Series A investors are now more frequently giving companies a pass on the financial statement audit requirement, which defers this covenant until the next financing round. This means companies save the compliance cost, but the window of time for financial transactions being unaudited and subject to inspection in a first-time audit grows.
At the time of the 2018 spin-out, management did not document its considerations and analysis supporting the business combination accounting. The spin-out, as well as certain complexities with debt and equity financing, needed additional accounting analysis. These complexities included:
- Convertible notes with beneficial conversion terms, derivative features relating to change in control premiums in multiple debt instruments, and warrants issued along with the debt instruments all needed to be addressed.
- Management made a good-faith valuation of the acquired technology at the time of the spin-out. However, this required a closer look in relation to traditional valuation methodologies.