UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549





FORM 10-Q





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





For the quarterly period ended June 30, 2012





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 001-32626





Talon Therapeutics, Inc.


(Exact Name of Registrant as Specified in Its Charter)





Delaware

(State or other jurisdiction of

incorporation or organization)

32-0064979

(I.R.S. Employer Identification No.)400 Oyster Point Boulevard, Suite 200

South San Francisco, CA.

94080(Address of principal executive offices)

(Zip Code)





(650) 588-6404


(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 issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No  o





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





Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, or 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   oNon-accelerated filer   o
Smaller reporting company   x(Do not check if 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  x





As of August 10, 2012, there were issued and outstanding 21,933,938 shares of the registrant's common stock, $.001 par value.




1





INDEX





PagePART I
FINANCIAL INFORMATION
4Item 1.
Unaudited Condensed Financial Statements
4Unaudited Condensed Balance Sheets
4Unaudited Condensed Statements of Operations and Comprehensive Loss
5Unaudited Condensed Statement of Changes in Redeemable Convertible Preferred Stock and Stockholders' Deficit
6Unaudited Condensed Statements of Cash Flows
7Notes to Unaudited Condensed Financial Statements
8Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
27Item 3.
Quantitative and Qualitative Disclosures About Market Risk
32Item 4.
Controls and Procedures
32PART II
OTHER INFORMATION
34Item 1.
Legal Proceedings
34Item 1A.
Risk Factors
34Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
35Item 3.
Defaults Upon Senior Securities
36Item 4.
Mine Safety Disclosures
36Item 5.
Other Information
36Item 6.
Exhibits
38Signatures
39Index to Exhibits Filed with this Report
40





2





FORWARD-LOOKING STATEMENTS





This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These forward-looking statements include, but are not limited to, statements about:





●
our ability to secure funding for our planned future operations;




●
the regulatory approval of our drug candidates;




●
our ability to either secure a strategic partner to commercialize our leading drug candidate or commercialize alone if no strategic partner is secured;




●
the development of our drug candidates, including when we expect to undertake, initiate and complete clinical trials of our product candidates;




●
our use of clinical research centers and other contractors;




●
our ability to find collaborative partners for research, development and commercialization of potential products;




●
acceptance of our products by doctors, patients or payors and the availability of reimbursement for our product candidates;




●
our ability to market any of our products;




●
our history of operating losses;




●
our ability to secure adequate protection for our intellectual property;




●
our ability to compete against other companies and research institutions;




●
the effect of potential strategic transactions on our business;




●
our ability to attract and retain key personnel; and




●
the volatility of our stock price.




These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend” and similar words or phrases. For such statements, we claim the protection of the Private Securities Litigation Reform Act of 1995. Readers of this Quarterly Report on Form 10-Q are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the time this Quarterly Report on Form 10-Q was filed with the Securities and Exchange Commission, or SEC. These forward-looking statements are based largely on our expectations and projections about future events and future trends affecting our business, and are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Discussions containing these forward-looking statements may be found throughout this report, including Part I, the section entitled “Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations.” These forward-looking statements involve risks and uncertainties, including the risks discussed in Item 1A of Part II of this Quarterly Report and Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the SEC on March 29, 2012 (the “2011 Form 10-K”), that could cause our actual results to differ materially from those in the forward-looking statements. Except as required by law, we undertake no obligation to publicly revise our forward-looking statements to reflect events or circumstances that arise after the filing of this report or documents incorporated by reference herein that include forward-looking statements. The risks discussed in the 2011 Form 10-K and in this report should be considered in evaluating our prospects and future financial performance.





In addition, past financial or operating performance is not necessarily a reliable indicator of future performance and you should not use our historical performance to anticipate results or future period trends. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition.





References to the “Company,” “Talon,” the “Registrant,” “we,” “us,” or “our” in this Quarterly Report on Form 10-Q refer to Talon Therapeutics, Inc., a Delaware corporation, unless the context indicates otherwise. Marqibo® is our U.S. registered trademark for our vincristine sulfate liposomes injections product candidate. AlocrestTM and BrakivaTM are our trademarks for our vinorelbine liposome injection and topotecan liposome injection product candidates, respectively. OptisomeTM is our trademark for our liposome encapsulation technology, which we currently utilize with respect to our Marqibo, Alocrest and Brakiva product candidates. We have applied for registration for our Alocrest, Brakiva and Optisome trademarks, and for our Talon Therapeutics logo, in the United States. All other trademarks and trade names mentioned in this Quarterly Report on Form 10-Q are the properties of their respective owners.




3





PART I - FINANCIAL INFORMATION


Item 1. Unaudited Condensed Financial Statements
 
 TALON THERAPEUTICS, INC.
 
 CONDENSED BALANCE SHEETS
 (In thousands, except per share data)
 (Unaudited)
  June 30,

2012


December 31,

2011ASSETSCurrent assets:Cash and cash equivalents

$
3,042


$
1,029Prepaid expenses and other current assets (Note 10)


521



635Total current assets


3,563



1,664Property and equipment, net (Note 11)


48



72Debt issuance costs (Note 3)


622



751Other long-term assets


33



—Total assets

$
4,266


$
2,487LIABILITIES AND STOCKHOLDERS' DEFICITCurrent liabilities:Accounts payable and accrued liabilities (Note 12)

$
2,975


$
4,557Other short-term liabilities


2



2Total current liabilities


2,977



4,559Notes payable, net of discount (Note 3)


24,427



24,033Other long-term liabilities


1



2Investors’ right to purchase future shares of Series A-1 and A-2 preferred stock (Note 5)


—



1,772Investors’ right to purchase future shares of Series A-3 preferred stock (Note 5)


89,463



—Warrant liabilities (Note 7)


1,646



502Total long term liabilities


115,537



26,309Total liabilities


118,514



30,868Redeemable convertible preferred stock; $0.001 par value: 10 million shares authorized; 0.5 and 0.4 million issued and outstanding as of June 30, 2012 and December 31, 2011, respectively; aggregate liquidation value of $62.0 million and $46.4 million at June 30, 2012 and December 31, 2011, respectively


35,336



30,643Stockholders' deficit:Common stock; $0.001 par value:600 million shares authorized; 21.9 and 21.8 million shares issued and outstanding at June 30, 2012 and December 31, 2011


22



22Additional paid-in capital


121,615



120,887Accumulated deficit


(271,221)



(179,933)Total stockholders' deficit


(149,584)



(59,024)Total liabilities, redeemable convertible preferred stock and stockholders' deficit

$
4,266


$
2,487
 
 See accompanying notes to unaudited condensed financial statements.
  4
 
 TALON THERAPEUTICS, INC.
 
 CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
 (In thousands, except per share data)
 (Unaudited)
 
 Three Months Ended

June 30,


Six Months Ended

June 30,2012


2011


2012


2011Operating expenses:General and administrative

$
1,496


$
1,277


$
3,181


$
2,757Research and development


2,172



3,533



4,914



8,677Total operating expenses


3,668



4,810



8,095



11,434Loss from operations


(3,668)



(4,810)



(8,095)



(11,434)Other expense (including non-cash charges):Interest expense


(938)



(887)



(1,876)



(1,768)Other income, net


1



2



1



7Change in fair market value of warrant liabilities (Note 7)


(700)



(338)



(1,155)



(796)Impairment of available-for-sale


—



—



—



(76)Change in fair market value of rights to purchase shares of Series A-3 Preferred Stock (Note 5)


(55,492)



—



(79,156)



—Change in fair market value of rights to purchase additional shares of Series A-1 and A-2 Preferred Stock (Note 5)


—



(17)



(1,007)



(2,399)Total other expense


(57,129)



(1,240)



(83,193)



(5,032)Net loss

$
(60,797)


$
(6,050)


$
(91,288)


$
(16,466)Deemed dividends attributable to preferred stock in connection with accretion (Note 5 and 8)


(1,343)



(972)



(2,619)



(1,913)Deemed dividends attributable to preferred stock in connection with embedded conversion features (Notes 5 and 8)


(197)



—



(4,549)



—Net loss applicable to common stock


(62,337)



(7,022)



(98,456)



(18,379)Net loss per share, basic and diluted

$
(2.85)


$
(0.33)


$
(4.50)


$
(0.86)Weighted average shares used in computing net loss per share, basic and diluted


21,883



21,423



21,865



21,334Comprehensive loss:Net loss

$
(60,797)


$
(6,050)


$
(91,288)


$
(16,466)Unrealized holdings gains (losses) arising during the period


—



12



—



(48)Less: reclassification adjustment for other-than-temporary impairment included in net loss


—



—



—



76Comprehensive loss

$
(60,797)


$
(6,038)


$
(91,288)


$
(16,438)
 
 See accompanying notes to unaudited condensed financial statements.
  5
 
 TALON THERAPEUTICS, INC.
 
 CONDENSED STATEMENT OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK
 AND STOCKHOLDERS' DEFICIT
 (In thousands)
 (Unaudited)
  Period from January 1, 2012 to June 30, 2012
  Redeemable Convertible Preferred Stock


Common StockShares


Amount


Shares


Amount


Additional paid-in capital


Accumulated other comprehensive income


Accumulated deficit


Total equityBalance at January 1, 2012


413


$
30,643



21,779


$
22


$
120,887


$
—


$
(179,933
)

$
(59,024
)Stock-based compensation of employees amortized over vesting period of stock options


—



—



—



—



664



—



—



664Issuance of shares under employee stock purchase plan


—



—



11



—



4



—



—



4Issuance of shares upon exercise of stock options


—



—



84



—



48



—



—



48Issuance of shares upon exercise of warrants


—



—



15



—



1



—



—



1Extinguishment of warrant liability upon exercise of Series A warrants


—



—



—



—



11



—



—



11Issuance of Series A-2 redeemable, convertible preferred stock on January 9, 2012, net of issuance costs of $0.8 million, and fair value of investors’ right to acquire shares of Series A-3 preferred stock


117



3,343



—



—



—



—



—



—Series A-2 redeemable, convertible shares issued on March 30, 2012 to settle interest payable under Facility Agreement


6



675



—



—



—



—



—



—Series A-2 redeemable, convertible shares issued on June 29, 2012 to settle interest payable under Facility Agreement


6



675



—



—



—



—



—



—Beneficial conversion feature on Series A-2 redeemable, convertible preferred stock


—



(4,549
)


—



—



4,549



—



—



4,549Deemed dividend attributable to beneficial conversion feature on Series A-2 redeemable, convertible preferred stock






4,549











(4,549
)










(4,549
)Net loss


—



—



—



—



—



—



(91,288
)


(91,288
)Balance at June 30, 2012


542


$
35,336



21,889


$
22


$
121,615


$
—


$
(271,221
)

$
(149,584
)
 
 See accompanying notes to unaudited condensed financial statements.
  6
 
 
 
 
 TALON THERAPEUTICS, INC.
 
 CONDENSED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 
 Six Months Ended June 30,2012


2011Cash flows from operating activities:Net loss

$
(91,288)


$
(16,466)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


24



68Share-based compensation to employees for services


664



547Amortization of discount and debt issuance costs


523



422Change in fair value of warrant liability


1,144



796Change in fair market value of rights to purchase shares of Series A Preferred


80,163



2,399Settlement of interest payments under Facility Agreement with Series A-2 Preferred


2,033



—Other-than-temporary loss on marketable securities


—



76Changes in operating assets and liabilities:Decrease in prepaid expenses and other assets


114



258(Decrease) in accounts payable and accrued liabilities


(1,582)



(446)Net cash used in operating activities


(8,205)



(12,346)Cash flows from investing activities:Purchase of property and equipment


—



(70)Maturities of marketable securities


—



18,000Restricted cash


(33)



—Net cash provided by (used in) investing activities


(33)



17,930Cash flows from financing activities:Cash proceeds from private placement of Series A-2 Preferred for $11 million less cash issuance costs of $0.8 million


10,188



—Proceeds from exercise of warrants, options and employee purchase of shares under employee stock purchase plan


64



357Payments on capital leases


(1)



--Net cash provided by financing activities


10,251



357Net increase in cash and cash equivalents


2,013



5,941Cash and cash equivalents, beginning of period


1,029



4,573Cash and cash equivalents, end of period

$
3,042


$
10,514Supplemental disclosures of cash flow data:Cash paid for interest

$
1


$
1,343Supplemental disclosures of noncash financing activities:Unrealized loss on available-for-sale securities

$
—


$
12Extinguishment of warrant liabilities, net of cash proceeds from warrant exercise


11



252Settlement of interest payments under Facility Agreement with Series A-2 Preferred


2,033



—
 
 See accompanying notes to unaudited condensed financial statements.
  7
 
 TALON THERAPEUTICS, INC.
 NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
 
 NOTE 1.  BUSINESS DESCRIPTION, BASIS OF PRESENTATION AND LIQUIDITY
 
 Business
 
 Talon Therapeutics, Inc. (“Talon”, “we”, “our”, “us” or the “Company”) is a biopharmaceutical company based in South San Francisco, California, which seeks to acquire, develop, and commercialize innovative products to strengthen the foundation of cancer care. The Company is committed to creating value by accelerating the development of its product candidates, including entering into strategic partnership agreements and expanding its product candidate pipeline by being an alliance partner of choice to universities, research centers and other companies.  The Company has exclusive rights to develop and commercialize the following product candidates:
 
 ●
Marqibo® (vincristine sulfate liposome injection), our lead product candidate, is a novel, targeted OptisomeTM encapsulated formulation product candidate of the Food and Drug Administration (FDA)-approved anticancer drug vincristine, currently in development primarily for the treatment of adult acute lymphoblastic leukemia, or ALL, in second or greater relapse or that has progressed following two or more prior lines of anti-leukemia therapy.  In July 2011, we submitted to the FDA a new drug application, or NDA, seeking accelerated approval of Marqibo.  In September 2011, the FDA accepted our NDA for filing under Subpart H – Accelerated Approval for New Drugs for Serious or Life Threatening Illnesses, and set an action date for our NDA under the Prescription Drug User Fee Act, commonly referred to as a PDUFA date, of May 13, 2012, reflecting a standard 10-month review timeline. After a hearing in front of a panel of the FDA’s Oncologic Drugs Advisory Committee, or ODAC, on March 21, 2012, which resulted in a positive vote (7 to 4 with 2 abstentions) for Marqibo, the FDA extended the PDUFA date for 3 months to August 12, 2012.  On August 9, 2012, the FDA granted accelerated approval of Marqibo for the treatment of Philadelphia chromosome negative adult ALL patients in second or greater relapse or whose disease has progressed following two or more prior lines of anti-leukemia therapy.
 
 ●
Menadione Topical Lotion (MTL)is a novel cancer supportive care product candidate being developed for the prevention and/or treatment of the skin toxicities associated with the use of epidermal growth factor receptor inhibitors, or EGFRIs, a type of anti-cancer agent used in the treatment of lung, colon, head and neck, pancreatic and breast cancer.  In August 2011, the Company entered into an agreement with the Mayo Clinic pursuant to which the Mayo Clinic agreed to sponsor and conduct a randomized Phase 2 trial of MTL in patients taking biologic and small molecule EGFR inhibitors for anti-cancer therapy and will test the effectiveness of MTL in preventing skin toxicities associated with EGFR inhibitors.  The Company agreed to provide supplies of MTL in connection with the Mayo Clinic study.
 
 ●
BrakivaTM (topotecan liposome injection) is a novel targeted OptisomeTM encapsulated formulation product candidate of the FDA-approved anticancer drug topotecan.
 
 ●
AlocrestTM (vinorelbine liposome injection) is a novel targeted OptisomeTM encapsulated formulation product candidate of the FDA-approved anticancer drug vinorelbine.
 
 Basis of Presentation and Liquidity
 
 The accompanying unaudited condensed financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q. In the opinion of the Company’s management, the unaudited condensed financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position for the periods presented herein. These interim financial results are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2012 or any subsequent interim period.
 
 As of June 30, 2012, the Company had stockholders’ accumulated deficit of approximately $271.2 million, and for the fiscal quarter ended June 30, 2012, the Company experienced a net loss of $60.8 million. The Company has financed operations primarily through equity and debt financing and expects such losses to continue over the next several years.  The Company has drawn down $27.5 million of long-term debt under the loan facility agreement with Deerfield Management, with the entire balance due in June 2015.  The Company currently has only a limited supply of cash available for operations. As of June 30, 2012, the Company had aggregate cash and cash equivalents of $3.0 million.
  On January 9, 2012, the Company entered into an Investment Agreement with certain investors pursuant to which the Company issued and sold to the investors an aggregate of 110,000 shares of its Series A-2 Convertible Preferred Stock (the “Series A-2 Preferred”), stated value $100 per share, at a per share purchase price of $100 for an aggregate purchase price of $11.0 million.  The Investment Agreement provides that, from the date of the Investment Agreement until the first anniversary of the Company’s receipt of marketing approval from the FDA for any of its product candidates, the investors have the right, but not the obligation, to purchase up to an additional 600,000 shares of the Company’s Series A-3 Convertible Preferred Stock (the “Series A-3 Preferred”), at a purchase price of $100 per share, in one or more tranches of at least 50,000 shares of Series A-3 Preferred per tranche.  On July 3, 2012, the Company and the investors entered into Amendment No. 1 to the Investment Agreement, pursuant to which the minimum size of each such tranche was reduced from 50,000 shares of Series A-3 Preferred to 30,000 shares of Series A-3 Preferred.  Additionally, on July 3, 2012, pursuant to the terms of the Investment Agreement, as amended, the Company issued and sold an aggregate of 30,000 shares of Series A-3 Preferred at a price per share of $100, for aggregate proceeds of $3.0 million.  The Company had previously entered into an Investment Agreement dated June 7, 2010, pursuant to which the same investors purchased 400,000 shares of the Company’s Series A-1 Convertible Preferred Stock (the “Series A-1 Preferred” and, collectively with the Series A-2 Preferred and the Series A-3 Preferred, the “Series A Preferred”) for an aggregate purchase price of $40.0 million.
  8
 
 As described in Note 3 below, the Company and certain affiliates of Deerfield Management, LLC (collectively, “Deerfield”) had previously entered into the Facility Agreement on October 30, 2007, as amended on June 7, 2010.  In connection with the entry into the Investment Agreement, on January 9, 2012, the Company and Deerfield entered into a Second Amendment to Facility Agreement.  Among other items, pursuant to the Second Amendment to Facility Agreement, the Company will satisfy its obligation under the Facility Agreement to make quarterly interest payments for the quarters ended December 31, 2011, March 31, 2012, June 30, 2012 and September 30, 2012, by issuing a whole number of shares of Series A-2 Preferred in lieu of cash.
 
 Even after receipt of the $14 million in gross proceeds from the sale of Series A Preferred pursuant to the January 2012 Investment Agreement, the Company currently does not have enough capital resources to fund its planned activities beyond September 30, 2012 and the accompanying financial statements reflect substantial doubt about the Company’s ability to continue as a going concern, which is also stated in the report from its auditors on the audit of the Company’s financial statements as of and for the year ended December 31, 2011.  The Company’s plan of operation for the year ending December 31, 2012 is to continue implementing its business strategy, which now includes preparing to commercially launch Marqibo, and the continued development of the Company’s clinical trials for Marqibo and other drug candidates.  The Company does not generate any recurring revenue and will require substantial additional capital before it will generate cash flow from its operating activities, if ever. The Company will be unable to commercially launch Marqibo and to continue development of its product candidates unless it is able to obtain additional funding through equity or debt financings or from payments in connection with potential strategic transactions.
 
 Management can give no assurances that additional capital that the Company is able to obtain, if any, will be sufficient to meet the Company’s needs. Moreover, there can be no assurance that such capital will be available to the Company on favorable terms or at all, especially given the current economic environment which has severely restricted access to the capital markets.  If anticipated costs are higher than planned or if the Company is unable to raise additional capital, it will have to delay the planned commercial activities for Marqibo and significantly curtail planned development to maintain operations before the end of 2012.  These conditions raise substantial doubt as to the Company’s ability to continue as a going concern.   The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities should the Company be unable to continue as a going concern.
 
 NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Use of Management's Estimates
 
 The preparation of financial statements in conformity with GAAP requires management to make estimates based upon current assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Examples include provisions for deferred taxes, the valuation of the warrant liabilities, investors’ rights to purchase shares of Series A-1 Preferred and Series A-2 Preferred, investors’ rights to purchase shares of Series A-3 Preferred (see Note 5 below), the computation of beneficial conversion feature and the cost of contracted clinical study activities and assumptions related to share-based compensation expense. Actual results may differ materially from those estimates.
 
 Segment Reporting
 
 The Company has determined that it currently operates in only one segment, which is the research and development of oncology therapeutics and supportive care for use in humans. All assets are located in the United States.
 
 Cash and Cash Equivalents and Short-Term Investments
 
 The Company considers all highly-liquid investments with a maturity of three months or less when acquired to be cash equivalents. Short-term investments consist of investments acquired with maturities exceeding three months and are classified as available-for-sale. All short-term investments are reported at fair value, based on quoted market price, with unrealized gains or losses included in other comprehensive income (loss).
  9
 
 Investments in Debt and Marketable Equity Securities
 
 The Company determines the appropriate classification of all debt and marketable equity securities as held-to-maturity, available-for-sale or trading at the time of purchase, and re-evaluates such classification as of each balance sheet date in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 320, Investments – Debt and Equity Securities.  Investments in equity securities that have readily determinable fair values are classified and accounted for as available for sale.  The Company assesses whether temporary or other-than-temporary unrealized losses on its marketable securities have occurred due to declines in fair value or other market conditions based on the extent and duration of the decline, as well as other factors.  Because the Company has determined that all of its debt and marketable equity securities previously held were available-for-sale, unrealized gains and losses, if any, were reported as a component of accumulated other comprehensive gain (loss) in stockholders’ equity.  Other-than-temporary unrealized losses relating to its investment in marketable equity securities, if any, were recorded in the statement of operations.
 
 Fair Value of Financial Instruments
 
 Financial instruments include cash and cash equivalents, available-for-sale securities, accounts payable, and warrant liabilities. Available-for-sale securities are carried at fair value. Cash and cash equivalents and accounts payable are carried at cost, which approximates fair value due to the relative short maturities of these instruments.  The fair value of the Company’s warrant liabilities is discussed in Notes 7.  The Company has issued certain financial instruments, including warrants to purchase common stock and rights to purchase shares of Series A-3 Preferred (see Note 5 below), which have the characteristics of both equity and liabilities.  These instruments were evaluated to be classified as liabilities at the time of issuance and are revalued at fair value from period to period with the resulting change in value included in other income (expense). The fair value of these financial instruments is discussed in Notes 5 and 7.
 
 Property and Equipment
 
 Property and equipment are stated at cost and depreciated over the estimated useful lives of the assets using the straight-line method. Tenant improvement costs are depreciated over the shorter of the life of the lease or their economic life, and equipment, computer software and furniture and fixtures are depreciated over three to five years.
 
 Debt Issuance Costs
 
 As discussed in Note 3 below, the debt issuance costs relate to fees paid in the form of cash and warrants to secure a firm commitment to borrow funds.  These fees are being amortized over the life of the related loan using the effective interest method.
 
 Financial Instruments with Characteristics of Both Equity and Liabilities
 
 The Company has issued certain financial instruments, including warrants to purchase common stock and rights to purchase shares of Series A-3 Preferred, which have the characteristics of both equity and liabilities. These instruments were evaluated to be classified as liabilities at the time of issuance and are revalued at fair value from period to period with the resulting change in value included in other income (expense).  The valuation of investors’ rights to purchase shares of Series A-3 Preferred is partially conditioned upon the likelihood of FDA approval. Management estimates regarding the likelihood of FDA approval could vary significantly in future periods, resulting in a material impact to the Company’s financial statements.  The fair value of these financial instruments is discussed in Notes 5 and 7.
 
 Bonus Accrual
 
 Bonuses are determined based on various criteria, including the achievement of corporate, departmental and individual goals. Bonus accruals are estimated based on various factors, including target bonus percentages per level of employee and probability of achieving the goals upon which bonuses are based. Management periodically reviews the progress made towards the goals under the bonus programs. As bonus accruals are dependent upon management's judgments of the likelihood of achieving the various goals, it is possible for bonus expense to vary significantly in future periods if changes occur in those management estimates.
 
 Clinical Study Activities and Other Expenses from Third-Party Contract Research Organizations
 
 A significant amount of the Company’s research and development activities related to clinical study activity are conducted by various third parties, including contract research organizations, which may also provide contractually defined administration and management services. Expense incurred for these contracted activities are based upon a variety of factors, including actual and estimated patient enrollment rates, clinical site initiation activities, labor hours and other activity-based factors. On a regular basis, the Company’s estimates of these costs are reconciled to actual invoices from the service providers and adjustments are made accordingly.
 
 Pursuant to a clinical trial research agreement with the German High-Grade Lymphoma Study Group, the Company agreed to provide support for a European Phase 3 trial of Marqibo in elderly patients with newly diagnosed aggressive NHL.  Under the terms of the agreement, the Company is obligated to provide supplies of Marqibo for the study as well as funding for a portion of the total financial costs of the study.  These costs are based upon the achievement of certain milestones related to patient enrollment and data provision. These payments are accrued for upon the achievement of patient enrollment and data provision milestones or when the achievement of such milestones becomes probable.  Milestone payments are expensed in the period the milestone is reached.  The Company has recorded less than $0.1 million in research and development expense in connection with the Phase 3 clinical trial for the three and six months ended June 30, 2012.
  10
 
 The Company also entered into an agreement with Mayo Clinic pursuant to which Mayo Clinic is sponsoring and conducting a Phase 2 clinical trial.  The Company’s obligation is limited to the provision of Menadione Topical Lotion for patients enrolled in the study.  The Company has recorded less than $0.1 million in research and development expense in connection with the Phase 2 clinical trial for the three and six months ended June 30, 2012.
 
 In November 2011, the Company entered into an agreement with Pharmaceutical Research Associates, Inc., a global clinical research organization providing services through all phases of clinical development, to initiate the U.S. portion of the Company’s global Phase 3 confirmatory study of Marqibo, named HALLMARQ, in the treatment of patients 60 years of age or older with newly diagnosed ALL. The Company also entered into an agreement with PPD, a leading global contract research organization providing drug discovery, development, and lifecycle management services, to administer central laboratory services for HALLMARQ. The Company has recorded $0.2 million and $0.5 million in research and development expense in connection with the HALLMARQ trial for the three and six months ended June 30, 2012, respectively.
 
 In March 2012, the Company entered into an investigator-initiated clinical trial research agreement with The University of Texas M.D. Anderson Cancer Center (“MDACC”), whereby the Company agreed to provide Marqibo to study the safety and efficacy of Marqibo in certain clinical trial research entitled “Hyper-CVAD with Liposomal Vincristine (Hyper-CMAD) in Acute Lymphoblastic Leukemia.”  The study is designed to evaluate whether intensive chemotherapy (Hyper-CVAD therapy) given in combination with Marqibo, in addition to rituximab for patients who are CD20 positive and/or imatinib or dasatinib for patients with the Philadelphia (Ph) chromosome, can effectively treat ALL or lymphoblastic lymphoma.  The Company expects enrollment for this study to begin in September 2012.
 
 Share-Based Compensation
 
 The Company accounts for share-based compensation in accordance with FASB ASC Topic 718, Compensation – Stock Compensation.  The Company has adopted a Black-Scholes-Merton model to estimate the fair value of stock options issued and the resultant expense is recognized in the operating expense for each reporting period.  Refer to Note 6 for further information regarding the required disclosures related to share-based compensation.
 
 Income Taxes
 
 Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between financial statement carrying amounts of existing assets and liabilities, and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
 
 Computation of Net Loss per Common Share
 
 Basic net loss per common share is calculated by dividing net loss by the weighted-average number of common shares outstanding for the period. Diluted net loss per common share is the same as basic net loss per common share, since potentially dilutive securities from stock options, stock warrants and restricted stock would have an anti-dilutive effect because the Company incurred a net loss during each period presented. Refer to Note 8.
 
 NOTE 3. FACILITY AGREEMENT
 
 On October 30, 2007, the Company entered into a Facility Agreement (the “Facility Agreement”) with certain affiliates of Deerfield Management (collectively, “Deerfield”), pursuant to which Deerfield agreed to loan to the Company up to $30 million.  The Facility Agreement requires that the Company comply with all regulatory agency requirements and the requirements of the Company’s license agreements, and requires Deerfield’s consent before disposing of certain assets related to certain product candidates the Company is currently developing.  In accordance with and upon execution of the Facility Agreement, the Company paid a loan commitment fee of $1.1 million to Deerfield Management.  The Company has drawn down an aggregate of $27.5 million since October 30, 2007, of which the entire amount was outstanding at June 30, 2012. There are no additional draws available under the Facility Agreement.  Pursuant to the Facility Agreement, the Company is required to make quarterly interest payments on outstanding principal, at a stated annual rate of 9.85%.  The Company’s obligations under the Facility Agreement are secured by all assets owned (or that will be owned in the future) by the Company, both tangible and intangible. The effective interest rate on the $27.5 million notes payable, including discount on debt, is approximately 14.6%.
  11
 
 The fair value of the loan payable as of June 30, 2012 was $16.6 million.  This fair value measurement is classified as Level 3 because such measurement is based upon unobservable inputs that reflect the Company’s best estimate of what hypothetical market participants would use to determine a transaction price for the fair value of the liability.
 
 First Amendment to the Facility Agreement
 
 Under the original terms of the Facility Agreement, all outstanding indebtedness was required to be repaid in full on October 30, 2013.  However, on June 7, 2010, the Company and Deerfield entered into an amendment to the Facility Agreement that, among other terms, extended the maturity date of the outstanding principal to June 30, 2015.  In accordance with FASB ASC Topic 470, Debt, a debt modification is considered extinguishment if the present values, calculated using the pre-modification effective interest rate, of pre- and post-modification cash flows exceeds 10%. The Company deemed this modification unsubstantial as the change in the present value of cash flows related to the payment of interest and principal was less than 10%.
 
 Second Amendment to the Facility Agreement
 
 In connection with the entry into the 2012 Investment Agreement on January 9, 2012, the Company and Deerfield entered into a Second Amendment to Facility Agreement (the “Second Amendment to Facility Agreement”).  Among other items, pursuant to the Second Amendment to Facility Agreement, the Company will satisfy its obligation under the Facility Agreement to make quarterly interest payments for the quarters ended December 31, 2011, March 31, 2012, June 30, 2012 and September 30, 2012, by issuing a whole number of shares of Series A-2 Preferred determined by dividing the amount of the interest payments payable to each Deerfield affiliate for each quarterly period by $100.  The Company evaluated this debt modification pursuant to FASB ASC Topic 470, and deemed this modification unsubstantial. Since the pre- and post-modification debt can be prepaid at the Company’s option at any time without penalty, the impact was limited to the difference between the fair values of the Series A-2 Preferred issued to settle accrued interest and future interest payments, which is less than 10% of the carrying value of debt as of January 9, 2012.
 
 On January 9, 2012, in accordance with the terms of the Second Amendment to the Facility Agreement, the Company satisfied its interest payment obligation in the aggregate amount of $0.7 million for the quarter ended December 31, 2011, by issuing an aggregate of 6,826 shares of Series A-2 Preferred to Deerfield and paying cash in lieu of fractional shares in the aggregate amount of $153.42.  On March 30, 2012, the Company satisfied its interest payment obligation in the aggregate amount of $0.7 million for the quarter ended March 31, 2012, by issuing an aggregate of 6,752 shares of Series A-2 Preferred to Deerfield and paying cash in lieu of fractional shares in the aggregate amount of $132.19.  On June 29, 2012, the Company satisfied its interest payment obligation in the aggregate amount of $0.7 million for the quarter ended June 30, 2012, by issuing an aggregate of 6,752 shares of Series A-2 Preferred to Deerfield and paying cash in lieu of fractional shares in the aggregate amount of $132.19.
 
 Discount on Debt. The Company issued certain warrants to Deerfield as part of the Facility Agreement.  The fair value of these warrants when issued was $6.0 million.  The total value of the warrants was recorded as a discount on the note payable with this discount amortized over the life of the loan agreement, through June 2015.  As of June 30, 2012, the remaining debt discount is approximately $3.1 million.
 
 Summary of Notes Payable. From November 1, 2007 through May 20, 2009, the Company drew down $27.5 million of the $30.0 million in total loan proceeds available under the Facility Agreement. The Company is not required to pay back any portion of the principal amount until June 30, 2015.  The table below is a summary of the change in carrying value of the notes payable, including the discount on debt for the six months ended June 30, 2012 and 2011 and twelve months ended December 31, 2011:
 
 ($ in thousands)

Carrying

Value at

January 1,


Gross

Borrowings

Incurred


Debt

Discount

Incurred


Amortized

Discount


Carrying

Value at

June 30,2012Notes payable

$
27,500


$
—


$
—


$
—


$
27,500Discount on debt


(3,467)



—



—



394



(3,073)Carrying value

$
24,033














$
24,427
 
 
 ($ in thousands)

Carrying

Value at

January 1,


Gross

Borrowings

Incurred


Debt

Discount

Incurred


Amortized

Discount


Carrying

Value at

June 30,2011Notes payable

$
27,500


$
—


$
—


$
—


$
27,500Discount on debt


(4,160)



—



—



345



(3,815)Carrying value

$
23,340














$
23,685
  12
  ($ in thousands)

Carrying

Value at

January 1,


Gross

Borrowings

Incurred


Debt

Discount

Incurred


Amortized

Discount


Carrying

Value at

December 31,2011Notes payable

$
27,500


$
—


$
—


$
—


$
27,500Discount on debt


(4,160)



—



—



693



(3,467)Carrying value

$
23,340














$
24,033
  The table below is a summary of the debt issuance costs and changes during the six months ended June 30, 2012 and 2011 and twelve months ended December 31, 2011:
 
 (In thousands)

Deferred Transaction Costs on

January 1,


Period

Amortized

Deferred

Transaction

Costs


Deferred Transaction Costs on June 30,2012Debt issuance costs

$
751


$
(129)


$
622
  (In thousands)

Deferred Transaction Costs on

January 1,


Period

Amortized

Deferred

Transaction

Costs


Deferred Transaction Costs on

June 302011Debt issuance costs

$
905


$
(78)


$
827
  (In thousands)

Deferred Transaction Costs on

January 1,


Period

Amortized

Deferred

Transaction

Costs


Deferred Transaction Costs on December 31,2011Debt issuance costs

$
905


$
(154)


$
751
  NOTE 4. AVAILABLE-FOR-SALE SECURITIES
 
 On June 30, 2012, the Company had investments with an estimated fair value of $2.0 million, all of which were classified as cash equivalents. The Company’s investment in money market funds primarily consists of bank instruments, commercial paper and notes, variable rate demand instruments, and repurchase agreements with effective maturities of three months or less.  The following table summarizes the investments classified as available-for-sale securities as of and for the six months ended June 30, 2012.  The Company did not have any available-for-sale instruments at December 31, 2011.
  June 30, 2012(In thousands)

Input Level

Amortized or Historical Cost


Gross

Realized

Gains/(Losses)


Gross

Unrealized

Gains/(Losses)


Estimated Fair

ValueMoney market funds

Level 2


2,001



—



—



2,001Total available-for-sale securities




2,001



—



—



2,001Less: amounts classified as cash equivalents




(2,001
)


—



—



(2,001
)Amounts classified as available-for-sale securities



$
—


$
—


$
—


$
—
 
 13
 
 NOTE 5. REDEEMABLE CONVERTIBLE PREFERRED STOCK
 
 Private Placement of Preferred Stock
 
 June 2010 Investment Agreement
 
 On June 7, 2010, the Company entered into an Investment Agreement (the “2010 Investment Agreement”), with Warburg Pincus Private Equity X, L.P. and Warburg Pincus X Partners, L.P. (collectively, “Warburg Pincus”) and Deerfield Private Design Fund, L.P., Deerfield Private Design International, L.P., Deerfield Special Situations Fund, L.P., and Deerfield Special Situations Fund International Limited (collectively, “Deerfield,” and together with Warburg Pincus, the “Purchasers”).  Pursuant to the terms of the agreement, on June 7, 2010, the Company issued and sold to the Purchasers an aggregate of 400,000 shares of Series A-1 Preferred at a per share purchase price of $100 for an aggregate purchase price of $40 million.
  The 2010 Investment Agreement required that the Company seek approval of its stockholders to amend the Company’s certificate of incorporation to:  (i) increase the authorized number of shares of Common Stock, (ii) effect a reverse split of its Common Stock at a ratio to be agreed upon with the Purchasers, and (iii) provide that the number of authorized shares of Common Stock may be increased or decreased by the affirmative vote of the holders of a majority of the issued and outstanding Common Stock and preferred stock, voting together as one class, notwithstanding the provisions of Section 242(b)(2) of the Delaware General Corporation Law (collectively, the “2010 Stockholder Approval”).  The 2010 Stockholder Approval was obtained at a special meeting of the Company’s stockholders on September 2, 2010. As a result of the Company obtaining the 2010 Stockholder Approval and filing the related certificate of amendment to its certificate of incorporation with the Secretary of State of Delaware on September 7, 2010, the Company and the Purchasers conducted a second closing under the Investment Agreement on September 10, 2010 (the “Second Closing”), resulting in the issuance of an additional 12,562 shares of Series A-1 Preferred in satisfaction of the accretion that had accrued on the original 400,000 shares since June 7, 2010 based upon an initial accretion rate of 12% per annum.
 
 The 2010 Investment Agreement also provided that the Purchasers had the right, but not the obligation, to make additional purchases of shares of the Company’s preferred stock; however, such right was eliminated pursuant to an amendment to the 2010 Investment Agreement that the Company entered into with the Purchasers in connection with its entry into a second Investment Agreement dated January 9, 2012 (the “2012 Investment Agreement”), the terms of which are discussed below under the caption “January 2012 Investment Agreement.”
 
 January 2012 Investment Agreement
  On January 9, 2012, the Company and the Purchasers entered into the 2012 Investment Agreement.   Pursuant to the terms of the agreement, on January 9, 2012, the Company issued and sold to the Purchasers an aggregate of 110,000 shares of Series A-2 Preferred at a per share purchase price of $100 for an aggregate purchase price of $11 million.  The 2012 Investment Agreement also provides that, until the first anniversary of the Company’s receipt of marketing approval from the FDA for any of its product candidates, Warburg Pincus may elect to purchase, and Deerfield may elect to participate in the purchase of, up to 600,000 shares of Series A-3 Preferred at a purchase price of $100 per share for an aggregate purchase price of $60 million, in one or more tranches of at least 50,000 shares of Series A-3 Preferred per tranche (such minimum number of shares per tranche, the “Minimum Series A-3 Additional Investment”).  In the event of a change of control, as such term is defined in the 2012 Investment Agreement, that occurs prior to the issuance of the maximum number of shares of Series A-3 Preferred that are issuable under the agreement, the 2012 Investment Agreement provides that the Purchasers may elect to receive an amount equal to the excess of the fair market value of the unissued shares of Series A-3 Preferred over the aggregate purchase price of such shares, as if the Purchasers had purchased such shares of Series A-3 Preferred immediately prior to such change of control.
  Because the number of authorized shares of common stock was insufficient to allow for complete conversion of all Series A-2 Preferred and Series A-3 Preferred, the 2012 Investment Agreement required the Company to seek an amendment to the Company’s Amended and Restated Certificate of Incorporation to increase the number of authorized shares of its common stock from 350 million to 600 million (the “2012 Stockholder Approval”).  To be approved, the proposal required the affirmative vote of the holders of a majority of (i) the outstanding shares of the Company’s capital stock voting together as a single class, and (ii) the outstanding shares of the Company’s Series A-1 Convertible Preferred Stock voting as a separate class. The 2012 Stockholder Approval was obtained at a special meeting of the Company’s stockholders on April 5, 2012.  Following receipt of the 2012 Stockholder Approval, the Company filed the related certificate of amendment to its certificate of incorporation (the “Charter Amendment”) with the Secretary of State of Delaware on April 5, 2012.
  14
  By effecting the Charter Amendment on or before July 9, 2012, the terms of the Series A-2 Preferred and any shares of Series A-3 Preferred that may be issued in the future pursuant to the 2012 Investment Agreement will remain more Company-favorable than the adjusted terms that would have taken effect after July 9, 2012 if the Charter Amendment had not yet been effected.  In addition, while the Company did not previously have a sufficient number of authorized shares of Common Stock available for issuance upon conversion of the entire 600,000 shares of Series A-3 Preferred that are issuable under the 2012 Investment Agreement, the increase in the number of authorized shares pursuant to the Charter Amendment will allow the Company to fully satisfy the conversion rights of the Series A-3 Preferred.
  Amendment to 2012 Investment Agreement.  On July 3, 2012, the Company and the Purchasers entered into Amendment No. 1 to the Investment Agreement, pursuant to which the Minimum Series A-3 Additional Investment was reduced from 50,000 shares of Series A-3 Preferred to 30,000 shares of Series A-3 Preferred.  Additionally, on July 3, 2012, pursuant to the terms of the Investment Agreement, as amended, the Company issued and sold to the purchasers an aggregate of 30,000 shares of Series A-3 Preferred at a price per share of $100, for aggregate proceeds of $3.0 million.
  Terms of the Preferred Shares
  Series A-1 Preferred
  As a result of the Company obtaining the 2010 Stockholder Approval on September 2, 2010, the Company and the Purchasers conducted a second closing under the Investment Agreement on September 10, 2010.  As a result of the Second Closing, the terms of the Series A-1 Preferred were adjusted to have the following material terms:
 
 ·
the stated value of the Series A-1 Preferred Stock, initially $100 per share, accretes at a rate of 9% per annum for a five-year term, compounded quarterly, and following such five-year term, the holders are thereafter entitled to cash dividends at 9% of the accreted stated value per annum, payable quarterly;
 
 each share of Series A-1 Preferred Stock is convertible into shares of the Company’s Common Stock at a conversion price of $0.736 per share;
 
 ·
upon a liquidation of the Company, holders of the Series A-1 Preferred would be entitled to receive a liquidation preference per share equal to the greater of (i) 100% of the then-accreted value of the Series A-1 Preferred and (ii) the amount which the holder would have received if the Series A-1 Preferred Stock had been converted into common stock immediately prior to the liquidation.  Similar rights would apply upon any “change of control” of the Company (although the liquidation preference would be calculated assuming the liquidation occurred on the fifth anniversary of the date of issuance).
 
 During the period prior to the Second Closing on September 2, 2010, the Series A-1 Preferred was subject to the following initial terms:
 
 ·
the stated value of the Series A-1 Preferred, initially $100 per share, accreted at a rate of 12% per annum;
 
 ·
each share of Series A-1 Preferred was convertible into shares of the Company’s Common Stock at a conversion price of $0.5152 per share, subject to the limitation on the number of shares of Common Stock then available for issuance;
 
 ·
the Series A-1 Preferred was redeemable at the holders’ election any time after December 7, 2010, at a redemption price equal to the greater of (i) 250% of the then-accreted value of the Series A-1 Preferred Stock, plus any unpaid dividends accrued thereon and (ii) market value of common stock shares the holder would receive if the Series A-1 Preferred Stock are converted into common stock immediately prior to the redemption; and
 
 ·
upon a liquidation of the Company, holders of the Series A-1 Preferred would have been entitled to receive a liquidation preference per share equal to the greater of (i) 250% of the then-accreted value of the Series A-1 Preferred and (ii) the amount which the holder would have received if the Series A-1 Preferred Stock had been converted into common stock immediately prior to the liquidation.  Similar rights would have applied upon any “change of control” of the Company (although the liquidation preference would have been calculated assuming the liquidation occurred on the seventh anniversary of the date of issuance).
 
 Series A-2 Preferred
 
 As a result of the Company obtaining the 2012 Stockholder Approval on April 5, 2012, the Series A-2 Preferred shall remain subject to the following material terms, among others:
 
 ·
The conversion price of the Series A-2 Preferred shall initially be $0.30 per share (subject to adjustment in certain circumstances);
  15
  ·
The stated value of each share of Series A-2 Preferred will accrete at a rate of 9% per annum, compounded quarterly, for a five-year term; thereafter, cash dividends will be payable at a rate of 9% of the accreted stated value per annum, payable quarterly;
 
 ·
Upon the occurrence and during the continuance of certain material breaches by the Company of its obligations under the 2012 Investment Agreement, the amended and restated certificate of designation filed with the Secretary of State of Delaware on January 9, 2012 (the “Series A-2 Certificate”), and related transaction agreements (referred to in the Series A-2 Certificate as “special triggering events”), the accretion rate and the dividend rate on the Series A-2 Preferred will increase by 3% per annum, compounded quarterly; and
 
 ·
Upon any liquidation of the Company, holders of the Series A-2 Preferred are entitled to receive a liquidation preference per share equal to the greater of (i) 100% of the then-accreted value of the Series A-2 Preferred and (ii) the amount that the holder would have received if the Series A-2 Preferred had been converted into Common Stock at the conversion price immediately prior to the liquidation.  Similar rights would apply upon any “change of control” of the Company (although the liquidation preference would be calculated assuming the liquidation occurred on the fifth anniversary of the date of issuance).
 
 The Purchasers are not permitted to transfer or sell the Series A-2 Preferred until the earlier of (a) June 7, 2012, or (b) the date following the first period of 20 consecutive trading days during which the closing price of the Company’s common stock exceeds 200% of the Series A-1 Preferred conversion price. Transfer and sale restrictions could also lapse upon occurrence of certain other events.
 
 Series A-3 Preferred
 
 There were no shares of Series A-3 Preferred outstanding as of June 30, 2012.  Pursuant to the terms of the 2012 Investment Agreement, the Purchasers have the right, but not an obligation, to purchase up to 600,000 shares of Series A-3 Preferred, at a purchase price of $100 per share, at any time until the first anniversary of the Company’s receipt of marketing approval from the FDA for any of its product candidates.  As noted above, on July 3, 2012, the Company and the Purchasers entered into Amendment No. 1 to the Investment Agreement, pursuant to which the Minimum Series A-3 Additional Investment was reduced from 50,000 shares of Series A-3 Preferred to 30,000 shares of Series A-3 Preferred. Additionally, on July 3, 2012, pursuant to the terms of the Investment Agreement, as amended, the Company issued and sold to the purchasers an aggregate of 30,000 shares of Series A-3 Preferred at a price per share of $100, for aggregate proceeds of $3.0 million.  The terms of the Series A-3 Preferred are substantially identical to the terms of the Series A-1 Preferred and the Series A-2 Preferred except that the initial conversion price applicable to the Series A-3 Preferred is $0.35 per share (compared to $0.736 for the Series A-1 Preferred and $0.30 for the Series A-2 Preferred).  The Series A-3 Preferred, with respect to both dividend rights and rights upon a liquidation or change of control, ranks senior to all junior stock, including the Company’s common stock, and on parity with all parity stock, including the Series A-1 Preferred and Series A-2 Preferred.
 
 Accounting Treatment
 
 Series A-1 Preferred Shares
 
 Due to certain contingent redemption features of this instrument, the Company classified the 400,000 shares of Series A-1 Preferred sold on June 7, 2010 in the mezzanine section (between equity and liabilities) on the accompanying balance sheet.  The Company allocated the proceeds from the June 2010 financing between Series A-1 Preferred and the Purchasers’ rights to purchase additional shares of Series A-1 and A-2 Preferred in connection with the Additional Investments and Subsequent Investments (see below).  The Company recorded the residual value of the Series A-1 Preferred as $29.9 million on June 7, 2010, net of transaction costs of $1.4 million and $8.7 million allocated to the rights to purchase Series A-1 and Series A-2 Preferred in the future.  When the 400,000 shares of Series A-1 Preferred were issued on June 7, 2010, approximately 121,000 shares were convertible due to the limited remaining authorized shares of common stock available for conversion.  At the Second Closing, the remaining 279,000 shares of Series A-1 Preferred became convertible when the Reverse Stock Split and the additional shares of common stock were authorized.
 
 At the Second Closing on September 10, 2010, the Company issued an additional 12,562 shares of Series A-1 Preferred to the Purchasers in satisfaction of the accretion to the stated value of the Series A-1 Preferred from June 7, 2010, when the shares were issued through the Second Closing.  The carrying value of the Series A-1 Preferred was increased by the estimated fair value of these shares on September 10, 2010, which was $0.7 million.  The Company reduced shareholder’s equity by the same amount.  All of these additional shares of Series A-1 Preferred were convertible upon issuance.  As of June 30, 2012, the outstanding Series A-1 Preferred was convertible into approximately 65.8 million shares of common stock, including total value accreted since the issuance date of the Series A-1 Preferred.
 
 Series A-2 Preferred Issued on January 9, 2012
 
 On January 9, 2012, the Company issued and sold to the Purchasers an aggregate of 110,000 shares of Series A-2 Preferred at a per share purchase price of $100 for an aggregate purchase price of $11.0 million. Pursuant to the Second Amendment to the Facility Agreement, on the same date, the Company also issued 6,826 shares of Series A-2 Preferred to Deerfield to settle interest accrued as of and for the quarter ended December 31, 2011.  Due to certain contingent redemption features of this instrument, the Company classified the 116,826 shares of Series A-2 Preferred sold on January 9, 2012 in the mezzanine section (between equity and liabilities) on the accompanying balance sheet. Total proceeds received on January 9, 2012 pursuant to the 2012 Investment Agreement and Second Amendment to the Facility Agreement (collectively, “January 2012 financing”) are equal to the sum of (a) $11.0 million of cash received, (b) fair value of eliminated rights to purchase Series A-1 and A-2 Preferred of $2.8 million, and (c) settled interest accrued under the Facility Agreement for the quarter ended December 31, 2011 of $0.7 million. The Company allocated the proceeds from the January 2012 financing between Series A-2 Preferred and the Purchasers’ rights to purchase up to 600,000 shares of Series A-3 Preferred.  The Company recorded the residual value of the Series A-2 Preferred as $3.3 million on January 9, 2012, net of transaction costs of $0.8 million and $10.3 million allocated to the rights to purchase Series A-3 Preferred.
  16
 
 Series A-2 Preferred Issued to Settle Interest Payments to Deerfield
 
 In connection with the entry into the 2012 Investment Agreement on January 9, 2012, the Company entered into a Second Amendment to the  Facility Agreement pursuant to which, among other things, the Company agreed to satisfy its obligation under the Facility Agreement to make quarterly interest payments for the quarters ended December 31, 2011, March 31, 2012, June 30, 2012 and September 30, 2012, by issuing a whole number of shares of Series A-2 Preferred determined by dividing the amount of the interest payments payable to each Deerfield entity for each quarterly period by $100.  Accordingly, as described above, the Company issued an aggregate of 6,826 shares of Series A-2 Preferred to Deerfield in satisfaction of interest accrued under the Facility Agreement for the quarter ended December 31, 2011. As noted above, the fair value of the interest settled was included in the total proceeds allocated between the Series A-2 Preferred and the Purchasers’ rights to purchase up to 600,000 shares of Series A-3 Preferred. On March 30, 2012, the Company issued an aggregate of 6,752 shares of Series A-2 Preferred in satisfaction of interest accrued under the Facility Agreement for the quarter ended March 31, 2012.  The Company recorded the book value of interest settled, net of cash payment in lieu of fractional shares, to the Series A-2 Preferred, which was $0.7 million.  On June 29, 2012, the Company issued an aggregate of 6,752 shares of Series A-2 Preferred in satisfaction of interest accrued under the Facility Agreement for the quarter ended June 30, 2012.  The Company recorded the book value of interest settled, net of cash payment in lieu of fractional shares, to the Series A-2 Preferred, which was $0.7 million.
 
 Rights to Purchase Series A-1 and A-2 Preferred Stock
 
 The Company determined that the Purchasers’ rights to purchase future shares of Series A-1 and A-2 Preferred Stock in connection with the Additional and Subsequent Investments under the 2010 Investment Agreement were freestanding instruments that are required to be classified as liabilities and carried at fair value. The treatment of these instruments as a liability was due to certain redemption features of the underlying Preferred Stock. As discussed above, these rights were eliminated on January 9, 2012 pursuant to an amendment to the 2010 Investment Agreement that the Company entered into with the Purchasers in connection with the 2012 Investment Agreement.
 
 Prior to its amendment on January 9, 2012, the 2010 Investment Agreement provided that the Purchasers had the right, but not the obligation, to make additional investments in the Company as follows:
 
 ·
at any time prior to the date the Company receives marketing approval from the FDA for the first of its product candidates (“Marketing Approval Date”), the Purchasers were entitled to purchase up to an additional 200,000 shares of Series A-1 Preferred Stock at a purchase price of $100 per share for an aggregate purchase price of $20 million (“Additional Investment”); and
 
 ·
at any time beginning 15 days and within 120 days following the Marketing Approval Date, the Purchasers were entitled to purchase up to an aggregate of 400,000 shares of Series A-2 Convertible Preferred Stock at the stated value of $100 per share for an aggregate purchase price of $40 million (“Subsequent Investment”).
 
 The value of the option to make Additional Investments and Subsequent Investments (see above) is estimated directly from the Black-Scholes-Merton model output.  Changes in the market price of the common stock would result in a change in the value of the option and impact the statement of operations. For example, a 10% increase in the market price of the common stock would cause the fair value of the warrants and the warrant liability to increase by approximately 10%.
 
 The following table summarizes the fair value of the Purchasers’ rights to purchase additional shares of Series A-1 and Series A-2 Preferred Stock as of January 9, 2012, June 30, 2011 and December 31, 2011and the changes in the valuation in the periods then ended.
 
 (In thousands)

Fair value at

January 1


Revaluation of rights

increase/(decrease)


Elimination of rights(1)


Fair value at

January 92012Rights to purchase preferred stock

$
1,772


$
1,007


$
(2,779)


$
—
  17
  (In thousands)

Fair value at

January 1


Revaluation of rights

increase/(decrease)


Elimination of rights


Fair value at

June 302011Rights to purchase preferred stock

$
5,131


$
2,399


$
—


$
7,530
  (In thousands)

Fair value at

January 1


Revaluation of rights

increase/(decrease)


Elimination of rights


Fair value at

December 312011Rights to purchase preferred stock

$
5,131


$
(3,359)


$
—


$
1,772
  
 (1)  The amendment to the 2010 Investment Agreement, executed concurrently with the 2012 Investment Agreement, terminated Warburg Pincus and Deerfield’s right to purchase up to 200,000 shares of Series A-1 and up to 400,000 shares of Series A-2 Preferred Stock at $100 per share. The right was accounted for as a freestanding financial instrument liability and was re-measured to fair value at the end of each reporting period with the changes in fair value recognized in the Company’s statement of operations.  This right was replaced with the Purchasers’ rights to purchase Series A-3 shares as noted below.
 
 The following table summarizes the assumptions used in applying the Black-Scholes-Merton option pricing model to determine the fair value of the liability related to the rights to purchase additional shares of Series A-1 Preferred and Series A-2 Preferred on January 9, 2012:
  January 9, 2012Rights to purchase future shares of Series A-1 and A-2 PreferredRisk-free interest rate


0.04
%Expected life (in years)


0.42Volatility


1.20Dividend Yield


8.8
%Probability of FDA Approval


33
%
 
 Rights to Purchase Series A-3 Preferred Stock
 
 The 2012 Investment Agreement provides that, from the date of such agreement until the first anniversary of the Company’s receipt of marketing approval from the Food and Drug Administration for any of its product candidates, the Purchasers have the right, but not the obligation, to purchase up to an additional 600,000 shares of Series A-3 Preferred at a purchase price of $100 per share.
 
 In accordance with FASB ASC Topic 480, Distinguishing Liabilities from Equity, the Company determined that the Purchasers’ rights to purchase future shares of Series A-3 Preferred are freestanding instruments that are required to be classified as liabilities and carried at fair value. The treatment of these instruments as a liability was due to certain redemption features of the underlying Preferred Stock.  The value of the option to purchase additional shares of Series A-3 Preferred is estimated directly from the Black-Scholes-Merton model output. The value of the option is partially conditioned upon the likelihood of successful FDA approval. As such, a weighting reflecting management’s estimates of the probability of successful FDA approval is applied to the preliminary Black-Scholes-Merton option price at each valuation date.  Such estimates of probability are subject to change based on various factors regarding the likelihood of FDA approval.  Continued regulatory progress since the previous valuation as of March 31, 2012 resulted in a 10% increase to management’s probability estimate.
  The Company recognized $55.5 million and $79.2 million in total losses related to the revaluation of the rights to purchase shares of Series A-3 Preferred during the three and six months ended June 30, 2012, respectively.  Changes in the market price of the common stock would result in a change in the value of the option and impact the statement of operations. For example, a 10% increase in the market price of the common stock would cause the fair value of the warrants and the warrant liability to increase by approximately 10%.
  18
 
 The following table summarizes the fair value of the Purchasers’ rights to purchase shares of Series A-3 Preferred as of June 30, 2012 and the changes in the valuation in the period then ended.
 
 2012 (In thousands)

Fair value at

January 9(1)


Revaluation of rights

increase/(decrease)


Fair value at

June 30Rights to purchase preferred stock

$
10,307


$
79,156


$
89,463
  (1)  The initial valuation date of the option to purchase shares of Series A-3 Preferred is the date of the execution of the 2012 Investment Agreement with the Purchasers, or January 9, 2012.
 
 The following table summarizes the assumptions used in applying the Black-Scholes-Merton option pricing model to determine the fair value of the liability related to the rights to purchase additional shares of Series A-3 Preferred for the three months ended March 31, 2012 and June 30, 2012:
  Three Months EndedMarch 31


June 30Rights to purchase shares of Series A-3 PreferredRisk-free interest rate

0.04
-
0.06
%


0.17
%Expected life (in years)

0.20
-
0.42



0.58Volatility


1.20




1.20Dividend Yield

8.8
-
8.9
%


8.8
%Probability of FDA Approval

33
-
65
%


75
%
 
 Beneficial Conversion Feature
 
 Because the conversion price of the shares of Series A-1 and A-2 Preferred was less than the fair value of common stock at the respective dates when preferred stock was sold and issued, the in-the-money conversion feature (Beneficial Conversion Feature, or BCF) requires separate recognition and is measured at the intrinsic value (i.e., the amount of the increase in value that holders of Preferred Stock would realize upon conversion based on the value of the conversion shares, including all future potential conversion shares adjusted for accretion to the Preferred Stock, on the commitment date).  The BCF is limited to the proceeds allocated to Preferred Stock and is initially recorded as a discount to preferred shares and included as additional paid-in capital.  Because there is not a stated redemption date of the shares of the convertible Series A-1 and A-2 Preferred, the BCF is immediately accreted to the preferred shares as a deemed preferred stock dividend.   The Company has recognized aggregate BCF of $29.9 million related to the shares of Series A-1 Preferred issued on June 7, 2010 and this amount is included in the total value of Series A Preferred of $35.3 million as of June 30, 2012. The Company has also recognized aggregate BCF of $4.2 million related to the shares of Series A-2 Preferred issued on January 9, 2012 and $0.4 million related to the shares of Series A-2 Preferred issued on March 30, 2012 and June 29, 2012, all of which were accreted to the preferred shares as a deemed preferred stock dividend.
 
 Accretion on Preferred Stock
 
 For the period from June 7, 2010 to September 10, 2010 (the date of the Second Closing under 2010 Investment Agreement), the 400,000 shares of Series A-1 Preferred accreted value to the stated rate of $100 at an annual rate of 12%, compounded quarterly.  Upon the Second Closing, the 412,652 shares of Series A-1 Preferred accreted value to the stated rate of $100 at an annual rate of 9%, compounded quarterly.  The total accretable value of the Series A-1 Preferred from the transaction date through June 30, 2012 was $8.5 million, including $1.1 million and $2.1 million for the three and six months ended June 30, 2012, respectively.  The total accretable value of the Series A-1 Preferred for the three and six months ended June 30, 2011 was $1.0 million and $1.9 million, respectively.  The shares of Series A-2 Preferred accreted value to the stated rate of $100 at an annual rate of 9%, compounded quarterly. The total accretable value of the Series A-2 Preferred for the three and six months ended June 30, 2012 was $0.3 million and $0.5 million, respectively.
 
 The Company will not recognize the value of the accretion to the preferred stock until such time that it becomes probable that the shares of preferred stock will become redeemable.  The accretable value is included, for loss per share purposes only, as a dividend to holders of preferred stock and the loss attributable to holders of common stock is increased by the value of the accretion for the period.  In total, accretion on preferred stock accounts for $1.3 million and $2.6 million in deemed dividends to holders of preferred stock for the three and six months ended June 30, 2012, compared to $1.0 million and $1.9 million in deemed dividends to holder of preferred stock through the three and six months ended June 30, 2011, respectively.
 
 NOTE 6. STOCKHOLDERS' DEFICIT
  As a result of the one-for-four reverse stock split the Company implemented at the close of business on September 10, 2010 (the “Reverse Stock Split”), the number of resulting outstanding shares of common stock and share-based compensation awards was determined by dividing the number of outstanding shares and share-based compensation awards by four.  The resulting per share exercise price of outstanding stock options and warrants was determined by multiplying the exercise price prior to the Reverse Stock Split by four.  All historical share and per share amounts have been adjusted to reflect the Reverse Stock Split.
 
 Stock Incentive Plans. As of June 30, 2012, the Company had three stockholder approved stock incentive plans under which it grants or has granted options to purchase shares of its common stock and restricted stock awards to employees: the 2010 Equity Incentive Plan (the “2010 Plan”), the 2004 Stock Incentive Plan (the “2004 Plan”) and the 2003 Stock Option Plan (the “2003 Plan”).   The Board of Directors, or the Chief Executive Officer when designated by the Board, is responsible for administration of the employee stock incentive plans and determines the term, exercise price and vesting terms of each option. In general, stock options issued under all the current plans vest over a four-year period, subject to continued employment, and expire ten years from the date of grant. Additionally, the Company maintains the 2006 Employee Stock Purchase Plan (the “2006 Plan”), pursuant to which eligible employees may purchase shares of the Company’s newly-issued common stock.
  19
 
 On February 16, 2010, the Company’s Board of Directors adopted the 2010 Plan.  Under the 2010 Plan, the Board or a committee appointed by the Board may award nonqualified stock options, incentive stock options, restricted stock, restricted stock units, performance awards, and stock appreciation rights to participants.  Officers, directors, employees or non-employee consultants or advisors (including the Company’s subsidiaries and affiliates) are eligible to receive awards under the 2010 Plan. As of June 30, 2012, the total number of shares of common stock available for grants of awards to participants under the 2010 Plan was 1.3 million shares.  On February 17, 2012, the Company’s Board of Directors adopted an amendment to the 2010 Plan increasing the number of shares of the Company’s common stock issuable thereunder from 8.5 million to 10 million.  The Company intends for all future stock option awards to be issued under the 2010 Plan, with no additional awards being issued under the 2003 Plan or 2004 Plan.
 
 Stock Options. The following table summarizes information about stock options outstanding at June 30, 2012 and changes in outstanding options in the six months then ended, all of which are at fixed prices:
 
 Number Of

Shares Subject To

Options Outstanding

(in 000’s)


Weighted Average

Exercise Price

Per Share


Weighted Average

Remaining

Contractual Term

(In Years)

Aggregate

Intrinsic Value

($ in 000’s)Outstanding January 1, 2012


6,031


$
1.20Options granted


3,584



0.92Options exercised


(84)



0.57Options cancelled


(365)



3.06Outstanding June 30, 2012


9,166


$
1.01



8.6


$
3,981Exercisable at June 30, 2012


3,330


$
1.51



7.7


$
1,470
 
 The weighted-average grant date fair value of options granted during the three months ended June 30, 2012 was $0.73.  During the three month periods ended June 30, 2012 and 2011, the Company recorded share-based compensation cost from all equity awards to employees of $0.3 million and $0.2 million, respectively.  During the six month periods ended June 30, 2012 and 2011, the Company recorded share-based compensation cost from all equity awards to employees of $0.7 million and $0.5 million, respectively.
 
 Employee Stock Purchase Plan. The 2006 Plan allows employees to contribute a percentage of their gross salary toward the semi-annual purchase of shares of newly-issued common stock. The price of each share will not be less than the lower of 85% of the fair market value of common stock on the last trading day prior to the commencement of the offering period or 85% of the fair market value of common stock on the last trading day of the purchase period. A total of 187,500 shares of common stock were initially reserved for issuance under the 2006 Plan.  On July 15, 2011, the Company’s Board of Directors approved an additional 150,000 shares of common stock available for issuance under the 2006 Plan. On July 12, 2012, the Board of Directors approved an amendment to the 2006 Plan increasing the number of shares of the Company’s common stock available for purchase thereunder by 400,000.  The Company issued 10,751 shares of common stock on January 10, 2012 and 36,703 shares on July 5, 2012 pursuant to the 2006 Plan. As of the date of this Report, 510,240 shares of common stock are remaining under the 2006 Plan.
 
 Assumptions. The following table summarizes the assumptions used in applying the Black-Scholes-Merton option pricing model to determine the fair value of new awards granted during the three and six months ended June 30, 2012 and 2011:
 
 Three Months Ended June 30,


Six Months Ended June 30,2012


2011


2012


2011Employee stock optionsRisk-free interest rate

0.75
–
1.38
%


2.24

%

0.75
–
1.43
%


2.24

%Expected life (in years)

6.02
–
6.50



5.50



5.50
–
6.50



5.50Volatility

1.00
–
1.02



107.20



1.00
–
1.16



107.20Dividend Yield


0

%


0

%


0

%


0

%Employee Stock Purchase PlanRisk-free interest rate

0.06
–
0.61
%

0.19
–
0.61
%

0.06
–
0.61
%

0.19
–
0.61
%Expected life (in years)

0.5
–
2.0


0.5
–
2.0


0.5
–
2.0


0.5
–
2.0Volatility

1.07
–
1.89


0.98
–
1.43


1.07
–
1.89


0.98
–
1.43Dividend Yield


0

%


0

%


0

%



0
%
  20
  The Company estimates the fair value of each option award on the date of grant using the Black-Scholes-Merton option-pricing model and uses the assumptions as allowed by FASB ASC Topic 718, Compensation – Stock Compensation.  Through October 2010, as allowed by FASB ASC 718-10-55, companies with a short period of publicly traded stock history, the Company’s estimate of expected volatility was based on the average expected volatilities of a sampling of other peer companies with similar attributes to it, including industry, stage of life cycle, size and financial leverage as well as the Company’s own historical data.  For options issued after October 2010, the Company used its own historical data to estimate expected volatility.  As the Company has so far only awarded “plain vanilla” options as described by the SEC’s Staff Accounting Bulletin Topic No. 14, Share-Based Payment, it used the “simplified method” for determining the expected life of the options granted. The Company will continue to use the “simplified method” under certain circumstances, which it will continue to use as it does not have sufficient historical data to estimate the expected term of share-based awards.  The risk-free rate for periods within the contractual life of the option is based on the U.S. treasury yield curve in effect at the time of grant valuation. ASC 718 does not allow companies to account for option forfeitures as they occur.  Instead, estimated option forfeitures must be calculated upfront to reduce the option expense to be recognized over the life of the award and updated upon the receipt of further information as to the amount of options expected to be forfeited. Based on historical information, the Company currently estimates that 23% annually of its stock options awarded with annual vesting mechanisms will be forfeited.
 
 The Company has elected to track the portion of its federal and state net operating loss carryforwards attributable to stock option benefits in a separate memo account.  Therefore, these amounts are no longer included in gross or net deferred tax assets. The benefit of these net operating loss carryforwards will only be recorded in equity when they reduce cash taxes payable.
 
 Common Stock Warrants.As of June 30, 2012, the Company had outstanding warrants to purchase an aggregate of approximately 2.0 million shares of its common stock, all of which were available for exercise.
 
 At June 30, 2012, there are outstanding Series A warrants to purchase an aggregate of 0.6 million shares of common stock and Series B warrants to purchase an aggregate of 1.1 million shares of common stock, all of which were originally issued in connection with the Company’s October 2009 private placement.  As a result of an anti-dilution provision contained in the Series B warrants, the exercise price of the Series B warrants was reduced to $1.20 per share after giving effect to the issuance of Series A-1 Preferred on June 7, 2010. A total of 0.2 million warrants are outstanding in connection with the transactions contemplated by the 2010 and 2012 Investment Agreements.
 
 In May 2012, an investor exercised Series A warrants to purchase 15,000 shares of common stock.  The Company received total cash proceeds of $600 from the exercise.  See “Note 7. Warrant Liabilities.”
 
 The following table summarizes the warrants outstanding as of June 30, 2012 and the changes in outstanding warrants in the six month period then ended:
  Number Of

Shares Subject

To Warrants

Outstanding

(in 000’s)


Weighted-Average

Exercise PriceWarrants outstanding January 1, 2012


1,967


$
0.76Warrants granted


—



—Warrants cancelled


—



—Warrants exercised


(15)



0.04Warrants outstanding June 30, 2012


1,952


$
0.76
  NOTE 7. WARRANT LIABILITIES
  The Company had outstanding warrants to purchase 1.7 million shares of common stock that were classified as liabilities and 0.2 million classified as equity on the balance sheet as of June 30, 2012.  The fair value of the warrants classified as liabilities was $1.6 million and $0.5 million on June 30, 2012 and December 31, 2011, respectively.
 
 During the three months ended June 30, 2012, the Company recorded just over $0.7 million in total losses related to increased valuation of the warrant liability, offset partially by a reduction of less than $0.1 million for the reduction of liabilities related to the exercise of the Series A warrants.  During the three months ended June 30, 2011, the Company recorded just over $0.3 million in total losses related to increased valuation of the warrant liability, offset partially by a reduction of just under $0.3 million for the reduction of liabilities related to the exercise of the Series B warrants.
  21
 
 During the six months ended June 30, 2012, the Company recorded $1.2 million in total losses related to increased valuation of the warrant liability, offset partially by a reduction of less than $0.1 million for the reduction of liabilities related to the redemption of the Series A warrants. During the six months ended June 30, 2011, the Company recorded $0.8 million in total losses related to increased valuation of the warrant liability, offset partially by a reduction of approximately $0.3 million for the reduction of liabilities related to the redemption of the Series B warrants.
 
 During the twelve months ended December 31, 2011, the Company recorded less than $0.1 million in total losses related to increased valuation of the warrant liability, offset by a reduction of approximately $0.3 million for the reduction of liabilities related to the redemption of the Series B warrants.
 
 The following table summarizes the fair value of the warrant liability during the six months ended June 30, 2012 and 2011 and the twelve months ended December 31, 2011:
 
 (In thousands)

Fair value

Value at

January 1


Reduction of

liability due to redemption or exercise


Net change in

fair value of

liabilities

loss/(gain)


Fair

Value at

June 302012Warrants classified as liabilities

$
502


$
(11)


$
1,155


$
1,646
  (In thousands)

Fair value

Value at

January 1


Reduction of

liability due to redemption or exercise


Net change in

fair value of

liabilities

loss/(gain)


Fair

Value at

June 302011Warrants classified as liabilities

$
713


$
(252)


$
796


$
1,257
  (In thousands)

Fair value

Value at

January 1


Reduction of

liability due to redemption or exercise


Net change in

fair value of

liabilities

loss/(gain)


Fair

Value at

December 312011Warrants classified as liabilities

$
713


$
(252)


$
41


$
502
 
 All warrants that were classified as liabilities as of June 30, 2012 and December 31, 2011 were issued to various investors pursuant to the October 2009 private placement.  The warrants issued were Series A and Series B Warrants as discussed in Note 6.  The Company classified these warrants as liabilities based on certain cash settlement provisions available to the warrant holders upon certain reorganization events in the equity structure, including mergers.  Specifically, in the event the Company is acquired in an all cash transaction, a transaction whereby it ceases to be a publicly held entity under Rule 13e-3 of the Securities Exchange Act of 1934, or a reorganization involving an entity not traded on a national securities exchange, the warrant holders may elect to receive an amount of cash equal to the value of the warrants as determined in accordance with the Black-Scholes-Merton option pricing model with certain defined assumptions.  At any time when the resale of the warrant shares is not covered by an effective registration statement under the Securities Act of 1933, the warrant holders can elect a cashless exercise of all or any portion of shares outstanding under a warrant, in which case they would receive a number of shares with a value equal to the intrinsic value on the date of exercise of the portion of the warrant being exercised.  Additionally, warrant holders have certain registration rights and the Company would be obligated to make penalty payments to them under certain circumstances if the Company is unable to maintain effective registration of the shares underlying the warrants with the SEC.
  22
 
 Assumptions. The following table summarizes the assumptions used in applying the Black-Scholes-Merton option pricing model to determine the fair value of the liability related to warrants outstanding during the three and six months ended June 30, 2012 and 2011, respectively:
  Three Months Ended June 30,


Six Months Ended June 30,2012


2011


2012


2011Risk-free interest rate


0.72
%


1.76
%

0.72
–
1.04
%

1.76
–
2.24
%Expected life (in years)


4.3



5.3


4.3
–
4.5


5.3
–
5.5Volatility


1.14



101.8


1.10
–
1.14


0.98
–
1.02Dividend Yield


0
%


0
%


0

%

0


%
  For additional details on the change in value of these liabilities, see Note 9.  Changes in the Company’s stock price or volatility would result in a change in the value of the warrants and impact the statement of operations. A 10% increase in the Company’s stock price would cause the fair value of the warrants and the warrant liability to increase by approximately 10%.
 
 NOTE 8. BASIC NET LOSS PER COMMON SHARE
 
 Basic net loss per share is based upon the weighted average number of common shares outstanding during the period. Diluted net loss per share is based upon the weighted average number of common shares outstanding during the period, plus the effect of additional weighted average common equivalent shares outstanding during the period when the effect of adding such shares is anti-dilutive.
 
 Basic and diluted net loss per share was determined as follows:
 
 Three Months Ended

June 30,


Six Months Ended

June 30,(in thousands, except per share amounts)

2012


2011


2012


2011Net loss

$
(60,797)


$
(6,050)


$
(91,288)


$
(16,466)Deemed dividends attributable to preferred stock in connection with accretion


(1,343)



(972)



(2,619)



(1,913)Deemed dividends attributable to preferred stock in connection with embedded beneficial conversion features


(197)



—



(4,549)



—Net loss applicable to common stock


(62,337)



(7,022)



(98,456)



(18,379)Weighted average shares used in computing net loss per share, basic and diluted


21,883



21,423



21,865



21,334Net loss per share, basic and diluted

$
(2.85)


$
(0.33)


$
(4.50)


$
(0.86)
  The securities in the table below were excluded from the computation of diluted net loss per common share for the six months ended June 30, 2012 and 2011 because such securities were anti-dilutive during the periods presented:
 
 (In thousands)

2012


2011Warrants


1,952



1,785Stock options and employee stock purchase plan


9,276



6,443Convertible redeemable preferred stock


111,017



60,229Total


122,245



68,457
 
 NOTE 9. FAIR VALUE MEASUREMENTS
  ASC 820 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
 
 ·
Level 1 - Quoted prices in active markets for identical assets or liabilities;
  23
  ·
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company’s Level 2 assets exclusively include money market funds comprised of bank instruments, commercial paper and notes, variable rate demand instruments, and repurchase agreements with quoted prices that are traded less frequently than exchange-traded instruments. All of the Company’s Level 2 asset values are determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. The pricing model information is provided by third party entities (e.g. banks or brokers). In some instances, these third party entities engage external pricing services to estimate the fair value of these securities; and
 
 ·
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.
 
 The following tables represent the fair value hierarchy for financial assets and liabilities held by the Company measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011:
 
 June 30, 2012(in $ thousands)

Level 1


Level 2(1)


Level 3(2)


TotalAssetsAvailable-for-sale securities

$
—


$
2,001


$
—


$
2,001Total

$
—


$
2,001


$
—


$
2,001LiabilitiesWarrant liabilities


—



—


$
1,646


$
1,646Right to purchase Series A-3 preferred stock


—



—



89,463



89,463Total

$
—


$
—


$
91,109


$
91,109
 
 December 31, 2011(in $ thousands)

Level 1


Level 2


Level 3(2)


TotalAssetsAvailable-for-sale equity securities

$
—


$
—


$
—


$
—Available-for-sale debt securities


—



—



—



—Total

$
—


$
—


$
—


$
—LiabilitiesWarrant liabilities


—



—


$
502


$
502Right to purchase Series A-1 and A-2 preferred stock


—



—



1,772



1,772Total

$
—


$
—


$
2,274


$
2,274
 
 
 (1)  The Company’s Level 2 assets were classified as cash and cash equivalents as of June 30, 2012.
 
 (2)  See Notes 5 and 7 of these Notes to the Financial Statements for a roll forward of the Company’s Level 3 liabilities for the six months ended June 30, 2012 and twelve months ended December 31, 2011.
 
 NOTE 10.  PREPAID EXPENSES AND OTHER CURRENT ASSETS
 
 The following table presents the composition of other assets as of June 30, 2012 and December 31, 2011:
 
 (in $ thousands)

June 30, 2012


December 31, 2011Direct financing costs

$
32


$
462Prepaid expenses


458



140Security deposit


31



31Accounts receivable


—



2Total

$
521


$
635
 
 The Company incurred direct financing costs associated with the transactions contemplated by the January 2012 Investment Agreement. Accumulated direct financing costs were deferred and reclassified as a reduction to the carrying value of preferred stock upon the sale and issuance of the respective shares.
  24
 
 NOTE 11.  PROPERTY AND EQUIPMENT
 
 The following table presents the composition of property and equipment as of June 30, 2012 and December 31, 2011:
 
 June 30,

2012


December 31,

2011Property and equipment: (in $ thousands)Furniture & fixtures

$
71


$
71Computer hardware


277



277Computer software


220



220Manufacturing equipment


164



164Tenant improvements


163



163895



895Less accumulated depreciation


(847)



(823)Property and equipment, net

$
48


$
72
 
 For each of the three and six month periods ended June 30, 2012 and 2011, depreciation expense was less than $0.1 million.
 
 NOTE 12.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
 
 Accounts payable and accrued liabilities consist of the following at June 30, 2012 and December 31, 2011:
 
 (In thousands)

June 30,

2012


December 31,

2011Trade accounts payable

$
805


$
1,633Clinical research and other development related costs


1,014



1,173Accrued personnel related expenses


1,052



800Interest payable


—



683Accrued other expenses


104



268Total

$
2,975


$
4,557
 
 NOTE 13. RELATED PARTY TRANSACTIONS
 
 Pursuant to the 2010 and 2012 Investment Agreements (see Note 5 above), Warburg Pincus may seek reimbursement from the Company for reasonable fees and disbursements incurred in connection with transactions contemplated by such agreements, including fees and disbursements of legal counsel, accountants, advisors and consultants, and miscellaneous other fees and expenses incurred by Warburg Pincus.
  For the six months ended June 30, 2012, the Company recorded approximately $0.2 million in professional and legal fees incurred by Warburg Pincus, which is included in the $0.8 million in direct transaction costs recorded as a reduction to the carrying value of the Series A-2 Preferred issued on January 9, 2012.
 
 NOTE 14. COMMITMENTS AND CONTINGENCIES
 
 Lease Agreements. On February 10, 2011, the Company entered into a 17-month sublease for property at 2207 Bridgepointe Parkway in San Mateo, California, which commenced on March 1, 2011.  The total cash payments due over the remaining sublease period, as of June 30, 2012, are less than $0.1 million.  This lease expired on July 25, 2012.  On June 22, 2012, the Company entered into a 24-month lease for 17,555 square feet of office space at 400 Oyster Point Boulevard in South San Francisco, California, which commenced on July 1, 2012.  The total cash payments due over the remaining lease period, as of June 30, 2012, are $0.8 million.
 
 Clinical Trial Agreements. In May 2011, the Company entered into a clinical trial research agreement with the German High-Grade Lymphoma Study Group, pursuant to which the Company agreed to provide support for a European Phase 3 trial of Marqibo in elderly patients with newly diagnosed aggressive NHL.  Under the terms of the agreement, the Company is obligated to provide supplies of Marqibo for the study as well as funding for a portion of the total financial costs of the study.  As of June 30, 2012, the Company’s portion of these costs is estimated to be approximately between €8.6 million and €10.2 million (or between $10.4 million and $12.3 million) to be paid over a period of three to five years.  Per the terms of the agreement, the Company is under no obligation to make a payment before the later of January 1, 2013 or the enrollment of the 150th patient. No amounts have been accrued as of June 30, 2012 in connection with this arrangement.
  25
 
 In July 2011, the National Cancer Institute enrolled the first patient in an open-label Phase 1 dose-escalation trial of Marqibo in children and adolescents with solid tumors and hematologic malignancies, including ALL, being conducted at the NCI in Bethesda, MD.  The primary objective of this Phase I clinical trial, which is an investigator-sponsored study, is to determine the maximum tolerated dose.  Per the terms of the clinical trial agreement, the Company’s obligations are limited to the provision of Marqibo during the study.  No amounts have been accrued as of June 30, 2012 in connection with this arrangement.
 
 In August 2011, the Company entered into an agreement with Mayo Clinic pursuant to which Mayo Clinic will sponsor and conduct a Phase 2 clinical trial that is designed to enroll approximately 40 patients taking biologic and small molecule EGFR inhibitors for anti-cancer therapy and will test the effectiveness of MTL in preventing skin toxicities associated with EGFR inhibitors.  In January 2012, the first patient was enrolled in the study. As of June 30, 2012, the Company accrued less than $0.1 million for drug manufacture and related expenditures.
 
 In November 2011, the Company entered into an agreement with Pharmaceutical Research Associates, Inc., a global clinical research organization providing services through all phases of clinical development, to initiate the U.S. portion of the Company’s global Phase 3 confirmatory study of Marqibo, named HALLMARQ, in the treatment of patients 60 years of age or older with newly diagnosed ALL. The Company also entered into an agreement with PPD, a leading global contract research organization providing drug discovery, development, and lifecycle management services, to administer central laboratory services for HALLMARQ. In May 2012, the Company enrolled and dosed its first patient under the HALLMARQ study.  Direct costs associated with the HALLMARQ study are estimated to be approximately $53.1 million over a period of five years.  As of June 30, 2012, the Company accrued approximately $0.2 million for expenditures related to the HALLMARQ study.
 
 In March 2012, the Company entered into an investigator-initiated clinical trial research agreement with The University of Texas M.D. Anderson Cancer Center (“MDACC”), whereby the Company agreed to provide Marqibo to study the safety and efficacy of Marqibo in certain clinical trial research entitled “Hyper-CVAD with Liposomal Vincristine (Hyper-CMAD) in Acute Lymphoblastic Leukemia.”  The study is designed to evaluate whether intensive chemotherapy (Hyper-CVAD therapy) given in combination with Marqibo, in addition to rituximab for patients who are CD20 positive and/or imatinib or dasatinib for patients with the Philadelphia (Ph) chromosome, can effectively treat ALL or lymphoblastic lymphoma.  In support of the performance of this study, the Company agreed to pay MDACC approximately $0.2 million for the clinical study of approximately sixty-five (65) patients.  The Company expects enrollment for this study to begin in September 2012.
 
 NOTE 15.  SUBSEQUENT EVENTS
 
 Amendment to 2012 Investment Agreement and Sale of Series A-3 Preferred
 
 As disclosed above, on January 9, 2012, the Company entered into an Investment Agreement with certain purchasers whereby the Company issued and sold to the Purchasers an aggregate of 110,000 shares of its Series A-2 Convertible Preferred Stock at a purchase price of $100 per share, and pursuant to which the purchasers have the right, but not the obligation, to purchase up to 600,000 shares of the Company’s Series A-3 Preferred at a purchase price of $100 per share, in one or more tranches of at least 50,000 shares of Series A-3 Preferred per tranche (such minimum number of shares per tranche, the “Minimum Series A-3 Additional Investment”). On July 3, 2012, the Company and the Purchasers entered into Amendment No. 1 to the Investment Agreement, pursuant to which the Minimum Series A-3 Additional Investment was reduced from 50,000 shares of Series A-3 Preferred to 30,000 shares of Series A-3 Preferred. Additionally, on July 3, 2012, pursuant to the terms of the Investment Agreement, as amended, the Company issued and sold to the purchasers an aggregate of 30,000 shares of Series A-3 Preferred at a price per share of $100, for aggregate proceeds of $3.0 million.
 
 Amendment to 2006 Employee Stock Purchase Plan
 
 On July 12, 2012, the Board of Directors approved an amendment to the Company’s 2006 Employee Stock Purchase Plan (the “Plan”) increasing the number of shares of the Company’s common stock available for purchase thereunder by 400,000.  The Company had originally reserved 187,500 shares under the Plan when it was initially adopted in 2006 (after giving effect to the Company’s reverse split effected on September 2010) and in July 2011, increased the number of shares available for purchase by an additional 150,000.
 
 Accelerated Approval of Marqibo
 
 On August 9, 2012, the FDA approved the Company’s NDA seeking accelerated approval of Marqibo for the treatment of Philadelphia chromosome negative adult ALL patients in second or greater relapse or whose disease has progressed following two or more prior lines of anti-leukemia therapy.  As disclosed above, the FDA had previously accepted the Company’s NDA for Marqibo in September 2011, setting a PDUFA date of May 13, 2012, which date was subsequently extended to August 12, 2012.
  26





Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited condensed financial statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q. This discussion includes forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” in Item 1A of Part I of the 2011 Form 10-K, our actual results may differ materially from those anticipated in these forward-looking statements.





Overview





We are a biopharmaceutical company dedicated to developing and commercializing new, differentiated cancer therapies designed to improve and enable current standards of care.  We currently have four product candidates in various stages of development:


●
Marqibo® (vincristine sulfate liposome injection), our lead product candidate, is a novel, targeted OptisomeTM encapsulated formulation product candidate of the Food and Drug Administration (FDA)-approved anticancer drug vincristine, currently in development primarily for the treatment of adult acute lymphoblastic leukemia, or ALL, in second or greater relapse or that has progressed following two or more prior lines of anti-leukemia therapy.  In July 2011, we submitted to the FDA a new drug application, or NDA, seeking accelerated approval of Marqibo.  In September 2011, the FDA accepted our NDA for filing under Subpart H – Accelerated Approval for New Drugs for Serious or Life Threatening Illnesses, and set an action date for our NDA under the Prescription Drug User Fee Act, commonly referred to as a PDUFA date, of May 13, 2012, reflecting a standard 10-month review timeline. Following a hearing in front of a panel of the FDA’s Oncologic Drugs Advisory Committee, or ODAC, on March 21, 2012, which resulted in a positive vote (7 to 4 with 2 abstentions) for Marqibo, the FDA extended the PDUFA date for 3 months to August 12, 2012.  On August 9, 2012, the FDA granted accelerated approval of Marqibo for the treatment of Philadelphia chromosome negative adult ALL patients in second or greater relapse or whose disease has progressed following two or more prior lines of anti-leukemia therapy.
 ●
Menadione Topical Lotion, a novel supportive care product candidate being developed for the prevention and/or treatment of the skin toxicities associated with the use of epidermal growth factor receptor inhibitors, or EGFRIs, a type of anti-cancer agent used in the treatment of lung, colon, head and neck, pancreatic and breast cancer.  MTL is currently being studied in a Phase 2 placebo-controlled clinical trial sponsored and conducted by Mayo Clinic.
 ●
BrakivaTM (topotecan liposome injection), a novel targeted OptisomeTM encapsulated formulation product candidate of the FDA-approved anticancer drug topotecan.
 ●
AlocrestTM (vinorelbine liposome injection), a novel, targeted OptisomeTM encapsulated formulation product candidate of the FDA-approved anticancer drug vinorelbine.
 Strategy





We are committed to developing and commercializing new, differentiated cancer therapies designed to improve and enable current standards of care. Key aspects of our strategy include:





●
Focus on developing innovative cancer therapies. We focus on oncology product candidates in order to capture efficiencies and economies of scale. We believe that drug development for cancer markets is particularly attractive because relatively small clinical trials can provide meaningful information regarding patient response and safety.  Our main focus is the development of Marqibo, our lead product candidate, for which the FDA recently granted accelerated approval for the treatment of Philadelphia chromosome negative adult ALL patients in second or greater relapse or whose disease has progressed following two or more prior lines of anti-leukemia therapy.





●
Build a sustainable pipeline by employing multiple therapeutic approaches and disciplined decision criteria based on clearly defined proof of principle goals. We seek to build a sustainable product pipeline by employing multiple therapeutic approaches and by acquiring product candidates belonging to known drug classes. In addition, we employ disciplined decision criteria to assess product candidates. By pursuing this strategy, we seek to minimize our clinical development risk and accelerate the potential commercialization of current and future product candidates.  For a majority of our product candidates, we intend to pursue regulatory approval in multiple indications.





●
Develop strategic partnerships, through licensing agreements, joint venture or merger and acquisition, to develop and commercialize our lead product candidates in the United States, Europe, and other international regions.We intend to explore strategic partnership opportunities or other transactions with pharmaceutical, biotechnology, or other companies to develop and commercialize our current products and product candidates, in the United States, Europe and other international regions.  We believe that this strategy will help us to mitigate our development and commercialization risk, reduce our capital expenditure requirements, and broaden the scope of our sales and marketing activities for our products within domestic and international markets. However, if we are unable to secure such partnerships or strategic transactions on terms we believe are in our best interests, then we will prepare to commercialize our products alone.





27





Revenues





We do not expect to generate any significant revenue from product sales or royalties in 2012.  We anticipate revenues beyond 2012 provided we are able to develop and commercialize our products, license our technology and/or enter into strategic partnerships. If we are unsuccessful, our ability to generate future revenues will be significantly diminished.





Research and Development Expenses





Research and development expenses, which account for the bulk of our expenses, consist primarily of salaries and related personnel costs, fees paid to consultants and outside service providers for laboratory development, manufacturing, and other expenses relating to the acquiring, design, development, testing, and enhancement of our product candidates, including milestone payments for licensed technology. We expense research and development costs as they are incurred.





While expenditures on current and future clinical development programs are expected to be substantial, particularly in light of our available resources, they are subject to many uncertainties, including the results of clinical trials and whether we develop any of our drug candidates with a partner or independently. As a result of such uncertainties, we cannot predict with any significant degree of certainty the duration and completion costs of our research and development projects or whether, when and to what extent we will generate revenues from the commercialization and sale of Marqibo or any of our other product candidates. The duration and cost of clinical trials may vary significantly over the life of a project as a result of unanticipated events arising during clinical development and a variety of factors, including:





●
the number of trials and studies in a clinical program;





●
the number of patients who participate in the trials;





●
the number of sites included in the trials;





●
the rates of patient recruitment and enrollment;





●
the duration of patient treatment and follow-up;





●
the costs of manufacturing our drug candidates; and





●
the costs, requirements, timing of, and the ability to secure regulatory approvals.





General and Administrative Expenses





General and administrative expenses consist primarily of salaries and related expenses for executive, finance, business development and other administrative personnel, recruitment expenses, professional fees and other corporate expenses, including accounting and general legal activities.





Share-Based Compensation





Share-based compensation expenses consist primarily of expensing the fair-market value of a share-based award over the vesting term.  This expense is included in our operating expenses for each reporting period.





Critical Accounting Policies





The accompanying discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. We believe there are certain accounting policies that are critical to understanding our financial statements, as these policies affect the reported amounts of expenses and involve management’s judgment regarding significant estimates. We have reviewed our critical accounting policies and their application in the preparation of our financial statements and related disclosures with the Audit Committee of our Board of Directors. Our critical accounting policies and estimates are described below.




28





Share-Based Compensation





We account for share-based compensation in accordance with FASB ASC Topic 718, Compensation – Stock Compensation.  We have adopted a Black-Scholes-Merton model to estimate the fair value of stock options issued and the resultant expense is recognized in the statement of operations each reporting period.





Financial Instruments with Characteristics of Both Equity and Liabilities





We have issued certain financial instruments, including warrants to purchase common stock, rights to purchase shares of Series A-1 and A-2 Preferred Stock, and rights to purchase shares of Series A-3 Preferred Stock which have the characteristics of both equity and liabilities.  These instruments were evaluated to be classified as liabilities at the time of issuance and are revalued at fair value from period to period with the resulting change in value included in other income/(expense).





Licensed In-Process Research and Development





Licensed in-process research and development relates primarily to technology, intellectual property and know-how acquired from another entity. We evaluate the stage of development as well as additional time, resources and risks related to development and eventual commercialization of the acquired technology. As we historically have acquired non-FDA approved technologies, the nature of the remaining efforts for completion and commercialization generally include completion of clinical trials, completion of manufacturing validation, interpretation of clinical and preclinical data and obtaining marketing approval from the FDA and other regulatory bodies. The cost in resources, probability of success and length of time to commercialization are extremely difficult to determine. Numerous risks and uncertainties exist with respect to the timely completion of development projects, including clinical trial results, manufacturing process development results and ongoing feedback from regulatory authorities, including obtaining marketing approval. Additionally, there is no guarantee that the acquired technology will ever be successfully commercialized due to the uncertainties associated with the pricing of new pharmaceuticals, the cost of sales to produce these products in a commercial setting, changes in the reimbursement environment or the introduction of new competitive products. Due to the risks and uncertainties noted above, we will expense such licensed in-process research and development projects when incurred. However, the cost of acquisition of technology is capitalized if there are alternative future uses in other research and development projects or otherwise based on internal review. All milestone payments will be expensed in the period the milestone is reached.





Clinical Study Activities and Other Expenses from Third-Party Contract Research Organizations





Much of our research and development activities related to clinical study activity are conducted by various third parties, including contract research organizations, which may also provide contractually defined administration and management services. Expense incurred for these contracted activities are based upon a variety of factors, including actual and estimated patient enrollment rates, clinical site initiation activities, labor hours and other activity-based factors. On a regular basis, our estimates of these costs are reconciled to actual invoices from the service providers, and adjustments are made accordingly.





Results of Operations





Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011





General and administrative expenses. For the three months ended June 30, 2012, general and administrative, or G&A, expense was $1.5 million, as compared to $1.3 million for the three months ended June 30, 2011.  The $0.2 million increase is due to increased personnel related expenses of $0.1 million and $0.2 million related to increased professional fees and third-party service fees, offset partially by $0.1 million in decreased allocated departmental costs and overhead.





Research and development expenses. The following table summarizes our R&D expenses incurred for preclinical support, contract manufacturing for clinical supplies and clinical trial services provided by third parties, as well as milestone payments for in-licensed technology for each of our current major product development programs for the three months ended June 30, 2012 and 2011.  The table also summarizes outside services and allocated overhead costs, which consist of personnel, facilities and other costs not directly allocable to development programs.





Three months ended June 30,R&D expenses ($ in thousands)

2012


2011


%

ChangeMarqibo

$
703


$
2,257



(68.9)%Other product candidates


59



0



N/AProfessional fees and third-party service costs


152



13



1,069.2%Allocable costs and overhead


81



260



(68.8)%Personnel related expense


1,047



926



13.1%Share-based compensation expense


130



77



68.8%Total research and development expense

$
2,172


$
3,533



(38.5)%





29




Marqibo. In the three months ended June 30, 2012, Marqibo costs decreased by $1.6 million compared to the same period in 2011.  During the three months ended June 30, 2011, the Company incurred significant fees from contract research organizations (CROs) related to the preparation of the Marqibo NDA filing, which was submitted in July 2011. CRO costs and professional consultation fees decreased for the quarter ended June 30, 2012, compared to the corresponding quarter in the preceding year, as such activities during the 2012 period were primarily limited to preparatory activities in connection with the March 2012 ODAC meeting.





We expect to spend approximately $20 million to $25 million on clinical development for Marqibo in 2012 (including milestone payments that were triggered under the license agreements relating to Marqibo upon approval from the FDA of our NDA seeking accelerated approval of Marqibo).  We estimate that we will need to spend an additional $50 million to $55 million on external costs to run the trial needed to obtain full FDA approval in adult ALL. External costs include drug production, clinical trial costs, data management and supporting activities not provided by our full-time employees. These costs are impacted by the size and duration of the clinical trials. We expect that it will take several years until we will have completed development and obtained full FDA approval of Marqibo, if ever. We need to raise additional capital to fund these planned expenditures beyond September 2012. If we are unable to raise additional capital when needed, we will have to discontinue our product development programs or relinquish or rights to some or all of our product candidates.





Other R&D expenses. Personnel related costs increased by $0.1 million during the three months ended June 30, 2012 compared to the corresponding period in the preceding year. Increased salaries in 2012 contributed to the slight increase from the three months ended June 30, 2012.





Interest expense. For the three months ended June 30, 2012 and 2011, interest expense was $0.9 million for each respective period.





Gain or loss on change in fair market value of liabilities re-measured at fair value.  We have certain financial instruments that are recorded as liabilities. We re-measure the fair value of these liabilities at each reporting period with the gain or loss recognized in the statement of operations. For the three months ended June 30, 2012, we recorded a net loss related to these liabilities of $55.5 million, compared to a net loss of less than $0.1 million in the corresponding period in the preceding year. The increase in net loss in the current period, compared to the same period last year, is driven by the loss incurred in connection with the revaluation of rights to purchase shares of Series A-3 Preferred in connection with the 2012 Investment Agreement executed on January 9, 2012.  The loss incurred during the three months ended June 30, 2011 related to the revaluation of rights to purchase additional shares of Series A-1 and Series A-2 Preferred, which were eliminated on January 9, 2012.  The value of these liabilities is largely dependent on the price of our common stock, and as the stock price increases or decreases, the value of these instruments will increase or decrease in relation. The value of the option is also partially conditioned upon the likelihood of successful FDA approval. As such, a weighting reflecting management’s estimates of the probability of successful FDA approval is applied to the preliminary Black-Scholes-Merton option price at each valuation date.  Such estimates of probability are subject to change based on various factors regarding the likelihood of FDA approval.  Continued regulatory progress since the previous valuation as of March 31, 2012 resulted in a 10% increase to management’s probability estimate.   For additional details, see Notes 5, 7 and 9 of our unaudited condensed financial statements included elsewhere in this Form 10-Q.





Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2012





General and administrative expenses. For the six months ended June 30, 2012, general and administrative, or G&A, expense was $3.2 million, as compared to $2.8 million for the six months ended June 30, 2011.  The $0.4 million increase is due to increased personnel related expenses of $0.2 million and $0.4 million related to increased professional fees and third-party service fees, offset partially by $0.2 million in decreased allocated departmental costs and overhead.   Personnel costs increased due to higher bonus payments resulting from the achievement of certain corporate milestones in 2011.





Research and development expenses. The following table summarizes our R&D expenses incurred for preclinical support, contract manufacturing for clinical supplies and clinical trial services provided by third parties, as well as milestone payments for in-licensed technology for each of our current major product development programs for the six months ended June 30, 2012 and 2011.  The table also summarizes outside services and allocated overhead costs, which consist of personnel, facilities and other costs not directly allocable to development programs.





Six months ended June 30,R&D expenses ($ in thousands)

2012


2011


%

ChangeMarqibo

$
1,758


$
5,514



(68.1)%Other product candidates


117



11



963.6%Professional fees and third-party service costs


338



232



45.7%Allocable costs and overhead


168



534



(68.5)%Personnel related expense


2,301



2,238



2.8%Share-based compensation expense


232



148



56.8%Total research and development expense

$
4,914


$
8,677



(43.4)%





30





Marqibo. In the six months ended June 30, 2012, Marqibo costs decreased by $3.8 million compared to the same period in 2011.  During the six months ended June 30, 2011, the Company incurred significant fees from contract research organizations (CROs) related to the preparation of the Marqibo NDA filing, which was submitted in July 2011. CRO costs and professional consultation fees decreased for the six months ended June 30, 2012, compared to the corresponding six month period in the preceding year, as such activities were primarily limited to preparatory activities in connection with the March 2012 ODAC meeting.





Other R&D expenses. Personnel related costs increased by $0.1 million during the six months ended June 30, 2012 compared to the corresponding six month period in the preceding year.  Personnel costs increased due to higher bonus payments resulting from the achievement of certain corporate milestones in 2011.





Interest expense. For the six months ended June 30, 2012 and 2011, interest expense was $1.9 million and $1.8 million, respectively.





Gain or loss on change in fair market value of liabilities re-measured at fair value.  We have certain financial instruments that are recorded as liabilities. We re-measure the fair value of these liabilities at each reporting period with the gain or loss recognized in the statement of operations. For the six months ended June 30, 2012, we recorded a net loss related to these liabilities of $80.2 million, compared to a net loss of $2.4 million in the corresponding period in the preceding year. The increase in net loss in the current period, compared to the same period last year, is driven by a $79.2 million loss incurred in connection with the revaluation of rights to purchase shares of Series A-3 Preferred in connection with the 2012 Investment Agreement executed on January 9, 2012.  The revaluation of rights to purchase additional shares of Series A-1 and Series A-2 Preferred also contributed to $1.0 million of the total net loss. The value of these liabilities is largely dependent on the price of our common stock, and as the stock price increases or decreases, the value of these instruments will increase or decrease in relation. The value of the option is also partially conditioned upon the likelihood of successful FDA approval. As such, a weighting reflecting management’s estimates of the probability of successful FDA approval is applied to the preliminary Black-Scholes-Merton option price at each valuation date.  Such estimates of probability are subject to change based on various factors regarding the likelihood of FDA approval.  Continued regulatory progress since the previous valuation as of March 31, 2012 resulted in a 10% increase to management’s probability estimate.   For additional details, see Notes 5, 7 and 9 of our unaudited condensed financial statements included elsewhere in this Form 10-Q.





Liquidity and Capital Resources





As of June 30, 2012, we had a stockholders’ accumulated deficit of approximately $271.2 million, and for the fiscal quarter ended June 30, 2012, we experienced a net loss of $60.8 million. We have financed operations primarily through equity and debt financing and expect such losses to continue over the next several years.  We have drawn down $27.5 million of long-term debt under the October 2007 Facility Agreement that we entered into with Deerfield Management and certain of its affiliates (collectively, “Deerfield”), with the entire balance due in June 2015.  We currently have a limited supply of cash available for operations. As of June 30, 2012, we had aggregate cash and cash equivalents of $3.0 million.





On January 9, 2012, we entered into an Investment Agreement with certain investors pursuant to which we issued and sold to such investors an aggregate of 110,000 shares of Series A-2 Preferred at a per share purchase price of $100 for an aggregate purchase price of $11.0 million.  The Investment Agreement also provides that, until the first anniversary of our receipt of marketing approval from the Food and Drug Administration for any of our product candidates, the investors have the right, but not the obligation, to purchase up to an additional 600,000 shares of Series A-3 Preferred, at a purchase price of $100 per share, in one or more tranches of at least 50,000 shares of Series A-3 Preferred per tranche. On July 3, 2012, we and the purchasers entered into Amendment No. 1 to the Investment Agreement, pursuant to which the minimum size of each such tranche was reduced from 50,000 shares of Series A-3 Preferred to 30,000 shares of Series A-3 Preferred. Additionally, on July 3, 2012, pursuant to the terms of the Investment Agreement, as amended, we issued and sold to the purchasers an aggregate of 30,000 shares of Series A-3 Preferred at a price per share of $100, for aggregate proceeds of $3.0 million.  We had previously entered into an Investment Agreement dated June 7, 2010, pursuant to which the same investors purchased 400,000 shares of Series A-1 Preferred for an aggregate purchase price of $40.0 million.





As described above, we and Deerfield had previously entered into the Facility Agreement on October 30, 2007, as amended on June 7, 2010.  In connection with the entry into the Investment Agreement, on January 9, 2012, we and Deerfield entered into a Second Amendment to Facility Agreement.  Among other items, pursuant to the Second Amendment to Facility Agreement, we will satisfy our obligation under the Facility Agreement to make quarterly interest payments for the quarters ended December 31, 2011, March 31, 2012, June 30, 2012 and September 30, 2012, by issuing a whole number of shares of Series A-2 Preferred in lieu of cash.  On January 9, 2012, we issued an aggregate of 6,826 shares of Series A-2 Preferred in satisfaction of interest accrued under the Facility Agreement for the quarter ended December 31, 2011.  On March 30, 2012, we issued an aggregate of 6,752 shares of Series A-2 Preferred in satisfaction of interest accrued under the Facility Agreement for the quarter ended March 31, 2012.  On June 29, 2012, we issued an aggregate of 6,752 shares of Series A-2 Preferred in satisfaction of interest accrued under the Facility Agreement for the quarter ended June 30, 2012.




31





We believe that our cash resources as of June 30, 2012 are only sufficient to fund our development plans through September 2012.  Accordingly, our financial statements reflect substantial doubt about our ability to continue as a going concern, which is also stated in the report from our auditors on the audit of our financial statements as of and for the year ended December 31, 2011.  Our plan of operation for the year ending December 31, 2012 is to continue implementing our business strategy, which now includes preparing to commercially launch Marqibo and the continued development of our clinical trials for Marqibo and other drug candidates.  We do not generate any recurring revenue and will require substantial additional capital before we will generate cash flow from our operating activities, if ever. We will be unable to prepare to commercially launch Marqibo and to continue development of our product candidates unless we are able to obtain additional funding through equity or debt financings or from payments in connection with potential strategic transactions.  Although the investors identified in our 2012 Investment Agreement have the right to make additional investments in our Series A-3 Preferred, they have no obligation to do so and we have no assurance that they will make any further investments under that or any other agreement.  Accordingly, we can give no assurances that additional capital that we are able to obtain, if any, will be sufficient to meet our needs. Moreover, there can be no assurance that such capital will be available to us on favorable terms or at all, especially given the current economic environment which has severely restricted access to the capital markets.  If anticipated costs are higher than planned or if we are unable to raise additional capital, we will have to significantly curtail planned development to maintain operations before the end of 2012.





As part of our planned research and development, we intend to use clinical research organizations and third parties to help perform our clinical studies and manufacturing. As indicated above, at our current and desired pace of clinical development of our product candidates, over the next 12 months we expect to spend approximately between $20 million and $25 million on clinical development for Marqibo (including milestone payments that were triggered under the license agreements relating to Marqibo upon approval from the FDA of our NDA seeking accelerated approval of Marqibo).  We also expect to spend approximately $5.8 million on general corporate and administrative expenses.  However, as noted above, our cash resources as of June 30, 2012 are only sufficient to fund our development plans through September 2012.





The actual amount of funds we will need to operate is subject to many factors, some of which are beyond our control. These factors include the following:





●
costs associated with the commercial launch of Marqibo;●
costs associated with conducting preclinical and clinical testing;●
costs of establishing arrangements for manufacturing our product candidates;●
payments required under our current and any future license agreements and collaborations;●
costs, timing and outcome of regulatory reviews;●
costs of obtaining, maintaining and defending patents on our product candidates; and●
costs of increased general and administrative expenses.





We have based our estimate on assumptions that may prove to be wrong. We may need to obtain additional funds sooner or in greater amounts than we currently anticipate.





Off-Balance Sheet Arrangements





We do not have any “off-balance sheet agreements,” as that term is defined by SEC regulation.





Item 3.  Quantitative and Qualitative Disclosures About Market Risk





Not applicable.





Item 4. Controls and Procedures





Evaluation of Disclosure Controls and Procedures





We conducted an evaluation as of June 30, 2012, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, which are defined under SEC rules as controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within required time periods. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.




32





Limitations on the Effectiveness of Controls





Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefit of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Talon have been detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.





Changes in Internal Controls over Financial Reporting





During the quarter ended June 30, 2012, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.




33





PART II - OTHER INFORMATION





Item 1. Legal Proceedings





None.





Item 1A.  Risk Factors





An investment in our common stock involves significant risk. You should carefully consider the information described in the following risk factors, together with the other information appearing elsewhere in this report, before making an investment decision regarding our common stock. You should also consider the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2011 (“2011 Annual Report”) under the caption “Item 1A. Risk Factors,”  If any of the risks described below or in our 2010 Annual Report actually occur, our business, financial conditions, results of operation and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock could decline, and you may lose all or a part of your investment in our common stock.  Moreover, the risks described below and in our 2011 Annual Report are not the only ones that we face. Additional risks not presently known to us or that we currently deem immaterial may also affect our business, operating results, prospects or financial condition.





We need to raise immediate additional capital to fund our planned operations beyond September 2012. If we are unable to raise additional capital when needed, we will have to discontinue our product development programs or relinquish our rights to some or all of our product candidates. The manner in which we raise any additional funds may affect the value of your investment in our common stock.





We believe that our currently available capital is only sufficient to fund our operations through September 2012. Given our desired clinical development plans for the next 12 months, our financial statements reflect an uncertainty about our ability to continue as a going concern, which is reflected in the report from our auditors on the audit of our financial statements as of and for the year ended December 31, 2011.  Accordingly, we need additional capital to fund our operations beyond September 2012.  Further, our available capital may be consumed sooner than we anticipate depending on a variety of factors, including:





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costs associated with conducting our ongoing and planned clinical trials and regulatory development activities;





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costs of establishing arrangements for manufacturing our product candidates;





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costs associated with commercializing our Marqibo program, including establishing sales and marketing functions;





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payments required under our current and any future license agreements and collaborations;





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costs of obtaining, maintaining and defending patents on our product candidates; and





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costs of acquiring any new drug candidates.





Since we do not generate any recurring revenue, the most likely sources of such additional capital include private placements of our equity securities, including our common stock, preferred stock, debt financing or from a potential strategic licensing or collaboration transaction involving the rights to one or more of our product candidates.  To the extent that we raise additional capital by issuing equity securities, our stockholders will likely experience significant dilution. We may also grant future investors rights superior to those of our current stockholders. If we raise additional funds through collaborations and licensing arrangements, it may be necessary to relinquish some rights to our technologies, product candidates or products, or grant licenses on terms that are not favorable to us. If we raise additional funds by incurring debt, we could incur significant interest expense and become subject to covenants in the related transaction documentation that could affect the manner in which we conduct our business.





In January 2012, we entered into an investment agreement with certain investment funds affiliated with Warburg Pincus, LLC and Deerfield Management pursuant to which we sold an aggregate of 110,000 shares of Series A-2 Preferred for $100 per share. Under the investment agreement, the investors have the right, but not the obligation, from the date of the agreement until the first anniversary of our receipt of marketing approval from the FDA for any of our product candidates, to purchase up to an additional 600,000 shares of Series A-3 Preferred, at a purchase price of $100 per share, in one or more tranches of at least 50,000 shares of Series A-3 Preferred per tranche.  On July 3, 2012, we and the investors entered into an amendment to the investment agreement, pursuant to which the minimum size of each such tranche was reduced from 50,000 shares of Series A-3 Preferred to 30,000 shares of Series A-3 Preferred. Additionally, on July 3, 2012, pursuant to the terms of the investment agreement, as amended, we issued and sold to the investors an aggregate of 30,000 shares of Series A-3 Preferred at a price per share of $100, for aggregate proceeds of $3.0 million.  If the investors do not make additional investments pursuant to the January 2012 investment agreement at times when we are in need of additional capital, then we will need to secure such additional capital from other sources.  Beyond the investment agreement, however, we have no committed sources of additional capital and our access to funding is always uncertain. Further, other than certain issuances of common stock in connection with a new financing transaction, the holders of our preferred stock have the right to approve issuances of equity or debt securities by us, which could prevent us from being able to complete a financing with other investors if not first approved by our preferred stockholders. In addition, the uncertainty surrounding our ability to obtain additional financing is further exacerbated due to ongoing global economic turmoil, which has continued to restrict access to the U.S. and international capital markets, particularly for small biopharmaceutical and biotechnology companies like us. Accordingly, despite our ability to secure adequate capital in the past, there is no assurance that additional equity or debt financing will be available to us when needed, on acceptable terms or even at all. If we fail to obtain the necessary additional capital when needed, we will be forced to significantly curtail our planned research and development activities, which will cause a delay in our drug development programs.  If we do not obtain additional capital before we have consumed our currently available resources, we may be forced to cease our operations altogether, in which case you will lose your entire investment in our company.




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Our long-term success is dependent on our ability to establish strategic partnerships to develop and commercialize our product candidates, particularly Marqibo and Menadione Topical Lotion, in the United States, Europe, and other international regions.





An important element to our business strategy includes partnering with pharmaceutical, biotechnology, or other companies to develop and commercialize our product candidates in the United States, Europe, and other international regions.  We are likely to face significant competition in seeking appropriate strategic partners, and these strategic partnerships can be complicated and time consuming to negotiate and execute. In addition, such arrangements may not be commercially successful or we may not be able to enter into such partnerships on favorable terms.





We are unable to predict when, if ever, we will enter into any potential strategic partnerships because of the numerous risks and uncertainties associated with establishing strategic partnerships. If we are unable to negotiate strategic partnerships for our product candidates we may be forced to curtail the development of a particular candidate, reduce or delay its development program, delay its potential commercialization, reduce the scope of our sales or marketing activities or undertake development or commercialization activities at our own expense. In addition, we will bear all the risk related to the development of that product candidate. If we elect to increase our expenditures to fund development or commercialization activities on our own, we will need to obtain additional capital, which may not be available to us on acceptable terms, or at all. If we do not have sufficient funds, we will not be able to bring our product candidates to market and generate product revenue.





Our near and long-term business prospects are substantially dependent on our ability to satisfy post-accelerated approval requirements with respect to our lead product candidate, Marqibo.





In July 2011, we submitted to the FDA a new drug application, or NDA, seeking accelerated approval of our lead product candidate, Marqibo, for the treatment of Philadelphia chromosome negative adult ALL patients in second or greater relapse or whose disease has progressed following two or more prior lines of anti-leukemia therapy. In September 2011, the FDA accepted our NDA for filing under Subpart H – Accelerated Approval for New Drugs for Serious or Life Threatening Illnesses, and, on August 9, 2012, the FDA granted accelerated approval of Marqibo.





In order for a new drug product to be approved for marketing in the United States, a drug sponsor typically needs to establish the safety and efficacy of the drug through one or more randomized Phase 3 clinical trials.  However, under the FDA’s Subpart H accelerated approval regulations, the agency is authorized to approve a drug candidate that has been studied for its safety and efficacy in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit to patients over existing treatments based upon either a surrogate endpoint that is reasonably likely to predict clinical benefit or on the basis of an effect on a clinical endpoint other than patient survival or irreversible morbidity.  Accelerated approval may be granted prior to the conduct of a Phase 3 clinical trial, but a drug candidate receiving accelerated approval is subject to rigorous post-marketing compliance requirements, including the completion of one or more post-approval confirmatory clinical trials to validate the surrogate endpoint or confirm the effect on the clinical endpoint. Failure to conduct required post-approval studies with due diligence, or to validate a surrogate endpoint or confirm a clinical benefit during post-marketing studies, may cause the FDA to seek to withdraw the drug from the market on an expedited basis.





Because our NDA for Marqibo was submitted on the basis of the data from our rALLy study, a Phase 2 clinical trial, and did not include data from any Phase 3 clinical trial of Marqibo, we remain subject to the rigorous compliance requirements discussed above, and any failure to satisfy such requirements may cause the FDA to withdraw its approval of Marqibo.  If the FDA were to withdraw its approval of Marqibo, we would be required to expend significant additional capital in order to complete our ongoing Phase 3 clinical trials, which would be required to obtain full marketing approval.  Such capital may not be available to us when needed, on acceptable terms or even at all.  As a result, we may be forced to cease our operations altogether, in which case you may lose your entire investment in our company.





Item 2. Unregistered Sales of Equity Securities and Use of Proceeds





On May 8, 2012, a holder of warrants issued by us in our October 2009 private placement exercised its right to purchase 15,000 shares of our common stock at an exercise price of $0.04 per share.  The sale of these shares was made pursuant to a private transaction that did not involve a public offering, and accordingly, we believe this transaction was exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(2) thereof and the rules and regulations promulgated thereto, that the holder acquired the shares for investment and not distribution, it could bear the risks of the investment, and it could hold the securities for an indefinite period of time. The holder received written disclosures that the securities had not been registered under the Securities Act and any resale must be made pursuant to a registration or an available exemption from such registration.




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Item 3. Defaults Upon Senior Securities





Not applicable.





Item 4. Mine Safety Disclosures





Not applicable.





Item 5. Other Information





Amendment and Restatement of 2012 Change of Control Payment Plan





As previously disclosed, effective as of February 17, 2012, the Company adopted the Talon Therapeutics, Inc. 2012 Change of Control Payment Plan (the “Change of Control Plan”) to provide benefits upon a “change of control” transaction to full-time Company employees serving at or above the level of Vice President as of the time of such transaction.  Effective as of August 10, 2012, the Company amended and restated the Change of Control Plan for the purposes of, among other things, (i) increasing the total amount of benefits payable to eligible participants under the plan, (ii) expanding the group of eligible participants under the plan to include full-time Company employees serving at or above the level of Senior Director as of the time of the change of control transaction, (iii) increasing the benefits payable to Steven R. Deitcher, M.D., the Company’s President & Chief Executive Officer, and (iv) extending the termination date of the plan from December 31, 2012, to June 30, 2013.  The following is a summary of the material terms of the Change of Control Plan, as amended and restated (the “Restated Plan”):





Participants.  Full-time Company employees serving at or above the level of Senior Director as of the time of the change of control transaction are eligible to receive benefits under the Restated Plan upon the effective time of a “change of control” transaction.





Plan Benefits; Allocation.  The Restated Plan provides for total benefits payable to eligible participants in an amount not to exceed 9.0% of the Change of Control Proceeds (the “Plan Benefits”).  For purposes of the plan, the term “Change of Control Proceeds” means all cash and the fair market value of all property paid, directly or indirectly, to the Company or its stockholders in consideration for their shares of capital stock, but excluding (1) fees and expenses incurred by the Company in connection with such transaction, (2) amounts payable under employment or consulting agreements between an acquirer and any current or former employee, consultant or director of the Company, (3) the value of any Company debt paid or assumed by the acquirer in such transaction, and (4) the gross cash proceeds received by the Company in all equity financings completed on or after June 1, 2010.  Of the total Plan Benefits, the Restated Plan provides that (A) Dr. Deitcher is entitled to 4.0% of Change of Control Proceeds up to $200 million, 4.5% of Change of Control Proceeds exceeding $200 million and up to $400 million, and 5.0% of Change of Control Proceeds exceeding $400 million, and (B) Craig W. Carlson, the Company’s Sr. V.P. & Chief Financial Officer, is entitled to 1.0% of Change of Control Proceeds, provided each remains employed in their respective positions at the time of the change of control transaction.  The remaining Plan Benefits will be allocated among the other eligible participants in the discretion of the Board, provided that Vice Presidents other than Mr. Carlson are entitled to an aggregate of 2.5% of Change of Control Proceeds and Senior Directors are entitled, subject to the vesting provisions discussed below, to an aggregate of 0.5% of Change of Control Proceeds.  However, each participant’s share of the Plan Benefits shall be reduced, on a dollar-for-dollar basis, by the amount of cash and/or value of other property received by such participant in connection with the change of control transaction in respect of outstanding stock options or other stock incentives held by the participant.  The Restated Plan is unfunded and all benefits payable under the plan shall be paid only from the Company’s general assets.





Form and Timing of Payments. The Plan Benefits shall be payable to eligible participants in the same manner and form and at the same time as the consideration payable to the Company’s stockholders in connection with the change of control transaction; provided, however, that Plan Benefits payable to Senior Directors shall vest and become payable in two equal installments on each of the first and second anniversaries of the effective date of the change of control, subject to the continued employment of such employee by the Company (including any successor or surviving entity); provided, further, that in the event a Senior Director experiences a Qualifying Termination (as defined in the Restated Plan) following the change of control, then such payments shall immediately vest and become payable in full.





Definition of Change of Control.  As defined in the Restated Plan, the term “change of control” includes the following:





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a person or group becoming the direct or indirect beneficial owner of more than 50% of the combined voting power of the Company other than by merger or similar transaction; provided, that a change of control will not be deemed to occur in connection with the acquisition of securities from the Company in a financing transaction;





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a merger, consolidation or similar transaction involving the Company in which the Company’s stockholders immediately prior to the transaction no longer own more than 50% of the voting securities or voting power of the surviving company in substantially the same proportion as their ownership of Company securities immediately prior to such transaction; and




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●
the sale, lease, exclusive worldwide license or other disposition of all or substantially all of the total gross value of the Company’s assets to an entity or person, more than 50% of the combined voting power of which is not owned by the Company’s stockholders in substantially the same proportion as their ownership of Company securities immediately prior to such transaction.





Amendment; Termination. The Company may amend or terminate the Restated Plan at any time in its sole discretion.  However, the Restated Plan will automatically terminate on the earlier of (i) the effective date of a change of control transaction (subject to the Company’s obligation to pay the Plan Benefits with respect to such transaction) or (ii) June 30, 2013, provided that the Board may renew or extend the plan for additional one-year periods.





The foregoing summary of the Restated Plan is qualified in its entirety by reference to the complete plan, a copy of which is attached hereto as Exhibit 10.1 and incorporated herein by reference.




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Item 6. Exhibits





Exhibit No.

Description3.1

Certificate of Amendment of Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed April 6, 2012).10.1

Amended and Restated 2012 Change of Control Payment Plan.31.1

Certification of Chief Executive Officer, as required by Rule 13a-14(a) or Rule 15d-14(a).31.2

Certification of Chief Financial Officer, as required by Rule 13a-14(a) or Rule 15d-14(a).32.1

Certification of Chief Executive Officer and Chief Financial Officer, as required by Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).101

The following financial information from Talon Therapeutics, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2012, formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Balance Sheets as of June 30, 2012 and December 31, 2011, (ii) Condensed Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2012 and June 30, 2011, (iii) Condensed Statement of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Deficit for the period from January 1, 2012 to June 30, 2012, (iv) Condensed Statements of Cash Flows for the six months ended June 30, 2012 and June 30, 2011, and (v) Notes to Condensed Financial Statements.*








* To be furnished by amendment pursuant to Rule 405(a)(2)(ii) of Regulation S-T.
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SIGNATURES





In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





TALON THERAPEUTICS, INC.Dated: August 13, 2012
By:
/s/ Steven R. Deitcher, MDSteven R. Deitcher, MDPresident and Chief Executive OfficerDated: August 13, 2012
By:
/s/ Craig W. CarlsonCraig W. Carlson

Senior Vice President and Chief Financial Officer





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Index to Exhibits Filed with this Report





Exhibit No.

Description10.1

Amended and Restated 2012 Change of Control Payment Plan.31.1

Certification of Chief Executive Officer, as required by Rule 13a-14(a) or Rule 15d-14(a).31.2

Certification of Chief Financial Officer, as required by Rule 13a-14(a) or Rule 15d-14(a).32.1

Certification of Chief Executive Officer and Chief Financial Officer, as required by Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).