This case is about a company named Hearts ‘R us. This company provides research and development for medical devices. According to the information provided the company is in its early stage and has no products in the market. They have developed a Heart Valve System that would be revolutionary in the market if is approved. Also there’s another company called Bionic Body that is a biological medical device company, they have another product that would work well With this new Heart Value System.
Therefore both companies decided to fuse by agreement. The agreement is as follows: $3. Million preferred stock shares of Series A from Heart Company are sold to Bionics with a par value of SSL each. This transaction was completed on November 30, 201 1, according to the information provided. This transaction gave Bionic specific rights: 1. Board Rights, 2. Mandatory Conversion right, 3. Contingent Redemption Rights, 4. Additional Protective Rights, 5. Right of first refusal and Co-Sale Rights.
The $3. 5 millions of shares would be convertible in common stock according to the agreement when the PIP reaches net proceeds of at least $50 millions. It is stated that if on ear five of the agreement the FDA has not yet approve the product to be in the market; the shares could be redeemed at its par value. Hearts R us is a company that reports on a year basis and it’s planning to make an PIP soon. There are a couple of issues surrounding this case.
First is an early-stage company that doesn’t have the financial stability and this might create trouble for further transactions. The only product that might be coming to the market still depends on a series of trials and the approval of the PDA Since the company is just starting; all of its accounting transactions have being recorded to comply with the events of its outstanding debt. Furthermore they are not required to comply with SEC and are currently not doing so.
Also theirs an issue of how to be done to register the Series A shares that have being sold to Bionic. – Accounting Authorities Definitions and Statements: Definitions according to FAST: 505-10-20 ; Preferred Stock: A security that has preferential rights compared to common stock. ;Participation Rights: contractual rights of security holders to receive dividends or returns from the security issuer’s profits, cash flows, or returns on investment. FAST has some guide lines of how companies should report or disclose information of their securities. . FAST: addresses disclosure of information about capital arrangement is in the FAST Codification 505-10-50-3. 2. Participation Right is contractual right of security holders to receive dividends or returns from security issuer’s profits, cash flows or returns on investments, ; FAST Codification 50310-50-3: An entity shall explain, in summary form within its financial statements, the pertinent rights and privileges of the various securities outstanding.
Examples of information that shall be disclosed are dividend and liquidation preferences, participation right, call prices and dates, conversion or exercise prices or rates and pertinent dates, sinking-fund requirements, unusual voting rights, and significant terms of contracts to issue additional shares. An entity shall disclose within its financial statements the number Of shares issued upon conversion, exercise, or satisfaction of required conditions during at least the most recent annual fiscal period and any subsequent interim period presented. ; FAST codification 505-10-50-4:
An entity that issues preferred stock (or Other senior stock) that has a preference in involuntary liquidation considerably in excess of the par or stated value of the shares shall disclose the liquidation preference of the stock (the relationship between the preference in liquidation and the par or stated value of the shares). That disclosure shall be made in the equity section of the statement of financial position in the aggregate, either parenthetically or in short, rather than on a per- share basis or through disclosure in the notes.
A financial instrument, other than an outstanding share, that, at inception, embodies an obligation to purchase the issuers equity shares, or is indexed to such an obligation, and that requires or may require the issuer to settle the obligation by transferring assets (for example, a forward purchase contract or written put option on the issuer’s equity shares that is to be physically settled or net cash settled).
A financial instrument that embodies an unconditional obligation, or a financial instrument other than an outstanding share that embodies a conditional obligation, that the issuer must or may settle by issuing a variable number of its equity shares, it, at inception, the monetary value to the obligation is based solely or predominantly on any of the following: ; A fixed monetary amount known at inception, for example, a payable settable with a variable number of the issuer’s equity shares.