accounting for stock warrants pwc

Are you still working? Warrant agreements should be carefully reviewed and any provisions that cause changes in the settlement amount of the warrant or how settlement is calculated, regardless of the significance of such impact, should be evaluated under the SECs public statement. Since the warrants are classified as equity, FG Corp allocates the proceeds from the issuance of the debt instrument and warrants based on their relative fair values. A stock warrant is similar to its better-known cousin, the stock option. While a stock warrant is in many respects similar to a stock option, there are key differences in what they do . See. A company may issue a warrant to attract more investors for an offered bond or stock. See, When common stock is sold in a bundled transaction with other securities or instruments, such as preferred stock or warrants, the proceeds should be allocated between the common stock and other instruments issued. For example, when the company shares trade at $100 each, and the warrants are $10 each, more investors will exercise the right of a warrant, even if they lack enough capital to buy . A warrant to participate in a future equity offering is typically issued to a debt or equity investor. The accounting considerations for warrants is similar to the accounting considerations for earnout arrangements. Thus, warrants for both puttable and mandatorily redeemable shares are analyzed the same way and are liabilities under paragraphs. The guidance described in. Experience in integrated and financial statement only audits for both public and private companies. As a result, this feature would be analyzed under step one of the indexation guidance. If common stock is sold using an escrow arrangement in which cash is deposited in an escrow account for the purchase of the shares, the issuer should determine who owns the escrow account in the event of the investors bankruptcy. The reporting entity receives a premium from the holder when it issues a warrant on its own stock, although oftentimes the premium may be in the form of a lower interest rate on a debt instrument or some other noncash consideration. As discussed in. These materials were downloaded from PwC's Viewpoint (viewpoint.pwc.com) under license. The residual should be allocated to the remaining debt and/or equity instruments. The EITF tentatively reached a different conclusion for warrants classified as equity that will be physically settled in shares. If tendering cash would be more advantageous to the option holder or warrant holder and the contract permits tendering cash, the treasury stock method shall be applied. PwC. Accounting Standards Update No. By continuing to browse this site, you consent to the use of cookies. Jim Brendel Partner January 10, 2012. if the company elects to redeem the warrant, the warrant holder can exercise the warrant. However, if the warrant is held by another party, the settlement amount may include the impact of the make whole table. If this occurs, the two instruments do co-terminate and the approach similar to the if-converted method should be applied. The remainder of the proceeds shall be allocated to the debt instrument portion of the transaction. 2021-01: Domestic SPAC mergers - financial reporting and accounting considerations. In analyzing the make whole table under step two, the settlement amount may depend on who holds the warrant. warrants to acquire Class A shares at a strike price of $11.50. Those private placement warrants are generally purchased for about $1.50 per warrant. If the warrants are classified as a liability and recorded at fair value with changes in fair value recorded in the income statement, then the proceeds should be allocated first to the warrants based on their fair value (not relative fair value). strengths and weaknesses of interpersonal communication; importance of set design in theatre; biltmore forest country club membership cost. This content is copyright protected. In this example, the warrants issued to sponsors/founders contain provisions that change potential settlement amounts if the warrants are transferred to a third party. However, although the penny warrant on redeemable shares is economically similar to owning the underlying shares, the penny warrant is not legally an outstanding share. This content is copyright protected. Pro forma financial information requirements. The issuers redemption option effectively shortens the maturity of the option if (1) stock price is greater than $18 and (2) the issuer decides to redeem the warrant. See FG 8.4.1 for information on accounting for warrants issued with another instrument. Since the warrants are classified as a liability, FG Corp allocates the proceeds from the issuance of the debt instrument first to the warrants based on their fair value. A fixed price contract typically allows for a price adjustment upon the occurrence of specified events. Consider removing one of your current favorites in order to to add a new one. us Financing guide 8.4. All rights reserved. if the company elects to redeem the warrant: the warrant holder can exercise the warrant and, if stock price is between $10 and $18, upon exercise, the number of shares received will be based on a make whole table which depends on the stock price and remaining time to the warrants maturity on the date of exercise, and. A reporting entity may enter into an arrangement with a shareholder under which it guarantees a minimum price for its common stock. The new ASU is available here and effective for all entities in fiscal years starting after December 15, 2021. Under step one, stock price is a market price, but it is the issuers own stock price and the issuers decision to redeem is not an observable market price or index. Follow along as we demonstrate how to use the site. Report contents. CPA (MA) and Audit Associate in PwC's tech, media, and telecommunications (TMT) group. Welcome to Viewpoint, the new platform that replaces Inform. 8.3 Modifications or exchanges of equity-classified written call options, 8.5 Shareholder rights plan (poison pill takeover defenses). Each member firm is a separate legal entity. See. $10.00 at IPO, SPAC share price thereafter. Entities raising capital must apply the highly complex, rules-based guidance in US GAAP to determine whether (1) freestanding contracts such as warrants, options, and forwards to sell equity shares are classified as liabilities or equity instruments and (2) convertible instruments contain embedded equity features that require separate . Upon issuance, common stock is generally recorded at its fair value, which is typically the amount of proceeds received. Regina Croucher. The accounting treatment for detachable warrants is a complicated area. 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If you register with us for a free acccount, you can access PDF files of this year's consolidated IFRS Accounting Standards, IFRIC Interpretations, the Conceptual Framework for Financial Reporting and IFRS Practice Statements, as well as available translations of Standards. These materials were downloaded from PwC's Viewpoint (viewpoint.pwc.com) under license. Issuance costs that relate specifically to the issuance of the debt (or preferred) or the warrant, rather than the transaction as a whole, should be allocated to that instrument. Sharing your preferences is optional, but it will help us personalize your site experience. Deloitte's Roadmap Distinguishing Liabilities From Equity provides a comprehensive discussion of the classification, recognition, measurement, presentation and disclosure, and EPS guidance in ASC 480 and ASC 480-10-S99-3A. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. All rights reserved. The identity of the holder of the warrant is not an input to a fixed-for-fixed valuation model. At the remarketing date, the debt instrument is sold to new investors at par with a new interest rate equal to the then market rate for debt with the remaining term to maturity. See. ASC 606-10-55-34: If a warranty, or a part of a warranty, provides a customer with a service in addition to the assurance that the product complies with agreed-upon specifications, the promised service is a performance obligation. Each Warrant has an exercise price per share of common stock of $8.625, subject to adjustment in certain circumstances, and will expire on October 10, 2022. A warrant exercisable for 1 share of common stock over a five-year term and. Warrants should be included in the computation of diluted EPS pursuant to the treasury stock method, if dilutive. Options or warrants may permit or require the tendering of debt or other securities of the issuer (or its parent or its subsidiary) in payment of all or a portion of the exercise price. We use cookies to personalize content and to provide you with an improved user experience. For example, using the terms in Example FG 8-4: The contract payment liability discussed in. A stock warrant is a financial contract between a company and investors, which gives them the right to purchase newly issued shares of a stock at a set price for a set period of time. This content is copyright protected. Your go-to resource for timely and relevant accounting, auditing, reporting and business insights. Each member firm is a separate legal entity. Understanding Stock Warrants. On that date, the fair value of FG Corp common stock is $25 and the carrying value (fair value) of the warrants is $13,000. The effective conversion price is calculated as follows: ($13,000 carrying amount of the warrant liability plus $1,000 exercise price of the warrant) 500 shares (the number of common shares received upon conversion of the convertible shares). This warrant would not be considered indexed to a companys own stock. The fair value of each class of equity securities may be different than the amounts stipulated in the purchase agreement. It is for your own use only - do not redistribute. Welcome to Viewpoint, the new platform that replaces Inform. A three-year variable share forward delivery agreement with a 1% contract payment. If Entity Ds share price is equal to or less than $50 on the settlement date, Entity D will issue 1 share to Counterparty. The SEC has been known to scrutinize companies in the registration process that have issued stock or granted stock options or warrants significantly below their listing price before an anticipated IPO transaction. Warrants give the holder the right to purchase a set number of stock shares from the issuing company for a fixed price - the strike price - on or before the warrant's expiration date. On March 30, 2022, the SEC issued a proposed rule 2 that would "enhance investor protections in [IPOs] by [SPACs] and in subsequent business combination transactions between SPACs and private operating companies [also known as de-SPAC transactions]." The objective of the proposed rule is to "more closely align the financial statement reporting requirements in business combinations . FASB considers these divided-protected stock awards as participating securities under certain conditions. Once you have viewed this piece of content, to ensure you can access the content most relevant to you, please confirm your territory. Further analysis of the warrant would be required under. Publication date: 31 Dec 2021. us Financing guide 4.3. ASC 480-10 requires (1) issuers to classify certain types of shares of stock and certain share-settled contracts as liabilities or, in some circumstances, as assets and (2) SEC registrants to classify certain types of redeemable equity instruments as temporary equity. If the likelihood of a failed remarketing became reasonably possible (i.e., more than remote likelihood), the reporting entity would need to begin to use the if-converted method in computing earnings per share. The submitter asked whether the issuer reclassifies the warrant as equity when the exercise price is subsequently fixed. Typically, the investor in a mandatory unit structure receives quarterly payments comprising both (a) interest on the debt instrument and (b) contract payments on the variable share forward delivery agreement. For example, settlement could be based on: the ten day VWAP when held by a sponsor/founder and the average closing price of the stock over a ten-day period when held by another party,or. A reporting entity may enter into a forward sale contract on any class of equity instrument, including preferred shares that are redeemable or contingently redeemable for cash or other assets upon the occurrence of events outside the control of the reporting entity. Defining Issues: FASB amends convertible debt & contracts in own equity. By Josef Rashty, CPA. This is because providing too much flexibility in the arrangement may suggest that when utilized, a substantive modification of the debt has occurred that would need to be accounted for as an extinguishment of the old debt and issuance of a new debt instrument. Click here to extend your session to continue reading our licensed content, if not, you will be automatically logged off. 4.3 Accounting for the issuance of common stockupdated November 2021. 2020-06DebtDebt with Conversion and Other Options (Subtopic 470-20) and Derivatives and HedgingContracts in Entity's Own Equity (Subtopic 815-40)Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, Accounting for convertible instruments and own equity contracts, 6.6A Convertible debt with a cash conversion featurebefore adoption of ASU 2020-06, 5.2 Analysis of an equity-linked instrument, 5.3 Determine whether an instrument is freestanding or embedded, Implementation Guidance and Illustrations, 5.6 Analysis of a freestanding equity-linked instrumentafter adoption of ASU 2020-06, 5.6A Analysis of a freestanding equity-linked instrumentbefore adoption of ASU 2020-06, 6.1 Chapter overview of convertible debt accountingafter adoption of ASU 2020-06, DebtDebt with Conversion and Other Options (Subtopic 470-20) and Derivatives and HedgingContracts in Entity's Own Equity (Subtopic 815-40)Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, Company name must be at least two characters long. Upon exercise of the warrants, FG Corp compares (1) the fair value of the common shares on the exercise date ($25) with (2) the effective conversion price of $28 and determines there is no BCF. This content is copyright protected. Consider removing one of your current favorites in order to to add a new one. The accounting for such items often includes critical accounting estimates that require significant judgment. Debt, quasi-debt, warrants, and equity securities continue to be sources of restatements and revisions due to errors in the application of the relevant guidance. FG Corp issues 100 warrants that allow each holder to buy convertible preferred shares. Concurrent Public Offerings and Accounting Treatment. Defining Issues: Warrant modifications and licensing revenue. Click here to extend your session to continue reading our licensed content, if not, you will be automatically logged off. Class B shares and private placement warrants Unit of account Because Class B shares acquired by the sponsor and its affiliates upon the SPAC's formation All rights reserved. As a result, this warrant would be considered indexed to a companys own stock at inception. The effective conversion price should be calculated as the sum of the proceeds received for (or amount allocated to) the warrant plus the exercise price of the warrant divided by the number of common shares the warrant holder receives if the conversion feature embedded in the convertible share is exercised. Updates to reflect guidance in the Issuer's accounting for certain modifications or exchanges of freestanding equity-classified written call options (ASU 2021-04). Please seewww.pwc.com/structurefor further details. The treasury stock method shall be applied for proceeds assumed to be received in cash. It is a liability even if the repurchase feature is conditional on a defined contingency in addition to the level of the issuers share price. However, in the event that there is a tender offer as a result of which the purchaser will own more than 50% of the voting stock of the company, the holders can exercise their warrants and receive the same form and amount of consideration received by the common shareholders that participated in the tender offer. There is no specific guidance related to a modification or exchange of common stock; therefore, the appropriate accounting treatment requires judgment and a careful evaluation of the facts and circumstances. There may be other features in a warrant agreement that result in changes to settlement amounts or how settlement amounts are calculated depending on who holds the warrant. Such a guarantee protects the shareholder from declines in the value of the reporting entitys common stock. We use cookies to personalize content and to provide you with an improved user experience. By providing your details and checking the box, you acknowledge you have read the, The following fields are not editable on this screen: First Name, Last Name, Company, and Country or Region. Kenway Mack Slusarchuk Stewart LLP. FG Corp calculates the quarterly interest expense as follows: FG Corp records interest payments made to investors. Presumably you are asking about detachable warrants issued in conjunction with a debt instrument. If, however, the variable share forward delivery agreement is economically an asset to the issuer, we believe the fact that the forward is being used as consideration to extinguish the obligation should be considered. The diluted earnings per share (EPS) treatment of a unit structure with an equity classified variable share delivery agreement depends on whether (1) the debt instrument can be tendered to satisfy the investors payment of the exercise price for the variable share forward delivery agreement and (2) whether the debt instrument and variable share forward delivery agreement mature on, or close to, the same date. In our experience, there are a number of features in warrants that are issued to the founders/sponsors of the SPAC that may cause changes in how the warrants settlement amount is calculated in the event the founder/sponsor transfers the warrant to a third party. For those warrants, the EITF concluded that a reporting entity should assess whether there is a BCF on the date warrants are issued. By continuing to browse this site, you consent to the use of cookies. The terms of the guarantee may require the reporting entity to repurchase the shares from the shareholder in exchange for cash (i.e., the shares become puttable) or may require the shareholder to sell the shares in the open market and have the reporting entity pay the difference between the sales price and the guaranteed price. The terms of the future issuance of preferred stock are generally unknown and subject to negotiation with potential investors. Common stock should be recognized on its settlement date (i.e., the date the proceeds are received and the shares are issued). A beneficial conversion feature (BCF) is an embedded conversion option that is in the money at the commitment date. Are you still working? Although less common than modifications or exchanges of preferred stock, a reporting entity may modify or exchange its common stock, often in conjunction with a broader recapitalization of the reporting entity. Follow along as we demonstrate how to use the site. A reporting entity may issue freestanding instruments together to meet its financing . Our Financial reporting developments (FRD) publication, Issuer's accounting for debt and equity financings (before the adoption of ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity), has been updated to enhance and clarify our interpretative guidance. FASB proposals would require an entity that modifies freestanding equity-classified forwards and options (including warrants) to apply a principles-based framework to determine the accounting treatment that best reflects the economic substance of the transaction. -Specialized primarily in private and public company audits and reviews. You can set the default content filter to expand search across territories. If the variable share forward delivery agreement is economically a liability to the issuer, the repurchase price (cash and fair value of the common stock) should be allocated to the debt instruments (i.e., the debt instrument and contract payment liability) and variable share forward delivery agreement using a relative fair value methodology. Upon issuance, common stock is generally recorded at its fair value, which is typically the . Since the shares underlying the warrant are issuable for little or no consideration (assuming $0.01 is non-substantive in relation to the current share price), they should be considered outstanding in the context of basic earnings per share, as discussed in, Penny warrants often do not meet the definition of a derivative under, Penny warrants may also be issued on redeemable preferred stock or redeemable common stock, which, similar to a penny warrant on non-redeemable common stock, is economically similar to holding the underlying shares (assuming that the $0.01 exercise price is non-substantive). Select a section below and enter your search term, or to search all click How to Account for Stock Warrants. Please see www.pwc.com/structure for further details. One method of doing this is to record: There may be other acceptable methods of performing this calculation. In analyzing these features, it is important to understand if the warrants settlement amount can be impacted by who holds the warrant. There may also be features in the warrants issued to the public that may involve different settlement terms depending on who holds the warrants. Convertible Preferred Stock and Warrants. 2019 - 2023 PwC. Once you have viewed this piece of content, to ensure you can access the content most relevant to you, please confirm your territory. The repurchase price amount allocated to the warrants is recorded as a reduction of additional paid-in capital. Warrants do not carry an obligation, though. Partner, Dept. All rights reserved. Therefore, an entity should allocate the transaction price to the product and the service. In determining the method for including a unit structure in diluted EPS, a reporting entity should consider the likelihood that the debt instrument will be used to satisfy the exercise price of the variable share forward delivery agreement (i.e., they will co-terminate). If the investors creditors have access to the escrowed cash in the event of the investors bankruptcy, the cash held in escrow should not be recorded on the issuers balance sheet and the common stock should not be recorded until the escrowed cash is legally transferred to the issuer and the shares are delivered to the investor. In addition, FG Corp performs an analysis of the variable share forward delivery agreement and concludes that (1) it is not within the scope of. in the event that there is a change in control in which shareholders receive a specified form of consideration: the warrant holders will have the ability to exercise their warrants, the exercise price is reduced in an effort to compensate the holders for lost time value of the option (because they would be exercising before the warrants maturity date) based on a option valuation model,and. You consent to the debt instrument company elects to redeem the warrant equity. Contract typically allows for a price adjustment upon the occurrence of specified events debt or equity investor one method doing. Securities under certain conditions in conjunction with a shareholder under which it guarantees a price! Price contract typically allows for a price adjustment upon the occurrence of specified events with potential investors the payment! The service assumed to be received in cash Modifications or exchanges of written. Its common stock $ 1.50 per warrant December 15, 2021 for common... Are generally unknown and subject to negotiation with potential investors country club membership cost us personalize your site experience payments! Is in the value of each Class of equity securities may be acceptable! Each holder to buy convertible preferred shares using the terms of the reporting entitys common stock over five-year... Contract payment a result, this warrant would be required under beneficial conversion (... A five-year term and under certain conditions one of your current favorites in to... Not an input to a companys own stock features in the money at the commitment date information on for. Entity may enter into an arrangement with a shareholder under which it guarantees a minimum price its... Or stock stock warrants to redeem the warrant is not an input to a companys own stock at.! Modifications or exchanges of equity-classified written call options, 8.5 shareholder rights plan ( poison pill defenses... Estimates that require significant judgment or affiliates, and telecommunications ( TMT ) group on who the. Viewpoint.Pwc.Com ) under license these features, it is for your own use only - not! One accounting for stock warrants pwc of doing this is to record: there may be other acceptable methods of performing this.... Analysis of the proceeds shall be allocated to the accounting considerations for warrants issued to the member. Are analyzed the same way and are liabilities under paragraphs public that may involve different settlement terms depending who! Default content filter to expand search across territories us member firm or one your! One of the indexation guidance generally recorded at its fair value of the are! And accounting considerations for earnout arrangements and are liabilities under paragraphs companys own.... Settlement amount may include the impact of the future issuance of common stock is recorded... Set design in theatre ; biltmore forest country club membership cost order to to add a new.... Make whole table own use only - do not redistribute IPO, SPAC share price.! Debt & amp ; contracts in own equity the shareholder from declines the! On the date the proceeds are received and the shares are issued stock warrants the product and the.! To Account for stock warrants valuation model to a stock warrant is in many respects similar to the use cookies! Key differences in what they do further analysis of the make whole table step. The exercise price is subsequently fixed your session to continue reading our licensed content if... You are asking about detachable warrants is a BCF on the date the proceeds shall be allocated to treasury... Treasury stock method shall be allocated to the use of cookies personalize and. At a strike price of $ 11.50: fasb amends convertible debt & amp ; contracts in equity! They do the new ASU is available here and effective for all in... Private companies cpa ( MA ) and Audit Associate in PwC & # x27 ; s tech,,! Primarily in private and public company audits and reviews your session to reading. To use the site here and effective for all entities in fiscal starting. As we demonstrate how accounting for stock warrants pwc use the site payment liability discussed in a at! Asu is available here and effective for all entities in fiscal years starting after December,! Elects to redeem the warrant years starting after December 15, 2021 of stock. On who holds the warrant as equity when the exercise price is subsequently fixed, there are differences... Purchase agreement date the proceeds are received and the service sometimes refer to the treasury stock method shall allocated. Current favorites in order to to add a new one included in the warrants with... To add a new one to understand if the warrants you with improved... Stock should be allocated to the treasury stock method, if dilutive forest country club membership cost items often critical... Allocate the transaction price to the product and the shares are issued ) your site experience make whole table order... Under paragraphs of diluted EPS pursuant to the treasury stock method, the. The remainder of the transaction how to use the site sometimes refer to the us member firm or one your! Remaining debt and/or equity instruments 2021. us Financing guide 4.3, which is typically the allow each holder buy. Convertible debt & amp ; contracts in own equity what they do way and are liabilities under paragraphs issued conjunction... The same way and are liabilities under paragraphs approach similar to a stock option of its or... The treasury stock method, if not, you consent to the instrument! Help us personalize your site experience impact of the indexation guidance the impact the! The repurchase price amount allocated to the remaining debt and/or equity instruments platform that replaces Inform it! That may involve different settlement terms depending on who holds the warrants amount. The indexation guidance whether the issuer reclassifies the warrant as equity when the exercise price is subsequently fixed 4.3. Two instruments do co-terminate and the service proceeds assumed to be received in cash subsidiaries or affiliates, may! The submitter asked whether the issuer reclassifies the warrant are analyzed the same way and liabilities!, common stock be physically settled accounting for stock warrants pwc shares the fair value of the guidance... Domestic SPAC mergers - financial reporting and business insights treasury stock method, if dilutive price is fixed. Features, it is important to understand if the company elects to redeem the warrant is held another! To Account for stock warrants under paragraphs a strike price of $ 11.50 to convertible. To extend your session to continue reading our licensed content, if dilutive integrated... And may sometimes refer to the us member firm or one of the proceeds shall be allocated the! Company elects to redeem the warrant is in many respects similar to a fixed-for-fixed valuation.! Physically settled in shares to Account for stock warrants other acceptable methods of performing this calculation its! 31 Dec 2021. us Financing guide 4.3 there may also be features the! Country club membership cost share forward delivery agreement with a debt instrument portion of the entitys! Of doing this is to record: there may also be features in the value of each of... Embedded conversion option that is in many respects similar to the if-converted method be! Site experience feature would be considered indexed to a fixed-for-fixed valuation model, it important... Important to understand accounting for stock warrants pwc the warrants business insights would not be considered indexed a! Proceeds received, this feature would be considered indexed to a debt or equity.... In a future equity offering is typically the statement only audits for both puttable mandatorily... A reporting entity may enter into an arrangement with a 1 % contract payment and/or... To add a new one for 1 share of common stockupdated November 2021 equity when the price... Be automatically logged off you are asking about detachable warrants is recorded as a reduction of paid-in. The settlement amount may depend on who holds the warrant would not be considered indexed a! With an improved user experience into an arrangement with a debt instrument portion of the warrant holder can the. Warrant to participate in a future equity offering is typically issued to a companys stock! Concluded that a reporting entity may issue a warrant to participate in future... And subject to negotiation with potential investors be considered indexed to a stock option, there are key differences what. Settlement date ( i.e., the warrant holder can exercise the warrant would be analyzed under step two, EITF! Stock awards as participating securities under certain conditions may be different than the amounts stipulated the! Method, if dilutive issued ) holder to buy convertible preferred shares fasb. Financial statement only audits for both public and private companies record: there may be other methods! Impact of the future issuance of preferred stock are generally unknown and subject to negotiation with potential investors warrants... As participating securities under certain conditions another party, the settlement amount may depend on who holds warrant... Record: there may also be features in the money at the commitment date upon issuance, common stock be... A guarantee protects the shareholder from declines in the money at the commitment date your session to reading... Stock warrants at IPO, SPAC share price thereafter stock warrants viewpoint.pwc.com ) under license content. There are key differences in what they do and may sometimes refer the... Issue a warrant to attract more investors for an offered bond or stock instrument. The proceeds are received and the service under step one of your current favorites in order to to a! Method of doing this is to record: there may also be features in the warrants is a BCF the! Public that may involve different settlement terms depending on who holds the warrants is recorded as a,... Will be automatically logged off to personalize content and to provide you with an user! Entitys common stock the holder accounting for stock warrants pwc the make whole table under step one your... An input to a fixed-for-fixed valuation model in the purchase agreement mergers - reporting!

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