Note 6. Notes Payable

6 Months Ended

Jun. 30, 2011

Debt Disclosure [Text Block]

6. NOTES PAYABLE

Notes payable assumed in connection with the acquisition of ProlX

In connection with the acquisition of ProlX, the Company assumed two loan agreements under which approximately $199,000 was outstanding at December 31, 2010.  The Company was required to repay such loans if it commercialized or sold the product, PX-12, that was the subject of such agreement.  In February 2011, the Company provided notice to the counterparty to such agreements that it does not intend to commercialize PX-12.  As a result, the agreements terminated in March 2011 and the Company is no longer required to repay such loans.  Accordingly, the Company derecognized the notes payable in March 2011 and recognized $199,000 in other income.

Notes payable — General Electric Capital Corporation

On February 8, 2011, the Company entered into a Loan and Security Agreement with General Electric Capital Corporation (“GECC”, and together with the other financial institutions that may become parties to the Loan and Security Agreement, the “Lenders”), pursuant to which the Lenders agreed to make a term loan in an aggregate principal amount of $5.0 million (the “Term Loan”), subject to the terms and conditions set forth in the Term Loan.  On February 8, 2011, the Lenders funded a Term Loan in the principal amount of $5.0 million on a total facility of $12.5 million.  Subject to the satisfaction of certain conditions, the Company may, at its option, access a portion or all of the remaining $7.5 million term loan facility on or before November 1, 2011.  The Term Loan accrues interest at a fixed rate of 10.64% per annum and is payable over a 42-month period.  The Company is required to make monthly payments of interest only, through November 1, 2011, and is required to repay the principal amount of the Term Loan over a period of 32 consecutive equal monthly installments of principal of $151,515 plus accrued interest, commencing on December 1, 2011.  At maturity of the Term Loan, the Company is also required to make a final payment equal to 1.5% ($75,000) of the Term Loan, which has been treated as a discount to the loan.  The Company may incur additional fees if it elects to prepay the Term Loan.  In connection with the Term Loan, on February 8, 2011, the Company issued to an affiliate of GECC a warrant to purchase up to an aggregate of 48,701 shares of common stock at an exercise price of $3.08 per share.  This warrant, classified as equity, is immediately exercisable and will expire on February 8, 2018.

The Company allocated the aggregate proceeds of the Term Loan between the warrant and the debt obligations based on their relative fair values.  The fair value of the warrant issued to the affiliate of GECC was calculated utilizing the Black-Scholes option-pricing model.  The Company is amortizing the relative fair value of the warrants of $114,447 together with the final payment of $75,000 as a discount over the term of the loan through maturity date using the effective interest method, resulted in a total effective interest rate of 14.89%.  As of June 30, 2011, the unamortized Term Loan discount was $158,452.  If the maturity of the debt is accelerated due to an event of default, then the amortization would also be accelerated.

The loan agreement with GECC contains certain restrictive covenants that limit or restrict the Company’s ability to incur indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into certain transactions with affiliates, pay dividends or make distributions, or repurchase stock.  The loan agreement also requires that the Company have 12 months of unrestricted cash and cash equivalents (as calculated in the loan agreement) as of each December 31 during the term of the loan agreement.  As security for its obligations under the Loan agreement, the Company granted the Lenders a lien on substantially all of its assets, excluding intellectual property.  The Company was in compliance with its financial and non-financial covenants as of June 30, 2011.

Deferred financing costs of $196,039 were capitalized as other assets and are being amortized to interest expense over the term of the Term Loan.  As of June 30, 2011, the unamortized Term Loan deferred financing costs were $163,966.

As of June 30, 2011, the future contractual principal payments on the Term Loan are as follows:

2011	$	303,030
2012		1,818,182
2013		1,818,182
2014		1,060,606
Total	$	5,000,000

A reconciliation of the face value of the Term Loan to the carrying value of the Term Loan as of June 30, 2011 is as follows:

Total Term Loan, including final payment fee (face value)	$	5,075,000
Less: Term Loan  discount balance		(158,452	)
Total Term Loan carrying value		4,916,548
Less: current portion of notes payable		(1,131,660	)
Long-term notes payable	$	3,784,888

 Interest expense for the three months and six months ended June 30, 2011, all of which related to the Term Loan, was $175,030 and $274,391, respectively.    Interest expense is calculated using the effective interest method and includes non-cash amortization of debt discount and capitalized loan fees in the amount of $40,552 and $63,068 for the three months and six months ended June 30, 2011, respectively.