10-K 1 tlon_10k-123112.htm FORM 10-K tlon_10k-123112.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 


FORM 10-K
 

 
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2012
or

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from: _____________ to _____________
 

 
Talon Therapeutics, Inc.
(Exact name of registrant as specified in its charter)
 


Delaware
1-32626
32-0064979
(State or Other Jurisdiction
(Commission
(I.R.S. Employer
of Incorporation or Organization)
File Number)
Identification No.)
400 Oyster Point Boulevard, Suite 200, South San Francisco, California 94080
(Address of Principal Executive Office) (Zip Code)
(650) 588-6404
(Registrant’s telephone number, including area code)
 

 
Securities registered pursuant to Section 12(b) of the Act:   None

Securities registered pursuant to Section 12(g) of the Act:   Common stock, $0.001 par value
 

 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ¨ No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ¨     No  x
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x     No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or  information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer  ¨ Accelerated filer  ¨ Non-accelerated filer  ¨ Smaller reporting company  x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  ¨ No  x
The approximate aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $24.6 million as of June 30, 2012, based on the last sale price of the registrant’s common stock as reported on the OTC Bulletin Board on such date.
As of March 29, 2013, there were 22,011,657 shares of the registrant’s common stock outstanding.
 


 
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TABLE OF CONTENTS

  
Page
PART I
 
Item 1
Business
4
Item 1A
Risk Factors
18
Item 1B
Unresolved Staff Comments
31
Item 2
Properties
31
Item 3
Legal Proceedings
31
Item 4
Mine Safety Disclosures
31
     
PART II
 
Item 5
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
32
Item 6
Selected Financial Data
32
Item 7
Management's Discussion and Analysis of Financial Condition and Results of Operations
33
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
40
Item 8
Financial Statements and Supplementary Data
40
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
40
Item 9A
Controls and Procedures
40
Item 9B
Other Information
41
     
PART III
 
Item 10
Directors, Executive Officers and Corporate Governance
42
Item 11
Executive Compensation
44
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
51
Item 13
Certain Relationships and Related Transactions, and Director Independence
53
Item 14
Principal Accountant Fees and Services
54
     
PART IV
 
Item 15
Exhibits and Financial Statement Schedules
55
Signatures
59
Index to Financial Statements
F-1
 
 
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FORWARD-LOOKING STATEMENTS
 
This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These forward-looking statements include, but are not limited to, statements about:
 
 
·
our ability to secure funding for our planned future operations;
 
 
·
the regulatory approval of our drug candidates;
 
 
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our ability to either secure a strategic partner to commercialize our leading drug, Marqibo, or commercialize alone if no strategic partner is secured;
 
 
·
the development of our drug candidates, including when we expect to undertake, initiate and complete clinical trials of our product candidates;
 
 
·
our use of clinical research centers and other contractors;
 
 
·
our ability to find collaborative partners for research, development and commercialization of potential products;
 
 
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acceptance of our products by doctors, patients or payors and the availability of reimbursement for our product candidates;
 
 
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our ability to market any of our products;
 
 
·
our history of operating losses;
 
 
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our ability to secure adequate protection for our intellectual property;
 
 
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our ability to compete against other companies and research institutions;
 
 
·
the effect of potential strategic transactions on our business;
 
 
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our ability to attract and retain key personnel;
 
 
·
the volatility of our stock price; and
 
 
·
other risks and uncertainties detailed in “Risk Factors” in this Form 10-K.
 

These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe” “intend” and similar words or phrases. For such statements, we claim the protection of the Private Securities Litigation Reform Act of 1995. Readers of this Annual Report on Form 10-K are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the time this Annual Report on Form 10-K was filed with the Securities and Exchange Commission, or SEC. These forward-looking statements are based largely on our expectations and projections about future events and future trends affecting our business, and are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Discussions containing these forward-looking statements may be found throughout this Form 10-K, including Part I, the sections entitled “Item 1: Business” as well as “Item 1A: Risk Factors” and Part II, the sections entitled “Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations.”  These forward-looking statements involve risks and uncertainties, including the risks discussed in Part 1 of this form in the section entitled “Item 1A: Risk Factors,” that could cause our actual results to differ materially from those in the forward-looking statements. Except as required by law, we undertake no obligation to publicly revise our forward-looking statements to reflect events or circumstances that arise after the filing of this Annual Report on Form 10-K or documents incorporated by reference herein that include forward-looking statements. The risks discussed in this report should be considered in evaluating our prospects and future financial performance.

In addition, past financial or operating performance is not necessarily a reliable indicator of future performance and you should not use our historical performance to anticipate results or future period trends. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition.

References to the “Company,” “Talon,” the “Registrant,” “we,” “us,” or “our” in this Annual Report on Form 10-K refer to Talon Therapeutics, Inc., a Delaware corporation, unless the context indicates otherwise. Marqibo® is our U.S. registered trademark for our vincristine sulfate liposome injections product. Alocrest™ and Brakiva™ are our trademarks for our vinorelbine liposome injection and topotecan liposome injection product candidates, respectively. Optisome™ is our trademark for our liposome encapsulation technology, which we currently utilize with respect to our Marqibo product as well as our Alocrest and Brakiva product candidates. We have applied for registration for our Alocrest, Brakiva and Optisome trademarks, and for our Talon Therapeutics logo, in the United States. All other trademarks and trade names mentioned in this Annual Report on Form 10-K are the properties of their respective owners.

 
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PART I
  
ITEM 1.         BUSINESS

Overview

We are a South San Francisco, California-based biopharmaceutical company dedicated to developing and commercializing new and differentiated cancer therapies designed to improve and enable current standards of care.  Our lead product, Marqibo, and our lead product candidate, menadione topical lotion, target large markets.  On August 9, 2012, the FDA approved Marqibo for the treatment of Philadelphia chromosome negative adult ALL patients in second or greater relapse or whose disease has progressed following two or more prior lines of anti-leukemia therapy. We are developing Marqibo for the treatment of other blood cancers including non-Hodgkin’s lymphoma and metastic uveal melanoma.  We are also developing menadione topical lotion, a first-in-class compound, for the potential prevention and/or treatment of skin toxicity associated with epidermal growth factor receptor inhibitors.  We have additional pipeline opportunities that, like Marqibo, we believe may improve delivery and enhance the therapeutic benefits of well-characterized, proven chemotherapies and enable high potency dosing without increased toxicity.
  
Our executive offices are located at 400 Oyster Point Blvd., Suite 200, South San Francisco, California 94080. Our telephone number is (650) 588-6404 and our Internet address is www.talontx.com . We were originally incorporated under Delaware law in 2002 under the name Hudson Health Sciences, Inc. In July 2004, we acquired Email Real Estate.com, Inc., a Colorado corporation and public shell company in a reverse acquisition.  In September 2004, we reincorporated under Delaware law under the name Hana Biosciences, Inc.  In December 2010, we changed our name to Talon Therapeutics, Inc.

Our Research and Development Programs
  
We have exclusive rights to develop and commercialize the following products and product candidates:
 
Marqibo® (vincristine sulfate liposome injection) is a novel, sphingomyelin/cholesterol liposome encapsulated formulation of vincristine, a microtubule inhibitor that is FDA-approved for acute lymphoblastic leukemia (ALL) and currently being developed for non-Hodgkin’s lymphoma (NHL). Vincristine is widely used in combination regimens for treatment of adult and pediatric hematologic and solid tumor malignancies.  On August 9, 2012, the FDA approved our new drug application, or NDA, granting accelerated approval of Marqibo for the treatment of Philadelphia chromosome negative adult ALL patients in second or greater relapse or whose disease has progressed following two or more prior lines of anti-leukemia therapy.  In May 2012, we enrolled the first patient in a global Phase 3 confirmatory study of Marqibo in the treatment of patients 60 years of age and older with newly-diagnosed ALL, which is known as the HALLMARQ study.  Marqibo is also being studied in a Phase 3 clinical trial (OPTIMAL>60) in elderly patients with newly-diagnosed NHL being conducted by the German High-Grade Lymphoma Study Group for which we are providing support. There are additional Phase 1 and Phase 2 clinical trials underway in adults and pediatrics.
 
Menadione Topical Lotion (MTL) is a novel cancer supportive care product candidate being developed for the prevention and/or treatment of the skin toxicities associated with the use of epidermal growth factor receptor inhibitors, or EGFRIs, a type of anti-cancer agent used in the treatment of lung, colon, head and neck, pancreatic and breast cancer.  In August 2011, we entered into an agreement with the Mayo Clinic pursuant to which the Mayo Clinic agreed to sponsor and conduct a randomized Phase 2 trial of MTL in patients taking biologic and small molecule EGFR inhibitors for anti-cancer therapy and will test the effectiveness of MTL in preventing skin toxicities associated with EGFR inhibitors.  We agreed to provide supplies of MTL in connection with the Mayo Clinic study.
 
Brakiva™ (topotecan liposome injection) is a novel targeted Optisome™ encapsulated formulation product candidate of the FDA-approved anticancer drug topotecan. We have focused our capital resources to advance the development of Marqibo and Menadione Topical Lotion. Consequently, we have not recently allocated resources toward the development of Brakiva.
 
Alocrest™ (vinorelbine liposome injection) is a novel targeted Optisome™ encapsulated formulation product candidate of the FDA-approved anticancer drug vinorelbine. We have focused our capital resources to advance the development of Marqibo and Menadione Topical Lotion. Consequently, we have not recently allocated resources toward the development of Alocrest.
 
Industry Background and Market Opportunity
 
Cancer is a group of diseases characterized by either the uncontrolled growth of cells or the failure of cells to function normally. Cancer is caused by a series of mutations, or alterations, in genes that control cells’ ability to grow and divide. These mutations cause cells to rapidly and continuously divide or lose their normal ability to die. There are more than 100 different varieties of cancer, which can be divided into six major categories. Carcinomas, the most common category, include breast, lung, colorectal and prostate cancer. Sarcomas begin in tissue that connects, supports or surrounds other tissues and organs. Lymphomas are cancers of the lymphatic system, a part of the body’s immune system. Leukemias are cancers of blood cells, which originate in the bone marrow. Brain tumors are cancers that begin in the brain, and skin cancers, including melanomas, originate in the skin. Cancers are considered metastatic if they spread via the blood or lymphatic system to other parts of the body to form secondary tumors.
 
 
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According to the American Cancer Society, over 1.7 million new cases of cancer are expected to be diagnosed in 2013 in the United States alone. Cancer is the second leading cause of death, after heart disease, in the United States, and is expected to account for more than 580,350 deaths in 2013.  Major cancer treatments include surgery, radiotherapy and chemotherapy. Supportive care, such as blood cell growth factors, represents another major segment of the cancer treatment market. There are many different drugs that are used to offer supportive care and to treat cancer, including cytotoxics or antineoplastics, hormones and biologics. Major categories include:

 
·
Chemotherapy. Cytotoxic chemotherapy refers to anticancer drugs that destroy cancer cells by stopping them from multiplying. Healthy cells can also be harmed with the use of cytotoxic chemotherapy, especially those that divide quickly. Cytotoxic agents act primarily on macromolecular synthesis, repair or activity, which affects the production or function of DNA, RNA or proteins. Our Marqibo product and our Alocrest and Brakiva product candidates are liposome encapsulated cytotoxic agents that are targeting treatment of solid tumor and hematological malignancies.

 
·
Supportive care. Cancer treatment can include the use of chemotherapy, radiation therapy, biologic response modifiers, surgery or some combination of these or other therapeutic options. All of these treatment options are directed at killing or eradicating the cancer that exists in the patient’s body. Unfortunately, the delivery of many cancer therapies adversely affects the body’s normal organs. These complications of treatment or side effects not only cause discomfort, but may also prevent the optimal delivery of therapy to a patient at its maximal dose and time.  Our product candidate Menadione Topical Lotion is a supportive care product candidate designed to treat and prevent skin toxicities associated with the use of EGFRIs, a class of anti-cancer agents.

Our Strategy
 
We are committed to developing and commercializing new, differentiated cancer therapies designed to improve and enable current standards of care. Key aspects of our strategy include:

 
·
Focus on developing innovative cancer therapies. We focus on oncology products and product candidates in order to capture efficiencies and economies of scale. We believe that drug development for cancer markets is particularly attractive because relatively small clinical trials can provide meaningful information regarding patient response and safety.  Our main focus is the development of Marqibo, our lead product, for which the FDA recently granted accelerated approval for the treatment of Philadelphia chromosome negative adult ALL patients in second or greater relapse or whose disease has progressed following two or more prior lines of anti-leukemia therapy.

 
·
Build a sustainable pipeline by employing multiple therapeutic approaches and disciplined decision criteria based on clearly defined proof of principle goals. We seek to build a sustainable product pipeline by employing multiple therapeutic approaches and by acquiring product candidates belonging to known drug classes. In addition, we employ disciplined decision criteria to assess product candidates. By pursuing this strategy, we seek to minimize our clinical development risk and accelerate the potential commercialization of current and future product candidates.  For a majority of our product candidates, we intend to pursue regulatory approval in multiple indications.

 
·
Pursue strategic transactions such as joint venture, merger and acquisition or commercial partnerships to develop and commercialize Marqibo and our product candidates in the United States, Europe, and other international regions. We are exploring strategic partnership opportunities or other transactions with pharmaceutical, biotechnology, or other companies to develop and commercialize our current products and product candidates, in the United States, Europe and other international regions.  We believe this strategy will help us to mitigate our development and commercialization risk, reduce our capital expenditure requirements, and broaden the scope of our sales and marketing activities for our products within domestic and international markets. However, if we are unable to secure strategic transactions on terms we believe are in our best interests, then we will prepare to commercialize our products alone.

Product Pipeline
  
Background of Optisomal Targeted Drug Delivery   
  
Optisomal encapsulation is a novel method of liposomal drug delivery, which is designed to significantly increase tumor targeting and duration of exposure for cell-cycle specific anticancer agents, such as vincristine sulfate, an FDA-approved chemotherapy drug. Optisomal drug delivery involves the encapsulation of an appropriate drug in a lipid envelope composed of sphingomyelin and cholesterol.  The encapsulated agent is carried through the bloodstream and delivered to disease sites where it is released to carry out its therapeutic action. When used in unencapsulated form, chemotherapeutic drugs mostly diffuse indiscriminately throughout the body, diluting drug effectiveness and potentially causing toxic side effects in the patient’s healthy tissues. Our proprietary Optisomal formulation technology is designed to permit loading high concentrations of therapeutic agent inside the lipid envelope, which promotes accumulation of the drug in tumors and prolongs the drug’s release at disease sites. Non-clinical studies have demonstrated the Optisomal formulation technology’s ability to deliver dose intensification to the tumor, which we believe has the potential to increase the therapeutic benefit of the drug.
 
 
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·
Targeted delivery with improved pharmacokinetics. In normal tissues, a continuous endothelial (blood vessel) lining constrains liposomes within capillaries, limiting accumulation of the drug in the healthy tissues. In contrast, the immature blood vessel system within tumors is created during tumor growth and has numerous gaps up to 800 nanometers in size. With an average diameter of approximately 100 nanometers, Optisomes can pass through these gaps.  Once lodged within the tumor interstitial space, these Optisomes gradually release the encapsulated drug. We believe that gradual release of the drug from Optisomes increases drug levels within the tumor, extends drug exposure through multiple cell cycles, and increases tumor cell killing. A limited fraction of a patient’s tumor cells are in a particular drug-sensitive phase at any point in time, which we believe indicates that duration of drug exposure is critical to increased drug efficacy.

 
·
Increased drug concentration. The link between drug exposure and anti-tumor efficacy is especially pronounced for cell cycle-specific agents such as vincristine, vinorelbine and topotecan, which destroy tumor cells by interfering in one specific phase in cell division (e.g., the mitosis, synthesis and/or rapid growth phases).

 
·
Prolonged exposure. The advanced liposomal technology of the capsule that protects the active drug increases the circulating half-life and is designed to extend the duration of drug release within cancerous tissues.

Unmet Medical Needs in ALL
  
ALL is a type of cancer of the blood and bone marrow, the spongy tissue inside bones where blood cells are made. Acute leukemias progress rapidly and are characterized by the accumulation of immature blood cells. ALL affects a group of white blood cells, called lymphocytes, which fight infection and constitute our immune systems. Normally, bone marrow produces immature cells or stem cells, in a controlled way, and they mature and specialize into the various types of blood cells, as needed. In people with ALL, this production process breaks down. Abnormally large numbers of immature, abnormal lymphocytes called lymphoblasts are produced and released into the bloodstream. These abnormal cells are not able to mature and perform their usual functions. Furthermore, they multiply rapidly and can crowd out healthy blood cells like neutrophils and platelets, leaving an adult or child with ALL vulnerable to infection or bleeding. Leukemic cells can also collect in certain areas of the body, including the central nervous system and spinal cord, which can cause serious problems. According to the American Cancer Society, over 6,000 people in the United States over the age of 15 were expected to be diagnosed with ALL in 2013, and over 1,400 people were expected to die from the disease.  Multiple clinical trials have suggested the overall 5-year survival rate for adults diagnosed with ALL is approximately 20% to 50%, underscoring the need for new therapeutic options.
 
Marqibo® (vincristine sulfate liposomes injection)

Marqibo is a novel, targeted Optisome™ encapsulated liposomal formulation product of the FDA-approved anticancer drug vincristine.  We are primarily developing Marqibo for the treatment of adult ALL and adult NHL. Non-liposomal vincristine, a microtubule inhibitor, is FDA-approved for ALL and is widely used as a single agent and in combination regimens for treatment for hematologic malignancies such as lymphomas and leukemias.  Our encapsulation formulation is designed to provide prolonged circulation of the drug in the blood and accumulation at the tumor site. These characteristics are intended to increase the effectiveness and potentially reduce the side effects of the encapsulated drug.  On August 9, 2012, the FDA granted accelerated approval of Marqibo for the treatment of Philadelphia chromosome negative adult ALL patients in second or greater relapse or whose disease has progressed following two or more prior lines of anti-leukemia therapy.

In May 2011, a Phase 3 study of Marqibo in elderly patients with newly-diagnosed aggressive NHL was initiated by the German High-Grade Non-Hodgkin's Lymphoma Study Group.   The study is expected to enroll approximately 1,000 patients (ages 61-80) with aggressive CD20+ B-cell NHL. The primary objectives of the study are to assess the effects of substituting conventional vincristine with Marqibo in the R-CHOP regimen.  The first patient enrolled in the study in November 2011 and as of March 29, 2013, a total of 144 patients have been enrolled and 83 centers are open for enrollment.  In 2013, if sufficient funds are available, we expect to spend between $1.5 million and $3 million in connection with this study.

In November 2011, we initiated our global Phase 3 confirmatory study of Marqibo, named HALLMARQ, in the treatment of patients 60 years of age or older with newly diagnosed ALL. HALLMARQ is an international, multicenter, open-label randomized, controlled trial with 2 arms that vary only in the administration of standard vincristine versus Marqibo. Eligible subjects will be randomized to combination chemotherapy containing either standard vincristine or Marqibo. We estimate that 350 - 400 total subjects will be enrolled and randomized in this study.  All subjects will receive treatment until documentation of failure to achieve remission, relapse from remission, or for up to 24 months.  Treatment will be composed of induction (one 4-week course), early intensification (two 4-week courses), interim maintenance (one 12-week course), late intensification (one 8-week course), and prolonged maintenance (4-week courses, repeated for up to 24 months after beginning induction) therapy.  As of March 29, 2013, fifteen sites in the United States are open for subject enrollment and 8 patients have been enrolled to date.  In 2013, if sufficient funds are available, we expect to spend between $2 million and $3.5 million in connection with this study.
 
 
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Additionally, in July 2011, the National Cancer Institute enrolled the first patient in an open-label Phase 1 dose-escalation trial of Marqibo in children and adolescents with solid tumors and hematologic malignancies, including ALL, being conducted at the NCI in Bethesda, MD.  The primary objective of this Phase I clinical trial, which is an investigator-sponsored study, is to determine the maximum tolerated dose. As of March 29, 2013, 15 patients have been enrolled to date.

We are also conducting a Phase 2 study to assess the efficacy of Marqibo in patients with metastatic malignant uveal melanoma as determined by Disease Control Rate (CR, partial response or durable stable disease).  Secondary objectives are to assess the safety and antitumor activity of Marqibo as determined by response rate, progression free survival and overall survival. In addition, patients undergo continuous electrocardiographic evaluation during the first dose of Marqibo exposure.  The patient population is defined as adults with uveal melanoma and confirmed metastatic disease that is untreated.  We have enrolled 54 subjects to date and plan to enroll up to a total of approximately 59 subjects in this clinical trial.

       On March 2, 2012, we entered into an investigator-initiated clinical trial research agreement with The University of Texas M.D. Anderson Cancer Center (“MDACC”), whereby we agreed to provide Marqibo to study the safety and efficacy of Marqibo in certain clinical trial research entitled “Hyper-CVAD with Liposomal Vincristine (Hyper-CMAD) in Acute Lymphoblastic Leukemia.”  The study is designed to evaluate whether intensive chemotherapy (Hyper-CVAD therapy) given in combination with Marqibo, in addition to rituximab for patients who are CD20 positive and/or imatinib or dasatinib for patients with the Philadelphia (Ph) chromosome, can effectively treat ALL or lymphoblastic lymphoma.

Marqibo received a U.S. orphan drug designation in January 2007, as well as a European Commission orphan drug designation in June 2008 for the ALL indication. Marqibo also received a U.S. orphan drug designation in July 2008 for metastatic uveal melanoma. Marqibo received a fast track designation from the FDA in August 2007 for the treatment of adult ALL in second or greater relapse or that has progressed following two or more prior lines of anti-leukemia therapy.  We met with the European Medicine Association in December 2011 and February 2012, seeking scientific advice regarding the appropriate approval path to pursue.  
  
Menadione Topical Lotion (Supportive Care Product)
  
Menadione Topical Lotion, or MTL, which we licensed from the Albert Einstein College of Medicine, or AECOM, in October 2006, is a novel product candidate under development for the treatment and/or prevention of skin rash associated with the use of EGFR inhibitors in the treatment of certain cancers. EGFR inhibitors, which include Tarceva, Erbitux, Iressa, Tykerb and Vectibix, are currently approved to treat non-small cell lung cancer, pancreatic, colorectal, breast and head and neck cancer. EGFR inhibitors are associated with significant skin toxicities presenting as acne-like rash on the face, neck and upper-torso of the body in approximately 75% of patients.  Fifty percent of patients who manifest skin toxicity experience significant discomfort. This results in discontinuation or dose reduction in at least 10% and up to 30% of patients that receive the EGFR inhibitor.  Menadione, a small organic molecule, has been shown to activate the EGFR signaling pathway by inhibiting phosphatase activity which is an important enzyme in the EGFR pathway. In vivo studies have suggested that topically-applied menadione may restore EGFR signaling specifically in the skin of patients treated systemically with EGFR inhibitors. Currently, there are no FDA-approved products or therapies available to treat these skin toxicities.

We completed enrollment of a Phase 1 clinical trial in cancer patients in 2010.   The primary endpoints for the Phase 1 study included safety, tolerability and identification of a maximum tolerated dose.  The results of the Phase 1 study demonstrated that MTL is generally safe and well-tolerated.  A dose limiting toxicity of skin irritation and redness was observed primarily at the 0.2% lotion strength.  The apparent maximum tolerated lotion strength is 0.1%.  MTL applied twice daily at all strengths, including the highest lotion strength tested (0.2%) resulted in no appreciable systemic exposure.

In August 2011, we entered into an agreement with Mayo Clinic pursuant to which Mayo Clinic will sponsor and conduct a Phase 2 clinical trial.  The study is designed to enroll approximately 40 patients taking biologic and small molecule EGFR inhibitors for anti-cancer therapy and will test the effectiveness of MTL in preventing skin toxicities associated with EGFR inhibitors.  As of March 29, 2013, there are 26 patients enrolled in the study.

Alocrest™ (vinorelbine liposome injection)
  
Alocrest is a novel Optisomal encapsulated formulation product candidate of the FDA-approved drug vinorelbine, a microtubule inhibitor for use as a single agent or in combination with cisplatin for the first-line treatment of unresectable, advanced non-small cell lung cancer. In February 2008, we completed enrollment in a Phase 1 study of Alocrest. The trial enrolled 30 adult subjects with confirmed solid tumors refractory to standard therapy or for which no standard therapy was known to exist. The objectives of the Phase 1 clinical trial were: (1) to assess the safety and tolerability of Alocrest; (2) to determine the maximum tolerated dose of Alocrest; (3) to characterize the pharmacokinetic profile of Alocrest; and (4) to explore preliminary efficacy of Alocrest. The study was conducted at the Cancer Therapy and Research Center and South Texas Accelerated Research Therapeutics (START), both located in San Antonio, Texas and at McGill University in Montreal.  Reversible neutropenia, a low white blood cell count, was the dose-limiting toxicity. The results of this study revealed expected toxicity, and a 50% disease control rate was achieved across a range of doses in patients with previously treated, advanced cancers.
 
 
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Brakiva™ (topotecan liposome injection)
  
Brakiva is our proprietary product candidate comprised of the anti-cancer drug topotecan encapsulated in Optisomes. Topotecan is FDA-approved for the treatment of metastatic carcinoma of the ovary after failure of initial or subsequent chemotherapy, and small cell lung cancer sensitive disease after failure of first-line chemotherapy.  In November 2008, we initiated a Phase 1 dose-escalation clinical trial of Brakiva, which is primarily designed to assess the safety, tolerability and maximum tolerated dose. The primary objective is to evaluate the safety, tolerability and maximum tolerated dose of 2 different schedules of Brakiva administered intravenously as a 30 minute infusion in adult subjects with advanced solid tumors that have relapsed, are refractory to standard therapy, or for whom there is no standard therapy available.  The study is conducted at South Texas Accelerated Research Therapeutics (START) in San Antonio, Texas and Karmanos Cancer Institute in Detroit, Michigan. This clinical trial has been on enrollment hold for a number of years for resource allocation reasons. As of March 29, 2013, 14 subjects have been enrolled on study with the goal of enrolling up to 50 subjects.  

License Agreements
  
Marqibo, Alocrest and Brakiva
  
In May 2006, we completed a transaction with Tekmira Pharmaceuticals Corporation, formerly Inex Pharmaceuticals Corporation, pursuant to which we acquired exclusive, worldwide rights to develop and commercialize Marqibo, Alocrest and Brakiva, which we collectively refer to as the Optisome products. The following is a summary of the various agreements entered into to consummate the transaction.
 
Tekmira License Agreement
 
Pursuant to the terms of a license agreement between us and Tekmira entered into in May 2006, which was amended and restated in April 2007, Tekmira granted us:

 
·
an exclusive license under certain patents held by Tekmira to commercialize the Optisome products for all uses throughout the world;

 
·
an exclusive license under certain patents held by Tekmira to commercialize the Optisome products for all uses throughout the world under the terms of certain research agreements between Tekmira and the British Columbia Cancer Agency; and

 
·
an exclusive license to all technical information and know-how relating to the technology claimed in the patents held exclusively by Tekmira and to all confidential information possessed by Tekmira relating to the Optisome products, including all data, know-how, manufacturing information, specifications and trade secrets, collectively called the Tekmira Technology, to commercialize the Optisome products for all uses throughout the world.

We have the right to grant sublicenses to third parties and in such event we and Tekmira will share sublicensing revenue received by us at varying rates for each Optisome product depending on such Optisome product’s stage of clinical development.  Under the license agreement, we also granted back to Tekmira a limited, royalty-free, non-exclusive license in certain patents and technology owned or licensed to us solely for use in developing and commercializing liposomes having an active agent encapsulated, intercalated or entrapped therein.

We and Tekmira amended the terms of the license agreement in June 2009, as follows:

 
·
As amended, the amount of the milestone payment that we are required to make to Tekmira upon the FDA’s approval of a Marqibo NDA was increased.

 
·
The original license agreement previously required us to make milestone payments upon the dosing of the first patient in any clinical trial of each of Alocrest and Brakiva.  Following the June 2009 amendment, such milestones are payable following the FDA’s acceptance for review of an NDA for such product candidates.  In addition, the milestone payments payable under the license agreement upon the FDA’s approval of an NDA for Alocrest and Brakiva were both increased in amount.

 
·
Tekmira’s share of any payments received by us from third parties in consideration of sublicenses granted to such third parties or for royalties received by us from such third parties was reduced.

 
·
The maximum aggregate amount of milestone payments for all product candidates was increased from $30.5 million to $37.0 million.

As a result of the June 2009 amendment, we reversed recognition of a previously accrued milestone payment to Tekmira which was achieved upon the enrollment of the first patient in our Phase 1 clinical trial in Brakiva.
 
 
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In September 2010, we and Tekmira further amended the terms of the license agreement, as follows:

 
·
Our maximum aggregate obligation for milestone payments to Tekmira for all three product candidates was decreased from $37.0 million to $19.0 million.  All of the affected milestone payment obligations relate to amounts triggered by the achievement of regulatory milestones for Marqibo.

 
·
The royalty rates payable by us to Tekmira for net sales of Marqibo were modified by eliminating a tiered royalty rate structure based upon the amount of net sales and instead now provide for a single digit royalty rate without regard to the amount of net sales.  With respect to Alocrest and Brakiva, the license agreement continues to provide that we will pay royalties to Tekmira in the range of 5% to 10% of net sales, against which we may offset a portion of the research and development expenses we incur in connection with the development of those product candidates.

 
·
In consideration of the foregoing, we made a one-time payment to Tekmira of $5.75 million.

Pursuant to the terms of the Tekmira license, including all amendments, at our option the milestones may be paid in cash or, subject to certain restrictions, shares of our common stock. In addition to our obligations to make milestone payments and pay royalties to Tekmira, we also assumed all of Tekmira’s obligations to its licensors and collaborators relating to the Optisome products, which include aggregate milestone payments of up to $2.5 million, annual license fees and additional royalties.

The license agreement also provides that we will use our commercially reasonable efforts to develop each Optisome product, including causing the necessary and appropriate clinical trials to be conducted in order to obtain and maintain regulatory approval for each Optisome product and preparing and filing the necessary regulatory submissions for each Optisome product. We also agreed to provide Tekmira with periodic reports concerning the status of each Optisome product.
 
We are required to use commercially reasonable efforts to commercialize each Optisome product in each jurisdiction where an Optisome product has received regulatory approval. We will be deemed to have breached our commercialization obligations in the United States, or in Germany, the United Kingdom, France, Italy or Spain, if for a continuous period of 180 days at any time following commercial sales of an Optisome product in any such country, no sales of an Optisome product are made in the ordinary course of business in such country by us (or a sublicensee), unless the parties agree to such delay or unless we are prohibited from making sales by a reason beyond our control. If we breach this obligation, then Tekmira is entitled to terminate the license with respect to such Optisome product and for such country.

Under the license agreement, Tekmira will be the owner of patents and patent applications claiming priority to certain patents licensed to us, and we have an obligation to assign to Tekmira our rights to inventions covered by such patents or patent applications, and, when negotiating any joint venture, collaborative research, development, commercialization or other agreement with a third party, to require such third party to do the same.

The prosecution and maintenance of the licensed patents will be overseen by an IP committee having equal representation from us and Tekmira. We will have the right and obligation to file, prosecute and maintain most of the licensed patents, although Tekmira maintained primary responsibility to prosecute certain of the licensed patents.  The parties agreed to share the expenses of prosecution at varying rates.  We also have the first right, but not the obligation, to enforce such licensed patents against third party infringers, or to defend against any infringement action brought by any third party.

We agreed to indemnify Tekmira for all losses resulting from our breach of our representations and warranties, or other default under the license agreement, our breach of any regulatory requirements, regulations and guidelines in connection with the Optisome products, complaints alleging infringement against Tekmira with respect to our manufacture, use or sale of an Optisome product, and any injury or death to any person or damage to property caused by any Optisome product provided by us or our sublicensee, except to the extent such losses are due to Tekmira’s breach of a representation or warranty, Tekmira’s default under the agreement, and the breach by Tekmira of any regulatory requirements, regulations and guidelines in connection with licensed patent and related know-how. Tekmira has agreed to indemnify us for losses arising from Tekmira’s breach of representation or warranty, Tekmira’s default under the agreement, and the breach by Tekmira of any regulatory requirements, regulations and guidelines in connection with licensed patent and related know-how, except to the extent such losses are due to our breach of our representations and warranties, our default under the agreement, our breach of any regulatory requirements, regulations and guidelines in connection with the Optisome products, complaints alleging infringement against Tekmira with respect to our manufacture, use or sale of an Optisome product, and any injury or death to any person or damage to property caused by any Optisome product provided by us or our sublicensee.
  
Unless terminated earlier, the license grants made under the license agreement expire on a country-by-country basis upon the later of (i) the expiration of the last to expire patents covering each Optisome product in a particular country, (ii) the expiration of the last to expire period of product exclusivity covered by an Optisome product under the laws of such country, or (iii) with respect to the Tekmira Technology, on the date that all of the Tekmira Technology ceases to be confidential information. The covered issued patents are scheduled to expire between 2014 and 2021.

Either we or Tekmira may terminate the license agreement in the event that the other has materially breached its obligations thereunder and fails to remedy such breach within 90 days following notice by the non-breaching party. If such breach is not cured, then the non-breaching party may, upon 6 months’ notice to the breaching party, terminate the license in respect of the Optisome products or countries to which the breach relates. Tekmira may also terminate the license if we assert or intend to assert any invalidity challenge on any of the patents licensed to us. The license agreement also provides that either party may, upon written notice, terminate the agreement in the event of the other’s bankruptcy, insolvency, dissolution or similar proceeding. In the event Tekmira validly terminates the license agreement, all data, materials, regulatory filings and all other documentation reverts to Tekmira.
 
 
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Assignment of Agreement with M.D. Anderson Cancer Center

In April 2007, Tekmira assigned to us its right and interest in and to a Patent and Technology License Agreement dated February 14, 2000 between Tekmira and M.D. Anderson Cancer Center.  As assigned to us, this agreement grants to us a royalty-bearing license to certain patents relating to Marqibo that are owned by M.D. Anderson.  As consideration for the license, we are required to pay to M.D. Anderson royalties on net sales of Marqibo, as well as an annual maintenance fee.  The M.D. Anderson license provides that we have the first right to prosecute and maintain the licensed patents at our expense.  In addition, we also have the first right to control any infringement claims against third parties. The M.D. Anderson license will be automatically terminated in the event we become bankrupt or insolvent, and may be terminated by M.D. Anderson in the event we default on our obligations under the agreement.

UBC Sublicense Agreement

In May 2006, we also entered into a sublicense agreement with Tekmira relating to Tekmira’s rights to certain patents it licensed from the University of British Columbia, or UBC. Under the UBC sublicense agreement, Tekmira granted to us an exclusive, worldwide sublicense under several patents relating to Alocrest and Brakiva, together with all knowledge, know-how, and techniques relating to such patents, called the UBC Technology. The UBC Technology is owned by UBC and licensed to Tekmira pursuant to a license agreement dated July 1, 1998. The UBC sublicense agreement provides that we will undertake all of Tekmira’s obligations contained in Tekmira’s license agreement with UBC, which includes the payment of royalties (in addition to the royalties owing to Tekmira under the license agreement between Tekmira and us) and an annual license fee. The provisions of the UBC sublicense agreement relating to our obligation to develop and commercialize the UBC Technology, termination and other material obligations are substantially similar to the terms of license agreement between Tekmira and us, as discussed above.

Assignment of Agreement with Elan Pharmaceuticals, Inc.

Pursuant to an Amended and Restated License Agreement dated April 3, 2003, between Tekmira (including two of its wholly-owned subsidiaries) and Elan Pharmaceuticals, Inc., Tekmira held a paid up, exclusive, worldwide license to certain patents, know-how and other intellectual property relating to vincristine sulfate liposomes. In connection with our transaction with Tekmira, Tekmira assigned to us all of its rights under the Elan license agreement pursuant to an Assignment and Novation Agreement dated May 6, 2006 among us, Tekmira and Elan.

As assigned to us, the Elan license agreement provides that Elan will own all improvements to the licensed patents or licensed know-how made by us or our sublicensees, which will in turn be licensed to us as part of the technology we license from Elan. Elan has the first right to file, prosecute and maintain all licensed patents and we have the right to do so if Elan decides that it does not wish to do so only pertaining to certain portions of the technology. Elan also has the first right to enforce such licensed patents and we may do so only if Elan elects not to enforce such patents. In addition, Elan has the right but not the obligation to control any infringement claim brought against Elan.

We have indemnification obligations to Elan for all losses arising from the research, testing, manufacture, transport, packaging, storage, handling, distribution, marketing, advertising, promotion or sale of the products by us, our affiliates or sublicensees, any personal injury suits brought against Elan, any infringement claim, certain third party agreements entered into by Elan, and any acts or omissions of any of our sublicensees.

The Elan license agreement, unless earlier terminated, will expire on a country by country basis, upon the expiration of the life of the last to expire licensed patent in that country. Elan may terminate the Elan license agreement earlier for our material breach upon 60 days’ written notice if we do not cure such breach within such 60 day period (we may extend such cure period for up to 90 days if we propose a course of action to cure the breach within the initial 60 day period and act in good faith to cure such breach), for our bankruptcy or going into liquidation upon 10 days’ written notice, or immediately if we, or our sublicense, directly or indirectly disputes the ownership, scope or validity of any of the licensed technology or support any such attack by a third party.

Menadione Topical Lotion

In October 2006, we entered into a license agreement with the Albert Einstein College of Medicine of Yeshiva University (AECOM), a division of Yeshiva University. Pursuant to the agreement, we acquired an exclusive, worldwide, royalty-bearing license to certain patent applications, and other intellectual property relating to topical menadione. We were originally required to make payments to AECOM in the aggregate amount of $2.8 million upon the achievement of various clinical and regulatory milestones, as described in the agreement, which amount was increased to $2.9 million pursuant to a February 6, 2013 amendment to the license agreement. We also agreed to pay annual maintenance fees, and to make royalty payments to AECOM on net sales of any products covered by a claim in any licensed patent. We may also grant sublicenses to the licensed patents and the proceeds resulting from such sublicenses will be shared with AECOM.
 
 
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In August 2012, we entered into a Settlement and License Agreement with Merck Serono S.A., pursuant to which we granted Merck Serono a non-exclusive, royalty-free license under certain of our patents relating to MTL to market and sell Vitamin K1 lotion to treat EFGR inhibitor-related rash. In consideration of the license grant, Merck-Serono withdrew its opposition to  a European patent application that we had filed relating to MTL.  The license expires on a country-by-country basis six months following our notice to Merck Serono that we have obtained marketing authorization for MTL in such country. Thereafter, we and Merck Serono agreed to negotiate in good faith the terms of a non-exclusive royalty-bearing license under such patents.

Intellectual Property
  
General

Patents and other proprietary rights are very important to the development of our business. We will be able to protect our proprietary technologies from unauthorized use by third parties only to the extent that our proprietary rights are covered by valid and enforceable patents or are effectively maintained as trade secrets. It is our intention to seek and maintain patent and trade secret protection for our products and product candidates and our proprietary technologies. As part of our business strategy, our policy is to actively file patent applications in the United States and internationally to cover methods of use, new chemical compounds, pharmaceutical compositions and dosing of the compounds and compositions and improvements in each of these. We also rely on trade secret information, technical know-how, innovation and agreements with third parties to continuously expand and protect our competitive position. We own, or license the rights to, a number of patents and patent applications related to our products and product candidates, but we cannot be certain that issued patents will be enforceable or provide adequate protection or that the pending patent applications will issue as patents.

The patent positions of biotechnology and pharmaceutical companies are highly uncertain and involve complex legal and factual questions. Therefore, we cannot predict with certainty the breadth of claims allowed in biotechnology and pharmaceutical patents, or their enforceability. To date, there has been no consistent policy regarding the breadth of claims allowed in biotechnology patents. Third parties or competitors may challenge or circumvent our patents or patent applications, if issued. If our competitors prepare and file patent applications in the United States that claim technology also claimed by us, we may have to participate in interference proceedings declared by the United States Patent and Trademark Office to determine priority of invention, which could result in substantial cost, even if the eventual outcome is favorable to us. Because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that before we commercialize any of our products or product candidates, any related patent may expire or remain in existence for only a short period following commercialization, thus reducing any advantage of the patent.

If patents are issued to others containing preclusive or conflicting claims and these claims are ultimately determined to be valid, we may be required to obtain licenses to these patents or to develop or obtain alternative technology. Our breach of an existing license or failure to obtain a license to technology required to commercialize our products may seriously harm our business. We also may need to commence litigation to enforce any patents issued to us or to determine the scope and validity of third-party proprietary rights. Litigation would create substantial costs. An adverse outcome in litigation could subject us to significant liabilities to third parties and require us to seek licenses of the disputed rights from third parties or to cease using the technology if such licenses are unavailable.

Optisomal Product Candidates
 
Pursuant to our license agreement with Tekmira and related sublicense with UBC, we have exclusive rights to 14 issued U.S. patents, 102 issued foreign patents, 10 pending U.S. patent applications and 18 pending foreign applications, covering composition of matter, method of use and treatment, formulation and process. These patents and patent applications cover sphingosome based pharmaceutical compositions including Marqibo, Alocrest and Brakiva, formulation, dosage, process of making the liposome compositions, and methods of use of the compositions in the treatment cancer, relapsed cancer, and solid tumors. The earliest of these issued patents expires in 2014 and the last of the issued patents expires in 2021.
 
Menadione Topical Lotion
 
We have exclusive, worldwide rights to a patent family consisting of 2 issued U.S. patent; 20 issued foreign patent and 1 pending US patent application, 7 pending foreign patent applications pursuant to our license agreement, as amended, with AECOM. The issued patent, which expires in 2026, covers a method of using menadione topical lotion in treating skin rash in patients taking biologic and small molecule EGFR inhibitors.  The patent applications cover, pharmaceutical compositions and methods of use (e.g., methods of treating and preventing a skin rash secondary to an anti-EGFR therapy). If any foreign patent issues from these applications, such a patent would be scheduled to expire in 2026, excluding any patent term extensions.
 
In addition, we solely own one (1) pending provisional U.S. patent application and 6 pending foreign patent applications relating to menadione.  These applications cover topical formulations and methods of using menadione topical lotion in treating skin rash in patients taking biologic and small molecule EGFR inhibitors. If any patents issue from such applications, they would expire in 2029.

Other Intellectual Property Rights

We also depend upon trademarks, trade secrets, know-how and continuing technological advances to develop and maintain our competitive position. To maintain the confidentiality of trade secrets and proprietary information, we require our employees, scientific advisors, consultants and collaborators, upon commencement of a relationship with us, to execute confidentiality agreements and, in the case of parties other than our research and development collaborators, to agree to assign their inventions to us. These agreements are designed to protect our proprietary information and to grant us ownership of technologies that are developed in connection with their relationship with us. These agreements may not, however, provide protection for our trade secrets in the event of unauthorized disclosure of such information.
 
 
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In addition to patent protection, we may utilize orphan drug regulations to provide market exclusivity for certain of our products and product candidates. The orphan drug regulations of the FDA provide incentives to pharmaceutical and biotechnology companies to develop and manufacture drugs for the treatment of rare diseases, currently defined as diseases that exist in fewer than 200,000 individuals in the United States, or, diseases that affect more than 200,000 individuals in the United States but that the sponsor does not realistically anticipate will generate a net profit. Under these provisions, a manufacturer of a designated orphan drug can seek tax benefits, and the holder of the first FDA approval of a designated orphan product will be granted a seven-year period of marketing exclusivity for such FDA-approved orphan product. We believe that certain of the indications for our product candidates will be eligible for orphan drug designation; however, we cannot assure you that our drugs will obtain such orphan drug designation or will be the first to reach the market and provide us with such market exclusivity protection.   

Government Regulation and Product Approval

The FDA and comparable regulatory agencies in state and local jurisdictions and in foreign countries impose substantial requirements upon the testing (preclinical and clinical), manufacturing, labeling, storage, recordkeeping, advertising, promotion, import, export, marketing and distribution, among other things, of drugs and drug product candidates. If we do not comply with applicable requirements, we may be fined, the government may refuse to approve our marketing applications or allow us to manufacture or market our products, and we may be criminally prosecuted.  We and our manufacturers may also be subject to regulations under other United States federal, state, and local laws.

United States Government Regulation

In the United States, the FDA regulates drugs under the Food, Drug and Cosmetic Act, or FDCA, and implementing regulations. The process required by the FDA before our product candidates may be marketed in the United States generally involves the following (although the FDA is given wide discretion to impose different or more stringent requirements on a case-by-case basis):

 
·
completion of extensive preclinical laboratory tests, preclinical animal studies and formulation studies, all performed in accordance with the FDA’s good laboratory practice regulations and other regulations;

 
·
submission to the FDA of an investigational new drug, or IND, application which must become effective before clinical trials may begin;

 
·
performance of multiple adequate and well-controlled clinical trials meeting FDA requirements to establish the safety and efficacy of the product candidate for each proposed indication;

 
·
submission of an NDA to the FDA;

 
·
satisfactory completion of an FDA pre-approval inspection of the manufacturing facilities at which the product candidate is produced, and potentially other involved facilities as well, to assess compliance with current good manufacturing practice, or cGMP, regulations and other applicable regulations; and

 
·
the FDA review and approval of the NDA prior to any commercial marketing, sale or shipment of the drug.

 The testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that any approvals for our product candidates will be granted on a timely basis, if at all. Risks to us related to these regulations are described under “Risk Factors – Risks Related to the Clinical Testing, Regulatory Approval and Manufacturing of Our Product Candidates.”
  
Preclinical tests may include laboratory evaluation of product chemistry, formulation and stability, as well as studies to evaluate toxicity and other effects in animals. The results of preclinical tests, together with manufacturing information and analytical data, among other information, are submitted to the FDA as part of an IND application. Subject to certain exceptions, an IND becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, issues a clinical hold to delay a proposed clinical investigation due to concerns or questions about the conduct of the clinical trial, including concerns that human research subjects will be exposed to unreasonable health risks. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. Our submission of an IND, or those of our collaboration partners, may not result in the FDA authorization to commence a clinical trial. A separate submission to an existing IND must also be made for each successive clinical trial conducted during product development. The FDA must also approve changes to an existing IND. Further, an independent institutional review board, or IRB, for each medical center proposing to conduct the clinical trial must review and approve the plan for any clinical trial before it commences at that center and it must monitor the study until completed. The FDA, the IRB or the sponsor may suspend a clinical trial at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk. Clinical testing also must satisfy extensive Good Clinical Practice requirements and regulations for informed consent.
 
 
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Clinical Trials
  
For purposes of NDA submission and approval, clinical trials are typically conducted in the following three sequential phases, which may overlap (although additional or different trials may be required by the FDA as well):

 
·
Phase 1 clinical trials are initially conducted in a limited population to test the drug candidate for safety, dose tolerance, absorption, metabolism, distribution and excretion in healthy humans or, on occasion, in patients, such as cancer patients. In some cases, particularly in cancer trials, a sponsor may decide to conduct what is referred to as a “Phase 1b” evaluation, which is a second safety-focused Phase 1 clinical trial typically designed to evaluate the impact of the drug candidate in combination with currently FDA-approved drugs.

 
·
Phase 2 clinical trials are generally conducted in a limited patient population to identify possible adverse effects and safety risks, to determine the efficacy of the drug candidate for specific targeted indications and to determine dose tolerance and optimal dosage. Multiple Phase 2 clinical trials may be conducted by the sponsor to obtain information prior to beginning larger and more expensive Phase 3 clinical trials. In some cases, a sponsor may decide to conduct what is referred to as a “Phase 2b” evaluation, which is a second, confirmatory Phase 2 clinical trial that could, if positive and accepted by the FDA, serve as a pivotal clinical trial in the approval of a drug candidate.

 
·
Phase 3 clinical trials are commonly referred to as pivotal trials. When Phase 2 clinical trials demonstrate that a dose range of the drug candidate is effective and has an acceptable safety profile, Phase 3 clinical trials are undertaken in large patient populations to further evaluate dosage, to provide substantial evidence of clinical efficacy and to further test for safety in an expanded and diverse patient population at multiple, geographically dispersed clinical trial sites.
  
In some cases, the FDA may condition continued approval of an NDA on the sponsor’s agreement to conduct additional clinical trials with due diligence. In other cases, the sponsor and the FDA may agree that additional safety and/or efficacy data should be provided; however, continued approval of the NDA may not always depend on timely submission of such information. Such post-approval studies are typically referred to as Phase IV studies.

New Drug Application
  
The results of drug candidate development, preclinical testing and clinical trials, together with, among other things, detailed information on the manufacture and composition of the product and proposed labeling, and the payment of a user fee, are submitted to the FDA as part of an NDA. The FDA reviews all NDAs submitted before it accepts them for filing and may request additional information rather than accepting an NDA for filing. Once an NDA is accepted for filing, the FDA begins an in-depth review of the application.
  
During its review of an NDA, the FDA may refer the application to an advisory committee for review, evaluation and recommendation as to whether the application should be approved. The FDA may refuse to approve an NDA and issue a not approvable letter if the applicable regulatory criteria are not satisfied, or it may require additional clinical or other data, including one or more additional pivotal Phase III clinical trials. Even if such data are submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. Data from clinical trials are not always conclusive and the FDA may interpret data differently than we or our collaboration partners interpret data. If the FDA’s evaluations of the NDA and the clinical and manufacturing procedures and facilities are favorable, the FDA may issue either an approval letter or an approvable letter, which contains the conditions that must be met in order to secure final approval of the NDA. If and when those conditions have been met to the FDA’s satisfaction, the FDA will issue an approval letter, authorizing commercial marketing of the drug for certain indications. The FDA may withdraw drug approval if ongoing regulatory requirements are not met or if safety problems occur after the drug reaches the market. In addition, the FDA may require testing, including Phase IV clinical trials, and surveillance programs to monitor the effect of approved products that have been commercialized, and the FDA has the power to prevent or limit further marketing of a drug based on the results of these post-marketing programs. Drugs may be marketed only for the FDA-approved indications and in accordance with the FDA-approved label. Further, if there are any modifications to the drug, including changes in indications, other labeling changes, or manufacturing processes or facilities, we may be required to submit and obtain FDA approval of a new NDA or NDA supplement, which may require us to develop additional data or conduct additional preclinical studies and clinical trials.

The Hatch-Waxman Act

Under the Hatch-Waxman Act, newly-approved drugs and new conditions of use may benefit from a statutory period of non-patent marketing exclusivity. The Hatch-Waxman Act provides five-year marketing exclusivity to the first applicant to gain approval of an NDA for a new chemical entity, meaning that the FDA has not previously approved any other new drug containing the same active entity. The Hatch-Waxman Act prohibits the submission of an abbreviated NDA, or ANDA, or a Section 505(b)(2) NDA for another version of such drug during the five-year exclusive period; however, submission of a Section 505(b)(2) NDA or an ANDA for a generic version of a previously-approved drug containing a paragraph IV certification is permitted after four years, which may trigger a 30-month stay of approval of the ANDA or Section 505(b)(2) NDA. Protection under the Hatch-Waxman Act does not prevent the submission or approval of another “full” 505(b)(1) NDA; however, the applicant would be required to conduct its own preclinical and adequate and well-controlled clinical trials to demonstrate safety and effectiveness. The Hatch-Waxman Act also provides three years of marketing exclusivity for the approval of new and supplemental NDAs, including Section 505(b)(2) NDAs, for, among other things, new indications, dosages, or strengths of an existing drug, if new clinical investigations that were conducted or sponsored by the applicant are essential to the approval of the application. Some of our product candidates may qualify for Hatch-Waxman non-patent marketing exclusivity.
 
 
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In addition to non-patent marketing exclusivity, the Hatch-Waxman Act amended the FDCA to require each NDA sponsor to submit with its application information on any patent that claims the drug for which the applicant submitted the NDA or that claims a method of using such drug and with respect to which a claim of patent infringement could reasonably be asserted if a person not licensed by the owner engaged in the manufacture, use, or sale of the drug. Generic applicants that wish to rely on the approval of a drug listed in the Orange Book must certify to each listed patent, as discussed above. We intend to submit for Orange Book listing all relevant patents for our product candidates.

Finally, the Hatch-Waxman Act amended the patent laws so that certain patents related to products regulated by the FDA are eligible for a patent term extension if patent life was lost during a period when the product was undergoing regulatory review, and if certain criteria are met. We intend to seek patent term extensions, provided our patents and products, if they are approved, meet applicable eligibility requirements.

Orphan Drug Designation and Exclusivity

The FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition, which generally is a disease or condition that affects fewer than 200,000 individuals in the United States. Orphan drug designation must be requested before submitting an NDA. If the FDA grants orphan drug designation, which it may not, the identity of the therapeutic agent and its potential orphan use are publicly disclosed by the FDA. Orphan drug designation does not convey an advantage in, or shorten the duration of, the review and approval process. If a product which has an orphan drug designation subsequently receives the first FDA approval for the indication for which it has such designation, the product is entitled to seven years of orphan drug exclusivity, meaning that the FDA may not approve any other applications to market the same drug for the same indication for a period of seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan exclusivity (superior efficacy, safety, or a major contribution to patient care). Orphan drug designation does not prevent competitors from developing or marketing different drugs for that indication. We received orphan drug status for Marqibo in January 2007 for the treatment of ALL.
 
Under European Union medicines laws, the criteria for designating a product as an “orphan medicine” are similar but somewhat different from those in the United States. A drug is designated as an orphan drug if the sponsor can establish that the drug is intended for a life-threatening or chronically debilitating condition affecting no more than five in 10,000 persons in the European Union or that is unlikely to be profitable, and if there is no approved satisfactory treatment or if the drug would be a significant benefit to those persons with the condition. Orphan medicines are entitled to ten years of marketing exclusivity, except under certain limited circumstances comparable to United States law. During this period of marketing exclusivity, no “similar” product, whether or not supported by full safety and efficacy data, will be approved unless a second applicant can establish that its product is safer, more effective or otherwise clinically superior. This period may be reduced to six years if the conditions that originally justified orphan designation change or the sponsor makes excessive profits.   
 
Fast Track Designation
 
The FDA’s fast track program is intended to facilitate the development and to expedite the review of drugs that are intended for the treatment of a serious or life-threatening condition and that demonstrate the potential to address unmet medical needs. Under the fast track program, applicants may seek traditional approval for a product based on data demonstrating an effect on a clinically meaningful endpoint, or approval based on a well-established surrogate endpoint.  The sponsor of a new drug candidate may request the FDA to designate the drug candidate for a specific indication as a fast track drug at the time of original submission of its IND, or at any time thereafter prior to receiving marketing approval of a marketing application. The FDA will determine if the drug candidate qualifies for fast track designation within 60 days of receipt of the sponsor’s request.

If the FDA grants fast track designation, it may initiate review of sections of an NDA before the application is complete. This so-called “rolling review” is available if the applicant provides and the FDA approves a schedule for the submission of the remaining information and the applicant has paid applicable user fees. The FDA’s PDUFA review clock for both a standard and priority NDA for a fast track product does not begin until the complete application is submitted. Additionally, fast track designation may be withdrawn by the FDA if it believes that the designation is no longer supported by emerging data, or if the designated drug development program is no longer being pursued.   

In some cases, a fast track designated drug candidate may also qualify for one or more of the following programs:

 
·
Priority Review.  As explained above, a drug candidate may be eligible for a six-month priority review. The FDA assigns priority review status to an application if the drug candidate provides a significant improvement compared to marketed drugs in the treatment, diagnosis or prevention of a disease. A fast track drug would ordinarily meet the FDA’s criteria for priority review, but may also be assigned a standard review. We do not know whether any of our other drug candidates will be assigned priority review status or, if priority review status is assigned, whether that review or approval will be faster than conventional FDA procedures, or that the FDA will ultimately approve the drug.

 
·
Accelerated Approval.  Under the FDA’s accelerated approval regulations, the FDA is authorized to approve drug candidates that have been studied for their safety and efficacy in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit to patients over existing treatments based upon either a surrogate endpoint that is reasonably likely to predict clinical benefit or on the basis of an effect on a clinical endpoint other than patient survival or irreversible morbidity. In clinical trials, surrogate endpoints are alternative measurements of the symptoms of a disease or condition that are substituted for measurements of observable clinical symptoms. A drug candidate approved on this basis is subject to rigorous post-marketing compliance requirements, including the completion of Phase IV or post-approval clinical trials to validate the surrogate endpoint or confirm the effect on the clinical endpoint. Failure to conduct required post-approval studies with due diligence, or to validate a surrogate endpoint or confirm a clinical benefit during post-marketing studies, may cause the FDA to seek to withdraw the drug from the market on an expedited basis. All promotional materials for drug candidates approved under accelerated regulations are subject to prior review by the FDA.
 
 
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On August 9, 2012, the FDA approved the Marqibo NDA, granting accelerated approval of Marqibo for the treatment of Philadelphia chromosome negative adult ALL patients in second or greater relapse or whose disease has progressed following two or more prior lines of anti-leukemia therapy. Also, we intend to seek fast track designation, accelerated approval or priority review for our product candidates, when appropriate. We cannot predict whether any of our product candidates will obtain fast track, accelerated approval, or priority review designation, or the ultimate impact, if any, of these expedited review mechanisms on the timing or likelihood of the FDA approval of any of our product candidates.
 
Satisfaction of the FDA regulations and approval requirements or similar requirements of foreign regulatory agencies typically takes several years, and the actual time required may vary substantially based upon the type, complexity and novelty of the product or disease. Typically, if a drug candidate is intended to treat a chronic disease, as is the case with some of the product candidates we are developing, safety and efficacy data must be gathered over an extended period of time. Government regulation may delay or prevent marketing of drug candidates for a considerable period of time and impose costly procedures upon our activities. The FDA or any other regulatory agency may not grant approvals for changes in dosage form or new indications for our product candidates on a timely basis, or at all. Even if a drug candidate receives regulatory approval, the approval may be significantly limited to specific disease states, patient populations and dosages. Further, even after regulatory approval is obtained, later discovery of previously unknown problems with a drug may result in restrictions on the drug or even complete withdrawal of the drug from the market. Delays in obtaining, or failures to obtain, regulatory approvals for any of our product candidates would harm our business. In addition, we cannot predict what adverse governmental regulations may arise from future United States or foreign governmental action.

Pediatric Studies and Exclusivity
 
The FDCA provides an additional six months of non-patent marketing exclusivity and patent protection for any such protections listed in the Orange Book for new or marketed drugs if a sponsor conducts specific pediatric studies at the written request of the FDA. The Pediatric Research Equity Act of 2003, or PREA, authorizes the FDA to require pediatric studies for drugs to ensure the drugs’ safety and efficacy in children. PREA requires that certain new NDAs or NDA supplements contain data assessing the safety and effectiveness for the claimed indication in all relevant pediatric subpopulations. Dosing and administration must be supported for each pediatric subpopulation for which the drug is safe and effective. The FDA may also require this data for approved drugs that are used in pediatric patients for the labeled indication, or where there may be therapeutic benefits over existing products. The FDA may grant deferrals for submission of data, or full or partial waivers from PREA. PREA pediatric assessments may qualify for pediatric exclusivity. Unless otherwise required by regulation, PREA does not apply to any drug for an indication with orphan designation. We may also seek pediatric exclusivity for conducting any required pediatric assessments.

Other Regulatory Requirements
 
Any drugs manufactured or distributed by us or our collaboration partners pursuant to future FDA approvals are subject to continuing regulation by the FDA, including recordkeeping requirements and reporting of adverse experiences associated with the drug. Drug manufacturers and their subcontractors are required to register with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with ongoing regulatory requirements, including cGMP, which impose certain procedural and documentation requirements upon us and our third-party manufacturers. Failure to comply with the statutory and regulatory requirements can subject a manufacturer to possible legal or regulatory action, such as warning letters, suspension of manufacturing, sales or use, seizure of product, injunctive action or possible civil penalties. We cannot be certain that we or our present or future third-party manufacturers or suppliers will be able to comply with the cGMP regulations and other ongoing FDA regulatory requirements. If our present or future third-party manufacturers or suppliers are not able to comply with these requirements, the FDA may halt our clinical trials, require us to recall a drug from distribution, or withdraw approval of the NDA for that drug.
 
The FDA closely regulates the post-approval marketing and promotion of drugs, including standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving the Internet. A company can make only those claims relating to safety and efficacy that are approved by the FDA. Failure to comply with these requirements can result in adverse publicity, warning and/or untitled letters, corrective advertising and potential civil and criminal penalties.
 
Foreign Regulation
  
In addition to regulations in the United States, we will be subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution of our future products. Whether or not we obtain FDA approval for a product, we must obtain approval of a product by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product in those countries. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country.
 
 
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Under European Union regulatory systems, marketing authorizations may be submitted either under a centralized or mutual recognition procedure. The centralized procedure provides for the grant of a single marking authorization that is valid for all European Union member states. The mutual recognition procedure provides for mutual recognition of national approval decisions. Under this procedure, the holder of a national marking authorization may submit an application to the remaining member states. Within 90 days of receiving the applications and assessment report, each member state must decide whether to recognize approval.
  
In addition to regulations in Europe and the United States, we will be subject to a variety of foreign regulations governing clinical trials and commercial distribution of our future products.

Reimbursement
  
In many of the markets where we intend to commercialize a product following regulatory approval, the prices of pharmaceutical products are subject to direct price controls by law and to drug reimbursement programs with varying price control mechanisms.
  
In the United States, there has been an increased focus on drug pricing in recent years. Although there are currently no direct government price controls over private sector purchases in the United States, federal legislation requires pharmaceutical manufacturers to pay prescribed rebates on certain drugs to enable them to be eligible for reimbursement under certain public health care programs such as Medicaid. Various states have adopted further mechanisms under Medicaid and otherwise that seek to control drug prices, including by disfavoring certain higher priced drugs and by seeking supplemental rebates from manufacturers. Managed care has also become a potent force in the market place that increases downward pressure on the prices of pharmaceutical products. Federal legislation, enacted in December 2003, has altered the way in which physician-administered drugs covered by Medicare are reimbursed. Under the new reimbursement methodology, physicians are reimbursed based on a product’s “average sales price,” or ASP. This new reimbursement methodology has generally led to lower reimbursement levels. The new federal legislation also has added an outpatient prescription drug benefit to Medicare, effective January 2006. In the interim, Congress has established a discount drug card program for Medicare beneficiaries. Both benefits will be provided primarily through private entities, which will attempt to negotiate price concessions from pharmaceutical manufacturers.
  
Public and private health care payors control costs and influence drug pricing through a variety of mechanisms, including through negotiating discounts with the manufacturers and through the use of tiered formularies and other mechanisms that provide preferential access to certain drugs over others within a therapeutic class. Payors also set other criteria to govern the uses of a drug that will be deemed medically appropriate and therefore reimbursed or otherwise covered. In particular, many public and private health care payors limit reimbursement and coverage to the uses of a drug that are either approved by the FDA or that are supported by other appropriate evidence (for example, published medical literature) and appear in a recognized drug compendium. Drug compendia are publications that summarize the available medical evidence for particular drug products and identify which uses of a drug are supported or not supported by the available evidence, whether or not such uses have been approved by the FDA. For example, in the case of Medicare coverage for physician-administered oncology drugs, the Omnibus Budget Reconciliation Act of 1993, with certain exceptions, prohibits Medicare carriers from refusing to cover unapproved uses of an FDA-approved drug if the unapproved use is supported by one or more citations in the American Hospital Formulary Service Drug Information, the American Medical Association Drug Evaluations, or the U.S. Pharmacopoeia Drug Information. Another commonly cited compendium, for example under Medicaid, is the DRUGDEX Information System.
 
Different pricing and reimbursement schemes exist in other countries. For example, in the European Union, governments influence the price of pharmaceutical products through their pricing and reimbursement rules and control of national health care systems that fund a large part of the cost of such products to consumers. The approach taken varies from member state to member state. Some jurisdictions operate positive and/or negative list systems under which products may only be marketed once a reimbursement price has been agreed. Other member states allow companies to fix their own prices for medicines, but monitor and control company profits. The downward pressure on health care costs in general, particularly prescription drugs, has become very intense. As a result, increasingly high barriers are being erected to the entry of new products, as exemplified by the National Institute for Clinical Excellence in the UK, which evaluates the data supporting new medicines and passes reimbursement recommendations to the government. In addition, in some countries cross-border imports from low-priced markets (parallel imports) exert a commercial pressure on pricing within a country.

Manufacturing
  
We currently rely on a number of third-parties, including contract manufacturing organizations and our collaborative partners, to produce our compounds. Marqibo requires three separate ingredients, sphingomyelin/cholesterol liposome for injection, or SCLI, Vincristine Sulfate Injection, USP, and sodium phosphate for injection, all of which are handled by separate suppliers.  SCLI is manufactured by Cangene Corporation, Vincristine Sulfate Injection, USP is manufactured by Hospira and sodium phosphate for injection is manufactured by Jubilant Hollister-Stier Laboratories.  Alocrest and Brakiva are both manufactured by Gilead. We have contracted with Contract Pharmaceuticals Limited to manufacture Menadione Topical Lotion.
 
 
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Competition
 
We compete primarily in the segment of the biopharmaceutical market that addresses cancer and cancer supportive care, which is highly competitive. We face significant competition from many pharmaceutical, biopharmaceutical and biotechnology companies that are researching and selling products designed to address cancer in this market. Many of our competitors have significantly greater financial, manufacturing, marketing and drug development resources than we do. Large pharmaceutical companies in particular have extensive experience in clinical testing and in obtaining regulatory approvals for drugs. These companies also have significantly greater research capabilities than we do. In addition, many universities and private and public research institutes are active in cancer research. We also compete with commercial biotechnology companies for the rights to product candidates developed by public and private research institutes. Smaller or early-stage companies are also significant competitors, particularly those with collaborative arrangements with large and established companies.

We believe that our ability to successfully compete will depend on, among other things:

 
·
our ability to develop novel compounds with attractive pharmaceutical properties and to secure and protect intellectual property rights based on our innovations;

 
·
the efficacy, safety and reliability of our products and product candidates;

 
·
the speed at which we develop our products and product candidates;

 
·
our ability to design and successfully complete appropriate clinical trials;

 
·
our ability to maintain a good relationship with regulatory authorities;

 
·
the timing and scope of regulatory approvals;

 
·
our ability to manufacture and sell commercial quantities of future products to the market or enter into strategic partnership agreements with others; and

 
·
acceptance of future products by physicians and other healthcare providers.

Research and Development Expenses
 
Research and development expenses, which include salaries and related personnel costs, fees paid to consultants and outside service providers for laboratory development, manufacturing and other expenses relating to the acquiring, design, development, testing, and enhancement of our products and product candidates, including milestone payments for licensed technology, are the primary source of our overall expenses.  Research and development expenses totaled $12.9 million and $13.4 million for the years ended December 31, 2012 and December 31, 2011, respectively.

Employees
 
As of December 31, 2012, we employed 24 full-time employees and no part-time employees.  23 employees are based at our South San Francisco, California office and 1 employee is based in Minneapolis, Minnesota. None of our employees are covered by a collective bargaining agreement. We believe our relationship with our employees to be good.
 
Additional Information
 
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Exchange Act are available free of charge via our website (www.talontx.com) as soon as reasonably practicable after they are filed with, or furnished to, the SEC.

 
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ITEM 1A.        RISK FACTORS
  
Investment in our common stock involves significant risk. You should carefully consider the information described in the following risk factors, together with the other information appearing elsewhere in this Form 10-K, before making an investment decision regarding our common stock. If any of these risks actually occur, our business, financial conditions, results of operation and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock could decline, and you may lose all or a part of your investment in our common stock. Moreover, the risks described below are not the only ones that we face.

Risks Related to Our Business
 
We need to raise immediate additional capital to fund our planned operations beyond May 2013. If we are unable to raise additional capital when needed, we will have to delay our commercialization activities for Marqibo, discontinue our product development programs or relinquish our rights to some or all of our product candidates. Our ability to raise additional funds and the manner in which we raise any additional funds may affect the value of your investment in our common stock.
 
Our capital requirements are substantial to implement our business strategy, including our capital requirements to develop and commercialize Marqibo.  We believe that our currently available capital is only sufficient to fund our operations through May 2013. Given our desired clinical development plans for the next 12 months, our financial statements reflect an uncertainty about our ability to continue as a going concern, which is reflected in the report from our auditors on the audit of our financial statements as of and for the year ended December 31, 2012.  Accordingly, we need additional capital to fund our operations beyond May 2013.  Further, our available capital may be consumed sooner than we anticipate depending on a variety of factors, including:
 
 
·
costs associated with conducting our ongoing and planned clinical trials and regulatory development activities;
 
 
·
costs of establishing arrangements for manufacturing our products and product candidates;
 
 
·
costs associated with commercializing our Marqibo program, including establishing sales and marketing functions;
 
 
·
payments required under our current and any future license agreements and collaborations;
 
 
·
costs of obtaining, maintaining and defending patents on our products and product candidates; and
 
 
·
costs of acquiring any new drug candidates.
 
In January 2012, we entered into an Investment Agreement with certain investment funds affiliated with Warburg Pincus, LLC and Deerfield Management pursuant to which we sold an aggregate of 110,000 shares of Series A-2 Preferred for $100 per share for aggregate gross proceeds of $11.0 million. Under the 2012 Investment Agreement, the investors have the right, but not the obligation, from the date of the agreement until the first anniversary of our receipt of marketing approval from the FDA for any of our product candidates, to purchase up to an additional 600,000 shares of Series A-3 Preferred, at a purchase price of $100 per share, in one or more tranches of at least 50,000 shares of Series A-3 Preferred per tranche.  On July 3, 2012, we and the investors entered into an amendment to the 2012 Investment Agreement, pursuant to which the minimum size of each such tranche was reduced from 50,000 shares of Series A-3 Preferred to 30,000 shares of Series A-3 Preferred. Also on July 3, 2012, pursuant to the terms of the 2012 Investment Agreement, as amended, we issued and sold to the investors an aggregate of 30,000 shares of Series A-3 Preferred at a price per share of $100, for aggregate gross proceeds of $3.0 million.  On August 17 and November 14, 2012, pursuant to the terms of the 2012 Investment Agreement, as amended, we issued and sold to the investors 60,000 shares and 30,000 shares, respectively, of Series A-3 Preferred at a price per share of $100, for aggregate gross proceeds of $9.0 million.  In addition, on January 11, 2013, pursuant to the terms of the 2012 Investment Agreement, as amended, we issued and sold to the investors an aggregate of 60,000 shares of Series A-3 Preferred at a price per share of $100, for aggregate gross proceeds of $6.0 million.  Since January 2012, these investors have represented our only material source of additional capital.  These investors have no obligation to make additional investments in the Company.  Accordingly, we can give no assurance that additional capital sufficient to meet our needs can be obtained.
 
If our preferred stock investors do not make additional investments pursuant to the 2012 Investment Agreement at times when we are in need of additional capital, then we will need to secure such additional capital from other sources.  Because the investors are under no obligation to make additional investments pursuant to the 2012 Investment Agreement, we have no committed sources of additional capital, making our access to funding highly uncertain. Further, other than certain issuances of common stock in connection with a new financing transaction, the holders of our preferred stock, who hold approximately 89% of our voting securities, have the right to approve issuances of equity or debt securities by us, which could prevent us from being able to complete a financing with other investors if not first approved by our preferred stockholders. The substantial control held by our preferred stockholders, combined with the preferential rights afforded to such stockholders in the event we effect a liquidation or certain transactions that result in a change of control or sale of substantially all of our assets, may make an investment in our securities less attractive from the perspective of a new investor.  In addition, the uncertainty surrounding our ability to obtain additional financing is further exacerbated due to ongoing global economic turmoil, which has continued to restrict access to the U.S. and international capital markets, particularly for small biopharmaceutical and biotechnology companies like us. Accordingly, despite our ability to secure adequate capital in the past, there is no assurance that additional equity or debt financing will be available to us when needed, on acceptable terms or even at all. If we fail to obtain the necessary additional capital when needed, we will be forced to significantly curtail our Marqibo commercialization activities and our planned research and development activities, which will cause a delay in our drug development programs.  If we do not obtain additional capital before we have consumed our currently available resources, we may be forced to cease our operations altogether, in which case you will lose your entire investment in our company.  To the extent that we raise additional capital by issuing equity securities, our stockholders will likely experience significant dilution. We may also grant future investors rights superior to those of our current stockholders. If we raise additional funds through collaborations and licensing arrangements, it may be necessary to relinquish some rights to our technologies, product candidates or products, or grant licenses on terms that are not favorable to us. If we raise additional funds by incurring debt, we could incur significant interest expense and become subject to covenants in the related transaction documentation that could affect the manner in which we conduct our business.
 
 
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Our short-term viability and long-term success is dependent on our ability to establish strategic partnerships to develop and commercialize our products and product candidates, particularly Marqibo and Menadione Topical Lotion.
 
An important element to our business strategy includes partnering with pharmaceutical, biotechnology, or other companies to develop and commercialize our products and product candidates.  We are likely to face significant competition in seeking appropriate strategic partners, and these strategic partnerships can be complicated and time consuming to negotiate and execute. In addition, such arrangements may not be commercially successful or we may not be able to enter into such partnerships on favorable terms and may cease to continue to operate as a going concern as early as the end of May 2013.
 
On January 7, 2013, we announced that our board of directors had engaged a financial advisor to assist with exploring strategic alternatives, which may include a possible transaction, including a merger, business combination, or sale of the Company. We are unable to predict when, if ever, we will enter into any potential strategic partnerships because of the numerous risks and uncertainties associated with establishing strategic partnerships. If we are unable to negotiate strategic partnerships for our products and product candidates we may be forced to curtail the development of a particular product or product candidate, reduce or delay its development program, delay its potential commercialization, reduce the scope of our sales or marketing activities or undertake development or commercialization activities at our own expense. In addition, we will bear all the risk related to the development of that product or product candidate. If we elect to increase our expenditures to fund development or commercialization activities on our own, we will need to obtain additional capital, which may not be available to us on acceptable terms, or at all. If we do not have sufficient funds, we will not be able to bring our products and product candidates to market and generate product revenue.
 
If we enter into strategic partnerships, we may be required to relinquish important rights to and control over development of our products and product candidates or otherwise be subject to terms unfavorable to us.
 
Any potential strategic partnerships we enter into could require us to relinquish important rights to and control over the development of our products and product candidates, and may subject us to the following risks:

 
·
additional expenditures and the utilization of increased clinical, regulatory, and manufacturing resources to satisfy obligations pursuant to any strategic partnership arrangement;
 
 
·
a lack of control over the amount of timing of resources committed by any potential strategic partner to promote the continued development and commercialization of our products and product candidates;

 
·
strategic partners may not pursue further development and commercialization of products resulting from the strategic partnering arrangement or may elect to discontinue research and development programs; and

 
·
disputes may arise between us and our strategic partners that could result in the delay or termination of the research, development or commercialization of our products and product candidates.

Our independent registered public accounting firm has included an explanatory paragraph relating to our ability to continue as a going concern in its report on our audited financial statements included in this Annual Report.
 
The report from our independent registered public accounting firm included in this Annual Report includes an explanatory paragraph stating that our recurring losses from operations and significant negative cash flow from operations raise substantial doubt about our ability to continue as a going concern. If we are unable to obtain sufficient funding, our business, financial condition and results of operations will be materially and adversely affected and we may be unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our consolidated financial statements, and it is likely that investors will lose all or a part of their investment. If there remains doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding on commercially reasonable terms or at all.

We have a limited operating history and may not be able to commercialize any products, generate significant revenues or attain profitability.
 
We do not generate any recurring revenue and have incurred significant net losses in each year since our inception. We expect to incur losses and negative cash flow from operations until we are able to successfully commercialize Marqibo, and we may never achieve or maintain profitability. For the twelve months ended December 31, 2012 and December 31, 2011, we had a net loss of $43.7 million and $18.8 million, respectively.   Our net cash used in operations during the twelve months ended December 31, 2012 and December 31, 2011, was approximately $20.2 million and $21.9 million, respectively.
 
 
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We expect our cash requirements to increase substantially in the foreseeable future as we:
 
 
·
develop our commercial and distribution capabilities to market Marqibo;
 
 
·
continue to undertake clinical development of our current products and product candidates;
 
 
·
seek regulatory approvals for our product candidates at the appropriate time in the future;
 
 
·
implement additional internal systems and infrastructure;
 
 
·
seek to acquire additional technologies to develop; and
 
 
·
hire additional personnel.
 
We expect to incur losses for the foreseeable future as we fund our operations and capital expenditures and develop our commercial infrastructure to support the Marqibo product launch. As a result, we will need to generate significant revenues in order to achieve and maintain profitability. Even if we succeed in developing and commercializing or partnering Marqibo, which success is not assured, we may not be able to generate significant revenues. Even if we do generate significant revenues, we may never achieve or maintain profitability. Our failure to achieve or maintain profitability could negatively impact the trading price of our common stock.
 
If we are unable to successfully manage our growth, our business may be harmed.
 
In the future, if we are able to advance Marqibo or our product candidates to the point of, and thereafter through, clinical trials, we may need to expand our development, regulatory, manufacturing, marketing and sales capabilities or contract with third parties to provide these capabilities. Any future growth will place a significant strain on our management and on our administrative, operational and financial resources. Our future financial performance and our ability to successfully commercialize Marqibo and our product candidates and to compete effectively will depend, in part, on our ability to manage any future growth effectively. We must manage our development efforts and clinical trials effectively, and hire, train and integrate additional management, administrative and sales and marketing personnel. We may not be able to accomplish these tasks, and our failure to accomplish any of them could prevent us from successfully growing.
 
If we are unable to attract and retain key personnel, our business may be harmed.
 
Our ability to attract and retain key personnel is critical to our success.  We compete for qualified individuals with numerous biopharmaceutical companies, universities and other research institutions. Competition for such individuals, particularly in the San Francisco Bay Area where we are headquartered, is intense, and we cannot be certain that our efforts to attract and retain such personnel will be successful. Our ability to attract and retain key personnel is further exacerbated by the uncertainty surrounding our ability to obtain additional financing and continue as a going concern.
 
We may incur substantial liabilities and may be required to limit commercialization of our products in response to product liability lawsuits.
 
The testing and marketing of pharmaceutical products entail an inherent risk of product liability. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our products and product candidates, if approved. Even successful defense would require significant financial and management resources. Regardless of the merit or eventual outcome, liability claims may result in:

 
·
decreased demand for our products and product candidates;

 
·
injury to our reputation;

 
·
withdrawal of clinical trial participants;

 
·
withdrawal of prior governmental approvals;

 
·
costs of related litigation;

 
·
substantial monetary awards to patients;

 
·
product recalls;

 
·
loss of revenue; and

 
·
the inability to commercialize Marqibo or our product candidates.
 
 
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Our inability to obtain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of pharmaceutical products we develop, alone or with collaborators. We carry a $10 million product liability insurance policy for our product and product candidates and ongoing clinical trials. Even if our agreements with any future collaborators entitle us to indemnification against damages from product liability claims, such indemnification may not be available or adequate should any claim arise.

If we fail to acquire and develop other product candidates we may be unable to grow our business.

Although we have no current plans to do so, we may in the future acquire rights to develop and commercialize additional product candidates. Because we currently neither have nor intend to establish internal research capabilities, we are dependent upon pharmaceutical and biotechnology companies and academic and other researchers to sell or license us their product candidates. The success of our strategy depends upon our ability to identify, select and acquire pharmaceutical product candidates.

Proposing, negotiating and implementing an economically viable product acquisition or license agreement is a lengthy and complex process. We compete for partnering arrangements and license agreements with pharmaceutical, biopharmaceutical and biotechnology companies, many of which have significantly more experience than us and have significantly more financial resources than we do. Our competitors may have stronger relationships with certain third parties with whom we are interested in partnering, such as academic research institutions, and may, therefore, have a competitive advantage in entering into partnering arrangements with those third parties. We may not be able to acquire rights to additional product candidates on terms that we find acceptable, or at all.

We expect that any product candidate to which we acquire rights will require significant additional development and other efforts prior to commercial sale, including extensive clinical testing and approval by the FDA and applicable foreign regulatory authorities. We do not currently have the capital and human resources available to develop additional product candidates and would need to obtain significant amounts of additional capital and personnel to do so.  Further, all product candidates are subject to the risks of failure inherent in pharmaceutical product development, including the possibility that the product candidate will not be shown to be sufficiently safe or effective for approval by regulatory authorities. Even if our product candidates are approved, they may not be manufactured or produced economically or commercialized successfully.
 
Risks Related to the Clinical Testing, Regulatory Approval and Manufacturing of Our Product Candidates

Our near and long-term business prospects are substantially dependent on our ability to satisfy post-accelerated approval requirements with respect to our lead product, Marqibo.

In July 2011, we submitted to the FDA a new drug application, or NDA, seeking accelerated approval of our lead product candidate, Marqibo, for the treatment of Philadelphia chromosome negative adult ALL patients in second or greater relapse or whose disease has progressed following two or more prior lines of anti-leukemia therapy. In September 2011, the FDA accepted our NDA for filing under Subpart H – Accelerated Approval for New Drugs for Serious or Life Threatening Illnesses, and, on August 9, 2012, the FDA granted accelerated approval of Marqibo.

In order for a new drug product to be approved for marketing in the United States, a drug sponsor typically needs to establish the safety and efficacy of the drug through one or more randomized Phase 3 clinical trials.  However, under the FDA’s Subpart H “accelerated approval” regulations, the agency is authorized to approve a drug candidate that has been studied for its safety and efficacy in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit to patients over existing treatments based upon either a surrogate endpoint that is reasonably likely to predict clinical benefit or on the basis of an effect on a clinical endpoint other than patient survival or irreversible morbidity.  Accelerated approval may be granted prior to the conduct of a Phase 3 clinical trial, but a drug candidate receiving accelerated approval is subject to rigorous post-marketing compliance requirements, including the completion of one or more post-approval confirmatory clinical trials to validate the surrogate endpoint or confirm the effect on the clinical endpoint. Failure to conduct required post-approval studies with due diligence, or to validate a surrogate endpoint or confirm a clinical benefit during post-marketing studies, may cause the FDA to seek to withdraw the drug from the market on an expedited basis.  
 
 
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The FDA granted accelerated approval of our NDA for Marqibo on the basis of data from our rALLy study, a Phase 2 clinical trial, and not based on data from any Phase 3 clinical trial.  As a result of receiving accelerated approval, we remain subject to the rigorous compliance requirements discussed above, and any failure to satisfy these requirements may cause the FDA to withdraw its approval of Marqibo.  If the FDA withdrew its grant of accelerated approval, then we would be required to complete our ongoing Phase 3 confirmatory trial, named HALLMARQ, before we could market Marqibo and realize any revenue from sales of the product in the U.S.  We estimate that we need to spend at least $25 million and perhaps as much as $35 million in order to complete HALLMARQ.  If the FDA revoked our accelerated approval, we would not be able to finance any portion of those development expenses by sales of Marqibo. Instead, we would need to raise additional capital in order to finance all of those additional development expenses, as well as our other ongoing operating activities.  Such capital may not be available to us when needed, on acceptable terms or even at all.  As a result, if the FDA revoked its accelerated approval of Marqibo and if we are unable to raise the additional capital necessary to fund our ongoing development and other operating expenses, we may be forced to cease our operations altogether, in which case you may lose your entire investment in our company.
 
Our business will suffer if we are unable to obtain regulatory approval to sell our product candidates.
 
Other than Marqibo, we do not have approval from the FDA or any foreign regulatory authority needed to market any of our product candidates. Significant FDA regulatory risks exist which may prevent FDA approval of these drug candidates and thereby prevent their commercial use, as described below. Additionally, with respect to Marqibo and in the event any of our product candidates are approved by the FDA, such approval may be withdrawn by the FDA for a variety of reasons, including:

 
·
that clinical or other experience, tests, or other scientific data show that the drug is unsafe for use;

 
·
that new evidence of clinical experience or evidence from new tests, evaluated together with the evidence available to the FDA when the NDA was approved, shows that the drug is not shown to be safe for use under the approved conditions of use;

 
·
that on the basis of new information presented to the FDA, there is a lack of substantial evidence that the drug will have the effect it purports or is represented to have under the approved conditions of use;

 
·
that an NDA contains any untrue statement of a material fact; or

 
·
for a drug approved under the FDA’s accelerated approval regulations or as a fast track drug, if any required post-approval study is not conducted with due diligence or if such study fails to verify the clinical benefit of the drug.
 
Other regulatory risks may arise as a result of a change in applicable law or regulation or the interpretation thereof, and may result in material modification or withdrawal of prior FDA approvals.

Many of our product candidates are in early stages of clinical trials, which are very expensive and time-consuming. Any failure or delay in completing clinical trials for our product candidates could harm our business.
 
Other than Marqibo, the product candidates that we are developing, Menadione Topical Lotion, Alocrest and Brakiva, are in early stages of development and will require extensive clinical and other testing and analysis before we will be in a position to consider seeking FDA approval to sell such product candidates.  Conducting clinical trials is a lengthy, time consuming and very expensive process and the results are inherently uncertain. The duration of clinical trials can vary substantially according to the type, complexity, novelty and intended use of the product candidate. We estimate that clinical trials of our product candidates will take at least several years to complete. The completion of clinical trials for our product candidates may be delayed or prevented by many factors, including:

 
·
delays in patient enrollment, and variability in the number and types of patients available for clinical trials;

 
·
difficulty in maintaining contact with patients after treatment, resulting in incomplete data;

 
·
poor effectiveness of product candidates during clinical trials;

 
·
safety issues, side effects, or other adverse events;

 
·
an inability to provide sufficient drug supply to the clinical trial sites;

 
·
results that do not demonstrate the safety or effectiveness of the product candidates; and

 
·
governmental or regulatory delays and changes in regulatory requirements, policy and guidelines.  

In conducting clinical trials, we may fail to establish the effectiveness of a compound for the targeted indication or discover that it is unsafe due to unforeseen side effects or other reasons. Even if our clinical trials are commenced and completed as planned, their results may not support our anticipated product candidate claims. Further, failure of product candidate development can occur at any stage of the clinical trials, or even thereafter, and we could encounter problems that cause us to abandon or repeat clinical trials. These problems could interrupt, delay or halt clinical trials for our product candidates and could result in FDA, or other regulatory authorities, delaying approval of our product candidates for any or all indications. The results from preclinical testing and prior clinical trials may not be predictive of results obtained in later or other larger clinical trials. A number of companies in the pharmaceutical industry have suffered significant setbacks in clinical trials, even in advanced clinical trials after showing promising results in earlier clinical trials. Our failure to adequately demonstrate the safety and effectiveness of any of our product candidates will prevent us from receiving regulatory approval to market these product candidates and will negatively impact our business.
 
 
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In addition, we or the FDA may suspend or curtail our clinical trials at any time if it appears that we are exposing participants to unacceptable health risks or if the FDA finds deficiencies in the conduct of these clinical trials or in the composition, manufacture or administration of the product candidates. Accordingly, we cannot predict with any certainty when or if we will ever be in a position to submit an NDA for any of our product candidates, or whether any such NDA would ever be approved.
 
If we do not obtain the necessary U.S. or foreign regulatory approvals to commercialize our product candidates, we will not be able to market and sell our product candidates.
 
Other than Marqibo, none of our product candidates has been approved for commercial sale in any country. FDA approval is required to commercialize all of our product candidates in the United States and approvals from the FDA equivalent regulatory authorities are required in foreign jurisdictions in order to commercialize our product candidates in those jurisdictions. We possess world-wide rights to develop and commercialize Marqibo and our product candidates.

In order to obtain FDA approval of any of our product candidates, we must submit to the FDA an NDA, demonstrating that the product candidate is safe for humans and effective for its intended use and otherwise meets the requirements of existing laws and regulations governing new drugs. This demonstration requires significant research and animal tests, which are referred to as preclinical studies, and human tests, which are referred to as clinical trials, as well as additional information and studies. Satisfaction of the FDA’s regulatory requirements typically takes many years, depending on the type, complexity and novelty of the product candidate and requires substantial resources for research, development and testing as well as for other purposes. We cannot predict whether our research and clinical approaches will result in drugs that the FDA considers safe for humans and effective for indicated uses. Historically, only a small percentage of all drug candidates that start clinical trials are eventually approved by the FDA for commercialization. After clinical trials are completed, the FDA has substantial discretion in the drug approval process and may require us to conduct additional preclinical and clinical testing or to perform post-marketing studies. The approval process may also be delayed by changes in government regulation, future legislation or administrative action or changes in FDA policy that occur prior to or during our regulatory review. Delays in obtaining regulatory approvals may:

 
·
delay or prevent commercialization of, and our ability to derive product revenues from, our product candidates;

 
·
impose costly procedures on us;

 
·
reduce the potential prices we may be able to charge for our product candidates, assuming they are approved for sale; and

 
·
diminish any competitive advantages that we may otherwise enjoy.

Even if we comply with all FDA requests, the FDA may ultimately reject one or more of our NDAs. We cannot be sure that we will ever obtain regulatory approval for any of our product candidates. Additionally, a change in applicable law or regulation, or the interpretation thereof, may result in material modification or withdrawal of prior FDA approvals.
 
Failure to obtain FDA approval of any of our product candidates will severely undermine our business by reducing our number of saleable products and, therefore, corresponding product revenues. If we do not complete clinical trials and obtain regulatory approval for a product candidate, we will not be able to recover any of the substantial costs invested by us in the development of the product candidate.
 
In foreign jurisdictions, we must receive approval from the appropriate regulatory authorities before we can commercialize our drugs. Foreign regulatory approval processes generally include all of the risks associated with the FDA approval procedures described above. We cannot assure you that we will receive the approvals necessary to commercialize any of our product candidates for sale outside the United States.
 
Our competitive position may be harmed if a competitor obtains orphan drug designation and approval for the treatment of ALL for a clinically superior drug.
 
Orphan drug designation is an important element of our competitive strategy because the latest of our licensors’ patents for Marqibo expires in November 2021. In 2007, the FDA granted orphan drug designation for the use of Marqibo in treating adult ALL and adult metastatic uveal melanoma. The company that obtains the first FDA approval for a designated orphan drug for a rare disease generally receives marketing exclusivity for use of that drug for the designated condition for a period of seven years. However, even though we obtained orphan drug status for Marqibo in the treatments noted, the FDA may permit other companies to market a drug for the same designated and approved condition during our period of orphan drug exclusivity if it can be demonstrated that the drug is clinically superior to our drug. This could create a more competitive market for us.
 
 
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Even if we obtain regulatory approvals for our products, the terms of approvals and ongoing monitoring and regulation of our products may limit how we manufacture and market our products, which could materially impair our ability to generate revenue.

Even if regulatory approval is granted in the United States or in a foreign country, the approved product and its manufacturer, as well as others involved in the manufacturing and packaging process, remain subject to continual regulatory review and monitoring. Any regulatory approval that we receive for a product candidate may be subject to limitations on the indicated uses for which the product may be marketed, or include requirements for potentially costly post-approval clinical trials. In addition, if the FDA and/or foreign regulatory agencies approve any of our product candidates, the labeling, packaging, storage, advertising, promotion, recordkeeping and submission of safety and other post-marketing information on the product will be subject to extensive regulatory requirements that may change over time. We and the manufacturers of our products, our suppliers and our manufacturers’ suppliers, and many aspects of the packaging are also required to comply with current good manufacturing practice regulations, which include requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation. Further, regulatory agencies must approve these manufacturing facilities before they can be used to manufacture our products or their ingredients or certain packaging materials, and these facilities are subject to ongoing regulatory inspection. Discovery of problems with a product or manufacturer may result in restrictions or sanctions with respect to the product, manufacturer and relevant manufacturing facility, including withdrawal of the product from the market. If we fail to comply with the regulatory requirements of the FDA and other applicable foreign regulatory authorities, or if problems with our products, manufacturers or manufacturing processes are discovered, we could be subject to administrative or judicially imposed sanctions, including:

 
·
restrictions on the products, manufacturers or manufacturing process;

 
·
warning letters or untitled letters;

 
·
civil or criminal penalties or fines;

 
·
injunctions;

 
·
product seizures, detentions or import bans;

 
·
voluntary or mandatory product recalls and publicity requirements;

 
·
suspension or withdrawal of regulatory approvals;

 
·
total or partial suspension of production and/or sale; and

 
·
refusal to approve pending applications for marketing approval of new drugs or supplements to approved applications.
 
In order to market any products outside of the United States, we must establish and comply with the numerous and varying regulatory requirements of other countries regarding safety and efficacy. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might differ from that required to obtain FDA approval. Regulatory approval in one country does not ensure regulatory approval in another, but failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others.
 
Because we are dependent on clinical research institutions and other contractors for clinical testing and for research and development activities, the timing and results of our clinical trials and such research activities are, to a certain extent, beyond our control.
 
       We depend upon independent investigators and collaborators, such as universities and medical institutions, to conduct our clinical trials under agreements with us. These parties are not our employees and we cannot control the amount or timing of resources that they devote to our programs. These investigators may not assign as great a priority to our programs or pursue them as diligently as we would if we were undertaking such programs ourselves. If outside collaborators fail to devote sufficient time and resources to our drug-development programs, or if their performance is substandard, the approval of our FDA applications, if any, and our introduction of new drugs, if any, will be delayed. These collaborators may also have relationships with other commercial entities, some of whom may compete with us. If our collaborators assist our competitors at our expense, our competitive position would be harmed.
 
 
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Our reliance on third parties to formulate and manufacture Marqibo and our product candidates exposes us to a number of risks that may delay the development, regulatory approval and commercialization of our products or result in higher product costs.
 
We have no experience in drug formulation or manufacturing and do not intend to establish our own manufacturing facilities. We lack the resources and expertise to formulate or manufacture our own product candidates. We contract with one or more manufacturers to manufacture, supply, store and distribute drug supplies for our clinical trials and commercial sale. Our anticipated future reliance on a limited number of third-party manufacturers exposes us to the following risks:

 
·
In connection with the manufacture of Marqibo, we are dependent on a single source for many of the materials involved in its manufacture.  To the extent there are any technical, regulatory, labor, capacity or other issues affecting such suppliers, our ability to manufacture adequate supplies of Marqibo may be severely and adversely affected.

 
·
Some of our product candidates require complex materials to make saleable goods.  As a result, our suppliers may have difficulty consistently meeting the applicable specifications for our product candidates, which could cause disruptions in our ability to produce an adequate supply of our drug products.

 
·
We may be unable to identify manufacturers on acceptable terms or at all because the number of potential manufacturers is limited and the FDA must approve any replacement contractor. This approval would require new testing and compliance inspections. In addition, a new manufacturer would have to be educated in, or develop substantially equivalent processes for, production of our products after receipt of FDA approval, if any. 

 
·
Our third-party manufacturers might be unable to formulate and manufacture our drugs in the volume and of the quality required to meet our clinical and/or commercial needs, if any.

 
·
Our future contract manufacturers may not perform as agreed or may not remain in the contract manufacturing business for the time required to supply our clinical trials or to successfully produce, store and distribute our products.

 
·
Drug manufacturers are subject to ongoing periodic unannounced inspection by the FDA and corresponding state agencies to ensure strict compliance with good manufacturing practice and other government regulations and corresponding foreign standards. We do not have control over third-party manufacturers’ compliance with these regulations and standards, but we will be ultimately responsible for any of their failures.

 
·
If any third-party manufacturer makes improvements in the manufacturing process for our products, we may not own, or may have to share, the intellectual property rights to the innovation. This may prohibit us from seeking alternative or additional manufacturers for our products.

 
·
Regulatory authorities outside the United States may request an independent body conduct compliance audits of our manufacturers.  There can be no assurance of successful outcomes of these audits.   
 
Each of these risks could delay our clinical trials, the approval, if any, of our product candidates by the FDA, or the commercialization of our product candidates or result in higher costs or deprive us of potential product revenues.

Risks Related to Our Ability to Commercialize Marqibo and Our Product Candidates
  
If we are unable either to create sales, marketing and distribution capabilities or enter into agreements with third parties to perform these functions, we will be unable to commercialize Marqibo or our product candidates successfully.
 
We currently do not have robust sales, marketing or distribution capabilities nor do we currently have funds sufficient to further develop these capabilities. To commercialize Marqibo and our product candidates, we must either develop internal sales, marketing and distribution capabilities, which will be expensive and time consuming, or make arrangements with third parties to perform these services. If we decide to market any of our products directly, we must commit financial and managerial resources to develop marketing capabilities and a sales force with technical expertise and with supporting distribution capabilities. Other factors that may inhibit our efforts to commercialize Marqibo and our product candidates, if approved, directly and without strategic partners include:

 
·
our inability to recruit and retain adequate numbers of effective sales and marketing personnel;

 
·
the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe our products;

 
·
the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and

 
·
unforeseen costs and expenses associated with creating an independent sales and marketing organization.
 
If we are not able to partner with a third party and are not successful in recruiting sales and marketing personnel or in building a sales and marketing infrastructure, we will have difficulty commercializing Marqibo and our product candidates, which would harm our business. If we rely on pharmaceutical or biotechnology companies with established distribution systems to market our products, we will need to establish and maintain partnership arrangements, and we may not be able to enter into these arrangements on acceptable terms or at all. To the extent that we enter into co-promotion or other arrangements, any revenues we receive will depend upon the efforts of third parties which may not be successful and which may only be partially within our control. Our product revenues would likely be lower than if we marketed and sold our products directly.
 
 
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 The terms of our license agreements relating to intellectual property ownership rights may make it more difficult for us to establish collaborations for the development and commercialization of our products and product candidates.

The terms of our license agreements obligate us to include intellectual property assignment provisions in any sublicenses or collaboration agreements that may be unacceptable to our potential sublicensees and partners. These terms may impede our ability to enter into partnerships for some of our existing product candidates. Under our license agreement with Tekmira, Tekmira will be the owner of patents and patent applications claiming priority to certain patents licensed to us, and we not only have an obligation to assign to Tekmira our rights to inventions covered by such patents or patent applications, but also, when negotiating any joint venture, collaborative research, development, commercialization or other agreement with a third party, to require such third party to do the same. Our license agreement with Elan relating to Marqibo, provides that Elan will own all improvements to the licensed patents or licensed know-how made by us or any of our sublicensees. Potential collaboration and commercialization partners for these product candidates may not agree to such intellectual property ownership requirements and therefore not elect to partner with us for these product candidates.

If physicians and patients do not accept and use our products and product candidates, our ability to generate revenue from sales of our products will be materially impaired.
 
Despite FDA approval for Marqibo or future approval for any of our product candidates, physicians and patients may not accept and use these products, and our business could be adversely affected. Acceptance and use of our products will depend upon a number of factors including:

 
·
perceptions by members of the health care community, including physicians, about the safety and effectiveness of our drugs;

 
·
pharmacological benefit and cost-effectiveness of our products relative to competing products;

 
·
availability of reimbursement for our products from government or other healthcare payors;

 
·
effectiveness of marketing and distribution efforts by us and our licensees and distributors, if any; and

 
·
the price at which we sell our products.
 
We are subject to uncertainty relating to reimbursement policies which, if not favorable for Marqibo or our product candidates, could hinder or prevent their commercial success.

Our ability to commercialize Marqibo or our early-stage product candidates successfully will depend in part on the coverage and reimbursement levels set by governmental authorities, private health insurers and other third-party payors. As a threshold for coverage and reimbursement, third-party payors generally require that drug products have been approved for marketing by the FDA. Third-party payors also are increasingly challenging the effectiveness of and prices charged for medical products and services. We may not obtain adequate third-party coverage or reimbursement for Marqibo or our product candidates or we may be required to sell them at a discount.
 
We expect that private insurers will consider the efficacy, cost effectiveness and safety of Marqibo in determining whether to approve reimbursement for Marqibo and at what level. Obtaining these approvals can be a time consuming and expensive process. Our business would be materially adversely affected if we do not receive approval for reimbursement of Marqibo from private insurers on a timely or satisfactory basis. Our business could also be adversely affected if private insurers, including managed care organizations, the Medicare program or other reimbursing bodies or payors limit the indications for which Marqibo will be reimbursed to a smaller set than we believe it is effective in treating.
 
In some foreign countries, particularly Canada and the countries of Europe, the pricing of prescription pharmaceuticals is subject to strict governmental control. In these countries, pricing negotiations with governmental authorities can take six to 12 months or longer after the receipt of regulatory approval and product launch. To obtain favorable reimbursement for the indications sought or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our products, including Marqibo, to other available therapies. If reimbursement for our products is unavailable in any country in which reimbursement is sought, limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be materially harmed.
 
We expect to experience pricing pressures in connection with the sale of Marqibo and our future products due to the potential healthcare reforms discussed below, as well as the trend toward programs aimed at reducing health care costs, the increasing influence of health maintenance organizations and additional legislative proposals.
 
 
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If we cannot compete successfully for market share against other drug companies, we may not achieve sufficient product revenues and our business will suffer.
 
The market for Marqibo and our product candidates is characterized by intense competition and rapid technological advances. Marqibo and our product candidates, if they receive FDA approval, will compete with a number of existing and future drugs and therapies developed, manufactured and marketed by others. More specifically, Marqibo will compete with non-liposomal vincristine, which is generic, other cytotoxic agents such as antimetabolites, alkylating agents, cytotoxic antibiotics, vinca alkyloids, platinum compounds and taxanes, and other cytotoxic agents that use different encapsulation technologies. These or other future competing products and product candidates may provide greater therapeutic convenience or clinical or other benefits for a specific indication than our products, or may offer comparable performance at a lower cost. If our products fail to capture and maintain market share, we may not achieve sufficient product revenues and our business will suffer.
 
We will compete against fully integrated pharmaceutical companies and smaller companies that are collaborating with larger pharmaceutical companies, academic institutions, government agencies and other public and private research organizations. In addition, many of these competitors, either alone or together with their collaborative partners, operate larger research and development programs and have substantially greater financial resources than we do, as well as significantly greater experience in:
 
 
·
developing drugs;

 
·
undertaking preclinical testing and human clinical trials;

 
·
obtaining FDA and other regulatory approvals of drugs;

 
·
formulating and manufacturing drugs; and
 
 
·
launching, marketing and selling drugs.
 
Developments by competitors may render our products or technologies obsolete or non-competitive.
 
Alternative technologies are being developed to treat cancer and immunological disease, several of which are in advanced clinical trials. In addition, companies pursuing different but related fields represent substantial competition. Many of these organizations have substantially greater capital resources, larger research and development staffs and facilities, longer drug development history in obtaining regulatory approvals and greater manufacturing and marketing capabilities than we do. These organizations also compete with us to attract qualified personnel, parties for acquisitions, joint ventures or other collaborations.
 
Healthcare reform measures could hinder or prevent the commercial success of Marqibo or our product candidates.
 
The U.S. government and other governments have shown significant interest in pursuing healthcare reform, as evidenced by the enactment in 2010 of the Patient Protection and Affordable Healthcare Act. Such government-adopted reform measures may adversely impact the pricing of healthcare products and services in the U.S. or internationally and the amount of reimbursement available from governmental agencies or other third party payors. The continuing efforts of the U.S. and foreign governments, insurance companies, managed care organizations and other payors of health care services to contain or reduce health care costs may adversely affect our ability to set prices for our products which we believe are fair, and our ability to generate revenues and achieve and maintain profitability.
 
New laws, regulations and judicial decisions, or new interpretations of existing laws, regulations and decisions, that relate to healthcare availability, methods of delivery or payment for products and services, or sales, marketing or pricing, may limit our potential revenue, and we may need to revise our research and development programs. As a result of the recently-passed healthcare legislation in the U.S., as well as fiscal challenges faced by government health administration authorities, the pricing and reimbursement environment presumably will change in the future and become more challenging. In addition, in some foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the health care system in ways that could affect our ability to sell our products profitably. The recent U.S. legislation and these proposed reforms could result in reduced reimbursement rates for Marqibo and our potential products, which would adversely affect our business strategy, operations and financial results.
 
In addition, the Medicare Prescription Drug Improvement and Modernization Act of 2003 reforms the way Medicare will cover and reimburse for pharmaceutical products. This legislation could decrease the coverage and price that we may receive for our products. Other third-party payors are increasingly challenging the prices charged for medical products and services. It will be time consuming and expensive for us to go through the process of seeking reimbursement from Medicare and private payors. Our products may not be considered cost-effective, and coverage and reimbursement may not be available or sufficient to allow us to sell our products on a profitable basis. Further federal and state proposals and health care reforms are likely which could limit the prices that can be charged for the product candidates that we develop and may further limit our commercial opportunity. Our results of operations could be materially adversely affected by the recent healthcare reforms, by the Medicare prescription drug coverage legislation, by the possible effect of such current or future legislation on amounts that private insurers will pay and by other health care reforms that may be enacted or adopted in the future.
 
 
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In September 2007, the Food and Drug Administration Amendments Act of 2007 was enacted, giving the FDA enhanced post-marketing authority, including the authority to require post-marketing studies and clinical trials, labeling changes based on new safety information, and compliance with risk evaluations and mitigation strategies approved by the FDA. The FDA’s exercise of this authority could result in delays or increased costs during product development, clinical trials and regulatory review, increased costs to assure compliance with post-approval regulatory requirements, and potential restrictions on the sale and/or distribution of approved products.

Risks Related to Our Intellectual Property

If we fail to adequately protect or enforce our intellectual property rights or secure rights to patents of others, the value of our intellectual property rights would diminish.
 
Our success, competitive position and future revenues will depend in large part on our ability and the abilities of our licensors to obtain and maintain patent protection for our products, methods, processes and other technologies, to preserve our trade secrets, to prevent third parties from infringing on our proprietary rights and to operate without infringing the proprietary rights of third parties.
 
We have licensed and sublicensed from third parties rights to numerous issued patents and patent applications. To date, through our license agreements for Marqibo, Alocrest, Brakiva and Menadione Topical Lotion, we hold certain exclusive and co-owned patent rights, including rights under U.S. patents and U.S. patent applications. We also have patent rights to applications pending in several foreign jurisdictions. We have filed and anticipate filing additional patent applications both in the United States and internationally, as appropriate.
 
The rights to product candidates that we acquire from licensors or collaborators are protected by patents and proprietary rights owned by them, and we rely on the patent protection and rights established or acquired by them. We generally do not unilaterally control, or do not control at all, the prosecution of patent applications licensed from third parties. Accordingly, we are unable to exercise the same degree of control over this intellectual property as we may exercise over internally developed intellectual property.
 
The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions. Even if we are able to obtain patents, any patent may be challenged, invalidated, held unenforceable or circumvented. The existence of a patent will not necessarily protect us from competition. Competitors may successfully challenge our patents, produce similar drugs or products that do not infringe our patents or produce drugs in countries where we have not applied for patent protection or that do not respect our patents. Under our license agreements, we generally do not unilaterally control, or do not control at all, the enforcement of the licensed patents or the defense of third party suits of infringement or invalidity.

Furthermore, if we become involved in any patent litigation, interference or other administrative proceedings, we will incur substantial expense and the efforts of our technical and management personnel will be significantly diverted. As a result of such litigation or proceedings we could lose our proprietary position and be restricted or prevented from developing, manufacturing and selling the affected products, incur significant damage awards, including punitive damages, or be required to seek third-party licenses that may not be available on commercially acceptable terms, if at all.

The degree of future protection for our proprietary rights is uncertain in part because legal means afford only limited protection and may not adequately protect our rights, and we will not be able to ensure that:

 
·
we or our licensors or collaborators were the first to make the inventions described in patent applications;

 
·
we or our licensors or collaborators were the first to file patent applications for inventions;

 
·
others will not independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights;

 
·
any of our pending patent applications will result in issued patents;

 
·
any patents licensed or issued to us will provide a basis for commercially viable products or will provide us with any competitive advantages or will not be challenged by third parties;

 
·
we will ultimately be able to enforce our owned or licensed patent rights pertaining to our products;

 
·
any patents licensed or issued to us will not be challenged, invalidated, held unenforceable or circumvented;

 
·
we will develop or license proprietary technologies that are patentable; or

 
·
the patents of others will not have an adverse effect on our ability to do business.
 
 
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Our success also depends upon the skills, knowledge and experience of our scientific and technical personnel, our consultants and advisors as well as our licensors and contractors. To help protect our proprietary know-how and our inventions for which patents may be unobtainable or difficult to obtain, we rely on trade secret protection and confidentiality agreements. To this end, we require all of our employees to enter into agreements which prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries and inventions important to our business. These agreements may not provide adequate protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure or the lawful development by others of such information. If any of our trade secrets, know-how or other proprietary information is disclosed, the value of our trade secrets, know-how and other proprietary rights would be significantly impaired and our business and competitive position would suffer.

Our license agreements relating to Marqibo and our product candidates may be terminated in the event we commit a material breach, the result of which would harm our business and future prospects.
 
In the event any of our license agreements relating to our products and product candidates are terminated, we could lose all of our rights to develop and commercialize the applicable product or product candidate covered by such license, which would harm our business and future prospects. Our rights to Menadione Topical Lotion are governed by a license agreement with Albert Einstein College of Medicine, or AECOM, which provides that AECOM may terminate the agreement, after providing us with notice and an opportunity to cure, for our material breach or default, or upon our bankruptcy.  Our rights to Marqibo, Alocrest and Brakiva are governed by a series of agreements which may be individually or collectively terminated, not only by Tekmira, but also by M.D. Anderson Cancer Center or University of British Columbia under the underlying agreements governing the license or assignment of technology to Tekmira. Tekmira may terminate these agreements for our uncured material breach, for our involvement in a bankruptcy, for our assertion or intention to assert any invalidity challenge on any of the patents licensed to us for these products or for our failure to meet our development or commercialization obligations, including the obligations of continuing to sell each product in all major market countries after its launch. In the event that these agreements are terminated, not only will we lose all rights to these products, we will also have the obligation to transfer all of our data, materials, regulatory filings and all other documentation to our licensor, and our licensor may on its own exploit these products without any compensation to us, regardless of the progress or amount of investment we have made in the products.
 
Third party claims of intellectual property infringement would require us to spend significant time and money and could prevent us from developing or commercializing our products.
 
In order to protect or enforce patent rights, we may initiate patent litigation against third parties. Similarly, we may be sued by others. We also may become subject to proceedings conducted in the U.S. Patent and Trademark Office, including interference proceedings to determine the priority of inventions, or reexamination proceedings. In addition, any foreign patents that are granted may become subject to opposition, nullity, or revocation proceedings in foreign jurisdictions having such proceedings opposed by third parties in foreign jurisdictions having opposition proceedings. The defense and prosecution, if necessary, of intellectual property actions are costly and divert technical and management personnel from their normal responsibilities.

No patent can protect its holder from a claim of infringement of another patent. Therefore, our patent position cannot and does not provide any assurance that the commercialization of our products would not infringe the patent rights of another. While we know of no actual or threatened claim of infringement that would be material to us, there can be no assurance that such a claim will not be asserted.
 
If such a claim is asserted, there can be no assurance that the resolution of the claim would permit us to continue marketing the relevant product on commercially reasonable terms, if at all. We may not have sufficient resources to bring these actions to a successful conclusion. If we do not successfully defend any infringement actions to which we become a party or are unable to have infringed patents declared invalid or unenforceable, we may have to pay substantial monetary damages, which can be tripled if the infringement is deemed willful, or be required to discontinue or significantly delay commercialization and development of the affected products.

Any legal action against us or our collaborators claiming damages and seeking to enjoin developmental or marketing activities relating to affected products could, in addition to subjecting us to potential liability for damages, require us or our collaborators to obtain licenses to continue to develop, manufacture or market the affected products. Such a license may not be available to us on commercially reasonable terms, if at all.
 
An adverse determination in a proceeding involving our owned or licensed intellectual property may allow entry of generic substitutes for our products.
 
 
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Risks Related to Our Securities
 
Our stock price has, and we expect it to continue to, fluctuate significantly, and the value of your investment may decline.
 
From January 1, 2011 to December 31, 2012, the market price of our common stock has ranged from a high of $1.83 per share to a low of $0.40 per share. The volatile price of our stock makes it difficult for investors to predict the value of their investment, to sell shares at a profit at any given time, or to plan purchases and sales in advance. You might not be able to sell your shares of common stock at or above the offering price due to fluctuations in the market price of the common stock arising from changes in our operating performance or prospects. In addition, the stock markets in general, and the markets for biotechnology and biopharmaceutical companies in particular, have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. A variety of factors may affect our operating performance and cause the market price of our common stock to fluctuate. These include, but are not limited to: 

 
·
announcements by us or our competitors of regulatory developments, clinical trial results, clinical trial enrollment, regulatory filings, product development updates, new products and product launches, significant acquisitions, strategic partnerships or joint ventures;

 
·
any intellectual property infringement, product liability or any other litigation involving us;

 
·
developments or disputes concerning patents or other proprietary rights;

 
·
regulatory developments in the United States and foreign countries;

 
·
market conditions in the pharmaceutical and biotechnology sectors and issuance of new or changed securities analysts’ reports or recommendations;

 
·
economic or other crises and other external factors;

 
·
actual or anticipated period-to-period fluctuations in our results of operations;

 
·
departure of any of our key management personnel; or

 
·
sales of our common stock.
 
These and other factors may cause the market price and demand of our common stock to fluctuate substantially, which may limit investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity or value of our common stock.
 
Holders of our outstanding shares of preferred stock have, and holders of any future outstanding shares of preferred stock will have, liquidation, dividend and other rights that are senior to the rights of the holders of our common stock.

Our certificate of incorporation authorizes the issuance of up to 10,000,000 shares of preferred stock, of which we have designated 412,562 shares as Series A-1 Convertible Preferred Stock, which we sometimes refer to herein as Series A-1 Preferred, 140,000 shares as Series A-2 Convertible Preferred Stock, which we sometimes refer to herein as Series A-2 Preferred, and 600,000 shares as Series A-3 Convertible Preferred Stock, which we sometimes refer to herein as Series A-3 Preferred.  Collectively, we sometimes refer to the Series A-1 Preferred, Series A-2 Preferred, and Series A-3 Preferred as Series A Preferred. We currently have 412,562 shares of Series A-1 Preferred outstanding, 137,156 shares of Series A-2 Preferred outstanding, and 180,000 shares of Series A-3 Preferred outstanding.  Among other rights, the holders of Series A Preferred are entitled, as of the date of this report, to an aggregate preferential payment of approximately $86 million in the event we effect a liquidation and approximately $136 million in the event we effect certain transactions that result in a change of control or sale of substantially all of our assets, meaning that the holders of Series A Preferred would be entitled to receive such amounts before any distributions could be made to holders of our common stock following such an event or transaction.

Beyond our Series A Preferred, our board of directors has the authority to fix and determine the relative rights and preferences of our preferred shares, as well as the authority to issue such shares, without approval of our common stockholders.  As a result, our board of directors could authorize the issuance of additional series of preferred stock that would be senior to our common stock and that would grant to holders preferred rights to our assets upon liquidation, the right to receive dividends, additional registration rights, anti-dilution protection, the right to the redemption to such shares, together with other rights, none of which will be afforded holders of our common stock.

Because our common stock is primarily traded on the OTCQB tier of the OTC Markets, the volume of shares traded and the prices at which such shares trade may result in lower prices than might otherwise exist if our common stock was traded on a national securities exchange.

We were delisted from the Nasdaq Capital Market in September 2009 and trading in our common stock is now conducted on the OTCQB tier of the OTC Markets, an automated quotation system.  Stocks traded on the OTCQB are often less liquid than stocks traded on national securities exchanges, not only in terms of the number of shares that can be bought and sold at a given price, but also in terms of delays in the timing of transactions and reduced coverage of us by security analysts and the media. This may result in lower prices for our common stock than might otherwise be obtained if our common stock were traded on a national securities exchange, and could also result in a larger spread between the bid and asked prices for our common stock.
 
 
30

 

If our results do not meet investor and analyst forecasts and expectations, our stock price could decline.
 
Currently, we do not believe there are any securities analysts who cover us or our common stock. The lack of analyst coverage of our business and operations may decrease the public demand for our common stock, making it more difficult for you to resell your shares when you deem appropriate.  To the extent we obtain an analyst following in the future, such analysts may provide valuations regarding our stock price and make recommendations whether to buy, hold or sell our stock. Our stock price may be dependent upon such valuations and recommendations. Analysts’ valuations and recommendations are based primarily on our reported results and their forecasts and expectations concerning our future results regarding, for example, expenses, revenues, clinical trials, regulatory marketing approvals and competition. Our future results are subject to substantial uncertainty, and we may fail to meet or exceed analysts’ forecasts and expectations as a result of a number of factors, including those discussed elsewhere in this “Risk Factors” section. If our results do not meet analysts’ forecasts and expectations, our stock price could decline as a result of analysts lowering their valuations and recommendations or otherwise.

We are at risk of securities class action litigation.
 
In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because biotechnology companies have experienced greater than average stock price volatility in recent years. If we faced such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.

Our common stock is considered a “penny stock.”

The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. Because the market price of our common stock is currently less than $5.00 per share, and none of the specific exemptions are applicable, our common stock is considered a “penny stock” according to SEC rules. This designation requires any broker or dealer selling our common stock to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase our common stock. These rules may restrict the ability of brokers or dealers to sell shares of our common stock.

Because we do not expect to pay dividends, you will not realize any income from an investment in our common stock unless and until you sell your shares at profit.
 
We have never paid dividends on our common stock and do not anticipate paying any dividends for the foreseeable future. You should not rely on an investment in our stock if you require dividend income. Further, you will only realize income on an investment in our shares in the event you sell or otherwise dispose of your shares at a price higher than the price you paid for your shares. Such a gain would result only from an increase in the market price of our common stock, which is uncertain and unpredictable.

ITEM 1B.         UNRESOLVED STAFF COMMENTS

None.

ITEM 2.            PROPERTIES

Our executive offices are located at 400 Oyster Point Boulevard, Suite 200, South San Francisco, California 94080. We occupy this space, which consists of 17,555 square feet of office space, pursuant to a written lease agreement under which we pay $32,476.75 per month from July 1, 2012 through June 30, 2013 and $33,354.50 per month from July 1, 2013 through June 30, 2014.

We believe that our existing facilities are adequate to meet our current requirements. We do not own any real property.

ITEM 3.            LEGAL PROCEEDINGS

We are not a party to any material legal proceedings. In assessing the materiality of a legal proceeding, we evaluate, among other factors, the amount of monetary damages claimed, as well as the potential impact of non-monetary remedies sought by potential plaintiffs (e.g., injunctive relief) that may require us to change our business practices in a manner that could have a material adverse impact on our business. 

If we believe that a loss arising from legal matters is probable and can be reasonably estimated, we accrue the estimated liability in our financial statements. If only a range of estimated losses can be determined, we accrue an amount within the range that, in our judgment, reflects the most likely outcome; if none of the estimates within that range is a better estimate than any other amount, we accrue the low end of the range. No amounts have been accrued for legal proceedings for which we believe a loss is probable as of and for the year ended December 31, 2012.  To the extent proceedings in which an unfavorable outcome is reasonably possible but not probable exist, we will disclose either an estimate of the reasonably possible loss or range of losses or a conclusion that an estimate of the reasonably possible loss or range of losses arising directly from the proceeding (i.e., monetary damages or amounts paid in judgment or settlement) are not material. If we cannot estimate the probable or reasonably possible loss or range of losses arising from a legal proceeding, we will disclose that fact.

ITEM 4.            MINE SAFETY DISCLOSURES

Not applicable.
 
 
31

 
 
PART II
 
ITEM 5.            MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market for Common Stock

Our common stock is traded on the OTCQB tier of the OTC Markets under the symbol “TLON.”

The following table lists the high and low sale price for our common stock as quoted, in U.S. dollars, by the OTC Bulletin Board or OTCQB during each quarter within the last two fiscal years.

   
Price Range
 
Quarter Ended
 
High
   
Low
 
             
March 31, 2011
   
0.90
     
0.45
 
June 30, 2011
   
1.65
     
0.70
 
September 30, 2011
   
1.10
     
0.50
 
December 31, 2011
   
0.72
     
0.40
 
March 31, 2012
   
1.28
     
0.41
 
June 30, 2012
   
1.20
     
0.63
 
September 30, 2012
   
1.83
     
0.58
 
December 31, 2012
   
0.70
     
0.40
 
 
  
Record Holders

As of March 29, 2013, we had approximately 110 holders of record of our common stock, one of which was Cede & Co., a nominee for Depository Trust Company, or DTC. Shares of common stock that are held by financial institutions as nominees for beneficial owners are deposited into participant accounts at DTC, and are considered to be held of record by Cede & Co. as one stockholder.

Dividends

We have not paid or declared any dividends on our common stock and we do not anticipate paying dividends on our common stock in the foreseeable future.
 
Issuer Purchases of Equity Securities

None.

Recent Sales of Unregistered Securities

None.
 
ITEM 6.            SELECTED FINANCIAL DATA

Not applicable.
 
 
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ITEM 7.            MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  
The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements included elsewhere in this Annual Report. This discussion includes forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” in Item 1A of this Annual Report, our actual results may differ materially from those anticipated in these forward-looking statements.

Overview

We are a biopharmaceutical company dedicated to developing and commercializing new, differentiated cancer therapies designed to improve and enable current standards of care.  We currently have one product and three product candidates in various stages of development:
 
Marqibo® (vincristine sulfate liposome injection) is a novel, sphingomyelin/cholesterol liposome encapsulated formulation of vincristine, a microtubule inhibitor that is FDA-approved for acute lymphoblastic leukemia (ALL) and currently being developed for non-Hodgkin’s lymphoma (NHL). Vincristine is widely used in combination regimens for treatment of adult and pediatric hematologic and solid tumor malignancies.  On August 9, 2012, the FDA approved our new drug application, or NDA, granting accelerated approval of Marqibo for the treatment of Philadelphia chromosome negative adult ALL patients in second or greater relapse or whose disease has progressed following two or more prior lines of anti-leukemia therapy.  In May 2012, we enrolled the first patient in a global Phase 3 confirmatory study of Marqibo in the treatment of patients 60 years of age and older with newly-diagnosed ALL, which is known as the HALLMARQ study.  Marqibo is also being studied in a Phase 3 clinical trial (OPTIMAL>60) in elderly patients with newly-diagnosed NHL being conducted by the German High-Grade Lymphoma Study Group for which we are providing support. There are additional Phase 1 and Phase 2 clinical trials underway in adults and pediatrics.
 
Menadione Topical Lotion (MTL) is a novel cancer supportive care product candidate being developed for the prevention and/or treatment of the skin toxicities associated with the use of epidermal growth factor receptor inhibitors, or EGFRIs, a type of anti-cancer agent used in the treatment of lung, colon, head and neck, pancreatic and breast cancer.  In August 2011, we entered into an agreement with the Mayo Clinic pursuant to which the Mayo Clinic agreed to sponsor and conduct a randomized Phase 2 trial of MTL in patients taking biologic and small molecule EGFR inhibitors for anti-cancer therapy and will test the effectiveness of MTL in preventing skin toxicities associated with EGFR inhibitors.  We agreed to provide supplies of MTL in connection with the Mayo Clinic study.
 
Brakiva™ (topotecan liposome injection) is a novel targeted Optisome™ encapsulated formulation product candidate of the FDA-approved anticancer drug topotecan. We have focused our capital resources to advance the development of Marqibo and Menadione Topical Lotion. Consequently, we have not recently allocated resources toward the development of Brakiva.
 
Alocrest™ (vinorelbine liposome injection) is a novel targeted Optisome™ encapsulated formulation product candidate of the FDA-approved anticancer drug vinorelbine. We have focused our capital resources to advance the development of Marqibo and Menadione Topical Lotion. Consequently, we have not recently allocated resources toward the development of Alocrest.
 
Revenues

We received accelerated approval from the FDA in August 2012 to market Marqibo for the treatment of Philadelphia chromosome negative adult ALL patients in second or greater relapse or whose disease has progressed following two or more prior lines of anti-leukemia therapy and we have not yet initiated a commercial launch of Marqibo. In January 2013, we announced that our Board of Directors authorized a review of strategic alternatives and that we had engaged a financial advisor in connection with that review. The review of strategic alternatives may lead to a possible transaction, including the merger, business combination, or sale of the Company, which would allow our partner in such a transaction to commercialize Marqibo. No decision has been made to enter into a transaction at this time and there can be no assurance that we will be able to consummate any such transaction. Alternatively, we may also determine to commercialize Marqibo ourselves. However, we would require as much as $25 million in 2013 to fund both the required commercialization activities and the ongoing HALLMARQ and German NHL Phase 3 studies. Our ability to obtain the capital necessary to fund those activities is highly uncertain. If we are unable to either consummate a strategic transaction or obtain the additional capital needed to commercialize Marqibo alone, we may not be able to generate any revenue in the future from the sales of Marqibo or any of our other product candidates.

Research and Development Expenses

Research and development, or R&D, expenses, which account for the bulk of our expenses, consist primarily of salaries and related personnel costs, fees paid to consultants and outside service providers for laboratory development, manufacturing, and other expenses relating to the acquiring, design, development, testing, and enhancement of Marqibo and our product candidates, including milestone payments for licensed technology. We expense research and development costs as they are incurred.
 
 
33

 

While expenditures on current and future clinical development programs are expected to be substantial, particularly in light of our available resources, they are subject to many uncertainties, including the results of clinical trials and whether we develop Marqibo or any of our drug candidates with a partner or independently. As a result of such uncertainties, we cannot predict with any significant degree of certainty the duration and completion costs of our research and development projects or whether, when and to what extent we will generate revenues from the commercialization and sale of Marqibo or any of our product candidates. The duration and cost of clinical trials may vary significantly over the life of a project as a result of unanticipated events arising during clinical development and a variety of factors, including:

 
·
the number of trials and studies in a clinical program;

 
·
the number of patients who participate in the trials;

 
·
the number of sites included in the trials;

 
·
the rates of patient recruitment and enrollment;

 
·
the duration of patient treatment and follow-up;

 
·
the costs of manufacturing Marqibo and our drug candidates; and

 
·
the costs, requirements, timing of, and the ability to secure regulatory approvals.
   
General and Administrative Expenses

General and administrative, or G&A, expenses consist primarily of salaries and related expenses for executive, finance, business development, commercial planning and other administrative personnel, recruitment expenses, professional fees and other corporate expenses, including accounting and general legal activities. Professional fees and related expenses incurred in connection with the development of the Company’s commercial infrastructure are also classified as G&A.  

Share-Based Compensation

Share-based compensation expenses consist primarily of expensing the fair-market value of a share-based award over the vesting term.  This expense is included in our operating expenses for each reporting period.  As of December 31, 2012, we estimate that there is $2.6 million in total, unrecognized compensation costs related to non-vested share-based awards, which is expected to be recognized over a weighted average period of 2.75 years.

Review of Strategic Alternatives

On January 7, 2013, we announced that the our Board of Directors authorized a review of strategic alternatives and that Goldman Sachs had been engaged to provide financial advisory services in connection with that review. The review of strategic alternatives may lead to a possible transaction, including the merger, business combination, or sale of the company. No decision has been made to enter into a transaction at this time, and there can be no assurance that we will enter into a transaction in the future. We do not plan to disclose or comment on developments regarding the strategic review process until further disclosure is deemed appropriate.

CRITICAL ACCOUNTING POLICIES
    
     The accompanying discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. We believe there are certain accounting policies that are critical to understanding our financial statements, as these policies affect the reported amounts of expenses and involve management’s judgment regarding significant estimates. We have reviewed our critical accounting policies and their application in the preparation of our financial statements and related disclosures with the Audit Committee of our Board of Directors. Our critical accounting policies and estimates are described below.
  
Use of Management's Estimates
 
     The preparation of financial statements in conformity with GAAP requires management to make estimates based upon current assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Examples include provisions for deferred taxes, the valuation of the warrant liabilities, investors’ rights to purchase shares of Series A Preferred (see Note 4 below), the computation of beneficial conversion feature and the cost of contracted clinical study activities and assumptions related to share-based compensation expense. Actual results may differ materially from those estimates.
 
 
34

 
 
Segment Reporting

       The Company has determined that it currently operates in only one segment, which is the research and development of oncology therapeutics and supportive care for use in humans. All assets are located in the United States.

Cash and Cash Equivalents and Short-Term Investments
 
      The Company considers all highly-liquid investments with a maturity of three months or less when acquired to be cash equivalents. Short-term investments consist of investments acquired with maturities exceeding three months and are classified as available-for-sale. All short-term investments are reported at fair value, based on quoted market price, with unrealized gains or losses included in other comprehensive income (loss).

Inventory

     Inventories are stated at the lower of cost or market with cost determined using the first-in, first-out method. Inventory values are based upon standard costs, which approximate actual costs. The Company engages multiple contract manufacturing organizations (CMOs) and raw material suppliers to manufacture products for commercial sale and use in ongoing clinical trials. For products that have not been approved by the FDA, inventory used in clinical trials is expensed at the time of production and recorded as research and development expense. Products that have been approved by the FDA and prepared for sale but subsequently repurposed for clinical trial use are expensed at the time the inventory is packaged for the clinical trial.

     The Company’s policy is to write down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value and inventory in excess of expected requirements. The estimate of excess quantities is subjective and primarily dependent on the Company’s estimates of future demand for a particular product. If the estimate of future demand is significantly different than management’s expectations, the Company may have to significantly increase the reserve for excess inventory for that product and record a charge to cost of sales. The Company provides an allowance for 100% of the standard cost of excess or obsolete inventory. The Company performs reviews of its inventory levels on a quarterly basis to assess the adequacy of its reserve. Expired inventory is disposed of and the related costs are written off to cost of sales.

Investments in Debt and Marketable Equity Securities

     The Company determines the appropriate classification of all debt and marketable equity securities as held-to-maturity, available-for-sale or trading at the time of purchase, and re-evaluates such classification as of each balance sheet date in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 320, Investments – Debt and Equity Securities.  Investments in equity securities that have readily determinable fair values are classified and accounted for as available for sale.  The Company assesses whether temporary or other-than-temporary unrealized losses on its marketable securities have occurred due to declines in fair value or other market conditions based on the extent and duration of the decline, as well as other factors.  Because the Company has determined that all of its debt and marketable equity securities previously held were available-for-sale, unrealized gains and losses, if any, were reported as a component of accumulated other comprehensive gain (loss) in stockholders’ equity.  Other-than-temporary unrealized losses relating to its investment in marketable equity securities, if any, were recorded in the statement of operations.
  
Fair Value of Financial Instruments
 
     Financial instruments include cash and cash equivalents, available-for-sale securities, accounts payable, and warrant liabilities. Available-for-sale securities are carried at fair value. Cash and cash equivalents and accounts payable are carried at cost, which approximates fair value due to the relative short maturities of these instruments.  The fair value of the Company’s warrant liabilities is discussed in Notes 6 and 8.  The Company has issued certain financial instruments, including warrants to purchase common stock and rights to purchase shares of Series A-3 Preferred (see Note 4 below), which have the characteristics of both equity and liabilities.  These instruments were evaluated to be classified as liabilities at the time of issuance and are revalued at fair value from period to period with the resulting change in value included in other income (expense).
  
Debt Issuance Costs
 
     Debt issuance costs relate to fees paid in the form of cash and warrants to secure a firm commitment to borrow funds.  These fees are being amortized over the life of the related loan using the effective interest method.
 
Financial Instruments with Characteristics of Both Equity and Liabilities
 
     The Company has issued certain financial instruments, including warrants to purchase common stock and rights to purchase shares of Series A-3 Preferred, which have the characteristics of both equity and liabilities. These instruments were evaluated to be classified as liabilities at the time of issuance and are revalued at fair value from period to period with the resulting change in value included in other income (expense).   
 
 
35

 
  
Clinical Study Activities and Other Expenses from Third-Party Contract Research Organizations
 
     A significant amount of the Company’s research and development activities related to clinical study activity are conducted by various third parties, including contract research organizations, which may also provide contractually defined administration and management services. Expense incurred for these contracted activities are based upon a variety of factors, including actual and estimated patient enrollment rates, clinical site initiation activities, labor hours and other activity-based factors. On a regular basis, the Company’s estimates of these costs are reconciled to actual invoices from the service providers and adjustments are made accordingly.

     Pursuant to a clinical trial research agreement with the German High-Grade Lymphoma Study Group, the Company agreed to provide support for a Phase 3 trial of Marqibo in elderly patients with newly diagnosed aggressive NHL conducted in Germany.  Under the terms of the agreement, the Company is obligated to provide supplies of Marqibo for the study as well as funding for a portion of the total financial costs of the study.  These costs are based upon the achievement of certain milestones related to patient enrollment and data provision. These payments are accrued for upon the achievement of patient enrollment and data provision milestones or when the achievement of such milestones becomes probable.  Milestone payments are expensed in the period the milestone is reached.

     The Company also entered into an agreement with Mayo Clinic pursuant to which Mayo Clinic is sponsoring and conducting a Phase 2 clinical trial of the Company’s MTL product candidate.  The Company’s primary obligation is limited to the provision of MTL for patients enrolled in the study.

     In November 2011, the Company entered into an agreement with Pharmaceutical Research Associates (PRA), Inc., a global clinical research organization, to initiate the global Phase 3 confirmatory study of Marqibo, named HALLMARQ, in the treatment of patients 60 years of age or older with newly diagnosed ALL. The November 2011 agreement was subsequently amended to reduce the scope of PRA’s services. The U.S. portion of the clinical trial is primarily being conducted by the Company, while PRA has conducted an international site feasibility study. The Company also entered into an agreement with PPD, a leading global contract research organization providing drug discovery, development, and lifecycle management services, to administer central laboratory services for HALLMARQ.

     In March 2012, the Company entered into an investigator-initiated clinical trial research agreement with The University of Texas M.D. Anderson Cancer Center (“MDACC”), whereby the Company agreed to provide Marqibo to study the safety and efficacy of Marqibo in certain clinical trial research entitled “Hyper-CVAD with Liposomal Vincristine (Hyper-CMAD) in Acute Lymphoblastic Leukemia.”  The study is designed to evaluate whether intensive chemotherapy (Hyper-CVAD therapy) given in combination with Marqibo, in addition to rituximab for patients who are CD20 positive and/or imatinib or dasatinib for patients with the Philadelphia (Ph) chromosome, can effectively treat ALL or lymphoblastic lymphoma.

Share-Based Compensation
 
     The Company accounts for share-based compensation in accordance with FASB ASC Topic 718, Compensation – Stock Compensation.  The Company has adopted a Black-Scholes-Merton model to estimate the fair value of stock options issued and the resultant expense is recognized in the operating expense for each reporting period.  Refer to Note 5 for further information regarding the required disclosures related to share-based compensation.
 
Income Taxes
 
     Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between financial statement carrying amounts of existing assets and liabilities, and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

Computation of Net Gain/(Loss) per Common Share
 
     Basic net gain or loss per common share is calculated by dividing net loss by the weighted-average number of common shares outstanding for the period. Diluted net income per share is calculated using the Company’s weighted-average outstanding common shares including the dilutive effect of stock awards as determined under the treasury stock method and the dilutive effect of convertible preferred stock as determined under the if converted method. Diluted net loss per common share is the same as basic net loss per common share, since potentially dilutive securities from stock options, stock warrants and restricted stock would have an anti-dilutive effect because the Company incurred a net loss during each period presented.
 
 
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RESULTS OF OPERATIONS

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
  
General and administrative expenses. For the year ended December 31, 2012, general and administrative, or G&A, expense was $7.9 million, as compared to $5.1 million for the year ended December 31, 2011.  The increase of $2.8 million is primarily due to increased employee compensation and related expenditures of $0.9 and professional fees and outside services of $2.0 million, offset by an overall reduction in overhead of $0.1 million.

Research and development expenses. The following table summarizes our R&D expenses incurred for preclinical support, contract manufacturing for clinical supplies and clinical trial services provided by third parties, as well as milestone payments for in-licensed technology for each of our current major product development programs for the years ended December 31, 2012 and 2011, plus the cumulative costs for our various products and product candidates for the last five years or since we began development of a product  or product candidate if it has not been in development for five years.   The table also summarizes unallocated costs, which consist of personnel, facilities and other costs not directly allocable to development programs.
 
Product/Product Candidates ($ in thousands)
 
2012
   
2011
   
Annual %
Change
   
Product costs
(5 years)
Jan. 1, 2008 to
Dec. 31, 2012
 
Marqibo
 
$
6,524
   
$
7,743
     
(15.7)
%
 
$
37,038
 
Menadione Topical Lotion
   
148
     
158
     
(6.3)
%
   
4,156
 
Brakiva
   
29
     
30
     
(3.3)
%
   
1,459
 
Alocrest
   
164
     
30
     
446.7
%
   
917
 
Total third party costs
   
916
     
742
     
23.5
%
       
Allocable costs and overhead
   
453
     
513
     
(11.7)
%
       
Personnel related expense
   
4,154
     
3,883
     
7.0
%
       
Share-based compensation expense
   
511
     
288
     
77.4
%
       
Total research and development expense
 
$
12,899
   
$
13,387
     
(3.6)
%
       
 

Marqibo.  In 2012, Marqibo costs decreased by $1.2 million in 2012 compared to 2011. This decrease was driven by reductions to contract research organization (CRO) costs of $2.5 million, professional consultation fees of $1.7 million, and manufacturing costs of $0.9 million, offset by $3.5 million in milestone obligations incurred upon FDA approval of Marqibo and increases to clinical trial site costs of $0.4 million.

If sufficient funds are available, we expect to spend approximately $20 million to $25 million on Marqibo in 2013, including costs for personnel, consultants and CROs, the majority of which will be spent on product distribution and commercialization, the Phase 3 confirmatory study of Marqibo in the treatment of patients 60 years of age and older with newly-diagnosed ALL (HALLMARQ), and the Phase 3 clinical trial (OPTIMAL>60) in elderly patients with newly-diagnosed NHL being conducted by the German High-Grade Lymphoma Study Group. The Company is also providing drug for the investigator sponsored trials for Marqibo in pediatric and adolescent patients with solid tumors and hematological malignancies, including ALL.

We estimate that we will need to spend an additional $25 million to $35 million on internal and external costs to run the confirmatory trial needed to obtain full FDA approval in adult ALL. External costs include CRO management and trial administration, central laboratory costs, drug production, clinical trial costs, data management and supporting activities not provided by our full-time employees. These costs are impacted by both the extent to which a CRO is contracted to manage and administer the trial and the overall size and duration of the clinical trial. We expect that it will take several years until we will have completed development and obtained full FDA approval of Marqibo, if ever. We need to raise additional capital to fund these planned expenditures beyond May 2013. If we are unable to raise additional capital when needed, we will have to discontinue our product development programs or relinquish or rights to some or all of our products and product candidates.

Menadione Topical Lotion (MTL).  MTL costs decreased by less than $0.1 million in 2012 compared to 2011, due to slight decreases in manufacturing costs. The Mayo Clinic agreed to sponsor and conduct a randomized Phase 2 trial of MTL in patients taking biologic and small molecule EGFR inhibitors for anti-cancer therapy and will test the effectiveness of MTL in preventing skin toxicities associated with EGFR inhibitors.  The Company agreed to provide supplies of MTL in connection with the Mayo Clinic study.

Brakiva.  We are exploring options for further development of Brakiva beyond the phase 1 trial. As this drug is early in its clinical development, both the registration strategy and total expenditures to obtain FDA approval are still being evaluated. We do not expect to incur significant research and development costs related to Brakiva in 2013.

Alocrest.   We completed enrollment in a Phase 1 clinical trial in early 2008. This Phase 1 trial was designed to assess safety, tolerability and preliminary efficacy in patients with advanced solid tumors. We are currently exploring options for the continued development of Alocrest and do not expect to incur significant research and development costs in 2013.
 
 
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Other R&D expenses.  Third-party costs related to indirect support of our clinical trials and preparation activities in connection with the March 2012 Oncologic Drugs Advisory Committee meeting. Total third-party costs increased by $0.2 million in 2012 compared to 2011, driven by increases in professional consultancy and FDA regulatory fees. We expect these costs to increase in 2013 due to the continued progression of our global Phase 3 confirmatory study of Marqibo, named HALLMARQ, in the treatment of patients 60 years of age or older with newly diagnosed ALL and the Phase 3 clinical trial (OPTIMAL>60) in elderly patients with newly-diagnosed NHL.

Allocable costs decreased by less than $0.1 million as a result of capitalized expenditures becoming fully depreciated and lower utility costs.

Personnel related costs increased by $0.3 million in 2012 compared to 2011.  The increase was driven by an increase in the number of full-time employees from the prior year.  Stock compensation increased by $0.2 million in 2012 compared to 2011 due to an increase in the number of option grants.

Interest expense. For the year ended December 31, 2012, interest expense was $3.8 million as compared to interest expense of $3.6 million for the year ended December 31, 2011.

Gain or loss on change in fair market value of liabilities re-measured at fair value. We have certain financial instruments that are recorded as liabilities. We re-measure the fair value of these liabilities at each reporting period with the gain or loss recognized in the statement of operations. For the twelve months ended December 31, 2012, we recorded a loss related to these liabilities of $19.2 million, compared to a net gain of $3.3 million for the same period in 2011. The value of these liabilities is largely dependent on the price of our common stock, and as the stock price increases or decreases, the value of these instruments will increase or decrease in relation. For additional details, see Notes 4, 6 and 8 of our financial statements included elsewhere in this Form 10-K.
 
Income tax expense. There was no current or deferred income tax expense (other than state minimum tax) for years ended December 31, 2012 and 2011 because of our operating losses. A 100% valuation allowance has been recorded against our $54.5 million of deferred tax assets as of December 31, 2012. Historical performance leads management to believe that realization of these assets is uncertain. As a result of the valuation allowance, our effective tax rate differs from the statutory rate.
 
Liquidity and Capital Resources
  
As of December 31, 2012, we had a stockholders’ accumulated deficit of approximately $223.6 million, and for the fiscal year ended December 31, 2012, we experienced a net loss of $43.7 million. We have financed operations primarily through equity and debt financing and expect such losses to continue over the next several years.  We have drawn down $27.5 million of long-term debt under the secured loan facility agreement with Deerfield Management and certain of its affiliates (collectively, “Deerfield”), with the entire balance due in June 2015.  We currently have a limited supply of cash available for operations. As of December 31, 2012, we had aggregate cash and cash equivalents and available-for-sale securities of $3.0 million.

On January 9, 2012, we entered into an Investment Agreement with certain investors pursuant to which we issued and sold to such investors an aggregate of 110,000 shares of Series A-2 Preferred at a per share purchase price of $100 for an aggregate purchase price of $11.0 million.  The 2012 Investment Agreement provides that, from the date of the Investment Agreement until the first anniversary of our receipt of marketing approval from the FDA for any of our product candidates, the investors have the right, but not the obligation, to purchase up to an additional 600,000 shares of Series A-3 Preferred at a purchase price of $100 per share, in one or more tranches of at least 50,000 shares of Series A-3 Preferred per tranche. On July 3, 2012, we and the investors entered into an amendment to the 2012 Investment Agreement, pursuant to which the minimum size of each such tranche was reduced from 50,000 shares of Series A-3 Preferred to 30,000 shares of Series A-3 Preferred. Also on July 3, 2012, pursuant to the terms of the 2012 Investment Agreement, as amended, we issued and sold to the investors an aggregate of 30,000 shares of Series A-3 Preferred at a price per share of $100, for aggregate gross proceeds of $3.0 million.  On August 17 and November 14, 2012, pursuant to the terms of the 2012 Investment Agreement, as amended, we issued and sold to the investors 60,000 shares and 30,000 shares, respectively, of Series A-3 Preferred at a price per share of $100, for aggregate gross proceeds of $9.0 million.  In addition, on January 11, 2013, pursuant to the terms of the 2012 Investment Agreement, as amended, we issued and sold to the investors an aggregate of 60,000 shares of Series A-3 Preferred at a price per share of $100, for aggregate gross proceeds of $6.0 million. We had previously entered into an Investment Agreement dated June 7, 2010, pursuant to which the same investors purchased 400,000 shares of Series A-1 Preferred for an aggregate purchase price of $40.0 million.

As described above, we and Deerfield had previously entered into the Facility Agreement on October 30, 2007, as amended on June 7, 2010, which is secured by all of our assets.  In connection with the entry into the 2012 Investment Agreement, on January 9, 2012, we and Deerfield entered into a Second Amendment to Facility Agreement.  Among other items, pursuant to the Second Amendment to Facility Agreement, we agreed to satisfy our obligation under the Facility Agreement to make quarterly interest payments for the quarters ended December 31, 2011, March 31, 2012, June 30, 2012 and September 30, 2012, by issuing shares of Series A-2 Preferred in lieu of cash.  On January 9, 2012, we issued an aggregate of 6,826 shares of Series A-2 Preferred in satisfaction of interest accrued under the Facility Agreement for the quarter ended December 31, 2011.  On March 30, 2012, we issued an aggregate of 6,752 shares of Series A-2 Preferred in satisfaction of interest accrued under the Facility Agreement for the quarter ended March 31, 2012.  On June 29, 2012, we issued an aggregate of 6,752 shares of Series A-2 Preferred in satisfaction of interest accrued under the Facility Agreement for the quarter ended June 30, 2012.  On September 28, 2012, we issued an aggregate of 6,826 shares of Series A-2 Preferred in satisfaction of interest accrued under the Facility Agreement for the quarter ended September 30, 2012.
 
 
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We believe that our cash resources as of December 31, 2012, together with the net proceeds from the sale and issuance of the Series A-3 Preferred on January 11, 2013, are only sufficient to fund our development plans through May 2013.  Accordingly, our financial statements reflect substantial doubt about our ability to continue as a going concern, which is also stated in the report from our auditors on the audit of our financial statements as of and for the year ended December 31, 2012.  Our plan of operation for the year ending December 31, 2013 is to continue implementing our business strategy, including developing strategic partnerships, through licensing agreements, joint venture or merger and acquisition, to develop and commercialize Marqibo and our product candidates in the United States, Europe, and other international regions. We currently do not generate any recurring revenue and will require substantial additional capital before we will generate cash flow from our operating activities, if ever. We will be unable to continue development of Marqibo and our product candidates unless we are able to obtain additional funding through equity or debt financings or from payments in connection with potential strategic transactions.  Although the investors identified in our 2012 Investment Agreement have the right to make additional investments in our Series A-3 Preferred, they have no obligation to do so and we have no assurance that they will make any further investments under that or any other agreement.  Accordingly, we can give no assurances that additional capital that we are able to obtain, if any, will be sufficient to meet our needs. Moreover, there can be no assurance that such capital will be available to us on favorable terms or at all, especially given the current economic environment which has severely restricted access to the capital markets.  If anticipated costs are higher than planned or if we are unable to raise additional capital, we will have to significantly curtail planned development to maintain operations before the end of May 2013. 

As part of our planned research and development, we intend to use clinical research organizations and third parties to help perform our clinical studies and manufacturing. As indicated above, at our current and desired pace of clinical development of Marqibo and our product candidates, over the next 12 months we expect to spend approximately between $10 million and $15 million on clinical development for Marqibo and approximately $5.0 million on commercialization activities for Marqibo.  We also expect to spend approximately $5.0 million on general corporate and administrative expenses over the next 12 months.
 
The actual amount of funds we will need to operate is subject to many factors, some of which are beyond our control. These factors include the following:
 
·
costs associated with the commercial launch of Marqibo and whether such launch is done by us or with a strategic partner;
 
·
costs associated with conducting preclinical and clinical testing;
 
·
costs of establishing arrangements for manufacturing our products and product candidates;
 
·
payments required under our current and any future license agreements and collaborations;
 
·
costs, timing and outcome of regulatory reviews;
 
·
costs of obtaining, maintaining and defending patents on our products and product candidates; and
 
·
costs of increased general and administrative expenses.
 
We have based our estimate on assumptions that may prove to be wrong. We may need to obtain additional funds sooner or in greater amounts than we currently anticipate. 

Contractual Commitments

        In May 2011, we entered into a clinical trial research agreement with the German High-Grade Lymphoma Study Group, pursuant to which we agreed to provide support for a Phase 3 trial of Marqibo in elderly patients with newly diagnosed aggressive NHL conducted in Germany.  Under the terms of the agreement, we are obligated to provide supplies of Marqibo for the study as well as funding for a portion of the total financial costs of the study.  As of December 31, 2012, our portion of these costs is estimated to be approximately between €8.6 million and €10.2 million (or between $11.6 million and $13.4 million) to be paid over a period of three to five years.  Per the terms of the agreement, we are under no obligation to make a payment before the later of January 1, 2013 or the enrollment of the 150th patient. As of the date of this Report, there are approximately 144 patients enrolled. No amounts have been accrued as of December 31, 2012 in connection with this arrangement.
 
        In July 2011, the National Cancer Institute enrolled the first patient in an open-label Phase 1 dose-escalation trial of Marqibo in children and adolescents with solid tumors and hematologic malignancies, including ALL, being conducted at the NCI in Bethesda, MD.  The primary objective of this Phase I clinical trial, which is an investigator-sponsored study, is to determine the maximum tolerated dose.  Per the terms of the clinical trial agreement, our obligations are limited to the provision of Marqibo during the study.  No amounts have been accrued as of December 31, 2012 in connection with this arrangement.
 
 
39

 
 
        In August 2011, we entered into an agreement with Mayo Clinic pursuant to which Mayo Clinic will sponsor and conduct a Phase 2 clinical trial.  The study is designed to enroll approximately 40 patients taking biologic and small molecule EGFR inhibitors for anti-cancer therapy and will test the effectiveness of MTL in preventing skin toxicities associated with EGFR inhibitors.  In January 2012, the first patient was enrolled in the study. As of December 31, 2012, we accrued less than $0.1 million for drug manufacture and related expenditures.
 
        In November 2011, we entered into an agreement with Pharmaceutical Research Associates (PRA), Inc., a global clinical research organization, to initiate our global Phase 3 confirmatory study of Marqibo, named HALLMARQ, in the treatment of patients 60 years of age or older with newly diagnosed ALL. The November 2011 agreement was subsequently amended to reduce the scope of PRA’s services. We have primarily conducted the U.S. portion of the clinical trial ourselves, while PRA has conducted an international site feasibility study.  We also entered into an agreement with PPD, a leading global contract research organization providing drug discovery, development, and lifecycle management services, to administer central laboratory services for HALLMARQ. In May 2012, the first patient was enrolled and dosed in the study. Direct costs associated with the HALLMARQ study are estimated to be approximately $30-$35 million over a period of five years.  As of December 31, 2012, we accrued approximately $0.6 million for expenditures related to the HALLMARQ study.
 
        In March 2012, we entered into an investigator-initiated clinical trial research agreement with The University of Texas M.D. Anderson Cancer Center (“MDACC”), whereby we agreed to provide Marqibo to study the safety and efficacy of Marqibo in certain clinical trial research entitled “Hyper-CVAD with Liposomal Vincristine (Hyper-CMAD) in Acute Lymphoblastic Leukemia.”  The study is designed to evaluate whether intensive chemotherapy (Hyper-CVAD therapy) given in combination with Marqibo, in addition to rituximab for patients who are CD20 positive and/or imatinib or dasatinib for patients with the Philadelphia (Ph) chromosome, can effectively treat ALL or lymphoblastic lymphoma.  In support of the performance of this study, we agreed to pay MDACC approximately $0.2 million for the clinical study of approximately sixty-five (65) patients. No amounts have been accrued as of December 31, 2012 in connection with this arrangement.
 
Off-Balance Sheet Arrangements

We do not have any “off-balance sheet agreements,” as that term is defined by SEC regulation.

 RECENT ACCOUNTING PRONOUNCEMENTS
  
There are no accounting pronouncements that we recently adopted or are pending our adoption that are expected to have a material impact on our financial position or results of operations.

ITEM 7A.         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.


ITEM 8.            FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The response to this Item is submitted as a separate section of this report commencing on Page F-1.

ITEM 9.            CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE

 Not applicable.

ITEM 9A.         CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
  
We conducted an evaluation as of December 31, 2012, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, which are defined under SEC rules as controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within required time periods. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.
  
Management’s Report on Internal Control over Financial Reporting
  
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
 
 
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Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in the Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2012.
  
Limitations on the Effectiveness of Controls
  
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting 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 benefit 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 Talon have been detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Controls over Financial Reporting
  
There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the fourth quarter of the year ended December 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
  
ITEM 9B.         OTHER INFORMATION

On March 28, 2013, Cecilia Gonzalo submitted her resignation from the Board, effective as of March 29, 2013. Pursuant to the terms of the Investment Agreement dated June 7, 2010, between us and Warburg Pincus, Warburg Pincus has the right to designate five of nine members of the Board.  Following the departure of Ms. Gonzalo, Warburg Pincus has the right to designate two additional persons for appointment to the Board.
 
 
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PART III
 

ITEM 10.          DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  
Directors and Executive Officers

The following table lists our executive officers and directors and their respective ages and positions as of the date of this report:

Name
 
Age
 
Position(s) Held
         
Steven R. Deitcher, M.D.
 
49
 
President, Chief Executive Officer and Director
Craig W. Carlson
 
65
 
Senior Vice President, Chief Financial Officer
Thomas DeZao
 
55
 
Vice President of Commercial Operations and Planning
Samir M. Gharib
 
30
 
Controller, Director of Finance
Nandan Oza
 
51
 
Vice President of Chemistry, Manufacturing, and Controls
Thomas J. Tarlow
  63  
Vice President of Regulatory Affairs and Quality
Howard P. Furst, M.D.
 
44
 
Director
Paul V. Maier
 
65
 
Director
Howard H. Pien
 
54
 
Director
Leon E. Rosenberg, M.D.
 
79
 
Chairman of the Board
Robert J. Spiegel, M.D.
 
63
 
Director
Elizabeth H. Weatherman
 
52
 
Director

Steven R. Deitcher, M.D., has been President, Chief Executive Officer and a director of Talon since August 2007, and served as our Executive Vice President of Development and Chief Medical Officer from May 2007 to August 2007.  Prior to joining Talon, Dr. Deitcher served as Vice President and Chief Medical Scientist at Nuvelo, Inc. since 2004.  Prior to joining Nuvelo, from 1998 to 2004, Dr. Deitcher held a variety of positions in both the Department of Vascular Medicine and the Department of Hematology/Oncology while at The Cleveland Clinic Foundation, including Head of the Section of Hematology and Coagulation Medicine in the Department of Hematology/Oncology. Prior to that, he spent four years at The University of Tennessee in positions including Associate Chairman, Department of Medicine; Director, Combined Pediatric and Adult Thrombosis Clinic; and Director, Special Coagulation Laboratory. Dr. Deitcher earned his B.S. and M.D. in the Honors Program in Medical Education at Northwestern University Medical School.

Craig W. Carlson joined Talon as Vice President on March 1, 2010, was appointed Chief Financial Officer effective April 1, 2010, and was promoted to Senior Vice President on December 16, 2010. Mr. Carlson has held senior leadership and executive financial management positions for the past 25 years, including positions at two public healthcare companies. Most recently, from February 2009 to February 2010, Mr. Carlson served as Chief Financial Officer and Chief Operating Officer for 20 Cent Ventures, a new business incubator focused primarily on applying life science technologies to high value niche opportunities worldwide, where he was responsible for managing several businesses, including four international subsidiaries. From July 2006 to March 2008, he was Chief Financial Officer of Neurobiological Technologies, Inc. and from 1993 to 2005 Mr. Carlson worked at Cygnus, Inc where he served as Chief Financial Officer and Chief Operating Officer.  Mr. Carlson received his M.B.A. from the Stanford Graduate School of Business, his M.S. Ed. in Counseling from Hofstra University, and his B.A. in Political Science from Union College.

Thomas DeZao joined Talon in May 2012 as Vice President of Commercial Operations and Planning. Mr. DeZao's experience includes senior commercial and marketing positions related to hematologic cancer product candidates at ChemGenex Pharmaceuticals, Genitope Corporation, and Corixa/Coulter Pharmaceuticals. Prior to that, Mr. DeZao worked for Schering-Plough Corp. and Chiron Corp., where he spent 10 years in various product sales, marketing and commercialization positions.

Samir M. Gharib joined Talon as Controller, Director of Finance in January 2012.  Prior to joining Talon as an employee, Mr. Gharib had served as Talon’s interim controller pursuant to the terms of an engagement agreement dated August 25, 2011 between Talon and Mr. Gharib’s former employer, CRC Results, Inc. (“CRC”), a consulting firm specializing in accounting, compliance, and risk advisory services.  From January 2008 until January 6, 2012, Mr. Gharib provided accounting services to CRC’s public company clients in the financial services, technology, healthcare, and real estate fields.  Prior to joining CRC, he was a member of KPMG’s Audit and Risk Advisory Services and Forensic Advisory Services groups from 2005 to 2007.  Mr. Gharib earned a B.S. in Business Administration from and is currently an MBA candidate at the Haas School of Business at the University of California, Berkeley. Mr. Gharib is a licensed Certified Public Accountant in the State of California.

Nandan Oza joined Talon on August 2, 2010 as Vice President of Chemistry, Manufacturing and Controls (CMC). Mr. Oza has held senior positions in Pharmaceutical Operations for a decade, including senior management positions at two publicly traded pharmaceutical companies. Most recently, from February 2009 to August 2010, Mr. Oza was the Founder and Principal of Ally CMC Consulting, which provided consulting services to over 20 organizations in pharmaceuticals, Venture Capital and Private Equity areas. From February 2007 to February 2009, Mr. Oza was VP of Manufacturing and Supply Chain Operations at Jazz Pharmaceuticals. From May 2003 to February 2007, Mr. Oza held the identical position at Connetics Corporation. Prior to this, Mr. Oza was Executive Director of Bay area Operations for Alza Corporation, a subsidiary of Johnson and Johnson. Mr. Oza did his graduate studies in Engineering at the University of California, Davis. He received his Bachelor’s degree from the University of Houston and his M.B.A. from National University.
 
 
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Thomas J. Tarlow joined Talon as Vice President on January 7, 2009.  Prior to assuming his current responsibilities, Mr. Tarlow served as Vice President, Regulatory Affairs at Tercica, Inc. from October 2006 to December 2008.  Prior to that appointment, Mr. Tarlow held various senior positions in regulatory affairs at Amgen, SUGEN, and ALZA.  Mr. Tarlow received his MS in Comparative Pathology from the University of California, Davis, School of Veterinary Medicine and his BA in Biology from the University of California, Santa Cruz.

Howard P. Furst, M.D., has served as a director of Talon since December 2009.  Dr. Furst has over 20 years of experience in the healthcare industry and is currently a partner at Deerfield Management, a healthcare investment fund based in New York City, where he is primarily responsible for overseeing the firm’s private investments.  Prior to joining Deerfield Management in 2007, Dr. Furst was a portfolio manager for the healthcare group at Magnetar Capital, an investment fund, from 2006 to 2007.  Prior to joining Magnetar Capital, Dr. Furst was a principal at Maverick Capital, an investment firm, where he was primarily responsible for managing the firm’s investments in the pharmaceutical and biotechnology sectors.  Dr. Furst received his M.D. from the New York University School of Medicine, an M.B.A. with a dual concentration in finance and healthcare administration from the Wharton School of Business at the University of Pennsylvania, and a B.A. from the University of Pennsylvania.  

Paul V. Maier was appointed a director of Talon in March 2008.  Since November 2009, Mr. Maier has served as Chief Financial Officer of Sequenom, Inc., a publicly-held biotechnology company.  From January 2007 until November 2009, he served as an independent financial consultant. From October 1992 to January 2007, Mr. Maier served as Senior Vice President, Chief Financial Officer of Ligand Pharmaceuticals, Inc., a publicly-held biopharmaceutical company based in San Diego, CA. Prior to joining Ligand, Mr. Maier served as Vice President, Finance at DFS West, a division of DFS Group, L.P., a private multinational retailer from October 1990 to October 1992. From February 1990 to October 1990, Mr. Maier served as Vice President and Treasurer of ICN Pharmaceuticals, Inc., a pharmaceutical and biotechnology research products company. Mr. Maier held various positions in finance and administration at SPI Pharmaceuticals, Inc., a publicly held subsidiary of ICN Pharmaceuticals Group, from 1984 to 1988, including Vice President, Finance from February 1984 to February 1987. Mr. Maier also serves on the boards of directors of Apricus Biosciences, Inc., Pure Bioscience, Inc., and International Stem Cell Corp., all publicly-held companies. Mr. Maier received an M.B.A. from Harvard Business School and a B.S. from Pennsylvania State University.
 
Howard H. Pien was appointed director of Talon in April 2012. Mr. Pien was most recently employed at Medarex, Inc. serving as President, Chief Executive Officer, and Chairman of the Board until Bristol-Myers Squibb acquired it in 2009. Prior to joining Medarex in 2007, Mr. Pien served as President, Chief Executive, and Chairman of the Board of Chiron Corporation from 2003 until 2006 (when Chiron was acquired by Novartis). He joined Chiron from GlaxoSmithKline (formerly SmithKline Beecham) where he served as President, Pharmaceuticals of SmithKline Beecham and later as President of GlaxoSmithKline's International Pharmaceutical business. Mr. Pien has also held positions in sales, market research, licensing and product management at Abbott Laboratories and Merck & Co. Mr. Pien earned a B.S. from the Massachusetts Institute of Technology and an M.B.A. from Carnegie-Mellon University.

Leon E. Rosenberg, M.D., has served on our Board of Directors since February 2004 and has been our non-executive Chairman of the Board since March 2007. Dr. Rosenberg has been a Professor in the Princeton University Department of Molecular Biology and the Woodrow Wilson School of Public and International Public Affairs since September 1997. Since July 1999, he has also been Professor Adjunct of Genetics at Yale University School of Medicine. From January 1997 to March 1998, Dr. Rosenberg served as Senior Vice President, Scientific Affairs of Bristol-Myers Squibb, and from September 1991 to January 1997, Dr. Rosenberg served as President of the Bristol-Myers Squibb Pharmaceutical Research Institute. From July 1984 to September 1991, Dr. Rosenberg was Dean of the Yale University School of Medicine. Dr. Rosenberg also serves on the Boards of Directors of Lovelace Respiratory Research Institute, Karo Bio AB, and Medicines for Malaria Venture. Dr. Rosenberg received B.A. and M.D. degrees, both summa cum laude, from the University of Wisconsin. He completed his internship and residency training in internal medicine at Columbia Presbyterian Medical Center in New York City.

Robert J. Spiegel, M.D., was appointed a director of our company in July 2010 after being designated by Warburg Pincus pursuant to its rights under our June 2010 Investment Agreement.  From 1983 until his retirement in November 2009, Dr. Spiegel was employed by Schering Plough, serving in a number of positions of increasing responsibility, including Chief Medical Officer from 1998 until 2009.  Prior to joining Schering Plough, Dr. Spiegel was an Assistant Professor, Department of Medicine, NYU Medical Center. Dr. Spiegel obtained his M.D. from the University of Pennsylvania and a B.A., cum laude, from Yale University. Dr. Spiegel also serves as a director of Geron Corporation and Clavis Pharma, both publicly-held biopharmaceutical companies.

Elizabeth H. Weatherman, a director of Talon since January 2013, is a General Partner of Warburg Pincus & Co., a Managing Director of Warburg Pincus LLC and a member of the firm's Executive Management Group. Ms. Weatherman joined Warburg Pincus in 1988 and is currently responsible for the firm's U.S. healthcare investment activities. Ms. Weatherman currently serves on the board of directors of Tornier, Inc., Bausch + Lomb Incorporated and several other privately held companies. Previously, Ms. Weatherman served on the board of directors of ev3 Inc. and Kyphon, Inc. Ms. Weatherman earned a Master of Business Administration from the Stanford Graduate School of Business and a Bachelor of Arts from Mount Holyoke College.
 
 
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Experience, Qualifications, Attributes and Skills of Directors

We look to our directors to lead us through our continued growth as an early-stage public biopharmaceutical company.  Our directors bring their leadership experience from a variety of life science companies and professional backgrounds which we require to continue to grow and bring value to our stockholders.  Dr. Deitcher’s academic and clinical expertise in oncology and hematology offers a unique perspective into the development and practical application of our products and product candidates.  Dr. Deitcher’s current position as our President and CEO also allows him to provide a unique insight into our business, including our development and growth.  Dr. Furst’s scientific and financial expertise, including his substantial experience evaluating and investing in public and private healthcare companies, provides our board of directors with valuable insight into the financial and operational aspects of our decision-making processes.  Likewise, Ms. Weatherman’s financial and business acumen, as well her experience evaluating and investing in public and private healthcare companies, makes her well suited to serve as a director.  In addition, Mr. Pien has substantial experience serving on the boards and as Chief Executive Officer of public pharmaceutical companies, which allows him to contribute significant business and managerial expertise and provide strategic and operational guidance to our executive management. Mr. Maier has significant experience with early stage biopharmaceutical companies and brings depth of knowledge in building stockholder value, growing a company from inception and navigating significant corporate transactions and the public company process.  As a result of his experience in the role of chief financial officer and treasurer of public companies, Mr. Maier also brings extensive finance, accounting and risk management knowledge to us.  Dr. Rosenberg’s medical background and experience in the pharmaceutical industry allows him to contribute significant scientific and operational expertise.  Dr. Spiegel, a medical oncologist and former pharmaceutical executive, possesses skills and experience that allow him to provide unique insight and perspective into our business and operations and constructive feedback to our executive management.

Pursuant to the terms of our June 2010 Investment Agreement, Warburg Pincus has the right to designate up to five persons as directors of our company.  Currently, Mr. Pien, Ms. Weatherman, and Dr. Spiegel were each appointed directors upon designation by Warburg Pincus. Pursuant to the terms of the January 2012 Investment Agreement, Deerfield Management has the right to designate one director, who will initially be Dr. Furst.  Thereafter, if Deerfield Management fails to participate to its pro rata share in a subsequent investment under the Investment Agreement or if its beneficial ownership decreases below 10%, then Deerfield Management’s right to designate one director terminates immediately.

Section 16(a) Beneficial Ownership Reporting Compliance
 
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our officers, directors and persons who are the beneficial owners of more than 10% of our common stock to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock.  Officers, directors and beneficial owners of more than 10% of our common stock are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based solely on a review of the copies of the Forms 3, 4 and 5 that we received with respect to transactions during 2012, we believe that all such forms were filed on a timely basis, except for the reporting of the March 7, 2012 sale of an aggregate of 21,000 shares of our common stock by affiliates of Deerfield Management, which transactions were reported on a Form 4 filed on March 12, 2012.

Code of Ethics

We have adopted a Code of Business Conduct and Ethics that applies to all officers, directors and employees of our company.  A copy of our Code of Business Conduct and Ethics is available on our Investor Relations page of our company’s website at www.talontx.com.   If we make any substantive amendments to the Code of Business Conduct and Ethics or grant any waiver from a provision of the code to an executive officer or director, we will promptly disclose the nature of the amendment or waiver by filing with the SEC a current report on Form 8-K.

Audit Committee
 
The current members of our Audit Committee are Mr. Maier (Chair), Dr. Rosenberg and Dr. Spiegel.  Our Board of Directors has determined that Mr. Maier qualifies as an “audit committee financial expert,” as defined by applicable rules of the SEC.  The Board has further determined that Mr. Maier is “independent” within the meaning of the applicable listing standard of the NASDAQ Stock Market.
  
ITEM 11.          EXECUTIVE COMPENSATION
  
Executive Compensation

The following summary compensation table reflects cash and non-cash compensation for the 2011 and 2012 fiscal years awarded to or earned by (i) each individual serving as our principal executive officer during the fiscal year ended December 31, 2012; (ii) each individual that served as an executive officer at the end of the fiscal year ended December 31, 2012 and who received in excess of $100,000 in total compensation during such fiscal year; and (iii) up to two additional individuals who received in excess of $100,000 in total compensation during such fiscal year but was not serving as an executive officer during the fiscal year.  We refer to these individuals as our “named executive officers.”
 
 
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Summary Compensation Table

Name and Principal
Position
 
Year
 
Salary
   
Bonus
   
Option
Awards (1)
   
Non-Equity Incentive
Plan Compensation(2)
   
All Other
Compensation (3)
   
Total
 
                                         
Steven R. Deitcher, M.D.
 
2012
  $ 467,857     $     $ 717,224     $ 474,775     $ 31,719 (5)   $ 1,691,575  
President & CEO
 
2011
  $ 454,230     $ 136,269 (4)   $     $ 90,846     $ 26,438 (6)   $ 707,783  
                                                     
Craig W. Carlson
 
2012
  $ 333,566     $     $ 286,889     $ 185,242     $ 54,461 (8)   $ 860,158  
Sr. VP, CFO
 
2011
  $ 323,850     $ 25,908 (7)   $     $ 51,816     $ 44,573 (9)   $ 446,147  
                                                     
Nandan Oza (10)
 
2012
  $ 249,003     $     $ 125,514     $ 136,426     $ 41,019 (11)   $ 551,962  
Vice President of Chemistry, Manufacturing, and Controls
                                                   



 
(1)
Amounts reflect the aggregate grant date fair value of option awards granted in the respective fiscal years as computed in accordance with Financial Accounting Standards Board’s Accounting Standards Codification 718 “Compensation – Stock Compensation,” excluding the effect of estimated forfeitures. For awards that are subject to performance conditions, amounts reflect the assumption that the highest level of performance conditions will be achieved.  Refer to the assumptions used in applying the Black-Scholes-Merton option pricing model to determine the fair value of awards granted in Note 5, “Stockholders’ Deficit” to financial statements for years ended December 31, 2012 and 2011.
 
(2)
Amount reflects cash incentives both paid and accrued for services related to 2011 and 2012, including one-time bonuses awarded following the FDA’s approval of our Marqibo NDA on August 9, 2012.  All accrued bonuses relating to performance in 2011 and 2012 included in totals were paid early in the first quarters of 2012 and 2013, respectively. Cash incentives relate to services performed during the fiscal year pursuant to performance incentives earned.
 
(3)
Except as otherwise noted for a named executive officer, these amounts consist of matching contributions made to the named executives’ respective 401(k) plan contributions and health, dental, vision, life, and disability insurance (collectively, “insurance”) premiums paid by the company.
 
(4)
Represents amount paid to Dr. Deitcher as a performance bonus for 2011 in excess of his targeted bonus of $90,846, which amount is reflected under “Non-Equity Incentive Plan Compensation,” above.
 
(5)
Consists of $17,000 in matching contributions made to Dr. Deitcher’s 401(k) plan and $14,719 in premiums paid for insurance in 2012.
 
(6)
Consists of $16,500 in matching contributions made to Dr. Deitcher’s 401(k) plan and $9,938 in premiums paid for insurance in 2011.
 
(7)
Represents amount paid to Mr. Carlson as a performance bonus for 2011 in excess of his targeted bonus of $51,816, which amount is reflected under “Non-Equity Incentive Plan Compensation,” above.
 
(8)
Consists of $16,678 in matching contributions made to Mr. Carlson’s 401(k) plan, $31,533 in premiums paid for insurance, and $6,250 in health savings account contributions in 2012.
 
(9)
Consists of $14,013 in matching contributions made to Mr. Carlson’s 401(k) plan and $30,560 in premiums paid for insurance in 2011.
 
(10)
The Company designated Mr. Oza a named executive officer as of and for the year ended December 31, 2012.
 
(11)
Consists of $12,450 in matching contributions made to Mr. Oza’s 401(k) plan, $22,319 in premiums paid for insurance, and $6,250 in health savings account contributions in 2012.

Employment Agreements and Other Compensation Matters

Steven R. Deitcher, M.D.

Salary and Bonus.  Dr. Deitcher’s employment with us is governed by an employment agreement dated June 6, 2008, which was amended January 6, 2011 and December 27, 2011.  The employment agreement, which replaced and superseded a prior agreement dated May 6, 2007, provides for Dr. Deitcher’s employment as Chief Executive Officer for a term ending December 31, 2014, unless terminated earlier.  Pursuant to the agreement, Dr. Deitcher was entitled to an initial annual base salary of $420,000, which amount will be reviewed by the board of directors at least annually and never decreased.  During 2011, Dr. Deitcher’s annualized base salary was $454,230 and was increased to $467,857 for 2012 and to $486,571 for 2013.

At the discretion of our board of directors, Dr. Deitcher is also eligible to receive an annual bonus in an amount targeted at 50% of his base salary based upon the achievement of specified Company goals approved by the board of directors, except that the bonus shall be equal to 70% of his base salary in the event all specified goals are satisfied in their entirety. For 2011, the Board of Directors determined that 40% of the 2011 performance targets were achieved, and 60% of the targets (consisting of our receipt of FDA marketing approval for Marqibo) were not achieved.  In addition to awarding the portion of target bonus in proportion to targets achieved in 2011, the Board in its discretion awarded to Dr. Deitcher additional amounts in recognition of his exceptional performance and contributions in 2011. On February 17, 2012, the Board awarded Dr. Deitcher a bonus of $227,115. Further, the Board determined that Dr. Deitcher would be eligible to receive an additional bonus of $90,846 payable upon FDA approval of our Marqibo NDA, which amount represents (i) 100% of his 2011 target bonus (i.e., 70% of his base salary, or $317,961), less (ii) the $227,115 previously awarded for 2011. In addition to the foregoing, the Board had previously determined that Dr. Deitcher would be entitled to receive a one-time bonus of $150,000 if our NDA for Marqibo was approved by the FDA.

Accordingly, following the FDA’s approval of our Marqibo NDA on August 9, 2012, Dr. Deitcher received a combined one-time bonus of $240,846, representing the sum of $90,846 and $150,000, as described in the preceding paragraph.  Also, in January 2013, the Board of Directors awarded Dr. Deitcher a bonus of $233,929, or 50% of his 2012 base salary, following its determination that substantially all of the Company’s performance targets for 2012 were achieved.
 
 
45

 

Post-Termination Benefits.  In the event Dr. Deitcher is terminated upon a “change of control,” he will receive (i) his then-current annualized base salary and health insurance for a period of 12 months following the date of the termination, (ii) the maximum discretionary bonus (at the 70% targeted rate) for which he would have been eligible in the year of the termination, and (iii) an acceleration in the vesting of all options to purchase shares of our common stock then held by him. If Dr. Deitcher is terminated by us other than for “cause” or upon a change of control, or if Dr. Deitcher terminates his employment for “good reason,” or if we elect not to renew the employment agreement at the end of its term, then Dr. Deitcher will receive (x) his then-current annualized base salary and health insurance for a period of 12 months following the date of the termination, (y) the maximum discretionary bonus (at the 50% targeted rate) for which he would have been eligible in the year of the termination, prorated for the number of months Dr. Deitcher was employed by us in the year of termination, and (z) an acceleration in the vesting of all of his stock options to provide for 12 additional months of vesting.

Pursuant to the December 27, 2011 amendment to the employment agreement, the severance benefits payable to Dr. Deitcher were increased under certain circumstances.  The amendment provides that if (i) we receive FDA approval of our Marqibo NDA on or before December 31, 2012, and (ii) following such approval,  we terminate Dr. Deitcher’s employment other than for “cause” or if Dr. Deitcher terminates his employment for “good reason,” then Dr. Deitcher will receive (x) his then-current annualized base salary and health insurance for a period of 18 months (increased from 12 months) following the date of the termination, (y) 150% (increased from 100%) of the maximum discretionary bonus for which he would have been eligible in the year of the termination, pro-rated for the number of months that he was employed during such year, and (z) an immediate acceleration in the vesting of all options to purchase shares of our common stock then held by him to provide for 18 additional months (increased from 12 additional months) of vesting.

The term “cause” under the employment agreement means the following conduct or actions taken by Dr. Deitcher: (i) his willful and repeated failure or refusal to perform his duties under the agreement that is not cured by within 30 days after written notice thereof is given by us; (ii) any willful, intentional or grossly negligent act having the effect of injuring, in a material way (whether financial or otherwise), our business or reputation; (iii) willful and material misconduct in respect of his duties or obligations; (iv) the conviction of any felony or a misdemeanor involving a crime of moral turpitude; (v) the determination by us that Dr. Deitcher engaged in material harassment or discrimination prohibited by law; (vi) any misappropriation or embezzlement of our property; (vii) a breach of the non-solicitation, invention assignment and confidentiality provisions of the employment agreement; or (viii) a material breach of any other material provision of the employment agreement that is not cured within 30 days after we provide written notice thereof.

The term “change of control” means any of the following: (A) the direct or indirect acquisition by a person in one or a series of related transactions of our securities representing more than 50% of our combined voting power; or (B) the disposition by us of all or substantially all of our business and/or assets in one or a series of related transactions, other than a merger effected to change our state of domicile.

The term “good reason” means (1) a material breach by us of the employment agreement, which we do not cure within 30 days after written notice thereof is given to us; (2) a change in the lines of reporting such that Dr. Deitcher no longer directly reports to our Board; (3) a reduction in Dr. Deitcher’s compensation or other benefits except such a reduction in connection with a general reduction in compensation or other benefits of all senior executives; (4) a material reduction in Dr. Deitcher’s authority, duties, responsibilities, or title; or (5) a relocation of Dr. Deitcher’s principal place of performance by more than 30 miles from our current South San Francisco office location.

Craig W. Carlson

Salary and Bonus. Mr. Carlson’s employment with us is governed by the terms of a letter agreement dated February 5, 2010, as amended on February 17, 2010 and December 27, 2011.  Pursuant to the letter agreement, as amended, Mr. Carlson’s employment with us commenced March 1, 2010, but his appointment as Chief Financial Officer was not effective until April 1, 2010.  The letter agreement provides that he is entitled to an annualized base salary of $295,000, which was increased to $323,850 for 2011, to $333,566 for 2012, and to $346,909 for 2013.

Pursuant to the letter agreement, Mr. Carlson was initially eligible to receive an annual bonus in an amount targeted at 30% of his base salary based upon the achievement of specified Company goals approved by the board of directors, which targeted amount was increased to 40% of his base salary beginning in 2011. For 2011, the Board of Directors determined that 40% of the 2011 performance targets were achieved, and 60% of the targets (consisting of our receipt of FDA marketing approval for Marqibo) were not achieved.  In addition to awarding the portion of target bonus in proportion to targets achieved in 2011, the Board in its discretion awarded to Mr. Carlson additional amounts in recognition of his exceptional performance and contributions in 2011. On February 17, 2012, the Board awarded Mr. Carlson a bonus of $77,724. Further, the Board determined that Mr. Carlson would be eligible to receive an additional bonus of $51,816 payable upon FDA approval of our Marqibo NDA, which amount represents (i) 100% of his 2011 target bonus (i.e., 40% of his base salary, or $129,540), less (ii) the $77,724 previously awarded for 2011.

Accordingly, following the FDA’s approval of our Marqibo NDA on August 9, 2012, Mr. Carlson received a one-time bonus of $51,816, as described in the preceding paragraph.  Also, in January 2013, the Board of Directors awarded Mr. Carlson a bonus of $133,426, or 40% of his 2012 base salary, following its determination that substantially all of the Company’s performance targets for 2012 were achieved.
 
 
46

 

Post-Termination Benefits.  The letter agreement further provides that if we terminate Mr. Carlson’s employment without “cause,” or if he terminates his employment for “good reason,” then he is entitled to continue receiving his then current annualized base salary and medical benefits for a period of six months following such termination.  Pursuant to the December 27, 2011 amendment to the letter agreement, the severance benefits payable to Mr. Carlson were increased under certain circumstances.  The amendment provides that if (i) we receive FDA approval of our Marqibo NDA on or before December 31, 2012, and (ii) following such approval we terminate Mr. Carlson’s employment other than for “cause” or if Mr. Carlson terminates his employment for “good reason,” then Mr. Carlson will receive his then-current annualized base salary and health insurance for a period of 12 months (increased from 6 months) following the date of the termination.

For purposes of the letter agreement, the term “cause” means the following actions committed by Mr. Carlson: (i) his willful and repeated failure, disregard or refusal by to perform his employment duties, or his willful misconduct in respect of his duties or obligations; (ii) any willful, intentional or grossly negligent act having the effect of materially injuring (whether financial or otherwise) our business or reputation or any of our affiliates; (iii) conviction of any felony or a misdemeanor involving a crime of moral turpitude; (iv) engagement in illegal harassment; (v) misappropriation or embezzlement by Mr. Carlson of our property; or (vi) a material breach by Mr. Carlson of any of his obligations under any other agreement or policy.

The term “good reason” means (1) a reduction in Mr. Carlson’s annual base salary or annual target bonus rate or a material reduction in the benefits provided to him, taken as a whole, in each case without his consent, but not if all senior executives also incur such reduction in compensation or other benefits, or (2) a significant reduction in Mr. Carlson’s duties and responsibilities, but in each case after we have failed to correct such event after 30 days’ written notice from Mr. Carlson.

Nandan Oza

Salary and Bonus. Mr. Oza’s employment with us is governed by the terms of a letter agreement dated July 26, 2010.  The letter agreement provides for Mr. Oza’s employment as our Vice President of Chemistry, Manufacturing and Controls, effective as of August 2, 2010.  The letter agreement provides that he is entitled to an annualized base salary of $225,000, which was increased to $241,750 for 2011, to $249,003 for 2012, and to $258,963 for 2013.

Pursuant to the letter agreement, Mr. Oza is eligible to receive an annual bonus in an amount targeted at 25% of his base salary based upon the achievement of specified Company goals approved by the Board of Directors. For 2011, the Board of Directors determined that 60% of Mr. Oza’s 2011 performance targets were achieved, and 40% of the targets were not achieved.  Accordingly, the Board of Directors awarded Mr. Oza a bonus of $36,263 for 2011.  Further, the Board determined that Mr. Oza would be eligible to receive an additional bonus of $24,175 payable upon FDA approval of our Marqibo NDA, which amount represents (i) 100% of his 2011 target bonus (i.e., 25% of his base salary, or $60,438), less (ii) the $36,263 previously awarded for 2011.  In addition to the foregoing, the Board had previously determined that Mr. Oza would be entitled to receive a one-time bonus of $50,000 if our NDA for Marqibo was approved by the FDA.

Accordingly, following the FDA’s approval of our Marqibo NDA on August 9, 2012, Mr. Oza received a combined one-time bonus of $74,175, representing the sum of $24,175 and $50,000, as described in the preceding paragraph.  Also, in January 2013, the Board of Directors awarded Mr. Oza a bonus of $62,251, or 25% of his 2012 base salary, following its determination that substantially all of the Company’s performance targets for 2012 were achieved.

Post-Termination Benefits.  The letter agreement further provides that if we terminate Mr. Oza’s employment without “cause,” or if he terminates his employment for “good reason,” then he is entitled to continue receiving his then current annualized base salary for a period of six months following such termination.

For purposes of the letter agreement, the term “cause” means the following actions committed by Mr. Oza: (i) his willful and repeated failure, disregard or refusal by to perform his employment duties, or his willful misconduct in respect of his duties or obligations; (ii) any willful, intentional or grossly negligent act having the effect of materially injuring (whether financial or otherwise) our business or reputation or any of our affiliates; (iii) conviction of any felony or a misdemeanor involving a crime of moral turpitude; (iv) engagement in illegal harassment; (v) misappropriation or embezzlement by Mr. Oza of our property; or (vi) a material breach by Mr. Oza of any of his obligations under any other agreement or policy.

The term “good reason” means (1) a reduction in Mr. Oza’s annual base salary or annual target bonus rate or a material reduction in the benefits provided to him, taken as a whole, in each case without his consent, but not if all senior executives also incur such reduction in compensation or other benefits, or (2) a significant reduction in Mr. Oza’s duties and responsibilities, but in each case after we have failed to correct such event after 30 days’ written notice from Mr. Oza.

2012 Severance Payment Plan
 
In February 2012, we adopted the Talon Therapeutics, Inc. 2012 Severance Payment Plan (the “Severance Plan”).  All full-time regular employees are eligible to participate in the Severance Plan, except such employees with individual employment agreements that provide for benefits in connection with a termination of employment.  Subject to their execution and non-revocation of a general release of claims, eligible participants are entitled to the following benefits in the event their employment is terminated by us without cause.  Employees at the level of Vice President and higher shall receive 3 months continued base salary and health insurance coverage, which shall be increased to 6 months if such termination occurs following FDA Approval.  All other employees shall receive 2 months continued base salary and health insurance coverage, which shall increase to 3 months if such termination occurs following FDA Approval.  The Severance Plan is unfunded and all benefits payable under the plan shall be paid only from our general assets.  The Company may amend or terminate the Severance Plan at any time in its sole discretion.
 
 
47

 
 
2012 Change of Control Payment Plan
 
In February 17, 2012, the Company adopted the Talon Therapeutics, Inc. 2012 Change of Control Payment Plan (the “Change of Control Plan”) to provide benefits upon a “change of control” transaction to full-time Company employees serving at or above the level of Vice President as of the time of such transaction.  Effective as of August 10, 2012, the Company amended and restated the Change of Control Plan for the purposes of, among other things, (i) increasing the total amount of benefits payable to eligible participants under the plan, (ii) expanding the group of eligible participants under the plan to include full-time Company employees serving at or above the level of Senior Director as of the time of the change of control transaction, (iii) increasing the benefits payable to Steven R. Deitcher, M.D., the Company’s President & Chief Executive Officer, and (iv) extending the termination date of the plan from December 31, 2012, to June 30, 2013.  The following is a summary of the material terms of the Change of Control Plan, as amended and restated (the “Restated Plan”):

Participants.  Full-time Company employees serving at or above the level of Senior Director as of the time of the change of control transaction are eligible to receive benefits under the Restated Plan upon the effective time of a “change of control” transaction.

Plan Benefits; Allocation.  The Restated Plan provides for total benefits payable to eligible participants in an amount not to exceed 9.0% of the Change of Control Proceeds (the “Plan Benefits”).  For purposes of the plan, the term “Change of Control Proceeds” means all cash and the fair market value of all property paid, directly or indirectly, to the Company or its stockholders in consideration for their shares of capital stock, but excluding (1) fees and expenses incurred by the Company in connection with such transaction, (2) amounts payable under employment or consulting agreements between an acquirer and any current or former employee, consultant or director of the Company, (3) the value of any Company debt paid or assumed by the acquirer in such transaction, and (4) the gross cash proceeds received by the Company in all equity financings completed on or after June 1, 2010.  Of the total Plan Benefits, the Restated Plan provides that (A) Dr. Deitcher is entitled to 4.0% of Change of Control Proceeds up to $200 million, 4.5% of Change of Control Proceeds exceeding $200 million and up to $400 million, and 5.0% of Change of Control Proceeds exceeding $400 million, and (B) Craig W. Carlson, the Company’s Sr. V.P. & Chief Financial Officer, is entitled to 1.0% of Change of Control Proceeds, provided each remains employed in their respective positions at the time of the change of control transaction.  The remaining Plan Benefits will be allocated among the other eligible participants in the discretion of the Board, provided that Vice Presidents other than Mr. Carlson are entitled to an aggregate of 2.5% of Change of Control Proceeds and Senior Directors are entitled, subject to the vesting provisions discussed below, to an aggregate of 0.5% of Change of Control Proceeds.  However, each participant’s share of the Plan Benefits shall be reduced, on a dollar-for-dollar basis, by the amount of cash and/or value of other property received by such participant in connection with the change of control transaction in respect of outstanding stock options or other stock incentives held by the participant.  The Restated Plan is unfunded and all benefits payable under the plan shall be paid only from the Company’s general assets.

Form and Timing of Payments. The Plan Benefits shall be payable to eligible participants in the same manner and form and at the same time as the consideration payable to the Company’s stockholders in connection with the change of control transaction; provided, however, that Plan Benefits payable to Senior Directors shall vest and become payable in two equal installments on each of the first and second anniversaries of the effective date of the change of control, subject to the continued employment of such employee by the Company (including any successor or surviving entity); provided, further, that in the event a Senior Director experiences a Qualifying Termination (as defined in the Restated Plan) following the change of control, then such payments shall immediately vest and become payable in full.  

Definition of Change of Control.  As defined in the Restated Plan, the term “change of control” includes the following:

 
·
a person or group becoming the direct or indirect beneficial owner of more than 50% of the combined voting power of the Company other than by merger or similar transaction; provided, that a change of control will not be deemed to occur in connection with the acquisition of securities from the Company in a financing transaction;

 
·
a merger, consolidation or similar transaction involving the Company in which the Company’s stockholders immediately prior to the transaction no longer own more than 50% of the voting securities or voting power of the surviving company in substantially the same proportion as their ownership of Company securities immediately prior to such transaction; and

 
·
the sale, lease, exclusive worldwide license or other disposition of all or substantially all of the total gross value of the Company’s assets to an entity or person, more than 50% of the combined voting power of which is not owned by the Company’s stockholders in substantially the same proportion as their ownership of Company securities immediately prior to such transaction.

Amendment; Termination. The Company may amend or terminate the Restated Plan at any time in its sole discretion.  However, the Restated Plan will automatically terminate on the earlier of (i) the effective date of a change of control transaction (subject to the Company’s obligation to pay the Plan Benefits with respect to such transaction) or (ii) June 30, 2013, provided that the Board may renew or extend the plan for additional one-year periods.
 
 
48

 

Outstanding Equity Awards at Fiscal Year-End

The following table sets forth information concerning stock options held by the named executive officers at December 31, 2012:
 
Name
 
Number of
Securities Underlying
Unexercised Options Exercisable
   
Number of
Securities Underlying Unexercised Options
Unexercisable
   
Option Exercise
Price ($)
 
Option
Expiration Date
 
Steven R. Deitcher, M.D.
    100,000             6.60  
05/21/2017
(1)
      25,000             6.96  
08/24/2017
(2)
      162,500             4.48  
12/14/2017
(3)
      75,000             0.56  
02/24/2019
(4)
      236,111       13,889       0.76  
02/16/2020
(5)
      59,027       3,473       0.76  
02/16/2020
(6)
      72,917       14,583       0.92  
06/07/2020
(7)
      817,500       817,500       0.495  
12/21/2020
(8)
      208,333       791,667       0.905  
02/17/2022
(9)
                             
Craig W. Carlson
    80,208       7,292       0.76  
03/01/2020
(10)
      52,083       10,417       0.92  
06/07/2020
(7)
      352,500       352,500       0.495  
12/21/2020
(8)
      83,333       316,667       0.905  
02/17/2022
(9)
                             
Nandan Oza
    19,444       5,556       0.68  
08/02/2020
(11)
      125,000       125,000       0.495  
12/21/2020
(8)
      36,458       138,542       0.905  
02/17/2022
(9)
 
 

 
(1) 
Option granted May 21, 2007, and which vested in three equal annual installments commencing on the first anniversary of the grant.
 
 
(2) 
Option granted August 24, 2007, and which vested in three equal annual installments commencing on the first anniversary of the grant.
 
 
(3) 
Option granted December 14, 2007, and which vested in three equal annual installments commencing on the first anniversary of the grant.
 
 
(4) 
Option granted February 24, 2009, and which vested in three equal annual installments commencing on the first anniversary of the grant.
 
 
(5) 
Option granted February 16, 2010, one-third of which became exercisable on the first anniversary of the grant and the remaining two-thirds becomes exercisable in 24 equal monthly installments beginning March 2011.
 
 
(6) 
Option granted February 16, 2010, the exercisability of which was subject to both continued employment and the achievement of a regulatory milestone relating to Marqibo, which was satisfied in 2010. Exercisability of the option is also subject to continued employment, one-third of which vested on the first anniversary of the grant date and the remaining two-thirds vest in 24 equal monthly installments beginning in March 2011.
 
 
(7) 
Option granted June 7, 2010, one-third of which vested on the first anniversary of the grant and the remaining two-third vest in 24 equal monthly installments beginning July 2011.
 
 
(8) 
Option granted December 21, 2010 and which vests in 48 equal monthly installments commencing January 21, 2011.
 
 
(9) 
Option granted February 17, 2012 and which vests in 48 equal monthly installments commencing March 17, 2012.
 
 
(10) 
Option granted March 1, 2010 upon the commencement of Mr. Carlson’s employment, one-third of which vested on the first anniversary of the grant and the remaining two-third vest in 24 equal monthly installments beginning April 2011.
 
 
(11) 
Option granted August 2, 2010, one-third of which vested on the first anniversary of the grant and the remaining two-third vest in 24 equal monthly installments beginning September 2011.
 
 
49

 
 
Compensation of Directors

Our non-employee directors are entitled to receive the following in consideration for their service on the Board: (1) a cash fee of $2,500 for attendance at each regular quarterly meeting of the Board; (2) an annual retainer fee of $20,000, as compensation for special Board and other meetings; and (3) an annual stock option grant relating to 35,000 shares of common stock, which option vests upon the first anniversary of the grant and accelerates upon a “change of control” of the Company. In lieu of the foregoing compensation, Dr. Rosenberg, as our non-executive chairman of the Board, is entitled to an annual retainer of $50,000, a meeting fee of $4,000 and an annual stock option grant of 65,000 shares.  Mr. Maier, as Chair of our Audit Committee, is entitled to receive, in addition to the compensation set forth above for non-employee directors, an annual stock option grant relating to 12,000 shares of common stock.  Effective April 1, 2011, in addition to the compensation set forth above, our non-employee directors are entitled to receive, upon their initial appointment or election to the Board, a stock option grant relating to 50,000 shares of common stock, which option shall vest in three equal annual installments commencing on the first anniversary of such appointment or election.  The following table sets forth the compensation paid to our directors in 2012.

Name (1)
 
Fees Earned or
Paid in Cash
   
Option
Awards (2)
   
Total
 
Andrew Ferrer (4)
  $ 27,000     $ 24,914     $ 51,914  
Howard P. Furst, M.D.
    30,000       24,914       54,914  
Cecilia Gonzalo (3)
    30,000       61,411       91,411  
Jonathan S. Leff (5)
    30,000       24,914       54,914  
Paul V. Maier
    30,000       33,456       63,456  
Howard H. Pien (4)
    10,000       33,137       43,137  
Leon E. Rosenberg, M.D.
    66,000       46,268       112,268  
Robert J. Spiegel, M.D.
    30,000       24,914       54,914  
 

 
(1)
Steven R. Deitcher, our President and Chief Executive Officer, has been omitted from this table since he receives no additional compensation for serving on our Board; his compensation is described above under “Management and Board of Directors – Executive Compensation.”

 
(2)
Amounts reflect the grant date fair value of stock option awards granted in 2012, computed pursuant to Financial Accounting Standards Board’s Accounting Standards Codification 718 “Compensation – Stock Compensation,” excluding the effect of estimated forfeitures or actual cancellations. Refer to the assumptions used in applying the Black-Scholes-Merton option pricing model to determine the fair value of awards granted in Note 5, “Stockholders’ Deficit” to financial statements for years ended December 31, 2012 and 2011. At December 31, 2012, our non-employee directors held options to purchase shares of common stock as follows: Mr. Ferrer, 0 shares; Dr. Furst, 80,000 shares; Ms. Gonzalo, 85,000 shares; Mr. Leff, 80,000 shares; Mr. Maier, 131,500 shares; Mr. Pien, 50,000 shares; Dr. Rosenberg, 232,050 shares; and Dr. Spiegel, 80,000 shares.

 
(3)
The stock option award relating to 50,000 shares of common stock to which Ms. Gonzalo became entitled upon her initial appointment to the Board on December 14, 2011 was not granted until February 17, 2012, and is thus included in this table. On March 28, 2013, Ms. Gonzalo resigned from the Board, effective as of March 29, 2013.

 
(4)
Andrew Ferrer resigned from the Board effective as of April 20, 2012. Upon the resignation of Mr. Ferrer, Warburg Pincus designated Howard H. Pien for appointment to the Board pursuant to the terms of the June 2010 Investment Agreement between the Company and Warburg Pincus.

 
(5)
Jonathan S. Leff resigned from the Board effective as of December 31, 2012. Upon the resignation of Mr. Leff, Warburg Pincus designated Elizabeth H. Weatherman, a Managing Director at Warburg Pincus, for appointment to the Board pursuant to the terms of the June 2010 Investment Agreement between the Company and Warburg Pincus.
 
 
50

 
 
ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Security Ownership of Certain Beneficial Owners and Management

The following table sets forth certain information regarding the ownership of our common stock, Series A-1 Preferred, Series A-2 Preferred, and Series A-3 Preferred as of March 29, 2013, by: (i) each of our current directors; (ii) each of our “named executive officers,” as set forth above; (iii) all of our current directors and executive officers as a group; and (iv) all those known by us to be beneficial owners of at least 5% of our common stock. Beneficial ownership is determined under rules promulgated by the SEC. Under those rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any shares which the individual has the right to acquire within 60 days through the exercise or conversion of any stock option, convertible security, warrant or other right. Inclusion of shares in the table does not, however, constitute an admission that the named stockholder is a direct or indirect beneficial owner of those shares. Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power (or shares that power with that person’s spouse) with respect to all shares of capital stock listed as owned by that person or entity. Unless otherwise indicated, the address of each of the following persons is c/o Talon Therapeutics, Inc., 400 Oyster Point Blvd., Suite 200, South San Francisco, California 94080.
 
Name
 
Shares of Common Stock Beneficially Owned
   
Percent
of
Class
   
Shares of Series A-1 Preferred Beneficially
Owned
   
Percent
of
Class
   
Shares of Series A-2 Preferred Beneficially
Owned
   
Percent
of
Class
   
Shares of Series A-3 Preferred Beneficially
Owned
   
Percent
of
Class
 
                                                 
Steven R. Deitcher (1)
    2,327,907       9.6                                      
Craig W. Carlson (2)
    732,535       3.2                                      
Nandan Oza (2)
    243,229       1.1                                      
Howard P. Furst (2)
    80,000       *                                      
Paul V. Maier (3)
    133,250       *                                      
Howard H. Pien (2)
    16,667       *                                      
Leon E. Rosenberg (4)
    232,300       1.0                                      
Robert J. Spiegel (2)
    80,000       *                                      
Elizabeth H. Weatherman (5)
    148,329,832       87.1       371,307       90.0       99,000       72.2       162,000       90.0  
All directors and officers as a group (12 persons)
    179,564,185       89.3       371,307       90.0       99,000       72.2       162,000       90.0  
Warburg Pincus & Co. (6)(7)
450 Lexington Avenue
New York, NY 10017
    148,329,832       87.1       371,307       90.0       99,000       72.2       162,000       90.0  
James E. Flynn (7)(8)
780 Third Avenue, 37th Floor
New York, NY 10017
    26,949,194       55.4       41,255       10.0       38,156       27.8       18,000       10.0  
 

* represents less than 1%.
 
(1) 
Includes 2,143,715 shares issuable upon the exercise of stock options.
 
(2) 
Represents shares issuable upon the exercise of stock options.
 
(3) 
Includes 131,500 shares issuable upon the exercise of stock options.
 
(4) 
Includes 232,050 shares issuable upon the exercise of stock options.

(5)
Ms. Weatherman is a Member and Managing Director of Warburg Pincus LLC (“WP LLC”), a New York limited liability company that manages each of the Warburg Pincus Purchasers.  Ms. Weatherman disclaims beneficial ownership of all capital stock held by the Warburg Pincus Purchasers, except to the extent of any indirect pecuniary interest therein.  See also Notes (6) and (7), below.
 
 
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(6) 
Beneficial ownership includes: (i) 359,797 shares of Series A-1 Preferred, 95,931 shares of Series A-2 Preferred, and 156,978 shares of Series A-3 Preferred held by Warburg Pincus Private Equity X, L.P. (“WPX”), which shares are convertible, as of March 29, 2013, into 61,347,077; 35,643,252; and 46,741,370 shares of common stock, respectively; and (ii) 11,510 shares of Series A-1 Preferred, 3,069 shares of Series A-2 Preferred, and 5,022 shares of Series A-3 Preferred held by Warburg Pincus X Partners, L.P. (“WPPX”), which shares are convertible, as of March 29, 2013, into 1,962,508; 1,140,289; and 1,495,336 shares of common stock, respectively. Warburg Pincus X, L.P. (“WP X LP”) is a Delaware limited partnership and the sole general partner of each of the Warburg Pincus Purchasers. Warburg Pincus X LLC (“WP X LLC”) is a Delaware limited liability company and the sole general partner of WP X LP. Warburg Pincus Partners, LLC (“WPP LLC”) is a New York limited liability company and the sole member of WP X LLC. Warburg Pincus LLC (“WP LLC”) is a New York limited liability company that manages each of the Warburg Pincus Purchasers. Warburg Pincus & Co. (“WP”) is a New York general partnership and the managing member of WPP LLC. Each of WPX, WPPX, WP X LP, WP X LLC, WPP LLC, WP LLC and WP may be deemed to share the power to (a) dispose or to direct the disposition of the 148,329,832 shares of common stock the Warburg Pincus Purchasers may be deemed to beneficially own (and convert into) as of March 29, 2013, and (b) vote or direct the vote of the 148,329,832 shares of common stock the Warburg Pincus Purchasers may be deemed to beneficially own for voting purposes as of March 29, 2013. Charles R. Kaye and Joseph P. Landy are Managing General Partners of WP and Co-Presidents and Managing Members of WP LLC and may be deemed to control the Warburg Pincus Purchasers. Messrs. Kaye and Landy disclaim beneficial ownership of all shares held by the Warburg Pincus Purchasers. Beneficial ownership information is based on information known to the Company and a Schedule 13D/A filed with the SEC on January 15, 2013, by WPX, WPPX, WP X LP, WP X LLC, WPP LLC, WP LLC, WP, Mr. Kaye and Mr. Landy.

(7) 
Beneficial ownership of the Purchasers has not been adjusted for accretion beyond March 29, 2013, and does not reflect the Purchasers’ contractual right to purchase up to an aggregate of 420,000 additional shares of Series A-3 Preferred pursuant to the Investment Agreement.

(8) 
Beneficial ownership includes: (i) 84,934 shares of common stock currently outstanding, warrants to purchase 116,172 shares of common stock, and 13,168 shares of Series A-1 Preferred, 12,179 shares of Series A-2 Preferred, and 5,748 shares of Series A-3 Preferred held by Deerfield Private Design Fund, L.P., which shares are convertible, as of March 29, 2013, into 2,245,205; 4,426,508; and 1,711,480 shares of common stock, respectively; (ii) 136,849 shares of common stock currently outstanding, warrants to purchase 187,149 shares of common stock, and 21,213 shares of Series A-1 Preferred, 19,620 shares of Series A-2 Preferred, and 9,258 shares of Series A-3 Preferred held by Deerfield Private Design International, L.P., which shares are convertible, as of March 29, 2013, into 3,616,916; 7,130,897; and 2,756,636 shares of common stock, respectively; (iii) 67,524 shares of common stock currently outstanding, warrants to purchase 39,249 shares of common stock, and 4,448 shares of Series A-1 Preferred, 4,114 shares of Series A-2 Preferred, and 1,938 shares of Series A-3 Preferred held by Deerfield Special Situations Fund International Limited, which shares are convertible, as of March 29, 2013, into 758,404; 1,495,249; and 577,053 shares of common stock, respectively; and (iv) 34,252 shares of common stock currently outstanding, warrants to purchase 21,414 shares of common stock, and 2,426 shares of Series A-1 Preferred, 2,243 shares of Series A-2 Preferred, and 1,056 shares of Series A-3 Preferred held by Deerfield Special Situations Fund, L.P., which shares are convertible, as of March 29, 2013, into 413,643; 815,230; and 314,430 shares of common stock, respectively. Deerfield Capital, L.P. is the general partner of Deerfield Private Design Fund, L.P., Deerfield Private Design International, L.P., and Deerfield Special Situations Fund, L.P.  Deerfield Management Company, L.P. is the investment manager of Deerfield Special Situations Fund International Limited. James E. Flynn, the sole member of the general partner of each of Deerfield Capital, L.P. and Deerfield Management Company, L.P., holds voting and dispositive power over the shares held by Deerfield Private Design Fund, L.P., Deerfield Private Design International, L.P., Deerfield Special Situations Fund International Limited and Deerfield Special Situations Fund, L.P. (collectively, “Deerfield”).  Beneficial ownership information is based on information known to the Company and a Schedule 13D/A and Form 4 filed with the SEC on January 15, 2013, by Deerfield and Mr. Flynn.

Equity Compensation Plan Information
  
The following table provides information on our equity-based compensation plans as of December 31, 2012:
 
Plan category
 
Number of
securities to
be issued upon
exercise of
outstanding
options,
warrants and
rights
(a)
   
Weighted
average
exercise price of
outstanding
options,
warrants
and rights
(b)
   
Number of
securities
remaining
available for
future
issuance
(excluding
securities
reflected in
column (a))
(c)
 
Equity compensation plans not approved by stockholders:
                 
Awards issued outside of any plan (1)
    59,927     $ 2.58        
2010 Equity Incentive Plan
    8,390,625       0.69       1,222,162  
Equity compensation plans approved by stockholders:
                       
2003 Stock Option Plan
    64,916       6.83        
2004 Stock Incentive Plan
    564,707       4.11        
2006 Employee Stock Purchase Plan
    9,766       0.36       500,474  
                         
Total
    9,089,941               1,722,636  
 

 
(1) 
Represents shares of common stock reserved for issuance upon exercise of several individual outstanding stock option awards issued outside of any plan.
 
 
52

 
 
ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
  
Certain Relationships and Related Transactions

We have adopted a written policy with respect to related party transactions whereby any proposed transaction between us and any (i) of our executive officers or directors, (ii) shareholder beneficially owning in excess of 5% of our common stock (or its controlled affiliates’) stock, (iii) immediate family member of an executive officer or director, or (iv) entity that is owned or controlled by someone listed in items (i) through (iii) above, or an entity in which someone listed in items (i) through (iii) above has a substantial ownership interest or control, must be approved by a majority of the disinterested members of our Audit Committee, unless the transaction is available to all of our employees generally, or involves less than the lesser of $120,000 or one percent of the average of our total assets at year end for the last two completed fiscal years. If the proposed transaction involves executive or director compensation, it must be approved by the compensation committee.

In the event a proposed transaction has been identified as a related party transaction, such transaction must be presented to our Audit Committee for consideration and approval or ratification.  The presentation to the Audit Committee must include a description of all material facts, including the interests, director and indirect, of the related party, the benefits to us of the transaction and whether alternative transactions are available. A majority of disinterested members of the Audit Committee must approve a transaction for us to enter into it.  

As described below in Note 4 of our financial statements included elsewhere in this Form 10-K, in June 2010 we entered into Investment Agreements with the Warburg and Deerfield Purchasers.  Pursuant to the 2010 Investment Agreement, the Deerfield Purchasers purchased 40,000 shares of our Series A-1 Preferred Stock at a total purchase price of $4 million.  At the time we entered into the Investment Agreement, the Deerfield Purchasers beneficially owned approximately 23 percent of our outstanding common stock, and pursuant to a Facility Agreement dated October 30, 2007, between us and the Deerfield Purchasers, we borrowed from the Deerfield Purchasers an aggregate of $27.5 million, all of which remains outstanding.  Howard P. Furst, a director of Talon since December 2009, is a partner of Deerfield Management, an affiliate of the Deerfield Purchasers.  The terms of the Investment Agreement were reviewed by an independent and disinterested committee of our board of directors and approved by our full board of directors.  Dr. Furst was not a member of such board committee and did not participate in any meetings of our board at which the terms of the Investment Agreement were considered.

Also, as described below in Note 4 of our financial statements included elsewhere in this Form 10-K, in January 2012 we entered into Investment Agreements with the Warburg and Deerfield Purchasers.  Pursuant to the 2012 Investment Agreement, the Warburg and Deerfield Purchasers purchased 110,000 shares of our Series A-1 Preferred Stock at a total purchase price of $11million.  At the time we entered into the Investment Agreement, the Warburg and Deerfield Purchasers beneficially owned approximately 72 percent and 34 percent, respectively, of our outstanding common stock. The terms of the Investment Agreement were reviewed by an independent and disinterested committee of our board of directors and approved by our full board of directors.  Dr. Furst and Directors representing the Warburg Pincus Purchasers were not members of such board committee and did not participate in any meetings of our board at which the terms of the Investment Agreement were considered.

Pursuant to the 2010 and 2012 Investment Agreements, the Warburg Pincus Purchasers may seek reimbursement from the Company for reasonable fees and disbursements incurred in connection with transactions contemplated by such agreements, including fees and disbursements of legal counsel, accountants, advisors and consultants, and miscellaneous other fees and expenses incurred by Warburg Pincus. For the year ended December 31, 2012, the Company reimbursed approximately $0.5 million in professional and legal fees incurred by and on behalf of Warburg Pincus.

Director Independence

Our Board of Directors, after reviewing all relevant transactions or relationships between each director, or any of his family members, and Talon, its senior management and its independent registered public accounting firm, has determined that  Mr. Maier, Mr. Pien, Dr. Rosenberg and Dr. Spiegel are “independent” directors within the meaning of all relevant securities and other laws and regulations regarding the definition of “independent,” including those set forth in the applicable Nasdaq listing standards.
 
 
53

 
  
ITEM 14.          PRINCIPAL ACCOUNTANT FEES AND SERVICES   
  
Fees Billed to the Company by Its Independent Registered Public Accounting Firm

The following is a summary of the fees billed to us by BDO USA, LLP, our independent registered public accounting firm for professional services rendered for fiscal years ended December 31, 2012 and 2011:

Fee Category
 
2012 Fees
   
2011 Fees
 
Audit Fees
 
$
251,437
   
$
205,504
 
Audit-Related Fees (1)
   
31,139
     
41,105
 
Tax Fees (2)
   
23,165
     
38,636
 
Total Fees
 
$
305,741
   
$
285,245
 
 
 

 
(1)
Audit-Related Fees consist principally of assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements but not reported under the caption “Audit Fees.”
 
 
(2)
Tax Fees consist of fees for tax compliance, tax advice and tax planning.
 
 
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
 
At present, the Audit Committee approves each engagement for audit or non-audit services before the Company engages its independent public accountants to provide those services.  The Audit Committee has not established any pre-approval policies or procedures that would allow the Company’s management to engage its independent auditor to provide any specified services with only an obligation to notify the audit committee of the engagement for those services. None of the services provided by the Company’s independent auditors for fiscal year 2012 was obtained in reliance on the waiver of the pre-approval requirement afforded in SEC regulations.

 
54

 
 
PART IV
  
ITEM 15.          EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 
Exhibit No.
  
 Description
     
     
2.1
 
Agreement and Plan of Merger dated June 17, 2004 by and among the Registrant, Hudson Health Sciences, Inc. and EMLR Acquisition Corp. (incorporated by reference to Exhibit 2.0 of the Registrant’s Form 8-K filed June 24, 2004).
     
3.1
 
Amended and Restated Certificate of Incorporation of the Registrant, as amended through September 7, 2010 (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 10-Q for the quarter ended September 30, 2010).
     
3.2
 
Certificate of Amendment of Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed April 6, 2012).
     
3.3
 
Certificate of Designation of Series A-1 Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed June 11, 2010).
     
3.4
 
Certificate of Amendment of Corrected Certificate of Designation of Series A-1 Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed January 10, 2012).
     
3.5
 
Certificate of Designation of Series A-2 Convertible Preferred Stock (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed June 11, 2010).
     
3.6
 
Certificate of Amendment of Corrected Certificate of Designation of Series A-2 Convertible Preferred Stock (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed January 10, 2012).
     
3.7
 
Certificate of Designation of Series A-3 Convertible Preferred Stock (incorporated by reference to Exhibit 3.3 to the Registrant’s Current Report on Form 8-K filed January 10, 2012).
     
3.8
 
Amended and Restated Bylaws of the Registrant, as amended (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 10-Q for the quarter ended June 30, 2010).
     
3.9
 
Certificate of Ownership merging Talon Therapeutics, Inc. with and into Hana Biosciences, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed December 2, 2010).
     
4.1
 
Specimen common stock certificate (incorporated by reference to Exhibit 4.1 of the Registrant’s Registration Statement on Form SB-2/A (SEC File No. 333-118426) filed October 12, 2004).
     
4.2
 
Form of option to purchase an aggregate of 138,951 shares of common stock originally issued to Yale University and certain employees thereof (incorporated by reference to Exhibit 4.3 of the Registrant’s Annual Report on Form 10-KSB (SEC File No. 000-50782) for the year ended December 31, 2004).
     
4.3
 
Schedule of options in form of Exhibit 4.2 (incorporated by reference to Exhibit 4.4 of the Registration’s Annual Report on Form 10-KSB (SEC. File No. 000-50782) for the year ended December 31, 2004).
     
4.4
 
Form of Promissory Note issued to lenders in connection with October 30, 2007 Facility Agreement. (incorporated by reference to Exhibit 4.9 to the Registrant’s Form 10-K for the year ended December 31, 2007).
     
4.5
 
Form of Series A warrant to purchase common stock issued in connection with October 2009 private placement (incorporated by reference to Exhibit 4.8 of the Registrant’s Registration Statement on Form S-1 filed November 3, 2009, SEC File No. 333-162836).
     
4.6
 
Schedule of warrants issued on form of warrant attached as Exhibit 4.5 hereof (incorporated by reference to Exhibit 4.9 of the Registrant’s Registration Statement on Form S-1 filed November 3, 2009, SEC File No. 333-162836).
     
4.7
 
Form of Series B warrant to purchase common stock issued in connection with October 2009 private placement (incorporated by reference to Exhibit 4.10 of the Registrant’s Registration Statement on Form S-1 filed November 3, 2009, SEC File No. 333-162836).
 
 
55

 
 
4.8
 
Schedule of warrants issued on form of warrant attached as Exhibit 4.7 hereof (incorporated by reference to Exhibit 4.11 of the Registrant’s Registration Statement on Form S-1 filed November 3, 2009, SEC File No. 333-162836).
     
10.1
 
Talon Therapeutics, Inc. 2004 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed June 27, 2007). *
     
10.2
 
Form of stock option agreement for use in connection with 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-K for the year ended December 31, 2006). *
     
10.3
 
2003 Stock Option Plan of Talon Therapeutics, Inc. (incorporated by reference to Appendix B of the Registrant’s Definitive Proxy Statement on Schedule 14A filed April 7, 2006). *
     
10.4
 
Summary terms of non-employee director compensation, effective April 1, 2011 (incorporated by reference to Exhibit 10.4 to the Registrant’s Form 10-K for the year ended December 31, 2011). *
     
10.5
 
Registrant’s 2006 Employee Stock Purchase Plan, as amended through July 15, 2011 (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended September 30, 2011). *
     
10.6
 
Amendment dated July 12, 2012 to the Registrant’s 2006 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-Q for the quarter ended September 30, 2012). *
     
10.7
 
Amended and Restated License Agreement dated April 30, 2007 between the Registrant and Tekmira Pharmaceuticals Corp., as successor in interest to Inex Pharmaceuticals Corp. (incorporated by reference to Exhibit 10.4 of the Registrant’s Form 10-Q for the quarter ended June 30, 2007).+
     
10.8
 
Sublicense Agreement dated May 6, 2006 among the Registrant, Inex Pharmaceuticals Corporation and the University of British Columbia (incorporated by reference to Exhibit 10.5 of the Registrant’s Form 10-Q for the quarter ended June 30, 2006).+
     
10.9
 
Registration Rights Agreement dated May 6, 2006 between the Registrant and Inex Pharmaceuticals Corporation (incorporated by reference to Exhibit 10.6 of the Registrant’s Form 10-Q for the quarter ended June 30, 2006).
     
10.10
 
Amended and Restated License Agreement among Elan Pharmaceuticals, Inc., Inex Pharmaceuticals Corporation (for itself and as successor in interest to IE Oncology Company Limited), as assigned to the Registrant by Inex Pharmaceuticals Corporation on May 6, 2006 (incorporated by reference to Exhibit 10.8 of the Registrant’s Form 10-Q for the quarter ended June 30, 2006).
     
10.11
 
Form of common stock purchase agreement dated May 17, 2006 between the Registrant and certain investors (incorporated by reference to Exhibit 10.2 of the Registrant’s Form 8-K filed May 17, 2006).
     
10.12
 
Research and License Agreement dated October 9, 2006 between the Registrant and Albert Einstein College of Medicine of Yeshiva University, a division of Yeshiva University (incorporated by reference to Exhibit 10.38 to the Registrant’s Form 10-K for the year ended December 31, 2006).+
     
10.13
 
Patent and Technology License Agreement dated February 14, 2000 (including amendment dated August 15, 2000) between the Board of Regents of the University of Texas System on behalf of the University of Texas M.D. Anderson Cancer Center and the Registrant, as successor in interest to Inex Pharmaceuticals Corp. (incorporated by reference to Exhibit 10.3 of the Registrant’s Form 10-Q for the quarter ended June 30, 2007).+
     
10.14
 
Facility Agreement dated October 30, 2007 among the Registrant, Deerfield Private Design Fund, L.P., Deerfield Special Situations Fund L.P., Deerfield Special Situations Fund International Limited, and Deerfield Private Design International, L.P. (incorporated by reference to Exhibit 10.24 to the Registrant’s Form 10-K for the year ended December 31, 2007).
     
10.15
 
Security Agreement dated October 30, 2007 between the Registrant in favor of Deerfield Private Design Fund, L.P., Deerfield Special Situations Fund L.P., Deerfield Special Situations Fund International Limited, and Deerfield Private Design International, L.P. (incorporated by reference to Exhibit 10.25 to the Registrant’s Form 10-K for the year ended December 31, 2007).
     
10.16
 
Employment Agreement by and between the Registrant and Steven R. Deitcher, dated June 6, 2008 (incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K filed June 11, 2008). *
  
   
10.17
 
Amendment No. 1 dated June 2, 2009 to Amended and Restated License Agreement dated April 30, 2007 between the Registrant and Tekmira Pharmaceuticals Corp. (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended June 30, 2009).+
 
 
56

 
 
10.18
 
Agreement dated September 3, 2009 by and among the Registrant, Deerfield Private Design Fund, L.P., Deerfield Special Situations Fund L.P., Deerfield Special Situations Fund International Limited, and Deerfield Private Design International, L.P. (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed September 10, 2009).
     
10.19
 
Form of Securities Purchase Agreement entered into among the Registrant and certain accredited investors on October 7, 2009 (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed October 8, 2009).
     
10.20
 
Registrant’s 2010 Equity Incentive Plan, as amended through January 21, 2013 (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed January 25, 2013). *
     
10.21
 
Form of Stock Option Agreement under 2010 Equity Incentive Plan (incorporated by reference to Exhibit 4.2 to the Registrant’s Registration Statement on Form S-8 filed February 14, 2011, SEC File No. 333-172229). *
     
10.22
 
Form of Restricted Stock Agreement under 2010 Equity Incentive Plan (incorporated by reference to Exhibit 4.3 to the Registrant’s Registration Statement on Form S-8 filed February 14, 2011, SEC File No. 333-172229). *
     
10.23
 
Amendment No. 2 dated September 20, 2010 to Amended and Restated License Agreement dated April 30, 2007 between the Registrant and Tekmira Pharmaceuticals Corp. (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended September 30, 2010).+
     
10.24
 
Letter agreement dated February 5, 2010 between the Registrant and Craig W. Carlson, as amended on February 17, 2010 (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended March 31, 2010). *
     
10.25
 
Investment Agreement dated June 7, 2010 among the Registrant and the Purchasers named therein (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed June 11, 2010).
     
10.26
 
Form of Indemnification Agreement dated June 7, 2010 between the Registrant and each of Jonathan Leff, Nishan de Silva and Andrew Ferrer (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed June 11, 2010).
     
10.27
 
Registration Rights Agreement dated June 7, 2010 among the Registrant and the Holders identified therein (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed June 11, 2010).
     
10.28
 
First Amendment dated June 7, 2010 to Facility Agreement dated October 30, 2007 among the Registrant and the Lenders identified therein (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed June 11, 2010).
     
10.29
 
Letter agreement between the Registrant and Steven R. Deitcher, M.D., dated January 6, 2011 (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed January 12, 2011). *
     
10.30
 
Letter agreement dated December 26, 2011 between the Registrant and Samir M. Gharib (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed December 30, 2011). *
     
10.31
 
Amendment No. 2 dated December 27, 2011 to Employment Agreement dated June 6, 2008 between the Registrant and Steven R. Deitcher, M.D. (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K filed December 30, 2011).*
     
10.32
 
Letter agreement dated December 27, 2011 between the Registrant and Craig W. Carlson (incorporated by reference to Exhibit 10.3 to the Registrant’s Form 8-K filed December 30, 2011). *
  
   
10.33
 
Investment Agreement dated January 9, 2012 among the Registrant and the Purchasers named therein (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed January 10, 2012).
     
10.34
 
Amendment No. 1, dated July 3, 2012, to Investment Agreement dated January 9, 2012, among the Registrant and the Purchasers named therein (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed July 5, 2012).
     
10.35
 
Amendment No. 1 dated January 9, 2012 to Investment Agreement dated June 7, 2010 among the Registrant and the Purchasers named therein (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed January 10, 2012).
     
10.36
 
Amendment No. 1 dated January 9, 2012 to Registration Rights Agreement dated June 7, 2010 among the Registrant and the Holders identified therein (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed January 10, 2012).
 
 
57

 
 
10.37
 
Second Amendment dated January 9, 2012 to Facility Agreement dated October 30, 2007 among the Registrant and the Lenders identified therein (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed January 10, 2012).
     
10.38
 
Talon Therapeutics, Inc. 2012 Severance Payment Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed February 24, 2012). *
     
10.39
 
Talon Therapeutics, Inc. Amended and Restated 2012 Change of Control Payment Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended June 30, 2012). *
     
10.40
 
Office Lease dated June 10, 2012, between the Registrant and Kashiwa Fudosan America, Inc. (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter ended September 30, 2012).
     
10.41
 
Letter Agreement between the Registrant and Nandan Oza, dated July 26, 2010 (filed herewith). *
     
23.1
 
Consent of BDO USA, LLP, Independent Registered Public Accounting Firm (filed herewith).
     
24.1
 
Power of Attorney (included on signature page hereof).
     
31.1
 
Certification of Chief Executive Officer (filed herewith).
     
31.2
 
Certification of Chief Financial Officer (filed herewith).
     
32.1
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
     
101
 
The following financial information from Talon Therapeutics, Inc.’s Annual Report on Form 10-K for the annual period ended December 31, 2012, formatted in eXtensible Business Reporting Language (XBRL): (i) Balance Sheets as of December 31, 2012 and 2011, (ii) Statements of Operations and Comprehensive Loss for the years ended December 31, 2012 and 2011, (iii) Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Deficit for the years ended December 31, 2012 and 2011, (iii) Statements of Cash Flows for years ended December 31, 2012 and 2011, and (v) Notes to Financial Statements. ^

+
Confidential treatment has been granted as to certain omitted portions of this exhibit pursuant to Rule 406 of the Securities Act or Rule 24b-2 of the Exchange Act.
*
Indicates a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K.
^
Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filings.

 
58

 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.
 
         
TALON THERAPEUTICS, INC.
   
  
     
Date: April 1, 2013
By:  
/s/ Steven R. Deitcher
   
Steven R. Deitcher, M.D
   
President and Chief Executive Officer
  
POWER OF ATTORNEY
 
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Steven R. Deitcher and Craig W. Carlson, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this annual report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act, this report has been duly signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
Signature
  
Title
  
Date
  
  
  
  
  
   
President, Chief Executive Officer and Director
   
/s/  Steven R. Deitcher
  
(Principal Executive Officer)
  
April 1, 2013
Steven R. Deitcher
  
 
  
  
  
  
  
  
  
   
Senior Vice President and Chief Financial Officer
   
/s/  Craig W. Carlson
  
(Principal Financial Officer)
  
April 1, 2013
Craig W. Carlson
  
 
  
  
  
  
  
  
  
   
Controller, Director of Finance
   
/s/  Samir M. Gharib
  
(Principal Accounting Officer)
  
April 1, 2013
Samir M. Gharib
  
 
  
  
         
/s/  Leon E. Rosenberg
 
Chairman of the Board
 
April 1, 2013
Leon E. Rosenberg
       
  
  
  
  
  
/s/  Howard P. Furst
 
Director
 
April 1, 2013
Howard P. Furst
       
  
  
  
  
  
/s/  Paul V. Maier
  
Director
  
April 1, 2013
Paul V. Maier
  
  
  
  
  
  
  
  
  
/s/  HOWARD H. PIEN
  
Director
  
April 1, 2013
Howard H. Pien
  
  
  
  
         
/s/  Robert J. Spiegel
 
Director
 
April 1, 2013
Robert J. Spiegel
       
         
/s/  ELIZABETH H. WEATHERMAN
 
Director
 
April 1, 2013
Elizabeth H. Weatherman
       
 
59

 

Index to Financial Statements of
Talon Therapeutics, Inc.
  
Audited Financial Statements:   

Report of Independent Registered Public Accounting Firm
 
F-2
Balance Sheets as of December 31, 2012 and 2011
 
F-3
Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2012 and 2011
 
F-4
Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders' Deficit for the Years Ended December 31, 2012 and 2011
 
F-5
Statements of Cash Flows for the Years Ended December 31, 2012 and 2011
 
F-6
Notes to Financial Statements
 
F-7

 
F-1

 
 
Report of Independent Registered Public Accounting Firm
 
 
Board of Directors and Stockholders
Talon Therapeutics, Inc.
South San Francisco, California
 
We have audited the accompanying balance sheets of Talon Therapeutics, Inc. as of December 31, 2012 and 2011 and the related statements of operations and comprehensive loss, changes in redeemable convertible preferred stock and stockholders’ deficit, and cash flows for each of the two years in the period ended December 31, 2012. These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedules.  We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Talon Therapeutics, Inc. at December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that, among other factors, raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.


 /s/ BDO USA, LLP
 
BDO USA, LLP
 
   
San Jose, California
 
April 1, 2013
 
 
 
F-2

 
 
TALON THERAPEUTICS, INC.

BALANCE SHEETS

   
December 31,
2012
   
December 31,
2011
 
             
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
2,973,028
   
$
1,028,518
 
Inventory (Note 9)
   
283,321
     
 
Prepaid expenses and other current assets (Note 10)
   
237,918
     
635,297
 
Total current assets
   
3,494,267
     
1,663,815
 
                 
Property and equipment, net (Note 11)
   
42,714
     
72,431
 
Restricted cash
   
34,004
     
 
Debt issuance costs, net (Note 3)
   
517,525
     
751,401
 
Total assets
 
$
4,088,510
   
$
2,487,647
 
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
Current liabilities:
               
Accounts payable and accrued liabilities (Note 12)
 
$
3,549,276
   
$
4,556,951
 
Investors’ rights to purchase shares of Series A-3 Preferred Stock (Note 4)
   
14,276,000
     
 
Other short term liabilities
   
2,474
     
2,110
 
Total current liabilities
   
17,827,750
     
4,559,061
 
Notes payable, net of discount (Note 3)
   
24,833,183
     
24,033,257
 
Investors’ right to purchase future shares of Series A-1 and A-2 preferred stock (Note 4)
   
     
1,772,100
 
Warrant liabilities, non-current (Note 6)
   
563,070
     
501,664
 
Other long term liabilities
   
     
2,474
 
Total long term liabilities
   
25,396,253
     
26,309,495
 
Total liabilities
   
43,224,003
     
30,868,556
 
Redeemable convertible preferred stock; $0.001 par value: 10 million shares authorized, 0.7 million and 0.4 million shares issued and outstanding at December 31, 2012 and December 31, 2011, respectively; aggregate liquidation value of $77.9 million and $46.4 million at December 31, 2012 and December 31, 2011, respectively
   
47,913,500
     
30,643,219
 
                 
Stockholders' deficit:
               
Common stock; $0.001 par value: 600 million shares authorized, 22.0 million and 21.8 million shares issued and outstanding at December 31, 2012 and December 31, 2011, respectively
   
22,001
     
21,779
 
Additional paid-in capital
   
136,562,864
     
120,887,432
 
Accumulated deficit
   
(223,633,858)
     
(179,933,339)
 
Total stockholders' deficit
   
(87,048,993)
     
(59,024,128)
 
Total liabilities, redeemable convertible preferred stock and stockholders' deficit
 
$
4,088,510
   
$
2,487,647
 
 
See accompanying notes to financial statements.

 
F-3

 

TALON THERAPEUTICS, INC.

STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
 
   
Years Ended
December 31,
 
   
2012
   
2011
 
Operating expenses:
           
General and administrative
  $ 7,900,846     $ 5,121,678  
Research and development
    12,898,688       13,387,168  
Total operating expenses
    20,799,534       18,508,846  
                 
Loss from operations
    (20,799,534 )     (18,508,846 )
                 
Other expense:
               
Interest income
    3,324       8,124  
Interest expense
    (3,751,799 )     (3,560,444 )
Other expense, net
          (78,768 )
Change in fair value of warrant liabilities (Note 6)
    (73,151 )     (41,146 )
Change in fair value of investors’ right to purchase future shares of Series A-1 and A-2 preferred stock (Note 4)
    (1,006,900 )     3,358,900  
Change in fair value of investors’ right to purchase future shares of Series A-3 preferred stock (Note 4)
    (18,072,459 )      
Total other expense
    (22,900,985 )     (313,334 )
                 
Net loss
  $ (43,700,519 )   $ (18,822,180 )
                 
Deemed dividends attributable to preferred stock in connection with accretion (Notes 4 and 7)
    (5,847,123 )     (3,947,713 )
Deemed dividends attributable to preferred stock in connection with embedded conversion features (Notes 4 and 7)
    (15,236,723 )      
                 
Net loss applicable to common stock
    (64,784,365 )     (22,769,893 )
                 
Net loss per share applicable to common stock, basic and diluted
  $ (2.95 )   $ (1.06 )
                 
Weighted average shares used in computing net loss per share, basic and diluted
    21,925,200       21,557,062  
Comprehensive loss:
               
Net loss
  $ (43,700,519 )   $ (18,822,180 )
Unrealized holdings gains arising during the period
          15,841  
                 
Comprehensive loss
  $ (43,700,519 )   $ (18,806,339 )

See accompanying notes to financial statements.
 
 
F-4

 
TALON THERAPEUTICS, INC.
 
STATEMENT OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
 
   
Redeemable
Convertible Preferred Stock
   
Common Stock
                         
   
Shares
   
Amount
   
Shares
   
Amount
   
Additional
paid-in capital
   
Accumulated other comprehensive income
   
Accumulated deficit
   
Total equity
 
Balance at January 1, 2011
    412,562     $ 30,643,219       21,234,307     $ 21,234     $ 119,241,956     $ (15,841 )   $ (161,111,159 )   $ (41,863,810 )
                                                                 
Stock-based compensation of employees amortized over vesting period of stock options
                            883,860                   883,860  
                                                                 
Issuance of shares under employee stock purchase plan
                39,998       40       16,279                   16,319  
                                                                 
Fair value of warrants issued to nonemployee as partial payment of services rendered
                            56,209                   56,209  
                                                                 
Issuance of shares upon exercise of employee stock options
                72,395       73       49,948                   50,021  
                                                                 
Stock-based compensation of restricted stock and issuance of shares upon vesting
                179,192       179       83,481                   83,660  
                                                                 
Issuance of shares upon exercise of warrants
                252,920       253       303,251                   303,504  
                                                                 
Extinguishment of warrant liability upon exercise of warrants
                            252,448                   252,448  
                                                                 
Unrealized holdings gains (losses) arising during the period
                                  17,600             17,600  
                                                                 
Reclassification of realized gains (losses) included in net income
                                  (1,759 )           (1,759 )
                                                                 
Net loss
                                        (18,822,180 )     (18,822,180 )
                                                                 
Balance at December 31, 2011
    412,562     $ 30,643,219       21,778,812     $ 21,779     $ 120,887,432     $     $ (179,933,339 )   $ (59,024,128 )
                                                                 
Stock-based compensation of employees amortized over vesting period of stock options
                            1,445,720                   1,445,720  
                                                                 
Issuance of shares under employee stock purchase plan
                47,454       47       16,496                   16,543  
                                                                 
Issuance of shares upon exercise of employee stock options
                160,625       160       97,428                   97,588  
                                                                 
Issuance of shares upon exercise of warrants
                15,000       15       585                   600  
                                                                 
Extinguishment of warrant liability upon exercise of Series A common stock warrants
                            11,744                   11,744  
       
Issuance of Series A-2 redeemable, convertible preferred stock on January 9, 2012, net of issuance costs of $0.8 million, and fair value of investors’ right to acquire shares of Series A-3 preferred stock
    116,826       3,343,005                                      
                                                                 
Series A-2 redeemable, convertible shares issued on March 30, June 29, and September 28, 2012 to settle interest payable under Facility Agreement
    20,330       2,033,000                                      
                                                                 
Issuance of Series A-3 redeemable, convertible preferred stock on July 3, August 17, and November 14, 2012, net of issuance costs of $0.1 million
    120,000       11,894,276                                      
                                                                 
Beneficial conversion feature on Series A-2 redeemable, convertible preferred stock
          (4,747,973 )                 4,747,973                    
                                                                 
Deemed dividend attributable to beneficial conversion feature on Series A-2 redeemable, convertible preferred stock
          4,747,973                   (4,747,973 )                  
                                                                 
Deemed dividend attributable to beneficial conversion feature on Series A-3 redeemable, convertible preferred stock
          (10,488,750 )                 10,488,750                    
                                                                 
Beneficial conversion feature on Series A-3 redeemable, convertible preferred stock
          10,488,750                   (10,488,750 )                  
                                                                 
Extinguishment of investor rights to purchase shares of Series A-3 redeemable, convertible preferred stock upon exercise
                            14,103,459                   14,103,459  
                                                                 
Net loss
                                        (43,700,519 )     (43,700,519 )
                                                                 
Balance at December 31, 2012
    669,718     $ 47,913,500       22,001,891     $ 22,001     $ 136,562,864     $     $ (223,633,858 )   $ (87,048,993 )
 
See accompanying notes to financial statements.
 
F-5

 

TALON THERAPEUTICS, INC.
 
STATEMENTS OF CASH FLOWS
   
   
Twelve Months Ended December 31,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
Net loss
 
$
(43,700,519)
   
$
(18,822,180)
 
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
   
43,265
     
95,137
 
Share-based compensation to employees for services
   
1,445,720
     
967,520
 
Amortization of discount and debt issuance costs
   
1,033,801
     
846,622
 
Fair value of warrants issued to nonemployee as partial payment of services rendered
   
     
56,209
 
Loss on investments
   
     
70,355
 
Change in fair value of warrant liability
   
73,151
     
41,146
 
Change in fair value of investors’ right to purchase future shares of Series A Preferred
   
19,079,359
     
(3,358,900)
 
Settlement of interest payments under Facility Agreement with Series A-2 Preferred
   
2,715,600
     
 
Changes in operating assets and liabilities:
               
(Increase)/decrease in prepaid expenses and other assets
   
82,354
     
(256,396)
 
Decrease in accounts payable and accrued liabilities
   
(1,007,675)
     
(1,495,032)
 
Net cash used in operating activities
   
(20,234,944)
     
(21,855,519)
 
 
               
Cash flows from investing activities:
               
Purchase of property and equipment
   
(13,549)
     
(70,336)
 
Proceeds from maturities and sales of available-for-sale securities
   
     
18,013,232
 
Restricted cash
   
(2,301)
     
 
Net cash provided by/(used in) investing activities
   
(15,850)
     
17,942,896
 
                 
Cash flows from financing activities:
               
Proceeds from exercise of warrants and options
   
98,188
     
353,524
 
Issuance of shares under the employee stock purchase plan
   
16,543
     
16,319
 
Payments on capital leases
   
(2,108)
     
(1,955)
 
Cash proceeds from private placement of Series A-2 Preferred for $11 million less issuance costs of $0.8 million
   
10,188,405
     
 
Cash proceeds from private placement of Series A-3 Preferred for $12 million less issuance costs of $0.1 million
   
11,894,276
     
 
Net cash provided by financing activities
   
22,195,304
     
367,888
 
 
               
Net increase/(decrease) in cash and cash equivalents
   
1,944,510
     
(3,544,735)
 
Cash and cash equivalents, beginning of period
   
1,028,518
     
4,573,254
 
Cash and cash equivalents, end of period
 
$
2,973,028
   
$
1,028,518
 
Supplemental disclosures of cash flow data:
               
Cash paid for interest
 
$
683,325
   
$
2,708,750
 
Supplemental disclosures of noncash financing activities:
               
Unrealized gain (loss) on available-for-sale securities
 
$
   
$
17,600
 
Fair value of warrants issued to nonemployee as partial payment of services rendered
 
$
   
$
56,209
 
Extinguishment of warrant liabilities
 
$
14,115,203
   
$
252,448
 
   
See accompanying notes to financial statements.
 
 
F-6

 

TALON THERAPEUTICS, INC.
 
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2012 and 2011
 
NOTE 1.  BUSINESS DESCRIPTION, BASIS OF PRESENTATION AND LIQUIDITY
 
Business
 
Talon Therapeutics, Inc. (“Talon”, “we”, “our”, “us” or the “Company”) is a biopharmaceutical company based in South San Francisco, California, which seeks to acquire, develop, and commercialize innovative products to strengthen the foundation of cancer care. The Company is committed to creating value by accelerating the development of its products and product candidates, including entering into strategic partnership agreements and expanding its product candidate pipeline by being an alliance partner of choice to universities, research centers and other companies.  The Company has exclusive rights to develop and commercialize the following products and product candidates:
 
Marqibo® (vincristine sulfate liposome injection) is a novel, sphingomyelin/cholesterol liposome encapsulated formulation of vincristine, a microtubule inhibitor that is FDA-approved for acute lymphoblastic leukemia (ALL) and currently being developed for non-Hodgkin’s lymphoma (NHL). Vincristine is widely used in combination regimens for treatment of adult and pediatric hematologic and solid tumor malignancies.  On August 9, 2012, the FDA approved our new drug application, or NDA, granting accelerated approval of Marqibo for the treatment of Philadelphia chromosome negative adult ALL patients in second or greater relapse or whose disease has progressed following two or more prior lines of anti-leukemia therapy.  In May 2012, we enrolled the first patient in a global Phase 3 confirmatory study of Marqibo in the treatment of patients 60 years of age and older with newly-diagnosed ALL, which is known as the HALLMARQ study.  Marqibo is also being studied in a Phase 3 clinical trial (OPTIMAL>60) in elderly patients with newly-diagnosed NHL being conducted by the German High-Grade Lymphoma Study Group for which we are providing support. There are additional Phase 1 and Phase 2 clinical trials underway in adults and pediatrics.
 
Menadione Topical Lotion (MTL) is a novel cancer supportive care product candidate being developed for the prevention and/or treatment of the skin toxicities associated with the use of epidermal growth factor receptor inhibitors, or EGFRIs, a type of anti-cancer agent used in the treatment of lung, colon, head and neck, pancreatic and breast cancer.  In August 2011, we entered into an agreement with the Mayo Clinic pursuant to which the Mayo Clinic agreed to sponsor and conduct a randomized Phase 2 trial of MTL in patients taking biologic and small molecule EGFR inhibitors for anti-cancer therapy and will test the effectiveness of MTL in preventing skin toxicities associated with EGFR inhibitors.  We agreed to provide supplies of MTL in connection with the Mayo Clinic study.
 
Brakiva™ (topotecan liposome injection) is a novel targeted Optisome™ encapsulated formulation product candidate of the FDA-approved anticancer drug topotecan. We have focused our capital resources to advance the development of Marqibo and Menadione Topical Lotion. Consequently, we have not recently allocated resources toward the development of Brakiva.
 
Alocrest™ (vinorelbine liposome injection) is a novel targeted Optisome™ encapsulated formulation product candidate of the FDA-approved anticancer drug vinorelbine. We have focused our capital resources to advance the development of Marqibo and Menadione Topical Lotion. Consequently, we have not recently allocated resources toward the development of Alocrest.

Basis of Presentation and Liquidity
 
The accompanying audited financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and the instructions to Form 10-K, as promulgated by the Securities and Exchange Commission (the “SEC”).
 
As of December 31, 2012, the Company had a stockholder's accumulated deficit of approximately $223.6 million, and for the fiscal year ended December 31, 2012, the Company experienced a net loss of $43.7 million. The Company has financed operations primarily through equity and debt financing and expects such losses to continue over the next several years.  The Company has drawn down $27.5 million of long-term debt under the secured loan facility agreement with Deerfield Management, with the entire balance due in June 2015.  The Company currently has only a limited supply of cash available for operations. As of December 31, 2012, the Company had aggregate cash and cash equivalents and available-for-sale securities of $3.0 million.
 
 
F-7

 
 
On January 9, 2012, the Company entered into an Investment Agreement with certain investors pursuant to which the Company issued and sold to the investors an aggregate of 110,000 shares of its Series A-2 Convertible Preferred Stock (the “Series A-2 Preferred”), stated value $100 per share, at a per share purchase price of $100 for an aggregate purchase price of $11.0 million.  The 2012 Investment Agreement provides that, from the date of the 2012 Investment Agreement until the first anniversary of the Company’s receipt of marketing approval from the FDA for any of its product candidates, the investors have the right, but not the obligation, to purchase up to an additional 600,000 shares of the Company’s Series A-3 Convertible Preferred Stock (the “Series A-3 Preferred”) at a purchase price of $100 per share, in one or more tranches of at least 50,000 shares of Series A-3 Preferred per tranche. On July 3, 2012, the Company and the investors entered into an amendment to the 2012 Investment Agreement, pursuant to which the minimum size of each such tranche was reduced from 50,000 shares of Series A-3 Preferred to 30,000 shares of Series A-3 Preferred. Also on July 3, 2012, pursuant to the terms of the 2012 Investment Agreement, as amended, the Company issued and sold to the investors an aggregate of 30,000 shares of Series A-3 Preferred at a price per share of $100, for aggregate gross proceeds of $3.0 million.  On August 17 and November 14, 2012, pursuant to the terms of the 2012 Investment Agreement, as amended, the Company issued and sold to the investors 60,000 shares and 30,000 shares, respectively, of Series A-3 Preferred at a price per share of $100, for aggregate gross proceeds of $9.0 million.  In addition, on January 11, 2013, pursuant to the terms of the 2012 Investment Agreement, as amended, the Company issued and sold to the investors an aggregate of 60,000 shares of Series A-3 Preferred at a price per share of $100, for aggregate gross proceeds of $6.0 million.  The Company had previously entered into an Investment Agreement dated June 7, 2010, pursuant to which the same investors purchased 400,000 shares of the Company’s Series A-1 Convertible Preferred Stock (the “Series A-1 Preferred” and, collectively with the Series A-2 Preferred and the Series A-3 Preferred, the “Series A Preferred”) for an aggregate purchase price of $40.0 million.

As described in Note 3 below, the Company and certain affiliates of Deerfield Management, LLC (collectively, “Deerfield”) had previously entered into the Facility Agreement on October 30, 2007, as amended on June 7, 2010, which is secured by all of the Company’s assets.  In connection with the entry into the Investment Agreement, on January 9, 2012, the Company and Deerfield entered into a Second Amendment to Facility Agreement.  Among other items, pursuant to the Second Amendment to Facility Agreement, the Company agreed to satisfy its obligation under the Facility Agreement to make quarterly interest payments for the quarters ended December 31, 2011, March 31, 2012, June 30, 2012 and September 30, 2012, by issuing shares of Series A-2 Preferred in lieu of cash. On January 9, 2012, the Company issued an aggregate of 6,826 shares of Series A-2 Preferred in satisfaction of interest accrued under the Facility Agreement for the quarter ended December 31, 2011.  On March 30, 2012, the Company issued an aggregate of 6,752 shares of Series A-2 Preferred in satisfaction of interest accrued under the Facility Agreement for the quarter ended March 31, 2012.  On June 29, 2012, the Company issued an aggregate of 6,752 shares of Series A-2 Preferred in satisfaction of interest accrued under the Facility Agreement for the quarter ended June 30, 2012.  On September 28, 2012, the Company issued an aggregate of 6,826 shares of Series A-2 Preferred in satisfaction of interest accrued under the Facility Agreement for the quarter ended September 30, 2012.

Even after receipt of the $29 million in aggregate gross proceeds from the sale of Series A Preferred pursuant to the 2012 Investment Agreement, the Company currently does not have enough capital resources to fund its planned activities beyond May 2013 and the accompanying financial statements reflect substantial doubt about the Company’s ability to continue as a going concern, which is also stated in the report from its auditors on the audit of the Company’s financial statements as of and for the year ended December 31, 2012.  The Company’s plan of operation for the year ending December 31, 2013 is to continue implementing its business strategy, including efforts to develop strategic partnerships, through licensing agreements, joint venture or merger and acquisition, to develop and commercialize Marqibo and its product candidates in the United States as well as Europe and other international regions if and when regulatory approvals to market in such regions are obtained. The Company does not generate any recurring revenue and will require substantial additional capital before it will generate cash flow from its operating activities, if ever.  The Company will be unable to continue development of Marqibo and its product candidates unless it is able to obtain additional funding through equity or debt financings or from payments in connection with potential strategic transactions.  

Management can give no assurances that additional capital that the Company is able to obtain, if any, will be sufficient to meet the Company’s needs. Moreover, there can be no assurance that such capital will be available to the Company on favorable terms or at all, especially given the current economic environment which has severely restricted access to the capital markets.  If anticipated costs are higher than planned or if the Company is unable to raise additional capital, it will have to significantly curtail planned development to maintain operations before the end of May 2013.  These conditions raise substantial doubt as to the Company’s ability to continue as a going concern.   The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities should the Company be unable to continue as a going concern.

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Use of Management's Estimates
 
The preparation of financial statements in conformity with GAAP requires management to make estimates based upon current assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Examples include provisions for deferred taxes, the valuation of the warrant liabilities, investors’ rights to purchase shares of Series A Preferred (see Note 4 below), the computation of beneficial conversion feature and the cost of contracted clinical study activities and assumptions related to share-based compensation expense. Actual results may differ materially from those estimates.
 
Segment Reporting
 
The Company has determined that it currently operates in only one segment, which is the research and development of oncology therapeutics and supportive care for use in humans. All assets are located in the United States.
 
 
F-8

 

Cash and Cash Equivalents and Short-Term Investments
 
The Company considers all highly-liquid investments with a maturity of three months or less when acquired to be cash equivalents. Short-term investments consist of investments acquired with maturities exceeding three months and are classified as available-for-sale. All short-term investments are reported at fair value, based on quoted market price, with unrealized gains or losses included in other comprehensive income (loss).

Inventory

Inventories are stated at the lower of cost or market with cost determined using the first-in, first-out method. Inventory values are based upon standard costs, which approximate actual costs. The Company engages multiple contract manufacturing organizations (CMOs) and raw material suppliers to manufacture products for commercial sale and use in ongoing clinical trials. Inventory that is manufactured for consumption in ongoing clinical trials is expensed at the time of production and recorded as research and development expense. Inventory of products that have been approved by the FDA and made available for sale but subsequently repurposed for clinical trial use is expensed at the time the inventory is packaged for the clinical trial.

The Company’s policy is to write down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value and inventory in excess of expected requirements. The estimate of excess quantities is subjective and primarily dependent on the Company’s estimates of future demand for a particular product. If the estimate of future demand is significantly different than management’s expectations, the Company may have to significantly increase the reserve for excess inventory for that product and record a charge to cost of sales. The Company performs reviews of its inventory levels on a quarterly basis to assess the adequacy of its reserve. Expired inventory is disposed of and the related costs are written off to cost of sales.

Investments in Debt and Marketable Equity Securities

The Company determines the appropriate classification of all debt and marketable equity securities as held-to-maturity, available-for-sale or trading at the time of purchase, and re-evaluates such classification as of each balance sheet date in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 320, Investments – Debt and Equity Securities.  Investments in equity securities that have readily determinable fair values are classified and accounted for as available for sale.  As of December 31, 2012, the Company’s investment in available for sale securities was classified as cash equivalents. Refer to Note 8 below.

The Company assesses whether temporary or other-than-temporary unrealized losses on its marketable securities have occurred due to declines in fair value or other market conditions based on the extent and duration of the decline, as well as other factors.  Because the Company has determined that all of its debt and marketable equity securities previously held were available-for-sale, unrealized gains and losses, if any, were reported as a component of accumulated other comprehensive gain (loss) in stockholders’ equity.  Other-than-temporary unrealized losses relating to its investment in marketable equity securities, if any, were recorded in the statement of operations.
  
Fair Value of Financial Instruments
 
Financial instruments include cash and cash equivalents, available-for-sale securities, accounts payable, and warrant liabilities. Available-for-sale securities are carried at fair value. Cash and cash equivalents and accounts payable are carried at cost, which approximates fair value due to the relative short maturities of these instruments.  The fair value of the Company’s warrant liabilities is discussed in Notes 6 and 8.  The Company has issued certain financial instruments, including warrants to purchase common stock and rights to purchase shares of Series A-3 Preferred (see Note 4 below), which have the characteristics of both equity and liabilities.  These instruments were evaluated to be classified as liabilities at the time of issuance and are revalued at fair value from period to period with the resulting change in value included in other income (expense). The fair value of these financial instruments is discussed in Notes 4 and 8.
 
Property and Equipment
 
Property and equipment are stated at cost and depreciated over the estimated useful lives of the assets using the straight-line method. Tenant improvement costs are depreciated over the shorter of the life of the lease or their economic life, and equipment, computer software and furniture and fixtures are depreciated over three to five years.
 
Debt Issuance Costs
 
As discussed in Note 3 below, the debt issuance costs relate to fees paid in the form of cash and warrants to secure a firm commitment to borrow funds.  These fees are being amortized over the life of the related loan using the effective interest method.
 
Financial Instruments with Characteristics of Both Equity and Liabilities
 
The Company has issued certain financial instruments, including warrants to purchase common stock and rights to purchase shares of Series A-3 Preferred, which have the characteristics of both equity and liabilities. These instruments were evaluated to be classified as liabilities at the time of issuance and are revalued at fair value from period to period with the resulting change in value included in other income (expense).  The fair value of these financial instruments is discussed in Notes 4, 6 and 8.   
 
 
F-9

 
  
Clinical Study Activities and Other Expenses from Third-Party Contract Research Organizations
 
A significant amount of the Company’s research and development activities related to clinical study activity are conducted by various third parties, including contract research organizations, which may also provide contractually defined administration and management services. Expense incurred for these contracted activities are based upon a variety of factors, including actual and estimated patient enrollment rates, clinical site initiation activities, labor hours and other activity-based factors. On a regular basis, the Company’s estimates of these costs are reconciled to actual invoices from the service providers and adjustments are made accordingly.

Pursuant to a clinical trial research agreement with the German High-Grade Lymphoma Study Group, the Company agreed to provide support for a Phase 3 trial of Marqibo in elderly patients with newly diagnosed aggressive NHL conducted in Germany.  Under the terms of the agreement, the Company is obligated to provide supplies of Marqibo for the study as well as funding for a portion of the total financial costs of the study.  These costs are based upon the achievement of certain milestones related to patient enrollment and data provision. These payments are accrued for upon the achievement of patient enrollment and data provision milestones or when the achievement of such milestones becomes probable.  Milestone payments are expensed in the period the milestone is reached.  The Company recorded $0.1 million in research and development expense in connection with the Phase 3 clinical trial for the twelve months ended December 31, 2012.

The Company also entered into an agreement with Mayo Clinic pursuant to which Mayo Clinic is sponsoring and conducting a Phase 2 clinical trial of the Company’s MTL product candidate.  The Company’s primary obligation is limited to the provision of MTL for patients enrolled in the study.  The Company recorded less than $0.1 million in research and development expense in connection with the Phase 2 clinical trial for the twelve months ended December 31, 2012.

In November 2011, the Company entered into an agreement with Pharmaceutical Research Associates (PRA), Inc., a global clinical research organization, to initiate its global Phase 3 confirmatory study of Marqibo, named HALLMARQ, in the treatment of patients 60 years of age or older with newly diagnosed ALL. The November 2011 agreement was subsequently amended to reduce the scope of PRA’s services. The U.S. portion of the clinical trial is primarily being conducted by the Company, while PRA has conducted an international site feasibility study.  The Company also entered into an agreement with PPD, a leading global contract research organization providing drug discovery, development, and lifecycle management services, to administer central laboratory services for HALLMARQ.  The Company recorded $1.4 million in research and development expense in connection with the HALLMARQ trial for the twelve months ended December 31, 2012.

In March 2012, the Company entered into an investigator-initiated clinical trial research agreement with The University of Texas M.D. Anderson Cancer Center (“MDACC”), whereby the Company agreed to provide Marqibo to study the safety and efficacy of Marqibo in certain clinical trial research entitled “Hyper-CVAD with Liposomal Vincristine (Hyper-CMAD) in Acute Lymphoblastic Leukemia.”  The study is designed to evaluate whether intensive chemotherapy (Hyper-CVAD therapy) given in combination with Marqibo, in addition to rituximab for patients who are CD20 positive and/or imatinib or dasatinib for patients with the Philadelphia (Ph) chromosome, can effectively treat ALL or lymphoblastic lymphoma.

Share-Based Compensation
 
The Company accounts for share-based compensation in accordance with FASB ASC Topic 718, Compensation – Stock Compensation.  The Company has adopted a Black-Scholes-Merton model to estimate the fair value of stock options issued and the resultant expense is recognized in the operating expense for each reporting period.  Refer to Note 5 for further information regarding the required disclosures related to share-based compensation.
 
Income Taxes
 
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between financial statement carrying amounts of existing assets and liabilities, and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

Computation of Net Gain/(Loss) per Common Share
 
Basic net gain or loss per common share is calculated by dividing net loss by the weighted-average number of common shares outstanding for the period. Diluted net income per share is calculated using the Company’s weighted-average outstanding common shares including the dilutive effect of stock awards as determined under the treasury stock method and the dilutive effect of convertible preferred stock as determined under the if converted method. Diluted net loss per common share is the same as basic net loss per common share, since potentially dilutive securities from stock options, stock warrants and restricted stock would have an anti-dilutive effect because the Company incurred a net loss during each period presented. Refer to Note 7.
 
F-10

 

NOTE 3.  FACILITY AGREEMENT

On October 30, 2007, the Company entered into a Facility Agreement (the “Facility Agreement”) with certain affiliates of Deerfield Management (collectively, “Deerfield”), pursuant to which Deerfield agreed to loan to the Company up to $30 million.  The Facility Agreement requires, among other things, that the Company comply with all regulatory agency requirements and the requirements of the Company’s license agreements. The Company is also prohibited from disposing of certain assets related to certain product candidates the Company is currently developing.  In accordance with and upon entering into the Facility Agreement, the Company paid a loan commitment fee of $1.1 million to Deerfield.  The Company has drawn down an aggregate of $27.5 million since October 30, 2007, of which the entire amount was outstanding at December 31, 2012. There are no additional draws available under the Facility Agreement. The effective interest rate on the $27.5 million notes payable, including discount on debt, is approximately 14.5%.  As of December 31, 2012, the Company had accrued $0.7 million in interest payable, which was paid in January 2013. In connection with the Facility Agreement, the Company recorded interest expense of $3.8 million and $3.6 million for the twelve months ended December 31, 2012 and 2011, respectively.  Pursuant to a Security Agreement dated October 30, 2007, the Company’s obligations under the Facility Agreement are secured by all of its assets.

The fair value of the loan payable as of December 31, 2012 was $17.8 million. This fair value measurement is classified as Level 3 because such measurement is based upon unobservable inputs that reflect the Company’s best estimate of what hypothetical market participants would use to determine a transaction price for the fair value of the liability.
 
First Amendment to the Facility Agreement

Under the original terms of the Facility Agreement, all outstanding indebtedness was required to be repaid in full on October 30, 2013.  However, on June 7, 2010, the Company and Deerfield entered into an amendment to the Facility Agreement that, among other terms, extended the maturity date of the outstanding principal to June 30, 2015.  In accordance with FASB ASC Topic 470, Debt, a debt modification is considered extinguishment if the present values, calculated using the pre-modification effective interest rate, of pre- and post-modification cash flows exceeds 10%. The Company deemed this modification unsubstantial as the change in the present value of cash flows related to the payment of interest and principal was less than 10%.

Second Amendment to the Facility Agreement

In connection with the entry into the 2012 Investment Agreement, on January 9, 2012, the Company and Deerfield entered into a Second Amendment to Facility Agreement (the “Second Amendment to Facility Agreement”).  Among other items, pursuant to the Second Amendment to Facility Agreement, the Company agreed to satisfy its obligation under the Facility Agreement to make quarterly interest payments for the quarters ended December 31, 2011, March 31, 2012, June 30, 2012 and September 30, 2012, by issuing a whole number of shares of Series A-2 Preferred determined by dividing the amount of the interest payments payable to each Deerfield affiliate for each quarterly period by $100.  The Company evaluated this debt modification pursuant to FASB ASC Topic 470, and deemed this modification unsubstantial. Since the pre- and post-modification debt can be prepaid at the Company’s option at any time without penalty, the impact was limited to the difference between the fair values of the Series A-2 Preferred issued to settle accrued interest and future interest payments, which was less than 10% of the carrying value of debt as of January 9, 2012.

On January 9, 2012, in accordance with the terms of the Second Amendment to the Facility Agreement, the Company satisfied its interest payment obligation in the aggregate amount of $0.7 million for the quarter ended December 31, 2011, by issuing an aggregate of 6,826 shares of Series A-2 Preferred to Deerfield and paying cash in lieu of fractional shares in the aggregate amount of $153.42.  On March 30, 2012, the Company satisfied its interest payment obligation in the aggregate amount of $0.7 million for the quarter ended March 31, 2012, by issuing an aggregate of 6,752 shares of Series A-2 Preferred to Deerfield and paying cash in lieu of fractional shares in the aggregate amount of $132.19.  On June 29, 2012, the Company satisfied its interest payment obligation in the aggregate amount of $0.7 million for the quarter ended June 30, 2012, by issuing an aggregate of 6,752 shares of Series A-2 Preferred to Deerfield and paying cash in lieu of fractional shares in the aggregate amount of $132.19. On September 28, 2012, the Company satisfied its interest payment obligation in the aggregate amount of $0.7 million for the quarter ended September 30, 2012, by issuing an aggregate of 6,826 shares of Series A-2 Preferred to Deerfield and paying cash in lieu of fractional shares in the aggregate amount of $153.42.

Discount on Debt. The Company issued certain warrants to Deerfield as part of the Facility Agreement.  The fair value of these warrants when issued was $6.0 million.  The total value of the warrants was recorded as a discount on the note payable with this discount amortized over the life of the loan agreement, through June 2015.  As of December 31, 2012, the remaining debt discount is approximately $2.7 million.

Summary of Notes Payable. From November 1, 2007 through May 20, 2009, the Company drew down $27.5 million of the $30.0 million in total loan proceeds available under the Facility Agreement. The Company is not required to pay back any portion of the principal amount until June 30, 2015.  The table below is a summary of the change in carrying value of the notes payable, including the discount on debt for the twelve months ended December 31, 2012 and 2011:

($ in thousands)
 
Carrying
Value at
January 1,
   
Gross
Borrowings
Incurred
   
Debt
Discount
Incurred
   
Amortized
Discount
   
Carrying
Value at
December 31,
 
2012
                             
Notes payable
 
$
27,500
   
$
   
$
   
$
   
$
27,500
 
Discount on debt
   
(3,467)
     
     
     
800
     
(2,667)
 
Carrying value
 
$
24,033
                           
$
24,833
 
 
 
F-11

 

($ in thousands)
 
Carrying
Value at
January 1,
   
Gross
Borrowings
Incurred
   
Debt
Discount
Incurred
   
Amortized
Discount
   
Carrying
Value at
December 31,
 
2011
                             
Notes payable
 
$
27,500
   
$
   
$
   
$
   
$
27,500
 
Discount on debt
   
(4,160)
     
     
     
693
     
(3,467)
 
Carrying value
 
$
23,340
                           
$
24,033
 


A summary of the debt issuance costs and changes during the periods ending December 31, 2012 and 2011 is as follows:
 
 
 
Deferred
Transaction
Costs on
January 1,
   
Period
Amortized
Deferred
Transaction
Costs
   
Deferred
Transaction
Costs on
December 31,
 
($ in thousands)
                 
2012
 
$
751
   
$
(234)
   
$
517
 
                   
                   
($ in thousands)
                 
2011
  $ 905     $ (154 )   $ 751  
 
NOTE 4.  REDEEMABLE CONVERTIBLE PREFERRED STOCK
 
Private Placement of Preferred Stock 

2010 Investment Agreement

On June 7, 2010, the Company entered into an Investment Agreement (the “2010 Investment Agreement”), with Warburg Pincus Private Equity X, L.P. and Warburg Pincus X Partners, L.P. (collectively, “Warburg Pincus”) and Deerfield Private Design Fund, L.P., Deerfield Private Design International, L.P., Deerfield Special Situations Fund, L.P., and Deerfield Special Situations Fund International Limited (collectively, “Deerfield,” and together with Warburg Pincus, the “Purchasers”).  Pursuant to the terms of the agreement, on June 7, 2010, the Company issued and sold to the Purchasers an aggregate of 400,000 shares of Series A-1 Preferred at a per share purchase price of $100 for an aggregate purchase price of $40 million.
 
The 2010 Investment Agreement required that the Company seek approval of its stockholders to amend the Company’s certificate of incorporation to:  (i) increase the authorized number of shares of Common Stock, (ii) effect a reverse split of its Common Stock at a ratio to be agreed upon with the Purchasers, and (iii) provide that the number of authorized shares of Common Stock may be increased or decreased by the affirmative vote of the holders of a majority of the issued and outstanding Common Stock and preferred stock, voting together as one class, notwithstanding the provisions of Section 242(b)(2) of the Delaware General Corporation Law (collectively, the “2010 Stockholder Approval”).  The 2010 Stockholder Approval was obtained at a special meeting of the Company’s stockholders on September 2, 2010. As a result of the Company obtaining the 2010 Stockholder Approval and filing the related certificate of amendment to its certificate of incorporation with the Secretary of State of Delaware on September 7, 2010, the Company and the Purchasers conducted a second closing under the 2010 Investment Agreement on September 10, 2010 (the “Second Closing”), resulting in the issuance of an additional 12,562 shares of Series A-1 Preferred in satisfaction of the accretion that had accrued on the original 400,000 shares since June 7, 2010 based upon an initial accretion rate of 12% per annum.

The 2010 Investment Agreement also provided that the Purchasers had the right, but not the obligation, to make additional purchases of shares of the Company’s preferred stock.  However, such right was eliminated pursuant to an amendment to the 2010 Investment Agreement that the Company entered into with the Purchasers in connection with its entry into a second Investment Agreement dated January 9, 2012 (the “2012 Investment Agreement”), the terms of which are discussed below under the caption “2012 Investment Agreement.”
 
 
F-12

 

2012 Investment Agreement
 
On January 9, 2012, the Company and the Purchasers entered into the 2012 Investment Agreement.   Pursuant to the terms of the agreement, on January 9, 2012, the Company issued and sold to the Purchasers an aggregate of 110,000 shares of Series A-2 Preferred at a per share purchase price of $100 for an aggregate purchase price of $11 million.  The 2012 Investment Agreement also provides that, until the first anniversary of the Company’s receipt of marketing approval from the FDA for any of its product candidates, Warburg Pincus may elect to purchase, and Deerfield may elect to participate in the purchase of, up to 600,000 shares of Series A-3 Preferred at a purchase price of $100 per share for an aggregate purchase price of $60 million, in one or more tranches of at least 50,000 shares of Series A-3 Preferred per tranche (such minimum number of shares per tranche, the “Minimum Series A-3 Additional Investment”).  In the event of a liquidation, change of control, or sale of substantially all of the Company’s assets, that occurs prior to the issuance of the maximum number of shares of Series A-3 Preferred that are issuable under the agreement, the 2012 Investment Agreement provides that the Purchasers may elect to receive an amount equal to the excess of the fair market value of the unissued shares of Series A-3 Preferred over the aggregate purchase price of such shares, as if the Purchasers had purchased such shares of Series A-3 Preferred immediately prior to such liquidation, change of control, or sale of substantially all of the Company’s assets.  As of March 29, 2012, the total amount payable to the Purchasers upon liquidation of the company was approximately $86 million, and the total amount payable upon a change of control or sale of substantially all of the Company’s assets was approximately $136 million.
 
Because the number of authorized shares of common stock was insufficient to allow for complete conversion of all Series A-2 Preferred and Series A-3 Preferred, the 2012 Investment Agreement required the Company to seek an amendment to the Company’s Amended and Restated Certificate of Incorporation to increase the number of authorized shares of its common stock from 350 million to 600 million (the “2012 Stockholder Approval”).  To be approved, the proposal required the affirmative vote of the holders of a majority of (i) the outstanding shares of the Company’s capital stock voting together as a single class, and (ii) the outstanding shares of the Company’s Series A-1 Convertible Preferred Stock voting as a separate class. The 2012 Stockholder Approval was obtained at a special meeting of the Company’s stockholders on April 5, 2012.  Following receipt of the 2012 Stockholder Approval, the Company filed the related certificate of amendment to its certificate of incorporation (the “Charter Amendment”) with the Secretary of State of Delaware on April 5, 2012.
 
By effecting the Charter Amendment on or before July 9, 2012, the terms of the Series A-2 Preferred and any shares of Series A-3 Preferred that may be issued in the future pursuant to the 2012 Investment Agreement will remain more Company-favorable than the adjusted terms that would have taken effect after July 9, 2012 if the Charter Amendment had not yet been effected.  In addition, while the Company did not previously have a sufficient number of authorized shares of Common Stock available for issuance upon conversion of the entire 600,000 shares of Series A-3 Preferred that are issuable under the 2012 Investment Agreement, the increase in the number of authorized shares pursuant to the Charter Amendment will allow the Company to fully satisfy the conversion rights of the Series A-3 Preferred.
 
Amendment to 2012 Investment Agreement; Additional Investments.  On July 3, 2012, the Company and the Purchasers entered into Amendment No. 1 to the 2012 Investment Agreement, pursuant to which the Minimum Series A-3 Additional Investment was reduced from 50,000 shares of Series A-3 Preferred to 30,000 shares of Series A-3 Preferred.  Also on July 3, 2012, pursuant to the terms of the 2012 Investment Agreement, as amended, the Company issued and sold to the purchasers an aggregate of 30,000 shares of Series A-3 Preferred at a price per share of $100, for aggregate gross proceeds of $3.0 million.  On August 17 and November 14, 2012, pursuant to the terms of the 2012 Investment Agreement, as amended, the Company issued and sold to the investors 60,000 shares and 30,000 shares, respectively, of Series A-3 Preferred at a price per share of $100, for aggregate gross proceeds of $9.0 million.  In addition, on January 11, 2013, pursuant to the terms of the 2012 Investment Agreement, as amended, the Company issued and sold to the investors an aggregate of 60,000 shares of Series A-3 Preferred at a price per share of $100, for aggregate gross proceeds of $6.0 million.
 
Terms of the Preferred Shares
 
Series A-1 Preferred
 
Following receipt of the 2010 Stockholder Approval, the Company and the Purchasers conducted a second closing under the 2010 Investment Agreement on September 10, 2010.  As a result of the Second Closing, the terms of the Series A-1 Preferred were adjusted to have the following material terms:

 
·
the stated value of the Series A-1 Preferred Stock, initially $100 per share, accretes at a rate of 9% per annum for a five-year term, compounded quarterly, and following such five-year term, the holders are thereafter entitled to cash dividends at 9% of the accreted stated value per annum, payable quarterly;

 
·
each share of Series A-1 Preferred Stock is convertible into shares of the Company’s Common Stock at a conversion price of $0.736 per share;

 
·
upon a liquidation of the Company, holders of the Series A-1 Preferred would be entitled to receive a liquidation preference per share equal to the greater of (i) 100% of the then-accreted value of the Series A-1 Preferred and (ii) the amount which the holder would have received if the Series A-1 Preferred Stock had been converted into common stock immediately prior to the liquidation.  Similar rights would apply upon any change of control or sale of substantially all of the Company’s assets (although the liquidation preference would be calculated assuming the liquidation occurred on the fifth anniversary of the date of issuance).
 
 
F-13

 
 
During the period prior to the Second Closing, the Series A-1 Preferred was subject to the following initial terms:

 
·
the stated value of the Series A-1 Preferred, initially $100 per share, accreted at a rate of 12% per annum;

 
·
each share of Series A-1 Preferred was convertible into shares of the Company’s Common Stock at a conversion price of $0.5152 per share, subject to the limitation on the number of shares of Common Stock then available for issuance;

 
·
the Series A-1 Preferred was redeemable at the holders’ election any time after December 7, 2010, at a redemption price equal to the greater of (i) 250% of the then-accreted value of the Series A-1 Preferred Stock, plus any unpaid dividends accrued thereon and (ii) market value of common stock shares the holder would receive if the Series A-1 Preferred Stock are converted into common stock immediately prior to the redemption; and

 
·
upon a liquidation of the Company, holders of the Series A-1 Preferred would have been entitled to receive a liquidation preference per share equal to the greater of (i) 250% of the then-accreted value of the Series A-1 Preferred and (ii) the amount which the holder would have received if the Series A-1 Preferred Stock had been converted into common stock immediately prior to the liquidation.  Similar rights would have applied upon any change of control or sale of substantially all of the Company’s assets (although the liquidation preference would have been calculated assuming the liquidation occurred on the seventh anniversary of the date of issuance).

Series A-2 Preferred

As a result of the Company obtaining the 2012 Stockholder Approval, the Series A-2 Preferred is subject to the following material terms, among others:

 
·
The conversion price of the Series A-2 Preferred is initially $0.30 per share (subject to adjustment in certain circumstances);

 
·
The stated value of each share of Series A-2 Preferred accretes at a rate of 9% per annum, compounded quarterly, for a five-year term; thereafter, cash dividends are payable at a rate of 9% of the accreted stated value per annum, payable quarterly;

 
·
Upon the occurrence and during the continuance of certain material breaches by the Company of its obligations under the 2012 Investment Agreement, the amended and restated certificate of designation filed with the Secretary of State of Delaware on January 9, 2012 (the “Series A-2 Certificate”), and related transaction agreements (referred to in the Series A-2 Certificate as “special triggering events”), the accretion rate and the dividend rate on the Series A-2 Preferred will increase by 3% per annum, compounded quarterly; and

 
·
Upon any liquidation of the Company, holders of the Series A-2 Preferred are entitled to receive a liquidation preference per share equal to the greater of (i) 100% of the then-accreted value of the Series A-2 Preferred and (ii) the amount that the holder would have received if the Series A-2 Preferred had been converted into Common Stock at the conversion price immediately prior to the liquidation.  Similar rights would apply upon any change of control or sale of substantially all of the Company’s assets (although the liquidation preference would be calculated assuming the liquidation occurred on the fifth anniversary of the date of issuance).

Series A-3 Preferred

Pursuant to the terms of the 2012 Investment Agreement, the Purchasers have the right, but not an obligation, to purchase up to 600,000 shares of Series A-3 Preferred, at a purchase price of $100 per share, at any time until the first anniversary of the Company’s receipt of marketing approval from the FDA for any of its product candidates.  As noted above, on July 3, 2012, the Company and the Purchasers entered into Amendment No. 1 to the 2012 Investment Agreement, pursuant to which the Minimum Series A-3 Additional Investment was reduced from 50,000 to 30,000 shares of Series A-3 Preferred. Also on July 3, 2012, pursuant to the terms of the 2012 Investment Agreement, as amended, the Company issued and sold to the purchasers an aggregate of 30,000 shares of Series A-3 Preferred at a price per share of $100, for aggregate gross proceeds of $3.0 million.  On August 17 and November 14, 2012, pursuant to the terms of the 2012 Investment Agreement, as amended, the Company issued and sold to the investors 60,000 shares and 30,000 shares, respectively, of Series A-3 Preferred at a price per share of $100, for aggregate gross proceeds of $9.0 million.  In addition, on January 11, 2013, pursuant to the terms of the 2012 Investment Agreement, as amended, the Company issued and sold to the investors an aggregate of 60,000 shares of Series A-3 Preferred at a price per share of $100, for aggregate gross proceeds of $6.0 million. The terms of the Series A-3 Preferred are substantially identical to the terms of the Series A-1 Preferred and the Series A-2 Preferred except that the initial conversion price applicable to the Series A-3 Preferred is $0.35 per share (compared to $0.736 for the Series A-1 Preferred and $0.30 for the Series A-2 Preferred).  The Series A-3 Preferred, with respect to both dividend rights and rights upon a liquidation, change of control, or sale of substantially all of the Company’s assets, ranks senior to all junior stock, including the Company’s common stock, and on parity with all parity stock, including the Series A-1 Preferred and Series A-2 Preferred.  In addition, in the event of a liquidation, change of control, or sale of substantially all of the Company’s assets that occurs prior to the issuance of the maximum number of shares of Series A-3 Preferred that are issuable under the 2012 Investment Agreement, the Purchasers will be entitled to receive an amount equal to the excess of the fair market value of the unissued shares of Series A-3 Preferred over the aggregate purchase price of such shares, as further described above.
 
 
F-14

 

Accounting Treatment
 
Series A-1 Preferred

Due to certain contingent redemption features of this instrument, the Company classified the 400,000 shares of Series A-1 Preferred sold on June 7, 2010 in the mezzanine section (between equity and liabilities) on the accompanying balance sheet.  The Company allocated the proceeds from the June 2010 financing between Series A-1 Preferred and the Purchasers’ rights to purchase additional shares of Series A-1 and A-2 Preferred in connection with the Additional Investments and Subsequent Investments (see below).  The Company recorded the residual value of the Series A-1 Preferred as $29.9 million on June 7, 2010, net of transaction costs of $1.4 million and $8.7 million allocated to the rights to purchase Series A-1 and Series A-2 Preferred in the future.  When the 400,000 shares of Series A-1 Preferred were issued on June 7, 2010, approximately 121,000 shares were convertible due to the limited remaining authorized shares of common stock available for conversion.  Following receipt of the 2010 Stockholder Approval, the remaining 279,000 shares of Series A-1 Preferred became convertible at the Second Closing.

At the Second Closing on September 10, 2010, the Company issued an additional 12,562 shares of Series A-1 Preferred to the Purchasers in satisfaction of the accretion to the stated value of the Series A-1 Preferred from June 7, 2010, when the shares were issued through the Second Closing.  The carrying value of the Series A-1 Preferred was increased by the estimated fair value of these shares on September 10, 2010, which was $0.7 million.  The Company reduced stockholder’s equity by the same amount.  All of these additional shares of Series A-1 Preferred were convertible upon issuance.  As of December 31, 2012, the outstanding shares of Series A-1 Preferred, including total value accreted since the issuance date of such shares were convertible into approximately 68.8 million shares of common stock.

Series A-2 Preferred Issued on January 9, 2012

On January 9, 2012, the Company issued and sold to the Purchasers an aggregate of 110,000 shares of Series A-2 Preferred at a per share purchase price of $100 for an aggregate purchase price of $11.0 million. Pursuant to the Second Amendment to the Facility Agreement, on the same date, the Company also issued 6,826 shares of Series A-2 Preferred to Deerfield to settle interest accrued as of and for the quarter ended December 31, 2011.  Due to certain contingent redemption features of this instrument, the Company classified the 116,826 shares of Series A-2 Preferred sold on January 9, 2012 in the mezzanine section (between equity and liabilities) on the accompanying balance sheet. Total proceeds received on January 9, 2012 pursuant to the 2012 Investment Agreement and Second Amendment to the Facility Agreement (collectively, “January 2012 financing”) are equal to the sum of (a) $11.0 million of cash received, (b) fair value of eliminated rights to purchase Series A-1 and A-2 Preferred of $2.8 million, and (c) settled interest accrued under the Facility Agreement for the quarter ended December 31, 2011 of $0.7 million. The Company allocated the proceeds from the January 2012 financing between Series A-2 Preferred and the Purchasers’ rights to purchase up to 600,000 shares of Series A-3 Preferred.  The Company recorded the residual value of the Series A-2 Preferred as $3.3 million on January 9, 2012, net of transaction costs of $0.8 million and $10.3 million allocated to the rights to purchase Series A-3 Preferred.      

Series A-2 Preferred Issued to Settle Interest Payments to Deerfield

In connection with the entry into the 2012 Investment Agreement on January 9, 2012, the Company entered into a Second Amendment to the  Facility Agreement pursuant to which, among other things, the Company agreed to satisfy its obligation under the Facility Agreement to make quarterly interest payments for the quarters ended December 31, 2011, March 31, 2012, June 30, 2012 and September 30, 2012, by issuing a whole number of shares of Series A-2 Preferred determined by dividing the amount of the interest payments payable to each Deerfield entity for each quarterly period by $100.  Accordingly, as described above, the Company issued an aggregate of 6,826 shares of Series A-2 Preferred to Deerfield in satisfaction of interest accrued under the Facility Agreement for the quarter ended December 31, 2011. As noted above, the fair value of the interest settled was included in the total proceeds allocated between the Series A-2 Preferred and the Purchasers’ rights to purchase up to 600,000 shares of Series A-3 Preferred. On March 30, 2012, the Company issued an aggregate of 6,752 shares of Series A-2 Preferred in satisfaction of interest accrued under the Facility Agreement for the quarter ended March 31, 2012.  The Company recorded the book value of interest settled, net of cash payment in lieu of fractional shares, to the Series A-2 Preferred, which was $0.7 million.  On June 29, 2012, the Company issued an aggregate of 6,752 shares of Series A-2 Preferred in satisfaction of interest accrued under the Facility Agreement for the quarter ended June 30, 2012.  The Company recorded the book value of interest settled, net of cash payment in lieu of fractional shares, to the Series A-2 Preferred, which was $0.7 million.  On September 28, 2012, the Company issued an aggregate of 6,826 shares of Series A-2 Preferred in satisfaction of interest accrued under the Facility Agreement for the quarter ended September 30, 2012.  The Company recorded the book value of interest settled, net of cash payment in lieu of fractional shares, to the Series A-2 Preferred, which was $0.7 million.

As of December 31, 2012, the outstanding shares of Series A-2 Preferred, including total value accreted since the issuance date of such shares, were convertible into approximately 49.6 million shares of common stock.
 
 
F-15

 

Series A-3 Preferred

On July 3, 2012, the Company issued and sold to the Purchasers an aggregate of 30,000 shares of Series A-3 Preferred at a per share purchase price of $100 for an aggregate purchase price of $3.0 million. Additionally, On August 17 and November 14, 2012, pursuant to the terms of the 2012 Investment Agreement, as amended, the Company issued and sold to the investors 60,000 shares and 30,000 shares, respectively, of Series A-3 Preferred at a price per share of $100, for aggregate gross proceeds of $9.0 million.    Due to certain contingent redemption features of this instrument, the Company classified the 120,000 shares of Series A-3 Preferred sold on July 3, 2012, August 17, 2012, and November 14, 2012  in the mezzanine section (between equity and liabilities) on the accompanying balance sheet. The Company recorded the residual value of the Series A-3 Preferred as $11.9 million, net of transaction costs of $0.1 million. As of December 31, 2012, the outstanding shares of Series A-3 Preferred, including total value accreted since the issuance date of such shares, were convertible into approximately 35.4 million shares of common stock.    

Rights to Purchase Series A-1 and A-2 Preferred Stock

The Company determined that the Purchasers’ rights to purchase future shares of Series A-1 and A-2 Preferred Stock in connection with the Additional and Subsequent Investments under the 2010 Investment Agreement were freestanding instruments that are required to be classified as liabilities and carried at fair value. The treatment of these instruments as a liability was due to certain redemption features of the underlying Preferred Stock. As discussed above, these rights were eliminated on January 9, 2012 pursuant to an amendment to the 2010 Investment Agreement that the Company entered into with the Purchasers in connection with the 2012 Investment Agreement.

Prior to its amendment on January 9, 2012, the 2010 Investment Agreement provided that the Purchasers had the right, but not the obligation, to make additional investments in the Company as follows:

 
·
at any time prior to the date the Company receives marketing approval from the FDA for the first of its product candidates (“Marketing Approval Date”), the Purchasers were entitled to purchase up to an additional 200,000 shares of Series A-1 Preferred Stock at a purchase price of $100 per share for an aggregate purchase price of $20 million (“Additional Investment”); and

 
·
at any time beginning 15 days and within 120 days following the Marketing Approval Date, the Purchasers were entitled to purchase up to an aggregate of 400,000 shares of Series A-2 Convertible Preferred Stock at the stated value of $100 per share for an aggregate purchase price of $40 million (“Subsequent Investment”).

The value of the option to make Additional Investments and Subsequent Investments (see above) is estimated directly from the Black-Scholes-Merton model output.  Changes in the market price of the common stock would result in a change in the value of the option and impact the statement of operations. For example, a 10% increase in the market price of the common stock would cause the fair value of the warrants and the warrant liability to increase by approximately 10%.

The following table summarizes the fair value of the Purchasers’ rights to purchase additional shares of Series A-1 and Series A-2 Preferred Stock as of January 9, 2012 and December 31, 2011 and the changes in the valuation in the periods then ended. 

(In thousands)
 
Fair value at
January 1
   
Revaluation of rights
increase/(decrease)
   
Elimination of rights(1)
   
Fair value at
January 9
 
2012
                       
Rights to purchase preferred stock
 
$
1,772
   
$
1,007
   
$
(2,779)
   
$
 
 
(In thousands)
 
Fair value at
January 1
   
Revaluation of rights
increase/(decrease)
   
Elimination of rights
   
Fair value at
December 31
 
2011
                       
Rights to purchase preferred stock
 
$
5,131
   
$
(3,359)
   
$
   
$
1,772
 
 
 

(1)  The amendment to the 2010 Investment Agreement, executed concurrently with the 2012 Investment Agreement, terminated the Purchasers’ rights to purchase up to 200,000 shares of Series A-1 and up to 400,000 shares of Series A-2 Preferred Stock at $100 per share. The right was accounted for as a freestanding financial instrument liability and was re-measured to fair value at the end of each reporting period with the changes in fair value recognized in the Company’s statement of operations.  This right was replaced with the Purchasers’ rights to purchase Series A-3 shares as noted below.
 
 
F-16

 

The following table summarizes the assumptions used in applying the Black-Scholes-Merton option pricing model to determine the fair value of the liability related to the rights to purchase additional shares of Series A-1 Preferred and Series A-2 Preferred on January 9, 2012:
 
   
January 9, 2012
 
Rights to purchase future shares of Series A-1 and A-2 Preferred
     
Risk-free interest rate
   
0.04
%
Expected life (in years)
   
0.42
 
Volatility
   
1.20
 
Dividend Yield
   
8.8
%
Probability of FDA Approval
   
33
%

Rights to Purchase Series A-3 Preferred Stock

The 2012 Investment Agreement provides that, from the date of such agreement until the first anniversary of the Company’s receipt of marketing approval from the FDA for any of its product candidates, the Purchasers have the right, but not the obligation, to purchase up to an additional 600,000 shares of Series A-3 Preferred at a purchase price of $100 per share.

In accordance with FASB ASC Topic 480, Distinguishing Liabilities from Equity, the Company determined that the Purchasers’ rights to purchase future shares of Series A-3 Preferred are freestanding instruments that are required to be classified as liabilities and carried at fair value. The treatment of these instruments as a liability was due to certain redemption features of the underlying Preferred Stock.  The value of the option to purchase additional shares of Series A-3 Preferred is estimated directly from the Black-Scholes-Merton model output.
 
The Company recognized $18.1 million in total losses related to the revaluation of the rights to purchase shares of Series A-3 Preferred during the twelve months ended December 31, 2012.  As noted above, during the twelve months ended December 31, 2012, the Company sold and issued an aggregate of 120,000 shares of Series A-3 Preferred pursuant to the exercise of investors’ rights granted on January 9, 2012, resulting in a reduction of the fair value of the associated liability by $14.1 million.  Changes in the market price of the common stock would result in a change in the value of the option and impact the statement of operations. For example, a 10% increase in the market price of the common stock would cause the fair value of the warrants and the warrant liability to increase by approximately 10%.

The following table summarizes the fair value of the Purchasers’ rights to purchase shares of Series A-3 Preferred as of December 31, 2012 and the changes in the valuation in the twelve month period then ended. 

(In thousands)
 
Fair value
Value at
January 9(1)
   
Reduction of
liability due to exercise
   
Net change in
fair value of
liabilities
loss/(gain)
   
Fair
Value at
December 31
 
2012
                       
Investors’ right to purchase future shares of Series A-3 preferred stock
 
$
10,307
   
$
(14,103)
   
$
18,072
   
$
14,276
 
 
 

(1)  The initial valuation date of the option to purchase shares of Series A-3 Preferred is the date of the execution of the 2012 Investment Agreement with the Purchasers, or January 9, 2012.

The following table summarizes the assumptions used in applying the Black-Scholes-Merton option pricing model to determine the fair value of the liability related to the rights to purchase shares of Series A-3 Preferred during the period from January 9, 2012 to  December 31, 2012:
 
   
Twelve Months Ended December 31, 2012
 
Rights to purchase shares of Series A-3 Preferred
     
Risk-free interest rate
  0.04 -
0.17
%
Expected life (in years)
  0.20 -
0.58
 
Volatility
  0.95 -
1.20
 
Dividend Yield
  8.8 -
8.9
%
Probability of FDA Approval(1)
  33 -
75
%
 
 

(1)  Prior to the receipt of FDA approval for Marqibo, the valuation of the rights to purchase shares of Series A-3 Preferred was partially conditioned upon the likelihood of successful FDA approval. As such, a weighting reflecting management’s estimates of the probability of successful FDA approval was applied to the preliminary Black-Scholes-Merton option price at each valuation date. Following receipt of FDA approval for Marqibo, this input was eliminated from the Black-Scholes-Merton valuation model used to determine the option price at each valuation date.
 
 
F-17

 

Beneficial Conversion Feature

Because the conversion price at which shares of Series A-1 and A-2 Preferred are convertible into shares of common stock was less than the fair value of common stock at the respective dates when preferred stock was sold and issued, the in-the-money conversion feature (Beneficial Conversion Feature, or BCF) requires separate recognition and is measured at the intrinsic value (i.e., the amount of the increase in value that holders of Preferred Stock would realize upon conversion based on the value of the conversion shares, including all future potential conversion shares adjusted for accretion to the Preferred Stock, on the commitment date).  The BCF is limited to the proceeds allocated to Preferred Stock and is initially recorded as a discount to preferred shares and included as additional paid-in capital.  Because there is not a stated redemption date of the shares of the convertible Series A-1, A-2, and A-3 Preferred, the BCF is immediately accreted to the preferred shares as a deemed preferred stock dividend.  

·
Series A-1 Preferred: The Company recognized a BCF of $29.9 million related to the shares of Series A-1 Preferred issued on June 7, 2010.
·
Series A-2 Preferred: The Company recognized a BCF of $4.2 million related to the shares of Series A-2 Preferred issued on January 9, 2012 and $0.6 million related to the shares of Series A-2 Preferred issued on March 30, June 29, and September 28, 2012, all of which were accreted to the preferred shares as a deemed preferred stock dividend.
·
Series A-3 Preferred: The Company recognized a BCF of $10.5 million related to the shares of Series A-3 Preferred issued on July 3, 2012, August 17, 2012, and November 14, 2012.

The aggregate BCF recognized in connection with the issuance of Series A-1, A-2, and A-3 Preferred were all accreted to the preferred shares as a deemed preferred stock dividend and is included in the total value of the Series A Preferred of $47.9 million as of December 31, 2012.

Accretion on Preferred Stock

For the period from June 7, 2010 to September 10, 2010 (the date of the Second Closing under the 2010 Investment Agreement), the 400,000 shares of Series A-1 Preferred accreted value to the stated rate of $100 at an annual rate of 12%, compounded quarterly.  Upon the Second Closing, the 412,652 shares of Series A-1 Preferred accreted value to the stated rate of $100 at an annual rate of 9%, compounded quarterly.  The total accretable value of the Series A-1 Preferred from the transaction date through December 31, 2012 was $10.7 million, including $4.3 million for the twelve months ended December 31, 2012, respectively.  The total accretable value of the Series A-1 Preferred for the twelve months ended December 31, 2011 was $3.9 million.  The shares of Series A-2 Preferred accreted value to the stated rate of $100 at an annual rate of 9%, compounded quarterly. The total accretable value of the Series A-2 Preferred for twelve months ended December 31, 2012 was $1.1 million. The shares of Series A-3 Preferred accreted value to the stated rate of $100 at an annual rate of 9%, compounded quarterly. The total accretable value of the Series A-3 Preferred for the twelve months ended December 31, 2012 was $0.4 million.

The Company will not recognize the value of the accretion to the preferred stock until such time that it becomes probable that the shares of preferred stock will become redeemable.  The accretable value is included, for loss per share purposes only, as a dividend to holders of preferred stock and the loss attributable to holders of common stock is increased by the value of the accretion for the period.  In total, accretion on preferred stock accounts for $5.8 million and $3.9 million in deemed dividends to holders of preferred stock for the twelve months ended December 31, 2012 and 2011, respectively.

NOTE 5.  STOCKHOLDERS' DEFICIT

As a result of the one-for-four reverse stock split the Company implemented at the close of business on September 10, 2010 (the “Reverse Stock Split”), the number of resulting outstanding shares of common stock and share-based compensation awards was determined by dividing the number of outstanding shares and share-based compensation awards by four.  The resulting per share exercise price of outstanding stock options and warrants was determined by multiplying the exercise price prior to the Reverse Stock Split by four.  All historical share and per share amounts have been adjusted to reflect the Reverse Stock Split.

Stock Incentive Plans. As of December 31, 2012, the Company had three stockholder approved stock incentive plans under which it grants or has granted options to purchase shares of its common stock and restricted stock awards to employees: the 2010 Equity Incentive Plan (the “2010 Plan”), the 2004 Stock Incentive Plan (the “2004 Plan”) and the 2003 Stock Option Plan (the “2003 Plan”).   The Board of Directors, or the Chief Executive Officer when designated by the Board, is responsible for administration of the employee stock incentive plans and determines the term, exercise price and vesting terms of each option. In general, stock options issued under the current plans vest over a four-year period, subject to continued employment, and expire ten years from the date of grant. Additionally, the Company maintains the 2006 Employee Stock Purchase Plan (the “2006 Plan”), pursuant to which eligible employees may purchase shares of the Company’s newly-issued common stock.
 
 
F-18

 
 
On February 16, 2010, the Company’s Board of Directors adopted the 2010 Plan.  Under the 2010 Plan, the Board or a committee appointed by the Board may award nonqualified stock options, incentive stock options, restricted stock, restricted stock units, performance awards, and stock appreciation rights to participants.  Officers, directors, employees or non-employee consultants or advisors (including the Company’s subsidiaries and affiliates) are eligible to receive awards under the 2010 Plan. As of December 31, 2012, the total number of shares of common stock available for grants of awards to participants under the 2010 Plan was 1.2 million shares.  On February 17, 2012, the Company’s Board of Directors adopted an amendment to the 2010 Plan increasing the number of shares of the Company’s common stock issuable thereunder from 8.5 million to 10 million.  On January 21, 2013, the Company’s Board of Directors adopted an amendment to the 2010 Plan increasing the number of shares of the Company’s common stock issuable thereunder from 10 million to 12.5 million.  The Company intends for all future stock option awards to be issued under the 2010 Plan, with no additional awards being issued under the 2003 Plan or 2004 Plan.
 
Stock Options. The following table summarizes information about stock options outstanding at December 31, 2012 and December 31, 2011 and changes in outstanding options in the twelve months then ended, all of which are at fixed prices:

   
Number Of
Shares Subject To
Options Outstanding
(in 000’s)
   
Weighted Average
Exercise Price
Per Share
   
Weighted Average
Remaining
Contractual Term
(In Years)
 
Aggregate
Intrinsic Value
($ in 000’s)
 
                       
Outstanding January 1, 2011
   
6,749
   
$
1.32
           
                           
Options granted
   
302
   
$
.78
           
Options exercised
   
(72)
     
.69
             
Options cancelled
   
(948)
     
1.92
             
Outstanding December 31, 2011
   
6,031
   
$
1.20
     
8.3
   
$
2
 
                                 
Options granted
   
3,859
   
$
.88
                 
Options exercised
   
(161)
     
.61
                 
Options cancelled
   
(649)
     
2.14
                 
Outstanding December 31, 2012
   
9,080
   
$
1.01
     
8.1
   
$
3
 
Exercisable at December 31, 2012
   
4,161
   
$
1.34
     
7.4
   
$
3
 


     
Options Outstanding
   
Options Exercisable
 
Exercise Price
   
Number of
Shares
Subject to
Options
Outstanding
(in 000’s)
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Life of
Options
Outstanding
(years)
   
Number
of Options
Exercisable
(in 000’s)
   
Weighted
Average
Exercise
Price
 
$ 0.28   -   $ 0.77       5,286     $ 0.55       8.0       2,921     $ 0.57  
$ 0.78   -   $ 4.48       3,564       1.16       8.7       1,010       1.79  
$ 4.49   -   $ 9.20       198       6.72       3.6       198       6.72  
$ 9.21   -   $ 28.20       32       23.84       3.5       32       23.84  
                                                       
$ 0.28   -   $ 28.20       9,080     $ 1.01       8.1       4,161     $ 1.34  
 
The weighted-average grant date fair value of options granted during the twelve months ended December 31, 2012 and 2011 was $0.70 and $0.63, respectively.  During the years ended December 31, 2012 and 2011, the Company recorded share-based compensation cost from all equity awards to employees of $1.4 million and $1.0 million, respectively. 

The total intrinsic value of options exercised during the twelve months ended December 31, 2012 and 2011 was $0.1 million.

As of December 31, 2012, we estimate that there is $2.6 million in total, unrecognized compensation costs related to non-vested share-based awards, which is expected to be recognized over a weighted average period of 2.75 years.
 
 
F-19

 

Employee Stock Purchase Plan. The 2006 Plan allows employees to contribute a percentage of their gross salary toward the semi-annual purchase of shares of common stock. The price of each share will not be less than the lower of 85% of the fair market value of common stock on the last trading day prior to the commencement of the offering period or 85% of the fair market value of common stock on the last trading day of the purchase period. A total of 187,500 shares of common stock were initially reserved for issuance under the 2006 Plan.  On July 15, 2011, the Company’s Board of Directors approved an additional 150,000 shares of common stock available for issuance under the 2006 Plan. On July 12, 2012, the Board of Directors approved an amendment to the 2006 Plan increasing the number of shares of the Company’s common stock available for purchase thereunder by 400,000.  The Company also issued 10,751 shares of common stock on January 10, 2012 and 36,703 shares of common stock on July 5, 2012 pursuant to the 2006 Plan. The Company also issued 9,766 shares on January 8, 2013. As of the date of this Report, 500,474 shares of common stock are remaining under the 2006 Plan.

Assumptions. The following table summarizes the assumptions used in applying the Black-Scholes-Merton option pricing model to determine the fair value of new awards granted during the twelve months ended December 31, 2012 and 2011, respectively:
 
   
December 31,
 
   
2012
   
2011
 
Stock options
           
Risk-free interest rate
  0.63
1.43
%
  1.55
2.24
%
Expected life (in years)
  5.50
6.50
    5.50
6.02
 
Volatility
  1.00
1.16
    1.07
1.09
 
Dividend Yield
     
0
%
   
0
 
%
Employee stock purchase plan
                   
Risk-free interest rate
  0.06
0.61
%
  0.19
1.14
%
Expected life (in years)
  0.50
2.0
    0.50
2.0
 
Volatility
  1.07
1.89
    0.98
2.07
 
Dividend Yield
   
0
 
%
   
0
 
%
 
The Company estimates the fair value of each option award on the date of grant using the Black-Scholes-Merton option-pricing model and uses the assumptions as allowed by ASC 718, “Compensation – Stock Compensation .”  Through October 2010, as allowed by ASC 718-10-55, companies with a short period of publicly traded stock history, the Company’s estimate of expected volatility was based on the average expected volatilities of a sampling of other peer companies with similar attributes to it, including industry, stage of life cycle, size and financial leverage as well as the Company’s own historical data.  For options issued after October 2010, the Company used its own historical data to estimate expected volatility.  As the Company has so far only awarded “plain vanilla” options as described by the SEC’s Staff Accounting Bulletin Topic No. 14, “Share-Based Payment”, it used the “simplified method” for determining the expected life of the options granted. The Company will continue to use the “simplified method” under certain circumstances, which it will continue to use as it does not have sufficient historical data to estimate the expected term of share-based awards.  The risk-free rate for periods within the contractual life of the option is based on the U.S. treasury yield curve in effect at the time of grant valuation. ASC 718 does not allow companies to account for option forfeitures as they occur.  Instead, estimated option forfeitures must be calculated upfront to reduce the option expense to be recognized over the life of the award and updated upon the receipt of further information as to the amount of options expected to be forfeited. Based on our historical information, the Company currently estimates that 23% annually of its stock options awarded with annual vesting mechanisms will be forfeited.
 
The Company has elected to track the portion of its federal and state net operating loss carryforwards attributable to stock option benefits in a separate memo account.  Therefore, these amounts are no longer included in our gross or net deferred tax assets. The benefit of these net operating loss carryforwards will only be recorded in equity when they reduce cash taxes payable.
 
Common Stock Warrants.  As of December 31, 2012, the Company had outstanding warrants to purchase an aggregate of approximately 2.0 million shares of its common stock, all of which were available for exercise.

At December 31, 2012, there are outstanding “Series A” warrants to purchase an aggregate of 0.6 million shares of common stock and “Series B” warrants to purchase an aggregate of 1.1 million shares of common stock, all of which were originally issued in connection with the Company’s October 2009 private placement.  As a result of an anti-dilution provision contained in the Series B warrants, the exercise price of the Series B warrants was reduced to $1.20 per share after giving effect to the issuance of Series A-1 Preferred on June 7, 2010. A total of 0.2 million warrants are outstanding in connection with the transactions contemplated by the 2010 and 2012 Investment Agreements.

In May 2012, an investor exercised Series A warrants to purchase 15,000 shares of common stock.  The Company received total cash proceeds of $600 from the exercise.
 
 
F-20

 
 
The following table summarizes the warrants outstanding as of December 31, 2012 and 2011 and the changes in outstanding warrants in the twelve month periods then ended:

 
 
Number Of
Shares Subject
To Warrants
Outstanding
(in 000’s)
   
Weighted-Average
Exercise Price
 
Warrants outstanding January 1, 2011
   
2,037
   
$
2.99
 
Warrants granted
   
183
     
0.41
 
Warrants cancelled
   
--
     
--
 
Warrants exercised
   
(253)
     
1.20
 
Warrants outstanding December 31, 2011
   
1,967
   
$
0.76
 
Warrants granted
   
--
     
--
 
Warrants cancelled
   
--
     
--
 
Warrants exercised
   
(15)
     
0.04
 
Warrants outstanding December 31, 2012
   
1,952
   
$
0.76
 

NOTE 6.  WARRANT LIABILITIES

The Company had outstanding warrants to purchase 1.7 million shares of common stock that were classified as liabilities and 0.2 million classified as equity on the balance sheet as of December 31, 2012.  The fair value of the warrants classified as liabilities was $0.6 million and $0.5 million on December 31, 2012 and December 31, 2011, respectively.

During the twelve months ended December 31, 2012, the Company recorded $0.1 million in total losses related to increased valuation of the warrant liability, offset partially by a reduction of less than $0.1 million for the reduction of liabilities related to the redemption of the Series A warrants. In May 2012, the Company issued 15,000 shares of common stock pursuant to the exercise of the Series A warrants.

During the twelve months ended December 31, 2011, the Company recorded less than $0.1 million in total losses related to increased valuation of the warrant liability, offset partially by a reduction of approximately $0.3 million for the reduction of liabilities related to the redemption of the Series B warrants.

The following table summarizes the fair value of warrants classified as liabilities and outstanding as of December 31, 2012 and 2011 and the changes in the valuation in the twelve month periods then ended:

($ in thousands)
 
Fair value
Value at
January 1,
   
Reduction of liability due to redemption or exercise
   
Net change in fair value of liabilities
   
Fair
Value at
December 31,
 
2012
                       
Warrants classified as liabilities
 
$
502
   
$
(12)
   
$
73
   
$
563
 
                                 
2011
                               
Warrants classified as liabilities
 
$
713
   
$
(252)
   
$
41
   
$
502
 

       
All warrants that were classified as liabilities as of December 31, 2012 and December 31, 2011 were issued to various investors pursuant to the October 2009 private placement.  The warrants issued were Series A and Series B Warrants.  The Company classified these warrants as liabilities based on certain cash settlement provisions available to the warrant holders upon certain reorganization events in the equity structure, including mergers.  Specifically, in the event the Company is acquired in an all cash transaction, a transaction whereby it ceases to be a publicly held entity under Rule 13e-3 of the Securities Exchange Act of 1934, or a reorganization involving an entity not traded on a national securities exchange, the warrant holders may elect to receive an amount of cash equal to the value of the warrants as determined in accordance with the Black-Scholes-Merton option pricing model with certain defined assumptions.  At any time when the resale of the warrant shares is not covered by an effective registration statement under the Securities Act of 1933, the warrant holders can elect a cashless exercise of all or any portion of shares outstanding under a warrant, in which case they would receive a number of shares with a value equal to the intrinsic value on the date of exercise of the portion of the warrant being exercised.  Additionally, warrant holders have certain registration rights and the Company would be obligated to make penalty payments to them under certain circumstances if we were unable to maintain effective registration of the shares underlying the warrants with the SEC.

Assumptions. The following table summarizes the assumptions used in applying the Black-Scholes-Merton option pricing model to determine the fair value of the liability related to warrants outstanding during the twelve months ended December 31, 2012 and 2011, respectively:

   
Twelve Months Ended December 31,
 
   
2012
   
2011
 
Warrant liabilities
           
Risk-free interest rate
  0.36
1.04
%
  0.83
2.24
%
Expected life (in years)
  3.77
4.52
    4.77
5.50
 
Volatility
  1.06
1.19
    0.98
1.04
 
Dividend Yield
   
0
 
%
   
0
 
%
 
 
F-21

 

For additional details on the change in value of these liabilities, see Note 8.  Changes in the market price of the common stock or volatility would result in a change in the value of the warrants and impact the statement of operations. For example, a 10% increase in the market price of the common stock would cause the fair value of the warrants and the warrant liability to increase by approximately 10%.

NOTE 7.  EARNINGS PER SHARE

Basic net gain or loss per common share is calculated by dividing net loss by the weighted-average number of common shares outstanding for the period. Diluted net income per share is calculated using the Company’s weighted-average outstanding common shares including the dilutive effect of stock awards as determined under the treasury stock method and the dilutive effect of convertible preferred stock as determined under the if converted method. Diluted net loss per common share is the same as basic net loss per common share, since potentially dilutive securities from stock options, stock warrants and restricted stock would have an anti-dilutive effect because the Company incurred a net loss during each period presented.

Basic and diluted net loss per share was determined as follows:

   
Twelve Months Ended
December 31,
 
(in thousands, except per share amounts)
 
2012
   
2011
 
Net loss
 
$
(43,700)
   
$
(18,822)
 
Deemed dividends attributable to preferred stock in connection with accretion
   
(5,847)
     
(3,948)
 
Deemed dividends attributable to preferred stock in connection with embedded beneficial conversion features
   
(15,237)
     
--
 
                 
Net loss applicable to common stock
   
(64,784)
     
(22,770)
 
                 
Weighted average shares used in computing net loss per share, basic and diluted
   
21,925
     
21,557
 
                 
Net loss per share, basic and diluted
 
$
(2.95)
   
$
(1.06)
 


The securities in the table below were excluded from the computation of diluted net loss per common share for the twelve months ended December 31, 2012 and 2011 because such securities were anti-dilutive during the periods presented:

(in thousands)
 
2012
   
2011
 
Warrants
   
1,952
     
1,967
 
Stock options and Employee Stock Purchase Plans
   
10,803
     
6,178
 
Convertible redeemable preferred stock
   
153,782
     
62,987
 
                 
Total
   
166,537
     
71,132
 
 
 
F-22

 

NOTE 8.  FAIR VALUE MEASUREMENTS
 
ASC 820 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

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

·
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Our Level 2 assets comprise of money market funds that primarily consist of bank instruments, commercial paper and notes, variable rate demand instruments, and repurchase agreements with effective maturities of three months or less.  All of our Level 2 asset values are determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. The pricing model information is provided by third party entities (e.g. banks or brokers). In some instances, these third party entities engage external pricing services to estimate the fair value of these securities; and

·
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 following table represents the fair value hierarchy for our financial assets and liabilities held by the Company measured at fair value on a recurring basis for the years ended December 31, 2012 and December 31, 2011:

December 31, 2012
                       
(in $ thousands)
 
Level 1
   
Level 2(1)
   
Level 3(2)
   
Total
 
Assets
                               
Available-for-sale securities
 
$
   
$
1,003
   
$
   
$
1,003
 
Total
 
$
   
$
1,003
   
$
   
$
1,003
 
Liabilities
                               
Warrant liabilities
   
     
   
$
563
   
$
563
 
Right to purchase shares of Series A-3 Preferred
   
     
     
14,276
     
14,276
 
Total
 
$
   
$
   
$
14,839
   
$
14,839
 
 
December 31, 2011
                       
(in $ thousands)
 
Level 1
   
Level 2
   
Level 3(2)
   
Total
 
Assets
                               
Available-for-sale equity securities
 
$
   
$
   
$
   
$
 
Available-for-sale debt securities
   
     
     
     
 
Total
 
$
   
$
   
$
   
$
 
Liabilities
                               
Warrant liabilities
   
     
   
$
502
   
$
502
 
Right to purchase future shares of Series A-1 and A-2 Preferred
   
     
     
1,772
     
1,772
 
Total
 
$
   
$
   
$
2,274
   
$
2,274
 

 

(1)  The Company’s Level 2 assets were classified as cash and cash equivalents as of December 31, 2012.

(2)  See Notes 4 and 6 of these Notes to the Financial Statements for a roll forward of the Company’s Level 3 liabilities for the twelve months ended December31, 2012 and 2011.

NOTE 9.  INVENTORY
 
Prior to receiving FDA approval of Marqibo, all costs related to purchases of the active pharmaceutical ingredient and the manufacturing of the product were recorded as research and development expense, since the Company could not reasonably estimate the probability that it would obtain a future benefit from these costs.

Inventories are stated at the lower of cost or market with cost determined using the first-in, first-out method. Inventory values are based upon standard costs, which approximate actual costs. The following table presents the composition of inventory as of December 31, 2012:

(in $ thousands)
 
December 31, 2012
 
Raw materials
 
$
24
 
Work In Process
   
259
 
Inventory
 
$
283
 
 
 
F-23

 
NOTE 10.  PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other assets consist of the following at December 31:

(in $ thousands)
 
2012
   
2011
 
Direct financing costs
 
$
   
$
462
 
Prepaid expenses
   
238
     
140
 
Security deposit
   
     
31
 
Accounts receivable
   
     
2
 
Total
 
$
238
   
$
635
 

As of December 31, 2011, the Company incurred direct financing costs associated with the transactions contemplated by the 2012 Investment Agreement. Accumulated direct financing costs were deferred and reclassified as a reduction to the carrying value of preferred stock upon the sale and issuance of the Series A-2 Preferred on January 9, 2012.

NOTE 11.  PROPERTY AND EQUIPMENT
 
Property and equipment consist of the following at December 31:
 
 
(in $ thousands)
 
2012
   
2011
 
Property and equipment:
           
Furniture & fixtures
 
$
71
   
$
71
 
Computer hardware
   
280
     
277
 
Computer software
   
221
     
220
 
Manufacturing equipment
   
174
     
164
 
Tenant improvements
   
     
163
 
     
746
     
895
 
Less accumulated depreciation
   
(703)
     
(823)
 
Property and equipment, net
 
$
43
   
$
72
 

For the years ended December 31, 2012 and 2011, depreciation expense was approximately $0.1 million.   

NOTE 12.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
 
Accounts payable and accrued liabilities consist of the following at December 31:

(in $ thousands)
 
2012
   
2011
 
Trade accounts payable
 
$
786
   
$
1,633
 
Clinical research and other development related costs
   
783
     
1,173
 
Marketing, commercial, and distribution costs
   
154
     
 
Accrued personnel related expenses
   
1,077
     
800
 
Interest payable
   
683
     
683
 
Accrued trade payables
   
66
     
268
 
Total
 
$
3,549
   
$
4,557
 
 
 
NOTE 13. INCOME TAXES
 
There was no current or deferred income tax expense (other than state minimum tax) for the years ended December 31, 2012 and 2011 because of the Company’s operating losses.
 
The components of deferred tax assets (there were no deferred tax liabilities) as of December 31, 2012 and 2011 are as follows:
 
Deferred tax assets consist of the following:
   
December 31,
 
(in $ thousands)
 
2012
   
2011
 
Deferred tax assets:
           
Net operating loss carryforwards
 
$
23,157
   
$
13,711
 
Research and development credit
   
5,438
     
4,573
 
Capitalized research costs
   
23,932
     
24,634
 
Stock-based compensation
   
1,563
     
1,357
 
Accruals and reserves
   
442
     
80
 
Total deferred tax asset
   
54,532
     
44,355
 
Less valuation allowance
   
(54,532)
     
(44,355)
 
Net deferred tax asset
 
$
   
$
 

 
F-24

 
 
A reconciliation between our effective tax rate and the U.S. statutory tax rate follows:
  
   
For the Years Ended,
 
   
December 31, 2012
   
December 31, 2011
 
Footnote Disclosure:
           
Tax Benefit at Federal Statutory Rate
   
34.0
%
   
34.0
%
State Taxes, Net of Federal Benefit
   
5.8
%
   
5.8
%
Permanent Book/Tax Differences
   
(1.0)
%
   
(4.3)
%
Gain/loss on Call Options
   
(17.4)
%
   
7.1
%
Tax Credits
   
2.0
%
   
11.0
%
Change in Valuation Allowance
   
(23.4)
%
   
(53.6)
%
Provision (Benefit) for Taxes
   
0.0
%
   
0.0
%
 
As of December 31, 2012, the Company had potentially utilizable federal and state net operating loss tax carryforwards of approximately $57.2 million and $57.1 million, respectively.  The net operating loss carryforwards expire in various amounts for federal tax purposes from 2022 through 2031 and for state tax purposes from 2018 through 2031.   As of December 31, 2012, the Company also had research and development credit carryforwards of approximately $0.3 and $2.8 million for federal and state tax reporting purposes and orphan drug credit carryforwards of approximately $4.6 million for federal purposes. The research and development credit carryforward will start to expire in 2027 for federal purposes and carryforward indefinitely for state purposes. The orphan drug credit carryforward will start to expire in 2028 for federal purposes.
 
Utilization of the net operating loss carryforwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. The Company completed a Section 382 analysis through December 31, 2010 and determined that an ownership change, as defined under Section 382 of the Internal Revenue Code, occurred in prior years. Based on the analysis, the Company has undergone three ownership changes as defined in Section 382 of the Internal Revenue Code. The first ownership change occurred on July 21, 2004, the second ownership change occurred on July 31, 2007, and the third ownership change occurred on June 7, 2010.  No additional ownership changes occurred through December 31, 2012. Net operating loss carryovers presented have accounted for any limited and potential lost attributes due to the ownership changes and expiration dates.

Management maintains a valuation allowance for its deductible temporary differences (i.e. deferred tax assets) when it concludes that it is more likely than not that the benefit of such deferred tax assets will not be recognized. The ultimate realization of deferred tax assets is dependent upon the Company’s ability to generate taxable income during the periods in which the temporary differences become deductible. Management considers the historical level of taxable income, projections for future taxable income, and tax planning strategies in making this assessment. Management’s assessment in the near term is subject to change if estimates of future taxable income during the carryforward period are reduced. The Company’s valuation allowance increased by $10.2 million and $9.3 million in the years ended December 31, 2012 and 2011, respectively.

The American Taxpayer Relief Act of 2012 (the “Act”) was enacted on January 2, 2013.  The Act retroactively reinstates the federal research and development credit from January 1, 2012, through December 31, 2013.  The effect of the change in the tax law related to fiscal 2012 is estimated to be $0.2 million, which will be recognized as a benefit to income tax expense in the first quarter of fiscal 2013, the quarter in which the law was enacted.

The Company has adopted the provisions of FIN 48 as of January 1, 2007, which is now codified as part of ASC 740. The total amount of unrecognized tax benefits as of December 31, 2012 was $1.6 million. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Unrecognized Tax Benefits
(in $ thousands)
 
2012
   
2011
 
Balance as of January 1
 
$
1,319
   
$
782
 
Additions for current year tax positions
   
237
     
538
 
Reductions for current year tax positions
   
-
     
-
 
Additions for prior year tax positions
   
-
     
-
 
Reductions for prior year tax positions
   
(5)
     
(1)
 
Settlements
   
-
     
-
 
Reductions related to 382 limitations
   
-
     
-
 
Balance as of December 31
 
$
1,551
   
$
1,319
 
 
 
F-25

 

None of the unrecognized tax benefits as of December 31, 2012 would affect the Company’s effective tax rate if recognized. As the Company would currently need to increase their valuation allowance for any additional amounts benefited, the effective rate would not be impacted until the valuation allowance was removed.
 
Penalties and interest expense related to income taxes are included as a component of other expense and interest expense, respectively, if they are incurred.  For the years ended December 31, 2012 and 2011, no penalties or interest expense related to income tax positions were recognized. The Company does not anticipate that any of the unrecognized tax benefits will increase or decrease significantly in the next twelve months.
 
The Company is subject to federal and California state income tax. As of December 31, 2012, the Company’s federal returns for the years ended 2002 through the current period and state returns for the years ended 2004 through the current period are still open to examination. Net operating losses and research and development carryforwards that may be used in future years are still subject to inquiry given that the statute of limitation for these items would be from the year of utilization. There are no tax years under examination by any jurisdiction at this time.

NOTE 14. LICENSE AGREEMENTS
 
Tekmira License Agreement.  Pursuant to an Amended and Restated License Agreement dated April 30, 2007, as amended effective May 27, 2009 (the “License Agreement”), between the Company and Tekmira Pharmaceuticals Corporation (“Tekmira”), the Company holds exclusive, worldwide rights to develop and commercialize three oncology drugs and drug candidates, Marqibo, Brakiva, and Alocrest.  On September 20, 2010, the Company and Tekmira entered into Amendment No. 2 to the License Agreement (the “Amendment”), which amends the License Agreement as follows:

 
·
The Company’s maximum aggregate obligation for milestone payments to Tekmira for all three products and product candidates was decreased from $37.0 million to $19.0 million.  All of the affected milestone payment obligations relate to amounts triggered by the achievement of regulatory milestones for Marqibo.
     
 
·
The Amendment modified the royalty rates payable by the Company for net sales of Marqibo by eliminating a tiered royalty rate structure based upon the amount of net sales and instead provides for a single digit royalty rate without regard to the amount of net sales.
     
 
·
In consideration of the foregoing, the Company agreed to make a one-time payment to Tekmira of $5.75 million.
 
In connection with the FDA’s approval of the Company’s NDA for Marqibo on August 9, 2012, the Company incurred and paid Tekmira a milestone obligation totaling $1.0 million. This amount was recognized as research and development expense for the twelve months ended December 31, 2012.

Assignment of Agreement with Elan Pharmaceuticals, Inc. Pursuant to an Amended and Restated License Agreement dated April 3, 2003, between Tekmira (including two of its wholly-owned subsidiaries) and Elan Pharmaceuticals, Inc., Tekmira held a paid up, exclusive, worldwide license to certain patents, know-how and other intellectual property relating to vincristine sulfate liposomes. In connection with the Company’s transaction with Tekmira, Tekmira assigned to the Company all of its rights under the Elan license agreement pursuant to an Assignment and Novation Agreement dated May 6, 2006 among the Company, Tekmira and Elan.

Pursuant to a merger between Elan Drug Technologies, a subsidiary of Elan Pharmaceuticals, Inc., and Alkermes, Inc. in September 2011, Alkermes, Inc. assumed the rights, title, and interest arising under certain clauses under the Termination Agreement entered into by and between Elan Pharmaceuticals Inc. and Tekmira. As such, in connection with the FDA’s approval of the Company’s NDA for Marqibo on August 9, 2012, the Company incurred and paid Alkermes, Inc. a milestone obligation totaling $2.5 million. This amount was recognized as research and development expense for the twelve months ended December 31, 2012.

Menadione Topical Lotion License Agreement. In October 2006, the Company entered into a license agreement with the Albert Einstein College of Medicine of Yeshiva University (AECOM), a division of Yeshiva University. Pursuant to the agreement, the Company acquired an exclusive, worldwide, royalty-bearing license to certain patent applications, and other intellectual property relating to topical menadione. The Company was originally required to make payments to AECOM in the aggregate amount of $2.8 million upon the achievement of various clinical and regulatory milestones, as described in the agreement, which amount was increased to $2.9 million pursuant to a February 6, 2013 amendment to the license agreement. The Company also agreed to pay annual maintenance fees, and to make royalty payments to AECOM on net sales of any products covered by a claim in any licensed patent. The Company may also grant sublicenses to the licensed patents and the proceeds resulting from such sublicenses will be shared with AECOM.
 
 
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NOTE 15. RELATED PARTY TRANSACTIONS

Pursuant to the 2010 and 2012 Investment Agreements, the Warburg Pincus Purchasers may seek reimbursement from the Company for reasonable fees and disbursements incurred in connection with transactions contemplated by such agreements, including fees and disbursements of legal counsel, accountants, advisors and consultants, and miscellaneous other fees and expenses incurred by Warburg Pincus. For the year ended December 31, 2012, the Company reimbursed approximately $0.5 million in professional and legal fees incurred by and on behalf of Warburg Pincus.

NOTE 16. COMMITMENTS AND CONTINGENCIES
 
Lease Agreement. On June 22, 2012, the Company entered into a 24-month lease for 17,555 square feet of office space at 400 Oyster Point Boulevard in South San Francisco, California, which commenced on July 1, 2012.  The total cash payments due over the remaining lease period, as of December 31, 2012, are $0.6 million.
 
Approximate expenses associated with operating leases were as follows:

   
Years Ended December 31,
 
(in $ thousands)
 
2012
   
2011
 
Rent expense
 
$
306
   
$
255
 


Clinical Trial Agreements. In May 2011, the Company entered into a clinical trial research agreement with the German High-Grade Lymphoma Study Group, pursuant to which the Company agreed to provide support for a Phase 3 trial of Marqibo in elderly patients with newly diagnosed aggressive NHL conducted in Germany.  Under the terms of the agreement, the Company is obligated to provide supplies of Marqibo for the study as well as funding for a portion of the total financial costs of the study.  As of December 31, 2012, the Company’s portion of these costs is estimated to be approximately between €8.6 million and €10.2 million (or between $11.6 million and $13.4 million) to be paid over a period of three to five years.  Per the terms of the agreement, the Company is under no obligation to make a payment before the later of January 1, 2013 or the enrollment of the 150th patient. No amounts have been accrued as of December 31, 2012 in connection with this arrangement.
 
In July 2011, the National Cancer Institute enrolled the first patient in an open-label Phase 1 dose-escalation trial of Marqibo in children and adolescents with solid tumors and hematologic malignancies, including ALL, being conducted at the NCI in Bethesda, MD.  The primary objective of this Phase I clinical trial, which is an investigator-sponsored study, is to determine the maximum tolerated dose.  Per the terms of the clinical trial agreement, the Company’s obligations are limited to the provision of Marqibo during the study.  No amounts have been accrued as of December 31, 2012 in connection with this arrangement.
 
In August 2011, the Company entered into an agreement with Mayo Clinic pursuant to which Mayo Clinic will sponsor and conduct a Phase 2 clinical trial.  The study is designed to enroll approximately 40 patients taking biologic and small molecule EGFR inhibitors for anti-cancer therapy and will test the effectiveness of MTL in preventing skin toxicities associated with EGFR inhibitors.  The Company’s primary obligation is limited to the provision of MTL for patients enrolled in the study. In January 2012, the first patient was enrolled in the study. As of December 31, 2012, the Company had accrued less than $0.1 million for drug manufacture and related expenditures.
 
In November 2011, the Company entered into an agreement with Pharmaceutical Research Associates (PRA), Inc., a global clinical research organization, to initiate its global Phase 3 confirmatory study of Marqibo, named HALLMARQ, in the treatment of patients 60 years of age or older with newly diagnosed ALL. The November 2011 agreement was subsequently amended to reduce the scope of PRA’s services. The U.S. portion of the clinical trial is primarily being conducted by the Company, while PRA has conducted an international site feasibility study.  The Company also entered into an agreement with PPD, a leading global contract research organization providing drug discovery, development, and lifecycle management services, to administer central laboratory services for HALLMARQ. In May 2012, the first patient was enrolled and dosed in the study. Direct costs associated with the HALLMARQ study are estimated to be approximately $30-$35 million over a period of five years.  As of December 31, 2012, the Company had accrued approximately $0.6 million for expenditures related to the HALLMARQ study.
 
In March 2012, the Company entered into an investigator-initiated clinical trial research agreement with The University of Texas M.D. Anderson Cancer Center (“MDACC”), whereby the Company agreed to provide Marqibo to study the safety and efficacy of Marqibo in certain clinical trial research entitled “Hyper-CVAD with Liposomal Vincristine (Hyper-CMAD) in Acute Lymphoblastic Leukemia.”  The study is designed to evaluate whether intensive chemotherapy (Hyper-CVAD therapy) given in combination with Marqibo, in addition to rituximab for patients who are CD20 positive and/or imatinib or dasatinib for patients with the Philadelphia (Ph) chromosome, can effectively treat ALL or lymphoblastic lymphoma.  In support of the performance of this study, the Company agreed to pay MDACC approximately $0.2 million for the clinical study of approximately sixty-five (65) patients. No amounts have been accrued as of December 31, 2012 in connection with this arrangement.

NOTE 17.  401(K) SAVINGS PLAN
 
During 2004, the Company adopted a 401(k) Plan (the “401(k) Plan”) for the benefit of its employees. The Company elects to match contributions to the 401(k) Plan equal to 100% of the first 5% of wages deferred by each participating employee. During both 2012 and 2011, the Company incurred total charges of approximately $0.2 million for employer matching contributions.
 
 
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NOTE 18.  SUBSEQUENT EVENTS

Sale of Series A-3 Preferred
 
On January 11, 2013, pursuant to the terms of the 2012 Investment Agreement, as amended, the Company issued and sold to the Purchasers an aggregate of 60,000 shares of Series A-3 Preferred at a price per share of $100, for aggregate gross proceeds of $6.0 million. As noted in Note 4 above, the 2012 Investment Agreement provides that, from the date of such agreement until the first anniversary of the Company’s receipt of marketing approval from the FDA for any of its product candidates, the Purchasers have the right, but not the obligation, to purchase up to an additional 600,000 shares of Series A-3 Preferred at a purchase price of $100 per share. As of the date of this Report, after giving effect to the issuance and sale of the 60,000 shares of Series A-3 Preferred discussed above, the Purchasers hold rights to purchase an additional 420,000 shares of Series A-3 Preferred at a purchase price of $100 per share.
 
Amendment to 2010 Equity Incentive Plan

On January 21, 2013, the Company’s Board of Directors adopted an amendment to the 2010 Plan increasing the total number of shares of the Company’s common stock issuable thereunder from 10 million to 12.5 million.  On January 25, 2013, the Company granted to its employees and non-employee directors stock options to purchase an aggregate of 2.6 million shares of common stock under the 2010 Plan.

Departure of Director

On March 28, 2013, Cecilia Gonzalo submitted her resignation from the Board, effective as of March 29, 2013. Pursuant to the terms of the Investment Agreement dated June 7, 2010, entered into by and between Warburg Pincus and the Company, Warburg Pincus has the right to designate five of nine members of the Board. Following the departure of Ms. Gonzalo, Warburg Pincus has the right to designate two additional persons for appointment to the Board.
 
 
F-28

 

 INDEX TO EXHIBITS FILED WITH THIS REPORT
 
 
 
Exhibit No.
 
Description
10.41
 
Letter Agreement between the Registrant and Nandan Oza, dated July 26, 2010. *
     
23.1
 
Consent of Independent Registered Public Accounting Firm
     
31.1
 
Certification of Chief Executive Officer.
     
31.2
 
Certification of Chief Financial Officer.
     
32.1
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101
 
The following financial information from Talon Therapeutics, Inc.’s Annual Report on Form 10-K for the annual period ended December 31, 2012, formatted in eXtensible Business Reporting Language (XBRL): (i) Balance Sheets as of December 31, 2012 and 2011, (ii) Statements of Operations and Comprehensive Loss for the years ended December 31, 2012 and 2011, (iii) Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Deficit for the years ended December 31, 2012 and 2011, (iii) Statements of Cash Flows for years ended December 31, 2012 and 2011, and (v) Notes to Financial Statements. ^


 
 
*
Indicates a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K.
   
^
Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filings.