CONVERTIBLE PREFFERED STOCK AND WARRANTS

2013 Financing

On December 13, 2013, the Company entered into a securities purchase agreement with certain investors for the private placement, for aggregate gross proceeds of $7.0 million, of 3,500,000 shares of the Company’s newly-designated Series A 6% Convertible Preferred Stock (the “Series A Preferred Stock” – see Note 6) and warrants to purchase 5,250,000 shares of our common stock at an exercise price of $2.387 per share.

In connection with the placement of the Series A Preferred Stock and warrants, we also issued warrants to purchase 525,000 shares of our common stock, with the same terms as the investor warrants, to the placement agent.

Because the holders of the Series A Preferred Stock could have requested redemption on or after December 13, 2017, the preferred stock had conditions for its redemption that were not within the control of the Company. Accordingly, the carrying amount of the Series A Preferred Stock of $2.6 million, net of the expenses allocated to the preferred stock of $0.4 million, was recorded outside of stockholders’ equity, as mezzanine equity, in accordance with FASB ASC 480-10-S99. The net carrying amount of the Series A Preferred Stock was accreted to its redemption value over the four year period to when the holders may request redemption, using an effective interest method. For the year ended December 31, 2015, additional accretion of $221,902 was recognized. During 2015, the Series A Preferred Stock and certain related common warrants were exchanged for Series B Preferred Stock. As a result the net carrying amount of the Series A Preferred Stock at December 31, 2017 and 2016 was $0.

Reconciliation of changes in fair value

Certain assets and liabilities that are measured at fair value on a recurring basis are measured in accordance with FASB ASC Topic 820-10-05, Fair Value Measurements. FASB ASC Topic 820-10-05 defines fair value, establishes a framework for measuring fair value and expands the disclosure requirements regarding fair value measurements for financial assets and liabilities as well as for non-financial assets and liabilities that are recognized or disclosed at fair value on a recurring basis in the financial statements.

The statement requires fair value measurement be classified and disclosed in one of the following three categories:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. Our derivative financial instruments that are measured at fair value on a recurring basis are all measured at fair value using Level 3 inputs. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following represents a reconciliation of the changes in fair value of warrants measured at fair value using Level 3 inputs during the year ended December 31, 2017:



(in thousands)	2013 Placement Agent Warrants
Balance, December 31, 2015	$	267
Exercise of warrants	(698		)
Change in fair value	634
Balance, December 31, 2016	203
Exercise of warrants	(130		)
Change in fair value	(53		)
Balance, December 31, 2017	$	20

The warrants are valued using a trinomial lattice model. Significant assumptions used in the model at December 31, 2017 and 2016, include the market price of our common stock, an expected dividend yield of zero, remaining life of 2.0 years and 2.5 years, historical volatility of 24.359% and 82.470% and risk-free rates of return of 1.798% and 1.470%, respectively.

At December 31, 2017 and December 31, 2016, the fair value of the remaining 40,000 placement agent warrants was approximately $20,000 and $203,000, respectively.