DERIVATIVE WARRANT LIABILITY

3 Months Ended

Mar. 31, 2014

Notes to Financial Statements

Note 6. DERIVATIVE WARRANT LIABILITY

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

At March 31, 2014 and December 31, 2013, the Company had outstanding warrants to purchase 1,182,393 and 1,209,211 shares of its Common Stock, respectively.  Included in these outstanding warrants at March 31, 2014 and December 31, 2013 are warrants to purchase 700,000 shares, that are considered to be derivative financial instruments. The fair value of these derivative instruments at March 31, 2014 and December 31, 2013 was approximately $979,000 and $1,119,000, 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 or loss on revaluation of derivative warrant liability.  The Gain on Revaluation of Derivative Warrant Liability for the three months ended March 31, 2014 and 2013 was approximately $140,000 and $1,681,000, 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.  For the three months ended March 31, 2014 and 2013, no derivative warrants were exercised and none expired.

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:

	2014			2013
Derivative warrant liability as of January 1	$	1,119,155		$	5,585,141
Total unrealized losses included in net loss (1)		15,000			741,682
Total realized losses included in net loss(1)		—			—
Total unrealized gains included in net loss (1)		(155,000	)		(2,270,000	)
Total realized gains included in net loss (1)		—			(152,668	)
Reclassification of liability to additional paid-in capital for warrants exercised		—			—
Derivative warrant liability as of March 31	$	979,155		$	3,904,155

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 (1) Included in Gain on Revaluation of Derivative Warrant Liability in the Consolidated Statement of Operations.