Stock Warrants

On July 2, 2007, the Company announced that it had signed an Ancillary Care Services Network Access Agreement (the “Ancillary Care Services Agreement”) effective as of May 21, 2007 (the “Effective Date”) with a new client, Texas True Choice, Inc. (“Texas True Choice”), a Texas-based preferred provider organization network, and certain subsidiaries of Texas True Choice. As partial compensation to Texas True Choice under the Ancillary Care Services Agreement, the Company issued to Corporate Health Plans of America, Inc., an affiliate of Texas True Choice, warrants to purchase a total of 225,000 shares of the Company’s common stock at an exercise price of $1.84, the closing price of the common stock of the Company as reported on the American Stock Exchange on the Effective Date. The Company valued the warrants when various measurement dates had been reached under the agreement. Utilizing the Black-Scholes Merton valuation method, 112,500 warrants were valued at $0.94 in 2007, 56,250 warrants were valued at $2.87 at June 2008 and the remaining 56,250 were valued at $5.53 in June 2009.

These warrants vested 25% on the Effective Date, an additional 25% on each anniversary date of the Effective Date, and have an expiration date of May 20, 2012. As of December 31, 2010, all warrants to purchase shares of the Company's common stock were fully vested. The Company recorded the value of warrants as deferred costs upon vesting and amortized the deferred costs as administrative fees over the related contract term. As of December 31, 2010, the total unrecognized cost related to the warrants of approximately $67,000 was included as Prepaid and Other Current Assets and recognized as an expense through the term of the contract which expired in June 2011. The weighted average remaining contractual life of the warrants is 0.8 years.

The Company entered into an agreement as of February 25, 2011 with an employee, whereby the Company agreed to issue warrants to purchase 250,000 shares of common stock with an exercise price of $1.67. The warrants vest in increments pursuant to the achievement of defined, agreed upon revenue targets generated by new clients within a five year term. The agreement also obligates the Company to issue warrants to purchase up to an additional 500,000 shares of common stock (issued in 250,000 increments) pursuant to the achievement of additional defined agreed upon revenue targets. During the twelve months ended December 31, 2011, we did not recognize compensation costs associated with these warrants due to the probability of vesting. That probability will be re-evaluated and updated based on current market conditions, on a quarterly basis, and compensation costs will be adjusted accordingly.

On February 1, 2012, certain terms of the agreement were modified, including the revenue targets and the total number of shares under the initial and future warrants. The warrant issuance now allows for 133,334 shares to be purchased at an exercise price of $0.50, 66,667 of which are vested, and the remaining 66,667 shares vesting upon the achievement of certain revenue targets. The number of shares under the future warrant issuances was also reduced to 266,666 (issued in 133,333 increments) shares based upon the achievement of additional defined agreed upon revenue targets.

A summary of stock warrant activity is as follows:



	Outstanding Warrants (thousands)		Weighted-Average Exercise Price
Outstanding at December 31, 2009	1,827		$	0.89
Exercised	(1,502	)	$	0.44
Outstanding at December 31, 2010	325		$	2.96
Granted	250		$	1.67
Cancelled	(100	)	$	5.51
Outstanding at December 31, 2011	475		$	1.75
Vested at December 31, 2011	225		$	1.84