10. Redeemable Convertible Preferred Stock

On June 13, 2013, the Company’s Board of Directors approved a resolution designating 10,000,000 shares of Preferred Stock as Series B redeemable convertible preferred stock (Series B) with an initial stated value of $1.40 and par value of $0.01. Each Series B share is convertible into 0.20 shares of common stock and is entitled to the number of votes equal to the number of shares of common stock into which such Series B share may be converted. These Series B shares may be converted to common stock by the holder of the shares at any time. The Series B shares may be automatically converted into common stock upon the election of the holders of at least two-thirds of the outstanding Series B shares. In addition, pursuant to the Company’s Articles of Incorporation, the Series B shares are automatically convertible into common stock upon an underwritten initial public offering by the Company, with aggregate proceeds to the Company of at least $7.0 million and a price per share to the public of at least the Series B stated value of $1.40 per share upon the closing of which the shares of common stock of the Company are listed for trading on a major national stock exchange.

Holders of the Series B shares are entitled to receive cumulative, cash dividends at the rate of 10% of the Series B stated value. Such dividends accrue from day-to-day commencing on the original issue date, whether or not earned or declared by the Board of Directors, and are compounded annually. No dividends have been declared or paid through December 31, 2015.

At any time on or after June 26, 2018, the holders of at least two-thirds of the outstanding Series B shares may require the Company to redeem all of the outstanding Series B shares for an amount equal to the original issue price per share plus any accrued and unpaid dividends.

Holders of the Series B are entitled to a liquidation preference in an amount equal to the Series B stated value of $1.40 per share plus all accrued and unpaid dividends in the event of a liquidation, dissolution, or winding-up of the Company, or in the event the Company merges with or is acquired by another entity.

As noted in Note 2 – Liquidity, the Company has a disagreement with one of its principal stockholders, Third Security, LLC, regarding the interpretation of the Company’s Amended and Restated Articles of Incorporation. The disagreement relates to whether it is technically possible for the Company to satisfy the requirements for automatic conversion of the Company’s outstanding shares of Series B Redeemable Convertible Preferred Stock (Series B Preferred) pursuant to an underwritten public offering.

In connection with the private placement of Series B, the Company recorded a liability for an embedded derivative that required bifurcation under the applicable accounting guidance. The embedded derivative includes a redemption feature, multiple dividend features, as well as multiple conversion features with specified anti-dilution adjustments for certain financing transactions involving the issuance of securities at a price below a minimum non-diluting issuance price of $7.00 per share.

The following table summarizes the conversions of Series B shares to common stock pursuant to Series B stockholder elections during the year ended December 31, 2015:



					Amount
					Reclassified
	Series B		Common		from Liability
Conversion	Shares		Stock		into Stockholders'
Date	Converted		Issued		Equity (1)
April 8, 2015		107,100		21,420	$	219,000
May 4, 2015		23,587		4,717		36,000
May 11, 2015		250,000		50,000		381,000
July 16, 2015		262,500		52,500		318,000
August 13, 2015		500,000		100,000		543,000
Totals		1,143,187		228,637	$	1,497,000


	(1)	Not inclusive of $9,000 reclassified from Series B redeemable convertible preferred stock and liabilities for dividends payable of $368,000 upon conversion of these shares.

The Company re-measured the fair value of the derivative feature and recorded a gain of $9,330,000 for the year ended December 31, 2015 to adjust the liability associated with the conversion feature to its estimated fair value of $1,493,000 as of December 31, 2015.

At December 31, 2015, the Company reclassified $8,971,000 from additional paid-in capital to Series B redeemable convertible preferred stock to adjust the Series B redeemable convertible preferred stock to its redemption value at that date.

At December 31, 2015, the Company recorded dividends payable of $368,000 to former holders of preferred stock, which are classified as current liabilities on the Company’s Balance Sheet at that date.