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EisnerAmper Blog

Technology and Life Sciences Blog

IPOs Expected to Increase This Year

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February 26, 2015

Fogarty,MarcBy Marc Fogarty, CPA, CFE

The past three years have shown an increase in IPO activity, with 273 IPOs in 2014. IPOs continue to be prominent in the tech and health care sectors, as I have mentioned in past blogs, due to an upturn in those markets.  Conversely, there are concerns that the IPO market will not fare as well for other sectors.

With low oil prices and a surplus in global supply, some have predicted a decline in energy IPOs this year. So it was a bit of a surprise to see Philadelphia Energy Solutions listed on the NASDAQ as a recently filed IPO. According to their website, “PES processes approximately 335,000 barrels of crude oil per day, making it the largest oil refining complex on the Eastern seaboard.” Time will tell if their decision to go public in a volatile market was a gamble worth taking.

It has also been predicted that tech IPOs will be on the rise again in 2015 and that prediction appears to be off to a good start! The new year heartily welcomed the online file storage company, Box, as one of the first tech companies to enter the market in 2015. With an IPO price of $14 a share, Box closed significantly up on its first day of trading, at $23.23 a share. This resulted in Box having a market value of $2.7 billion, which surpassed the $2.4 billion valuation announced last summer. 

Perhaps there won’t be an IPO that can even come close to last year’s record breaking star, Alibaba, but there is still plenty of opportunity on the horizon. If the market remains strong, more companies may decide that 2015 is the right time for an IPO.

IPOs and Non-GAAP Measures for Financial Reporting

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February 24, 2015
Fogarty,MarcBy Marc Fogarty, CPA, CFE

Eighteen percent of U.S. IPOs last year showed profits using their own accounting methods (as disclosed under the Non-GAAP Measures heading in their IPO filings); but reported losses when they had used traditional standardized (GAAP) accounting rules.  The concern is that using differing accounting measures could confuse or mislead investors. While the companies using non-GAAP measures believe they are providing better transparency, the SEC is asking some to revise their regulatory filings.

An example of how traditional and non-traditional accounting methods differ can be exemplified by how expense items are reported. A company using a nonstandard accounting measure might remove expense items such as acquisitions and executive bonuses, which would not be excluded if standard accounting methods were used. Some companies have defended this by saying that a one-time expense should not be factored into possible future earnings. Their theory is that if a company has a "one-time" high-ticket expense, it would be more misleading to investors if they include it, since it would not be included as an expense against future earnings.  In other words, using non-GAAP reporting measures might be an opportunity to highlight certain facts and downplay others to investors, which could make the company heading into an IPO appear more attractive on paper.

The danger is that companies tend to have several yearly “one-time” events.   For example, this year a company could have a one-time severance cost, and next year they shut down a plant. In the third year, they have a costly hurricane event.  These are all considered "one-time" events; but if they are excluded from the company's expense reporting, then the public's understanding of the company's true profitability may be distorted.

To avoid issues with regulatory filing, a company including earnings using non-GAAP measures should also prominently disclose their earnings under GAAP (aside from what is already reported in the core financial statements).  Additionally, there should always be consistency in the way non-GAAP measures are used, both before and after an IPO.

Venture Summit West: Is There Money Out There?

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February 19, 2015

Heller, DanBy Dan Heller, CPA, CMAP, CVA

As part of our ongoing efforts to connect with the technology ecosystem, I recently took a few days off from our San Francisco office and attended Venture Summit West (organized by Youngstartup Ventures, Inc.) at the Computer History Museum in Mountain View, CA.  A high-level panel that included David Hornick of August Capital, Patricia Nakache of Trinity, Lisa Rhoads of Easton Capital, and Ann Winblad of Hummer Winblad covered topics such as “The Changing Venture World: What Can We Expect for the next 24 Months?”  Panelists noted that $47.3 billion of venture money was invested in 2013.  The majority of the money was made in Silicon Valley; however, the New York City area had significant gains and was second in investment deals. 

The panelists noted that in 2014 seed rounds are up.  There is a blurred line between series A and seed rounds probably caused by an overall increase in the availability of investment funds.  They also noted that series B rounds increased in 2013.

With the increase in overall global wealth, funds are getting bigger and bigger.  Some venture funds have raised new funds but are trying to keep the individual investments and tranches small in order to maintain a personal touch with the management of the portfolio companies.  There was a consensus with the panelists that venture capital is a personal business and they want to be focused on helping their investments succeed.  They want to work closely with their companies.  Patricia Nakache of Trinity said that she would like to keep investments on a modest scale in order to be accessible to their CEOs.

Panelists noted New York and Silicon Valley are great and very much happening but venture opportunities are everywhere. 

With the low barrier of entry and interest in startups, we are seeing a lot of incubators and accelerators these days.  Incubators are generally good but VCs want to date and get to know company management.  VCs also want to see how management behaves in a coaching environment. 

Accelerators can have great advisors but the differentiator is the quality of the advisors.  The key for start-ups is to make sure the advisors are experienced, able to coach, and are well connected.

Possible Regulated Exchange for Bitcoin

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February 12, 2015

Fogarty,MarcBy Marc Fogarty, CPA, CFE

When the largest and first Bitcoin exchange, Mt. Gox, collapsed last year, I pondered in my blog whether Bitcoin exchanges would eventually embrace regulation and internal controls to ensure consumer protection. In the beginning of January, a security breach at a European Bitcoin exchange further dampened consumer confidence. The price of a Bitcoin plummeted from over $1200 (at the end of 2013) to below $200 recently.

With such wild fluctuations, how can consumers have confidence in Bitcoin currency? Cameron and Tyler Winklevoss (a.k.a. the Winklevoss Twins), who are perhaps most notorious for waging a legal battle with Facebook’s Mark Zuckerberg, are now hopeful they can change public sentiment by creating the first regulated Bitcoin exchange.  The exchange, named ‘Gemini’ for the twins, already has a test model running and is waiting for regulatory approval.

Even if the Winklevoss Twins succeed in creating the first regulated American exchange, is there really a need for another investment vehicle or currency?  What are the advantages/disadvantages of such an exchange?

In some circles, Bitcoin is being touted as the next ‘global’ currency. With the number of international ecommerce transactions sharply rising every year, a digital currency like Bitcoin might be the payment system of the future.  If regulation can instill consumer confidence in Bitcoin, the Winklevoss twins might be at the forefront of a historic event. Given the fact that they are financing the project themselves, you might say they are banking on it.

A Synergy Between Colleges and Video Games?

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February 9, 2015

Fogarty,MarcBy Marc Fogarty, CPA, CFE

Tell most kids that they can play video games and possibly get a scholarship to college, and you can just imagine the smile that will appear on their faces. eSports (Electronic sports; also known as competitive gaming) is becoming popular with many notable colleges and universities like Princeton, Harvard, M.I.T, and San Jose State University in California. Universities and colleges are divided into eSport leagues, with the biggest college league boasting over 10,000 students.

And there is big money to be made. The winners of big college-level tournaments can earn enough prize money to pay their tuition for several years. Game makers are also taking advantage of the eSports craze by using the publicity to their advantage. They are funding prize scholarships and monetarily supporting teams in exchange for brand promotion. 

While some people feel that video games are a waste of time and brain power, others feel they build critical analytical thinking and strengthen the ability to multi-task.  In the case of collegiate-level eSports teams, if the gamers don't go to class and get the grades, then they have no use for the scholarships that the gaming companies are providing. The bottom line is the gamer needs to maintain a certain GPA to stay in school.

Regardless of your position on the benefits or evils of gaming, it appears that eSports is here to stay, with several educational institutions already treating eSports with the same popularity and privileges notable in other sports programs. One top-playing student said when his name was called during roll call, the class turned to look to see who he was because of his online gaming fame. In one eSports training program, students were said to be getting up to 50% of their tuition paid, plus room and board. It makes me think that being a competitive video gamer might not be such a bad gig after all! And, in the event of a career-ending thumb injury, they still have their education to fall back upon.

Sometimes You Need to Make Mistakes to Be Successful

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February 5, 2015
Fogarty,MarcBy Marc Fogarty, CPA, CFE

I read an article in The New York Times in which Mark Zuckerberg of Facebook fame is quoted as saying, “If you’re successful, most of the things you’ve done were wrong. What ends up mattering is the stuff you get right.” I’ve noticed in the past few years that the hallmark of many successful people is that they are willing to give things a try. After all, how can you be successful if you don’t try? And if they fail, they own up to their mistakes and try again.

With technology changing at warp speed, companies can’t help but evolve in response. Facebook is no exception. Even though some Facebook changes have garnered criticism, for privacy or usability issues, the company is not afraid of moving forward and trying something new. The most recent challenge for them is a potential change to the ‘like’ button. Many people will click ‘like’ to acknowledge that they have seen a post and are supportive. But how do you ‘like’ a post about something serious or negative, like someone breaking their arm? You might want to let the person know that you're thinking of them, but "like" just isn't the right sentiment. Conversely, having a ‘dislike’ button has the potential for hurting someone’s feelings. Facebook will need to come up with another type of button or way to communicate, which could be quite a challenge.    

Another example that comes to mind is the evolution of Netflix. The company began its life providing rental movies via DVD in the mail. But as technology evolved, a good portion of their business changed to online streaming as the delivery method. For a while, their membership included both streaming and DVDs in their monthly price, whether or not the subscriber used both services. In order to give customers only what they wanted, Netflix decided to split the two service types into completely different companies, each with their own website and branding. There was consumer backlash on many levels, ranging from usability issues to management concerns. The stock price fell, and shortly thereafter Netflix changed their mind and decided to stay as one company. While the split may have made sense from a business perspective (see my recent blog on companies who are making the split), it clearly was unsettling to consumers and investors.

All businesses face challenges, in one form or another, and the decision to try something new to answer those challenges must be made. Even though we hope all of our decisions will result in a positive outcome, the bottom line is that some mistakes will be made along the way. It’s how those failures are handled that people will remember the most. A well-managed mistake can actually build respect and have a positive impact on a company’s reputation.

Digital Health Technology in the Spotlight

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News from the Annual J.P. Morgan Health Care Conference

January 21, 2015

Fogarty,MarcBy Marc Fogarty, CPA, CFE

The palpable buzz at this year’s J.P. Morgan Health Care conference indicates that valuations are still going strong and 2015 could shape up much like 2014, in terms of deals and IPOs.  This year, the number of digital health companies at the conference was much larger. Perhaps this influx was a result of the Affordable Care Act and the HITECH Act which encourages health care providers to improve health care quality, safety and efficiency. Many digital health companies were formed with the intention of helping providers achieve those goals through innovative technology. 

With interest rates near zero, the capital markets are looking optimistic for digital health companies, whether start-ups or companies that have been around for a while. Even before the conference, Qualcomm Ventures announced a joint investment company created with Novartis Pharmaceuticals with the intention to raise $100M to invest in digital health companies. There is also an expectation that several large IPOs will occur this year, including companies like HealthGrades, Evolent Health, MindBody, Doximity and Best Doctors.

The environment might be right on Wall Street since investors are aware that the health care industry withstood the 2008-2009 recession. During that time, jobs in the health care industry grew 7% while the overall job loss was 8 million.  Another positive indicator could be that investors made money last year from the IPOs of digital health companies Everyday Health and Veeva Systems.

According to Forbes, the top 10 tweets from the J.P. Morgan Health Care conference included three tweets from Rock Health, a company that provides startups with funding: 

  • “Ask VCs which industry they’re most excited to revolutionize, and odds are high they’ll say healthcare"
  • "Telemedicine may just be the biggest trend in digital health in 2015"
  • "Digital health is no longer the sideshow of #JPM15.”

The overwhelming highlight from the J.P. Morgan Health Care Conference is that digital health companies are hot. Whether they will raise funds through venture capital or IPO, digital health companies are definitely on the watch list for 2015.

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