Notes Payable and Debt

12 Months Ended

Dec. 31, 2011

Notes Payable and Debt [Abstract]

Notes Payable and Debt

6. Notes Payable and Debt

Convertible Notes Payable to Significant Stockholders		December 31,
		2011		2010
Unsecured convertible promissory note; interest rate of 5%; due December 31, 2010		$	4,655,173	$	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		2,172,415		5,000,000
Unsecured convertible promissory note; interest rate of 5%; due December 31, 2010			5,000,000		5,000,000
Aggregate carrying value		$	21,827,588	$	29,000,000

Interest expense totaling $1,417,776 and $1,657,432 was incurred related to the convertible notes payable for the years ended December 31, 2011 and 2010, respectively.

In December 2011 the Company entered into the Fifth Amendment to Convertible Note Purchase Agreement (“Amendment”) with the Purchasers of convertible promissory notes of the Company purchased pursuant to a Promissory Note Purchase Agreement executed in March, 2007. The Amendment provided that each Purchaser would waive their respective right to be paid any and all interest accrued or to be accrued pursuant to the promissory notes issued under the Note Purchase Agreement. This transaction resulted in the reduction of $6,132,499 in accrued interest expense. The Amendment further provided that two of the Purchasers would convert a portion of the amounts owed to them into common stock of the Company at $2.50 per share as provided in the Note Purchase Agreement. Robert Gipson converted $5,827,585 of debt into 2,331,034 shares of common stock and Thomas Gipson converted $1,344,827 of debt into 537,931 shares of common stock. As a result of this transaction, $28,690 was recorded to the common stock account and $7,143,722 was recorded to additional paid-in-capital a component of Stockholders’ deficit.

The Company considered the guidance offered under Accounting Standards Codification ASC 470-50-40-2 and ASC 470-50-40-3, “Debt – Modifications and Extinguishments – Derecognition”. The Company determined that the extinguishment of the debt more closely represented a capital transaction. The $6,132,499 in forgiven accrued interest occurred with a related party and was therefore classified as a capital transaction and recorded to additional paid-in capital a component of stockholders’ deficit.

The remaining 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 (including Altropane and FLUORATEC) 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. 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. There has been no demand for amounts due and the classification remains current.

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 recognized as interest expense using the effective interest method through December 31, 2010. The Company recorded interest expense related to the BCF of approximately $724,000 for the year ended December 31, 2010.

Promissory Notes

Notes Payable to Significant Stockholder	December 31,
	2011		2010
Unsecured demand note payable; interest rate of 7% to Neurobiologics, Inc. (a subsidiary of the Company)	$	—	$	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 - December 2011		2,240,000		—
		5,900,000		4,660,000
Accrued interest		486,691		270,759
Aggregate carrying value	$	6,386,691	$	4,930,759

Interest expense totaling $411,741 and $208,018 was incurred related to the notes payable for the years ended December 31, 2011 and 2010, respectively.

In November 2011, the Company purchased from Robert L. Gipson (the “Holder”) an unsecured promissory note, pursuant to which the Company’s wholly owned subsidiary, Neurobiologics Inc., had borrowed an aggregate principal amount of $1,000,000 (“the Note”) dated February 11, 2009. At the time of the purchase, $195,807 of interest had accrued on the Note. The purchase price for the Note and all accrued interest was $1,000. This transaction resulted in a reduction of $195,807 in accrued interest expense.

The Company considered the guidance offered under Accounting Standards Codification ASC 470-50-40-2 and ASC 470-50-40-3, “Debt – Modifications and Extinguishments – Derecognition”. The Company determined that the extinguishment of the debt more closely represented a capital transaction. The $195,807 in forgiven accrued interest and the gain of $999,000 due to the difference between the purchase price of $1,000 and the carrying value of the extinguished debt of $1,000,000 occurred with a related party and was therefore classified as a capital transaction and recorded to additional paid-in capital a component of stockholders’ deficit.