UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.
20549




Form 10-Q





(Mark
      One)þ
                QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934For
      the quarterly period ended March 31, 2009ORo
                TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934





Commission
File Number 001-33484





ZIOPHARM
Oncology, Inc.


(Exact
name of registrant as specified in its charter)




Delaware
                (State
      or other jurisdiction of
                incorporation
      or organization)
              
              84-1475642
                (I.R.S.
      Employer
                Identification
      No.)




1180
Avenue of the Americas, 19th Floor,
New York, NY 10036


(646) 214-0700


(Address,
including zip code, and telephone number, including


area
code, of registrant’s principal executive offices)





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 than the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes:  þ     No:   ̈





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





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





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





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





The
number of shares of the registrant’s Common Stock, $.001 par value, outstanding
as of May 14, 2009, was 21,848,464 shares.







Table of Contents




ZIOPHARM Oncology, Inc. (a development stage
company)





Table
of Contents




PagePart
      I -
                                          Financial
      InformationItem 1.
                                          Financial StatementsBalance Sheets (unaudited) as of March 31, 2009 and
      December 31, 2008
                                          
                                          3Statements of Operations (unaudited) for the three
      months ended March 31, 2009 and 2008 and the period from September 9, 2003
      (date of inception) through March 31, 2009
                                          
                                          4Statements of Cash Flows (unaudited) for the three months
      ended March 31, 2009 and 2008 and the period from September 9, 2003 (date
      of inception) through March 31, 2009
                                          
                                          5Notes to Financial Statements
(unaudited)
                                          
                                          6Item 2.
                                          Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                                          
                                          14Item 3.
                                          Quantitative and Qualitative Disclosures about Market
      Risk
                                          
                                          22Item 4.
                                          Controls and Procedures
                                          
                                          22Part
      II -
                                          Other InformationItem 1.
                                          Legal Proceedings
                                          
                                          23Item 1A.
                                          Risk Factors
                                          
                                          23Item 2.
                                          Unregistered Sale of Equity Securities and Use of
      Proceeds
                                          
                                          35Item 3.
                                          Defaults upon Senior Securities
                                          
                                          35Item 4.
                                          Submission of Matters to a Vote of Security
      Holders
                                          
                                          35Item 5.
                                          Other Information
                                          
                                          35Item 6.
                                          Exhibits
                                          
                                          35SIGNATURES
                                          
                                          36




2




Table of Contents





Part I - Financial Information





Item 1. Consolidated Financial Statements




ZIOPHARM
Oncology, Inc. (a development stage company)





BALANCE SHEETS


(unaudited)





(in
thousands, except share and per share data)





March
      31,
                  
                  
                  December
      31,2009
                  
                  
                  2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                  
                  $
                  6,768
                  
                  
                  $
                  11,379Prepaid
      expenses and other current assets
                  
                  
                  238
                  
                  
                  
                  327Total
      current assets
                  
                  
                  7,006
                  
                  
                  
                  11,706Property
      and equipment, net
                  
                  
                  489
                  
                  
                  
                  489Deposits
                  
                  
                  87
                  
                  
                  
                  87Other
      non current assets
                  
                  
                  291
                  
                  
                  
                  291Total
      assets
                  
                  $
                  7,873
                  
                  
                  $
                  12,573LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                  
                  $
                  1,621
                  
                  
                  $
                  2,639Accrued
      expenses
                  
                  
                  2,298
                  
                  
                  
                  3,137Deferred
      rent - current portion
                  
                  
                  37
                  
                  
                  
                  -Total
      current liabilities
                  
                  
                  3,956
                  
                  
                  
                  5,776Deferred
      rent
                  
                  
                  100
                  
                  
                  
                  58Warrant
      liabilities
                  
                  
                  80
                  
                  
                  
                  -Total
      Liabilities
                  
                  
                  4,136
                  
                  
                  
                  5,834commitments
      and contingencies (note 4)Stockholders'
      equity:Common
      stock, $.001 par value; 280,000,000 shares authorized; 21,848,464 and
      21,860,464 shares issued and outstanding at March 31, 2009 and December
      31, 2008, respectively
                  
                  
                  22
                  
                  
                  
                  22Preferred
      stock, $0.01 par value; 30,000,000 shares authorized and no shares issued
      and outstanding
                  
                  
                  -
                  
                  
                  
                  -Additional
      paid-in capital
                  
                  
                  71,683
                  
                  
                  
                  71,274Warrants
      issued
                  
                  
                  18,865
                  
                  
                  
                  20,504Deficit
      accumulated during the development stage
                  
                  
                  (86,833
                  )
                  
                  
                  (85,061
                  )Total
      stockholders' equity
                  
                  
                  3,737
                  
                  
                  
                  6,739Total
      liabilities and stockholders' equity
                  
                  $
                  7,873
                  
                  
                  $
                  12,573





The
accompanying notes are an integral part of the unaudited interim financial
statements.




3




Table of Contents





ZIOPHARM Oncology, Inc. (a
development stage company)





STATEMENTS OF OPERATIONS


(unaudited)





(in
thousands, except share and per share data)





Period
      fromSeptember
      9, 2003(date
      of inception)For
      the Three Months Ended March 31,
                  
                  
                  through2009
                  
                  
                  2008
                  
                  
                  March
      31, 2009Research
      contract revenue
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Operating
      expenses:Research
      and development, including costs of research
contracts
                  
                  
                  1,608
                  
                  
                  
                  6,074
                  
                  
                  
                  55,958General
      and administrative
                  
                  
                  1,724
                  
                  
                  
                  2,745
                  
                  
                  
                  36,332Total
      operating expenses
                  
                  
                  3,332
                  
                  
                  
                  8,819
                  
                  
                  
                  92,290Loss
      from operations
                  
                  
                  (3,332
                  )
                  
                  
                  (8,819
                  )
                  
                  
                  (92,290
                  )Interest
      income, net
                  
                  
                  -
                  
                  
                  
                  196
                  
                  
                  
                  3,897Change
      in fair value of warrants
                  
                  
                  (7
                  )
                  
                  
                  -
                  
                  
                  
                  (7
                  )Net
      loss
                  
                  $
                  (3,339
                  )
                  
                  $
                  (8,623
                  )
                  
                  $
                  (88,400
                  )Basic
      and diluted net loss per share
                  
                  $
                  (0.16
                  )
                  
                  $
                  (0.41
                  )Weighted
      average common shares outstanding used to compute
                    basic
      and diluted net loss per share
                  
                  
                  21,304,334
                  
                  
                  
                  21,228,964





The
accompanying notes are an integral part of the unaudited interim financial
statements.


4


Table of Contents





ZIOPHARM
Oncology, Inc. (a development stage company)





STATEMENTS OF CASH FLOWS


(unaudited)





(in
thousands)




Period
      fromSeptember
      9, 2003(date
      of inception)For
      the Three Months Ended March 31,
                      
                      
                      through2009
                      
                      
                      2008
                      
                      
                      March
      31, 2009Cash
      flows from operating activities:Net
      loss
                      
                      $
                      (3,339
                      )
                      
                      $
                      (8,623
                      )
                      
                      $
                      (88,400
                      )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                      
                      
                      83
                      
                      
                      
                      89
                      
                      
                      
                      1,213Stock-based
      compensation
                      
                      
                      410
                      
                      
                      
                      468
                      
                      
                      
                      7,133Change
      in fair value of warrants
                      
                      
                      7
                      
                      
                      
                      -
                      
                      
                      
                      7Loss
      on disposal of fixed assets
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      9Change
      in operating assets and liabilities:(Increase)
      decrease in:Prepaid
      expenses and other current assets
                      
                      
                      89
                      
                      
                      
                      163
                      
                      
                      
                      (238
                      )Other
      noncurrent assets
                      
                      
                      3
                      
                      
                      
                      (2
                      )
                      
                      
                      (288
                      )Deposits
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (87
                      )Increase
      (decrease) in:Accounts
      payable
                      
                      
                      (1,018
                      )
                      
                      
                      (261
                      )
                      
                      
                      1,621Accrued
      expenses
                      
                      
                      (839
                      )
                      
                      
                      686
                      
                      
                      
                      2,298Deferred
      rent
                      
                      
                      (6
                      )
                      
                      
                      8
                      
                      
                      
                      52Net
      cash used in operating activities
                      
                      
                      (4,610
                      )
                      
                      
                      (7,472
                      )
                      
                      
                      (76,680
                      )Cash
      flows from investing activities:Purchases
      of property and equipment
                      
                      
                      (1
                      )
                      
                      
                      (69
                      )
                      
                      
                      (1,630
                      )Proceeds
      from sale of property and equipment
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1Net
      cash used in investing activities
                      
                      
                      (1
                      )
                      
                      
                      (69
                      )
                      
                      
                      (1,629
                      )Cash
      flows from financing activities:Stockholders'
      capital contribution
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      500Proceeds
      from exercise of stock options
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      66Proceeds
      from issuance of common stock and warrants, net
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      67,751Proceeds
      from issuance of preferred stock, net
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      16,760Net
      cash provided by financing activities
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      85,077Net
      increase (decrease) in cash and cash equivalents
                      
                      
                      (4,611
                      )
                      
                      
                      (7,541
                      )
                      
                      
                      6,768Cash
      and cash equivalents, beginning of period
                      
                      
                      11,379
                      
                      
                      
                      35,028
                      
                      
                      
                      -Cash
      and cash equivalents, end of period
                      
                      $
                      6,768
                      
                      
                      $
                      27,487
                      
                      
                      $
                      6,768Supplementary
      disclosure of cash flow information:Cash
      paid for interest
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -Cash
      paid for income taxes
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -Supplementary
      disclosure of noncash investing and financing activities:Warrants
      issued to placement agents and investors, in connection with private
      placement
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      20,208Preferred
      stock conversion to common stock
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      16,760Warrants
      converted to common shares
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      18





The
accompanying notes are an integral part of the unaudited interim financial
statements.


5


Table of Contents





ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES TO FINANCIAL STATEMENTS


(unaudited)




1.
Nature of the Business and Basis of Presentation





ZIOPHARM
Oncology, Inc. (“ZIOPHARM” or the “Company”) is a biopharmaceutical company that
seeks to acquire, develop and commercialize, on its own or with other commercial
partners, products for the treatment of important unmet medical needs in cancer
treatment.





The
Company has had limited operations to date and its activities have consisted
primarily of raising capital and conducting research and development.
Accordingly, the Company is considered to be in the development stage at
March 31, 2009, as defined by the Financial Accounting Standards Board
("FASB") in Statement of Financial Accounting Standards ("SFAS") No. 7,
"Accounting and Reporting by
Development Stage Enterprises." The Company's fiscal year ends on
December 31.





The
Company has operated at a loss since its inception in 2003 and has no revenues.
The Company anticipates that losses will continue for the foreseeable future. At
March 31, 2009, the Company’s accumulated deficit was approximately $86.8
million. With the proceeds from its 2007 common stock offering, which was
completed on February 23, 2007, the Company currently believes that it has
sufficient capital to fund development and commercialization activities,
principally for palifosfamide, late into the second quarter of 2010. The
Company’s ability to continue operations after its current cash resources are
exhausted depends on its ability to obtain additional financing and achieve
profitable operations, as to which no assurances can be given. Cash requirements
may vary materially from those now planned because of changes in the focus and
direction of its research and development programs, competitive and technical
advances, patent developments or other developments. Additional financing will
be required to continue operations after the Company exhausts its current cash
resources and to continue its long-term plans for clinical trials and new
product development. The Company is working with placement agents to obtain
additional financing. There can be no assurance that any such financing can be
realized by the Company, or if realized, what the terms thereof may be, or that
any amount that the Company is able to raise, will be adequate to support the
Company’s working capital requirements until it achieves profitable
operations.  The Company’s failure to raise capital as and when needed
would have a negative impact on its financial condition and its ability to
pursue its business strategies. If adequate additional
funds are not available when required,or if unsuccessful in entering
into partnership agreements for the further development of its products,the Company will be
required to delay, reduce or eliminate planned preclinical and clinical
trialsand terminate
theapproval process for its product candidates from the FDA or other
regulatory authorities.  In addition, the Company could be forced to
discontinue product development, reduce or forego sales and marketing efforts,
forego attractive business opportunities or pursue merger or
divestiture strategies.There can be no assurances that
forecasted results will be achieved or that additional financing will be
obtained.  The financial statements do not include any adjustments
relating to the recoverability and classification of asset amounts or the
amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.





The
accompanying unaudited interim financial statements have been prepared in
accordance with the instructions to Form 10-Q pursuant to the rules and
regulations of the Securities and Exchange Commission.  Certain
information and note disclosures required by generally accepted accounting
principles (“GAAP”) in the United States of America have been condensed or
omitted pursuant to such rules and regulations.





The
preparation of financial statements in conformity with GAAP requires the Company
to make estimates and judgments that affect the reported amounts of assets,
liabilities and expenses, and related disclosure of contingent liabilities at
the dates of the financial statements.  Actual amounts may differ from
these estimates.





It is
management’s opinion that the accompanying unaudited interim financial
statements reflect all adjustments (which are normal and recurring) that are
necessary for a fair statement of the results for the interim
periods.  The unaudited interim financial statements should be read in
conjunction with the unaudited financial statements and the notes thereto for
the year ended December 31, 2008 included in the Company’s Form
10-K.





The
year-end balance sheet data was derived from the audited financial statements
but does not include all disclosures required by accounting principles generally
accepted in the United States of America.





The
results disclosed in the Statements of Operations for the three months ended
March 31, 2009 are not necessarily indicative of the results to be expected for
the full fiscal year.


6


Table of Contents




ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





2.
Summary of Significant Accounting Policies





Except
for the policies listed below, our significant accounting policies were
identified in the Company’s Form 10-K for the fiscal year ended December 31,
2008.





Warrants





On
January 1, 2009, the Company adopted Emerging Issues Task Force Issue 07-05,
“Determining whether an
Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”,
(“EITF 07-05”).  This Issue prescribes the
methodology by which a company must determine whether a financial instrument is
a derivative within the meaning of Statement of Financial Accounting
Standard No. 133 Accounting
for Derivative Instruments and Hedging Activities (“FASB No. 133”). In
applying the methodology contained in EITF 07-05 and FASB No. 133 it was
concluded that certain warrants issued by the Company in May 2005 have terms
that do not meet the criteria to be considered indexed to the Company’s own
stock and therefore should be re-classified from the equity section to the
liability section of the Balance Sheets. . The warrant is subject
to re-measurement at each balance sheet date and any change in fair value is
recognized as a component of other income (expense). Fair value is measured
using the Black-Scholes valuation model.




Fair
Value Measurements
  Effective
January 1, 2008, the Company adopted Statement of Financial Accounting
Standards No. 157, “Fair Value Measurements” (“SFAS 157”). In
February 2008, the FASB issued FASB Staff Position No. FAS 157-2,
“Effective Date of FASB Statement No. 157,” which provides a one year
deferral of the effective date of SFAS 157 for non-financial assets and
non-financial liabilities, except those that are recognized or disclosed in the
financial statements at fair value at least annually. SFAS 157 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 SFAS 157 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 SFAS 157 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.
  ·
              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.
  ·
              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
adoption of this statement did not have a material impact on the Company’s
results of operations and financial condition.
  Assets
and liabilities measured at fair value on a recurring basis as of March 31,
2009 are as follows:
 ($
      in thousands)
                    
                    Fair
      Value Measurements at Reporting Date UsingDescription
                    
                    Balance
      as of March 31, 2009
                    
                    
                    Quoted
      Prices in Active Markets for Identical Assets/Liabiities (Level
      1)
                    
                    
                    Significant
      Other Observable Inputs (Level 2)
                    
                    
                    Significant
      Unobservabl Inputs (Level 3)Warrant
      liability
                    
                    $
                    80
                    
                    
                    $
                    -
                    
                    
                    $
                    80
                    
                    
                    $
                    -
  The
warrants were valued using a Black-Scholes valuation model.  See note 5
for additional disclosure on the valuation methodology and significant
assumptions.


7


Table of Contents





ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





2.
Summary of Significant Accounting Policies – (continued)




Recent
Accounting Pronouncements
 
 In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”). This statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007. On February 6, 2008, the
FASB announced it issued a FASB Staff Position (FSP) to allow a one-year
deferral of adoption of SFAS 157 for nonfinancial assets and nonfinancial
liabilities that are recognized at fair value on a nonrecurring basis. SFAS 157
provides a common fair value hierarchy for companies to follow in determining
fair value measurements in the preparation of financial statements and expands
disclosure requirements relating to how such fair value measurements were
developed. SFAS 157 clarifies the principle that fair value should be based on
the assumptions that the marketplace would use when pricing an asset or
liability, rather than company specific data. The Company adopted the provisions
of this statement relative to financial assets and liabilities on January 1,
2008 and those relative to non-financial assets and liabilities on January 1,
2009. Adoption of this new standard did not have a material impact on the
Company’s financial position, results of operations or cash flows.
 
 In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS
141(R)”). SFAS 141(R) expands the definition of a business combination and
requires the fair value of the purchase price of an acquisition, including the
issuance of equity securities, to be determined on the acquisition date. SFAS
141(R) also requires that all assets, liabilities, contingent considerations,
and contingencies of an acquired business be recorded at fair value at the
acquisition date. In addition, SFAS 141(R) requires that acquisition costs
generally be expensed as incurred, restructuring costs generally be expensed in
periods subsequent to the acquisition date, changes in accounting for deferred
tax asset valuation allowances be expensed after the measurement period, and
acquired income tax uncertainties be expensed after t he measurement period.
SFAS 141(R) is effective for fiscal years beginning after December 15, 2008
with early adoption prohibited. SFAS 141(R) is effective for the Company
beginning January 1, 2009 and did not have an impact but may change accounting
for business combinations on a prospective basis.


In April
2008, the FASB issued EITF 07-05, “Determining whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock”, (“EITF
07-05”).  EITF 07-05 provides guidance on determining what types of
instruments or embedded features in an instrument held by a reporting entity can
be considered indexed to its own stock for the purpose of evaluating the first
criteria of the scope exception in paragraph 11(a) of SFAS 133.  EITF
07-05 is effective for financial statements issued for fiscal years beginning
after December 15, 2008 and early application is not
permitted.  Adoption of this new standard decreased equity warrants by
$1,639,000, decreased deficit accumulated during the development stage by
$1,566,000 and increased warrant liability by $73,000.  See Note 6,
“Warrants” for additional disclosure.





In April
2009, the FASB issued FASB Staff Position FAS 157-4,Determining Whether a Market Is Not
Active and a Transaction Is Not Distressed,  or FSP
FAS 157-4; FSP FAS 157-4 provides guidelines for making fair value
measurements more consistent with the principles presented in SFAS 157. FSP
FAS 157-4 provides additional authoritative guidance in determining whether
a market is active or inactive, and whether a transaction is distressed, is
applicable to all assets and liabilities (i.e. financial and nonfinancial) and
will require enhanced disclosures.  This standard is effective for periods
ending after June 15, 2009. We are evaluating the impact that it will have
on our financial statements, if any.




In April
2009 the FASB issued FASB Staff Position FAS 115-2, FAS 124-2,
and EITF 99-20-2,Recognition and Presentation of Other-Than-Temporary Impairments , or FSP
FAS 115-2, FAS 124-2, and EITF 99-20-2; and FSP FAS 115-2,
FAS 124-2, and EITF 99-20-2 provides additional guidance to provide
greater clarity about the credit and noncredit component of an
other-than-temporary impairment event and to more effectively communicate when
an other-than-temporary impairment event has occurred. This FSP applies to debt
securities.  This standard is effective for periods ending after
June 15, 2009. We are evaluating the impact that it will have on our
financial statements, if any.




In April
2009 the FASB issued FASB Staff Position FAS 107-1 and APB 28-1,Interim Disclosures about Fair
Value of Financial Instruments , or FSP FAS 107-1 and APB 28-1. FSP
FAS 107-1 and APB 28-1, amends FASB Statement No. 107,Disclosures about Fair
Value of Financial Instruments , to require disclosures about fair value
of financial instruments in interim as well as in annual financial statements.
This FSP also amends APB Opinion No. 28,Interim Financial
Reporting , to require those disclosures in all interim financial
statements.  This standard is effective for periods ending after
June 15, 2009. We are evaluating the impact that it will have on our
financial statements, if any.





3.
Net Loss per Share





Basic net loss per share is computed by
dividing net loss by the weighted average number of common shares outstanding
for the period. The Company's potential dilutive shares, which include
outstanding common stock options, unvested restricted stock and warrants have
not been included in the computation of diluted net loss per share for any of
the periods presented as the result would be antidilutive.  Such
potential common shares at March 31, 2009 and 2008 consist of the
following:





March
      31,2009
                  
                  
                  2008Stock
      options
                  
                  
                  2,581,256
                  
                  
                  
                  2,834,666Unvested
      restricted stock
                  
                  
                  541,167
                  
                  
                  
                  170,000Warrants
                  
                  
                  5,039,659
                  
                  
                  
                  5,039,6598,162,082
                  
                  
                  
                  8,044,325




8


Table of Contents





ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





4.
Commitments and Contingencies





License
agreements and patents





Patent
and Technology License Agreement—The University of Texas M. D. Anderson Cancer
Center and the Texas A&M University System.





On August
24, 2004, the Company entered into a patent and technology license agreement
with The Board of Regents of the University of Texas System, acting on behalf of
The University of Texas M. D. Anderson Cancer Center and the Texas A&M
University System (collectively, the “Licensors”). Under this agreement, the
Company was granted an exclusive, worldwide license to rights (including rights
to US and foreign patent and patent applications and related improvements and
know-how) for the manufacture and commercialization of two classes of organic
arsenicals (water- and lipid-based) for human and animal use. The class of
water-based organic arsenicals includes darinaparsin.





In
October 2004, the Company received a notice of allowance for US Patent
Application No. 10/337969, entitled “S-dimethylarsino-thiosuccinic acid
S-dimethylarsino-2-thiobenzoic acid S-(simethylarsino) glutathione as treatments
for cancer.” The patent application claims both therapeutic uses and
pharmaceutical compositions containing a novel class of organic arsenicals,
including darinaparsin, for the treatment of cancer. In February 2006, we
announced that a second organic arsenic case has been issued under U.S. Patent
No. 6995188. This patent provides further coverage of cancer treatment using
organic arsenic, including darinaparsin, in combination with other agents or
therapies.  On July 29, 2008, an additional organic arsenic patent was
issued under U.S. Patent No. 7,405,314, providing further coverage of cancer
treatment using organic arsenic, including higher purity
darinaparsin.  Currently there are corresponding foreign applications
relating to darinaparsin in various foreign countries.





As
partial consideration for the license rights obtained, the Company made an
upfront payment of $125 thousand and granted the Licensors 250,487 (500,000
pre-Merger) shares of our common stock. The Company recorded expense for the
$125 thousand upfront payment and recognized research and development expense of
$426 thousand in connection with the issuance of the 250,487 shares of common
stock in the year ended December 31, 2004. In addition, the Company issued
options to purchase an additional 50,222 (100,250 pre-Merger) shares outside the
2003 Stock Option Plan for $0.002 per share following the successful completion
of certain clinical milestones. Upon the filing of an Investigation New Drug
Application (“IND”) for darinaparsin in 2005, 12,555 (25,063 pre-Merger) shares
vested and the Company recognized compensation expense of $54 thousand. Upon the
completion of dosing of the last patient for both phase I clinical trials in
2007, 25,111 (50,125 pre-Merger) shares vested and the Company recognized
expense of $120 thousand. The remaining 12,556 (25,062 pre-Merger) shares will
vest upon enrollment of the first patient in a multi-center pivotal clinical
trial (i.e., a human clinical trial intended to provide the substantial evidence
of efficacy necessary to support the filing of an approvable New Drug
Application (“NDA”) for darinaparsin). The options were subject to accounting
pursuant to EITF 96-18, and therefore were valued at the date which the
milestones are achieved. In addition, the Licensors are entitled to receive
certain milestone payments (the “Anderson Milestones”), including $100,000 that
was paid upon the commencement of phase I clinical trial for which the Company
recognized the expense in the year ended December 31, 2005 and $250 thousand
upon the dosing of the first patient in the Registrant-sponsored phase II
clinical trial for darinaparsin which was recognized in the year ended December
31, 2006. The Company may be required to make additional payments upon
achievement of certain other milestones, in varying amounts which on a
cumulative basis could total up to $4.9 million. In addition, the Licensors
are entitled to receive royalty payments on sales from a licensed product should
such a product be approved for commercial sale and sales of a licensed product
be effected in the United States, Canada, the European Union or Japan. The
Licensors also will be entitled to receive a portion of any fees that the
Company may receive from a possible sublicense under certain circumstances. For
the years ended December 31, 2007 and 2006, the Company expensed $100 thousand
for payments made to the Licensors to conduct scientific research. The Company
has the exclusive right to all intellectual property rights resulting from such
research pursuant to the terms of the license agreement. These sponsored
research agreements and any related extensions expired in February 2008 with no
payments being made in 2008 or the first quarter of 2009.





The
license agreement also contains other provisions customary and common in similar
agreements within the industry, such as the right to sublicense the Company
rights under the agreement. However, if the Company sublicenses its rights prior
to the commencement of a pivotal study (i.e., a human clinical trial
intended to provide the substantial evidence of efficacy necessary to support
the filing of an approvable NDA), the Licensors will be entitled to receive a
share of the payments received by the company in exchange for the sublicense
(subject to certain exceptions).


9




Table of Contents




ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





4.
Commitments and Contingencies – (continued)





License
Agreement with DEKK-Tec, Inc.





On
October 15, 2004, the Company entered into a license agreement with DEKK-Tec,
Inc., pursuant to which it was granted an exclusive, worldwide license for
palifosfamide. As part of the signing of license agreement with DEKK-Tec, the
Company expensed a $50 thousand up-front payment in the year ended December 31,
2004.





In
consideration for the license rights, DEKK-Tec is entitled to receive milestone
payments upon the occurrence of certain achievements of certain milestones, in
varying amounts which on a cumulative basis may total $3,900,000. Of the
aggregate milestone payments, most of the total amount will be creditable
against future royalty payments, as referenced below. During the year ended
December 31, 2006, the Company recorded a charge of $100 thousand for achieving
phase II milestones. Additionally in 2004, the Company issued DEKK-Tec an option
to purchase 27,616 shares of our common stock for $0.02 per share. The options
were subject to accounting pursuant to EITF 96-18, and therefore are valued at
the date which the milestones are achieved. Upon the execution of the license
agreement, 6,904 shares vested and were exercised in the fiscal year ended
December 31, 2005 and resulted in a recorded charge of $12 thousand to research
and development expense.  The remaining options will vest upon certain
milestone events, culminating with final FDA approval of the first NDA submitted
by the Company (or by our sublicensee) for palifosfamide. DEKK-Tec is entitled
to receive royalty payments on the sales of palifosfamide should it be approved
for commercial sale.  There were no payments during the first quarter
of 2009.




Option
Agreement with Southern Research Institute (“SRI”)





On
December 22, 2004, the Company entered into an Option Agreement with SRI (the
“Option Agreement”), pursuant to which the Company was granted an exclusive
option to obtain an exclusive license to SRI’s interest in certain intellectual
property, including exclusive rights related to certain isophosphoramide mustard
analogs (the “SRI Option”).




Also on
December 22, 2004, the Company entered into a Research Agreement with SRI
pursuant to which, the Company agreed to spend a sum not to exceed $200 thousand
between the execution of the agreement and December 21, 2006, including a $25
thousand payment that was made simultaneously with the execution of the
agreement, to fund research and development work by SRI in the field of
isophosphoramide mustard analogs (the “SRI Research Program”).  The
option agreement was exercised on February 13, 2007 and annual payments of $25
thousand were made in the years ended December 31, 2008 and 2007 for maintenance
of this option agreement.  There were no payments during the first
quarter of 2009.





License
Agreement with Baxter Healthcare Corporation





On
November 3, 2006, the Company signed a definitive Asset Purchase Agreement (for
indibulin) and License Agreement (to Baxter's proprietary nanosuspension
technology) with affiliates of Baxter Healthcare Corporation. Indibulin is a
novel anti-cancer agent that binds to tubulin, one of the essential proteins for
chromosomal segregation, and targets mitosis like the taxanes and vinca alkaloids. It is
available as both an oral and a proprietary nanosuspension intravenous
form. Molecules that target mitosis and inhibit cell division (antimitotic
agents) are a major focus of cancer research and they are among the
most widely used anti-cancer drugs in oncology today. Among the
more well known antimitotic drugs are the taxanes (paclitaxel, docetaxel) and
the vinca alkaloids (vincristine, vinblastine).  The terms of the agreement
include an upfront cash payment of approximately $1.1 million, which has been
expensed as purchased research and development in the year ended December 31,
2006. In addition, $15 thousand was paid for annual patent and license
maintenance fee and $100 thousand was paid for existing inventory during
2006. During the year ended December 31, 2007, the Company recorded an expense
of $625 thousand related to the achievement of a milestone for the successful US
IND application for indibulin and also paid an additional $15 thousand for the
annual patent and license maintenance fee. In 2008, the Company paid $15
thousand for the annual patent and license maintenance fee.  In
addition to the upfront costs, there will be additional milestone payments that
could amount to approximately $8 million in the aggregate and royalties on net
sales. The purchase price includes the entire indibulin intellectual property
portfolio as well as existing drug substance and capsule
inventories.  There were no payments during the first quarter of
2009.


10


Table of Contents





ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





4.
Commitments and Contingencies – (continued)





Collaboration
agreement with Harmon Hill, LLC





On April
8, 2008, the Company signed a collaboration agreement for Harmon Hill, LLC
(“Harmon Hill) to provide consulting and other services for the development and
commercialization of oncology therapeutics by ZIOPHARM.  The initial
term is one year and may be renewed or extended.  The Company shall
pay Harmon Hill $20 thousand per month for the consulting
services.  In addition the Company agrees to pay Harmon Hill (a) $500
thousand upon the first patient dosing of the Specified Drug in a pivotal trial,
which trial uses a dosing Regime introduced by Harmon Hill; and (b) provided
that the Specified Drug receives regulatory approval from the FDA, the EMEA or
another regulatory agency for the marketing of the Specified Drug, a 1% royalty
of the Company’s net sales will be awarded to Harmon Hill.  A 1% award
of royalties received from a sublicensee will be given to Harmon Hill in any
event that the Specified Drug is sublicensed. During the year ended December 31,
2008, the Company paid and expensed $180 thousand for consulting services per
aforementioned contract.  No milestones have been reached or accrued
during the three months ended March 31, 2009 or the year ended December 31,
2008.





5.
Warrants





On
January 1, 2009, the Company adopted Emerging Issues Task Force Issue 07-05,
“Determining whether an
Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”,
(“EITF 07-05”).  This Issue prescribes the
methodology by which a company must determine whether a financial instrument is
a derivative within the meaning of Statement of Financial Accounting
Standard No. 133 Accounting
for Derivative Instruments and Hedging Activities (“FASB No. 133”). In
applying the methodology contained in EITF 07-05 and FASB No. 133 it was
concluded that certain warrants issued by the Company in May 2005 have terms
that do not meet the criteria to be considered indexed to the Company’s own
stock and therefore should be re-classified from the equity section to the
liability section of the Balance Sheets.





In May
2005, the Company issued 419,786 placement warrants for services performed,
11,083 of which were subsequently exercised.  The remaining 408,703
warrants were originally valued at $1,639,000.  These warrants have a
provision for price protection should common stock or warrants be subsequently
issued at less than the warrants’ exercise price of $4.75 per
share.  This provision was triggered in 2006 when stock was sold at
$4.63 per share in a PIPE financing.  Accordingly, the warrants were
re-priced at $4.69.  The application of FASB No. 133 requires that the
warrants be valued at each financial reporting period and the resulting gain or
loss be recorded as other income (expense) in the Statements of
Operations.  Using a Black-Scholes model, the warrants were valued at
$73,000 on January 1, 2009, when EITF 07-05 was adopted.  The
reclassification attributed to the adoption of EITF 07-05 had the following
cumulative effect on the Balance Sheets:





Liabilities
                                  
                                  
                                  Stockholders’
      EquityDeficit
      AccumulatedDuring
      theWarrants
                                  
                                  
                                  Warrants
                                  
                                  
                                  Development
      StageAs
      reported on December 31, 2008
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  20,504
                                  
                                  
                                  $
                                  (85,061
                                  )Re-classification
                                  
                                  
                                  73
                                  
                                  
                                  
                                  (1,639
                                  )
                                  
                                  
                                  1,566Balance
      on January 1, 2009
                                  
                                  $
                                  73
                                  
                                  
                                  $
                                  18,865
                                  
                                  
                                  $
                                  (83,495
                                  )




11




Table of Contents





ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





5.
Warrants – (continued)





On March
31, 2009, the warrants were valued at $80,000 using a Black-Scholes valuation
model.  The change in the fair value of the warrant liability of
$7,000, was charged to other income (loss) in the Statements of
Operations.  The following assumptions were used at January 1, 2009
and March 31, 2009:





January
      1, 2009
                    
                    
                    March
      31, 2009Risk-free
      interest rate
                    
                    
                    1.55
                    %
                    
                    
                    1.67
                    %Expected
      life in years
                    
                    
                    3.42
                    
                    
                    
                    3.17Expected
      volatility
                    
                    
                    102
                    %
                    
                    
                    103
                    %Expected
      dividend yield
                    
                    
                    0
                    
                    
                    
                    0




6.
Stock-Based Compensation





The
Company recognized stock-based compensation expense on all employee and
non-employee awards as follows:





For
      the three months ended March 31,(in
      thousands)
                  
                  2009
                  
                  
                  2008Research
      and development, including costs of research contracts
                  
                  $
                  69
                  
                  
                  $
                  180General
      and administrative
                  
                  
                  341
                  
                  
                  
                  288Share
      based employee compensation expense before tax
                  
                  
                  410
                  
                  
                  
                  468Income
      tax benefit
                  
                  
                  -
                  
                  
                  
                  -Net
      share based employee compensation expense
                  
                  $
                  410
                  
                  
                  $
                  468





During
the three months ended March 31, 2009, the Company granted 10,000 stock options
at an exercise price of $0.80 per share.  The weighted-average grant
date fair value was $0.60 per share.





For the
three months ended March 31, 2009 and 2008, the fair value of stock options was
estimated on the date of grant using a Black-Scholes option valuation model with
the following assumptions:





For
      the three months ended March 31,2009
                  
                  
                  2008Risk-free
      interest rate
                  
                  
                  1.44
                  %
                  
                  
                  2.48
      - 2.98
                  %Expected
      life in years
                  
                  
                  5
                  
                  
                  
                  5Expected
      volatility
                  
                  
                  102
                  %
                  
                  
                  95
      - 96
                  %Expected
      dividend yield
                  
                  
                  0
                  
                  
                  
                  0




12





Table of Contents




ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)




6.
Stock-Based Compensation – (continued)





Transactions
under the stock option plan for the three months ended March 31, 2009 are as
follows:





(in thousands, except share and per
                    share data)
                  
                  Number of Shares
                  
                  
                  Weighted-
                    Average
                    Exercise Price
                  
                  
                  Weighted-
                    Average
                    Contractual
                    Term (Years)
                  
                  
                  Aggregate
                    Intristic
                    ValueOutstanding,
      December 31, 2008
                  
                  
                  2,738,089
                  
                  
                  $
                  3.43Granted
                  
                  
                  10,000
                  
                  
                  $
                  0.80Exercised
                  
                  
                  -Cancelled
                  
                  
                  166,833
                  
                  
                  $
                  2.12Outstanding,
      March 31, 2009
                  
                  
                  2,581,256
                  
                  
                  $
                  3.50
                  
                  
                  
                  7.09
                  
                  
                  $
                  148Options
      exercisable, March 31, 2009
                  
                  
                  1,772,142
                  
                  
                  
                  
                  
                  
                  
                  6.93
                  
                  
                  $
                  148Options
      available for future grant
                  
                  
                  754,561





A summary
of the status of non-vested restricted stock for the three months ended March
31, 2009 is as follows:





Number
      of Shares
                  
                  
                  Weighted-Average
                    Grant
      Date Fair ValueOutstanding,
      December 31, 2008
                  
                  
                  586,500
                  
                  
                  $
                  1.15Granted
                  
                  
                  -Vested
                  
                  
                  (33,333
                  )
                  
                  $
                  2.73Cancelled
                  
                  
                  (12,000
                  )
                  
                  $
                  0.83Outstanding,
      March 31, 2009
                  
                  
                  541,167
                  
                  
                  $
                  1.19




13


Table of Contents





Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations





Forward
Looking Statements





This
quarterly report on Form 10-Q contains “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended.  In
particular, statements contained in this Form 10-Q, including but not limited
to, statements regarding our future results of operations and financial
position, business strategy and plan prospects, projected revenue or costs and
objectives of management for future research, development or operations, are
forward-looking statements.  These statements relate to our future
plans, objectives, expectations and intentions and may be identified by words
such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “intends,”
“targets,” “projects,” “contemplates,” “believes,” “seeks,” “goals,”
“estimates,” “predicts,” “potential” and “continue” or similar
words.  Readers are cautioned that these forward-looking statements
are only predictions and are subject to risks, uncertainties, and assumptions
that are difficult to predict, including those identified below, under Part II,
Item 1A. “Risk Factors” and elsewhere herein. Therefore, actual results may
differ materially and adversely from those expressed in any forward-looking
statements. We undertake no obligation to revise or update any forward-looking
statements for any reason.





Business
Overview





ZIOPHARM
Oncology, Inc. is a biopharmaceutical company that is seeking to develop and
commercialize a diverse, risk-sensitive portfolio of in-licensed cancer drugs
that can address unmet medical needs through enhanced efficacy and/or safety and
quality of life. Our principal focus is on the licensing and development of
proprietary small molecule drug candidates that are related to cancer
therapeutics already on the market or in development and can be administered by
intravenous (“IV”) and/or oral capsule forms of administration.  We
believe this strategy will result in lower risk and expedited drug development
programs with product candidates having a low cost of manufacturing to address
changing reimbursement requirements around the world. While we may commercialize
our products on our own in North America, we recognize that favorable clinical
trial results can be better addressed by partnering with companies with the
requisite financial resources.  The Company could also negotiate the
right to complete development and marketing in certain geographies especially
for certain limited (niche) indications. Although we are currently in phase I
and/or II studies for three product candidates identified as darinaparsin
(ZinaparTM,
ZIO-101), palifosfamide (ZymafosTM,
ZIO-201), and indibulin (ZybulinTM,
ZIO-301), the Company’s current focus is on palifosfamide and more specifically
on completing initial enrollment of the ongoing randomized phase II trial with
palifosfamide to support a registration trial for palifosfamide in combination
with doxorubicin in the front- and second-line setting of soft tissue sarcoma.
We anticipate the initiation of such a trial as early as the first half of
2010.





·
            ZIO-101,
      or darinaparsin is an anti-mitochondrial (organic arsenic) compound
      covered by issued patents and pending patent applications in the U.S.
      and in foreign countries. A form of commercially available inorganic
      arsenic (arsenic trioxide [Trisenox ® ];
      “ATO”) has been approved in the United States and the European Union for
      the treatment of acute promyelocytic leukemia (“APL”), a precancerous
      condition. ATO is on the compendia listing for the therapy of multiple
      myeloma, and has been studied for the treatment of various other cancers.
      Nevertheless, ATO has been shown to be toxic to the heart, liver, and
      brain, which limits its use as an anti-cancer agent. ATO carries a “black
      box” warning for ECG abnormalities since arsenic trioxide has been shown
      to cause QT interval prolongation and complete atrioventricular block. QT
      prolongation can lead to a torsade de pointes-type
      ventricular arrhythmia, which can be fatal. Inorganic arsenic has also
      been shown to cause cancer of the skin and lung in humans. The toxicity of
      arsenic is generally correlated to its accumulation in organs and tissues.
      Our preclinical and clinical studies to date have demonstrated that
      darinaparsin is considerably less toxic than inorganic arsenic,
      particularly with regard to cardiac toxicity. In vitro testing of
      darinaparsin using the National Cancer Institute’s human cancer cell panel
      detected activity against a series of tumor cell lines including lung,
      colon, brain, melanoma, ovarian, and kidney cancer. Moderate activity was
      detected against breast and prostate cancer. In addition to solid tumors,
      in vitro testing
      in both the National Cancer Institute’s cancer cell panel and in vivo testing in a
      leukemia animal model demonstrated substantial activity against
      hematological cancers (cancers of the blood and blood-forming tissues)
      such as leukemia, lymphoma, myelodysplastic syndromes, and multiple
      myeloma. Preliminary results indicate significant activity against the HuT
      78 cutaneous T-cell lymphoma, the NK-G2MI natural killer-cell NHL,
      KARPAS-299 T-cell NHL, SU-DHL-8 B-cell NHL, SU-DHL-10 B-cell NHL and
      SU-DHL-16 B-cell NHL cell lines. Preclinical studies have also established
      anti-angiogenic properties of darinaparsin and provided support for the
      development of an oral capsule form of the drug, and established synergy
      of darinaparsin in combination with other approved anti-cancer
      agents.


14




Table of Contents





Phase I
testing of the intravenous form of darinaparsin in solid tumors and
hematological cancers has been completed. The Company has reported clinical
activity and, importantly, a safety profile from these studies as predicted by
preclinical results. The Company is nearing completion of Phase II studies in
advanced myeloma, in certain other hematological cancers, and primary liver
cancer. In addition, the Company is completing two Phase I studies with an oral
capsule form of darinaparsin. Preliminary favorable results from the trial with
IV-administered darinaparsin in hematologic cancers have been reported. Initial
study results indicate efficacy and a favorable safety profile in various types
of blood cancers. In the ongoing Phase I trials, preliminary reported data in
solid tumors indicate the oral form is active and well tolerated. The Company is
actively seeking a partner or partners, or other sources of funding, to progress
both the IV and oral programs into phase II study in particular sub-types of
non-Hodgkin’s lymphoma. If we cannot find a partner to fund the development of
either one or both forms of darinaparsin, we would intend to complete the
ongoing studies which are included in the Company’s current estimate of expenses
and then place the development program for darinaparsin on hold.





·
              ZIO-201,
      or palifosfamide, is the active metabolite of ifosfamide, a compound
      chemically related to cyclophosphamide. Patent applications covering
      proprietary forms of palifosfamide for pharmaceutical composition and
      method of use have been filed in the U.S. and internationally. Like
      cyclophosphamide and ifosfamide, palifosfamide is an alkylating agent. The
      Company believes that cyclophosphamide is the most widely used alkylating
      agent in cancer therapy, with significant use in the treatment of breast
      cancer and non-Hodgkin’s lymphoma. Ifosfamide has been shown to be
      effective at high doses in the treatment of sarcoma and lymphoma, either
      by itself or in combination with other anticancer agents. Ifosfamide is
      approved by the U.S. Food and Drug Administration ("FDA") as a
      treatment for testicular cancer while ifosfamide-based treatment is a
      standard of care for sarcoma, although it is not licensed for this
      indication by the U.S. Food and Drug Administration. Preclinical studies
      have shown that palifosfamide has activity against leukemia and solid
      tumors. These studies also indicate that palifosfamide may have a better
      safety profile than ifosfamide or cyclophosphamide because it does not
      appear to produce known toxic metabolites of ifosfamide, such as acrolein
      and chloroacetaldehyde. Acrolein, which is toxic to the kidneys and
      bladder, can mandate the administration of a protective agent called
      mesna, which is inconvenient and expensive. Chloroacetaldehyde is toxic to
      the central nervous system, causing “fuzzy brain” syndrome for which there
      is currently no protective measure. Similar toxicity concerns pertain to
      high-dose cyclophosphamide, which is widely used in bone marrow and blood
      cell transplantation. Palifosfamide has evidenced activity against
      ifosfamide- and/or cyclophosphamide-resistant cancer cell lines. Also in
      preclinical cancer models, palifosfamide was shown to be orally active and
      encouraging results have been obtained with palifosfamide in combination
      with doxorubicin, an agent approved to
  treat sarcoma.





Following
a Phase I dose escalation study, Phase II testing of the intravenous form of
palifosfamide as a single agent to treat advanced sarcoma has been completed. In
both Phase I and Phase II testing, palifosfamide has been administered without
the “uroprotectant” mesna, and the toxicities associated with acrolein and
chloroacetaldehyde have not been observed. With an earlier form of
palifosfamide, which has been substituted in the clinic with a new form, kidney
toxicity (Fanconi’s Syndrome) and acute renal failure were reported primarily at
doses significantly higher than the dose currently used in clinical trials. In
clinical study to date with the new form, there have been no definitive reports
of drug related kidney toxicity and palifosfamide has been otherwise well
tolerated. The Company reported clinical activity of palifosfamide when used
alone in the Phase II study addressing advanced sarcoma. Following review of the
preclinical combination studies, clinical data, and discussion with sarcoma
experts, the Company initiated a Phase I dose escalation study of palifosfamide
in combination with doxorubicin in patients with metastatic or unresectable soft
tissue sarcoma. In light of the reported favorable phase II clinical
activity data and with the combination of palifosfamide with doxorubicin well
tolerated in the phase I trial and evidencing activity, the Company has
initiated a Phase II randomized controlled trial to compare doxorubicin plus
palifosfamide to doxorubicin alone in patients with front and second-line
metastatic or unresectable soft tissue sarcoma. Data from the initial
patients in this trial are expected to shape a registration trial in the same
setting which is expected to initiate as early as the first half of 2010. The
Company is also developing an oral capsule form of palifosfamide to be studied
clinically following further data from the IV trials and partnering or other
sources of funding and  is considering other phase II trials in other
solid tumors as funding becomes available. Orphan Drug Designation for
palifosfamide has been obtained in both the United States and the European Union
for the treatment of soft tissue sarcomas.





15




Table of Contents





·
            ZIO-301,
      or indibulin, is a novel, orally available small molecular-weight
      inhibitor of tubulin polymerization that was acquired from Baxter
      Healthcare and is the subject of numerous patents worldwide, including the
      United States, the European Union and Japan. The microtubule component,
      tubulin, is one of the more well established drug targets in cancer.
      Microtubule inhibitors interfere with the dynamics of tubulin
      polymerization, resulting in inhibition of chromosome segregation during
      mitosis and consequently inhibition of cell division. A number of marketed
      IV anticancer drugs target tubulin, such as the taxane family members,
      paclitaxel (Taxol ® ),
      docetaxel (Taxotere ® )
      ,  the Vinca alkaloid family
      members, vincristine and vinorelbine, and the new class of epothilones
      with IxempraTMmarketed. This class of agents is typically the mainstay of therapy
      in a wide variety of indications. In spite of their effectiveness, the use
      of these drugs is associated with significant toxicities, notably
      peripheral neurotoxicity.




Preclinical
studies with indibulin demonstrate significant and broad antitumor activity,
including activity against taxane-refractory cell lines. The cytotoxic activity
of indibulin was demonstrated in several rodent and human tumor cell lines
derived from prostate, brain, breast, pancreas, lung, ovary, and cervical tumor
tissues and in rodent tumor and human tumor xenograft models. In addition,
indibulin was effective against multidrug resistant tumor cell lines (breast,
lung, and leukemia) both in
vitro and in
vivo. Indibulin is potentially safer than other tubulin inhibitors. No
neurotoxicity has been observed at therapeutic doses in rodents and in the
ongoing Phase I trials. Indibulin has also demonstrated synergy with approved
anti-cancer agents in preclinical studies. The availability of an oral capsule
formulation of indibulin creates significant commercial opportunity because no
oral capsule formulations of paclitaxel or related compounds are currently on
the market in the United States.





Indibulin
has completed a Phase I trial in Europe and two additional Phase I trials are
nearing completion in the U.S. in patients with advanced solid tumors. The
Company has reported signs of clinical activity at well-tolerated doses using a
continuous dosing scheme without the development of clinically relevant
peripheral neuropathy. Following encouraging results obtained with indibulin in
combination with erlotinib, and 5-FU in preclinical models, two Phase
I combination studies have been enrolled with Tarceva® and Xeloda® and are
reaching completion. Preclinical work with consultant Dr. Larry Norton is
continuing to explore dose scheduling for the clinical setting. With the data
from the phase I single agent and combination studies showing activity and with
a dose limiting toxicity not yet reached, the Company has decided to continue
the indibulin development program with a focus on Dr. Norton’s dose scheduling
findings and, subject to the availability of additional funding, with dose
escalation to maximum tolerated dose using a schedule selected from the
preclinical work.




Although
we intend to continue with clinical development of darinaparsin for lymphoma in
conjunction with a partner, of palifosfamide for soft tissue sarcoma, and
of indibulin for solid tumors, the successful development of our product
candidates is highly uncertain. Product development costs and timelines can vary
significantly for each product candidate are difficult to accurately predict and
will require us to obtain additional funding, either alone or in connection with
partnering arrangements.. Various statutes and regulations also govern or
influence the manufacturing, safety, labeling, storage, record keeping and
marketing of each product. The lengthy process of seeking approval and the
subsequent compliance with applicable statutes and regulations require the
expenditure of substantial resources. Any failure by us to obtain, or any delay
in obtaining, regulatory approvals could materially, adversely affect our
business. To date, we have not received approval for the sale of any drug
candidates in any market and, therefore, have not generated any revenues from
our drug candidates.




Development
Plan




Our
development plan for the next twelve months is focused on completing the first
50 patients in the randomized Phase II trial for palifosfamide, partnering
darinaparsin, and further establishing dose scheduling and maximum tolerated
dose with indibulin. We expect our principal expenditures during those 12 months
to be predominately for palifosfamide and include:





·
            Clinical
      trial expenses for palifosfamide;





·
            Clinical
      trial expenses, including the close down and data collection expenses for
      darinaparsin and indibulin;





·
            Rent
      for our facilities; and





·
            General
      corporate and working capital, including general and administrative
      expenses.




We intend
to use senior advisors, consultants, clinical research organizations, and other
third parties to perform certain aspects of product development, manufacturing,
clinical, and preclinical development, and regulatory, safety and quality
assurance functions.





16




Table
of Contents




With the
planned development of palifosfamide and continued collection of indibulin data,
with the intention of partnering further development of darinaparsin following
completion of ongoing studies, and with other adjustments in our project and
personnel expenses, including a recent workforce reduction of four positions in
February 2009 and other loss of personnel,  following the initial
patient enrollment and assuming no additional capital from financing or
partnering, we expect to incur the following expenses during the next twelve
months: approximately $1.6 million on preclinical and regulatory expenses;
approximately $3.1 million on clinical expenses (including clinical trials
that we expect to be triggered under the license agreements relating to our
product candidates); approximately $1.4
million on manufacturing expenses; approximately $0.7 million on
facilities, rent, and other facilities-related expenses; and approximately $3.7
million on general corporate and administrative expenses. With our current
cash position, adjustments in staffing and aggressive cash management strategy,
we believe that we currently have sufficient capital that will support our
current operations strategy into the second quarter of
2010.Our forecast of the period of time through which our
financial resources will be adequate to support our operations, the costs to
complete development of products and the cost to commercialize our future
products are forward-looking statements and involve risks and uncertainties, and
actual results could vary materially and negatively as a result of a number of
factors, including the factors discussed in the "Risk Factors" section of this
report. We have based these estimates on assumptions that may prove to be wrong,
and we could exhaust our available capital resources sooner than we currently
expect.





Product
Candidate Development and Clinical Trials





Intravenous darinaparsin,
organic arsenic, has been or is being tested in patients with advanced myeloma,
other hematological malignancies, and liver cancer. Two separate Phase II trials
have been completed with a third nearing completion. Recently reported positive
results in patients with lymphoma have led to the expansion of the hematological
trial focusing on non-Hodgkin's lymphoma. The Phase I trials with an oral form
of darinaparsin are completed in solid tumors and have been also expanded
to include non-Hodgkin’s lymphoma patients. The Company is in actively seeking
partners and other sources of funding for continuing the development program of
both the IV and oral forms in certain sub-types of non-Hodgkin’s
lymphoma.  If funding or partnering is not accomplished, the project
will be placed on hold.





Intravenous palifosfamide,
the proprietary form of isophosphoramide mustard, is being developed presently
to treat soft tissue sarcoma. A Phase II trial in advanced sarcoma has been
completed. A Phase I trial in combination with doxorubicin is fully enrolled
with treatment still ongoing and with the combination well tolerated, evidencing
activity, and with the dose combination established for further study. The
Company has initiated a randomized controlled phase II trial designed to compare
palifosfamide in combination with doxorubicin to doxorubicin alone in
the front or second-line treatment of metastatic or unresectable soft
tissue sarcoma and intends to treat initial patients to develop a
registration trial to initiate as early as the first half of 2010. An oral
formulation has also been developed preclinically and, following further IV
study results, additional funding or partnering, a phase I is expected to
initiate. Other trials in solid tumors are under consideration pending further
funding.  Orphan Drug Designation has been obtained for both the
United States and the European Union for the treatment of soft tissue sarcomas.
Technology transfer and scale-up for the commercial manufacture of the active
pharmaceutical ingredient and final product specification will continue as
resources allow.




Indibulin, a novel
anti-cancer agent that targets mitosis by inhibiting tubulin polymerization,
is administered as an oral capsule formulation. Indibulin has completed a
Phase I trial in Europe and two additional Phase I trials are nearing completion
in the United States with preliminary results reported for all three
trials.  Phase I trials of indibulin in combination with Tarceva ® and also
with Xeloda ® have
been initiated and are completing. Preclinical studies under the direction of
Dr. Larry Norton to support clinical study of dose dense and metronomic dosing
are well underway.  Pending further results from the Norton
preclinical work and subject to available funding, the Company intends to
further study indibulin with an identified schedule and to determine maximum
tolerated dose prior to formal phase II testing in a selected solid
tumor.  If further funding is not available, the project will be
placed on hold.


17


Table of Contents





Financial
Overview





Overview
of Results of Operations





Three
months ended March 31, 2009 compared to three months ended March 31,
2008





Revenue.  We had no
revenues for the three months ended March 31, 2009 and 2008.





Research and development
expenses.  Research and development expenses during the three
months ended March 31, 2009 and 2008 were as follows:





Three
      months ended March 31,2009
                  
                  
                  2008
                  
                  
                  Change($
      in thousands)Research
      and development
                  
                  $
                  1,608
                  
                  
                  $
                  6,074
                  
                  
                  $
                  (4,466
                  )
                  
                  
                  -74
                  %





Research
and development expenses decreased by $4.5 million from the three months ended
March 31, 2008 to the three months ended March 31, 2009.  The decrease
was primarily due to reduced manufacturing costs of $2.9 million, reduced
clinical project costs of $770,000, reduced travel of $104,000 and other
reductions of $138,000.  Contributing to the decrease was the
reduction in personnel which led to a savings of $603,000 in our salary and
benefit expenses and stock based compensation expense.  These
reductions and savings are attributed to our cost cutting initiatives in order
to extend our operations.





We expect
our research and development expenses to continue to decrease as patient costs
related to indibulin and darinaparsin end.




18


Table of Contents





General and administrative
expenses.  General and administrative expenses during the three
months ended March 31, 2009 and 2008 were as follows:





Three
      months ended March 31,2009
                  
                  
                  2008
                  
                  
                  Change($
      in thousands)General
      and administrative
                  
                  $
                  1,724
                  
                  
                  $
                  2,745
                  
                  
                  $
                  (1,021
                  )
                  
                  
                  -37
                  %





The
decrease in general and administrative expenses of $1.0 million from the three
months ended March 31, 2008 to the three months ended March 31, 2009 was
primarily due to decreased headcount which lead to a decrease in our salary and
benefit expenses and stock based compensation expense of
$457,000.  The decrease is also attributable to reductions in legal
and patent costs of $239,000, travel of $128,000, consulting of $127,000 and
other cost reductions of $70,000.





We expect
our selling, general and administrative expenses to level off over the remainder
of the year.





Other income
(expense).  Other income (expense) for the three months ended
March 31, 2009 and 2008 was as follows:





Three
      months ended March 31,2009
                  
                  
                  2008
                  
                  
                  Change($
      in thousands)Interest
      income
                  
                  $
                  -
                  
                  
                  $
                  196
                  
                  
                  $
                  (196
                  )
                  
                  
                  -100
                  %Change
      in fair value of warrants
                  
                  
                  (7
                  )
                  
                  
                  -
                  
                  
                  
                  7
                  
                  
                  
                  -100
                  %Total
                  
                  $
                  (7
                  )
                  
                  $
                  196
                  
                  
                  $
                  (189
                  )





The
decrease in interest income from the three months ended March 31, 2008 compared
to the three months ended March 31, 2009 was due primarily to lower cash
balances during the three months ended March 31, 2009.




19





Table of Contents





Liquidity
and Capital Resources





As of
March 31, 2009, we had approximately $6.8 million in cash and cash equivalents,
down from $11.4 million in cash and cash equivalents as of December 31, 2008.
Given the rate at we have historically used cash, the limited amount of cash for
use in operations and the recent instability in the capital markets, we have
taken measures to reduce our near term expenses while we seek additional
financing and partnering arrangements for the development of certain drug
candidates. We have reduced staffing and other personnel and project related
expenses, and have focused our priorities, including changes in our clinical
trial program and seeking a partner, to continue the further development of
darinaparsin.  If we cannot find a partner to fund the development of
either one or both forms of darinaparsin, we intend to discontinue the
development of darinaparsin following the completion of ongoing trials for which
associated expenses are included in the current forecast. If we are able to
obtain additional financing, further studies will progress with regard to
indibulin.  Based on our current costs, we believe that we currently
have sufficient capital to fund the development programs for palifosfamide into
the second quarter of 2010 (see Development Plan). Because our business does not
generate any cash flow, however, we will need to raise additional capital to
continue development of the palifosfamide beyond that time or to continue
development of our other product candidates. To the extent additional capital is
not available when we need it, or if we cannot successfully enter into
partnership agreements for the further development of our products, we may be
forced to abandon some or all of our development efforts, which would have a
material adverse effect on the prospects of our business. Further, our
assumptions relating to the expected costs of development and commercialization
and timeframe for completion are dependent on numerous factors other than
available financing, including significant unforeseen delays in the clinical
trial and regulatory approval process, which could be extremely costly. In
addition, our estimates assume that we will be able to enroll a sufficient
number of patients in each clinical trial.





The
following table summarizes our net increase (decrease) in cash and cash
equivalents for the three months ended March 31, 2009 and 2008:





Three
      months ended March 31,2009
                  
                  
                  2008($
      in thousands)Net
      cash provided by (used in):Operating
      activities
                  
                  $
                  (4,610
                  )
                  
                  $
                  (7,472
                  )Investing
      activities
                  
                  
                  (1
                  )
                  
                  
                  (69
                  )Financing
      activities
                  
                  
                  -
                  
                  
                  
                  -Net
      increase (decrease) in cash and cash equivalents
                  
                  $
                  (4,611
                  )
                  
                  $
                  (7,541
                  )




Net cash
used in operating activities was $4.6 million for the three months ended March
31, 2009 compared to $7.5 million for the three months ended March 31,
2008.  The $2.9 million decrease was primarily due to a $5.3 million
decrease in the net loss partially offset by changes to accounts payable,
accruals and other assets and liabilities.





Net cash
used in investing activities was $1,000 for the three months ended March 31,
2009 compared to net cash used in investing activities of $69,000 for the three
months ended March 31, 2008.  The decrease was primarily due to a
reduction in spending for purchases of property and equipment.





There was
no net cash provided by financing activities for the three months ended March
31, 2009 and 2008.


20





Table of Contents





Operating
capital and capital expenditure requirements





The
Company anticipates that losses will continue for the foreseeable future. At
March 31, 2009, the Company’s accumulated deficit was approximately $86.8
million.  Our actual cash requirements may vary materially from those
planned because of a number of factors including:





·
            Changes
      in the focus and direction of our development
  programs;





·
            Competitive
      and technical advances;





·
            Costs
      associated the development of palifosfamide and indibulin and the further
      financing of darinaparsin development by a partner;
  and





·
            Costs
      of filing, prosecuting, defending and enforcing any patent claims and any
      other intellectual property rights, or other
      developments.




In order
to continue our long-term plans for clinical trials and new product development,
we will need to raise additional capital to continue to fund our research and
development as well as operations after we exhaust our current cash
resources. We expect to finance our cash needs through the sale of equity
securities and strategic collaborations or debt financings or through other
sources that may be dilutive to existing stockholders. There can be no assurance
that any such financing can be realized by the Company, or if realized, what the
terms thereof may be, or that any amount that the Company is able to raise will
be adequate to support the Company’s working capital requirements until it
achieves profitable operations. Currently, we have no committed sources of
additional capital.  Recently, capital markets have experienced a
period of unprecedented instability that we expect may severely hinder our
ability to raise capital within the time periods needed or on terms we consider
acceptable, if at all.  If we are unable to raise additional funds
when needed, we may not be able to market our products as planned or continue
development and regulatory approval of our products, or we could be required to
delay, scale back or eliminate some or all our research and development
programs.





Working
capital as of December 31, 2008 was $5.9 million, consisting of
$11.7 million in current assets and $5.8 million in current
liabilities. Working capital as of March 31, 2009 was $3.0 million,
consisting of $7.0 million in current assets and $4.0 million in current
liabilities.





Contractual
obligations





The
following table summarizes our outstanding obligations as of March 31, 2009 and
the effect those obligations are expected to have on our liquidity and cash
flows in future periods:





Less
      than
                  
                  
                  
                  
                  
                  
                  
                  
                  More
      than($
      in thousands)
                  
                  Total
                  
                  
                  1
      year
                  
                  
                  2
      - 3 years
                  
                  
                  4
      - 5 years
                  
                  
                  5
      yearsOperating
      Leases
                  
                  $
                  927
                  
                  
                  $
                  434
                  
                  
                  $
                  413
                  
                  
                  $
                  80
                  
                  
                  $
                  -





Our
commitments for operating leases relate to the lease for our corporate
headquarters in New York, NY and our operations center in Boston,
Massachusetts.




21




Table of Contents




Off-balance
sheet arrangements





During
the three months ended March 31, 2009 and 2008, we did not engage in any
off-balance sheet arrangements.





Critical
Accounting Policies and Estimates





In our
Form 10-K for the fiscal year ended December 31, 2008, our most critical
accounting policies and estimates upon which our financial status depends were
identified as those relating to stock-based compensation; net operating losses
and tax credit carryforwards; and impairment of long-lived assets.  We
reviewed our policies and determined that those policies remain our most
critical accounting policies for the three months ended March 31,
2009.  During the three months ended March 31, 2009, we have added an
accounting policy for valuing our warrant liability.  See footnotes 2
and 5 herein for additional disclosure.





Item 3. Quantitative and Qualitative Disclosures about
Market Risk





Our
exposure to market risk is limited to our cash. The goals of our investment
policy are preservation of capital, fulfillment of liquidity needs and fiduciary
control of cash. We also seek to maximize income from our investments without
assuming significant risk. To achieve our goals, we maintain our cash in
interest-bearing bank accounts.  As all of our investments are cash
deposits in a global bank, it is subject to minimal interest rate
risk.





Item 4. Controls and Procedures





Our
management, with the participation of our chief executive officer and chief
financial officer, has evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the
end of the period covered by this report. Based on such evaluation, our
principal executive officer and principal financial officer have concluded that,
as of the end of such period, our disclosure controls and procedures were
effective in ensuring that information required to be disclosed by ZIOPHARM in
the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported, on a timely basis, and is accumulated and
communicated to our management, including our principal executive officer and
principal financial officer, as appropriate, to allow timely decisions regarding
required disclosure.





No change
in our internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) occurred during the period covered by
this quarterly report that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.





22


Table of Contents


Part II - Other Information





Item 1. Legal Proceedings





Not applicable.





Item 1A. Risk Factors





The
following important factors could cause our actual business and financial
results to differ materially from those contained in forward-looking statements
made in this Quarterly Report on Form 10-Q or elsewhere by management from
time to time.   The risk factors in this report have been revised
to incorporate changes to our risk factors from those included in our annual
report on Form 10-K for the year ended December 31, 2008. The risk factors set
forth below with an asterisk (*) next to the title are new risk factors or risk
factors containing changes, including any material changes, from the risk
factors previously disclosed in Item 1A of our Annual Report on Form 10-K for
the year ended December 31, 2008, as filed with the Securities and Exchange
Commission.





RISKS
RELATED TO OUR BUSINESS




We
may not be able to raise sufficient capital to continue clinical testing our
product candidates.





If we do
not succeed in raising additional funds on acceptable terms or if we cannot
successfully enter into partnership agreements for the further development of
our products, we will be unable to continue our planned preclinical and clinical
trials or obtain approval for any of our product candidates from the FDA or
other regulatory authorities.  In addition, we could be forced to
discontinue product development, reduce or forego sales and marketing efforts
and forego attractive business opportunities. In the event that we are unable to
continue as a going concern, we may be forced to cease operations altogether or
may elect or be required to seek protection from our creditors by filing a
voluntary petition in bankruptcy or may be subject to an involuntary petition in
bankruptcy.





We
believe we have sufficient capital to continue enrolling patients in our ongoing
randomized phase II trial for palifosfamide as we are currently seeking a
partner to fund the development of darinaparsin and we complete our current
trials with indibulin.  Further work with indibulin is ongoing
preclinically and will be further extended clinically if we are able to obtain
sufficient additional capital.  If we are unable to obtain sufficient
additional capital, the program will be placed on hold.  If we cannot
find a partner to fund the development of darinaparsin, we intend to discontinue
its development following the completion of ongoing trials.  We are
currently devoting a significant portion of our resources to the development of
palifosfamide.  Accordingly, the resources that we are devoting to the
development of indibulin and darinaparsin have significantly
diminished.  As a result, further progress with the development of
darinaparsin and indibulin, if any, may be significantly delayed and may depend
on the success of our ongoing clinical trials involving
palifosfamide.





We
may not be able to commercialize any products, generate significant revenues, or
attain profitability.





We have
never generated revenue and have incurred significant net losses in each year
since our inception. For the three months ended March 31, 2009, we had a net
loss of $3.3 million and we had incurred approximately $86.8 million of
cumulative net losses since our inception in 2003. We expect to continue to
incur significant operating and capital expenditures. Although we have taken
near-term cost cutting measures aimed at preserving capital while we pursue
sources of potential additional financing, further development of our product
candidates will likely require substantial increases in our expenses in the
future as we:




·
              Continue
      to undertake preclinical development and clinical trials for product
      candidates;





·
              Scale-up
      the formulation and manufacturing of our product
    candidates;





·
              Seek
      regulatory approvals for product
candidates;





·
              Implement
      additional internal systems and infrastructure;
  and





·
              Hire
      additional personnel.





Even if
we succeed in developing and commercializing one or more of our product
candidates, for which success is not assured, we may not be able to generate
significant revenues. If we do generate significant revenues, we may never
achieve or maintain profitability. Our failure to achieve or maintain
profitability could negatively impact the trading price of our common
stock.





23





Table of Contents


If
we are not able to successfully develop and commercialize our product
candidates, we may not generate sufficient revenues to continue our business
operations.





To date,
none of our product candidates have been approved for commercial sale in any
country. The process to develop, obtain regulatory approval for, and
commercialize potential drug candidates is long, complex, and costly. Unless and
until we receive approval from the FDA and/or other regulatory authorities for
our product candidates, we cannot sell our drugs and will not have product
revenues. Even if we obtain regulatory approval for one or more of our product
candidates, if we are unable to successfully commercialize our products, we may
not be able to generate sufficient revenues to continue our business without
raising significant additional capital, which may not be available.





We
may need to raise additional capital to fund our operations.  The
manner in which we raise any additional funds may affect the value of your
investment in our common stock.




As of
March 31, 2009, we had incurred approximately $86.8 million of cumulative net
losses and had approximately $6.8 million of cash, cash equivalents, and
short-term investments. Currently and anticipating additional reductions in
expense with no additional capital, we anticipate we will have sufficient cash
to fund our operations, principally related to the development of palifosfamide,
late into the second quarter of 2010. However, changes may occur that would
consume our existing capital prior to that time, including the progress of our
research and development efforts, changes in governmental regulation, and
acquisitions of additional product candidates.





Currently,
we have no committed sources of additional capital.  We do not know
whether additional financing will be available on terms favorable or acceptable
to us when needed, if at all.  Our business is highly cash-intensive
and our ability to continue operations after our current cash resources are
exhausted depends on our ability to obtain additional financing and achieve
profitable operations, as to which no assurances can be given.





Recently,
capital markets have experienced a period of unprecedented instability that we
expect may severely hinder our ability to raise capital within the time periods
needed or on terms we consider acceptable, if at all.  Moreover, if we
fail to advance one or more of our current product candidates to later-stage
clinical trials, successfully commercialize one or more of our product
candidates, or acquire new product candidates for development, we may have
difficulty attracting investors that might otherwise be a source of additional
financing.





In the
current economic environment, our need for additional capital and limited
capital resources may force us to accept financing terms that could be
significantly more dilutive than if we were raising capital when the capital
markets were more stable.  To the extent that we raise additional
capital by issuing equity securities, our stockholders may experience
dilution.  This dilution could be particularly substantial because the
price of our stock is trading at historically low prices.  In
addition, we may grant future investors rights superior to those of our common
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.





24




Table
of Contents





We
have a limited operating history upon which to base an investment
decision.





We are a
development-stage company that was incorporated in September 2003. To date, we
have not demonstrated an ability to perform the functions necessary for the
successful commercialization of any product candidates. The successful
commercialization of any product candidates will require us to perform a variety
of functions, including:




·
            Continuing
      to undertake preclinical development and clinical
  trials;





·
            Participating
      in regulatory approval processes;





·
            Formulating
      and manufacturing products; and





·
            Conducting
      sales and marketing activities.





Our
operations have been limited to organizing and staffing our Company, acquiring,
developing, and securing our proprietary product candidates, and undertaking
preclinical and clinical trials of our product candidates: darinaparsin,
palifosfamide, and indibulin. These operations provide a limited basis for you
to assess our ability to commercialize our product candidates and the
advisability of investing in our securities.





The
success of our growth strategy depends upon our ability to identify, select, and
acquire additional pharmaceutical product candidates for development and
commercialization. Because we currently neither have nor intend to establish
internal research capabilities, we are dependent upon pharmaceutical and
biotechnology companies and academic and other researchers to sell or license us
their product candidates.





Proposing,
negotiating, and implementing an economically viable product acquisition or
license is a lengthy and complex process. We compete for partnering arrangements
and license agreements with pharmaceutical, biopharmaceutical, and biotechnology
companies, many of which have significantly more experience than we do, and have
significantly more financial resources. Our competitors may have stronger
relationships with certain third parties including academic research
institutions, with whom we are interested in collaborating and may have,
therefore, a competitive advantage in entering into partnering arrangements with
those third parties. We may not be able to acquire rights to additional product
candidates on terms that we find acceptable, or at all.





We expect
that any product candidate to which we acquire rights will require significant
additional development and other efforts prior to commercial sale, including
extensive clinical testing and approval by the FDA and applicable foreign
regulatory authorities. All drug product candidates are subject to the risks of
failure inherent in pharmaceutical product development, including the
possibility that the product candidate will not be shown to be sufficiently safe
or effective for approval by regulatory authorities. Even if our product
candidates are approved, they may not be economically manufactured or produced,
or be successfully commercialized.





We
actively evaluate additional product candidates to acquire for development. Such
additional product candidates, if any, could significantly increase our capital
requirements and place further strain on the time of our existing personnel,
which may delay or otherwise adversely affect the development of our existing
product candidates. We must manage our development efforts and clinical trials
effectively, and hire, train and integrate additional management,
administrative, and sales and marketing personnel. We may not be able to
accomplish these tasks, and our failure to accomplish any of them could prevent
us from successfully growing our Company.




25





Table
of Contents




We
may not be able to successfully manage our growth.





In the
future, if we are able to advance our product candidates to the point of, and
thereafter through, clinical trials, we will need to expand our development,
regulatory, manufacturing, marketing and sales capabilities or contract with
third parties to provide for these capabilities. Any future growth will place a
significant strain on our management and on our administrative, operational, and
financial resources. Therefore, our future financial performance and our ability
to commercialize our product candidates and to compete effectively will depend,
in part, on our ability to manage any future growth effectively. To manage this
growth, we must expand our facilities, augment our operational, financial and
management systems, and hire and train additional qualified personnel. If we are
unable to manage our growth effectively, our business may be
harmed.





Our
business will subject us to the risk of liability claims associated with the use
of hazardous materials and chemicals.





Our
contract research and development activities may involve the controlled use of
hazardous materials and chemicals. Although we believe that our safety
procedures for using, storing, handling and disposing of these materials comply
with federal, state and local laws and regulations, we cannot completely
eliminate the risk of accidental injury or contamination from these materials.
In the event of such an accident, we could be held liable for any resulting
damages and any liability could have a materially adverse effect on our
business, financial condition, and results of operations. In addition, the
federal, state and local laws and regulations governing the use, manufacture,
storage, handling and disposal of hazardous or radioactive materials and waste
products may require our contractors to incur substantial compliance costs that
could materially adversely affect our business, financial condition, and results
of operations.





We
rely on key executive officers and scientific and medical advisors, and their
knowledge of our business and technical expertise would be difficult to
replace.





We are
highly dependent on Dr. Jonathan Lewis, our Chief Executive Officer and Chief
Medical Officer, Richard Bagley, our President, Chief Operating Officer and
Chief Financial Officer, and our principal scientific, regulatory, and medical
advisors. Dr. Lewis’ and Mr. Bagley’s employment are governed by written
employment agreements that provide for terms that expire in January 2011 and
July 2011, respectively.  Dr. Lewis and Mr. Bagley may terminate their
employment with us at any time, subject, however, to certain non-compete and
non-solicitation covenants. The loss of the technical knowledge and management
and industry expertise of Dr. Lewis and Mr. Bagley, or any of our other key
personnel, could result in delays in product development, loss of customers and
sales, and diversion of management resources, which could adversely affect our
operating results. We do not carry “key person” life insurance policies on any
of our officers or key employees.





If
we are unable to hire additional qualified personnel, our ability to grow our
business may be harmed.





We will
need to hire additional qualified personnel with expertise in preclinical and
clinical research and testing, government regulation, formulation and
manufacturing, and eventually, sales and marketing. We compete for qualified
individuals with numerous biopharmaceutical companies, universities, and other
research institutions. Competition for such individuals is intense and we cannot
be certain that our search for such personnel will be successful. Attracting and
retaining qualified personnel will be critical to our success. If we are unable
to hire additional qualified personnel, our ability to grow our business may be
harmed.





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We
may incur substantial liabilities and may be required to limit commercialization
of our products in response to product liability lawsuits.





The
testing and marketing of medical products entail an inherent risk of product
liability. If we cannot successfully defend ourselves against product liability
claims, we may incur substantial liabilities or be required to limit
commercialization of our products, if approved. Even a successful defense would
require significant financial and management resources. Regardless of the merit
or eventual outcome, liability claims may result in:





·
            Decreased
      demand for our product candidates;





·
            Injury
      to our reputation;





·
            Withdrawal
      of clinical trial participants;





·
            Withdrawal
      of prior governmental approvals;





·
            Costs
      of related litigation;





·
            Substantial
      monetary awards to patients;





·
            Product
      recalls;





·
            Loss
      of revenue; and





·
            The
      inability to commercialize our product
  candidates.





We
currently carry clinical trial insurance and product liability insurance.
However, our inability to renew our policies or to obtain sufficient insurance
at an acceptable cost could prevent or inhibit the commercialization of
pharmaceutical products that we develop, alone or with
collaborators.





RISKS
RELATED TO THE CLINICAL TESTING, REGULATORY APPROVAL AND MANUFACTURING OF OUR
PRODUCT CANDIDATES





If
we are unable to obtain the necessary U.S. or worldwide regulatory approvals to
commercialize any product candidate, our business will suffer.





We may
not be able to obtain the approvals necessary to commercialize our product
candidates, or any product candidate that we may acquire or develop in the
future for commercial sale. We will need FDA approval to commercialize our
product candidates in the U.S. and approvals from regulatory authorities in
foreign jurisdictions equivalent to the FDA to commercialize our product
candidates in those jurisdictions. In order to obtain FDA approval of any
product candidate, we must submit to the FDA a New Drug Application,
demonstrating that the product candidate is safe for humans and effective for
its intended use. This demonstration requires significant research and animal
tests, which are referred to as preclinical studies, as well as human tests,
which are referred to as clinical trials. Satisfaction of the FDA’s regulatory
requirements typically takes many years, depending upon the type, complexity,
and novelty of the product candidate, and will require substantial resources for
research, development, and testing. We cannot predict whether our research,
development, and clinical approaches will result in drugs that the FDA will
consider safe for humans and effective for their intended uses. The FDA has
substantial discretion in the drug approval process and may require us to
conduct additional preclinical and clinical testing or to perform post-marketing
studies. The approval process may also be delayed by changes in government
regulation, future legislation, or administrative action or changes in FDA
policy that occur prior to or during our regulatory review. Delays in obtaining
regulatory approvals may:





·
            Delay
      commercialization of, and our ability to derive product revenues from, our
      product candidates;





·
            Impose
      costly procedures on us; and





·
            Diminish
      any competitive advantages that we may otherwise
  enjoy.





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Even if
we comply with all FDA requests, the FDA may ultimately reject one or more of
our NDAs. We cannot be sure that we will ever obtain regulatory clearance for
any of our product candidates. Failure to obtain FDA approval for our product
candidates will severely undermine our business by leaving us without a saleable
product, and therefore without any potential revenue source, until another
product candidate can be developed. There is no guarantee that we will ever be
able to develop or acquire another product candidate or that we will obtain FDA
approval if we are able to do so.





In
foreign jurisdictions, we similarly must receive approval from applicable
regulatory authorities before we can commercialize any drugs. Foreign regulatory
approval processes generally include all of the risks associated with the FDA
approval procedures described above.





Our
product candidates are in early stages of clinical trials, which are very
expensive and time-consuming. We cannot be certain when we will be able to file
an NDA with the FDA and any failure or delay in completing clinical trials for
our product candidates could harm our business.





Our
product candidates are in early stages of development and require extensive
clinical testing. Notwithstanding our current clinical trial plans for each of
our existing product candidates, we may not be able to commence additional
trials or see results from these trials within our anticipated timelines. As
such, we cannot predict with any certainty if or when we might submit an NDA for
regulatory approval of our product candidates or whether such an NDA will be
accepted. Because we do not anticipate generating revenues unless and until we
submit one or more NDAs and thereafter obtain requisite FDA approvals, the
timing of our NDA submissions and FDA determinations regarding approval thereof,
will directly affect if and when we are able to generate revenues.





Clinical
trials are very expensive, time-consuming, and difficult to design and
implement.





Human
clinical trials are very expensive and difficult to design and implement, in
part because they are subject to rigorous regulatory requirements. The clinical
trial process itself is also time consuming. We estimate that clinical trials of
our product candidates will take at least several years to complete.
Furthermore, failure can occur at any stage of the trials, and we could
encounter problems that cause us to abandon or repeat clinical trials. The
commencement and completion of clinical trials may be delayed by several
factors, including:




·
            Unforeseen
      safety issues;





·
            Determination
      of dosing issues;





·
            Lack
      of effectiveness during clinical
trials;





·
            Slower
      than expected rates of patient
recruitment;





·
            Inability
      to monitor patients adequately during or after treatment;
    and





·
            Inability
      or unwillingness of medical investigators to follow our clinical
      protocols.





We have
received “Orphan Drug” status for palifosfamide in both the United States and
Europe and we are hopeful that we may be able to obtain “Fast Track” and/or
Orphan Drug status from the FDA for our product candidates.  Fast
Track allows the FDA to facilitate development and expedite review of drugs that
treat serious and life-threatening conditions so that an approved product can
reach the market expeditiously.  Fast Track status does not apply to a
product alone, but applies to a combination of a product and the specific
indications for which it is being studied. Therefore, it is a drug’s development
program for a specific indication that receives Fast Track designation. Orphan
Drug status promotes the development of products that demonstrate the promise
for the diagnosis and treatment of one disease or condition and affords certain
financial and market protection benefits to successful
applicants.  However, there is no guarantee that any of our product
candidates, other than palifosfamide, will be granted Orphan Drug status or will
be granted Fast Track status by the FDA or that, even if such product candidate
is granted such status, the product candidate’s clinical development and
regulatory approval process will not be delayed or will be
successful.





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In
addition, we or the FDA may suspend our clinical trials at any time if it
appears that we are exposing participants to unacceptable health risks or if the
FDA finds deficiencies in our IND submission or in the conduct of these trials.
Therefore, we cannot predict with any certainty the schedule for future clinical
trials.





The
results of our clinical trials may not support our product candidate
claims.




Even if
our clinical trials are completed as planned, we cannot be certain that their
results will support approval of our product candidates. Success in preclinical
testing and early clinical trials does not ensure that later clinical trials
will be successful, and we cannot be certain that the results of later clinical
trials will replicate the results of prior clinical trials and preclinical
testing. The clinical trial process may fail to demonstrate that our product
candidates are safe for humans and effective for the indicated uses. This
failure would cause us to abandon a product candidate and may delay development
of other product candidates. Any delay in, or termination of, our clinical
trials will delay the filing of our NDAs with the FDA and, ultimately, our
ability to commercialize our product candidates and generate product revenues.
In addition, our clinical trials involve small patient populations. Because of
the small sample size, the results of these clinical trials may not be
indicative of future results.





Even if
the FDA approves our product candidates, physicians and patients may not accept
and use them. Acceptance and use of our products will depend upon a number of
factors including:





·
            Perceptions
      by members of the health care community, including physicians, regarding
      the safety and effectiveness of our
drugs;





·
            Cost-effectiveness
      of our products relative to competing
products;





·
            Availability
      of reimbursement for our products from government or other healthcare
      payers; and





·
            Effectiveness
      of marketing and distribution efforts by us and our licensees and
      distributors, if any.




Because
we expect sales of our current product candidates, if approved, to generate
substantially all of our product revenues for the foreseeable future, the
failure of a drug to find market acceptance would harm our business and could
require us to seek additional financing in order to fund the development of
future product candidates.





Because
we are dependent upon clinical research institutions and other contractors for
clinical testing and for research and development activities, the results of our
clinical trials and such research activities are, to a certain extent, beyond
our control.





We
materially rely upon independent investigators and collaborators, such as
universities and medical institutions, to conduct our preclinical and clinical
trials under agreements with us. These collaborators are not our employees and
we cannot control the amount or timing of resources that they devote to our
programs. These investigators may not assign as great a priority to our programs
or pursue them as diligently as we would if we were undertaking such programs
ourselves. If outside collaborators fail to devote sufficient time and resources
to our drug development programs, or if their performance is substandard, the
approval of our FDA applications, if any, and our introduction of new drugs, if
any, will be delayed. These collaborators may also have relationships with other
commercial entities, some of whom may compete with us. If our collaborators
assist our competitors to our detriment, our competitive position would be
harmed.





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Our
reliance on third parties to formulate and manufacture our product candidates
exposes us to a number of risks that may delay the development, regulatory
approval and commercialization of our products or result in higher product
costs.





We do not
have experience in drug formulation or manufacturing and do not intend to
establish our own manufacturing facilities. We lack the resources and expertise
to formulate or manufacture our own product candidates. We currently are
contracting for the manufacture of our product candidates. We intend to contract
with one or more manufacturers to manufacture, supply, store, and distribute
drug supplies for our clinical trials. If a product candidate we develop or
acquire in the future receives FDA approval, we will rely on one or more
third-party contractors to manufacture our drugs. Our anticipated future
reliance on a limited number of third-party manufacturers exposes us to the
following risks:





·
            We
      may be unable to identify manufacturers on acceptable terms or at all
      because the number of potential manufacturers is limited and the FDA must
      approve any replacement contractor. This approval would require new
      testing and compliance inspections. In addition, a new manufacturer would
      have to be educated in, or develop substantially equivalent processes for,
      production of our products after receipt of FDA approval, if
      any.





·
            Our
      third-party manufacturers might be unable to formulate and manufacture our
      drugs in the volume and of the quality required to meet our clinical needs
      and commercial needs, if any.





·
            Our
      future contract manufacturers may not perform as agreed or may not remain
      in the contract manufacturing business for the time required to supply our
      clinical trials or to successfully produce, store, and distribute our
      products.





·
            Drug
      manufacturers are subject to ongoing periodic unannounced inspection by
      the FDA, the Drug Enforcement Administration the “DEA”), and corresponding
      state agencies to ensure strict compliance with good manufacturing
      practices and other government regulations and corresponding foreign
      standards. We do not have control over third-party manufacturers’
      compliance with these regulations and
standards.





·
            If
      any third-party manufacturer makes improvements in the manufacturing
      process for our products, we may not own, or may have to share, the
      intellectual property rights to the
innovation.





Each of
these risks could delay our clinical trials, the approval, if any, of our
product candidates by the FDA or the commercialization of our product candidates
or result in higher costs or deprive us of potential product
revenues.





RISKS
RELATED TO OUR ABILITY TO COMMERCIALIZE OUR PRODUCT CANDIDATES





If
we are unable either to create sales, marketing and distribution capabilities or
enter into agreements with third parties to perform these functions, we will be
unable to commercialize our product candidates successfully.





We
currently have no marketing, sales, or distribution capabilities. If and when we
become reasonably certain that we will be able to commercialize our current or
future products, we anticipate allocating resources to the marketing, sales and
distribution of our proposed products in North America; however, we cannot
assure that we will be able to market, sell, and distribute our products
successfully. Our future success also may depend, in part, on our ability to
enter into and maintain collaborative relationships for such capabilities and to
encourage the collaborator’s strategic interest in the products under
development, and such collaborator’s ability to successfully market and sell any
such products. Although we intend to pursue certain collaborative arrangements
regarding the sale and marketing of our products, there are no assurances that
we will be able to establish or maintain collaborative arrangements or, if we
are able to do so, whether we would be able to conduct our own sales efforts.
There can also be no assurance that we will be able to establish or maintain
relationships with third-party collaborators or develop in-house sales and
distribution capabilities. To the extent that we depend on third parties for
marketing and distribution, any revenues we receive will depend upon the efforts
of such third parties, and there can be no assurance that such efforts will be
successful. In addition, there can also be no assurance that we will be able to
market and sell our products in the United States or overseas.





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If we are
not able to partner with a third party and are not successful in recruiting
sales and marketing personnel or in building a sales and marketing
infrastructure, we will have difficulty commercializing our product candidates,
which would harm our business. If we rely on pharmaceutical or biotechnology
companies with established distribution systems to market our products, we will
need to establish and maintain partnership arrangements, and we may not be able
to enter into these arrangements on acceptable terms or at all. To the extent
that we enter into co-promotion or other arrangements, any revenues we receive
will depend upon the efforts of third parties that may not be successful and
that will be only partially in our control.





If
we cannot compete successfully for market share against other drug companies, we
may not achieve sufficient product revenues and our business will
suffer.





The
market for our product candidates is characterized by intense competition and
rapid technological advances. If a product candidate receives FDA approval, it
will compete with a number of existing and future drugs and therapies developed,
manufactured and marketed by others. Existing or future competing products may
provide greater therapeutic convenience or clinical or other benefits for a
specific indication than our products, or may offer comparable performance at a
lower cost. If our products fail to capture and maintain market share, we may
not achieve sufficient product revenues and our business will
suffer.





We will
compete against fully integrated pharmaceutical companies and smaller companies
that are collaborating with larger pharmaceutical companies, academic
institutions, government agencies and other public and private research
organizations. Many of these competitors have products already approved or in
development. In addition, many of these competitors, either alone or together
with their collaborative partners, operate larger research and development
programs or have substantially greater financial resources than we do, as well
as significantly greater experience in:





·
            Developing
      drugs;





·
            Undertaking
      preclinical testing and human clinical
trials;





·
            Obtaining
      FDA and other regulatory approvals of
drugs;





·
            Formulating
      and manufacturing drugs; and





·
            Launching,
      marketing, and selling drugs.





If
physicians and patients do not accept and use our product candidates, our
ability to generate revenue from sales of our products will be materially
impaired.





Even if
the FDA approves our product candidates, physicians and patients may not accept
and use them. Acceptance and use of our products will depend upon a number of
factors including:





·
            Perceptions
      by members of the health care community, including physicians, about the
      safety and effectiveness of our
drugs;





·
            Pharmacological
      benefit and cost-effectiveness of our products relative to competing
      products;





·
            Availability
      of reimbursement for our products from government or other healthcare
      payors;





·
            Effectiveness
      of marketing and distribution efforts by us and our licensees and
      distributors, if any; and





·
            The
      price at which we sell our
products.





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Our
ability to generate product revenues will be diminished if our drugs sell for
inadequate prices or patients are unable to obtain adequate levels of
reimbursement.





Our
ability to commercialize our drugs, alone or with collaborators, will depend in
part on the extent to which reimbursement will be available from:




·
            Government
      and health administration
authorities;





·
            Private
      health maintenance organizations and health insurers;
  and





·
            Other
      healthcare payers.





Government
and other healthcare payers increasingly attempt to contain healthcare costs by
limiting both coverage and the level of reimbursement for drugs. As a result, we
cannot provide any assurances that third-party payors will provide adequate
coverage of and reimbursement for any of our product candidates. If we are
unable to obtain adequate coverage of and payment levels for our product
candidates from third-party payors, physicians may limit how much or under what
circumstances they will prescribe or administer them and patients may decline to
purchase them. This in turn could affect our ability to successfully
commercialize our products and impact our profitability and future
success.





In both
the United States and certain foreign jurisdictions, there have been a number of
legislative and regulatory policies and proposals in recent years to change the
healthcare system in ways that could impact our ability to sell our products
profitably. On December 8, 2003, President Bush signed into law the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (“MMA”), which
contains, among other changes to the law, a wide variety of changes that have
and will impact Medicare reimbursement of pharmaceuticals to physicians and
hospitals.





There
also likely will continue to be legislative and regulatory proposals that could
bring about significant changes in the healthcare industry. We cannot predict
what form those changes might take or the impact on our business of any
legislation or regulations that may be adopted in the future. The implementation
of cost containment measures or other healthcare reforms may prevent us from
being able to generate revenue, attain profitability, or commercialize our
products.





In
addition, in many foreign countries, particularly the countries of the European
Union, the pricing of prescription drugs is subject to government control. We
may face competition for our product candidates from lower-priced products in
foreign countries that have placed price controls on pharmaceutical products. In
addition, there may be importation of foreign products that compete with our own
products, which could negatively impact our profitability.





RISKS
RELATED TO OUR INTELLECTUAL PROPERTY





If
we fail to adequately protect or enforce our intellectual property rights or
secure rights to patents of others, the value of our intellectual property
rights would diminish.





Our
success, competitive position, and future revenues will depend in part on our
ability and the abilities of our licensors to obtain and maintain patent
protection for our products, methods, processes and other technologies, to
preserve our trade secrets, to prevent third parties from infringing on our
proprietary rights, and to operate without infringing the proprietary rights of
third parties.




·
            To
      date, we have exclusive rights to certain U.S. and foreign intellectual
      property. We anticipate filing additional patent applications both in the
      U.S. and in other countries, as appropriate. However, we cannot
      predict:





·
            The
      degree and range of protection any patents will afford us against
      competitors, including whether third parties will find ways to invalidate
      or otherwise circumvent our
patents;





·
            If
      and when patents will be issued;





·
            Whether
      or not others will obtain patents claiming aspects similar to those
      covered by our patents and patent applications;
  or





·
            Whether
      we will need to initiate litigation or administrative proceedings that may
      be costly whether we win or lose.





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Our
success also depends upon the skills, knowledge, and experience of our
scientific and technical personnel, our consultants and advisors, as well as our
licensors and contractors. To help protect our proprietary know-how and our
inventions for which patents may be unobtainable or difficult to obtain, we rely
on trade secret protection and confidentiality agreements. To this end, it is
our general policy to require our employees, consultants, advisors, and
contractors to enter into agreements that prohibit the disclosure of
confidential information and, where applicable, require disclosure and
assignment to us of the ideas, developments, discoveries, and inventions
important to our business. These agreements may not provide adequate protection
for our trade secrets, know-how or other proprietary information in the event of
any unauthorized use or disclosure or the lawful development by others of such
information. If any of our trade secrets, know-how or other proprietary
information is disclosed, the value of our trade secrets, know-how and other
proprietary rights would be significantly impaired and our business and
competitive position would suffer.





Third-party
claims of intellectual property infringement would require us to spend
significant time and money and could prevent us from developing or
commercializing our products.





In order
to protect or enforce patent rights, we may initiate patent litigation against
third parties. Similarly, we may be sued by others. We also may become subject
to proceedings conducted in the U.S. Patent and Trademark Office, including
interference proceedings to determine the priority of inventions, or
reexamination proceedings. In addition, any foreign patents that are granted may
become subject to opposition, nullity, or revocation proceedings in foreign
jurisdictions having such proceedings opposed by third parties in foreign
jurisdictions having opposition proceedings. The defense and prosecution, if
necessary, of intellectual property actions are costly and divert technical and
management personnel away from their normal responsibilities.





No patent
can protect its holder from a claim of infringement of another patent.
Therefore, our patent position cannot and does not provide any assurance that
the commercialization of our products would not infringe the patent rights of
another. While we know of no actual or threatened claim of infringement that
would be material to us, there can be no assurance that such a claim will not be
asserted.





If such a
claim is asserted, there can be no assurance that the resolution of the claim
would permit us to continue marketing the relevant product on commercially
reasonable terms, if at all. We may not have sufficient resources to bring these
actions to a successful conclusion. If we do not successfully defend any
infringement actions to which we become a party or are unable to have infringed
patents declared invalid or unenforceable, we may have to pay substantial
monetary damages, which can be tripled if the infringement is deemed willful, or
be required to discontinue or significantly delay commercialization and
development of the affected products.





Any legal
action against us or our collaborators claiming damages and seeking to enjoin
developmental or marketing activities relating to affected products could, in
addition to subjecting us to potential liability for damages, require us or our
collaborators to obtain licenses to continue to develop, manufacture, or market
the affected products. Such a license may not be available to us on commercially
reasonable terms, if at all.





An
adverse determination in a proceeding involving our owned or licensed
intellectual property may allow entry of generic substitutes for our
products.





OTHER
RISKS RELATED TO OUR COMPANY





We
are subject to Sarbanes-Oxley and the reporting requirements of federal
securities laws, which can be expensive.





As a
public reporting company, we are subject to the Sarbanes-Oxley Act of 2002, as
well as to the information and reporting requirements of the Securities Exchange
Act of 1934, as amended, and other federal securities laws.  As a
result, we incur significant legal, accounting, and other expenses that we did
not incur as a private company, including costs associated with our public
company reporting requirements and corporate governance
requirements.  As an example of public reporting company requirements,
we evaluate the effectiveness of disclosure controls and procedures and of our
internal control over financing reporting in order to allow management to report
on such controls.  Pursuant to Sarbanes-Oxley, our independent
registered public accounting firm will be required to attest to the
effectiveness of our internal control over financial reporting, as of December
31, 2009, in our Annual Report on Form 10-K for the fiscal year ending December
31, 2009.  While management has not currently identified any material
weaknesses in our internal control over financial reporting, there can be no
assurance that our systems will be deemed effective when our independent
registered public accounting firm reviews the systems during 2009 and tests
transactions.  In addition, any updates to our finance and accounting
systems, procedures and controls, which may be required as a result of our
ongoing analysis of internal controls, or results of testing by our independent
auditor, may require significant time and expense.





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As a
company with limited capital and human resources, our management has identified
that there is a potential for a lack of segregation of duties due to the limited
number of employees within our company’s financial and administrative functions.
Management believes that, based on the employees involved and the control
procedures in place, risks associated with such lack of segregation are not
significant and that the potential benefits of adding employees to segregate
duties more clearly do not justify the associated added expense. However, our
management is working to continuously monitor and improve internal controls and
has set in place controls to mitigate the potential segregation of duties risk.
We have engaged the services of a Sarbanes-Oxley consultant to tighten our
internal controls and ensure adherence to the regulations.  In the
event significant deficiencies or material weaknesses are indentified in our
internal control over financial reporting that we cannot remediate in a timely
manner, investors and others may lose confidence in the reliability of our
financial statements and the trading price of our common stock and ability to
obtain any necessary equity or debt financing could suffer.  In
addition, in the event that our independent registered public accounting firm is
unable to rely on our internal controls over financial reporting in connection
with its audit of our financial statements, and in the further event that it is
unable to devise alternative procedures in order to satisfy itself as to the
material accuracy of our financial statements and related disclosures, we may be
unable to file our periodic reports with the Securities and Exchange Commission.
This would likely have an adverse affect on the trading price of our common
stock and our ability to secure any necessary additional equity or debt
financing, and could result in the delisting of our common stock from the NASDAQ
Capital Market, which would severely limit the liquidity of our common
stock.





There
is not now, and there may not ever be an active market for shares of our common
stock.





In
general, there has been limited trading activity in shares of the Company’s
common stock. The small trading volume may make it more difficult for our
stockholders to sell their shares as and when they choose. Furthermore, small
trading volumes generally depress market prices. As a result, you may not always
be able to resell shares of our common stock publicly at the time and prices
that you feel are fair or appropriate.





Our
common stock could be delisted from The NASDAQ Capital Market, which could
negatively impact the price of our common stock and our ability to access the
capital markets.





Our
common stock is listed on The NASDAQ Capital Market.  The listing
standards of The NASDAQ Capital Market provide, among other things, that a
company may be delisted if the bid price of its stock drops below $1.00 for a
period of 30 consecutive business days.  In light of current market
conditions, The Nasdaq Stock Market has suspended this listing requirement until
July 20, 2009. Recently our stock has traded below $1.00, and if we fail to
comply with the listing standards applicable to issuers listed on The NASDAQ
Capital Market, our common stock may be delisted absent further suspension of
the trading price requirements.  The delisting of our common stock
would significantly affect the ability of investors to trade our securities and
would significantly negatively affect the value and liquidity of our common
stock.  In addition, the delisting of our common stock could
materially adversely affect our ability to raise capital on terms acceptable to
us or at all.  Delisting from The NASDAQ Capital Market could also
have other negative results, including the potential loss of confidence by
suppliers and employees, the loss of institutional investor interest and fewer
business development opportunities.





Anti-takeover
provisions in our charter documents and under Delaware law may make an
acquisition of us, which may be beneficial to our stockholders, more
difficult.





Provisions
of our amended and restated certificate of incorporation and bylaws, as well as
provisions of Delaware law, could make it more difficult for a third party to
acquire us, even if doing so would benefit our stockholders. These provisions
authorize the issuance of “blank check” preferred stock that could be issued by
our board of directors to increase the number of outstanding shares and hinder a
takeover attempt, and limit who may call a special meeting of stockholders. In
addition, Section 203 of the Delaware General Corporation Law, which prohibits
business combinations between us and one or more significant stockholders unless
specified conditions are met, may discourage, delay or prevent a third party
from acquiring us.


Because
we do not expect to pay dividends, you will not realize any income from an
investment in our common stock unless and until you sell your shares at
profit.




We have
never paid dividends on our capital stock and we do not anticipate that we will
pay any dividends for the foreseeable future. Accordingly, any return on an
investment in our Company will be realized, if at all, only when you sell shares
of our common stock.





34




Table of Contents





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





Not applicable.





Item 3. Defaults upon Senior
Securities





Not applicable.




Item 4. Submission of Matters to a Vote of the
Security Holders





Not applicable.





Item 5. Other Information





None.





Item 6. Exhibits





The
exhibits listed in the Exhibit Index immediately preceding such exhibits are
filed as part of this report and such Exhibit Index is incorporated herein by
reference.





35





Table
of Contents





SIGNATURES





Pursuant
to 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.





/s/
      Jonathan LewisJonathan
      Lewis, M.D., Ph.D.
                  Chief
      Executive Officer(Principal
      Executive Officer)


Dated:
May 14, 2009





/s/
      Richard E. BagleyRichard
      E. Bagley
                  President
      and Chief Financial Officer(Principal
      Financial and Accounting
Officer)


Dated:
May 14, 2009





36





EXHIBIT
INDEX





31.1*
              Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  200231.2*
              Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  200232.1*
              Certifications
      pursuant to 18 U.S.C. Section
1350





*
            Filed
      herewith




37