Cross-referenced from Rule 204(2)

1. Introduction

1.1 This Practice Note sets out the considerations to apply in computing the quantitative standards in Rule 204(2).

2. Definitions and Computations

2.1 In computing income from continuing operations before income taxes, the Exchange will rely on the issuer’s financial information as submitted to the Exchange in the issuer's most recent periodic financial statements and/or prospectus.

2.2 If an issuer has less than three years of publicly reported financial data, it may qualify under Rule 204(2)(b)(ii)) if it has:

(a) aggregate income from continuing operations before income taxes of at least US$11 million; and

(b) positive income from continuing operations before income taxes in each of the reported financial years. 

2.3 In computing total assets and shareholders' equity for purposes of Rule 204(2)(b)(iii), the Exchange will rely on an issuer's most recent publicly reported financial statements subject to the adjustments described below:

(a) application of use of proceeds - If the issuer is in the process of an equity offering, adjustments should be made to reflect the net proceeds of that offering, and the specified intended application(s) of such proceeds to:

(i) pay off existing debt or other financial instruments: The adjustment will include elimination of the actual historical interest expense on debt or other financial instruments classified as liabilities under generally accepted accounting principles being retired with offering proceeds of all relevant periods or by conversion into common stock at the time of an initial public offering occurring in conjunction with the issuer's listing. If the event giving rise to the adjustment occurred during a time-period such that pro forma amounts are not set forth in the prospectus (typically, the pro forma effect of repayment of debt will be provided in the prospectus only with respect to the last financial year plus any interim period in accordance with SEC rules), the issuer must prepare the relevant adjusted financial data to reflect the adjustment to its historical financial data, and its outside audit firm must provide a report of having applied agreed-upon procedures with respect to such adjustments. Such report must be prepared in accordance with the standards established by the American Institute of Certified Public Accountants.

(ii) fund an acquisition:

(A) the adjustments will include those applicable with respect to acquisition(s) to be funded with the proceeds. Adjustments will be made that are disclosed as such in accordance with rule 3-05 "Financial Statements of Business Acquired or to be Acquired" and article 11 of the SEC Regulation S-X. Adjustments will be made for all the relevant periods for those acquisitions for which historical financial information of the acquiree is required to be disclosed in the prospectus; and

(B) adjustments applicable to any period for which pro forma numbers are not set forth in the prospectus shall be accompanied by the relevant adjusted financial data to combine the historical results of the acquiree (or relevant portion thereof) and acquiror. Under SEC rules, the number of periods disclosed depends upon the significance level of the acquiree to the acquiror. The adjustments will include those necessary to reflect (I) the allocation of the purchase price, including adjusting assets and liabilities of the acquiree to fair value recognizing any intangibles (and associated amortization and depreciation), and (II) the effects of additional financing to complete the acquisition. The issuer must prepare the relevant adjusted financial data to reflect the adjustment to its historical financial data, and its outside audit firm must provide a report of having applied agreed-upon procedures with respect to such adjustments. Such report must be prepared in accordance with the standards established by the American Institute of Certified Public Accountants

(b) acquisitions and Dispositions - In instances other than acquisitions (and related dispositions of part of the acquiree) funded with the use of proceeds, adjustments will be made for those acquisitions and dispositions that are disclosed as such in the issuer's financial statements in accordance with rule 3-05 "Financial Statements of Business Acquired or to be Acquired" and article 11 of the SEC Regulation S-X. If the disclosure does not specify pre-tax earnings from continuing operations, minority interest, and equity in the earnings or losses of investees, then such data must be prepared by the issuer's outside audit firm for the Exchange's consideration. In this regard, the audit firm would have to issue an independent accountant's report on applying agreed-upon procedures in accordance with the standards established by the American Institute of Certified Public Accountants.