Convertible Promissory Notes and Other Notes Payable

3 Months Ended

Jun. 30, 2014

Notes to Financial Statements

NOTE 7 - Convertible Promissory Notes and Other Notes Payable

The following table summarizes our secured and unsecured promissory notes and other notes payable at June 30, 2014 and March 31, 2014.

	June 30, 2014									March 31, 2014
	Principal			Accrued						Principal			Accrued
	Balance			Interest			Total			Balance			Interest			Total
Senior Secured 10% Convertible Promissory Notes
issued to Platinum: (2)
Exchange Note issued on October 11, 2012	$	1,272,600		$	241,000		$	1,513,600		$	1,272,600		$	203,400		$	1,476,000
Investment Note issued on October 11, 2012		500,000			94,700			594,700			500,000			79,900			579,900
Investment Note issued on October 19, 2012		500,000			93,400			593,400			500,000			78,600			578,600
Investment Note issued on February 22, 2013		250,000			36,500			286,500			250,000			29,400			279,400
Investment Note issued on March 12, 2013		750,000			105,300			855,300			750,000			84,100			834,100
		3,272,600			570,900			3,843,500			3,272,600			475,400			3,748,000
Convertible promissory note issued on July 26, 2013		250,000			24,600			274,600			250,000			17,700			267,700
Total Senior notes		3,522,600			595,500			4,118,100			3,522,600			493,100			4,015,700
Aggregate note discount		(2,014,100	)		-			(2,014,100	)		(2,085,900	)		-			(2,085,900	)
Net Senior notes (non-current)	$	1,508,500		$	595,500		$	2,104,000		$	1,436,700		$	493,100		$	1,929,800
10% Convertible Promissory Notes (Unit Notes)
2013/2014 Unit Notes, due 7/31/14	$	41,700		$	1,500		$	43,200		$	1,007,500		$	35,700		$	1,043,200
2014 Unit Notes, including amended notes, due 3/31/15		2,513,400			28,200			2,541,600			50,000			200			50,200
		2,555,100			29,700			2,584,800			1,057,500			35,900			1,093,400
Note discounts		(1,236,900	)		-			(1,236,900	)		(697,400	)		-			(697,400	)
Net convertible Unit Notes (all current)	$	1,318,200		$	29,700		$	1,347,900		$	360,100		$	35,900		$	396,000
Notes Payable to unrelated parties:
7.5% Notes payable to service providers for accounts payable converted to notes payable:
Burr, Pilger, Mayer	$	90,400		$	8,500		$	98,900		$	90,400		$	6,800		$	97,200
Desjardins		185,200			18,100			203,300			178,600			14,100			192,700
McCarthy Tetrault		374,200			32,800			407,000			360,900			24,800			385,700
August 2012 Morrison & Foerster Note A		918,200			113,100			1,031,300			918,200			87,900			1,006,100
August 2012 Morrison & Foerster Note B (1)		1,379,400			229,600			1,609,000			1,379,400			195,200			1,574,600
University Health Network  (1)		549,500			70,900			620,400			549,500			60,600			610,100
		3,496,900			473,000			3,969,900			3,477,000			389,400			3,866,400
Note discount		(762,700	)		-			(762,700	)		(848,100	)		-			(848,100	)
		2,734,200			473,000			3,207,200			2,628,900			389,400			3,018,300
less: current portion		(1,115,100	)		(172,500	)		(1,287,600	)		(1,130,100	)		(133,600	)		(1,263,700	)
non-current portion and discount	$	1,619,100		$	300,500		$	1,919,600		$	1,498,800		$	255,800		$	1,754,600
5.75% and 10.25% Notes payable to insurance premium financing company (current)	$	92,900		$	-		$	92,900		$	4,900		$	-		$	4,900
10% Notes payable to vendors for accounts payable converted to notes payable	$	403,600		$	37,700		$	441,300		$	119,400		$	34,700		$	154,100
less: current portion		(403,600	)		(37,700	)		(441,300	)		(119,400	)		(34,700	)		(154,100	)
non-current portion	$	-		$	-		$	-		$	-		$	-		$	-
7.0% Note payable (August 2012)	$	58,800		$	4,800		$	63,600		$	58,800		$	3,800		$	62,600
less: current portion		(17,900	)		(4,800	)		(22,700	)		(15,800	)		(3,800	)		(19,600	)
7.0% Notes payable - non-current portion	$	40,900		$	-		$	40,900		$	43,000		$	-		$	43,000
Total notes payable to unrelated parties	$	4,052,200		$	515,500		$	4,567,700		$	3,660,100		$	427,900		$	4,088,000
less: current portion		(1,629,500	)		(215,000	)		(1,844,500	)		(1,270,200	)		(172,100	)		(1,442,300	)
non-current portion		2,422,700			300,500			2,723,200			2,389,900			255,800			2,645,700
less: discount		(762,700	)		-			(762,700	)		(848,100	)		-			(848,100	)
	$	1,660,000		$	300,500		$	1,960,500		$	1,541,800		$	255,800		$	1,797,600
Notes payable to related parties:
October 2012 7.5% Note to Cato Holding Co.	$	293,600		$	36,900		$	330,500		$	293,600		$	30,800		$	324,400
October 2012 7.5% Note to Cato Research Ltd. (1)		1,009,000			138,500			1,147,500			1,009,000			117,300			1,126,300
		1,302,600			175,400			1,478,000			1,302,600			148,100			1,450,700
Note discount		(91,400	)		-			(91,400	)		(103,200	)		-			(103,200	)
Total notes payable to related parties		1,211,200			175,400			1,386,600			1,199,400			148,100			1,347,500
less: current portion		(254,400	)		(36,900	)		(291,300	)		(259,600	)		(30,800	)		(290,400	)
non-current portion and discount	$	956,800		$	138,500		$	1,095,300		$	939,800		$	117,300		$	1,057,100
____________
(1) Note and interest payable solely in restricted shares of the Company's common stock.
(2) See Note 10, Subsequent Events,regarding Note Conversion and Warrant Amendment with Platinum

Significant changes in our convertible promissory notes and other promissory notes since March 31, 2014 are described below:

10% Convertible Notes Issued in Connection with 2014 Unit Private Placement

As described more completely in the section entitled 2014 Unit Private Placement in Note 8, Capital Stock, between late March 2014 and June 30, 2014, we issued to accredited investors 10% convertible notes (the 2014 Unit Notes) in the aggregate face amount of $1,570,000, including an aggregate face amount of $750,000 of such notes issued to Platinum and 2014 Unit Notes in the aggregate principal amount of $50,000 issued prior to March 31, 2014, in connection with our private placement offering of Units. (See Note 10, Subsequent Events, for information regarding additional notes issued in connection with the 2014 Unit Private Placement after June 30, 2014.) The 2014 Unit Notes mature on March 31, 2015 (Maturity) and the outstanding principal of the 2014 Unit Notes and their related accrued interest (the Outstanding Balance) is convertible into shares of our common stock at a conversion price of $0.50 per share at or prior to Maturity, at the option of the investor. In addition, upon our consummation of either (i) an equity or equity-based public financing registered with the SEC, or (ii) an equity or equity-based private placement, or series of private placements, not registered with the SEC, in either case resulting in gross cash proceeds to us of at least $10.0 million prior to Maturity (a Qualified Financing), the Outstanding Balance of the 2014 Unit Notes will automatically convert into the securities sold in the Qualified Financing, based on the following formula: (the Outstanding Balance as of the closing of the Qualified Financing) x 1.25 / (the per security price of the securities sold in the Qualified Financing). This automatic conversion feature results in a contingent beneficial conversion feature which will be recorded upon the consummation of a Qualified Financing. Under certain circumstances, the holders of the 2014 Unit Notes may request payment in cash in lieu of automatic conversion into the securities of the Qualified Financing.

We allocated the proceeds from the sale of the units to the 2014 Unit Notes, the common stock and the warrants comprising the units based on the relative fair value of the individual securities in the unit on the date of the unit sale. Based on the short-duration of the 2014 Unit Notes and their other terms, we determined that the fair value of the 2014 Unit Notes at the date of issuance was equal to their face value. Accordingly, we recorded an initial discount attributable to each 2014 Unit Note for an amount representing the difference between the face value of the 2014 Unit Note and its allocated relative value. Additionally, the 2014 Unit Notes contain an embedded conversion feature, certain of which had an intrinsic value at the issuance date, which value we treated as an additional discount attributable to those 2014 Unit Notes, subject to limitations on the absolute amount of discount attributable to each 2014 Unit Note. We recorded a corresponding credit to additional paid-in capital, an equity account, attributable to the beneficial conversion feature. We amortize the aggregate discount attributable to the 2014 Unit Notes using the effective interest method over the respective term of each 2014 Unit Note.  Based on their respective discounts, the effective interest rates attributable to the 2014 Unit Notes range from 38.7% to 701.9%, with a weighted average rate of 193.5%.

Amendment of 2013/2014 Unit Notes and Warrants

Effective May 31, 2014, we entered into note and warrant amendment agreements with substantially all holders of our 2013/2014 Unit Notes and 2013/2014 Unit Warrants, each of whom agreed to (i) modify certain terms of their 2013/2014 Unit Note to conform to the corresponding terms of the 2014 Unit Notes, including an extension of the maturity date of their 2013/2014 Unit Note from July 30, 2014 to March 31, 2015, as well as adoption of the automatic conversion and 25% conversion premium features related to consummation of a Qualified Financing, as described above (Amended 2013 Unit Notes), and (ii) modify certain terms of their 2013/2014 Unit Warrants, including the exercise price and expiration date, to conform to the corresponding terms of the 2014 Unit Warrants (Amended 2013 Unit Warrants). Holders of 2013/2014 Unit Notes having an aggregate initial face amount of $895,000 agreed to such amendments. The maturity date of the $41,700 face amount of 2013/2014 Unit Notes outstanding at June 30, 2014 and payable to holders who did not agree to amend their 2013/2014 Unit Note and 2013/2014 Unit Warrant remained July 30, 2014 and the $1.00 per share exercise price and July 30, 2016 expiration date of the 2013/2014 Unit Warrants held by such holders remains unchanged. Between April 1, 2014 and June 30, 2014, we repaid 2013/2014 Unit Notes having an initial face value of $70,800.

We determined that the modification of the 2013/2014 Unit Notes and the 2013/2014 Unit Warrants should be accounted for as an extinguishment of debt. Considering the cash flows and the non-contingent and contingent beneficial conversion features of the Amended 2013 Notes and other factors, including market interest rates for unsecured debt of similar quality and the probability of their conversion to securities in a Qualified Financing, we determined that the fair values of the Amended 2013 Unit Notes, aggregating $1,394,000, represented a substantial premium over their aggregate $943,400 face values. In accordance with the provisions of ASC 470-20, Debt with Conversion and Other Options, we recognized the premium in excess of the face value, $450,600, as a credit to additional paid-in capital, an equity account. Consequently, we recorded the liability for the Amended 2013 Unit Notes at their face values. We recognized the difference between the pre-modification carrying values of the notes and their fair values, an aggregate of $867,500, as a non-cash charge to loss on extinguishment of debt in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) for the three months ended June 30, 2014. As described in greater detail in Note 8, Capital Stock, we determined the incremental fair value of the Amended 2013 Unit Warrants, which are treated as equity instruments, to be $272,900. We recognized this incremental fair value as an additional component of loss on extinguishment of debt in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended June 30, 2014 and as a credit to additional paid-in capital.  Certain of the 2013/2014 Unit Notes contained a beneficial conversion feature when they were originally issued. We have accounted for the repurchase of the beneficial conversion feature at the time of the modification, an aggregate of $614,200, as a reduction to the loss on extinguishment of debt in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended June 30, 2014 with a corresponding reduction to additional paid-in capital. The net amount of the loss on extinguishment of debt related to the Amended 2013 Unit Notes and Amended 2013 Unit Warrants recognized in accompanying Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended June 30, 2014 is $526,200. Since the Amended 2013 Unit Notes have the same features and maturity as the 2014 Unit Notes, the two sets of notes are aggregated in the summary table above.  Only the 2013/2014 Unit Notes that were not amended and that reach maturity at July 30, 2014 are reported in the 2013/2014 Unit Note category in the summary table.

Extension of McCarthy Tetrault Note Maturity Date

On June 11, 2014, we agreed with McCarthy Tetrault, our legal counsel in Ontario, Canada (McCarthy), to extend the maturity date of our promissory note payable to McCarthy from June 14, 2014 to the earlier of (i) September 30, 2014, (ii) consummation of a financing in which we receive gross cash proceeds of at least $15.0 million, or (iii) consummation of a change of control of the Company, as defined in the McCarthy note.  McCarthy also agreed to forbear with respect to the requirement that we make monthly payments on the McCarthy note from the date of the agreement until maturity and granted us a waiver with respect to previously missed monthly payments.

Interest on Notes Payable upon Exercise of Warrants

Between August 2012 and October 2012, we issued to Morrison & Foerster, LLP, our intellectual property counsel (M&F), Cato Research Ltd., our contract research organization for development of AV-101 (CRL), and University Health Network, our long-term stem cell research collaborator (UHN), certain unsecured promissory notes and related warrants.  The respective notes are payable solely in restricted shares of our common stock pursuant to M&F’s, CRL’s, and UHN’s surrender from time to time of all or a portion of the principal and interest balance due on their respective notes in connection with their concurrent exercise of their respective warrant.  Between March 31, 2014 and June 30, 2014 we adjusted the M&F warrant, the CRL warrant and the UHN warrant to increase the number of restricted shares available for purchase by 34,390 shares, 21,192 shares and 10,275 shares, respectively, based on interest accrued on the underlying notes through June 30, 2014.  We have recorded the fair value of the additional warrant shares, an aggregate of $16,500, as a charge to interest expense and a corresponding credit to additional paid-in capital.