Quarterly report pursuant to Section 13 or 15(d)

Warrant Liabilities

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Warrant Liabilities
9 Months Ended
Sep. 30, 2012
Warrant Liability [Abstract]  
Warrant Liabilities

7. Warrant Liabilities

On March 15, 2011, in connection with our Deerfield facility agreement, we issued Deerfield six-year warrants to purchase 6,000,000 shares of our common stock at an exercise price of $1.57 per share. The warrants were immediately exercisable and expire on March 15, 2017. The warrants contain a provision where the warrant holder has the option to receive cash, equal to the Black Scholes fair value of the remaining unexercised portion of the warrant, as cash settlement in the event that there is a fundamental transaction (contractually defined to include various merger, acquisition or stock transfer activities). Due to this provision, ASC 480 Distinguishing Liabilities from Equity requires that these warrants be classified as liabilities. The fair values of these warrants have been determined using the Binomial Lattice (“Lattice”) valuation model, and the changes in the fair value are recorded in the condensed statements of operations and comprehensive loss. The Lattice model provides for assumptions regarding volatility and risk-free interest rates within the total period to maturity. As a result of the April 9, 2012 common stock offering (See Note 8, “Stockholders’ Equity” for further discussion), and pursuant to the terms of the Deerfield Warrants, the exercise price of the Deerfield Warrants was adjusted to $1.25 per share.

The key assumptions used to value the warrants were as follows:

 

         

Assumption

  September 30,
2012
 

Expected price volatility

    75

Expected term (in years)

    4.46  

Risk-free interest rate

    0.54

Dividend yield

    0.00

Weighted-average fair value of warrants

  $ 0.55  

On April 9, 2012, in connection with subscription agreements with certain institutional investors for the purchase and sale of 6,517,648 shares of our common stock, we issued (i) six-year warrants to purchase 6,517,648 shares of common stock at an exercise price of $1.15 per share (the “Series A Warrants”) and (ii) six-month warrants to purchase 6,517,648 shares of common stock at an exercise price of $0.85 per share (the “Series B Warrants”) (together with the Series A Warrants, the “Warrants”). The warrants contain a provision where the warrant holder has the option to receive cash, equal to the Black Scholes fair value of the remaining unexercised portion of the warrant, as cash settlement in the event that there is a fundamental transaction (contractually defined to include various merger, acquisition or stock transfer activities). Due to this provision, ASC 480 Distinguishing Liabilities from Equity requires that these warrants be classified as liabilities. The fair values of these warrants have been determined using the Binomial Lattice (“Lattice”) valuation model, and the changes in the fair value are recorded in the condensed statements of operations and comprehensive loss. The Lattice model provides for assumptions regarding volatility and risk-free interest rates within the total period to maturity.

During the three month period ended September 30, 2012, Series B Warrants to purchase 1,133,824 shares of common stock were exercised at a price of $0.85 per share

The key assumptions used to value the warrants were as follows:

 

                 
    September 30, 2012  

Assumption

  Series A
Warrants
    Series B
Warrants
 

Expected price volatility

    75     75

Expected term (in years)

    5.53       0.02  

Risk-free interest rate

    0.73     0.06

Dividend yield

    0.00     0.00

Weighted-average fair value of warrants

  $ 0.61     $ 0.17