Note 10. Warrants

9 Months Ended

Sep. 30, 2012

Note 10. Warrants

Common Stock Warrants

Following is a summary of all warrant activity for 2012:

Warrants	Number of Warrants Issued			Weighted Average Exercise Price
Warrants outstanding at December 31, 2011		11,627,001		$	3.15

Warrants granted in connection with the Credit Agreement as more fully described in Note 9		51,370		$	2.92

Warrants exercised for common stock		(1,512,110	)		2.58

Warrants outstanding at September 30, 2012		10,166,261		$	3.23

Aggregate intrinsic value of outstanding warrants at September 30, 2012	$	22,232,473

Weighted average remaining contractual terms (years)	4.20

During the third quarter of 2012, the Company received gross proceeds of approximately $3.9 million from the exercise of warrants to purchase 1,512,110 shares of common stock. During the 4th quarter of 2012 and as of the date of this Form 10Q filing, the Company received additional proceeds of approximately $681,000 from the exercise of warrants and options to purchase common stock.

Common Stock Warrant Liability

In September 2009, 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. In connection with this registered direct offering, the Company issued 2,018,153 shares of its common stock and warrants to purchase 1,009,076 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 valuation 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. At the end of each subsequent quarter, the Company will revalue 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 September 30, 2012 and December 31, 2011 was $1,417,248 and $166,398, respectively, calculated using the Black-Scholes option-pricing model with the following assumptions:

	September 30, 2012			December 31,2011
Risk-free interest rate		0.62	%		0.83	%
Expected volatility		55.14	%		75.17	%
Expected life (in years)		1.25			1.6
Expected forfeiture rate		0.0	%		0.0	%
Expected dividend yield		0.00	%		0.00	%

As a result of this change in the warrant liability, the Company recorded a non-cash loss of $1.3 million in the nine months ended September 30, 2012. The following is a summary of the changes in the common stock warrant liability for the nine months ended September 30, 2012:

Beginning balance, January 1, 2012	$	166,398
Issuances		-
Loss from the adjustment for the change in fair value included in net loss		1,250,850
Ending balance, September 30, 2012	$	1,417,248