8. 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 March 31, 2013 and December 31, 2012 were as follows:


	March 31, 2013		December 31, 2012
Liability-classified warrants		8,050,709		8,050,709
Equity-classified warrants		3,097,430		3,146,745

Total warrants		11,148,139		11,197,454

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. Of the total warrant tranche, 419,207 were exercised and the remaining 579 expired on May 31, 2012.

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 Company uses the Binomial/Monte Carlo pricing model to estimate the value of the liability-classified warrants. The following assumptions were used in the Binomial/Monte Carlo valuation model at March 31, 2013 and 2012:


	March 31, 2013	March 31, 2012
Risk-free interest rate	0.25%	0.07 - 0.42%
Expected life in years	1.69	0.17 - 2.69
Expected volatility	70%	60 - 80%
Expected dividend yield	0	0
Steps per year	12	12

The change in the fair value of the warrant liability resulted in a gain of $10.8 million and a loss of $5.8 million for the three months ended March 31, 2013 and 2012, respectively. The change in the fair value of the warrant liability was charged to other income (expense) in the Statements of Operations.

During the three months ended March 31, 2013, warrant exercises were as follows:


(in thousands, except share data)	Equity Warrants		Liability Warrants		Common Stock Issued		Liability Reclassed to Equity		Cash Received
Cash exercises		49,315		—		49,315	$	—	$	101
Cashless exercises		—		—		—		—		—

		49,315		—		49,315	$	—	$	101

During the three months ended March 31, 2012, warrant exercises were as follows:


(in thousands, except share data)	Equity Warrants		Liability Warrants		Common Stock Issued		Liability Reclassed to Equity		Cash Received
Cash exercises		68,494		—		68,494	$	—	$	140
Cashless exercises		—		31,712		8,021		42		—

		68,494		31,712		76,515	$	42	$	140

During the three months ended March 31, 2012, 1,359,317 warrants issued on February 23, 2007, exercisable at $5.75, expired unexercised on February 23, 2012.

Subsequent to the balance sheet date, 706,708 warrants issued on May 3, 2006, exercisable at $5.09, expired unexercised on May 3, 2013.