Apollo Endosurgery, Inc. - Quarter Report: 2014 March (Form 10-Q)
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 March 31, 2014
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)
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Nevada |
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16-1630142 |
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(State or other jurisdiction of |
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(I.R.S. Employer |
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):
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Large accelerated filer o |
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Accelerated filer o |
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Non-accelerated filer o |
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Smaller reporting company x |
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(Do not check if a smaller reporting company) |
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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 May 9, 2014 was 15,588,848.
LPATH, INC.
FORM 10-Q
March 31, 2014
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report includes statements of our expectations, intentions, plans, and beliefs that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are intended to come within the safe harbor protection provided by those sections. These forward-looking statements are principally, but not solely, contained in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words “estimate,” “project,” “intend,” “forecast,” “anticipate,” “plan,” “planning,” “expect,” “believe,” “will,” “will likely,” “should,” “could,” “would,” “may” or words or expressions of similar meaning. The matters discussed in these forward-looking statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from those projected, anticipated or implied in the forward-looking statements. The most significant of these risks, uncertainties and other factors are described in “Item 1A—Risk Factors” of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed with the Securities and Exchange Commission on March 18, 2014. Except to the limited extent required by applicable law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
LPATH, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
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March 31, |
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December 31, |
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2014 |
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2013 |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
16,111,256 |
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$ |
11,851,639 |
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Accounts receivable |
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2,704,293 |
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1,310,037 |
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Prepaid expenses and other current assets |
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445,569 |
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292,477 |
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Total current assets |
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19,261,118 |
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13,454,153 |
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Equipment and leasehold improvements, net |
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279,507 |
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211,362 |
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Patents, net |
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2,012,563 |
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1,926,868 |
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Deposits and other assets |
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77,350 |
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77,350 |
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Total assets |
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$ |
21,630,538 |
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$ |
15,669,733 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current Liabilities: |
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Accounts payable |
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$ |
2,564,683 |
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$ |
2,025,799 |
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Accrued compensation |
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331,661 |
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693,022 |
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Accrued expenses |
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595,912 |
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291,358 |
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Deferred contract revenue, current portion |
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374,000 |
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498,000 |
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Deferred rent, short-term portion |
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26,406 |
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24,008 |
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Total current liabilities |
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3,892,662 |
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3,532,187 |
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Deferred rent, long-term portion |
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62,172 |
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69,373 |
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Warrants |
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2,300,000 |
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2,100,000 |
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Total liabilities |
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6,254,834 |
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5,701,560 |
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Stockholders’ Equity: |
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Common stock - $.001 par value; 100,000,000 shares authorized; 15,309,183 and 13,387,914 issued and outstanding at March 31, 2014 and December 31, 2013, respectively |
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15,309 |
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13,388 |
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Additional paid-in capital |
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68,139,142 |
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59,432,943 |
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Accumulated deficit |
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(52,778,747 |
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(49,478,158 |
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Total stockholders’ equity |
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15,375,704 |
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9,968,173 |
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Total liabilities and stockholders’ equity |
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$ |
21,630,538 |
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$ |
15,669,733 |
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See accompanying notes to the condensed consolidated financial statements.
LPATH, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
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Three Months Ended March 31, |
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2014 |
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2013 |
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Revenues: |
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Grant and royalty revenue |
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$ |
116,099 |
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$ |
224,220 |
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Research and development revenue under collaborative agreements |
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1,603,277 |
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887,590 |
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Total revenues |
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1,719,376 |
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1,111,810 |
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Expenses: |
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Research and development |
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3,663,008 |
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1,584,684 |
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General and administrative |
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1,156,957 |
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1,003,855 |
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Total expenses |
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4,819,965 |
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2,588,539 |
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Loss from operations |
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(3,100,589 |
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(1,476,729 |
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Other income (expense), net |
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— |
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27,022 |
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Change in fair value of warrants |
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(200,000 |
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200,000 |
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Total other income (expense), net |
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(200,000 |
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227,022 |
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Net loss |
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$ |
(3,300,589 |
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(1,249,707 |
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Basic and diluted net loss per share |
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$ |
(0.23 |
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(0.09 |
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Weighted-average shares outstanding used in the calculation |
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14,511,710 |
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13,401,821 |
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See accompanying notes to the condensed consolidated financial statements.
LPATH, INC.
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31,
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2014 |
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2013 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(3,300,589 |
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$ |
(1,249,707 |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Stock-based compensation expense |
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317,801 |
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193,886 |
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Change in fair value of warrants |
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200,000 |
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(200,000 |
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Depreciation and amortization |
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35,916 |
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42,034 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(1,394,256 |
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5,734 |
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Prepaid expenses and other current assets |
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(153,092 |
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90,808 |
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Accounts payable and accrued expenses |
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501,966 |
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(1,964,821 |
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Deferred contract revenue |
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(124,000 |
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(887,590 |
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Other |
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(4,803 |
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(29,497 |
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Net cash used in operating activities |
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(3,921,057 |
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(3,999,153 |
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Cash flows from investing activities: |
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Equipment and leasehold improvement expenditures |
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(91,248 |
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(11,050 |
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Patent expenditures |
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(98,508 |
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(73,972 |
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Net cash used in investing activities |
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(189,756 |
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(85,022 |
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Cash flows from financing activities: |
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Proceeds from sale of common stock and warrants, net |
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8,440,807 |
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— |
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Proceeds from options and warrants exercised |
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250 |
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1,450 |
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Payment for restricted stock tax liability on net settlement |
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(70,627 |
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— |
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Net cash provided by financing activities |
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8,370,430 |
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1,450 |
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Net (decrease) increase in cash and cash equivalents |
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4,259,617 |
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(4,082,725 |
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Cash and cash equivalents at beginning of period |
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11,851,639 |
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24,621,083 |
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Cash and cash equivalents at end of period |
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$ |
16,111,256 |
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$ |
20,538,358 |
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Supplemental disclosure of cash flow information: |
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Cash paid during the year for: |
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Income taxes |
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$ |
1,600 |
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$ |
1,600 |
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Supplemental disclosure of non-cash investing and financing activities: |
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Change in fair value of warrant liability |
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$ |
200,000 |
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$ |
(200,000 |
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See accompanying notes to the condensed consolidated financial statements.
LPATH, INC.
Notes to Condensed Consolidated Financial Statements
March 31, 2014
Note 1 — BASIS FOR PRESENTATION
The unaudited condensed consolidated balance sheet of Lpath, Inc. (“Lpath” or “the company”) as of December 31, 2013 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 regulations 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 period ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014 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, 2013.
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.
Note 2 — 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.
Following completion of the clinical trial, 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 $497.5 million. In addition, Lpath will be entitled to receive tiered double-digit royalties based on sales of iSONEP. As part of the agreement, Lpath has granted to Pfizer a time-limited right of first refusal for ASONEP™, Lpath’s product candidate that is being evaluated for the treatment of cancer.
The company recognized revenue under the Pfizer Agreement as follows:
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Three Months Ended |
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March 31, |
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2014 |
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2013 |
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Cost reimbursements |
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$ |
1,479,277 |
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$ |
— |
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Amortization of development fees |
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124,000 |
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887,590 |
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$ |
1,603,277 |
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$ |
887,590 |
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Note 3 — SHARE-BASED PAYMENTS
The company recognized share-based compensation expense as follows:
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Three Months Ended |
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March 31, |
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2014 |
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2013 |
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Research and development |
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$ |
114,652 |
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$ |
40,410 |
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General and administrative |
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203,149 |
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153,476 |
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Total share-based compensation expense |
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$ |
317,801 |
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$ |
193,886 |
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As of March 31, 2014, there was a total of $2.8 million in unrecognized compensation expense related to unvested stock-based compensation under the Lpath, Inc. Amended and Restated 2005 Equity Incentive Plan. That expense is expected to be recognized over a weighted-average period of 3.1 years. Because of its net operating loss carryforwards, the company did not realize any tax benefits for the tax deductions from share-based payment arrangements during the three months ended March 31, 2014 and 2013.
Note 4 — FAIR VALUE MEASUREMENTS
Lpath has issued warrants, of which some are classified as equity and some as liabilities. The warrants issued in March 2012 (and expiring in March 2017) provide that in the event of a fundamental transaction, as defined by the warrant agreement, the company may, under certain circumstances, be obligated to settle the March 2012 warrants for cash equal to the value of the warrants determined in accordance with the warrant agreement. The company’s recurring fair value measurements at March 31, 2014 were as follows:
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Fair Value as of |
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Significant |
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Liabilities: |
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Warrants expiring March 2017 |
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$ |
2,300,000 |
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$ |
2,300,000 |
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The company determined the fair value of the warrant liability for certain warrants, as applicable, using a Black-Scholes model. The model considered amounts and timing of future possible equity and warrant issuances and volatility of the company’s stock price equal to 100%, as specified in the underlying warrants.
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).
Fair value measurements using significant unobservable inputs (Level 3):
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Liabilities: |
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Warrant liability as of January 1, 2014 |
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$ |
2,100,000 |
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Change in fair value of warrants |
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200,000 |
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Warrant liability as of March 31, 2014 |
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$ |
2,300,000 |
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The company determined the fair value of the warrant liability for certain warrants, as applicable, using a Black-Scholes model. The model considered amounts and timing of future possible equity and warrant issuances and historical volatility of the company’s stock price.
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 three months ended March 31, 2014, 7,143 warrants expired. As of March 31, 2014, there were 923,956 warrants outstanding with a weighted-average exercise price of $7.60 per share expiring through March 2017.
Note 5 — COMMON STOCK
On March 18, 2014, Lpath cancelled its at-the-market issuance sales agreement with MLV & Co. LLC (“MLV”) and JMP Securities LLC and entered into a new at-the-market issuance sales agreement with MLV (the “MLV Agreement”). Pursuant to the MLV Agreement, the company may issue and sell shares of its common stock having an aggregate offering price of up to $23 million from time to time, at the company’s option, through MLV. Sales of common stock through MLV, if any, will be made by any method that is deemed an “at-the-market” offering as defined in Rule 415 promulgated under the Securities Act of 1933, as amended, including by means of ordinary brokers’ transactions at market prices, in block transactions or as otherwise agreed by the Lpath and MLV. Subject to the terms and conditions of the MLV Agreement, MLV will use commercially reasonable efforts to sell the common stock based upon the company’s instructions (including any price, time or size limits or other customary parameters or conditions the Company may impose). Lpath is not obligated to make any sales of its common stock under the MLV Agreement. Any shares sold will be sold pursuant to the company’s effective shelf registration statement on Form S-3. The company will pay MLV a commission of up to 3.0% of the gross proceeds. The MLV Agreement will terminate upon the earlier of the sale of all common stock subject to the MLV Agreement or termination of the MLV Agreement by the company or MLV. During the quarter ended March 31, 2014, the company sold 1,865,488 shares at sales prices ranging from $4.30 to $5.16 per share, resulting in $8,441,000 in net proceeds. From April 1, 2014 to May 9, 2014, the company sold 268,840 shares at sales prices ranging from $4.25 to $4.76 per share, resulting in $1.2 million in net proceeds.
Note 6 — EARNINGS PER SHARE
Anti-dilutive common stock equivalents were excluded from the calculation of diluted loss per share as follows:
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Three Months Ended |
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March 31, |
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2014 |
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2013 |
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Stock options |
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807,901 |
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364,463 |
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Warrants |
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923,956 |
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1,261,874 |
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Restricted stock units |
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654,784 |
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545,552 |
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Total |
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2,386,641 |
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2,171,889 |
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis of the financial condition and results of operations of Lpath, Inc. (“Lpath”, the “company”, “we”, “us”, or “our”) should be read in conjunction with our condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013, 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 our 2013 Annual Report on Form 10-K.
Overview
We are a biotechnology company focused on the discovery and development of lipidomic-based therapeutic antibodies, an emerging field of medical science that targets bioactive signaling lipids to treat a wide range of human diseases. We have two product candidates that are currently in clinical development, and one in pre-clinical evaluation.
iSONEP™ is the ocular formulation of sonepcizumab, a humanized monoclonal antibody (“mAb”) against sphingosine-1-phosphate (“S1P”). Sphingomab™ is the original mouse version of this monoclonal antibody. iSONEP is administered by intravitreal injection, and has demonstrated multiple mechanisms of action in ocular models of disease, including anti-angiogenesis, anti-inflammatory, anti-fibrotic and anti-vascular permeability. This combination of mechanisms would suggest: (i) iSONEP might have a comparative advantage over currently marketed products for “wet” age-related macular degeneration (“wet AMD”) and (ii) iSONEP might demonstrate clinical efficacy in a broad range of retinal diseases where there is currently a significant unmet medical need, including diabetic retinopathy, dry AMD, and glaucoma-related surgery.
In December 2010, we entered into an agreement with Pfizer Inc. (the “Pfizer Agreement”), which provides Pfizer with an exclusive option for a worldwide license to develop and commercialize iSONEP. Under the original terms of the Pfizer Agreement, Pfizer and the Company planned to conduct two studies, including a Phase 1b study in wet AMD patients with Pigment Epithelial Detachment (PED), a complication of wet AMD (the ‘‘PEDigree trial’’), and a larger Phase 2 study in wet AMD patients generally (the ‘‘Nexus trial’’). The Company began enrolling patients in the PEDigree and Nexus trials in September 2011 and October 2011, respectively.
The Food and Drug Administration (FDA) placed the PEDigree and Nexus trials on clinical hold in January 2012 following a determination by the FDA that the fill-and-finish contractor that had filled the iSONEP clinical trial vials was not in compliance with the FDA’s current Good Manufacturing Practice (‘‘cGMP’’) standards during the time period it provided those services to the Company. Thereafter, we manufactured new iSONEP drug substance with an alternate fill-and-finish contractor and resumed dosing patients in the Nexus trial in September 2012.
As a result of the clinical hold and the requirement to manufacture new drug substance, the projected costs to complete the iSONEP trials increased significantly and Pfizer requested the Company to consider potential alternatives to reduce the increased costs of the iSONEP trials. In December 2012, Lpath and Pfizer amended the Pfizer Agreement to among other things, reflect the parties’ agreement to discontinue the PEDigree trial and to focus on the Nexus trial. The parties agreed to continue to pursue and share the cost of the iSONEP trials, including any costs associated with discontinuing the PEDigree trial.
In October 2013, Lpath announced that it had received notice from Pfizer that Pfizer would be seeking to divest certain ophthalmology research and development assets, including Pfizer’s rights and obligations under the Pfizer Agreement. Lpath presented offers to Pfizer to reacquire those rights. However, in December 2013, Pfizer informed Lpath that its offers were not competitive with other offers. Therefore, Lpath believes that a number of third parties may have an interest in acquiring Pfizer’s rights. Acquisition of Pfizer’s rights and obligations under the terms of the Pfizer Agreement by a third party would not affect the terms of the Pfizer Agreement, as the existing rights and obligations currently held by Pfizer will be assumed by to the third party or remain with Pfizer based on the terms of the agreement between Pfizer and the third party.
As of March 31, 2014, Pfizer had paid the Company $20.0 million pursuant to the terms of the Pfizer Agreement, including the $14 million upfront payment. The amendment to the Pfizer Agreement did not modify the Company’s obligation to fund $6.0 million of Nexus trial expenses, which it completed during 2013. The terms of the Pfizer Agreement specify that, since the Company has fulfilled its funding obligation, Pfizer (or any third party who acquires Pfizer’s rights) will fund the remaining expenses necessary to complete the Nexus trial.
We expect to complete dosing the last Nexus trial patient during the second half of 2014. The actual time required to complete our clinical trials will depend upon a number of factors outside of our direct control, including those discussed in “Risk Factors — We may have delays in completing our clinical trials, and we may not complete them at all.”
Following completion of the Nexus study, Pfizer (or a third party who may acquire Pfizer’s rights) has the right to exercise its option for worldwide rights to iSONEP for an undisclosed option fee and, if Pfizer (or a third party who may acquire Pfizer’s rights) exercises its option, we will be eligible to receive development, regulatory, and commercial milestone payments that could total up to $497.5 million. In addition, we will be entitled to receive tiered double-digit royalties based on sales of iSONEP.
ASONEP™ is the systemic formulation of sonepcizumab. We are collaborating with investigators at several medical research institutions on a Phase 2 clinical trial testing ASONEP as a treatment for renal cell carcinoma. This study is ongoing, and we expect to complete the first cohort of this study in 2014.
As part of the Pfizer Agreement, Lpath has granted to Pfizer (or a third party who may acquire Pfizer’s rights) a time-limited right of first refusal for ASONEP, which period ends on the latest date that Pfizer, or a third party who may acquire Pfizer’s rights, may exercise its option to continue development of iSONEP.
Lpathomab™, our pre-clinical product candidate, is a mAb against lysophosphatidic acid (“LPA”), a key bioactive lipid that has long been recognized as a significant promoter of cancer-cell growth and metastasis in a broad range of tumor types. Published research has also demonstrated that LPA is a significant contributor to neuropathic pain and traumatic brain injury, and plays a key role in pulmonary fibrosis. We have selected the clinical candidate mAb from among three humanized mAbs that inhibit LPA. These mAbs were tested against each other in various models of human disease to determine which mAb would be most likely to succeed in clinical trials. We are now engaged in the antibody manufacturing process development activities and expect to complete Investigational New Drug (“IND”) enabling studies in 2014. We plan to file the IND in early 2015, and begin testing Lpathomab in clinical trials thereafter.
Lpath has incurred significant net losses since its inception. As of March 31, 2014, we had an accumulated deficit of approximately $52.8 million. We expect that the cost of our ongoing research and development activities, including general and administrative expenses, will approximate $24 million from April 1, 2014 through the second quarter of 2015. This estimate includes the expenses to conduct the Nexus clinical trial for iSONEP, as well as the Phase 2 clinical trial for ASONEP. In addition, this estimate includes the expenses to develop the manufacturing process and conduct the IND-enabling studies for our third product candidate, Lpathomab. As of March 31, 2014, we had cash and cash equivalents totaling $16.1 million. In addition, from April 1, 2014 through May 9, 2014, we have received net proceeds of $1.2 million from the issuance of common stock in “at-the-market” sales pursuant to the at-the-market sales agreement we entered into in March 2014. Additional near-term sources of cash include our accounts receivable of $2.7 million and funding under the terms of the Pfizer Agreement to support our Nexus clinical trial, as well as $0.3 million of unexpended funding remaining on NIH grants awarded to the company. We believe these funds should be sufficient to fund our planned drug discovery and development activities through the second quarter of 2015. However, we may be required to secure substantial additional capital to continue to fund our planned drug discovery and development projects beyond the second quarter of 2015.
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, have a material adverse effect on our results of operations.
Results of Operations
Grant and Royalty Revenue. Grant and royalty revenues for the quarter ended March 31, 2014 were $116,000 compared to $224,000 for the quarter ended March 31, 2013. The decrease of $108,000 in 2014 was due to the conclusion of one of our NIH grants in August 2013.
Research and Development Revenue Under Collaborative Agreement. As described in Note 2 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:
|
|
|
Three Months Ended |
| ||||
|
|
|
March 31, |
| ||||
|
|
|
2014 |
|
2013 |
| ||
|
Cost reimbursements |
|
$ |
1,479,277 |
|
$ |
— |
|
|
Amortization of development fees |
|
124,000 |
|
887,590 |
| ||
|
|
|
$ |
1,603,277 |
|
$ |
887,590 |
|
During the fourth quarter of 2013, we reached the point in the contract where Pfizer became responsible for funding the iSONEP development costs pursuant to the terms of the Pfizer Agreement. During the first quarter of 2013, Lpath was responsible for funding iSONEP development costs, resulting in increased amortization of development fees in 2013 compared to 2014. Overall project costs in the first quarter of 2014 were greater than during the first quarter of 2013 because there were more active patients in the study in the first quarter of 2014 than there were during the the same period of 2013.
Research and Development Expenses. Research and development expenses increased to $3,663,000 for the first quarter of 2014 from $1,585,000 for the first quarter of 2013, an increase of $2,078,000. The increase in 2014 was driven by the increased costs of our ongoing clinical trials and the addition of new employees in the research and development functions.
General and Administrative Expenses. General and administrative expenses were $1,157,000 for the quarter ended March 31, 2014 compared to $1,004,000 for the same period in 2013, an increase of $153,000. This increase is principally attributable to increased expenses incurred related to legal and professional fees and investor relations. .
Change in Fair Value of Warrants. Various factors are considered in the pricing model 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 $200,000 net change in fair value of the warrants credited to the results of operations, recognized during the three months ended March 31, 2014, 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 March 31, 2014, Lpath had cash and cash equivalents totaling $16.1 million. In addition, from April 1, 2014 through May 9, 2014, we have received net proceeds of $1.2 million from the issuance of common stock in “at-the-market” sales pursuant to the at-the-market sales agreement we entered into in March 2014. Additional near-term sources of cash include our accounts receivable of $2.7 million and funding under the terms of the Pfizer Agreement to support our Nexus clinical trial, as well as $0.3 million of unexpended funding remaining on NIH grants awarded to the company. We expect that the cost of our ongoing research and development activities, including general and administrative expenses, will approximate $24 million from April 1, 2014 through the second quarter of 2015. This estimate includes the expenses to conduct the Nexus clinical trial for iSONEP, as well as the Phase 2 clinical trial for ASONEP. In addition, this estimate includes the expenses to develop the manufacturing process and conduct the IND-enabling studies for our third product candidate, Lpathomab. We believe our cash on hand as of March 31, 2014, 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, as currently planned, through the second quarter of 2015.
In addition, we may receive additional funding to support our operations beyond the second quarter of 2015 under the Pfizer Agreement if Pfizer (or any third party who may acquire Pfizer’s rights) elects to exercise its option to continue the clinical development of iSONEP. However, we cannot assure you that we will be successful in maintaining our commercial relationship with Pfizer (or any third party who may acquire Pfizer’s rights), that Pfizer (or any third party who may acquire Pfizer’s rights) 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. Even if Pfizer exercises its option, but does so after 2014, we may be required to secure substantial additional capital to continue to fund our planned drug discovery and development projects beyond the second quarter of 2015.
We have also entered into an at-the-market issuance sales agreement on March 18, 2014 with MLV & Co. LLC and filed a prospectus supplement under which we may sell up to $23,000,000 in shares of our common stock.
Further, our expenses may exceed our current plans and expectations. For example, we believe we have adequate supplies of clinical material to complete the Phase 2 clinical trial for iSONEP, and we also believe we have enough clinical material to meet the requirements of the ASONEP Phase 2 clinical trial through 2014. However, depending on various factors, including the stability of the drug product and the length of time that patients remain on the study, we may need to manufacture additional clinical material to complete the ASONEP Phase 2 clinical trial.
Until we can generate significant cash from operations, we expect to continue to fund our operations with cash resources generated from a combination of NIH grants, license agreements, and the proceeds of offerings of our equity and debt securities. However, we may not be successful in obtaining funding 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 could eventually 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, 2013.
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 Controls 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 covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are not currently a party in any material legal proceedings.
In evaluating us and our common stock, we urge you to carefully consider the risks and other information in this Quarterly Report on Form 10-Q, as well as the risk factors disclosed in Item 1A. to Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, which we filed with the SEC on March 18, 2014. The risks and uncertainties described in “Item 1A — Risk Factors” of our Annual Report on Form 10-K have not materially changed. Any of the risks discussed in this Quarterly Report on Form 10-Q or any of the risks disclosed in Item 1A. to Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as well as additional risks and uncertainties not currently known to us or that we currently deem immaterial, could materially and adversely affect our results of operations or financial condition.
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
None.
(a) Exhibits:
The following exhibit index shows those exhibits filed with this report and those incorporated herein by reference:
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2.1 |
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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). |
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2.2 |
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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). |
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3.1 |
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Composite Articles of Incorporation (filed as Exhibit 3.1 to Form 8-A filed with the SEC on October 18, 2012 and incorporated herein by reference). |
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3.2 |
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Certificate of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed with the SEC on June 21, 2013). |
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3.3 |
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Amended and Restated Bylaws, as amended on April 3, 2007 (conformed) (filed as Exhibit 3.5 to the Registration Statement on Form SB-2, SEC File No. 144199 (the “June 2007 SB-2”) and incorporated herein by reference). |
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3.4 |
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Amendment No. 1 to Amended and Restated Bylaws (filed as Exhibit 3.1 to the Current Report on Form 8-K filed with the SEC on October 26, 2012 and incorporated herein by reference). |
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4.1 |
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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.) |
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4.2 |
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Form of Common Stock Purchase Warrant for Placement Agents of the Units. (filed as an exhibit to the Current Report on Form 8-K filed with the SEC on March 6, 2012 and incorporated herein by reference.) |
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4.3 |
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Form of Warrant for Griffin Securities, Inc. (filed as an exhibit to the Current Report on Form 8-K filed with the SEC on March 6, 2012 and incorporated herein by reference.) |
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10.1 |
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Lease dated May 31, 2011 between Sorrento Science Park, LLC and Lpath, Inc. for 4025 Sorrento Valley Blvd. San Diego, California 92121 (filed as an exhibit to the Current Report on the Current Report on Form 8-K filed with the SEC on June 3, 2011 and incorporated herein by reference). |
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10.2 |
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Assignment Agreement dated June 9, 2005 between Lpath Therapeutics Inc. and LPL Technologies, Inc. (filed as an exhibit to the Current Report on the Current Report on Form 8-K filed with the SEC on December 6, 2005 and incorporated herein by reference). |
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10.3 |
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Research Collaboration Agreement dated August 2, 2005 between Lpath Therapeutics Inc. and AERES Biomedical Limited (filed as Exhibit 10.4 to the Current Report on Form 8-K/A filed on January 9, 2006 and incorporated herein by reference) (portions of this exhibit have been omitted pursuant to a request for confidential treatment). |
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10.4 |
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Lpath, Inc. Amended and Restated 2005 Equity Incentive Plan (filed as Appendix A to the company’s Schedule 14-A Proxy Statement filed on August 28, 2007 and incorporated herein by reference).+ |
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10.5 |
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Assignment and Assumption Agreement dated December 1, 2005 by and between Lpath, Inc. and Lpath Therapeutics, Inc. (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). |
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10.6 |
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Form of Employment Agreement between Lpath, Inc. and Scott R. Pancoast dated as of January 1, 2006 (filed as an exhibit to the Current Report on Form 8-K filed with the SEC on March 29, 2006 and incorporated herein by reference).+ |
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10.7 |
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Form of Employment Agreement between Lpath, Inc. and Gary Atkinson dated as of February 6, 2006 (filed as an exhibit to the Current Report on Form 8-K filed with the SEC on March 29, 2006 and incorporated herein by reference).+ |
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10.8 |
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Form of Consultant Agreement between Lpath, Inc. and Roger Sabbadini, Ph.D. dated as of June 1, 2012 (filed as Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on June 5, 2012 and incorporated herein by reference).+ |
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10.9 |
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Development and Manufacturing Services Agreement dated August 16, 2006 between Lpath Inc. and Laureate Pharma, Inc. (filed as Exhibit 10.13 to the Quarterly Report on Form 10-QSB for the quarter ended September 30, 2006 filed on November 13, 2006 and incorporated herein by reference) (portions of this exhibit have been omitted pursuant to a request for confidential treatment). |
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10.10 |
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Securities Purchase Agreement, dated as of April 6, 2007, by and among Lpath, Inc. and each investor identified therein (filed as Exhibit 10.14 to the June 2007 SB-2 and incorporated herein by reference). |
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10.11 |
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Registration Rights Agreement, dated as of April 6, 2007, by and among Lpath, Inc. and each investor identified therein (filed as Exhibit 10.15 to the June 2007 SB-2 and incorporated herein by reference). |
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10.12 |
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License Agreement dated August 8, 2006 between Lonza Biologics PLC and Lpath, Inc. (filed as an exhibit to the Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 2007 filed with the SEC on November 13, 2007 and incorporated herein by reference)(portions of this exhibit have been omitted pursuant to a request for confidential treatment). |
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10.13 |
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Securities Purchase Agreement, dated August 12, 2008, by and among Lpath, Inc. and each of the investors identified therein (filed as Exhibit 10.17 to the registration statement on Form S-1 filed with the SEC on September 11, 2008 and incorporated herein by reference). |
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10.14 |
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Registration Rights Agreement, dated August 12, 2008, by and among Lpath, Inc. and each of the investors identified therein (filed as Exhibit 10.18 to the registration statement on Form S-1 filed with the SEC on September 11, 2008 and incorporated herein by reference). |
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10.15 |
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License Agreement, dated as of October 28, 2008, by and between Lpath, Inc. and Merck KgaA (filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on March 25, 2009 and incorporated herein by reference) (portions of this exhibit have been omitted pursuant to a request for confidential treatment). |
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10.16 |
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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). |
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10.17 |
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Registration Rights 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). |
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10.18 |
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Option, License and Development Agreement, dated as of December 16, 2010, by and between Lpath, Inc. and Pfizer Inc. (filed as Exhibit 10.19 to the Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on March 23, 2011 and incorporated herein by reference) (portions of this exhibit have been omitted pursuant to a request for confidential treatment). |
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10.19 |
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Form of Placement Agent Agreement. (filed as an exhibit to the Current Report on Form 8-K filed with the SEC on March 6, 2012 and incorporated herein by reference.) |
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10.20 |
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Form of Subscription Agreement for U.S. investors. (filed as an exhibit to the Current Report on Form 8-K filed with the SEC on March 6, 2012 and incorporated herein by reference.) |
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10.21 |
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Financial Advisor Agreement, dated as of December 30, 2011 by and between Lpath, Inc. and Griffin Securities, Inc. (filed as an exhibit to the registration statement on Form S-1/A filed with the SEC on February 10, 2012 and incorporated herein by reference.) |
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10.22 |
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Form of Indemnification Agreement for directors and officers. (filed as an exhibit to Form 8-K filed with the SEC on October 26, 2012 and incorporated herein by reference.) |
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10.23 |
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Amendment to Option, License and Development Agreement, dated December 5, 2012, by and between Lpath, Inc. and Pfizer Inc (filed as Exhibit 10.24 to the Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on March 15, 2013 and incorporated herein by reference). |
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10.24 |
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At-The-Market Issuance Sales Agreement, dated as of August 15, 2013 by and between MLV & Co. LLC, JMP Securities LLC and Lpath, Inc. (filed as an exhibit to the Registration Statement on Form S-3 filed with the SEC on August 15, 2013 and incorporated herein by reference). |
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10.25 |
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At-The-Market Issuance Sales Agreement, dated as of March 18, 2014 by and between MLV & Co. LLC and Lpath, Inc. (filed as Exhibit 10.25 to the Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 18, 2014 and incorporated herein by reference). |
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10.26 |
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First Amendment to Employment Agreement, between Lpath, Inc. and Gary Atkinson, entered into as of March 17, 2014. (filed as Exhibit 10.26 to the Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 18, 2014 and incorporated herein by reference). + |
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10.27 |
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Form of Option Agreement, between the Lpath, Inc. and its officers and directors (filed as Exhibit 10.27 to the Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 18, 2014 and incorporated herein by reference). + |
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10.28 |
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Employment Agreement, dated as of April 15, 2013 by and between Lpath, Inc. and Dario A. Paggiarino, M.D.+ (filed as Exhibit 10.28 to the Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 18, 2014 and incorporated herein by reference). |
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31.1 |
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Section 302 Certification by Chief Executive Officer of Lpath, Inc.* |
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31.2 |
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Section 302 Certification by Chief Financial Officer of Lpath, Inc.* |
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32.1 |
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Section 906 Certification by Chief Executive Officer and Chief Financial Officer of Lpath, Inc.* |
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101.INS# XBRL |
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Instance Document |
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101.SCH# XBRL |
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Taxonomy Extension Schema Document |
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101.CAL# XBRL |
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Taxonomy Extension Calculation Linkbase Document |
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101.DEF# XBRL |
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Taxonomy Extension Definition Linkbase Document |
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101.LAB# XBRL |
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Taxonomy Extension Label Linkbase Document |
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101.PRE# XBRL |
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Taxonomy Extension Presentation Linkbase Document |
+ Management contract or compensation plan or arrangement
* Provided herewith.
(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.
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.
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Lpath, Inc. |
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Date: May 9, 2014 |
/S/ SCOTT R. PANCOAST |
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Scott R. Pancoast |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
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/S/ GARY J. G. ATKINSON |
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Gary J. G. Atkinson, |
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Senior Vice President and Chief Financial Officer |
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(Principal Financial and Accounting Officer) |