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
3 Months Ended
Jun. 30, 2012
Notes to Financial Statements  
NOTE 7 - 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 three months ended June 30, 2012:

 

    Principal               Foreign Currency   Principal   Accrued
    Balance               Adjustments/Other   Balance   Interest
    3/31/2012   Additions   Payments   Amortization   Reclassifications   6/30/2012   6/30/2012
                             
Convertible Promissory Notes:                            
 February 2012 12% convertible promissory notes   $ 500,000     $ —       $ —       $ —       $ —       $ 500,000     $ 20,200  
  Note discount     (499,300 )     —         —         9,800     —         (489,500 )        
   12% convertible notes, net   $ 700     $ —       $ —       $ 9,800   $ —       $ 10,500        
                                                         
Notes Payable:                                                        
 To Related parties:                                                        
 7 % Note payable to Cato Holding Co.     293,300                                       293,300     $ 12,000  
           Note discount     (24,300 )     —         —         3,200       —         (21,100 )        
    Total notes payable to related parties   $ 269,000     $ —       $ —       $ 3,200     $ —       $ 272,200          
 less: current portion     (168,200 )     —         —         —         (34,500 )     (202,700 )        
   non-current portion and discount   $ 100,800     $ —       $ —       $ 3,200     $ (34,500 )   $ 69,500          
                                                         
 Accrued officer’s compensation                                                        
  Non-interest bearing notes payable to                                                        
   Officer for deferred salary   $ 57,000     $ —       $ —       $ —       $ —       $ 57,000     $ —    
                                                         
To Unrelated parties                                                        
 7.0% Notes payable - all current   $ 63,800     $ —       $ —       $ —       $ —       $ 63,800     $ 1,500  
                                                         
 7.5% Notes payable to vendors for                                                        
accounts payable converted to notes                                                        
payable:                                                        
    Burr, Pilger, Mayer   $ 93,400     $ —       $ (1,600 )   $ —       $ —       $ 91,800     $ 500  
    Desjardins     224,300       —         —         —         (18,400 )     205,900       6,800  
    McCarthy Tetrault     459,400       —         —         —         (35,500 )     423,900       13,100  
    Morrison Foerster     2,420,100       —         —         —         —         2,420,100       83,200  
       note discount     (228,900 )     —         —         17,700       —         (211,200 )     —    
      2,968,300       —         (1,600 )     17,700       (53,900 )     2,930,500     $ 103,600  
 less: current portion     (367,700 )     —         1,600       —         (206,300 )     (572,400 )        
   non-current portion and discount   $ 2,600,600     $ —       $ —       $ 17,700     $ (260,200 )   $ 2,358,100          
                                                         
  5.8%  and 8% Notes payable to                                                        
insurance premium financing company   $ 4,600     $ 77,200     $ (16,800 )   $ —       $ —       $ 65,000     $ —    
                                                         
 10% Notes payable to vendors for                                                        
accounts payable converted to notes                                                        
payable   $ 165,400     $ —       $ (3,100 )   $ —       $ —       $ 162,300     $ 19,200  
 less: current portion     (146,000 )     —         3,100       —         (2,500 )     (145,400 )        
   non-current portion   $ 19,400     $ —       $ —       $ —       $ (2,500 )   $ 16,900          
                                                         

 

 

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 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 June 30, 2012, for strategic purposes, the Company had not filed the registration statement and had recorded $5,500 as a liability under the Registration Rights Agreement. Such amount is included in Accrued expenses in the Condensed Consolidated Balance Sheet at June 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 the payment due on June 1, 2012 in early July 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") or 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. Concurrently, 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 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 may prepay the outstanding balance under this note in full or in part at any time during the term of this note without penalty.  For strategic purposes, at June 30, 2012, the Company had not made the monthly payments due subsequent to December 2011.

 

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. For strategic purposes, at June 30, 2012, the Company had not made the monthly payments required for February through June 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. For strategic purposes, at June 30, 2012, the Company had not made the monthly payments required for February through June 2012.

 

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 issued by the Company in payment of legal services (“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 was 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. At June 30, 2012, the Company had not made the monthly payments required for February through June 2012.