5. DEBT

12 Months Ended

Dec. 31, 2018

Debt Disclosure [Abstract]

DEBT

The table below summarizes the Company’s debt at December 31, 2018 and December 31, 2017:

Debt Description	December 31, 2018		December 31, 2017		Maturity	Rate
Comerica Bank Loan and Security Agreement	$	5,000,000	$	5,000,000	June 2020		6.10	%
Capital lease obligations - Noteholder lease		18,843		45,294	August 2019		8.00	%
Capital lease obligations - office furniture and other equipment		-		4,870	August 2018		9.80	%
Capital lease obligations - vehicle		10,126		13,670	July 2021		5.59	%
Convertible notes - related parties, net of discount of $1,527,146 and $447,988, respectively		35,740,085		37,101,243	November 2020		8.00	%
Convertible notes, net of discount of $45,029 and $50,129, respectively		610,740		680,640	November 2020		8.00	%
Subordinated Promissory Notes - related party		525,000		-	November 2020		8.00	%
Total debt		41,904,794		42,845,717
Less:  current portion of long term debt
Capital lease obligations		22,591		34,927
Convertible notes - related parties, net of discount of $447,988		-		37,101,243
Convertible notes, net of discount of $50,129		-		680,640
Comerica Bank Loan and Security Agreement		-		5,000,000
Total current portion of long term debt		22,591		42,816,810
Debt - long term	$	41,882,203	$	28,907

Convertible Notes Overview

Since November 14, 2007 and through December 10, 2014, the Company financed its working capital deficiency primarily through the issuance of its notes of up to $33,300,000 in principal (the “2007 NPA Notes”) under the Convertible Secured Subordinated Note Purchase Agreement, dated November 14, 2007, as amended (as so amended, the “2007 NPA”).   On December 11, 2014 the Company entered into an unsecured Convertible Subordinated Note Purchase Agreement, as amended (as so amended, the “2014 NPA”) with Union Bancaire Privée, UBP SA ("UBP") a related party, for the sum of notes up to $40,000,000 in principal ("2014 NPA Notes").  At the request of the noteholder any amounts borrowed under the 2007 NPA and the 2014 NPA allow the principal amount to be converted to common shares at a conversion price of $1.43 per share.

On May 25, 2018, the Company and the holders of the majority of the aggregate outstanding principal amount of the 2014 NPA Notes and holders of the majority of the aggregate outstanding principal amount of the 2007 NPA Notes agreed to extend to November 14, 2020, the maturity date of the 2014 NPA Notes and the 2007 NPA Notes.  All other terms relating to the outstanding 2007 NPA Notes and the 2014 NPA Notes were not modified. The Company is entitled to utilize the amounts available for future borrowing under each of the 2007 Note Purchase Agreement and the 2014 Note Purchase Agreement through November 14, 2020.

As a result of the modification, any unamortized discount will be amortized into interest expense through the new maturity date of November 14, 2020.

During 2018, the Company borrowed an additional $4,715,000 under the 2014 NPA from UBP.    The market value of the Company’s common stock on the date of each issuance of the 2014 NPA Notes to UBP was higher than the conversion price, which resulted in a beneficial conversion feature totaling $1,850,035 and a corresponding debt discount, which is being amortized into interest expense through the maturity date of the Notes.

During the years ended December 31, 2017 and December 31, 2018 a total of $12,075,000 of notes were converted into 8,444,056 shares of Company's common stock at the stated conversion price of $1.43 per share.  Related party debt  was $12,000,000 of the converted amount.

On October 30, 2018 following request from UBP, the Company simultaneously repaid $2,000,000 of  2014 NPA Notes and borrowed $2,000,000 by issuing  2007 NPA Notes in a cashless note exchange with UBP.

During 2018 the Company  sold $525,000 of unsecured subordinated short term notes to a related party.  The notes mature in November of 2020 and have an interest rate of 8%.

In September of 2018 the Company changed the frequency of interest payments on its 2007 NPA Notes, 2014 NPA Notes and other related party note from quarterly to twice per year in January and July of each year until maturity.

The table below  summarizes convertible notes issued as of December 31, 2018 and 2017 by type:

	2018		2017
2007 NPA notes, net of discount	$	20,374,668	$	23,271,479
2014 NPA notes, net of discount		15,976,157		14,510,404
Total convertible notes, net of discount	$	36,350,825	$	37,781,883

Convertible notes issued under 2014 NPA

The aggregate principal amount of  2014 NPA Notes that may be issued under the 2014 NPA is $40 million, of which $19,440,000 had been borrowed as of December 31, 2018.  The 2014 NPA Notes are convertible into shares of the Company’s common stock, par value $0.001 per share, and are subordinated to the $5 million outstanding under the Company’s Loan and Security Agreement (the “LSA”) with Comerica Bank and to any promissory notes outstanding under the Company’s existing 2007 NPA program.  

The 2014 NPA Notes have the following terms:

● a maturity date of the earlier of (i) November 14, 2020, (ii) a Change of Control (as defined in the 2014 NPA), or (iii) when, upon or after the occurrence of an Event of Default (as defined in the 2014 NPA), other than for a bankruptcy related, such amounts are declared due and payable by at least two-thirds of the aggregate outstanding principal amount of the 2014 NPA Notes;

● an interest rate of 8% per year, with accrued interest payable in cash in semi-annual installments with the final installment payable on the maturity date of the note;

● a conversion price per share that is fixed at $1.43 per share;

● 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, the noteholder may only convert that portion of their Notes outstanding for which the Company has a sufficient number of authorized shares of common stock.  To the extent multiple noteholders under the 2014 NPA, the 2007 NPA, or both, request conversion of its notes on the same date, any limitations on conversion shall be applied on a pro rata basis. In such case, 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 conversions of the remaining portion of the notes outstanding as well as the maximum issuances contemplated pursuant to the Company’s 2004 Equity Compensation Plan, within 90 calendar days after the Company’s receipt of such request; and

● may not be prepaid without the consent of holders of at least two-thirds of the aggregate outstanding principal amount of 2014 NPA Notes.

Convertible notes issued under 2007 NPA

The aggregate principal amount of  2007 NPA Notes that may be issued under the 2007 NPA is $33,300,000, of which $32,755,000 had been borrowed as of December 31, 2018.  The 2007 NPA Notes are convertible into shares of the Company’s common stock, par value $0.001 per share, and are subordinated to the $5 million outstanding under the LSA with Comerica Bank.  

As amended, the 2007 NPA Notes have the following terms:

● a maturity date of the earlier of (i) November 14, 2020, (ii) a Change of Control (as defined in the amended 2007 NPA), or (iii) when, upon or after the occurrence of an Event of Default (as defined in the amended 2007 NPA) such amounts are declared due and payable by a 2007 NPA Noteholder or made automatically due and payable in accordance with the terms of the 2007 NPA;

● an interest rate of 8% per year, with accrued interest payable in cash in semi-annual installments with the final installment payable on the maturity date of the note;

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

● optional conversion upon 2007 NPA 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 2007 NPA 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.

Related Party Convertible Notes under 2007 and 2014 NPAs

Grasford, the Company’s largest stockholder, owns $12,076,282 in face value amount of 2007 NPA Notes as of December 31, 2018. Grasford is controlled by Avy Lugassy, one of the Company’s principal shareholders.

UBP owns $24,457,180 in combined face value amount of 2007 and 2014 NPA Notes as of December 31, 2018 and is considered a significant beneficial owner.

Crystal Management owns $730,769 in face value amount of 2007 NPA Notes as of December 31, 2018. Crystal Management is controlled by Doron Rotler, the third largest shareholder of the Company.

Interest expense for 2018 for convertible notes was $3,818,657, including amortization of discount of $773,877. 

Interest expense for 2017 for convertible notes was $4,219,510, including amortization of discount of $799,161.

Comerica LSA

The Company has an outstanding Loan and Security Agreement with Comerica Bank dated June 9, 2014 (the "LSA") in the amount of $5,000,000, with original maturity of June 9, 2016.  On June 8, 2018, the Company and Comerica Bank entered into Second Amendment to the LSA, which extended the maturity of the LSA to June 9, 2020.  The LSA is secured by an extended irrevocable letter of credit ("SBLC") issued by UBS AG (Geneva, Switzerland) ("UBS AG") with a renewed term expiring on May 31, 2019, which term is renewable 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. 

The LSA with Comerica has the following terms:

● a maturity date of June 9, 2020;

● a variable interest rate at prime plus 0.6% 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 with an initial term expiring on May 31, 2015, which term is automatically renewable 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 (no such notice has been given and SBLC was extended to expire on May 31, 2019); 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, observe the covenants made by it under the LSA, failure to renew the UBS AG SBLC, and insolvency of the Company.

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, 2018 was $18,843.

In July 2016, the Company acquired a vehicle, that it had been previously leasing since July of 2013. The vehicle is financed through a 5 year auto loan. The payments are made monthly.  The unpaid balance on the note payable is $10,126 as of December 31, 2018.

The table below details future payments under capital leases:

Year:
2019	$	23,631
2020		4,219
Thereafter		2,461
		30,311
Less amount representing interest		(1,342	)
Capital lease obligations	$	28,969