SEC Company Response from EDAP TMS SA (EDAP) (CIK 0001041934) (FOCL) — Sep 14, 2012
EDAP TMS SA (EDAP) (CIK 0001041934)
Date: Sept. 14, 2012 · CIK: 0001041934 · Accession: 0001171843-12-003396
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 000-29374
Referenced dates: December 15, 2010, July 23, 2012
Letter
Via EDGAR Division of Corporation Finance Securities and Exchange Commission EDAP TMS SA Form 20-F for the Fiscal Year Ended December 31, 2011 Filed April 26, 2012 File No. 000-29374
Dear Mr. James:
We are responding to the Staff’s comment letter dated July 23, 2012 relating to EDAP TMS SA’s (the “Company”) annual report on Form 20-F for the fiscal year ended December 31, 2011 (the “Form 20-F”). The numbered paragraphs below correspond to the numbered paragraphs of the Staff’s comment letter which have been retyped in bold herein for your ease of reference.
Form 20-F for the Fiscal Year Ended December 31, 2011
Item 5. Operating and Financial Review and Prospects, Operating Results, page 31
1.
We see that you discuss various measures in your management's discussion and analysis on pages 33 through 36 that adjust your operating results to exclude expenses from your FDA PMA trials. Please tell us how you considered the guidance in Item 10(e) of Regulation S-K relating to the presentation of non-GAAP measures in determining that the disclosures required by that Item were not required for these measures, including the reconciliation of a non-GAAP measure to its most directly comparable GAAP measure, the disclosure of the reasons why management believes the presentation provides useful information to investors and the additional purposes for which your management uses the non-GAAP measure. Alternatively, please revise future filings, including any amendments, to include the disclosures required by Item 10(e) for these measures and provide us with a copy of your proposed disclosure.
The Company includes information about its FDA PMA trials in Item 5 as part of its segment reporting. In connection with the Company’s $20 million principal amount of 9% Senior Convertible Debentures due 2012 and related Warrants issued in 2007, the Company undertook to use the proceeds of the private placement to finance costs associated with the regulatory approval for the commercialization of
Page 2
Ablatherm HIFU in the United States (including related clinical trials). As part of the Company’s desire to monitor such costs and ultimately to provide investors with clear information regarding the use of such proceeds and, pursuant to Accounting Standards Codification 280, the Company updated its internal reporting with a new segment reviewed regularly by the Chief Operating Decision Maker, which resulted in the creation of a new reporting segment dedicated to the Federal Drug Administration’s approval for the Company’s Ablatherm-HIFU activity in its segment information.
Since that time, the Company’s expenses in relation to FDA PMA activities have been presented in a separate reporting segment and detailed in a note to its financial statements, provided in conformity with ASC 280. The information provided in Item 5 of the Form 20-F with respect to GAAP measures excluding expenses of the FDA PMA trials is directly derived from the segment information that can be found in Note 27 to the Company’s financial statements for the year ended December 31, 2011. The Company will include in its future filings a sub-total showing such measures excluding expenses of the FDA PMA in its Note 27.
Signatures, page 68
2.
We note that your Form 20-F is unsigned. Please file a full amendment that includes all required signatures.
The Form 20-F was manually signed by Marc Oczachowski, Chief Executive Officer and Eric Soyer, Chief Financial Officer. Due to a clerical error, the Edgarized version of the document inadvertently failed to include the conformed signatures. The Company will ensure that future filings include properly conformed electronic signatures.
Given that the two officers authorized to sign on behalf of the registrant also signed the certifications required by Rules 13a-14(a) and (b) of the Exchange Act and by Form 20-F, and that the signature lines were correctly conformed in the Edgarized filing, the Company believes that it should be treated the same as various domestic issuers filing on Form 10-K, where the Staff noted the missing signatures and requested that future filings contain fully conformed signatures (see for example, SEC comment letters dated December 15, 2010 regarding Comfort Systems USA, Inc and dated March 28, 2012 regarding Stericycle, Inc.). The registrant’s liability for the filing is clearly established by the fact that it filed the form and that the two officers authorized to take this corporate action signed the certifications in their individual capacities elsewhere in the filing.
In addition, the Company believes it would be a significant hardship and potentially misleading to investors for it to file an amendment containing an entire Form 20-F for the year ended December 31, 2011 that does not include updated information as required by General Instruction C(b) and C(d) to Form 20-F. Indeed, it would seem that any amendment containing the entire document would need to comply with the reporting requirements of each Item as of the date of filing, in particular because in this case, the signature pages would be dated the date of the amendment, as if the full document spoke also as of that date.
If the Staff believes that an amendment is required, we would propose to file an amendment containing:
-
the Cover Page,
-
an explanatory note with the following text:
Page 3
“We are filing this Amendment No. 2 (this “Amendment No. 2”) to the Annual Report on Form 20-F for the year ended December 31, 2011, filed with the Securities and Exchange Commission (the “SEC”) on April 26, 2012 (the “Original Form 20-F”) by EDAP TMS SA (the “Company”), solely to file an electronic version of the manually signed signature page dated the date of the original filing, which version, due to a clerical error in the Edgarization process, was inadvertently omitted from the Original Form 20-F. As required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, new certifications by our Chief Executive Officer and Chief Financial Officer are being filed as exhibits to this Amendment No. 2 under Item 19. This Amendment No. 2 therefore consists solely of the cover page, this explanatory note, the electronic version of the signature page to the Original Form 20-F, the signature pages to this Amendment No. 2 and the exhibits attached hereto.
Other than as expressly set forth above, this Amendment No. 2 does not, and does not purport to, amend, update or restate any other information or disclosure included in the Original Form 20-F, or reflect any events that have occurred after the filing date of the Original Form 20-F. Accordingly, this Amendment No. 2 should be read in conjunction with the Original Form 20-F, Amendment No. 1 to the Annual Report on Form 20-F for the year ended December 31, 2011, filed with the Securities and Exchange Commission on May 21, 2012 and the documents filed with or furnished to the Securities and Exchange Commission by the Company subsequent to April 26, 2012, including any amendments to such documents. Among other things, forward-looking statements contained in the Original Form 20-F have not been revised to reflect events, results or developments that occurred or facts that became known to us after the original filing date, and such forward-looking statements should be read in their historical context.”
-
the electronic version of the manually signed signature page dated the date of the original filing,
-
the signature page for the amendment (appropriately conformed) dated the date the amendment is filed, and
-
the certifications required by Rule 13a-14(a) of the Securities Exchange Act of 1934, dated the date of the amendment.
Item 18. Financial Statements
Note 31. Subsequent Significant Events as of April 26, 2012, (b) Exchange Agreement regarding the Convertible Debentures and Warrants, page F-42
3.
Please describe for us in appropriate detail how you valued and accounted for the exchange, including a discussion of how the embedded warrant derivatives were treated upon extinguishment, how the exchange was recorded and provide the calculations supporting any gain or loss recorded as part of the exchange. Please refer to the appropriate authoritative literature which supports your accounting.
Page 4
I.
BACKGROUND: DESCRIPTION OF THE EXCHANGE AGREEMENT
On January 19, 2012, the Company entered into a privately negotiated exchange agreement (the “Exchange Agreement”) with all holders of the Company’s outstanding 9% Senior Convertible Debentures due October 29, 2012 (the “2007 Debentures”) and warrants to purchase up to 882,000 ordinary shares at an exercise price of $6.87 per share (the “2007 Warrants”). Pursuant to the terms of the Exchange Agreement:
·
‘Option A’ of the Exchange Agreement: certain holders of an aggregate principal amount of USD 500,000 of 2007 Debentures and 2007 Warrants to purchase up to 42,000 ordinary shares agreed to exchange their outstanding securities for 22,186 newly issued ordinary shares, in the form of ADRs, and $500,000 in cash ; and
·
‘Option B’ of the Exchange Agreement: holders of an aggregate principal amount of USD 10 million of 2007 Debentures and 2007 Warrants to purchase up to 840,000 ordinary shares agreed to exchange their outstanding securities for an aggregate principal amount of USD 10 million of new 9% non-convertible Senior Debentures due June 30, 2014 (the “New Debentures”), new warrants to purchase up to 408,691 newly issued ordinary shares at an exercise price equal to the par value per share (the “New Warrants”), and 1,926,685 newly issued ordinary shares, in the form of restricted American Depositary Receipts (“ADRs”) (collectively, the “Exchange”).
On January 25, 2012, the Company closed the Exchange and all of the 2007 Debentures and the 2007 Warrants were exchanged for the New Debentures, 1,948,871 newly issued ordinary shares, in the form of ADRs, the New Warrants and $500,000 in cash, or a combination thereof as described above.
As result of the Exchange, all 2007 Debentures and 2007 Warrants of the Company have been cancelled.
II.
ACCOUNTING AND VALUATION ANALYSIS OF THE EXCHANGE AGREEMENT
II-1.
Accounting analysis:
Analysis of the relevant accounting model to be applied by the Company to recognize the Exchange Agreement.
II-1-1.
Authoritative literature and accounting principles
The Company considered guidance contained in FASB Accounting Standard Codification (ASC) 405-20 – Extinguishments of Liabilities and FASB ASC 470-50 – Debt Modifications and Extinguishment / FASB ASC 470-60 – Troubled Debt Restructuring for the general concepts on debt modifications and restructurings.
Pursuant to this literature and given that the Exchange did not result in a change of lenders, the Company structured its initial analysis around three questions:
1.
Have the Liability Derecognition criteria been met pursuant to ASC 405-20-40?
2.
If not, do the Company and the Exchange meet the Troubled Debt Restructuring criteria?
Page 5
3.
If the Troubled Debt Restructuring accounting model is not applicable, should the Company apply the accounting model for a Debt Modification or Extinguishment?
II-1-2.
Application of the Extinguishment Accounting model to the Exchange Agreement
Step 1: Have the Liability Derecognition criteria been met pursuant to ASC 405-20-40?
The derecognition threshold would have been met only if: a) the Company had reimbursed the holders of the existing 2007 Debentures (upon delivery of cash, or of other financial assets, or of goods or services) for the total amount of the remaining 2007 Debentures; or b) the Company had been legally released from its debt obligation as the primary obligor. Since neither of these two criteria has been met through the Exchange, the Company needed to proceed to Step 2 of the debt exchange analysis in order to determine whether it should take the 2007 Debentures off its books.
Step 2: Did the Company and the Exchange meet the Troubled Debt Restructuring criteria?
The Company determined that the Company and the Exchange did not meet any of the criteria needed to apply the Troubled Debt Restructuring accounting model:
-
The Company is not and was not at the time of the Exchange experiencing financial difficulties.
-
The Exchange did not result in any economic concession granted to the Company by the Holders of the 2007 Debentures. This was primarily a result of the large “day 1 sweetener” of new shares and the New Warrants provided by the Company to facilitate the transaction (i.e., 1,948,871 ordinary shares in the form of ADRs and 408,691 New Warrants, with an exercise price set at par).
Since the Troubled Debt Restructuring accounting model did not apply to the Exchange, the Company then determined whether the Debt Modification or Debt Extinguishment model applied.
Step 3: Did the Exchange meet the Debt Extinguishment criteria?
Pursuant to FASB ASC 470-50-40-6 through 12, the Company determined that the Exchange met the Debt Extinguishment model on the basis that the New Debentures received in the exchange were substantially different from the 2007 Debentures, which were convertible.
The elimination of the conversion option, which was a substantive conversion feature within the meaning of FASB ASC 470-20-40-7 to 9, was a substantive modification of the 2007 Debentures and therefore qualified the exchange for the Debt Extinguishment model.
Similarly, the substantial differences in the 2007 Warrants and the New Warrants (different exercise prices, extended maturity, elimination of certain price adjustment mechanisms, including the elimination of the ”Black-Scholes adjustment”) justified the extinguishment of the 2007 Warrants.
As a result of the above, the Company determined that the Debt Extinguishment model should apply to account for the Exchange and that gains or losses that could result from the Exchange would be recognized in its income statement.
Page 6
II-2.
Valuation analysis:
II-2-1.
Fair Value of the $10 million principal amount New Debentures:
After review of its valuation models with experts and the assumptions used, the Company determined that a preliminary estimate of the fair value of the New Debentures, still subject to further review and analysis, was $5,925,000.
The difference between the nominal value of the New Debentures ($10,000,000 or €7,691,000 using the USD/EUR exchange rate on January 24, 2012 of 1.3003) and its preliminary estimate of market fair value ($5,925,000 or €4,557,000 using the USD/EUR exchange rate on January 24, 2012 of $1.3003) is therefore €3,134,000.
II-2-2.
Fair Value of the ordinary shares issued as part of the Exchange:
Pursuant to the Exchange Agreement, the Company issued 1,926,685 new ordinary shares to the holders that chose the cash and shares option of the Exchange Agreement.
Based on the market price of EDAP’s shares on the day immediately prior to Closing (i.e., $2.59 on January 24, 2012) and the USD/EUR exchange rate on January 24, 2012 (i.e., $1.3003 for €1 ), the Company determined that the issuance price of the new ordinary shares shall be €1.99184 (i.e., $2.59/1.3003) and that the total fair market value of the 1,926,685 new shares issued was €3,838,000.
II-2-3.
Fair Value of the New Warrants issued as part of the Exchange:
Pursuant to the Exchange Agreement signed on January 19, 2012, the Company issued 408,691 New Warrants to the holders that chose the New Debentures, New Warrants and/or New Shares option of the Exchange Agreement.
The Company used a Black-Scholes model to value these warrants. The model, based on the market price of the Company’s shar
Show Raw Text
CORRESP
1
filename1.htm
corresp_091412.htm
EDAP TMS S.A.
Parc Activite La Poudrette Lamartine
4/6 Rue du Dauphine
69120 Vaulx-en-Velin – France
R.C.S. Lyon 316,488,204
September 14, 2012
Via EDGAR
Mr. Martin James
Senior Assistant Chief Accountant
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549
Re:
EDAP TMS SA
Form 20-F for the Fiscal Year Ended December 31, 2011
Filed April 26, 2012
File No. 000-29374
Dear Mr. James:
We are responding to the Staff’s comment letter dated July 23, 2012 relating to EDAP TMS SA’s (the “Company”) annual report on Form 20-F for the fiscal year ended December 31, 2011 (the “Form 20-F”). The numbered paragraphs below correspond to the numbered paragraphs of the Staff’s comment letter which have been retyped in bold herein for your ease of reference.
Form 20-F for the Fiscal Year Ended December 31, 2011
Item 5. Operating and Financial Review and Prospects, Operating Results, page 31
1.
We see that you discuss various measures in your management's discussion and analysis on pages 33 through 36 that adjust your operating results to exclude expenses from your FDA PMA trials. Please tell us how you considered the guidance in Item 10(e) of Regulation S-K relating to the presentation of non-GAAP measures in determining that the disclosures required by that Item were not required for these measures, including the reconciliation of a non-GAAP measure to its most directly comparable GAAP measure, the disclosure of the reasons why management believes the presentation provides useful information to investors and the additional purposes for which your management uses the non-GAAP measure. Alternatively, please revise future filings, including any amendments, to include the disclosures required by Item 10(e) for these measures and provide us with a copy of your proposed disclosure.
The Company includes information about its FDA PMA trials in Item 5 as part of its segment reporting. In connection with the Company’s $20 million principal amount of 9% Senior Convertible Debentures due 2012 and related Warrants issued in 2007, the Company undertook to use the proceeds of the private placement to finance costs associated with the regulatory approval for the commercialization of
Page 2
Ablatherm HIFU in the United States (including related clinical trials). As part of the Company’s desire to monitor such costs and ultimately to provide investors with clear information regarding the use of such proceeds and, pursuant to Accounting Standards Codification 280, the Company updated its internal reporting with a new segment reviewed regularly by the Chief Operating Decision Maker, which resulted in the creation of a new reporting segment dedicated to the Federal Drug Administration’s approval for the Company’s Ablatherm-HIFU activity in its segment information.
Since that time, the Company’s expenses in relation to FDA PMA activities have been presented in a separate reporting segment and detailed in a note to its financial statements, provided in conformity with ASC 280. The information provided in Item 5 of the Form 20-F with respect to GAAP measures excluding expenses of the FDA PMA trials is directly derived from the segment information that can be found in Note 27 to the Company’s financial statements for the year ended December 31, 2011. The Company will include in its future filings a sub-total showing such measures excluding expenses of the FDA PMA in its Note 27.
Signatures, page 68
2.
We note that your Form 20-F is unsigned. Please file a full amendment that includes all required signatures.
The Form 20-F was manually signed by Marc Oczachowski, Chief Executive Officer and Eric Soyer, Chief Financial Officer. Due to a clerical error, the Edgarized version of the document inadvertently failed to include the conformed signatures. The Company will ensure that future filings include properly conformed electronic signatures.
Given that the two officers authorized to sign on behalf of the registrant also signed the certifications required by Rules 13a-14(a) and (b) of the Exchange Act and by Form 20-F, and that the signature lines were correctly conformed in the Edgarized filing, the Company believes that it should be treated the same as various domestic issuers filing on Form 10-K, where the Staff noted the missing signatures and requested that future filings contain fully conformed signatures (see for example, SEC comment letters dated December 15, 2010 regarding Comfort Systems USA, Inc and dated March 28, 2012 regarding Stericycle, Inc.). The registrant’s liability for the filing is clearly established by the fact that it filed the form and that the two officers authorized to take this corporate action signed the certifications in their individual capacities elsewhere in the filing.
In addition, the Company believes it would be a significant hardship and potentially misleading to investors for it to file an amendment containing an entire Form 20-F for the year ended December 31, 2011 that does not include updated information as required by General Instruction C(b) and C(d) to Form 20-F. Indeed, it would seem that any amendment containing the entire document would need to comply with the reporting requirements of each Item as of the date of filing, in particular because in this case, the signature pages would be dated the date of the amendment, as if the full document spoke also as of that date.
If the Staff believes that an amendment is required, we would propose to file an amendment containing:
-
the Cover Page,
-
an explanatory note with the following text:
Page 3
“We are filing this Amendment No. 2 (this “Amendment No. 2”) to the Annual Report on Form 20-F for the year ended December 31, 2011, filed with the Securities and Exchange Commission (the “SEC”) on April 26, 2012 (the “Original Form 20-F”) by EDAP TMS SA (the “Company”), solely to file an electronic version of the manually signed signature page dated the date of the original filing, which version, due to a clerical error in the Edgarization process, was inadvertently omitted from the Original Form 20-F. As required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, new certifications by our Chief Executive Officer and Chief Financial Officer are being filed as exhibits to this Amendment No. 2 under Item 19. This Amendment No. 2 therefore consists solely of the cover page, this explanatory note, the electronic version of the signature page to the Original Form 20-F, the signature pages to this Amendment No. 2 and the exhibits attached hereto.
Other than as expressly set forth above, this Amendment No. 2 does not, and does not purport to, amend, update or restate any other information or disclosure included in the Original Form 20-F, or reflect any events that have occurred after the filing date of the Original Form 20-F. Accordingly, this Amendment No. 2 should be read in conjunction with the Original Form 20-F, Amendment No. 1 to the Annual Report on Form 20-F for the year ended December 31, 2011, filed with the Securities and Exchange Commission on May 21, 2012 and the documents filed with or furnished to the Securities and Exchange Commission by the Company subsequent to April 26, 2012, including any amendments to such documents. Among other things, forward-looking statements contained in the Original Form 20-F have not been revised to reflect events, results or developments that occurred or facts that became known to us after the original filing date, and such forward-looking statements should be read in their historical context.”
-
the electronic version of the manually signed signature page dated the date of the original filing,
-
the signature page for the amendment (appropriately conformed) dated the date the amendment is filed, and
-
the certifications required by Rule 13a-14(a) of the Securities Exchange Act of 1934, dated the date of the amendment.
Item 18. Financial Statements
Note 31. Subsequent Significant Events as of April 26, 2012, (b) Exchange Agreement regarding the Convertible Debentures and Warrants, page F-42
3.
Please describe for us in appropriate detail how you valued and accounted for the exchange, including a discussion of how the embedded warrant derivatives were treated upon extinguishment, how the exchange was recorded and provide the calculations supporting any gain or loss recorded as part of the exchange. Please refer to the appropriate authoritative literature which supports your accounting.
Page 4
I.
BACKGROUND: DESCRIPTION OF THE EXCHANGE AGREEMENT
On January 19, 2012, the Company entered into a privately negotiated exchange agreement (the “Exchange Agreement”) with all holders of the Company’s outstanding 9% Senior Convertible Debentures due October 29, 2012 (the “2007 Debentures”) and warrants to purchase up to 882,000 ordinary shares at an exercise price of $6.87 per share (the “2007 Warrants”). Pursuant to the terms of the Exchange Agreement:
·
‘Option A’ of the Exchange Agreement: certain holders of an aggregate principal amount of USD 500,000 of 2007 Debentures and 2007 Warrants to purchase up to 42,000 ordinary shares agreed to exchange their outstanding securities for 22,186 newly issued ordinary shares, in the form of ADRs, and $500,000 in cash ; and
·
‘Option B’ of the Exchange Agreement: holders of an aggregate principal amount of USD 10 million of 2007 Debentures and 2007 Warrants to purchase up to 840,000 ordinary shares agreed to exchange their outstanding securities for an aggregate principal amount of USD 10 million of new 9% non-convertible Senior Debentures due June 30, 2014 (the “New Debentures”), new warrants to purchase up to 408,691 newly issued ordinary shares at an exercise price equal to the par value per share (the “New Warrants”), and 1,926,685 newly issued ordinary shares, in the form of restricted American Depositary Receipts (“ADRs”) (collectively, the “Exchange”).
On January 25, 2012, the Company closed the Exchange and all of the 2007 Debentures and the 2007 Warrants were exchanged for the New Debentures, 1,948,871 newly issued ordinary shares, in the form of ADRs, the New Warrants and $500,000 in cash, or a combination thereof as described above.
As result of the Exchange, all 2007 Debentures and 2007 Warrants of the Company have been cancelled.
II.
ACCOUNTING AND VALUATION ANALYSIS OF THE EXCHANGE AGREEMENT
II-1.
Accounting analysis:
Analysis of the relevant accounting model to be applied by the Company to recognize the Exchange Agreement.
II-1-1.
Authoritative literature and accounting principles
The Company considered guidance contained in FASB Accounting Standard Codification (ASC) 405-20 – Extinguishments of Liabilities and FASB ASC 470-50 – Debt Modifications and Extinguishment / FASB ASC 470-60 – Troubled Debt Restructuring for the general concepts on debt modifications and restructurings.
Pursuant to this literature and given that the Exchange did not result in a change of lenders, the Company structured its initial analysis around three questions:
1.
Have the Liability Derecognition criteria been met pursuant to ASC 405-20-40?
2.
If not, do the Company and the Exchange meet the Troubled Debt Restructuring criteria?
Page 5
3.
If the Troubled Debt Restructuring accounting model is not applicable, should the Company apply the accounting model for a Debt Modification or Extinguishment?
II-1-2.
Application of the Extinguishment Accounting model to the Exchange Agreement
Step 1: Have the Liability Derecognition criteria been met pursuant to ASC 405-20-40?
The derecognition threshold would have been met only if: a) the Company had reimbursed the holders of the existing 2007 Debentures (upon delivery of cash, or of other financial assets, or of goods or services) for the total amount of the remaining 2007 Debentures; or b) the Company had been legally released from its debt obligation as the primary obligor. Since neither of these two criteria has been met through the Exchange, the Company needed to proceed to Step 2 of the debt exchange analysis in order to determine whether it should take the 2007 Debentures off its books.
Step 2: Did the Company and the Exchange meet the Troubled Debt Restructuring criteria?
The Company determined that the Company and the Exchange did not meet any of the criteria needed to apply the Troubled Debt Restructuring accounting model:
-
The Company is not and was not at the time of the Exchange experiencing financial difficulties.
-
The Exchange did not result in any economic concession granted to the Company by the Holders of the 2007 Debentures. This was primarily a result of the large “day 1 sweetener” of new shares and the New Warrants provided by the Company to facilitate the transaction (i.e., 1,948,871 ordinary shares in the form of ADRs and 408,691 New Warrants, with an exercise price set at par).
Since the Troubled Debt Restructuring accounting model did not apply to the Exchange, the Company then determined whether the Debt Modification or Debt Extinguishment model applied.
Step 3: Did the Exchange meet the Debt Extinguishment criteria?
Pursuant to FASB ASC 470-50-40-6 through 12, the Company determined that the Exchange met the Debt Extinguishment model on the basis that the New Debentures received in the exchange were substantially different from the 2007 Debentures, which were convertible.
The elimination of the conversion option, which was a substantive conversion feature within the meaning of FASB ASC 470-20-40-7 to 9, was a substantive modification of the 2007 Debentures and therefore qualified the exchange for the Debt Extinguishment model.
Similarly, the substantial differences in the 2007 Warrants and the New Warrants (different exercise prices, extended maturity, elimination of certain price adjustment mechanisms, including the elimination of the ”Black-Scholes adjustment”) justified the extinguishment of the 2007 Warrants.
As a result of the above, the Company determined that the Debt Extinguishment model should apply to account for the Exchange and that gains or losses that could result from the Exchange would be recognized in its income statement.
Page 6
II-2.
Valuation analysis:
II-2-1.
Fair Value of the $10 million principal amount New Debentures:
After review of its valuation models with experts and the assumptions used, the Company determined that a preliminary estimate of the fair value of the New Debentures, still subject to further review and analysis, was $5,925,000.
The difference between the nominal value of the New Debentures ($10,000,000 or €7,691,000 using the USD/EUR exchange rate on January 24, 2012 of 1.3003) and its preliminary estimate of market fair value ($5,925,000 or €4,557,000 using the USD/EUR exchange rate on January 24, 2012 of $1.3003) is therefore €3,134,000.
II-2-2.
Fair Value of the ordinary shares issued as part of the Exchange:
Pursuant to the Exchange Agreement, the Company issued 1,926,685 new ordinary shares to the holders that chose the cash and shares option of the Exchange Agreement.
Based on the market price of EDAP’s shares on the day immediately prior to Closing (i.e., $2.59 on January 24, 2012) and the USD/EUR exchange rate on January 24, 2012 (i.e., $1.3003 for €1 ), the Company determined that the issuance price of the new ordinary shares shall be €1.99184 (i.e., $2.59/1.3003) and that the total fair market value of the 1,926,685 new shares issued was €3,838,000.
II-2-3.
Fair Value of the New Warrants issued as part of the Exchange:
Pursuant to the Exchange Agreement signed on January 19, 2012, the Company issued 408,691 New Warrants to the holders that chose the New Debentures, New Warrants and/or New Shares option of the Exchange Agreement.
The Company used a Black-Scholes model to value these warrants. The model, based on the market price of the Company’s shar