5. DEBT

12 Months Ended

Dec. 31, 2013

Debt Disclosure [Abstract]

5. DEBT

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

	December 31,		December 31,
Description	2013		2012		Maturity	Rate
IDB Credit Facility	$	5,000,000	$	5,000,000	14-May		4	%
Insurance premium note		-		23,987	13-Jun		7	%
Capital lease obligations		169,099		150,072	19-Aug		8	%
Convertible notes - related parties, net of discount		23,512,836		19,769,230	16-Nov		8	%
Convertible notes		730,770		730,770	16-Nov		8	%
Total debt		29,412,705		25,674,059
Less: current portion of long term debt
Capital lease obligations		26,113		17,754
IDB Credit Facility		5,000,000		5,000,000
Insurance premium note		-		23,987
Total current portion of long term debt		5,026,113		5,041,741
Debt - long term	$	24,386,592	$	20,632,318

Convertible Notes

Since November 14, 2007, the Company has financed its working capital deficiency primarily with the issuance of Notes under the Convertible Secured Subordinated Note Purchase Agreement, dated November 14, 2007, as amended (as so amended, the “Note Purchase Agreement”).

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 Notes issued by the Company under the Note Purchase Agreement, and an additional purchaser of the Notes, Grasford Investments Ltd (“Grasford”) (collective, the “Noteholders”). The modification to the Company’s 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 14, 2016;

● an interest rate of 8% per year;

● optional conversion upon Noteholder 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 Company’s shares of common stock in the 12-month period immediately preceding the date of conversion or (ii) $0.50; and

● if at the time of any particular requested conversion the Company does not have a sufficient number of shares of its common stock authorized to allow for such conversion, the Noteholder may request that the Company call a special meeting of the stockholders specifically for the purpose of increasing the number of shares of common stock authorized 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 previously outstanding Notes, in the amount of $21,793,055, was recognized as loss on extinguishment of debt in the Statements of Operations.

Subsequent to modification and through March 21, 2014, the Company sold $4,320,000 in additional Notes to Union Bancaire Privée (“UBP”) under the Note Purchase Agreement at conversion prices ranging between $.72 and $1.12 on the date of sale. The Company recorded a beneficial conversion feature of $2,130,074 and corresponding debt discount, which is being amortized into interest expense through the maturity of the Notes. The unamortized debt discount as of December 31, 2013 was $1,921,394.

The Company is obligated to pay interest on the Notes in quarterly installments commencing three months after the purchase date of the Notes. The Company is not permitted to prepay the Notes without approval of the holders of at least a majority of the principal amount of the Notes then outstanding.

The Note Purchase Agreement contains provisions whereby repayment of the Notes may be accelerated if the Company enters into voluntary or involuntary bankruptcy or insolvency proceedings. This acceleration right was waived by the Noteholders until such time when the promissory note with Israel Discount Bank of New York (“IDB”) is repaid.

Related Party Convertible Notes

Grasford, the Company’s largest stockholder, owns $13,826,282 in principal amount of Notes as of December 31, 2013. Grasford is controlled by Avy Lugassy, a beneficial owner of both debt and equity holdings in the Company by Grasford.

UBP owns $10,877,180 in principle amount of Notes as of December 31, 2013 and is considered a significant beneficial owner.

Fair Value of Modified Convertible Notes

The modified Note facility 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 the 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:

● the 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 three 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%.

Capital Leases

On September 4, 2009, the Company entered into a sale transaction whereby it sold its computer equipment, furniture, fixtures and certain personal property located at its former principal executive offices in Durham, North Carolina (collectively, the “Equipment”) on an “as-is, where-is” basis to the holders of the Company’s Notes, on a ratable basis in proportion to their respective holdings of Notes, for $200,000 (“Purchase Price”). The Purchase Price was paid through a $200,000 reduction, on a ratable basis, in the outstanding aggregate principal amount of the Notes. The Purchase Price represented the fair market value of the Equipment based on an independent appraisal.

The payments on the lease are made monthly. The balance of the lease as of December 31, 2013 was $132,321. 

In September 2013 the Company purchased furniture for its new office by execution of a five year non-cancellable lease, which is accounted for as a capital lease. The unpaid balance on the lease as of December 31, 2013 is $36,778.

The table below details future payments under capital leases:

Year:
2014	$	39,259
2015		39,259
2016		39,259
2017		39,259
2018		34,189
Thereafter		19,412
		210,637
Less amount representing interest		(41,538	)
Capital lease obligations	$	169,099

Promissory Note

On December 6, 2010, the Company entered into (i) a $6,500,000 Promissory Note (the “IDB Note”), as borrower, and (ii) a Letter Agreement for the $6,500,000 Term Loan Facility, each with IDB as lender.

The total of all amounts borrowed under the initial IDB Credit Facility had to be drawn by June 10, 2011. The Company borrowed $5,000,000 during the initial term of the loan, which was originally due May 31, 2012. Subsequently the Company extended the loan twice. The current maturity of the loan is May 31, 2014. At each instance of extension the Company was required to deposit $250,000 in a restricted checking account held at IDB. The cash balance is used to pay quarterly interest payments. The balance in the restricted account as of December 31, 2013 was $131,757.

Borrowings under the IDB Credit Facility were guaranteed by Atlas Capital SA (“Atlas”) and subsequent to the merger between Atlas and Mirelis InvesTrust SA (“Mirelis”), by Mirelis. In addition, the IDB Credit Facility is further secured by an extended irrevocable standby letter of credit issued by UBS Private Bank with an expiration date of November 30, 2015.