Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVE WARRANT LIABILITY

v2.4.1.9
DERIVATIVE WARRANT LIABILITY
 9 Months Ended
Sep. 30, 2014
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE WARRANT LIABILITY
14.
DERIVATIVE WARRANT LIABILITY
 
Warrants issued in connection with several private placements contain provisions that protect holders from a decline in the issue price of the Company’s common stock (or “down-round”) or that contain net settlement provisions.  The Company accounts for these warrants as liabilities instead of equity.  Down-round provisions reduce the exercise price or conversion price of a warrant if a company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new warrants or equity that have a lower exercise price or at a lower price.  Net settlement provisions allow the holder of the warrant to surrender shares underlying the warrant equal to the exercise price as payment of its exercise price, instead of physically exercising the warrant by paying cash.  The Company evaluates whether warrants to acquire its common stock contain provisions that protect holders from declines in the stock price or otherwise could result in modification of the exercise price and/or shares to be issued under the respective warrant agreements based on a variable that is not an input to the fair value of “fixed for fixed” option.
 
During the nine months ended September 30, 2014, the Company offered all holders of warrants with round down protection the opportunity to waive those rights in exchange for warrants without round down protection and a premium of 27% in the number of shares underlying warrants for those holders who initially acquired their warrants in October 2013 and a 25% inducement in the number of warrants for those holders who initially acquired their warrants and warrant units in December 2013. The exchanged warrants have the same initial term, exercise price and vesting rights as the warrants which offered round down protection. The inducement warrants vest immediately, have a term of five years and an exercise price based on the date of the acceptance of the offer. As of September 30, 2014, 9,881,418 warrants and warrant units were exchanged for warrants which do not offer round down protection resulting in a reduction of the warrant liability of $4,494,608. The exchanged warrants which do not offer round down protection were valued at $1,596,685 as of September 30, 2014. Additionally, 2,626,068 inducement warrants issued were valued at $382,753 as of September 30, 2014. These warrants were subsequently surrendered to the Company in 2015 as more fully described in Note 19-Subsequent Events.  
 
The Company recognizes these warrants at their fair value and remeasures them at fair value on each reporting date.
 
The assumptions used in connection with the valuation of warrants and units were as follows:
 
 
 
 
September 30,
2014
 
December 31,
2013
 
Number of shares underlying the warrants
 
 
 
9,992,296
 
 
19,873,714
 
Exercise price
 
 
$
1.00 - $1.05
 
$
1.00 - $1.05
 
Volatility
 
 
 
87.38
%
 
90.11
%
Risk free interest rate
 
 
 
1.07
%
 
0.78
%
Expected dividend yield
 
 
 
0.00
%
 
0.00
%
Expected warrant life (years)
 
 
 
4.19 – 4.41
 
 
4.78 – 4.94
 
Stock price
 
 
$
0.60
 
$
1.25
 
 
Recurring Level 3 Activity and Reconciliation
 
The table below provides a reconciliation of the beginning and ending balances for the liabilities measured at fair value using significant unobservable inputs (Level 3).  The table reflects gains and losses for the nine months ended September 30, 2014 for all financial liabilities categorized as Level 3.  There were no financial liabilities categorized as Level 3 for the nine months ended September 30, 2013.
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
 
December 31,
2013
 
Initial
Measurements
 
Increase
(Decrease)
To
Fair Value
 
Issuance
 
Reclassed
To Equity
 
September 30,
2014
 
Unit Offering
 
$
8,518,330
 
$
—
 
$
(614,241)
 
$
—
 
$
(3,768,916)
 
$
4,135,173
 
Unit Offering- Placement Agent
 
 
993,034
 
 
—
 
 
(71,063)
 
 
—
 
 
(576,439)
 
 
345,532
 
Beam warrants
 
 
1,216,000
 
 
3,347
 
 
(960,636)
 
 
(247,800)
 
 
—
 
 
10,911
 
 
 
$
10,727,364
 
$
3,347
 
$
(1,645,940)
 
$
(247,800)
 
$
(4,345,355)
 
$
4,491,616