Form S-1 Financial Statement Requirements

Companies that register securities for direct public offering on Form S-1 as part of their going public transaction must provide audited financial statements to the Securities and Exchange Commission (“SEC”). These financial statements include a balance sheet, statement of shareholders’ equity, income statement and statement of cash flows.

This blog post discusses the financial statement requirements for Form S-1 registration statements in  direct public offerings.

To determine the specific financial statements requirements for registration on Form S-1, the company should consult with an experienced auditor and going public attorney.  As discussed below, the audited financial statement requirements depend upon the size of the issuer going public.

If the issuer is not a smaller reporting company as defined by Rules 3-01 and 3-02 of SEC Regulation S-X, the requirements are:

• Audited balance sheets (consolidated if the issuer has subsidiaries) as of the end of each of the two most recent fiscal years. If the issuer has been in existence for less than one fiscal year, an audited balance sheet as of a date within 135 days of the date of filing the Form S-1.
• Audited statements of income and cash flows for each of the three fiscal years preceding the date of the most recent audited balance sheet being filed or such shorter period as the issuer has been in existence.
• Interim reviewed financial statements for the current period if the filing is more than 135 days after the end of the issuer’s fiscal year.
• Date of financial statements: Each amendment must include updated interim or audited financial statements if the financial statements in the prior filing are more than 135 days old.

Most companies qualify as a smaller reporting companies.  This designation allows the issuer to provide two years of audited financial statements. Rule 8-01 of Regulation S-X provides the requirements below for smaller reporting companies. The company’s going public attorney can assist the company in providing the reduced disclosures allowed for smaller reporting issuers.

• Audited balance sheet as of the end of each of the most recent two fiscal years, or as of a date within 135 days if the issuer has existed for a period of less than one fiscal year.
• Audited statements of income, cash flows and changes in stockholders’ equity for each of the two fiscal years preceding the date of the most recent audited balance sheet (or such shorter period as the registrant has been in business).
• Interim reviewed financial statements for the current period if the filing is more than 135 days after the end of the issuer’s fiscal year.

Date of financial statements: Each amendment must include updated interim or audited financial statements if the financial statements in the prior filing are more than 135 days old.

The company’s accountant and going public attorney can assist the issuer in compiling much of the information required by its auditor. The SEC requires that the auditor being registered with the Public Company Accounting and Oversight Board (“PCAOB”).

The Balance Sheet

The balance sheet provides detailed information about the company’s assets, liabilities and shareholders’ equity.

The balance sheet requirements for a private company going public and an existing public company are the same. The balance sheet provides a snapshot of a company’s assets, liabilities and shareholders’ equity at the end of a specific reporting period.

Assets are what a company owns that have a recognized value. Generally, an asset is something that can either be sold or used by the company to make its products or provide its services that could be sold. Assets include physical property, such as real estate, equipment, vehicles and inventory.   Assets are also things that can’t be touched such as trademarks and patents. Cash as well as investments are included as assets on a company’s balance sheet.

Generally, a company’s assets are reflected in its financial statements based upon how quickly the asset can be converted into cash. Current assets are assets a company expects to convert to cash within one year such as inventory it expects to sell within one year. Noncurrent assets are assets that a company does not expect to sell or convert to cash within one year or assets that would take longer than a year to sell. Noncurrent assets include fixed assets. Fixed assets are assets used to operate the business but that are not readily available for sale, such as vehicles, office furniture and other property.

Liabilities are the amounts a company owes to others. Liabilities include all kinds of obligations. This includes a company’s payroll obligations, taxes, loans, rents, money owed to suppliers or vendors, environmental cleanup costs. Liabilities also include the company’s obligation to provide goods or services in the future.

Liabilities are generally reflected in a company’s financial statements by the due date. Liabilities are said to be either current or long-term. Current liabilities are obligations a company expects to pay off within the year. Long-term liabilities are obligations due more than one year away.

Shareholders Equity

Capital or net worth in financial statements is reflected as Shareholders’ equity. Shareholders’ equity is the money that would be left if a company sold all of its assets and paid off all of its liabilities. Shareholders’ equity is the amount owners invested in the company plus or minus the company’s earnings or losses since inception.

Income Statement

The income statement shows how much revenue an issuer earned over a specific period of time (usually for a year or some portion of a year). A Form S-1 income statement also shows the costs and expenses associated with earning revenue. In going public transactions, issuers must include revenues incurred before and after their securities are publicly traded if earned during the relevant period.  The bottom line of the income statement reflects its net earnings or losses over a specific period.

The top line of the Income Statement is often referred to as gross revenues or sales because expenses have not been deducted from the figures presented.

The bottom line is the amount of earned after deducting all of the expenses from the amount that the company actually earned or lost during the specific period.   Funds a company doesn’t expect to collect from sales  is deducted from its gross sales.   The company’s net revenues reflect gross revenues less its returns and allowances.

There are several entries in the Income Statement that represent different types of operating expenses.  Operating expenses are expenses used for the company’s operations for a specific period.  Salaries, utilities and marketing expenses are common operating expenses. Costs of sales are expenses necessary for the production of the products or services being sold.

Depreciation is deducted from gross profit. Depreciation reflects the wear and tear of some assets, such as machinery, tools and furniture, which are used over the long term. Depreciation is the process of spreading these costs over the periods in which they are used. The charge for using these assets during the period is a fraction of the original cost of the particular asset.

Income from operations or operating profit is what is left after all operating expenses are deducted from gross profit prior to the deduction of interest and income tax expenses.

Interest income is the interest earned on funds held in interest-bearing accounts. Conversely, interest expense is interest paid for money borrowed. Some income statements reflect interest income and interest expense separately while others reflect the two numbers. The interest income and expense are added or subtracted from operating profit to arrive at operating profit before income tax.

After amount after the company’ deducts income tax it is the net profit or net losses. Net profit is referred to as net income or net earnings.

Earnings per share reflects the amounts shareholders would receive for each share of stock held if the company distributed all of its net income for the period. To calculate earnings per share, total net income is divided by the outstanding shares.

Cash Flows

The Statement of cash flows report the cashing coming in and going out of the company.   The cash flow statement indicates if the company generates enough cash to pay its ongoing operating expenses.

A statement if cash flow shows changes over time rather than absolute dollar amounts at a point in time. The bottom line of the cash flow statement shows the net increase or decrease in cash for the relevant period. Generally, cash flow statements are divided into operating, investing activities and financing activities.

The first part of a cash flow statement analyzes a company’s cash flow from net income or losses. For most companies, this section of the cash flow statement reconciles the net income to the actual cash the company received from or used in its operating activities. To do this, it adjusts net income for any non-cash items and adjusts for any cash that was used or provided by other operating assets and liabilities.

The second part of a cash flow statement shows the cash flow from all investing activities, which generally include purchases or sales of long-term assets, such as property, plant and equipment, as well as investment securities.

The third part of a cash flow statement shows the cash flow from all financing activity. Typical sources of cash flow include funds from the sale of securities or loans. Repayment of a loan would be reflected as  a use of cash flow.

The Footnotes

The footnotes of the financial statements provide useful narrative information about the financial statements. The company’s going public attorneys often use the footnotes as a starting point for drafting its business development and other related disclosures.  The footnotes must disclose the accounting policies that are important to the company’s financial condition and results and provide detailed information about federal, state, local and/or foreign income and deferred tax as well as the primary items that affect the company’s tax rate.

The footnotes must also reflect pension plans and other retirement or post-employment benefit programs and provide specific information about the assets and costs of the foregoing.

The footnotes also contain narrative disclosure of stock options granted to officers, directors and employees, including the method of accounting for stock-based compensation and its effect on the reported results.

For more information about going public, securities law or our other services please contact a Securities Attorney at Hamilton & Associates Law Group, P.A. 01 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956 or by email at [email protected].   This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates Law Group, P.A provides ongoing corporate and securities counsel to private companies and public companies listed and publicly traded on the NASDAQ Stock Market, the NYSE MKT or over-the-counter market, such as the OTC Pink, OTCQB and OTCQX. For two decades the Firm has served private and public companies and other market participants in corporate law matters, securities law and going public matters. The firm’s practice areas include, but are not limited to, forensic law and investigations, SEC investigations and SEC defense, corporate law matters, compliance with the Securities Act of 1933 securities offer and sale and registration statement requirements, including Regulation A/ Regulation A+ , private placement offerings under Regulation D including Rule 504 and Rule 506 and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, Form F-1,  Form S-8 and Form S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including Form 8-A and Form 10 registration statements, reporting on Forms 10-Q, Form 10-K and Form 8-K, Form 6-K and SEC Schedule 14CInformation and SEC Schedule 14A Proxy Statements; Regulation A / Regulation A+ offerings; all forms of going public transactions; mergers and acquisitions; applications to and compliance with the corporate governance requirements of national securities exchanges including NASDAQ and NYSE MKT and foreign listings; crowdfunding; corporate; and general contract and business transactions. The firm provides preparation of corporate documents and other transaction documents such as share purchase and exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The firm prepares the necessary documentation and assists in completing the requirements of federal and state securities laws such as FINRA and DTC for Rule 15c2-11 / Form 211 trading applications, corporate name changes, reverse and forward splits, changes of domicile and other transactions. The firm represents clients in London, Dubai, India, Germany, India and throughout the U.S.