Prospectus
Supplement No. 3
(To
Prospectus dated April 14, 2006)
Filed
Pursuant to Rule 424(b)(3)
File
No.
333-129680
ZIOPHARM
Oncology, Inc.
7,462,095
Shares
Common
Stock
The
information contained in this prospectus supplement amends and updates our
prospectus dated April 14, 2006, as supplemented by Prospectus Supplement No.
1
dated April 26, 2006 and Prospectus No. 2 dated May 3, 2006 (collectively,
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 May 15, 2006
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 March 31, 2006
Included
in this prospectus supplement beginning at page F-1 are our interim financial
statements as of and for the three month period ended March 31, 2006, including
the accompanying footnotes thereto. These interim financial statements, which
were included in our Quarterly Report on Form 10-QSB for the quarter ended
March
31, 2006, should be read in conjunction with the audited financial statements
as
of and for the year ended December 31, 2005, 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:
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 U.S.
phase
I and I/II studies for two product candidates known as ZIO-101 and ZIO-201.
We
currently intend to continue with clinical development of ZIO-101 for advanced
myeloma and ZIO-201 for advanced sarcoma and to study preclinically product
candidates (ZIO-102, ZIO-202, etc.) in the same product families while licensing
additional candidates.
We
currently have two products in development:
|
·
|
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 phase I 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.
|
S-1
Phase
I
testing of ZIO-101 is ongoing with two safety and dose finding studies at
The
University of Texas M. D. Anderson Cancer Center (“MDACC”). The Company has seen
encouraging signs of clinical activity in both of these studies including
impact
on blood and bone marrow blast cells in patients with acute myelogenous leukemia
(AML) and including one patient with metastatic renal cell carcinoma where
metastasis to the brain resolved. The Company recently initiated a phase
I/II
advanced multiple myeloma study to be conducted in the U.S., Canada and Europe
designed to determine maximum tolerated dose and to assess clinical activity
in
this specific indication. The Company expects to pursue registration in the
U.S.
for the treatment of advanced multiple myeloma with a potentially pivotal
trial
to begin 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.
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 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, 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
testing of ZIO-201 is ongoing at two sites in the U.S. (Karmanos Cancer Center
at Wayne State University in Detroit and Premiere Oncology in Los Angeles).
IPM
has been administered without the “uroprotectant” mesna and the toxicities
associated with acrolein and chloroacetaldehyde have not been observed. Kidney
toxicity seen with ifosfamide has occurred in the higher dose cohorts. One
patient with advanced mesothelioma had stable disease for 18 cycles of therapy
with ZIO-201 as a single agent. The Company recently initiated a phase I/II
trial in advanced sarcoma at The University of Texas M. D. Anderson Cancer
Center. The MDACC will be joined by additional centers in the U.S., Canada
and
Europe in the coming months. A phase II study in patients with advanced sarcoma
utilizing a modified dosing regimen in the U.S. is expected to initiate in
the
first half of 2006 and plans for a phase I/II study in pediatric sarcoma
are
well advanced. The Company expects to pursue registration in the U.S. for
the
treatment of advanced sarcoma with a potentially pivotal trial to begin in
2007.
S-2
Currently,
we are in U.S. phase I/II studies for both of these drug candidates. In January
2006, we initiated a phase I/II with ZIO-101 in advanced multiple myeloma
and in
February 2006 with ZIO-201 in advanced sarcoma. 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.
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.”
S-3
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 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 those 12 months
to
include:
| · |
Fees
and milestone payments required under the license agreements relating
to
our existing product candidates and additional in-licensed 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 several additional
full-time employees in medical, regulatory, clinical and financial. 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 $5.9 million on
clinical trials (including milestone payments that we expect to be triggered
under the license agreements relating to our product candidates), approximately
$3.2 million on manufacturing costs, approximately $400,000 on facilities,
rent (including additional space not presently contracted) and other facilities
related costs, and approximately $9.4 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 into
the
second quarter of 2008 with the proceeds from the offering received on May
3,
2006. (See “Note 7 - Subsequent Event” and “Liquidity and Capital Resources”
below.)
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 was initiated in January 2006. With the completion of patient enrollment
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 other phase II trials. 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 2007. Preclinical development
will continue with additional compounds and routes of
administration.
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
in advanced sarcoma was initiated in February 2006 and other trials are in
the
advanced planning stage. With the completion of patient enrollment of this
trial
in 2006, we expect to initiate a registration trial in advanced sarcoma in
2007.
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
2007. Preclinical development will continue with back-up
analogues.
S-4
Results
of Operations
Revenues. We
had no
revenues for either of the three-month periods ended March 31, 2006 and
2005.
Research
and development expenses. For
the
three-month period ended March 31, 2006, research and development expenses
increased by $169,679, or 11%, to $1,768,250 from $1,598,571 in the three-month
period ended March 31, 2005. The increase is attributable to an increase
of
approximately $28,000 in stock compensation expense related to stock options
and
approximately $160,000 in employee related costs. We had an increase of
approximately $314,000 spent on clinical trials offset by decrease of
approximately $382,000 in manufacturing related costs. For the remainder
of the
year, we expect research and development spending related to our existing
product candidates to approximate the same level as seen in the first quarter
of
2006, as we continue with clinical trials and our manufacturing
activities.
General
and administrative expenses.
For the
three month period ended March 31, 2006, general and administrative expenses
increased by $838,771, or 126%, to $1,504,628 from $665,857 in the three-month
period ended March 31, 2005. The increase is attributable to approximately
$166,000 in stock compensation expense related to stock options, approximately
$106,000 as compensation expense for common stock issued to an investor
relations consultant, approximately $80,000 for investors relations services,
approximately $60,000 in legal and accounting costs resulting in part from
our
becoming a public reporting company, and approximately $153,000 in employee
related costs as we have built infrastructure to support the research and
development efforts. For the remainder of the year, we expect general and
administrative spending to approximate the same level as seen in the first
quarter of 2006.
Other
income (expense).
Other
income increased by $49,965 to $53,838 in the three-month period ended March
31,
2006 from $3,873 recorded in the three-month period ended March 31, 2005.
Other
income during the three month periods ended March 31, 2006 and 2005,
respectively, was comprised of interest income. The increase in is due to
higher
cash balances available for investing purposes.
Net
income (loss). For
the
reasons described above, the net loss increased by $958,485, or 42%, to
$3,219,040 in the three month period ended March 31, 2006 from $2,260,555.
Liquidity
and Capital Resources
As
of
March 31, 2006, we had approximately $5.6 million in cash, cash equivalents
and
short-term investments. With the proceeds from the offering completed on
May 3,
2006 (See Note 7 - Subsequent Event), we believe we currently have sufficient
capital to fund development and commercialization activities of ZIO-101 and
ZIO-201 into the second 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. 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 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.
S-5
The
Company anticipates that losses will continue for the foreseeable future.
At
March 31, 2006, the Company’s accumulated deficit was approximately $18.6
million. The Company has incurred significant losses from operations and
has an
accumulated deficit that raises substantial doubt about the Company’s ability to
continue as a going concern. 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 product
candidates;
|
| · |
costs
of filing, prosecuting, defending and enforcing any patent claims
and any
other intellectual property rights;
|
| · |
or
other developments.
|
We
will
need to raise additional capital to continue to fund our research and
development and operations after we exhaust our current cash resources in
order
to continue our long-term plans for clinical trials and new product development.
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 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.
On
May 3,
2006, 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 “Offering”) for total gross proceeds of approximately $37
million before deducting selling commissions and expenses. 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 799,125 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.
Following the completion of Offering, the Company has 15,264,248 shares of
common stock outstanding.
S-6
Since
inception, our primary source of funding for our operations has been the
private
sale of our securities. 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
March
31, 2006, working capital was approximately $3.9 million, compared to working
capital of approximately $6.8 million at December 31, 2005. The decrease
in
working capital reflects the use of funds for operations.
Capital
expenditures were approximately $70,000 for the three months ended March
31,
2006. We anticipate additional capital expenditures of approximately $30,000
for
the fiscal year ended December 31, 2006.
The
Company’s significant lease obligation payable is as follows:
|
Payments
due by Period
|
||||||||||||||||
|
Total
|
Less
than 1 Year
|
1
- 3 Years
|
4
- 5 Years
|
After
5 Years
|
||||||||||||
|
Operating
lease
|
$
|
796,241
|
$
|
190,457
|
$
|
399,400
|
$
|
206,384
|
$
|
–
|
||||||
Critical
Accounting Policies
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 expenses consist primarily of salaries and related personnel
costs, fees paid to consultants and outside service providers for 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.
S-7
Our
results include non-cash compensation expense as a result of the issuance
of
stock option and warrants grants. 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’s most critical
estimates consist of accounting for stock-based compensation.
Off-Balance
Sheet Arrangements
We
do not
have any “off-balance sheet agreements,” as that term is defined by SEC
regulation.
S-8
Unaudited
Interim Financial Statements:
|
Balance
Sheets March 31, 2006 (unaudited) and December 31, 2005
(unaudited)
|
F-2
|
|
|
Statement
of Operations for the three months ended March 31, 2006 and 2005
(unaudited) and for the period from inception (September 9, 2003)
to March
31, 2006 (unaudited)
|
F-3
|
|
|
Statement
of Cash Flows for the three months ended March 31, 2006 and 2005
(unaudited) and for the period from inception (September 9, 2003)
to March
31, 2006 (unaudited)
|
F-4
|
|
|
Statement
of Changes in Convertible Preferred Stock and Stockholders’
Equity/(Deficit) for the three months ended March 31, 2006 (unaudited)
and
for the year ended December 31, 2005 and 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
|
|
March
31, 2006
|
|
December
31, 2005
|
||||
|
(Unaudited)
|
|||||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
1,079,203
|
$
|
8,880,717
|
|||
|
Short-term
investments
|
4,500,000
|
-
|
|||||
|
Prepaid
expenses and other current assets
|
296,132
|
211,837
|
|||||
|
Total
current assets
|
5,875,335
|
9,092,554
|
|||||
|
Property
and equipment, net
|
301,770
|
269,702
|
|||||
|
Deposits
|
5,700
|
5,700
|
|||||
|
Other
non current assets
|
125,200
|
124,343
|
|||||
|
Total
assets
|
$
|
6,308,005
|
$
|
9,492,299
|
|||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
$
|
544,907
|
$
|
835,997
|
|||
|
Accrued
expenses
|
1,443,077
|
1,418,819
|
|||||
|
Total
current liabilities
|
1,987,984
|
2,254,816
|
|||||
|
Deferred
rent
|
36,436
|
35,557
|
|||||
|
Commitments
and contingencies
|
|||||||
|
Stockholders'
equity:
|
|||||||
|
Common
stock, $.001 par value; 280,000,000 shares
authorized;
|
|||||||
|
7,272,992
and 7,247,992 shares issued and outstanding
|
|||||||
|
at
March 31, 2006 and December 31, 2005, respectively
|
7,273
|
7,248
|
|||||
|
Additional
paid-in capital
|
22,859,708
|
22,559,034
|
|||||
|
Deficit
accumulated during the development stage
|
(18,583,396
|
)
|
(15,364,356
|
)
|
|||
|
Total
stockholders' equity
|
4,283,585
|
7,201,926
|
|||||
|
Total
liabilities and stockholders' equity
|
$
|
6,308,005
|
$
|
9,492,299
|
|||
F-2
ZIOPHARM
Oncology, Inc.
(A
Development Stage Enterprise)
Statements
of Operation
For
the
three months ended March 31, 2006 and 2005 (unaudited) and for the period
from
inception (September 9, 2003) through March 31, 2006 (unaudited)
|
For
the three
Months
Ended
March
31, 2006
|
For
the three
Months
Ended
March
31, 2005
|
For
the Period
from
Inception
(September
9, 2003)
Through
March
31, 2006
|
||||||||
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
||||||||
|
Research
contract revenue
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
Operating
expenses and other income:
|
||||||||||
|
Research
and development, including
|
||||||||||
|
costs
of research contracts
|
1,768,250
|
1,598,571
|
9,488,707
|
|||||||
|
General
and administrative
|
1,504,628
|
665,857
|
9,440,774
|
|||||||
|
Total
operating expenses
|
3,272,878
|
2,264,428
|
18,929,481
|
|||||||
|
Loss
from operations
|
(3,272,878
|
)
|
(2,264,428
|
)
|
(18,929,481
|
)
|
||||
|
Interest
income
|
53,838
|
3,873
|
346,085
|
|||||||
|
Net
loss
|
$
|
(3,219,040
|
)
|
$
|
(2,260,555
|
)
|
$
|
(18,583,396
|
)
|
|
|
Basic
and diluted net loss per share
|
$
|
(0.44
|
)
|
$
|
(0.82
|
)
|
||||
|
Weighted
average common shares outstanding used to compute
|
||||||||||
|
basic
and diluted net loss per share
|
7,269,501
|
2,761,621
|
||||||||
F-3
ZIOPHARM
Oncology, Inc.
(A
Development Stage Enterprise)
Statements
of Cash Flows
For
the
three months ended March 31, 2006 and 2005 (unaudited) and for the period
from
inception(September 9, 2003) through March 31, 2006 (unaudited)
|
For
the three months |
|
For
the three months |
|
For
the
Period from
Inception |
||||||
|
Cash
flows from operating activities:
|
||||||||||
|
Net
loss
|
$
|
(3,219,040
|
)
|
$
|
(2,260,555
|
)
|
$
|
(18,583,396
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used
in operating activities:
|
||||||||||
|
Depreciation
and amortization
|
36,631
|
23,001
|
171,816
|
|||||||
|
Non-cash
stock-based compensation
|
300,674
|
-
|
1,102,545
|
|||||||
|
Loss
on disposal of fixed assets
|
1,166
|
- | 1,166 | |||||||
|
Change
in operating assets and liabilities:
|
||||||||||
|
(Increase)
decrease in:
|
||||||||||
|
Prepaid
expenses and other current assets
|
(84,295
|
)
|
25,872
|
(296,132
|
)
|
|||||
|
Other
noncurrent assets
|
(857
|
)
|
4,014
|
(125,200
|
)
|
|||||
|
Deposits
|
-
|
-
|
(5,700
|
)
|
||||||
|
Increase
(decrease) in:
|
||||||||||
|
Accounts
payable
|
(291,090
|
)
|
1,091,507
|
544,907
|
||||||
|
Accrued
expenses
|
24,258
|
228,091
|
1,443,077
|
|||||||
|
Deferred
rent
|
879
|
-
|
36,436
|
|||||||
|
Net
cash used in operating activates
|
(3,231,674
|
)
|
(888,070
|
)
|
(15,710,481
|
)
|
||||
|
Cash
flows from investing activities:
|
||||||||||
|
Purchases
of property and equipment
|
(69,865
|
)
|
(1,298
|
)
|
(474,752
|
)
|
||||
|
Increase
in short-term investments
|
(4,500,000
|
)
|
-
|
(4,500,000
|
)
|
|||||
|
Net
cash used in investing activities
|
(4,569,865
|
)
|
(1,298
|
)
|
(4,974,752
|
)
|
||||
|
Cash
flows from financing activities:
|
||||||||||
|
Stockholders'
capital contribution
|
-
|
-
|
500,000
|
|||||||
|
Proceeds
from issuance of common stock, net
|
-
|
-
|
4,504,815
|
|||||||
|
Issuance
of common stock for services rendered
|
25
|
-
|
25
|
|||||||
|
Proceeds
from issuance of preferred stock, net
|
-
|
-
|
16,759,596
|
|||||||
|
Net
cash provided by financing activities
|
25
|
-
|
21,764,436
|
|||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(7,801,514
|
)
|
(889,368
|
)
|
1,079,203
|
|||||
|
Cash
and cash equivalents, beginning of period
|
8,880,717
|
1,026,656
|
-
|
|||||||
|
Cash
and cash equivalents, end of period
|
$
|
1,079,203
|
$
|
137,288
|
$
|
1,079,203
|
||||
|
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
|
||||
F-4
(A
Development Stage Enterprise)
Statement
of Changes in Convertible Preferred Stock and Stockholders' Equity
(Deficit)
For
the
three months ended March 31, 2006 (unaudited), For the Year ended December
31,
2005 and 2004 and
For
the
Period from Inception (September 9, 2003) to December 31, 2003
|
Convertible
Preferred Stock and
Warrants
|
|
Stockholder's
Equity (Deficit)
|
|
||||||||||||||||||||||
|
|
|
Series
A
Convertible |
|
Warrants
to
Purchase Series A Convertible Preferred Stock |
|
Common
Stock
|
|
Additional
Paid-in |
|
DeficitAccumulated during
the |
|
Total Stockholders
'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
|
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
|
16,755,398
|
-
|
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
|
98,755
|
98,755
|
|||||||||||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(9,516,923
|
)
|
(9,516,923
|
)
|
|||||||||||||||
|
Balance
at December 31, 2005 (audited)
|
-
|
-
|
-
|
7,247,992
|
7,248
|
22,559,034
|
(15,364,356
|
)
|
7,201,926
|
||||||||||||||||
|
Issuance
of common stock for services rendered
|
-
|
-
|
-
|
25,000
|
25
|
106,225
|
-
|
106,250
|
|||||||||||||||||
|
Stock
based compensation for employees
|
-
|
-
|
-
|
-
|
-
|
194,449
|
-
|
194,449
|
|||||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(3,219,040
|
)
|
(3,219,040
|
)
|
|||||||||||||||
|
Balance
at March 31, 2006 (unaudited)
|
-
|
-
|
-
|
7,272,992
|
$
|
7,273
|
$
|
22,859,708
|
$
|
(18,583,396
|
)
|
$
|
4,283,585
|
||||||||||||
F-5
ZIOPHARM
Oncology, Inc.
Notes
to
Unaudited Financial Statements
For
the
three months ended March 31, 2006 and 2005
|
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 10-KSB filed on March 20, 2006 for the fiscal year ended
December 31, 2005.
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 will continue for the foreseeable future.
At
March 31, 2006, the Company’s accumulated deficit was approximately $18.6
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
May 3,
2006, 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
“Offering”) for total gross proceeds of approximately $37 million before
deducting selling commissions and expenses. (See note 7)
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 and EasyWeb changed
its name to ZIOPHARM Oncology, Inc. In conjunction with the Merger, ZIOPHARM
made payments of approximately $425,000 in September 2005 to certain affiliates
of EasyWeb. Subsequently, on September 14, 2005 ZIOPHARM merged with and
into
EasyWeb and EasyWeb changed its name to ZIOPHARM Oncology, Inc.
F-6
Although
EasyWeb was 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
4,197,944 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.
F-7
The
Company has valued the Series A Stock Warrants using the Black-Scholes model
recording a cost of $1,682,683. The
Company has estimated the fair value of such warrants using the Black-Scholes
model, using and assumed risk-free rate of 3.93% and expected life of 7 years,
volatility of 134% and dividend yield of 0%.
The
results disclosed in the Statements of Operations for the three months ended
March 31, 2006 are not necessarily indicative of the results to be expected
for
the full year.
|
2.
|
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 payment plans in the
statements of operations for the three months ended March 31, 2006 under
SFAS
123R and did not capitalize any such costs on the balance sheets. The following
table presents share-based compensation expense included in the Company’s
statement of operations:
|
Three
months ended March 31,
|
||||
|
2006
|
||||
|
Research
and development, including costs of research contracts
|
$
|
27,991
|
||
|
General
and administrative
|
166,458
|
|||
|
Share
based compensation expense before tax
|
194,449
|
|||
|
Income
tax benefit
|
-
|
|||
|
Net
compensation expense
|
$
|
194,449
|
||
F-8
Stock
Based Compensation…continued
The
adoption of SFAS 123R resulted in incremental stock-based compensation expense
of $194,449 for the three months ended March 31, 2006, which caused the
Company’s net loss to increase by $194,449 and its net loss per share to
increase by $.02 per share for the period. 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 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 three-month period ended March 31, 2005:
|
Three
months ended March 31,
|
||||
|
2005
|
||||
|
Net
loss:
|
||||
|
As
reported
|
$
|
(2,260,555
|
)
|
|
|
Stock-based
compensation expense included in reported net loss
|
-
|
|||
|
Stock-based
compensation expense under the fair value-based method
|
(233,785
|
)
|
||
|
Pro
forma net loss
|
$
|
(2,494,340
|
)
|
|
|
Basic
and diluted net loss per share:
|
||||
|
As
reported
|
$
|
(0.82
|
)
|
|
|
Pro
forma
|
$
|
(0.90
|
)
|
|
F-9
|
3.
|
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.
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).
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.
Convertible
Preferred Stock of ZIOPHARM, Inc.
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.
F-10
Convertible
Preferred Stock of 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),
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.
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 would have 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.
|
4.
|
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
2,428,910 shares of Common Stock (such shares, the “Horizon Distributed
Shares”), in equal installments of 1,214,455 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.
F-11
Related
Party Transactions...continued
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
shares
of the Company’s Common Stock at a price equal to $4.75 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 (the “Introduction Agreement”),
pursuant to which the Company 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 offering, on May 3, 2006, the Company paid Paramount
a
cash
commissions equal to 7% of the gross proceeds from the sale of the Shares
sold
by Paramount in the Offering, resulting in a cash payment of approximately
$1,578,756. In addition, the Company issued 7-year
warrants to
the
Placement Agents and their designees to purchase an aggregate of 799,125
shares
of the Company’s common stock (10 percent of the Shares sold in the Offering) at
an exercise price of $5.09 per share (the “Placement Agent Warrants”). (See Note
7 - Subsequent Event)
Dr.
Michael Weiser and Mr. Timothy McInerney, who are both members of the Board
of
Directors of the Company, are also full-time employees
of
Paramount.
|
5.
|
STOCK
OPTION PLAN
|
The
Company has adopted the 2003 Stock Option Plan (the “Plan”), under which we had
reserved for the issuance of 1,252,436 shares of our Common Stock as of March
31, 2006. The Plan was approved by our 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
March 31, 2006, there were 973,639 shares that are issuable under its 2003
Stock
Option Plan upon exercise of outstanding options to purchase Common Stock.
As of
March 31, 2006, the
Company had issued to our employees options to purchase up to 881,964 shares
of
the Company’s Common Stock. In addition, the Company has issued to our directors
options to purchase up to 90,175 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-12
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. 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 77,839
additional shares for issuance under options granted outside of the 2003
Stock
Option Plan.
During
three months ended March 31, 2006 and 2005, no options were granted, exercised
or cancelled under the 2003 Stock Option plan.
Stock
option activity under the Company’s stock plan for the three-month period ended
March 31, 2006 was
as
follows:
|
|
|
Weighted
|
Weighted
Average
|
||||||||||
|
|
|
Average
|
Remaining
|
||||||||||
|
|
Number
of
|
Exercise
|
Contractual
|
Aggregate
|
|||||||||
|
|
Shares
|
Price
|
Term
(Years)
|
Intrinsic
Value
|
|||||||||
|
Outstanding,
January 1, 2006
|
973,639
|
$
|
2.56
|
||||||||||
|
Granted
|
—
|
—
|
|||||||||||
|
Exercised
|
—
|
—
|
|||||||||||
|
Canceled
|
—
|
—
|
|||||||||||
|
Outstanding,
March 31, 2006
|
973,639
|
$
|
2.56
|
8.7
|
2,200,200
|
||||||||
|
Options
exercisable, March 31, 2006
|
417,423
|
$
|
1.97
|
8.4
|
1,180,876
|
||||||||
At
March
31, 2006, total unrecognized compensation costs related to non-vested stock
options outstanding amounted to $1,037,613. The cost is expected to be
recognized over a weighted-average period of 1.4 years.
On
April
26, 2006, the Company granted stock options to each of its six non-employee
directors to purchase 15,000 shares of the Company’s common stock. Each such
stock option was granted under the 2003 Stock Option Plan, was vested with
respect to all shares on the date of grant and has an exercise price
per
share equal to $5.01.
F-13
Stock
Option Plan...continued
Also
on
April 26, 2006, the Company granted stock options, each with an exercise
price
per share equal to $5.01, to the following officers and one additional
Vice
President in the amounts and subject to the vesting provisions set forth
below:
|
Name
|
Title
|
No.
of Options
|
Vesting
|
|||
|
Jonathan
Lewis
|
Chief
Executive Officer
|
214,315
|
100%
upon date of grant
|
|||
|
Richard
E. Bagley
|
President,
Chief Operating Officer, Treasurer and Chief Financial
Officer
|
54,873
|
100%
upon date of grant
|
|||
|
Robert
Newman
|
Vice
President Business Operations (non-officer)
|
40,000
|
50%
upon date of grant and 50% on December 14, 2006
|
|||
|
Robert
Peter Gale
|
Senior
Vice President Research
|
25,000
|
50%
upon date of grant and 50% on December 14,
2006
|
|
6.
|
WARRANTS
|
The
Company 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 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
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 had estimated the fair value of such warrants 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 warrants vest
in
increments of 12,500, 12,500 and 12,500 based on certain performance
objectives.
In
connection with the Offering completed in June 2005, the Company compensated
Paramount, the placement agent for the Offering, or its affiliates for
its
services through the payment of 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. 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 had 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%.
F-14
Warrants...continued
On
May 3,
2006, as part of the offering, the Company issued warrants to purchase 2,397,392
shares
of
common stock to investors and 799,125 warrants to purchase common stock to
the
Placement Agents and their designees. (See Note 7 - Subsequent
Event)
|
7.
|
SUBSEQUENT
EVENT
|
Pursuant
to Subscription Agreements (the “Subscription Agreements”) between the Company
and certain institutional and other accredited investors, on May 3, 2006,
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 “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 Offering.
In the
aggregate, these Warrants entitle investors to purchase an additional
2,397,392
shares of common stock. The total gross proceeds resulting from the Offering
was
approximately $37 million, before deducting selling commissions and expenses.
Following the completion of Offering, the Company has 15,264,248 shares
of
common stock outstanding.
The
Company engaged Paramount BioCapital, Inc. and Griffin Securities, Inc.
(together, 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 and their designees aggregate
cash
commissions of $2,589,966(of which $1,578,756 was paid to Paramount)
and
issued
7-year
warrants to
the
Placement Agents and their designees to purchase an aggregate of 799,125
shares
of the Company’s common stock (10 percent of the Shares sold in the Offering) at
an exercise price of $5.09 per share (the “Placement Agent Warrants”). The
Company also agreed to reimburse the Placement Agents for their accountable
expenses incurred in connection with the 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 Offering, and (ii) use its reasonable
commercial efforts to cause the
registration statement to be effective within 120 days after such final
closing
date.
Neither
the Shares, Warrants or Placement Agent Warrants sold and issued in
the Offering
(including the shares of common stock issuable upon exercise of the
Warrants or
Placement Agent Warrants), were registered under the Securities Act
of 1933, as
amended (the “Securities Act”), and therefore may not be offered or sold in the
United States absent registration or an applicable exemption from registration
requirements. For these issuances, the Company relied on the exemption
from
federal registration under Section 4(2) of the Securities Act and/or
Rule 506
promulgated thereunder, based on the Company’s belief that the offer and sale of
the Shares, Warrants and Placement Agent Warrants
did not involve a public offering as each investor was “accredited” and no
general solicitation was involved in the Offering.
F-15