7. Equity Instruments Modification and Fair Value Measurements

12 Months Ended

Dec. 31, 2014

Debt Disclosure [Abstract]

Equity Instruments Modification and Fair Value Measurements:

The fair value of the Company’s cash, accounts receivable and accounts payable at December 31, 2014 approximate their carrying values due to the relative liquidity and/or short-term nature of these instruments. As defined by ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”), fair value measurements and disclosures establish a fair value hierarchy that prioritizes fair value measurements based on the type of inputs used for the various valuation techniques (market approach, income approach and cost approach). The three levels of the fair value hierarchy under ASC 820 are described below:

●	Level 1 - observable inputs such as quoted prices in active markets for identical assets or liabilities;

●

Level 2 - inputs other than quoted market prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets, such as interest rates and yield curves that are observable at commonly-quoted intervals; and

●	Level 3 - unobservable inputs that reflect the Company’s own assumptions, as there is little, if any, related market activity.

The following table presents the fair value hierarchy and the change in fair values of the Company’s derivative liabilities measured at fair value on a recurring basis.

		Fair Value Hierarchy Level				Fair Value December 31, 2013				Change in Fair Value From Jan. 1 to Sept. 15, 2014 (Modification Date)
Series C-1, C-2 and C-3 non-voting preferred stock conversion option issued in October 2013 and January 2014			3			$	2,027,330			$	599,814
Series D non-voting preferred stock conversion option issued in October 2013			3				901,625				2,017,960
Series E non-voting preferred stock conversion option issued in October 2013			3				735,619				1,786,902
Warrants issued in connection with convertible debt issued in May 2013			3				660,869				1,566,444
Warrants issued in connection with Series C-1, C-2 and C-3 non-voting preferred stock issued in October 2013 and January 2014			3				983,361				3,732,962
Warrants issued in March 2014 in connection with the private placement of common stock and warrants			3				-				(855,129	)
Total						$	5,308,804			$	8,848,953

The Company's derivative liabilities are classified as Level 3. Changes in the unobservable input values would likely cause material changes in the fair value of the Company’s Level 3 derivative liabilities. Significant unobservable inputs are implied volatilities. Significant increases (decreases) in implied volatilities in isolation would result in a significantly higher (lower) fair value measurement. The Company reviews these valuations and the changes in the fair value measurements for reasonableness.

On September 15, 2014, the Company entered into consent and exchange agreements with the investors holding its outstanding Series C-2 preferred stock and related warrants, Series C-3 preferred stock and related warrants, Series D preferred stock and Series E preferred stock, and the investors holding warrants issued in March 2014. Pursuant to those agreements, the Company and the investors agreed to amend and restate the Series C-2 preferred stock and related warrants, Series C-3 preferred stock and related warrants, Series D preferred stock and Series E preferred stock and the warrants issued in May 2013, October 2013 and March 2014, to remove anti-dilution, price reset, cash settlement features and certain change of control provisions that caused those instruments to be classified as derivative liabilities. The Company also eliminated the preferred dividends on the Series D preferred stock and Series E preferred stock.

In exchange for the removal of the anti-dilution, price reset, cash settlement, change of control and dividend provisions from the Series C-2 preferred stock, Series C-3 preferred stock, Series D preferred stock and Series E preferred stock and the related warrants, as applicable, the Company agreed to the following:

1.

Decrease the exercise price of the warrants issued in May 2013 from $1.00 to $0.65, decrease the exercise price of the warrants issued in October 2013 from $1.25 to $0.90, decrease the exercise price of the warrants issued in January 2014 from $1.25 to $0.90, and decrease the exercise price of the warrants issued in March 2014 from $3.10 to $2.50;

2.

Extend the existing right of the two institutional investors in our May and October 2013 financings to participate in future financings to the later of two years after September 15, 2014 or the date on which the respective holder holds less than 5% of the Company’s common stock on a fully diluted basis;

3.	Increase the conversion ratio of the Series E preferred stock from 20 shares to 21.8667 shares of common stock for every share of Series E preferred stock;

4.	Issue 16,562 shares of the Company’s Series D preferred stock to the investor holding all of the outstanding shares of the Series D preferred stock in satisfaction of the 9.0% payment-in-kind dividend on that stock; and

5.	Issue an aggregate of 37,226 shares of Series E preferred stock to the two investors holding all of the outstanding shares of Series E preferred stock in satisfaction of the 8.0% payment-in-kind dividend on that stock.

As a result of these modifications, all of the outstanding derivative liabilities were reclassified to equity. The Company applied the accounting treatment prescribed for the modification of stock options under ASC 718 to the modification of the preferred stock and warrant instruments by analogy. The outstanding warrants and the preferred stock Series E and Series D hybrid instruments were re-measured immediately prior to the modification date with the original terms and immediately after the modification date with the amended terms. The change in fair value resulting from the modifications made to those instruments on September 15, 2014 was recorded as loss on modification of equity instruments and extinguishment of derivative liabilities in the amount of approximately $2,463,000.

The table below sets forth a summary of changes in the fair value of the Company’s Level 3 derivative liabilities related to the non-voting preferred stock embedded derivatives and the liability classified warrants.

		December 31, 2014
Balance at beginning of year		$	5,308,804
Additions to derivative liabilities			3,782,182
Conversion of convertible preferred stock to common stock			(2,447,384	)
Loss from modification of preferred stock and warrant instruments			2,462,588
Change in fair value of derivative liabilities			8,848,953
Reclassification of derivative liabilities to equity (excluding $21,117 dividends issued in 2013)			(17,955,143	)
Balance at end of year		$	-