ZIOPHARM Oncology, Inc. (a development stage company)

Table of Contents

 

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

 

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 ZIOPHARM Oncology, Inc. (a development stage company)

NOTES TO FINANCIAL STATEMENTS

(unaudited)

1. Nature of the Business and Basis of Presentation

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

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

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

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

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

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

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

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

 

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ZIOPHARM Oncology, Inc. (a development stage company)

NOTES TO FINANCIAL STATEMENTS (unaudited)

2. Summary of Significant Accounting Policies

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

New Accounting Pronouncements

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

Warrants

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

Fair Value Measurements

 

Effective January 1, 2008, the Company adopted a newly issued accounting standard for fair value measurements.  In February 2008, an amendment provided a one year deferral of the standard’s effective date for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value on a recurring basis, at least annually.  The accounting standard defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements.  Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.  The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

 

·

Level 1 - Quoted prices in active markets for identical assets or liabilities.

 

·

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

 

·

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

 

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

 

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ZIOPHARM Oncology, Inc. (a development stage company)

NOTES TO FINANCIAL STATEMENTS (unaudited)

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

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

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

 

Subsequent Events

 

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

Other Recently Adopted Accounting Standards

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

 

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ZIOPHARM Oncology, Inc. (a development stage company)

NOTES TO FINANCIAL STATEMENTS (unaudited)

2. Summary of Significant Accounting Policies – (continued)

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

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

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

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

 

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ZIOPHARM Oncology, Inc. (a development stage company)

NOTES TO FINANCIAL STATEMENTS (unaudited)

3. Net Loss per Share

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

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

 

4. Commitments and Contingencies

License agreements and patents

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

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

 

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ZIOPHARM Oncology, Inc. (a development stage company)

NOTES TO FINANCIAL STATEMENTS (unaudited)

4. Commitments and Contingencies – (continued)

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

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

License Agreement with DEKK-Tec, Inc.

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