Notes to Consolidated Financial Statements (continued)
Notes to Consolidated Financial Statements
(continued)
36
L
icensed Products. In consideration for this license, the Company agreed to pay a license maintenance fee in the amount of US$50,000 per year effective on the first anniversary of the agreement date and increasing by US$50,000 per year in each successive year for a period of ten years.
O
n June 5, 2005, the Company amended and restated its Operating Agreement to ratify the issuance of the 33% interest in the Company to Vanderbilt for the contributed licensed intellectual property (IP) noted above into the Company. The IP was valued at US$1,404,051 and has been recorded as a US$1.0 million capital contribution and US$404,051 of license maintenance fees payable, representing the present value of the remaining future payments due under the license maintenance fee agreement. The present value of the future payments due under the license maintenance fee agreement has been included in in-process research and development expenses in the statement of operations and was determined using a risk adjusted discount rate of 55%, which corresponded with the stage of development of the Company
at that time.
The present value will be re-stated at each period end, as the discount unwinds and further payments are made in accordance with the agreement. As of December 31, 2006, the license maintenance fee liability on the balance sheet was US$501,780.
O
n April 23, 2007, an arrangement to accelerate payment of the Vanderbilt licensing agreement was executed between the Company and Vanderbilt for cash of US$470,000 and 65,457 shares of the Company´s common stock valued at US$651,000. Related to this settlement of the license agreement, the Company recognized US$518,692 loss on the early extinguishment of the liability during the year ended December 31, 2007.
(9) Warrrrants
(a) XLTXLTXLTech Group, Inc. Warrants
In connection with the US$10.0 million secured note payable to XLTech Group, Inc. (XLTG) the Company´s former parent, the Company entered into a purchase option agreement by which XLTG was granted an option to purchase equity in the Company. Under the purchase option, the Company granted XLTG the right to purchase a variable number of shares based upon the amount of the note payable drawn down by the Company at the qualified public offering and the qualified public offering initial share price. The warrants are for a term of 5 years. At the date of grant the warrants were recorded at fair value as a warrant liability and as a discount in obtaining financing. The fair value of the warrant at the grant was US$1.9 million. The warrant is re-measured at fair value at each reporting date with subsequent changes in fair value recorded in the statement of operations. Upon the qualified public offering of the shares in June 1, 2007, the warrant qualified for equity classification within the balance sheet and as such the warrant liability was reclassified to equity at fair value on June 1, 2007. The warrant is not subsequently re-measured to fair value after this date as it qualifies for equity classification. The fair value of the warrant as of June 1, 2007 upon the qualified public offering was US$4.5 million. The XLTG warrants were transferred
to PetroTech Holdings Corporation a Laurus/Valens group company as part of the transfer of XLTG´s 45.69% shareholding in
the Company.
The fair value of this purchase option was estimated by using the Black-Scholes option-pricing model with the following assumptions: no dividends, risk-free rate of 4.8%–4.9%, the remaining contractual life of the purchase option and a volatility of 100%.
(b) Collaborative Warrants
In connection with research and development collaborations, the Company granted warrants to purchase a variable number of common shares of Company´s common shares equal to US$2.0 million divided by the per share price to the public in an initial public offering or the price paid in a private placement for each common share of the Company. The US$2.0 million of warrants were divided into two parts: US$1.0 million of the warrants are exercisable upon the closing of a qualified equity investment offering and the remaining US$1.0 million of warrants are exercisable upon successful completion of prescribed co-development activities in accordance with the technology sublicensing agreement. The warrants have a term of three years from the time of the qualified equity offering. With the IPOPO in June 2007, the warrants have a term until June 1, 2010. At the date of grant, the first US$1.0 million of warrants were recorded at fair value to a warrant liability and included as a reduction to revenue as a sales incentive to the unrelated third party. The fair value of the first US$1.0 million of warrants as of December 31, 2006 was US$0.5 million. The remaining US$1.0 million of warrants are recorded at fair
