ITEM 1B. UNRESOLVED STAFF COMMENTS
We do not have any unresolved SEC staff comments relating to our periodic or current reports.
ITEM 2.
ITEM 2. PROPERTIES
Our corporate headquarters are located in Conshohocken, Pennsylvania, where we occupy approximately 11,075 square feet of office space and 240 square feet of storage space. The initial term of this lease ends on March 31, 2013.
We also occupy approximately 480 square feet of packaging and storage space in a building adjacent to our headquarters. We occupy this storage space pursuant to a license agreement. The term of this license ends on March 31, 2013 but may be terminated earlier by the licensor for any reason upon 90 days advance written notice.
In general, these properties are adequate and suitable for the purposes for which they are being used, however, we expect to obtain additional space as we prepare for the potential commercial launch of Zelrix.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any pending legal proceedings.
ITEM 4.
ITEM 4. (REMOVED AND RESERVED)
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock began trading on The NASDAQ Global Market on August 6, 2010 under the symbol “PATH”. Prior to that time, there was no public trading market for our common stock. The following table sets forth the high and low closing sales prices per share for our common stock for the periods indicated, as reported by The NASDAQ Global Market:
Comparative Stock Performance Graph
The following graph illustrates a comparison of the total cumulative stockholder return on our common stock since August 6, 2010, which is the date our common stock first began trading on The NASDAQ Global Market, to two indices: the NASDAQ Composite Index and the NASDAQ Biotechnology Index. The graph assumes an initial investment of $100 on August 6, 2010, in each of our common stock, the stocks comprising the NASDAQ Composite Index, and the stocks comprising the NASDAQ Biotechnology Index. Historical stockholder return is not necessarily indicative of the performance to be expected for any future periods.
The foregoing graph and table are furnished solely with this report, and are not filed with this report, and shall not be deemed incorporated by reference into any other filing under the Securities Act or the Exchange Act, whether made by us before or after the date hereof, regardless of any general incorporation language in any such filing, except to the extent we specifically incorporate this material by reference into any such filing.
Holders of Record
As of February 14, 2011, there were approximately 28 holders of record of our common stock. Because many of such shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
Dividends
We have never paid or declared any cash dividends on our common stock. We currently intend to retain any earnings for future growth and, therefore, do not expect to pay cash dividends in the foreseeable future.
Use of Proceeds from Registered Securities
On August 11, 2010, we completed the sale of 5,000,000 shares of our common stock in our IPO at a price of $10.00 per share pursuant to a Registration Statement on Form S-1 (File No. 333-166825), which was declared effective by the SEC on August 5, 2010 (the “Effective Date”). After deducting underwriting discounts and commissions and other expenses of the offering, we received net offering proceeds of $43.0 million. From the Effective Date through December 31, 2010, we have used the net proceeds from the IPO as follows:
•
approximately $8.0 million for further clinical development, manufacturing development, and preparation and submission of an NDA for Zelrix;
•
approximately $2.8 million for salaries and related personnel expenses and approximately $1.4 million for working capital and other general corporate purposes.
The foregoing amounts represent the Company’s reasonable estimate of the amount of net offering proceeds applied to such activities instead of the actual amount of net offering proceeds used. The remainder of the net proceeds have been invested into money market accounts. None of the net proceeds, were directly or indirectly paid to any of our directors, officers or their associates, any person(s) owning 10% or more of any class of our equity securities, or any of our affiliates, other than payments in the ordinary course of business to officers for salaries and to non-employee directors as compensation for board or board committee service.
There has been no material change in our planned use of proceeds from the IPO from that described in the final prospectus filed with the SEC pursuant to Rule 424(b) on August 6, 2010.
The selected financial data set forth below should be read in conjunction with, and is qualified by reference to, the audited financial statements and related notes contained in this Form 10-K and the information in this Form 10-K under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business”. The statement of operations data for the years ended December 31, 2010, 2009 and 2008 and the balance sheet data as of December 31, 2010 and 2009 have been derived from our audited financial statements and related notes, which are included elsewhere in this Form 10-K. The statement of operations data for the years ended December 31, 2007 and 2006 and the balance sheet data as of December 31, 2008, 2007 and 2006 have been derived from audited financial statements which do not appear in this Form 10-K. The historical results are not necessarily indicative of the results to be expected for any future periods.
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read together with our audited financial statements and related notes appearing elsewhere in this Form 10-K.
Overview
We are a specialty pharmaceutical company focused on the development and commercialization of branded therapeutics for diseases of the central nervous system, including neurological and psychiatric disorders. Our most advanced product candidate, Zelrix, is an active, single-use transdermal sumatriptan patch that we are developing for the treatment of acute migraine. Zelrix uses our proprietary SmartRelief technology. We submitted a New Drug Application (“NDA”) for Zelrix to the U.S. Food and Drug Administration (“FDA”) on October 29, 2010. Subject to the approval of our NDA, we plan to build our own specialty sales force in the U.S. to launch Zelrix. We have two other proprietary product candidates in preclinical development that address large market opportunities, NP201 for the continuous symptomatic treatment of Parkinson’s disease and NP202 for the long-term treatment of schizophrenia and bipolar disorder. We expect to submit an Investigational New Drug Application (“IND”) to the FDA in the first half of 2011 for NP201 and in 2012 for NP202.
We were incorporated in the State of Delaware in January 2005 and are a development stage company. Since our inception, we have invested a significant portion of our efforts and financial resources in the development of Zelrix. Zelrix is the only product candidate for which we have conducted clinical trials, and to date we have not marketed, distributed or sold any products. As a result, we have generated no product revenue and have never been profitable. Our net loss for the years ended December 31, 2010, 2009 and 2008 was $24.4 million, $15.6 million and $17.5 million, respectively. As of December 31, 2010, we had an accumulated deficit of $79.8 million.
We have funded our operations to date primarily with the proceeds of the sale of common stock, convertible preferred stock, preferred stock warrants, convertible notes and borrowings under credit facilities. From inception through December 31, 2010, we have received net proceeds of $101.2 million from the sale of common stock, convertible preferred stock, preferred stock warrants and convertible notes.
Liquidity and Capital Resources
We expect to continue to incur substantial additional operating losses for at least the next several years as we continue to develop our product candidates and seek marketing approval for, and the eventual commercialization of, Zelrix and our other products candidates. If we obtain marketing approval for Zelrix, we will incur significant sales, marketing and outsourced manufacturing expenses. In addition, we expect to incur additional expenses to add operational, financial and information systems and personnel to comply with corporate governance, internal controls and similar requirements applicable to us as a public company.
Our principal sources of liquidity are cash and cash equivalents of $38.9 million as of December 31, 2010. We believe that our existing cash and cash equivalents will be sufficient to fund our operations and capital requirements through FDA approval of Zelrix and into the expected commercial launch of Zelrix in the U.S. in the first half of 2012. However, changing circumstances may cause us to expend cash faster than we currently anticipate, or we may need to spend more cash than currently expected because of such circumstances. Our future capital needs and the adequacy of our available funds will depend on many factors, including:
•
The outcome of the FDA’s review of the NDA for Zelrix;
•
The cost, scope and timing of activities undertaken to prepare for the potential commercialization of Zelrix;
•
The extent to which the FDA may require us to perform additional clinical trials for Zelrix;
•
The cost of purchasing manufacturing and other capital equipment for our potential products;
•
The scope, progress, results and costs of development for our other product candidates;
•
The extent to which we acquire or invest in new products, businesses and technologies; and
•
The extent to which we choose to establish collaboration, co-promotion, distribution or other similar agreements for product candidates.
If additional funds are required or we elect to raise additional funds, we may raise such funds from time to time through public or private sales of equity or debt securities or from bank or other loans. Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could materially and adversely impact our growth plans and our financial condition or results of operations. The terms of any such financing may involve significant cash payment obligations and covenants that restrict our ability to operate our business. Additionally, equity financing, if available, may be dilutive to the holders of our common stock.
We may request an additional $6.0 million in funding through May 2011 under the debt facility we entered into in May 2010 (the May 2010 Loan Facility). Any such request for additional funding would be subject to our compliance with the terms of the May 2010 Loan Facility, including the continued accuracy of our representations and warranties contained therein, and is at the lenders’ sole discretion. This facility has a scheduled maturity date in August 2013 and is secured by substantially all of our assets, excluding intellectual property, which is subject to a negative pledge prohibiting the granting of liens thereon to any third party.
Key Components of Our Statement of Operations
Research and Development Expenses
Our research and development expenses consist of expenses incurred in developing, testing and seeking marketing approval of our product candidates, including:
•
Expenses associated with regulatory submissions, preclinical development, clinical trials and manufacturing;
•
Personnel related expenses, such as salaries, benefits, travel and other related expenses, including stock-based compensation;
•
Payments made to third party investigators who perform research and development on our behalf;
•
Payments to third party contract research organizations, laboratories and independent contractors;
•
Expenses incurred to obtain technology licenses if the technology licensed has not reached technological feasibility and has no alternative future use; and
•
Facility, maintenance and other related expenses
We expense all research and development costs as incurred. Preclinical development expenses and clinical trial expenses for our product candidates are a significant component of our current research and development expenses. Product candidates in later stage clinical development, such as Zelrix, generally have higher research and development expenses than those in earlier stages of development, primarily due to the increased size and duration of the clinical trials. We track and record information regarding external research and development expenses for each study or trial that we conduct. From time to time, we use third party contract research organizations, laboratories and independent contractors in preclinical studies. We recognize the expenses associated with third parties performing these services for us in our preclinical studies based on the percentage of each study completed at the end of each reporting period. We coordinate clinical trials through a number of contracted investigational sites and recognize the associated expense based on a number of factors, including actual and estimated subject enrollment and visits, direct pass-through costs and other clinical site fees.
From our inception in January 2005 through December 31, 2010, we incurred research and development expenses of $54.4 million, of which $40.0 million was for the development of Zelrix (inclusive of $5.5 million of acquired in-process research and development expense in connection with the patent application utilized by Zelrix), $2.8 million was for the development of NP201 and $0.3 million was for to the development of NP202. The remaining research and development expenses are for amounts incurred that we do not allocate to specific programs, such as personnel related expenses, including salaries and benefits, as well as general fixed costs for our facility and related expenses.
We expect that our research and development expenses in 2011 will be similar to or slightly lower than 2010 due to the fact that 2010 included substantial costs related to the completion of the full enrollment of two long-term, open label Phase III trials for Zelrix and increased regulatory expenses related to the Zelrix NDA we submitted in October. While we will continue to incur expenses related to the continued development of Zelrix, we also expect to incur research and development expenses in 2011 for the development of NP201 and NP202. These expenditures are subject to numerous uncertainties regarding timing and cost to completion. We also expect to incur additional costs relating to post-marketing studies to gather additional information regarding Zelrix’s risks, benefits and optimal use.
We currently anticipate submitting an IND for NP201 in the first half of 2011 and for NP202 in 2012. Due to their early stages of development, we are not currently able to determine the duration and completion costs of our NP201 and NP202 development projects.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation, for personnel serving in our executive, finance, accounting, legal, market research and human resource functions. Our selling, general and administrative expenses also include facility and related costs not included in research and development expenses, professional fees for legal, including patent-related expenses, expenses related to market research and commercialization preparation activities, consulting, tax and accounting services, insurance, depreciation and general corporate expenses.
We expect that our selling, general and administrative expenses in 2011 will be significantly higher than in 2010 as a result of higher expenses in 2011 for costs related to building a commercial infrastructure for the anticipated U.S. launch of Zelrix in the first half of 2012. Additionally, we expect higher expenses relating to a full year of operating as a public company, including increased costs for the hiring of additional personnel, and for payment to outside consultants, including lawyers and accountants, to comply with additional regulations, corporate governance, internal control and similar requirements applicable to public companies, as well as increased costs for insurance.
Interest Income and Interest Expense
Interest income consists of interest earned on our cash and cash equivalents. Interest expense consists primarily of cash and non-cash interest costs related to our outstanding debt. Additionally, in connection with some of our debt financings, we issued warrants, the fair value of which we recorded as deferred financing costs. We amortize these deferred financing costs over the lives of the loans as interest expense in our statement of operations. Prior to our initial public offering (IPO), on a quarterly basis these warrants were marked-to-market, in accordance with accounting principles generally accepted in the U.S (GAAP), and any change in fair value was recorded as interest expense in our statement of operations. Upon the completion of our IPO, these warrants were reclassified into stockholders’ equity as they were converted into warrants to purchase common stock and are no longer required to be marked-to-market at each balance sheet date. We expect cash-paid interest expense to increase in 2011 compared with 2010 as a result of the May 2010 Loan Facility. We do not anticipate significant non-cash interest expense in 2011.
Net Operating Losses and Tax Loss Carryforwards
Our net loss was $24.4 million for the year ended December 31, 2010 and $15.6 million for the year ended December 31, 2009. We have incurred cumulative net losses of $73.4 million from inception through December 31, 2010. As of December 31, 2010, we had approximately $64.9 million of federal net operating loss carryforwards and state research and development credits available to offset future taxable income. These federal and state net operating loss carryforwards will begin to expire in 2025. Due to the uncertainty of our ability to realize the benefit of any net operating loss carryforwards and credits, the deferred tax asset related to these carryforwards has been fully offset by a valuation allowance at December 31, 2010.
Our IPO, together with private placements and other transactions that have occurred since our inception, may trigger, or may have already triggered, an “ownership change” pursuant to Section 382 of the Code. If an ownership change is triggered, it will limit our ability to use some of our net operating loss carryforwards. In addition, since we will need to raise substantial additional funding to finance our operations, we may undergo further ownership changes in the future, which could further limit our ability to use net operating loss carryforwards. As a result, if we generate taxable income, our ability to use some of our net operating loss carryforwards to offset U.S. federal taxable income may be subject to limitations.
Critical Accounting Policies and Use of Estimates
This “Management’s Discussion and Analysis of Our Financial Condition and Results of Operations” discusses our financial statements, which have been prepared in accordance with GAAP and are included in this Form 10-K. The preparation of these financial statements in accordance with GAAP requires us to make estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to clinical trial expenses and stock-based compensation. We base our estimates on historical experience and on various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully discussed in note 3 to our financial statements, we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our financial statements. We have reviewed these critical accounting policies and estimates with the audit committee of our board of directors.
Research and Development Expenses
Although we manage the conduct of our own clinical trials, we rely on third parties to conduct our preclinical studies and to provide services, including data management, statistical analysis and electronic compilation for our clinical trials, as well as for the manufacture of our clinical trial supplies. At the end of each reporting period, we compare the payments made to each service provider to the estimated progress towards completion of the related project. Factors that we consider in preparing these estimates include the number of subjects enrolled in studies, milestones achieved and other criteria related to the efforts of our vendors. These estimates are subject to change as additional information becomes available. Depending on the timing of payments to vendors and estimated services provided, we record net prepaid or accrued expenses related to these costs. We calculate expenses incurred for the manufacture of our clinical supplies using our estimate of costs and capitalize these expenses on our balance sheet to the extent we hold clinical supply materials on hand to be distributed for use in our clinical trials. We expense these costs as the supplies are consumed in the trials.
Stock-Based Compensation
We use the Black-Scholes option-pricing model to value our stock option awards. The Black-Scholes option-pricing model requires the input of subjective assumptions, including the expected life of stock options, stock price volatility and the risk-free interest rate. The risk-free interest rate is based on U.S. Treasury instruments with a remaining term equal to the expected term of the option. As a newly public company, we do not have sufficient history to estimate the expected life of our options or the volatility of our common stock price. We use comparable public companies as a basis for our expected volatility to calculate the fair value of our option grants. We intend to continue to consistently apply this process using comparable companies until a sufficient amount of historical information regarding the volatility of our own share price becomes available. We use the “simplified method,” as allowed under the Securities and Exchange Commission’s, or SEC, accounting guidance, to determine the expected life, which is the midpoint between an option’s vesting date and contractual term. The assumptions used in calculating the fair value of stock options represent our best estimate and involve inherent uncertainties and the application of our judgment. As a result, if factors change and we use different assumptions, stock-based compensation could be materially different in the future.
Prior to our IPO, the fair value of our common stock underlying grants of common stock options and restricted stock was determined by our board of directors, or compensation committee pursuant to authority delegated by our board of directors, and represented the most important factor in determining the value of our stock-based compensation. In the absence of a public trading market for our common stock, our board of directors or compensation committee was required to estimate the fair value of our common stock at the grant date of our stock-based awards. In estimating our aggregate equity value, we used methodologies and assumptions consistent with the American Institute of Certified Public Accountants Practice Guide, or the AICPA Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. The primary methodologies that we considered to determine our aggregate equity value were a market-based approach and an asset-based approach.
Impact of Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (ASU 2010-06), which amends the existing fair value measurement and disclosure guidance currently included in Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures, to require additional disclosures regarding fair value measurements. Specifically, ASU 2010-06 requires entities to disclose the amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers, the reasons for any transfer in or out of Level 3 and information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. In addition, ASU 2010-06 also clarifies the requirement for entities to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for additional disclosures related to Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010. The adoption of ASU 2010-06 did not impact the Company’s financial statements.
Results of Operations
Comparison of Years Ended December 31, 2010 and 2009
Revenue
During the year ended December 31, 2010, the Company was awarded $650,000 of Qualifying Therapeutic Discovery Project (QTDP) grants under section 48D of the U.S. Internal Revenue Code in connection with costs incurred during 2009 and 2010 for the Company’s Zelrix, NP201 and NP202 development programs. Under the award guidelines, QTDP’s had to show a reasonable potential to result in new therapies to treat areas of unmet medical need or prevent, detect or treat chronic or acute diseases and conditions, reduce the long-term growth of health care costs in the United States, or significantly advance the goal of curing cancer within 30 years.
Research and Development Expenses
Research and development expenses for the years ended December 31, 2010 and 2009 were comprised of the following:
Research and development expenses increased by $5.8 million, or 51%, to $17.1 million in 2010 from $11.3 million in 2009. This increase resulted primarily from a $2.5 million increase in manufacturing costs related to production of Phase III clinical supplies of Zelrix, a $2.4 million increase in regulatory and quality assurance costs related to the preparation and filing of our Zelrix NDA in October 2010, and a $1.4 million increase in clinical development costs due to our continued Phase III clinical program for Zelrix. These increases were, in part, offset by a $1.3 million decrease in preclinical expenses, reflecting the completion in 2009 of a substantial portion of our preclinical studies for Zelrix and our increased focus on our Phase III clinical program for Zelrix in 2010. Research and development headcount remained fairly flat for 2010 as compared to 2009, with the increase in compensation and related expenses resulting from annual increases in salary, bonus, stock-based compensation expense and benefit premiums.
Research and development expenses by program for the years ended December 31, 2010 and 2009 are presented below:
The increase in spending on Zelrix in 2010 was primarily due to the continuation of our Phase III clinical programs and the related manufacture of Phase III clinical supplies, as well as the preparation of our Zelrix NDA which was submitted in October 2010. These expenses were partially offset by lower preclinical spending due to the completion of many of our preclinical studies in 2009. Increased spending on NP201 in 2010, compared to 2009, was primarily the result of additional formulation (manufacturing) work. Modest spending on NP202 began in the second half of 2010 as we began early research and development. Personnel related expenses, including salaries and benefits, are included in the table above as general development expenses as we do not allocate these expenses to specific programs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $1.6 million, or 52%, to $4.8 million in 2010 from $3.1 million in 2009. This increase resulted primarily from higher personnel costs due to additional employees as well as salary increases, higher stock-based compensation expense and expenses related to being a public company, such as increased public accounting expense and board of director’s fees.
Interest Expense
Interest expense increased by $2.4 million to $3.7 million in 2010 from $1.3 million in 2009. The 2010 expense is comprised of $2.6 million of non-cash interest expense incurred during 2010 that was related to the amortization of the beneficial conversion feature (BCF) of secured subordinated promissory notes that we issued and sold to investors in April 2010 (April 2010 Convertible Notes), plus an additional $0.3 million of non-cash interest accrued on these notes prior to their conversion, and an additional $0.3 million of non-cash interest expense for the increase in fair value of our warrant liability that occurred during 2010 before the warrants were reclassified to stockholders’ equity upon the completion of our IPO. Also included in the 2010 interest expense is $0.2 million of non-cash amortization of deferred debt issuance costs and $0.4 million of cash-paid interest on our outstanding debt. During 2009, the Company had $1.1 million of non-cash interest expense related to the issuance and subsequent conversion of the convertible promissory notes issued in July 2009 and $0.2 million of cash-paid interest on our outstanding debt.
Income Tax Benefit
We recognized an income tax benefit of $0.5 million in 2010 and $0.2 million in 2009 related to the sale of Pennsylvania research and development tax credits to third party buyers.
Comparison of Years Ended December 31, 2009 and 2008
Research and Development Expenses
Research and development expenses for the years ended December 31, 2009 and 2008 were comprised of the following:
Research and development expenses increased by $2.5 million, or 28%, to $11.3 million in 2009 from $8.8 million in 2008. This increase resulted primarily from a $3.2 million increase in clinical development costs related to our pivotal Phase III clinical trial and our long term, open label Phase III trials for Zelrix and a $0.4 million increase in compensation and related costs, offset by a $0.6 million decrease in preclinical expenses and a $0.6 million decrease in manufacturing expenses. The increase in compensation and related costs in 2009 primarily reflected our addition of research and development personnel, particularly in the areas of quality assurance, regulatory and medical, throughout 2008. The costs of these additional personnel were reflected as a full year of expense in 2009. The decrease in preclinical expense in 2009 primarily reflected the completion of a preclinical NP201 study in the first half of 2009, which had been ongoing throughout 2008. The decrease in manufacturing expenses in 2009 primarily reflected prototype development work in 2008 for NP201 that did not recur in 2009.
Research and development expenses by program for the years ended December 31, 2009 and 2008 are presented below:
The significant increase in spending on Zelrix in 2009 was primarily due to the continuation of our Phase III clinical program. As we completed and analyzed the results of our preclinical trial for NP201, our spending on NP201 declined by 67% in 2009. Personnel related expenses, including salaries and benefits, are included in the table above as general development expenses as we do not allocate these costs to specific product candidates.
Acquired In-Process Research and Development Expenses
In July 2008, we entered into an asset purchase and license agreement with Travanti Pharma Inc., or Travanti. Pursuant to the terms of the Travanti agreement, we paid $5.5 million to Travanti for the purchase of a patent application, and a worldwide license in the field of migraine to additional intellectual property, related to transdermal delivery of anti-migraine medications using an active delivery patch. We recognized the purchase price in our statement of operations for the year ended December 31, 2008 as acquired in-process research and development because additional research and development efforts and marketing approval in the U.S. is required in order to commercialize Zelrix, which utilizes this patent application.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $3.1 million in both 2009 and 2008. Although selling, general and administrative compensation expenses increased by $0.4 million in 2009 due, in part, to the hiring of a chief financial officer in the fourth quarter of 2008, this increase was offset by decreases of $0.2 million in legal expenses, $0.1 million in market research expenses and $0.1 million in other general expenses.
Interest Income/Expense
Interest income decreased to $30,000 in 2009 from $158,000 in 2008 due to lower average cash and cash equivalent balances, consisting primarily of bank deposits and money market mutual funds invested in short-term corporate and government obligations, and lower yields on investments.
Interest expense increased to $1.3 million in 2009 from $0.3 million in 2008 primarily as a result of the non-cash beneficial conversion feature and the fair value of the warrants issued in connection with the issuance of convertible debt in July 2009. This convertible debt converted into shares of Series B preferred stock in August 2009.
Income Tax Benefit
In 2009, we recognized an income tax benefit of $151,000 related to the sale of Pennsylvania research and development tax credits to a third party buyer.
Cash Flows
Net cash used in operating activities in 2010 was $18.4 million, primarily the result of spending on our Phase III clinical program for Zelrix and the related manufacture of supplies for those trials, as well as costs incurred for the preparation and filing of our Zelrix NDA. During the year ended December 31, 2010, we used $3.5 million of cash in investing activities, almost solely for the purchase of equipment related to the commercial manufacture of Zelrix. These payments represent the first seven of fourteen scheduled payments to be made for this equipment that total $7.1 million based on exchange rates in effect at December 31, 2010. Also in the year ended December 31, 2010, we were provided with $56.9 million from financing activities, primarily from the $43.0 million of net proceeds received from our IPO, combined with $10.1 million from the April 2010 Convertible notes and $5.0 million from the May 2010 Loan Facility. These cash inflows from financings are offset by $1.2 million of contractual debt repayments throughout 2010.
Net cash used in operating activities in 2009 was $13.6 million, primarily the result of spending on our pivotal Phase III clinical trial as well as our long-term, open label Phase III trials for Zelrix, and the related manufacture of supplies for these trials. During the year ended December 31, 2009, we used $29,000 in investing activities for the purchase of property and equipment. Cash provided by financing activities in 2009 was $9.2 million, reflecting $10.1 million of net proceeds from the sale of Series B preferred stock, partially offset by scheduled debt repayments of $0.9 million.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not have as of the filing of this 10-K with the SEC, any off-balance sheet arrangements as defined in Item 3(a)(4) of the SEC’s Regulation S-K.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2010:
In addition to the contractual commitments reflected in the table above, we have agreed to pay Penn aggregate milestone payments of up to $950,000, per licensed product, upon the achievement of specified development and regulatory milestones related to each licensed product that contains ropinirole and other specified active ingredients, including the active ingredients in NP201 and NP202, and royalties in the low single digits on worldwide net sales of such licensed products. We and Penn have agreed to negotiate the milestone payments and royalties payable for each licensed product that contains an active ingredient other than those currently specified in the agreement. We are unable to determine the timing of the achievement of these milestones or whether and when we will commercialize and generate any sales for a licensed product.
We have also entered into a license agreement with SurModics under which we have agreed to pay SurModics milestone payments of up to an aggregate amount of $4.75 million upon the achievement of specified development, regulatory and sales level milestones related to the first clinical indication approved by a regulatory authority for NP201. We must also pay an additional single milestone payment upon regulatory approval of each additional clinical indication for NP201 and royalties in the low single digits on worldwide net sales of commercial product. We are unable to determine the timing of the achievement of these milestones or whether and when we will commercialize and generate any sales for a licensed product.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve our capital to fund operations. We also seek to maximize income from our investments without assuming significant risk. Our exposure to market risk is confined to our cash and cash equivalents. As of December 31, 2010, we had cash and cash equivalents of $38.9 million. We do not engage in any hedging activities against changes in interest rates. Because of the short-term maturities of our cash and cash equivalents, we do not believe that an increase in market rates would have any significant impact on the realized value of our investments, but may increase the interest expense associated with our debt.
We have no operations outside the U.S. We have, however, entered into two agreements with LTS, a manufacturer in Germany. Under one of these agreements, LTS provides services to us related to the production and assembly of Zelrix. Under this agreement, we paid $2.1 million in 2008, $1.2 million in 2009 and $1.6 million in the year ended December 31, 2010 to LTS. Under the other agreement, we have agreed to pay LTS an aggregate of 5.4 million in 14 monthly installments that commenced in June 2010, to fund the purchase of commercial manufacturing equipment for Zelrix. As of December 31, 2010, 2.7 million, or approximately $3.6 million, based on exchange rates as of December 31, 2010, remain to be paid.
Because of these agreements, we are subject to fluctuations in the exchange rate between the U.S. dollar and the Euro. We do not engage in any hedging activities against changes in the exchange rate between the U.S. dollar and the euro because we believe reasonably possibly near-term fluctuations of such exchange rate would not materially affect our results of operations, financial position or cash flows. We are currently in the process of transferring these manufacturing activities to one of LTS’s U.S. subsidiaries and anticipate that our commercial manufacturing activities will be located in the U.S., thereby substantially eliminating our exposure to fluctuation in the relative values of the U.S. dollar and the Euro.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NUPATHE INC.
(A Development-Stage Company)
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
NuPathe Inc.:
We have audited the accompanying balance sheets of NuPathe Inc. (a development-stage company) (the Company) as of December 31, 2010 and 2009, and the related statements of operations, redeemable convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2010 and the period from January 7, 2005 (inception) through December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NuPathe Inc. as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2010 and for the period from January 7, 2005 (inception) through December 31, 2010, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 18, 2011
NUPATHE INC.
(A Development-Stage Company)
Balance Sheets
See accompanying notes to financial statements.
NUPATHE INC.
(A Development-Stage Company)
Statements of Operations
See accompanying notes to financial statements.
NUPATHE INC.
(A Development-Stage Company)
Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
Period from January 7, 2005 (inception) through December 31, 2010
See accompanying notes to financial statements.
NUPATHE INC.
(A Development-Stage Company)
Statements of Cash Flows
See accompanying notes to financial statements.
NUPATHE INC.
(A Development-Stage Company)
Notes to Financial Statements
(1) Background
NuPathe Inc. (the Company) is a specialty pharmaceutical company focused on the development and commercialization of branded therapeutics for diseases of the central nervous system. The Company was incorporated in Delaware on January 7, 2005 (inception) and has its principal office in Conshohocken, Pennsylvania. The Company operates as a single business segment and is a development stage company.
(2) Development-Stage Risks and Liquidity
The Company has incurred losses and negative cash flows from operations since inception and has accumulated a deficit during the development stage of $79,796,332 as of December 31, 2010. The Company anticipates incurring additional losses until such time, if ever, that it can generate significant sales of its products currently in development. Management estimates that cash and cash equivalents of $38,918,332 as of December 31, 2010, will be sufficient to fund operations and capital requirements into the first half of 2012. Additional financing will be needed by the Company to fund its operations and the commercialization of its products beyond the first half of 2012. There is no assurance that such financing will be available when needed or on acceptable terms.
The Company is subject to those risks associated with any development-stage specialty pharmaceutical company that has substantial expenditures for research and development. There can be no assurance that the Company’s research and development projects will be successful, that products developed will obtain necessary regulatory approval, or that any approved product will be commercially successful. In addition, the Company operates in an environment of rapid technological change, and is largely dependent on the services of its employees and consultants.
(3) Summary of Significant Accounting Policies
(a) Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from such estimates.
(b) Fair Value of Financial Instruments
Management believes that the carrying amounts of the Company’s financial instruments, including cash equivalents, prepaid expenses and other current assets, accounts payable and accrued expenses, approximate fair value due to the short-term nature of those instruments. The carrying amount of the Company’s debt obligations approximate fair value based on interest rates available on similar borrowings.
The Company follows Financial Accounting Standards Board (FASB) accounting guidance on fair value measurements for financial assets and liabilities measured on a recurring basis. The guidance requires fair value measurements be classified and disclosed in one of the following three categories:
•
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
•
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liabilities; or
•
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
The following fair value hierarchy table presents information about each major category of the Company’s financial assets and liability measured at fair value on a recurring basis as of December 31, 2010 and 2009:
The reconciliation of warrant liability measured at fair value on a recurring basis using unobservable inputs (Level 3) is as follows:
The fair value of the warrant liability is based on Level 3 inputs. For this liability, the Company developed its own assumptions that do not have observable inputs or available market data to support the fair value. See note 6(b) for further discussion of the warrant liability.
(c) Cash and Cash Equivalents
The Company considers all highly liquid debt instruments that have maturities of three months or less when acquired to be cash equivalents. As of December 31, 2010 and 2009, cash equivalents of $38,770,210 and $3,654,831, respectively, consisted of money market mutual funds invested in commercial paper and short-term corporate and government obligations. The Company’s cash accounts are subject to account control agreements with certain lenders that give the lenders the right to assume control of the accounts in the event of a loan default (note 6).
(d) Property and Equipment
Property and equipment are recorded at cost and are depreciated on a straight-line basis over their estimated useful lives. The Company uses a life of three years for laboratory equipment and computer equipment, including software, and five years for office equipment and furniture. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the asset. Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, then an impairment charge is recognized for the amount by which the carrying value of the asset exceeds the fair value of the asset. As of December 31, 2010 and 2009, management believes that no revision of the remaining useful lives or write-down of long-lived assets is required.
(e) Government Grants
Grants received are recognized as revenue when the related work is performed and the qualifying research and development costs are incurred. In October 2010, the Company was awarded $649,959 in research grants by the U.S. government under the Qualifying Therapeutic Discovery Project program which was recognized as grant revenue for the year ended December 31, 2010.
(f) Research and Development and In-Process Research and Development
Research and development costs are charged to expense as incurred. Upfront and milestone payments made to third parties who perform research and development services on the Company’s behalf will be expensed as services are rendered. Costs incurred in obtaining technology licenses are charged to research and development expense if the technology licensed has not reached technological feasibility and has no alternative future use.
(g) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(h) Stock-Based Compensation
The Company measures employee stock-based awards at grant date fair value and records compensation expense, net of expected forfeitures, if any, on a straight-line basis over the vesting period of the award. For stock-based awards that have performance based vesting criteria, compensation cost is recognized when it is deemed probable that the vesting criteria will be met.
Determining the appropriate fair value of stock-based awards requires the use of subjective assumptions, including, for stock options, the expected life of the option and expected stock price volatility, and, prior to the Company’s initial public offering (IPO), the fair value of the Company’s common stock. The Company uses the Black-Scholes option-pricing model to value its stock option awards. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, stock-based compensation expense could be materially different for future awards.
The expected life of stock options was estimated using the “simplified method,” as the Company has limited historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior for its stock option grants. The simplified method is the midpoint between the vesting period and the contractual term of the option. As a newly public company, sufficient history to estimate the expected life of stock options or the volatility of our common stock price is not available. The Company uses a basket of comparable public companies as a basis for the expected volatility assumption. The Company intends to continue to consistently apply this process using comparable companies until a sufficient amount of historical information regarding the volatility of the Company’s share price becomes available.
Nonemployee awards are revalued until an award vests and compensation expense is recorded on a straight-line basis over the vesting period of each separate vesting tranche of the award, or using the accelerated attribution method. The estimation of the number of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from the Company’s current estimates, such amounts will be recorded as an adjustment in the period in which estimates are revised.
(i) Net Loss Per Common Share
Basic and diluted net loss per common share is determined by dividing net loss applicable to common stockholders by the weighted average common shares outstanding during the period. For all periods presented, the previously outstanding shares of Series A Convertible Preferred Stock (Series A) and Series B Convertible Preferred Stock (Series B), common stock options, unvested restricted stock and stock warrants have been excluded from the calculation because their effect would be anti-dilutive. Therefore, the weighted average shares used to calculate both basic and diluted loss per share are the same.
The following potentially dilutive securities have been excluded from the computations of diluted weighted average shares outstanding as of December 31, 2010, 2009 and 2008, as they would be anti-dilutive:
(j) Segment Information
The Company is managed and operated as one business. The entire business is managed by a single management team that reports to the chief executive officer. The Company does not operate separate lines of business or separate business entities with respect to any of its product candidates. Accordingly, the Company does not prepare discrete financial information with respect to separate product areas and does not have separately reportable segments.
(k) Recently Issued Accounting Pronouncements
In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (ASU 2010-06), which amends the existing fair value measurement and disclosure guidance currently included in Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures, to require additional disclosures regarding fair value measurements. Specifically, ASU 2010-06 requires entities to disclose the amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers, the reasons for any transfer in or out of Level 3 and information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. In addition, ASU 2010-06 also clarifies the requirement for entities to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for additional disclosures related to Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010. The adoption of ASU 2010-06 did not impact the Company’s financial statements.
(l) Reverse Stock Split Ratio
On July 14, 2010, the board of directors of the Company approved a reverse stock split of the Company’s common stock at a ratio of one share for every 8.0149 shares previously held. The stockholders approved the reverse stock split on July 19, 2010, and it was effected on July 20, 2010. All common stock share and per-share data included in these financial statements reflects the reverse stock split.
(4) Property and Equipment
Property and equipment consisted of the following:
Depreciation and amortization expense was $46,649, $57,383, and $48,197 for the years ended December 31, 2010, 2009 and 2008, respectively.
(5) Accrued Expenses
Accrued expenses consisted of the following:
(6) Debt
(a) Convertible Notes
In July 2009, the Company issued convertible promissory notes for cash proceeds of $1,934,183 to existing investors, including two officers of the Company (the 2009 Notes). The 2009 Notes bore interest of 10% per year and were due on June 30, 2010, if not converted prior to such date, and were mandatorily convertible into preferred stock upon the occurrence of the Second Tranche Closing, as defined. The holders of the 2009 Notes were entitled to receive warrants to purchase shares of Series B upon the conversion of the 2009 Notes. The fair value of the warrants of $556,042 was recorded as a reduction in the carrying value of the 2009 Notes as original issue discount and recognized as interest expense during 2009. After the allocation of the original issue discount, the 2009 Notes contained a beneficial conversion feature (BCF) of $556,042, which was also recognized as additional interest expense during 2009.
In August 2009, the holders of the 2009 Notes converted their notes, including accrued interest of $22,840, into 2,104,326 shares of Series B at a conversion price of $0.93 per share. Upon conversion, the investors received warrants to purchase 736,514 shares of Series B at $0.93 per share which, upon completion of the Company’s IPO, converted into warrants to purchase 91,890 shares of common stock at $7.45 per share that are exercisable for a term of up to seven years. The following table summarizes the fair value and the assumptions used for the Black-Scholes option-pricing model for the Series B warrants:
Upon the completion of the Company’s IPO in August 2010, and as the result of these warrants converting into warrants to purchase common stock, they were reclassified into stockholder’s equity.
In April 2010, the Company issued convertible promissory notes for cash proceeds of $10,062,500 to existing investors, including three officers of the Company (the April 2010 Convertible Notes). The April 2010 Convertible Notes bore interest of 8% per year and were due on December 31, 2010, if not converted prior to that date. The April 2010 Convertible Notes and related accrued interest were mandatorily convertible into common stock upon the completion of a qualifying IPO, at a conversion price equal to 80% of the offering price per share in such IPO. Upon the completion of the Company’s IPO in August 2010, the April 2010 Convertible Notes and related accrued interest converted into 1,292,122 shares of common stock. The Company initially recorded the April 2010 Convertible Notes net of a $2,583,617 BCF, which has been fully recognized as interest expense as of December 31, 2010 as the result of the conversion of the April 2010 Convertible Notes.
(b) Credit Facilities and Vendor Debt
In May 2010, the Company executed a term loan facility with lenders to fund working capital needs. The loan is secured by a lien on all of the Company’s assets, excluding intellectual property, which is subject to a negative pledge. The Company received proceeds of $5,000,000 at closing. An additional $6,000,000 of proceeds is available to the Company subject to final approval from the lenders. The loan bears interest at an annual rate of LIBOR plus 8.75%, subject to a LIBOR floor of 3.00%. The loan contains a material adverse change clause, as defined, which can trigger an event of default. In connection with the term loan facility, the Company’s cash and investment accounts are subject to account control agreements with the lenders that give them the right to assume control of the accounts in the event of a loan default. The loan is repayable over 39 months with interest only payments for the first twelve months. As of December 31, 2010, the balance of the loan was $5,000,000, with $1,296,296 of that amount classified as current. In connection with the loan, the lenders received warrants to purchase 255,376 shares of Series B at $0.93 per share, which became warrants to purchase 31,861 shares of common stock at $7.45 per share upon the closing of the IPO. The fair value of the warrants at the date of issuance of $204,224 has been recorded as deferred financing costs and will be amortized to interest expense through the maturity date of the debt. The Company is required to issue additional warrants to purchase up to an additional 38,235 shares of common stock in the event that additional proceeds are received from the lenders.
In March 2007, the Company received a $2,500,000 loan from a finance company. The loan was secured by a lien on all of the Company’s assets, excluding intellectual property, which was subject to a negative pledge. Interest on the loan was at a rate of 11.44%. The loan was interest-only for six months, and was repayable in equal monthly payments of principal and interest of $82,369 over 36 months. Interest expense of $42,633, $142,785 and $226,594 was recognized during the years ended December 31, 2010, 2009, and 2008 respectively. This loan was repaid on May 13, 2010. In connection with the loan from the finance company, the Company issued a warrant to purchase 134,408 shares of Series A at an exercise price of $0.93 per share, which became, upon the closing of the IPO, warrants to purchase 16,769 shares of common stock at an exercise price of $7.45 per share. The following table summarizes the fair value and the assumptions used for the Black-Scholes option-pricing model for the Series A warrants:
Upon the completion of the Company’s IPO in August 2010, and as the result of these warrants converting into warrants to purchase common stock, they were reclassified into stockholder’s equity.
Additionally, at December 31, 2010 and 2009, there was $216,571 and $36,043, respectively, outstanding on a short-term loan from an independent third party vendor.
(7) Capital Structure
(a) Initial Public Offering
In August 2010 the Company completed its initial public offering of common stock selling 5,000,000 shares at an offering price of $10.00 per share, resulting in gross proceeds of $50,000,000. Net proceeds after underwriting fees and offering expenses were approximately $43,000,000.
(b) Redeemable Convertible Preferred Stock
All outstanding shares of the Company’s redeemable convertible preferred stock, plus accrued dividends thereon, were converted into 7,861,785 shares of common stock upon the completion of the IPO in August 2010.
(c) Warrants
All outstanding warrants to purchase shares of preferred stock converted into warrants to purchase an equal number of shares of common stock, adjusted for the reverse stock split as discussed in Note 3(l), upon completion of the IPO in August 2010. As of December 31, 2010, the following warrants to purchase common stock were outstanding:
As of December 31, 2009, the warrants were classified as a warrant liability on the accompanying balance sheet as the warrants entitled the holder to purchase preferred stock, which could have been redeemed at the option of the holder. In connection with the Company’s IPO, all outstanding warrants were reclassified into stockholders’ equity on the accompanying balance sheet as the warrants converted into warrants to purchase common stock.
(8) Stock-Based Compensation
The Company is authorized to grant up to 1,738,886 shares of common stock under the NuPathe Inc. 2010 Omnibus Incentive Compensation Plan (the 2010 Plan). Such grants may be made to eligible employees, directors, consultants and advisors to the Company in the form of restricted stock, stock options, stock appreciation rights, stock units, performance units and other stock-based awards. The 2010 Plan was approved by stockholders in July 2010 and became effective on August 5, 2010. The 2010 Plan replaces the Company’s 2005 Equity Compensation Plan (the 2005 Plan) and no further grants may be made under the 2005 Plan. All outstanding grants under the 2005 Plan shall be satisfied with shares under the 2010 Plan. Awards under the 2010 Plan are made by the Compensation Committee of the Company’s board of directors. As of December 31, 2010, there were 314,893 shares of common stock available for future grants under the 2010 Plan.
Stock-based compensation expense for the years ended December 31, 2010, 2009 and 2008 includes compensation expense for employee (which also includes director) and nonemployee stock option grants and restricted stock grants. The compensation expense for the years ended December 31, 2010, 2009 and 2008 is as follows:
The reversal of compensation expense for restricted stock in 2009 resulted from the forfeiture of restricted stock grants for which expense was recorded in prior years.
Stock-based compensation expense was included in the accompanying statements of operations for the years ended December 31, 2010, 2009 and 2008, as follows:
Stock Options
The weighted average fair value of the options granted during 2010, 2009 and 2008 was estimated at $6.36, $1.36 and $1.36, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
The following table summarizes the aggregate stock option activity:
Of the 483,372 stock options granted during 2010, 144,489 had performance-based vesting criteria. These 144,489 stock options were awarded to executive officers and include vesting criteria that are contingent upon the achievement of certain corporate milestones, as defined in the grant agreements. For stock-based awards that have performance-based vesting criteria, compensation cost is recognized when it is deemed probable that the vesting criteria will be met. As of December 31, 2010, the Company has not deemed the achievement of the vesting criteria to be probable, and therefore there has been no compensation expense recorded for these performance-based awards during 2010.
The aggregate intrinsic values represent the total amount by which the value of the shares of common stock subject to such options exceeds the exercise price of such options, based on the Company’s closing stock price of $9.06 on December 31, 2010.
As of December 31, 2010, there was $3,256,376 of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted average period of 2.6 years. As of December 31, 2010, there were a total of 1,104,084 in-the-money options.
The following table summarizes information about stock options outstanding at December 31, 2010:
Restricted Stock
The following table summarizes the aggregate restricted stock activity for the year ended December 31, 2010, 2009 and 2008:
(9) Commitments
(a) Leases
The Company leases office space and office equipment under operating leases, which expire at various times through March 2013. Rent expense under these leases was $299,304, $299,342, and $316,350, for the years ended December 31, 2010, 2009 and 2008, respectively. Rent expense under these leases since inception was $1,219,130.
Future minimum lease payments as of December 31, 2010 are as follows:
(b) License Agreements
In July 2008, the Company and Travanti Pharma Inc. (Travanti) entered into an asset purchase and license agreement and an assignment agreement. Pursuant to the terms of the Travanti agreement, the Company paid $5,500,000 for the purchase of a patent application, including all supporting documentation and priority documents that is directed to transdermal delivery of anti-migraine medications using an active delivery patch. The Company granted Travanti a nonexclusive, royalty-free, perpetual worldwide license to use the purchased patent application, and the invention covered by such patent application, outside the field of migraine. In addition, Travanti granted to the Company a perpetual, worldwide, exclusive, royalty-free license, with the right to grant sublicenses, under Travanti’s patent rights and know-how that relate generally to specified iontophoresis technology to develop, make and commercialize migraine products. This fee was recognized in the accompanying statement of operations for the year ended December 31, 2008 as acquired in process research and development, as additional research and development efforts and regulatory approval is required in order to commercialize this product in the United States.
The Company entered into a patent license agreement with the University of Pennsylvania (Penn), which became effective in July 2006 and was amended in May 2007. Under the patent license agreement, Penn granted to the Company exclusive, worldwide rights under specified patent applications, and patents issuing therefrom, to make, use and sell products using Long Acting Delivery (LAD) technology. Under the agreement, the Company has the right to sublicense, subject to specified conditions, including the payment of sublicense fees. The patent license agreement requires that the Company use commercially reasonable efforts to develop and commercialize licensed products and requires the Company to commit a minimum of $250,000 per year towards such activities until the first commercial sale of the first licensed product. The license agreement requires the Company to make annual license maintenance payments of up to $50,000 to Penn until the first commercial sale of the first licensed product. The license agreement covers the Company’s product candidates NP201 and NP202. In addition, the Company has agreed to pay Penn aggregate milestone payments of up to $950,000 upon the achievement of specified development and regulatory milestones related to each licensed product as specified and royalty payments equal to a specified percentage of future commercial sales of licensed products subject to the license through the expiration of the licensed patents. The Company paid annual license fees of $30,000, $30,000 and $20,000 in 2010, 2009 and 2008, respectively, which were recorded as research and development expense. The Company incurred expenses from Penn for $46,488, $64,864 and $72,984 in 2010, 2009 and 2008, respectively, for patent prosecution costs, which was recorded as expense by the Company.
In September 2009, the Company entered into a license agreement with SurModics Pharmaceuticals, Inc. (SurModics), pursuant to which the Company received an exclusive worldwide license, with the right to sublicense, under SurModics’ intellectual property, including its interest in joint inventions developed under a feasibility agreement, to make, have made, use, sell, import and export products covered by the license agreement. The Company granted SurModics an exclusive, perpetual, worldwide, royalty-free license under the Company’s interest in joint inventions for uses that do not relate to products covered by the agreement or include any of the Company’s existing technology or confidential information. The Company also granted SurModics a right of first negotiation to manufacture clinical supplies of covered products. If the Company and SurModics enter into such clinical manufacturing agreement, SurModics has a right of first negotiation to manufacture commercial supplies of covered products. The Company is obligated to pay aggregate milestones of up to $4,750,000 upon the achievement of specified development, regulatory and sales level milestones related to the first clinical indication approved by regulatory authority for covered products. The license agreement currently covers the Company’s product candidate NP201. The Company must also pay an additional milestone payment upon regulatory approval of each additional clinical indication for covered products and specified royalties on sales of commercial product.
(c) Equipment Funding Agreement
In June 2010, the Company entered into an equipment funding agreement with LTS Lohmann Therapie-Systeme AG (LTS), under which the Company agreed to fund the purchase by LTS of manufacturing equipment for Zelrix, one of the Company’s product candidates. The Company is required to make agreed upon installment payments to LTS, in the aggregate amount of 5,370,000 in 14 monthly installments that commenced in June 2010. As of December 31, 2010, 2,713,250, or approximately $3,595,500 based on exchange rates as of December 31, 2010, remains to be paid in accordance with monthly installments under the agreement. As of December 31, 2010, 2,656,750, or $3,410,315, based on exchange rates in effect at the time payments were made, has been recorded as a noncurrent asset in the accompanying balance sheet. Amounts capitalized under the LTS agreement will be amortized to cost of goods sold upon commencement of commercial sales of Zelrix.
Under the agreement, LTS will purchase and install the equipment according to an agreed upon project plan. LTS will own the purchased equipment and will be responsible for its routine and scheduled maintenance and repair. However, during the term of the LTS development and license agreement or any subsequent commercial manufacturing agreement that the parties may enter into, LTS will be required to use the purchased equipment solely for fulfilling its obligations to manufacture Zelrix. Additionally, during the term of the development and license agreement or such commercial manufacturing agreement, LTS is prohibited from encumbering the purchased equipment and may not sell or dispose of such equipment, except that LTS may transfer ownership of it to its affiliate, LTS Lohmann Therapy Systems Partnership L.P. If the Company does not enter into a commercial manufacturing agreement with LTS or if the Company terminates the equipment funding agreement due to a breach by LTS, LTS must, at its option, either transfer ownership of the equipment to the Company or refund to the Company the purchase price of the equipment, less depreciation, as defined.
The equipment funding agreement will remain in effect until the later of the completion by LTS of all installation activities or the execution of a commercial manufacturing agreement.
(d) Employment Agreements
Certain of the officers of the Company have employment agreements providing for severance and continuation of benefits in the event of termination without cause, including in the event of a Change of Control of the Company, as defined.
(10) 401(k) Profit Sharing Plan
The Company maintains a 401(k) Profit Sharing Plan (the 401(k) Plan) available to all employees meeting certain eligibility criteria. The 401(k) Plan permits participants to contribute up to 90% of their salary, not to exceed the limits established by the Internal Revenue Code. All contributions made by participants into the participants’ accounts vest immediately. Since 2008, the Company has provided a biweekly matching contribution to participant’s accounts as provided for under the 401(k) Plan. This contribution is determined by a formula that is based on the employee’s contributions, not to exceed 3% of their eligible wages, as defined by the 401(k) Plan. The Company sponsored match was $94,860, $74,425, and $61,565 for the years ended December 31, 2010, 2009 and 2008, respectively. The Company’s contribution to the 401(k) Plan is 100% vested upon the contribution date.
(11) Related-Party Transactions
A former director of the Company, who resigned in July 2008, served as the chairman, through December 31, 2009, of a company that provides outsourced clinical development services to the pharmaceutical industry. During the year ended December 31, 2008, the Company purchased $166,308 of services from that company and its affiliates. The Company considers the fees paid fair value for the services rendered.
(12) Income Taxes
The Company sold $500,388 and $151,012 of Pennsylvania research and development tax credits to a third party buyer during the years ended December 31, 2010 and 2009, respectively. Accordingly, the Company recorded an income tax benefit of $500,388 and $151,012 for the years ended December 31, 2010 and 2009, respectively.
A reconciliation of the statutory U.S. federal rate to the Company’s effective tax rate is as follows:
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets were as follows:
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences representing net future deductible amounts become deductible. Due to the Company’s history of losses, the deferred tax assets are fully offset by a valuation allowance at December 31, 2010 and 2009. The valuation allowance in 2010 increased by $9,000,000 over 2009 and the valuation allowance in 2009 increased by $6,500,000 over 2008, related primarily to additional net operating losses incurred by the Company and additional capitalized start-up expenses.
As of December 31, 2010 and 2009, $278,000 and $348,000, respectively, of the Company’s expenses had been capitalized for tax purposes as start-up costs. For tax purposes, capitalized start-up costs will be amortized over fifteen years beginning when the Company commences operations, as defined under the Internal Revenue Code.
The following table summarizes carryforwards of net operating losses and tax credits as of December 31, 2010:
The Tax Reform Act of 1986 (the Act) provides for a limitation of the annual use of net operating loss and research and development tax credit carryforwards following certain ownership changes (as defined by the Act) that could limit the Company’s ability to utilize these carryforwards. The Company has not completed a study to assess whether an ownership change has occurred, or whether there have been multiple ownership changes since its formation, due to the significant costs and complexities associated with such a study. The Company may have experienced various ownership changes, as defined by the Act, as a result of past financings. Accordingly, the Company’s ability to utilize the aforementioned carryforwards may be limited. Additionally, U.S. tax laws limit the time during which these carryforwards may be applied against future taxes; therefore, the Company may not be able to take full advantage of these carryforwards for federal or state income tax purposes.
On January 1, 2009, the Company adopted the provisions of Financial Accounting Standards Board (FASB) ASC 740-10, Accounting for Uncertainty in Income Taxes, which provides a financial statement recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. Under FASB ASC 740-10, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based solely on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood to be sustained upon ultimate settlement. FASB ASC 740-10 also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions and income tax disclosures.
The Company did not have unrecognized tax benefits as of December 31, 2010 and does not expect this to change significantly over the next twelve months. In connection with the adoption of FASB ASC 740-10, the Company will recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of December 31, 2010, the Company has not accrued interest or penalties related to uncertain tax positions. The Company’s tax returns for the years ended December 31, 2007 through December 31, 2010 are still subject to examination by major tax jurisdictions.
(13) Quarterly Financial Information
(unaudited)
This table summarizes the unaudited quarterly results of operations for the quarters in 2010 and 2009:
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and our principal financial officer, evaluated, as of the end of the period covered by this Annual Report, the effectiveness of our disclosure controls and procedures. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures as of such date are effective at the reasonable assurance level in ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
This annual report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of the company’s registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies.
Changes to Internal Controls Over Financial Reporting
There has been no change in internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
We have adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees. Our Code of Business Conduct and Ethics contains provisions that satisfy the standards for a “code of ethics” set forth in Item 406 of Regulation S-K of the rules and regulations of the SEC. Our Code of Business Conduct and Ethics also contains a special code of ethics that is applicable to our Chief Executive Officer and our senior financial officers. Our Code of Business Conduct and Ethics is available through our website’s “Investor Relations - Corporate Governance” page, the address of which is www.nupathe.com.
To the extent that we amend any provision of our Code of Conduct or grant a waiver from any provision of our Code of Conduct that is applicable to any of our directors or our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions, we intend to satisfy our disclosure obligations under applicable SEC rules by posting such information on our Internet Web site under the heading “For Investors-Corporate Governance.”
The reference to our website is intended to be inactive textual references only, and the contents of our websites is not incorporated by reference herein.
The additional information required by this item is incorporated herein by reference to the sections captioned “Election of Directors,” “Executive Officers,” “Corporate Governance,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive Proxy Statement relating to our 2011 Annual Meeting of Stockholders.
The information required by this item is incorporated herein by reference to the section captioned “Executive Compensation” in our definitive Proxy Statement relating to our 2011 Annual Meeting of Stockholders.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference to the sections captioned “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in our definitive Proxy Statement relating to our 2011 Annual Meeting of Stockholders.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference to the section captioned “Director Independence and Relationships and Related Party Transactions” in our definitive Proxy Statement relating to our 2011 Annual Meeting of Stockholders.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference to the section captioned “Ratification of Selection of Independent Registered Public Accounting Firm” in our definitive Proxy Statement relating to our 2011 Annual Meeting of Stockholders.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Financial Statements: The following financial statements are included in Part II, Item 8 of this Form 10-K:
Financial Statement Schedules: All schedules to our financial statements are omitted because they are not applicable or not required, or because the required information is included in the financial statements or notes thereto.
Exhibits: A list of exhibits filed as part of this Form 10-K is set forth in the Exhibit Index that immediately follows the signature page to this Form 10-K and is incorporated by reference herein. Where so indicated by footnote, exhibits which were previously filed are incorporated by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jane H. Hollingsworth and Keith A. Goldan, jointly and severally, his or her attorney-in-fact, with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
INDEX TO EXHIBITS
*
Certain information in this exhibit has been omitted pursuant to an Order Granting Confidential Treatment issued by the Securities and Exchange Commission.
#
Indicates management contract or compensatory plan or arrangement.

Furnished herewith.