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PATH > SEC Filings for PATH > Form 10-K on 27-Mar-2013All Recent SEC Filings

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Form 10-K for NUPATHE INC.


27-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read together with our audited financial statements and related notes appearing elsewhere in this Form 10-K.

Overview

We are a specialty pharmaceutical company focused on the development and commercialization of branded therapeutics for diseases of the central nervous system, including neurological and psychiatric disorders. Our lead product, Zecuity (sumatriptan iontophoretic transdermal system), was approved by the FDA on January 17, 2013 for the acute treatment of migraine with or without aura in adults. Zecuity is a single-use, battery-powered patch that actively delivers sumatriptan, the most prescribed migraine medication, through the skin. Zecuity is the first patch approved by the FDA for the acute treatment of migraine. We designed Zecuity to overcome limitations of current migraine treatments that are related to route of administration and peak plasma concentrations, and in particular, to address the unmet needs of patients who experience migraine-relating nausea (MRN) as part of their attacks. We expect to make Zecuity available by prescription in the U.S. in the fourth quarter of 2013.

We are actively seeking partnerships to maximize the commercial potential for Zecuity. Our goal is to secure a commercial partner prior to the launch of Zecuity and to build our commercial infrastructure to complement that of our partner, which may include the hiring and deployment of our own specialty sales force. If we hire our own specialty sales force, we may seek to acquire complementary products to market and sell, or collaborate with pharmaceutical or biotechnology companies to market and sell their products. We may also seek to commercialize Zecuity outside the U.S., although we currently plan to do so only with a partner.

We also have two proprietary product candidates in preclinical development that address large market opportunities. NP201, for the continuous symptomatic treatment of Parkinson's disease, utilizes ropinirole, an FDA-approved dopamine agonist, and is designed to provide up to two months of continuous delivery. NP202, for the long-term treatment of schizophrenia and bipolar disorder, is designed to help address the long-standing problem of patient noncompliance by providing three months of continuous delivery of risperidone, an FDA-approved atypical antipsychotic. We are actively seeking partnerships to maximize the commercial potential for NP201 and NP202 in the U.S. and territories throughout the world and currently intend to limit spending on these programs until a development partner is obtained.

Liquidity and Capital Resources

We were incorporated in the State of Delaware in January 2005 and are a development-stage company. Since our inception, we have invested a significant portion of our efforts and financial resources in the development of Zecuity. Zecuity is the only product for which we have received marketing approval from the FDA, and to date we have not marketed, distributed or sold any products. As a result, we have generated no product revenue and have never been profitable. Our net loss for the years ended December 31, 2012, 2011 and 2010 was $24.5 million, $23.2 million and $24.4 million, respectively. As of December 31, 2012, we had an accumulated deficit of $140.8 million.

We have funded our operations to date primarily with the proceeds of the sale of common stock, convertible preferred stock, warrants, convertible notes and borrowings under credit facilities. From inception through December 31, 2012, we have received net proceeds of $128.0 million from the sale of common stock, convertible preferred stock, warrants and convertible notes. In October 2012, we received net proceeds of $26.3 million from the sale of 14 million units of our securities (the October 2012 Financing). The per unit purchase price was $2.00, and each unit consisted of one one-thousandth (1/1,000) of a share of our newly-designated Series A Preferred Stock, par value $0.001


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per share, and a five-year warrant to purchase one share of our common stock, par value $0.001 per share, at an exercise price of $2.00 per share. All shares of Series A Preferred Stock have converted into common stock.

In connection with the October 2012 Financing, we undertook certain cost containment measures in order to focus our expenditures on gaining FDA approval of Zecuity, securing commercial partners and select pre-launch activities. The cost containment measures included, among others:


the elimination of 15 full-time-equivalent positions in our workforce;


the reduction in expenditures relating to commercialization activities for Zecuity and our earlier stage product candidates; and


the delay of the filing of an Investigational New Drug application for NP202 until a development partner is obtained.

In November 2012, we entered into a Loan and Security Agreement with Hercules Technology Growth Capital, Inc. (Hercules) pursuant to which we obtained an $8.5 million term loan (Term Loan). We used $7.75 million of the Term Loan proceeds to repay in full the term loans outstanding under our Term Loan Facility with MidCap Funding III, LLC and Silicon Valley Bank and the Term Loan Facility was terminated. As of December 31, 2012, the principal balance of the Term Loan was $8.5 million and we are in compliance with all of the debt covenants.

We expect to continue to incur substantial additional operating losses for at least the next several years as we commercialize Zecuity and continue to develop our product candidates. Our future capital needs will depend on many factors, including:


the extent to which we are successful in obtaining a commercial partner for Zecuity and the timing, scope, terms and structure of such partnership;


the cost, scope and timing of activities undertaken for commercialization of Zecuity;


the extent to which we are successful in establishing collaboration, co-promotion, distribution or other similar arrangements for our product candidates;


the scope, progress, results and costs of development for our product candidates; and


the extent to which we acquire or invest in new products, businesses and technologies.

Our principal sources of liquidity are cash and cash equivalents of $22.6 million as of December 31, 2012. As of December 31, 2012, we had working capital of $19.8 million. During 2012, we used $20.6 million of cash for operating activities and $0.5 million for investing activities, which were partially funded from $20.6 million of net cash provided by financing activities (primarily from the $26.3 million of net proceeds from the October 2012 Financing).

We believe that our existing cash and cash equivalents will be sufficient to fund our operations and debt service obligations into the fourth quarter of 2013. However, changing circumstances may cause us to consume capital faster than we currently anticipate, and we may need to spend more money than currently expected because of such circumstances. The additional capital that we will require to launch Zecuity and fund our operations and debt service obligations beyond the fourth quarter of 2013 will depend largely upon the timing, scope, terms and structure of any commercial partnership that we are able to enter into for Zecuity because we intend to build our commercial infrastructure to complement that of our partner. However, there can be no assurance that we will be able to secure a commercial partner on acceptable terms or otherwise.

To meet our capital needs, we intend to raise additional capital through corporate collaborations, partnerships or other strategic transactions, debt or equity financings or other funding opportunities. There can be no assurance that we will be able to complete any such transaction on acceptable terms


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or otherwise. Furthermore, the covenants and the pledge of our assets as collateral under the 2012 Term Loan limit our ability to obtain additional debt financing. Until such time as we are able to secure the necessary capital, we intend to limit and delay certain expenditures required for commercialization of Zecuity.

If we raise additional funds by issuing equity securities, our stockholders will experience dilution. Debt financing, if available, will result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any debt financing or additional equity that we raise may contain terms, such as liquidation and other preferences, which are not favorable to us or our stockholders. If we raise additional funds through corporate collaboration, partnership or other strategic transactions, it may be necessary to relinquish valuable rights to Zecuity, our product candidates, our technologies or future revenue streams or to grant licenses or sell assets on terms that may not be favorable to us.

If we are unable to raise the necessary capital on terms acceptable to us, as and when needed, we will be required to delay the launch of Zecuity and to curtail and reduce our operations and costs and modify our business strategy, and we may be unable to continue as a going concern. As a result, our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements for the year ended December 31, 2012 related to our ability to continue as a going concern.

We have prepared our financial statements on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts of liabilities that might be necessary should we be unable to continue in existence.

Aspire Capital Purchase Agreement

In August 2011, we entered into a common stock purchase agreement (Purchase Agreement) with Aspire Capital Fund, LLC (Aspire Capital), which provides that Aspire Capital is committed to purchase up to an aggregate of $30.0 million of our common stock over the term of the Purchase Agreement. Upon execution of the Purchase Agreement, we issued 84,866 shares of common stock to Aspire Capital as a commitment fee in consideration for entering into the Purchase Agreement (the Commitment Shares) and we sold 70,721 shares of common stock to Aspire Capital at a per share purchase price of $7.07 resulting in gross proceeds to us of $0.5 million (the Initial Purchase Shares).

We have registered under the Securities Act of 1933 Aspire Capital's sale of the Commitment Shares, the Initial Purchase Shares, and 2,746,147 additional shares that we may elect to sell to Aspire Capital under the Purchase Agreement. As a result, on any trading day on which the closing sale price of common stock is not less than $4.00 per share, we may direct Aspire Capital to purchase shares of Company common stock at a known per share purchase price based on prevailing market prices, using a formula as set forth in the Purchase Agreement (a Regular Purchase). The maximum number of shares that we may direct Aspire to purchase on any trading day pursuant to a Regular Purchase is 100,000 shares or such lesser number of shares that results in an aggregate purchase price of not greater than $0.5 million.

In addition, on any trading day on which we direct Aspire Capital to make a Regular Purchase for the maximum number of shares set forth above, we may also direct Aspire Capital to purchase a number of shares of common stock equal to up to 30% of the aggregate shares of our common stock traded on the NASDAQ Global Market on the next trading day (a VWAP Purchase), subject to a maximum number of shares as we may determine and a minimum trading price, which is equal to the greater of (a) 90% of the closing price of our common stock on the business day immediately


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preceding the VWAP Purchase Date or (b) such higher price as we may set in the VWAP Purchase Notice. The per share purchase price of common stock sold to Aspire Capital pursuant to a VWAP Purchase is equal to 95% of the volume weighted average price for such purchase date.

There are no trading volume requirements or restrictions under the Purchase Agreement, and we will control the timing and amount of any stock sales to Aspire Capital. Aspire Capital has no right to require any sales by us, but is obligated to make purchases from us as we direct in accordance with the Purchase Agreement. There are no limitations on use of proceeds, financial or business covenants, restrictions on future financings, rights of first refusal, participation rights, penalties or liquidated damages in the Purchase Agreement. The Purchase Agreement may be terminated by us at any time, at our discretion, without any penalty or cost to us.

Other than the Commitment Shares and Initial Purchase Shares as referenced above, we have not made any sales to Aspire Capital during the years ended December 31, 2012 and December 31, 2011. The extent to which we may utilize the Purchase Agreement as a source of funding will depend on a number of factors, including the prevailing market price of our common stock, the volume of trading in our common stock and the extent to which we are able to secure funds from other sources. The Purchase Agreement expires in August 2013.

Key Components of Our Statement of Operations

Research and Development Expenses

Our research and development expenses consist of expenses incurred in developing, testing and seeking marketing approval of our product candidates, including:


Expenses associated with regulatory submissions, preclinical development, clinical trials and manufacturing;


Personnel related expenses, such as salaries, benefits, travel and other related expenses, including stock-based compensation;


Payments made to third party investigators who perform research and development on our behalf;


Payments to third party contract research organizations, laboratories and independent contractors;


Expenses incurred to obtain technology licenses if the technology licensed has not reached technological feasibility and has no alternative future use; and


Facility, maintenance and other related expenses.

We expense all research and development costs as incurred. Preclinical development expenses and clinical trial expenses for our product candidates are a significant component of our current research and development expenses. We track and record information regarding external research and development expenses for each study or trial that we conduct. From time to time, we use third party contract research organizations, laboratories and independent contractors in preclinical studies. We recognize the expenses associated with third parties performing these services for us in our preclinical studies based on the percentage of each study completed at the end of each reporting period. We coordinate clinical trials through a number of contracted investigational sites and recognize the associated expense based on a number of factors, including actual and estimated subject enrollment and visits, direct pass-through costs and other clinical site fees.

From our inception in January 2005 through December 31, 2012, we incurred research and development expenses of $76.9 million, of which $53.1 million was for the development of Zecuity (inclusive of $5.5 million of acquired in-process research and development expense in connection with


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the patent application utilized by Zecuity), $3.4 million was for the development of NP201 and $0.9 million was for to the development of NP202. The remaining research and development expenses are for amounts incurred that we do not allocate to specific programs, such as personnel related expenses, including salaries and benefits, as well as general fixed costs for our facility and related expenses.

We will continue to incur research and development expenses in 2013 related to Zecuity. As a condition to FDA approval of Zecuity, we agreed to conduct the following post-marketing clinical and non-clinical studies:

                                                       Expected         Required
Study Description                                     Start Date     Completion Date
Phase I: Open label, single-dose safety, PK and
tolerability study of Zecuity in pediatric
migraine patients (12 - 17 years)                    August 2013        July 2014
Phase III: Efficacy and tolerability of Zecuity
in the treatment of acute migraine in
adolescents: randomized, double-blind, placebo
controlled                                          September 2014    December 2015
Phase III: 12 month safety study in the treatment
of acute migraine in adolescents: Open label        September 2014    December 2016
Non-clinical: 7 day dermal painting study (mice)
using various penetration enhancers                    May 2013       November 2013
Non-clinical: A dermal carcinogenicity study of
sumatriptan succinate in mice                          May 2014       December 2016

As we are actively seeking development partnerships for NP201 and NP202 in the U.S. and territories throughout the world, we do not currently anticipate incurring significant research and development expenses in 2013 for the development of NP201 or NP202.

The amount of research and development expenses that we will incur in 2013 will depend largely upon the timing, scope, terms and structure of any commercial partnership that we are able to enter into for Zecuity because we intend to build our medical affairs and regulatory and quality affairs infrastructure to complement that of our partner. However, there can be no assurance that we will be able to secure a commercial partner on acceptable terms or otherwise. In the event we do not obtain a commercial partner and subject to obtaining additional capital, we expect research and development expenses to be greater in 2013 than 2012.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation, for personnel serving in our executive, finance, accounting, legal, marketing, market research and human resource functions. Our selling, general and administrative expenses also include facility and related costs not included in research and development expenses, professional fees for legal, including patent-related expenses, expenses related to market research and commercialization preparation activities, consulting, tax and accounting services, insurance, depreciation and general corporate expenses.

We expect to incur significant selling, general and administrative expenses in 2013 as we prepare for, and commercialize, Zecuity in the U.S. Our selling, general and administrative expenses in 2013 will depend largely upon the timing, scope, terms and structure of any commercial partnership that we are able to enter into for Zecuity because we intend to build our commercial infrastructure to complement that of our partner. However, there can be no assurance that we will be able to secure a commercial partner on acceptable terms or otherwise. In the event we do not obtain a commercial


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partner and subject to obtaining additional capital, we expect selling, general and administrative expenses to be substantially greater in 2013 than 2012.

Interest Income and Interest Expense

Our interest income consists of interest earned on our cash and cash equivalents. Our interest expense consists primarily of cash and non-cash interest costs related to our outstanding debt. Additionally, in connection with some of our debt financings, we issued warrants, the fair value of which we recorded as deferred financing costs or debt discount. We amortize these deferred financing costs and debt discounts over the lives of the loans as interest expense in our statement of operations. Any warrants that we issued that were liability classified, in accordance with accounting principles generally accepted in the U.S (GAAP), were marked-to-market on a quarterly basis and any change in fair value was recorded as interest expense in our statement of operations.

Change in fair value of warrants

In October 2012, we issued warrants that include a provision for "price protection" anti-dilution, and, as a result, were liability classified at the grant date. The warrants will be revalued at each balance sheet date using a Monte-Carlo simulation analysis to determine the fair value. These warrants were marked to market at December 31, 2012 and the change in fair value is recorded in Change in fair value of warrants on the accompanying statement of operations.

Net Operating Losses and Tax Loss Carryforwards

Our net loss was $24.5 million and $23.2 million for the years ended December 31, 2012 and 2011, respectively. We have incurred cumulative net losses of $121.1 million from inception through December 31, 2012. As of December 31, 2012, we had approximately $108.4 million of federal net operating loss carryforwards and state research and development credits available to offset future taxable income. These federal and state net operating loss carryforwards will begin to expire in 2025. Due to the uncertainty of our ability to realize the benefit of any net operating loss carryforwards and credits, the deferred tax asset related to these carryforwards has been fully offset by a valuation allowance at December 31, 2012.

Our IPO, together with private placements and other equity financing transactions that have occurred since our inception, may trigger, or may have already triggered, an "ownership change" pursuant to Section 382 of the Internal Revenue Code. If an ownership change is triggered, it will limit our ability to use some of our net operating loss carryforwards. In addition, since we will need to raise substantial additional funding to finance our operations, we may undergo further ownership changes in the future, which could further limit our ability to use net operating loss carryforwards. As a result, if we generate taxable income, our ability to use some of our net operating loss carryforwards to offset U.S. federal taxable income may be subject to limitations.

Critical Accounting Policies and Use of Estimates

This "Management's Discussion and Analysis of Our Financial Condition and Results of Operations" discusses our financial statements, which have been prepared in accordance with GAAP and are included in this Form 10-K. The preparation of these financial statements in accordance with GAAP requires us to make estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to clinical trial expenses and stock-based compensation. We base our estimates on historical experience and on various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.


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While our significant accounting policies are more fully discussed in note 3 to our financial statements, we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our financial statements. We have reviewed these critical accounting policies and estimates with the audit committee of our board of directors.

Research and Development Expenses

Although we manage the conduct of our own clinical trials, we rely on third parties to conduct our preclinical and clinical studies and to provide services, including data management, statistical analysis and electronic compilation for our clinical trials, as well as for the manufacture of our clinical trial supplies. At the end of each reporting period, we compare the payments made to each service provider to the estimated progress towards completion of the related project. Factors that we consider in preparing these estimates include the number of subjects enrolled in studies, milestones achieved and other criteria related to the efforts of our vendors. These estimates are subject to change as additional information becomes available. Depending on the timing of payments to vendors and estimated services provided, we record net prepaid or accrued expenses related to these costs. We calculate expenses incurred for the manufacture of our clinical supplies using our estimate of costs and capitalize these expenses on our balance sheet to the extent we hold clinical supply materials on hand to be distributed for use in our clinical trials. We expense these costs as the supplies are consumed in the trials.

Stock-Based Compensation

We use the Black-Scholes option-pricing model to value our stock option awards. The Black-Scholes option-pricing model requires the input of subjective assumptions, including the expected life of stock options, stock price volatility and the risk-free interest rate. The risk-free interest rate is based on U.S. Treasury instruments with a remaining term equal to the expected term of the option. As a newly public company, we do not have sufficient history to estimate the expected life of our options or the volatility of our common stock price. We use comparable public companies as a basis for our expected volatility to calculate the fair value of our option grants. We intend to continue to consistently apply this process using comparable companies until a sufficient amount of historical information regarding the volatility of our own share price becomes available. We use the "simplified method," as allowed under the Securities and Exchange Commission's (SEC) accounting guidance, to determine the expected life, which is the midpoint between an option's vesting date and contractual term. The assumptions used in calculating the fair value of stock options represent our best estimate and involve inherent uncertainties and the application of our judgment. As a result, if factors change and we use different assumptions, stock-based compensation could be materially different in the future. Prior to our IPO, the fair value of our common stock underlying grants of common stock options and restricted stock was determined by our board of directors or compensation committee.

Impact of Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-05, Comprehensive Income (Topic 220):
Presentation of Comprehensive Income (ASU 2011-05). The issuance of ASU 2011-05 is intended to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The guidance in ASU 2011-05 supersedes the presentation options in ASC Topic 220 and facilitates convergence of U.S. GAAP and IFRS by . . .

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