UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

x

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For Quarterly Period ended September 30, 2018

 

¨

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from                      to                      .

 

Commission File Number: 001-36357

 

 

LIPOCINE INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware	99-0370688
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)
675 Arapeen Drive, Suite 202, Salt Lake City, Utah	84108
(Address of Principal Executive Offices)	(Zip Code)

 

801-994-7383

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x   No  ¨

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  x    No  ¨

 

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

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

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

 

Outstanding Shares

 

As of November 5, 2018, the registrant had 21,464,030 shares of common stock outstanding.

 

 

  

TABLE OF CONTENTS

 

		Page
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risks	30
Item 4.	Controls and Procedures	30
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults Upon Senior Securities	36
Item 4.	Mine Safety Disclosures	36
Item 5.	Other Information	36
Item 6.	Exhibits	37

 

  

PART I—FINANCIAL INFORMATION

 

ITEM  1.

FINANCIAL STATEMENTS

 

LIPOCINE INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

 

		September 30,				December 31,
		2018				2017
Assets
Current assets:
Cash and cash equivalents		$	4,802,806			$	3,210,749
Restricted cash			5,000,000				-
Marketable investment securities			12,077,016				18,257,321
Accrued interest income			29,892				23,067
Litigation insurance recovery			-				3,319,927
Prepaid and other current assets			728,482				408,227
Total current assets			22,638,196				25,219,291
Property and equipment, net of accumulated depreciation of $1,120,256 and $1,121,080, respectively			23,442				75,070
Other assets			23,753				30,753
Total assets		$	22,685,391			$	25,325,114
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	239,922			$	598,070
Litigation settlement payable			-				4,250,000
Accrued expenses			488,632				1,497,056
Debt - current portion			2,341,054				-
Total current liabilities			3,069,608				6,345,126
Debt - non-current portion			7,853,844				-
Total liabilities			10,923,452				6,345,126
Commitments and contingencies (notes 5 and 10)
Stockholders' equity:
Preferred stock, par value $0.0001 per share, 10,000,000 shares authorized; zero issued and outstanding			-				-
Common stock, par value $0.0001 per share, 100,000,000 shares authorized; 21,340,017 and 21,270,249 issued and 21,334,307 and 21,264,539 outstanding			2,134				2,127
Additional paid-in capital			146,638,736				145,423,012
Treasury stock at cost, 5,710 shares			(40,712	)			(40,712	)
Accumulated other comprehensive loss			(3,853	)			(4,616	)
Accumulated deficit			(134,834,366	)			(126,399,823	)
Total stockholders' equity			11,761,939				18,979,988
Total liabilities and stockholders' equity		$	22,685,391			$	25,325,114

 

See accompanying notes to unaudited condensed consolidated financial statements

 

  

LIPOCINE INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2018				2017				2018				2017
Revenues:
License revenue		$	-			$	-			$	428,031			$	-
Total revenues			-				-				428,031				-
Operating expenses:
Research and development			1,422,919				2,046,533				4,282,823				9,237,169
General and administrative			930,137				2,719,526				4,299,659				6,578,423
Total operating expenses			2,353,056				4,766,059				8,582,482				15,815,592
Operating loss			(2,353,056	)			(4,766,059	)			(8,154,451	)			(15,815,592	)
Other income (expense):
Interest and investment income			112,561				65,811				343,145				165,018
Interest expense			(218,577	)			-				(622,537	)			-
Total other income (expense), net			(106,016	)			65,811				(279,392	)			165,018
Loss before income tax expense			(2,459,072	)			(4,700,248	)			(8,433,843	)			(15,650,574	)
Income tax expense			-				-				(700	)			(700	)
Net loss		$	(2,459,072	)		$	(4,700,248	)		$	(8,434,543	)		$	(15,651,274	)
Basic loss per share attributable to common stock		$	(0.12	)		$	(0.22	)		$	(0.40	)		$	(0.80	)
Weighted average common shares outstanding, basic			21,266,639				20,890,580				21,265,247				19,666,131
Diluted loss per share attributable to common stock		$	(0.12	)		$	(0.22	)		$	(0.40	)		$	(0.80	)
Weighted average common shares outstanding, diluted			21,266,639				20,890,580				21,265,247				19,666,131
Comprehensive loss:
Net loss		$	(2,459,072	)		$	(4,700,248	)		$	(8,434,543	)		$	(15,651,274	)
Net unrealized gain on available-for-sale securities			7,756				79				763				7,960
Comprehensive loss		$	(2,451,316	)		$	(4,700,169	)		$	(8,433,780	)		$	(15,643,314	)

 

See accompanying notes to unaudited condensed consolidated financial statements

 

  

LIPOCINE INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

		Nine Months Ended September 30,
		2018				2017
Cash flows from operating activities:
Net loss		$	(8,434,543	)		$	(15,651,274	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation expense			14,150				21,278
Loss on disposition of property and equipment			37,478				-
Stock-based compensation expense			1,124,970				2,217,709
Non-cash interest expense			194,898				-
Amortization of discount on marketable investment securities			(159,226	)			(56,530	)
Changes in operating assets and liabilities:
Accrued interest income			(6,825	)			29,687
Prepaid and other current assets			(320,255	)			(123,898	)
Accounts payable			(358,148	)			557,904
Litigation insurance recovery			3,319,927				-
Litigation settlement payable			(4,250,000	)			-
Accrued expenses			(1,008,424	)			600,061
Cash used in operating activities			(9,845,998	)			(12,405,063	)
Cash flows from investing activities:
Refund of rental deposit			7,000				-
Purchases of marketable investment securities			(20,698,650	)			(24,746,690	)
Maturities of marketable investment securities			27,038,944				29,682,000
Cash provided by investing activities			6,347,294				4,935,310
Cash flows from financing activities:
Proceeds from debt			10,000,000				-
Proceeds from stock option exercises			-				534,977
Net proceeds from common stock offering			90,761				10,644,883
Cash provided by financing activities			10,090,761				11,179,860
Net increase in cash, cash equivalents, and restricted cash			6,592,057				3,710,107
Cash, cash equivalents, and restricted cash at beginning of period			3,210,749				5,560,716
Cash, cash equivalents, and restricted cash at end of period		$	9,802,806			$	9,270,823
Supplemental disclosure of cash flow information:
Interest paid		$	427,639			$	-
Income taxes paid			700				700
Supplemental disclosure of non-cash investing and financing activity:
Net unrealized gain on available-for-sale securities		$	763			$	7,960
Accrued final payment charge on debt			194,898				-

 

See accompanying notes to unaudited condensed consolidated financial statements

 

  

LIPOCINE INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

(1)

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements included herein have been prepared by Lipocine Inc. (“Lipocine” or the “Company”) in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”). The unaudited condensed consolidated financial statements are comprised of the financial statements of Lipocine and its subsidiaries collectively referred to as the Company. In management's opinion, the interim financial data presented includes all adjustments (consisting solely of normal recurring items) necessary for fair presentation. All intercompany accounts and transactions have been eliminated. Certain information required by U.S. generally accepted accounting principles has been condensed or omitted in accordance with rules and regulations of the SEC. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for any future period or for the year ended December 31, 2018.

 

These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and the notes thereto for the year ended December 31, 2017.

 

The preparation of the unaudited condensed consolidated financial statements requires management to make estimates and assumptions relating to reporting of the assets and liabilities and the disclosure of contingent assets and liabilities to prepare these condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period in conformity with U.S. generally accepted accounting principles. Actual results could differ from these estimates.

 

(2)

Earnings (Loss) per Share

 

Basic earnings (loss) per share is calculated by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is based on the weighted average number of common shares outstanding plus, where applicable, the additional potential common shares that would have been outstanding related to dilutive options and unvested restricted stock units to the extent such shares are dilutive.

 

  

The following table sets forth the computation of basic and diluted earnings (loss) per share of common stock for the three and nine months ended September 30, 2018 and 2017:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2018				2017				2018				2017
Basic loss per share attributable to common stock:
Numerator
Net loss		$	(2,459,072	)		$	(4,700,248	)		$	(8,434,543	)		$	(15,651,274	)
Denominator
Weighted avg. common shares outstanding			21,266,639				20,890,580				21,265,247				19,666,131
Basic loss per share attributable to  common stock		$	(0.12	)		$	(0.22	)		$	(0.40	)		$	(0.80	)
Diluted loss per share attributable to common stock:
Numerator
Net loss		$	(2,459,072	)		$	(4,700,248	)		$	(8,434,543	)		$	(15,651,274	)
Denominator
Weighted avg. common shares outstanding			21,266,639				20,890,580				21,265,247				19,666,131
Diluted loss per share attributable to common stock		$	(0.12	)		$	(0.22	)		$	(0.40	)		$	(0.80	)

 

The computation of diluted loss per share for the three and nine months ended September 30, 2018 and 2017 does not include the following stock options and unvested restricted stock units to purchase shares in the computation of diluted loss per share because these instruments were antidilutive:

 

		September 30,
		2018				2017
Stock options			2,208,228				2,067,967
Unvested restricted stock units			164,623				272,000

 

(3)

Marketable Investment Securities

 

The Company has classified its marketable investment securities as available-for-sale securities, all of which are debt securities. Debt securities are carried at fair value with unrealized holding gains and losses, net of the related tax effect, included in accumulated other comprehensive loss in stockholders’ equity until realized. Gains and losses on investment security transactions are reported on the specific-identification method. Dividend income is recognized on the ex-dividend date and interest income is recognized on an accrual basis. The amortized cost, gross unrealized holding gains, gross unrealized holding losses, and fair value for available-for-sale securities by major security type and class of security at September 30, 2018 and December 31, 2017 were as follows:

 

  

September 30, 2018		Amortized  Cost				Gross unrealized holding gains				Gross unrealized holding losses				Aggregate fair value
Government bonds and notes		$	1,994,757			$	-			$	(447	)		$	1,994,310
Corporate bonds, notes and commercial paper			10,086,112				-				(3,406	)			10,082,706
		$	12,080,869			$	-			$	(3,853	)		$	12,077,016

 

December 31, 2017		Amortized Cost				Gross unrealized holding gains				Gross unrealized holding losses				Aggregate fair value
Government bonds and notes		$	4,744,566			$	-			$	(2,876	)		$	4,741,690
Corporate bonds, notes and commercial paper			13,517,371				-				(1,740	)			13,515,631
		$	18,261,937			$	-			$	(4,616	)		$	18,257,321

 

Maturities of debt securities classified as available-for-sale securities at September 30, 2018 are as follows:

 

September 30, 2018		Amortized Cost				Aggregate fair value
Due within one year		$	12,080,869			$	12,077,016

 

There were no sales of marketable investment securities during the three and nine months ended September 30, 2018 and 2017 and therefore no realized gains or losses. Additionally, $10.4 million and $8.4 million of marketable investment securities matured during the three months ended September 30, 2018 and 2017, respectively. Also, $27.0 million and $29.7 million of marketable investment securities matured during the nine months ended September 30, 2018 and 2017, respectively. The Company determined there were no other-than-temporary impairments for the three and nine months ended September 30, 2018 and 2017.

 

(4)

Fair Value

 

The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

  

•

Level 1 Inputs: Quoted prices for identical instruments in active markets.

 

  

•

Level 2 Inputs: Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuation in which all significant inputs and significant value drivers are observable in active markets.

 

•

Level 3 Inputs: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

 

All of the Company’s financial instruments are valued using quoted prices in active markets or based on other observable inputs. For accrued interest income, prepaid and other current assets, accounts payable, and accrued expenses, the carrying amounts approximate fair value because of the short maturity of these instruments. The following table presents the placement in the fair value hierarchy of assets and liabilities that are measured at fair value on a recurring basis at September 30, 2018 and December 31, 2017:

 

		September 30,				Fair value measurements at reporting date using
		2018				Level 1 inputs				Level 2 inputs				Level 3 inputs
Assets:
Cash equivalents - money market funds, corporate bonds, treasury bills, and treasury bonds		$	4,345,681			$	3,845,786			$	499,895			$	-
Government bonds and notes			1,994,310				1,994,310				-				-
Corporate bonds, notes and commercial paper			10,082,706				-				10,082,706				-
		$	16,422,697			$	5,840,096			$	10,582,601			$	-

 

		December 31,				Fair value measurements at reporting date using
		2017				Level 1 inputs				Level 2 inputs				Level 3 inputs
Assets:
Cash equivalents - money market funds		$	2,171,814			$	2,171,814			$	-			$	-
Government bonds and notes			4,741,690				4,741,690				-				-
Corporate bonds, notes and commercial paper			13,515,631				-				13,515,631				-
		$	20,429,135			$	6,913,504			$	13,515,631			$	-

 

The following methods and assumptions were used to determine the fair value of each class of assets and liabilities recorded at fair value in the balance sheets:

 

Cash equivalents: Cash equivalents primarily consist of highly-rated money market funds, commercial paper and treasury bills with original maturities to the Company of three months or less and are purchased daily at par value with specified yield rates. Cash equivalents related to money market funds and treasury bills are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices or broker or dealer quotations for similar assets. Cash equivalents related to commercial paper are classified within Level 2 of the fair value hierarchy because they are valued using broker/dealer quotes, bids and offers, benchmark yields and credit spreads and other observable inputs.

 

Government bonds and notes: The Company uses a third-party pricing service to value these investments. United States Treasury bonds and notes are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets for identical assets and reportable trades. Other United States government agency bonds are classified within Level 2 of the fair value hierarchy because they are valued using broker/dealer quotes, bids and offers, benchmark yields and credit spreads and other observable inputs.

 

 

 

Corporate bonds, notes, and commercial paper: The Company uses a third-party pricing service to value these investments. The pricing service utilizes broker/dealer quotes, bids and offers, benchmark yields and credit spreads and other observable inputs.

 

The Company’s accounting policy is to recognize transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer. There were no transfers into or out of Level 1 or Level 2 for the three and nine months ended September 30, 2018.

 

(5)

Loan and Security Agreement

 

On January 5, 2018, the Company entered into a Loan and Security Agreement (the “Loan and Security Agreement”) with Silicon Valley Bank (“SVB”) pursuant to which SVB agreed to lend the Company $10.0 million. The principal borrowed under the Loan and Security Agreement bears a fixed interest rate equal to the Prime Rate, as reported in the money rates section of The Wall Street Journal or any successor publication representing the rate of interest per annum then in effect, plus one percent per annum, which interest is payable monthly. The loan matures on December 1, 2021. The Company is only required to make monthly interest payments until December 31, 2018, following which the Company will be required to also make equal monthly payments of principal and interest for the remainder of the term. The Company will also be required to pay an additional final payment at maturity equal to $650,000 (the “Final Payment Charge”). The Final Payment Charge will be due on the scheduled maturity date and is being recognized as an increase to the principal balance with a corresponding charge to interest expense over the term of the facility using the effective interest method. At its option, the Company may prepay all amounts owed under the Loan and Security Agreement (including all accrued and unpaid interest and the Final Payment Charge), subject to a prepayment charge if the loan has been outstanding for less than two years, which prepayment charge is determined based on the date the loan is prepaid.

 

In connection with the Loan and Security Agreement, the Company granted to SVB a security interest in substantially all of the Company’s assets now owned or hereafter acquired, excluding intellectual property and certain other assets. In addition, as TLANDO was not approved by the FDA prior to May 31, 2018, the Company maintains $5.0 million of cash collateral at SVB as required under the Loan and Security Agreement until such time as TLANDO is approved by the FDA.

 

While any amounts are outstanding under the Loan and Security Agreement, the Company is subject to a number of affirmative and negative covenants, including covenants regarding dispositions of property, business combinations or acquisitions, incurrence of additional indebtedness and transactions with affiliates, among other customary covenants. The credit facility also includes events of default, the occurrence and continuation of which could cause interest to be charged at the rate that is otherwise applicable plus 5.0% and would provide SVB, as collateral agent, with the right to exercise remedies against the Company and the collateral securing the credit facility, including foreclosure against the property securing the credit facilities, including its cash. These events of default include, among other things, any failure by the Company to pay principal or interest due under the credit facility, a breach of certain covenants under the credit facility, the Company’s insolvency, a material adverse change, and one or more judgments against the Company in an amount greater than $100,000 individually or in the aggregate.

 

Principal payments on debt at September 30, 2018, are as follows:

 

Years Ending December 31,		Amount (in thousands)
2018		$	—
2019			3,144
2020			3,330
2021			3,526
Thereafter			—
		$	10,000

 

  

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the statement of financial position that sum to the total of the same such amounts shown in the statement of cash flows.

 

		September 30,
		2018
Cash and cash equivalents		$	4,802,806
Restricted cash			5,000,000
Cash , cash equivalents, and restricted cash shown in the statement of cash flows		$	9,802,806

 

Amounts included in restricted cash represent those required to be set aside by the Loan and Security Agreement. The restriction will lapse if and when TLANDO is approved by the FDA.

 

(6)

Income Taxes

 

The tax provision for interim periods is determined using an estimate of the Company’s effective tax rate for the full year adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter the Company updates its estimate of the annual effective tax rate, and if the estimated tax rate changes, the Company makes a cumulative adjustment.

 

At September 30, 2018 and December 31, 2017, the Company had a full valuation allowance against its deferred tax assets, net of expected reversals of existing deferred tax liabilities, as it believes it is more likely than not that these benefits will not be realized.

 

(7)

Contractual Agreements

 

(a)

Abbott Products, Inc.

 

On March 29, 2012, the Company terminated its collaborative agreement with Solvay Pharmaceuticals, Inc. (later acquired by Abbott Products, Inc.) for TLANDO. As part of the termination, the Company reacquired the rights to the intellectual property from Abbott. All obligations under the prior license agreement have been completed except that Lipocine will owe Abbott a perpetual 1% royalty on net sales. Such royalties are limited to $1.0 million in the first two calendar years following product launch, after which period there is not a cap on royalties and no maximum aggregate amount. If generic versions of any such product are introduced, then royalties are reduced by 50%. The Company did not incur any royalties during the three or nine months ended September 30, 2018 and 2017.

 

(b)

Contract Research and Development

 

The Company has entered into agreements with various contract organizations that conduct preclinical, clinical, analytical and manufacturing development work on behalf of the Company as well as a number of independent contractors, primarily clinical researchers, who serve as advisors to the Company. The Company incurred expenses of $887,000 and $1.4 million, respectively, for the three months ended September 30, 2018 and 2017 and $2.5 million and $7.3 million, respectively, for the nine months ended September 30, 2018 and 2017 under these agreements and has recorded these expenses in research and development expenses.

 

(8)

Leases

 

On August 6, 2004, the Company assumed a non-cancelable operating lease for office space and laboratory facilities in Salt Lake City, Utah. On May 6, 2014, the Company modified and extended the lease through February 28, 2018. On February 8, 2018, the Company extended the lease through February 28, 2019. Additionally, on December 28, 2015, the Company entered into an operating lease for office space in Lawrenceville, New Jersey through January 31, 2018. The Company vacated the Lawrenceville, New Jersey office on January 31, 2018. Future minimum lease payments under non-cancellable operating leases (with initial or remaining lease terms in excess of one year) as of September 30, 2018 are:

 

  

		Operating
		leases
Year ending December 31:
2018			80,190
2019			53,460
Total minimum lease payments		$	133,650

 

The Company’s rent expense was $80,000 and $95,000 for the three months ended September 30, 2018 and 2017, respectively, and $243,000 and $285,000 for the nine months ended September 30, 2018 and 2017, respectively.

 

(9)

Stockholders’ Equity

 

(a)

Issuance of Common Stock

 

In March 2017, the Company entered into a Controlled Equity Offering Sales Agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co. (“Cantor”), to sell shares of our common stock, with aggregate gross sales proceeds of up to $20.0 million, from time to time, through an “at the market” (“ATM”), equity offering program, under which Cantor acts as sales agent. The shares of common stock to be sold under the Sales Agreement were originally sold and issued pursuant to the Company’s Registration Statement on Form S-3 (File No. 333-199093) (the “Prior Form S-3”), which was previously declared effective by the Securities and Exchange Commission, and the related prospectus and one or more prospectus supplements. On October 13, 2017, the Company filed a Form S-3 (File No. 333-220942) (the “New Form S-3”) to replace the Existing Form S-3.  The New Form S-3 has been declared effective by the Securities and Exchange Commission, and the Prior Form S-3 has been terminated.  The New Form S-3 registered the sale of up to $150.0 million of any combination of common stock, preferred stock, debt securities, warrants and units pursuant to a shelf registration statement.  The New Form S-3 also contains a prospectus pursuant to which we may sell, from time to time, shares of our common stock having an aggregate offering price of up to $25.0 million through Cantor as our sales agent, pursuant to the Sales Agreement.  On September 20, 2018, the Company filed a prospectus supplement in which the Company disclosed that as a result of the limitations of General Instruction I.B.6. of Form S-3, and in accordance with the terms of the Sales Agreement, the amount of shares of our common stock available for sale under the New Form S-3 is now limited to $10.8 million over any rolling 12-month period. 

 

As of September 30, 2018, we had sold an aggregate of 2,587,877 shares at a weighted-average sales price of $4.32 per share under the ATM for aggregate gross proceeds of $11.2 million and net proceeds of $10.7 million, after deducting sales agent commission and discounts and our other offering costs. During the three and nine months ended September 30, 2018, we sold an aggregate of 69,768 shares at a weighted-average sales price of $1.40 per share under the ATM for aggregate gross proceeds of $98,000 and $91,000 in net proceeds. During the three months ended September 30, 2017, we sold an aggregate of 531,400 shares at a weighted-average sales price of $4.34 per share under the ATM for aggregate gross proceeds of $2.3 million and $2.3 million in net proceeds. During the nine months ended September 30, 2017, we sold an aggregate of 2,518,109 shares at a weighted-average sales price of $4.40 per share under the ATM for aggregate gross proceeds of $11.1 million and $10.6 million in net proceeds.

 

(b)

Rights Agreement

 

On November 13, 2015, the Company and American Stock Transfer & Trust Company, LLC, as Rights Agent, entered into a Rights Agreement. Also on November 12, 2015, the board of directors of the Company authorized and the Company declared a dividend of one preferred stock purchase right (each a “Right” and collectively, the “Rights”) for each outstanding share of common stock of the Company. The dividend was payable to stockholders of record as of the close of business on November 30, 2015 and entitles the registered holder to purchase from the Company one one-thousandth of a fully paid non-assessable share of Series A Junior Participating Preferred Stock of the Company at a price of $63.96 per one-thousandth share (the “Purchase Price”). The Rights will generally become exercisable upon the earlier to occur of (i) 10 business days following a public announcement that a person or group of affiliated or associated persons has become an Acquiring Person (as defined below) or (ii) 10 business days (or such later date as may be determined by action of the board of directors prior to such time as any person or group of affiliated or associated persons becomes an Acquiring Person) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 15% or more of the outstanding common stock of the Company. Except in certain situations, a person or group of affiliated or associated persons becomes an “Acquiring Person” upon acquiring beneficial ownership of 15% or more of the outstanding shares of common stock of the Company.

 

  

In general, in the event a person becomes an Acquiring Person, then each Right not owned by such Acquiring Person will entitle its holder to purchase from the Company, at the Right’s then current exercise price, in lieu of shares of Series A Junior Participating Preferred Stock, common stock of the Company with a market value of twice the Purchase Price.

 

In addition, if after any person has become an Acquiring Person, (a) the Company is acquired in a merger or other business combination, or (b) 50% or more of the Company’s assets, or assets accounting for 50% or more of its earning power, are sold, leased, exchanged or otherwise transferred (in one or more transactions), proper provision shall be made so that each holder of a Right (other than the Acquiring Person, its affiliates and associates and certain transferees thereof, whose Rights became void) shall thereafter have the right to purchase from the acquiring corporation, for the Purchase Price, that number of shares of common stock of the acquiring corporation which at the time of such transaction would have a market value of twice the Purchase Price.

 

The Company will be entitled to redeem the Rights at $0.001 per Right at any time prior to the time an Acquiring Person becomes such. The terms of the Rights are set forth in the Rights Agreement, which is summarized in the Company's Current Report on Form 8-K dated November 13, 2015. The rights plan was originally set to expire on November 12, 2018; however, on November 5, 2018 our Board of Directors approved an extension of the expiration date to November 5, 2021, unless the rights are earlier redeemed or exchanged by the Company.

 

(c)

Share-Based Payments

 

The Company recognizes stock-based compensation expense for grants of stock option awards, restricted stock units and restricted stock under the Company’s Incentive Plan to employees and nonemployee members of the Company’s board of directors based on the grant-date fair value of those awards. The grant-date fair value of an award is generally recognized as compensation expense over the award’s requisite service period. In addition, the Company grants stock options to nonemployee consultants from time to time in exchange for services performed for the Company. Equity instruments granted to nonemployees are subject to periodic revaluation over their vesting terms.

 

The Company uses the Black-Scholes model to compute the estimated fair value of stock option awards. Using this model, fair value is calculated based on assumptions with respect to (i) expected volatility of the Company’s common stock price, (ii) the periods of time over which employees and members of the board of directors are expected to hold their options prior to exercise (expected term), (iii) expected dividend yield on the Common Stock, and (iv) risk-free interest rates. Stock-based compensation expense also includes an estimate, which is made at the time of grant, of the number of awards that are expected to be forfeited. This estimate is revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock-based compensation cost that has been expensed in the statements of operations amounted to $244,000 and $939,000, respectively, for the three months ended September 30, 2018 and 2017 and $1.1 million and $2.2 million, respectively, for the nine months ended September 30, 2018 and 2017, allocated as follows:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2018				2017				2018				2017
Research and development		$	151,580			$	196,869			$	451,662			$	620,881
General and administrative			91,956				742,411				673,308				1,596,828
		$	243,536			$	939,280			$	1,124,970			$	2,217,709

 

The Company did not issue any stock options during the three months ended September 30, 2018 and 2017, and the Company issued 80,000 and 50,000 stock options during the nine months ended September 30, 2018 and 2017, respectively. Additionally, the Company issued 287,000 restricted stock units during the nine months ended September 30, 2017 and did not issue any restricted stock units during the three and nine months ended September 30, 2018 or the three months ended September 30, 2017.

 

  

Key assumptions used in the determination of the fair value of stock options granted are as follows:

 

Expected Term: The expected term represents the period that the stock-based awards are expected to be outstanding. Due to limited historical experience of similar awards, the expected term was estimated using the simplified method in accordance with the provisions of Staff Accounting Bulletin (“SAB”) No. 107, Share-Based Payment, for awards with stated or implied service periods. The simplified method defines the expected term as the average of the contractual term and the vesting period of the stock option. For awards with performance conditions, and that have the contractual term to satisfy the performance condition, the contractual term was used.

 

Risk-Free Interest Rate: The risk-free interest rate used was based on the implied yield currently available on U.S. Treasury issues with an equivalent remaining term.

 

Expected Dividend: The expected dividend assumption is based on management’s current expectation about the Company’s anticipated dividend policy. The Company does not anticipate declaring dividends in the foreseeable future.

 

Expected Volatility: Since the Company did not have sufficient trading history, the volatility factor was based on the average of similar public companies through August 2014. When selecting similar companies, the Company considered the industry, stage of life cycle, size, and financial leverage. Beginning in August 2014, the volatility factor is based on a combination of the Company's trading history since March 2014 and the average of similar public companies. Beginning in July 2017, the volatility factor is based solely on the Company’s trading history since March 2014.

 

For options granted during the three and nine months ended September 30, 2018 and 2017, the Company calculated the fair value of each option grant on the respective dates of grant using the following weighted average assumptions:

 

		2018				2017
Expected term			5.50 years				5.85 years
Risk-free interest rate			2.72	%			1.96	%
Expected dividend yield			—				—
Expected volatility			77.29	%			85.56	%

 

FASB ASC 718, Stock Compensation, requires the Company to recognize compensation expense for the portion of options that are expected to vest. Therefore, the Company applied estimated forfeiture rates that were derived from historical employee termination behavior. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods.

 

As of September 30, 2018, there was $1.2 million of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the Company’s stock plans. That cost is expected to be recognized over a weighted average period of 1.52 years and will be adjusted for subsequent changes in estimated forfeitures. Additionally, as of September 30, 2018, there was $594,000 of total unrecognized compensation cost related to unvested restricted stock units that have performance vesting.

 

(d)

Stock Option Plan

 

In April 2014, the board of directors adopted the 2014 Stock and Incentive Plan ("2014 Plan") subject to shareholder approval which was received in June 2014. The 2014 Plan provides for the granting of nonqualified and incentive stock options, stock appreciation rights, restricted stock units, restricted stock and dividend equivalents. An aggregate of 1,000,000 shares are authorized for issuance under the 2014 Plan. Additionally, 271,906 remaining authorized shares under the 2011 Equity Incentive Plan ("2011 Plan") were issuable under the 2014 Plan at the time of the 2014 Plan adoption. Upon receiving shareholder approval in June 2016, the 2014 Plan was amended and restated to increase the authorized number of shares of common stock of the Company issuable under all awards granted under the 2014 Plan from 1,271,906 to 2,471,906. Additionally, upon receiving shareholder approval in June 2018, the 2014 Plan was further amended and restated to increase the authorized number of shares of common stock of the Company issuable under all awards granted under the 2014 Plan from 2,471,906 to 3,221,906. The board of directors, on an option-by-option basis, determines the number of shares, exercise price, term, and vesting period. Options granted generally have a ten-year contractual life. The Company issues shares of common stock upon the exercise of options with the source of those shares of common stock being either newly issued shares or shares held in treasury. An aggregate of 3,221,906 shares are authorized for issuance under the 2014 Plan, with 1,528,704 shares remaining available for grant as of September 30, 2018.

 

  

A summary of stock option activity is as follows:

 

		Outstanding stock options
		Number of shares				Weighted average exercise price
Balance at December 31, 2017			2,374,449			$	5.64
Options granted			80,000				1.33
Options exercised			-				-
Options forfeited			(198,581	)			4.04
Options cancelled			(47,640	)			6.61
Balance at September 30, 2018			2,208,228				5.60
Options exercisable at September 30, 2018			1,607,693				6.29

 

The following table summarizes information about stock options outstanding and exercisable at September 30, 2018:

 

Options outstanding														Options exercisable
Number outstanding		Weighted average remaining contractual life (Years)				Weighted average exercise price				Aggregate intrinsic value				Number exerciseable				Weighted average remaining contractual life (Years)				Weighted average exercise price				Aggregate intrinsic value
2,208,228			6.37			$	5.60			$	4,000				1,607,693				5.41			$	6.29			$	-

 

The intrinsic value for stock options is defined as the difference between the current market value and the exercise price. The total intrinsic value of stock options exercised during the nine months ended September 30, 2018 and 2017 was zero and $202,000, respectively. There were no stock options exercised during the nine months ended September 30, 2018 and 190,383 stock options were exercised during the nine months ended September 30, 2017.

 

(e)

Restricted Stock Units

 

A summary of restricted stock unit activity is as follows:

 

		Number of unvested restricted shares
Balance at December 31, 2017			203,998
Granted			-
Vested			-
Cancelled			(39,375	)
Balance at September 30, 2018			164,623

 

  

(10)

Commitments and Contingencies

 

Litigation

The Company is involved in various lawsuits, claims and other legal matters from time to time that arise in the ordinary course of conducting business. The Company records a liability when a particular contingency is probable and estimable.

 

On July 2, 2018 the court signed a final order approving the parties’ agreement to settle the purported securities class action litigation captioned In re Lipocine Inc. Securities Litigation, 2:17CV00182 DB (D. Utah) which was originally filed against the Company on July 1, 2016. The final order issued by the court specifically finds that the settlement set forth in the parties’ stipulation is fair, reasonable, adequate, and in the best interests of the Class, and resolves all of the claims that were or could have been brought in the action being settled. The Company maintains insurance for claims of this nature. When the Company signed the memorandum of understanding to settle the purported securities class action litigation, the potential liability became probable and estimable. The Company recorded a litigation settlement liability for $4.3 million as of December 31, 2017. Additionally, the Company recorded a litigation insurance settlement recovery receivable of $3.6 million as of December 31, 2017 which represented the estimated insurance claims proceeds from our insurance carrier in excess of the Company’s retention. As of September 30, 2018, the Company and the insurance carrier have remitted the full balance of the litigation settlement and, as such, the litigation settlement liability and litigation insurance receivable have zero balances.

 

Beyond In re Lipocine Inc. Securities Litigation, 2:17CV00182 DB (D. Utah), management does not currently believe that any other matter, individually or in the aggregate, will have a material adverse effect on our financial condition, liquidity or results of operations.

 

Guarantees and Indemnifications

In the ordinary course of business, the Company enters into agreements, such as lease agreements, licensing agreements, clinical trial agreements, and certain services agreements, containing standard guarantee and / or indemnifications provisions. Additionally, the Company has indemnified its directors and officers to the maximum extent permitted under the laws of the State of Delaware.

 

(11)

Spriaso, LLC

 

On July 23, 2013, the Company entered into an assignment/license and a services agreement with Spriaso, a related-party that is majority-owned by certain current and former directors of Lipocine Inc. and their affiliates. Under the license agreement, the Company assigned and transferred to Spriaso all of the Company’s rights, title and interest in its intellectual property to develop products for the cough and cold field. In addition, Spriaso received all rights and obligations under the Company’s product development agreement with a third-party. In exchange, the Company will receive a royalty of 20 percent of the net proceeds received by Spriaso, up to a maximum of $10.0 million. Spriaso also granted back to the Company an exclusive license to such intellectual property to develop products outside of the cough and cold field. Under the service agreement, the Company provided facilities and up to 10 percent of the services of certain employees to Spriaso for a period of 18 months which expired January 23, 2015. Effective January 23, 2015, the Company entered into an amended services agreement with Spriaso in which the Company agreed to continue providing up to 10 percent of the services of certain employees to Spriaso at a rate of $230/hour for a period of six months. The agreement was further amended on July 23, 2015, on January 23, 2016, on July 23, 2016, on January 23, 2017, on July 23, 2017 on January 23, 2018 and again on July 23, 2018 to extend the term of the agreement for an additional six months. The agreement may be extended upon written agreement of Spriaso and the Company. The Company did not receive any reimbursements for the three months ended September 30, 2018 and 2017 and received reimbursements of zero and $31,000 for the nine months ended September 30, 2018 and 2017, respectively. Additionally, during the three months ended September 30, 2018 and 2017, the Company did not receive any royalty payments from Spriaso and during the nine months ended September 30, 2018 and 2017, the Company received approximately $428,000 and zero, respectively, in royalty payments from Spriaso. Spriaso filed its first NDA and as an affiliated entity of the Company, it used up the one-time waiver for user fees for a small business submitting its first human drug application to the FDA. Spriaso is considered a variable interest entity under the FASB ASC Topic 810-10, Consolidations, however the Company is not the primary beneficiary and has therefore not consolidated Spriaso.

 

  

(12)

Recent Accounting Pronouncements

 

Accounting Pronouncements Not Yet Adopted

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. The new standard amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company plans to adopt this pronouncement effective January 1, 2019 and does not believe it will have a material effect on the Company's financial position or results of operations.

 

In February 2016, FASB issued ASU 2016-02, Leases, which provides new guidance for lease accounting including recognizing most leases on-balance sheet. The standard becomes effective for annual and interim periods in fiscal years beginning after December 15, 2018. ASU 2016-02 mandates a modified retrospective transition method for all entities. The Company does not have any lease that extends beyond December 31, 2018 other than its facility lease that was extended in February 2018 for a period of one-year until February 28, 2019. The Company plans to adopt this pronouncement effective January 1, 2019 and does not believe it will have a material effect on the Company's financial position or results of operations.

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes thereto and other financial information included elsewhere in this report. For additional context with which to understand our financial condition and results of operations, see the management’s discussion and analysis included in our Form 10-K, filed with the SEC on March 12, 2018 as well as the financial statements and related notes contained therein.

 

As used in the discussion below, “we,” “our,” and “us” refers to Lipocine.

 

Forward-Looking Statements

 

This section and other parts of this report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements may refer to such matters as products, expected product benefits, pre-clinical and clinical development timelines, results and timelines of ongoing or future studies, clinical and regulatory expectations and plans, anticipated financial performance, future revenues or earnings, business prospects, projected ventures, new products and services, anticipated market performance, future expectations for liquidity and capital resources needs and similar matters. Such words as “may”, “will”, “expect”, “continue”, “estimate”, “project”, “potential”, “ anticipate”, “believe”, “could”, “plan”, “predict”, “should”, “would” and “intend” and similar terms and expressions are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part II, Item 1A (Risk Factors) of this Form 10-Q, Item 1A (Risk Factors) of our Form 10-Q for the quarter ended June 30, 2018 filed with the SEC on August 7, 2018, Item 1A (Risk Factors) of our Form 10-Q for the quarter ended March 31, 2018 filed with the SEC on May 7, 2018 or in Part I, Item 1A (Risk Factors) of our Form 10-K filed with the SEC on March 12, 2018. Except as required by applicable law, we assume no obligation to revise or update any forward-looking statements for any reason.

 

  

Overview of Our Business

 

We are a specialty pharmaceutical company focused on applying our oral drug delivery technology for the development of pharmaceutical products in the area of men’s and women’s health. Our proprietary delivery technologies are designed to improve patient compliance and safety through orally available treatment options. Our primary development programs are based on oral delivery solutions for poorly bioavailable drugs. We have a portfolio of proprietary product candidates designed to produce favorable pharmacokinetic (“PK”) characteristics and facilitate lower dosing requirements, bypass first-pass metabolism in certain cases, reduce side effects, and eliminate gastrointestinal interactions that limit bioavailability. Our most advanced product candidate, TLANDO™, is an oral testosterone replacement therapy (“TRT”). On May 8, 2018 TLANDO received a Complete Response Letter ("CRL") from the United States Food and Drug Administration ("FDA") regarding its New Drug Application ("NDA"). A CRL is a communication from the FDA that informs companies that an application cannot be approved in its present form. The CRL identified four deficiencies which include the following: determining the extent, if any, of any clinically meaningful ex vivo conversion of testosterone undecanoate (“TU”) to testosterone (“T”) in serum blood collection tubes to confirm the reliability of T data; obtaining definitive evidence pre-approval via an ambulatory blood pressure monitoring (“ABPM”) study as to whether TLANDO causes a clinically meaningful increase in blood pressure in hypogonadal men; verifying the reliability of Cmax data and providing justification for non-applicability of the agreed-upon and prespecified Cmax secondary endpoints for TLANDO; and, determining the appropriate stopping criteria that can reproducibly and accurately identify those patients who should discontinue use of TLANDO. The CRL also identified additional comments that are not considered approvability issues. On July 19, 2018, we completed a Post Action Meeting with the FDA in which the deficiencies raised in the CRL were discussed and a path forward for NDA resubmission for the potential approval of TLANDO was clarified. We are currently conducting an ABPM clinical study and have completed enrollment of 138 subjects with a four-month treatment duration. We expect results in the first quarter of 2019. Additionally, we expect results from a definitive phlebotomy study evaluating the extent, if any, of clinically meaningful ex vivo conversion of TU to T in the fourth quarter of 2018. Previously in June 2016, TLANDO received an initial CRL from the FDA that requested additional information related to the dosing algorithm for the proposed label. We conducted the Dosing Validation (“DV”) study to confirm the efficacy of TLANDO with a fixed dose regimen without need for dose adjustment. TLANDO was well tolerated upon 52-week exposure with no reports of drug related Serious Adverse Events (“SAEs”). Additional pipeline candidates include LPCN 1144, an oral prodrug of bioidentical testosterone for the treatment of non-alcoholic steatohepatitis (“NASH”), LPCN 1111, a next generation oral testosterone therapy product with the potential for once daily dosing which is currently in Phase 2 testing and LPCN 1107, potentially the first oral hydroxyprogesterone caproate product indicated for the prevention of recurrent preterm birth which has completed an End-of-Phase 2 meeting with the FDA.

 

To date, we have funded our operations primarily through the sale of equity securities, debt and convertible debt and through up-front payments, research funding and royalty and milestone payments from our license and collaboration arrangements. We have not generated any revenues from product sales and we do not expect to generate revenue from product sales unless and until we obtain regulatory approval of TLANDO or other products.

 

We have incurred losses in most years since our inception. As of September 30, 2018, we had an accumulated deficit of $134.8 million. Income and losses fluctuate year to year, primarily depending on the nature and timing of research and development occurring on our product candidates. Our net loss was $8.4 million for the nine months ended September 30, 2018, compared to $15.7 million for the nine months ended September 30, 2017. Substantially all of our operating losses resulted from expenses incurred in connection with our product candidate development programs, our research activities and general and administrative costs associated with our operations.

 

We expect to continue to incur significant expenses and operating losses for the foreseeable future as we:

 

•

conduct the ABPM clinical study, definitive phlebotomy study or any other pre or post-approval clinical studies required in support of TLANDO;

 

•

prepare to resubmit our NDA for TLANDO;

 

•

conduct further development of our other product candidates, including LPCN 1111, LPCN 1107 and LPCN 1144;

 

•

continue our research efforts;

 

•

research new products or new uses for our existing products;

 

•

maintain, expand and protect our intellectual property portfolio; and

 

•

provide general and administrative support for our operations.

 

To fund future long-term operations, we will need to raise additional capital. The amount and timing of future funding requirements will depend on many factors, including capital market conditions, regulatory requirements and outcomes related to TLANDO including our ABPM clinical study, regulatory requirements related to our other development programs, the timing and results of our ongoing development efforts, the potential expansion of our current development programs, potential new development programs, our ability to license our products to third parties, the pursuit of various potential commercial activities and strategies associated with our development programs and related general and administrative support. We anticipate that we will seek to fund our operations through public or private equity or debt financings or other sources, such as potential license, partnering and collaboration agreements. We cannot be certain that anticipated additional financing will be available to us on favorable terms, or at all. Although we have previously been successful in obtaining financing through public and private equity securities offerings and our license and collaboration agreements, there can be no assurance that we will be able to do so in the future.

 

  

Our Product Candidates

 

Our current portfolio includes our most advanced product candidate, TLANDO, an oral testosterone replacement. Additionally, we are in the process of establishing our pipeline of other clinical candidates including an oral androgen therapy for the treatment of NASH, LPCN 1144, a next-generation potential once daily oral testosterone replacement therapy, LPCN 1111, and an oral therapy for the prevention of preterm birth, LPCN 1107.

 

Our Development Pipeline

 

TLANDO: An Oral Product Candidate for Testosterone Replacement Therapy

 

Our most advanced product, TLANDO, is an oral formulation of the chemical, TU, an eleven carbon side chain attached to T. TU is an ester prodrug of T. An ester is chemically formed by bonding an acid and an alcohol. Upon the cleavage, or breaking, of the ester bond, T is formed. TU has been approved for use outside the United States for many years for delivery via intra-muscular injection and in oral dosage form and recently TU has received regulatory approval in the United States for delivery via intra-muscular injection. We are using our proprietary technology to facilitate steady gastrointestinal solubilization and absorption of TU. Proof of concept was initially established in 2006, and subsequently TLANDO was licensed in 2009 to Solvay Pharmaceuticals, Inc. which was then acquired by Abbott Products, Inc. ("Abbott"). Following a portfolio review associated with the spin-off of AbbVie by Abbott in 2011, the rights to TLANDO were reacquired by us. All obligations under the prior license agreement have been completed except that Lipocine will owe Abbott a perpetual 1% royalty on net sales. Such royalties are limited to $1 million in the first two calendar years following product launch, after which period there is not a cap on royalties and no maximum aggregate amount. If generic versions of any such product are introduced, then royalties are reduced by 50%.

 

NDA Resubmission

 

We resubmitted our NDA to the FDA in August 2017 based on the results of the DV study. The DV study confirmed the efficacy of TLANDO with a fixed dose regimen without need for dose adjustment. TLANDO was well tolerated upon 52-week exposure with no reports of drug related Serious Adverse Events (“SAEs”). On May 8, 2018 TLANDO received a CRL from the FDA regarding its NDA. A CRL is a communication from the FDA that informs companies that an application cannot be approved in its present form. The CRL identified four deficiencies which include the following: determining the extent, if any, of ex vivo conversion of TU to T in serum blood collection tubes to confirm the reliability of T data; obtaining definitive evidence pre-approval via an ABPM study as to whether TLANDO causes a clinically meaningful increase in blood pressure in hypogonadal men; verifying the reliability of Cmax data and providing justification for non-applicability of the agreed-upon and prespecified Cmax secondary endpoints for TLANDO; and, determining the appropriate stopping criteria that can reproducibly and accurately identify those patients who should discontinue use of TLANDO. The CRL also identified additional comments that are not considered approvability issues. On July 19, 2018, we completed a Post Action Meeting with the FDA in which the deficiencies raised in the CRL were discussed and a path forward for NDA resubmission for the potential approval of TLANDO was clarified. The FDA provided specific feedback on potential resolution of each deficiency, including clinical design elements where appropriate. We are currently conducting an ABPM clinical study in which we enrolled 138 subjects. We expect results during the first quarter of 2019. Subsequent to our Advisory Committee meeting for TLANDO on January 10, 2018, we conducted a pilot phlebotomy study to assess whether ex vivo conversion of TU to T in serum blood collection tubes occurs post collection. We are currently conducting a definitive phlebotomy study based on FDA study design feedback to exclude any potential clinically meaningful ex vivo TU to T conversion post collection. We expect results from the definitive phlebotomy study by the end of the year. Finally, we are performing additional analyses of existing data in order to address the Cmax deficiency and dose stopping criteria deficiency identified by the FDA. Although there is no guarantee that TLANDO will ever be approved by the FDA, we believe the data analyses we have performed to date together with the results from the on-going ABPM clinical study and the definitive phlebotomy study should address the deficiencies identified by the FDA in its CRL. Assuming results from the APBM clinical study and the definitive phlebotomy study support resubmission of the TLANDO NDA, we expect resubmission to occur in the first half of 2019 and a six-month review by the FDA.

 

Previously on June 28, 2016, we received a CRL from the FDA on our original NDA submission. The CRL identified a deficiency related to the dosing algorithm for the label. Specifically, the proposed titration scheme for clinical practice was significantly different from the titration scheme used in the Phase 3 trial leading to discordance in titration decisions between the Phase 3 trial and real-world clinical practice. In response to the CRL, we met with the FDA in a Post Action meeting and proposed a dosing regimen to the FDA based on analyses of existing data. The FDA noted that while the proposed dosing regimen might be acceptable, validation in a clinical trial would be needed prior to resubmission. The DV study was in response to the FDA’s request. We also initiated the Dosing Flexibility (“DF”) study to assess TLANDO in hypogonadal males on a fixed daily dose of 450 mg divided into three equal doses.

 

  

Results from DV and DF Studies

 

The DV and DF studies were both an open-label, fixed dose (no titration), single treatment clinical study of oral TRT in hypogonadal males with low testosterone (T) (< 300 ng/dL) that assessed TLANDO in hypogonadal males on a fixed daily dose of 450 mg divided into two equal doses (“BID”) in the DV study and into three equal doses (“TID”) in the DF study. In total, 95 and 100 subjects were enrolled into DV and DF studies, respectively, with 94 and 98 subjects completing the DV and DF studies, respectively.

 

On June 19, 2017, we announced top-line results of the DV and DF studies. Although there is no guarantee of FDA approval of TLANDO, we believe the results from the DV study confirm the validity of a fixed dose approach without the need for dose titration to orally administering TLANDO. The DV study will be considered our pivotal efficacy clinical study for the NDA resubmission. TLANDO successfully met the FDA primary efficacy guidelines in the DV study safety statistical analysis set (“SS”) where 80% of the subjects achieved average testosterone levels (“Cavg”) within the normal range with a lower bound confidence interval (“CI”) of 72%. The DF study restored 70% of the subjects’ average testosterone levels within the normal range (Cavg) confirming that twice daily (“BID”) dosing is the appropriate dosing regimen for TLANDO and was the basis for resubmission. The safety set is defined as any subject that was randomized into the study and took at least one dose (N=95 subjects in the DV study and N=100 in the DF study). A baseline carried forward approach was used to account for missing data as a result of subject discontinuation.

 

The primary efficacy endpoint is the percentage of subjects with Cavg within the normal range, which is defined as 300-1080 ng/dL. The FDA guidelines for primary efficacy success is that at least 75% of the subjects on active treatment achieve a testosterone Cavg within the normal range; and the lower bound of the 95% CI must be greater than or equal to 65%.

 

The adverse event profile of TLANDO in both the DV and DF studies was consistent with the previously conducted 52-week Phase 3 Study of Androgen Replacement (“SOAR”) clinical trial. All drug related adverse events (“AEs”) were either mild or moderate in intensity and none were severe. To date, the safety database of TLANDO includes ~525 unique hypogonadal men demonstrating a profile consistent with other TRT products.

 

The secondary endpoints assessed the maximum total testosterone concentration (“Cmax”) post dosing using predetermined limits developed by the FDA for transdermals. The FDA guidelines for secondary efficacy success is that at least 85% of the subjects achieve Cmax less than 1500 ng/dL; no greater than 5% of the subjects have Cmax between 1800 ng/dl and 2500 ng/dL; and zero percent of the subjects have Cmax greater than 2500 ng/dL. Consistent with the definition of Cmax and the pharmacokinetic profile of multiple times a day dosing, two pre-specified analyses were performed, Cmax per dose and Cmax per day.

 

In the DV study SS Cmax per dose analysis, the percentage of subjects with Cmax less than 1500 ng/dL and between 1800 ng/dL and 2500 ng/dL were 85% and 7%, respectively. Deviations from the predetermined limits in the DV study were observed in the Cmax per day dose analysis for these thresholds. Only one subject, who was a major protocol violator, exceeded the 2500 ng/dL limit independent of per dose or per day dose analyses.

 

The DF study SS met all Cmax thresholds in per dose and per day dose analyses.

 

Prior to conducting the DV study and the DF study, we completed our SOAR pivotal Phase 3 clinical study evaluating efficacy and 52-week safety of TLANDO. The SOAR study is considered our pivotal safety clinical study for the NDA resubmission.

 

Results from SOAR

 

SOAR was a randomized, open-label, parallel-group, active-controlled, Phase 3 clinical study of TLANDO in hypogonadal males with low testosterone (< 300 ng/dL). In total, 315 subjects at 40 active sites were assigned, such that 210 were randomized to TLANDO and 105 were randomized to the active control, AndroGel 1.62%®, for 52 weeks of treatment. The active control is included for safety assessment. TLANDO subjects were started at 225 mg TU (equivalent to ~ 142 mg of T) twice daily (“BID”) with a standard meal and then dose titrated, if needed, based on average T levels during the day, Cavg, and peak serumT levels, Cmax, up to 300 mg TU BID or down to 150 mg TU BID based on serum testosterone measured at weeks 3 and 7 based on PK profile with multiple blood samples drawn at each time period. The mean age of the subjects in the trial was ~53 years with ~91% of the patients < 65 years of age. The discontinuation rate for TLANDO was 38% compared to 32% for AndroGel 1.62%.

 

Primary statistical analysis was conducted using the Efficacy Population Set ("EPS"). The EPS is defined as subjects randomized into the study with at least one PK profile and no significant protocol deviations and includes imputed missing data by last observation carried forward, N=151. Further analysis was performed using the full analysis set ("FAS") (any subject randomized into the study with at least one post-baseline efficacy variable response, N=193) and the SS (any subject that was randomized into the study and took at least one dose, N=210).

 

  

Safety

 

The safety component of the SOAR trial was completed the last week of April 2015. The safety extension phase was designed to assess safety based on information such as metabolites, biomarkers, laboratory values, serious adverse events ("SAEs") and AEs, with subjects on their stable dose regimen in both the treatment arm and the active control arm. TLANDO treatment was well tolerated in there were no hepatic, cardiac or drug related SAEs.

 

TLANDO safety highlights include:

 

·

TLANDO was well tolerated during 52 weeks of dosing;

 

·

Overall AE profile for TLANDO was comparable to the active control;

 

·

Cardiac AE profiles were consistent between treatment groups and none of the observed cardiac AEs occurred in greater than 1.0% of the subjects in the TLANDO arm and none were classified as severe; and

 

·

All observed adverse drug reactions (“ADRs”) were classified as mild or moderate in severity and no serious ADRs occurred during the 52-week treatment period.

 

Food Effect Study

 

We also completed our labeling "food effect" study in May 2015. Results from the labeling "food effect" study indicate that bioavailability of testosterone from TLANDO is not affected by changes in meal fat content. The results demonstrate comparable testosterone levels between the standard fat meal (similar to the meal instruction provided in the Phase 3 clinical study) and both the low and high fat meals. The labeling “food effect” study was conducted per the FDA requirement and we submitted preliminary results from this study to the FDA in the second quarter of 2015 prior to submitting the NDA.

 

Other Safety Requirements

 

Based on our meetings with the FDA, we do not expect to be required to conduct a heart attack and stroke risk study prior to the potential approval of TLANDO. We may, however, be required to conduct a heart attack and stroke risk study on our own or with a consortium of sponsors that have an approved TRT product subsequent to the potential approval of TLANDO.

 

Recent Competition Update

 

On September 29, 2018, Antares Pharma, Inc.’s product XYOSTED™, a testosterone enanthate auto-injector administered subcutaneously once each week, was approved by the FDA. Although the FDA approved XYOSTED™, there is no guarantee that TLANDO will ever be approved.

 

LPCN 1144: An Oral Androgen Product Candidate for the Treatment of NASH

 

We are currently evaluating LPCN 1144, an oral prodrug of bioidentical testosterone, for the treatment of NASH. NASH is a more advanced state of non-alcoholic fatty liver disease (“NAFLD”) and can progress to a cirrhotic liver and eventually hepatocellular carcinoma or liver cancer. Twenty to thirty percent of the U.S. population is estimated to suffer from NAFLD and fifteen to twenty percent of this group progress to NASH, which is a substantially large population that lacks effective therapy. NAFLD/NASH is becoming more common due to its strong correlation with obesity and metabolic syndrome, including components of metabolic syndrome such as diabetes, cardiovascular disease and high blood pressure. In men, especially with comorbidities associated with NAFLD/NASH, testosterone deficiency has been associated with an increased accumulation of visceral adipose tissue and insulin resistance, which are factors contributing to NAFLD/NASH.

 

Preclinical and clinical studies in the literature have shown the prevalence of testosterone deficiency across the NAFLD/NASH histological spectrum wherein low testosterone was independently associated with NAFLD/NASH with an inverse relationship between testosterone and NAFLD/NASH.

 

  

Post hoc analyses of our existing clinical trials in subjects with comorbidities typically associated with NASH indicate that oral androgen therapy significantly and consistently reduces elevated levels of key serum biomarkers (liver function enzymes and serum triglyceride) generally associated with NAFLD/NASH. We are further evaluating this indication potential in a Proof-Of-Concept (“POC”) study in a biopsy-confirmed NASH in-vivo pre-clinical model as well as in a POC clinical study to assess liver fat changes in hypogonadal men at risk of developing NASH using magnetic resonance imaging, proton density fat fraction (“MRI-PDFF”) technique. We expect results from the biopsy-confirmed in-vivo POC study and the POC liver imaging study in the first quarter of 2019. Completion of enrollment of 36 subjects in the POC liver study occurred in the fourth quarter of 2018. Additionally, LPCN 1144 results have been selected to be a part of the late-breaker session of The Liver Meeting® 2018. The presentation will highlight data from multiple clinical trials of LPCN 1144 in potential NAFLD/NASH patients.

 

LPCN 1111: A Next-Generation Oral Product Candidate for TRT

 

LPCN 1111 is a next-generation, novel ester prodrug of testosterone which uses the Lip’ral technology to enhance solubility and improve systemic absorption. We completed a Phase 2b dose finding study in hypogonadal men in the third quarter of 2016. The primary objectives of the Phase 2b clinical study were to determine the starting Phase 3 dose of LPCN 1111 along with safety and tolerability of LPCN 1111 and its metabolites following oral administration of single and multiple doses in hypogonadal men. The Phase 2b clinical trial was a randomized, open label, two-period, multi-dose PK study that enrolled hypogonadal males into five treatment groups. Each of the 12 subjects in a group received treatment for 14 days. Results of the Phase 2b study suggest that the primary objectives were met, including identifying the dose expected to be tested in a Phase 3 study. Good dose-response relationship was observed over the tested dose range in the Phase 2b study. Additionally, the target Phase 3 dose met primary and secondary end points. Overall, LPCN 1111 was well tolerated with no drug-related severe or serious adverse events reported in the Phase 2b study.

 

Additionally in October 2014, we completed a Phase 2a proof-of-concept study in hypogonadal men. The Phase 2a open-label, dose-escalating single and multiple dose study enrolled 12 males. Results from the Phase 2a clinical study demonstrated the feasibility of a once daily dosing with LPCN 1111 in hypogonadal men and a good dose response. Additionally, the study confirmed that steady state is achieved by day 14 with consistent inter-day performance observed on day 14, 21 and 28. No subjects exceeded Cmax of 1500 ng/dL at any time during the 28-day dosing period on multi-dose exposure. Overall, LPCN 1111 was well tolerated with no serious AE’s reported.

 

We have also completed a preclinical toxicology study with LPCN 1111 in dogs. In February 2018 we had a meeting with the FDA to discuss these preclinical results and to discuss the Phase 3 clinical study and path forward for LPCN 1111. Based on the results of this FDA meeting, additional pre-clinical and clinical trials may be required before a Phase 3 clinical study can be initiated. Additionally, the FDA requested that an ABPM clinical study be conducted as part of the Phase 3 clinical study. Based on our capital resources and the clinical status of our product candidates, we will primarily focus our efforts in 2018 on TLANDO. We do not anticipate the initiation of a Phase 3 study with LPCN 1111 to occur in 2018 unless and until additional capital is secured or the product candidate is out-licensed.

 

LPCN 1107: An Oral Product Candidate for the Prevention of Preterm Birth

 

We believe LPCN 1107 has the potential to become the first oral hydroxyprogesterone caproate (“HPC”) product indicated for the reduction of risk of preterm birth (“PTB”) in women with singleton pregnancy who have a history of singleton spontaneous PTB. Prevention of PTB is a significant unmet need as ~11.7% of all U.S. pregnancies result in PTB (delivery less than 37 weeks), a leading cause of neonatal mortality and morbidity.

 

We have completed a multi-dose PK dose selection study in pregnant women. The objective of the multi-dose PK selection study was to assess HPC blood levels in order to identify the appropriate LPCN 1107 Phase 3 dose. The multi-dose PK dose selection study was an open-label, four-period, four-treatment, randomized, single and multiple dose, PK study in pregnant women of three dose levels of LPCN 1107 and the injectable intramuscular ("IM") HPC (Makena®). The study enrolled 12 healthy pregnant women (average age of 27 years) with a gestational age of approximately 16 to 19 weeks. Subjects received three dose levels of LPCN 1107 (400 mg BID, 600 mg BID, or 800 mg BID) in a randomized, crossover manner during the first three treatment periods and then received five weekly injections of HPC during the fourth treatment period. During each of the LPCN 1107 treatment periods, subjects received a single dose of LPCN 1107 on Day 1 followed by twice daily administration from Day 2 to Day 8. Following completion of the three LPCN 1107 treatment periods and a washout period, all subjects received five weekly injections of HPC. Results from this study demonstrated that average steady state HPC levels (C_avg0-24) were comparable or higher for all three LPCN 1107 doses than for injectable HPC. Additionally, HPC levels as a function of daily dose were linear for the three LPCN 1107 doses. Also, unlike the injectable HPC, steady state exposure was achieved for all three LPCN 1107 doses within seven days. We have also completed a proof-of-concept Phase 1b clinical study of LPCN 1107 in healthy pregnant women in January 2015 and a proof-of-concept Phase 1a clinical study of LPCN 1107 in healthy non-pregnant women in May 2014. These studies were designed to determine the PK and bioavailability of LPCN 1107 relative to an IM HPC, as well as safety and tolerability.

 

  

A traditional pharmacokinetics/pharmacodynamics (“PK/PD”) based Phase 2 clinical study in the intended patient population is not expected to be required prior to entering into Phase 3. Therefore, based on the results of our multi-dose PK study we had an End-of-Phase 2 meeting with the FDA as well as other guidance meetings with the FDA to define a Phase 3 development plan for LPCN 1107. During the End-of-Phase 2 meeting and subsequent guidance meetings, the FDA agreed to a randomized, open-label, two-arm clinical study to include a LPCN 1107 arm and a comparator IM arm with treatment up to 23 weeks. The FDA also provided preliminary feedback on other critical Phase 3 study design considerations including: positive feedback on the proposed 800 mg BID Phase 3 dose and dosing regimen; confirmation of the use of a surrogate primary endpoint focusing on rate of delivery less than 37 weeks gestation rather on clinical infant outcomes; acknowledged that the use of a gestational age endpoint would likely lead to any FDA approval, if granted, being a Subpart H approval; and, recommended a non-inferiority study margin of 7% with interim analyses. A standard statistical design for a NI study based on the FDA feedback, a NI margin of 7% for the primary endpoint may require ~1,100 subjects per treatment arm with a 90% power. However, based on the FDA’s suggestion of including an interim analysis in the NI design, an adaptive study design is under consideration that may allow for fewer subjects. We submitted the initial LPCN 1107 Phase 3 protocol to the FDA via a SPA in June 2017 and have received multiple rounds of FDA’s feedback. Agreement with the FDA on the Phase 3 protocol via SPA has not occurred and will not occur until results from a planned food-effect study with LPCN 1107 are reviewed by the FDA. Final agreement with the FDA on the Phase 3 protocol, if reached, may or may not confirm the FDA’s preliminary feedback on the Phase 3 design. Additionally, manufacturing scale-up work for LPCN 1107 has been completed. Based on our capital resources and the clinical status of our product candidates, we plan to primarily focus our efforts in 2018 on TLANDO. We do not anticipate the initiation of a Phase 3 study with LPCN 1107 to occur in 2018 unless and until additional capital is secured or the product candidate is out-licensed. We are exploring the possibility of licensing LPCN 1107 to a third party, although no licensing agreement has been entered into by the Company. No assurance can be given that any license agreement will be completed, or, if an agreement is completed, that such an agreement would be on acceptable terms.

 

The FDA has granted orphan drug designation to LPCN 1107 based on a major contribution to patient care. Orphan designation qualifies Lipocine for various development incentives, including tax credits for qualified clinical testing, and a waiver of the prescription drug user fee when we file our NDA.

 

Financial Operations Overview

 

Revenue

 

To date, we have not generated any revenues from product sales and do not expect to do so until one of our product candidates receives approval from the FDA. Revenues to date have been generated substantially from license fees, royalty and milestone payments and research support from our licensees. Since our inception through September 30, 2018, we have generated $27.9 million in revenue under our various license and collaboration arrangements and from government grants. We may never generate revenues from TLANDO or any of our other clinical or preclinical development programs or licensed products as we may never succeed in obtaining regulatory approval or commercialize any of these product candidates.

 

Research and Development Expenses

 

Research and development expenses consist primarily of salaries, benefits, stock-based compensation and related personnel costs, fees paid to external service providers such as contract research organizations and contract manufacturing organizations, contractual obligations for clinical development, clinical sites, manufacturing and scale-up for late-stage clinical trials, formulation of clinical drug supplies, and expenses associated with regulatory submissions. Research and development expenses also include an allocation of indirect costs, such as those for facilities, office expense, travel, and depreciation of equipment based on the ratio of direct labor hours for research and development personnel to total direct labor hours for all personnel. We expense research and development expenses as incurred. Since our inception, we have spent approximately $101.4 million in research and development expenses through September 30, 2018.

 

We expect to incur approximately $4.7 million in additional research and developments costs for TLANDO as we conduct and complete the ABPM and definitive phlebotomy clinical studies. However, these expenditures are subject to numerous uncertainties regarding timing and cost to completion.

 

We expect to continue to incur significant costs as we seek approval of TLANDO and as we develop other product candidates.

 

In general, the cost of clinical trials may vary significantly over the life of a project as a result of uncertainties in clinical development, including, among others:

 

•

the number of sites included in the trials;

 

•

the length of time required to enroll suitable subjects;

 

•

the duration of subject follow-ups;

 

•

the length of time required to collect, analyze and report trial results;

 

  

•

the cost, timing and outcome of regulatory review; and

 

•

potential changes by the FDA in clinical trial and NDA filing requirements for testosterone replacement therapies.

 

We also incurred significant manufacturing costs to prepare launch supplies for TLANDO and expect to incur additional manufacturing costs related to TLANDO. However, these expenditures are subject to numerous uncertainties regarding timing and cost to completion, including, among others:

 

•

the timing and outcome of regulatory filings and FDA reviews and actions for TLANDO;

 

•

our dependence on third-party manufacturers for the production of satisfactory finished product for registration and launch should regulatory approval be obtained;

 

•

the potential for future license or co-promote arrangements for TLANDO, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our future plans and capital requirements; and

 

•

the effect on our product development activities of actions taken by the FDA or other regulatory authorities.

 

A change of outcome for any of these variables with respect to the development of TLANDO could mean a substantial change in the costs and timing associated with these efforts, will require us to raise additional capital, and may require us to reduce operations.

 

Given the stage of clinical development and the significant risks and uncertainties inherent in the clinical development, manufacturing and regulatory approval process, we are unable to estimate with any certainty the time or cost to complete the development of LPCN 1111, LPCN 1107, LPCN 1144 and other product candidates. Clinical development timelines, the probability of success and development costs can differ materially from expectations and results from our clinical trials may not be favorable. If we are successful in progressing LPCN 1111, LPCN 1107, LPCN 1144 or other product candidates into later stage development, we will require additional capital. The amount and timing of our future research and development expenses for these product candidates will depend on the preclinical and clinical success of both our current development activities and potential development of new product candidates, as well as ongoing assessments of the commercial potential of such activities.

 

Summary of Research and Development Expense

 

We are conducting on-going clinical and regulatory activities with all of our product candidates Additionally, we incur costs for our other research programs. The following table summarizes our research and development expenses:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2018				2017				2018				2017
External service provider costs:
TLANDO		$	821,219			$	953,289			$	2,061,560			$	6,334,585
LPCN 1111			28,897				134,335				80,708				310,760
LPCN 1107			2,000				335,458				297,264				698,683
LPCN 1144			35,100				-				35,100				-
Total external service provider costs			887,216				1,423,082				2,474,632				7,344,028
Internal personnel costs			422,917				514,065				1,400,591				1,564,146
Other research and development costs			112,786				109,386				407,600				328,995
Total research and development		$	1,422,919			$	2,046,533			$	4,282,823			$	9,237,169

 

We expect research and development expenses to increase in the future as we complete the ABPM clinical study and definitive phlebotomy clinical study for TLANDO, as we complete the biopsy-confirmed in-vivo POC clinical study and the POC liver imaging study for LPCN 1144 and when and if we initiate Phase 3 clinical trials for LPCN 1111 and LPCN 1107.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation related to our executive, finance, business development, marketing, sales and support functions. Other general and administrative expenses include rent and utilities, travel expenses, professional fees for auditing, tax and legal services, litigation settlement and market research and market analytics.

 

  

They also include expenses for the cost of preparing, filling and prosecuting patent applications and maintaining, enforcing and defending intellectual property-related claims.

 

We expect that general and administrative expenses will continue to increase as we mature as a public company. These increases will likely include legal and consulting fees, accounting and audit fees, director fees, increased directors’ and officers’ insurance premiums, fees for investor relations services and enhanced business and accounting systems, litigation costs, professional fees and other costs. However, outside spend on sales and marketing pre-commercialization activities will be consistent with spend during 2017 until we receive clarity on the regulatory path forward for TLANDO. If the FDA approves TLANDO, we will increase our outside spend on pre-commercialization and commercialization activities substantially and will need to raise additional capital to fund these expenses.

 

Other Expense (Income), Net

 

Other expense (income), net consists primarily of interest income earned on our cash, cash equivalents and marketable investment securities and interest expense incurred on our outstanding Loan and Security Agreement.

  

Results of Operations

 

Comparison of the Three Months Ended September 30, 2018 and 2017

 

The following table summarizes our results of operations for the three months ended September 30, 2018 and 2017:

 

		Three Months Ended September 30,
		2018				2017				Variance
Research and development expenses		$	1,422,919			$	2,046,533				623,614
General and administrative expenses			930,137				2,719,526				1,789,389
Other expense (income), net			106,016				(65,811	)			(171,827	)

 

Research and Development Expenses

 

The decrease in research and development expenses during the three months ended September 30, 2018 was primarily due to reduced contract manufacturing organization costs of $954,000 for TLANDO and LPCN 1107 and reduced personnel costs of $91,000. This was offset by increased contract research organization costs for TLANDO of $461,000 for the ABPM study. We expect research and development costs to increase through the first quarter of 2019 while we conduct the ABPM study for TLANDO and complete the POC liver imaging study for LPCN 1144.

 

General and Administrative Expenses

 

The decrease in general and administrative expenses during the three months ended September 30, 2018 was primarily due to professional fees related to legal, intellectual property and commercial activities being lower by $527,000 as well as decreased personnel costs of $1.3 million related to reduced headcount resulting in lower stock compensation costs, bonus accrual, and salary and related benefit costs in 2018.

 

Other Expense (Income), Net

 

The increase in other expense, net, during the three months ended September 30, 2018 was primarily due to interest expense of $219,000 on our Loan and Security Agreement (the “Loan and Security Agreement”) with Silicon Valley Bank (“SVB”) which was entered into January 2018. These increases in other expense were offset by increased interest income due to higher interest rates on balances of cash, cash equivalents and marketable investment securities in 2018 as compared to 2017.

 

  

Comparison of the Nine Months Ended September 30, 2018 and 2017

 

The following table summarizes our results of operations for the nine months ended September 30, 2018 and 2017:

 

		Nine months ended September 30,
		2018				2017				Variance
License revenue		$	(428,031	)		$	-				428,031
Research and development expenses			4,282,823				9,237,169				4,954,346
General and administrative expenses			4,299,659				6,578,423				2,278,764
Other expense (income), net			279,392				(165,018	)			(444,410	)
Income tax expense			700				700				-

 

Revenue

 

License revenue was $428,000 during the nine months ended September 30, 2018 compared to no license revenue during the nine months ended September 30, 2017. License revenue relates to royalty payments received from Spriaso, LLC under a licensing agreement in the cough and cold field. We may or may not receive royalty payments in the future from Spriaso, LLC.

 

Research and Development Expenses

 

The decrease in research and development expenses during the nine months ended September 30, 2018 was primarily due to reduced contract research organization costs for TLANDO of $4.1 million as the DV and DF studies were complete in 2017 while the ABPM study was being initiated in 2018, lower personnel costs of $164,000, and lower contract manufacturing costs of $985,000 for LPCN 1107 offset by increased outside service and other costs of $344,000 primarily related to the meeting of the Bone, Reproductive and Urologic Drugs Advisory Committee (“BRUDAC”) of the FDA related to TLANDO that was held in January 2018.

 

General and Administrative Expenses

 

The decrease in general and administrative expenses during the nine months ended September 30, 2018 was primarily due to decreased personnel costs of $1.6 million primarily related to reduced headcount resulting in lower stock compensation costs, bonus accrual, and salary and related benefit costs in 2018. Additionally, professional fees decreased $682,000 in 2018 related to legal, intellectual property, and commercial activities.

 

Other Expense (Income), Net

 

The increase in other expense, net, during the nine months ended September 30, 2018 was primarily due to interest expense of $623,000 on our Loan and Security Agreement with SVB which was entered into January 2018. These increases in other expense were offset by increased interest income due to higher interest rates on balances of cash, cash equivalents and marketable investment securities in 2018 as compared to 2017.

 

Liquidity and Capital Resources

 

Since our inception, our operations have been primarily financed through sales of our equity securities, debt and payments received under our license and collaboration arrangements. In January 2018, we secured a term loan with SVB for $10.0 million. We have devoted our resources to funding research and development programs, including discovery research, preclinical and clinical development activities. We have incurred operating losses in most years since our inception and we expect to continue to incur operating losses into the foreseeable future as we seek to advance our lead product candidate, TLANDO, and further clinical development of LPCN 1111, LPCN 1107, LPCN 1144 and our other programs and continued research efforts.

 

As of September 30, 2018, we had $16.9 million of unrestricted cash, cash equivalents and marketable investment securities compared to $21.5 million at December 31, 2017. Additionally, as of September 30, 2018 we had $5.0 million of restricted cash, which is required to be maintained as cash collateral under the Loan and Security Agreement.

 

  

On January 5, 2018, we entered into the Loan and Security Agreement with SVB pursuant to which SVB agreed to lend us $10.0 million. The principal borrowed under the Loan and Security Agreement bears a fixed interest rate equal to the Prime Rate, as reported in money rates section of The Wall Street Journal or any successor publication representing the rate of interest per annum then in effect, plus one percent per annum, which interest is payable monthly. The loan matures on December 1, 2021. We are only required to make monthly interest payments until December 31, 2018, following which we will be required to also make equal monthly payments of principal and interest for the remainder of the term. We will also be required to pay an additional final payment at maturity equal to $650,000 (the “Final Payment Charge”). At our option, we may prepay all amounts owed under the Loan and Security Agreement (including all accrued and unpaid interest and the Final Payment Charge), subject to a prepayment charge if the loan has been outstanding for less than two years, which prepayment charge is determined based on the date the loan is prepaid. In connection with the Loan and Security Agreement, we granted to SVB a security interest in substantially all of our assets now owned or hereafter acquired, excluding intellectual property and certain other assets. In addition, as TLANDO was not approved by the FDA by May 31, 2018, we are required to maintain $5.0 million of cash collateral at SVB until such time as TLANDO is approved by the FDA. While any amounts are outstanding under the Loan and Security Agreement, we are subject to a number of affirmative and negative covenants, including covenants regarding dispositions of property, business combinations or acquisitions, incurrence of additional indebtedness and transactions with affiliates, among other customary covenants. The credit facility also includes events of default, the occurrence and continuation of which could cause interest to be charged at the rate that is otherwise applicable plus 5.0% and would provide SVB, as collateral agent, with the right to exercise remedies against us and the collateral securing the credit facility, including foreclosure against the property securing the credit facilities, including its cash. These events of default include, among other things, any failure by us to pay principal or interest due under the credit facility, a breach of certain covenants under the credit facility, the Company’s insolvency, a material adverse change, and one or more judgments against us in an amount greater than $100,000 individually or in the aggregate.

 

On March 6, 2017, we entered into the Sales Agreement with Cantor pursuant to which we may issue and sell, from time to time, shares of our common stock having an aggregate offering price of up to $20.0 million through Cantor as our sales agent. Cantor may sell our common stock by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415(a)(4) of the Securities Act, including sales made directly on or through the Nasdaq Capital Market or any other existing trade market for our common stock, in negotiated transactions at market prices prevailing at the time of sale or at prices related to prevailing market prices, or any other method permitted by law.

 

The shares of our common stock to be sold under the Sales Agreement will be sold and issued pursuant to the Company’s Registration Statement on Form S-3 (File No. 333-199093) (the “Prior Form S-3”), which was previously declared effective by the Securities and Exchange Commission, and the related prospectus and one or more prospectus supplements. Cantor will use its commercially reasonable efforts consistent with its normal trading and sales practices and applicable law and regulations to sell these shares. We will pay Cantor 3.0% of the aggregate gross proceeds from each sale of shares under the Sales Agreement. We have also provided Cantor with customary indemnification rights.

 

On October 13, 2017, we filed a Form S-3 (File No. 333-220942) (the “New Form S-3”) to replace the Prior Form S-3.  The New Form S-3 has been declared effective by the Securities and Exchange Commission, and the Prior Form S-3 has been terminated.  The New Form S-3 registered the sale of up to $150.0 million of any combination of common stock, preferred stock, debt securities, warrants and units pursuant to a shelf registration statement.  The New Form S-3 also contains a prospectus pursuant to which we may sell, from time to time, shares of our common stock having an aggregate offering price of up to $25.0 million through Cantor as our sales agent, pursuant to the Sales Agreement. On September 20, 2018, the Company filed a prospectus supplement in which the Company disclosed that as a result of the limitations of General Instruction I.B.6. of Form S-3, and in accordance with the terms of the Sales Agreement, the amount of shares of our common stock available for sale under the New Form S-3 is now limited to $10.8 million over any rolling 12-month period.

 

We are not obligated to make any sales of our common stock under the Sales Agreement. The offering of our common stock pursuant to the Sales Agreement will terminate upon the termination of the Sales Agreement as permitted therein. We and Cantor may each terminate the Sales Agreement at any time upon ten days’ prior notice.

 

As of September 30, 2018, we have sold 2,587,877 shares of our common stock resulting in net proceeds of approximately $10.7 million under the Sales Agreement which is net of $260,000 commissions paid to Cantor in connection with these sales.

 

We believe that our existing capital resources, together with interest thereon, will be sufficient to meet our projected operating requirements through September 30, 2019. While we believe we have sufficient liquidity and capital resources to fund our projected operating requirements through September 30, 2019, we will need to raise additional capital at some point, either before or after September 30, 2019, to support our operations, on-going clinical studies, compliance with regulatory requirements and long-term research and development and commercialization of TLANDO, if we receive approval of TLANDO from the FDA. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Additional clinical studies may be required to obtain approval of TLANDO and these studies would put additional demands on our limited capital resources. Further, our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for product development, regulatory compliance, clinical trials and pre-commercialization activities sooner than planned. We may consume our capital resources more rapidly if the FDA approval for TLANDO is delayed or denied, or if we elect to pursue the build out of an internal sales force as part of our commercialization launch plan if our product candidates receive approval from the FDA. Conversely, our capital resources could last longer if we reduce expenses and the number of activities currently contemplated under our operating plan.

 

  

We can raise capital pursuant to the Sales Agreement in the ATM Offering but may choose not to issue common stock if our market price is too low to justify such sales in our discretion. There are numerous risks and uncertainties associated with the development and, subject to approval by the FDA, commercialization of our product candidates. There are numerous risks and uncertainties impacting our ability to enter into collaborations with third parties to participate in the development and potential commercialization of our product candidates. We are unable to precisely estimate the amounts of increased capital outlays and operating expenditures associated with our anticipated or unanticipated clinical studies and ongoing development and pre-commercialization efforts. All of these factors affect our need for additional capital resources. To fund future operations, we will need to ultimately raise additional capital and our requirements will depend on many factors, including the following:

 

•

further clinical development requirements or other requirements of the FDA related to approval of TLANDO;

 

•

the scope, rate of progress, results and cost of our clinical studies, preclinical testing and other related activities;

 

•

the scope of clinical and other work required to obtain approval of TLANDO and our other product candidates;

 

•

the cost of manufacturing clinical supplies, and establishing commercial supplies, of our product candidates and any products that we may develop;

 

•

the cost and timing of establishing sales, marketing and distribution capabilities;

 

•

the terms and timing of any collaborative, licensing and other arrangements that we may establish;

 

•

the number and characteristics of product candidates that we pursue;

 

•

the cost, timing and outcomes of regulatory approvals;

 

•

the timing, receipt and amount of sales, profit sharing or royalties, if any, from our potential products;

 

•

the cost of preparing, filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

 

•

the extent to which we acquire or invest in businesses, products or technologies, although we currently have no commitments or agreements relating to any of these types of transactions; and

 

•

the extent to which we grow significantly in the number of employees or the scope of our operations.

 

Funding may not be available to us on acceptable terms, or at all. Also, market conditions may prevent us from accessing the debt and equity capital markets, including sales of our common stock through the ATM Offering. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the scope of or suspend one or more of our clinical studies, research and development programs or, if any of our product candidates receive approval from the FDA, commercialization efforts. We may seek to raise any necessary additional capital through a combination of public or private equity offerings, including the ATM Offering, debt financings, collaborations, strategic alliances, licensing arrangements and other marketing and distribution arrangements. These arrangements may not be available to us or available on terms favorable to us. To the extent that we raise additional capital through marketing and distribution arrangements, other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences, warrants or other terms that adversely affect our stockholders’ rights or further complicate raising additional capital in the future. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we are unable, for any reason, to raise needed capital, we will have to reduce costs, delay research and development programs, liquidate assets, dispose of rights, commercialize products or product candidates earlier than planned or on less favorable terms than desired or reduce or cease operations.

 

Sources and Uses of Cash

 

The following table provides a summary of our cash flows for the nine months ended September 30, 2018 and 2017: 

 

  

		Nine Months Ended September 30,
		2018				2017
Cash used in operating activities		$	(9,845,998	)		$	(12,405,063	)
Cash provided by investing activities			6,347,294				4,935,310
Cash provided by financing activities			10,090,761				11,179,860

 

Net Cash Used in Operating Activities

 

During the nine months ended September 30, 2018 and 2017, net cash used in operating activities was $9.8 million and $12.4 million, respectively.

 

Net cash used in operating activities during the nine months ended September 30, 2018 and 2017 was primarily attributable to cash outlays to support ongoing operations, including research and development expenses and general and administrative expenses. During 2018, we were performing activities related to the BRUDAC meeting for TLANDO on January 10, 2018 as well as conducting the ABPM clinical study for TLANDO. Additionally, we completed manufacturing scale-up activities for LPCN 1107. During 2017, we were conducting our DV study and DF study for TLANDO, we were conducting our preclinical toxicity study with LPCN 1111 and we were drafting our protocol for LPCN 1107 as well as conducting manufacturing scale-up activities for LPCN 1107.

 

Net Cash Provided by Investing Activities

 

During the nine months ended September 30, 2018 and 2017, net cash provided by investing activities was $6.3 million and $4.9 million, respectively.

 

Net cash provided by investing activities during the nine months ended September 30, 2018 and 2017 was primarily the result of utilizing marketable investment securities, net, of $6.3 and $4.9 million, respectively, to fund operations.

 

Net Cash Provided by Financing Activities

 

During the nine months ended September 30, 2018 and 2017 net cash provided by financing activities was $10.1 million and $11.2 million, respectively.

 

Net cash provided by financing activities during 2018 was attributable to $10.0 million in proceeds from the SVB Loan and Security Agreement and net proceeds from the sale of 69,768 shares of common stock pursuant to the ATM Offering resulting in net proceeds of $91,000.

 

Net cash provided by financing activities during 2017 was primarily attributable to the net proceeds from the sale of 2,518,109 shares of common stock pursuant to the ATM Offering resulting in net proceeds of $10.6 million as well as proceeds from the exercise of stock options.

 

Employee stock option exercises provided approximately zero and $535,000 of cash during the nine months ended September 30, 2018 and 2017, respectively. Proceeds from the exercise of employee stock options vary from period to period based upon, among other factors, fluctuations in the market price of our common stock relative to the exercise price of such options.

 

Contractual Commitments and Contingencies

 

Purchase Obligations

 

We enter into contracts and issue purchase orders in the normal course of business with clinical research organizations for clinical trials and clinical and commercial supply manufacturing and with vendors for preclinical research studies, research supplies and other services and products for operating purposes. These contracts generally provide for termination on notice and are cancellable obligations.

 

 

Operating Leases

 

In August 2004, we entered into an agreement to lease our facility in Salt Lake City, Utah consisting of office and laboratory space which serves as our corporate headquarters. On February 9, 2018, we modified and extended the lease through February 28, 2019. Additionally, on December 28, 2015, we entered into an agreement to lease office space in Lawrenceville, New Jersey which had an occupancy date of February 1, 2016 and an end date of January 31, 2018. We vacated the Lawrenceville, New Jersey office on January 31, 2018.

 

Other Contractual Obligations

 

We enter into contracts in the normal course of business with clinical research organizations for clinical trials and clinical supply manufacturing and with vendors for preclinical research studies, research supplies and other services and products for operating purposes. These contracts generally provide for termination on notice, and are cancellable obligations.

 

Critical Accounting Policies and Significant Judgments and Estimates

 

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements which we have prepared in accordance with U.S. generally accepted accounting principles. In preparing our financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no significant and material changes in our critical accounting policies during the three and nine months ended September 30, 2018, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Significant Judgments and Estimates” in our Form 10-K filed March 12, 2018.

 

New Accounting Standards

 

Refer to Note 12, in “Notes to Unaudited Condensed Consolidated Financial Statements” for a discussion of accounting standards not yet adopted.

 

Off-Balance Sheet Arrangements

 

None.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to various market risks, which include potential losses arising from adverse changes in market rates and prices, such as interest rates. We do not enter into derivatives or other financial instruments for trading or speculative purposes.

 

Interest Rate Risk. Our interest rate risk exposure results from our investment portfolio. Our primary objectives in managing our investment portfolio are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. The securities we hold in our investment portfolio are subject to interest rate risk. At any time, sharp changes in interest rates can affect the fair value of the investment portfolio and its interest earnings. After a review of our marketable investment securities, we believe that in the event of a hypothetical one percent increase in interest rates, the resulting decrease in fair value of our marketable investment securities would be insignificant to the consolidated financial statements. In addition, in the event of a hypothetical one percent decrease in interest rates, the resulting increase in fair value of our marketable investment securities would be insignificant to the consolidated financial statements. Currently, we do not hedge these interest rate exposures. We have established policies and procedures to manage exposure to fluctuations in interest rates. We place our investments with high quality issuers and limit the amount of credit exposure to any one issuer and do not use derivative financial instruments in our investment portfolio. We invest in highly liquid, investment-grade securities and money market funds of various issues, types and maturities. Debt securities are classified as available-for-sale and, consequently, are recorded on the balance sheet at fair value with unrealized gains or losses reported as accumulated other comprehensive income as a separate component in stockholders' deficit unless a loss is deemed other than temporary, in which case the loss is recognized in earnings.

 

ITEM  4.

CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain "disclosure controls and procedures" within the meaning of Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Our disclosure controls and procedures, or Disclosure Controls, are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission's rules and forms. Our Disclosure Controls include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

  

As of the end of the period covered by this Quarterly Report on Form 10-Q, we evaluated the effectiveness of the design and operation of our Disclosure Controls, which was done under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer. Based on the controls evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the date of their evaluation, our Disclosure Controls were effective as of September 30, 2018.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the most recent fiscal quarter covered by this report, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II—OTHER INFORMATION

 

ITEM  1.

LEGAL PROCEEDINGS

 

On May 15, 2015, we filed a patent application with the PTO, and our application requested that the U.S. Patent and Trademark Office (“PTO”) declare an interference between our patent application and the Clarus 428 Patent.  Pursuant to our request, on December 4, 2015, the Patent Trial and Appeal Board (“PTAB”) declared an interference between the Clarus 428 Patent and our application to determine, as between Clarus and us, who was the first to invent the subject matter of the claimed invention. We were declared the Senior Party in the interference. On September 20, 2017 the PTAB issued a Decisions on Motions. The PTAB granted our motion to deny Clarus’ previously accorded priority date for the Clarus 428 Patent and denied Clarus’ motion for an earlier priority date based upon the filing of its provisional applications. Therefore, Clarus has a new priority date of April 16, 2014 for the Clarus 428 patent. The PTAB also granted Clarus’ motion to deny our accorded priority date. Therefore, we have an accorded priority date of May 15, 2015 on its application. As a consequence of this decision, the PTAB has redeclared the interference and named Clarus as the senior party and us as the junior party. All other motions were denied. A conference call with the PTAB was held on October 4, 2017 to discuss the next steps, including a priority schedule. After the conference call, the PTAB issued an order setting times in the priority phase.  The order indicated that since we are the only party that filed a priority statement, only we shall be permitted to put on a priority case. The priority statement filed by us included a claimed date of invention well prior to Clarus’ accorded benefit date. We filed our motion for priority on January 18, 2018, and thereafter, on March 26, 2018, Clarus filed a notice stating it has not filed, and will not file, a substantive opposition to our priority motion. We are awaiting the PTAB’s ruling on this interference matter.

 

On July 1, 2016, the Company and certain of its officers were named as defendants in a purported shareholder class action lawsuit, David Lewis v. Lipocine Inc., et al., 3:16-cv-04009-BRM-LHG, filed in the United States District Court for the District of New Jersey. This initial action was followed by additional lawsuits also filed in the District of New Jersey. On December 2, 2016, the court granted plaintiff’s motion to consolidate the various lawsuits and appointed Pomerantz LLP as lead counsel and Lipocine Investor Group as lead plaintiff.  The court also stated that all filings shall bear the caption In re Lipocine Inc. Securities Litigation.  On March 14, 2017, the court granted our motion to transfer the action to the United States District Court for the District of Utah.  On April 27, 2017, Plaintiff filed an Amended Complaint against the Company and certain of its officers and/or directors in the United States District Court for the District of Utah.  This was a purported class action seeking relief for violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.  The Amended Complaint alleged that the defendants made false and/or misleading statements and/or failed to disclose that our filing of the NDA for TLANDO to the FDA contained deficiencies and as a result the defendants’ statements about our business and operations were false and misleading and/or lacked a reasonable basis in violation of federal securities laws. Plaintiff sought certification as a class action, compensatory damages of an unspecified amount, pre-judgment and post-judgment interest, reasonable attorneys’ fees, expert fees, and unspecified other costs, as well as any further relief the court deems just and proper.  We filed a motion to dismiss the Amended Complaint on June 12, 2017, in compliance with the scheduling order entered by the court on December 20, 2016. Oral arguments on the motion to dismiss were held on October 24, 2017, and the judge denied our motion to dismiss.  On February 15, 2018 we and the other defendants entered into a memorandum of understanding to settle the purported securities class action litigation. On March 15, 2018, plaintiff filed a motion for preliminary approval of the settlement along with a copy of the parties’ stipulation of settlement. On March 21, 2018, the court granted the motion for preliminary approval of the settlement and amended the order on March 28, 2018. On July 2, 2018, the court issued the final order and approved the settlement of $4.3 million as set forth in the parties’ stipulation. The order resolves all of the claims that were or could have been brought in the action being settled. We maintain insurance for claims of this nature, which management believes is adequate. As a result, our insurance carrier paid $3.6 million of the settlement, which represented the settlement amount less our insurance policy retention. The settlement did not have a material impact on our financial position.

 

  

ITEM  1A.

RISK FACTORS

 

In addition to the other information set forth in this Report, consider the risk factors discussed in Part 1, "Item 1A. Risk Factors" in the Company's Annual Report filed on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 12, 2018, the risk factors discussed in Part II, “Item 1A. Risk Factors of the Form 10-Q for the quarter ended March 31, 2018 filed on May 7, 2018, the risk factors discussed in Part II, “Item 1A. Risk Factors of the Form 10-Q for the quarter ended June 30, 2018 filed on August 7, 2018 and the risk factors discussed in Item 1A of this Form 10-Q, which could materially affect our business, financial condition or future results. The risks described in the aforementioned report are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that it currently deems to be not material also may materially adversely affect the Company's business, financial condition and or operating results.

 

The following are the risk factors that have materially changed from our risk factors included in our Form 10-K for the year ended December 31, 2017 filed with the SEC on March 12, 2018, from our risk factors included in our Form 10-Q for the quarter ended March 31, 2018 filed with the SEC on May 7, 2018 and from our risk factors included in our Form 10-Q for the quarter ended June 30, 2018 filed with the SEC on August 7, 2018:

 

RISKS RELATING TO OUR BUSINESS AND INDUSTRY

 

We depend primarily on the success of our lead product candidate, TLANDO, for which we recently received a Complete Response Letter from the FDA and which may not receive regulatory approval or be successfully commercialized.

 

TLANDO is currently our only product candidate that has completed Phase 3 clinical trials, and our business currently depends primarily on its successful development, regulatory approval and commercialization, if approved. We submitted an NDA to the FDA but have not submitted comparable applications to other regulatory authorities. If the FDA denies or further delays approval of TLANDO, our business would be materially and adversely harmed. If the FDA does approve TLANDO, but we are unsuccessful in commercializing TLANDO, our business will be materially and adversely harmed.

 

Although we have completed Phase 3 efficacy trials with TLANDO, approval from the FDA is not guaranteed. We re-submitted our NDA to the FDA in August 2017 based on the results of the DV study. The DV study confirmed the efficacy of TLANDO with a fixed dose regimen without need for dose adjustment. TLANDO was well tolerated upon 52-week exposure with no reports of drug related Serious Adverse Events (“SAEs”). On May 8, 2018 TLANDO received a CRL from the FDA regarding its NDA. A CRL is a communication from the FDA that informs companies that an application cannot be approved in its present form. The CRL identified four deficiencies which include the following: determining the extent, if any, of clinically meaningful ex vivo conversion of TU to T in serum blood collection tubes to confirm the reliability of T data; obtaining definitive evidence pre-approval via an ABPM study as to whether TLANDO causes a clinically meaningful increase in blood pressure in hypogonadal men; verifying the reliability of Cmax data and providing justification for non-applicability of the agreed-upon and pre-specified Cmax secondary endpoints for TLANDO; and, determining the appropriate stopping criteria that can reproducibly and accurately identify those patients who should discontinue use of TLANDO. The CRL also identified additional comments that are not considered approvability issues. On July 19, 2018, we completed a Post Action Meeting with the FDA in which the deficiencies raised in the CRL were discussed and a path forward for NDA resubmission for the potential approval of TLANDO was clarified, although no assurance can be given that such approval will be received. The FDA provided specific feedback on potential resolution of each deficiency, including clinical design elements where appropriate. We are currently conducting an ABPM clinical study, have completed enrollment, we expect results during the first quarter of 2019; however, if the results of the ABPM clinical study show a clinically meaningful increase in blood pressure, we may not be able to successfully respond to the CRL, which would significantly impact our ability to receive approval of TLANDO. Subsequent to our Advisory Committee meeting for TLANDO on January 10, 2018, we conducted a pilot phlebotomy study to assess whether ex vivo conversion of TU to T in serum blood collection tubes occurs post collection. We are conducting a definitive phlebotomy study based on FDA study design feedback to exclude any potential clinically meaningful ex vivo TU to T conversion post collection. Finally, we are performing additional analyses of existing data as well as modeling in order to address the Cmax deficiency and dose stopping criteria deficiency identified by the FDA. Although there is no guarantee that TLANDO will ever be approved by the FDA, we believe the data analyses we have performed to date together with the results from the on-going ABPM clinical study and the definitive phlebotomy study should address the deficiencies identified by the FDA in their CRL.

 

  

On June 28, 2016, we received a CRL from the FDA on our original NDA submission. The CRL identified a deficiency related to the dosing algorithm for the label. Specifically, the proposed titration scheme for clinical practice was significantly different from the titration scheme used in the Phase 3 trial leading to discordance in titration decisions between the Phase 3 trial and real-world clinical practice. In response to the CRL, we met with the FDA in a Post Action meeting, and proposed a dosing regimen to the FDA based on analyses of existing data. The FDA noted that while the proposed dosing regimen might be acceptable, validation in a clinical trial would be needed prior to resubmission

 

The FDA may also require the addition of labeling statements or other warnings or contraindications, require us to perform additional clinical trials or studies, such as the ABPM clinical study, or provide additional information in order to secure approval. Any such requirement would increase our costs and delay approval and commercialization of TLANDO and would have a material adverse effect on our business and financial condition.

 

Even if we resubmit our NDA for TLANDO, we may receive another CRL from the FDA which would result in substantial delays and additional studies and expense before we would be in a position to resubmit an NDA responsive to such additional CRL. Our ability to raise capital may also be impaired. If we proceed with any study we face the risk that the FDA would not agree with the design or results of the study. Specifically, the results from the ABPM clinical study may find that blood pressure effects of TLANDO are clinically meaningful and approval of TLANDO may never occur.

 

Even if TLANDO is approved, the FDA may limit the indications for which it may be used, include extensive warnings on the product labeling, or require costly ongoing requirements for post-marketing clinical studies including participation in a long-term TRT consortium cardiovascular study and surveillance or other risk management measures to monitor the safety or efficacy of TLANDO. Further, in the event that we seek regulatory approval of TLANDO outside the United States, such markets also have requirements for approval of drug candidates with which we must comply prior to marketing. Obtaining regulatory approval for marketing of TLANDO in one country does not ensure we will be able to obtain regulatory approval in other countries but a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in other countries.

 

Any regulatory approval of TLANDO, once obtained, may be withdrawn. Ultimately, the failure to obtain and maintain regulatory approvals would prevent TLANDO from being marketed and would have a material adverse effect on our business.

 

LPCN 1144 is in a very early stage of development and may not be further developed for a variety of reasons.

 

LPCN 1144 is in a very early stage of development and consequently the risk that we fail to commercialize LPCN 1144 and related products is high. In particular, we have not conducted any clinical studies with this product candidate although we are currently conducting two POC clinical studies. We have, however, completed various clinical studies with oral androgens which demonstrate that androgens may have a positive effect on NAFLD/NASH related biomarkers. The FDA may require further preclinical studies before the LPCN 1144 can be studied in humans. All of these factors can impact the timing of and our ability to continue development of LPCN 1144.

 

In addition, a number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late stage clinical trials, even after achieving positive results in early stage development. Accordingly, our results from our POC studies may not be predictive of the results we may obtain from further studies and trials.

 

Several factors could significantly affect the prospects for LPCN 1144, including factors relating to the regulatory approval and clinical development challenges for LPCN 1144 discussed above. The anticipated Phase 2 and 3 programs for an NDA filing for LPCN 1144 will be very long and expensive.

 

Our research and development programs and processes are at an early stage of development, which makes it difficult to evaluate our business and prospects, or predict if or when we will successfully commercialize our product candidates.

 

Our operations to date have primarily been limited to conducting research and development activities under license and collaboration agreements. Our current portfolio consists of our most advanced product candidate TLANDO as well as three additional earlier stage clinical candidates, LPCN 1111, LPCN 1107 and LPCN 1144. We have never marketed or commercialized a drug product. Consequently, any predictions about our future performance may not be as accurate as they could be if we were further along our commercialization path. In addition, as a pre-commercial stage business, we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors.

 

Our clinical product candidates are at an early stage of development and will require significant further investment and regulatory approvals prior to marketing and commercialization. As such, our product development processes for TLANDO, LPCN 1111, LPCN 1107 and LPCN 1144 are very risky and uncertain, and our product candidates may fail to advance beyond the current study. Even if we obtain required financing, we cannot ensure successful product development or that we will obtain regulatory approval or successfully commercialize any of our product candidates and generate product revenues.

 

  

All of our clinical candidates will be subject to extensive regulation which can be costly and time consuming, cause delays or prevent approval of the products for commercialization.

 

Our clinical development of TLANDO, LPCN 1111, LPCN 1107, LPCN 1144 and any future product candidates, is subject to extensive regulations by the FDA. Product development is a very lengthy and expensive process and can vary significantly based upon the product candidate’s novelty and complexity. Regulations are subject to change and regulatory agencies have significant discretion in the approval process.

 

Numerous statutes and regulations govern human testing and the manufacture and sale of human therapeutic products in the United States. Such legislation and regulation bears upon, among other things, the approval of protocols and human testing, the approval of manufacturing facilities, safety of the product candidates, testing procedures and controlled research, review and approval of manufacturing, preclinical and clinical data prior to marketing approval including adherence to cGMP during production and storage as well as regulation of marketing activities including advertising and labeling.

 

In order to obtain regulatory clearance for the commercial sale of any of our product candidates, we must demonstrate through preclinical studies and clinical trials that the potential product is safe and efficacious for use in humans for each target indication. Obtaining approval of any of our product candidates is an extensive, lengthy, expensive and uncertain process, and the FDA may delay, limit or deny approval for many reasons, including:

 

•

we may not be able to demonstrate that the product candidate is safe and effective to the satisfaction of the FDA;

•

the results of our clinical trials may not meet the level of statistical or clinical significance required by the FDA for marketing approval;

•

the FDA may disagree with the number, design, size, conduct or implementation of our clinical trials;

•

the contract research organization (“CRO”) that we retain to manage our clinical trials may take actions outside of our control that materially adversely impact our clinical trials;

•

the FDA may not find the data from preclinical studies and clinical trials sufficient to demonstrate that a particular product candidate’s clinical and other benefits outweigh its safety risks;

•

the FDA may disagree with our interpretation of data from our preclinical studies and clinical trials or may require that we conduct additional trials;

•

the FDA may not accept data generated at our clinical trial sites;

•

if our NDA once submitted is reviewed by an Advisory Committee, the FDA may have difficulties scheduling an advisory committee meeting in a timely manner or the advisory committee may recommend against approval of our application or may recommend that the FDA require, as a condition of approval, additional preclinical studies or clinical trials, limitations on approved labeling or distribution and use restrictions;

•

the FDA may require development of a Risk Evaluation and Mitigation Strategy (“REMS”) as a condition of approval;

•

the FDA may require longer or additional duration of stability data on the clinical lots prior to initiation of further clinical trials;

•

the FDA may identify deficiencies in the formulation or stability of our product candidates or products, or relating to our manufacturing processes or facilities, or in the processes and facilities of the contract manufacturing organization, or CMO, our suppliers or other third parties that may be utilized in the production supply chain of our products; and

•

with respect to TLANDO and LPCN 1111, the FDA may not grant a five-year exclusivity as the active is a Testosterone prodrug.

 

Preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain FDA approval for their products.

 

No assurance can be given that current regulations relating to regulatory approval will not change or become more stringent. The FDA may also require that we amend clinical trial protocols and/or run additional trials in order to provide additional information regarding the safety, efficacy or equivalency of any compound for which we seek regulatory approval. Moreover, any regulatory approval of a drug which is eventually obtained may entail limitations on the indicated uses for which that drug may be marketed. Furthermore, product approvals may be withdrawn or limited in some way if problems occur following initial marketing or if compliance with regulatory standards is not maintained. FDA could become more risk averse to any side effects or set higher standards of safety and efficacy prior to reviewing or approving a product. This could result in a product not being approved.

 

  

RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK

 

Our management and directors will be able to exert influence over our affairs.

 

As of September 30, 2018, our executive officers and directors beneficially owned approximately 11.2% of our common stock. These stockholders, if they act together, may be able to influence our management and affairs and all matters requiring stockholder approval, including significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control and might affect the market price of our common stock.

 

Our common stock is thinly traded, may continue to be thinly traded in the future, and our stockholders may be unable to sell at or near asking prices or at all if they need to sell their shares.

 

To date, we have a low volume of daily trades in our common stock on NASDAQ. For example, the average daily trading volume in our common stock on NASDAQ during the third quarter of 2018 was approximately 70,062 shares per day with volumes continuing to decrease. Our stockholders may be unable to sell their common stock at or near their asking prices or at all, which may result in substantial losses to our stockholders.

 

The market for our common stock may be characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will be more volatile than a seasoned issuer for the indefinite future. As noted above, our common stock may be sporadically and/or thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline significantly in the event that a large number of shares of our common stock are sold on the market without commensurate demand, as compared to a seasoned issuer that could better absorb those sales without adverse impact on its share price.

 

RISKS RELATING TO OUR FINANCIAL POSITION AND CAPITAL REQUIREMENTS

 

We have incurred significant operating losses in most years since our inception and anticipate that we will incur continued losses for the foreseeable future.

 

We have focused a significant portion of our efforts on developing TLANDO. We have funded our operations to date through proceeds from sales of common stock, preferred stock and convertible debt and from license and milestone revenues and research revenue from license and collaboration agreements with corporate partners. We have incurred losses in most years since our inception. As of September 30, 2018, we had an accumulated deficit of $134.8 million. Substantially all of our operating losses resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations. These losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ equity and working capital. We expect our research and development expenses to significantly increase in connection with clinical trials associated with TLANDO, LPCN 1111, LPCN 1107 and LPCN 1144, if initiated. In addition, if we obtain marketing approval for TLANDO, we will incur significant sales, marketing and commercialization expenses. As a result, we expect to continue to incur significant operating losses for the foreseeable future as we advance our lead product candidate, TLANDO, and further clinical development of LPCN 1111, LPCN 1107, LPCN 1144 and our other programs and continued research efforts. Because of the numerous risks and uncertainties associated with developing pharmaceutical products, we are unable to predict the extent of any future losses or when we will become profitable, if at all.

 

We will need substantial additional capital in the future. If additional capital is not available, we will have to delay, reduce or cease operations.

 

We will need to raise additional capital to continue to fund our operations. Our future capital requirements may be substantial and will depend on many factors including:

 

·

current and future clinical trials for our product candidates, including for TLANDO and LPCN 1144;

·

the receipt of any additional CRLs related to TLANDO;

·

our ability to respond to the CRLs we have received from the FDA;

·

regulatory actions of the FDA, particularly related to TLANDO;

·

the scope, size, rate of progress, results and costs of completing ongoing clinical trials and development plans with our product candidates, including any cardiovascular study required for TLANDO;

·

the duration of regulatory uncertainty relating to the TRT class;

·

the cost, timing and outcomes of our efforts to obtain marketing approval for our product candidates in the United States;

 

  

·

payments received under any license agreements, strategic partnerships or collaborations that we may enter into in the future, if any;

·

the cost of filing, prosecuting and enforcing patent claims;

·

the costs associated with commercializing our product candidates if we receive marketing approval, including the cost and timing of developing internal sales and marketing capabilities or entering into strategic collaborations to market and sell our products; and

·

funding additional product line expansions.

 

Changing circumstances may cause us to consume capital significantly faster than we currently anticipate. Also, financial markets may not be conducive to raising the capital we need, and we may not be able to raise capital through partnering arrangements. Additional financing may not be available when we need it or may not be available on terms that are favorable to us. In addition, we may seek additional capital due to favorable market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans. If adequate funds are not available to us on a timely basis, or at all, we may be unable to continue the development of our product candidates or to commercialize our product, if approved, unless we find a partner that provides additional capital or reduces our capital needs. If we are unable to take these actions we will have to delay, reduce or cease operations. 

  

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM  3.

DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

None.

 

ITEM  5.

OTHER INFORMATION

 

Employment and Severance Agreement with Nachiappan Chidambaram

 

On November 5, 2018, the Company entered into an Employment Agreement with Nachiappan Chidambaram (the “Chidambaram Agreement”), who serves as Vice President of Product Development. Under the terms of the Chidambaram Agreement, Dr. Chidambaram receives a base salary of $234,000 per year, subject to adjustment by the Company’s Board of Directors (“Board”). Dr. Chidambaram will be eligible to receive an annual discretionary cash bonus of up to twenty-two percent of his base salary, or such higher amount as may be determined by the Board. In the event Dr. Chidambaram’s employment is terminated without Cause or for Good Reason, as such terms are defined in the Dr. Chidambaram Agreement, Dr. Chidambaram will be entitled to receive, among other severance benefits, up to twenty-six (26) weeks of severance pay at his then-applicable base salary and six months accelerated vesting of outstanding equity awards. In the event that Dr. Chidambaram’s termination without cause or for Good Reason occurs as a result of or immediately prior to the closing of a Change-in-Control and results in a Separation from Service, as such terms are defined in the Chidambaram Agreement, Dr. Chidambaram will be entitled to accelerated vesting of all equity awards and severance, including (i) an amount equal to fifty-two (52) weeks of his then-applicable base salary and (ii) a bonus equal to the product of his then-applicable base salary and annual bonus percentage target.

 

Amended and Restated Stockholder Rights Plan

 

On November 12, 2015, the Board of Directors of the Company adopted a stockholder rights plan. The plan is similar to plans adopted by many other companies and was not adopted in response to any hostile takeover attempt. On November 5, 2018, the Board of Directors adopted an Amended and Restated Stockholder Rights Plan (the “Rights Plan”) in which the expiration date of the prior stockholder rights plan was extended until November 5, 2021.

 

Preferred stock purchase rights (the “Rights”) were distributed on November 30, 2015. The Rights Plan is designed to deter coercive takeover tactics, including the accumulation of shares in the open market or through private transactions and to prevent an acquiror from gaining control of the Company without offering a fair price to all of the Company’s stockholders.

 

  

Each Right entitles stockholders to buy one one-thousandth of a share of Series A Junior Participating Preferred Stock (the “Preferred Stock”) at a price of $63.96 per one-thousandth share (the “Purchase Price”). The Rights generally become exercisable upon the earlier to occur of (i) 10 business days following a public announcement that a person or group of affiliated or associated persons has, subsequent to the adoption of the Rights Plan, become an Acquiring Person (as defined below) or (ii) 10 business days (or such later date as may be determined by action of the Board of Directors prior to such time as any person or group of affiliated or associated persons becomes an Acquiring Person) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 15% or more of the outstanding common stock of the Company (the earlier of the dates described in clauses (i) and (ii) being called the “Distribution Date”). Except in certain situations, a person or group of affiliated or associated persons becomes an “Acquiring Person” upon acquiring beneficial ownership, subsequent to the adoption of the Rights Plan, of 15% or more of the outstanding shares of common stock of the Company.

 

In the event that a person becomes an Acquiring Person, other than pursuant to a board-approved tender or exchange offer for all the outstanding shares of the Company, then each Right not owned by an Acquiring Person will entitle its holder to purchase from the Company, at the Right’s then current exercise price, in lieu of shares of Preferred Stock, that number of shares of common stock of the Company which at the time such person became an Acquiring Person had a market value of twice the Purchase Price (the Company may at its option substitute one one-thousandth of a share of Series A Preferred Stock for some or all of the shares of common stock so issuable).

 

In addition, if after any person has become an Acquiring Person, (a) the Company is acquired in a merger or other business combination, or (b) 50% or more of the Company’s assets, or assets accounting for 50% or more of its earning power, are sold, leased, exchanged or otherwise transferred (in one or more transactions), proper provision shall be made so that each holder of a Right (other than the Acquiring Person, its affiliates and associates and certain transferees thereof, whose Rights became void) shall thereafter have the right to purchase from the acquiring corporation, for the Purchase Price, that number of shares of common stock of the acquiring corporation which at the time of such transaction would have a market value of twice the Purchase Price.

 

The Company is entitled to redeem the Rights at $0.001 per Right at any time prior to the time an Acquiring Person becomes such.

 

The Rights are intended to enable all stockholders to realize the long-term value of their investment in the Company. The Rights do not prevent a takeover attempt, but should encourage anyone seeking to acquire the Company to negotiate directly with the Board of Directors.

 

The above description of the terms of the Rights Plan is a summary and does not purport to be complete, and is qualified in its entirety by reference to the copy of the Amended and Restated Stockholder Rights Agreement and related exhibits, dated November 5, 2018, between the Company and American Stock Transfer & Trust Company, LLC, which is attached hereto as Exhibit 4.1 and incorporated herein by reference.

 

ITEM 6.

EXHIBITS

 

INDEX TO EXHIBITS

 

Exhibit				Incorporation By Reference
Number		Exhibit Description		Form		SEC File No.		Exhibit		Filing Date
4.1		Amended and Restated Stockholder Rights Plan
10.1		Employment and Severance Agreement of Nachiappan Chidambaram
31.1*		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350 (1)
32.2*		Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350 (1)

 

  

Exhibit				Incorporation By Reference
Number		Exhibit Description		Form		SEC File No.		Exhibit		Filing Date
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Labels Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document
*		Filed herewith
(1)		This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Registrant under the Securities Act, or the Exchange Act (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	Lipocine Inc.
	(Registrant)
Dated: November 7, 2018	/s/ Mahesh V. Patel
	Mahesh V. Patel, President and Chief Executive Officer (Principal Executive Officer)
Dated: November 7, 2018	/s/ Morgan R. Brown
	Morgan R. Brown, Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)