means to have a man who's there kind of filling that gap, uh, particularly as a young guy trying to figure out life. 00:06:53.434 --> 00:06:55.283 So Jeff, I appreciate that, man. 00:06:55.283 --> 00:06:57.144 Thank you so much for being that guy. 00:06:57.663 --> 00:07:07.673 So, okay, let's dump… Let's, uh, l- let's kind of put the personal stuff to the side for a minute, though I feel like we could, on both of those, dive in a whole lot more. 00:07:07.934 --> 00:07:08.983 Let's talk business. 00:07:09.004 --> 00:07:12.663 Let's, uh, let's talk DESPACs, and let's talk Aprio. 00:07:12.684 --> 00:07:20.304 So real quick, uh, what does Aprio mean for a private company looking to go public and considering a SPAC vehicle? 00:07:20.463 --> 00:07:22.504 Why do they care about who you are and what you do? 00:07:23.949 --> 00:07:25.280 Yeah, I'll take a first stab at that. 00:07:25.480 --> 00:07:27.709 So Aprio's a top 20 public accounting firm. 00:07:28.129 --> 00:07:31.350 Full service, audit, tax, advisory. 00:07:31.560 --> 00:07:45.090 You know, while we don't audit public companies, we do a ton of advisory for companies that are primarily in the small to middle market space and desiring to become public, whether that be through a regular way IPO or a, these DESPAC transaction. 00:07:45.389 --> 00:07:51.090 And we primarily focus on the DESPAC transaction side of the house, or other reverse mergers with public shells. 00:07:51.430 --> 00:07:53.759 And Aprio really is a partner. 00:07:53.800 --> 00:07:54.649 We truly are. 00:07:54.930 --> 00:07:57.459 Uh, not just some vendor, some service provider. 00:07:57.699 --> 00:08:08.590 We, we meet companies where they are and, and help them get to where they want to be, fully invested in what's next for those companies and helping them achieve their strategic goals by accounting for anything, really 00:08:09.783 --> 00:08:10.274 Right on. 00:08:10.574 --> 00:08:18.494 And, and I know that you mentioned that you guys, you don't do the audit, but man, you're there before the audit helping them get ready. 00:08:18.723 --> 00:08:29.723 You're there during the audit helping them walk through the process, and you're there after the audit helping them f- prepare to be a public company. 00:08:30.554 --> 00:08:31.524 So- Absolutely. 00:08:31.554 --> 00:08:32.764 Um, yeah, yeah. 00:08:32.764 --> 00:08:33.073 Okay. 00:08:33.384 --> 00:08:39.134 And then Jonathan, um, I, I know that there's more to it that Aprio does, particularly from your side. 00:08:39.723 --> 00:08:41.083 Yeah, absolutely. 00:08:41.083 --> 00:08:41.693 And I, I think that- Bring 00:08:41.693 --> 00:08:42.313 the heat, man. 00:08:42.313 --> 00:08:42.603 Bring the heat 00:08:43.473 --> 00:08:59.933 as Jeff said, you know, we like to serve as trusted advisors to all of our clients, and, you know, I find it especially important for us with a firm that is growing in terms of capabilities that we're adding to bring big four quality to underserved markets. 00:09:00.254 --> 00:09:06.163 Where there's a lot of underserved markets that are out there, but where we're talking about everyone talks about serving sponsors. 00:09:06.163 --> 00:09:07.303 That's where the money is. 00:09:07.724 --> 00:09:17.874 And all of these sponsors wanna, wanna target, and we wanna help and assist targets prepare for the most successful DESPAC transaction possible. 00:09:18.374 --> 00:09:20.244 And that can look a number of ways. 00:09:20.244 --> 00:09:36.234 That's through accounting advisory, that's through valuation services, tax, any services that, that we can

help provide as an, a trusted advisor throughout the process to set you up for success, not just through the transaction, but beyond the transaction as well. 00:09:37.293 --> 00:09:38.043 I like that. 00:09:38.724 --> 00:09:41.104 So l- let's dive in real quick. 00:09:41.134 --> 00:09:45.783 I, I mean, I first wanna go to, uh, I first wanna go to you, Jonathan. 00:09:45.793 --> 00:09:58.724 I wanna talk real quick just about the idea of, uh, about the idea of thinking about valuation and investigation. 00:09:59.173 --> 00:10:02.903 Um, I, I wanna dive on the investigation part. 00:10:03.173 --> 00:10:10.384 Why would a private company that's looking to go public and thinking about a DESPAC care about investigation? 00:10:10.394 --> 00:10:12.403 Where does that become really important for them? 00:10:13.134 --> 00:10:28.354 Yeah, it's a great question, and I think that as you transition from a private company to a public company mindset, one of the things that you need to start thinking about is the policies and procedures that you have in place regarding anti-money laundering, fraud. 00:10:28.634 --> 00:10:47.224 And one of the things that our investigations practices helps both private and public companies with is well in advance of an, uh, an issue arising, doing an internal audit, doing an internal review of controls and procedures, and providing recommendations to uncover those things to set yourself up for success. 00:10:47.543 --> 00:11:00.683 The best outcome in an investigation or in any type of litigation is avoiding it entirely, and the best way to do that is having advisors sit alongside you as you're thinking about where your exposure lies. 00:11:01.908 --> 00:11:04.868 As the D&O insurance guy, um, I thank you. 00:11:04.998 --> 00:11:11.038 I, I thank you for helping keep these people out of litigation and regulatory crosshairs. 00:11:11.307 --> 00:11:17.048 So it, uh, it makes my life a little bit easier whenever they don't have that going on. 00:11:17.408 --> 00:11:23.628 Um, let's, let's talk about real fast, um, and we'll come back to the valuation part in a little bit. 00:11:23.638 --> 00:11:27.018 But Jeff, um, let me ask this. 00:11:27.148 --> 00:11:33.597 What are three keys when preparing for a successful DESPAC transaction? 00:11:33.868 --> 00:11:41.898 Because I, I feel like they need to be really starting it early, and that they need to be kinda looking at it from a long game perspective. 00:11:41.908 --> 00:11:45.337 But I'd love to really just, um, hear your thoughts 00:11:46.190 --> 00:11:46.720 Yeah, absolutely. 00:11:46.720 --> 00:11:47.529 You hit the nail on the head. 00:11:47.529 --> 00:11:49.190 So first, start early. 00:11:49.539 --> 00:11:53.620 Uh, second, prepare for a PCAOB audit. 00:11:53.970 --> 00:11:57.870 And third, really it's a mindset shift from M&A to IPO. 00:11:57.870 --> 00:12:12.789 So when we say start early, in an ideal situation, a private company that will, will be acting as a public company

for about twelve to eighteen months in ahead of the BCA close, the business combination agreement close. 00:12:13.159 --> 00:12:14.879 Uh, and, and why is that? 00:12:14.919 --> 00:12:20.350 Well, as, as soon as that BCA becomes effective, I mean, you got four days, right, to get a Super 8K out. 00:12:20.720 --> 00:12:21.560 That's a quick turn. 00:12:21.870 --> 00:12:30.210 If you're not, if you're not ready to truly act as a public company, have your technology processes in place, you're gonna struggle from day one. 00:12:30.450 --> 00:12:36.549 Those struggles will, will then persist onto your first Q file and your first K, and you don't wanna be late. 00:12:36.810 --> 00:12:38.909 So when we say start early, what are we talking about? 00:12:38.909 --> 00:12:45.690 We're, we're first of all looking at our manual tools, uh, uh, going to more scalable reporting solutions. 00:12:45.990 --> 00:12:59.310 Uh, I, I, I often have conversations with auditors that I work with on the other side of the table on specific deals where, for example, there'll be an Excel template used to track inventory. 00:12:59.350 --> 00:13:06.230 And as a public… as a private company, okay, you know, there was no time reporting pressure really on the company. 00:13:06.460 --> 00:13:12.200 You know, they had a hundred and twenty days to, to get an audit out because all they cared about was really like a bank. 00:13:12.230 --> 00:13:14.159 Maybe they had a debt that required an audit. 00:13:14.529 --> 00:13:28.480 But when you're under the pressure of public reporting and accuracy is key, you don't wanna have to go back and restate, you don't wanna have to file an extension because you're trying to figure out what your inventory is, and because it's all in Excel. 00:13:28.490 --> 00:13:38.019 Uh, y- you, you really come out better ahead of time fixing that type of issue, getting some type of inventory system and process. 00:13:38.330 --> 00:13:49.940 Uh, even if you're on one of the smaller tools, they have extensions that you can use to, uh, to get your inventory off of Excel and into an actual, uh, database. 00:13:50.179 --> 00:13:54.460 The benefit of working with a company like Aprio is that we have all that in-house, right? 00:13:54.620 --> 00:14:13.370 If, if our team comes in and does what we call a gap assessment, so think low cost, quick kick the tires and say, "Hey, here's the punch list of items you need to fix ahead of time," we can bring in a resource from our technology consulting group to help with not just putting in some system, but helping evaluate, well, what system makes sense for you? 00:14:13.629 --> 00:14:18.000 Do you need to change your ERPs, uh, and then use a module in that ERP? 00:14:18.000 --> 00:14:20.690 Can you stay where you are and get a, and get an add-on? 00:14:21.100 --> 00:14:22.710 Uh, something like AP. 00:14:23.029 --> 00:14:33.490 Uh, we've seen companies where there's, uh, let's say some old school guys that have a ream of paper that they like to see come down the hallway, and they want to go through the list of everything that needs to be approved for payment. 00:14:33.820 --> 00:14:42.548 That's fine when they're running their private company, but that's… does not It's not sustainable at all when you're going to become a public company. 00:14:42.577 --> 00:14:47.727 Same thing with a lot of our SaaS companies, uh, software development cost tracking in Excel. 00:14:48.028 --> 00:14:50.087 Uh, that's just not gonna work, right? 00:14:50.087 --> 00:14:53.038 This has to be auditable, and we have to timely get numbers. 00:14:53.248 --> 00:14:59.648 It has to tie into what was lead from inventory, what went to R&D, what projects are in what phase, and who's worked on them. 00:14:59.888 --> 00:15:05.337 We really need to be able to track all of these costs in an automated workflow fashion through some tool. 00:15:05.878 --> 00:15:12.268 Uh, identifying internal controls gaps and system limitations go hand-in-hand, really. 00:15:12.518 --> 00:15:24.748 There's a lot of the changes in your processes/internal controls that ultimately are over your financial reporting are closely tied to the systems that you have in place and working at your company. 00:15:25.158 --> 00:15:30.977 Um, another kind of thing that we want to tackle early is negotiation with legacy debt and equity holders. 00:15:31.447 --> 00:15:46.268 So some of these companies that are going from private to public have been operating for quite some time, and along the way, they have taken on financing historically that w- will likely go away in this deal, right? 00:15:46.918 --> 00:15:53.567 Uh, so whether those are old promissory notes with attached warrants, they've been accruing interest, maybe not have been getting totally serviced. 00:15:54.077 --> 00:16:07.227 You need to start having that conversation with those debt holders early, uh, to see w- on what terms they're willing to provide you a waiver, uh, or otherwise allow you to affect your business combination. 00:16:07.248 --> 00:16:17.947 Because I have seen deals close be, uh, or lack of close because of legacy creditors that just- Mm were not amenable to the terms that are being presented at the last minute. 00:16:17.947 --> 00:16:19.457 So get ahead of these things early. 00:16:21.298 --> 00:16:21.988 That's huge. 00:16:22.028 --> 00:16:42.977 And then, and real quick, uh, just whenever you talk about the, the, the gap strategy where you have a team that comes in, um, I'm just curious, is that when they're already a GAAP, uh, a company that's already just GAAP compliant and you're flipping them from GAAP to PCAOB, like, what about if they've just never done an audit? 00:16:43.858 --> 00:16:44.207 Yeah. 00:16:44.207 --> 00:16:50.108 If you've never done an audit, being prepared for a PCAOB audit is, is, it's a significant uplift, right? 00:16:50.427 --> 00:16:53.158 So we're usually the tip of the sphere, right? 00:16:53.238 --> 00:17:06.258 Uh, we come

in and do that initial a- analysis or investigation to say, "Okay, here's the gaps that you have that will enable you to be ready for a PCAOB audit." Uh, number one is always gathering documents. 00:17:06.587 --> 00:17:16.337 I can't tell you how many deals we have where the, the audit is slowed down because a new document pops up after the fact. 00:17:16.907 --> 00:17:21.567 For example, yeah, you had a … You were lack, you were low on cash flow, right? 00:17:21.567 --> 00:17:22.717 This is a very common one. 00:17:23.227 --> 00:17:26.227 Private company, you're low on cash flow, you have a vendor working for you. 00:17:26.227 --> 00:17:33.627 You say, "You know, we're gonna settle this $300,000 invoice we owe you by issuing some equity." That happens in an email from some founder to some vendor. 00:17:34.217 --> 00:17:44.617 Five years later, uh, it comes up as one of the many audit selections that, hey, there's an invoice that says,"Look, we were settled by issuing equity." Uh- Uh, we didn't see it. 00:17:44.707 --> 00:17:48.267 The, the, the CFO didn't know about it, that just joined two years ago, right? 00:17:48.557 --> 00:17:54.627 Uh, but now it's coming up in the audit, and now we have to address that in real time as we're trying to get the financials out. 00:17:54.707 --> 00:17:54.917 Mm. 00:17:54.927 --> 00:17:56.717 Now we have to go back and write a technical memo. 00:17:56.717 --> 00:17:58.407 We have to adjust- Exactly … the earnings per share. 00:17:58.667 --> 00:18:00.077 The disclosures have now changed. 00:18:00.177 --> 00:18:15.887 That, so there's all these significant impacts of just not having all of the documents for historical debt, equity, leases, acquisitions, stock comp, contracts with customers, in a database, a repository, a data room if you will. 00:18:16.227 --> 00:18:21.557 Uh, so that way all of the agreements are known day one. 00:18:21.897 --> 00:18:36.627 And as we go through those agreements, as we go through these processes, we start to see gaps in process and technology, and hopefully we see those well before the BCA is, is, is close to closing, before your audit starts. 00:18:36.827 --> 00:18:41.157 So that way when your auditors come in, you, you have an inventory system. 00:18:41.377 --> 00:18:44.077 You have all your stock comp agreements in place. 00:18:44.397 --> 00:18:53.767 Uh, we make sure that the inventory that you typed into some capital management software is actually in line with the terms on the actual documents. 00:18:54.337 --> 00:18:56.527 There's many times where those are not the case. 00:18:56.707 --> 00:18:58.287 Vesting schedules are different. 00:18:58.557 --> 00:19:00.027 Uh, grant dates are off. 00:19:00.427 --> 00:19:03.298 Uh, the, the list goes on and on truly. 00:19:03.527 --> 00:19:10.037 But it really is that tip of the spear analysis that allows us to identify problems and bring in the additional resources as early as possible. 00:19:10.767 --> 00:19:12.107 So Jeff, let me ask you this. 00:19:12.147 --> 00:19:23.407 So if, if there's a private company right now considering going public, and they know that they're going to need to do an audit, one thing that I know is that sometimes these companies, they just don't know where to start. 00:19:23.437 --> 00:19:29.287 Like, especially if they were a founder, they just kind of, they kind of set their own system up. 00:19:29.617 --> 00:19:31.137 They know that it's kind of hokey. 00:19:31.167 --> 00:19:35.447 They butt heads with their bookkeeper, not, much less an auditor, right? 00:19:35.477 --> 00:19:37.507 And just, like, I mean, that's me. 00:19:37.747 --> 00:19:39.817 Like, I butt heads with my bookkeeper all the time. 00:19:40.197 --> 00:19:42.607 And I'm just like, "I don't know. 00:19:40.197 --> 00:20:21.077 Just make it a disbursement, whatever. I don't, like, I don't even want to think about it." And, and so but it's, it- it's one of those things to where it's like can they, can they for example reach out to you and say, "Hey, Jeff, um, I, I, I think I would like for you guys to put some stuff together for us and maybe, uh, go to work for us. But before that, I need to figure out how to even organize everything." Um, would it be, like, do you have like a system to where if they reached out to you real quick, you could have just maybe a, a, a quick conversation to at least start things and, and you could tell them,"Here's how you should be organizing all of your files to, to get ready for us"? 00:20:21.257 --> 00:20:21.817 Like, I don't- 00:20:21.827 --> 00:20:22.137 Yeah 00:20:23.085 --> 00:20:23.335 Yeah, 00:20:23.335 --> 00:20:24.045 absolutely. 00:20:24.045 --> 00:20:26.445 Uh, that, that, we, we do that very often. 00:20:26.465 --> 00:20:35.405 You know, there's a lot of companies that contact us maybe a year out, honestly, before they even have identified a potential SPAC sponsor. 00:20:35.596 --> 00:20:37.615 They know that they wanna do a SPAC. 00:20:37.635 --> 00:20:39.465 They've had a conversation in a boardroom. 00:20:39.905 --> 00:20:50.935 Uh, the head of accounting says,"Okay, don't know how that process works, but I'll find somebody." So, you know, we have a pretty solid presence online. 00:20:50.935 --> 00:20:51.655 They'll find us. 00:20:51.665 --> 00:20:52.835 The call will get routed to me. 00:20:52.835 --> 00:20:54.875 I'll hop on, and I'll just have a conversation. 00:20:55.165 --> 00:20:56.785 I mean, th- Cool … this is free of charge. 00:20:56.785 --> 00:21:12.825 We'll hop on a call, spend 30 minutes to an hour just kinda understanding where the company is, what their strategic plan is, ask some probing questions, and, and help them put together a plan well in advance of them being close to ready to engage us or engage an auditor. 00:21:13.205 --> 00:21:16.505 Uh, and that's just a value add of, of Aprio. 00:21:16.565 --> 00:21:29.225 Yeah, we're, we're always happy to help the founders of companies or those who have been placed in

chairs where they're now in charge of this large transaction, uh, to, to, to give them some peace of mind and some guidance. 00:21:29.235 --> 00:21:29.245 A- 00:21:29.645 --> 00:22:04.365 and guys, I cannot tell you, uh, if, if you're a private company, um, I can't tell you how many times that I have seen to where a DESPAC or an IPO or a DPO, um, they were all trying to work towards getting stuff done, or even after they got through the hurdle of the DESPAC, the IPO, the DPO, whatever, like they, they got through their listing, and all of the sudden now they've got quarterlies, they've got annual reporting that has to get done, and they fall behind. 00:22:04.585 --> 00:22:10.285 They can't get it together even though they've got a CFO, even though they've got a controller. 00:22:10.415 --> 00:22:12.655 So they think, "Man, we've got this," you know? 00:22:12.655 --> 00:22:40.425 Like, I, I will tell you, somebody like Aprio, until you can take the training wheels off, it is money so well spent so that you're not getting premature gray hair, um, and just banging your head against a wall and calling auditors four-letter words that maybe it's really one finger pointing at the auditor but three more pointing back at you kind of situation. 00:22:40.725 --> 00:22:43.185 So, okay, let's move back over to Jonathan real quick. 00:22:43.185 --> 00:22:43.635 I wanna talk valuation. 00:22:44.375 --> 00:22:45.655 I wanna come back on that, man. 00:22:46.096 --> 00:22:54.125 Um, on valuation, why is valuation to a DESPAC specifically so central? 00:22:55.437 --> 00:22:57.517 Yeah, it's, it's another great question, Chaz. 00:22:57.637 --> 00:22:57.697 Thank you. 00:22:57.697 --> 00:23:01.887 And I think that, you know, you, you know, it's almost like you do this for a, uh, a job. 00:23:01.897 --> 00:23:09.087 Um, you know, I, I think that when we think about valuation in a DESPAC, you have to think about how many competing interests there are. 00:23:09.407 --> 00:23:22.407 You have the founders, the existing investors, you have the SPAC that's coming in, you have the sponsor of the SPAC as well as the public shareholders, and oftentimes you'll get PIPE investors along the way. 00:23:22.717 --> 00:23:30.107 And the one language that all of these competing interests speak that is a common language is valuation. 00:23:30.107 --> 00:23:30.407 Hmm. 00:23:30.407 --> 00:23:34.107 That's a valuation negotiation between the sponsor and the target. 00:23:34.137 --> 00:23:37.437 That's a valuation negotiation between the sponsor and the PIPE. 00:23:37.767 --> 00:23:42.847 That's a valuation conversation between the target and their auditors. 00:23:43.077 --> 00:23:51.347 And so valuation sits at a very pivotal role and intersection that kind of levels the playing field between all of these, uh, competing parties. 00:23:52.205 --> 00:23:53.325 Dude, that's huge. 00:23:53.346 --> 00:23:59.465 And, and it's one of the most litigated parts of a DESPAC. 00:23:59.475 --> 00:24:06.315 So I mean, coming from the D&O perspective, I see this regularly when we're looking at securities litigation. 00:24:06.315 --> 00:24:11.045 You've got the, like, the inside shareholders of the private company before they go public. 00:24:11.265 --> 00:24:22.096 If, if the valuation's not big enough, they're suing on a derivative suit trying to either unwind the transaction or k- have the courts compel the SPAC to give a bigger valuation. 00:24:22.435 --> 00:24:29.865 And then if it's too small of a deal, you've got the other side investors that are doing the same thing or, or like… You know what I mean? 00:24:29.865 --> 00:24:38.125 So it's kinda like, um… Or pardon me, if it's too big of one, then they're doing the same thing because now it, it crashes and because it was overvalued. 00:24:38.125 --> 00:24:46.596 And so it's like finding that sweet spot, that proper inflection point, because you can't make all the people happy all the time kinda thing. 00:24:46.846 --> 00:25:05.675 But at the end of the day, I, I think what we, what we know is that you wanna make them, you at least want to pacify them enough to where you stay out of the crosshairs and to where when the, when the stock is free trading post-combination, that it doesn't just tank into oblivion. 00:25:06.055 --> 00:25:07.565 That's kind of the goal, right? 00:25:07.846 --> 00:25:14.596 And like, can you, can you make it to where the market respects the valuation that's there? 00:25:14.605 --> 00:25:14.625 So- 00:25:15.195 --> 00:25:16.215 That's exactly right. 00:25:16.325 --> 00:25:26.185 And I think that what we've seen is really kind of a, like I think you heard Jeff say it earlier, but you'll hear us say this a, a lot throughout this, is a mindset shift. 00:25:26.195 --> 00:25:26.215 Mm-hmm. 00:25:26.705 --> 00:25:30.475 A lot of targets think about a DESPAC transaction as an exit event. 00:25:30.945 --> 00:25:35.875 And when you think about a DESPAC transaction as an exit, your goal is maximizing your value. 00:25:36.195 --> 00:25:39.275 And this just isn't quite an exit. 00:25:39.365 --> 00:25:45.335 It's an alternative route to going public, and IPOs are traditionally priced at a slight discount to the actual value. 00:25:45.655 --> 00:25:46.565 And why is that? 00:25:46.785 --> 00:25:53.015 Well, if you're offering shares to the public market, they need to see the opportunity to make money on those shares. 00:25:53.315 --> 00:25:53.535 Yeah. 00:25:53.575 --> 00:26:05.835 And so maximizing your value might be leaving, not leaving any room for public investors or PIPE investors to see value accretion other, uh, uh, that they couldn't find in another investment. 00:26:05.875 --> 00:26:19.785 And so we see these competing interests, um, regularly throughout this, and the best answer is maximizing the value to the extent that is, it is defendable and supportable based on the information and what you expect that the market will be able to bear 00:26:21.000 -->

00:26:40.019 So, okay, um, le- let's talk about this real quick because I think one thing that doesn't get discussed enough, we talk about all, what all the investors think on everything, and all the competing interests that are there from the ancillary parties that have dollars in the deal, but they're not necessarily the ones at the table, right? 00:26:40.329 --> 00:26:55.750 So they're… So I would love to hear from you, when, when the valuation comes in, do they usually already have a price that's kind of agreed upon, a valuation that's agreed upon, and now you're just there to validate it? 00:26:56.159 --> 00:27:06.439 Um, or is it something to where you're stepping in and that is the, that's the thing that everything kind of hangs on? 00:27:06.689 --> 00:27:10.989 So because we're talking to these, about these private companies that they haven't gone through this. 00:27:11.000 --> 00:27:17.979 So, um, so unpack really like where you come in and how that impacts the negotiation. 00:27:18.639 --> 00:27:19.669 Yeah, absolutely. 00:27:19.669 --> 00:27:21.429 And we've seen it both ways, right? 00:27:21.429 --> 00:27:32.059 Where people come to us with an LOI in hand that they have already signed or that they are about to sign, or as Jeff said, we'll have clients that come to us well in advance as they contemplate these. 00:27:32.339 --> 00:27:35.669 And it kind of just depends on where you're at in the process. 00:27:35.789 --> 00:27:48.739 Um, but ultimately, there's a number of, of ways that we can think about this in terms of helping a target understand not just… Look, we understand as well, you're a founder, this is your baby. 00:27:48.739 --> 00:27:50.599 You've put your blood, sweat, and tears. 00:27:50.599 --> 00:27:59.529 You've sacrificed so much for this, and taking a haircut on value is not something that is often palatable, even if it might be the right answer long-term. 00:27:59.809 --> 00:28:21.699 And so having those conversations prior to an LOI being put in place, being able to reset expectations, being able to reframe your valuation from how does this maximize your long-term gains and not just your short-term interests, is something that we step in, in, in advance of an LOI, in advance of negotiations. 00:28:22.139 --> 00:28:27.949 Prior to even needing a fairness opinion, we help founders understand what could a market bear? 00:28:28.199 --> 00:28:33.869 Because that's a different question than what do I think that this is worth and what would I pay for this? 00:28:33.879 --> 00:28:33.889 I 00:28:35.659 --> 00:28:36.639 appreciate that, man. 00:28:36.689 --> 00:28:38.500 So, like, I… Let me ask you this. 00:28:38.500 --> 00:28:40.299 I'm gonna flip back over to Jeff for a minute. 00:28:40.989 --> 00:29:02.505 Um, Jeff- W- let me ask on a, uh, a, on a DESPAC, what is the likelihood of, of getting a securities class action suit on a DESPAC versus, um, versus just a traditional IPO? 00:29:02.846 --> 00:29:07.855 And, like, and can you backstop costs of litigation on this? 00:29:09.145 --> 00:29:09.425 Yeah. 00:29:09.425 --> 00:29:10.855 It's a great question. 00:29:10.865 --> 00:29:22.745 So the likelihood of getting a securities class action post-DESPAC is 16%, uh, which is higher, uh, significantly higher than the 6 to 9% of a traditional IPO. 00:29:23.055 --> 00:29:27.635 And this is where governance and D&O insurance are vital. 00:29:27.885 --> 00:29:39.565 Uh, having the proper governance in place will, it enable you to prove that you have done your side of the work in order to protect your investors. 00:29:39.825 --> 00:29:46.585 And D&O insurance and having a great provider like yourself is extremely critical in that process. 00:29:48.221 --> 00:29:48.741 Appreciate that. 00:29:48.921 --> 00:29:49.291 Yeah. 00:29:49.471 --> 00:29:52.621 And I, I appreciate the shout-out there, man. 00:29:52.661 --> 00:29:53.381 Uh, Churchwell- Yeah, 00:29:53.381 --> 00:29:54.021 absolutely. 00:29:54.431 --> 00:29:56.731 This, uh, this podcast is sponsored by Churchwell Insurance. 00:29:56.751 --> 00:29:57.451 So yeah, whatever. 00:29:57.491 --> 00:30:09.131 But, um, so, so basically, I… The reason why I ask you that is because I, I see it time and time again. 00:30:09.141 --> 00:30:13.531 Now, there's securities class action, um, that's gonna happen at a federal level, right? 00:30:13.531 --> 00:30:27.631 But then there's also all of these state lawsuits that can happen in securities litigation that aren't even, uh, aren't even as well quantified by NERA and Stanford Law Review, Cornerstone Research, stuff like that. 00:30:28.041 --> 00:30:56.511 Um, but you'll find that there is still a lot of it, and, and I don't know if, if you've seen this stat, Jeff and, and Jonathan, but 26% of securities litigation last year, the attorneys withdrew their, their filing, they withdrew their motion, and backed off the lawsuit before it even got to a dismissal. 00:30:57.311 --> 00:30:57.521 Hm. 00:30:58.041 --> 00:31:12.491 They filed it- Wow… threw stuff against the wall, went ahead, grabbed some discovery, or they basically just tried to hijack things and say,"Pay my legal fees and I'll go away." You know, like, just shenanigans like that. 00:31:12.501 --> 00:31:18.501 But like, but it's the reality of you have to take all of this stuff seriously. 00:31:18.691 --> 00:31:21.241 Like Jonathan talks about valuation. 00:31:21.521 --> 00:31:23.711 You have to take it seriously. 00:31:23.941 --> 00:31:27.931 You've got Jeff talking about you've gotta have all your paperwork in order. 00:31:28.061 --> 00:31:30.771 You've gotta have your I's dotted and your T's crossed. 00:31:30.941 --> 00:31:46.701 You're gonna find these PCAOB auditors, they're gonna, they're gonna feel like tyrants because they won't let you through unless everything is meticulous and like you'll bang your head against the wall if you're somebody that's wired like me. 00:31:47.061 --> 00:31:51.711 And it's, and it's one of those

deals to where I'm, 'cause I'm not a detail guy, you know? 00:31:51.711 --> 00:31:54.001 I just don't love the details. 00:31:54.001 --> 00:31:56.241 I don't love staring at spreadsheets for a living. 00:31:56.241 --> 00:31:57.341 It's not how I'm built. 00:31:57.741 --> 00:32:00.051 And, but, but that's the, what you have to do. 00:32:00.071 --> 00:32:01.381 That's what this is. 00:32:01.691 --> 00:32:12.741 And so you have to realize that whenever you take public money, you're putting yourself in a public spotlight, and now you're taking on public risk. 00:32:12.961 --> 00:32:23.691 So to bring full circle what Jeff was talking about from a D&O perspective, it's interesting 'cause people, they're blown away when they see the price on D&O insurance for public companies. 00:32:24.031 --> 00:32:32.901 'Cause when I tell them, I'm like, "Yeah, you should expect to pay 12 to 20% or 12 to 20x what you pay for a D&O program. 00:32:33.181 --> 00:32:43.529 Um, maybe more, depending on how big your raise is." They're like, "Say what?" It's, you know, I mean, but it's because the risk is exponentially higher. 00:32:43.959 --> 00:32:49.439 So, um, let me ask, let's… I, I know Jonathan earlier talked about pipes. 00:32:49.489 --> 00:32:57.909 I wanna bring that over to you, Jeff, and I wanna talk about what role pipes play in the SPAC DESPAC transaction 00:32:58.953 --> 00:33:00.073 Uh, yeah, critical. 00:33:00.103 --> 00:33:12.383 So really taking a step back, to understand the role of a PIPE, you first need to understand that it's commercially risky, uh, if a company can't achieve cash flow neutrality in the short term or raise capital quickly. 00:33:12.933 --> 00:33:32.953 Uh, since many of these DESPAC target companies are either in the development, pre-revenue, um, relative to a IPO, uh, a traditional IPO company, it also stands to reason that, you know, they'll need more time to properly implement their business objectives and, uh, build viable companies. 00:33:33.353 --> 00:33:39.603 You know, like with private venture markets, uh, those operations realistically take years to establish. 00:33:39.893 --> 00:33:48.753 It's not a knock on SPACs,'cause SPACs truly allow public investors access to venture capital opportunities sooner than otherwise available in the private markets. 00:33:49.133 --> 00:33:59.383 So sponsors, boards, bankers, uh, should seek to ensure that enough unrestricted capital is being raised to fund operations for at least one year post-close. 00:33:59.803 --> 00:34:06.363 You know, the primary mechanism to accomplish that goal is a private investment in public equity, a PIPE. 00:34:06.933 --> 00:34:14.503 Um, in a PIPE, often investors commit to purchase a certain number of restricted shares from a company at a specific price. 00:34:15.034 --> 00:34:21.384 Uh, the company agrees in turn to file a resale registration so that the investors can resell the shares to the public. 00:34:22.054 --> 00:34:31.003 Those SPAC investors can redeem, meaning take back their money, um, and what's left in trust may not be enough to fund the deal. 00:34:31.273 --> 00:34:43.253 So for this reason, SPACs have become a critical part of SPAC deals, um, as like 90-plus percent of redemption rates, uh, have been seen in a lot of these transactions. 00:34:43.513 --> 00:34:44.253 Not all of them. 00:34:44.253 --> 00:34:49.223 I've seen some where there's 30% redemptions, but by and large, you're gonna see the 90-plus. 00:34:49.933 --> 00:34:53.293 So despite, the PIPE steps in really to replace that capital. 00:34:53.703 --> 00:35:06.074 Moreover, uh, they provide validation, uh, from institutional investors are willing to commit real dollars- Yeah … signaling to the market that they believe in the valuation that Jonathan was talking about. 00:35:06.074 --> 00:35:06.563 Yeah. 00:35:06.563 --> 00:35:11.673 They believe in the story, and the post-combination reporting entity will hold up. 00:35:12.094 --> 00:35:15.603 You know, it really tells the street who's backing the deal at what price and on what terms. 00:35:16.143 --> 00:35:31.923 You know, uh, so those DESPAC transactions that manage to raise about 100 million of common PIPE prior to publicly announcing the target, they trade above $12.50 at the business combination close on average. 00:35:32.143 --> 00:35:40.493 You know, and even if they don't get to 100 million, uh, deals with any institutional qualifying PIPE capital trade significantly better than those without. 00:35:41.869 --> 00:35:42.259 Yeah. 00:35:42.400 --> 00:35:47.889 And the one thing I'd add to kind of everything that Jeff said, um, is we've seen a shift, right? 00:35:47.960 --> 00:35:52.109 SPACs of old, you would take the target on a roadshow. 00:35:52.109 --> 00:35:54.569 It was about minimizing redemptions. 00:35:54.569 --> 00:36:01.710 It was about maximizing public investor confidence- Yeah … and guaranteeing that trust account goes to the balance sheet. 00:36:02.349 --> 00:36:10.039 I think that what we saw in the last, you know, four or five years was some real erosion in public investor confidence. 00:36:10.359 --> 00:36:24.659 And PIPEs have stepped in to fill what is… Look, at the end of the day, a DESPAC transaction is a financing event for the company, and you wouldn't go through a financing event with an, a question mark on what actually ends up in your balance sheet. 00:36:24.940 --> 00:36:24.960 Yeah. 00:36:25.039 --> 00:36:35.659 And while we have seen a lot of companies, uh, or a, a lot of positive momentum, I think we actually saw a zero redemption transaction close within the last couple months. 00:36:36.130 --> 00:36:51.469 You know, until we see that being the norm and not the exception, there's gonna need to be a ba- a, a, a guarantee for these targets to have a, a minimum amount of cash that gets funded to the balance sheet 00:36:53.333 --> 00:36:54.063 No, I appreciate that. 00:36:54.873 --> 00:36:58.513 Um, so let me ask you this. 00:36:58.824 -->

00:37:03.784 Let's talk about just, uh, let, let's stay on this PIPE component for just a moment. 00:37:04.364 --> 00:37:10.913 Um, how does… Does evaluation play any role, Jonathan, in how the PIPE is viewed? 00:37:11.853 --> 00:37:13.643 Yeah, it, it absolutely does. 00:37:13.743 --> 00:37:23.884 I think as Jeff said, um, you know, there, there's a validation that comes from raising PIPE from an external, uh, investor, right? 00:37:23.884 --> 00:37:37.193 An institutional investor reviewed the, um, the business plan, they reviewed the terms, they got comfortable with the agreement, the ex- uh, the ex- execution, and the story of the company. 00:37:37.493 --> 00:38:00.634 That's validation for the public markets to say, "Look, someone that has done diligence here that isn't necessarily being directly compensated, um, from the con- uh, from the transaction agrees." Now, the caveat there is that PIPE investors… PIPEs are typically priced at a slight discount to, uh, to public securities. 00:38:01.023 --> 00:38:10.574 Um, so they are… There is some… They're, they're unrestricted or they're restricted securities, so some of that discount is taking… or is to account for their registration risk. 00:38:10.893 --> 00:38:15.423 But also, some of that discount is to incentivize them to raise their capital. 00:38:15.634 --> 00:38:24.893 And so, you know, there is a large part that valuation plays in there, but there's a lot of ways to also get that validation outside of raising a PIPE. 00:38:25.293 --> 00:38:28.503 But I think that PIPEs are the way that we're most commonly seeing that happen right now. 00:38:29.733 --> 00:38:37.983 And the reason why I say that is because valuations, they're not like this singular event that happens near the close, right? 00:38:38.223 --> 00:38:40.784 There's a… It, it runs in phases. 00:38:40.784 --> 00:38:41.743 Wouldn't you say, Jonathan? 00:38:42.293 --> 00:38:42.693 Yeah. 00:38:42.693 --> 00:38:50.534 You know, I think that what, what I would say is that there are… there's this misnomer when we talk about valuation that it's a valuation, right? 00:38:50.554 --> 00:38:55.094 And we- we're really kind of talking about a broad range of things. 00:38:55.123 --> 00:38:59.103 You have valuations that l- uh, stem from negotiations. 00:38:59.364 --> 00:39:06.413 You have valuations that help protect the company, and you have valuations that are for compliance and ongoing reporting purposes. 00:39:06.673 --> 00:39:17.273 Negotiated valuations, the LOI, the BCA, the PIPE, those are really kind of behind closed doors, validating, understanding, and they're, they're wonderful. 00:39:17.433 --> 00:39:22.313 You know, those investor valuations that help protect the company, you know, your fairness opinions. 00:39:22.313 --> 00:39:30.653 You want to make sure that you're doing your diligence, protecting the board, protecting management from a contemplated transaction for all of the reasons that we've talked about. 00:39:30.963 -->

00:39:44.864 But then- One of the things that gets less, um, kind of conversation in all of these is what does it look like from a valuation for compliance purposes on an ongoing and leading up to a DESPAC, uh, transaction purpose? 00:39:45.163 --> 00:39:51.643 That's all of these value instruments or all of these DESPAC transactions typically include earn-outs. 00:39:51.933 --> 00:39:53.513 They include warrants. 00:39:53.523 --> 00:39:58.043 They oftentimes include complex financings post-close. 00:39:58.413 --> 00:40:14.864 All of those create both GAAP and tax reporting requirements alongside them, and you have to get those filed very quickly and understand what the implications are, not just to you, but to your new public investors. 00:40:15.103 --> 00:40:30.473 I think one of the things that, um, we, we like to tell all of the CFOs that we work with as we get them to a DESPAC is, "Congratulations on starting your new job as a public company CFO," because day one is when it all starts to kind of the rubber meets the road. 00:40:30.703 --> 00:40:37.153 You've gotten through the transaction, but now you have to get through all of your ongoing continuous reporting requirements as well. 00:40:38.673 --> 00:40:40.503 Oh, they are ongoing. 00:40:40.844 --> 00:40:42.153 They never stop. 00:40:42.344 --> 00:40:42.933 They never stop. 00:40:42.933 --> 00:40:43.074 That's 00:40:43.213 --> 00:40:43.463 right. 00:40:44.344 --> 00:40:48.673 So, all right, let's, uh, let's shift gears for, for just a moment. 00:40:48.923 --> 00:41:03.263 I wanna talk, 'cause we, y- we talk about how they're ongoing, and it feels like when, because of quarterly reporting and then annual reporting, it feels like it's never ending for public companies. 00:41:03.543 --> 00:41:23.403 And that it's like you get, you get maybe, I don't know, nine weeks, um, every quarter that you get to actually focus on your business, and then you have a whole bunch, and then you got like another three weeks to where you're just focused on telling everyone about your business and getting your reporting done. 00:41:23.743 --> 00:41:28.884 So let me ask, number one, how does Aprio help with that? 00:41:29.324 --> 00:41:39.003 And number two, I wanna hear your thoughts on the proposal of moving from quarterly reporting to semi-annual reporting. 00:41:40.034 --> 00:41:42.173 Let's, let's get wild. 00:41:42.223 --> 00:41:43.263 Let's get speculative. 00:41:43.293 --> 00:41:43.913 I love it. 00:41:45.253 --> 00:41:46.023 Yeah, yeah. 00:41:46.054 --> 00:41:52.554 Uh, I, I, I try hard to stay away from, uh, predicting the future, but, uh, I'll, I'll, I'll give some thoughts on it. 00:41:52.913 --> 00:41:54.844 Uh, so let's talk Aprio first. 00:41:54.853 --> 00:41:55.013 Yeah, yeah. 00:41:55.013 --> 00:41:58.263 So when you think of a DESPAC, you know, it's a dress rehearsal, right? 00:41:58.503 --> 00:42:05.864 As Jonathan was saying, you know, it's, it's not getting through this M&A transaction, it is

starting life as a now public company. 00:42:06.163 --> 00:42:13.153 Uh, this, this S4 proxy BCA effectiveness whole talk is really just the starting point. 00:42:13.153 --> 00:42:14.284 It's not the finish line. 00:42:14.574 --> 00:42:17.284 And a lot, a lot of private companies don't view it that way, right? 00:42:17.284 --> 00:42:24.933 They're, they're seeing the big nugget, and they wanna get to that, the cash in that trust or get that pipe in, uh, that close, and they feel like they've won. 00:42:25.213 --> 00:42:30.833 In reality, they're, they're, if, if not prepared, they're really setting themselves up for failure. 00:42:31.043 --> 00:42:42.753 And it's our goal as advisors to make sure that we not only help our clients get through that dress rehearsal to obtain their effectiveness, but that we're there to support them after until they're able to build up their internal shop. 00:42:43.013 --> 00:42:44.993 So think about it this way. 00:42:45.393 --> 00:42:48.384 Uh, once you get your effectiveness of your BCA, congratulations. 00:42:48.384 --> 00:42:51.513 In four days, four business days, a super 8-K is due, right? 00:42:51.993 --> 00:42:57.253 Uh, that's essentially the contents of a Form 10-K that you need to be able to produce extremely quickly. 00:42:57.563 --> 00:43:02.063 So if you're not already, if you don't already have that prepared, you're, you know, it's not gonna happen. 00:43:02.364 --> 00:43:08.163 Uh, so before you know it, your first 10-Q or 10-K is due, depending on when your, uh, deal close. 00:43:08.384 --> 00:43:11.473 And advisors, we help clients bridge that gap. 00:43:11.853 --> 00:43:22.023 Yeah, it's, it's hard to get a fully built out, if not impossible really, to get a fully built out SEC reporting shop in place in advance of a BCA close. 00:43:22.193 --> 00:43:36.554 Because you're really asking somebody that has a long, uh, uh, resume of experience doing this job to take a risk that your company's actually gonna be there, uh, you know, a year from now, that this deal's actually gonna close and you're not gonna just say, "Oh, sorry. 00:43:36.703 --> 00:43:44.594 We tried, but you can go back to your old job now." So i- in reality, like, we exist because the, the market dictates that we have to exist. 00:43:44.603 --> 00:43:58.563 Mm. Um, and then it'll take some time after that close in order for you to get that shop in place to make sure everyone's up to speed, and that you're not gonna skip a beat, you're not gonna file any extensions that will definitely erode your stock price, and we're there for you. 00:43:58.793 --> 00:44:05.574 We're there to move from the, what we call the DESPAC kind of subgroup to our ongoing outsourced SEC reporting subgroup. 00:44:05.923 --> 00:44:27.683 We're able to continue to do the heavy lift on your financial reporting, working alongside your auditors as an extension of the office of the CFO to make sure that you meet your deadlines, uh, that you actually can go from your

pro forma financials that we helped you prepare to the reality of your now opening balance sheet from post-DESPAC, right? 00:44:27.993 --> 00:44:33.543 Uh, and, and, and maintaining those filings as we help you with both tax compliance. 00:44:33.753 --> 00:44:38.373 Most of our, if not all of our clients are also our tax clients, right? 00:44:38.373 --> 00:44:42.473 So we're helping with the tax provision and other compliance work- Yeah … that needs to be done. 00:44:42.723 --> 00:44:45.483 We also are helping you build up your internal shop. 00:44:45.683 --> 00:44:50.293 At Aprio, we have Aprio Talent Solutions, which that's what they do, right? 00:44:50.313 --> 00:44:58.483 They help companies place those permanent, uh, people in those chairs that can do all of the jobs, whether that's in accounting and finance or IT. 00:44:58.483 --> 00:45:07.134 Across the board of your organization, you're gonna have to have people in place that are custom to dealing, uh, to existing as part of a public company. 00:45:07.293 --> 00:45:17.493 They understand what that means, they understand the need to be responsive and have their plans together so that when investor relations reaches out, they can get answers to put in front of The Street. 00:45:19.605 --> 00:45:30.945 Aprio Advisory, like a warm, weighted blanket just making you feel comfy and cozy while you go through the, through the cold winter of the SEC. I love it. 00:45:31.175 --> 00:45:31.615 Okay. 00:45:31.625 --> 00:45:46.615 So now just, uh, let, let's hear from, uh, from Jonathan real quick on the Aprio part, and then, uh, and then let's dive in to, uh, to talking about quarterly versus semi-annual. 00:45:46.755 --> 00:45:47.465 Oh, yeah. 00:45:47.735 --> 00:45:48.205 Yeah. 00:45:48.205 --> 00:45:53.346 You know, and I think that, uh, Jeff, Jeff did a great job explaining kind of where we fit in. 00:45:53.346 --> 00:46:00.516 I do just want to echo kind of one thing that he said, which is we serve as an extension of the office of the CFO. 00:46:00.525 --> 00:46:21.596 We work hand-in-hand as trusted partners to make sure that you are getting through the accounting and reporting requirements that you now have on an ongoing basis with as little burden on you and your team as possible so that you, as a CFO of a public company, can do what your actual job is, which is running and managing the business, right? 00:46:21.625 --> 00:46:31.645 And getting the finance place, finances in place and making sure that you're doing your actual day-to-day responsibilities rather than managing spreadsheets and managing technical memos. 00:46:31.925 --> 00:46:36.726 Um, that changes and shifts depending on what the target looks like and what the business is. 00:46:36.766 --> 00:46:40.915 But ultimately, you know, we're here to be trusted advisors along the way. 00:46:42.440 --> 00:46:43.009 I love it. 00:46:43.099 --> 00:46:43.489 Okay. 00:46:43.880 --> 00:46:45.929 So- Yeah … let's get speculative. 00:46:45.969 --> 00:46:55.539 Talk to me, what, what do you think about the, uh, the proposal of semi-annual reporting versus sticking with quarterly? 00:46:55.549 --> 00:47:01.000 Do you like it when somebody moves your cheese or, uh, or do you just wanna keep it status quo? 00:47:02.069 --> 00:47:02.469 Yeah. 00:47:02.469 --> 00:47:04.099 It's an interesting conversation. 00:47:04.099 --> 00:47:15.449 So I, at the… So I think at the last SPAC conference I attended up in Westchester, I had three CFOs come to me before the conference started and ask me about this specific question. 00:47:15.779 --> 00:47:17.690 It was definitely on their minds and for good reason. 00:47:17.690 --> 00:47:28.889 So for those who don't know, the SEC is proposing, uh, potentially moving from quarterly reporting to a semi-annual reporting, uh, which would mean that the 10-Qs go away. 00:47:28.889 --> 00:47:36.029 That, well, they have the option to not do a 10-Q and instead file a 10-S, uh, on a semi-annual basis. 00:47:36.079 --> 00:47:48.639 And it, there's an interesting, uh, survey that NASDAQ did back in 2019, uh, where they looked at… They, they reached out to 187 of their companies, so they got 187, uh, 7 respondents actually. 00:47:49.079 --> 00:48:02.059 And of those respondents, uh, the vast majority said, well, the majority said that, you know, they spend about 853 hours per quarter on average complying with quarterly reporting processes. 00:48:02.069 --> 00:48:09.949 Uh, that's a cost of about $330,000 per quarter on outside counsel, vendors, and internal resources. 00:48:10.319 --> 00:48:20.369 You know, these public companies already provide key financial data and earnings, uh, each quarter, and then they gotta turn around and do a formal report, and that's duplicate in nature. 00:48:20.809 --> 00:48:28.099 Uh, you know, 70% of the participants said that they received questions regarding their formal 10-Q disclosures less than four times a year. 00:48:28.569 --> 00:48:42.179 Well, that might suggest that either investors are not reading the 10-Ks or, uh, 10-Qs, or that the Qs are providing little additional actionable information that can't be found in the earnings release. 00:48:42.569 --> 00:48:44.839 So why are we doing this, right? 00:48:44.889 --> 00:48:54.239 I think it was about 70% of the companies that were asked said that they would prefer to move to the semi-annual, uh, reporting. 00:48:54.719 --> 00:49:02.730 Now, that said, investors feel differently in most cases from just the ones I've spoken to in my network. 00:49:02.929 --> 00:49:05.319 You know, they wanna get as much information as they possibly can. 00:49:05.650 --> 00:49:05.949 Um- 00:49:06.000 --> 00:49:12.549 Right… Jeffrey Duncan: which I So it's gonna be interesting to see which contingent wins out. 00:49:12.569 --> 00:49:18.000 Is it going to be the companies that are listed that, you know, we wanna encourage more companies to list, right? 00:49:18.329 --> 00:49:20.670 Uh, that one would

benefit the SPAC world for sure. 00:49:20.929 --> 00:49:27.900 You know, if you're trying to get your in, your company viable and you're the C- CFO of this company, everyone's relying on you. 00:49:28.159 --> 00:49:30.279 The, the warehouse is relying on you. 00:49:30.289 --> 00:49:32.029 The, the sales team's relying on you. 00:49:32.029 --> 00:49:36.809 Uh, the board's relying on you to pour into the building up of the operation. 00:49:37.609 --> 00:49:48.711 And the more time you spend doing regulatory- you know, requirement work, the less time you have actually running your company and getting the return that the investors are looking for. 00:49:49.031 --> 00:50:03.011 So, you know, um, I, you know, I, I would say, you know, based on the, the, the survey results of the people I talk to, uh, clients I talk to on a regular basis, that the semi-annual reporting would be a good thing. 00:50:03.322 --> 00:50:06.791 Uh, doesn't lose the fact that there's still the earnings releases, right? 00:50:06.811 --> 00:50:11.121 Doesn't stop the fact that 8-Ks will be released if there's any material events that happen. 00:50:11.391 --> 00:50:19.121 So I- Yeah, that's true … I don't think that the erosion of the data transfer that the investor's side is concerned about will actually be the case. 00:50:19.152 --> 00:50:26.261 I think it's just one of those, like back when I was an auditor, uh, in, in my big four days, uh, we, we had this concept called SALLY. 00:50:26.511 --> 00:50:28.072 Same as last year, right? 00:50:28.251 --> 00:50:31.592 Uh, and we were encouraged not to just do same as last year. 00:50:31.592 --> 00:50:34.231 Don't just do the thing you've been doing because you've been doing it. 00:50:34.652 --> 00:50:40.163 Really challenge what you were doing historically and see if, well, you know, maybe there's a better way Hmm. 00:50:40.614 --> 00:50:41.614 Jonathan, what you got, man? 00:50:42.443 --> 00:50:49.054 Yeah, I'll, uh, I'll say the elephant in the room as a service provider that assists companies on a quarterly basis, I'm devastated. 00:50:49.183 --> 00:50:51.813 Um, no, but in reality, I understand- No, that's, 00:50:51.813 --> 00:50:52.463 that's honest. 00:50:52.463 --> 00:50:53.324 I, I appreciate 00:50:53.324 --> 00:51:13.403 that Yeah, but, but, but I also understand th- this, this burden that is being placed on companies, if investors aren't actually relying upon the information and the actual amount of information that is being conveyed isn't increasing investor confidence, then we all have to take a step back and say, "What are we doing this for?" Right? 00:51:13.723 --> 00:51:17.263 And I, I understand both sides of the coin, like Jeff said. 00:51:17.554 --> 00:51:31.103 I think that I probably sit a little bit more as an investor myself on the, look, I might be the only person in the world that still reads these 10-Qs, but, um, I, I read them on the companies I'm interested in and I, I get into those, and I get in the weeds

on them. 00:51:31.103 --> 00:51:33.153 And so I find them incredibly helpful. 00:51:33.153 --> 00:51:50.463 I do understand that there's still gonna be disclosures for material events, but I also, you know, I, I think that there's, there's some breathing room that could be, uh, given to these companies that could make this a little bit less onerous and less painful on them along the way. 00:51:51.273 --> 00:51:54.804 I, I will say this, you're not alone in reading the Qs. 00:51:55.163 --> 00:52:01.813 Um, I'm pretty sure that everybody that interviewed for a math PhD role- … that's, that's your squad. 00:52:01.824 --> 00:52:03.344 They're all reading them, brother. 00:52:03.373 --> 00:52:04.503 They're all reading them. 00:52:05.074 --> 00:52:25.114 So, hey, uh, so I, I would tell you this, I mean, coming from a D&O standpoint, um, I, I will say that I think that when the Like, it's, it's really interesting because I think that when these guys are freed up, I think, Jeff, you said, uh, 835 hours a quarter. 00:52:25.763 --> 00:52:40.223 That's 835 hours a quarter, that's a little over 3,400 hours a year that instead of working in their business, these CFOs and controllers are having to work on their business. 00:52:40.513 --> 00:52:49.903 So I really feel that ultimately it's going to be to the shareholder's gain whenever they can work on it more than in it. 00:52:50.134 --> 00:53:06.213 And- Mm-hmm … like, and, and so, I mean, I know that, like, information is power and, and you want to have more information, but if you have information of something that's, that's limping along and not being optimal for what it could be, then wouldn't you want to free it so that it could be optimal? 00:53:06.453 --> 00:53:12.723 Like, I, I think of that, um, from a, a standpoint of shareholder price going up. 00:53:12.723 --> 00:53:24.476 But as a D&O guy, I imagine, like, people are going … 'Cause Jeff, you mentioned that if there's anything material, they can file the 8-K What if they don't think about it? 00:53:26.255 --> 00:53:27.005 You know what I mean? 00:53:27.005 --> 00:53:29.596 Like, I mean, these guys are running. 00:53:29.615 --> 00:53:33.165 When you're a CEO and a CFO, you are running. 00:53:33.365 --> 00:53:34.665 These guys are running full speed. 00:53:35.025 --> 00:53:45.596 They, like, I mean, they for- how often do they forget to do stuff that you know that they're supposed to do, and that they know they're supposed to do it, but they're just trying to, they're trying to keep all the plates in the air, right? 00:53:46.496 --> 00:53:49.905 Pa- particularly if you're dealing with a small cap and a micro cap, right? 00:53:49.905 --> 00:53:50.246 Right. 00:53:50.246 --> 00:53:58.485 And then, so now all of the sudden there's these 8-Ks to where if it's material, yeah, we need to, we, we need to get that done. 00:53:58.875 --> 00:54:02.516 But then all of the sudden that was three weeks ago. 00:54:02.556 --> 00:54:03.605 That was a month ago. 00:54:03.605 --> 00:54:07.565 That was two months ago, and now you've, you've totally just forgotten about it. 00:54:07.835 --> 00:54:11.545 You, it went from I know I need to do it, I know I need to do it, to I forgot about it. 00:54:11.545 --> 00:54:15.496 And now all of a sudden securities litigation, regulatory event. 00:54:15.855 --> 00:54:34.925 And then D&Os kicking in and more work for us because of the fact that now we're having to step up and stand by our client, protect them, um, provide legal defense, all that kind of stuff because of the fact that these guys just, they forgot to get the, the 8-K done. 00:54:34.935 --> 00:54:37.865 It's like when it's a queue, it's rhythmic, right? 00:54:37.875 --> 00:54:40.246 It's just there's that consistent rhythm. 00:54:40.476 --> 00:54:51.775 But it's when it's something you only do twice a year, it's kind of harder to think about the, like, the, the other little things that you need to do in between along the way sporadically. 00:54:52.185 --> 00:54:54.016 So that's my concern about it. 00:54:54.025 --> 00:55:03.657 But at the end of the day You look at London, um, if, if you look at the UK's exchange, they do semi-annual reportings. 00:55:03.677 --> 00:55:04.597 Work fine for them. 00:55:04.887 --> 00:55:05.018 Mm-hmm. 00:55:05.027 --> 00:55:11.228 Um, if you look at the United States, I don't think we even did quarterly reporting until, like, the '70s. 00:55:11.538 --> 00:55:12.067 Am I right? 00:55:12.067 --> 00:55:17.067 Like, I, I think it was, like, in the 1970s that we started doing quarterlies. 00:55:17.097 --> 00:55:20.057 Before that, I think we were on a semi-annual. 00:55:20.317 --> 00:55:49.837 But, like, but the one big thing that from a D&O perspective makes me nervous is that when you go to the, the semi-annual, yeah, it works in the UK, but 97.3% of all securities litigation happens in the United States, 2%'s in Australia, and then.7% of all global securities litigation is the rest of the world, including the UK. 00:55:50.117 --> 00:55:57.087 So it might be, yeah, it works in the UK, but that's 'cause nobody's getting sued for securities litigation stuff over there, you know? 00:55:57.387 --> 00:56:00.387 So it, it, I mean, it's one of those deals we don't know. 00:56:00.728 --> 00:56:02.307 We just don't know. 00:56:02.827 --> 00:56:03.117 Yeah. 00:56:03.117 --> 00:56:07.717 You know, I, I, I took a, an extra stats course in undergrad for fun. 00:56:07.728 --> 00:56:14.297 I, I know that sounds really nerdy- but I needed a easy A, so I took Stats 2 with all the economics majors. 00:56:14.327 --> 00:56:18.177 And, you know, the professor, he really opened my eyes to one concept. 00:56:18.208 --> 00:56:21.498 You can make data say just about anything you want, right? 00:56:21.498 --> 00:56:21.824 You truly can. 00:56:21.824 --> 00:56:27.907 Um, so, you know, I would think about that kind of statistic with the 97% litigation of the securities litigation in this country.

00:56:28.387 --> 00:56:34.498 We have the quarterly reporting, yet we have 97% of all the litigation. 00:56:34.748 --> 00:56:36.427 Dude, that's so well said. 00:56:36.887 --> 00:56:37.107 Yeah. 00:56:38.173 --> 00:56:41.703 It's like you, you can leverage that data either way. 00:56:41.913 --> 00:56:42.554 Either way. 00:56:43.463 --> 00:56:43.833 Mm. 00:56:43.844 --> 00:56:44.034 Right? 00:56:44.353 --> 00:56:46.784 So, you know, it's just another way to think about it, you know? 00:56:46.804 --> 00:56:57.403 Like I say- Okay … I don't have a crystal ball, and I don't like to guess too much, but I just try to look at all the facts and all the data and all the inputs and- Yeah, that's well put you know, try to advise my clients and make sure they're aware of this information. 00:56:57.403 --> 00:57:07.384 And, um, like, look, even if we were to go to semi-annual, uh, and I would say if we do go to semi-annual, it would be even more incumbent that you have strong internal controls in place. 00:57:07.733 --> 00:57:26.804 I, I, I can count many a times where we have CFOs that come in right before or right as we do to help a, a company go from, uh, private to public, and maybe they're in the chair six months before I show up, and I'm finding things that they haven't even heard of, right? 00:57:26.983 --> 00:57:34.213 Like, how, how is it that I know that they had a securities issuance, uh, that they didn't know about, right? 00:57:34.213 --> 00:57:37.443 It's like, well, that's simply because they're not looking at the CST report, right? 00:57:37.683 --> 00:57:39.193 You know, I am, right? 00:57:39.213 --> 00:57:42.721 Like, 'cause I don't know anything, so I'm gonna come in, I'm gonna like,"Well, I need to see your CST reports. 00:57:42.721 --> 00:57:49.943 I need to read all your board minutes." And, and the, the, the, the CFOs in a lot of these founder-led companies are just out the loop. 00:57:49.943 --> 00:57:51.663 It's not that anything nefarious is happening. 00:57:51.663 --> 00:57:53.054 These are great, wonderful people. 00:57:53.063 --> 00:57:53.083 Yeah. 00:57:53.223 --> 00:57:59.873 I've never dealt with anyone at a company as a founder that I thought was anything other than extremely highly moral, my experience. 00:58:00.103 --> 00:58:04.844 Uh, but what I do know is that they have a lot of plates that they're trying to juggle, right? 00:58:04.844 --> 00:58:05.134 Yeah. 00:58:05.134 --> 00:58:09.143 Uh, while riding a tricycle on top of a chair that they're balancing on a table, right? 00:58:09.403 --> 00:58:12.203 Uh, so they are just moving so fast. 00:58:12.203 --> 00:58:17.003 It's the nature of being a private company to move very fast, break things, and just push on. 00:58:17.304 --> 00:58:19.723 That can't happen as a public company. 00:58:19.723 --> 00:58:26.833 So, you know, if we have this semi-annual reporting, now it's even more incumbent that you have strong controls around your treasury function. 00:58:27.034 --> 00:58:35.993 There is no way that any agreement gets signed that, that is a debt or equity-related, and the CFO hasn't read it before it's signed, right? 00:58:35.993 --> 00:58:48.223 And it's not all cataloged, both mentioned in the board minutes and in the repository so that e- everyone in finance knows exactly what has been, what is going to be executed. 00:58:48.473 --> 00:59:08.313 Maybe even, dare I say, have your accounting advisor read that agreement so that I can tell you if the words that are currently being used in the negotiation will result in you having to record some kind of embedded derivative, uh, that will come with valuation work every quarter from Jonathan and, and, and come with, uh, more scrutiny from your auditors, right? 00:59:08.513 --> 00:59:12.023 You know, like, th- this is the kind of thing- Yeah … that more mature companies do. 00:59:12.253 --> 00:59:15.463 Uh, some are more mature, you know, call them multi-billion dollar companies. 00:59:15.723 --> 00:59:35.949 Uh, before they sign a contract with a customer, they have an accounting manager that just reads the contract to make sure that they're not introducing the, they being the sales guys- No offense, but they're not introducing any terms that now become the customary business practice, as we say, that impact the rest of their revenue recognition. 00:59:36.190 --> 00:59:52.549 Yeah, it's, it's, it's, uh, it's, it's part of changing your mindset from we're a p- a private company that, you know, we just move fast and try to grow as fast as we can no matter what, to, hey, how is this gonna impact our ability to report timely and be perceived by the street? 00:59:54.029 --> 00:59:54.420 Yeah. 00:59:54.650 --> 00:59:57.339 And okay, so that was, that was good. 00:59:57.339 --> 00:59:58.940 I appreciate you sharing that as we kind of wrap up. 00:59:58.980 --> 01:00:10.679 So let me ask, I want to ask a completely ridiculous question because as I'm sitting here thinking, and man, uh, Jeff, as you brought up that whole 97.3%, yeah, we're already quarterly, and it's like that. 01:00:11.250 --> 01:00:14.969 It made me think, I was like, man, it's just, it's like a big circus. 01:00:15.170 --> 01:00:25.759 I- I mean, and then I, I, I had this idea that popped into my head, and I just kind of as a, as a closing question, something that's a little more on the light-hearted side. 01:00:26.690 --> 01:00:42.529 I, I'm just curious, would you rather be crowded with 20 other clowns in a car at a circus, or would you rather be in the cage with the lion and a whip in a chair? 01:00:45.931 --> 01:00:46.692 Jonathan first 01:00:46.741 --> 01:00:48.551 I'm gonna take clowns in the car. 01:00:48.942 --> 01:00:50.991 I'm gonna take clowns in a car every day. 01:00:50.991 --> 01:00:55.172 Yeah, I think it's, uh, it's, it's, um, it just feels better to me. 01:00:55.172 --> 01:00:55.612 I don't know. 01:00:55.761 --> 01:01:00.871 I'm just not… I love cats, but I'm not, I'm not about to get that close to a, a big cat. 01:01:02.891 --> 01:01:03.431 Yeah. 01:01:03.451 --> 01:01:09.612 I, I love to take on big challenges, uh, solve complex puzzles and, and, and relish in my accomplishments. 01:01:09.922 --> 01:01:14.461 But, uh, I, I, I am a, a, a, a CPA at the end of the day, a little bit more risk-averse. 01:01:14.471 --> 01:01:37.342 So I'll, I'll, I'll take my chances being the leader of the clowns in the car, um- You got it … and, and hopefully help them be less clownish i- … so we could get to our destination, uh, versus the slightly riskier, uh, cat and whip situ- uh, thousand, or was it 500-pound cat, uh, versus the, the whip and chair situation. 01:01:38.362 --> 01:01:38.902 Fair enough. 01:01:38.911 --> 01:01:39.561 Fair enough. 01:01:40.241 --> 01:01:40.882 All right, guys. 01:01:40.882 --> 01:01:43.911 Hey, I want to thank you both so much for coming on. 01:01:44.281 --> 01:01:51.402 Jeff, Jonathan, Aprio Accounting and Advisory, uh, you've been amazing, so I appreciate you. 01:01:51.711 --> 01:01:56.451 Everyone, this is Chaz, your host of the DESPAC Podcast. 01:01:56.451 --> 01:01:57.701 Jonathan, Jeff, thank you. 01:01:58.811 --> 01:01:59.001 Thank 01:01:59.001 --> 01:01:59.172 you. 01:01:59.181 --> 01:02:00.101 Thank you so much, Chaz. 01:02:00.701 --> 01:02:01.811 All the best, everyone. 01:02:01.971 --> 01:02:02.422 Blessings. 01:02:02.422 --> 01:02:03.001 Have a good day.