Warrant Liabilities

3 Months Ended

Mar. 31, 2014

Note 4. Warrant Liabilities

Warrants issued in connection with the Company’s registered public offering contain provisions that protect holders from a decline in the issue price of its common stock (or “down-round” provision) and contain net settlement provisions. As a result, the Company accounts for these warrants as liabilities instead of equity instruments. Down-round provisions reduce the exercise or conversion price of a warrant if the Company issues equity shares for a price that is lower than the exercise or conversion price of the warrants. Net settlement provisions allow the holder of the warrant to surrender shares underlying the warrant equal to the exercise price as payment of its exercise price, instead of exercising the warrant by paying cash. The Company evaluates whether warrants to acquire its common stock contain provisions that protect holders from declines in the stock price or otherwise could result in modification of the exercise price and/or shares to be issued under the respective warrant agreements based on a variable that is not an input to the fair value of a “fixed for fixed” option.

The Company recognizes these warrants as liabilities at their fair value on the date of grant and remeasures them to fair value on each reporting date.

The Company recognized an initial warrant liability for the warrants issued in connection with the registered public offering completed in June 2013 totaling $4,827,788, which was based on the June 25, 2013 closing price of a share of the Company’s common stock as reported on OTC Markets of $0.96. On January 21, 2014, 250,000 warrants were exercised. The fair value of the warrants exercised, or $502,025, was reclassified from Warrant liability to Additional paid-in capital. On March 31, 2014, the closing price of the Company’s common stock as reported on OTC Markets was $2.24. Due to the fluctuations in the market value of the Company’s common stock from December 31, 2013 through March 31, 2014, the Company recognized a non-cash charge of $1,742,090 for the change in the fair value of the warrant liability for the three months ended March 31, 2014.

The assumptions used in connection with the valuation of warrants issued utilizing the Monte Carlo method were as follows:

	December 31, 2013			January 22, 2014			March 31, 2014

Number of shares underlying the warrants		5,309,438			5,309,438			5,059,438
Exercise price	$	1.65		$	1.65		$	1.65
Volatility		135	%		135	%		133	%
Risk-free interest rate		1.75	%		1.30	%		1.32	%
Expected dividend yield		0			0			0
Expected warrant life (years)		4.5			4.42			4.25
Stock Price	$	1.80		$	2.29		$	2.24

The table below provides a reconciliation of the beginning and ending balances for the liability measured at fair value using significant unobservable inputs (Level 3). The table reflects losses for the period ended March 31, 2014 for the financial liability categorized as Level 3 as of March 31, 2014.

		December 31, 2013				Decrease from Warrants Exercised in 2014				Increase in Fair Value				March 31, 2014
Warrant liability		$	8,281,247			$	(502,025	)		$	1,742,090			$	9,521,312