3. DEBT

9 Months Ended

Sep. 30, 2013

Debt Disclosure [Abstract]

3. DEBT

The table below summarizes the Company’s debt at September 30, 2013 and December 31, 2012:

Note Description	September 30,		December 31,
	2013		2012		Maturity	Rate
IDB Bank	$	5,000,000	$	5,000,000	May-14		4.0	%
Insurance premium note		-		23,987	Jun-13		6.9	%
Capital lease obligations - Noteholder lease		136,893		150,072	Aug-19		8.0	%
Capital lease obligations - Office furniture		38,310		-	Sep-18		9.8	%
Convertible notes - Related parties		14,557,051		14,557,051	Nov-16		8.0	%
Convertible notes, net of discount		9,055,509		5,942,949	Nov-16		8.0	%
Total debt		28,787,763		25,674,059
Less:  current portion of long term debt
Capital lease obligations		25,142		17,754
IDB Bank		5,000,000		5,000,000
Insurance premium note		-		23,987
Total current portion of long term debt		5,025,142		5,041,741
Debt - long term	$	23,762,621	$	20,632,318

Convertible Notes

On June 26, 2013, the Company entered into the Sixth Amendment and Agreement to Join as a Party to Convertible Secured Subordinated Note Purchase Agreement, Fourth Amendment to Convertible Secured Subordinated Promissory Notes and Fifth Amendment and Agreement to Join as a Party to Registration Rights Agreement (the “Sixth Amendment”), with the holders of a majority of the aggregate outstanding principal amount of the Convertible Secured Subordinated Promissory Notes (the “Notes”), issued by the Company under the Convertible Secured Subordinated Note Purchase Agreement, dated November 14, 2007, as amended (as so amended, the “Note Purchase Agreement”), and an additional purchaser of the Notes, Grasford Investments Ltd (“Grasford”). (together, the “Noteholders”).  The modification to our convertible instrument applied to $23,075,000 of Notes outstanding as of the date of modification and to all future Notes.  As amended by the Sixth Amendment, the convertible instrument has the following characteristics:

● a maturity date of November 16, 2016;

● an interest rate of 8% per year;

● optional conversion at a Noteholders’ request;

● the borrowing commitment was increased by $10 million to $33.3 million;

● a conversion price that is the greater of (i) 80% of the lowest closing price of the Common Stock in the twelve-month period immediately preceding the date of conversion  or (ii) $0.50; and

● if at the time any particular requested conversion the Company does not have the number of authorized shares of Common Stock sufficient to allow for such particular conversion, the Noteholders may request that the Company call a special meeting of the stockholders specifically for the purpose of increasing the number of the authorized shares of Common Stock to cover the remaining portion of the Notes outstanding.

The modification of the Note Purchase Agreement was accounted for as debt extinguishment.  The total value of the convertible instrument immediately after the modification was determined to be $44,868,055, of which $21,793,055 was allocated to the intrinsic value of the embedded conversion feature of the instrument immediately after the modification (beneficial conversion feature) in accordance with ASC 470 “Debt” and recorded as part of additional paid-in capital.

The difference between the fair value of the new convertible instrument and the carrying value of the old convertible notes in the amount of $21,793,055 was recognized as loss on extinguishment of debt in the statement of operations.

Subsequent to modification and through September 30, 2013 the Company sold $1,800,000 in additional Notes to Union Bancaire Privée (“UBP”) under the amended Note Purchase Agreement at conversion prices ranging between $0.72 and $0.82 on the date of sale.  The Company recorded a beneficial conversion feature of $1,334,804 and corresponding debt discount, which will be amortized into interest expense through the maturity of the Notes.

During the nine-month period ended September 30, 2013, the Company sold Notes to UBP totaling $4,375,000 (including the $1,800,000 in Notes described above) under the same terms as previously-sold Notes under the convertible instrument.

Fair Value of Modified Convertible Notes

The modified convertible debt instrument was recorded at fair value of $44,868,055.  The Company used a binomial model to determine the fair value of the instrument.  The binomial model method uses significant unobservable inputs and falls within Level III measurement method under Fair Value Hierarchy under ASC 820 “Fair Value Measurements”

The significant unobservable inputs and information used to develop those inputs include the following:

● volatility of stock price was determined to be 47% and was based on the volatility of the Company’s stock price as quoted on the Over-the-Counter Bulletin Board (the “OTCBB”) for the period of 3.4 years, which approximates the period remaining until maturity of the convertible instrument;

● the risk free rate of 1.41%;

● the credit spread over the risk free rate was determined to be approximately 20%, which was derived from a combination of the credit spread of CCC rated bonds with added premium for lack of marketability of the convertible instrument;

● the nodes of the binomial model were extended for 3 years, which approximates the time period until maturity of the convertible instrument; and

● the conversion ratio varied from approximately 1.39 to .56 shares per dollar, depending on the node of the conversion tree.  The conversion ratio varied due to projected change in value of the stock driven by historical volatility of 47%.

IDB Credit Facility

On June 28, 2013, the Company extended its secured credit facility (the “IDB Credit Facility”), with Israel Discount Bank of New York (“IDB”), as lender, effective as of May 31, 2013, for an additional one-year period for the $5,000,000 already outstanding, and we maintain $250,000 in a Restricted Cash Account held at IDB for future interest payments.  All other terms remained unchanged.  To date, the Company has borrowed $5,000,000 under the IDB Credit Facility.   Borrowings under the IDB Credit Facility are guaranteed by Atlas Capital SA (“Atlas”), a majority Noteholder and a related party, and further secured by an extended irrevocable standby letter of credit issued by UBS Private Bank (“UBS”) with an expiration date of November 30, 2015.