Quarterly report pursuant to Section 13 or 15(d)

Convertible Promissory Notes and Other Notes Payable

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Convertible Promissory Notes and Other Notes Payable
6 Months Ended
Sep. 30, 2012
Notes to Financial Statements  
NOTE 7 - Convertible Promissory Notes and Other Notes Payable

 

The following table summarizes the components of the company’s secured and unsecured promissory notes and other notes payable at September 30, 2012 and March 31, 2012 (amounts in 100’s).

 

    September 30, 2012   March 31, 2012
      Principal       Accrued               Principal        Accrued           
      Balance       Interest       Total       Balance        Interest        Total  
Senior Secured 10% Convertible Promissory Notes:                                                
Issued to Platinum on July 2, 2012   $ 500,000     $ 12,400     $ 512,400     $ —       $ —       $ —    
Issued to Platinum on August 30, 2012     750,000       6,300       756,300       —         —         —    
   Total Senior notes (non-current)   $ 1,250,000     $ 18,700     $ 1,268,700     $ —       $ —       $ —    
                                                 
Convertible Promissory Notes:                                                
 February 2012 12% convertible promissory notes   $ 500,000     $ 35,400     $ 535,400     $ 500,000     $ 5,300     $ 505,300  
  Note discount     (481,300 )     —         (481,300 )     (499,300 )     —         (499,300 )
   Total 12% convertible notes, net (non-current)   $ 18,700     $ 35,400     $ 54,100     $ 700     $ 5,300     $ 6,000  
                                                 
Notes Payable to unrelated parties:                                                
 7.0% Notes payable (April 2011)   $ 38,500     $ 200     $ 38,700     $ 63,800     $ 400     $ 64,200  
 7.0% Notes payable (August 2012)     60,000       400       60,400       —         —         —    
      98,500     $ 600     $ 99,100       63,800     $ 400     $ 64,200  
 less: current portion     (43,000 )     (600 )     (43,600 )     (63,800 )     (400 )     (64,200 )
 7.0% Notes payable - non-current portion   $ 55,500     $ —       $ 55,500     $ —       $ —       $ —    
                                                 
 7.5% Notes payable to vendors for accounts payable converted to notes payable:                                                
    Burr, Pilger, Mayer   $ 91,800     $ 1,200     $ 93,000     $ 93,400     $ 1,100     $ 94,500  
    Desjardins     214,500       10,700       225,200       224,300       2,800       227,100  
    McCarthy Tetrault     441,700       22,000       463,700       459,400       5,700       465,100  
    May 2011 Morrison Foerster     —         —         —         2,420,100       37,900       2,458,000  
    August 2012 Morrison & Foerster Note A     991,200       —         991,200       —         —         —    
    August 2012 Morrison & Foerster Note B     1,379,400       8,300       1,387,700       —         —         —    
       Note discount     (1,600,400 )     —         (1,600,400 )     (228,900 )     —         (228,900 )
      1,518,200       42,200       1,560,400       2,968,300       47,500       3,015,800  
 less: current portion     (531,000 )     (33,900 )     (564,900 )     (367,700 )     —         (367,700 )
   non-current portion and discount   $ 987,200     $ 8,300     $ 995,500     $ 2,600,600     $ 47,500     $ 2,648,100  
                                                 
  5.8%  and 8% Notes payable to insurance                                                
premium financing company (current)   $ 40,300     $ —       $ 40,300     $ 4,600     $ —       $ 4,600  
                                                 
 10% Notes payable to vendors for accounts                                                
payable converted to notes payable   $ 158,900     $ 20,800     $ 179,700     $ 165,400     $ 16,800     $ 182,200  
 less: current portion     (145,400 )     (20,800 )     (166,200 )     (146,000 )     —         (146,000 )
   non-current portion   $ 13,500     $ —       $ 13,500     $ 19,400     $ 16,800     $ 36,200  
                                                 
   Total notes payable to unrelated paties   $ 1,815,900     $ 63,600     $ 1,879,500     $ 3,202,100     $ 64,700     $ 3,266,800  
 less: current portion     (759,700 )     (55,300 )     (815,000 )     (582,100 )     (400 )     (582,500 )
   non-current portion and discount   $ 1,056,200     $ 8,300     $ 1,064,500     $ 2,620,000     $ 64,300     $ 2,684,300  
                                                 
                                                 
Notes payable to related parties:                                                
 7 % Note payable to Cato Holding Co.   $ 293,400     $ 17,200     $ 310,600     $ 293,300     $ 6,900     $ 300,200  
           Note discount     (18,000 )     —         (18,000 )     (24,300 )     —         (24,300 )
    Total notes payable to related parties   $ 275,400     $ 17,200     $ 292,600     $ 269,000     $ 6,900     $ 275,900  
 less: current portion     (237,200 )     (17,200 )     (254,400 )     (168,200 )     —         (168,200 )
   non-current portion and discount   $ 38,200     $ —       $ 38,200     $ 100,800     $ 6,900     $ 107,700  

 

 

Senior Secured Convertible Promissory Notes

 

On July 2, 2012 and on August 31, 2012, the Company issued to Platinum senior secured convertible promissory notes in the principal amount of $500,000 (the “July 2012 Platinum Note”) and $750,000 (the "August 2012 Platinum Note"), respectively.  The July 2012 Platinum Note and the August 2012 Platinum Note each accrue interest at the rate of 10% per annum and are due and payable on July 2, 2015.  The July 2012 Platinum Note and the August 2012 Platinum Note are each mandatorily convertible into securities that may be issued by the Company in an equity, equity-based, or debt financing, or series of financings, subsequent to the issuance of the note resulting in gross proceeds to the Company of at least $3,000,000, excluding any additional investment by Platinum.  However, as further discussed in Note 11, Subsequent Events, all amounts due under the terms of the July 2012 Platinum Note and the August 2012 Platinum Note, as well as the related accrued interest, were consolidated into a senior secured convertible note and warrant financing with Platinum that is expected to result in gross proceeds to the Company of approximately $3.25 million, including proceeds of $1.25 million from the issuance of the July 2012 Platinum Note and the August 2012 Platinum Note. The Company and Platinum also executed and subsequently amended a security agreement to secure repayment of all obligations due and payable under the terms of the July 2012 Platinum Note and the August 2012 Platinum Note.  The Company did not issue warrants in connection with either the July 2012 Platinum Note or the August 2012 Platinum Note. 

 

February 2012 12% Convertible Notes

 

On February 28, 2012, the Company completed a private placement of convertible promissory notes to certain accredited investors in the aggregate principal amount of $500,000 (the "Notes").  Each Note accrues interest at the rate of 12% per annum and matures on the earlier of (i) twenty-four months from the date of issuance, or (ii) the consummation of an equity, equity-based, or series of equity-based financings resulting in gross proceeds to the Company of at least $4.0 million (the “Qualified Financing Threshold”).  The holder of each Note may voluntarily convert the outstanding principal amount of the Notes and all accrued and unpaid interest (the “Outstanding Balance”) at any time prior to maturity into that number of shares of the Company’s common stock equal to the Outstanding Balance, divided by $3.00 (the "Conversion Shares").  In addition, in the event the Company consummates a financing equal to or exceeding the Qualified Financing Threshold, and the price per unit of the securities sold, or price per share of common stock issuable in connection with such financing, is at least $2.00 (a “Qualified Financing”), the Outstanding Balance will automatically convert into such securities, including warrants, that are issued in the Qualified Financing, the amount of which shall be determined according to the following formula: (Outstanding Balance at the closing date of the Qualified Financing) x (1.25) / (the per security price of the securities sold in the Qualified Financing).  The purchaser of each Note was issued a five-year warrant to purchase, for $2.75 per share, the number of shares of the Company’s common stock equal to 150% of the total principal amount of the Notes purchased by such purchaser, divided by $2.75, resulting in the potential issuance of an aggregate of 272,724 shares of the Company’s common stock upon exercise of the warrants (the “Warrant Shares”).

 

The Company entered into a Registration Rights Agreement with the purchasers of the February 2012 Notes pursuant to which the Company agreed to register for resale the Conversion Shares and the Warrant Shares.  The Company agreed to file a registration statement no later than ninety days from the February 28, 2012 closing date, or by May 28, 2012 (the “Filing Deadline”).  If the Company does not file the registration statement by the Filing Deadline or if the registration statement is not declared effective by the agreed upon effectiveness deadline, the Company is required to make aggregate payments to the purchasers in an amount equal to 1% of the $500,000 aggregate face amount of the February 2012 Notes for each 30-day period following the Filing Deadline, or pro-rata portion thereof, with an aggregate limitation of $50,000.  At September 30, 2012, for strategic purposes, the Company had not filed the registration statement and had recorded $20,700 as a liability under the Registration Rights Agreement.  Such amount is included in Accrued expenses in the Condensed Consolidated Balance Sheet at September 30, 2012.  (See Note 6, Accrued Expenses.)

 

August 2010 Short-Term Note Converted to 7% Note Payable

 

In August 2010, the Company issued short-term, non-interest bearing, unsecured promissory notes (the “August 2010 Short-Term Notes”) having an aggregate principal amount, as adjusted, of $1,120,000.  In May 2011, a total of $840,000 of the aggregate principal amount of the August 2010 Short-Term Notes were converted into Units consisting of shares of the Company’s common stock and three-year warrants to purchase shares of the Company’s common stock at an exercise price of $2.50 per share.  Of the remaining balance of the August 2010 Short Term Notes; $105,000 of such amount was converted into a long-term note issued to Cato Holding Company, doing business as Cato BioVentures; and $175,000 of such amount was amended into a note bearing interest at 7% per annum, as described below.

 

In April 2011, the Company and the holder of the $175,000 August 2010 Short-Term Note amended the note, whereby the Company paid $50,000 of the note balance in May 2011 and was to make four monthly payments of $5,000 between May 2011 and August 2011, an additional nine monthly payments of $11,125 per month for the period from September 1, 2011 through May 1, 2012, plus a final payment on May 2, 2012 equal to any remaining balance.  In September 2011, the Company and the holder agreed to modify the payment schedule to require payments of $5,000 per month through November 1, 2011, six monthly payments of $11,125 for the period from December 1, 2011 through May 1, 2012, an additional payment of $11,125 on May 2, 2012, plus a final payment on June 30, 2012 equal to any remaining balance.  For strategic purposes, the Company did not make the February 2012 and March 2012 payments as scheduled. In March 2012, the Company and the note holder again agreed to modify the payment schedule to require seven monthly payments of $9,171 beginning June 1, 2012 with the final payment due on December 1, 2012 to include interest accrued after March 2012.  The Company made three payments totaling $27,500 during the period from June 1, 2012 to September 30, 2012.

 
Issuance of Long-Term Promissory Note to Cato Holding Company

 

In April 2011, all amounts owed by the Company to Cato Holding Company ("CHC") and its affiliates, which included the $105,000 balance of the August 2010 Short-Term Note issued to Cato BioVentures discussed above, were consolidated into a single note, in the principal amount of $352,273 (the “2011 CHC Note”).  Concurrently, CHC released certain security interests in the Company’s personal property.  The 2011 CHC note bears interest at 7% per annum, compounded monthly.  Under the terms of the note, the Company was to make six monthly payments of $10,000 each beginning June 1, 2011, and thereafter to make payments of $12,500 monthly until the note is repaid in full. The Company has the option to prepay the outstanding balance under this note in full or in part at any time during its term without penalty.   At September 30, 2012, the Company had not made the monthly payments due subsequent to December 2011.  As disclosed in Note 11, Subsequent Events, in October 2012, the Company issued a new unsecured promissory note in the principal amount of $310,400 and a warrant to CHC, exercisable for 250,000 shares of the Company’s common stock, in exchange for the cancellation of the 2011 CHC Note.

 

Issuance of Long-Term Notes and Cancellation of Amounts Payable

 

On February 25, 2011, the Company issued to Burr, Pilger, and Mayer, LLC (“BPM”) an unsecured promissory note in the principal amount of $98,674 for amounts payable in connection with valuation services provided to the Company by BPM.  The BPM note bears interest at the rate of 7.5% per annum and has payment terms of $1,000 per month, beginning March 1, 2011 and continuing until all principal and interest are paid in full.  In addition, a payment of $25,000 shall be due upon the sale of the Company or upon the Company completing a financing transaction of at least $5.0 million during any three-month period, with the payment increasing to $50,000 (or the amount then owed under the note, if less) upon the Company completing a financing of over $10.0 million.

 

On April 29, 2011, the Company issued to Desjardins Securities, Inc. (“Desjardins”) an unsecured promissory note in the principal amount of CDN $236,000 for amounts payable for legal fees incurred by Desjardins in connection with investment banking services provided to the Company by Desjardins.  The Desjardins note bears interest at 7.5% and will be due, along with all accrued but unpaid interest on the earliest of (i) June 30, 2014, (ii) the consummation of a Change of Control, as defined in the Desjardins note, and (iii) any failure to pay principal or interest when due.  The Company is to make payments of CDN $4,000 per month beginning May 31, 2011, increasing to CDN $6,000 per month on January 31, 2012. In addition, if, prior to June 30, 2012, the Company closes an equity financing or series of equity financings with aggregate proceeds of $5.0 million or more, then the Company shall make a payment of $39,600 to Desjardins within 10 business days of the closing of such transaction(s). Beginning on January 1, 2012, the Company shall also make payments equal to one-half percent (0.5%) of the net proceeds of all private or public equity financings closed during the term of the note. At September 30, 2012, the Company had not made the monthly payments required for February through September 2012. However, the Company resumed such monthly payments in October 2012.

 

On May 5, 2011, the Company issued to McCarthy Tetrault LLP (“McCarthy”) an unsecured promissory note in the principal amount of CDN $502,797 for the amounts payable in connection with legal services provided to the Company.  The McCarthy note bears interest at 7.5% and will be due, along with all accrued but unpaid interest on the earliest of (i) June 30, 2014, (ii) the consummation of a Change of Control, as defined in the McCarthy note, and (iii) any failure to pay principal or interest when due.  The Company is to make payments of CDN $10,000 per month beginning May 31, 2011, increasing to CDN $15,000 per month on January 31, 2012. In addition, if, prior to June 30, 2012, the Company had closed an equity financing or series of equity financings with aggregate proceeds of $5.0 million or more, then the Company would have been required to make a payment of $100,000 to McCarthy within 10 business days of the closing of such transaction(s). Beginning on January 1, 2012, the Company is also required to make payments equal to one percent (1%) of the net proceeds of all private or public equity financings closed during the term of the note.  At September 30, 2012, the Company had not made the monthly payments required for February through September 2012. However, the Company resumed such monthly payments in October 2012.

 

On August 30, 2012, the Company issued a promissory note in the principal amount of $60,000 and 15,000 shares of its common stock valued at a market price of $0.94 per share to Progressive Medical Research in settlement of past due obligations for clinical research services in the amount of $79,900. Under the terms of the settlement, the company also agreed to make monthly cash payments of $5,000 in August 2012 through December 2012. The promissory note bears interest at 7% per annum and requires payments of $1,000 per month beginning January 15, 2013 until all principal and interest is paid in full.  The note requires payment in full upon the sale of all or substantially all of the Company’s assets or upon the Company completing a financing transaction, or series of transactions, resulting in gross proceeds to the Company of at least $4.0 million in any three-month period, excluding proceeds from stock option or warrant exercises. The Company charged the loss on the settlement to interest expense.

 

On May 5, 2011, the Company and Morrison & Foerster LLP (“Morrison & Foerster”), the Company’s legal and intellectual property counsel, amended a previously outstanding note (the “Original Note”) issued by the Company in payment of legal services (the “Amended Note”).  Under the Amended Note, the principal balance of the Original Note was increased to $2,200,000, interest accrued at the rate of 7.5% per annum, and the Company was required to make an additional payment of $100,000 within three business days of the date of the Amended Note, which amount was paid.

 

On August 31, 2012, the Company restructured the Amended Note (the “Restructuring Agreement”).  Pursuant to the Restructuring Agreement, the Company issued to Morrison & Foerster two new unsecured promissory notes to replace the Amended Note, one in the principal amount of $1,000,000 ("Replacement Note A") and the other in the principal amount of $1,379,400 ("Replacement Note B") (together, the "Replacement Notes"); amended an outstanding warrant to purchase shares of the Company’s common stock (the “Amended M&F Warrant”); and issued a new warrant to purchase shares of the Company’s common stock (the “New M&F Warrant”).  Under the terms of the Restructuring Agreement, the Amended Note was cancelled and all of the Company's past due payment obligations under the Amended Note were satisfied.  The Company made a payment of $155,000 to Morrison & Foerster on August 31, 2012 pursuant to the terms of the Amended Note, and issued the Replacement Notes, each dated as of August 31, 2012.  Both Replacement Notes accrue interest at the rate of 7.5% per annum and are due and payable on March 31, 2016.  Replacement Note A requires monthly payments of $15,000 per month through March 31, 2013, and $25,000 per month thereafter until maturity.  Payment of the principal and interest on Replacement Note B will be made solely in shares of the Company’s common stock pursuant to Morrison & Foerster’s surrender from time to time of all or a portion of the principal and interest balance due on Replacement Note B in connection with its exercise of the New M&F Warrant, at an exercise price of $1.00 per share, and concurrent cancellation of indebtedness and surrender of Replacement Note B; provided, however, that Morrison & Foerster shall have the option to require payment of Replacement Note B in cash upon the occurrence of a change in control of the Company or an event of default, and only in such circumstances. 

 

The Company treated the aggregate of the incremental value of the Amended M&F Warrant and the fair value of the New M&F Warrant as a discount to the Replacement Notes.  Under the terms of the Amended M&F Warrant, the Company amended the warrant to purchase 425,000 shares of its common stock originally issued to Morrison & Foerster on March 15, 2010 to extend the expiration date of the warrant from December 31, 2014 to September 15, 2017 and to provide for exercise by paying cash or by the cancellation in whole or in part of the Company’s indebtedness under either of the Replacement Notes.  The Company determined that the incremental value of the Amended M&F Warrant was $121,650 at the modification date using the Black-Scholes Option Pricing Model and the following assumptions:

 

Assumption:   Pre-modification     Post-modification  
Market price per share   $ 0.94     $ 0.94  
Exercise price per share   $ 2.00     $ 2.00  
Risk-free interest rate     0.25 %     0.60 %
Expected term (years)     2.33       5.04  
Volatility     77.9 %     88.8 %
Dividend rate     0.0 %     0.0 %
                 
Fair Value per share   $ 0.24     $ 0.52  

 

The New M&F Warrant is exercisable for the number of shares of the Company’s common stock equal to the principal and accrued interest due under the terms of Replacement Note B divided by the warrant exercise price of $1.00 per share.  At the August 31, 2012 date of grant, the New M&F Warrant was exercisable to purchase 1,379,376 shares of the Company’s common stock.  The New M&F Warrant effectively requires exercise only by the cancellation in whole or in part of the Company’s indebtedness under either of the Replacement Notes. The New M&F Warrant expires on September 15, 2017.  The Company determined the fair value of the New M&F Warrant to be $0.94 per share, or $1,296,600, at the date of grant using the Black Scholes Option Pricing Model and the following assumptions:  market price per share: $0.94; exercise price per share: $0.00; risk-free interest rate: 0.61%; contractual term: 5.04 years; volatility: 88.8%; expected dividend rate: 0%.  The note discounts totaling $1,617,700, including the $199,500 remaining unamortized discount recorded prior to the modification, will be amortized to interest expense using the effective interest method over the term of the Replacement Notes. The aggregate amount of the incremental fair value of the Amended M&F Warrant, and the fair value of the New M&F Warrant, $1,418,300, was recognized as equity and was credited to additional paid-in capital in the accompanying Condensed Consolidated Balance Sheets.  The effective interest rate on the Replacement Notes at the date of issuance was 50.37%, based on the stated interest rate, the amount of discount, and the term of the Replacement Notes.