Financings

12 Months Ended

Sep. 30, 2011

10. Financings

In May 2011, the Company completed a registered direct offering of an aggregate of 12,074,945 shares of the Company’s common stock, 1,813,944 shares of the Company’s Series A Preferred Stock and warrants to purchase 9,027,772 shares of the Company’s common stock. The shares and warrants were sold in units consisting of (i) one share of common stock and (ii) one warrant to purchase 0.65 of a share of common stock, at an exercise price of $2.48 per share of the Company’s common stock. However, one investor also purchased units consisting of one share of Series A Preferred Stock and a warrant to purchase 0.65 of a share of common stock. No fractional warrants were issued. Each unit was sold at a price of $2.16 per unit. These units were not issued or certificated. The shares and warrants were immediately separated. The warrants will expire on May 17, 2016, five years from the issuance date of May 18, 2011. The Company received net proceeds, after deducting placement agent fees and other offering expenses, of approximately $28.0 million from this financing.

Each share of Series A Preferred Stock is convertible into one share of the Company’s common stock at any time at the option of the holder, provided that the holder will be prohibited from converting the shares of Series A Preferred Stock into shares of the Company’s common stock if, as a result of such conversion, the holder, together with its affiliates, would beneficially own more than 9.98% of the total number of shares of the Company’s common stock then issued and outstanding. In the event of the Company’s liquidation, dissolution or winding up, holders of the Series A Preferred Stock will receive a payment equal to $0.01 per share of Series A Preferred Stock before any proceeds are distributed to the holders of the Company’s common stock. After the payment of this preferential amount, and subject to the rights of holders of any class or series of capital stock specifically ranking by its terms senior to the Series A Preferred Stock, holders of Series A Preferred Stock will participate ratably in the distribution of any remaining assets with the Company’s common stock and any other class or series of capital stock that participates with the common stock in such distributions. Shares of Series A Preferred Stock will generally have no voting rights, except as required by law and except that the consent of the holders of a majority of the outstanding Series A Preferred Stock will be required to amend the terms of the Series A Preferred Stock. The Series A Preferred Stock will not be entitled to receive any dividends, unless and until specifically declared by the Company’s board of directors.

In the event that the Company enters into a merger or change of control transaction, the holders of the warrants issued in the May 2011 financing will be entitled to receive consideration as if they had exercised the warrant immediately prior to such transaction, or they may require the Company to purchase the unexercised warrants at the Black-Scholes value (as defined in the warrant) of the warrant on the date of such transaction. As per the terms of the warrants, the holders have up to 30 days following any such transaction to exercise this right. As a result of this provision, the Company recognizes the warrants as liabilities at their fair value on each reporting date.

The Company’s warrant liability is marked-to-market each reporting period with the change in fair value recorded as a gain or loss within Other Expense (“Adjustment to fair value of common stock warrant liability”), until the warrants are exercised, expire or other facts and circumstances lead the warrant liability to be reclassified as an equity instrument. Because the warrants issued in the May 2011 financing do not contain a repricing provision, the Company is using the Black-Scholes valuation model to estimate the fair value of the warrants. Using this model, the Company recorded an initial warrant liability of $9,438 as of May 18, 2011 (warrant issuance date). The significant assumptions of the model were warrants and common stock outstanding, remaining terms of the warrants, the per stock price of $2.06, a risk-free rate of 1.89% and expected volatility rate of 75%.

During the year ended September 30, 2011, the Company recorded a decrease to Adjustment to fair value of common stock warrant liability of $8,442 to Adjustment to fair value of common stock warrant liability, within Other (income) expense, to reflect the decrease in the valuation of the warrants from May 18, 2011 to September 30, 2011 due to the decrease in the value of the Company’s common stock price from the date of issuance to September 30, 2011. At September 30, 2011, the fair value of the warrant liability determined utilizing the Black-Scholes valuation model was approximately $996.

The following summarizes the changes in value of the warrant liability from the date of issuance through September 30, 2011:

Balance at September 30, 2010	$	—
Initial fair value, at the date of issuance		9,438
Decrease in fair value		(8,442	)
Balance at September 30, 2011	$	996

In August 2010, the Company sold to two institutional investors an aggregate of 2,398,200 units, with each unit consisting of (i) one share of common stock and (ii) one warrant to purchase one share of common stock, for a purchase price of $3.93 per unit. These units were not issued nor certificated. The shares and warrants were immediately separated and the Company issued 2,398,200 shares of its common stock and warrants to purchase an additional 2,398,200 shares of the Company’s common stock at an initial exercise price of $4.716 per share, subject to re-pricing following the Company’s receipt of the complete response letter for Linjeta^TM. On December 1, 2010, the exercise price of the warrants was re-set to $1.56 per share as per the terms of the warrant and agreement. This financing resulted in net proceeds of $8,700.

The warrants are exercisable at any time on or after the date of issuance and expire on December 1, 2011. Pursuant to the terms of the warrants, the exercise price per share for the warrants is $1.175, which, per the warrant agreement, was reset when the May 2011 Financing occurred. There was no adjustment to the number of warrants acquirable upon exercise of the warrants in connection with an adjustment to the exercise price. Subsequently, these warrants expired on December 1, 2011, one year and 21 trading days following the Company’s receipt of the FDA’s complete response letter for Linjeta^TM.

In the event that the Company enters into a merger or change of control transaction, the holders of the warrants will be entitled to receive consideration as if they had exercised the warrant immediately prior to such transaction, or they may require the Company to purchase the warrant at the Black-Scholes value of the warrant on the date of such transaction. As per the warrants, the holders have up to 30 days following any such transaction to exercise this clause.

The Company’s warrant liability is marked-to-market each reporting period with the change in fair value recorded as a gain or loss within Other Expense (“Adjustments to fair value of common stock warrant liability”), until the warrants are exercised, expire or other facts and circumstances lead the warrant liability to be reclassified as an equity instrument. The fair value of the warrant liability is determined at each reporting period by utilizing the Monte Carlo simulation model that takes into account estimated probabilities of possible outcomes provided by the Company. At the date of the transaction, the fair value of the warrant liability was $2,915 utilizing the Monte Carlo simulation method. The Monte Carlo simulation is a generally accepted statistical technique used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of future expected stock prices of the Company and its peer group and minimizes standard error.

In August 2011, one investor exercised 42,200 warrants, at $1.175 per share, and the Company received proceeds totaling approximately $50. Subsequently, on December 1, 2011 the remaining 2,356,000 warrants expired unexercised.

At September 30, 2011, the fair value of the warrant liability determined utilizing the Monte Carlo simulation method was approximately $0. The decrease in the fair value of the warrants from September 30, 2010 to September 30, 2011 mainly reflects the decrease in stock price, as well as the warrants approaching their expiration date.

During the year ended September 30, 2011, the Company recorded income of $4,140 to Adjustment to fair value of common stock warrant liability, within Other income (expense), to reflect the decrease in the valuation of the warrants.

The following summarizes the changes in value of the warrant liability from the date of issuance through September 30, 2011:

Balance at September 30, 2009	$	—
August 2010 warrant — initial fair value at date of issuance		(2,915	)
Increase in fair value		(1,254	)
Balance at September 30, 2010		4,169
Exercised		(29	)
Decrease in fair value		(4,140	)
Balance at September 30, 2011	$	0

Fair Value Assumptions Used in Accounting for Warrant Liability

The Company has determined its warrant liability to be a Level 3 fair value measurement and used the Black Scholes valuation model (May 2011 financing) and the Monte Carlo simulation method (August 2010 financing) to calculate the fair value for the fiscal year ended September 30, 2010 and 2011.

At the measurement dates, the Company estimated the fair value for the May 2011 warrants using the Black-Scholes valuation model. Fair value at the measurement date of September 30, 2011 was estimated using the following assumptions:


May 2011 Financing
Stock price	0.54
Exercise price	2.48
Risk-free interest rate	0.96	%
Expected remaining term	4.63	years
Expected volatility	75	%
Dividend yield	0	%
Warrants outstanding May 2011 registered direct	9,027,772

At the measurement dates, the Company estimated the fair value for the August 2010 warrants using the Monte Carlo simulation method.

Fair value at the measurement date of September 30, 2011 was estimated using the following assumptions:


August 2010 Financing
Risk-free interest rate	.25	%	.02	%
Expected remaining term	1.17	years	.2	years
Expected volatility	100	%	60	%
Dividend yield	0	%	0	%
Warrants outstanding August 2010 registered direct	2,398,200		2,356,000

Risk-Free Interest Rate. This is the United States Treasury rate for the measurement date having a term equal to the expected remaining term of the warrant. An increase in the risk-free interest rate will increase the fair value and the associated derivative liability.

Expected Remaining Term. This is the period of time over which the warrant is expected to remain outstanding and is based on management’s estimate, taking into consideration the remaining contractual life.

Expected Volatility. This is a measure of the amount by which the stock price has fluctuated or is expected to fluctuate. Since the Company’s stock has not been traded for as long as the expected remaining term of the warrants, the Company uses a weighted-average of the historic volatility of four comparable companies over the retrospective period corresponding to the expected remaining term of the warrants on the measurement date. Extra weighting is attached to those companies most similar in terms of size and business activity. An increase in the expected volatility will increase the fair value and the associated derivative liability.

Dividend Yield. The Company has not made any dividend payments nor does it have plans to pay dividends in the foreseeable future. An increase in the dividend yield will decrease the fair value and the associated derivative liability.

Change of Control. The Monte Carlo simulation incorporates the probability that the Company effects a change of control. The Company estimated a 15% and 0% probability for a change of control for the year ended September 30, 2010 and 2011, respectively.

Participating Securities

If at any time the Company grants, issues or sells securities or other property to holders of any class of common stock the holders of the warrants are entitled to also acquire those same securities as if they held the number of shares of common stock acquirable upon complete exercise of the warrants.

As such, given that the warrant holders will participate fully on any dividends or dividend equivalents, the Company determined that the warrants are participating securities and therefore are subject to ASC 260-10-55 earnings per share. These securities were excluded from the year ended September 30, 2010 earnings per share calculation since their inclusion would be anti-dilutive.