Commission File Number 0-32353

ZIOPHARM Oncology, Inc.

(Exact Name of Small Business Issuer as Specified in Its Charter)

 

Delaware		84-1475642
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)
1180 Avenue of the Americas, 19 th  Floor, New York, NY		10036
(Address of Principal Executive Offices)		(Zip Code)

(646) 214-0700

(Issuer’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registration is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of November 13, 2006, there were 15,264,248 shares of the issuer’s common stock, $.001 par value per share, outstanding.

Traditional Small Business Disclosure Format (check one): Yes o  No x

 

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Index

				Page
PART I		FINANCIAL INFORMATION
Item 1.		Financial Statements
		Balance Sheets September 30, 2006 (unaudited) and December 31, 2005		3
		Statement of Operations for the three and nine months ended September 30, 2006 and 2005 (unaudited) and for the period from inception (September 9, 2003) to September 30, 2006 (unaudited)		4
		Statement of Cash Flows for the nine months ended September 30, 2006 and 2005 (unaudited) and for the period from inception (September 9, 2003) to September 30, 2006 (unaudited)		5
		Statement of Changes in Convertible Preferred Stock and Stockholders’ Equity/(Deficit) for the nine months ended September 30, 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		6
		Notes to Unaudited Financial Statements		7
Item 2.		Management’s Discussion and Analysis or Plan of Operation		17
Item 3.		Controls and Procedures		24
PART II		OTHER INFORMATION
Item 1.		Legal Proceedings		25
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		25
Item 3.		Defaults Under Senior Securities		25
Item 4.		Submission of Matters to a Vote of Security Holders		25
Item 5.		Other Information		26
Item 6.		Exhibits		26
		Signatures		27
		Exhibit Index		28

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ZIOPHARM Oncology, Inc.

(A Development Stage Enterprise)

Balance Sheets

		September 30, 2006			December 31, 2005
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	32,962,230		$	8,880,717
Short-term investments			1,536,357			—
Prepaid expenses and other current assets			314,785			211,837
Total current assets			34,813,372			9,092,554
Property and equipment, net			294,982			269,702
Deposits			9,367			5,700
Other non current assets			177,219			124,343
Total assets		$	35,294,940		$	9,492,299
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	1,143,777		$	835,997
Accrued expenses			2,136,961			1,418,819
Total current liabilities			3,280,738			2,254,816
Deferred rent			39,972			35,557
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value; 280,000,000 shares authorized;
15,264,248 and 7,247,992 shares issued and outstanding
at September 30, 2006 and December 31, 2005, respectively			15,264			7,248
Additional paid-in capital			59,361,574			22,559,034
Deficit accumulated during the development stage			(27,402,608	)		(15,364,356	)
Total stockholders' equity			31,974,230			7,201,926
Total liabilities and stockholders' equity		$	35,294,940		$	9,492,299

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ZIOPHARM Oncology, Inc.

(A Development Stage Enterprise)

Statements of Operation (unaudited)

 

		For the three months ended September 30, 2006			For the three months ended September 30, 2005			For the nine months ended September 30, 2006			For the nine months ended September 30, 2005			From Inception (Sept. 9, 2003) through September 30, 2006
Research contract revenue		$	—		$	—		$	—		$	—		$	—
Operating expenses and other income:
Research and development			2,097,617			1,318,608			6,545,986			4,279,687			14,266,443
General and administrative			1,832,361			1,541,740			6,345,450			2,953,830			14,281,596
Total operating expenses			3,929,978			2,860,348			12,891,436			7,233,517			28,548,039
Loss from operations			(3,929,978	)		(2,860,348	)		(12,891,436	)		(7,233,517	)		(28,548,039	)
Interest income			475,476			94,231			853,184			177,710			1,145,431
Net loss		$	(3,454,502	)	$	(2,766,117	)	$	(12,038,252	)	$	(7,055,807	)	$	(27,402,608	)
Basic and diluted net loss per share		$	(0.23	)	$	(0.77	)	$	(1.03	)	$	(2.32	)
Weighted average common shares
outstanding used to compute basic
and diluted net loss per share share			15,264,368			3,593,109			11,662,722			3,041,829

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ZIOPHARM Oncology, Inc.

(A Development Stage Enterprise)

Statements of Cash Flows

 

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 September 30, 2006, the Company’s accumulated deficit was approximately $27.4 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, pursuant to Subscription Agreements (the “Subscription Agreements”) between the Company and certain institutional and other accredited investors, the Company completed the sale of an aggregate of 7,991,256 shares (the “Shares”) of the Company’s common stock at a price of $4.63 per Share in a private placement (the “2006 Offering”). In addition to the Shares, the Company also issued to each investor a five-year warrant (each a “Warrant”) to purchase, at an exercise price of $5.56 per share, an additional number of shares of common stock equal to 30 percent of the Shares purchased by such investor in the 2006 Offering. In the aggregate, these Warrants entitle investors to purchase an additional 2,397,392 shares of common stock. The Company estimated the fair value of these warrants at $9,575,958 using the Black-Scholes model, using an assumed risk-free rate of 5.01% and an expected life of 5 years, volatility of 100% and a dividend yield of 0%. The total gross proceeds resulting from the 2006 Offering was approximately $37 million, before deducting selling commissions and expenses. Following the completion of 2006 Offering, the Company has 15,264,248 shares of common stock outstanding.

The Company engaged Paramount BioCapital, Inc. (“Paramount”) and Griffin Securities, Inc. (together,  the “Placement Agents”) as co-placement agents in connection with the 2006 Offering. In consideration for their services, the Company paid the Placement Agents and certain selected dealers engaged by the Placement Agents and their designees aggregate cash commissions of $2,589,966 (of which $1,726,644 was paid to Paramount; see Note 4 - Related Party Transactions) and issued 7-year warrants to the Placement Agents and their designees to purchase an aggregate of 799,126 shares of the Company’s common stock (10 percent of the Shares sold in the 2006 Offering) at an exercise price of $5.09 per share (the “Placement Agent Warrants”). The Company estimated the fair value of these warrants at $3,516,603 using the Black-Scholes model, using an assumed risk-free rate of 5.01% and an expected life of 7 years, volatility of 100% and a dividend yield of 0%. The Company made reimbursements of $100,000 to the Placement Agents for their accountable expenses incurred in connection with the 2006 Offering.

Pursuant to the Offering, the Company agreed to use its best efforts to (i) file a registration statement covering the resale of the Shares and the common stock issuable upon exercise of the Warrants and Placement Agent Warrants within 30 days following the closing date of the 2006 Offering, and (ii) use its reasonable commercial efforts to cause the registration statement to be effective within 120 days after such final closing date.

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With respect to each investor in the 2006 Offering, the Company also agreed to use its reasonable commercial efforts to cause the registration statement to remain effective until the earliest of (i) the date on which the investor may sell all of the Shares and shares issuable upon exercise of the Warrants then held by the investor pursuant to Rule 144(k) of the Securities Act of 1933 without regard to volume restrictions; and (ii) such time as all of the securities held by the investor and registered under the Registration Statement have been sold pursuant to a registration statement, or in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act of 1933 under Section 4(1) thereof so that all transfer restrictions and restrictive legends are removed upon the consummation of such sale. The Placement Agents have been afforded equivalent registration rights as the investors in the 2006 Offering with respect to the shares issuable upon exercise of the Placement Agent Warrants. On May 19, 2006, the Company filed a registration statement on form S-3 with the Securities and Exchange Commission. The registration statement was declared effective on May 30, 2006, rendering the resale of the shares issued in the May 3, 2006 Offering registered under the Securities Exchange Act of 1933.

On August 3, 2005 the Company entered into an Agreement and Plan of Merger dated as of August 3, 2005 (the “Merger Agreement”) with EasyWeb, Inc., a Delaware corporation (“EasyWeb”), and ZIO Acquisition Corp., a Delaware corporation and wholly owned subsidiary of EasyWeb (“ZIO Acquisition”). EasyWeb was a company that was incorporated in September 1998 and had been in the business of designing, marketing, selling and maintaining customized and template turnkey sites on the Internet that are hosted by third parties. At the time of the Merger (as defined below), however, EasyWeb had no operating business and had limited assets and liabilities. Pursuant to the Merger Agreement, ZIO Acquisition merged with and into ZIOPHARM, with ZIOPHARM remaining as the surviving company and a wholly-owned subsidiary of EasyWeb (the “Merger”). In connection with the Merger, which was effective as of September 13, 2005, ZIO Acquisition ceased to exist and the surviving company changed its corporate name to ZIOPHARM, Inc. Based upon an Exchange Ratio, as defined in the Merger Agreement, in exchange for all of their shares of capital stock in ZIOPHARM, the ZIOPHARM Stockholders received a number of shares of Common Stock of EasyWeb such that, upon completion of the Merger, the then-current ZIOPHARM Stockholders held approximately 96.8% of the outstanding shares of Common Stock of EasyWeb on a fully-diluted basis. Upon completion of the Merger, EasyWeb ceased all of its remaining operations and adopted and continued implementing the business plan of ZIOPHARM. Further, effective upon the Merger, the then current officers and directors of EasyWeb resigned, and the then current officers and directors of ZIOPHARM were appointed officers and directors of EasyWeb 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.

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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 “2005 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 2005 Offering, the Company compensated Paramount, which served as placement agent for the 2005 Offering, 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 2005 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 2005 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 of the Offering, 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.

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The Company has valued the Series A Stock Warrants using the Black-Scholes model recording a cost of $1,682,863. 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 and nine months ended September 30, 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 and nine months ended September 30, 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: