Notes to Consolidated Financial Statements (continued)
37
value upon successful completion of the first milestone related to the technology and sublicensing agreement as a reduction to the revenue as a sales incentive. The first US$1.0 million of warrants were initially 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 2007, the first US$1.0 million of warrants qualified for equity classification within the balance sheet and as such the warrant liability was reclassified to equity at fair value. With equity classification of the warrants, the warrants are not subsequently re-measured to fair value after this date. The fair value of the first US$1.0 million of warrants upon the qualified public offering in June 2007 was US$0.5 million. The fair value of the second US$1.0 million of warrants upon the achievement of the first milestone in December 2007 was US$0.5 million with the warrant being equity classified. The US$2.0 million of warrants are for 202,941 common shares of the Company at an exercise prices of US$9.80 to US$9.89
per share.
The fair value of the warrants was determined by using the Black-Scholes option-pricing model with the following assumptions: no dividends, risk-free rate of 4.6% to 4.8%, 3-year life of the warrants from the time of a qualified equity investment offering, volatility of 68% to 80% and a discount factor related to the probability of a qualified offering not occurring of 0%.
(c) IPO Underwriter Warrants
In connection with the IPOPO, the Company granted warrants to underwriters of the IPOPO to purchase 198,002 common shares of the Company at £5 per common share. The warrants are for a term of 5 years. At the date of grant, the warrants were recorded at fair value to a warrant liability with the expense offset against the IPOPO proceeds in equity. The warrant is re-measured at fair value at each reporting date with subsequent changes in fair value recorded in the statement of operations. The fair value of the warrants as of December 31, 2008 and December 31, 2007 were US$618 and US$1.0 million, respectively.
The fair value of these warrants was determined by using the Black-Scholes option-pricing model with the following assumptions: no dividends, risk-free rate of 4.4%, the remaining contractual life of the warrants, and a volatility of 68%.
(10) Stock-Based Compensation
(a) Unit Grants
From inception until recapitalized from a limited liability company to a corporation on May 23, 2007, the Company has granted a total of 2.0 million net member units to various employees through unit grant agreements. The unit grants generally vest over four years of continual service and have initial cost to the unit holder of US$0.01. The fair value of these grants was determined by the Company at the grant date and was equal to the fair market value of the units at the date of grant. The fair value is amortized to compensation expense on a straight line basis over the vesting period.
Employees
A
s of December 31, 2008 the total unrecognized compensation cost for these unit grants was US$5.5 million (2007: US$10.0 million), which is being amortized over the remaining weighted average vesting period of 1.8 years (2007: 2.9 years). The compensation recognized in operating expenses for unit grants for
the year ended December 31, 2008 was US$2.6 million (2007: US$3.0 million). Since inception to December 31, 2008, 705,426 units granted have vested. The initial cost of the unit grants to
the employees was forgiven by the Company and is treated as additional compensation to the employee. The weighted average grant date fair value for all unit grants during the year ended December 31, 2008 was US$0.0 million (2007: US$6.2 million).
Nonemployees
In 2008, the Company granted zero units (2007: 60,000 units) to several nonemployees through unit grant agreements. The unit grants vest based on achieving performance terms of the contract and have an initial cost to the unit holder of US$0.01 per unit. The fair values of these grants are recognized as the performance terms of the contract have been met. The compensation recognized for unit grants for the year ended December 31, 2008 totaled US$0.0 million (2007: US$0.5 million) and is included in operating expenses.
During the year ended December 31, 2008, 19,368 units (2007: 35,000 units) vested under the terms of the unit grant agreements. The initial cost of the units to the holder was forgiven by the Company and treated as additional compensation to the nonemployee.
TyraTech, Inc. Annual Report 2008
