Apollo Endosurgery, Inc. - Quarter Report: 2015 September (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

---

 

FORM 10-Q

 

---

 

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

 

For the quarterly period ended September 30, 2015

 

OR

 

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

 

For the transition period from                  to                 

 

Commission File Number: 001-35706

 

---

 

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 ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒ No ☐

 

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 ☐ No ☒

 

The number of shares of issuer’s outstanding common stock as of November 11, 2015 was 32,406,671.

 

 

 

 

LPATH, INC.

FORM 10-Q

 

September 30, 2015

 

TABLE OF CONTENTS

 

 

 

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, our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015 filed with the Securities and Exchange Commission (the “SEC”) on August 11, 2015, and our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 filed with the SEC on March 24, 2015. 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.

 

 

PART I. FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS

 

LPATH, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

 

LPATH, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

 

 

See accompanying notes to the condensed consolidated financial statements.

 

 

 

LPATH, INC.

Condensed Consolidated Statements of Cash Flows

Nine months Ended September 30,

(Unaudited)

 

 

See accompanying notes to the condensed consolidated financial statements.

 

LPATH, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2015

 

Note 1 — BASIS FOR PRESENTATION

 

The unaudited condensed consolidated balance sheet of Lpath, Inc. (“Lpath” or “the company”) as of December 31, 2014 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 and nine-month periods ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015 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, 2014.

 

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.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenues from Contracts with Customers (Topic 606). This guidance applies to any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance supersedes existing revenue recognition guidance, including most industry-specific guidance, as well as certain related guidance on accounting for contract costs. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is not permitted. The company is currently evaluating the impact of this ASU on its consolidated financial statements.

 

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 defines management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. The guidance in ASU 2014-15 is effective for annual reporting periods beginning after December 15, 2016, with early application permitted. We do not expect that this standard will have a material impact on our consolidated financial statements.

 

In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement Period Adjustments, that eliminates the requirement to restate prior period financial statements for measurement period adjustments. The standard is effective for interim and annual periods beginning after December 15, 2015. The new standard must be applied prospectively to measurement period adjustments that occur after the effective date. We do not expect that this standard will have a material impact on our consolidated financial statements.

 

 

Note 2 – GOING CONCERN UNCERTAINTY

 

The accompanying consolidated financial statements have been prepared assuming that the company will continue as a going concern. Lpath utilized cash in operations of $8.8 million during the nine months ended September 30, 2015 and $15.2 million during the year ended December 31, 2014. The company expects to continue to incur cash losses from operations during the remainder of 2015. These conditions raise substantial doubt about the company’s ability to continue as a going concern. Management’s plans with regard to these matters are discussed below. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

As of September 30, 2015, the company had cash totaling $11.6 million.  As they are currently planned, we do not believe that our existing cash resources are sufficient to meet our operating plan for the full 12 month period after the date of this filing.  We estimate that the cost of our ongoing drug discovery and development efforts, including our general and administrative expenses, will consume approximately $8 million through the end of the second quarter of 2016. Further, we estimate that the costs to wind-down our operations in an orderly fashion will require $3 million.  However, in the event we are unable to obtain additional funding or generate revenue from licensing fees by early 2016, we can defer or curtail certain planned research and development activities, and extend our operating runway through the third quarter of 2016.

 

We are exploring various strategic alternatives and seeking additional funding to finance our research and development activities beyond the second quarter of 2016 by:

 

 

 

 

 

Future financings through equity investments will be dilutive to existing stockholders. Also, the terms of securities we may issue in future capital transactions may be more favorable for our new investors. If we raise additional funds through collaboration or licensing arrangements, we may be required to relinquish potentially valuable rights to our product candidates or proprietary technologies, or grant licenses on terms that are not favorable to us. In any event, there can be no assurance that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable to us. If we are unable to raise funds to satisfy our capital needs on a timely basis, we will be required to curtail our current business plans and may ultimately be required to cease operations altogether.

 

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.

 

On May 20, 2015, Lpath announced that its Phase 2 "Nexus" clinical trial evaluating iSONEP™ in patients with wet age-related macular degeneration (wet AMD) did not meet its primary or key secondary endpoints. Wet AMD patients who had not responded adequately to existing anti-vascular endothelial growth factor (VEGF) therapies including Lucentis®, Avastin® and Eylea® did not show any statistically significant improvement in visual acuity when treated with iSONEP as an adjunctive or monotherapy.  On August 9, 2015, Pfizer’s option to obtain worldwide rights to iSONEP expired, unexercised, which resulted in the termination of the Pfizer Agreement. Consequently, all rights that Pfizer held in the iSONEP program have reverted to Lpath. Lpath has no plans for further development of iSONEP.  As part of the agreement, Lpath 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. That right of first refusal expired on August 9, 2015, concurrently with the expiration of Pfizer’s option to acquire the license to iSONEP. Pfizer has no further obligations to fund clinical trial costs incurred after the expiration date of the Pfizer Agreement.

 

The company recognized revenue under the Pfizer Agreement as follows:

 

 

 

Note 4 — SHARE-BASED PAYMENTS

 

The company recognized share-based compensation expense as follows:

 

 

As of September 30, 2015, there was a total of $1.5 million in unrecognized compensation expense related to unvested share-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 3.8 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 nine months ended September 30, 2015 and 2014.

 

Note 5 — 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 September 30, 2015 were as follows:

 

 

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):

 

 

The terms of all outstanding warrants permit the company, upon exercise of the warrants, to settle the contract by the delivery of unregistered shares. As of September 30, 2015 there were 4,591,359 warrants outstanding with a weighted-average exercise price of $4.21 per share expiring through September 2019.

 

Note 6 — COMMON STOCK

 

On March 18, 2014, Lpath entered into an 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 (subject to limitations set by the SEC if the aggregate market-value of the company’s common stock held by non-affiliates remains below $75 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 nine-month period ended September 30, 2015, the company sold 11,644,872 shares at sales prices ranging from $0.21 to $0.34 per share, resulting in $3,272,807 in net proceeds. From October 1, 2015 to November 11, 2015, the company sold an additional 1,298,117 shares at sales prices ranging from $0.21 to $0.23 per share, resulting in $281,517 in net proceeds. 

 

Note 7 — EARNINGS PER SHARE

 

Basic net loss per common share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for potentially dilutive securities.  Because the company reported a net loss for the three months ended September 30, 2015 and 2014, diluted net loss per common share is the same as basic net loss per common share for those periods.  Anti-dilutive common stock equivalents were excluded from the calculation of diluted loss per share as follows:

 

 

 

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, 2014, 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 2014 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 developed four drug candidates, advancing the first two to mid-stage trials, and built evidence to support our approach of targeting bioactive lipids to treat a wide range of diseases.  In September 2015, we announced that the first cohort of six subjects had been dosed in the Phase 1 clinical trial of Lpathomab.  We intend to generate in vivo data in select programs, including Altepan™ and other earlier stage preclinical candidates, in order to identify our next clinical candidates and indications to pursue.  Additionally, we intend to actively explore partnering, licensing and monetization options for our pipeline assets.

 

During the second quarter of 2015, we announced that our multicenter, Phase 2 “Nexus” clinical trial evaluating iSONEP™ in patients with wet age-related macular degeneration (wet AMD) did not meet its primary or key secondary endpoints.  iSONEP is the ocular formulation of sonepcizumab, a humanized monoclonal antibody (“mAb”) against sphingosine-1-phosphate (“S1P”).  The Wet AMD patients in the Nexus trial did not show statistically significant improvement in visual acuity when treated with iSONEP as an adjunctive or monotherapy.

 

We had entered into an agreement with Pfizer Inc. in December 2010, and amended it in 2012 (collectively, the “Pfizer Agreement”), that provided Pfizer with an exclusive option for a worldwide license to develop and commercialize iSONEP.  As we expected and discussed in previous press releases, based on the negative results of the Nexus trial, Pfizer elected to allow its option to expire unexercised on August 9, 2015. As a result, the Pfizer Agreement terminated by its terms, and all rights that Pfizer held in the iSONEP program have reverted to Lpath.  At present, we have no plans for further development of iSONEP.

 

During the first quarter, we announced that our Phase 2a single-agent, open-label study of ASONEP™ did not meet the primary endpoint of statistically significant progression-free survival in patients with advanced renal cell carcinoma (RCC).  ASONEP™ is the systemic formulation of sonepcizumab.  To successfully meet the primary endpoint of progression-free survival, at least 20 out of 39 patients needed to be progression-free at four months of treatment. Fourteen out of 40 patients (over enrolled by one patient) were progression-free at four months.  Eight of the fourteen patients were progression-free for at least six months, of which three patients remained progression-free for over 20 months. Overall, ASONEP was well-tolerated. The ASONEP study follow-up period concluded during the third quarter of 2015, and there are no longer any patients being treated with ASONEP.  We are now exploring other indications where ASONEP may have a better chance of success.

 

As part of the Pfizer Agreement, Lpath granted to Pfizer (or a third party who may acquire Pfizer’s rights) a right of first refusal for ASONEP. That right of first refusal expired on August 9, 2015, concurrently with the expiration of Pfizer’s option to acquire the license to iSONEP.

 

Lpathomab is a mAb against lysophosphatidic acid (“LPA”), a bioactive lipid that has been characterized in scientific literature as playing a key role in nerve injury and neuropathic pain. Published research has also demonstrated that LPA is a significant promoter of cancer-cell growth and metastasis in a broad range of tumor types, and plays a key role in pulmonary fibrosis. Preclinical studies showed strong in vivo results with Lpathomab in several different pain models, which suggest that LPA may be an attractive target across a variety of chronic pain conditions, including diabetic peripheral neuropathy, post-herpetic neuralgia, chemotherapy-induced neuropathic pain and pain associated with lumbosacral radiculopathy.

 

In September 2015, we announced that the first cohort of six subjects had been dosed in the Phase 1 clinical trial with Lpathomab. The double-blind, placebo-controlled, single ascending dose trial is designed to evaluate the safety, tolerability, pharmacokinetics and pharmacodynamics of Lpathomab in healthy volunteers. The trial also aims to establish a maximum tolerated dose for future clinical studies in patients with neuropathic pain or other potential indications. The trial will include a total of five cohorts at increasing doses. As of the date of this filing, subjects in the first three cohorts have been dosed. If this Phase 1 clinical trial continues as scheduled, we expect that the fifth cohort of patients will be dosed in December, 2015.

 

We also have a preclinical drug candidate, Altepan, that has now shown positive results in preclinical models of pulmonary fibrosis, asthma, inflammatory bowel disease, and other indications. Altepan is a monoclonal antibody targeting members of the cysteinyl leukotriene family, which are important mediators of inflammatory disorders. Altepan is ready to begin IND-enabling development activities to prepare for an IND submission to the FDA as soon as funding is available.

 

We have incurred significant net losses since its inception. As of September 30, 2015, we had an accumulated deficit of approximately $73.7 million. As they are currently planned, we estimate that our ongoing drug discovery and development efforts, including general and administrative expenses, will require us to use approximately $8 million from October 1, 2015, through the second quarter of 2016. As of September 30, 2015, we had cash and cash equivalents totaling $11.6 million. In addition, from October 1, 2015 to November 11, 2015, we raised net proceeds of $282,000 from the sale of our common stock in at-the-market transactions pursuant to the MLV Agreement. We believe these funds should be sufficient to fund our planned drug discovery and development activities through the second quarter of 2016.

 

We expect our overall expenditures to decrease in the near term as we have concluded both Phase 2 clinical trials on iSONEP and ASONEP. 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 nine-months ended September 30, 2015 were $45,000 compared to $448,000 for the nine-months ended September 30, 2014. Grant and royalty revenues for the quarter ended September 30, 2015 were $18,000 compared to $132,000 for the quarter ended September 30, 2014. The decreases of $403,000 for the nine-months ended September 30, 2015 and $114,000 for the quarter ended September 30, 2015 were due to the conclusion of our large NIH grants in the second half of 2014.  As of September 30, 2015, we have completed work on all of our grants.

 

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 provided financial support for our iSONEP and ASONEP development programs. We recognized revenues as follows:

 

 

Pfizer had no obligation to reimburse us for any costs of the Nexus trial occurring after August 9, 2015.

 

Research and Development Expenses.    Research and development expenses decreased to $7,102,000 for the first nine months of 2015 from $11,868,000 for the first nine months of 2014, a decrease of $4,766,000.  Research and development expenses decreased to $1,430,000 for the third quarter of 2015 from $3,630,000 for the third quarter of 2014, a decrease of $2,200,000. The decreases in research and development expenses in 2015 were principally due to decreasing activity related to our Phase 2 clinical trials and the reduction in our workforce that was implemented in May, 2015.

 

General and Administrative Expenses. General and administrative expenses were $3,010,000 for the first nine months of 2015 compared to $3,289,000 for the same period in 2014, a decrease of $278,000.  This decrease is principally attributable to decreased compensation expenses.  General and administrative expenses were $858,000 for the third quarter of 2015 compared to $1,049,000 for the same period in 2014, an increase of $191,000.  These decreases were due to the reduction in our workforce.

 

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 risk-free interest rate and volatility of the company’s stock price equal to 100%, as specified in the underlying warrants. 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. As such, we expect future changes in the fair value of the warrants may continue to vary significantly from quarter to quarter. Management cautions that the $850,000 net change in fair value of the warrants credited to the results of operations, recognized during the nine months ended September 30, 2015, 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 Lpath.

 

Liquidity and Capital Resources

 

The accompanying consolidated financial statements have been prepared assuming that the company will continue as a going concern. Lpath utilized cash in operations of $8.8 million during the nine months ended September 30, 2015 and $15.2 million during the year ended December 31, 2014. The company expects to continue to incur cash losses from operations during the remainder of 2015.  

 

As of September 30, 2015, the company had cash totaling $11.6 million.  In addition, subsequent to September 30, 2015, we raised net proceeds of $282,000 from the sale of our common stock in at-the-market transactions pursuant to the MLV Agreement.  We may also receive additional funding from future awards of NIH grants.  Nevertheless, as they are currently planned, we do not believe that our existing cash resources will be sufficient to meet our operating plan for the full 12 month period after the date of this filing. We estimate that the cost of our ongoing drug discovery and development efforts, including our general and administrative expenses, will consume approximately $8 million through the end of the second quarter of 2016.  Further, we estimate that the costs to wind-down our operations in an orderly fashion will require approximately $3 million.  However, in the event that we are unable to obtain additional funding or generate revenue form licensing fees before early 2016, we can defer or curtail certain planned research and development activities, and extend our operating runway through the third quarter of 2016.

 

We are exploring various strategic alternatives and seeking additional funding to finance our research and development activities beyond the second quarter of 2016 by:

 

 

 

 

 

Future financings through equity investments will be dilutive to existing stockholders. Also, the terms of securities we may issue in future capital transactions may be more favorable for our new investors. 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.  If we raise additional funds through

collaboration or licensing arrangements, we may be required to relinquish potentially valuable rights to our product candidates or proprietary technologies, or grant licenses on terms that are not favorable to us. In any event, there can be no assurance that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable to us. If we are unable to raise funds to satisfy our capital needs on a timely basis, we will be required to curtail our operations and current business plans, and may be required to cease operations altogether.

 

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, 2014.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenues from Contracts with Customers (Topic 606). This guidance applies to any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance supersedes existing revenue recognition guidance, including most industry-specific guidance, as well as certain related guidance on accounting for contract costs. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.  Early application is not permitted. The company is currently evaluating the impact of this ASU on its consolidated financial statements.

 

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 defines management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. The guidance in ASU 2014-15 is effective for annual reporting periods beginning after December 15, 2016, with early application permitted. We do not expect that this standard will have a material impact on our consolidated financial statements.

 

In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement Period Adjustments, that eliminates the requirement to restate prior period financial statements for measurement period adjustments. The standard is effective for interim and annual periods beginning after December 15, 2015. The new standard must be applied prospectively to measurement period adjustments that occur after the effective date. We do not expect that this standard will have a material impact on our consolidated financial statements.

 

 

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, financial, and accounting officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Under the supervision of our Interim Chief Executive Officer and Chief Financial Officer (our principal executive, financial, and accounting 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,  financial, and accounting 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 Interim Chief Executive Officer and 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 Interim Chief Executive Officer and 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.

 

PART II — OTHER INFORMATION

 

Item 1.  LEGAL PROCEEDINGS

 

We are not currently a party in any material legal proceedings.

 

Item 1A.  RISK FACTORS

 

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, 2014, which we filed with the SEC on March 24, 2015 (the “Form 10-K”) and the risk factors disclosed in Item 1A. to Part II of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, which we filed with the SEC on August 11, 2015.  The risks and uncertainties described in “Item 1A — Risk Factors” of our Form 10-K and our Form 10-Q for the quarter ended June 30, 2015  have not materially changed, other than the risk factors disclosed below. 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 Form 10-K and Item 1A. to Part II of our Form 10-Q for the quarter ended June 30, 2015, 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, financial condition or prospects.

 

We will require, and may not be able to obtain, substantial additional financial resources in order to carry out our planned activities and we may not be able to continue as a going concern.

 

As of September 30, 2015, we had cash and cash equivalents totaling $11.6 million.  Additional near-term sources of cash include proceeds from the sale of our stock under the MLV Agreement.  Subsequent to September 30, 2015, we sold 1,298,117 shares at sales prices ranging from $0.21 to $0.23 per share, resulting in $281,517 in net proceeds. We may also receive additional funding from future awards of NIH grants.  Nevertheless, as they are currently planned, we do not believe that our existing cash resources will be sufficient to meet our operating plan for the full 12 month period after the date of this filing.  We estimate the cost of our ongoing drug discovery and development efforts, including our general and administrative expenses, will consume approximately $8 million through the end of the second quarter of 2016.  Further, we estimate that the costs to wind-down our operations in an orderly fashion will require approximately $3 million.  However, in the event that we are unable to obtain additional funding or generate revenue from licensing fees by early 2016, we can defer or curtail certain planned research and development activities, and extend our operating runway through the third quarter of 2016.

 

As a result, based on our current plans and available resources, we will be required to secure additional capital to continue to fund our planned drug discovery and development projects beyond the second quarter of 2016. In addition, our expenses may exceed our current plans and expectations, which would require us to secure additional capital sooner than anticipated. See Note 2 to the Condensed Consolidated Financial Statements.

 

We expect that we will be required to issue additional equity or debt securities or enter into other commercial arrangements, including relationships with corporate and other partners, to secure the additional financial resources to support our development efforts and future operations.  However, given the early stage of development of our current clinical and preclinical drug candidates, we may not be successful in obtaining funding from new collaboration or license agreements, or in receiving milestone or royalty payments under those agreements.

Future financings through equity investments will be dilutive to our existing stockholders. Also, the terms of securities we may issue in future capital transactions may be more favorable for our new investors. 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.  If we raise additional funds through collaboration or licensing arrangements, we may be required to relinquish potentially valuable rights to our product candidates or proprietary technologies, or grant licenses on terms that are not favorable to us.  In any event, there can be no assurance that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable to us. If we are unable to raise funds to satisfy our capital needs on a timely basis, we will be required to curtail our operations and current business plans and may be required to cease operations altogether. 

 

We could be delisted from NASDAQ, which could seriously harm the liquidity of our stock and our ability to raise capital

 

On July 9, 2015 we received a letter (the “Notice”) from the Listing Qualifications staff (the “Staff”) of The NASDAQ Stock Market LLC (“Nasdaq”) indicating that, based upon the closing bid price of the our common stock for the last 30 consecutive business days, we no longer meet the requirement to maintain a minimum bid price of $1 per share, as set forth in Nasdaq Listing Rule 5550(a)(1). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have been provided a period of 180 calendar days, or until January 5, 2016, in which to regain compliance. In order to regain compliance with the minimum bid price requirement, the closing bid price of our common stock must be at least $1 per share for a minimum of ten consecutive business days during this 180-day period. In the event that we do not regain compliance within this 180-day period, we may be eligible to seek an additional compliance period of 180 calendar days if we meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the bid price requirement, and provide written notice to Nasdaq of our intent to cure the deficiency during this second compliance period, by effecting a reverse stock split, if necessary. However, if it appears to the Nasdaq staff that we will not be able to cure the deficiency, or if we are otherwise not eligible, Nasdaq will provide us notice that our common stock will be subject to delisting.

 

 

 

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:

 

 

 

 

---

*             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.

 

 

SIGNATURE

 

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.