Note 10 - Subsequent Events | 3 Months Ended |
Mar. 31, 2014 |
Subsequent Events [Abstract] | ' |
Subsequent Events [Text Block] | ' |
Note 10. Subsequent Events |
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a) On April 4, 2014, the Company’s operating subsidiary, Paulson Investment Company, Inc. (“PIC”), completed the sale of a term life insurance policy on the life of its founder, Chester L.F. Paulson (the “Policy”), to Coventry First LLC (“Coventry”) for cash proceeds of $2,203,333, net of commissions and expenses. The Policy, with a face amount of $7,000,000, was sold to Coventry pursuant to a Life Settlement Contract between the parties. The Life Settlement Contract contains customary covenants, representations and warranties of PIC, and PIC agrees to indemnify Coventry against certain losses, including losses related to (i) PIC’s failure to perform any of its obligations under the Life Settlement Contract, (ii) any representation made, or information provided, by PIC to Coventry which Coventry has reason to believe was false or misleading at the time it was provided, and (iii) any claim by the insurer, John Hancock Life Insurance Company (U.S.A.), or any other party that the original owner or any beneficiary of the Policy lacked an insurable interest in the life of Mr. Paulson. |
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It is contemplated that the cash proceeds from the sale of the Policy will be contributed to a liquidating trust to be created for the benefit of the Company’s shareholders of record as of October 11, 2013. |
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b) On April 10, 2014, the Board of Directors granted 180,000 common shares to officers and directors under the 2013 Equity Incentive Plan. |
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c) On May 8, 2014, the Company, Variation Biotechnologies (US), Inc., a Delaware corporation (“VBI”), and VBI Acquisition Corp., a special purpose wholly owned subsidiary of the Company (the “Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which, subject to the satisfaction or waiver of certain conditions, the Merger Sub will merge with and into VBI, with VBI surviving as a wholly owned subsidiary of the Company (the “VBI Merger”). |
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At the effective time of the VBI Merger, each share of VBI common stock and Series A Preferred Stock will be converted into the right to receive 1.226 shares of the Company’s common stock, par value $0.0001 per share (the “Paulson Common Stock”) (as may be adjusted under the Merger Agreement, the “Exchange Ratio”). No fraction of a share of Paulson Common Stock will be issued, but instead each holder of shares of VBI common stock and Series A Preferred Stock who would otherwise be entitled to a fraction of a share of Paulson Common Stock will receive from the Company one full share of Paulson Common Stock (i.e., rounded up to the nearest whole share). The total number of shares of Paulson Common Stock to be issued to the former holders of VBI common stock and Series A Preferred Stock at the effective time of the VBI Merger would be 42,772,713. These newly issued shares, together with the options to purchase shares of VBI common stock that will be converted into options to purchase shares of Paulson Common Stock (and will be assumed by the Company at the effective time of the VBI Merger), would represent approximately 41.5% of the shares of Paulson Common Stock on a fully diluted basis after the effective time of the VBI Merger (not including shares of Paulson Common Stock issued to VBI stockholders in the $11 million private placement contemplated to be completed concurrently with the VBI Merger). |
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Subject to, and immediately prior to the effective time of, the VBI Merger, all outstanding convertible debt securities issued by VBI will be converted into capital stock of VBI, and at the effective time of the VBI Merger, VBI shall have no convertible notes or other indebtedness outstanding (other than the Venture Debt, as defined in the Merger Agreement). At the effective time of the VBI Merger, each outstanding option to purchase a share of VBI common stock, whether vested or unvested, and so long as such option has not, prior to the effective time of the VBI Merger, been exercised, cancelled, terminated or expired, will be deemed to constitute an option to purchase, on the same terms and conditions, a number of shares of Paulson Common Stock (rounded down to the nearest whole share) equal to the product of (i) the number of shares of VBI common stock subject to such option multiplied by (ii) the Exchange Ratio (defined above), at an exercise price per share of Paulson Common Stock equal to the quotient of (i) the exercise price per share of VBI common stock (rounded up to the nearest cent) subject to such option divided by (ii) the Exchange Ratio. |
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The Company and VBI each made customary representations, warranties and covenants in the Merger Agreement, including, among others, covenants by each of the Company and VBI to, subject to certain exceptions, conduct its business in the ordinary course during the interim period between the execution of the Merger Agreement and the consummation of the VBI Merger. |
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The obligation of the parties to consummate the VBI Merger is subject to a number of closing conditions, including, among other things: |
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| • | | the Company’s stockholders will have approved the VBI Merger proposal at a special meeting of its shareholders to be held at a time and place to be determined, and VBI stockholders will have approved the VBI Merger; |
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| • | | the name of Paulson Capital (Delaware) Corp. must have been changed to “VBI Vaccines Inc.”; |
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| • | | the Company must have delivered to an escrow agent instructions as to the reserve for issuance of the number of shares of Paulson Common Stock equal to $1,000,000 divided by the price per share used in the private placement (described in the Merger Agreement) and must have deposited or caused to be deposited $250,000 with the escrow agent, each allocated among the VBI stockholders as provided in the Merger Agreement; |
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| • | | the Company must have furnished to VBI the Liquidating Trust Indemnification Agreement (as defined in the Merger Agreement), pursuant to which the Liquidating Trust agrees to stand behind the Company's indemnification obligations in the Merger Agreement; |
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| • | | the Company’s Board must have, upon the effective time of the VBI Merger: (i) increased the Company’s Board to seven directors; (ii) elected to the Board (a) the following five VBI director designees: Jeff Baxter, Steven Gillis (Chairman), Michael Steinmetz, Michel De Wilde and Sam Chawla; and (b) Trent Davis and Alan Timmins, as the two designees of the Company; and (iii) appointed as the officers of the Company Jeff Baxter, President & CEO; David Anderson, Senior Vice President, Research; Egidio Nascimento, Chief Financial Officer; Marc Kirchmeier, Vice President, Formulations; and T. Adam Buckley, Vice President, Operations & Project Management; |
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| • | | VBI and the Company must have in escrow for the benefit of the surviving company in the VBI Merger aggregate gross proceeds of at least $11,000,000 (rounded up to the nearest thousand) (or such lesser amount agreed to in writing by VBI in its sole discretion) received pursuant to a private placement of Paulson Common Stock solely to accredited investors in compliance with the exemption from registration provided by Section 4(a)(2) of the Securities Act or Rule 506 of Regulation D thereunder, on terms satisfactory to VBI and the Company; and the conditions to closing such private placement must have been satisfied and such amount of gross proceeds must be unencumbered cash available to the surviving company in the VBI Merger at the effective time of the VBI Merger; |
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| • | | holders of no more than 5% of the outstanding shares of VBI common stock and Series A Preferred Stock will have exercised, or remained entitled to exercise, their appraisal rights under Section 262 of the Delaware General Corporation Law; |
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| • | | the Company shall have entered into definitive documentation, reasonably acceptable to VBI, whereby the Company’s ownership in its operating subsidiary, Paulson Investment Company, Inc. (“PIC”) shall be reduced to 0.01%, by the issuance of equity securities to holders of convertible promissory notes of PIC and to members of PIC’s management team; |
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| • | | NASDAQ must have approved an initial listing application of VBI on a post-merger basis for purposes of listing of Paulson Common Stock on NASDAQ following the VBI Merger; the Company must be in compliance with all of NASDAQ’s criteria for continued listing; and Paulson Common Stock shall continue to be listed on NASDAQ from the date of the Merger Agreement through the closing of the VBI Merger; |
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| • | | the Company must have completed the actions voted upon at the Annual Meeting of Shareholders as described in the Company’s Definitive Proxy Statement on Schedule 14A filed by the Company with the SEC on October 18, 2013; |
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| • | | the Company must have available not less than $5,250,000 in unencumbered cash invested by Hudson Bay Master Fund Ltd. and DKR Ventures, LLC (each a "July 2013 Investor") or their designees pursuant to the series of agreements described in the Current Report on Form 8-K/A filed with the SEC by the Company on August 30, 2013 (the “July 2013 Financing Documents”), all of the conditions to closing the transactions contemplated by the July 2013 Financing Documents must have been satisfied at or prior to the effective time of the VBI Merger and the $5,250,000 gross proceeds resulting from such closing must have been released from escrow to the Company at or prior to the effective time of the VBI Merger; |
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| • | | the Company shall have no material indebtedness for money borrowed except as directly attributable to PIC as set forth in the Merger Agreement and presented in the Company's financial statements provided pursuant to the Merger Agreement solely for the purpose of complying with ASC 810 – Consolidation; notwithstanding, however, that contemporaneously with the closing of the VBI Merger, the Company may issue up to $6 million in principal amount of non-convertible venture debt instruments to venture debt investors approved by VBI, including, without limitation, Perceptive Advisors LLC or its affiliated investment vehicles; |
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| • | | the Company’s Class A Warrants must have been exchanged for Paulson Common Stock; |
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| • | | the Company’s Class B Warrants must have been converted into Paulson Common Stock (or modified or exchanged for a new class of preferred stock of the Company); |
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| • | | all of the Company’s Series A Preferred Stock issued pursuant to the July 2013 Financing Documents must have been converted to Paulson Common Stock; |
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| • | | the Interest Preservation Letter Agreement included in the July 2013 Financing Documents must have been terminated and must not be deemed a “Dilutive Acquisition” and must have no effect with respect to the VBI Merger or any issuances prior thereto; |
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| • | | The July 2013 Investors must not have any continuing “most favored nation” rights, registration rights (provided the provisions of Rule 144 are then applicable), anti-dilution rights or any other special investor rights except as may be granted to all investors in the private placement; |
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| • | | the Company must not have outstanding special investor rights (such as anti-dilution rights or registration rights) of holders of Paulson Common Stock and preferred stock other than registration rights of the July 2013 Investors if no Rule 144 resale exemption is available to them and other than as may be granted to all the investors in the private placement; |
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| • | | prior to the effective time of the VBI Merger, PIC shall have (i) obtained all requisite consents or approvals of FINRA pursuant to FINRA Conduct Rule 1017 relating to the change in equity ownership of PIC that may be deemed to result as a consequence of (A) the merger and (B) the issuances of PIC (or its successor) equity interests upon conversion of notes of PIC, in exchange for PIC Series B Preferred Stock and to PIC's management; |
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| • | | the Company must have filed an amendment to its Certificate of Incorporation setting forth a certificate of designation of a new class of preferred stock of the Company (as required by the terms of secured convertible promissory notes issued by VBI in March 2014) that will not have any economic or voting preferences over the common stock of the Company but will have limits on the amount of common stock that may be issued upon conversion of such preferred stock; |
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| • | | the Company must have obtained stockholder approval of the reverse split proposal and effected a reverse split of the outstanding Paulson Common Stock if required for its market price on the NASDAQ Capital Market to be at least $4.00 per share at the closing of the VBI Merger or for such longer period as is required by the listing rules of the NASDAQ Capital Market; and |
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| • | | the Company must have obtained the stockholder approval of the VBI Equity Plan proposal, to become effective upon the closing of the VBI Merger; |
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The Merger Agreement contains certain other termination rights for each of the Company and VBI, including the right of each party to terminate the Merger Agreement if the VBI Merger has not been consummated by July 25, 2014. In addition, VBI has the right to terminate the Merger Agreement if the Company becomes the subject of any proceeding of NASDAQ to delist the Company. |
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Concurrently with the execution of the Merger Agreement, certain stockholders of VBI and a holder of approximately 40% of the Paulson Common Stock, respectively, have entered into Voting Agreements, referred to as the “voting agreements,” pursuant to which those VBI and Company stockholders have, among other matters, agreed to support the VBI Merger and the other transactions contemplated by the VBI Merger. Under the voting agreements, in addition to agreeing to vote in favor of approval of the VBI Merger and the Merger Agreement and the transactions contemplated thereby, each VBI stockholder and the Company stockholder party to a voting agreement have agreed to not transfer, sell, offer to sell, exchange, assign, pledge or otherwise dispose of or encumber any of the VBI stock or stock of the Company held by such stockholders prior to the VBI Merger becoming effective, the termination of the Merger Agreement, or the amendment of the voting agreement in a manner adverse to the stockholder, whichever occurs first. |
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The foregoing description of the VBI Merger does not purport to be complete, and is qualified in its entirety by reference to the Company’s Preliminary Proxy Statement on Schedule 14A filed with the SEC on May 9, 2014 and its Current Report on Form 8-K filed with the SEC on May 14, 2014. |