Apollo Endosurgery, Inc. - Quarter Report: 2012 September (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

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

 

For the quarterly period ended September 30, 2012

 

OR

 

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

 

For the transition period from                      to                     

 

Commission File Number: 001-35706

 

 

LPATH, INC.

(Exact name of registrant as specified in its charter)

 

 

 

4025 Sorrento Valley Blvd., San Diego, CA 92121

(Address of principal executive offices, including zip code)

 

(858) 678-0800

(Registrant’s telephone number, including area code)

 

 

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

 

Indicate by check mark whether the 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

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

 

 

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

 

The number of shares of issuer’s outstanding Class A common stock as of November 6, 2012 was 10,587,251.

 

 

Table of Contents

 

LPATH, INC.

FORM 10-Q

 

September 30, 2012

 

TABLE OF CONTENTS

 

PART I	FINANCIAL INFORMATION	3
ITEM 1:	Financial Statements	3
ITEM 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
ITEM 4:	Controls and Procedures	13
PART II	OTHER INFORMATION	14
ITEM 1:	Legal Proceedings	14
ITEM 2:	Unregistered Sales of Equity Securities and Use of Proceeds	14
ITEM 3:	Defaults upon Senior Securities	14
ITEM 4:	Mine Safety Disclosure	14
ITEM 5:	Other Information	14
ITEM 6:	Exhibits	14
SIGNATURES		17

 

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PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

 

LPATH, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

 

		September 30,			December 31,
		2012			2011
ASSETS
Current Assets:
Cash and cash equivalents		$	16,020,441		$	14,410,630
Accounts receivable		372,533			1,334,583
Prepaid expenses and other current assets		286,099			331,828
Total current assets		16,679,073			16,077,041
Equipment and leasehold improvements, net		275,207			176,067
Patents, net		1,741,032			1,610,752
Deposits and other assets		77,350			79,350
Total assets		$	18,772,662		$	17,943,210
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	918,939		$	2,215,152
Accrued expenses		1,761,068			1,768,786
Deferred contract revenue, current portion		6,790,014			6,081,934
Deferred rent, short-term portion		12,227			5,378
Total current liabilities		9,482,248			10,071,250
Deferred rent, long-term portion		98,184			107,936
Deferred contract revenue, long-term portion		—			3,535,000
Warrants		3,400,000			3,600,000
Total liabilities		12,980,432			17,314,186
Stockholders’ Equity:
Common stock - $.001 par value; 28,571,429 shares authorized; 10,536,717 and 8,657,474 issued and outstanding at September 30, 2012 and December 31, 2011, respectively		10,537			8,657
Additional paid-in capital		47,045,077			40,781,460
Accumulated deficit		(41,263,384		)	(40,161,093		)
Total stockholders’ equity		5,792,230			629,024
Total liabilities and stockholders’ equity		$	18,772,662		$	17,943,210

 

See accompanying notes to the condensed consolidated financial statements.

 

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LPATH, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

 

		Nine Months Ended						Three Months Ended
		September 30,						September 30,
		2012			2011			2012			2011
Revenues:
Grant and royalty revenue		$	758,710		$	1,211,037		$	358,090		$	246,652
Research and development revenue under collaborative agreements		4,743,170			4,886,283			1,060,057			1,531,789
Total revenues		5,501,880			6,097,320			1,418,147			1,778,441
Expenses:
Research and development		6,335,193			5,013,659			1,700,803			1,705,319
General and administrative		2,825,739			2,320,920			1,070,989			774,106
Total expenses		9,160,932			7,334,579			2,771,792			2,479,425
Loss from operations		(3,659,052		)	(1,237,259		)	(1,353,645		)	(700,984		)
Other income (expense), net		(43,239		)	(8,260		)	(47,926		)	31,241
Change in fair value of warrants		2,600,000			2,100,000			300,000			1,800,000
Total other income (expense)		2,556,761			2,091,740			252,074			1,831,241
Net income (loss)		$	(1,102,291	)	$	854,481		$	(1,101,571	)	$	1,130,257
Earnings (loss) per share
Basic		$	(0.10	)	$	0.10		$	(0.10	)	$	0.13
Diluted		$	(0.10	)	$	0.09		$	(0.10	)	$	0.12
Weighted-average shares outstanding used in the calculation
Basic		10,516,428			8,985,339			11,004,495			9,009,988
Diluted		10,516,428			9,351,249			11,004,495			9,266,213

 

See accompanying notes to the condensed consolidated financial statements.

 

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LPATH, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

		Nine Months Ended
		September 30,
		2012			2011
Cash flows from operating activities:
Net (loss) income		$	(1,102,291	)	$	854,481
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Stock-based compensation expense		453,551			528,372
Change in fair value of warrants		(2,600,000		)	(2,100,000		)
Depreciation and amortization		74,994			65,757
Changes in operating assets and liabilities:
Accounts receivable		962,050			13,514,213
Prepaid expenses and other current assets		45,729			(272,945		)
Accounts payable and accrued expenses		(1,347,191		)	(884,562		)
Deferred contract revenue		(2,826,920		)	(2,282,913		)
Other		42,582			13,672
Net cash (used in) provided by operating activities		(6,297,496		)	9,436,075
Cash flows from investing activities:
Equipment and leasehold improvement expenditures		(154,751		)	(129,849		)
Patent expenditures		(149,888		)	(277,653		)
Net cash (used in) investing activities		(304,639		)	(407,502		)
Cash flows from financing activities:
Proceeds from sale of common stock and warrants, net		8,211,946			—
Proceeds from options and warrants exercised		—			34,090
Net cash provided by financing activities		8,211,946			34,090
Net increase in cash and cash equivalents		1,609,811			9,062,663
Cash and cash equivalents at beginning of period		14,410,630			6,803,506
Cash and cash equivalents at end of period		$	16,020,441		$	15,866,169
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes		$	1,600		$	1,600
Supplemental disclosure of non-cash investing and financing activities:
Change in fair value of warrant liability		$	(2,600,000	)	$	(2,100,000	)

 

See accompanying notes to the condensed consolidated financial statements.

 

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LPATH, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2012

 

Note 1 — BASIS FOR PRESENTATION

 

The unaudited condensed consolidated balance sheet of Lpath, Inc. (“Lpath” or “the company”) as of December 31, 2011 was derived from our audited financial statements, but does not contain all disclosures required by accounting principles generally accepted in the United States of America, and certain information and disclosures normally included have been condensed or omitted pursuant to the rules and reg ulations of the SEC.

 

In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Except as otherwise disclosed, all such adjustments are of a normal recurring nature. Operating results for the three-month and nine-month periods ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 or for any future financial period. For further information, refer to the consolidated financial statements and notes included in the company’s annual report on Form 10-K for the year ended December 31, 2011.

 

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Reverse Stock Split

 

On October 3, 2012, the Board of Directors approved a 1-for-7 reverse split of the company’s issued and outstanding Class A common stock and a corresponding decrease in the number of authorized shares of common stock.  The reverse split was effective on October 9, 2012.  Fractional shares created by the reverse stock split were rounded up to the nearest whole share.  All issued and outstanding common stock, options exercisable for common stock, warrants exercisable for common stock, restricted stock units, and per share amounts contained in the Company’s condensed consolidated financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented.

 

Note 2 — SALE OF COMMON STOCK

 

In March 2012, Lpath closed a public offering in which it sold 1,765,524 units, with each unit consisting of one share of the company’s Class A common stock and 0.5 warrants to purchase one share of the company’s Class A common stock, for aggregate gross proceeds of $9,269,000, before deducting placement agent fees and other estimated offering expenses of $1,057,000. The purchase price for each unit was $5.25. Each warrant issued has an exercise price of $7.70 per share, is exercisable immediately, and will expire five years from the date of issuance. Each warrant may be exercised using a cashless exercise procedure at the holder’s sole discretion and includes provisions providing for adjustments to the number of shares exercisable thereunder upon stock dividends, stock splits, and similar events.

 

Note 3 — RESEARCH AND DEVELOPMENT COLLABORATIVE AGREEMENTS

 

In 2010, Lpath entered into an agreement providing Pfizer Inc. (“Pfizer”) with an exclusive option for a worldwide license to develop and commercialize iSONEP™ (“the Pfizer Agreement”), Lpath’s lead monoclonal antibody product candidate that is being evaluated for the treatment of wet age-related macular degeneration (“wet AMD”) and other ocular disorders.

 

Under the terms of the agreement, Pfizer provided Lpath with an up-front option payment of $14 million in addition to sharing the cost of the planned trials. The up-front payment was received in January 2011. Following completion of the trials, Pfizer has the right to exercise its option for worldwide rights to iSONEP for an undisclosed option fee and, if Pfizer exercises its option, Lpath will be eligible to receive development, regulatory, and commercial milestone payments that could total up to $497.5 million; in addition, Lpath will be entitled to receive tiered double-digit royalties based on sales of iSONEP. As part of the agreement, Lpath has granted to Pfizer a time-limited right of first refusal for ASONEP™, Lpath’s product candidate that is being evaluated for the treatment of cancer.

 

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We recognized revenue under the Pfizer Agreement as follows:

 

		Nine Months Ended						Three Months Ended
		September 30,						September 30,
		2012			2011			2012			2011
Cost reimbursements		$	1,916,250		$	1,928,370		$	—		$	748,876
Amortization of development fees		2,826,920			2,282,913			1,060,057			782,913
		$	4,743,170		$	4,211,283		$	1,060,057		$	1,531,789

 

In connection with the termination in 2010 of the License Agreement dated October 28, 2008 by and between the company and Merck KGaA, the company has received payment from Merck KGaA in the second quarter of 2011 in the amount of $675,000 to discharge certain payment obligations that survived termination of the License Agreement. Payment of this amount became certain and determinable in the first quarter of 2011 and, as such, was recognized as revenue in that period.

 

Note 4 — SHARE-BASED PAYMENTS

 

The company recognized share-based compensation expense as follows:

 

		Nine Months Ended						Three Months Ended
		September 30,						September 30,
		2012			2011			2012			2011
Research and development		$	140,840		$	149,358		$	74,729		$	37,824
General and administrative		312,711			379,014			121,092			99,628
Total share-based compensation expense		$	453,551		$	528,372		$	195,821		$	137,452

 

As of September 30, 2012, there was a total of $1.0 million in unrecognized compensation expense related to unvested stock-based compensation under the Lpath, Inc. Amended and Restated 2005 Equity Incentive Plan. That expense is expected to be recognized over a weighted-average period of 2.6 years. Because of its net operating loss carryforwards, the company did not realize any tax benefits for the tax deductions from share-based payment arrangements during the three and nine months ended September 30, 2012 and 2011.

 

Note 5 — FAIR VALUE MEASUREMENTS

 

Lpath has issued warrants, of which some are classified as equity and some as liabilities.  The following table includes warrants classified as liabilities either because they have “down-round” protection or due to cash settlement provisions.  The company’s recurring fair value measurements at September 30, 2012 were as follows:

 

		Fair Value as of September 30, 2012			Significant Unobservable Inputs (Level 3)
Liabilities:
Warrants expiring August 2013		$	300,000		$	300,000
Warrants expiring March 2017		3,100,000			3,100,000
		$	3,400,000		$	3,400,000

 

The warrants issued in March 2012 (and expiring in March 2017) provide that in the event of a fundamental transaction, as defined by the warrant agreement, the company may, under certain circumstances, be obligated to settle the March 2012 warrants for cash equal to the value of the warrants determined in accordance with the warrant agreement.

 

Recurring Level 3 Activity, Reconciliation, and Basis for Valuation

 

The table below provides a reconciliation of the beginning and ending balances for the liabilities measured at fair value using significant unobservable inputs (Level 3).

 

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Fair value measurements using significant unobservable inputs (Level 3):

 

Liabilities:
Warrant liability as of January 1, 2012		$	3,600,000
Exercise of warrants		(1,100,000		)
Issuance of warrants		3,500,000
Change in fair value of warrants		(2,600,000		)
Warrant liability as of September 30, 2012		$	3,400,000

 

The company determined the fair value of the warrant liability for certain warrants, as applicable, using a Black-Scholes model with consideration given to their “down-round” protection provisions that reduce the exercise price if the company issues new warrants or equity at a price lower than the stated exercise price. The model considered amounts and timing of future possible equity and warrant issuances and historical volatility of the company’s stock price.

 

The following table summarizes Lpath warrants outstanding as of September 30, 2012, inclusive of warrants classified as equity and as liabilities:

 

Warrant Expiration Date		Number of Shares		Exercise Price per Share
October 31, 2012		75,915		$	1.12
November 16, 2012		518,305		$	7.00
February 28, 2013		7,143		$	1400
August 12, 2013		294,664		$	7.84
August 15, 2013		12,590		$	7.84
August 18, 2013		2,025		$	7.84
March 27, 2014		7,143		$	7.00
June 24, 2014		5,715		$	5.60
December 24, 2015		5,715		$	5.60
March 9, 2017		29,750		$	5.25
March 9, 2017		882,776		$	7.70
Total:		1,841,741
Weighted average:				$	7.22

 

The terms of all outstanding warrants permit the company, upon exercise of the warrants, to settle the contract by the delivery of unregistered shares. During the nine months ended September 30, 2012, there were cashless exercises of 482,630 warrants in exchange for issuance of 108,573 shares of common stock, and 636,991 warrants expired.

 

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Note 6 — EARNINGS PER SHARE

 

Basic and diluted earnings per share were calculated as follows:

 

		Nine Months Ended						Three Months Ended
		September 30,						September 30,
		2012			2011			2012			2011
Net income (loss)		$	(1,102,291	)	$	854,481		$	(1,101,571	)	$	1,130,257
Weighted average number of shares used in basic earnings (loss) per share		10,516,428			8,985,339			11,004,495			9,009,988
Additional dilutive shares from the assumed exercise of outstanding:
Options		—			193,241			—			173,714
Restricted stock units		—			26,826			—			17,818
Warrants		—			145,843			—			64,694
Weighted average number of shares used in diluted earnings (loss) per share		10,516,428			9,351,249			11,004,495			9,266,214

 

Anti-dilutive common stock equivalents were excluded from the calculation of diluted income (loss) per share as follows:

 

		Nine Months Ended				Three Months Ended
		September 30,				September 30,
		2012		2011		2012		2011
Stock options		373,789		88,029		373,789		88,029
Warrants		1,841,741		305,326		1,841,741		1,959,623
Restricted stock units		125,615		184,378		125,615		109,820
Total		2,341,145		577,733		2,341,145		2,157,472

 

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

 

This discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto included in this quarterly report on Form 10-Q (the “Quarterly Report”) and the audited financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2011 (the “2011 Annual Report”), as filed with the Securities and Exchange Commission (the “SEC”). In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors including, but not limited to, those identified in the 2011 Annual Report in the section entitled “Market Risks.”

 

On October 3, 2012, the Board of Directors approved a 1-for-7 reverse split of the company’s issued and outstanding Class A common stock and a corresponding decrease in the number of authorized shares of common stock.  The reverse split was effective on October 9, 2012.  Fractional shares created by the reverse stock split were rounded up to the nearest whole share.  All issued and outstanding common stock, options exercisable for common stock, warrants exercisable for common stock, restricted stock units, and per-share amounts contained in the company’s condensed consolidated financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented.

 

Overview

 

We are a biotechnology company focused on the discovery and development of lipidomic-based therapeutics. Lipidomics is an emerging field of medical science whereby bioactive signaling lipids are targeted to treat important human diseases. We have three product candidates, iSONEP™, ASONEP™, and Lpathomab™. iSONEP is a monoclonal antibody against sphingosine-1-phosphate (“S1P”) formulated for treating retinal diseases. A Phase 2a clinical trial of iSONEP is now in process. In the Phase 1 clinical trial, iSONEP demonstrated promising results in treating patients afflicted with wet age-related macular degeneration. Studies conducted in models of human ocular disease indicate that iSONEP may also be useful in treating other ocular diseases including diabetic retinopathy and glaucoma. ASONEP (another formulation of the same S1P-targeted antibody) completed a Phase 1 clinical trial in 2010, and we believe that it holds promise for the treatment of cancer and other diseases. Lpathomab™ is an antibody against lysophosphatidic acid (“LPA”), a key bioactive lipid that has been long recognized as a valid disease target. Lpathomab is in pre-clinical testing in various animal models of disease relating to the central nervous system and to fibrosis. Our ability to generate novel antibodies against bioactive lipids is based on our ImmuneY2™ technology, a series of proprietary processes we have developed. We are currently applying the Immune Y2 process to other lipid-signaling agents that are validated targets for disease treatment, thereby potentially creating a further pipeline of monoclonal antibody-based drug candidates.

 

In December 2010, we entered into an agreement providing Pfizer Inc. (“Pfizer”) the rights to develop and commercialize iSONEP (the “Pfizer Agreement”). Under the terms of that agreement, Pfizer provided us with an upfront payment of $14 million and is sharing the cost of human proof-of-concept clinical trials of iSONEP. The first trial (called “PEDigree”) was designed to test iSONEP as a treatment for patients with Pigment Epithelial Detachment (“PED”), a complication of wet-AMD. The second, and larger, trial (“Nexus”) was designed to further study iSONEP as a treatment for wet-AMD. We began enrolling patients in the PEDigree and Nexus trials in September 2011 and October 2011, respectively.

 

In January 2012, we suspended dosing patients in our PEDigree and Nexus trials. We took this action because the FDA had determined that our fill-and-finish contractor, Formatech, Inc. (“Formatech”), was not in compliance with FDA’s current Good Manufacturing Practice (“cGMP”) requirements over a three-year period during which the iSONEP clinical vials were filled. After we suspended dosing, we were notified by the FDA that the iSONEP trials were being placed on clinical hold. The FDA has not informed us regarding any specific non-compliance issues at Formatech that may have affected our drug product. iSONEP has been well tolerated by all patients in our Phase 1 trial and by all patients treated thus far in our PEDigree and Nexus trials.

 

Since the hold, we have manufactured the additional drug substance required to complete the trials, and resumed dosing patients in the Nexus trial in September 2012.  As a result of the clinical hold, the projected cost to complete the iSONEP trials has increased significantly. This cost increase is related to activities required to restart the clinical trials, including the additional clinical material.

 

Pfizer approached us several months ago and requested that we consider potential alternatives to offset a portion of the increased costs, including the possibility of incorporating the PEDigree study into the Nexus study. Because of these ongoing discussions we have restarted the larger Nexus trial, but have deprioritized the smaller PEDigree trial.

 

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The actual time required to complete our clinical trials will depend on a number of factors outside of our direct control, including those discussed in the section of our 2011 Annual Report entitled, “Risk Factors—We may have delays in completing our clinical trials and we may not complete them all.” Pfizer has the right to exercise its option for exclusive worldwide rights to iSONEP. If Pfizer exercises its option, we will receive an option fee as well as potential development, regulatory, and commercial milestone payments. In addition, if iSONEP eventually becomes a commercial product, we will be entitled to receive double-digit royalties, tiered based on annual sales of iSONEP. As part of the Pfizer Agreement, we granted to Pfizer a time-limited right of first refusal for ASONEP.

 

Lpath has incurred significant accumulated losses since its inception. As of September 30, 2012, we had an accumulated deficit of approximately $41.2 million. We expect that the cost of our ongoing research and development activities as currently planned, including general and administrative expenses, will approximate $21 million to $23 million through the end of 2014. This estimate includes the expenses to conduct the clinical trials for iSONEP, as well as to initiate Phase 2a clinical trials for ASONEP. In addition, this estimate includes the expenses to conduct cell-line development, the first step in developing the manufacturing process, for our third product candidate, Lpathomab.  In order to complete preclinical development and file an Investigational New Drug (“IND”) application for Lpathomab, we will need to obtain approximately $4 million to $6 million of additional funding. As has been the case with our other development programs, that funding may come from a number of potential sources, including grants, equity financing, or partnerships. We expect our expenditures to increase as we continue the advancement of our product development programs. The lengthy process of completing clinical trials and seeking regulatory approval for one product candidate typically requires expenditures in excess of approximately $100 million, according to industry data. Any failure by us or delay in completing clinical trials, or in obtaining regulatory approvals, would cause our research and development expenses not reimbursable under the Pfizer agreement to increase and, in turn, could have a material adverse effect on our results of operations.

 

Results of Operations

 

Grant and Royalty Revenue.  Grant and royalty revenue for the quarter ended September 30, 2012 was $358,000 compared to $246,000 for the quarter ended September 30, 2011. The increase in 2012 was due to increased reimbursable costs incurred as our Phase 2 clinical trials resumed.   For the first three quarters of 2012, grant and royalty revenue was $759,000 compared to $1,211,000 in the first three quarters of 2011.  The 2012 decrease in grant revenue is attributable to the suspension of clinical trials, which resulted in reduced reimbursable costs for outside services in 2012 compared to 2011.

 

Research and Development Revenue Under Collaborative Agreement.  As described in Note 3 to the condensed consolidated financial statements, in December 2010 we entered into an agreement with Pfizer that provides financial support for our iSONEP and ASONEP development programs. We recognized revenues as follows:

 

		Nine Months Ended						Three Months Ended
		September 30,						September 30,
		2012			2011			2012			2011
Cost reimbursements		$	1,916,250		$	1,928,370		$	—		$	748,876
Amortization of development fees		2,826,920			2,282,913			1,060,057			782,913
		$	4,743,170		$	4,211,283		$	1,060,057		$	1,531,789

 

At the end of the second quarter of 2012, we became responsible for funding the next $6,000,000 of iSONEP development costs pursuant to the terms of the Pfizer Agreement.  During this period, deferred revenue is recognized as we fund the ongoing development on a dollar-for-dollar basis.  This accounts for the 2012 increase in amortization of deferred revenues with a corresponding decrease in cost reimbursement revenues.

 

In connection with the termination in 2010 of the License Agreement dated October 28, 2008 by and between the company and Merck KGaA, the company received payment from Merck KGaA in the second quarter of 2011 in the amount of $675,000 to discharge certain payment obligations that survived termination of the License Agreement. That payment became certain and determinable in the first quarter of 2011 and, as such, was recognized as revenue in that period.

 

Research and Development Expenses.  Research and development expenses decreased to $1,701,000 for the third quarter of 2012 from $1,705,000 for the third quarter of 2011.

 

Research and development expense increased to $6,335,000 in the first three quarters of 2012 from $5,014,000 for the same period in 2011, an increase of $1,321,000.  Outside services and lab supplies increased by $928,000 in the first three quarters of 2012.  The increase was driven by the costs associated with remanufacturing the drug substance used in our clinical trials.  Employee compensation expense increased by $244,000 in the first three quarters of 2012 compared to 2011 due to increased staffing in our research and development functions.

 

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General and Administrative Expenses. General and administrative expenses were $1,071,000 for the quarter ended September 30, 2012 compared to $774,000 for the same period in 2011; an increase of $297,000.  General and administrative expenses were $2,826,000 in the first three quarters of 2012 compared to $2,321,000 in 2011; an increase of $505,000.  The increases reflect increased occupancy costs, legal and professional fees, and employee compensation.

 

Change in Fair Value of Warrants. Various factors are considered in the pricing models we use to value outstanding warrants, including the company’s current stock price, the remaining life of the warrants, the volatility of the company’s stock price, and the risk-free interest rate. Future changes in these factors will have a significant impact on the computed fair value of the warrant liability. The most significant factor in the valuation model is the company’s stock price. Lpath’s stock is thinly traded and relatively small transactions can impact the company’s quoted stock price significantly.  As such, we expect future changes in the fair value of the warrants to continue to vary significantly from quarter to quarter. Management cautions that the $2,600,000 net change in fair value of the warrants credited to the results of operations, recognized during the nine months ended September 30, 2012, and all similar changes in the future, should not be given undue importance when considering the financial condition of Lpath and the results of its operations. Management does not believe that these adjustments, which are required by current generally accepted accounting principles, reflect economic activities or financial obligations undertaken by the company.

 

Liquidity and Capital Resources

 

As of September 30, 2012, Lpath had cash and cash equivalents totaling $16.0 million.  Since Lpath’s inception, its operations have been financed primarily through the private placement of equity and debt securities and funds received from corporate partners pursuant to research and development collaboration agreements. In March 2012, Lpath closed a public offering in which it sold 1,765,524 units, with each unit consisting of one share of the company’s Class A common stock and 0.5 warrants to purchase one share of the company’s Class A common stock, for aggregate gross proceeds of $9,269,000, before deducting placement agent fees and other estimated offering expenses of $1,057,000.  From inception through September 30, 2012, Lpath had received net proceeds of approximately $49.6 million from the sale of equity securities and the issuance of convertible promissory notes. In addition, Lpath had received a total of $34.4 million from corporate partners. During the first nine months of 2012, Lpath received $2.6 million in funding from a research and development arrangement with Pfizer.

 

Under the Pfizer research and development agreement, Pfizer and Lpath share ongoing development costs of iSONEP.  As of September 30, 2012, Pfizer has paid us $20.0 million.  Under the terms of the agreement, we will fund the next $6.0 million of iSONEP project costs, which began in the second quarter of 2012.

 

Net cash used in investing activities during the nine months ended September 30, 2012 was $305,000. Of the amount used for investing activities in the first three quarters of 2012, $150,000 was invested in the prosecution of patents compared to $278,000 during the comparable period in 2011. As provided for in the agreement with Pfizer, in 2011, Pfizer has assumed financial responsibility to prosecute certain patents related to technology underlying the Pfizer Agreement.

 

We believe our cash on hand as of September 30, 2012, together with amounts to be received pursuant to the Pfizer Agreement and NIH grants, should be sufficient to fund our ongoing research and development activities, through the end of 2013. As currently planned, we expect the cost of our research and development activities, including general and administrative expenses, will approximate $21 to $23 million during that period. This estimate includes the expenses to conduct the clinical trials for iSONEP, as well as to initiate a Phase 2a clinical trial for ASONEP. In addition, this estimate includes the expenses to conduct cell-line development, the first step in developing the manufacturing process, for our third product candidate, Lpathomab.  In order to complete preclinical development and file an IND application for Lpathomab, we will need to obtain approximately $4 million to $6 million of additional funding. As has been the case with our other development programs, that funding may come from a number of potential sources, including grants, equity financing, or partnerships. We expect our expenditures to increase as we continue the advancement of our product development programs. The lengthy process of completing clinical trials and seeking regulatory approval for one product candidate typically requires expenditures in excess of approximately $100 million, according to industry data. Any failure by us or delay in completing clinical trials, or in obtaining regulatory approvals, would cause our research and development expenses to increase and, in turn, could have a material adverse effect on our results of operations.

 

If Pfizer exercises its option to continue the clinical development of iSONEP, we will receive an option fee as well as potential development, regulatory, and commercial milestone payments and royalties. If received, those payments could provide significant funding to support our drug discovery and development activities. However, we cannot assure you that we will be successful in maintaining our commercial relationship with Pfizer, that Pfizer will exercise its option to commercialize iSONEP, or that iSONEP will achieve the developmental, regulatory, and commercial milestones necessary to entitle us to future payments under the Pfizer Agreement on a timely basis, or at all. As a result, we may be required to secure substantial additional capital to continue to fund our planned drug discovery and development projects beyond the end of 2013.

 

Until we can generate significant cash from operations, we expect to continue to fund our operations with cash resources generated from a combination of proceeds of offerings of our equity and debt securities, license agreements, and NIH grants. However, we may

 

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not be successful in obtaining cash from new or existing collaboration agreements or licenses, or in receiving milestone or royalty payments under those agreements. In addition, we cannot be sure that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to us or to our stockholders. Having insufficient funds may require us to delay, scale back, or eliminate some or all of our development programs, relinquish some or even all rights to product candidates at an earlier stage of development, or renegotiate less favorable terms than we would otherwise choose. Failure to obtain adequate financing also may adversely affect our ability to operate as a going concern. If we raise additional funds from the issuance of equity securities, substantial dilution to our existing stockholders would likely result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business.

 

Critical Accounting Policies, Estimates, and Judgments

 

Our condensed consolidated financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical of which are those related to revenue recognition, valuation of long-lived assets and warrant liability, share-based compensation, the timing of the achievement of drug development milestones, and income taxes. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known.

 

Besides the estimates identified above that are considered critical, we make many other accounting estimates in preparing our condensed consolidated financial statements and related disclosures. All estimates, whether or not deemed critical, affect reported amounts of assets, liabilities, revenues and expenses, as well as disclosures of contingent assets and liabilities. These estimates and judgments are also based on historical experience and other factors that are believed to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known, even for estimates and judgments that are not deemed critical.

 

For further information, refer to the consolidated financial statements and notes thereto included in the company’s annual report on Form 10-K for the year ended December 31, 2011.

 

Item 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial and accounting officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Under the supervision of our Chief Executive Officer and our Chief Financial Officer, and with the participation of all members of management, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were designed and operating effectively as of the end of the period covered by this Quarterly Report on Form 10-Q.

 

Our management, including our Chief Executive Officer and our Chief Financial Officer, cannot be certain that our disclosure controls and procedures or our internal controls will prevent all instances of errors and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected.

 

Changes in Internal Control Over Financial Reporting

 

In connection with the evaluation required by Exchange Act Rule 13a-15(d), our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that no changes in our internal control over financial reporting occurred during the period

 

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covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II — OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

 

None.

 

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

 

None.

 

Item 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

Item 4. MINE SAFETY DISCLOSURE

 

Not applicable

 

Item 5. OTHER INFORMATION

 

None.

 

Item 6. EXHIBITS

 

(a)                 Exhibits:

 

The following exhibit index shows those exhibits filed with this report and those incorporated herein by reference:

 

2.1		Agreement and Plan of Reorganization, by and between Neighborhood Connections, Inc., Neighborhood Connections Acquisition Corporation, and Lpath Therapeutics Inc. dated July 15, 2005 (filed as an exhibit to the Current Report on Form 8-K filed with the SEC on December 6, 2005 and incorporated herein by reference).
2.2		Acquisition Agreement and Plan of Merger, dated as of March 19, 2004, between Neighborhood Connections, Inc. and JCG, Inc. (filed as Exhibit 2.1 to the Current Report on Form 8-K filed on March 22, 2004 and incorporated herein by reference).
3.1		Composite Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form 8-A, filed with the SEC on October 18, 2012).
3.2		Amended and Restated Bylaws, as amended on April 3, 2007 (conformed) (incorporated by reference to Exhibit 3.5 to the Registration Statement on Form SB-2, SEC File No. 144199).
3.3		Amendment No. 1 to the Amended and Restated Bylaws of Lpath, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on October 26, 2012).

 

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4.1		Form of Warrant issued to purchasers of Convertible Secured Promissory Notes as amended by the Omnibus Amendment to Convertible Secured Promissory Notes and Warrants dated November 30, 2005 (filed as an exhibit to the Current Report on Form 8-K filed with the SEC on December 6, 2005 and incorporated herein by reference).
4.2		Form of Warrant issued pursuant to the Common Stock and Warrant Purchase Agreement dated March 28, 2006 (filed as Exhibit 4.7 to the registration statement on Form SB-2 filed on March 30, 2006, SEC File No. 333-132850, and incorporated herein by reference).
4.3		Form of Warrant issued pursuant to the Securities Purchase Agreement dated April 6, 2007 (April 2007 Warrants) (filed as Exhibit 4.7 to the June 2007 SB-2 and incorporated herein by reference).
4.4		Form of Warrant issued pursuant to the Securities Purchase Agreement dated June 13, 2007 (June 2007 Warrants) (filed as Exhibit 4.8 to the June 2007 SB-2 and incorporated herein by reference).
4.5		Form of Warrant issued pursuant to the Securities Purchase Agreement dated August 12, 2008 (August 2008 Warrants) (filed as Exhibit 4.10 to the registration statement on Form S-1 filed on September 11, 2008, SEC File No. 333-153423 and incorporated herein by reference).
4.6		Form of Warrant issued pursuant to the Securities Purchase Agreement, dated November 16, 2010, by and between Lpath, Inc. and each purchaser identified therein (filed as an exhibit to the Current Report on Form 8-K filed with the SEC on November 18, 2010 and incorporated herein by reference).
4.7		Form of Common Stock Purchase Warrant for Investors in the Units. (filed as an exhibit to Form 8-K filed with the SEC on March 6, 2012 and incorporated herein by reference.)
4.8		Form of Common Stock Purchase Warrant for Placement Agents of the Units. (filed as an exhibit to Form 8-K filed with the SEC on March 6, 2012 and incorporated herein by reference.)
4.9		Form of Warrant for Griffin Securities, Inc. (filed as an exhibit to Form 8-K filed with the SEC on March 6, 2012 and incorporated herein by reference.)

 

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21.1		List of Subsidiaries of Registrant (filed as an exhibit to the Annual Report on Form 10-KSB for the year ended December 31, 2005 filed with the SEC on March 16, 2006 and incorporated herein by reference).
31.1		Section 302 Certification by Chief Executive Officer of Lpath, Inc.
31.2		Section 302 Certification by Chief Financial Officer of Lpath, Inc.
32.1		Section 906 Certification by Chief Executive Officer and Chief Financial Officer of Lpath, Inc.
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

 

+                          Management contract or compensation plan or arrangement

*                          In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 shall be deemed “furnished” and not “filed.”

(c)                   Financial Statement Schedules

 

All financial statement schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or other notes hereto.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

	Lpath, Inc.
Date: November 9, 2012	/S/ SCOTT R. PANCOAST
	Scott R. Pancoast
	President and Chief Executive Officer
	(Principal Executive Officer)
	/S/ GARY J. G. ATKINSON
	Gary J. G. Atkinson,
	Senior Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

 

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