5. DEBT

Financing Facility

On November 13, 2013, the Company, together with each of the Company’s subsidiaries as guarantors, entered into the Loan Agreement with RCF, whereby RCF agreed, subject to the terms and conditions set forth in the Loan Agreement, to provide a secured convertible loan facility of up to $15.0 million to the Company. The facility initially consisted of three tranches of $5.0 million each. RCF advanced $3.0 million of the first $5.0 million tranche shortly following the closing of the Loan Agreement and on January 29, 2014, the Company’s stockholders, excluding RCF, approved the Loan Agreement and the issuance of shares thereunder. Following such approval, RCF advanced the remaining $2.0 million of the first tranche on February 4, 2014. On April 29, 2014, the Company and RCF executed an amendment to the Loan Agreement which reduced the amount available thereunder from $15.0 million to $8.0 million, and on April 30,2014, the Company requested, and RCF advanced, the final $3.0 million available under the Loan Agreement. See Note 11 — Subsequent Events — Amendment to Loan Agreement. No additional amounts may be drawn under the Loan Agreement.

On February 4, 2014, the Company paid a $300,000 loan establishment fee by the issuance of 117,188 shares of the common stock of the Company. The number of shares issued was determined based upon the volume weighted average price of the Company’s common stock for the 20 trading days ended October 17, 2013 ($2.56). On February 4, 2014, the Company also paid $16,083 of the commitment fee and $47,000 of interest accrued through December 31, 2013 by the issuance of 21,218 shares of the common stock of the Company. The number of shares issued was determined based upon the volume weighted average price of the Company’s common stock for the 20 trading days ended December 30, 2013 ($2.97).

The Company’s obligations under the Loan Agreement are secured by pledges on the equity interests of the Company’s subsidiaries and a lien on substantially all of the assets of the Company and its subsidiaries. Amounts drawn under the Loan Agreement mature on December 31, 2016 and bear interest at 12% per annum through January 29, 2014 and 10% per annum thereafter, payable quarterly in arrears in shares of the Company’s common stock or, at RCF’s election, in cash. The Company may prepay all or any portion of the amounts drawn under the Loan Agreement without penalty, subject to a minimum prepayment amount of $5.0 million or (if lower) the full amount then outstanding. Prepaid amounts may not be redrawn. The Loan Agreement contains customary representations, warranties, covenants and events of default and grants RCF the right to designate two nominees to the Company’s Board of Directors so long as any obligations remain outstanding under the Loan Agreement.

RCF may convert amounts drawn under the Loan Agreement into shares of the Company’s common stock at any time prior to maturity on December 31, 2016. The conversion price is initially set at $2.60 per share and is subject to customary anti-dilution adjustments and further downward adjustment, subject to a floor of $1.00 per share, in case of certain equity issuances by the Company before November 13, 2014. As of May 9, 2014, RCF owned approximately 6.7 million shares or 27% of the Company’s outstanding common stock. If RCF were to convert the entire $8.0 million outstanding under the Loan Agreement as of May 9, 2014, assuming a conversion price of $2.60 per share, RCF would receive approximately 3.1 million shares of the Company’s common stock, and RCF’s ownership percentage in the Company would increase to approximately 35.1%.

Derivative Liability

The conversion feature of the Loan Agreement meets the definition of a derivative liability instrument because the exercise price is not a fixed price as described above. Therefore, the conversion feature does not meet the “fixed-for-fixed” criteria outlined in ASC 815-40-15. As a result, the conversion feature of the convertible Loan Agreement is required to be recorded as a derivative liability recorded at fair value and marked-to-market each period with the changes in fair value each period being charged or credited to income or loss. The initial fair value of the derivative liability offset was recognized as a debt discount and will be amortized over the life of the Loan Agreement. At the drawdown of the $3,000,000 on November 13, 2013, the fair value of the derivative liability related to the conversion feature was $2,061,794, at December 31, 2013 it was $2,169,408, and at March 31, 2014 it was $1,842,867.

At the drawdown of the $2,000,000 on February 4, 2014, the fair value of the derivative liability related to the conversion feature was $1,555,806, and at March 31, 2014 it was $1,228,578. The derivative liability was calculated using the Black-Scholes option pricing model with the following fair value Level 3 assumptions:

Risk-free interest rate		0.65% - 0.90%
Expected life of derivative liability		2.76 — 2.91 years
Expected volatility		93% - 94%
Dividend rate		0.00%

The changes in the derivative liabilities related to the conversion feature are as follows:

	Derivative
	Liability
Balance, January 1, 2014	$	2,169,408
Fair value of $2,000,000 drawdown	1,555,806
Unrealized gain - derivative liability	(653,768		)
Balance, March 31, 2014	$	3,071,446