Common Stock And Warrant Liability

6 Months Ended

Jun. 30, 2011

Common Stock And Warrant Liability

Common Stock And Warrant Liability

7. Common Stock and Warrant Liability

2011 At Market Issuance Sales Agreement

On June 13, 2011, the Company entered into an At Market Issuance Sales Agreement, or ATM agreement, with McNicoll, Lewis & Vlak LLC, or MLV, pursuant to which the Company may issue and sell from time to time through MLV shares of its common stock, $0.01 par value per share, with an aggregate offering price of up to $20,000,000. Upon delivery of a placement notice and subject to the terms and conditions of the ATM agreement, MLV may sell the common stock by methods deemed to be an "at-the-market" offering as defined in Rule 415 of the Securities Act of 1933, including sales made directly on The NASDAQ Global Market, on any other existing trading market for the common stock or to or through a market maker. With the Company's prior written approval, MLV may also sell the common stock by any other method permitted by law, including in privately negotiated transactions. The Company or MLV may suspend or terminate the offering of common stock upon notice and subject to other conditions. MLV will act as sales agent on a commercially reasonable best efforts basis consistent with its normal trading and sales practices and applicable state and federal law, rules and regulations and the rules of NASDAQ. The Company will pay MLV a commission equal to 3.0% of the gross sales price per share sold. The Company has agreed to provide indemnification and contribution to MLV against certain civil liabilities, including liabilities under the Securities Act. As of June 30, 2011, the Company had not delivered a placement notice and had not sold any common shares under the ATM agreement. Total offering expenses incurred related to the ATM agreement through June 30, 2011 were approximately $105,000. The Company has capitalized this amount in the "Prepaid expenses and other current assets" line item of its Consolidated Balance Sheet as of June 30, 2011. In July 2011, the Company delivered a placement notice to MLV and sold shares under the ATM agreement resulting in proceeds of $255,000, which is net of MLV's commission.

2010 Registered Direct Offering

On January 27, 2010, the Company completed a registered direct offering of 6,449,288 units with each unit consisting of (i) one share of the Company's common stock and (ii) one warrant to purchase 0.25 of one share of common stock at a purchase price of $2.52 per unit. The Company received net proceeds from the sale of the units, after deducting offering expenses, of approximately $14,942,000.

In connection with this offering, the Company issued warrants to purchase an aggregate of 1,612,322 shares of common stock. The warrants have an initial exercise price of $3.55 per share and a five-year term. The warrants include certain protective features for the benefit of the warrantholder, including an anti-dilution adjustment clause and a possible cash-settlement option in the event of a change of control until the later to occur of (i) two years from the date of original issuance of the warrant and (ii) the date upon which Genentech or Roche submits a new drug application (NDA) for vismodegib. Due to these terms, the warrants were deemed to be a liability and, therefore, the fair value of the warrants was recorded as a liability in the Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010. The Company estimated that the fair value of the warrants at issuance was $2,181,000 using a Black-Scholes option pricing model under various probability-weighted outcomes which take into consideration the protective, but limited, cash-settlement feature of the warrants with the following assumptions assigned to the varying outcomes: expected volatilities of 69.8% and 80%, risk free interest rates ranging from 1.42% to 2.38%, expected lives of three to five years, and no dividends.

The Company estimated that the fair value of the warrants at June 30, 2011 was $3,427,000 using this same model with the following assumptions assigned to the varying outcomes: expected volatility of 80%, risk free interest rates ranging from 0.8% to 1.1%, expected lives of three to four years, and no dividends. The Company estimated that the fair value of the warrants at June 30, 2010 was $1,290,000 using the following assumptions assigned to the varying outcomes: expected volatilities of 78.4% and 97.8%, risk free interest rates ranging from 0.9% to 2.4%, expected lives of three to five years, and no dividends. The warrants will be revalued each reporting period with updated assumptions, and the resulting change in fair value of the warrant liability will be recognized in the Consolidated Statement of Operations.

The Company recorded other expense of approximately $320,000 and $1,822,000 for the three and six months ended June 30, 2011, respectively, and other income of approximately $1,797,000 and $891,000 for the three and six months ended June 30, 2010, respectively, as a result of the change in the fair value of the warrant liability. These changes are primarily due to the changes in the Company's stock price during the respective reporting periods.