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Note 6 - Related Party Notes Payable
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Dec. 31, 2012
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| Related Party Notes Payable [Text Block] |
6.
Related
Party Notes Payable
Related
Party BSC Convertible Notes Payable
In
2009, the Company entered into a convertible note payable
arrangement with BSC. During 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). The Company recorded interest expense
under the BSC Notes of $39,499, $388,678, and $356,452
during the years ended December 31, 2012, 2011, and 2010,
respectively. 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 elects 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
calculates the fair value of this derivative liability
utilizing the Black-Scholes pricing model. The fair value
of the derivative liability was computed using Level 2
inputs at December 31, 2012 and Level 3 inputs for all
reporting periods prior to 2012. The
assumptions used in calculating the fair value of the
derivative liability are as follows:
The
changes in the fair value of the derivative liability are
as follows:
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 registration statement 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.
The
Company analyzed the terms of the warrants based on the
provisions of FASB, ASC 480, “Distinguishing
Liabilities from Equity,” 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 was 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 Company determined the fair value of its
common stock to be $0.60 per share at each of the dates
the warrants were issued. In conjunction with
the conversion of the Summer 2011 Notes, the Company
applied the guidance in FASB ASC 470-20, “Debt with
Conversion and Other Options,” 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
December 31:
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