7. 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 of December 31, 2012, the contingent royalty liability resulting from the conversion is classified as a Level 3 liability and was reflected in the consolidated balance sheet at its fair value as a long-term liability. As is further described in Note 8, this liability was extinguished as of December 31, 2013.

Promissory Notes — Unsecured


Notes Payable to Significant Stockholder	December 31,
	2013		2012
Unsecured demand note payable; interest rate of 7%: issued December 2009	$	—	$	350,000
Unsecured demand notes payable; interest rate of 7%: issued January 2010 — December 2010		—		3,310,000
Unsecured demand notes payable; interest rate of 7%: issued January 2011 — December 2011		—		2,240,000
Unsecured demand notes payable; interest rate of 7%: issued January 2012 — September 2012		—		510,000

		—		6,410,000
Accrued interest		—		919,526

Aggregate carrying value	$	—	$	7,329,526

Interest expense totaling $446,104 and $432,835 was incurred related to the unsecured notes payable for the years ended December 31, 2013 and 2012, respectively.

Through 2013, a series of working capital loans (“Borrowings”) were made to the Company by its significant stockholder, Mr. Gipson, evidenced by demand promissory notes and totaling $7,135,000 and bearing interest at 7% per annum. Interest on these notes was accrued and totaled approximately $1,365,000 at the execution date. On December 31, 2013, the Company executed a Loan Consolidation Agreement with its significant stockholder (“Lender”). The terms of the Borrowings were modified to reduce the interest to be paid and provide for a fixed due date, additional potential borrowings and a security interest in certain assets of the Company. Upon execution of the Loan Consolidation Agreement, all amounts outstanding under the Borrowings including accrued interest were cancelled and considered paid in full and the Company entered into a new Promissory Note (“Consolidated Note”).

The Consolidated Note bears interest at 3.2% per annum payable semi-annually in arrears and requires principal to be repaid on or before December 31, 2016. The Consolidated Note also includes semi-annual cash draws for the future working capital needs of the Company. The draws will be a minimum of $110,000 and are to be added to principal when drawn. Coincident with the execution of the Loan Consolidation Agreement, the Company and the Lender also executed a Security Agreement which provides the Lender with an undivided security interest in and to all personal and intellectual property of the Company subject to all existing liens, encumbrances and license rights previously granted by the Company. The Security Agreement also allows the Company to be free to dispose of or liquidate the collateral without any prior waiver or authorization from the Lender so long as the proceeds of any such disposition are used to pay down the principal on the Consolidated Note or the Lender affirmatively waives such obligation in writing.

The Company considered whether the transaction was within the scope of ASC 470-60-55 Accounting for Troubled Debt Restructuring, which states that if a Company is experiencing financial difficulties and a concession is granted, troubled debt restructuring accounting should be applied. The Company has concluded that it is experiencing financial difficulties and the creditor has granted a concession as the effective borrowing rate for the restructured debt is less than the effective rate of told debt prior to restructuring. The Company has recognized a gain of $682,670 equal to the difference between the carrying value of the old debt and the present value of the future cash flows under the new terms. Since the lender is a related party, the gain was considered to be in essence a capital transaction and therefore, the gain was recognized as an addition to additional paid in capital. Additionally, due to this restructuring, future payments made will be charged to the carrying value of the restructured debt balance and no interest expense will be recorded going forward.