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Welchcapitalpartners.com

Managing Cash Flow

during the COVID-19 Crisis

We help companies and their stakeholders understand, maximize and capture value.

Welch Capital Partners is an advisory firm that helps companies understand, maximize, and capture value, through the provision of Mergers & Acquisitions, Capital, Advisory, Virtual CFO and Valuation Services.

WELCH CAPITAL PARTNERS

THE COVID-19 PLAN

• 1. Understand and document the impact COVID-19 will have on your business

a) Create/update financial projections; know your cash in-flows and out-flows (mid to long term view: minimum 6-month focus) i. Revenue - sensitivity/scenario analysis (worst, expected, best case)

• Based on sales pipeline
• Based on % of prior year’s revenue

ii. Expenses

• Variable: can move up/down depending on the volume of sales (e.g. travel, advertising,

materials or inventory, wages, storage)

• Fixed: static expenses (e.g. rent, insurance, wages, loan payments)
• Break even analysis

iii. Balance Sheet & Cash Flow b) Depending on your initial analysis, determine the level of oversight you’ll need (daily, weekly, monthly cash flow reporting)

Pla lan Objective

Pla lan Objective

“Nobody ever regrets making fast and decisive adjustments to changing

• circumstances. In downturns, revenue and cash levels always fall faster than expenses.

In some ways, business mirrors biology. As Darwin surmised, those who survive “are not the strongest or the most intelligent, but the most adaptable to change.”1

1 https://medium.com/sequoia-capital/coronavirus-the-black-swan-of-2020-7c72bdeb9753

• 2. Create an action plan

a) Quick wins b) Cash flow management c) Market pivot

CASH FLOW MANAGEMENT

Managing Cash in a Cris isis is Mode/Distressed Times

• Know your

runway

• Longer

term view

Forecast

• Revenue

uncertainty

• Expenses

are known

Curtail Spending

• Traditional
• Alternative
• Stimulus

Capital

Customers (Sales/Accounts Receivable)

COVID-19  Call your customers to understand the impact of COVID-19 on their business*; get a sense of their payment ability and sales projections to assist you in modelling out your cash flow  Do you have any work in progress (WIP) that you could bill out?  Consider offering incentives for early payment or put pro-active payment plans in place (i.e. 6-months)  Are there new revenue streams you can capitalize on (Spartan Bioscience, Thawrih)?

* Companies that are doing well should continue to support other businesses by paying promptly and providing some leniency

BEST PRACTICE  Review customer payment terms (payments in advance, customer deposits, early payment discounts)  Make it convenient for customers to pay (credit card, wires, automated clearing house (ACH) payments, etc.)  Send invoices immediately/more frequently  Be diligent on collections; focus on past due accounts

Key Suppliers (Expenses/Accounts Payable)

COVID-19  Call your key suppliers to understand how COVID-19 will impact your supply chain (i.e. delays in orders)*; maintain strong relationships  Assess inventory levels – do you have the appropriate levels if there may be a disruption to your supply chain (too much, safety stock, obsolete)  Negotiate payables (terms, due date, partial payments, new pricing, extend contract terms for better pricing)  Prioritize payments to key suppliers vs paying everyone

* Companies that are doing well should continue to support other businesses by paying promptly and providing some leniency

Other Vendors (Expenses/Accounts Payable)

COVID-19  Call key vendors to understand their situation*; maintain strong relationships  Negotiate payables (terms, due date, partial payments, new pricing, extend contract terms for better pricing)  Slash expenses where necessary  Workforce adjustments  Hiring freezes  Capital project deferral  Right-size operational cost based on any workforce adjustments (i.e. subscriptions, licenses)  Eliminate all discretionary spending (i.e. training, travel, meals & entertainment, advertising)

* Companies that are doing well should continue to support other businesses by paying promptly and providing some leniency

People

Employees*  Consider temporary lay-offs (13 weeks, maintain benefits)  Consider permanent lay-offs (right size organization)  Reduce contract labor and redistribute work to full-time employees  Owner/management compensation reduction (review full incentive plans: discretionary bonuses/commissions)  Offer reduced work week, voluntary leave without pay, work-sharing arrangements  Reduction of pay for all staff  Consider accessing a contingent labor pool (VCFO, VHR, VGC (in-house legal council), etc.)

* Consult legal council – depends on contracts

Other

Other Considerations  Understand your business interruption insurance  Accelerate filings where you are owed money (SRED, HST, Corporate Tax, etc.)  Sell non essential assets  Long term: What other functions could be outsourced to reduce costs and diversify risk (i.e. contract manufacturing vs in-house, third party warehousing, contingent labor, etc.)

Capital

Traditional/Commercial Lenders  Speak to your Commercial banker and renegotiate loans if possible  Increases in lines of credit  Postponement of principal payments on loans  New financings – lower interest rates  Apply to BDC ($100,000 small business loan, 6 month principle postponement, 5 year years + working capital, acquisitions, PO financing, etc.)  Take advantage of financing options (i.e. equipment financing vs outright purchase) Alternative Lenders  Factor receivables  Purchase order financing  Debt & Equity alternatives (VC, Private Equity)

SUPPORT FOR BUSINESSES

Key Federal Government Subsidies - Business

Subsidy Description $40 billion Federally Guaranteed Loans for Small & Medium Enterprises (SMEs) – Business Credit Availability Program: SME Loan & Guarantee Program EDC Guarantee - $20 billion

• Guarantee new operating credit and cash flow term loans that financial

institutions extend to SMEs, up to $6.25 million

• Applies to domestic companies and the export sector
• 80% EDC guarantee, 20% by a financial institution

BDC Co-Lending Program - $20 billion

• Co-lending program for SMEs to provide incremental credit amounts up to

$6.25 million maximum per loan.

• 80% BDC, 20% by a financial institution
• Commercial interest rate
• 10-year repayment period
• Financial institutions are the interface with clients for both programs
• Companies could obtain up to $12.5M through these two lending streams
• The definition of eligible businesses has not been provided
• Roll out will occur within 3 weeks after March 27th

Key Federal Government Subsidies - Business

Subsidy Description $40 billion Federally Guaranteed Loans for Small & Medium Enterprises (SMEs) – Business Credit Availability Program: SME Loan & Guarantee Program BDC is offering low-interest loans up to $2 million if your business has been generating revenue for at least 24 months

• Was “bankable” before COVID-19; not in breach of covenants or

Commercial Lender is willing to waive the covenants

• ~ 3.5%, 6 month postponement of principal, 3 year term
• 6 month cash flow impact
• https://www.bdc.ca/en/about/mediaroom/news_releases/pages/bdc-

announces-additional-measures-provide-relief-canadian- entrepreneurs.aspx $40,000 in Federally Guaranteed Loans to Small Businesses & Not-for- Profits (administered by EDC & financial institutions) – Business Credit Availability Program: Canada Emergency Business Account ($25 billion).

• Organizations that paid between $50,000 and $1 million in total payroll in

2019 and experienced a decline in revenues due to COVID-19

• Interest-free
• If loans are paid off by December 31, 2022, 25% of the loan will be

forgiven.

• Contact your financial institution for details.

Key Federal Government Subsidies - Business

Subsidy Description Defer Tax Filings ($85 billion)

• Defer payment of any income tax amounts that become owing on or after

March 18th and before September 2020 – payment due September 1, 2020

• Defer payment of GST, HST and customs duties until June 30, 2020
• No interest/penalties during the deferral period

3 month, 10% Temporary Wage Subsidy for Employers ($975 million)

• Retroactive to March 15th and available to June 30, 2020
• $1,375 max per employee; $25,000 limit per employer (may increase with

the percentage increase)

• Eligible employers can claim the reduction by withholding payroll income

tax deductions (only income tax, not CPP or EI remittances)

• Taxable

EI Work Sharing Program

• Offered to workers who agree to reduce their normal working hours

because of developments beyond the control of their employers.

• EI eligibility extended to 76 weeks vs 38 and eases the eligibility

requirements

Key Federal Government Subsidies - Business

Subsidy Description 75% Canada Emergency Wage Subsidy ($71 billion)

• Eligible employers: individuals, public and private taxable corporations,

partnerships consisting of eligible employers, registered charities and NPOs (other than public bodies which include municipalities and local governments, Crown corporations, public universities, colleges, schools and hospitals).

• Criteria: at least a 30% decrease in gross revenue measured against the

same period last year

• Apply on-line through your My Business Account CRA Portal on the CRA

website (businesses should ensure they have direct deposit)

• Employers will need to re-apply each month and attest to the decline in

revenue

• Effective March 15th and available for the months of March, April and May
• Max benefit of $847/week or 75% of employee’s pre-crisis remuneration
• Funds available within 6 weeks; portal available in 3 weeks
• Taxable
• Can not claim the Temporary Wage Subsidy (10%) + the Canada Emergency

Wage Subsidy (75%) concurrently

Key Provincial Government Subsidies - Business

Subsidy Description Employer Health Tax (EHT) Temporary increase to the EHT exemption from $490,000 to $1,000,000 for 2020 (retroactive to January 1st) for eligible private sector employers with payroll < $5M Deferral of WSIB Payments

• Deferral of both reporting & premium payment until August 31, 2020.
• No interest or penalties will accrue during this exemption period.

Deferral of Provincially Administered Taxes (EHT; Tobacco; Fuel; Gas; Beer, Wine & Spirits; Mining; Insurance Premium, etc.

• Tax filing & remittance deadlines remain unchanged
• Beginning April 1, 2020 to September 1, 2020, no interest or penalties will

be levied if you miss the filings/remittances. Regional Opportunities Investment Tax Credit Percentage refundable Corporate Income Tax credit available to eligible businesses that construct, renovate or acquire qualifying commercial/industrial buildings in designated regions (~$45K savings) Electricity Cost Relief Increase to the new Ontario Electricity Rebate (OER) for eligible residential, farm and small business consumers of ~ $1.9 billion. Will be an automatic savings on your bill.

THE TURNAROUND PLAN

Managing your Business Mindfully & Pro-Actively

• 1. Think long term

a) This too shall pass b) Markets had to adjust c) We have a lot to build on d) We can all do a better job at planning and cash flow management

• 2. Think strategically

a) Are you focused on the right things and your core competencies b) Can you do more with less (i.e. remote work locations may pick up steam) c) Do you need to diversify your markets & customers ((supply chain risk, sales risk) d) Reassess your business model (i.e. technology, e-commerce, focus, right-size, right talent – new labor pool) 3. Don’t do this alone a) Get advice - different perspectives, support for now and later

We’re all in it together so lets support one another

Help lpful Lin inks/Resources

Government of Canada https://www.canada.ca/en/department-finance/economic-response- https://www.canada.ca/en/department-finance/news/2020/04/the-canada-emergency-wage-subsidy.html BDC https://www.bdc.ca/en/financing/business-loans/pages/small-business-loan.aspx https://www.bdc.ca/en/pages/special-support.aspx https://www.youtube.com/watch?v=ZWtYS2XwovM&utm_campaign=Webinar-COVID19--VOD--25-03-2020-- EN&utm_medium=email&utm_source=Eloqua Welch LLP https://www.welchllp.com/blog/canada-emergency-wage-subsidy/https://www.welchllp.com/media- library/?fwp_type=blog plan.htmlhttps://www.welchllp.com/blog/government-of-canada-stimulus-announcement-summary-march-27-2020/ https://www.welchllp.com/blog/wage-subsidy-for-employers/

Candace Enman, CPA, CA, CMC President, Welch Capital Partners

• t. 613.236.9191 ext. 195
• e. cenman@welchcapitalpartners.com
• w. welchcapitalpartners.com