9. 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 June 30, 2014 and December 31, 2013 were as follows:


	June 30, 2014		December 31, 2013
Liability-classified warrants		8,235,076		8,235,076
Equity-classified warrants		2,261,391		2,304,691


Total warrants		10,496,467		10,539,767

Liability-Classified Warrants

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 shares of the Company’s common stock underlying the outstanding 2009 Warrants were increased by 184,367 shares to 8,235,076 shares, and the exercise price of the 2009 Warrants was decreased to $3.93.

The Company assessed whether 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 June 30, 2014 and 2013:


	June 30, 2014			June 30, 2013
Risk-free interest rate		0.06	%		0.26	%
Expected life in years		0.44			1.44
Expected volatility		70	%		70	%
Expected dividend yield		0			0
Steps per year		54			12

The change in the fair value of the warrant liability resulted in a gain of $5.6 million and $5.7 million for the three and six months ended June 30, 2014, respectively. The change in the fair value of the warrant liability resulted in a loss of $0.4 million and a gain of $10.4 million for the three and six months ended June 30, 2013. The change in the fair value of the warrant liability was charged to other income (expense) in the Statements of Operations.

During the six months ended June 30, 2014, 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		—		—		—	$	—	$	—
Cashless exercises		43,300		—		21,977		—		—

		43,300		—		21,977	$	—	$	—

During the six months ended June 30, 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