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Note 11 - Warrants

9 Months Ended

Sep. 30, 2013

Note 11. Warrants

Common Stock Warrants

Following is a summary of all warrant activity for the first nine months of 2013:

Warrants	Number of Warrants Issued			Weighted Average Exercise Price
Warrants outstanding at December 31, 2012		1,747,478		$	15.17

Warrants granted in connection with the Preferred Stock Offering, as more fully described in Note 9		1,341,382		$	5.31

Warrants exercised for common stock		(15,833	)		14.63

Warrants outstanding at September 30, 2013		3,073,027		$	10.89

Aggregate intrinsic value of outstanding warrants at September 30, 2013	$	-

Weighted average remaining contractual terms (in years)		3.7

The outstanding warrants in the schedule above are effected for the reverse stock split made effective on October 28, 2013 as more fully described in Note 9.

During the first nine months of 2013, the Company received gross proceeds of approximately $0.2 million from the exercise of warrants to purchase 15,833 shares of 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 448,478 shares of its common stock and warrants to purchase 224,239 shares of common stock. The warrants have an exercise price of $23.58 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.

As more fully described in Note 9, concurrent with the closing of the Common Stock Offering, the investors in this offering agreed to waive their rights to exercise the Waived Warrants to purchase 1,398,816 shares of common stock of the Company until the Company has obtained stockholders’ approval of increasing the number of its authorized shares of common stock in conjunction with the proposed reverse stock split of its outstanding shares of common stock. In accordance with ASC 815-40, Derivative Instruments and Hedging - Contracts in Entity’s Own Equity, the Waived Warrants were required to be classified as liabilities immediately after the closing of the Common Stock Offering on June 3, 2013 because there were an insufficient number of common shares authorized to permit the full exercise of the Waived Warrants if they were exercised. Therefore, the Company has reclassified the fair value of the Waived Warrants totaling approximately $9.1 million from equity to a liability as of June 3, 2013. The Waived Warrants were required to be recorded at fair value at each balance sheet date with changes in fair value recorded in earnings until such time as there are a sufficient number of common shares authorized to permit the full exercise of the warrants.

The fair value of the warrants at September 30, 2013 and December 31, 2012 was $5,252,660 and $4,283,932, respectively, calculated using the Black-Scholes option-pricing model with the following ranges of assumptions:

	September 30, 2013					December 31, 2012
Risk-free interest rate		0.33	-	1.39	%		0.73	%
Expected volatility		60.0	-	111.26	%		92.0	%
Expected life (in years)		1.5	-	4.4			1.13
Expected forfeiture rate				0.0	%		0.0	%
Expected dividend yield				0.0	%		0.0	%

In connection with the Common Stock Offering, the Company recorded an additional warrant liability of $9.1 million immediately after the closing of the Common Stock Offering on June 3, 2013. As a result of this change in the warrant liability in the aggregate at September 30, 2013, the Company recorded a non-cash benefit of $8.1 million in the nine months ended September 30, 2013. The following is a summary of the changes in the common stock warrant liability for the nine months ended September 30, 2013:

Beginning balance as of January 1, 2013	$	4,283,932
Warrant liability classification (see Note 9)		9,110,302
Gain from the adjustment for the change in fair value included in net income		(8,141,574	)
Ending balance as of September 30, 2013	$	5,252,660

In connection with the Reverse Stock Split as more fully described in Note 9, these warrants will be revalued as of October 28, 2013 and be reclassified from liabilities to equity.