Warrants

9 Months Ended

Sep. 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 September 30, 2011 and December 31, 2010 were as follows:

	September 30,		December 31,
	2011		2010
Liability-classified warrants		8,424,905		8,590,456
Equity-classified warrants		4,754,980		7,321,686
Total warrants		13,179,885		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 “2009 Warrants”).  The 2009 Warrants issued to investors were exercisable immediately and the warrants issued to underwriters became exercisable six months after the date of issuance. The 2009 Warrants have an exercise price of $4.02 per share and have a five year term. The fair value of the 2009 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 2005 Warrants and the 2009 Warrants require accounting as derivatives.  The Company determined that these 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 these warrants did not meet the scope exception for determining whether the instruments require accounting as derivatives and were classified as liabilities.

The change in the fair value of the warrant liability resulted in a gain of $13.4 million and $4.4 million for the three and nine months ended September 30, 2011, respectively.  The change in the fair value of the warrant liability resulted in losses of $3.7 million and $2.7 million for the three and nine months ended September 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 September 30, 2011 and 2010:

	September 30,
	2011			2010
Risk-free interest rate		0.08 - 0.47	%		0.37 - 1.01	%
Expected life in years		0.67 - 3.18			1.67 - 4.18
Expected volatility		48.9 - 95.5	%		94.9 - 101.5	%
Expected dividend yield		0			0

During the first nine 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		2,311,585		-		2,311,585			$	12,399
Cashless exercises		39,832		165,551		65,986	$	303		-
		2,351,417		165,551		2,377,571	$	303	$	12,399

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	$	71
Cashless exercises		67,446		8,767		19,933		-
		70,738		24,767		39,225	$	71