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ZIOPHARM ONCOLOGY 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-10.1
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.1
Unassociated Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
 
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-33038

ZIOPHARM Oncology, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 (State or other jurisdiction of
 incorporation or organization)
 
84-1475642
 (I.R.S. Employer
 Identification No.)
 
1180 Avenue of the Americas, 19th Floor, New York, NY 10036
(646) 214-0700
(Address, including zip code, and telephone number, including
area code, of registrant’s principal executive offices)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes:  þ     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 þ              Non-accelerated filer ¨              Smaller reporting company ¨
       (Do not check if a smaller reporting company)

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

The number of shares of the registrant’s Common Stock, $.001 par value, outstanding as of October 28, 2011, was 68,451,324 shares.

 
 

 

ZIOPHARM Oncology, Inc. (a development stage company)

Table of Contents
 
   
Page
Part I - Financial Information
 
   
Item 1.
Financial Statements
 
     
 
Balance Sheets as of September 30, 2011 and December 31, 2010 (unaudited)
3
     
 
Statements of Operations for the three and nine months ended September 30, 2011 and 2010 and the period from September 9, 2003 (date of inception) through September 30, 2011 (unaudited)
4
     
 
Statement of Changes in Stockholders’ Equity for the nine months ended September 30, 2011 (unaudited)
5
     
 
Statements of Cash Flows for the nine months ended September 30, 2011 and 2010 and the period from September 9, 2003 (date of inception) through September 30, 2011 (unaudited)
6
     
 
Notes to Financial Statements (unaudited)
7
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
19
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
29
     
Item 4.
Controls and Procedures
29
     
Part II - Other Information
 
   
Item 1.
Legal Proceedings
30
     
Item 1A.
Risk Factors
30
     
Item 2.
Unregistered Sale of Equity Securities and Use of Proceeds
44
     
Item 3.
Defaults upon Senior Securities
44
     
Item 4.
Removed and Reserved
44
     
Item 5.
Other Information
44
     
Item 6.
Exhibits
44
     
SIGNATURES
45

 
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,
 
   
2011
   
2010
 
             
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 118,933     $ 60,392  
Collaboration receivable
    79       -  
Prepaid expenses and other current assets
    1,405       424  
Total current assets
    120,417       60,816  
                 
Property and equipment, net
    886       253  
                 
Deposits
    91       87  
Other non-current assets
    882       364  
Total assets
  $ 122,276     $ 61,520  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities:
               
Accounts payable
  $ 2,160     $ 1,031  
Accrued expenses
    8,789       2,538  
Deferred revenue - current portion
    800       -  
Deferred rent - current portion
    21       43  
Total current liabilities
    11,770       3,612  
                 
Deferred revenue
    3,733       -  
Deferred rent
    77       44  
Warrant liabilities
    22,584       27,311  
Total liabilities
    38,164       30,967  
                 
Commitments and contingencies (note 6)
               
                 
Stockholders' equity:
               
Preferred stock, $0.001 par value; 30,000,000 shares authorized and no shares issued and outstanding
    -       -  
Common stock, $0.001 par value; 250,000,000 shares authorized; 68,451,324 and 48,466,562 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively
    68       48  
Additional paid-in capital - common stock
    244,670       131,530  
Additional paid-in capital - warrants issued
    13,722       22,789  
Deficit accumulated during the development stage
    (174,348 )     (123,814 )
Total stockholders' equity
    84,112       30,553  
Total liabilities and stockholders' equity
  $ 122,276     $ 61,520  

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 from
 
                           
September 9, 2003
 
   
For the Three Months
   
For the Nine Months
   
(date of inception)
 
   
Ended September 30, 2011
   
Ended September 30, 2011
   
through
 
   
2011
   
2010
   
2011
   
2010
   
September 30, 2011
 
                               
Research contract revenue
  $ 200     $ -     $ 467     $ -     $ 467  
                                         
Operating expenses:
                                       
Research and development, including costs of research contracts
    10,667       5,711       44,433       9,872       116,249  
General and administrative
    3,742       2,789       11,017       8,313       64,828  
Total operating expenses
    14,409       8,500       55,450       18,185       181,077  
                                         
Loss from operations
    (14,209 )     (8,500 )     (54,983 )     (18,185 )     (180,610 )
                                         
Other income, net
    19       7       26       29       4,701  
Change in fair value of warrants
    13,388       (3,712 )     4,423       (2,663 )     1,561  
Net income (loss)
  $ (802 )   $ (12,205 )   $ (50,534 )   $ (20,819 )   $ (174,348 )
                                         
Net income (loss) per share - basic
  $ (0.01 )   $ (0.26 )   $ (0.77 )   $ (0.48 )        
Net income (loss) per share - diluted
  $ (0.01 )   $ (0.26 )   $ (0.77 )   $ (0.48 )        
                                         
Weighted average common shares outstanding to compute net income (loss) per share - basic
    68,104,934       47,426,991       65,277,084       43,333,663          
                                         
Weighted average common shares outstanding to compute net income (loss) per share - diluted
    68,104,934       47,426,991       65,277,084       43,333,663          

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

 
4

 

ZIOPHARM Oncology, Inc. (a development stage company)

STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Nine Months Ended September 30, 2011
(unaudited)

    
(in thousands, except share and per share data)
 
                           
Additional
         
Deficit
       
                           
Paid-in
   
Additional
   
Accumulated
       
   
Preferred Stock
   
Common Stock
   
Capital
   
Paid-in
   
During the
   
Total
 
                           
Common
   
Capital
   
Development
   
Stockholders'
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Stock
   
Warrants
   
Stage
   
Equity
 
Balance at December 31, 2010
    -     $ -       48,466,562     $ 48     $ 131,530     $ 22,789     $ (123,814 )   $ 30,553  
                                                                 
Stock-based compensation
    -       -       -       -       1,900       -       -       1,900  
Exercise of employee stock options
    -       -       460,887       -       904       -       -       904  
Exercise of warrants to purchase common stock
    -       -       2,377,571       2       21,768       (9,067 )     -       12,703  
Issuance of restricted common stock
    -       -       75,000       -       -       -       -       -  
Repurchase of shares of common stock
    -       -       (15,190 )     -       (78 )     -       -       (78 )
Forfeiture of unvested restricted common stock
    -       -       (16,667 )     -       -       -       -       -  
Issuance of common stock in a securities offering, net of commissions and expenses of $245
    -       -       11,040,000       11       59,795       -       -       59,806  
Issuance of common stock in a collaboration agreement, net of commissions and expenses of $86
    -       -       6,063,161       7       28,851       -       -       28,858  
Net loss
    -       -       -       -       -       -       (50,534 )     (50,534 )
Balance at September 30, 2011
    -     $ -       68,451,324     $ 68     $ 244,670     $ 13,722     $ (174,348 )   $ 84,112  

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

 
5

 

ZIOPHARM Oncology, Inc. (a development stage company)

STATEMENTS OF CASH FLOWS
(unaudited)

(in thousands)
               
Period from
 
               
September 9, 2003
 
   
For the Nine Months
   
(date of inception)
 
   
Ended September 30,
   
through
 
   
2011
   
2010
   
September 30, 2011
 
Cash flows from operating activities:
                 
Net loss
  $ (50,534 )   $ (20,819 )   $ (174,348 )
Adjustments to reconcile net loss to net cash used in operating activities:
                       
Depreciation and amortization
    172       153       1,821  
Stock-based compensation
    1,900       3,198       14,441  
Change in fair value of warrants
    (4,423 )     2,663       (1,561 )
Common stock issued in exchange for in-process research and development
    17,457       -       17,457  
Loss on disposal of fixed assets
    -       -       9  
Change in operating assets and liabilities:
                       
(Increase) decrease in:
                       
Collaboration receivable
    (79 )     -       (79 )
Prepaid expenses and other current assets
    (981 )     3       (1,405 )
Other noncurrent assets
    (518 )     (67 )     (882 )
Deposits
    (4 )     (41 )     (91 )
Increase (decrease) in:
                       
Accounts payable
    1,129       (703 )     2,160  
Accrued expenses
    6,251       1,717       8,789  
Deferred revenue
    4,533       -       4,533  
Deferred rent
    12       (15 )     98  
Net cash used in operating activities
    (25,085 )     (13,911 )     (129,058 )
Cash flows from investing activities:
                       
Purchases of property and equipment
    (806 )     (128 )     (2,717 )
Proceeds from sale of property and equipment
    -       -       1  
Net cash used in investing activities
    (806 )     (128 )     (2,716 )
Cash flows from financing activities:
                       
Stockholders' capital contribution
    -       -       500  
Proceeds from exercise of stock options
    904       225       1,267  
Payments to employees for repurchase of common stock
    (78 )     (1,429 )     (2,126 )
Proceeds from exercise of warrants
    12,399       71       12,750  
Proceeds from issuance of common stock and warrants, net
    71,207       32,804       221,556  
Proceeds from issuance of preferred stock, net
    -       -       16,760  
Net cash provided by financing activities
    84,432       31,671       250,707  
Net increase (decrease) in cash and cash equivalents
    58,541       17,632       118,933  
Cash and cash equivalents, beginning of period
    60,392       48,839       -  
Cash and cash equivalents, end of period
  $ 118,933     $ 66,471     $ 118,933  
                         
Supplementary disclosure of cash flow information:
                       
Cash paid for interest
  $ -     $ -     $ -  
                         
Cash paid for income taxes
  $ -     $ -     $ -  
                         
Supplementary disclosure of noncash investing and financing activities:
                       
Warrants issued to placement agents and investors
  $ -     $ -     $ 47,276  
                         
Preferred stock conversion to common stock
  $ -     $ -     $ 16,760  
                         
Exercise of equity-classified warrants to common shares
  $ 9,067     $ 257     $ 9,324  
                         
Exercise of liability-classified warrants to common shares
  $ 303     $ 49     $ 352  
 
The accompanying notes are an integral part of the unaudited interim financial statements.

 
6

 

ZIOPHARM Oncology, Inc. (a development stage company)

NOTES TO FINANCIAL STATEMENTS
(unaudited)

1. Business

Overview

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, 2011. The Company's fiscal year ends on December 31.

The Company has operated at a loss since its inception in 2003 and has minimal revenues. The Company anticipates that losses will continue for the foreseeable future. At September 30, 2011, the Company’s accumulated deficit was approximately $174.3 million. The Company currently believes that it has sufficient capital to fund development and commercialization activities into early 2013. The Company’s ability to continue operations after its current cash resources are exhausted depends on its ability to obtain additional financing or achieve profitable operations, as to which no assurances can be given. Cash requirements may vary materially from those now planned because of changes in the Company’s focus and direction of its research and development programs, competitive and technical advances, patent developments, regulatory changes or other developments.  Additional financing will be required to continue operations after the Company exhausts its current cash resources and to continue its long-term plans for clinical trials and new product development. There can be no assurance that any such financing can be realized by the Company, or if realized, what the terms thereof may be, or that any amount that the Company is able to raise will be adequate to support the Company’s working capital requirements until it achieves profitable operations.

Basis of Presentation

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.

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, 2010 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 GAAP.

The results disclosed in the Statements of Operations for the three and nine months ended September 30, 2011 are not necessarily indicative of the results to be expected for the full fiscal year.

Use of Estimates

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.

Subsequent Events

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

 
7

 

ZIOPHARM Oncology, Inc. (a development stage company)

NOTES TO FINANCIAL STATEMENTS (unaudited)

2. Summary of Significant Accounting Policies

Other than the policy below, our significant accounting policies were identified in the Company’s Form 10-K for the fiscal year ended December 31, 2010.

Revenue Recognition

The Company receives revenue from a collaboration agreement (see Note 3). Collaboration arrangements typically include payments for one or more of the following: non-refundable, upfront license fees, funding of research and development efforts, milestone payments if specified objectives are achieved and/or profit-sharing or royalties on product sales. Arrangements containing multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the collaborative partner. The consideration received is then allocated among the separate units based on their respective fair values and the applicable revenue recognition criteria are applied to each of the separate units.
 
Revenue from non-refundable, upfront research and development fees is reported as research and development revenue and is recognized on a straight-line basis over the contracted or estimated period of performance, which is typically the development term. Research and development funding is earned over the period of effort.

Milestone payments are recognized as research and development revenue upon achievement of the milestone only if (1) the milestone payment is non-refundable, (2) substantive effort is involved in achieving the milestone and (3) the amount of the milestone is reasonable in relation to the effort expended or the risk associated with achievement of the milestone. If any of these conditions are not met, the milestone payment is deferred and recognized as revenue over the estimated remaining period of performance under the contract as the Company completes its performance obligations.

3. Collaborations and Alliances

On March 7, 2011, the Company entered into a License and Collaboration Agreement with Solasia Pharma K.K. (“Solasia”).
 
Pursuant to the License and Collaboration Agreement (the “Agreement”), the Company granted Solasia an exclusive license to develop and commercialize darinaparsin (Zinapar™ or ZIO-101) in both intravenous and oral forms and related organic arsenic molecules, in all indications for human use in a pan-Asian/Pacific territory comprised of Japan, China, Hong Kong, Macau, Republic of Korea, Taiwan, Singapore, Australia, New Zealand, Malaysia, Indonesia, Philippines and Thailand.
 
As consideration for the license, the Company received an upfront payment of $5 million to be used exclusively for further clinical development of darinaparsin outside of the pan-Asian/Pacific territory, and will be entitled to receive additional payments of up to $32.5 million in development-based milestones and up to $53.5 million in sales-based milestones. The Company will also be entitled to receive double digit royalty payments from Solasia based upon net sales of licensed products in the applicable territories, once commercialized, and a percentage of sublicense revenues generated by Solasia. 

The upfront payment for research and development funding is earned over the period of effort. The Company currently estimates this period to be 75 months, which could be adjusted in the future.
 
Under the Agreement, the Company provides Solasia with drug product to conduct clinical trials. These transfers are accounted for as a reduction of research and development costs and an increase in collaboration receivables.
 
The Agreement provides that Solasia will be responsible for the development and commercialization of darinaparsin in the pan-Asian/Pacific territory.

 
8

 

ZIOPHARM Oncology, Inc. (a development stage company)

NOTES TO FINANCIAL STATEMENTS (unaudited)

4. Fair Value Measurements
 
The Company accounts for fair value measurements of its financial assets and liabilities and 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. The accounting standard defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.  The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
 
 
·
Level 1 - Quoted prices in active markets for identical assets or liabilities.

 
·
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 
·
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets and liabilities measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010 are as follows:

($ in thousands)
 
Fair Value Measurements at Reporting Date Using
 
         
Quoted Prices in
             
         
Active Markets for
             
         
Identical
   
Significant Other
   
Significant
 
   
Balance as of
   
Assets/Liabilities
   
Observable Inputs
   
Unobservable
 
Description
 
September 30, 2011
   
(Level 1)
   
(Level 2)
   
Inputs (Level 3)
 
                         
Cash equivalents
  $ 117,641     $ 117,641     $ -     $ -  
                                 
Warrant liability
  $ 22,584     $ -     $ 22,584     $ -  

 
9

 

ZIOPHARM Oncology, Inc. (a development stage company)

NOTES TO FINANCIAL STATEMENTS (unaudited)

4. Fair Value Measurements – (continued)

($ in thousands)
 
Fair Value Measurements at Reporting Date Using
 
         
Quoted Prices in
             
         
Active Markets for
             
         
Identical
   
Significant Other
   
Significant
 
   
Balance as of
   
Assets/Liabilities
   
Observable Inputs
   
Unobservable
 
Description
 
December 31, 2010
   
(Level 1)
   
(Level 2)
   
Inputs (Level 3)
 
                         
Cash equivalents
  $ 59,219     $ 59,219     $ -     $ -  
                                 
Warrant liability
  $ 27,311     $ -     $ 27,311     $ -  

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

5. Earnings (Loss) per Share

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted earnings (loss) per share is computed using the weighted-average number of common shares outstanding during the period, plus the dilutive effect of outstanding options and warrants, using the treasury stock method and the average market price of our common stock during the applicable period.

   
For the Three Months
   
For the Nine Months
 
   
Ended September 30,
   
Ended September 30,
 
in thousands, except share and per share data
 
2011
   
2010
   
2011
   
2010
 
Basic
                       
Net income (loss)
  $ (802 )   $ (12,205 )   $ (50,534 )   $ (20,819 )
Weighted-average common shares outstanding
    68,104,934       47,426,991       65,227,084       43,333,663  
Earnings (loss) per share, basic
  $ (0.01 )   $ (0.26 )   $ (0.77 )   $ (0.48 )

 
10

 

 ZIOPHARM Oncology, Inc. (a development stage company)>

NOTES TO FINANCIAL STATEMENTS (unaudited)

5. Earnings (Loss) per Share – (continued)

Certain shares related to some of the Company's outstanding common stock options, unvested restricted stock and warrants have not been included in the computation of diluted earnings (loss) per share for the three and nine months ended September 30, 2011 and 2010 as the result would be anti-dilutive.  Such potential common shares at September 30, 2011 and 2010 consist of the following:

   
For the Three Months
   
For the Nine Months
 
   
Ended September 30,
   
Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Stock options
    4,981,398       3,528,852       4,981,398       3,528,852  
Unvested restricted common stock
    298,752       518,334       298,752       518,334  
Warrants
    13,179,885       15,924,642       13,179,885       15,924,642  
      18,460,035       19,971,828       18,460,035       19,971,828  

6. Commitments and Contingencies

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

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

As partial consideration for the license rights obtained, the Company made an upfront payment in 2004 of $125 thousand and granted the Licensors 250,487 shares of the Company’s common stock.  In addition, the Company issued options to purchase an additional 50,222 shares outside the 2003 Stock Option Plan for $0.002 per share following the successful completion of certain clinical milestones, which vested with respect to 12,555 shares upon the filing of an Investigation New Drug application (“IND”) for darinaparsin in 2005 and vested with respect to another 25,111 shares upon the completion of dosing of the last patient for both Phase 1 clinical trials in 2007. The Company recorded $120 thousand of stock-based compensation expense related to the vesting in 2007.  The remaining 12,556 shares will vest upon enrollment of the first patient in a multi-center pivotal clinical trial, i.e. a human clinical trial intended to provide the substantial evidence of efficacy necessary to support the filing of an approvable New Drug Application (“NDA”). In addition, the Licensors are entitled to receive certain milestone payments, including $100 thousand that was paid in 2005 upon the commencement of the Phase 1 clinical trial and $250 thousand that was paid in 2006 upon the dosing of the first patient in the ZIOPHARM-sponsored Phase 2 clinical trial for darinaparsin. The Company may be required to make additional payments upon achievement of certain other milestones in varying amounts that, on a cumulative basis, could total up to an additional $4.5 million. In addition, the Licensors are entitled to receive single digit percentage royalty payments on sales from a licensed product and will also be entitled to receive a portion of any fees that the Company may receive from a possible sublicense under certain circumstances. In addition, the Company also paid the Licensors $100 thousand in 2006 and 2007 to conduct scientific research with the Company obtaining exclusive right to all resulting intellectual property rights. The sponsored research agreements governing this research and any related extensions expired in February 2008 with no payments being made subsequent to that date.

The license agreement also contains other provisions customary and common in similar agreements within the industry, such as the right to sublicense the Company rights under the agreement. However, if the Company sublicenses its rights prior to the commencement of a pivotal study, i.e. a human clinical trial intended to provide the substantial evidence of efficacy necessary to support the filing of an approvable NDA, the Licensors will be entitled to receive a share of the payments received by the Company in exchange for the sublicense (subject to certain exceptions). The term of the license agreement extends until the expiration of all claims under patents and patent applications associated with the licensed technology, subject to earlier termination in the event of a default by the Company or the Licensors under the license agreement, or if the Company becomes bankrupt or insolvent. No milestones under the license agreement were reached or expensed during the years ended December 31, 2008, 2009 or 2010 or during the nine months ended September 30, 2011.

 
11

 

ZIOPHARM Oncology, Inc. (a development stage company)

NOTES TO FINANCIAL STATEMENTS (unaudited)

6. Commitments and Contingencies – (continued)

License Agreement with DEKK-Tec, Inc.

On October 15, 2004, the Company entered into a license agreement with DEKK-Tec, Inc. (“DEKK-Tec”), pursuant to which it was granted an exclusive, worldwide license for palifosfamide. As part of the signing of license agreement with DEKK-Tec, the Company expensed an upfront $50 thousand payment to DEKK-Tec in 2004.

In consideration for the license rights, DEKK-Tec is entitled to receive payments upon achieving certain milestones in varying amounts that, on a cumulative basis, may total $4.0 million.  Of the aggregate milestone payments, most will be creditable against future royalty payments as referenced below. The Company expensed a $100 thousand milestone payment upon achieving Phase 2 milestones during the year ended December 31, 2006.  Additionally, in 2004 the Company issued DEKK-Tec an option to purchase 27,616 shares of the Company’s common stock for $0.02 per share. Upon the execution of the license agreement, 6,904 shares vested and were subsequently exercised in 2005. The remaining options will vest upon certain milestone events, culminating with final U.S. Food and Drug Administration (“FDA”) approval of the first NDA submitted by the Company (or by its sublicensee) for palifosfamide.  DEKK-Tec is entitled to receive single digit percentage royalty payments on the sales of palifosfamide should it be approved for commercial sale.  On March 16, 2010, the Company expensed a $100 thousand milestone payment upon receiving a U.S. Patent for palifosfamide.  There were no payments made during 2009.  In December 2010, the Company expensed a $300 thousand milestone payment and 6,904 stock options became vested upon achieving Phase 3 milestones. The Company’s obligation to pay royalties will terminate on a country-by-country basis upon the expiration of all valid claims of patents in such country covering licensed product, subject to earlier termination in the event of a default by a party under the license agreement.  No milestones under the license agreement were reached or expensed during the nine months ended September 30, 2011.

Option Agreement with Southern Research Institute

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

Also on December 22, 2004, the Company entered into a Research Agreement with SRI pursuant to which the Company agreed to spend a sum not to exceed $200 thousand between the execution of the agreement and December 21, 2006, including a $25 thousand payment that was made simultaneously with the execution of the agreement, to fund research and development work by SRI in the field of isophosphoramide mustard analogs.  The Option Agreement was exercised on February 13, 2007.  Under the license agreement entered into upon exercise of the option, the Company is required to remit minimum annual royalty payments of $25 thousand until the first commercial sale of a licensed product.  These payments were made for the years ended December 31, 2008 and 2009 and 2010.  The Company may be required to make payments upon achievement of certain milestones in varying amounts which on a cumulative basis could total up to $775 thousand. In addition, SRI will be entitled to receive single digit percentage royalty payments on the sales of a licensed product in any country until all licensed patents rights in that country which are utilized in the product have expired.  No milestones under the license agreement were reached or expensed during the years ended December 31, 2008, 2009 or 2010 or during the nine months ended September 30, 2011.

 
12

 

ZIOPHARM Oncology, Inc. (a development stage company)

NOTES TO FINANCIAL STATEMENTS (unaudited)

6. Commitments and Contingencies – (continued)

License Agreement with Baxter Healthcare Corporation

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

In October 2009, the License Agreement was amended to allow the Company to manufacturer indibulin.  No milestones under the license agreement were reached or expensed during the years ended December 31, 2008, 2009 or 2010 or during the nine months ended September 30, 2011.

Exclusive Channel Partner Agreement with Intrexon Corporation

On January 6, 2011, the Company entered into an Exclusive Channel Partner Agreement (the “Channel Agreement”) with Intrexon Corporation (“Intrexon”) that governs a “channel partnering” arrangement in which the Company uses Intrexon’s technology directed towards in vivo expression of effectors in connection with the development of ZIN-CTI-001 and ZIN-ATI-001 and generally to research, develop and commercialize products, in each case in which DNA is administered to humans for expression of anti-cancer effectors for the purpose of treatment or prophylaxis of cancer (collectively, the “Cancer Program”). The Channel Agreement establishes committees comprised of the Company and Intrexon representatives that govern activities related to the Cancer Program in the areas of project establishment, chemistry, manufacturing and controls, clinical and regulatory matters, commercialization efforts and intellectual property.

The Channel Agreement grants the Company a worldwide license to use patents and other intellectual property of Intrexon in connection with the research, development, use, importing, manufacture, sale, and offer for sale of products involving DNA administered to humans for expression of anti-cancer effectors for the purpose of treatment or prophylaxis of cancer (“ZIOPHARM Products”). Such license is exclusive with respect to any clinical development, selling, offering for sale or other commercialization of ZIOPHARM Products, and otherwise is non-exclusive. Subject to limited exceptions, the Company may not sublicense the rights described without Intrexon’s written consent.

Under the Channel Agreement, and subject to certain exceptions, the Company is responsible for, among other things, the performance of the Cancer Program including development, commercialization and certain aspects of manufacturing of ZIOPHARM Products. Intrexon is responsible for the costs of establishing manufacturing capabilities and facilities for the bulk manufacture of products developed under the Cancer Program, certain other aspects of manufacturing and costs of discovery-stage research with respect to platform improvements and costs of filing, prosecution and maintenance of Intrexon’s patents.

Subject to certain expense allocations and other offsets provided in the Channel Agreement, the Company will pay Intrexon on a quarterly basis 50% of net profits derived in that quarter from the sale of ZIOPHARM Products, calculated on a ZIOPHARM Product-by-ZIOPHARM Product basis. The Company has likewise agreed to pay Intrexon on a quarterly basis 50% of revenue obtained in that quarter from a sublicensor in the event of a sublicensing arrangement. In addition, in partial consideration for each party’s execution and delivery of the Channel Agreement, the Company entered into a Stock Purchase Agreement with Intrexon.  (See Note 8)

 
13

 

ZIOPHARM Oncology, Inc. (a development stage company)

NOTES TO FINANCIAL STATEMENTS (unaudited)

During the first 24 months of the agreement, either the Company or Intrexon may terminate the Channel Agreement in the event of a material breach by the other and Intrexon may terminate the Channel Agreement under certain circumstances if the Company assigns its rights under the Channel Agreement without Intrexon’s consent. Following the first 24 months of the agreement, Intrexon may also terminate the Channel Agreement if the Company fails to use diligent efforts to develop and commercialize ZIOPHARM Products or if the Company elects not to pursue the development of a Cancer Program identified by Intrexon that is a “Superior Therapy” as defined in the Channel Agreement. Also following the first 24 months of the agreement, the Company may voluntarily terminate the Channel Agreement upon 90 days written notice to Intrexon.

Upon termination of the Channel Agreement, the Company may continue to develop and commercialize any ZIOPHARM Product that, at the time of termination:

 
is being commercialized by the Company;
 
has received regulatory approval;
 
is a subject of an application for regulatory approval that is pending before the applicable regulatory authority; or
 
is the subject of at least an ongoing Phase 2 clinical trial (in the case of a termination by Intrexon due to a ZIOPHARM uncured breach or a voluntary termination by the Company), or an ongoing Phase 1 clinical trial in the Field (in the case of a termination by the Company due to an Intrexon uncured breach or a termination by Intrexon following an unconsented assignment by the Company or the Company’s election not to pursue development of a Superior Therapy).

The Company’s obligation to pay 50% of net profits or revenue described above with respect to these “retained” products will survive termination of the Channel Agreement.

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 European Medicines Agency or another regulatory agency for the marketing of the Specified Drug, a 1% royalty of the Company’s net sales will be awarded to Harmon Hill.  If the Specified Drug is sublicensed to a third party, the agreement entitles Harmon Hill to 1% award of royalties or other payments received from a sublicense.  Subject to renewal or extension by the parties, the term of the agreement was for a one year period that expired April 8, 2009.  Following such expiration, the parties continued to operate under the terms of the agreement and, during 2010, the agreement was formally extended through April 8, 2011 and again through April 8, 2012.  The Company expensed $240 thousand during the years ended December 31, 2009 and 2010 and $180 thousand for the nine months ended September 30, 2011 for consulting services per the aforementioned agreement.  No milestones under the collaboration agreement were reached or expensed during the years ended December 31, 2008, 2009 or 2010 or during the nine months ended September 30, 2011.

CRO Services Agreement with PPD Development, L. P.

The Company and PPD Development, L.P. ("PPD") are parties to a master clinical research organization services agreement dated January 29, 2010 and a related work order dated June 25, 2010 under which PPD provides clinical research organization ("CRO") services in support of the Company's clinical trials. PPD is entitled to cumulative payments of up to $21.5 million under these arrangements, which is payable by the Company in varying amounts upon PPD achieving specified milestones.  During the year ended December 31, 2010, the Company expensed $1.8 million upon contract execution and $1.1 million upon a clinical study commencement of enrollment in North America.  During the nine months ended September 30, 2011, additional milestones related to commencing enrollment in Europe, Latin America and Asia along with enrollment based milestones were met and the Company recorded an aggregate $3.1 million expense.

 
14

 

ZIOPHARM Oncology, Inc. (a development stage company)

NOTES TO FINANCIAL STATEMENTS (unaudited)

7. Warrants

The Company has issued both warrants that are accounted for as liabilities and warrants that are accounted for as equity instruments.  The number of warrants outstanding at September 30, 2011 and December 31, 2010 were as follows:

   
September 30,
   
December 31,
 
   
2011
   
2010
 
             
Liability-classified warrants
    8,424,905       8,590,456  
Equity-classified warrants
    4,754,980       7,321,686  
                 
Total warrants
    13,179,885       15,912,142  

Liability-Classified Warrants

In May 2005, the Company issued 419,786 warrants to placement agents for services performed in connection with a 2005 private placement (the “2005 Warrants”), 11,083 of which were subsequently exercised.  The remaining 408,703 warrants were originally valued at $1.6 million.  Subject to certain exceptions, the 2005 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 2005 Warrants then in effect, which was initially $4.75 per share.  This provision was triggered when the Company sold stock in a 2006 private placement at $4.63 per share.  Accordingly, the 2005 Warrants were re-priced at $4.69.  The provision was triggered a second time upon completion of a 2009 private placement in which the Company sold stock at $1.825 per share and issued common stock purchase warrants with an exercise price of $2.04,  and the 2005 Warrants were re-priced at $4.25.  The provision was triggered again when the Company sold stock in a December 2009 public offering at $3.10 per share and the 2005 Warrants were re-priced at $3.93.

Also, in connection with its December 2009 public securities offering, the Company issued warrants to purchase an aggregate of 8,206,520 shares of common stock (including the investor warrants and 464,520 warrants issued to the underwriters for the offering) (the “2009 Warrants”).  The 2009 Warrants issued to investors were exercisable immediately and the warrants issued to underwriters became exercisable six months after the date of issuance. The 2009 Warrants have an exercise price of $4.02 per share and have a five year term. The fair value of the 2009 Warrants was estimated at $22.9 million using a Black-Scholes model with the following assumptions: expected volatility of 105%, risk free interest rate of 2.14%, expected life of five years and no dividends.

The Company assessed whether the 2005 Warrants and the 2009 Warrants require accounting as derivatives.  The Company determined that these warrants were not indexed to the Company’s own stock in accordance with accounting standards codification Topic 815, Derivatives and Hedging.  As such, the Company has concluded these warrants did not meet the scope exception for determining whether the instruments require accounting as derivatives and were classified as liabilities.

The change in the fair value of the warrant liability resulted in a gain of $13.4 million and $4.4 million for the three and nine months ended September 30, 2011, respectively.  The change in the fair value of the warrant liability resulted in losses of $3.7 million and $2.7 million for the three and nine months ended September 30, 2010, respectively.  The change in the fair value of the warrant liability was charged to other income (expense) in the Statements of Operations.  The following assumptions were used in the Black-Scholes valuation model at September 30, 2011 and 2010:

   
September 30,
 
   
2011
   
2010
 
             
Risk-free interest rate
    0.08 - 0.47 %     0.37 - 1.01 %
Expected life in years
    0.67 - 3.18       1.67 - 4.18  
Expected volatility
    48.9 - 95.5 %     94.9 - 101.5 %
Expected dividend yield
    0       0  

 
15

 

ZIOPHARM Oncology, Inc. (a development stage company)

NOTES TO FINANCIAL STATEMENTS (unaudited)

7. Warrants – (continued)

During the first nine months of 2011, warrant exercises were as follows:

               
Common
   
Liability
       
   
Equity
   
Liability
   
Stock
   
Reclassed
   
Cash
 
in thousands, except share data
 
Warrants
   
Warrants
   
Issued
   
to Equity
   
Received
 
Cash exercises
    2,311,585       -       2,311,585           $ 12,399  
Cashless exercises
    39,832       165,551       65,986     $ 303       -  
      2,351,417       165,551       2,377,571     $ 303     $ 12,399  

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

               
Common
       
   
Equity
   
Liability
   
Stock
   
Cash
 
in thousands, except share data
 
Warrants
   
Warrants
   
Issued
   
Received
 
Cash exercises
    3,292       16,000       19,292     $ 71  
Cashless exercises
    67,446       8,767       19,933       -  
      70,738       24,767       39,225     $ 71  

8. Common Stock

On January 6, 2011, and in conjunction with the Company’s execution and delivery of the Channel Agreement with Intrexon, the Company entered into a Stock Purchase Agreement and Registration Rights Agreement with Intrexon. On January 12, 2011, and pursuant to that Stock Purchase Agreement, Intrexon purchased 2,426,235 shares of the Company’s common stock in a private placement for a total purchase price of $11,645,928, or $4.80 per share. The Company simultaneously issued to Intrexon an additional 3,636,926 shares of its common stock for a cash purchase price equal to the $0.001 par value of such shares, which price was deemed paid in partial consideration for the execution and delivery of the Channel Agreement.  This resulted in a non-cash expense of approximately $17.5 million for the in process research and development.  Under the terms of the Stock Purchase Agreement, the Company agreed to issue to Intrexon an additional 3,636,926 shares of its common stock under certain conditions upon dosing of the first patient in a ZIOPHARM-conducted Phase 2 clinical trial in the Unites States, or similar study as the parties may agree in a country other than the United States, of a product candidate that is created, produced, developed or identified directly or indirectly by us during the term of the Channel Agreement and that, subject to certain exceptions, involves DNA administered to humans for expression of anti-cancer effectors for the purpose of treatment or prophylaxis of cancer. If issued, the purchase price for such shares will be equal to the $0.001 par value of such shares, which price will be deemed paid in partial consideration for the execution and delivery of the Channel Agreement.  Pursuant to the Registration Rights Agreement, the Company has agreed to file a registration statement with the SEC registering the resale of the shares that we have issued or may issue to Intrexon under the Stock Purchase Agreement.

 
16

 

ZIOPHARM Oncology, Inc. (a development stage company)

NOTES TO FINANCIAL STATEMENTS (unaudited)

8. Common Stock – (continued)

Also under the Stock Purchase Agreement, if requested by the Company and subject to certain conditions, restrictions and limitations, Intrexon has agreed to purchase the Company’s securities in conjunction with ‘‘qualified’’ securities offerings that are conducted by the Company while the Channel Agreement remains in effect. In conjunction with a qualified offering, Intrexon has committed to purchase up to 19.99% of the securities offered and sold therein (exclusive of Intrexon’s purchase) if requested to do so by the Company. Intrexon will not be obligated to purchase securities in a ‘‘qualified’’ securities offering unless the Company is then in substantial compliance with its obligations under the Channel Agreement and, with respect to a ‘‘qualified’’ offering that is completed following January 6, 2012, the Company confirms its intent that 40% of the offering’s net proceeds shall have been spent, or in the next year will be spent, by the Company under the Channel Agreement. In the case of a ‘‘qualified’’ offering that is completed after January 6, 2012, Intrexon’s purchase commitment will be further limited to an amount equal to one-half of the proceeds spent or to be spent by the Company under the Channel Agreement. Intrexon’s aggregate purchase commitment for all future qualified offerings is capped at $50.0 million. The Company and Intrexon subsequently amended the Stock Purchase Agreement to clarify that gross proceeds from the sale of Company securities to Intrexon in a qualified offering will apply against Intrexon’s $50.0 million purchase commitment regardless of whether Intrexon participates voluntarily or at the request of the Company. As a result of Intrexon’s purchase of securities in our February 2011 public offering (see below), the remaining maximum amount of Intrexon’s equity purchase commitment is approximately $39.0 million.

On February 3, 2011, the Company entered into an underwriting agreement with Barclays Capital Inc. (“Barclays”) relating to the issuance and sale of 9,600,000 shares of the Company’s common stock in a public offering.  The price to the public in the offering was $5.75 per share, and Barclays, as the sole underwriter for the offering, agreed to purchase the shares from the Company pursuant to the underwriting agreement at a purchase price of $5.425 per share. Under the terms of the underwriting agreement, the Company also granted Barclays an option, exercisable for 30 days, to purchase up to an additional 1,440,000 shares of the Company’s common stock at a purchase price of $5.425 per share.  On February 8, 2011, the transactions contemplated by the underwriting agreement were completed. In connection with the closing, Barclays exercised in full its option to purchase the additional 1,440,000 shares, resulting in the Company issuing a total of 11,040,000 shares at the closing. The net proceeds from the offering were approximately $59.4 million after deducting underwriting discounts and offering expenses.

9. Stock-Based Compensation

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

   
For the three months
   
For the nine months
 
   
ended September 30,
   
ended September 30,
 
(in thousands)
 
2011
   
2010
   
2011
   
2010
 
                         
Research and development, including costs of research contracts
  $ 264     $ 199     $ 540     $ 613  
General and administrative
    322       824       1,360       2,585  
Stock-based employee compensation expense
  $ 586     $ 1,023     $ 1,900     $ 3,198  

The Company granted 509 thousand and 1.6 million stock options during the three and nine months ended September 30, 2011 that had a weighted-average grant date fair value of $3.88 and $4.18 per share, respectively.  During the three and nine months ended September 30, 2010, the Company granted 42 thousand and 197 thousand stock options that had a weighted-average grant date fair value of $2.66  and $3.42 per share, respectively.

At September 30, 2011, total unrecognized compensation costs related to unvested stock options outstanding amounted to $7.1 million. The cost is expected to be recognized over a weighted-average period of 1.77 years.

 
17

 

ZIOPHARM Oncology, Inc. (a development stage company)

NOTES TO FINANCIAL STATEMENTS (unaudited)

9. Stock-Based Compensation – (continued)

For the nine months ended September 30, 2011 and 2010, 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,
 
   
2011
   
2010
 
Risk-free interest rate
    1.12 -2.61 %     1.28 - 2.75 %
Expected life in years
    5.77 - 6       5  
Expected volatility
    83.26 - 87.4 %     89.2 - 90.6 %
Expected dividend yield
    0       0  

Stock option activity under the Company’s stock option plan for the nine months ended September 30, 2011 is as follows:

               
Weighted-
       
         
Weighted-
   
Average
       
(in thousands, except share and per
 
Number of
   
Average Exercise
   
Contractual
   
Aggregate
 
share data)
 
Shares
   
Price
   
Term (Years)
   
Intrinsic Value
 
                         
Outstanding, December 31, 2010
    4,566,935     $ 3.39              
                             
Granted
    1,573,100       5.83              
Exercised
    460,887       1.96              
Cancelled
    697,750       4.91              
                             
Outstanding, September 30, 2011
    4,981,398     $ 4.08       7.22     $ 4,485  
                                 
Options exercisable, September 30, 2011
    2,619,880     $ 3.17       5.31     $ 4,002  
                                 
Options available for future grant
    1,141,718                          

A summary of the status of unvested restricted stock for the nine months ended September 30, 2011 is as follows:

         
Weighted-Average
 
   
Number of Shares
   
Grant Date Fair Value
 
Non-vested, December 31, 2010
    348,753     $ 3.32  
Granted
    75,000       5.66  
Vested
    108,334       4.36  
Cancelled
    16,667       2.85  
                 
Non-vested, September 30, 2011
    298,752     $ 2.57  

At September 30, 2011, total unrecognized compensation costs related to unvested restricted stock outstanding amounted to $688 thousand. The cost is expected to be recognized over a weighted-average period of 1.47 years.

 
18

 

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 portfolio of in-licensed cancer drugs that can address unmet medical needs. Our principal focus has been on the licensing and development of proprietary small molecule drug candidates that are related to cancer therapeutics already on the market or in development and that can be administered by intravenous (“IV”) and/or oral dosing.  Our clinical programs for our small molecule candidates include palifosfamide (ZymafosTM or ZIO-201), darinaparsin (ZinaparTM or ZIO-101) and indibulin (ZybulinTM or ZIO-301). We are also pursuing the development of novel DNA-based biotherapeutics in the field of cancer pursuant to a partnering arrangement with Intrexon Corporation (“Intrexon”). Under the arrangement, we obtained rights to Intrexon’s effector platform for use in the field of oncology, which includes two existing clinical stage product candidates, ZIN-CTI-001 (or DC-RTS-IL-12 + AL) and ZIN-ATI-001 (or Ad-RTS-IL-12 + AL). We plan to leverage Intrexon’s synthetic biology platform to develop products to stimulate key pathways used by the body’s immune system to inhibit the growth and metastasis of cancers, adding significantly to our small molecule drug development portfolio utilizing our global capabilities to translate science to the patient setting.  Descriptions of our current clinical development plans for palifosfamide, darinaparsin, indibulin, ZIN-CTI-001 and ZIN-ATI-001 are set forth below.  More detailed descriptions of these product candidates and our clinical development plans for each are also set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 and in other reports that we file from time to time with the Securities and Exchange Commission.

We believe that our strategy will result in expedited drug development programs for product candidates with a cost of manufacturing that, upon successful commercialization, would help to address changing worldwide product reimbursement requirements.  We are currently in Phase 1, 2, and/or Phase 3 studies for our product candidates with a particular emphasis on completing a global palifosfamide pivotal Phase 3 trial to support registration in combination with doxorubicin in the front-line setting of metastatic soft tissue sarcoma.

 
19

 

Product Candidates
 
ZIO-101, Darinaparsin, ZinaparTM

Darinaparsin is a novel mitochondrial-targeted agent (organic arsenic) in development with IV and oral administrations. Phase 1 testing of the IV form of darinaparsin in solid tumors and hematological cancers was completed and we reported clinical activity and, importantly, a safety profile from these studies as predicted by preclinical results. We subsequently completed Phase 2 studies in advanced myeloma, primary liver cancer and in certain other hematological cancers. At the May 2009 annual meeting of the American Society of Clinical Oncology (“ASCO”), we reported favorable results from the trial with IV-administered darinaparsin in lymphoma, particularly peripheral T-cell lymphoma (“PTCL”).  With focus on the relapsed setting, a Phase 1 study of darinaparsin in combination with the treatment regimen called “CHOP” in the front-line setting of PTCL was ended.  A Phase 1 trial with an oral form of darinaparsin is currently in progress in a solid tumor Phase I study. Data from the completion of this study will guide further study in solid tumors and/or PTCL. We have obtained Orphan Drug Designation for darinaparsin in the United States and Europe for the treatment of PTCL.

ZIO-201, Palifosfamide, ZymafosTM

Palifosfamide is a novel DNA cross-linker (stabilized active metabolite of ifosfamide) in class with bendemustine, ifosfamide, and cyclophosphamide and currently in development with IV administration (oral in late preclinical). Following Phase 1 study, we completed Phase 2 testing of the IV form of palifosfamide as a single agent to treat advanced sarcoma.  In both Phase 1 and Phase 2 testing, palifosfamide has been administered without the “uroprotectant” mesna, as is required with ifosfamide, and the toxicities associated with other ifosfamide metabolites, acrolein and chloroacetaldehyde, have not been observed. We reported clinical activity of palifosfamide when used alone in the Phase 2 study addressing advanced sarcoma. Following review of preclinical combination studies, we initiated a Phase 1 dose escalation study of palifosfamide in combination with doxorubicin, primarily in patients with soft tissue sarcoma. We reported favorable results and safety profile from this study at ASCO’s 2009 annual meeting. In light of reported favorable Phase 2 single agent clinical activity data and with the combination being well tolerated in the Phase 1 trial, we initiated a Phase 2 randomized controlled trial (“PICASSO”) in the second half of 2008 to compare doxorubicin plus palifosfamide to doxorubicin alone in patients with front- and second-line metastatic or unresectable soft tissue sarcoma. The study generated positive top line interim data in 2009. Upon successfully reaching a pre-specified efficacy milestone and following safety and efficacy data review by the Data Committee, sarcoma experts, and our Medical Advisory Board, we elected to suspend enrollment in the trial in October 2009. We subsequently presented further positive interim data from the trial at the 15th Annual Connective Tissue Oncology Society meeting held in November 2009 and again at the 2010 ASCO annual meeting in June 2010, where the presentation was selected for “Best of ASCO.” In July 2010, we announced the initiation of a worldwide registration trial on a protocol design developed through a FDA End-of- Phase 2 meeting and the Special Protocol Assessment (“SPA”) process. Although we did engage in the SPA process, we, with guidance from the FDA, elected to initiate the trial without having obtained SPA agreement from the FDA. The Phase 3 trial is in front-line metastatic soft tissue sarcoma, entitled PICASSO 3, and is an international, randomized, double-blinded, placebo-controlled trial with a targeted enrollment of 424 patients. The study is designed to evaluate the safety and efficacy of palifosfamide administered with doxorubicin compared with doxorubicin administered with placebo, with no cross-over between the arms. Progression-free survival is the primary endpoint for accelerated approval, with overall survival as the primary endpoint for full approval. PICASSO 3 has no interim data analysis, although the trial is monitored by a Data Monitoring Committee (DMC) of outside, independent expects. The DMC has met twice to review trial data for safety and futility and on both occasions has recommended trial continuation. Orphan Drug Designation for palifosfamide has been obtained in both the United States and the European Union for the treatment of soft tissue sarcomas.

A Phase 1 trial is also ongoing with palifosfamide in combination with etoposide and carboplatin to determine appropriate safety for initiating a potentially pivotal, adaptive trial in front-line small-cell lung cancer (“SCLC”).  An oral form of palifosfamide has been the subject of preclinical studies necessary for an Investigational New Drug ("IND") application to support commencing Phase 1 study. Based on an initial review, the FDA has requested that we repeat an animal study, that is currently underway, in order to support the planned Phase 1 protocol. 

 
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ZIO-301, Indibulin, ZybulinTM

Indibulin is a novel orally administered tubulin binding agent.  Phase 1 study as a single agent in patients with advanced solid tumors has been completed.  We have reported clinical activity at well-tolerated doses using a continuous dosing scheme without the development of clinically relevant peripheral neuropathy.  Following encouraging preclinical results obtained with indibulin in combination with other chemotherapies, two Phase 1 combination studies were initiated with TarcevaTM and XelodaTM, respectively. The favorable activity and safety profile of oral indibulin with oral XelodaTM was reported at ASCO’s annual meeting in May 2009.  In all studies, a maximum tolerated dose (“MTD”) was not established.  Preclinical work with our consultant, Dr. Larry Norton, established a dosing schedule to enhance activity and reduce toxicity, which is presently five days on drug and nine days off in a Phase 1 study in late stage metastatic breast cancer.  In light of the lack of establishing an MTD and the need to administer many capsules several times a day, we have recently modified the dosage form to administer once a day dosing in the Phase 1 trial.

ZIN-CTI-001 (or DC-RTS-IL-12 + AL) and ZIN-ATI-001 (or Ad-RTS-IL-12 + AL)

We are also pursuing the development of novel DNA-based therapeutics in the field of cancer pursuant to an exclusive channel partnership with Intrexon. The partnership includes two existing clinical-stage product candidates. ZIN-CTI-001 is in a Phase 1b trial in the United States and employs intratumoral injection of modified dendritic cells from each patient and oral dosing of an activator ligand to turn on in vivo expression of interleukin-12 (“IL-12”).  ZIN-CTI-001 uses a RheoSwitch Therapeutic System® (“RTS”) to control the timing and level of transgene expression for gene and cell therapy. The RTS technology functions as a “gene switch” for the regulated expression of human IL-12 in the patients’ dendritic cells, which are transduced with a replication deficient adenoviral vector carrying the IL-12 gene under the control of the RTS and in this study injected intratumorally for the treatment of patients with stage III or IV melanoma. The binding of the small molecule activator to the fusion proteins of RTS is intended to regulate the timing and level of IL-12 expression. In the absence of the activator ligand, the level of IL-12 is below detectable levels.

The activator ligand has been the subject of a number of preclinical, safety and pharmacology studies under FDA and International Conference on Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use (“ICH”) guidelines. Preclinical studies in the B16 mouse melanoma model consistently induced regression of established melanoma lesions, both in those directly injected and those elsewhere in the body. Preclinical studies have shown DC-RTS-IL-12, in combination with an activator ligand, to have strong activity against a broad array of cancers, including brain, colon, renal, and pancreatic cancers and melanoma.

A Phase 1a clinical study of the activator ligand was conducted in 65 healthy volunteers, with the two most common side effects being dysgeusia (impairment of taste) and throat irritation. A subsequent Phase 1b trial, which is ongoing in patients with advanced melanoma, has been amended to study efficacy and immunological and biological effects in addition to safety with cohort-based dose escalation of the activator ligand during repeated treatment cycles.  Initial positive clinical results from the Phase 1b trial were presented at the June 2011 ASCO annual meeting. The trial enrolled ten patients (median age 61) with unresectable Stage III or IV melanoma. Among eight evaluable patients, partial or complete regression of injected and some uninjected lesions was observed by computed axial tomography (“CT”) scans in three patients, with one patient having a RECIST PR of >11 months and three patients demonstrating stable disease by RECIST, for an overall disease control rate of 50%. Treatment was generally well tolerated, and maximum tolerated dose has not yet been reached. Adverse events were mild to moderate, with one to two patients each experiencing nausea, vomiting, anorexia, arthralgia, fever or chills. One severe adverse event was reported 18 hours after treatment onset with 60 mg AL + ZIN-CTI-001, and included diarrhea, followed by hypotension and reversible acute renal failure, which completely resolved.

The FDA has recently accepted our IND application to begin clinical study of ZIN-ATI-001 in oncology and patient enrollment is underway.  The Phase 1 study will evaluate safety in addition to immunological and biological effects of the therapeutic candidate in patients with melanoma.

We intend to evaluate both ZIN-CTI-001 and ZIN-ATI-001 with the intent either to further develop both candidates or to select one of the two candidates for further study. ZIN-ATI-001 is identical to ZIN- CTI-001 except that the autologous dendritic cell component is omitted.  Both product candidates are targeted for further development in different indications.

 
21

 

Development Plans

We are currently pursuing several clinical programs, which include:

 
palifosfamide (ZymafosTM or ZIO-201) – completing our Phase 3 pivotal trial in front-line metastatic soft tissue sarcoma, entitled PICASSO 3, and completing our recently initiated Phase 1 trial with palifosfamide in combination with etoposide and carboplatin to determine appropriate safety for initiating a subsequent randomized trial in front-line small-cell lung cancer.

 
darinaparsin (ZinaparTM or ZIO-101) –completing an ongoing Phase 1 study with an oral form.

 
indibulin (ZybulinTM or ZIO-301) – entering the Phase 2 portion of the Phase 1/2 trial having established the MTD in Phase 1 with once daily dosing.

 
ZIN-CTI-001 - completing a Phase 1b trial in patients with advanced melanoma in that is on-going in the U.S.

 
ZIN-ATI-001 – completing the Phase 1 trial treatment of patients with late-stage malignant melanoma that is the subject of an IND application recently accepted by FDA.

We are also in late preclinical evaluation with respect to several additional potential product candidates under our channel partnership with Intrexon, and we anticipate continuing evaluation to select product candidates for clinical study, which could commence as early as 2012.  We also anticipate continuing discovery efforts aimed at identifying additional potential product candidates under the Intrexon channel partnership for study thereafter.

Our current plans involve using internal financial resources to develop palifosfamide and pursue the clinical work outlined above, with the intention of ultimately partnering or otherwise raising additional resources to support further development activities for all of our product candidates.  Based on these plans, we expect to incur the following expenses during the next twelve months: approximately $83.5 million on research and development expenses and approximately $16.3 million on general corporate and administrative expenses. This forecast of expenses is forward-looking information that involves risks and uncertainties, and the actual amount of our expenses over the next twelve months could vary materially and adversely as a result of a number of factors, including the factors discussed in the ‘‘Risk Factors’’ section of this report and the uncertainties applicable to our forecast for the overall sufficiency of our capital resources, which are discussed under “Liquidity and Capital Resources” below. We have based our estimates on assumptions that may prove to be wrong, and our expenses could prove to be significantly higher than we currently anticipate.

Furthermore, 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 product candidates in any market and, therefore, have not generated any revenues from our product candidates.

 
22

 

Financial Overview

Overview of Results of Operations

Three and nine months ended September 30, 2011 compared to three and nine months ended September 30, 2010

Revenue.>  Revenue during the three and nine months ended September 30, 2011 and 2010 were as follows:

   
Three months ended
               
Nine months ended
             
   
September 30,
               
September 30,
             
   
2011
   
2010
   
Change
   
2011
   
2010
   
Change
 
($ in thousands)
                                               
                                                 
Collaboration revenue
  $ 200     $ -     $ 200       100 %   $ 467     $ -     $ 467       100 %

Revenue for the three months ended September 30, 2011 increased by $200 thousand from the three months ended September 30, 2010.  The increase was due to a collaboration agreement from which the Company received funds in order to further the research and development of darinaparsin.  The Company is recognizing the research and development funding revenue over the estimated period of performance (75 months).

Revenue for the nine months ended September 30, 2011 increased by $467 thousand from the nine months ended September 30, 2010.  The increase was due to a collaboration agreement from which the Company received funds in order to further the research and development of darinaparsin.  The Company is recognizing the research and development funding revenue over the estimated period of performance (75 months).

Research and development expenses.>  Research and development expenses during the three and nine months ended September 30, 2011 and 2010 were as follows:

   
Three months ended
               
Nine months ended
             
   
September 30,
               
September 30,
             
   
2011
   
2010
   
Change
   
2011
   
2010
   
Change
 
($ in thousands)
                                               
                                                 
Research and development
  $ 10,667     $ 5,711     $ 4,956       87 %   $ 44,433     $ 9,872     $ 34,561       350 %

Research and development expenses for the three months ended September 30, 2011 increased by $5.0 million from the three months ended September 30, 2010.  The increase was primarily due to increased clinical costs of $1.1 million related to the Phase 3 palifosfamide study, clinical costs of $781 thousand related to DNA based therapeutics projects, other clinical costs of $320 thousand, preclinical costs of $486 thousand, salary and employee-related costs of $1.7 million resulting from additional headcount and  increased manufacturing activity of $569  thousand to replenish drug supplies.

Research and development expenses for the nine months ended September 30, 2011 increased by $34.6 million from the nine months ended September 30, 2010.  The increase was primarily due to a one-time $17.5 million non-cash expense related to our channel partnership arrangement with Intrexon, including our associated license of Intrexon technology, along with increased clinical costs of $7.2 million related to the Phase 3 palifosfamide study, clinical costs of $2.9 million related to DNA based therapeutics projects, preclinical costs of $622 thousand, manufacturing activity of $2.4 million to replenish drug supplies, salary and employee-related costs of $3.8 million resulting from additional headcount and other costs of $178 thousand.

Exclusive of the one-time $17.5 million non-cash expense related to our channel partnership arrangement with Intrexon, we expect our research and development expenses to increase, as compared to prior periods, as we continue our pivotal Phase 3 palifosfamide and other studies for palifosfamide, darinaparsin, indibulin and DNA therapeutics.

 
23

 

Our research and development expense consists primarily of salaries and related expenses for personnel, costs of contract manufacturing services, costs of facilities and equipment, fees paid to professional service providers in conjunction with our clinical trials, fees paid to research organizations in conjunction with pre-clinical animal studies, costs of materials used in research and development, consulting, license and milestone payments and sponsored research fees paid to third parties. During the nine months ended September 30, 2011, we also incurred a non-cash expense upon issuing shares of our common stock in conjunction with entering into our channel partnering arrangement with Intrexon.

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

In 2011, our clinical projects have consisted primarily of a Phase 3 project for our lead product candidate palifosfamide.  The expenses for this trial incurred by us to third parties were $11.5 million for the nine months ended September 30, 2011 and $16.4 million from the project inception through September 30, 2011.

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

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

Clinical Phase
 
Estimated Completion Period
 
Phase 1
 
1 - 2 years
 
Phase 2
 
2 - 3 years
 
Phase 3
 
2 - 4 years
 

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

·
the number of clinical sites included in the trials;

·
the length of time required to enroll suitable patents;

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

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

·
the efficacy and safety profile of the product.

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

 
24

 

General and administrative expenses.>  General and administrative expenses during the three and nine months ended September 30, 2011 and 2010 were as follows:

   
Three months ended
               
Nine months ended
             
   
September 30,
               
September 30,
             
   
2011
   
2010
   
Change
   
2011
   
2010
   
Change
 
($ in thousands)
                                               
                                                 
General and administrative
  $ 3,742     $ 2,789     $ 953       34 %   $ 11,017     $ 8,313     $ 2,704       33 %

General and administrative expenses for the three months ended September 30, 2011 increased by $1.0 million from the three months ended September 30, 2010.  The increase was primarily due to increased consulting of $609 thousand, salary and employee-related costs of $269 thousand, travel costs of $113 thousand and other costs of $9 thousand.  The increased general and administrative activity was related to additional headcount and increased support for clinical studies.

General and administrative expenses for the nine months ended September 30, 2011 increased by $2.7 million from the nine months ended September 30, 2010.  The increase was primarily due to increased consulting fees of $1.7 million, salary and employee-related costs of $668 thousand, travel costs of $499 thousand and offset by certain cost reductions of ($167) thousand.  The increased general and administrative activity was related to increased support for clinical studies.

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

Other income (expense).>  Other income (expense) for the three and nine months ended September 30, 2011 and 2010 were as follows:

   
Three months ended
               
Nine months ended
             
   
September 30,
               
September 30,
             
   
2011
   
2010
   
Change
   
2011
   
2010
   
Change
 
($ in thousands)
                                               
                                                 
Other income, net
  $ 19     $ 7     $ 12       171 %   $ 26     $ 29     $ (3 )     -10 %
Change in fair value of warrants
    13,388       (3,712 )     (17,100 )     -461 %     4,423       (2,663 )     (7,086 )     -266 %
                                                                 
Total
  $ 13,407     $ (3,705 )   $ (17,088 )           $ 4,449     $ (2,634 )   $ (7,089 )        

The decrease in other income (expense) from the three and nine months ended September 30, 2011 compared to the three and nine months ended September 30, 2010 was due primarily to the decreased non-cash expense recorded from the change in the fair value of liability-classified warrants.  The change directly correlates with the decrease in the Company’s stock price during the three and nine months ended September 30, 2011 and 2010. Additional changes are attributable to increased state tax refunds and decreased interest rates on invested funds.

 
25

 

Liquidity and Capital Resources

As of September 30, 2011, we had approximately $118.9 million in cash and cash equivalents, compared to $60.4 million in cash and cash equivalents as of December 31, 2010.  We believe that our existing cash will be sufficient to fund our operations into early 2013. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves 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 our forecast on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we currently expect.  Specifically, we commenced the PICASSO 3 pivotal trial for IV palifosfamide early in the third quarter of 2010 and expect to initiate a trial in SCLC in 2012. We have estimated the sufficiency of our cash resources based on our current timing expectations for enrollment for these studies, which may change based on the progression of enrollment.

We recently assumed responsibility for two product candidates under our exclusive channel partnership with Intrexon in early January 2011. We expect that the costs associated with these product candidates will increase the level of our overall research and development expenses significantly going forward. Although all human clinical trials are expensive and difficult to design and implement, we believe generally that costs associated with clinical trials for synthetic biology products are greater than the corresponding costs associated with clinical trials for small molecule candidates. In addition to increased research and development costs, we have added headcount in part to support our exclusive channel partnership endeavors and have opened a small office in the greater Washington D.C. area, which will add to our general and administrative expenses going forward. Although our forecasts for expenses and the sufficiency of our capital resources takes into account our plans to develop the Intrexon product candidates, we have only recently assumed development responsibility for these products and the actual costs associated therewith may be significantly in excess of forecast amounts.

In addition to these factors our actual cash requirements may vary materially from our current expectations for a number of other factors that may include, but are not limited to, changes in the focus and direction of our development programs, competitive and technical advances, costs associated with the development of our product candidates, our ability to secure partnering arrangements, and costs of filing, prosecuting, defending and enforcing our intellectual property rights.  In addition, the pace of our expenses may be further increased as we begin to develop product candidates under our exclusive channel partnership with Intrexon in addition to the two existing product candidates. If we exhaust our capital reserves more quickly than anticipated, regardless of the reason, and we are unable to obtain additional financing on terms acceptable to us or at all, we will be unable to proceed with development of some or all of our product candidates on expected timelines.

 
26

 

We expect that we will need additional financing to support our long-term plans for clinical trials and new product development. We expect to finance our cash needs through the sale of equity securities, strategic collaborations and/or debt financings, or through other sources that may be dilutive to existing stockholders. There can be no assurance that we will be able to obtain funding from any of these sources or, if obtained, what the terms of such funding(s) may be, or that any amount that we are able to obtain will be adequate to support our working capital requirements until we achieve profitable operations. Other than the Intrexon equity purchase commitment, we have no committed sources of additional capital.  Capital markets continue to experience instability that may severely hinder our ability to raise capital within the time periods needed or on terms we consider acceptable, if at all.  If we are unable to raise additional funds when needed, we may not be able to continue development and regulatory approval of our products, or we could be required to delay, scale back or eliminate some or all our research and development programs.

The following table summarizes our net increase (decrease) in cash and cash equivalents for the nine months ended September 30, 2011 and 2010:

   
Nine months ended
 
   
September 30,
 
   
2011
   
2010
 
($ in thousands)
           
Net cash provided by (used in):
           
Operating activities
  $ (25,085 )   $ (13,911 )
Investing activities
    (806 )     (128 )
Financing activities
    84,432       31,671  
                 
Net increase (decrease) in cash and cash equivalents
  $ 58,541     $ 17,632  

Net cash used in operating activities was $25.1 million for the nine months ended September 30, 2011 compared to $13.9 million for the nine months ended September 30, 2010.  The $11.2 million increase was primarily due to an increase in the net loss from operations, caused by increased research and development activities, excluding non-cash expenses of the change in fair value of warrants, stock-based compensation, and in process research and development.  This is offset by increases in other assets, accrued liabilities and deferred revenue.

Net cash used in investing activities was $806 thousand for the nine months ended September 30, 2011 compared to $128 thousand for the nine months ended September 30, 2010.  The increase was due to increased purchases of leasehold improvements, furniture and fixtures, and computer equipment.

Net cash provided by financing activities was $84.4 million for the nine months ended September 30, 2011 compared to $31.7 million for the nine months ended September 30, 2010.  The increase is attributable to a financing that resulted in $71.2 million of cash proceeds, in addition to stock option and warrant exercises partially offset by the Company’s re-purchase of common stock from employees to satisfy employee tax withholding obligations triggered upon vesting of previously granted restricted stock awards.

 
27

 

Operating capital and capital expenditure requirements

The Company anticipates that losses will continue for the foreseeable future. At September 30, 2011, the Company’s accumulated deficit was approximately $174.3 million.  Our actual cash requirements may vary materially from those planned because of a number of factors including:

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

 
·
Competitive and technical advances;

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

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

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

Working capital as of September 30, 2011 was $108.6 million, consisting of $120.4 million in current assets and $11.8 million in current liabilities. Working capital as of December 31, 2010 was $57.2 million, consisting of $60.8 million in current assets and $3.6 million in current liabilities.

Contractual obligations

The following table summarizes our outstanding obligations as of September 30, 2011 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 years
 
                               
Operating leases
  $ 5,674     $ 726     $ 2,019     $ 2,019     $ 910  
Royalty and license fees
    1,600       25       550       525       500  
Contract milestone payments
    11,939       6,822       4,668       449          
Total
  $ 19,213     $ 7,573     $ 7,237     $ 2,993     $ 1,410  

Our commitments for operating leases relate to our corporate headquarters in New York, New York, our operations center in Boston, Massachusetts, as well as our small liaison office with Intrexon in Germantown, Maryland.  Our commitments for royalty and license fees relate to our patent agreement with Baxter Healthcare Corporation and our royalty agreements with Southern Research Institute and Baxter Healthcare Corporation.  The contract milestone payments relate to our CRO agreement with PPD Development, L. P.  The timing of the remaining contract milestone payments are dependent upon factors that are beyond our control, including our ability to recruit patients, the outcome of future clinical trials and any requirements imposed on our clinical trials by regulatory agencies.  However, for the purpose of the above table, we have assumed that the payment of the milestones will occur within five years of September 30, 2011.

 
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Off-balance sheet arrangements

During the three and nine months ended September 30, 2011 and 2010, 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, 2010, 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, 2011.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our exposure to market risk is limited to our cash.  The goals of our investment policy are preservation of capital, fulfillment of liquidity needs and fiduciary control of cash.  We also seek to maximize income from our investments without assuming significant risk. To achieve our goals, we maintain our cash in interest-bearing bank accounts in global banks, U.S. treasuries and other government-backed investments, which are subject to minimal interest rate risk