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Note 6 - Related Party Notes Payable
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Jun. 30, 2012
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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 (also
see Note 5) with BSC 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 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 as were as follows:
The
Company recognized a loss in its statements of operations of
$26,545 during the three and six months ended June 30, 2012
as the fair value of the derivative liability was $26,545 at
June 30, 2012, and nil at March 31, 2012 and December 31,
2011. The fair value of the derivative liability was measured
using Level 2 inputs at June 30, 2012 and Level 3 inputs for
all prior reporting periods.
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, 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:
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