CSA Staff Notice: 51-339 - Continuous Disclosure Review Program Activities for the fiscal year ended March 31, 2013

3. Going concern

Under IAS 1, when management is aware of material uncertainties related to events or conditions that may cast significant doubt upon the issuer's ability to continue as a going concern, the issuer must disclose these uncertainties.

Under paragraph 19 of the Canadian Auditing Standards 570 Going Concern, if adequate disclosure is made in the financial statements, the auditor shall express an unmodified opinion and include an "Emphasis of Matter" paragraph in the auditor's report to highlight the existence of a material uncertainty relating to the event or condition that may cast significant doubt on the entity's ability to continue as a going concern and draw attention to the note in the financial statements that discloses the matters set out in this paragraph.

We sometimes see inconsistent information between the going concern disclosure provided in an issuer's financial statements and the going concern disclosure included in the auditor's report.

Some issuers provide indications of financial difficulty, sometimes under a going concern heading, without explicitly stating that the disclosed uncertainties may cast significant doubt upon the issuer's ability to continue as a going concern despite the fact that the auditor's report highlights the existence of a material uncertainty relating to the event or condition that may cast significant doubt on the issuer's ability to continue as a going concern.

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Example of deficient disclosure

Extract from the auditor's report

Emphasis of Matter paragraph

We draw attention to Note 2 to the financial statements that highlights the existence of a material uncertainty relating to the event or condition that may cast significant doubt on the entity's ability to continue as a going concern. Our opinion is not qualified in respect of this matter.

Extract from the financial statements

Note 2 -- Going concern assumption

At year-end the Company had minimal cash and a working capital deficiency. While the Company has prepared its financial statements on the going concern basis, it is dependent on its ability to obtain additional financing from related parties and external financing to sustain operations and fund its expenditures.

Management is actively pursuing such additional sources of financing, and while it has been successful in doing so in the past, there can be no assurance it will be able to do so in the future.

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Example of entity-specific disclosure

Extract from the auditor's report

Emphasis of Matter paragraph

We draw attention to Note 2 to the financial statements that highlights the existence of a material uncertainty relating to the event or condition that may cast significant doubt on the entity's ability to continue as a going concern. Our opinion is not qualified in respect of this matter.

Extract from the financial statements

Note 2 -- Going concern assumption

The financial statements were prepared on a going concern basis. The going concern basis assumes that the Company will continue to operate in the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business.

For the year ended December 31, 2012, the Company had a net loss from operations of $3 million, a negative cash flow from operations of $2 million. As at year-end, the Company had a working capital deficiency of $1.5 million and cash on hand of $2 million.

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Extract from the financial statements (continued)

The Company has a history of operating losses. In recent years, it had negative cash flows from operations and working capital deficiencies. The Company's credit facility contains certain financial covenants that are subject to periodic reviews. As part of its debt agreement, the Company must maintain a working capital ratio of at least 1:1. As at December 31, 2012, this ratio was 0.5:1. Given the breach, the lender has the right to demand full repayment at any time. As a result, the bank debt has been reclassified to short term liabilities resulting in a higher working capital deficiency. The Company is currently in negotiations with the lender to waive the covenant violations.

Whether and when the Company can attain profitability and positive cash flows is uncertain. These uncertainties cast significant doubt upon the Company's ability to continue as a going concern.

The Company will need to complete a short term financing to make the payment for the credit facility, raise sufficient working capital to maintain operations, reduce operating expenses and increase revenues. Subsequent to year end, the Company completed a private placement of $3 million to fund ongoing operations and to pay off the credit facility in the event the waiver cannot be obtained.

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We remind issuers, that when there are uncertainties that cast doubt on the issuer's ability to continue as going concern, the MD&A should also provide a discussion and analysis on how the issuer expects to resolve the uncertainty event or condition.

APPENDIX B

MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A) DEFICIENCIES

As in prior years, deficiencies were noted in the MD&A disclosure. As stated in Part 1(a) of Form 51-102F1 Management's Discussion and Analysis of National Instrument 51-102 Continuous disclosure obligations (Form 51-102F1), the MD&A should include balanced discussions of the issuer's financial performance and financial condition, including, without limitation, such considerations as liquidity and capital resources. The MD&A should help current and prospective investors to understand what the financial statements show and do not show. It should also discuss material information that may not be fully reflected in the financial statements.

There are three important areas of the MD&A where deficient disclosures were noted: 1) liquidity; 2) discussion of operations; and 3) related party transactions. For each area, we have provided examples of deficient disclosure contrasted against more robust entity-specific disclosure.

1. Liquidity

Many smaller issuers focus their resources on completing a project or on expanding their operations. In accordance with section 1.6 of Form 51-102F1, the MD&A should focus on the issuer's ability to generate sufficient liquidity in the short term and in the long term to fund development activities or to meet planned growth. Moreover, the MD&A should explain how an issuer will meet its obligations as they become due and how they will address working capital deficiencies. We often find issuers reproduce in their MD&A information that is readily available from the financial statements without ensuring compliance with section 1.6 of Form 51-102F1.

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Example of deficient disclosure

Liquidity

Operating activities

The cash flows used in operating activities totalled $270,000. For the same period last year, the cash flow from operating totalled $102,000.

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Investing activities

The cash flows used in investing activities increased by $10,000.

Example of deficient disclosure (continued)

Financing activities

The cash flows from financing activities totalled $520,000. For the same period last year, the cash flows from financing totalled $425,000.

The company's working capital decreased by $981,000.

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Example of entity-specific disclosure

At the end of fiscal 2012, the Company had $51,000 of cash on hand and working capital of $15,000.

Given the various projects the Company is handling in the short and medium terms, management still considers the current cash balance and forecast net cash flows from operating activities for the next 12 months to be below the $300,000 desirable for its planned business development activities.

The success of development projects depends greatly on the Company's ability to generate sufficient cash to meet its needs. In fiscal 2012, the Company renegotiated the terms of its financing agreement with its financial institution and obtained an operating line of credit of $500,000 to continue development of its X products distribution activities and to finance growth. As at the end of fiscal 2012, $150,000 was available on the line of credit. Also in 2012, the Company contracted new financing of $120,000, secured by investment tax credits, to continue research and development work on its Y project. This financing was used at the end of fiscal 2012.

Hence, as of the end of fiscal 2012, management was still considering various sources of financing available on the market to increase the Company's liquidity. At year end, management was negotiating a private placement of $500,000 that was completed after year end.

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2. Discussion of operations

An MD&A should explain what factors contributed to changes in an issuer's operations. Issuers often reproduce information from the statement of profit or loss and other comprehensive income in their MD&A, without explaining what caused the changes.

In accordance with section 1.4 of Form 51-102F1, the revenue analysis included in an issuer's MD&A should discuss any change caused by selling prices, volume or quantity of goods or services being sold, or the introduction of new products or services. It is useful to investors if the issuer quantifies each of these elements. If other elements affected revenue, such as the introduction of a new competitor, the issuer's MD&A should also address these factors. If an issuer's financial statements present information from more than one reportable segment, the issuer must discuss the results of each segment in its MD&A.

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Example of deficient disclosure

The Company reported revenue of $7,666,000 for the year ended December 31, 2012, compared with $7,098,000 a year earlier, an increase of 8%. The growth is mainly due to the sales of L products.

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Example of entity-specific disclosure

During fiscal 2012, the Company's sales increased by 8%. The Company undertook a new activity, namely the distribution of L product in the Canadian manufacturing sector. As at year end, because of a delay in the manufacturing of L products, this activity had not yet reached the level that management had anticipated. The sales of L products increased sales by 7%.

Since 30% of sales are made in US dollars, the depreciation of the Canadian dollar had a positive impact on sales. This impact was a 3% increase in sales.

Despite the positive effect of the introduction of L product and of the exchange rate, the arrival of a new competitor forced the Company to decrease its sale price on product V. With this decrease, the Company was able to maintain the sale volume of product V. Due to the quality reputation of product V, management believes that no other decrease of the sale price will be necessary to maintain the sale volume of product V in the future. The decrease in the sale price caused a 2% decrease in sales.

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3. Related party transactions

Under section 1.9 of Form 51-102F1, issuers are required to identify the related person or entities, to discuss the business purpose of the transaction, to describe the measurement basis used and to discuss ongoing commitments resulting from the transaction. It is common for issuers to reproduce the related party transactions note provided in their financial statements or to simply refer to that note. However, IAS 24 Related Party Disclosures does not require the same level of information as section 1.9 of Form 51-102F1.

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Example of deficient disclosure

The Company paid $150,000 to a company controlled by a director for consulting services.

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Example of entity-specific disclosure

During the year, the Company paid $150,000 to Orange Inc., which is controlled by Mr. Smith, Chief Executive Officer and director of the Company. The $150,000 fee was paid for programming services relating to the implementation of new inventory software. The fee is based on what Orange Inc. usually charges its regular clients less a 10% discount. The Company expects to continue to use Orange Inc.'s programming services until the implementation of the new inventory software is completed.

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APPENDIX C

OTHER REGULATORY DISCLOSURE DEFICIENCIES

CSA Staff assess issuer compliance with securities laws. Our objective is to promote clear and informative disclosure that will allow investors to make informed investment decisions. The areas where compliance issues persist include disclosure about: 1) mineral projects; 2) oil and gas activities; 3) disclosure controls and procedures and internal control over financial reporting in venture issuers' MD&A; and 4) executive compensation.

1. Mineral projects

Issuers engaged in mining activities have to comply with the requirements set out in National Instrument 43-101Standards of Disclosure for Mineral Projects. Common deficiencies noted include:

• incomplete or inadequate disclosure of preliminary economic assessments, mineral resources and mineral reserves;

• non-compliant certificates and consents of qualified persons for technical reports;

• incomplete or inadequate disclosure of historical estimates and exploration targets; and

• name of the qualified person omitted in documents containing scientific and technical information.

2. Oil and gas activities

Issuers engaged in oil and gas activities must comply with the requirements set out in National Instrument 51-101Standards of Disclosure for Oil and Gas Activities (NI 51-101). Common deficiencies noted include:

• failure to adapt to current requirements of Form 51-101F1 Statement of Reserves Data and Other Oil and Gas Information (Form 51-101F1), Form 51-101F2 Report on Reserves Data by Independent Qualified Reserves Evaluator or Auditor, and Form 51-101F3 Report of Management and Directors on Oil and Gas Disclosure;

• non-compliance with sections 5.9, 5.16 and 5.17 of NI 51-101 concerning disclosure of resources other than reserves, classification to the most specific category of resources, summation across resource categories and disclosure of high case estimates of resources;

• inadequate disclosure of the meaning of, and method of calculating, the metrics used by issuers to measure and compare oil and gas activities;

• deficiencies in reserves reconciliation disclosure, including, for example, opening balances for the reserves reconciliation required under item 4.1 of Form 51-101F1 that do not agree with the prior year's closing balances; and

• insufficient and boilerplate disclosure of significant factors and uncertainties as per items 5.2 and 6.2.1 of Form 51-101F1, regarding the issuer's proved and probable undeveloped reserves and plans for developing those reserves under item 5.1 of Form 51-101F1.

3. Disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR) in venture issuers' MD&A

Some venture issuers discussed DC&P or ICFR in their MD&As, but did not include cautionary language. In accordance with section 15.3 of the Companion Policy to National Instrument 52-109Certification of Disclosure in Issuers' Annual and Interim Filings (52-109 CP), if a venture issuer and its certifying officers file Forms 52-109FV1 or 52-109FV2 (Venture Issuers Basic Certificates) and choose to discuss the design or operation of one or more components of their ICFR and DC&P in the MD&A or other regulatory filings, they should also consider disclosing in the same document that:

(a) the venture issuer is not required to certify the design and evaluation of its DC&P and ICFR and has not completed such an evaluation; and

(b) inherent limitations on the ability of the certifying officers to design and implement on a cost-effective basis DC&P and ICFR for the issuer may result in additional risks to the quality, reliability, transparency and timeliness of interim and annual filings and other reports provided under securities legislation.

Venture Issuers Basic Certificates provided in National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings (NI 52-109) include a "Note to Reader" that the certifying officers are not making any representations relating to the establishment and maintenance of:

i) controls and other procedures designed to provide reasonable assurance that information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and

ii) a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer's GAAP.

In the following example, the venture issuer used Venture Issuers Basic Certificates.

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Example of deficient disclosure

Disclosure controls and procedures

The Company's Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) are responsible for establishing and maintaining the Company's disclosure controls and procedures. These controls and procedures have been evaluated as at December 31, 2012 and have been determined to be effective.

Internal controls over financial reporting

The Company's CEO and the CFO are responsible for establishing and maintaining the Company's internal controls over financial reporting.

The internal control system pertaining to financial reporting gives a reasonable assurance as to the reliability of the financial information reported and the preparation of the financial statements in accordance with IFRS.

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In the above example, to avoid confusion, it would have been more appropriate for the venture issuer to use Forms 52-109F1 or 52-109F2 (Full Certificates) as allowed by subsections 4.2(2) and 5.2(2) of NI 52-109. However, if the venture issuer does use Full Certificates, it must use a control framework for the design of ICFR, as required by subsection 3.4(2) of NI 52-109. The guidance in Parts 6 and 7 of 52-109 CP regarding establishing and evaluating DC&P and ICFR would also apply.

If in the above example, the venture issuer intends to use only a Venture Issuers Basic Certificate then it could have discussed only one or a few discrete components of DC&P or ICFR. In addition, the MD&A disclosure should be clear and should not include assertions about the design or evaluation of all aspects of DC&P or ICFR, and should not include any conclusions on the effectiveness of DC&P or ICFR. In addition, the cautionary language set out in section 15.3 of 52-109 CP would ensure transparent disclosure.

For additional guidance on NI 52-109, please see CSA Staff Notice 52-325 Certification Compliance Review and CSA Staff Notice 52-327Certification Compliance Update.

4. Executive compensation

Issuers must provide the executive compensation disclosure for the periods set out in, and in accordance with Form 51-102F6 Statement of Executive Compensation of National Instrument 51-102 Continuous disclosure obligations. This disclosure can be included in an information circular, an annual information form (AIF) or as a stand-alone document.

The executive compensation disclosure must be filed not later than 140 days after the end of the issuer's most recently completed financial year pursuant to subsection 11.6(3) of National Instrument 51-102 Continuous Disclosure Obligations. We noted that some issuers failed to file the executive compensation disclosure within 140 days. We remind issuers, that if they are not planning to send an information circular to their securityholders within 140 days after the end of their most recently completed financial year, they must include the executive compensation disclosure in either the AIF or as a stand-alone document, and file it within the 140 days.

APPENDIX D

CATEGORIES OF OUTCOMES

Enforcement referral/ Default list/ Cease trade order

If the issuer has critical CD deficiencies, we may add the issuer to our default list, issue a cease trade order and/or refer the issuer to Enforcement.

Refiling

The issuer must amend and refile certain CD documents.

Prospective Changes

The issuer is informed that certain changes or enhancements are required in its next filing as a result of deficiencies identified.

Education and Awareness

The issuer receives a proactive letter alerting it to certain disclosure enhancements that should be considered in its next filing.

No action required

The issuer does not need to make any changes or additional filings. The issuer could have been selected in order to monitor overall quality disclosure of a specific topic, observe trends and conduct research.

Questions

Please refer your questions to any of the following:

Nadine Gamelin	Allan Lim
Analyst, Continuous Disclosure	Manager
Autorité des marchés financiers	British Columbia Securities Commission
514-395-0337, ext. 4417	604-899-6780
Toll-free: 1-877-525-0337, ext. 4417	Toll-free 800-373-6393
<<[email protected]>>	<<[email protected]>>
Nicole Parent	Sabina Chow
Analyst, Continuous Disclosure	Senior Securities Analyst
Autorité des marchés financiers	British Columbia Securities Commission
514-395-0337, ext. 4455	604-899-6797
Toll-free: 1-877-525-0337, ext. 4455	Toll-free 800-373-6393
<<[email protected]>>	<<[email protected]>>
Cheryl McGillivray	Tony Herdzik
Manager, Corporate Finance	Deputy Director, Corporate Finance
Alberta Securities Commission	Financial and Consumer Affairs Authority of Saskatchewan
403-297-3307	306-787-5849
<<[email protected]>>	<<[email protected]>>
Elena Kim
Securities Analyst, Corporate Finance
Alberta Securities Commission
403-297-4226
<<[email protected]>>
Bob Bouchard	Kathryn Daniels
Director, Corporate Finance	Deputy Director, Corporate Finance
Manitoba Securities Commission	Ontario Securities Commission
204-945-2555	416-593-8093
<<[email protected]>>	<<[email protected]>>
Patrick Weeks	Christine Krikorian
Analyst, Corporate Finance	Senior Accountant, Corporate Finance
Manitoba Securities Commission	Ontario Securities Commission
204-945-3326	416-593-2313
<<[email protected]>>	<<[email protected]>>
Pierre Thibodeau	Kevin Redden
Senior Securities Analyst	Director, Corporate Finance
Financial and Consumer Services Commission (New Brunswick)	Nova Scotia Securities Commission
506-643-7751	902-424-5343
<<[email protected]>>	<<[email protected]>>
	Junjie (Jack) Jiang
	Securities Analyst, Corporate Finance
	Nova Scotia Securities Commission
	902-424-7059
	<<[email protected]>>

{1}In this notice "issuers" means those reporting issuers contemplated in National Instrument 51-102 Continuous Disclosure Obligations.