Tableof Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**x****   QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For thequarterly period ended September 30, 2008**

 

**OR**

 

**o****    TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the transition period from                 to                  **

 

**CommissionFile Number: 000-50344**

 

**LPATH,INC.**

(Name of small business issuer in its charter)

 

| **Nevada**                                                      | ** ** | **16-1630142**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer Identification No.) |

 

**6335 Ferris Square, Suite A, San Diego, CA 92121**

(Address of principal executive offices, including zip code)

 

**(858) 678-0800**

(Registrant’s telephone number, including area code)

 

Indicateby check mark whether the registrant (1) filed all reports required to befiled by Section 13 or 15(d) of the Exchange Act during the past 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes x No  ̈

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of “large accelerated filer,” “accelerated filer,” and“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

 
| Large  accelerated filer o                     |   | Accelerated  filer o         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                       |   | Smaller  reporting company x |
| (Do  not check if a smaller reporting company) |   |                              |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o No x

 

Thenumber of shares of issuer’s outstanding Class A common stock as of November 11,2008 was 52,611,911.

 

 

 

----

Tableof Contents

 

**LPATH, INC.**

**FORM 10-Q**

 

**September 30, 2008**

 

**TABLE OF CONTENTS**

 
| **PART I**  | **FINANCIAL  INFORMATION**                                                                  | 3      |
|------------------|---------------------------------------------------------------------------------------------|--------|
|             |                                                                                        |   |
| ITEM 1:          | Financial Statements                                                                        | 3      |
|             |                                                                                        |   |
| ITEM 2:          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 8      |
|             |                                                                                        |   |
| ITEM 4:          | Controls and  Procedures                                                                    | 10     |
|             |                                                                                        |   |
| **PART II** | **OTHER  INFORMATION**                                                                      | 11     |
|             |                                                                                        |   |
| ITEM 1:          | Legal Proceedings                                                                           | 11     |
|             |                                                                                        |   |
| ITEM 2:          | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 11     |
|             |                                                                                        |   |
| ITEM 3:          | Defaults upon  Senior Securities                                                            | 11     |
|             |                                                                                        |   |
| ITEM 4:          | Submission of  Matters to a Vote of Security Holders                                        | 11     |
|             |                                                                                        |   |
| ITEM 5:          | Other Information                                                                           | 11     |
|             |                                                                                        |   |
| ITEM 6:          | Exhibits                                                                                    | 12     |
|             |                                                                                        |   |
| **SIGNATURES**   |                                                                                        | 14     |

 

2

----

Table of Contents

 

**PART I.****              ****FINANCIAL INFORMATION**

**Item 1.****                      ****FINANCIAL STATEMENTS**

** **

**LPATH, INC.**

**CondensedConsolidated Balance Sheets**

 
| ** **                                                                                                                                                                            | ** ** | **September 30,** | ** **    | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|---------------|-----------------------|------------|
| ** **                                                                                                                                                                            | ** ** | **2008**               | ** **    | **2007**              | ** ** |
| ** **                                                                                                                                                                            | ** ** | **(Unaudited)**        | ** **    | **(See note)**   | ** ** |
| **ASSETS**                                                                                                                                                                            | ** ** | ** **             | ** **    | ** **            | ** ** |
| Current Assets:                                                                                                                                                                       |       |                   |          |                  |       |
| Cash and cash equivalents                                                                                                                                                             |       | $                      | 5,903,789     |                  | $          | 7,521,071 |   |
| Accounts receivable                                                                                                                                                                   |       | 380,609                |          | 10,502                |       |
| Prepaid expenses and other current assets                                                                                                                                             |       | 143,463                |          | 217,581               |       |
| Total current assets                                                                                                                                                                  |       | 6,427,861              |          | 7,749,154             |       |
|                                                                                                                                                                                  |       |                   |          |                  |       |
| Equipment and leasehold improvements, net                                                                                                                                             |       | 318,172                |          | 422,484               |       |
| Patents, net                                                                                                                                                                          |       | 422,498                |          | 442,706               |       |
| Deposits and other assets                                                                                                                                                             |       | 37,414                 |          | 37,644                |       |
|                                                                                                                                                                                  |       |                   |          |                  |       |
| Total assets                                                                                                                                                                          | ** ** | **$**                  | **7,205,945** | ** **            | **$**      | **8,651,988** | ** ** |
|                                                                                                                                                                                  |       |                   |          |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                         |       |                   |          |                  |       |
| Current Liabilities:                                                                                                                                                                  |       |                   |          |                  |       |
| Accounts payable                                                                                                                                                                      |       | $                      | 830,875       |                  | $          | 989,069 |   |
| Accrued expenses                                                                                                                                                                      |       | 509,219                |          | 572,798               |       |
| Deferred rent, current portion                                                                                                                                                        |       | 49,477                 |          | 45,405                |       |
| Leasehold improvement debt, current portion                                                                                                                                           |       | 14,977                 |          | 14,107                |       |
| Total current liabilities                                                                                                                                                             |       | 1,404,548              |          | 1,621,379             |       |
|                                                                                                                                                                                  |       |                   |          |                  |       |
| Deferred rent, long-term portion                                                                                                                                                      |       | 63,706                 |          | 101,121               |       |
| Leasehold improvement debt, long-term  portion                                                                                                                                        |       | 19,051                 |          | 30,395                |       |
| Long-term accrued liabilities                                                                                                                                                         |       | 502,971                |          | 563,865               |       |
| Total liabilities                                                                                                                                                                     |       | 1,990,276              |          | 2,316,760             |       |
|                                                                                                                                                                                  |       |                   |          |                  |       |
| Stockholders’ Equity:                                                                                                                                                            |       |                   |          |                  |       |
| Common stock - $.001 par value; 100,000,000  shares authorized; 52,608,161 and 45,046,495 issued and outstanding at  September 30, 2008 and December 31, 2007, respectively |       | 52,608                 |          | 45,046                |       |
| Additional paid-in capital                                                                                                                                                            |       | 43,005,663             |          | 34,457,999            |       |
| Accumulated deficit                                                                                                                                                                   |       | (37,842,602            | )             | (28,167,817           | )          |
| Total stockholders’ equity                                                                                                                                                       |       | 5,215,669              |          | 6,335,228             |       |
|                                                                                                                                                                                  |       |                   |          |                  |       |
| Total liabilities and stockholders’ equity                                                                                                                                       | ** ** | **$**                  | **7,205,945** | ** **            | **$**      | **8,651,988** | ** ** |

 

Note:     The balance sheet at December 31, 2007 hasbeen derived from the audited consolidated financial statements at that date.See accompanying notes to the condensed consolidated financial statements.

 

3

----

Table of Contents

 

**LPATH,INC.**

**CondensedConsolidated Statements of Operations**

**(Unaudited)**

 
| ** **                                                                    | ** ** | **Nine Months Ended** | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                                                                    | ** ** | **September 30,**          | ** ** | **September 30,**           | ** ** |
| ** **                                                                    | ** ** | **2008**                        | ** ** | **2007**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                          |       |                            |       |                             |       |   |   |   |   |
| Grant and royalty revenue                                                     |       | $                               | 905,198    |                             | $          | 361,846 |   | $ | 430,484 |   | $ | 11,926 |   |
|                                                                          |       |                            |       |                             |       |   |   |   |   |
| Expenses:                                                                     |       |                            |       |                             |       |   |   |   |   |
| Research and development                                                      |       | 7,390,689                       |       | 9,120,869                        |       | 1,747,300 |   | 4,114,359 |   |
| General and administrative                                                    |       | 3,276,928                       |       | 2,354,267                        |       | 858,517 |   | 653,837 |   |
| Total expenses                                                                |       | 10,667,617                      |       | 11,475,136                       |       | 2,605,817 |   | 4,768,196 |   |
|                                                                          |       |                            |       |                             |       |   |   |   |   |
| Loss from operations                                                          |       | (9,762,419                      | )          | (11,113,290                      | )          | (2,175,333 | ) | (4,756,270 | ) |
|                                                                          |       |                            |       |                             |       |   |   |   |   |
| Other income (expense):                                                       |       |                            |       |                             |       |   |   |   |   |
| Interest income                                                               |       | 93,879                          |       | 296,761                          |       | 16,233 |   | 162,985 |   |
| Interest expense                                                              |       | (6,245                          | )          | (20,056                          | )          | (4,522 | ) | (3,588 | ) |
| Total other income (expense)                                                  |       | 87,634                          |       | 276,705                          |       | 11,711 |   | 159,397 |   |
|                                                                          |       |                            |       |                             |       |   |   |   |   |
| Net loss                                                                      |       | $                               | (9,674,785 | )                                | $          | (10,836,585 | ) | $ | (2,163,622 | ) | $ | (4,596,873 | ) |
|                                                                          |       |                            |       |                             |       |   |   |   |   |
| Basic and diluted net loss per share                                          |       | $                               | (0.21      | )                                | $          | (0.30 | ) | $ | (0.04 | ) | $ | (0.10 | ) |
|                                                                          |       |                            |       |                             |       |   |   |   |   |
| Weighted average number of common shares outstanding  used in the calculation |       | 46,537,324                      |       | 36,665,193                       |       | 49,137,774 |   | 44,915,735 |   |

 

See accompanying notes to the condensedconsolidated financial statements.

 

4

----

Table of Contents

 

**LPATH, INC.**

**CondensedConsolidated Statements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                   | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                   | ** ** | **September 30,**          | ** ** |
| ** **                                                                   | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| Cash flows from operating activities:                                        |       |                            |       |   |   |
| Net loss                                                                     |       | $                               | (9,674,785 | ) | $ | (10,836,585 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                            |       |   |   |
| Stock-based compensation expense                                             |       | 1,996,657                       |       | 1,478,031 |   |
| Depreciation and amortization                                                |       | 175,984                         |       | 125,775 |   |
| Deferred rent expense                                                        |       | (33,343                         | )          | 34,082 |   |
| Foreign currency exchange gain                                               |       | (66,942                         | )          | — |   |
| Changes in operating assets and  liabilities:                                |       |                            |       |   |   |
| Accounts receivable                                                          |       | (370,107                        | )          | 105,759 |   |
| Prepaid expenses and other current assets                                    |       | 74,118                          |       | 64,804 |   |
| Accounts payable and accrued expenses                                        |       | (227,568                        | )          | 1,303,723 |   |
| Deposits and other assets                                                    |       | 2,425                           |       | (2,150 | ) |
| Net cash used in operating activities                                        |       | (8,123,561                      | )          | (7,726,561 | ) |
|                                                                         |       |                            |       |   |   |
| Cash flows from investing activities:                                        |       |                            |       |   |   |
| Equipment expenditures                                                       |       | (3,112                          | )          | (100,327 | ) |
| Patent expenditures                                                          |       | (60,683                         | )          | (89,870 | ) |
| Net cash used in investing activities                                        |       | (63,795                         | )          | (190,197 | ) |
|                                                                         |       |                            |       |   |   |
| Cash flows from financing activities:                                        |       |                            |       |   |   |
| Proceeds from sale of common stock and  warrants, net                        |       | 6,369,070                       |       | 15,841,690 |   |
| Proceeds from options and warrants  exercised                           |       | 211,478                         |       | 1,486,152 |   |
| Proceeds from issuance of notes payable to  related parties                  |       | —                          |       | 100,000 |   |
| Repayments of notes payable to related  parties, including loan fees         |       | —                          |       | (108,163 | ) |
| Repayments of leasehold improvement debt                                     |       | (10,474                         | )          | (5,939 | ) |
| Net cash provided by financing activities                                    |       | 6,570,074                       |       | 17,313,740 |   |
|                                                                         |       |                            |       |   |   |
| Net increase/(decrease) in cash                                              |       | (1,617,282                      | )          | 9,396,982 |   |
|                                                                         |       |                            |       |   |   |
| Cash and cash equivalents at beginning of  period                            |       | 7,521,071                       |       | 1,361,214 |   |
| Cash and cash equivalents at end of period                                   |       | $                               | 5,903,789  |   | $ | 10,758,196 |   |
| ** **                                                                   | ** ** | ** **                      | ** ** | ** ** | ** ** |
| **Supplemental Schedule of Non-cash Investing  and Financing Activities:**   |       |                            |       |   |   |
|                                                                         |       |                            |       |   |   |
| Incurred patent expenditures contained in  accrued expenses                  |       | $                               | 13,066     |   | $ | 20,521 |   |
| Common stock issued in payment of loan fees                                  |       | $                               | —     |   | $ | 7,837 |   |
| Leasehold improvements financed by landlord                                  |       | $                               | —     |   | $ | 58,568 |   |
| Leasehold improvements paid by landlord                                      |       | $                               | —     |   | $ | 80,428 |   |

 

See accompanying notes to the condensedconsolidated financial statements.

 

5

----

Table of Contents

 

**LPATH, INC.**

**Notesto Condensed Consolidated Financial Statements**

**September 30,2008**

 

**Note 1 –BASIS FOR PRESENTATION**

 

The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with generally accepted accounting principlesfor interim financial information and with the instructions to Form 10-Qand Article 10 of Regulation S-X. Accordingly, they do not include allinformation and notes required by accounting principles generally accepted inthe United States for complete financial statements.

 

In the opinion of management, all adjustments considered necessary fora fair presentation have been included. Except as otherwise disclosed, all suchadjustments are of a normal recurring nature. Operating results for the nine and three month periods ended September 30,2008 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2008. For further information, refer to theconsolidated financial statements and footnotes thereto included in the company’sannual report on Form 10-KSB for the year ended December 31, 2007.

 

The preparation of the financial statements in conformity with U. S.generally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

 

**Note 2 — PRIVATE PLACEMENT OF COMMON STOCK AND WARRANTS**

 

InAugust 2008, the company received gross proceeds of $6,736,000 from thesale of common stock and warrants through a private placement.  Lpath issued 7,090,999 shares of Class Acommon stock at a price of $0.95 per share. Each investor also received warrants to purchase the number of shares ofClass A common stock equal to 25% of the number of common shares purchasedin this financing.  This resulted in theissuance of warrants to purchase a total of 1,772,748 shares of Class Acommon stock in this transaction.  Thewarrants are exercisable at a price of $1.25 per share, and expire on August 12,2013.

 

Stock issuance costs related to the private placement were paid in cashand warrants.  Cash expenses for thistransaction totaled $368,000, including placement agent fees totaling $276,000and legal and other fees totaling $92,000. In addition, 166,740 warrants wereissued to placement agents.  Thesewarrants carry an exercise price of $1.25 per share, and expire on August 12,2013.  All of the warrants issued inconjunction with this financing contain provisions specifying that in the eventthat Lpath sells shares of its Class A Common Stock at a price per shareless than the exercise price of the warrants, then both the exercise price ofthe warrants and the number of shares that may be acquired with the warrantswill be adjusted according to formulas specified in the warrants.

 

# **Note 3 – SUBSEQUENTEVENT**

 

On October 28, 2008 (the “Effective Date”), Lpath, Inc.entered into the License Agreement (the “Agreement”) with Merck KgaA,(“Merck”), pursuant to which Merck has agreed to collaborate, through its MerckSerono division, with the company to develop and commercialize ASONEPTM, Lpath’sPhase 1 monoclonal antibody which is currently being evaluated as a drugcandidate for the treatment of certain cancers.

 

Pursuantto the terms of the Agreement, the company licensed to Merck exclusive,worldwide rights to develop and commercialize ASONEPTM across all non-ocularindications.  The Agreement requires Merck to provide the company with upto $23 million of upfront payments and research and development funding tosupport the company’s completion of the Phase 1 clinical trial forASONEPTM.  On November 6, 2008, Merck paid the company an initialamount of $4,000,000, as provided in the Agreement.  During the 12 monthperiod following the Effective Date (the “Initial Development Period”), Merckwill be required to provide the company research and development funding of$500,000 per month, which the company intends to use to support developmentactivities related to ASONEPTM, including the company’s Phase 1 clinicaltrials.  Within the Initial Development Period, Merck will pay the companyadditional amounts if certain clinical development objectives areachieved.  At Merck’s election, the Initial Development Period may beextended by up to 6 months, in which case Merck will continue to pay Lpathagreed upon amounts for research and development funding.

 

Uponconclusion of the Initial Development Period, if Merck elects to accept theresponsibility and  related expenses for further development of ASONEPTM,Merck will pay the company $28 million in various installments, the majority ofwhich funds the company believes, based on the company’s reasonable estimates,will be due either upon transfer or within six months of transfer.  If, atthe conclusion of the Initial Development Period, Merck does not accept theresponsibility for further development of ASONEP, all rights granted under theAgreement revert to Lpath.

 

6

----

Tableof Contents

 

Additionalpayments of up to $422 million could be made by Merck upon achievement ofcertain development, regulatory, and sales milestones, should ASONEPTM beapproved in multiple indications.  If Merck successfully brings ASONEPTM to market, Merck would pay thecompany royalties (the “Royalty Payments”) based on worldwide net sales of theproducts licensed under the Agreement (the “Licensed Products”), at theincremental royalty rates negotiated by the parties.  The Royalty Paymentswould continue on a country-by country and Licensed Product-by-Licensed Productbasis upon the later of 10-years after the date of the first commercial sale ofsuch Licensed Product in such country or the expiration of protection bypatents covering such products in such country.

 

TheAgreement does not include any rights to license, develop or commercialize thecompany’s other product candidates or the company’s underlying drug discoveryor development technologies, including iSONEPTM   (Lpath’s ocularformulation of the anti-S1P antibody) and LpathomabTM (an antibody against LPA,a key bioactive lipid). The Agreement, does however provide Merck, contingentupon the occurrence of specified events, with certain rights of firstnegotiation and rights of first refusal with respect to other non-ocularantibody products of the company.

 

TheAgreement contains customary termination provisions including (but not limitedto) the right of Merck to terminate the Agreement in its entirety during theInitial Development Period upon 30 days written notice to Lpath.

 

# **Note 4 – SHARE-BASEDPAYMENTS**

#  

The company recognizedshare-based compensation expense in accordance with SFAS No. 123R, “Share-BasedPayment,” as follows:

** **
| ** **                             | ** ** | **Nine Months Ended** | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                             | ** ** | **September 30,**          | ** ** | **September 30,**           | ** ** |
| ** **                             | ** ** | **2008**                        | ** ** | **2007**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                   |       |                            |       |                             |       |   |   |   |   |
| Research and development               |       | $                               | 624,042    |                             | $          | 1,069,292 |   | $ | 6,153 |   | $ | 426,120 |   |
| General and administrative             |       | 1,372,615                       |       | 408,739                          |       | 136,031 |   | 118,005 |   |
| Total share-based compensation expense |       | $                               | 1,996,657  |                             | $          | 1,478,031 |   | $ | 142,184 |   | $ | 544,125 |   |

 

As of September 30, 2008 there was a total of $3.1 millionunrecognized compensation expense related to unvested stock-based compensationunder the plan.  That expense is expectedto be recognized over a weighted-average period of 2 years.  Because of its net operating losses, thecompany did not realize any tax benefits for the tax deductions fromshare-based payment arrangements during the periods ended September 30,2008 and 2007.

 

**Note 5 – RECENT ACCOUNTINGPRONOUNCEMENTS**

 

No new accountingpronouncement issued or effective during the third quarter of 2008 had or isexpected to have a material impact on the consolidated financial statements.

 

7

----

Tableof Contents

 

**Item 2.****          MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Thisdiscussion and analysis of our financial condition and results of operationsshould be read in conjunction with our financial statements and notes theretoincluded in this quarterly report on Form 10-Q (the “Quarterly Report”)and the audited financial statements and notes thereto included in our annualreport on Form 10-KSB for the year ended December 31, 2007 (the “2007Annual Report”), as filed with the Securities and Exchange Commission (the “SEC”).  In addition to historical information, thisdiscussion and analysis contains forward-looking statements that involve risks,uncertainties, and assumptions. Our actual results may differ materially fromthose anticipated in these forward-looking statements as a result of certainfactors including but not limited to those identified in the 2007 Annual Reportin the section entitled “Market Risks.”

 

**Overview**

 

Lpath, Inc.is a biotechnology company focused on the discovery and development oflipidomic-based therapeutics.  Lipidomicsis an emerging field of medical science whereby bioactive signaling lipids aretargeted to treat important human diseases. Our lead product candidate, ASONEP**TM**, is a monoclonalantibody against sphingosine-1-phosphate (S1P). ASONEP is currently in Phase 1clinical trials and holds promise for the treatment of cancer, multiplesclerosis, and other diseases.  A secondproduct candidate, iSONEPTM (another formulation of the same S1P-targetedantibody) is currently in Phase I clinical trials, and has demonstratedsuperior results in various models of human ocular disease, includingage-related macular degeneration, retinopathy, and glaucoma.  Our third product candidate, LpathomabTM, isan antibody against lysophosphatidic acid (LPA), a key bioactive lipid that hasbeen long recognized as a valid disease target. Lpath’s unique ability to generate novel antibodies against bioactivelipids is based on its ImmuneY2TM technology, a series of proprietary processesdeveloped by the company.  We arecurrently applying the Immune Y2 process to other lipid-signaling agents thatare validated targets for disease treatment, thereby potentially creating apipeline of monoclonal antibody-based drug candidates.

 

Lpath has incurred significant net losses since its inception. As of September 30,2008, Lpath had an accumulated deficit of approximately$37.9 million.  Lpath expects itsoperating losses to increase for the next several years as it pursues theclinical development of its product candidates.

 

**Resultsof Operations**

 

***Comparison of the Nine Months Ended September 30,2008 and September 30, 2007***

 

*Grant and Royalty Revenue.* Grant and royalty revenue for the nine-monthperiod ended September 30, 2008 increased to $905,000 from$362,000 for the nine-month period ended September 30, 2007.  The increase of $543,000 reflects theincreased level of activity on studies funded by grants from the NationalInstitutes of Health (“NIH”).

 

*Research and Development Expenses.* Research and development (*R&D*)expenses for the nine months ended September 30, 2008 were $7,391,000compared to $9,121,000 for the same period in 2007.  The decrease of $1,730,000 reflects thesignificant pre-clinical costs incurred in 2007.  In addition, spending for R&D wascurtailed in 2008 pending the completion of the financing transaction in August 2008.   Outside services expense decreased byapproximately $1,398,000 during the nine-months ended September 30, 2008compared to 2007 primarily due the IND-enabling studies performed in 2007.  For the nine-months ended September 30,2008, employee compensation and benefits expense increased by approximately$119,000 compared to 2007, commensurate with the increase in research anddevelopment staffing.  Stock-basedcompensation charges decreased by $445,000 due primarily to the decrease in themarket value of Lpath’s common stock, which is a key factor in the calculationof stock-based compensation expense for outside consultants.  This was partially offset by the vesting,during 2008, of restricted stock units granted in the fourth quarter of 2007.

 

*General and Administrative Expenses.* General and administrative expenses increased $923,000 for thenine-month period ended September 30, 2008 to $3,277,000 compared to$2,354,000 in 2007.  Stock-basedcompensation charges increased by $964,000 due primarily to the vesting ofrestricted stock units granted in the fourth quarter of 2007.  Lpath recognized a foreign currency gain of$67,000 in the third quarter of 2008 due to a reduction in the U. K. Poundexchange rate used to translate the carrying amount of the company’s accruedliability related to a license agreement with a company located in the U.K.Such liability is included in long-term liabilities on the balance sheet.

 

*Interest Income*.  Interest income was $94,000for the nine months ended September 30, 2008, compared with $297,000 forthe nine months ended September 30, 2007. The $203,000 decrease was the result of higher levels of invested cashin 2007.

 

8

----

Table of Contents

 

***Comparison of the Three Months EndedSeptember 30, 2008 and September 30, 2007***

 

*Grant and Royalty Revenue.*  Grantand royalty revenue for the three-month period ended September 30, 2008increased to $430,000 from $12,000 for the three-month period ended September 30,2007.  The increase of $418,000 isattributable to the fact that in 2007 all of the company’s work on projectsfunded by the NIH was completed before the end of the second quarter.

 

*Research and Development Expenses.* Research and development expenses decreased from $4,114,000 for thethird quarter of 2007 to $1,747,000 for the third quarter of 2008.  The decrease of $2,367,000 is principally dueto two factors: (1) in 2007 significant expense was incurred forIND-enabling studies, and (2) in 2008 Lpath curtailed spending during thesecond and third quarters to conserve cash until the August 2008 financingcould be completed.  As a result, outsideservices and consulting expenses decreased by approximately $1,921,000.Stock-based compensation charges decreased by $420,000 due primarily to thedecrease in the market value of Lpath’s common stock, which is a key factor inthe calculation of stock-based compensation expense for outside consultants.

 

*General and Administrative Expenses.* General and administrative expenses increased from $654,000 for thethree-month period ended September 30, 2007 to $859,000 for thethree-month period ended September 30, 2008, an increase of $205,000.  Legal, consulting, and investor relationsexpenses increased in the aggregate by approximately $153,000 in 2008 inconjunction with the company’s efforts to negotiate the licensing agreementconcluded in October 2008 as described in Note 3 to the financialstatements.

 

*Interest Income*.  Interest income was $16,000for the quarter ended September 30, 2008, compared with $163,000 for thequarter ended September 30, 2007. The $147,000 decrease was principally a result of lower levels ofinvested cash as compared to the prior year.

 

**Liquidity and Capital Resources**

 

**Since Lpath’sinception, its operations have been financed primarily through the privateplacement of equity and debt securities. Through September 30, 2008 Lpath had received net proceeds ofapproximately $36,400,000 from the sale of equity securities and from theissuance of convertible promissory notes. As of September 30, 2008, Lpath had cash and cash equivalentstotaling $5,904,000.**

** **

Duringthe nine-month period ended September 30, 2008 we used net cash of$8,124,000 for operating activities compared to $7,727,000 in the nine monthsended September 30, 2007.  The$397,000 increase in net cash used in operating activities was driven primarilyby the payments of accounts payable and accrued expenses and increases in grantrevenue receivable.  Net cash used ininvesting activities during the nine-month period ended September 30, 2008amounted to $64,000 compared to $190,000 during the same period in 2007.  Of the amount used for investing activitiesin 2008, $61,000 was invested in the prosecution of additional patents comparedto $90,000 in 2007.  In the comparableperiod of 2007, $100,000 was used to purchase new equipment compared to $3,000in 2008.

 

Net cash provided from financing activities during the nine-monthperiod ended September 30, 2008 totaled approximately $6,570,000 comparedto $17,314,000 in the first nine months of 2007.  In 2007, $1,486,000 was received from stockoption and warrant exercises compared to $212,000 in 2008.  In 2007, the company realized proceeds fromthe sale of common stock and warrants totaling $15,842,000 and $100,000 wasborrowed under the terms of the promissory notes payable to relatedparties.  In 2008, net proceeds form thesale of common stock and warrants totaled $6,369,000.

 

As described in Note 3 to the financial statements, on October 28,2008 Lpath enteredinto a license agreement with Merck.  Merckhas agreed to collaborate with the company to develop and commercializeASONEPTM.  On November 6, 2008, inconnection with the execution of the Agreement, Merck paid to the company aninitial amount of $4,000,000.  During theensuing 12-month period Merck will provide research and development funding tothe company of $500,000 per month.  Inaddition, during the initial development period Merck will pay additionalamounts to the company upon the achievement of specified drug developmentobjectives.  While the agreementcontains customary termination provisions, the company’s management believesthat it is unlikely that the agreement will be terminated within the firsttwelve months.  At Merck’s election, the Initial Development Period may be extended byup to 6 months, in which case Merck will continue to pay Lpath agreed uponamounts for research and development funding.

 

Our auditors, LevitZacks, included a going concern uncertainlyparagraph in their report on our 2007 financial statements because our cashbalance as of December 31, 2007 was not adequate to meet our working capitalneeds for 2008.  We completed an equityfinancing which raised net cash of $6.4 million in August 2008 and entered intoa licensing agreement with Merck (Note 3) which provides for an upfront paymentof $4 million in November 2008 and is expected to provide research anddevelopment funding of at least $500,000 per month from November 2008 toOctober 2009.  We expect our cash on handat September 30, 2008 and the funds that will be provided under the termsof the Merck licensing agreement will be adequate to meet our working capitalneeds through 2009.

 

9

----

Tableof Contents

 

**CriticalAccounting Policies, Estimates and Judgments**

 

Our financial statementsare prepared in accordance with accounting principles that are generallyaccepted in the United States. The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets and liabilities, and disclosure of contingent assets and liabilities atthe date of the financial statements, and the reported amounts of revenues andexpenses during the reporting period. We continually evaluate our estimates andjudgments, the most critical of which are those related to revenue recognition,valuation of long-lived assets, share-based compensation, the timing of theachievement of drug development milestones, and income taxes. We base ourestimates and judgments on historical experience and other factors that webelieve to be reasonable under the circumstances. Materially different resultscan occur as circumstances change and additional information becomes known.

 

Besides the estimatesidentified above that are considered critical, we make many other accountingestimates in preparing our financial statements and related disclosures. Allestimates, whether or not deemed critical, affect reported amounts of assets,liabilities, revenues and expenses, as well as disclosures of contingent assetsand liabilities. These estimates and judgments are also based on historicalexperience and other factors that are believed to be reasonable under thecircumstances. Materially different results can occur as circumstances changeand additional information becomes known, even for estimates and judgments thatare not deemed critical.

 

For further information,refer to the consolidated financial statements and notes thereto included inthe company’s annual report on Form 10-KSB for the year ended December 31,2007.

 

**Recent Accounting Pronouncements**

 

No new accountingpronouncement issued or effective during the third quarter of 2008 had or isexpected to have a material impact on the consolidated financial statements.

 

**Item 4.**    CONTROLS AND PROCEDURES

** **

Wemaintain disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in our Exchange Act reports is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms, and that such information is accumulated and communicatedto our management, including our principal executive officer and principalfinancial officer, as appropriate, to allow timely decisions regarding requireddisclosure.

 

Underthe supervision of our principal executive officer and principal financialofficer, and with the participation of all members of management, we conductedan evaluation of our disclosure controls and procedures, as such term isdefined under Rule 13a- 15(e) promulgated under the ExchangeAct. Based on this evaluation, our principal executive officer and ourprincipal financial officer concluded that our disclosure controls andprocedures were designed and operating effectively as of the end of the periodcovered by this Quarterly Report on Form 10-Q.

 

Ourmanagement, including our principal executive officer and our principalfinancial officer, does not expect that our disclosure controls and proceduresor our internal controls will prevent all errors and all fraud. A controlsystem, no matter how well conceived and operated, can provide only reasonable,not absolute, assurance that the objectives of the control system are met.Further, the design of a control system must reflect the fact that there areresource constraints, and the benefits of controls must be considered relativeto their costs. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within the company have been detected.

 

**Changes in Internal Control Over Financial Reporting**

 

Therehas been no change in our internal control over financial reporting during thequarter ended September 30, 2008 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

10

----

Table ofContents

 

**PART II– OTHER INFORMATON**

 

**Item 1.****          LEGALPROCEEDINGS**

 

None.

 

**Item 2.****          UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

None.

 

**Item 3.****          DEFAULTSUPON SENIOR SECURITIES**

 

None.

 

**Item 4.****          SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

None.

 

**Item 5.****          OTHERINFORMATION**

 

None.

 

11

----

Tableof Contents

 

**Item 6.****           ****EXHIBITS**

 

Thefollowing exhibit index shows those exhibits filed with this report and thoseincorporated herein by reference:

 
| 2.1*   |   | Agreement and Plan of  Reorganization, by and between Neighborhood Connections, Inc.,  Neighborhood Connections Acquisition Corporation, and Lpath  Therapeutics Inc. dated July 15, 2005.                                                                                                         |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                              |
| 2.2    |   | Acquisition Agreement and  Plan of Merger, dated as of March 19, 2004, between Neighborhood  Connections, Inc. and JCG, Inc. (filed as Exhibit 2.1 to the  Current Report on Form 8-K filed on March 22, 2004 and incorporated  herein by reference).                               |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 3.1*   |   | Amendment to Articles of  Incorporation filed December 1, 2005.                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 3.2    |   | Articles of Incorporation  filed on September 18, 2002 (filed as Exhibit 3.1 to Amendment  No. 1 to the Annual Report on Form 10-KSB/A for the year ended  December 31, 2003 (the “2003 Amended 10-KSB”) (filed on March 25,  2004 and incorporated herein by reference). |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 3.3    |   | Amendment  to Articles of Incorporation filed on December 27, 2002 (filed as  Exhibit 3.3 to the Current Report on Form 8-K/A filed on  January 9, 2006 and incorporated herein by reference).                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 3.4    |   | Amended  and Restated By-laws (filed as Exhibit 3.4 to the Quarterly Report on  Form 10-QSB filed on November 13, 2006 and incorporated herein by  reference).                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 3.5    |   | Amended  and Restated Bylaws, as amended on April 3, 2007 (conformed) (filed as  Exhibit 3.5 to the Registration Statement on Form SB-2, SEC File  No. 144199 (the “June 2007 SB-2”) and incorporated herein by  reference).                                                   |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 3.6    |   | Certificate  of Amendment of Articles of Incorporation filed June 8, 2007 (filed as  Exhibit 3.6 to the June 2007 SB-2 and incorporated herein by  reference).                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 4.1*   |   | Form of  Warrant issued to Western States Investment Corporation for lease guaranty.                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 4.2*   |   | Form of  Warrant issued pursuant to the Common Stock and Warrant Purchase Agreement  dated June 30, 2005.                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 4.3*   |   | Form of  Warrant issued to Johnson & Johnson Development Corporation dated  April 3, 2002.                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 4.4*   |   | Form of  Warrant issued to purchasers of Convertible Secured Promissory Notes as  amended by the Omnibus Amendment to Convertible Secured Promissory Notes and  Warrants dated November 30, 2005.                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 4.5*   |   | Form of  Warrant issued pursuant to the Common Stock and Warrant Purchase Agreement  dated November 30, 2005.                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 4.6#   |   | Form of  Warrant issued pursuant to the Common Stock and Warrant Purchase Agreement  dated January 31, 2006.                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 4.7    |   | Form of  Warrant issued pursuant to the Common Stock and Warrant Purchase Agreement  dated March 28, 2006 (filed as Exhibit 4.7 to the registration  statement on Form SB-2 filed on March 30, 2006, SEC File  No. 333-132850, and incorporated herein by reference).               |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 4.8    |   | Form of  Warrant issued pursuant to the Securities Purchase Agreement dated  April 6, 2007 (April 2007 Warrants) (filed as Exhibit 4.7 to  the June 2007 SB-2 and incorporated herein by reference).                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 4.9    |   | Form of  Warrant issued pursuant to the Securities Purchase Agreement dated  June 13, 2007 (June 2007 Warrants) (filed as Exhibit 4.8 to  the June 2007 SB-2 and incorporated herein by reference).                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 4.10   |   | Form of Warrant  issued pursuant to the Securities Purchase Agreement dated August 12,  2008 (August 2008 Warrants) (filed as Exhibit 4.10 to the  September 2008 Form S-1and incorporated herein by reference).                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 10.1*  |   | Lease  Agreement dated August 12, 2005 between Lpath Therapeutics Inc. and  Pointe Camino Windell, LLC.                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 10.2*  |   | Research  Agreement dated January 28, 2004 between Medlyte, Inc. and San  Diego State University, together with Amendments No.1 and No.2.                                                                                                                                                               |

 

12

----

Table of Contents

 
| 10.3*   |   | Assignment  Agreement dated June 9, 2005 between Lpath Therapeutics Inc. and LPL  Technologies, Inc.                                                                                                                                                                                                                                                                                                           |
|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.4    |   | Research  Collaboration Agreement dated August 2, 2005 between Lpath Therapeutics  Inc. and AERES Biomedical Limited (filed as Exhibit 10.4 to the Current  Report on Form 8-K/A filed on January 9, 2006 and incorporated  herein by reference) (portions of this exhibit have been omitted pursuant to  a request for confidential treatment).                                                     |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.7*   |   | Lpath, Inc.  Amended and Restated 2005 Equity Incentive Plan (filed as Appendix A to the  company’s Schedule 14-A Proxy Statement filed on August 28, 2007 and  incorporated herein by reference).+                                                                                                                                                                                                       |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.8#   |   | Assignment  and Assumption Agreement dated December 1, 2005 by and between  Lpath, Inc. and Lpath Therapeutics, Inc.                                                                                                                                                                                                                                                                                      |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.9**  |   | Form of  Employment Agreement between Lpath, Inc. and Scott R. Pancoast dated as  of January 1, 2006.+                                                                                                                                                                                                                                                                                                    |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.10** |   | Form of  Employment Agreement between Lpath, Inc. and Gary Atkinson dated as of  February 6, 2006.+                                                                                                                                                                                                                                                                                                       |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.11** |   | Form of  Consultant Agreement between Lpath, Inc. and William Garland dated as of  January 1, 2006.+                                                                                                                                                                                                                                                                                                      |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.12** |   | Form of  Consultant Agreement between Lpath, Inc. and Roger Sabbadini dated as of  February 1, 2006.+                                                                                                                                                                                                                                                                                                     |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.13   |   | Development  and Manufacturing Services Agreement dated August 16, 2006 between Lpath  Inc. and Laureate Pharma, Inc. (filed as Exhibit 10.13 to the  Quarterly Report on Form 10-QSB for the quarter ended September 30,  2006 filed on November 13, 2006 and incorporated by reference) (portions  of this exhibit have been omitted pursuant to a request for confidential  treatment). |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.14   |   | Securities  Purchase Agreement, dated as of April 6, 2007, by and among  Lpath, Inc. and each investor identified therein (filed as  Exhibit 10.14 to the June 2007 SB-2 and incorporated herein by  reference).                                                                                                                                                                                     |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.15   |   | Registration  Rights Agreement, dated as of April 6, 2007, by and among  Lpath, Inc. and each investor identified therein (filed as  Exhibit 10.15 to the June 2007 SB-2 and incorporated herein by  reference).                                                                                                                                                                                     |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.16## |   | License  Agreement dated August 8, 2006 between Lonza Biologics PLC and  Lpath, Inc. (portions of this exhibit have been omitted pursuant to a  request for confidential treatment).                                                                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.17   |   | Securities  Purchase Agreement, dated as of August 12, 2008, by and among  Lpath, Inc. and each investor identified therein (filed as exhibit 10.17  to the September 2008 Form S-1 and incorporated herein by reference).                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.18   |   | Registration  Rights Agreement, dated as of August 12, 2008, by and among  Lpath, Inc. and each investor identified therein (filed as exhibit 10.18  to the September 2008 Form S-1 and incorporated herein by reference).                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 14.1#   |   | Code  of Ethics of Lpath, Inc.                                                                                                                                                                                                                                                                                                                                                                                      |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 21.1#   |   | List  of Subsidiaries of Registrant.                                                                                                                                                                                                                                                                                                                                                                                     |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 31.1    |   | Section 302  Certification by Chief Executive Officer of Lpath, Inc.                                                                                                                                                                                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 31.2    |   | Section 302  Certification by Chief Financial Officer of Lpath, Inc.                                                                                                                                                                                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 32.1    |   | Section 906  Certification by CEO and CFO of Lpath, Inc.                                                                                                                                                                                                                                                                                                                                                       |

 

----

*Filedas an exhibit to the Current Report on Form 8-K filed with the SEC on December 6,2005 and incorporated herein by reference.

 

#Filed as an exhibit to the Annual Report on Form 10-KSBfor the year ended December 31, 2005 filed with the SEC on March 16,2006 and incorporated herein by reference.

 

**Filedas an exhibit to the Current Report on Form 8-K filed with the SEC on March 29,2006 and incorporated herein by reference.

 

##Filedas an exhibit to the Quarterly Report on Form 10-QSB for the quarterlyperiod ended September 30, 2007 filed with the SEC on November 13,2007 and incorporated herein by reference.

 

+Managementcontract, or compensation plan or arrangement.

 

13

----

Tableof Contents

 

##### ***SIGNATURES***

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.

 
| ** **                    | **Lpath, Inc.**           |
|-------------------------------|--------------------------------|
| ** **                    | ** **                     |
| ** **                    | ** **                     |
| Date:  November 13, 2008 | /s/  Scott R. Pancoast    |
|                          | Scott  R. Pancoast             |
|                          | President  and Chief Executive |
|                          | Officer                        |
|                          | (Principal  executive officer) |
|                          |                           |
|                          |                           |
|                          | /s/  Gary J.G. Atkinson   |
|                          | Gary  J.G. Atkinson,           |
|                          | Vice  President and Chief      |
|                          | Financial  Officer             |
|                          | (Principal  financial and      |
|                          | accounting  officer)           |

 

14

----