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EX-31.1 - EXHIBIT 31.1 - Talon Therapeutics, Inc.ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - Talon Therapeutics, Inc.ex31-2.htm
EX-32.1 - EXHIBIT 32.1 - Talon Therapeutics, Inc.ex32-1.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2011
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period __________ to __________.
 
Commission file number 001-32626 
 
Talon Therapeutics, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
(State or other jurisdiction of
incorporation or organization)
 
32-0064979
(I.R.S. Employer Identification No.)
     
2207 BridgePointe Parkway, Suite 250
San Mateo, CA.
 
94404
(Address of principal executive offices)
 
(Zip Code)
 
(650) 588-6404
(Registrant's Telephone Number, Including Area Code)
 
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 that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x   No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  o   No  x
 
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
 
Large accelerated filer   o
Accelerated filer   o
Non-accelerated filer   o
Smaller reporting company   x
(Do not check if 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  x
 
As of May 12, 2011, there were issued and outstanding 21,242,772 shares of the registrant's common stock, $.001 par value.
 
 
 

 
 
INDEX
 
   
Page
PART I
FINANCIAL INFORMATION
5
     
Item 1.
Unaudited Condensed Financial Statements
5
     
 
Unaudited Condensed Balance Sheets
5
     
 
Unaudited Condensed Statements of Operations and Other Comprehensive Loss
6
     
 
Unaudited Condensed Statement of Changes in Redeemable Convertible Preferred Stock and Stockholders' Deficit
7
     
 
Unaudited Condensed Statements of Cash Flows
8
     
 
Notes to Unaudited Condensed Financial Statements
9
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
  20
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
  25
     
Item 4.
Controls and Procedures
  25
     
PART II
OTHER INFORMATION
  26
     
Item 1.
Legal Proceedings
  26
     
Item 1A.
Risk Factors
  26
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
  26
     
Item 3.
Defaults Upon Senior Securities
  26
     
Item 4.
[Removed and Reserved]
  26
     
Item 5.
Other Information
  26
     
Item 6.
Exhibits
  27
     
 
Signatures
  28
     
 
Index of Exhibits Filed with this Report
  29
           
 
- 2 -

 
           
Forward-Looking Statements
 
This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These forward-looking statements include, but are not limited to, statements about:
 
our ability to obtain adequate financing;
 
the development of our drug candidates, including when we expect to undertake, initiate and complete clinical trials of our product candidates;
 
the regulatory approval of our drug candidates, including the timing of our submission of applications for marketing approval and other items with the FDA;
 
our use of clinical research centers and other contractors;
 
our ability to find collaborative partners for research, development and commercialization of potential products;
 
acceptance of our products by doctors, patients or payors and the availability of reimbursement for our product candidates;
 
our ability to market any of our products;
 
our history of operating losses;
 
our ability to secure adequate protection for our intellectual property;
 
our ability to compete against other companies and research institutions;
 
the effect of potential strategic transactions on our business;
 
our ability to attract and retain key personnel; and
 
the volatility of our stock price.
 
These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend” and similar words or phrases. For such statements, we claim the protection of the Private Securities Litigation Reform Act of 1995. Readers of this Quarterly Report on Form 10-Q are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the time this Quarterly Report on Form 10-Q was filed with the Securities and Exchange Commission, or SEC. These forward-looking statements are based largely on our expectations and projections about future events and future trends affecting our business, and are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Discussions containing these forward-looking statements may be found throughout this report, including Part I, the section entitled “Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations.” These forward-looking statements involve risks and uncertainties, including the risks discussed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC on March 28, 2011 (the "2010 Form 10-K"), that could cause our actual results to differ materially from those in the forward-looking statements. Except as required by law, we undertake no obligation to publicly revise our forward-looking statements to reflect events or circumstances that arise after the filing of this report or documents incorporated by reference herein that include forward-looking statements. The risks discussed in the 2010 Form 10-K and in this report should be considered in evaluating our prospects and future financial performance.
 
In addition, past financial or operating performance is not necessarily a reliable indicator of future performance and you should not use our historical performance to anticipate results or future period trends. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition.
 
References to the “Company,” “Talon,” the “Registrant,” “we,” “us,” or “our” in this report refer to Talon Therapeutics, Inc., a Delaware corporation, unless the context indicates otherwise.
 
 
- 3 -

 
        
NOTE REGARDING REVERSE STOCK SPLIT
 
On September 8, 2010, the Company amended its Certificate of Incorporation to increase the number of authorized shares of Common Stock from 200,000,000 to 350,000,000 and to effect a combination of its outstanding Common Stock at a ratio of one-for-four (the “Reverse Stock Split”).  The Reverse Stock Split was effective at the close of business on September 10, 2010.  No fractional shares will be issued as a result of the Reverse Stock Split, but instead stockholders received cash in lieu of any fractional shares to which they would otherwise have been entitled, based upon the last quoted bid price of the Common Stock on September 10, 2010, as reported on the OTC Bulletin Board. All historical share and per share amounts have been adjusted to reflect the Reverse Stock Split.  All stock options and warrants outstanding were appropriately adjusted to give effect to the Reverse Stock Split.
 
 
- 4 -

 
              
PART I - FINANCIAL INFORMATION
 
Item 1. Unaudited Condensed Financial Statements
 
TALON THERAPEUTICS, INC.
 
CONDENSED BALANCE SHEETS
(In thousands)
(Unaudited)
 
   
March 31,
2011
   
December 31,
2010
 
ASSETS
 
 
       
Current assets:
           
Cash and cash equivalents
 
$
9,170
   
$
4,573
 
Available-for-sale securities, equity securities
   
7,015
     
18,068
 
Prepaid expenses and other current assets
   
177
     
254
 
Total current assets
   
16,362
     
22,895
 
                 
Property and equipment, net
   
125
     
97
 
Restricted cash
   
125
     
125
 
Other long-term assets
   
32
     
-
 
Debt issuance costs
   
866
     
905
 
Total assets
 
$
17,510
   
$
24,022
 
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
Current liabilities:
               
Accounts payable and accrued liabilities
 
$
6,663
   
$
6,052
 
Other short-term liabilities
   
2
     
2
 
Total current liabilities
   
6,665
     
6,054
 
                 
Notes payable, net of discount
   
23,513
     
23,340
 
Other long-term liabilities
   
4
     
5
 
Investors’ right to purchase future shares of Series A-1 and A-2 preferred stock (Note 5)
   
7,513
     
5,131
 
Warrant liabilities
   
1,171
     
713
 
                 
Commitments and contingencies (Notes 5, 7, 9 and 11):
               
Redeemable convertible preferred stock; $100 par value:
               
10 million shares authorized, 0.4 million issued and outstanding at March 31, 2011 and December 31, 2010; aggregate liquidation value of $43.4 million and $42.4 million at March 31, 2011 and December 31, 2010, respectively
   
30,643
     
30,643
 
                 
Stockholders' deficit:
               
Common stock; $0.001 par value:
               
350 million shares authorized, 21.2 million shares issued and outstanding at March 31, 2011 and December 31, 2010
   
21
     
21
 
Additional paid-in capital
   
119,505
     
119,242
 
Accumulated other comprehensive income
   
1
     
(16)
 
Accumulated deficit
   
(171,526)
     
(161,111)
 
Total stockholders' deficit
   
(51,999)
     
(41,864)
 
Total liabilities, redeemable convertible preferred stock and stockholders' deficit
 
$
17,510
   
$
24,022
 
        
See accompanying notes to unaudited condensed financial statements.
 
 
- 5 -

 
              
TALON THERAPEUTICS, INC.
 
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share data)
(Unaudited)
         
   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
Operating expenses:
           
General and administrative
 
$
1,480
   
$
1,171
 
Research and development
   
5,144
     
3,258
 
Total operating expenses
   
6,624
     
4,429
 
                 
Loss from operations
   
(6,624)
     
(4,429)
 
                 
Other expense:
               
Interest expense
   
(881)
     
(1,084)
 
Other expense, net
   
(70)
     
 
Change in fair value of warrant liabilities
   
(458)
     
41
 
Change in fair value of investors’ right to purchase future shares of Series A-1 and A-2 preferred stock
   
(2,382)
     
 
Total other expense
   
(3,791)
     
(1,043)
 
                 
Net loss
 
$
(10,415)
   
$
(5,472)
 
                 
Deemed dividends attributable to preferred stock
   
(941)
     
 
                 
Net loss applicable to common stock
   
(11,356)
     
(5,472)
 
                 
Net loss per share applicable to common stock, basic and diluted
 
$
(0.53)
   
$
(0.27)
 
                 
Weighted average shares used in computing net loss per share, basic and diluted
   
21,243
     
19,946
 
Comprehensive loss:
               
Net loss
 
$
(10,415)
   
$
(5,472)
 
Unrealized holdings gains (losses) arising during the period
   
(59)
     
8
 
Less: reclassification adjustment for other-than-temporary impairment included in net loss
   
76
     
 
                 
Comprehensive loss
 
$
(10,398)
   
$
(5,464)
 
 
See accompanying notes to unaudited condensed financial statements.
 
 
- 6 -

 
                                  
TALON THERAPEUTICS, INC.
 
CONDENSED STATEMENT OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' DEFICIT
(In thousands)
(Unaudited)
 
Period from January 1, 2011 to March 31, 2011
 
   
 
Redeemable Convertible
Preferred Stock
   
Common stock
   
Additional
paid-in
   
Accumulated
Other
Comprehensive
   
Accumulated
   
Total
stockholders'
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
income
   
deficit
   
deficit
 
Balance at January 1, 2011
   
413
   
$
30,643
     
21,234
   
$
21
   
$
119,242
   
$
(16)
   
$
(161,111)
   
$
(41,864)
 
Share-based compensation of employees amortized over vesting period of stock options
   
     
     
     
     
260
     
     
     
260
 
Issuance of shares under employee stock purchase plan
   
     
     
8
     
     
3
     
     
     
3
 
Unrealized loss on available-for-sale securities
   
     
     
     
     
     
17
     
     
17
 
Net loss
   
     
     
     
     
             
(10,415)
     
(10,415)
 
                                                                 
Balance at March 31, 2011
   
413
   
$
30,643
     
21,242
   
$
21
   
$
119,505
   
$
1
   
$
(171,526)
   
$
(51,999)
 
           
See accompanying notes to unaudited condensed financial statements.
 
 
- 7 -

 
                 
TALON THERAPEUTICS, INC.
 
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
   
Three Months Ended March 31,
 
   
2011
   
2010
 
Cash flows from operating activities:
           
Net loss
  $ (10,415 )   $ (5,472 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    38       41  
Share-based compensation to employees for services
    260       185  
Amortization of discount and debt issuance costs
    212       414  
Change in fair value of warrant liability
    458       (41 )
Change in fair value of investors’ right to purchase future shares of Series A-1 and A-2 preferred stock
    2,382          
Other-than-temporary loss on marketable securities
    76        
   Changes in operating assets and liabilities:
               
Decrease in prepaid expenses and other assets
    38       9  
Increase/(decrease) in accounts payable and accrued liabilities
    611       (610 )
Net cash used in operating activities
    (6,340 )     (5,473 )
  
               
Cash flows from investing activities:
               
Purchase of property and equipment
    (66 )     (6 )
Sale and maturities of marketable securities
    11,000        
Net cash provided by (used in) investing activities
    10,934       (6 )
                 
Cash flows from financing activities:
               
Proceeds from exercise of warrants and options and issuance of shares under employee stock purchase plan
    3       22  
Payments on capital leases
          (17 )
Net cash provided by financing activities
    3       5  
  
               
Net increase (decrease) in cash and cash equivalents
    4,597       (5,474 )
Cash and cash equivalents, beginning of period
    4,573       9,570  
Cash and cash equivalents, end of period
  $ 9,170     $ 4,096  
Supplemental disclosures of cash flow data:
               
Cash paid for interest
  $ 684     $ 685  
Supplemental disclosures of noncash financing activities:
               
Unrealized loss on available-for-sale securities
  $ 1     $ 8  
 
See accompanying notes to unaudited condensed financial statements.  
    
 
- 8 -

 
              
TALON THERAPEUTICS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
 
NOTE 1. BUSINESS DESCRIPTION AND BASIS OF PRESENTATION AND LIQUIDITY
 
BUSINESS
 
Talon Therapeutics, Inc. (“Talon”, “we”, “our”, “us” or the “Company”) is a biopharmaceutical company based in San Mateo, California, which seeks to acquire, develop, and commercialize innovative products to strengthen the foundation of cancer care. The Company is committed to creating value by accelerating the development of its product candidates, including entering into strategic partnership agreements and expanding its product candidate pipeline by being an alliance partner of choice to universities, research centers and other companies.  Our product candidates consist of the following:
 
Marqibo® (vincristine sulfate liposomes injection), the Company’s lead product candidate, is a novel, targeted Optisome™ encapsulated formulation product candidate of the FDA-approved anticancer drug vincristine. The Company is currently developing Marqibo primarily for the treatment of adult acute lymphoblastic leukemia, or ALL. The Company plans to submit a new drug application to the Food and Drug Administration, or FDA, in 2011 seeking accelerated approval of Marqibo for the treatment of adult ALL in second relapse or that has progressed following two or more prior lines of anti-leukemia therapy.  Additionally, Marqibo will be studied in a Phase 3 trial in elderly patients with newly diagnosed aggressive Non-Hodgkin’s Lymphoma, or NHL, with enrollment expected to begin before the end of 2011.
 
Menadione Topical Lotion, a novel supportive care product candidate being developed for the prevention and/or treatment of the skin toxicities associated with the use of epidermal growth factor receptor inhibitors, or EGFRIs, a type of anti-cancer agent used in the treatment of lung, colon, head and neck, pancreatic and breast cancer.
 
Brakiva™ (topotecan liposome injection), a novel targeted Optisome™ encapsulated formulation product candidate of the FDA-approved anticancer drug topotecan.
 
Alocrest™ (vinorelbine liposome injection), a novel, targeted Optisome™ encapsulated formulation product candidate of the FDA-approved anticancer drug vinorelbine.
 
BASIS OF PRESENTATION AND LIQUIDITY
 
The accompanying unaudited condensed financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q. In the opinion of the Company’s management, the unaudited condensed financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position for the periods presented herein. These interim financial results are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2011 or any subsequent interim period.
 
As of March 31, 2011, the Company has a stockholder's deficit of approximately $52 million, and for the three months ended March 31, 2011, the Company realized a net loss of $10.4 million. The Company has financed operations primarily through equity and debt financing and expects such losses to continue over the next several years.  The Company currently has a limited supply of cash available for operations. As of March 31, 2011, the Company had aggregate cash and cash equivalents and available-for-sale securities of $16.2 million, which it believes is sufficient to continue operations through late 2011.  The Company has drawn down $27.5 million of long-term debt under the loan facility agreement with Deerfield Management, with the entire balance due in June 2015.  On June 7, 2010, the Company entered into an Investment Agreement with certain investors pursuant to which it sold 400,000 shares of Series A-1 Convertible Preferred Stock (“Series A-1 Preferred Stock”) at the stated value of $100 per share, for gross proceeds of $40 million.  The Investment Agreement provides that the investors have the right, but not the obligation, to make additional investments of up to $60 million subject to certain conditions.  See “Note 5 Redeemable Convertible Preferred Stock.”
 
The Company does not generate any recurring revenue and will require substantial additional capital before it will generate cash flow from its operating activities, if ever. The Company does not currently have sufficient capital to fund its entire development plan beyond 2011.  The Company’s continued operations are entirely reliant upon obtaining additional capital. The Company will be unable to continue development of its product candidates unless it is able to obtain additional funding through equity or debt financings or from payments in connection with potential strategic transactions.  The Company can give no assurances that any additional capital that it is able to obtain, if any, will be sufficient to meet its needs. Moreover, there can be no assurance that such capital will be available to the Company on favorable terms or at all, especially given the current economic environment which has severely restricted access to the capital markets.  If anticipated costs are higher than planned or if the Company is unable to raise additional capital, it will have to significantly curtail planned development to maintain operations through 2011.  These conditions raise substantial doubt as to the Company’s ability to continue as a going concern.   The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities should the Company be unable to continue as a going concern.   
 
 
- 9 -

 
 
Reverse Stock Split
 
On September 8, 2010, the Company amended its Amended and Restated Certificate of Incorporation to effect a combination (Reverse Stock Split) of the Common Stock at a ratio of one-for-four.  The reverse stock split was effective at the close of business on September 10, 2010.  All historical share and per share amounts have been adjusted to reflect the reverse stock split.
 
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
 
Use of Management's Estimates
 
The preparation of financial statements in conformity with GAAP requires management to make estimates based upon current assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Examples include provisions for deferred taxes, the valuation of the warrant liabilities and investors’ rights to purchase shares of Series A-1 and A-2 preferred stock, computation of beneficial conversion feature, the cost of contracted clinical study activities and assumptions related to share-based compensation expense. Actual results may differ materially from those estimates.
 
Segment Reporting
 
The Company has determined that it currently operates in only one segment, which is the research and development of oncology therapeutics and supportive care for use in humans. All assets are located in the United States. 
 
 Cash and Cash Equivalents and Short-Term Investments
 
The Company considers all highly-liquid investments with a maturity of three months or less when acquired to be cash equivalents. Short-term investments consist of investments acquired with maturities exceeding three months and are classified as available-for-sale. All short-term investments are reported at fair value, based on quoted market price, with unrealized gains or losses included in other comprehensive loss and other-than-temporary impairment included as a loss in the statement of operations.
 
Investments in Debt and Marketable Equity Securities
 
The Company determines the appropriate classification of all debt and marketable equity securities as held-to-maturity, available-for-sale or trading at the time of purchase, and re-evaluates such classification as of each balance sheet date in accordance with FASB ASC 320.  Investments in equity securities that have readily determinable fair values are classified and accounted for as available for sale.  We assess whether temporary or other-than-temporary unrealized losses on our marketable securities have occurred due to declines in fair value or other market conditions based on the extent and duration of the decline, as well as other factors.  Because we have determined that all of our debt and marketable equity securities are available-for-sale, unrealized gains and losses are reported as a component of accumulated other comprehensive income (loss) in stockholders’ deficit.  In the three months ended March 31, 2011, the Company recognized a loss of $0.1 million for other-than-temporary impairment of available-for-sale securities it its unaudited condensed statement of operations.
 
Fair Value of Financial Instruments
 
Financial instruments include cash and cash equivalents, available-for-sale securities, and accounts payable. Available-for-sale securities are carried at fair value. Cash and cash equivalents and accounts payable are carried at cost, which approximates fair value due to the relative short maturities of these instruments.  The Company has issued certain financial instruments, including warrants to purchase common stock and rights to purchase shares of Series A-1 and A-2 Preferred Stock, which have the characteristics of both equity and liabilities.  These instruments were evaluated to be classified as liabilities at the time of issuance and are revalued at fair value from period to period with the resulting change in value included in other income/(expense).The fair value of the Company’s financial liabilities and available-for-sale securities are discussed in Notes 5, 7 and 9.
 
Debt Issuance Costs
 
As discussed in Note 3, the debt issuance costs relate to fees paid in the form of cash and warrants to secure a firm commitment to borrow funds.  These fees are deferred, and if the commitment is exercised, amortized over the life of the related loan using the interest method.    
 
 
- 10 -

 
 
NOTE 3. FACILITY AGREEMENT
 
On October 30, 2007, the Company entered into a Facility Agreement (the “Facility Agreement”) with certain affiliates of Deerfield Management (collectively, “Deerfield”), pursuant to which Deerfield agreed to loan to the Company up to $30 million.  The Facility Agreement requires that the Company comply with all regulatory agency requirements and the requirements of the Company’s license agreements. The Company is also prohibited from disposing of certain assets related to certain product candidates the Company is currently developing.  In accordance with and upon execution of the Facility Agreement, the Company paid a loan commitment fee of $1.1 million to Deerfield Management.  The Company has drawn down an aggregate of $27.5 million since October 30, 2007, of which the entire amount was outstanding at March 31, 2011. There are no additional draws available under the Facility Agreement.
 
Pursuant to the Facility Agreement, the Company is required to make quarterly interest payments on outstanding principal, at a stated annual rate of 9.85%.  Under the original terms of the Facility Agreement, all outstanding indebtedness was required to be repaid in full on October 30, 2013.  However, on June 7, 2010, the Company and Deerfield entered into an amendment to the Facility Agreement that, among other terms, extended the maturity date of the outstanding principal to June 30, 2015.  The Company deemed this modification unsubstantial as the change in the present value of cash flows related to the payment of interest and principal was less than 10%.  The Company’s obligations under the Facility Agreement are secured by all assets owned (or that will be owned in the future) by the Company, both tangible and intangible. The effective interest rate on the $27.5 million notes payable, including discount on debt, is approximately 14.5%.  As of March 31, 2011, the Company had accrued $0.7 million in interest payable that was paid in April 2011.  The fair value of the loan payable as of March 31, 2011 was $14.3 million.
 
Discount on Debt. The Company issued certain warrants to Deerfield as part of the Facility Agreement.  The fair value of these warrants when issued was $6.0 million.  The total value of the warrants was recorded as a discount on the note payable with this discount amortized over the life of the loan agreement, through June 2015.  As of March 31, 2011, the remaining debt discount is approximately $4.0 million.
 
Summary of Notes Payable. From November 1, 2007 through May 20, 2009, the Company drew down $27.5 million of the $30.0 million in total loan proceeds available under the Facility Agreement. The Company is not required to pay back any portion of the principal amount until June 30, 2015.  The table below is a summary of the change in carrying value of the notes payable, including the discount on debt for the three months ended March 31, 2011 and 2010:
 
(In thousands)
 
Carrying
Value at
January 1,
   
Amortized
Discount
   
Carrying
Value at
March 31,
 
2011
                 
Notes payable
 
$
27,500
   
$
   
$
27,500
 
Discount on debt
   
(4,160)
     
(173)
     
(3,987)
 
Carrying value
 
$
23,340
           
 $
23,513
 
                         
2010
                       
Notes payable
 
$
27,500
   
$
   
$
27,500
 
Discount on debt
   
(4,903)
     
(239)
     
(4,664)
 
Carrying value
 
$
22,597
           
$
22,836
 
 
 
- 11 -

 
 
A summary of the debt issuance costs and changes during the periods ending March 31, 2011 and 2010 is as follows:
 
  
 
Carrying
Value at
January 1,
   
Amortized
Deferred
Transaction
Costs
   
Carrying
Value at
March 31,
 
 (In thousands)
                 
2011
Deferred transaction costs
 
$
905
   
$
(39)
   
$
866
 
                         
2010
Deferred transaction costs
 
$
1,194
   
$
(175)
   
$
1,019
 
 
NOTE 4. AVAILABLE-FOR-SALE SECURITIES
 
On March 31, 2011, the Company had investments with an estimated fair value of $10.3 million, of which $7.0 million were classified as available-for-sale securities and consisted of both equity and debt investments.  All the Company’s debt investments are considered U.S. treasury obligations and these securities have original maturities less than twelve months.  The following table summarizes the investments classified as available-for-sale securities during the three months ended March 31, 2011 and 2010:
    
March 31, 2011 (In thousands)
 
Input Level
 
Amortized or
Historical Cost
   
Gross
Realized
Gains/(Losses)
   
Gross
Unrealized
Gains/(Losses)
   
Estimated Fair
Value
 
Money market funds
 
Level 2
  $ 3,261     $     $     $ 3,261  
U.S. treasury obligations
 
Level 2
    6,991             8       6,999  
Equity securities
 
Level 1
    92       (76 )           16  
                                     
Total available-for-sale securities
        10,344       (76 )     8       10,276  
Less: amounts classified as cash equivalents
        (3,261 )                 (3,261 )
                                     
Amounts classified as available-for-sale securities
      $ 7,083     $ (76 )   $ 8     $ 7,015  
                                     
March 31, 2010 (In thousands)
 
Input Level
 
Amortized or
 Historical Cost
   
Gross
Realized
Gains/(Losses)
   
Gross
Unrealized
Gains/(Losses)
   
Estimated Fair
Value
 
Equity securities
 
Level 1
  $ 92     $     $ (16 )   $ 76  
                                     
 
NOTE 5. REDEEMABLE CONVERTIBLE PREFERRED STOCK
 
Private Placement of Preferred Stock 
 
On June 7, 2010, the Company, Warburg Pincus Private Equity X, L.P. and Warburg Pincus X Partners, L.P. (collectively, “Warburg Pincus”) and Deerfield (together with Warburg Pincus, the “Purchasers”) entered into an Investment Agreement pursuant to which the Company issued and sold to the Purchasers an aggregate of 400,000 shares of its newly-designated Series A-1 Convertible Preferred Stock at the stated value of $100 per share for an aggregate purchase price of $40 million. 
 
The Investment Agreement provides that the Purchasers also have the right, but not the obligation, to make additional investments in the Company as follows:
 
 
at any time prior to the date the Company receives marketing approval from the U.S. Food and Drug Administration for the first of its product candidates (“Marketing Approval Date”), the Purchasers may purchase up to an additional 200,000 shares of Series A-1 Preferred Stock at a purchase price of $100 per share for an aggregate purchase price of $20 million (“Additional Investment”); and
 
 
at any time beginning 15 days and within 120 days following the Marketing Approval Date, the Purchasers may purchase up to an aggregate of 400,000 shares of Series A-2 Convertible Preferred Stock at the stated value of $100 per share for an aggregate purchase price of $40 million (“Subsequent Investment”).
The Investment Agreement required that the Company seek approval of its stockholders to amend the Company’s certificate of incorporation to:  (i) increase the authorized number of shares of Common Stock, (ii) effect a reverse split of its Common Stock at a ratio to be agreed upon with the Purchasers, and (iii) provide that the number of authorized shares of Common Stock may be increased or decreased by the affirmative vote of the holders of a majority of the issued and outstanding Common Stock and preferred stock, voting together as one class, notwithstanding the provisions of Section 242(b)(2) of the Delaware General Corporation Law (collectively, the “Stockholder Approval”).  Stockholder Approval was obtained at a special meeting of the Company’s stockholders on September 2, 2010.
 
 
- 12 -

 
 
Terms of the Preferred Shares
 
As a result of the Company obtaining Stockholder Approval on September 2, 2010, the Company and the Purchasers conducted a second closing under the Investment Agreement on September 10, 2010 (the “Second Closing”).  As a result of the Second Closing, the terms of the Series A-1 Preferred Stock were adjusted to have the following material terms (hereafter the “Series A-1 Revised Terms”):
 
 
the stated value of the Series A-1 Preferred Stock, initially $100 per share, accretes at a rate of 9% per annum for a five-year term, compounded quarterly, and following such five-year term, the holders are thereafter entitled to cash dividends at 9% of the accreted stated value per annum, payable quarterly;
 
 
each share of Series A-1 Preferred Stock is convertible into shares of the Company’s Common Stock at a conversion price of $0.736 per share;
 
 
upon a liquidation of the Company, as defined, including a change in control of the Company, holders of the Series A-1 Preferred Stock would be entitled to receive a liquidation preference per share equal to the greater of (i) 100% of the then-accreted value of the Series A-1 Preferred Stock and (ii) the amount which the holder would have received if the Series A-1 Preferred Stock had been converted into common stock immediately prior to the liquidation; and
 
 
the Series A-1 Preferred Stock is not redeemable except as noted in the bullet points above.
 
During the period prior to the Second Closing on September 2, 2010, the Series A-1 Preferred Stock were subject to the following initial terms:
 
 
the stated value of the Series A-1 Preferred Stock, initially $100 per share, accreted at a rate of 12% per annum;
 
 
each share of Series A-1 Preferred Stock was convertible into shares of the Company’s Common Stock at a conversion price of $0.5152 per share, subject to the limitation on the number of shares of Common Stock then available for issuance; and
 
 
the Series A-1 Preferred Stock were redeemable at the holders’ election any time after December 7, 2010, at a redemption price equal to the greater of (i) 250% of the then-accreted value of the Series A-1 Preferred Stock, plus any unpaid dividends accrued thereon and (ii) market value of common stock shares the holder would receive if the Series A-1 Preferred Stock are converted into common stock immediately prior to the redemption.
 
In addition to the Stockholder Approval, the Purchasers’ obligations to complete the Second Closing were subject to a number of customary closing conditions, including the continued accuracy of the representations and warranties made by the Company in the Investment Agreement and the Company’s compliance with its contractual obligations there under. At the Second Closing, the shares of Series A-1 Preferred Stock that were originally sold and issued on June 7, 2010 automatically became subject to the Series A-1 Revised Terms.  In addition, the Company issued to the Purchasers an additional 12,562 shares of Series A-1 Preferred Stock in satisfaction of an aggregate of $1.2 million in accretion on the initial 400,000 shares of Series A-1 Preferred Stock since their issuance date on June 7, 2010.
 
The terms of the Series A-2 Preferred Stock are identical to the Series A-1 Revised Terms, except the conversion price is $1.104 per share.
 
Upon closing of the initial investment on June 7, 2010, the Warburg Purchasers received the right to designate five out of nine members of the Company’s Board of Directors.  The Purchasers also received certain other rights including registration rights for all securities contemplated in the Investment Agreement and the right to participate in any future financing transactions.  
 
The Purchasers are not permitted to transfer or sell preferred stock until the earlier of (a) June 7, 2011 for the initial 400,000 shares of Series A-1 Preferred Stock issued on June 7, 2010, and the applicable first anniversary date of the applicable closing date for the future tranches of shares of Series A-1 or Series A-2 Preferred Stock, (b) June 7, 2012, or (c) the date following the first period of 20 consecutive trading days during which the closing price of the Company’s common stock exceeds 200% of the conversion price. Transfer and sale restrictions could also lapse upon occurrence of certain other events.
 
Additionally, as a condition to the initial closing under the Investment Agreement, the Company and Deerfield amended the Facility Agreement.  The maturity date of the principal outstanding pursuant to the loan under the Facility Agreement was extended from October 30, 2013 to June 30, 2015.  
 
Accounting Treatment
 
The Company has allocated the proceeds from the financing between Series A-1 Preferred Shares and the Purchasers’ rights to purchase additional shares of Series A-1 and A-2 Preferred Stock in connection with the Additional Investments and Subsequent Investments. 
 
 
- 13 -

 
 
 
Outstanding Series A-1 Preferred Stock – Due to certain contingent redemption features of this instrument, the Company classified the 400,000 shares of Series A-1 Preferred Stock sold on June 7, 2010 in the mezzanine section (between equity and liabilities) on the accompanying balance sheet.  The Company recorded the residual value of these shares as $29.9 million on June 7, 2010, net of transaction costs of $1.4 million and $8.7 million allocated to the rights to purchase additional Preferred Stock in the future.  When the 400,000 shares of Preferred Stock were issued on June 7, 2010, approximately 121,000 shares were convertible due to the limited remaining authorized shares of common stock available for conversion.  At the Second Closing, the remaining 279,000 shares of Preferred Stock became convertible when the reverse stock split and the additional shares of common stock were authorized.
 
 
Additional Series A-1 Preferred Stock Issued During Second Closing – At the Second Closing on September 10, 2010, the Company issued an additional 12,562 shares to the Purchasers to capture the accretion to the stated value of the Preferred Stock from June 7, 2010, when the shares were issued through the second closing.  The carrying value of the Preferred Stock was increased by the estimated fair value of these shares on September 10, 2010, which was $0.7 million.  The Company reduced shareholder’s equity by the same amount.  All of these additional shares were convertible upon issuance.
 
  Rights to Purchase Preferred Stock in the Additional and Subsequent Investments – The Company determined that the Purchasers’ rights to purchase future shares of Preferred Stock in connection with the Additional and Subsequent Investments are freestanding instruments that are required to be classified as liabilities and carried at fair value. The treatment of these instruments as a liability is due to certain redemption features of the underlying Preferred Stock.   
 
    The following table summarizes the fair value of right to purchase future shares of Preferred Stock outstanding as of March 31, 2011 and the changes in the valuation in the three month periods then ended:
 
(In thousands)
 
Fair Value at
January 1, 2011
   
Net change in
 fair value of
 liabilities
   
Fair Value at
March 31, 2011
 
Investors’ rights to purchase future shares of series
     A-1 and A-2 preferred stock
 
$
5,131
     
2,382
   
$
7,513
 
 
The following table summarizes the assumptions used in applying the Black-Scholes-Merton option pricing model to determine the fair value of the liability related to the rights to purchase outstanding during the three months ended March 31, 2011:
 
Rights to purchase future shares of preferred stock
  Three Months Ended
March 31, 2011
 
Risk-free interest rate
   
0.23 – 0.25
%
Expected life (in years)
   
0.75 – 0.83
 
Volatility
   
0.98 – 0.985
 
Dividend Yield
   
8.7
%
 
 
Beneficial Conversion Feature – Because the conversion price of the shares of Preferred Stock was less than the fair market price of the Company’s common stock at the date Preferred Stock was sold and issued, the in-the-money conversion feature (Beneficial Conversion Feature, or BCF) requires separate recognition and is measured at the intrinsic value (i.e., the amount of the increase in value that preferred stockholders would realize upon conversion based on the value of the conversion shares on the commitment date).  The BCF is limited to the proceeds allocated to preferred shares and is initially recorded as a discount to preferred shares and included as additional paid-in capital.  Because there is not a stated redemption date of the shares of the convertible Series A-1 Preferred Stock, the BCF is immediately accreted to the Preferred Shares as a deemed preferred stock dividend.   The Company has recognized aggregate BCF of $29.9 million related to the shares of Preferred Share in June 2010.
 
 
Accretion on Preferred Stock - For the period from June 7, 2010 to September 10, 2010 (the date of the Second Closing), the 400,000 shares of Series A-1 Preferred Stock accreted value to the stated rate of $100 at an annual rate of 12%, compounded quarterly.  Upon the Second Closing, the 412,652 shares of Series A-1 Preferred Stock accreted value to the stated rate of $100 at an annual rate of 9%, compounded quarterly.  The total accretable value from the transaction date to March 31, 2011 was $3.4 million, including $0.9 million for the three months ended March 31, 2011.  The Company will not recognize the value of the accretion to the preferred stock until such time that it becomes probable that the shares of preferred stock will become redeemable.  The accretable value is included, for loss per share purposes only, as a dividend to preferred stockholders and the loss attributable to common shareholders is increased by the value of the accretion for the period.
 
 
- 14 -

 
 
NOTE 6. STOCKHOLDERS' DEFICIT
 
In connection with the one-for-four reverse stock split the Company implemented at the close of business on September 10, 2010, the number of outstanding shares of common stock and equity awards was proportionately adjusted to reflect the reverse stock split.  As a result, the number of outstanding shares of common stock and equity awards was determined by dividing the number of outstanding shares and equity awards by four.  The per share exercise price of stock options and warrants was determined by multiplying the exercise price by four.  All historical share and per share amounts have been adjusted to reflect the reverse stock split.  All stock options and warrants were appropriately adjusted to give effect to the Reverse Stock Split.
 
Stock Incentive Plans. As of March 31, 2011, the Company had three stockholder approved stock incentive plans under which it grants or has granted options to purchase shares of our common stock and restricted stock awards to employees: the 2010 Equity Incentive Plan (the “2010 Plan”), the 2004 Stock Incentive Plan (the “2004 Plan”) and the 2003 Stock Option Plan (the “2003 Plan”).   The Board of Directors, or the Chief Executive Officer when designated by the Board, is responsible for administration of the employee stock incentive plans and determines the term, exercise price and vesting terms of each option. In general, stock options issued under all the current plans have a vesting period of three to four years and expire ten years from the date of grant. Additionally, the Company has an Employee Stock Purchase Plan, the 2006 Employee Stock Purchase Plan (the “2006 Plan”).
 
On February 16, 2010, the Company’s Board of Directors adopted the 2010 Plan.  Under the 2010 Plan, the Board or a committee appointed by the Board may award nonqualified stock options, incentive stock options, restricted stock, restricted stock units, performance awards, and stock appreciation rights to participants.  Officers, directors, employees or non-employee consultants or advisors (including our subsidiaries and affiliates) are eligible to receive awards under the 2010 Plan. The total number of shares of our common stock available for grants of awards to participants under the 2010 Plan is 8.5 million shares.  The Company intends for all future stock option awards to be issued under the 2010 Plan, with no additional awards being issued under the 2003 Plan or 2004 Plan.
 
Stock Options. The following table summarizes information about stock options outstanding at March 31, 2011 and changes in outstanding options in the three months then ended, all of which are at fixed prices:
   
Number Of
Shares Subject To
Options Outstanding
(in 000’s)
   
Weighted Average
Exercise Price
Per Share
   
Weighted Average
Remaining
Contractual Term
(In Years)
 
Aggregate
Intrinsic Value
($ in 000’s)
 
                       
Outstanding January 1, 2011
   
6,749
   
$
1.32
           
                           
Options granted
   
     
           
Options exercised
   
     
             
Options cancelled
   
(138)
     
1.14
             
Outstanding March 31, 2011
   
6,611
   
$
1.32
     
9.0
   
$
$1,247
 
Exercisable at March 31, 2011
   
1,509
   
$
3.92
     
7.1
   
$
114
 
 
During the three months ended March 31, 2011 and 2010, the Company recorded share-based compensation cost from all equity awards to employees of $0.3 million and $0.2 million, respectively.  
 
Employee Stock Purchase Plan. The 2006 Plan allows employees to contribute a percentage of their gross salary toward the semi-annual purchase of shares of our common stock. The price of each share will not be less than the lower of 85% of the fair market value of our common stock on the last trading day prior to the commencement of the offering period or 85% of the fair market value of our common stock on the last trading day of the purchase period. A total of 0.2 million shares of common stock were initially reserved for issuance under the 2006 Plan.
 
Assumptions. There were no options issued during the three months ended March 31, 2011.  The following table summarizes the assumptions used in applying the Black-Scholes-Merton option pricing model to determine the fair value of new awards granted during the three months ended March 31, 2011 and 2010, respectively:
 
   
Three Months Ended March 31,
 
   
2011
   
2010
 
Stock options
           
Risk-free interest rate
   
-
%
   
3.00
%
Expected life (in years)
   
-
     
5.5 – 6.0
 
Volatility
   
-
     
0.99
 
Dividend Yield
   
-
%
   
0
%
 
 
- 15 -

 
 
The Company estimates the fair value of each option award on the date of grant using the Black-Scholes-Merton option-pricing model and uses the assumptions as allowed by ASC 718, “Compensation – Stock Compensation.”  Through October 2010, as allowed by ASC 718-10-55, companies with a short period of publicly traded stock history, the Company’s estimate of expected volatility was based on the average expected volatilities of a sampling of other peer companies with similar attributes to it, including industry, stage of life cycle, size and financial leverage as well as the Company’s own historical data.  For options issued after October 2010, the Company used its own historical data to estimate expected volatility.  As the Company has so far only awarded “plain vanilla” options as described by the SEC’s Staff Accounting Bulletin Topic No. 14, “Share-Based Payment,” it used the “simplified method” for determining the expected life of the options granted. The Company will continue to use the “simplified method” under certain circumstances, which it will continue to use as it does not have sufficient historical data to estimate the expected term of share-based awards.  The risk-free rate for periods within the contractual life of the option is based on the U.S. treasury yield curve in effect at the time of grant valuation. ASC 718 does not allow companies to account for option forfeitures as they occur.  Instead, estimated option forfeitures must be calculated upfront to reduce the option expense to be recognized over the life of the award and updated upon the receipt of further information as to the amount of options expected to be forfeited.
 
Common Stock Warrants.  As of March 31, 2011, the Company had outstanding warrants to purchase an aggregate of approximately 2.0 million shares of its common stock, all of which were available for exercise. 
 
At March 31, 2011, there are outstanding Series A warrants to purchase an aggregate of 0.6 million shares of common stock and Series B warrants to purchase an aggregate of 1.4 million shares of common stock in connection with the Company’s October 2009 private placement.  As a result of an anti-dilution provision contained in the Series B warrants issued in the Company’s October 2009 private placement, the exercise price of the Series B warrants was reduced to $1.20 per share after giving effect to the issuance of Series A-1 Preferred Stock on June 7, 2010.
 
The following table summarizes the warrants outstanding as of March 31, 2011 and the changes in outstanding warrants in the three month period then ended:
 
   
 
Number Of
Shares Subject
To Warrants
Outstanding
(in 000’s)
   
Weighted-Average
Exercise Price
 
Warrants outstanding January 1, 2011
   
2,037
   
$
0.84
 
Warrants granted
   
     
 
Warrants cancelled
   
     
 
Warrants exercised
   
         
Warrants outstanding March 31, 2011
   
2,037
   
$
0.84
 
 
 
- 16 -

 
 
NOTE 7. WARRANT LIABILITIES
 
The 0.6 million shares subject to purchase under Series A warrants and 1.4 million shares subject to purchase under Series B warrants were classified as liabilities on the balance sheet as of March 31, 2011.  See Note 6 for discussion on these warrants.  The fair value of the warrants classified as liabilities was $1.2 million on March 31, 2011. During the three months ended March 31, 2011 and 2010, the Company recognized a loss of $0.5 million and a gain of less than $0.1 million, respectively, related to the revaluation of the warrant liabilities.
 
The following table summarizes the fair value of warrants classified as liabilities and outstanding as of March 31, 2011 and 2010 and the changes in the valuation in the three month periods then ended:
 
(In thousands)
 
Fair value
Value at
January 1,
   
Reduction of
 liability due to redemption or exercise
   
Net change in
 fair value of
 liabilities
   
Fair
Value at
March 31,
 
2011
                       
Warrants classified as liabilities
 
$
713
   
$
   
$
458
   
$
1,171
 
                                 
2010
                               
Warrants classified as liabilities
 
$
2,146
     
 
 
 $
(41)
   
$
2,105
 
 
The Company classified these warrants as liabilities based on certain cash settlement provisions available to the warrant holders upon certain reorganization events in the equity structure, including mergers.  Specifically, in the event the Company is acquired in an all cash transaction, a transaction whereby it ceases to be a publicly held entity under Rule 13e-3 of the Securities Exchange Act of 1934, or a reorganization involving an entity not traded on a national securities exchange, the warrant holders may elect to receive an amount of cash equal to the value of the warrants as determined in accordance with the Black-Scholes-Merton option pricing model with certain defined assumptions.  At any time when the resale of the warrant shares is not covered by an effective registration statement under the Securities Act of 1933, the warrant holders can elect a cashless exercise of all or any portion of shares outstanding under a warrant, in which case they would receive a number of shares with a value equal to the intrinsic value on the date of exercise of the portion of the warrant being exercised.  Additionally, warrant holders have certain registration rights and the Company would be obligated to make penalty payments to them under certain circumstances if we were unable to maintain effective registration of the shares underlying the warrants with the SEC.
 
Assumptions. The following table summarizes the assumptions used in applying the Black-Scholes-Merton option pricing model to determine the fair value of the liability related to warrants outstanding during the three months ended March 31, 2011 and 2010, respectively:
 
   
Three Months Ended March 31,
 
Warrant liabilities  
2011
   
2010
 
Risk-free interest rate
   
2.24
%
   
3.28
%
Expected life (in years)
   
5.50
     
6.5
 
Volatility
   
98
     
99
 
Dividend Yield
   
0
%
   
0
%
 
For additional details on the change in value of these liabilities, see Note 9.  Changes in the Company’s stock price or volatility would result in a change in the value of the warrants and impact the statement of operations. A 10% increase in the Company’s stock price would cause the fair value of the warrants and the warrant liability to increase by approximately 10%.
 
 
- 17 -

 
 
NOTE 8. BASIC NET LOSS PER COMMON SHARE
 
Basic net loss per share is based upon the weighted average number of common shares outstanding during the period. Diluted net loss per share is based upon the weighted average number of common shares outstanding during the period, plus the effect of additional weighted average common equivalent shares outstanding during the period when the effect of adding such shares is anti-dilutive.
 
Basic and diluted net loss per share was determined as follows:
 
   
Three Months Ended
 
   
March 31,
 
(In thousands, except per share amounts)
 
2011
   
2010
 
Net loss
 
$
(10,415)
   
$
(5,472)
 
Deemed dividend to preferred shareholders, additional accretion
   
(941)
     
 
                 
Net loss applicable to Common Stock
   
(11,356)
     
(5,472)
 
                 
Weighted average shares used in computing net loss per share, basic and diluted
   
21,243
     
19,946
 
                 
Net loss per share, basic and diluted
 
$
(0.53)
   
$
(0.27)
 
 
The securities in the table below were excluded from the computation of diluted net loss per common share for the three months ended March 31, 2011 and 2010 because such securities were anti-dilutive during the periods presented:
 
(In thousands)
 
2011
   
2010
 
Warrants
   
2,037
     
3,686
 
Stock options and Employee Stock Purchase Plans
   
6,650
     
2,260
 
Convertible redeemable preferred stock
   
58,902
     
 
                 
Total
   
67,589
     
5,946
 
 
NOTE 9. FAIR VALUE MEASUREMENTS
 
ASC 820 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 under ASC 820 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 under ASC 820 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. Our Level 2 assets exclusively include U.S. government obligations with quoted prices that are traded less frequently than exchange-traded instruments. All of our Level 2 asset values are determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. The pricing model information is provided by third party entities (e.g. banks or brokers). In some instances, these third party entities engage external pricing services to estimate the fair value of these securities; and
 
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 following table represents the fair value hierarchy for our financial assets and liabilities held by the Company measured at fair value on a recurring basis as of March 31, 2011:
 
 
- 18 -

 
 
As of March 31, 2011
                       
(In thousands)
 
Level 1
   
Level 2
   
Level 31
   
Total
 
Assets
                               
Available-for-sale equity securities
 
$
16
   
$
   
$
   
$
16
 
Available-for-sale debt securities
   
     
10,260
     
     
10,260
 
Total
 
$
16
   
$
10,260
   
$
   
$
10,276
 
Liabilities
                               
Warrant liabilities
   
     
   
$
1,171
   
$
1,171
 
Right to purchase future Series A-1 and A-2 preferred stock
   
     
     
7,513
     
7,513
 
Total
 
$
   
$
   
$
8,684
   
$
8,684
 
 
As of December 31, 2010
                       
(In thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets
                       
Available-for-sale equity securities
  $ 74     $     $     $ 74  
Available-for-sale debt securities
          17,994             17,994  
Total
  $ 74     $ 17,994     $     $ 18,068  
Liabilities
                               
Warrant liabilities
              $ 713     $ 713  
Right to purchase future Series A-1 and A-2 preferred stock
                5,131       5,131  
Total
  $     $     $ 5,844     $ 5,844  
 
NOTE 10.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
 
Accounts payable and accrued liabilities consist of the following at March 31, 2011 and December 31, 2010:
 
 (In thousands)
 
March 31,
2011
   
December 31,
2010
 
Trade accounts payable
 
$
1,961
   
$
1,725
 
Clinical research and other development related costs
   
3,413
     
2,340
 
Accrued personnel related expenses
   
333
     
1,202
 
Interest payable
   
668
     
683
 
Accrued other expenses
   
288
     
102
 
Total
 
$
6,663
   
$
6,052
 
    
NOTE 11. COMMITMENTS
 
Lease Agreements. The Company entered into a three year sublease, which commenced on May 31, 2006, for property at 7000 Shoreline Court in South San Francisco, California, where the Company’s executive offices were located until March 15, 2011.  This lease expired on March 31, 2011.
 
On February 10, 2011, the Company entered into a 17-month sublease for property at 2207 Bridgepointe Parkway in San Mateo, California, which commenced on March 1, 2011.  The total cash payments due over the 17-month sublease period are under $0.3 million.
 
   
 
1 See notes 5 and 7 of these Notes to the Unaudited Condensed Financial Statements for a roll forward of the Company’s Level 3 Assets for the three months ended March 31, 2011 and 2010.
 
 
- 19 -

 
       
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited condensed financial statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q. This discussion includes forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” in Item 1A of Part I of the 2010 Form 10-K, our actual results may differ materially from those anticipated in these forward-looking statements .
 
Overview
 
We are a biopharmaceutical company dedicated to developing and commercializing new, differentiated cancer therapies designed to improve and enable current standards of care.  We currently have four product candidates in various stages of development:
 
Marqibo® (vincristine sulfate liposomes injection), our lead product candidate, is a novel, targeted Optisome™ encapsulated formulation product candidate of the FDA-approved anticancer drug vincristine, being developed primarily for the treatment of ALL. We plan to submit a new drug application to the FDA in 2011 seeking accelerated approval of Marqibo for the treatment of adult ALL in second relapse or that has progressed following two or more prior lines of anti-leukemia therapy.  Additionally, Marqibo will be studied in a Phase 3 trial in elderly patients with newly diagnosed aggressive NHL, with enrollment expected to begin before the end of 2011.
   
Menadione Topical Lotion, a novel supportive care product candidate, being developed for the prevention and/or treatment of the skin toxicities associated with the use of epidermal growth factor receptor inhibitors, a type of anti-cancer agent used in the treatment of certain cancers.
   
Brakiva™ (topotecan liposome injection), a novel targeted Optisome™ encapsulated formulation product candidate of the FDA-approved anticancer drug topotecan.
   
Alocrest™ (vinorelbine liposome injection), a novel, targeted Optisome™ encapsulated formulation product candidate of the FDA-approved anticancer drug vinorelbine, being developed for the treatment of solid tumors such as non-small-cell lung cancer.
 
Product Candidates
 
Marqibo® (vincristine sulfate liposomes injection)
 
Marqibo is a novel, targeted Optisome™ encapsulated formulation product candidate of the FDA-approved anticancer drug vincristine. We are primarily developing Marqibo for the treatment of adult ALL. Vincristine, a microtubule inhibitor, is FDA-approved for ALL and is widely used as a single agent and in combination regimens for treatment for hematologic malignancies such as lymphomas and leukemias. Our encapsulation formulation is designed to provide prolonged circulation of the drug in the blood and accumulation at the tumor site. These characteristics are intended to increase the effectiveness and potentially reduce the side effects of the encapsulated drug.
 
Marqibo has been evaluated in 18 clinical trials with over 700 patients, including Phase 2 clinical trials in patients with non-Hodgkin’s lymphoma, or NHL and ALL. Based on the results from these studies, in 2007 we initiated a global, Phase 2 clinical trial of Marqibo in adult Philadelphia chromosome negative, or Ph-, ALL patients in second relapse, or those who have progressed following two or greater prior lines of anti-leukemia therapy. We refer to this clinical trial as the rALLy study. The primary outcome measure was complete remission, or CR, or complete remission without full hematologic recovery, which we refer to as CRi.
 
We completed the rALLy study and announced data in 2010. The sample size from the study consisted of 65 evaluable subjects. The analysis of the study data demonstrated an overall response rate (measured by CR, CRi, partial remission and bone marrow blast count normalization without blood count recovery) reported by study investigators in 23 of the 65 evaluable subjects, or 35 percent. Thirteen subjects, or 20 percent, experienced a CR or CRi. As of the announcement of the study results, the estimated median overall survival in complete responders was 7.33 months, with five subjects having an overall survival of more than one year. The estimated median duration of CR/CRi was 5.3 months. Eleven subjects participating in the rALLy study went on to receive a potentially life-saving stem cell transplant. The data also showed that the safety profile of Marqibo was predictable, manageable and comparable with standard vincristine sulfate.
 
Based on the data from the rALLy study, before the end of June 2011, we plan to submit to the FDA a New Drug Application, or NDA, seeking accelerated approval of Marqibo in Ph- adult ALL, in second relapse or that has progressed following two or more prior lines of anti-leukemia therapy. At a February 8, 2011 meeting of the FDA’s Oncology Drug Advisory Committee, or ODAC, the FDA indicated that a drug sponsor and the FDA must agree on the feasibility and design of Phase 3 confirmatory studies as a necessary element in the NDA submission process for those sponsors seeking accelerated approval. According to the FDA, a sponsor seeking accelerated approval should not submit its NDA until such agreement on Phase 3 confirmatory studies has been finalized. As such, our NDA submission may be delayed beyond June 2011 if we and the FDA do not timely reach agreement on our proposed confirmatory Phase 3 study.
 
In May 2011, we announced the initiation of a Phase 3 Study of Marqibo in elderly patients with newly diagnosed aggressive NHL to be conducted by the German High-Grade Non-Hodgkin's Lymphoma Study Group (DSHNHL). The study will enroll approximately 1,000 patients (61-80 years of age) with aggressive CD20+ B-cell NHL. The primary objectives are to test the effects of substituting conventional vincristine with Marqibo in the R-CHOP regimen.  We anticipate enrollment of the first patient in this study prior to the end of 2011.
 
Marqibo received a U.S. orphan drug designation in January 2007 as well as a European Commission orphan drug designation in June 2008 for the ALL indication. Marqibo also received a U.S. orphan drug designation in July 2008 for metastatic uveal melanoma. Marqibo received a fast track designation from the FDA in August 2007 for the treatment of adult ALL in second relapse or that has progressed following two or more prior lines of anti-leukemia therapy.
 
 
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Menadione Topical Lotion (Supportive Care Product)
 
Menadione Topical Lotion, or MTL, which we licensed from the Albert Einstein College of Medicine, or AECOM, in October 2006, is a novel, product candidate under development for the treatment and/or prevention of skin rash associated with the use of EGFR inhibitors in the treatment of certain cancers. EGFR inhibitors, which include Tarceva, Erbitux, Iressa, Tykerb and Vectibix, are currently approved to treat non-small cell lung cancer, pancreatic, colorectal, breast and head and neck cancer. EGFR inhibitors are associated with significant skin toxicities presenting as acne-like rash on the face, neck and upper-torso of the body in approximately 75% of patients.  Fifty percent of patients who manifest skin toxicity experience significant discomfort. This results in discontinuation or dose reduction in at least 10% and up to 30% of patients that receive the EGFR inhibitor.  Menadione, a small organic molecule, has been shown to activate the EGFR signaling pathway by inhibiting phosphatase activity which is an important enzyme in the EGFR pathway. In vivo studies have suggested that topically-applied menadione may restore EGFR signaling specifically in the skin of patients treated systemically with EGFR inhibitors. Currently, there are no FDA-approved products or therapies available to treat these skin toxicities.
 
We completed enrollment of a Phase 1 clinical trial in cancer patients.   The primary endpoints for the Phase 1 study included safety, tolerability and identification of a maximum tolerated dose.  The results of the Phase 1 study demonstrated that MTL is generally safe and well-tolerated.  A dose limiting toxicity of skin irritation and redness was observed primarily at the 0.2% lotion strength.  The apparent maximum tolerated lotion strength is 0.1%.  MTL applied twice daily at all strengths, including the highest lotion strength tested (0.2%) resulted in no appreciable systemic exposure.
 
Following the completion of the Phase 1 study, we are continuing to evaluate the development plan for MTL.  However, our immediate strategy is to seek a partner to enhance and accelerate the future development of MTL.
 
Brakiva™ (topotecan liposome injection)
 
Brakiva is our proprietary product candidate comprised of the anti-cancer drug topotecan encapsulated in Optisomes. Topotecan is FDA-approved for the treatment of metastatic carcinoma of the ovary after failure of initial or subsequent chemotherapy, and small cell lung cancer sensitive disease after failure of first-line chemotherapy.  In November 2008, we initiated a Phase 1 dose-escalation clinical trial of Brakiva, which is primarily designed to assess the safety, tolerability and maximum tolerated dose.
 
Alocrest™ (vinorelbine liposome injection)
 
Alocrest is a novel Optisomal encapsulated formulation product candidate of the FDA-approved drug vinorelbine, a microtubule inhibitor for use as a single agent or in combination with cisplatin for the first-line treatment of unresectable, advanced non-small cell lung cancer. In February 2008, we completed enrollment in a Phase 1 study of Alocrest. The trial enrolled 30 adult subjects with confirmed solid tumors refractory to standard therapy or for which no standard therapy was known to exist. The objectives of the Phase 1 clinical trial were: (1) to assess the safety and tolerability of Alocrest; (2) to determine the maximum tolerated dose of Alocrest; (3) to characterize the pharmacokinetic profile of Alocrest; and (4) to explore preliminary efficacy of Alocrest. The study was conducted at the Cancer Therapy and Research Center and South Texas Accelerated Research Therapeutics (START), both located in San Antonio, Texas and at McGill University in Montreal.  Reversible neutropenia, a low white blood cell count, was the dose-limiting toxicity. The results of this study revealed expected toxicity, and a 50% disease control rate was achieved across a range of doses in patients with previously treated, advanced cancers.
 
Revenues
 
We do not expect to generate any significant revenue from product sales or royalties in the foreseeable future.  We may have revenues in the future only if we are able to develop and commercialize our products, license our technology and/or enter into strategic partnerships. If we are unsuccessful, our ability to generate future revenues will be significantly diminished.
 
Research and Development Expenses
 
Research and development expenses, which account for the bulk of our expenses, consist primarily of salaries and related personnel costs, fees paid to consultants and outside service providers for laboratory development, manufacturing, and other expenses relating to the acquiring, design, development, testing, and enhancement of our product candidates, including milestone payments for licensed technology. We expense research and development costs as they are incurred.
 
While expenditures on current and future clinical development programs are expected to be substantial, particularly in light of our available resources, they are subject to many uncertainties, including the results of clinical trials and whether we develop any of our drug candidates with a partner or independently. As a result of such uncertainties, we cannot predict with any significant degree of certainty the duration and completion costs of our research and development projects or whether, when and to what extent we will generate revenues from the commercialization and sale of any of our product candidates. The duration and cost of clinical trials may vary significantly over the life of a project as a result of unanticipated events arising during clinical development and a variety of factors, including:
 
 
- 21 -

 
 
 
the number of trials and studies in a clinical program;
 
 
the number of patients who participate in the trials;
 
 
the number of sites included in the trials;
 
 
the rates of patient recruitment and enrollment;
 
 
the duration of patient treatment and follow-up;
 
 
the costs of manufacturing our drug candidates; and
 
 
the costs, requirements, timing of, and the ability to secure regulatory approvals.
         
General and Administrative Expenses
 
General and administrative expenses consist primarily of salaries and related expenses for executive, finance, business development and other administrative personnel, recruitment expenses, professional fees and other corporate expenses, including accounting and general legal activities. 
 
Share-based Compensation
 
Share-based compensation expenses consist primarily of expensing the fair-market value of a share-based award over the vesting term.  This expense is included in our operating expenses for each reporting period.
 
Critical Accounting Policies
   
The accompanying discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. We believe there are certain accounting policies that are critical to understanding our financial statements, as these policies affect the reported amounts of expenses and involve management’s judgment regarding significant estimates. We have reviewed our critical accounting policies and their application in the preparation of our financial statements and related disclosures with the Audit Committee of our Board of Directors. Our critical accounting policies and estimates are described below.
  
Share-Based Compensation
 
We account for share-based compensation in accordance with FASB ASC TOPIC 718 “Compensation – Stock Compensation.”  We have adopted a Black-Scholes-Merton model to estimate the fair value of stock options issued and the resultant expense is recognized in the statement of operations each reporting period.  
 
Financial Instruments with Characteristics of Both Equity and Liabilities
 
The Company has issued certain financial instruments, including warrants to purchase common stock and rights to purchase shares of Series A-1 and A-2 Preferred Stock, which have the characteristics of both equity and liabilities.  These instruments were evaluated to be classified as liabilities at the time of issuance and are revalued at fair value from period to period with the resulting change in value included in other income/(expense).  
 
Licensed In-Process Research and Development
 
Licensed in-process research and development relates primarily to technology, intellectual property and know-how acquired from another entity. We evaluate the stage of development as well as additional time, resources and risks related to development and eventual commercialization of the acquired technology. As we historically have acquired non-FDA approved technologies, the nature of the remaining efforts for completion and commercialization generally include completion of clinical trials, completion of manufacturing validation, interpretation of clinical and preclinical data and obtaining marketing approval from the FDA and other regulatory bodies. The cost in resources, probability of success and length of time to commercialization are extremely difficult to determine. Numerous risks and uncertainties exist with respect to the timely completion of development projects, including clinical trial results, manufacturing process development results and ongoing feedback from regulatory authorities, including obtaining marketing approval. Additionally, there is no guarantee that the acquired technology will ever be successfully commercialized due to the uncertainties associated with the pricing of new pharmaceuticals, the cost of sales to produce these products in a commercial setting, changes in the reimbursement environment or the introduction of new competitive products. Due to the risks and uncertainties noted above, we will expense such licensed in-process research and development projects when incurred. However, the cost of acquisition of technology is capitalized if there are alternative future uses in other research and development projects or otherwise based on internal review. All milestone payments will be expensed in the period the milestone is reached.
 
 
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Clinical Study Activities and Other Expenses from Third-Party Contract Research Organizations
 
Much of our research and development activities related to clinical study activity are conducted by various third parties, including contract research organizations, which may also provide contractually defined administration and management services. Expense incurred for these contracted activities are based upon a variety of factors, including actual and estimated patient enrollment rates, clinical site initiation activities, labor hours and other activity-based factors. On a regular basis, our estimates of these costs are reconciled to actual invoices from the service providers, and adjustments are made accordingly.
                
Results of Operations
 
Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
  
General and administrative expenses. For the three months ended March 31, 2011, general and administrative, or G&A, expense was $1.5 million, as compared to $1.2 million for the three months ended March 31, 2010.  The $0.3 million increase is due to increased personnel related expenses of $0.2 million, $0.2 million related to increased professional fees and third-party service fees, offset partially by $0.1 million in decreased allocated departmental costs and overhead.   Personnel costs increased due to higher headcount and compensation costs, including $0.1 million of increased share-based compensation expense.
 
Research and development expenses. The following table summarizes our R&D expenses incurred for preclinical support, contract manufacturing for clinical supplies and clinical trial services provided by third parties, as well as milestone payments for in-licensed technology for each of our current major product development programs for the three months ended March 31, 2011 and 2010.  The table also summarizes outside services and allocated overhead costs, which consist of personnel, facilities and other costs not directly allocable to development programs.
   
Product candidates ($ in thousands)
 
2011
   
2010
   
Annual %
Change
 
Marqibo
 
$
3,254
   
$
1,600
     
103
%
Other product candidates
   
59
     
6
     
883
%
Professional fees and third-party service costs
   
175
     
80
     
119
%
Allocable costs and overhead
   
273
     
288
     
-5
%
Personnel related expense
   
1,312
     
1,200
     
9
%
Share-based compensation expense
   
71
     
84
     
-15
%
Total research and development expense
 
$
5,144
   
$
3,258
     
58
%
 
Marqibo. Based upon a pre-NDA follow-up meeting with the FDA completed on November 8, 2010, we and the FDA agreed that we would simultaneously submit all modules of our proposed NDA as a complete, original, new drug application, as opposed to initiating a partial, rolling submission by the end of 2010. We do not anticipate that this change will affect the timing of submission completion, review nor potential approval. We plan to submit to the FDA a New Drug Application, or NDA, seeking accelerated approval of Marqibo in Ph- adult ALL, in second relapse or that has progressed following two or more prior lines of anti-leukemia therapy by the end of June 2011. At a February 8, 2011 meeting of the FDA’s Oncology Drug Advisory Committee, or ODAC, the FDA indicated that a drug sponsor and the FDA must agree on the feasibility and design of Phase 3 confirmatory studies as a necessary element in the NDA submission process for those sponsors seeking accelerated approval. According to the FDA, a sponsor seeking accelerated approval should not submit its NDA until such agreement on Phase 3 confirmatory studies has been finalized. As such, our NDA submission may be delayed beyond June 2011 if we and the FDA do not timely reach agreement on our proposed confirmatory Phase 3 study.
 
In the three months ended March 31, 2011, Marqibo costs increased by $1.7 million compared to the same period in 2010. The main reason for the increased costs was increased consulting services and the use of contract research organizations (CRO) used to prepare our NDA submission. We also continued enrollment in our pilot Phase 2 trial in metastic uveal melanoma. Additionally, in May 2011, we announced the initiation of a Phase 3 Study of Marqibo in elderly patients with newly diagnosed aggressive NHL to be conducted by DSHNHL. The study will enroll approximately 1,000 patients (61-80 years of age) with aggressive CD20+ B-cell NHL. The primary objectives are to test the effects of substituting conventional vincristine with Marqibo in the R-CHOP regimen.  We anticipate enrollment of the first patient in this study prior to the end of 2011
 
We expect to spend approximately $15 million on Marqibo in 2011, for personnel, consultants and CROs, the majority of which will be spent on the NDA submission, continuation of the Phase 2 trial in metastic uveal melanoma and preparation for the confirmatory Phase 3 trial. We estimate that we will need to spend an additional $45 million to $50 million on external costs to run the trial needed to obtain full FDA approval in adult ALL. External costs include drug production, clinical trial costs, data management and supporting activities not provided by our full-time employees. These costs are impacted by the size and duration of the clinical trials. We expect that it will take several years until we will have completed development and obtained full FDA approval of Marqibo, if ever.
 
Menadione Topical Lotion (MTL).   We have analyzed data from the recently completed MTL Phase 1 program.  The Phase 1 program has successfully demonstrated that MTL is generally safe and well-tolerated.  The dose limiting toxicity, skin irritation and redness, was primarily observed at the 0.2% lotion strength.  The apparent maximum tolerated lotion strength is 0.1%.   MTL applied twice daily at all strengths, including the highest lotion strength tested (0.2%) resulted in no appreciable systemic exposure.
 
As this drug is early in its clinical development, both the registration strategy and total expenditures to obtain FDA approval are still being evaluated. While we are still evaluating the development plan for MTL following completion of our Phase 1 study, we estimate that it will cost an aggregate of approximately $55 million of external costs in order to obtain full FDA approval for MTL, if ever. External costs include drug manufacture and clinical trial costs.  Our strategy is to seek a partner to enhance and accelerate the future development of MTL.
 
 
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Brakiva.   We are exploring options for further development of Brakiva beyond the phase 1 trial. As this drug is early in its clinical development, both the registration strategy and total expenditures to obtain FDA approval are still being evaluated.
 
Alocrest.   We completed enrollment in a Phase 1 clinical trial in early 2008. This Phase 1 trial was designed to assess safety, tolerability and preliminary efficacy in patients with advanced solid tumors. We are currently exploring options for the continued development of Alocrest and do not expect to incur significant project costs in 2011.
 
Other R&D expenses.   Personnel related costs increased by $0.1 million in the three months ended March 31, 2011 compared to the same period in 2010.  The increase was due largely to increased employee compensation costs.    
 
Interest expense. For the three months ended March 31, 2011, interest expense was $0.9 million as compared to interest expense of $1.1 million for the three months ended March 31, 2010. The decrease is due to a decrease in the recognition of deferred transaction costs and debt discount on the loan facility with Deerfield which are now being recognized in the unaudited condensed statement of operations over a longer period due to the extension of the loan repayment date from October 2013 to June 2015. We originally entered into this loan agreement in October 2007.
 
Gain or loss on change in fair market value of liabilities re-measured at fair value.We have certain financial instruments that are recorded as liabilities. We re-measure the fair value of these liabilities at each reporting period with the gain or loss recognized in the statement of operations. For the three months ended March 31, 2011, we recorded a net loss related to these liabilities of $2.8 million, compared to a gain of less than $0.1 million for the same period in 2010. The value of these liabilities is largely dependent on the price of our common stock, and as the stock price increases or decreases, the value of these instruments will increase or decrease in relation. For additional details, see Notes 5, 7 and 9 of our unaudited condensed financial statements included elsewhere in this Form 10-Q.
 
Liquidity and Capital Resources
 
As of March 31, 2011, we had a stockholder's deficit of approximately $52 million, and for the three months ended March 31, 2011, we experienced a net loss of $10.4 million. We have financed operations primarily through equity and debt financing and expect such losses to continue over the next several years.  We currently have a limited supply of cash available for operations. As of March 31, 2011, we had aggregate cash and cash equivalents and available-for-sale securities of $16.2 million, which we believe is sufficient to continue operations through late 2011.  We have drawn down $27.5 million of long-term debt under the loan facility agreement with Deerfield Management, with the entire balance due in June 2015.  On June 7, 2010, we entered into an Investment Agreement with certain investors pursuant to which we sold 400,000 shares of convertible preferred stock at the stated value of $100 per share, for gross proceeds of $40 million.
 
The Investment Agreement provides that the investors have the right, but not the obligation, to make additional investments, as follows:
 
  
at any time prior to the date we receive marketing approval from the U.S. Food and Drug Administration for any of our product candidates (“Marketing Approval Date”), the Purchasers may purchase up to an additional 200,000 shares of Series A-1 Preferred Stock at a purchase price of $100 per share for an aggregate purchase price of $20 million (“Additional Investment”); and
 
  
at any time beginning 15 days and within 120 days following the Marketing Approval Date, the investors may purchase up to an aggregate of 400,000 shares of Series A-2 Convertible Preferred Stock at the stated value of $100 per share for an aggregate purchase price of $40 million.
 
We currently do not have enough capital resources to fund our entire development plan beyond 2011 and our financial statements reflect substantial doubt about our ability to continue as a going concern, which is also stated in the report from our auditors on the audit of our financial statements included in our Form 10-K as of and for the year ended December 31, 2010.  Our plan of operation for the year ending December 31, 2011 is to continue implementing our business strategy, including the continued development of our main product candidate Marqibo, which includes submitting a complete NDA to the FDA by the end of June 2011.  At a February 8, 2011 meeting of the FDA’s Oncology Drug Advisory Committee, or ODAC, the FDA indicated that a drug sponsor and the FDA must agree on the feasibility and design of Phase 3 confirmatory studies as a necessary element in the NDA submission process for those sponsors seeking accelerated approval.  According to the FDA, a sponsor seeking accelerated approval should not submit its NDA until such agreement on Phase 3 confirmatory studies has been finalized.  Our NDA submission may be delayed beyond June 2011 if we and the FDA do not timely reach agreement of our proposed confirmatory Phase 3 study.  We do not generate any recurring revenue and will require substantial additional capital before we will generate cash flow from our operating activities, if ever. We will be unable to continue development of our product candidates unless we are able to obtain additional funding through equity or debt financings or from payments in connection with potential strategic transactions.  We can give no assurances that additional capital that we are able to obtain, if any, will be sufficient to meet our needs. Moreover, there can be no assurance that such capital will be available to us on favorable terms or at all, especially given the current economic environment which has severely restricted access to the capital markets.  If anticipated costs are higher than planned or if we are unable to raise additional capital, we will have to significantly curtail planned development to maintain operations before the end of 2011. 
 
As part of our planned research and development, we intend to use CROs and other third parties to help conduct our clinical studies and manufacture our product candidates. As indicated above, at our current and desired pace of clinical development of our product candidates, through the 2011 fiscal year we expect to spend approximately between $14 million and $15 million on clinical development (including milestone payments that may be triggered under the license agreements relating to our product candidates).  We expect to spend approximately $5.5 million on general corporate and administrative expenses and $2.7 million in interest payments for our long-term debt during the 2011 fiscal year.
 
 
- 24 -

 
 
The actual amount of funds we will need to operate is subject to many factors, some of which are beyond our control. These factors include the following:
 
costs associated with conducting preclinical and clinical testing;
   
costs of establishing arrangements for manufacturing our product candidates;
   
payments required under our current and any future license agreements and collaborations;
   
costs, timing and outcome of regulatory reviews;
   
costs of obtaining, maintaining and defending patents on our product candidates; and
   
costs of increased general and administrative expenses.
 
We have based our estimate on assumptions that may prove to be wrong. We may need to obtain additional funds sooner or in greater amounts than we currently anticipate.
 
Off-Balance Sheet Arrangements
 
We do not have any “off-balance sheet agreements,” as that term is defined by SEC regulation. 
  
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
 
Not applicable. 
 
Item 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
  
We conducted an evaluation as of March 31, 2011, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, which are defined under SEC rules as controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within required time periods. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.
    
Limitations on the Effectiveness of Controls
  
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefit of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Talon have been detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.    
 
Changes in Internal Controls over Financial Reporting
 
During the quarter ended March 31, 2011, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
 
 
- 25 -

 
 
PART II - OTHER INFORMATION
  
Item 1. Legal Proceedings
 
None.
 
Item 1A.  Risk Factors
 
Not applicable
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
None.
  
Item 3. Defaults Upon Senior Securities
 
Not applicable
  
Item 4. [Removed and Reserved]
  
Item 5. Other Information
 
None 
  
 
- 26 -

 
 
Item 6. Exhibits
  
Exhibit No.
 
Description
     
10.1
 
Letter agreement between Talon Therapeutics, Inc. and Steven R. Deitcher, M.D., dated January 6, 2011 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on January 12, 2011).
     
10.2
 
Agreement and Release dated January 11, 2011 between the Company and Anne E. Hagey (incorporated  by reference to Exhibit 10.31 to the Company's Registration Statement on Form S-1 filed on May 5, 2011 (File No. 333-173957)).
     
31.1
 
Certification of Chief Executive Officer, as required by Rule 13a-14(a) or Rule 15d-14(a).
     
31.2
 
Certification of Chief Financial Officer, as required by Rule 13a-14(a) or Rule 15d-14(a).
     
32.1
 
Certification of Chief Executive Officer and Chief Financial Officer, as required by Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).
 
 
- 27 -

 
 
SIGNATURES
 
In accordance with the requirements of the Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
TALON THERAPEUTICS, INC.
     
Dated: May 13, 2011
By:  
/s/ Steven R. Deitcher, MD
 
Steven R. Deitcher, MD
 
President and Chief Executive Officer
     
Dated: May 13, 2011
By:  
/s/ Craig W. Carlson  
 
Craig W. Carlson
Vice President, Chief Financial Officer

 
 
- 28 -

 
 
Index to Exhibits Filed with this Report
 
Exhibit No.
 
Description
     
31.1
 
Certification of Chief Executive Officer, as required by Rule 13a-14(a) or Rule 15d-14(a).
     
31.2
 
Certification of Chief Financial Officer, as required by Rule 13a-14(a) or Rule 15d-14(a).
     
32.1
 
Certification of Chief Executive Officer and Chief Financial Officer, as required by Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).
 
 
 
 
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