SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-KSB
x ANNUAL
REPORT UNDER SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
fiscal year ended December 31, 2006
OR
o TRANSITION
REPORT UNDER SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
transition period from _______ to _______
Commission
File Number 0-32353
ZIOPHARM
Oncology, Inc.
(Exact
Name of Small Business Issuer as Specified in Its Charter)
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Delaware
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84-1475642
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(State
or Other Jurisdiction of Incorporation or Organization)
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(IRS
Employer Identification No.)
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1180
Avenue of the Americas, 19 th Floor,
New York, NY
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10036
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(Address
of Principal Executive Offices)
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(Zip
Code)
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(646)
214-0700
(Issuer’s
Telephone Number, Including Area Code)
_________________________________________________________________
(Former
Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock (par value $0.001 per share)
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. o
Check
whether the issuer (1) has filed all reports required to be filed by Section
13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been
subject to such filing requirements for the past 90 days. Yes x No
o
Check
if
there is no disclosure of delinquent files pursuant to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to
the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment
to
this form 10-KSB. o
Indicate
by check mark whether the registration is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o No
x
The
registrant had no revenue for the most recent fiscal year.
As
of
February 12, 2007, the aggregate market value of common stock held by
non-affiliates of the registrant approximated $78,349,972 based upon the closing
price of the common stock on the NASDAQ Capital Market as of the close of
business on that date. Shares of common stock held by each executive officer
and
director and by each entity that owns 10% or more of the outstanding common
stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
As
of
February 12, 2007, there were 15,272,899 shares of the issuer’s common stock,
$.001 par value per share, outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
Portions
of the definitive proxy statement for our 2007 annual meeting of stockholders,
which is to be filed within 120 days after the end of the fiscal year ended
December 31, 2006, are incorporated by reference into Part III of this Form
10-KSB, to the extent described in Part III.
Traditional
Small Business Disclosure Format (check one): Yes x No
o
2
ZIOPHARM
Oncology, Inc.
Index
to Annual Report on Form 10-KSB
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Page
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PART
I
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Item
1.
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Description
of Business
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4
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Item
2.
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Description
of Property
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23
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Item
3.
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Legal
Proceedings
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24
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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24
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PART
II
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Item
5.
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Market
for Common Equity, Related Stockholders Matters and Small Business
Issuer
Purchases of Equity Securities
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24
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Item
6.
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Management’s
Discussion and Analysis or Plan of Operation
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24
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Item
7.
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Financial
Statements
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33
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Item
8.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosures
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34
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Item
8A.
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Controls
and Procedures
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34
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Item
8B.
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Other
Information
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34
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PART
III
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Item
9.
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Directors,
Executive Officers, Promoters and Control Persons; Compliance with
Section
16(a) of the Exchange Act
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35
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Item
10.
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Executive
Compensation
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35
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Item
11.
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Security
Owners of Certain Beneficial Owners and Management and Related
Stockholders Matters
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35
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Item
12.
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Certain
Relationships and Related Transactions
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35
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Item
13.
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Exhibits
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36
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Item
14.
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Principal
Accountant Fees and Services
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36
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Signatures
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37
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Exhibit
Index
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38
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3
Additional
Information
Descriptions
in this Report are qualified by reference to the contents of any contract,
agreement or other documents and are not necessarily complete. Reference is
made
to each such contract or document filed as an exhibit to this report, or
previously filed by the Company pursuant to regulations of the Securities and
Exchange Commission (the “SEC”). (see “Item 13. Exhibits.”)
References
in this document to “us”, “we”, “our”, “the Company”, or “the Registrant” refer
to ZIOPHARM Oncology, Inc. On September 13, 2005, our wholly-owned subsidiary,
ZIO Acquisition Corp., merged with and into ZIOPHARM, Inc. with ZIOPHARM Inc.
remaining as the surviving corporation and our wholly-owned subsidiary. This
transaction is referred to throughout this report as the “Merger.” On September
14, 2005, ZIOPHARM, Inc. merged with and into us, leaving us as the surviving
corporation. In connection with this parent-subsidiary merger, we relinquished
our prior corporate name, EasyWeb, Inc., and assumed in its place the name
“ZIOPHARM Oncology, Inc.” The parent-subsidiary merger and name change became
effective on September 14, 2005. Unless provided otherwise, references in
this document to “us”, “we”, “our”, “the Company”, or “the Registrant” for
periods prior to these transactions refer to ZIOPHARM, Inc. See “Description of
Business - Recent Developments - Acquisition of ZIOPHARM, Inc.”
Special
Note Regarding Forward Looking Statements
This
Annual Report on Form 10-KSB contains statements that are not historical, but
are forward-looking in nature, including statements regarding the expectations,
beliefs, intentions or strategies regarding the future. In particular, the
discussion contained in this report under the heading “Management’s Discussion
and Analysis or Plan of Operation” includes forward-looking statements that
reflect our current views with respect to future events and financial
performance. We use words such as we “expect,” “anticipate,” “believe,” and
“intend” and similar expressions to identify forward-looking statements. A
number of important factors could, individually or in the aggregate, cause
actual results to differ materially from those expressed or implied in any
forward-looking statements. Such factors include, but are not limited to, our
ability to develop successfully our product candidates, to obtain regulatory
approval for such product candidates or to successfully commercialize them,
our
ability to obtain additional financing, our ability to develop and maintain
vendor relationships, regulatory developments relating to and the general
success of our products, and our ability to protect our proprietary technology.
Other risks that may impact forward-looking statements contained in this Annual
Report on 10-KSB are described under the heading “Risk Factors”.
PART
I
Item
1. Description of Business
General
ZIOPHARM
Oncology, Inc. is a biopharmaceutical company that is seeking to develop and
commercialize a diverse, risk-sensitive portfolio of in-licensed cancer drugs
that address unmet medical needs. Our principal focus is on the licensing and
development of proprietary drug candidate families that are related to cancer
therapeutics that are already on the market or in development. We believe this
strategy will result in lower risk and expedited drug development programs.
We
expect to commercialize our products on our own in North America but recognize
that promising clinical trial results in cancers with a high incidence and
prevalence might also be addressed in a commercial partnership with another
company with the requisite financial resources. Currently, we are in phase
I
and/or II studies for three product candidates identified as ZIO-101, ZIO-201,
and ZIO-301. We intend to continue with clinical development to register ZIO-101
for the treatment of advanced myeloma, ZIO-201 to treat advanced sarcoma and
ZIO-301 for an as yet undetermined solid tumor indication. We will continue
with
preclinical study of our products and back-up candidates, dosing forms and
schedules, while evaluating additional later stage clinical
candidates.
Our
corporate office is located at 1180 Avenue of the Americas, 19th Floor, New
York, NY 10036, and our telephone number is (646) 214-0700. Our business and
development operations are located in Charlestown, Massachusetts.
Cancer
Overview
Cancer
is
a group of diseases characterized by either the runaway growth of cells or
the
failure of cells to die normally. Often, cancer cells spread to distant parts
of
the body, where they can form new tumors. Cancer can arise in any organ of
the
body and, according to the American Cancer Society, strikes one of every two
American men and one of every three American women at some point in their
lives.
4
It
is
reported that there are more than 100 different varieties of cancer divided
into
six major categories. Carcinomas, the most common type of cancer, originate
in
tissues that cover a surface or line a cavity of the body. Sarcomas begin in
tissue that connects, supports or surrounds other tissues and organs. Lymphomas
are cancers of the lymph system, the circulatory system that bathes and cleanses
the body’s cells. Leukemias involve blood-forming tissues and blood cells. As
their name indicates, brain tumors are cancers that begin in the brain, and
skin
cancers, including melanomas, originate in the skin. Cancers are considered
metastatic if they spread via the blood or lymphatic system to other parts
of
the body to form secondary tumors.
Cancer
is
caused by a series of mutations, or alterations, in genes that control cells’
ability to grow and divide. Some mutations are inherited, others arise from
environmental factors such as smoking or exposure to chemicals, radiation,
or
viruses that damage cells’ DNA. The mutations cause cells to divide relentlessly
or lose their normal ability to die.
In
2007,
the American Cancer Society estimates that 559,650 Americans are expected to
die
from cancer, more than 1,500 every day. The cost of cancer to the healthcare
system is significant. The National Institute of Health estimates that the
overall cost of cancer in 2006 was $206.3 billion. This cost includes an
estimate of $78.2 billion in direct medical expenses, $17.9 billion in indirect
morbidity costs, and $110.2 billion in indirect mortality costs.
Cancer
Treatments
Major
treatments for cancer include surgery, radiotherapy, and chemotherapy. There
are
many different drugs that are used to treat cancer, including cytotoxics or
antineoplastics, hormones, and biologics. There are also many experimental
treatments under investigation including radiation sensitizers, vaccines, gene
therapy and immunotoxins. We believe cancer treatment represents a significant
unmet medical need.
Radiotherapy.
Also
called radiation therapy, radiotherapy is the treatment of cancer and other
diseases with ionizing radiation. Ionizing radiation deposits energy that
injures or destroys cells in the area being treated - the target tissue - by
damaging their genetic material, making it impossible for these cells to
continue growing. Although radiation damages both cancer cells and normal cells,
the latter are able to repair themselves and regain proper function.
Radiotherapy may be used to treat localized solid tumors, such as cancers of
the
skin, tongue, larynx, brain, breast, or uterine cervix. It can also be used
to
treat leukemia and lymphoma.
Scientists
are also looking for ways to increase the effectiveness of radiation therapy.
Two types of investigational drugs are being studied for their effect on cells
exposed to radiation. Radiosensitizers increase the damage done to tumor cells
by radiation; radioprotectors protect normal tissues from the effects of
radiation.
Cytotoxics.
Cytotoxics are anticancer drugs that destroy cancer cells by stopping them
from
multiplying. Healthy cells, especially those that divide quickly can also be
harmed with the use of cytotoxics. Harm to healthy cells is what causes side
effects. These cells usually repair themselves after chemotherapy and in many
cases, newer agents may offer a greater therapeutic window - the difference
between a dose that is helpful and one that is toxic.
Cytotoxic
agents act primarily by disrupting cellular pathways involved in maintaining
cellular integrity, repair or activity which affects the production or function
of DNA, RNA or protein. Although there are many cytotoxic agents, there is
a
considerable amount of overlap in their mechanisms of action. As such, the
choice of a particular agent or group of agents is generally not a consequence
of a prior prediction of antitumor activity by the drug, but instead the result
of empirical clinical trials.
Supportive
Care.
The
treatment of a cancer may include the use of chemotherapy, radiation therapy,
biologic response modifiers, surgery, or some combination of all of these or
other therapeutic options. All of these treatment options are directed at
killing or eradicating the cancer that exists in the patient’s body.
Unfortunately, the delivery of many cancer therapies adversely affects the
body’s normal organs. The undesired consequence of harming an organ not involved
with cancer is referred to as a complication of treatment or a side
effect.
In
addition to anemia, fatigue, hair-loss, reduction in blood platelets and white
and red blood cells, and bone pain, one of the most common side effects of
chemotherapy is nausea and vomiting. Several drugs have been developed to help
prevent and control chemotherapy-induced nausea and vomiting, including 5HT3
receptor antagonists, like ondansetron, which is a selective blocking agent
of
the hormone serotonin.
5
Product
Candidates
ZIO-101
General.
ZIO-101
is an organic arsenic compound covered by issued U.S. patents and U.S. and
international applications. A commercially available inorganic arsenic (arsenic
trioxide (Trisenox®)
or ATO)
has been approved for the treatment of acute promyelocytic leukemia (APL) and
is
on the compendia listing for the therapy of multiple myeloma as well as having
been studied for the treatment of various other cancers. ATO has been shown
to
be toxic to the heart, nerves and liver, limiting its use as a broad anti-cancer
agent. Our preclinical studies demonstrated that ZIO-101 is considerably less
toxic than ATO, particularly with regard to heart toxicity. In phase I testing,
significantly higher doses of ZIO-101 have been safely administered than the
approved dose of Trisenox®,
confirming preclinical findings.
In
vitro
testing
of ZIO-101 using the National Cancer Institute’s human cancer cell panel
detected activity against cell lines derived from multiple cancers including
lung, colon, brain, melanoma, ovarian and kidney cancer. Moderate activity
was
detected against breast and prostate cancer. In addition to cell lines derived
from solid tumors, in
vitro
testing
in both the National Cancer Institute’s cancer cell panel and in
vivo
testing
in a leukemia animal model demonstrated substantial activity against
hematological cancers (cancers of the blood and blood-forming tissues) such
as
leukemia, lymphoma, myelodysplastic syndromes and multiple myeloma. In addition,
ZIO-101 has potent anti-angiogenic activity as demonstrated in
in
vitro
as well
as in
vivo
studies.
In
a
murine leukemia model, ZIO-101 demonstrated oral activity comparable to that
achieved with systemic administration. Subsequent pharmacokinetic studies in
dogs established oral bioavailability comparable to IV administration. Oral
administration of an effective cancer drug would allow prolonged and potentially
more effective dosing regimens.
Clinical
Lead Indication: Multiple
Myeloma.
We expect that advanced myeloma, a hematologic cancer, will be the target
indication for our first regulatory approval for ZIO-101. Myeloma is a group
of
plasma cell cancers associated with the overproduction of monoclonal
immunoglobulin (M-protein). Each year approximately 17,000 patients are
diagnosed with multiple myeloma in the United States, while 65,000 patients
are
living with the disease. Primary treatment for myeloma is chemotherapy.
Approximately 15-20% of patients with myeloma are resistant to aggressive
primary treatment. Patients that initially respond to treatment usually develop
resistance to primary therapy after several years. The average survival of
patients with progressive or resistant disease is three to four
years.
The
standard of care for progressive or resistant multiple myeloma is in transition.
Velcade®
and
Revlimid®
are
approved to treat patients with myeloma that have had at least one prior
therapy. Recent clinical trials offer evidence supporting the use of these
therapies either alone or in combination with other agents. However, neither
treatment is universally effective. The ongoing need for new and non-cross
resistant therapies for the treatment of myeloma suggests that as new
therapeutic options come to market, the market will continue to grow.
Penetration into the market for new agents is to a large extent independent
of
the number of therapies available, as most patients generally will fail all
available agents at some point. A more rapid market penetration can be expected
for new therapies with a wide therapeutic window and where efficacy is equal
to
or greater than currently available agents.
Clinical
Development Plan for ZIO-101.
ZIO-101
safety, pharmacokinetics, and drug activity continue to be evaluated in phase
I
studies. These trials have involved different patient populations, namely solid
tumors, multiple myeloma, and hematalogic malignancies. One study is completed
(multiple myeloma) while two studies are nearing completion. In summary, ZIO-101
has shown single agent activity in hematologic cancers (including multiple
myeloma), and solid tumors. Phase II clinical trials in each of these
populations have been initiated. In addition, a number of additional studies
are
planned, including a phase I trial utilizing an oral formulation of ZIO-101.
Upon
the
completion of the phase II multiple myeloma program in 2007, the Company
anticipates having an end of phase II meeting with the FDA to discuss a Fast
Track development program for advanced myeloma under Special Protocol Assessment
(SPA) .
6
ZIO-201
General.
ZIO-201, or isophosphoramide mustard (IPM), is a proprietary active metabolite
of the pro-drug ifosfamide. A number of patent applications have been filed
in
the U.S. and internationally. Ifosfamide, as well as the related drug
cyclophosphamide, are alkylating agents. Cyclophosphamide is believed to be
the
most widely used alkylating agent in cancer therapy. Ifosfamide has been shown
to be effective at high doses by itself, or in combination with other agents,
in
treating sarcoma and lymphoma and it is approved in the U.S for the treatment
of
testicular cancer. Although ifosfamide-based treatment generally represents
the
standard of care for sarcoma, it is not licensed for this indication by the
U.S.
Food and Drug Administration (the “FDA”).
Our
preclinical studies have shown that, in animal and laboratory models, ZIO-201
evidences activity against leukemia and solid tumors. These studies also
indicate that ZIO-201 has a better pharmacokinetic and safety profile than
ifosfamide or cyclophosphamide, offering the possibility of safer and more
efficacious therapy with ZIO-201.
In
addition to IPM, other metabolites of ifosfamide are produced including
acrolein, which is toxic to the kidneys and bladder. The presence of acrolein
mandates the administration of a protective agent called mesna, which is
inconvenient to use and expensive. Chloroacetaldehyde, another metabolite of
ifosfamide, is toxic to the central nervous system, causing “fuzzy brain”
syndrome for which there is currently no protective measure. Similar toxicity
concerns pertain to high-dose cyclophosphamide, which is widely used in bone
marrow and blood cell transplantation. Because ZIO-201 is independently
active—without acrolein or chloroacetaldehyde metabolites—the Company believes
that the administration of ZIO-201 (without the administration of mesna) may
avoid many of the toxicities of ifosfamide without compromising
efficacy.
In
addition to anticipated lower toxicity, ZIO-201 may have other advantages over
ifosfamide and cyclophosphamide. ZIO-201 cross-links DNA differently than the
active metabolite of cyclophosphamide, resulting in a different activity
profile. Moreover, in some preclinical studies, ZIO-201 shows activity in
cisplatin-, ifosfamide- and/or cyclophosphamide-resistant cancer cells. In
xenografts of human breast cancer and in a mouse leukemia model, ZIO-201 has
anti-tumor activity when administered orally, a potential additional advantage
over ifosfamide and cyclophosphamide.
Potential
Lead Indications for ZIO-201. Sarcomas.
Sarcomas are cancers of the bone, cartilage, fat, muscle, blood vessels, or
other connective or supportive tissue. There are more than 50 histological
or
tissue types of soft tissue sarcomas. The prognosis for patients with soft
tissue sarcomas depends on several factors, including the patient’s age, size of
the primary tumor, histological grade, and stage of the tumor. Factors
associated with a poorer prognosis include age greater than 60 years, tumors
larger than five centimeters, and high-grade histology. While small, low-grade
tumors are usually curable by surgery alone; higher-grade or larger sarcomas
are
associated with higher local treatment failure rates and increased metastatic
potential.
ZIO-201
may be a useful agent that, either alone or in combination with other agents,
can deliver therapeutic activity with fewer side effects of the type that have
been associated with ifosfamide. In the United States, ifosfamide is regularly
included in combination regimens for the treatment of sarcomas, testicular
cancers, head and neck cancer and some types of non-Hodgkin’s lymphomas and
other solid tumors. The Company believes that ZIO-201 may be able to replace
ifosfamide in any or all of these combination protocols.
Clinical
Development Plan for ZIO-201.
ZIO-201
has now been evaluated in two phase I studies, one in advanced cancers and
one
in advanced sarcoma. In both phase I trials, ZIO-201 was given without mesna.
There was no hemorrhagic cystitis or CNS-toxicity. Bone marrow toxicity was
modest. One subject with mesothelioma had stable disease >13 months and two
patients with sarcoma had a response of at least stable disease.
A
phase
II trial in advanced sarcoma has been initiated while the phase I study in
advanced cancers continues. A number of additional studies are planned for
2007
including a phase II study in lymphoma, a phase I/II study in pediatric
malignancies, and a possible phase I study with an oral formulation. Other
routes of administration where alkylating agents are active are being evaluated
i.e., intrathecal and intraperitoneal.
The
Company anticipates evaluating the phase II sarcoma study in the second half
of
2007, followed by an end of phase II meeting with the FDA to discuss a Fast
Track development program for advanced sarcoma under an SPA.
7
ZIO-301
General.
ZIO-301
(indibulin) is a novel small molecular weight tubulin polymerization inhibitor
that has been acquired from Baxter Healthcare. The microtubule component,
tubulin, is one of the best established anti-tumor targets in the treatment
of
cancer today. A number of other tubulin targeting drugs are currently on the
market, including paclitaxel (Taxol®)
and the
vinca alkaloids (vincristine, vinorelbine). The use of these drugs is associated
with important toxicities, notably peripheral neuropathy. In contrast, no
peripheral neurotoxicity has been observed with ZIO-301 either in preclinical
testing or in phase I testing to date. In addition, its activity as an oral
formulation could offer significant patient convenience, since to date no oral
formulations of paclitaxel or related compounds have been
developed.
ZIO-301
has a different pharmacological profile from other tubulin inhibitors currently
on the market (paclitaxel, docetaxel, vinorelbine, vincristine and vinblastin).
It binds to a unique site on tubulin and is active in multi-drug (MDR-1, MRP-1)
and taxane resistant tumors. ZIO-301 binding causes destabilization of
microtubules
in
vitro,
an
effect similar to that of the vinca alkaloid family or colchicine, but opposite
to that of paclitaxel and related drugs.
Testing
of ZIO-301 for
in
vitro
growth
inhibitory activity against a panel of human and rodent tumor-derived cell
lines
revealed that the drug candidate is active in a broad spectrum of cell lines
of
different organ origin. In
vivo,
ZIO-301
is active in a number of xenograft and rodent tumor models. Its
unique pharmacodynamic properties in preclinical studies and its excellent
safety profile observed so far in the ongoing phase I study warrants further
evaluation in the clinic.
Potential
Lead Indications for ZIO-301. Bladder, head & neck, prostate, colorectal,
renal. At
the
current time, the Company anticipates pursuing a Fast Track development program
in a niche indication following the completion of phase II testing that would
initiate this year. Registration in one of these indications would then be
followed by label expansion trials that will have been already initiated in
anticipation of registration. In addition, the development of an IV formulation
could further expand the market opportunity.
Clinical
Development Plan for ZIO-301. A
phase I
study is currently underway in the Netherlands with ZIO-301 to evaluate safety,
pharmacokinetics (PK), maximum tolerated dose (MTD) and dose limiting toxicity
(DLT) in patients with advanced solid tumors. MTD has not yet been reached
in
the phase I study. Drug activity has been observed in patients with several
histologic subtypes. The clinical regulatory strategy is to include a phase
II
study of ZIO-301 in the United States in 2007.
Competition
The
development and commercialization for new products to treat cancer is highly
competitive, and there will be considerable competition from major
pharmaceutical, biotechnology, and specialty cancer companies. Many of our
competitors have substantially more resources than the Company, including both
financial and technical. In addition, many of these companies have more
experience than the Company in preclinical and clinical development,
manufacturing, regulatory, and global commercialization. The Company is also
competing with academic institutions, governmental agencies and private
organizations that are conducting research in the field of cancer. Competition
for highly qualified employees is intense.
8
There
are
a number of companies developing chemotherapies for cancer and in particular
for
multiple myeloma and sarcoma. Millennium Pharmaceuticals, Inc. and Celgene
Corporation have marketed products to treat multiple myeloma, and many other
product candidates are in clinical trials and preclinical research. There is
a
more limited number of competitors developing new approaches to treat sarcoma,
Ariad Pharmaceuticals principal among them.
In
addition to competitive companies, treatments for cancer that compete with
our
product candidates are summarized under the caption “Cancer
Treatments.”
License
Agreements and Intellectual Property
Our
goal
is to obtain, maintain and enforce patent protection for our products,
formulations, processes, methods and other proprietary technologies, to preserve
our trade secrets, and to operate without infringing the proprietary rights
of
other parties, both in the United States and in other countries. Our policy
is
to actively seek the broadest possible intellectual property protection for
our
product candidates through a combination of contractual arrangements and
patents, both in the United States and abroad.
Patent
and Technology License Agreement — University of Texas M. D. Anderson Cancer
Center and the Texas A&M University System.
On
August 24, 2004, the Company entered into a Patent and Technology License
Agreement with The Board of Regents of the University of Texas System, acting
on
behalf of The University of Texas M. D. Anderson Cancer Center and the Texas
A&M University System (collectively, the “Licensors”). Under this agreement,
the Company was granted an exclusive, worldwide license to rights (including
rights to U.S. and foreign patent and patent applications and related
improvements and know-how) for the manufacture and commercialization of two
classes of organic arsenicals for human and animal use. One of these includes
ZIO-101.
In
October 2004, we received a notice of allowance for U.S. Patent Application
No.
10/337969, entitled “S-dimethylarsino-thiosuccinic acid
S-dimethylarsino-2-thiobenzoic acid S-(simethylarsino) glutathione as treatments
for cancer.” The patent was granted on June 28, 2005 as U.S. Patent No.
6,911,471. The patent application claims both therapeutic uses and
pharmaceutical compositions containing a novel class of organic arsenicals,
including ZIO-101, for the treatment of cancer. In February 2006, we announced
that a second organic arsenic case has been issued under U.S. Patent No.
6,995,188. This
patent provides further coverage of cancer treatment using organic arsenic,
including ZIO-101, in combination with other agents or therapies. In addition,
there were seven (7) patents related to ZIO-101 that issued in various foreign
countries in 2006.
As
partial consideration for the license rights obtained by us, we paid the
Licensors an upfront, nonrefundable $125,000 fee and issued 250,487 shares
of
our common stock to The University of Texas M. D. Anderson Cancer Center and
granted it an option to purchase an additional 50,222 shares of our common
stock
for approximately $0.002 per share. The option vested and became exercisable
with respect to 25% of its shares upon the Company’s filing of an
Investigational New Drug (“IND”) in the fiscal year ended December 31, 2005. The
option will vest and become exercisable with respect to another 50% of its
shares upon completion of the dosing of the last patient for both the blood
and
solid tumor phase I trials for ZIO-101 and will vest and become exercisable
with
respect to 25% of the shares upon enrollment of the first patient in a
multi-center pivotal clinical trial (i.e., a human clinical trial intended
to
provide the substantial evidence of efficacy necessary to support the filing
of
an approvable New Drug Application (“NDA”) for ZIO-101). As additional
consideration for the license, the Licensors are entitled to receive up to
an
aggregate of $4.85 million in cash payments, payable in varying amounts, upon
the achievement of certain milestones, including $100,000 that we paid upon
the
commencement of the phase I clinical trial for ZIO-101 in May 2005 and $250,000
upon the dosing of the first patient in the Registrant-sponsored phase II
clinical trial for ZIO-101 in November 2006. The Licensors are entitled to
receive royalty payments from sales of a licensed product (should such a product
be approved for commercial sale), as well and a portion of any fees that we
may
receive from a sublicensee under certain circumstances. Finally, the license
agreement provided that we enter into two separate sponsored research agreements
with the Licensors, each of which required that we make annual payments of
$100,000 for no less than two years following the contract. We have the
exclusive right to all intellectual property rights resulting from such research
pursuant to the terms of the agreements. One of these agreements has now been
extended to a third year by mutual agreement.
The
agreement also contains other provisions customary and common in similar
agreements within the industry, such as our right to sublicense our rights
under
the agreement. Nevertheless, if we sublicense our rights prior to the
commencement of a pivotal clinical trial (i.e., a human clinical trial intended
to provide the substantial evidence of efficacy necessary to support the filing
of an approvable NDA), the Licensors will generally be entitled to receive
a
share of the payments we receive in exchange for the sublicense (subject to
certain exceptions).
9
License
Agreement with DEKK-Tec, Inc.
On
October 15, 2004, we entered into a license agreement with DEKK-Tec, Inc.,
pursuant to which we were granted an exclusive, worldwide license to the second
of our lead product candidates, ZIO-201.
As
partial consideration for the license rights obtained by us, we paid DEKK-Tec
an
upfront, non-refundable $50,000 fee. In addition, DEKK-Tec is entitled to
receive cash payments in the aggregate amount of up to $3.9 million, which
are
payable in varying amounts upon the occurrence of certain milestone events.
The
majority of these milestone payments will be creditable against future royalty
payments, as referenced below. During the year ended December 31, 2006, the
Company recorded a charge of $100,000 for achieving Phase II milestones. We
also
issued DEKK-Tec an option to purchase up to 27,616 shares of our common stock
for approximately $0.02 per share, which option vested with respect to 6,904
shares vested upon the execution of the license agreement. DEKK-Tec has since
exercised the vested portion of the option in its entirety. The option will
vest
with respect to the remaining shares upon certain milestone events culminating
with final FDA approval of the first NDA submitted by us (or by our sublicensee)
for ZIO-201. DEKK-Tec is entitled to receive royalty payments on the sales
of
ZIO-201 should it be approved for commercial sale. The license agreement also
contains other provisions customary and common in similar agreements within
the
industry.
Asset
Purchase of Indibulin from Baxter Healthcare Corporation.
On
November 3, 2006, the Company signed a definitive Asset Purchase Agreement
and
License Agreement to acquire indibulin (and license rights to nanosuspension
technology) from affiliates of Baxter Healthcare Corporation. The terms of
the agreement include an upfront cash payment of approximately $1.125 million,
which has
been
expensed as purchased research and development in the year ended December 31,
2006, $15,000 was paid for annual license maintenance fee, and
$100,000 paid for existing inventory. In addition to the upfront payments there
will be follow-on milestone cash payments that could amount to approximately
$8
million in the aggregate and royalties on net sales typical of a product at
this
stage of development. The purchase price includes the entire indibulin
intellectual property portfolio as well as existing drug substance and capsule
inventories.
Option
and Research Agreements with Southern Research Institute
(“SRI”).
On
December 22, 2004, we entered into an Option Agreement with SRI, pursuant to
which we were granted an exclusive option to obtain an exclusive license to
SRI’s interest in certain intellectual property, including exclusive rights
related to certain isophosphoramide mustard analogs. Also on December 22, 2004,
we entered into a Research Agreement with SRI pursuant to which we agreed to
spend a sum not to exceed $200,000 between the execution of the agreement and
December 21, 2006, including a $25,000 payment that we made simultaneously
with
the execution of the agreement, to fund research and development work by SRI
in
the field of isophosphoramide mustard analogs. The
option agreement must be exercised within 60 days of December 22,
2006.
Other
Intellectual Property Rights and Protection.
We
depend upon the skills, knowledge and experience of our scientific and technical
personnel, as well as those of our advisors, consultants and other contractors,
none of which is patentable. To help protect proprietary know-how, which is
not
patentable, and for inventions for which patents may be difficult to enforce,
we
currently rely, and in the future will continue to rely, on trade secret
protection and confidentiality agreements to protect our interests. To this
end,
we generally require employees, consultants, advisors and other contractors
to
enter into confidentiality agreements that prohibit the disclosure of
confidential information and, where applicable, require disclosure and
assignment to us of the ideas, developments, discoveries and inventions
important to our business.
Governmental
Regulation
The
research, development, testing, manufacture, labeling, promotion, advertising,
distribution, and marketing, among other things, of our products are extensively
regulated by governmental authorities in the United States and other countries.
In the United States, the FDA regulates drugs under the Federal Food, Drug,
and
Cosmetic Act, or the “FDCA,” and its implementing regulations. Failure to comply
with the applicable U.S. requirements may subject us to administrative or
judicial sanctions, such as FDA refusal to approve pending New Drug Applications
(NDAs), warning letters, product recalls, product seizures, total or partial
suspension of production or distribution, injunctions, and/or criminal
prosecution.
Drug
Approval Process
. None
of our drugs may be marketed in the U.S. until the drug has received FDA
approval. The steps required before a drug may be marketed in the U.S.
include:
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Preclinical
laboratory tests, animal studies, and formulation
studies;
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Submission
to the FDA of an IND for human clinical testing, which must become
effective before human clinical trials may begin;
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Adequate
and well-controlled human clinical trials to establish the safety
and
efficacy of the drug for each indication;
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Submission
to the FDA of an NDA;
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Satisfactory
completion of an FDA inspection of the manufacturing facility or
facilities at which the drug is produced to assess compliance with
current
good manufacturing practices, or “cGMPs”; and
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FDA
review and approval of the NDA.
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10
Preclinical
tests include laboratory evaluation of product chemistry, toxicity, and
formulation, as well as animal studies. The conduct of the preclinical tests
and
formulation of the compounds for testing must comply with federal regulations
and requirements. The results of the preclinical tests, together with
manufacturing information and analytical data, are submitted to the FDA as
part
of an IND Application, which must become effective before human clinical trials
may begin. An IND will automatically become effective 30 days after receipt
by
the FDA, unless before that time the FDA raises safety concerns or questions
about issues such as the design of the trials as outlined in the IND. In such
a
case, the IND sponsor and the FDA must resolve any outstanding FDA concerns
or
questions before clinical trials can proceed. The Company cannot be sure that
submission of an IND will result in the FDA allowing clinical trials to
begin.
Clinical
trials involve the administration of the investigational drug to human subjects
under the supervision of qualified investigators. Clinical trials are conducted
under protocols detailing the objectives of the study, the parameters to be
used
in monitoring safety, and the effectiveness criteria to be evaluated. Each
protocol must be submitted to the FDA as part of the IND.
Clinical
trials typically are conducted in three sequential phases, but the phases may
overlap. The study protocol and informed consent information for study subjects
in clinical trials must also be approved by an Institutional Review Board for
each institution where the trials will be conducted. Study subjects must sign
an
informed consent form before participating in a clinical trial. Phase I usually
involves the initial introduction of the investigational drug into people to
evaluate its short-term safety, dosage tolerance, metabolism, pharmacokinetics
and pharmacologic actions, and, if possible, to gain an early indication of
its
effectiveness. Phase II usually involves trials in a limited patient population
to (i) evaluate dosage tolerance and appropriate dosage; (ii) identify possible
adverse effects and safety risks; and (iii) evaluate preliminarily the efficacy
of the drug for specific indications. Phase III trials usually further evaluate
clinical efficacy and test further for safety by using the drug in its final
form in an expanded patient population. There can be no assurance that phase
I,
phase II, or phase III testing will be completed successfully within any
specified period of time, if at all. Furthermore, a company or the FDA may
suspend clinical trials at any time on various grounds, including a finding
that
the subjects or patients are being exposed to an unacceptable health
risk.
The
FDCA
permits the FDA and the IND sponsor to agree in writing on the design and size
of clinical studies intended to form the primary basis of an effectiveness
claim
in an NDA application. This process is known as Special Protocol Assessment
and
can be a somewhat lengthy process. If an agreement is reached, the Agency will
reduce the agreement to writing and make it part of the administrative record.
An agreement may not be changed by the sponsor or FDA after the trial begins,
except (1) with the written agreement of the sponsor and FDA, or (2) if the
director of the FDA reviewing division determines that "a substantial scientific
issue essential to determining the safety or effectiveness of the drug" was
identified after the testing began.
Assuming
successful completion of the required clinical testing, the results of the
preclinical studies and of the clinical studies, together with other detailed
information, including information on the manufacture and composition of the
drug, are submitted to the FDA in the form of an NDA requesting approval to
market the product for one or more indications. The testing and approval process
requires substantial time, effort, and financial resources. The agencies review
the application and may deem it to be inadequate to support the registration,
and companies cannot be sure that any approval will be granted on a timely
basis, if at all. The FDA may also refer the application to the appropriate
advisory committee, typically a panel of clinicians, for review, evaluation
and
a recommendation as to whether the application should be approved. The FDA
is
not bound by the recommendations of the advisory committee.
The
NDA
application is the vehicle through which drug sponsors formally propose that
the
FDA approve a new pharmaceutical for sale and marketing in the U.S. The data
gathered during the animal studies and human clinical trials of an IND become
part of the NDA. The goals of the NDA are to provide enough information to
permit FDA to reach the following key decisions:
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Is
the drug safe and effective in its proposed use(s), and do the benefits
of
the drug outweigh the risks?
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Is
the drug's proposed labeling (package insert) is appropriate, and
what it
should contain?
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Are
the methods used in manufacturing the drug and the controls used
to
maintain the drug's quality adequate to preserve the drug's identity,
strength, quality, and purity.
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11
The
FDA
has various programs, including Exploratory INDs (also referred to as phase
0),
orphan drug, fast track, priority review, and accelerated approval, that are
intended to expedite or simplify the process for developing and reviewing drugs,
and/or provide for approval on the basis surrogate endpoints or provide
financial incentives and market exclusivity. Generally, drugs that may be
eligible for one or more of these programs are those for serious or
life-threatening conditions, those with the potential to address unmet medical
needs, and those that provide meaningful benefit over existing treatments.
A
company cannot be sure that any of its drugs will qualify for any of these
programs, or that, if a drug does qualify, that the review time will be
reduced.
Section
505(b)(2) of the FDCA allows the FDA to approve a follow-on drug on the basis
of
data in the scientific literature or a prior FDA approval of an NDA for a
related drug. Specifically, a 505(b)(2) application is one for which one or
more
of the investigations relied upon by the applicant for approval were not
conducted by or for the applicant and for which the applicant has not obtained
a
right of reference or use from the person by or for whom the investigations
were
conducted. This procedure potentially makes it easier for generic drug
manufacturers to obtain rapid approval of new forms of drugs based on
proprietary data of the original drug manufacturer.
Before
approving an NDA, the FDA usually will inspect the facility or the facilities
at
which the drug is manufactured and will not approve the product unless Good
Manufacturing Practice (cGMP) compliance is satisfactory. If the FDA evaluates
the NDA and the manufacturing facilities as acceptable, the FDA may issue an
approval letter, or in many cases, an approvable letter followed by an approval
letter. Both letters usually contain a number of conditions that must be met
in
order to secure final approval of the NDA. When and if those conditions have
been met to the FDA’s satisfaction, the FDA will issue an approval letter. The
approval letter authorizes commercial marketing of the drug for specific
indications. As a condition of NDA approval, the FDA may require post-marketing
testing and surveillance to monitor the drug’s safety or efficacy, or impose
other conditions.
12
After
approval, certain changes to the approved product, such as adding new
indications, making certain manufacturing changes, or making certain additional
labeling claims, are subject to further FDA review and approval. Before a
company can market products for additional indications, it must obtain
additional approvals from FDA. Obtaining approval for a new indication generally
requires that additional clinical studies be conducted. A company cannot be
sure
that any additional approval for new indications for any product candidate
will
be approved on a timely basis, or at all.
Post-Approval
Requirements.
Often
times, even after a drug has been approved by the FDA for sale, the FDA may
require that certain post-approval requirements be satisfied, including the
conduct of additional clinical studies. If such post-approval conditions are
not
satisfied, the FDA may withdraw its approval of the drug. In addition, holders
of an approved NDA are required to: (i) report certain adverse reactions to
the
FDA, (ii) comply with certain requirements concerning advertising and
promotional labeling for their products, and (iii) continue to have quality
control and manufacturing procedures conform to cGMP after approval. The FDA
periodically inspects the sponsor’s records related to safety reporting and/or
manufacturing facilities; this latter effort includes assessment of compliance
with cGMP. Accordingly, manufacturers must continue to expend time, money,
and
effort in the area of production and quality control to maintain cGMP
compliance. We intend to use third party manufacturers to produce our products
in clinical and commercial quantities, and future FDA inspections may identify
compliance issues at the facilities of our contract manufacturers that may
disrupt production or distribution, or require substantial resources to correct.
In addition, discovery of problems with a product after approval may result
in
restrictions on a product, manufacturer, or holder of an approved NDA, including
withdrawal of the product from the market.
Employees
As
of the
date of this current report, the Company has 28 employees, all of which are
full-time employees. Several additional employees are expected to be hired
prior to the end of 2007.
Recent
Developments
Reverse
Stock Split
On
August
24, 2005, we (EasyWeb, Inc.) effected a 1-for-40 share combination (i.e.,
reverse stock split) of our capital stock. The share combination was approved
by
our stockholders at a special stockholder meeting held on February 28, 2005.
As
a result of the share combination, we had 189,922 shares of common stock
outstanding immediately prior to the merger transaction with ZIOPHARM, Inc.,
which is discussed immediately below.
Acquisition
of ZIOPHARM, Inc.
Pursuant
to an Agreement and Plan of Merger dated August 3, 2005 (the “Merger Agreement”)
by and among us, ZIO Acquisition Corp., a Delaware corporation and our wholly
owned subsidiary, and ZIOPHARM, Inc., a Delaware corporation, ZIO Acquisition
Corp. merged with and into ZIOPHARM, Inc., with ZIOPHARM, Inc. remaining as
the
surviving corporation and our wholly-owned subsidiary. This transaction is
referred to throughout this report as the “Merger.” The Merger was effective as
of September 13, 2005, upon the filing of a certificate of merger with the
Delaware Secretary of State. In consideration for their shares of ZIOPHARM,
Inc.
capital stock and in accordance with the Merger Agreement, the stockholders
of
ZIOPHARM, Inc. received an aggregate of 6,967,941 shares or approximately 97.3%
of our common stock. In addition, all securities convertible into and
exercisable for shares of ZIOPHARM, Inc. capital stock outstanding immediately
prior to the Merger were cancelled, and the holders thereof received similar
securities convertible into an aggregate of 1,366,846 shares of our common
stock.
All
share
and per share data in this report have been adjusted to give effect to the
conversions effected as part of the Merger.
The
Merger Agreement was filed as Exhibit 10.1 to our current report on Form 8-K
filed with the Securities and Exchange Commission on August 9, 2005, and is
incorporated herein by reference. The foregoing description of the Merger
Agreement and the Merger do not purport to be complete and is qualified in
its
entirety by reference to the Merger Agreement.
On
September 13, 2005, our board of directors approved a transaction pursuant
to
which ZIOPHARM, Inc. merged with and into us, leaving us as the surviving
corporation. In connection with this parent-subsidiary merger, we relinquished
our prior corporate name, EasyWeb, Inc., and assumed in its place the name
“ZIOPHARM Oncology, Inc.” The parent-subsidiary merger and name change became
effective on September 14, 2005.
13
Changes
in Board of Directors
At
the
effective time of the Merger, the board of directors was reconstituted by the
appointment of Dr. Jonathan Lewis, Richard Bagley, Dr. Murray Brennan, James
Cannon, Senator Wyche Fowler, Jr., Gary S. Fragin, Timothy McInerney and Dr.
Michael Weiser as directors (all of whom were directors of ZIOPHARM, Inc.
immediately prior to the Merger), and the resignations of David C. Olson and
David Floor from their previous positions as our directors.
RISK
FACTORS
An
investment in our common stock is very risky. In addition to the other
information in this Annual Report on Form 10-KSB, you should consider
carefully the
following risk factors in evaluating us and our business. If any of the events
described in the following risk factors were to occur, our business, financial
condition or result of our operations would suffer and, in that event, the
trading price of the common stock could decline. Therefore, we urge you to
carefully review this entire 10-KSB and consider the following risk
factors:
Risks
Related to our Business
We
may not be able to commercialize any products, generate significant revenues
or
attain profitability.
We
have
never generated revenue and have incurred significant net losses in each year
since our inception. For the year ended December 31, 2006, we had a net loss
of
$17.9 million and we had incurred approximately $33.2 million of cumulative
net
losses since our inception in 2003. We expect to continue to incur significant
operating and capital expenditures and anticipate that our expenses will
increase substantially in the foreseeable future as we:
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Continue
to undertake preclinical development and clinical trials for product
candidates;
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Scale
up the formulation and manufacturing of our product
candidates;
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Seek
regulatory approvals for product candidates;
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Implement
additional internal systems and infrastructure; and
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Hire
additional personnel.
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Because
we expect to incur losses for the foreseeable future, we will need to generate
significant revenues in order to achieve and maintain profitability. Even if
we
succeed in developing and commercializing one or more of our product candidates,
which success is not assured, we may not be able to generate significant
revenues. If we do generate significant revenues, we may never achieve or
maintain profitability. Our failure to achieve or maintain profitability could
negatively impact the trading price of our common stock.
If
we are not able to successfully develop and commercialize our product
candidates, we may not generate sufficient revenues to continue our business
operations.
To
date,
none of our product candidates have been approved for commercial sale in any
country. The process to develop, obtain regulatory approval for and
commercialize potential drug candidates is long, complex and costly. Until
and
unless we receive approval from the FDA and/or other regulatory authorities
for
our product candidates, we cannot sell our drugs and will not have product
revenues. Even if we obtain regulatory approval for one or more of our product
candidates, if we are unable to successfully commercialize our products, we
may
not be able to earn sufficient revenues to continue our business without raising
significant additional capital, which may not be available.
We
may need to raise additional capital to fund our operations. If we are unable
to
raise additional capital when needed, we may have to discontinue our product
development programs. The manner in which we raise any additional funds may
affect the value of your investment in our common
stock.
As
of
December 31, 2006, we had incurred approximately $33.2 million of cumulative
net
losses and had approximately $28.4 million of cash, cash equivalents, and
short-term investments. Currently, we expect that we will have sufficient cash
to fund our operations into the first quarter of 2008. Although we expect our
cash on-hand to fund our operations into the first quarter of 2008, changes
may
occur that would consume our existing capital prior to that time, including
the
progress of our research and development efforts, changes in governmental
regulation and acquisitions of additional product candidates.
14
Currently,
we have no committed sources of additional capital. We do not know whether
additional financing will be available on terms favorable to us when needed,
if
at all. If we fail to advance our current product candidates to later stage
clinical trials, successfully commercialize one or more of our product
candidates, or acquire new product candidates for development, we may have
difficulty obtaining additional financing. To the extent that we raise
additional capital by issuing equity securities, our stockholders may experience
dilution. We may grant future investors rights superior to those of our common
stockholders. If we raise additional funds through collaborations and licensing
arrangements, it may be necessary to relinquish some rights to our technologies,
product candidates or products, or grant licenses on terms that are not
favorable to us. If we raise additional funds by incurring debt, we could incur
significant interest expense and become subject to covenants in the related
transaction documentation that could affect the manner in which we conduct
our
business.
If
we do
not succeed in raising additional funds on acceptable terms, we may be unable
to
complete planned preclinical and clinical trials or obtain approval of any
product candidates from the FDA and other regulatory authorities. In addition,
we could be forced to discontinue product development, reduce or forego sales
and marketing efforts or forego attractive business opportunities, or
discontinue our operations altogether.
We
have a limited operating history upon which to base an investment
decision.
Prior
to
the Merger, ZIOPHARM, Inc. was a development-stage company that was incorporated
in September 2003. To date, we have not demonstrated an ability to perform
the
functions necessary for the successful commercialization of any product
candidates. The successful commercialization of any product candidates will
require us to perform a variety of functions, including:
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Continuing
to undertake preclinical development and clinical
trials;
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Participating
in regulatory approval processes;
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Formulating
and manufacturing products; and
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Conducting
sales and marketing activities.
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Our
operations have been limited to organizing and staffing our Company, acquiring,
developing and securing our proprietary product candidates, undertaking
preclinical trials and clinical trials of our product candidates ZIO-101,
ZIO-201 and ZIO-301, and manufacturing ZIO-101 and ZIO- 201 and soon ZIO-301.
These operations provide a limited basis for you to assess our ability to
commercialize our product candidates and the advisability of investing in our
securities.
We
intend to acquire rights to develop and commercialize additional product
candidates. Because we currently neither have nor intend to establish internal
research capabilities, we are dependent upon pharmaceutical and biotechnology
companies and academic and other researchers to sell or license us their product
candidates. The success of our strategy depends upon our ability to identify,
select and acquire pharmaceutical product candidates.
Proposing,
negotiating and implementing an economically viable product acquisition or
license is a lengthy and complex process. We compete for partnering arrangements
and license agreements with pharmaceutical, biopharmaceutical and biotechnology
companies, many of which have significantly more experience than us and have
significantly more financial resources than we do. Our competitors may have
stronger relationships with certain third parties with whom we are interested
in
partnering, such as academic research institutions, and may, therefore, have
a
competitive advantage in entering into partnering arrangements with those third
parties. We may not be able to acquire rights to additional product candidates
on terms that we find acceptable, or at all.
We
expect
that any product candidate to which we acquire rights will require significant
additional development and other efforts prior to commercial sale, including
extensive clinical testing and approval by the FDA and applicable foreign
regulatory authorities. All product candidates are subject to the risks of
failure inherent in pharmaceutical product development, including the
possibility that the product candidate will not be shown to be sufficiently
safe
or effective for approval by regulatory authorities. Even if our product
candidates are approved, they may not be manufactured or produced economically
or commercialized successfully. If we are unable to successfully manage our
growth, our business may be harmed.
15
In
the
future, if we are able to advance our product candidates to the point of, and
thereafter through, clinical trials, we will need to expand our development,
regulatory, manufacturing, marketing and sales capabilities or contract with
third parties to provide these capabilities. Any future growth will place a
significant strain on our management and on our administrative, operational
and
financial resources. Our future financial performance and our ability to
commercialize our product candidates and to compete effectively will depend,
in
part, on our ability to manage any future growth effectively. We actively
evaluate additional product candidates to acquire for development. Such
additional product candidates, if any, could significantly increase our capital
requirements and place further strain on the time of our existing personnel,
which may delay or otherwise adversely affect the development of our existing
product candidates. We must manage our development efforts and clinical trials
effectively, and hire, train and integrate additional management, administrative
and sales and marketing personnel. We may not be able to accomplish these tasks,
and our failure to accomplish any of them could prevent us from successfully
growing our Company.
We
may not be able to successfully manage our growth.
Our
success will depend upon the expansion of our operations and the effective
management of our growth, which will place a significant strain on our
management and on our administrative, operational and financial resources.
To
manage this growth, we must expand our facilities, augment our operational,
financial and management systems and hire and train additional qualified
personnel. If we are unable to manage our growth effectively, our business
may
be harmed.
Our
business will subject us to the risk of liability claims associated with the
use
of hazardous materials and chemicals.
Our
contract research and development activities may involve the controlled use
of
hazardous materials and chemicals. Although we believe that our safety
procedures for using, storing, handling and disposing of these materials comply
with federal, state and local laws and regulations, we cannot completely
eliminate the risk of accidental injury or contamination from these materials.
In the event of such an accident, we could be held liable for any resulting
damages and any liability could have a materially adverse effect on our
business, financial condition and results of operations. In addition, the
federal, state and local laws and regulations governing the use, manufacture,
storage, handling and disposal of hazardous or radioactive materials and waste
products may require our contractors to incur substantial compliance costs
that
could materially adversely affect our business, financial condition and results
of operations.
We
rely on key executive officers and scientific and medical advisors, and their
knowledge of our business and technical expertise would be difficult to
replace.
We
are
highly dependent on Dr. Jonathan Lewis, our Chief Executive Officer, Richard
E.
Bagley, our Chief Operating Officer and Chief Financial Officer, and our
principal scientific, regulatory and medical advisors. Dr. Lewis’ and Mr.
Bagley’s employment are governed by written employment agreements that provide
for terms that expire in January 2008 and July 2007, respectively. Dr. Lewis
and
Mr. Bagley may terminate their employment with us at any time, subject, however,
to certain non-compete and non-solicitation covenants. The loss of the technical
knowledge and management and industry expertise of any of our key personnel
could result in delays in product development, loss of customers and sales
and
diversion of management resources, which could adversely affect our operating
results. We do not carry "key person" life insurance policies on any of our
officers or key employees. If we are unable to hire additional qualified
personnel, our ability to grow our business may be harmed.
We
will
need to hire additional qualified personnel with expertise in preclinical and
clinical research and testing, government regulation, formulation and
manufacturing, and eventually sales and marketing. We compete for qualified
individuals with numerous biopharmaceutical companies, universities and other
research institutions. Competition for such individuals is intense, and we
cannot be certain that our search for such personnel will be successful.
Attracting and retaining qualified personnel will be critical to our
success.
We
may incur substantial liabilities and may be required to limit commercialization
of our products in response to product liability
lawsuits.
The
testing and marketing of medical products entail an inherent risk of product
liability. If we cannot successfully defend ourselves against product liability
claims, we may incur substantial liabilities or be required to limit
commercialization of our products, if approved. Even successful defense would
require significant financial and management resources. Regardless of the merit
or eventual outcome, liability claims may result in:
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Decreased
demand for our product candidates;
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16
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Injury
to our reputation;
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Withdrawal
of clinical trial participants;
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Withdrawal
of prior governmental approvals;
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Costs
of related litigation
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Substantial
monetary awards to patients
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Product
recalls
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Loss
of revenue; and
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The
inability to commercialize our product
candidates.
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Our
inability to obtain sufficient product liability insurance at an acceptable
cost
to protect against potential product liability claims could prevent or inhibit
the commercialization of pharmaceutical products we develop, alone or with
collaborators. We currently carry clinical trial insurance and product liability
insurance.
Risks
Related to the Clinical Testing, Regulatory Approval and Manufacturing of Our
Product Candidates
If
we are unable to obtain the necessary U.S. or worldwide regulatory approvals
to
commercialize any product candidate, our business will
suffer.
We
may
not be able to obtain the approvals necessary to commercialize our product
candidates, ZIO-101, ZIO-201 and ZIO-301, or any product candidate that we
may
acquire or develop in the future for commercial sale. We will need FDA approval
to commercialize our product candidates in the U.S. and approvals from
regulatory authorities in foreign jurisdictions equivalent to the FDA to
commercialize our product candidates in those jurisdictions. In order to obtain
FDA approval of any product candidate, we must submit to the FDA a New Drug
Application (NDA), demonstrating that the product candidate is safe for humans
and effective for its intended use. This demonstration requires significant
research and animal tests, which are referred to as preclinical studies, as
well
as human tests, which are referred to as clinical trials. Satisfaction of the
FDA’s regulatory requirements typically takes many years, depending upon the
type, complexity and novelty of the product candidate, and will require
substantial resources for research, development and testing. We cannot predict
whether our research, development, and clinical approaches will result in drugs
that the FDA considers safe for humans and effective for their intended uses.
The FDA has substantial discretion in the drug approval process and may require
us to conduct additional preclinical and clinical testing or to perform
post-marketing studies. The approval process may also be delayed by changes
in
government regulation, future legislation or administrative action or changes
in
FDA policy that occur prior to or during our regulatory review. Delays in
obtaining regulatory approvals may:
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Delay
commercialization of, and our ability to derive product revenues
from, our
product candidates;
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Impose
costly procedures on us; and
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Diminish
any competitive advantages that we may otherwise
enjoy.
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Even
if
we comply with all FDA requests, the FDA may ultimately reject one or more
of
our NDAs. We cannot be sure that we will ever obtain regulatory clearance for
our product candidates, ZIO-101, ZIO-201 and ZIO-301. Failure to obtain FDA
approval of our product candidates will severely undermine our business by
leaving us without a saleable product, and therefore without any potential
revenue source, until another product candidate can be developed. There is
no
guarantee that we will ever be able to develop or acquire another product
candidate.
In
foreign jurisdictions, we similarly must receive approval from applicable
regulatory authorities before we can commercialize any drugs. Foreign regulatory
approval processes generally include all of the risks associated with the FDA
approval procedures described above.
Our
product candidates are in early stages of clinical trials, which are very
expensive and time-consuming. We cannot be certain when we will be able to
file
an NDA with the FDA and any failure or delay in completing clinical trials
for
our product candidates could harm our business.
17
Our
product candidates, ZIO-101, ZIO-201, and ZIO-301 are in early stages of
development and require extensive clinical testing. Notwithstanding our current
clinical trial plans for each of our existing product candidates, we may not
be
able to commence additional trials or see results from these trials within
our
anticipated timelines. As such, we cannot predict with any certainty if or
when
we might submit an NDA for regulatory approval of our product candidates or
whether such an NDA will be accepted.
Clinical
trials are very expensive, time-consuming and difficult to design and
implement.
Human
clinical trials are very expensive and difficult to design and implement, in
part because they are subject to rigorous regulatory requirements. The clinical
trial process is also time consuming. We estimate that clinical trials of our
product candidates will take at least several years to complete. Furthermore,
failure can occur at any stage of the trials, and we could encounter problems
that cause us to abandon or repeat clinical trials. The commencement and
completion of clinical trials may be delayed by several factors,
including:
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Unforeseen
safety issues;
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Determination
of dosing issues;
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Lack
of effectiveness during clinical trials;
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Slower
than expected rates of patient recruitment;
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Inability
to monitor patients adequately during or after treatment;
and
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Inability
or unwillingness of medical investigators to follow our clinical
protocols.
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We
are
hopeful that we may be able to obtain “Fast Track” and or “Orphan Drug” status
from the FDA for one or more of our product candidates. Fast Track allows the
FDA to facilitate development and expedite review of drugs that treat serious
and life-threatening conditions so that an approved product can reach the market
expeditiously. Fast Track status does not apply to a product alone, but applies
to a combination of a product and the specific indications for which it is
being
studied. Therefore, it is a drug’s development program for a specific indication
that receives Fast Track designation. Orphan Drug status promotes the
development of products that demonstrate the promise for the diagnosis and
treatment of one disease or condition and affords certain financial and market
protection benefits to successful applicants. However, there is no guarantee
that any of our product candidates will be granted Fast Track or Orphan Drug
status by the FDA or that, even if such product candidate is granted such
status, the product candidate’s clinical development and regulatory approval
process will not be delayed or will be successful.
In
addition, we or the FDA may suspend our clinical trials at any time if it
appears that we are exposing participants to unacceptable health risks or if
the
FDA finds deficiencies in our IND submission or in the conduct of these trials.
Therefore, we cannot predict with any certainty the schedule for future clinical
trials.
The
results of our clinical trials may not support our product candidate
claims.
Even
if
our clinical trials are completed as planned, we cannot be certain that their
results will support approval of our product candidates. Success in preclinical
testing and early clinical trials does not ensure that later clinical trials
will be successful, and we cannot be sure that the results of later clinical
trials will replicate the results of prior clinical trials and preclinical
testing. The clinical trial process may fail to demonstrate that our product
candidates are safe for humans and effective for indicated uses. This failure
would cause us to abandon a product candidate and may delay development of
other
product candidates. Any delay in, or termination of, our clinical trials will
delay the filing of our NDAs with the FDA and, ultimately, our ability to
commercialize our product candidates and generate product revenues. In addition,
our clinical trials involve small patient populations. Because of small sample
size, the results of these clinical trials may not be indicative of future
results.
Even
if
the FDA approves our product candidates, physicians and patients may not accept
and use them. Acceptance and use of our products will depend upon a number
of
factors including:
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|
Perceptions
by members of the health care community, including physicians, regarding
the safety and effectiveness of our drugs;
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|
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Cost-effectiveness
of our products relative to competing products;
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·
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Availability
of reimbursement for our products from government or other healthcare
payers; and
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18
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·
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Effectiveness
of marketing and distribution efforts by us and our licensees and
distributors, if any.
|
Because
we expect sales of our current product candidates, if approved, to generate
substantially all of our product revenues for the foreseeable future, the
failure of a drug to find market acceptance would harm our business and could
require us to seek additional financing in order to fund the development of
future product candidates.
Because
we are dependent on clinical research institutions and other contractors for
clinical testing and for research and development activities, the results of
our
clinical trials and such research activities are, to a certain extent, beyond
our control.
We
materially rely upon independent investigators and collaborators, such as
universities and medical institutions, to conduct our preclinical and clinical
trials under agreements with us. These collaborators are not our employees
and
we cannot control the amount or timing of resources that they devote to our
programs. These investigators may not assign as great a priority to our programs
or pursue them as diligently as we would if we were undertaking such programs
ourselves. If outside collaborators fail to devote sufficient time and resources
to our drug development programs, or if their performance is substandard, the
approval of our FDA applications, if any, and our introduction of new drugs,
if
any, will be delayed. These collaborators may also have relationships with
other
commercial entities, some of whom may compete with us. If our collaborators
assist our competitors to our detriment, our competitive position would be
harmed.
Our
reliance on third parties to formulate and manufacture our product candidates
exposes us to a number of risks that may delay the development, regulatory
approval and commercialization of our products or result in higher product
costs.
We
do not
have experience in drug formulation or manufacturing and do not intend to
establish our own manufacturing facilities. We lack the resources and expertise
to formulate or manufacture our own product candidates. We currently are
contracting for the manufacture of our product candidates. We intend to contract
with one or more manufacturers to manufacture, supply, store and distribute
drug
supplies for our clinical trials. If a product candidate we develop or acquire
in the future receives FDA approval, we will rely on one or more third-party
contractors to manufacture our drugs. Our anticipated future reliance on a
limited number of third-party manufacturers exposes us to the following
risks:
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We
may be unable to identify manufacturers on acceptable terms or at
all
because the number of potential manufacturers is limited and the
FDA must
approve any replacement contractor. This approval would require new
testing and compliance inspections. In addition, a new manufacturer
would
have to be educated in, or develop substantially equivalent processes
for,
production of our products after receipt of FDA approval, if
any.
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Our
third-party manufacturers might be unable to formulate and manufacture
our
drugs in the volume and of the quality required to meet our clinical
needs
and commercial needs, if any.
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Our
future contract manufacturers may not perform as agreed or may not
remain
in the contract manufacturing business for the time required to supply
our
clinical trials or to successfully produce, store and distribute
our
products.
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Drug
manufacturers are subject to ongoing periodic unannounced inspection
by
the FDA, the Drug Enforcement Administration (the “DEA”), and
corresponding state agencies to ensure strict compliance with good
manufacturing practices and other government regulations and corresponding
foreign standards. We do not have control over third-party manufacturers’
compliance with these regulations and standards.
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If
any third-party manufacturer makes improvements in the manufacturing
process for our products, we may not own, or may have to share, the
intellectual property rights to the
innovation.
|
Each
of
these risks could delay our clinical trials, the approval, if any, of our
product candidates by the FDA or the commercialization of our product candidates
or result in higher costs or deprive us of potential product
revenues.
Risks
Related to Our Ability to Commercialize Our Product
Candidates
If
we are unable either to create sales, marketing and distribution capabilities
or
enter into agreements with third parties to perform these functions, we will
be
unable to commercialize our product candidates
successfully.
19
We
currently have no marketing, sales or distribution capabilities. If and when
we
become reasonably certain that we will be able to commercialize our current
or
future products, we anticipate allocating resources to the marketing, sales
and
distribution of our proposed products in North America, however, we cannot
assure that we will be able to market, sell and distribute our products
successfully. Our future success also may depend, in part, on our ability to
enter into and maintain collaborative relationships for such capabilities and
to
encourage the collaborator’s strategic interest in the products under
development and such collaborator’s ability to successfully market and sell any
such products. Although we intend to pursue certain collaborative arrangements
regarding the sale and marketing of our products, there can be no assurance
that
we will be able to establish or maintain our own sales operations or affect
collaborative arrangements, or that if we are able to do so, our collaborators
will have effective sales forces. There can also be no assurance that we will
be
able to establish or maintain relationships with third party collaborators
or
develop in-house sales and distribution capabilities. To the extent that we
depend on third parties for marketing and distribution, any revenues we receive
will depend upon the efforts of such third parties, and there can be no
assurance that such efforts will be successful. In addition, there can also
be
no assurance that we will be able to market and sell our products in the United
States or overseas.
If
we are
not able to partner with a third party and are not successful in recruiting
sales and marketing personnel or in building a sales and marketing
infrastructure, we will have difficulty commercializing our product candidates,
which would harm our business. If we rely on pharmaceutical or biotechnology
companies with established distribution systems to market our products, we
will
need to establish and maintain partnership arrangements, and we may not be
able
to enter into these arrangements on acceptable terms or at all. To the extent
that we enter into co-promotion or other arrangements, any revenues we receive
will depend upon the efforts of third parties which may not be successful and
which will be only partially in our control. Our product revenues would likely
be lower than if we marketed and sold our products directly.
If
we cannot compete successfully for market share against other drug companies,
we
may not achieve sufficient product revenues and our business will
suffer.
The
market for our product candidates is characterized by intense competition and
rapid technological advances. If a product candidate receives FDA approval,
it
will compete with a number of existing and future drugs and therapies developed,
manufactured and marketed by others. Existing or future competing products
may
provide greater therapeutic convenience or clinical or other benefits for a
specific indication than our products, or may offer comparable performance
at a
lower cost. If our products fail to capture and maintain market share, we may
not achieve sufficient product revenues and our business will
suffer.
We
will
compete against fully integrated pharmaceutical companies and smaller companies
that are collaborating with larger pharmaceutical companies, academic
institutions, government agencies and other public and private research
organizations. Many of these competitors have products already approved or
in
development. In addition, many of these competitors, either alone or together
with their collaborative partners, operate larger research and development
programs or have substantially greater financial resources than we do, as well
as significantly greater experience in:
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Developing
drugs;
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Undertaking
preclinical testing and human clinical trials;
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Obtaining
FDA and other regulatory approvals of drugs;
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Formulating
and manufacturing drugs; and
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Launching,
marketing and selling drugs.
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If
physicians and patients do not accept and use our product candidates, our
ability to generate revenue from sales of our products will be materially
impaired.
Even
if
the FDA approves our product candidates, physicians and patients may not accept
and use them. Acceptance and use of our products will depend upon a number
of
factors including:
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|
|
Perceptions
by members of the health care community, including physicians, about
the
safety and effectiveness of our drugs;
|
|
·
|
|
Pharmacological
benefit and cost-effectiveness of our products relative to competing
products;
|
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·
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Availability
of reimbursement for our products from government or other healthcare
payors;
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Effectiveness
of marketing and distribution efforts by us and our licensees and
distributors, if any; and
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The
price at which we sell our
products.
|
20
Our
ability to generate product revenues will be diminished if our drugs sell for
inadequate prices or patients are unable to obtain adequate levels of
reimbursement.
Our
ability to commercialize our drugs, alone or with collaborators, will depend
in
part on the extent to which reimbursement will be available from:
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Government
and health administration authorities;
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|
Private
health maintenance organizations and health insurers;
and
|
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Other
healthcare payers.
|
Government
and other healthcare payers increasingly attempt to contain healthcare costs
by
limiting both coverage and the level of reimbursement for drugs. As a result,
we
cannot provide any assurances that third-party payors will provide adequate
coverage of and reimbursement for any of our product candidates. If we are
unable to obtain adequate coverage of and payment levels for our product
candidates from third-party payors, physicians may limit how much or under
what
circumstances they will prescribe or administer them and patients may decline
to
purchase them. This in turn could affect our ability to successfully
commercialize our products and impact our profitability and future success.
In
both
the United States and certain foreign jurisdictions, there have been a number
of
legislative and regulatory policies and proposals in recent years to change
the
healthcare system in ways that could impact our ability to sell our products
profitably. On December 8, 2003, President Bush signed into law the Medicare
Prescription Drug, Improvement and Modernization Act of 2003, or the MMA, which
contains, among other changes to the law, a wide variety of changes that have
and will impact Medicare reimbursement of pharmaceuticals to physicians and
hospitals.
There
also likely will continue to be legislative and regulatory proposals that could
bring about significant changes in the healthcare industry. We cannot predict
what form those changes might take or the impact on our business of any
legislation or regulations that may be adopted in the future. The implementation
of cost containment measures or other healthcare reforms may prevent us from
being able to generate revenue, attain profitability or commercialize our
products.
In
addition, in many foreign countries, particularly the countries of the European
Union, the pricing of prescription drugs is subject to government control.
We
may face competition for our product candidates from lower priced products
in
foreign countries that have placed price controls on pharmaceutical products.
In
addition, there may be importation of foreign products that compete with our
own
products which could negatively impact our profitability.
Risks
Related to Our Intellectual Property
If
we fail to adequately protect or enforce our intellectual property rights or
secure rights to patents of others, the value of our intellectual property
rights would diminish.
Our
success, competitive position and future revenues will depend in part on our
ability and the abilities of our licensors to obtain and maintain patent
protection for our products, methods, processes and other technologies, to
preserve our trade secrets, to prevent third parties from infringing on our
proprietary rights and to operate without infringing the proprietary rights
of
third parties.
To
date,
we have exclusive rights to certain U.S. and foreign intellectual property.
We
anticipate filing additional patent applications both in the U.S. and in other
countries, as appropriate. However, we cannot predict:
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|
The
degree and range of protection any patents will afford us against
competitors, including whether
third parties will find ways to invalidate or otherwise circumvent
our
patents;
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|
|
If
and when patents will issue;
|
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|
|
Whether
or not others will obtain patents claiming aspects similar to those
covered by our patents and
patent applications; or
|
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|
Whether
we will need to initiate litigation or administrative proceedings
which
may be costly whether
we win or lose.
|
21
Our
success also depends upon the skills, knowledge and experience of our scientific
and technical personnel, our consultants and advisors as well as our licensors
and contractors. To help protect our proprietary know-how and our inventions
for
which patents may be unobtainable or difficult to obtain, we rely on trade
secret protection and confidentiality agreements. To this end, it is our policy
generally to require our employees, consultants, advisors and contractors to
enter into agreements which prohibit the disclosure of confidential information
and, where applicable, require disclosure and assignment to us of the ideas,
developments, discoveries and inventions important to our business. These
agreements may not provide adequate protection for our trade secrets, know-how
or other proprietary information in the event of any unauthorized use or
disclosure or the lawful development by others of such information. If any
of
our trade secrets, know-how or other proprietary information is disclosed,
the
value of our trade secrets, know-how and other proprietary rights would be
significantly impaired and our business and competitive position would
suffer.
Third
party claims of intellectual property infringement would require us to spend
significant time and money and could prevent us from developing or
commercializing our products.
In
order
to protect or enforce patent rights, we may initiate patent litigation against
third parties. Similarly, we may be sued by others. We also may become subject
to proceedings conducted in the U.S. Patent and Trademark Office, including
interference proceedings to determine the priority of inventions, or
reexamination proceedings. In addition, any foreign patents that are granted
may
become subject to opposition, nullity, or revocation proceedings in foreign
jurisdictions having such proceedings opposed by third parties in foreign
jurisdictions having opposition proceedings. The defense and prosecution, if
necessary, of intellectual property actions are costly and divert technical
and
management personnel from their normal responsibilities.
No
patent
can protect its holder from a claim of infringement of another patent.
Therefore, our patent position cannot and does not provide any assurance that
the commercialization of our products would not infringe the patent rights
of
another. While we know of no actual or threatened claim of infringement that
would be material to us, there can be no assurance that such a claim will not
be
asserted.
If
such a
claim is asserted, there can be no assurance that the resolution of the claim
would permit us to continue marketing the relevant product on commercially
reasonable terms, if at all. We may not have sufficient resources to bring
these
actions to a successful conclusion. If we do not successfully defend any
infringement actions to which we become a party or are unable to have infringed
patents declared invalid or unenforceable, we may have to pay substantial
monetary damages, which can be tripled if the infringement is deemed willful,
or
be required to discontinue or significantly delay commercialization and
development of the affected products.
Any
legal
action against us or our collaborators claiming damages and seeking to enjoin
developmental or marketing activities relating to affected products could,
in
addition to subjecting us to potential liability for damages, require us or
our
collaborators to obtain licenses to continue to develop, manufacture or market
the affected products. Such a license may not be available to us on commercially
reasonable terms, if at all.
An
adverse determination in a proceeding involving our owned or licensed
intellectual property may allow entry of generic substitutes for our
products.
Other
Risks Related to Our Company
We
are subject to Sarbanes-Oxley and the reporting requirements of federal
securities laws, which can be expensive.
As
a
public reporting company, we are subject to the Sarbanes-Oxley Act of 2002,
as
well as the information and reporting requirements of the Securities Exchange
Act of 1934, as amended, and other federal securities laws. As a result, we
incur significant legal, accounting and other expenses that we did not incur
as
a private company, including costs associated with our public company reporting
requirements and corporate governance requirements. As an example of public
reporting company requirements, we evaluate the effectiveness of disclosure
controls and procedures and of our internal control over financing reporting
in
order to allow management to report on such controls.
As
a
company with limited capital and human resources, our management has identified
that there is a lack of segregation of duties due to the limited number of
employees within our company’s financial and administrative functions.
Management believes that, based on the employees involved and the control
procedures in place, risks associated with such lack of segregation are not
significant and that the potential benefits of adding employees to segregate
duties more clearly do not justify the associated added expense. However,
management continues to evaluate this segregation of duties. Our management
is
working to continuously monitor the segregation of duties as well as reviewing
internal controls. We have engaged the services of a Sarbanes-Oxley consultant
to tighten our internal controls and ensure adherence to the regulations once
finalized. In the event we identify significant deficiencies or material
weaknesses in our internal control over financial reporting that we cannot
remediate in a timely manner, investors and others may lose confidence in the
reliability of our financial statements and the trading price of our common
stock and ability to obtain any necessary equity or debt financing could
suffer.
22
There
is not now, and there may not ever be an active market for shares of our common
stock.
In
general, there has been limited trading activity in shares of the Company’s
common stock. The small trading volume may make it more difficult for our
stockholders to sell their shares as and when they choose. Furthermore, small
trading volumes generally depress market prices. As a result, you may not always
be able to resell shares of our common stock publicly at the time and prices
that you feel are fair or appropriate.
Because
we became public by means of a reverse merger, we may not be able to attract
the
attention of major brokerage firms.
Additional
risks may exist as a result of our becoming a public reporting company through
a
“reverse merger.” Security analysts of major brokerage firms may not provide
coverage of the Company. Because we became public through a reverse merger,
there is no incentive to brokerage firms to recommend the purchase of our common
stock. No assurance can be given that brokerage firms will want to provide
analyst coverage of our Company in the future.
Anti-takeover
provisions in our charter documents and under Delaware law may make an
acquisition of us, which may be beneficial to our stockholders, more
difficult.
Provisions
of our amended and restated certificate of incorporation and bylaws, as well
as
provisions of Delaware law, could make it more difficult for a third party
to
acquire us, even if doing so would benefit our stockholders. These provisions
authorize the issuance of "blank check" preferred stock that could be issued
by
our board of directors to increase the number of outstanding
shares and hinder a takeover attempt, and limit who may call a special meeting
of stockholders.
In
addition, Section 203 of the Delaware General Corporation Law, which prohibits
business combinations between us and one or more significant stockholders unless
specified conditions are met, may discourage, delay or prevent a third party
from acquiring us.
Because
we do not expect to pay dividends, you will not realize any income from an
investment in our common stock unless and until you sell your shares at
profit.
We
have
never paid dividends on our capital stock and we do not anticipate that we
will
pay any dividends for the foreseeable future. Accordingly, any return on an
investment in our Company will be realized, if at all, only when you sell shares
of our common stock.
Item
2. Description of Property
Our
corporate office is located at 1180 Avenue of the Americas, 19th Floor, New
York, NY 10036. The New York office space is subject to a five-year lease
agreement that expires in June 2010. Under the terms of the lease, we lease
approximately 2,580 square feet and are required to make monthly rental payments
of approximately $10,100 until December 31, 2007, with such payments increasing
to approximately $11,000 thereafter through the remainder of the term of the
lease. Our business and development operations in Charlestown occupy
approximately 6,000 square feet located as 197 Eighth Street, Charlestown,
Massachusetts 02129. The main Charlestown office space consists of two suites
and is subject to a five-year lease agreement that expires in October 2009.
Under the terms of the lease, we lease approximately 3,630 square feet and
are
required to make monthly rental payments that range from $5,675 during the
current year of the lease to $6,350 during the last year of the lease. The
additional 2,400 square feet of the Charlestown space generates a monthly charge
of approximately $6,940 per month and is not subject to any long-term lease
agreements. The Company also has a small office in New Haven, Connecticut which
is leased until October 31, 2009 and generates monthly payments that range
from
$3,667 at the beginning of the lease to $3,889 at the end of the lease term.
The
Company expects to lease additional square footage in the Boston area in 2007
to
meet its expanding needs.
23
Item
3. Legal Proceedings
We
are
not currently involved in any material legal proceedings.
Item.
4. Submission of Matters to a Vote of Security
Holders
No
matters were submitted to a vote of our security holders during the fourth
quarter of the fiscal year ended December 31, 2006.
PART
II :
Item
5. Market for Common Equity and related Stockholders
Matters
Prior
to
the consummation of the Merger, our common stock traded on the OTCBB under
the
symbol “ESWB.” As a result of the Company’s name change to ZIOPHARM Oncology,
Inc., our common stock now trades under the symbol “ZIOP.” On September 22,
2006, the Company’s common shares began trading on the NASDAQ Capital Market
under the symbol ZIOP. The following table sets forth the high and low bid
prices for our common stock as reported by NASDAQ since September 22, 2006
and
the OTCBB since our common stock began trading over the counter in 2004. The
OTCBB quotations reflect inter-dealer prices, without retail markup, markdown
or
commission, and may not represent actual transactions. Prices set forth below
for periods prior to August 24, 2005 do not reflect the 1-for-40 share
combination effected on that date.
|
|
Price
Range
|
||||||
|
Fiscal
Year 2006 (Quarter Ended)
|
High
|
Low
|
|||||
|
December
31, 2006
|
$
|
5.97
|
$
|
5.60
|
|||
|
September
30, 2006
|
$
|
5.19
|
$
|
4.90
|
|||
|
June
30, 2006
|
$
|
5.50
|
$
|
5.20
|
|||
|
March
31, 2006
|
$
|
4.80
|
$
|
4.80
|
|||
|
Fiscal
Year 2005 (Quarter Ended)
|
High
|
|
|
Low
|
|||
|
December
31, 2005
|
$
|
6.00
|
$
|
3.25
|
|||
|
September
30, 2005
|
$
|
0.40
|
$
|
0.00
|
|||
|
June
30, 2005
|
$
|
0.05
|
$
|
0.00
|
|||
|
March
31, 2005
|
$
|
0.05
|
$
|
0.00
|
|||
|
Fiscal
Year 2004 (Quarter Ended)
|
High
|
Low
|
|||||
|
December
31, 2004
|
$
|
0.00
|
$
|
0.00
|
|||
|
September
30, 2004
|
$
|
0.00
|
$
|
0.00
|
|||
|
June
30, 2004
|
$
|
0.00
|
$
|
0.00
|
|||
|
March
31, 2004
|
$
|
0.00
|
$
|
0.00
|
|||
The
approximate number of stockholders of record of our common stock as December
31,
2006 was 332. We have never declared or paid a cash dividend on our common
stock
and do not anticipate paying any cash dividends in the foreseeable
future.
Item
6. Management
Discussion and Analysis or Plan of Operation
Overview:
ZIOPHARM
Oncology, Inc. is a biopharmaceutical company that is seeking to develop and
commercialize a diverse, risk-sensitive portfolio of in-licensed cancer drugs
that address unmet medical needs. Our principal focus is on the licensing and
development of proprietary drug candidate families that are related to cancer
therapeutics that are already on the market or in development. We believe this
strategy will result in lower risk and expedited drug development programs.
We
expect to commercialize our products on our own in North America but recognize
that promising clinical trial results in cancers with a high incidence and
prevalence might also be addressed in a commercial partnership with another
company with the requisite financial resources. Currently, we are in phase
I
and/or II studies for three product candidates known as ZIO-101, ZIO-201 and
ZIO-301:
|
|
·
|
ZIO-101
is an organic arsenic compound covered by issued U.S. patents and
applications internationally. A form of commercially available inorganic
arsenic (arsenic trioxide (Trisenox®)
or ATO) has been approved for the treatment of acute promyelocytic
leukemia (APL), a precancerous condition, and is on the compendia
listing
for the therapy of multiple myeloma as well as having been studied
for the
treatment of various other cancers. Nevertheless, ATO has been shown
to be
toxic to the heart, liver, and brain, limiting its use as an anti-cancer
agent. Inorganic arsenic has also been shown to cause cancer of the
skin
and lung in humans. The toxicity of arsenic generally is correlated
to its
accumulation in organs and tissues. Our preclinical and clinical
studies
to date have demonstrated that ZIO-101 (and organic arsenic in general)
is
considerably less toxic than inorganic arsenic, particularly with
regard
to heart toxicity. In vitro testing of ZIO-101 using the National
Cancer Institute’s human cancer cell panel detected activity against lung,
colon, brain, melanoma, ovarian and kidney cancer. Moderate activity
was
detected against breast and prostate cancer. In addition to solid
tumors,
in
vitro
testing in both the National Cancer Institute’s cancer cell panel and
in
vivo
testing in a leukemia animal model demonstrated substantial activity
against hematological cancers (cancers of the blood and blood-forming
tissues) such as leukemia, lymphoma, myelodysplastic syndromes and
multiple myeloma. Preclinical study has also established antiangiogenic
properties of ZIO-101 and also support the use of an oral form of
the
drug.
|
24
|
|
|
Phase
I testing of the intravenous (IV) form of ZIO-101 is still ongoing
with
two safety and dose finding studies to be completed in the near future.
The Company has seen encouraging signs of clinical activity in both
of
these studies. The Company has completed the phase I portion of an
ongoing
phase I/II study in advanced multiple myeloma, also with encouraging
signs
of clinical activity. Following phase II studies in advanced myeloma,
the
Company expects to pursue registration in the U.S. with a potentially
pivotal trial under Special Protocol Assessment (“SPA”) and to initiate
patient treatment in early 2008. The Company has initiated additional
phase II studies in other hematological and solid tumor cancers while
also
exploring different dosing schedules and expects to file a U.S.
Investigational New Drug Application for the clinical study of an
oral
form of ZIO-101 in 2007.
|
|
|
·
|
ZIO-201,
or isophosphoramide mustard (IPM), is a proprietary stabilized metabolite
of ifosfamide that is also related to cyclophosphamide. A patent
application for pharmaceutical composition has been filed in the
U.S. and
internationally. Cyclophosphamide and ifosfamide are alkylating agents.
The Company believes cyclophosphamide is the most widely used alkylating
agent in cancer therapy and is used to treat breast cancer and
non-Hodgkin’s lymphoma. Ifosfamide has been shown to be effective in high
dose by itself, or in combination in treating sarcoma and lymphoma.
Although ifosfamide-based treatment generally represents the standard
of
care for sarcoma, it is not licensed for this indication by the Food
and
Drug Administration. Our preclinical studies have shown that, in
animal
and laboratory models, IPM evidences activity against leukemia and
solid
tumors. These studies also indicate that ZIO-201 has a better
pharmacokinetic and safety profile than ifosfamide or cyclophosphamide,
offering the possibility of safer and more efficacious therapy with
ZIO-201. Ifosfamide is metabolized to IPM. In addition to IPM, another
metabolite of ifosfamide is acrolein, which is toxic to the kidneys
and
bladder. The presence of acrolein can mandate the administration
of a
protective agent called mesna, which is inconvenient and expensive.
Chloroacetaldehyde is another metabolite of ifosfamide and is toxic
to the
central nervous system, causing “fuzzy brain” syndrome for which there is
currently no protective measure. Similar toxicity concerns pertain
to
high-dose cyclophosphamide, which is widely used in bone marrow and
blood
cell transplantation. Because ZIO-201 is independently active without
acrolein or chloroacetaldehyde metabolites, the Company believes
that the
administration of ZIO-201 may avoid many of the toxicities of ifosfamide
and cyclophosphamide without compromising efficacy. In addition to
anticipated lower toxicity, ZIO-201 (and without the co-administration
of
mesna) may have other advantages over ifosfamide. In preclinical
studies
ZIO-201 likely cross-links DNA differently than ifosfamide or
cyclophosphamide metabolites, resulting in a different activity profile.
Moreover, in some instances ZIO-201 appears to show activity in
ifosfamide- and/or cyclophosphamide-resistant cancer
cells.
|
|
|
|
|
|
|
|
Phase
I and phase II testing of the intravenous (“IV”)
form
of
ZIO-201 is ongoing in the U.S. IPM has been administered without
the
“uroprotectant” mesna and the toxicities associated with acrolein and
chloroacetaldehyde have not been observed. Electrolyte inbalances
seen
with ifosfamide have occurred in the higher dose cohorts. The Company
has
seen encouraging signs of clinical activity in the phase I study.
The
Company has completed a phase I study in advanced sarcoma and a phase
II
is ongoing. The Company expects to pursue registration in the U.S.
for the
treatment of advanced sarcoma with a potentially pivotal trial under
SPA
to initiate patient treatment early in 2008. The Company also expects
to
start additional phase II studies in other cancers and using different
dosing schedules and routes of administration and to file a U.S.
Investigational New Drug Application for an oral form of ZIO-201in
2007.
|
25
| ● |
ZIO-301
(indibulin) is a novel small molecular weight tubulin polymerization
inhibitor that has been acquired from
Baxter Healthcare. A phase I study is currently underway with ZIO-301
to
evaluate safety, pharmacokinetics (PK), maximum tolerated dose (MTD)
and
dose limiting toxicity (DLT) in patients with advanced solid tumors.
|
The
microtubule component tubulin is one of the more well established anti-tumor
targets in the treatment of cancer today. A number of drugs are on the market
that target tubulin, for example paclitaxel (Taxol®)
and the
vinca alkaloid family (vincristine, vinorelbine). The use of these drugs is
associated with important toxicities. Notably paclitaxel causes significant
peripheral neurotoxicity. In contrast, ZIO-301 has not shown peripheral
neurotoxicity either in preclinical testing or in the clinic to
date.
This
class of agents is typically the mainstay of chemotherapy in a wide variety
of
cancer indications. ZIO-301 is an orally available compound with preclinical
data that indicates significant and broad activity (including taxane refractory
and multi-drug resistant cell lines and xenografts) and it is potentially safer
than other tubulin inhibitors (no neurotoxicity at curative doses in animals
and
in the ongoing phase I trial). At the current time, the Company anticipates
pursuing a Fast Track development program in a niche indication following the
completion of phase II testing. Potential initial indications would include
but
are not limited to: bladder, head & neck, prostate, colorectal, and renal
cancer. Registration in one of these indications would then be followed by
label
expansion via trials that will have been initiated in anticipation of
registration. In addition, the availability of an IV formulation would further
expand the market opportunity and will be explored in 2007. Availability of
an
oral formulation of ZIO-301 creates significant commercial opportunity, since
no
oral formulations of paclitaxel or related compounds are currently on the
market.
Although
we intend to continue with clinical development of ZIO-101 for advanced myeloma
and ZIO-201 for advanced sarcoma, and ZIO-301 in solid tumors, the successful
development of our product candidates is highly uncertain. Product development
costs and timelines can vary significantly for each product candidate and are
difficult to accurately predict. Various statutes and regulations also govern
or
influence the manufacturing, safety, labeling, storage, record keeping and
marketing of each product. The lengthy process of seeking these approvals,
and
the subsequent compliance with applicable statutes and regulations, require
the
expenditure of substantial resources. Any failure by us to obtain, or any delay
in obtaining, regulatory approvals could materially adversely affect our
business. To date, we have not received approval for the sale of any drug
candidates in any market and, therefore, have not generated any revenues from
our drug candidates.
Recent
Developments
On
November 3, 2006, the Company signed a definitive Asset Purchase Agreement
(for
indibulin) and License Agreement (to Baxter's proprietary nanosuspension
technology) with affiliates of Baxter Healthcare Corporation. Indibulin,
referred to by the Company as ZIO-301, is a novel anti-cancer agent that binds
to tubulin, one of the essential proteins for chromosomal segregation, and
targets mitosis like the taxanes and vinca
alkaloids. It is available as both an oral and a proprietary nanosuspension
intravenous form. Molecules that target mitosis and inhibit cell
division (antimitotic agents) are a major focus of cancer research and they
are amoung the most widely used anti-cancer drugs in oncology
today. Among the more well known antimitotic drugs are the taxanes
(paclitaxel, docetaxel) and the vinca alkaloids
(vincristine, vinblastine). The terms of the agreement include an upfront
cash payment of approximately $1.125 million has been expensed as purchased
research and development in the year ended December 31, 2006, $15,000
was paid for annual annual license maintenance fee, and $100,000
payment for existing inventory. In addition to the upfront payments there will
be follow-on milestone cash payments that could amount to approximately $8
million in the aggregate and royalties on net sales typical of a product at
this
stage of development. The purchase price includes the entire indibulin
intellectual property portfolio as well as existing drug substance and capsule
inventories.
26
Plan
of Operation
Our
plan
of operation for the next twelve months, is to continue implementing our
business strategy, including the clinical development of our two lead product
candidates, ZIO-101, ZIO-201 and the newly acquired ZIO-301. We also intend
to
expand our drug candidate portfolio by seeking additional drug candidates
through in-licensing arrangements. We expect our principal expenditures during
those 12 months to include:
|
·
|
Fees
and milestone payments required under the license agreements relating
to
our existing product candidates;
|
|
·
|
Clinical
trial expenses, including the costs incurred with respect to the
conduct
of clinical trials for ZIO-101 and ZIO-201, ZIO-301, and preclinical
costs
associated with back-up candidates ZIO-102 and ZIO-202;
|
|
·
|
Costs
related to the scale-up and manufacture of ZIO-101, ZIO-201, and
ZIO-301;
|
|
·
|
Rent
for our facilities; and
|
|
·
|
General
corporate and working capital, including general and administrative
expenses.
|
As
part
of our plan for additional employees, we anticipate hiring several additional
full-time employees in the regulatory, clinical and finance functions. In
addition, we intend to use senior advisors, consultants, clinical research
organizations and third parties to perform certain aspects of product
development, manufacturing, clinical and preclinical development, and regulatory
and quality assurance functions.
At
our
current and desired pace of clinical development of ZIO-101, ZIO-201, newly
acquired ZIO-301, and other back-up candidates and ongoing in-licensing efforts
over the next 12 months we expect to spend approximately $3.1 million on
preclinical and regulatory expenses, $12.5 million on clinical expenses
(including clinical trials and milestone payments that we expect to be triggered
under the license agreements relating to our product candidates), approximately
$6.7 million on manufacturing costs, approximately $475,000 on facilities,
rent (including additional space not presently contracted) and other facilities
related costs, and approximately $5.4 million on general corporate and
working capital. We believe that we currently have sufficient capital to fund
development and commercialization activities of ZIO-101 and ZIO-201, as well
as
newly acquired ZIO-301, into the first quarter of 2008 with the proceeds, and
interest earned herin, from the common stock offering received on May 3,
2006.
Product
Candidate Development and Clinical Trials
ZIO-101.
ZIO-101,
organic arsenic, is being developed presently to treat advanced myeloma and
the
phase II portion of a phase I/II trial in advanced multiple myeloma is underway.
We will continue to explore the use of ZIO-101 in other phase II trials as
well
as exploring different dosing schedules and forms. Preclinical development
will
continue with a back-up compound designated as ZIO-102. Additional compounds
are
being synthesized under an extension of our agreement with The University of
Texas M.D. Anderson Cancer Center and the Texas A&M University System.
Technology transfer and scale-up for the commercial manufacture of the active
pharmaceutical ingredient, its lyophilization, and final product specification
for both the IV and oral forms will continue through the period leading to
the
expected registration trial. Preclinical development will continue with
additional compounds.
ZIO-201.
ZIO-201,
stabilized isophosphoramide mustard, is being developed presently to treat
advanced sarcoma. As a follow-on to the ongoing phase I trial, a phase II trial
in advanced sarcoma is well underway. Other trials, including different dosing
schedules and additional forms are in the advanced planning stage. We expect
to
initiate a registration trial in advanced sarcoma following the completion
of
phase II study. Technology transfer and scale-up for the commercial manufacture
of the active pharmaceutical ingredient, its lyophilization, and final product
specification (for both the IV and oral forms) will continue. Preclinical
development will continue with back-up analogues.
ZIO-301.
ZIO-301,
a novel anti-cancer agent that targets mitosis like the taxanes, is available
as
an oral and potentially an intravenous form. The oral form is currently in
a
phase I trial, with phase II expected to initiate in 2007 under an
Investigational New Drug Application filed in the United States.
27
Results
of Operations for the fiscal year ended December 31, 2006 versus December 31,
2005
Revenues.
We
had no revenues for year ended December 31, 2006 and 2005.
Research
and development expenses.
For the year ended December 31, 2006, research and development expenses
increased by $4.8 million, or 85.7%, to $10.4 million from $5.6 million in
the
year ended December 31, 2005. A significant portion of the increase is due
to
the purchased research and development of $1.2 million for ZIO-301. Increased
research and development expenses in the current year period can also be
attributable to an increase of approximately $0.4 million in milestone expenses
in relation to ZIO -101 and ZIO-201. In addition the increase is attributable
to
an increase of approximately $0.9 million in the cost of clinical trials, an
increase of approximately $0.6 million in manufacturing related costs, and
an
increase of approximately $0.1 million in travel expense. The increase in
expenses is also attributable to an increase of approximately $1.0 million
in
stock compensation expense related to stock options, approximately $0.5 million
in employee related costs, and approximately $0.1 million increase in recruiting
costs.
General
and administrative expenses.
For the
year ended December 31, 2006, general and administrative expenses increased
by
$4.5 million, or 108.0%, to $8.7 million from $4.2 million in the year ended
December 31, 2005. The increase is attributable to an increase of approximately
$2.5 million in stock compensation expense related to stock options,
approximately $0.5 million for investors relations services, approximately
$0.4
million in legal, accounting, and filing fee costs, approximately $0.2 million
in travel expenses, approximately $0.1 million in recruiting costs,
approximately $0.1 million in insurance related expenses, approximately $0.1
in
facility, depreciation, and equipment rental expenses, and approximately
$0.7 million in employee related costs as we have built infrastructure to
support the research and development efforts. In addition, there was a $0.2
million one time settlement fee to Paramount BioCapital (see footnote 5 for
more
information). These costs were offset by a decrease of $0.4 million in merger
related costs that were incurred in the year ending December 31, 2005.
Other
income (expense).
Other
income increased by $1.0 million, or 363.9%, to $1.3 million in the year ended
December 31, 2006 from $0.3 million recorded in the year ended December 31,
2005. Other income during the year ended December 31, 2006 and 2005,
respectively, was comprised of interest income. The increase is due to
higher cash balances, which was derived from the May 3, 2006 private placement,
that was made available for investing purposes.
Net
income (loss).
For the
reasons described above, the net loss increased by $8.3, or 87.6%, to $(17.9)
million in the year ended December 31, 2006 from $(9.5) million for the same
period of 2005.
Results
of Operations for the fiscal year ended December 31, 2005 versus December 31,
2004
Revenues.
We had
no revenues for the fiscal year ended December 31, 2005 and 2004.
Research
and development expenses.
For the
year ended December 31, 2005, research and development expenses increased to
approximately $5.6 million from approximately $2.1 million in the twelve-month
period ended December 31, 2004, an increase of approximately 163%. The increase
is attributable to an increase of $1.2 million spent on clinical trials, $1.9
in
manufacturing related costs, $0.2 million in pre-clinical costs, and $0.3
million in employee related costs as we built infrastructure to support the
research and development efforts. For the next year, we expect research and
development spending to continue to increase as we continue to progress our
clinical trials and continue with commercial scale-up manufacturing
activities.
General
and administrative expenses.
For the
year ended December 31, 2005, general and administrative expenses increased
to
approximately $4.2 million from approximately $3.6 million in the year ended
December 31, 2004, and increase of approximately 17%. The increase is primarily
attributable to a nonrecurring payment of $0.4 million due on closing of the
merger.
28
Other
income (expense)
. Other
income increased to approximately $0.3 million in the year ended December 31,
2005 from approximately $0.02 million in the year ended December 31, 2004,
an
increase of approximately 1171%. Other income during the year ended December
31,
2005 was primarily comprised of interest income. The increase in the period
is
due to higher cash balances available for investing purposes.
Net
income (loss).
For the
reasons described above, the net loss increased to approximately $3.8 million
in
the year ended December 31, 2005 to $9.5 million from approximately $5.7 million
in the year ended December 31, 2005, an increase of approximately
67%.
Liquidity
and Capital Resources
As
of
December 31, 2006, we had approximately $28.4 million in cash, cash equivalents
and short-term investments. With the proceeds from our 2006 common stock
offering, which was completed on May 3, 2006, we believe we currently have
sufficient capital to fund development and commercialization activities of
ZIO-101, ZIO-201, and ZIO-301 early into the first quarter of 2008. Because
our business does not generate any cash flow, however, we will need to raise
additional capital to continue development of the product candidates beyond
that
time or to fund development efforts related to new product candidates. We
anticipate raising such additional capital by either borrowing money or by
selling shares of our capital stock. To the extent additional capital is not
available when we need it, we may be forced to abandon some or all of our
development and commercialization efforts, which would have a material adverse
effect on the prospects of our business. Further, our assumptions relating
to
the expected costs of development and commercialization and timeframe for
completion are dependent on numerous factors other than available financing,
including significant unforeseen delays in the clinical trial and regulatory
approval process, which could be extremely costly. In addition, our estimates
assume that we will be able to enroll a sufficient number of patients in each
clinical trial.
29
The
Company anticipates that losses will continue for the foreseeable future. At
December 31, 2006, the Company’s accumulated deficit was approximately $33.2
million. The Company’s ability to continue operations after its current cash
resources are exhausted depends on its ability to obtain additional financing
and achieve profitable operations, as to which no assurances can be
given.
Our
actual cash requirements may vary materially from those now planned because
of a
number of factors including:
|
·
|
Changes
in the focus and direction of our research and development programs,
including the acquisition and pursuit of development of new product
candidates;
|
|
·
|
Competitive
and technical advances;
|
|
·
|
Costs
of commercializing any of the product candidates;
|
|
·
|
Costs
of filing, prosecuting, defending and enforcing any patent claims
and any
other intellectual property rights; or
other developments.
|
In
order
to continue our long-term plans for clinical trials and new product development,
we will need to raise additional capital to continue to fund our research and
development as well as operations after we exhaust our current cash
resources. We expect to finance our cash needs through the sale of equity
securities and possibly strategic collaborations or debt financings or through
other sources that may be dilutive to existing stockholders. There can be no
assurance that any such financing can be realized by the Company, or if
realized, what the terms thereof may be, or that any amount that the Company
is
able to raise will be adequate to support the Company’s working capital
requirements until it achieves profitable operations. If we are unable to raise
additional funds when needed, we may not be able to market our products as
planned or continue development and regulatory approval of our products, or
we
could be required to delay, scale back or eliminate some or all our research
and
development programs.
30
Since
inception, our primary source of funding for our operations has been the private
sale of our securities. For the twelve months ended December 31, 2006, we
received gross proceeds of approximately $37 million ($34,280,120 net of cash
issuance costs) as a result of the sale of an aggregate of 7,991,256 shares
(the
“Shares”) of common stock, at a price of $4.63 per Share, in a private offering
(the “2006 Offering”) that was completed on May 3, 2006. In addition to the
Shares, the Company also issued to each investor a five-year warrant (each
a
“Warrant”) to purchase, at an exercise price of $5.56 per share, an additional
number of shares of common stock equal to 30 percent of the Shares purchased
by
such investor in the Offering. In the aggregate, these Warrants entitle
investors to purchase an additional 2,397,392 shares of common stock. The
Company engaged Paramount BioCapital, Inc. and Griffin Securities, Inc. (the
“Placement Agents”) as co-placement agents in connection with the Offering. In
consideration for their services, the Company paid the Placement Agents and
certain selected dealers engaged by the Placement Agents aggregate cash
commissions of $2,589,966 and issued 7-year warrants to the Placement Agents
and
their designees to purchase an aggregate of 799,126 shares at an exercise price
of $5.09 per share. The Company also agreed to reimburse the Placement Agents
for their accountable expenses incurred in connection with the Offering.
Immediately following the completion of Offering, the Company had 15,264,248
shares of common stock outstanding.
During
the twelve months ended December 31, 2005, we received $4,815 proceeds from
the
exercise of stock options and gross proceeds of approximately $18.1 million
($16.8 net of issuance costs) as a result of the sale by ZIOPHARM, Inc. of
Series A Convertible Preferred Stock in a private placement transaction. During
the twelve months ended December 31, 2004, we received proceeds of approximately
$4.5 million as a result of the sale by ZIOPHARM, Inc. of common stock in a
private placement transaction.
At
December 31, 2006, working capital was approximately $25.9 million, compared
to
working capital of approximately $6.8 million at December 31, 2005. The increase
in working capital reflects the proceeds from the May 2006 offset by the use
of
funds for operations.
Capital
expenditures were approximately $354,000 for the twelve months ended December
31, 2006. We anticipate capital expenditures of approximately $425,000 for
the
fiscal year ended December 31, 2007.
The
Company’s significant lease obligation payable is as follows:
|
Payments
due by Period
|
||||||||||||||||
|
|
Total
|
Less
than 1 Year
|
1
- 3 Years
|
3
- 5 Years
|
After
5 Years
|
|||||||||||
|
Operating
lease
|
$
|
813,020
|
$
|
262,139
|
$
|
485,091
|
$
|
65,790
|
-
|
|||||||
Critical
Accounting Policies and Significant Estimates
The
preparation of financial statements requires the Company to make estimates
and
judgments that affect the reported amounts of assets, liabilities, revenue
and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, the Company evaluates its estimates, including those related
to
accounting for stock-based compensation and research and development activities.
The Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under difference assumptions
or
conditions.
Research
and Development
Research
and development expenses consist primarily of salaries and related personnel
costs, fees paid to consultants and outside service providers for preclinical,
clinical, and manufacturing development, legal expenses resulting from
intellectual property prosecution and organizational affairs and other expenses
relating to the design, development, testing, and enhancement of our product
candidates. We expense our research and development costs as they are incurred.
General and administrative expenses consist primarily of salaries and related
expenses for executive, finance and other administrative personnel, recruitment
expenses, professional fees and other corporate expenses, including business
development and general legal activities.
31
Stock-based
compensation
The
Company’s most critical estimates consist of accounting for stock-based
compensation. On January 1, 2006, the Company adopted Statement of Financial
Accounting Standards No. 123(R) (“SFAS 123R”) Share-Based Payment, using the
modified prospective method, which results in the provision of SFAS 123R only
being applied to the consolidated financial statements on a going-forward basis
(that is, the prior period results have not been restated). Under the fair
value
recognition provisions of SFAS 123R, stock-based compensation cost is measured
at the grant date based on the value of the award using the Black Scholes Model
and is recognized as expense over the service period. Previously, the Company
had followed Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees,
and
related interpretations which resulted in account for employee share options
at
their intrinsic value in the financial statements.
The
Company had previously adopted the provisions of SFAS No. 123, Accounting
for Stock-Based Compensation (“SFAS 123”),
as
amended by
SFAS
No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure,
through
disclosure only. SFAS 123 required the measurement of the fair value of stock
option or warrants granted to employees to be included in the statement of
operations or alternatively, disclosed in the notes to the financial statements.
The Company previously accounted for stock-based awards to employees using
the
intrinsic value method as prescribed by Accounting Principles Board (APB)
Opinion No. 25, Accounting
for Stock Issued to Employees
, and
related interpretations, and had elected the disclosure only alternative under
SFAS 123. All stock-based awards to nonemployees were accounted for at their
fair value in accordance with SFAS 123 and Emerging Issues Task Force (EITF)
96-18, Accounting
for Equity Instruments that are Issued to Other than Employees for Acquiring,
or
in Conjunction with Selling, Goods or Services
. The
Company had recorded the fair value of each stock option issued to non-employees
as determined at the date of grant using the Black-Scholes option pricing
model. Had
we
applied the fair value recognition provisions of SFAS No. 123, our net loss
for
the year ended December 31, 2005 and 2004 would have increased by approximately
$844,000 and $110,000, respectively. We expect to record additional non-cash
compensation expense in the future, which may be significant.
Off-Balance
Sheet Arrangements
We
do not
have any “off-balance sheet agreements,” as that term is defined by SEC
regulation.
32
Item
7. FINANCIAL
STATEMENTS
INDEX
TO FINANCIAL STATEMENTS
|
|
|
Page
|
|
Audited
Financial Statements of ZIOPHARM Oncology, Inc.:
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-1
|
|
Balance
Sheets as of December 31, 2006 and 2005
|
|
F-2
|
|
Statements
of Operations for the Years Ended December 31, 2006, 2005, and 2004,
and
for the Period from inception (September 9, 2003) through December
31,
2006
|
|
F-3
|
|
S
Statements of Cash Flows for the Years Ended December 31, 2006, 2005,
and
2004, and
for the Period from inception (September 9, 2003) through December
31,
2006
|
|
F-4
|
|
Statements
of Changes in Convertible Preferred Stock and Stockholders’ Equity
(Deficit) for the Year Ended December 31, 2006, 2005, and 2004
|
|
F-5
|
|
Notes
to Financial Statements
|
|
F-6
|
33
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of
ZIOPHARM
Oncology, Inc.
Charlestown,
Massachusetts
We
have
audited the balance sheets of ZIOPHARM Oncology, Inc. (a development stage
company) as of December 31, 2006 and 2005 and the related statements of
operations, changes in convertible preferred stock and stockholders’ equity
(deficit) and cash flows for each of the years in the three year period
ended December 31, 2006 and in the period from inception (September 9,
2003) through December 31, 2006. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, audits of its internal control
over financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of ZIOPHARM Oncology, Inc. as of
December 31, 2006 and 2005 and the results of their operations and their cash
flows for each of the years in the three year period ended December 31,
2006 and in the period from inception (September 9, 2003) through December
31,
2006 in conformity with accounting principles generally accepted in the United
States of America.
As
discussed in Note 2 to the financial statements,
effective January 1, 2006, the Company adopted the provisions of Statement
of
Financial Accounting Standard No. 123R, “Share Based
Payment”.
Vitale,
Caturano & Company, Ltd.
Boston,
Massachusetts
February
6, 2006
F-1
|
|
|
|
||||
|
(A
Development Stage Enterprise)
|
|
|
|
|||
|
Balance
Sheets
|
|
|
|
|||
|
As
of December 31, 2006 and 2005
|
|
|
|
|||
|
December
31, 2006
|
December
31, 2005
|
||||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
26,855,450
|
$
|
8,880,717
|
|||
|
Short-term
investments
|
1,555,164
|
-
|
|||||
|
Prepaid
expenses and other current assets
|
462,789
|
211,837
|
|||||
|
Total
current assets
|
28,873,403
|
9,092,554
|
|||||
|
Property
and equipment, net
|
451,247
|
269,702
|
|||||
|
Deposits
|
9,367
|
5,700
|
|||||
|
Other
non current assets
|
178,080
|
124,343
|
|||||
|
Total
assets
|
$
|
29,512,097
|
$
|
9,492,299
|
|||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
$
|
776,128
|
$
|
835,997
|
||||
|
Accrued
expenses
|
2,161,914
|
1,418,819
|
|||||
|
Total
current liabilities
|
2,938,042
|
2,254,816
|
|||||
|
Deferred
rent
|
41,078
|
35,557
|
|||||
|
Commitments
and contingencies (Note 6)
|
|||||||
|
Stockholders’
equity:
|
|||||||
|
Common
stock, $.001 par value; 280,000,000 shares authorized;
|
|||||||
|
15,272,899
and 7,247,992 shares issued and outstanding
|
|||||||
|
at
December 31, 2006 and 2005, respectively
|
15,273
|
7,248
|
|||||
|
Additional
paid-in capital
|
44,667,878
|
20,580,494
|
|||||
|
Warrants
issued
|
15,071,101
|
1,978,540
|
|||||
|
Deficit
accumulated during development stage
|
(33,221,275
|
)
|
(15,364,356
|
)
|
|||
|
Total
stockholders’ equity
|
26,532,977
|
7,201,926
|
|||||
|
Total
liabilities and stockholders’ equity
|
$
|
29,512,097
|
$
|
9,492,299
|
|||
F-2
|
ZIOPHARM
Oncology, Inc.
|
|||||||
|
(A
Development Stage Enterprise)
|
|||||||
|
Statements
of Operations
|
|||||||
|
For
the years ended December 31, 2006, 2005, and 2004,
|
|||||||
|
and
for the period from inception (September 9, 2003)
|
|||||||
|
through
December 31, 2006
|
|
For
the year
ended
December
31,
2006
|
For
the year
ended
December
31,
2005
|
For
the year
ended
December
31,
2004
|
For
the period from inception (September 9, 2003) through December
31,
2006
|
||||||||||
|
Research
contract revenue
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
|||||
|
Operating
expenses and other income:
|
|||||||||||||
|
Research
and development, including
|
|||||||||||||
|
costs
of research contracts
|
10,391,302
|
5,593,850
|
2,126,607
|
18,111,759
|
|||||||||
|
General
and administrative
|
8,720,290
|
4,193,553
|
3,581,959
|
16,656,436
|
|||||||||
|
Total
operating expenses
|
19,111,592
|
9,787,403
|
5,708,566
|
34,768,195
|
|||||||||
|
Loss
from operations
|
(19,111,592
|
)
|
(9,787,403
|
)
|
(5,708,566
|
)
|
(34,768,195
|
)
|
|||||
|
Interest
income
|
1,254,673
|
270,480
|
21,269
|
1,546,920
|
|||||||||
|
Net
loss
|
$
|
(17,856,919
|
)
|
$
|
(9,516,923
|
)
|
$
|
(5,687,297
|
)
|
$
|
(33,221,275
|
)
|
|
|
Basic
and diluted net loss per share
|
$
|
(1.42
|
)
|
$
|
(2.32
|
)
|
$
|
(2.37
|
)
|
||||
|
Weighted
average common shares outstanding used
|
|||||||||||||
|
to
compute basic and diluted net loss per share
|
12,571,951
|
4,101,514
|
2,402,127
|
F-3
|
ZIOPHARM
Oncology, Inc.
|
|||||||
|
(A
Development Stage Enterprise)
|
|||||||
|
Statements
of Cash Flows
|
|||||||
|
For
the years ended December 31, 2006, 2005, and 2004,
|
|||||||
|
and
for the period from inception (September 9, 2003)
|
|||||||
|
through
December 31, 2006
|
|
For
the year ended December 31, 2006
|
|
For
the year ended December 31, 2005
|
|
For
the year ended December 31, 2004
|
|
For
the period from inception (September 9, 2003) through December
31,
2006
|
|||||||
|
Cash
flows from operating activities:
|
|||||||||||||
|
Net
loss
|
$
|
(17,856,919
|
)
|
$
|
(9,516,923
|
)
|
$
|
(5,687,297
|
)
|
$
|
(33,221,275
|
)
|
|
|
Adjustments
to reconcile net loss to net cash
|
|||||||||||||
|
used
in operating activities:
|
|||||||||||||
|
Depreciation
and amortization
|
173,920
|
101,232
|
33,953
|
309,105
|
|||||||||
|
Stock-based
compensation
|
2,882,658
|
98,755
|
703,116
|
3,684,529
|
|||||||||
|
Gain
on disposal of fixed assets
|
(1,165
|
)
|
(1,165
|
)
|
|||||||||
|
Change
in operating assets and liabilities:
|
|||||||||||||
|
Increase
(decrease) in:
|
|||||||||||||
|
Prepaid
expenses and other current assets
|
(250,952
|
)
|
(94,266
|
)
|
(117,571
|
)
|
(462,789
|
)
|
|||||
|
Other
noncurrent assets
|
(53,737
|
)
|
(124,343
|
)
|
-
|
(178,080
|
)
|
||||||
|
Deposits
|
(3,667
|
)
|
54,346
|
(60,046
|
)
|
(9,367
|
)
|
||||||
|
Increase
(decrease) in:
|
|||||||||||||
|
Accounts
payable
|
(59,869
|
)
|
126,050
|
647,448
|
776,128
|
||||||||
|
Accrued
expenses
|
743,095
|
539,443
|
879,376
|
2,161,914
|
|||||||||
|
Deferred
rent
|
5,521
|
35,557
|
-
|
41,078
|
|||||||||
|
Net
cash used in operating activates
|
(14,421,115
|
)
|
(8,780,149
|
)
|
(3,601,021
|
)
|
(26,899,922
|
)
|
|||||
|
Cash
flows from investing activities:
|
|||||||||||||
|
Purchases
of property and equipment
|
(354,300
|
)
|
(130,201
|
)
|
(274,686
|
)
|
(759,187
|
)
|
|||||
|
Increase
in short term investments
|
(1,555,164
|
)
|
-
|
-
|
(1,555,164
|
)
|
|||||||
|
Net
cash used in investing activities
|
(1,909,464
|
)
|
(130,201
|
)
|
(274,686
|
)
|
(2,314,351
|
)
|
|||||
|
Cash
flows from financing activities:
|
|||||||||||||
|
Stockholders'
capital contribution
|
-
|
-
|
-
|
500,000
|
|||||||||
|
Proceeds
from exercise of stock options
|
25,192
|
4,815
|
-
|
30,007
|
|||||||||
|
Proceeds
from issuance of common stock, net
|
34,280,120
|
-
|
4,500,000
|
38,780,120
|
|||||||||
|
Proceeds
from issuance of preferred stock, net
|
-
|
16,759,596
|
-
|
16,759,596
|
|||||||||
|
Net
cash provided by financing activities
|
34,305,312
|
16,764,411
|
4,500,000
|
56,069,723
|
|||||||||
|
Net
increase in cash and cash equivalents
|
17,974,733
|
7,854,061
|
624,293
|
26,855,450
|
|||||||||
|
Cash
and cash equivalents, beginning of period
|
8,880,717
|
1,026,656
|
402,363
|
-
|
|||||||||
|
Cash
and cash equivalents, end of period
|
$
|
26,855,450
|
$
|
8,880,717
|
$
|
1,026,656
|
$
|
26,855,450
|
|||||
|
Supplementary
disclosure of cash flow information:
|
|||||||||||||
|
Cash
paid for interest
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
|||||
|
|
|||||||||||||
|
Cash
paid for income taxes
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
|||||
|
Supplementary
disclosure of noncash investing
|
|||||||||||||
|
and
financing activities:
|
|||||||||||||
|
Warrants
issued to placement agents and investors, in
|
|||||||||||||
|
connection
with private placement
|
$
|
13,092,561
|
$
|
-
|
$
|
-
|
$
|
13,092,561
|
|||||
|
Warrants
issued to placement agent, in connection
|
|||||||||||||
|
with
preferred stock issuance
|
$
|
-
|
$
|
1,682,863
|
$
|
-
|
$
|
1,682,863
|
|||||
|
Preferred
stock conversion to common stock
|
$
|
-
|
$
|
16,759,596
|
$
|
-
|
$
|
16,759,596
|
|||||
|
Warrants
converted to common shares
|
$
|
17,844
|
$
|
-
|
$
|
-
|
$
|
17,844
|
|||||
F-4
|
ZIOPHARM
Oncology, Inc.
|
||||||||
|
(Development
Stage Enterprise)
|
||||||||
|
Statement
of changes in convertible prefered stock and stockholders'
equity
|
||||||||
|
For
the years ended December 31, 2006, 2005, and 2004, and
|
||||||||
|
for
the period from inception (September 9, 2003)
|
||||||||
|
through
December 31, 2006
|
|
Convertible
Preferred Stock and Warrants
|
Stockholder's
Equity
|
||||||||||||||||||||||||||||
|
Series
A Convertible Preferred Stock
|
Warrants
to Purchase Series A Convertible Preferred Stock
|
Common
Stock
|
Additional
Paid-in
|
Deficit
Accumulated During The Development
|
Total
Stockholders'
|
||||||||||||||||||||||||
|
Stockholders'
contribution,
|
Shares
|
Amount
|
Warrants
|
Shares
|
Amount
|
Capital
|
Warrants
|
Stage
|
Equity
|
||||||||||||||||||||
|
September
9, 2003
|
—
|
$
|
—
|
$
|
—
|
250,487
|
$
|
250.00
|
$
|
499,750.00
|
$
|
—
|
$
|
—
|
$
|
500,000.00
|
|||||||||||||
|
Net
loss
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(160,136
|
)
|
(160,136
|
)
|
||||||||||||||||||
|
Balance
at December 31, 2003 (audited)
|
0
|
0
|
0
|
250,487
|
250
|
499,750
|
—
|
(160,136
|
)
|
339,864
|
|||||||||||||||||||
|
Issuance
of common stock
|
—
|
—
|
—
|
2,254,389
|
2,254
|
4,497,746
|
—
|
—
|
4,500,000
|
||||||||||||||||||||
|
Issuance
of common stock for services
|
256,749
|
257
|
438,582
|
—
|
—
|
438,839
|
|||||||||||||||||||||||
|
Fair
value of options/warrants
|
|||||||||||||||||||||||||||||
|
issued
for nonemployee services
|
—
|
—
|
—
|
—
|
—
|
13,240
|
251,037
|
—
|
264,277
|
||||||||||||||||||||
|
Net
loss
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(5,687,297
|
)
|
(5,687,297
|
)
|
||||||||||||||||||
|
|
|||||||||||||||||||||||||||||
|
Balance
at December 31, 2004
|
—
|
—
|
—
|
2,761,625
|
2,761
|
5,449,318
|
251,037
|
(5,847,433
|
)
|
(144,317
|
)
|
||||||||||||||||||
|
|
|||||||||||||||||||||||||||||
|
Issuance
of Series A convertible preferred
|
|||||||||||||||||||||||||||||
|
stock
(net of expenses of $1,340,263 and
|
|||||||||||||||||||||||||||||
|
warrant
cost of $1,682,863)
|
4,197,946
|
15,076,733
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||
|
Fair
value of warrants to purchase Series
|
|||||||||||||||||||||||||||||
|
A
convertible preferred stock
|
—
|
—
|
1,682,863
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||
|
Issuance
of Common stock to EasyWeb
|
|||||||||||||||||||||||||||||
|
Shareholders
|
—
|
—
|
—
|
189,922
|
190
|
(190
|
)
|
—
|
|
—
|
—
|
||||||||||||||||||
|
Conversion
of Series A convertible
|
|||||||||||||||||||||||||||||
|
preferred
stock @ $0.001 into $0.001
|
|||||||||||||||||||||||||||||
|
common
stock on September 13, 2005
|
|||||||||||||||||||||||||||||
|
at
an exchange ratio of .500974
|
(4,197,946
|
)
|
(15,076,733
|
)
|
(1,682,863
|
)
|
4,197,823
|
4,198
|
15,072,535
|
1,682,863
|
—
|
16,759,596
|
|||||||||||||||||
|
Issuance
of common stock for options
|
—
|
—
|
—
|
98,622
|
99
|
4,716
|
—
|
—
|
4,815
|
||||||||||||||||||||
|
Fair
value of options/warrants issued for
|
|
||||||||||||||||||||||||||||
|
nonemployee
services
|
—
|
—
|
—
|
—
|
—
|
54,115
|
44,640
|
—
|
98,755
|
||||||||||||||||||||
|
Net
loss
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(9,516,923
|
)
|
(9,516,923
|
)
|
||||||||||||||||||
|
|
|||||||||||||||||||||||||||||
|
Balance
at December 31, 2005
|
—
|
—
|
—
|
7,247,992
|
7,248
|
20,580,494
|
1,978,540
|
(15,364,356
|
)
|
7,201,926
|
|||||||||||||||||||
|
|
|||||||||||||||||||||||||||||
|
Issuance
of common stock in private
|
|||||||||||||||||||||||||||||
|
placement,
net of expenses $2,719,395
|
—
|
—
|
—
|
7,991,256
|
7,991
|
21,179,568
|
—
|
—
|
21,187,559
|
||||||||||||||||||||
|
Issuance
of warrants
|
—
|
—
|
—
|
—
|
—
|
—
|
13,092,561
|
—
|
13,092,561
|
||||||||||||||||||||
|
Issuance
of common stock
|
|||||||||||||||||||||||||||||
|
for
services rendered
|
—
|
—
|
—
|
25,000
|
25
|
106,225
|
—
|
—
|
106,250
|
||||||||||||||||||||
|
Stock
based compensation
|
|||||||||||||||||||||||||||||
|
for
employees
|
—
|
—
|
—
|
—
|
—
|
2,776,408
|
—
|
—
|
2,776,408
|
||||||||||||||||||||
|
Issuance
of commom stock due to exercise of stock options
|
—
|
—
|
—
|
5,845
|
6
|
25,186
|
—
|
—
|
25,192
|
||||||||||||||||||||
|
Issuance
of common stock due to exercise of stock warrants
|
—
|
—
|
—
|
2,806
|
3
|
(3
|
)
|
—
|
|
—
|
—
|
||||||||||||||||||
|
Net
loss
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(17,856,919
|
)
|
(17,856,919
|
)
|
||||||||||||||||||
|
|
|||||||||||||||||||||||||||||
|
Balance
at December 31, 2006
|
—
|
$
|
—
|
$
|
—
|
$ |
15,272,899
|
$
|
15,273
|
$ |
44,667,878
|
15,071,101
|
$
|
(33,221,275
|
)
|
$
|
26,532,977
|
||||||||||||
F-5
ZIOPHARM
Oncology, Inc.
(A
Development Stage Enterprise)
Notes
to
Financial Statements
| 1. |
ORGANIZATION
|
ZIOPHARM
Oncology, Inc. (“ZIOPHARM” or the “Company”) is a development stage
biopharmaceutical company that seeks to acquire, develop and commercialize,
on
its own or with other commercial partners, products for the treatment of
important unmet medical needs in cancer.
The
Company has operated at a loss since its inception in 2003 and has no revenues.
The Company anticipates that losses will continue for the foreseeable future.
At
December 31, 2006, the Company’s accumulated deficit was approximately $33.2
million. The Company’s ability to continue operations after its current cash
resources are exhausted depends on its ability to obtain additional financing
and achieve profitable operations, as to which no assurances can be given.
Cash
requirements may vary materially from those now planned because of changes
in
the focus and direction of our research and development programs, competitive
and technical advances, patent developments or other developments. Additional
financing will be required to continue operations after we exhaust our current
cash resources and to continue our long-term plans for clinical trials and
new
product development. There can be no assurance that any such financing can
be
realized by the Company, or if realized, what the terms thereof may be, or
that
any amount that Company is able to raise will be adequate to support the
Company’s working capital requirements until it achieves profitable operations.
On
May 3,
2006, pursuant to Subscription Agreements (the “Subscription Agreements”)
between the Company and certain institutional and other accredited investors,
the Company completed the sale of an aggregate of 7,991,256 shares (the
“Shares”) of the Company’s common stock at a price of $4.63 per Share in a
private placement (the “2006 Offering”). In addition to the Shares, the Company
also issued to each investor a five-year warrant (each a “Warrant”) to purchase,
at an exercise price of $5.56 per share, an additional number of shares of
common stock equal to 30 percent of the Shares purchased by such investor in
the
2006 Offering. In the aggregate, these Warrants entitle investors to purchase
an
additional 2,397,392 shares of common stock. The Company estimated the fair
value of these warrants at $9,575,958 using the Black-Scholes model, using
an
assumed risk-free rate of 5.01% and an expected life of 5 years, volatility
of
100% and a dividend yield of 0%. The total gross proceeds resulting from the
2006 Offering was approximately $37 million, before deducting selling
commissions and expenses.
The
Company engaged Paramount BioCapital, Inc. (“Paramount”) and Griffin Securities,
Inc. (together, the “Placement Agents”) as co-placement agents in
connection with the 2006 Offering. In consideration for their services, the
Company paid the Placement Agents and certain selected dealers engaged by the
Placement Agents and their designees aggregate cash commissions of $2,589,966
(of which $1,726,644 was paid to Paramount; see Note 4 - Related Party
Transactions) and issued 7-year warrants to the Placement Agents and their
designees to purchase an aggregate of 799,126 shares of the Company’s common
stock (10 percent of the Shares sold in the 2006 Offering) at an exercise price
of $5.09 per share (the “Placement Agent Warrants”). The Company estimated the
fair value of these warrants at $3,516,603 using the Black-Scholes model, using
an assumed risk-free rate of 5.01% and an expected life of 7 years, volatility
of 100% and a dividend yield of 0%. The Company made reimbursements of $100,000
to the Placement Agents for their accountable expenses incurred in connection
with the 2006 Offering.
Pursuant
to the Offering, the Company agreed to use its best efforts to (i) file a
registration statement covering the resale of the Shares and the common stock
issuable upon exercise of the Warrants and Placement Agent Warrants within
30
days following the closing date of the 2006 Offering, and (ii) use its
reasonable commercial efforts to cause the registration statement to be
effective within 120 days after such final closing date.
F-6
ZIOPHARM
Oncology, Inc.
(A
Development Stage Enterprise)
Notes
to
Financial Statements
| 1. |
ORGANIZATION...
continued
|
With
respect to each investor in the 2006 Offering, the Company also agreed to use
its reasonable commercial efforts to cause the registration statement to remain
effective until the earliest of (i) the date on which the investor may sell
all
of the Shares and shares issuable upon exercise of the Warrants then held by
the
investor pursuant to Rule 144(k) of the Securities Act of 1933 without regard
to
volume restrictions; and (ii) such time as all of the securities held by the
investor and registered under the Registration Statement have been sold pursuant
to a registration statement, or in a transaction exempt from the registration
and prospectus delivery requirements of the Securities Act of 1933 under Section
4(1) thereof so that all transfer restrictions and restrictive legends are
removed upon the consummation of such sale. The Placement Agents have been
afforded equivalent registration rights as the investors in the 2006 Offering
with respect to the shares issuable upon exercise of the Placement Agent
Warrants. Warrants issued in the 2006 Offering are classified as equity based
on
the determination that the penalty for failure to register is not uneconomic.
On
May 19, 2006, the Company filed a registration statement on Form S-3 with the
Securities and Exchange Commission. The registration statement was declared
effective on May 30, 2006, rendering the resale of the shares issued in the
May
3, 2006 Offering registered under the Securities Exchange Act of
1933.
On
August, 3, 2005, the Company entered into an Agreement and Plan of Merger dated
as of August 3, 2005 (the “Merger Agreement”) with EasyWeb, Inc., a Delaware
corporation (“EasyWeb”), and ZIO Acquisition Corp., a Delaware corporation and
wholly owned subsidiary of EasyWeb (“ZIO Acquisition”). EasyWeb was a company
that was incorporated in September 1998 and had been in the business of
designing, marketing, selling and maintaining customized and template turnkey
sites on the Internet that are hosted by third parties. At the time of the
Merger (as defined below), however, EasyWeb had no operating business and had
limited assets and liabilities. Pursuant to the Merger Agreement, ZIO
Acquisition merged with and into ZIOPHARM, with ZIOPHARM remaining as the
surviving company and a wholly-owned subsidiary of EasyWeb (the “Merger”). In
connection with the Merger, which was effective as of September 13, 2005, ZIO
Acquisition ceased to exist and the surviving company changed its corporate
name
to ZIOPHARM, Inc. Based upon an Exchange Ratio, as defined in the Merger
Agreement, in exchange for all of their shares of capital stock in ZIOPHARM,
the
ZIOPHARM stockholders received a number of shares of Common Stock of EasyWeb
such that, upon completion of the Merger, the then-current ZIOPHARM stockholders
held approximately 96.8% of the outstanding shares of Common Stock of EasyWeb
on
a fully-diluted basis. Upon completion of the Merger, EasyWeb ceased all of
its
remaining operations and adopted and continued implementing the business plan
of
ZIOPHARM. Further, effective upon the Merger, the then current officers and
directors of EasyWeb resigned, and the then current officers and directors
of
ZIOPHARM were appointed officers and directors of EasyWeb. In conjunction with
the Merger, ZIOPHARM made payments of approximately $425,000 to
certain affiliates of EasyWeb in the third quarter of 2005. Subsequently, on
September 14, 2005, ZIOPHARM merged with into EasyWeb and EasyWeb changed its
name to ZIOPHARM Oncology, Inc.
F-7
ZIOPHARM
Oncology, Inc.
(A
Development Stage Enterprise)
Notes
to
Financial Statements
| 1. |
ORGANIZATION...
continued
|
Although
EasyWeb is the legal acquirer in the transaction, ZIOPHARM became the registrant
with the Securities and Exchange Commission. Under generally accepted accounting
principles, the transaction was accounted for as a reverse acquisition, whereby
ZIOPHARM was considered the acquirer of EasyWeb for financial reporting purposes
because ZIOPHARM’s stockholders controlled more than 50% of the post-transaction
combined entity, the management and the board were that of ZIOPHARM
after the transaction, EasyWeb had no operating activity and
limited assets and liabilities as of the transaction date and the
continuing operations of the entity are those of ZIOPHARM.
Accordingly,
the equity of EasyWeb has been adjusted to reflect a recapitalization of the
stock and the equity of ZIOPHARM has been adjusted to reflect a financing
transaction with the proceeds equal to the net asset value of EasyWeb
immediately prior to the Merger. The historical financial statements of ZIOPHARM
have become the historical financial statements of the Company. The historical
stockholders’ equity has been retroactively restated to adjust for the exchange
of shares pursuant to the Merger Agreement. All share and per share information
included in the accompanying financial statements and notes give effect to
the
exchange, except as otherwise stated.
On
June
6, 2005, the Company completed an offering (the “Offering”) of Series A
Convertible Preferred Stock (“Series A Preferred Stock”). The Company issued
4,197,946 shares at $4.31 for gross proceeds of approximately $18.1 million.
In
connection with the Offering, the Company compensated Paramount BioCapital,
Inc., placement agent for the Offering (“Paramount”), or its affiliates for its
services through the payment of (a) cash commissions equal to 7% of the gross
proceeds from the sale of the shares of Series A Preferred Stock, and (b)
placement warrants to acquire 419,794 shares of Series A Preferred Stock (the
“Series A Stock Warrants”), exercisable for a period of 7 years from the Closing
Date at a per share exercise price equal to 110% of the price per share sold
in
the Offering. These commissions are also payable on additional sales by the
Company of securities (other than in a public offering) to investors introduced
to the Company by Paramount during the twelve (12) month period subsequent
to
the final closing of the Offering. The Company also paid Paramount an expense
allowance of $50,000 to reimburse Paramount for its out-of-pocket expenses.
Also, for a period of 36 months from the final Closing, Paramount has the right
of first refusal to act as the placement agent for any private sale of the
Company’s securities. Lastly, the Company has agreed to indemnify Paramount
against certain liabilities, including liabilities under the Securities
Act.
The
Company has valued the Series A Stock Warrants using the Black-Scholes
model and recorded a charge of $1,682,863 against additional paid-in
capital. The Company has estimated the fair value of such warrants using the
Black-Scholes model, using an assumed risk-free rate of 3.93% and expected
life
of 7 years, volatility of 134% and dividend yield of 0%. The net proceeds
from the Offering will be used for research and development, licensing fees
and
expenses, and for working capital and general corporate purposes.
F-8
ZIOPHARM
Oncology, Inc.
(A
Development Stage Enterprise)
Notes
to
Financial Statements
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES
|
Use
of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash
and Cash Equivalents
Cash
equivalents consist of short-term, highly liquid high-grade investments with
a
maturity of ninety days or less when purchased.
Concentrations
of Credit Risk
Financial
instruments which potentially subject the Company to concentrations of credit
risk consist principally of cash and cash equivalents. The Company maintains
cash accounts in commercial banks, which may, at times, exceed federally insured
limits. The Company has not experienced any losses in such accounts. The Company
believes it is not exposed to any significant credit risk on cash and cash
equivalents.
Short-Term
Investments
The
Company accounts for its short-term investments in accordance with Statement
of
Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain
Investments in Debt and Equity Securities.” The Company’s investments, which are
carried at fair value, consist of funds comprised of certificate of
deposits with maturities over ninety days, totaling $1.6 million at
December 31, 2006.
Fair
Value of Financial Instruments
The
carrying amounts of cash equivalents, accounts payable and accrued expenses
approximate their fair value because of their short-term nature. Short-term
investments are carried at aggregate fair value.
Income
Taxes
The
Company recognizes deferred tax assets and liabilities for the expected future
tax consequences of events that have been included in the Company’s financial
statements or tax returns. Deferred tax assets and liabilities are determined
based upon the difference between the financial reporting basis and the tax
basis of existing assets and liabilities using enacted tax rates expected to
be
in effect in the year(s) in which the differences are expected to reverse.
A
valuation allowance is provided against deferred tax assets if it is more likely
than not that such assets will not be realized.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation and amortization are provided
on
the straight-line method over the estimated useful lives of the related assets,
which is three to five years.
F-9
ZIOPHARM
Oncology, Inc.
(A
Development Stage Enterprise)
Notes
to
Financial Statements
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES…continued
|
Research
and Development Costs
Costs
related to research and development are charged to expense when incurred. Such
costs include proprietary research and development activities, purchased
research and development, and expenses associated with research and development
contracts, whether performed by the Company or contracted with independent
third
parties.
Accounting
for Stock-Based Compensation
On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123(R) (“SFAS 123R”) Share-Based Payment, using the modified prospective
method, which results in the provision of SFAS 123R only being applied to the
consolidated financial statements on a going-forward basis (that is, the prior
period results have not been restated). Under the fair value recognition
provisions of SFAS 123R, stock-based compensation cost is measured at the grant
date based on the value of the award using the Black Scholes Model and is
recognized as expense over the service period. Previously, the Company had
followed Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees,
and
related interpretations which resulted in account for employee share options
at
their intrinsic value in the financial statements.
The
Company recognized the full impact of its share-based employee payment
plans in the statements of operations for the year ended December 31, 2006
under
SFAS 123R and did not capitalize any such costs on the balance sheet. The
following table presents share-based compensation expense included in the
Company’s statement of operations:
|
|
Twelve
months
ended
December 31, 2006
|
|||
|
|
||||
|
Research
and development, including costs of research contracts
|
$
|
375,411
|
||
|
General
and administrative
|
2,400,997
|
|||
|
Share
based employee compensation expense before tax
|
2,776,408
|
|||
|
Income
tax benefit
|
—
|
|||
|
Net share-based
employee compensation expense
|
$
|
2,776,408
|
||
F-10
ZIOPHARM
Oncology, Inc.
(A
Development Stage Enterprise)
Notes
to
Financial Statements
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES…continued
|
Accounting
for Stock-Based Compensation… continued
The
adoption of SFAS 123R resulted in incremental stock-based compensation expense
of $2,776,408 twelve months ended December 31, 2006 which caused the Company’s
net loss to increase by $2,776,408 and its net loss per share to increase by
$0.22 per share for the twelve months ended December 31, 2006. The adoption
had
no impact on cash used in operating activities or cash provided by financing
activities.
The
Company had previously adopted the provisions of SFAS No. 123, Accounting
for Stock-Based Compensation (“SFAS 123”),
as
amended by SFAS
No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure,
through
disclosure only. SFAS 123 required the measurement of the fair value of stock
option or warrants granted to employees to be included in the statement of
operations or alternatively, disclosed in the notes to the financial statements.
The Company previously accounted for stock-based awards to employees using
the
intrinsic value method as prescribed by Accounting Principles Board (APB)
Opinion No. 25, Accounting
for Stock Issued to Employees
, and
related interpretations, and had elected the disclosure only alternative under
SFAS 123. All stock-based awards to nonemployees were accounted for at their
fair value in accordance with SFAS 123 and Emerging Issues Task Force (EITF)
96-18, Accounting
for Equity Instruments that are Issued to Other than Employees for Acquiring,
or
in Conjunction with Selling, Goods or Services
. The
Company had recorded the fair value of each stock option issued to non-employees
as determined at the date of grant using the Black-Scholes option pricing
model.
The
following table illustrates the effect on net loss and earnings per share if
the
company had applied the fair value recognition provisions of SFAS 123 to stock
based awards for the twelve month periods ended December 31, 2005 and 2004,
and
for the period from inception (September 9, 2003) to December 31,
2005:
|
|
For
the years ended
December
31,
|
For
the period
from
inception
(September
9, 2003)
to
December
31,
|
||||||||
|
|
2005
|
2004
|
2005
|
|||||||
|
Net
loss:
|
||||||||||
|
As
reported
|
$
|
(9,516,923
|
)
|
$
|
(5,687,297
|
)
|
$
|
(15,364,356
|
)
|
|
|
Stock-based
compensation expense included in reported net loss
|
98,755
|
703,116
|
801,871
|
|||||||
|
Stock-based
compensation expense under the fair value-based method
|
(942,888
|
)
|
(813,095
|
)
|
(1,755,983
|
)
|
||||
|
Pro
forma net loss
|
$
|
(10,361,056
|
)
|
$
|
(5,797,276
|
)
|
$
|
(16,318,468
|
)
|
|
|
|
||||||||||
|
Basic
and diluted net loss per share:
|
||||||||||
|
As
reported
|
$
|
(2.32
|
)
|
$
|
(2.37
|
)
|
||||
|
Pro
forma
|
$
|
(2.53
|
)
|
$
|
(2.41
|
)
|
||||
F-11
ZIOPHARM
Oncology, Inc.
(A
Development Stage Enterprise)
Notes
to
Financial Statements
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES…continued
|
Accounting
for Stock-Based Compensation...continued
The
fair
value of each stock option is estimated at the date of grant using the
Black-Scholes option pricing model. The estimated weighted average fair value
of
stock options granted to employees in 2006, 2005 and 2004 was approximately
$4.10, $3.43 and $1.32 per share, respectively. The following table summarizes
the assumptions used in the Black-Scholes option pricing model:
|
|
2006
|
2005
|
2004
|
|||||||
|
Expected
life
|
5
years
|
5
years
|
5
years
|
|||||||
|
Expected
volatility
|
92%
- 102
|
%
|
109%
- 114
|
%
|
134
|
%
|
||||
|
Dividend
yield
|
0
|
%
|
0
|
%
|
0
|
%
|
||||
|
Weighted
average risk-free interest rate
|
4.53
- 5.02
|
%
|
3.77
- 4.39
|
%
|
3.6
|
%
|
||||
| Forfeiture rate | 0 |
%
|
0
|
%
|
0
|
%
|
||||
Net
Loss Per Share
Consistent
with Statement of Financial Accounting Standards No. 128, Earnings
Per Share,
basic
loss per share amounts are based on the weighted average number of shares of
common stock outstanding during the period. Diluted loss per share amounts
are
based on the weighted average number of shares of common stock and potentially
dilutive common stock outstanding during the period. The impact of options
and
warrants to purchase 5,593,377, 1,576,988 and 728,262 shares of common stock
have been excluded from the calculation of diluted weighted average share
amounts as their inclusion would have been anti-dilutive for 2006, 2005 and
2004, respectively.
F-12
ZIOPHARM
Oncology, Inc.
(A
Development Stage Enterprise)
Notes
to
Financial Statements
|
3.
|
PROPERTY
AND EQUIPMENT
|
Property
and equipment at December 31, 2006 and 2005 consisted of the
following:
|
Estimated
Useful Life (Years)
|
2006
|
2005
|
||||||||
|
Software,
Office & Computer equipment
|
3
|
$
|
582,511
|
$
|
349,527
|
|||||
|
Leasehold
Improvements
|
3
|
163,878
|
43,004
|
|||||||
|
Manufacturing
Equipment
|
5
|
12,357
|
12,357
|
|||||||
|
|
758,746
|
404,888
|
||||||||
|
Less
- accumulated depreciation and amortization
|
(307,499
|
)
|
(135,186
|
)
|
||||||
|
|
$
|
451,247
|
$
|
269,702
|
Depreciation
and amortization expense was $173,920, $101,232, $33,953, and $309,105 for
the
years ended December 31, 2006, 2005, and 2004 and for the period from inception
(September 9, 2003) to December 31, 2006, respectively.
|
4.
|
ACCRUED
EXPENSES
|
Accrued
expenses at December 31, 2006 and 2005, consisted of the following:
|
|
2006
|
2005
|
|||||
|
|
|
|
|||||
|
Employee
compensation
|
$
|
496,841
|
$
|
441,668
|
|||
|
Professional
services
|
107,737
|
76,649
|
|||||
|
Research
and development consulting services
|
102,516
|
69,466
|
|||||
|
Clinical
consulting services
|
518,712
|
369,439
|
|||||
|
Manufacturing
services
|
773,019
|
388,563
|
|||||
|
Accrued
vacation
|
22,094
|
6,765
|
|||||
|
Other
|
140,995
|
66,269
|
|||||
|
|
$
|
2,161,914
|
$
|
1,418,819
|
|||
F-13
ZIOPHARM
Oncology, Inc.
(A
Development Stage Enterprise)
Notes
to
Financial Statements
|
5.
|
RELATED
PARTY TRANSACTIONS
|
The
Company had engaged Paramount BioCapital, Inc. (“Paramount”) to assist in
placing shares of Series A Preferred Stock on a “best efforts” basis. Lindsay A.
Rosenwald, M.D. is Chairman and Chief Executive Officer of Paramount. Dr.
Rosenwald is also managing member of Horizon BioMedical Ventures, LLC
(“Horizon”). On December 30, 2004, Horizon authorized the distribution of
2,428,911(4,848,376 pre-Merger) shares of Common Stock (such shares, the
“Horizon Distributed Shares”), in equal installments of 1,214,456 (2,424,188
pre-Merger) shares of Common Stock to Mibars, LLC (“Mibars”) and to Dr.
Rosenwald and his designees (the “Designated Shares”). The disposition of the
Designated Shares will be subject to certain restrictions as agreed to among
Dr.
Rosenwald and Dr. Rosenwald’s designees. Among other things, under certain
circumstances set forth in pledge agreements between Dr. Rosenwald and his
designees, Dr. Rosenwald has the right to re-acquire the Designated Shares
from
his designees. As a result of those rights, Dr. Rosenwald may be deemed to
be an
affiliate of the Company.
In
connection with the December 22, 2004 Option Agreement with Southern Research
Institute (“SRI”), the Company entered into a Finders Agreement, dated December
23, 2004, with Paramount pursuant to which the Company has agreed to compensate
Paramount, for services in connection with the Company’s introduction to SRI
through the payment of (a) a cash fee of $60,000 and (b) warrants to purchase
62,621 (125,000 pre-Merger) shares of the Company’s Common Stock at a price
equal to $4.75 ($2.38 pre-Merger) per share. The Company has estimated the
fair
value of such warrants using the Black-Scholes model, using an assumed risk-free
rate of 3.93%, and expected life of 7 years, volatility of 134% and dividend
yield of 0%. In December 2004, the Company expensed the $60,000 that was payable
to Paramount and recognized compensation expense in the amount of $251,037
for
the issuance of the warrants.
In
connection with the Series A Preferred Stock Offering, the Company and Paramount
entered into an Introduction Agreement in January 2005, pursuant to which the
Company had agreed to compensate Paramount for its services in connection with
the Offering through the payment of (a) cash commissions equal to 7% of the
gross proceeds from the sale of the shares of Series A Preferred Stock, and
(b) placement warrants to acquire a number of shares of Series A Preferred
Stock
equal to 10% of the number of shares of Series A Preferred Stock issued in
the
Offering, exercisable for a period of 7 years from the Closing Date at a per
Share exercise price equal to 110% of the price per Share sold in the Offering.
These commissions are also payable on additional sales by the Company of
securities (other than in a public offering) to investors introduced to the
Company by Paramount during the twelve (12) month period subsequent to the
final
closing of the Offering. The Company also agreed to pay to Paramount a
non-accountable expense allowance of $50,000 to reimburse the Paramount for
its out-of-pocket expenses. Also, for a period of 36 months from the final
Closing, Paramount has the right of first refusal to act as the placement
agent for the private sale of the Company’s securities. Lastly, the Company has
agreed to indemnify Paramount against certain liabilities, including
liabilities under the Securities Act.
In
connection with the 2006 Offering, on May 3, 2006, the Company paid Paramount
a
cash commission equal to 7% of the gross proceeds from the sale of the Shares
sold by Paramount in the 2006 Offering, resulting in a cash payment of
approximately $1,726,644. In addition, the Company issued 7-year warrants to
the
Placement Agents and their designees to purchase an aggregate of 799,126 shares
(10 percent of the Shares sold in the Offering) of the Company’s common stock,
of which 532,750 were issued at an exercise price of $5.09 per share (the
“Placement Agent Warrants”).
On
December 18, 2006 the Company paid Paramount a cash settlement of $180,000
in
exchange for Paramount’s agreement to terminate certain of its rights under the
2005 and 2004 agreements. This amount was expensed in the year ended December
31, 2006.
Mr.
Timothy McInerney, who is a member of the Board of Directors of the Company,
is
also full-time employee of Paramount. In addition, Michael Weiser, a current
member of the Board of Directors of the Company, and David M. Tanen, who was
a
member of the Board of Directors of the Company, were full-time employees of
Paramount from July 1998 through November 2006, and July 1996 through
August 2004, respectively. Mr. John Knox, our former Treasurer, is also a
full-time Paramount employee.
F-14
ZIOPHARM
Oncology, Inc.
(A
Development Stage Enterprise)
Notes
to
Financial Statements
|
6.
|
COMMITMENTS
AND CONTINGENCIES
|
Lease
Commitment
The
Company leases office space in three locations under various agreements expiring
in 2007, 2009, and 2010. The leases include payment increases over the term
of
the agreements. The total amount of the lease payments is being charged to
expense using the straight-line method over the term of the
agreement.
Future
minimum lease payments under noncancelable operating leases as of December
31, 2006, were as follows:
|
|
Operating
|
|||
|
|
Leases
|
|||
|
2007
|
$
|
262,139
|
||
|
2008
|
251,086
|
|||
|
2009
|
234,005
|
|||
|
2010
|
65,790
|
|||
|
2011
|
-
|
|||
|
|
$
|
813,020
|
||
License
Agreement
Patent
and Technology License Agreement- The University of Texas M. D. Anderson Cancer
Center and the Texas A&M University System.
On
August
24, 2004, the Company entered into a patent and technology license agreement
with The Board of Regents of the University of Texas System, acting on behalf
of
The University of Texas M. D. Anderson Cancer Center and the Texas A&M
University System (collectively, the “Licensors”). Under this agreement, the
Company was granted an exclusive, worldwide license to rights (including rights
to US and foreign patent and patent applications and related improvements and
know-how) for the manufacture and commercialization of two classes of organic
arsenicals (water - and lipid-based) for human and animal use. The class of
water-based organic arsenicals includes ZIO-101.
In
October 2004, the Company received a notice of allowance for US Patent
Application No. 10/337969, entitled “S-dimethylarsino-thiosuccinic acid
S-dimethylarsino-2-thiobenzoic acid S-(simethylarsino) glutathione as treatments
for cancer.” The patent application claims both therapeutic uses and
pharmaceutical compositions containing a novel class of organic arsenicals,
including ZIO-101, for the treatment of cancer. In February 2006, we announced
that a second organic arsenic case has been issued under U.S. Patent No.
6995188. This patent provides further coverage of cancer treatment using organic
arsenic, including ZIO-101, in combination with other agents or therapies.
In
addition, there were seven (7) patents related to ZIO-101 that issued in various
foreign countries in 2006.
F-15
ZIOPHARM
Oncology, Inc.
(A
Development Stage Enterprise)
Notes
to
Financial Statements
|
6.
|
COMMITMENTS
AND CONTINGENCIES
...continued
|
License
Agreement...continued
As
partial consideration for the license rights obtained, the Company made an
upfront payment of $125,000 and granted the Licensors 250,487 (500,000
pre-Merger) shares of our Common Stock, as well as options to purchase up to
an
additional 50,222 (100,250 pre-Merger) shares of our Common Stock for $0.002
per
share, following the successful completion of certain clinical milestones (the
“Anderson Options”). The Company expensed the $125,000 upfront payment and
recognized research and development compensation expense of $426,339 in
connection with the issuance of the Common Stock in the year ended December
31,
2004. The Anderson Options became immediately exercisable with respect to 12,555
(25,063 pre-Merger) shares of our Common Stock upon the filing of an
Investigation New Drug Application (“ IND”) for ZIO-101 in the fiscal year ended
December 31, 2005 and the company recognized compensation expense. The Anderson
Options will vest and become exercisable with respect to an additional 25,111
(50,125 pre-Merger) shares upon the completion of dosing of the last patient
for
both phase I clinical trials, and will vest and become exercisable with respect
to an additional 12,556 (25,062 pre-Merger) shares upon the commencement of
a
pivotal clinical trial. During 2005, the Company recognized research and
development compensation expense of $54,115 in connection with the vesting
of
the Anderson Options in respect to the filing of an IND for ZIO-101. The options
are subject to variable plan accounting and are re-measured at each reporting
period. In addition, the Licensors are entitled to receive certain milestone
payments (the “Anderson Milestones”), including $100,000 to be paid upon the
commencement of phase I clinical trial for which the Company recognized the
expense in the year ended December 31, 2005 and a $250,000 upon the dosing
of
the first patient in the Registrant-sponsored Phase II clinical trial for
ZIO-101 in the year ended December 31, 2006. The Company may be required to
make
additional payments upon achievement of certain other milestones, in varying
amounts which on a cumulative basis could total up to $4,850,000. In
addition, the Licensors are entitled to receive royalty payments on sales from
a
licensed product should such a product be approved for commercial sale and
sales
of a licensed product be effected in the United States, Canada, the European
Union or Japan. The Licensors also will be entitled to receive a portion of
any
fees that the Company may receive from a possible sublicense under certain
circumstances. Finally, the Company agreed to remit to the Licensor $200,000
for
at least each of the next two years to be used by the Licensors to conduct
scientific research funding. The Company will have the exclusive right to all
intellectual property rights resulting from such research pursuant to the terms
of the license agreement.
The
license agreement also contains other provisions customary and common in similar
agreements within the industry, such as the right to sublicense our rights
under
the agreement. However, if we sublicense our rights prior to the commencement
of
a pivotal study ( i.e.
, a
human clinical trial intended to provide the substantial evidence of efficacy
necessary to support the filing of an approvable NDA), the Licensors will be
entitled to receive a share of the payments we receive in exchange for the
sublicense (subject to certain exceptions).
License
Agreement with DEKK-Tec, Inc.
On
October 15, 2004, the Company entered into a license agreement with DEKK-Tec,
Inc., pursuant to which it was granted an exclusive, worldwide license to the
second lead product candidate, ZIO-201. As part of the signing of license
agreement with DEKK-Tec, the Company expensed a $50,000 up-front payment in
the
year ended December 31, 2004.
F-16
ZIOPHARM
Oncology, Inc.
(A
Development Stage Enterprise)
Notes
to
Financial Statements
|
6.
|
COMMITMENTS
AND CONTINGENCIES
...continued
|
In
consideration for our license rights, DEKK-Tec is entitled to receive milestone
payments upon the occurrence of certain events. The Company may be required
to
make payments upon achievements of certain milestones, in varying amounts which
on a cumulative basis may total $3,900,000. Of the aggregate milestone payments,
most of the total amount will be creditable against future royalty payments,
as
referenced below. During the year ended December 31, 2006, the Company recorded
a charge of $100,000 for achieving phase II milestones. In 2004, the Company
also issued DEKK-Tec an option to purchase 27,616 shares of our Common Stock
for
$0.02 per share, which option vested with respect to 6,904 shares vested upon
the execution of the license agreement and was exercised in the fiscal year
ended December 31, 2005. The options are subject to accounting pursuant to
EITF
96-18 and are re-measured at each reporting period. In 2004, the Company
has estimated the fair value of such options using the Black-Scholes model,
using an assumed risk-free rate of 3.35%, and expected life of 5 years,
volatility of 134% and dividend yield of 0%. In 2004, the Company recorded
a
charge of $12,190 to research and development expense for the vested options.
The option will vest with respect to the remaining shares upon certain milestone
events, culminating with final FDA approval of the first NDA submitted by us
(or
by our sublicensee) for ZIO-201. DEKK-Tec is entitled to receive royalty
payments on the sales of ZIO-201 should it be approved for commercial
sale.
Option
Agreement with Southern Research Institute (“SRI”)
On
December 22, 2004, the Company entered into an Option Agreement with SRI (the
“Option Agreement”), pursuant to which the Company was granted an exclusive
option to obtain an exclusive license to SRI’s interest in certain intellectual
property, including exclusive rights related to certain isophosphoramide mustard
analogs (the “SRI Option”).
Also
on
December 22, 2004, the Company entered into a Research Agreement with SRI
pursuant to which the Company agreed to spend a sum not to exceed $200,000
between the execution of the agreement and December 21, 2006, including a
$25,000 payment that we made simultaneously with the execution of the agreement,
to fund research and development work by SRI in the field of isophosphoramide
mustard analogs (the “SRI Research Program”). Under the terms of the Option
Agreement, the Company’s exclusive right to exercise the SRI Option will expire
sixty days after the termination or expiration of the SRI Research Program
and
the delivery of the reports required thereunder. (See Note 5- Related Party
Transactions)
License
Agreement with Baxter Healthcare Corporation.
On
November 3, 2006, the Company signed a definitive Asset Purchase Agreement
(for
indibulin) and License Agreement to (to Baxter's proprietary nanosuspension
technology) with affiliates of Baxter Healthcare Corporation. Indibulin,
referred to by the Company as ZIO-301, is a novel anti-cancer agent that binds
to tubulin, one of the essential proteins for chromosomal segregation, and
targets mitosis like the taxanes and vinca
alkaloids. It is available as both an oral and a proprietary nanosuspension
intravenous form. Molecules that target mitosis and inhibit cell
division (antimitotic agents) are a major focus of cancer research and they
are among the most widely used anti-cancer drugs in oncology
today. Among the more well known antimitotic drugs are the taxanes
(paclitaxel, docetaxel) and the vinca
alkaloids (vincristine, vinblastine). The terms of the agreement include
an upfront cash payment of approximately $1.125 million, which has been expensed
as purchased research and development in the year ended December 31, 2006,
$15,000 was paid for annual license maintenance fee, and a $100,000 payment
for existing inventory. In addition to the upfront costs there will be follow-on
milestone cash payments that could amount to approximately $8 million in the
aggregate and royalties on net sales. The purchase price includes the entire
indibulin intellectual property portfolio as well as existing drug substance
and
capsule inventories.
Guarantees
and indemnification Obligations
Certain
officers and employees have agreements with the company that call for a
guarantee bonus that is payable within 30 days after the employee’s anniversary
date. Certain officer and employees also have specific severance agreements.
In
conjunction with the 2005 Offering, the Company has agreed to indemnify
Paramount against certain liabilities, including liabilities under the
Securities Act. The Company has not recorded any expense or liabilities under
FIN 45 Guantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtness of others - An Interpretation of
FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No.
34.
F-17
ZIOPHARM
Oncology, Inc.
(A
Development Stage Enterprise)
Notes
to
Financial Statements
|
7.
|
INCOME
TAXES
|
The
components of the net deferred tax asset (liability) are as
follows:
|
|
December
31,
|
December
31,
|
|||||
|
|
2006
|
2005
|
|||||
|
Net
operating loss carryforwards
|
$
|
5,793,182
|
$
|
2,550,081
|
|||
|
Start-up
and organizational costs
|
6,132,679
|
3,392,774
|
|||||
|
Research
and development credit carryforwards
|
703,276
|
293,606
|
|||||
| Stock compensation | 347,317 |
—
|
|||||
|
Accrued
bonus
|
21,477
|
16,779
|
|||||
|
Depreciation
|
22,126
|
14,419
|
|||||
|
Other
|
129,551
|
56,042
|
|||||
|
Net
deferred tax assets
|
13,149,608
|
6,323,701
|
|||||
|
Deferred
tax asset valuation allowance
|
(13,149,608
|
)
|
(6,323,701
|
)
|
|||
|
|
$
|
— |
$
|
—
|
|||
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amount of assets and liabilities for financial reporting purposes
and
the amounts used for income tax purposes. As of December 31, 2006 and 2005,
the
Company has net operating loss carryforwards of approximately $14,385,851 and
$6,332,000, respectively, available to offset future federal and state taxable
income to the extent permitted under the Internal Revenue Code (IRC), expiring
in varying amounts through 2024. Under the IRC, certain substantial changes
in
the Company’s ownership may limit the amount of net operating loss carryforwards
that can be utilized in any one year to offset future taxable
income.
The
Company has provided a valuation allowance for the full amount of these net
deferred tax assets, since it is more likely than not that these future benefits
will not be realized. However, these deferred tax assets may be available to
offset future income tax liabilities and expenses. The valuation allowance
increased by $6,825,907 due primarily to net operating loss carryforward, stock
based compensation, and the increase in research and development
credits.
Income
taxes using the federal statutory income tax rate differ from the Company’s
effective tax rate primarily due to the change in the valuation allowance on
deferred tax assets.
|
8.
|
CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS’
EQUITY
|
On
December 31, 2005 the Company has authorized capital of 280,000,000 shares
which
has been designated as Common Stock. On April 26, 2006, the date of the
Company’s annual stockholders meeting, the shareholders approved the adoption of
an Amended and Restated Certificate of Incorporation pursuant to which the
Company has 280,000,000 shares of authorized capital stock, of which 250,000,000
shares are designated as common stock, par value $.001 per share (the “Common
Stock”), and 30,000,000 shares are designated as preferred stock, par value
$.001 per share ( the “ Preferred Stock”).
Common
Stock of ZIOPHARM, Inc.
As
of
December 31, 2006, the Company has issued and outstanding 15,272,899 shares
of
Common Stock and no shares of preferred stock.
F-18
ZIOPHARM
Oncology, Inc.
(A
Development Stage Enterprise)
Notes
to
Financial Statements
|
8.
|
CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS’ EQUITY ...continued
|
In
September 2003, the Company issued 2,000,000 (before the split discussed below
and pre-Merger) shares of Common Stock at $0.25 per share for gross proceeds
of
$500,000.
In
January 2004, the Company issued 18,000,000 (before the split discussed below
and pre-Merger) shares of Common Stock at $0.25 per share for gross proceeds
of
$4,500,000.
In
February 2004, the Company amended its articles of incorporation to provide
for
the combination of the Company’s common stock, par value $0.001 per share on a
1-for-4 basis (unless stated otherwise all other share and per share amounts
presented reflect the reverse split).
On
June
6, 2005, the Company completed the 2005 Offering (see Note 1). As a result
of
the Merger, all shares of the Series A Preferred Stock were automatically
converted into the number of shares of Common Stock that the holders of Series
A
Preferred Stock would have received if their shares of Series A Preferred Stock
had been converted into Common Stock immediately prior to the
Merger.
On
May 3,
2006, pursuant to Subscription Agreements (the “Subscription Agreements”)
between the Company and certain institutional and other accredited investors,
the Company completed the sale of an aggregate of 7,991,256 shares (the
“Shares”) of the Company’s common stock at a price of $4.63 per Share in the
2006 Offering. The total gross proceeds resulting from the 2006 Offering was
approximately $37 million, before deducting selling commissions and
expenses.
Convertible
Preferred Stock of ZIOPHARM, Inc.
All
shares of Series A Preferred Stock have been converted into shares of Common
Stock of the Company.
Voting
Rights
The
holders of Series A Preferred Stock would have been entitled to vote together
with all other holders of the Company’s voting stock on an “as-converted” basis
on all matters submitted to a vote of holders generally. The holders of Series
A
Preferred Stock, voting as a separate class, would also have had the
right to approve by a 66% supermajority certain actions proposed to be taken
by
the Company.
Dividend
Rights
The
holders of Series A Preferred Stock had been entitled to receive dividends
on an
equal basis with the holders of Common Stock when, as and if declared by the
Board of Directors.
F-19
ZIOPHARM
Oncology, Inc.
(A
Development Stage Enterprise)
Notes
to
Financial Statements
|
8.
|
CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS’ EQUITY ...continued
|
Liquidation
Preferences
The
Series A Preferred Stock would have rank senior to the Common Stock and any
future class of junior securities, and would have been entitled to a liquidation
preference equal to the Stated Value, subject to adjustment (as defined in
the
Certificate of Designations for the Series A Preferred Stock), upon any
liquidation, dissolution or winding up of the Company or upon a voluntary or
involuntary bankruptcy of the Company.
Conversion
Rights
Each
share of Series A Preferred Stock would have been convertible into Common Stock
at any time at the option of the holder thereof (the Series A Preferred Stock
and the Common Stock issuable upon conversion of the Series A Preferred Stock
are sometimes herein collectively referred to as the “Securities”). All of the
outstanding shares of Series A Preferred Stock would have automatically convert
into Common Stock upon the first date (the “Trading Date”) on which the Common
Stock (or securities received in exchange for Common Stock) trades on a national
securities exchange or on NASDAQ, including the Over the Counter Bulletin Board
(a “Trading Event”). The rate at which shares of Series A Preferred Stock will
convert into Common Stock will initially be one-for-one, subject to adjustment
in connection with certain anti-dilution protections and other
adjustments.
F-20
ZIOPHARM
Oncology, Inc.
(A
Development Stage Enterprise)
Notes
to
Financial Statements
|
8.
|
CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS’ EQUITY ...continued
|
In
the
event of a reclassification, capital reorganization or other similar change
in
the outstanding shares of Common Stock, a consolidation or merger of the Company
with or into another entity (other than a consolidation or merger in which
the
Corporation is the continuing entity and which does not result in a
reclassification, capital reorganization or other change of outstanding shares
of Common Stock other than the number thereof), or a sale of the property of
the
Company as, or substantially as, an entirety (other than a sale/leaseback,
mortgage or other financing transaction), the Series A Preferred Stock
became convertible into the kind and number of shares of stock or other
securities or property (including cash) that the holders of Series A Preferred
Stock would have received if the Series A Preferred Stock had been converted
into Common Stock immediately prior to such reclassification, capital
reorganization or other change, consolidation, merger or sale.
F-21
ZIOPHARM
Oncology, Inc.
(A
Development Stage Enterprise)
Notes
to
Financial Statements
|
9.
|
STOCK
OPTION PLAN
|
The
Company has adopted the 2003 Stock Option Plan (the “Plan”), under which the
Company had reserved for the issuance of 1,252,436 shares of its Common Stock.
The Plan was approved by the Company’s stockholders on December 21, 2004. On
April 26, 2006, the date of the Company’s annual stockholders meeting, the
shareholders approved an amendment to the Plan increasing the total shares
reserved by 750,000 shares, for a total of 2,002,436 shares.
As
of
December 31, 2006 there were 1,913,035 shares that are issuable under its 2003
Stock Option Plan upon exercise of outstanding options to purchase Common Stock.
As of December 31, 2006, the Company had issued to our employees outstanding
options to purchase up to 1,642,611 shares of the Company’s Common Stock. In
addition, the Company has issued to our directors options to purchase up to
270,174 shares of the Company’s Common Stock, as well as options to a consultant
in connection with services rendered to purchase up to 250 shares of the
Company’s Common Stock. The Company had estimated the fair value of the options
issued to the consultant using the Black-Scholes model, using an assumed
risk-free rate of 4.23%, and expected life of 10 years, volatility of 134%
and
dividend yield of 0%. The options issued to the consultant were valued at
$1,050, and recorded as a charge to compensation expense in December
2004.
F-22
ZIOPHARM
Oncology, Inc.
(A
Development Stage Enterprise)
Notes
to
Financial Statements
|
9.
|
STOCK
OPTION PLAN ...continued
|
Currently,
stock options are granted with an exercise price equal to the closing market
price of the Company’s common stock on the day before the date of grant. Stock
options to employees generally vest ratably over three years and have
contractual terms of ten years. Stock options to directors generally vest
ratably over two years and have contractual terms of ten years. 359,188 options
granted, in 2006, to the Board of Directors and some members of management
vested immediately. Stock options are valued using the Black-Scholes option
valuation method and compensation is recognized based on such fair value over
the period of vesting on a straight-line basis. The Company has also reserved
an
aggregate of 70,934 additional shares for issuance under options granted outside
of the 2003 Stock Option Plan. The
options were granted to The University of Texas M.D. Anderson Cancer Center
and
DEKK-Tec, Inc. (See Note 6- Commitments and Contingencies).
Proceeds
from the 2006 exercises amounted to $25,192 and the intrinsic value of these
options amounted to $7,702. Proceeds from the 2005 exercises amounted to $4,676
and the intrinsic value of these options amounted to $286,119. The fair value
of
each option award is estimated on the date of grant using the Black-Scholes
option-pricing model. Assumptions regarding volatility, expected term, dividend
yield and risk-free interest rate are required for the Black-Scholes model.
Volatility and expected term assumptions are based on comparable Company’s
historical experience. The risk-free interest rate is based on a U.S. treasury
note with a maturity similar to the option award’s expected life.
Transactions
under the Plan for the years ending December 31, 2006, 2005, and 2004 were
as
follows:
Number
of Shares
|
|
Weighted-
Average Exercise Price
|
|
Weighted-
Average Contractual Term (Years)
|
|
Aggregate
Intrinsic Value
|
|||||||
|
Outstanding,
January 1, 2004
|
1,250
|
$
|
20.00
|
||||||||||
|
Granted
|
586,553
|
1.25
|
|||||||||||
|
Exercised
|
—
|
—
|
|||||||||||
|
Canceled
|
—
|
—
|
|||||||||||
|
Outstanding,
December 31, 2004
|
587,803
|
$
|
1.29
|
||||||||||
|
Granted
|
542,389
|
3.60
|
|||||||||||
|
Exercised
|
(91,719
|
)
|
0.05
|
||||||||||
|
Canceled
|
(64,834
|
)
|
3.29
|
||||||||||
|
Outstanding,
December 31, 2005
|
973,639
|
$
|
2.56
|
||||||||||
|
Granted
|
988,180
|
5.42
|
|||||||||||
|
Exercised
|
(5,845
|
)
|
4.31
|
||||||||||
|
Canceled
|
(42,939
|
)
|
4.50
|
||||||||||
|
Outstanding,
December 31, 2006
|
1,913,035
|
$
|
3.95
|
8.71
|
3,995,097
|
||||||||
|
Options
exercisable, December 31, 2006
|
1,083,514
|
$ | 3.58 |
8.47
|
2,593,897
|
||||||||
|
Options
available for future grants
|
75,187
|
|
|||||||||||
Stock
options granted in the year ended December 31, 2006, 2005, and 2004 had a
weighted-average grant date fair values of $4.10, $2.33, and $0.64,
respectively. At December 31, 2006, total unrecognized compensation costs
related to non-vested stock options outstanding amounted to 2,362,664. The
cost
is expected to be recognized over a weighted-average period of 1.77
years.
F-23
ZIOPHARM
Oncology, Inc.
(A
Development Stage Enterprise)
Notes
to
Financial Statements
|
9.
|
STOCK
OPTION PLAN ...continued
|
The
following table summarizes information about stock options outstanding that
are
in the plan at December 31, 2006:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||
|
Exercise
Price
|
Number
Outstanding
|
Weighted-
Average
Remaining
Contractual
Life
(Years)
|
Weighted-
Average
Exercise
Price
|
Number
Exercisable
|
Weighted-
Average
Exercise
Price
|
|||||||||||
|
$0.08
|
268,654
|
7.07
|
$
|
0.08
|
179,102
|
$
|
.08
|
|||||||||
|
$0.44
|
25,111
|
7.07
|
$
|
0.44
|
16,740
|
$
|
.44
|
|||||||||
|
$1.70
|
176,750
|
7.52
|
$
|
1.70
|
117,832
|
$
|
1.70
|
|||||||||
|
$4.05
|
138,250
|
8.96
|
$
|
4.05
|
46,083
|
$
|
4.05
|
|||||||||
|
$4.31
|
375,086
|
8.41
|
$
|
4.31
|
255,318
|
$
|
4.31
|
|||||||||
|
$4.60
- $4.75
|
58,250
|
9.72
|
4.62
|
-
|
-
|
|||||||||||
|
$5.00
- $5.35
|
619,934
|
9.37
|
5.08
|
467,188
|
5.01
|
|||||||||||
|
$5.65
- $5.90
|
7,750
|
9.93
|
5.89
|
-
|
-
|
|||||||||||
|
$6.45
- $6.49
|
242,000
|
9.96
|
$
|
6.49
|
-
|
$
|
-
|
|||||||||
|
$20.00
|
1,250
|
3.05
|
$
|
20.00
|
1,250
|
$
|
20.00
|
|||||||||
|
|
1,913,035
|
8.71
|
$
|
3.95
|
1,083,513
|
$
|
3.58
|
|||||||||
|
10.
|
WARRANTS
|
The
Company also issued warrants to purchase 62,621 shares of the Company’s Common
Stock to Paramount as compensation for services rendered in connection with
our
entering into an option agreement with Southern Research Institute. In
connection with the warrants issued, the Company recorded a charge of $251,037
to general and administrative expense. The Company has estimated the fair value
of such options using the Black-Scholes model, using an assumed risk-free rate
of 3.93%, and expected life of 7 years, volatility of 134% and dividend yield
of
0%.
In
2005,
the Company also issued performance warrants to purchase 50,000 shares of the
Company’s Common Stock for services to be rendered to its investor relations
consultant as compensation. In connection with the warrant issuance 12,500
shares are exercisable immediately and the Company recorded a charge of $44,640
to general and administrative expense in the year ended December 31, 2005.
The
Company has estimated the fair value of such options using the Black-Scholes
model, using an assumed risk-free rate of 4.39%, and expected life of 5 years,
volatility of 109% and dividend yield of 0%. The remaining 37,500 warrants
have
been cancelled in the year ended December 31, 2006 due to performance objectives
not being obtained at the expiration of agreement.
In
connection with the 2005 Offering completed in June 2005, the Company
compensated Paramount, placement agent for the Offering, or its affiliates
for
its services through the payment of placement warrants to acquire 419,794
(837,956 - pre-Merger) shares of Series A Preferred Stock (the Series A Stock
Warrants), exercisable for a period of 7 years from the Closing Date at a per
share exercise price equal to 110% of the price per share sold in the Offering.
The Company valued the Series A Stock Warrants using the Black-Scholes
model and recorded a charge of $1,682,863 against additional paid-in
capital. The Company has estimated the fair value of the Series A Stock Warrants
using the Black-Scholes model, using an assumed risk-free rate of 3.93% and
expected life of 7 years, volatility of 134% and dividend yield of
0%.
In
connection with the 2006 Offering completed on May 3, 2006, the Company issued
warrants to purchase 2,397,392 shares of common stock to investors and 799,126
warrants to purchase common stock to the Placement Agents and their designees.
The Company estimated the fair value of the warrants at $9,575,958 and
$3,516,603, respectively, using the Black-Scholes model, using an assumed
risk-free rate of 5.01% and an expected life of 5 and 7 years, volatility of
100% and a dividend yield of 0%. The fair value of the warrants was recorded
as
a permanent component of shareholders’ equity.
F-24
ZIOPHARM
Oncology, Inc.
(A
Development Stage Enterprise)
Notes
to
Financial Statements
|
10.
|
WARRANTS
...continued
|
The
following is a summary of warrants outstanding as of December 31,
2006.
|
|
Issued
in connection with
|
|
Exercise
Price
|
|
Expiration
Date
|
|
||||
|
|
|
|
|
|
|
|
|
|||
|
62,621
|
|
|
Services
performed
|
|
$
|
4.75
|
|
|
December
23, 2011
|
|
|
408,703
|
|
|
Placement
warrants for services performed
|
|
$
|
4.75
|
|
|
May
31, 2012
|
|
|
12,500
|
Services
performed
|
$
|
4.76
|
September
14, 2010
|
||||||
|
2,397,392
|
Investors
warrants
|
$
|
5.56
|
May
3, 2011
|
||||||
|
799,126
|
|
|
Placement
warrants for services performed
|
|
$
|
5.09
|
|
|
May
3, 2013
|
|
|
3,680,342
|
|
|
|
|
|
|
|
|
|
|
|
11.
|
Employee
Benefit Plan
|
The
Company sponsors a qualified 401(k) Retirement Plan ( the “Plan”) under which
employees are allowed to contribute certain percentages of their pay, up to
the
maximum allowed under Section 401(k) of the Internal Revenue Code. The Company
does not presently make contributions to the Plan.
F-25
Item
8. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures
On
November 9, 2005, the Company, upon the recommendation and approval of its
audit
committee, dismissed Cordovano and Honeck, P.C., independent registered public
accounting firm, as its principal independent accountant. On the same date,
the
Company engaged Vitale, Caturano & Company, Ltd., independent registered
public accounting firm, to serve as the Company’s principal independent
accountant.
Cordovano
and Honeck’s reports on the Company’s financial statements for the past two
years did not contain an adverse opinion or disclaimer of opinion, nor were
they
qualified or modified as to uncertainty, audit scope or accounting
principles.
During
the years ended December 31, 2004 and 2003, and subsequently through the date
of
Cordovano and Honeck’s dismissal, there were no disagreements with Cordovano and
Honeck on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure which, if not resolved to Cordovano
and Honeck’s satisfaction, would have caused it to make reference to the subject
matter in connection with its report on the Company’s financial statements for
such fiscal years.
The
Company provided Cordovano and Honeck with a copy of the foregoing disclosures
and requested that Cordovano and Honeck furnish it with a letter addressed
to
the Securities and Exchange Commission stating whether it agrees with the above
statements and, if not, stating the respects in which it does not agree. A
copy
of such letter was filed on November 11, 2005 as Exhibit 16.1 to the Form 10-QSB
for the quarter ended September 30, 2005.
Vitale,
Caturano & Company, Ltd. has served as the accountant for ZIOPHARM, Inc., a
Delaware corporation that became the Company’s wholly-owned subsidiary on
September 13, 2005 and merged with and into the Company on September 14, 2005,
since the date of ZIOPHARM, Inc.’s inception in September 2003. During the years
ended December 31, 2004 and 2003, and subsequently through November 9, 2005,
neither the Company nor anyone acting on its behalf consulted with Vitale,
Caturano & Company, Ltd. regarding any of the matters or events set forth in
Items 304(a)(2)(i) and (ii) of Regulation S-B.
The
Company provided Vitale, Caturano & Company, Ltd. with a copy of the
foregoing disclosures and provided Vitale, Caturano the opportunity to furnish
a
letter containing any new information, clarification of the above disclosures,
or disagreements with the statements made herein.
Item
8A. Controls and Procedures
We
maintain “disclosure controls and procedures” (as defined in the Securities and
Exchange Act of 1934 Rules 13a-15(e) and 15(d)-15(e) designed to ensure that
information required to be disclosed in reports filed under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed,
summarized and reported within the specified time periods. Under the supervision
and with the participation of our management, including our Chief Executive
Officer and our Treasurer, we conducted an evaluation of our disclosure controls
and procedures as of December 31, 2006. Based on this evaluation, our Chief
Executive Officer and Treasurer concluded that, while our disclosure controls
and procedures are effective in timely alerting them to material information
required to be included in our periodic filings with the SEC, there is a lack
of
segregation of duties at our company due to the limited number of employees
dealing with general administrative and financial matters. At this time
management believes that, given the individuals involved and the control
procedures in place, the risks associated with such lack of segregation are
not
considered significant, and that the potential benefits of adding additional
employees to segregate duties more clearly do not currently justify the
associated added expense. However, management will reevaluate the situation
periodically and will mitigate the current lack of segregation of duties within
the general administrative functions if it believes the risks from such lack
of
segregation have increased or when additional capital is secured.
There
have been no changes in our internal control over financial reporting identified
in connection with the evaluation required by paragraph (d) of Rule 13a-15
or
15d-15 promulgated under the Exchange Act that occurred during the last fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting. Management is aware
that
there is a lack of segregation of duties at our company due to the limited
number of employees dealing with general administrative and financial matters.
At this time management believes that, given the individuals involved and the
control procedures in place, the risks associated with such lack of segregation
are insignificant, and that the potential benefits of adding additional
employees to segregate duties more clearly do not justify the associated added
expense. Management will continue to evaluate this segregation of duties. In
addition, management is aware that many of
our
currently existing internal controls are undocumented. Our management will
be
working to document such internal controls over the coming
year.
Item
8B. Other Information
None.
34
PART
III
Item
9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with
Section 16(a) of the Exchange Act
Information
in response to this Item is incorporated herein by reference to our definitive
proxy statement to be filed pursuant to Regulation 14A within 120 days after
the
end of the fiscal year covered by this form 10-KSB.
Our
Board
of Directors adopted a Code of Business Conduct and Ethics to be applicable
to
all officers, directors and employees. The Code of Business Conduct and Ethics
is intended to be designed to deter wrong-doing and promote honest and ethical
behavior, full, fair, timely, accurate and understandable disclosure, and
compliance with applicable laws. The Board adopted the Code of Business Conduct
and Ethics in February 2006. A copy of the Code of Business Conduct and Ethics
can be obtained and will be provided to any person without charge upon written
request to the Company’s President at the Company’s headquarters
address.
Item
10. Executive Compensation
Information
in response to this Item is incorporated herein by reference to our definitive
proxy statement to be filed pursuant to Regulation 14A within 120 days after
the
end of the fiscal year covered by this form 10-KSB.
Item
11. Security Ownership of Certain Beneficial Owners and
Management
Information
in response to this Item is incorporated herein by reference to our definitive
proxy statement to be filed pursuant to Regulation 14A within 120 days after
the
end of the fiscal year covered by this form 10-KSB.
Item
12. Certain Relationships and Related Transactions
Information
in response to this Item is incorporated herein by reference to our definitive
proxy statement to be filed pursuant to Regulation 14A within 120 days after
the
end of the fiscal year covered by this form 10-KSB.
35
Item
13. EXHIBITS
The
following exhibits, as required by Item 601 of Regulation S-B are filed as
a
part of this report:
|
Exhibit
No.
|
Description
of Document
|
|
2.1
|
Agreement
and Plan of Merger among the Registrant (formerly EasyWeb, Inc.),
ZIO
Acquisition Corp. and ZIOPHARM, Inc., dated August 3, 2005 (incorporated
by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed August 9,
2005).
|
|
3.1
|
Amended
and Restated Certificate of Incorporation, as filed with the Delaware
Secretary of State on April 26, 2006 (incorporated by reference
to Exhibit
3.1 to the Registrant’s Current Report of Form 8-K filed April 26,
2006).
|
|
3.2
|
Certificate
of Merger dated September 13, 2005, relating to the merger of ZIO
Acquisition Corp. with and into ZIOPHARM, Inc. (incorporated by
reference
to Exhibit 3.1 to the Registrant’s Form 8-K filed September 19,
2005).
|
|
3.3
|
Certificate
of Ownership of the Registrant (formerly EasyWeb, Inc.) dated as
of
September 14, 2005, relating the merger of ZIOPHARM, Inc. with
and into
the Registrant and changing the Registrant’s corporate name from EasyWeb,
Inc. to ZIOPHARM Oncology, Inc. (incorporated by reference to Exhibit
3.2
to the Registrant’s Form 8-K filed September 19, 2005).
|
|
3.4
|
Bylaws,
as amended to date (incorporated by reference to Exhibit 3.3 to
the
Registrant’s Form 8-K filed September 19, 2005).
|
|
4.1
|
Specimen
common stock certificate. (incorporated by reference to Exhibit
4.1 to the
Registrant’s Registration Statement on Form SB-2 (SEC File No. 333-129020)
filed October 14, 2005).
|
|
4.2
|
Form
of Warrant issued to placement agents in connection with ZIOPHARM,
Inc.
2005 private placement (incorporated by reference to Exhibit 4.2
to the
Registrant’s Registration Statement on Form SB-2 (SEC File No. 333-129020)
filed October 14, 2005).
|
|
4.3
|
Schedule
identifying holders of Warrants in the form filed as Exhibit 4.2
to this
Report (incorporated by reference to Exhibit 4.3 to the Registrant’s
Registration Statement on Form SB-2 (SEC File No. 333-129020) filed
October 14, 2005).
|
|
4.4
|
Warrant
for the Purchase of Shares of Common Stock dated December 23, 2004.
(incorporated by reference to Exhibit 4.4 to the Registrant’s Registration
Statement on Form SB-2 (SEC File No. 333-129020) filed October
14,
2005).
|
|
4.5
|
Option
for the Purchase of Common Stock dated October 15, 2004 and issued
to
DEKK-Tec, Inc. (incorporated by reference to Exhibit 4.5 to the
Registrant’s Annual Report on Form 10-KSB filed (SEC File No. 000-32353)
March 20, 2006).
|
|
4.6
|
Form
of Option for the Purchase of Shares of Common Stock dated August
30, 2004
and issued to The University of Texas M.D. Anderson Cancer Center.
(incorporated by reference to Exhibit 4.6 to the Registrant’s Annual
Report on Form 10-KSB filed (SEC File No. 000-32353) March 20,
2006).
|
|
4.7
|
Schedule
identifying material terms of Options for the Purchase of Shares
of Common
Stock in the form filed as Exhibit 4.6 to this Report. (incorporated
by
reference to Exhibit 4.7 to the Registrant’s Annual Report on Form 10-KSB
filed (SEC File No. 000-32353) March 20, 2006).
|
|
4.8
|
Form
of Common Stock Purchase Warrant issued to investors in connection
with
ZIOPHARM Oncology, Inc. 2006 private placement (incorporated by
reference
to Exhibit 4.1 to the Registrant’s Current Report of Form 8-K filed May 3,
2006).
|
|
4.9
|
Form
of Common Stock Purchase Warrant issued to placement agents in
connection
with ZIOPHARM Oncology, Inc. 2006 private placement (incorporated
by
reference to Exhibit 4.2 to the Registrant’s Current Report of Form 8-K
filed May 3, 2006).
|
|
10.1
|
2003
Stock Incentive Plan (incorporated by reference to Exhibit 10.1
to the
Registrant’s Registration Statement on Form SB-2 (SEC File No. 333-129020)
filed October 14, 2005).
|
|
10.2
|
Amendment
No. 1 to 2003 Stock Incentive Plan of ZIOPHARM Oncology, Inc.
(incorporated by reference to Exhibit 3.1 to the Registrant’s Current
Report of Form 8-K filed April 26, 2006).
|
|
10.3
|
Employment
Agreement dated January 8, 2004, between the Registrant and Dr.
Jonathan
Lewis (incorporated by reference to Exhibit 10.2 to the Registrant’s
Registration Statement on Form SB-2 (SEC File No. 333-129020) filed
October 14, 2005).
|
|
10.4
|
Employment
Agreement Extension dated December 21, 2006, between the Registrant
and
Dr. Jonathan Lewis (incorporated by reference to Exhibit 10.1 to
the
Registrant’s Current Report on Form 8-K filed December 26,
2007).
|
|
10.5
|
Employment
Agreement dated January 15, 2004, between the Registrant and Dr.
Robert
Peter Gale (incorporated by reference to Exhibit 10.3 to the Registrant’s
Registration Statement on Form SB-2 (SEC File No. 333-129020) filed
October 14, 2005).
|
|
10.6
|
Employment
Agreement dated July 21, 2004, between the Registrant and Richard
Bagley
(incorporated by reference to Exhibit 10.4 to the Registrant’s
Registration Statement on Form SB-2 (SEC File No. 333-129020) filed
October 14, 2005).
|
|
10.7
|
Patent
and Technology License Agreement dated August 24, 2004, among ZIOPHARM,
Inc. (predecessor to the Registrant), the Board of Regents of the
University of Texas System on behalf of the University of Texas
M.D.
Anderson Cancer Center and the Texas A&M University System
(incorporated by reference to Exhibit 10.5 to the Registrant’s
Registration Statement on Form SB-2 (SEC File No. 333-129020) filed
October 14, 2005).++
|
|
10.8
|
License
Agreement dated October 15, 2004, between ZIOPHARM, Inc. (predecessor
to
the Registrant) and DEKK-Tec, Inc. (incorporated by reference to
Exhibit
10.6 to the Registrant’s Registration Statement on Form SB-2 (SEC File No.
333-129020) filed October 14, 2005).++
|
|
10.9
|
Form
of subscription agreement between the ZIOPHARM, Inc. and the investors
in
ZIOPHARM, Inc.’s private placement (incorporated by reference to Exhibit
10.7 to the Registrant’s Registration Statement on Form SB-2 (SEC File No.
333-129020) filed October 14, 2005).
|
|
10.10
|
Form
of Incentive Stock Option Agreement granted under 2003 Stock Option
Plan
(incorporated by reference to Exhibit 10.7 to the Registrant’s Annual
Report on Form 10-KSB (SEC File No. 000-32353) filed March 20,
2006).
|
|
10.11
|
Form
of Employee Non-Qualified Stock Option Agreement granted under
2003 Stock
Option Plan (incorporated by reference to Exhibit 10.8 to the Registrant’s
Annual Report on Form 10-KSB (SEC File No. 000-32353) filed March
20,
2006).
|
|
10.12
|
Form
of Director Non-Qualified Stock Option Agreement granted under
2003 Stock
Option Plan (incorporated by reference to Exhibit 10.9 to the Registrant’s
Annual Report on Form 10-KSB (SEC File No. 000-32353) filed March
20,
2006).
|
|
10.13
|
Form
of Subscription Agreement by and between ZIOPHARM Oncology, Inc.
and
investors in the ZIOPHARM Oncology, Inc. 2006 private placement
(incorporated by reference to Exhibit 10.1 to the Registrant’s Current
Report of Form 8-K filed May 3, 2006).
|
|
10.14
|
Asset
Purchase Agreement dated November 3, 2006 by and among Baxter Healthcare
S.A., Baxter International, Inc., Baxter Oncology GmbH and ZIOPHARM
Oncology, Inc. (incorporated by reference to Exhibit 10.1 to the
Registrant’s Quarterly Report on Form 10-QSB filed November 13, 2006).
+
|
|
10.15
|
License
Agreement dated November 3, 2006 by and among Baxter Healthcare S.A.,
Baxter International, Inc. and ZIOPHARM Oncology, Inc. (incorporated
by
reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form
10-QSB filed November 13, 2006). +
|
|
|
|
|
10.16
|
Consulting
agreement dated January 15, 2007, between the Registrant and Robert
Gale.
|
|
10.17
|
Amendment
to incentive stock option agreements between Registrant and Robert
Peter
Gale, M.D., PH.D.
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm - Vitale, Caturano
&
Company, Ltd.
|
|
Certification
of Chief Executive Officer pursuant to Securities Exchange Act
Rule
13a-15(e)/15d-15(e) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Securities Exchange Act
Rule
13a-15(e)/15d-15(e) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
99.1
|
Press Release dated February 13, 2006 |
|
+
|
Confidential
treatment has been requested as to certain portions of this exhibit
pursuant to Rule 24b-2 of the Securities Exchange Act of 1934,
as
amended.
|
| ++ | Confidential treatment has been granted as to certain portions of this exhibit pursuant to Rule 406 of the Securities Act of 1933, as amended. |
Item
14. Principal Accountant Fees and Services
Information
in response to this Item is incorporated herein by reference to our definitive
proxy statement to be filed pursuant to Regulation 14A within 120 days after
the
end of the fiscal year covered by this form 10-KSB.
36
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
ZIOPHARM
ONCOLOGY, INC.
|
||
| |
|
|
|
Date:
February 13 , 2007
|
By: |
/s/ Jonathan
Lewis
|
|
Jonathan
Lewis
Chief
Executive Officer
(Principal
Executive Officer)
|
||
|
Date:
February 13 , 2007
|
By: |
/s/ Richard
Bagley
|
|
Richard
Bagley
President,
Chief Financial Officer, Treasurer and
Chief
Operating Officer
(Principal
Financial and Accounting
Officer)
|
||
In
accordance with the Securities Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities
and
on the dates indicated.
|
Signature
|
|
Title
|
Date
|
|
|
|
|
|
|
|
| /s/ Jonathan Lewis |
|
|
|
|
|
Jonathan Lewis |
|
Director
and Chief Executive Officer (Principal Executive Officer)
|
February
13, 2007
|
|
|
/s/ Richard Bagley
|
|
|
|
|
|
Richard Bagley |
|
Director,
President, Chief Financial Officer, Treasurer and Chief Operating
Officer
(Principal Accounting and Financial Officer)
|
February
13, 2007
|
|
|
/s/
Murray
Brennan
|
|
|
|
|
|
Murray Brennan |
|
Director
|
February
13, 2007
|
|
|
/s/ James Cannon
|
|
|
|
|
|
James Cannon |
|
Director
|
February
13, 2007
|
|
|
/s/ Timothy McInerney
|
|
|
|
|
|
Timothy McInerney |
|
Director
|
February
13, 2007
|
|
|
/s/
Wyche
Fowler, Jr.
|
|
|
|
|
|
Wyche Fowler, Jr. |
|
Director
|
February
13, 2007
|
|
|
/s/ Gary S. Fragin
|
|
|
|
|
|
Gary S. Fragin |
|
Director
|
February
13, 2007
|
|
|
/s/ Michael Weiser
|
|
|
|
|
|
Michael Weiser |
|
Director
|
February
13, 2007
|
37
EXHIBIT
INDEX
|
Exhibit
No.
|
Description
of Document
|
|
|
10.1
|
Consulting
agreement dated January 15, 2007, between the Registrant and Robert
Peter
Gale, M.D., PH.D.
|
|
|
10.2
|
Amendment
to incentive stock option agreements between Registrant and Robert
Peter
Gale, M.D., PH.D.
|
|
|
23.1
|
Consent of Independent Registered Public Accounting Firm - Vitale, Caturano & Company, Ltd. | |
|
31.1
|
Certification
of Chief Executive Officer pursuant to Securities Exchange Act Rule
13a-15(e)/15d-15(e) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Securities Exchange Act Rule
13a-15(e)/15d-15(e) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
99.1
|
Press Release dated February 13, 2006 |
38
Exhibit
10.1
CONSULTING
AGREEMENT
THIS
CONSULTING AGREEMENT, dated January 15, 2007 (the “Agreement”)
is by
and between ROBERT PETER GALE, M.D., PH.D (the “Consultant”),
and
ZIOPHARM ONCOLOGY, INC., a Delaware corporation (the “Company”).
WITNESSETH:
WHEREAS,
the
current employment agreement, dated as of January 15, 2004, by and between
the
Consultant and the Company (the “Employment
Agreement”)
will
expire in accordance with its terms on January 14, 2007 and will not be
extended;
WHEREAS,
the
Company will not exercise its option under Section 6(g) of the Employment
Agreement to retain the Consultant as a consultant as set forth in the
Employment Agreement;
WHEREAS,
the
Company wishes to retain the Consultant to render services for the Company
on
the terms and conditions set forth in this Agreement, and the Consultant
wishes
to be retained by the Company on such terms and conditions set forth herein.
NOW,
THEREFORE,
in
consideration of the premises herein contained and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the
parties hereto agree as follows:
Section
1. Title;
Nature of Consulting.
The
Consultant shall hold the title Chief Scientific Advisor. The Consultant
shall
perform services for the Company as outlined by the terms of this Agreement
herein (“Consulting
Services”).
In
addition, the Consultant shall continue to serve as a member of the Company’s
Medical Advisory Board.
Section
2. Compensation.
|
a)
|
In
exchange therefor, the Company shall pay the Consultant for Consulting
Services actually requested by and provided to the Company $100,000
per
year, payable in equal monthly installments in arrears.
|
|
b)
|
If
the Consultant elects to continue medical coverage under the Company’s
medical plan pursuant to the provisions of the Consolidated Omnibus
Budget
Reconciliation Act of 1986 (“COBRA”),
the Company hereby agrees to pay the cost of such continuation
coverage
during the term of this Agreement.
|
|
c)
|
In
addition to the payment for Consulting Services set forth above,
the
Company shall compensate the Consultant for his services as a member
of
the Company’s Medical Advisory Board in the same amount and in the same
manner as it compensates the other members of the Medical Advisory
Board.
|
|
d)
|
In
the event that the Consultant travels for or on behalf of the Company,
the
Company hereby agrees to reimburse the Consultant as provided under
Section 4 below.
|
Section
3. Consulting
Services.
The
Consultant shall be available for up to 10 hours per month, as requested
by the
Company, to provide advice regarding development and clinical testing of
the
Company’s pharmaceutical products and such other matters pertaining to the
Company’s business as may be requested by Dr. Jonathon J. Lewis or Dr. Brian
Schwartz. The Consultant shall use his best efforts to advance the best
interests of the Company.
Section
4. Travel.
The
Consultant has no obligation to travel for or on behalf of the Company. In
the
event the Consultant consents to travel on behalf of the Company in any
particular instance, the Company will reimburse the Consultant’s reasonable
travel costs, provided that documentation is supplied in accordance with
the
Company’s regular travel expense reimbursement policies in effect from time to
time; and the Company will pay the Consultant $1,000 per day for his services
while traveling, provided that on each such day the Consultant devotes at
least
2 hours to the Company’s business. The payments and time commitments in this
Section 4 will be in addition to the payments and time commitments referred
to
in Section 2 and Section 3 hereof.
Section
5. Representations
and Acknowledgements.
|
a)
|
Consultant
represents that he has the requisite expertise, ability and legal
right to
render the Consulting Services, and will perform the Consulting
Services
in an efficient manner and in accordance with the terms of this
Agreement.
The Consultant will abide by all laws, rules, and regulations that
apply
to the performance of the Consulting Services.
|
|
b)
|
Consultant
acknowledges and agrees that the Consultant is an independent contractor
and will perform the Consulting Services as such and not as an
employee of
the Company. Accordingly, nothing in this Agreement shall be construed
as
establishing a relationship of employer and employee, or principal
and
agent, between the Company and the Consultant.
|
|
c)
|
Each
party herein acknowledges that the Consultant is not an employee
for state
or federal tax purposes or any other purpose, and the Consultant
shall be
solely responsible for the payment of all applicable federal, state,
local
and foreign income taxes, self-employment taxes, and any other
applicable
taxes, withholdings, required insurance contributions or other
charges or
deductions under the laws of any and all applicable jurisdictions.
The
Consultant acknowledges that the Company will not withhold federal,
state,
local or foreign income taxes, pay Social Security contributions
or
provide disability insurance coverage for the Consultant with respect
to
his services under this Agreement, and the Consultant will not
participate
in any of the Company’s employee benefit plans with respect to his period
of service as a consultant under this
Agreement.
|
|
d)
|
Consultant
acknowledges and agrees that the Consultant is solely responsible
for his
own acts as they relate to any services provided, and will not
have
authority to speak for, represent or obligate the Company in any
way.
|
Section
6. Consultant’s
Covenants.
|
a)
|
Consultant
shall be available to perform the Consulting Services for the term
of this
Agreement and shall not enter into any other agreement with any
other
person or entity that would restrict the Consultant’s ability to fully
perform the Consulting Services under this Agreement. In the event
that
the Consultant becomes unavailable or enters into such an agreement,
the
Company will have the option to terminate this Agreement without
further
liability to the Consultant to pay for any Consulting Services
other than
those services previously rendered. The Consultant will enter into
an
Invention, Non-Disclosure and Non-Competition Agreement in the
form of the
Agreement attached hereto as Schedule 1, which will provide for
certain
non-competition covenants applicable during the period of his service
under this Agreement.
|
|
b)
|
During
the term of this Agreement, the Consultant shall not directly or
indirectly disparage, whether or not true, the name or reputation
of the
Company or any of its affiliates, officers, directors, employees
or
shareholders.
|
Section
7. Indemnification.
The
Consultant agrees to indemnify and hold the Company harmless for any injury
occurring to the property or person of the Consultant as a result of the
Consultant’s performance of Consulting Services under this Agreement, provided
that said injury has not occurred due to the gross negligence of the Company.
Section
8. Miscellaneous.
a. Term;
Termination. This
Agreement is effective as of January 15, 2007 and shall continue thereafter
for
one calendar year, ending as of January 14, 2008. The Company or the Consultant
may terminate this Agreement at any time on 30 days notice, with no continuing
obligation (except as required under the Invention, Non-Disclosure and
Non-Competition Agreement) for either party.
b. Assignment.
No
assignment by the Consultant of this Agreement or any sums due under it,
will be
binding on the Company without the Company’s written consent.
c. Application
of Law.
This
Agreement and the application or interpretation hereof shall be governed
exclusively by the law of the State of New York (without regard to conflicts
of
law principles).
d. Headings.
The
headings in this Agreement are inserted for convenience only and do not
describe, interpret, define or limit the scope, extent or intent of the
Agreement or any provision hereof. Unless the context requires otherwise,
all
references in this Agreement to Sections shall be deemed to mean and refer
to
Sections of this Agreement. The words “herein” and “hereunder” and other words
of similar import refer to this Agreement as a whole and not to any particular
Section or other subdivision.
e. Number
and Gender.
Where
the context so indicates, the masculine includes the feminine and the neuter,
the neuter includes the masculine and the feminine and the singular includes
the
plural.
f. Binding
Effect.
Except
as herein otherwise provided to the contrary, this Agreement shall be binding
upon and inure to the benefit of the Consultant and the Company and their
respective successors and assigns.
g. Severability.
The
parties hereto intend that this Agreement shall be enforced to the fullest
extent permissible under the law and public policies of each state and
jurisdiction in which such enforcement is sought, but that unenforceability
(or
the modification to conform with such laws or public policies) of any provision
hereof, shall not render unenforceable or impair the remainder of this
Agreement. Accordingly, in the event that any provision of this Agreement
shall
be determined to be invalid or unenforceable (including, without limitation,
as
to duration or geographic area), either in whole or in part, this Agreement
shall be deemed amended to delete or modify as necessary, the offending
provision and to alter the balance of this Agreement in order to render the
same
valid and enforceable to the fullest extent permissible.
h. Entire
Agreement.
This
Agreement constitutes the entire agreement between the parties hereto relating
to the subject matter hereof, and supersedes all previous contracts and
agreements between the parties hereto, both oral and written. This Agreement
may
not be modified, except in a writing signed by both parties hereto.
i. Counterparts.
This
Agreement may be executed in several counterparts, each of which shall be
deemed
an original, but all of which together shall constitute one and the same
instrument.
[SIGNATURE
PAGE FOLLOWS] IN WITNESS WHEREOF,
the
parties hereto have executed this Agreement as of the day and year first
written
above.
|
ROBERT
PETER GALE, M.D., PH.D
|
||
| |
|
|
| By: | ||
|
Title: |
||
|
ZIOPHARM
ONCOLOGY, INC.
|
||
| |
|
|
| By: | ||
|
Name: Title:
|
||
Exhibit
10.2
ZIOPHARM
ONCOLOGY, INC
AMENDMENT
TO INCENTIVE STOCK OPTION AGREEMENTS
This
agreement (the “Amendment”) is entered into as of January 12, 2007, by and
between Robert Peter Gale (the “Employee”) and ZIOPHARM Oncology, Inc. a
Delaware corporation (the “Company”).
WHEREAS,
the Employee and the Company have entered into Stock Option Agreements dated
as
of April 26, 2006, June 8, 2005, January 27, 2004, and January 15, 2004
(together with certain Addenda reflecting modifications attributable to
recapitalization events, the “Stock Option Agreements”);
WHEREAS,
pursuant to the terms of those Option Agreements, certain of the options
granted
pursuant to the Option Agreements dated as of June 8, 2005, January 27, 2004
and
January 15, 2004 remain unvested as of the date hereof (the “Unvested
Options”);
WHEREAS,
the Employee’s employment with the Company will terminate effective January 14,
2007;
WHEREAS,
except as otherwise provided in this Amendment, the Unvested Options would
expire as of the date of such termination of the Employee’s employment;
and
WHEREAS,
in consideration of the Employee’s past services to the Company and the
Employee’s entering into a Consulting Agreement with the Company dated as of the
date hereof, the Committee (as such term is defined in the Company’s 2003 Stock
Option Plan) has determined that all of the Unvested Options shall become
fully
vested as of the date hereof.
NOW
THEREFORE, the Employee and the Company agree as follows:
1. All
of
the options granted pursuant to the Stock Option Agreement dated as of April
26,
2006, have previously become fully vested pursuant to the terms of that Stock
Option Agreement; 8,349 options granted pursuant to the Stock Option Agreement
dated as of June 8, 2005, as previously modified, have previously become
fully
vested pursuant to the terms of that Stock Option Agreement; 15,029 options
granted pursuant to the Stock Option Agreement dated as of January 27, 2004,
as
previously modified, have previously become fully vested pursuant to the
terms
of that Stock Option Agreement; and 1,712 options granted pursuant to the
Stock
Option Agreement dated as of January 15, 2004, as previously modified, have
previously become fully vested pursuant to the terms of that Stock Option
Agreement.
2. All
of
the Unvested Options granted pursuant to the Stock Option Agreement dated
as of
June 8, 2005, as previously modified (being 8,350 options which otherwise
would
become vested on June 8, 2007 and 8,349 options which otherwise would become
vested on June 8, 2008), shall be immediately fully vested.
3. All
of
the Unvested Options granted pursuant to the Stock Option Agreement dated
as of
January 27, 2004, as previously modified (being 7,514 options which otherwise
would become vested on January 15, 2007), shall be immediately fully
vested.
4. All
of
the Unvested Options granted pursuant to the Stock Option Agreement dated
as of
January 15, 2004, as previously modified (being 855 options which otherwise
would become vested on January 15, 2007), shall be immediately fully
vested.
5, Except
as
the vesting provisions are expressly amended by this Amendment, all of the
terms
and conditions of the Stock Option Agreements shall remain in full force
and
effect in accordance with their terms.
6. The
Employee acknowledges that all of the Options granted pursuant to the Stock
Option Agreements, including without limitation those whose vesting is
accelerated pursuant to the terms of this Amendment, to the extent they have
not
previously been exercised, remain exercisable until the date that is ninety
(90)
days following termination of the Employee’s employment with the Company and, if
unexercised, shall expire on such date.
IN
WITNESS WHEREOF, the undersigned have executed this Amendment as of the date
first written above.
|
EMPLOYEE
|
||
|
|
||
|
Name:
Robert Peter Gale
|
||
|
ZIOPHARM
Oncology, Inc.
|
||
| |
|
|
| By: | ||
|
Name: |
||
| Title: | ||
Exhibit
23.1
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
As
independent registered public accountants, we hereby consent to the
incorporation by reference of our report dated February 6, 2007 relating to
the
financial statements of ZIOPHARM Oncology, Inc. for the year ended December
31,
2006, and to all references to our Firm, included in or made part of this Form
10-KSB, into the Company's previously filed Registration Statements on Forms
S-8
(File Nos. 333-129884 and 333-134280) and Forms S-3 (File Nos. 333-129680 and
333-134279).
VITALE,
CATURANO & COMPANY, LTD.
Boston,
Massachusetts
February
12, 2007
CERTIFICATION
OF PRINCIPAL EXECUTIVE OFFICER
I,
Jonathan Lewis, certify that:
| 1. |
I
have reviewed this annual report on Form 10-KSB of ZIOPHARM Oncology,
Inc.;
|
| 2. |
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
| 3. |
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
| 4. |
The
small business issuer’s other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures
(as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small
business issuer and have:
|
| a) |
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the small business issuer,
including
its consolidated subsidiaries, is made known to us by others within
those
entities, particularly during the period in which this report is
being
prepared;
|
| b) |
Evaluated
the effectiveness of the small business issuer’s disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of
the period covered by this report based on such evaluation;
and
|
| c) |
Disclosed
in this report any change in the small business issuer’s internal control
over financial reporting that occurred during the small business
issuer’s
most recent fiscal quarter (the small business issuer’s fourth fiscal
quarter in the case of an annual report) that has materially affected,
or
is reasonably likely to materially affect, the small business issuer’s
internal control over financial reporting;
and
|
| 5. |
The
small business issuer’s other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the small business issuer’s auditors and the audit committee
of the small business issuer’s board of directors (or persons performing
the equivalent functions):
|
| a) |
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer’s ability
to record, process, summarize and report financial information;
and
|
| b) |
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer’s
internal control over financial
reporting.
|
Date:
February 13, 2007
/s/
Jonathan Lewis
Jonathan
Lewis
Principal
Executive Officer
Exhibit
31.2
CERTIFICATION
OF PRINCIPAL FINANCIAL OFFICER
I,
Richard Bagley, certify that:
| 1. |
I
have reviewed this annual report on Form 10-KSB of ZIOPHARM Oncology,
Inc.;
|
| 2. |
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
| 3. |
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
| 4. |
The
small business issuer’s other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures
(as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small
business issuer and have:
|
| a) |
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the small business issuer,
including
its consolidated subsidiaries, is made known to us by others within
those
entities, particularly during the period in which this report is
being
prepared;
|
| b) |
Evaluated
the effectiveness of the small business issuer’s disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of
the period covered by this report based on such evaluation;
and
|
| c) |
Disclosed
in this report any change in the small business issuer’s internal control
over financial reporting that occurred during the small business
issuer’s
most recent fiscal quarter (the small business issuer’s fourth fiscal
quarter in the case of an annual report) that has materially affected,
or
is reasonably likely to materially affect, the small business issuer’s
internal control over financial reporting;
and
|
| 5. |
The
small business issuer’s other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the small business issuer’s auditors and the audit committee
of the small business issuer’s board of directors (or persons performing
the equivalent functions):
|
| a) |
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer’s ability
to record, process, summarize and report financial information;
and
|
| b) |
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer’s
internal control over financial
reporting.
|
Date February
13, 2007
/s/
Richard E. Bagley
Richard
E. Bagley
Principal
Financial Officer
Exhibit
32.1
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Annual Report of ZIOPHARM Oncology, Inc. (the “Company”) on
Form 10-KSB for the year ended December 31, 2005, as filed with the Securities
and Exchange Commission on the date hereof (the “Report”), I, Jonathan Lewis,
Principal Executive Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of
2002, that:
|
|
(1)
|
The
Report fully complies with the requirements of Section 13(a) or 15(d)
of
the Securities Exchange Act of 1934; and
|
|
|
|
|
|
|
(2)
|
The
information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the
Company.
|
/s/
Jonathan Lewis
Jonathan
Lewis
Principal
Executive Officer
February
13, 2007
Exhibit
32.2
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Annual Report of ZIOPHARM Oncology, Inc. (the “Company”) on
Form 10-KSB for the year ended December 31, 2005, as filed with the Securities
and Exchange Commission on the date hereof (the “Report”), I, Richard Bagley,
Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of
2002, that:
|
(1)
|
The
Report fully complies with the requirements of Section 13(a) or 15(d)
of
the Securities Exchange Act of 1934; and
|
|
|
|
|
|
|
|
(2)
|
The
information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the
Company.
|
/s/
Richard E. Bagley
Richard
E. Bagley
Principal
Financial Officer
February
13, 2007
Exhibit
99.1
ZIOPHARM
Reports 2006 Fourth Quarter and Year-End Financial Results
NEW
YORK, NY-February 13, 2007—
ZIOPHARM Oncology, Inc. (NASDAQ: ZIOP), a biopharmaceutical company engaged
in
the development and commercialization of a diverse, risk-sensitive portfolio
of
in-licensed cancer drugs to address unmet medical needs, announces 2006 fourth
quarter and year-end financial results and the filing of its Annual Report
on
Form 10-KSB.
The
Company reported a net loss of $5.8 million, or $(0.38) per share for the
quarter ended December 31, 2006, compared to a net loss of $2.5 million, or
$(0.34) per share, in the fourth quarter of 2005. Net loss for the year was
$17.9 million, or $(1.42) per share. Total operating expenses for the fourth
quarter increased by 143.6% compared to the fourth quarter of 2005. Total
operating expenses for the year were $19.1 million, compared to total operating
expenses of $9.8 million in 2005. These increases were attributable to the
expanded development of ZIO-101 and ZIO-201 and the asset purchase of indibulin,
now designated as ZIO-301. Cash used in operations was $6.1 million in the
fourth quarter. ZIOPHARM ended the year with approximately $28.4 million in
total cash and short-term investments, compared to $34.5 million at the end
of
the third quarter of 2006.
“We
are
pleased to report a year of significant milestones including the progress of
both ZIO-101 and 201 into phase II studies, the acquisition of a third clinical
stage program and a NASDAQ listing,” said Jonathan Lewis, M.D., Ph.D., Chief
Executive Officer.
“We
expect 2007 to be an exciting year of data-generated news with a focus on phase
II study results with both ZIO-101 and ZIO-201 and the initiation of phase
II
trials with ZIO-301. We also expect to advance
the clinical evaluation of oral administration of both ZIO-101 and
ZIO-201.”
The
Company’s Form 10-KSB can be accessed at www.ziopharm.com.
About
ZIOPHARM Oncology, Inc.
ZIOPHARM
Oncology, Inc. is a biopharmaceutical company engaged in the development and
commercialization of a diverse, risk-sensitive portfolio of in-licensed cancer
drugs to address unmet medical needs. The Company applies new insights from
molecular and cancer biology to understand the efficacy and safety limitations
of approved and developmental cancer therapies and identifies proprietary and
related molecules for better patient treatment. For more information, visit
www.ziopharm.com.
Forward-Looking
Safe Harbor Statement:
This
press release contains forward-looking statements for ZIOPHARM Oncology, Inc.
that involve risks and uncertainties that could cause the Company's actual
results to differ materially from the anticipated results and expectations
expressed in these forward-looking statements. These statements are based on
current expectations, forecasts and assumptions that are subject to risks and
uncertainties, which could cause actual outcomes and results to differ
materially from these statements. Among other things, there can be no assurance
that any of the Company's development efforts relating to its product candidates
will be successful, or such product candidates will be successfully
commercialized. Other risks that affect forward-looking information contained
in
this press release include the possibility of being unable to obtain regulatory
approval of the Company's product candidates, the risk that the results of
clinical trials may not support the Company's claims, and risks related to
the
Company's ability to protect its intellectual property and its reliance on
third
parties to develop its product candidates. The Company assumes no obligation
to
update these forward-looking statements, except as required by law.
ZIOP-G
Investors:
ZIOPHARM
Oncology, Inc.
Suzanne
McKenna, Investor Relations,
646-214-0703
smckenna@ziopharm.com
Media:
Rx
Communications
Tina
Posterli
917-322-2565
tposterli@rxir.com