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 September 30, 2010OR ̈
            
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934





Commission
File Number 001-33038





ZIOPHARM
Oncology, Inc.


(Exact
name of registrant as specified in its charter)




Delaware
                
                84-1475642(State
      or other jurisdiction of
                
                (I.R.S.
      Employerincorporation
      or organization)
                
                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   ̈
                        Smaller
      reporting company þ(Do
      not check if a smaller reporting company)





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





The
number of shares of the registrant’s Common Stock, $.001 par value, outstanding
as of November 1, 2010, was 48,557,678 shares.










ZIOPHARM
Oncology, Inc. (a development stage company)





Table
of Contents





PagePart
      I - Financial InformationItem 1.
                                                      
                                                      Financial
      StatementsBalance
      Sheets as of September 30, 2010 and December 31, 2009
      (unaudited)
                                                      
                                                      3Statements
      of Operations for the three and nine months ended September 30, 2010 and
      2009 and the period from September 9, 2003 (date of inception) through
      September 30, 2010 (unaudited)
                                                      
                                                      4Statement
      of Changes in Stockholders’ Equity for the nine months
      ended  September 30, 2010 (unaudited)
                                                      
                                                      5Statements
      of Cash Flows for the nine months ended September 30, 2010 and 2009 and
      the period from September 9, 2003 (date of inception) through September
      30, 2010 (unaudited)
                                                      
                                                      6Notes
      to Financial Statements (unaudited)
                                                      
                                                      7Item 2.
                                                      
                                                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                                      
                                                      16Item 3.
                                                      
                                                      Quantitative
      and Qualitative Disclosures about Market Risk
                                                      
                                                      27Item 4.
                                                      
                                                      Controls
      and Procedures
                                                      
                                                      27Part
      II - Other InformationItem 1.
                                                      
                                                      Legal
      Proceedings
                                                      
                                                      28Item 1A.
                                                      
                                                      Risk
      Factors
                                                      
                                                      28Item 2.
                                                      
                                                      Unregistered
      Sale of Equity Securities and Use of Proceeds
                                                      
                                                      40Item 3.
                                                      
                                                      Defaults
      upon Senior Securities
                                                      
                                                      40Item
      4.
                                                      
                                                      Removed
      and Reserved
                                                      
                                                      41Item 5.
                                                      
                                                      Other
      Information
                                                      
                                                      41Item 6.
                                                      
                                                      Exhibits
                                                      
                                                      41SIGNATURES
                                                      
                                                      42





2




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)





September 30,
                    
                    
                    December 31,2010
                    
                    
                    2009ASSETSCurrent
      assets:Cash
      and cash equivalents
                    
                    $
                    66,471
                    
                    
                    $
                    48,839Prepaid
      expenses and other current assets
                    
                    
                    352
                    
                    
                    
                    354Total
      current assets
                    
                    
                    66,823
                    
                    
                    
                    49,193Property
      and equipment, net
                    
                    
                    230
                    
                    
                    
                    255Deposits
                    
                    
                    87
                    
                    
                    
                    46Other
      non-current assets
                    
                    
                    310
                    
                    
                    
                    242Total
      assets
                    
                    $
                    67,450
                    
                    
                    $
                    49,736LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                    
                    $
                    1,088
                    
                    
                    $
                    1,789Accrued
      expenses
                    
                    
                    2,978
                    
                    
                    
                    1,261Deferred
      rent - current portion
                    
                    
                    40
                    
                    
                    
                    45Total
      current liabilities
                    
                    
                    4,106
                    
                    
                    
                    3,095Deferred
      rent
                    
                    
                    55
                    
                    
                    
                    66Warrant
      liabilities
                    
                    
                    21,085
                    
                    
                    
                    18,471Total
      liabilities
                    
                    
                    25,246
                    
                    
                    
                    21,632Commitments
      and contingencies (note 6)Stockholders'
      equity:Preferred
      stock, $0.001 par value; 30,000,000 shares authorized and no shares issued
      and outstanding
                    
                    
                    -
                    
                    
                    
                    -Common
      stock, $0.001 par value; 250,000,000 shares authorized; 48,557,678 and
      41,583,528 shares issued and outstanding at September 30, 2010 and
      December 31, 2009, respectively
                    
                    
                    49
                    
                    
                    
                    42Additional
      paid-in capital - common stock
                    
                    
                    131,284
                    
                    
                    
                    96,133Additional
      paid-in capital - warrants issued
                    
                    
                    22,834
                    
                    
                    
                    23,073Deficit
      accumulated during the development stage
                    
                    
                    (111,963
                    )
                    
                    
                    (91,144
                    )Total
      stockholders' equity
                    
                    
                    42,204
                    
                    
                    
                    28,104Total
      liabilities and stockholders' equity
                    
                    $
                    67,450
                    
                    
                    $
                    49,736





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




3





ZIOPHARM
Oncology, Inc. (a development stage company)





STATEMENTS
OF OPERATIONS


(unaudited)





(in
thousands, except share and per share data)





Period fromSeptember 9, 2003For the Three Months Ended
                                  
                                  
                                  For the Nine Months Ended
                                  
                                  
                                  (date of inception)September 30,
                                  
                                  
                                  September 30,
                                  
                                  
                                  through2010
                                  
                                  
                                  2009
                                  
                                  
                                  2010
                                  
                                  
                                  2009
                                  
                                  
                                  September 30, 2010Research
      contract revenue
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Operating
      expenses:Research
      and development, including costs of research contracts
                                  
                                  
                                  5,711
                                  
                                  
                                  
                                  1,231
                                  
                                  
                                  
                                  9,872
                                  
                                  
                                  
                                  3,340
                                  
                                  
                                  
                                  68,778General
      and administrative
                                  
                                  
                                  2,789
                                  
                                  
                                  
                                  1,339
                                  
                                  
                                  
                                  8,313
                                  
                                  
                                  
                                  4,754
                                  
                                  
                                  
                                  50,488Total
      operating expenses
                                  
                                  
                                  8,500
                                  
                                  
                                  
                                  2,570
                                  
                                  
                                  
                                  18,185
                                  
                                  
                                  
                                  8,094
                                  
                                  
                                  
                                  119,266Loss
      from operations
                                  
                                  
                                  (8,500
                                  )
                                  
                                  
                                  (2,570
                                  )
                                  
                                  
                                  (18,185
                                  )
                                  
                                  
                                  (8,094
                                  )
                                  
                                  
                                  (119,266
                                  )Other
      income, net
                                  
                                  
                                  7
                                  
                                  
                                  
                                  (1
                                  )
                                  
                                  
                                  29
                                  
                                  
                                  
                                  1
                                  
                                  
                                  
                                  3,939Change
      in fair value of warrants
                                  
                                  
                                  (3,712
                                  )
                                  
                                  
                                  (304
                                  )
                                  
                                  
                                  (2,663
                                  )
                                  
                                  
                                  (520
                                  )
                                  
                                  
                                  3,364Net
      loss
                                  
                                  $
                                  (12,205
                                  )
                                  
                                  $
                                  (2,875
                                  )
                                  
                                  $
                                  (20,819
                                  )
                                  
                                  $
                                  (8,613
                                  )
                                  
                                  $
                                  (111,963
                                  )Net
      loss per share - basic
                                  
                                  $
                                  (0.26
                                  )
                                  
                                  $
                                  (0.13
                                  )
                                  
                                  $
                                  (0.48
                                  )
                                  
                                  $
                                  (0.40
                                  )Net
      loss per share - diluted
                                  
                                  $
                                  (0.26
                                  )
                                  
                                  $
                                  (0.13
                                  )
                                  
                                  $
                                  (0.48
                                  )
                                  
                                  $
                                  (0.40
                                  )Weighted
      average common shares outstanding used to compute net loss per share -
      basic
                                  
                                  
                                  47,426,991
                                  
                                  
                                  
                                  21,759,309
                                  
                                  
                                  
                                  43,333,663
                                  
                                  
                                  
                                  21,458,150Weighted
      average common shares outstanding used to compute net loss per share -
      diluted
                                  
                                  
                                  47,426,991
                                  
                                  
                                  
                                  21,759,309
                                  
                                  
                                  
                                  43,333,663
                                  
                                  
                                  
                                  21,458,150





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




4




ZIOPHARM
Oncology, Inc. (a development stage company)





STATEMENT
OF CHANGES IN STOCKHOLDERS’ EQUITY


For
the Nine Months Ended September 30, 2010


(unaudited)





(in
thousands, except share and per share data)





Stockholders' EquityAdditional
                        
                        
                        
                        
                        
                        DeficitPaid-in
                        
                        
                        Additional
                        
                        
                        AccumulatedPreferred Stock
                        
                        
                        Common Stock
                        
                        
                        Capital
                        
                        
                        Paid-in
                        
                        
                        During the
                        
                        
                        TotalCommon
                        
                        
                        Capital
                        
                        
                        Development
                        
                        
                        Stockholders'Shares
                        
                        
                        Amount
                        
                        
                        Shares
                        
                        
                        Amount
                        
                        
                        Stock
                        
                        
                        Warrants
                        
                        
                        Stage
                        
                        
                        EquityBalance
      at December 31, 2009
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        
                        
                        41,583,528
                        
                        
                        $
                        42
                        
                        
                        $
                        96,133
                        
                        
                        $
                        23,073
                        
                        
                        $
                        (91,144
                        )
                        
                        $
                        28,104Stock-based
      compensation
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        3,198
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        3,198Exercise
      of employee stock options
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        196,167
                        
                        
                        
                        -
                        
                        
                        
                        225
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        225Exercise
      of warrants to purchase common stock
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        39,225
                        
                        
                        
                        -
                        
                        
                        
                        360
                        
                        
                        
                        (239
                        )
                        
                        
                        -
                        
                        
                        
                        121Issuance
      of restricted common stock
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        115,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Repurchase
      of shares of common stock
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (364,992
                        )
                        
                        
                        -
                        
                        
                        
                        (1,429
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1,429
                        )Forfeiture
      of unvested restricted common stock
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (11,250
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Issuance
      of common stock in a securities offering, net of commissions and expenses
      of $2,203
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        7,000,000
                        
                        
                        
                        7
                        
                        
                        
                        32,797
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        32,804Net
      loss
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (20,819
                        )
                        
                        
                        (20,819
                        )Balance
      at September 30, 2010
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        
                        
                        48,557,678
                        
                        
                        $
                        49
                        
                        
                        $
                        131,284
                        
                        
                        $
                        22,834
                        
                        
                        $
                        (111,963
                        )
                        
                        $
                        42,204





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




5





ZIOPHARM
Oncology, Inc. (a development stage company)





STATEMENTS
OF CASH FLOWS


(unaudited)





(in
thousands)





Period fromSeptember 9, 2003(date of inception)For the Nine Months Ended September 30,
                      
                      
                      through2010
                      
                      
                      2009
                      
                      
                      September 30, 2010Cash
      flows from operating activities:Net
      loss
                      
                      $
                      (20,819
                      )
                      
                      $
                      (8,613
                      )
                      
                      $
                      (111,963
                      )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                      
                      
                      153
                      
                      
                      
                      252
                      
                      
                      
                      1,614Stock-based
      compensation
                      
                      
                      3,198
                      
                      
                      
                      1,264
                      
                      
                      
                      12,103Change
      in fair value of warrants
                      
                      
                      2,663
                      
                      
                      
                      520
                      
                      
                      
                      (3,365
                      )Loss
      on disposal of fixed assets
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      9Change
      in operating assets and liabilities:(Increase)
      decrease in:Prepaid
      expenses and other current assets
                      
                      
                      3
                      
                      
                      
                      (43
                      )
                      
                      
                      (352
                      )Other
      noncurrent assets
                      
                      
                      (67
                      )
                      
                      
                      49
                      
                      
                      
                      (310
                      )Deposits
                      
                      
                      (41
                      )
                      
                      
                      -
                      
                      
                      
                      (87
                      )Increase
      (decrease) in:Accounts
      payable
                      
                      
                      (703
                      )
                      
                      
                      (1,080
                      )
                      
                      
                      1,088Accrued
      expenses
                      
                      
                      1,717
                      
                      
                      
                      (1,228
                      )
                      
                      
                      2,978Deferred
      rent
                      
                      
                      (15
                      )
                      
                      
                      (22
                      )
                      
                      
                      95Net
      cash used in operating activities
                      
                      
                      (13,911
                      )
                      
                      
                      (8,901
                      )
                      
                      
                      (98,190
                      )Cash
      flows from investing activities:Purchases
      of property and equipment
                      
                      
                      (128
                      )
                      
                      
                      (3
                      )
                      
                      
                      (1,853
                      )Proceeds
      from sale of property and equipment
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1Net
      cash used in investing activities
                      
                      
                      (128
                      )
                      
                      
                      (3
                      )
                      
                      
                      (1,852
                      )Cash
      flows from financing activities:Stockholders'
      capital contribution
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      500Proceeds
      from exercise of stock options
                      
                      
                      225
                      
                      
                      
                      -
                      
                      
                      
                      364Payments
      to employees for repurchase of common stock
                      
                      
                      (1,429
                      )
                      
                      
                      -
                      
                      
                      
                      (1,809
                      )Proceeds
      from exercise of warrants
                      
                      
                      71
                      
                      
                      
                      -
                      
                      
                      
                      349Proceeds
      from issuance of common stock and warrants, net
                      
                      
                      32,804
                      
                      
                      
                      4,605
                      
                      
                      
                      150,349Proceeds
      from issuance of preferred stock, net
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      16,760Net
      cash provided by financing activities
                      
                      
                      31,671
                      
                      
                      
                      4,605
                      
                      
                      
                      166,513Net
      increase (decrease) in cash and cash equivalents
                      
                      
                      17,632
                      
                      
                      
                      (4,299
                      )
                      
                      
                      66,471Cash
      and cash equivalents, beginning of period
                      
                      
                      48,839
                      
                      
                      
                      11,379
                      
                      
                      
                      -Cash
      and cash equivalents, end of period
                      
                      $
                      66,471
                      
                      
                      $
                      7,080
                      
                      
                      $
                      66,471Supplementary
      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
                      
                      $
                      -
                      
                      
                      $
                      4,207
                      
                      
                      $
                      47,276Preferred
      stock conversion to common stock
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      16,760Exercise
      of equity-classified warrants to common shares
                      
                      $
                      239
                      
                      
                      $
                      -
                      
                      
                      $
                      257Exercise
      of liability-classified warrants to common shares
                      
                      $
                      49
                      
                      
                      $
                      -
                      
                      
                      $
                      49





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




6





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.





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 September 30, 2010. 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 September 30, 2010, the Company’s accumulated deficit was
approximately $112.0 million.  The Company currently believes that it
has sufficient capital to fund development and commercialization activities,
principally for palifosfamide, well into mid-2012.  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 Company’s
focus and direction of its research and development programs, competitive and
technical advances, patent developments, regulatory changes 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.  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 trials
and terminate the approval process for its product candidates from the U.S. Food
and Drug Administration (“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,
pursue merger or divestiture strategies, cease operations or declare
bankruptcy.   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 audited financial statements and the notes thereto for the
year ended December 31, 2009 included in the Company’s Form 10-K for such fiscal
year.





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 and nine months
ended September 30, 2010 are not necessarily indicative of the results to be
expected for the full fiscal year.




7




ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





2.
Summary of Significant Accounting Policies





Our
significant accounting policies were identified in the Company’s Form 10-K for
the fiscal year ended December 31, 2009.




3.
Fair Value Measurements




The
Company follows FASB Accounting Standards Codification (“ASC”) Topic 820, Fair Value
Measurements.  The accounting standard 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 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 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.





Assets
and liabilities measured at fair value on a recurring basis as of September 30,
2010 are as follows:





($ in thousands)
                    
                    Fair Value Measurements at Reporting Date UsingDescription
                    
                    Balance as of
                      September 30, 2010
                    
                    
                    Quoted Prices in
                      Active Markets for
                      Identical
                      Assets/Liabilities
                      (Level 1)
                    
                    
                    Significant Other
                      Observable Inputs
                      (Level 2)
                    
                    
                    Significant
                      UnobservableInputs
                      (Level 3)Warrant
      liability
                    
                    $
                    21,085
                    
                    
                    $
                    -
                    
                    
                    $
                    21,085
                    
                    
                    $
                    -





The
warrants were valued using a Black-Scholes valuation model.  See Note
7 for additional disclosures on the valuation methodology and significant
assumptions.





In
January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06
Fair Value Measurements and
Disclosures (Topic 820) which improves disclosures about fair value
measurements.  More specifically, ASU 2010-06 updates subtopic 820-10
to require disclosure of transfers in and out of levels 1 and 2 and the reason
for the transfers.  Additionally, it requires separate reporting of
purchases, sales, issuances and settlements for level 3.  This update
is effective for interim periods beginning after December 15, 2009 except for
the level 3 rollforward disclosure which is effective for periods beginning
after December 15, 2010.  The adoption of this standard did not have
an impact on our financial position, results of operations or financial
statement disclosure nor do we anticipate any impact upon the adoption of the
Level 3 rollforward disclosure in 2011.




8




ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)




4.
Subsequent Events





The
Company evaluated all events or transactions that occurred after the balance
sheet date through the date these financial statements were available to be
issued.  During this period the Company did not have any material
recognizable subsequent events and one disclosable event.





On
October 5, 2010, a milestone was reached under the Company’s license agreement
with DEKK-Tec, Inc. requiring a $300 thousand payment and vesting of options to
purchase 6,904 shares of the Company’s common stock that are exercisable at
$0.02 per share.




’ “QTDP ”





5.
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. Diluted loss per share is computed
using the weighted-average number of common shares outstanding during the
period, plus the dilutive effect of outstanding options and warrants, using the
treasury stock method and the average market price of our common stock during
the applicable period.





Certain
shares related to some of the Company's outstanding common stock options,
unvested restricted stock and warrants, have not been included in the
computation of diluted net loss per share for the three and nine months ended
September 30, 2010 and 2009 as the result would be antidilutive.  Such
potential common shares at September 30, 2010 and 2009 consist of the
following:





For the Three Months
                        
                        
                        For the Nine
      MonthsEnded September 30,
                        
                        
                        Ended September 30,2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009Stock
      options
                        
                        
                        3,528,852
                        
                        
                        
                        3,151,249
                        
                        
                        
                        3,528,852
                        
                        
                        
                        3,151,249Unvested
      restricted common stock
                        
                        
                        518,334
                        
                        
                        
                        1,491,667
                        
                        
                        
                        518,334
                        
                        
                        
                        1,491,667Warrants
                        
                        
                        15,924,642
                        
                        
                        
                        7,950,613
                        
                        
                        
                        15,924,642
                        
                        
                        
                        7,950,613




9




ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





6.
Commitments and Contingencies





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 U.S. 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.




As partial consideration for the license rights obtained, the
Company made an upfront payment in 2004 of $125 thousand and granted the
Licensors 250,487 shares of the Company’s common stock.  In addition, the
Company issued options to purchase an additional 50,222 shares outside the 2003
Stock Option Plan for $0.002 per share following the successful completion of
certain clinical milestones, which vested with respect to 12,555 shares
upon the filing of an Investigation New Drug application (“IND”) for
darinaparsin in 2005 and vested with respect to another 25,111 shares upon the
completion of dosing of the last patient for both Phase I clinical trials in
2007.  The Company recorded $120 thousand of stock based compensation
expense related to the vesting in 2007.  The remaining 12,556 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”).  In addition, the Licensors are entitled to
receive certain milestone payments, including $100 thousand that was paid in
2005 upon the commencement of Phase I clinical trial and $250 thousand that was
paid in 2006 upon the dosing of the first patient in the Registrant-sponsored
Phase II clinical trial for darinaparsin.  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 an additional
$4.5 million.  In addition, the Licensors are entitled to receive
single digit percentage royalty payments on sales from a licensed product and
will also be entitled to receive a portion of any fees that the Company may
receive from a possible sublicense under certain circumstances.  In
addition, the Company also paid the Licensors $100 thousand in 2006 and 2007 to
conduct scientific research with the Company obtaining exclusive right to all
resulting intellectual property rights.  The sponsored research
agreements governing this research and any related extensions expired in
February 2008 with no payments being made subsequent to that
date.





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).  The term of the license agreement
extends until the expiration of all claims under patents and patent applications
associated with the licensed technology, subject to earlier termination in the
event of defaults by the Company or the Licensors under the license agreement,
or if the Company becomes bankrupt or insolvent.  No milestones under
the license agreement were reached or expensed during the nine months ended
September 30, 2010.




10




ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





6.
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 an upfront $50 thousand payment to DEKK-Tec in
2004.





In
consideration for the license rights, DEKK-Tec is entitled to receive payments
upon achieving certain milestones in varying amounts which on a cumulative basis
may total $4.0 million.  Of the aggregate milestone payments, most
will be creditable against future royalty payments as referenced
below.  The Company expensed a $100 thousand milestone payment upon
achieving Phase II milestones during the year ended December 31,
2006.  Additionally, in 2004 the Company issued DEKK-Tec an option to
purchase 27,616 shares of the Company’s common stock for $0.02 per
share.  Upon the execution of the license agreement, 6,904 shares
vested and were subsequently exercised in 2005 and the remaining options will
vest upon certain milestone events, culminating with final FDA approval of the
first NDA submitted by the Company (or by its sublicensee) for
palifosfamide.  None of the remaining options have vested as of
September 30, 2010.  DEKK-Tec is entitled to receive single digit
percentage royalty payments on the sales of palifosfamide should it be approved
for commercial sale.  On March 16, 2010, the Company expensed a $100
thousand milestone payment upon receiving a United States Patent for
palifosfamide.  There were no payments made during the first nine
months of 2009.  The Company’s obligation to pay royalties will
terminate on a country-by-country basis upon the expiration of all valid claims
of patents in such country covering licensed product, subject to earlier
termination in the event of defaults by the parties under the license
agreement.





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.





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 Option Agreement was exercised
on February 13, 2007.  Under the license agreement entered into upon
exercise of the option, the Company is required to remit minimum annual royalty
payments of $25 thousand until the first commercial sale of a licensed
product.  These payments were made in the years ended December 31,
2008 and 2007 and the 2009 royalty payment was made during the first three
months of 2010.   The Company may be required to make payments upon
achievement of certain milestones in varying amounts which on a cumulative
basis could total up to $775,000. In addition, SRI will be entitled to
receive single digit percentage royalty payments on the sales of a licensed
product in any country until all licensed patents rights in that country which
are utilized in the product have expired.  No milestones under the
license agreement were reached or expensed during the nine months ended
September 30, 2010.




11




ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





6.
Commitments and Contingencies – (continued)





License
Agreement with Baxter Healthcare Corporation (“Baxter”)





On
November 3, 2006, the Company entered into a definitive Asset Purchase Agreement
for indibulin and a License Agreement to proprietary nanosuspension
technology with affiliates of Baxter Healthcare S.A. The purchase included the
entire indibulin intellectual property portfolio as well as existing drug
substance and capsule inventories.  The terms of the Asset Purchase
Agreement included an upfront cash payment of approximately $1.1 million and an
additional $100 thousand payment for existing inventory, both of which were
expensed in 2006. In addition to the upfront costs, the Asset Purchase Agreement
includes additional diligence and milestone payments that could amount to
approximately $8 million in the aggregate and royalties on net sales of products
covered by a valid claim of a patent for the life of the patent on a
country-by-country basis. The Company expensed a $625 thousand milestone payment
upon the successful U.S. IND application for indibulin in 2007. The License
Agreement requires payment of a $15 thousand annual patent and license
prosecution/maintenance fee through the expiration of the last of the Licensed
Patents which is expected to expire in 2025, and single digit royalties on net
sales of licensed products covered by a valid claim of a patent for the life of
the patent on a country-by-country basis. The term of the license agreement
extends until the expiration of the last to expire of the patents covering the
licensed products, subject to earlier termination in the event of defaults by
the parties under the license agreement.





In
October 2009, the Baxter License Agreement was amended to allow the Company to
manufacturer indibulin.  No milestones under the license agreement
were reached or expensed during the nine months ended September 30,
2010.





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.  Under the
agreement the Company has agreed to pay Harmon Hill $20 thousand per month for
the consulting services and has further agreed 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.  If the
Specified Drug is sublicensed to a third party, the agreement entitles Harmon
Hill to 1% award of royalties or other payments received from a
sublicense.  Subject to renewal or extension by the parties, the term
of the agreement was for a one year period that expired April 7,
2009.  Although the Company and Harmon Hill have not entered into a
formal written renewal or extension, the parties continued to operate under the
terms of the agreement at September 30, 2010.  The Company expensed
$180 thousand during the first nine months of 2009 and 2010 for consulting
services per the aforementioned agreement.  No milestones under the
collaboration agreement were reached or expensed during the nine months ended
September 30, 2010.





CRO
Services Agreement with PPD Development, L. P.





The
Company and PPD Development, L. P. ("PPD") are parties to a master clinical
research organization services agreement dated January 29, 2010 and a related
work order dated June 25, 2010 under which PPD provides clinical research
organization ("CRO") services in support of the Company's clinical
trials. PPD is entitled to cumulative payments of up to $21.5
million under these arrangements, which is payable by the Company in
varying amounts upon PPD achieving specified milestones. During the nine months
ended September 30, 2010, the Company expensed $1.8 million upon contract
execution and $1.1 million upon a clinical study commencement of enrollment in
North America.




12




ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





7.
Warrants





The
Company has issued both warrants that are accounted for as liabilities and
warrants that are accounted for as equity instruments.  The number of
warrants at September 30, 2010 and December 31, 2009 were as
follows:





September 30,
                          
                          
                          December 31,2010
                          
                          
                          2009Liability-classified
      warrants
                          
                          
                          8,590,456
                          
                          
                          
                          8,615,223Equity-classified
      warrants
                          
                          
                          7,334,186
                          
                          
                          
                          7,404,924Total
      warrants
                          
                          
                          15,924,642
                          
                          
                          
                          16,020,147





Liability-Classified
Warrants





In May
2005, the Company issued 419,786 warrants to placement agents for services
performed in connection with a securities offering conducted by the Company,
11,083 of which were subsequently exercised.  The remaining 408,703
warrants were originally valued at $1.6 million.  Subject to certain
exceptions, these warrants provide for anti-dilution protection should common
stock or common stock equivalents be subsequently issued at a price per share
less than the exercise price of the warrants then in effect, which was initially
$4.75 per share.  This protection was triggered in 2006 when the
Company sold stock in a securities offering at $4.63 per
share.  Accordingly, the warrants were re-priced at
$4.69.  The protection was triggered a second time upon the September
2009 consummation of a securities offering in which the Company sold stock at
$1.825 per share and the warrants were subsequently re-priced at
$4.25.  The protection was triggered again with the Company’s December
2009 securities offering when the Company sold stock at $3.10 per share and the
warrants were subsequently re-priced at $3.93.





Also, in
connection with the December 2009 public offering, the Company issued warrants
to purchase an aggregate of 8,206,520 shares of common stock (including
7,742,000 warrants issued to investors in the offering and 464,520 warrants
issued to the Underwriters). The investor warrants were exercisable immediately
and the underwriter warrants were exercisable six months after the date of
issuance. The warrants have an exercise price of $4.02 per share and have a five
year term. Subject to certain exceptions, these warrants provide for
anti-dilution protection should common stock or common stock equivalents be
subsequently issued at a price less than the exercise price of the warrants then
in effect.





Accounting
standards require an entity to assess whether an equity-issued financial
instrument is indexed to an entity’s own stock for purposes of determining
whether a financial instrument should be treated as a derivative. Accounting
standards further require that liability-classified warrants be revalued at each
financial reporting period and the resulting gain or loss be recorded as other
income (expense) in the Statements of Operations.  Fair value is
measured using the Black-Scholes valuation model.





The
Company assessed whether the warrants issued in connection with the May 2005 and
December 2009 securities offerings require accounting as derivatives and, based
on the anti-dilution protection provided to the warrantholders, determined that
the warrants were not indexed to the Company’s own stock in accordance with
accounting standards codification Topic 815, Derivatives and Hedging. As
such, the Company has concluded the warrants did not meet the scope exception
for determining whether the instruments require accounting as derivatives and
should be classified in liabilities.





The
change in the fair value of the warrant liability was a loss of $3.7 million and
$2.7 million for the three and nine months ended September 30, 2010 and a loss
of $304 thousand and $520 thousand for the three and nine months ended September
30, 2009, respectively, and was charged to other income (expense) in the
Statements of Operations.  The following assumptions were used in the
Black-Scholes valuation model at September 30, 2010 and December 31,
2009:





September 30, 2010
                    
                    
                    December 31, 2009Risk-free
      interest rate
                    
                    
                    0.37
      - 1.01%
                    
                    
                    
                    1.37
      - 2.65%Expected
      life in years
                    
                    
                    1.67
      - 4.18
                    
                    
                    
                    2.42
      - 4.92Expected
      volatility
                    
                    
                    94.9
      - 101.5%
                    
                    
                    
                    105%Expected
      dividend yield
                    
                    
                    0
                    
                    
                    
                    0




13




ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





7.
Warrants – (continued)





During
the first nine months of 2010, warrant exercises were as follows:





CommonEquity
                      
                      
                      Liability
                      
                      
                      Stock
                      
                      
                      Cashin thousands, except share data
                      
                      Warrants
                      
                      
                      Warrants
                      
                      
                      Issued
                      
                      
                      ReceivedCash
      exercises
                      
                      
                      3,292
                      
                      
                      
                      16,000
                      
                      
                      
                      19,292
                      
                      
                      $
                      72Cashless
      exercises
                      
                      
                      67,446
                      
                      
                      
                      8,767
                      
                      
                      
                      19,933
                      
                      
                      
                      -70,738
                      
                      
                      
                      24,767
                      
                      
                      
                      39,225
                      
                      
                      $
                      72





There
were no warrant exercises in the first nine months of 2009.





8.
Common Stock





On May
27, 2010, the Company entered into an underwriting agreement (the “Underwriting
Agreement”) with Jefferies & Company, Inc. (the “Representative”)
relating to the issuance and sale of 7,000,000 shares of the Company’s common
stock, par value $0.001 per share.  The Representative, on behalf of
itself and JMP Securities LLC, as underwriters for the offering, purchased
7,000,000 shares from the Company pursuant to the Underwriting Agreement and
offered the shares to the public at a price of $5.00, and to certain dealers at
that price less a concession not in excess of $0.18 per share of common stock.
The net proceeds to the Company from this offering were $32.8 million, after
deducting underwriting discounts, commissions and other offering expenses of
$2.2 million. The offering was completed on June 2, 2010. Under the
terms of the Underwriting Agreement, the Company granted the Representative an
option, exercisable for 30 days, to purchase up to an additional 1,050,000
shares of common stock to cover over-allotments, if any.  The
overallotment expired on July 2, 2010, without being exercised.





9.
Stock-Based Compensation





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





For the three months ended September 30,
                    
                    
                    For the nine months ended September 30,(in thousands)
                    
                    2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Research
      and development, including costs of research contracts
                    
                    $
                    199
                    
                    
                    $
                    140
                    
                    
                    $
                    613
                    
                    
                    $
                    295General
      and administrative
                    
                    
                    824
                    
                    
                    
                    375
                    
                    
                    
                    2,585
                    
                    
                    
                    969Stock-based
      employee compensation expense
                    
                    $
                    1,023
                    
                    
                    $
                    515
                    
                    
                    $
                    3,198
                    
                    
                    $
                    1,264





The
Company granted 42 thousand and 197 thousand stock options during the three and
nine months ended September 30, 2010 that had a weighted-average grant date fair
value of $2.66 and $3.42 per share, respectively.  During the nine
months ended September 30, 2009, the Company granted 815 thousand stock
options that had a weighted-average grant date fair value of $0.53 per
share.  There were no stock options granted during the three month
period ended September 30, 2009.








14




ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





9.
Stock-Based Compensation – (continued)





For the
nine months ended September 30, 2010 and 2009, 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 nine months ended September 30,2010
                    
                    
                    2009Risk-free
      interest rate
                    
                    
                    1.28-2.75%
                    
                    
                    
                    1.31-1.44%Expected
      life in years
                    
                    
                    5
                    
                    
                    
                    5Expected
      volatility
                    
                    
                    89.2-90.6%
                    
                    
                    
                    102-103%Expected
      dividend yield
                    
                    
                    0
                    
                    
                    
                    0





Stock
option transactions under the Company’s stock option plan for the nine months
ended September 30, 2010 are as follows:





(in thousands, except share and per share
                      data)
                    
                    Number of
                      Shares
                    
                    
                    Weighted-
                      AverageExercise
                      Price
                    
                    
                    Weighted-
                      Average
                      Contractual
                      Term (Years)
                    
                    
                    Aggregate
                      Intrinsic ValueOutstanding,
      December 31, 2009
                    
                    
                    3,534,686
                    
                    
                    $
                    2.82Granted
                    
                    
                    197,000
                    
                    
                    
                    4.86Exercised
                    
                    
                    196,167
                    
                    
                    
                    1.19Cancelled
                    
                    
                    6,667
                    
                    
                    
                    5.19Outstanding,
      September 30, 2010
                    
                    
                    3,528,852
                    
                    
                    $
                    3.02
                    
                    
                    
                    6.88
                    
                    
                    $
                    4,249,255Options
      exercisable, September 30, 2010
                    
                    
                    2,568,019
                    
                    
                    $
                    3.00
                    
                    
                    
                    6.12
                    
                    
                    $
                    3,375,200Options
      available for future grant
                    
                    
                    3,074,734





A summary
of the status of non-vested restricted stock for the nine months ended September
30, 2010 is as follows:





Number of Shares
                    
                    
                    Weighted-Average
                      Grant Date Fair ValueNon-vested,
      December 31, 2009
                    
                    
                    1,467,167
                    
                    
                    $
                    2.30Granted
                    
                    
                    115,000
                    
                    
                    $
                    5.15Vested
                    
                    
                    1,052,583
                    
                    
                    $
                    2.11Cancelled
                    
                    
                    11,250
                    
                    
                    $
                    4.34Non-vested,
      September 30, 2010
                    
                    
                    518,334
                    
                    
                    $
                    3.29





On June
23, 2010, the date of the Company’s annual stockholders meeting, the Company’s
stockholders approved an amendment to the 2003 Stock Option Plan increasing the
total shares reserved by 3,000,000 shares for a total of 9,002,436.




15




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 that can be
administered by intravenous and/or oral dosing.  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 endeavor to
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.  With partnering, we
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, II and/or III studies for three product candidates
identified as darinaparsin (ZinaparTM,
ZIO-101), palifosfamide (ZymafosTM,
ZIO-201), and indibulin (ZybulinTM,
ZIO-301), our primary focus has been and remains on palifosfamide development
and specifically on completing the recently initiated palifosfamide pivotal
Phase III trial to support registration in combination with doxorubicin in the
front -line setting of soft tissue sarcoma.





·
              ZIO-101
      or darinaparsin (ZinaparTM)
      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 ®]
      or “ATO”) has been approved in the United States, the European Union and
      Japan for the treatment of acute promyelocytic leukemia, a precancerous
      condition. In the United States, 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 ATO, particularly with regard
      to cardiac toxicity. In
      vitro testing of darinaparsin using the National Cancer Institute’s
      human cancer cell panel demonstrated activity against a series of tumor
      cell lines including lung, colon, brain, melanoma, ovarian, and kidney
      cancer. Moderate activity was shown against breast and prostate cancer
      tumor cell lines. 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. 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 form of the drug, and established synergy of darinaparsin in
      combination with other approved anti-cancer
  agents.




16




Phase I
testing of the intravenous (IV) form of darinaparsin in solid tumors and
hematological cancers was completed and we reported clinical activity and,
importantly, a safety profile from these studies as predicted by preclinical
results. We subsequently completed Phase II studies in advanced myeloma, primary
liver cancer and in certain other hematological cancers. In addition, we have
re-opened Phase I study with an oral form.  At the May 2009 annual
meeting of the American Society of Clinical Oncology, we reported favorable
results from the trial with IV-administered darinaparsin in lymphoma,
particularly peripheral T-cell lymphoma.  We have established a Phase
I protocol to study darinaparsin with the combination treatment regimen called
“CHOP”, which is standard of care for front-line peripheral T-cell lymphoma
(“PTCL”).   With the requisite financial resources, we would
intend to follow this Phase I trial into a pivotal trial as determined by trial
data. Orphan Drug Designation was recently obtained in the United States for the
treatment of peripheral T-cell lymphoma and the Japan Patent Office issued a
patent with claims covering pharmaceutical composition.





·
              ZIO-201
      or palifosfamide (ZymafosTM),
      comprises 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 and in the U.S. we
      recently received a patent covering pharmaceutical composition. Like
      cyclophosphamide, ifosfamide and bendamustine, palifosfamide is a DNA
      alkylating agent, a form of cancer therapy to treat a wide range of solid
      tumors and hematological malignancies. We believe 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.
      Bendamustine has been recently approved and successfully launched by
      Cephalon Oncology in the U.S. and Europe to treat certain hematological
      malignancies. Ifosfamide has been shown to be effective in the treatment
      of sarcoma and lymphoma, either by itself or in combination with other
      anticancer agents. Ifosfamide is approved by the FDA as a treatment for
      testicular cancer while ifosfamide-based treatment is a standard of care
      for sarcoma, although it is not approved for this indication by the FDA.
      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
completion of Phase I study, we completed Phase II testing of the intravenous
form of palifosfamide as a single agent to treat advanced sarcoma.  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.  We reported clinical
activity of palifosfamide when used alone in the Phase II study addressing
advanced sarcoma.  Following review of preclinical combination
studies, clinical data, and discussion with sarcoma experts, we initiated a
Phase I dose escalation study of palifosfamide in combination with doxorubicin
primarily in patients with soft tissue sarcoma.  We reported
favorable results and safety profile from this study at ASCO’s 2009 annual
meeting.  In light of reported favorable Phase II clinical activity
data and with the combination being well tolerated in the Phase I trial, we
initiated a Phase II randomized controlled trial in the second half of 2008 to
compare doxorubicin plus palifosfamide to doxorubicin alone in patients
with front and second-line metastatic or unresectable soft
tissue sarcoma.  The study generated positive top line interim
data in 2009.  Upon reaching a pre-specified efficacy milestone and
following safety and efficacy data review by the Data Committee, sarcoma
experts, and our Medical Advisory Board, we elected to suspend enrollment in the
trial in October 2009.  We subsequently presented further positive
interim data from the trial at the 15th Annual
Connective Tissue Oncology Society meeting held in November 2009 and again at
the 2010 ASCO Annual Meeting where the presentation was also selected for Best
of ASCO.  In July 2010, we announced the initiation of a worldwide
registration trial with FDA on a protocol design developed through an End
of Phase II meeting and the Special Protocol Assessment (SPA)
process.  Although the Company did engage in the SPA process, the
Company, with guidance from the FDA, elected to initiate the trial without
having obtained formal SPA. The Phase III trial is in front-line metastatic soft
tissue sarcoma, entitled PICASSO 3, and is an international, randomized,
double-blinded, placebo-controlled trial with a targeted enrollment of 424
patients.  The study is designed to evaluate the safety and efficacy
of palifosfamide administered with doxorubicin compared with doxorubicin
administered with placebo, with no cross-over between the
arms.  Progression-free survival is the primary endpoint for
accelerated approval, with overall survival as the primary endpoint for full
approval.  Orphan Drug Designation for palifosfamide has been obtained
in both the United States and the European Union for the treatment of soft
tissue sarcomas.




17




We are
also initiating a Phase I trial with palifosfamide in combination with etoposide
and carboplatin for front-line small-cell lung cancer (“SCLC”) and we expect a
Phase II randomized trial to follow.   An oral form of
palifosfamide is entering Phase I study while additional preclinical work
continues.





·
              ZIO-301
      or indibulin (ZybulinTM),  is a novel, orally available small
      molecular-weight inhibitor of tubulin polymerization that we acquired from
      Baxter Healthcare in 2006 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 Phase
I trials. Indibulin has also demonstrated synergy with approved anti-cancer
agents in preclinical studies. The availability of an oral formulation of
indibulin creates significant commercial opportunity because no oral capsule
formulations of the taxane family are currently on the market in the United
States.





Indibulin,
as a single agent, has completed Phase I trials in patients with advanced solid
tumors. We have reported 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 were initiated with TarcevaTMand
XelodaTM,
respectively.  Favorable activity and safety profile of oral indibulin
with oral XelodaTMwere
reported at ASCO’s annual meeting in May 2009.  Preclinical work with
our consultant, Dr. Larry Norton, to explore dose scheduling for the clinical
setting have been completed, with results supporting the recently initiated
Phase I safety trial necessary for a Phase II breast cancer trial and using the
mathematical dosing schedule established preclinically.




We intend
to continue with our principal focus on the clinical development of IV
palifosfamide for soft tissue sarcoma, completing the ongoingPhase II trial and the
recently initiated Phase III pivotal trial while also initiating the SCLC Phase
I trial and Phase I study with the oral form.  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.




18




Patents
and Other Proprietary Rights





Our goal
is to obtain, maintain, and enforce patent protection for our products,
formulations, processes, methods, and other proprietary technologies in order to
preserve our trade secrets and to operate without infringing upon the
proprietary rights of other parties, both in the United States and in other
countries. Our policy is to actively seek the broadest possible intellectual
property protection for our product candidates through a combination of
contractual arrangements and patents, both in the United States and
abroad.


Patents
extend for varying periods according to the date of patent filing or grant and
the legal term of patents in the various countries where patent protection is
obtained. The actual protection offering by a patent, which can vary from
country to country, depends of the type of patent, the scope of its coverage and
the availability of legal remedies in the country.


We also
depend upon the skills, knowledge, and experience of our scientific and
technical personnel, as well as those of our advisors, consultants, and other
contractors, none of which is patentable. To help protect proprietary know-how,
which is not patentable, and for inventions for which patents may be difficult
to enforce, we currently rely, and in the future will continue to rely, on trade
secret protection and confidentiality agreements to protect our interests. To
this end, we generally require employees, consultants, advisors and other
contractors to enter into confidentiality 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.


Our
patent position and proprietary rights are subject to certain risks and
uncertainties. Please read the “Risk Factors” section of this report for
information about certain risks and uncertainties that may affect our patent
position and proprietary rights.


Additional
information about material patents and other proprietary rights covering our
product candidates is set forth below.





Darinaparsin





The
patent estate covering darinaparsin compositions, methods of use and methods of
manufacture includes three issued United States patents, as well as issued
patents in certain foreign jurisdictions, all of which are scheduled to expire
in 2023. We license these patents, as well as pending applications in various
foreign jurisdictions, from The University of Texas M. D. Anderson Cancer Center
and the Texas A&M University System pursuant to an agreement dated August
24, 2004.  We have also filed pending applications in the United
States and various foreign jurisdictions.





Palifosfamide





The
patent estate covering palifosfamide compositions, methods of use and methods of
manufacture includes one issued United States patent that is scheduled to expire
in 2029, as well as pending applications in the United States and various
foreign jurisdictions. We license the issued patent and the patent applications
from DEKK-Tec, Inc. pursuant to an agreement dated October 15,
2004.  We have also filed pending applications in the United States
and various foreign jurisdictions.





Indibulin





The
patent estate covering indibulin compositions, methods of use and methods of
manufacture includes pending applications in the United States, and various
foreign jurisdictions, all of which we license from affiliates of Baxter
Healthcare Corporation pursuant to an agreement dated November 6, 2006. We also
have five issued United States patents that are scheduled to expire at varying
times between 2017 and 2019, as well as issued patents in various foreign
jurisdictions, and have filed pending applications in the United States and
various foreign jurisdictions.




19




Development
Plan




Our
development plan for the next twelve months remains focused on the following
endeavors:





·
            completing
      the randomized Phase II trial for IV palifosfamide in soft tissue
      sarcoma;


·
            implementation
      of  the Phase III registration trial for IV palifosfamide in
      soft tissue sarcoma, as well as initiating the SCLC and oral Phase I
      trials while conducting manufacturing
scale-up;


·
            completing
      the Phase I oral darinaparsin trial, while starting a Phase I trial with
      CHOP for front-line PTCL study; and


·
            conducting
      the Phase I safety trial following into a Phase II trial
      of  oral indibulin in breast
  cancer.





We expect
our material expenditures during this time to be predominately for palifosfamide
clinical trial expense, employment expense (we currently have 21 full time
employees) and other expenses associated with clinical trials.





We
continue 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.




Given our
current plans to use internal financial resources to develop palifosfamide and
pursue the clinical work discussed above, but with the intention of partnering
or otherwise raising additional resources to support further development
activities for all three product candidates, we expect to incur the following
expenses during the next twelve months: approximately $28.2 million on research
and development expenses and approximately $ 10.0 million on general
corporate and administrative expenses.  With our current cash
position, and ongoing aggressive cash management strategy, we believe that we
currently have sufficient capital that will support our current operations well
into mid-2012.  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.  Specifically, we commenced a registration trial for
IV palifosfamide early in the third quarter of 2010.  We have
estimated the sufficiency of our cash resources based this trial
design.  However, the actual costs may ultimately vary from our
current expectations, which could materially impact our use of capital and our
forecast of the period of time through which our financial resources will be
adequate to support our operations. In addition to the amount and timing of
expenses related to the IV palifosfamide registration trial, our actual cash
requirements may vary materially from our current expectations for a number of
other factors that may include, but are not limited to, changes in the focus and
direction of our development programs, competitive and technical advances, costs
associated with the development of our product candidates, our ability to secure
partnering arrangements, and costs of filing, prosecuting, defending and
enforcing our intellectual property rights.




20




Product
Candidate Development and Clinical Trials





Intravenous darinaparsin, an
organic arsenic, has been tested in patients with advanced myeloma, other
hematological malignancies, and liver cancer.   At the May 2009 ASCO
Annual Meeting, we reported positive results in patients with lymphoma,
particularly PTCL, which has led to the planning of a pivotal trial in PTCL
subject to regulatory guidance and the availability of sufficient financial
resources.  We intend to initiate a Phase I trial with CHOP and
continue to evaluate the options for a pivotal trial.  The Phase I
trial with an oral form of darinaparsin is again ongoing.  The Company
is actively seeking sources of funding for continuing the development program of
the IV form in a pivotal trial for PTCL and for continuing additional studies
for both IV and oral administration.  Technology transfer and scale-up
for the commercial manufacture of the active pharmaceutical ingredient and final
product specification will continue as the development program and resources
allow.  Orphan Drug Designation has been obtained for the United
States for the treatment of PTCL.





Intravenous palifosfamide,
the proprietary stabilized form of isophosphoramide mustard, is being developed
presently to treat soft tissue sarcoma.  A Phase II trial in
advanced sarcoma has been completed with favorable activity and with the
expected safety profile.  Favorable activity and safety data from a
Phase I trial of IV palifosfamide in combination with doxorubicin were reported
at the 2009 ASCO Annual Meeting.  The Company subsequently initiated a
randomized 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 recently announced
favorable interim efficacy data, thereby ending further enrollment, and
presented the results at the November 2009 CTOS Annual Meeting and the 2010 ASCO
Annual Meeting.  The Company initiated a global registration trial
during the third quarter of 2010.  We also plan to study IV
palifosfamide in SCLC and to initiate a Phase I clinical study will be initiated
with the oral form.  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 the program demands.




Indibulin, a novel
anti-cancer agent that targets mitosis by inhibiting tubulin polymerization,
is administered as an oral formulation.  Indibulin has completed
Phase I trials with favorable results of activity and safety profile reported
for all trials.  Phase I trials of indibulin in combination with
Tarceva TMand also with Xeloda TMhave
been conducted.  At the 2009 ASCO Annual Meeting, the Company
presented favorable preliminary activity and safety data of oral indibulin with
oral XelodaTM.  Preclinical studies under the direction of Dr. Larry Norton
to support clinical study of “dose dense” dosing are completed and were also
reported at 2009 ASCO Annual Meeting.  The Company has initiated a
Phase I/II trial to determine maximum tolerated dose and activity in breast
cancer with the schedule identified preclinically.




21




Financial
Overview





Overview
of Results of Operations





Three
and nine months ended September 30, 2010 compared to three and nine months ended
September 30, 2009





Revenue.  We
had no revenues for the three and nine months ended September 30, 2010 and
2009.





Research and
development expenses.  Research and development expenses during
the three and nine months ended September 30, 2010 and 2009 were as
follows:





Three months ended
                        September 30,
                      
                      
                      
                      
                      
                      
                      
                      
                      Nine months ended
                        September 30,2010
                      
                      
                      2009
                      
                      
                      Change
                      
                      
                      2010
                      
                      
                      2009
                      
                      
                      Change($
      in thousands)Research
      and development
                      
                      $
                      5,711
                      
                      
                      $
                      1,231
                      
                      
                      $
                      4,480
                      
                      
                      
                      364
                      %
                      
                      $
                      9,872
                      
                      
                      $
                      3,340
                      
                      
                      $
                      6,532
                      
                      
                      
                      196
                      %





Research
and development expenses for the three months ended September 30, 2010 increased
by $4.5 million from the three months ended September 30, 2009.  The
increase was primarily due to increased manufacturing activity of $455 thousand
to replenish drug inventories, clinical costs of $3.6 million related to the
Phase III palifosfamide study and other costs of $378
thousand.





Research
and development expenses for the nine months ended September 30, 2010 increased
by $6.5 million from the nine months ended September 30, 2009.  The
increase was primarily due to increased manufacturing activity of $1.3 million
to replenish drug inventories, stock-based compensation expense of $318
thousand, clinical costs of $4.3 million related to the Phase III trial with
palifosfamide study and other costs of $696 thousand.





We expect
our research and development expenses to increase as we start our pivotal Phase
III palifosfamide and other studies for palifosfamide, darinaparsin and
indibulin.





Overview





Our
research and development expense consists primarily of salaries and related
expenses for personnel, costs of contract manufacturing services, costs of
facilities and equipment, fees paid to professional service providers in
conjunction with our clinical trials, fees paid to research organizations in
conjunction with pre-clinical animal studies, costs of materials used in
research and development, consulting, license and milestone payments and
sponsored research fees paid to third parties.





We have
not accumulated and tracked our internal historical research and development
costs or our personnel and personnel-related costs on a program-by-program
basis.  Our employee and infrastructure resources are allocated across
several projects, and many of our costs are directed to broadly applicable
research endeavors.  As a result, we cannot state the costs incurred
for each of our oncology programs on a program-by-program basis.





In 2010,
our clinical projects consisted primarily of a Phase III project for our lead
product candidate palifosfamide.  This project was initiated during
2010.  The expenses incurred by us to third parties were $2.5 million
and $3.1 million for the three and nine months ended September 30, 2010,
respectively and $3.1 million for project to date.




22




Our
future research and development expenses in support of our current and future
programs will be subject to numerous uncertainties in timing and cost to
completion.  We test potential products in numerous pre-clinical
studies for safety, toxicology and efficacy.  We may conduct multiple
clinical trials for each product.  As we obtain results from trials,
we may elect to discontinue or delay clinical trials for certain products in
order to focus our resources on more promising products or
indications.  Completion of clinical trials may take several years or
more, and the length of time generally varies substantially according to the
type, complexity, novelty and intended use of a product.  It is not
unusual for pre-clinical and clinical development of each of these types of
products to require the expenditure of substantial resources.





We
estimate that clinical trials of the type generally needed to secure new drug
approval are typically completed over the following timelines:





Clinical
      Phase
                
                Estimated
      Completion PeriodPhase
      1
                
                1 -
      2 yearsPhase
      2
                
                2 -
      3 yearsPhase
      3
                
                2 -
      4 years





The
duration and the cost of clinical trials may vary significantly over the life of
a project as a result of differences arising during clinical development,
including, among others, the following:





·
            the
      number of clinical sites included in the
trials;





·
            the
      length of time required to enroll suitable
  patents;





·
            the
      number of patients that ultimately participate in the
    trials;





·
            the
      duration of patient follow-up to ensure the absence of long-term
      product-related adverse events; and





·
            the
      efficacy and safety profile of the
product.





As a
result of the uncertainties discussed above, we are unable to determine the
duration and completion costs of our programs or when and to what extent we will
receive cash inflows from the commercialization and sale of a
product.  Our inability to complete our programs in a timely manner or
our failure to enter into appropriate collaborative agreements could
significantly increase our capital requirements and could inversely impact our
liquidity.  These uncertainties could force us to seek additional,
external sources of financing from time-to-time in order to continue with our
product development strategy.  Our ability to raise additional
capital, or to do so on terms reasonably acceptable to us, would jeopardize the
future success of our business.




23




General and
administrative expenses.  General and administrative expenses
during the three and nine months ended September 30, 2010 and 2009 were as
follows:





Three months ended
                    September 30,
                  
                  
                  
                  
                  
                  
                  
                  
                  Nine months ended
                    September 30,2010
                  
                  
                  2009
                  
                  
                  Change
                  
                  
                  2010
                  
                  
                  2009
                  
                  
                  Change($
      in thousands)General
      and administrative
                  
                  $
                  2,789
                  
                  
                  $
                  1,339
                  
                  
                  $
                  1,450
                  
                  
                  
                  108
                  %
                  
                  $
                  8,313
                  
                  
                  $
                  4,754
                  
                  
                  $
                  3,559
                  
                  
                  
                  75
                  %





General
and administrative expenses for the three months ended September 30, 2010
increased by $1.5 million from the three months ended September 30,
2009.  The increase was primarily due to increased stock-based
compensation of $450 thousand, salaries of $241 thousand, consulting of $157
thousand, legal and patent costs of $241 thousand and other costs of $362
thousand.  The increased general and administrative activity was
related to support in preparation for new clinical studies.





General
and administrative expenses for the nine months ended September 30, 2010
increased by $3.6 million from the nine months ended September 30,
2009.  The increase was primarily due to increased stock-based
compensation of $1.6 million, salaries of $495 thousand, consulting of $410
thousand, legal and patent costs of $374 thousand, payments of $125 thousand
upon achieving license related milestones and other costs of $539
thousand.  The increased general and administrative activity was
related to support in preparation for new clinical studies.





We expect
our general and administrative expenses to increase moderately due to increased
activity to support the new clinical studies.




Other income
(expense).Other income (expense) for the three and nine months
ended September 30, 2010 and 2009 were as follows:





Three months ended
                  September 30,
                
                
                
                
                
                
                
                
                Nine months ended
                  September 30,2010
                
                
                2009
                
                
                Change
                
                
                2010
                
                
                2009
                
                
                Change($
      in thousands)Other
      income (expense), net
                
                $
                7
                
                
                $
                (1
                )
                
                $
                8
                
                
                
                -800
                %
                
                $
                29
                
                
                $
                1
                
                
                $
                28
                
                
                
                2800
                %Change
      in fair value of warrants
                
                
                (3,712
                )
                
                
                (304
                )
                
                
                (3,408
                )
                
                
                -1121
                %
                
                
                (2,663
                )
                
                
                (520
                )
                
                
                (2,143
                )
                
                
                -412
                %Total
                
                $
                (3,705
                )
                
                $
                (305
                )
                
                $
                (3,400
                )
                
                
                
                
                
                $
                (2,634
                )
                
                $
                (519
                )
                
                $
                (2,115
                )





The
decrease in other income (expense) from the three months ended September 30,
2009 compared to the three months ended September 30, 2010 was due primarily to
the increased non-cash expense recorded from the change in the fair value of
liability-classified warrants.  The increased expense directly correlates
with the Company’s increased stock price during the three months ended September
30, 2010.  Additionally, increased cash balances resulted in increased
interest income.





The
decrease in other income (expense) from the nine months ended September 30, 2009
compared to the nine months ended September 30, 2010 was due primarily to the
increased non-cash expense recorded from the change in the fair value of
liability-classified warrants.  The increased expense directly correlates
with the Company’s increased stock price during the nine months ended September
30, 2010.  Additionally, increased cash balances during the first nine
months of 2010 resulted in increased interest income.


24





Liquidity
and Capital Resources





As of
September 30, 2010, we had approximately $66.5 million in cash and cash
equivalents, compared to $48.8 million in cash and cash equivalents as of
December 31, 2009.  We believe that our existing cash will be sufficient to
fund our operations well into mid-2012. We expect that we will need additional
financing to support our long-term plans for clinical trials and new product
development.  We expect to finance our cash needs through the sale of
equity securities, strategic collaborations and/or debt financings, or through
other sources that may be dilutive to existing stockholders. There can be no
assurance that we will be able to obtain funding from any of these sources or,
if obtained, what the terms of such funding(s) may be, or that any amount that
the Company is able to obtain 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 instability that 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 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.





The
following table summarizes our net increase (decrease) in cash and cash
equivalents for the nine months ended September 30, 2010 and 2009:





Nine months ended
                            September 30,2010
                          
                          
                          2009($
      in thousands)Net
      cash provided by (used in):Operating
      activities
                          
                          $
                          (13,911
                          )
                          
                          $
                          (8,901
                          )Investing
      activities
                          
                          
                          (128
                          )
                          
                          
                          (3
                          )Financing
      activities
                          
                          
                          31,671
                          
                          
                          
                          4,605Net
      increase (decrease) in cash and cash equivalents
                          
                          $
                          17,632
                          
                          
                          $
                          (4,299
                          )




Net cash
used in operating activities was $13.9 million for the nine months ended
September 30, 2010 compared to $8.9 million for the nine months ended September
30, 2009.  The $5.0 million increase was primarily due to an increase in
the net loss from operations, caused by increased research and development
activities, partially offset by increases in accrued liabilities, stock based
compensation and change in fair value of warrants.





Net cash
used in investing activities was $128 thousand for the nine months ended
September 30, 2010 compared to $3 thousand for the nine months ended September
30, 2009.  The increase was due to increased purchases of property plant
and equipment.





Net cash
provided by financing activities was $31.7 million for the nine months ended
September 30, 2010 compared to $4.6 million for the nine months ended September
30, 2009.  The increase of $27.1 million is attributable to a financing
that resulted in $32.8 million of cash proceeds, in addition to stock option
exercises partially offset by the re-purchase of common stock by the Company to
cover taxes upon vesting of previously granted restricted stock
awards.


25




Operating
capital and capital expenditure requirements





The
Company anticipates that losses will continue for the foreseeable future. At
September 30, 2010, the Company’s accumulated deficit was approximately $112.0
million.  Our actual cash requirements may vary materially from those
planned because of a number of factors including:





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





·
            Competitive
      and technical advances;





·
            Internal
      costs associated with the development of palifosfamide and indibulin and
      our ability to secure further financing for darinaparsin development from
      a partner;





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





·
            Other
      matters identified under Part II – Item 1A. “Risk Factors”
      below.





Working
capital as of September 30, 2010 was $62.7 million, consisting of $66.8 million
in current assets and $4.1 million in current liabilities. Working capital as of
December 31, 2009 was $46.1 million, consisting of $49.2 million in current
assets and $3.1 million in current liabilities.





Contractual
obligations





The
following table summarizes our outstanding obligations as of September 30, 2010
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
                  
                  $
                  1,063
                  
                  
                  $
                  417
                  
                  
                  $
                  541
                  
                  
                  $
                  105
                  
                  
                  $
                  -Royalty
      and license fees
                  
                  
                  1,625
                  
                  
                  
                  25
                  
                  
                  
                  300
                  
                  
                  
                  800
                  
                  
                  
                  500Contract
      milestone payments
                  
                  
                  15,805
                  
                  
                  
                  5,046
                  
                  
                  
                  9,331
                  
                  
                  
                  1,428
                  
                  
                  
                  -Total
                  
                  $
                  18,493
                  
                  
                  $
                  5,488
                  
                  
                  $
                  10,172
                  
                  
                  $
                  2,333
                  
                  
                  $
                  500





Our
commitments for operating leases relate to the lease for our corporate
headquarters in New York, New York and our operations center in Boston,
Massachusetts.  Our commitments for royalty and license fees relate to our
patent agreement with Baxter Healthcare Corporation and our royalty agreements
with Southern Research Institute and Baxter Healthcare Corporation.  The
contract milestone payments relate to our CRO agreement with PPD Development, L.
P.  The timing of the remaining contract milestone payments are dependent
upon factors that are beyond our control, including our ability to recruit
patients, the outcome of future clinical trials and any requirements imposed on
our clinical trials by regulatory agencies.  However, for the purpose of
the above table, we have assumed that the payment of the milestones will occur
within five years of September 30, 2010.


26





Off-balance
sheet arrangements





During
the nine months ended September 30, 2010 and 2009, 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, 2009, 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 nine months ended September 30,
2010.





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 in global banks, United States
treasuries and other Government backed investments, which are subject to minimal
interest rate risk.





Item 4.
Controls and Procedures





Our
management, with the participation of our principal executive officer and
principal 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 the Company 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.


27





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 quarterly
report on Form 10-Q for the quarter ended September 30, 2010.  The risk
factors set forth below with an asterisk (*) next to the title are new risk
factors or risk factors containing changes, which may be material, from the risk
factors previously disclosed in Item 1A of our quarterly report on Form 10-Q for
the quarter ended September 30, 2010, as filed with the Securities and Exchange
Commission.




RISKS
RELATED TO OUR BUSINESS





*
We will require additional financial resources in order to continue on-going
development of our product candidates; if we are unable to obtain these
additional resources, we may be forced to delay or discontinue clinical testing
of our product candidates.





We have
never generated revenue and have incurred significant net losses in each year
since our inception.  For the nine months ended September 30, 2010, we had
a net loss of $20.8 million and we had incurred approximately $112.0 million of
cumulative net losses since our inception in 2003.  We expect to continue
to incur significant operating expenditures.  Although we took near-term
cost cutting measures in 2009 aimed at preserving capital while we pursued
sources of potential additional financing, further development of our product
candidates will likely require substantial increases in our expenses as
we:





·
            Continue
      to undertake 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.





We
continue to seek additional financial resources to fund the further development
of palifosfamide, darinaparsin and indibulin and in particular the planned
pivotal trial of darinaparsin in front-line PTCL.  If we are unable to
obtain sufficient additional capital, one or more of these programs could be
placed on hold.  Because we are currently devoting a significant portion of
our resources to the development of palifosfamide, further progress with the
development of darinaparsin and indibulin may be significantly delayed and may
depend on the success of our ongoing clinical trial involving
palifosfamide.





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. If adequate additional funds
are not available when required, or if we are unsuccessful in entering into
partnership agreements for the further development of our products, we will be
required to delay, reduce or eliminate planned preclinical and clinical trials
and may be forced to terminate the approval process for our product candidates
from the FDA or other regulatory authorities.  In addition, we could be
forced to discontinue product development, forego attractive business
opportunities or pursue merger or divestiture strategies.  In the event we
are unable to obtain additional financing, we may be forced to cease operations
altogether.


28





*
We 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
September 30, 2010, we had incurred approximately $112.0 million of cumulative
net losses and had approximately $66.5 million of cash and cash
equivalents.  Given our current plans for development of our product
candidates, we anticipate that our cash resources will be sufficient to fund our
operations well into mid-2012.  However, changes may occur that would
consume our existing capital prior to that time, including the scope and
progress of our research and development efforts and changes in governmental
regulation. Specifically, we have commenced a registration trial for IV
palifosfamide early in the third quarter of 2010.  We have estimated the
sufficiency of our cash resources based on this trial design.  However, the
actual costs may ultimately vary from our current expectations, which could
materially impact our use of capital and our forecast of the period of time
through which our financial resources will be adequate to support our
operations. In addition to the amount and timing of expenses related to the IV
palifosfamide registration trial, our actual cash requirements may vary
materially from our current expectations for a number of other factors that may
include, but are not limited to, changes in the focus and direction of our
development programs, competitive and technical advances, costs associated with
the development of our product candidates, our ability to secure partnering
arrangements, and costs of filing, prosecuting, defending and enforcing our
intellectual property rights.





Recently,
capital markets have experienced a period of unprecedented instability that 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.  In
addition, we may grant future investors rights superior to those of our existing
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.





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





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 achieve or
maintain profitability, or to continue our business without raising significant
additional capital, which may not be available.  Our failure to achieve or
maintain profitability could negatively impact the trading price of our common
stock.


29





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.


30





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.


31





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.


32





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 various 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 various 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, for darinaparsin in the United States and we are hopeful that we may be
able to obtain “Fast Track” and/or additional Orphan Drug status from the FDA,
Europe and Japan  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.





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.


33




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.





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.





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 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.


34




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.





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.


35





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.





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.





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.


36





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.





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.


37




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. 
Sarbanes-Oxley generally requires that a public reporting company’s independent
registered public accounting firm attest to the effectiveness of the company’s
internal control over financial reporting as of the end of each fiscal year in
the company’s Annual Report on Form 10-K.  While our management has not
currently identified any material weaknesses in our internal control over
financial reporting, there can be no assurance that we will not identify
identified any material weaknesses during the current year or that our systems
will be deemed effective when our independent registered public accounting firm
reviews the systems during 2010 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.





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 increased monitoring 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.  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.


38





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.


39


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





Issuer
Purchases of Equity Securities




During the
nine months ended September 30, 2010, we purchased 364,993 shares of common
stock in settlement of employee tax withholding obligations due upon the vesting
of restricted stock.  The following table provides information about these
purchases of restricted shares for the nine months ended September 30,
2010:




Period
                  
                  Total Number of
                    Shares Purchased
                  
                  
                  Average PricePaid
                    Per Share($)January
      1 to 30, 2010
                  
                  
                  15,283
                  
                  
                  $
                  3.10February
      1 to 28, 2010
                  
                  
                  -
                  
                  
                  $
                  -March
      1 to 31, 2010
                  
                  
                  -
                  
                  
                  $
                  -April
      1 to 30, 2010
                  
                  
                  -
                  
                  
                  $
                  -May
      1 to 31, 2010
                  
                  
                  -
                  
                  
                  $
                  -June
      1 to 30, 2010
                  
                  
                  -
                  
                  
                  $
                  -July
      1 to 31, 2010
                  
                  
                  -
                  
                  
                  $
                  -August
      1 to 31, 2010
                  
                  
                  -
                  
                  
                  $
                  -September
      1 to 30, 2010
                  
                  
                  349,710
                  
                  
                  $
                  3.95Total
                  
                  
                  364,993




Item 3.
Defaults upon Senior Securities





Not
applicable.


40





Item 4.
[Removed and Reserved.]





Item 5.
Other Information





Not
applicable.





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.


41





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:
November 4, 2010





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


Dated
November 4, 2010


42





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


43