Sacha: I think we can get started everybody. Thank you for joining us today. My name is Sacha Babic and I'm a partner in Gowling WLG's Hamilton office and a member of the firms business law practice group. I'm pleased to be your moderator for the first of a new series of webinars that we are hosting focused on Financing In Uncertain Times. I note that the firm has established on its website an insight and resources page dedicated to COVID-19 related matters which you can visit for information on a broad range of issues. You'll find various articles there as well as links to earlier webinars on a range of topics. Today's webinar will be posted there as well within a few days and, if you're unable to join us for the remaining seminars in this series, they too will eventually be posted on the on demand version. Please also take note the earlier M&A In Uncertain Times series, which you can also find on the website, as on demand versions. So before we get into today's discussion just a few housekeeping notes. To view the presentation, and all speakers, please click on the speaker view in the upper right hand corner of your screen. For questions throughout the session please use the Q&A button at the bottom of your screen. We'll try our best to answer as many questions as we can towards the end subject to time constraints. If your question isn't answered please feel free to reach out to us afterwards. We're more than happy to discuss your questions on an individual basis following the presentation as well. For those of you who are lawyer, this program counts for 1 hour of Continuing Professional Development credit, in applicable jurisdictions. So for example, in Ontario it counts as 1 hour of substantive credit towards the mandatory annual CPD requirements of the law society of Ontario. Finally, I must note our legal disclaimer. The information and commentary we're providing today is for informational purposes only, and it's not intended to be legal advice, because this is very high level it is impossible to cover everything or to consider each and every unique set of circumstances. To the extent that there's something you're dealing with in your organization, by all means do take this information away and give it some consideration, but I would encourage you to reach out to your legal counsel to discuss any specific questions. Finally, the COVID-19 situation is extremely fluid, it's rapidly evolving and the government is introducing new relief programs and updating existing programs regularly. So appreciate that the information we're providing today may even be outdated by the time this presentation is over. With the housekeeping out of the way I'd like to introduce you to today's speakers.
First, Radhika Vaidyanathan is a partner in Gowling WLG's Waterloo region office, practicing corporate commercial law. Radhika advises both private and public companies on a broad range of corporate transactions including mergers and acquisitions, public and private debt, equity financing and reorganizations.
Radhika: Welcome everyone.
Sacha: Naim Antaki is a partner in our business law group in Montreal, whose practice includes mergers and acquisitions, corporate finance and private equity. He's part of the part of the national executive committee of the Technology Industry Group and co-head of the Tech group in Montreal and he's experienced in working with early stage companies. His experience spans key IT acquisitions and reorganizations and financing at various stages.
Naim: Bonjour. Hi everyone.
Sacha: Josh Rosen is an associate with our Toronto office, practicing in the firms business law department. His practice focuses on securities, corporate finance, mergers and acquisitions and corporate governance. Josh's background includes exposure to various corporate commercial transactions involving early stage companies in a broad range of sectors.
Josh: Hi, Sacha. Pleased to be here.
Sacha: Finally, Mathieu Santos-Bouffard is an associate in Gowling WLG's Montreal office, working in the firms business law department, working with companies of all sizes. Matthew focuses his practice on a broad range of corporate commercial transactions.
Mathieu: Thanks, Sacha. Hello everyone.
Sacha: Continuing on to today's focus is early stage investing challenges in uncertain times. I stress that the catalyst for today's program is of course pandemic, however, the material is not necessarily unique to COVID. Early stage companies face challenges just by virtue of being early stage companies regardless of the climate. When you factor in intrinsic factors tied to crisis, whether economic, pandemic or otherwise, they're particularly vulnerable in the battle for limited financial resources. So with regard to COVID, my perception is really with the government's focuses being on sustaining established business; that is the focus being on survival rather than growth. So quite simply, early stage companies have probably received the least amount of attention, in that regard. These are certainly difficult times for new companies but that is not to suggest that resources aren't available. So today our panel will be discussing funding options and relief programs that have been put forward by governments and that are relevant to early stage companies. We will do our best to delve into these issues from different viewpoints. In terms of our agenda today, we'll start by discussing the investment climate in general, on account of COVID. Naim will provide commentary from the investor's side and Radhika will provide commentary from the founder's perspective. Next, we'll turn to Mathieu and Josh, who will be offering an overview ... COVID specific relief programs relevance to early stage companies, namely the BDC bridge financing program and the Regional Relief Recovery Fund implemented through Canada's regional development agencies. Our panel will then briefly discuss a few existing programs that early stage entities should continue to explore for funding opportunities as well, and finally, we'll conclude with a discussion regarding the challenges of navigating these relief programs, both in general and in during COVID. Of course, as much as possible, we want this to be an interactive discussion. We would love for each of you to share your questions with us using the Q&A option below. You can send us your questions at any time during the presentation. Please do so and we will address as many as we can following the panelists discussions. So, you've heard enough from me so I'm going to turn it over now to our panel. To set the stage for, not only today's seminar but this entire series, we want to start by discussing the current investment climate in general in Canada on account of COVID.
Naim, can I ask you to offer some of your thoughts regarding the current climate, particularly from the investor's perspective?
Naim: Thank you, Sacha. Yes, it would be my pleasure. This will be my personal view but it is also based on discussing with my colleagues across the firm. I think the key message that we've been getting is that it really depends on your own situation. It is not a one size fits all approach. In certain sectors you will have some deals that are definitely getting closed and increasing so my colleagues will be discussing those. While in other sectors it's really touch and go. There is more uncertainty. One of the particularities, I would say of COVID-19, is that we don't really know at this stage how it will get solved. Is this a situation, will people get back to normal or whatever the new normal is, in 2 months? Will it take 2 years? This uncertainty at the market level makes it more difficult for investors to really understand or, you know, doing what they do best which is understanding the risk from the overall markets standpoint, and then helping companies to execute. Right? From idea to commercialization all the way to exit. So with more uncertainty comes, potentially, more opportunities and more rewards. But I think people are really focusing on specific areas. Deals are getting closed. Definitely. But I would say this is more existing deals. We have seen across the firm some discussions that are unfortunately getting as long as my hair right now. So we need to figure out the right way to make people comfortable. Some of the ways in which people are getting more comfortable is that they are looking at different alternatives. If there is too much uncertainty right now, do you go from getting into some type of investment right away? Or do you go for a bridge which may help you to get to a place where there is less uncertainty. Where people are more comfortable closing the deal. Some of my colleagues will be discussing this aspect. There have been some quite interesting deals that have been getting closed. For example, sometimes it's project based and so Scale AI, for example, has closed on some projects. Other times it's going to be on work from home and health. So these are some of the typical areas that you would think about. However, what I'm seeing or what I'd like to see even more, is maybe some non-traditional sectors, or less sexier sectors, such as agriculture. Right? Everything relating to our agriculture is important. Think more generally at what has typically been an open area. So trade and movement between countries has always been something that's been taken for granted. Now it is a very different situation. How do you help companies navigate through that? Right? Investors are going to be looking for companies that are solving these types of new problems. Delivery mechanics. Logistics. Those are key issues that are no longer nice to have if you want to supplement what you're already do well. But it's the way to survive. Again, if investors are looking at people looking to solve these issues, and who have the capacity to help right away this. In terms of what investors will also look at, beyond I guess what's new about this situation, are the typical things that you've heard about but that are king. So, cashflow. Cashflow has always been king. You may have a great idea but if you cannot manage your cashflow all the way to commercialization you're going to be in trouble. Taking advantage of the governmental programs are available looks like a fantastic idea in order to show investors that are interested in your company that you are doing everything in order to have as much cashflow as possible. One small note of caution that I would give to you on this one is that investors will also take a look at what the impact of these governmental programs are. Are they going to be getting a piece of the pie in terms of the IP, ownership of IP? Are they going to be requiring consent for future rounds or exits in a different way that you're other investors would? Those are some of the questions that are questions that are being asked, whether there is COVID or not, but I think they're particularly important for you to be comfortable with as you're working through those programs. I guess something that we also need to do is to take a deep breath and realize that if you're just at this stage of the idea, and you just want to incorporate a company, the government is not closed. Right? The government is actually trying to do a lot in order to help. If you're trying to work on intellectual property. If you're trying to work on employment, etcetera, there's a lot of, how can I put this? Business is not closed. The environment is not closed. I think you can still focus on what is the problem that you want to solve. How you can convince an investor that you are the right person to do this. Maybe take a longer approach in terms of timing at how you're going to solve it. Then you can still rely on getting things done in typical way. Again, another note on this one. I personally think that there's a lot of fantastic opportunities being given right now because of some of the leeway or a relaxation of some of typical restrictions that governments may have. If it is easier, or now almost required for people to go online, maybe in terms of dispute resolution process or in terms of different types of matters, then people are going to be looking for companies that help them achieve these types of new possibilities. Again, I wouldn't look at the situation as necessarily a bad one but as a fantastic way to deal with opportunity. I guess the other aspect that is quite important to me is relationships. I want to just say a few words on relationships. The first one is if you are a founder and you're looking at an investor you should remember that an investor has to keep a good relationship with the people that fund this investor. Sometimes you'll have angels that already have their own money or strategic investors. But in oftentimes you'll have investors that are structures as funds which needs money from their own limited partners. A lot of times if these are funds that are well established and advanced in their fund process, they'll be doing a lot of, I would say, defense. So making sure that some of their existing portfolio companies are managing cashflows, etcetera, to maximize return. So you may get a bit less, maybe a bit more difficult, for you to get funding from these entities because they have a shorter timeframe in order to show return to the LP's. But newer funds or strategic ventures, angels, could be actually quite good places to look. That's the relationship from the investor to their own funders standpoint. The relationship between investors and founders is completely changing and there are some fantastic, again, opportunities or new ways to connect. Josh will be speaking about some of this a little bit later. Then I think the last part, which no one should forget about it, is how do you deal now with a relationship with clients? Companies who are looking to sell don't have necessarily same channels as before. Right? I was looking at Gartner analysis, that came out yesterday, that was saying that even in the tech sector, which people think would where spending would go up, actually spending is going down 5 to 8%. But it really depends on the specific type of IT spending that's happening. So I think knowing your niche market is very important. Focusing on those relationships. Being able to prove to the investors that you are managing cashflow by taking advantage of those governmental programs in a way that does not, I guess, block you in the future, are all things to think about. I would be happy to answer questions, or actually hear also from Radhika, on how she's seeing things from the founders standpoint.
Sacha: Thanks. Radhika, if you can take this to the founder side please.
Radhika: Absolutely. So good afternoon everyone. As every business needs capital to run and the question that crosses the mind of every founder and entrepreneur, especially in these difficult times, is where will they get the capital from. While it is true that there is a lot of uncertainty about how COVID-19 will change the investment climate, particularly for early stage companies, as Naim mentioned new deals are still being closed and investors are showing increased interest in certain sectors such as online health care, fitness, remote working solutions, mental health apps and services, for example. Before addressing the current situation it is important to note that there was a record number of VC funds that was raised in 2018 and 2019. The majority of these funds are still in their active investment period, and many may continue to make investments for the rest of the year, and perhaps even early 2021. In the past 2 years we also saw some historic levels of active seed and CMHC funds which means that it's not all negative news for capital availability at this point. But with that said we don't know the exact investment projections for the next 2 years. The true impact of COVID-19 and the current market fluctuations may be felt more in 2021. So should start preparing now for an altered investment climate over the next 24 months and start re-evaluating the plans you had originally mapped for 2020 and the next 24 months. So preparing for this now will really help companies stay afloat, if for some reason the capital availability means, depending on how the projections land. Startups at different stages are also going to feel the impact differently. As Naim mentioned it's not going to be a one size fits all approach. But for companies in their early stages boot strapping may be the way to go forward. Most startups may have to move from a growth or expansion mindset to sustainability and retention mindset and focus on their customers, manage the cashflow and strap in for the next 24 months. This aligns with what the investors are also expecting their startups to do which is essentially decrease cost, increase runway and focus on the customer. In short, it's more critical than ever for founders to focus on defining the value proposition of the product by targeting the most profitable segments. As they say, the best financing is non-diluted financing, which is called revenue. So that may be where the founders will have to start focusing on. Some of the other challenges will be, just in terms of making those investment pitches. These pitches will now have to be done remotely. CEO's are not meeting with their investors in person. Making it hard to figure out whether you will get along personally or not. It is an important consideration. Again, as Naim was mentioning, relationships are important. It is an important consideration especially if big backers are going to be involved, perhaps on the board, for years to come. Founders may also have to gauge if capital will still be available in the future and on what terms. Even if they get the capital now they may not be able to put it all into work, into hiring and expanding, just because of the crisis situation that everybody is in right now. So being realistic about the forecasting will save founders a lot of time and aggravation. Target companies may also have to accept lower valuations, and provide more favourable terms, just given the lack of reliable investors. In fact, we are doing a webinar on this topic next week, and we suggest that you tune into that webinar to get more details, specifically on the subject of downturns and what that might look like. Cost of capital is going to be high. The investment criteria may be tightened. Investors are going to be more vigilant which means that the funding decisions are going to take longer. Investors may also want to have very close working relationships with the founders, so that they have an oversight on the overall operational aspects of things, as things start to unfold. We're also seeing that investors are moving towards closing deals to support their existing portfolio companies, because they already have the skin in the game and they're more likely to help ... at this time. But with that said, existing portfolio companies should be warned that just with the disruption in the market and the fluctuations, the funding's may stall. So it may not move as swiftly as you had originally thought it would. So while we see angel investors may have the cash to invest, the pullback will trigger triage, more that we've seen in previous downturns. So investments may be in select companies and select sectors. But at the end of the day, if you look at previous economic downfalls we can notice that the market eventually bounces back. So founders, in my view, should ... to look for capital and may be look for sources of cash that are non-equity. Think of ways to get government grants, be creative about finding other sources of cash, explore the programs that have been put in place to help small businesses during this time, and also maybe potentially, consider doing some short term deals that may help the immediate cash crunch. So that's all from me, Sacha.
Sacha: Thank you, Radhika. Obviously it's a difficult climate for many founders. Investors are being cautious but very briefly, Josh, you had mentioned that you feel the least based on what you've seen locally in Toronto, but maybe at least some cause for optimism after an initial lull in response to the COVID outbreak. You want to maybe just tell us about your perspective in this regard?
Josh: Sure, Sacha. Now this might be the result of some regional or site specific variation but we've actually seen reason for optimism, at least in the near term. There was a bit of lull at the outset, as you mentioned, with everyone transitioning to work from home. But a number of transactions that were in progress prior to COVID-19 continued to closing and we've seen a number of new financing deals pop up. Early stage companies an e-commerce, consumer packaged goods, food and wellness have all been attracting venture capital financing. We've seen public offerings for junior tech companies, particularly those with a connection to the health or pharmaceutical industries. So while there may be some impact, in terms of scaled investment and degree of due diligence that investors are doing both on the company and the current situation, our market observations indicate that there is still a climate for capital raising for early stage companies. With that said, as Naim and Radhika pointed out, there's a lot of uncertainty surrounding the current situation and how it will evolve over time. So it's difficult to try to predict what will come next but at the moment there is still VC financing out there.
Sacha: Thank you, Josh. So we'd now like to turn our attention to consideration of a couple of the COVID specific relief programs that have been put into place by government in order to assist, well many companies, but we're focusing ones that we think relevant to early stage companies in particular. Mathieu, perhaps you could start by giving us an overview of the BDC bridge financing program, which has received quite a bit of attention since its announcement.
Mathieu: That's certain for sure, Sacha. Hello everyone. I'll speak about the BDC bridge financing program, which there's some details on the website, but there's also a lot of details that have been released in different webinars that were given by the BDC following the announcing of this new program. The investment arm of the business, Bank of Canada, has announced this new program called the Bridge Financing Program. To be eligible the company must have raised at least $500,000.00 in external capital before applying. Be backed by a qualified venture capital firm. Be specifically impacted by COVID-19 and be a Canadian business. To be a Canadian business the business must be Federally or Provincially incorporate, be in Canada, has substantial operations in Canada and have a majority of its senior management resident in Canada. For the additional details that were given in different webinars, the goal of the program is to provide capital to high potential venture backed companies that have been impacted by the COVID-19 crisis. The matching capital is not meant for a low cost capital companies with stable balance sheets. But more for companies that have been affected by COVID-19. Also, the company seeking help need to have an eligible investor participating. Meaning that the investor have at least $10,000,000.00 in assets under management and investment in a lease free existing portfolio companies in Canada. Eligible investors will mostly be firms where BDC is either an existing limited partner or has an existing relationship. Investment will also be subject to BDC capitals due diligence and investment company review and approval process. The terms of the investment will be current financing, must be an aggregate minimum amount of $250,000.00 and be completed after February 1st, 2020. BDC will match the current financing investment amount on a dollar per dollar basis to a maximum amount of $3,000,000.00. Matching investment will typically be structured to the issuance of unsecured subordinated convertible promissory notes, accrue interest annually at the fluctuating BDC base rate, currently at 4.5% plus 4% with a maturity date of 3 years. The notes will, at the option of BDC, be convertible but in a relatively short period of time following the completion of the current financing, at any time and to the most recent prior round of shares or other securities issued at a price featuring the financing, subject to a 20% discount and, in the event of a future financing into the shares or other securities issued at the price paid in that financing round, subject to a 20% discount. At the end of the journey BDC thinks that it will invest in around 100 projects.
Sacha: Thank you, Mathieu. Josh, you're going to be speaking to us about the Regional Relief Recovery Funds Program which was announced a few weeks. But I think it's important to note that the specific details on these programs really only came out over the last 2 days so thank you for pulling this next section together so quickly for everybody. Josh, you're needed.
Josh: Yeah, thanks. Of course. So in addition to the bridge financing programming through BDC that Mathieu has discussed, the Canadian Federal government has created the regional relief recovery fund for businesses, to be administered through six regional development agencies across the country. This fund looks to offer relief to businesses that may not have been eligible or were rejected from other COVID-19 relief programs offered by the government. As Sacha mentioned we've learned a lot about this in the last couple of days and each of the agencies have been publishing their guidelines for their respective programs. So there's two key aims with the fund. First, to help businesses try to off-set some of the financial pressure they've incurred due to COVID-19, and to help them to continue to operate and pay their employees. Second, to support projects by businesses that will help them to prepare for a successful recovery as the economy re-opens. In addition to providing $675,000,000.00 to support regional economies across the country, and the businesses that operate within them, the government has earmarked $287,000,000.00 to support community futures development corporations, or CFDC's, which targets small businesses and rural communities. Each of the agencies have now released some of the details of their respective programs as well as the allocation of funds. Up on the screen right now you can see the six agencies, and their coverage across the country, as well as how much money will be available to businesses in each region. So let's take a closer look at each of the programs. Starting in Southern Ontario, the Federal Economic Development Agency for Southern Ontario, or FedDev, has received $252.4 million dollars with $213,000,000.00 earmarked for SMEs facing financial pressure and $39.4 to be deployed through Southern Ontario's CFDC's. The FedDev program targets businesses located in Southern Ontario with 1 to 499 full time employees that were viable prior to the pandemic and are now facing pressure due to COVID-19. Industries like manufacturing, tech and tourism may be prioritized as key sectors and major employers in certain communities in the region. This program has two tracks. Conditionally repayable loans of up to $40,000.00 and unconditional repayable loans of up to $500,000.00. Both are intended to cover eligible unsupported fixed operating costs for a 3 month period. Businesses will need to submit financial statements for the last 2 years, as well as the most recent interim statements with their applications, as well as disclosure on revenue, angel venture capital funding, outstanding debt and other factors. In terms of repayment, loans up to $40,000.00 are conditionally repayable with an opportunity for forgiveness of 25%, if the other 75% of the contribution is repaid before December 31, 2022. Otherwise the full loan will be repayable, on a monthly basis, over a 3 year term starting in January 2023, with a requirement that everything be repaid by December 21, 2025. The repayment terms for loans up to $500,000.00 provide for 100% repayment, over a 3 year term starting in January 2023, with a requirement that the full balance of the contribution will be repaid by December 31, 2025. The CFDC program in Southern Ontario will focus on assisting local businesses like retail shops, restaurants, businesses of strategic importance to their industries, by providing loans up to $40,000.00. In Northern Ontario, the Federal Economic Development initiative for Northern Ontario, or FedNor, received $49 and a half million dollars. $24,000,000.00 of which will be delivered through its regional economic growth through innovation program to eligible participants like incorporated companies, corporations or cooperatives, indigenous organizations like settlement on businesses. The aim here is to help organizations stay solvent for a 6 month period. The remaining $25 and a half million dollars will be delivered as a direct support to the regions 24 CFDC's, reaching small businesses and entrepreneurs in the rural areas. Sole proprietorships and partnerships are covered under this umbrella and applicants will work directly through their local CFDC. The Canada Economic Development for Quebec region, or CED, received $211 million dollars split into two tracks for repayable loans to SMEs. There's one track with a $40,000.00 cap and one with a $500,000.00 cap based on the business' operating needs over a 6 month period starting n March 15th. The eligibility criteria for the CED's relief fund varies by industries and caps contributions at a percentage of sales or operating costs as applicable to that particular type of business. Eligible businesses must use the funding to address financial pressures on liquidity and have a post COVID viability perspective. Similar to the Southern Ontario program, the Quebec repayment terms for loans up to $40,000.00 provide for forgiveness of 25% of the contribution if the balance is repaid before December 31, 2022. Otherwise the full amount will be repayable over a 3 year term starting in January, 2023. Loans over $40,000.00 have a 5 year term starting in January 2023 for repayment. Eligible criteria for the local business track continue to be rolled out by Quebec CFDC's. So we will update this presentation when more information emerges. Out West, the Western Economic Diversification Canada, or WD, will split $304.2 million dollars into two tracks similar to Southern Ontario and Quebec. One track with a $40,000.00 cap and one track with a $1,000,000.00 dollar cap, based on a business' operating balance over a 6 month period starting in April. The eligibility criteria for the WD's relief fund includes a maximum 500 full time employees, current and intended future operations located in Western Canada and consideration of available alternative government relief funding. The $40,000.00 and under loan program is also open to pre-revenue firms and businesses without salaried employees but not to sole proprietorships or not profit organizations. Applicants will need to attest as to that the full amount of the relief was expended for operating costs and WD might request financials down the road to substantiate that information. The repayment terms for loans up to $40,000.00 are the same as Southern Ontario and Quebec with 25% forgiveness if the balance of the contribution is repaid before December 31, 2022. Otherwise the full loan will be repayable on a monthly basis over a 3 year term starting in January 2023 with a requirement that the full balance of the contribution be repaid by December 31, 2025. The million dollar program is aimed at businesses with 2019 revenue of less than $10,000,000.00 and pre-revenue businesses that received angel or venture capital funding. The application for the larger loan requires descriptions of the impact COVID-19 has had on operations and how WD funding will help support the Western Canadian economy going forward. Applicants will need to submit financials for the last 2 years and estimated 2020 cashflow needs from April 1 to September 30, 2020. Loans greater than $40,000.00 and up to a $1,000,000.00 are 100% repayable over a 3 year term starting in January 2023. On the East Coast, the Atlantic Canada Opportunities Agency, or ACOA, has been allocated a $110,000,000.00 with $66.75 million distributed to SMEs that provide products and services to other businesses, as well as organizations that provide support services to other businesses. $43.3 million will support mainstream businesses like retailers and restaurants and small rural and remote communities in the region. The fund contributions are repayable over a 3 year period starting January 1, 2023 with the full amount required to repaid by December 31, 2025. Last but not least, the Canadian Northern Economic Development Agency, or CanNor, will distribute $34.3 million which will be divided into three mechanisms to help businesses. First, by increasing the funding levels to SMEs through CanNor's existing Northern Business Relief Fund, to provide non-repayable grants ranging from $2,500.00 to $100,000.00 for fixed operating costs incurred over a 4 month period from when the pandemic began. Second, targeted and relief and stabilization to key sectors of the economy. Like tourism, mining supply chain and fisheries, as well as not for profit organizations in the region. Finally, CanNor's going to roll out a greater range of financing options through the CFDC network that have yet to be fully detailed but will likely be available to retailers, restaurants and professional services firms that are ineligible for the first and second tracks.
Sacha: Thanks, Josh. So quite apart from some of the government relief programs that are out there, it seems like there's members of the private sector who are also operating some support to startups within the community. Josh, just to keep you on the spot for a minute, I'm sure there are numerous initiatives out there but perhaps just an example of some private sector efforts. Can you give us a bit of an overview of this VC Hours initiative that we've learned of through publication that was recently received by the firm.
Josh: Yeah. I'd be happy to, Sacha. This is actually a great program that's been spearheaded by private sector VC's who recognize the challenges and strain that COVID-19 has created for all facets of the startup community across the country. There've been a couple of reports released recently saying that nearly 60% of Canadian startups and 90% of Canadian entrepreneurs are feeling the impact as they try to stay afloat. So what these VC's have done is they've set up a way for members of the community to reach out for short one on one calls to talk about what's happening in their businesses, their industries and what opportunities might be out there for them to continue operating through stressful times. This is a really good way to get a sense of how VC's have been working with their clients through this and it's particularly useful for entrepreneurs and startups that may not have those advisors or stakeholders to lean on during this pandemic.
Sacha: Excellent. Thanks, Josh. So, having considered now these COVID specific programs that are out there, we also wanted to touch on a few existing programs that are available to early stage companies. So while these have not been established in response to COVID, in particular, they remain a valuable resource that companies should explore and be mindful as they moved forward looking for assistance. Before turning to the panel I'll just stress that these are just a couple examples of what is out there. If you're an early stage company there are various programs available so be sure to look at the options. Whether it's through the National Research Council and the IRAP program or, in Ontario for example, with the Ontario Centers of Excellence which is focused on connecting entrepreneurs to industry academia and investors. Check these programs out. I'm sure there's similar ones in all Provinces and, finally, I'll just also urge you to look at your local municipality programs that might be being offered. Back to our panel. Our discussion here briefly focused on two of the more broadly available programs, that are common for early stage companies to look at, particularly innovation focused companies. So, Radhika, perhaps I could ask you to briefly tell us about the Scientific Research and Experimental Development Credit Program.
Radhika: Sure, Sacha. So the Scientific Research and Experimental Development Program, the SR&ED program as we call it, uses tax incentives to encourage Canadian businesses of all sizes and in all sectors to conduct research and development in Canada. These tax incentives come in three forms and in context adoption, an investment tax credit and in certain circumstances the refund. The short program provides more than $3 billion dollars in tax incentives to over 20,000 thousand claimants, annually, making it the single largest Federal program that supports our R&D in Canada. Or businesses that are doing R&D in Canada. The program is administered by the Canada Revenue Agency. So when the COVID-19 crisis hit a backlog of nearly $200 million of SR&ED investment tax credits was delayed, when the CRA had to begin working from home in March, they did not have the infrastructure to process the audits which led to the backlog. But since then reports say that the CRA has paid out about $13.4 million in claims between March 30th and April 7th and there are currently about 1,600 SR&ED claims under review. The CRA also released a notification a few weeks ago, where they said that they're taking action to ensure that the claimants receive the credit as soon as possible, and that for the time being no new review or audits are being conducted and that existing details of existing reviews will be completed as soon as possible. But the details as when the outstanding amount will be paid, or what the future of these reviews will look like, still remains unclear and we are waiting for those details to be made available. Hopefully in the next few weeks.
Sacha: Thank you, Radhika. And now, the other programming that we'd like to draw your attention to was the Federal governments Innovation Superclusters Initiative, which it accounted for the contributions to a limit of $950,000,000.00 which are going to be matched by private sector investment, for a maximum impact across the country. Naim, if you can just give us a brief overview of these programs and some of the localized initiatives that early stage companies, particularly in innovation, should be mindful of.
Naim: Absolutely. Thank you for this. I think this is a good imitative but you need to think about it in a different way than maybe how you would be thinking about the other programs that we've been discussing throughout this presentation. Don't take this the wrong way. This is not about you but, rather, it's about integrating the market. Right? So the goal of these Superclusters, the projects that are being funded, are really on a project by project basis and they are meant not to help one company but actually to help accelerate and integrate the use of technology, better efficiencies, by bringing people together that may not have taken the opportunity to do so by themselves. If it weren't for some of the assistance, both from a monetary standpoint and also from a training and guidance standpoint. There are some different Superclusters. So just to recap them quickly there's digital technology Supercluster, the protein industries Supercluster, the next generation manufacturing Supercluster, Scale AI Superclusters, so the artificial intelligence one, and the ocean Supercluster. These were established before COVID-19, of course. I'm going to focus, if you don't mind, on Scale AI in particular for this one. One of the interesting parts about this is that SMEs are required for a project to be funded. So if you are a company that's at the start, if you will, and you're trying to collaborate with more established companies, etcetera, this could be a great way to do so. It will have advantages because some of your costs will be recouped, but it will also have a great advantage in terms of trying to grow your network, and maybe potentially some clients later on. As some of the amount the first programs that had been announced prior to COVID-19 was multi-model transport imitative. Where AI was going to be key with Ray-mont and one of their partners. Scale AI has continued to be very active throughout COVID-19. They announced earlier this month eight projects for a total investment of $3.4 million dollars. These range from helping for chatbot and intelehealth to optimizing diagnostic tests to dealing with homecare, dealing with anti-viral molecules, etcetera, etcetera. I think that this is good news, of course, whether you are in AI or some of the other Supercluster initiatives, if you are looking for a different way to connect with other people in your network who may be looking to establish programs which may not have an SME with them, this could be a great opportunity to do so. Back to you, Sacha.
Sacha: Thanks so much. Okay, so that concludes, sorry one more point here. So, while early stage and startup funding does not appear to have been a focus of COVID, there are obviously some opportunities out there for early stage companies to explore. Just to close things down we want to consider some of the challenges that are early stage companies are facing in trying to navigate these various systems and access these programs. Radhika, let's turn back over to you to perhaps discuss this with your broad point.
Radhika: Sure. There are a few challenges that I can think of. Timing, for one. It takes time for the companies to prepare the applications and even for the reviewing authorities to review them and announce their decisions. There may also be lots of red tape to deal with. So that is a challenge that companies may experience. The other challenge that I see is that there's also a lot of uncertainty around eligibility. Particularly for all these new programs that are being sort of hastily put together, just in interest of time, with everything that's going on. So there's a lot of uncertainty as to whether a company will qualify or not, whether it will receive the funding, and if they don't they will need to start looking for additional or alternate plans, such as like bridge financing for example.
Sacha: Thanks, Radhika. Naim, maybe perhaps with your experience maybe you could add a bit to that commentary as well.
Naim: Absolutely. I think Radhika has raised some great points that are important to keep in mind. If I can add to that, the government is not trying to replace investors. Right? It's clear from the eligibility standpoint that the goal is to help the process. So this means that for companies that are looking to get funding at an early stage, they can't just look to government programs as a replacement for potential investment if they need initial financing, and they cannot bootstrap as Radhika suggested earlier. So, I think it's important to know these programs well, and maybe to use them as part of a conversation with investors knowing that once a round has been completed, hopefully with the right eligibility criteria, perhaps there may be some additional help that may be available from the government. I do want to commend, as I think we all do, the government on trying to do something to help with this situation. Obviously there are questions and that's normal. But I think the idea is people are trying to act and to advance fast on this. I'm sure, as Radhika mentioned, there will be some additional tweaks to make, hopefully, the programs better in a way that helps to advance jobs and you need to keep that in mind. Right? If you're thinking about government it has to be about jobs. It has to be about helping GDP and the ecosystem in general. So these are the types of things that you also need to think about. Are you helping not just your company, but are you helping the ecosystem generally, when you're thinking about submitting to these programs.
Sacha: Thank you so much. So that's going to complete the formal panel discussion. We have about 10 minutes left for some Q&A. A number of questions have been submitted. So, Mathieu, I'm going to turn it over to you first. We have a question around the BDC program. You had mentioned that there is a typical type of financing where there's convertible debt that can be converted on a subsequent equity financing at a 20% discount to the price of the financing. The question from Dave is, "What happens if such a financing never occurs? How do you typically handle the pricing of the convertibility feature?"
Mathieu: So, I don't have the exact answer to that question because I'm not a BDC agent. But what I've heard in the webinar is that for all investments under $3,000,000.00 BDC will try to standardize the path to finalize investments. For most cases BDC wants to convert the notes. As mentioned, the three different situations where the note will be convertible is based on a relatively short amount of time following the completion of the financing. If there's a future financing at a 20% discount, if you convert the notes into shares or other securities, or in a different realm of financing in the future. So if there's no repayment of the notes most probably the company will need to negotiate with the BDC, and the BDC will have its conditions to convert note, or to re-negotiate the loan.
Sacha: Thank you, Mathieu. Quick question for Josh. Now again, forgive us. The details aren't clear yet. But very quick question regarding the FedDev in Ontario. Is the $40,000.00 loan through the SMEs own banker or is it through some other agency? Do you know?
Josh: So it looks like the application will go in through FedDev and then they'll determine how much money the business needs and they'll make that payment directly to the business. More information's available on the Regional Development Agency website.
Sacha: Thanks, Josh. Okay, we have a general question. Based on recent experiences are financings closing, and if so, what kind of sectors are we seeing these closings in? I think, Radhika, perhaps you could provide us with a response on that point.
Radhika: Sure, yeah. We are certainly seeing, in our experience across the firm, that yes, deals are closing. Certainly the ones that were already in the pipeline for this year and where investors had already earmarked. They are closing and we're seeing some sectors more busier than others and more deals closing in those sectors. For example, e-commerce and food distribution, we are closing deals for those sectors. A lot more than maybe some of the other ones. There might be some challenges around diligence and whatnot. We did have some initial teething phase when everybody was getting used to the remote working options but I think we've come a long way from there. Remote working is no longer a barrier so we are able to close deals except that the timing. People may have to adjust their expectations around timing. But they found ways to make it work.
Sacha: Thanks, Radhika. So, Mathieu, the BDC program appears to be very popular so another question here for you. As it relates to the BDC program, what types of guarantees or security is BDC requiring in support of promissory notes? And in particular is it seeking security against intellectual property? Mathieu, you're muted.
Mathieu: So the BDC is not seeking any guarantees on IP. What the BDC will seek is, if there are advances by a shareholder to a corporation, they will seek to have priority over those advances. But the BDC will not ask for a subordination of the current creditors to its investment.
Sacha: Thanks, Mathieu. Another question here. With Bank of Canada interest rates at almost zero, is there a way for business' banks to tap into this for the benefit of their SME clients? I open up that to the panel if anybody wants to comment.
Naim: I'll take this on, Sacha. What I would say is the banks in the technology sector, especially, are working quite hard to help businesses. There's always been this issue that if you're very early stage, beyond opening a bank account to deposit money, what else can you do? But I think that's a bit of a traditional way to look at it and I can definitely tell you that from various, I guess, discussions and also some deals that we've seen, banks are being creative about this. They're looking to help. So I think it's definitely worth contacting the bank that you do business with to see what they offer now.
Sacha: Thanks very much, Naim. So, I think that will actually conclude our presentation. We are a few minutes ahead of schedule here. So we appreciated this opportunity to discuss this topic with you today. As I noted earlier if we missed any of your questions please feel free to reach out to us directly. Or if they come to you after the fact reach out to us. We're happy to discuss one on one. I would also just like to remind you that there are additional seminars to follow in this series over the next 4 weeks, as noted. If you are unable to view any of them you could monitor our website. The on demand versions will follow each seminar. Finally, I'd just like to thank our panelists, Naim, Radhika, Josh and Mathieu for the valuable insights today. Until next time please stay healthy and safe and thank you for attending.