Note 9. Warrant Liability

6 Months Ended

Jun. 30, 2011

9. WARRANT LIABILITY

In September 2010, the Company closed the sale of 4,242,870 units, with each unit consisting of one share of common stock and a warrant to purchase 0.75 shares of common stock, and in May 2009 the Company closed the sale of 3,878,993 units, with each unit consisting of one share of common stock and a warrant to purchase 0.75 shares of common stock. The warrants issued in May 2009 and September 2010 have been classified as liabilities, as opposed to equity, due to potential cash settlement upon the occurrence of certain transactions specified in the warrant agreement related to the warrants. As of June 30, 2011, the outstanding warrants for the May 2009 and September 2010 financings were 2,953,344 and 3,182,147 respectively.

The estimated fair value of outstanding warrants accounted for as liabilities is determined as of the balance sheet date and recorded in the condensed consolidated balance sheet at each financial reporting period. The change in the estimated fair value of such warrants is recorded in the condensed consolidated statement of operations in other income (expense) as a gain (loss). The fair value of the warrants is estimated using the Black-Scholes option-pricing model with the following inputs for the warrants issued in May 2009 and September 2010, respectively:

	As of June 30, 2011
	May 2009 Warrants			September 2010 Warrants
Exercise price	$	3.74		$	4.24
Market value of stock at end of period	$	9.19		$	9.19
Expected dividend rate		0.0	%		0.0	%
Expected volatility		87.2	%		87.6	%
Risk-free interest rate		0.8	%		1.4	%
Expected life (in years)		2.91			4.25

	As of December 31, 2010
	May 2009 Warrants			September 2010 Warrants
Exercise price	$	3.74		$	4.24
Market value of stock at end of period	$	3.26		$	3.26
Expected dividend rate		0.0	%		0.0	%
Expected volatility		102.7	%		92.2	%
Risk-free interest rate		1.2	%		1.9	%
Expected life (in years)		3.40			4.75

The change in fair value of the warrant liability during the three months ended June 30, 2011 was as follows (in thousands):

Warrant liability as of April 1, 2011	$	14,441
Change in fair value for the three months ended June 30, 2011………………………………………		28,023
Balance as of June 30, 2011…………………………………………………………………………...	$	42,464

The change in fair value of the warrant liability during the six months ended June 30, 2011 was as follows (in thousands):

Warrant liability as of January 1, 2011	$	12,983
Change in fair value for the six months ended June 30, 2011………………………………………		29,481
Balance as of June 30, 2011…………………………………………………………………………...	$	42,464

On December 31, 2010, the Company changed the way it estimates volatility when determining the fair value of the warrants using the Black-Scholes model. Prior to December 31, 2010, the volatility was calculated using the Company’s historical stock price, and discounting it by 15% to give effect to estimated lowered volatility expected by warrant holders. Before estimating the fair value of the warrants on December 31, 2010, the Company commissioned a study on volatility, and determined that the most appropriate volatility to use as of December 31, 2010 and for the foreseeable future thereafter, is the unadjusted volatility calculated using the Company’s historical stock price.