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EX-5.1 - OPINION OF DLA PIPER, LLP - Apollo Endosurgery, Inc.dex51.htm
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EX-23.1 - CONSENT OF MOSS ADAMS LLP - Apollo Endosurgery, Inc.dex231.htm
Table of Contents

As filed with the Securities and Exchange Commission on December 21, 2010

Registration No. 333-171026

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Amendment No. 1

to

FORM S-1

Registration Statement

Under

The Securities Act of 1933

 

 

LPATH, INC.

(Exact name of Registrant as specified in its Charter)

 

 

 

Nevada   2836   16-1630142

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code)

 

(IRS Employer

Identification No.)

 

6335 Ferris Square, Suite A,

San Diego, California 92121

Phone: (858) 678-0800

 

Scott R. Pancoast

Chief Executive Officer

6335 Ferris Square, Suite A,

San Diego, California 92121

Phone: (858) 678-0800

(Address, including zip code, and telephone number,

including area code, of Registrant’s principal executive offices)

 

(Name, address, including zip code, and telephone number,

including area code of agent for service)

 

 

Copies to:

Jeff Thacker, Esq.

DLA Piper LLP (US)

4365 Executive Drive, Suite 1100

San Diego, California 92121

Tel: (858) 677-1400

Fax: (858) 677-1401

 

 

Approximate date of commencement of proposed sale to public: From time to time after the effectiveness of the registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨


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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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check One).

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   x

 

 

Calculation of Registration Fee

 

Title of Class of Securities to be Registered   Amount to be
Registered (1)
 

Proposed

Maximum

Aggregate Price

Per Share

 

Proposed

Maximum
Aggregate

Offering Price

 

Amount of

Registration Fee

Class A Common Stock, $.001 par value per share (4)

  6,978,128   $0.84 (2)   $5,861,628 (2)   $418 (2)

Class A Common Stock, $.001 par value per share (5)

  3,489,064   $1.00 (3)   $3,489,064 (3)   $249 (3)

Class A Common Stock, $.001 par value per share (6)

  97,787   $1.19 (3)   $116,367 (3)   $9 (3)

Class A Common Stock, $.001 par value per share (7)

  292,489   $1.00 (3)   $292,489 (3)   $21 (3)

Class A Common Stock, $.001 par value per share (8)

  138,904   $1.00 (3)   $138,904 (3)   $10 (3)
 

Total

  10,996,372       $9,898,452   $706 (9)
 
 
(1) In the event of a stock split, stock dividend or similar transaction involving our common stock, the number of shares registered shall automatically be increased to cover the additional shares of common stock issuable pursuant to Rule 416 under the Securities Act of 1933, as amended (the “Securities Act”).
(2) Estimated for the sole purpose of calculating the registration fee in accordance with Rule 457(c) of the Securities Act, based on the average of the high and low price for our common stock on the OTC Bulletin Board on December 3, 2010.
(3) Calculated in accordance with Rule 457(g) of the Securities Act based upon the highest exercise price of the warrants held by the selling security holders.
(4) Represents shares of Class A common stock acquired by selling security holders in our November 2010 private placement.
(5) Represents shares of Class A common stock that may be issued upon exercise of warrants acquired by selling security holders in our November 2010 private placement.
(6) Represents additional shares of Class A common stock (pursuant to anti-dilution rights) that may be issued upon exercise of warrants acquired by selling security holders in our August 2008 private placement.
(7) Represents additional shares of Class A common stock (pursuant to anti-dilution rights) that may be issued upon exercise of warrants acquired by selling security holders in our private placements in April and June 2007.
(8) Represents shares of Class A common stock that may be issued upon exercise of warrants acquired by placement agents in our November 2010 private placement.
(9) Registration fee has been previously paid.

 

 

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

 

 

 


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The information in this prospectus is not complete and may be changed. The selling security holders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these Securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED DECEMBER 21, 2010

PRELIMINARY PROSPECTUS

LOGO

 

 

LPATH, INC.

 

 

6,978,128 shares of Common Stock

4,018,244 shares of Common Stock Issuable Upon the exercise of Warrants

The prospectus relates to the resale by certain selling security holders of Lpath, Inc. of up to 10,996,372 shares of our Class A common stock in connection with the resale of:

 

 

up to 6,978,128 shares of our Class A common stock that were issued in connection with a private placement that closed on November 15, 2010;

 

 

up to 3,627,968 shares of our Class A common stock that may be issued upon exercise of warrants acquired by selling security holders in our November 2010 private placement (including warrants issued to our placement agents in such offering);

 

 

up to 97,787 shares of our Class A common stock that may be issued upon exercise of certain warrants issued in connection with a private placement that closed in August 2008 (including warrants issued to our placement agents in such offering); and

 

 

up to 292,489 shares of our Class A common stock that may be issued upon exercise of certain warrants issued in connection with a private placement that closed in April and June of 2007 (including warrants issued to our placement agents in such offering).

The selling security holders may offer to sell the shares of Class A common stock being offered in this prospectus at fixed prices, at prevailing market prices at the time of sale, at varying prices, or at negotiated prices. For a description of the Plan of Distribution please see page 34 of this prospectus. We do not know when or in what amount the selling security holders may offer the securities for sale. The selling security holders may sell any, all or none of the securities offered by this prospectus.

We will not receive proceeds from the sale of shares by the selling security holders. Any proceeds received by us from the exercise of warrants by the selling security holders will be used for general corporate purposes. The selling security holders and any brokers executing selling orders on behalf of the selling security holders may be deemed to be “underwriters” within the meaning of the Securities Act of 1933, as amended. Commissions received by a broker executing selling orders may be deemed to be underwriting commissions under the Securities Act.

Our Class A common stock is traded on the OTC Bulletin Board under the symbol “LPTN.” On December 17, 2010, the closing sale price of our Class A common stock on the OTC Bulletin Board was $0.75 per share.

Investing in our securities involves significant risks. See “Risk Factors” beginning on page 6.

We may amend or supplement this prospectus from time to time by filing amendments or supplements as required. You should read the entire prospectus and any amendments or supplements carefully before you make your investment decision.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The date of the prospectus is December     , 2010.


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TABLE OF CONTENTS

 

Forward-Looking Statements

     1   

Prospectus Summary

     2   

Risk Factors

     6   

Use of Proceeds

     16   

Dividend Policy

     16   

Market for Common Equity, Related Stockholder Matters and the Issuer Purchases of Equity Securities

     17   

Selling Security Holders

     18   

Plan of Distribution

     33   

Description of Securities

     35   

Description of Business

     40   

Description of Property

     50   

Legal Proceedings

     50   

Financial Statements

     51   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     77   

Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

     83   

Quantitative and Qualitative Disclosures About Market Risk

     83   

Directors and Executive Officers

     84   

Executive Compensation

     86   

Security Ownership of Certain Beneficial Owners and Management

     90   

Certain Relationships and Related Transactions

     93   

Where You Can Find More Information

     94   

Interest of Named Experts and Counsel

     94   

LPATH, INC. HAS NOT REGISTERED THE SHARES OF CLASS A COMMON STOCK THAT MAY BE SOLD BY THE SELLING SECURITY HOLDERS UNDER THE SECURITIES LAWS OF ANY STATE. SELLING SECURITY HOLDERS, AND ANY BROKERS OR DEALERS, EFFECTING TRANSACTIONS IN THE SHARES SHOULD CONFIRM THAT THE SHARES HAVE BEEN REGISTERED UNDER THE SECURITIES LAWS OF THE STATE OR STATES IN WHICH SALES OF THE SHARES OCCUR AS OF THE TIME OF SUCH SALES, OR THAT THERE IS AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES LAWS OF SUCH STATES.

THIS PROSPECTUS IS NOT AN OFFER TO SELL ANY SECURITIES OTHER THAN THE SHARES OF CLASS A COMMON STOCK FOR SALE BY THE SELLING SECURITY HOLDERS. THIS PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH AN OFFER IS UNLAWFUL.

You should rely only on the information contained in this prospectus. We have not, and the selling security holders have not, authorized anyone to provide you with different information. If anyone provides you with different information, you should not rely on it. We are not, and the selling security holders are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information contained in this prospectus is accurate only as of the date on the front cover of this prospectus. Neither the delivery of this prospectus nor any sale made in connection with this prospectus shall, under any circumstances, create any implication that there has been no change in our affairs since the date of this prospectus or that the information contained by reference to this prospectus is correct as of any time after its date.

In this prospectus, (i) “Lpath,” “the Company,” “we,” “us,” and “our” refer to Lpath, Inc., a Nevada corporation, unless the context otherwise requires; (ii) references to “Lpath Therapeutics” or “LTI” refer to Lpath Therapeutics, Inc., our wholly owned subsidiary; and (iii) references to “common stock” or “Class A common stock” refer to the Company’s Class A common stock, par value $0.001 per share.

We own or have rights to use the trademarks and trade names that we use in conjunction with the operation of our business. Some of the more important trademarks that we own or have rights to use that appear in this prospectus include: Lpath ™, ASONEP™, iSONEP™, Lpathomab ™, Sphingomab™, and Immune Y2™ which may be registered or trademarked in the United States. Each trademark or trade name of any other company appearing in this prospectus is, to our knowledge, owned by such other company.


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FORWARD-LOOKING STATEMENTS

This prospectus 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 and Section 21E of the Securities Exchange Act of 1934 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 “Description of Business” below and 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. All such forward-looking statements involve risks and uncertainties, including, but not limited to:

 

   

statements regarding our research and pre-clinical and clinical development programs;

 

   

our ability to obtain necessary regulatory approvals for one or more of our product candidates;

 

   

granting or validity of our patents and intellectual property rights;

 

   

the effect of competition and proprietary rights of third parties;

 

   

the need for and availability of additional financing and our access to capital;

 

   

the trading of our common stock;

 

   

our ability to maintain our commercial relationship with Pfizer, Inc.; and

 

   

the period of time for which our existing cash will enable us to fund our operations.

In addition to the items described in this prospectus under the heading “Risk Factors,” many important factors affect our ability to achieve our stated objectives and to successfully develop and commercialize any product candidates, including, among other things, our ability to:

 

   

obtain substantial additional funds;

 

   

obtain and maintain all necessary patents or licenses;

 

   

demonstrate the safety and efficacy of product candidates at each stage of development;

 

   

meet applicable regulatory standards and receive required regulatory approvals;

 

   

meet obligations and required milestones under agreements;

 

   

be capable of manufacturing and distributing products in commercial quantities at reasonable costs; and

 

   

compete successfully against other products and to market products in a profitable manner.

Therefore, prospective investors are cautioned that the forward-looking statements included in this prospectus may prove to be inaccurate and our actual results or performance may differ materially from any future results or performance expressed or implied by the forward-looking statements. In light of the significant uncertainties inherent to the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation or warranty by us or any other person that our objectives and plans will be achieved in any specified time frame, if at all. These forward-looking statements represent beliefs and assumptions only as of the date of this prospectus. Except to the extent required by applicable laws or rules, we are not obligated in any way to update any forward-looking statements or to announce revisions to any of the forward-looking statements.


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PROSPECTUS SUMMARY

The following summary highlights selected information contained in this prospectus. Because it is a summary, it does not contain all of the information you should consider before making an investment decision. Before making an investment decision, you should read the entire prospectus carefully, including the “Risk Factors” section, the financial statements, and the notes to the financial statements.

Overview

Lpath, Inc. is a biotechnology company focused on the discovery and development of lipidomic-based therapeutics, an emerging field of medical science whereby bioactive lipids are targeted to treat human diseases. We have two product candidates that are currently in human clinical development, and one that is being evaluated in pre-clinical testing.

iSONEP

iSONEP is the ocular formulation of sonepcizumab, a humanized monoclonal antibody (“mAb”) against sphingosine-1-phosphate (“S1P”). Sphingomab is the original mouse version of this monoclonal antibody. iSONEP is administered by intravitreal injection, and has demonstrated multiple mechanisms of action in ocular models of disease, including anti-angiogenesis, anti-inflammatory, anti-fibrotic and anti-vascular permeability. This combination of mechanisms would suggest: (i) iSONEP might have a comparative advantage over currently marketed products for “wet” age-related macular degeneration (“wet AMD”) and (ii) iSONEP might demonstrate clinical efficacy in a broad range of retinal diseases where there is currently a significant unmet medical need, including diabetic retinopathy, dry AMD, and glaucoma-related surgery.

In 2009, we completed a Phase 1 clinical trial in which iSONEP was evaluated in patients with wet AMD. In that trial, iSONEP met its primary endpoint of being well tolerated in all 15 patients at dose levels ranging from 0.2 mg to 1.8 mg per intravitreal injection. No drug-related serious adverse events were reported in any of the patients. Positive biological effects were also observed in some patients in this clinical study, the most common being regression in choroidal neovascularization (CNV), which is the underlying cause of the disease that eventually leads to degeneration of the macula. Most of these positive effects appear to be largely independent of the effects seen when patients undergo treatment with the drugs that are the current market leaders for the treatment of wet AMD.

We are currently preparing to begin the next clinical studies of iSONEP in the first half of 2011 to further investigate the biological effects observed in the Phase 1 trial. In the first quarter of 2011, we plan to initiate a Phase 1b/2a clinical trial of iSONEP in patients with RPE Detachment, a persistent complication in patients with the occult form of wet AMD. Of the 15 patients in the Phase 1 iSONEP trial, two patients were diagnosed with RPE Detachment. With a single dose of iSONEP, both of these patients experienced complete resolution of the condition. There is currently no FDA approved treatment for RPE Detachments. While the small number of patients with RPE Detachment in the iSONEP Phase 1 clinical trial makes it difficult to draw any definitive conclusions, we believe, based on advice from our Ocular Advisory Board, that a follow-up study focused specifically on RPE Detachment patients is warranted. In the second quarter of 2011, we also plan to begin a larger Phase 2a clinical trial in a broader population of Wet-AMD patients, namely, those wet-AMD patients without RPE Detachment.

On December 16, 2010, we entered into an Option, License and Development Agreement (the “Pfizer Agreement”) with Pfizer Inc. (“Pfizer”), which provides Pfizer with an exclusive option for a worldwide license to develop and commercialize iSONEP. Under the terms of the Pfizer Agreement, Pfizer will provide us with an upfront payment of $14 million in addition to sharing the cost of the planned Phase 1b and Phase 2a trials for iSONEP. Following completion of the two studies, Pfizer has the right to exercise its option for worldwide rights to iSONEP for an undisclosed option fee and, if Pfizer exercises its option, we will be eligible to receive development, regulatory and commercial milestone payments that could total up to $497.5 million. In addition, Lpath will be entitled to receive tiered double-digit royalties based on future sales of iSONEP.

ASONEP

ASONEP is the systemic formulation of sonepcizumab. In the first quarter of 2010, we completed a Phase 1 clinical trial in which ASONEP was evaluated in very late-stage cancer patients. In that trial, ASONEP was well tolerated at all dose-levels ranging from 1 mg/kg to 24 mg/kg., other than minor infusion-related reactions observed at the highest dose. More than half the patients that completed the initial four-treatment evaluation period showed stable disease. Durable stable disease was observed in several patients in the trial. Based on ASONEP’s safety profile including the observation of stable disease in several late-stage cancer patients, we believe that further investigation of ASONEP for efficacy in Phase 2 clinical trials is warranted. We are now working to complete various tasks required to move ASONEP into Phase 2 clinical testing, and are collaborating with Harvard Medical School on plans to conduct one or more Phase 2a clinical trials.

In 2008, we entered into a License Agreement (the “Merck Agreement”) with Merck KGaA, (“Merck”), as amended in September 2009, pursuant to which Merck has agreed to collaborate, through its Merck-Serono division, with us to develop and commercialize ASONEP. Pursuant to the terms of the Merck Agreement, we licensed to Merck exclusive, worldwide rights to develop and commercialize ASONEP across all non-ocular indications. In March 2010, Merck proposed continuing the partnership via an extension of the Initial Development Period (as defined in the Merck Agreement). However the terms of that proposed extension were rejected by Lpath’s Board of Directors as not being in the best interests of Lpath or its stockholders. Consequently, Merck notified us of their decision to terminate the Merck Agreement. The termination was effective on April 24, 2010, and upon such termination Merck KGaA relinquished all rights to the ASONEP program. However, Merck may, under certain circumstances, have a right of first refusal, for a period of 12 months subsequent to the termination date, to Lpath’s then next most advanced oncology drug candidate.

As part of the Pfizer Agreement, we granted Pfizer a time-limited right of first refusal to ASONEP.

 

 

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Lpathomab

Lpathomab, our third 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 two lead humanized mAbs that inhibit LPA. These mAbs are being tested against each other in various models of human disease to determine which of these could be most likely to succeed in human clinical trials. The target date to begin testing Lpathomab in human clinical trials is 2012.

Corporate Background

Lpath Therapeutics Inc., our predecessor company, was incorporated in September 1997 in the state of Delaware as Medlyte Diagnostics, Inc. The company commenced operations in January 1998. The name was changed to Medlyte, Inc. in July 2001 and to Lpath Therapeutics Inc. in July 2004.

Effective November 30, 2005, Neighborhood Connections, Inc. (“NCI”), a publicly traded Nevada corporation, completed the acquisition of Lpath Therapeutics, Inc. (“LTI”) through a reverse triangular merger in which Neighborhood Connections Acquisition Corporation (“NCI Sub”), a wholly owned subsidiary of NCI formed solely for the purpose of facilitating the merger, merged with and into LTI (“the Merger”). LTI was the surviving corporation in the Merger and, as a result, became a wholly owned subsidiary of NCI. On December 2, 2005, NCI amended its Articles of Incorporation to change its name to Lpath, Inc.

Although NCI acquired LTI as a result of the Merger, the stockholders of LTI received a majority of the voting interest in the combined enterprise as consideration for entering into the Merger. Additionally, the Merger resulted in LTI’s management and Board of Directors assuming operational control of NCI. At the time of the Merger, NCI fell within the definition of a “shell company” as that term is defined in Rule 12b-2 under the Securities Exchange Act of 1934.

Immediately preceding the Merger on November 30, 2005, LTI raised $6.0 million through the private placement of units consisting of two shares of LTI common stock and one LTI warrant.

For accounting purposes, this Merger has been accounted for in accordance with guidance set forth for transactions of this type by the Securities and Exchange Commission, which views mergers of this type to be capital transactions rather than business combinations. Therefore, the Merger was accounted for as the issuance of LTI common stock by LTI for the net monetary assets of NCI, accompanied by a recapitalization.

Risks Associated with Our Business

Investing in our common stock involves substantial risk. Before participating in this offering, you should carefully consider all of the information in this prospectus, including risks discussed in “Risk Factors” beginning on page 4. A few of our most significant risks are:

 

   

The results of our pre-clinical testing and our clinical trials may not support either further clinical development or the commercialization of our drug candidates.

 

   

None of our drug candidates has received regulatory approval at this time, and we may fail to obtain required governmental approvals for our drug candidates.

 

   

We have a history of net losses and we may never achieve or maintain profitability.

 

   

We may not be successful in maintaining our commercial relationship with Pfizer.

 

   

We may require, and may not be able to obtain, substantial additional financial resources in order to carry out our planned activities beyond 2012.

 

   

The results of our clinical trials may not support either further clinical development or the commercialization of our drug candidates.

 

   

Our products could infringe patent rights of others, which may require costly litigation and, if we are not successful, could cause us to pay substantial damages or limit our ability to commercialize our products.

Corporate Information

Our offices are located at 6335 Ferris Square, Suite A, San Diego, California 92121. Our telephone number is (858) 678-0800. Our website can be found at www.lpath.com. The information contained in or that can be accessed through our website is not part of this prospectus.

 

 

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The Offering

Key Facts of the Offering

 

Class A common stock being offered by the selling security holders

6,978,128

 

Total shares of Class A common stock outstanding as of the date of this prospectus (1)

60,340,029

 

Number of shares of Class A common stock issuable upon the exercise of warrants held by the selling security holder registered on this prospectus

4,018,244

 

Use of Proceeds

We will not receive proceeds from the sale of our shares by the selling security holders. Any proceeds received by us from the exercise of warrants by the selling security holders will be used for general corporate purposes.

 

OTCBB Symbol

LPTN

 

Risk Factors

Investing in our securities involves a high degree of risk and purchasers of our securities may lose their entire investment. See “Risk Factors” below and the other information included elsewhere in this prospectus for a discussion of factors you should carefully consider before deciding to invest our securities.

 

(1) The number of shares of our common stock outstanding is based on the number of shares of our Class A common stock outstanding as of the date of this prospectus, including the shares held by the selling security holders. This number does not include:
   

14,607,079 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $0.97 per share, including the warrants held by the selling security holders.

   

2,892,835 shares of common stock issuable upon exercise of outstanding options, at a weighted average exercise price of $0.57 per share issued under our equity incentive plans prior to this offering.

   

2,684,876 shares of common stock issuable upon (i) vesting and (ii) attainment of the delivery date of outstanding restricted stock units issued under our equity incentive plans prior to this offering.

   

3,233,638 shares of our common stock which remain available for grant and possible subsequent issuance under our equity incentive plans.

 

 

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Summary Financial Data

The following summary audited financial information for the fiscal years ended December 31, 2009 and 2008, includes balance sheet and statement of operations data from our audited financial statements included elsewhere in this prospectus. The financial information as of September 30, 2010, and for the nine months ended September 30, 2010 and 2009 is derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The information contained in this table should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and accompanying notes included in this prospectus. In the opinion of management, the unaudited interim financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of our operating results and financial position for those periods and as of such dates. The results for any interim period are not necessarily indicative of the results that may be expected for a full year.

 

     Lpath, Inc.
Nine Months Ended
September 30,
     Lpath, Inc.
For the Year Ended
December 31,
 

Statement of Operations Data:

   2010     2009      2009      2008  

Revenues

   $ 5,851,902      $ 10,342,338       $ 11,909,270       $ 2,861,149   

Research and Development Expense

     6,625,466        5,382,133         6,628,200         10,116,124   

General and Administrative Expense

     2,613,620        2,822,309         3,479,326         4,480,260   

Income (loss) from Operations

     (3,387,184     2,137,896         1,801,744         (11,735,235

Change in fair value of warrants

     (200,000     1,900,000         2,200,000         —     

Net Income (loss)

     (3,610,968     1,887,619         3,983,010         (11,459,985

Income (loss) per Share

   $ (0.07   $ 0.07       $ 0.07       $ (0.24
    

 

September 30,

     December 31,  

Balance Sheet Data:

   2010     2009      2009      2008  

Working Capital

   $ 1,883,183      $ 5,248,091       $ 4,799,813       $ 3,261,433   

Total Assets

     4,915,794        8,293,009         7,869,974         9,421,952   

Current Liabilities

     1,591,142        1,903,678         1,893,776         5,375,244   

Total Stockholders’ Equity (Deficit)

   $ (975,348   $ 1,978,524       $ 1,876,198       $ 3,569,800   

 

 

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RISK FACTORS

Any investment in our common stock involves a high degree of risk. You should consider carefully the following information about these risks, together with the other information contained in this prospectus, before you decide to buy our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our operations. If any of the following risks actually occur, our business would likely suffer and the trading price of our common stock could decline, and you may lose all or part of the money you paid to buy our common stock.

Risks primarily associated with our business:

We are in the early stages of drug development, and we may be unable to generate significant revenues and may never become profitable.

We are in the early stages of drug development, and have not received FDA approval for marketing any of our drug candidates. We have generated approximately $22.7 million in revenues as of September 30, 2010 from grants and license agreements to support our research and development activities. In December 2010, we entered into the Pfizer Agreement under which Pfizer agreed to provide us with an upfront payment of $14 million in addition to sharing the cost of the planned Phase 1b and Phase 2a trials for iSONEP. We have a history of significant net losses, and net cash used to support our operations amounted to $2.7 million during the nine months ended September 30, 2010, $1.1 million during fiscal 2009, and $6.2 million during fiscal 2008. As of September 30, 2010, we had an accumulated deficit of approximately $36.1 million. We expect to incur significant operating losses for the foreseeable future as we continue to develop and seek regulatory approval for our drug candidates. We cannot provide you any assurance that any of our drug candidates will prove to be clinically significant or will receive regulatory approval. Even if the drug candidates were to receive any regulatory approval, there can no assurance that we could provide for their effective marketing and sales, either by ourselves or in partnership with others. In addition, we cannot assure you that Pfizer will not terminate the Pfizer Agreement, or that Pfizer will exercise its option for worldwide commercial rights to iSONEP. Consequently there can be no assurance that we will ever achieve profitability and, even if we achieve profitability, that we will be able to sustain or increase profitability on a quarterly or annual basis. Accordingly, our prospects must be considered in light of the risks, expenses, and difficulties frequently encountered by companies in an early stage of drug development.

We may require, and may not be able to obtain, substantial additional financial resources in order to carry out our planned activities beyond 2012.

Our Annual Report on Form 10-K for the year ended December 31, 2009 disclosed that certain factors, including our history of net losses and the net cash required for our operating activities, when compared with our net cash position, raise substantial doubt as to our ability to continue as a going concern. As they are currently planned, the cost of our ongoing drug discovery and development efforts, including general and administrative expenses, would require between $20 and $23 million from the 4th quarter of 2010 through the end of 2012. As of September 30, 2010, we had an available cash balance of approximately $3.1 million. In addition, we raised net proceeds of approximately $4.6 million from a private placement in November 2010, and in December 2010, we entered into the Pfizer Agreement, under which Pfizer agreed to provide us with an upfront payment of $14 million in addition to sharing the cost of the planned Phase 1b and Phase 2a trials for iSONEP. Additional near-term sources of cash include $2.5 million remaining on the $3 million BRDG-SPAN grant from the National Eye Institute (part of the National Institutes of Health) to support iSONEP-related trials, and the three year, $3 million grant from NIH awarded in 2009 that still has two years and $2 million remaining to support ASONEP clinical trials. In addition, in November, 2010, we received $0.5 million from the Internal Revenue Service from two qualifying therapeutic discovery projects grants. Further, we may receive additional funding to support our operations beyond 2012 under the Pfizer Agreement if Pfizer elects to exercise its option to commercialize iSONEP. 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 that would entitle us to future payments under the Pfizer Agreement. As a result, we may be required to secure substantial additional capital to continue to fund our planned drug discovery and development projects beyond 2012.

We expect 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 such additional financial resources. As widely reported, financial markets in the United States and abroad have been experiencing extreme disruption, including, among other things, extreme volatility in securities prices, severely diminished liquidity and financing and credit availability, rating downgrades of certain investments and declining valuations of others. Depending upon market conditions, we may not be successful in raising sufficient additional capital to support our long-term requirements. If we fail to obtain sufficient additional financing, or enter into relationships with others that provide additional financial resources, we will not be able to develop our product candidates on our planned timeline, or at all, and we will be required to reduce staff, reduce or eliminate research and development, slow the development of our product candidates and outsource or eliminate several business functions. In such event, our business, prospects, financial condition and results of operations could be materially adversely affected, and we may be required to cease operations.

We may not be successful in maintaining our commercial relationship with Pfizer, and our other collaborations may not be successful.

In December 2010, we entered into the Pfizer Agreement, which provides Pfizer with an exclusive option for a worldwide license to develop and commercialize iSONEP. However, we cannot assure you that Pfizer will exercise its option to commercialize iSONEP or that iSONEP will achieve the developmental, regulatory and commercial milestones that would entitled us to future payments under the Pfizer Agreement.

Our commercial relationship with Pfizer and the other collaborations we have entered into, or may enter into in the future, may not be successful due to one or more of the following:

 

   

disputes with respect to payments that we believe are due under a collaboration agreement;

 

   

disagreements with respect to ownership and use of intellectual property rights;

 

   

unwillingness on the part of a collaborator to keep us informed regarding the progress of its development and commercialization activities, or to permit public disclosure of these activities;

 

   

delay of a collaborator’s development or commercialization efforts with respect to our drug candidates; or

 

   

termination or non-renewal of the collaboration due to the failure of our product candidate to satisfy required developmental, regulatory or commercial milestones, changes in the collaborator’s business plans or financial health or other competitive or market reasons.

In addition, in any collaborations, we may be required to agree not to conduct independently, or with any third party, any research that is competitive with the research conducted under our collaborations. Our collaborations may have the effect of limiting the areas of research that we may pursue, either alone or with others. Our collaborators, however, may be able to develop, either alone or with others, products in related fields that are competitive with the products or potential products that are the subject of these collaborations.

In March 2010, Merck proposed continuing the partnership with Lpath via an extension of the Initial Development Period (as defined in the Merck Agreement). However the terms of that proposal were rejected by Lpath’s Board of Directors as not being in the best interests of Lpath or our stockholders. Consequently, Merck notified us of their decision to terminate the Merck Agreement. Pursuant to the terms of the Merck Agreement, the termination was effective on April 24, 2010, and upon termination Merck KGaA relinquished all rights to the ASONEP program. However, Merck may, under certain circumstances, have a right of first refusal, for a period of 12 months subsequent to the termination date, to Lpath’s then next most advanced oncology drug candidate.

 

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We may not be able to correctly estimate our future operating expenses, which could lead to cash shortfalls.

Our operating expenses may fluctuate significantly in the future as a result of a variety of factors, many of which are outside of our control. These factors include:

 

   

the time and resources required to develop our product candidates, conduct pre-clinical and clinical trials, obtain regulatory approvals, and create effective sales and marketing capabilities;

 

   

the expenses we incur for research and development required to develop our drug candidates and to maintain and improve our technology;

 

   

the costs of maintaining our commercial relationship with Pfizer;

 

   

the costs to attract and retain personnel with the skills required for effective operations; and

 

   

the costs of preparing, filing, prosecuting, defending and enforcing patent claims and other patent related costs, including litigation costs and the results of such litigation.

In addition, our budgeted expense levels are based in part on our expectations concerning future revenues. However, our ability to generate any revenues depends largely on the progress of our drug candidates through clinical trials, our ability to satisfy the milestone and other conditions of the Pfizer Agreement and ultimately on receiving marketing approval from the FDA, which is difficult to forecast accurately. In addition, we cannot assure you that Pfizer will not terminate the Pfizer Agreement, or that Pfizer will exercise its option for worldwide commercial rights to iSONEP. We may be unable to adjust our operations in a timely manner to compensate for any unexpected shortfall in revenues. As a result, a significant shortfall in our planned revenues could have an immediate and material adverse effect on our business and financial condition.

We must obtain governmental approval for each of our products, which is an expensive and complicated process in which any number of unforeseeable problems and difficulties could arise that would adversely affect our business.

Our product candidates target lipids, as opposed to proteins, and the FDA has not previously approved any similar product. Thus, we may encounter unexpected safety, efficacy, or manufacturing issues as we seek to obtain regulatory approval, and we may never receive approval from the FDA or other governmental authorities for our drug candidates.

The development, production and marketing of our products are subject to extensive regulation by government authorities in the United States and most other developed countries. The process of obtaining approval from the FDA in the United States requires conducting extensive pre-clinical and clinical testing. We have limited experience in, and limited resources available for, regulatory and clinical activities. The clinical trial process is also time-consuming, and we do not know whether planned clinical trials will begin on time or whether we will complete any of our clinical trials on schedule or at all. We estimate that the clinical trials for our first product candidate will not be completed before 2014 at the earliest. Significant delays may adversely affect our financial results and the commercial prospects for iSONEP™ (or our other potential products or any other products we may acquire or in-license).

Any of the following events relating to the regulatory approval of our drug candidates can occur and, if any did occur, any one could have a material adverse effect on our business, financial conditions and results of operations:

 

   

difficulty in securing centers to conduct trials;

 

   

difficulty in enrolling patients in conformity with required protocols or projected timelines;

 

   

unexpected adverse reactions by patients or a temporary suspension or complete ban on trials of our products due to adverse side effects;

 

   

inability or unwillingness of medical investigators to follow our clinical protocols;

 

   

inability to maintain a supply of the investigational drug in sufficient quantities to support the trials;

 

   

results of clinical trials not yielding sufficiently conclusive favorable data for regulatory agencies to approve the use of our products in development, or any other products we may acquire or in-license;

 

   

delays, sometimes long delays, in obtaining approval for our product candidates, including, but not limited, to requests for additional clinical trials;

 

   

changes in the rules and regulations governing the approval process for product candidates such as ours during the testing and review period, which can result in the need to spend time and money for further testing or review;

 

   

the authorized use of any product, if approved, is more limited than required for commercial success, or approval is conditioned on completion of further clinical trials or other activities; and

 

   

any approval being withdrawn, or limited, if previously unknown problems arise with our human-use product or data arising from its use.

Failure to comply with applicable regulations can, among other things, result in non-approval, suspensions of regulatory approvals, fines, product seizures and recalls, operating restrictions, injunctions and criminal prosecution.

 

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The results of our clinical trials may not support either further clinical development or the commercialization of our product candidates.

Even if our clinical trials are completed as planned, their results may not support either the further clinical development or the commercialization of our product-candidates. The FDA or government authorities may not agree with our conclusions regarding the results of our clinical trials. In addition, any collaboration partners, including Pfizer, may decide that the results of our clinical trials do not support further investment by such partners. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and the results from any later clinical trials may not replicate the results of prior clinical trials and pre-clinical testing. The clinical trial process may fail to demonstrate that our product candidates are safe for humans and effective for indicated uses. This failure would cause us to abandon a product candidate and may delay development of other product candidates. Any delay in, or termination of, our clinical trials will delay the filing of our NDAs with the FDA and, ultimately, our ability to commercialize our product candidates and generate product revenues.

In addition, we or the FDA may suspend our clinical trials at any time if it appears that we are exposing participants to unacceptable health risks or if the FDA finds deficiencies in any INDs or the conduct of these trials. A number of companies in the biotechnology and drug development industries have suffered significant setbacks in advanced clinical trials despite promising results in earlier trials. In the end, we may be unable to develop marketable products.

A primary source of revenue, grant funds from the National Institutes for Health, may not continue to be a source of revenue in the future.

Although we have applied for many grants and thus far and have been awarded nine of them, the National Institutes of Health (“NIH”) may not in the future find our applications worthy of such grants. In addition, the NIH requires audits of those recipients of grant funds exceeding $500,000 in any year, a threshold that we have exceeded in 2010. Such audits test the allowability and allocation of expenditures and ultimately compliance with OMB Circular A-133 audit requirements. There can be no assurance that we will pass such an audit, and failure to pass could result in a material adverse effect on our cash flow and our business operations.

Our drug-development programs depend upon third-party researchers who are outside our control.

We depend upon independent investigators and collaborators, such as universities, medical institutions, and clinical research organizations, and independent physicians to conduct our pre-clinical and clinical trials under agreements with us. Such agreements are often standard-form agreements typically not subject to extensive negotiation. These investigators or collaborators are not our employees, and in general we cannot directly control the amount or timing of resources that they devote to our programs. These investigators may not assign as great a priority, or medically or scientifically skilled personnel, to our programs or pursue them as we had anticipated or as diligently as we would if we were undertaking such programs ourselves. If outside collaborators fail to devote sufficient time and competent resources to our drug-development programs, or if their performance is substandard, the approval of our

 

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FDA applications, if any, and our introduction of new drugs, if any, will be delayed. These collaborators may also have relationships with other commercial entities, some of whom may compete with us.

Our collaborations with outside scientific and clinical advisors may be subject to restriction and change.

We work with scientific and clinical advisors at academic and other institutions who are experts in the fields of oncology, ophthalmology, autoimmune disorders, and related medical or scientific fields. They assist us in our research and development efforts and advise us with respect to our clinical trials. These advisors are not our employees and may have other commitments that would limit their future availability to us. Although our scientific and clinical advisors and collaborators generally agree not to engage in competing work, if a conflict of interest arises between their work for us and their work for another entity, we may lose their services, which may impair our reputation in the industry and delay the clinical development of our drug candidates.

We are dependent on third-party manufacturers, over whom we have limited control, to manufacture our products.

The manufacturing process of ASONEP, iSONEP, Lpathomab, and any other therapeutic products we may want to evaluate or commercialize involves a number of steps and requires compliance with stringent quality control specifications imposed by us and by the FDA. Moreover, our proposed products may be manufactured only in a facility that has undergone a satisfactory inspection and certification by the FDA. We do not have any manufacturing facilities ourselves and expect to rely on one or more third-party manufacturers to properly manufacture our products currently in clinical development as well as any other products we may develop or in-license. We may not be able to quickly replace our manufacturing capacity if we were unable to use a third party’s manufacturing facilities as a result of a fire, natural disaster (including an earthquake), equipment failure or other difficulty, or if such facilities are deemed not in compliance with current Good Manufacturing Practice (“cGMP”) requirements, and the noncompliance could not be rapidly rectified. Our inability or reduced capacity to have our products manufactured would prevent us from successfully evaluating or commercializing our proposed products. Our dependence upon third parties for the manufacture of our proposed products may adversely affect our profit margins and our ability to develop and deliver proposed products on a timely and competitive basis. Any delays in formulation and manufacturing objectives may cause a delay in our clinical program, and could have an adverse effect on the price of our shares.

We have a limited product and technology portfolio at the current time.

Although our clinical drug candidates, iSONEP and ASONEP might ultimately show clinical relevance in multiple disease states, we have assessed their clinical potential only against AMD and cancer, respectively, and only in Phase 1 clinical trials with small numbers of patients or in animal models. In addition, we may not be successful in moving Lpathomab from pre-clinical to Phase 1 clinical trials. There can be no assurance that any of our existing products will be successfully developed, prove to be safe and efficacious in clinical trials, meet applicable regulatory standards, be capable of being produced in commercial quantities at acceptable costs or be successfully marketed.

In addition, our ImmuneY2 process of generating monoclonal antibodies against lipid mediators may not be successful against future targets. As such, there can be no assurance that we will be able to develop a monoclonal antibody against our future targets, and thus, we may fail to generate additional clinical candidates for our pipeline.

If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to sell and market any products we may develop, we may not be able to generate product revenue.

We do not currently have an organization for the sales, marketing and distribution of pharmaceutical products. In order to market any products that may be approved by the FDA, we must build a sales, marketing, managerial and other non-technical capabilities or make arrangements with third parties to perform these services. Although we entered into the Pfizer Agreement in December 2010 which provides Pfizer with an exclusive option for a worldwide license to develop and commercialize iSONEP, we cannot assure you that we will successfully maintain 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 that would entitled us to future payments under the Pfizer Agreement. If iSONEP receives the necessary regulatory approvals and Pfizer does not exercise its option to commercialize iSONEP, we will need to establish our own sales and marketing capabilities or enter into agreements with other commercial partners for iSONEP. We have no experience in developing, training or managing a sales force and will incur substantial additional expenses in doing so. The cost of establishing and maintaining a sales force may exceed its cost effectiveness. Furthermore, we will compete with many companies that currently have extensive and well-funded marketing and sales operations. Our marketing and sales efforts may be unable to compete successfully against these companies. If we are unable to establish adequate sales, marketing and distribution capabilities, whether independently or with third parties, we may not be able to generate product revenue and may not become profitable.

Physicians and patients may not accept and use our drugs.

Even if the FDA approves our one or more of our product candidates (or any other product we attempt to commercialize), physicians and patients may not accept and use them. Acceptance and use of any of our future products, if approved, will depend upon a number of factors including:

 

   

perceptions by members of the health care community, including physicians, about the safety and effectiveness of our drugs;

 

   

cost-effectiveness of our drugs or diagnostic products relative to competing products;

 

   

availability of reimbursement from government or other healthcare payors for our products; and

 

   

effectiveness of marketing and distribution efforts by us and our licensees and distributors, if any.

 

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Because we expect sales of our current product candidates, if approved, to generate substantially all of our product revenues for the

foreseeable future, the failure of any of these drugs to find market acceptance, subsequent to approval, would severely harm our business.

Our industry is highly competitive, so even if our products ultimately get approved by the FDA, our success depends on our ability to sustain competitive advantages.

The pharmaceutical, biopharmaceutical and biotechnology industries are very competitive, fast moving and intense, and, are expected to be increasingly so in the future. Other companies have developed and are developing drugs that, if not similar in type to our drugs, are designed to provide comparable clinical significance. Therefore, our product candidates and any other products we may acquire or in-license may not be, or may not be perceived to be, the most efficacious (at all or for a majority of patients), the safest, the first to market, or the most economical to make or use. If a competitor’s product is, or is perceived to be, more advantageous than ours, for whatever reason, then we could make less money from sales, if we are able to generate sales at all.

There are many reasons why a competitor might be more successful than we are, including:

 

   

Many competitors have greater financial resources and can afford more technical and development setbacks than we can.

 

   

Many competitors have been in the drug-discovery and drug-development business longer than we have. They have greater experience than we have in critical areas like clinical testing, obtaining regulatory approval, and sales and marketing. This experience and their name recognition give them a competitive advantage over us.

 

   

Some competitors may have a better patent position protecting their technology than we have or will have to protect our technology. If we cannot use our proprietary rights to prevent others from copying our technology or developing similar technology, then our competitive position will be harmed.

 

   

Some companies with competitive technologies may move through stages of development, approval, and marketing faster than we do. If a competitor receives FDA approval before we do, then it will be authorized to sell its products before we can sell ours. Because the first company “to market” often has a significant advantage over latecomers, a second-place position could result in less-than-anticipated sales.

The United States Food, Drug, and Cosmetic Act and FDA regulations and policies provide incentives to manufacturers to challenge patent validity or create modified, non-infringed versions of a drug in order to facilitate the approval of abbreviated new drug application for generic substitutes. These same incentives also encourage manufacturers to submit new drug applications, known as 505(b)(2) applications, that rely on literature and clinical data not originally obtained by the drug sponsor. In light of these incentives and especially if our lead product (or our other drug candidates in development or any other products we may acquire or in-license) are commercially successful, other manufacturers may submit and gain successful approval for either an abbreviated new drug application or a 505(b)(2) application that will compete directly with our products. Such competition could cause a reduction in our revenues.

If Medicare and other third-party payors, including managed care organizations, do not provide adequate reimbursement for our product candidates, if commercialized, the commercial success of our product candidates could be compromised.

Reimbursement by a third-party payor may depend on a number of factors, including a payor’s determination that our product candidates, if commercialized, are: experimental or investigational; not medically necessary; not appropriate for the specific patient or clinical indication; or not cost-effective.

Reimbursement by Medicare may require a review that will be lengthy and that will be performed under the provisions of a National Coverage Decision process with payment limits as the Secretary of HHS determines appropriate. We cannot guarantee that the Secretary of HHS will act to approve any of our products, if commercialized, on a timely basis, or at all. In addition, there have been and will most likely continue to be significant efforts by both federal and state agencies to reduce costs in government healthcare programs and otherwise implement government control of healthcare costs. Any future changes in Medicare reimbursement that may come about as a result of enactment of healthcare reform or of deficit-reduction legislation will likely continue the downward pressure on reimbursement rates. In addition, emphasis on managed care in the United States may continue to pressure the pricing of healthcare services. In certain countries outside the United States, pricing and profitability of prescription pharmaceuticals are subject to government control. Third party payors, including Medicare, are challenging the prices charged for medical products and services. In addition, government and other third-party payors increasingly are limiting both coverage and the level of reimbursement for many drugs and diagnostic products. If government and other third-party payors do not provide adequate coverage and reimbursement for our products, it may adversely affect our business. Since policy-level reimbursement approval is required from each private payor individually, seeking such approvals is a time-consuming and costly process. If we are unable to obtain adequate reimbursement approval from Medicare and private payors for any of our products, or if the amount reimbursed is inadequate, our ability to generate revenue will be limited.

 

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Health care reform, which includes amendments to the Food and Drug Act, may adversely impact our business.

The United States government and other governments have shown significant interest in pursuing healthcare reform. Any government-adopted reform measures could adversely impact:

 

   

the pricing of healthcare products in the United States or internationally; and

 

   

the amount of reimbursement available from governmental agencies or other third party payors.

New laws, regulations and judicial decisions, or new interpretations of existing laws, regulations and decisions, that relate to healthcare availability, methods of delivery or payment for products and services, or sales, marketing or pricing may cause our revenue to decline, and we may need to revise our research and development programs.

On September 27, 2007, the Food and Drug Administration Amendments Act of 2007 (the “FDAAA”) was enacted, giving the FDA enhanced post-market authority, including the authority to require post-market studies and clinical trials, labeling changes based on new safety information, and compliance with risk evaluation and mitigation strategies approved by the FDA. The FDA’s exercise of its new authority could result in delays or increased costs during the period of product development, clinical trials and regulatory review and approval, increased costs to assure compliance with new post-approval regulatory requirements, and potential restrictions on the sale of approved products.

We may incur significant or currently undeterminable costs in complying with environmental laws and regulations.

We use hazardous materials, including chemicals and biological agents and compounds that could be dangerous to human health and safety or the environment. As appropriate, we will store these materials and wastes resulting from their use at our or our outsourced laboratory facility pending their ultimate use or disposal. We will contract with a third party to properly dispose of these materials and wastes. We will be subject to a variety of federal, state and local laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these materials and wastes. We may also incur significant costs complying with environmental laws and regulations adopted in the future.

We may be subject to product liability claims.

The development, manufacture, and sale of pharmaceutical products expose us to the risk of significant losses resulting from product liability claims. Although we intend to obtain and maintain product liability insurance to offset some of this risk, we may be unable to secure such insurance or it may not cover certain potential claims against us.

We may not be able to afford to obtain insurance due to rising costs in insurance premiums in recent years. If we are able to secure insurance coverage, we may be faced with a successful claim against us in excess of our product liability coverage that could result in a material adverse impact on our business. If insurance coverage is too expensive or is unavailable to us, we may be forced to self-insure against product-related claims. Without insurance coverage, a successful claim against us and any defense costs incurred in defending ourselves may have a material adverse impact on our operations.

If we lose the services of key management personnel, we may not be able to execute our business strategy effectively.

Our future success depends in a large part upon the continued service of key members of our senior management team. In particular, our Chief Executive Officer, Scott Pancoast, and our founder and Chief Scientific Officer, Roger Sabbadini, Ph.D., are critical to our overall management as well as the development of our technology, our culture and our strategic direction. None of our executive officers and key employees has long-term employment contracts with us, and we do not maintain any key-person life insurance policies. The loss of any of our management or key personnel could materially harm our business.

We rely on highly skilled personnel and, if we are unable to retain or motivate key personnel or hire additional qualified personnel, we may not be able to grow effectively.

Our performance is largely dependent on the talents and efforts of highly skilled individuals. Our future success depends on our continuing ability to identify, hire, develop, motivate, and retain highly skilled personnel for all areas of our organization. Competition in our industry for qualified employees is intense. We expect that as more companies in the biotechnology and pharmaceutical industries establish programs to discover drugs that target bioactive lipids, the demand for scientists with experience working with bioactive lipids will increase. As that demand increases, it is likely that certain of our competitors will directly target certain of our employees. Our continued ability to compete effectively depends on our ability to retain and motivate our existing employees.

We may also need to hire additional qualified personnel with expertise in preclinical testing, clinical research and testing, government regulation, formulation and manufacturing, and sales and marketing. We compete for qualified individuals with numerous biopharmaceutical companies and other emerging entrepreneurial companies, as well as universities and research institutions. Competition for such individuals, particularly in the Southern California area, is intense. Even though the current economic conditions

 

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have somewhat softened demand for qualified personnel, we expect that over the longer term we will continue to face stiff competition and may not be able to successfully recruit or retain such personnel. Attracting and retaining qualified personnel will be critical to our success.

Risks associated with our intellectual property

Our intellectual property rights are valuable, and our inability to protect them could reduce the value of our products, services and brand.

Our patents, trademarks, trade secrets, copyrights and other intellectual property rights are critically important assets to us. Events outside of our control could jeopardize our ability to protect our intellectual property rights. For example, effective intellectual property protection may not be available in every country in which our products and services may be distributed. In addition, the efforts we have taken to protect our intellectual property rights may not be sufficient or effective. Any significant impairment of our intellectual property rights could harm our business or our ability to compete. Protecting our intellectual property rights is costly and time consuming, and the unauthorized use of our intellectual property could cause these costs to rise significantly and materially affect our operating results.

While our goal is to obtain patent protection for our innovations, they may not be patentable or we may choose not to protect certain innovations that later turn out to be important for our business. Even if we do obtain protection for our innovations, the scope of protection gained may be insufficient or a patent issued may be deemed invalid or unenforceable, as the issuance of a patent is not conclusive as to its validity or as to the enforceable scope of the claims of the patent. The patenting process, enforcement of issued patents, and defense against claims of infringement are inherently costly and risky. We may not have the financial resources to defend our patents, thereby reducing our competitive position and our business prospects. Specific risks associated with the patent process include the following:

 

   

The United States or foreign patent offices may not grant patents of meaningful scope based on the applications we have already filed and those we intend to file. If our current patents do not adequately protect our drug molecules and the indications for their use, then we will not be able to prevent imitation and any product may not be commercially viable.

 

   

Some of the issued patents we now license may be determined to be invalid. If we have to defend the validity of the patents that we have in-licensed, the costs of such defense could be substantial, and there is no guarantee of a successful outcome. In the event any of the patents we have in-licensed is found to be invalid, we may lose competitive position and may not be able to receive royalties for products covered in part or whole by that patent under license agreements.

 

   

In addition, changes in or different interpretations of patent laws in the United States and foreign countries may permit others to use our discoveries or to develop and commercialize our technology and products without providing any compensation to us. The laws of some countries do not protect intellectual property rights to the same extent as U.S. laws and those countries may lack adequate rules and procedures for defending our intellectual property rights. For example, some countries, including many in Europe, do not grant patent claims directed to methods of treating humans, and in these countries patent protection may not be available at all to protect our drug candidates.

 

   

Although we try to avoid infringement, there is the risk that we will use a patented technology owned by another person or entity and/or be sued for infringement. For example, U.S. patent applications are confidential while pending in the Patent and Trademark Office, and patent offices in foreign countries often publish patent applications for the first time six months or more after filing. Further, we may not be aware of published or granted conflicting patent rights. Any conflicts resulting from patent applications and patents of others could significantly reduce the coverage of our patents and limit our ability to obtain meaningful patent protection. In addition, defending or indemnifying a third party against a claim of infringement can involve lengthy and costly legal actions, and there can be no guarantee of a successful outcome.

Specifically, we have filed patents to protect our compositions of matter and methods to treat several disease states, including cancer, cardiovascular disease, cerebrovascular disease, hyperproliferative diseases, and angiogenesis. We do not know whether our claims will be granted, or, if granted, upheld. Even if we do obtain protection for our innovations, the scope of protection gained may be insufficient or a patent issued may be deemed invalid or unenforceable.

We also seek to maintain certain intellectual property as trade secrets. The secrecy of this information could be compromised by third parties, or intentionally or accidentally disclosed to others by our employees, which may cause us to lose any competitive advantage we enjoy from maintaining these trade secrets.

We may in the future be subject to intellectual property rights claims, which are costly to defend, which could require us to pay damages, and which could limit our ability to use certain technologies in the future.

Companies in the pharmaceutical, biopharmaceutical and biotechnology industries own large numbers of patents, copyrights, trademarks, and trade secrets and frequently enter into litigation based on allegations of infringement or other violations by others of intellectual property rights. As our products get closer to commercialization, there is greater possibility that we may become subject to

 

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an infringement claim based on use of our technology such that we would be unable to continue using the technology without obtaining a license or settlement from third parties. We may not be able to obtain these licenses on acceptable terms, or at all. If we fail to obtain a required license or are unable to alter the design of our technology to fall outside the scope of a third party patent, we may be unable to market some of our products, which would limit our prospects for profitability.

Any intellectual property claims, whether merited or not, could be time-consuming and expensive to litigate and could cause us to divert critical management and financial resources to the resolution of such claims. We may not be able to afford the costs of litigation. Any legal action against us or our collaborators or us could lead to:

 

   

payment of damages, potentially treble damages, if we are found to have willfully infringed a party’s patent rights;

 

   

injunctive or other equitable relief that may effectively block our ability to further develop, commercialize and sell products; or

 

   

we or our collaborators having to enter into license arrangements that may not be available on commercially acceptable terms, if at all.

As a result, an adverse determination also could prevent us from offering our products to the marketplace.

Confidentiality agreements with employees and others may not adequately prevent disclosure of our trade secrets and other proprietary information and may not adequately protect our intellectual property.

Because we operate in the highly technical field of drug discovery and development, we rely in part on trade secret protection in order to protect our proprietary technology and processes. However, trade secrets are difficult to protect. We enter into confidentiality and intellectual property assignment agreements with our corporate partners, employees, consultants, outside scientific collaborators, sponsored researchers and other advisors. These agreements generally require that the other party keep confidential and not disclose to third parties all confidential information developed by the party or made known to the party by us during the course of the party’s relationship with us. These agreements also generally provide that inventions conceived by the party in the course of rendering services to us will be our exclusive property. However, these agreements may not be honored and may not effectively assign intellectual property rights to us. Enforcing a claim that a party illegally obtained and is using our trade secrets is difficult, expensive and time consuming and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets. The failure to obtain or maintain trade secret protection could adversely affect our competitive position.

Risks primarily associated with our stock:

The price of our common stock may be volatile.

Our common stock is traded on the Over-the-Counter Bulletin Board (“OTCBB”) and is quoted under the symbol LPTN.OB. The OTCBB is an inter-dealer, over-the-counter market that provides significantly less liquidity than a listing on the Nasdaq Stock Markets or other national securities exchange. Quotes for stocks included on the OTCBB are not listed in the financial sections of newspapers as are those for the Nasdaq Stock Market. Therefore, prices for securities traded solely on the OTCBB may be difficult to obtain.

In addition, the trading price of our common stock has in the past and may continue to fluctuate substantially. Our common stock is subject to fluctuations for many reasons, including the following:

 

   

price and volume fluctuations in the overall stock market from time to time;

 

   

fluctuations in stock market prices and trading volumes of similar companies;

 

   

actions of investors that affect the market price;

 

   

actual or anticipated changes in our earnings or fluctuations in our operating results or in the expectations of securities analysts;

 

   

general economic conditions and trends;

 

   

the announcement of collaboration agreements to pursue further clinical development of our drug candidates;

 

   

sales of large blocks of our stock;

 

   

departures of key personnel;

 

   

changes in the regulatory status of our product candidate or clinical trials;

 

   

announcements of new products or technologies;

 

   

regulatory developments in the United States and other countries; and

 

   

failure of our common stock to be listed quoted on the Nasdaq Stock Market, American Stock Exchange or other national market system.

 

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If shares of our common or preferred stock available for issuance or shares eligible for future sale were introduced into the market, it could hurt our stock price.

We are authorized to issue 200,000,000 shares of common stock. As of November 30, 2010, there were an aggregate of 80,524,819 shares of our common stock issued and outstanding on a fully diluted basis. That total includes 5,577,711 shares of our common stock that may be issued upon the exercise of outstanding stock options and the vesting of outstanding restricted stock units, and 14,607,079 shares of common stock that may be issued upon the exercise of outstanding warrants. The exercise of outstanding options and/or warrants may cause substantial dilution to those who hold shares of common stock prior to such exercises. In addition, sales of substantial amounts of the common stock in the public market by these holders or perceptions that such sales may take place may lower the common stock’s market price.

We may sell our authorized, but unissued, common stock to satisfy our funding requirements. We are also authorized to issue 15,000,000 shares of preferred stock, without stockholder approval. The preferred stock may have rights that are superior to the rights of the holders of our common stock, at a purchase price then approved by our Board of Directors. The sale or the proposed sale of substantial amounts of our common or preferred stock in the public markets may adversely affect the market price of our common stock and our stock price. Our stockholders may also experience substantial dilution.

Our common stock is considered “a penny stock” and, as a result, it may be difficult to trade a significant number of shares of our common stock.

The SEC has adopted regulations that generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. Our stock is currently less than $5.00 per share, and is classified as a “penny stock.” As a result, any broker or dealer selling our stock must disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase our securities. These rules may restrict the ability of brokers or dealers to sell our common stock and may affect the ability of investors to sell their shares.

We have not taken any of the steps necessary to register our Class A common stock with the securities division of any state within the United States.

We have not applied to register our Class A common stock under the laws of any state or other jurisdiction of the United States other than under the U.S. Securities Act of 1933, as amended, nor do we intend to make such an application. Until our common stock is listed for trading on a U.S. national securities exchange, trading in, or the offer and sale of, our common stock will be subject to the securities laws of the various states and jurisdictions of the United States in addition to U.S. federal securities law. These state securities laws cover all secondary trading that could enter a purchaser’s home state. As a result, holders may not resell their shares of common stock in the United States without satisfying the applicable state securities law or qualifying for an exemption therefrom, including the exemptions provided under the U.S. National Securities Markets Improvement Act of 1996. These restrictions and potential costs could be significant burdens to our stockholders seeking to effect resales of our common stock within the United States.

We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

We currently intend to invest our future earnings, if any, to fund the development and growth of our business. The payment of dividends will be at the discretion of our board of directors and will depend on our results of operations, capital requirements, financial condition, future prospects, contractual arrangements, restrictions imposed by applicable law, any limitations on payments of dividends present in any debt agreements we may enter into and other factors our board of directors may deem relevant. If we do not pay dividends, your ability to achieve a return on your investment in our company will depend on any future appreciation in the market price of our common stock. There is no guarantee that our common stock will appreciate in value or even maintain the price at which our holders have purchased their common stock.

We will incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which may adversely affect our operating results, and failure to achieve and maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could cause investors to lose confidence in our operating results and in the accuracy of our financial reports and could have a material adverse effect on our business and on the price of our common stock.

 

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As a public company, we will be required, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. Our first report on compliance with Section 404(b) may be in connection with our financial statements for the year ending December 31, 2011, depending upon the value of our public float as of June 30, 2011. The controls and other procedures are designed to ensure that information required to be disclosed by us in the reports that we file with the Securities and Exchange Commission, or SEC, is disclosed accurately and is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. We believe that we have conformed our internal control procedures to the requirements of Section 404. Although we have developed controls that we believe to be effective, these controls may become inadequate because of changes in conditions or the degree of compliance with these policies or procedures may deteriorate. Furthermore, even with these procedures in place additional weaknesses in our internal control over financial reporting may be discovered. In the event that we are not able to demonstrate compliance with Section 404 in a timely manner, or are unable to produce timely or accurate financial statements, we may be subject to sanctions or investigations by regulatory authorities such as the SEC and investors may lose confidence in our operating results and the price of our common stock could decline.

 

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USE OF PROCEEDS

We will not receive any proceeds from the sale of shares of our common stock by the selling security holders. A portion of the shares covered by this prospectus are issuable upon exercise of warrants to purchase our common stock. Upon any exercise of the warrants for cash, the selling security holders would pay us the exercise price of the warrants. Under certain conditions set forth in the warrants, the warrants are exercisable on a cashless basis. If the warrants are exercised on a cashless basis, we would not receive any cash payment from the selling security holders upon any exercise of the warrants. Instead, the selling security holders would satisfy their obligation to pay the exercise price through a formula-based transfer of warrant shares to us. The additional proceeds we could receive from the exercise of such warrants have not yet been earmarked for any specific use beyond working capital needs because there is no certainty that we will ever receive any proceeds from the exercise of such warrants.

The selling security holders will pay any underwriting discounts and commissions and expenses incurred by the selling security holders for brokerage, accounting, tax or legal services or any other expenses incurred by the selling security holders in disposing of the shares. We will bear all other costs, fees and expenses incurred in effecting the registration of the shares covered by this prospectus, including, without limitation, all registration and filing fees and fees and expenses of our counsel and our accountants.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock and we do not currently anticipate declaring or paying cash dividends on our capital stock in the foreseeable future. We currently intend to retain all of our future earnings, if any, to finance the operation and expansion of our business. Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including future earnings, capital requirements, financial conditions, future prospects, contractual restrictions and covenants and other factors that our board of directors may deem relevant.

 

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MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND

THE ISSUER PURCHASES OF EQUITY SECURITIES

Since December 1, 2005, our common stock has traded under the symbol “LPTN.OB” on the OTC Bulletin Board. The OTC Bulletin Board is a regulated quotation service that displays real-time quotes, last-bid prices and volume information in over-the-counter equity securities. The OTC Bulletin Board securities are traded by a community of market makers that enter quotes and trade reports. This market is extremely limited and any prices quoted may not be a reliable indication of the value of our common stock.

The following table sets forth the high and low sales prices for our common stock for the periods indicated, as reported by the OTC Bulletin Board. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.

 

     2010      2009      2008  
     High      Low      High      Low      High      Low  

First quarter

   $ 0.96       $ 0.70       $ 1.10       $ 0.50       $ 2.30       $ 1.70   

Second quarter

   $ 0.80       $ 0.45       $ 1.42       $ 0.70       $ 1.75       $ 1.23   

Third quarter

   $ 0.90       $ 0.40       $ 1.42       $ 0.78       $ 1.52       $ .96   

Fourth quarter (through December 17, 2010)

   $ 0.98       $ 0.75       $ 1.02       $ 0.65       $ 1.30       $ .90   

As of November 30, 2010, we had approximately 97 stockholders of record (excluding an indeterminable number of stockholders whose shares are held in street or “nominee” name) of our common stock. The closing price of our common stock on December 17, 2010, was $0.75 per share.

The following table summarizes our compensation plans under which our equity securities are authorized for issuance as of November 30, 2010:

EQUITY COMPENSATION PLAN INFORMATION

 

     Number of Shares
to be Issued Upon
Exercise  of
Outstanding
Stock Options and
Restricted Stock
Units
     Weighted-
Average
Exercise Price
of Outstanding
Stock Options
     Number of Shares
Remaining Available
for Future Issuance
Under  Equity
Compensation Plans
 

Equity compensation plans approved by security holders

     (1)    5,577,711       (2)  $     0.57         3,233,638   

Equity compensation plans not approved by security holders

     —           —           —     
                    

Total

     5,577,711       $ 0.57         3,233,638   
                          

 

(1) Includes 2,684,876 restricted stock units.
(2) Excludes 2,684,876 restricted stock units.

 

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SELLING SECURITY HOLDERS

We are registering the following shares of our Class A common stock:

 

   

up to 6,978,128 shares of our Class A common stock that were issued in connection with a private placement that closed on November 15, 2010;

 

   

up to 3,627,968 shares of our Class A common stock that may be issued upon exercise of warrants acquired by selling security holders in our November 2010 private placement (including warrants issued to our placement agents in such offering);

 

   

up to 97,787 shares of our Class A common stock that may be issued upon exercise of certain warrants issued in connection with a private placement that closed in August 2008 (including warrants issued to our placement agents in such offering); and

 

   

up to 292,489 shares of our Class A common stock that may be issued upon exercise of certain warrants issued in connection with a private placement that closed in April and June of 2007 (including warrants issued to our placement agents in such offering).

The selling security holders may sell some, all or none of their shares. We do not know how long the selling security holders will hold the shares offered hereunder before selling them. We currently have no agreements, arrangements or understandings with the selling security holders regarding the sale of any of the shares by them other than the registration rights agreements referenced below in Description of Securities. The shares offered by this prospectus may be offered from time to time by the selling security holders. As used in this prospectus, the term “selling security holder” includes each of the selling security holders listed below, and any donee, pledgee, transferee or other successor in interest selling shares received after the date of this prospectus from a selling security holder as a gift, pledge, or other non-sale related transfer. The selling security holders may have sold or transferred, in transactions exempt from the registration requirements of the Securities Act, some or all of their shares since the date on which the information in the table is presented. Information about the selling security holders may change over time.

The following table sets forth the name of each selling security holder, the number of shares owned by such selling security holder as of November 30, 2010, the number of shares that may be offered under this prospectus by such selling security holder, and the number of shares of our common stock and the percentage (if one percent or more) of our common stock to be owned by such selling security holder after completion of this offering, assuming that all shares offered hereunder are sold as contemplated herein. The number of shares in the column “Number of Shares Being Offered” represents all of the shares that a selling security holder may offer under this prospectus, which includes the shares issuable upon exercise of the warrants covered by this prospectus. Except as otherwise disclosed in this prospectus (or as disclosed in any document incorporated by reference) including information incorporated, none of the selling security holders has, or within the past three years has had, any position, office or other material relationship with us. The selling security holders have advised us that they may enter into short sales in the ordinary course of their business of investing and trading securities. The selling security holders participating in the November 2010 private placement have also advised us that no short sales in our securities were entered into by them during the period beginning when the selling security holders obtained knowledge that we were contemplating a private placement and ending upon the public announcement of the November 2010 private placement. Other than the costs of preparing and providing this prospectus and a registration fee to the SEC, we are not paying any costs relating to the sales by the selling security holders.

Ownership reflected in this table for each selling security holder is based upon information provided to us by the selling security holder and reflects holdings as of November 30, 2010. The percentages of common stock owned after the offering are based on 60,340,029 shares of our common stock outstanding as of November 30, 2010, including the shares issued in the November 2010 private placement. Beneficial ownership is determined in accordance with Rule 13d-3(d) promulgated by the Commission under the Securities Exchange Act of 1934. In computing the number of shares owned by and the percentage ownership of a selling security holder, shares of common stock that could be issued upon the exercise of outstanding options, warrants or other rights held by that selling security holder that are currently exercisable or exercisable within 60 days of November 30, 2010 are considered outstanding. However, such shares are not included in the shares outstanding as of November 30, 2010 when computing the percentage ownership of each other selling security holder.

Unless otherwise noted, each person or group identified possesses sole voting and investment power with respect to the shares, subject to community property laws where applicable.

 

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Table of Contents

 

Selling Security Holder

   Common  Stock
Beneficially
Owned as of
November 30, 2010
    Shares of Common
Stock  Being
Offered in the
Offering(1)
     Common  Stock
Beneficially
Owned  After
Offering(1)
     Percent
After
Offering
 

LB I Group Inc.***

399 Park Avenue

9th Floor

New York, NY 10022

     7,746,459 (2)      155,361         7,591,098         11.8   

WHI Morula Fund, LLC

191 N. Wacker Drive, Suite 1500

Chicago, IL 60606

     1,307,370 (3)      20,250         1,287,120         2.1   

WHI Growth Fund Q.P., L.P.

191 N. Wacker Drive, Suite 1500

Chicago, IL 60606

     2,249,961 (4)      22,617         2,227,344         3.7   

Panacea Fund, LLC

191 N. Wacker Drive, Suite 1500

Chicago, IL 60606

     1,771,748 (5)      16,933         1,754,815         2.9   

WHI Select Fund, L.P.

191 N. Wacker Drive, Suite 1500

Chicago, IL 60606

     1,151,600 (6)      10,893         1,140,707         1.9   

Biogen IDEC MA Inc.

A wholly owned subsidiary of Biogen IDEC., Inc.

14 Cambridge Center

Cambridge, MA 02142

     2,705,625 (7)      22,635         2,682,990         4.4   

Roaring Fork Capital SBIC, L.P.

1875 Lawrence Street Suite 400

Denver, CO 80202

     3,886,105 (8)      1,084,211         2,801,894         4.5   

E. Jeffrey Peierls

73 S. Holman Way

Golden, CO 80401

     5,107,805 (9)      1,479,953         3,627,852         5.9   

UD E.F. Peierls for B.E. Peierls

73 S. Holman Way

Golden, CO 80401

     141,413 (9)      50,388         91,025         *   

UD E.F. Peierls for E.J. Peierls

73 S. Holman Way

Golden, CO 80401

     141,413 (9)      50,388         91,025         *   

 

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Table of Contents

Selling Security Holder

   Common  Stock
Beneficially
Owned as of
November 30, 2010
    Shares of Common
Stock  Being
Offered in the
Offering(1)
     Common  Stock
Beneficially
Owned  After
Offering(1)
     Percent
After
Offering
 

UD J.N. Peierls for B.E. Peierls

73 S. Holman Way

Golden, CO 80401

     189,858 (9)      65,713         124,145         *   

UD J.N Peierls for E.J. Peierls

73 S. Holman Way

Golden, CO 80401

     189,858 (9)      65,713         124,145         *   

UD E.S. Peierls for E.F. Peierls Et

73 S. Holman Way

Golden, CO 80401

     82,298 (9)      23,078         59,220         *   

UW Jennie Peierls for B.E. Peierls

73 S. Holman Way

Golden, CO 80401

     175,902 (9)      65,577         110,325         *   

UW Jennie Peierls for E.J. Peierls

73 S. Holman Way

Golden, CO 80401

     175,902 (9)      65,577         110,325         *   

UW E.S. Peierls for BEP Art VI-Accum

73 S. Holman Way

Golden, CO 80401

     121,521 (9)      45,740         88,825         *   

UW E.S. Peierls for EJP Art VI-Accum

73 S. Holman Way

Golden, CO 80401

     72,386 (9)      21,499         50,887         *   

The Peierls Foundation, Inc.

73 S. Holman Way

Golden, CO 80401

     3,993,539 (9)      661,515         3,332,024         *   

UD Ethel F. Peierls Charitable Lead Trust

73 S. Holman Way

Golden, CO 80401

     485,097 (9)      189,312         295,785         *   

The Peierls By-Pass Trust

7808 Harvestman Cove

Austin, TX 78731

     82,500 (9)      82,500         —           *   

Brian Eliot Peierls

7808 Harvestman Cove

Austin, TX 78731

     5,107,805 (10)      1,148,607         3,959,198         6.5   

 

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Table of Contents

Selling Security Holder

   Common  Stock
Beneficially
Owned as of
November 30, 2010
    Shares of Common
Stock  Being
Offered in the
Offering(1)
     Common  Stock
Beneficially
Owned  After
Offering(1)
     Percent
After
Offering
 

Scott R. Pancoast

6335 Ferris Square, Suite A

San Diego, CA 92121

     1,849,046 (11)      128         1,848,919         3.0   

Theresa L. and John W. Trzcinka

1773 Playa Vista

San Marcos, CA 92078

     155,430 (12)      338         155,092         *   

Elise R. Stoller Living Trust

88 The Serpentine

Roslyn, NY 11576

     564,876 (13)      194         564,682         *   

William S. Shestowsky

7652 Marker Road

San Diego, CA 92130

     59,714 (14)      161         59,553         *   

Genevieve Hansen

PMB 168

P.O. Box 5000

Rancho Santa Fe, CA 92067

     90,593 (15)      272         90,321         *   

J. Scott Liolios ***

2431 W. Coast Highway #205

Newport Beach, CA 92663

     354,897 (16)      1,361         353,536         *   

Norbert V. Mang

26773 SW Labrousse Road

Sherwood, OR 97140

     123,889 (17)      139         123,750         *   

Richard Molinsky

51 Lords Highway East

Weston, CT 06883

     142,487 (18)      106,841         35,646         *   

Sterling Securities International Ltd

Suite # 6203

P.O. Box 561

I-5 Irish Town

Imossi House

Gibraltar

     198,908 (19)      1,881         197,027         *   

 

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Table of Contents

Selling Security Holder

   Common  Stock
Beneficially
Owned as of
November 30, 2010
    Shares of Common
Stock  Being
Offered in the
Offering(1)
     Common  Stock
Beneficially
Owned  After
Offering(1)
     Percent
After
Offering
 

Investment Strategies Fund LP

605 Third Avenue, 19th Floor

New York, NY 10158

     71,973 (20)      681         71,292         *   

Charles C. Feddermann

3 Robinhood Court

Lincolnshire, IL 60069

     183,947 (21)      1,361         182,586         *   

Alexander Ruckdaschel

123 East 83rd Street

New York, NY 10028

     71,973 (22)      681         71,292         *   

Mai N. Pogue, CGM IRA Rollover Custodian

7851 Fisher Island Drive

Fisher Island, FL 33109

     103,639 (23)      989         102,650         *   

Jacqueline Pogue Tanner

20 Hedgerow Lane

Greenwich, CT 06831

     43,321 (24)      425         42,896         *   

Gerald Pogue, Jr.

60 Patterson Avenue

Greenwich, CT 06830

     21,040 (25)      202         20,838         *   

Bernard S. Carrey

1012 Rainbow Court

Bradenton, FL 34212

     55,328 (26)      1,073         54,255         *   

Zachary Pancoast

c/o Scott R. Pancoast

6335 Ferris Square, Suite A

San Diego, CA 92121

     31,893 (27)      318         88,825         *   

Thomas J. Ray

23 Church Street

New Canaan, CT 06840

     19,939 (28)      199         19,740         *   

Edward B. Newman

11 Upper Prospect Road

Atlantic Highlands, NJ 07716

     132,908 (29)      1,327         131,581         *   

Donald R. Swortwood Trust

c/o WSIC,, 6335 Ferris Square

Suite A, San Diego, California 92121

     6,030,731 (30)      1,659         6,029,072         9.9   

 

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Table of Contents

Selling Security Holder

   Common  Stock
Beneficially
Owned as of
November 30, 2010
    Shares of Common
Stock  Being
Offered in the
Offering(1)
     Common  Stock
Beneficially
Owned  After
Offering(1)
     Percent
After
Offering
 

Letitia Swortwood Revocable Trust

c/o WSIC, 6335 Ferris Square

Suite A, San Diego, California 92121

     5,930,731 (31)      1,659         5,929,072         9.8   

Iroquois Master Fund Ltd.

641 Lexington Avenue

26th Floor

New York, NY 10022

     265,811 (32)      2,654         263,157         *   

Cranshire Capital LP

3100 Dundee Road

Suite 703

Northbrook, IL 60066

     238,214 (33)      204,898         33,316         *   

Blue Bell Investors, S.A.

30E, 62nd Street, Apt. 15B

New York, NY 10065

     321,426 (34)      321,426         —           *   

El Morro LLC

c/o Arco Capital Management LLC

City View Plaza II, 48 Carr. 165, Ste. 6000

Guaynabo, PR 00968

     300,000 (35)      300,000         —           *   

Cabat LLC

105 Ave. Ortegon, Caparra Classic Apt. 1601

Guaynabo, PR 00966

     214,284 (36)      214,284         —           *   

Arco International Group LLC

c/o Arco Capital Management LLC

City View Plaza II, 48 Carr. 165, Ste. 6000

Guaynabo, PR 00968

     160,713 (37)      160,713         —           *   

Eduardo I. Canto & Laura Canto JT

Y6 Hastings Street, Urb. Garden Hills

Guaynabo, PR 00966

     150,000 (38)      150,000         —           *   

Eduardo I. Canto Repetti Retirement Plan

Y6 Hastings Street, Urb. Garden Hills

Guaynabo, PR 00966

     150,000 (39)      150,000         —           *   

Roberto J. Canto & Josefina de la Fuente JT

Margarita N-15, Parquessta Maria

San Juan, PR 00927

     150,000 (40)      150,000         —           *   

 

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Selling Security Holder

   Common  Stock
Beneficially
Owned as of
November 30, 2010
    Shares of Common
Stock  Being
Offered in the
Offering(1)
     Common  Stock
Beneficially
Owned  After
Offering(1)
     Percent
After
Offering
 

Roberto J. Canto, MD Money Purchase Plan

29 Washington, Suite 109

San Juan, PR 00907

     150,000 (41)      150,000         —           *   

Jose I. Canto

Cond. Plaza del Prado I, 7 Carr. 833, Apt. 501

Guaynabo, PR 00969

     142,500 (42)      142,500         —           *   

Fernando Canto & Ana Maria Canto JT

8260 La Rampa Street

Coral Gables, FL 33143

     135,000 (43)      135,000         —           *   

Manuel Freije Betances

Call Box 1904

Toa Baja, PR 00950

     107,142 (44)      107,142         —           *   

Jorge I. Salcedo & Graciela Salcedo JT

URB. Santa Maria, 1910 Reseda Street

San Juan, PR 00927

     105,000 (45)      105,000         —           *   

Julio A. Ocasio-Tascon

#15 Palma De Coco, URB Paseo Las Palmas

Dorado, PR 00646

     64,284 (46)      64,284         —           *   

Juan Carlos Bou

Cond. Plaza del Mar, Isla Verde Ave., Apt. 2305

Carolina, PR 00979

     64,284 (47)      64,284         —           *   

Juan C. Canto

6815 Tordera Street

Coral Cables, FL 33146

     60,000 (48)      60,000         —           *   

Fernando E. Canto

8260 La Rampa Street

Coral Gables, FL 33143

     55,500 (49)      55,500         —           *   

Ana Maria Canto & Jose F. Jouvin JT

929 Anastasia Ave.

Coral Gables, FL 33134

     55,500 (50)      55,500         —           *   

 

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Selling Security Holder

   Common  Stock
Beneficially
Owned as of
November 30, 2010
    Shares of Common
Stock  Being
Offered in the
Offering(1)
     Common  Stock
Beneficially
Owned  After
Offering(1)
     Percent
After
Offering
 

Carlos A. Guajardo

8201 Ponce De Leon Road

Miami, FL 33143

     60,000 (51)      60,000         —           *   

BBS Capital Fund, LP

Jefferies Prime Brokerage

520 Madison Ave., 12th Floor, Attn: Stephen Augustin

New York, NY 10022

     150,000 (52)      150,000         —           *   

Mark Wheeler

430 E. 86th Street, Apt. 14H

New York, NY 10028

     107,142 (53)      107,142         —           *   

Goldman Capital Management Inc

Money Purchase Plan Dtd 12/23/87

c/o Goldman Capital Management,

767 Third Ave., 25th Floor

New York, NY 10021

     450,000 (54)      450,000         —           *   

Rockmore Investment Master Fund Ltd.

c/o Rockmore Capital LLC, 150 East 58th Street

New York, NY 10155

     107,142 (55)      107,142         —           *   

Spectrum Value Partners, LP

420 Lexington Ave., Suite 2006

New York, NY

     321,426 (56)      321,426         —           *   

Claire Rizzo

3 Laurel Ct.

North Caldwell, NJ 07006

     107,142 (57)      107,142         —           *   

Brio Capital L.P.

401 East 34th Street, Suite South 33c

New York, NY 10016

     428,571 (58)      428,571         —           *   

ProMed Partners, L.P.

125 Cambridge Park Drive, Attn: David Musket

Cambridge, MA 02140

     795,000 (59)      795,000         —           *   

David B. Musket

c/o ProMed Partners, 125 Cambridge Park Drive

Cambridge, MA 02140

     1,590,000 (60)      1,590,000         —           *   

Richard G. Wehby and Anne A. Wolf

447 Weld Street

West Roxbury, MA 02132

     45,426 (61)      45,426         —           *   

 

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Selling Security Holder

   Common  Stock
Beneficially
Owned as of
November 30, 2010
    Shares of Common
Stock  Being
Offered in the
Offering(1)
     Common  Stock
Beneficially
Owned  After
Offering(1)
     Percent
After
Offering
 

David A. Dent

6712 Arrowhead Pass

Edina, MN 55439

     60,000 (62)      60,000         —           *   

Boris Volman

135-30 Grand Central, Apt. 512

Kew Gardens, NY 11435

     281,717 (63)      76,988         204,729         *   

Freestone Advantage Partners, LP

3100 Dundee #703

Northbrook, IL 60066

     10,713 (64)      10,713         —           *   

Micro Pipe Capital Management

c/o Mickelson Investment Management, LLC

301 Mission Ave., Ste. 209

Oceanside, CA 92054

     160,713 (65)      160,713         —           *   

Univest Management Inc. Employee Profit Sharing Plan

149 W. Village Way

Jupiter, FL 33458

     225,000 (66)      225,000         —           *   

David R. Morgan

16330 Winchester Club Drive

Meadow Vista, CA 95722

     160,713 (67)      160,713         —           *   

Shipman & Goodwin LLP Profit Sharing Plan fbo James T. Betts

c/o Shipman & Goodwin LLP, One Constitution Plaza

Hartford, CT 06103-1919

     105,000 (68)      105,000         —           *   

Warrant STRATEGIES Fund, L.L.C.

350 Madison Ave. 10th Floor

New York, New York 10017

     30,060 (69)      1,253         28,807         *   

Gary Davis***

300 East 56th Street

New York, NY 10004

     232,023 (69)      4,207         227,816         *   

Salvatore Saraceno***

c/o Griffin Securities, Inc.

17 State Street

New York, NY 10004

     167,506 (70)      5,896         161,610         *   

 

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Selling Security Holder

   Common  Stock
Beneficially
Owned as of
November 30, 2010
    Shares of Common
Stock  Being
Offered in the
Offering(1)
     Common  Stock
Beneficially
Owned  After
Offering(1)
     Percent
After
Offering
 

Mark Zizzamia***

c/o Griffin Securities, Inc.

17 State Street

New York, NY 10004

     325,006 (70)      11,440         313,566         *   

Julia Lancian***

c/o Griffin Securities, Inc.

17 State Street

New York, NY 10004

     20,999 (70)      738         20,261         *   

Adrian Stecyk***

c/o Griffin Securities, Inc.

17 State Street

New York, NY 10004

     797,324 (70)      18,817         778,507         *   

Michael Boylan

10 Riverdell Drive

Essex Junction, VT

     63,527        2,236         61,291         *   

McGinn Smith & Company, Inc.**

99 Pine Street

Albany, NY

     267,414 (71)      8,285         259,129         *   

Piper Jaffray

150 East 42nd Street 35th Floor

New York, NY 10017

     7,064 (72)      7,064         —           *   

Dawson James Securities, Inc.

925 South Federal Highway

Boca Raton, FL 33432

     182 (72)      182         —           *   

Richard Aulincino

925 South Federal Highway

Boca Raton, FL 33432

     32 (72)      32         —           *   

Douglas Kaiser

925 South Federal Highway

Boca Raton, FL 33432

     53 (72)      53         —           *   

Albert Poliak

925 South Federal Highway

Boca Raton, FL 33432

     53 (72)      53         —           *   

 

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Table of Contents

Selling Security Holder

   Common  Stock
Beneficially
Owned as of
November 30, 2010
    Shares of Common
Stock  Being
Offered in the
Offering(1)
     Common  Stock
Beneficially
Owned  After
Offering(1)
     Percent
After
Offering
 

Robert D. Keyser

925 South Federal Highway

Boca Raton, FL 33432

     53 (72)      53         —           *   

Frank Salvatore

925 South Federal Highway

Boca Raton, FL 33432

     53 (72)      53         —           *   

Thomas Hands

925 South Federal Highway

Boca Raton, FL 33432

     5 (72)      5         —           *   

William Fox

925 South Federal Highway

Boca Raton, FL 33432

     5 (72)      5         —           *   

Griffin Securities, Inc.

17 State Street

New York, NY 10004

     706 (72)      706         —           *   

Friendly Capital, LLC Defined Benefit Plan

21 South End Ave. #603

New York, NY 10280

     9,707 (72)      9,707         —           *   

 

* Less than 1.0%
** Registered broker-dealer
*** Affiliate or registered representative of a registered broker-dealer
(1) Includes shares of Class A common stock issuable upon the exercise of warrants, and is adjusted to reflect the sale of shares pursuant to this offering.
(2) Consists of 3,684,211 shares of Class A common stock and 4,062,248 shares of Class A common issuable upon the exercise of warrants owned by LBI Group Inc. (“LBI”).
(3) Consists of 913,890 shares of Class A common stock owned by WHI Morula Fund, LLC (“Morula”) and 393,480 shares of Class A common stock issuable upon the exercise of warrants owned by Morula. Charles Polsky, a Vice President of William Harris Investors, Inc., the manager of Morula, has voting and investment power over the shares of our Class A common stock owned by Morula.
(4) Consists of 1,607,350 shares of Class A common stock owned by WHI Growth Fund Q.P., L.P. (the “Growth Fund”) and 642,611 shares of Class A common stock issuable upon the exercise of warrants owned by the Growth Fund. Charles Polsky, a Vice President of William Harris Investors, Inc., the general partner of the Growth Fund, has voting and investment power over the shares of our Class A common stock owned by the Growth Fund.
(5) Consists of 1,315,796 shares of Class A common stock owned by Panacea Fund, LLC (“Panacea”) and 455,952 shares of Class A common stock issuable upon the exercise of warrants owned by Panacea. Charles Polsky, a Vice President of William Harris Investors, Inc., the manager of Panacea, has voting and investment power over the shares of our Class A common stock owned by Panacea.
(6) Consists of 842,120 shares of Class A common stock owned by WHI Select Fund, L.P. (“WHI Select”) and 309,480 shares of Class A common stock issuable upon the exercise of warrants owned by WHI Select. Charles Polsky, a Vice President of William Harris Investors, Inc., the general partner of WHI Select, has voting and investment power over the shares of our Class A common stock owned by WHI Select.

 

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(7) Consists of 2,062,500 shares of Class A common stock owned by Biogen IDEC MA Inc. and 643,125 shares of Class A common stock issuable upon the exercise of warrants owned by Biogen IDEC MA Inc. Biogen IDEC MA Inc. is a wholly owned subsidiary of Biogen IDEC Inc. Biogen IDEC Inc. is a publicly traded company. Michael Phelps, the Vice President, Treasurer of Biogen IDEC Inc., has voting and investment power over the shares of our Class A common stock owned by Biogen IDEC MA Inc.
(8) Consists of 3,237,973 shares of Class A common stock owned by Roaring Fork Capital SBIC, L.P. (“Roaring Fork”) and 648,132 shares of Class A common stock issuable upon the exercise of warrants owned by Roaring Fork. Eugene McColley, a Managing General Partner of Roaring Fork, has voting and investment power over the shares of our Class A common stock owned by Roaring Fork.
(9) Consists of 496,579 shares of Class A common stock and 129,355 shares of Class A common stock issuable upon the exercise of warrants owned directly by Mr. E. Jeffrey Peierls. Also includes 3,211,842 shares of Class A common stock and 781,697 shares of Class A common stock issuable upon the exercise of warrants owned by The Peierls Foundation, Inc. (the “Foundation”), and 367,105 shares of Class A common stock and 117,992 shares of Class A common stock issuable upon the exercise of warrants owned by the U. D. Ethel F. Peierls Charitable Lead Trust (the “Lead Trust”), and 990,948 shares of Class A common stock and 382,103 shares of Class A common stock issuable upon the exercise of warrants owned in the aggregate by the following trusts: UD E.F. Peierls for B.E. Peierls, UD E.F. Peierls for E.J. Peierls, UD J.N. Peierls for B.E. Peierls, UD J.N. Peierls for E.J. Peierls, UD E.S. Peierls for E.F. Peierls Et al., UW Jennie Peierls for B.E. Peierls, UW Jennie Peierls for E.J. Peierls, UW E.S. Peierls for BEP Art VI-Accum, UW E.S. Peierls for EJP Art VI-Accum (the “Trusts”). Mr. E. Jeffrey Peierls is the President and a Director of the Foundation and is a Co-Trustee of the Lead Trust, and is a Co-Trustee of the Trusts. Mr. E. Jeffrey Peierls has voting and investment power over the shares of our Class A common stock owned by the Foundation, the Lead Trust and the Trusts.
(10) Consists of 420,947 shares of Class A common stock and 125,722 shares of Class A common stock issuable upon the exercise of warrants owned directly by Mr. Brian Eliot Peierls. Also includes 3,211,842 shares of Class A common stock and 781,697 shares of Class A common stock issuable upon the exercise of warrants owned by the Foundation, 367,105 shares of Class A common stock and 117,992 shares of Class A common stock issuable upon the exercise of warrants owned by the Lead Trust and 55,000 shares of Class A common stock and 27,500 shares of Class A common stock issuable upon the exercise of warrants owned by The Peierls By-Pass Trust. Mr. Brian E. Peierls is the Vice President and a Director of the Foundation and is a Co-Trustee of the Lead Trust. Mr. Brian E. Peierls has voting and investment power over the shares of our Class A common stock owned by the Foundation and the Lead Trust.
(11) Consists of 114,500 shares of common stock owned by Mr. Pancoast, 3,674 shares of common stock issuable upon the exercise of warrants owned by Mr. Pancoast, 1,123,840 shares of common stock issuable upon the exercise of outstanding options, and 581,251 shares that are issuable pursuant to the terms of restricted stock units (RSUs) owned by Mr. Pancoast. Mr. Pancoast is the Chief Executive Officer, President and a director of Lpath, Inc.
(12) Consists of 26,764 shares of Class A common stock owned jointly by Mr. and Ms. Trzcinka, 8,762 shares of Class A common stock issuable upon the exercise of warrants owned jointly by Mr. and Ms. Trzcinka, 52,632 shares of Class A common stock owned by Ms. Trzcinka, 9,034 shares of common stock issuable upon the exercise of warrants owned by Ms. Trzcinka, 57,000 shares of Class A common stock issuable upon the exercise of outstanding options, and 9,000 shares that are issuable pursuant to the terms of (RSUs) owned by Ms. Trzcinka.
(13) Consists of 31,700 shares of Class A common stock owned by the Elisa A Stoller Living Trust (the “Stoller Trust”), of which Dr. Stoller is the co-trustee, 5,512 shares of Class A common stock issuable upon the exercise of warrants owned by the Stoller Trust, 3,600 shares of Class A common stock owned by a UTMA account for the benefit of Dr. Stoller’s minor children (the “UTMA”) and 340,000 shares of Class A common stock issuable upon the exercise of outstanding options owned by Dr. Stoller, and 184,064 shares that are issuable pursuant to the terms of (RSUs) owned by . Dr. Stoller has voting and investment power over the shares of our Class A common stock owned by the Stoller Trust and the UTMA.
(14) Consists of 12,632 shares of Class A common stock owned by Mr. Shestowsky, 4,332 shares of Class A common stock issuable upon the exercise of warrants owned by Mr. Shestowsky 29,000 shares of Class A common stock issuable upon the exercise of outstanding options owned by Mr. Shestowsky, and 12,250 shares that are issuable pursuant to the terms of (RSUs) owned by Mr. Shestowsky.
(15) Consists of 82,875 shares of Class A common stock owned by Ms. Hansen, 7,718 shares of Class A common issuable upon the exercise of warrants owned by Ms. Hansen.
(16) Consists of 105,263 shares of Class A common stock owned by Mr. Liolios, 38,684 shares of Class A common issuable upon the exercise of warrants owned by Mr. Liolios, 3,000 shares owned in custody for Mr. Liolios’ minor children, 7,950 shares of common stock owned by the Liolios Family Trust, 100,000 shares of Class A common issuable up on the exercise of outstanding warrants owned by Liolios Group, Inc., and 100,000 shares of Class A common issuable up on the exercise of outstanding options owned by Liolios Group, Inc.
(17) Consists of 84,333 shares of Class A common stock and 39,556 shares of Class A common issuable upon the exercise of warrants owned by owned by Mr. Mang.
(18) Consists of 97,315 shares of Class A common stock and 45,172 shares of Class A common issuable upon the exercise of warrants owned by Mr. Molinsky.

 

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(19) Consists of 145,454 shares of Class A common stock owned by Sterling Securities International Ltd. (“Sterling) and 53,454 shares of Class A common stock issuable upon the exercise of warrants owned by Sterling. Mr. Chris Bonvini, an officer of Sterling, may be deemed to have voting and investment power over the shares of Class A common stock owned by Sterling.
(20) Consists of 52,631 shares of Class A common stock and 19,342 shares of Class A common issuable upon the exercise of warrants owned by Investment Strategies Fund, L.P. (“ISF”). Mr. Matthew Shefler, a Managing Partner of ISF, has voting and investment power over the shares of Class A common stock owned by ISF.
(21) Consists of 145,263 shares of Class A common stock and 38,684 shares of Class A common issuable upon the exercise of warrants owned by Mr. Feddermann.
(22) Consists of 52,631 shares of Class A common stock and 19,342 shares of Class A common issuable upon the exercise of warrants owned by Mr. Ruckdaeschel.
(23) Consists of 76,837 shares of Class A common stock and 26,802 shares of Class A common issuable upon the exercise of warrants owned by Ms. Pogue.
(24) Consists of 33,398 shares of Class A common stock and 10,175 shares of Class A common issuable upon the exercise of warrants owned by Ms. Tanner.
(25) Consists of 15,790 shares of Class A common stock and 5,250 shares of Class A common issuable upon the exercise of warrants owned by Mr. Pogue.
(26) Consists of 26,314 shares of Class A common stock and 29,014 shares of Class A common issuable upon the exercise of warrants owned by Mr. Carrey.
(27) Consists of 25,260 shares of Class A common stock and 6,633 shares of Class A common issuable upon the exercise of warrants owned by Mr. Pancoast. Zachary Pancoast is the son of Scott Pancoast, our Chief Executive Officer.
(28) Consists of 15,792 shares of Class A common stock and 4,147 shares of Class A common issuable upon the exercise of warrants owned by Mr. Ray.
(29) Consists of 105,265 shares of Class A common stock and 27,643 shares of Class A common issuable upon the exercise of warrants owned by Mr. Newman.
(30) Consists of 5,081,695 shares of Class A common stock and 261,036 shares of Class A common stock issuable upon the exercise of warrants owned by the Donald R. Swortwood Revocable Trust Dated July 7, 1995, 50,000 shares of Class A common stock issuable upon the exercise of outstanding options, and 50,000 shares that are issuable pursuant to the terms of (RSUs), and 588,000 shares of Class A common stock owned by Western States Investment Corporation (“WSIC”). Donald Swortwood is the trustee of the Donald R. Swortwood Trust Dated July 7, 1995 and has the voting and investment power of the shares of our Class A common stock held by the Donald R. Swortwood Trust Dated July 7, 1995. Mr. Swortwood owns 50% of WSIC and has voting and investment power of the shares of common stock owned by WSIC.
(31) Consists of 5,081,695 shares of Class A common stock and 261,036 shares of Class A common stock issuable upon the exercise of warrants owned by the Letitia H. Swortwood Revocable Trust #1 Dated September 16, 1992, and 588,000 shares of Class A common stock owned by Western States Investment Corporation (“WSIC”). Letitia Swortwood is the trustee of the Letitia H. Swortwood Revocable Trust #1 Dated September 16, 1992 and has the voting and investment power of the shares of our Class A common stock held by the Letitia H. Swortwood Revocable Trust #1 Dated September 16, 1992. Ms. Swortwood owns 50% of WSIC and has voting and investment power of the shares of common stock owned by WSIC.
(32) Consists of 210,526 shares of Class A common stock and 55,285 shares of Class A common issuable upon the exercise of warrants owned by Iroquois Master Fund Ltd. (“Iroquois”). Mr. Joshua Silverman has voting and investment power over the shares of Class A common stock owned by Iroquois.
(33) Consists of 142,714 shares of Class A common stock and 95,500 shares of Class A common issuable upon the exercise of warrants owned by Cranshire Capital, L.P. (“Cranshire”). Mr. Mitchell Kopin, the President of Downsview Capital, the general partner of Cranshire, has voting and investment power over the shares of Class A common stock owned by Cranshire.
(34) Consists of 200,000 shares of Class A common stock and 100,000 shares of Class A common issuable upon the exercise of warrants owned by Blue Bell Investors, S. A.
(35) Consists of 200,000 shares of Class A common stock and 100,000 shares of Class A common issuable upon the exercise of warrants owned by El Morro LLC. .
(36) Consists of 142,856 shares of Class A common stock and 71,428 shares of Class A common issuable upon the exercise of warrants owned by Cabat LLC Consists of shares of Class A common stock and shares of Class A common issuable upon the exercise of warrants owned by.
(37) Consists of 107,142 shares of Class A common stock and 53,571 shares of Class A common issuable upon the exercise of warrants owned by Arco International Group, LLC.
(38) Consists of 100,000 shares of Class A common stock and 50,000 shares of Class A common issuable upon the exercise of warrants owned by Eduardo I. Canto & Laura Canto JT.
(39) Consists of 100,000 shares of Class A common stock and 50,000 shares of Class A common issuable upon the exercise of warrants owned by Eduardo I. Canto Repetti Retirement Plan.
(40) Consists of 100,000 shares of Class A common stock and 50,000 shares of Class A common issuable upon the exercise of warrants owned by Roberto J. Canto & Josefina de la Fuente JT.

 

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(41) Consists of 100,000 shares of Class A common stock and 50,000 shares of Class A common issuable upon the exercise of warrants owned by Roberto J. Canto MD Money Purchase Plan.
(42) Consists of 95,000 shares of Class A common stock and 47,500 shares of Class A common issuable upon the exercise of warrants owned by Jose I. Canto.
(43) Consists of 90,000 shares of Class A common stock and 45,000 shares of Class A common issuable upon the exercise of warrants owned by Fernado Canot & Ana Maria Canto JT.
(44) Consists of 71,428 shares of Class A common stock and 35,714 shares of Class A common issuable upon the exercise of warrants owned by Manuel Freije Betances.
(45) Consists of 70,000 shares of Class A common stock and 35,000 shares of Class A common issuable upon the exercise of warrants owned by Jorge I. Salcedo & Graciela Salcedo JT.
(46) Consists of 42,856 shares of Class A common stock and 21,428 shares of Class A common issuable upon the exercise of warrants owned by Julio A. Ocasio-Tascon.
(47) Consists of 42,856 shares of Class A common stock and 21,428 shares of Class A common issuable upon the exercise of warrants owned by Juan Carlos Bou.
(48) Consists of 40,000 shares of Class A common stock and 20,000 shares of Class A common issuable upon the exercise of warrants owned by Juan C. Canto.
(49) Consists of 37,000 shares of Class A common stock and 18,500 shares of Class A common issuable upon the exercise of warrants owned by Fernando E. Canto.
(50) Consists of 37,000 shares of Class A common stock and 18,500 shares of Class A common issuable upon the exercise of warrants owned by Ana Maria Canto & Jose F. Jouvin JT.
(51) Consists of 40,000 shares of Class A common stock and 20,000 shares of Class A common issuable upon the exercise of warrants owned by Carlos A. Guajardo.
(52) Consists of 100,000 shares of Class A common stock and 50,000 shares of Class A common issuable upon the exercise of warrants owned by BBS Capital Fund, LP.
(53) Consists of 71,428 shares of Class A common stock and 35,714 shares of Class A common issuable upon the exercise of warrants owned by Mark Wheeler.
(54) Consists of 300,000 shares of Class A common stock and 150,000 shares of Class A common issuable upon the exercise of warrants owned by Goldman Capital Management Inc Money Purchase Plan Dated 12/23/87.
(55) Consists of 71,428 shares of Class A common stock and 35,714 shares of Class A common issuable upon the exercise of warrants owned by Rockmore Investment Master Fund Ltd.
(56) Consists of 214,284 shares of Class A common stock and 107,142 shares of Class A common issuable upon the exercise of warrants owned by Spectrum Value Partners, L.P.
(57) Consists of 71,428 shares of Class A common stock and 35,714 shares of Class A common issuable upon the exercise of warrants owned by Claire Rizzo.
(58) Consists of 285,714 shares of Class A common stock and 142,857 shares of Class A common issuable upon the exercise of warrants owned by Brio Capital, L.P.
(59) Consists of 530,000 shares of Class A common stock and 265,000 shares of Class A common issuable upon the exercise of warrants owned by ProMed Partners, L.P.
(60) Consists of 1,060,000 shares of Class A common stock and 530,000 shares of Class A common issuable upon the exercise of warrants owned by David B. Musket.
(61) Consists of 30,284 shares of Class A common stock and 15,142 shares of Class A common issuable upon the exercise of warrants owned by Richard G. Wehby and Anne A. Wolf.
(62) Consists of 40,000 shares of Class A common stock and 20,000 shares of Class A common issuable upon the exercise of warrants owned by David A. Dent.
(63) Consists of 205,000 shares of Class A common stock and 76,717 shares of Class A common issuable upon the exercise of warrants owned by Mr. Volman.
(64) Consists of 7,142 shares of Class A common stock and 3,571 shares of Class A common issuable upon the exercise of warrants owned by Freestone Advantage Partners L.P.
(65) Consists of 107,142 shares of Class A common stock and 53,571 shares of Class A common issuable upon the exercise of warrants owned by Micro Pipe Capital Managment.
(66) Consists of 150,000 shares of Class A common stock and 75,000 shares of Class A common issuable upon the exercise of warrants owned by Univest Management Inc. Employee Profit Sharing Plan.
(67) Consists of 107,142 shares of Class A common stock and 53,571 shares of Class A common issuable upon the exercise of warrants owned by David R. Morgan.
(68) Consists of 70,000 shares of Class A common stock and 35,000 shares of Class A common issuable upon the exercise of warrants owned by Shipman & Goodwin LLP Profit Sharing Plan fbo James T. Betts.
(69)

Consists of shares of Class A common stock issuable upon the exercise of warrants owned by the selling security holder which were transferred from the original warrant holder who received from McGinn, Smith & Company, Inc. (“McGinn Smith &

 

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Company”), in connection with services as a registered representative for McGinn, Smith as one of our placement agents in our April 2007 private placement.

(70) Consists of shares of Class A common stock issuable upon the exercise of warrants owned by the selling security holder which he or she received from Griffin Securities, Inc., in connection with his or her services as a registered representative for Griffin Securities as one of our placement agents in our April 2007 private placement.
(71) Consists of shares of Class A common stock issuable upon the exercise of warrants received by McGinn Smith & Company as one of our placement agents in our April 2007 and November 2005 private placements. David Smith, a principal of McGinn Smith & Company, Inc., has voting and investment power over the shares of Class A common stock issuable upon the exercise of the warrants owned by McGinn Smith & Company, Inc.
(72) Consists of warrants received as one of our placement agents in our August 2008 private placement.

 

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PLAN OF DISTRIBUTION

The selling security holders, which as used herein includes donees, pledgees, transferees, or other successors-in-interest selling shares of Class A common stock or interests in shares of Class A common stock received after the date of this prospectus from a selling security holder as a gift, pledge, partnership distribution, or other transfer, may, from time to time, sell, transfer, or otherwise dispose of any or all of their shares of Class A common stock or interests in shares of Class A common stock on any stock exchange, market, or trading facility on which the shares are traded or in private transactions. These dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices.

Each of the selling security holders that are identified as a registered broker-dealer in the selling security holders table above is an “underwriter” within the meaning of Section 2(11) of the Securities Act of 1933 in connection with the resale of our securities under this prospectus. Any commissions received by such selling security holders and any profit on the resale of the shares of our Class A common stock (including the shares of common stock issuable upon the exercise of the warrants) sold by such security holders while acting as principals will be deemed to be underwriting discounts or commissions. Because it is deemed to be an underwriter within the meaning of Section 2(11) of the Securities Act of 1933, the selling security holders that are identified as a registered broker-dealer in the selling security holders table will be subject to prospectus delivery requirements under the Securities Act.

The selling security holders may use any one or more of the following methods when disposing of shares or interests therein:

 

   

ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

 

   

block trades in which the broker-dealer will attempt to sell the shares as agent, but may position and resell a portion of the block as principal to facilitate the transaction;

 

   

purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

 

   

an exchange distribution in accordance with the rules of the applicable exchange;

 

   

privately negotiated transactions;

 

   

short sales;

 

   

through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;

 

   

broker-dealers may agree with the selling security holders to sell a specified number of such shares at a stipulated price per share;

 

   

a combination of any such methods of sale; and

 

   

any other method permitted pursuant to applicable law.

The selling security holders may, from time to time, pledge or grant a security interest in some or all of the shares of Class A common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock, from time to time, under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending the list of selling security holders to include the pledgee, transferee or other successors in interest as selling security holders under this prospectus. The selling security holders also may transfer the shares of Class A common stock in other circumstances, in which case the transferees, pledgees, or other successors in interest will be the selling beneficial owners for purposes of this prospectus.

In connection with the sale of our common stock or interests therein, the selling security holders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The selling security holders may also sell shares of our Class A common stock short and deliver these securities to close out their short positions, or loan or pledge the Class A common stock to broker-dealers that in turn may sell these securities. The selling security holders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities that require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

The aggregate proceeds to the selling security holders from the sale of the Class A common stock offered by them will be the purchase price of the Class A common stock less discounts or commissions, if any. Each of the selling security holders reserves the right to accept and, together with their agents from time to time, to reject, in whole or in part, any proposed purchase of Class A common stock to be made directly or through agents. We will not receive any of the proceeds from this offering. Upon any exercise of the warrants by payment of cash, however, we will receive the exercise price of the warrants.

The selling security holders also may resell all or a portion of the shares in open market transactions in reliance upon Rule 144 under the Securities Act of 1933, provided that they meet the criteria and conform to the requirements of that rule.

 

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To the extent required, the shares of our Class A common stock to be sold, the names of the selling security holders, the respective purchase prices and public offering prices, the names of any agents, dealer or underwriter, any applicable commissions or discounts with respect to a particular offer will be set forth in an accompanying prospectus supplement or, if appropriate, a post-effective amendment to the registration statement that includes this prospectus.

In order to comply with the securities laws of some states, if applicable, the common stock may be sold in these jurisdictions only through registered or licensed brokers or dealers. In addition, in some states the common stock may not be sold unless it has been registered or qualified for sale or an exemption from registration or qualification requirements is available and is complied with.

We have advised the selling security holders that the anti-manipulation rules of Regulation M under the Exchange Act may apply to sales of shares in the market and to the activities of the selling security holders and their affiliates. In addition, we will make copies of this prospectus (as it may be supplemented or amended from time to time) available to the selling security holders for the purpose of satisfying the prospectus delivery requirements of the Securities Act. The selling security holders may indemnify any broker-dealer that participates in transactions involving the sale of the shares against certain liabilities, including liabilities arising under the Securities Act.

We have agreed to indemnify the selling security holders against liabilities, including liabilities under the Securities Act and state securities laws, relating to the registration of the shares offered by this prospectus.

We have agreed with the selling security holders to keep the registration statement of which this prospectus constitutes a part effective until the earlier of (1) such time as all of the shares covered by this prospectus have been disposed of pursuant to and in accordance with the registration statement or (2) the date on which the shares may be sold pursuant to Rule 144(b) of the Securities Act.

Penny Stock Regulations

You should note that our stock is a penny stock. The Securities and Exchange Commission has adopted Rule 15g-9, which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny-stock rules, which impose additional sales-practice requirements on broker-dealers that sell to persons other than established customers and “accredited investors.” The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny-stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized-risk disclosure document in a form prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny-stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny-stock rules require that, prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny-stock rules. Consequently, these penny-stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny-stock rules discourage investor interest in and limit the marketability of our common stock.

Blue Sky Restrictions on Resale

If a selling security holder wants to sell shares of our Class A common stock under this prospectus in the United States, the selling security holders will also need to comply with state securities laws, also known as “Blue Sky laws,” with regard to secondary sales. As a result, holders may not resell their shares of common stock in the United States without satisfying the applicable state securities law or qualifying for an exemption therefrom, including the exemptions provided under the U.S. National Securities Markets Improvement Act of 1996. The broker for a selling security holder will be able to advise a selling security holder as to which states our common stock is exempt from registration with that state for secondary sales.

Any person who purchases shares of our Class A common stock from a selling security holder under this prospectus who then wants to sell such shares will also have to comply with Blue Sky laws regarding secondary sales. These restrictions and potential costs could be significant burdens to our stockholders seeking to effect resales of our common stock within the United States.

 

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DESCRIPTION OF SECURITIES

Our authorized capital stock consists of 200,000,000 shares of Class A common stock, par value $0.001 per share, of which there are 53,027,308 issued and outstanding as of November 30, 2010. In addition, our authorized capital stock includes Five million (5,000,000) authorized Series A Preferred Shares with a par value of $0.001, Five million (5,000,000) authorized Series B Preferred Shares with a par value of $0.001 and Five million (5,000,000) authorized Series C Preferred Shares with a par value of $0.001. There are currently no shares of Series A, Series B or Series C Preferred Shares issued and outstanding.

Common Stock

Holders of shares of Class A common stock are entitled to one vote for each share on all matters to be voted on by the stockholders. Holders of Class A common stock do not have cumulative voting rights. Holders of Class A common stock are entitled to share ratably in dividends, if any, as may be declared from time to time by the Board of Directors in its discretion from funds legally available therefor. In the event of a liquidation, dissolution, or winding up of the company, the holders of Class A common stock are entitled to share pro rata all assets remaining after payment in full of all liabilities. All of the outstanding shares of Class A common stock are fully paid and non-assessable.

Holders of Class A common stock have no preemptive rights to purchase our Class A common stock. There are no conversion or redemption rights or sinking fund provisions with respect to the Class A common stock.

Preferred Stock

Series A Preferred Shares have a par value of $0.001 and such other terms as determined by the Board of Directors prior to their issuance. Each Series A Preferred Share shall have voting rights and shall carry a voting weight equal to ten (10) shares of Class A common stock. Each Series A Preferred Share may be converted into ten (10) shares of Class A common stock upon approval by the Board of Directors.

Series B Preferred Shares have a par value of $0.001 per share and such other terms as may be determined prior to their issuance by the Board of Directors. Each Series B Preferred Share shall have voting rights and shall carry a voting weight equal to two (2) shares of Class A common stock. Each Series B Preferred Share may be converted into two (2) shares of Class A common stock upon approval by the Board of Directors.

Series C Preferred Shares have a par value of $0.001 per share and such other terms as may be determined by the Board of Directors prior to their issuance. No Series C Preferred Share shall have voting rights.

There are currently no shares of Series A, Series B or Series C Preferred Shares issued and outstanding.

Dividends

Dividends, if any, will be contingent upon our revenues and earnings, if any, and capital requirements and financial conditions. The payment of dividends, if any, will be within the discretion of the Board of Directors. We presently intend to retain all earnings, if any, and accordingly the Board of Directors does not anticipate declaring any dividends prior to a business combination.

Change of Control

The Board of Directors is authorized to provide for the issuance of shares of preferred stock in series and, by filing a certificate pursuant to the applicable law of Nevada, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences, and rights of the shares of each such series and the qualifications, limitations, or restrictions thereof without any further vote or action by the shareholders. Any shares of preferred stock so issued would have priority over the common stock with respect to dividend or liquidation rights. Any future issuance of preferred stock may have the effect of delaying, deferring, or preventing a change in control of us without further action by the shareholders and may adversely affect the voting and other rights of the holders of Class A common stock. At present, we have no plans to issue any preferred stock nor adopt any series, preferences, or other classification of preferred stock.

The issuance of shares of preferred stock, or the issuance of rights to purchase such shares, could be used to discourage an unsolicited acquisition proposal. For instance, the issuance of a series of preferred stock might impede a business combination by including class voting rights that would enable the holder to block such a transaction, or facilitate a business combination by including voting rights that would provide a required percentage vote of the stockholders. In addition, under certain circumstances, the issuance of preferred stock could adversely affect the voting power of the holders of the common stock. Although the Board of Directors is required to make any determination to issue such stock based on its judgment as to the best interests of our stockholders, the Board of Directors could act in a manner that would discourage an acquisition attempt or other transaction that some, or a majority, of the stockholders might believe to be in their best interests or in which stockholders might receive a premium for their stock over the then market price of such stock. The Board of Directors does not at present intend to seek stockholder approval prior to any issuance of currently authorized stock, unless otherwise required by law or otherwise. We have no present plans to issue any preferred stock.

 

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Warrants

Set forth below is information concerning the various warrants issued by us to our investors, placement agents, consultants and other persons.

Warrants issued to investors in a private placement in November 2010 (the “November 2010 warrants”).

On November 16, 2010, we entered into a Securities Purchase Agreement (“Purchase Agreement”) with various accredited investors (the “Investors”) pursuant to which the Investors agreed to purchase from us an aggregate of 6,978,128 restricted shares of our Class A common stock and warrants exercisable to purchase 3,489,064 shares of the Company’s Class A common stock for an aggregate purchase price of $4.9 million (“November 2010 private placement”). In addition, we issued warrants to purchase 138,904 shares of the Company’s Class A common stock to the placement agents participating in the November 2010 private placement.

Exercise Price, Vesting and Term. The November 2010 warrants are exercisable, without any vesting, until November 16, 2012. Each November 2010 warrant is exercisable to purchase one share of Class A common stock at an exercise price of $1.00.

Cashless Exercise. The November 2010 warrants may be exercised using a cashless exercise procedure, subject to certain exceptions.

Transferability. The November 2010 warrants are transferable if (i) registered under state and Federal securities laws or (ii) the transfer is made under an exemption to registration under state and Federal securities laws. If the transfer of November 2010 warrants is made pursuant to an exemption from registration, we may require the holder of the November 2010 warrant to provides us with (i) a written opinion of counsel and (ii) an executed investment letter. Additionally, we may require that the transferee be an “accredited investor” or a “qualified institutional buyer” (as such terms are defined under SEC rules).

Adjustments. The number of shares of Class A common stock issuable upon the exercise of the November 2010 warrants is subject to adjustments in the event of a stock dividend or a subdivision or combination of the company’s common stock. In such event, the exercise price and the number of shares of our Class A common stock issuable upon the exercise of each November 2010 warrant will be adjusted by us so that the number of shares of our Class A common stock that the holder of the November 2010 warrant would have received if such holder had exercised his or her November 2010 warrant on the record date fixed for such stock dividend, subdivision or combination.

Recapitalization, Reorganization, Reclassification, Consolidation, Merger or Sale. In case the company shall do any of the following (each, a “Triggering Event”): (a) consolidate with or merge into any other person and the company shall not be the continuing or surviving corporation of such consolidation or merger, or (b) permit any other person to consolidate with or merge into the company and the company shall be the continuing or surviving person but, in connection with such consolidation or merger, any capital stock of the company shall be changed into or exchanged for securities of any other person or cash or any other property, or (c) transfer all or substantially all of its properties or assets to any other person, or (d) effect a capital reorganization or reclassification of its capital stock, then, and in the case of each such Triggering Event, proper provision shall be made so that, upon the basis and the terms and in the manner provided in the warrant, the holder of the warrant shall be entitled upon the exercise hereof at any time after the consummation of such Triggering Event, to the extent this Warrant is not exercised prior to such Triggering Event, to receive at the exercise price in effect at the time immediately prior to the consummation of such Triggering Event in lieu of the common stock issuable upon such exercise of this warrant prior to such Triggering Event, the securities, cash and property to which such holder would have been entitled upon the consummation of such Triggering Event if such holder had exercised the rights represented by this Warrant immediately prior thereto.

Registration. We have agreed to register for resale, at our expense, the shares of Class A common stock underlying the November 2010 warrants. We are required to file a registration statement covering the shares of Class A common stock issuable upon the exercise of the November 2010 warrants within 30 calendar days of the first closing of the November 2010 Offering. If we fail to file the registration statement on a timely basis or fail to have the registration statement declared effective within 120 days after the filing date, then we must pay to each holder of an November 2010 warrant a penalty of 1.00% of the aggregate amount invested by such holder for each 30-day period or pro rata for any portion following the date by which the registration statement should have been effective (except that such penalty will not include the amount invested with regard to November 2010 warrants that are not in the money at the time of the event for which the penalty is being imposed). We also have to pay a 1.00% penalty for any period of time where the holder is unable to sell his Class A common stock under this prospectus for sales (except if such failure is due to market conditions for our Class A common stock). The maximum penalty is 6.00%. We must keep this resale registration statement effective until the earlier of (i) the date 120 days after none of the holders is an affiliate of the Company, (ii) the date on which all Registrable Securities covered by such Registration Statement have been sold, (iii) the date on which all Registrable Securities covered by such Registration Statement may be sold without volume restrictions pursuant to Rule 144(b)(1), and (iv) the date three (3) years from the Closing.

Holder of any November 2010 warrants Not a Stockholder. The November 2010 warrants do not confer upon the holders any voting, dividends or other rights as our stockholders.

 

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Warrants issued to investors in a private placement in August 2008 (the “August 2008 warrants”).

On August 12, 2008, we entered into a Securities Purchase Agreement (“Purchase Agreement”) with various accredited investors (the “Investors”) pursuant to which the Investors agreed to purchase from us an aggregate of approximately 7.1 million restricted shares of our Class A common stock and 1.8 million warrants exercisable to purchase the Company’s Class A common stock at an exercise price of $1.19 per share for an aggregate purchase price of $6.7 million (“August 2008 Offering”). Pursuant to the anti-dilution provisions of the warrants, additional warrants to purchase 97,787 shares of the Company’s Class A common stock were issued as a result of the November 2010 private placement.

Exercise Price, Vesting and Term. The August 2008 warrants are exercisable, without any vesting, until August 13, 2013. Each August 2008 warrant is exercisable to purchase one share of Class A common stock at an exercise price of $1.19.

Cashless Exercise. The August 2008 warrants may be exercised using a cashless exercise procedure.

Transferability. The August 2008 warrants are transferable if (i) registered under state and Federal securities laws or (ii) the transfer is made under an exemption to registration under state and Federal securities laws. If the transfer of August 2008 warrants is made pursuant to an exemption from registration, we may require the holder of the August 2008 warrant to provides us with (i) a written opinion of counsel and (ii) an executed investment letter. Additionally, we may require that the transferee be an “accredited investor” or a “qualified institutional buyer” (as such terms are defined under SEC rules).

Adjustments. The number of shares of Class A common stock issuable upon the exercise of the August 2008 warrants is subject to adjustments in the event of a stock split, reverse stock split, reclassifications of our class A common stock or stock dividend. In such event, the exercise price and the number of shares of our Class A common stock issuable upon the exercise of each August 2008 warrant will be adjusted by us so that the number of shares of our Class A common stock that the holder of the August 2008 warrant would have received if such holder had exercised his or her August 2008 warrant on the record date fixed for such subdivisions, combinations, reclassifications or stock dividend.

Subsequent Equity Sales. In the event that we sell or offer to sell our common stock at price per share less than the exercise price of the August 2008 warrants (“Dilutive Issuance”), then the (i) exercise price of the August 2008 warrant will be adjusted by multiplying the exercise price by a fraction, the numerator of which is the number of shares of our common stock issued and outstanding immediately prior to the Dilutive Issuance plus the number of shares of our common stock which the aggregate offering price for such Dilutive Issuance would purchase at the then exercise price, and the denominator of which shall be the sum of the number of shares of our common stock issued and outstanding immediately prior to the Dilutive Issuance plus the number of shares of Common Stock so issued or issuable in connection with the Dilutive Issuance and (ii) number of shares issuable upon the exercise of the August 2008 warrants will be proportionately increased so that we will still receive the same aggregate proceeds from the exercise of the August 2008 warrants after the exercise price reduction as we would have received prior to the exercise price adjustment.

Subsequent Rights Offerings. If we issue rights, options or warrants to all our stockholders entitling them to acquire shares of our common stock at a price per share less than the daily volume weighted average price of our Common Stock at the record date for the issuance of the rights, options and warrants, then the exercise price of the August 2008 warrants will be adjusted by multiplying the exercise price by a fraction, the (x) numerator of which is the sum of the number of shares of our common stock outstanding on the date of issuance of such rights or warrants plus the number of shares which the aggregate offering price of the total number of shares so offered (assuming receipt by the Company in full of all consideration payable upon exercise of such rights, options or warrants) would purchase at such daily volume weighted average price and (y) denominator of which equals the sum of the number of shares of our common stock outstanding on the date of issuance of such rights or warrants plus the number of additional shares of our common stock offered for subscription or purchase

Pro Rata Distributions. If we distribute to all of our stockholders evidences of our indebtedness or assets (including cash and cash dividends) or rights or warrants to subscribe for or purchase any security other than our Common Stock, then in each such case the exercise price of the August 2008 warrants will be adjusted by multiplying the exercise price of the August 2008 warrant in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction (x) of which the numerator shall be the daily volume weighted average price of our Common Stock on such record date less the then per share fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of our common stock (as determined by the Board of Directors in good faith) and (y) of which the denominator shall be the daily volume weighted average price of our Common Stock on such record date.

 

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Merger, Asset Sale, Etc. If we effect any merger, consolidation, any sale of all or substantially all of our assets or if any tender offer or exchange offer is completed pursuant to which our stockholders are permitted to tender or exchange their shares for other securities, cash or property, or we effect any reclassification of our common stock or any compulsory share exchange pursuant to which our common stock is effectively converted into or exchanged for other securities, cash or property, then, the holders of the August 2008 warrants will have the right to receive the consideration they would have received in such transaction had they exercised their August 2008 warrant as of the date on which our stockholders became entitled to receive the consideration for such transaction. In the event of any all cash transaction, an issuer tender offer or a transaction involving an entity that acquirer is not traded on an exchange or on a Nasdaq market, then the holders of the August 2008 warrants, then we must repurchase the August 2008 warrants at a cash value determined using the Black-Scholes option pricing formula.

Registration. We have agreed to register for resale, at our expense, the shares of Class A common stock underlying the August 2008 warrants. We were required to file a registration statement covering the shares of Class A common stock issuable upon the exercise of the August 2008 warrants within 30 calendar days of the first closing of the August 2008 Offering, which we filed on September 11, 2008. We were required to have that registration declared effective within 120 days of the first closing of the August 2008 Offering. The registration statement covering the shares of Class A common stock underlying the August 2008 warrants was declared effective on September 29, 2008. If we fail to keep the registration statement effective or the selling security holders cannot otherwise sell their August 2008 warrant shares under that registration for 30 consecutive days or for more than an aggregate of 60 calendar days during any 12-month period, then we must pay to each holder of an April 2008 warrant a penalty of 1.25% of the aggregate purchase price for the shares that cannot be sold under the registration statement. paid for each 30-day period or pro rata for any portion following the date by which the registration statement should have been effective (except that such penalty will not include the amount invested with regard to April 2008 warrants that are not in the money at the time of the event for which the penalty is being imposed). We also have to pay a 1.25% penalty for any period of time where the holder is unable to sell his Class A common stock under this prospectus for sales (except if such failure is due to market conditions for our Class A common stock). The maximum penalty is 8.75% of the aggregate purchase price paid by a holder in the August 2008 Offering. We must keep this resale registration statement effective until the first to occur: (A) the date on which all shares covered by such registration statement (i) have been sold or (ii) may be sold pursuant to Rule 144(b)(1) without volume limitation, or (B) 30 days after the August 2008 Warrants expire.

Holder of any August 2008 warrants Not a Stockholder. The August 2008 warrants do not confer upon the holders any voting, dividends or other rights as our stockholders.

Warrants issued to investors in a private placement in April 2007 (the “April 2007 warrants”).

On April 6, 2007, we entered into a Securities Purchase Agreement (“Purchase Agreement”) with various accredited investors (the “Investors”) pursuant to which the Investors agreed to purchase from us an aggregate of 17.7 million shares of our Class A common stock and 6.2 million April 2007 warrants exercisable to purchase the Company’s Class A common stock at an exercise price of $1.00 per share for an aggregate purchase price of $16.8 million. In addition, we issued 1,707,894 April 2007 warrants to the placement agent in this transaction. Pursuant to the anti-dilution provisions of the warrants, additional warrants to purchase 103,619 shares of the Company’s Class A common stock were issued as a result of the August 2008 private placement, and additional warrants to purchase 292,489 shares were issued as a result of the November 2010 private placement.

Exercise Price, Vesting and Term. The April 2007 warrants are exercisable, without any vesting, until April 6, 2012. Each April 2007 warrant is exercisable to purchase one share of Class A common stock at an exercise price of $1.00.

Cashless Exercise. The April 2007 warrants may be exercised using a cashless exercise procedure.

Transferability. The April 2007 warrants are transferable if (i) registered under state and Federal securities laws or (ii) the transfer is made under an exemption to registration under state and Federal securities laws. If the transfer of April 2007 warrants is made pursuant to an exemption from registration, we may require the holder of the April 2007 warrant to provides us with (i) a written opinion of counsel and (ii) an executed investment letter. Additionally, we may require that the transferee be an “accredited investor” or a “qualified institutional buyer” (as such terms are defined under SEC rules).

Adjustments. The number of shares of Class A common stock issuable upon the exercise of the April 2007 warrants is subject to adjustments in the event of a stock split, reverse stock split, reclassifications of our class A common stock or stock dividend. In such event, the exercise price and the number of shares of our Class A common stock issuable upon the exercise of each April 2007 warrant will be adjusted by us so that the number of shares of our Class A common stock that the holder of the April 2007 warrant would have received if such holder had exercised his or her April 2007 warrant on the record date fixed for such subdivisions, combinations, reclassifications or stock dividend.

 

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Subsequent Equity Sales. In the event that we sell or offer to sell our common stock at price per share less than the exercise price of the April 2007 warrants (“Dilutive Issuance”), then the (i) exercise price of the April 2007 warrant will be adjusted by multiplying the exercise price by a fraction, the numerator of which is the number of shares of our common stock issued and outstanding immediately prior to the Dilutive Issuance plus the number of shares of our common stock which the aggregate offering price for such Dilutive Issuance would purchase at the then exercise price, and the denominator of which shall be the sum of the number of shares of our common stock issued and outstanding immediately prior to the Dilutive Issuance plus the number of shares of Common Stock so issued or issuable in connection with the Dilutive Issuance and (ii) number of shares issuable upon the exercise of the April 2007 warrants will be proportionately increased so that we will still receive the same aggregate proceeds from the exercise of the April 2007 warrants after the exercise price reduction as we would have received prior to the exercise price adjustment.

Subsequent Rights Offerings. If we issue rights, options or warrants to all our stockholders entitling them to acquire shares of our common stock at a price per share less than the daily volume weighted average price of our Common Stock at the record date for the issuance of the rights, options and warrants, then the exercise price of the April 2007 warrants will be adjusted by multiplying the exercise price by a fraction, the (x) numerator of which is the sum of the number of shares of our common stock outstanding on the date of issuance of such rights or warrants plus the number of shares which the aggregate offering price of the total number of shares so offered (assuming receipt by the Company in full of all consideration payable upon exercise of such rights, options or warrants) would purchase at such daily volume weighted average price and (y) denominator of which equals the sum of the number of shares of our common stock outstanding on the date of issuance of such rights or warrants plus the number of additional shares of our common stock offered for subscription or purchase

Pro Rata Distributions. If we distribute to all of our stockholders evidences of our indebtedness or assets (including cash and cash dividends) or rights or warrants to subscribe for or purchase any security other than our Common Stock, then in each such case the exercise price of the April 2007 warrants will be adjusted by multiplying the exercise price of the April 2007 warrant in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction (x) of which the numerator shall be the daily volume weighted average price of our Common Stock on such record date less the then per share fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of our common stock (as determined by the Board of Directors in good faith) and (y) of which the denominator shall be the daily volume weighted average price of our Common Stock on such record date.

Merger, Asset Sale, Etc. If we effect any merger, consolidation, any sale of all or substantially all of our assets or if any tender offer or exchange offer is completed pursuant to which our stockholders are permitted to tender or exchange their shares for other securities, cash or property, or we effect any reclassification of our common stock or any compulsory share exchange pursuant to which our common stock is effectively converted into or exchanged for other securities, cash or property, then, the holders of the April 2007 warrants will have the right to receive the consideration they would have received in such transaction had they exercised their April 2007 warrant as of the date on which our stockholders became entitled to receive the consideration for such transaction. In the event of any all cash transaction, an issuer tender offer or a transaction involving an entity that acquirer is not traded on an exchange or on a Nasdaq market, then the holders of the April 2007 warrants, then we must repurchase the April 2007 warrants at a cash value determined using the Black-Scholes option pricing formula.

Registration. We have agreed to register for resale, at our expense, the shares of Class A common stock underlying the April 2007 warrants. We filed a registration statement covering the shares of Class A common stock issuable upon the exercise of the April 2007 warrants on June 29, 2007, which was declared effective on July 24, 2007. We have to pay a 1.25% penalty for any period of time where the holder is unable to sell his Class A common stock under this prospectus for sales (except if such failure is due to market conditions for our Class A common stock). The maximum penalty is 8.75% of the aggregate purchase price paid by a holder under the Purchase Agreement. We must keep this resale registration statement effective until the earlier date on which all shares covered by such registration statement (i) have been sold or (ii) may be sold pursuant to Rule 144(b)(1) without any volume limitation.

Holder of any April 2007 warrants Not a Stockholder. The April 2007 warrants do not confer upon the holders any voting, dividends or other rights as our stockholders.

Warrants issued to note holders of Lpath Therapeutics (the “2002 Note warrants”).

In 2002, our subsidiary, Lpath Therapeutics, entered into a convertible debt financing arrangement with certain of its preferred stockholders. As part of the debt financing, Lpath Therapeutics issued to these preferred stockholders warrants exercisable to purchase shares of its common stock, the number and exercise price of which was set by a formula based on a future equity financing by or sale of Lpath Therapeutics. As a result of such subsequent equity financing, the 2002 Note warrants became exercisable to purchase 531,394 shares of Lpath Therapeutics common stock at an exercise price of $0.16 per share. In our merger with Neighborhood Connections, these warrants were exchanged for identical 2002 Note warrants exercisable to purchase 531,394 shares of our Class A common stock.

 

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Exercise Price, Vesting and Term. The 2002 Note warrants are exercisable, without any vesting, until October 31, 2012. Each 2002 Note warrant is exercisable to purchase one share of Class A common stock at an exercise price of $0.16.

Transferability. The 2002 Note warrants are transferable if (i) registered under state and Federal securities laws or (ii) the transfer is made under an exemption to registration under state and Federal securities laws.

Adjustments. In the event of a stock split, the exercise price of the 2002 Note warrants will be proportionately reduced and the number of shares issuable upon exercise of the 2002 Note warrants will be proportionately increased. In the event of a reverse stock split, the exercise price of the 2002 Note warrants will be proportionately increased and the number of shares issuable upon exercise of the 2002 Note warrants will be proportionately decreased.

Merger, Asset Sale, Stock Dividend, Etc. In the event of any stock dividend paid by us or any spin-off, split-up, reclassification, merger, consolidation or sale of substantially all of our assets, the holders of the 2002 Note warrants will be entitled to receive upon the exercise of the 2002 Note warrants the amount of stock and other securities and property (including cash) that such person would have received for the shares of our Class A common stock as if he or she had exercised his or her warrant as of the date on which our stockholders became entitled to receive such consideration.

Registration. We have agreed to register for resale, at our expense, the shares of Class A common stock underlying the Note conversion warrants. The holder of the Note conversion warrants is not entitled to any penalty in the event that we fail to (i) file such registration statement by a certain date, (ii) have such registration statement declared effective by a certain date or (iii) keep the registration statement effective.

Holder of any Note conversion warrants Not a Stockholder. The Note conversion warrants do not confer upon holders any voting, dividends or other rights as our stockholders

DESCRIPTION OF BUSINESS

Overview

Lpath, Inc. is a biotechnology company focused on the discovery and development of lipidomic-based therapeutics, an emerging field of medical science whereby bioactive lipids are targeted to treat human diseases. We have two product candidates that are currently in human clinical development, and one that is being evaluated in pre-clinical testing.

iSONEP

iSONEP is the ocular formulation of sonepcizumab, a humanized monoclonal antibody (“mAb”) against sphingosine-1-phosphate (“S1P”). Sphingomab is the original mouse version of this monoclonal antibody. iSONEP is administered by intravitreal injection, and has demonstrated multiple mechanisms of action in ocular models of disease, including anti-angiogenesis, anti-inflammatory, anti-fibrotic and anti-vascular permeability. This combination of mechanisms would suggest: (i) iSONEP might have a comparative advantage over currently marketed products for “wet” age-related macular degeneration (“wet AMD”) and (ii) iSONEP might demonstrate clinical efficacy in a broad range of retinal diseases where there is currently a significant unmet medical need, including diabetic retinopathy, dry AMD, and glaucoma-related surgery.

In 2009, we completed a Phase 1 clinical trial in which iSONEP was evaluated in patients with wet AMD. In that trial, iSONEP met its primary endpoint of being well tolerated in all 15 patients at dose levels ranging from 0.2 mg to 1.8 mg per intravitreal injection. No drug-related serious adverse events were reported in any of the patients. Positive biological effects were also observed in some patients in this clinical study, the most common being regression in choroidal neovascularization (CNV), which is the underlying cause of the disease that eventually leads to degeneration of the macula. Most of these positive effects appear to be largely independent of the effects seen when patients undergo treatment with the drugs that are the current market leaders for the treatment of wet AMD.

We are currently preparing to begin the next clinical studies of iSONEP in the first half of 2011 to further investigate the biological effects observed in the Phase 1 trial. In the first quarter of 2011, we plan to initiate a Phase 1b/2a clinical trial of iSONEP in patients with RPE Detachment, a persistent complication in patients with the occult form of wet AMD. Of the 15 patients in the Phase 1 iSONEP trial, two patients were diagnosed with RPE Detachment. With a single dose of iSONEP, both of these patients experienced complete resolution of the condition. There is currently no FDA approved treatment for RPE Detachments. In the second quarter of 2011, we also plan to begin a larger Phase 2a clinical trial in a broader population of Wet-AMD patients, namely, those wet-AMD patients without RPE Detachment.

On December 16, 2010, we entered into an Option, License and Development Agreement (the “Pfizer Agreement”) with Pfizer Inc. (“Pfizer”), which provides Pfizer with an exclusive option for a worldwide license to develop and commercialize iSONEP. Under the terms of the Pfizer Agreement, Pfizer will provide us with an upfront payment of $14 million in addition to sharing the cost of the planned Phase 1b and Phase 2a trials for iSONEP. Following completion of the two studies, Pfizer has the right to exercise its option for worldwide rights to iSONEP for an undisclosed option fee and, if Pfizer exercises its option, we will be eligible to receive development, regulatory and commercial milestone payments that could total up to $497.5 million. In addition, we will be entitled to receive tiered double-digit royalties based on future sales of iSONEP.

ASONEP

ASONEP is the systemic formulation of sonepcizumab. In the first quarter of 2010, we completed a Phase 1 clinical trial in which ASONEP was evaluated in very late-stage cancer patients. In that trial, ASONEP was well tolerated at all dose-levels ranging from 1 mg/kg to 24 mg/kg., other than minor infusion-related reactions observed at the highest dose. More than half the patients that

 

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completed the initial four-treatment evaluation period showed stable disease. Durable stable disease was observed in several patients in the trial. Based on ASONEP’s safety profile including the observation of stable disease in several late-stage cancer patients, we believe that further investigation of ASONEP for efficacy in Phase 2 clinical trials is warranted. We are now working to complete various tasks required to move ASONEP into Phase 2 clinical testing, and are collaborating with Harvard Medical School on plans to conduct one or more Phase 2a clinical trials.

In 2008, we entered into a License Agreement (the “Merck Agreement”) with Merck KGaA, (“Merck”), as amended in September 2009, pursuant to which Merck has agreed to collaborate, through its Merck-Serono division, with us to develop and commercialize ASONEP. Pursuant to the terms of the Merck Agreement, we licensed to Merck exclusive, worldwide rights to develop and commercialize ASONEP across all non-ocular indications. In March 2010, Merck proposed continuing the partnership via an extension of the Initial Development Period (as defined in the Merck Agreement). However the terms of that proposed extension were rejected by Lpath’s Board of Directors as not being in the best interests of Lpath or its stockholders. Consequently, Merck notified us of their decision to terminate the Merck Agreement. The termination was effective on April 24, 2010, and upon such termination Merck KGaA relinquished all rights to the ASONEP program. However, Merck may, under certain circumstances, have a right of first refusal, for a period of 12 months subsequent to the termination date, to Lpath’s then next most advanced oncology drug candidate.

As part of the Pfizer Agreement, we granted Pfizer a time-limited right of first refusal to ASONEP.

Other Drug Discovery and Development Programs

Lpathomab™, our third 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 two lead humanized mAbs that inhibit LPA. These mAbs are being tested against each other in various models of human disease to determine which of these could be most likely to succeed in human clinical trials. The target date to begin testing Lpathomab in human clinical trials is in 2012.

We believe we are the only company to have developed functional therapeutic monoclonal antibodies against any bioactive lipid of which there are estimated to be 1,000 or more. We produced these unique antibodies using our ImmuneY2™ technology, a series of proprietary processes we have developed, for which patents are pending. We are currently applying the ImmuneY2 process to other bioactive lipids that are validated targets for disease treatment, thereby expanding our potential pipeline of novel monoclonal antibody-based drug candidates.

We have a strong intellectual-property position in the bioactive-lipid area, with more than 50 issued or pending patents in the United States, and over 70 in major foreign countries. Most of these patents were developed in-house based on our pioneering research on bioactive lipid signaling. Our research partners to date include the M.D. Anderson Cancer Center, Johns Hopkins University, Harvard Medical School, the University of Florida College of Medicine, San Diego State University, the French National Centre for Scientific Research and the University of Melbourne, Australia.

The Emergence of Lipidomics

For many years the drug-development industry has been fundamentally protein-centric, and most drugs on the market (and almost all drug candidates in clinical trials) target proteins. The recognition among medical researchers that bioactive lipids play key roles in disease is a relatively recent development. “Although the concept of ‘bioactive lipids’ has been decades in the making, it has only started to gain traction in the past 20 years, and promises to occupy centre-stage in cell biology research in the twenty-first century.” (Nature Reviews, February 2008).

In an article published in 2006, the British Journal of Cancer described the emergence of lipidomics in drug discovery:

The focus on proteins was a natural consequence of the science community’s evolving understanding of biochemistry, which allowed researchers to identify potential protein targets involved in key metabolic and signaling pathways. Some of the first drugs developed by the rational-drug-design approach to the scientific method came after the discovery of key enzymes, receptors, and ion channels [all proteins] as they emerged in the basic science literature. One can argue that target identification now is driven by the technological developments of proteomics and genomics, both of which reflect the persistent ‘protein-centric’ view of drug discovery.

Now, the field of lipidomics (a subset of ‘metabolomics’) has emerged … and provides new opportunities for drug discovery. As was the case for proteomics and genomics, tools of measurement led the way. For lipidomics, the development of electrospray tandem mass spectrometry and other tools has facilitated our understanding of the cellular lipidome, and we now believe that there are over 1,000 members of the lipidome, opening up an entire array of new potential targets for therapeutic interventions.

It has been recognized that alterations in lipid metabolism can lead to cancer, cardiovascular disease, diabetes, neurodegenerative disorders, immune function, pain, mental disorders, and inflammation. (British Journal of Cancer, October 2006).

 

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We believe that we are the leader in developing lipidomic-based therapeutics and humanizing related mAbs. This emerging field of medical science involves two areas of expertise:

 

  1. An understanding of the role of bioactive lipids in their respective signaling systems so that potentially important targets can be identified: The study of lipidomics is complex, as bioactive lipids have a molecular weight significantly lower than proteins and, unlike proteins, are not water-soluble. As such, many of the measurement and analytical tools that exist in the protein-centric pharmaceutical industry are not effective when dealing with bioactive lipids. Because of our long-standing focus on bioactive lipids as targets for human disease, we are one of the few companies that have developed the expertise and assays to address the unique challenges of lipidomics.

 

  2. The ability to inhibit the identified bioactive-lipid targets: Bioactive lipids are difficult to inhibit for the same reasons that make them difficult to study—they are extremely small and they are not water-soluble. As such, many companies have tried to generate monoclonal antibodies that inhibit the functional activity of bioactive lipids, only to have failed. We believe we are the only company to have developed functional monoclonal antibodies against bioactive lipids such as S1P or LPA. This capability is based on our proprietary ImmuneY2 technology.

Product Opportunities

Our key product-development programs are summarized in Table 1:

Table 1. Primary Product-Development Programs

 

PRODUCT

 

Description

 

Indication

  

Status

iSONEP

  mAb against S1P, a validated angiogenic growth factor & contributor to inflammation   AMD    Phase 2a wet AMD clinical trial expected to begin in Q2 2011.
    RPE Detachment    Phase 1b/2a PED clinical trial expected to begin in Q1 2011.
    Other retinal diseases    Demonstrated in vivo mechanisms that contribute to progression of diabetic retinopathy and wet AMD

ASONEP

 

mAb against S1P, a validated angiogenic factor and validated

mediator of lymphocyte trafficking

  Cancer – various tumor types    Phase 1 completed, and preparing for Phase 2.
    Multiple sclerosis (“MS”)    Demonstrated in vivo efficacy in validated models of MS.

Lpathomab

  mAb against LPA, a tumorigenic and metastatic agent and a validated contributor to neuropathic pain; in addition, the mAb was shown to inhibit fibrosis in a bleomycin model of pulmonary fibrosis  

Cancer

Neuropathic pain

Fibrosis

Fibrotic ocular diseases

   Antibody humanization completed for 2 lead antibodies. Clinical candidate selection in process. Phase 1 clinical trial targeted to begin in 2012

iSONEP

iSONEP is the ocular formulation of sonepcizumab, a monoclonal antibody against S1P, a bioactive lipid implicated in the progression of many diseases including various angiogenic-related diseases and inflammatory-oriented indications, multiple sclerosis, and many types of cancer, iSONEP—and ASONEP as well (see below)—acts as a molecular sponge to selectively absorb S1P from blood and from certain tissues.

iSONEP has demonstrated promising anti-angiogenic results in various eye models of wet AMD, as performed by Dr. Maria Grant (University of Florida) and Dr. Peter Campochiaro (Johns Hopkins University). Moreover, Dr. Peter Campochiaro also demonstrated

 

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that iSONEP has strong anti-vascular permeability effects in the eye, as well as promising anti-inflammatory properties. Studies that we performed in-house suggest iSONEP also may have anti-fibrotic effects.

In 2009, we completed a Phase 1 clinical trial in which iSONEP was tested as a treatment for wet AMD. In that trial, iSONEP met its primary endpoint of being well tolerated in all 15 patients at dose levels ranging from 0.2 mg to 1.8 mg per intravitreal injection. No drug-related serious adverse events were reported in any of the patients. A positive biological effect was also observed in a number of patients in this clinical study.

The most significant benefit observed in the Phase 1 trial was a regression in choroidal neovascularization (CNV), which is the underlying cause of the disease that eventually leads to degeneration of the macula, the area of the retina responsible for central vision. Of the seven patients that had a baseline lesion that was considered by experienced ophthalmologists to be “large,” four experienced a reduction exceeding 5 mm and three experienced a reduction of greater than 75% — all with a single dose of iSONEP. This type of clinical benefit is not typical with other treatments, as the published data (Heier JS et al. Ophthalmology. 2006; 113:642e1-642.e4) suggest that, even with repeated Lucentis dosing, the total physical size of CNV lesion does not show much reduction.

Another distinctive benefit was the resolution of retinal pigment epithelium (RPE) detachment, a potentially serious condition that is often a part of the pathology of wet AMD. Of two patients that were diagnosed with RPE detachment in the Phase 1 trial, both experienced complete or near-complete resolution of the condition — again, with only a single dose of iSONEP.

A key observation from the Phase 1 trial was that of the five patients that showed the strongest biological effect, all five had a component of occult-type CNV (either pure occult CNV or “minimally classic” CNV). Further, these five patients were the only ones in the Phase I study that were diagnosed with occult disease. In other words, all of the patients with a component of occult CNV exhibited a strong positive biological effect during the 30-45 days following a single injection of iSONEP. This correlation has significant implications for our Phase 2 study design.

Due to the small sample size, all biological effects described above can only be characterized as correlative at this time; no causal relationship has yet been established, statistically or otherwise.

The fact that these biological effects appear to be non-overlapping vis-à-vis those of the predominant market leaders, Lucentis® and Avastin®, may be significant. Wet AMD is characterized by the pathologic disruption of the retina, which is caused collectively by (i) new-blood-vessel growth in the choroid layer under the retina, (ii) sub-retinal fibrosis, (iii) general inflammation in the retinal area, and (iv) edema caused by new blood vessels that do not form perfectly and are thereby permeable (or leaky).

Lucentis and Avastin target the protein VEGF, a validated promoter of permeable and leaky blood vessels, and appear to exert most of their beneficial effect via an anti-permeability action that results in resolution of intra and sub-retinal edema. However, the actual CNV lesion does not typically regress.

In contrast, iSONEP has been shown in various animal models of disease not only to reduce blood-vessel growth and leakiness, but to significantly mitigate ocular fibrosis (Grant et al, Experimental Eye Research, August 2008) and to substantially reduce inflammation in the eye (Campochiaro et al., Journal of Cellular Physiology, October 2008). As such, iSONEP has the potential to be an effective wet AMD treatment that may offer significant advantages over exclusively anti-VEGF approaches. It may also act synergistically with them as a combination therapy to address the complex processes and multiple steps that ultimately lead to vision loss for wet AMD patients.

iSONEP’s non-overlapping effects relative to anti-VEGF therapeutics was predicted. As Campochiaro et al. state in Journal of Cellular Physiology, “Since S1P may have both independent and overlapping effects with VEGF, it is a particularly appealing target…There may be advantages to combined blockade of VEGF [Lucentis] and blockade of S1P [iSONEP].”

We are currently planning to begin the iSONEP Phase 2 trials in 2011 to further investigate the biological effects observed in the Phase 1 trial.

The promising results of the Phase 1 clinical trial together with the preclinical studies suggest the following:

 

  (i)

iSONEP may have comparative advantages over currently available treatments like Lucentis and Avastin (and soon-to-be-available treatments with similar mechanisms of action like Regeneron’s VEGF-Trap©). The loss of visual acuity associated with AMD is caused by a combination of all the factors mentioned above, yet Lucentis, Avastin, and the VEGF-Trap apparently fail to address inflammation and sub-retinal fibrosis. Thus, iSONEP may improve vision on a more-consistent basis across the patient population and may treat the multiple mechanisms that cause exudative-AMD-related vision loss. Such an agent might act as a monotherapy or an adjunct therapy to an anti-VEGF agent.

 

  (ii) iSONEP may be able to inhibit the vascular and extravascular components of ischemic retinopathies such as diabetic retinopathy and the dry form of AMD, both of which represent significant unmet medical needs.

 

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  (iii) iSONEP might be efficacious in treating fibrotic-related disorders of the eye, including proliferative retinopathy, post glaucoma filtration surgery (trabeculectomy or valve implantation), and various anterior-segment diseases.

ASONEP

ASONEP is the systemic formulation of, sonepcizumab; as such, it is also a mAb against the bioactive lipid S1P which has been implicated in the progression of various types of cancer and other angiogenic-related and inflammatory-oriented indications. It is well documented in scientific literature that S1P is a key protector of cancer cells when tumors are stressed by radiation or chemotherapy. Many studies have been conducted that demonstrate a strong link between S1P and several prevalent tumor types, including leukemia, prostate cancer, glioblastoma (a brain tumor), lung cancer, pancreatic cancer, and melanoma (skin cancer).

ASONEP has demonstrated efficacy in preclinical models of several types of human cancers. In addition, the safety profile of ASONEP was extremely favorable throughout a Phase 1 clinical trial as well as in a wide variety of preclinical studies at multiples of anticipated human exposure.

We believe ASONEP may be effective in reducing the four major processes of cancer progression: tumor proliferation, tumor metastasis, tumor-associated angiogenesis, and protection from cell death. The other mAbs on the market or in clinical trials of which we are aware generally inhibit only one or two tumor-promoting effects in a broad range of cancers. As such, we believe that ASONEP may have a comparative advantage over other therapeutic antibody approaches for cancer.

Other potential advantages of ASONEP, are generally related to our unique approach of targeting bioactive lipids (whereas most therapeutic mAbs on the market and in clinical trials are directed against protein targets) and include the following:

 

  a) ASONEP’s preclinical data may be more predictive of success in the clinic than typical protein-targeted drug candidates. Unlike protein targets, S1P has a single molecular structure that is conserved among species (i.e., S1P in a mouse is the same as in monkeys and humans), which is not the case for protein targets. This possibly provides for a greater translation (i.e., higher predictive value) between animal efficacy studies and possible human applications.

 

  b) Cancer cells (and other pathogenic cell types) may not as easily “escape therapy” by mutating around the therapy. When the target is a protein, cancerous cells can “escape therapy” by mutating around the therapy; they do this either (i) through a form of natural selection, by “selecting” the isoform of the protein that the drug has least efficacy against, or (ii) by making a new version of the protein that the drug is less effective against (and cancer cells have already proven to be highly likely to mutate). S1P, on the other hand, has no isoforms (or splice variants) so the natural selection process described above cannot occur. In addition, the second approach described above is highly unlikely to occur because cells are programmed to produce proteins and not lipids,

 

  c) ASONEP has greater binding affinity than other antibodies. The affinity of ASONEP (i.e., the “strength” of binding to its target, S1P) is believed to be higher than antibody therapeutics that are currently used in the clinic as molecular sponges.

ASONEP has demonstrated favorable results in disease models for clinical indications other than cancer. In a preclinical study conducted at Harvard Medical School using ASONEP in an Experimental Autoimmune Encephalomyelitis (EAE) model of Multiple Sclerosis, ASONEP performed favorably compared against FTY720, a Novartis compound that was recently approved for the treatment of Multiple Sclerosis.

In the first quarter of 2010, we completed a Phase 1 clinical trial in which ASONEP was tested in patients having cancer. The trial met its primary endpoint of identifying safe dose levels for investigation in the Phase 2 setting. ASONEP was well tolerated at all dose-levels, ranging from 1 mg/kg to 24 mg/kg. In the dose-escalation phase of the study, three evaluable patients were treated per dose level, with each one receiving four intravenous treatments during the initial evaluation period (generally on days 1, 15, 22, and 29). Patients could continue ASONEP treatment after this initial evaluation period as long as the patient’s disease did not progress. The study also included an extension phase, where six additional patients were dosed at the highest dose (24 mg/kg) using the same dosing guidelines described above.

More than half the patients that completed the initial four-treatment evaluation period showed stable disease. Durable stable disease was observed in several patients. The test results offer considerable flexibility with dose level in future studies because ASONEP was equally well tolerated across all doses that were tested, other than minor infusion-related reactions observed at the highest dose of 24 mg/kg. Based on ASONEP’s safety profile together with the observation of stable disease in several late-stage cancer patients, we believe that further investigation of ASONEP in Phase 2 clinical trials is warranted.

In October 2008, we entered into a License Agreement (the “Merck Agreement”) with Merck KgaA, (“Merck”), as amended in September 2009, pursuant to which Merck has agreed to collaborate, through its Merck Serono division, with us to develop and commercialize ASONEP. Pursuant to the terms of the Merck Agreement, we licensed to Merck exclusive, worldwide rights to develop and commercialize ASONEP across all non-ocular indications. In March 2010, Merck acknowledged that we had achieved a development milestone, for which we earned $2 million. Later in March 2010, Merck proposed moving forward with the partnership

 

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via an extension of the Initial Development Period (as defined in the Merck Agreement). However the terms of that proposal were rejected by Lpath’s Board of Directors as not being in the best interests of Lpath or its stockholders. Consequently, Merck notified us of their decision to terminate the Merck Agreement. Pursuant to the terms of the Agreement, the termination was effective on April 24, 2010. Upon termination Merck KGaA relinquished all rights to the ASONEP program. However, Merck may, under certain circumstances, have a right of first refusal, for a period of 12 months subsequent to the termination date, to Lpath’s then next most advanced oncology drug candidate. We received a total of $17.0 million from Merck during the term of the Agreement.

Lpathomab

Our drug discovery team, using our proprietary ImmuneY2 technology, was the first, we believe, to generate functional mAbs against lysophosphatidic acid (“LPA”). LPA has long been recognized in the literature as a key factor in a variety of diseases. Published research has also demonstrated that LPA is a significant contributor to neuropathic pain, and plays a key role in pulmonary fibrosis. Because of its potentially significant role in a number of diseases, including pain, fibrosis, and cancer, many other companies have tried, unsuccessfully, to create an antibody against LPA.

We have two lead humanized mAbs that inhibit LPA. We have humanized and optimized both of these drug candidates and are in the process of testing them head-to-head to determine which of the two will move ahead into Investigational New Drug (“IND”) -enabling activities. Following selection of the strongest anti-LPA drug candidate, we plan to proceed with the activities required to file an IND with the U.S. Food and Drug Administration. The target date to begin testing Lpathomab in human clinical trials is in 2012.

Business Strategy

With our long-standing focus on bioactive lipids as targets for human disease, we have developed an expertise involving various tools and technologies that positions us as the clear leader in the emerging category of lipidomic-based therapeutics. We intend to leverage this expertise by using our proprietary ImmuneY2 drug-discovery engine to add novel bioactive-lipid-oriented product candidates to our therapeutic pipeline. In addition, we will consider licensing in technologies and compounds that further leverage our unique expertise and related intellectual property.

Manufacturing, Development, and Commercialization Strategy

We have outsourced current Good Laboratory Practices (“cGLP”) preclinical development activities (e.g., toxicology) and cGMP manufacturing and clinical development activities to contract research organizations (“CRO”) and contract manufacturing organizations (“CMO”). CROs and CMOs are third-parties that specialize in executing processes relating to project-oriented research activities on behalf of their clients and are commonly engaged in the industry. Manufacturing is only outsourced to organizations with approved facilities and manufacturing practices. Marketing, sales, and distribution will likely be through strategic partners that license the right to market, sell, and distribute our compounds in exchange for some combination of up-front payments, royalty payments, and milestone payments.

Market and Competitive Considerations

The Monoclonal Antibody Market and Cancer

Cancer is the second leading cause of death in the U.S. Recently, the overall health burden of cancer was estimated to be in excess of $190 billion. This great personal and societal burden has resulted in cancer becoming a major focus of R&D programs for both the U.S. government and pharmaceutical companies. These programs reflect an unprecedented effort to discover, develop, and market cancer therapeutics, a market that is expected to grow at a rate of 8% annually and to reach $85 billion by the year 2012.

Unfortunately, the considerable R&D effort devoted to cancer has not significantly mitigated the incidence of the disease, nor has it significantly increased the survival rate or reduced the duration of treatment for most cancer patients. According to Cancer Statistics 2009, published by the American Cancer Society, there are still approximately 1.5 million new cases of cancer diagnosed annually, resulting in over 500,000 deaths per year in the United States alone. Thus, even though a significant effort has been put forth to discover new therapeutics for cancer, effective therapeutic agents to combat many forms of the disease remain elusive. Further, traditional therapeutic agents are commonly plagued with severe side effects. Therefore, many groups have recently begun to look for new approaches to fighting the war against cancer. Among these new “innovative therapies” are gene therapy and therapeutic proteins such as mAbs, now including those against bioactive lipids.

The first mAb used clinicically for the treatment of cancer was Rituxan (rituximab), which was launched in 1997. Since then, the sales level of this antibody has reached more than $5 billion per year. In addition, Genentech’s newer mAb, Avastin, is estimated to reach an annual sales level in excess of $5 billion by 2010. These sales levels demonstrate the great potential of an effective mAb against cancer. Since the launch of Rituxan, more than 20 other mAbs have since been approved for marketing, including seven that are approved for cancer. The success of these products, as well as the reduced cost and time to develop mAbs when compared with small molecules, has made mAb therapeutics the second largest category of drug candidates behind small molecules. Further, the specificity of antibodies when compared with small molecule therapeutics has provided antibody therapeutics with a major advantage in terms of

 

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maximizing efficacy and reducing toxicity. For cancer alone, there are currently approximately 300 industry antibody R&D projects with more than 50 companies involved in developing new cancer-antibody therapeutics. In the face of this substantial competition, we are uniquely poised to use the advantages of antibody therapeutics against an entirely new class of promising targets — bioactive lipids.

The Wet-AMD Market

AMD is the leading cause of severe vision loss and blindness among older Americans and currently affects more than 15 million people; there are estimated to be three times this many cases each year on a worldwide basis. Some estimates show that nearly one-third of all Americans 75 years of age or older have at least some form of AMD. Although wet AMD affects only ~10% of patients with AMD, it is responsible for ~80% of the cases among patients with severe vision loss. The World Health Organization (WHO) believes that the number of people over age 60 will double over the next 16 years; the number of AMD cases will grow accordingly, creating an even larger market opportunity.

The current market leaders are the VEGF inhibitors, Lucentis® and (off-label) Avastin®. Annual revenue (U.S.) for Lucentis in 2009 was $1.1 billion, despite significant cannibalization by the off-label use of Avastin (estimated to be 50% to 60%). This off-label use is motivated by a virtually indistinguishable therapeutic index (safety and efficacy) between the two drugs but an enormous cost differential (~$50 to $100 per dose of Avastin versus ~$1,950 per dose of Lucentis). It is estimated that greater than 90% of wet AMD patients will be administered either Lucentis or Avastin.

Competition

The pharmaceutical, biopharmaceutical and biotechnology industries are very competitive, fast moving and intense, and expected to be increasingly so in the future. Other larger and well funded companies have developed and are developing drugs that, if not similar in type to our drugs, are designed to address the same signaling pathways, or patient or subject population. Therefore, our lead product, other products in development, or any other products we may acquire or in-license may not be the best, the safest, the first to market, or the most economical to make or use. If a competitor’s product is better than ours, for whatever reason, then our sales could be lower than that of competing products, if we are able to generate sales at all.

Collaborative Arrangement

New Pfizer Agreement

In December 2010, we entered into the Pfizer Agreement, which provides Pfizer with an exclusive option for a worldwide license to develop and commercialize iSONEP. Under the terms of the Pfizer Agreement, Pfizer will provide us with an upfront payment of $14 million in addition to sharing the cost of the planned Phase 1b and Phase 2a trials for iSONEP. Following completion of the two studies, Pfizer has the right to exercise its option for worldwide rights to iSONEP for an undisclosed option fee and, if Pfizer exercises its option, we will be eligible to receive development, regulatory and commercial milestone payments that could total up to $497.5 million. In addition, Lpath will be entitled to receive tiered double-digit royalties based on future sales of iSONEP. As part of the Pfizer Agreement, we granted Pfizer a time-limited right of first refusal to ASONEP.

Prior Merck Agreement

In October 2008, we entered into the Merck Agreement with Merck KGaA, pursuant to which Merck agreed to collaborate, through its Merck Serono division, with us to develop and commercialize ASONEP. Pursuant to the terms of the Merck Agreement, we licensed to Merck exclusive, worldwide rights to develop and commercialize ASONEP across all non-ocular indications. Under the terms of the Merck Agreement, Merck paid us a total of $17.0 million, including $5.0 million in 2008, $8.0 million in 2009, and $5.0 million in 2010. These amounts included an up front license fee, milestone payments, and ongoing research and development support.

In March 2010, Merck acknowledged that we had achieved a development milestone, for which we earned $2 million. Later in March 2010, Merck proposed moving forward with the partnership via an extension of the Initial Development Period (as defined in the Merck Agreement). However the terms of that proposal were rejected by Lpath’s Board of Directors as not being in the best interests of Lpath or its stockholders. Consequently, Merck notified us of their decision to terminate the Merck Agreement. Pursuant to the terms of the Merck Agreement, the termination was effective on April 24, 2010, and upon termination Merck KGaA relinquished all rights to the ASONEP program. However, Merck may, under certain circumstances, have a right of first refusal, for a period of 12 months subsequent to the termination date, to Lpath’s then next most advanced oncology drug candidate.

In-licensed Technology

Lonza Biologics PLC

In 2006, we entered into two licensing arrangements with Lonza Biologics PLC (“Lonza”). In the first agreement known as the “Research Evaluation Agreement”, Lonza granted us a non-exclusive license to use cell-line development technology owned by Lonza for research purposes. The term of this agreement is one year, and requires an annual license fee of £35,000 (approximately $48,000 based on current exchange rates). The license may be extended at our discretion for additional one-year periods. The Research Evaluation Agreement does not permit the use of the underlying technology for the manufacture of products to be used in in vivo clinical studies or for commercial sale.

Under the terms of the second license from Lonza, identified as the “License Agreement,” Lonza granted us a non-exclusive license, with rights to use and to and authorize sublicenses, to use Lonza’s cell-line technology for the production of drug material to be used in human clinical trials, as well as for commercial sale. Pursuant to the terms of the License Agreement, we are obligated to pay Lonza various annual license fees and royalties depending on whether the drug material produced using the technology is manufactured by Lonza, by us or our affiliates, or by a contract manufacturer. Unless terminated earlier, the License Agreement will continue in effect until the expiration of the patents related to the underlying technology. We may terminate the agreement at any time in our discretion

 

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by giving Lonza 60 days’ written notice of termination. Either party may terminate the agreement upon a material breach by the other party, subject to certain cure periods.

AERES Biomedical Limited

In 2005, we entered into a collaboration agreement with AERES Biomedical Limited (“AERES”) to “humanize” our sonepcizumab monoclonal antibody. Humanization under this agreement with AERES involves utilizing proprietary processes owned by AERES for the purpose of modifying sonepcizumab antibodies originally generated in mice for potential human acceptance in a clinical trial. The expenses incurred under this contract totaled approximately $834,000. The work performed by AERES was successfully completed in 2006. We could owe certain contingent amounts when and if ASONEP or iSONEP passes through the various levels of the FDA drug-candidate-review and approval processes. In 2008, we paid AERES $150,000 for the first milestone payable under the agreement, which was triggered by the filing of the ASONEP IND. AERES will be entitled to a low single-digit royalty on any revenues generated by the ultimate commercialization of ASONEP or iSONEP.

DataMabs LLP

In 2007, we entered into a collaboration agreement with DataMabs LLP (“DataMabs”) to assist us in humanizing the Lpathomab monoclonal antibody. The expenses incurred to complete the work under this contract totaled $200,000. The work performed by DataMabs was successfully completed in 2007, and we completed the humanization project in early 2008. We could owe certain contingent amounts when and if Lpathomab passes through the various levels of the FDA drug-candidate-review and approval processes. DataMabs will be entitled to a low single-digit royalty on any revenues generated by the ultimate commercialization of Lpathomab.

Patents and Proprietary Rights

Our success will depend, in part, on our ability to obtain patent protection for our products in the United States and other countries. Since 1997, we have created a broad and deep intellectual-property position in the lysolipid signaling area. We currently own or have exclusively licensed more than 50 issued or pending patents in the United States, with over 70 in major foreign countries. Seven issued or allowed patents provide ownership of anti-sphingolipid therapeutic antibodies as compositions of matter and methods to treat disease. Several patents provide claims on sphingolipids and sphingolipid receptors as targets to treat cardiovascular diseases, cancer, inflammation, angiogenesis, and various diagnostic and drug-screening applications. We have other proprietary reagents and some small-molecule inhibitors that are being tested in discovery-stage studies. In 2005, we purchased eight issued patents formerly assigned to Atairgin Technologies, Inc. and LPL Technologies, Inc. These patents cover compositions of matter and methods in the cancer diagnostics and therapeutics arenas relating to related lipid-signaling pathways.

Manufacturing

To leverage our experience and available financial resources, we do not plan to develop company-owned or company-operated manufacturing facilities. We plan to outsource all product manufacturing to contract manufacturers of clinical drug products that operate manufacturing facilities in compliance with current cGMP. We will supervise these activities and may seek to refine the current manufacturing process and final product formulation to achieve improvements in storage temperatures and other characteristics.

In 2006, we entered into a contract manufacturing agreement with Laureate Pharma, Inc. (“Laureate”) for the production of ASONEP and iSONEP. Under the terms of the agreement, Laureate has performed cell-line development, cell-line optimization, and upstream and downstream process development, followed by cGMP manufacture of the product for use in clinical trials. The agreement has been amended to extend the termination date to December 31, 2010. We may terminate the agreement at any time in our discretion by giving Laureate 90 days prior written notice. Either party may terminate the agreement upon a material breach by the other party, subject to certain cure periods.

Government Regulation

The FDA and comparable regulatory agencies in foreign countries, as well as drug regulators in state and local jurisdictions, impose substantial requirements upon the clinical development, manufacture, and marketing of pharmaceutical products. These agencies and other federal, state and local entities regulate research and development activities and the human testing, manufacture, quality control, safety, effectiveness, labeling, storage, record keeping, approval, advertising, and promotion of our product candidates (and any other products we may develop, acquire, or in-license).

The process required by the FDA under the drug provisions of the United States Food, Drug, and Cosmetic Act before our initial products may be marketed in the U.S. generally involves the following:

 

   

Preclinical laboratory and animal tests;

 

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Submission of an Investigational New Drug Application (“IND”), which must become effective before human clinical trials may begin;

 

   

Adequate and well-controlled human clinical trials under FDA oversight to establish the safety and efficacy of the product candidate for its intended use;

 

   

Submission to the FDA of an New Drug Application (“NDA”); and

 

   

FDA review and possible approval of an NDA.

The testing and approval process requires substantial time, effort, and financial resources, and we cannot be certain that any approval will be granted on an expeditious basis, if at all. Preclinical tests include laboratory evaluation of the product candidate, its chemistry, formulation and stability, as well as animal studies to assess the potential safety and efficacy of the product candidate. Certain preclinical tests must be conducted in compliance with good laboratory practice regulations. Violations of these regulations can, in some cases, lead to invalidation of the studies, requiring such studies to be replicated. In some cases, long-term preclinical studies are conducted while clinical studies are ongoing.

We are required to submit the results of our preclinical tests, together with manufacturing information and analytical data, to the FDA as part of an IND, which must become effective before we may begin human clinical trials. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises concerns or questions about the conduct of the trials as outlined in the IND and imposes a clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can begin. Our submission of an IND may not result in FDA authorization to commence clinical trials. All clinical trials must be conducted under the supervision of a qualified investigator in accordance with good clinical practice regulations. These regulations include the requirement that all subjects provide informed consent. Further, an independent Institutional Review Board (“IRB”) at each medical center proposing to conduct the clinical trials must review and approve any clinical study. The IRB also continues to monitor the study and must be kept aware of the study’s progress, particularly as to adverse events and changes in the research. Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and more frequently if adverse events occur.

Human clinical trials are typically conducted in three sequential phases that may overlap:

 

   

Phase 1: The drug is initially introduced into healthy human subjects or patients and tested for safety, dosage tolerance, absorption, metabolism, distribution, and excretion.

 

   

Phase 2: The drug is studied in a limited patient population to identify possible adverse effects and safety risks, to determine the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage.

 

   

Phase 3: When Phase 2 evaluations demonstrate that a dosage range of the drug is effective and has an acceptable safety profile, Phase 3 trials are undertaken to further evaluate dosage and clinical efficacy and to further test for safety in an expanded patient population, often at geographically dispersed clinical study sites.

We cannot be certain that we will successfully initiate or complete Phase 1, Phase 2, or Phase 3 testing of our product candidates within any specific time period, if at all. Furthermore, the FDA or an Institutional Review Board may not approve or may suspend clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.

Concurrent with clinical trials and pre-clinical studies, we also must develop information about the chemistry and physical characteristics of the drug and finalize a process for manufacturing the product in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product, and we must develop methods for testing the quality, purity, and potency of the final products. Additionally, appropriate packaging must be selected and tested and chemistry stability studies must be conducted to demonstrate that the product does not undergo unacceptable deterioration over its shelf-life.

The results of product development, pre-clinical studies, and clinical studies are submitted to the FDA as part of an NDA for approval of the marketing and commercial shipment of the product. The FDA reviews each NDA submitted and may request additional information, rather than accepting the NDA for filing. In this event, the application must be resubmitted with the additional information. The resubmitted application is also subject to review before the FDA accepts it for filing. Once the FDA accepts the NDA for filing, the agency begins an in-depth review of the NDA. The FDA has substantial discretion in the approval process and may disagree with our interpretation of the data submitted in the NDA.

The review process may be significantly extended by FDA requests for additional information or clarification regarding information already provided. Also, as part of this review, the FDA may refer the application to an appropriate advisory committee, typically a panel of clinicians, for review, evaluation and a recommendation. The FDA is not bound by the recommendation of an advisory committee. Manufacturing establishments often also are subject to inspections prior to NDA approval to assure compliance with cGMPs and with manufacturing commitments made in the relevant marketing application.

 

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Under the Prescription Drug User Fee Act (“PDUFA”), submission of an NDA with clinical data requires payment of a fee to the FDA, which is adjusted annually. For fiscal year 2010, that fee is $1,405,500. In return, the FDA assigns a goal of ten months for standard NDA reviews from acceptance of the application to the time the agency issues its “complete response,” in which the FDA may approve the NDA, deny the NDA if the applicable regulatory criteria are not satisfied, or require additional clinical data. Even if the requested data is submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. If the FDA approves the NDA, the product becomes available for physicians to prescribe. Even if the FDA approves the NDA, the agency may decide later to withdraw product approval if compliance with regulatory standards is not maintained or if safety problems occur after the product reaches the market. The FDA may also require post-marketing studies, also known as Phase 4 studies, as a condition of approval to develop additional information regarding the safety of a product. In addition, the FDA requires surveillance programs to monitor approved products that have been commercialized, and the agency has the power to establish and require changes in labeling and to prevent further marketing of a product based on the results of these post-marketing programs.

Satisfaction of the above FDA requirements or requirements of state, local and foreign regulatory agencies typically takes several years, and the actual time required may vary substantially based upon the type, complexity and novelty of the pharmaceutical product or medical device. Government regulation may delay or prevent marketing of potential products for a considerable period of time and impose costly procedures upon our activities. We cannot be certain that the FDA or any other regulatory agency will grant approval for our lead product iSONEP (or any other products we may develop, acquire, or in-license) on a timely basis, if at all. Success in preclinical or early-stage clinical trials does not assure success in later-stage clinical trials. Data obtained from preclinical and clinical activities are not always conclusive and may be susceptible to varying interpretations that could delay, limit or prevent regulatory approval. Even if a product receives regulatory approval, the approval may be significantly limited to specific indications or uses. Further, even after regulatory approval is obtained, later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market. Delays in obtaining, or failures to obtain regulatory approvals would have a material adverse effect on our business.

Any products manufactured or distributed by us pursuant to the FDA clearances or approvals are subject to pervasive and continuing regulation by the FDA, including record-keeping requirements, reporting of adverse experiences with the drug, submitting other periodic reports, drug sampling and distribution requirements, notifying the FDA and gaining its approval of certain manufacturing or labeling changes, complying with certain electronic records and signature requirements, and complying with the FDA promotion and advertising requirements. Drug manufacturers and their subcontractors are required to register their facilities with the FDA and state agencies and are subject to periodic unannounced inspections by the FDA and state agencies for compliance with good manufacturing practices, which impose procedural and documentation requirements upon our third-party manufacturers. Failure to comply with these regulations could result, among other things, in suspension of regulatory approval, recalls, suspension of production or injunctions, seizures, or civil or criminal sanctions. We cannot be certain that our present or future subcontractors will be able to comply with these regulations and other FDA regulatory requirements.

The FDA regulates drug labeling and promotion activities. The FDA has actively enforced regulations prohibiting the marketing of products for unapproved uses. Under the FDA Modernization Act of 1997, the FDA will permit the promotion of a drug for an unapproved use in certain circumstances, but subject to very stringent requirements.

Our product candidates are also subject to a variety of state laws and regulations in those states or localities where our lead product iSONEP (and any other products we may develop, acquire, or in-license) is manufactured or marketed. Any applicable state or local regulations may hinder our ability to market our lead product (and any other products we may develop, acquire, or in-license) in those states or localities. In addition, whether or not FDA approval has been obtained, approval of a pharmaceutical product by comparable governmental regulatory authorities in foreign countries must be obtained prior to the commencement of clinical trials and subsequent sales and marketing efforts in those countries. The approval procedure varies in complexity from country to country, and the time required may be longer or shorter than that required for FDA approval.

The FDA’s policies may change, and additional government regulations may be enacted which could prevent or delay regulatory approval of our potential products. Moreover, increased attention to the containment of health care costs in the U.S. and in foreign markets could result in new government regulations that could have a material adverse effect on our business. We cannot predict the likelihood, nature or extent of adverse governmental regulation that might arise from future legislative or administrative action, either in the U.S. or abroad.

Other Regulatory Requirements

The U.S. Federal Trade Commission and the Office of the Inspector General of the U.S. Department of Health and Human Services (“HHS”) also regulate certain pharmaceutical marketing practices. Also, reimbursement practices and HHS coverage of medicine or medical services are important to the success of procurement and utilization of our product candidates, if they are ever approved for commercial marketing.

 

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We are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control, and disposal of hazardous or potentially hazardous substances. We may incur significant costs to comply with these laws and regulations now or in the future. We cannot assure you that any portion of the regulatory framework under which we currently operate will not change and that such change will not have a material adverse effect on our current and anticipated operations.

Employees

As of November 30, 2010, we employed 18 individuals, of whom 10 held advanced degrees. A significant number of our management and professional employees have had prior experience with pharmaceutical, biotechnology, or medical product companies. Collective bargaining agreements do not cover any of our employees, and we consider relations with our employees to be good.

DESCRIPTION OF PROPERTY

Our administrative offices and research facilities are located in San Diego, California and are considered to be in good condition and adequately utilized. We lease approximately 7,300 square feet of laboratory and office space. This lease expires on February 28, 2011, and at that time can be extended for 90 days on the existing terms. Approximately 500 square feet of the facility is subleased to a company that is co-owned by two of our largest shareholders. The terms of this sublease, in general, are identical to the terms of the company’s direct lease.

LEGAL PROCEEDINGS

We are not currently a party in any legal proceedings.

 

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FINANCIAL STATEMENTS

Index to Financial Statements

 

Unaudited Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009

     52   

Unaudited Condensed Consolidated Statements of Operations for the nine and three months ended September 30, 2010 and 2009

     53   

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September  30, 2010 and 2009

     54   

Notes to Unaudited Condensed Consolidated Financial Statements for the nine and three months ended September 30, 2010

     55   

Report of Independent Registered Public Accounting Firm (Moss Adams LLP)

     58   

Report of Independent Registered Public Accounting Firm (LevitZacks)

     59   

Audited Consolidated Balance Sheets as of December 31, 2009 and 2008

     60   

Audited Consolidated Statements of Operations for the years ended December 31, 2009 and 2008

     61   

Audited Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2009 and 2008

     62   

Audited Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008

     63   

Notes to Audited Consolidated Financial Statements for the years ended December 31, 2009 and 2008

     64   

 

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LPATH, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

 

     September 30,
2010
    December 31,
2009
 

ASSETS

    

Current Assets:

    

Cash and cash equivalents

   $ 3,113,686      $ 6,171,486   

Accounts receivable

     270,595        341,451   

Prepaid expenses and other current assets

     90,044        180,652   
                

Total current assets

     3,474,325        6,693,589   

Equipment and leasehold improvements, net

     136,723        238,753   

Patents, net

     1,269,245        901,026   

Deposits and other assets

     35,501        36,606   
                

Total assets

   $ 4,915,794      $ 7,869,974   
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current Liabilities:

    

Accounts payable

   $ 441,617      $ 253,252   

Accrued compensation

     148,883        169,992   

Accrued expenses

     989,835        745,853   

Deferred contract revenue

     —          659,573   

Deferred rent, current portion

     7,976        49,990   

Leasehold improvement debt, current portion

     2,831        15,116   
                

Total current liabilities

     1,591,142        1,893,776   

Warrants

     4,300,000        4,100,000   
                

Total liabilities

     5,891,142        5,993,776   
                

Stockholders' Equity:

    

Common stock - $.001 par value; 200,000,000 shares authorized; 53,297,234 and 53,027,308 issued and outstanding at September 30, 2010 and December 31, 2009, respectively

     53,297        53,027   

Additional paid-in capital

     35,027,115        34,267,963   

Accumulated deficit

     (36,055,760     (32,444,792
                

Total stockholders’ equity (deficit)

     (975,348     1,876,198   
                

Total liabilities and stockholders' equity (deficit)

   $ 4,915,794      $ 7,869,974   
                

See accompanying notes to the condensed consolidated financial statements.

 

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LPATH, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

 

     Nine Months Ended
September 30,
    Three Months Ended
September 30,
 
     2010     2009     2010     2009  

Revenues:

        

Grant and royalty revenue

   $ 1,192,329      $ 998,367      $ 769,025      $ 551,034   

Research and development revenue under collaborative agreement

     4,659,573        9,343,971        —          4,343,971   
                                

Total revenues

     5,851,902        10,342,338        769,025        4,895,005   

Expenses:

        

Research and development

     6,625,466        5,382,133        1,155,589        1,699,145   

General and administrative

     2,613,620        2,822,309        708,128        734,322   
                                

Total expenses

     9,239,086        8,204,442        1,863,717        2,433,467   
                                

Loss from operations

     (3,387,184     2,137,896        (1,094,692     2,461,538   
                                

Other income, net

     (23,784     (12,381     (60,731     24,870   

Change in fair value of warrants

     (200,000     1,900,000        (1,800,000     4,900,000   
                                

Total other income (expense)

     (223,784     1,887,619        (1,860,731     4,924,870   
                                

Net income (loss)

   $ (3,610,968   $ 4,025,515      $ (2,955,423   $ 7,386,408   
                                

Earnings (loss) per share

        

Basic

   $ (0.07   $ 0.07      $ (0.05   $ 0.14   

Diluted

   $ (0.07   $ 0.07      $ (0.05   $ 0.13   

Weighted average shares outstanding used in the calculation

        

Basic

     54,721,924        54,350,549        54,945,823        54,348,769   

Diluted

     54,721,924        56,638,516        54,945,823        57,269,169   

See accompanying notes to the condensed consolidated financial statements.

 

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LPATH, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

     Nine Months Ended
September 30,
 
     2010     2009  

Cash flows from operating activities:

    

Net income (loss)

   $ (3,610,968   $ 4,025,515   

Adjustments to reconcile net income (loss) to net cash used in operating activities:

    

Stock-based compensation expense

     737,422        648,066   

Change in fair value of warrants

     200,000        (1,900,000

Depreciation and amortization

     109,571        121,611   

Deferred rent expense

     (42,014     (37,614

Foreign currency exchange gain

     5,725        43,370   

Changes in operating assets and liabilities:

    

Accounts receivable

     70,856        105,187   

Prepaid expenses and other current assets

     90,608        57,406   

Accounts payable and accrued expenses

     405,513        (1,088,109

Deferred contract revenue

     (659,573     (2,843,971

Deposits and other assets

     1,105        (909
                

Net cash used in operating activities

     (2,691,755     (869,448
                

Cash flows from investing activities:

    

Equipment and leasehold improvement expenditures

     (1,958     (99,409

Patent expenditures

     (373,802     (377,258
                

Net cash used in investing activities

     (375,760     (476,667
                

Cash flows from financing activities:

    

Proceeds from options and warrants exercised

     22,000        35,143   

Repayments of leasehold improvement debt

     (12,285     (11,343
                

Net cash provided by financing activities

     9,715        23,800   
                

Net decrease in cash

     (3,057,800     (1,322,315

Cash and cash equivalents at beginning of period

     6,171,486        7,775,593   
                

Cash and cash equivalents at end of period

   $ 3,113,686      $ 6,453,278   
                

Supplemental disclosures of cash flow information:

    

Cash paid during the period for:

    

Income taxes

   $ 1,600      $ 1,600   
                

Supplemental Schedule of Non-cash Investing and Financing Activities:

    

Change in fair value of warrant liability

   $ 200,000      $ (1,900,000
                

See accompanying notes to the condensed consolidated financial statements.

 

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LPATH, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2010

Note 1 – BASIS FOR PRESENTATION

The unaudited condensed consolidated financial information has been prepared by Lpath, Inc. (“Lpath” or “the company”) without audit. The condensed consolidated financial statements, in the opinion of management, include all adjustments considered necessary for a fair presentation have been included. Except as otherwise disclosed, all such adjustments are of a normal recurring nature. The condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and in accordance with the regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and note disclosures normally included in complete financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such SEC rules and regulations. These unaudited condensed consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes for the fiscal year ended December 31, 2009 included elsewhere in this prospectus. Operating results for the three and nine month period ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Please see the company’s more critical accounting policies identified below as well as for the fiscal year ended December 31, 2009 included elsewhere in this prospectus.

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 of $2.7 million during the nine months ended September 30, 2010 and $1.6 million during the year ended December 31, 2009. The company expects to continue to incur cash losses from operations during the remainder of 2010. 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, 2010, the company had cash totaling $3.1 million. Additional near-term sources of cash include the $2.5 million remaining on the $3 million BRDG-SPAN grant from the National Eye Institute (part of the National Institutes of Health) to support iSONEP-related trials, and the three year, $3 million grant from NIH awarded in 2009 that still has two years and $2 million remaining to support ASONEP clinical trials. In addition, on November 1, 2010, Lpath was notified by the Internal Revenue Service that it had two qualifying therapeutic discovery projects grants totaling $0.5 million. As they are currently planned, the cost of Lpath’s ongoing drug discovery and development efforts, including general and administrative expenses, would consume between $12 and $16 million through the end of 2011. However, in the event we are unable to obtain additional funding or generate revenue form licensing fees before early 2011, certain planned research and development activities will be deferred or curtailed. If those research and development activities were deferred or curtailed, the company believes that its existing cash, together with its committed grant funding, will be sufficient to meet its operating requirements at least through 2011. The company is seeking additional funding to finance its research and development activities beyond 2010 by:

1. Pursuing additional funding from existing and potential new investors.

2. Exploring cash-generating opportunities from strategic alliances, including licensing portions of its technology and entering into corporate partnerships or collaborations. In such transactions, Lpath could transfer certain rights relating to one or more of its drug discovery or development programs, or relating to specific indications within those programs and, in exchange, receive infusions of cash in the short-term and potentially in the long-term as well.

3. Investigating opportunities to partner the operation of clinical development programs that would reduce the cost to the company of those programs.

4. Continuing to seek additional research grants from the NIH or other sources.

 

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LPATH, INC.

Notes to Condensed Consolidated Financial Statements—(Continued)

September 30, 2010

 

Future financings through equity investments may 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. 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 may be required to curtail our operations and current business plans.

Note 3 – RESEARCH AND DEVELOPMENT COLLABORATIVE AGREEMENT

On October 28, 2008 (the “Effective Date”), Lpath entered into a License Agreement (the “Merck Agreement”) with Merck KGaA, (“Merck”), pursuant to which Merck agreed to collaborate, through its Merck Serono division, with the company to develop and commercialize ASONEP™, Lpath’s monoclonal antibody which is currently being evaluated as a drug candidate for the treatment of certain cancers. Pursuant to the terms of the Merck Agreement, the company licensed to Merck exclusive, worldwide rights to develop and commercialize ASONEP across all non-ocular indications.

In March 2010, Merck acknowledged that we had achieved a development milestone, for which we earned $2,000,000. Later in March 2010, Merck proposed moving forward with the partnership via an extension of the Initial Development Period (as defined in the Merck Agreement). However the terms of that proposal were rejected by Lpath’s Board of Directors as not being in the best interests of Lpath or its stockholders. Consequently, on March 25, 2010, Merck notified us of their decision to terminate the License Agreement. Pursuant to the terms of the Agreement, the termination was effective April 24, 2010, and Merck relinquished all rights to the ASONEP program. Merck may, under certain circumstances following termination of the Agreement, have a right of first refusal for a period of 12 months to Lpath’s next most advanced oncology drug candidate.

The company accounted for the Merck Agreement as a single unit of accounting. Revenue was recognized using the straight-line method over the remaining term of the agreement. During the nine months ended September 30, revenue was recognized related to the upfront licensing fee and initial development funding totaling $2,659,573 and $5,000,000 in 2010 and 2009, respectively. In the first half of 2010, Lpath also recognized revenue of $2,000,000 related to the achievement of certain development objectives.

Note 4 – SHARE-BASED PAYMENTS

The company recognized share-based compensation expense as follows:

 

     Nine Months Ended
September 30,
     Three Months Ended
September 30,
 
     2010      2009      2010      2009  

Research and development

   $ 265,275       $ 81,468       $ 130,738       $ (10,004

General and administrative

     472,147         566,598         157,911         29,584   
                                   

Total share-based compensation expense

   $ 737,422       $ 648,066       $ 288,649       $  19,580   
                                   

As of September 30, 2010, there was a total of $869,000 unrecognized compensation expense related to unvested stock-based compensation under the plan. That expense is expected to be recognized over a weighted average period of 2.0 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 periods ended September 30, 2010 and 2009.

 

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LPATH, INC.

Notes to Condensed Consolidated Financial Statements—(Continued)

September 30, 2010

 

Note 5 – FAIR VALUE MEASUREMENTS

The company’s recurring fair value measurements at September 30, 2010 were as follows:

 

     Fair Value as of
September 30,
2010
     In Active
Markets for
Identical
Assets
(Level 1)
     Significant
other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Unrealized Losses
during the Nine
Months Ended
September 30, 2010
 

Liabilities:

              

Warrants expiring April - June 2012

   $ 3,300,000       $ —         $ —         $ 3,300,000       $ 100,000   

Warrants expiring August 2013

     1,000,000         —           —           1,000,000         100,000   
                                            
   $ 4,300,000       $ —         $ —         $ 4,300,000       $ 200,000   
                                            

The unrealized loss for the nine months ended September 30, 2010 is included on the statement of operations as change in fair value of 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). The table reflects net gains and losses for the nine months ended September 30, 2010 for all financial assets and liabilities categorized as Level 3 as of September 30, 2010.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3):

 

Liabilities:

  

Warrant liability as of January 1, 2010

   $ 4,100,000   

Increase in fair value of warrants

     200,000   
        

Warrant liability as of September 30, 2010

   $ 4,300,000   
        

The company determined the fair value of the warrants using a Black-Scholes model with consideration given to their “down-round” protection provisions that reduce the exercise price if the company issues new warrants or equity at a price lower than the stated exercise price. The model considered amounts and timing of future possible equity and warrant issuances and historical volatility of the company’s stock price.

Note 6 – Subsequent Event

On November 1, 2010, Lpath received notification from the U.S. Internal Revenue Service (IRS) that it was approved to receive two grants in the amount of $244,479 each for qualified investments in two qualifying therapeutic discovery projects. In July 2010, Lpath applied for grants for to continue the development of two of its drug candidates, ASONEP and iSONEP. After a determination by U.S. Department of Health and Human Services (HHS) that both projects met the definition of a “qualifying therapeutic discovery project,” the IRS certified the qualifying investment and approved the award amount of $244,479 per project, for a total of $488,958 in awards to Lpath. The qualified investments represent 2009 research and development expenses; there are no future performance obligations related to these grants.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

and Stockholders of

LPATH, INC.

We have audited the accompanying consolidated balance sheet of Lpath, Inc. as of December 31, 2009, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the year then ended. The consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lpath, Inc. as of December 31, 2009, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 9 to the consolidated financial statements, effective the first day of its fiscal 2009, the Company adopted Statement of Financial Accounting Standards Board Accounting Standards Codification Topic 815, “Derivatives and Hedging.”

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has incurred significant cash losses from operations since inception and expects to continue to incur cash losses from operations in 2010 and beyond. These factors, among others, raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

  /S/    MOSS ADAMS LLP        
 

San Diego, California

March 29, 2010

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

and Stockholders of

LPATH, INC.

We have audited the accompanying consolidated balance sheet of Lpath, Inc. as of December 31, 2008, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lpath, Inc. as of December 31, 2008, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has incurred significant cash losses from operations since inception and expects to continue to incur cash losses from operations in 2009 and beyond. These factors, among others, raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

  /S/    LEVITZACKS        
 

San Diego, California

March 17, 2009

 

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LPATH, INC.

Consolidated Balance Sheets

December 31,

 

     2009     2008  

ASSETS

    

Current Assets:

    

Cash and cash equivalents

   $ 6,171,486      $ 7,775,593   

Accounts receivable

     341,451        656,221   

Prepaid expenses and other current assets

     180,652        204,863   
                

Total current assets

     6,693,589        8,636,677   

Equipment and leasehold improvements, net

     238,753        285,218   

Patents, net

     901,026        462,785   

Deposits and other assets

     36,606        37,272   
                

Total assets

   $ 7,869,974      $ 9,421,952   
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current Liabilities:

    

Accounts payable

   $ 253,252      $ 1,123,836   

Accrued compensation

     169,992        459,831   

Accrued expenses

     745,853        391,836   

Deferred contract revenue

     659,573        3,333,333   

Deferred rent, current portion

     49,990        51,130   

Leasehold improvement debt, current portion

     15,116        15,278   
                

Total current liabilities

     1,893,776        5,375,244   

Deferred rent, long-term portion

     —          49,990   

Leasehold improvement debt, long-term portion

     —          15,116   

Long-term accrued liabilities

     —          411,802   

Warrants

     4,100,000        —     
                

Total liabilities

     5,993,776        5,852,152   
                

Commitments and contingencies

     —          —     

Stockholders’ Equity:

    

Common stock—$.001 par value; 100,000,000 shares authorized; 53,027,308 and 52,657,911 issued and outstanding at December 31, 2009 and December 31, 2008, respectively

     53,027        52,657   

Additional paid-in capital

     34,267,963        43,144,945   

Accumulated deficit

     (32,444,792     (39,627,802
                

Total stockholders’ equity

     1,876,198        3,569,800   
                

Total liabilities and stockholders’ equity

   $ 7,869,974      $ 9,421,952   
                

See accompanying notes to the consolidated financial statements.

 

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LPATH, INC.

Consolidated Statements of Operations

Years Ended December 31,

 

     2009     2008  

Revenues:

    

Grant and royalty revenue

   $ 1,235,510      $ 1,194,482   

Research and development revenue under collaborative agreement

     10,673,760        1,666,667   
                

Total revenues

     11,909,270        2,861,149   

Expenses:

    

Research and development

     6,628,200        10,116,124   

General and administrative

     3,479,326        4,480,260   
                

Total expenses

     10,107,526        14,596,384   
                

Income (loss) from operations

     1,801,744        (11,735,235

Other income (expense), net

     (18,734     275,250   

Change in fair value of warrants

     2,200,000        —     
                

Total other income (expense)

     2,181,266        275,250   
                

Net income (loss)

   $ 3,983,010      $ (11,459,985
                

Earnings (loss) per share

    

Basic

   $ 0.07      $ (0.24

Diluted

   $ 0.07      $ (0.24

Weighted average shares outstanding used in the calculation

    

Basic

     54,177,677        48,068,937   

Diluted

     56,825,586        48,068,937   

See accompanying notes to the consolidated financial statements.

 

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Lpath, Inc.

Consolidated Statements of Changes in Stockholders’ Equity

Years Ended December 31, 2009 and 2008

 

     Common Stock      Additional
Paid-in
Capital
    Accumulated
Deficit
    Total
Stockholders’
Equity
 
     Shares      Amount         

Balance, January 1, 2008

     45,046,495       $ 45,046       $ 34,457,999      $ (28,167,817   $ 6,335,228   

Common stock and warrants issued for cash, net of issuance costs

     7,090,999         7,091         6,341,730          6,348,821   

Warrants exercised, net of issuance costs

     144,963         144         122,078          122,222   

Stock options exercised

     262,642         263         108,791          109,054   

Stock-based compensation

     112,812         113         2,114,347          2,114,460   

Net loss

             (11,459,985     (11,459,985
                                          

Balance, December 31, 2008

     52,657,911         52,657         43,144,945        (39,627,802     3,569,800   

Cumulative effect of change in accounting principle

           (9,500,000     3,200,000        (6,300,000

Stock options exercised

     310,372         311         35,501          35,812   

Stock-based compensation

     59,025         59         587,517          587,576   

Net income

             3,983,010        3,983,010   
                                          

Balance, December 31, 2009

     53,027,308       $ 53,027       $ 34,267,963      $ (32,444,792   $ 1,876,198   
                                          

See accompanying notes to the consolidated financial statements.

 

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LPATH, INC.

Consolidated Statements of Cash Flows

Years Ended December 31,

 

     2009     2008  

Cash flows from operating activities:

    

Net income (loss)

   $ 3,983,010      $ (11,459,985

Adjustments to reconcile net income (loss) to net cash used in operating activities:

    

Stock-based compensation expense

     587,576        2,136,439   

Change in fair value of warrants

     (2,200,000     —     

Depreciation and amortization

     176,690        215,016   

Deferred rent expense

     (51,130     (45,406

Foreign currency exchange (gain) loss

     47,970        (163,331

Changes in operating assets and liabilities:

    

Accounts receivable

     314,770        (645,719

Prepaid expenses and other current assets

     24,211        12,718   

Accounts payable and accrued expenses

     (1,266,178     422,327   

Deferred contract revenue

     (2,673,760     3,333,333   

Deposits and other assets

     2,055        2,567   
                

Net cash used in operating activities

     (1,054,786     (6,192,041
                

Cash flows from investing activities:

    

Equipment and leasehold improvement expenditures

     (109,567     (5,383

Patent expenditures

     (460,288     (114,043
                

Net cash used in investing activities

     (569,855     (119,426
                

Cash flows from financing activities:

    

Proceeds from sale of common stock and warrants, net

     —          6,348,821   

Proceeds from options and warrants exercised

     35,812        231,276   

Repayments of leasehold improvement debt

     (15,278     (14,108
                

Net cash provided by financing activities

     20,534        6,565,989   
                

Net (decrease) increase in cash

     (1,604,107     254,522   

Cash and cash equivalents at beginning of period

     7,775,593        7,521,071   
                

Cash and cash equivalents at end of period

   $ 6,171,486      $ 7,775,593   
                

Supplemental disclosures of cash flow information:

    

Cash paid during the period for:

    

Interest

   $ 9,544      $ 12,122   
                

Income taxes

   $ 1,600      $ 1,600   
                

Supplemental Schedule of Non-cash Investing and Financing Activities:

    

Change in fair value of warrant liability

   $ (2,200,000   $ —     
                

See accompanying notes to the consolidated financial statements.

 

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LPATH, INC.

Notes to Consolidated Financial Statements

Years Ended December 31, 2009 and 2008

Note 1 – THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES

Organization and Business

Lpath, Inc. (“Lpath,” “we,” or “company”) is using its proprietary technology to discover and develop lipidomic-based therapeutics, an emerging field of medical science that targets bioactive signaling lipids to treat important human diseases. Lpath has active programs in cancer, heart failure, and age-related macular degeneration.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The consolidated financial statements include the accounts of Lpath, Inc. and its wholly-owned subsidiary, Lpath Therapeutics Inc. All significant intercompany balances and transactions have been eliminated in consolidation.

Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. By their nature, estimates are subject to an inherent degree of uncertainty and, as such, actual results may differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash deposits, money market deposits, and certificates of deposit.

Concentration of Credit Risk

Financial instruments that potentially subject the company to a significant concentration of credit risk consist of cash and cash equivalents. The company maintains its cash balances with one major commercial bank. The balances are insured by the Federal Deposit Insurance Corporation up to $250,000.

The company invests its excess cash in money market mutual funds and in certificates of deposit of federally insured financial institutions. The company has established guidelines relative to diversification of its cash investments and their maturities that are intended to secure safety and liquidity. These guidelines are periodically reviewed. To date, the company has not experienced any impairment losses on its cash equivalents.

Equipment and Leasehold Improvements

Equipment and leasehold improvements are recorded at cost. Equipment depreciation is computed using the straight-line method over the estimated useful asset lives, which range from three to five years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the remainder of the lease term. Repairs and maintenance are charged to expense as incurred.

Patents

Legal and filing costs directly associated with obtaining patents are capitalized. Upon issuance of a patent, amortization is computed using the straight-line method over the estimated remaining useful life of the patent.

Long-Lived Assets

The company accounts for the impairment and disposition of long-lived assets for events or changes in circumstances which indicate that their carrying value may not be recoverable. The company recorded charges for impairments of patents totaling $11,973 and $66,978 in 2009 and 2008, respectively.

Deferred Rent

Rent expense is recorded on a straight-line basis over the term of the lease. The difference between rent expense and amounts paid under the lease agreements is recorded as deferred rent. Lease incentives, including tenant improvement allowances, are also recorded to deferred rent and amortized on a straight-line basis over the lease term.

 

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LPATH, INC.

Notes to Consolidated Financial Statements—(Continued)

Years Ended December 31, 2009 and 2008

 

Stock-Based Compensation Expense

Compensation expense is measured based on the fair value of the award at the grant date, including estimated forfeitures, and is adjusted to reflect actual forfeitures and the outcomes of certain conditions. Compensation issued to non-employees is periodically remeasured and income or expense is recognized during their vesting terms.

Refer to Note 9, “Stockholders’ Equity,” for further information.

Revenue Recognition

Lpath may enter into collaborations where we receive non-refundable upfront payments, generally these payments would be for licenses to Lpath drug candidates. Non-refundable payments are recognized as revenue when the company has a contractual right to receive such payment, the contract price is fixed or determinable, the collection of the resulting receivable is reasonably assured and the company has no further performance obligations under the license agreement. Multiple element arrangements, such as license and development arrangements are analyzed to determine whether the deliverables, which often include a license together with performance obligations such as research and development responsibilities and steering committee services, can be separated or whether they must be accounted for as a single unit of accounting. The company recognizes up-front license payments as revenue upon delivery of the license only if the license has stand-alone value and the fair value of the undelivered performance obligations, typically including research and/or steering committee services, can be determined. If the fair value of the undelivered performance obligations can be determined, such obligations would then be accounted for separately as performed. If the license is considered to either (i) not have stand-alone value or (ii) have stand-alone value but the fair value of any of the undelivered performance obligations cannot be determined, the arrangement would then be accounted for as a single unit of accounting and the license payments and payments for performance obligations are recognized as revenue over the estimated period of when the performance obligations are performed.

If the company is involved in a steering committee as part of a multiple element arrangement that is accounted for as a single unit of accounting, the company assesses whether its involvement constitutes a performance obligation or a right to participate. Steering committee services that are determined to be performance obligations are combined with other research services or performance obligations required under an arrangement, if any, in determining the level of effort required in an arrangement and the period over which the company expects to complete its aggregate performance obligations.

Whenever the company determines that an arrangement should be accounted for as a single unit of accounting, it must determine the period over which the performance obligations will be performed and revenue will be recognized. Revenue will be recognized using either a relative performance or straight-line method. The company recognizes revenue using the relative performance method provided that the company can reasonably estimate the level of effort required to complete its performance obligations under an arrangement and such performance obligations are provided on a best-efforts basis. Revenue recognized is limited to the lesser of the cumulative amount of payments received or the cumulative amount of revenue earned, as determined using the relative performance method, as of each reporting period.

If the company cannot reasonably estimate the level of effort required to complete its performance obligations under an arrangement, the performance obligations are provided on a best-efforts basis and the company can reasonably estimate when the performance obligation ceases or the remaining obligations become inconsequential and perfunctory, then the total payments under the arrangement, excluding royalties and payments contingent upon achievement of substantive milestones, would be recognized as revenue on a straight-line basis over the period the company expects to complete its performance obligations. Revenue is limited to the lesser of the cumulative amount of payments received or the cumulative amount of revenue earned, as determined using the straight-line basis, as of the period ending date.

If the company cannot reasonably estimate when its performance obligation either ceases or becomes inconsequential and perfunctory, then revenue is deferred until the company can reasonably estimate when the performance obligation ceases or becomes inconsequential. Revenue is then recognized over the remaining estimated period of performance.

Significant management judgment is required in determining the level of effort required under an arrangement and the period over which the company is expected to complete its performance obligations under an arrangement.

Collaboration agreements may also contain substantive milestone payments. Substantive milestone payments are considered to be performance bonuses that are recognized upon achievement of the milestone only if all of the following conditions are met:

 

   

the milestone payments are non-refundable;

 

   

achievement of the milestone involves a degree of risk and was not reasonably assured at the inception of the arrangement;

 

   

substantive company effort is involved in achieving the milestone;

 

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LPATH, INC.

Notes to Consolidated Financial Statements—(Continued)

Years Ended December 31, 2009 and 2008

 

 

   

the amount of the milestone payment is reasonable in relation to the effort expended or the risk associated with achievement of the milestone; and,

 

   

a reasonable amount of time passes between the up-front license payment and the first milestone payment as well as between each subsequent milestone payment.

Determination as to whether a payment meets the aforementioned conditions involves management’s judgment. If any of these conditions are not met, the resulting payment would not be considered a substantive milestone, and therefore the resulting payment would be considered part of the consideration for the single unit of accounting and would be recognized as revenue as such performance obligations are performed under either the relative performance or straight-line methods, as applicable, and in accordance with these policies as described above.

Grant Revenue. Lpath’s primary source of revenue to date has been research grants received from the National Institutes of Health. Lpath recognizes grant revenue as the related research expenses are incurred, up to contractual limits.

Royalty Revenue. Lpath recognizes royalty revenue from licensed products when earned in accordance with the terms of the license agreements. The licensee’s net sales figures used for calculating royalties include deductions for costs of unsaleable returns, cash discounts, freight, postage and insurance.

Research and Development

Research and development costs are charged to expense when incurred.

Employee Benefit Plan

The company has a 401(k) defined contribution plan that provides benefits for most employees. An employee is eligible to participate in this plan after one month of service. The plan provides for full vesting of benefits over five years. Company contributions to the plan are made at the discretion of the Board of Directors and aggregated $62,803 and $62,140 in 2009 and 2008, respectively.

Income Taxes

Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

A net deferred tax asset related primarily to federal and state net operating loss and research and development credit carryforwards has been fully reserved due to uncertainties regarding Lpath’s ability to realize these tax benefits in future periods. Consequently, no income tax benefit has been recorded for the years ended December 31, 2009 and 2008.

Lpath periodically evaluates its tax positions to determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authorities. Lpath has not incurred any interest or penalties as of December 31, 2009 with respect to income tax matters. Lpath does not expect that there will be unrecognized tax benefits of a significant nature that will increase or decrease within 12 months of the reporting date.

Comprehensive Loss

Comprehensive loss is comprised of net loss and certain changes in equity that are excluded from net loss. At December 31, 2009 and 2008, Lpath had no reportable differences between net income (loss) and comprehensive income (loss) per share data.

Basic net income (loss) per common share is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common and common dilutive equivalent shares, such as stock options, restricted stock units, restricted stock awards, warrants, and convertible securities, outstanding during the period.

 

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LPATH, INC.

Notes to Consolidated Financial Statements—(Continued)

Years Ended December 31, 2009 and 2008

 

Recent Accounting Pronouncements

On July 1, 2009, the Financial Standards Accounting Board (“FASB”) issued Statement of Financial Accounting Standard No. 168, The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 , The Hierarchy of Generally Accepted Accounting Principles . This statement establishes the FASB Accounting Standards Codification TM (“Codification”) as the source of authoritative generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP in the United States (“the GAAP hierarchy”). Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority. The Codification is effective for interim and annual periods ending on or after September 15, 2009. All then-existing non-SEC accounting and reporting standards are superseded and all non-grandfathered, non-SEC accounting literature not included in the Codification is deemed non-authoritative. There was no impact of the Codification on Lpath’s consolidated financial statements and related disclosures.

In October 2009, the FASB issued Update 2009-13, Revenue Recognition (Topic 605): Multiple Deliverable Revenue Arrangements – a consensus of the FASB Emerging Issues Task Force . Accounting Standards Update No. 2009-13 amends Subtopic 605-25 to provide new guidance concerning (1) the determination of whether an arrangement involving multiple deliverables contains more than one unit of accounting, and (2) the manner in which arrangement consideration should be allocated to such deliverables. This update is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010.

Note 2 – RESEARCH AND DEVELOPMENT COLLABORATIVE AGREEMENT

On October 28, 2008 (the “Effective Date”), Lpath entered into a License Agreement (the “Merck Agreement”) with Merck KgaA, (“Merck”), pursuant to which Merck has agreed to collaborate, through its Merck Serono division, with the company to develop and commercialize ASONEP™, Lpath’s monoclonal antibody which is currently being evaluated as a drug candidate for the treatment of certain cancers. Pursuant to the terms of the Merck Agreement, the company licensed to Merck exclusive, worldwide rights to develop and commercialize ASONEP across all non-ocular indications.

In March 2010, Merck acknowledged that we had achieved a development milestone, for which we earned $2 million. Later in March 2010, Merck proposed moving forward with the partnership via an extension of the Initial Development Period (as defined in the Merck Agreement). However the terms of that proposal were rejected by Lpath’s Board of Directors as not being in the best interests of Lpath or its stockholders. Consequently, on March 25, 2010, Merck notified us of their decision to terminate the License Agreement. Pursuant to the terms of the Agreement, the termination was effective on April 24, 2010, and upon termination Merck KGaA relinquished all rights to the ASONEP program. Merck may, under certain circumstances following termination of the Agreement, have a right of first refusal for a period of 12 months to Lpath’s next most advanced oncology drug candidate.

In 2008, Merck paid the company an initial amount of $4,000,000, as provided in the Merck Agreement. Merck paid the company research and development funding of $1,000,000 in 2008 and $6,000,000 in 2009, which the company used to support development activities related to ASONEP, including the company’s Phase 1 clinical trial. In addition, during 2009 Merck paid the company $2,000,000 upon the achievement of certain ASONEP development objectives. As of December 31, 2009, Lpath had received a total of $13,000,000 from Merck under the terms of this arrangement.

The company accounts for the Merck Agreement as a single unit of accounting. Revenue is recognized over the anticipated performance period of twenty months using the straight-line method. Under the terms of the Merck Agreement, Lpath recognized revenue related to the upfront licensing fee and initial development funding of $1,666,667 in 2008 and $8,673,760 in 2009. In 2009, Lpath also recognized revenue of $2,000,000 related to the achievement of certain development objectives. As of December 31, 2009, the company had deferred revenue of $659,573 related principally to the upfront licensing fee.

Note 3 – GOING CONCERN UNCERTAINTY

The accompanying consolidated financial statements have been prepared assuming that the company will continue as a going concern. In the year ended December 31, 2009, Lpath utilized cash in operating activities of $1,054,786. In the year ended December 31, 2008, Lpath incurred a net loss and utilized net cash in operating activities of $11,459,985 and $6,192,041, respectively. 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.

 

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LPATH, INC.

Notes to Consolidated Financial Statements—(Continued)

Years Ended December 31, 2009 and 2008

 

During 2010, the company expects to continue to incur cash losses from operations. While the company had cash totaling $6,171,486 as of December 31, 2009, the cost of its ongoing drug discovery and development efforts, including general and administrative expenses, are expected to consume between $9 and $12 million in 2010. The company believes that its existing cash and expected funding under the Merck Agreement during the first and second quarters of 2010 will be sufficient to meet its projected operating requirements at least through December 2010 at current operating levels. The collaboration with Merck was terminated effective April 24, 2010. As a result, the company will need to seek additional sources of capital to finance our research and development activities beyond 2010.

We expect to continue to incur cash losses from operations during 2010. In the event the company needs to raise additional capital, it would:

 

  1. Pursue additional fund raising activities from both existing and potential new investors.

 

  2. Explore cash generating opportunities from strategic alliances, including licensing portions of its technology or entering into corporate partnerships or collaborations. In such transactions, Lpath could transfer certain rights to one or more of its drug discovery or development programs, or to specific indications within those programs and receive infusions of cash in the short-term, and potentially in the long-term as well.

 

  3. Continue to seek additional research grants from the National Institutes of Health or other sources.

Note 4 – COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS

 

     December 31,  
     2009     2008  

Equipment and leasehold improvements

    

Office furniture and fixtures

   $ 28,908      $ 28,908   

Laboratory equipment

     424,841        337,995   

Computer equipment and software

     139,090        129,264   

Leasehold improvements

     150,303        143,203   
                
     743,142        639,370   

Accumulated depreciation

     (504,389     (354,152
                

Equipment, net

   $ 238,753      $ 285,218   
                

Patents

    

Patents

   $ 972,289      $ 523,974   

Accumulated amortization

     (71,263     (61,189
                

Patents, net

   $ 901,026      $ 462,785   
                

Note 5 – FAIR VALUE MEASUREMENTS

The company measures fair value in accordance with the applicable accounting standards in the FASB Codification. Fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, there exists a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

   

Level 1 — unadjusted quoted prices in active markets for identical assets or liabilities that the company has the ability to access as of the measurement date.

 

   

Level 2 — inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.

 

   

Level 3 — unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date.

This hierarchy requires the company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

 

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LPATH, INC.

Notes to Consolidated Financial Statements—(Continued)

Years Ended December 31, 2009 and 2008

 

Recurring Fair Value Estimates

The company’s recurring fair value measurements at December 31, 2009 were as follows:

 

     Fair Value as of
December 31, 2009
     In Active
Markets for
Identical
Assets
(Level 1)
     Significant
other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Unrealized Gains
during the Year
Ended
December 31, 2009
 

Liabilities:

              

Warrants expiring April - June 2012

   $ 3,200,000       $ —         $ —         $ 3,200,000       $ 1,700,000   

Warrants expiring August 2013

     900,000         —           —           900,000         500,000   
                                            
   $ 4,100,000       $ —         $ —         $ 4,100,000       $ 2,200,000   
                                            

The unrealized gains for the year ended December 31, 2009 are included on the consolidated income statement as change in fair value of 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). The table reflects net gains and losses for all financial assets and liabilities categorized as Level 3 as of December 31, 2009.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3):

 

Liabilities:

  

Warrant liability as of January 1, 2009

   $ 6,300,000   

Decrease in fair value of warrants

     (2,200,000
        

Warrant liability as of December 31, 2009

   $ 4,100,000   
        

The company determined the fair value of the warrants using a Black-Scholes model with consideration given to their “down-round” protection provisions that reduce the exercise price if the company issues new warrants or equity at a price lower than the stated exercise price. The model considered amounts and timing of future possible equity and warrant issuances and historical volatility of the company’s stock price.

Note 6 – RESEARCH AND LICENSE AGREEMENTS

In August 2006, Lpath and Lonza Biologics, PLC entered into two agreements, a License Agreement and a Research Evaluation Agreement. Both agreements grant Lpath the use of certain proprietary technology to assist in the development of monoclonal antibodies. Under the terms of the License Agreement an annual license fee of approximately £300,000 (approximately $467,000 at December 31, 2009) per year began to accrue during the third quarter of 2007, when Lpath utilized the Lonza technology in the manufacture of drug substance to be used in clinical trials. Under the terms of the License Agreement, payment of this annual license fee will be deferred until Lpath’s drug candidate utilizing that technology begins Phase 2 clinical trials. While it is not possible to accurately predict when, or if, the drug candidate will progress to the initiation of Phase 2 clinical trials, management believes that it is likely that payment of this annual fee will occur prior to December 2010. Under the terms of the Research Evaluation Agreement, a license fee is due annually. The company paid Lonza Biologics PLC annual license fees totaling approximately $61,000 and $66,000 during 2009 and 2008, respectively, related to the Research Evaluation Agreement.

In August 2006, Lpath and Laureate Pharma, Inc. entered into a Development and Manufacturing Services Agreement for the development, manufacture and storage of Lpath’s Sonepcizumab monoclonal antibody for use in clinical trials. The company paid Laureate Pharma approximately $527,000 and $1,920,000 during 2009 and 2008, respectively, related to this agreement.

 

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LPATH, INC.

Notes to Consolidated Financial Statements—(Continued)

Years Ended December 31, 2009 and 2008

 

In August 2005, Lpath entered into a collaboration agreement with AERES Biomedical (“AERES”) to “humanize” the company’s Sphingomab monoclonal antibody. Humanization under this agreement with AERES involves utilizing proprietary processes owned by AERES for the purpose of modifying Sphingomab antibodies originally contained in mice for potential human acceptance in a clinical trial. The humanized version of Sphingomab that was produced from the collaboration with AERES is called Sonepcizumab. The company paid AERES $150,000 in 2008 and no amounts were paid during 2009. Lpath could owe certain additional contingent amounts when drug candidates based on Sonepcizumab pass through the levels of the FDA drug review and approval process. AERES will be entitled to a royalty, not to exceed 4%, on any revenues generated by the ultimate commercialization of any drug candidate based on Sonepcizumab.