DERIVATIVE WARRANT LIABILITY

12 Months Ended

Dec. 31, 2013

Notes to Financial Statements

Note 7. DERIVATIVE WARRANT LIABILITY

Derivative financial instruments are recognized as a liability on the consolidated balance sheet and measured at fair value.

At December 31, 2013 and 2012, the Company had outstanding warrants to purchase 1,209,211 and 1,254,004 shares of its common stock, respectively. Included in these outstanding warrants at December 31, 2013 and 2012 are warrants to purchase 700,000 and 736,015 shares, respectively, that are considered to be derivative instruments. The fair value of these derivative instruments at December 31, 2013 and 2012 was approximately $1,119,000 and $5,585,000, respectively, and is included in Derivative Warrant Liability, a current liability. Changes in fair value of the derivative financial instruments are recognized currently in the Statements of Operations as a Gain (Loss) on Revaluation of Derivative Warrant Liability. The changes in the fair value of the derivative warrant liability for the years ended December 31, 2013, 2012 and 2011 resulted in a gain (loss) of approximately $4,466,000, $3,684,000 and $(1,763,000), respectively.

The primary underlying risk exposure pertaining to the warrants is the change in fair value of the underlying common stock for each reporting period.  There were no warrants exercised in 2013 or 2012 pursuant to cashless exercise provisions.

For the year ended December 31, 2013 there were no derivative warrants exercised.  For the year ended December 31, 2012, derivative warrants to purchase 165,451 shares were exercised and certain anti-dilution rights were waived which resulted in a reclassification to additional paid-in capital in the amount of approximately $62,000.

The table below presents the changes in the derivative warrant liability, which is measured at fair value on a recurring basis and classified as Level 3 in fair value hierarchy (see Note 2):

	2013			2012
Derivative warrant liability as of January 1	$	5,585,141		$	1,035,337
Warrants issued under Montaur Credit Facility		—			8,295,000
Total unrealized losses included in net loss (1)		1,671,682			500,000
Total realized losses included in net loss (1)		—			1,438
Total unrealized gains included in net loss (1)		(5,985,000	)		(4,077,433	)
Total realized gains included in net loss (1)		(152,668	)		(107,681	)
Reclassification of liability to additional paid-in capital for warrants		—			(61,520	)
Derivative warrant liability as of December 31	$	1,119,155		$	5,585,141
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(1) Included in gain or loss on revaluation of derivative warrant liability in the Consolidated Statement of Operations.