Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
LPTN > SEC Filings for LPTN > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for LPATH, INC

Form 10-Q for LPATH, INC


9-Nov-2012

Quarterly Report


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

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

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

Overview

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

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

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

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

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


Table of Contents

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

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

Results of Operations

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

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

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

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

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

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

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


Table of Contents

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

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

Liquidity and Capital Resources

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

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

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

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

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

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


Table of Contents

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

Critical Accounting Policies, Estimates, and Judgments

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

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

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

  Add LPTN to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for LPTN - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.