Make-Whole Dividend Liability

12 Months Ended

Dec. 31, 2013

Make-whole dividend liability [Abstract]

Make-Whole Dividend Liability

MAKE-WHOLE DIVIDEND LIABILITY

In June 2013, the Company entered into a Series A Preferred Stock Purchase Agreement. Holders of Series A Preferred Stock are entitled to cumulative dividends at a rate of 8.0% per annum, with the dividend rate being indexed to the Company's stock price and subject to adjustment. Conversion or redemption of the Series A Preferred Stock within 4 years of issuance requires the Company pay a make-whole dividend to the holders, whereby dividends for the full four year period are to be paid in cash or common stock (valued at 10% below market price).

In October 2013, the Company entered into a Series B Preferred Stock Purchase Agreement. Holders of Series B Preferred Stock are entitled to cumulative dividends at a rate of 5.75% per annum, with the dividend rate being indexed to the Company's stock price and subject to adjustment. Conversion or redemption of the Series B Preferred Stock within 5 years of issuance requires the Company pay a make-whole dividend to the holders, whereby dividends for the full five year period are to be paid in cash or common stock (valued at 8% below market price, but not to exceed the lowest closing price paid during the applicable measurement period).

The Company concluded the make-whole payments should be characterized as embedded derivatives under ASC 815. See Note 3. Summary of Significant Accounting Policies and Note 10. Stockholders' Equity. With the closing of the Series A and Series B preferred stock transactions, during the year ended December 31, 2013, the Company recorded dividends totaling $3.7 million as "Deemed dividends on Preferred Stock and accretion of warrants" in the Statements of Operations and "Make-whole dividend liability" in the Balance Sheets.

The fair value of these dividend liabilities, which are indexed to the Company's common stock, must be evaluated at each period end. The fair value measurements rely primarily on Company-specific inputs and the Company’s own assumptions. With the absence of observable inputs, the Company determined these recurring fair value measurements reside primarily within Level 3 of the fair value hierarchy. Fair value determination required forecasting stock price volatility, expected average annual return and conversion date. As a result of this analysis, during the year ended December 31, 2013, the Company recorded a net increase in fair value of the liability in the amount of $1.3 million, recorded as "Change in fair value of make-whole dividend liability" in Other Income/(Expense) in the Statements of Operations and in the Statement of Cash Flows.

At December 31, 2013, there were 362,390 shares and 350 shares of Series A and Series B Preferred Shares outstanding, respectively. At December 31, 2013, the Company was entitled to redeem the outstanding Series A preferred shares for $2.9 million, plus a make-whole amount of $1.1 million, payable in cash or common shares. At December 31, 2013, the Company was entitled to redeem the outstanding Series B preferred shares for $3.5 million, plus a make-whole amount of $2.0 million, payable in cash or common shares. The combined fair value of the make-whole dividend liabilities for the Series A and Series B preferred shares, which approximates cash value, was $3.1 million as of December 31, 2013.