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LPTN > SEC Filings for LPTN > Form 10-Q on 8-Nov-2013All Recent SEC Filings

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Form 10-Q for LPATH, INC


8-Nov-2013

Quarterly Report


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, 2012 (the "2012 Annual Report"), as filed with the Securities and Exchange Commission (the "SEC") on March 15, 2013. 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 "Item 1A - Risk Factors" of this Quarterly Report on Form 10-Q and our 2012 Annual Report.

Overview

We are a biotechnology company focused on the discovery and development of lipidomic-based therapeutic antibodies, an emerging field of medical science that targets bioactive signaling lipids to treat a wide range of human diseases. We have two product candidates that are currently in clinical development, and one in pre-clinical evaluation.

In December 2010, we entered into an agreement providing Pfizer Inc. ("Pfizer") with an exclusive option for a worldwide license to develop and commercialize iSONEP (the "Pfizer Agreement"). iSONEP is the ocular formulation of sonepcizumab, a humanized monoclonal antibody ("mAb") against sphingosine-1-phosphate ("S1P"). As described in our 2012 Annual Report, we are currently conducting a Phase 2a clinical trial with Pfizer (the "Nexus trial") to test iSONEP™ as a treatment for wet-AMD.

In October 2013, Lpath announced that it had received notice from Pfizer that Pfizer is currently seeking to divest certain ophthalmology research and development assets, including Pfizer's exclusive option under the Pfizer Agreement. Lpath has presented an offer to Pfizer to reacquire these rights, and Lpath believes that a number of third parties may have an interest in acquiring these rights as well. Acquisition of the iSONEP option by a third party would not affect the terms of the Pfizer Agreement, as the existing rights and obligations currently held by Pfizer would either transfer to the third party or remain with Pfizer. We submitted an offer to reacquire the rights to the iSONEP program because we believe given acceptable terms, such reacquisition represents an opportunity to significantly increase the long-term value of Lpath's portfolio of drug candidates.

We expect to complete dosing the last Nexus trial patient during the first half of 2014. The actual time required to complete our clinical trials will depend upon a number of factors outside of our direct control, including those discussed in our 2012 Annual Report "Risk Factors - We may have delays in completing our clinical trials, and we may not complete them at all."

Following completion of the Nexus study, Pfizer (or a third party who may acquire Pfizer's rights) has the right to exercise its option for worldwide rights to iSONEP for an undisclosed option fee and, if Pfizer (or a third party who may acquire Pfizer's rights) exercises its option, the company will be eligible to receive development, regulatory, and commercial milestone payments that could total up to $497.5 million. In addition, the company will be entitled to receive tiered double-digit royalties based on sales of iSONEP.

ASONEP™ is the systemic formulation of sonepcizumab. We are collaborating with Beth Israel Deaconess Medical Center and other collaborators at academic medical research institutions on a Phase 2 clinical trial testing ASONEP as a treatment for renal cell carcinoma. That clinical trial is currently in progress.

As part of the Pfizer Agreement, Lpath has granted to Pfizer (or a third party who may acquire Pfizer's rights) a time-limited right of first refusal for ASONEP, which period ends when the iSONEP Nexus clinical trial is completed.

Lpathomab™, our pre-clinical product candidate, is a mAb against lysophosphatidic acid ("LPA"), a key bioactive lipid that has long been recognized as a significant promoter of cancer-cell growth and metastasis in a broad range of tumor types. Published research has also demonstrated that LPA is a significant contributor to neuropathic pain and plays a key role in pulmonary fibrosis. We have selected the clinical candidate mAb from among three humanized mAbs that inhibit LPA. These mAbs were tested against each other in various models of human disease to determine which mAb would be most likely to succeed in clinical trials. We are now in the early stages of antibody manufacturing process development, following which we expect to begin Investigational New Drug ("IND") enabling studies. The target date to begin testing Lpathomab in clinical trials is in early 2015.


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Lpath has incurred significant net losses since its inception. As of September 30, 2013, we had an accumulated deficit of approximately $48.1 million. We expect that the cost of our ongoing research and development activities, including general and administrative expenses, will approximate $24 million from September 30, 2013 through the end of 2014. This estimate includes the expenses to conduct the Nexus clinical trial for iSONEP, as well as the Phase 2a clinical trial for ASONEP. In addition, this estimate includes the expenses to develop the manufacturing process and conduct the IND-enabling studies for our third product candidate, Lpathomab. We expect our expenditures to increase as we continue the advancement of our product development programs. The lengthy process of completing clinical trials and seeking regulatory approval for one product candidate typically requires expenditures in excess of approximately $100 million, according to industry data. Any failure by us or delay in completing clinical trials, or in obtaining regulatory approvals, would cause our research and development expenses to increase and, in turn, have a material adverse effect on our results of operations.

Results of Operations

Grant and Royalty Revenue. Grant and royalty revenues for the quarter ended September 30, 2013 were $706,000 compared to $358,000 for the quarter ended September 30, 2012, an increase of $348,000. For the first three quarters of 2013, grant and royalty revenues were $1,283,000 compared to $759,000 for the first three quarters of 2012, an increase of $524,000. The increase in grant revenues is attributable to increased reimbursable costs incurred in our Phase 2a clinical trial of ASONEP and the commencement of work on a new grant related to the Lpathomab project that we received in third quarter of 2013.

Research and Development Revenue Under Collaborative Agreement. As described in Note 2 to the condensed consolidated financial statements, in December 2010 we entered into an agreement with Pfizer that provides financial support for our iSONEP and ASONEP development programs. We recognized revenues as follows:

                                       Nine Months Ended             Three Months Ended
                                         September 30,                 September 30,
                                      2013           2012           2013           2012
Cost reimbursements                $         -    $ 1,916,250    $         -    $         -
Amortization of license and
development fees                     4,336,036      2,826,920      1,845,021      1,060,057
                                   $ 4,336,036    $ 4,743,170    $ 1,845,021    $ 1,060,057

The increase in amortization of license and development fees in 2013 is attributable to increased development costs incurred as our Phase 2 clinical trials resumed after having been suspended for seven months in 2012. At the end of the second quarter of 2012, we reached the point in the contract where 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.

Research and Development Expenses. Research and development expenses increased to $3,353,000 for the third quarter of 2013 from $1,701,000 for the third quarter of 2012, an increase of $1,652,000. The resumption of our Phase 2 clinical trials in late 2012 caused our clinical trial-related expenses to increase by $1,489,000 in the third quarter of 2013 compared to the third quarter of 2012. Payroll costs increased $171,000 in third quarter of 2013 compared to the same period in 2012 due to increased staffing.

Research and development expenses increased to $7,777,000 in the first three quarters of 2013 from $6,335,000 in 2012, an increase of $1,442,000. Clinical trial-related expenses increased by $1,120,000 in the first three quarters of 2013. The resumption of our Phase 2 clinical trials in late 2012 was the primary driver of this increase. Compensation expense increased by $255,000 in the first three quarters of 2013 compared to 2012 due to increased staffing.

General and Administrative Expenses. General and administrative expenses were $977,000 for the quarter ended September 30, 2013 compared to $1,071,000 for the same period in 2012; a decrease of $94,000. General and administrative expenses were $3,089,000 for the nine months ended September 30, 2013 compared to $2,826,000 for the same period in 2012; an increase of $263,000. The increase in 2013 is attributable principally to increases in stock compensation expense, legal and investor relations expenses, and patent amortization.

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 $750,000 net change in fair value of the warrants charged to the results of operations, recognized during the three months ended September 30, 2013, 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.


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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, 2013, Lpath had cash and cash equivalents totaling $14.9 million. Additional near-term sources of cash include our accounts receivable of $622,000 and funding under the terms of the Pfizer Agreement to support our Nexus clinical trial, as well as $0.5 million of unexpended funding remaining on NIH grants awarded to the company. As they are currently planned, we estimate that the costs of our ongoing drug discovery and development efforts, including our general and administrative expenses, will require approximately $24 million from September 30, 2013 through the end of 2014. This estimate includes the expenses to conduct the Nexus clinical trial for iSONEP, as well as the Phase 2a clinical trial for ASONEP. In addition, this estimate includes the expenses to develop the manufacturing process and conduct the IND-enabling studies for our third product candidate, Lpathomab, through the end of 2014.

We believe our cash on hand as of September 30, 2013, together with amounts to be received pursuant to the Pfizer Agreement and the NIH grants, should be sufficient to fund our ongoing research and development activities, as currently planned, through the third quarter of 2014.

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 third quarter of 2014. If Pfizer elects to exercise its option to continue the clinical development of iSONEP beyond the current Nexus clinical trial, the terms of the Pfizer Agreement provide that we will receive additional funding that we may use to support our operations beyond the third quarter of 2014.

We cannot assure you that we will be successful in maintaining our commercial relationship with Pfizer (or any third party who may acquire Pfizer's rights under the Pfizer agreement), that Pfizer (or any third party who may acquire Pfizer's rights under the Pfizer agreement) will exercise its option to commercialize iSONEP prior to the end of the third quarter of 2014 or at all, 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.

Until we can generate significant cash from operations, we expect to continue to fund our operations with cash resources generated from a combination of NIH grants, collaboration or license agreements, and the proceeds of offerings of our equity and debt securities. However, we may not be successful in obtaining funding from new or existing collaboration or license agreements, 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. For example, in the future, we could determine to delay or scale back some of our planned drug discovery and development projects to extend our runway beyond the third quarter of 2014. Failure to obtain adequate financing could eventually adversely affect our ability to operate as a going concern. If we raise additional funds from the issuance of equity securities, substantial dilution to our existing stockholders would likely result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business. In addition, if we are successful in our bid to require Pfizer's rights under the Pfizer Agreement, our capital requirements will change materially and we will need to raise significant additional funds to support our drug development programs.

In August 2013, we entered into an at-the-market issuance sales agreement with MLV & Co. LLC and JMP Securities LLC to offer and sell, from time to time, shares of our common stock having an aggregate offering price of up to $20 million. Sales of the shares may be made in negotiated transactions and/or transactions that are deemed to be "at the market" offerings, including sales made by means of ordinary brokers' transactions, including directly on the Nasdaq Stock Market, or sales made to or through a market maker other than on an exchange.

Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2013-11 ("ASU 2013-11"), Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The update clarifies that an unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. In situations where the tax benefit is not available at the reporting date under the governing tax law or if the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented as a liability and not combined with deferred tax assets. ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendment is to be applied to all unrecognized tax benefits that exist as of the effective date and may be applied retrospectively to each prior reporting period presented. While early adoption is permitted, we expect to adopt ASU 2013-11 on January 1, 2014. We do not expect the adoption of these new presentation requirements to have a material impact on our consolidated financial position, results of operations, or cash flows.


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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 2012 Annual Report.

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