CONVERTIBLE SENIOR NOTES

6 Months Ended

Jun. 30, 2012

CONVERTIBLE SENIOR NOTES

CONVERTIBLE SENIOR NOTES

5.CONVERTIBLE SENIOR NOTES

The Company has outstanding 3.125% convertible senior notes due May 1, 2013 (the 2013 Notes).  The aggregate principal amount of the 2013 Notes outstanding at July 31, 2012, June 30, 2012 and December 31, 2011 was $8,277,850, $11,782,000 and $20,782,000, respectively.  In February 2012, the Company issued 1,868,055 shares of its common stock to one of the holders of the 2013 Notes in exchange for the cancellation of $9,000,000 in aggregate principal amount of such notes and the related accrued and unpaid interest on such notes.  A non-cash fair value adjustment of $(2,545,530) was recorded during the first quarter of 2012 as a result of the cancellation of such notes. The fair value adjustment recorded upon the cancellation of the notes is primarily attributable to the time value effect of settling these obligations at a date prior to the stated maturity of the notes.  In July 2012, the Company issued an aggregate of 1,784,070 shares of its common stock to two of the holders of the 2013 Notes in exchange for the cancellation of $3,504,150 in aggregate principal amount of such notes and accrued and unpaid interest of $20,686.  It is anticipated that an additional non-cash fair value adjustment of $(611,621) will be recorded during the third quarter of 2012 as a result of the July 2012 cancellation of such notes.

The remaining $8,277,850 aggregate principal amount of the 2013 Notes are exchangeable at the option of the holder or upon certain specified events into an aggregate of approximately 370,871 shares of the Company’s common stock at a conversion price of $22.32 per share.  The 2013 Notes are general, unsecured obligations of the Company and are described in Note 7 to the Company’s financial statements for the year ended December 31, 2011.  As of June 30, 2012, the 2013 Notes were not eligible for redemption. The indenture governing the 2013 Notes, as supplemented by the supplemental indenture, does not contain any financial covenants and does not restrict the Company from paying dividends, incurring additional debt or issuing or repurchasing the Company’s other securities.  In addition, the indenture, as supplemented by the supplemental indenture, does not protect the holders of the 2013 Notes in the event of a highly leveraged transaction or a fundamental change of the Company except in certain circumstances specified in the indenture.

As described in Note 3, “Liquidity and Capital Resources,” from time to time, the Company may purchase, exchange or restructure its outstanding 2013 Notes through cash purchases and/or exchanges for other equity securities of the Company, in open market purchases, privately negotiated transactions and/or a tender offer.

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 otherwise would require specialized valuation, bifurcation and recognition.  Accordingly, the Company has adjusted the carrying value of the 2013 Notes to their fair value as of June 30, 2012, with changes in the fair value of the 2013 Notes occurring since December 31, 2011, reflected in fair value adjustment in the unaudited condensed statements of operations.  As described in Note 9, “Fair Value Measurements,” the fair value of the 2013 Notes is based on Level 2 inputs.  The recorded fair value of the 2013 Notes of an aggregate of $10,477,635 as of June 30, 2012 differs from their total stated aggregate principal amount of $11,782,000 as of such date by $1,304,365.  The recorded fair value of the 2013 Notes of an aggregate of $17,336,760 as of December 31, 2011 differed from their total stated aggregate principal amount of $20,782,000 as of such date by $3,445,240.  During the three and six months ended June 30, 2012, the Company recorded a fair value adjustment of $15,953 and $(3,194,385) related to the 2013 Notes that remained outstanding as of June 30, 2012, that for the three months ended June 30, 2012 decreased the recorded liability and corresponding expense and for the six months ended June 30, 2012 increased the recorded liability and corresponding expense.  For the three and six months ended June 30, 2011, the Company recorded a fair value adjustment of $(1,753,000) and $(2,392,000) that increased the recorded liability and corresponding expense.

For the six months ended June 30, 2012 and 2011, approximately $(22,000) and $415,000, respectively, of the fair value adjustment was attributable to the change in instrument specific credit risk.  The change in the aggregate fair value of the 2013 Notes due to instrument specific credit risk for the six months ended June 30, 2012 was estimated by calculating the difference between the June 30, 2012 fair value of the 2013 Notes as recorded and what the fair value of the 2013 Notes would have been on June 30, 2012 if the December 31, 2011 discount rate continued to be used in the calculation.  The instrument specific credit risk for both periods has increased the fair value of the 2013 Notes as market borrowing rates have decreased for similarly rated companies and are estimated to have decreased for the Company as well, indicating a lower credit spread assuming no significant changes in the risk-free borrowing rate.

The Company establishes the value of the 2013 Notes based upon contractual terms of the 2013 Notes, as well as certain key assumptions.

The assumptions as of June 30, 2012 were:

Average risk-free rate	0.19	%
Volatility of BioSante common stock	86.6	%
Discount rate for principal payments in cash	18.8	%

The assumptions as of December 31, 2011 were:

Average risk-free rate	0.19	%
Volatility of BioSante common stock	77.4	%
Discount rate for principal payments in cash	18.5	%

The discount rate is based on observed yields as of the measurement date for debt securities of entities having a Ca and Caa3 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 six month and one-year U.S. Treasury Bonds.