3. Warrants Liability

The exercise price of the warrants issued by the Company in conjunction with the private placement of its common stock (the “2011 private placement”) could, in certain circumstances, be reset to below-market value. Accordingly, the Company has concluded that such warrants are not indexed to the Company's common stock; therefore, the fair value of the warrants was recorded as a liability upon their issuance and the changes in fair value of the warrants liability is recognized in other expense in the condensed consolidated statement of operations (See Note 9).

The Company used a binomial pricing model to determine the fair value of its warrants as of September 1, 2011, their issuance date, and September 30, 2011, the balance sheet date, using the following assumptions:

	Estimated Volatility			Annualized Forfeiture Rate		Expected Option Term (Years)		Estimated Exercise Factor		Risk-Free Interest Rate			Dividends
September 1, 2011		198	%		-		5.00		10		0.90	%		-
September 30, 2011		198	%		-		4.92		10		0.96	%		-

The following table is a reconciliation of the warrants liability measured at fair value using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2011:

September 1, 2011 fair value of the warrants liability at issuance	$	3,900,700
Change in fair value of warrant liability recorded in other expense		826,500
September 30, 2011 fair value of the warrants liability	$	4,727,200

The Company had no outstanding warrants during the year ended December 31, 2010.

Accounting Standards Codification 820, “Fair Value Measurement” establishes a fair value hierarchy that prioritizes the assumptions (inputs) to valuation techniques used to price assets or liabilities that are measured at fair value. The hierarchy, as defined below, gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The guidance for fair value measurements requires that assets and liabilities measured at fair value be classified and disclosed in one of the following categories:

Level 1: Defined as observable inputs, such as quoted (unadjusted) prices in active markets for identical assets or liabilities.
Level 2: Defined as observable inputs other than quoted prices included in Level 1. This includes quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3: Defined as unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valutaion techniques, as well as significant management judgment or estimation.

As of September 30, 2011, all of the Company's $4,727,200 Warrants Liability reported at fair value was categorized as Level 3 inputs.