| 5. DEBT | The table below summarizes the Companys debt at December 31,
2015 and December 31, 2014:
Debt Description December 31, December 31,
2015 2014 Maturity Rate
Comerica Bank LSA $ 5,000,000 $ 5,000,000 June 2016 3.85 %
Capital lease obligations - Noteholder lease 92,270 113,093 August 2019 8.00 %
Capital lease obligations - office furniture 22,368 29,922 September 2016 9.80 %
Convertible notes - related parties, net of discount of $2,010,743 and $4,338,901, respectively 33,363,488 25,985,330 November 2016 8.00 %
Convertible notes, net of discount of $50,129 680,640 680,640 November 2016 8.00 %
Total debt 39,158,766 31,808,985
Less: current portion of long term debt
Capital lease obligations 30,877 28,378
Comerica Bank LSA 5,000,000
Convertible notes - related parties, net of discount of $2,010,743 33,363,488
Convertible notes, net of discount of $50,129 680,640
Total current portion of long term debt 39,075,005 28,378
Debt - long term $ 83,761 $ 31,780,607 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 (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 (the 2014 NPA)
with Union Bancaire Privée, UBP SA ("UBP"). During 2015, the Company raised gross proceeds of $5,050,000 from
the private placement to UBP under 2014 NPA (the 2014 NPA Note). The table below summarizes
convertible notes issued as of December 31, 2015 by type:
Convertible Notes Type: Balance
2007 NPA notes, net of discount $ 28,499,698
2014 NPA notes, net of discount 5,544,430
Total convertible notes $ 34,044,128 Convertible notes issued under 2014 NPA The aggregate principal amount
of convertible unsecured subordinated promissory notes (the 2014 NPA Notes) that may be issued under the 2014 NPA
is $40 million. The 2014 NPA Notes are convertible into shares of the Companys common stock, par value $0.001
per share, and are subordinated to the $5 million outstanding under the Companys Loan and Security Agreement (the LSA)
with Comerica Bank and to any convertible secured subordinated promissory notes outstanding under the Companys existing
2007 NPA program. The 2014 NPA 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 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 quarterly installments commencing on the third month anniversary of the date of issuance of the 2014 NPA
● a conversion price per share that is fixed at $1.43;
● 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 Companys 2004 Equity Compensation Plan, within 90 calendar days after the Companys 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 During 2014 and 2013, several modifications were made to the 2007
NPA. 2014 modification of 2007 NPA On May 12, 2014, the Company entered into the Seventh Amendment to
2007 NPA and the Fifth Amendment to 2007 NPA Notes (the Seventh Amendment to 2007 NPA), with the holders of a majority
of the aggregate outstanding principal amount of the 2007 NPA. The Seventh Amendment to 2007 NPA applied to all of the 2007 NPA
Notes outstanding as of May 12, 2014, or $28,205,000, and will apply to any future 2007 NPA Notes issued by the Company. As
amended, the 2007 NPA 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 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;
● a total borrowing commitment of $33.3 million;
● a conversion price that is fixed at $1.43; 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 Companys 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. The 2014 modification of the aggregate principal balance of 2007
NPA Notes issued prior to the 2013 modification dated June 28, 2013, or $23,075,000, was accounted for as debt extinguishment
in accordance with provisions of ASC 470 Debt The 2014 modification of the aggregate principal balance of
2007 NPA Notes issued after 2013 modification, but prior to the 2014 modification, or $5,130,000, with a net carrying amount of
$922,202 immediately prior to the 2014 modification, resulted in a troubled debt restructuring treatment where no gain or
loss was recognized due to the 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. Fair Value of Convertible Notes under 2014 modification 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 Companys 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;
● conversion price was fixed at $1.43 per share. Related Party Convertible Notes under 2007 and 2014 NPAs Grasford, the Companys largest stockholder, owns $13,826,282
in face value amount of 2007 NPA Notes as of December 31, 2015. Grasford is controlled by Avy Lugassy, one of the Companys
principal shareholder . UBP owns $20,817,180 in combined face value amount of 2007 and 2014
NPA Notes as of December 31, 2015 and is considered a significant beneficial owner. Crystal Management owns $730,769 in face value amount of 2007 NPA
Notes as of December 31, 2015. Crystal Management is controlled by Doron Roethler, the second largest shareholder of the Company. Interest expense for 2015 for convertible notes was $5,020,148, including
amortization of discount of $2,335,151. Interest expense for 2014 for convertible notes was $4,196,918, including
amortization of discount of $1,899,060. IDB Credit Facility and Comerica LSA The Company had an outstanding promissory note with Israel Discount
Bank (IDB) dated December 6, 2010 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, in 2014 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 with Comerica 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 Companys 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 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, 2016); 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. The IDB to Comerica loan transfer
in 2014 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. The
approximately $30,000 in legal fees were deferred as deferred financing costs and are charged to interest expense over the life
of the LSA. 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 Companys 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, 2015 was $92,270. 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, 2015 is $22,368. The table below details future payments under capital leases:
Year:
2016 $ 39,259
2017 39,259
2018 34,189
2019 19,412
132,119
Less amount representing interest (17,481 )
Capital lease obligations $ 114,638 |
