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Note 4 - Note Payable Modification
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3 Months Ended |
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Mar. 31, 2013
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| Debt Disclosure [Text Block] |
4. Note
Payable Modification
In
April 2011, the Company issued a $2,000,000 subordinated
secured convertible note (“April 2011 Note”) to a
medical device co-development partner (“Strategic
Partner”). Upon issuance, the April 2011 Note was
scheduled to mature in April 2016, unless earlier converted,
and it accrued interest at the rate of 10% per year. The
April 2011 Note was amended in February 2012, among other
things, to provide the Strategic Partner the option to
convert the April 2011 Note into shares of the
Company’s common stock at a conversion price of $0.60
per share at any time on or before February 23, 2013.
On
February 21, 2013, the Strategic Partner delivered notice to
the Company of its election to convert the April 2011 Note
into shares of the Company’s common stock at the
conversion price of $0.60 per share. However, prior to the
issuance of those conversion shares, on March 6, 2013, the
Company and the Strategic Partner entered into a loan
modification. As a result of that loan
modification, the Strategic Partner revoked its election to
convert the April 2011 Note into shares of common stock.
Under the loan modification, the Company issued an amended
and restated subordinated secured convertible note to the
Strategic Partner (the “Amended and Restated
Note”) which amended the April 2011 Note (i) to
remove the equity conversion feature, such that the Amended
and Restated Note is not convertible into any shares of the
Company’s capital stock, (ii) to reduce the interest
rate, beginning March 6, 2013, from 10% per year to 5.5% per
year, (iii) to ease certain restrictive loan covenants, and
(iv) to reflect a new note principal balance of $4,289,444,
which represents the sum of (A) the original principal
balance of the April 2011 Note in the amount of $2,000,000,
plus (B) interest accrued under the April 2011 Note through
March 6, 2013 in the amount of $389,444, plus (C) $1,900,000.
The Amended and Restated Note completely replaced and
superseded the April 2011 Note. The Amended and
Restated Note matures in April 2016, and principal and
accrued interest under the Amended and Restated Note is
payable in a single installment upon
maturity. Like the April 2011 Note, the Amended
and Restated Note is secured by a security interest in the
assets of the Company, which security interest is junior and
subordinate to the security interest that secures the notes
issued by the Company to BSC.
The
Company has applied guidance in FASB ASC 470-50, “Debt
Modifications and Extinguishments,” which requires
calculating the fair value of the Amended and Restated Note,
as of the loan modification date, based on the amended terms.
At the time of the loan modification, the fair value of the
Amended and Restated Note, with its principal balance of
$4,289,444, was $3,745,621. The difference between
the fair value of the Amended and Restated Note immediately
following the loan modification and the carrying value of the
April 2011 Note and related accrued interest immediately
prior to the loan modification resulted in a charge to other
expense of $1,356,177 in the statement of operations during
the three months ended March 31, 2013. The
$543,823 difference between the principal amount of the
Amended and Restated Note and the fair value of the Amended
and Restated Note on the date of the loan modification was
recorded as a debt discount and will be amortized to interest
expense using the effective interest method over the term of
the Amended and Restated Note.
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