CONVERTIBLE SENIOR NOTES

9 Months Ended

Sep. 30, 2011

CONVERTIBLE SENIOR NOTES

CONVERTIBLE SENIOR NOTES

7. CONVERTIBLE SENIOR NOTES

As of September 30, 2011, the Company had two series of convertible senior notes outstanding:

· $20,782,000 principal amount of 3.125% Convertible Senior Notes due May 1, 2013 (2013 Notes), convertible at the option of the holder into an aggregate of 5,586,559 shares of the Company’s common stock at a conversion price of $3.72 per share; and

· $1,234,000 principal amount of 3.125% Convertible Senior Notes due November 1, 2011 (2011 Notes and collectively with the 2013 Notes, the Notes), convertible at the option of the holder into an aggregate of 24,789 shares of the Company’s common stock at a conversion price of $49.78 per share.

Subsequent to the end of the third quarter of 2011 on November 1, 2011, the maturity date of the 2011 Notes, the Company repaid in its entirety the outstanding principal amount of the 2011 Notes, plus all accrued and unpaid interest thereon through such date.

Interest on the 2013 Notes is payable on May 1 and November 1 each year through maturity. Under certain circumstances, the Company may redeem some or all of the 2013 Notes at a redemption price equal to 100 percent of the principal amount of the 2013 Notes plus accrued and unpaid interest.  The Company may be obligated to repurchase the 2013 Notes at a repurchase price equal to 100 percent of the principal amount of the 2013 Notes plus accrued and unpaid interest if prior to their stated maturity there is an occurrence of a fundamental event, as described in the indenture.

The Company has elected to record the 2013 Notes at fair value in order to simplify the accounting for the convertible debt, inclusive of the redemption, repurchase and conversion adjustment features which would otherwise require specialized valuation, bifurcation and recognition.  The Company has elected to record the 2011 Notes at fair value as of September 30, 2011 but with such fair value being determined as their total stated principal amount of $1.2 million in light of the proximity of the November 1, 2011 maturity date.  Prior to September 30, 2011, the Company recorded the 2011 Notes at fair value but with such fair value being determined in a manner similar to the 2013 Notes.  Accordingly, the Company has adjusted the carrying value of the Notes to their fair value as of September 30, 2011, with changes in the fair value of the Notes occurring since December 31, 2010 reflected in convertible note fair value adjustment in the unaudited condensed statements of operations.  The fair value of the Notes are based on Level 2 inputs.  The aggregate recorded fair value of the Notes of $20.5 million as of September 30, 2011 differs from their total stated principal amount of $22.0 million as of such date by $1.5 million.  The aggregate recorded fair value of the Notes of $18.6 million as of December 31, 2010 differs from their total stated principal amount of $22.0 million as of such date by $3.4 million.  The Company recorded a fair value adjustment of ($0.5) million related to the Notes for the three months ended September 30, 2011 to decrease its recorded liability and corresponding expense. The Company recorded a fair value adjustment of $1.9 million related to the Notes for the nine months ended September 30, 2011 to increase its recorded liability and corresponding expense.

The Company establishes the value of the Notes based upon contractual terms of the Notes, as well as, in the case of the 2013 Notes and as of December 31, 2010, the 2011 Notes, certain key assumptions.

The assumptions as of December 31, 2010 were:

	2013 Notes		2011 Notes
Average risk-free rate	0.82	%	0.29	%
Volatility of BioSante common stock	78.7	%	61.0	%
Discount rate for principal payments in cash	17.0	%	17.0	%

The assumptions as of September 30, 2011 were:

	2013 Notes
Average risk-free rate	0.19	%
Volatility of BioSante common stock	64.6	%
Discount rate for principal payments in cash	16.0	%

The discount rate is based on observed yields as of the measurement date for debt securities of entities having a C and Ca rating for long-term corporate obligations as assigned by Moody’s Investors Service.  Volatility is based on the historical fluctuations in the Company’s stock price for a period of time equal to the remaining time until the debt maturity.  The risk-free rate is based on observed yields as of the measurement date of one-year, two-year and three-year U.S. Treasury Bonds.