Securities Purchase Agreement

12 Months Ended

Dec. 31, 2011

Securities Purchase Agreement [Abstract]

Securities Purchase Agreement

4. Securities Purchase Agreement

On May 24, 2010, the Company entered into a Securities Purchase Agreement by and among the Company and the purchasers named therein (the “Purchasers”). The Purchasers included institutional investors as well as the Company’s Chief Executive Officer, Chief Financial Officer and an additional Company employee at that time. The total investment by these Company employees represented less than 3% of the proceeds received by the Company in the May 2010 Financing. Pursuant to the Securities Purchase Agreement, on May 26, 2010 (the “Closing Date” or “Closing”), for total consideration of $6,003,000, the Purchasers purchased (i) an aggregate of 289,704 shares of the Company’s Common Stock, par value $0.0001 per share, at a contractually stated price of $3.00 per share, and (ii) 5,134 shares of the Company’s Series C-1¹ Preferred, par value $0.0001 per share, at a contractually stated price of $1,000 per share. The Purchasers also received (i) Series D-1¹ Warrants to purchase 5,134 shares of the Company’s Series D-1¹ Preferred, par value $0.0001 per share, at an exercise price of $1,000 per share, which warrants may be exercised on a cashless basis, and (ii) Series C-2¹ Warrants to purchase 10,268 units, at an exercise price of $1,000 per unit, which warrants are exercisable only in cash, with each unit consisting of one share of the Company’s Series C-2 ¹ Preferred, par value $0.0001 per share, and an additional Series D-2 ¹ Warrant to purchase one share of the Company’s Series D-2¹ Preferred, par value $0.0001 per share, at an exercise price of $1,000 per share.

At the Closing Date, the estimated fair value of the Series C-2 ¹ Warrants for units, Series D-1 ¹ Warrants, and the embedded derivatives included within the Series C-1¹ Preferred exceeded the proceeds from the May 2010 Financing of $6,003,000 (see the valuations of these derivative liabilities under the heading, “Derivative Liabilities” below). As a result, all of the proceeds were allocated to these derivative liabilities and no proceeds remained for allocation to the Common Stock and Series C-1¹ Preferred issued in the financing.

As discussed in Note 2, in March 2011, the Company entered into the Consent Agreement which amended the terms of the Securities Purchase Agreement. Under the Consent Agreement, the holders agreed to the following, among other changes: (i) a temporary suspension of dividends on Series C-1¹ Preferred and Series C-2¹ Preferred (ii) to provide an additional cash payment of approximately $236,000 in exchange for the right to receive Series C-2¹ Preferred upon the achievement of certain pre-specified results in the preclinical study of one of the Compounds (the “Preclinical Milestone”), (iii) to increase the warrants that must be exercised for cash from 10,268 to 10,646 units, (iv) the mandatory exercise of $7,452,000 of such warrants upon the achievement of the Preclinical Milestone, (v) the mandatory exercise of the remaining $3,194,000 of warrants upon the achievement of a future clinical milestone and (vi) an automatic one time downward conversion price adjustment following the 2011 Reverse Stock Split.

The Company filed its Series C/D Certificate and Series E Certificate (collectively, the “Certificates”) with the State of Delaware on March 30, 2011. Each Certificate provides the holders with the following rights:

• The holders of New Preferred Stock and Series E Preferred Stock (collectively, the “C/D/E Preferred Stock”) do not have voting rights unless required by the Delaware General Corporation Law or as set forth below.

• Cumulative dividends are payable on the Series C-1 ¹ Stock and Series C-2 ¹ Stock (together referred to herein as the “Series C Preferred”) at a rate of 15% per annum and on the Series E Preferred Stock at a rate of 5% per annum, each accruing from the date of issuance through the date of conversion or redemption, payable semi-annually in shares of Series C-1 ¹ Stock, Series C-2 ¹ Stock and Series E Preferred Stock, respectively, but subject to the temporary suspension of dividends with respect to the Series C Preferred, as described above. Neither the Series D-1¹ Stock nor the Series D-2¹ Stock is entitled to dividends.

• The C/D/E Preferred Stock is convertible into common stock, initially at a rate of 66,667 shares of common stock for each share of C/D/E Preferred Stock, subject to certain limitations discussed below, at the election of the holders of C/D/E Preferred Stock. The conversion rate will be adjusted for certain events, such as stock splits, stock dividends, reclassifications and recapitalizations, and the New Preferred Stock is subject to full-ratchet anti-dilution protection such that any subsequent issuance of common stock below the effective conversion price of the C/D/E Preferred Stock at the time of such issuance automatically adjusts the conversion price of the C/D/E Preferred Stock to such lower price. There are also limits on the amount of C/D/E Preferred Stock that can be converted and the timing of such conversions. The New Preferred Stock may be converted starting the first Monday following the Closing of the asset purchase. The Series E Preferred Stock may not be converted until the first Monday following the achievement of the Preclinical Milestone under the Agreement.

• Upon a Liquidation Event (as defined in each Certificate), no other class or series of capital stock can receive any payment unless the New Preferred Stock has first received a payment in an amount equal to $1,000 per share, plus all accrued and unpaid dividends, if applicable. Once the New Preferred Stock has received its liquidation payment, the Series E Preferred Stock is entitled to receive a payment in an amount equal to $1,000 per share, plus all accrued and unpaid dividends, if applicable.

• In the event that certain actions occur without the prior written consent of the holders of two-thirds of the then outstanding shares of New Preferred Stock (the “Requisite Holders”), such as the Company’s material breach of any material representation or warranty under the Securities Agreement, a suspension of the trading of the Company’s common stock, the failure to timely deliver shares on conversion of the C/D/E Preferred Stock, or the consummation of a Change of Control (as defined in the Certificate of Designations), then the holders of the Series C Preferred shall have the right, upon the delivery of a notice to the Company by the Requisite Holders, to have such shares redeemed by the Company for an amount equal to the greater of $1,000 per share, plus accrued and unpaid dividends, or the fair market value of the underlying common stock issuable upon conversion of the Series C Preferred. The Series E Preferred Stock does not have similar redemption rights.

• Upon certain redemption events, such as the Company’s breach of covenants or material representations or warranties under the Purchase Agreement, the conversion price of the C/D/E Preferred Stock decreases to 10% of the conversion price in effect immediately before such redemption event.

So long as at least 1,000 shares of New Preferred Stock remain outstanding (or at least 3,000 shares of New Preferred Stock remain outstanding if the Cash Warrants have been fully exercised), the Company may not take a variety of actions (such as altering the rights, powers, preferences or privileges of the New Preferred Stock so as to effect the New Preferred Stock adversely, amending any provision of the Company’s certificate of incorporation, entering into an agreement for a Strategic Transaction or Change of Control (as each is defined in the Series C/D Certificate) and may not consummate any financing or file a registration statement with the Securities and Exchange Commission without the prior approval of the Requisite Holders. The Series E Preferred Stock does not have similar protective provisions.

In June 2011, the Company entered into the Amendment Agreement which amended the terms of the Securities Purchase Agreement and the Consent Agreement. Under the Amendment Agreement, the Holders agreed to the following, among other changes: (i) a temporary waiver of dividends on Series C¹ Preferred (ii) to provide additional working capital by July 29, 2011, in an amount to be determined, if the Requisite Holders (as defined in the Amendment Agreement) determined by July 22, 2011 that, as of such date, the Company was continuing to pursue a Strategic Transaction (as defined in the Amendment Agreement) (iii) to purchase up to all of the outstanding Series C ¹ Preferred and certain warrants held by then current and former Company employees, including the executive officers at that time, who will have the right to require the Holder to purchase these securities for a limited period of time following the employee’s termination of service with the Company.

In August 2011, the Company entered into a Second Amendment Agreement which extended the terms of the Amendment Agreement through October 31, 2011. Under the Second Amendment Agreement, the Holders agreed to the following, among other changes: (i) to continue a temporary waiver of dividends on Series C¹ Preferred (ii) to provide additional working capital, in an amount to be determined, if the Requisite Holders (as defined in the Second Amendment Agreement) determine by September 2, 2011, and then again by September 26, 2011, that, as of such date, the Company was continuing to pursue a Strategic Transaction (as defined in the Second Amendment Agreement) (iii) to purchase up to all of the outstanding Series C ¹ Preferred and certain warrants held by then current and former Company employees, including the executive officers at that time, who will have the right to require the Holder to purchase these securities for a limited period of time following the employee’s termination of service with the Company.

Common Stock

Pursuant to Rule 144 under the Securities Act of 1933 the Purchasers were restricted from selling the common stock until November 2010, which was six months after the Closing Date.

Redeemable Preferred Stock

As of December 31, 2011, the Company’s Board of Directors is authorized to issue 8,000,000 shares of preferred stock, with a par value of $0.0001 per share, in one or more series, of which 11,000 are designated for Series C-1 ¹ Preferred, 22,000 are designated Series C-2 ¹ Preferred, 5,134 are designated Series D-1 ¹ Preferred, 10,868 are designated Series D-2 ¹ Preferred, and 12,000 are designated Series E Preferred. As of December 31, 2011, 5,043 shares of Series C-1¹ Preferred Stock are issued and outstanding. As of December 31, 2010, 5,573 shares of Series C-1¹ Preferred Stock were issued and outstanding.

Voting Rights

The holders of New Preferred Stock do not have voting rights other than for general protective rights required by the Delaware General Corporation Law or as set forth below.

Dividends

Cumulative dividends are payable on the Series C¹ Preferred at an annual rate of 15% from the date of issuance through the date of conversion or redemption, payable semi-annually each November 25 ^th and May 25 ^th in shares of Series C ¹ Preferred. There is no limit to the number of shares of Series C¹ Preferred that may be issued as dividends. Neither the Series D-1¹ Preferred nor the Series D-2¹ Preferred (if and when issued) is entitled to dividends.

As discussed in Note 1, the Company funded its confirmatory preclinical study of the RIL compounds and general operations in part through the Forfeited Dividend and the Waived Dividend. From June 1 through August 31, 2011, there was an accrual of five shares Series C ¹ Preferred payable to current and former Company employees who are holders of Series C ¹ Preferred. These holders waived their dividends as part of the Second Amendment Agreement effective after August 31, 2011. The Waived Dividends were extended to cover the period through October 31, 2011. Dividends were paid in shares to these holders on November 25, 2011 and were accrued for such holders for the period from November 26, 2011 to December 31, 2011.

Conversion Rights

The New Preferred Stock was convertible into common stock, initially at a rate of 667 shares of common stock for each share of New Preferred Stock, subject to certain limitations discussed below, at the election of the holders of New Preferred Stock. The conversion rate was to be adjusted for certain events, such as stock splits, stock dividends, reclassifications and recapitalizations, and the New Preferred Stock is subject to full-ratchet anti-dilution protection such that if the Company issues or grants any warrants, rights, options to subscribe or purchase common stock or common stock equivalents (the “Options”) and the price per share for which the common stock issuable upon the exercise of such Options is below the effective conversion price of the New Preferred Stock at the time of such issuance, then the conversion rate of the New Preferred Stock automatically adjusts to increase the number of common shares into which it can convert. There are also limits on the amount of New Preferred Stock that can be converted and the timing of such conversions. In accordance with the Consent Agreement, after the 2011 Reverse Stock Split, the conversion ratio for the New Preferred Stock was adjusted based on the trading price of the Company’s common stock over a period of time after the 2011 Reverse Stock Split was implemented. Accordingly, effective May 7, 2011, each share of New Preferred Stock was convertible into approximately 166,667 shares of common stock.

Effective with the Consent Agreement, in any week, each holder of New Preferred Stock may convert its amount of the outstanding New Preferred Stock held by the stockholder multiplied by the Conversion Cap (as defined in the Certificate of Designations for the Series C-1¹, C-2 ¹, D-1 ¹ and D-2 ¹ Preferred (the “Series C ¹/D ¹ Certificate”) for such week. Depending on the Closing Sales Prices (as defined in the Series C ¹/D ¹ Certificate), the Conversion Cap can range from 0% to 7.2%. Moreover, holders of New Preferred Stock may not convert if such conversion would result in the holder or any of its affiliates beneficially owning more than 9.999% of the Company’s then issued and outstanding shares of common stock. As of December 31, 2011, 588 shares of Series C-1 ¹ Preferred had been converted into common stock.

Upon certain redemption events, as set forth in the Securities Purchase Agreement, and as subsequently amended in the Consent Agreement, the conversion price of the New Preferred Stock decreases to 10% of the conversion price in effect immediately before such redemption event thereby increasing the number of common shares that would be issued for each share of New Preferred Stock by a factor of ten times.

In connection with the Asset Purchase Agreement and the transaction that occurred in January 2012, the New Preferred Stock was exchanged for the 2012 New Preferred Stock (see Note 1). Additionally, another reverse stock split was to be executed per the Asset Purchase Agreement. The 2012 Reverse Stock occurred on February 17, 2012 and the conversion rate of the 2012 New Preferred Stock changed as a result. Effective on March 3, 2012, each share of 2012 New Preferred Stock was convertible into approximately 213,083 shares of common stock.

Liquidation Preference

Upon a Liquidation Event (as defined in the Series C¹/D ¹ Certificate), no other class or series of capital stock can receive any payment unless the Preferred Stock has first received a payment in an amount equal to $1,000 per share, plus all accrued and unpaid dividends, if applicable.

Redemption Rights

In the event that certain actions occur without the waiver or prior written consent of the holders of two-thirds of the then outstanding shares of New Preferred Stock (the “Requisite Holders”), such as the Company’s material breach of any material representation or warranty under the Securities Purchase Agreement, a suspension of the trading of the Company’s common stock, the failure to timely deliver shares on conversion of the New Preferred Stock, bankruptcy reorganization or the consummation of a Change of Control (as defined in the Series C¹/D ¹ Certificate) among others, then the holders of the Series C¹ Preferred shall have the right, upon the delivery of a notice to the Company by the Requisite Holders, to have such shares redeemed by the Company for an amount equal to the greater of $1,000 per share, plus accrued and unpaid dividends, or the fair market value of the underlying common stock issuable upon conversion of the Series C¹ Preferred, which could include a greater number of shares pursuant to the conversion reset described above under the caption “Conversion Rights”. As of December 31, 2011 and through the date of this filing, none of these redemption actions have occurred to the Company’s knowledge.

Since the Company failed to consummate a Strategic Transaction (as defined in the Series C¹/D ¹ Certificate) by February 26, 2011 (nine months from the May 26, 2010 Closing), the Series C¹ Preferred may be redeemed upon the demand of the Requisite Holders. The redemption price would be equal to $1,000 per share, plus accrued and unpaid dividends. As of December 31, 2011, the redemption value was $5,116,000. The Requisite Holders have not elected this redemption feature through December 31, 2011 or the period prior to the Asset Purchase Agreement on January 19, 2012. In connection with the Asset Purchase Agreement, the January 2012 transaction was designated as a Strategic Transaction and any redemption events associated with the original definition of a Strategic Transaction in the Series C¹/D ¹ Certificate are irrevocably waived.

Restrictions

So long as at least 1,000 shares of New Preferred Stock remain outstanding (or at least 3,000 shares of New Preferred Stock remain outstanding if the Series C-2¹ Warrants have been exercised), the Company may not take a variety of actions (such as altering the rights, powers, preferences or privileges of the New Preferred Stock so as to affect the New Preferred Stock adversely, amending any provision of the Company’s certificate of incorporation, entering into an agreement for a Strategic Transaction or Change of Control, consummating any financing or filing a registration statement with the Securities and Exchange Commission, or “SEC”) without the prior approval of the Requisite Holders. From May 2010 through April 2011, the Company had also agreed to certain limitations on its spending per month based on predetermined budgeted amounts. See Note 10 for changes in the restrictions at the time of the January 2012 asset purchase agreement.

Accounting Treatment

On May 26, 2010, the Company issued 5,134 shares of Series C-1 ¹ Preferred and recorded the par value of $0.0001 per share with a corresponding reduction to paid-in capital, given that there was no allocated value from the proceeds to the Series C-1¹ Preferred.

In a separate transaction, in exchange for a first right of negotiation for a product candidate, the Company issued approximately 50 shares of Series C-1¹ Preferred convertible into approximately 83,000 shares of the Company’s common stock to a Purchaser on May 26, 2010. Using the present value of the face amount of the Series C-1 ¹ Preferred at Closing, these shares were valued at $12,000 and were fully charged to general and administrative expense during the three months ended June 30, 2010.

Under accounting guidance covering accounting for redeemable equity instruments, preferred securities that are redeemable for cash or other assets are to be classified outside of permanent equity (within the mezzanine section between liabilities and equity on the consolidated balance sheets) if they are redeemable at the option of the holder or upon the occurrence of an event that is not solely within the control of the issuer. As there are redemption-triggering events related to the Series C ¹ Preferred that are not solely within the control of the Company, the Series C-1¹ Preferred was classified outside of permanent equity.

As of December 31, 2011, the outstanding Series C-1 ¹ Preferred is convertible into approximately 8,405,000 shares of common stock. The Company may be required to redeem the Series C-1¹ Preferred if a redemption event occurs. Since the Company did not consummate a Strategic Transaction by February 26, 2011, the Series C-1¹ Preferred was currently redeemable and therefore the Company adjusted the carrying value of the Series C-1¹ Preferred to the redemption value of such shares. The carrying value at December 31, 2011, $5,133,000, represents the redemption value of the Series C-1 ¹ Preferred plus accrued and unpaid dividends.

As of December 31, 2010, accrued dividends on the Series C-1 ¹ Preferred were $5,000, which consisted of 79 shares of Series C-1 ¹ Preferred, or approximately 0.014 dividend shares per Series C-1¹ Preferred share outstanding, convertible into approximately 132,000 shares of common stock. Due to the forfeiture of dividends on the Company’s outstanding Series C ¹ Preferred for the period from November 26, 2010 to May 31, 2011 as discussed in Note 1, the accrued dividends of $5,000 as of December 31, 2010 were reversed.

As discussed in Note 1, the dividends for then current and former Company employees were forfeited from November 26, 2010 to May 31, 2011 and waived from August 31, 2011 to October 31, 2011, and the dividends for the key investors were forfeited/waived from November 26, 2010 to October 31, 2011.

As of December 31, 2011 accrued dividends on the Series C-1¹ Preferred were $74,000, which consisted of 74 shares of Series C-1¹ Preferred for the period November 26, 2011 to December 31, 2011. The accrued dividends are convertible into approximately 123,000 shares of common stock.

Derivative Liabilities

The Series C-1¹ Preferred and the underlying securities of the Series C-2¹ Warrants for units and Series D-1¹ Warrants (Series C¹ Preferred and Series D¹ Preferred) contain conversion features. In addition, the Series C-1¹ Preferred and the underlying securities of the Series C-2¹ Warrants for units (Series C¹ Preferred) are subject to redemption provisions that are outside of the control of the Company.

The Series C-2 ¹ Warrants and Series D-1 ¹ Warrants are exercisable starting on the issuance date and expire three years from the date of issuance. The Series C-2¹ Warrants must be exercised in cash and beginning in June 2011, they are no longer subject to mandatory exercise terms. The Series D-1¹ Warrants may be exercised on a cashless basis and are not subject to mandatory exercise terms.

Changes in the redemption provisions and the expiration dates of the Warrants upon the January 2012 asset purchase are described in Note 1.

Accounting Treatment

The Company accounted for the conversion and redemption features embedded in the Series C-1 ¹ Preferred (the “Embedded Derivatives”) in accordance with accounting guidance covering derivatives. Under this accounting guidance, companies may be required to bifurcate conversion and redemption features embedded in redeemable convertible preferred stock from their host instruments and account for these embedded derivatives as free standing derivative financial instruments. If the underlying security of the embedded derivative requires net cash settlement in the event of circumstances that are not solely within the Company’s control, the embedded derivative should be classified as a liability, measured at fair value at issuance and adjusted to their current fair value at each period. As there are redemption triggering events for net cash settlement for Series C ¹ Preferred that are not solely within the Company’s control, and the conversion feature is a derivative, the Embedded Derivatives are classified as liabilities and are accounted for using fair value accounting at each reporting date (also see Note 2).

The Company accounted for the Series C-2 ¹ Warrants for units and Series D-1 ¹ Warrants in accordance with accounting guidance covering derivatives. If the underlying security of the warrant, a.) requires net cash settlement in the event of circumstances that are not solely within the Company’s control or if not, if they are b.) not indexed to the Company’s own stock, the warrants should be classified as liabilities, measured at fair value at issuance and adjusted to their current fair value at each period. As there are redemption triggering events for Series C ¹ Preferred that are not solely within the Company’s control, and the Series D ¹ Preferred are not indexed to the Company’s own stock, the Series C-2¹ Warrants for units and Series D-1¹ Warrants are classified as liabilities and are accounted for using fair value accounting at each reporting date. The Embedded Derivatives, Series C-2¹ Warrants for units and Series D-1 ¹ Warrants are collectively referred to as the “Derivative Liabilities”.

The estimated fair values of the Derivative Liabilities as of December 31, 2010 and 2011 are summarized as follows (in thousands):

	Fair Value Measurements at
	December 31, 2010			December 31, 2011
Embedded Derivatives of Series C-1 1 Preferred (including dividends paid in Series C-1 1 Preferred	$	5,098		$	3,628
Embedded Derivatives of accrued dividends payable in Series C-1 1 Preferred		72			52
Series D-1 1 Warrants		702			2,539
Series C-2 1 Warrants for:
Series C-2 1 Preferred		(1,175	)		3,785
Series D-2 1 Warrants		1,405			5,266
	$	6,102		$	15,270

The Derivative Liabilities were valued using binomial option pricing models with various assumptions detailed below. Due to the six month trading restriction on the unregistered shares of common stock issued or issuable from the conversion of Preferred Stock and the weekly conversion limitation on Preferred Stock as well as the uncertainty of the Company’s ability to continue as a going concern, the price per share of the Company’s common stock used in the binomial option pricing models for the Derivative Liabilities was discounted from the closing market prices of $2.60 and $.0.27 on December 31, 2010 and 2011, respectively. The expected lives that were used to value each of the Derivative Liabilities were based on the individual characteristics of the underlying Preferred Stock, which impact the expected timing of conversion into common stock. In addition, the probabilities associated with the consummation of a Strategic Transaction and the clinical development of a drug candidate based on industry data were used in each of the binomial option pricing models. The models used to value the Series C-2 ¹ Warrants and Series D-1 ¹ Warrants are particularly sensitive to such probabilities, as well as to the closing price per share of the Company’s common stock. In addition, as noted above, the model included the effects of the automatic one-time downward conversion price adjustment following the 2011 Reverse Stock Split. To better estimate the fair value of the Derivative Liabilities at each reporting period, the binomial option pricing models and their inputs were refined based on information available to the Company. Such changes did not have a significant impact on amounts recorded in previous interim reporting periods.

At December 31, 2010, the total value of the Embedded Derivatives, including the estimated fair value of Embedded Derivatives related to the accrued dividends payable in Series C-1¹ Preferred of $72,000 was $5,170,000. At December 31, 2011, the total value of the Embedded Derivatives was $3,680,000, resulting in non-cash other income on the decrease in the estimated fair value of the Embedded Derivatives for the year ended December 31, 2011 of $1,149,000 (exclusive of the decrease in the liability of $361,000 due to the conversion of 588 shares of Series C-1¹ Preferred into common stock, $52,000 due to the accrual of dividends and $41,000 due to the payment of dividends. Such decrease in value was primarily due to the significant decrease in the Company’s common stock price, and the updates to the assumptions used in the option pricing models.

The Embedded Derivatives were valued at December 31, 2010 and 2011 using a binomial option pricing model, based on the value of the Series C-1¹ Preferred shares with and without embedded derivative features, with the following assumptions:

	December 31, 2010			December 31, 2011
Closing price per share of common stock	$	2.60		$	0.27
Conversion price per share	$	1.50		$	0.60
Volatility		84.6	%		88.0	%
Risk-free interest rate		2.19	%		0.83	%
Credit spread		14.2	%		20.9	%
Remaining expected lives of underlying securities (years)		6.3			5.0

On December 31, 2010, the Series D-1¹ Warrants were recorded at estimated fair value of $702,000. On December 31, 2011, the Series D-1¹ Warrants were revalued at $2,539,000 resulting in non-cash other expense on the increase in the estimated fair value of the Series D-1 ¹ Warrants of $1,837,000. Such increase in value was primarily due to the increase in corporate value as a result of the expected Strategic Transaction in January 2012 and the updates to the assumptions used in the option pricing models.

The Series D-1¹ Warrants were valued at December 31, 2010 and at December 31, 2011 using a binomial option pricing model with the following assumptions:

	December 31, 2010			December 31, 2011
Closing price per share of common stock	$	2.60		$	0.27
Conversion price per share	$	1.50		$	0.60
Volatility		98.9	%		67.5	%
Risk-free interest rate		1.02	%		0.28	%
Remaining expected lives of underlying securities (years)		2.8			2.2
Probability of Strategic Transaction		50	%		70	%

On December 31, 2010, the Series C-2¹ Warrants (which consist of rights to purchase Series C-2¹ Preferred and Series D-2¹ Warrants) were recorded at an estimated fair value of $230,000. On December 31, 2011, the Series C-2¹ Warrants were revalued at $9,051,000, resulting in non-cash other expense on the increase in the estimated fair value of the Series C-2 ¹ Warrants of $8,821,000. Such increase in value was primarily due to the removal of the mandatory redemption requirement upon successful completion of a Strategic Transaction, the extension of the term to cover the longer clinical trial period, the increase in the Series C-2 ¹ Warrants by 378 units, and the updates to the assumptions used in the option pricing models. The fair value of the rights to purchase Series C-2¹ Preferred was negative as of December 31, 2010 as the Series C-2¹ Warrants were mandatorily exercisable at a price that was greater than the fair value of the underlying instruments.

The portion of the Series C-2¹ Warrants that represent the rights to purchase Series C-2¹ Preferred were valued at December 31, 2010 and December 31, 2011 using a binomial option pricing model. The pricing model at December 31, 2010 is discounted for the lack of dividends until the Series C-2 ¹ Warrants are exercised. The pricing model at December 31, 2011 determines the value of the Series C-2¹ Preferred at the warrant exercise date which is assumed to be at the end of the successful clinical trial and subtracts the value of the Series C-2 ¹ Preferred with the exercise price. The assumptions are:

	December 31, 2010			December 31, 2011
Closing price per share of common stock	$	2.60		$	0.27
Conversion price per share	$	1.50		$	0.60
Volatility		84.6	%		88.0	%
Risk-free interest rate		2.19	%		0.83	%
Credit spread		14.2	%		20.9	%
Remaining expected lives of underlying securities (years)		6.3			5.0
Time to exercise (months)		3			24

The Series D-2 ¹ Warrants were valued at December 31, 2010 and at December 31, 2011 using a binomial option pricing model with the same assumptions used in the valuation of the Series D-1¹ Warrants. The increase in the value of the Series D-2¹ Warrants was primarily due to the increase in the Series D-2¹ Warrants by 378 units and the updates to the assumptions used in the option pricing models.