VIAP VIA Pharmaceuticals Inc (CE)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 0-27264

VIA Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

DELAWARE		33-0687976
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

750 Battery Street, Suite 330
San Francisco, CA 94111
(Address of principal executive offices)

(415) 283-2200
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of November 9, 2010, there were 20,558,446 shares of common stock, par value $0.001 per share, outstanding.

 

 

VIA PHARMACEUTICALS, INC.

		Page No.
PART I. — FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Unaudited Condensed Balance Sheets as of September 30, 2010 and December 31, 2009			1
Unaudited Condensed Statements of Operations for the Three and Nine Month Periods Ended September 30, 2010 and 2009, and for the Period from June 14, 2004 (date of inception) to September 30, 2010			2
Unaudited Condensed Statements of Cash Flows for the Nine Month Periods Ended September 30, 2010 and 2009, and for the Period from June 14, 2004 (date of inception) to September 30, 2010			3
Notes to the Unaudited Condensed Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			30
Item 4T. Controls and Procedures			47
PART II. — OTHER INFORMATION			48
Item 1A. Risk Factors			48
Item 5. Other Information			48
Item 6. Exhibits			49
SIGNATURE			51
Exhibit 4.7
Exhibit 4.8
Exhibit 4.11
Exhibit 10.2
Exhibit 10.3
Exhibit 10.4
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I. — FINANCIAL INFORMATION

Item 1. Condensed Financial Statements

VIA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)

UNAUDITED CONDENSED BALANCE SHEETS

		September 30,				December 31,
		2010				2009
ASSETS
Current assets:
Cash and cash equivalents		$	277,924			$	2,189,742
Prepaid expenses and other current assets			147,792				155,361
Total current assets			425,716				2,345,103
Property and equipment-net			31,802				170,617
Other non-current assets			32,289				40,374
Total		$	489,807			$	2,556,094
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable		$	964,030			$	705,887
Accrued expenses and other liabilities			1,300,891				2,226,720
Accrued restructuring costs			122,650				—
Interest payable — affiliate			2,207,466				789,041
Notes payable — affiliate — net of discount of $491,565 at September 30, 2010 and $4,374 at December 31, 2009			12,508,435				9,995,626
Total current liabilities			17,103,472				13,717,274
Accrued expenses and other liabilities — long-term			52,763				—
Accrued restructuring costs — net of current portion			11,207				—
Deferred rent			10,323				37,450
Total liabilities			17,177,765				13,754,724
Commitments and contingencies
Stockholders’ equity (deficit):
Common stock, $0.001 par value-200,000,000 shares authorized at September 30, 2010 and December 31, 2009, respectively; 20,558,446 and 20,646,374 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively			20,559				20,646
Preferred stock Series A, $0.001 par value-5,000,000 shares authorized at September 30, 2010 and December 31, 2009, respectively; 0 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively			—				—
Convertible preferred stock Series C, $0.001 par value-17,000 shares authorized at September 30, 2010 and December 31, 2009, respectively; 2,000 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively; liquidation preference of $2,000,000			2				2
Additional paid-in capital			72,026,760				70,385,287
Deficit accumulated in the development stage			(88,735,279	)			(81,604,565	)
Total stockholders’ equity (deficit)			(16,687,958	)			(11,198,630	)
Total		$	489,807			$	2,556,094

See accompanying notes

VIA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)

UNAUDITED CONDENSED STATEMENTS OF OPERATIONS

																		Period From
																		June 14, 2004
																		(Date of
		Three Months Ended								Nine Months Ended								Inception) to
		September 30,				September 30,				September 30,				September 30,				September 30,
		2010				2009				2010				2009				2010
Revenue		$	—			$	—			$	—			$	—			$	—
Operating costs and expenses:
Research and development			449,908				1,306,309				1,818,599				4,949,118				42,724,777
General and administration			757,996				1,697,476				3,209,947				5,491,380				32,256,000
Merger transaction costs			—				—				—				—				3,824,090
Restructuring costs			—				—				106,959				—				106,959
Total operating costs and expenses			1,207,904				3,003,785				5,135,505				10,440,498				78,911,826
Operating loss			(1,207,904	)			(3,003,785	)			(5,135,505	)			(10,440,498	)			(78,911,826	)
Other income (expense):
Interest income			—				—				—				—				914,628
Interest expense			(901,028	)			(5,033,598	)			(1,979,460	)			(6,299,768	)			(10,717,943	)
Other income (expense)-net			(9,391	)			(663	)			(15,749	)			8,893				(20,138	)
Total other income (expense)			(910,419	)			(5,034,261	)			(1,995,209	)			(6,290,875	)			(9,823,453	)
Net Loss		$	(2,118,323	)		$	(8,038,046	)		$	(7,130,714	)		$	(16,731,373	)		$	(88,735,279	)
Loss per share of common stock—basic and diluted		$	(0.10	)		$	(0.40	)		$	(0.35	)		$	(0.84	)
Weighted average shares outstanding—basic and diluted			20,452,332				20,014,457				20,358,351				19,875,482

See accompanying notes

VIA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)

UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS

										Period from
										June 14, 2004
										(Date of
		Nine Months Ended								Inception) to
		September 30,				September 30,				September 30,
		2010				2009				2010
Cash flows from operating activities:
Net loss		$	(7,130,714	)		$	(16,731,373	)		$	(88,735,279	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			66,437				103,653				596,310
Amortization of discount on notes payable — affiliate			561,035				5,888,810				7,505,384
Excess facility lease costs			133,222				—				133,222
Lease abandonment costs			173,712				—				173,712
Disposal of property and equipment			72,378				450				76,991
Stock compensation expense			592,631				980,560				4,550,213
Deferred rent			(27,127	)			5,961				10,323
Changes in assets and liabilities:
Prepaid expenses and other assets			15,654				327,108				(205,081	)
Accounts payable			258,143				(423,439	)			960,541
Accrued expenses and other liabilities			(1,046,778	)			(22,056	)			1,279,943
Accrued restructuring costs			635				—				635
Interest payable — affiliate			1,418,425				410,959				3,200,188
Net cash used in operating activities			(4,912,347	)			(9,459,367	)			(70,452,898	)
Cash flows from investing activities:
Purchase of property and equipment			—				(16,155	)			(664,175	)
Sale of property and equipment			—				532				532
Cash provided in the Merger			—				—				11,147,160
Capitalized merger transaction costs			—				—				(350,069	)
Net cash provided by (used in) investing activities			—				(15,623	)			10,133,448
Cash flows from financing activities:
Proceeds from convertible promissory notes — affiliate			—				—				24,425,000
Proceeds from notes payable — affiliate			3,000,000				10,000,000				13,000,000
Capital lease payments			—				—				(11,973	)
Issuance of common stock			—				—				23,141,360
Exercise of stock options for the issuance of common stock			1,292				1,933				49,550
Repurchase and retirement of common stock			(763	)			—				(6,563	)
Net cash provided by financing activities			3,000,529				10,001,933				60,597,374
Increase (decrease) in cash and cash equivalents			(1,911,818	)			526,943				277,924
Cash and cash equivalents-beginning of period			2,189,742				4,064,545				—
Cash and cash equivalents-end of period		$	277,924			$	4,591,488			$	277,924
Supplemental disclosure of noncash activities:
Issuance of warrant and related discount on notes payable — affiliate		$	1,048,226			$	6,948,723			$	7,996,949
Interest on convertible debt converted to notes payable — affiliate		$	—			$	—			$	992,722
Conversion of notes to preferred stock Series A — affiliate		$	—			$	—			$	25,517,722
Accrued compensation converted to notes payable		$	—			$	—			$	100,000
Stock issuance for license acquisition		$	—			$	—			$	1,000
Supplemental disclosure of cash flow information:
Interest paid		$	—			$	—			$	7,856
Taxes paid		$	770			$	116			$	37,385

See accompanying notes

VIA PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS

1. ORGANIZATION

Overview — VIA Pharmaceuticals, Inc. (“VIA,” the “Company,” “we,” “our,” or “us”), incorporated in Delaware in June 2004 and headquartered in San Francisco, California, is a development stage biotechnology company focused on the development of compounds for the treatment of cardiovascular and metabolic disease. The Company is building a pipeline of small molecule drugs that target the underlying causes of cardiovascular and metabolic disease, including vascular inflammation, high cholesterol, high triglycerides and insulin sensitization/diabetes. During 2005, the Company in-licensed a small molecule compound, VIA-2291, which targets an unmet medical need of reducing atherosclerotic plaque inflammation, an underlying cause of atherosclerosis and its complications, including heart attack and stroke. Atherosclerosis, depending on its severity and the location of the artery it affects, may result in major adverse cardiovascular events (“MACE”), such as heart attack and stroke. During 2006, the Company initiated two Phase 2 clinical trials of VIA-2291 in patients undergoing a carotid endarterectomy (“CEA”), and in patients at risk for acute coronary syndrome (“ACS”). During 2007, the Company initiated a third Phase 2 clinical trial where ACS patients undergo Positron Emission Tomography with flurodeoxyglucose tracer (“FDG-PET”), an experimental non-invasive imaging technique to measure the effect of treatment of VIA-2291 on uptake of FDG into the vascular wall. Effective during the first quarter of 2009, the Company licensed from Hoffman-LaRoche Inc. and Hoffmann-LaRoche Ltd. (collectively “Roche”) the exclusive worldwide rights to two sets of compounds. The first license is for Roche’s thyroid hormone receptor beta agonist, a clinically ready candidate for the control of cholesterol, triglyceride levels and potential in insulin sensitization/diabetes. The second license is for multiple compounds from Roche’s preclinical diacylglycerol acyl transferase 1 metabolic disorders program.

Through September 30, 2010, the Company has been primarily engaged in developing initial procedures and product technology, screening and in-licensing of target compounds, clinical trial activity, and raising capital. To fund operations, VIA has been raising cash through debt, a merger and equity financings. The Company is organized and operates as one operating segment.

Merger — On June 5, 2007, Corautus completed a merger (the “Merger”) with privately-held VIA Pharmaceuticals, Inc. pursuant to the Agreement and Plan of Merger and Reorganization (the “Merger Agreement”), dated February 7, 2007, by and among Corautus, Resurgens Merger Corp., a Delaware corporation and a wholly owned subsidiary of Corautus (“Resurgens”), and privately-held VIA Pharmaceuticals, Inc. Pursuant to the Merger Agreement, Resurgens merged with and into privately-held VIA Pharmaceuticals, Inc., which continued as the surviving company as a wholly-owned subsidiary of Corautus. Immediately following the effectiveness of the Merger on June 5, 2007, privately-held VIA Pharmaceuticals, Inc. merged (the “Parent-Subsidiary Merger”) with and into Corautus, pursuant to which Corautus continued as the surviving corporation. Immediately following the Parent-Subsidiary Merger, Corautus changed its corporate name from “Corautus Genetics Inc.” to “VIA Pharmaceuticals, Inc.” Unless otherwise specified, as used throughout these unaudited condensed financial statements, the “Company,” “we,” “us,” and “our” refers to the business of the combined company after the merger (the “Merger”) with Corautus Genetics Inc. (“Corautus”) on June 5, 2007 and the business of privately-held VIA Pharmaceuticals, Inc. prior to the Merger. Unless specifically noted otherwise, as used throughout these unaudited condensed financial statements, “Corautus Genetics Inc.” or “Corautus” refers to the business of Corautus prior to the Merger.

Going Concern — From inception, the Company has incurred expenses in research and development activities without generating any revenues to offset those expenses and the Company does not expect to generate revenues in the near future. The Company has incurred losses and negative cash flow from operating activities from inception, and as of September 30, 2010, the Company had an accumulated net deficit of approximately $88.7 million. Until the Company can establish profitable operations to finance its cash requirements, the Company’s ability to meet its obligations in the ordinary course of business is dependent upon its ability to raise substantial additional capital through public or private equity or debt financings, the establishment of credit or other funding facilities, collaborative or other strategic arrangements with corporate sources or other sources of financing, the availability of which cannot be assured. On June 5, 2007, the Company raised $11.1 million through the Merger with Corautus to cover existing obligations and provide operating cash flows. In July 2007, the Company entered into a securities purchase agreement that provided for issuance of 10,288,065 shares of common stock for approximately $25.0 million in gross proceeds.

As more fully described in Note 6 in the notes to the unaudited condensed financial statements, in March 2009, the Company entered into a Note and Warrant Purchase Agreement (the “Loan Agreement”) with its principal stockholder and one of its affiliates (the “Lenders”) whereby the Lenders agreed to lend to the Company in the aggregate up to $10.0 million. The Company secured the loan with all of its assets, including the Company’s intellectual property. On March 12, 2009, the Company borrowed the initial $2.0 million available under the Loan Agreement. Subsequently, the Company made $2.0 million borrowings under the Loan Agreement on May 19, 2009, June 29, 2009, August 14, 2009, respectively, and the Company borrowed the final $2.0 million available under the Loan Agreement on September 11, 2009. According to the terms of the original Loan Agreement, the debt was due to the Lenders on September 14, 2009. The parties agreed to extend the repayment terms on various dates in 2009, and on February 26, 2010, the Lenders agreed to modify the Loan Agreement to further extend the repayment terms to April 1, 2010. The Lenders did not modify the interest rate or offer any concessions in the amendments to the Loan Agreements. The Company failed to repay the debt and all related interest to the Lenders due on April 1, 2010.

As more fully described in Note 6 in the notes to the unaudited condensed financial statements, in March 2010, the Company entered into a second Note and Warrant Purchase Agreement (the “2010 Loan Agreement”) with its principal stockholder and one of its affiliates (the “Lenders”) whereby the Lenders agreed to lend to the Company in the aggregate up to $3.0 million, pursuant to the terms of promissory notes (collectively, the “2010 Notes”) delivered under the 2010 Loan Agreement. The Company secured the loan with all of its assets, including the Company’s intellectual property. On March 29, 2010, the Company borrowed the initial $1.25 million available under the 2010 Loan Agreement. Subsequently, the Company made $100,000, $200,000, $300,000, $100,000, and $750,000 borrowings under the 2010 Loan Agreement on May 26, 2010, June 4, 2010, June 29, 2010, July 15, 2010, July 27, 2010, respectively, and the Company borrowed the final $300,000 available under the 2010 Loan Agreement on September 28, 2010. As more fully described in Note 14 in the notes to the unaudited condensed financial statements, on November 15, 2010, the Company entered into an amendment to the 2010 Loan Agreement (“2010 Loan Amendment”) to enable the Company to borrow up to an additional aggregate principal amount of $3,000,000, pursuant to the terms of amended and restated promissory notes (collectively, the “2010 Amended and Restated Notes”) delivered under the 2010 Loan Amendment. According to the terms of the 2010 Loan Amendment, the debt is due to the Lenders on December 31, 2010. The 2010 Amended and Restated Notes are secured by a lien on all of the assets of the Company. Amounts borrowed under the 2010 Amended and Restated Notes accrue interest at the rate of 15% per annum, which increases to 18% per annum following an event of default. Unless earlier paid in accordance with the terms of the 2010 Amended and Restated Notes, all unpaid principal and accrued interest shall become fully due and payable on the earlier to occur of (i) December 31, 2010, (ii) the closing of a debt, equity or combined debt/equity financing resulting in gross proceeds or available credit to the Company of not less than $20,000,000, and (iii) the closing of a transaction in which the Company sells, conveys, licenses or otherwise disposes of a majority of its assets or is acquired by way of a merger, consolidation, reorganization or other transaction or series of transactions pursuant to which stockholders of the Company prior to such acquisition own less than 50% of the voting interests in the surviving or resulting entity.

The Company had $278,000 in cash at September 30, 2010. Management believes that, under normal continuing operations, this amount of cash will enable the Company to meet only a portion of its current obligations. Management does not believe that existing cash resources will be sufficient to enable the Company to meet its ongoing working capital requirements for the next twelve months and the Company will need to raise substantial additional funding in the near term to repay amounts owed under the Loan Agreement and 2010 Loan Agreement, and to meet its ongoing working capital requirements. As a result, there are substantial doubts that the Company will be able to continue as a going concern and, therefore, may be unable to realize its assets and discharge its liabilities in the normal course of business. The unaudited condensed financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or to amounts and classifications of liabilities that may be necessary should the Company be unable to continue as a going concern.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation — The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, in accordance with the instructions to Form 10-Q of Regulations S-X, with accounting guidance for the accounting and reporting by development stage enterprises and assume the Company will continue as a going concern. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The unaudited condensed financial statements have been prepared on the same basis as the annual financial statements as discussed below. The financial information for the three and nine months ended September 30, 2010 and 2009 is unaudited but includes all adjustments (consisting of only normal recurring adjustments), which the Company considers necessary for a fair presentation of the results of operations for those periods. Interim results are not necessarily indicative of results for the full fiscal year.

The unaudited condensed financial statements and related disclosures have been prepared with the presumption that users of the unaudited condensed financial statements have read or have access to the audited financial statements of the preceding fiscal year. Accordingly, these unaudited condensed financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2009 on Form 10-K filed by the Company with the Securities and Exchange Commission (“SEC”) on March 31, 2010, and on Form 10-K/A filed by the Company with the SEC on April 30, 2010.

On March 21, 2006, the Company formed VIA Pharma UK Limited, a private corporation, in the United Kingdom to enable clinical trial activities in Europe. VIA Pharma UK Limited did not engage in operations from June 14, 2004 (date of inception) to September 30, 2010. The Company has a wholly-owned subsidiary Vascular Genetics Inc. (“VGI”) that was involved in Corautus clinical trials. VGI has not been active since the Corautus clinical trials ceased in 2006.

Use of Estimates — The preparation of the unaudited condensed financial statements in conformity with GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in our unaudited condensed financial statements and accompanying notes. Actual results could differ materially from those estimates.

Cash and Cash Equivalents — Cash equivalents are included with cash and consist of short term, highly liquid investments with original maturities of three months or less.

Property and Equipment — Property and equipment are stated at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, ranging from three to five years. Computers, lab and office equipment have estimated useful lives of three years; office furniture and equipment have estimated useful lives of five years; and leasehold improvements are amortized using the straight-line method over the shorter of the useful lives or the lease term.

Long-Lived Assets — Long-lived assets include property and equipment and certain purchased licensed patent rights that are included in other assets in the balance sheet. The Company reviews long-lived assets, including property and equipment, for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. As more fully discussed in Note 12 in the notes to the unaudited condensed financial statements, on March 31, 2010, the Company wrote-off $110,000 of certain computer equipment and leasehold improvements associated with the March 2010 restructuring resulting in $65,000 in losses on the disposal of property and equipment, which are included in restructuring costs in the Unaudited Condensed Statement of Operations. Through September 30, 2010, there have been no other such impairments.

Incentive Award Accruals — The Company accrues for liabilities under discretionary employee and executive incentive award plans. These estimated liabilities are based upon progress against corporate objectives approved by the Board of Directors, compensation levels of eligible individuals, and target bonus percentage level of employees. The Board of Directors and the Compensation Committee of the Board of Directors review and evaluate the performance against these objectives and ultimately determine what discretionary payments are made. At September 30, 2010 and December 31, 2009, the Company has accrued $767,185 and $1,308,043, respectively, for liabilities associated with these employee and executive incentive award plans. As described in Note 12 in the notes to the unaudited condensed financial statements, in March 2010, the Company reversed approximately $531,000 of previously recorded incentive award accruals related to the restructuring of the Company and reduction in workforce.

Research and Development Expenses — Research and development (“R&D”) expenses are charged to operations as incurred in accordance with accounting guidance for the accounting for research and development costs. R&D expenses include salaries, contractor and consultant fees; external clinical trial expenses performed by contract research organizations (“CROs”) and contracted investigators, licensing fees and facility allocations. In addition, the Company funds R&D at third-party research institutions under agreements that are generally cancelable at the Company’s option. Research costs typically consist of applied research, preclinical and toxicology work. Pharmaceutical manufacturing development costs consist of product formulation, chemical analysis and the transfer and scale-up of manufacturing at our contract manufacturers. Clinical costs include the costs of Phase 2 clinical trials. These costs, along with the manufacturing scale-up costs, are a significant component of R&D expenses.

The Company accrues costs for clinical trial activities performed by CROs and other third parties based upon the estimated amount of work completed on each study as provided by the vendors. These estimates may or may not match the actual services performed by the organizations as determined by patient enrollment levels and related activities. The Company monitors patient enrollment levels and related activities using available information; however, if the Company underestimates activity levels associated with various studies at a given point in time, the Company could record significant R&D expenses in future periods when the actual activity level becomes known. The Company charges all such costs to R&D expenses.

Fair Value of Financial and Derivative Instruments — The Company values its financial instruments in accordance with new accounting guidance on fair value measurements which, for certain financial assets and liabilities, requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

•

Level 1 — Quoted prices in active markets for identical assets or liabilities.

•

Level 2 — Inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

•

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

In March 2009, the Company entered into a $10.0 million Loan Agreement with the Lenders, as more fully described in Note 6 in the notes to the unaudited condensed financial statements. At the date of each borrowing under the Loan Agreement, the Company valued and reported the freestanding warrants issued in connection with the financing of notes payable to affiliates as paid-in-capital in the Stockholders’ Equity (Deficit) section of the Company’s balance sheets in accordance with the following accounting guidance:

•

Derivative financial instruments indexed to and potentially settled in a company’s own stock;

•

Accounting for derivative instruments and hedging activities; and

•

Accounting for convertible debt and debt issued with stock purchase warrants.

The Company made separate $2.0 million borrowings under the $10.0 million Loan Agreement on March 12, 2009, May 19, 2009, June 29, 2009, August 14, 2009, and a final borrowing on September 11, 2009, with warrants vesting at the time of each draw as described more fully in Note 6 in the notes to the unaudited condensed financial statements. The Company estimated the fair value of the warrants issued on the date of each draw using the Black-Scholes pricing model methodology. This methodology requires significant judgments in the estimation of fair value based on certain assumptions, including the market value and the estimated volatility of the Company’s common stock, a risk-free interest rate applicable to the facts and circumstances of the transaction, and the estimated life of the warrant. The freestanding warrant is classified within Level 3 of the fair value hierarchy.

In March 2010, the Company entered into the 2010 Loan Agreement with the Lenders, as more fully described in Note 6 in the notes to the unaudited condensed financial statements, whereby the Lenders agreed to lend to the Company in the aggregate up to $3.0 million. At the date of each borrowing under the 2010 Loan Agreement, the Company valued and reported the freestanding warrants issued in connection with the financing of notes payable to affiliates as paid-in-capital in the Stockholders’ Equity (Deficit) section of the Company’s balance sheets in accordance with the following accounting guidance:

•

Derivative financial instruments indexed to and potentially settled in a company’s own stock;

•

Accounting for derivative instruments and hedging activities; and

•

Accounting for convertible debt and debt issued with stock purchase warrants.

The Company made separate borrowings of $1.25 million on March 29, 2010, $100,000 on May 26, 2010, $200,000 on June 4, 2010, $300,000 on June 29, 2010, $100,000 on July 15, 2010, $750,000 on July 27, 2010, and a final $300,000 borrowing on September 28, 2010 under the 2010 Loan Agreement, with warrants vesting at the time of the draw as described more fully in Note 6 in the notes to the unaudited condensed financial statements. The Company estimated the fair value of the warrants issued on the date of each draw using the Black-Scholes pricing model methodology. This methodology requires significant judgments in the estimation of fair value based on certain assumptions, including the market value and the estimated volatility of the Company’s common stock, a risk-free interest rate applicable to the facts and circumstances of the transaction, and the estimated life of the warrant. The freestanding warrant is classified within Level 3 of the fair value hierarchy.

Changes in Level 3 Recurring Fair Value Measurements — The following is a rollforward of balance sheet amounts as of September 30, 2010 (including the change in fair value when applicable), for financial instruments classified as Level 3. The Company has no financial instruments classified as Level 1 and Level 2 as of September 30, 2010. When a determination is made to classify a financial instrument within Level 3, the determination is based upon the significance of the unobservable parameters to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable components, observable components (that is, components that are actively quoted and can be validated to external sources). Accordingly, the gains and losses in the table below include changes in fair value (when applicable) due in part to observable factors that are part of the methodology.

		As of
		September 30,
		2010
Fair value — December 31, 2009		$	6,948,723
Warrants (1)			1,048,226
Change in unrealized gains related to financial instruments at September 30, 2010 (2)			—
Fair value — September 30, 2010		$	7,996,949
Total unrealized gains (losses) (2)		$	—

Income Taxes — The Company accounts for income taxes using an asset and liability approach. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and operating loss and tax credit carryforwards measured by applying currently enacted tax laws. A valuation allowance is provided to reduce net deferred tax assets to an amount that is more likely than not to be realized. The amount of the valuation allowance is based on the Company’s best estimate of the recoverability of its deferred tax assets. On January 1, 2007, the Company adopted new accounting guidance for the accounting for uncertainty in income tax positions. This guidance seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes and provide guidance on de-recognition, classification, interest and penalties, and accounting in interim periods and requires expanded disclosure with respect to the uncertainty in income taxes. The accounting guidance requires that the Company recognize in its unaudited condensed financial statements the impact of a tax position if that position is more likely than not to be sustained on audit, based on the technical merits of the position.

Segment Reporting — Accounting guidance on disclosures about segments of an enterprise and related information requires the use of a management approach in identifying segments of an enterprise. Management has determined that the Company operates in one business segment — scientific research and development activities.

Earnings (Loss) Per Share of Common Stock — Basic earnings (loss) per share of common stock is computed by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted earnings (loss) per share of common stock is computed by dividing net income (loss) by the weighted-average number of shares of common stock and potentially dilutive shares of common stock equivalents outstanding during the period.

The following table presents the calculation of basic and diluted net loss per common share for the three and nine months ended September 30, 2010 and 2009:

		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2010				2009				2010				2009
Net loss		$	(2,118,323	)		$	(8,038,046	)		$	(7,130,714	)		$	(16,731,373	)
Basic and diluted net loss per share:
Weighted-average shares of common stock outstanding			20,558,446				20,646,374				20,580,460				20,630,382
Less: Weighted-average shares of common stock subject to repurchase			(106,114	)			(631,917	)			(222,109	)			(754,900	)
Weighted-average shares used in computing basic net loss per share			20,452,332				20,014,457				20,358,351				19,875,482
Dilutive effect of common share equivalents			—				—				—				—
Weighted-average shares used in computing diluted net loss per share			20,452,332				20,014,457				20,358,351				19,875,482
Basic and diluted net loss per share		$	(0.10	)		$	(0.40	)		$	(0.35	)		$	(0.84	)

Diluted earnings (loss) per share of common stock reflects the potential dilution that could occur if options or warrants to purchase shares of common stock were exercised, or shares of preferred stock were converted into shares of common stock. The following table details potentially dilutive shares of common stock equivalents that have been excluded from diluted net loss per share for the three and nine months ended September 30, 2010 and 2009 because their inclusion would be anti-dilutive:

		As of
		September 30,				September 30,
		2010				2009
Common stock equivalents (in shares):
Shares of common stock subject to outstanding options			1,847,872				2,740,733
Shares of common stock subject to outstanding warrants			101,050,407				83,503,348
Shares of common stock subject to conversion from series C preferred stock			13,986,013				—
Total shares of common stock equivalents			116,884,292				86,244,081

As described in Note 7 in the notes to the unaudited condensed financial statements, the Series C Preferred Stock became convertible on June 13, 2010 and shares are convertible upon delivery of notice of conversion. The number of shares of common stock into which Series C Preferred Stock will be converted is based in part on the “fair market value” (as defined in the Amended and Restated Certificate of Designation of Preferences and Rights of Series C Preferred Stock of the Company) of the Company’s common stock on June 13, 2010. Accordingly, we have not included any Series C Preferred Stock in the table above for the three and nine month period ended September 30, 2009.

Comprehensive Income (Loss) — Comprehensive income (loss) generally represents all changes in stockholders’ equity except those resulting from investments or contributions by stockholders. Amounts reported in other comprehensive income (loss) include derivative financial instruments designated and effective as hedges of underlying foreign currency denominated transactions.

The following table presents the calculation of total comprehensive income (loss) for the three and nine months ended September 30, 2010 and 2009:

		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2010				2009				2010				2009
Net loss		$	(2,118,323	)		$	(8,038,046	)		$	(7,130,714	)		$	(16,731,373	)
Changes in unrealized gain (loss) on foreign currency cash flow hedges			—				—				—				—
Basic and diluted net loss per share		$	(2,118,323	)		$	(8,038,046	)		$	(7,130,714	)		$	(16,731,373	)

Derivative Instruments — From time to time, the Company uses derivatives to manage its market exposure to fluctuations in foreign currencies. The Company records these derivatives on the balance sheet at fair value in accordance with accounting guidance for derivatives. To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) and in the Company’s statement of operations in the same period or periods during which the hedged transaction affects earnings. The gain or loss on the derivative instruments in excess of the cumulative change in the present value of future cash flows of the hedged transaction, if any, is recognized in the Company’s statement of operations during the period of change. The Company does not use derivative instruments for speculative purposes.

As of September 30, 2010, December 31, 2009 and September 30, 2009, the Company does not have any outstanding forward foreign exchange contracts. All foreign currency purchased under forward foreign exchange contracts has been expended in the purchase of clinical trial services and, as a result, the Company does not have any outstanding unrealized gains or losses on forward foreign exchange contracts and also does not have any related accumulated other comprehensive income on the Company’s September 30, 2010, December 31, 2009 and September 30, 2009 Balance Sheets.

New Accounting Pronouncements — In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force), which amends ASC 605-25, Revenue Recognition: Multiple-Element Arrangements. ASU No. 2009-13 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how to allocate consideration to each unit of accounting in the arrangement. This ASU replaces all references to fair value as the measurement criteria with the term selling price and establishes a hierarchy for determining the selling price of a deliverable. ASU No. 2009-13 also eliminates the use of the residual value method for determining the allocation of arrangement consideration. Additionally, ASU No. 2009-13 requires expanded disclosures. This ASU will become effective for revenue arrangements entered into or materially modified after the fiscal year 2010. Earlier application is permitted with required transition disclosures based on the period of adoption. The Company is currently evaluating the application date and does not believe this standard will have a material impact on our unaudited condensed financial statements.

3. STOCK-BASED COMPENSATION

On January 1, 2006, the Company adopted new accounting guidance for accounting for stock-based compensation. Under the fair value recognition provisions of this accounting guidance, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period. The Company elected the modified-prospective method, under which prior periods are not revised for comparative purposes. The valuation provisions of the accounting guidance apply to new grants and to grants that were outstanding as of the effective date and are subsequently modified. Estimated compensation for grants that were outstanding as of the effective date of this new guidance are now being recognized over the remaining service period using the compensation cost estimated for the required pro forma disclosures.

The Company uses the Black-Scholes option pricing model to estimate the fair value of stock-based awards. The determination of the fair value of stock-based awards on the date of grant using an option-pricing model is affected by the value of the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends.

Prior to June 5, 2007, the Company was a privately-held company and its common stock was not publicly traded. The fair value of stock options granted from January 2006 through June 5, 2007 (date of completion of the Merger with Corautus), and related stock-based compensation expense, were determined based upon quoted stock prices of Corautus, the exchange ratio of shares in the Merger, and a private company 10% discount for grants prior to March 31, 2007, as this represented the best estimate of market value to use in measuring compensation. Subsequent to the Merger, the Company, now publicly held, uses the closing stock price of the Company’s common stock on the date the options are granted to determine the fair market value of each option. The Company revalues each non-employee option quarterly based on the closing stock price of the Company’s common stock on the last day of the quarter. The Company also revalues options when there is a change in employment status.

The Company estimates the expected term of options granted by taking the average of the vesting term and the contractual term of the option. As of September 30, 2010, the Company estimates common stock price volatility using a hybrid approach consisting of the weighted-average of actual historical volatility using a look back period of approximately three years, representing the period of time the Company’s stock has been publicly traded, blended with an average of selected peer group volatility for approximately six years, consistent with the expected life from grant date. The volatility for the Company and the selected peer group was approximately 128% and 105%, respectively, as of September 30, 2010, and 132% and 93%, respectively as of September 30, 2009. The blended volatility rate was approximately a range from 114% to 118% as of September 30, 2010 and 107% as of September 30, 2009. The Company will continue to incrementally increase the look back period of the Company’s common stock and percent of actual historical volatility until historical data meets or exceeds the estimated term of the options. Prior to the year ended December 31, 2009, the Company used peer group calculated volatility as the Company is a development stage company with limited stock price history from which to forecast stock price volatility. The risk-free interest rates used in the valuation model are based on U.S. Treasury issues with remaining terms similar to the expected term on the options. The Company does not anticipate paying any dividends in the foreseeable future and therefore used an expected dividend yield of zero.

The Company calculated an annualized forfeiture rate of 4.77% and 2.98% as of September 30, 2010 and 2009, respectively, using the Company’s historical data. These rates were used to exclude future forfeitures in the calculation of stock-based compensation expense as of September 30, 2010 and 2009, respectively.

The assumptions used to value option and restricted stock award grants for the three and nine months ended September 30, 2010 and 2009 are as follows:

		Three Months Ended						Nine Months Ended
		September 30,		September 30,				September 30,		September 30,
		2010		2009				2010		2009
Expected life from grant date		6.16-7.21			—			6.16-7.21			6.08
Expected volatility		114%-118%			—	%		114%-118%			105	%
Risk free interest rate		1.64%-1.95%			—	%		1.64%-1.95%			2.89	%
Dividend yield		—			—			—			—

The following table summarizes stock-based compensation expenses related to stock options and warrants for the three and nine months ended September 30, 2010 and 2009, and for the period from June 14, 2004 (date of inception) to September 30, 2010, which were included in the statements of operations in the following captions:

																		Period from
																		June 14, 2004
		Three Months Ended								Nine Months Ended								(date of inception) to
		September 30,				September 30,				September 30,				September 30,				September 30,
		2010				2009				2010				2009				2010
Research and development expense		$	43,453			$	19,115			$	122,250			$	228,110			$	1,201,676
General and administrative expense			110,034				232,121				436,035				705,206				3,240,897
Total		$	153,487			$	251,236			$	558,285			$	933,316			$	4,442,573

If all of the remaining non-vested and outstanding stock option awards that have been granted became vested, we would recognize approximately $616,000 in compensation expense over a weighted average remaining period of 1.0 year. However, no compensation expense will be recognized for any stock option awards that do not vest.

The following table summarizes stock-based compensation expenses related to employee restricted stock awards for the three and nine months ended September 30, 2010 and 2009, and for the period from June 14, 2004 (date of inception) to September 30, 2010, which were included in the statements of operations in the following captions:

																		Period from
																		June 14, 2004
		Three Months Ended								Nine Months Ended								(date of inception) to
		September 30,				September 30,				September 30,				September 30,				September 30,
		2010				2009				2010				2009				2010
Research and development expense		$	3,588			$	3,934			$	10,695			$	11,754			$	27,063
General and administrative expense			6,314				12,024				23,651				35,490				73,199
Total		$	9,902			$	15,958			$	34,346			$	47,244			$	100,262

If all of the remaining non-vested restricted stock awards that have been granted became vested, we would recognize approximately $8,000 in compensation expense over a weighted average remaining period of 0.25 years. However, no compensation expense will be recognized for any stock option awards that do not vest.

4. RESEARCH AND DEVELOPMENT

The Company’s research and development expenses include expenses related to Phase 2 clinical development of the Company’s lead compound VIA-2291, regulatory activities, and preclinical development costs for additional assets in the Company’s product pipeline. R&D expenses include salaries, contractor and consultant fees, external clinical trial expenses performed by CROs and contracted investigators, licensing fees and facility allocations. In addition, the Company funds R&D at third-party research institutions under agreements that are generally cancelable at the Company’s option. Research costs typically consist of applied research, preclinical and toxicology work. Pharmaceutical manufacturing development costs consist of product formulation, chemical analysis and the transfer and scale-up of manufacturing at our contract manufacturers. Clinical costs include the costs of Phase 2 clinical trials. These costs, along with the manufacturing scale-up costs, are a significant component of research and development expenses.

The following reflects the breakdown of the Company’s research and development expenses generated internally versus externally for the three and nine months ended September 30, 2010 and 2009, and for the period from June 14, 2004 (date of inception) to September 30, 2010:

																		Period from
																		June 14, 2004
		Three Months Ended								Nine Months Ended								(date of inception) to
		September 30,				September 30,				September 30,				September 30,				September 30,
		2010				2009				2010				2009				2010
Externally generated R&D expense		$	85,729			$	732,162			$	474,366			$	2,985,635			$	29,179,557
Internally generated R&D expense			364,179				574,147				1,344,233				1,963,483				13,545,220
Total		$	449,908			$	1,306,309			$	1,818,599			$	4,949,118			$	42,724,777

Externally generated research and development expenses consist primarily of the following:

																		Period from
																		June 14, 2004
		Three Months Ended								Nine Months Ended								(date of inception) to
		September 30,				September 30,				September 30,				September 30,				September 30,
		2010				2009				2010				2009				2010
In-licensing expenses		$	—			$	—			$	—			$	400,000			$	5,270,000
CRO and investigator expenses			1,204				221,030				19,868				909,296				10,769,207
Consulting expenses			43,718				211,893				166,439				916,097				6,585,108
Other			40,807				299,239				288,059				760,242				6,555,242
Total		$	85,729			$	732,162			$	474,366			$	2,985,635			$	29,179,557

Internally generated research and development expenses consist primarily of the following:

																		Period from
																		June 14, 2004
		Three Months Ended								Nine Months Ended								(date of inception) to
		September 30,				September 30,				September 30,				September 30,				September 30,
		2010				2009				2010				2009				2010
Payroll and payroll related expenses		$	235,542			$	459,266			$	804,362			$	1,380,281			$	9,311,521
Stock-based compensation			47,041				23,050				132,945				239,864				1,228,739
Travel and entertainment expenses			11,724				29,799				55,005				134,815				1,210,624
Other			69,872				62,032				351,921				208,523				1,794,336
Total		$	364,179			$	574,147			$	1,344,233			$	1,963,483			$	13,545,220

5. PROPERTY AND EQUIPMENT

Property and equipment — net, at September 30, 2010 and December 31, 2009 consisted of the following:

		As of
		September 30,				December 31,
		2010				2009
Property and equipment at cost:
Computer equipment and software		$	281,822			$	308,467
Furniture and fixtures			113,363				113,363
Office equipment			21,048				38,282
Leasehold Improvements			24,794				129,740
Total property and equipment at cost			441,027				589,852
Less: accumulated depreciation			(409,225	)			(419,235	)
Total		$	31,802			$	170,617

Depreciation expense on property and equipment was $14,076 and $34,158 in the three months ended September 30, 2010 and 2009, respectively, $66,437 and $103,653 in the nine months ended September 30, 2010 and 2009, respectively, and $570,310 for the period from June 14, 2004 (date of inception) to September 30, 2010, and was included in the statements of operations as follows:

																		Period from
																		June 14, 2004
		Three Months Ended								Nine Months Ended								(date of inception) to
		September 30,				September 30,				September 30,				September 30,				September 30,
		2010				2009				2010				2009				2010
Research and development expense		$	2,729			$	5,865			$	10,923			$	17,730			$	142,851
General and administrative expense			11,347				28,293				55,514				85,923				427,459
Total		$	14,076			$	34,158			$	66,437			$	103,653			$	570,310

6. NOTES PAYABLE — AFFILIATES

Notes Payable — Affiliates consisted of the following:

		September 30,				December 31,
		2010				2009
Issued March 12, 2009 — 18% — due April 1, 2010 (Loan Agreement)		$	10,000,000			$	10,000,000
Less: Unamortized discount			—				(4,374	)
Balance		$	10,000,000			$	9,995,626
Issued March 26, 2010 — 15% — due December 31, 2010 (2010 Loan Agreement)			3,000,000				—
Less: Unamortized discount			(491,565	)			—
Balance		$	2,508,435			$	—
Total		$	12,508,435			$	9,995,626

Notes Payable Issued March 12, 2009 — due April 1, 2010 (Loan Agreement)

In March 2009, the Company entered into the Loan Agreement whereby the Lenders agreed to lend to the Company in the aggregate up to $10.0 million, pursuant to the terms of promissory notes (collectively, the “Notes”) delivered under the Loan Agreement.

On March 12, 2009, the Company borrowed an initial amount of $2.0 million under the Loan Agreement. During the three months ended June 30, 2009, the Company borrowed $2.0 million on May 19, 2009, and another $2.0 million on June 29, 2009. During the three months ended September 30, 2009, the Company borrowed $2.0 million on August 14, 2009, and borrowed the final $2.0 million on September 11, 2009. The Notes are secured by a first priority lien on all of the assets of the Company, including the Company’s intellectual property. Amounts borrowed under the Notes accrue interest at the rate of 15% per annum, which increases to 18% per annum following an event of default. Unless earlier paid in accordance with the terms of the Notes, all unpaid principal and accrued interest became fully due and payable on April 1, 2010. While the Lenders have not declared an event of default, the Company failed to repay the debt and all related interest to the Lenders due on April 1, 2010. As a result, the Company is now accruing interest at the higher 18% per annum beginning April 1, 2010. On September 11, 2009, the Lenders agreed to extend the repayment terms from September 14, 2009 to October 31, 2009; on October 30, 2009, the Lenders agreed to further extend the repayment terms from October 31, 2009 to December 31, 2009; on December 22, 2009, the Lenders agreed to again further extend the repayment terms from December 31, 2009 to February 28, 2010; and on February 26, 2010, the Lenders agreed to further extend the repayment terms from February 28, 2010 to April 1, 2010. There were no other significant changes to any of the terms and conditions of the original Notes in the September 11, 2009, October 30, 2009, December 22, 2009 or February 26, 2010 amendments and the Lenders did not give any loan concessions. As a result of the loan amendments, and because the Company did not repay the debt on April 1, 2010, total interest expense on the note and the note discount amortization increased $1,681,644 from anticipated interest expense based on the original due date of the Notes of $7,328,449 to actual interest after the loan amendments of $9,010,093 from the inception of the Notes to September 30, 2010.

Pursuant to the terms of the Loan Agreement, the Company issued to the Lenders warrants (the “Warrants”) to purchase an aggregate of up to 83,333,333 shares (the “Warrant Shares”) of common stock at $0.12 per share as more fully described below. The number of Warrant Shares is equal to the $10.0 million maximum aggregate principal amount that may be borrowed under the Loan Agreement, divided by the $0.12 per share exercise price of the Warrants. The Warrant Shares vest based on the amount of borrowings under the Notes and based on the passage of time. For each $2.0 million borrowing, 8,333,333 Warrant Shares vested and became exercisable immediately on the date of grant, and 8,333,333 vested and became exercisable 45 days thereafter as the Company meets certain conditions provided for in the Warrants, including that the Company did not complete a $20.0 million financing, as defined in the Loan Agreement, within 45 days of the borrowing. Based on the aggregate $10.0 million of borrowings at September 30, 2010, all 83,333,333 Warrant Shares are vested and are exercisable at September 30, 2010. The Warrant Shares are exercisable at any time until March 12, 2014.

On March 12, 2009, the fair value of the note and of the 16,666,666 Warrant Shares related to the $2.0 million borrowed under the Loan Agreement was $2.0 million and approximately $1.6 million, respectively. This resulted in the Company allocating the relative fair value of approximately $1.1 million of the $2.0 million in proceeds to the note and approximately $900,000 to the Warrants. The Company has recorded the $900,000 freestanding Warrants as permanent equity under accounting guidance for accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock, and accounting guidance for determining whether an instrument (or embedded feature) is indexed to an entity’s own stock . The $900,000 discount on the note payable — affiliate is netted against the $2.0 million note and is being amortized to interest expense using the interest method from March 12, 2009 through April 1, 2010, the maturity date of the note payable. At September 30, 2010, the balance of notes payable — affiliate net of discount was $2,000,000 and the unamortized discount was $0.

Interest expenses on the $2.0 million March 12, 2009 borrowing for the three and nine months ended September 30, 2010 and 2009, and for the period from inception (June 14, 2004) to September 30, 2010 were included in the statement of operations as follows:

																		Period from
																		June 14, 2004
		Three Months Ended								Nine Months Ended								(date of inception) to
		September 30,				September 30,				September 30,				September 30,				September 30,
March 12, 2009 Borrowing		2010				2009				2010				2009				2010
Interest expense		$	90,740			$	75,616			$	254,466			$	166,849			$	496,932
Discount amortization			—				354,211				36				891,334				900,044
Total		$	90,740			$	429,827			$	254,502			$	1,058,183			$	1,396,976

The Company estimated the fair value of the Warrants of approximately $1.6 million at March 12, 2009 using the Black-Scholes pricing model methodology with assumptions outlined below. The assumptions used to value the Warrants at March 12, 2009 (date of inception) are:

		March 12, 2009
Expected life from grant date — in years			5.0
Expected volatility			116.79	%
Risk free interest rate			2.10	%
Dividend yield			—

On May 19, 2009, the Company borrowed an additional $2.0 million under the Loan Agreement and the fair value of the note and of the 16,666,666 Warrant Shares related was $2.0 million and approximately $6.6 million, respectively. This resulted in the Company allocating the relative fair value of approximately $500,000 of the $2.0 million in proceeds to the note and approximately $1.5 million to the Warrants. The Company has recorded the $1.5 million freestanding Warrants as permanent equity under accounting guidance for accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock, and accounting guidance for determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. The $1.5 million discount on the note payable — affiliate is netted against the $2.0 million note and is being amortized to interest expense using the interest method from May 19, 2009 through April 1, 2010, the maturity date of the note payable. At September 30, 2010, the balance of notes payable — affiliate net of discount was $2,000,000 and the unamortized discount was $0.

Interest expenses on the $2.0 million May 19, 2009 borrowing for the three and nine months ended September 30, 2010 and 2009, and for the period from inception (June 14, 2004) to September 30, 2010 were included in the statement of operations as follows:

																		Period from
																		June 14, 2004
		Three Months Ended								Nine Months Ended								(date of inception) to
		September 30,				September 30,				September 30,				September 30,				September 30,
May 19, 2009 Borrowing		2010				2009				2010				2009				2010
Interest expense		$	90,740			$	75,617			$	254,466			$	110,959			$	441,041
Discount amortization			—				950,913				96				1,509,509				1,532,892
Total		$	90,740			$	1,026,530			$	254,562			$	1,620,468			$	1,973,933

The Company estimated the fair value of the Warrants of approximately $1.5 million at May 19, 2009 using the Black-Scholes pricing model methodology with assumptions outlined below. The assumptions used to value the Warrants at May 19, 2009 (date of inception) are:

		May 19, 2009
Expected life from grant date — in years			4.81
Expected volatility			108.63	%
Risk free interest rate			2.05	%
Dividend yield			—

On June 29, 2009, the Company borrowed an additional $2.0 million under the Loan Agreement and the fair value of the note and of the 16,666,666 Warrant Shares related was $2.0 million and approximately $8.7 million, respectively. This resulted in the Company allocating the relative fair value of approximately $400,000 of the $2.0 million in proceeds to the note and approximately $1.6 million to the Warrants. The Company has recorded the $1.6 million freestanding Warrants as permanent equity under accounting guidance for accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock, and accounting guidance for determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. The $1.6 million discount on the note payable — affiliate is netted against the $2.0 million note and is being amortized to interest expense using the interest method from June 29, 2009 through April 1, 2010, the maturity date of the note payable. At September 30, 2010, the balance of notes payable — affiliate net of discount was $2,000,000 and the unamortized discount was $0.

Interest expenses on the $2.0 million June 29, 2009 borrowing for the three and nine months ended September 30, 2010 and 2009, and for the period from inception (June 14, 2004) to September 30, 2010 were included in the statement of operations as follows:

																		Period from
																		June 14, 2004
		Three Months Ended								Nine Months Ended								(date of inception) to
		September 30,				September 30,				September 30,				September 30,				September 30,
June 29, 2009 Borrowing		2010				2009				2010				2009				2010
Interest expense		$	90,740			$	75,616			$	254,466			$	77,260			$	407,343
Discount amortization			—				1,545,694				157				1,587,926				1,625,935
Total		$	90,740			$	1,621,310			$	254,623			$	1,665,186			$	2,033,278

The Company estimated the fair value of the Warrants of approximately $1.6 million at June 29, 2009 using the Black-Scholes pricing model methodology with assumptions outlined below. The assumptions used to value the Warrants at June 29, 2009 (date of inception) are:

		June 29, 2009
Expected life from grant date — in years			4.7
Expected volatility			112.03	%
Risk free interest rate			2.40	%
Dividend yield			—

On August 14, 2009, the Company borrowed an additional $2.0 million under the Loan Agreement and the fair value of the note and of the 16,666,666 Warrant Shares related was $2.0 million and approximately $4.4 million, respectively. This resulted in the Company allocating the relative fair value of approximately $600,000 of the $2.0 million in proceeds to the note and approximately $1.4 million to the Warrants. The Company has recorded the $1.4 million freestanding Warrants as permanent equity under accounting guidance for accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock, and accounting guidance for determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. The $1.4 million discount on the note payable — affiliate is netted against the $2.0 million note and is being amortized to interest expense using the interest method from August 14, 2009 through April 1, 2010, the maturity date of the note payable. At September 30, 2010, the balance of notes payable — affiliate net of discount was $2,000,000 and the unamortized discount was $0.

Interest expenses on the $2.0 million August 14, 2009 borrowing for the three and nine months ended September 30, 2010 and 2009, and for the period from inception (June 14, 2004) to September 30, 2010 were included in the statement of operations as follows:

																		Period from
																		June 14, 2004
		Three Months Ended								Nine Months Ended								(date of inception) to
		September 30,				September 30,				September 30,				September 30,				September 30,
August 14, 2009 Borrowing		2010				2009				2010				2009				2010
Interest expense		$	90,740			$	39,452			$	254,466			$	39,452			$	369,534
Discount amortization			—				1,293,316				329				1,293,316				1,373,041
Total		$	90,740			$	1,332,768			$	254,795			$	1,332,768			$	1,742,575

The Company estimated the fair value of the Warrants of approximately $1.4 million at August 14, 2009 using the Black-Scholes pricing model methodology with assumptions outlined below. The assumptions used to value the Warrants at August 14, 2009 (date of inception) are:

		August 14, 2009
Expected life from grant date — in years			4.58
Expected volatility			115.22	%
Risk free interest rate			2.32	%
Dividend yield			—

On September 11, 2009, the Company borrowed the final $2.0 million under the Loan Agreement and the fair value of the note and of the 16,666,666 Warrant Shares related was $2.0 million and approximately $6.3 million, respectively. This resulted in the Company allocating the relative fair value of approximately $500,000 of the $2.0 million in proceeds to the note and approximately $1.5 million to the Warrants. The Company has recorded the $1.5 million freestanding Warrants as permanent equity under accounting guidance for accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock, and accounting guidance for determining whether an instrument (or embedded feature) is indexed to an entity’s own stock . The $1.5 million discount on the note payable — affiliate is netted against the $2.0 million note and is being amortized to interest expense using the interest method from September 11, 2009 through April 1, 2010, the maturity date of the note payable. At September 30, 2010, the balance of notes payable — affiliate net of discount was $2,000,000 and the unamortized discount was $0.

Interest expenses on the $2.0 million September 11, 2009 borrowing for the three and nine months ended September 30, 2010 and 2009, and for the period from inception (June 14, 2004) to September 30, 2010 were included in the statement of operations as follows:

																		Period from
																		June 14, 2004
		Three Months Ended								Nine Months Ended								(date of inception) to
		September 30,				September 30,				September 30,				September 30,				September 30,
September 11, 2009 Borrowing		2010				2009				2010				2009				2010
Interest expense		$	90,739			$	16,439			$	254,465			$	16,439			$	346,520
Discount amortization			—				606,724				3,756				606,724				1,516,811
Total		$	90,739			$	623,163			$	258,221			$	623,163			$	1,863,331

The Company estimated the fair value of the Warrants of approximately $1.5 million at September 11, 2009 using the Black-Scholes pricing model methodology with assumptions outlined below. The assumptions used to value the Warrants at September 11, 2009 (date of inception) are:

		September 11, 2009
Expected life from grant date — in years			4.50
Expected volatility			115.41	%
Risk free interest rate			2.07	%
Dividend yield			—

Interest expenses on the aggregate $10.0 million Loan Agreement for the three and nine months ended September 30, 2010 and 2009, and for the period from inception (June 14, 2004) to September 30, 2010 were included in the statement of operations as follows:

																		Period from
																		June 14, 2004
		Three Months Ended								Nine Months Ended								(date of inception) to
		September 30,				September 30,				September 30,				September 30,				September 30,
		2010				2009				2010				2009				2010
Interest expense		$	453,699			$	282,740			$	1,272,329			$	410,959			$	2,061,370
Discount amortization			—				4,750,858				4,374				5,888,809				6,948,723
Total		$	453,699			$	5,033,598			$	1,276,703			$	6,299,768			$	9,010,093

At September 30, 2010 the aggregate balance of the notes payable — affiliate net of discount was $10,000,000 and the aggregate unamortized discount was $0. The Company has accrued interest of $2,061,370 and $410,959 as of September 30, 2010 and December 31, 2009, respectively, which is included in the Balance Sheet.

Notes Payable Issued March 26, 2010 — 15% — due December 31, 2010 (2010 Loan Agreement)

In March 2010, the Company entered into the 2010 Loan Agreement whereby the Lenders agreed to lend to the Company in the aggregate up to $3.0 million, pursuant to the terms of the 2010 Notes.

On March 29, 2010, the Company borrowed an initial amount of $1,250,000. During the three months ended June 30, 2010, the Company borrowed $100,000 on May 26, 2010, $200,000 on June 4, 2010, and another $300,000 on June 29, 2010. During the three months ended September 30, 2010, the Company borrowed $100,000 on July 15, 2010, $750,000 on July 27, 2010 and a final $300,000 on September 28, 2010. The 2010 Notes are secured by a lien on all of the assets of the Company. Amounts borrowed under the 2010 Notes accrue interest at the rate of 15% per annum, which increases to 18% per annum following an event of default. Unless earlier paid in accordance with the terms of the 2010 Notes, all unpaid principal and accrued interest shall become fully due and payable on the earlier to occur of (i) December 31, 2010, (ii) the closing of a debt, equity or combined debt/equity financing resulting in gross proceeds or available credit to the Company of not less than $20,000,000, and (iii) the closing of a transaction in which the Company sells, conveys, licenses or otherwise disposes of a majority of its assets or is acquired by way of a merger, consolidation, reorganization or other transaction or series of transactions pursuant to which stockholders of the Company prior to such acquisition own less than 50% of the voting interests in the surviving or resulting entity.

Pursuant to the 2010 Loan Agreement, the Company issued to the Lenders warrants (the “2010 Warrants”) to purchase an aggregate of 17,647,059 shares (the “2010 Warrant Shares”) of common stock at $0.17 per share. The number of 2010 Warrant Shares is equal to the $3,000,000 maximum aggregate principal amount that may be borrowed under the 2010 Loan Agreement, divided by the $0.17 per share exercise price of the 2010 Warrants. The 2010 Warrant Shares vest based on the amount of borrowings under the 2010 Notes. Based on the $3,000,000 borrowings as of September 30, 2010, all 17,647,059 of the 2010 Warrant Shares are vested and are exercisable at September 30, 2010. The Warrant Shares are exercisable at any time until March 26, 2015.

On March 29, 2010, the fair value of the 2010 Notes and of the 7,352,941 2010 Warrant Shares related to the $1.25 million borrowed under the 2010 Loan Agreement was $1.25 million and approximately $904,000, respectively. This resulted in the Company allocating the relative fair value of approximately $726,000 of the $1.25 million in proceeds to the 2010 Notes and approximately $524,000 to the 2010 Warrants. The Company has recorded the $524,000 freestanding 2010 Warrants as permanent equity under accounting guidance for accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock, and accounting guidance for determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. The $524,000 discount on the note payable — affiliate is netted against the $1.25 million 2010 Notes and is being amortized to interest expense using the interest method from March 29, 2010 through December 31, 2010, the maturity date of the note payable. At September 30, 2010, the balance of notes payable — affiliate net of discount was $1,077,693 and the unamortized discount was $172,307.

Interest expenses on the $1.25 million March 29, 2010 borrowing for the three and nine months ended September 30, 2010 and 2009, and for the period from inception (June 14, 2004) to September 30, 2010 were included in the statement of operations as follows:

																		Period from
																		June 14, 2004
		Three Months Ended								Nine Months Ended								(date of inception) to
		September 30,				September 30,				September 30,				September 30,				September 30,
March 29, 2010 Borrowing		2010				2009				2010				2009				2010
Interest expense		$	47,260			$	—			$	95,548			$	—			$	95,548
Discount amortization			174,201				—				352,189				—				352,189
Total		$	221,461			$	—			$	447,737			$	—			$	447,737

The Company estimated the fair value of the 2010 Warrants of approximately $524,000 at March 29, 2010 using the Black-Scholes pricing model methodology with assumptions outlined below. The assumptions used to value the 2010 Warrants at March 29, 2010 (date of inception) are:

		March 29, 2010
Expected life from grant date — in years			4.99
Expected volatility			119.82	%
Risk free interest rate			2.60	%
Dividend yield			—

On May 26, 2010, the Company borrowed an additional $100,000 under the 2010 Loan Agreement and the fair value of the note and of the 588,235 Warrant Shares related was $100,000 and approximately $71,000, respectively. This resulted in the Company allocating the relative fair value of approximately $58,000 of the $100,000 in proceeds to the 2010 Notes and approximately $42,000 to the 2010 Warrants. The Company has recorded the $42,000 freestanding 2010 Warrants as permanent equity under accounting guidance for accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock, and accounting guidance for determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. The $42,000 discount on the note payable — affiliate is netted against the $100,000 note and is being amortized to interest expense using the interest method from May 26, 2010 through December 31, 2010, the maturity date of the note payable. At September 30, 2010, the balance of notes payable — affiliate net of discount was $82,705 and the unamortized discount was $17,295.

Interest expenses on the $100,000 May 26, 2010 borrowing for the three and nine months ended September 30, 2010 and 2009, and for the period from inception (June 14, 2004) to September 30, 2010 were included in the statement of operations as follows:

																		Period from
																		June 14, 2004
		Three Months Ended								Nine Months Ended								(date of inception) to
		September 30,				September 30,				September 30,				September 30,				September 30,
May 26, 2010 Borrowing		2010				2009				2010				2009				2010
Interest expense		$	3,781			$	—			$	5,260			$	—			$	5,260
Discount amortization			17,484				—				24,326				—				24,326
Total		$	21,265			$	—			$	29,586			$	—			$	29,586