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Molecular Templates, Inc. - Quarter Report: 2008 June (Form 10-Q)

Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-32979

 

 

Threshold Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   94-3409596
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

1300 Seaport Boulevard

Redwood City, CA 94063

(Address of principal executive offices, including zip code)

(650) 474-8200

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  x
      (Do not check if a smaller reporting company)   

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

On July 31, 2008, there were 37,414,918 shares of common stock, par value $0.001 per share, of Threshold Pharmaceuticals, Inc. outstanding.

 

 

 


Table of Contents

Threshold Pharmaceuticals, Inc.

FORM 10-Q

THREE MONTHS ENDED JUNE 30, 2008

TABLE OF CONTENTS

 

         Page

PART I.

 

FINANCIAL INFORMATION

  

Item 1.

 

Unaudited Condensed Consolidated Financial Statements

   3
 

Unaudited Condensed Consolidated Balance Sheets

   3
 

Unaudited Condensed Consolidated Statements of Operations

   4
 

Unaudited Condensed Consolidated Statements of Cash Flows

   5
 

Notes to Unaudited Condensed Consolidated Financial Statements

   6

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   15

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

   21

Item 4.

 

Controls and Procedures

   21

PART II.

 

OTHER INFORMATION

  

Item 1

 

Legal Proceedings

   22

Item 1A.

 

Risk Factors

   22

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

   39

Item 3.

 

Default upon Senior Securities

   39

Item 4.

 

Submission of Matters to a Vote of Security Holders

   39

Item 5.

 

Other Information

   40

Item 6.

 

Exhibits

   40

SIGNATURES

   41

EXHIBITS

  

The terms “Threshold,” “we,” “us,” “the Company” and “our” as used in this report refer to Threshold Pharmaceuticals, Inc. Trade marks, trade names and service marks used in this report are the property of their respective owners.

 

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Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM I. FINANCIAL STATEMENTS

Threshold Pharmaceuticals, Inc.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(unaudited)

 

     June 30,
2008
    December 31,
2007 (Note 1)
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 11,002     $ 11,404  

Marketable securities

     2,707       11,289  

Prepaid expenses and other current assets

     802       516  
                

Total current assets

     14,511       23,209  

Property and equipment, net

     1,626       2,097  

Restricted cash and other assets

     508       508  
                

Total assets

   $ 16,645     $ 25,814  
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 603     $ 1,022  

Accrued clinical and development expenses

     819       1,240  

Accrued liabilities

     580       717  

Deferred revenue

     718       1,437  

Notes payable, current portion

     800       909  
                

Total current liabilities

     3,520       5,325  

Notes payable, less current portion

     —         337  

Deferred rent

     567       565  
                

Total liabilities

     4,087       6,227  

Commitments and contingencies (Note 7)

    

Stockholders’ equity:

    

Preferred stock, $0.001 par value, 2,000,000 shares authorized; no shares issued and outstanding

     —         —    

Common stock, $0.001 par value, 150,000,000 shares authorized; issued and outstanding: 37,414,918 shares at June 30, 2008 and 37,368,336 shares at December 31, 2007

     37       37  

Additional paid-in capital

     186,948       185,702  

Deferred stock-based compensation

     (161 )     (834 )

Accumulated other comprehensive (loss) income

     (5 )     3  

Deficit accumulated during the development stage

     (174,261 )     (165,321 )
                

Total stockholders’ equity

     12,558       19,587  
                

Total liabilities and stockholders’ equity

   $ 16,645     $ 25,814  
                

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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Threshold Pharmaceuticals, Inc.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

     Three Months Ended
June 30,
    Six months Ended
June 30,
    Cumulative
Period from
October 17, 2001
(date of inception)
to June 30, 2008
 
     2008     2007     2008     2007    

Revenue

   $ 359     $ 359     $ 718     $ 718     $ 4,305  
                                        

Operating expenses:

          

Research and development

     3,020       5,992       6,201       13,334       136,627  

General and administrative

     1,392       2,462       3,723       5,110       50,035  
                                        

Total operating expenses

     4,412       8,454       9,924       18,444       186,662  
                                        

Loss from operations

     (4,053 )     (8,095 )     (9,206 )     (17,726 )     (182,357 )

Interest income, net

     106       498       305       1,109       8,569  

Interest expense

     (18 )     (41 )     (39 )     (80 )     (473 )
                                        

Net loss

     (3,965 )     (7,638 )     (8,940 )     (16,697 )     (174,261 )

Dividend related to beneficial conversion feature of redeemable convertible preferred stock

     —         —         —         —         (40,862 )
                                        

Net loss attributable to common stockholders

   $ (3,965 )   $ (7,638 )   $ (8,940 )   $ (16,697 )   $ (215,123 )
                                        

Net loss per common share, basic and diluted

   $ (0.11 )   $ (0.21 )   $ (0.24 )   $ (0.45 )  
                                  

Weighted average number of shares used in per common share calculations: basic and diluted

     37,389       36,952       37,333       36,927    
                                  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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Threshold Pharmaceuticals, Inc.

(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Six Months Ended
June 30,
    Cumulative
Period from
October 17, 2001
(date of inception)
to June 30,
2008
 
     2008     2007    

Cash flows from operating activities:

      

Net loss

   $ (8,940 )   $ (16,697 )   $ (174,261 )

Adjustments to reconcile net loss to net cash used in operating activities:

      

Depreciation and amortization

     493       557       3,288  

Stock-based compensation expense

     1,902       2,981       34,444  

Amortization of debt issuance costs

     —         —         44  

Gain on sale of investments, property and equipment

     —         —         (27 )

Changes in operating assets and liabilities:

      

Prepaid expenses and other assets

     (286 )     (349 )     (827 )

Accounts payable

     (419 )     101       603  

Accrued clinical and development expenses

     (421 )     (1,835 )     819  

Accrued liabilities

     (138 )     (1,564 )     579  

Deferred rent

     2       55       567  

Deferred revenue

     (718 )     (718 )     719  
                        

Net cash used in operating activities

     (8,525 )     (17,469 )     (134,052 )
                        

Cash flows from investing activities:

      

Acquisition of property and equipment

     (23 )     (42 )     (4,959 )

Acquisition of marketable securities

     (3,925 )     (11,793 )     (140,292 )

Proceeds from sales and maturities of marketable securities

     12,500       17,729       137,652  

Restricted cash

     —         —         (483 )
                        

Net cash provided by (used in) investing activities

     8,552       5,894       (8,082 )
                        

Cash flows from financing activities:

      

Proceeds from redeemable convertible preferred stock, net

     —         —         49,839  

Proceeds from issuance of common stock, net of offering expenses

     17       63       102,497  

Proceeds from issuance of notes payable

     —         —         3,616  

Repayment of notes payable

     (446 )     (501 )     (2,816 )
                        

Net cash (used in) provided by financing activities

     (429 )     (438 )     153,136  
                        

Net increase (decrease) in cash and cash equivalents

     (402 )     (12,013 )     11,002  

Cash and cash equivalents, beginning of period

     11,404       28,450       —    
                        

Cash and cash equivalents, end of period

   $ 11,002     $ 16,437     $ 11,002  
                        

Supplemental schedule of non-cash investing and financing activities

      

Deferred stock-based compensation

   $ —       $ (140 )   $ 19,511  
                        

Fair value of redeemable convertible preferred stock warrant

   $ —       $ —       $ 44  
                        

Change in unrealized gain (loss) on marketable securities

   $ (8 )   $ (2 )   $ (5 )
                        

Conversion of redeemable preferred stock

   $ —       $ —       $ 49,839  
                        

Dividend related to beneficial conversion feature of redeemable convertible preferred stock.

   $ —       $ —       $ 40,862  
                        

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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Threshold Pharmaceuticals, Inc.

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

Threshold Pharmaceuticals, Inc. (the “Company”) is a biotechnology company focused on the discovery and development of drugs targeting the microenvironment of solid tumors. The Company was incorporated in the State of Delaware on October 17, 2001.

In June 2005, the Company formed a wholly-owned subsidiary, THLD Enterprises (UK), Limited in the United Kingdom for purposes of conducting clinical trials in Europe. There is currently no financial activity related to this entity.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments necessary for the fair statement of results for the periods presented, have been included. The results of operations of any interim period are not necessarily indicative of the results of operations for the full year or any other interim period.

The preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect the recorded amounts reported therein. A change in facts or circumstances surrounding the estimate could result in a change to estimates and impact future operating results.

The unaudited condensed consolidated financial statements and related disclosures have been prepared with the presumption that users of the interim unaudited condensed consolidated financial statements have read or have access to the audited consolidated financial statements for the preceding fiscal year. The condensed consolidated balance sheet at December 31, 2007 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by United States Generally Accepted Accounting Principles (“GAAP”) for complete financial statements. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2007 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 12, 2008.

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, and reflect the elimination of intercompany accounts and transactions.

Liquidity

The Company has product candidates in various stages of development as well as discovery and, since inception, has devoted substantially all of its time and efforts to performing research and development, raising capital and recruiting personnel. The Company has incurred significant losses since its inception. At June 30, 2008, the Company had an accumulated deficit of $174.3 million.

On July 9, 2008, the Company entered into a transaction for the proposed sale of an aggregate of 53,823,530 shares of the Company’s common stock for a purchase price equal to $0.34 per share and issue warrants to purchase 21,529,413 shares of common stock. The warrants will have a five-year term and an exercise price equal to $0.39 per share of common stock. The Company anticipates raising gross proceeds of $18.3 million and net offering proceeds are expected to be approximately $17.0 million. See further discussion of the proposed offering in Note 10 – Subsequent Events.

The Company expects to need to raise additional capital or incur indebtedness to continue to fund its future operations. The Company may seek to raise capital through a variety of sources, including:

 

   

the public equity market;

 

   

private equity financing;

 

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collaborative arrangements; and/or

 

   

public or private debt.

The Company believes that its existing cash, cash equivalents and marketable securities as of June 30, 2008, and the net proceeds from the proposed sale discussed above, contingent upon shareholder approval, will be sufficient to fund its projected operating requirements through the fourth quarter of 2009, including completing its current trials, conducting research and discovery efforts towards additional product candidates, working capital and general corporate purposes. Additional funds will be required to in-license or otherwise acquire and develop additional products or programs.

The Company intends to seek funds through arrangements with collaborators or others that may require the Company to relinquish rights to certain product candidates that it might otherwise seek to develop or commercialize independently. Additionally, the Company may need or choose to raise additional capital or incur indebtedness to continue to fund its operations in the future.

The Company’s ability to raise additional funds will depend on its clinical and regulatory events, its ability to identify promising in-licensing opportunities, and factors related to financial, economic, and market conditions, many of which are beyond its control. The Company cannot be certain that sufficient funds will be available when required or on satisfactory terms. If adequate funds are not available, the Company may be required to significantly reduce or refocus its operations or to obtain funds through arrangements that may require the Company to relinquish rights to certain of its products, technologies or potential markets, any of which could delay or require that the Company curtail its development programs or otherwise have a material adverse effect on its business, financial condition and results of operations. In addition, the Company may have to delay, reduce the scope or eliminate some of its research and development, which could delay the time to market for any of its product candidates, if such adequate funds are not available. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities would result in ownership dilution to existing stockholders.

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” ( “SFAS No. 141(R)”), which replaces SFAS No. 141. SFAS No. 141(R), establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. SFAS No. 141(R) also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is currently evaluating the impact of the adoption of SFAS No. 141(R) on its consolidated financial statements.

In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”), to partially defer FASB Statement No. 157, “Fair Value Measurements” (“SFAS 157”). FSP 157-2 defers the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years, and interim periods within those fiscal years, beginning after November 15, 2008. The Company adopted SFAS No. 157 in the first quarter of 2008 and is currently evaluating the impact of adopting the provisions of FSP 157-2.

 

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NOTE 2 — NET LOSS PER COMMON SHARE

Basic net loss per common share is computed by dividing net loss per share by the weighted-average number of vested common shares outstanding during the period. Diluted net loss per common share is computed by giving effect to all potential dilutive common shares, including outstanding options, warrants and common stock subject to repurchase. A reconciliation of the numerator and denominator used in the calculation is as follows (in thousands, except per share amounts):

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2008     2007     2008     2007  

Numerator:

        

Net loss

   $ (3,965 )   $ (7,638 )   $ (8,940 )   $ (16,697 )
                                

Denominator:

        

Weighted average common shares outstanding

     37,413       37,329       37,402       37,398  

Less: Weighted average unvested common shares subject to repurchase

     (24 )     (377 )     (69 )     (471 )
                                

Denominator for basic and diluted calculations

     37,389       36,952       37,333       36,927  
                                

Basic and diluted net loss per share

   $ (0.11 )   $ (0.21 )   $ (0.24 )   $ (0.45 )
                                

The following outstanding options, purchase rights under the Company’s 2004 Employee Stock Purchase Plan and common stock subject to repurchase were excluded from the computation of diluted net loss per share for the periods presented because including them would have had an antidilutive effect (in thousands):

 

     As of June 30,
     2008    2007

Shares issuable upon exercise of stock options

   3,890    2,887

Shares issuable related to the ESPP

   46    50

Common shares subject to repurchase

   16    326

NOTE 3 — STOCK BASED COMPENSATION

The Company recognizes stock-based compensation in accordance with the fair value provisions of Statement of Financial Accounting Standards No.123(R), “Share-Based Payment” (“SFAS 123(R)”) using the modified prospective transition method, except for options granted prior to the Company’s initial public offering in February 2005, for which the fair value was determined for disclosure purposes using the minimum value method. Under this transition method, stock-based compensation cost recognized for the three and six months ended June 30, 2008 and 2007 includes:

 

   

compensation cost for all unvested stock-based awards as of January 1, 2006 that were granted subsequent to the Company’s initial public offering in February 2005, and prior to January 1, 2006, that were earned during the three and six months ended June 30, 2008 and 2007, based on the recognition of the grant date fair value estimated in accordance with the original provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), as amended by SFAS No. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure.” over the service period, which is generally the vesting period;

 

   

compensation cost for all stock-based awards granted or modified subsequent to January 1, 2006, that were earned during the three and six months ended June 30, 2008 and 2007, based on the recognition of the grant date fair value estimated in accordance with the provisions of SFAS 123(R) over the service period, which is generally the vesting period; and

 

   

compensation cost for options granted prior to the Company’s initial public offering in February 2005 that were earned during the three and six months ended June 30, 2008 and 2007, based on the grant date intrinsic value over the service period, which is generally the vesting period, in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”).

In addition, SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Prior to the adoption of SFAS 123(R), the Company accounted for forfeitures upon occurrence.

 

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Stock-based compensation expense related to stock options and ESPP recognized in the unaudited condensed consolidated statement of operations was $0.8 million and $1.9 million for the three and six months ended June 30, 2008, respectively, and was $1.6 million and $3.0 million for the three and six months ended June 30, 2007, respectively. Stock-based compensation expense related to options granted prior to the initial public offering that were valued using the intrinsic value method in accordance with the provisions of APB 25 was $0.2 million and $0.7 million for the three and six months ended June 30, 2008, respectively, and was $0.7 million and $1.5 million for the three and six months ended June 30, 2007, respectively.

Valuation Assumptions

The Company estimated the fair value of stock options granted using the Black-Scholes option-pricing formula and a single option award approach. This fair value is being amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The fair value of employee stock options and employee purchase rights under the Company’s ESPP was estimated using the following weighted-average assumptions for the three and six months ended June 30, 2008 and 2007:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2008     2007     2008     2007  

Employee Stock Options

        

Risk-free interest rate

     3.21 %     4.59 %     3.12 %     4.63 %

Expected term (in years)

     5.27       5.56       5.97       5.97  

Dividend yield

     —         —         —         —    

Volatility

     83 %     77 %     83 %     77 %

Weighted-average fair value of stock options granted

   $ 0.25     $ 1.05     $ 0.36     $ 1.65  

Employee Stock Purchase Plan (ESPP):

        

Risk-free interest rate

     2.0 %     5.0 %     2.0 %     5.0 %

Expected term (in years)

     1.25       1.25       1.25       1.25  

Dividend yield

     —         —         —         —    

Volatility

     67 %     67 %     67 %     67 %

Weighed-average fair value of ESPP purchase rights

   $ 0.18     $ 1.52     $ 0.18     $ 1.52  

To determine the expected term of the Company’s employee stock options granted during the three and six months ended June 30, 2008 and 2007, the Company utilized the simplified approach as defined by SEC Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB 107”). To determine the risk-free interest rate, the Company utilized an average interest rate based on U.S. Treasury instruments with a term consistent with the expected term of the Company’s awards. To determine the expected stock price volatility for the Company’s stock options for the three and six months ended June 30, 2008 and 2007, the Company examined historical volatilities for industry peers as the Company did not have sufficient trading history for its common stock and utilized a median of the historical volatilities of the Company’s industry peers. The Company will continue to analyze the expected stock price volatility and expected term assumption as more historical data for the Company’s common stock becomes available. The expected stock price volatility for the Company’s ESPP for the three and six months ended June 30, 2008 and 2007 was based on expected stock price volatilities of the Company’s industry peers, as well as the historical volatility of the Company’s common stock as the Company had trading history for its common stock in excess of the expected term of the stock purchase rights under the ESPP. The fair value of all the Company’s stock based award assumes no dividends as the Company does not anticipate paying cash dividends on its common stock.

Employee Stock-based Compensation Expense

Deferred stock-based compensation Prior to the initial public offering, the Company issued options to certain employees with exercise prices below the fair market value of the Company’s common stock at the date of grant, determined with hindsight. In accordance with the requirements of APB 25, the Company recorded deferred stock-based compensation aggregating $19.5 million, net of forfeitures for the difference between the exercise price of the stock option and the fair market value of the Company’s stock at the date of grant. This deferred stock-based compensation is being amortized on a straight-line basis over the period during which the Company’s right to repurchase the stock lapses or the options vest, generally four years. Through June 30, 2008, the Company amortized approximately $19.3 million of such compensation expense, net of forfeitures, with approximately $0.2 million and $0.7 million being amortized in the three and six months ended June 30, 2008, respectively and $0.7 million $1.5 million being amortized in the three and six months ended June 30, 2007, respectively.

 

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Stock-based compensation expense As required by SFAS 123(R) the Company recognized $0.6 million and $1.2 million of stock-based compensation expense related to stock options and purchase rights granted subsequent to the Company’s initial public offering in February 2005, under the Company’s stock option plans, for the three and six months ended June 30, 2008, respectively, and $0.8 million and $1.4 million of stock-based compensation expense for the three and six months ended June 30, 2007, respectively, in addition to the amortization of deferred compensation above. As of June 30, 2008, the total unrecognized compensation cost related to unvested stock-based awards granted to employees under the Company’s stock option plans was approximately $4.5 million before forfeitures. This cost will be recorded as compensation expense on a straight-line basis over the remaining weighted average requisite service period of approximately 3.01 years.

Non-employee Stock-based Compensation Expense

The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS 123 and Emerging Issues Task Force No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” The equity instruments consisting of stock options are valued using the Black-Scholes option pricing model. The values attributable to these options are amortized over the service period and the unvested portion of these options is remeasured at each vesting date. In connection with the grant of stock options to non-employees, the Company recorded stock-based compensation of approximately $5,000 and $20,000 for the three months and six months ended June 30, 2008, respectively, and $38,000 and $0.1 million for the three months and six months ended June 30, 2007, respectively.

Stock-based compensation expense, which consists of the compensation cost for employee stock options, and the value of options issued to non-employees for services rendered, was allocated to research and development and general and administrative as follows (in thousands):

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2008    2007    2008    2007

Stock-based compensation expense:

           

Research and development

   $ 395    $ 652    $ 834    $ 1,195

General and administrative

     404      938      1,068      1,786
                           
   $ 799    $ 1,590    $ 1,902    $ 2,981
                           

Equity Incentive Plans

2004 Equity Incentive Plan During the six months ended June 30, 2008, the Company granted stock options to purchase 1,310,000 shares at an average exercise price of $0.50 per share under the 2004 Equity Incentive Plan. At June 30, 2008, 1,423,300 shares were authorized and available for issuance under the stock option plan.

The following table summarizes stock option activity under the Company’s stock option plans:

 

Options

   Number of
Shares
    Weighted-
Average
Exercise
Price
   Weighted-
Average
Remaining
Contractual
Term
   Aggregate
Intrinsic
Value

Outstanding at January 1, 2008

   2,983,232     $ 2.12    —        —  

Granted

   1,310,000     $ 0.50    —        —  

Exercised

   (4,365 )   $ 0.26    —        —  

Forfeitures

   (399,322 )   $ 2.93    —        —  
              

Outstanding at June 30, 2008

   3,889,545     $ 1.49    8.80    $ 8,568
              

Vested and expected to vest June 30, 2008

   3,822,975     $ 1.50    8.53    $ 8,562

Exercisable at June 30, 2008

   1,221,723     $ 2.11    8.08    $ 7,743
              

 

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The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock for options that were in-the-money at June 30, 2008. The total intrinsic value of stock options exercised during the six months ended June 30, 2008 and 2007 was $400 and $2,000, respectively, determined at the date of the option exercise. Cash received from stock option exercises was $1,000 and $5,000 for the six months ended June 30, 2008 and 2007, respectively. The Company issues new shares of common stock upon exercise of options. In connection with these exercises, there was no tax benefit realized by the Company due to the Company’s current loss position.

2004 Employee Stock Purchase Plan For the quarter ended March 31, 2008, plan participants had purchased 42,483 shares at an average purchase price of $0.37. At June 30, 2008, plan participants had $17,000 withheld to purchase stock on August 14, 2008, which is included in accrued liabilities on the accompanying unaudited condensed consolidated balance sheet. At June 30, 2008, 761,042 shares were authorized and available for issuance under the ESPP.

NOTE 4 — FAIR VALUE MEASUREMENTS AND MARKETABLE SECURITIES

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measures” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. In February 2008, the FASB issued FSP FAS 157-2 “Partial Deferral of the Effective Date of Statement 157” (FSP 157-2). FSP-2 delays the effective date of FAS 157 for non-financial assets and liabilities that are not measured or disclosed on a recurring basis to fiscal years beginning after November 15, 2008. The Company adopted SFAS No. 157 in the first quarter of 2008. The Company is currently in the process of evaluating the impact of adopting this pronouncement for other non-financial assets or liabilities.

SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

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

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company’s short-term investments primarily utilize broker quotes in a non-active market for valuation of these securities.

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

The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The following table sets forth the Company’s financial assets (cash equivalents and marketable securities) at fair value on a recurring basis as of June 30, 2008:

 

     Fair Value as of
June 30, 2008
   Basis of Fair Value Measurements

(in thousands)

      Level 1    Level 2    Level 3

Money market funds

   $ 7,592    $ 7,592    $ —      $ —  

Corporate bonds

     1,226      —        1,226      —  

Government securities

     2,999      —        2,999      —  

Commercial paper

     1,481      —        1,481      —  
                           

Total cash equivalents and marketable securities

   $ 13,298    $ 7,592    $ 5,706    $ —  
                           

 

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The Company invests in highly-liquid, investment-grade securities. The following is a summary of the Company’s available-for-sale securities at June 30, 2008 and December 31, 2007:

 

As of June 30, 2008 (in thousands):

   Cost Basis     Unrealized
Gain
    Unrealized
Loss
    Fair
Value
 

Money market funds

   $ 7,592     $ —       $ —       $ 7,592  

Corporate bonds

     1,230       —         (4 )     1,226  

Government securities

     2,999       —         —         2,999  

Commercial paper

     1,482       —         (1 )     1,481  
                                
     13,303       —         (5 )     13,298  

Less cash equivalents

     (10,591 )     —         —         (10,591 )
                                

Total marketable securities

   $ 2,712     $ —       $ (5 )   $ 2,707  
                                

As of December 31, 2007 (in thousands):

   Cost Basis     Unrealized
Gain
    Unrealized
Loss
    Fair
Value
 

Money market funds

   $ 3,386     $ —       $ —       $ 3,386  

Corporate bonds

     2,353       1       (2 )     2,352  

Government securities

     8,542       3       —         8,545  

Commercial paper

     7,230       —         —         7,230  

Asset-backed securities

     793       2       —         795  
                                
     22,304       6       (2 )     22,308  

Less cash equivalents

     (11,018 )     (1 )     —         (11,019 )
                                

Total marketable securities

   $ 11,286     $ 5     $ (2 )   $ 11,289  
                                

NOTE 5 — RESTRUCTURING ACCRUAL

In October 2007, the Company adopted a plan to reduce its operating expenses and refocus its research and development efforts. The plan included a reduction of 12 positions in both research and development and general and administrative areas of the Company. As a result of the staffing reduction, the Company incurred severance benefits of approximately $1.2 million in the fourth quarter of 2007. The Company made payments on severance benefits of $0.1 million and $1.1 million in the quarters ended March 31, 2008 and December 31, 2007, respectively.

The following table sets forth an analysis of the restructuring accrual at June 30, 2008 (in thousands):

 

     Severance and benefits  

Balance at December 31, 2007

   $ 120  

Charges

     —    

Cash paid

     (120 )
        

Balance at June 30, 2008

   $ —    
        

NOTE 6 — NOTES PAYABLE

In April 2006, the Company amended the existing loan and security agreement to borrow up to an additional $4.0 million for working capital and equipment purchases. The interest rate for borrowings under this facility will be determined based on the 36-month U.S. Treasury note plus 2.25% on the date of borrowing. The Company borrowed $2.6 million under this facility, which will be repaid over a 36-month period from the date of borrowing. The interest rate on these borrowings was approximately 7.2% per annum. Under the amended loan and security agreement, the Company is required to maintain the lower of 85% of its total cash and cash equivalents or $10.0 million with the financial institution. Borrowings under the equipment line of credit are collateralized by the related equipment. At June 30, 2008, the Company was in compliance with all financial covenants in the agreement.

 

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At June 30, 2008, future principal payments under the amended loan and security agreement are as follows (in thousands):

 

Years Ending December 31,

    

2008 (remaining six months)

   $ 463

2009

     337
      

Total

   $ 800
      

NOTE 7 — COMMITMENTS AND CONTINGENCIES

The Company leases certain of its facilities under noncancelable leases, which qualify for operating lease accounting treatment under SFAS No. 13, “Accounting for Leases,” and, as such, these facilities are not included on its unaudited condensed consolidated balance sheets. In February 2006, the Company entered into a new lease for an additional 34,205 square feet of space and an increase in the lease term for the existing space located at the Company’s headquarters in Redwood City, California to September 30, 2011. The lease is for a period of 66 months, beginning on April 1, 2006 with respect to the additional square footage and will begin on March 1, 2010 with respect to the existing square footage. The lease will expire, unless otherwise terminated under the terms of the lease, on September 30, 2011. The aggregate rent for the term of the lease is approximately $4.8 million. In addition, the lease requires the Company to pay certain taxes, assessments, fees and other costs and expenses associated with the premises in amounts yet to be determined as well as a customary management fee. The Company will also be responsible for the costs of certain tenant improvements associated with the leased space. In connection with the lease, the Company furnished a letter of credit to the landlord for approximately $0.3 million.

The future rental payments required by the Company for all of its facilities under noncancelable operating leases are as follows (in thousands):

 

Years Ending December 31,

    

2008 (remaining six months)

   $ 682

2009

     1,398

2010

     1,462

2011

     1,129
      

Total

   $ 4,671
      

The Company’s purchase commitments at June 30, 2008 were $1.9 million.

Indemnification

The Company enters into indemnification provisions under its agreements with other companies in the ordinary course of business, including business partners, contractors and parties performing its clinical trials. Pursuant to these arrangements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified parties for losses suffered or incurred by the indemnified party as a result of the Company’s activities. The duration of these indemnification agreements is generally perpetual. The maximum potential amount of future payments the Company could be required to make under these agreements is not determinable. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. The Company maintains commercial general liability insurance and products liability insurance to offset certain of its potential liabilities under these indemnification provisions.

The Company’s bylaws provide that it is required to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct of a culpable nature, to the fullest extent permissible by applicable law; and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified.

Legal proceedings

On July 5 and July 18, 2007, purported shareholder class action complaints alleging violations of the federal securities laws were filed against the Company, its Chief Executive Officer Harold E. Selick and its former Chief Financial Officer Janet I. Swearson in the United States District Court for the Southern District of New York. On September 14, 2007, these lawsuits, which have been consolidated by the Court into a single proceeding, were ordered transferred to the United States

 

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District Court for the Northern District of California. In a consolidated amended complaint filed on January 15, 2008, Plaintiffs, on behalf of an alleged class of purchasers of our common stock from the date of our initial public offering of securities on February 4, 2005 through July 14, 2006, purported to allege claims arising under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended (the “Act”), and under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), generally alleging that the defendants violated the federal securities laws by, among other things, making material misstatements or omissions concerning our Phase II and Phase III clinical trials of Lonidamine (TH-070). On July 11, 2008, the Court granted Defendants' motions to dismiss the consolidated amended complaint but afforded Plaintiffs leave to file a further amended complaint within a time period that has not yet expired. Management believes that Plaintiffs' claims are without merit and intends to defend against the actions vigorously. The Company cannot reasonably predict the outcome of this matter at this time.

NOTE 8 — COMPREHENSIVE LOSS

Comprehensive loss is comprised of net loss and other comprehensive loss, which consists of unrealized losses on the Company’s available-for-sale securities. The components of comprehensive loss are as follows (in thousands):

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2008     2007     2008     2007  

Net loss

   $ (3,965 )   $ (7,638 )   $ (8,940 )   $ (16,697 )

Other comprehensive loss:

        

Unrealized loss on marketable securities

     (7 )     (5 )     (8 )     (3 )
                                

Total comprehensive loss

   $ (3,972 )   $ (7,643 )   $ (8,948 )   $ (16,700 )
                                

NOTE 9 — RELATED PARTIES

In March 2008, the Company entered into a License Agreement, for the use of 5,500 square feet of its facilities and laboratory space with Ethos Pharmaceuticals (formerly AllChemie, Inc.), a Delaware corporation. Dr. Harold E. Selick, the Company’s Chief Executive Officer and a member of the board of directors, is the chairman of the board of directors of Ethos Pharmaceuticals. Ethos Pharmaceuticals will pay the Company a fee in the aggregate of $193,462 for the one-year initial term of the agreement and, if extended, a fee in the aggregate of $127,050 for the six-month extension term of the License Agreement. In addition, Ethos Pharmaceuticals will pay for costs incurred relating to agreed upon services provided by the Company.

NOTE 10 — SUBSEQUENT EVENTS

On July 9, 2008, the Company entered into a transaction with a select group of investors for the proposed sale of an aggregate of 53,823,530 shares of the Company’s common stock for a purchase price equal to $0.34 per share and issue warrants to purchase 21,529,413 shares of common stock. The warrants will have a five-year term and an exercise price equal to $0.39 per share of common stock. The Company anticipates raising gross proceeds of $18.3 million and net offering proceeds are expected to be approximately $17.0 million. Certain members of the Company’s management team agreed to purchase 1,470,588 shares of common stock and will receive warrants to purchase 588,236 shares of common stock.

Pursuant to the agreement, the Company agreed to file a proxy statement with the SEC to solicit the approval of its stockholders for the transaction. The Company also agreed to file, upon receiving stockholder approval for the transaction, a registration statement with the SEC to register for resale the common stock and the common stock to be issued upon exercise of the warrants from the transaction. If the Company fails to register the shares pursuant to a registration statement filed with the SEC, subject to certain terms and conditions, it may be required to pay certain liquidated damages. The Company anticipates that the offering will close in the third quarter of 2008, subject to the Company obtaining the stockholder approval and other customary closing conditions. If the Board of Directors elects not to close the transaction, subject to certain exceptions, the Company will be required to issue warrants to purchase a number of shares of common stock equal to 19.9% of the outstanding shares of common stock. Such warrants will have a five year term and an exercise price equal to $0.34 per share.

Effective July 10, 2008, the Company entered into an amendment (the “Amendment”) to that certain Preferred Shares Rights Agreement, dated as of August 8, 2006, by and between the Company and Mellon Investor Services LLC (the “Rights Agreement”). The Amendment amends certain terms in the Rights Agreement so that the Company can announce and consummate the offering described above without triggering the Rights Agreement.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the “Risk Factors” section of this quarterly report on Form 10-Q. Other than statements of historical fact, statements made in this quarterly report on Form 10-Q are forward-looking statements within the meaning of Section 21E of the Exchange Act, and Section 27A of the Act . When used in this report or elsewhere by management from time to time, the words “believe,” “anticipate,” “intend,” “plan,” “estimate,” “expect,” and similar expressions are forward-looking statements. Such forward-looking statements are based on current expectations. Forward-looking statements made in this report include, for example, statements about:

 

   

the progress of our clinical programs, including estimated milestones;

 

   

estimates of future performance, capital requirements and needs for financing;

 

   

uncertainties associated with obtaining and enforcing patents and other intellectual property rights; and

 

   

the costs and timing of obtaining drug supply for our pre-clinical and clinical activities.

Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors. For a more detailed discussion of the potential risks and uncertainties that may impact their accuracy, see the “Overview” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations and the “Risk Factors” section in Part II of this quarterly report on Form 10-Q. Forward-looking statements reflect our view only as of the date of this report. We undertake no obligation to update any forward-looking statements. You should also review carefully the cautionary statements and risk factors listed in our Annual Report on Form 10-K for the year ended December 31, 2007, and in our other filings with the SEC, including our Forms 10-Q and 8-K and our Annual Report to Shareholders.

Overview

We are a biotechnology company focused on the discovery and development of drugs targeting the microenvironment of solid tumors as novel treatments for patients with cancer. The microenvironment of solid tumors is characterized by, among other things, hypoxia, or lack of oxygen, disordered blood vessel growth and the upregulation of glucose transport. This hypoxic environment is known to be resistant to standard chemotherapy and radiation. It is thought to be responsible for the poor prognosis of many solid tumors and treating the hypoxic environment is currently believed to be a significant unmet medical need. Our product candidates are designed to selectively target the hypoxic microenvironment of tumors either by selective toxin activation in the case of our hypoxia activated prodrug (HAP) program, including TH-302, or potentially utilizing the consequences of increased uptake of glucose in cancer cells relative to most normal cells. Our product candidates, glufosfamide and 2-deoxyglucose (“2DG”), share certain structural characteristics with glucose but act instead as chemotherapeutic toxins when taken up by a cell.

 

   

TH-302, which we discovered, is our lead product candidate for the potential treatment of patients with cancer. It is a novel drug candidate that is activated under the severe hypoxic conditions typical of most solid tumors. In May 2007, we announced the filing of an investigational new drug application (“IND”) with the FDA for TH-302, and in July 2007, we initiated a Phase 1 clinical trial evaluating the safety and preliminary efficacy of TH-302 in patients with advanced solid tumors. In July 2008, we reported top line results for this clinical trial, which has planned enrollment completion by Q4 2008. In addition, we plan to initiate a Phase 1/2 clinical trial of TH-302 in combination with three different chemotherapeutic agents in patients with solid tumors in the second half of 2008. In the second half of 2008, we also plan to start a Phase 1/2 clinical trial of TH-302 in combination with doxorubicin in patients with advanced soft tissue sarcoma.

 

   

Glufosfamide is our most advanced product candidate for the potential treatment of patients with cancer. In February 2007, we announced that our Phase 3 clinical trial did not reach its primary endpoint of a statistically significant survival benefit for patients with metastatic pancreatic cancer that relapsed following chemotherapy with gemcitabine. In the third quarter of 2007, we presented final results including promising tumor response and survival data from the Phase 2 stage of a clinical trial of glufosfamide plus gemcitabine for the first-line treatment of pancreatic cancer. In 2007 we initiated a Phase 2 clinical trial of glufosfamide in soft-tissue sarcoma, platinum-resistant ovarian cancer and recurrent sensitive small cell lung cancer. All studies have been closed to enrollment and top-line results from each study have been reported. We plan to partner or seek external funding for the future development of glufosfamide.

 

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2DG is our product candidate for the potential treatment of patients with cancer and is being evaluated in a Phase 1 clinical trial alone and in combination with docetaxel as a combination therapy. This clinical trial began in the first quarter of 2004 and we completed enrollment in the first half of 2008. We presented top-line results for this clinical trial in August 2008. Some evidence of anti-tumor activity was observed, including a partial response in one patient with breast cancer and disease stabilization in multiple patients with head and neck tumors. We are not planning on conducting any additional clinical trials of 2DG as we are focusing our resources on the development of our hypoxia-activated prodrug, TH-302, and the out-licensing of glufosfamide for the potential treatment of solid tumors.

We also are working to discover additional hypoxia activated prodrugs that will selectively target cancer cells.

We are a development stage company incorporated in October 2001. We have devoted substantially all of our resources to research and development of our product candidates. We have not generated any revenue from the sale of our product candidates, and prior to our initial public offering in February 2005, we funded our operations through the private placement of equity securities. In February 2005, we completed our initial public offering that raised net proceeds of $38.1 million, and in October 2005, we completed an offering of common stock that raised net proceeds of $62.4 million. As of June 30, 2008 we had cash, cash equivalents and marketable securities of $13.7 million. The net loss for the three and six months ended June 30, 2008 was $4.0 million and $8.9 million, respectively, and the cumulative net loss since our inception through June 30, 2008 was $174.3 million.

On July 9, 2008, the Company entered into a transaction for the proposed sale of an aggregate of 53,823,530 shares of the Company’s common stock for a purchase price equal to $0.34 per share and issue warrants to purchase 21,529,413 shares of common stock. The warrants will have a five-year term and an exercise price equal to $0.39 per share of common stock. The Company anticipates raising gross proceeds of $18.3 million and net offering proceeds are expected to be approximately $17.0 million. For further discussion of the proposed offering, see Liquidity and Capital Resources section of this Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations.

We expect to continue to incur losses from operations in the future. We expect that expenses will decrease in 2008 compared to 2007 due to a reduced workforce and reduced number of patients in smaller clinical trials, and that our cash, cash equivalents and marketable securities as of June 30, 2008, and the net proceeds from the proposed sale discussed above, contingent upon shareholder approval, will be sufficient to fund our projected operating requirements through the fourth quarter of 2009, including completing our current ongoing clinical trials and conducting research and discovery efforts toward additional product candidates, working capital and general corporate purposes. Research and development expenses may fluctuate significantly from period to period as a result of the progress and results of our clinical trials.

Results of Operations

Revenue. For each of the three and six months ended June 30, 2008 and 2007, we recognized revenue of $0.4 million and $0.7 million, respectively, related to a $5.0 million upfront payment received in connection with a 2004 agreement with MediBIC Co., Ltd. for the development of glufosfamide in Japan and several other Asian countries. Revenue is being recognized on a straight-line basis over the estimated development period, currently estimated to continue through 2008. We are responsible for all development activities under this agreement.

Research and Development. Research and development expenses were $3.0 million for the three months ended June 30, 2008 compared to $6.0 million for the three months ended June 30, 2007. The $3.0 million decrease in expenses is due to a $1.9 million decrease in clinical and development expenses, $0.3 million in lower staffing expenses due to a lower headcount compared to the prior year period, $0.3 million in lower consulting expenses and a $0.2 million decrease in facilities expenses. Stock-based compensation decreased by $0.3 million primarily due to a reduction in the number of employees and consultants compared to the prior year, as well as a lower valuation for 2008 stock option grants primarily due to a lower stock price. Research and development expenses were $6.2 million for the six months ended June 30, 2008 compared to $13.3 million for the six months ended June 30, 2007. The $7.1 million decrease in expenses is due to a $4.6 million decrease in clinical and development expenses, and $1.3 million in lower staffing expense, $0.6 million in lower consulting expenses and a decrease of $0.3 million in facilities expenses. Stock-based compensation expense decreased by $0.3 million primarily due to a reduction in the number of employees and consultants compared to the prior year, as well as a lower valuation for 2008 stock option grants primarily due to a lower stock price.

 

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Research and development expenses by project (in thousands)

   Three months ended
June 30,
   Six months ended
June 30,
   2008    2007    2008    2007

TH-302

   $ 1,422    $ 1,671    $ 2,691    $ 2,982

Glufosfamide

     484      2,922      1,213      7,356

2DG

     62      241      215      646

Discovery research

     1,052      1,158      2,082      2,350
                           

Total research and development expenses

   $ 3,020    $ 5,992    $ 6,201    $ 13,334
                           

Research and development expenses associated with our internally discovered compound TH-302 were $1.4 million for the three months ended June 30, 2008 and $1.7 million for the three months ended June 30, 2007. TH-302 continues to progress through the Phase 1 clinical trial initiated in July 2007, with enrollment expected to be completed in Q2 2008. Research and development expenses associated with glufosfamide were $0.5 million for the three months ended June 30, 2008 and $2.9 million for the three months ended June 30, 2007. This decrease is primarily due to a $1.7 million decrease in clinical, manufacturing and consulting expenses and a $0.7 million decrease in employee-related and stock-based compensation expenses. These declines in expenses were due to completion and announcement of results for our Phase 2 trials in pancreatic cancer and soft-tissue sarcoma in 2007 and discontinuation of our Phase 2 trials in recurrent sensitive small cell lung cancer and platinum-resistant ovarian cancer in October 2007 and January 2008, respectively. Research and development expenses associated with 2DG were $0.1 million for the three months ended June 30, 2008 and $0.2 million for the three months ended June 30, 2007 as we completed enrollment in our 2DG Phase 1 trial in Q2 2008. Discovery research expenses were $1.1 million for the three months ended June 30, 2008 and $1.2 million for the three months ended June 30, 2007.

Research and development expenses associated with our internally discovered compound TH-302 were $2.7 million for the six months ended June 30, 2008 and $3.0 million for the six months ended June 30, 2007. TH-302 continues to progress through the Phase 1 clinical trial initiated in July 2007, with enrollment expected to be completed in Q2 2008. Research and development expenses associated with glufosfamide were $1.2 million for the six months ended June 30, 2008 and $7.4 million for the six months ended June 30, 2007. This decrease is primarily due to a $4.0 million decrease in clinical and manufacturing expenses and a $1.7 million decrease in employee-related and stock compensation expenses and a $0.4 million decrease in outside consulting expenses. These declines in expenses were due to completion and announcement of results for our Phase 2 trials in pancreatic cancer and soft-tissue sarcoma in 2007 and discontinuation of our Phase 2 trials in recurrent sensitive small cell lung cancer and platinum-resistant ovarian cancer in October 2007 and January 2008, respectively. Research and development expenses associated with 2DG were $0.2 million for the six months ended June 30, 2008 and $0.6 million for the six months ended June 30, 2007, as we completed enrollment of our 2DG Phase 1 trial in Q2 2008. Discovery research expenses were $2.1 million for the six months ended June 30, 2008 and $2.4 million for the six months ended June 30, 2007. The decrease was primarily due to the allocation of resources towards our TH-302 program and lower staffing and facilities expenses to support our other discovery research programs.

We did not track research and development expenses by project prior to 2003, and therefore we cannot provide cumulative project expenses to date. Due to the risks and uncertainties involved in discovering and developing product candidates, such as clinical trial results, regulatory approval requirements, dependence on third parties and market acceptance, all of which are described in the “Risk Factors” section in part II of this quarterly report on Form 10-Q, we cannot reasonably estimate the costs and timing of completion of each project or when any project will result in net cash inflows.

We expect to continue to devote substantial resources to research and development in future periods as we complete our current clinical trials, start additional clinical trials and continue our discovery efforts. Research and development expenses are expected to decrease in 2008 compared to 2007 due to smaller clinical trials and a reduced workforce.

General and Administrative. General and administrative expenses were $1.4 million for the three months ended June 30, 2008, compared to $2.5 million for the three months ended June 30, 2007. The decrease of $1.1 million is due to $0.5 million of decrease in stock-based compensation expenses, $0.3 million in lower staffing and facilities expenses related to staff reductions in 2007 and $0.2 million of decreased consulting expenses.

General and administrative expenses were $3.7 million for the six months ended June 30, 2008, compared to $5.1 million for the six months ended June 30, 2007. The decrease of $1.4 million is due a $0.7 million decrease in stock-based compensation expenses, $0.7 million in lower staffing and facilities expenses related to staff reductions in October 2007. These reductions in expenses were partially offset by $0.1 million increase in consulting expenses.

 

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We currently expect our general and administrative expenses to decrease in 2008 due to lower employee-related costs as a result of 2007 staff reductions.

Interest Income, Net Interest income for the three and six months ended June 30, 2008 was $0.1 million and $0.3 million, respectively, compared to $0.5 million and $1.1 million for the three and six months ended June 30, 2007, respectively. The decrease was primarily due to lower invested cash balances and, lower interest rates during the three and six months ended June 30, 2008 compared to the prior year.

Liquidity and Capital Resources

We have incurred net losses of $174.3 million since inception through June 30, 2008. We have not generated and do not expect to generate revenue from sales of product candidates in the near term. From inception until our initial public offering in February 2005, we funded our operations primarily through the private placement of our preferred stock. In February 2005, we completed our initial public offering of 6,112,601 shares of common stock, raising net proceeds of $38.1 million. In October 2005, we completed a public offering of 6,399,222 shares of our common stock for net proceeds of $62.4 million. We had cash, cash equivalents and marketable securities of $13.7 million and $22.7 million at June 30, 2008 and December 31, 2007, respectively, available to fund operations.

On July 9, 2008, we entered into a transaction with a select group of investors for the proposed sale of an aggregate of 53,823,530 shares of our common stock for a purchase price equal to $0.34 per share and issue warrants to purchase 21,529,413 shares of common stock. The warrants will have a five-year term and an exercise price equal to $0.39 per share of common stock. We anticipate raising gross proceeds of $18.3 million and net offering proceeds are expected to be approximately $17.0 million.

Pursuant to the agreement, we have agreed to file a proxy statement with the SEC to solicit the approval of our stockholders for the transaction. We also agreed to file, upon receiving stockholder approval for the transaction, a registration statement with the SEC to register for resale the common stock and the common stock to be issued upon exercise of the warrants from the transaction. If we fail to register the shares pursuant to a registration statement filed with the SEC, subject to certain terms and conditions, we may be required to pay certain liquidated damages. We anticipate that the offering will close in the third quarter of 2008, subject to obtaining stockholder approval and other customary closing conditions. If our Board of Directors elects not to close the transaction, subject to certain exceptions, we will be required to issue warrants to purchase a number of shares of common stock equal to 19.9% of the outstanding shares of common stock. Such warrants will have a five year term and an exercise price equal to $0.34 per share.

Net cash used in operating activities for the six months ended June 30, 2008 and 2007 was $8.5 million and $17.5 million, respectively. The decrease of $9.0 million in cash used in operations was primarily attributable to a lower net loss in 2007 and lower accounts payable and accrual balances.

Net cash provided by investing activities for the six months ended June 30, 2008 and 2007 was $8.6 million and $5.9 million, respectively. The $2.7 million increase in cash provided by investing activities was due primarily to a decrease in purchases of marketable securities, partially offset by a decrease in proceeds from the sale and maturities of the marketable securities.

Net cash used in financing activities for the six months ended June 30, 2008 and 2007 was $0.4 million and $0.4 million, respectively. The cash used in the six months ended June 30, 2008 and 2007 was primarily to repay our outstanding notes payable.

Obligations and Commitments

In April 2006, we amended the existing loan and security agreement to borrow up to an additional $4.0 million for working capital and equipment purchases. The interest rate for borrowings under this facility will be determined based on the 36-month U.S. Treasury note plus 2.25% on the date of borrowing. We borrowed $2.6 million under this facility, which will be repaid over a 36-month period from the date of borrowing. The interest rate on these borrowings was approximately 7.2% per annum. At June 30, 2008, the total amount due under this facility was $0.8 million. Under the amended loan and security agreement, we are required to maintain the lower of 85% of its total cash and cash equivalents or $10.0 million with the financial institution. Borrowings under the equipment line of credit are collateralized by the related equipment. At June 30, 2008, we were in compliance with all covenants in the agreement.

 

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In August 2004, we entered into a noncancelable facilities sublease agreement that expires on February 28, 2010 for our headquarters in Redwood City, California. On April 1, 2005, we entered into a noncancelable facilities lease agreement that expires on February 28, 2010 for additional laboratory space in Redwood City, California.

In February 2006, we entered into a lease for an additional 34,205 square feet of space and increased the lease term for the existing space located at our headquarters in Redwood City, California to September 30, 2011. The lease is for a period of 66 months, beginning on April 1, 2006 with respect to the additional square footage and will begin on March 1, 2010 with respect to the existing square footage. The lease will expire, unless otherwise terminated under the terms of the lease, on September 30, 2011. The aggregate rent for the term of the lease is approximately $4.8 million.

In addition, the lease requires us to pay certain taxes, assessments, fees and other costs and expenses associated with the premises as well as a customary management fee. We are also responsible for the costs of certain tenant improvements associated with the leased space. In connection with the lease, we furnished a letter of credit to the landlord for approximately $0.3 million.

Our major outstanding contractual obligations consist of amounts due under our financing and lease agreements, and purchase commitments. Contractual obligations and related scheduled payments as of June 30, 2008, are as follows (in thousands):

 

     Remainder of
current year
(2008)
   One to three
years (2009
to 2011)
   Four to five
years (2012 to
2013)
   After five
Years
   Total

Facilities leases

   $ 682    $ 3,989    $ —      $ —      $ 4,671

Notes payable, principal and interest

     485      343      —        —        828

Purchase commitments

     1,938      —        —        —        1,938
                                  

Total

   $ 3,105    $ 4,332    $ —      $ —      $ 7,437
                                  

We expect 2008 cash requirements to be in the range of $17.0 million to $20.0 million. We believe that our cash, cash equivalents and marketable securities as of June 30, 2008, and the net proceeds from the proposed sale discussed above, contingent upon shareholder approval, will be sufficient to fund our projected operating requirements through the fourth quarter of 2009, including completing our current trials, conducting research and discovery efforts towards additional product candidates, working capital and general corporate purposes. We intend to seek funds through arrangements with collaborators or others that may require us to relinquish rights to certain product candidates that we might otherwise seek to develop or commercialize independently.

We expect to need to raise additional capital or incur indebtedness to continue to fund our future operations. We may seek to raise capital through a variety of sources, including:

 

   

the public equity market;

 

   

private equity financing;

 

   

collaborative arrangements; and/or

 

   

public or private debt.

Our ability to raise additional funds will depend on our clinical and regulatory events, our ability to identify promising in-licensing opportunities, and factors related to financial, economic, and market conditions, many of which are beyond our control. We cannot be certain that sufficient funds will be available to us when required or on satisfactory terms. If adequate funds are not available, we may be required to significantly reduce or refocus our operations or to obtain funds through arrangements that may require us to relinquish rights to certain of our products, technologies or potential markets, any of which could delay or require that we curtail our development programs or otherwise have a material adverse effect on our business, financial condition and results of operations. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities would result in ownership dilution to our existing stockholders.

In addition, our ability to raise additional capital may be dependent upon our stock being quoted on The NASDAQ Capital Market. On October 19, 2007, we received a notice from the Listing Qualifications Department of The NASDAQ Stock Market indicating that the Company did not comply with the $1.00 minimum bid price requirement for continued listing set forth in NASDAQ Marketplace Rule 4450(a)(5). The notice further stated that pursuant to Marketplace Rule 4450(e)(2), we would be provided 180 calendar days, or until April 16, 2008 to regain compliance. The notice further indicated that if compliance with the minimum bid price rule was not regained by April 16, 2008, NASDAQ will provide written notification that our common stock would be delisted. On April 17, 2008, we received a Staff Determination Letter

 

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from NASDAQ indicating that we had not gained compliance with the $1.00 minimum bid price requirement for continued listing and that our securities were therefore subject to delisting. On April 24, 2008, we requested a hearing before the NASDAQ Listing Qualifications Panel to appeal the Staff Determination and were granted a hearing that was held on June 5, 2008, which stayed the delisting pending the Panel’s decision. At the hearing we requested to transfer the listing of our common stock to from The NASDAQ Global Market to The NASDAQ Capital Market since we satisfied the requirements for initial inclusion set forth in Marketplace Rule 4310(c), other than the minimum bid price requirement of Marketplace Rule 4310(c)(4). On June 13, 2008, the NASDAQ Listing Qualifications Panel approved our request to transfer to The NASDAQ Capital Market and an extension to comply with the minimum $1.00 bid price requirement through September 5, 2008, by which date the Company must evidence compliance for at least ten consecutive business days. The transfer took effect on June 17, 2008.

We will continue to monitor the bid price for our common stock and, if we have not regained compliance in sufficient time, our Board of Directors will implement a reverse stock split to regain compliance with the minimum bid price requirement. In that regard, on May 13, 2008, our stockholders approved the implementation of a reverse stock split of all of the outstanding shares of our common stock, to be effected at the discretion of the Board of Directors at a ratio of not less than one-for-two and not greater than one-for-ten shares. To maintain our listing on the NASDAQ Capital Market, we are also required, among other things, to either maintain stockholders’ equity of at least $5 million or a market value of at least $15 million. While we currently satisfy the stockholders’ equity requirement, we may not continue to do so.

If we are unable to secure additional financing on a timely basis or on terms favorable to us, we may be required to cease or reduce certain research and development projects, to sell some or all of our technology or assets or to merge all or a portion of our business with another entity. Insufficient funds may require us to delay, scale back, or eliminate some or all of our activities, and if we are unable to obtain additional funding, there is uncertainty regarding our continued existence.

Critical Accounting Policies and Use of Estimates

Our discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses based on historical experience and on various assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. For further information of our critical accounting policies, see the discussion of critical accounting policies in our 2007 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 12, 2008.

There have been no material revisions to the critical accounting policies as discussed in our Annual Report on Form 10-K for the year ended December 31, 2007, filed with the SEC on March 12, 2008.

The Company adopted SFAS No. 157 in the first quarter of 2008. SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

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

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company’s short-term investments primarily utilize broker quotes in a non-active market for valuation of these securities.

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

SFAS No. 157 requires us to maximize the use of observable inputs and minimize the use of unobservable inputs. If a financial instrument uses inputs that fall in different levels of the hierarchy, the instrument will be categorized based upon the lowest level of input that is significant to the fair value calculation. Our financial assets measured at fair value on a recurring basis include securities available for sale. Securities available for sale include money market funds, government securities, commercial paper, corporate bonds and asset-backed securities.

 

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Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“ SFAS No. 141(R)”), which replaces SFAS No. 141. SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. SFAS No. 141(R) also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is currently evaluating the impact of the adoption of SFAS No. 141(R) on its consolidated financial statements.

In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”), to partially defer FASB Statement No. 157, “Fair Value Measurements” (“SFAS 157”). FSP 157-2 defers the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years, and interim periods within those fiscal years, beginning after November 15, 2008. We adopted SFAS No. 157 in the first quarter of 2008 and are currently evaluating the impact of adopting the provisions of FSP 157-2.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk. Our exposure to market risk for changes in interest rates relates to our cash equivalents on deposit in highly liquid money market funds and investments in short-term marketable securities. The primary objective of our cash investment activities is to preserve principal while at the same time maximizing the income we receive from our invested cash without significantly increasing risk of loss. We invest in high-quality financial instruments, which currently have weighted average maturity of less than one year. We do not use derivative financial instruments in our investment portfolio. Our cash and investments policy emphasizes liquidity and preservation of principal over other portfolio considerations. Our investment portfolio is subject to interest rate risk and will fall in value if market interest rates rise. Nevertheless, due to the short duration of our investment portfolio, we believe an increase in the interest rates of one percentage point would not be material to our financial condition or results of operations.

In addition, we do not have any material exposure to foreign currency rate fluctuations as we operate primarily in the United States. Although we conduct some clinical trials and safety studies, and manufacture some active pharmaceutical product with vendors outside the United States, most of our transactions are denominated in U.S. dollars.

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.

Based on their evaluation as of June 30, 2008, our chief executive officer and principal financial and accounting officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) were sufficiently effective to ensure that the information required to be disclosed by us in reports we are required to file under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and Form 10-Q and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures.

Changes in internal controls over financial reporting.

There were no changes in our internal control over financial reporting during the three months ended June 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the effectiveness of controls.

Our management, including our chief executive officer and senior director, finance and controller, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control.

 

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The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and we cannot be certain that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our chief executive officer and principal financial and accounting officer have concluded, based on their evaluation, that our disclosure controls and procedures were sufficiently effective as of June 30, 2008 to provide reasonable assurance that the objectives of our disclosure control system were met.

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

On July 5 and July 18, 2007, purported shareholder class action complaints alleging violations of the federal securities laws were filed against the Company, its Chief Executive Officer Harold E. Selick and its former Chief Financial Officer Janet I. Swearson in the United States District Court for the Southern District of New York. On September 14, 2007, these lawsuits, which have been consolidated by the Court into a single proceeding, were ordered transferred to the United States District Court for the Northern District of California. In a consolidated amended complaint filed on January 15, 2008, Plaintiffs, on behalf of an alleged class of purchasers of our common stock from the date of our initial public offering of securities on February 4, 2005 through July 14, 2006, purported to allege claims arising under Sections 11, 12(a)(2) and 15 of the Act and under Sections 10(b) and 20(a) of the Exchange Act, generally alleging that the defendants violated the federal securities laws by, among other things, making material misstatements or omissions concerning our Phase II and Phase III clinical trials of Lonidamine (TH-070). On July 11, 2008, the Court granted Defendants' motions to dismiss the consolidated amended complaint but afforded Plaintiffs leave to file a further amended complaint within a time period that has not yet expired. We believe that Plaintiffs' claims are without merit and intend to defend against the actions vigorously. We cannot reasonably predict the outcome of this matter at this time.

 

ITEM 1A. RISK FACTORS

Risks Related to Drug Discovery, Development and Commercialization

We are substantially dependent upon the success of our product candidates. Clinical trials may not demonstrate efficacy or lead to regulatory approval.

We will not be able to commercialize our drug candidates until we obtain FDA approval in the United States or approval by comparable regulatory agencies in Europe and other countries. To satisfy FDA or foreign regulatory approval standards for the commercial sale of our product candidates, we must demonstrate in adequate and controlled clinical trials that our product candidates are safe and effective. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful. A number of companies in the pharmaceutical industry, including us, have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier clinical trials.

Our product candidates must undergo rigorous clinical testing, the results of which are uncertain and could substantially delay or prevent us from bringing them to market.

Before we can obtain regulatory approval for a product candidate, we must undertake extensive clinical testing in humans to demonstrate safety and efficacy to the satisfaction of the FDA or other regulatory agencies. Clinical trials of new drug candidates sufficient to obtain regulatory marketing approval are expensive and take years to complete.

We cannot be certain of successfully completing clinical testing within the time frame we have planned, or at all. We may experience numerous unforeseen events during, or as a result of, the clinical trial process that could delay or prevent us from receiving regulatory approval or commercializing our product candidates, including the following:

 

   

our clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical and/or preclinical testing or to abandon programs;

 

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the results obtained in earlier stage clinical testing may not be indicative of results in future clinical trials;

 

   

clinical trial results may not meet the level of statistical significance required by the FDA or other regulatory agencies;

 

   

enrollment in our clinical trials for our product candidates may be slower than we anticipate, resulting in significant delays;

 

   

we, or regulators, may suspend or terminate our clinical trials if the participating patients are being exposed to unacceptable health risks; and

 

   

the effects of our product candidates on patients may not be the desired effects or may include undesirable side effects or other characteristics that may delay or preclude regulatory approval or limit their commercial use, if approved.

Completion of clinical trials depends, among other things, on our ability to enroll a sufficient number of patients, which is a function of many factors, including:

 

   

the therapeutic endpoints chosen for evaluation;

 

   

the eligibility criteria defined in the protocol;

 

   

the perceived benefit of the investigational drug under study;

 

   

the size of the patient population required for analysis of the clinical trial’s therapeutic endpoints;

 

   

our ability to recruit clinical trial investigators and sites with the appropriate competencies and experience;

 

   

our ability to obtain and maintain patient consents; and

 

   

competition for patients by clinical trial programs for other treatments.

We may experience difficulties in enrolling patients in our clinical trials, which could increase the costs or affect the timing or outcome of these clinical trials. This is particularly true with respect to diseases with relatively small patient populations.

Pre-clinical studies of our product candidates may not predict the results of their human clinical trials.

Pre-clinical studies, including studies of our product candidates in animal models of disease, may not accurately predict the result of human clinical trials of those product candidates. In particular, promising animal studies suggesting the efficacy of TH-302 for the treatment of different types of cancer may not accurately predict the ability of TH-302 to treat cancer effectively in humans. TH-302 may be found not to be efficacious in treating cancer, alone or in combination with other agents, when studied in human clinical trials.

We are subject to significant regulatory approval requirements, which could delay, prevent or limit our ability to market our product candidates.

Our research and development activities, preclinical studies, clinical trials and the anticipated manufacturing and marketing of our product candidates are subject to extensive regulation by the FDA and other regulatory agencies in the United States and by comparable authorities in Europe and elsewhere. We require the approval of the relevant regulatory authorities before we may commence commercial sales of our product candidates in a given market. The regulatory approval process is expensive and time-consuming, and the timing of receipt of regulatory approval is difficult to predict. Our product candidates could require a significantly longer time to gain regulatory approval than expected, or may never gain approval. We cannot be certain that, even after expending substantial time and financial resources, we will obtain regulatory approval for any of our product candidates. A delay or denial of regulatory approval could delay or prevent our ability to generate product revenues and to achieve profitability.

 

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Changes in regulatory approval policies during the development period of any of our product candidates, changes in, or the enactment of, additional regulations or statutes, or changes in regulatory review practices for a submitted product application may cause a delay in obtaining approval or result in the rejection of an application for regulatory approval.

Regulatory approval, if obtained, may be made subject to limitations on the indicated uses for which we may market a product. These limitations could adversely affect our potential product revenues. Regulatory approval may also require costly post-marketing follow-up studies. In addition, the labeling, packaging, adverse event reporting, storage, advertising, promotion and record-keeping related to the product will be subject to extensive ongoing regulatory requirements. Furthermore, for any marketed product, its manufacturer and its manufacturing facilities will be subject to continual review and periodic inspections by the FDA or other regulatory authorities. Failure to comply with applicable regulatory requirements may, among other things, result in fines, suspensions of regulatory approvals, product recalls, product seizures, operating restrictions and criminal prosecution.

Our product candidates are based on targeting the microenvironment of solid tumors, which currently are unproven approaches to therapeutic intervention.

Our product candidates are designed to target the microenvironment of solid tumors either by harnessing hypoxia for selective toxin activation in the case of TH-302 and our HAP program or potentially utilizing the increased uptake of glucose or enhanced activation of glufosfamide in cancer cells relative to most normal cells. Our product candidates, glufosfamide and 2DG, share certain structural characteristics with glucose but act instead as poisons when taken up by a cancer cell. We have not, nor to our knowledge has any other company, received regulatory approval for a drug based on either of these approaches. We cannot be certain that our approaches will lead to the development of approvable or marketable drugs.

In addition, the FDA or other regulatory agencies may lack experience in evaluating the safety and efficacy of drugs based on these targeting approaches, which could lengthen the regulatory review process, increase our development costs and delay or prevent commercialization of our product candidates.

Our product candidates may have undesirable side effects that prevent or delay their regulatory approval or limit their use if approved.

Certain anti-tumor drugs being developed by us, such as TH-302, glufosfamide and 2DG, are expected to have undesirable side effects. The extent, severity and clinical significance of these effects may not be apparent initially and may be discovered during drug development or even post-approval. These expected side effects or other side effects identified in the course of our clinical trials or that may otherwise be associated with our product candidates may outweigh the benefits of our product candidates. Side effects may prevent or delay regulatory approval or limit market acceptance if our products are approved.

Delays in clinical testing could result in increased costs to us and delay our ability to obtain regulatory approval and commercialize our product candidates.

Significant delays in clinical testing could materially impact our product development costs and delay regulatory approval of our product candidates. We do not know whether planned TH-302, glufosfamide and 2DG clinical trials will need to be redesigned or will be completed on schedule, if at all. Clinical trials can be delayed for a variety of reasons, including adverse safety events experienced during our clinical trials and delays in:

 

   

obtaining regulatory approval to commence a clinical trial;

 

   

obtaining clinical materials;

 

   

reaching agreement on acceptable clinical trial agreement terms with prospective sites;

 

   

obtaining institutional review board approval to conduct a clinical trial at a prospective site; and

 

   

recruiting patients to participate in a clinical trial.

 

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Orphan drug exclusivity affords us limited protection, and if another party obtains orphan drug exclusivity for the drugs and indications we are targeting, we may be precluded from commercializing our product candidates in those indications.

In September 2006, the FDA granted orphan drug designation to glufosfamide, for the treatment of pancreatic cancer. For those drugs that meet the eligible requirements, we intend to seek orphan drug designation for the cancer indications that our drug candidates are intended to treat. Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition, which is defined by the FDA as a disease or condition that affects fewer than 200,000 individuals in the United States. The company that obtains the first FDA approval for a designated orphan drug indication receives marketing exclusivity for use of that drug for that indication for a period of seven years. Orphan drug exclusive marketing rights may be lost if the FDA later determines that the request for designation was materially defective, or if the manufacturer is unable to assure sufficient quantity of the drug. Orphan drug designation does not shorten the development or regulatory review time of a drug.

Orphan drug exclusivity may not prevent other market entrants. A different drug, or, under limited circumstances, the same drug may be approved by the FDA for the same orphan indication. The limited circumstances include an inability to supply the drug in sufficient quantities or where a new formulation of the drug has shown superior safety or efficacy. As a result, if our product is approved and receives orphan drug status, the FDA can still approve other drugs for use in treating the same indication covered by our product, which could create a more competitive market for us.

Moreover, due to the uncertainties associated with developing pharmaceutical products, we may not be the first to obtain marketing approval for any orphan drug indication. Even if we obtain orphan drug designation, if a competitor obtains regulatory approval for TH-302, glufosfamide or 2DG for the same indication we are targeting before we do, we would be blocked from obtaining approval for that indication for seven years, unless our product is a new formulation of the drug that has shown superior safety or efficacy, or the competitor is unable to supply sufficient quantities.

Even if we obtain regulatory approval, our marketed drugs will be subject to ongoing regulatory review. If we fail to comply with continuing United States and foreign regulations, we could lose our approvals to market drugs and our business would be seriously harmed.

Following initial regulatory approval of any drugs we may develop, we will be subject to continuing regulatory review, including review of adverse drug experiences and clinical results that are reported after our drug products become commercially available. This would include results from any post-marketing tests or vigilance required as a condition of approval. The manufacturer and manufacturing facilities we use to make any of our drug candidates will also be subject to periodic review and inspection by the FDA. If a previously unknown problem or problems with a product or a manufacturing and laboratory facility used by us is discovered, the FDA or foreign regulatory agency may impose restrictions on that product or on the manufacturing facility, including requiring us to withdraw the product from the market. Any changes to an approved product, including the way it is manufactured or promoted, often require FDA approval before the product, as modified, can be marketed. We and our contract manufacturers will be subject to ongoing FDA requirements for submission of safety and other post-market information. If we and our contract manufacturers fail to comply with applicable regulatory requirements, a regulatory agency may:

 

   

issue warning letters;

 

   

impose civil or criminal penalties;

 

   

suspend or withdraw our regulatory approval;

 

   

suspend or terminate any of our ongoing clinical trials;

 

   

refuse to approve pending applications or supplements to approved applications filed by us;

 

   

impose restrictions on our operations;

 

   

close the facilities of our contract manufacturers; or

 

   

seize or detain products or require a product recall.

 

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The FDA and foreign regulatory authorities may impose significant restrictions on the indicated uses and marketing of pharmaceutical products.

FDA rules for pharmaceutical promotion require that a company not promote an unapproved drug or an approved drug for an unapproved use. In addition to FDA requirements, regulatory and law enforcement agencies, such as the United States Department of Health and Human Services’ Office of Inspector General and the United States Department of Justice, monitor and investigate pharmaceutical sales, marketing and other practices. For example, sales, marketing and scientific/educational grant programs must comply with the Medicare-Medicaid Anti-Fraud and Abuse Act, as amended, the False Claims Act, as amended, and similar state laws. In recent years, actions by companies’ sales forces and marketing departments have been scrutinized intensely to ensure, among other things, that actions by such groups do not qualify as “kickbacks” to healthcare professionals. A “kickback” refers to the provision of any item of value to a healthcare professional or other person in exchange for purchasing, recommending, or referring an individual for an item or service reimbursable by a federal healthcare program. These kickbacks increase the expenses of the federal healthcare program and may result in civil penalties, criminal prosecutions, and exclusion from participation in government programs, any of which would adversely affect our financial condition and business operations. In addition, even if we are not determined to have violated these laws, government investigations into these issues typically require the expenditure of significant resources and generate negative publicity, which would also harm our financial condition. Comparable laws also exist at the state level.

We are, and in the future may be, subject to new federal and state requirements to submit information on our open and completed clinical trials to public registries and databases.

In 1997, a public registry of open clinical trials involving drugs intended to treat serious or life-threatening diseases or conditions was established under the Food and Drug Administration Modernization Act, or FDMA, in order to promote public awareness of and access to these clinical trials. Under FDMA, pharmaceutical manufacturers and other clinical trial sponsors are required to post the general purpose of these clinical trials, as well as the eligibility criteria, location and contact information of the clinical trials. Since the establishment of this registry, there has been significant public debate focused on broadening the types of clinical trials included in this or other registries, as well as providing for public access to clinical trial results. A voluntary coalition of medical journal editors has adopted a resolution to publish results only from those clinical trials that have been registered with a no-cost, publicly accessible database, such as www.clinicaltrials.gov. The Pharmaceuticals and Research Manufacturers of America has also issued voluntary principles for its members to make results from certain clinical trials publicly available and has established a website for this purpose. Other groups have adopted or are considering similar proposals for clinical trial registration and the posting of clinical trial results. The state of Maine has enacted legislation, with penalty provisions, requiring the disclosure of results from clinical trials involving drugs marketed in the state, and similar legislation has been introduced in other states. Federal legislation was introduced in the fall of 2004 to expand www.clinicaltrials.gov and to require the inclusion of clinical trial results in this registry. In some states, such as New York, prosecutors have alleged that a lack of disclosure of clinical trial information constitutes fraud, and these allegations have resulted in settlements with pharmaceutical companies that include agreements to post clinical trial results. Our failure to comply with any clinical trial posting requirements could expose us to negative publicity, fines, and other penalties, all of which could materially harm our business.

Risks Related to Our Financial Performance and Operations

We have incurred losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future, and our future profitability is uncertain.

We are a development stage company with a limited operating history and no current source of revenue from the sale of our product candidates. We have incurred losses in each year since our inception in 2001, and we expect to incur losses for the foreseeable future. We have devoted, and will continue to devote for the foreseeable future, substantially all of our resources to research and development of our product candidates. For the six months ended June 30, 2008, we had a net loss of $8.9 million and an accumulated deficit of $174.3 million. Clinical trials are costly. We do not expect to generate any revenue from the sale of our product candidates in the near term, and we expect to continue to have significant losses.

To attain profitability, we will need to develop products successfully and market and sell them effectively. We cannot predict when we will become profitable, if at all. We have never generated revenue from the sale of our product candidates, and there is no guarantee that we will be able to do so in the future. If we fail to become profitable, or if we are unable to fund our continuing losses, we would be unable to continue our research and development programs.

If we fail to complete our previously announced proposed financing and do not otherwise obtain the capital necessary to fund our operations when needed, which could force us to delay, reduce or eliminate our drug discovery, product development and commercialization activities.

We believe that our cash, cash equivalents and marketable securities as of June 30, 2008, will be sufficient to fund our projected operating requirements through the first quarter of 2009, including completing our current clinical trials, conducting research and discovery efforts towards additional product candidates, working capital and general corporate purposes. Without additional capital, meeting our working capital needs under a continuation of our current business model would prove difficult beyond the first quarter of 2009.

 

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On July 9, 2008, we entered into a transaction for the proposed sale of an aggregate of 53,823,530 shares of our common stock for a purchase price equal to $0.34 per share and to issue warrants to purchase 21,529, 413 shares of common stock. We anticipate raising gross proceeds of $18.3 million and net offering proceeds are expected to be approximately $17.0 million. Completion of the proposed financing is subject to the satisfaction of certain conditions, some of which are outside of our control, including, but not limited to:

 

   

stockholder approval of the proposed financing;

 

   

no suspension of trading or interruption of listing of our common stock on a qualified trading market;

 

   

the continued accuracy of certain representations and warranties; and

 

   

no material adverse change in our results of operations, assets, business or financial condition.

If we do not complete the proposed financing for any reason, we would be forced to preserve our cash position through a combination of additional cost reduction measures, sales of assets likely at values significantly below their potential worth, or the pursuit of alternative financing transactions that would likely be on terms substantially more disadvantageous to us and dilutive to our stockholders. If we are unable to raise additional funds, we may be forced to delay, reduce or eliminate our drug discovery, product development and commercialization activities.

Even if we complete the proposed financing, we are likely to require substantial additional funding and may be unable to raise capital when needed, which could force us to delay, reduce or eliminate our drug discovery, product development and commercialization activities.

Developing drugs, conducting clinical trials, and commercializing products is expensive. Our future funding requirements will depend on many factors, including:

 

   

the terms and timing of any collaborative, licensing, acquisition or other arrangements that we may establish;

 

   

the progress and cost of our clinical trials and other research and development activities;

 

   

the costs and timing of obtaining regulatory approvals;

 

   

the costs of filing, prosecuting, defending and enforcing any patent applications, claims, patents and other intellectual property rights;

 

   

the cost and timing of securing manufacturing capabilities for our clinical product candidates and commercial products, if any; and

 

   

the costs of lawsuits involving us or our product candidates.

We believe that our existing cash, cash equivalents and marketable securities as of June 30, 2008 and the expected net proceeds from the proposed financing will be sufficient to fund our projected operating requirements through the fourth quarter of 2009, including completing our current clinical trials, conducting research and discovery efforts towards additional product candidates, working capital and general corporate purposes. Additional funds will be required to in-license or otherwise acquire and develop additional products or programs. We expect to seek funds through arrangements with collaborators or others that may require us to relinquish rights to certain products candidates that we might otherwise seek to develop or commercialize independently. We cannot be certain that we will be able to enter into any such arrangements on reasonable terms, if at all.

We expect to need to raise additional capital or incur indebtedness to continue to fund our future operations. We may seek to raise capital through a variety of sources, including:

 

   

the public equity market;

 

   

private equity financing;

 

   

collaborative arrangements; and/or

 

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public or private debt.

Our ability to raise additional funds will depend on our clinical and regulatory events, our ability to identify promising in-licensing opportunities, and factors related to financial, economic, and market conditions, many of which are beyond our control. We cannot be certain that sufficient funds will be available to us when required or on satisfactory terms, if at all. If adequate funds are not available, we may be required to significantly reduce or refocus our operations or to obtain funds through arrangements that may require us to relinquish rights to certain of our products, technologies or potential markets, any of which could delay or require that we curtail or eliminate some or all of our development programs or otherwise have a material adverse effect on our business, financial condition and results of operations.

In addition, our ability to raise additional capital may be dependent upon our stock being quoted on The NASDAQ Capital Market. On October 19, 2007, we received a notice from the Listing Qualifications Department of The NASDAQ Stock Market indicating that the Company did not comply with the $1.00 minimum bid price requirement for continued listing set forth in NASDAQ Marketplace Rule 4450(a)(5). The notice further stated that pursuant to Marketplace Rule 4450(e)(2), we would be provided 180 calendar days, or until April 16, 2008 to regain compliance. The notice further indicated that if compliance with the minimum bid price rule was not regained by April 16, 2008, NASDAQ would provide written notification that our common stock would be delisted. On April 17, 2008, we received a Staff Determination Letter from NASDAQ indicating that we had not gained compliance with the $1.00 minimum bid price requirement for continued listing and that our securities are therefore subject to delisting. On April 24, 2008, we requested a hearing before the NASDAQ Listing Qualifications Panel to appeal the Staff Determination and were granted a hearing that was held on June 5, 2008, which stayed the delisting pending the Panel’s decision. At the hearing we requested to transfer the listing of our common stock to from The NASDAQ Global Market to The NASDAQ Capital Market since we satisfied the requirements for initial inclusion set forth in Marketplace Rule 4310(c), other than the minimum bid price requirement of Marketplace Rule 4310(c)(4). On June 13, 2008, the NASDAQ Listing Qualifications Panel approved our request to transfer to The NASDAQ Capital Market and an extension to comply with the minimum $1.00 bid price requirement through September 5, 2008, by which date the Company must evidence compliance for at least ten consecutive business days. The transfer took effect on June 17, 2008.

If we are unable to secure additional financing on a timely basis or on terms favorable to us, we may be required to cease or reduce certain research and development projects, to sell some or all of our technology or assets or to merge all or a portion of our business with another entity. Insufficient funds may require us to delay, scale back, or eliminate some or all of our activities, and if we are unable to obtain additional funding, there is uncertainty regarding our continued existence.

If we complete our proposed financing, otherwise raise additional funds or if our board of directors elects not to close the proposed financing, our stockholders will suffer substantial dilution of the percentage ownership of our common stock.

Stockholders will incur immediate and substantial dilution of their percentage ownership of our common stock if our recently proposed financing is completed. The aggregate ownership of all holders of our outstanding common stock immediately prior to the closing of the proposed financing will be reduced to approximately 41% of the outstanding shares of our common stock after the closing (disregarding purchases of common stock in the offering by our existing stockholders), or approximately 33% assuming exercise in full of the warrants issued as part of the proposed financing. Even if we complete the proposed financing, our business may require that we raise additional funds through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. We cannot be certain that additional funding will be available on a timely basis or on acceptable terms, or at all. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience dilution. Debt financing, if available, may subject us to restrictive covenants that could limit our flexibility in conducting future business activities. To the extent that we raise additional funds through collaboration and licensing arrangements, it may be necessary to relinquish some rights to our product candidates. If our board of directors elects not to close the proposed offering, subject to certain exceptions, we will be required to issue to the investors warrants to purchase a number of shares equal to 19.9% of the outstanding shares of our common stock as of July 9, 2008. Such warrants will be identical to the warrants issuable in the proposed financing, except that the exercise price will be equal to $0.34 per share.

If we complete our proposed financing, the investors in the proposed financing will acquire shares of common stock and warrants representing substantially more than a majority of shares of our common stock.

If we complete our proposed financing, the investors in the proposed financing would acquire shares of our common stock and warrants to acquire such shares representing up to approximately 67% of our outstanding common stock, assuming the full investment of approximately $18.3 million and the exercise in full of the warrants. Immediately following completion

 

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of the proposed financing, those investors would hold a sufficient portion of our outstanding shares so as to permit them, if they chose to act in concert, to approve all actions requiring stockholder approval, including the election of directors, a merger, business combination or certain other strategic or financing transactions, without obtaining the approval of other stockholders.

Our success depends in part on retaining and motivating key personnel and, if we fail to do so, it may be more difficult for us to execute our business strategy. As a small organization we are dependent on key employees and may need to hire additional personnel to execute our business strategy successfully.

Our success depends on our continued ability to attract, retain and motivate highly qualified management, clinical and scientific personnel and on our ability to develop and maintain important relationships with leading academic institutions, clinicians and scientists. We are highly dependent upon our senior management and scientific staff, particularly our Chief Executive Officer, Dr. Harold E. Selick, President and Chief Medical Officer, Dr. John M. Curd and Senior Vice President of Discovery Research, Dr. Mark G. Matteucci. We do not have employment agreements with Drs. Selick, Curd or Matteucci. The loss of the services of Drs. Selick, Curd or Matteucci or one or more of our other key employees could delay or have an impact on the successful completion of our clinical trials or the development of additional product candidates.

As of June 30, 2008, we had 29 employees. Our success will depend on our ability to retain and motivate remaining personnel and hire additional qualified personnel when required. Competition for qualified personnel in the biotechnology field is intense. We face competition for personnel from other biotechnology and pharmaceutical companies, universities, public and private research institutions and other organizations. We may not be able to attract and retain qualified personnel on acceptable terms given the competition for such personnel. If we are unsuccessful in our retention, motivation and recruitment efforts, we may be unable to execute our business strategy.

The reduction in our work force may cause difficulties in conducting operations and maintaining an effective work environment.

The reductions in our work force in August 2006 and October 2007 imposed significant added responsibilities on remaining management and other employees, including the need to consolidate job functions and to conduct operation with fewer employees. We expect that we may need to increase our use of various third parties in order to continue and conduct some operations. Our ability to manage our operations and outside relationships will require us to continue to improve our operational, financial and management controls, reporting systems and procedures. If we are unable to do this effectively, it may be difficult for us to execute our business strategy.

Our facilities in California are located near an earthquake fault, and an earthquake or other natural disaster or resource shortage could disrupt our operations.

Important documents and records, such as hard copies of our laboratory books and records for our product candidates, are located in our corporate headquarters at a single location in Redwood City, California, near active earthquake zones. In the event of a natural disaster, such as an earthquake, drought or flood, or localized extended outages of critical utilities or transportation systems, we do not have a formal business continuity or disaster recovery plan, and could therefore experience a significant business interruption. In addition, California from time to time has experienced shortages of water, electric power and natural gas. Future shortages and conservation measures could disrupt our operations and could result in additional expense. Although we maintain business interruption insurance coverage, the policy specifically excludes coverage for earthquake and flood.

Risks Related to Our Dependence on Third Parties

We rely on third parties to manufacture TH-302, glufosfamide and 2DG. If these parties do not manufacture the active pharmaceutical ingredients or finished products of satisfactory quality, in a timely manner, in sufficient quantities or at an acceptable cost, clinical development and commercialization of our product candidates could be delayed.

We do not currently own or operate manufacturing facilities; consequently, we rely and expect to continue to rely on third parties for the production of clinical and commercial quantities of our product candidates. We have not yet entered into any long term manufacturing or supply agreement for any of our product candidates. Our current and anticipated future dependence upon others for the manufacture of our product candidates may adversely affect our ability to develop and commercialize any product candidates on a timely and competitive basis.

 

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Our initial supplies of glufosfamide were prepared by a subsidiary of Baxter International, Inc. and were used to initiate some of our clinical trials. We subsequently relied on new contract manufacturers for the manufacturing of glufosfamide API and drug product. If we seek a partner to continue development of glufosfamide, we will be dependent on contract manufacturers to produce additional API and drug product. If we are not successful, we may experience a significant delay in our glufosfamide clinical development program.

We rely on contract manufacturers for the manufacturing of 2DG API and drug product. If we seek a partner to continue development of 2DG, we will be dependent on contract manufacturers to produce additional API and drug product. If we are not successful, we may experience problems in seeking a partner or in meeting our obligations under a potential partnership to continue development of 2DG.

Our contract manufacturers have produced sufficient TH-302 API and drug product for the initial stage of our Phase 1 clinical trial, which commenced in July 2007. Additional clinical trial material will be manufactured as required. This amount will be partially dependent on the maximum tolerated dose of TH-302 as a single agent and as a combination agent with chemotherapy. If we are not successful in manufacturing sufficient TH-302 clinical trial material, we may experience a significant delay in our TH-302 clinical program.

We will need to enter into additional agreements for additional supplies of each of our product candidates to complete clinical development and/or commercialize them. We cannot be certain that we can do so on favorable terms, if at all. The products will need to satisfy all cGMP manufacturing requirements, including passing specifications. Our inability to satisfy these requirements could delay our clinical programs.

To date, we believe drug supply for our product candidates have been manufactured in quantities sufficient for preclinical studies or clinical trials. If any of our product candidates is approved by the FDA or other regulatory agencies for commercial sale, we will need to have it manufactured in commercial quantities. We may not be able to increase the manufacturing capacity for any of our product candidates in a timely or economic manner successfully or at all. Significant scale-up of manufacturing may require additional validation studies, which the FDA and other regulatory agencies must review and approve. If we are unable to successfully increase the manufacturing capacity for a product candidate, the regulatory approval or commercial launch of that product candidate may be delayed, or there may be a shortage of supply which could limit our sales.

In addition, if the facility or the equipment in the facility that produces our product candidates is significantly damaged or destroyed, or if the facility is located in another country and trade or commerce with such country is interrupted, we may be unable to replace the manufacturing capacity quickly or inexpensively. The inability to obtain manufacturing agreements, the damage or destruction of a facility on which we rely for manufacturing or any other delays in obtaining supply would delay or prevent us from completing our clinical trials and commercializing our current product candidates.

We have no control over our manufacturers’ and suppliers’ compliance with manufacturing regulations, and their failure to comply could result in an interruption in the supply of our product candidates.

The facilities used by our contract manufacturers must undergo an inspection by the FDA for compliance with current good manufacturing practice, or cGMP regulations, before the respective product candidates can be approved. In the event these facilities do not receive a satisfactory cGMP inspection for the manufacture of our product candidates, we may need to fund additional modifications to our manufacturing process, conduct additional validation studies, or find alternative manufacturing facilities, any of which would result in significant cost to us as well as a delay of up to several years in obtaining approval for such product candidate. In addition, our contract manufacturers, and any alternative contract manufacturer we may utilize, will be subject to ongoing periodic inspection by the FDA and corresponding state and foreign agencies for compliance with cGMP regulations, similar foreign regulations and other regulatory standards. We do not have control over our contract manufacturers’ compliance with these regulations and standards. Any failure by our third-party manufacturers or suppliers to comply with applicable regulations could result in sanctions being imposed on them (including fines, injunctions and civil penalties), failure of regulatory authorities to grant marketing approval of our product candidates, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products, operating restrictions and criminal prosecution.

We rely on third parties to conduct some of our clinical trials, and their failure to perform their obligations in a timely or competent manner may delay development and commercialization of our product candidates.

We may require one or more clinical research organization to oversee our clinical trials. There are numerous alternative sources to provide these services. However, we may face delays outside of our control if these parties do not perform their obligations in a timely or competent fashion or if we are forced to change service providers. This risk is heightened for our

 

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clinical trials conducted outside of the United States, where it may be more difficult to ensure that clinical trials are conducted in compliance with FDA requirements. Any third-party that we hire to conduct clinical trials may also provide services to our competitors, which could compromise the performance of their obligations to us. If we experience significant delays in the progress of our clinical trials and in our plans to file NDAs, the commercial prospects for product candidates could be harmed and our ability to generate product revenue would be delayed or prevented.

We may rely on strategic collaborators to market and sell our products.

We have no sales and marketing experience. We may contract with strategic collaborators to sell and market our products, when and if approved. We may not be successful in entering into collaborative arrangements with third parties for the sale and marketing of any products. Any failure to enter into collaborative arrangements on favorable terms could delay or hinder our ability to develop and commercialize our product candidates and could increase our costs of development and commercialization. Dependence on collaborative arrangements will subject us to a number of risks, including:

 

   

we may not be able to control the amount or timing of resources that our collaborators may devote to the product candidates;

 

   

we may be required to relinquish important rights, including intellectual property, marketing and distribution rights;

 

   

we may have lower revenues than if we were to market and distribute such products ourselves;

 

   

should a collaborator fail to commercialize one of our product candidates successfully, we may not receive future milestone payments or royalties;

 

   

a collaborator could separately move forward with a competing product candidate developed either independently or in collaboration with others, including our competitors;

 

   

our collaborators may experience financial difficulties;

 

   

business combinations or significant changes in a collaborator’s business strategy may also adversely affect a collaborator’s willingness or ability to complete its obligations under any arrangement; and

 

   

our collaborators may operate in countries where their operations could be adversely affected by changes in the local regulatory environment or by political unrest.

Risks Related to Our Intellectual Property

2DG is a known compound that is not protected by patents on the composition of the molecule.

2DG is a known compound that is no longer eligible for patent protection on the composition of the molecule. A patent of this nature, known as a compound per se patent, excludes others from making, using or selling the patented compound, regardless of how or for what purpose the compound is formulated or intended to be used. Consequently, this compound and certain of its uses are in the public domain.

We have an issued U.S. patent for the use of orally administered 2DG for the treatment of cancer at certain doses and administration schedules, and we have in-licensed two issued U.S. patents that cover the treatment of certain cancers with 2DG in combination with other specific anti-cancer agents. We also have applications related to the issued licensed patent that cover other 2DG combination therapies, but we cannot be certain that any other patent application under this license will be issued. Others may develop and market 2DG for the treatment of cancer, however, if they develop treatments using dosing and administration schedules or combination therapies outside the scope of our patents or in contravention of our patent rights.

Hypoxia Activated Prodrug technology is not a platform technology broadly protected by patents, and others may be able to develop competitive drugs using this approach.

We have not issued patents or patent applications that would prevent others from taking advantage of Hypoxia Activated Prodrug technology generally to discover and develop new therapies for cancer or other diseases. Consequently, our competitors may seek to discover and develop potential therapeutics that operate by mechanisms of action that are the same or similar to the mechanisms of action of our HAP product candidates.

 

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Metabolic Targeting by targeting the increased uptake of glucose and the increased reliance on glycolysis as an energy source in cancer cells is not protected by patents, and others may be able to develop competitive drugs using this approach.

We have not issued patents or patent applications that would prevent others from taking advantage of targeting the increased uptake of glucose and the increased reliance of glycolysis as an energy source in solid tumors to discover and develop new therapies for cancer or other diseases. Consequently, our competitors may seek to discover and develop potential therapeutics that operate by mechanisms of action that are the same or similar to the mechanisms of action of our product candidates.

We are dependent on patents and proprietary technology, both our own and those licensed from others. If we or our licensors fail to adequately protect this intellectual property or if we otherwise do not have exclusivity for the marketing of our products, our ability to commercialize products could suffer.

Our commercial success will depend in part on our ability and the ability of our licensors to obtain and maintain patent protection sufficient to prevent others from marketing our product candidates, as well as to successfully defend and enforce these patents against infringement and to operate without infringing the proprietary rights of others. We will only be able to protect our product candidates from unauthorized use by third parties to the extent that valid and enforceable patents cover our product candidates or they are effectively protected by trade secrets. If our patent applications do not result in issued patents, or if our patents, or those patents we have licensed are found to be invalid, we will lose the ability to exclude others from making, using or selling the inventions claimed therein. We have a limited number of patents and pending patent applications.

The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions. No consistent policy regarding the breadth of claims allowed in biotechnology patents has emerged to date in the United States. The laws of many countries may not protect intellectual property rights to the same extent as United States laws, and those countries may lack adequate rules and procedures for defending our intellectual property rights. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property. We do not know whether any of our patent applications will result in the issuance of any patents and we cannot predict the breadth of claims that may be allowed in our patent applications or in the patent applications we license from others.

The degree of future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:

 

   

we or our licensors might not have been the first to make the inventions covered by each of our or our licensors’ pending patent applications and issued patents, and we may have to participate in expensive and protracted interference proceedings to determine priority of invention;

 

   

we or our licensors might not have been the first to file patent applications for these inventions;

 

   

others may independently develop similar or alternative product candidates or duplicate any of our or our licensors’ product candidates;

 

   

our or our licensors’ pending patent applications may not result in issued patents;

 

   

our or our licensors’ issued patents may not provide a basis for commercially viable products or may not provide us with any competitive advantages or may be challenged by third parties;

 

   

others may design around our or our licensors’ patent claims to produce competitive products that fall outside the scope of our or our licensors’ patents;

 

   

we may not develop or in-license additional patentable proprietary technologies related to our product candidates; or

 

   

the patents of others may prevent us from marketing one or more of our product candidates for one or more indications that may be valuable to our business strategy.

 

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Moreover, an issued patent does not guarantee us the right to practice the patented technology or commercialize the patented product. Third parties may have blocking patents that could be used to prevent us from commercializing our patented products and practicing our patented technology. Our issued patents and those that may be issued in the future may be challenged, invalidated or circumvented, which could limit our ability to prevent competitors from marketing related product candidates or could limit the length of the term of patent protection of our product candidates. In addition, the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages against competitors with similar technology. Furthermore, our competitors may independently develop similar technologies. Moreover, because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that, before any of our product candidates can be commercialized, any related patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantage of the patent. For glufosfamide, the major European counterparts to the U.S. patent expire in 2009 and the U.S. patent expires in 2014. Patent term extension may not be available for these patents.

We rely on trade secrets and other forms of non-patent intellectual property protection. If we are unable to protect our trade secrets, other companies may be able to compete more effectively against us.

We rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect, especially in the pharmaceutical industry, where much of the information about a product must be made public during the regulatory approval process. Although we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third party illegally obtained and is using our trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing to or may not protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how.

If we are sued for infringing intellectual property rights of third parties or if we are forced to engage in an interference proceeding, it will be costly and time consuming, and an unfavorable outcome in that litigation or interference would have a material adverse effect on our business.

Our ability to commercialize our product candidates depends on our ability to develop, manufacture, market and sell our product candidates without infringing the proprietary rights of third parties. Numerous United States and foreign issued patents and pending patent applications, which are owned by third parties, exist in the general field of cancer therapies or in fields that otherwise may relate to our product candidates. We are also aware of a patent that claims certain agents, including 2DG, to inhibit the import of glucose-6-phosphate into the endoplasmic reticulum of a cell. We do not know whether administration of 2DG for our intended uses inhibits such import. If it does, we would be required to license the patent or risk that a claim of infringement could be made. If we are shown to infringe, we could be enjoined from use or sale of the claimed invention if we are unable to prove that the patent is invalid. In addition, because patent applications can take many years to issue, there may be currently pending applications, unknown to us, which may later result in issued patents that our product candidates or any other compound that we may develop, may infringe, or which may trigger an interference proceeding regarding one of our owned or licensed patents or applications. There could also be existing patents of which we are not aware that our product candidates may inadvertently infringe or which may become involved in an interference proceeding.

The biotechnology and biopharmaceutical industries are characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. For so long as our product candidates are in clinical trials, we believe our clinical activities fall within the scope of the exemptions provided by 35 U.S.C. Section 271(e) in the United States, which exempts from patent infringement liability activities reasonably related to the development and submission of information to the FDA. As our clinical investigational drugs progress toward commercialization, the possibility of a patent infringement claim against us increases. While we attempt to ensure that our active clinical investigational drugs and the methods we employ to manufacture them, as well as the methods for their use we intend to promote, do not infringe other parties’ patents and other proprietary rights. However, we cannot be certain they do not, and competitors or other parties may assert that we infringe their proprietary rights in any event.

We may be exposed to future litigation based on claims that our product candidates, or the methods we employ to manufacture them, infringe the intellectual property rights of others. Our ability to manufacture and commercialize our product candidates may depend on our ability to demonstrate that the manufacturing processes we employ and the use of our product candidates do not infringe third-party patents. If third-party patents were found to cover our product candidates or their use or manufacture, we could be required to pay damages or be enjoined and therefore unable to commercialize our product candidates, unless we obtained a license. A license may not be available to us on acceptable terms, if at all.

 

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Risks Related To Our Industry

If our competitors are able to develop and market products that are more effective, safer or more affordable than ours, or obtain marketing approval before we do, our commercial opportunities may be limited.

Competition in the biotechnology and pharmaceutical industries is intense and continues to increase, particularly in the area of cancer treatment. Most major pharmaceutical companies and many biotechnology companies are aggressively pursuing oncology development programs, including traditional therapies and therapies with novel mechanisms of action. Our cancer product candidates face competition from established biotechnology and pharmaceutical companies, including Sanofi-Aventis Group, Astrazeneca PLC, Genentech, Inc., Eli Lilly and Company and Pfizer, Inc. and from generic pharmaceutical manufacturers. In particular, our drug candidates for pancreatic cancer will compete with Gemzar, marketed by Eli Lilly and Company, doxorubicin, cisplatin, paclitaxel, ifosfamide, and 5-flurouracil, or 5-FU, a generic product which is sold by many manufacturers. In addition, several drugs marketed for different indications, such as Camptosar®, marketed by Pfizer, Inc., Erbitux®, marketed by Imclone Systems Inc. and Bristol-Myers Squibb Company, Taxotere®, marketed by the Sanofi-Aventis Group, Xeloda®, marketed by Roche, Avastin®, marketed by Genentech, Inc., Nexavar®, marketed by Onyx Pharmaceuticals, Inc. and Bayer AG, and Alimta®, marketed by Eli Lilly and Company, are under investigation as possible combination therapies or monotherapy for pancreatic, ovarian, small cell lung cancers and soft tissue sarcoma. Additionally OSI Pharmaceuticals, Inc. and Genentech, Inc. market Tarceva® as a combination therapy with gemcitabine for the first-line treatment of pancreatic cancer. In addition, a number of companies, including Novacea, Inc. and Proacta Inc., have compounds in clinical trials that target the hypoxic zones of tumors, as our TH-302 clinical product candidate is intended to do, and Sanofi-Aventis recently completed a Phase 3 clinical trial on Tirapazamine, a hypoxically activated prodrug, and while Sanofi-Aventis has released rights to the compound to the innovator SRI, another company may pursue further clinical development of the compound.

We also face potential competition from academic institutions, government agencies and private and public research institutions engaged in the discovery and development of drugs and therapies. Many of our competitors have significantly greater financial resources and expertise in research and development, preclinical testing, conducting clinical trials, obtaining regulatory approvals, manufacturing, sales and marketing than we do. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established pharmaceutical companies.

Our competitors may succeed in developing products that are more effective, have fewer side effects and are safer or more affordable than our product candidates, which would render our product candidates less competitive or noncompetitive. These competitors also compete with us to recruit and retain qualified scientific and management personnel, establish clinical trial sites and patient registration for clinical trials, as well as to acquire technologies and technology licenses complementary to our programs or advantageous to our business. Moreover, competitors that are able to achieve patent protection obtain regulatory approvals and commence commercial sales of their products before we do, and competitors that have already done so, may enjoy a significant competitive advantage.

There is a substantial risk of product liability claims in our business. If we do not obtain sufficient liability insurance, a product liability claim could result in substantial liabilities.

Our business exposes us to significant potential product liability risks that are inherent in the development, manufacturing and marketing of human therapeutic products. Regardless of merit or eventual outcome, product liability claims may result in:

 

   

delay or failure to complete our clinical trials;

 

   

withdrawal of clinical trial participants;

 

   

decreased demand for our product candidates;

 

   

injury to our reputation;

 

   

litigation costs;

 

   

substantial monetary awards against us; and

 

   

diversion of management or other resources from key aspects of our operations.

 

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If we succeed in marketing products, product liability claims could result in an FDA investigation of the safety or efficacy of our products, our manufacturing processes and facilities or our marketing programs. An FDA investigation could also potentially lead to a recall of our products or more serious enforcement actions, or limitations on the indications, for which they may be used, or suspension or withdrawal of approval.

We have product liability insurance that covers our clinical trials up to an $8 million annual aggregate limit. We intend to expand our insurance coverage to include the sale of commercial products if marketing approval is obtained for our product candidates or any other compound that we may develop. However, insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost or at all, and the insurance coverage that we obtain may not be adequate to cover potential claims or losses.

Even if we receive regulatory approval to market our product candidates, the market may not be receptive to our product candidates upon their commercial introduction, which would negatively affect our ability to achieve profitability.

Our product candidates may not gain market acceptance among physicians, patients, healthcare payors and the medical community. The degree of market acceptance of any approved products will depend on a number of factors, including:

 

   

the effectiveness of the product;

 

   

the prevalence and severity of any side effects;

 

   

potential advantages or disadvantages over alternative treatments;

 

   

relative convenience and ease of administration;

 

   

the strength of marketing and distribution support;

 

   

the price of the product, both in absolute terms and relative to alternative treatments; and

 

   

sufficient third-party coverage or reimbursement.

If our product candidates receive regulatory approval but do not achieve an adequate level of acceptance by physicians, healthcare payors and patients, we may not generate product revenues sufficient to attain profitability.

If third-party payors do not adequately reimburse patients for any of our product candidates, if approved for marketing, we may not be successful in selling them.

Our ability to commercialize any products successfully will depend in part on the extent to which reimbursement will be available from governmental and other third-party payors, both in the United States and in foreign markets. Even if we succeed in bringing one or more products to the market, the amount reimbursed for our products may be insufficient to allow us to compete effectively and could adversely affect our profitability.

Reimbursement by a governmental and other third-party payor may depend upon a number of factors, including a governmental or other third-party payor’s determination that use of a product is:

 

   

a covered benefit under its health plan;

 

   

safe, effective and medically necessary;

 

   

appropriate for the specific patient;

 

   

cost-effective; and

 

   

neither experimental nor investigational.

Obtaining reimbursement approval for a product from each third-party and governmental payor is a time-consuming and costly process that could require us to provide supporting scientific, clinical and cost-effectiveness data for the use of our products to each payor. We may not be able to provide data sufficient to obtain reimbursement.

 

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Eligibility for coverage does not imply that any drug product will be reimbursed in all cases or at a rate that allows us to make a profit. Interim payments for new products, if applicable, may also not be sufficient to cover our costs and may not become permanent. Reimbursement rates may vary according to the use of the drug and the clinical setting in which it is used, may be based on payments allowed for lower-cost drugs that are already reimbursed, may be incorporated into existing payments for other products or services, and may reflect budgetary constraints and/or Medicare or Medicaid data used to calculate these rates. Net prices for products also may be reduced by mandatory discounts or rebates required by government health care programs or by any future relaxation of laws that restrict imports of certain medical products from countries where they may be sold at lower prices than in the United States.

The health care industry is experiencing a trend toward containing or reducing costs through various means, including lowering reimbursement rates, limiting therapeutic class coverage and negotiating reduced payment schedules with service providers for drug products. The Medicare Prescription Drug, Improvement and Modernization Act of 2003, or MMA, became law in November 2003 and created a broader prescription drug benefit for Medicare beneficiaries. The MMA also contains provisions intended to reduce or eliminate delays in the introduction of generic drug competition at the end of patent or nonpatent market exclusivity. The impact of the MMA on drug prices and new drug utilization over the next several years is unknown. The MMA also made adjustments to the physician fee schedule and the measure by which prescription drugs are presently paid, changing from Average Wholesale Price to Average Sales Price. The effects of these changes are unknown but may include decreased utilization of new medicines in physician prescribing patterns, and further pressure on drug company sponsors to provide discount programs and reimbursement support programs. There have been, and we expect that there will continue to be, federal and state proposals to constrain expenditures for medical products and services, which may affect reimbursement levels for our future products. In addition, the Centers for Medicare and Medicaid Services frequently change product descriptors, coverage policies, product and service codes, payment methodologies and reimbursement values. Third-party payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates and may have sufficient market power to demand significant price reductions.

Foreign governments tend to impose strict price controls, which may adversely affect our future profitability.

In some foreign countries, particularly in the European Union, prescription drug pricing is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our profitability will be negatively affected.

We may incur significant costs complying with environmental laws and regulations, and failure to comply with these laws and regulations could expose us to significant liabilities.

Our research and development activities use biological and hazardous materials that are dangerous to human health and safety or the environment. We are subject to a variety of federal, state and local laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these materials and wastes resulting from these materials. We are also subject to regulation by the Occupational Safety and Health Administration, or OSHA, the California and federal environmental protection agencies and to regulation under the Toxic Substances Control Act. OSHA or the California or federal Environmental Protection Agency, or EPA, may adopt regulations that may affect our research and development programs. We are unable to predict whether any agency will adopt any regulations that could have a material adverse effect on our operations. We have incurred, and will continue to incur, capital and operating expenditures and other costs in the ordinary course of our business in complying with these laws and regulations.

Although we believe our safety procedures for handling and disposing of these materials comply with federal, state and local laws and regulations, we cannot entirely eliminate the risk of accidental injury or contamination from the use, storage, handling or disposal of hazardous materials. In the event of contamination or injury, we could be held liable for any resulting damages, and any liability could significantly exceed our insurance coverage.

 

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We may not be able to conduct, or contract with others to conduct, animal testing in the future, which could harm our research and development activities.

Certain laws and regulations relating to drug development require us to test our product candidates on animals before initiating clinical trials involving humans. Animal testing activities have been the subject of controversy and adverse publicity. Animal rights groups and other organizations and individuals have attempted to stop animal testing activities by pressing for legislation and regulation in these areas and by disrupting these activities through protests and other means. To the extent the activities of these groups are successful, our research and development activities may be interrupted or delayed.

Risks Related To Our Common Stock

Our common stock may be delisted from the NASDAQ Capital Market.

In addition, our ability to raise additional capital may be dependent upon our stock being quoted on The NASDAQ Capital Market. On October 19, 2007, we received a notice from the Listing Qualifications Department of The NASDAQ Stock Market indicating that the Company did not comply with the $1.00 minimum bid price requirement for continued listing set forth in NASDAQ Marketplace Rule 4450(a)(5). The notice further stated that pursuant to Marketplace Rule 4450(e)(2), we would be provided 180 calendar days, or until April 16, 2008 to regain compliance. The notice further indicated that if compliance with the minimum bid price rule was not regained by April 16, 2008, NASDAQ would provide written notification that our common stock would be delisted. On April 17, 2008, we received a Staff Determination Letter from NASDAQ indicating that we had not gained compliance with the $1.00 minimum bid price requirement for continued listing and that our securities were therefore subject to delisting. On April 24, 2008, we requested a hearing before the NASDAQ Listing Qualifications Panel to appeal the Staff Determination and were granted a hearing that was held on June 5, 2008, which stayed the delisting pending the Panel’s decision. At the hearing we requested to transfer the listing of our common stock to from The NASDAQ Global Market to The NASDAQ Capital Market since we satisfied the requirements for initial inclusion set forth in Marketplace Rule 4310(c), other than the minimum bid price requirement of Marketplace Rule 4310(c)(4). On June 13, 2008, the NASDAQ Listing Qualifications Panel approved our request to transfer to The NASDAQ Capital Market and an extension to comply with the minimum $1.00 bid price requirement through September 5, 2008, by which date the Company must evidence compliance for at least ten consecutive business days. The transfer took effect on June 17, 2008.

We will continue to monitor the bid price for our common stock and, if we have not regained compliance in sufficient time, our Board of Directors will implement a reverse stock split to regain compliance with the minimum bid price requirement. In that regard, on May 13, 2008, our stockholders approved the implementation of a reverse stock split of all of the outstanding shares of our common stock, to be effected at the discretion of the Board of Directors at a ratio of not less than one-for-two and not greater than one-for-ten shares. To maintain our listing on the NASDAQ Capital Market, we are also required, among other things, to either maintain stockholders’ equity of at least $5 million or a market value of at least $15 million. While we currently satisfy the stockholders’ equity requirement, we may not continue to do so.

The price of our common stock has been and may continue to be volatile.

The stock markets in general, the markets for biotechnology stocks and, in particular, the stock price of our common stock, have experienced extreme volatility.

Price declines in our common stock could result from general market and economic conditions and a variety of other factors, including:

 

   

adverse results or delays in our clinical trials;

 

   

announcements of FDA non-approval of our product candidates, or delays in the FDA or other foreign regulatory agency review process;

 

   

adverse actions taken by regulatory agencies with respect to our product candidates, clinical trials, manufacturing processes or sales and marketing activities;

 

   

announcements of technological innovations, patents or new products by our competitors;

 

   

regulatory developments in the United States and foreign countries;

 

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any lawsuit involving us or our product candidates;

 

   

announcements concerning our competitors, or the biotechnology or pharmaceutical industries in general;

 

   

developments concerning any strategic alliances or acquisitions we may enter into;

 

   

actual or anticipated variations in our operating results;

 

   

changes in recommendations by securities analysts or lack of analyst coverage;

 

   

deviations in our operating results from the estimates of analysts;

 

   

sales of our common stock by our executive officers, directors and five percent stockholders or sales of substantial amounts of common stock;

 

   

changes in accounting principles; and

 

   

loss of any of our key scientific or management personnel.

In the past, following periods of volatility in the market price of a particular company’s securities, litigation has often been brought against that company. On July 5 and July 18, 2007, purported shareholder class action complaints alleging violations of the federal securities laws were filed against the Company, its Chief Executive Officer Harold E. Selick and its former Chief Financial Officer Janet I. Swearson in the United States District Court for the Southern District of New York. On September 14, 2007, these lawsuits, which have been consolidated by the Court into a single proceeding, were ordered transferred to the United States District Court for the Northern District of California. In a consolidated amended complaint filed on January 15, 2008, Plaintiffs, on behalf of an alleged class of purchasers of our common stock from the date of our initial public offering of securities on February 4, 2005 through July 14, 2006, purported to allege claims arising under Sections 11, 12(a)(2) and 15 of the Act and under Sections 10(b) and 20(a) of the Exchange Act, generally alleging that the defendants violated the federal securities laws by, among other things, making material misstatements or omissions concerning our Phase II and Phase III clinical trials of Lonidamine (TH-070). On July 11, 2008, the Court granted Defendants' motions to dismiss the consolidated amended complaint but afforded Plaintiffs leave to file a further amended complaint within a time period that has not yet expired. We believe that Plaintiffs' claims are without merit and intend to defend against the actions vigorously. We cannot reasonably predict the outcome of this matter at this time. Due to the early stage of these actions, we cannot reasonably predict the outcome of this matter at this time. Although we believe our directors and officer’s insurance coverage is adequate, if our defense of the suit is unsuccessful, there can be no assurances that the insurance will substantially cover any resulting claim or that the premiums for directors and officers insurance will not be substantially higher in the future.

If our officers, directors and largest stockholders choose to act together, they may be able to control our management and operations, acting in their best interests and not necessarily those of other stockholders.

As of June 30, 2008, our officers, directors and holders of 5% or more of our outstanding common stock beneficially own approximately 44.8% of our common stock. As a result, these stockholders, acting together, will be able to significantly influence all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. The interests of this group of stockholders may not always coincide with the interests of other stockholders, and they may act in a manner that advances their best interests and not necessarily those of other stockholders.

Our certificate of incorporation, our bylaws and Delaware law contain provisions that could discourage another company from acquiring us and may prevent attempts by our stockholders to replace or remove our current management.

Provisions of Delaware law, where we are incorporated, our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace or remove our board of directors. These provisions include:

 

   

authorizing the issuance of “blank check” preferred stock without any need for action by stockholders;

 

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providing for a classified board of directors with staggered terms;

 

   

requiring supermajority stockholder voting to effect certain amendments to our certificate of incorporation and bylaws;

 

   

eliminating the ability of stockholders to call special meetings of stockholders;

 

   

prohibiting stockholder action by written consent; and

 

   

establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.

In addition, in August 2006, our board of directors adopted a preferred shares rights agreement, the provisions of which could make it more difficult for a potential acquirer to consummate a transaction without the approval of our board of directors.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

(c) Issuer Purchases of Equity Securities

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

Period

   (a) Total number of
shares (or Units)
Purchased*
   (b) Average Price Paid
per Share (or Unit)
   (c) Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs
   (d) Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units) that
May Yet Be Purchased
Under the Plans or
Programs

04/01/2008 to 4/30/2008

   —      $ —      —      —  

05/01/2008 to 5/31/2008

   —      $ —      —      —  

06/01/2008 to 06/30/2008

   —      $ —      —      —  

 

* Shares repurchased from former employees upon termination of their employment pursuant to our contractual repurchase rights under the terms of the 2004 Amended and Restated Equity Incentive Plan.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On May 13, 2008, the Annual Meeting of Stockholders of Threshold Pharmaceuticals Inc. was held at our offices in Redwood City, California.

An election of Class I directors was held with the following individuals being elected to our Board of Directors to serve until our 2009 Annual Meeting of Stockholders:

 

Dr. Harold E. Selick    (32,242,099 votes for, 382,912 votes withheld)
Dr. Michael F. Powell    (31,870,786 votes for, 754,225 votes withheld)

The Company’s directors whose terms continued after the Annual Meeting are Bruce C. Cozadd, William A. Halter, David R. Hoffmann, Dr. Wilfred E. Jaeger, Dr. George C. Parker.

 

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Other matters voted upon and approved at the meeting and the number of affirmations, negative votes cast and abstentions with respect to each such matter were as follows:

 

* Ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2008 (32,489,783 votes in favor, 100,761 votes opposed, 34,467 votes abstaining).

 

* Approval of an amendment to the Company’s Amended and Restated Certificate of Incorporation to be implemented, if deemed necessary, by the Board of Directors at any time within twelve months from the annual meeting which will (i) give effect to a reverse stock split of the Company’s outstanding shares of common stock at a ratio of not less than one-for-two and not greater than one-for-ten, with the exact ratio to be determined by the Board, and (ii) reduce the number of authorized shares of the Company’s common stock from 150,000,000 to 50,000,000 (31,395,122 votes in favor, 1,206,730 votes opposed, 23,159 votes abstaining).

 

ITEM 5. OTHER INFORMATION

None.

 

ITEM 6. EXHIBITS

Exhibits

The exhibits listed on the accompanying index to exhibits are filed or incorporated by reference (as stated therein) as part of this Quarterly Report on Form 10-Q.

 

Exhibit
Number

  

Description

31.1    Certification required by Rule 13a-14(a) or Rule 15d-14(a) of Harold E. Selick.
31.2    Certification required by Rule 13a-14(a) or Rule 15d-14(a) of Joel A. Fernandes.
32.1    Certification pursuant to 18 U.S.C. Section 1350 of Harold E. Selick.
32.2    Certification pursuant to 18 U.S.C. Section 1350 of Joel A. Fernandes.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    Threshold Pharmaceuticals, Inc.
Date: August 7, 2008     /s/ Harold E. Selick
    Harold E. Selick., Ph.D.
   

Chief Executive Officer

(Principal Executive Officer)

Date: August 7, 2008     /s/ Joel A. Fernandes
    Joel A. Fernandes
   

Senior Director, Finance and Controller

(Principal Financial and Accounting Officer)

 

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EXHIBIT INDEX

 

Exhibit
Number

  

Description

31.1    Certification required by Rule 13a-14(a) or Rule 15d-14(a) of Harold E. Selick.
31.2    Certification required by Rule 13a-14(a) or Rule 15d-14(a) of Joel A. Fernandes.
32.1    Certification pursuant to 18 U.S.C. Section 1350 of Harold E. Selick.
32.2    Certification pursuant to 18 U.S.C. Section 1350 of Joel A. Fernandes.

 

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