EFTA00293562.pdf

AliphCom Consolidated Financial Statements December 31, 2010 and 2009 EFTA00293562 AliphCom Index December 31, 2010 and 2009 Pairg$ Report of Independent Auditors 1 Consolidated Financial Statements Balance Sheets 2 Statements of Operations 3 Statements of Stockholders' Equity 4 Statements of Cash Flows 5 Notes to Financial Statements 6-31 EFTA00293563 pwc Report of Independent Auditors To the Board of Directors and Stockholders of AliphCom: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity, and of cash flows present fairly, in all material respects, the financial position of AliphCom and its subsidiary at December 31, solo and woo, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note i to the consolidated financial statements, the Company adopted new accounting rules for revenue recognition in 2010. April 2, 2012 EFTA00293564 AliphCom Consolidated Balance Sheets December 31, 2010 and 2009 (in thousands, except share andper sham amounts) 2010 2009 Assets Current assets Cash and cash equivalents $ 28,993 $ 34,091 Accounts receivable 6.952 5,644 Inventories 15,237 5,396 Prepaid and other current assets 1.978 1,032 Total current assets 53,160 46,163 Property and equipment, net 2,818 2,357 Other bng-term assets 1,587 6.259 Total assets S 57,565 $ 54,779 Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 21,370 $ 10,082 Accrued liabilities 15,965 13,970 Deferred revenue, current portion 2.895 1,937 Capital lease obligations, current portion 63 79 Income tax payable 441 553 Total current liabilities 40,734 26,621 Preferred stock warrant liability 6,874 Capital lease obligations, less current portion 63 Deferred revenue, less current portion 483 1,452 Total liabilities 41,217 35,010 Commitments and contingencies (Note 5) Stockholders' equity Redeemable convertible preferred stock: Kam par value; 111,853,887 shares authorized at December 31, 2010 and 2009, 105,356,638 and 88,277,291 shares issued and outstanding at December 31, 2010 and 2009, respectively 53,631 43,725 Common Stock: $0.001 par value; 215,000,000 shares authorized at December 31, 2010 and 2009, 45,238,384 and 40,724,308 shares issued and outstanding at December 31, 2010 and 2009, respectively 45 40 Additional paid-in capital 4,422 3,329 Stockholder's notes receivable (180) (180) Accumulated deficit (41,570) (27,145) Total stockholders' equity 16,348 19,769 Total liabilities and stockholders' equity $ 57,565 $ 54,779 The accompanying notes are an integral part of these consolidated financial statements. 2 EFTA00293565 AliphCom Consolidated Statements of Operations Years Ended December 31, 2010 and 2009 (in thousands) 2010 2009 Revenues 87,483 $ 66,789 Cost of revenues 59,583 42,706 Gross profit 27,900 24,083 Operating expenses Research and development 13,777 9,902 Selling, general and administrative 29.191 29,678 Total operating expenses 42.968 39,580 Loss from operations (15.068) (15,497) Total other (expense) income, net Warrant revaluation income (expense) 3 (4,543) Interest expense (60) Interest and other (expense) income, net 15 (23) Total other income (expense), net 18 (4,626) Net loss before income taxes (15,050) (20,123) (Benefit) provision for income tax (625) (3,106) Net loss $ (14,425) $ (17.017) The accompanying notes are an integral part of these consolidated financial statements. 3 EFTA00293566  AliphCom Consolidated Statements of Stockholders' Equity Years Ended December 31, 2010 and 2009 Redeemable Convertible Additional Stockholder's Total (in thousands, except Preferred Stock Common Stock Paid-In Notes Accumulated Stockholders' sham amounts) Shares Amount Shares Amount Capital Receivable Deficit Equity Balance at December 31, 2008 88,277,291 $ 43,725 38,383,508 $ 38 $ 2,460 $ (180) $ (10,128) $ 35,915 Issuance of common stock warrants 7 7 Exercise of common stock warrants 1.688,238 2 298 300 Stock-based compensation expense 523 523 Exercises of common stock options 652.562 41 41 Net loss (17.017) (17,017) Balance at December 31, 2009 88.277,291 43,725 40,724,308 40 3.329 (180) (27,145) 19,769 Issuance of common stock warrants 21 21 Exercise of preferred stock warrants 17,079,347 9.906 9,906 Stock-based compensation expense 38,021 806 808 Exercises of common stock options 4,476,055 5 266 271 Net loss • (14,425) (14,425) Balance at December 31, 2010 105,356,638 $ 53.631 45.238.384 $ 45 S 4,422 $ (180) $ (41.570 $ 16,348 The accompanying notes are an integral part of these consolidated financial statements. 4 EFTA00293567 AliphCom Consolidated Statements of Cash Flows Years Ended December 31, 2010 and 2009 (in thousands) 2010 2009 Cash flows from operating activities Net loss $ (14,425) $ (17,017) Adjustments to reconcile net loss to net cash (used in) provided by operating activities Inventory write-down (376) 478 Issuance of warrants for services 21 7 Depreciation and amortization 1,733 2,509 Stock-based compensation 806 523 Remeasurement of preferred stock warrant liability (3) 4.543 Changes in current assets and liabilities Accounts receivable (1.308) (4,131) Inventories (9,464) (600) Prepaid and other assets 401 (2,367) Accounts payable 11,288 2,220 Accrued liabilities and other long-term liabilities 1,995 3,628 Deferred revenue (11) 3,389 Income taxes payable (112) (4,203) Net cash used in operating activities (9,455) (11.021) Cash flows from investing activities Purchases of property and equipment (2,194) (885) Changes in restricted cash 3.325 7,200 Net cash provided by investing activities 1,131 6,315 Cash flows from financing activities Proceeds from exercises of stock options and warrants 3,305 341 Repayment of capital lease obligations (79) (44) Net cash provided by financing activities 3.226 297 Net decrease in cash and cash equivalents (5,098) (4,409) Cash and cash equivalents Beginning of year 34,091 38,500 End of year $ 28,993 $ 34,091 Supplemental cash flow information Cash paid for income taxes - $ 2,450 Cash paid for interest 34 Supplemental noncash investing and financing activities Exercise of preferred stock warrant liability 6.871 The accompanying notes are an integral part of these consolidated financial statements. 5 EFTA00293568 AliphCom Notes to Consolidated Financial Statements December 31, 2010 and 2009 1. The Company and Summary of Significant Accounting Policies AliphCom ("Aliphs or the -Company) was incorporated in the State of California on March 12, 1998. Together with its wholly owned subsidiary the Company designs, develops and markets lightweight communications headset products and wireless speakers under the Jawbone® brand. The Company sells its products primarily through a global sales channel network, which includes distributors and traditional retailers. In March 2011, the Company issued 7,131,940 shares of Series 4 preferred stock at $3.926 per share for gross proceeds of approximately $28 million. In March 2011, the Company also issued 2,025,300 shares of common stock at $0.54 per share for proceeds of $1.1 million to the purchaser of the Series 4 preferred stock. In July and December 2011, the Company issued 7,578,781 shares of Series 5 preferred stock at $7.19113 per share for proceeds of $52.8 million, net of issuance costs of approximately $1.7 million. In December 2011, the Company issued 3,150,582 shares of Series 2 and 2,978,707 shares of common stock, each at $3.96752 per share for total proceeds of $24.3 million. However, the Company has incurred significant losses and negative cash flows from operating activities. For the year ended December 31, 2010, the Company incurred a loss from operations of approximately $14.4 million and negative cash flows from operating activities of approximately $9.5 million. Operating losses and negative cash flows from operating activities may continue for the foreseeable future because of the additional costs and expenses related to product development, promotional activities, and continued expansion of operations and development of relationships with other businesses. Management's plans include increasing the Company's revenues. focusing on the Company's fixed cost base and improving its working capital position to better align with operations, market demand and current sales levels. However, if projected sales do not materialize, management may be required to reduce expenses. Basis of Presentation The Company operates a wholly owned sales and customer support subsidiary in the United Kingdom. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All intercompany accounts and transactions have been eliminated in consolidation. The Company has made certain reclassifications to the prior period financial statements in order to conform to the current period presentation. The functional currency of the Company's subsidiary is the U.S. dollar. Accordingly, assets and liabilities denominated in foreign currency are remeasured into U.S. dollars at current exchange rates for monetary assets and liabilities and historical exchange rates for nonmonetary assets and liabilities. Expenses are remeasured at average exchange rates in effect during the period. Gains and losses from foreign currency remeasurement are included in interest and other (expense) income, net in the consolidated statements of operations and to date have not been material. 6 EFTA00293569 AliphCom Notes to Consolidated Financial Statements December 31, 2010 and 2009 Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ('GAAP-) requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions made by management involve: sales returns reserve, the assessment of collectability of accounts receivable, inventory valuations, the determination of accruals, the estimation of the useful lives of long-lived assets, the fair value of the Company's equity instruments and the valuation of deferred tax asset balances. Actual results could differ from those estimates, and such differences may be material to the financial statements. Revenue Recognition Revenue from product sales is recognized at the time the product is shipped provided that persuasive evidence of an arrangement exists, title and risk of loss has transferred to the customer, the selling price is fixed or determinable, and collection of the related receivable is reasonably assured. The Company assesses collectability based on a number of factors, including general economic and market conditions, past transaction history with the customer, and the creditworthiness of the customer. The Company recognizes revenue net of estimated sales returns, price protection, and sales incentives. Upon shipment of the product, the Company reduces revenue for an estimate of potential future returns, price protection and sales incentives related to the current period revenue. The related reserves for sales returns, price protection and sales incentives are recorded in the current liabilities. Management analyzes historical returns, current economic trends, new product introduction timelines and changes in customer demand for the Company's products when evaluating the adequacy of the allowance for sales returns, price protection and sales incentives. Revenue Recognition for Arrangements With Multiple Deliverables In October 2009, the Financial Accounting Standards Board ('FASB") amended the accounting standards for revenue recognition to remove tangible products containing software components and nonsoftware components that function together to deliver the product's essential functionality from the scope of the software revenue recognition guidance. In October 2009, the FASB also amended the accounting standards for multiple deliverable revenue arrangements to: • provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the considered should be allocated: • require an entity to allocate revenue in an arrangement using best estimated selling price ('BESP") of deliverables if a vendor does not first have vendor-specific objective evidence ("VSOE') of selling price or secondly does not have third-party evidence (—ME) of selling price; and • eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method. 7 EFTA00293570 AliphCom Notes to Consolidated Financial Statements December 31, 2010 and 2009 The Company elected to early adopt this accounting guidance on January 1, 2010 on a prospective basis for applicable transaction originating or materially modified after December 31, 2009. As a result, substantially all of the Company's products are no longer within the scope of the software revenue recognition guidance. For multi-element arrangements that include hardware products containing undelivered software elements that relate to the hardware product's firmware, the Company allocates revenue to all deliverables based on their relative selling prices. In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value, (ii) third-party evidence of selling price, and (iii) best estimate of the selling price. VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable. TPE is determined based on competitor prices for similar deliverables when sold separately. BESPs reflect the Company's best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis. For sales of Icon products late in 2009, and Jambox and Era products beginning in January 2010, the Company has indicated it may from time-to-time provide future unspecified updates and features to the firmware bundled with each of these hardware products free of charge to customers via the Company's MyTalk platform. The Company has identified two deliverables in arrangements involving the sale of these devices. The first deliverable is the hardware and firmware essential to the functionality of the hardware device delivered at the time of sale. The second deliverable is the embedded right included with the purchase of these devices to receive on a when-and-if-available basis, future unspecified updates and features relating to the product's firmware. The Company allocates revenue between these deliverables using the relative selling price method. Because the Company has neither VSOE nor TPE for these deliverables, the allocation of revenue has been based on the Company's BESP. Amounts allocated to the delivered hardware and the related essential firmware are recognized at the time of sale provided the other conditions for revenue recognition have been met. Amounts allocated to the embedded unspecified update rights are deferred and recognized on a straight-line basis over the estimated lives of each of these devices, which is 21 months. Cost of sales related to delivered hardware and related essential firmware, including estimated warranty costs, are recognized at the time of sale. Costs incurred to provide when-and-if updates are recognized as operating expenses as incurred. The Company's process for determining its BESP for deliverables without VSOE or TPE considers consumer behaviors as well as the Company's internal pricing model. The Company believes its customers, particularly consumers, would be reluctant to buy unspecified firmware update rights related to Jawbone devices. This view is primarily based on the fact that unspecified update rights do not obligate the Company to provide upgrades at a particular time or at all, and do not specify to customers which upgrades or features will be delivered. Therefore, the Company has concluded that if it were to sell update rights on a standalone basis, the selling prices would be relatively low. Key factors considered by the Company in developing the BESP for MyTalk update rights include market trends for pricing of mobile updates such as smartphone apps, the Company's historical pricing practices, the nature of the update rights (e.g., unspecified and when-and-if-available), and the relative BESP of the update rights as compared to the total selling price of the product. BESP for the hardware and essential firmware as delivered at the time of sale was determined by the Company's internal pricing practices, which take into account pricing trends in the consumer electronics market as well as the requirement for an acceptable profit margin. 8 EFTA00293571 AliphCom Notes to Consolidated Financial Statements December 31, 2010 and 2009 The Company's BESP for the unspecified firmware update rights are as follows: 3.3% of Icon sales, 1.7% of Jambox sales and 2.6% of Era sales. Amounts allocated to the embedded unspecified firmware update rights associated with these Jawbone products are recognized on a straight-line basis over the estimated life of the product, 21 months in all cases. The Company regularly reviews its basis for establishing BESP. Total net revenues as reported and adjusted total net revenues that would have been reported during the year ended December 31, 2009, if the transactions were subject to current accounting guidance, are shown in the following table (in thousands): Year Ended December 31, 2009 Net revenue, as reported $ 66,789 Net revenue, as adjusted 70,066 The impact to total net revenues during the year ended December 31, 2010, due to the adoption of the accounting guidance, was primarily attributable to net product revenues. This will generally result in an increase in the amount of upfront product revenue recognized and a decrease in services revenue recognized. Sales Incentives The Company accrues for sales incentives as a marketing expense if it receives an identifiable benefit in exchange and can reasonably estimate the fair value of the identifiable benefit received. Otherwise, the sales incentives are recorded as a reduction to revenues. The Company records its channel marketing costs as a reduction of revenues. The Company records estimated reductions to revenues for sales incentives upon the later of when the related revenue is recognized or when the program is offered to the customer or end consumer. Cash Equivalents All highly liquid investments with an original or remaining maturity of three months or less at the date of purchase are classified as cash equivalents. The Company maintains its cash and cash equivalents with financial institutions which are Al or A+ rated. At December 31, 2010 and 2009, cash equivalents consisted primarily of money market funds. Deposits Certain deposits are required by the Company's landlords to guarantee the contractual obligations under its office lease agreements. As of December 31, 2010 and 2009, deposits totaled $358 thousand and $92 thousand, respectively, and were recorded within other long-term assets in the accompanying consolidated balance sheets. Restricted Cash At December 31, 2010 and 2009, the Company maintained $475 thousand and $3.8 million, respectively, of restricted cash in the form of institutional money market funds and certificates of deposit. The December 31, 2010 balance was to support a letter of credit required by the Company's lessor as part of the lease agreement and is recorded in prepaid and other current assets on the balance sheet. The December 31, 2009 balance was to support letters of credit required by the Company's primary inventory supplier and is recorded within other long-term assets in the 2009 consolidated balance sheets. The letters of credit requirement by the Company's supplier was relinquished in March 2010. 9 EFTA00293572 AliphCom Notes to Consolidated Financial Statements December 31, 2010 and 2009 Allowance for Doubtful Accounts The Company makes judgments as to its ability to collect outstanding accounts receivable and provides allowances for accounts receivable when and if collection becomes doubtful. The Company has not recorded any allowance for doubtful accounts on customer accounts. Fair Value of Financial Instruments The Company's financial instruments consist principally of cash and cash equivalents, accounts receivable. accounts payable, and preferred stock warrant liability The fair value of the Company's cash equivalents is determined based on quoted prices in active markets for identical assets. The recorded values of the Company's accounts receivable and accounts payable approximate their current fair values due to the relatively short-term nature of these accounts. Business Risk and Concentration of Credit Risk The Company's products are concentrated in an industry characterized by rapid technological advances, changes in customer requirements and evolving regulatory requirements and industry standards. Any significant delays in the development or introduction of products or services, or any failure by the Company to anticipate or to respond adequately to technological developments in its industry, changes in customer requirements or changes in regulatory requirements or industry standards, could have a material adverse effect on the Company's business and operating results. The Company's products are manufactured, assembled and tested by a third-party contractor in Asia. There is no long-term agreement with the contractor. A significant disruption in the operations of the contractor would impact the production of the Company's products for a substantial period of time, which could have a material adverse effect on the Company's business. financial condition, and results of operations. Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, restricted cash, and trade accounts receivable. Cash and cash equivalents are deposited with financial institutions in the United States which are Al or A+ rated. Deposits in the United States may exceed federally insured limits. Management believes that the financial institutions that hold the Company's deposits are financially credit worthy and, accordingly, minimal credit nsk exists with respect to those balances. Generally. these deposits may be redeemed upon demand and, therefore. bear minimal interest rate risk. The Company's accounts receivable are derived from customers located principally in the United States. The Company performs ongoing credit evaluations of its customers, does not require collateral, and maintains allowances for potential credit losses on customers' accounts when deemed necessary. As of and for the years ended December 31, 2010 and 2009, customers representing 10% or more of the accounts receivable balance and/or revenues were as follows: Percentage of Percentage of Accounts Receivable Net Revenues 2010 2009 2010 2009 Customer A 22 % 52 % 54% 59% Customer B 28 17 2 Customer C 13 12 Customer D 11 10 EFTA00293573 AliphCom Notes to Consolidated Financial Statements December 31, 2010 and 2009 Inventories Inventories are stated at the lower of cost or market, cost being determined using the first-in, first out method. The Company reduces the value of its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value. Allowances, once established, are not reversed until the related inventory has been subsequently sold or scrapped. Property and Equipment, Net Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets, as described in the table below. Maintenance and repairs are expensed as incurred. When assets are retired or otherwise disposed of, the cost and the related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is reflected in the statement of operations. Asset Estimated Useful Lives Computer equipment 3 years Software 2 years Office equipment, furniture and fixtures 5 years Manufacturing equipment and tools Based on the estimated life of the product of 1.5 years to 3 years Leasehold improvements The shorter of the lease term or the estimated useful lives of the improvements of 1-2 years Capitalized Software Development Costs Software development costs are included in research and development and are expensed as incurred. After technological feasibility is established, software development costs are capitalized. To date, the period between achieving technological feasibility, which the Company has defined as the establishment of a working model which typically occurs when the beta testing commences, and the general availability of such software has been short and software development costs qualifying for capitalization have been insignificant. Accordingly, the Company has not capitalized any software development costs. Impairment of Long-Lived Assets The Company reviews the recoverability of its long-lived assets, such as property and equipment, when events or changes in circumstances occur that indicate that the carrying value of the asset or asset group may not be recoverable. The assessment of possible impairment is based on the Company's ability to recover the carrying value of the asset or asset group from the expected future pre-tax cash flows, undiscounted and without interest charges, of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. The measurement of impairment requires management to estimate future cash flows and the fair value of long-lived assets. Through December 31, 2010, the Company has not identified any impairment on its long-lived assets. Research and Development Costs The Company expenses costs related to research, design and development of products to research and development as incurred. The costs included in research and development primarily consist of salaries, contractor fees and allocated overhead costs. 11 EFTA00293574 AliphCom Notes to Consolidated Financial Statements December 31, 2010 and 2009 Income Taxes The Company accounts for income taxes based on the asset and liability method whereby deferred tax asset and liability balances are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. In evaluating the ability to recover its deferred income tax assets the Company considers all available positive and negative evidence, including its operating results, forecasts of future taxable income and ongoing tax planning on a jurisdiction-by-jurisdiction basis. In the event the Company was to determine that it would be able to realize its deferred tax assets in the future in excess of their net recorded amount, it would make an adjustment to the valuation allowance which would reduce the provision for income taxes. Conversely, in the event that all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made. The Company recognizes and measures benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon settlement. Significant judgment is required to evaluate uncertain tax positions. The Company evaluates its uncertain tax positions annually. Evaluations are based upon a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of audits and effective settlement of audit issues. Advertising Costs Costs related to advertising and promotions of products are expensed to sales and marketing as incurred. Advertising and promotion expense for the years ended December 31, 2010 and 2009 was $892 thousand and $507 thousand, respectively. Product Warranty The Company offers a standard product warranty that the product will operate under normal use for a period of one year from date of original purchase. The Company shall, at its option, either repair or replace the defective product. 12 EFTA00293575 AliphCom Notes to Consolidated Financial Statements December 31, 2010 and 2009 At the time revenue is recognized, an estimate of future warranty costs is recorded as a component of cost of revenues. Factors that affect the warranty obligation include product failure rates and service delivery costs incurred in correcting the product failures. Because the Company's products are manufactured by a third party manufacturer, in certain cases the Company has recourse to the third party manufacturer in determining its warranty liability. Product warranty accrual is included within accrued liabilities in the accompanying consolidated balance sheets, and its activity for the years ended December 31, 2010 and 2009 was as follows: (in thousands) 2010 2009 Balance at beginning of the year $ 276 $ 626 Provision for warranty liability made during the year 1.133 687 Settlements made during the year (928) (1.037) Balance at end of the year $ 481 $ 276 Shipping and Handling Fees and Costs The Company accounts for shipping and handling fees billed to customers as revenues and the associated shipping and handling costs as cost of revenues. In addition, shipping and handling costs for inbound freight are included in cost of revenues. Preferred Stock Warrant Liability The freestanding warrant related to the Company's preferred stock is classified as a liability on its 2009 consolidated balance sheet. The warrant was exercised in June 2010 and subsequently recorded as Series 2 preferred stock on the 2010 consolidated balance sheet. The warrant was subject to re-measurement at each balance sheet date and an increase in fair value of $3 thousand was recognized in 2010 as a component of interest and other expense, net. Stock-Based Compensation Stock-based compensation expense for the years ended December 31, 2010 and 2009, includes compensation expense for all stock-based compensation awards granted on or after January 1, 2006 and is based on the grant-date fair value estimated using the Black-Scholes option pricing model. Stock-based compensation expense recognized in the statements of operations is based on options ultimately expected to vest, reduced by the amount of estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. When estimating forfeitures, the Company considers historic voluntary termination behaviors as well as trends of actual option forfeitures. The Company accounts for stock-based compensation arrangements with nonemployees, using the Black-Scholes option-pricing model, based on the fair value as these instruments vest. Accordingly, at each reporting date, the Company revalues the unearned portion of the stock-based compensation and the resulting change in fair value is recognized in the consolidated statements of operations over the period the related services are rendered. 13 EFTA00293576 AliphCom Notes to Consolidated Financial Statements December 31, 2010 and 2009 Recently Adopted Accounting Standards In January 2010, the FASB issued guidance related to additional requirements regarding disclosures of fair value measurements. The guidance requires the gross presentation of activity within the Level 3 fair value measurement roll forward and details of transfers in and out of Level 1 and 2 fair value measurements. It also clarifies two existing disclosure requirements on the level of disaggregation of fair value measurements and disclosures on inputs and valuation techniques. The new requirements and guidance are effective for interim and annual periods beginning after December 15, 2009, except for the Level 3 roll forward which is effective for fiscal years beginning after December 15, 2010 (including interim periods within those fiscal years). As of December 31, 2010, this guidance has no effect on the Company's financial statements or disclosures. Recently Issued Accounting Standards In 2011, the FASB issued new disclosure guidance related to the presentation of the Statement of Comprehensive Income. This guidance eliminates the current option to report other comprehensive income and its components in the consolidated statement of stockholders' equity. The requirement to present reclassification adjustments out of accumulated other comprehensive income on the face of the consolidated statements of income has been deferred. The Company will adopt this accounting standard upon its effective date for periods beginning on or after December 15, 2011, and this adoption will not have any impact on the Company's financial position or results of operations but will impact the financial statements presentation. 2. Fair Value of Financial Instruments The Company adopted the accounting guidance which defines fair value, establishes a framework for measuring fair value and expands required disclosures about fair value measurements. Under the standard, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. The standard clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. The fair value hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company primarily applies the market approach for recurring fair value measurements. The standard describes three levels of inputs that may be used to measure fair value: Level 1 Quoted prices in active markets for identical assets or liabilities. Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. As of December 31, 2010 and 2009, those assets and liabilities that are measured at fair value on a recurring basis consisted of the Company's short-term securities it classifies as cash equivalents and its preferred stock warrant liability. The Company believes that the carrying amounts of its other financial instruments, including accounts receivable, prepaid expenses and other current assets, accounts payable and accrued expenses, approximate fair value due to their short-term maturities. 14 EFTA00293577 AliphCom Notes to Consolidated Financial Statements December 31, 2010 and 2009 The following table presents information about assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 and 2009, and indicates the fair value hierarchy utilized to determine such fair value. pi itxusena) 2010 X09 Loral 1 Lnl2 Level 3 rota Assets Money marki4 Sala n I 29013 $ • S - $ 29.913 S 35.922 $ • 5 • $ 36,502 Celfieelas <I Sone - 475 - 475 - 20 20 TOM web immoral at tar van $ 29.913 5 475 5 • 5 30.366 $ 350:02 S 20 1 • 5 30922 tiabililin Preferred sock vorrovIst41e 5 • 5 . 5 . S - 5 5 . 5 0974 S 0974 Toil 1400109 mound a IS vslw 5