LIPOCINE INC. Financial Statements

Financial Statements

March 31, 2013 and 2012

Financial Statements

March 31, 2013 and 2012

Condensed Balance Sheets

See notes to condensed financial statements

Condensed Statements of Operations

See notes to condensed financial statements

Condensed Statements of Cash Flows

See notes to condensed financial statements

Notes to Condensed Financial Statements

The accompanying unaudited financial statements have been prepared pursuant to the rules and regulations of the

Securities and Exchange Commission ( SEC ) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements

and should be read in conjunction with the audited Lipocine Inc. financial statements for the year ended December 31, 2012. The accompanying unaudited financial statements reflect all adjustments necessary for a fair presentation of results for

the interim periods presented. Preparing financial statements requires the Company to make estimates and assumptions that affect the amounts that are reported in the financial statements and accompanying footnotes. Although these estimates are based

upon the Company s best knowledge of current events and actions that the Company may undertake in the future, actual results may be different from the estimates. The results of operations for the three-months ended March 31, 2013 are not

necessarily indicative of the results to be expected for any future period or for the full year.

The Company has, at times, incurred negative cash flow from operations, and has expended, and expects to continue to

expend substantial funds to implement its product development efforts and commercialization programs. The Company believes its existing capital resources at March 31, 2013 should be sufficient to fund its current operations through at least

April 1, 2014. The Company will need to raise additional funds to support its planned operations, long-term research, product development, and commercialization programs. However, there is no assurance that, if required, the Company will be

able to raise additional capital or reduce spending, including modifying or terminating planned clinical trials or commercialization programs, to provide the required liquidity.

Basic earnings (loss) per share is calculated by dividing net income available to common shareholders by the weighted

average number of common shares outstanding during the period. Net income (loss) available to common shareholders for the three-months ended March 31, 2013 and 2012 was calculated using the two-class method, which is an earnings (loss)

allocation method for computing earnings (loss) per share when an entity s capital structure includes common stock and participating securities. The two-class method determines earnings (loss) per share based on dividends declared on common

stock and participating securities (i.e., distributed earnings) and participation rights of participating securities in any undistributed earnings (loss). The application of the two-class method was required as the Company has Class A and Class B

common stock and since the Company s Series B preferred stock and the unvested restricted stock each contain nonforfeitable rights to dividends or dividend equivalents. However, unvested restricted stock grants and Series B convertible

preferred stock are not included in computing basic earnings (loss) per share for the three-months ended March 31, 2013, as the Company has losses for this period and these securities are not contractually obligated to share in losses of the

Diluted earnings (loss) per share is based on the weighted average number of common shares outstanding plus, where

applicable, the additional potential common shares that would have been outstanding related to dilutive options, warrants, convertible preferred stock and unvested restricted stock, to the extent such shares are dilutive

Notes to Condensed Financial Statements

The following table sets forth the computation of basic and diluted earnings (loss) per share of

Class A and Class B common stock at March 31, 2013 and 2012. The allocation of undistributed earnings (losses) to Class A and Class B common stock in the table below excludes $0 and $255,177 of net income (loss) allocated to the

participating securities as March 31, 2013 and 2012.

The computation of diluted earnings per share for the three-months ended March 31, 2013 and 2012 does not include

the following unvested restricted stock, stock options and warrants to purchase shares in the computation of diluted earnings per share because these instruments were antidilutive:

Notes to Condensed Financial Statements

For trade accounts receivable, prepaid and other current assets, related-party receivable, trade accounts payable, and

accrued expenses the carrying amounts approximate fair value because of the short maturity of these instruments.

liabilities that are measured at fair value on a recurring basis using quoted prices in active markets for identical instruments (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3) consist of the

following at March 31, 2013 and December 31, 2012:

The following methods and assumptions were used to determine the fair value of each class of assets and

liabilities recorded at fair value in the balance sheets:

Cash equivalents: Cash equivalents primarily consist of highly

rated money market funds with original maturities to the Company of three months or less, and are purchased daily at par value with specified yield rates. Due to the high ratings and short-term nature of the funds, the Company considers all cash

equivalents as Level 1.

The tax provision for interim periods is determined using an estimate of the Company s effective tax rate for the

full year adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter the Company updates its estimate of the annual effective tax rate, and if the estimated tax rate changes, the Company makes a cumulative

At March 31, 2013 and December 31, 2012, the Company has a full valuation allowance against its deferred

tax assets, net of expected reversals of existing deferred tax liabilities, as it believes it is more likely than not that these benefits will not be realized.

Notes to Condensed Financial Statements

During the three month period ended March 31, 2013, an extension of the research

and development credit in the U.S. was signed into law. While the Company fully intends to take advantage of the research and development credit for the 2012 and 2013 tax years, no benefit has been recorded in the financial statements due to the

full valuation allowance position in the U.S.

The Company recognizes stock-based compensation expense for grants of stock option awards and restricted stock under

the Company s Incentive Plan to employees and nonemployee members of the Company s board of directors based on the grant-date fair value of those awards. The grant-date fair value of an award is generally recognized as compensation expense

over the award s requisite service period. In addition, the Company has granted performance-based stock option awards and restricted stock grants which vest based upon the Company satisfying certain performance conditions. Potential

compensation cost, measured on the grant date, related to these performance options will be recognized only if, and when, the Company estimates that these options will vest, which is based on whether the Company considers the options

performance conditions to be probable of attainment. The Company s estimates of the number of performance-based options that will vest will be revised, if necessary, in subsequent periods. In addition, the Company grants stock options to

nonemployee consultants from time to time in exchange for services performed for the Company. Equity instruments granted to nonemployees are subject to periodic revaluation over their vesting terms.

During the three-months ended March 31, 2013, the Company modified 3,262,948 existing time-vested and performance based stock options

by lowering the exercise price to $0.782. Additionally, the Company modified the vesting terms for its unvested performance stock options and unvested restricted stock to vest on the earlier of the first dosing in the pivotal clinical study for its

lead drug candidate, or 50% on January 31, 2014 and 50% on January 31, 2015. Compensation expense of $421,950 was recorded as a result of the modifications.

Stock-based compensation cost that has been expensed in the statements of operations amounted to $480,306 and $46,033 for the three-months ended March 31, 2013

and 2012, allocated as follows:

As of March 31, 2013, there was approximately $859,038 of total unrecognized compensation cost

related to unvested share-based compensation arrangements granted under the Company s Incentive Plan. The cost will be expensed pro-rata over the service period. The cumulative amount of compensation

expense recognized at any point in time is at least equal to the portion of the award that is vested at that date. The weighted average fair value of share-based compensation awards granted during the three-months ended March 31, 2013, was

approximately $0.48.

Notes to Condensed Financial Statements

On May 15, 2009, the Company granted an exclusive license to Solvay Pharmaceuticals, Inc. (later acquired by Abbott Products, Inc.) to certain rights to its intellectual property in exchange for an

up-front license fee of $4,000,000, certain specified payments upon achievement of various development and commercial milestones or the passage of time and also a royalty on related net sales. The Company also received research revenue for services

rendered during the development period and reimbursement of out-of-pocket expenses.

The Company received the up-front fee of

$4,000,000 in 2009 and milestone payments, related solely to the passing of time and not the achievement of any of the development or commercial milestones, totaling $3,000,000 and $2,000,000 in 2011 and 2010. The up-front license fee and milestone

payments were recorded as a single unit of account, as the delivered technology does not have stand-alone value. Total consideration was recorded using cumulative catch-up method as payments were deemed collectible over the estimated term of the

contract for which the Company has continuing performance obligations. The agreement was terminated effective March 29, 2012, and the balance of deferred revenue of $7,523,438 was recognized as licensing and milestone revenue during the

three-months ended March 31, 2012. The Company also earned research revenue under the agreement of $186,233 during the three-months ended March 31, 2012.

On May 21, 2011, the Company entered into a collaborative product development agreement with Nexgen Pharma, Inc.

( Nexgen ). Under the agreement, the parties agreed to jointly develop certain products for the treatment of coughs and colds and to share future revenues from those products. Nexgen agreed to reimburse the Company at cost for all future

clinical costs incurred in the development of the products. A total of $375,616 and $342,292 was reimbursed for related expenses under the agreement during the three-months ended March 31, 2013 and 2012 and recorded net in research and

development expense. The Company had a trade receivable of $375,616 at March 31, 2013 for which payment was received subsequent to that date. The Company is responsible for certain new drug application ( NDA ) filing costs with the

Food and Drug Administration ( FDA ) under terms of this contract and, additionally, will participate on a joint steering committee with Nexgen for the development, regulatory, and manufacturing strategy of product candidates. On

July 23, 2013, the Company transferred all rights and obligations under this agreement to Spriaso, LLC (see note 11).

The Company has entered into agreements with various contract organizations that conduct preclinical, clinical, analytical and manufacturing development work on behalf of the Company as well as with a

number of independent contractors, primarily clinical researchers, who serve as advisors to the Company. The Company incurred expenses of $414,490 and $446,701 under these agreements during the three-months ended March 31 2013 and 2012.

Notes to Condensed Financial Statements

Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of

one year) as of March 31, 2013 are:

The Company s rent expense was $86,864 and $84,952 for the three-months ended March 31, 2013

Series B convertible preferred stock may be converted any time after three years after issuance and at the option of the holder

into Series A common stock on a one-to-one basis. Series B preferred stockholders are not entitled to vote. Series B convertible preferred stock has