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Notes Payable and Debt
12 Months Ended
Dec. 31, 2012
Notes Payable and Debt [Abstract]  
Notes Payable and Debt

7. Notes Payable and Debt

 

                 
     December 31,  
Convertible Notes Payable to Significant Stockholders       2012         2011  

Unsecured convertible promissory note; interest rate of 5%; due December 31, 2010

  $     —     $ 4,655,173  

Unsecured convertible promissory note; interest rate of 5%; due December 31, 2010

          10,000,000  

Unsecured convertible promissory note; interest rate of 5%; due December 31, 2010

          2,172,415  

Unsecured convertible promissory note; interest rate of 5%; due December 31, 2010

          5,000,000  
   

 

 

   

 

 

 

Aggregate carrying value

  $     —     $ 21,827,588  
   

 

 

   

 

 

 

No interest expense was incurred related to the convertible notes payable for the year ended December 31, 2012. Interest expense totaling $1,417,776 was incurred related to the convertible notes payable for the year ended December 31, 2011. 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 a reduction of $6,132,499 in accrued interest expense. The Amendment related to convertible promissory notes held by the Company’s majority shareholder, therefore the reversal of this accrual was recorded as a contribution to capital.

In December 2012, Arthur Koenig and Ingalls & Snyder Value Partners LLP elected to convert the remaining $5,827,588 of their convertible notes payable into common stock of the Company. Effective July 31, 2012, Arthur Koenig and Ingalls & Snyder Value Partners LLP had executed the Sixth Amendment to Convertible Note Purchase Agreement. The sixth amendment provides that the two lenders waive any and all rights to convert the $5,827,588 of principal still outstanding under the promissory notes into royalty on future sales of the Company’s Altropane product, while retaining their right to convert all or any portion of the remaining convertible debt to common stock of the Company at $2.50 per share.

Effective July 31, 2012, Robert Gipson, Thomas Gipson, Arthur Koenig and Ingalls & Snyder Value Partners LLP, all lenders to the Company under a Convertible Note Purchase Agreement originally executed in 2007, elected to convert $16,000,000 of principal outstanding under the promissory notes to a royalty on future net sales of the Company’s Altropane product (see Note 8). All other rights under the Convertible Note Purchase Agreement related to the $16,000,000 of principal were waived by the lenders. As of December 31, 2012, the contingent royalty liability resulting from the conversion is classified as a Level 3 liability and is reflected in the consolidated balance sheet at its fair value as a long-term liability.

The Company has demonstrated financial difficulties. Further, the intent of the above convertible debt conversion and modifications was to allow for continued product development and was considered to be the most viable option for the Company. Based on these factors, these transactions were considered to be concessions and were accounted for as a troubled debt restructuring under the guidance of ASC 470-60-55. As prescribed in ASC 470-60-35-11, when estimates are used relating to the maximum future cash payments as is this case, no gain shall be recognized until the estimated maximum future cash payments fall below the carrying value of the debt before restructuring. As a result of applying this guidance the company has determined that the carrying value of the obligation remains $16,000,000 at December 31, 2012.

 

Promissory Notes

 

                 
     December 31,  

Notes Payable to Significant Stockholder

  2012     2011  

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       2,240,000  

Unsecured demand notes payable; interest rate of 7%: issued January 2012 — September 2012

    510,000       —    
   

 

 

   

 

 

 
      6,410,000       5,900,000  

Accrued interest

    919,526       486,691  
   

 

 

   

 

 

 

Aggregate carrying value

  $ 7,329,526     $ 6,386,691  
   

 

 

   

 

 

 

Interest expense totaling $432,835 and $411,741 was incurred related to the notes payable for the years ended December 31, 2012 and 2011, respectively.

According to a Schedule D/A filed with the SEC on December 27, 2011 Robert Gipson beneficially owned approximately 50.1% of the outstanding common stock of the Company as of that date. 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 D/A filed with the SEC on December 27, 2011, Thomas Gipson beneficially owned approximately 15.2% of the outstanding common stock of the Company as of that date. 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/A filed with the SEC on February 2, 2012, ISVP owned approximately 9.99% of the outstanding common stock of the Company as of December 31, 2011. According to a Schedule 13G/A filed with the SEC on February 7, 2012, Ingalls & Snyder LLC beneficially owned approximately 9.99% of the outstanding common stock of the Company on December 31, 2011.