UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.
20549




Form 10-Q





(Mark
      One)þ
            
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934For
      the quarterly period ended September 30, 2009ORo
            
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934





Commission
File Number 001-33484





ZIOPHARM
Oncology, Inc.


(Exact
name of registrant as specified in its charter)




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




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


(646) 214-0700


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


area
code, of registrant’s principal executive offices)


Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period than the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes:  þ     No:   ̈
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).   Yes:   ̈     No:   ̈
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or smaller reporting company. See the
definitions of "large accelerated filer,” “accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check
one):
 
 Large accelerated filer  ̈
                  Accelerated
      filer  ̈
                  Non-accelerated
      filer  ̈
                  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 November 9, 2009, was 25,571,301 shares.







ZIOPHARM
Oncology, Inc. (a development stage company)





Table
of Contents




PagePart
      I - Financial InformationItem 1.
                          
                          Financial
      StatementsBalance
      Sheets as of September 30, 2009 and December 31, 2008
      (unaudited)
                          
                          3Statements
      of Operations for the three and nine months ended September 30, 2009 and
      2008 and the period from September 9, 2003 (date of inception) through
      September 30, 2009 (unaudited)
                          
                          4Statements
      of Changes in Convertible Preferred Stock and Stockholders’ Equity
      (Deficit) for the period from September 9, 2003 (date of inception)
      through September 30, 2009 (unaudited)
                          
                          5Statements
      of Cash Flows for the nine months ended September 30, 2009 and 2008 and
      the period from September 9, 2003 (date of inception) through September
      30, 2009 (unaudited)
                          
                          9Notes
      to Financial Statements (unaudited)
                          
                          10Item 2.
                          
                          Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                          
                          21Item 3.
                          
                          Quantitative
      and Qualitative Disclosures about Market Risk
                          
                          29Item 4.
                          
                          Controls
      and Procedures
                          
                          29Part
      II - Other InformationItem 1.
                          
                          Legal
      Proceedings
                          
                          30Item 1A.
                          
                          Risk
      Factors
                          
                          30Item 2.
                          
                          Unregistered
      Sale of Equity Securities and Use of Proceeds
                          
                          42Item 3.
                          
                          Defaults
      upon Senior Securities
                          
                          42Item 4.
                          
                          Submission
      of Matters to a Vote of Security Holders
                          
                          43Item 5.
                          
                          Other
      Information
                          
                          43Item 6.
                          
                          Exhibits
                          
                          43SIGNATURES
                          
                          44




2





Part I - Financial Information





Item 1.
Consolidated Financial Statements




ZIOPHARM
Oncology, Inc. (a development stage company)





BALANCE
SHEETS


(unaudited)





(in
thousands, except share and per share data)





September 30,
                        
                        
                        December 31,2009
                        
                        
                        2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                        
                        $
                        7,080
                        
                        
                        $
                        11,379Prepaid
      expenses and other current assets
                        
                        
                        370
                        
                        
                        
                        327Total
      current assets
                        
                        
                        7,450
                        
                        
                        
                        11,706Property
      and equipment, net
                        
                        
                        324
                        
                        
                        
                        489Deposits
                        
                        
                        87
                        
                        
                        
                        87Other
      non current assets
                        
                        
                        242
                        
                        
                        
                        291Total
      assets
                        
                        $
                        8,103
                        
                        
                        $
                        12,573LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                        
                        $
                        1,559
                        
                        
                        $
                        2,639Accrued
      expenses
                        
                        
                        1,909
                        
                        
                        
                        3,137Deferred
      rent - current portion
                        
                        
                        46
                        
                        
                        
                        -Total
      current liabilities
                        
                        
                        3,514
                        
                        
                        
                        5,776Deferred
      rent
                        
                        
                        74
                        
                        
                        
                        58Warrant
      liabilities
                        
                        
                        592
                        
                        
                        
                        -Total
      liabilities
                        
                        
                        4,180
                        
                        
                        
                        5,834Commitments
      and contingencies (note 4)Stockholders'
      equity:Common
      stock, $0.001 par value; 280,000,000 shares authorized; 25,571,301 and
      21,860,464shares issued and outstanding at September 30, 2009 and
      December 31, 2008, respectively
                        
                        
                        26
                        
                        
                        
                        22Preferred
      stock, $0.001 par value; 30,000,000 shares authorized and no shares issued
      andoutstanding
                        
                        
                        -
                        
                        
                        
                        -Additional
      paid-in capital - common stock
                        
                        
                        72,932
                        
                        
                        
                        71,274Additional
      paid in capital - warrants issued
                        
                        
                        23,073
                        
                        
                        
                        20,504Deficit
      accumulated during the development stage
                        
                        
                        (92,108
                        )
                        
                        
                        (85,061
                        )Total
      stockholders' equity
                        
                        
                        3,923
                        
                        
                        
                        6,739Total
      liabilities and stockholders' equity
                        
                        $
                        8,103
                        
                        
                        $
                        12,573








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 September 30,
                          
                          
                          For the Nine Months Ended September 30,
                          
                          
                          through2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008
                          
                          
                          September
      30, 2009Research
      contract revenue
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -Operating
      expenses:Research
      and development, includingcosts
      of research contracts
                          
                          
                          1,231
                          
                          
                          
                          3,879
                          
                          
                          
                          3,340
                          
                          
                          
                          14,219
                          
                          
                          
                          57,690General
      and administrative
                          
                          
                          1,339
                          
                          
                          
                          1,740
                          
                          
                          
                          4,754
                          
                          
                          
                          6,835
                          
                          
                          
                          39,362Total
      operating expenses
                          
                          
                          2,570
                          
                          
                          
                          5,619
                          
                          
                          
                          8,094
                          
                          
                          
                          21,054
                          
                          
                          
                          97,052Loss
      from operations
                          
                          
                          (2,570
                          )
                          
                          
                          (5,619
                          )
                          
                          
                          (8,094
                          )
                          
                          
                          (21,054
                          )
                          
                          
                          (97,052
                          )Other
      income (expense), net
                          
                          
                          (1
                          )
                          
                          
                          75
                          
                          
                          
                          1
                          
                          
                          
                          386
                          
                          
                          
                          3,898Change
      in fair value of warrants
                          
                          
                          (304
                          )
                          
                          
                          -
                          
                          
                          
                          (520
                          )
                          
                          
                          -
                          
                          
                          
                          1,046Net
      loss
                          
                          $
                          (2,875
                          )
                          
                          $
                          (5,544
                          )
                          
                          $
                          (8,613
                          )
                          
                          $
                          (20,668
                          )
                          
                          $
                          (92,108
                          )Basic
      and diluted net loss per share
                          
                          $
                          (0.13
                          )
                          
                          $
                          (0.26
                          )
                          
                          $
                          (0.40
                          )
                          
                          $
                          (0.97
                          )Weighted
      average common shares outstanding used to compute basic and diluted net
      loss per share
                          
                          
                          21,759,309
                          
                          
                          
                          21,228,964
                          
                          
                          
                          21,458,150
                          
                          
                          
                          21,228,964





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




4





ZIOPHARM Oncology, Inc. (a
development stage company)





STATEMENTS
OF CHANGES IN CONVERTIBLE PREFERRED STOCK


AND
STOCKHOLDERS’ EQUITY (DEFICIT)


For
the Period September 9, 2003 (Date of Inception) to September 30,
2009


(unaudited)





(in
thousands, except share and per share data)





Convertible
      PrefrredStock
      and Warrants
                      
                      
                      Stockholder's
      Equity (Deficit)Warrants
      toPurchase
      Series A
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      DeficitSeries
      A
                      
                      
                      Convertible
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      Accumulated
                      
                      
                      TotalConvertible
                      
                      
                      Preferred
                      
                      
                      
                      
                      
                      
                      
                      
                      Additional
                      
                      
                      
                      
                      
                      During
      the
                      
                      
                      Stockholders'Preferred
      Stock
                      
                      
                      Stock
                      
                      
                      Common
      Stock
                      
                      
                      Paid-in
                      
                      
                      
                      
                      
                      Development
                      
                      
                      Equity/Shares
                      
                      
                      Amount
                      
                      
                      Warrants
                      
                      
                      Shares
                      
                      
                      Amount
                      
                      
                      Capital
                      
                      
                      Warrants
                      
                      
                      Stage
                      
                      
                      (Deficit)Stockholders'
      contribution,September
      9, 2003
                      
                      
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      
                      250,487
                      
                      
                      $
                      -
                      
                      
                      $
                      500
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      500Net
      loss
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (160
                      )
                      
                      
                      (160
                      )Balance
      at December 31, 2003
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      250,487
                      
                      
                      
                      -
                      
                      
                      
                      500
                      
                      
                      
                      -
                      
                      
                      
                      (160
                      )
                      
                      
                      340Issuance
      of common stock
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,254,389
                      
                      
                      
                      2
                      
                      
                      
                      4,498
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      4,500Issuance
      of common stock for services
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      256,749
                      
                      
                      
                      1
                      
                      
                      
                      438
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      439Fair
      value of options/warrants issued for nonemployee Services
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      13
                      
                      
                      
                      251
                      
                      
                      
                      -
                      
                      
                      
                      264Net
      loss
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (5,687
                      )
                      
                      
                      (5,687
                      )Balance
      at December 31, 2004
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,761,625
                      
                      
                      $
                      3
                      
                      
                      $
                      5,449
                      
                      
                      $
                      251
                      
                      
                      $
                      (5,847
                      )
                      
                      $
                      (144
                      )





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




5




ZIOPHARM Oncology, Inc. (a
development stage company)





STATEMENTS
OF CHANGES IN CONVERTIBLE PREFERRED STOCK


AND
STOCKHOLDERS’ EQUITY (DEFICIT) (Cont.)


For
the Period September 9, 2003 (Date of Inception) to September 30,
2009


(unaudited)





(in
thousands, except share and per share data)





Convertible
      PrefrredStock
      and Warrants
                  
                  
                  Stockholder's
      Equity (Deficit)Warrants
      toPurchase
      Series A
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  DeficitSeries
      A
                  
                  
                  Convertible
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  Accumulated
                  
                  
                  TotalConvertible
                  
                  
                  Preferred
                  
                  
                  
                  
                  
                  
                  
                  
                  Additional
                  
                  
                  
                  
                  
                  During
      the
                  
                  
                  Stockholders'Preferred
      Stock
                  
                  
                  Stock
                  
                  
                  Common
      Stock
                  
                  
                  Paid-in
                  
                  
                  
                  
                  
                  Development
                  
                  
                  Equity/Shares
                  
                  
                  Amount
                  
                  
                  Warrants
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Warrants
                  
                  
                  Stage
                  
                  
                  (Deficit)Issuance
      of Series A convertible preferred stock (net of expenses of
      $1,340 and warrant cost of $1,683)
                  
                  
                  4,197,946
                  
                  
                  
                  15,077
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  15,077Fair
      value of warrants to purchase Series A convertible preferred
      stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,683
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,683Issuance
      of common stock to EasyWeb Stockholders
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  189,922
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Conversion
      of Series A convertible preferred stock @ $0.001 into
      $0.001 common stock on September 13, 2005 at an exchange
      ratio of .500974
                  
                  
                  (4,197,946
                  )
                  
                  
                  (15,077
                  )
                  
                  
                  (1,683
                  )
                  
                  
                  4,197,823
                  
                  
                  
                  4
                  
                  
                  
                  15,073
                  
                  
                  
                  1,683
                  
                  
                  
                  -
                  
                  
                  
                  -Issuance
      of common stock for options
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  98,622
                  
                  
                  
                  -
                  
                  
                  
                  4
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  4Fair
      value of options/warrants issued for
      nonemployee services
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  54
                  
                  
                  
                  45
                  
                  
                  
                  -
                  
                  
                  
                  99Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (9,517
                  )
                  
                  
                  (9,517
                  )Balance
      at December 31, 2005
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  7,247,992
                  
                  
                  
                  7
                  
                  
                  
                  20,580
                  
                  
                  
                  1,979
                  
                  
                  
                  (15,364
                  )
                  
                  
                  7,202





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




6




ZIOPHARM Oncology, Inc. (a
development stage company)





STATEMENTS
OF CHANGES IN CONVERTIBLE PREFERRED STOCK


AND
STOCKHOLDERS’ EQUITY (DEFICIT) (Cont.)


For
the Period September 9, 2003 (Date of Inception) to September 30,
2009


(unaudited)





(in
thousands, except share and per share data)





Convertible
      PrefrredStock
      and Warrants
                      
                      
                      Stockholder's
      Equity (Deficit)Warrants
      toPurchase
      Series A
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      DeficitSeries
      A
                      
                      
                      Convertible
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      Accumulated
                      
                      
                      TotalConvertible
                      
                      
                      Preferred
                      
                      
                      
                      
                      
                      
                      
                      
                      Additional
                      
                      
                      
                      
                      
                      During
      the
                      
                      
                      Stockholders'Preferred
      Stock
                      
                      
                      Stock
                      
                      
                      Common
      Stock
                      
                      
                      Paid-in
                      
                      
                      
                      
                      
                      Development
                      
                      
                      Equity/Shares
                      
                      
                      Amount
                      
                      
                      Warrants
                      
                      
                      Shares
                      
                      
                      Amount
                      
                      
                      Capital
                      
                      
                      Warrants
                      
                      
                      Stage
                      
                      
                      (Deficit)Issuance
      of common stock in private placement, net of expenses
    $2,719
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      7,991,256
                      
                      
                      
                      8
                      
                      
                      
                      21,180
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      21,188Issuance
      of warrants
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      13,092
                      
                      
                      
                      -
                      
                      
                      
                      13,092Issuance
      of common stock for services rendered
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      25,000
                      
                      
                      
                      -
                      
                      
                      
                      106
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      106Stock
      based compensation for employees
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,777
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,777Issuance
      of common stock due to exercise of stock options
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      5,845
                      
                      
                      
                      -
                      
                      
                      
                      25
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      25Issuance
      of common stock due to exercise of stock warrants
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,806
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Net
      loss
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (17,857
                      )
                      
                      
                      (17,857
                      )Balance
      at December 31, 2006
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      15,272,899
                      
                      
                      
                      15
                      
                      
                      
                      44,668
                      
                      
                      
                      15,071
                      
                      
                      
                      (33,221
                      )
                      
                      
                      26,533Issuance
      of common stock in private placement, net of expenses
    $1,909
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      5,910,049
                      
                      
                      
                      6
                      
                      
                      
                      23,532
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      23,538Issuance
      of warrants
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      5,433
                      
                      
                      
                      -
                      
                      
                      
                      5,433Stock-based
      compensation
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      -for
      employees
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,318
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,318Stock-based
      compensation for non-employee
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      120
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      120Issuance
      of common stock for stock options
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      46,016
                      
                      
                      
                      -
                      
                      
                      
                      36
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      36Issuance
      of restricted stock
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      70,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Net
      Loss
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (26,608
                      )
                      
                      
                      (26,608
                      )Balance
      at December 31, 2007
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      21,298,964
                      
                      
                      
                      21
                      
                      
                      
                      69,674
                      
                      
                      
                      20,504
                      
                      
                      
                      (59,829
                      )
                      
                      
                      30,370





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




7




ZIOPHARM Oncology, Inc. (a
development stage company)





STATEMENTS
OF CHANGES IN CONVERTIBLE PREFERRED STOCK


AND
STOCKHOLDERS’ EQUITY (DEFICIT) (Cont.)


For
the Period September 9, 2003 (Date of Inception) to September 30,
2009


(unaudited)





(in
thousands, except share and per share data)





Convertible
      PrefrredStock
      and Warrants
                  
                  
                  Stockholder's
      Equity (Deficit)Warrants
      toPurchase
      Series A
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  DeficitSeries
      A
                  
                  
                  Convertible
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  Accumulated
                  
                  
                  TotalConvertible
                  
                  
                  Preferred
                  
                  
                  
                  
                  
                  
                  
                  
                  Additional
                  
                  
                  
                  
                  
                  During
      the
                  
                  
                  Stockholders'Preferred
      Stock
                  
                  
                  Stock
                  
                  
                  Common
      Stock
                  
                  
                  Paid-in
                  
                  
                  
                  
                  
                  Development
                  
                  
                  Equity/Shares
                  
                  
                  Amount
                  
                  
                  Warrants
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Warrants
                  
                  
                  Stage
                  
                  
                  (Deficit)Stock-based
      compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,600
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,600Issuance
      of restricted stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  586,500
                  
                  
                  
                  1
                  
                  
                  
                  (1
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Cancellation
      of restricted stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (25,000
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Other
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1
                  
                  
                  
                  -
                  
                  
                  
                  (1
                  )
                  
                  
                  -Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (25,231
                  )
                  
                  
                  (25,231
                  )Balance
      at December 31, 2008
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  21,860,464
                  
                  
                  
                  22
                  
                  
                  
                  71,274
                  
                  
                  
                  20,504
                  
                  
                  
                  (85,061
                  )
                  
                  
                  6,739Cummulative
      effect of a change in accounting principle - January 1, 2009
      reclassification of warrants to warrant liabilities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,638
                  )
                  
                  
                  1,566
                  
                  
                  
                  (72
                  )Stock-based
      compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,264
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,264Forfeiture
      of unvested restricted stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (69,500
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Issuance
      of common stock in private placement, net of expenses $455
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,772,337
                  
                  
                  
                  3
                  
                  
                  
                  395
                  
                  
                  
                  4,207
                  
                  
                  
                  -
                  
                  
                  
                  4,605Issuance
      of restricted stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,008,000
                  
                  
                  
                  1
                  
                  
                  
                  (1
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (8,613
                  )
                  
                  
                  (8,613
                  )Balance
      at September 30, 2009
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  25,571,301
                  
                  
                  $
                  26
                  
                  
                  $
                  72,932
                  
                  
                  $
                  23,073
                  
                  
                  $
                  (92,108
                  )
                  
                  $
                  3,923





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




8





ZIOPHARM Oncology, Inc. (a development stage
company)





STATEMENTS
OF CASH FLOWS


(unaudited)





(in
thousands)




Period fromSeptember 9, 2003(date of inception)For the Nine Months Ended September 30,
                                        
                                        
                                        through2009
                                        
                                        
                                        2008
                                        
                                        
                                        September
      30, 2009Cash
      flows from operating activities:Net
      loss
                                        
                                        $
                                        (8,613
                                        )
                                        
                                        $
                                        (20,668
                                        )
                                        
                                        $
                                        (92,108
                                        )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                                        
                                        
                                        252
                                        
                                        
                                        
                                        279
                                        
                                        
                                        
                                        1,382Stock-based
      compensation
                                        
                                        
                                        1,264
                                        
                                        
                                        
                                        1,352
                                        
                                        
                                        
                                        7,987Change
      in fair value of warrants
                                        
                                        
                                        520
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (1,046
                                        )Loss
      on disposal of fixed assets
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        9Change
      in operating assets and liabilities:(Increase)
      decrease in:Prepaid
      expenses and other current assets
                                        
                                        
                                        (43
                                        )
                                        
                                        
                                        (78
                                        )
                                        
                                        
                                        (370
                                        )Other
      noncurrent assets
                                        
                                        
                                        49
                                        
                                        
                                        
                                        (4
                                        )
                                        
                                        
                                        (242
                                        )Deposits
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (87
                                        )Increase
      (decrease) in:Accounts
      payable
                                        
                                        
                                        (1,080
                                        )
                                        
                                        
                                        (682
                                        )
                                        
                                        
                                        1,559Accrued
      expenses
                                        
                                        
                                        (1,228
                                        )
                                        
                                        
                                        76
                                        
                                        
                                        
                                        1,909Deferred
      rent
                                        
                                        
                                        (22
                                        )
                                        
                                        
                                        10
                                        
                                        
                                        
                                        36Net
      cash used in operating activities
                                        
                                        
                                        (8,901
                                        )
                                        
                                        
                                        (19,715
                                        )
                                        
                                        
                                        (80,971
                                        )Cash
      flows from investing activities:Purchases
      of property and equipment
                                        
                                        
                                        (3
                                        )
                                        
                                        
                                        (123
                                        )
                                        
                                        
                                        (1,632
                                        )Proceeds
      from sale of property and equipment
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1
                                        
                                        
                                        
                                        1Net
      cash used in investing activities
                                        
                                        
                                        (3
                                        )
                                        
                                        
                                        (122
                                        )
                                        
                                        
                                        (1,631
                                        )Cash
      flows from financing activities:Stockholders'
      capital contribution
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        500Proceeds
      from exercise of stock options
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        66Proceeds
      from issuance of common stock and warrants, net
                                        
                                        
                                        4,605
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        72,356Proceeds
      from issuance of preferred stock, net
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        16,760Net
      cash provided by financing activities
                                        
                                        
                                        4,605
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        89,682Net
      increase (decrease) in cash and cash equivalents
                                        
                                        
                                        (4,299
                                        )
                                        
                                        
                                        (19,837
                                        )
                                        
                                        
                                        7,080Cash
      and cash equivalents, beginning of period
                                        
                                        
                                        11,379
                                        
                                        
                                        
                                        35,029
                                        
                                        
                                        
                                        -Cash
      and cash equivalents, end of period
                                        
                                        $
                                        7,080
                                        
                                        
                                        $
                                        15,192
                                        
                                        
                                        $
                                        7,080Supplementary
      disclosure of cash flow information:Cash
      paid for interest
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -Cash
      paid for income taxes
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -Supplementary
      disclosure of noncash investing andfinancing
      activities:Warrants
      issued to placement agents and investors, in connection with private
      placement
                                        
                                        $
                                        4,207
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        24,415Preferred
      stock conversion to common stock
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        16,760Warrants
      converted to common shares
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        18





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




9




ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS


(unaudited)








1.
Nature of the Business and Basis of Presentation





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





The
Company has had limited operations to date and its activities have consisted
primarily of raising capital and conducting research and
development.  Accordingly, the Company is considered to be in the
development stage at September 30, 2009. The Company's fiscal year ends on
December 31.





The
Company has operated at a loss since its inception in 2003 and has no
revenues.  The Company anticipates that losses will continue for the
foreseeable future. At September 30, 2009, the Company’s accumulated deficit was
approximately $92.1 million.  The Company currently believes that it
has sufficient capital to fund development and commercialization activities,
principally for palifosfamide, into the second quarter of 2010.  The
Company’s ability to continue operations after its current cash resources are
exhausted depends on its ability to obtain additional financing and achieve
profitable operations, as to which no assurances can be given.  Cash
requirements may vary materially from those now planned because of changes in
the focus and direction of its research and development programs, competitive
and technical advances, patent developments or other
developments.  Additional financing will be required to continue
operations after the Company exhausts its current cash resources and to continue
its long-term plans for clinical trials and new product
development.  There can be no assurance that any such financing can be
realized by the Company, or if realized, what the terms thereof may be, or that
any amount that the Company is able to raise will be adequate to support the
Company’s working capital requirements until it achieves profitable
operations.  The Company’s failure to raise capital as and when needed
would have a negative impact on its financial condition and its ability to
pursue its business strategies.  If adequate additional
funds are not available when required,or if unsuccessful in entering
into partnership agreements for the further development of its products,the Company will be
required to delay, reduce or eliminate planned preclinical and clinical
trialsand terminate
theapproval process for its product candidates from the FDA or other
regulatory authorities.  In addition, the Company could be forced to
discontinue product development, reduce or forego sales and marketing efforts,
forego attractive business opportunities, pursue merger or
divestiture strategies, cease operations or declare
bankruptcy.There can be no assurances that forecasted results
will be achieved or that additional financing will be obtained.  The
financial statements do not include any adjustments relating to the
recoverability and classification of asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.





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





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





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





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





The
results disclosed in the Statements of Operations for the three and nine months
ended September 30, 2009 are not necessarily indicative of the results to be
expected for the full fiscal year.




10





ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





2.
Summary of Significant Accounting Policies





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





New
Accounting Pronouncements





From time
to time, new accounting pronouncements are issued by the Financial Accounting
Standards Board (or “FASB”) or other standard setting bodies that are adopted by
the Company as of the specified effective date. Unless otherwise discussed, the
Company’s management believes that the impact of recently issued standards that
are not yet effective will not have a material impact on its consolidated
financial position or results of operations upon adoption.





Warrants





On
January 1, 2009, the Company adopted a newly issued accounting standard which
provides guidance in assessing 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 have
terms that do not meet the criteria to be considered indexed to the Company’s
own stock and therefore were re-classified from the equity section to the
liability section of the Balance Sheet as of January 1, 2009. The warrant is subject to
re-measurement at each balance sheet date and any change in fair value is
recognized as a component of other income (expense). Fair value is measured
using the Black-Scholes valuation model.Adoption of this new standard
decreased equity warrants classified in stockholders’ equity by $1,638 thousand,
decreased deficit accumulated during the development stage by $1,566 thousand
and increased warrant liabilities by $72 thousand.  See Note 5,
“Warrants” for additional disclosure.





Fair
Value Measurements




Effective
January 1, 2008, the Company adopted a newly issued accounting standard for
fair value measurements.  In February 2008, an amendment provided
a one year deferral of the standard’s effective date for non-financial assets
and non-financial liabilities, except those that are recognized or disclosed in
the financial statements at fair value on a recurring basis, at least
annually.  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.




The
adoption of these accounting standards did not have a material impact on the
Company’s results of operations, financial condition or cash flow.




11




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 September 30,
2009 are as follows:





($ in thousands)
                  
                  Fair Value Measurements at Reporting Date UsingDescription
                  
                  Balance as of
                    September 30, 2009
                  
                  
                  Quoted Prices in
                    Active Markets for
                    Identical
                    Assets/Liabilities
                    (Level 1)
                  
                  
                  Significant Other
                    Observable Inputs
                    (Level 2)
                  
                  
                  Significant
                    Unobservable Inputs
                    (Level 3)Warrant
      liability
                  
                  $
                  592
                  
                  
                  $
                  -
                  
                  
                  $
                  592
                  
                  
                  $
                  -





The
warrants were valued using a Black-Scholes valuation model.  See note
5 for additional disclosure on the valuation methodology and significant
assumptions.




Subsequent
Events




During
the second quarter of 2009, the Company adopted a new accounting standard which
established general standards of accounting and disclosure of events which occur
after the balance sheet date.  The Company evaluated all events or
transactions that occurred after September 30, 2009 through November 10,
2009, the date the Company issued these financial statements.  During
this period the Company did not have any material recognizable subsequent
events.





Other
Recently Adopted Accounting Standards





In
December 2007, the FASB issued a new accounting standard which expands the
definition of a business combination and requires the fair value of the purchase
price of an acquisition, including the issuance of equity securities, to be
determined on the acquisition date. The accounting standard also requires that
all assets, liabilities, contingent considerations, and contingencies of an
acquired business be recorded at fair value at the acquisition date. In
addition, it requires that acquisition costs generally be expensed as incurred,
restructuring costs generally be expensed in periods subsequent to the
acquisition date, changes in accounting for deferred tax asset valuation
allowances be expensed after the measurement period, and acquired income tax
uncertainties be expensed after the measurement period.  The adoption
of the accounting standard by the Company on January 1, 2009 did not have an
impact but may change accounting for business combinations on a prospective
basis.




12




ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





2.
Summary of Significant Accounting Policies – (continued)





In April
2009, the Company implemented a newly issued accounting standard which provides
guidelines for making fair value measurements more consistent including
additional authoritative guidance in determining whether a market is active or
inactive, and whether a transaction is distressed, is applicable to all assets
and liabilities (i.e. financial and nonfinancial) and will require enhanced
disclosures.  Adoption of this new standard during the second quarter
of 2009 did not have a material impact on the Company’s financial position,
results of operations or cash flows.





In April
2009, the Company implemented newly issued accounting standards which provided
guidance for the recognition, measurement and presentation of
other-than-temporary impairments. These newly issued standards amended the
other-than-temporary impairment model for debt securities and require additional
disclosures regarding the calculation of credit losses and the factors
considered in reaching a conclusion that an investment is not
other-than-temporarily impaired.  Adoption of these new standards
during the second quarter of 2009 did not have a material impact on the
Company’s financial position, results of operations or cash flows.





In April
2009, the Company implemented newly issued accounting standards which provided
guidance on interim disclosures about the fair value of financial
instruments.  These newly issued standards amend prior guidance to
require disclosures about fair value of financial instruments in interim as well
as in annual financial statements.  Adoption of these new standards
during the second quarter of 2009 did not have a material impact on the
Company’s financial position, results of operations or cash flows.





In July
2009, the Company implemented a newly issued accounting standard which codified
prior pronouncements and is the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in preparation
of financial statements in conformity with generally accepted accounting
principles in the United States for interim and annual
periods.  Adoption of this new standard during the third quarter of
2009 did not have a material impact on the Company’s financial position, results
of operations or cash flows however, it changes the way in which U.S. GAAP is
referenced.




13




ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





3.
Net Loss per Share





Basic net loss per share is computed by
dividing net loss by the weighted average number of common shares outstanding
for the period. The Company's potential dilutive shares, which include
outstanding common stock options, unvested restricted stock and warrants, have
not been included in the computation of diluted net loss per share for any of
the periods presented as the result would be antidilutive.  Such
potential common shares at September 30, 2009 and 2008 consist of the
following:





September
      30,2009
                  
                  
                  2008Stock
      options
                  
                  
                  3,151,249
                  
                  
                  
                  2,751,670Unvested
      restricted stock
                  
                  
                  1,491,667
                  
                  
                  
                  145,000Warrants
                  
                  
                  7,950,613
                  
                  
                  
                  5,039,65912,593,529
                  
                  
                  
                  7,936,329




4.
Commitments and Contingencies





License
agreements and patents





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





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




14




ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





4.
Commitments and Contingencies – (continued)





As
partial consideration for the license rights obtained, the Company made an
upfront payment of $125 thousand and granted the Licensors 250,487 shares of the
Company’s common stock.  The Company recorded expense for the $125
thousand upfront payment and recognized research and development expense of $426
thousand in connection with the issuance of the 250,487 shares of common stock
in the year ended December 31, 2004.  In addition, the Company issued
options to purchase an additional 50,222 shares outside the 2003 Stock Option
Plan for $0.002 per share following the successful completion of certain
clinical milestones.  Upon the filing of an Investigation New Drug
Application (“IND”) for darinaparsin in 2005, 12,555 shares vested and the
Company recognized compensation expense of $54 thousand.  Upon the
completion of dosing of the last patient for both Phase I clinical trials in
2007, 25,111 shares vested and the Company recognized expense of $120
thousand.  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”)
for darinaparsin).  In accordance with accounting standards, the
options were valued at the date on which the milestones were
achieved.  In addition, the Licensors are entitled to receive certain
milestone payments, including $100,000 that was paid upon the commencement of
Phase I clinical trial for which the Company recognized the expense in the year
ended December 31, 2005 and $250 thousand upon the dosing of the first patient
in the Registrant-sponsored Phase II clinical trial for darinaparsin which was
recognized in the year ended December 31, 2006.  The Company may be
required to make additional payments upon achievement of certain other
milestones, in varying amounts which on a cumulative basis could total up
to $4.5 million.  In addition, the Licensors are entitled to receive
royalty payments on sales from a licensed product should such a product be
approved for commercial sale and sales of a licensed product be effected in the
United States, Canada, the European Union or Japan.  The Licensors
also will be entitled to receive a portion of any fees that the Company may
receive from a possible sublicense under certain circumstances.  For
the years ended December 31, 2007 and 2006, the Company expensed $100 thousand
for payments made to the Licensors to conduct scientific
research.  The Company has the exclusive right to all intellectual
property rights resulting from such research pursuant to the terms of the
license agreement.  These sponsored research agreements and any
related extensions expired in February 2008 with no payments being made in the
nine months ended September 30, 2008 or 2009.





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





License
Agreement with DEKK-Tec, Inc.





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





In
consideration for the license rights, DEKK-Tec is entitled to receive milestone
payments upon the occurrence of certain achievements of certain milestones, in
varying amounts which on a cumulative basis may total $3.9
million.  Of the aggregate milestone payments, most of the total
amount will be creditable against future royalty payments, as referenced
below.  During the year ended December 31, 2006, the Company recorded
a charge of $100 thousand for achieving Phase II
milestones.  Additionally in 2004, the Company issued DEKK-Tec an
option to purchase 27,616 shares of the Company’s common stock for $0.02 per
share.  The options were  valued at the date which the
milestones were achieved.  Upon the execution of the license
agreement, 6,904 shares vested and were exercised in the fiscal year ended
December 31, 2005 and resulted in a recorded charge of $12 thousand to research
and development expense.  The remaining options will vest upon certain
milestone events, culminating with final FDA approval of the first NDA submitted
by the Company (or by its sublicensee) for palifosfamide.  None of the
remaining options have vested as of September 30, 2009.  DEKK-Tec is
entitled to receive royalty payments on the sales of palifosfamide should it be
approved for commercial sale.  There were no payments during the nine
months ended September 30, 2008 or 2009.




15





ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





4.
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 and annual payments of $25 thousand were made in the years
ended December 31, 2008 and 2007 for maintenance of the Option
Agreement.  There were no payments during the nine months ended
September 30, 2009.





License
Agreement with Baxter Healthcare Corporation (“Baxter”)





On
November 3, 2006, the Company entered into a definitive Asset Purchase Agreement
(for indibulin) and License Agreement (to Baxter's
proprietary nanosuspension technology) with affiliates of Baxter. Indibulin
is a novel anti-cancer agent that binds to tubulin, one of the essential
proteins for chromosomal segregation, and targets mitosis like the taxanes and
vinca alkaloids. It is being developed as an oral form.   Among the more
well known antimitotic drugs are the taxanes (paclitaxel, docetaxel) and the
vinca alkaloids (vincristine, vinblastine).  The terms of the agreement
include an upfront cash payment of approximately $1.1 million, which was
expensed as purchased research and development in the year ended December 31,
2006.  In addition, $15 thousand was paid for annual patent and
license maintenance fee and $100 thousand was paid for existing inventory
during 2006.  During the year ended December 31, 2007, the Company
recorded an expense of $625 thousand related to the achievement of a milestone
for the successful U.S. IND application for indibulin and also paid an
additional $15 thousand for the annual patent and license maintenance fee. In
2008, the Company paid $15 thousand for the annual patent and license
maintenance fee.  In addition to the upfront costs, there will be
additional milestone payments that could amount to approximately $8 million in
the aggregate and royalties on net sales.  The purchase price includes
the entire indibulin intellectual property portfolio as well as existing drug
substance and capsule inventories.  There were no payments during the
nine months ended September 30, 2009.





Subsequent
to September 30, 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 September 30,
2009.  The Company expensed $120 thousand and $180 thousand during the
nine months ended September 30, 2008 and 2009, respectively, for consulting
services per aforementioned agreement.  No milestones have been
reached or accrued during the year ended December 31, 2008 or the nine months
ended September 30, 2009.




16




ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





5.
Warrants





On
January 1, 2009, the Company adopted a newly issued accounting standard which
provides guidance in assessing 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 have
terms that do not meet the criteria to be considered indexed to the Company’s
own stock and therefore were re-classified from the equity section to the
liability section of the Balance Sheets as of January 1, 2009. The warrant is subject to
re-measurement at each balance sheet date and any change in fair value is
recognized as a component of other income (expense). Fair value is measured
using the Black-Scholes valuation model.





In May
2005, the Company issued 419,786 warrants to placement agents for services
performed, 11,083 of which were subsequently exercised.  The remaining
408,703 warrants were originally valued at $1,638 thousand.  Subject
to certain exceptions, these warrants provide for anti-dilution protection
should common stock or common stock equivalents be subsequently issued at a
price less than the exercise price of the warrants then in effect, which was
initially $4.75 per share.  This provision was triggered in 2006 when
stock was sold at $4.63 per share in a Private Investment in Public Equity
(“PIPE”) financing.  Accordingly, the warrants were re-priced at
$4.69.  The provision was triggered again with the September 2009 PIPE
financing when stock was sold at $1.70 per share and the warrants were
subsequently re-priced at $4.25.  Accounting standards require that
the warrants be valued at each financial reporting period and the resulting gain
or loss be recorded as other income (expense) in the Statements of
Operations.  Using a Black-Scholes model, the warrants were valued at
$72 thousand on January 1, 2009, when a new accounting standard was
adopted.  The reclassification attributed to the new standard had the
following cumulative effect on the Balance Sheets:





(in thousands)
                  
                  Liabilities
                  
                  
                  Stockholders' EquityWarrants
                  
                  
                  Warrants
                  
                  
                  Deficit Accumulated
                    During the Development
                    StageAs
      reported on December 31, 2008
                  
                  $
                  -
                  
                  
                  $
                  20,504
                  
                  
                  $
                  (85,061
                  )Re-classification
                  
                  
                  72
                  
                  
                  
                  (1,638
                  )
                  
                  
                  1,566Balance
      on January 1, 2009
                  
                  $
                  72
                  
                  
                  $
                  18,866
                  
                  
                  $
                  (83,495
                  )





On
September 30, 2009, the warrants were valued at $592 thousand using a
Black-Scholes valuation model.  The change in the fair value of the
warrant liability of $304 thousand and $520 thousand for the three and nine
months ended September 30, 2009, respectively, was charged to other income
(loss) in the Statements of Operations.  The following assumptions
were used at January 1, 2009 and September 30, 2009:





January 1, 2009
                  
                  
                  September 30, 2009Risk-free
      interest rate
                  
                  
                  1.55
                  %
                  
                  
                  1.45
                  %Expected
      life in years
                  
                  
                  3.42
                  
                  
                  
                  2.67Expected
      volatility
                  
                  
                  102
                  %
                  
                  
                  105
                  %Expected
      dividend yield
                  
                  
                  0
                  
                  
                  
                  0




17




ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)




6.
Common Stock




On
September 9, 2009, the Company entered into a securities purchase agreement
("Offering") with certain investors pursuant to which it sold a total of
2,772,337 units (the "Units"), each Unit consisting of (i) one share of
common stock (collectively, the "Shares") and (ii) one warrant
(collectively, the "Warrants") to purchase one share of common stock at an
exercise price of $2.04 per share, for a purchase price of $1.825 per
Unit.  The closing of the transaction occurred on September 15, 2009.
In connection with the Offering, the Company raised approximately
$5.1 million in gross proceeds. After paying $455 thousand in placement
agent fees and offering expenses, the net proceeds were
$4.6 million.




In
connection with the Offering, the Company issued warrants to purchase an
aggregate of 2,910,954 shares of common stock (including 138,617 warrants issued
to the placement agents) which are exercisable immediately. The warrants have an
exercise price of $2.04 per share and have a five year term. The fair value of
the warrants was estimated at $4,207 thousand using a Black-Scholes model with
the following assumptions: expected volatility of 105%, risk free interest rate
of 2.41%, expected life of five years and no dividends.  The fair
value of the warrants was recorded in the equity section of the balance
sheet.




The
Company assessed whether the warrants require accounting as
derivatives.  The Company determined that the warrants were both (1)
indexed to the Company’s own stock and (2) classified in stockholders’ equity in
accordance with accounting standards codification Topic 815, Derivatives and Hedging.  As such,
the Company has concluded the warrants met the scope exception for determining
whether the instruments require accounting as derivatives and should be
classified in stockholders’ equity.




In
connection with the Offering, the Company entered into a registration rights
agreement (the "Registration Rights Agreement") with each of the investors. The
Registration Rights Agreement provides that the Company file a "resale"
registration statement (the "Registration Statement") covering all of the Shares
and the shares issuable upon exercise of the Warrants, up to the maximum number
of shares able to be registered pursuant to applicable Securities and Exchange
Commission regulations, within 30 days of the closing of the Offering. The
Company filed the Registration Statement with the SEC on September 28, 2009
(File No. 333-162160). Under the terms of the Registration Rights
Agreement, the Company is obligated to maintain the effectiveness of the
"resale" registration statement until all securities therein are sold or are
otherwise can be sold pursuant to Rule 144, without any restrictions. A
cash penalty at the rate of 1% of the purchase price per month, capped at a
maximum of 10% of the purchase price (or $506 thousand), will be triggered for
any filing or effectiveness failures or if, at any time after six months
following the closing of the Offering, the Company ceases to be current in
periodic reports with the SEC.




In
December 2006, the FASB issued an accounting standard, which addresses an
issuer's accounting for registration payment arrangements. The accounting
standard specifies that the contingent obligation to make future payments or
otherwise transfer consideration under a registration payment arrangement,
whether issued as a separate agreement or included as a provision of a financial
instrument or other agreement, should be separately recognized and measured in
accordance with FASB guidance in Accounting for Contingencies. The accounting
standard further clarifies that a financial instrument subject to a registration
payment arrangement should be accounted for in accordance with US GAAP
without regard to the contingent obligation to transfer consideration pursuant
to the registration payment arrangement. The Company applied the recognition and
measurement provisions of the accounting standard to the registration rights
associated with the Registration Rights Agreement. As result, the Company
believes that the contingent obligation to make future payments is not probable
and as such has recorded no liability associated with these registration
rights.




18




ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





7.
Stock-Based Compensation





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





For the three months ended
                    September 30,
                  
                  
                  For the nine months ended
                    September 30,(in thousands)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Research
      and development, including costs of research contracts
                  
                  $
                  140
                  
                  
                  $
                  115
                  
                  
                  $
                  295
                  
                  
                  $
                  501General
      and administrative
                  
                  
                  375
                  
                  
                  
                  266
                  
                  
                  
                  969
                  
                  
                  
                  851Share
      based employee compensation expense before tax
                  
                  
                  515
                  
                  
                  
                  381
                  
                  
                  
                  1,264
                  
                  
                  
                  1,352Income
      tax benefit
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Net
      share based employee compensation expense
                  
                  $
                  515
                  
                  
                  $
                  381
                  
                  
                  $
                  1,264
                  
                  
                  $
                  1,352





Stock
options granted during the nine months ended September 30, 2009 had a
weighted-average grant date fair value of $0.53.  There were no stock
options granted during the three month period ending September 30,
2009.   Stock options granted during the three and nine months
ended September 30, 2008 had weighted-average grant date fair values of $1.01
and $1.93, respectively.





For the
nine months ended September 30, 2009 and 2008, the fair value of stock options
was estimated on the date of grant using a Black-Scholes option valuation model
with the following assumptions:





For the nine months ended September 30,2009
                  
                  
                  2008Risk-free
      interest rate
                  
                  
                  1.31
      - 1.44
                  %
                  
                  
                  2.48
      - 3.49
                  %Expected
      life in years
                  
                  
                  5
                  
                  
                  
                  5Expected
      volatility
                  
                  
                  102
      - 103
                  %
                  
                  
                  94
      - 96
                  %Expected
      dividend yield
                  
                  
                  0
                  
                  
                  
                  0




19




ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





7.
Stock-Based Compensation – (continued)





Transactions
under the Company’s stock option plan for the nine months ended September 30,
2009 are as follows:





(in thousands, except share and per share
                  data)
                
                Number of Shares
                
                
                Weighted-
                  Average Exercise
                  Price
                
                
                Weighted-
                  Average
                  Contractual
                  Term (Years)
                
                
                Aggregate
                  Intrinsic ValueOutstanding,
      December 31, 2008
                
                
                2,738,089
                
                
                $
                3.43Granted
                
                
                815,000
                
                
                $
                0.70Exercised
                
                
                -
                
                
                $
                -Cancelled
                
                
                (401,840
                )
                
                $
                3.25Outstanding,
      September 30, 2009
                
                
                3,151,249
                
                
                $
                2.74
                
                
                
                7.47
                
                
                $
                2,768Options
      exercisable, September 30, 2009
                
                
                2,141,999
                
                
                
                
                
                
                
                6.83
                
                
                $
                1,711Options
      available for future grant
                
                
                1,246,068





A summary
of the status of non-vested restricted stock for the nine months ended September
30, 2009 is as follows:





Number of Shares
                  
                  
                  Weighted-Average
                    Grant Date Fair ValueNon-vested,
      December 31, 2008
                  
                  
                  586,500
                  
                  
                  $
                  1.15Granted
                  
                  
                  1,008,000
                  
                  
                  $
                  2.06Vested
                  
                  
                  (33,333
                  )
                  
                  $
                  3.25Cancelled
                  
                  
                  (69,500
                  )
                  
                  $
                  0.83Non-vested,
      September 30, 2009
                  
                  
                  1,491,667
                  
                  
                  $
                  1.77




20




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





Forward
Looking Statements





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





Business
Overview





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





·
              ZIO-101,
      or darinaparsin (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 ®];
      “ATO”) has been approved in the United States, the European Union and
      Japan for the treatment of acute promyelocytic leukemia (“APL”), 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 inorganic arsenic, 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.




21





Phase I
testing of the intravenous (IV) form of darinaparsin in solid tumors and
hematological cancers has been completed.  The Company reported
clinical activity and, importantly, a safety profile from these studies as
predicted by preclinical results.  The Company subsequently completed
Phase II studies in advanced myeloma and primary liver cancer and is nearing
completion of a Phase II study in certain other hematological
cancers.  In addition, the Company is 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 (“ASCO”), the Company
reported favorable results from the trial with IV-administered darinaparsin in
lymphoma, particularly peripheral T-cell lymphoma (“PTCL”).  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.  The Company is presently initiating data collection for
completing the IV Phase II trial with intention of meeting with the U.S. Food
and Drug Administration (“FDA”) to progress the IV program into a potentially
pivotal trial in PTCL as early as the first half of 2010.  The Company
intends to fund that program using additional sources of financing that may
include funds that could be received from potential partnering
arrangements.  We expect that the oral Phase I program will continue
its ongoing clinical trials to completion with establishment of a maximum
tolerated dose (“MTD”).





·
              ZIO-201,
      or palifosfamide (ZymafosTM),
      is the active metabolite of ifosfamide, a compound chemically related to
      cyclophosphamide.  Patent applications covering proprietary
      forms of palifosfamide for pharmaceutical composition and method of use
      have been filed in the U.S. and internationally.  Like
      cyclophosphamide, 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.  The Company believes
      that cyclophosphamide is the most widely used alkylating agent in cancer
      therapy, with significant use in the treatment of breast cancer and
      non-Hodgkin’s lymphoma.  Bendamustine has been recently approved
      and successfully launched by Cephalon in the U.S. and Europe to treat
      certain hematological malignancies.  Ifosfamide has been shown
      to be effective at high doses in the treatment of sarcoma and lymphoma,
      either by itself or in combination with other anticancer
      agents.  Ifosfamide is approved by the 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
Phase I study, Phase II testing of the intravenous form of palifosfamide as a
single agent to treat advanced sarcoma has been completed.  In both
Phase I and Phase II testing, palifosfamide has been administered without the
“uroprotectant” mesna, and the toxicities associated with acrolein and
chloroacetaldehyde have not been observed.  The Company reported
clinical activity of palifosfamide when used alone in the Phase II study
addressing advanced sarcoma.  Following review of the preclinical
combination studies, clinical data, and discussion with sarcoma experts, the
Company initiated a Phase I dose escalation study of palifosfamide in
combination with doxorubicin in patients with metastatic or unresectable soft
tissue sarcoma.  The Company reported favorable results and
safety profile from this study at this year’s ASCO 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, the Company initiated a Phase II randomized
controlled trial in the second half of last year to compare doxorubicin plus
palifosfamide to doxorubicin alone in patients with front and second-line
metastatic or unresectable soft tissue sarcoma.  Subsequent to
quarter end, the study has generated positive top line interim
data.  As a result of reaching a pre-specified efficacy milestone and
following safety and efficacy data review by the Data Committee, sarcoma
experts, and the Company’s Medical Advisory Board, the decision was reached to
formally stop enrollment in the trial on October 13,
2009.  Subsequently, further positive interim data from the trial was
presented at the 15th Annual
Connective Tissue Oncology Society (“CTOS”) meeting held on November 6,
2009.  The Company plans to initiate a registration trial following
regulatory review of the palifosfamide program to date.  The Company
is also developing an oral capsule form of palifosfamide to be studied
clinically following further data from the IV trials and subject to partnering
or the availability of other sources of funding.  The Company is 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.




22





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




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





Indibulin,
as a single agent, has completed a Phase I trial in Europe and additional Phase
I trials are nearing completion in the U.S. in patients with advanced solid
tumors and the Company has 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 Tarceva® in one
and Xeloda® in
another and are reaching completion.  Favorable activity and safety
profile of oral indibulin with oral Xeloda® were
reported at ASCO’s annual meeting in May 2009.  Preclinical work with
consultant Dr. Larry Norton to explore dose scheduling for the clinical setting
have been completed and were also reported at the ASCO meeting, supporting the
Company’s plan to initiate the Phase I portion of a Phase I/II breast cancer
trial using a dose schedule established preclinically.




Subject
to obtaining appropriate funding, we intend to continue with clinical
development of IV palifosfamide for soft tissue sarcoma and to initiate a
clinical study with the oral form following the United States Food and Drug
Administration approval; with IV darinaparsin, for PTCL and with the further
development of the oral form; and with oral indibulin, for solid tumors and in
particular breast cancer.  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.




Development
Plan




Without
additional resources from partnering or other sources, our development plan for
the next twelve months remains focused on completing the randomized Phase II
trial for IV palifosfamide, data collection for the darinaparsin Phase II trial
in hematological malignancies, and preparing for a potential end-of-Phase II
meeting with the FDA for a potential pivotal trial for IV palifosfamide and
darinaparsin, and on designing and conducting the Phase I portion of an oral
indibulin Phase I/II trial in breast cancer.  We expect our principal
expenditures to be predominately for palifosfamide clinical trial expense,
employment expense (we currently have 14 full time employees) and other expenses
associated with clinical trials already completed but not fully
expensed.





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.




23




With the
planned development of palifosfamide and with the intention of partnering or
otherwise raising additional resources to support development activities for
darinaparsin and indibulin, we expect to incur the following expenses during the
next twelve months: Approximately $1.4 million on preclinical and regulatory
expenses; approximately $4.3 million on clinical expenses; approximately
$1.5 million on manufacturing expenses; approximately $0.8 million on
facilities, rent, and other facilities-related expenses; and approximately $3.0
million on general corporate and administrative expenses.  With
our current cash position, previous adjustments in staffing and ongoing
aggressive cash management strategy, we believe that we currently have
sufficient capital that will support our current operations into the second
quarter of 2010.  Our forecast of the period
of time through which our financial resources will be adequate to support our
operations, the costs to complete development of products and the cost to
commercialize our future products are forward-looking statements and involve
risks and uncertainties, and actual results could vary materially and negatively
as a result of a number of factors, including the factors discussed in the "Risk
Factors" section of this report.  We have based these estimates on
assumptions that may prove to be wrong, and we could exhaust our available
capital resources sooner than we currently expect.





Product
Candidate Development and Clinical Trials





Intravenous darinaparsin, an
organic arsenic, has been tested in patients with advanced myeloma, other
hematological malignancies, and liver cancer.  Two separate Phase II
trials have been completed while one is still ongoing.  Recently
reported at the May 2009 ASCO meeting, positive results in patients with
lymphoma, particularly PTCL, have led to the planning of a pivotal trial in PTCL
as early as the first half of 2010, subject to 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 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 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 ASCO meeting in May.  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 CTOS Annual meeting on November 6, 2009.  The Company expects to
review its data with the FDA with plans to initiate a registration trial as
early as the first half of 2010.  An oral formulation has also been
developed preclinically and, following further IV study results, additional
funding or partnering, a Phase I trial is expected to initiate.  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 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® and also
with Xeloda ® have
been initiated.  At the ASCO annual meeting in May, the Company
presented favorable preliminary activity and safety data of oral indibulin with
oral  Xeloda®.  Preclinical
studies under the direction of Dr. Larry Norton to support clinical study of
“dose dense” dosing are completed and were also reported at ASCO.  The
Company intends to initiate the Phase I portion of a Phase I/II study in breast
cancer with a schedule identified preclinically to determine maximum tolerated
dose in the Phase I portion prior to formal Phase II testing.  If
sufficient funding is not available, the Company intends to place the project on
hold.




24




Financial
Overview





Overview
of Results of Operations





Three
and nine months ended September 30, 2009 compared to three and nine months ended
September 30, 2008





Revenue.  We had no
revenues for the three and nine months ended September 30, 2009 and
2008.





Research and development
expenses.  Research and development expenses during the three
and nine months ended September 30, 2009 and 2008 were as follows:





Three months ended
                      September 30,
                    
                    
                    
                    
                    
                    Nine months ended
                      September 30,2009
                    
                    
                    2008
                    
                    
                    Change
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    Change($
      in thousands)Research
      and development
                    
                    $
                    1,231
                    
                    
                    $
                    3,879
                    
                    
                    $
                    (2,648
                    )
                    
                    
                    -68
                    %
                    
                    $
                    3,340
                    
                    
                    $
                    14,219
                    
                    
                    $
                    (10,879
                    )
                    
                    
                    -77
                    %





Research
and development expenses decreased by $2.6 million from the three months ended
September 30, 2008 to the three months ended September 30, 2009.  The
decrease was primarily due to reduced manufacturing costs of $822 thousand,
reduced clinical project costs of $932 thousand, reduced salaries of $246
thousand, reduced consulting costs of $382 thousand and other reductions
totaling $266 thousand.  These reductions and savings resulted from
the cost cutting initiatives we put in place in order to extend our
operations.





Research
and development expenses decreased by $10.9 million from the nine months ended
September 30, 2008 to the nine months ended September 30, 2009.  The
decrease was primarily due to reduced manufacturing costs of $5.3 million,
reduced clinical project costs of $2.6 million, reduced salaries of $1.2
million, reduced consulting costs of $703 thousand, reduced employee costs of
$486 thousand and other reductions of $529 thousand.  These reductions
and savings resulted from the cost cutting initiatives we put in place in order
to extend our operations.





We expect
our research and development expenses to increase as studies related to
indibulin and darinaparsin are resumed.


25





General and administrative
expenses.  General and administrative expenses during the three
and nine months ended September 30, 2009 and 2008 were as follows:





Three months ended
                    September 30,
                  
                  
                  
                  
                  
                  
                  
                  
                  Nine months ended
                    September 30,2009
                  
                  
                  2008
                  
                  
                  Change
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  Change($
      in thousands)General
      and administrative
                  
                  $
                  1,339
                  
                  
                  $
                  1,740
                  
                  
                  $
                  (401
                  )
                  
                  
                  -23
                  %
                  
                  $
                  4,754
                  
                  
                  $
                  6,835
                  
                  
                  $
                  (2,081
                  )
                  
                  
                  -30
                  %





Similar
to the decrease in research and development expenses, the decrease in general
and administrative expenses of $401 thousand from the three months ended
September 30, 2008 to the three months ended September 30, 2009 was primarily
due to decreased headcount which lead to a decrease in our salary and benefit
expenses of $276 thousand.  The decrease is also attributable to
reductions in legal and patent costs of $85 thousand, and other cost reductions
totaling $40 thousand.





The
decrease in general and administrative expenses of $2.1 million from the nine
months ended September 30, 2008 to the nine months ended September 30, 2009 was
primarily due to decreased headcount which lead to a decrease in our salary and
benefit expenses of $1.2 million.  The decrease is also attributable
to reductions in legal and patent costs of $389 thousand, consulting of $254
thousand and other cost reductions totaling $214 thousand.





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





Other income
(expense).  Other income (expense) for the three and nine
months ended September 30, 2009 and 2008 was as follows:





Three months ended
                      September 30,
                    
                    
                    
                    
                    
                    
                    
                    
                    Nine months ended
                      September 30,2009
                    
                    
                    2008
                    
                    
                    Change
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    Change($
      in thousands)Other
      income (expense), net
                    
                    $
                    (1
                    )
                    
                    $
                    75
                    
                    
                    $
                    (76
                    )
                    
                    
                    -101
                    %
                    
                    $
                    1
                    
                    
                    $
                    386
                    
                    
                    $
                    (385
                    )
                    
                    
                    -100
                    %Change
      in fair value of warrants
                    
                    
                    (304
                    )
                    
                    
                    -
                    
                    
                    $
                    (304
                    )
                    
                    
                    -100
                    %
                    
                    
                    (520
                    )
                    
                    
                    -
                    
                    
                    $
                    (520
                    )
                    
                    
                    -100
                    %Total
                    
                    $
                    (305
                    )
                    
                    $
                    75
                    
                    
                    $
                    (380
                    )
                    
                    
                    
                    
                    
                    $
                    (519
                    )
                    
                    $
                    386
                    
                    
                    $
                    (905
                    )





The
decrease in other income (expense) from the three and nine months ended
September 30, 2008 compared to the three and nine months ended September 30,
2009 was due primarily to lower cash balances during the three and nine months
ended September 30, 2009.  Additionally, there were no warrants being
marked to market during 2008.





26




Liquidity
and Capital Resources





As of
September 30, 2009, we had approximately $7.1 million in cash and cash
equivalents, down from $11.4 million in cash and cash equivalents as of December
31, 2008.  Given the rate that we have historically used cash, the
limited amount of cash for use in operations and the recent instability in the
capital markets, we have taken measures to reduce our near term expenses while
we seek additional financing and partnering arrangements for the development of
certain drug candidates.  We have reduced staffing and other personnel
and project related expenses and may have to continue to do so.  If
additional resources remain unavailable, we intend to place the development of
darinaparsin and indibulin on hold following the completion of ongoing trials
for which associated expenses are included in our current
forecast.  Based on our current costs, we believe that we currently
have sufficient capital to fund the development programs into the second quarter
of 2010 (see Development Plan).  Because our business does not
generate any cash flow, however, we will need to raise additional capital to
continue development of our product candidates beyond that
time.  There can be no assurance that any such financing can be
realized by us, or if realized, what the terms thereof may be, or that any
amount that we are able to raise will be adequate to support our working capital
requirements until we achieve profitable operations.  Our failure to
raise capital as and when needed would have a negative impact on our financial
condition and our ability to pursue our business strategies.  If adequate additional
funds are not available when required,or if 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 trialsand terminate theapproval process for our product candidates from the FDA or other
regulatory authorities.  In addition, we could be forced to
discontinue product development, reduce or forego sales and marketing efforts,
forego attractive business opportunities or pursue merger or
divestiture strategies.Further, our assumptions relating to
the expected costs of development and commercialization and timeframe for
completion are dependent on numerous factors other than available financing,
including significant unforeseen delays in the clinical trial and regulatory
approval process, which could be extremely costly.  In addition, our
estimates assume that we will be able to enroll a sufficient number of patients
in each clinical trial.  There can be no assurances that forecasted
results will be achieved or that additional financing will be
obtained.





The
following table summarizes our net decrease in cash and cash equivalents for the
nine months ended September 30, 2009 and 2008:





Nine months ended September 30,2009
                      
                      
                      2008($
      in thousands)Net
      cash provided by (used in):Operating
      activities
                      
                      $
                      (8,901
                      )
                      
                      $
                      (19,715
                      )Investing
      activities
                      
                      
                      (3
                      )
                      
                      
                      (122
                      )Financing
      activities
                      
                      
                      4,605
                      
                      
                      
                      -Net
      decrease in cash and cash equivalents
                      
                      $
                      (4,299
                      )
                      
                      $
                      (19,837
                      )





Net cash
used in operating activities was $8.9 million for the nine months ended
September 30, 2009 compared to $19.7 million for the nine months ended September
30, 2008.  The $10.8 million decrease was primarily due to a reduction
in spending resulting in a $12.1 million decrease in the net loss partially
offset by changes to accounts payable, accruals and other assets and
liabilities.





Net cash
used in investing activities was $3 thousand for the nine months ended September
30, 2009 compared to net cash used in investing activities of $122 thousand for
the nine months ended September 30, 2008.  The decrease was primarily
due to a reduction in spending for purchases of property and
equipment.





Net cash
provided by financing activities was $4.6 for the nine months ended September
30, 2009 compared to net cash provided by financing activities of $0 for the
nine months ended September 30, 2008.  The increase of $4.6 million is
attributable to the PIPE financing completed on September 15,
2009.


27




Operating
capital and capital expenditure requirements





The
Company anticipates that losses will continue for the foreseeable future. At
September 30, 2009, the Company’s accumulated deficit was approximately $92.1
million.  Our actual cash requirements may vary materially from those
planned because of a number of factors including:





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





·
            Competitive
      and technical advances;





·
            Costs
      associated with the further development of palifosfamide, darinaparsin and
      indibulin; and





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





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





Working
capital as of December 31, 2008 was $5.9 million, consisting of
$11.7 million in current assets and $5.8 million in current
liabilities. Working capital as of September 30, 2009 was $4.0 million,
consisting of $7.5 million in current assets and $3.5 million in current
liabilities.





Contractual
obligations





The
following table summarizes our outstanding obligations as of September 30, 2009
and the effect those obligations are expected to have on our liquidity and cash
flows in future periods:





Less
      than
                  
                  
                  
                  
                  
                  
                  
                  
                  More
      than($
      in thousands)
                  
                  Total
                  
                  
                  1 year
                  
                  
                  2 - 3 years
                  
                  
                  4 - 5 years
                  
                  
                  5 yearsOperating
      Leases
                  
                  $
                  713
                  
                  
                  $
                  351
                  
                  
                  $
                  362
                  
                  
                  $
                  -
                  
                  
                  $
                  -





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





28




Off-balance
sheet arrangements





During
the nine months ended September 30, 2009 and 2008, we did not engage in any
off-balance sheet arrangements.





Critical
Accounting Policies and Estimates





In our
Form 10-K for the fiscal year ended December 31, 2008, our most critical
accounting policies and estimates upon which our financial status depends were
identified as those relating to stock-based compensation; net operating losses
and tax credit carryforwards; and impairment of long-lived assets.  We
reviewed our policies and determined that those policies remain our most
critical accounting policies for the nine months ended September 30,
2009.  During the nine months ended September 30, 2009, we have added
an accounting policy for valuing our warrant liability.  See footnotes
2 and 5 herein for additional disclosure.





Item 3.
Quantitative and Qualitative Disclosures about Market Risk





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





Item 4.
Controls and Procedures





Our
management, with the participation of our chief executive officer and chief
financial officer, has evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the
end of the period covered by this report.  Based on such evaluation,
our principal executive officer and principal financial officer have concluded
that, as of the end of such period, our disclosure controls and procedures were
effective in ensuring that information required to be disclosed by 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.


29





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 most
recent previously filed periodic report, which was our quarterly report on Form
10-Q for the fiscal quarter ended June 30, 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 quarterly report on Form 10-Q for the
fiscal quarter ended June 30, 2009, as filed with the Securities and Exchange
Commission.




RISKS
RELATED TO OUR BUSINESS




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





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





We
believe we have sufficient capital to continue in our ongoing randomized Phase
II trial for palifosfamide, to collect the necessary IV darinaparsin data to
meet with FDAwhile continuing the oral Phase I trials to completion, and to
initiate a Phase I portion of a Phase I/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.  We are
currently devoting a significant portion of our resources to the development of
palifosfamide.  As a result, 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.





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





We have
never generated revenue and have incurred significant net losses in each year
since our inception.  For the nine months ended September 30, 2009, we
had a net loss of $8.6 million and we had incurred approximately $92.1 million
of cumulative net losses since our inception in 2003.  We expect to
continue to incur significant operating expenditures.  Although we
have taken near-term cost cutting measures aimed at preserving capital while we
pursue sources of potential additional financing, further development of our
product candidates will likely require substantial increases in our expenses 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.





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


30
 If
we are not able to successfully develop and commercialize our product
candidates, we may not generate sufficient revenues to continue our business
operations.





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





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




As of
September 30, 2009, we had incurred approximately $92.1 million of cumulative
net losses and had approximately $7.1 million of cash and cash
equivalents.  With the proceeds received from our September 2009
private placement of common stock and warrants,  we anticipate we will
have sufficient cash to fund our operations well into the second quarter of
2010.  However, changes may occur that would consume our existing
capital prior to that time, including the progress of our research and
development efforts and changes in governmental regulation.





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 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 trialsand terminate theapproval process for our product candidates from the FDA or other
regulatory authorities.  In addition, we could be forced to
discontinue product development, reduce or forego sales and marketing efforts,
forego attractive business opportunities or pursue merger or
divestiture strategies.  In the event we are unable to continue as a
going concern, we may be forced to cease operations
altogether.





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





In the
current economic environment, our need for additional capital and limited
capital resources may force us to accept financing terms that could be
significantly more dilutive than if we were raising capital when the capital
markets were more stable.  To the extent that we raise additional
capital by issuing equity securities, our stockholders may experience
dilution.  In addition, we may grant future investors rights superior
to those of our common stockholders.  If we raise additional funds
through collaborations and licensing arrangements, it may be necessary to
relinquish some rights to our technologies, product candidates or products, or
grant licenses on terms that are not favorable to us.  If we raise
additional funds by incurring debt, we could incur significant interest expense
and become subject to covenants in the related transaction documentation that
could affect the manner in which we conduct our business.


31





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.


32





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.


33





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.


34





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





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





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





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





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





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




·
            Unforeseen
      safety issues;





·
            Determination
      of dosing issues;





·
            Lack
      of effectiveness during clinical
trials;





·
            Slower
      than expected rates of patient
recruitment;





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





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





We have
received “Orphan Drug” status for palifosfamide in both the United States and
Europe and we are hopeful that we may be able to obtain “Fast Track” and/or
Orphan Drug status from the FDA for our other 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.


35





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





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




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





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





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





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





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





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




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





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





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


36





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





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





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





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





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





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





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





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





RISKS
RELATED TO OUR ABILITY TO COMMERCIALIZE OUR PRODUCT CANDIDATES





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





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


37





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





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





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





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





·
            Developing
      drugs;





·
            Undertaking
      preclinical testing and human clinical
trials;





·
            Obtaining
      FDA and other regulatory approvals of
drugs;





·
            Formulating
      and manufacturing drugs; and





·
            Launching,
      marketing, and selling drugs.





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





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





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





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





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





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





·
            The
      price at which we sell our
products.


38





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





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




·
            Government
      and health administration
authorities;





·
            Private
      health maintenance organizations and health insurers;
  and





·
            Other
      healthcare payers.





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





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





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





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





RISKS
RELATED TO OUR INTELLECTUAL PROPERTY





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





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




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





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





·
            If
      and when patents will be issued;





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





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


39





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





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





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





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





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





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





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





OTHER
RISKS RELATED TO OUR COMPANY





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





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


40





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





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





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





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





Our
common stock is listed on The NASDAQ Capital Market.  The listing
standards of The NASDAQ Capital Market provide, among other things, that a
company may be delisted if the bid price of its stock drops below $1.00 for a
period of 30 consecutive business days.  In addition, our total
stockholders’ equity at September 30, 2009 was approximately $3.9
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 (or $1.37 per share based on our common stock outstanding at September
30, 2009) for 10 consecutive business 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.


41





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





Use
of Proceeds from Private Placement in Public Equity Offering




On
September 9, 2009, we entered into a securities purchase agreement and related
documentation with certain investors pursuant to which we agreed to sell a total
of 2,772,337 units (the "Units"), each Unit consisting of (i) one share of
common stock (collectively, the "Shares") and (ii) one warrant
(collectively, the "Warrants") to purchase one share of common stock at an
exercise price of $2.04 per share, for a purchase price of $1.825 per Unit for
gross proceeds of $5.1 million.  The offering was completed on
September 15, 2009.  We paid $455 thousand in placement agent fees and
offering expenses and expect to use the remaining net proceeds of
$4.6 million for general corporate purposes andongoing clinical
development of our three product candidates, palifosfamide (ZymafosTMor ZIO-201), darinaparsin
(ZinaparTMor ZIO-101), and
indibulin (ZybulinTMor
ZIO-301).




In
connection with the Offering, we issued warrants to purchase an aggregate of
2,910,954 shares of common stock (including 138,617 warrants issued to the
placement agents) which are exercisable immediately. The warrants have an
exercise price of $2.04 per share and have a five year term.




The
Shares and the Warrants (including the placement agent warrants) issued in the
Offering (including the shares of common stock issuable upon exercise of the
Warrants or Placement Agent Warrants), were not registered under the Securities
Act of 1933, as amended (the “Securities Act”) at the time of sale. For these
issuances, the Company relied on the exemption from federal registration under
Section 4(2) of the Securities Act and/or Rule 506 promulgated thereunder, based
on the Company’s belief that the offer and sale of the Shares and Warrants did
not involve a public offering as each investor was “accredited” and no general
solicitation was involved in the Offering.





The
foregoing description of each of the Offering is qualified by the more detailed
description set forth in the Company’s current report on Form 8-K filed with the
SEC on September 15, 2009 and the agreements and other documents filed as
exhibits to such report.





Item 3.
Defaults upon Senior Securities





Not
applicable.


42




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





Not
applicable.





Item 5.
Other Information





None.





Item 6.
Exhibits





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


43





SIGNATURES





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





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


Dated:
November 10, 2009





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


Dated:
November 10, 2009


44




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


45