Warrants

85 Months Ended

Sep. 30, 2010

Warrants

7. Warrants

The Company has issued both warrants that are accounted for as liabilities and warrants that are accounted for as equity instruments.  The number of warrants at September 30, 2010 and December 31, 2009 were as follows:

	September 30,		December 31,
	2010		2009
Liability-classified warrants		8,590,456		8,615,223
Equity-classified warrants		7,334,186		7,404,924
Total warrants		15,924,642		16,020,147

Liability-Classified Warrants

In May 2005, the Company issued 419,786 warrants to placement agents for services performed in connection with a securities offering conducted by the Company, 11,083 of which were subsequently exercised.  The remaining 408,703 warrants were originally valued at $1.6 million.  Subject to certain exceptions, these warrants provide for anti-dilution protection should common stock or common stock equivalents be subsequently issued at a price per share less than the exercise price of the warrants then in effect, which was initially $4.75 per share.  This protection was triggered in 2006 when the Company sold stock in a securities offering at $4.63 per share.  Accordingly, the warrants were re-priced at $4.69.  The protection was triggered a second time upon the September 2009 consummation of a securities offering in which the Company sold stock at $1.825 per share and the warrants were subsequently re-priced at $4.25.  The protection was triggered again with the Company’s December 2009 securities offering when the Company sold stock at $3.10 per share and the warrants were subsequently re-priced at $3.93.

Also, in connection with the December 2009 public offering, the Company issued warrants to purchase an aggregate of 8,206,520 shares of common stock (including 7,742,000 warrants issued to investors in the offering and 464,520 warrants issued to the Underwriters). The investor warrants were exercisable immediately and the underwriter warrants were exercisable six months after the date of issuance. The warrants have an exercise price of $4.02 per share and have a five year term. Subject to certain exceptions, these warrants provide for anti-dilution protection should common stock or common stock equivalents be subsequently issued at a price less than the exercise price of the warrants then in effect.

Accounting standards require an entity to assess whether an equity-issued financial instrument is indexed to an entity’s own stock for purposes of determining whether a financial instrument should be treated as a derivative. Accounting standards further require that liability-classified warrants be revalued at each financial reporting period and the resulting gain or loss be recorded as other income (expense) in the Statements of Operations.  Fair value is measured using the Black-Scholes valuation model.

The Company assessed whether the warrants issued in connection with the May 2005 and December 2009 securities offerings require accounting as derivatives and, based on the anti-dilution protection provided to the warrantholders, determined that the warrants were not indexed to the Company’s own stock in accordance with accounting standards codification Topic 815, Derivatives and Hedging. As such, the Company has concluded the warrants did not meet the scope exception for determining whether the instruments require accounting as derivatives and should be classified in liabilities.

The change in the fair value of the warrant liability was a loss of $3.7 million and $2.7 million for the three and nine months ended September 30, 2010 and a loss of $304 thousand and $520 thousand for the three and nine months ended September 30, 2009, respectively, and was charged to other income (expense) in the Statements of Operations.  The following assumptions were used in the Black-Scholes valuation model at September 30, 2010 and December 31, 2009:

	September 30, 2010		December 31, 2009
Risk-free interest rate		0.37 - 1.01%		1.37 - 2.65%
Expected life in years		1.67 - 4.18		2.42 - 4.92
Expected volatility		94.9 - 101.5%		105%
Expected dividend yield		0		0

During the first nine months of 2010, warrant exercises were as follows:

					Common
	Equity		Liability		Stock		Cash
in thousands, except share data	Warrants		Warrants		Issued		Received
Cash exercises		3,292		16,000		19,292	$	72
Cashless exercises		67,446		8,767		19,933		-
		70,738		24,767		39,225	$	72

There were no warrant exercises in the first nine months of 2009.