Writing MD&A for Venture Issuers | GoPublicInCanada.com Going Public in Canada

Law and Accounting Matters - September 2009

Writing MD&A for Venture Issuers

Writing a company’s MD&A four times a year can be a daunting task. Here are a few tips for writing effective MD&A that I presented at a seminar sponsored by the Canadian Listed Company Association on April 8, 2009.

Always work with the MD&A instruction form

The disclosure required in your MD&A is prescribed in Form 51-102F1. When you first sit down to write your MD&A, get a hard copy of the current version of the form to work with. The form changes from time to time and was last updated in December 2008. There’s a direct link to the current version of the form on this page of my website http://www.venexlaw.com/vxl_site/clive_comments_detail/4.

There are items that can be missed if you don’t review the form instructions each quarter. For example, paragraph (i) of the “Results of Operations” section requires you to compare how you actually spent the proceeds of a prior financing with how you said you were going to spend them in your original disclosure. If no prior financings were under discussion in the previous quarter, this disclosure could easily be missed in the current quarter. Similarly, the “Proposed Transactions” section will only occasionally be applicable.

Interest rates and Canada/U.S. exchange rates were stable not that long ago. Now, these items can have a material impact on your operating results. If you simply update disclosure from old versions of your MD&A, these emerging trends could be missed as important disclosure items.

Don’t create this quarter’s MD&A by taking last quarter’s and changing the numbers.

Treat each MD&A as a new disclosure document, working with the current financial statements and a hard copy of Form 51-102F1. Just changing the numbers from previous quarters can have unintended results. I know of a case where a company, in a recent quarter, reported that profits from operations were an important source of new capital and then stated the profit for the quarter. The next quarter, they used exactly the same language and then inserted the profit number, but for that quarter it was a loss. Not only did the disclosure make no sense, it didn’t respond to the form requirement to disclose the company’s actual capital resources for the period under review.

Use clear language

Your MD&A should be written in clear, easy-to-understand language, it should be organized and the disclosure should follow logically from item to item.

One of the difficulties with the MD&A requirement for venture issuers is that the writing skills of a typical venture issuer’s management may not be up to the task of explaining complex concepts in easy to understand language. This is not as big a problem for larger companies because they have the financial resources to attract qualified members of the management team or can outsource the job. But for some venture issuers, this can be a real challenge. One answer is to have the company lawyer or accountant assist in the draft of the MD&A, or least review and edit it. This may cost money, but so does responding to a compliance review by your local Securities Commission.

Give equal emphasis to bad news

This is advice common to most corporate disclosure, and it applies to MD&A as well. Things don’t go well sometimes, and when they don’t, that fact will be reflected in your financial statements. The purpose of the MD&A is to expand on all of the relevant events of the quarter, not just the favourable ones.

The MD&A form also contains some specific instructions for disclosing negative news. For example, the “Liquidity” section specifically requires you to discuss any working capital deficiency and defaults or anticipated defaults under lease obligations, interest or principal payments on debt, and debt covenants.

Tell the story of the quarter under review

In my experience every set of financial statements tells a unique story. Three months is a sufficient period of time for one or more things to have occurred that create an impact. Think about a typical three-month period in the life of your family. Perhaps a child won a basketball championship or you bought a new car.

The same can be true in the life of a company. If you’re in the mining industry, you may have completed a financing or received the results of a drilling program; perhaps you acquired or abandoned a property. That financing will increase cash and your issued share capital, the drill results will be relevant in your property descriptions and the cost incurred will be added to deferred exploration expense; property transactions will affect the balance sheet value of your assets.

If you are an established industrial company, perhaps you lost a major client. That will have an impact on your earnings. And perhaps this is part of a trend of increased competition or an economic downturn. The MD&A instructions contain a number of requirements to disclose emerging trends.

Before you start writing, take a few minutes to think about what happened during the quarter and how those events are reflected in your financial statements. That will be the basis of the story you tell in your MD&A.

Put yourself in the shoes of the reader

The purpose of MD&A is to explain the financial statements to an average shareholder and investor. Look at the statements under discussion and ask yourself what would an average person find mysterious about them? Those are the items to highlight in your MD&A.

A good example is the requirement to include stock-based compensation as an expense item on your earnings statement. An average investor may find this difficult to understand, as there’s no readily apparent cost in granting stock options. Explaining the rationale for the charge in the MD&A and disclosing what the income or loss would have been without it, and perhaps other non-cash items like depreciation, will help the reader to better understand the company’s actual financial condition.

Take advantage of the exemptions in the form

The MD&A form provides that certain disclosure is not required to be made by venture issuers. Venture issuers are overregulated as it is, so if you are offered an exemption, take it. The primary exemptions relate to disclosure of critical accounting estimates in section 1.12 and the summary of contractual obligations in section 1.6, instruction (iv).

Don’t just repeat the numbers from the statements

In many cases I’ve seen MD&A that just says, “earnings for the quarter were $x”; “general and administrative expense totalled $y”, and so on, simply repeating numbers that are already in the financial statements. This provides no useful information that can’t already be found in the statements. The point of the MD&A is to expand on the financial statements, not repeat them. Take a look at instruction (a), Part I “What is MD&A” in Form 51-102F1 for a good summary of what the MD&A is intended to achieve and the sorts of disclosure that should be included.

That said, there’s nothing wrong with repeating numbers from the financial statements to introduce a topic. This is a convenient way to start the discussion on a particular matter and avoids the necessity for the reader to keep flipping back and forth between the MD&A and the financial statements.

Comparables in Interim Statements

This is a common mistake in interim MD&A: knowing which periods to compare with which periods.

Generally balance sheet items should be compared with the balance sheet for the immediately preceding year-end. Operational items should be compared with the same quarter in the previous year.

Although not specifically referred to in the instructions, for businesses that are not materially affected by seasonal or similar influences it can be useful to compare the current quarter results to those of the previous quarter, to demonstrate a pattern of growth or decline.

Additional disclosure

The MD&A instructions set out required disclosure, but there’s nothing in the form that prevents you from providing additional disclosure that you believe may be helpful.

I always start any MD&A that I write with a brief description of the business. It’s not required, but I find it a helpful jumping off point for the disclosure that’s to follow. In many cases your audience may include first time readers who have only recently invested in your company or are still thinking about investing. This type of discussion can help these readers better understand your business model and the subsequent disclosure.

Having said that, don’t take the “kitchen sink” approach and throw in reams of irrelevant disclosure. I’ve seen MD&A where every press release, material change report or other disclosure made during the quarter (or year) is cut and pasted into the MD&A. In many cases, this is just added to the same type of disclosure from previous periods that is no longer relevant to the quarter under review. I recently came across a current MD&A that contained references to property transactions that were completed in 2006. This approach overwhelms the reader with disclosure that doesn’t relate to current financial results, and conveys that whoever wrote the MD&A doesn’t really understand the requirements. This can reflect poorly on management and discourage potential investors.

Don’t leave it to the last minute

This advice is easy to understand but sometimes difficult to employ. One of the most common reasons for badly written MD&A is that the author simply didn’t have enough time to rationally absorb the information in the financial statements and then write a considered and meaningful discussion. Ideally, you should be in possession of your completed financial statements at least two weeks before the filing deadline to provide enough time to write the first draft of the MD&A, circulate the draft to the appropriate members of your management and other advisors, have them provide feedback, and make the required revisions. We’ve all been in situations where for one reason or another the financial statements arrived at the last minute. This happens, and when it does we have to adapt. But if your statements are consistently late, identify the source of the problem and fix it.

And be wary of basing your MD&A on draft financials when you’re running out of time. The final version of the statements can vary materially from earlier drafts, and if you don’t pick up all the changes the results can be disastrous.


Well-written and instructive MD&A can provide useful information to your shareholders and potential investors. It can also serve as an advertisement for your business, how it’s run and the quality of your management. Badly written MD&A has the opposite effect.

When I’m making an investment decision, I routinely refer to the company’s disclosure record to assess whether the company’s management understands what is required of it and is capable of delivering what is required. If the record is poor, I wonder what other deficiencies may exist, and how those deficiencies may impact the day-to-day operation of the business. It’s reasonable to expect that other potential investors take the same approach.

Hopefully, the foregoing discussion will assist your company in improving the quality of its MD&A, with beneficial results.

Clive Forth is the principal of Venex Law which is a Vancouver-based boutique law firm that restricts its practice to “venture exchange law”, the various areas of legal service required by a typical venture company: securities law, corporate finance, mineral resource law, business and industry law and related corporate and commercial matters. You can contact Clive at (604) 605-5444 or by email at cforth@venexlaw.com.



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