Note 12. Warrants

Common Stock Warrant Liability

On September 30, 2009, pursuant to the April 17, 2009 shelf registration statement, the Company closed a registered direct offering with a select group of institutional investors that raised gross proceeds of $7.1 million and net proceeds of $6.3 million. The Company sold 2,018,153 units at a price of $3.50 per unit. Each unit consisted of one share of common stock and a warrant to purchase 0.5 shares of common stock. The warrants have an exercise price of $5.24 per share and are exercisable at any time on or after the six month anniversary of the date of issuance and on or prior to 66 months after the date of issuance. Under the terms of the warrants, upon certain transactions, including a merger, tender offer or sale of all or substantially all of the assets of the Company, each warrant holder may elect to receive a cash payment in exchange for the warrant, in an amount determined by application of the Black-Scholes option pricing model. Accordingly, pursuant to ASC 815.40, Derivative Instruments and Hedging - Contracts in Entity's Own Equity, the warrants are recorded as a liability and then marked to market each period through the Statement of Operations in other income or expense. As of September 30, 2009, the Company recorded a warrant liability of $1.6 million based on the fair value offset by a reduction in additional-paid in-capital. At the end of each subsequent quarter, the Company revalues the fair value of the warrants and the change in fair value will be recorded as a change to the warrant liability and the difference will be recorded through the Statement of Operations in other income or expense.

The fair value of the warrants at June 30, 2011 and December 31, 2010 was $0.7 million and $0.2 million, respectively, calculated using the Black-Scholes option-pricing model with the following assumptions:

	June 30, 2011			December 31, 2010
Risk-free interest rate		1.76	%		2.02	%
Expected volatility		60.8	%		63.5	%
Expected life (in years)		1.9			2.1
Expected forfeiture rate		0.0	%		0.0	%
Expected dividend yield		0.00	%		0.00	%

As a result of this adjustment, the Company recorded a non-cash charge of $417,860 in the six months ended June 30, 2011. The following is a summary of the changes in the common stock warrant liability for the six months ended June 30, 2011:

Beginning balance, January 1, 2011	$	248,131
Issuances		-
Loss from the adjustment for the change in fair value included in net loss		417,860
Ending balance, June 30, 2011	$	665,991

As more fully described in Note 10, in connection with the January 2011 Preferred Stock Offering, the Company issued warrants to purchase up to 2,083,333 shares of common stock with an exercise price of $3.25 per whole share of common stock and Placement Agent Warrants to purchase up to 350 shares of the convertible preferred stock. These Placement Agent Warrants are equivalent to 145,833 shares of common stock at an exercise price of $2.40 per whole share.

As more fully described in Note 10, in connection with the June 2, 2011 Private Placement Offering, the Company issued warrants to purchase up to 3,218,612 shares of common stock with an exercise price of $2.77 per whole share of common stock.

The following is a summary of all warrant activity for the six months ended June 30, 2011:

Warrants	Number Outstanding		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding at December 31, 2010		1,009,076	$	5.24
Common stock warrants granted in connection with the January 2011 Preferred Stock Offering		2,083,333		3.25
Placement Agent Warrants granted (as if exercised and converted to common stock)		145,833		2.40
Common stock warrants granted in connection with the May 27, 2011 Private Placement Offering		3,218,612		2.77
Canceled or expired		−		−
Outstanding at June 30, 2011		6,456,854	$	3.30		5.52	$	-

Exercisable June 30, 2011		4,227,688	$	3.36		5.78	$	-