Warrants

6 Months Ended

Jun. 30, 2011

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 outstanding at June 30, 2011 and December 31, 2010 were as follows:

	June 30,		December 31,
	2011		2010
Liability-classified warrants		8,445,551		8,590,456
Equity-classified warrants		4,806,795		7,321,686
Total warrants		13,252,346		15,912,142

Liability-Classified Warrants

In May 2005, the Company issued 419,786 warrants to placement agents for services performed in connection with a 2005 private placement (the 2005 Warrants”), 11,083 of which were subsequently exercised.  The remaining 408,703 warrants were originally valued at $1.6 million.  Subject to certain exceptions, the 2005 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 2005 Warrants then in effect, which was initially $4.75 per share.  This provision was triggered when the Company sold stock in a 2006 private placement at $4.63 per share.  Accordingly, the 2005 Warrants were re-priced at $4.69.  The provision was triggered a second time upon completion of a 2009 private placement in which the Company sold stock at $1.825 per share and issued common stock purchase warrants with an exercise price of $2.04,  and the 2005 Warrants were re-priced at $4.25.  The provision was triggered again when the Company sold stock in a December 2009 public offering at $3.10 per share and the 2005 Warrants were re-priced at $3.93.

Also, in connection with its December 2009 public securities offering, the Company issued warrants to purchase an aggregate of 8,206,520 shares of common stock (including the investor warrants and 464,520 warrants issued to the underwriters for the offering).  The investor warrants are exercisable immediately and the underwriter warrants became 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. The fair value of the warrants was estimated at $22.9 million using a Black-Scholes model with the following assumptions: expected volatility of 105%, risk free interest rate of 2.14%, expected life of five years and no dividends.

The Company assessed whether the warrants require accounting as derivatives.  The Company 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 resulted in a gain of $2.1 million for the three months ended June 30, 2011 and a loss of $9.0 million for the six months ended June 30, 2011.  The change in the fair value of the warrant liability resulted in gains of $1.0 million and $14.1 million for the three and six months ended June 30, 2010, respectively.  The change in the fair value of the warrant liability was charged to other income (expense) in the Statements of Operations.  The following assumptions were used in the Black-Scholes valuation model at June 30, 2011 and 2010:

	June 30, 2011			June 30, 2010
Risk-free interest rate		0.18 - 1.01	%		0.59 - 1.56	%
Expected life in years		0.92 - 3.43			1.92 - 4.43
Expected volatility		45 - 97	%		92 - 116	%
Expected dividend yield		0			0

During the first six months of 2011, warrant exercises were as follows:

					Common		Liability
	Equity		Liability		Stock		Reclassed		Cash
in thousands, except share data	Warrants		Warrants		Issued		to Equity		Received
Cash exercises		2,259,770		-		2,259,770			$	12,293
Cashless exercises		39,832		144,905		59,308	$	265		-
		2,299,602		144,905		2,319,078	$	265	$	12,293

During the first six 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