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
9 Months Ended
Dec. 31, 2011
Convertible Promissory Notes And Other Notes Payable [Text Block]
5.  Convertible Promissory Notes and Other Notes Payable
 
The following table summarizes the activity for the Company’s unsecured convertible promissory notes and other notes payable for the nine months ended December 31, 2011:
 
 
Balance
   
 
   
 
   
 
         
Conversion to Exchange
   
Balance
   
Accrued
Interest
 
 
 
3/31/2011
   
Additions
   
Payments
   
Amortization
   
Reclassifications
   
 for Equity
   
12/31/2011
   
12/31/2011
 
                                                 
Convertible Promissory Notes:
                                           
 2006/2007 Notes
  $ 1,837,368     $ -     $ -     $ -     $ -     $ (1,837,368 )   $ -     $ -  
 Platinum Notes
    4,000,000       -       -       -       -       (4,000,000 )     -       -  
 Note discounts
    (674,011 )     (908,920 )     -       908,947       -       673,984       -       -  
    Platinum Notes, net
    3,325,989       (908,920 )     -       908,947       -       (3,326,016 )     -       -  
 2008/2010 Notes
    2,971,815       -       -       -       -       (2,971,815 )     -       -  
    Total convertible
                                                         
    promissory notes, net
  $ 8,135,172     $ (908,920 )   $ -     $ 908,947     $ -     $ (8,135,199 )   $ -     $ -  
Non-interest bearing promissory notes
                                                 
August 2010 Short-Term Notes
  $ 1,120,000     $ -     $ -     $ -     $ (280,000 )   $ (840,000 )   $ -     $ -  
     Note discount
    (14,270 )     -       -       14,270       -       -       -       -  
     Non-interest bearing notes,  net
  $ 1,105,730     $ -     $ -     $ 14,270     $ (280,000 )   $ (840,000 )   $ -     $ -  
Other Notes Payable
                                                               
  Related parties:
                                                               
     7% Notes payable to
      Officer and
                                                         
      Directors for legal and
      consulting
                                                         
      services (1)
  $ 34,423     $ 5,138     $ (26,419 )   $ -     $ -     $ (13,142 )   $ -     $ -  
      7 % Note payable to
      Cato Holding Co.
    -       90,787       (72,500 )     -       115,370       -       133,657       1,743  
      Note discount
    -       (35,903 )     -       8,448       -       -       (27,455 )     -  
Total current notes
                                                         
     payable to related
     parties
  $ 34,423     $ 60,022     $ (98,919 )   $ 8,448     $ 115,370     $ (13,142 )   $ 106,202     $ 1,743  
     Notes payable to Cato
                                                         
     BioVentures under line
     of credit, non-current
  $ 170,000     $ -     $ -     $ -     $ (170,000 )   $ -     $ -     $ -  
     7 % Note payable to
     Cato Holding Co.
                                                 
     non-current
  $ -     $ -     $ -     $ -     $ 159,630     $ -       159,630     $ -  
     Accrued officer’s
     compensation
                                                         
    Non-interest bearing
    notes payable to
                                                               
    Officer for deferred
    salary
  $ 56,986     $ -     $ -     $ -     $ -     $ -     $ 56,986     $ -  
Unrelated parties, current portion:
                                                         
    7.0% Notes payable
  $ -     $ 5,621     $ (96,125 )   $ -     $ 175,000     $ -     $ 84,496     $ 357  
    7.5% Notes payable to
    vendors for accounts
                                                         
    payable converted to
                                                         
    notes payable:
                                                               
        Burr, Pilger, Mayer
    5,590       -       -       -       (467 )     -       5,123       -  
        Desjardins
    -       -       -       -       59,256       -       59,256       -  
        McCarthy Tetrault
    -       -       -       -       156,609       -       156,609       -  
        Morrison Foerster
    -       -       -       -       82,136       -       82,136       -  
    5.5% and 10% Notes
    payable to
                                                         
    insurance premium
    financing company
    5,401       82,711       (71,485 )     -       -       -       16,627       -  
    10% Notes payable to
    vendors for
                                                         
    accounts payable
    converted to notes
                                                         
    payable
    140,463       9,442       (54,000 )     -       49,656       -       145,561       14,602  
Total current notes
payable to unrelated
                                                         
parties
  $ 151,454     $ 97,774     $ (221,610 )   $ -     $ 522,190     $ -     $ 549,808     $ 14,959  
 
Unrelated parties, long term portion:
                                                         
    7.5% Notes payable
    to vendors for
                                                         
    accounts payable
    converted to notes
                                                         
    payable:
                                                               
        Burr, Pilger, Mayer
  $ 92,652     $ 5,534     $ (10,000 )   $ -     $ 467     $ -     $ 88,653     $ -  
        Desjardins
    -       259,325       (28,000 )     -       (59,256 )     -       172,069       1,475  
        McCarthy Tetrault
    -       548,346       (70,000 )     -       (156,609 )     -       321,737       3,048  
        Morrison Foerster
    2,133,421       511,691       (225,000 )     -       (82,136 )     -       2,337,976       7,709  
    Note discount
    (236,617 )     (58,692 )     -       48,793       -       -       (246,516 )     -  
    7.5% Notes, net
    1,989,456       1,266,204       (333,000 )     48,793       (297,534 )     -       2,673,919       12,232  
    10% Notes payable to
    vendors for
                                                         
    accounts payable
    converted to notes
                                                         
    payable
    79,461       -       -       -       (49,656 )     -       29,805       -  
Total long term notes
                                                         
payable to unrelated parties
  $ 2,068,917     $ 1,266,204     $ (333,000 )   $ 48,793     $ (347,190 )   $ -     $ 2,703,724     $ 12,232  
 
(1) Includes two notes with principal balances of $26,419 and $8,004 and corresponding accrued interest of $9,580 and $6,358, respectively, at March 31, 2011.
 
Conversion of Convertible Promissory Notes
 
On May 11, 2011, and concurrent with the Merger:
 
·  
All convertible promissory notes issued by the Company during 2006 and 2007 (except for the Platinum Note) (“2006/2007 Notes”) in the amount of $2,559,584, including principal and accrued interest, were converted into 1,462,559 Units (as described in Note 1, under 2011 Private Placement ) consisting of 1,462,559 shares of common stock of the Company and three-year warrants to purchase 365,640 shares of common stock at an exercise price of $2.50 per share.  The warrants expire on May 11, 2014.  The associated contingently exercisable warrants, originally issued with the 2006/2007 Notes, became exercisable for 1,049,897 shares of common stock at an exercise price of $1.75 per share.
 
·  
All convertible promissory notes issued by the Company during the period from 2008 through 2010 (except for the Platinum Note) (“2008/2010 Notes”) in the amount of $3,615,209, including principal and accrued interest, were converted into 2,065,731 Units consisting of 2,065,731 shares of common stock of the Company and three-year warrants to purchase 516,415 shares of common stock at an exercise price of $2.50 per share.  The warrants expire on May 11, 2014. The associated contingently exercisable warrants, originally issued with the 2008/2010 Notes, became exercisable for 848,998 shares of common stock at an exercise price of $2.62 per share.
 
Platinum Note
 
May 2011 Amendment
 
During 2007 and 2008, the Company issued three convertible promissory notes with an aggregate principal balance of $4.0 million (the “Original Platinum Notes”) to Platinum Long Term Growth VII, LLC (“Platinum”).  On May 5, 2011, the Original Platinum Notes were amended, restated and consolidated into a single note (the “Platinum Note”) with a principal balance of $4.0 million ("May 2011 Amendment").  The following paragraphs describe the May 2011 Amendment.  In December 2011, the Company and Platinum entered into a Note and Warrant Exchange Agreement pursuant to which the Platinum Note and warrants issued to Platinum were cancelled in exchange for a new series of the Company’s preferred stock.  See Note and Warrant Exchange Agreement   below.
 
As a result of the May 2011 Amendment, the maturity date of the Platinum Note was extended to June 30, 2012 from June 30, 2011.  The Platinum Note bears interest at an annual rate of 10%. Platinum may, in its sole discretion, extend the maturity date of the Platinum Note by one year to June 30, 2013.  The Platinum Note, as amended, will be automatically converted, subject to certain conditions, upon the last to occur of (i) the closing of an equity or equity-based financing or series of equity or equity-based financings after May 1, 2011 resulting in gross proceeds to the Company totaling at least $5.0 million, including the 2011 Private Placement and cancellation of debt not otherwise convertible; and (ii) the Company becoming a publicly traded company ("Qualified Financing").  The number of shares issuable to Platinum upon the automatic conversion of the Platinum Note is determined in accordance with one of the following three formulas, as selected by Platinum in its sole discretion: (i) the outstanding principal plus accrued but unpaid interest  ("Outstanding Balance") as of the closing of the Qualified Financing multiplied by 1.25 and divided by $1.75 per share; (ii) the Outstanding Balance as of the closing of the Qualified Financing multiplied by 1.25 and divided by the per share price of shares sold in the Qualified Financing; or (iii) the Outstanding Balance as of the closing of the Qualified Financing divided by the Company's per share price assuming a pre-Qualified Financing valuation of the Company of $30 million on a fully-diluted basis, subject to certain exclusions.  Under the Platinum Note, the cash payment option previously included in the Original Platinum Notes was eliminated. In the event the Company completed a Qualified Financing prior to December 31, 2011, interest accrued on the Platinum Note from May 5, 2011 through the date of the closing of the Qualified Financing would have been forgiven.
 
The Platinum Note is voluntarily convertible, at the option of Platinum, at any time prior to a Qualified Financing or its maturity date into shares of common stock that would be determined by multiplying the Outstanding Balance being converted by 1.25 and dividing by the lesser of (i) $1.75 per share; (ii) the per share price in any subsequent equity financing; or (iii) the per share price assuming a $30 million valuation of the Company on a fully diluted basis (subject to certain exclusions).  Platinum may elect to convert the Platinum Note at any time, but it is not obligated to convert the Platinum Note until the shares issuable upon conversion of the note are freely tradable pursuant to an effective registration statement or can be sold in any ninety day period without registration under the Securities Act of 1933, as amended (“Securities Act”), in compliance with Rule 144. Additionally, Platinum may not convert the Platinum Note if the shares issuable upon conversion would result in it beneficially owning in excess of 9.99% of the then outstanding shares of the Company's common stock. However, Platinum may waive this condition upon giving 61 days’ notice to the Company.
 
In connection with the issuance of the Platinum Note, the Company issued to Platinum a three-year warrant to purchase 825,574 shares of the Company’s common stock at an exercise price of $2.50 per share.  The warrant expires on May 5, 2014, and becomes exercisable upon Platinum’s conversion of the Platinum Note and is exercisable for one-fourth (1/4) of the number of shares issued in the conversion. The Company valued the warrant at a fair value of $0.69 per share on the date of issuance using the Black-Scholes option pricing model and the following assumptions:  fair value of common stock - $1.58; risk-free rate – 0.96%; volatility – 85%; contractual term – 3.00 years.
 
The Company evaluated the extension of the maturity date of the Platinum Note along with the issuance of the new three-year warrant and determined that the modifications are to be accounted for as a troubled debt restructuring on a prospective basis.  The Company has recorded a discount of $908,920 to the Original Platinum Notes which is equal to the incremental fair value of the note conversion feature and the cash payments option liability and the fair value of the new warrant.  The note discount is being amortized as non-cash interest expense over the remaining term of the Platinum Note using the effective interest method.  The effective annual interest rate of the extended Platinum Note is 17.3%, based on the amortization of the note discount, the stated interest rate, and the note term.
 
Warrant Liability
 
The warrants issued with the Original Platinum Notes included certain exercise price adjustment features and accordingly were not deemed to be indexed to the Company’s common stock. On April 1, 2009, the Company recorded the estimated fair value of the warrant liability of $151,281 as a non-current liability in the consolidated balance sheet. Changes in the estimated fair value of the warrant liability were recorded in other income (expense) in the consolidated statement of operations. The Company continued to record adjustments to the fair value of the warrants until the closing of the Merger on May 11, 2011, when the amended warrants no longer contained the exercise price adjustment features, at which time the warrants were deemed to be indexed to the Company’s common stock and therefore no longer treated as a liability.  The warrant liability was recorded at its fair value of $424,068 at May 11, 2011, which resulted in a non-cash expense of $7,014 that was charged to other income (expense) in the three-month period ended June 30, 2011.  As of May 11, 2011, $424,068, the then-current aggregate fair value of these warrants, was reclassified from a liability to additional paid-in capital, a component of stockholders’ deficit.
 
Note and Warrant Exchange Agreement
 
On December 29, 2011, the Company and Platinum entered into a Note and Warrant Exchange Agreement pursuant to which the Platinum Note and outstanding warrants issued to Platinum to purchase an aggregate of 1,599,858 shares of the Company’s common stock were cancelled in exchange for 391,075 shares of the Company’s newly-created Series A Preferred Stock (“Series A Preferred”).  Each share of Series A Preferred is convertible into ten shares of the Company’s common stock (see Note 7, Capital Stock ).  The Company issued 231,089 shares of Series A Preferred to Platinum in connection with the note cancellation based on the sum of the $4.0 million principal balance of the Platinum Note plus accrued but unpaid interest through May 11, 2011 ($611,111) adjusted for a 125% conversion premium, net of the $1,719,823 aggregate exercise price of the outstanding 1,599,858 warrants held by Platinum, and a contractual conversion basis of $1.75 per common share, all adjusted for the 1:10 Series A Preferred to common exchange ratio.  An additional 159,986 shares of Series A Preferred were issued to Platinum in connection with the warrant exercise and exchange to acquire the common shares issued upon the warrant exercise.
 
The Company determined that the cancellation of the Platinum Note and exercise of the warrants pursuant to the Note and Warrant Exchange Agreement should be accounted for as a debt extinguishment.  The Company estimated the fair value of the shares of Series A Preferred stock tendered to Platinum for the cancellation of the Platinum Note under the terms of the agreement at $15.51 per share ($1.55 on a per common share equivalent basis).  The Company recorded a loss of $1,193,500 attributable to the early debt extinguishment, reported in Other expenses, net in the accompanying Condensed Consolidated Statements of Operations.  The loss includes $287,278, calculated using the Black-Scholes Option Pricing Model, representing the incremental fair value of the warrants exercised by Platinum as modified to reduce their exercise price.  (See Discounted Warrant Exercise Program in Note 7, Capital Stock , for a description of the modification of warrant exercise prices and the resulting valuation that occurred during the quarter ended December 31, 2011.)  The common shares issued in connection with the warrant exercise that were exchanged for shares of Series A Preferred Stock are treated as Treasury Stock in the accompanying Condensed Consolidated Balance Sheet at December 31, 2011.
 
August 2010 Short-Term Notes
 
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, for a purchase price of $800,000.  In connection with the   2011 Private Placement, as described in Note 7, a total of $840,000 of the aggregate principal amount of the August 2010 Short-Term Notes, plus a note cancellation premium of $94,500, were converted into 534,000 Units consisting of 534,000 shares of the Company’s common stock and  three-year warrants to purchase 133,500 shares of the Company’s common stock at an exercise price of $2.50 per share; $105,000 of such amount was converted into a long-term note issued to Cato Holding Company; and $175,000 of such amount was not converted.  In April 2011, the Company and the holder of the $175,000 note amended the note, whereby the Company paid $50,000 of the note balance within three days of the closing of the 2011 Private Placement, 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.  The amended note bears interest at 7% per annum. The note cancellation premium was recorded as interest expense.  In September 2011, the Company and the holder agreed to further 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.
 
7% Notes Payable to Officer and Directors for Consulting Services
 
On May 11, 2011, and concurrent with the Merger, the 7% note payable to a director for principal and accrued interest totaling $14,362, plus a $5,138 note cancellation premium, was converted into 11,142 shares of common stock and a three-year warrant to purchase 2,785 shares of common stock at an exercise price of $2.50 per share.  The related note cancellation premium was recorded as interest expense. Also, on May 11, 2011, the 7% note payable to an officer and director including principal and accrued interest totaling $35,999 was paid.
 
Issuance of Long-Term Promissory Note and Cancellation of Note Payable to Cato BioVentures Under Line of Credit and Partial Cancellation of August 2010 Short-Term Notes
 
In April 2011, all amounts owed by the Company to Cato Holding Company ("CHC") or its affiliates were consolidated into a single note, in the principal amount of $352,273.  Additionally, CHC released certain security interests in the Company’s personal property.  The CHC note bears interest at 7% per annum, compounded monthly.  Under the terms of the note, the Company is to make six monthly payments of $10,000 each beginning June 1, 2011; and thereafter will make payments of $12,500 monthly until the note is repaid in full. The Company may prepay the outstanding balance under this note in full or in part at any time during the term of this note without penalty. 
 
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, 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. In connection with issuance of the note, the Company issued 39,600 shares of restricted common stock to Desjardins which, at the time of issuance, had a value of $1.75 per share.
 

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 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 $100,000 to McCarthy 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 percent (1%) of the net proceeds of all private or public equity financings closed during the term of the note. In connection with issuance of this note, the Company issued 100,000 shares of restricted common stock to McCarthy which had a value, at the time of issuance, of $1.75 per share.

 
On May 5, 2011, the Company and Morrison & Foerster LLP ("Morrison & Foerster"), the Company’s legal and intellectual property counsel, entered into Amendment No. 1 to the Morrison & Foerster Note ("Amendment No. 1").  Under Amendment No. 1, the principal balance of the Morrison & Foerster note was increased to $2,200,000, with an additional payment of $100,000 due within three business days of the date of Amendment No. 1, which amount has been paid. The Morrison & Foerster note bears interest at 7.5% and principal will be due, along with all accrued but unpaid interest on the earliest of (i) March 31, 2016, (ii) the consummation of a Change of Control, as defined in the Morrison & Foerster note, and (iii) any failure to pay principal or interest when due. The Company is to make payments of $10,000 per month until June 1, 2011 and thereafter will pay $15,000 per month through March 31, 2012, $25,000 per month through March 31, 2013, and $50,000 per month through maturity.  In addition, the Company will make payments equal to five percent (5%) of the net proceeds of any equity financing closed during the term of the note until all outstanding principal and interest is paid in full.  If the Company prepays the entire amount due by December 31, 2012, however, the amount of such payment shall be reduced by ten percent (10%), up to a maximum of $100,000. In connection with Amendment No. 1, the Company issued 200,000 shares of restricted common stock to Morrison & Foerster which had a value, at the time of issuance, of $1.75 per share. In addition, the Company reduced the exercise price of the common stock warrants previously issued to Morrison & Foerster from $3.00 to $2.00 per share. The change in the fair value of the warrants was recorded as a note discount and a corresponding increase in additional paid-in capital.