DERIVATIVE WARRANT LIABILITY

3 Months Ended

Mar. 31, 2013

Notes to Financial Statements

Note 5. DERIVATIVE WARRANT LIABILITY

 At March 31, 2013 and December 31, 2012, the Company had outstanding warrants to purchase 10,504,270 and 12,540,040 shares of its Common Stock, respectively. Included in these outstanding warrants at March 31, 2013 and December 31, 2012 are warrants to purchase 7,000,000 and 7,360,153 shares, respectively, that are considered to be derivative financial instruments because the warrant agreements contain “down round” provisions whereby the number of shares covered by the warrants is subject to change in the event of certain future dilutive stock issuances. The fair value of these derivative instruments at March 31, 2013 and December 31, 2012 was approximately $3,904,000 and $5,585,000, respectively, and is included in Derivative Warrant Liability, a current liability, in the Consolidated Balance Sheet. Changes in fair value of the derivative financial instruments are recognized in the Consolidated Statement of Operations as a Gain on Revaluation of Derivative Warrant Liability. The Gain on Revaluation of Derivative Warrant Liability for the three months ended March 31, 2013 and 2012 was approximately $1,681,000 and $232,000, respectively.

 The Derivative Warrant Liability represents the risk exposure pertaining to the warrants and is based on the fair value of the underlying common stock and the Gain on Revaluation of Derivative Warrant Liability is a result of the change in that fair value.  For the three months ended March 31, 2013 and 2012, no derivative warrants were exercised and 451,636 warrants expired.

 The table below presents the changes in the Level 3 Derivative Warrant Liability measured for the three months ended March 31, 2013 and 2012:

	2013			2012
Derivative Warrant Liability as of January 1	$	5,585,141		$	1,035,337
Total unrealized losses included in net loss (1)		741,682			—
Total unrealized gains included in net loss (1)		(2,270,000	)		(231,543	)
Total realized gains included in net loss (1)		(152,668	)		—
Derivative Warrant Liability as of March 31	$	3,904,155		$	803,794
(1) Included in Gain on Revaluation of Derivative Warrant Liability in the Consolidated Statement of Operations.