6. Notes Payable and Debt

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. All other rights under the Convertible Note Purchase Agreement related to the $16,000,000 of principal were waived by the lenders.

The intent of the above convertible debt conversions and modifications was to allow for continued product development by a licensee and was considered to be the most viable option for the debt holders to recoup any of their principal. 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 therein, when estimates are used relating to the maximum future cash payments, as in 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 at $16,000,000 at June 30, 2013.

Promissory Notes


Demand Notes Payable to Significant Stockholder	June 30, 2013		December 31, 2012
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 — December 2012		510,000		510,000
Unsecured demand notes payable; interest rate of 7%: issued January 2013 — June 2013		50,000		0

		6,460,000		6,410,000
Accrued interest		1,142,225		919,526

Aggregate carrying value	$	7,602,225	$	7,329,526

Interest expense totaling $112,059 and $105,687 was incurred related to the demand notes payable for the three months ended June 30, 2013 and June 30, 2012, respectively. Interest expense totaling $222,697 and $208,836 was incurred related to the demand notes payable for the six months ended June 30, 2013 and June 30, 2012 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.

Contingent Royalty Liability

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 10 for full disclosure of this transaction.