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This excerpt taken from the GENT 6-K filed Dec 1, 2005. Convertible Promissory Notes: The convertible feature of certain notes
payable (See “Note 2”) and stock purchase warrants provides for conversion into
Gentium’s ordinary shares at below market value. This feature is normally
characterized as a “beneficial conversion feature” (“BCF”), which represents
the “intrinsic value” of the difference between the conversion price of the
instrument and the underlying fair value of the Company’s shares at that date.
Pursuant to Emerging Issues Task Force (“EITF”) Issue No. 98-5, “Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion
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Ratio” and EITF No. 00-27, “Application of EITF Issue No. 98-5 to Certain Convertible Instruments,” the Company determined the value of the BCF, for the convertible notes payable and stock purchase warrants issued as of December 31, 2004, to be approximately €3,688 ($4,643) and €459 ($578), respectively. Additionally in conjunction with convertible notes issued in January 2005, the Company determined the value of the BCF to be approximately €1,111 ($1,456) and €138 ($181), for the convertible notes payable and stock purchase warrants, respectively. Accordingly, the relative fair value of the BCF on convertible notes payable and stock purchase warrants was recorded in the financial statements as a discount from the face amount of the notes. The discount was being amortized to interest expense and additional paid in capital, respectively, using the effective interest method, through the earliest put option date. As of September 30, 2005 the convertible notes have all been converted or redeemed. The balance of the discount related to Notes redeemed was charged to expense and for Notes converted into ordinary shares, was charged to additional paid-in capital.
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