8. Warrants

The Company has issued both warrants that are accounted for as liabilities and warrants that are accounted for as equity instruments.

The Company follows accounting standards that provide guidance in assessing 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 and classified as a liability. Accounting standards require that liability classified warrants be recorded at their fair value 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 binomial valuation model.

The number of warrants outstanding at March 31, 2014 and December 31, 2013 were as follows:


	March 31,		December 31,
	2014		2013

Liability-classified warrants		8,235,076		8,235,076
Equity-classified warrants		2,304,691		2,304,691


Total warrants		10,539,767		10,539,767

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 per share. 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.

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, which was initially $4.02 per share. This provision was triggered in 2013 when stock was sold at $3.50 per share in our 2013 public offering. Accordingly, the outstanding warrants were increased by 184,367 warrants to 8,235,076 warrants.

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, 2014 and 2013:


	March 31, 2014			March 31, 2013

Risk-free interest rate		0.11	%		0.25	%
Expected life in years		0.69			1.69
Expected volatility		80	%		70	%
Expected dividend yield		0			0
Steps per year		13			12

The change in the fair value of the warrant liability resulted in a gain of $82 thousand for the three months ended March 31, 2014, respectively. The change in the fair value of the warrant liability resulted in a gain of $10.8 million for the three months ended March 31, 2013. The change in the fair value of the warrant liability was charged to other income (expense) in the Statements of Operations.

There were no warrant exercises during the three months ended March 31, 2014.

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 Equity		Cash Received

Cash exercises		49,315		—		49,315	$	—	$	101
Cashless exercises		—		—		—		—		—

		49,315		—		49,315	$	—	$	101