UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.
20549




Form 10-Q





(Mark
      One)þ
            
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934For
      the quarterly period ended March 31, 2010OR ̈
            
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934





Commission
File Number 001-33038





ZIOPHARM
Oncology, Inc.


(Exact
name of registrant as specified in its charter)




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




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


(646) 214-0700


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


area
code, of registrant’s principal executive offices)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period than the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes:  þ     No:   ̈





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





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





Large accelerated filer  ̈
            Accelerated filer  ̈
            Non-accelerated
      filer  ̈
            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 April 23, 2010, was 41,765,445 shares.








ZIOPHARM
Oncology, Inc. (a development stage company)





Table
of Contents




PagePart
      I - Financial InformationItem 1.
                      
                      Financial
      StatementsBalance
      Sheets as of March 31, 2010 and December 31, 2009
    (unaudited)
                      
                      3Statements
      of Operations for the three months ended March 31, 2010 and 2009 and the
      period from September 9, 2003 (date of inception) through March 31, 2010
      (unaudited)
                      
                      4Statement
      of Changes in Stockholders’ Equity for the three months
      ended  March 31, 2010 (unaudited)
                      
                      5Statements
      of Cash Flows for the three months ended March 31, 2010 and 2009 and the
      period from September 9, 2003 (date of inception) through March 31, 2010
      (unaudited)
                      
                      6Notes
      to Financial Statements (unaudited)
                      
                      7Item 2.
                      
                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                      
                      16Item 3.
                      
                      Quantitative
      and Qualitative Disclosures about Market Risk
                      
                      25Item 4.
                      
                      Controls
      and Procedures
                      
                      25Part
      II - Other InformationItem 1.
                      
                      Legal
      Proceedings
                      
                      26Item 1A.
                      
                      Risk
      Factors
                      
                      26Item 2.
                      
                      Unregistered
      Sale of Equity Securities and Use of Proceeds
                      
                      38Item 3.
                      
                      Defaults
      upon Senior Securities
                      
                      38Item 4.
                      
                      Other
      Information
                      
                      39Item 5.
                      
                      Exhibits
                      
                      39SIGNATURES
                      
                      40




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)





March 31,
                
                
                December 31,2010
                
                
                2009ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                45,044
                
                
                $
                48,839Prepaid
      expenses and other current assets
                
                
                312
                
                
                
                354Total
      current assets
                
                
                45,356
                
                
                
                49,193Property
      and equipment, net
                
                
                196
                
                
                
                255Deposits
                
                
                46
                
                
                
                46Other
      non-current assets
                
                
                242
                
                
                
                242Total
      assets
                
                $
                45,840
                
                
                $
                49,736LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                
                $
                1,468
                
                
                $
                1,789Accrued
      expenses
                
                
                1,322
                
                
                
                1,261Deferred
      rent - current portion
                
                
                43
                
                
                
                45Total
      current liabilities
                
                
                2,833
                
                
                
                3,095Deferred
      rent
                
                
                57
                
                
                
                66Warrant
      liabilities
                
                
                31,564
                
                
                
                18,471Total
      liabilities
                
                
                34,454
                
                
                
                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; 41,710,778 and
      41,583,528 shares issued and outstanding at March 31, 2010 and December
      31, 2009, respectively
                
                
                42
                
                
                
                42Additional
      paid-in capital - common stock
                
                
                97,080
                
                
                
                96,133Additional
      paid-in capital - warrants issued
                
                
                23,061
                
                
                
                23,073Deficit
      accumulated during the development stage
                
                
                (108,797
                )
                
                
                (91,144
                )Total
      stockholders' equity
                
                
                11,386
                
                
                
                28,104Total
      liabilities and stockholders' equity
                
                $
                45,840
                
                
                $
                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 of inception)For the Three Months Ended March 31,
                
                
                through2010
                
                
                2009
                
                
                March 31, 2010Research
      contract revenue
                
                $
                -
                
                
                $
                -
                
                
                $
                -Operating
      expenses:Research
      and development, including costs of research contracts
                
                
                1,939
                
                
                
                1,608
                
                
                
                60,845General
      and administrative
                
                
                2,630
                
                
                
                1,724
                
                
                
                44,805Total
      operating expenses
                
                
                4,569
                
                
                
                3,332
                
                
                
                105,650Loss
      from operations
                
                
                (4,569
                )
                
                
                (3,332
                )
                
                
                (105,650
                )Other
      income (expense), net
                
                
                9
                
                
                
                -
                
                
                
                3,919Change
      in fair value of warrants
                
                
                (13,093
                )
                
                
                (7
                )
                
                
                (7,066
                )Net
      loss
                
                $
                (17,653
                )
                
                $
                (3,339
                )
                
                $
                (108,797
                )Basic
      and diluted net loss per share
                
                $
                (0.44
                )
                
                $
                (0.16
                )Weighted
      average common shares outstanding used to compute basic and diluted net
      loss per share
                
                
                40,150,100
                
                
                
                21,304,334





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 STOCKHOLDER’S EQUITY


For
the Three Months Ended March 31, 2010


(unaudited)





(in
thousands, except share and per share data)




Stockholder's
      EquitySeries A
                        
                        
                        
                        
                        
                        
                        
                        
                        Additional
                        
                        
                        
                        
                        
                        DeficitConvertible
                        
                        
                        
                        
                        
                        
                        
                        
                        Paid-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
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        933
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        933Exercise
      of employee stock options
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        48,667
                        
                        
                        
                        -
                        
                        
                        
                        49
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        49Cashless
      exercise of warrants to purchase common stock
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3,866
                        
                        
                        
                        -
                        
                        
                        
                        12
                        
                        
                        
                        (12
                        )
                        
                        
                        -
                        
                        
                        
                        -Issuance
      of restricted common stock
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        90,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Repurchase
      of shares of common stock
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (15,283
                        )
                        
                        
                        -
                        
                        
                        
                        (47
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (47
                        )Net
      loss
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (17,653
                        )
                        
                        
                        (17,653
                        )Balance
      at March 31, 2010
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        
                        
                        41,710,778
                        
                        
                        $
                        42
                        
                        
                        $
                        97,080
                        
                        
                        $
                        23,061
                        
                        
                        $
                        (108,797
                        )
                        
                        $
                        11,386





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 Three Months Ended March 31,
                
                
                through2010
                
                
                2009
                
                
                March 31, 2010Cash
      flows from operating activities:Net
      loss
                
                $
                (17,653
                )
                
                $
                (3,339
                )
                
                $
                (108,797
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                
                
                67
                
                
                
                83
                
                
                
                1,527Stock-based
      compensation
                
                
                933
                
                
                
                410
                
                
                
                9,837Change
      in fair value of warrants
                
                
                13,093
                
                
                
                7
                
                
                
                7,066Loss
      on disposal of fixed assets
                
                
                -
                
                
                
                -
                
                
                
                9Change
      in operating assets and liabilities:(Increase)
      decrease in:Prepaid
      expenses and other current assets
                
                
                42
                
                
                
                89
                
                
                
                (312
                )Other
      noncurrent assets
                
                
                -
                
                
                
                3
                
                
                
                (242
                )Deposits
                
                
                -
                
                
                
                -
                
                
                
                (46
                )Increase
      (decrease) in:Accounts
      payable
                
                
                (321
                )
                
                
                (1,018
                )
                
                
                1,468Accrued
      expenses
                
                
                61
                
                
                
                (839
                )
                
                
                1,322Deferred
      rent
                
                
                (11
                )
                
                
                (6
                )
                
                
                15Net
      cash used in operating activities
                
                
                (3,789
                )
                
                
                (4,610
                )
                
                
                (88,153
                )Cash
      flows from investing activities:Purchases
      of property and equipment
                
                
                (8
                )
                
                
                (1
                )
                
                
                (1,648
                )Proceeds
      from sale of property and equipment
                
                
                -
                
                
                
                -
                
                
                
                1Net
      cash used in investing activities
                
                
                (8
                )
                
                
                (1
                )
                
                
                (1,647
                )Cash
      flows from financing activities:Stockholders'
      capital contribution
                
                
                -
                
                
                
                -
                
                
                
                500Proceeds
      from exercise of stock options
                
                
                49
                
                
                
                -
                
                
                
                188Payments
      to employees for repurchase of common stock
                
                
                (47
                )
                
                
                -
                
                
                
                (427
                )Proceeds
      from exercise of warrants
                
                
                -
                
                
                
                -
                
                
                
                279Proceeds
      from issuance of common stock and warrants, net
                
                
                -
                
                
                
                -
                
                
                
                117,544Proceeds
      from issuance of preferred stock, net
                
                
                -
                
                
                
                -
                
                
                
                16,760Net
      cash provided by financing activities
                
                
                2
                
                
                
                -
                
                
                
                134,844Net
      increase (decrease) in cash and cash equivalents
                
                
                (3,795
                )
                
                
                (4,611
                )
                
                
                45,044Cash
      and cash equivalents, beginning of period
                
                
                48,839
                
                
                
                11,379
                
                
                
                -Cash
      and cash equivalents, end of period
                
                $
                45,044
                
                
                $
                6,768
                
                
                $
                45,044Supplementary
      disclosure of cash flow information:Cash
      paid for interest
                
                $
                -
                
                
                $
                -
                
                
                $
                -Cash
      paid for income taxes
                
                $
                -
                
                
                $
                -
                
                
                $
                -Supplementary
      disclosure of noncash investing and financing activities:Warrants
      issued to placement agents and investors
                
                $
                -
                
                
                $
                -
                
                
                $
                47,276Preferred
      stock conversion to common stock
                
                $
                -
                
                
                $
                -
                
                
                $
                16,760Cashless
      exercise of warrants to common shares
                
                $
                12
                
                
                $
                -
                
                
                $
                30





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 March 31, 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 March 31, 2010, the Company’s accumulated deficit was
approximately $108.8 million.  The Company currently believes that it
has sufficient capital to fund development and commercialization activities,
principally for palifosfamide, very early into 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 months ended
March 31, 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 for
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.





8





ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





Assets
and liabilities measured at fair value on a recurring basis as of March 31, 2010
are as follows:





($ in thousands)
                
                Fair Value Measurements at Reporting Date UsingDescription
                
                Balance as of
                  March 31, 2010
                
                
                Quoted Prices in
                  Active Markets for
                  Identical
                  Assets/Liabilities
                  (Level 1)
                
                
                Significant Other
                  Observable Inputs
                  (Level 2)
                
                
                Significant
                  UnobservableInputs
                  (Level 3)Warrant
      liability
                
                $
                31,564
                
                
                $
                -
                
                
                $
                31,564
                
                
                $
                -





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 Topic 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.





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.


9





ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





5.
Net Loss per Share





Basic net loss per share is computed by
dividing net loss by the weighted average number of common shares outstanding
for the period. The Company's potential dilutive shares, which include
outstanding common stock options, unvested restricted stock and warrants, have
not been included in the computation of diluted net loss per share for any of
the periods presented as the result would be antidilutive.  Such
potential common shares at March 31, 2010 and 2009 consist of the
following:





March 31,2010
                  
                  
                  2009Stock
      options
                  
                  
                  3,569,532
                  
                  
                  
                  2,581,256Unvested
      restricted stock
                  
                  
                  1,523,834
                  
                  
                  
                  541,167Warrants
                  
                  
                  16,011,588
                  
                  
                  
                  5,039,65921,104,954
                  
                  
                  
                  8,162,082





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.


10





ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





6.
Commitments and Contingencies – (continued)





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 $4.85
million.  In addition, the Licensors are entitled to receive royalty
payments on sales from a licensed product should such a product be approved for
commercial sale and sales of a licensed product be effected in the United
States, Canada, the European Union or Japan.  The Licensors also will
be entitled to receive a portion of any fees that the Company may receive from a
possible sublicense under certain circumstances.  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).





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 $3.9 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 March
31, 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 during the first three months
of 2009.


11





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. In connection with the exercise of the option, minimum
annual royalty payments of $25 thousand were made in the years ended December
31, 2008 and 2007 as part of the License Agreement. The 2009 royalty payment of
$25 thousand was made during the first three months of 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 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.





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 a 1% award of royalties 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 March 31,
2010.  The Company expensed $60 thousand during the first three months
of 2009 and 2010 for consulting services per the aforementioned
agreement.  No milestones have been reached or expensed as of March
31, 2010.


12





ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





7.
Warrants





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





March 31,2010
                      
                      
                      2009Liability-classified
      warrants
                      
                      
                      8,615,223
                      
                      
                      
                      408,703Equity
      classified warrants
                      
                      
                      7,396,365
                      
                      
                      
                      4,630,956Total
      warrants
                      
                      
                      16,011,588
                      
                      
                      
                      5,039,659





Accounting
standards require a 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 March
31, 2010, the liability-classified warrants were valued at $31.6 million using a
Black-Scholes valuation model.  The increase in the fair value of the
warrant liability of $13.1 million and $7 thousand for the three months ended
March 31, 2010 and 2009, respectively, was charged to other income (loss) in the
Statements of Operations.  The following assumptions were used at
March 31, 2010 and 2009:





March 31, 2010
                  
                  
                  March 31, 2009Risk-free
      interest rate
                  
                  
                  1.12
      - 2.40
                  %
                  
                  
                  1.67
                  %Expected
      life in years
                  
                  
                  2.17
      - 4.68
                  
                  
                  
                  3.17Expected
      volatility
                  
                  
                  90
      - 113
                  %
                  
                  
                  103
                  %Expected
      dividend yield
                  
                  
                  0
                  
                  
                  
                  0





During
the first three months of 2010, 8,559 warrants issued in September 2009 were
exercised for 3,866 shares of common stock in a cashless
exercise.


13




ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





8.
Stock-Based Compensation





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





For the three months ended March 31,(in
      thousands)
                  
                  2010
                  
                  
                  2009Research
      and development, including costs of research contracts
                  
                  $
                  208
                  
                  
                  $
                  69General
      and administrative
                  
                  
                  725
                  
                  
                  
                  341Share-based
      employee compensation expense
                  
                  $
                  933
                  
                  
                  $
                  410





The
Company granted 90 thousand stock options during the three months ended March
31, 2010 that had a weighted-average grant date fair value of $3.59 per
share.  The Company granted 10 thousand stock options during the three
months ended March 31, 2009 that had a weighted-average grant date fair value of
$0.60 per share.





For the
three months ended March 31, 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 three months ended March 31,2010
                  
                  
                  2009Risk-free
      interest rate
                  
                  
                  2.55
                  %
                  
                  
                  1.44Expected
      life in years
                  
                  
                  5
                  
                  
                  
                  5Expected
      volatility
                  
                  
                  90
                  %
                  
                  
                  102
                  %Expected
      dividend yield
                  
                  
                  0
                  
                  
                  
                  0




14





ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





8.
Stock-Based Compensation – (continued)





Stock
option transactions under the Company’s stock option plan for the three months
ended March 31, 2010 are as follows:





(in thousands, except share and per share
                    data)
                  
                  Number of
                    Shares
                  
                  
                  Weighted-
                    Average Exercise
                    Price
                  
                  
                  Weighted-
                    Average
                    Contractual
                    Term (Years)
                  
                  
                  Aggregate
                    Intrinsic ValueOutstanding,
      December 31, 2009
                  
                  
                  3,534,686
                  
                  
                  $
                  2.82Granted
                  
                  
                  90,000
                  
                  
                  
                  5.09Exercised
                  
                  
                  (48,667
                  )
                  
                  
                  1.00Cancelled
                  
                  
                  (6,667
                  )
                  
                  
                  5.19Outstanding,
      March 31, 2010
                  
                  
                  3,569,352
                  
                  
                  $
                  2.90
                  
                  
                  
                  7.60
                  
                  
                  $
                  8,045Options
      exercisable, March 31, 2010
                  
                  
                  2,588,018
                  
                  
                  $
                  2.89
                  
                  
                  
                  6.93
                  
                  
                  $
                  5,939Options
      available for future grant
                  
                  
                  196,734





A summary
of the status of non-vested restricted stock for the three months ended March
31, 2010 is as follows:





Number of Shares
                  
                  
                  Weighted-Average
                    Grant Date Fair ValueNon-vested,
      December 31, 2009
                  
                  
                  1,467,167
                  
                  
                  $
                  2.30Granted
                  
                  
                  90,000
                  
                  
                  $
                  5.09Vested
                  
                  
                  (33,333
                  )
                  
                  $
                  2.73Non-vested,
      March 31, 2010
                  
                  
                  1,523,834
                  
                  
                  $
                  2.46




15





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





Forward
Looking Statements





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





Business
Overview





ZIOPHARM
Oncology, Inc. is a biopharmaceutical company that is seeking to develop and
commercialize a diverse, risk-sensitive portfolio of in-licensed cancer drugs
that can address unmet medical needs through enhanced efficacy and/or safety and
quality of life. Our principal focus is on the licensing and development of
proprietary small molecule drug candidates that are related to cancer
therapeutics already on the market or in development and that can be
administered by intravenous and/or oral 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 and/or II 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 more specifically on completing the ongoing randomized phase II trial with
palifosfamide to support a registration trial for palifosfamide in combination
with doxorubicin in the front- and second-line setting of soft tissue sarcoma.
We anticipate the initiation of such a registration trial as early as the first
half of 2010.




·
            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.


16





Phase I
testing of the intravenous (IV) form of darinaparsin in solid tumors and
hematological cancers has been completed. 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 and
primary liver cancer and are nearing completion of a Phase II study in certain
other hematological cancers. In addition, we are completing two Phase I studies
with an oral capsule form of darinaparsin. 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.  In the ongoing Phase I trials, also reported at the
ASCO annual meeting, preliminary data primarily in solid tumors indicate the
oral form is active and well tolerated.  We are completing data
collection from the IV Phase II trial to address a registration and other trials
with the U.S. Food and Drug Administration.  The oral Phase I program
will be progressed to establish a dose for further clinical
testing.





·
            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 has
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.  We currently plan to initiate a registration trial following
regulatory review of the palifosfamide program to date.  We are also
developing an oral capsule form of palifosfamide to be studied clinically
following receipt of further data from the IV trials and subject to obtaining
sufficient additional sources of funding, either from potential partnering
arrangements or from other sources.  To date we have no such
partnering arrangements or other sources of such financing in place. We are also
considering additional Phase II trials in other solid tumors as funding becomes
available.  Orphan Drug Designation for palifosfamide has been
obtained in both the United States and the European Union for the treatment of
soft tissue sarcomas.


17





·
            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 I/II breast cancer trial and using
the mathematical dose schedule / frequency established
preclinically.




We intend
to continue with clinical development of IV palifosfamide for soft
tissue sarcoma both completing the ongoingPhase II multicenter, parallel group, randomized study of palIfosfamide
tris plus doxorubicin versus doxorubiCin
in subjects with unresectAble
or metastatic Soft
tissue SarcOma
(“PICASSO”) trial and in a planned registration trial and, with additional
resources, to initiate a clinical study with the oral form and/or in additional
indications beyond STS.  For IV darinaparsin, we will complete the
ongoing Phase I oral trial and will address peripheral T-cell lymphoma (“PTCL”)
registration and other trials, in part dependent on additional
funding.   For oral indibulin, we will complete the Phase I
breast cancer safety trial and initiate the subsequent Phase I/II trial and,
with additional funding, other trials.  However, the successful
development of our product candidates is highly uncertain.  Product
development costs and timelines can vary significantly for each product
candidate, are difficult to accurately predict, and will require us to obtain
additional funding, either alone or in connection with partnering
arrangements.  Various statutes and regulations also govern or
influence the manufacturing, safety, labeling, storage, record keeping and
marketing of each product.  The lengthy process of seeking approval
and the subsequent compliance with applicable statutes and regulations require
the expenditure of substantial resources.  Any failure by us to
obtain, or any delay in obtaining, regulatory approvals could materially,
adversely affect our business.  To date, we have not received approval
for the sale of any drug candidates in any market and, therefore, have not
generated any revenues from our drug candidates.


18


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;


·
            initiating
      a registration trial for IV palifosfamide in soft tissue sarcoma and
      seeking the additional resources for an oral Phase I trial and/or other
      trials beyond soft tissue sarcoma;


·
            completing
      the Phase I oral darinaparsin trial, collecting data from the darinaparsin
      Phase II trial in hematological
malignancies;


·
            conducting
      necessary activities for establishing a registration pathway and seeking
      additional financial resources to fund on-going development of
      darinaparsin; and


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





We expect
our material expenditures during this time to be predominately for palifosfamide
clinical trial expense, employment expense (we currently have 15 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  $3.2 million on
preclinical and regulatory expenses; approximately $12.0 million on
clinical expenses; approximately $2.0 million on manufacturing expenses;
approximately $0.7 million on facilities, rent, and other facilities-related
expenses; and approximately $5.8 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 very early into
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 currently anticipate commencing a
registration trial for IV palifosfamide as early as the first half of 2010.
However, we are still in the evaluative phase regarding the protocol design for
this trial, including with respect to overall trial size, clinical endpoints and
our ability to receive Special Protocol Assessment.  We also continue
to evaluate the appropriate number of and locations for trial sites. We have
estimated the sufficiency of our cash resources based on our current
expectations for the trial design.  However, the final trial design
may ultimately vary from our current expectations, which could materially impact
the schedule and cost of the trial and, in turn, alter 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 planned 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.


19





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.  The Phase I trials with an oral form of darinaparsin are
ongoing in solid tumors and have been expanded to include non-Hodgkin’s
lymphoma patients.  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 has 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.  The
Company expects to review its data with the FDA and European Medicines Agency
(“EMA”) and, subject to the results of such reviews, plans to initiate a global
registration trial as early as the first half of 2010.  An oral
formulation has also been developed preclinically and we plan to initiate a
Phase I trial following further IV study results and subject to obtaining
additional sources of financing from partnering or other
arrangements.  Other trials are under consideration pending further
funding.  Orphan Drug Designation has been obtained for both the
United States and the European Union for the treatment of soft tissue
sarcomas.  Technology transfer and scale-up for the commercial
manufacture of the active pharmaceutical ingredient and final product
specification will continue as the program demands and resources
allow.




Indibulin, a novel
anti-cancer agent that targets mitosis by inhibiting tubulin polymerization,
is administered as an oral capsule formulation.  Indibulin has
completed 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 trial to determine maximum tolerated dose and intends to initiate a
subsequent Phase I/II trial in breast cancer with the schedule identified
preclinically.


20





Financial
Overview





Overview
of Results of Operations





Three
months ended March 31, 2010 compared to three months ended March 31,
2009





Revenue.  We
had no revenues for the three months ended March 31, 2010 and 2009.





Research and
development expenses.  Research and development expenses during
the three months ended March 31, 2010 and 2009 were as follows:





Three months ended
                    March 31,2010
                  
                  
                  2009
                  
                  
                  Change($
      in thousands)Research
      and development
                  
                  $
                  1,939
                  
                  
                  $
                  1,608
                  
                  
                  $
                  331
                  
                  
                  
                  21
                  %





Research
and development expenses increased by $331 thousand from the three months ended
March 31, 2009 to the three months ended March 31, 2010.  The increase
was primarily due to increased manufacturing activity of $437 thousand,
stock-based compensation expense of $139 thousand and clinical costs of $31
thousand, offset by a reduction in salaries of $136 thousand, rent and
depreciation of $60 thousand, consulting of $40 thousand, employee costs of $30
thousand and other reductions totaling $10 thousand.  The
manufacturing increase resulted from replenishing drug inventories whereas the
reductions and savings resulted from the cost cutting initiatives we put in
place during 2009.





We expect
our research and development expenses to increase as we start our pivotal Phase
III palifosfamide study and other studies related to indibulin and darinaparsin
are resumed.


21





General and
administrative expenses.  General and administrative expenses
during the three months ended March 31, 2010 and 2009 were as
follows:





Three months ended
                      March 31,2010
                    
                    
                    2009
                    
                    
                    Change($
      in thousands)General
      and administrative
                    
                    $
                    2,630
                    
                    
                    $
                    1,724
                    
                    
                    $
                    906
                    
                    
                    
                    53
                    %





The
increase in general and administrative expenses of $906 thousand from the three
months ended March 31, 2009 to the three months ended March 31, 2010 was
primarily due to increased stock-based compensation of $384 thousand, salaries
of $112 thousand, consulting $159 thousand, royalty and milestone payments of
$125 thousand, legal and patent costs of $110 thousand, and other costs of $16
thousand.  The increased general and administrative activity during
the first three months of 2010 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 months ended
March 31, 2010 and 2009 were as follows:





Three months ended
                    March 31,2010
                  
                  
                  2009
                  
                  
                  Change($
      in thousands)Other
      income (expense), net
                  
                  $
                  9
                  
                  
                  $
                  -
                  
                  
                  $
                  9
                  
                  
                  
                  100
                  %Change
      in fair value of warrants
                  
                  
                  (13,093
                  )
                  
                  
                  (7
                  )
                  
                  
                  (13,086
                  )
                  
                  
                  -100
                  %Total
                  
                  $
                  (13,084
                  )
                  
                  $
                  (7
                  )
                  
                  $
                  (13,077
                  )





The
decrease in other income (expense) from the three months ended March 31, 2009
compared to the three months ended March 31, 2010 was due primarily to the
increased non-cash expense recorded from the change in the fair value of
liability-classified warrants.  The increased expense directly
correlates with the Company’s increased stock price during the first three
months of 2010.  Additionally, increased cash balances during the
first three months of 2010 resulted in increased interest
income.


22


Liquidity
and Capital Resources
 
 As of
March 31, 2010, we had approximately $45.0 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 very early into 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 decrease in cash and cash equivalents for the
three months ended March 31, 2010 and 2009:
 
 Three
      months ended
                          March
      31,2010
                        
                        
                        2009($
      in thousands)Net
      cash provided by (used in):Operating
      activities
                        
                        $
                        (3,789
                        )
                        
                        $
                        (4,610
                        )Investing
      activities
                        
                        
                        (8
                        )
                        
                        
                        (1
                        )Financing
      activities
                        
                        
                        2
                        
                        
                        
                        -Net
      increase (decrease) in cash and cash equivalents
                        
                        $
                        (3,795
                        )
                        
                        $
                        (4,611
                        )
 
 Net cash
used in operating activities was $3.8 million for the three months ended March
31, 2010 compared to $4.6 million for the three months ended March 31,
2009.  The $0.8 million decrease was primarily due to decreased cash
payments related to accounts payable and accrued liability reductions during
2010.
 
 Net cash
used in investing activities was $8 thousand for the three months ended March
31, 2010 compared to $1 thousand for the three months ended March 31,
2009.  The increase was due to increased purchases of property plant
and equipment.
 
 Net cash
provided by financing activities was $2 thousand for the three months ended
March 31, 2010 compared to $0 for the three months ended March 31,
2009.  The increase of $2 thousand is attributable 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.
  23
  Operating
capital and capital expenditure requirements
 
 The
Company anticipates that losses will continue for the foreseeable future. At
March 31, 2010, the Company’s accumulated deficit was approximately $108.8
million.  Our actual cash requirements may vary materially from those
planned because of a number of factors including:
 
 ·
              Changes
      in the focus and direction of our development
  programs;
 
 ·
              Competitive
      and technical advances;
 
 ·
              Internal
      costs associated with the development of palifosfamide and indibulin and
      our ability to secure further financing for darinaparsin development from
      a partner, and
 
 ·
              Costs
      of filing, prosecuting, defending and enforcing any patent claims and any
      other intellectual property rights, or other
  developments.
 
 Working
capital as of March 31, 2010 was $42.5 million, consisting of
$45.3 million in current assets and $2.8 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 March 31, 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
                    
                    $
                    494
                    
                    
                    $
                    224
                    
                    
                    $
                    270
                    
                    
                    $
                    -
                    
                    
                    $
                    -
 
 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.
  24
  Off-balance
sheet arrangements
 
 During
the three months ended March 31, 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 three months ended March 31,
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.  As all of our
investments are cash deposits in a global bank, it is subject to minimal
interest rate risk.
 
 Item 4.
Controls and Procedures
 
 Our
management, with the participation of our 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.
  25
  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 three months ended March 31, 2010, we
had a net loss of $17.7 million and we had incurred approximately $108.8 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
believe based on information as of the date of this filing that we have
sufficient capital to continue in our ongoing randomized Phase II trial for
palifosfamide and with the initiation and enrollment of a registration trial
expected to initiate as early as the first half of 2010, to collect the IV
darinaparsin data necessary for the design of a registration and other trials
with darinaparsin while continuing the oral Phase I trial to completion, and
with the Phase I safety trial and Phase I portion of the subsequent PhaseI/II
trial with indibulin.   We continue to seek additional financial
resources to fund the further development of palifosfamide, darinaparsin and
indibulin.  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.
  26
  *
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
March 31, 2010, we had incurred approximately $108.8 million of cumulative net
losses and had approximately $45.0 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 very early into 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 currently anticipate commencing a registration
trial for IV palifosfamide as early as the first half of 2010. However, we are
still evaluating the protocol design for this trial, including with respect to
overall trial size, clinical endpoints and our ability to receive Special
Protocol Assessment.  We also continue to evaluate the appropriate
number of and locations for trial sites. We have estimated the sufficiency of
our cash resources based on our current expectations for the trial
design.  However, the final trial design may ultimately vary from our
current expectations, which could materially impact the schedule and cost of the
trial and, in turn, alter 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
planned 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.
  27
  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.
  28
  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.
  29
  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.
  30
  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.
  31
  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.
  32
  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.
  33
  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.
  34
  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.
  35
  Any legal
action against us or our collaborators claiming damages and seeking to enjoin
developmental or marketing activities relating to affected products could, in
addition to subjecting us to potential liability for damages, require us or our
collaborators to obtain licenses to continue to develop, manufacture, or market
the affected products. Such a license may not be available to us on commercially
reasonable terms, if at all.
 
 An
adverse determination in a proceeding involving our owned or licensed
intellectual property may allow entry of generic substitutes for our
products.
 
 OTHER
RISKS RELATED TO OUR COMPANY
 
 We
are subject to Sarbanes-Oxley and the reporting requirements of federal
securities laws, which can be expensive.
 
 As a
public reporting company, we are subject to the Sarbanes-Oxley Act of 2002, as
well as to the information and reporting requirements of the Securities Exchange
Act of 1934, as amended, and other federal securities laws.  As a
result, we incur significant legal, accounting, and other expenses that we did
not incur as a private company, including costs associated with our public
company reporting requirements and corporate governance
requirements.  As an example of public reporting company requirements,
we evaluate the effectiveness of disclosure controls and procedures and of our
internal control over financing reporting in order to allow management to report
on such controls.  Pursuant to Sarbanes-Oxley, our independent
registered public accounting firm will be attesting to the effectiveness of our
internal control over financial reporting, as of December 31, 2010, in our
Annual Report on Form 10-K for the fiscal year ending December 31,
2010.  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.
 
 There
is not now, and there may not ever be an active market for shares of our common
stock.
 
 In
general, there has been limited trading activity in shares of the Company’s
common stock.  The small trading volume may make it more difficult for
our stockholders to sell their shares as and when they choose. Furthermore,
small trading volumes generally depress market prices.  As a result,
you may not always be able to resell shares of our common stock publicly at the
time and prices that you feel are fair or appropriate.
  36
  Our
common stock could be delisted from The NASDAQ Capital Market, which could
negatively impact the price of our common stock and our ability to access the
capital markets.
 
 Our
common stock is listed on The NASDAQ Capital Market.  The listing
standards of The NASDAQ Capital Market provide, among other things, that a
company may be delisted if the bid price of its stock drops below $1.00 for a
period of 30 consecutive trading days.  In addition, our total
stockholders’ equity at December 31, 2009 was approximately $28.1
million.  If our stockholders’ equity is less than $2.5 million, we
will fail to comply with The NASDAQ Capital Market’s listing standards if shares
of our common stock fail to have an aggregate market value of at least $35
million for 30 consecutive trading days.  If we fail to comply with
these or other listing standards applicable to us, our common stock may be
delisted from The NASDAQ Capital Market.  The delisting of our common
stock would significantly affect the ability of investors to trade our
securities and would significantly negatively affect the value and liquidity of
our common stock.  In addition, the delisting of our common stock
could materially adversely affect our ability to raise capital on terms
acceptable to us or at all.  Delisting from The NASDAQ Capital Market
could also have other negative results, including the potential loss of
confidence by suppliers and employees, the loss of institutional investor
interest and fewer business development opportunities.
 
 Anti-takeover
provisions in our charter documents and under Delaware law may make an
acquisition of us, which may be beneficial to our stockholders, more
difficult.
 
 Provisions
of our amended and restated certificate of incorporation and bylaws, as well as
provisions of Delaware law, could make it more difficult for a third party to
acquire us, even if doing so would benefit our stockholders.  These
provisions authorize the issuance of “blank check” preferred stock that could be
issued by our board of directors to increase the number of outstanding shares
and hinder a takeover attempt, and limit who may call a special meeting of
stockholders.  In addition, Section 203 of the Delaware General
Corporation Law, which prohibits business combinations between us and one or
more significant stockholders unless specified conditions are met, may
discourage, delay or prevent a third party from acquiring us.
 
 Because
we do not expect to pay dividends, you will not realize any income from an
investment in our common stock unless and until you sell your shares at
profit.
 
 We have
never paid dividends on our capital stock and we do not anticipate that we will
pay any dividends for the foreseeable future. Accordingly, any return on an
investment in our Company will be realized, if at all, only when you sell shares
of our common stock.
  37
  Item 2.
Unregistered Sale of Equity Securities and Use of Proceeds
 
 Issuer
Purchases of Equity Securities
  During the
first three months of 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 three months ended March 31,
2010:
  Period
                    
                    Total
      Number of
                      Shares
      Purchased
                    
                    
                    Average
      Price
                      Paid
      Per Share ($)January
      1 to 31, 2010
                    
                    
                    -
                    
                    
                    $
                    -February
      1 to 28, 2010
                    
                    
                    -
                    
                    
                    $
                    -March
      1 to 31, 2010
                    
                    
                    15,283
                    
                    
                    $
                    3.10Total
                    
                    
                    15,283
 
 Item 3.
Defaults upon Senior Securities
 
 Not
applicable.
  38
  Item 4.
Other Information
 
 None.
 
 Item 5.
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.
  39
  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:
April 30, 2010
 
 /s/
      Richard E. BagleyRichard
      E. Bagley
                    President
      and Chief Financial Officer(Principal
      Financial and Accounting
Officer)
 Dated:
April 30. 2010
  40
  EXHIBIT
INDEX
 
 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 1350
 
 *
              Filed
      herewith
  41