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ASC 470-20

ASC 470-20

I am having some difficulty in understanding and calculating the equity conversion value in our convertible debt under ASC 470-20.

Our convertible Note instrument with a purchase price of $100,000 has a maturity date of 8 months from issue, and is convertible into common stock at noteholders option any time after six months from issue at a price equal to 62.5%  of the average of the three lowest closing bid prices in the ten days preceding the date of conversion.  The note bears interest at 8% pa and the accrued interest is also convertible into stock, along with principal in the event of the conversion option.

For a Pink sheet company, this represents a way of raising capital through the issuance of common stock. The note holder acquires greater security by holding debt for six months rather than common stock, after which time, he has fulfilled Rule 144 owership requirements, and has a built in 37.5% margin at the time he is free to exercise the conversion and sell the shares.

My problems include

(i) I do not know how long the note will be outstanding prior to conversion which will likely be low price days.

(ii) I do not know what my conversion price will be until the conversion is exercised

(iii) I am not in a position to repay the note, hence I know up front that the transaction is effectively just a stock issuance transaction with the note purchase price buying a number of shares to be determined at the conversion date.

Under these circumstances does anyone have a model to calculate the debt and equity components, and if past experience, and absence of financial werewithall to repay the note are absent, is there actually a debt component, or is it all an advance equity purchase?

Answers

Topic Expert
Simon Westbrook
Title: CFO
Company: Aargo Inc.
( CFO, Aargo Inc.) |

Mark,

Thanks for all your efforts to help me on this topic, obviously one you know well. Thats what's so great about Proformative, the ability to share collective experience and specialist knowledge with financial peers. Keep up the good work Proformative!!!

Richard Connelly
Title: CFO
Company:
(CFO, ) |

Looks like a Contingent Conversion. Look in the ASC. IMO: I don't think you need to book anything but the note until the conversion date at 6 months.

Look at
470-20-35-2 The guidance in the following paragraph applies to an instrument with either of the following characteristics:
a. The instrument becomes convertible only upon the occurrence of a future event outside the control of the holder.
b. The instrument is convertible from inception but contains conversion terms that change upon the occurrence of a future event.
470-20-35-3 A contingent beneficial conversion feature in an instrument having the characteristics in the preceding paragraph shall not be recognized in earnings until the contingency is resolved.
Look at 505-10-50-6 for disclosure during the 6 months.

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