10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2016

OR

☐ 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: 001-36754

Neothetics, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware	20-8527075
( State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
9171 Towne Centre Drive, Suite 270 San Diego, CA	92122
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (858) 750-1008

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 for 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 ☒    No☐  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes ☒    No☐  

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

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐  (Do not check if a small reporting company)	Smaller reporting company	☒

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

As of November 1, 2016, the registrant had 13,828,496 shares of common stock, $0.0001 par value per share, outstanding.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	2
	Condensed Balance Sheets	2
	Condensed Statements of Operations	3
	Condensed Statements of Cash Flows	4
	Notes to Condensed Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4.	Controls and Procedures	17
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	19
Item 1A.	Risk Factors	19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Mine Safety Disclosures	24
Item 5.	Other Information	24
Item 6.	Exhibits	24
Signatures		25
Exhibit Index		26

i

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Neothetics, Inc.

Condensed Balance Sheets

(Unaudited)

	September 30,			December 31,
	2016			2015
Assets
Current assets:
Cash and cash equivalents	$	14,363,899		$	37,748,603
Prepaid expenses and other current assets		509,420			1,976,997
Total current assets		14,873,319			39,725,600
Restricted cash		200,000			200,000
Property and equipment, net		132,514			186,372
Total assets	$	15,205,833		$	40,111,972
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	797,227		$	4,017,192
Accrued clinical trial expenses		71,156			1,422,810
Other accrued expenses		563,340			903,148
Long-term debt, current portion		—			2,756,351
Total current liabilities		1,431,723			9,099,501
Long-term debt, net of current portion		—			7,205,176
Stockholders’ equity:
Preferred stock, $0.0001 par value; 5,000,000  shares authorized; no shares issued and    outstanding		—			—
Common stock, $0.0001 par value; 300,000,000 shares authorized;    13,828,496 and 13,750,016 shares issued and outstanding at    September 30, 2016 and December 31, 2015, respectively		1,382			1,374
Additional paid-in capital		137,651,010			136,637,678
Accumulated deficit		(123,878,282	)		(112,831,757	)
Total stockholders’ equity		13,774,110			23,807,295
Total liabilities and stockholders’ equity	$	15,205,833		$	40,111,972

The accompanying notes are an integral part of these condensed financial statements.

2

Neothetics, Inc.

Condensed Statements of Operations

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Operating expenses:
Research and development	$	964,937		$	15,211,268		$	5,653,432		$	27,381,864
General and administrative		905,176			1,768,935			4,407,408			5,435,543
Total operating expenses		1,870,113			16,980,203			10,060,840			32,817,407
Loss from operations		(1,870,113	)		(16,980,203	)		(10,060,840	)		(32,817,407	)
Interest income		13,935			6,035			50,078			20,352
Interest expense		(506,302	)		(287,916	)		(1,035,763	)		(844,839	)
Net loss	$	(2,362,480	)	$	(17,262,084	)	$	(11,046,525	)	$	(33,641,894	)
Net loss per share, basic and diluted	$	(0.17	)	$	(1.26	)	$	(0.80	)	$	(2.46	)
Weighted average shares used to compute basic and diluted net loss per share		13,816,464			13,702,177			13,786,207			13,683,470

The accompanying notes are an integral part of these condensed financial statements.

3

Neothetics, Inc.

Condensed Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30,
	2016			2015
Operating activities
Net loss	$	(11,046,525	)	$	(33,641,894	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		53,858			40,650
Loss on disposal of assets		—			6,140
Noncash interest expense on debt		100,290			162,340
Share-based compensation		970,381			1,042,014
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		1,467,577			(70,125	)
Accounts payable and accrued expenses		(4,911,427	)		8,124,961
Net cash used in operating activities		(13,365,846	)		(24,335,914	)
Investing activities
Restricted cash		—			(200,000	)
Purchase of property and equipment		—			(226,128	)
Net cash used in investing activities		—			(426,128	)
Financing activities
Prepayment resulting in loan extinguishment		(9,514,058	)		—
Principal payments on bank loan		(485,942	)		—
Loan amendment costs		(52,400	)		—
Proceeds from issuance of common stock from exercise of options		33,542			65,835
Proceeds from issuance of common stock from Employee Stock Purchase Plan		—			19,090
Net cash (used in) provided by financing activities		(10,018,858	)		84,925
Net decrease in cash and cash equivalents		(23,384,704	)		(24,677,117	)
Cash and cash equivalents, beginning of period		37,748,603			75,947,516
Cash and cash equivalents, end of period	$	14,363,899		$	51,270,399
Supplemental disclosure of cash flow activity
Cash paid for interest	$	664,292		$	530,000

The accompanying notes are an integral part of these condensed financial statements.

4

Neothetics, Inc.

Notes to Unaudited Condensed Financial Statements

1. Organization and Basis of Presentation

Neothetics, Inc. (Neothetics or the Company) was incorporated in Delaware on February 1, 2007, under the name Lipothera, Inc. In September 2008, the Company changed its name to Lithera, Inc. In August 2014, the Company changed its name to Neothetics, Inc. The Company is a clinical-stage specialty pharmaceutical company developing therapeutics for the aesthetic market. The Company’s lead product candidate is a novel injectable treatment for localized fat reduction and body contouring.

As of September 30, 2016, the Company has devoted substantially all of its efforts to product development, raising capital, and building infrastructure and has not realized revenues from its planned principal operations.

The accompanying unaudited financial statements of the Company should be read in conjunction with the audited financial statements and notes thereto as of and for the year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K (Annual Report) filed with the Securities and Exchange Commission (SEC). The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, since they are interim statements, the accompanying financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, the accompanying financial statements reflect all adjustments (consisting of normal recurring adjustments) that are necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented. Interim results are not necessarily indicative of results for a full year.

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of 90 days or less at the date of purchase to be cash equivalents. Cash and cash equivalents include cash in readily available checking and money market accounts.

Restricted Cash

 Restricted cash as of September 30, 2016 and December 31, 2015 represents a $200,000 restricted money market account used to secure the standby letter of credit issued in connection with a lease amendment (see Note 5 “Debt”).

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to significant risk on its cash due to the financial position of the depository institution in which those deposits are held.

Fair Value of Financial Instruments

The carrying amounts of prepaid and other current assets, accounts payable and accrued expenses are reasonable estimates of their fair value because of the short maturity of these items.

Property and Equipment

Property and equipment, which primarily consist of office furniture and equipment and computer equipment, are stated at cost and depreciated over the estimated useful lives of the assets (three to five years) using the straight-line method.

5

Impairment of Long-Lived Assets

Long-lived assets consist primarily of property and equipment. An impairment loss is recorded if and when events and circumstances indicate that assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. While the Company's current and historical operating losses and negative cash flows are indicators of impairment, management believes that future cash flows to be received support the carrying value of its long-lived assets and, accordingly, has not recognized any impairment losses since inception.

Research and Development Costs

Research and development expenses consist primarily of salaries and related overhead expenses, fees paid to consultants and contract research organizations, costs related to acquiring and manufacturing clinical trial materials, and costs related to compliance with regulatory requirements.

All research and development costs are charged to expense as incurred.

Income Taxes

The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and the tax reporting basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Valuation allowances are recorded when the realizability of such deferred tax assets is not more likely than not.

The guidance on accounting for uncertainty in income taxes prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The Company’s policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense. The Company has not recognized interest and penalties in the balance sheets or statements of operations. The Company is subject to taxation in the U.S. and state jurisdictions. The Company’s tax years from inception are subject to examination by the United States and California authorities due to the carryforwards of unutilized net operating losses (NOLs) and research and development credits.

Share-Based Compensation

Share-based compensation expense for stock option grants, restricted stock awards and employee stock purchase plan shares is recorded at the estimated fair value of the award as of the grant date and is recognized as expense on a straight-line basis over the requisite service period of the stock-based award. The estimation of stock options, restricted stock awards and employee stock purchase plan fair value requires management to make estimates and judgments about, among other things, employee exercise behavior, forfeiture rates and volatility of the Company’s common stock. The judgments directly affect the amount of compensation expense that will be recognized.

Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common shares and common share equivalents outstanding during the period. Common stock equivalents are only included when their effect is dilutive. The Company’s potentially dilutive securities, which include warrants and outstanding stock options and restricted stock awards under the stock compensation plans, have been excluded from the computation of diluted net loss per share as they would be anti-dilutive. For all periods presented, there is no difference in the number of shares used to compute basic and diluted shares outstanding due to the Company’s net loss position.

The following table sets forth the outstanding potentially dilutive securities that have been excluded in the calculation of diluted net loss per share because to do so would be anti-dilutive.

	Nine Months Ended September 30,
	2016		2015
Warrants for common stock		71,257		71,257
Common stock options and restricted stock awards issued and outstanding		1,190,913		1,509,672
		1,262,170		1,580,929

6

Recent Accounting Pronouncements

In August 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. This pronouncement gives guidance to clarify how certain cash receipts and payments should be presented and classified in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the timing of adoption of this guidance and the impact of the adoption of this guidance on its condensed financial statements.

In March 2016, the FASB issued ASU 2016-09 (“ASU 2016-09”), Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies several aspects of the accounting for employee share-based payments, including accounting for income taxes, forfeitures, statutory tax withholding requirements, and classification on the statement of cash flows. The amendments in this ASU are effective for annual periods beginning after December 15, 2016. Early adoption is permitted. The Company is evaluating the impact of adoption on its condensed financial statements.

In February 2016, the FASB issued ASU 2016-02 (“ASU 2016-02”), Leases. ASU 2016-02 requires that lessees recognize assets and liabilities for the rights and obligations for leases with a lease term of more than one year. The amendments in this ASU are effective for annual periods ending after December 15, 2018. Early adoption is permitted. The Company is evaluating the impact of adoption on its condensed financial statements.

In August 2014, the FASB issued guidance codified in ASU 2014-15 (Subtopic 205-40), Presentation of Financial Statements - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The guidance requires management to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued (or available to be issued when applicable). Management will be required to make this evaluation for both annual and interim reporting periods and will make certain disclosures if it concludes that substantial doubt exists or when its plans alleviate substantial doubt about the entity’s ability to continue as a going concern. Substantial doubt exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). The term probable is used consistently with its use in ASC Topic 450, Contingencies. The guidance is effective for annual periods ending after December 15, 2016 and for interim reporting periods starting in the first quarter 2017, with early adoption permitted. The Company does not expect this guidance to have a significant impact on the consolidated financial statements and expects to adopt the standard for the annual reporting period ended December 31, 2016.

3. Fair Value Measurements

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, accounts payable, accrued expenses, including warrants issued in connection with financing arrangements, and long-term debt. Fair value estimates of these instruments are made at a specific point in time based on relevant market information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. The carrying amount of cash and cash equivalents, accounts payable, and accrued expenses are generally considered to be representative of their respective fair values because of the short-term nature of these instruments.   The Company believes that the fair value of long-term debt approximates its carrying value based on the borrowing rates currently available to the Company for loans with similar terms.

The authoritative guidance for fair value measurements defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Market participants are buyers or sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact. The guidance prioritizes three levels of inputs into the following hierarchy:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

7

Assets measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015 are as follows:

			Fair Value Measurements at Reporting Date Using
	Balance as of September 30, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Money market fund(1)	$	14,363,899	$	14,363,899	$	—	$	—
Total assets	$	14,363,899	$	14,363,899	$	—	$	—

⁽¹⁾ Included as a component of cash and cash equivalents on accompanying balance sheet.

			Fair Value Measurements at Reporting Date Using
	Balance as of December 31, 2015		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Money market fund(1)	$	36,752,200	$	36,752,200	$	—	$	—
Total assets	$	36,752,200	$	36,752,200	$	—	$	—

⁽¹⁾ Included as a component of cash and cash equivalents on accompanying balance sheet.

There were no liabilities at fair value on a recurring basis as of September 30, 2016 or December 31, 2015.

4. Property and Equipment

Property and equipment consist of the following:

	September 30,			December 31,
	2016			2015
Office furniture and equipment	$	264,838		$	279,547
Less accumulated depreciation and amortization		(132,324	)		(93,175	)
	$	132,514		$	186,372

5. Debt

Loans

In February 2010, the Company entered into a loan and security agreement (2010 Loan and Security Agreement) with Silicon Valley Bank (SVB), which was subsequently amended in 2012, for borrowings of $3,750,000, collateralized by all assets of the Company. In connection with the borrowings, the Company issued warrants to the bank for the purchase of a total of 64,865 shares of Series B convertible preferred stock and warrants to purchase 75,000 shares of Series C convertible preferred stock. Effective upon the IPO, this was converted to a warrant to purchase 24,419 shares of common stock at a weighted average exercise price of $9.90 and expire ten years from the date of issuance. The 2010 Loan and Security Agreement was fully paid off in June 2014.

In June 2014, the Company entered into a Loan and Security Agreement (Loan Agreement) with Hercules Technology Growth Capital Inc. that provided for borrowings up to $10.0 million available to the Company in two tranches. Upon closing of the Loan Agreement, the Company borrowed $4.0 million. In October 2014, the Company entered into the first amendment of the Loan Agreement and borrowed the remaining $6.0 million available under the agreement.

In connection with the Loan Agreement, in June 2014, the Company issued warrants to purchase shares of Series C convertible preferred stock equal to 4% of the amount advanced under the loan. Effective upon the IPO, this was converted to a warrant to purchase 46,838 shares of common stock at $8.54, which expires eight years after the date of issuance. The fair value of the warrants issued was $207,429, based on the fair value of such Series C warrants at the date of issuance. The warrants’ fair value and financing fees of approximately $133,000 were recorded as a debt discount.

8

In March 2016, the Company entered into the second amendment of the Loan Agreement that provided for a prepayment of the outstanding loan carrying amount of $5.5 million with a prepayment fee of $110,000.  In connection with the second amendment, the Company re-priced the outstanding warrants to purchase 46,838 shares of common stock at a new exercise price of $0.62, which will expire in September 2022 unless exercised prior to such expiration date. The Company recorded a debt discount of $9,417 associated with the fair value of the warrants issued in connection with the amendment. In addition, the Company incurred loan amendment fees and legal fees of $52,400, which the Company recorded as a debt discount.

In September 2016, the Company prepaid the remaining outstanding balance under the Loan Agreement at a carrying amount of $4.0 million with a prepayment fee of $120,000 and an end of term fee of $300,000.  Accordingly, the Loan Agreement was terminated on September 23, 2016.  Upon termination of the Loan Agreement, the prepayment fees of $230,000 and unamortized end of term fee of $260,000 were recorded as interest expense. The Company recorded total interest expense of $506,302 and $1,035,763 related to the Loan Agreement for the three and nine months ended September 30, 2016, respectively.

Letter of Credit

In January 2015, the Company executed a lease amendment with LJ Gateway, LLC for new office space. In connection with this lease amendment the Company issued a stand-by letter of credit in the amount of $200,000 in lieu of a security deposit.  The standby letter of credit is secured by a restricted money market account. The terms of the standby letter of credit expire in May 2020 and are subject to automatic yearly renewal prior to this date.

6. Stockholders’ Equity

Warrants

As of September 30, 2016 and December 31, 2015, warrants to purchase 71,257 shares of common stock remain outstanding. As of September 30, 2016 and December 31, 2015 there were 24,419 warrants to purchase shares of common stock are at a weighted average exercise price of $9.90. Additionally, there were 46,838 warrants to purchase shares of common stock are at an exercise price of $0.62 at September 30, 2016 and $8.54 at December 31, 2015.

Common Stock

On December 1, 2015, the Company entered into a Controlled Equity Offering Sales Agreement, or Sales Agreement, with Cantor Fitzgerald, as a sales agent pursuant to which the Company may offer and sell from time to time, through Cantor Fitzgerald shares of the Company’s common stock, par value $0.0001 per share, having an aggregate offering price of up to $20.0 million. The minimum share price for this Controlled Equity Offering is selected at the discretion of the Company’s Board of Directors. Through September 30, 2016, no shares of common stock have been sold pursuant to this Sales Agreement.

Stock Compensation Plans

The following table summarizes the Company’s stock compensation plan activity for the nine months ended September 30, 2016:

	Options Outstanding			Weighted Average Exercise Price
Outstanding and exercisable at December 31, 2015		1,363,027		$	3.09
Granted		563,856		$	1.09
Exercised		(78,480	)	$	0.43
Forfeited		(657,490	)	$	2.52
Outstanding and exercisable at September 30, 2016		1,190,913		$	2.63

9

The Company recognized non-cash share-based compensation expense related to its 2014 Employee Stock Purchase Plan, restricted stock awards and stock options granted to employees and directors as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
General and administrative	$	67,687	$	257,938	$	851,837	$	732,255
Research and development		15,331		108,048		118,544		309,759
	$	83,018	$	365,986	$	970,381	$	1,042,014

Common Stock Reserved for Future Issuance

The following shares of common stock are reserved for future issuance at September 30, 2016:

Warrants issued and outstanding	71,257
Stock options issued and outstanding	1,190,913
Authorized for future awards under stock compensation plans	1,956,369
Employee Stock Purchase Plan	436,175
	3,654,714

7. Commitments

Operating Leases

The Company entered into a noncancelable operating lease for its facilities on January 20, 2015. The lease expires in March 2020.   

The following table summarizes the minimum lease payments under this commitment:

2016	$	95,631
2017		395,520
2018		410,850
2019		431,508
2020		109,293
Total	$	1,442,802

10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis and the interim financial statements included in this quarterly report on Form 10-Q should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2015 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our annual report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 29, 2016. References to the Company throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations are made using the first person notations of “we,” “us” and “our.”  

Forward-Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements, other than statements of historical facts, contained in this document, including statements regarding our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business operations and financial performance and condition, are forward-looking statements. These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “predict,” “project,” “potential,” “should,” “target,” “will,” “would,” or the negative of those terms and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

The forward-looking statements in this Form 10-Q include, among other things, statements about:

• our ability to develop a modified formulation of LIPO-202;

• whether our modified formulation of LIPO-202 is able to achieve positive results;

• the initiation, timing, progress and results of Phase 2 and potential future Phase 3 clinical trials and any preclinical studies;

• the results and success of our research and development programs;

• our expectations regarding timing of results in our clinical trials;

• our ability to utilize existing cash and raise additional funding for ongoing and future clinical trials and operations;

• estimates of our expenses, future revenue, capital requirements and our needs for additional financing;

• implementation of our business model, strategic plans for our business, product candidates and technology;

• the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates and technology and our ability to operate our business without infringing on the intellectual property rights of others;

• our expectations regarding the timing of our submission of an NDA for approval of LIPO-202 with the FDA and the likelihood and timing of approval of such NDA;

• the potential for commercialization and market acceptance of LIPO-202;

• our expectations regarding the potential market size and opportunity for LIPO-202, if approved for commercial use;

• our plans to commercialize LIPO-202 and our ability to develop and maintain sales and marketing capabilities;

• regulatory developments in the United States and foreign countries;

• the success of competing procedures that are or become available;

• our ability to maintain and establish collaborations;

• our expectations regarding the time during which we will be an emerging growth company under the JOBS Act;

• our financial performance; and

• developments and projections relating to our competitors and our industry. 

11

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Forward-looking statements should be regarded solely as our current plans, estimates and beliefs. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this document, particularly in the “Risk Factors” section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

Overview

We are a clinical-stage specialty pharmaceutical company developing therapeutics for the aesthetic market. Our initial focus is on localized fat reduction and body contouring. Our lead product candidate, LIPO-202, is a first-in-class injectable formulation of the long-acting ß2-adrenergic receptor agonist, salmeterol xinafoate, which is an active ingredient in the U.S. Food and Drug Administration, or FDA, approved inhaled products SEREVENT DISKUS, ADVAIR HFA and ADVAIR DISKUS.  We previously completed Phase 2 development of LIPO-202 with our RESET trial in 2013, showing a statistically significant reduction in central abdominal bulging due to subcutaneous fat in non-obese patients.  In 2015, we conducted two pivotal U.S. Phase 3 trials of LIPO-202 for this same indication, which  failed to meet their co-primary composite or secondary endpoints as well as showing near identical results with no bias in sites or subgroups.  In these trials, AbCONTOUR1 and AbCONTOUR2, LIPO-202 continued to show a safety profile similar to placebo.  We, and expert consultants that we engaged, conducted a detailed review of these unexpected trial results.  Based on the results of the review by us and our expert consultants, we concluded that modifications intended to make LIPO-202 commercially ready may have affected the drug product.  

In February 2016, our Board of Directors established an Operating Committee to assist with many of the responsibilities arising in the day-to-day operations of the company that normally would be managed by our Chief Executive Officer and President, which position is currently vacant.  The Operating Committee currently is comprised of three members of the Board of Directors; Martha J. Demski, Kim Kamdar, Ph.D, and Jeffrey Nugent.  In June 2016, we formed a Development Committee led by medical aesthetic and dermatology veteran, Dan Piacquadio, M.D., and includes additional members of Neothetics management and other outside consultants.  The Development Committee is responsible for general oversight and overall strategy for the LIPO-202 development plan activities including Chemistry, Manufacturing and Controls, or CMC, clinical and regulatory.   As part of our continuing development efforts, we completed manufacturing of the modified formulation of LIPO-202 for use in our planned Phase 2 proof of concept trial, which is primarily based on the drug product formulation used in the Phase 2 RESET trial.  

We are continuing our LIPO-202 development program focused on localized fat reduction and body contouring using this modified formulation of LIPO-202.  In November 2016, we announced plans to prioritize our efforts and resources on the Phase 2 proof of concept trial for the reduction of localized fat deposits under the chin, or submental fat. We plan to initiate this trial with the modified formulation of LIPO-202 in December 2016 and expect top-line results in the second quarter of 2017.  We also plan to continue development of LIPO-202 for the reduction of central abdominal bulging pending results from the submental Phase 2 proof of concept trial. Since commencing operations in February 2007, we have invested substantially all of our efforts and financial resources in the research and development and commercial planning for LIPO-202, which is currently our lead product candidate. Through September 30, 2016, we have funded substantially all of our operations through the sale and issuance of our preferred stock, venture debt, convertible debt and the sale of shares in our initial public offering.

We have never been profitable and, as of September 30, 2016, we had an accumulated deficit of $123.9 million. We incurred net losses of $2.4 million and $17.3 million for the three months ended September 30, 2016 and 2015, respectively, and $11.0 million and $33.6 million for the nine months ended September 30, 2016 and 2015, respectively. We expect to continue to incur net operating losses for at least the next several years as we advance LIPO-202 through clinical development, seek regulatory approval, prepare for and, if approved, proceed to commercialization. We have no manufacturing facilities and all of our manufacturing activities are contracted out to third parties. Additionally, we currently utilize third-party CROs to carry out our clinical development. We will need substantial additional funding to support our operating activities. Adequate funding may not be available to us on acceptable terms, or at all. Our failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on our business, results of operations, and financial condition.

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JOBS Act

In April 2012, the Jumpstart Our Business Startups Act of 2012, or JOBS Act, was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an “emerging growth company.” As an “emerging growth company,” we are electing not to take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision not to take advantage of the extended transition period is irrevocable. In addition, we are in the process of evaluating the benefits of relying on the other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if as an “emerging growth company” we choose to rely on such exemptions, we may not be required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, as amended, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis) and (iv) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation. These exemptions will apply for a period of five years following the completion of our IPO or until we no longer meet the requirements of being an “emerging growth company,” whichever is earlier.

Basis of Presentation

Revenues

Our ability to generate revenues from product sales, which we do not expect will occur before 2020, at the earliest, will depend heavily on our obtaining marketing approval from the FDA for, and, subsequent to that, our successful commercialization of, LIPO-202. If we fail to complete the development of LIPO-202 in a timely manner or to obtain regulatory approval, our ability to generate future revenue, and our results of operations and financial position, would be materially adversely affected.

Research and Development Expenses

Our research and development expenses consist primarily of:

• fees paid to clinical consultants, clinical trial sites and vendors, including CROs in conjunction with implementing and monitoring our preclinical and clinical trials and acquiring and evaluating clinical trial data, including all related fees, such as for investigator grants, patient screening fees, laboratory work and statistical compilation and analysis;

• expenses related to clinical trials and related clinical manufacturing, materials and supplies;

• expenses related to compliance with drug development regulatory requirements in the United States and other foreign jurisdictions; and

• personnel costs, including cash compensation, benefits and share-based compensation expense.

We expense both internal and external research and development costs in the periods in which they are incurred. To date, substantially all our research and development expenses have related to the development of LIPO-202. For the three months ended September 30, 2016 and 2015, we incurred expenses of $1.0 million and $15.2 million, respectively, and $5.7 million and $27.4 million for the nine months ended September 30, 2016 and 2015, respectively, on research and development expenses.

We do not allocate compensation expense to individual product candidates, as we are organized and record expense by functional department and our employees may allocate time to more than one development project. We do not utilize a formal time allocation system to capture expenses on a project-by-project basis.

Conducting significant research and development is central to our business and strategy. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and greater duration of late stage clinical trials as compared to earlier clinical and preclinical development.  Our research and development expenses decreased temporarily and we expect that such expenses will increase once we initiate our Phase 2 proof of concept trial in December 2016 with a modified formulation of LIPO-202.  The costs of clinical trials may vary significantly over the life of a project owing to a number of factors.

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General and Administrative Expenses

Our general and administrative expenses primarily consist of personnel costs, including cash compensation, benefits and share-based compensation expense, associated with our executive, accounting and finance departments. Other general and administrative expenses include costs in connection with patent filings, facility, information technology costs and professional fees for legal, consulting, marketing, audit and tax services.

We anticipate that our general and administrative costs will increase after we initiate our Phase 2 proof of concept clinical trial which we expect to commence in December 2016.

Interest Income    

Our interest income consists primarily of interest received or earned on our cash and cash equivalents. We expect interest income to vary each reporting period depending on our average cash and cash equivalents and marketable securities balances during the period and applicable interest rates. To date, our interest income has not been significant in any individual period.

Interest Expense

Our interest expense consists of cash and noncash interest costs related to our borrowings. The noncash interest costs consist of the amortization of the fair value of warrants that were issued in connection with our borrowings, with the initial fair value of the warrants being amortized to interest expense over the term of the governing agreements, and the amortization of other debt issuance costs, primarily legal and banker fees, over the period the related convertible notes were outstanding. We expect interest expense to vary each reporting period depending on our average debt outstanding during the period, as well as applicable interest rates.

Critical Accounting Policies and Significant Judgments and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate these estimates, including those related to stock-based compensation and warrant liabilities. These estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for judgments about the carrying values of assets and liabilities and the recognition of revenues and expenses. Actual results may differ from these estimates under different assumptions or conditions. There have been no material changes to our critical accounting policies and estimates from the information provided in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies Involving Management Estimates and Assumptions,” included in our Annual Report on Form 10-K for the year ended December 31, 2015.

Results of Operations

Comparison of the Three Months Ended September 30, 2016 and 2015

	Three Months Ended September 30,						Change
	2016			2015			$
	(in thousands)
Operating expenses:
Research and development	$	965		$	15,211			(14,246	)
General and administrative		905			1,769			(864	)
Total operating expenses		1,870			16,980			(15,110	)
Loss from operations		(1,870	)		(16,980	)		15,110
Interest income		14			6			8
Interest expense		(506	)		(288	)		(218	)
Net loss	$	(2,362	)	$	(17,262	)		14,900

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Research and Development Expenses. Research and development expenses decreased by $14.2 million, to approximately $1.0 million for the three months ended September 30, 2016 from $15.2 million for the three months ended September 30, 2015.  Approximately $10.3 million of the decrease was due to the completion of our AbCONTOUR1 and AbCONTOUR2 U.S. Phase 3 clinical trials and $2.5 million of the decrease was due to the termination of the supplemental clinical trials.  Approximately $0.8 million of the decrease was due to the reduction of consulting and other outside services, as well as the elimination of the Corporate Advisory Board.  The remaining decrease of $0.6 million was due to a reduction in headcount in research and development.  

General and Administrative Expenses. General and administrative expenses decreased by approximately $900,000 to $0.9 million for the three months ended September 30, 2016, from $1.8 million for the three months ended September 30, 2015.  The decrease of approximately $380,000 was related to the reduction of headcount.  Approximately $475,000 of the decrease was due to lower general legal fees, public and investor relations expenses, and outside services expenses for the three months ended September 30, 2016.    

Interest Income. Interest income increased by $8,000, to approximately $14,000 for the three months ended September 30, 2016 from approximately $6,000 for the three months ended September 30, 2015. The increase resulted from higher rates of return during the three months ended September 30, 2016.

Interest Expense. Interest expense increased by approximately $218,000, to approximately $506,000 for the three months ended September 30, 2016 from approximately $288,000 for the three months ended September 30, 2015. The increase in interest expense was due to the end of term interest fee and early termination fee related to the debt extinguishment for the three months September 30, 2016.  

Comparison of the Nine Months Ended September 30, 2016 and 2015

	Nine Months Ended September 30,						Change
	2016			2015			$
	(in thousands)
Operating expenses:
Research and development	$	5,653		$	27,382			(21,729	)
General and administrative		4,408			5,435			(1,027	)
Total operating expenses		10,061			32,817			(22,756	)
Loss from operations		(10,061	)		(32,817	)		22,756
Interest income		50			20			30
Interest expense		(1,035	)		(845	)		(190	)
Net loss	$	(11,046	)	$	(33,642	)		22,596

Research and Development Expenses. Research and development expenses decreased by $21.7 million, to $5.7 million for the nine months ended September 30, 2016 from $27.4 million for the nine months ended September 30, 2015.  Approximately $16.3 million of the decrease was due to the completion of our AbCONTOUR1 and AbCONTOUR2 U.S. Phase 3 clinical trials and $2.1 million of the decrease was due to the termination of supplemental clinical trials.  Approximately $2.3 million of the decrease was due to the reduction of consulting and other outside services, as well as the elimination of the Corporate Advisory Board.  The remaining decrease of $1.0 million was due to a reduction in headcount in research and development.

General and Administrative Expenses. General and administrative expenses decreased by approximately $1.0 million to $4.4 million for the nine months ended September 30, 2016, from $5.4 million for the nine months ended September 30, 2015.  The decrease of approximately $610,000 was due to the decrease in public and investor relations expenses and consulting services expenses.  Approximately $460,000 of the decrease was due to the decrease in general legal and intellectual property expenses.  

Interest Income. Interest income increased by $30,000, to approximately $50,000 for the nine months ended September 30, 2016 from approximately $20,000 for the nine months ended September 30, 2015. The increase resulted from higher rates of return during the nine months ended September 30, 2016.

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Interest Expense. Interest expense increased by approximately $190,000, to approximately $1.0 million for the nine months ended September 30, 2016 from approximately $845,000 for the nine months ended September 30, 2015. The increase in interest expense was due to the decrease in long-term debt balance as the result of the principal payments that commenced in February 2016 and the early prepayment of long-term debt of $5.5 million in the first quarter of 2016 offset by an increase in expenses related to the end of term interest fee and early termination fee for debt extinguishment for the nine months ended September 30, 2016.  

Liquidity and Capital Resources

We have incurred losses and negative cash flows from operating activities for the nine months ended September 30, 2016 and 2015. As of September 30, 2016, we had an accumulated deficit of $123.9 million. We anticipate that we will continue to incur net losses for the foreseeable future as we continue the development and potential commercialization of LIPO-202.

Prior to our IPO in November 2014, we funded our operations primarily through private placements of our convertible preferred stock, warrants, venture debt and convertible debt. In November 2014, we completed our IPO of 4,650,000 shares of common stock at an offering price of $14.00 per share. We received net proceeds of approximately $57.7 million, after deducting underwriting discounts, commissions and offering-related transaction costs. At September 30, 2016, we had cash and cash equivalents of approximately $14.4 million.

On December 1, 2015, the Company entered into a Controlled Equity Offering Sales Agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co., as a sales agent (“Cantor Fitzgerald”) pursuant to which the Company may offer and sell from time to time, through Cantor Fitzgerald shares of Neothetics common stock, par value $0.0001 per share, having an aggregate offering price of up to $20.0 million. As of September 30, 2016, no shares were issued pursuant to the Sales Agreement.

We believe that our existing cash and cash equivalents will be sufficient to meet our anticipated cash requirements for at least the next twelve months. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially.

To fund further operations, we will need to raise additional capital. If we are unable to obtain additional financing on commercially reasonable terms, or at all, our business, financial condition and results of operations will be materially adversely affected and we may be unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our financial statements. We may obtain additional financing in the future through the issuance of our common stock from other equity or debt financings or through collaborations or partnerships with other companies.

Summary Statement of Cash Flows

The following table sets forth a summary of the net cash flow activity for each of the periods set forth below (in thousands):

	Nine Months Ended September 30,
	2016			2015
Net cash used in operating activities	$	(13,366	)	$	(24,336	)
Net cash used in investing activities		-			(426	)
Net cash (used in) provided by financing activities		(10,019	)		85
Net decrease in cash and cash equivalents	$	(23,385	)	$	(24,677	)

Cash Flows from Operating Activities. Net cash used in operating activities was $13.4 million and $24.3 million for the nine months ended September 30, 2016 and 2015, respectively. The decrease of $10.9 million in cash used in operating activities for nine months ended September 30, 2016 compared to September 30, 2015 was primarily due to the decrease in net loss of $22.6 million and the change in prepaid expenses by $1.5 million.  The decreases were offset by an increase in payments of accounts payable of $13.0 million.    

Cash Flows from Investing Activities. Net cash used in investing activities was zero and $426,000 for the nine months ended September 30, 2016 and 2015, respectively. During the nine months ended September 30, 2015, cash used for investing activities consisted primarily of the purchase of furniture and equipment of $226,000 and an increase in restricted cash of $200,000.  

Cash Flows from Financing Activities. Net cash used by financing activities was $10.0 million for the nine months ended September 30, 2016 and net cash provided by financing activities was $85,000 for the nine months ended September 30, 2015. During the nine months ended September 30, 2016, cash used by financing activities consisted primarily of principal payments of $0.5 million

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and prepayment of long-term debt of $9.5 million.  During the nine months ended September 30, 2015, cash provided by financing activities included proceeds from issuance of common stock from exercise of options and Employee Stock Purchase Plan.

Operating and Capital Expenditure Requirements

Our future capital requirements are difficult to forecast and will depend on many factors, including:

• the initiation, progress, costs and results of our planned Phase 2 proof of concept clinical trial of LIPO-202, any additional Phase 2 clinical trials and potential future Phase 3 clinical trials and any preclinical studies;

• the outcome, timing and cost of regulatory approvals;

• the costs and timing of establishing sales, marketing and distribution capabilities, if LIPO-202 is approved;

• delays that may be caused by changing regulatory requirements;

• the costs involved in filing and prosecuting patent applications and enforcing and defending patent claims; and

• the extent to which we acquire or invest in businesses, products or technologies.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic partnerships and licensing arrangements. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic partnerships or licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates, our other technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market LIPO-202 even if we would otherwise prefer to develop and market LIPO-202 ourselves.

Contractual obligations and commitments

In January 2015, the Company entered into a noncancelable operating lease (see Note 7 “Commitments”). In September 2016, the Company prepaid the remaining outstanding balance under the Loan Agreement (see Note 5 “Debt”). Other than described in Note 5 and Note 7, there have been no material changes outside the ordinary course of our business to the contractual obligations we reported in “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual obligations and commitments” in our annual report on Form 10-K for the year ended December 31, 2015.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements (as defined by applicable regulations of the Securities and Exchange Commission) that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

As of September 30, 2016, there have been no material changes in our market risk from that described in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our annual report on Form 10-K for the year ended December 31, 2015.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this quarterly report on Form 10-Q. Based on such evaluation, our principal executive officer and principal financial officer has concluded that as of such date, our disclosure controls and procedures were effective.

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Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during our latest fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We are currently not a party to any material legal proceedings.

Item 1A. Risk Factors.

The risk factors set forth below contain material changes to the risk factors previously disclosed and included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. An investment in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described under Item 1A of Part I of our Annual Report on Form 10-K, as updated in this Item 1A (collectively, Risk Factors) together with all other information contained or incorporated by reference in this report before you decide to invest in our common stock. If any of the Risk Factors were to actually occur, our business, financial condition, results of operations and our future growth prospects could be materially and adversely affected. Under the circumstances, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Related to Our Business

Our lead product candidate, LIPO-202, recently failed to meet its co-primary composite and secondary endpoints from our AbCONTOUR1 and AbCONTOUR2 U.S.-based pivotal Phase 3 trials.  

On December 14, 2015, we announced that top-line results from our AbCONTOUR1 and AbCONTOUR2 U.S.-based pivotal Phase 3 trials to evaluate the safety and efficacy of our lead product candidate, LIPO-202, for the reduction of central abdominal bulging due to subcutaneous fat, showed that in both studies that LIPO-202 did not meet its co-primary composite and secondary endpoints resulting in a significant set-back to our company.  We, and expert consultants that we engaged, conducted a detailed review of these unexpected trial results. Based on the results of the review by us and our expert consultants, we concluded that modifications intended to make LIPO-202 commercially ready may have affected the drug product. We have completed manufacturing of a modified formulation of LIPO-202, which is primarily based on the drug product formulation used in the Phase 2 RESET trial.  We are continuing our LIPO-202 development program focused on localized fat reduction and body contouring using this modified formulation of LIPO-202.  In November 2016 we announced plans to prioritize our efforts and resources on the Phase 2 proof of concept trial for the reduction of localized fat deposits under the chin, or submental fat. We plan to initiate this trial with the modified formulation of LIPO-202 in December 2016 and expect top-line results in the second quarter of 2017. We also plan to continue development of LIPO-202 for the reduction of central abdominal bulging, pending results from the submental Phase 2 proof of concept trial and capital resources. If the Phase 2 proof of concept trial for the reduction of submental fat and any future Phase 2 and Phase 3 trials are successful, we would then expect to file a new drug application, or NDA, utilizing the 505(b)(2) regulatory pathway. We have experienced a significant delay in any future development and commercialization of LIPO-202 and while we anticipate having enough cash on hand to finance our planned Phase 2 proof of concept trial, we will require substantial funding to further develop and commercialize LIPO-202 in the event that we obtain positive results from this trial.

Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results.

Clinical testing is expensive, and can take many years to complete, and its outcome is inherently uncertain. Based on the negative results from our U.S.-based pivotal Phase 3 trials, we suffered a significant setback and will be required to conduct further trials to evaluate the safety and efficacy of LIPO-202.  Furthermore, we rely on clinical research organizations, or CROs, and clinical trial sites to ensure the proper and timely conduct of our clinical trials and while we have agreements governing their committed activities, we have limited influence over their actual performance. The costs of clinical trials may vary significantly over the life of a project owing to factors that include but are not limited to the following:

• per patient trial costs;

• salaries and related overhead expenses, including share-based compensation and benefits for personnel in research and development functions;

• fees paid to third-party professional consultants and service providers;

• costs to develop and manufacture preclinical study and clinical trial materials;

• costs for laboratory supplies;

• the number of patients that participate in the trials;

• the number of sites included in the trials;

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• the number of trials required for approval;

• the countries in which the trials are conducted;

• the length of time required to enroll eligible patients;

• the number of doses that patients receive;

• the drop-out or discontinuation rates of patients;

• the phase of development of the product candidate;

• requests by regulatory agencies for pediatric data;

• potential additional safety monitoring or other studies requested by regulatory agencies;

• the duration of patient follow-up; and

• the efficacy and safety profile of the product candidate.

Failure can occur at any time during the clinical trial process. For example, we have in the past terminated early-stage development and clinical programs for other potential product candidates due to a lack of sufficient efficacy or the potential for unacceptable adverse reactions to a particular product candidate, as well as our desire to concentrate our efforts on the development of LIPO-202. The results of preclinical and clinical trials of our product candidates may not be predictive of the results of later-stage clinical trials. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy despite having progressed through preclinical studies and initial clinical trials. It is not uncommon for a number of companies in the specialty pharmaceutical industry in advanced clinical trials to suffer significant setbacks due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier studies. On December 14, 2015, we announced that LIPO-202 failed to meet its co-primary composite and secondary endpoints of the Phase 3 clinical trial resulting in us suffering a significant setback.  We are continuing our LIPO-202 development program focused on localized fat reduction and body contouring using this modified formulation of LIPO-202.  In November 2016, we announced plans to prioritize our efforts and resources on the Phase 2 proof of concept trial for the reduction of localized fat deposits under the chin, or submental fat. We plan to initiate this trial with the modified formulation of LIPO-202 in December 2016 and expect top-line results in the second quarter of 2017. We also plan to continue development of LIPO-202 for the reduction of central abdominal bulging, pending results from the submental Phase 2 proof of concept trial. We cannot be certain that any new trials will produce results showing safety and efficacy and that additional setbacks will not occur.  Even if our ongoing or future clinical trials are completed, the results may not be sufficient to obtain regulatory approval for our product candidates.

We may experience delays in our future clinical trials and we do not know whether these clinical trials, if any, will begin on time, need to be redesigned, enroll an adequate number of patients on time or be completed on schedule, if at all. Clinical trials can be delayed or aborted for a variety of reasons, including:

• delay or failure in obtaining regulatory approval to commence a trial;

• inability to reach agreement on acceptable terms with prospective CROs and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

• regulatory objections to commencing a clinical trial or proceeding to the next phase of investigation, including inability to reach agreement with the FDA or non-U.S. regulators regarding the scope, design or implementation of our clinical trials or for other reasons such as safety concerns identified during preclinical development or early stage clinical trials;

• inability to qualify for exemptions from infringement of intellectual property rights for clinical trial testing of products in countries where we want to conduct clinical trials outside the United States;

• inability to identify, add and maintain a sufficient number of trial sites;

• withdrawal of clinical trial sites from our clinical trials as a result of changing standards of care or the ineligibility of a site to participate in our clinical trials;

• difficulty identifying and engaging qualified clinical investigators;

• failure to obtain IRB approval at each site;

• difficulty recruiting and enrolling patients to participate in clinical trials for a variety of reasons, including failure to meet the enrollment criteria for our study and competition from other clinical trial programs;

• inability to retain patients in clinical trials due to the treatment protocol, personal issues, side effects from the therapy or lack of efficacy;

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• failure to have clinical sites observe trial protocol or continue to participate in a trial;

• failure to address any patient safety concerns that arise during the course of a trial;

• failure to address any conflicts with new or existing laws or regulations;

• failure to manufacture sufficient quantities of product candidates or placebos for use in clinical trials; or

• inability to obtain sufficient funding to commence or finish a clinical trial.

We could encounter delays if a clinical trial is suspended or terminated by us, by the IRBs of the institutions in which such trials are being conducted, by the Data Safety Monitoring Board, or DSMB, for such trial or by the FDA or other regulatory authorities. Such authorities may suspend or terminate a clinical trial due to a number of factors, including failure to conduct the clinical trial in accordance with the requirements of the relevant regulatory filing (including clinical protocol and manufacturing), inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial due to unforeseen costs resulting from enrollment delays, requirements to conduct additional trials and studies, increased expenses associated with the services of our CROs and other third parties or other reasons.

If we experience delays in the completion of, or terminate, any clinical trial of our current or future product candidates, if any, the commercial prospects of these product candidates may be harmed, and our ability to generate product revenues from any of these product candidates will be delayed or not realized at all. In addition, any delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may significantly harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of a clinical trial may also ultimately lead to the denial of regulatory approval of a product candidate.

Changes in regulatory requirements and guidance may occur and we or any of our partners may be required by appropriate regulatory authorities to amend clinical trial protocols to reflect these changes. Amendments may require us or any of our partners to resubmit clinical trial protocols to independent review boards for re-examination, which may impact the costs, timing or successful completion of a clinical trial. If we or any of our partners experience delays in the completion of, or if we or our partners terminate, clinical trials, the commercial prospects for our product candidates will be harmed, and our ability to generate revenue from sales of our products will be prevented or delayed. In addition, many of the factors that may cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of a product candidate.

As a result of our Phase 3 clinical trial data, we were required to reduce our headcount in order to control expenses, which may have an adverse impact on our internal programs, our ability to hire and retain key personnel and may be distracting to management.

As of December 31, 2015, we had sixteen full-time employees.  In January 2016, we implemented a reduction in force, which resulted in reducing our headcount to twelve full-time employees, or an approximate reduction of 25%.  As of September 30, 2016, based on further cost-saving measures and employee departures, our headcount has been reduced to eight full-time employees.  Depending on our need for additional funding and expense control, we may be required to further implement workforce and expense reductions in the future.  Further workforce and expense reductions could result in reduced progress on our internal programs. In addition, employees, whether or not directly affected by a reduction, may seek future employment with our business partners or competitors. Although our employees are required to sign a confidentiality agreement at the time of hire, the confidential nature of certain proprietary information may not be maintained in the course of any such future employment.  

Our cash conservation activities may yield unintended consequences, such as attrition beyond our planned reductions in workforce and reduced employee morale which may cause our remaining employees to seek alternate employment. Competition among biotechnology companies for qualified employees is intense, and the ability to retain our key employees is critical to our ability to effectively manage our resources following the Phase2 data and our path forward. Although we have implemented severance arrangements for certain key employees, these retention protections may not be successful in incentivizing these employees to stay employed with us. Additional attrition could have a material adverse effect on our business.

21

If we are able to conduct further trials which demonstrate the efficacy of LIPO-202, we may need to expand our managerial, operational, commercial, medical affairs, finance and other resources in order to manage our operations and clinical trials, continue our development activities and commercialize LIPO-202 or any of our current and future product candidates. Our management and personnel, systems and facilities currently in place may not be adequate to support this future development and commercialization efforts. Our need to effectively execute our growth strategy requires that we:

• manage our clinical trials effectively;

• identify, recruit, retain, incentivize and integrate additional employees;

• build effective business processes to launch LIPO-202 and other products;

• manage our internal development efforts effectively while carrying out our contractual obligations to third parties; and

• continue to improve our operational, financial and management controls, reporting systems and procedures.

If we fail to attract and keep senior management and key scientific and commercial personnel, we may be unable to successfully develop LIPO-202 or any of our other current and future product candidates, conduct our clinical trials and commercialize LIPO-202 or any of our other current and future product candidates.

Based on the results of our Phase 3 clinical trials, we were required to implement workforce reductions, which have reduced our headcount.  

Our success depends in part on our continued ability to attract, retain and motivate highly qualified management, clinical and scientific, and commercial personnel. We have not entered into any employment agreements with our key personnel other than our senior management team, nor do we maintain key man life insurance on the lives of any of the members of our senior management. Although we have an equity incentive plan pursuant to which we provide our executive officers with various economic incentives to remain employed with us, these incentives may not be sufficient to retain them. None of our senior management has any arrangement with us for a fixed term of service. The ability to retain our key employees is critical to our ability to effectively manage our resources following the LIPO-202 data and the loss of services of any of these individuals or our inability to hire, retain and motivate additional qualified personnel in the future could delay or prevent the completion of our planned clinical trials or the commercialization of LIPO-202 or any of our other current and future product candidates.

Our chief executive officer, or CEO, tendered his resignation in February 2016.  While we have established an Operating Committee to assist with many of the responsibilities arising in the day-to-day operations of the company, we currently do not have a Chief Executive Officer or President.  We expect to conduct a search for a new CEO and while we have not historically experienced unique difficulties attracting and retaining qualified employees, we could experience such problems in the future, especially considering the negative results from our Phase 3 clinical studies. Competition for qualified personnel in the biotechnology and specialty pharmaceuticals field is intense due to the limited number of individuals who possess the skills and experience required by our industry. While we have established a Development Committee responsible for general oversight and overall strategy for the LIPO-202 development plan activities including CMC, clinical and regulatory, we currently do not have a Chief Medical Officer or Chief Scientific Officer, and we may need to hire additional personnel in the event that we receive positive results from our planned Phase 2 proof of concept trial or other Phase 2 trials and we are able to proceed with additional clinical development and commercial activities. We may not be able to attract and retain quality personnel on acceptable terms, or at all. In addition, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or that they have divulged proprietary or other confidential information, or that their former employers own their research output.

LIPO-202, if approved, will face significant competition, and the failure by us to compete effectively may prevent us from achieving significant market acceptance.

The aesthetic procedure market is highly competitive and dynamic, and is characterized by rapid and substantial technological development and product innovations. A substantial portion of our target physician market is comprised of dermatologists, primary care physicians, OB/GYNs, and members of other specialties, some of whom perform liposuction, non-invasive fat reduction and other procedures for fat reduction. Such physicians may find it more advantageous to utilize these surgical and non-surgical procedures to remove localized fat deposits rather than a cosmetic injectable therapy such as LIPO-202. In addition, we expect that LIPO-202, if approved, will compete for the attention and discretionary income of patients with new and existing therapies for the treatment of localized fat, including liposuction and other procedures, as well as other technologies aimed at fat reduction, including injectable therapies, laser energy-based, cryolipolysis-based, and ultrasound energy-based products.

22

If approved, LIPO-202 may also compete with unregulated, unapproved and off-label fat reduction and body contouring treatments. For example, we are aware that there are entities such as compounding pharmacies that have manufactured quantities of phosphatidylcholine and deoxycholic acid-based formulations, which are being sold as fat reduction treatments without drug approval from the FDA. In order to compete successfully in the aesthetics market, we will have to demonstrate that LIPO-202 is a worthwhile aesthetic treatment and is a superior alternative to existing therapies. There may be other drug or device products or injectable therapies currently under development or being considered for similar indications of which we are not currently aware, but which upon approval would compete directly with LIPO-202.

LIPO-202, if approved, will also compete for patient and physician resources and mindshare with products and technologies that are not primarily related to fat reduction and body contouring, such as skin tightening, anti-aging, dispigmentation and other aesthetic technologies. The medical technology and aesthetic companies that offer these products tend to have a broad range of other product offerings, large direct sales forces, and long-term customer relationships with our target physicians, which could inhibit our market penetration efforts.

In addition, a large portion of our target physician market is comprised of plastic surgeons who utilize surgical methods for fat reduction. Such physicians may find it more advantageous to utilize surgical techniques to remove localized fat deposits rather than a cosmetic injectable therapy such as LIPO-202. Additionally, some non-invasive technologies for the reduction of fat or “body contouring” have received marketing clearance from the FDA. For example, , Zeltiq Aesthetics, Inc. received multiple clearances for various anatomical regions of the body  for their body contouring system, CoolSculpting®, which utilizes controlled cooling to reduce the temperature of fat cells in the treated area for the selective reduction of fat. Additional products such as SculpSure®, a laser energy based product marketed by Cynosure, Vanquish Fat Removal System , a radio frequency energy-based product marketed by BTL Aesthetics, Zerona®, a laser energy-based product marketed by Erchonia Corporation, and Liposonix®, an ultrasound energy-based product marketed by Valeant Pharmaceuticals, Inc., have also received FDA marketing clearance. In April 2015, Kythera, Inc., which was acquired by Allergan plc, received FDA approval for KYBELLA®, for improvement in the appearance of moderate to severe convexity or fullness associated with submental fat, or chin fat, in adults.   CoolSculpting®, KYBELLA® and Vanquish Fat Removal System have approval in expected treatment indications for LIPO-202.  Moreover, these methods and technologies may be used off-label by physicians in the expected treatment indications for LIPO-202, which may decrease the market available for LIPO-202, if approved.

Many of these potential competitors are large and/or experienced companies that have substantially greater resources and brand recognition than we do. By way of example, Kythera was acquired by Allergan. Competing in the aesthetic market could result in price-cutting, reduced profit margins, and limited market share, any of which would harm our business, financial condition, and results of operations.

Should we fail to comply with the NASDAQ Listing Qualification, we could be delisted from The NASDAQ Global Market, which could seriously harm the liquidity of our stock and our ability to raise capital

On March 21, 2016, we received a letter from the Listing Qualifications staff of The NASDAQ Stock Market LLC (“NASDAQ Listing Qualification”)indicating that, based upon the closing bid price of our common stock for the last 30 consecutive business days, we no longer meet the requirement of the NASDAQ Global Market to maintain a minimum bid price of $1 per share, as set forth in Nasdaq Listing Rule 5450(a)(1). On June 3, 2016, we received written notification from the NASDAQ Listing Qualification that we had regained compliance with NASDAQ Listing Rule 5450(a)(1) and we are now in compliance with the bid price requirement for continued listing on The NASDAQ Global Market.  If in the future we are unable to comply with the Listing Qualifications as set forth in Nasdaq Listing Rule 5450(a)(1), we would have to regain compliance within the 180 day time period prescribed by The NASDAQ Global Market, and if it appears that we would not be able to cure the deficiency in a timely manner, or if we are then otherwise not eligible, then we may be subject to delisting, or forced to transfer to a less desirable trading market within Nasdaq.  

If our shares of common stock have a Market Value of Listed Securities, or MVLS, for 30 consecutive business days of less than $50,000,000, we would no longer meet the requirement to maintain a MVLS of $50,000,000, as set forth in Nasdaq Listing Rule 5450(b)(2)(a). If this occurs and we are unable to regain compliance within the 180 day time period prescribed by The NASDAQ Global Market, or if we were to fall out of compliance with this rule once again, and if it appears that we would not be able to cure the deficiency in a timely manner, or if we are then otherwise not eligible, then we may be subject to delisting, or forced to transfer to a less desirable trading market within Nasdaq.  

There can be no assurance that we will be able to maintain compliance with the minimum bid price requirement or the MVLS requirement, or maintain compliance with the other listing requirements, or that we will be eligible for listing on any comparable trading market. The effects of losing the NASDAQ listing could materially harm our ability to raise additional capital.  

23

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Unregistered Sales of Equity Securities

None.

Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

A list of exhibits is set forth on the Exhibit Index immediately following the signature page of this quarterly report on Form 10-Q and is incorporated herein by reference.

24

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.

	Company Name
Date: November 10, 2016	By:	/s/ Susan A. Knudson
		Susan A. Knudson
		Chief Financial Officer (Principal Executive Officer and Principal Financial Officer)

25

EXHIBIT INDEX

Exhibit		Filed with this	Incorporated by Reference
Number	Exhibit Title	Form 10‑Q	Form	File No.	Date Filed
3.1	Amended and Restated Certificate of Incorporation.		S‑1	333‑199449	10/17/2014
3.2	Amended and Restated Bylaws.		S‑1	333‑199449	10/17/2014
4.2	Warrant to Purchase Stock, dated February 23, 2010, issued to Silicon Valley Bank.		S‑1	333‑199449	10/17/2014
4.3	Warrant to Purchase Stock, dated March 30, 2012, issued to Silicon Valley Bank.		S‑1	333‑199449	10/17/2014
4.4	Warrant to Purchase Stock, dated August 17, 2012, issued to Silicon Valley Bank.		S‑1	333‑199449	10/17/2014
4.5	Warrant Agreement, dated June 11, 2014, by and between the Registrant and Hercules Technology III, L.P.		S‑1	333‑199449	10/17/2014
4.6	Fourth Amended and Restated Investors’ Rights Agreement, dated September 22, 2014, by and between the Registrant and the investors listed therein.		S‑1	333‑199449	10/17/2014
4.7	Warrant Modification Agreement, dated March 30, 2016, by and between the Registrant and Hercules Technology III, L.P.		10-Q	001-36754	05/12/2016
10.1	Amendment to 2014 Equity Incentive Plan		10-Q	001-36754	08/11/2016
31.1‡	Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated pursuant to the Securities Exchange Act of 1934, as amended.	X
32.1‡	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	X
101.INS	XBRL Instance Document	X
101.SCH	XBRL Taxonomy Extension Schema Document	X
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	X
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	X
101.LAB	XBRL Taxonomy Extension Label Linkbase Document	X
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	X

26

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO

RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Susan A. Knudson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Neothetics, Inc. for the quarter ended September 30, 2016;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) [paragraph omitted in accordance with Exchange Act Rule 13a-14(a)];

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 10, 2016	By:	/s/ Susan A. Knudson
		Susan A. Knudson
		Chief Financial Officer (Principal Executive Officer and Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Neothetics, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: November 10, 2016	By:	/s/ Susan A. Knudson
		Susan A. Knudson
		Chief Financial Officer (Principal Executive Officer and Principal Financial Officer)

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate document.

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2016	Nov. 01, 2016
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2016
Document Fiscal Year Focus	2016
Document Fiscal Period Focus	Q3
Trading Symbol	NEOT
Entity Registrant Name	Neothetics, Inc.
Entity Central Index Key	0001618835
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		13,828,496

XML

Condensed Balance Sheets (Unaudited) - USD ($)	Sep. 30, 2016	Dec. 31, 2015
Current assets:
Cash and cash equivalents	$ 14,363,899	$ 37,748,603
Prepaid expenses and other current assets	509,420	1,976,997
Total current assets	14,873,319	39,725,600
Restricted cash	200,000	200,000
Property and equipment, net	132,514	186,372
Total assets	15,205,833	40,111,972
Current liabilities:
Accounts payable	797,227	4,017,192
Accrued clinical trial expenses	71,156	1,422,810
Other accrued expenses	563,340	903,148
Long-term debt, current portion		2,756,351
Total current liabilities	1,431,723	9,099,501
Long-term debt, net of current portion		7,205,176
Stockholders’ equity:
Preferred stock, $0.0001 par value; 5,000,000 shares authorized; no shares issued and outstanding
Common stock, $0.0001 par value; 300,000,000 shares authorized; 13,828,496 and 13,750,016 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively	1,382	1,374
Additional paid-in capital	137,651,010	136,637,678
Accumulated deficit	(123,878,282)	(112,831,757)
Total stockholders’ equity	13,774,110	23,807,295
Total liabilities and stockholders’ equity	$ 15,205,833	$ 40,111,972

XML

Condensed Balance Sheets (Unaudited) (Parenthetical) - $ / shares	Sep. 30, 2016	Dec. 31, 2015
Statement Of Financial Position [Abstract]
Preferred stock, par value	$ 0.0001	$ 0.0001
Preferred stock, shares authorized	5,000,000	5,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value	$ 0.0001	$ 0.0001
Common stock, shares authorized	300,000,000	300,000,000
Common stock, shares issued	13,828,496	13,750,016
Common stock, shares outstanding	13,828,496	13,750,016

XML

Condensed Statements of Operations (Unaudited) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Operating expenses:
Research and development	$ 964,937	$ 15,211,268	$ 5,653,432	$ 27,381,864
General and administrative	905,176	1,768,935	4,407,408	5,435,543
Total operating expenses	1,870,113	16,980,203	10,060,840	32,817,407
Loss from operations	(1,870,113)	(16,980,203)	(10,060,840)	(32,817,407)
Interest income	13,935	6,035	50,078	20,352
Interest expense	(506,302)	(287,916)	(1,035,763)	(844,839)
Net loss	$ (2,362,480)	$ (17,262,084)	$ (11,046,525)	$ (33,641,894)
Net loss per share, basic and diluted	$ (0.17)	$ (1.26)	$ (0.80)	$ (2.46)
Weighted average shares used to compute basic and diluted net loss per share	13,816,464	13,702,177	13,786,207	13,683,470

XML

Condensed Statements of Cash Flows (Unaudited) - USD ($)	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
Operating activities
Net loss	$ (11,046,525)	$ (33,641,894)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	53,858	40,650
Loss on disposal of assets		6,140
Noncash interest expense on debt	100,290	162,340
Share-based compensation	970,381	1,042,014
Changes in operating assets and liabilities:
Prepaid expenses and other current assets	1,467,577	(70,125)
Accounts payable and accrued expenses	(4,911,427)	8,124,961
Net cash used in operating activities	(13,365,846)	(24,335,914)
Investing activities
Restricted cash		(200,000)
Purchase of property and equipment		(226,128)
Net cash used in investing activities		(426,128)
Financing activities
Prepayment resulting in loan extinguishment	(9,514,058)
Principal payments on bank loan	(485,942)
Loan amendment costs	(52,400)
Proceeds from issuance of common stock from exercise of options	33,542	65,835
Proceeds from issuance of common stock from Employee Stock Purchase Plan		19,090
Net cash (used in) provided by financing activities	(10,018,858)	84,925
Net decrease in cash and cash equivalents	(23,384,704)	(24,677,117)
Cash and cash equivalents, beginning of period	37,748,603	75,947,516
Cash and cash equivalents, end of period	14,363,899	51,270,399
Supplemental disclosure of cash flow activity
Cash paid for interest	$ 664,292	$ 530,000

XML

Organization and Basis of Presentation

9 Months Ended

Sep. 30, 2016

Organization Consolidation And Presentation Of Financial Statements [Abstract]

Organization and Basis of Presentation

1. Organization and Basis of Presentation

Neothetics, Inc. (Neothetics or the Company) was incorporated in Delaware on February 1, 2007, under the name Lipothera, Inc. In September 2008, the Company changed its name to Lithera, Inc. In August 2014, the Company changed its name to Neothetics, Inc. The Company is a clinical-stage specialty pharmaceutical company developing therapeutics for the aesthetic market. The Company’s lead product candidate is a novel injectable treatment for localized fat reduction and body contouring.

As of September 30, 2016, the Company has devoted substantially all of its efforts to product development, raising capital, and building infrastructure and has not realized revenues from its planned principal operations.

The accompanying unaudited financial statements of the Company should be read in conjunction with the audited financial statements and notes thereto as of and for the year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K (Annual Report) filed with the Securities and Exchange Commission (SEC). The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, since they are interim statements, the accompanying financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, the accompanying financial statements reflect all adjustments (consisting of normal recurring adjustments) that are necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented. Interim results are not necessarily indicative of results for a full year.

XML

Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2016

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of 90 days or less at the date of purchase to be cash equivalents. Cash and cash equivalents include cash in readily available checking and money market accounts.

Restricted Cash

 Restricted cash as of September 30, 2016 and December 31, 2015 represents a $200,000 restricted money market account used to secure the standby letter of credit issued in connection with a lease amendment (see Note 5 “Debt”).

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to significant risk on its cash due to the financial position of the depository institution in which those deposits are held.

Fair Value of Financial Instruments

The carrying amounts of prepaid and other current assets, accounts payable and accrued expenses are reasonable estimates of their fair value because of the short maturity of these items.

Property and Equipment

Property and equipment, which primarily consist of office furniture and equipment and computer equipment, are stated at cost and depreciated over the estimated useful lives of the assets (three to five years) using the straight-line method.

Impairment of Long-Lived Assets

Long-lived assets consist primarily of property and equipment. An impairment loss is recorded if and when events and circumstances indicate that assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. While the Company's current and historical operating losses and negative cash flows are indicators of impairment, management believes that future cash flows to be received support the carrying value of its long-lived assets and, accordingly, has not recognized any impairment losses since inception.

Research and Development Costs

Research and development expenses consist primarily of salaries and related overhead expenses, fees paid to consultants and contract research organizations, costs related to acquiring and manufacturing clinical trial materials, and costs related to compliance with regulatory requirements.

All research and development costs are charged to expense as incurred.

Income Taxes

The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and the tax reporting basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Valuation allowances are recorded when the realizability of such deferred tax assets is not more likely than not.

The guidance on accounting for uncertainty in income taxes prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The Company’s policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense. The Company has not recognized interest and penalties in the balance sheets or statements of operations. The Company is subject to taxation in the U.S. and state jurisdictions. The Company’s tax years from inception are subject to examination by the United States and California authorities due to the carryforwards of unutilized net operating losses (NOLs) and research and development credits.

Share-Based Compensation

Share-based compensation expense for stock option grants, restricted stock awards and employee stock purchase plan shares is recorded at the estimated fair value of the award as of the grant date and is recognized as expense on a straight-line basis over the requisite service period of the stock-based award. The estimation of stock options, restricted stock awards and employee stock purchase plan fair value requires management to make estimates and judgments about, among other things, employee exercise behavior, forfeiture rates and volatility of the Company’s common stock. The judgments directly affect the amount of compensation expense that will be recognized.

Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common shares and common share equivalents outstanding during the period. Common stock equivalents are only included when their effect is dilutive. The Company’s potentially dilutive securities, which include warrants and outstanding stock options and restricted stock awards under the stock compensation plans, have been excluded from the computation of diluted net loss per share as they would be anti-dilutive. For all periods presented, there is no difference in the number of shares used to compute basic and diluted shares outstanding due to the Company’s net loss position.

The following table sets forth the outstanding potentially dilutive securities that have been excluded in the calculation of diluted net loss per share because to do so would be anti-dilutive.

	Nine Months Ended September 30,
	2016		2015
Warrants for common stock		71,257		71,257
Common stock options and restricted stock awards issued and outstanding		1,190,913		1,509,672
		1,262,170		1,580,929

Recent Accounting Pronouncements

In August 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. This pronouncement gives guidance to clarify how certain cash receipts and payments should be presented and classified in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the timing of adoption of this guidance and the impact of the adoption of this guidance on its condensed financial statements.

In March 2016, the FASB issued ASU 2016-09 (“ASU 2016-09”), Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies several aspects of the accounting for employee share-based payments, including accounting for income taxes, forfeitures, statutory tax withholding requirements, and classification on the statement of cash flows. The amendments in this ASU are effective for annual periods beginning after December 15, 2016. Early adoption is permitted. The Company is evaluating the impact of adoption on its condensed financial statements.

In February 2016, the FASB issued ASU 2016-02 (“ASU 2016-02”), Leases. ASU 2016-02 requires that lessees recognize assets and liabilities for the rights and obligations for leases with a lease term of more than one year. The amendments in this ASU are effective for annual periods ending after December 15, 2018. Early adoption is permitted. The Company is evaluating the impact of adoption on its condensed financial statements.

In August 2014, the FASB issued guidance codified in ASU 2014-15 (Subtopic 205-40), Presentation of Financial Statements - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The guidance requires management to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued (or available to be issued when applicable). Management will be required to make this evaluation for both annual and interim reporting periods and will make certain disclosures if it concludes that substantial doubt exists or when its plans alleviate substantial doubt about the entity’s ability to continue as a going concern. Substantial doubt exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). The term probable is used consistently with its use in ASC Topic 450, Contingencies. The guidance is effective for annual periods ending after December 15, 2016 and for interim reporting periods starting in the first quarter 2017, with early adoption permitted. The Company does not expect this guidance to have a significant impact on the consolidated financial statements and expects to adopt the standard for the annual reporting period ended December 31, 2016.

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Fair Value Measurements

9 Months Ended

Sep. 30, 2016

Fair Value Disclosures [Abstract]

Fair Value Measurements

3. Fair Value Measurements

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, accounts payable, accrued expenses, including warrants issued in connection with financing arrangements, and long-term debt. Fair value estimates of these instruments are made at a specific point in time based on relevant market information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. The carrying amount of cash and cash equivalents, accounts payable, and accrued expenses are generally considered to be representative of their respective fair values because of the short-term nature of these instruments.   The Company believes that the fair value of long-term debt approximates its carrying value based on the borrowing rates currently available to the Company for loans with similar terms.

The authoritative guidance for fair value measurements defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Market participants are buyers or sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact. The guidance prioritizes three levels of inputs into the following hierarchy:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015 are as follows:

			Fair Value Measurements at Reporting Date Using
	Balance as of September 30, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Money market fund(1)	$	14,363,899	$	14,363,899	$	—	$	—
Total assets	$	14,363,899	$	14,363,899	$	—	$	—

⁽¹⁾ Included as a component of cash and cash equivalents on accompanying balance sheet.

			Fair Value Measurements at Reporting Date Using
	Balance as of December 31, 2015		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Money market fund(1)	$	36,752,200	$	36,752,200	$	—	$	—
Total assets	$	36,752,200	$	36,752,200	$	—	$	—

⁽¹⁾ Included as a component of cash and cash equivalents on accompanying balance sheet.

There were no liabilities at fair value on a recurring basis as of September 30, 2016 or December 31, 2015.

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Property and Equipment

9 Months Ended

Sep. 30, 2016

Property Plant And Equipment [Abstract]

Property and Equipment

4. Property and Equipment

Property and equipment consist of the following:

	September 30,			December 31,
	2016			2015
Office furniture and equipment	$	264,838		$	279,547
Less accumulated depreciation and amortization		(132,324	)		(93,175	)
	$	132,514		$	186,372

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Debt

9 Months Ended

Sep. 30, 2016

Debt Disclosure [Abstract]

Debt

5. Debt

Loans

In February 2010, the Company entered into a loan and security agreement (2010 Loan and Security Agreement) with Silicon Valley Bank (SVB), which was subsequently amended in 2012, for borrowings of $3,750,000, collateralized by all assets of the Company. In connection with the borrowings, the Company issued warrants to the bank for the purchase of a total of 64,865 shares of Series B convertible preferred stock and warrants to purchase 75,000 shares of Series C convertible preferred stock. Effective upon the IPO, this was converted to a warrant to purchase 24,419 shares of common stock at a weighted average exercise price of $9.90 and expire ten years from the date of issuance. The 2010 Loan and Security Agreement was fully paid off in June 2014.

In June 2014, the Company entered into a Loan and Security Agreement (Loan Agreement) with Hercules Technology Growth Capital Inc. that provided for borrowings up to $10.0 million available to the Company in two tranches. Upon closing of the Loan Agreement, the Company borrowed $4.0 million. In October 2014, the Company entered into the first amendment of the Loan Agreement and borrowed the remaining $6.0 million available under the agreement.

In connection with the Loan Agreement, in June 2014, the Company issued warrants to purchase shares of Series C convertible preferred stock equal to 4% of the amount advanced under the loan. Effective upon the IPO, this was converted to a warrant to purchase 46,838 shares of common stock at $8.54, which expires eight years after the date of issuance. The fair value of the warrants issued was $207,429, based on the fair value of such Series C warrants at the date of issuance. The warrants’ fair value and financing fees of approximately $133,000 were recorded as a debt discount.

In March 2016, the Company entered into the second amendment of the Loan Agreement that provided for a prepayment of the outstanding loan carrying amount of $5.5 million with a prepayment fee of $110,000.  In connection with the second amendment, the Company re-priced the outstanding warrants to purchase 46,838 shares of common stock at a new exercise price of $0.62, which will expire in September 2022 unless exercised prior to such expiration date. The Company recorded a debt discount of $9,417 associated with the fair value of the warrants issued in connection with the amendment. In addition, the Company incurred loan amendment fees and legal fees of $52,400, which the Company recorded as a debt discount.

In September 2016, the Company prepaid the remaining outstanding balance under the Loan Agreement at a carrying amount of $4.0 million with a prepayment fee of $120,000 and an end of term fee of $300,000.  Accordingly, the Loan Agreement was terminated on September 23, 2016.  Upon termination of the Loan Agreement, the prepayment fees of $230,000 and unamortized end of term fee of $260,000 were recorded as interest expense. The Company recorded total interest expense of $506,302 and $1,035,763 related to the Loan Agreement for the three and nine months ended September 30, 2016, respectively.

Letter of Credit

In January 2015, the Company executed a lease amendment with LJ Gateway, LLC for new office space. In connection with this lease amendment the Company issued a stand-by letter of credit in the amount of $200,000 in lieu of a security deposit.  The standby letter of credit is secured by a restricted money market account. The terms of the standby letter of credit expire in May 2020 and are subject to automatic yearly renewal prior to this date.

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Stockholders' Equity

9 Months Ended

Sep. 30, 2016

Equity [Abstract]

Stockholders' Equity

6. Stockholders’ Equity

Warrants

As of September 30, 2016 and December 31, 2015, warrants to purchase 71,257 shares of common stock remain outstanding. As of September 30, 2016 and December 31, 2015 there were 24,419 warrants to purchase shares of common stock are at a weighted average exercise price of $9.90. Additionally, there were 46,838 warrants to purchase shares of common stock are at an exercise price of $0.62 at September 30, 2016 and $8.54 at December 31, 2015.

Common Stock

On December 1, 2015, the Company entered into a Controlled Equity Offering Sales Agreement, or Sales Agreement, with Cantor Fitzgerald, as a sales agent pursuant to which the Company may offer and sell from time to time, through Cantor Fitzgerald shares of the Company’s common stock, par value $0.0001 per share, having an aggregate offering price of up to $20.0 million. The minimum share price for this Controlled Equity Offering is selected at the discretion of the Company’s Board of Directors. Through September 30, 2016, no shares of common stock have been sold pursuant to this Sales Agreement.

Stock Compensation Plans

The following table summarizes the Company’s stock compensation plan activity for the nine months ended September 30, 2016:

	Options Outstanding			Weighted Average Exercise Price
Outstanding and exercisable at December 31, 2015		1,363,027		$	3.09
Granted		563,856		$	1.09
Exercised		(78,480	)	$	0.43
Forfeited		(657,490	)	$	2.52
Outstanding and exercisable at September 30, 2016		1,190,913		$	2.63

The Company recognized non-cash share-based compensation expense related to its 2014 Employee Stock Purchase Plan, restricted stock awards and stock options granted to employees and directors as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
General and administrative	$	67,687	$	257,938	$	851,837	$	732,255
Research and development		15,331		108,048		118,544		309,759
	$	83,018	$	365,986	$	970,381	$	1,042,014

Common Stock Reserved for Future Issuance

The following shares of common stock are reserved for future issuance at September 30, 2016:

Warrants issued and outstanding	71,257
Stock options issued and outstanding	1,190,913
Authorized for future awards under stock compensation plans	1,956,369
Employee Stock Purchase Plan	436,175
	3,654,714

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Commitments

9 Months Ended

Sep. 30, 2016

Commitments And Contingencies Disclosure [Abstract]

Commitments

7. Commitments

Operating Leases

The Company entered into a noncancelable operating lease for its facilities on January 20, 2015. The lease expires in March 2020.   

The following table summarizes the minimum lease payments under this commitment:

2016	$	95,631
2017		395,520
2018		410,850
2019		431,508
2020		109,293
Total	$	1,442,802

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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2016

Accounting Policies [Abstract]

Use of Estimates

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of 90 days or less at the date of purchase to be cash equivalents. Cash and cash equivalents include cash in readily available checking and money market accounts.

Restricted Cash

Restricted Cash

 Restricted cash as of September 30, 2016 and December 31, 2015 represents a $200,000 restricted money market account used to secure the standby letter of credit issued in connection with a lease amendment (see Note 5 “Debt”).

Concentrations of Credit Risk

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to significant risk on its cash due to the financial position of the depository institution in which those deposits are held.

Fair Value of Financial Instruments

Fair Value of Financial Instruments

The carrying amounts of prepaid and other current assets, accounts payable and accrued expenses are reasonable estimates of their fair value because of the short maturity of these items.

Property and Equipment

Property and Equipment

Property and equipment, which primarily consist of office furniture and equipment and computer equipment, are stated at cost and depreciated over the estimated useful lives of the assets (three to five years) using the straight-line method.

Impairment of Long-Lived Assets

Impairment of Long-Lived Assets

Long-lived assets consist primarily of property and equipment. An impairment loss is recorded if and when events and circumstances indicate that assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. While the Company's current and historical operating losses and negative cash flows are indicators of impairment, management believes that future cash flows to be received support the carrying value of its long-lived assets and, accordingly, has not recognized any impairment losses since inception.

Research and Development Costs

Research and Development Costs

Research and development expenses consist primarily of salaries and related overhead expenses, fees paid to consultants and contract research organizations, costs related to acquiring and manufacturing clinical trial materials, and costs related to compliance with regulatory requirements.

All research and development costs are charged to expense as incurred.

Income Taxes

Income Taxes

The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and the tax reporting basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Valuation allowances are recorded when the realizability of such deferred tax assets is not more likely than not.

The guidance on accounting for uncertainty in income taxes prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The Company’s policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense. The Company has not recognized interest and penalties in the balance sheets or statements of operations. The Company is subject to taxation in the U.S. and state jurisdictions. The Company’s tax years from inception are subject to examination by the United States and California authorities due to the carryforwards of unutilized net operating losses (NOLs) and research and development credits.

Share-Based Compensation

Share-Based Compensation

Share-based compensation expense for stock option grants, restricted stock awards and employee stock purchase plan shares is recorded at the estimated fair value of the award as of the grant date and is recognized as expense on a straight-line basis over the requisite service period of the stock-based award. The estimation of stock options, restricted stock awards and employee stock purchase plan fair value requires management to make estimates and judgments about, among other things, employee exercise behavior, forfeiture rates and volatility of the Company’s common stock. The judgments directly affect the amount of compensation expense that will be recognized.

Net Loss Per Share

Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common shares and common share equivalents outstanding during the period. Common stock equivalents are only included when their effect is dilutive. The Company’s potentially dilutive securities, which include warrants and outstanding stock options and restricted stock awards under the stock compensation plans, have been excluded from the computation of diluted net loss per share as they would be anti-dilutive. For all periods presented, there is no difference in the number of shares used to compute basic and diluted shares outstanding due to the Company’s net loss position.

The following table sets forth the outstanding potentially dilutive securities that have been excluded in the calculation of diluted net loss per share because to do so would be anti-dilutive.

	Nine Months Ended September 30,
	2016		2015
Warrants for common stock		71,257		71,257
Common stock options and restricted stock awards issued and outstanding		1,190,913		1,509,672
		1,262,170		1,580,929

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In August 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. This pronouncement gives guidance to clarify how certain cash receipts and payments should be presented and classified in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the timing of adoption of this guidance and the impact of the adoption of this guidance on its condensed financial statements.

In March 2016, the FASB issued ASU 2016-09 (“ASU 2016-09”), Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies several aspects of the accounting for employee share-based payments, including accounting for income taxes, forfeitures, statutory tax withholding requirements, and classification on the statement of cash flows. The amendments in this ASU are effective for annual periods beginning after December 15, 2016. Early adoption is permitted. The Company is evaluating the impact of adoption on its condensed financial statements.

In February 2016, the FASB issued ASU 2016-02 (“ASU 2016-02”), Leases. ASU 2016-02 requires that lessees recognize assets and liabilities for the rights and obligations for leases with a lease term of more than one year. The amendments in this ASU are effective for annual periods ending after December 15, 2018. Early adoption is permitted. The Company is evaluating the impact of adoption on its condensed financial statements.

In August 2014, the FASB issued guidance codified in ASU 2014-15 (Subtopic 205-40), Presentation of Financial Statements - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The guidance requires management to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued (or available to be issued when applicable). Management will be required to make this evaluation for both annual and interim reporting periods and will make certain disclosures if it concludes that substantial doubt exists or when its plans alleviate substantial doubt about the entity’s ability to continue as a going concern. Substantial doubt exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). The term probable is used consistently with its use in ASC Topic 450, Contingencies. The guidance is effective for annual periods ending after December 15, 2016 and for interim reporting periods starting in the first quarter 2017, with early adoption permitted. The Company does not expect this guidance to have a significant impact on the consolidated financial statements and expects to adopt the standard for the annual reporting period ended December 31, 2016.

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Summary of Significant Accounting Policies (Tables)

9 Months Ended

Sep. 30, 2016

Accounting Policies [Abstract]

Summary of Outstanding Potentially Dilutive Securities Excluded from Calculation of Diluted Net Loss Per Share

The following table sets forth the outstanding potentially dilutive securities that have been excluded in the calculation of diluted net loss per share because to do so would be anti-dilutive.

	Nine Months Ended September 30,
	2016		2015
Warrants for common stock		71,257		71,257
Common stock options and restricted stock awards issued and outstanding		1,190,913		1,509,672
		1,262,170		1,580,929

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Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2016

Fair Value Disclosures [Abstract]

Schedule of Assets Measured at Fair Value on a Recurring Basis

Assets measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015 are as follows:

			Fair Value Measurements at Reporting Date Using
	Balance as of September 30, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Money market fund(1)	$	14,363,899	$	14,363,899	$	—	$	—
Total assets	$	14,363,899	$	14,363,899	$	—	$	—

⁽¹⁾ Included as a component of cash and cash equivalents on accompanying balance sheet.

			Fair Value Measurements at Reporting Date Using
	Balance as of December 31, 2015		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Money market fund(1)	$	36,752,200	$	36,752,200	$	—	$	—
Total assets	$	36,752,200	$	36,752,200	$	—	$	—

⁽¹⁾ Included as a component of cash and cash equivalents on accompanying balance sheet.

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Property and Equipment (Tables)

9 Months Ended

Sep. 30, 2016

Property Plant And Equipment [Abstract]

Summary of Property and Equipment

Property and equipment consist of the following:

	September 30,			December 31,
	2016			2015
Office furniture and equipment	$	264,838		$	279,547
Less accumulated depreciation and amortization		(132,324	)		(93,175	)
	$	132,514		$	186,372

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Stockholders' Equity (Tables)

9 Months Ended

Sep. 30, 2016

Equity [Abstract]

Summary of Stock Compensation Plan Activity

The following table summarizes the Company’s stock compensation plan activity for the nine months ended September 30, 2016:

	Options Outstanding			Weighted Average Exercise Price
Outstanding and exercisable at December 31, 2015		1,363,027		$	3.09
Granted		563,856		$	1.09
Exercised		(78,480	)	$	0.43
Forfeited		(657,490	)	$	2.52
Outstanding and exercisable at September 30, 2016		1,190,913		$	2.63

Summary of Recognized Non-Cash Share-Based Compensation Expense

The Company recognized non-cash share-based compensation expense related to its 2014 Employee Stock Purchase Plan, restricted stock awards and stock options granted to employees and directors as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
General and administrative	$	67,687	$	257,938	$	851,837	$	732,255
Research and development		15,331		108,048		118,544		309,759
	$	83,018	$	365,986	$	970,381	$	1,042,014

Summary of Common Stock Reserved for Future Issuance

The following shares of common stock are reserved for future issuance at September 30, 2016:

Warrants issued and outstanding	71,257
Stock options issued and outstanding	1,190,913
Authorized for future awards under stock compensation plans	1,956,369
Employee Stock Purchase Plan	436,175
	3,654,714

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Commitments (Tables)

9 Months Ended

Sep. 30, 2016

Commitments And Contingencies Disclosure [Abstract]

Schedule of Future Minimum Lease Payments

The following table summarizes the minimum lease payments under this commitment:

2016	$	95,631
2017		395,520
2018		410,850
2019		431,508
2020		109,293
Total	$	1,442,802

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Organization and Basis of Presentation - Additional Information (Details)	9 Months Ended
	Sep. 30, 2016
DELAWARE
Organization And Basis Of Presentation [Line Items]
Date of incorporation	Feb. 01, 2007

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Summary of Significant Accounting Policies - Additional Information (Details) - USD ($)	9 Months Ended
	Sep. 30, 2016	Dec. 31, 2015
Summary Of Significant Accounting Policies [Line Items]
Restricted cash	$ 200,000	$ 200,000
Impairment of long-lived assets	0
Interest and penalties related to income tax	$ 0
Minimum
Summary Of Significant Accounting Policies [Line Items]
Estimated useful lives of the assets	3 years
Maximum
Summary Of Significant Accounting Policies [Line Items]
Estimated useful lives of the assets	5 years

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Summary of Significant Accounting Policies - Summary of Outstanding Potentially Dilutive Securities Excluded from Calculation of Diluted Net Loss Per Share (Details) - shares	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items]
Anti-dilutive securities excluded from computation of earnings per share	1,262,170	1,580,929
Warrants for Common Stock
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items]
Anti-dilutive securities excluded from computation of earnings per share	71,257	71,257
Common Stock Options and Restricted Stock Awards Issued and Outstanding
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items]
Anti-dilutive securities excluded from computation of earnings per share	1,190,913	1,509,672

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Fair Value Measurements - Schedule of Assets Measured at Fair Value on a Recurring Basis (Details) - Fair Value, Measurements, Recurring - USD ($)	Sep. 30, 2016	Dec. 31, 2015
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total assets	$ 14,363,899	$ 36,752,200
Quoted Prices in Active Markets for Identical Assets (Level 1)
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total assets	14,363,899	36,752,200
Money market fund
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total assets	14,363,899	36,752,200
Money market fund | Quoted Prices in Active Markets for Identical Assets (Level 1)
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total assets	$ 14,363,899	$ 36,752,200

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Fair Value Measurements - Additional Information (Details) - USD ($)	Sep. 30, 2016	Dec. 31, 2015
Fair Value, Measurements, Recurring
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Liabilities at fair value	$ 0	$ 0

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Property and Equipment - Summary of Property and Equipment (Details) - USD ($)	Sep. 30, 2016	Dec. 31, 2015
Property Plant And Equipment [Abstract]
Office furniture and equipment	$ 264,838	$ 279,547
Less accumulated depreciation and amortization	(132,324)	(93,175)
Property and equipment, net	$ 132,514	$ 186,372

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Debt - Additional Information (Details)			1 Months Ended					3 Months Ended		6 Months Ended	9 Months Ended
	Sep. 23, 2016 USD ($)	Jan. 31, 2015 USD ($)	Sep. 30, 2016 USD ($) shares	Mar. 31, 2016 USD ($) $ / shares shares	Oct. 31, 2014 USD ($)	Jun. 30, 2014 USD ($) $ / shares	Feb. 28, 2010 USD ($) $ / shares shares	Sep. 30, 2016 USD ($) shares	Sep. 30, 2015 USD ($)	Jun. 30, 2014 USD ($) Tranche $ / shares	Sep. 30, 2016 USD ($) shares	Sep. 30, 2015 USD ($)	Dec. 31, 2015 shares
Debt Instrument [Line Items]
Warrants issued and outstanding | shares			71,257					71,257			71,257		71,257
Prepayment of outstanding loan carrying amount											$ 9,514,058
Interest expense								$ 506,302	$ 287,916		$ 1,035,763	$ 844,839
Stand-by Letter of Credit | LJ Gateway, LLC
Debt Instrument [Line Items]
Line of credit		$ 200,000
Line of credit facility, expiration date		2020-05
2010 Loan and Security Agreement | Silicon Valley Bank
Debt Instrument [Line Items]
Line of credit facility collateralized							$ 3,750,000
Warrants issued and outstanding | shares							24,419
Warrant exercise price per share | $ / shares							$ 9.90
Warrant expiration period from date of issuance							10 years
2010 Loan and Security Agreement | Silicon Valley Bank | Series B Convertible Preferred Stock
Debt Instrument [Line Items]
Warrants issued in connection with debt | shares							64,865
2010 Loan and Security Agreement | Silicon Valley Bank | Series C Convertible Preferred Stock
Debt Instrument [Line Items]
Warrants issued in connection with debt | shares							75,000
2014 Loan and Security Agreement | Hercules Technology Growth Capital Inc
Debt Instrument [Line Items]
Maximum borrowing capacity						$ 10,000,000				$ 10,000,000
Number of tranches | Tranche										2
Amount borrowed under loan agreement					$ 6,000,000	4,000,000
Debt discount				$ 52,400		$ 133,000				$ 133,000
Prepayment of outstanding loan carrying amount			$ 4,000,000	5,500,000
Prepayment fees			$ 120,000	$ 110,000
End of term payment	$ 300,000
Loan agreement terminated date											Sep. 23, 2016
Interest expense								$ 506,302			$ 1,035,763
2014 Loan and Security Agreement | Hercules Technology Growth Capital Inc | Unamortized Term Fee
Debt Instrument [Line Items]
Interest expense	260,000
2014 Loan and Security Agreement | Hercules Technology Growth Capital Inc | Debt Prepayment Fee
Debt Instrument [Line Items]
Interest expense	$ 230,000
2014 Loan and Security Agreement | Hercules Technology Growth Capital Inc | Warrants
Debt Instrument [Line Items]
Warrants issued and outstanding | shares				46,838
Warrant exercise price per share | $ / shares				$ 0.62		$ 8.54				$ 8.54
Warrant expiration period from date of issuance						8 years
Debt discount				$ 9,417
Warrant expiration date											2022-09
2014 Loan and Security Agreement | Hercules Technology Growth Capital Inc | Series C Convertible Preferred Stock
Debt Instrument [Line Items]
Warrants issued as percentage of loan amount						4.00%
Fair value of warrants issued						$ 207,429				$ 207,429

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Stockholders' Equity - Additional Information (Details) - USD ($)	Dec. 01, 2015	Sep. 30, 2016	Dec. 31, 2015
Class Of Stock [Line Items]
Common stock shares outstanding under warrant conversion		71,257	71,257
Common stock, par value		$ 0.0001	$ 0.0001
Common stock, shares issued		13,828,496	13,750,016
Cantor Fitzgerald
Class Of Stock [Line Items]
Common stock, shares issued		0
Controlled Equity Offering Sales Agreement | Cantor Fitzgerald
Class Of Stock [Line Items]
Common stock, par value	$ 0.0001
Controlled Equity Offering Sales Agreement | Cantor Fitzgerald | Maximum
Class Of Stock [Line Items]
Aggregate offering price	$ 20,000,000
Warrants with Exercise price $9.90
Class Of Stock [Line Items]
Common stock shares outstanding under warrant conversion		24,419	24,419
Warrant exercise price per share		$ 9.90	$ 9.90
Warrants with Exercise price $0.62
Class Of Stock [Line Items]
Common stock shares outstanding under warrant conversion		46,838	46,838
Warrant exercise price per share		$ 0.62	$ 8.54

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Stockholders' Equity - Summary of Stock Compensation Plan Activity (Details)	9 Months Ended
	Sep. 30, 2016 $ / shares shares
Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]
Options Outstanding beginning of period | shares	1,363,027
Options Granted | shares	563,856
Options Exercised | shares	(78,480)
Options Forfeited | shares	(657,490)
Options Outstanding at end of period | shares	1,190,913
Weighted Average Exercise Price, Outstanding at beginning of period | $ / shares	$ 3.09
Weighted Average Exercise Price, Granted | $ / shares	1.09
Weighted Average Exercise Price, Exercised | $ / shares	0.43
Weighted Average Exercise Price, Forfeited | $ / shares	2.52
Weighted Average Exercise Price, Outstanding at end of period | $ / shares	$ 2.63

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Stockholders' Equity - Summary of Recognized Non-Cash Share-Based Compensation Expense (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Share-based compensation expense	$ 83,018	$ 365,986	$ 970,381	$ 1,042,014
General And Administrative
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Share-based compensation expense	67,687	257,938	851,837	732,255
Research And Development
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Share-based compensation expense	$ 15,331	$ 108,048	$ 118,544	$ 309,759

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Stockholders' Equity - Summary of Common Stock Reserved for Future Issuance (Details) - shares	Sep. 30, 2016	Dec. 31, 2015
Common Stock Reserved For Future Issuance [Line Items]
Total common stock reserved for future issuance	3,654,714
Stock options issued and outstanding	1,190,913	1,363,027
Authorized for future awards under stock compensation plans	1,956,369
Warrants issued and outstanding
Common Stock Reserved For Future Issuance [Line Items]
Total common stock reserved for future issuance	71,257
Stock options issued and outstanding
Common Stock Reserved For Future Issuance [Line Items]
Stock options issued and outstanding	1,190,913
Employee Stock Purchase Plan
Common Stock Reserved For Future Issuance [Line Items]
Total common stock reserved for future issuance	436,175

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Commitments - Additional Information (Details)	9 Months Ended
	Sep. 30, 2016
Commitments And Contingencies Disclosure [Abstract]
Non-cancelable operating lease agreement date	Jan. 20, 2015
Lease expiration period	2020-03

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Commitments - Summarized minimum lease payments (Details)	Sep. 30, 2016 USD ($)
Commitments And Contingencies Disclosure [Abstract]
2016	$ 95,631
2017	395,520
2018	410,850
2019	431,508
2020	109,293
Future minimum lease payments under operating leases	$ 1,442,802