PREFERRED STOCK AND DETACHABLE WARRANTS

The total number of authorized shares of the Company’s preferred stock is 50,000,000 shares, $0.001 par value per share. The total number of designated shares of the Company’s Series A Convertible Preferred Stock is 5,000,000 (“Series A Preferred”). The total number of designated shares of the Company’s Series B Convertible Preferred Stock is 10,000,000. The total number of designated shares of the Company’s Series B1 Convertible Preferred Stock is 17,000,000. The number of designated shares of the Company's Series C Convertible Preferred Stock is 44,000. As of June 30, 2018 and December 31, 2017, there were 419,859 shares and 453,567 shares of Series A Preferred Stock issued and outstanding, respectively. As of June 30, 2018 and December 31, 2017, there were 3,499,059 and 3,427,597 shares of Series B Preferred Stock issued and outstanding, respectively. As of June 30, 2018 and December 31, 2017, there were 13,105,989 and 13,151,989 shares of Series B1 Preferred Stock issued and outstanding, respectively. As of both June 30, 2018 and December 31, 2017, there were 31,568 shares of Series C Preferred Stock issued and outstanding.

Series B Preferred Stock and Temporary Equity

Dividends on our Series B Preferred Stock accrue at an annual rate of 6% of the original issue price of the preferred stock ($3.10 per share), subject to increase under certain circumstances, and are payable on a quarterly basis. The dividends are payable by the Company, at the Company’s election, in registered common stock of the Company (if available), cash or in-kind in Series B Preferred Stock at $3.10 per share.

The Company has the option to redeem the outstanding shares of Series B Preferred Stock at $3.10 per share, plus any accrued and unpaid dividends on such Series B Preferred Stock redeemed, at any time beginning on June 24, 2017, and the Company is required to redeem the Series B Preferred Stock at $3.10 per share, plus any accrued and unpaid dividends, on June 24, 2020. Notwithstanding either of the foregoing, the Series B Preferred Stock may not be redeemed unless and until amounts outstanding under the Company’s senior credit facility have been paid in full.

The Warrants issued in connection with the Series B Preferred Stock (Series B Warrants) were valued using the Dynamic Black Scholes Merton formula pricing model that computes the impact of share dilution upon the exercise of the warrant shares at $7,028,067. In accordance with ASC 815-40-25 and ASC 815-10-15 Derivatives and Hedging and ASC 480-10-25 Liabilities-Distinguishing Liabilities from Equity, the convertible preferred shares are accounted for net outside of stockholders’ equity with the Warrants accounted for as liabilities at their fair value. The initial value assigned to the derivative warrant liability was recognized through a corresponding discount to the Series B Preferred Stock. The value of the derivative warrant liability will be re-measured at each reporting period with changes in fair value recorded in earnings. The initial valuation of the warrants resulted in a beneficial conversion feature on the convertible preferred stock of $5,737,796. The amounts related to the warrant discount and beneficial conversion feature will be accreted over the term as a deemed dividend. Fees in the amount of $1.4 million relating to the stock placement were netted against proceeds.

The following table represents the activity related to the Series B Preferred Stock, classified as Temporary Equity on the accompanying Consolidated Balance Sheet, during the six months ended June 30, 2018 and 2017:



	2018			2017
Balance at beginning of period	$	7,190,467		$	5,676,467
Less: conversions of shares to common	(62,973		)	—
Plus: discount accretion	525,664			419,196
Plus: dividends in kind	278,372			353,413
Balance at end of period	$	7,931,530		$	6,449,076

The Series B Warrants and Series B1 Warrants were revalued at June 30, 2018 and December 31, 2017 using the Dynamic Black Scholes model that computes the impact of a possible change in control transaction upon the exercise of the warrant shares at approximately $2,201,246 and $2,245,408, respectively. At June 30, 2018, the Series B Warrants and Series B1 Warrants were valued at approximately $653,807 and $1,547,439, respectively. The Dynamic Black Scholes Merton inputs used were: expected dividend rate of 0%, expected volatility of 76%-100%, risk free interest rate of 2.58% (Series B Warrants) and 2.72% (Series B1 Warrants), and expected term of 2.22 years (Series B Warrants) and 3.61 years (Series B1 Warrants).

At both June 30, 2018 and December 31, 2017, a total of $137,963 and $139,186 of dividends were accrued on our outstanding Series B Preferred Stock. During the three months ended June 30, 2018 and 2017, we paid dividends in-kind in additional shares of Series B Preferred Stock of $139,186 and $139,186, respectively.

Series B1 Preferred Stock and Temporary Equity

Dividends on our Series B1 Preferred Stock accrue at an annual rate of 6% of the original issue price of the preferred stock ($1.56 per share), subject to increases if certain EBITDA thresholds are not met, and are payable on a quarterly basis. The dividends are payable by the Company, at the Company’s election, in registered common stock of the Company (if available), cash, or in-kind in Series B Preferred Stock at $1.56 per share. At March 31, 2018, and June 30, 2018, the EBITDA thresholds were not met resulting in a 9% dividend rate.

The Company has the option to redeem the outstanding shares of Series B1 Preferred Stock at $1.72 per share, plus any accrued and unpaid dividends on such Series B1 Preferred Stock redeemed, at any time beginning on June 24, 2017, and the Company is required to redeem the Series B1 Preferred Stock at $1.56 per share, plus any accrued and unpaid dividends, on June 24, 2020. Notwithstanding either of the foregoing, the Series B1 Preferred Stock may not be redeemed unless and until amounts outstanding under the Company’s senior credit facility have been paid in full.

The Warrants issued in connection with the Series B1 Preferred Stock offering (Series B1 Warrants) were initially valued using the Dynamic Black Scholes Merton formula pricing model that computes the impact of share dilution upon the exercise of the May 2016 Warrant shares at $2,867,264. In accordance with ASC 815-40-25 and ASC 815-10-15 Derivatives and Hedging and ASC 480-10-25 Liabilities-Distinguishing Liabilities from Equity, the convertible Series B1 Preferred Stock shares are accounted for net outside of stockholders’ equity at $16,100,770 with the May 2016 Warrants accounted for as liabilities at their fair value. The initial value assigned to the derivative warrant liability was recognized through a corresponding discount to the Series B1 Preferred Stock. The value of the derivative warrant liability will be re-measured at each reporting period with changes in fair value recorded in earnings. This initial valuation of the warrants resulted in a beneficial conversion feature on the convertible preferred stock of $2,371,106. The amounts related to the warrant discount and beneficial conversion feature will be accreted over the term as a deemed dividend. Fees in the amount of $0.6 million relating to the stock placement were netted against proceeds.

The following table represents the activity related to the Series B1 Preferred Stock, classified as Temporary Equity on the accompanying Consolidated Balance Sheet, for the six months ended June 30, 2018, and 2017:



	2018			2017
Balance at beginning of period	$	15,769,478		$	13,927,788
Less: conversions of shares to common	(754,766		)	(86,467		)
Plus: dividends-in-kind	683,044			568,697
Plus: discount accretion	403,014			391,129
Balance at end of period	$	16,100,770		$	14,801,147

As of June 30, 2018 and December 31, 2017, respectively, a total of $396,717 and $276,144 of dividends were accrued on our outstanding Series B1 Preferred Stock. During the three months ended June 30, 2018 and 2017, we paid dividends in-kind in additional shares of Series B Preferred Stock of $401,517 and $276,144, respectively.

The following is an analysis of changes in the derivative liability for the six months ended June 30:



Level Three Roll-Forward
	2018			2017
Balance at beginning of period	$	2,245,408		$	4,365,992
Change in valuation of warrants	(44,162		)	(1,305,441		)
Balance at end of period	$	2,201,246		$	3,060,551