SEC Company Response from AIM ImmunoTech Inc. (AIM) (CIK 0000946644) (AIM) — Nov 23, 2010
AIM ImmunoTech Inc. (AIM) (CIK 0000946644)
Date: Nov. 23, 2010 · CIK: 0000946644 · Accession: 0001144204-10-063187
AI Filing Summary & Sentiment
Reasoning
Letter
Division of Corporation Finance Securities and Exchange Commission Hemispherx Biopharma, Inc. Form 10-K for the year ended December 31, 2009 Form 10-K/A for the year ended December 31, 2009 (SEC filing No. 1-13441)
Dear Mr. Rosenberg:
We hereby respond to the oral comment received in discussions with the staff on November 22, 2010 related to the above referenced Form 10-K and Form 10-K/A of Hemispherx Biopharma, Inc. (the "Company").
The staff requested clarification of the Company’s response to prior comment no. 2 (financial statements footnote 17- Fair value of warrants) contained in your November 4, 2010 comment letter. Specifically, clarification was requested related to the probability adjustment to the Black-Scholes computation, including the accounting literature relied upon for such adjustment and quantifying the actual calculated value of the Company’s warrant liability (the “Warrants”) as of December 31, 2009.
The Company’s clarified response to former comment no. 2 is as follows:
(17) Fair value, page F-33
Comment 2. We acknowledge your response to prior comment 5. You stated that the probability - adjusted Black-Scholes value of your warrants is zero. Please tell us the assumed probability of an event taking place that would cause cash settlement. Please also tell us the various factors considered that decreased the likelihood of a Fundamental Transaction occurring that would require cash settlement. Please provide us with your analysis that supports the probability of each of these factors to be zero and that the value of the warrants is zero for each scenario considered, including scenarios that do not require cash settlement.
Corporate Headquarters
One Penn Center, 1617 JFK Blvd., Philadelphia, PA
t: 215-988-0080
f: 215-988-1739
Jim B. Rosenberg
November 23, 2010
Page -
Response: The Company utilized the Black-Sholes method of valuing the Warrants. As permitted by fair value accounting (ASC 820), the Company then adjusted the valuation based on the probability factor related to the possible occurrence of a “Fundamental Transaction” (discussed below) that could result in a cash settlement of the Warrants.
Consistent with ASC 820 (formally SFAS 157), the applicable standard of value is “fair value” which is defined by the Financial Accounting Standards Board as “[t]he price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Implicit in this definition is the requirement that factors relevant to the specific situation be taken into account. ASC 820-10-55-1 states “…any fair value measurement requires that the reporting entity determine all of the following: …(d)the valuation technique(s) appropriate for the measurement, considering the availability of data with which to develop inputs that represent the assumptions that market participants would use in pricing the asset or liability and the level in the fair value hierarchy within which the inputs fall.” The Company determined that the extreme unlikelihood of the occurrence of a Fundamental Transaction was a relevant factor.
In furtherance of the foregoing, the Company utilized the following information in its determination of the Warrant valuation:
1.
the assumed probability of an event taking place that would cause cash settlement;
2.
the various factors considered that decreased the likelihood of a Fundamental Transaction (as defined in the Warrants and discussed below) occurring that would require cash settlement; and
3.
the analysis that supports the probability of each of these factors to be insignificant and that the value of the Warrants is insignificant for each scenario considered and in total, including scenarios that do not require cash settlement.
Generally Accepted Accounting Principles require the value of a liability to be recorded where the Warrant holders have a put option or is able to receive cash for their warrants.
Section 3.(e) of the Warrants addresses the potential of a Fundamental Transaction (“Transaction”) occurring while the Warrants are outstanding. Transactions include (i) a merger or consolidation of the Company with or into another person, (ii) the sale or other disposition of all or substantially all of its assets, (iii) a purchase, tender or exchange offer that is completed and accepted by the holders of 50% or more of the outstanding common stock, (iv) a reclassification, reorganization or recapitalization of the Company’s common stock or any compulsory share exchange pursuant to which the common stock is effectively converted into or exchanged for other securities, cash or property, or (v) the consummation of a stock purchase agreement or other business combination with another person whereby such other person acquires more than 50% of the outstanding shares of common stock.
Jim B. Rosenberg
November 23, 2010
Page -
Where a Transaction is (1) an all cash transaction, (2) a “Rule 13e-3 transaction” as defined in Rule 13e-3 under the Exchange Act, or (3) a Transaction involving a person or entity not traded on a national securities exchange, the Company is required, at the Warrantholder’s option, to purchase the Warrant from the holder by paying to the holder an amount of cash equal to the Black Scholes Value of the remaining unexercised portion of the Warrant on the date of the consummation of the Transaction.
The following “Factors” were considered in determining the fair value of such liability regarding the assumed probability of an event taking place that would cause a cash settlement, especially regarding a potential Transaction:
1)
The Company has been in business for over 20 years and has only had one product reach FDA approval which was via an acquisition of a company with an existing FDA approved product;
2)
Based on having the NDA rejected by the FDA in November 2010, the Company will have to perform two Phase III clinical trials, that will cost millions of dollars for the possibility of FDA approval of Ampligen in addition to required funding for commercialization of this product;
3) Industry and market conditions at May 2009 included a global market recession, adding risk;
4) Available capital for a potential buyer in a cash transaction as of May 2009 was limited;
5)
The nature of a life sciences company is heavily dependent on future funding and high fixed costs, including research & development;
6)
According to Forbes.com, of approximately 17,000 public companies, fewer than 30 went private in 2008 and nearly 100 going private deals were completed in 2007, representing a probability ratio of 0.18% and 0.6%, respectively. This probability would be further reduced based on the nature of a life sciences company and the potential lack of revenues, cash flows, and the Company’s funding needs;
7)
Rights to acquire common stock, pursuant to Company's Rights Agreement, make it less attractive to a buyer and therefore less likely to be acquired.
With the factors identified above regarding the probability of an event taking place that could cause cash settlement, a sensitivity analysis was created to estimate the probability-adjusted likelihood of a Transaction occurring which would affect the value of a liability. The Warrants’ valuation was estimated as follows:
Jim B. Rosenberg
November 23, 2010
Page -
Warrants’ Valuation
December 31, 2009
Grant Date 05/18/09 (Deal #1)
Grant Date 05/21/09 (Deal #2)
Projected Total
Series I
Investors
Fair Value
Investors
Agent
Unexercised
Agent
of Warrants
Underlying Price
$ 0.56
$ 0.56
$ 0.56
$ 0.56
Exercise (Strike) Price
$ 1.65
$ 1.38
$ 1.31
$ 1.34
Est. Time To Expiration in Years (a)
2.50
2.50
2.20
2.20
Volatility
%
%
%
%
Interest Rate (b)
1.42 %
1.42
Show Raw Text
CORRESP
1
filename1.htm
Unassociated Document
November 23,
2010
Jim B.
Rosenberg
Senior
Assistant Chief Accountant
Division
of Corporation Finance
Securities
and Exchange Commission
100 F
Street, NE
Washington,
DC 20549
Re:
Hemispherx
Biopharma, Inc.
Form
10-K for the year ended December 31, 2009
Form
10-K/A for the year ended December 31, 2009
(SEC filing No.
1-13441)
Dear Mr.
Rosenberg:
We hereby
respond to the oral comment received in discussions with the staff on November
22, 2010 related to the above referenced Form 10-K and Form 10-K/A of Hemispherx
Biopharma, Inc. (the "Company").
The staff
requested clarification of the Company’s response to prior comment no. 2
(financial statements footnote 17- Fair value of warrants) contained in your
November 4, 2010 comment letter. Specifically, clarification was requested
related to the probability adjustment to the Black-Scholes computation,
including the accounting literature relied upon for such adjustment and
quantifying the actual calculated value of the Company’s warrant liability (the
“Warrants”) as of December 31, 2009.
The
Company’s clarified response to former comment no. 2 is as follows:
(17) Fair value, page
F-33
Comment
2. We acknowledge your response to prior comment
5. You stated that the probability - adjusted Black-Scholes value of
your warrants is zero. Please tell us the assumed probability of an
event taking place that would cause cash settlement. Please also tell
us the various factors considered that decreased the likelihood of a Fundamental
Transaction occurring that would require cash settlement. Please
provide us with your analysis that supports the probability of each of these
factors to be zero and that the value of the warrants is zero for each scenario
considered, including scenarios that do not require cash
settlement.
Corporate
Headquarters
One Penn Center, 1617 JFK Blvd., Philadelphia, PA
19103
t: 215-988-0080
f:
215-988-1739
Jim B.
Rosenberg
November
23, 2010
Page -
2
Response: The
Company utilized the Black-Sholes method of valuing the Warrants. As
permitted by fair value accounting (ASC 820), the Company then adjusted the
valuation based on the probability factor related to the possible occurrence of
a “Fundamental Transaction” (discussed below) that could result in a cash
settlement of the Warrants.
Consistent
with ASC 820 (formally SFAS 157), the applicable standard of value is “fair
value” which is defined by the Financial Accounting Standards Board as “[t]he
price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date.”
Implicit in this definition is the requirement that factors relevant to the
specific situation be taken into account. ASC 820-10-55-1 states
“…any fair value measurement requires that the reporting entity determine all of
the following: …(d)the valuation technique(s) appropriate for the measurement,
considering the availability of data with which to develop inputs that represent
the assumptions that market participants would use in pricing the asset or
liability and the level in the fair value hierarchy within which the inputs
fall.” The Company determined that the extreme unlikelihood of the
occurrence of a Fundamental Transaction was a relevant factor.
In
furtherance of the foregoing, the Company utilized the following information in
its determination of the Warrant valuation:
1.
the
assumed probability of an event taking place that would cause cash
settlement;
2.
the
various factors considered that decreased the likelihood of a Fundamental
Transaction (as defined in the Warrants and discussed below) occurring
that would require cash settlement;
and
3.
the
analysis that supports the probability of each of these factors to be
insignificant and that the value of the Warrants is insignificant for each
scenario considered and in total, including scenarios that do not require
cash settlement.
Generally
Accepted Accounting Principles require the value of a liability to be recorded
where the Warrant holders have a put option or is able to receive cash for their
warrants.
Section
3.(e) of the Warrants addresses the potential of a Fundamental Transaction
(“Transaction”) occurring while the Warrants are outstanding. Transactions
include (i) a merger or consolidation of the Company with or into another
person, (ii) the sale or other disposition of all or substantially all of its
assets, (iii) a purchase, tender or exchange offer that is completed and
accepted by the holders of 50% or more of the outstanding common stock, (iv) a
reclassification, reorganization or recapitalization of the Company’s common
stock or any compulsory share exchange pursuant to which the common stock is
effectively converted into or exchanged for other securities, cash or property,
or (v) the consummation of a stock purchase agreement or other business
combination with another person whereby such other person acquires more than 50%
of the outstanding shares of common stock.
Jim B.
Rosenberg
November
23, 2010
Page -
3
Where a
Transaction is (1) an all cash transaction, (2) a “Rule 13e-3 transaction” as
defined in Rule 13e-3 under the Exchange Act, or (3) a Transaction involving a
person or entity not traded on a national securities exchange, the Company is
required, at the Warrantholder’s option, to purchase the Warrant from the holder
by paying to the holder an amount of cash equal to the Black Scholes Value of
the remaining unexercised portion of the Warrant on the date of the consummation
of the Transaction.
The
following “Factors” were considered in determining the fair value of such
liability regarding the assumed probability of an event taking place that would
cause a cash settlement, especially regarding a potential
Transaction:
1)
The
Company has been in business for over 20 years and has only had one
product reach FDA approval which was via an acquisition of a company with
an existing FDA approved product;
2)
Based
on having the NDA rejected by the FDA in November 2010, the Company will
have to perform two Phase III clinical trials, that will cost millions of
dollars for the possibility of FDA approval of Ampligen in addition to
required funding for commercialization of this
product;
3)
Industry
and market conditions at May 2009 included a global market recession,
adding risk;
4)
Available
capital for a potential buyer in a cash transaction as of May 2009 was
limited;
5)
The
nature of a life sciences company is heavily dependent on future funding
and high fixed costs, including research &
development;
6)
According
to Forbes.com, of approximately 17,000 public companies, fewer than 30
went private in 2008 and nearly 100 going private deals were completed in
2007, representing a probability ratio of 0.18% and 0.6%,
respectively. This probability would be further reduced based
on the nature of a life sciences company and the potential lack of
revenues, cash flows, and the Company’s funding
needs;
7)
Rights
to acquire common stock, pursuant to Company's Rights Agreement, make it
less attractive to a buyer and therefore less likely to be
acquired.
With the
factors identified above regarding the probability of an event taking place that
could cause cash settlement, a sensitivity analysis was created to estimate the
probability-adjusted likelihood of a Transaction occurring which would affect
the value of a liability. The Warrants’ valuation was estimated as
follows:
Jim B.
Rosenberg
November
23, 2010
Page -
4
Warrants’
Valuation
December
31, 2009
Grant
Date 05/18/09 (Deal #1)
Grant
Date 05/21/09 (Deal #2)
Projected
Total
Series
I
Investors
Fair
Value
Investors
Agent
Unexercised
Agent
of Warrants
Underlying
Price
$
0.56
$
0.56
$
0.56
$
0.56
Exercise
(Strike) Price
$
1.65
$
1.38
$
1.31
$
1.34
Est.
Time To Expiration in Years (a)
2.50
2.50
2.20
2.20
Volatility
138
%
138
%
146
%
146
%
Interest
Rate (b)
1.42
%
1.42