3.	Warrants Liability, at Fair Value.

2011 Warrants

The Company allocated approximately $1.3 million of proceeds from its October 2011 registered direct offering to the fair value of common stock purchase warrants issued in connection with the offering that are classified as a liability (the 2011 warrants). The 2011 warrants are classified as a liability because of provisions in such warrants that allow for the net cash settlement of such warrants in the event of certain fundamental transactions (as defined in the warrant agreement). The valuation of the 2011 warrants is determined using the Black-Scholes Model. This model uses inputs such as the underlying price of the shares issued when the warrant is exercised, volatility, risk free interest rate and expected life of the instrument. The Company has determined that the 2011 warrants liability should be classified within Level 3 of the fair value hierarchy by evaluating each input for the Black-Scholes Model against the fair value hierarchy criteria and using the lowest level of input as the basis for the fair value classification. There are six inputs: closing price of the Company’s common stock on the day of evaluation; the exercise price of the warrants; the remaining term of the warrants; the volatility of the Company’s common stock; annual rate of dividends; forfeiture rate; and the risk free rate of return. Of those inputs, the exercise price of the warrants and the remaining term are readily observable in the warrants agreement. The annual rate of dividends is based on the Company’s historical practice of not granting dividends. The closing price of the Company’s common stock would fall under Level 1 of the fair value hierarchy as it is a quoted price in an active market. The risk free rate of return is a Level 2 input, while the historical volatility is a Level 3 input in accordance with the fair value accounting guidance. Since the lowest level input is a Level 3, the Company determined the warrants liability is most appropriately classified within Level 3 of the fair value hierarchy. This liability is subject to fair value mark-to-market adjustment each reporting period.

The calculated value of the 2011 warrants liability was determined using the Black-Scholes Model with the following assumptions:


	June 30, 2015		December 31, 2014
Risk free interest rate		0.58%		0.81%
Expected term		1.84 years		2.34 years
Expected volatility		73%		112%
Expected dividend yield		0%		0%
Expected forfeiture rate		0%		0%

The following table rolls forward the fair value of the Company’s warrants liability activity for the three and six month periods ended June 30, 2015 and 2014:


	Three months ended June 30,					Six months ended June 30,
	2015			2014		2015			2014
Fair value, beginning of period	$	3,564,299		$	2,136,539	$	2,794,891		$	1,819,562
Issuance of warrants		—			—		—			—
Exercise of warrants		(251,305	)		—		(662,175	)		(18,537	)
Change in fair value		(333,956	)		223,591		846,322			559,105

Fair value, end of period	$	2,979,038		$	2,360,130	$	2,979,038		$	2,360,130

During the three and six month periods ended June 30, 2015, 86,957 and 239,131 of the 2011 warrants were exercised, with proceeds to the Company of $113,044 and $310,870, respectively. During the three month period ending June 30, 2014 none of the 2011 warrants were exercised. During the six month period ended June 30, 2014 12,696 of the 2011 warrants were exercised, with proceeds to the Company of $16,504. The Company recognizes the change in the fair value of the warrants liability as a non-operating income or loss in the accompanying statements of operations.