NOTE 8—STOCKHOLDERS' EQUITY

Common Stock

On March 16, 2011, the Company sold to certain investors an aggregate of 14,313,081 shares of its common stock for a purchase price equal to $2.05 per share and, for a purchase price of $0.05 per share, warrants exercisable for a total of 5,725,227 shares of its common stock for aggregate gross proceeds equal to $30.1 million in connection with the offering. Net proceeds generated from the offering were approximately $27.8 million which includes underwriter discounts and estimated offering costs. The warrants have a five-year term and an exercise price equal to $2.46 per share of common stock. The number of shares issuable upon exercise of the warrants and the exercise price are subject to adjustment for subdivisions and stock splits, stock dividends, combinations, reorganizations, reclassifications, consolidations, mergers or sales of properties and assets and upon the issuance of certain assets or securities to holders of our common stock, as applicable.

On October 29, 2010, the Company entered into an at market issuance sales agreement, or sales agreement, with MLV & Co., LLC, formerly McNicoll, Lewis & Vlak LLC ("MLV"), pursuant to which the Company may issue and sell shares of our common stock having an aggregate offering price of up to $15.0 million from time to time through MLV as sales agent. Subject to the terms and conditions of the sales agreement, MLV will use commercially reasonable efforts to sell the Company's common stock from time to time, based upon the Company's instructions (including any price, time or size limits or other customary parameters or conditions the Company may impose). The Company will pay MLV an aggregate commission rate of 3.0% of the gross proceeds of the sales price per share of any common stock sold under the sales agreement. Under certain circumstances, sales of the stock under the at market issuances sales agreement could result in an adjustment to the exercise price of certain of our outstanding warrants. As of the year ended December 31, 2010 we had not sold any stock pursuant to the sales agreement. During the year ended December 31, 2011, we sold 971,037 shares of our common stock at an average price of $2.66 pursuant to the sales agreement. Net proceeds from the sale of stock were $2.3 million. The sale of stock did not result in an adjustment to the exercise price of certain of our outstanding warrants.

On October 5, 2009, the Company sold to certain investors an aggregate of 18,324,599 shares of its common stock for a purchase price equal to $1.86 per share and, for a purchase price of $0.05 per share, warrants exercisable for a total of 7,329,819 shares of its common stock for aggregate gross proceeds equal to $35.0 million in connection with the offering. Net proceeds generated from the offering were $33.1 million. The warrants have a five-year term and an exercise price equal to $2.23 per share of common stock. The exercise price of the warrants may be adjusted in certain circumstances, including certain issuances of securities at a price equal to less than the then current exercise price. In addition, the number of shares issuable upon exercise of the warrants and the exercise price are subject to adjustment for subdivisions and stock splits, stock dividends, combinations, reorganizations, reclassifications, consolidations, mergers or sales of properties and assets and upon the issuance of certain assets or securities to holders of our common stock, as applicable. As a result of the offering on March 16, 2011, the exercise price of the warrants exercisable for a total of 7,329,819 shares of common stock sold to investors in October 2009 that had an original exercise price of $2.23 per share, was subsequently reduced to $2.05 per share pursuant to the terms of such warrants.

 

On August 29, 2008, the Company sold to certain investors an aggregate of 8,970,574 shares of its common stock for a purchase price equal to $2.04 per share for aggregate gross proceeds equal to $18.3 million in connection with the offering. Net proceeds generated from the offering were $16.8 million. As part of the sale of common stock, the Company also issued warrants exercisable for a total of 3,588,221 shares of its common stock to the investors. The warrants have a five-year term and an exercise price equal to $2.34 per share of common stock. The exercise price and/or the number of shares of common stock issuable upon exercise of the warrants may be adjusted in certain circumstances, including certain issuances of securities at a price equal to less than the then current exercise price, subdivisions and stock splits, stock dividends, combinations, reorganizations, reclassifications, consolidations, mergers or sales of properties and assets and upon the issuance of certain assets or securities to holders of our common stock, as applicable. As a result of the offering on October 5, 2009, the exercise price of the warrants exercisable for a total of 3,588,221 shares of common stock sold to investors in August 2008 that had an original exercise price of $2.34 per share, was subsequently reduced to $1.86 per share pursuant to the terms of such warrants.

On February 4, 2005, the Company completed its initial public offering of 1.0 million shares of common stock for net proceeds totaling $38.1 million. On October 14, 2005, the Company completed a public offering of 1.1 million shares of its common stock for net proceeds totaling $62.4 million. Each share of common stock has the right to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the Board of Directors, subject to the prior rights of holders of all classes of stock outstanding having priority rights as to dividends. No dividends have been declared or paid as of December 31, 2011.

Reverse Stock Split and Shares Authorized

On August 13, 2008, the Company's Board of Directors approved a 1-for-6 reverse split of its common stock, following approval by the Company's stockholders on May 13, 2008. The reverse stock split was effective August 20, 2008. The par value of the common stock was not affected by the reverse stock split and remains at $0.001 per share. Consequently, on the Company's consolidated balance sheet, the aggregate par value of the issued common stock was reduced by reclassifying the par value amount of the eliminated shares of common stock to Additional Paid-in Capital. The Company paid cash in lieu of any fractional shares to which a holder of common stock would otherwise be entitled as a result of the reverse stock split, including fractional shares for the in-the-money stock options. In addition, the number of authorized shares of common stock was reduced from 150,000,000 to 50,000,000. All common share and per share amounts contained in the accompanying consolidated financial statements have been retroactively adjusted to reflect the reverse stock split.

In May 2010, the Company's stockholder's approved the number of authorized shares of common stock be increased from 50,000,000 to 150,000,000.

Common Stock Warrants

The Company accounts for its common stock warrants under guidance now codified in ASC 815 that clarifies the determination of whether an instrument (or an embedded feature) is indexed to an entity's own stock, which would qualify for classification as liabilities. The guidance required the Company's outstanding warrants to be classified as liabilities and to be fair valued at each reporting period, with the changes in fair value recognized as other income (expense) in the Company's consolidated statement of operations.

 

At December 31, 2011 and 2010, the Company had warrants outstanding to purchase 3,588,221 shares of common stock from the August 2008 offering. The fair value of these warrants on December 31, 2011 and 2010 was determined using a Black Scholes valuation model with the following Level 3 inputs:

 

		December 31, 2011				December 31, 2010
Risk-free interest rate			0.25	%			1.02	%
Expected life (in years)			1.66				2.66
Dividend yield			—				—
Volatility			84	%			94	%
Stock price		$	1.22			$	1.35

On January 1, 2009, Company recorded a cumulative effect of change in accounting principle adjustment to its deficit accumulated during development stage of $0.5 million and a corresponding reclassification of the Company's outstanding warrants from stockholder's equity to warrant liability. During the years ended December 31, 2011 and 2010, a change in fair value of $1.1 million and $1.8 million related to the August 2008 warrants was recorded as other income in the Company's consolidated statement of operations, respectively.

At December 31, 2011 and 2010, the Company had warrants outstanding to purchase 7,329,819 shares of common stock from the October 2009 offering. The fair value of these warrants on December 31, 2011 and 2010 was determined using a Black Scholes valuation model with the following Level 3 inputs:

 

		December 31, 2011				December 31, 2010
Risk-free interest rate			0.36	%			1.40	%
Expected life (in years)			2.76				3.76
Dividend yield			—				—
Volatility			88	%			88	%
Stock price		$	1.22			$	1.35

On October 5, 2009, the Company determined the fair value of the warrants to be $9.8 million and classified that amount of the net proceeds from the October 2009 offering to warrant liability. During the years ended December 31, 2011 and 2010, a change in fair value of $1.4 million and $3.4 million related to the October 2009 warrants was recorded as other income in the Company's consolidated statement of operations.

At December 31, 2011 the Company had warrants outstanding to purchase 5,725,227 shares of common stock from the March 2011 offering. The fair value of these warrants on December 31, 2011 and March 16, 2011, was determined using a Black Scholes valuation model with the following Level 3 inputs:

 

		December 31, 2011				March 16, 2011
Risk-free interest rate			0.60	%			1.87	%
Expected life (in years)			4.21				5.0
Dividend yield			—				—
Volatility			102	%			89	%
Stock price		$	1.22			$	1.67

On March 16, 2011, the Company determined the fair value of the warrants to be $6.1 million and classified that amount of the net proceeds from the March 2011 offering to warrant liability. During the year ended December 31, 2011, a change in the fair value of $1.9 million related to the March 2011 warrants was recorded as other income in the Company's consolidated statement of operations.

 

The following table sets forth the Company's financial liabilities, related to warrants issued in the August 2008, October 2009 and March 2011 offerings, subject to fair value measurements as of December 31, 2011:

 

(in thousands)		Fair Value as of December 31, 2011				Basis of Fair Value Measurements
						Level 1				Level 2				Level 3
Common stock warrants		$	9,209			$	—			$	—			$	9,209

The following table is a reconciliation of the warrant liability measured at fair value using level 3 inputs (in thousands):

 

		Warrant Liability
Balance at December 31, 2009		$	12,665
Change in fair value of common stock warrants during 2010			(5,166	)
Balance at December 31, 2010		$	7,499
Issuance of common stock warrants related to March 2011 offering			6,068
Change in fair value of common stock warrants during 2011			(4,358	)
Balance at December 31, 2011		$	9,209

Preferred Share Rights Agreement

On August 8, 2006, the Board of Directors adopted a Preferred Shares Rights Agreement. As part of this agreement, preferred stock purchase rights ("the rights") were distributed to stockholders of record as of August 23, 2006, at the rate of one right for each share of common stock held. The rights become exercisable only upon the acquisition, or the acquisition of the right to acquire, by a person or group of affiliated or associated persons, 15% or more of the outstanding shares of the Company's common stock. Once exercisable, each right entitles the holder to purchase, at a price of $25.00, six one-thousandth of a share of Series A Participating Preferred Stock. For a limited period of time following the announcement of any such acquisition or offer, the rights are redeemable by the Company at a price of $0.01 per right. If the rights are not redeemed or exchanged, each right will then entitle the holder to receive, upon exercise of such right, a number of shares of the Company's common stock having a then current value equal to two times the purchase price of such right. Similarly, if the rights are not redeemed or exchanged and following the acquisition of 15% or more of the outstanding shares of the Company's common stock by a person or group of affiliated or associated persons, (i) the Company consolidates with or merges into another entity, (ii) another entity consolidates with or merges into the Company or (iii) the Company sells or otherwise transfers 50% or more of its consolidated assets or earning power, each right will then entitle the holder to receive, upon exercise of such right, a number of shares of common stock of the acquiring company having a then current value equal to two times the purchase price. For a limited period of time after the exercisability of the rights, each right, at the discretion of the Board of Directors, may be exchanged for one share of common stock per right. The Company has initially reserved 200,000 shares of preferred stock pursuant to the exercise of these rights. These rights expire on August 8, 2016.

Effective July 9, 2008, the Company entered into an amendment (the "First Amendment") to that certain Preferred Shares Rights Agreement, dated as of August 8, 2006, by and between the Company and Mellon Investor Services LLC (the "Rights Agreement"). The First Amendment amended certain terms in the Rights Agreement so that the Company could announce and consummate the 2008 offering of common stock and warrants described above without triggering the Rights Agreement.

Effective September 29, 2009, the Company entered into an additional amendment (the "Second Amendment") to the Rights Agreement. The Second Amendment amended certain terms in the Rights Agreement so that the Company could announce and consummate the 2009 offering described above without triggering the Rights Agreement.