CONVERTIBLE SENIOR NOTES

3 Months Ended

Mar. 31, 2013

6. CONVERTIBLE SENIOR NOTES

At March 31, 2013 and December 31, 2012, the Company had $8,277,850 in aggregate principal amount of 3.125% convertible senior notes due May 1, 2013 outstanding. On April 30, 2013, immediately prior to the May 1, 2013 maturity date of the 2013 Notes, the Company repaid in its entirety the outstanding principal amount of the 2013 Notes, plus all accrued and unpaid interest thereon of $129,341 through such date.

The 2013 Notes were general, unsecured obligations of the Company and are described in Note 7 to the Company’s financial statements for the year ended December 31, 2012. As of March 31, 2013, the 2013 Notes were not eligible for redemption. The indenture governing the 2013 Notes, as supplemented by the supplemental indenture, did not contain any financial covenants and did 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, did 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.

In February 2012, the Company issued an aggregate of 1.9 million shares of its common stock to one of the holders of the 2013 Notes in exchange for the cancellation of $9.0 million in aggregate principal amount of such notes, including accrued and unpaid interest of $79,024. A non-cash fair value adjustment of $(2,545,530) was recorded during the three months ended March 31, 2012 as a result of the cancellation of such notes. The fair value adjustment recorded upon cancellation of these 2013 Notes was primarily attributable to the time value effect of settling these obligations at a date prior to the stated maturity of the 2013 Notes. No 2013 Notes were cancelled during the three months ended March 31, 2013.

The Company 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 March 31, 2013, with changes in the fair value of the Notes occurring since December 31, 2012, reflected in fair value adjustment in the statements of operations. 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 $8,169,215 as of March 31, 2013 differs from their total stated aggregate principal amount of $8,277,850 as of such date by $108,635. The recorded fair value of the 2013 Notes of an aggregate of $7,883,886 as of December 31, 2012 differed from their total stated aggregate principal amount of $8,277,850 as of such date by $393,964. During the three months ended March 31, 2013, the Company recorded a fair value adjustment of $(285,329) related to the 2013 Notes that remained outstanding as of March 31, 2013, that increased the recorded liability and corresponding expense. For the three months ended March 31, 2012, the Company recorded a fair value adjustment of $(664,808).

There was an immaterial change in the aggregate fair value of the 2013 Notes due to instrument specific credit risk for the three months ended March 31, 2013 and 2012.

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

The assumptions as of March 31, 2013 were:

	2013 Notes
Average risk-free rate	0.04	%
Volatility of BioSante common stock	35.6	%
Discount rate for principal payments in cash	20.0	%

The assumptions as of December 31, 2012 were:

	2013 Notes
Average risk-free rate	0.08	%
Volatility of BioSante common stock	79.9	%
Discount rate for principal payments in cash	19.4	%

The discount rate was 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 was 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 was based on observed yields as of the measurement date of one-year, two-year and three-year U.S. Treasury Bonds.

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

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