Prospectus
Supplement
(To
Prospectus dated November 9, 2005)
Filed
Pursuant to Rule 424(b)(3)
File
No.
333-129020
ZIOPHARM
Oncology, Inc.
5,202,982
shares of common stock
The
information contained in this prospectus supplement amends and updates our
prospectus dated November 9, 2005 (the “Prospectus”), and should be read in
conjunction therewith. Please keep this prospectus supplement with your
Prospectus for future reference.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or determined if this prospectus
supplement or the Prospectus is truthful or complete. Any representation
to the
contrary is a criminal offense.
The
date
of this prospectus supplement is November 10, 2005
Note
Regarding Forward-Looking Statements
This prospectus supplement 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 prospectus supplement 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, the continued availability of our chief
technology officer, our ability to obtain additional financing, our ability
to
develop and maintain customer relationships, regulatory developments relating
to
and the general success of our customers’ products, and our ability to protect
our proprietary technology. Other risks that may impact forward-looking
statements contained in this prospectus supplement are described in the
Prospectus under the heading “Risk Factors”.
Interim
Financial Statements - Quarter Ended September 30, 2005
Included
in this prospectus supplement beginning at page F-1 are our interim financial
statements as of and for the three and nine-month periods ended September
30,
2005, including the accompanying footnotes thereto. These interim financial
statements, which were included in our Quarterly Report on Form 10-QSB for
the
quarter ended September 30, 2005, should be read in conjunction with the
audited
financial statements as of and for the year ended December 31, 2004, which
were
included in the Prospectus.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion of our financial condition and results of operations
should
be read in conjunction with the financial statements and the notes to those
statements included in this prospectus supplement and in the Prospectus.
This
discussion includes forward-looking statements that involve risks and
uncertainties. As a result of many factors, such as those set forth under
the
heading “Risk Factors” in the Prospectus, our actual results may differ
materially from those anticipated in these forward-looking
statements.
Overview
We
are a
development-stage company that is seeking to develop and commercialize a
diverse, risk-sensitive portfolio of in-licensed cancer drugs that address
unmet
medical needs. Our management and advisors are focused on licensing proprietary
drug candidate families that are related to cancer therapeutics on the market
where the application of new biological understanding and our drug development
expertise will lead to a lower risk for clinical development failure while
expediting clinical registration. We aim 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.
S-1
We
currently have two products in development:
| · |
ZIO-101
is an organic arsenic compound covered by an issued U.S. patent
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 and
liver,
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 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.
|
| · |
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.
Cyclophosphamide and ifosfamide are alkylating agents. 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 FDA. 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—we believe that the
administration of ZIO-201 may avoid the toxicities of ifosfamide
and
cyclophosphamide without compromising efficacy. In addition to
anticipated
lower toxicity, ZIO-201 may have other advantages over ifosfamide
and
cyclophosphamide. 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.
|
Currently,
we are in U.S. Phase I studies for both of these drug candidates. We intend
to
continue with clinical development of ZIO-101 for advanced myeloma and ZIO-201
for advanced sarcoma. However, 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.
S-2
We
were
originally incorporated in Colorado in September 1998 (under the name Net
Escapes, Inc.) and later changed our name to “EasyWeb, Inc.” in February 1999.
We were re-incorporated in Delaware on May 16, 2005 under the same name.
On
September 13, 2005, we completed a “reverse” acquisition of privately held
ZIOPHARM, Inc., a Delaware corporation. To effect this transaction, we caused
ZIO Acquisition Corp., our wholly-owned subsidiary, to merge with and into
ZIOPHARM, Inc., with ZIOPHARM, Inc. surviving as our wholly owned subsidiary.
In
accordance with the terms of the merger, the outstanding common stock of
ZIOPHARM, Inc. automatically converted into the right to receive an aggregate
of
approximately 97.3% of our outstanding common stock (after giving effect
to the
transaction). Following the merger, we caused ZIOPHARM, Inc. to merge with
and
into us and we changed our name to “ZIOPHARM Oncology, Inc.”
Plan
of Operation
Our
plan
of operation for the 12-month period commencing on the date of this prospectus,
is to continue implementing our business strategy, including the clinical
development of our two lead product candidates, ZIO-101 and ZIO-201. We also
intend to expand our drug candidate portfolio by seeking additional drug
candidates through in-licensing arrangements. We expect our principal
expenditures during the next 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 and preclinical costs
associated with back-up candidates ZIO-102 and ZIO-202;
|
| · |
costs
related to the scale-up and manufacture of ZIO-101 and
ZIO-201;
|
| · |
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 at least three
to
four additional full-time employees in medical, regulatory and administrative
support. 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 our two product candidates,
over the next 12 months we expect to spend approximately $4.6 million on
clinical trials (including milestone payments that we expect to be triggered
under the license agreements relating to our product candidates), approximately
$3.7 million on manufacturing costs, $215,000 on facilities rent,
and
approximately $6.8 million on general corporate and working capital.
We
believe we currently have sufficient capital to fund development and
commercialization activities of ZIO-101 and ZIO-201 into the second quarter
of
2006. See “Liquidity and Capital Resources” below.
S-3
Product
Candidate Development and Clinical Trials
ZIO-101.
ZIO-101,
organic arsenic, is being developed presently to treat advanced myeloma.
As a
follow-on to the ongoing phase I trials, a phase I/II trial in advanced multiple
myeloma is in the advanced planning stage. With the completion of this trial
in
2006, we expect to initiate a registration trial in advanced multiple myeloma.
We will continue to explore the use of ZIO-101 in solid tumors as well as
a
phase II trial in advanced multiple myeloma. Preclinical development will
continue with a back-up compound designated as ZIO-102. Additional compounds
are
being synthesized under 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 will continue through
the
period leading to the expected registration trial in the first half of 2007.
ZIO-201.
ZIO-201,
stabilized isophosphoramide mustard, is being developed presently to treat
advanced sarcoma. As follow-on to the ongoing phase I trial, a phase I/II
trial
and a phase II trial in advanced sarcoma is in the advanced planning stage.
With
the completion of this trial in 2006, we expect to initiate a registration
trial
in advanced sarcoma in the first half of 2007. We will explore the potential
to
test ZIO-201 in pediatric sarcoma in a phase II trial. Preclinical development
will continue with back-up analogues, one of which we would expect to be
designated ZIO-202. Technology transfer and scale-up for the commercial
manufacture of the active pharmaceutical ingredient, its lyophilization,
and
final product specification will continue through the period leading to the
expected registration trial in the first half of 2007.
Results
of Operations
Revenues. We
had no
revenues for the three-month and nine-month periods ended September 30, 2005
and
2004.
Research
and development expenses. For
the
three-month period ended September 30, 2005, research and development expenses
increased by $893,180, or 210%, to $1,318,608 from $425,428 in the three-month
period ended September 30, 2004. The increase is attributable to an increase
of
$235,546 spent on clinical trials and $672,626 in manufacturing related costs.
For the nine month period ended September 30, 2005, research and development
expenses increased by $3,854,259, or 906%, to $4,279,687 from $425,428 in
the
nine-month period ended September 30, 2004. The increase is attributable
to an
increase of $ 1,012,822 spent on clinical trials, $1,847,889 in manufacturing
related costs, $208,288 in preclinical projects, and $390,955 in employee
related costs as we built infrastructure to support the research and development
efforts. For the remainder of the year, we expect research and development
spending to approximate the same level as seen in the third quarter of 2005,
as
we continue with clinical trials and our manufacturing activities.
General
and administrative expenses.
For the
three month period ended September 30, 2005, general and administrative expenses
increased by $613,566, or 66%, to $1,541,740 from $928,174 in the three-month
period ended September 30, 2004. The increase is attributable to a non-recurring
payment of $425,000 due on closing of the merger with EasyWeb, $119,091 in
legal
and accounting costs, and $104,420 in employee related costs as we built
infrastructure to support the research and development efforts. For the nine
month period ended September 30, 2005, general and administrative expenses
increased by $307,746, or 12%, to $2,953,830 from $2,646,084 in the nine-month
period ended September 30, 2004. The increase is primarily attributable to
a
nonrecurring payment of $425,000 due on closing of the merger. For the remainder
of the year, we expect general and administrative spending to approximate
the
same level as seen in the third quarter of 2005 excluding the $425,000
non-recurring payment as a result of the merger.
S-4
Other
income (expense).
Other
income increased by $89,002, or 1702%, to $94,231 in the three-month period
ended September 30, 2005 from $5,229 recorded in the three-month period ended
September 30, 2004. Other income increased by $162,239, or 1049%, to $177,710
in
the nine-month period ended September 30, 2005 from $15,471 recorded in the
nine-month periods ended September 30, 2004. Other income during both the
three
and nine-month period ended September 30, 2005 was comprised of interest
income.
The increase in both periods is due to higher cash balances available for
investing purposes.
Net
income (loss). For
the
reasons described above, the net loss increased by $1,417,744, or 105%, to
$2,766,117 in the three month period September 30, 2005 from $1,348,373.
Net
loss increased by $3,999,766, or 130%, to $7,055,807 for the nine-month period
ended September 30, 2005.
Liquidity
and Capital Resources
As
of
September 30, 2005, we had $10,740,639 in cash and cash equivalents. We believe
we currently have sufficient capital to fund development and commercialization
activities of ZIO-101 and ZIO-201 into the second quarter of 2006. 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. We expect to raise 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 our development and
commercialization efforts, which would have a material adverse effect on
the
prospects of our business. Further, our assumptions relating 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.
Since
inception, our primary source of funding for our operations has been the
private
sale of our securities. During the first nine months of 2005, we received
$4,676
proceeds from the exercise of stock options and gross proceeds of $18.1 million
($16.8 net of issuance costs) as a result of the sale of Series A Convertible
Preferred Stock in a private placement transaction. During the first nine
months
of 2004, we received proceeds of $4.5 million as a result of the sale of
common
stock in a private placement transaction.
At
September 30, 2005, working capital was approximately $9.2 million, compared
to
working capital deficit of $445,096 at December 31, 2004. The increase in
working capital reflects net proceeds received as a result of the closing
of the
$16.8 million as a result of the sale of the Series A Preferred stock offset
by
the use of funds for operations.
Capital
expenditures were $64,648 for the first nine months of 2005. We anticipate
additional capital expenditures will be approximately $80,000 for the remainder
of the fiscal year ended December 31, 2005.
Critical
Accounting Policies
Research
and development expenses consist primarily of salaries and related personnel
costs, fees paid to consultants and outside service providers for laboratory
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.
S-5
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.
Our
results include non-cash compensation expense as a result of the issuance
of
stock option grants. We account 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. We follow the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, for disclosure purposes. All stock-based awards
to
non-employees are accounted for at their fair value in accordance with SFAS
No.
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 fair value of each stock
option
is estimated at the date of grant using the Black-Scholes option pricing
model.
We have adopted the disclosure provisions of SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS
No.
123, for all stock-based awards as of December 31, 2004. Had we applied the
fair
value recognition provisions of SFAS No. 123, our net loss for the three-month
periods ended September 30, 2004 and 2005 would have increased by $33,958
and
$176,297, respectively, and our net loss for the nine-month periods ended
September 30, 2004 and 2005 would have increased by $60,683 and $340,197,
respectively. We expect to record additional non-cash compensation expense
in
the future, which may be significant.
Recent
Accounting Pronouncements
In
December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123R, Share-Based Payment
("SFAS
No. 123R"). This Statement is a revision of SFAS No. 123, Accounting for
Stock-Based Compensation, and supersedes Accounting Principles Board Opinion
No.
25, Accounting for Stock Issued to Employees, and its related implementation
guidance. SFAS No. 123R focuses primarily on accounting for transactions
in
which an entity obtains employee services in share-based payment transactions.
The Statement requires entities to recognize stock compensation expense for
awards of equity instruments to employees based on the grant-date fair value
of
those awards (with limited exceptions). SFAS No. 123R is effective for the
first
fiscal year beginning after December 15, 2005. Based on current options
outstanding, we anticipate the adoption of this statement to result in
approximately $631,823 of additional compensation costs to be recognized
in the
year of adoption.
Off-Balance
Sheet Arrangements
We
do not
have any “off-balance sheet agreements,” as that term is defined by SEC
regulation.
S-6
Changes
in Our Certifying Accountant
On
November 9, 2005, we, upon the recommendation and approval of our audit
committee, dismissed Cordovano and Honeck, P.C., independent registered public
accounting firm, as our principal independent accountant. On the same date,
we
engaged Vitale, Caturano & Company, Ltd., independent registered public
accounting firm, to serve as our principal independent accountant.
Cordovano
and Honeck’s reports on our 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 our financial statements for such
fiscal
years.
We
provided Cordovano and Honeck with a copy of the foregoing disclosures and
requested that Cordovano and Honeck furnish us 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 as Exhibit 16.1 to our Form 10-QSB for the quarter
ended September 30, 2005, which was filed with the Securities and Exchange
Commission on November 10, 2005.
Vitale,
Caturano served as the accountant for the ZIOPHARM, Inc., a Delaware corporation
that became our wholly-owned subsidiary on September 13, 2005 and merged
with
and into us on September 14, 2005, since the date of that corporation’s
inception in September 2003. During the years ended December 31, 2004 and
2003,
and subsequently through November 9, 2005, neither we nor anyone acting on
our
behalf consulted with Vitale, Caturano regarding any of the matters or events
set forth in Items 304(a)(2)(i) and (ii) of Regulation S-B.
We
provided Vitale, Caturano 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.
S-7
Unaudited
Interim Financial Statements:
|
Balance
Sheets as of September 30, 2005 and December 31, 2004
(unaudited)
|
F-2
|
|
|
Statement
of Operations for the three and nine months ended September 30,
2005 and 2004 and for the period
from
inception (September 9, 2003) to September 30,
2005 (unaudited)
|
F-3
|
|
|
Statement
of Cash Flows for the nine months ended September 30, 2005
and 2004 and for the period
from
inception (September 9, 2003) to September 30, 2005
(unaudited)
|
F-4
|
|
|
Statement
of changes in Convertible Preferred Stock and Stockholders’ Equity
(Deficit) for the nine months
ended
September 30, 2005 (unaudited), for the year ended December 31,
2004 and
for the period from inception
(September
9, 2003) to December 31,
2003
|
F-5
|
|
|
Notes
to Unaudited Financial Statements
|
F-6
|
F-1
|
ZIOPHARM
Oncology, Inc.
|
|||||||
|
(A
Development Stage Enterprise)
|
|||||||
|
Balance
Sheets
|
|||||||
|
September
30, 2005
|
December
31, 2004
|
||||||
|
|
Unaudited
|
||||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
10,740,639
|
$
|
1,026,656
|
|||
|
Prepaid
expenses and other current assets
|
209,816
|
117,571
|
|||||
|
Total
current assets
|
10,950,455
|
1,144,227
|
|||||
|
Property
and equipment, net
|
232,862
|
240,733
|
|||||
|
Deposits
|
36,032
|
60,046
|
|||||
|
Other
non current assets
|
92,812
|
-
|
|||||
|
Total
assets
|
$
|
11,312,161
|
$
|
1,445,006
|
|||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
$
|
477,389
|
$
|
709,947
|
|||
|
Accrued
expenses
|
1,270,624
|
879,376
|
|||||
|
Total
current liabilities
|
1,748,013
|
1,589,323
|
|||||
|
|
- |
-
|
|||||
|
Commitments
and contingencies
|
|||||||
|
Stockholders'
deficit:
|
|||||||
|
Common
stock, $.001 par value; 280,000,000 shares
authorized;
|
|||||||
|
7,241,211
and 2,761,621 shares issued and outstanding
|
|||||||
|
at September
30, 2005 and December 31, 2004, respectively
|
7,241
|
2,761
|
|||||
|
Additional
paid-in capital
|
22,460,147
|
5,700,355
|
|||||
|
Deficit
accumulated during the development stage
|
(12,903,240
|
)
|
(5,847,433
|
)
|
|||
|
Total
stockholders' equity (deficit)
|
9,564,148
|
(144,317
|
)
|
||||
|
Total
liabilities and stockholders' equity (deficit)
|
$
|
11,312,161
|
$
|
1,445,006
|
|||
F-2
|
ZIOPHARM
Oncology, Inc.
|
||||||||||||||||
|
(A
Development Stage Enterprise)
|
||||||||||||||||
|
Statements
of Operations
|
||||||||||||||||
|
For
the three and nine months ended September 30, 2005 and
2004 and for the
period from inception (September 9, 2003) through September
30, 2005
(unaudited)
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
For
the Period
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
from
Inception
|
|
|||||
|
For
the three
|
|
For
the three
|
|
For
the nine
|
|
For
the nine
|
|
(September
9,
|
||||||||
|
months
|
months
|
months
|
months
|
2003)
|
||||||||||||
|
|
|
ended
|
|
ended
|
|
ended
|
|
ended
|
|
through
|
|
|||||
|
|
|
September
30, 2005
|
|
September
30,
2004
|
|
September
30,
2005
|
|
September
30,
2004
|
|
September
30,
2005
|
||||||
|
Revenue
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
|
Operating
expenses and other income:
|
||||||||||||||||
|
Research
and development, including
|
||||||||||||||||
|
costs
of research contracts
|
1,318,608
|
425,428
|
4,279,687
|
425,428
|
6,406,294
|
|||||||||||
|
General
and administrative
|
1,541,740
|
928,174
|
2,953,830
|
2,646,084
|
6,696,423
|
|||||||||||
|
Total
operating expenses
|
2,860,348
|
1,353,602
|
7,233,517
|
3,071,512
|
13,102,717
|
|||||||||||
|
Loss
from operations
|
(2,860,348
|
)
|
(1,353,602
|
)
|
(7,233,517
|
)
|
(3,071,512
|
)
|
(13,102,717
|
)
|
||||||
|
Interest
income
|
94,231
|
5,229
|
177,710
|
15,471
|
199,477
|
|||||||||||
|
Net
loss
|
$
|
(2,766,117
|
)
|
$
|
(1,348,373
|
)
|
$
|
(7,055,807
|
)
|
$
|
(3,056,041
|
)
|
$
|
(12,903,240
|
)
|
|
|
Basic
and diluted net loss per share
|
$
|
(0.77
|
)
|
$
|
(0.52
|
)
|
$
|
(2.32
|
)
|
$
|
(1.34
|
)
|
||||
|
Weighted
average common shares outstanding used to
|
||||||||||||||||
|
compute
basic and diluted net loss per share
|
3,593,109
|
2,611,873
|
3,041,829
|
2,280,832
|
||||||||||||
F-3
|
ZIOPHARM
Oncology, Inc.
|
||||||||||
|
(A
Development Stage Enterprise)
|
||||||||||
|
Statements
of Cash Flows
|
||||||||||
|
For
the nine months ended September 30, 2005 and 2004 and
for the period from
inception(September 9, 2003) through September 30, 2005
(unaudited)
|
||||||||||
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
For
the Period
|
|
|||
|
For
the
|
For
the
|
from
Inception
|
||||||||
|
|
|
Nine
months
|
|
Nine
months
|
|
(September
9, 2003)
|
|
|||
|
|
|
ended
|
|
ended
|
|
through
|
|
|||
|
|
|
September
30, 2005
|
|
September
30, 2004
|
|
September
30, 2005
|
||||
|
Cash
flows from operating activities:
|
||||||||||
|
Net
loss
|
$
|
(7,055,807
|
)
|
$
|
(3,056,041
|
)
|
$
|
(12,903,240
|
)
|
|
|
Adjustments
to reconcile net loss to net cash
|
||||||||||
|
used
in operating activities:
|
||||||||||
|
Depreciation
and amortization
|
72,519
|
25,177
|
106,472
|
|||||||
|
Stock-based
compensation
|
-
|
- |
703,116
|
|||||||
|
Change
in operating assets and liabilities:
|
||||||||||
|
Increase
in:
|
||||||||||
|
Prepaid
expenses and other current assets
|
(92,245
|
)
|
(52,054
|
)
|
(209,816
|
)
|
||||
|
Other
noncurrent assets
|
(92,812
|
)
|
-
|
(92,812
|
)
|
|||||
|
Increase
(decrease) in:
|
||||||||||
|
Deposits
|
24,014
|
(69,246
|
)
|
(36,032
|
)
|
|||||
|
Accounts
payable
|
(232,558
|
)
|
202,673
|
477,389
|
||||||
|
Accrued
expenses
|
391,248
|
387,103
|
1,270,624
|
|||||||
|
Net
cash used in operating activates
|
(6,985,641
|
)
|
(2,562,388
|
)
|
(10,684,299
|
)
|
||||
|
Cash
flows from investing activities:
|
||||||||||
|
Purchases
of property and equipment
|
(64,648
|
)
|
(133,077
|
)
|
(339,334
|
)
|
||||
|
Net
cash used in investing activities
|
(64,648
|
)
|
(133,077
|
)
|
(339,334
|
)
|
||||
|
Cash
flows from financing activities:
|
||||||||||
|
Stockholders'
capital contribution
|
-
|
-
|
500,000
|
|||||||
|
Proceeds
from issuance of common stock, net
|
4,676
|
4,500,000
|
4,504,676
|
|||||||
|
Proceeds
from issuance of preferred stock, net
|
16,759,596
|
-
|
16,759,596
|
|||||||
|
Net
cash provided by financing activities
|
16,764,272
|
4,500,000
|
21,764,272
|
|||||||
|
Net
increase in cash and cash equivalents
|
9,713,983
|
1,804,535
|
10,740,639
|
|||||||
|
Cash
and cash equivalents, beginning of period
|
1,026,656
|
402,363
|
-
|
|||||||
|
Cash
and cash equivalents, end of period
|
$
|
10,740,639
|
$
|
2,206,898
|
$
|
10,740,639
|
||||
|
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 agent, in connection with
|
||||||||||
|
preferred
stock issuance
|
$
|
1,682,863
|
$
|
-
|
$
|
1,682,863
|
||||
F-4
|
ZIOPHARM Oncology,
Inc.
|
|||||||||||||||||||||||||
|
(A Development Stage
Enterprise)
|
|||||||||||||||||||||||||
|
Statement
of Changes in Convertible Preferred Stock and Stockholders'
Equity
(Deficit)
|
|||||||||||||||||||||||||
|
For
the nine months ended September 30, 2005 (unaudited), For
the Year ended
December 31, 2004 and
|
|||||||||||||||||||||||||
|
For
the Period from Inception (September 9, 2003) to December
31,
2003
|
|||||||||||||||||||||||||
|
Convertible
Preferred Stock and Warrants
|
|
Stockholder's
Equity (Deficit)
|
|
||||||||||||||||||||||
|
|
|
|
|
|
|
Warrants
to
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
Purchase
Series
A
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
||||||||||
|
|
|
Series
A
|
|
Convertible
|
|
|
|
|
|
|
|
Accumulated
|
|
Total
|
|
||||||||||
|
|
|
Convertible
|
|
Preferred
|
Additional
|
during
the
|
Stockholders'
|
||||||||||||||||||
|
|
|
Preferred
Stock
|
|
Stock
|
|
Common
Stock
|
|
Paid-in
|
|
Development
|
|
Equity/
|
|
||||||||||||
|
|
|
Shares
|
|
Amount
|
|
Warrants
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Stage
|
|
(Deficit)
|
|||||||||
|
Stockholders'
contribution, September 9, 2003
|
-
|
$
|
-
|
$
|
-
|
250,487
|
$
|
250
|
$
|
499,750
|
$
|
-
|
$
|
500,000
|
|||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(160,136
|
)
|
(160,136
|
)
|
|||||||||||||||
|
Balance
at December 31, 2003 (audited)
|
-
|
-
|
-
|
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
|
-
|
-
|
-
|
-
|
-
|
264,277
|
-
|
264,277
|
|||||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(5,687,297
|
)
|
(5,687,297
|
)
|
|||||||||||||||
|
Balance
at December 31, 2004 (audited)
|
-
|
-
|
-
|
2,761,625
|
2,761
|
5,700,355
|
(5,847,433
|
)
|
(144,317
|
)
|
|||||||||||||||
|
Issuance
of Series A convertible preferred stock
|
8,379,564
|
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
|
(8,379,564
|
)
|
(15,076,733
|
)
|
(1,682,863
|
)
|
4,197,946
|
4,198
|
16,755,398
|
-
|
16,759,596
|
||||||||||||||
|
Issuance
of common stock due to exercise of stock options
|
-
|
-
|
-
|
91,718
|
92
|
4,584
|
-
|
4,676
|
|||||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(7,055,807
|
)
|
(7,055,807
|
)
|
|||||||||||||||
|
Balance
at September 30, 2005 (unaudited)
|
-
|
$
|
-
|
$
|
-
|
7,241,211
|
$
|
7,241
|
$
|
22,460,147
|
$
|
(12,903,240
|
)
|
$
|
9,564,148
|
||||||||||
F-5
ZIOPHARM
Oncology, Inc.
Notes
to
Unaudited Financial Statements
For
the
three and nine months ended September 30, 2005 and 2004
|
1.
|
BASIS
OF PRESENTATION AND
OPERATIONS
|
The
financial statements included herein have been prepared by ZIOPHARM Oncology,
Inc. (“ZIOPHARM” or the “Company”) without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and
footnote disclosures normally included in financial statements prepared
in
accordance with accounting principles generally accepted in the United
States of
America have been condensed or omitted pursuant to such rules and regulations.
In the opinion of management, the accompanying unaudited financial statements
include all adjustments (consisting of normal recurring adjustments)
necessary
to present fairly the financial position, results of operations and cash
flows
of the Company at the dates and for the periods indicated. The unaudited
financial statements included herein should be read in conjunction with
the
audited financial statements and the notes thereto included in ZIOPHARM
Oncology
Inc.’s Form 8-K filed on September 19, 2005 for the fiscal year ended December
31, 2004.
ZIOPHARM
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 may continue for the foreseeable
future. At
September 30, 2005, the Company’s accumulated deficit was approximately $12.9
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.
On
August, 3, 2005 the Company entered into an Agreement and Plan of Merger
dated
as of August 3, 2005 (as may be amended from time to time, the “Merger
Agreement”) with EasyWeb, Inc., a Delaware corporation (OTC:ESYW.OB)
(“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 Stockholders
received
a number of shares of Common Stock of EasyWeb such that, upon completion
of the
Merger, the then-current 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 and EasyWeb changed its name to ZIOPHARM
Oncology, Inc. In conjunction with the Merger, ZIOPHARM made payments of
approximately $425,000 to certain affiliates of EasyWeb.
F-6
ZIOPHARM
Oncology, Inc.
Notes
to
Unaudited Financial Statements
For
the
three and nine months ended September 30, 2005 and 2004
Although
EasyWeb is the legal acquirer in the transaction, ZIOPHARM becomes the
registrant with the Securities and Exchange Commission. Under generally
accepted
accounting principles, the transaction will be accounted for as a reverse
acquisition, whereby ZIOPHARM will be considered the acquirer of EasyWeb
for
financial reporting purposes since ZIOPHARM’s shareholders control more than 50%
of the post-transaction combined entity, the management and the
board
are that of ZIOPHARM after the transaction, EasyWeb had no operations,
assets or 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 accompany 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
4,197,944 (8,379,564 - pre-merger) shares at $4.31 ($2.16 per share,
pre-merger)
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 (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. 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 (the “Expense Allowance”). 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.
F-7
ZIOPHARM
Oncology, Inc.
Notes
to
Unaudited Financial Statements
For
the
three and nine months ended September 30, 2005 and 2004
The
Company has valued the warrants using the Black-Scholes model and
recorded
a charge of $1,682,683. 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.
The
results disclosed in the Statement of Operations for the nine months
ended
September 30, 2005 are not necessarily indicative of the results to be
expected
for the full year.
| 2. |
STOCK
BASED COMPENSATION
|
Accounting
for Stock-Based Compensation
The
Company accounts 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. The Company follows the provisions of SFAS
No. 123, Accounting
for Stock-Based Compensation,
for
disclosure purposes. All stock-based awards to nonemployees are accounted
for at
their fair value in accordance with SFAS No. 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 has adopted the disclosure provisions of SFAS No. 148,
Accounting
for Stock-Based Compensation - Transition and Disclosure - an amendment
of SFAS
No. 123,
for all
stock-based awards as of December 31, 2004.
The
following illustrates the effect on net loss had the Company applied
the fair
value recognition provisions of SFAS No. 123:
|
Three
months ended
September
30,
|
Nine
months ended
September
30,
|
||||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
Net
loss:
|
|||||||||||||
|
As
reported
|
$
|
(2,766,117
|
)
|
$
|
(1,348,373
|
)
|
$
|
(7,055,807
|
$
|
(3,056,041
|
)
|
||
|
Stock-based
compensation expense included in reported net loss
|
---
|
---
|
---
|
---
|
|||||||||
|
Stock-based
compensation expense under the fair value-based method
|
(176,297
|
)
|
(33,958
|
)
|
(340,197
|
)
|
(60,683
|
)
|
|||||
|
Pro
forma net loss
|
$
|
(2,942,414
|
)
|
$
|
(1,382,331
|
)
|
$
|
(7,396,004
|
)
|
$
|
(3,116,724
|
)
|
|
|
Basic
and diluted net loss per share:
|
|||||||||||||
|
As
reported
|
$
|
(0.77
|
)
|
$
|
(0.52
|
)
|
$
|
(2.32
|
)
|
$
|
(1.34
|
)
|
|
|
Pro
forma
|
$
|
(0.82
|
)
|
$
|
(0.53
|
)
|
$
|
(2.43
|
)
|
$
|
(1.37
|
)
|
|
F-8
ZIOPHARM
Oncology, Inc.
Notes
to
Unaudited Financial Statements
For
the
three and nine months ended September 30, 2005 and 2004
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 following table summarizes the
assumptions used in the Black-Scholes option pricing model:
|
Three
months ended
September
30,
|
Nine
months ended
September
30,
|
||||||
|
2005
|
2004
|
2005
|
2004
|
||||
|
Expected
life
|
5
years
|
5
years
|
5
years
|
5
years
|
|||
|
Expected
volatility
|
172%
|
134%
|
172%
|
114%
|
|||
|
Dividend
yield
|
0%
|
0%
|
0%
|
0%
|
|||
|
Weighted
average risk-free interest rate
|
4.01%
|
3.60%
|
4.01%
|
3.60%
|
|||
Recently
Issued Pronouncements
In
December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123R, Share-Based Payment
("SFAS
No. 123R"). This Statement is a revision of SFAS No. 123, Accounting
for
Stock-Based Compensation, and supersedes Accounting Principles Board
Opinion No.
25, Accounting for Stock Issued to Employees, and its related implementation
guidance. SFAS No. 123R focuses primarily on accounting for transactions
in
which an entity obtains employee services in share-based payment transactions.
The Statement requires entities to recognize stock compensation expense
for
awards of equity instruments to employees based on the grant-date fair
value of
those awards (with limited exceptions). SFAS No. 123R is effective for
the first
fiscal year beginning after December 15, 2005. Based on current
options
outstanding, the Company anticipates the adoption of this statement to
result in
approximately $573,604 of additional compensation costs to be recognized
in the
year of adoption.
|
3.
|
CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS’
EQUITY
|
On
June
6, 2005, the Company completed its Series A Convertible Preferred Stock
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.
After
the
Merger, the Company has
authorized capital stock of 280,000,000 shares which has been designated
as
common stock, par value $.001 per share (the “Common Stock”)
Prior
to
the Merger, the Company had authorized capital stock of 50,000,000 shares,
of
which 30,000,000 shares were designated as common stock, par value $.001
per
share (the “Common Stock”), and 20,000,000 shares designated as preferred stock,
par value $.001 per share.
F-9
ZIOPHARM
Oncology, Inc.
Notes
to
Unaudited Financial Statements
For
the
three and nine months ended September 30, 2005 and 2004
Convertible
Preferred Stock
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 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.
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),
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 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.
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 will become 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-10
ZIOPHARM
Oncology, Inc.
Notes
to
Unaudited Financial Statements
For
the
three and nine months ended September 30, 2005 and 2004
Common
Stock
At
the
time of this report, the Company currently have issued and outstanding
7,248,115
shares of Common Stock.
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 (all other share amounts presented reflect the reverse
split).
|
4.
|
RELATED
PARTY TRANSACTIONS
|
The
Company engaged Paramount
BioCapital, Inc.
(“Paramount”)
to
assist in placing shares of Series A Preferred Stock on a “best efforts” basis
(see Note 1). 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
2,428,910 (4,848,376 - pre-Merger) shares of Common Stock (such shares,
the
“Horizon Distributed Shares”), in equal installments of 1,214,455 (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 had 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 (see Note 1), the
Company
and Paramount
entered
into an Introduction Agreement in January 2005 (the “Introduction Agreement”),
pursuant to which the Company has 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 (the “Expense Allowance”). 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.
F-11
ZIOPHARM
Oncology, Inc.
Notes
to
Unaudited Financial Statements
For
the
three and nine months ended September 30, 2005 and 2004
Dr.
Michael Weiser, who is a member of the Board of Directors of the Company,
is
also a full-time employee
of
Paramount.
In
addition, David M. Tanen, who is a member of the Board of Directors of
the
Company, was a full-time employee of Paramount from
July
1996 through August 2004.
|
5.
|
STOCK
OPTION PLAN
|
The
Company has adopted the 2003 Stock Option Plan (the “Plan”), under which we have
reserved for the issuance of 1,252,435 (2,500,000 - pre-Merger) shares
of our
Common Stock. The Plan was approved by our stockholders on December 21,
2004.
As
of
December 31, 2004, there were 586,553 (1,170,826 - pre-merger) shares
that are
issuable under its 2003 Stock Option Plan upon exercise of outstanding
options
to purchase Common Stock. As of December 31, 2004, the Company had issued
to our
employees options to purchase up to 496,127 (990,326 - pre-Merger) shares
of the
Company’s Common Stock. In addition, the Company has issued to our directors
options to purchase up to 90,175 (180,000 - pre-Merger) shares of the
Company’s
Common Stock, as well as options to a consultant in connection with services
rendered to purchase up to 250 (500 - pre-Merger) shares of the Company’s Common
Stock. The Company had estimated the fair value of such options 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. The Company has also reserved an aggregate
of 77,839
(155,375 - pre-Merger) additional shares for issuance under options granted
outside of the 2003 Stock Option Plan and warrants to purchase 62,621
(125,000 -
pre-Merger) 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
in
December 2004. The Company had valued the options using the Black-Scholes
model
as of the issue date of the warrants. 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%.
During
nine months ended September 30, 2005, 586,966 options were granted and
91,718
options were exercised and 32,563 options were cancelled under the 2003
Stock
Option plan.
F-12
ZIOPHARM
Oncology, Inc.
Notes
to
Unaudited Financial Statements
For
the
three and nine months ended September 30, 2005 and 2004
|
6.
|
COMMITMENTS
AND CONTIGENCIES
|
On
May
26, 2005, the Company entered into a five-year lease agreement for its
corporate
office located in New York that expires in June 2010. Under the terms
of the
lease, the Company leases approximately 2,580 square feet of office space
and is
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.
On
April
25, 2005, the Company entered into a Surrender and Termination Agreement
and an
Escrow agreement with WE George Street, L.L.C and Cohm Birnbaum & Shea P.C.
relating to the escrow of a termination fee for $90,000, for an early
termination to the New Haven, Connecticut office space.
Effective
November, 1, 2005, we amended our lease in Charlestown, Massachusetts
to expand
our commercial space by approximately 830 square feet.
F-13