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** **

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**x****    QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 30,2008**

 

**OR**

 

**o****     TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition periodfrom              to              **

 

**Commission File Number: 000-50344**

 

**LPATH,INC.**

(Name of smallbusiness issuer in its charter)

 

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

 

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

(Address ofprincipal executive offices, including zip code)

 

**(858)678-0800**

(Registrant’stelephone number, including area code)

 

Indicate by check markwhether the registrant (1) filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes x No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o No x

 

The number of shares ofissuer’s outstanding Class A common stock as of August 14, 2008 was 52,128,819.

 

 

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**LPATH, INC.**

**FORM 10-Q**

 

**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 | 7      |
|             |                                                                                        |   |
| 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                                                                                          |

 

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**PART I.   FINANCIALINFORMATION**

**Item 1.****       ****FINANCIALSTATEMENTS**

** **

**LPATH, INC.**

**Condensed Consolidated Balance Sheets**

 
| ** **                                                                                                                                                                       | ** ** | **June 30,** | ** **    | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|---------------|-----------------------|------------|
| ** **                                                                                                                                                                       | ** ** | **2008**          | ** **    | **2007**              | ** ** |
| ** **                                                                                                                                                                       | ** ** | **(Unaudited)**   | ** **    | **(See note)**        | ** ** |
| **ASSETS**                                                                                                                                                                       | ** ** | ** **        | ** **    | ** **            | ** ** |
| Current Assets:                                                                                                                                                                  |       |              |          |                  |       |
| Cash and cash equivalents                                                                                                                                                        |       | $                 | 1,893,563     |                  | $          | 7,521,071 |   |
| Accounts receivable                                                                                                                                                              |       | 282,278           |          | 10,502                |       |
| Prepaid expenses and other current assets                                                                                                                                        |       | 145,585           |          | 217,581               |       |
| Total current assets                                                                                                                                                             |       | 2,321,426         |          | 7,749,154             |       |
|                                                                                                                                                                             |       |              |          |                  |       |
| Equipment and leasehold improvements, net                                                                                                                                        |       | 353,335           |          | 422,484               |       |
| Patents, net                                                                                                                                                                     |       | 486,033           |          | 442,706               |       |
| Deposits and other assets                                                                                                                                                        |       | 37,491            |          | 37,644                |       |
|                                                                                                                                                                             |       |              |          |                  |       |
| Total assets                                                                                                                                                                     |       | **$**             | **3,198,285** | ** **            | **$**      | **8,651,988** | ** ** |
|                                                                                                                                                                             |       |              |          |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                    | ** ** | ** **        | ** **    | ** **            | ** ** |
| Current Liabilities:                                                                                                                                                             |       |              |          |                  |       |
| Accounts payable                                                                                                                                                                 |       | $                 | 1,297,320     |                  | $          | 989,069 |   |
| Accrued expenses                                                                                                                                                                 |       | 349,244           |          | 572,798               |       |
| Deferred rent, current portion                                                                                                                                                   |       | 48,253            |          | 45,405                |       |
| Leasehold improvement debt, current portion                                                                                                                                      |       | 14,681            |          | 14,107                |       |
| Total current liabilities                                                                                                                                                        |       | 1,709,498         |          | 1,621,379             |       |
|                                                                                                                                                                             |       |              |          |                  |       |
| Deferred rent, long-term portion                                                                                                                                                 |       | 76,044            |          | 101,121               |       |
| Leasehold improvement debt, long-term portion                                                                                                                                    |       | 22,908            |          | 30,395                |       |
| Long-term accrued liabilities                                                                                                                                                    |       | 562,058           |          | 563,865               |       |
| Total liabilities                                                                                                                                                                |       | 2,370,508         |          | 2,316,760             |       |
|                                                                                                                                                                             |       |              |          |                  |       |
| Stockholders’ Equity:                                                                                                                                                       |       |              |          |                  |       |
| Common stock - $.001 par value; 100,000,000 shares authorized;  45,348,922 and 45,046,495 issued and outstanding at June 30, 2008 and  December 31, 2007, respectively |       | 45,349            |          | 45,046                |       |
| Additional paid-in capital                                                                                                                                                       |       | 36,461,408        |          | 34,457,999            |       |
| Accumulated deficit                                                                                                                                                              |       | (35,678,980       | )             | (28,167,817           | )          |
| Total stockholders’ equity                                                                                                                                                  |       | 827,777           |          | 6,335,228             |       |
|                                                                                                                                                                             |       |              |          |                  |       |
| Total liabilities and stockholders’ equity                                                                                                                                  |       | **$**             | **3,198,285** | ** **            | **$**      | **8,651,988** | ** ** |

 

Note:  The balance sheet at December 31, 2007 has beenderived from the audited consolidated financial statements at that date.  See accompanying notes to the condensedconsolidated financial statements.

 

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**LPATH, INC.**

**Condensed Consolidated Statements of Operations**

**(Unaudited)**

 
| ** **                                                                    | ** ** | **Six Months Ended** | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------|------------|------------------------|------------|
| ** **                                                                    | ** ** | **June 30,**    | ** ** | **June 30,**      | ** ** |
| ** **                                                                    | ** ** | **2008**             | ** ** | **2007**               | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                          |       |                 |       |                   |       |   |   |   |   |
| Grant and royalty revenue                                                     |       | $                    | 474,714    |                   | $          | 349,920 |   | $ | 461,588 |   | $ | 152,939 |   |
|                                                                          |       |                 |       |                   |       |   |   |   |   |
| Expenses:                                                                     |       |                 |       |                   |       |   |   |   |   |
| Research and development                                                      |       | 5,643,389            |       | 5,006,510              |       | 2,038,952 |   | 2,827,863 |   |
| General and administrative                                                    |       | 2,418,411            |       | 1,700,430              |       | 874,984 |   | 966,680 |   |
| Total expenses                                                                |       | 8,061,800            |       | 6,706,940              |       | 2,913,936 |   | 3,794,543 |   |
|                                                                          |       |                 |       |                   |       |   |   |   |   |
| Loss from operations                                                          |       | (7,587,086           | )          | (6,357,020             | )          | (2,452,348 | ) | (3,641,604 | ) |
|                                                                          |       |                 |       |                   |       |   |   |   |   |
| Other income (expense):                                                       |       |                 |       |                   |       |   |   |   |   |
| Interest income                                                               |       | 77,646               |       | 133,776                |       | 20,291 |   | 124,761 |   |
| Interest expense                                                              |       | (1,723               | )          | (16,468                | )          | (925 | ) | (271 | ) |
| Total other income (expense)                                                  |       | 75,923               |       | 117,308                |       | 19,366 |   | 124,490 |   |
|                                                                          |       |                 |       |                   |       |   |   |   |   |
| Net loss                                                                      |       | $                    | (7,511,163 | )                      | $          | (6,239,712 | ) | $ | (2,432,982 | ) | $ | (3,517,114 | ) |
|                                                                          |       |                 |       |                   |       |   |   |   |   |
| Basic and diluted net loss per share                                          |       | $                    | (0.17      | )                      | $          | (0.19 | ) | $ | (0.05 | ) | $ | (0.09 | ) |
|                                                                          |       |                 |       |                   |       |   |   |   |   |
| Weighted average number of common shares outstanding used in the  calculation |       | 45,222,811           |       | 32,471,547             |       | 45,278,501 |   | 40,154,651 |   |

 

See accompanying notes to the condensed consolidated financial statements.

 

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**LPATH, INC.**

**Condensed Consolidated Statements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                   | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                   | ** ** | **June 30,**    | ** ** |
| ** **                                                                   | ** ** | **2008**             | ** ** | **2007** | ** ** |
| Cash flows from operating activities:                                        |       |                 |       |   |   |
| Net loss                                                                     |       | $                    | (7,511,163 | ) | $ | (6,239,712 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities: |       |                 |       |   |   |
| Stock-based compensation expense                                             |       | 1,854,473            |       | 933,906 |   |
| Depreciation and amortization                                                |       | 77,736               |       | 58,352 |   |
| Deferred rent expense                                                        |       | (22,229              | )          | 24,430 |   |
| Changes in operating assets and liabilities:                                 |       |                 |       |   |   |
| Accounts receivable                                                          |       | (271,776             | )          | (34,578 | ) |
| Prepaid expenses and other current assets                                    |       | 71,996               |       | 67,725 |   |
| Accounts payable and accrued expenses                                        |       | 67,113               |       | 1,057,607 |   |
| Deposits and other assets                                                    |       | 2,348                |       | — |   |
| Net cash used in operating activities                                        |       | (5,731,502           | )          | (4,132,270 | ) |
|                                                                         |       |                 |       |   |   |
| Cash flows from investing activities:                                        |       |                 |       |   |   |
| Equipment expenditures                                                       |       | (3,112               | )          | (57,376 | ) |
| Patent expenditures                                                          |       | (57,199              | )          | (48,579 | ) |
| Net cash used in investing activities                                        |       | (60,311              | )          | (105,955 | ) |
|                                                                         |       |                 |       |   |   |
| Cash flows from financing activities:                                        |       |                 |       |   |   |
| Proceeds from sale of common stock and warrants, net                         |       | —               |       | 15,841,690 |   |
| Proceeds from options & warrants exercised                          |       | 171,218              |       | 1,441,586 |   |
| 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                                     |       | (6,913               | )          | — |   |
| Net cash provided by financing activities                                    |       | 164,305              |       | 17,275,113 |   |
|                                                                         |       |                 |       |   |   |
| Net increase/(decrease) in cash                                              |       | (5,627,508           | )          | 13,036,888 |   |
|                                                                         |       |                 |       |   |   |
| Cash and cash equivalents at beginning of period                             |       | 7,521,071            |       | 1,361,214 |   |
| Cash and cash equivalents at end of period                                   |       | $                    | 1,893,563  |   | $ | 14,398,102 |   |
|                                                                         |       |                 |       |   |   |
| **Supplemental Schedule of Non-cash Investing and  Financing Activities:**   | ** ** | ** **           | ** ** | ** ** | ** ** |
| ** **                                                                   | ** ** | ** **           | ** ** | ** ** | ** ** |
| Incurred patent expenditures contained in accrued expenses                   |       | $                    | 17,000     |   | $ | 25,038 |   |
| Common stock issued in payment of loan fees                                  |       | $                    | —     |   | $ | 7,837 |   |

 

See accompanying notes to the condensed consolidated financialstatements.

 

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**LPATH, INC.**

**Notes toCondensed Consolidated Financial Statements**

**June 30,2008**

 

**Note 1 – BASIS FOR PRESENTATION**

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with generally accepted accounting principles forinterim financial information and with the instructions to Form 10-Q and Article 10of Regulation S-X. Accordingly, they do not include all information and notesrequired by accounting principles generally accepted in the United States forcomplete financial statements.

 

Inthe opinion of management, all adjustments considered necessary for a fairpresentation have been included. Except as otherwise disclosed, all suchadjustments are of a normal recurring nature. Operating results for the six andthree month periods ended June 30, 2008 are not necessarily indicative ofthe results that may be expected for the year ending December 31, 2008.For further information, refer to the consolidated financial statements andfootnotes thereto included in the company’s annual report on Form 10-KSBfor the year ended December 31, 2007.

 

Thepreparation of the financial statements in conformity with U. S. generallyaccepted accounting principles requires management to make estimates andassumptions 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 —SUBSEQUENT EVENT – RECENT FINANCING**

 

On August 12, 2008,Lpath received gross proceeds of $6,400,000 in a private placement of shares ofcommon stock and warrants.  In thistransaction, Lpath issued 6,775,210 shares of Class A common stock at aprice of $0.95 per share.  Each investoralso received warrants to purchase the number of shares of Class A commonstock equal to 25% of the number of common shares purchased in thisfinancing.  This resulted in the issuanceof warrants to purchase a total of 1,693,802 shares of Class A commonstock in this transaction.  The warrantsare exercisable at a price of $1.25 per share, and expire on August 8,2013.

 

**Note 3 –GOING CONCERN**

 

Theaccompanying condensed consolidated financial statements have been preparedassuming that the company will continue as a going concern. In the six monthsended June 30, 2008, Lpath incurred a net loss and utilized net cash inoperating activities of $7,511,163 and $5,731,502, respectively.  In the year ended December 31, 2007 thecompany incurred a net loss and utilized net cash in operating activities of$15,091,760 and $10,918,841, respectively. These conditions raise substantialdoubt about the company’s ability to continue as a going concern. Management’splans with regard to these matters are discussed below. The accompanying condensedconsolidated financial statements do not include any adjustments that mightresult from the outcome of this uncertainty.

 

Duringthe ensuing year, the company expects to continue to incur cash losses fromoperations.  While the company had cash totaling$1,893,563 as of June 30, 2008, and raised gross proceeds of approximately$6.4 million in August 2008 (see Note 2), the cost of its ongoing drugdiscovery and development efforts, including general and administrativeexpenses, are expected to consume a total of more than $20,000,000 in the nextyear.  Additional capital will berequired to continue to fund the company’s research and development projects in2009 and beyond.  The company plans tobridge such cash shortfalls by a variety of actions, including to

 

1.     Explore cash generatingopportunities from strategic alliances, including licensing portions of ourtechnology or entering into corporate partnerships or collaborations.  In such transactions, Lpath could transfer certainrights to one or more of its drug discovery or development programs, or tospecific indications within those programs and receive infusions of cash in theshort-term, and potentially in the long-term as well.

 

2.     Pursue additional fundraising activities from both existing and potential new investors.

 

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

 

Thecompany is in the process of acquiring additional capital to fund operationsfor 2009 and beyond; however, no assurance can be given that the company willbe able to obtain additional financing when and as needed in the future.

 

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# **Note 4 – SHARE-BASEDPAYMENTS**

# ** **

The company recognized share-based compensationexpense in accordance with SFAS No. 123R, “Share-Based Payment,” asfollows:

 
| ** **                             | ** ** | **Six Months Ended** | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| ** **                             | ** ** | **June 30,**              | ** ** | **June 30,**                | ** ** |
| ** **                             | ** ** | **2008**                       | ** ** | **2007**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                   |       |                           |       |                             |       |   |   |   |   |
| Research and development               |       | $                              | 617,889    |                             | $          | 643,172 |   | $ | 12,457 |   | $ | 204,881 |   |
| General and administrative             |       | 1,236,584                      |       | 290,734                          |       | 305,860 |   | 104,316 |   |
| Total share-based compensation expense |       | $                              | 1,854,473  |                             | $          | 933,906 |   | $ | 318,317 |   | $ | 309,197 |   |

 

Asof June 30, 2008 there was a total of $3.1 million unrecognizedcompensation expense related to unvested stock-based compensation under theplan.  That expense is expected to berecognized 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 June 30, 2008and 2007.

 

# **Note 5**– RECENT ACCOUNTING PRONOUNCEMENTS

# ** **

InDecember 2007, the FinancialAccounting Standards Boards (FASB) issued SFAS No. 160, *Noncontrolling Interests in Consolidated FinancialStatements — an amendment of ARB No. 51*(SFAS 160). SFAS 160requires an entity to clearly identify and present ownership interests insubsidiaries held byparties other than the entity in the consolidated financial statements withinthe equity section but separate from the entity’s equity. It also requires theamount of consolidated net income attributable to the parent and to thenoncontrolling interest be clearly identified and presented on the face of theconsolidated statement of income; changes in ownership interest be accountedfor similarly, as equity transactions; and when a subsidiary is deconsolidated,any retained noncontrolling equity investment in the former subsidiary and thegain or loss on the deconsolidation of the subsidiary be measured at fairvalue. This statement is effective for financial statements issued for fiscalyears beginning after Dec. 15, 2008. The adoption of SFAS 160 is notexpected to have a material effect on the company’s consolidated financialstatements.

 

In March 2008, theFASB issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities*(SFAS 161). SFAS161 amends and expands the disclosure requirements of SFAS 133, *Accounting for Derivative Instruments and HedgingActivities*(SFAS 133). It requires qualitative disclosures aboutobjectives and strategies for using derivatives, quantitative disclosures aboutfair value amounts of gains and losses on derivative instruments, and disclosuresabout credit-risk-related contingent features in derivative agreements. Thisstatement is effective for financial statements issued for fiscal periodsbeginning after Nov. 15, 2008. The adoption of SFAS 161 is not expected tohave a material effect on the company’s consolidated financial statements.

 

In May 2008,the FASB issued SFAS No. 162, *TheHierarchy of Generally Accepted Accounting Principles*(SFAS 162).SFAS 162 identifies the sources of accounting principles and the framework forselecting principles to be used in the preparation and presentation offinancial statements in accordance with generally accepted accountingprinciples. This statement will be effective 60 days after the Securitiesand Exchange Commission approves the Public Company Accounting Oversight Board’samendments to AU Section 411, *TheMeaning of Present Fairly in Conformity With Generally Accepted AccountingPrinciples*. The company does not anticipate the adoption of SFAS 162will have a material effect on the consolidated financial statements.

 

**Item 2.****   ****MANAGEMENT’SDISCUSSION AND 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.”

 

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**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) will soon enter 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 June 30,2008, Lpath had an accumulated deficit of approximately$35.7 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 Six Months Ended June 30,2008 and June 30, 2007***

 

*Grant and Royalty Revenue.* Grant and royalty revenuefor the six-month period ended June 30, 2008 increased to $475,000 from$350,000 for the six-month period ended June 30, 2007.  The increase of $125,000 reflects thecommencement of work on a grant in the first half of 2008.

 

*Research and Development Expenses.*  Research and development expenses increasedfrom $5,007,000 for the first six months of 2007 to $5,643,000 for the firstsix months of 2008.  The increase of$637,000 reflects the costs of pre-clinical research and development activitiesundertaken principally in the first quarter of 2008.  Outside services expense increased byapproximately $463,000 primarily due to the costs of manufacturing drugsupplies to be used in clinical trials. The use of consultants and other contracted services to augment the capabilitiesof our research and development team also contributed to the increase inexpenditures for outside services by approximately $79,000.  Employee compensation and benefits expenseincreased by approximately $128,000, commensurate with the increase in researchand development staffing.  Stock-basedcompensation charges decreased by $25,000 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 ofrestricted stock units upon the achievement of specified clinical trialmilestones during the first half of 2008.

 

*General and Administrative Expenses.*  General and administrative expenses increasedfrom $1,700,000 for the six-month period ended June 30, 2007 to $2,418,000for the six-month period ended June 30, 2008, an increase of$718,000.  Stock-based compensationcharges increased by $946,000 due primarily to the vesting of restricted stockunits tied to the achievement of specified clinical trial milestones in thefirst half of 2008.  Legal fees decreasedby approximately $144,000 because substantial legal expenses were incurred inthe first six months of 2007 in negotiation of corporate collaborationarrangements.  Employee compensation andbenefits decreased by approximately $79,000, due to bonuses recognized in thesecond quarter of 2007; a reduction partially offset by increases in basecompensation in 2008.

 

*Interest Income*.  Interest income was $78,000 for the sixmonths ended June 30, 2008, compared with $134,000 for the six monthsended June 30, 2007.  The $56,000decrease was principally a result of higher levels of invested cash in 2007.

 

***Comparison of the Three Months EndedJune 30, 2008 and June 30, 2007***

 

*Grant and Royalty Revenue.*  Grant and royalty revenue for the three-monthperiod ended June 30, 2008 increased to $462,000 from $153,000 forthe three-month period ended June 30, 2007.  The increase of $309,000 reflects thecommencement of work on a grant in the second quarter of 2008.

 

*Research and Development Expenses.*  Research and development expenses decreasedfrom $2,828,000 for the second quarter of 2007 to $2,039,000 for the secondquarter of 2008.  The decrease of$789,000 reflects the decrease in discretionary spending to conserve cash untila pending financing could be completed. As a result, outside services expense decreased by approximately$585,000.  Stock-based compensationcharges decreased by $192,000 due primarily to the decrease in the 

 

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marketvalue of Lpath’s common stock, which is a key factor in the calculation ofstock-based compensation expense for outside consultants.

 

*General and Administrative Expenses.*  General and administrative expenses decreasedfrom $967,000 for the three-month period ended June 30, 2007 to $875,000for the three-month period ended June 30, 2008, a decrease of$92,000.  Payroll expenses decreased by$137,000 compared to the second quarter of 2007 due to bonuses recognized inthe second quarter of 2007, which are partially offset by increases in basecompensation in 2008.  Stock-basedcompensation charges increased by $202,000 due to the vesting of restrictedstock units issued to employees.   Legal,consulting, and investor relations expenses decreased in the aggregate byapproximately $117,000 in 2008 in conjunction with the company’s efforts toreduce discretionary spending.

 

*Interest Income*.  Interest income was $20,000 for the quarterended June 30, 2008, compared with $125,000 for the quarter ended June 30,2007.  The $105,000 decrease wasprincipally a result of lower levels of invested cash as compared to the prioryear.

 

**Liquidity and Capital Resources**

 

**Since Lpath’sinception, its operations have been financed primarily through the privateplacement of equity and debt securities. Through June 30, 2008 Lpath had received net proceeds ofapproximately $30,000,000 from the sale of equity securities and from theissuance of convertible promissory notes. As of June 30, 2008, Lpath had cash and cash equivalents totaling$1,894,000.**

** **

During the six-monthperiod ended June 30, 2008 we used net cash of $5,732,000 for operatingactivities compared to $4,132,000 in the first half of 2007.  The increase in net cash used in operatingactivities was a result of the costs of preparing for and beginning Phase 1clinical trials for our two lead drug candidates and manufacturing drugsupplies to be used in clinical trials.

 

Net cash used ininvesting activities during the first half of 2008 amounted to $60,000 comparedto $106,000 in the first half of 2007. Of the amount used for investing activities in the first half of 2008,$57,000 was invested in the prosecution of additional patents compared to$49,000 in 2007.  In the comparableperiod of 2007, $57,000 was used to purchase new equipment compared to $3,000in 2008.

 

Netcash provided from financing activities during the six month period ended June 30,2008 totaled approximately $164,000 compared to $17,275,000 in the first sixmonths of 2007.  During the first half of2007 $1,442,000 was received from stock option and warrant exercises comparedto $171,000 in 2008.  In the first halfof 2007, the company realized proceeds from the sale of common stock andwarrants totaling $15,842,000 and $100,000 was borrowed under the terms of thepromissory notes payable to related parties.

 

Theaccompanying condensed consolidated financial statements have been preparedassuming that the company will continue as a going concern. In the six monthsended June 30, 2008, Lpath incurred a net loss and utilized net cash inoperating activities of $7,511,163 and $5,731,502, respectively.  In the year ended December 31, 2007 thecompany incurred a net loss and utilized net cash in operating activities of$15,091,760 and $10,918,841, respectively. These conditions raise substantialdoubt about the company’s ability to continue as a going concern. Management’splans with regard to these matters are discussed below. The accompanyingcondensed consolidated financial statements do not include any adjustments thatmight result from the outcome of this uncertainty.

 

Duringthe ensuing year, the company expects to continue to incur cash losses fromoperations.  While the company had cashtotaling $1,893,563 as of June 30, 2008, and raised gross proceeds ofapproximately $6.4 million in August 2008 (see Note 2), the cost of itsongoing drug discovery and development efforts, including general andadministrative expenses, are expected to consume a total of more than$20,000,000 in the next year.  Additionalcapital will be required to continue to fund the company’s research anddevelopment projects in 2009 and beyond. The company plans to bridge such cash shortfalls by a variety ofactions, including to

 

1.     Explore cash generatingopportunities from strategic alliances, including licensing portions of ourtechnology or entering into corporate partnerships or collaborations.  In such transactions, Lpath could transfercertain rights to one or more of its drug discovery or development programs, orto specific indications within those programs and receive infusions of cash inthe short-term, and potentially in the long-term as well.

 

2.     Pursue additional fundraising activities from both existing and potential new investors.

 

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

 

9

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Thecompany is in the process of acquiring additional capital to fund operationsfor 2009 and beyond; however, no assurance can be given that the company willbe able to obtain additional financing when and as needed in the future.

 

**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**

 

Refer to Note 5 to the financial statements for adiscussion of the impact of recent accounting pronouncements.

 

**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 June 30, 2008 that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

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**PART II – OTHER INFORMATON**

 

**Item 1.****         ****LEGAL PROCEEDINGS**

 

None.

 

**Item 2.****         ****UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

None.

 

**Item 3.****         ****DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**Item 4.****         ****SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS**

 

On June 5, 2008 weheld our Annual Meeting of the Stockholders in San Diego, California.    Matters voted upon were (1) electionof directors and (2) ratification of the Board’s selection of LevitZacksas the Company’s independent auditors for the fiscal year ending December 31,2008.

 

The number of votes castfor, against or withheld, with respect to each matter are set out below.

 

1.     Election of Directors

 
| ** **          | ** ** | ** ** | ** ** | ** **  | ** ** | ** **   | ** ** | **Broker**    | ** ** |
|---------------------|------------|------------|------------|-------------|------------|--------------|------------|---------------|------------|
| **Director**        | ** ** | **For**    | ** ** | **Against** | ** ** | **Withheld** | ** ** | **Non-votes** | ** ** |
| Scott R. Pancoast   |       | 36,531,853 |       | —      |       | 12,300       |       | 3,995,564     |       |
| Roger A. Sabbadini  |       | 36,532,053 |       | —      |       | 12,100       |       | 3,995,564     |       |
| Jeffrey Ferrell     |       | 36,536,553 |       | —      |       | 7,600        |       | 3,995,564     |       |
| Charles A. Mathews  |       | 36,536,553 |       | —      |       | 7,600        |       | 3,995,564     |       |
| Donald R. Swortwood |       | 36,531,643 |       | —      |       | 12,510       |       | 3,995,564     |       |

 

2.     Ratification of IndependentAuditors

 
| ** ** | ** ** | ** **  | ** ** | ** **   | ** ** | ** **  | ** ** | **Broker**    | ** ** |
|------------|------------|-------------|------------|--------------|------------|-------------|------------|---------------|------------|
| **For**    | ** ** | **Against** | ** ** | **Withheld** | ** ** | **Abstain** | ** ** | **Non-votes** | ** ** |
| 40,128,153 |       | —      |       | 5,000        |       | 7,000       |       | 399,656       |       |

 

**Item 5.****         ****OTHER INFORMATION**

 

None.

 

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**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).                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                              |
| 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.                                                                                                                                                               |

 

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| 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).                                                                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 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 anexhibit to the Annual Report on Form 10-KSB for the year ended December 31,2005 filed with the SEC on March 16, 2006 and incorporated herein byreference.

 

**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.

 

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##### ***Tableof Contents***

 

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

##### *** ***

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the dates indicated.

 

 
|                        | **Lpath, Inc.**           |
|-----------------------------|--------------------------------|
|                        | ** **                     |
|                        |                           |
| Date:  August 14, 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

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