UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C.
20549
 
 Form 10-Q
 (Mark
One)
 þ
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934
 For
the quarterly period ended June 30, 2010
 OR
 o
              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:  o
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).   Yes:  o     No:  o
 
 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 o
              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:   ̈     No:  þ
 
 The
number of shares of the registrant’s Common Stock, $.001 par value, outstanding
as of July 27, 2010, was 48,826,555 shares.
  
 
 ZIOPHARM
Oncology, Inc. (a development stage company)
 
 Table
of Contents
 
 PagePart
      I - Financial InformationItem 1.
                                                                                    
                                                                                    Financial
      StatementsBalance
      Sheets as ofJune
      30, 2010and
      December 31, 2009
      (unaudited)
                                                                                    3Statements
      of Operations for the threeand
      sixmonths
      endedJune
      30, 2010 and2009
      and the period from September 9, 2003 (date of inception) throughJune
      30, 2010 (unaudited)
                                                                                    4Statement
      of Changes
      in Stockholders’ Equity forthesix
      months endedJune
      30, 2010 (unaudited)
                                                                                    5Statements
      of Cash Flows for thesixmonths
      endedJune
      30, 2010 and2009
      and the period from September9,
      2003 (date of inception) throughJune
      30, 2010 (unaudited)
                                                                                    6Notes
      to Financial Statements(unaudited)
                                                                                    7Item 2.
                                                                                    
                                                                                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                                                                    15Item 3.
                                                                                    
                                                                                    Quantitative
      and Qualitative Disclosures about Market
Risk
                                                                                    24Item 4.
                                                                                    
                                                                                    Controls
      and Procedures
                                                                                    24Part
      II - Other InformationItem 1.
                                                                                    
                                                                                    Legal
      Proceedings
                                                                                    25Item 1A.
                                                                                    
                                                                                    Risk
      Factors
                                                                                    25Item 2.
                                                                                    
                                                                                    Unregistered
      Sale of Equity Securities and Use of
Proceeds
                                                                                    37Item 3.
                                                                                    
                                                                                    Defaults
      upon Senior Securities
                                                                                    37Item
      4.
                                                                                    
                                                                                    Removed
      and Reserved
                                                                                    38Item 5.
                                                                                    
                                                                                    Other
      Information
                                                                                    38Item 6.
                                                                                    
                                                                                    Exhibits
                                                                                    38SIGNATURES
                                                                                    39
  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)
 
 June
      30,
                          
                          
                          December
      31,2010
                          
                          
                          2009ASSETSCurrent
      assets:Cash
      and cash equivalents
                          
                          $
                          73,662
                          
                          
                          $
                          48,839Prepaid
      expenses and other current assets
                          
                          
                          279
                          
                          
                          
                          354Total
      current assets
                          
                          
                          73,941
                          
                          
                          
                          49,193Property
      and equipment, net
                          
                          
                          216
                          
                          
                          
                          255Deposits
                          
                          
                          87
                          
                          
                          
                          46Other
      non-current assets
                          
                          
                          212
                          
                          
                          
                          242Total
      assets
                          
                          $
                          74,456
                          
                          
                          $
                          49,736LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                          
                          $
                          1,143
                          
                          
                          $
                          1,789Accrued
      expenses
                          
                          
                          1,139
                          
                          
                          
                          1,261Deferred
      rent - current portion
                          
                          
                          23
                          
                          
                          
                          45Total
      current liabilities
                          
                          
                          2,305
                          
                          
                          
                          3,095Deferred
      rent
                          
                          
                          60
                          
                          
                          
                          66Warrant
      liabilities
                          
                          
                          17,373
                          
                          
                          
                          18,471Total
      liabilities
                          
                          
                          19,738
                          
                          
                          
                          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; 48,826,555 and
      41,583,528 shares issued and outstanding at June 30, 2010 and December 31,
      2009, respectively
                          
                          
                          49
                          
                          
                          
                          42Additional
      paid-in capital - common stock
                          
                          
                          131,593
                          
                          
                          
                          96,133Additional
      paid-in capital - warrants issued
                          
                          
                          22,834
                          
                          
                          
                          23,073Deficit
      accumulated during the development stage
                          
                          
                          (99,758
                          )
                          
                          
                          (91,144
                          )Total
      stockholders' equity
                          
                          
                          54,718
                          
                          
                          
                          28,104Total
      liabilities and stockholders' equity
                          
                          $
                          74,456
                          
                          
                          $
                          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 9,2003(date ofinception)For the Three Months Ended June 30,
                  
                  
                  For the Six Months Ended June 30,
                  
                  
                  through2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009
                  
                  
                  June 30, 2010Research
      contract revenue
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Operating
      expenses:Research
      and development, including costs of research contracts
                  
                  
                  2,222
                  
                  
                  
                  501
                  
                  
                  
                  4,161
                  
                  
                  
                  2,109
                  
                  
                  
                  63,067General
      and administrative
                  
                  
                  2,894
                  
                  
                  
                  1,692
                  
                  
                  
                  5,524
                  
                  
                  
                  3,415
                  
                  
                  
                  47,699Total
      operating expenses
                  
                  
                  5,116
                  
                  
                  
                  2,193
                  
                  
                  
                  9,685
                  
                  
                  
                  5,524
                  
                  
                  
                  110,766Loss
      from operations
                  
                  
                  (5,116
                  )
                  
                  
                  (2,193
                  )
                  
                  
                  (9,685
                  )
                  
                  
                  (5,524
                  )
                  
                  
                  (110,766
                  )Other
      income, net
                  
                  
                  13
                  
                  
                  
                  2
                  
                  
                  
                  22
                  
                  
                  
                  2
                  
                  
                  
                  3,932Change
      in fair value of warrants
                  
                  
                  14,142
                  
                  
                  
                  (208
                  )
                  
                  
                  1,049
                  
                  
                  
                  (216
                  )
                  
                  
                  7,076Net
      income (loss)
                  
                  $
                  9,039
                  
                  
                  $
                  (2,399
                  )
                  
                  $
                  (8,614
                  )
                  
                  $
                  (5,738
                  )
                  
                  $
                  (99,758
                  )Net
      income (loss) per share - basic
                  
                  $
                  0.21
                  
                  
                  $
                  (0.11
                  )
                  
                  $
                  (0.21
                  )
                  
                  $
                  (0.27
                  )Net
      income (loss) per share - diluted
                  
                  $
                  0.19
                  
                  
                  $
                  (0.11
                  )
                  
                  $
                  (0.21
                  )
                  
                  $
                  (0.27
                  )Weighted
      average common shares outstanding used to compute net income (loss) per
      share - basic
                  
                  
                  42,364,791
                  
                  
                  
                  21,307,297
                  
                  
                  
                  41,253,076
                  
                  
                  
                  21,305,824Weighted
      average common shares outstanding used to compute net income (loss) per
      share - diluted
                  
                  
                  48,822,686
                  
                  
                  
                  21,307,297
                  
                  
                  
                  41,253,076
                  
                  
                  
                  21,305,824
 
 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 Six Months Ended June 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
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,174
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,174Exercise
      of employee stock options
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  115,334
                  
                  
                  
                  -
                  
                  
                  
                  176
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  176Exercise
      of warrants to purchase common stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  39,225
                  
                  
                  
                  -
                  
                  
                  
                  360
                  
                  
                  
                  (239
                  )
                  
                  
                  -
                  
                  
                  
                  121Issuance
      of restricted common stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  115,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Repurchase
      of shares of common stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (15,282
                  )
                  
                  
                  -
                  
                  
                  
                  (47
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (47
                  )Forfeiture
      of unvested restricted common stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (11,250
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Issuance
      of common stock in a registered direct offering, net of commissions and
      expenses of $2,203
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  7,000,000
                  
                  
                  
                  7
                  
                  
                  
                  32,797
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  32,804Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (8,614
                  )
                  
                  
                  (8,614
                  )Balance
      at June 30, 2010
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  48,826,555
                  
                  
                  $
                  49
                  
                  
                  $
                  131,593
                  
                  
                  $
                  22,834
                  
                  
                  $
                  (99,758
                  )
                  
                  $
                  54,718
 
 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 Six Months Ended June 30,
                      
                      
                      through2010
                      
                      
                      2009
                      
                      
                      June 30, 2010Cash
      flows from operating activities:Net
      loss
                      
                      $
                      (8,614
                      )
                      
                      $
                      (5,738
                      )
                      
                      $
                      (99,758
                      )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                      
                      
                      116
                      
                      
                      
                      169
                      
                      
                      
                      1,577Stock-based
      compensation
                      
                      
                      2,174
                      
                      
                      
                      749
                      
                      
                      
                      11,079Change
      in fair value of warrants
                      
                      
                      (1,049
                      )
                      
                      
                      216
                      
                      
                      
                      (7,076
                      )Loss
      on disposal of fixed assets
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      9Change
      in operating assets and liabilities:(Increase)
      decrease in:Prepaid
      expenses and other current assets
                      
                      
                      76
                      
                      
                      
                      174
                      
                      
                      
                      (279
                      )Other
      noncurrent assets
                      
                      
                      30
                      
                      
                      
                      48
                      
                      
                      
                      (212
                      )Deposits
                      
                      
                      (41
                      )
                      
                      
                      -
                      
                      
                      
                      (87
                      )Increase
      (decrease) in:Accounts
      payable
                      
                      
                      (646
                      )
                      
                      
                      (1,033
                      )
                      
                      
                      1,143Accrued
      expenses
                      
                      
                      (122
                      )
                      
                      
                      (1,407
                      )
                      
                      
                      1,139Deferred
      rent
                      
                      
                      (28
                      )
                      
                      
                      (13
                      )
                      
                      
                      83Net
      cash used in operating activities
                      
                      
                      (8,104
                      )
                      
                      
                      (6,835
                      )
                      
                      
                      (92,382
                      )Cash
      flows from investing activities:Purchases
      of property and equipment
                      
                      
                      (78
                      )
                      
                      
                      (1
                      )
                      
                      
                      (1,803
                      )Proceeds
      from sale of property and equipment
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1Net
      cash used in investing activities
                      
                      
                      (78
                      )
                      
                      
                      (1
                      )
                      
                      
                      (1,802
                      )Cash
      flows from financing activities:Stockholders'
      capital contribution
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      500Proceeds
      from exercise of stock options
                      
                      
                      176
                      
                      
                      
                      -
                      
                      
                      
                      315Payments
      to employees for repurchase of common stock
                      
                      
                      (47
                      )
                      
                      
                      -
                      
                      
                      
                      (427
                      )Proceeds
      from exercise of warrants
                      
                      
                      72
                      
                      
                      
                      -
                      
                      
                      
                      349Proceeds
      from issuance of common stock and warrants, net
                      
                      
                      32,804
                      
                      
                      
                      -
                      
                      
                      
                      150,349Proceeds
      from issuance of preferred stock, net
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      16,760Net
      cash provided by financing activities
                      
                      
                      33,005
                      
                      
                      
                      -
                      
                      
                      
                      167,846Net
      increase (decrease) in cash and cash equivalents
                      
                      
                      24,823
                      
                      
                      
                      (6,836
                      )
                      
                      
                      73,662Cash
      and cash equivalents, beginning of period
                      
                      
                      48,839
                      
                      
                      
                      11,379
                      
                      
                      
                      -Cash
      and cash equivalents, end of period
                      
                      $
                      73,662
                      
                      
                      $
                      4,543
                      
                      
                      $
                      73,662Supplementary
      disclosure of cash flow information:Cash
      paid for interest
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -Cash
      paid for income taxes
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -Supplementary
      disclosure of noncash investing andfinancing
      activities:Warrants
      issued to placement agents and investors
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      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 June 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 June 30, 2010, the Company’s accumulated deficit was
approximately $99.8 million.  The Company currently believes that it
has sufficient capital to fund development and commercialization activities,
principally for palifosfamide, 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 six months
ended June 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 June 30, 2010
are as follows:
 
 ($ in thousands)
                      
                      Fair Value Measurements at Reporting Date UsingDescription
                      
                      Balance as of
                        June 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
                      
                      $
                      17,373
                      
                      
                      $
                      -
                      
                      
                      $
                      17,373
                      
                      
                      $
                      -
 
 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 or disclosable subsequent events.
 
 5.
Net Income (Loss) per Share
 
 Basic
net earnings (loss) per share is computed by dividing net income (loss) by
the weighted-average number of common shares outstanding for the period.
Diluted net earnings (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.
 
 For the Three Months
                              
                              
                              For the Six MonthsEnded June 30,
                              
                              
                              Ended June 30,in thousands, except share and per share
      data
                              
                              2010
                              
                              
                              2009
                              
                              
                              2010
                              
                              
                              2009BasicNet
      income (loss)
                              
                              $
                              9,039
                              
                              
                              $
                              (2,399
                              )
                              
                              $
                              (8,614
                              )
                              
                              $
                              (5,738
                              )Weighted-average
      common shares outstanding
                              
                              
                              42,364,791
                              
                              
                              
                              21,307,297
                              
                              
                              
                              41,253,076
                              
                              
                              
                              21,305,824Earnings
      per share, basic
                              
                              $
                              0.21
                              
                              
                              $
                              (0.11
                              )
                              
                              $
                              (0.21
                              )
                              
                              $
                              (0.27
                              )DilutedNet
      income (loss)
                              
                              $
                              9,039
                              
                              
                              $
                              (2,399
                              )
                              
                              $
                              (8,614
                              )
                              
                              $
                              (5,738
                              )Weighted-average
      common shares outstanding
                              
                              
                              42,364,791
                              
                              
                              
                              21,307,297
                              
                              
                              
                              41,253,076
                              
                              
                              
                              21,305,824Effect
      of dilutive securitiesStock
      options
                              
                              
                              1,292,335
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Unvested
      restricted common stock
                              
                              
                              1,496,334
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Warrants
                              
                              
                              3,669,226
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Dilutive
      potential common shares
                              
                              
                              6,457,895
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Shares
      used in calculating diluted earnings per share
                              
                              
                              48,822,686
                              
                              
                              
                              21,307,297
                              
                              
                              
                              41,253,076
                              
                              
                              
                              21,305,824Earnings
      per share, diluted
                              
                              $
                              0.19
                              
                              
                              $
                              (0.11
                              )
                              
                              $
                              (0.21
                              )
                              
                              $
                              (0.27
                              )
 
 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 earnings (loss) per share for the three and six
months ended June 30, 2010 and 2009 as the result would be
antidilutive.  Such potential common shares at June 30, 2010 and 2009
consist of the following:
 
 For the Three Months
                      
                      
                      For the Six MonthsEnded June 30,
                      
                      
                      Ended June 30,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Stock
      options
                      
                      
                      227,000
                      
                      
                      
                      3,220,916
                      
                      
                      
                      3,564,685
                      
                      
                      
                      3,220,916Unvested
      restricted common stock
                      
                      
                      -
                      
                      
                      
                      483,667
                      
                      
                      
                      1,496,334
                      
                      
                      
                      483,667Warrants
                      
                      
                      3,756,709
                      
                      
                      
                      5,039,659
                      
                      
                      
                      15,924,642
                      
                      
                      
                      5,039,659
  9
  ZIOPHARM
Oncology, Inc. (a development stage company)
 
 NOTES
TO FINANCIAL STATEMENTS (unaudited)
 
 6.
Commitments and Contingencies
 
 License
agreements and patents
 
 Patent
and Technology License Agreement—The University of Texas M. D. Anderson Cancer
Center and the Texas A&M University System.
 
 On August
24, 2004, the Company entered into a patent and technology license agreement
with The Board of Regents of the University of Texas System, acting on behalf of
The University of Texas M. D. Anderson Cancer Center and the Texas A&M
University System (collectively, the “Licensors”).  Under this
agreement, the Company was granted an exclusive, worldwide license to rights
(including rights to 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
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).  No milestones have been reached or
expensed as of June 30, 2010.
 
 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 June
30, 2010.  DEKK-Tec is entitled to receive 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 six months of 2009.
  10
 
 ZIOPHARM Oncology, Inc. (a development stage
company)
 
 NOTES
TO FINANCIAL STATEMENTS (unaudited)
 
 6.
Commitments and Contingencies – (continued)
 
 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 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 have been reached or expensed as of June
30, 2010.
 
 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, as well as 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.
 
 In
October 2009, the Baxter License Agreement was amended to allow the Company to
manufacturer indibulin.  No milestones have been reached or expensed
as of June 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 June 30, 2010.  The Company expensed $120
thousand during the first six months of 2009 and 2010 for consulting services
per the aforementioned agreement.  No milestones have been reached or
expensed as of June 30, 2010.
  11
 
 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 June 30, 2010 and December 31, 2009 were as follows:
 
 June 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
 
 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
whethera financial
instrument should be treated as a derivative. In applying the
methodology, the Company concluded that certain warrants issued by the Company
in May 2005 and December 2009 have terms that do not meet the criteria to be
considered indexed to the Company’s own stock and therefore are classified in
the liability section of the Balance Sheets. 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.
 
 On June
30, 2010, the liability-classified warrants were valued at $17.4 million using a
Black-Scholes valuation model.  The change in the fair value of the
warrant liability was a gain of $14.1 million and $1.0 million for the three and
six months ended June 30, 2010 and a loss of $208 thousand and $216 thousand for
the three and six months ended June 30, 2009, respectively, and was charged to
other income (loss) in the Statements of Operations.  The following
assumptions were used in the Black-Scholes valuation model at June 30, 2010 and
December 31, 2009:
 
 June 30, 2010
                        
                        
                        December 31, 2009Risk-free
      interest rate
                        
                        0.59-1.56%
                        
                        
                        1.37
      - 2.65%Expected
      life in years
                        
                        1.92-4.43
                        
                        
                        2.42
      - 4.92Expected
      volatility
                        
                        92-116%
                        
                        
                        105%Expected
      dividend yield
                        
                        0
                        
                        
                        0
  During
the first six 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 six months of 2009.
  12
 
 ZIOPHARM
Oncology, Inc. (a development stage company)
 
 NOTES
TO FINANCIAL STATEMENTS (unaudited)
 
 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 June 30,
                    
                    
                    For the six months ended June 30,(in thousands)
                    
                    2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Research
      and development, including costs of research contracts
                    
                    $
                    206
                    
                    
                    $
                    87
                    
                    
                    $
                    414
                    
                    
                    $
                    155General
      and administrative
                    
                    
                    1,035
                    
                    
                    
                    252
                    
                    
                    
                    1,760
                    
                    
                    
                    594Stock-based
      employee compensation expense
                    
                    $
                    1,241
                    
                    
                    $
                    339
                    
                    
                    $
                    2,174
                    
                    
                    $
                    749
 
 The
Company granted 62 thousand and 152 thousand stock options during the three and
six months ended June 30, 2010 that had a weighted-average grant date fair value
of $3.68 and $3.63 per share, respectively.  During the three and six
months ended June 30, 2009, the Company granted 805 thousand and 815 thousand
stock options that had a weighted-average grant date fair value of
$0.53 per share for each period.
 
 For the
six months ended June 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 six months ended June 30,2010
                  
                  2009Risk-free
      interest rate
                  1.93
      - 2.75%
                  
                  1.31-1.44%Expected
      life in years
                  5
                  
                  5Expected
      volatility
                  89
      - 90%
                  
                  102-103%Expected
      dividend yield
                  0
                  
                  0
  13
 
 ZIOPHARM
Oncology, Inc. (a development stage company)
 
 NOTES
TO FINANCIAL STATEMENTS (unaudited)
 
 9.
Stock-Based Compensation – (continued)
 
 Stock
option transactions under the Company’s stock option plan for the six months
ended June 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
                  
                  
                  152,000
                  
                  
                  
                  5.14Exercised
                  
                  
                  115,334
                  
                  
                  
                  1.53Cancelled
                  
                  
                  6,667
                  
                  
                  
                  5.19Outstanding,
      June 30, 2010
                  
                  
                  3,564,685
                  
                  
                  $
                  2.96
                  
                  
                  
                  7.13
                  
                  
                  $
                  3,264Options
      exercisable, June 30, 2010
                  
                  
                  2,646,185
                  
                  
                  $
                  2.94
                  
                  
                  
                  6.45
                  
                  
                  $
                  2,820Options
      available for future grant
                  
                  
                  3,119,734
 
 A summary
of the status of non-vested restricted stock for the six months ended June 30,
2010 is as follows:
 
 Number of Shares
                    
                    
                    Weighted-Average
                      Grant Date FairValueNon-vested,
      December 31, 2009
                    
                    
                    1,467,167
                    
                    
                    $
                    2.30Granted
                    
                    
                    115,000
                    
                    
                    $
                    5.15Vested
                    
                    
                    74,583
                    
                    
                    $
                    2.70Cancelled
                    
                    
                    11,250
                    
                    
                    $
                    4.34Non-vested,
      June 30, 2010
                    
                    
                    1,496,334
                    
                    
                    $
                    2.49
  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.
  14





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 capsule 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 now more specifically on completing the recently initiated palifosfamide
pivotal Phase III trial as announced subsequent to the quarter in July 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 and 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 capsule form of the drug, and established synergy of darinaparsin in
      combination with other approved anti-cancer
  agents.


15




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 capsule 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 in the same setting.





·
              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 licensed 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 of palifosfamide with doxorubicin well
tolerated in the Phase I trial and evidencing activity, 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 a Special Protocol Assessment (SPA) process. Although the Company elected to
engage in the SPA process, the Company 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.


16





We are
also preparing 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 capsule form of palifosfamide is
entering Phase I study while additional preclinical work continues in pediatric
cancer.





·
              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 capsule 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.


17





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 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 18 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 $29.5 on research and
development expenses and approximately $6.8 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 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 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 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.


18





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 as the first step for a pivotal
trial in the same setting. The Phase I trial with an oral form of darinaparsin
is again ongoing. The Company is actively seeking partners and other 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.





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. IV palifosfamide will also be studied in
SCLC while 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 capsule 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 Xeloda TM.
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.


19





Financial
Overview





Overview
of Results of Operations





Three
and six months ended June 30, 2010 compared to three and six months ended June
30, 2009





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





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





Three months ended
                    June 30,
                  
                  
                  
                  
                  
                  
                  
                  
                  Six months ended
                    June 30,2010
                  
                  
                  2009
                  
                  
                  Change
                  
                  
                  2010
                  
                  
                  2009
                  
                  
                  Change($ in thousands)Research
      and development
                  
                  $
                  2,222
                  
                  
                  $
                  501
                  
                  
                  $
                  1,721
                  
                  
                  
                  344
                  %
                  
                  $
                  4,161
                  
                  
                  $
                  2,109
                  
                  
                  $
                  2,052
                  
                  
                  
                  97
                  %





Research
and development expenses increased by $1,721 thousand from the three months
ended June 30, 2009 to the three months ended June 30, 2010. The increase was
primarily due to increased manufacturing activity of $475 thousand to replenish
drug inventories, stock-based compensation expense of $119 thousand, clinical
costs of $863 thousand related to the Phase III palifosfamide study and other
costs of $264 thousand.





Research
and development expenses increased by $2,052 thousand from the six months ended
June 30, 2009 to the six months ended June 30, 2010. The increase was primarily
due to increased manufacturing activity of $822 thousand to replenish drug
inventories, stock-based compensation expense of $258 thousand, clinical costs
of $894 thousand related to the Phase III trial with palifosfamide study and
other costs of $78 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.


20





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





Three months ended
                    June 30,
                  
                  
                  
                  
                  
                  
                  
                  
                  Six months ended
                    June 30,2010
                  
                  
                  2009
                  
                  
                  Change
                  
                  
                  2010
                  
                  
                  2009
                  
                  
                  Change($
      in thousands)General
      and administrative
                  
                  $
                  2,894
                  
                  
                  $
                  1,692
                  
                  
                  $
                  1,202
                  
                  
                  
                  71
                  %
                  
                  $
                  5,524
                  
                  
                  $
                  3,415
                  
                  
                  $
                  2,109
                  
                  
                  
                  62
                  %





The
increase in general and administrative expenses of $1,202 thousand from the
three months ended June 30, 2009 to the three months ended June 30, 2010 was
primarily due to increased stock-based compensation of $782 thousand, salaries
of $141 thousand, consulting of $96 thousand and other costs of $183 thousand.
The increased general and administrative activity was related to support in
preparation for new clinical studies.





The
increase in general and administrative expenses of $2,109 thousand from the six
months ended June 30, 2009 to the six months ended June 30, 2010 was primarily
due to increased stock-based compensation of $1,167 thousand, salaries of $253
thousand, consulting of $253 thousand, royalty, milestone payments of $125
thousand, legal and patent costs of $133 thousand, and other costs of $178
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 six months ended June
30, 2010 and 2009 were as follows:





Three months ended
                    June 30,
                  
                  
                  
                  
                  
                  
                  
                  
                  Six months ended
                    June 30,2010
                  
                  
                  2009
                  
                  
                  Change
                  
                  
                  2010
                  
                  
                  2009
                  
                  
                  Change($
      in thousands)Other
      income (expense), net
                  
                  $
                  13
                  
                  
                  $
                  2
                  
                  
                  $
                  11
                  
                  
                  
                  550
                  %
                  
                  $
                  22
                  
                  
                  $
                  2
                  
                  
                  $
                  20
                  
                  
                  
                  1000
                  %Change
      in fair value of warrants
                  
                  
                  14,142
                  
                  
                  
                  (208
                  )
                  
                  
                  14,350
                  
                  
                  
                  6899
                  %
                  
                  
                  1,049
                  
                  
                  
                  (216
                  )
                  
                  
                  1,265
                  
                  
                  
                  586
                  %Total
                  
                  $
                  14,155
                  
                  
                  $
                  (206
                  )
                  
                  $
                  14,361
                  
                  
                  
                  
                  
                  
                  $
                  1,071
                  
                  
                  $
                  (214
                  )
                  
                  $
                  1,285





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





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


21





Liquidity
and Capital Resources





As of
June 30, 2010, we had approximately $73.7 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 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 six months ended June 30, 2010 and 2009:





Six months ended
                        June 30,2010
                      
                      
                      2009($
      in thousands)Net
      cash provided by (used in):Operating
      activities
                      
                      $
                      (8,104
                      )
                      
                      $
                      (6,835
                      )Investing
      activities
                      
                      
                      (78
                      )
                      
                      
                      (1
                      )Financing
      activities
                      
                      
                      33,005
                      
                      
                      
                      -Net
      increase (decrease) in cash and cash equivalents
                      
                      $
                      24,823
                      
                      
                      $
                      (6,836
                      )





Net cash
used in operating activities was $8.1 million for the six months ended June 30,
2010 compared to $6.8 million for the six months ended June 30, 2009. The $1.3
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 accounts payable and accrued liabilities.





Net cash
used in investing activities was $78.0 thousand for the six months ended June
30, 2010 compared to $1 thousand for the six months ended June 30, 2009. The
increase was due to increased purchases of property plant and
equipment.





Net cash
provided by financing activities was $33.0 million for the six months ended June
30, 2010 compared to $0 for the six months ended June 30, 2009. The increase of
$33.0 million is attributable to 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.


22





Operating
capital and capital expenditure requirements





The
Company anticipates that losses will continue for the foreseeable future. At
June 30, 2010, the Company’s accumulated deficit was approximately $99.8
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 1.A. “Risk Factors”
      below.





Working
capital as of June 30, 2010 was $71.6 million, consisting of $73.9 million in
current assets and $2.3 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 June 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
                  
                  $
                  1,107
                  
                  
                  $
                  363
                  
                  
                  $
                  605
                  
                  
                  $
                  139
                  
                  
                  $
                  -





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.


23





Off-balance
sheet arrangements





During
the six months ended June 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 six months ended June 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 treasureies 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.


24





Part
II - Other Information





Item
1. Legal Proceedings





Not
applicable.





Item
1A. Risk Factors





The
following important factors could cause our actual business and financial
results to differ materially from those contained in forward-looking statements
made in this Quarterly Report on Form 10-Q or elsewhere by management from time
to time. The risk factors in this report have been revised to incorporate
changes to our risk factors from those included in our annual report on Form
10-K for the year ended December 31, 2009. 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 annual report on Form 10-K for the fiscal year ended
December 31, 2009, 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 six months ended June 30, 2010, we had a net loss
of $8.6 million and we had incurred approximately $99.8 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.


25





*
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
June 30, 2010, we had incurred approximately $99.8 million of cumulative net
losses and had approximately $73.7 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 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.


26





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.


27





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.


28


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.


29


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





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.


30


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.


31


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.


32


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.


33


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.


34


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.  Beginning with fiscal 2010, Sarbanes-Oxley requires
that our independent registered public accounting firm attest to the
effectiveness of our internal control over financial reporting, as of the end of
each fiscal year, in our Annual Report on Form 10-K.  While 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.


35


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.


36


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





Issuer
Purchases of Equity Securities




During the
six months ended June 30, 2010, we purchased 15,283 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 six months ended June 30,
2010:




Period
                    
                    TotalNumberof
                      SharesPurchased
                    
                    
                    AveragePricePaid
                      PerShare($)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
                    
                    
                    -
                    
                    
                    $
                    -Total
                    
                    
                    15,283





Item 3.
Defaults upon Senior Securities





Not
applicable.


37


Item 4.
[Removed and Reserved.]





Item 5.
Other Information





On July
21, 2010, ZIOPHARM Oncology, Inc. (the "Company") was notified that effective
July 20, 2010, McGladrey & Pullen, LLP ("McGladrey") acquired certain assets
of Caturano and Company, Inc. (formerly Caturano and Company, P.C.), the
Company's independent registered public accounting firm ("Caturano") and
substantially all of the officers and employees of Caturano joined
McGladrey.  As a result, and effective July 27, 2010, Caturano
resigned as the independent registered public accounting firm for the
Company.  Concurrently with such resignation, McGladrey was appointed
by the Company as its new independent registered public accounting. The decision
to engage McGladrey was approved by the audit committee of the board of
directors.





The audit
reports of Caturano on the financial statements of the Company for the years
ending December 31, 2009 and 2008 did not contain an adverse opinion or a
disclaimer of opinion, and were not qualified or modified to the uncertainty,
audit scope or accounting principles, except that the audit opinion for the year
ended December 31, 2009 did contain an explanatory paragraph disclosing that the
Company changed the manner in which it accounts for certain warrants effective
January 1, 2009.





During
the two most recent fiscal years ended December 31, 2009 and through date of
Caturano's resignation there were: (1) no disagreements between the Company and
Caturano on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures, which disagreements, if
not resolved to the satisfaction of Caturano would have caused them to make
reference thereto in their reports on the Company's financial statements for
such years, and (2) no reportable events within the meaning set for in Item
304(a)(1)(v) of Regulation S-K.





During
the Company's two most recent fiscal years ended December 31, 2009 and through
the date of McGladrey's appointment, the Company did not consult with McGladrey
on either (1) the application of accounting principles to a specified
transaction, either completed or proposed; or the type of audit opinion that may
be rendered on the Company's financial statements, and McGladrey did not provide
either a written report or oral advice to the Company that McGladrey concluded
was an important factor considered by the Company in reaching a decision as to
the accounting, auditing or financial reporting issue; or (2) any matter that
was either the subject of a disagreement, as defined in Item 304(a)(1)(iv) of
Regulation S-K and the related instructions to Item 304 of Regulation S-K, or a
reportable event, as that term is defined in Item 304(a)(1)(v) of Regulation
S-K.





The
Company has provided Caturano a copy of the disclosures in Item 5 of this Form
10-Q and has requested that Caturano furnish it with a letter addressed to the
Securities and Exchange Commission stating whether or not it agrees with the
Company's statements herein.  A copy of the letter dated July 30, 2010
is filed as Exhibit 16.1 to this Form 10-Q.




On July
30, 2010, the Company issued a press release announcing its financial condition
and results of operations for the second quarter of 2010.  A copy of the
press release is furnished as Exhibit 99.1 to this Form 10-Q in lieu of
furnishing pursuant to Item 2.02 of Form 8-K and shall not be deemed “filed” for
purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange
Act”) or otherwise subject to the liabilities of that Section, nor shall such
document be deemed incorporated by reference in any filing under the Securities
Act of 1933 or the Exchange Act.





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.


38


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:
July 30, 2010





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


Dated:
July 30. 2010


39


EXHIBIT
INDEX





16.1*
              Letter
      dated July 30, 2010 regarding change in certifying
accountant.31.1*
              Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002


31.2*
            Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002


32.1*
              Certifications
      pursuant to 18 U.S.C. Section 135099.1*
              Press
      release dated July 30, 2010





*
            Filed
      herewith


40