DERIVATIVE INSTRUMENTS

12 Months Ended

Dec. 31, 2013

DERIVATIVE INSTRUMENTS

DERIVATIVE INSTRUMENTS

12. DERIVATIVE INSTRUMENTS

        Certain warrants issued to investors and the placement agent warrants in the fourth quarter of 2010 had provisions that included anti-dilution protection and, under certain conditions, granted the right to the holder to require the Company to repurchase the warrant. Accordingly through March 2013, these warrants were accounted for as derivative liabilities. In the quarter ended March 31, 2013, $476,426 was reclassified from Derivative warrant liability to Additional paid-in capital related to warrants exercised. In May 2013, the Company called for the redemption of all the outstanding investor warrants and during the quarter ended June 30, 2013, all such warrants, for a total of 11,726,343 warrants, were exercised and the fair value of $25,241,401 was reclassified from Derivative warrant liability to Additional paid-in capital. There were no derivative instruments subsequent to June 30, 2013.

        On May 17, 2013, the Company completed its offer to exchange certain of its outstanding warrants to purchase shares of the Company's common stock (the "Eligible Warrants") for new warrants (the "New Warrants") with the same terms except (i) the expiration date of the New Warrants was extended two years and (ii) weighted average anti-dilution provisions were removed from the New Warrants (the "Offer"). The Eligible Warrants consisted of (i) warrants to purchase common stock dated October 26, 2010, issued in connection with the closing of a merger (the "Merger Warrants") and (ii) warrants to purchase common stock issued to the placement agent as compensation for services in connection with each closing of a private placement which occurred on October 26, 2010, November 10, 2010 and December 3, 2010 (the "Placement Agent Warrants"). In connection with the Offer, Merger Warrants to purchase 255,000 shares of the Company's common stock and Placement Agent Warrants to purchase 3,064,091 shares of the Company's common stock were tendered and accepted for exchange for New Warrants to purchase an aggregate of 3,319,091 shares of the Company's common stock. Due to the modification of the terms, the Eligible Warrants were revalued prior to modification and immediately after modification as of May 17, 2013. This resulted in an incremental fair value immediately after the modification and the Derivative warrant liability was increased by $764,769 and a corresponding non-cash charge was recorded in Other expense as Loss from modification of warrants. Since the New Warrants are not accounted for as derivative liabilities, the fair value of these warrants after modification of $7,738,320 was reclassified from Derivative warrant liability to Additional paid-in capital.

        The Company used the Black-Scholes option pricing model and assumptions that consider among other factors the fair value of the underlying stock, risk-free interest rate, volatility, expected life and dividend rates in estimating fair value for the warrants considered to be derivative instruments. The fair value of these derivative instruments at December 31, 2013 and 2012 was $0 and $14,584,818, respectively and was included as a derivative warrant liability, a current liability. Changes in fair value of the derivative financial instruments are recognized currently in the Statement of Operations as a derivatives gain or loss. The warrant derivative gains (losses) are non-cash income (expenses) and for the years ended December 31, 2013, 2012, and 2011 were $(18,871,329), $17,479,674, and $(26,065,579), respectively, were included in other income (expense) in the consolidated statements of operations.

        The assumptions used principally in determining the fair value of warrants were as follows:

	2012	2011
Risk free interest rate	0.32 - 0.35%	0.52 - 0.58%
Expected dividend yield	0%	0%
Contractual term	2.7 - 2.9 years	3.7 - 3.9 years
Expected volatility	73%	79%

        The primary underlying risk exposure pertaining to the warrants is the change in fair value of the underlying Common Stock for each reporting period.

        The table below presents the changes in derivative warrant liability during the years ended December 31, 2013, 2012, and 2011:

	Year Ended December 31,
	2013			2012			2011
Balance at beginning of year	$	14,584,818		$	35,473,230		$	10,647,190
Increase (decrease) in the fair value of the warrants		18,871,329			(17,479,674	)		26,065,579
Reduction in derivative liability due to exercise of warrants		(33,456,147	)		(3,408,738	)		(1,239,539	)
Balance at end of year	$	—		$	14,584,818		$	35,473,230