Make-Whole Dividend Liability

9 Months Ended

Sep. 30, 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 that 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). The Company concluded that the make-whole payment should be characterized as an embedded derivative under ASC 815. See Note 9. Stockholders' Equity. With the closing of the Series A Preferred stock transaction, during the nine months ended September 30, 2013, the Company recorded a make-whole dividend of $1.9 million as "Deemed dividend on Preferred Stock and accretion of warrants" in the Condensed Statements of Operations and "Make-whole dividend liability" in the Condensed Balance Sheets. The fair value of this dividend liability, which is indexed to the Company's common stock, must be evaluated at each period end.

The fair value measurement for this make-whole dividend liability relies primarily on Company-specific inputs and the Company’s own assumptions. With the absence of observable inputs, the Company determined that this recurring fair value measurement resides 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, for the three months ended September 30, 2013, the Company recorded a fair value adjustment in the amount of $70,000, recorded as "Change in fair value of make-whole dividend liability" in Other Income/(Expense) in the Condensed Statements of Operations and in the Condensed Statement of Cash Flows. At September 30, 2013, there were 712,390 shares of Series A Preferred Shares outstanding. The fair value of the corresponding make-whole dividend liability was $1,653,000 at September 30, 2013.