Quarterly report pursuant to sections 13 or 15(d)

CONVERTIBLE PROMISSORY NOTES AND DERIVATIVE LIABILITY

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CONVERTIBLE PROMISSORY NOTES AND DERIVATIVE LIABILITY
3 Months Ended
Mar. 31, 2012
Notes to Financial Statements  
CONVERTIBLE PROMISSORY NOTES AND DERIVATIVE LIABILITY

 

The Company owes the principal amount of $230,000 to a total of six (6) investors who were issued Convertible Promissory Notes under the terms of a Convertible Promissory Note Agreement dated December 13, 2010 and amended on March 23, 2011 as follows:

 

  Principal Amount   Issue Date Maturity Date
$ 100,000   12-13-10 12-13-12
$ 25,000   4-11-11 4-11-13
$ 35,000   4-15-11 4-15-13
$ 10,000   4-22-11 4-22-13
$ 50,000   4-27-11 4-27-13
$ 10,000   6-6-11 6-6-13

 

These notes bear interest at a rate of 5% per annum, with all principal and accrued interest payable on the maturity date. Principal and unpaid accrued interest due under these notes shall be automatically converted into our equity securities at the closing of our next equity financing in which the gross proceeds exceed $1,000,000 (the Next Equity Financing”), based on a conversion price equal to one-third of the price per share of the stock sold to outside investors in the Next Equity Financing. If the Next Equity Financing does not occur on or before the maturity date, the principal and unpaid accrued interest can be converted at our option into shares of our most recently closed equity financing, based on a conversion price equal to one-third of the price per share of the most recently closed equity financing.

 

In addition, we also currently owe the principal sum of $41,537 to Molecular Medicine Research Institute (MMRI”), who was issued a series of Convertible Promissory Notes under the terms of a Note and Warrant Purchase Agreement as follows:

 

  Principal Amount   Issue Date Maturity Date
$ 16,037   11-1-10 11-1-12
$ 4,250   12-1-10 12-1-12
$ 4,250   1-1-11 1-1-13
$ 4,250   2-1-11 2-1-13
$ 4,250   3-1-11 3-1-13
$ 4,250   4-1-11 4-1-13
$ 4,250   5-1-11 5-1-13

 

These notes bear interest at a rate of 5% per annum, with all principal and accrued interest payable on demand by the holder on or after the maturity date. Principal and unpaid accrued interest due under these notes shall be converted, at the option of the holder, into our equity securities at the closing of our next equity financing in which the gross proceeds exceed $1,000,000 (the Next Equity Financing”), based on a conversion price equal to the price per share of the stock sold to outside investors in the Next Equity Financing. If the Next Equity Financing does not occur on or before the maturity date, the principal and unpaid accrued interest can be converted at our option into a new class of equity securities to be designated Series A Preferred Stock,” with the conversion price per share to be based upon a pre-money” valuation of the company at that time of $2,000,000. These notes also include 20% warrant coverage which expire seven years from the date of the note.

 

We are currently party to a Sponsored Research Agreement with MMRI under which we are provided office and laboratory space, use of research equipment, and other items within MMRI’s research facility in exchange for a monthly Sponsor Research Fee. The notes detailed above, in conjunction with certain warrants to purchase stock, were issued in payment of 50% of the respective monthly fees due under this agreement.

We also owe the principal sum of $500,000 to a total of ten (10) investors who were issued Secured Convertible Promissory Notes under the terms of a Senior Secured Convertible Promissory Note Agreement dated December 28, 2010, as amended May 20, 2011 as follows:

 

  Principal Amount   Issue Date Maturity Date
$ 125,000   12-28-10 12-6-11
$ 62,500   12-28-10 12-6-11
$ 100,000   4-15-11 12-6-11
$ 25,000   4-18-11 12-6-11
$ 25,000   5-13-11 12-6-11
$ 50,000   5-19-11 12-6-11
$ 25,000   5-24-11 12-6-11
$ 25,000   5-24-11 12-6-11
$ 31,250   6-7-11 12-6-11
$ 31,250   6-9-11 12-6-11

 

Principal and interest, accrued at the rate of 5% per annum, are due and payable on December 6, 2011, unless earlier converted into equity securities of the company. Principal and unpaid accrued interest shall be converted, at the option of the holder, into equity securities of the company at the closing of our next equity financing in which gross aggregate proceeds to the Company exceed $1,750,000 and the Company registers its stock for sale pursuant to the Securities and Exchange Act of 1934. The conversion price shall be equal to one-third of the price per share of this financing. If this financing does not occur on or before the maturity date, the principal and unpaid accrued interest can be converted, at the option of the holders of a majority of the aggregate principal amount of the senior secured convertible promissory notes, into common stock of the Company. These notes were formerly secured by collateral consisting of substantially all assets of the company. Under the May 20, 2011 amendment to the Senior Secured Convertible Promissory Note Agreement, this security interest was terminated. Under the terms of the agreement as amended, we may not incur any indebtedness for borrowed money except pursuant to an agreement that provides that repayment of such indebtedness will be subordinated to repayment of the Notes. In addition, we may not encumber any of our property during such time as the Notes remain due and owing. As provided in the amendment the note holders have warrant coverage equal to 100% of the note principal at an exercise price equal to 100% of that to outside investors in the closing of the next equity financing of $1,175,000, but not to be less than $0.60 per share. The warrants expire five years from the date of the next equity financing closing. We are currently in default on these notes. See footnote 9 Commitments and Contingencies for further information.

 

In addition, we owe the principal sum of $12,240 to The Parkinson’s Institute, which was issued a Convertible Promissory Note under the terms of a Note and Warrant Purchase Agreement dated August 25, 2010. This note bears interest at a rate of 5% per annum, with all principal and accrued interest payable on demand by the holder on or after the maturity date of August 25, 2012. Principal and unpaid accrued interest due under this note shall be automatically converted into our equity securities at the closing of our next equity financing in which the gross proceeds exceed $1,000,000 (the Next Equity Financing”), based on a conversion price equal to the price per share of the stock sold to outside investors in the Next Equity Financing. If the Next Equity Financing does not occur on or before the maturity date, the principal and unpaid accrued interest can be converted at our option into a new class of equity securities to be designated Series A Preferred Stock,” with the conversion price per share to be based upon a pre-money” valuation of the company at that time of $2,000,000. In addition the note holder has warrant coverage equal to 5% of the note principal with an warrant exercise price equal to in the next equity financing per share price, and expiration seven years from the date of the note.

 

During the twelve months ended December 31, 2011, the Company issued convertible promissory notes to various investors for aggregate proceeds of $90,000. Principal and interest on these convertible notes, accrued at the rate of 6% per annum, are due and payable 180 days from the issuance date, unless earlier converted into equity securities of the Company, at the option of the Holder of the promissory note. Conversion of the principal and interest will be at either $0.10 or $0.20 per share. In addition, the Company issued warrants to the note holders to purchase a number of shares of capital stock issued to investors at the equivalent to 100% of the principal amount of the notes divided by the respective price per share of the stock which the principal of the note converts at. The warrants expire one year from the date of the note. During the three months ended March 31, 2012, $67,000 of these convertible notes converted to Company Common shares.

 

  Principal Amount     Issue Date     Maturity Date     Converted to Equity     Conversion Date
$ 21,000     7-28-11     1-24-12   $ 21,000     February 2012
$ 21,000     7-28-11     1-24-12   $ 21,000     February 2012
$ 10,000     8-16-11     2-12-12   $ 10,000     February 2012
$ 20,000     8-18-11     2-14-12            
$ 5,000     9-6-11     3-4-12   $ 5,000     February 2012
$ 5,000     9-9-11     3-7-12   $ 5,000     February 2012
$ 3,000     9-26-11     3-24-12            
$ 5,000     11-2-11     4-30-12   $ 5,000     February 2012

 

During the period October, 2011 through March 31, 2012, the Company issued convertible promissory notes to various investors for aggregate proceeds of $168,750. Principal and interest on these convertible notes, accrue at the rate of 6% per annum, are due and payable 180 days from the issuance date, unless earlier converted into equity securities of the Company, at the option of the Holder of the promissory note. Conversion of the principal and interest will be at either $0.03 or $0.05 per share.

 

  Principal Amount     Issue Date     Maturity Date     Converted to Equity     Conversion Date
$ 5,000     10-27-11     4-24-12   $ 5,000     February 2012
$ 10,000     11-23-11     5-21-12            
$ 30,000     11-30-11     5-28-12   $ 30,000     February 2012
$ 10,000     12-8-11     6-5-12   $ 10,000     February 2012
$ 5,000     12-14-11     6-11-12   $ 5,000     February 2012
$ 5,000     12-30-11     6-27-12   $ 5,000     February 2012
$ 100,000     1-17-12     7-15-12            
$ 3,750     2-21-12     8-19-12   $ 3,750     February 2012

 

During the three months ended March 31, 2012, the Company issued two convertible promissory notes to one investor totaling $54,500. Principal and interest on these convertible notes accrue at the rate of 8% per annum. The holder of the note can convert the note to common shares of the Company any time after the initial 180 days of the note at a conversion price that is a percentage of an average of the market low over for a certain number days over a greater number of prior number of trading days from the date of notice to convert.

 

  Principal Amount   Issue Date Maturity Date
$ 37,500   2-7-12 10-27-12
$ 17,000   11-23-11 5-21-12

 

In January, 2012, a vendor convertible their trade account to convertible promissory notes for the amount due them at the time of the note plus future billings, amounting to $244,988. These notes accrue interest at 8.5% and have the option to convert to common stock at any time by the note holder, at a conversion price of $0.11 per share. These notes are payable upon demand.

In March, 2012, a third party acquired some older Company trade payables in exchange for a convertible promissory note in the amount of $15,000, bearing an interest rate of 12% per annum, due September 9, 2012 and convertible at any time by the Holder. Simultaneous with the convertible promissory note transaction the note Holder elected to convert the full note into common shares of the Company at a conversion price of $0.031 per share.

 

Also in March, 2012, the Company issued a convertible promissory note for $9,500 as part of a unit debt instrument which consisted of a return on investment (“ROI” ) agreement and the convertible promissory note in return for $10,000. The ROI has a redemption value of $10,500 due on demand and the convertible promissory note is for $9,500, non-interest bearing, due September 20, 2012, and is convertible to common shares after six months from the date of the note at a conversion price that is 50% of the lowest trading price over the 20 prior trading dates from the date of conversion notice

 

In connection with certain liabilities incurred in connection with our March 5, 2008 acquisition of the intellectual property rights to the MANF protein compound, we have an outstanding Promissory Note issued as follows:

 

Note Payable To:   Amount   Due Date
Neurotrophics, Inc. $ 222,083   3-5-15

 

This note bears interest at the rate of 2% per annum.

 

On October 4, 2011 we received short-term financing in the amount of $150,000 under a Promissory Note issued to Dr. Samuel Herschkowitz as follows:

 

Note Payable To:   Amount   Due Date
Samuel Herschkowitz $ 150,000   4-1-12

 

The balance due under the Note bears interest at the rate of twenty percent (20%) per year.

 

In addition, in conjunction with the Promissory Note, Dr. Herschkowitz received an equity bonus of 2,054,794 shares of common stock. As security for our obligations under the note, we have pledged in favor of the note holder 8,219,178 shares of common stock. We are currently in default under this note. In April 2012, a third party acquired the note becoming the new note holder. As part of this transaction the 8,219,178 shares of common stock were returned to the company. Other terms of the new note are being negotiated.

 

At March 31, 2012, total future minimum payments under the Convertible Notes are as follows:

 

2012 $ 1,084,5150  
2013   151,250  
       
Total minimum payments   1,235,765  
       
Less: Debt discount resulting from warrant and derivative liabilities   (118,914 )
       
Total   1,116,851  
       
Current portion of convertible promissory notes   (1,049,059 )
       
Convertible promissory notes - net of current portion $ 67,792  

 

A number of Company’s convertible notes contain embedded derivatives wherein their automatic conversion, which is contingent upon a future equity raise, can accelerate the realization of the expected payout for each note. This feature creates the possibility of a greater than expected return for the note holder and thus a higher than expected liability for the Company. The value of this feature was estimated for each note using the probability expected return method, in which the payout of distinct potential early conversion scenarios was discounted to the present using the expected IRR of the note and compared with the present value of the note if held to maturity. Probabilities were applied to the value of early conversion in each scenario to arrive at a probability weighted value of the early conversion feature.

 

As of March 31, 2012 and December 31, 2011, the fair value of the derivative liability was $73,007 and $140,709, respectively. The changes in fair value for the three month periods ended March 31, 2012 and March 31, 2011 of $67,698 and $ 38,260 respectively, and the period from January 14, 2008 (date of inception) to March 31, 2012 of $479,811 have been recorded in the accompanying statements of operations as a component of other income (expense).