6. Stock Purchase Warrants

On July 2, 2010, the Company entered into a Common Stock Purchase Agreement with a single investor. As part of this agreement, the Company issued warrants to purchase 60,606 shares of common stock to the placement agent, or its permitted assigns. The warrants have an exercise price of $1.32 and a life of 5 years. The warrants vested on January 1, 2011 and expire December 31, 2015. Since these warrants were granted as part of an equity raise, the Company has treated them as a direct offering cost. The result of the transaction has a $0 net effect to equity. As of June 30, 2011, 30,303 of these warrants remained outstanding.

On January 28, 2011, the Company entered into a Common Stock Purchase Agreement with three institutional investors. As part of this agreement, the Company issued warrants to purchase 1,428,572 shares of common stock. Each warrant was exercisable for thirteen months at $2.00 per share. We have entered into an agreement pursuant to which we have agreed to exchange the original warrants for new warrants with substantially the same terms as the original warrants except that the expiration date will be extended two months. The warrants had an anti-dilution price protection feature; if the Company issues securities at a price per share that is less than $2.00 per share, the warrant holders will be ratcheted down to the lower offering price. However, the Company has instituted a floor price of $1.40 per share in connection with the price protection. On April 6, 2011, the Company entered into another Common Stock Purchase Agreement that triggered the ratchet provision and re-set the price of these warrants to $1.40. Due to the re-set the floor price, the warrant liability was marked-to-market and reclassified to additional paid in capital since it ceased to contain the provisions of a derivative liability.

The warrants were recorded as liabilities at their estimated fair value on the commitment date, which was $716,000 with subsequent changes in estimated fair value recorded as a warrant expense in the Company’s statement of operations at each subsequent reporting period. At April 6, 2011, the fair value of the warrant liability was $1,481,143, which represented an increase in fair value of $765,143. The fair value was measured using the Black Scholes valuation model, which is based, in part, upon unobservable inputs for which there is little or no market data, requiring the Company to develop its own assumptions. The assumptions used by the Company are summarized in the following table:

	Commitment Date			Remeasurement Date April 6, 2011
Closing stock price	$	1.39		$	2.08
Expected dividend rate		0	%		0	%
Expected stock price volatility		117.1	%		104.6	%
Risk free interest rate		0.28	%		0.29	%
Expected life (years)		1.08			0.85

On April 6, 2011, the Company entered into a Common Stock Purchase Agreement with an institutional investor. As part of this agreement, the Company issued a warrant to purchase 844,391 shares of common stock. The warrant was initially exercisable for thirteen months at $2.0725 per share. The warrant had an anti-dilution price protection feature; that provided if the Company issues securities at a price per share that is less than $2.0725 per share, the exercise price of the warrant will be ratcheted down to the lower offering price. On July 28, 2011, the warrant was exchanged for a new warrant with substantially similar terms except that in the new warrant (i) the anti-dilution price protection was eliminated, (ii) the exercise price was lowered to $1.00, (iii) the expiration date was extended for an additional three months to August 12, 2012, and (iv) the warrant’s initial exercise date was changed to January 2012. Due to this warrant exchange, the warrant liability will be eliminated on a go-forward basis since the new warrant no longer contains the provisions that cause it to be treated as a derivative liability. See Note 8 – Subsequent Event.

The warrant is recorded as a liability at its estimated fair value on the commitment date, which was $775,995 with subsequent changes in estimated fair value recorded as a warrant expense in the Company’s statement of operations at each subsequent period. At June 30, 2011, the fair value of the warrant liability was $88,323, which represented a decrease in fair value of $687,672. The fair value is measured using the Black Scholes valuation model, which is based, in part, upon unobservable inputs for which there is little or no market data, requiring the Company to develop its own assumptions. The assumptions used by the Company are summarized in the following table:

	Commitment Date			Remeasurement Date June 30, 2011
Closing stock price	$	2.08		$	$0.86
Expected dividend rate		0	%		0	%
Expected stock price volatility		112.1	%		105.4	%
Risk free interest rate		0.29	%		0.19	%
Expected life (years)		1.08			0.77

The following table summarizes the estimated fair value of the warrant liabilities:

Balance at December 31, 2010	$	-
Warrant liability		1,491,995
Change in fair value of warrant liability		77,471
Reclass to stockholders’ equity		(1,481,143	)

Balance at June 30, 2011	$	88,323

A summary of warrant activities as of June 30, 2011, and for the year ended December 31, 2010, is as follows:

	Warrants			Weighted Average Exercise Price
Balance – December 31, 2009		1,070,472		$	3.27
Granted		60,606			1.32
Exercised		-			-
Forfeited or expired		-			-
Balance – December 31, 2010		1,131,078			3.49
Granted		2,272,963			1.65
Forfeited or expired		(19,688)			1.32
Exercised		(15,615	)		1.19
Balance – June 30, 2011 - outstanding		3,368,738		$	2.27

Balance – June 30, 2011 – exercisable		3,368,738		$	2.27

The warrants outstanding as of June 30, 2011, are as follows:

Range of Exercise Price		Number outstanding		Weighted Average Remaining Contractual Life
$	1.32		30,303	4.51 years
$	1.40		1,428,572	0.85 years
$	2.0725		844,391	0.77 years
$	2.22		626,809	5.01 years
$	3.30		61,207	3.92 years
$	3.75		50,000	4.63 years
$	6.36		327,456	1.36 years
			3,368,738	1.80 years