Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. Montalvo Spirits, Inc. (1518238) 10-K published on Apr 08, 2016 at 5:51 pm
Reporting Period: Mar 30, 2015
On March 30, 2015, we consummated a Securities Purchase Agreement (the “Agreement”) with an accredited investor (the “Investor”), pursuant to which the Company sold to the Investor a convertible note in the principal amount of $84,000.00, bearing interest at the rate of 8% per annum (the “Convertible Note”). The Convertible Note contains customary default provisions, including provisions for potential acceleration of the Convertible Note, a default premium and a default interest rate. The Convertible Note is payable, along with any and all accrued interest, on December 23, 2015. The principal balance of the Convertible Note is convertible into shares of the Company’s common stock, par value $0.001 per share, at the election of the holder, beginning 180 days after the issuance of the Convertible Note. The conversion price is equal to the Market Price (as such term is defined in the Convertible Note) multiplied by 61%.
The Company’s Level 3 financial liabilities consist of the derivative financial instruments for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. The Company valued the automatic conditional conversion, re-pricing/down-round, change of control; default and follow-on offering provisions using a Monte Carlo model, with the assistance of a valuation specialist, for which management understands the methodologies. These models incorporate transaction details such as Company stock price, contractual terms, maturity, risk free rates, as well as assumptions about future financings, volatility, and holder behavior as of the date of issuance and each balance sheet date.
Pursuant to paragraphs 330-10-50-1 and 50-2 the basis of stating inventories shall be consistently applied and shall be disclosed in the financial statements; whenever a significant change is made therein, there shall be disclosure of the nature of the change and, if material, the effect on income. A change of such basis may have an important effect upon the interpretation of the financial statements both before and after that change, and hence, in the event of a change, a full disclosure of its nature and of its effect, if material, upon income shall be made. See paragraph 210-10-50-1. When substantial and unusual losses result from the application of the rule of lower of cost or market it will frequently be desirable to disclose the amount of the loss in the income statement as a charge separately identified from the consumed inventory costs described as cost of goods sold.
The Company allocates the proceeds received from convertible debt instruments between the liability component and equity component, and records the conversion feature as a liability in accordance with subtopic 470-20 of the FASB Accounting Standards Codification (“Subtopic 470-20”). The conversion feature and certain other features that are considered embedded derivative instruments, such as a conversion reset provision, a penalty provision and redemption option, have been recorded at their fair value as its fair value can be separated from the convertible note and its conversion is independent of the underlying note value. The conversion liability is marked to market each reporting period with the resulting gains or losses shown in the Statement of Operations. The Company has also recorded the resulting discount on debt related to the conversion features and amortizes the discount using the effective interest rate method over the life of the debt instruments.
The Company utilizes the Binomial Lattice Model that values the liability of the derivative conversion feature based on a probability weighted discounted cash flow model with the assistance of a third party valuation firm. Black-Scholes valuation does not consider all of the terms of the instrument which may not be appropriate in many situations given complex features and terms of conversion option (e.g., combined embedded derivatives). The Binomial Lattice Model is based on future projections of the various potential outcomes. The features that were analyzed and incorporated into the model included the conversion features. The Binomial Lattice Model analyzed the underlying economic factors that influenced which of these events would occur, when they were likely to occur, and the specific terms that would be in effect at the time (i.e. stock price, exercise price, volatility, etc.). Projections were then made on the underlying factors which led to potential scenarios. Probabilities were assigned to each scenario based on management projections. This led to a cash flow projection and a probability associated with that cash flow. A discounted weighted average cash flow over the various scenarios was completed to determine the value of the conversion features.