Note 5. Warrant Liability

Warrants issued in connection with the Company’s June 2013 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. As a result of the Company’s December 2014 registered public unit offering, the exercise price of warrants outstanding in connection with the public offering completed in June 2013 was adjusted to $0.61 per share. As a result of the Company’s December 2015 drawdown on the Equity Line Purchase Agreement, the exercise price of warrants outstanding in connection with the public offering completed in June 2013 was adjusted to $0.51 per share.

The Company recognized 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 March 31, 2016, the closing price of the Company’s common stock as reported on OTC Markets was $0.84. Due to the fluctuations in the market value of the Company’s common stock from December 31, 2015 through March 31, 2016, the Company recognized non-cash income of $760,157 for the change in the fair value of the warrant liability for the three months ended March 31, 2016.

The assumptions used in connection with the valuation of warrants issued using the binomial method were as follows:

	December 31, 2015			March 31, 2016

Number of shares underlying the warrants		3,036,928			3,036,928
Exercise price	$	0.51		$	0.51
Volatility		98	%		98	%
Risk-free interest rate		1.19	%		0.80	%
Expected dividend yield		0			0
Expected warrant life (years)		2.48			2.24
Stock Price	$	1.13		$	0.84

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 gains for the three months ended March 31, 2016 for the financial liability categorized as Level 3 as of March 31, 2016.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3):

		December 31, 2015				Decrease from Warrants Exercised in 2016				Decrease in Fair Value				March 31, 2016
Warrant liability		$	2,434,101				-			$	760,157			$	1,673,944