DERIVATIVE WARRANT LIABILITY

9 Months Ended

Sep. 30, 2013

Notes to Financial Statements

Note 5. DERIVATIVE WARRANT LIABILITY

 At September 30, 2013 and December 31, 2012, the Company had outstanding warrants to purchase 1,050,454 and 1,254,004 shares of its Common Stock, respectively. Included in these outstanding warrants at September 30, 2013 and December 31, 2012 are warrants to purchase 700,000 and 736,015 shares, respectively, that are considered to be derivative financial instruments. The fair value of these derivative instruments at September 30, 2013 and December 31, 2012 was approximately $979,000 and $5,585,000, 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 Loss on Revaluation of Derivative Warrant Liability for the three months ended September 30, 2013 was approximately $70,000.  The Gain on Revaluation of Derivative Warrant Liability for the nine months ended September 31, 2013 was approximately $4,606,000.  The Gain (Loss) on Revaluation of Derivative Warrant Liability for the three and nine months ended September 30, 2012 was approximately a loss of $400,000 and a gain of $201,281, respectively.

 The Derivative Warrant Liability represents the risk exposure pertaining to the warrants and is based on the fair value of the underlying common stock and the Gain (Loss) on Revaluation of Derivative Warrant Liability is a result of the change in that fair value.  For the three months ended September 30, 2013, no derivative warrants were exercised and none expired. For the nine months ended September 30, 2013, no derivative warrants were exercised and 45,164 expired. For the nine months ended September 30, 2012, 16,545 derivative warrants were exercised, which resulted in a reclassification of approximately $61,000 from the Derivative Warrant Liability to Additional Paid-in Capital.

 The table below presents the changes in the Level 3 Derivative Warrant Liability measured for the nine months ended September 30, 2013 and 2012:

	2013			2012
Derivative Warrant Liability as of January 1	$	5,585,141		$	1,035,337
Warrants issued under Montaur credit facility		—			6,000,000
Total unrealized losses included in net loss (1)		1,061,682			500,000
Total realized losses included in net loss(1)		—			1,438
Total unrealized gains included in net loss (1)		(5,515,000	)		(595,038	)
Total realized gains included in net loss (1)		(152,668	)		(107,681	)
Reclassification of derivative warrant liability to additional paid-in capital for derivative warrants exercised		—			(61,520	)
Derivative Warrant Liability as of September 30	$	979,155		$	6,772,536
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(1) Included in Gain (Loss) on Revaluation of Derivative Warrant Liability in the Consolidated Statement of Operations.