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NOTE 2 - MANAGEMENT'S PLANS TO CONTINUE AS A GOING CONCERN

May 12, 2014

Basis of Presentation

We have prepared our financial statements on the basis that we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information not misleading. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. We have incurred losses since inception and have a deficit accumulated of $34.3 million as of March 31, 2014. We anticipate incurring additional losses for the foreseeable future and until such time, if ever, that we can generate significant sales from our therapeutic product candidates currently in development or enter into cash flow positive business development transactions. Development Stage Risks We are a development stage entity. To date, we have generated no sales revenues, have incurred losses and expect to incur significant additional losses as we advance G-202 through clinical studies. Consequently, our operations are subject to all the risks inherent in the establishment of a pre-revenue business enterprise as well as those risks associated with a company engaged in research and development of pharmaceutical compounds. Our cash and cash equivalents balance at March 31, 2014 was $2.6 million, representing 90% of our total assets. Based upon our current expected level of operating expenditures, we expect to be able to fund our operations for the next six to nine months. We will require additional cash to fund and continue our operations beyond that point. This period could be shortened if there are any unanticipated significant increases in planned spending on development programs or other unforeseen events. We anticipate raising additional funds through collaborative arrangements, public or private sales of debt or equity securities, or some combination thereof. There is no assurance that any such collaborative arrangement will be entered into or that financing will be available when needed to allow us to continue our operations, or if available, on terms acceptable to us.

In the event financing is not obtained, the Company may pursue cost cutting measures as well as explore the sale of selected assets to generate additional funds. If we are required to significantly reduce operating expenses and delay, reduce the scope of, or eliminate development programs, these events could have a material adverse effect on: our business, results of operations, and financial condition. These factors raise significant doubt about our ability to continue as a going concern. The financial statements do not include any adjustments relating to recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue in existence. 11



NOTE 3 - SUMMARY OF CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures. Actual results may differ from those estimates. Research and Development Research and development costs are charged to expense as incurred. Our research and development expenses consist primarily of expenditures for manufacturing, clinical trials, employee compensation and consulting costs and expenses. We incurred research and development expenses of approximately $1.1 million, $0.8 million and $17.9 million for the three months ended March 31, 2014 and 2013, and from November 21, 2003 (inception) through March 31, 2014, respectively. Loss per Share Basic loss per share is calculated by dividing net loss and net loss attributable to common shareholders by the weighted average number of common shares outstanding for the period. Basic and diluted loss per share are the same, in that any potential common stock equivalents would have the effect of being anti-dilutive in the computation of net loss per share. The following potentially dilutive securities have been excluded from the computations of weighted average shares outstanding as of March 31, 2014 and 2013, as they

would be anti-dilutive: Three months ended March 31, 2014 2013

Shares underlying options outstanding 8,334,895



6,023,641

Shares underlying warrants outstanding 10,001,591



8,171,088

Shares underlying convertible notes outstanding 263,695

254,873 18,600,181 14,449,602



Fair Value of Financial Instruments

Our short-term financial instruments, including cash, accounts payable and other liabilities, consist primarily of instruments without extended maturities. We believe that the fair values of our current assets and current liabilities approximate their reported carrying amounts. Warrant derivative liability consists of certain of our warrants with anti-dilution provisions. We use the Black-Scholes option-pricing model to value our warrant derivative liability which incorporates our stock price, volatility, U.S. risk-free interest rate, dividend rate, and estimated life. Fair Value Measurements

Valuation Hierarchy - GAAP establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:



Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.



Level 3: Unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value.

A financial asset or liability's classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. We previously recorded a warrant derivative liability for warrants with non-standard anti-dilution provisions. These warrants were either exercised or expired as of March 31, 2014. 12 Stock-Based Compensation We measure the cost of employee services received in exchange for equity awards based on the grant-date fair value of the awards. All awards under our stock-based compensation programs are accounted for at fair value and that cost is recognized over the period during which an employee is required to provide service in exchange for the award (the vesting period).



Compensation expense for options granted to non-employees is determined in accordance with the standard as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. Compensation expense for awards granted to non-employees is re-measured each accounting period.

Determining the appropriate fair value of the stock-based compensation requires the input of subjective assumptions, including the expected life of the stock-based compensation and stock price volatility. We use the Black-Scholes option-pricing model to value our stock option awards which incorporates our stock price, volatility, U.S. risk-free interest rate, dividend rate, and estimated life. Reclassifications



Certain prior year balances have been reclassified to conform to current year presentation.

Recent Accounting Pronouncements

Recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC, did not, or are not believed by management, to have a material impact on the Company's present or future financial statements.

NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION

The following table contains additional information for the periods reported (in thousands): Three months ended March 31, 2014 2013 Non-cash financial activities: Common stock options issued as payment of accrued compensation $ 962 $ 999 Derivative liability reclassified to equity upon exercise of warrants - 15



There was no cash paid for interest and income taxes for the three months ended March 31, 2014 and 2013.

NOTE 5 - ACCRUED EXPENSES



Accrued expenses consist of the following (in thousands):

March 31, December 31, 2014 2013 Accrued compensation and benefits $ 318$ 1,040 Accrued research and development 190 82 Accrued other 254 128 Total accrued expenses $ 762$ 1,250



NOTE 6 - CONVERTIBLE NOTES PAYABLE

We previously entered into convertible notes with our chief executive officer pursuant to which we borrowed an aggregate of $0.2 million, with $0.1 million principal balance outstanding at March 31, 2014. The notes, which bear interest at a rate of 4.2% per annum and matured at various dates through December 6, 2011, are now considered due on demand. As of March 31, 2014, our chief executive officer has not demanded the payment of the outstanding principal and accrued interest. Accrued interest at March 31, 2014 and December 31, 2013 was approximately $27,000 and $26,000, respectively. The notes and accrued interest are convertible, at the option of the holder, into shares of our common stock at a conversion price of $0.50 per share. 13



NOTE 7 - COMMITMENTS AND CONTINGENCIES

Legal Matters On March 12, 2012, GenSpera instituted a declaratory judgment action against Annastasiah Mhaka ("Mhaka") in the United States District Court for the District of Maryland: GenSpera, Inc. v. Mhaka, Civil Action No. MJG-12-772 (D. Md.). In that complaint, GenSpera, as the licensee of the inventions described and claimed in the U.S. Patent No. 7,468,354 ("the '354 patent") and U.S. Patent No. 7,767,648 ("the '648 patent"), sought a declaratory judgment that Mhaka (a former doctoral student at Johns Hopkins University) should not be added to either the '354 patent or the '648 patent as an inventor. On April 2, 2012, Mhaka filed and served her answer and counterclaim, in which she sought to be added as an inventor to the '354 patent and the '648 patent pursuant to 35 U.S.C. sec. 256. Between April 26, 2012 and October 1, 2012, the parties conducted fact discovery. Between October 1, 2012 and December 1, 2012, the parties conducted limited expert discovery. On November 1, 2012, Mhaka filed a separate complaint in the State Circuit Court for Baltimore County, Maryland, naming GenSpera as a defendant along with Dr. Samuel Denmeade and Dr. John Isaacs (the named inventors on the '354 patent and the '648 patent). In the complaint, Mhaka alleged that the defendants are liable under various state law tort theories for the same alleged conduct that formed the basis for her prior inventorship claim. In her prayer for relief, Mhaka sought unspecified damages from the defendants but did not seek to alter the inventorship or ownership of the '354 patent or '648 patent. On November 8, 2012, the defendants removed this second action to the United States District Court for the District of Maryland, and on November 16, 2012, the defendants moved to dismiss all claims in the complaint, asserting (among other things) that the claims were preempted by federal patent law. On January 24, 2013, the Court heard GenSpera's motion for summary judgment in the original case and the defendants' motion to dismiss in the second case. On May 1, 2013, the Court granted GenSpera's motion for summary judgment in the original case. In its order, the Court stated that it would proceed to issue a declaratory judgment establishing that Mhaka should not be added to the two patents at issue as an additional inventor pursuant to 35 U.S.C. 256. Reserving any ruling on the issue of whether Mhaka's state law tort claims are preempted by federal patent law, the Court denied defendants' motion to dismiss Mhaka's complaint and directed Mhaka to re-file her claims as counterclaims in the original action. On May 14, 2013, Mhaka filed an amended answer and counterclaims in the consolidated action, re-pleading her tort claims as counterclaims. On June 3, 2013, GenSpera (along with Drs. Denmeade and Isaacs) filed a reply to the counterclaims, denying their allegations and raising a number of affirmative defenses. Fact discovery was completed on December 13, 2013, and expert discovery was completed on March 28, 2014. On January 2, 2014, Drs. Isaacs and Denmeade moved for summary judgment on the grounds that Mhaka's claims are barred by the applicable statute of limitations, and GenSpera joined in the motion. The briefing on that motion is now complete. GenSpera filed a separate motion for summary judgment on May 6, 2014. Mhaka's opposition to that motion is due to be filed on or before May 28, 2014. GenSpera's reply brief in support of the motion is due on June 4, 2014. Further scheduling, as appropriate, is to be set after resolution of summary judgment motions.



NOTE 8 - CAPITAL STOCK AND STOCKHOLDER'S EQUITY

Common Stock In February 2014, we entered into an agreement with H.C. Wainwright to serve as our exclusive placement agent, advisor and underwriter for a proposed offering of our securities. We agreed to pay the placement agent a placement fee equal to 8% of the aggregate gross proceeds received by us from our sale of the securities in the offering and to issue the placement agent warrants to purchase shares of common stock equal to 8% of the common stock sold to investors. In February 2014, we entered into an agreement for method development by a contract manufacturer and issued an aggregate of 91,334 shares of common stock, valued at approximately $127,000, as compensation. In February 2014, we entered into an agreement to grant an aggregate of 47,800 shares of common stock, valued at approximately $67,000, to a consultant for business advisory services to

be provided to the Company. During the three months ended March 31, 2014, no warrants were exercised into common shares. During the three months ended March 31, 2013, 119,100 warrants were exercised into an equivalent number of common shares for which we received proceeds of approximately $95,000 and one million warrants were exercised on a cashless basis into 537,722 common shares. NOTE 9 - STOCK OPTIONS The terms of our 2009 Executive Compensation Plan ("2009 Plan") and our 2007 Equity Compensation Plan ("2007 Plan") allow for the issuance of up to 6,000,000 shares of common stock each. Collectively, the 2009 Plan and 2007 Plan are referred to as "the Plans." Total stock-based compensation expense recognized for stock options and warrants issued using the straight-line method in the statement of operations for the three months ended March 31, 2014 and 2013 was $1,069,000 and $1,077,000, respectively, of which $962,000 and $958,000 was accrued as of December 31, 2013 and 2012, respectively. 14



The following table summarizes stock option activity under the Plans:

Weighted- Weighted-average Aggregate Average Remaining Intrinsic Number of Exercise contractual term value (in shares price (in years) thousands) Outstanding at December 31, 2013 6,050,623 $ 1.82 Granted 2,284,272 $ 1.36 Exercised - - Forfeited - - Outstanding at March 31, 2014 8,334,895 $ 1.70 4.5 $ 283 Exercisable at March 31, 2014 8,132,015 $ 1.70

4.5 $ 280 As of March 31, 2014, there was $0.1 million of total unrecognized compensation cost related to non-vested stock options which vest over time. That cost is expected to be recognized over a weighted-average period of approximately one year. As of March 31, 2014, there was no unrecognized compensation expense related to performance-based, non-vested employee stock options. During the three months ended March 31, 2014, we issued options to purchase 1,948,902 and 38,000 shares of common stock to employees and non-employee directors, respectively, under the Plans. Additionally, we issued options to purchase 297,370 shares of common stock to consultants. During the three months ended March 31, 2013, we issued options to purchase 1,221,972 and 38,000 shares of common stock to employees and non-employee directors, respectively, under the Plans. Additionally, we issued options to purchase 89,041 shares of common stock to consultants. During the three months ended March 31, 2014 and 2013, no options were exercised.



The following table summarizes weighted-average assumptions using the Black-Scholes option-pricing model used on the date of the grants issued during the three months ended March 31, 2014 and 2013:

Three months ended March 31, 2014 2013 Volatility 56.0 % 59.1 % Expected term (years) 3.4 3.6 Risk-free interest rate 0.5 % 0.5 % Dividend yield 0 % 0 %



NOTE 10 - WARRANTS AND DERIVATIVE WARRANT LIABILITY

We account for common stock purchase warrants as either equity instruments or derivative liabilities depending on the specific terms of the warrant agreement. Warrants are accounted for as derivative liabilities if the warrants allow for cash settlement or provide for modification of the warrant exercise price in the event subsequent sales of common stock by the Company are at a lower price per share than the then-current warrant exercise price. We classify derivative warrant liabilities on the balance sheet at fair value, and changes in fair value during the periods presented in the statement of operations, which is revalued at each balance sheet date subsequent to the initial issuance of the warrant. At March 31, 2014, all outstanding liability-classified warrants were either exercised or had expired. Transactions involving our equity-classified warrants are summarized as follows: Weighted- Weighted-average Aggregate Average Remaining Intrinsic Number of Exercise contractual term value (in shares price (in years) thousands) Outstanding at December 31, 2013 10,216,597 $ 2.56 Granted 96,000 $ 3.00 Exercised - - Forfeited (311,006 ) $ 2.71 Outstanding at March 31, 2014 10,001,591 $ 2.56 2.8 $ 48 Exercisable at March 31, 2014 10,001,591 $ 2.56

2.8 $ 48 15 During the three months ended March 31, 2014, no warrants were exercised. During the three months ended March 31, 2013, 119,100 warrants were exercised into an equivalent number of common shares and 1,000,000 warrants were exercised on a cashless basis into 537,722 common shares. The following table summarizes outstanding common stock purchase warrants as of March 31, 2014: Weighted- average Number of exercise shares price Expiration Equity-classified warrants Issued to consultants 1,163,759 $ 2.36 July 2014 through February 2019 Issued pursuant to 2009 financings 1,205,510 $ 3.00 June 2014 through September 2014 Issued pursuant to 2010 financings 1,022,943 $ 3.38 January 2015 through May 2015 Issued pursuant to 2011 financings 1,936,785 $ 3.24 January 2016 through April 2016 Issued pursuant to 2012 financings 296,366 $ 3.00 December 2017



Issued pursuant to 2013 financings 4,376,228 $ 1.97December 2017 through August 2023

10,001,591 Equity-classified Warrants During the three months ended March 31, 2014, we issued warrants to consultants to purchase 96,000 shares of common stock. The per share weighted-average fair value of the warrants granted to consultants during 2014 was estimated at $0.41 per share on the date of grant. During the three months ended March 31, 2013, no warrants were issued to consultants. Total stock-based compensation expense of approximately $40,000 and $4,000 was recognized for warrants and included in the statement of operations for the three months ended March 31, 2014 and 2013, respectively. During the three months ended March 31, 2013, in connection with the offering of our securities, we issued an aggregate of 776,204 common stock purchase warrants, including: 686,420 pursuant to closings in January 2013 and March 2013; 18,410 to the placement agent; and 71,374 additional warrants issued to investors that participated in the December 2012 closing. All warrants were issued with an exercise price of $3.00 per share.



Liability-classified Warrants

We have assessed our outstanding equity-linked financial instruments and have concluded that certain of our warrants are subject to derivative accounting as a result of certain non-standard anti-dilution provisions contained in the warrants. The fair value of these warrants is classified as a liability in the financial statements with the change in fair value during the periods presented, recorded in the statement of operations. At March 31, 2014, all outstanding liability-classified warrants were either exercised or had expired. We did not record a gain or loss during the three months ended March 31, 2014, as the outstanding liability-classified warrants were either exercised or had expired. We recorded a gain of $0.2 million during the three months ended March 31, 2013, related to the change in fair value of the warrant derivative liability during that period. The following table summarizes the calculated aggregate fair values for the warrant derivative liability using the Black-Scholes method based on the following assumptions: Fair value as of March 31, 2013 Calculated aggregate value (in thousands) $ 1,010 Exercise price per share of warrant $ 1.50 Closing price per share of common stock $ 2.15 Volatility 50.0 % Expected term (years) 0.3 Risk-free interest rate 0.07 % Dividend yield 0 % 16



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

OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements regarding our business development plans, capital raising, clinical trials, regulatory reviews, timing, strategies, expectations, anticipated expense levels, business prospects and positioning with respect to the market, business outlook, technology spending and various other matters (including contingent liabilities and obligations and changes in accounting policies, standards and interpretations) and express our current intentions, beliefs, expectations, strategies or predictions. These forward-looking statements are based on a number of assumptions and currently available information and are subject to a number of risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Cautionary Note Regarding Forward-Looking Statements" and elsewhere in this Quarterly Report. The following discussion should be read in conjunction with Part I, Item 1 of this Quarterly Report as well as the financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on March 3, 2014.



Our Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows.

Company Overview Business We are a development stage pharmaceutical company focused on the development of prodrug cancer therapeutics for the treatment of solid tumors including prostate, liver, brain and other cancers. A prodrug is an inactive precursor of a drug that is converted into its active form only at the site of the tumor. Our technology platform combines a powerful, plant-derived cytotoxin with a prodrug delivery system that targets release of the drug within the tumor. We believe that, if successfully developed, our cancer prodrug therapies have the potential to provide a targeted therapeutic approach to a broad range of solid tumors with fewer side effects than those related to current chemotherapy treatments. We are currently focused on the clinical development of G-202. Our major focus for the next twelve months will be the ongoing Phase II clinical trial of G-202 in patients with liver cancer, and the ongoing Phase II clinical trial in patients with glioblastoma. As of April 26, 2014, we have treated seventeen patients in our Phase II liver cancer trial and four patients in our Phase II glioblastoma trial. Assuming positive indications from our Phase II trials, we will develop subsequent randomized studies to further develop G-202 with a goal of seeking FDA approval for marketing. Financial

To date, we have devoted a substantial portion of our efforts and financial resources to the development of G-202. G-202 is the only product candidate for which we have conducted clinical trials, and we have not marketed, distributed or sold any products. As a result, since our inception in 2003, we have generated no revenue from product sales and have funded our operations principally through private sales of our equity securities. We have never been profitable and, as of March 31, 2014, we had an accumulated deficit of approximately $34.3 million. We expect to continue to incur significant operating losses for the foreseeable future as we continue the development of our product candidates and advance them through clinical trials. Our cash and cash equivalents balance at March 31, 2014 was approximately $2.6 million, representing 90% of total assets. Based on our current expected level of operating expenditures, we expect to be able to fund our operation for the next six to nine months. This period could be shortened if there are any significant increases in spending that were not anticipated or other unforeseen events. We anticipate raising the additional cash needed through the private or public sales of equity or debt securities, collaborative arrangements, or a combination thereof, to continue to fund operations and the development of our product candidates. There is no assurance that any such collaborative arrangement will be entered into or that financing will be available to us when needed in order to allow us to continue our operations, or if available, on terms acceptable to us. If we do not raise sufficient funds in a timely manner, we may be forced to curtail operations, delay or stop our ongoing clinical trials, cease operations altogether, or file for bankruptcy. We currently do not have commitments for future funding from any source nor are in negotiations with regard to a collaborative arrangement. Product Development of G-202 Our ability to execute our product development plan is dependent on the amount and timing of cash, if any, that we are able to raise. Should we not raise sufficient funds to execute our product development plan, our priority is the continuation and completion of our Phase II clinical study in liver cancer. We believe we have sufficient working capital to fund the Phase II clinical trial in liver cancer to the point where we can determine if such trial will have a positive or negative outcome. Notwithstanding, depending on the rate of enrollment, and the duration of the trial, we may not have sufficient capital to fund the trial through completion. 17



Our current product development plan of G-202 contemplates the following major initiatives:

Conducting a Phase II clinical study in patients with liver cancer.

In the first quarter of 2014, we entered into a collaborative arrangement and

initiated our Phase II clinical trial in patients with glioblastoma (a form of

brain cancer). This trial is being conducted at a single site in the U.S. and

is expected to enroll up to 34 patients.



Initiation of a Phase II clinical study in patients with prostate cancer via a

collaborative agreement with a single site in the U.S.



Phase II Clinical Development of G-202

We are conducting a Phase II clinical trial in patients with advanced liver cancer. This trial is being conducted at multiple sites in the U.S. As of April 26, 2014, seventeen patients were treated in the study.

In the first quarter of 2014, we entered into a collaborative arrangement and initiated our Phase II clinical trial in patients with glioblastoma. This trial is being initially conducted at a single site in the U.S. As of April 26, 2014, four patients have been treated in the study.



Critical Accounting Policies and Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make significant judgments and estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Management bases these significant judgments and estimates on historical experience and other assumptions it believes to be reasonable based upon information presently available. Actual results could differ from those estimates under different assumptions, judgments or conditions. There were no material changes to our critical accounting policies and use of estimates previously disclosed in our 2013 Annual Report on Form 10-K. Result of Operations



Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013

Our results of operations have varied significantly from year to year and quarter to quarter and may vary significantly in the future. We did not have revenue during the three months ended March 31, 2014 and 2013. We do not anticipate generating any revenues during 2014. Net loss for the three months ending March 31, 2014 and 2013 were approximately $1.9 million and $1.3 million, respectively, resulting from the operational activities described below. Operating Expenses



Operating expense totaled approximately $1.9 million and $1.5 million during the three months ended March 31, 2014 and 2013, respectively. The increase in operating expenses is the result of the following factors.

Three months ended March 31, Change in 2014 versus 2013 2014 2013 $ % (amount in thousands) Operating Expenses General and administrative $ 836 $ 741 $ 95 13 % Research and development 1,104 790 314 40 % Total operating expenses $ 1,940$ 1,531 $ 409 27 % General and Administrative

General and administrative expenses totaled approximately $0.8 million and $0.7 million for the three months ended March 31, 2014 and 2013, respectively. The increase of approximately $95,000, or 13%, for the three months ended March 31, 2014 compared to the same period in 2013 was primarily attributable to an increase in stock-based compensation, professional fees and consulting expenses, partially offset by a decrease in personnel-related costs. 18



Our general and administrative expenses consist primarily of expenditures related to employee compensation, legal, accounting and tax, other professional services, and general operating expenses.

Research and Development Expenses

Research and development expenses totaled approximately $1.1 million and $0.8 million for the three months ended March 31, 2014 and 2013, respectively. The increase of approximately $314,000, or 40%, for the three months ended March 31, 2014 compared to the same period in 2013 was primarily attributable to increases related to manufacturing of approximately $200,000, as well as an increase in legal and patent costs of $135,000, which were partially offset by a decrease in personnel-related costs. Our research and development expenses consist primarily of expenditures related to manufacturing, clinical trials, employee compensation and consulting costs, and patent related costs.



Gain (loss) on change in fair value of warrant derivative liability

There was no gain (loss) on change in fair value of warrant derivative liability during the three months ended March 31, 2014 compared to an approximately $0.2 million loss during the three months ended March 31, 2013. The change in the fair value of warrant derivative liability in the prior year resulted primarily from the reduction in the expected term and from changes in our stock price during the reported periods. Refer to our Notes to Unaudited Condensed Financial Statements for further discussion on our warrant liability.



Liquidity and Capital Resources

We have incurred losses since our inception in 2003 as a result of significant expenditures for operations and research and development and the lack of any approved products to generate revenue. We have an accumulated deficit of approximately $34.3 million as of March 31, 2014 and anticipate that we will continue to incur additional losses for the foreseeable future. To date, we have funded our operations primarily through the sale of our equity securities and the exercise of warrants, resulting in gross proceeds of approximately $25.1 million and net proceeds of approximately $24.3 million. Cash and cash equivalents at March 31, 2014 was approximately $2.6 million. Based on our current level of expected operating expenditures, we expect to be able to fund our operations for the next six to nine months. This assumes that we spend minimally on general operations and only continue conducting our ongoing Phase II clinical trials, and that we do not encounter any unexpected events or other circumstances that could shorten this time period. We are actively seeking sources of financing to fund our continued operations and research and development programs. To raise additional capital, we may sell shares of equity or debt securities, or enter into collaborative, strategic and/or licensing transactions. There can be no assurance that we will be able to complete any financing transaction in a timely manner or on acceptable terms or otherwise or enter into a collaborative or strategic transaction. If we are not able to raise additional cash, we may be forced to delay, curtail, or cease development of our product candidates, or cease operations altogether. Three months ended March 31, Change in 2014 versus 2013 2014 2013 $ % (amount in thousands) Cash at beginning of period $ 3,587$ 2,345 $ 1,242 53 % Net cash used in operating activities (1,009 ) (1,010 ) 1 - %

Cash used in investing activities (2 ) (1 ) (1 ) (100 )% Net cash provided by financing activities - 1,219 (1,219 ) (100 )% Cash at end of period $ 2,576$ 2,553 $ 23 1 % Cash totaled approximately $2.6 million as of March 31, 2014 and 2013, respectively. The increase of approximately $23,000 at March 31, 2014 compared to the same period in 2013 was primarily attributable to approximately $1.2 million less cash at the beginning of 2014 compared to the beginning of 2013 offset by an increase in 2013 provided by financing activities of approximately $1.2 million.



Net Cash Used in Operating Activities

Net cash used in operating activities was approximately $1.0 million for each of the three months ended March 31, 2014 and 2013, respectively. The small decrease in cash used for operations during the three months ended March 31, 2014, compared to the same period in 2013, was primarily attributable to an increase in our net loss compared to prior year as a result of increases in research and development related costs, partially offset by increases in stock-based compensation, changes in the derivative liability and other accrued expenses. 19



Net Cash Provided by Financing Activities

There was no cash provided by financing activities for the three months ended March 31, 2014, compared to cash provided by financing activities of approximately $1.2 million for the three months ended March 31, 2013. Cash provided by financing activities for the three months ended March 31, 2013 is attributed to the sale of common stock and warrants and the exercise of outstanding warrants during the prior year.


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