Note 6 - Debt

3 Months Ended

Sep. 30, 2011

Note 6. Debt

Notes Payable

On February 21, 2008, the Company entered into a Securities Purchase Agreement with Imperium Master Fund, LTD. and three other parties (collectively “Imperium”), which Securities Purchase Agreement was amended on October 14, 2008 (as so amended, the “SPA”), pursuant to which the Company issued, and Imperium purchased from the Company, an aggregate $7,000 in principal of senior secured notes (“Notes Payable”). The Notes Payable matured on November 15, 2009 and bear interest at the rate of 8.0%. Interest is payable monthly. As of September 30, and June 30, 2011, accrued interest of $47 for each period is included in accrued expenses and other current liabilities in the condensed consolidated balance sheets.

An additional premium of $805 was granted due to the amendment noted above. The additional premium is subject to interest payments commencing October 1, 2011.

The Notes Payable are secured by a pledge of substantially all of the Company’s assets.

On October 4, 2011, the Company and the Collateral Agent for the Note Payable Holders, entered into a Forbearance Agreement (the “Forbearance Agreement”). The Forbearance Agreement provides that the Collateral Agent shall forbear from exercising rights and remedies arising from the occurrence of Specified Defaults (as defined in the Forbearance Agreement), including the Company’s failure to repay the Notes Payable which are due and payable. The Forbearance Agreement will terminate on the earlier to occur of (i) December 31, 2011, (ii) the date the Company fails to comply with the covenants, conditions and agreements contained in the Forbearance Agreement, (iii) the date of the occurrence of any Event of Default, other than the Specified Defaults (as defined in the Forbearance Agreement), under the SPA, the Notes Payable, the Certificate of Designation (as defined in the SPA), the Registration Rights Agreement (as defined in the SPA), the Subsidiary Guaranty, dated as of February 21, 2008, by and among the Company, certain of its subsidiaries and the Collateral Agent, the Security Agreement, dated as of February 21, 2008 (the “Security Agreement”), by and among the Company, certain of its subsidiaries and the Collateral Agent and all other agreements, documents and other instruments entered into by the Company or any of its subsidiaries in connection with the SPA (collectively, the “Transaction Documents”), or (iv) the date the amended Notes Payable are paid in cash and all other obligations under the Transaction Documents are satisfied. Additionally, under the Forbearance Agreement, among other things:

(1)

The Collateral Agent may cause to be sold by the Company, shares of common stock of iBio, pledged by the Company to the holders of the Notes Payable pursuant to the Security Agreement as soon as commercially reasonable and apply the net proceeds from such sale first, against unpaid principal obligations under the Notes Payable and second, to any remaining obligations under the Transaction Documents. As of November 21, 2011, there have been no such sales.

(2)

The Company shall not, prior to the payment in full of all obligations owed to the amended Note Payable Holders under the Transaction Documents, make any (a) principal payments in respect of the $4,500 outstanding principal amount of the Convertible Note Payable which matured on February 21, 2011 (the “CD Financial Debt”), (b) past due rental or lease payments under the Company’s lease obligations to Vitamin Realty Associates, L.L.C. (“Vitamin Realty”) ($686 as of September 30, 2011), or (c) any rental or lease payments, including any past due rental or lease payments, in respect of any other personal or real property leased or rented by the Company or any of its subsidiaries from E. Gerald Kay or any family member of E. Gerald Kay; provided, that, so long as no Event of Default (other than the Specified Defaults) exists and is continuing, the Company shall be permitted to make interest payments (on a pre-default, non-accelerated basis) in respect of the CD Financial Debt and make current rental or lease payments under the Company’s lease obligations to Vitamin Realty. If an Event of Default (other than the Specified Defaults) exists and is continuing, the Company shall not be permitted to make any interest payments (on a pre-default, non-accelerated basis) in respect of the CD Financial Debt or make any current rental or lease payments under the Company’s lease obligations to Vitamin Realty. Any breach by the Company of (a) (b) or (c) shall constitute an Event of Default under, and shall trigger a termination of, the Forbearance Agreement.

(3)

If the Company fails to repay all of obligations under the Transaction Documents prior to December 31, 2011, then on December 31, 2011, the Company shall pay to the Collateral Agent, for the ratable benefit of the Note Payable Holders, a fee equal to $1,000, which shall be in addition to all other fees and expenses payable by the Company to the Collateral Agent and the Note Payable Holders under the Transaction Documents.

(4)

The Company has absolutely, unconditionally and irrevocably released, on behalf of itself and its subsidiaries, and its and their respective successors, assigns and other legal representatives, the Collateral Agent, the Note Payable Holders, and various other Releasees (as defined in the Forbearance Agreement) from all Claims (as defined in the Forbearance Agreement) arising at any time on or prior to the date of the Forbearance Agreement, in connection with the Transaction Documents, on the terms and conditions set forth in the Forbearance Agreement.

During the period from October 4 to November 21, 2011, the Company and the Collateral Agent continue to discuss the options available to the Company to repay the Notes Payable by the extended due date under the Forbearance Agreement among other strategic options, including retaining an investment banker as contemplated under the Forbearance Agreement to assist the Company in selling its propriety nutraceutical business, to repay the Notes Payable under agreeable terms. When and if it is determined that the Company will not be able to satisfy the payment requirements under the Forbearance Agreement, the Company will recognize the forbearance fee of $1,000.

Convertible Note Payable – CD Financial, LLC

On February 21, 2008, the Company entered into a Securities Purchase Agreement (the “CD SPA”) with CD Financial, a significant shareholder of the Company, pursuant to which the Company issued and CD Financial purchased from the Company, a Convertible Senior Secured Note in the principal amount of $4,500 (the “Convertible Note Payable”). The Convertible Note Payable matured on February 21, 2011 and bears interest at the rate of 9.5%. Interest is payable monthly. The Convertible Note Payable is secured by a pledge of substantially all of the Company’s assets.

In March 2009, the Company and CD Financial entered into an oral agreement to suspend the cash interest payments on the Convertible Note Payable until the Company returned to positive cash flows in its operations. In this oral agreement, CD Financial agreed not to give any default notices or increase interest rates due to such default (the default interest rate as defined in the Convertible Note Payable is 18%). The Company resumed interest payments on the Convertible Note Payable in August of 2009. In March 2010, CD Financial orally agreed to defer the interest owed for April 2010, in the amount of $36, until the Company returned to positive cash flows to assist the Company in meeting its short term cash flow requirements. The Company has made timely monthly interest payments, beginning with the May 2010 monthly interest obligation. As of November 21, 2011, the Company is in default under the Convertible Note Payable for the nonpayment of the principal balance due on February 21, 2011. In connection with the Company entering into the Forbearance Agreement with respect to the Notes Payable (See Note 6. Debt – Notes Payable), CD Financial has agreed to not receive any principal payments until all of the Company’s obligations to the Note Payable Holders have been repaid.

As of September 30 and June 30, 2011, accrued interest of $253 with respect to the Convertible Note Payable for each period is included in accrued expenses and other current liabilities in the condensed consolidated balance sheets, including interest in arrears of $217 in each period.

The Convertible Note Payable may be converted, at any time and at the holder’s option, into shares of the Company’s common stock under the terms and conditions set forth in the CD SPA. The conversion price is a formula that bases the conversion price on the greater of (i) 90% of the average Volume Weighted Average Price (the "VWAP") market price of the Company’s common stock for 20 trading days immediately preceding the conversion date and (ii) $2.00, subject to adjustment in the event of a stock dividend, stock split or combination, reclassification or similar event and upon certain issuances below the conversion price.

Also, in accordance with the CD SPA, the Company will issue and deliver to CD Financial, for no additional consideration, 50,000 shares of common stock, on a quarterly basis in arrears, until the Convertible Note Payable has been repaid in full, after which the Company's obligations to issue shares of common stock will no longer be applicable.

Debt discount of $324 in the three months ended September 30, 2010 was recorded in interest expense in condensed consolidated statement of operations.

Notes Payable, CD Financial LLC

On November 24, 2009, Manhattan Drug, a wholly owned subsidiary of the Company, entered into a $300 promissory note (the “CD Note”) with CD Financial. The CD Note matured on November 24, 2010 and bears interest at the rate of 5%, which interest is payable quarterly. Interest is accrued monthly and is payable upon maturity. As of September 30, 2011, the Company is in default under the CD Note as a result of the Company’s failure to repay the CD Note on its scheduled maturity date. Interest is paid quarterly. The CD Note is expected to remain outstanding until the Company satisfies the Company’s obligations under the Notes Payable. (See Note 6. Debt – Notes Payable).

On July 29, 2010, Manhattan Drug entered into a second promissory note in the amount of $40 (the “CD $40 Note”) with CD Financial. The CD $40 Note matured on October 29, 2010 and bore interest at the rate of 5%. Manhattan Drug repaid the CD $40 Note on October 29, 2010. Interest was accrued monthly and was paid on maturity.

The weighted average interest rate paid on the Company’s outstanding debt was 8.49% and 8.48% in the three months ended September 30, 2011 and 2010, respectively.