Warrants

12 Months Ended

Dec. 31, 2012

15. Warrants

In conjunction with a private placement in October 2010 (the “2010 Private Placement”), the Company issued warrants to Ladenburg, the placement agent for the 2010 Private Placement. The warrants entitle Ladenburg to purchase up to a total of 1,044,584 shares of Common Stock for $0.25 per share. The warrants expire October 28, 2015. The warrants are exercisable, at the option of the holder, at any time prior to their expiration. The fair value of warrants issued to placement agents was calculated utilizing the lattice method. The warrants issued to Ladenburg contain provisions that make them redeemable for cash by the holder of the warrant under certain circumstances that are not within the control of the Company. Accordingly, the fair market value of the warrants as of the date of issuance has been classified as liabilities. The fair value of the 2010 Private Placement warrants as of December 31, 2011 was $198,471. At December 31, 2012 the value of the warrants were adjusted to their fair value which was $125,350.

In conjunction with the March Private Placement, the Company issued warrants to Ladenburg in March 2012. The warrants entitle Ladenburg to purchase up to a total of 86,323 shares of Common Stock for $0.35 per share and expire March 27, 2017. The Company also issued warrants to Ladenburg in May 2012 in connection with the additional 702,872 shares of Common Stock issued in the March Private Placement. These warrants entitle Ladenburg to purchase 29,700 shares of Common Stock at $0.35 per share and expire May 22, 2017.The warrants are exercisable, at the option of the holder, at any time prior to their expiration. The fair value of warrants issued to placement agents were calculated utilizing the lattice method. The warrants issued to Ladenburg contain provisions that make them redeemable for cash by the holder of the warrant under certain circumstances that are not within the control of the Company. Accordingly, the fair market value of the warrants as of the date of issuance has been classified as liabilities. The fair value of the March Private Placements warrants at December 31, 2012 was $11,899.

As part of the issuance of convertible debentures to Hillair as disclosed in Note 10, the Company issued warrants to Hillair. The warrants entitle Hillair to purchase up to 2,604,651 shares of Common Stock for $0.4488, subject to adjustments upon certain events. The warrants may be exercised at any time on or after June 27, 2013 and expire on June 27, 2018. The fair value of warrants issued to Hillair was calculated utilizing the lattice method. The warrants issued to Hillair contain provisions that make them redeemable for cash by the holder of the warrant under certain circumstances that are not within the control of the Company. Accordingly, the fair market value of the warrants as of the date of issuance has been classified as liabilities and has been included as a debt discount of the convertible debentures described in Note 10. No amortization expense of the debt discount has been recorded for the year ended December 31, 2012. The fair value of the Hillair warrants as of December 31, 2012 was $199,806.

In connection, with the issuance of convertible debentures to Hillair, the Company issued warrants to Merriman. The warrants entitle Merriman to purchase up to 52,093 shares of Common Stock for $0.4488 and 52,093 shares of Common Stock at $0.43. The warrants issued to Merriman contain terms substantially similar to the warrants issued to Hillair. The fair value of the Merriman warrants as of December 31, 2012 was $8,166 and is recorded in deferred loan costs on the accompanying consolidated balance sheets.

The total change in fair value of the warrants of $(80,352) and $86,122 is included in the accompanying condensed consolidated statement of operations for the years ended December 31, 2012 and 2011, respectively.

The significant assumptions which the Company used to measure the fair value of warrants at December 31, 2012 and 2011 is as follows:

	2012			2011
Stock price	$	0.30		$	0.38
Term	2.84-5 Years			3.82 Years
Volatility		50	%		50	%
Risk-free interest rate		0.36-0.72	%		0.60	%
Exercise prices	$	0.25-0.45		$	0.25
Dividend yield		0.00	%		0.00	%
Delta		0.08			0.08
Up ratio		1.144			1.144
Down ratio		0.857			0.857
Up transition probability		0.500			0.500