Note 11 - Warrant Transactions

3 Months Ended

Mar. 31, 2014

Warrants [Abstract]

Warrants [Text Block]

Note 11—Warrant Transactions

Below is a summary of the number of shares issuable upon exercise of outstanding warrants and the terms and accounting treatment for the outstanding warrants:

					Weighted-average			Balance sheet
	Warrants as of				exercise			classification
	March 31, 2014		December 31, 2013		price per share		Expiration	March 31, 2014	December 31, 2013
Venture Lending & Leasing VI, Inc.		170,919		255,102	$	1.96	2/28/2024	Liability	Liability
Venture Lending & Leasing VII, Inc.		170,919		255,102		1.96	2/28/2024	Liability	Liability
Allen, F. Stephen Series #2		500,000		500,000		3.55	3/21/2016	Equity	Equity
Allen, F. Stephen Series #3		500,000		500,000		3.55	3/21/2016	Equity	Equity
Stearns, Robert		200,000		200,000		3.55	3/21/2016	Equity	Equity
MATT Series #1		270,576		401,486		2.75	9/19/2016	Equity	Equity
MATT Series #2		1,000,000		1,000,000		2.75	9/19/2016	Equity	Equity
All warrants		2,812,414		3,111,690

Venture Lending & Leasing VI and VII Inc.

In connection with the Term loan that took place in April 2013, the Company issued warrants to the lender with an initial aggregate exercise value of $800,000, which increased by $200,000 with the first tranche and which would increase by $300,000 with the second and third tranche draw down of the loan (See Note 7). Each warrant was immediately exercisable and expires ten years from the original date of issuance. The warrants to purchase shares of the Company's common stock have an exercise price equal to the estimated fair value of the underlying instrument as of the initial date such warrants were issued. Each warrant is exercisable on either a physical settlement or net share settlement basis from the date of issuance.

The warrant agreement contains a provision requiring an adjustment to the number of shares in the event the Company issues common stock, or securities convertible into or exercisable for common stock, at a price per share lower than the warrant exercise price. The Company concluded the anti-dilution feature required the warrants to be classified as liabilities under ASC Topic 815, Derivatives and Hedging—Contracts in Entity's Own Equity (ASC 815). The warrants are measured at fair value, with changes in fair value recognized as a gain or loss to other income (expense) in the statements of operations and comprehensive loss for each reporting period thereafter. The fair value of the common stock warrants were recorded as a discount to the Term loan.

On March 10, 2014, Venture Lending & Leasing VI and VII exercised 168,366 warrants with an exercise price of $1.96 per share. The warrants were net settled resulting in the Company issuing 89,230 shares of common stock.

On March 31, 2014, the Company remeasured the fair value of the outstanding warrants, using current assumptions, resulting in an increase in fair value of $355,954, which was recorded in other income (expense) in the accompanying statements of operations and comprehensive loss. The Company will continue to re-measure the fair value of the liability associated with the warrants to purchase common stock at the end of each reporting period until the earlier of the exercise or the expiration of the applicable warrants.

The fair value of the warrants to purchase common stock on the date of issuance and on each re-measurement date for those warrants to purchase common stock are classified as liabilities, and the fair value is estimated using the Black-Scholes option pricing model. This method of valuation involves using inputs such as the fair value of the Company's common stock, stock price volatility, contractual term of the warrants, risk free interest rates, and dividend yields. Due to the nature of these inputs and the valuation techniques utilized, the valuation of the warrants to purchase preferred stock and common stock are considered a Level 3 measurement (Note 3).

The fair value of the warrants was calculated using the Black-Scholes option-pricing model with the following assumptions as of:

	March 31, 2014
Risk-free interest rate:		2.73	%
Expected term (years):		9.92
Expected dividend yield:		-
Expected volatility:		90.59	%

Allen, F. Stephen Series #2 and #3

In March 2006, the Company issued warrants to purchase 1,000,000 shares of common stock each at exercise prices of $4.00, and $7.00 as compensation for certain strategic initiatives. On February 19, 2010, the Company reduced the exercise price of the remaining 1,000,000 outstanding warrants to $3.55 per share.    The Series 2 and Series 3 warrants were outstanding at March 31, 2014 and expire in March 2016.  The fair value of the warrant re-pricing was determined by comparing the fair value of the modified warrant with the fair value of the unmodified warrant on the modification date.  The fair value of the modified warrants was calculated using the Black-Scholes option-pricing model with the following assumptions:

Risk-free interest rate:	3.24	%
Expected term (years):	6.08
Expected dividend yield:	—
Expected volatility:	94.07	%

Stearns, Robert

In March 2006, the Company issued warrants to purchase 200,000 shares of common stock at an exercise price of $3.55 per share as compensation to the Company’s then Chief Executive Officer. The awards of warrants to purchase shares of common stock are accounted for as equity instruments. The warrants are exercisable at any time through their respective expiration dates. The fair value at issuance was calculated using the Black-Scholes option-pricing model, and was charged to compensation expense. These warrants were still outstanding at March 31, 2014 and expire in March 2016.

MATT Series #1 and #2

In October 2006, the Company issued two series of warrants to purchase 1,000,000 shares of common stock each at exercise prices of $12.50 and $15.00 per share to MATT, Inc. in connection with the issuance of common stock. On January 25, 2008, the Company entered into a Note Purchase Agreement (the “MATT Agreement”) with MATT, Inc. Pursuant to the terms of the MATT Agreement, among other things, the exercise price of MATT, Inc.’s outstanding warrants was reduced to $2.75 per share and the Company issued MATT, Inc. a subordinated promissory note due October 16, 2016 with 4.46% interest per annum (the “MATT Note”). The warrant re-pricing resulted in a discount on the MATT Note of $1,341,692, to be amortized over the life of the MATT Note. These warrants expire in October 2016 and were outstanding as of December 31, 2013. The fair value of the warrant re-pricing was determined by comparing the fair value of the modified warrant with the fair value of the unmodified warrant on the modification date and recording any excess as a discount on the note. No such discount was recorded as the repriced warrants value decreased. On March 5, 2013, MATT, Inc. exercised warrants to purchase 2,147 shares of common stock using the amount by which the outstanding principal and accrued interest under the MATT Note exceeded the amount of the Receivable. MATT, Inc. agreed to exercise or forfeit the MATT warrants with an aggregate exercise price of $2,000,000 over an eleven-month period beginning in March 2013. For the three months ended March 31, 2014, 130,910 warrants were forfeited. At March 31, 2014, MATT warrants totaling 1,270,571 were outstanding.

The fair value of the modified warrants was calculated using the Black-Scholes option-pricing model with the following assumptions:

Risk-free interest rate:	2.81	%
Expected term (years):	8.73
Expected dividend yield:	-
Expected volatility:	100.75	%

A summary of warrant activity for the three months ended March 31, 2014 is as follows:

Warrants	Number of Warrants			Weighted- Average Exercise Price
Outstanding at December 31, 2013		3,111,690		$	2.61
Granted		-			-
Exercised		(168,366	)		1.96
Forfeited or expired		(130,910	)		2.75
Outstanding at March 31, 2014		2,812,414		$	3.00
Exercisable at March 31, 2014		2,812,414		$	3.00