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Related Party Notes Payable
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Sep. 30, 2012
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Dec. 31, 2011
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| Related Party Notes Payable [Text Block] |
6.
Related
Party Notes Payable
Related
Party BSC Convertible Notes Payable
In
October 2009, the Company entered into a convertible note
payable arrangement with BSC. During October, November
and December 2009, the Company borrowed an aggregate of
$3,500,000 from BSC under this arrangement pursuant to
three convertible notes payable (the “BSC
Notes”). These borrowings accrued interest at 10%
per year and were scheduled to mature on the second
anniversary of the date on which the funds were
advanced. Effective February 2, 2012, the
Company entered into a loan modification with BSC (also
see Note 5) pursuant to which (i) interest accrued under
each of the BSC Notes as of February 2, 2012 was added to
the principal balance of the note, (ii) beginning
February 2, 2012, the interest rate of each of the BSC
Notes was reduced from 10% per year to 0%, and (iii) the
maturity date of each of the BSC Notes was extended by
three years (until October through December
2014). As of February 2, 2012, the outstanding
aggregate loan balance, including principal and interest,
owed to BSC was $4,338,601. Pursuant to ASC
470-60, Troubled Debt Restructurings by Debtors, the loan
modification was considered a “Troubled Debt
Restructuring.” However, because the total future
cash payments required under the new terms of the BSC
Notes were not reduced from what was owed at the time of
the loan modification, no gain was recorded under
Troubled Debt Restructuring accounting.
The
Company will be required to prepay all or a portion of
the BSC Notes upon the consummation of any future
“qualified financing,” which is defined as
any equity financing in which shares of the
Company’s preferred stock are issued in
exchange for cash proceeds. Upon consummation of a
qualified financing from Medtronic, Inc., St. Jude
Medical, Inc., or Johnson & Johnson, or any of their
respective subsidiaries or affiliates, up to 100% of the
cash proceeds from such qualified financing must be used
to prepay the outstanding balance of the BSC Notes. Upon
consummation of a qualified financing from any other
investor, up to 25% of the cash proceeds from such
qualified financing must be applied by the Company to
prepay the outstanding balance of the BSC Notes. The
Company has not conducted a qualified financing since
entering into the loan arrangement with BSC under which
the Company issued the BSC Notes. The Company can prepay
the BSC Notes at any time. Each of the BSC Notes is
convertible, at the option of the holder, at any time
prior to the earlier of the maturity date or the
consummation of a qualified initial public offering
(which is defined as a bona fide first underwritten
public offering of the Company’s common stock on a
firm commitment basis in which the aggregate gross
proceeds received by the Company at the public offering
price equals or exceeds $20,000,000), into one share of
the Company’s preferred stock at a
conversion price equal to the lower of $8.00 per share or
the price per share paid by investors in a future
qualified financing conducted by
the Company. In the event BSC elected to
convert the BSC Notes into shares of preferred stock
other than in the context of a qualified financing, each
such share of preferred stock would initially be
convertible into one share of the Company’s common
stock. The BSC Notes are secured by a first priority
security interest in all of the Company’s
assets.
The
Company analyzed the terms of the conversion feature of
the BSC Notes under ASC Topic 815, Derivatives and
Hedging, and determined, based upon the conversion price
reset provision, that the conversion feature should be
accounted for as a derivative liability (see Note 2,
Summary of Significant Accounting Policies – Fair
Value Measurements). Under this guidance the conversion
feature was initially measured at fair value upon the
issuance of the BSC Notes and has been adjusted to the
current fair value at the end of each reporting period.
Changes in fair value are recorded in other income
(expense) in the related statements of operations. The
Company calculated the fair value of this derivative
liability utilizing the Black-Scholes pricing model. The
assumptions used in calculating the fair value of the
derivative liability using this model were as
follows:
The
Company recognized a loss in its statements of operations
of $7,439 during the three and nine months ended
September 30, 2012 as the fair value of the derivative
liability was $7,439 at September 30, 2012, and nil at
December 31, 2011. The fair value of the derivative
liability was measured using Level 2 inputs at September
30, 2012 and Level 3 inputs for all reporting periods
prior to 2012.
Related
Party 2011 Unsecured Convertible Notes Payable
In
June through September 2011, the Company issued unsecured
convertible notes (the “Summer 2011 Notes”)
in the aggregate amount of $1,310,000 to six non-employee
directors of the Company. The note holders also received
warrants to purchase 1,310,000 shares of the
Company’s common stock in the aggregate. The Summer
2011 Notes had two-year maturities and accrued interest
at 15% per year. The warrants were fully vested upon
issuance, have a term of two years, and have an exercise
price of $0.01 per share. The original terms of the
Summer 2011 Notes provided for automatic conversion of
the notes into shares of the Company’s common stock
upon consummation of an initial public offering of shares
of the Company’s common stock, based on a
conversion price equal to 60% of the public offering
price. In addition, the original terms of the Summer 2011
Notes provided for optional conversion of the notes, at
the election of the note holder, upon consummation of a
reverse merger of the Company into a public shell
company, based on a conversion price equal to 60% of the
fair market value of the Company’s common stock at
the time of the merger. The Summer 2011 Notes were
amended in December 2011 to provide for automatic
conversion of the principal and all accrued interest into
shares of the Company’s common stock upon the
effectiveness of a Form 10 filed by the Company with the
SEC under the Exchange Act, based on a conversion price
of $0.60 per share. Upon the effectiveness of the
Company’s Form 10 on February 27, 2012, all of the
Summer 2011 Notes, representing an aggregate of
$1,425,865 in principal and accrued interest, were
converted into 2,376,447 shares of the Company’s
common stock. In conjunction with the
conversion of the Summer 2011 Notes, the Company applied
the guidance in ASC 470-20, Debt with Conversion and
Other Options (“ASC 470-20”), and wrote-off
the unamortized discount of $405,602 associated with the
relative fair value of the warrants, which were issued
with the Summer 2011 Notes, against additional paid-in
capital.
The
table below summarizes related party notes payable
at:
|
6.
Related Party Notes Payable
Related
Party BSC Convertible Notes Payable
In
October 2009, the Company entered into a convertible note
payable arrangement with BSC. During October, November and
December of 2009, the Company borrowed an aggregate of
$3,500,000 from BSC under this arrangement. These
borrowings accrued interest at 10% per year and were
scheduled to mature on the second anniversary of the date
on which the funds were advanced. At December 31, 2011
BSC had extended the due dates of the notes to
January 16, 2012 (see Note 13 for subsequent
modification of the terms of the BSC Notes).
The
Company will be required to prepay all or a portion of the
convertible notes payable (the “BSC Notes”)
upon the consummation of any qualified financing, which is
defined as any equity financing in which shares of the
Company’s preferred stock are issued in exchange for
cash proceeds. Upon consummation of a qualified financing
from Medtronic, Inc., St. Jude Medical, Inc., or
Johnson & Johnson, or any of their respective
subsidiaries or affiliates, up to 100% of the cash proceeds
from such qualified financing must be used to prepay the
outstanding principal and accrued interest of the BSC
Notes. Upon consummation of a qualified financing from any
other investor, up to 25% of the cash proceeds from such
qualified financing must be applied by the Company to
prepay the outstanding principal and accrued interest of
the BSC Notes. The Company has not conducted a qualified
financing since entering into the agreement related to the
BSC Notes. The Company can prepay the BSC Notes at any
time. The principal and interest outstanding on each of the
BSC Notes is convertible, at the option of the holder, at
any time prior to the earlier of the maturity date or the
consummation of a qualified initial public offering (a bona
fide first underwritten public offering of the
Company’s common stock on a firm commitment basis in
which the aggregate gross proceeds received by the Company
at the public offering price equals or exceeds $20,000,000)
into one share of the Company’s preferred stock at a
conversion price equal to the lower of $8.00 per share, or
the price per share paid by investors in a future preferred
stock financing conducted by the Company prior to the
qualified public offering. The terms of the preferred stock
into which BSC may elect to convert the BSC Notes, other
than in the context of a qualified financing, must be
agreed upon between the Company and BSC. The BSC Notes are
secured by a first priority security interest in all of the
Company’s assets.
The
Company analyzed the terms of the conversion feature of the
BSC Notes under ASC Topic 815 and determined, based upon
the conversion price reset provision that the conversion
feature should be accounted for as a derivative liability
(see Note 2, Fair Value Measurements). Under this guidance
the conversion feature was initially measured at fair value
upon the issuance of the BSC Notes and will be adjusted to
the current fair value at the end of each reporting period.
Changes in fair value will be recorded as other income
(expense) in the related statement of operations. The
Company calculated the fair value of this derivative
liability utilizing the Black-Scholes pricing model. The
assumptions used in calculating the fair value of the
derivative liability using this model as of the transaction
date and December 31, 2011 and 2010 were as
follows:
There
was no adjustment of the derivative liability of $1,227,500
at December 31, 2009 because the change in its fair
value from the transaction date was insignificant. At
December 31, 2011 and 2010, the fair value of the
derivative liability was $0 (using Level 3 Inputs).
Accordingly, the $1,227,500 decrease in fair value during
the year ended December 31, 2010 was recorded as a
gain in the 2010 statement of operations.
The
proceeds from the transaction were allocated as
follows:
The
discount on the BSC Notes was amortized through charges to
interest expense based upon the effective interest method
through the date of maturity. The unamortized discount at
December 31, 2011 and 2010 was $0 and $653,236,
respectively.
Related
Party 2011 Unsecured Convertible Notes Payable
In
June through September 2011, the Company issued unsecured
convertible notes (the “Summer 2011 Notes”) in
the aggregate amount of $1,310,000 to six non-employee
directors of the Company. The note holders also received
warrants to purchase 1,310,000 shares of the
Company’s common stock in the aggregate. The Summer
2011 Notes mature June through September 2013, unless
earlier converted, and accrue interest at 15% per
year. The warrants vest immediately, have a term of five
years, and have an exercise price of $0.01 per share. The
original terms of the Summer 2011 Notes provide for
automatic conversion of the notes into shares of the
Company’s common stock upon consummation of an
initial public offering of shares of the Company’s
common stock, based on a conversion price equal to 60% of
the public offering price. In addition, the original terms
of the Summer 2011 Notes provide for optional conversion of
the notes, at the election of the note holder, upon
consummation of a reverse merger of the Company into a
public shell company, based on a conversion price equal to
60% of the fair market value of the Company’s common
stock at the time of the merger. To the extent not
previously converted, the original terms of the Summer 2011
Notes provide for automatic conversion of the notes in the
event the Company completes a reverse merger transaction
with a public shell company and thereafter closes an equity
financing that results in gross proceeds of at least
$5,000,000, based on a conversion price equal to 60% of the
price paid by investors in the equity financing. The Summer
2011 Notes were amended in December 2011 to provide that
the principal and all accrued interest under the notes will
automatically convert into shares of the Company’s
common stock on the effective date of a Form 10
registration statement filed with the SEC under the
Exchange Act, based on a conversion price of $0.60 per
share. The Company filed a Form 10 registration statement
with the SEC in December 2011, and the Company expects that
its Form 10 registration statement will be effective on
February 27, 2012. At that time, the Summer 2011 Notes
will convert into shares of the Company’s common
stock.
The
Company analyzed the terms of the warrants based on the
provisions of ASC Topic 480 and determined that they
qualified for equity accounting. Under guidance in ASC 470,
the Company allocated the $1,310,000 in proceeds
proportionately between the Summer 2011 Notes and the
common stock warrants issued to the note holders based on
their relative fair values. The relative fair value of the
common stock warrants, $486,102, was recorded as additional
paid in capital. The Summer 2011 Notes were recorded at the
principal amount of $1,310,000 less a discount of $486,102.
This discount is being amortized to interest expense over
the term of the Summer 2011 Notes using the effective
interest method. The fair value of the Summer 2011 Notes
was estimated based on an assumed market interest rate for
notes of similar terms and risk. The fair value of the
$0.01 common stock warrants was determined using the
Black-Scholes pricing model. The assumptions used in
calculating the fair value of the warrants were a dividend
yield of 0%, expected volatility of approximately 43%, risk
free interest rates between 0.21% and 0.45%, an expected
term of 2 years, and a $0.60 per share price of the
Company’s common stock. The Company determined the
fair value of its common stock to be $0.60 per share at
each of the dates the warrants were issued.
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