12. FAIR VALUE MEASUREMENT

DERIVATIVE LIABILITIES

During the year ended December 31, 2013, the Company sold common stock and warrants to investors. The warrants contained an exercise price reset provision. The Company computed the issuance date fair value of the warrants to be an aggregate of $11,042,057 which was recorded as a derivative liability. On December 31, 2014 and 2013, the Company recomputed the fair value of the warrants and recorded a gain on the change in fair value of derivative liabilities of $3,407,823 and $1,303,286 during the years ended December 31, 2014 and 2013, respectively.

During the year ended December 31, 2014, the Company, in consideration of the amendment of certain warrants to remove the exercise price reset provision (the “Amended Warrants”), offered to issue a warrant to purchase a number of shares of common stock equal to 25%-27% of the number of shares underlying the amended warrant (the “Inducement Warrants”). The Inducement Warrants vest immediately, have a term of five years and an exercise price equal the fair market value of the Company’s common stock on the date of issuance. As a result, during the year ended December 31, 2014, warrants to purchase an aggregate of 9,881,418 shares of common stock were amended to remove the exercise price reset provision which resulted in the reclassification of $4,345,355 from derivative liability to additional paid in capital, which fair value was recomputed on the date of amendment. The Amended Warrants had an aggregate fair value of $1,596,685 as of the date of amendment, which represented a reduction in fair value of $2,748,670. In addition, Inducement Warrants to purchase an aggregate of 2,626,068 shares of common stock were issued during the year ended December 31, 2014 and had an issuance date fair value of an aggregate of $382,753 which was recorded as inducement expense in the accompanying statement of operations for the year ended December 31, 2014.

In connection with the sale of Series C Convertible Preferred Stock during the year ended December 31, 2014, the Company issued five-year warrants to purchase an aggregate of 8,571,429 shares of the Company’s common stock at an exercise price of $1.00 per share that contain exercise price reset provisions. See Note 13 – Stockholders’ Deficiency – Preferred Stock – Series C Convertible Preferred Stock for additional details. The warrants had an aggregate issuance date fair value of $529,904 using the Binomial Lattice Model, which was recorded as a debit to preferred stock discount and a credit to derivative liabilities. Given that redemption was not deemed to be probable, the Company has not recorded amortization of the preferred stock discount. On December 31, 2014, the Company recomputed the fair value of the warrants as $688,040 and recorded a loss on the change in fair value of derivative liabilities of $158,136.

On December 23, 2014, the Company reclassified warrants to purchase 31,896,182 shares of common stock with a value of $914,977 from additional paid in capital to derivative liabilities as a result of the existence of a provision that provides for a cash payment to the holder equal to the value of the warrant as computed using the Black-Scholes option pricing model upon a future fundamental transaction, as defined in the agreement. The Company has determined that the occurrence of a fundamental transaction is no longer under its control due to the December 23, 2014 (the date of issuance of Series C Convertible Preferred Stock) effectiveness of the Series A Preferred Stock holder’s (the Company’s former CEO) waiver of his super voting rights which permitted him votes equal to five times the number of his common stock equivalents.

WARRANTS PAYABLE

In connection with the Beam Exchange Agreement, during the years ended December 31, 2014 and 2013, the Company accrued for the value of the warrant obligations resulting from the Triggering Events occurring during the same period, which, using the Black-Scholes option pricing model, was determined to be an aggregate of $66,963 and $1,216,000, respectively, which was a component of accrued expenses in the consolidated balance sheets as of December 31, 2014 and 2013, respectively. The Company recomputed the fair value of the warrants payable and recorded a gain on the change in fair value of $34,240 and $264,000 during the years ended December 31, 2014 and 2013, respectively.

During the year ended December 31, 2014, the Company issued warrants to purchase an aggregate of 746,098 shares of common stock at an estimated fair value of $259,690 to the former Beam members. As of December 31, 2014, warrants to purchase an aggregate of 167,462 shares of common stock are required to be issued, with an estimated fair value of $63,533 using the following assumptions: expected volatility of 87%; risk-free interest rate of 0.24%; expected term of one year; and 0% dividend yield. These warrants were issued by the Company on January 27, 2015.

During year ended December 31, 2014, the Company changed significant estimates used to calculate the fair value of the warrants including the term, the impact of Beam member stock sales and the impact thereof on their subsequent percentage of ownership on a prospective basis and changes to percentage of ownership on a fully-diluted basis, which resulted in a $925,500 gain on the change in fair value.

SUMMARY

Assumptions utilized in the valuation of Level 3 liabilities are described as follows:

The following table sets forth a summary of the changes in the fair value of Level 3 warrant liabilities that are measured at fair value on a recurring basis:

Assets and liabilities measured at fair value on a recurring or nonrecurring basis are as follows: