Convertible Notes	9 Months Ended
Sep. 30, 2011
Convertible Notes
Convertible Notes	(10) CONVERTIBLE NOTES In April 2011, we entered into a Securities Purchase Agreement (the Purchase Agreement) with certain institutional investors (the Purchasers), including a fund affiliated with Kevin Tang, who is on our Board of Directors, for a private placement of up to $4.5 million in Senior Secured Convertible Notes due 2021 (the Notes). Pursuant to the Purchase Agreement, the Company may issue up to $4.5 million aggregate principal amount of Notes, which are convertible into shares of the Company’s common stock at a rate of 25,000 shares for every $1,000 of principal and accrued interest due under the Notes (the Conversion Shares). The initial funding from the bridge loan was approximately $1.3 million, net of financing costs. The Purchasers may also purchase up to an additional $3.0 million aggregate principal amount of Notes from time to time, with such right expiring upon the second anniversary of the initial closing date. The Notes are secured by substantially all of the assets of the Company, including placing the bank accounts under a control agreement. The Notes initially bore interest at 20% per annum, payable quarterly in cash or in additional principal amount of Notes at the election of the Purchasers. In June 2011, the interest rate was lowered to 6% per annum effective July 1, 2011 in the Amended Secured Convertible Note Agreement. There is no right to convert the Notes to the extent that after giving effect to such conversion, the holder would beneficially own in excess of 9.99% of the Company’s outstanding common stock after the conversion. Each holder of the Notes can increase or decrease this beneficial ownership conversion limit by written notice to the Company, which will not be effective until 61 days after delivery of the notice. The Company is in compliance with all debt-related covenants at September 30, 2011. Upon the occurrence of an event of default, holders of the Notes have the right to require the Company to redeem all or a portion of their Notes. Pursuant to the Purchase Agreement, the Company agreed to file a registration statement registering for resale the Conversion Shares. In May 2011, the Company filed a registration statement on Form S-1 registering these shares for resale; the registration statement was declared effective on July 29, 2011. Concurrent with the approval of the offer and sale of the Notes, the Board of Directors approved the termination of the Company’s Preferred Shares Rights Agreement (the Rights Agreement), effective immediately prior to the initial closing date. Under the Rights Agreement, preferred stock purchase rights were distributed to stockholders of record as of January 2, 2007 and to each person who acquires the company stock thereafter. The rights were exercisable only upon the acquisition, or the acquisition of the right to acquire, by a person or group of affiliated or associated persons, of 20% or more (34% for Tang Capital Partners, LP and 30% for Baker Brothers Investments) of the outstanding shares of the company’s common stock. These rights were terminated as a result of the termination of the Rights Agreement. The Rights Agreement had not been triggered as of that date. The Notes contain an embedded conversion feature which was in-the-money on the issuance date. Based on an effective fixed conversion rate of $0.04 per share, the total conversion benefit at issuance exceeded the loan proceeds. Therefore, a full debt discount was recorded in an amount equal to the face value of the Notes on the issuance date and the Company began amortizing the resultant debt discount over the 10-year term of the Notes. On July 1, 2011, accrued interest of $50,000 was paid-in-kind and rolled into the Note principal balance, which resulted in an additional debt discount of $50,000. As of September 30, 2011, the carrying value of the Notes was approximately $64,000, which is comprised of the $1,550,000 Note principal less debt discount of $1,486,000. Accrued interest on the principal balance was $23,250 at September 30, 2011.

Convertible Notes

9 Months Ended

Sep. 30, 2011

(10) CONVERTIBLE NOTES

In April 2011, we entered into a Securities Purchase Agreement (the Purchase Agreement) with certain institutional investors (the Purchasers), including a fund affiliated with Kevin Tang, who is on our Board of Directors, for a private placement of up to $4.5 million in Senior Secured Convertible Notes due 2021 (the Notes). Pursuant to the Purchase Agreement, the Company may issue up to $4.5 million aggregate principal amount of Notes, which are convertible into shares of the Company’s common stock at a rate of 25,000 shares for every $1,000 of principal and accrued interest due under the Notes (the Conversion Shares). The initial funding from the bridge loan was approximately $1.3 million, net of financing costs. The Purchasers may also purchase up to an additional $3.0 million aggregate principal amount of Notes from time to time, with such right expiring upon the second anniversary of the initial closing date.

The Notes are secured by substantially all of the assets of the Company, including placing the bank accounts under a control agreement. The Notes initially bore interest at 20% per annum, payable quarterly in cash or in additional principal amount of Notes at the election of the Purchasers. In June 2011, the interest rate was lowered to 6% per annum effective July 1, 2011 in the Amended Secured Convertible Note Agreement.

There is no right to convert the Notes to the extent that after giving effect to such conversion, the holder would beneficially own in excess of 9.99% of the Company’s outstanding common stock after the conversion. Each holder of the Notes can increase or decrease this beneficial ownership conversion limit by written notice to the Company, which will not be effective until 61 days after delivery of the notice.

The Company is in compliance with all debt-related covenants at September 30, 2011. Upon the occurrence of an event of default, holders of the Notes have the right to require the Company to redeem all or a portion of their Notes.

Pursuant to the Purchase Agreement, the Company agreed to file a registration statement registering for resale the Conversion Shares. In May 2011, the Company filed a registration statement on Form S-1 registering these shares for resale; the registration statement was declared effective on July 29, 2011.

Concurrent with the approval of the offer and sale of the Notes, the Board of Directors approved the termination of the Company’s Preferred Shares Rights Agreement (the Rights Agreement), effective immediately prior to the initial closing date. Under the Rights Agreement, preferred stock purchase rights were distributed to stockholders of record as of January 2, 2007 and to each person who acquires the company stock thereafter. The rights were exercisable only upon the acquisition, or the acquisition of the right to acquire, by a person or group of affiliated or associated persons, of 20% or more (34% for Tang Capital Partners, LP and 30% for Baker Brothers Investments) of the outstanding shares of the company’s common stock. These rights were terminated as a result of the termination of the Rights Agreement. The Rights Agreement had not been triggered as of that date.

The Notes contain an embedded conversion feature which was in-the-money on the issuance date. Based on an effective fixed conversion rate of $0.04 per share, the total conversion benefit at issuance exceeded the loan proceeds. Therefore, a full debt discount was recorded in an amount equal to the face value of the Notes on the issuance date and the Company began amortizing the resultant debt discount over the 10-year term of the Notes. On July 1, 2011, accrued interest of $50,000 was paid-in-kind and rolled into the Note principal balance, which resulted in an additional debt discount of $50,000.

As of September 30, 2011, the carrying value of the Notes was approximately $64,000, which is comprised of the $1,550,000 Note principal less debt discount of $1,486,000. Accrued interest on the principal balance was $23,250 at September 30, 2011.