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EX-31.1 - ZIOPHARM ONCOLOGY INCv165392_ex31-1.htm
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EX-32.1 - ZIOPHARM ONCOLOGY INCv165392_ex32-1.htm
 
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, 2009
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-33484

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

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

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

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

Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company þ
   
(Do not check if a smaller reporting company)
 

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

The number of shares of the registrant’s Common Stock, $.001 par value, outstanding as of November 9, 2009, was 25,571,301 shares.

 
 

 
 
ZIOPHARM Oncology, Inc. (a development stage company)

Table of Contents
 
       
Page
Part I - Financial Information
   
         
Item 1.
 
Financial Statements
   
         
   
Balance Sheets as of September 30, 2009 and December 31, 2008 (unaudited)
 
3
         
   
Statements of Operations for the three and nine months ended September 30, 2009 and 2008 and the period from September 9, 2003 (date of inception) through September 30, 2009 (unaudited)
 
4
         
   
Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the period from September 9, 2003 (date of inception) through September 30, 2009 (unaudited)
 
5
         
   
Statements of Cash Flows for the nine months ended September 30, 2009 and 2008 and the period from September 9, 2003 (date of inception) through September 30, 2009 (unaudited)
 
9
         
   
Notes to Financial Statements (unaudited)
 
10
         
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
21
         
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
 
42
         
Item 3.
 
Defaults upon Senior Securities
 
42
         
Item 4.
 
Submission of Matters to a Vote of Security Holders
 
43
       
 
Item 5.
 
Other Information
 
43
         
Item 6.
 
Exhibits
 
43
     
SIGNATURES
 
44
 
2



Item 1. Consolidated Financial Statements
 
ZIOPHARM Oncology, Inc. (a development stage company)

BALANCE SHEETS
(unaudited)

(in thousands, except share and per share data)

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

The accompanying notes are an integral part of the unaudited interim financial statements.
 
3


 ZIOPHARM Oncology, Inc. (a development stage company)

STATEMENTS OF OPERATIONS
(unaudited)

(in thousands, except share and per share data)

                           
Period from
 
                           
September 9, 2003
 
                           
(date of inception)
 
   
For the Three Months Ended September 30,
   
For the Nine Months Ended September 30,
   
through
 
   
2009
   
2008
   
2009
   
2008
   
September 30, 2009
 
                               
Research contract revenue
  $ -     $ -     $ -     $ -     $ -  
                                         
Operating expenses:
                                       
Research and development, including
                                       
costs of research contracts
    1,231       3,879       3,340       14,219       57,690  
General and administrative
    1,339       1,740       4,754       6,835       39,362  
Total operating expenses
    2,570       5,619       8,094       21,054       97,052  
                                         
Loss from operations
    (2,570 )     (5,619 )     (8,094 )     (21,054 )     (97,052 )
                                         
Other income (expense), net
    (1 )     75       1       386       3,898  
Change in fair value of warrants
    (304 )     -       (520 )     -       1,046  
Net loss
  $ (2,875 )   $ (5,544 )   $ (8,613 )   $ (20,668 )   $ (92,108 )
 
                                       
Basic and diluted net loss per share
  $ (0.13 )   $ (0.26 )   $ (0.40 )   $ (0.97 )        
                                         
Weighted average common shares outstanding used to compute basic and diluted net loss per share
    21,759,309       21,228,964       21,458,150       21,228,964          

The accompanying notes are an integral part of the unaudited interim financial statements.
 
4


 ZIOPHARM Oncology, Inc. (a development stage company)

STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS’ EQUITY (DEFICIT)
For the Period September 9, 2003 (Date of Inception) to September 30, 2009
(unaudited)

(in thousands, except share and per share data)

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

The accompanying notes are an integral part of the unaudited interim financial statements.
 
5

 
 ZIOPHARM Oncology, Inc. (a development stage company)

STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS’ EQUITY (DEFICIT) (Cont.)
For the Period September 9, 2003 (Date of Inception) to September 30, 2009
(unaudited)

(in thousands, except share and per share data)

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

The accompanying notes are an integral part of the unaudited interim financial statements.
 
6

 
 ZIOPHARM Oncology, Inc. (a development stage company)

STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS’ EQUITY (DEFICIT) (Cont.)
For the Period September 9, 2003 (Date of Inception) to September 30, 2009
(unaudited)

(in thousands, except share and per share data)

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

The accompanying notes are an integral part of the unaudited interim financial statements.
 
7

 
 ZIOPHARM Oncology, Inc. (a development stage company)

STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS’ EQUITY (DEFICIT) (Cont.)
For the Period September 9, 2003 (Date of Inception) to September 30, 2009
(unaudited)

(in thousands, except share and per share data)

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

The accompanying notes are an integral part of the unaudited interim financial statements.
 
8



STATEMENTS OF CASH FLOWS
(unaudited)

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

The accompanying notes are an integral part of the unaudited interim financial statements.
 
9

 
 ZIOPHARM Oncology, Inc. (a development stage company)

NOTES TO FINANCIAL STATEMENTS
(unaudited)


1. Nature of the Business and Basis of Presentation

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

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

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

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

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

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

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

The results disclosed in the Statements of Operations for the three and nine months ended September 30, 2009 are not necessarily indicative of the results to be expected for the full fiscal year.
 
10


ZIOPHARM Oncology, Inc. (a development stage company)

NOTES TO FINANCIAL STATEMENTS (unaudited)

2. Summary of Significant Accounting Policies

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

New Accounting Pronouncements

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

Warrants

On January 1, 2009, the Company adopted a newly issued accounting standard which provides guidance in assessing whether an equity-issued financial instrument is indexed to an entity’s own stock for purposes of determining whether a financial instrument should be treated as a derivative. In applying the methodology the Company concluded that certain warrants issued by the Company in May 2005 have terms that do not meet the criteria to be considered indexed to the Company’s own stock and therefore were re-classified from the equity section to the liability section of the Balance Sheet as of January 1, 2009. The warrant is subject to re-measurement at each balance sheet date and any change in fair value is recognized as a component of other income (expense). Fair value is measured using the Black-Scholes valuation model. Adoption of this new standard decreased equity warrants classified in stockholders’ equity by $1,638 thousand, decreased deficit accumulated during the development stage by $1,566 thousand and increased warrant liabilities by $72 thousand.  See Note 5, “Warrants” for additional disclosure.

Fair Value Measurements
 
Effective January 1, 2008, the Company adopted a newly issued accounting standard for fair value measurements.  In February 2008, an amendment provided a one year deferral of the standard’s effective date for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value on a recurring basis, at least annually.  The accounting standard defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements.  Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.  The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
 
 
·
Level 1 - Quoted prices in active markets for identical assets or liabilities.
 
 
·
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
 
·
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
The adoption of these accounting standards did not have a material impact on the Company’s results of operations, financial condition or cash flow.
 
11

 
ZIOPHARM Oncology, Inc. (a development stage company)

NOTES TO FINANCIAL STATEMENTS (unaudited)

Assets and liabilities measured at fair value on a recurring basis as of September 30, 2009 are as follows:

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

The warrants were valued using a Black-Scholes valuation model.  See note 5 for additional disclosure on the valuation methodology and significant assumptions.
 
Subsequent Events
 
During the second quarter of 2009, the Company adopted a new accounting standard which established general standards of accounting and disclosure of events which occur after the balance sheet date.  The Company evaluated all events or transactions that occurred after September 30, 2009 through November 10, 2009, the date the Company issued these financial statements.  During this period the Company did not have any material recognizable subsequent events.

Other Recently Adopted Accounting Standards

In December 2007, the FASB issued a new accounting standard which expands the definition of a business combination and requires the fair value of the purchase price of an acquisition, including the issuance of equity securities, to be determined on the acquisition date. The accounting standard also requires that all assets, liabilities, contingent considerations, and contingencies of an acquired business be recorded at fair value at the acquisition date. In addition, it requires that acquisition costs generally be expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date, changes in accounting for deferred tax asset valuation allowances be expensed after the measurement period, and acquired income tax uncertainties be expensed after the measurement period.  The adoption of the accounting standard by the Company on January 1, 2009 did not have an impact but may change accounting for business combinations on a prospective basis.
 
12

 
ZIOPHARM Oncology, Inc. (a development stage company)

NOTES TO FINANCIAL STATEMENTS (unaudited)

2. Summary of Significant Accounting Policies – (continued)

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

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

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

In July 2009, the Company implemented a newly issued accounting standard which codified prior pronouncements and is the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in preparation of financial statements in conformity with generally accepted accounting principles in the United States for interim and annual periods.  Adoption of this new standard during the third quarter of 2009 did not have a material impact on the Company’s financial position, results of operations or cash flows however, it changes the way in which U.S. GAAP is referenced.
 
13

 
ZIOPHARM Oncology, Inc. (a development stage company)

NOTES TO FINANCIAL STATEMENTS (unaudited)

3. Net Loss per Share

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

   
September 30,
 
   
2009
   
2008
 
             
Stock options
    3,151,249       2,751,670  
Unvested restricted stock
    1,491,667       145,000  
Warrants
    7,950,613       5,039,659  
                 
      12,593,529       7,936,329  
 
4. Commitments and Contingencies

License agreements and patents

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

On August 24, 2004, the Company entered into a patent and technology license agreement with The Board of Regents of the University of Texas System, acting on behalf of The University of Texas M. D. Anderson Cancer Center and the Texas A&M University System (collectively, the “Licensors”).  Under this agreement, the Company was granted an exclusive, worldwide license to rights (including rights to US and foreign patent and patent applications and related improvements and know-how) for the manufacture and commercialization of two classes of organic arsenicals (water- and lipid-based) for human and animal use.  The class of water-based organic arsenicals includes darinaparsin.
 
14

 
ZIOPHARM Oncology, Inc. (a development stage company)

NOTES TO FINANCIAL STATEMENTS (unaudited)

4. Commitments and Contingencies – (continued)

As partial consideration for the license rights obtained, the Company made an upfront payment of $125 thousand and granted the Licensors 250,487 shares of the Company’s common stock.  The Company recorded expense for the $125 thousand upfront payment and recognized research and development expense of $426 thousand in connection with the issuance of the 250,487 shares of common stock in the year ended December 31, 2004.  In addition, the Company issued options to purchase an additional 50,222 shares outside the 2003 Stock Option Plan for $0.002 per share following the successful completion of certain clinical milestones.  Upon the filing of an Investigation New Drug Application (“IND”) for darinaparsin in 2005, 12,555 shares vested and the Company recognized compensation expense of $54 thousand.  Upon the completion of dosing of the last patient for both Phase I clinical trials in 2007, 25,111 shares vested and the Company recognized expense of $120 thousand.  The remaining 12,556 shares will vest upon enrollment of the first patient in a multi-center pivotal clinical trial (i.e., a human clinical trial intended to provide the substantial evidence of efficacy necessary to support the filing of an approvable New Drug Application (“NDA”) for darinaparsin).  In accordance with accounting standards, the options were valued at the date on which the milestones were achieved.  In addition, the Licensors are entitled to receive certain milestone payments, including $100,000 that was paid upon the commencement of Phase I clinical trial for which the Company recognized the expense in the year ended December 31, 2005 and $250 thousand upon the dosing of the first patient in the Registrant-sponsored Phase II clinical trial for darinaparsin which was recognized in the year ended December 31, 2006.  The Company may be required to make additional payments upon achievement of certain other milestones, in varying amounts which on a cumulative basis could total up to $4.5 million.  In addition, the Licensors are entitled to receive royalty payments on sales from a licensed product should such a product be approved for commercial sale and sales of a licensed product be effected in the United States, Canada, the European Union or Japan.  The Licensors also will be entitled to receive a portion of any fees that the Company may receive from a possible sublicense under certain circumstances.  For the years ended December 31, 2007 and 2006, the Company expensed $100 thousand for payments made to the Licensors to conduct scientific research.  The Company has the exclusive right to all intellectual property rights resulting from such research pursuant to the terms of the license agreement.  These sponsored research agreements and any related extensions expired in February 2008 with no payments being made in the nine months ended September 30, 2008 or 2009.

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

License Agreement with DEKK-Tec, Inc.

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

In consideration for the license rights, DEKK-Tec is entitled to receive milestone payments upon the occurrence of certain achievements of certain milestones, in varying amounts which on a cumulative basis may total $3.9 million.  Of the aggregate milestone payments, most of the total amount will be creditable against future royalty payments, as referenced below.  During the year ended December 31, 2006, the Company recorded a charge of $100 thousand for achieving Phase II milestones.  Additionally in 2004, the Company issued DEKK-Tec an option to purchase 27,616 shares of the Company’s common stock for $0.02 per share.  The options were  valued at the date which the milestones were achieved.  Upon the execution of the license agreement, 6,904 shares vested and were exercised in the fiscal year ended December 31, 2005 and resulted in a recorded charge of $12 thousand to research and development expense.  The remaining options will vest upon certain milestone events, culminating with final FDA approval of the first NDA submitted by the Company (or by its sublicensee) for palifosfamide.  None of the remaining options have vested as of September 30, 2009.  DEKK-Tec is entitled to receive royalty payments on the sales of palifosfamide should it be approved for commercial sale.  There were no payments during the nine months ended September 30, 2008 or 2009.
 
15


ZIOPHARM Oncology, Inc. (a development stage company)

NOTES TO FINANCIAL STATEMENTS (unaudited)

4. Commitments and Contingencies – (continued)

Option Agreement with Southern Research Institute (“SRI”)

On December 22, 2004, the Company entered into an Option Agreement with SRI (the “Option Agreement”), pursuant to which the Company was granted an exclusive option to obtain an exclusive license to SRI’s interest in certain intellectual property, including exclusive rights related to certain isophosphoramide mustard analogs.
 
Also on December 22, 2004, the Company entered into a Research Agreement with SRI pursuant to which, the Company agreed to spend a sum not to exceed $200 thousand between the execution of the agreement and December 21, 2006, including a $25 thousand payment that was made simultaneously with the execution of the agreement, to fund research and development work by SRI in the field of isophosphoramide mustard analogs.  The Option Agreement was exercised on February 13, 2007 and annual payments of $25 thousand were made in the years ended December 31, 2008 and 2007 for maintenance of the Option Agreement.  There were no payments during the nine months ended September 30, 2009.

License Agreement with Baxter Healthcare Corporation (“Baxter”)

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

Subsequent to September 30, 2009, the Baxter License Agreement was amended to allow the Company to manufacturer indibulin.

Collaboration Agreement with Harmon Hill, LLC

On April 8, 2008, the Company signed a collaboration agreement for Harmon Hill, LLC (“Harmon Hill”) to provide consulting and other services for the development and commercialization of oncology therapeutics by ZIOPHARM.  Under the agreement the Company has agreed to pay Harmon Hill $20 thousand per month for the consulting services and has further agreed to pay Harmon Hill (a) $500 thousand upon the first patient dosing of the Specified Drug in a pivotal trial, which trial uses a dosing Regime introduced by Harmon Hill; and (b) provided that the Specified Drug receives regulatory approval from the FDA, the EMEA or another regulatory agency for the marketing of the Specified Drug, a 1% royalty of the Company’s net sales will be awarded to Harmon Hill.  If the Specified Drug is sublicensed to a third party, the agreement entitles Harmon Hill to a 1% award of royalties received from a sublicense.  Subject to renewal or extension by the parties, the term of the agreement was for a one year period that expired April 7, 2009.  Although the Company and Harmon Hill have not entered into a formal written renewal or extension, the parties continued to operate under the terms of the agreement at September 30, 2009.  The Company expensed $120 thousand and $180 thousand during the nine months ended September 30, 2008 and 2009, respectively, for consulting services per aforementioned agreement.  No milestones have been reached or accrued during the year ended December 31, 2008 or the nine months ended September 30, 2009.
 
16

 
ZIOPHARM Oncology, Inc. (a development stage company)

NOTES TO FINANCIAL STATEMENTS (unaudited)

5. Warrants

On January 1, 2009, the Company adopted a newly issued accounting standard which provides guidance in assessing whether an equity-issued financial instrument is indexed to an entity’s own stock for purposes of determining whether a financial instrument should be treated as a derivative. In applying the methodology the Company concluded that certain warrants issued by the Company in May 2005 have terms that do not meet the criteria to be considered indexed to the Company’s own stock and therefore were re-classified from the equity section to the liability section of the Balance Sheets as of January 1, 2009. The warrant is subject to re-measurement at each balance sheet date and any change in fair value is recognized as a component of other income (expense). Fair value is measured using the Black-Scholes valuation model.

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

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

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

   
January 1, 2009
   
September 30, 2009
 
             
Risk-free interest rate
    1.55 %     1.45 %
Expected life in years
    3.42       2.67  
Expected volatility
    102 %     105 %
Expected dividend yield
    0       0  
 
17

 
ZIOPHARM Oncology, Inc. (a development stage company)

NOTES TO FINANCIAL STATEMENTS (unaudited)
 
6. Common Stock
 
On September 9, 2009, the Company entered into a securities purchase agreement ("Offering") with certain investors pursuant to which it sold a total of 2,772,337 units (the "Units"), each Unit consisting of (i) one share of common stock (collectively, the "Shares") and (ii) one warrant (collectively, the "Warrants") to purchase one share of common stock at an exercise price of $2.04 per share, for a purchase price of $1.825 per Unit.  The closing of the transaction occurred on September 15, 2009. In connection with the Offering, the Company raised approximately $5.1 million in gross proceeds. After paying $455 thousand in placement agent fees and offering expenses, the net proceeds were $4.6 million.
 
In connection with the Offering, the Company issued warrants to purchase an aggregate of 2,910,954 shares of common stock (including 138,617 warrants issued to the placement agents) which are exercisable immediately. The warrants have an exercise price of $2.04 per share and have a five year term. The fair value of the warrants was estimated at $4,207 thousand using a Black-Scholes model with the following assumptions: expected volatility of 105%, risk free interest rate of 2.41%, expected life of five years and no dividends.  The fair value of the warrants was recorded in the equity section of the balance sheet.
 
The Company assessed whether the warrants require accounting as derivatives.  The Company determined that the warrants were both (1) indexed to the Company’s own stock and (2) classified in stockholders’ equity in accordance with accounting standards codification Topic 815, Derivatives and Hedging.  As such, the Company has concluded the warrants met the scope exception for determining whether the instruments require accounting as derivatives and should be classified in stockholders’ equity.
 
In connection with the Offering, the Company entered into a registration rights agreement (the "Registration Rights Agreement") with each of the investors. The Registration Rights Agreement provides that the Company file a "resale" registration statement (the "Registration Statement") covering all of the Shares and the shares issuable upon exercise of the Warrants, up to the maximum number of shares able to be registered pursuant to applicable Securities and Exchange Commission regulations, within 30 days of the closing of the Offering. The Company filed the Registration Statement with the SEC on September 28, 2009 (File No. 333-162160). Under the terms of the Registration Rights Agreement, the Company is obligated to maintain the effectiveness of the "resale" registration statement until all securities therein are sold or are otherwise can be sold pursuant to Rule 144, without any restrictions. A cash penalty at the rate of 1% of the purchase price per month, capped at a maximum of 10% of the purchase price (or $506 thousand), will be triggered for any filing or effectiveness failures or if, at any time after six months following the closing of the Offering, the Company ceases to be current in periodic reports with the SEC.
 
In December 2006, the FASB issued an accounting standard, which addresses an issuer's accounting for registration payment arrangements. The accounting standard specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB guidance in Accounting for Contingencies. The accounting standard further clarifies that a financial instrument subject to a registration payment arrangement should be accounted for in accordance with US GAAP without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement. The Company applied the recognition and measurement provisions of the accounting standard to the registration rights associated with the Registration Rights Agreement. As result, the Company believes that the contingent obligation to make future payments is not probable and as such has recorded no liability associated with these registration rights.
 
18

 
ZIOPHARM Oncology, Inc. (a development stage company)

NOTES TO FINANCIAL STATEMENTS (unaudited)

7. Stock-Based Compensation

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

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

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

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

   
For the nine months ended September 30,
 
   
2009
   
2008
 
             
Risk-free interest rate
    1.31 - 1.44 %     2.48 - 3.49 %
Expected life in years
    5       5  
Expected volatility
    102 - 103 %     94 - 96 %
Expected dividend yield
    0       0  
 
19

 
ZIOPHARM Oncology, Inc. (a development stage company)

NOTES TO FINANCIAL STATEMENTS (unaudited)

7. Stock-Based Compensation – (continued)

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

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

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

   
Number of Shares
   
Weighted-Average
Gr