Note 4 - Liability Attributable to Warrants

3 Months Ended

Mar. 31, 2015

Warrants Liability [Abstract]

Warrants Liability [Text Block]

4. Liability Attributable to Warrants

On January 7, 2014, we entered into a securities purchase agreement (the “SPA”) with a limited number of institutional investors, pursuant to which we issued and sold for cash an aggregate 11,299,999 shares of our common stock at a purchase price of $0.30 per share (See Note 11). We also issued warrants to the investors for no additional consideration to purchase an aggregate 5,650,001 shares of our common stock at an exercise price of $0.40 per share from January 7, 2014 through January 7, 2019.

Under certain conditions of the SPA that were to expire no later than January 7, 2015, we could have been required to issue a variable number of additional warrants to the investors at a below-market value exercise price. Accordingly, we have concluded that the warrants issued to the investors are not indexed to our common stock; therefore, the fair value of these warrants was recorded as a liability of $1,356,000 on January 7, 2014 on our Balance Sheet. Since these conditions did not occur as of January 7, 2015, we have reclassified the warrant from liability to equity.

Using a binomial pricing model, we calculated the fair value of the warrants issued to the investors on January 7, 2015 to be $407,300. We used the following assumptions in the binomial pricing model to derive the fair value: estimated volatility 113%; annualized forfeiture rate 0%; expected term 4.1 years; estimated exercise factor 3.5; risk free interest rate 1.20; and dividends 0.

Changes in fair value of the warrants liability are recognized in other income (expense), except for changes in the fair value of the warrants issued to ipCapital, which are recognized as a component of general and administrative expense in the condensed consolidated statement of operations.

We used the exercise price of the warrants, as well as the fair market value of our common stock, to determine the fair value of our warrants. The exercise price for warrants issued in conjunction with the 2011 Transaction, including those issued to the placement agent, was either $0.20 or $0.26 per share, and was $0.26 per share for the warrants issued to ipCapital.

The fair market value of our common stock was $0.17 and $0.20 per share as of March 31, 2015 and 2014, respectively. We used a binomial pricing model to determine the fair value of our warrants liability as of March 31, 2015 and December 31, 2014, the balance sheet dates, using the following assumptions:

	Estimated Volatility			Annualized Forfeiture Rate		Expected Term (Years)		Estimated Exercise Factor		Risk-Free Interest Rate			Dividends
2011 Transaction
March 31, 2015		110	%		—		1.44		3.5		0.40	%		—
December 31, 2014		104	%		—		1.69		3.5		0.56	%		—
2014 Transaction
March 31, 2015		—			—		—		—		—			—
December 31, 2014		114	%		—		4.08		3.5		1.35	%		—
ipCapital
March 31, 2015		107	%		—		1.56		4.0		0.44	%		—
December 31, 2014		105	%		—		1.81		4.0		0.61	%		—

The following table is a reconciliation of the warrants liability measured at fair value using significant unobservable inputs (Level 3) for the three months ended March 31, 2015:

Warrants liability – December 31, 2014 fair value	$	647,300
Change in fair value of warrant liability recorded in other income		55,100
Change in fair value of warrant liability recorded in general and administrative expense		(400	)
Reclassification of 2014 PIPE Warrant to Equity		(407,300	)
Warrants liability – March 31, 2015 fair value	$	294,700

The following tables reconcile the total number of warrants outstanding for the periods indicated:

For the Three-Month Period Ended March 31, 2015 

	Beginning Outstanding		Issued		Exercised		Ending Outstanding
2011 Transaction		10,302,500		—		—		10,302,500
2014 Transaction		5,650,001		—		—		5,650,001
Exercise Agreement		4,500,000		—		—		4,500,000
ipCapital		400,000		—		—		400,000
Consultant Warrant (1)		169,273		—		—		169,273
Offer to Exercise		152,500		—		—		152,500
Total		21,174,274		—		—		21,174,274

	Beginning Outstanding		Issued		Exercised		Ending Outstanding
2011 Transaction		11,302,500		—		1,000,000		10,302,500
2014 Transaction		—		5,650,001		—		5,650,001
Exercise Agreement		4,500,000		—		—		4,500,000
ipCapital		400,000		—		—		400,000
Consultant Warrant (1)		312,500		—		—		312,500
Offer to Exercise		152,500		—		—		152,500
Total		16,667,500		5,650,001		1,000,000		21,317,501

(1) On February 11, 2014, we served notice to a former investor relations firm that we were cancelling our consulting agreement with them, with such cancellation to be effective April 11, 2014. Under the terms of the agreement, 169,273 of the warrants that had been issued to such firm will have vested as of the effective cancellation date, and 143,227 will ultimately be forfeited.