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

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

Commission File Number: 000-13347

NEUROLOGIX, INC.

(Exact name of Registrant as specified in its charter)

Delaware		06-1582875
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One Bridge Plaza, Fort Lee, NJ 07024
(Address of principal executive offices)

(201) 592-6451

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 þ 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 definition 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 (Do not check if a smaller reporting company)		Smaller reporting company þ

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, 2009, 27,865,010 shares of common stock were outstanding.

 

 

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets (Unaudited)			3
Condensed Statements of Operations (Unaudited)			4
Statements of Changes in Stockholders’ Equity (Deficiency) (Unaudited)			5
Condensed Statements of Cash Flows (Unaudited)			9
Notes to Condensed Financial Statements (Unaudited)			11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3. Quantitative and Qualitative Disclosures About Market Risk			25
Item 4. Controls and Procedures			25
PART II. OTHER INFORMATION			26
Item 6. Exhibits			26
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

NEUROLOGIX, INC. AND SUBSIDIARY
(A Development Stage Company)

		September 30,				December 31,
		2009				2008
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	11,771			$	18,906
Prepaid expenses and other current assets			346				323
Total current assets			12,117				19,229
Equipment, less accumulated depreciation of $602 and $542 at September 30, 2009 and December 31, 2008, respectively			124				141
Intangible assets, less accumulated amortization of $243 and $182 at September 30, 2009 and December 31, 2008, respectively			848				748
Other assets			5				5
Total Assets		$	13,094			$	20,123
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses		$	1,201			$	850
Total current liabilities			1,201				850
Derivative financial instruments, at estimated fair value — Warrants			3,773				—
Total liabilities			4,974				850
Commitments and contingencies
Stockholders’ equity:
Preferred stock; 5,000,000 shares authorized
Series A — Convertible, $0.10 par value; 650 shares designated, 645 shares issued and outstanding at September 30, 2009 and December 31, 2008, with an aggregate liquidation preference of $1			—				—
Series C — Convertible, $0.10 par value; 700,000 shares designated, 281,263 and 285,878 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively, with an aggregate liquidation preference of $7,301 and $5,863 at September 30, 2009 and December 31, 2008, respectively			28				29
Series D — Convertible, $0.10 par value; 792,100 shares designated, 734,898 shares issued and outstanding at September 30, 2009 and December 31, 2008, with an aggregate liquidation preference of $29,900 and $27,031 at September 30, 2009 and December 31, 2008, respectively			73				73
Common Stock:
$0.001 par value; 100,000,000 shares authorized, 27,865,010 and 27,764,058 issued and outstanding at September 30, 2009 and December 31, 2008, respectively			28				28
Additional paid-in capital			56,664				62,393
Deficit accumulated during the development stage			(48,673	)			(43,250	)
Total stockholders’ equity			8,120				19,273
Total Liabilities and Stockholders’ Equity		$	13,094			$	20,123

See accompanying notes to condensed financial statements.

NEUROLOGIX, INC. AND SUBSIDIARY
(A Development Stage Company)

																		For the period
		Nine Months Ended								Three Months Ended								February 12, 1999
		September 30,								September 30,								(inception) through
		2009				2008				2009				2008				September 30, 2009
Revenues		$	—			$	—			$	—			$	—			$	—
Operating expenses:
Research and development			5,779				2,911				2,121				1,082				25,396
General and administrative expenses			2,179				2,495				631				734				18,279
Loss from operations			(7,958	)			(5,406	)			(2,752	)			(1,816	)			(43,675	)
Other income (expense):
Dividend, interest and other income			55				478				6				167				1,881
Interest expense-related parties			—				—				—				—				(411	)
Change in estimated fair value of derivative financial instruments — Warrants			(2,703	)			—				(723	)			—				(2,703	)
Other (expense) income, net			(2,648	)			478				(717	)			167				(1,233	)
Net loss			(10,606	)			(4,928	)			(3,469	)			(1,649	)		$	(44,908	)
Preferred stock dividends			(2,208	)			(1,937	)			(757	)			(707	)
Charge for accretion of beneficial conversion feature			—				(562	)			—				—
Charge for contingent beneficial conversion feature			—				(212	)			—				—
Net loss applicable to common stock		$	(12,814	)		$	(7,639	)		$	(4,226	)		$	(2,356	)
Net loss applicable to common stock per share, basic and diluted		$	(0.46	)		$	(0.28	)		$	(0.15	)		$	(0.08	)
Weighted average common shares outstanding, basic and diluted			27,819,156				27,668,255				27,865,010				27,738,379

See accompanying notes to condensed financial statements.

NEUROLOGIX, INC. AND SUBSIDIARY
(A Development Stage Company)

																																		Deficit
																																		Accumulated
																										Additional								During the
		Series D Preferred Stock								Series C Preferred Stock								Common Stock								Paid-in				Unearned				Development
		Shares				Amount				Shares				Amount				Shares				Amount				Capital				Compensation				Stage				Total
Sale of common stock to founders			—			$	0				—			$	0				6,004,146			$	0			$	4			$	0			$	0			$	4
Net loss			—				—				—				—				—				—				—				—				(328	)			(328	)
Balance, December 31, 1999			—			$	0				—			$	0				6,004,146			$	0			$	4			$	0			$	(328	)		$	(324	)
Net loss			—				—				—				—				—				—				—				—				(1,055	)			(1,055	)
Balance, December 31, 2000			—			$	0				—			$	0				6,004,146			$	0			$	4			$	0			$	(1,383	)		$	(1,379	)
Stock options granted for services			—				—				—				—				—				—				9				—				—				9
Common stock issued for intangible assets at $0.09 per share			—				—				—				—				259,491				—				24				—				—				24
Net loss			—				—				—				—				—				—				—				—				(870	)			(870	)
Balance, December 31, 2001			—			$	0				—			$	0				6,263,637			$	0			$	37			$	0			$	(2,253	)		$	(2,216	)
Retirement of founder shares			—				—				—				—				(33,126	)			—				—				—				—				—
Common Stock issued pursuant to license agreement at $1.56 per share			—				—				—				—				368,761				—				577				(577	)			—				—
Private placement of Series B convertible preferred stock			—				—				—				—				—				—				2,613				—				—				2,613
Amortization of unearned compensation			—				—				—				—				—				—				—				24				—				24
Net loss			—				—				—				—				—				—				—				—				(1,310	)			(1,310	)
Balance, December 31, 2002			—			$	0				—			$	0				6,599,272			$	0			$	3,227			$	(553	)		$	(3,563	)		$	(889	)
Sale of Common Stock			—				—				—				—				276,054				—				90				(89	)			—				1
Amortization of unearned compensation			—				—				—				—				—				—				—				164				—				164
Net loss			—				—				—				—				—				—				—				—				(2,274	)			(2,274	)
Balance, December 31, 2003			—			$	0				—			$	0				6,875,326			$	0			$	3,317			$	(478	)		$	(5,837	)		$	(2,998	)
Conversion of note payable to Common Stock at $2.17 per share			—				—				—				—				1,091,321				1				2,371				—				—				2,372
Conversion of mandatory redeemable preferred stock to Common Stock			—				—				—				—				6,086,991				6				494				—				—				500
Conversion of Series B convertible preferred stock to Common Stock			—				—				—				—				1,354,746				1				(1	)			—				—				—
Effects of reverse acquisition			—				—				—				—				7,103,020				14				5,886				—				—				5,900
Amortization of unearned compensation			—				—				—				—				—				—				—				202				—				202

NEUROLOGIX, INC. AND SUBSIDIARY
(A Development Stage Company)

																																		Deficit
																																		Accumulated
																										Additional								During the
		Series D Preferred Stock								Series C Preferred Stock								Common Stock								Paid-in				Unearned				Development
		Shares				Amount				Shares				Amount				Shares				Amount				Capital				Compensation				Stage				Total
Stock options granted for services			—				—				—				—				—				—				42				(42	)			—				—
Exercise of stock options			—				—				—				—				10,000				—				15				—				—				15
Net loss			—				—				—				—				—				—				—				—				(2,937	)			(2,937	)
Balance, December 31, 2004			—			$	0				—			$	0				22,521,404			$	22			$	12,124			$	(318	)		$	(8,774	)		$	3,054
Sale of Common Stock through private placement at an average price of $1.30 per share			—				—				—				—				2,473,914				4				3,062				—				—				3,066
Sale of Common Stock at an average price of $1.752 per share and warrants to Medtronic			—				—				—				—				1,141,552				1				2,794				—				—				2,795
Amortization of unearned compensation			—				—				—				—				—				—				—				825				—				825
Stock options granted for services			—				—				—				—				—				—				1,305				(1,305	)			—				—
Exercise of stock options			—				—				—				—				406,054				—				127				—				—				127
Net loss			—				—				—				—				—				—				—				—				(5,345	)			(5,345	)
Balance, December 31, 2005			—			$	0				—			$	0				26,542,924			$	27			$	19,412			$	(798	)		$	(14,119	)		$	4,522
Sale of Preferred Stock through private placement at an average price of $35.00 per share			—				—				342,857				34				—				—				11,578				—				—				11,612
Fair value of beneficial conversion rights issued in connection with issuance of Series C Preferred Stock			—				—				—				—				—				—				2,621				—				—				2,621
Preferred Dividend and accretion of fair value of beneficial conversion charge			—				—				25,298				3				—				—				(3	)			—				(2,621	)			(2,621	)
Employee share-based compensation expense			—				—				—				—				—				—				1,193				—				—				1,193
Non-employee share-based compensation			—				—				—				—				—				—				83				—				—				83
Reclassification of prior year non-employee compensation to prepaid expenses			—				—				—				—				—				—				—				487				—				487
Effects of adoption of SFAS 123R			—				—				—				—				—				—				(311	)			311				—				—
Net loss			—				—				—				—				—				—				—				—				(7,046	)			(7,046	)
Balance, December 31, 2006			—			$	0				368,155			$	37				26,542,924			$	27			$	34,573			$	0			$	(23,786	)		$	10,851
Sale of Series D Preferred Stock through private placement at an average price of $35.00 per share			428,571				43				—				—				—				—				14,727				—				—				14,770

NEUROLOGIX, INC. AND SUBSIDIARY
(A Development Stage Company)

																																		Deficit
																																		Accumulated
																										Additional								During the
		Series D Preferred Stock								Series C Preferred Stock								Common Stock								Paid-in				Unearned				Development
		Shares				Amount				Shares				Amount				Shares				Amount				Capital				Compensation				Stage				Total
Fair value of beneficial conversion rights issued in connection with the issuance of Series D Preferred Stock			—				—				—				—				—				—				2,130				—				—				2,130
Preferred Dividend and accretion of fair value of beneficial conversion charge			5,108				1				68,801				7				—				—				(8	)			—				(2,130	)			(2,130	)
Contingent beneficial conversion feature related to Series C Preferred Stock			—				—				—				—				—				—				627				—				(627	)			—
Induced conversion of preferred stock in connection with the issuance of Series D Preferred Stock			163,470				16				(230,184	)			(23	)			—				—				(347	)			—				354				—
Issuance of Series C Preferred Stock in connection with induced conversion of preferred stock			—				—				93,940				9				—				—				2,949				—				(2,958	)			—
Issuance of Common Stock in connection with issuance of Series D Preferred Stock			—				—				—				—				192,017				—				192				—				(192	)			—
Employee share-based compensation expense			—				—				—				—				—				—				702				—				—				702
Non-employee share-based compensation			—				—				—				—				—				—				72				—				—				72
Conversion of Series C Preferred Stock to Common Stock			—				—				(5,597	)			—				110,052				—				—				—				—				—
Exercise of stock options			—				—				—				—				787,815				1				590				—				—				591
Net loss			—				—				—				—				—				—				—				—				(6,817	)			(6,817	)
Balance, December 31, 2007			597,149			$	60				295,115			$	30				27,632,808			$	28			$	56,207			$	0			$	(36,156	)		$	20,169
Sale of Series D Preferred Stock through private placement at an average price of $35.00 per share			142,857				14				—				—				—				—				4,918				—				—				4,932
Fair value of beneficial conversion rights issued in connection with the issuance of Series D Preferred Stock			—				—				—				—				—				—				562				—				—				562
Accretion of fair value of beneficial conversion charge			—				—				—				—				—				—				—				—				(562	)			(562	)
Contingent beneficial conversion feature related to Series C Preferred Stock			—				—				—				—				—				—				212				—				(212	)			—
Adjustment to preferred dividends accrued			(5,108	)			(1	)			(3,237	)			(1	)			—				—				2				—				—				—

NEUROLOGIX, INC. AND SUBSIDIARY
(A Development Stage Company)

																																		Deficit
																																		Accumulated
																										Additional								During the
		Series D Preferred Stock								Series C Preferred Stock								Common Stock								Paid-in				Unearned				Development
		Shares				Amount				Shares				Amount				Shares				Amount				Capital				Compensation				Stage				Total
Employee share-based compensation expense			—				—				—				—				—				—				489				—				—				489
Non-employee share-based compensation			—				—				—				—				—				—				3				—				—				3
Conversion of Series C Preferred Stock to Common Stock			—				—				(6,000	)			—				131,250				—				—				—				—				—
Net Loss			—				—				—				—				—				—				—				—				(6,320	)			(6,320	)
Balance December 31, 2008			734,898			$	73				285,878			$	29				27,764,058			$	28			$	62,393			$	0			$	(43,250	)		$	19,273
Employee share-based compensation expense			—				—				—				—				—				—				376				—				—				376
Non-employee share-based compensation			—				—				—				—				—				—				146				—				—				146
Cumulative effect of adoption of ASC Topic 815-40			—				—				—				—				—				—				(6,252	)			—				5,183				(1,069	)
Conversion of Series C Preferred Stock to Common Stock			—				—				(4,615	)			(1	)			100,952				—				1				—				—				—
Net Loss			—				—				—				—				—				—				—				—				(10,606	)			(10,606	)
Balance September 30, 2009			734,898			$	73				281,263			$	28				27,865,010			$	28			$	56,664			$	0			$	(48,673	)		$	8,120

See accompanying notes to condensed financial statements.

NEUROLOGIX, INC. AND SUBSIDIARY
(A Development Stage Company)

										For the period
										February 12, 1999
		Nine Months Ended September 30,								(inception) through
		2009				2008				September 30, 2009
Operating activities:
Net loss		$	(10,606	)		$	(4,928	)		$	(44,908	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			61				83				609
Amortization			61				38				383
Gain on redemption of investment			—				—				(62	)
Stock options granted for services			—				—				9
Impairment of intangible assets			5				29				199
Amortization of non-employee share-based compensation			179				46				1,658
Share-based employee compensation expense			376				408				2,760
Non-cash interest expense			—				—				378
Change in estimated fair value of derivative financial instruments			2,703				—				2,703
Changes in operating assets and liabilities
(Increase) decrease in prepaid expenses and other current assets			(55	)			58				598
Increase (decrease) in accounts payable and accrued expenses			351				(577	)			1,140
Net cash used in operating activities			(6,925	)			(4,843	)			(34,533	)
Investing activities:
Security deposits paid			—				—				(7	)
Purchases of equipment			(44	)			(15	)			(619	)
Additions to intangible assets			(166	)			(171	)			(1,400	)
Proceeds from redemption of investment			—				—				65
Purchases of marketable securities			—				—				(12,673	)
Proceeds from maturities of marketable securities			—				—				12,673
Net cash used in investing activities			(210	)			(186	)			(1,961	)
Financing activities:
Proceeds from note payable			—				—				1,100
Borrowings from related party			—				—				2,000
Cash acquired in Merger			—				—				5,413
Merger-related costs			—				—				(375	)
Payments of capital lease obligations			—				—				(99	)
Proceeds from exercise of stock options			—				—				733
Proceeds from issuance of common stock and warrants			—				—				5,066
Proceeds from issuance of preferred stock			—				4,932				34,427
Net cash provided by financing activities			—				4,932				48,265
Net (decrease) increase in cash and cash equivalents			(7,135	)			(97	)			11,771
Cash and cash equivalents, beginning of period			18,906				20,157				—

NEUROLOGIX, INC. AND SUBSIDIARY
(A Development Stage Company)

										For the period
										February 12, 1999
		Nine Months Ended September 30,								(inception) through
		2009				2008				September 30, 2009
Cash and cash equivalents, end of period		$	11,771			$	20,060			$	11,771
Supplemental disclosure of non-cash investing and financing activities:
Dividends on Series C Preferred Stock paid in preferred shares		$	—			$	—			$	1,811
Accrued dividends on Preferred Stock		$	2,208			$	1,937			$	5,152
Accretion of fair value of beneficial conversion on preferred stock		$	—			$	562			$	5,313
Accretion of contingent beneficial conversion related on Series C Preferred Stock		$	—			$	212			$	839
Induced conversion of preferred stock in connection with issuance of Series D Preferred Stock		$	—			$	—			$	2,796
Issuance of Common Stock to pay debt		$	—			$	—			$	2,372
Reverse acquisition — net liabilities assumed, excluding cash		$	—			$	—			$	(214	)
Mandatory redeemable convertible preferred stock converted to Common Stock		$	—			$	—			$	500
Common Stock issued to acquire intangible assets		$	—			$	—			$	24
Stock options granted for services		$	—			$	—			$	1,424
Deferred research and development cost resulting from Medtronic Stock Purchase		$	—			$	—			$	795
Acquisition of equipment through capital leases		$	—			$	—			$	106

See accompanying notes to condensed financial statements.

NEUROLOGIX, INC. AND SUBSIDIARY
(A Development Stage Company)

(1) Description of Business

Neurologix, Inc. (“Neurologix” or the “Company”) is engaged in the research and development of proprietary treatments for disorders of the brain and central nervous system, primarily utilizing gene therapies. These treatments are designed as alternatives to conventional surgical and pharmacological treatments. The Company has not generated any operating revenues and, accordingly, it is considered to be a development stage company as defined by ASC Topic 915, “Development Stage Entities.”

The Company incurred net losses of $10,606, $4,928 and $44,908 and negative cash flows from operating activities of $6,925, $4,843 and $34,533 for the nine months ended September 30, 2009 and 2008 and for the period from February 12, 1999 (inception) to September 30, 2009, respectively. The Company expects that it will continue to incur net losses and cash flow deficiencies from operating activities for the foreseeable future.

The Company had cash and cash equivalents of $11,771 and $18,906 as of September 30, 2009 and December 31, 2008, respectively. Management believes that the Company’s current resources will enable it to continue as a going concern through at least September 30, 2010. Accordingly, it will, from time to time, continue to seek additional funds through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. The Company does not know whether additional financing will be available when needed, or, if available, will be on acceptable or favorable terms to it or its stockholders. If the Company is unable to secure additional funding by December 31, 2009 or shortly thereafter, its ability to continue as a going concern may be in doubt.

(2) Basis of Presentation

The accompanying unaudited condensed financial statements of the Company should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 (the “2008 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 25, 2009. The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, the instructions to Form 10-Q and the rules and regulations of the SEC. Accordingly, since they are interim statements, the accompanying financial statements do not include all of the information and notes required by GAAP for annual financial statements, but reflect all adjustments consisting of normal, recurring adjustments, that are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The December 31, 2008 balance sheet information was derived from the audited financial statements as of that date.

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2009-01, “Generally Accepted Accounting Principles” (ASC Topic 105), which establishes the FASB Accounting Standards Codification (the “Codification” or “ASC”) as the single source of authoritative GAAP. All existing accounting standards in effect prior to the Codification were superseded by the Codification. All other accounting guidance not included in the Codification will be considered non-authoritative. The Codification also includes all relevant SEC guidance organized using the same topical structure in separate sections within the Codification. The Codification does not change GAAP and does not impact the Company’s financial statements. Beginning with the financial statements and the notes thereto included in this quarterly report, all references to authoritative accounting literature (including references related to periods prior to the establishment of the Codification) will be referenced in accordance with the Codification.

(3) Summary of Significant Accounting Policies

(a) Stock-Based Compensation:

At September 30, 2009, the Company had one active share-based employee compensation plan available for grants to employees, non-employee directors and consultants. Stock option awards granted from this plan are granted at the fair market value on the date of grant, vest over a period determined at the time the options are granted, ranging from zero to three years, and generally have a maximum term of ten years. Certain options provide for accelerated vesting if there is a change in control (as defined in the plan) or if there is a termination of employment event for specified reasons set forth in certain employment agreements. When options are exercised, new shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), are issued.

The Company follows the provisions of ASC Topic 718, “Stock Compensation” (“ASC Topic 718”) for employee stock options and other share-based compensation using the modified prospective method. The Company continues to reflect share-based employee compensation cost in net loss.

The total value of the stock option awards is expensed ratably over the service period of the employees receiving the awards. As of September 30, 2009, total unrecognized compensation cost related to stock option awards, to be recognized as expense subsequent to September 30, 2009, was approximately $265, and the related weighted-average period over which it is expected to be recognized was approximately 1 year.

The amount of compensation expense recognized during the three and nine months ended September 30, 2009 and 2008 was comprised of the following:

		Nine Months Ended September 30,								Three Months Ended September 30,
		2009				2008				2009				2008
Research and development		$	113			$	112			$	23			$	22
General and administrative			263				296				48				61
Employee share-based compensation expense		$	376			$	408			$	71			$	83
Net share-based compensation expenses per basic and diluted common share		$	(0.01	)		$	(0.01	)		$	(0.00	)		$	(0.00	)

A summary of option activity as of September 30, 2009 and changes during the nine months then ended is presented below:

										Weighted-
		Shares				Weighted-				Average
		Subject to				Average				Remaining				Aggregate
		Option				Exercise				Contractual				Intrinsic
Options		(000)				Price				Term (years)				Value
Outstanding at December 31, 2008			3,623			$	1.38
Granted			1,088				0.65
Exercised			—				—
Forfeited or expired			(537	)			1.36
Outstanding at September 30, 2009			4,174			$	1.19				6.39			$	0
Exercisable at September 30, 2009			3,186			$	1.36				5.91			$	0

The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2009 and 2008 was $0.52 and $0.46, respectively and was estimated using the Black-Scholes option pricing model.

The fair value of each stock option award is estimated on the date of the grant using the Black-Scholes option pricing model based on the assumptions noted in the following table:

		Nine Months Ended September 30,
		2009				2008
Expected option term			5-6				5-6
Risk-free interest rate			2.06	%			3.79	%
Expected volatility			116	%			91	%
Dividend yield			0	%			0	%

Expected volatility is based on historical volatility of the Common Stock. The risk-free rate is based on the five-year U.S. Treasury security rate.

The expected option term represents the period that stock-based awards are expected to be outstanding based on the simplified method provided in Staff Accounting Bulletin No. 107 (“SAB 107”), which averages an award’s weighted-average vesting period and expected term for “plain vanilla” share options. Under SAB 107, options are considered to be “plain vanilla” if they have the following basic characteristics: granted “at-the-money”; exercisability is conditioned upon service through the vesting date; termination of service prior to vesting results in forfeiture; limited exercise period following termination of service; and options are non-transferable and non-hedgeable.

In December 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SAB 110”). SAB 110 was effective January 1, 2008 and expresses the views of the staff of the SEC with respect to extending the use of the simplified method, provided in SAB 107, in developing an estimate of the expected term of “plain vanilla” share options in accordance with ASC Topic 718. The Company will continue to use the simplified method until it has the historical data necessary to provide a reasonable estimate of expected life in accordance with SAB 107, as amended by SAB 110. For the expected option term, the Company has “plain-vanilla” stock options and, therefore, used a simple average of the vesting period and the contractual term for options granted subsequent to January 1, 2006 as permitted by SAB 107.

For equity awards to non-employees, the Company also applies the Black-Scholes option pricing model to determine the fair value of such instruments in accordance with ASC Topic 718 and the provisions of ASC Topic 505-50, “Equity-Based Payments to Non-Employees.” The options granted to non-employees are re-measured as they vest and the resulting value is recognized as an adjustment against the Company’s net loss over the period during which the services are received.

(b) Basic and Diluted Net Loss Per Common Share:

Basic net loss per common share excludes the effects of potentially dilutive securities and is computed by dividing net loss applicable to common stock by the weighted average number of common shares outstanding for the period. Diluted net income or loss per common share is adjusted for the effects of convertible securities, options, warrants and other potentially dilutive financial instruments only in the periods in which such effects would have been dilutive.

The following securities were not included in the computation of diluted net loss per share because to do so would have had an anti-dilutive effect for the periods presented:

		Nine Months Ended
		September 30,
		2009				2008
Stock options			4,173,833				3,623,333
Warrants			7,441,920				7,441,920
Common Stock issuable upon conversion of Series A Convertible Preferred Stock			645				645
Common Stock issuable upon conversion of Series C Convertible Preferred Stock			7,275,494				6,757,647
Common Stock issuable upon conversion of Series D Convertible Preferred Stock			25,066,747				23,400,144

(c) Derivative Instruments:

Effective December 28, 2008, the Company adopted provisions of ASC Topic 815-10, “Derivatives and Hedging — Overall” (“ASC Topic 815-10”) relating to the Company’s derivative and hedging activities. ASC Topic 815-10 requires enhanced disclosure of the Company’s derivatives and hedging activities, including certain derivative instruments embedded in other contracts. All derivatives are recorded on the Company’s balance sheet at fair value in accordance with current accounting guidelines for such complex financial instruments. (See Note 4 and Note 5).

ASC Topic 815-10 requires entities that utilize derivative instruments to provide qualitative disclosures about their objectives and strategies for using such instruments, as well as any details of credit-risk-related contingent features contained within derivatives. ASC Topic 815-10 also requires entities to disclose additional information about the amounts and location of derivatives located within the financial statements, how the provisions of ASC Topic 815-10 have been applied and the impact that hedges have on an entity’s financial position, financial performance and cash flows. The Company’s derivative liabilities are related to warrants issued in connection with financing transactions and are therefore not designated as hedging instruments.

(d) Financial Instruments and Fair Value:

Effective January 1, 2008, the Company adopted provisions of ASC Topic 820, “Fair Value Measurements and Disclosures,” as they relate to financial assets and financial liabilities (“ASC Topic 820”). ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC Topic 820 are described below:

Level 1 — Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 — Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and

Level 3 — Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

In estimating the fair value of the Company’s derivative liabilities, the Company used the probability-weighted Black-Scholes option pricing model. (See Note 4 and Note 5).

Financial assets with carrying values approximating fair value include cash and cash equivalents. Financial liabilities with carrying values approximating fair value include accounts payable and other accrued liabilities. The carrying value of these financial instruments approximates fair value due to their short maturities or variable interest rates that approximate current market rates.

(e) Recent Accounting Pronouncements:

In August 2009, the FASB issued Accounting Standards Update No. 2009-05, “Measuring Liabilities at Fair Value” (“ASU 2009-05”). ASU 2009-05 amends ASC Topic 820 and clarifies that, where a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following methods: 1) a valuation technique that uses a) the quoted price of the identical liability when traded as an asset or b) quoted prices for similar liabilities or similar liabilities when traded as assets and/or 2) a valuation technique that is consistent with the principles of ASC Topic 820. ASU 2009-05 also clarifies that, when estimating the fair value of a liability, a reporting entity is not required to adjust to include inputs relating to the existence of transfer restrictions on that liability. The adoption of ASU 2009-05 did not have a material impact on the Company’s financial statements.

In April 2009, the FASB issued guidance within ASC Topic 825-10, “Financial Instruments — Overall,” concerning interim disclosures about fair value instruments. This guidance requires that disclosures about the fair value of a company’s financial instruments be made whenever summarized financial information for interim reporting periods is made. The provisions of this guidance are effective for interim periods ending after June 15, 2009. The adoption of this guidance did not have a material impact on the Company’s financial statements.

In May 2009, the FASB issued guidance within ASC Topic 855-10, “Subsequent Events,” relating to subsequent events. This guidance establishes principles and requirements for subsequent events. This guidance defines the period after the balance sheet date during which events or transactions that may occur would be required to be disclosed in a company’s financial statements. Public entities are required to evaluate subsequent events through the date that financial statements are issued. This guidance also provides guidelines for evaluating whether or not events or transactions occurring after the balance sheet date should be recognized in the financial statements. This guidance requires disclosure of the date through which subsequent events have been evaluated. The Company has evaluated subsequent events immediately prior to the date of issuance of this report.

(4) Derivative Financial Instruments

Effective January 1, 2009, the Company adopted provisions of ASC Topic 815-40, “Derivatives and Hedging: Contracts in Entity’s Own Entity” (“ASC Topic 815-40”). ASC Topic 815-40 clarifies the determination of whether an instrument issued by an entity (or an embedded feature in the instrument) is indexed to an entity’s own stock, which would qualify as a scope exception under ASC Topic 815-10.

Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, certain warrants (the “Warrants”) issued in connection with the issuance of the Series C Convertible Preferred Stock, par value $0.10 per share, and the Series D Convertible Preferred Stock, par value $0.10 per share, must now be treated as derivative liabilities in the Company’s balance sheet.

Consistent with ASC Topic 815-40 requirements, the Company recognized the cumulative effect of the change in accounting principle to reduce the opening balance of the deficit accumulated during the development stage for fiscal year 2009. The cumulative effect adjustment of $5,183 represents the difference between the amounts recognized in the balance sheet before initial application of ASC Topic 815-40 on January 1, 2009. Additionally, the initial fair value of the Warrants, aggregating $6,252, which were initially recorded as additional paid-in capital upon issuance, was reclassified to long-term liabilities upon adoption of ASC Topic 815-40. The amounts recognized at initial issuance were determined based on the estimated fair value of the Warrants using a probability-weighted Black-Scholes option pricing model. Prospectively, the Warrants will be re-measured at each balance sheet date based on estimated fair value, and any resultant changes in fair value will be recorded as non-cash valuation adjustments within other income (expense) in the Company’s statement of operations. During the nine months ended September 30, 2009, the Company recorded other expense of $2,703 relating to the change in fair value of the Warrants during this period. During the three months ended September 30, 2009, the Company recorded other expense of $723 relating to the change in fair value of the Warrants during this period.

The Company estimates the fair value of the Warrants using the probability-weighted Black-Scholes option pricing model. The assumptions used for the three and nine months ended September 30, 2009 are noted in the following table:

		Three and Nine Months
		Ended September 30, 2009
Expected option term		5 to 7 years
Risk-free interest rate		2.31% – 2.93%
Expected volatility		123%
Dividend yield		0%

Expected volatility is based on historical volatility of the Company’s common stock. The Warrants have a transferability provision and based on guidance provided in SAB 107 for options issued with such a provision, the Company used the full contractual term as the expected term of the Warrants. The risk free rate is based on the five-year and seven-year U.S. Treasury security rates.

(5) Fair Value Measurements

The following table presents the Company’s liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of September 30, 2009:

Quoted

Prices in

Active

Markets

for

Significant

Identical

Other

Significant

Balance as

Assets and

Observable

Unobservable

of

Liabilities

Inputs

Inputs

September 30,

Description

(Level 1)

(Level 2)

(Level 3)

2009

Derivative liabilities related to Warrants

$

—

$

—

$

3,773

$

3,773

The following table sets forth a summary of changes in the fair value of the Company’s Level 3 liabilities for the nine months ended September 30, 2009:

						Cumulative
						Effect of the								Balance as
		Balance at				Adoption of								of
		December 31,				ASC Topic 815-40				Unrealized				September 30,
Description		2008				(See Note 4)				Losses				2009
Derivative liabilities related to Warrants		$	—			$	1,070			$	2,703			$	3,773