Notes Payable and Debt

9 Months Ended

Sep. 30, 2011

6. Notes Payable and Debt


Convertible Notes Payable to Significant Stockholders		September 30, 2011		December 31, 2010
Unsecured convertible promissory note; interest rate of 5%; due December 31, 2010		$	9,000,000	$	9,000,000
Unsecured convertible promissory note; interest rate of 5%; due December 31, 2010	BCF		10,000,000		10,000,000
Unsecured convertible promissory note; interest rate of 5%; due December 31, 2010	BCF		5,000,000		5,000,000
Unsecured convertible promissory note; interest rate of 5%; due December 31, 2010			5,000,000		5,000,000


Aggregate carrying value		$	29,000,000	$	29,000,000

Interest expense of $362,499 and $1,087,497 was recorded related to the convertible notes payable for the three and nine months ended September 30, 2011. Interest expense of $652,927 and $1,899,233 was recorded related to the convertible notes payable for the three and nine months ended September 30, 2010.

The above unsecured convertible promissory notes may be converted, at the option of the Purchasers, into (i) shares of the Company’s common stock at a conversion price per share of $2.50, (ii) the right to receive future payments related to the Company’s molecular imaging products in amounts equal to 2% of the Company’s pre-commercial revenue related to such products plus 0.5% of future net sales of such products for each $1,000,000 of outstanding principal and interest that a Purchaser elects to convert into future payments, or (iii) a combination of (i) and (ii). Any outstanding notes that are not converted into the Company’s common stock or into the right to receive future payments became due and payable on December 31, 2010. As of September 30, 2011, the holders of this debt have not made any formal demand for payment and the Company continues to accrue interest on this obligation. However, each Purchaser is prohibited from effecting a conversion into common stock if at the time of such conversion the common stock issuable to such Purchaser, when taken together with all shares of common stock then held or otherwise beneficially owned by such Purchaser exceeds 19.9%, or 9.99% ISVP, of the total number of issued and outstanding shares of the Company’s common stock immediately prior to such conversion unless and until the Company’s stockholders approve the conversion of all of the shares of common stock issuable there under.

The Company is subject to certain debt covenants pursuant to the March 2008 Amended Purchase Agreement and the June 2008 Purchase Agreement (the “Purchase Agreements”). If the Company (i) fails to pay the principal or interest due under the Purchase Agreements, (ii) files a petition for action for relief under any bankruptcy or similar law or (iii) an involuntary petition is filed against the Company, all amounts borrowed under the Purchase Agreements may become immediately due and payable by the Company. In addition, without the consent of the Purchasers, the Company may not (i) create, incur or otherwise, permit to be outstanding any indebtedness for money borrowed, (ii) declare or pay any cash dividend, or make a distribution on, repurchase, or redeem, any class of the Company’s stock, subject to certain exceptions or sell, lease, transfer or otherwise dispose of any of the Company’s material assets or property or (iii) dissolve or liquidate.

Beneficial Conversion Feature (BCF)

Three of the unsecured promissory notes were issued with a conversion price of $2.50 which was below the market price of the Company’s common stock on the dates the agreements were entered into and resulted in the recording of a beneficial conversion feature. The Company recorded a BCF of $1,400,000 on (the “ISVP”) note and a BCF of $380,000 on (the “2008 RG”) note which was recognized as a decrease in the carrying value and an increase to additional paid-in capital. The BCF was fully recognized as interest expense using the effective interest method through December 31, 2010. Therefore, the Company did not record any interest expense related to the BCF for the three and nine months ended September 30, 2011. The Company recorded $229,995 and $604,303 of interest expense related to the BCF for the three and nine months ended September 30, 2010.

Promissory Notes


Demand Notes Payable to Significant Stockholder	September 30, 2011		December 31, 2010
Unsecured demand note payable; interest rate of 7% to Neurobiologics, Inc. (a subsidiary of the Company)	$	1,000,000	$	1,000,000
Unsecured demand note payable; interest rate of 7%: issued December 2009		350,000		350,000
Unsecured demand notes payable; interest rate of 7%: issued January 2010 - December 2010		3,310,000		3,310,000
Unsecured demand notes payable; interest rate of 7%: issued January 2011 - September 2011		1,940,000		—


		6,600,000		4,660,000
Accrued interest		569,501		270,759


Aggregate carrying value	$	7,169,501	$	4,930,759

Interest expense of $112,518 and $298,742 was recorded related to the demand notes payable for the three and nine months ended September 30, 2011. Interest expense of $57,404 and $130,083 was recorded related to the demand notes payable for the three and nine months ended September 30, 2010.

According to a Schedule D filed with the SEC on June 7, 2011 Robert Gipson beneficially owned approximately 50% of the outstanding common stock of the Company on June 6, 2011. Robert Gipson, who serves as a Senior Director of Ingalls & Snyder and a General Partner of ISVP, served as a director of the Company from June 15, 2004 until October 28, 2004. According to a Schedule 13G/A filed with the SEC on January 12, 2010, Thomas Gipson beneficially owned approximately 20.0% of the outstanding common stock of the Company on December 31, 2009. According to a Schedule 13G/A filed with the SEC on June 7, 2011, Arthur Koenig beneficially owned approximately 7% of the outstanding common stock of the Company on June 1, 2011. According to a Schedule 13G filed with the SEC on June 7, 2011, ISVP owned approximately 9.99% of the outstanding common stock of the Company on June 1, 2011. According to a Schedule 13G filed with the SEC on June 7, 2011, Ingalls & Snyder LLC beneficially owned approximately 9.9% of the outstanding common stock of the Company on June 6, 2011.