2. DEBT

9 Months Ended

Sep. 30, 2014

Debt Disclosure [Abstract]

2. DEBT

The table below summarizes the Company’s debt at September 30, 2014 and December 31, 2013:

Debt Description	September 30,		December 31,
	2014		2013		Maturity	Rate
Bank Loan	$	5,000,000	$	5,000,000	June 2016	3.85	%
Capital lease obligations - Noteholder lease		118,045		132,321	August 2019	8.00	%
Capital lease obligations - Office furniture		31,699		36,778	September 2016	9.80	%
Convertible notes - related parties, net of discount of $4,927,129 and $1,921,394, respectively		24,447,102		23,512,836	November 2016	8.00	%
Convertible notes, net of discount of $50,129 and zero, respectively		680,640		730,770	November 2016	8.00	%
Total debt		30,277,486		29,412,705
Less:  current portion of long term debt
Capital lease obligations		27,786		26,113
Bank Loan		-		5,000,000
Total current portion of long term debt		27,786		5,026,113
Debt - long term	$	30,249,700	$	24,386,592

Convertible Notes

During the nine months ended September 30, 2014, the Company sold $3,940,000 of additional Convertible Secured Subordinated Promissory Notes (the “Notes”) to Union Bancaire Privée (“UBP”) under its existing Convertible Secured Subordinated Note Purchase Agreement, dated November 14, 2007, as amended (as so amended, the “Note Purchase Agreement”).

On May 12, 2014, the Company entered into the Seventh Amendment to Convertible Secured Subordinated Note Purchase Agreement (the “Seventh Amendment”) and the Fifth Amendment to Convertible Secured Subordinated Promissory Notes (the “Fifth 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 (collectively, the “Noteholders”). The Seventh Amendment and the Fifth Amendment applied to all $28,205,000 in principal amount of Notes outstanding as of May 12, 2014 and applies to any Notes sold by the Company thereafter.  As amended, the Notes have the following terms:

● a maturity date of the earlier of (i) November 14, 2016, (ii) a Change of Control (as defined in the Note Purchase Agreement), or (iii) when, upon or after the occurrence of an Event of Default (as defined in the Note Purchase Agreement) such amounts are declared due and payable by a Noteholder or made automatically due and payable in accordance with the terms of the Note Purchase Agreement;

● an interest rate of 8% per year;

● a total borrowing commitment of $33.3 million;

● a conversion price that is fixed at $1.43; and

● optional conversion upon Noteholder request, provided that, if at the time of any such request, the Company does not have a sufficient number of shares of common stock authorized to allow for such conversion as well as the issuance of the maximum amount of common stock permitted under the Company’s 2004 Equity Compensation Plan, the Noteholder may request that the Company call a special meeting of its stockholders specifically for the purpose of increasing the number of shares of common stock authorized to cover the remaining portion of the Notes outstanding as well as the maximum issuances permitted under the 2004 Equity Compensation Plan.

The modification of the aggregate principal balance of Notes issued prior to the  most recent prior modification dated June 28, 2013, or $23,075,000, was accounted for as debt extinguishment in accordance with provisions of ASC 470 “Debt”.  The fair value of the new debt was determined to be $21,404,018.  The difference between the carrying value of the debt balance prior to the modification and the fair value of the new debt was recorded as debt discount in the amount of $1,670,982 and will be charged to interest expense over the remaining life of the debt.  $22,344,231 of the modified $23,075,000 balance was related party debt and $730,769 was non-related party debt.  For the related party portion of the debt, the Company recorded a capital contribution in the amount of $1,620,852 with a charge to Additional Paid-in Capital; the non-related party debt modification resulted in a $50,129 gain on extinguishment of debt.

The modification of the aggregate principal balance  of Notes issued subsequent to June 28, 2013, but prior to the May 12, 2014 modification, or $5,130,000, with a net carrying amount of $922,202 immediately prior to  the May 12, 2014 modification resulted in a troubled debt restructuring treatment where no gain or loss was recognized due to fact that the carrying amount of the debt balance was less than total future cash payments  specified by the terms of the debt remaining unsettled after the modification.

As of September 30, 2014, the Notes were convertible into 21,052,448 shares of Company’s common stock.

Fair Value of Modified Convertible Notes

The modified convertible debt instrument with a face value of $23,075,000, accounted for as debt extinguishment, was recorded with a fair value of $21,404,018. 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 in accordance with the 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 Company’s historical volatility;

● risk free rate of 1.41%;

● 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;

● nodes of the binomial model were extended for 2.5 years, which approximates the  time period until maturity of the convertible instrument; the model included 5 nodes; and

● conversion price was fixed at $1.43 per share.

On June 9, 2014, the Company entered into the Eighth Amendment to the Note Purchase Agreement and the Sixth Amendment to the Notes with a majority of the Noteholders.  The only modification that resulted from these amendments was direct subordination of all current and future Notes under the Note Purchase Agreement to the Loan and Security Agreement (the “LSA”) with Comerica Bank (“Comerica”), which is discussed further below.

IDB Credit Facility and Comerica LSA

The Company had an outstanding promissory note with Israel Discount Bank (“IDB”) that had a maturity date of May 31, 2014 (the “IDB Credit Facility”).  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. The IDB Credit Facility was further secured by an extended irrevocable standby letter of credit (“SBLC”) issued by UBS Private Bank with an expiration date of November 30, 2015.  The Company received confirmation that it will not be required to re-pay any fees associated with previous or future guarantees of the Company's bank loan through issuance of the SBLC by UBS.  As such, the Company reversed previously accrued fees associated with the issuance of the SBLC in the IDB transaction and recorded a $169,861 gain on reversal of previously recorded liabilities.

 On June 9, 2014, the Company refinanced the IDB Credit Facility with a new financial institution by entering into the LSA with Comerica. The Company borrowed the entire amount available under the LSA ($5,000,000) and used those proceeds to repay the IDB Credit Facility in full.

The LSA has the following terms:

● a maturity date of June 9, 2016;

● a variable interest rate at prime plus 0.6% (3.85% on the date of execution) payable quarterly;

● secured by substantially all of the assets of the Company, including the Company’s intellectual property;

● secured by an extended irrevocable SBLC issued by UBS AG (Geneva, Switzerland) (“UBS AG”) with an initial term expiring on May 31, 2015, which term shall be automatically renewed for one year periods, unless notice of non-renewal is given by UBS AG at least 45 days prior to the then current expiration date; and

● acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, including but not limited to, failure by the Company to perform its obligations and observe the covenants made by it under the LSA and insolvency of the Company.

This transaction was accounted for under the guidance of ASC 470 “Debt” as debt extinguishment.  The $12,500 in bank fees that the Company paid to Comerica in connection with entering into the LSA was recorded as loss on extinguishment in the current period.  The approximately $30,000 in legal fees were deferred as deferred financing costs and will be charged to interest expense over the life of the LSA.