10.4+ Exhibit No. | Description | | Method of Filing | | | | | | | | | 10.5* | Form of Notice of Grant of Stock Option under the 1998 Stock Incentive Plan | | Incorporated by reference to Exhibit 10.2 to Discovery’s Quarterly Report on Form 10-QSB for the quarter ended September 30, 1999, as filed with the SEC on November 17, 1999. | | | | | 10.6* | Discovery’s 2007 Long Term Incentive Plan | | Incorporated by reference to Exhibit 1.1 to Discovery’s Current Report on Form 8-K, as filed with the SEC on June 28, 2007. | | | | | 10.7* | Form of 2007 Long-Term Incentive Plan Stock Option Agreement | | Incorporated by reference to Exhibit 10.3 to Discovery’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, as filed with the SEC on August 9, 2007. | | | | | 10.8* | Form of Stock Issuance Agreement, dated as of October 30, 2007, between Discovery and the Grantees | | Incorporated by reference to Exhibit 10.1 to Discovery’s Current Report on Form 8-K, as filed with the SEC on November 5, 2007. | | | | | 10.8* | Form of Restricted Stock Award (RSA) Agreement dated September 27, 2010 | | Incorporated by reference to Exhibit 10.1 to Discovery’s Current Report on Form 8-K, as filed with the SEC on October 1, 2010. | | | | | 10.10* | Form of 2011 Long-Term Incentive Plan Stock Option Agreement | | Incorporated by reference to Appendix II to Discovery’s Definitive Proxy Statement on Form DEF 14A, as filed with the SEC on August 15, 2011 (Commission File Number 000-26422). | | | | | 10.11* | Renewal of Interim CEO Agreement dated July 2, 2010 between W. Thomas Amick and Discovery | | Incorporated by reference to Exhibit 10.8 to Discovery’s Quarterly Report on Form 10-Q dated June 30, 2010, as filed with the SEC on August 9, 2010. | | | | | 10.12* | Employment Agreement dated as of October 18, 2010 between Discovery and W. Thomas Amick | | Incorporated by reference to Exhibit 10.5 to Discovery’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, as filed with the SEC on November 15, 2010. | | | | | 10.13* | Amendment dated August 11, 2011 to the Employment Agreement dated as of October 18, 2010 between Discovery and W. Thomas Amick | | Incorporated by reference to Exhibit 10.2 to Discovery’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, as filed with the SEC on August 15, 2011. | | | | | 10.14* | Amended and Restated Employment Agreement, dated as of May 4, 2006, by and between Discovery and John G. Cooper | | Incorporated by reference to Exhibit 10.2 to Discovery’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, as filed with the SEC on May 10, 2006. | | | | | 10.15* | Amendment to the Amended and Restated Employment Agreement dated as of May 4, 2006 between John G. Cooper and Discovery Laboratories, Inc. | | Incorporated by reference to Exhibit 10.3 to Discovery’s Current Report on Form 8-K, as filed with the SEC on January 3, 2008. |
Exhibit No. | Description | | Method of Filing | | | | | 10.16+ | Amended and Restated Sublicense and Collaboration Agreement made as of December 3, 2004, between Discovery and Laboratorios del Dr. Esteve, S.A. | | Incorporated by reference to Exhibit 10.28 to Discovery’s Annual Report on Form 10-K for the year ended December 31, 2004, as filed with the SEC on March 16, 2005. | | | | | 10.17+10.5+ | Amended and Restated Supply Agreement, dated as of December 3, 2004, by and between Discovery and Laboratorios del Dr. Esteve, S.A. | | Incorporated by reference to Exhibit 10.29 to Discovery’s Annual Report on Form 10-K for the year ended December 31, 2004, as filed with the SEC on March 16, 2005. | | | | | 10.6* | Discovery’s 2007 Long Term Incentive Plan | | Incorporated by reference to Exhibit 1.1 to Discovery’s Current Report on Form 8-K, as filed with the SEC on June 28, 2007. |
Exhibit No. | Description | | Method of Filing | | | | | 10.1810.7* | Form of 2007 Long-Term Incentive Plan Stock Option Agreement | | Incorporated by reference to Exhibit 10.3 to Discovery’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, as filed with the SEC on August 9, 2007. | | | | | 10.8* | Discovery’s 2011 Long-Term Incentive Plan | | Incorporated by reference to Appendix II to Discovery’s Definitive Proxy Statement on Form DEF 14A, as filed with the SEC on August 15, 2011 (Commission File Number 000-26422). | | | | | 10.9* | Form of Employee Option Agreement under Discovery’s 2011 Long-Term Incentive Plan | | Incorporated by reference to Exhibit 10.2 to Discovery’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, as filed with the SEC on May 15, 2012. | | | | | 10.10* | Form on Non-Employee Director Agreement under Discovery’s 2011 Long-Term Incentive Plan | | Incorporated by reference to Exhibit 10.3 to Discovery’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, as filed with the SEC on May 15, 2012. | | | | | 10.11* | Employment Agreement dated as of May 4, 2012 between Discovery and John G. Cooper | | Incorporated by reference to Exhibit 10.1 to Discovery’s Current Report on Form 8-K, as filed with the SEC on May 10, 2012. | | | | | 10.12* | Employment Agreement dated as of April 1, 2013, between Discovery Laboratories, Inc. and John G. Cooper | | Incorporated by reference to Exhibit 10.1 to Discovery’s Current Report on Form 8-K, as filed with the SEC on April 2, 2013. | | | | | 10.13* | Employment Agreement dated as of May 4, 2012 between Discovery and Thomas F. Miller | | Incorporated by reference to Exhibit 10.3 to Discovery’s Current Report on Form 8-K, as filed with the SEC on May 10, 2012 as amended by Exhibit 10.1 to Discovery’s Current Report on Form 8-K/A, as filed with the SEC on May 11, 2012. | | | | | 10.14* | Employment Agreement dated as of April 1, 2013, between Discovery Laboratories, Inc. and Thomas F. Miller, Ph.D., MBA | | Incorporated by reference to Exhibit 10.1 to Discovery’s Current Report on Form 8-K, as filed with the SEC on April 2, 2013. | | | | | | Employment Agreement dated as of April 1, 2013, between Discovery Laboratories, Inc. and Russell G. Clayton | | Filed herewith. | | | | | | Employment Agreement dated as of April 1, 2013, between Discovery Laboratories, Inc. and Mary B. Templeton | | Filed herewith. |
Exhibit No. | Description | | Method of Filing | | | | | 10.17 | Assignment of Lease and Termination and Option Agreement, dated as of December 30, 2005, between Laureate Pharma, Inc. and Discovery | | Incorporated by reference to Exhibit 10.1 to Discovery’s Annual Report on Form 10-K for the year ended December 31, 2005, as filed with the SEC on March 16, 2006. | | | | | 10.18 | Extension, dated as of July 16, 2013, of Lease dated as of December 3, 2004, between Discovery, as successor-in-interest to Laureate Pharma, Inc., and Norwell Land Company, with respect to property at 710 Union Blvd., Totowa, NJ 07512 | | Incorporated by reference to Exhibit 10.1 to Discovery’s Quarterly Report on Form 10-Q, as filed with the SEC on August 8, 2013. | | | | | 10.19 | Lease Agreement dated May 26, 2004, and First Amendment to Lease Agreement, dated April 2, 2007, by and between TR Stone Manor Corp. and Discovery Laboratories, Inc. | | Incorporated by reference to Exhibits 10.1 and 10.2 to Discovery’s Current Report on Form 8-K, as filed with the SEC on April 6, 2007. | | | | | 10.20 | Payment Agreement and LoanSecond Amendment (amending the Second Amended and Restated Loanto Lease Agreement, dated as of December 10, 2001, amended and restated as of October 25, 2006) dated April 27, 2010,January 3, 2013 by and between DiscoveryTR Stone Manor Corp. and PharmaBioDiscovery | | Incorporated by reference to Exhibit 1.1 to Discovery’s Current Report on Form 8-K, as filed with the SEC on April 28, 2010. | | | | | 10.21 | Third Amended Promissory Note dated April 27, 2010 (amending and restating the Second Amended Promissory Note dated as of October 25, 2006), payable to PharmaBio | | Incorporated by reference to Exhibit 1.2 to Discovery’s Current Report on Form 8-K, as filed with the SEC on April 28, 2010. | | | | | 10.22 | Securities Purchase Agreement dated April 27, 2010, by and between Discovery and PharmaBio | | Incorporated by reference to Exhibit 1.3 to Discovery’s Current Report on Form 8-K, as filed with the SEC on April 28, 2010. | | | | | 10.23 | Securities Purchase Agreement dated October 12, 2010 by and between PharmaBio and Discovery | | Incorporated by reference to ExhibitExhibits 10.1 to Discovery’s Current Report on Form 8-K, as filed with the SEC on October 13, 2010.January 8, 2013. | | | | | 10.24 | Registration Rights Agreement, dated as of May 22, 2008, by and between Kingsbridge Capital and Discovery | | Incorporated by reference to Exhibit 10.2 to Discovery’s Current Report on Form 8-K, as filed with the SEC on May 27, 2008. | | | | | 10.25 | Registration Rights Agreement, dated as of December 12, 2008, by and between Kingsbridge Capital and Discovery | | Incorporated by reference to Exhibit 10.2 to Discovery’s Current Report on Form 8-K, as filed with the SEC on December 15, 2008. | | | | | 10.26 | Common Stock Purchase Agreement dated as of June 11, 2010, by and between Kingsbridge Capital Limited and Discovery. | | Incorporated by reference to Exhibit 10.1 to Discovery’s Current Report on Form 8-K, as filed with the SEC on June 14, 2010. |
Exhibit No. | Description | | Method of Filing | | | | | 10.27+10.21 | Supply Agreement dated as of December 22, 2010 between by and between Corden Pharma (formerly Genzyme Pharmaceuticals LLC)LLC, now known as Corden Pharma) and Discovery | | Incorporated by reference to Exhibit 10.1 to Discovery’s Current Report on Form 8-K, as filed with the SEC on December 29, 2010. | | | | | 10.28*10.22 | Separation of EmploymentProduct Development and Supply Agreement and General Release between Discovery and David L. Lopez, Esq., C.P.A.Lacey Manufacturing Company, a Division of Precision Engineered Products, LLC | | Incorporated by reference to Exhibit 10.1 to Discovery’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, as filed with the SEC on May 15, 2012. | | | | | 10.23 | Research and Development Services Agreement between Discovery and Battelle Memorial Institute, dated June 22, 2012 | | Incorporated by reference to Exhibit 10.4 of Discovery’s Quarterly Report on Form 10-Q, as filed with the SEC on August 14, 2012. | | | | | 10.24 | Facility Agreement dated as of February 13, 2013, between Discovery and Deerfield | | Incorporated by reference to Exhibit 10.1 to Discovery’s Current Report on Form 8-K/A, as filed with the SEC on March 15, 2013. | | | | | 10.25 | Registration Rights Agreement dated as of February 13, 2013, between Discovery and Deerfield | | Incorporated by reference to Exhibit 10.2 to Discovery’s Current Report on Form 8-K/A, as filed with the SEC on March 15, 2013. |
Exhibit No. | Description | | Method of Filing | | | | | 10.26 | Security Agreement dated as of February 13, 2013, between Discovery and Deerfield | | Incorporated by reference to Exhibit 10.3 to Discovery’s Current Report on Form 8-K/A, as filed with the SEC on March 15, 2013. | | | | | 10.27 | At-the-Market Equity Offering Sales Agreement dated February 11, 2013 between Discovery and Stifel Nicolaus & Company, Incorporated | | Incorporated by reference to Exhibit 10.1 to Discovery’s Current Report on Form 8-K, as filed with the SEC on July 18, 2011.February 13, 2013. | | | | | 10.2910.28 | Sales AgencyPharmaceutical Manufacturing and Supply Agreement dated December 14, 2011,August 7, 2013 between Discovery and Lazard Capital Markets LLCDSM Pharmaceuticals, Inc. | | Incorporated by reference to Exhibit 10.110.2 to Discovery’s CurrentQuarterly Report on Form 8-K,10-Q, as filed with the SEC on December 14, 2011. | | | | August 8, 2013. | | | | | 10.29 | Master Services Agreement dated October 24, 2013 between Discovery and DSM | | Incorporated by reference to Exhibit 10.2 to Discovery’s Quarterly Report on Form 10-Q, as filed with the SEC on November 12, 2013. | | | | | | Subsidiaries of Discovery | | Filed herewith. | | | | | | Consent of Ernst & Young LLP, independent registered public accounting firm | | Filed herewith. | | | | | | Certification of Chief Executive Officer and Principal ExecutiveChief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act | | Filed herewith. | | | | | | Certification of Chief Financial Officer and Principal Accounting Officer pursuant to Rule 13a-14(a) of the Exchange Act | | Filed herewith. | | | | | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | Filed herewith. | | | | | 101.1 | The following consolidated financial statements from the Discovery Laboratories.Laboratories, Inc. Annual Report on Form 10-K for the year ended December 31, 2011,2013, formatted in Extensive Business Reporting Language ("XBRL"(“XBRL”): (i) Balance Sheets as of December 31, 20112013, December 31, 2012 and December 31, 2010,2011, (ii) Statements of Operations for the years ended December 31, 20112013, December 31, 2012, and December 31, 2010,2011, (iii) Statements of Changes in Equity for the years ended December 31, 20112013, December 31, 2012, and December 31, 2010,2011, (iv) Statements of Cash Flows for the years ended December 31, 20112013, December 31, 2012, and December 31, 2010,2011, and (v) Notes to consolidated financial statementsstatements. | | | | | | | 101.INS | Instance Document | | Filed herewith. | | | | | 101.SCH | XBRL Taxonomy Extension Schema Document | | Filed herewith. |
Exhibit No. | Description | | Method of Filing | | | | | 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | | Filed herewith. | | | | | 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | | Filed herewith. | | | | | 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | | Filed herewith. | | | | | 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | | Filed herewith. |
+ | Confidential treatment requested as to certain portions of these exhibits. Such portions have been redacted and filed separately with the Commission. |
+ Confidential treatment requested as to certain portions of these exhibits. Such portions have been redacted and filed separately with the Commission.
* A management contract or compensatory plan or arrangement required to be filed as an exhibit to this annual report pursuant to Item 15(b) of Form 10-K.
* | A management contract or compensatory plan or arrangement required to be filed as an exhibit to this annual report pursuant to Item 15(b) of Form 10-K. |
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
Contents
Contents | | | | Consolidated Financial Statements | | | | Report of Independent Registered Public Accounting Firm | F-2 | | | Balance Sheets as of December 31, 20112013 and December 31, 20102012 | F-3 | | | Statements of Operations for the years ended December 31, 20112013, 2012, and December 31, 20102011 | F-4 | | | Statements of Changes in Stockholders’ Equity for the years ended December 31, 20112013, 2012, and December 31, 20102011 | F-5 | | | Statements of Cash Flows for the years ended December 31, 20112013, 2012, and December 31, 20102011 | F-6 | | | Notes to consolidated financial statements | F-7 |
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders Discovery Laboratories, Inc.
We have audited the accompanying consolidated balance sheets of Discovery Laboratories, Inc. and subsidiary (the “Company”) as of December 31, 20112013 and 2010,2012, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the three years then ended.in the period ended December 31, 2013. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,statements. An audit also includes assessing the accounting principles used and significant estimates made by management, andas well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Discovery Laboratories, Inc. and subsidiary at December 31, 20112013 and 2010,2012, and the consolidated results of their operations and their cash flows for each of the three years thenin the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Discovery Laboratories, Inc. and subsidiary's internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated March 17, 2014 expressed an unqualified opinion thereon. | /s/ Ernst &and Young LLP | | Philadelphia, Pennsylvania | | | March 30, 2012 | | |
Philadelphia, Pennsylvania
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
Consolidated Balance Sheets (in thousands, except share and per share data)
| | December 31, | | | December 31, | | | | 2013 | | | 2012 | | ASSETS | | | | | | | Current Assets: | | | | | | | Cash and cash equivalents | | $ | 86,283 | | | $ | 26,892 | | Accounts receivable | | | 67 | | | | – | | Inventory, net | | | 112 | | | | 195 | | Prepaid expenses and other current assets | | | 777 | | | | 719 | | Total current assets | | | 87,239 | | | | 27,806 | | | | | | | | | | | Property and equipment, net | | | 1,656 | | | | 1,737 | | Restricted cash | | | 325 | | | | 400 | | Other assets | | | 97 | | | | – | | Total assets | | | 89,317 | | | | 29,943 | | | | | | | | | | | LIABILITIES & STOCKHOLDERS’ EQUITY | | | | | | | | | Current Liabilities: | | | | | | | | | Accounts payable | | $ | 1,433 | | | $ | 1,166 | | Accrued expenses | | | 4,785 | | | | 4,159 | | Deferred revenue | | | 139 | | | | – | | Common stock warrant liability | | | 5,425 | | | | 6,305 | | Equipment loans, current portion | | | 73 | | | | 69 | | Total current liabilities | | | 11,855 | | | | 11,699 | | | | | | | | | | | Long-term debt, net of discount of $11,646 at December 31, 2013 and $0 at December 31, 2012 | | | 18,354 | | | | – | | Equipment loans, non-current portion | | | 69 | | | | 148 | | Other liabilities | | | 538 | | | | 443 | | Total liabilities | | $ | 30,816 | | | $ | 12,290 | | | | | | | | | | | Stockholders’ Equity: | | | | | | | | | Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued or outstanding | | | – | | | | – | | Common stock, $0.001 par value; 150,000,000 and 100,000,000 shares authorized at December 31, 2013 and 2012, respectively; 84,659,111 and 43,673,636 shares issued at December 31, 2013 and 2012, respectively; 84,638,219 and 43,652,744 shares outstanding at December 31, 2013 and 2012, respectively | | | 85 | | | | 44 | | Additional paid-in capital | | | 541,420 | | | | 455,398 | | Accumulated deficit | | | (479,950 | ) | | | (434,735 | ) | Treasury stock (at cost); 20,892 shares at December 31, 2013 and 2012 | | | (3,054 | ) | | | (3,054 | ) | Total stockholders’ equity | | $ | 58,501 | | | $ | 17,653 | | Total liabilities & stockholders’ equity | | $ | 89,317 | | | $ | 29,943 | |
See notes to consolidated financial statements DISCOVERY LABORATORIES, INC. AND SUBSIDIARY Consolidated Statements of Operations (Inin thousands, except per share data)
| | December 31, | | | December 31, | | | | 2011 | | | 2010 | | ASSETS | | | | | | | Current Assets: | | | | | | | Cash and cash equivalents | | $ | 10,189 | | | $ | 10,211 | | Prepaid expenses and other current assets | | | 442 | | | | 285 | | Total current assets | | | 10,631 | | | | 10,496 | | | | | | | | | | | Property and equipment, net | | | 2,293 | | | | 3,467 | | Restricted cash | | | 400 | | | | 400 | | Other assets | | | - | | | | 174 | | Total assets | | $ | 13,324 | | �� | $ | 14,537 | | | | | | | | | | | LIABILITIES & STOCKHOLDERS’ EQUITY | | | | | | | | | Current Liabilities: | | | | | | | | | Accounts payable | | $ | 1,111 | | | $ | 1,685 | | Accrued expenses | | | 2,972 | | | | 3,286 | | Common stock warrant liability | | | 6,996 | | | | 2,469 | | Equipment loans and capitalized leases, current portion | | | 68 | | | | 136 | | Total current liabilities | | | 11,147 | | | | 7,576 | | | | | | | | | | | Equipment loans and capitalized leases, non-current portion | | | 224 | | | | 301 | | Other liabilities | | | 689 | | | | 634 | | Total liabilities | | | 12,060 | | | | 8,511 | | | | | | | | | | | Stockholders’ Equity: | | | | | | | | | Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued or outstanding | | | – | | | | – | | Common stock, $0.001 par value; 100,000 and 50,000 authorized; 24,603 and 13,822 shares issued, 24,582 and 13,801 shares outstanding | | | 25 | | | | 14 | | Additional paid-in capital | | | 401,713 | | | | 385,521 | | Accumulated deficit | | | (397,420 | ) | | | (376,455 | ) | Treasury stock (at cost); 21 shares | | | (3,054 | ) | | | (3,054 | ) | Total stockholders’ equity | | | 1,264 | | | | 6,026 | | Total liabilities & stockholders’ equity | | $ | 13,324 | | | $ | 14,537 | |
| | Year Ended December 31, | | | | | | | | | | | 2013 | | | 2012 | | | 2011 | | | | | | | | | | | | Grant revenue | | $ | 388 | | | $ | 195 | | | $ | 582 | | Expenses: | | | | | | | | | | | | | Cost of product sales | | | 517 | | | | - | | | | - | | Research & development | | | 27,661 | | | | 21,570 | | | | 17,230 | | Selling, general & administrative | | | 16,718 | | | | 16,444 | | | | 7,864 | | Total expenses | | | 44,896 | | | | 38,014 | | | | 25,094 | | Operating loss | | | (44,508 | ) | | | (37,819 | ) | | | (24,512 | ) | | | | | | | | | | | | | | Change in fair value of common stock warrant liability | | | 761 | | | | 555 | | | | 3,560 | | | | | | | | | | | | | | | Other income / (expense): | | | | | | | | | | | | | Interest and other income | | | 3 | | | | 6 | | | | 13 | | Interest and other expense | | | (1,471 | ) | | | (57 | ) | | | (26 | ) | Other income / (expense), net | | | (1,468 | ) | | | (51 | ) | | | (13 | ) | | | | | | | | | | | | | | Net loss | | $ | (45,215 | ) | | $ | (37,315 | ) | | $ | (20,965 | ) | Net loss per common share – basic and diluted | | $ | (0.82 | ) | | $ | (0.95 | ) | | $ | (0.93 | ) | Weighted average number of common shares outstanding – basic and diluted | | | 55,258 | | | | 39,396 | | | | 22,660 | |
See notes to consolidated financial statements
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY Consolidated Statements of Operations
(In thousands, except per share data)
| | Year Ended December 31, | | | | 2011 | | | 2010 | | | | | | | | | Grant Revenue | | $ | 582 | | | $ | – | | | | | | | | | | | Expenses: | | | | | | | | | Research & development | | | 17,230 | | | | 17,136 | | General & administrative | | | 7,864 | | | | 8,392 | | Total expenses | | | 25,094 | | | | 25,528 | | Operating loss | | | (24,512 | ) | | | (25,528 | ) | | | | | | | | | | Change in fair value of common stock warrant liability | | | 3,560 | | | | 6,422 | | | | | | | | | | | Other income / (expense): | | | | | | | | | Interest and other income | | | 13 | | | | 288 | | Interest and other expense | | | (26 | ) | | | (357 | ) | Other income / (expense), net | | | (13 | ) | | | (69 | ) | | | | | | | | | | Net loss | | $ | (20,965 | ) | | $ | (19,175 | ) | Net loss per common share - basic and diluted | | $ | (0.93 | ) | | $ | (1.65 | ) | Weighted average number of common shares outstanding - basic and diluted | | | 22,660 | | | | 11,602 | |
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders’ Equity For Years Ended December 31, 2011 and 2010
(In thousands)
(In thousands) | | Common Stock | | | | | | | | | Treasury Stock | | | | | | | Shares | | | Amount | | | Additional Paid-in Capital | | | Accumulated Deficit | | | Shares | | | Amount | | | Total | | | | | | | | | | | | | | | | | | | | | | | | Balance – January 1, 2011 | | | 13,822 | | | $ | 14 | | | $ | 385,521 | | | $ | (376,455 | ) | | | (21 | ) | | $ | (3,054 | ) | | $ | 6,026 | | Net loss | | | – | | | | – | | | | – | | | | (20,965 | ) | | | – | | | | – | | | | (20,965 | ) | Issuance of common stock, restricted stock awards | | | 1 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | Issuance of common stock, 401(k) Plan employer match | | | 265 | | | | – | | | | 497 | | | | – | | | | – | | | | – | | | | 497 | | Issuance of common stock, February 2011 financing | | | 10,000 | | | | 10 | | | | 13,513 | | | | – | | | | – | | | | – | | | | 13,523 | | Issuance of common stock, CEFF financings | | | 515 | | | | 1 | | | | 1,315 | | | | – | | | | – | | | | – | | | | 1,316 | | Stock-based compensation expense | | | – | | | | – | | | | 867 | | | | – | | | | – | | | | – | | | | 867 | | Balance – December 31, 2011 | | | 24,603 | | | $ | 25 | | | $ | 401,713 | | | $ | (397,420 | ) | | | (21 | ) | | $ | (3,054 | ) | | $ | 1,264 | | Net loss | | | – | | | | – | | | | – | | | | (37,315 | ) | | | – | | | | – | | | | (37,315 | ) | Issuance of common stock, March 2012 financing | | | 16,072 | | | | 16 | | | | 42,074 | | | | – | | | | – | | | | – | | | | 42,090 | | Issuance of common stock, ATM financing | | | 350 | | | | 1 | | | | 1,460 | | | | – | | | | – | | | | – | | | | 1,461 | | Issuance of common stock, 401(k) Plan employer match | | | 317 | | | | – | | | | 763 | | | | – | | | | – | | | | – | | | | 763 | | Exercise of common stock warrants | | | 2,289 | | | | 2 | | | | 6,875 | | | | – | | | | – | | | | – | | | | 6,877 | | Exercise of stock options for cash | | | 3 | | | | – | | | | 6 | | | | – | | | | – | | | | – | | | | 6 | | Issuance of common stock, consultants | | | 40 | | | | – | | | | 96 | | | | – | | | | – | | | | – | | | | 96 | | Stock-based compensation expense | | | – | | | | – | | | | 2,411 | | | | – | | | | – | | | | – | | | | 2,411 | | Balance – December 31, 2012 | | | 43,674 | | | $ | 44 | | | $ | 455,398 | | | $ | (434,735 | ) | | | (21 | ) | | $ | (3,054 | ) | | $ | 17,653 | | Net loss | | | – | | | | – | | | | – | | | | (45,215 | ) | | | – | | | | – | | | | (45,215 | ) | Issuance of common stock, May 2013 financing | | | 10,847 | | | | 11 | | | | 15,102 | | | | – | | | | – | | | | – | | | | 15,113 | | Issuance of common stock, November 2013 financing | | | 28,750 | | | | 29 | | | | 53,836 | | | | – | | | | – | | | | – | | | | 53,865 | | Issuance of common stock, ATM financing | | | 714 | | | | 1 | | | | 1,795 | | | | – | | | | – | | | | – | | | | 1,796 | | Issuance of common stock warrants, Deerfield | | | – | | | | – | | | | 11,729 | | | | – | | | | – | | | | – | | | | 11,729 | | Issuance of common stock, 401(k) Plan employer match | | | 510 | | | | – | | | | 959 | | | | – | | | | – | | | | – | | | | 959 | | Exercise of common stock warrants | | | 114 | | | | – | | | | 290 | | | | – | | | | – | | | | – | | | | 290 | | Exercise of stock options for cash | | | 18 | | | | – | | | | 34 | | | | – | | | | – | | | | – | | | | 34 | | Issuance of common stock, consultants | | | 32 | | | | – | | | | 67 | | | | – | | | | – | | | | – | | | | 67 | | Stock-based compensation expense | | | – | | | | – | | | | 2,210 | | | | – | | | | – | | | | – | | | | 2,210 | | Balance – December 31, 2013 | | | 84,659 | | | $ | 85 | | | $ | 541,420 | | | $ | (479,950 | ) | | | (21 | ) | | $ | (3,054 | ) | | $ | 58,501 | |
| | Common Stock | | | Additional Paid-in | | | Accumulated | | | Treasury Stock | | | | | | | Shares | | | Amount | | | Capital | | | Deficit | | | Shares | | | Amount | | | Total | | | | | | | | | | | | | | | | | | | | | | | | Balance – January 1, 2010 | | | 8,446 | | | $ | 8 | | | $ | 361,622 | | | $ | (357,280 | ) | | | (21 | ) | | $ | (3,054 | ) | | $ | 1,296 | | Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss | | | – | | | | – | | | | – | | | | (19,175 | ) | | | – | | | | – | | | | (19,175 | ) | Total comprehensive loss | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | (19,175 | ) | Issuance of common stock, restricted stock awards | | | 155 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | Issuance of common stock, 401(k) employer match | | | 61 | | | | 1 | | | | 223 | | | | – | | | | – | | | | – | | | | 224 | | Issuance of common stock, February 2010 financing | | | 1,833 | | | | 2 | | | | 9,379 | | | | – | | | | – | | | | – | | | | 9,381 | | Issuance of common stock, April 2010 financing | | | 270 | | | | – | | | | 2,105 | | | | – | | | | – | | | | – | | | | 2,105 | | Issuance of common stock, June 2010 financing | | | 2,381 | | | | 2 | | | | 9,092 | | | | – | | | | – | | | | – | | | | 9,094 | | Issuance of common stock, October 2010 financing | | | 159 | | | | – | | | | 452 | | | | – | | | | – | | | | – | | | | 452 | | Issuance of common stock, CEFF financings | | | 517 | | | | 1 | | | | 1,242 | | | | – | | | | – | | | | – | | | | 1,243 | | Stock-based compensation expense | | | – | | | | – | | | | 1,406 | | | | – | | | | – | | | | – | | | | 1,406 | | Balance – December 31, 2010 | | | 13,822 | | | $ | 14 | | | $ | 385,521 | | | $ | (376,455 | ) | | | (21 | ) | | $ | (3,054 | ) | | $ | 6,026 | | Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss | | | – | | | | – | | | | – | | | | (20,965 | ) | | | – | | | | – | | | | (20,965 | ) | Total comprehensive loss | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | (20,965 | ) | Issuance of common stock, restricted stock awards | | | 1 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | Issuance of common stock, 401(k) employer match | | | 265 | | | | – | | | | 497 | | | | – | | | | – | | | | – | | | | 497 | | Issuance of common stock, February 2011 financing | | | 10,000 | | | | 10 | | | | 13,513 | | | | – | | | | – | | | | – | | | | 13,523 | | Issuance of common stock, CEFF financings | | | 515 | | | | 1 | | | | 1,315 | | | | – | | | | – | | | | – | | | | 1,316 | | Stock-based compensation expense | | | – | | | | – | | | | 867 | | | | – | | | | – | | | | – | | | | 867 | | Balance – December 31, 2011 | | | 24,603 | | | $ | 25 | | | $ | 401,713 | | | $ | (397,420 | ) | | | (21 | ) | | $ | (3,054 | ) | | $ | 1,264 | |
See notes to consolidated financial statements
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (In thousands)
| | Year Ended December 31, | | | | | | | | | | | | | | 2013 | | | 2012 | | | 2011 | | Cash flows from operating activities: | | | | | | | | | | Net loss | | $ | (45,215 | ) | | $ | (37,315 | ) | | $ | (20,965 | ) | Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | | | | Depreciation and amortization | | | 707 | | | | 1,150 | | | | 1,234 | | Provision for excess inventory | | | 514 | | | | – | | | | – | | Stock–based compensation and 401(k) Plan employer match | | | 3,236 | | | | 3,270 | | | | 1,364 | | Fair value adjustment of common stock warrants | | | (761 | ) | | | (555 | ) | | | (3,560 | ) | Amortization of discount of long-term debt | | | 534 | | | | – | | | | – | | Loss on disposal of equipment | | | – | | | | 42 | | | | 45 | | Reduction in required restricted cash under lease agreement | | | 75 | | | | – | | | | – | | Changes in: | | | | | | | | | | | | | Inventory | | | (431 | ) | | | (195 | ) | | | – | | Accounts receivable | | | (67 | ) | | | – | | | | – | | Prepaid expenses and other current assets | | | (58 | ) | | | (277 | ) | | | (157 | ) | Accounts payable | | | 267 | | | | 55 | | | | (574 | ) | Accrued expenses | | | 626 | | | | 1,187 | | | | (314 | ) | Deferred revenue | | | 139 | | | | – | | | | – | | Other assets | | | (115 | ) | | | – | | | | 174 | | Other liabilities | | | 95 | | | | (246 | ) | | | 55 | | Net cash used in operating activities | | | (40,454 | ) | | | (32,884 | ) | | | (22,698 | ) | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | Purchase of property and equipment | | | (608 | ) | | | (636 | ) | | | (106 | ) | Net cash used in investing activities | | | (608 | ) | | | (636 | ) | | | (106 | ) | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | Proceeds from issuance of securities, net of expenses | | | 70,774 | | | | 43,551 | | | | 22,927 | | Proceeds from issuance of long-term debt | | | 30,000 | | | | – | | | | – | | Payment of debt issuance costs | | | (450 | ) | | | – | | | | – | | Proceeds from exercise of common stock warrants and options | | | 204 | | | | 6,747 | | | | – | | Principal payments under equipment loans | | | (75 | ) | | | (75 | ) | | | (145 | ) | Net cash provided by financing activities | | | 100,453 | | | | 50,223 | | | | 22,782 | | Net increase / (decrease) in cash and cash equivalents | | | 59,391 | | | | 16,703 | | | | (22 | ) | Cash and cash equivalents – beginning of year | | | 26,892 | | | | 10,189 | | | | 10,211 | | Cash and cash equivalents – end of year | | $ | 86,283 | | | $ | 26,892 | | | $ | 10,189 | | | | | | | | | | | | | | | Supplementary disclosure of cash flows information: | | | | | | | | | | | | | Interest paid | | $ | 920 | | | $ | 13 | | | $ | 20 | |
(In thousands)
| | Year Ended December 31, | | | | 2011 | | | 2010 | | Cash flow from operating activities: | | | | | | | Net loss | | $ | (20,965 | ) | | $ | (19,175 | ) | Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | Depreciation and amortization | | | 1,234 | | | | 1,549 | | Stock–based compensation and 401(k) match | | | 1,364 | | | | 1,634 | | Fair value adjustment of common stock warrants | | | (3,560 | ) | | | (6,422 | ) | Loss / (gain) on sale of equipment | | | 45 | | | | (16 | ) | Changes in: | | | | | | | | | Prepaid expenses and other current assets | | | (157 | ) | | | (52 | ) | Accounts payable | | | (574 | ) | | | 391 | | Accrued expenses | | | (314 | ) | | | (166 | ) | Other assets | | | 174 | | | | 4 | | Other liabilities and accrued interest on loan payable | | | 55 | | | | (2,017 | ) | Net cash used in operating activities | | | (22,698 | ) | | | (24,270 | ) | | | | | | | | | | Cash flow from investing activities: | | | | | | | | | Purchase of property and equipment | | | (106 | ) | | | (101 | ) | Net cash used in investing activities | | | (106 | ) | | | (101 | ) | | | | | | | | | | Cash flow from financing activities: | | | | | | | | | Proceeds from issuance of securities, net of expenses | | | 22,927 | | | | 27,977 | | Principal payments of loan payable | | | - | | | | (8,500 | ) | Principal payments under equipment loan and capital lease obligations | | | (145 | ) | | | (636 | ) | Net cash provided by financing activities | | | 22,782 | | | | 18,841 | | Net decrease in cash and cash equivalents | | | (22 | ) | | | (5,530 | ) | Cash and cash equivalents – beginning of year | | | 10,211 | | | | 15,741 | | Cash and cash equivalents – end of year | | $ | 10,189 | | | $ | 10,211 | | | | | | | | | | | Supplementary disclosure of cash flows information: | | | | | | | | | Interest paid | | $ | 20 | | | $ | 2,123 | | Non-cash transactions: | | | | | | | | | Equipment acquired through capitalized lease | | $ | - | | | $ | 48 | |
See notes to consolidated financial statements
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
Note 1 – The Company and Description of Business
Discovery Laboratories, Inc. (referred to as “we,” “us,” or the “Company”) is a specialty biotechnology company focused on creating life-saving products for critical carecritical-care patients with respiratory disease and improving the standard of care in pulmonary medicine. Our proprietary drug technology produces a synthetic, peptide-containing surfactant (KL4 surfactant) that is structurally similar to pulmonary surfactant, a substance produced naturally in the lung and essential for normal respiratory function and survival. We are developing our KL4 surfactant in liquid, lyophilized and aerosolized dosage forms. We are also developing novel drug delivery technologies potentially to enable efficient delivery of inhaled therapies, including our aerosolized KL4 surfactant. We believe that our proprietary technologies may make it possible, for the first time, to develop a significant pipeline of products to address a variety of respiratory diseases for which there frequently are few or no approved therapies.
On March 6, 2012,We are initially focused on improving the U.S. Food and Drug Administration (FDA) granted us marketing approval for SURFAXIN® (lucinactant) for the preventionmanagement of respiratory distress syndrome (RDS) in premature infants at high risk for RDS. SURFAXIN is the first synthetic, peptide-containing surfactant approved for use in neonatal medicine and provides healthcare practitioners with an alternative to the animal-derived surfactants that today are the standard of care to manage RDS in premature infants. We are implementing a plan that, if successful, is intended to result in the commercial introduction of SURFAXIN in the United States in the fourth quarter of 2012.
Our strategy is initially to focus on the development of our KL4 surfactant and aerosol technologies to improve the management of RDS in premature infants. RDS is a serious respiratory condition caused by insufficient surfactant production in underdeveloped lungs of premature infants, andinfants. RDS is the most prevalent respiratory disease in the neonatal intensive care unitNeonatal Intensive Care Unit (NICU). RDS and can result in long-term respiratory problems, developmental delay and death. Mortality
Our first KL4 surfactant drug product, SURFAXIN® (lucinactant) Intratracheal Suspension for the prevention of RDS in premature infants at high risk for RDS, was approved by the United States Food and morbidity rates associatedDrug Administration (FDA) in 2012. SURFAXIN is our KL4 surfactant in liquid form and is the first synthetic, peptide-containing surfactant approved by the FDA and the only alternative to animal-derived surfactants currently used in the United States (U.S.). Since November 2013, SURFAXIN has been commercially available in the U.S.
Premature infants with severe RDS havecurrently are treated with surfactants that can only be administered by endotracheal intubation supported with mechanical ventilation, both invasive procedures that may each result in serious respiratory conditions and other complications. To avoid such complications, many neonatologists treat infants with less severe RDS by less invasive means, typically nasal continuous positive airway pressure (nCPAP). Unfortunately, a significant number of premature infants on nCPAP will not meaningfully improved overrespond well (an outcome referred to as nCPAP failure) and thereafter may require delayed surfactant therapy. Since neonatologists currently cannot predict which infants will experience nCPAP failure, neonatologists are faced with difficult choices in treating infants with less severe RDS. This is because the last decade. Wemedical outcomes for those infants who experience nCPAP failure and receive delayed surfactant therapy may be less favorable than the outcomes for infants who receive surfactant therapy in the first hours of life.
AEROSURF® is an investigational combination drug/device product that combines our KL4 surfactant with our proprietary capillary aerosol generator (CAG). With AEROSURF, neonatologists potentially will be able to administer aerosolized KL4 surfactant to premature infants supported with nCPAP, without having to use invasive intubation and mechanical ventilation. By enabling delivery of our KL4 surfactant using less invasive procedures, we believe that AEROSURF will address a serious unmet medical need and potentially enable the RDS market is presently underserved, and that our RDS programs, beginning with SURFAXIN and, if approved, SURFAXIN LS™ and AEROSURF®, have the potential to greatly improve the managementtreatment of RDS and, collectively over time, to become the global standarda significantly greater number of care for premature infants with RDS.RDS who could benefit from surfactant therapy but are currently not treated.
SURFAXIN LS is ourWe are also developing a lyophilized (freeze-dried) dosage form of SURFAXINour KL4 surfactant that is stored as a powder and resuspendedreconstituted to liquid form prior to use. We are developing SURFAXIN LSuse with the objective of improving ease of use for healthcare practitioners, as well as potentially to prolong shelf life and eliminate the need for cold-chain storage. We are implementing ainitially developing this dosage form for use in our AEROSURF development program. We are also planning to seek regulatory plan intendedadvice to determine if we could gain marketing authorization for a lyophilized dosage form of SURFAXIN LSunder a development plan that would be both capital efficient and capable of implementation within a reasonable time. If feasible, we would likely implement such a development plan and would plan to introduce it commercially as a life-cycle extension of SURFAXIN under the name SURFAXIN LS™, in the United States,U.S. and potentially in other markets.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY To support the European Unioncommercial introduction of SURFAXIN in the U.S. and our other major markets worldwide. AEROSURF is a drug/device combination product that combines our KL4 surfactant pipeline products, if approved, we have established our own specialty respiratory critical care commercial and medical affairs team. This team includes medical professionals with experience in neonatal/pediatric respiratory critical care, and has focused on products that address neonatal indications, beginning with SURFAXIN. We believe that this team will be positioned to efficiently introduce our proprietary capillary aerosol generator (CAG)other KL4 surfactant products under development, if approved, including AEROSURF and potentially SURFAXIN LS and future applications of our novel AFECTAIRaerosolized KL®4 ventilator circuit / patient interface connectors. We are developingsurfactant.
In addition, we recognize that our commercial and medical affairs team could potentially support introductions of other synergistic pipeline products, including products owned or developed by third parties for the NICU/PICU. To that end, we would consider potential transactions focused on securing commercial rights to such synergistic products, including in the form of product acquisitions, in-licensing agreements or distribution, marketing or co-marketing arrangements.
In the future, we expect that we may be able to leverage the information, data and know-how that we gain from our development efforts with SURFAXIN and AEROSURF for premature infants with or at riskto support development of RDS. Premature infants with RDS currently are treated with surfactants that can only be administered by endotracheal intubation supported with mechanical ventilation, both invasive procedures that frequently result ina potential product pipeline to address serious critical care respiratory conditions in larger children and complications. Asadults in pediatric and adult intensive care units (PICUS and ICUs), including Acute Lung Injury (ALI), Chronic Obstructive Pulmonary Disorder (COPD) and Cystic Fibrosis (CF). At the present time, however, we are focusing our resources primarily on the commercial introduction of SURFAXIN and development of AEROSURF through phase 2 clinical trials. Once we have achieved these objectives, we believe we would be in a consequence, neonatologists will not treat infants who could benefit from surfactant therapy unlessbetter position to assess the potential benefits of surfactant therapy outweighother development programs to address the risks associated with such invasive administration procedures. AEROSURF potentially will provide practitioners with the ability to deliver surfactant therapy using a less-invasive method. For this reason, we believe that AEROSURF, if approved, potentially may enable the treatmentcritical care needs of a significantly greater number of premature infants at risk for RDS who could benefit from surfactant therapy but are currently not treated. AFECTAIR, a series of disposable ventilator circuit / patient interface connectors, was initially developed for usepatients in the NICU as part of our AEROSURF development program. AFECTAIR devicesPICU and ICU.
We also have developed a disposable aerosol-conducting airway connector for infants that is intended to simplify the delivery of inhaled therapiesaerosolized medications (including our aerosolized KL4 surfactant) and other inhaled therapies to critical-care patients requiring ventilatory support by introducing the inhaled therapysupport. This device introduces aerosolized medications directly at the patient interface and minimizingminimizes the number of connections in the ventilator circuit. We initially developed a ventilator circuit / patient interface connector to be used with our CAG in the NICU. To benefit all critical care patients who require inhaled therapies and who are receiving ventilatory support, we are developing AFECTAIR devices in different sizes for use in NICUs, pediatric intensive care units (PICUs) and adult intensive care units (ICUs), and to be compatible with a variety of aerosol generating devices. In February 2012, we successfullyhave registered our initial AFECTAIRthis device which is intended for use with jet nebulizers and other aerosol generators, in the United States as a Class I, exempt medical device. We believe that AFECTAIR has the potential to become a new standard of care for the delivery of inhaled therapies to critical care patients. We are implementing a regulatory and manufacturing plan that, if successful, is intended to result in the commercial introduction of the initial AFECTAIR device in the United StatesU.S. under the name AFECTAIR® and the European Unionit is currently commercially available in the fourth quarter of 2012, and a second AFECTAIR device, AFECTAIR DUO, in mid-2013.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
We are preparingThe reader is referred to, and encouraged to read in its entirety “Item 1 – Business” of this Annual Report on Form 10-K for the commercial introductions, beginning in late 2012, of SURFAXIN in the United States, and AFECTAIR in the United States and the European Union and other markets worldwide thereafter. To accomplish our objectives, in the United States, we plan to build our own, in-house, specialty respiratory critical care commercial and medical affairs organization that will specialize in neonatal indications, beginning with SURFAXIN. We also expect that our commercial and medical affairs organization will be able to leverage the experience and relationships that we gain with the introduction of SURFAXIN to efficiently support the introductions of SURFAXIN LS and AEROSURF, if approved. We also expect that our in-house organization will also work inyear ended December 31, 2013, which contains a coordinated manner with a network of third-party distributors to execute the commercial introduction of the AFECTAIR devices.
In major markets outside the United States, an important priority is to secure the strategic resources to support the continued development and commercial introductiondiscussion of our RDS products. A key goal for us in 2012 is to secure one or more strategic alliances and/or collaboration arrangements potentially to share researchBusiness and development expenses for our SURFAXIN LS and AEROSURF development programs, and, if approved, to support the commercial introduction of these products in Europe and elsewhere. We may also seek strategic alliances and/or collaboration arrangements to support the potential commercial introduction of SURFAXIN in countries where regulatory marketing authorization is facilitated by the recent approval of SURFAXIN by the FDA. We are engaged in discussions with potential strategic partners who could provide development and commercial expertiseBusiness Strategy, as well as financial resources (potentially in the form of upfront payments, milestone payments, commercialization royaltiesinformation concerning our proprietary technologies and a sharing of researchour current and development expenses). There can be no assurance, however, that we will be successful in concluding any strategic alliance, collaboration or other similar transaction.planned KL4 pipeline programs.
Note 2 – Liquidity Risks and Management’s Plans
We have incurred substantial losses since inception, due to investments in research and development, manufacturing, and, potentialmore recently, commercialization and medical affairs activities, and we expect to continue to incur substantial losses over the next several years. Historically, we have funded our business operations through various sources, including public and private securities offerings, draw downs under a seriesdebt facilities, strategic alliances, the use of Committed Equity Financing Facilitiescommitted equity financing facilities (CEFFs), and at-the-market equity programs, and capital equipment financings.
As of December 31, 2013, we had cash and cash equivalents of $86.3 million and $30 million ($18.4 million net of discount) of long-term debt facilities,under our Deerfield Loan with affiliates of Deerfield Management Company, L.P. (Deerfield). See, “Note 9 – Deerfield Loan.” During 2013, we raised aggregate gross proceeds of $75.8 million through public offerings of our common stock, including under our ATM Program. In February 2013, we entered into the Deerfield Loan and, strategic alliances. We expectupon execution of the agreement, Deerfield advanced to us $10 million ($9.85 million net of transaction fee). In May 2013, we completed a public offering of 10.847 million shares of common stock, including 1.347 million shares under an option granted to and exercised by the underwriters, at an offering price of $1.50 per share, resulting in gross proceeds of $16.3 million ($15.1 million net of commissions, discounts and expenses). In October 2013, we completed an offering under the ATM Program and issued 713,920 shares of our common stock resulting in net proceeds to us of approximately $1.8 million (net of commissions). In November 2013, we completed a public offering of 28.75 million shares of common stock, including 3.75 million shares under an option granted to and exercised by the underwriters for over-allotments, at an offering price of $2.00 per share resulting in gross proceeds of $57.5 million ($53.9 million net of commissions, discounts and expenses). In December 2013, we received an additional $20 million under the Deerfield Loan ($19.7 million net of transaction fee), which became due under the Deerfield Loan upon the first commercial sale of SURFAXIN. Before any additional financings, including under our ATM Program, we anticipate that we will have sufficient cash available to fund our business operations primarily through a combination, or all, of public offerings, including our CEFF and At-the-Market (ATM) Program (see, Note 10); anticipated revenue from the commercial introduction of SURFAXIN® and AFECTAIR®; strategic alliances; the exercise of outstanding warrants; and debt facilities.service obligations through the third quarter of 2015.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY Our future capital requirements depend upon many factors, primarily the success of our efforts to (i) to execute the commercial introduction of SURFAXIN and AFECTAIR in the United States and other markets,U.S.; (ii) advance the AEROSURF development program to completion of the phase 2 clinical program as planned (ii) toin the second half of 2015; and (iii) secure one or more strategic alliances or other collaboration arrangements to support the development and, if approved, commercial introduction of AEROSURF and potentially SURFAXIN LS™ and AEROSURF®in the European Union and markets outside the U.S., (iii) We believe that, if we are able to complete the AEROSURF phase 2 clinical program on a timely basis and obtain encouraging results, and if we are able to successfully advance the commercial introduction of SURFAXIN, LS and AEROSURF development programsour ability to enter into a significant strategic alliance will be in a positionenhanced. There can be no assurance, however, that our efforts will be successful, or that we will be able to initiate planned Phase 3 and Phase 2 clinical trials, respectively, and (iv) to procure theobtain additional capital necessary and desirable to support our activities when needed on acceptable terms, if at all.
Even if we succeed with the commercial introduction of SURFAXIN, given the time required to secure formulary acceptance at our target hospitals, we expect our revenues from SURFAXIN to be modest in the first 12-24 months and then increase slowly over time. For the next several years, we expect that our cash outflows for marketing, commercial and medical activities, development programs, operations and debt service will far outpace the rate at which we may generate revenues. Therefore, to execute our business strategy and fund our operations over the long term, we will require significant additional infusions of capital until such time as the net revenues from ourthe sale of approved products, from potential strategic alliance and other collaboration arrangementsalliances and from other sources such as future warrant exercises, are sufficient to offset our cash flow requirements. To secure the necessary capital to fund our development programs, we would prefer to enter into strategic alliances or collaboration arrangements with partners having broad experience in markets outside the U.S., including regulatory and product-development expertise as well as an ability to commercialize our products, if approved. Such alliances typically would also provide financial resources, in the form of upfront payments, milestone payments, commercialization royalties and a sharing of research and development expenses. Collaboration, co-marketing and other similar arrangements would provide, in addition to an ability to introduce our products in markets outside the U.S., a sharing of revenues. Under our ATM Program (see, “Note 11 – Stockholders' Equity – At-the-Market Program (ATM Program)”), subject to market conditions, we may sell up to approximately $23 million of common stock at such times and in such amounts that we deem appropriate, subject to a 3% commission. However, use of the ATM Program is subject to market and other conditions and the ATM Program could be cancelled at any time by either party. We also may consider public and private equity offerings or other financing transactions, including potentially secured equipment financing facilities or other similar transactions. There can be no assurance, however, that our AEROSURF and other research and development projects will be successful, that our products under development will obtain necessary regulatory approval in the U.S. and other markets, that any approved product, including SURFAXIN, will be commercially viable, that the ATM Program will be available when needed, if at all, or that we will be able to obtain additional capital when needed on acceptable terms, if at all. Even if we succeed in raising additional capital and developing and subsequently commercializing product candidates, we may never achieve sufficient sales revenue to achieve or maintain profitability.
The accompanying financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the next several years, our ability to continue as a going concern will be dependent on our ability to raise additional capital, to fund our research and development and commercial programs and meet our obligations, including debt service, on a timely basis. If we are unable to successfully raise sufficient additional capital when needed, we will likely not have sufficient cash flows and liquidity to fund our business operations, which could significantly limit our ability to continue as a going concern. In that event, we may be forced to further limit our programs and consider other means of creating value for our stockholders, such as licensing the development and commercialization of products that we consider valuable and would otherwise likely develop ourselves. If we are unable to raise the necessary capital, we may be forced to curtail all of our activities and, ultimately, potentially cease operations. Even if we are able to raise additional capital, such financings may only be available on unattractive terms, or could result in significant dilution of stockholders’ interests and, in such event, the market price of our common stock may decline. The balance sheets do not include any adjustments relating to recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue in existence.
As of December 31, 2011, we had cash and cash equivalents of $10.2 million. From January 1, 2012 through March 21, 2012, (i) holders of 15-month warrants we issued in February 2011 have exercised warrants to purchase 2,233,000 shares of our common stock at an exercise price of $2.94 per share, resulting in proceeds to us of $6.6 million; and (ii) holders of the five-year warrants we issued in February 2011 have exercised warrants to purchase 46,250 shares of our common stock at an exercise price of $3.20 per share, resulting in proceeds to us of $148,000. In addition, on March 7, 2012, we delivered a sales notice under our ATM Program to sell shares of common stock. We terminated the offering on March 8, 2012. As a result of that offering, we issued an aggregate 350,374 shares of common stock at an aggregate purchase price of approximately $1.56 million, resulting in net proceeds to us of approximately $1.52 million, after deducting commissions due to the sales agent. On March 21, 2012, we completed a public offering of 16,071,429 shares of common stock for net proceeds to us (after underwriter fees and anticipated expenses) of approximately $42.1 million. In addition, we granted the underwriters a 30-day option to purchase up to an additional 2,410,714 shares of common stock at a public offering price of $2.80 per share, with respect to which we potentially could realize additional net proceeds to us of $6.3 million.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
As of December 31, 2011 and March 21, 2012, of the 1002013, 150 million shares of common stock were authorized under our Amended and Restated Certificate of Incorporation we hadand approximately 42.1 million shares of common stock were available for issuance and not otherwise reservedreserved.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY In addition, as of December 31, 2013, we had outstanding warrants to purchase approximately 14.8 million shares of our common stock at various prices, exercisable on different dates into 2019. Of these warrants, 7 million warrants were issued to Deerfield in connection with the Deerfield Loan at an exercise price of $2.81 per share. The Deerfield Warrants may be exercised for future issuance,cash or on a cashless basis. In lieu of paying cash upon exercise, the holders also may elect to reduce the principal amount of the Deerfield loan in an amount sufficient to satisfy the exercise price of the Deerfield Warrants. In addition to the Deerfield Warrants, we have outstanding warrants to purchase approximately 56.5 million and 40.04.8 million shares of common stock respectively.
To execute our business strategy over time,that were issued in February 2011, are exercisable for five-years, and contain anti-dilution provisions that adjust the exercise price if we anticipate potentially securing additional infusions of capital fromissue any common stock, securities convertible into common stock, or other securities (subject to certain exceptions) at a combination of some or allvalue below the then-existing exercise price of the warrants. These warrants were originally issued with an exercise price of $3.20 per share and thereafter adjusted downward, first to $2.80 per share in March 2012 and then to $1.50 per share following sources:
Exercisea public offering in May 2013. If the market price of outstanding warrants:
· | In connection with our February 2011 public offering, we issued 15-month warrants to purchase five million shares of our common stock at an exercise price of $2.94 per share (15-month warrants) of which 2,233,000 warrants have been exercised through March 21, 2012. If the market price of our common stock should exceed $2.94 at any time prior to May 2012 (the expiration date of these warrants), and if the holders determine (in their discretion) to exercise the 15-month warrants and we have an effective registration statement covering the warrant shares, we potentially could raise up to an additional $8.1 million. |
· | Also in connection with the February 2011 public offering, we issued five-year warrants to purchase five million shares of our common stock at an exercise price of $3.20 per share (2011 five-year warrants). These warrants also contain anti-dilutive provisions that adjust the exercise price if we issue any common stock, securities convertible into common stock, or other securities (subject to certain exceptions) at a value below the then-existing exercise price. As a result of the March 2012 public offering, the exercise price of these warrants has been adjusted downward to $2.80 per share. Thus, if the market price of our common stock should remain above $2.80 at any time prior February 2016 (the expiration date of these warrants), and if the holders determine (in their discretion) to exercise the five-year warrants and we have an effective registration statement covering the warrant shares to be issued upon exercise of the warrants, we potentially could raise up to an additional $13.9 million. |
Upfrontour common stock should exceed $1.50 at any time prior to the expiration date of these warrants (February 2016) and milestone payments and co-fundingif the holders determine in their discretion to exercise these warrants (and we have an effective registration statement covering the warrant shares to be issued upon exercise of development activities associated with potential strategic alliances or other similar transactions:
· | We are engaged in discussions with potential strategic partners who could provide development and commercial expertise as well as financial resources (potentially in the form of upfront payments, milestone payments, commercialization royalties and a sharing of research and development expenses) to support the development of SURFAXIN LS and AEROSURF and, if approved, the introduction of these products in Europe and various markets outside the U.S. |
Secured debt arrangementsthe warrants), we potentially could receive up to fund working capital and/or investment$7.3 million. Although we believe that, in capital assets:
· | In the future, if our efforts are successful, we believe that debt could potentially be a component of our capital structure and financing plans. We could potentially enter into capital equipment financing facilities, revolving working capital lines of credit, term loans and other similar transactions to satisfy our working capital requirements. |
In appropriate circumstances, tothe future, we will secure additional capital and strengthenfrom the exercise of at least a portion of our financial condition, we will also consider equity public offerings and other financing transactions:
· | We have a CEFF with Kingsbridge Capital Ltd. (Kingsbridge) that could allow us, at our discretion, to raise capital (subject to certain conditions, including volume limitations) at a time and in amounts we deem suitable to support our business plans. Based on the closing market price of our common stock on March 21, 2012 ($2.80) and assuming that all available shares are issued, the potential availability under our CEFF is approximately $2.8 million. See, Note 10.
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· | In December 2011, we established an “at-the-market” program (ATM Program), which allows us, at our discretion and at such times that we may choose, to sell up to a maximum of $15 million of shares of common stock. Based on the closing market price of our common stock on March 21, 2012 ($2.80), and assuming that the full amount available under the ATM Program ($13.4 million) is sold, we may issue up to approximately 4.8 million additional shares under the ATM Program. See, “– Financings Pursuant to Common Stock Offerings.” |
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
· | We have agreed in connection with our March 2012 public offering that we will not issue or sell (with certain limited exceptions) securities for a period of 90 days ending in June 2012. See, “- Financings Pursuant to Common Stock Offerings.” |
Thereoutstanding warrants, there can be no assurance that the market price of our common stock will remain atequal or exceed price levels that make exercise of outstanding warrants likely or that holders of outstanding warrants will choose to exercise any or all of their warrants prior to the warrant expiration date; that wedate. Moreover, if our outstanding warrants are exercised, such exercises likely will be successful in concluding any strategic alliance, collaboration or other financing transaction; that the CEFF will be available at any time, or, even if available, that we will utilize the CEFF prior to its expiration in June 2013; that we will issue any shares pursuanta discount to the ATM Program, or thatthen-market value of our common stock and have a dilutive effect on the entire amount provided undervalue of our shares of common stock at the ATM Program will be realized prior the expiration or earlier terminationtime of the ATM Program; or that we will undertake any financings or similar transactions, on favorable terms or otherwise.exercise.
We believe, if we are successful in implementing our strategic business plan, that the anticipated net revenues from the sale of SURFAXIN and AFECTAIR, when combined with the other sources of anticipated capital outlined above, including from potential strategic alliances and collaboration arrangements to support the SURFAXIN LS and AEROSURF development programs, potentially could be sufficient to support our future operations. In that event, we would nevertheless continue to consider financings and similar transactions that would strengthen our financial condition and build value for our stockholders.
Although we currently believe that we will be successful in meetingable to successfully execute our strategic planning goals within the time frame set forth above,business strategy, there can be no assurance that we will successfully fundbe successful. We will require significant additional capital to satisfy debt obligations and build our own commercial organizationsustain operations, and to complete the development and support the commercial introduction of SURFAXIN and AFECTAIR; that we will successfully executeour products. Failure to secure the launch of SURFAXIN and AFECTAIR within the anticipated time frame; that the revenues we may realize from the sale of SURFAXIN and AFECTAIR will be in line with current expectations; that we will successfully identify one or more strategic partners or collaboration arrangements to support development and, if approved, commercial introduction of the SURFAXIN LS and AEROSURF product candidates; or that the revenues, if any, that we generate in the future will be sufficient at any time to fund the further development of our research and development programs and support our operations. If we are unable to identify and enter into strategic alliances for the development of SURFAXIN LS and AEROSURF, and if approved, commercialization of SURFAXIN LS and AEROSURF in the European Union and other markets outside the U.S., we may be unable to fund planned clinical trials, whichnecessary additional capital would have a material adverse effect on our researchbusiness, financial condition and development programs.results of operations.
Note 3 – Accounting Policies and Recent Accounting Pronouncements
The consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States.
Consolidation
The consolidated financial statements include all of the accounts of Discovery Laboratories, Inc. and its inactive subsidiary, Acute Therapeutics, Inc. All intercompany transactions and balances have been eliminated in consolidation.
Use of estimates
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents are held in U.S. banks and consist of liquid investments and money market funds with a maturity from date of purchase of 90 days or less that are readily convertible into cash.
We consider cash and cash equivalents as amounts on hand, on deposit in financial institutions and all highly liquid marketable securities purchased with a maturity of three months or less.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
Fair value of financial instruments
Our financial instruments consist principally of cash and cash equivalents and restricted cash. The fair values of our cash equivalents are based on quoted market prices. The carrying amount of cash equivalents is equal to their respective fair values at December 31, 20112013 and December 31, 2010.2012, respectively. Other financial instruments, including accounts payable and accrued expenses, are carried at cost, which we believe approximates fair value. DISCOVERY LABORATORIES, INC. AND SUBSIDIARY Accounts receivable Trade accounts receivable are recorded net of allowances for prompt payment discounts and doubtful accounts.
Inventory
Inventories, which are recorded at the lower of cost or market, include materials, labor, and other direct and indirect costs and are valued at cost using the first-in, first-out method. The Company capitalizes inventories produced in preparation for commercial launches when the related product candidates receive regulatory approval and that the related costs will be recoverable through the commercial sale of the product. Costs incurred prior to FDA approval of SURFAXIN drug product and registration of our initial AFECTAIR device have been recorded in our statement of operations as research and development expense. Inventory is evaluated for impairment through consideration of factors such as the net realizable value, lower of cost or market, obsolescence, and expiry. Inventories do not have carrying values that exceed either cost or net realizable value.
We evaluate our expiry risk by evaluating current and future product demand relative to product shelf life. We build demand forecasts by considering factors such as, but not limited to, overall market potential, market share, market acceptance and hospital ordering practices.
Property and equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets (generally three to ten years). Leasehold improvements are amortized over the shorter of the estimated useful lives or the remaining term of the lease. Repairs and maintenance costs are charged to expense as incurred.
Long-lived assetsRestricted cash
Restricted cash consists of a certificate of deposit held by our bank as collateral for a letter of credit in the same notional amount held by our landlord to secure our obligations under our Lease Agreement dated May 26, 2004 and amended January 3, 2013 for our headquarters location in Warrington, Pennsylvania (See, Note 14 – Commitments, for further discussion on our leases). Under terms of the lease agreement, the required restricted cash balance was reduced to $325,000 in October 2013.
Long-lived assets
Our long-lived assets, primarily consisting of equipment, are reviewed for impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable, or its estimated useful life has changed significantly. When an asset’sthe undiscounted cash flows of an asset are less than its carrying value, an impairment is recorded and the asset is written down to its estimated value. No impairment was recorded during the years ended December 31, 20112013, 2012, and 2010,2011 as management believes there are no circumstances that indicate the carrying amount of the assets will not be recoverable. Financing costs related to long-term debt Costs associated with obtaining long-term debt, including the fair value of warrants issued in connection with the debt and transaction fees, are amortized over the term of the related debt using the effective interest method.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY Deferred revenue Deferred revenue reflects amounts related to SURFAXIN sales to our specialty distributor, which are deferred and recognized as revenue once product has been sold through to the hospital and all revenue recognition criteria have been met.
Product Sales
Revenues from product sales are recognized when (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the price is fixed or determinable and (4) collectability is reasonably assured.
Our products are distributed in the U.S. using a specialty distributor. Under this model, the specialty distributor purchases and takes physical delivery and title of product, and then sells to hospitals. We began the commercial introduction of SURFAXIN in the fourth quarter of 2013 and, for that reason, we currently cannot make a reasonable estimate of future product returns when product is delivered to the specialty distributor. Therefore, we currently do not recognize revenue upon product shipment to the specialty distributor, even though the distributor is invoiced upon product shipment. Instead, we recognize revenue once product has been sold through to the hospital and all revenue recognition criteria have been met. Once product has been delivered to the hospital, the risk of material returns is significantly mitigated. As of December 31, 2013, we have deferred revenue recognition on all product sales since the inception of the commercial launch of SURFAXIN in November 2013. We will recognize those revenues at the point in time when all revenue recognition criteria have been met.
We will begin to recognize revenue at the time of shipment of product to our specialty distributor when we can reasonably estimate expected distributor sales deductions and returns. In developing estimates for sales returns we consider the shelf life of the product, expected demand based on market data and return rates of other surfactant products.
Product sales are recorded net of accruals for estimated chargebacks, discounts, specialty distributor deductions and returns.
| · | Chargebacks. Chargebacks are discounts that occur when contracted customers purchase directly from our specialty distributor. Contracted customers, which currently consist primarily of member hospitals of Group Purchasing Organizations, generally purchase the product at a discounted price. Our specialty distributor, in turn, charges back the difference between the price initially paid by the specialty distributor and the discounted price paid to the specialty distributor by the customer. The allowance for specialty distributor chargebacks is based on known sales to contracted customers. |
| · | Sales discounts: Sales discounts are offered to certain contracted customers based upon a customer’s historical volume of surfactant product purchases. Customers must enter into a Letter of Participation (LOP) with us to receive sales discounts. Sales discounts are calculated on a quarterly basis based upon the customer’s quarterly purchases of SURFAXIN, as provided in the LOP. The allowance for sales discounts is based on known sales to contracted customers. |
| · | Specialty distributor deductions. Our specialty distributor is offered various forms of consideration including allowances, service fees and prompt payment discounts. Specialty distributor allowances and service fees are provided in our contractual agreement and are generally a percentage of the purchase price paid by the specialty distributor. The specialty distributor is offered a prompt pay discount for payment within a specified period. |
| · | Returns. Sales of our products are not subject to a general right of return; however, we will accept product that is damaged or defective when shipped or for expired product up to 6 months subsequent to its expiry date. Product that has been administered to patients is no longer subject to any right of return. |
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY Grant Revenue
We recognize grant revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed and determinable, and collectability is reasonably assured.
We recognized $0.4 million and $0.2 million of grant revenue for the years ended December 31, 2013 and 2012, respectively, for funds received and expended under a $0.6 million Small Business Innovation Research (SBIR) Phase I award to Discovery Labs from National Institute of Health’s (NIH) National Institute of Allergy and Infectious Diseases (NIAID) Center for Medical Counter Measures Against Radiation and Nuclear Threats to assess the ability of KL4 surfactant to mitigate the effects of acute radiation exposure to the lung, including acute pneumonitis and delayed lung injury.
For the year ended December 31, 2011, grant revenue represents funds received and expended under a $0.6 million Fast Track Small Business Innovation Research Grant (SBIR)SBIR from the National Institutes of HealthNIH to support the development of aerosolized KL4 surfactant for RDS. The amount of the award was approximately $582,000 and the grant revenue was recognized in the period in which the related expenditures were incurred. For the year ended December 31, 2010, we received grant proceeds, recorded as other income, of $244,480 under the Patient Protection and Affordable Care Act of 2010 to reimburse costs incurred in 2009 to advance our aerosolized KL4 surfactant program for the prevention of neonatal RDS.
Research and development
We track research and development expense by activity, as follows: (a) product development and manufacturing, (b) medical and regulatory operations, and (c) direct preclinical and clinical programs. Research and development costs consist primarily of expenses associated with ourexpense includes personnel, facilities, manufacturing and quality operations, pharmaceutical and device development, research, clinical, regulatory, other preclinical and clinical activities and medical affairs. Research and development costs are charged to operations as incurred.
Stock-based compensation
Stock-based compensation is accounted for under the fair value recognition provisions of Accounting Standards Codification (ASC) Topic 718 “Stock Compensation” (ASC Topic 718). See, Note 1112 – Stock Options and Stock-based Employee Compensation, for a detailed description of our recognition of stock-based compensation expense. The fair value of stock option grants is recognized evenly over the vesting period of the options or over the period between the grant date and the time the option becomes non-forfeitable by the employee, whichever is shorter. Stock option expense is generally included in research and development and selling, general and administrative expenses in the accompanying Consolidated Statements of Operations.
Warrant accounting
We account for common stock warrants in accordance with applicable accounting guidance provided in Accounting Standards CodificationASC Topic 815 “Derivatives and Hedging – Contracts in Entity’s Own Equity” (ASC Topic 815), as either derivative liabilities or as equity instruments depending on the specific terms of the warrant agreement. We classify derivative warrant liabilities on the consolidated balance sheet as a current liability,liabilities, which isare revalued at each balance sheet date subsequent to the initial issuance. We use the Black-Scholes or trinomial pricing models, depending on the applicable terms of the warrant agreement, to value the derivative warrant liabilities. Changes in the fair value of the warrants are reflected in the consolidated statement of operations as “Change in the fair value of common stock warrant liability.” See, Note 8 – Common Stock Warrant Liability, for a detailed description of our accounting for derivative warrant liabilities.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
Income taxes
We account for income taxes in accordance with Accounting Standards Codification (ASC)ASC Topic 740, “Accounting for Income Taxes.” ASC Topic 740 requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY We use a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Because we have never realized a profit, management has fully reserved the net deferred tax asset since realization is not assured.
Net loss per common share
Basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding for the periods.period. For the years ended December 31, 2013, 2012, and 2011, and 2010, 15.4 million and 5.3 millionthe number of shares of common stock respectively, were potentially issuable upon the exercise of certain stock options and warrants. Due to ourwarrants was 20.2 million, 11.9 million and 15.4 million shares, respectively. As a result of the net loss, theselosses for all periods presented, all potentially issuable sharesdilutive securities were not included inanti-dilutive and therefore have been excluded from the calculationcomputation of diluted net loss per share as the effect would be anti-dilutive, therefore basic and dilutive net loss per share are the same.share. We do not have any components of other comprehensive income (loss). Concentration of Suppliers
Concentration of Suppliers
We currently obtain the active pharmaceutical ingredients (APIs) of our KL4surfactant drug products from single-source suppliers. In addition, we rely on a number of third-party institutions and laboratories that perform various studies as well as quality control release and stability testing and other activities related to our KL4 surfactant development and manufacturing activities. At the present time, several of these laboratories are single-source providers. The loss of one or more of theseour single-source suppliers or testing laboratories could have a material adverse effect upon our operations.
Business segmentsMajor customer and concentration of credit risk
We currently sell our products to one exclusive pharmaceutical specialty distributor in the U.S. We periodically assess the financial strength of our specialty distributor and establish allowances for anticipated uncollectible amounts, if necessary. As of December 31, 2013, we have not recorded an allowance for doubtful accounts.
Business segments
We currently operate in one business segment, which is the research and development of products focused on surfactant replacement therapies for respiratory disorders and diseases.diseases, and the manufacture and commercial sales of approved products. We are managed and operated as one business. A single management team that reports to the Chief Executive Officer comprehensively manages the entire business. We do not operate separate lines of business with respect to our product candidates.
Recent Accounting Pronouncements
In May 2011, the FASB amended theThe Company did not adopt any new accounting guidance for fair value to develop common requirements between U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards. The amendments, which are effective for interim and annual periods beginning after December 15, 2011, require entities to (i) provide information about valuation techniques and unobservable inputs used in Level 3 fair value measurements, and (ii) provide a narrative description of the sensitivity of Level 3 measurements to changes in unobservable inputs. The adoption of this update is not expected to havepronouncements during 2013 that had a material impacteffect on ourthe Company’s consolidated financial statements.
In June 2011, the FASB issued accounting guidance related to the presentation of comprehensive income. The guidance, which is effective for interim and annual periods beginning after December 15, 2011, require entities to present all components of comprehensive income in either (i) a single continuous statement of comprehensive income or (ii) in a statement of net income and statement of other comprehensive income. The adoption of this update is not expected to have a material impact on our consolidated financial statements.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
Note 4 – Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, as follows:
| · | Level 1 – Quoted prices in active markets for identical assets and 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. |
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are categorized in the table below as of December 31, 20112013 and 2010:2012:
| | Fair Value | | | Fair value measurement using | | | Fair Value | | | Fair value measurement using | | (in thousands) | | December 31, 2011 | | | Level 1 | | | Level 2 | | | Level 3 | | | December 31, 2013 | | | Level 1 | | | Level 2 | | | Level 3 | | | | | | | | | | | | | | | | | | | | | | | | | | | Assets: | | | | | | | | | | | | | | | | | | | | | | | | | Money markets | | $ | 9,377 | | | $ | 9,377 | | | $ | – | | | $ | – | | | Cash and cash equivalents | | | $ | 86,283 | | | $ | 86,283 | | | $ | – | | | $ | – | | Certificate of deposit | | | 400 | | | | 400 | | | | – | | | | – | | | | 325 | | | | 325 | | | | – | | | | – | | Total Assets | | $ | 9,777 | | | $ | 9,777 | | | $ | – | | | $ | – | | | $ | 86,608 | | | $ | 86,608 | | | $ | – | | | $ | – | | Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Common stock warrant liability | | $ | 6,996 | | | $ | $ – | | | $ | – | | | $ | 6,996 | | | Common stock warrants | | | $ | 5,425 | | | $ | $ – | | | $ | – | | | $ | 5,425 | |
| | Fair Value | | | Fair value measurement using | | (in thousands) | | December 31, 2010 | | | Level 1 | | | Level 2 | | | Level 3 | | | | | | | | | | | | | | | Assets: | | | | | | | | | | | | | Money markets | | $ | 9,690 | | | $ | 9,690 | | | $ | – | | | $ | – | | Certificate of deposit | | | 600 | | | | 600 | | | | – | | | | – | | Total Assets | | $ | 10,290 | | | $ | 10,290 | | | $ | – | | | $ | – | | Liabilities: | | | | | | | | | | | | | | | | | Common stock warrant liability | | $ | 2,469 | | | $ | $ – | | | $ | – | | | $ | 2,469 | |
| | Fair Value | | | Fair value measurement using | | (in thousands) | | December 31, 2012 | | | Level 1 | | | Level 2 | | | Level 3 | | Assets: | | | | | | | | | | | | | Cash and cash equivalents | | $ | 26,892 | | | $ | 26,892 | | | $ | – | | | $ | – | | Certificate of deposit | | | 400 | | | | 400 | | | | – | | | | – | | Total Assets | | $ | 27,292 | | | $ | 27,292 | | | $ | – | | | $ | – | | Liabilities: | | | | | | | | | | | | | | | | | Common stock warrants | | $ | 6,305 | | | $ | $ – | | | $ | – | | | $ | 6,305 | |
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
The following table summarizes changes in the activityfair value of Level 3 inputsthe common stock warrants measured on a recurring basis using Level 3 inputs for 2012 and 2013:
(in thousands) | | | | | | | | Balance at January 1, 2012 | | $ | 6,996 | | Issuance of common stock warrants | | | (136 | ) | Change in fair value of common stock warrant liability | | | (555 | ) | Balance at December 31, 2012 | | $ | 6,305 | | Exercise of warrants (1) | | | (119 | ) | Change in fair value of common stock warrant liability | | | (761 | ) | Balance at December 31, 2013 | | $ | 5,425 | |
| (1) | See, Note 8 – Common Stock Warrant Liability. |
The significant unobservable inputs used in the year endedfair value measurement of the common stock warrants measured on a recurring basis are the historical volatility of our common stock market price, expected term of the applicable warrants, and the risk-free interest rate based on the U.S. Treasury yield curve in effect at the measurement date. In addition to the significant unobservable inputs noted above, certain fair value measurements also take into account an assumption of the likelihood and timing of the occurrence of an event that would result in an adjustment to the exercise price in accordance with the anti-dilutive pricing provisions in the warrant. Any significant increases or decreases in the unobservable inputs, with the exception of the risk-free interest rate, may result in significantly higher or lower fair value measurements. DISCOVERY LABORATORIES, INC. AND SUBSIDIARY | | December 31, | | Significant Unobservable Input Assumptions of Level 3 Valuations | | 2013 | | | 2012 | | | | | | | | | Historical volatility | | | 62% -76 | % | | | 56% -80 | % | Expected term (in years) | | | 0.4 – 2.1 | | | | 1.4 – 3.2 | | Risk-free interest rate | | | 0.08% - 0.44 | % | | | 0.16% - 0.36 | % |
Fair Value of Long-Term Debt
At December 31, 2011: (2013, the estimated fair value of the Company's Deerfield Loan was $23.6 million compared to a carrying value, net of discounts, of $18.4 million. We had no long-term debt as of December 31, 2012. The estimated fair value of the Deerfield Loan was based on discounting the future contractual cash flows to the present value. This analysis utilizes certain Level 3 unobservable inputs, including current cost of capital. Considerable judgment is required to interpret market data and to develop estimates of fair value. The estimates presented are not necessarily indicative of amounts we could realize in thousands)a current market exchange. The use of alternative market assumptions and estimation methodologies could have a material effect on these estimates of fair value.
| | Fair Value Measurements of Common Stock Warrants Using Significant Unobservable Inputs | | | | (Level 3) | | | | | | Balance at December 31, 2010 | | $ | 2,469 | | Issuance of common stock warrants | | | 8,087 | | Change in fair value of common stock warrant liability | | | (3,560 | ) | Balance at December 31, 2011 | | $ | 6,996 | |
Note 5 – Restricted CashInventory
Restricted cash consists of a security deposit held by our bank as collateral for a letter of credit in the same notional amount held by our landlord to secure our obligations under our Lease Agreement dated May 26, 2004 for our headquarters location in Warrington, Pennsylvania (See, Note 13 – Commitments, for further discussion on our leases). Under termsInventory is comprised of the lease agreement the required restricted cash balancefollowing:
| | December 31, | | (in thousands) | | 2013 | | | 2012 | | | | | | | | | Raw materials | | $ | 52 | | | $ | 195 | | Finished goods | | | 60 | | | | – | | | | $ | 112 | | | $ | 195 | |
Raw materials costs in inventory of $52,000 as of December 31, 2011 and 2010 was $400,000, respectively. The notional amount2013 consisted of the letterportion of credit (andraw materials anticipated to be used in the manufacture of commercial product that were purchased after October 4, 2013, the date the FDA agreed to our updated product specifications for SURFAXIN that allowed us to proceed with the commercial introduction of SURFAXIN. Raw materials on hand as of December 31, 2013 that were purchased prior to October 4, 2013 were $1.6 million. These raw materials have a carrying value of zero, as the costs to purchase this material were expensed as research and development expense in the period purchased, and accordingly are not reflected in the inventory balances shown above. The majority of these raw materials are anticipated to be used in manufacturing development and research and development activities. The remaining portion of these raw materials are anticipated to be used in the manufacture of commercial product.
Raw materials costs in inventory of $195,000 as of December 31, 2012 consisted of the portion of raw materials anticipated to be used in the manufacture of commercial product that were purchased after the FDA agreed granted us marketing approval for SURFAXIN (March 2012). Due to a delay in commercial availability of SURFAXIN drug product until the fourth quarter of 2013, previously capitalized raw material costs of $195,000 as of December 31, 2012 were charged to research and development expense in the first quarter of 2013, as these raw materials were no longer expected to be used in the manufacture of commercial product. Inventory reserves were $0.5 million as of December 31, 2013 and $0 as of December 31, 2012. The inventory reserves in 2013 primarily reflect costs of SURFAXIN related security deposit) will remain at $400,000finished goods inventories that are not anticipated to be recoverable through the remaindercommercial sale of the lease term. Subjectproduct during the initial launch period due to certain conditions, upon expirationproduct expiration. These reserves ensure that the inventory carrying values do not exceed net realizable value.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY Note 6 – Property and Equipment
Property and equipment as of December 31, 2011 and 2010 wasis comprised of the following: | | December 31, | | (in thousands) | | 2013 | | | 2012 | | | | | | | | | Manufacturing, laboratory & office equipment | | $ | 8,383 | | | $ | 7,775 | | Furniture & fixtures | | | 816 | | | | 816 | | Leasehold improvements | | | 2,711 | | | | 2,711 | | Subtotal | | | 11,910 | | | | 11,302 | | Accumulated depreciation and amortization | | | (10,254 | ) | | | (9,565 | ) | Property and equipment, net | | $ | 1,656 | | | $ | 1,737 | |
| | December 31, | | (in thousands) | | 2011 | | | 2010 | | | | | | | | | Equipment | | $ | 7,428 | | | $ | 7,418 | | Furniture | | | 815 | | | | 801 | | Leasehold improvements | | | 2,875 | | | | 2,838 | | Subtotal | | | 11,118 | | | | 11,057 | | Accumulated depreciation and amortization | | | (8,825 | ) | | | (7,590 | ) | Property and equipment, net | | $ | 2,293 | | | $ | 3,467 | |
Equipment primarily consists of: (i) manufacturing equipment to produce our KL4 surfactant products, including SURFAXIN® and AEROSURF®, for use in our preclinical studies, clinical trials and potential commercial needs; (ii) laboratory equipment for manufacturing, analytical, research and development activities; and (iii) computers and office equipment to support our overall business activities.
Leasehold improvements primarily consist of construction of an analytical and development laboratory in our Warrington, Pennsylvania headquarters, which was completed in 2007. The activities conducted in our laboratory include release and stability testing of raw materials as well as preclinical, clinical and commercial drug product supply. We also perform development work with respect to our aerosolized and lyophilized dosage forms of our KL4 surfactant. The laboratory will be amortized through the end of the lease term for our Warrington, Pennsylvania headquarters in 2013. In addition, in 2007, we built a microbiology laboratory at our manufacturing facility in Totowa, New Jersey, to support production of our drug product candidates. The microbiology laboratory will be amortized through the end of the lease term for our Totowa, New Jersey facility in 2014.June 2015.
Depreciation expense on property and equipment for the years ended December 31, 2013, 2012, and 2011 was $0.7 million, $0.9 million, and 2010 was $1.3 million, and $1.4 million, respectively.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
Note 7 – Accrued Expenses
Accrued expenses as of December 31, 2011 and 2010 wereare comprised of the following:
| | December 31, | | (in thousands) | | 2011 | | | 2010 | | | | | | | | | Accrued compensation (1) | | $ | 957 | | | $ | 760 | | Accrued manufacturing | | | 917 | | | | 796 | | Accrued research and development | | | 461 | | | | 689 | | Accrued accounting and legal fees | | | 315 | | | | 395 | | All other accrued expenses | | | 322 | | | | 646 | | Total accrued expenses | | $ | 2,972 | | | $ | 3,286 | |
| | December 31, | | (in thousands) | | 2013 | | | 2012 | | | | | | | | | Salaries, bonus & benefits | | $ | 1,849 | | | $ | 1,206 | | Manufacturing operations | | | 1,707 | | | | 926 | | Research and development | | | 270 | | | | 734 | | Professional fees | | | 393 | | | | 428 | | Sales and marketing | | | 161 | | | | 279 | | All other | | | 405 | | | | 586 | | Total accrued expenses | | $ | 4,785 | | | $ | 4,159 | |
| (1) | Accrued compensation primarily consists of employee incentive arrangements (pursuant to plans approved by our Board) and employees’ unused earned vacation. As of December 31, 2011, accrued compensation also included contractual severance arrangements for our former Executive Vice President and General Counsel (See, Note 13 – Commitments).
|
Note 8 – Common Stock Warrant Liability
We account for common stock warrants in accordance with applicable accounting guidance provided in ASC Topic 815, either as derivative liabilities or as equity instruments depending on the specific terms of the warrant agreement.
The form of warrant agreement for the registered warrants that we issued in our May 2009 and February 2010 public offerings generally provide that, in the event a related registration statement or an exemption from registration is not available for the issuance or resale of the warrant shares upon exercise of the warrant, the holder may exercise the warrant on a cashless basis. Notwithstanding the availability of cashless exercise, under generally accepted accounting principles (GAAP) provide that these registered warrants are deemed to be subject to potential net cash settlement and must be classified as derivative liabilities because (i) under the federal securities laws, it may not be within our absolute control to provideproviding freely-tradable shares upon exercise of the warrants may not be within our control in all circumstances, and (ii) the warrant agreements do not expressly stateprovide that there is no circumstance in which we may be required to effect a net cash settlement of the warrants. The applicable accounting principlesguidance expressly do not allow forprecludes an evaluation of the likelihood that an event would result in a cash settlement.settlement could occur. Accordingly, the May 2009 and February 2010 warrants have been classified as derivative liabilities and reported, at each balance sheet date, at estimated fair value determined using the Black-Scholes option pricingoption-pricing model.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY The form of warrant agreement for the registered five-year warrants that we issued in the February 2011 public offering (February 2011 five-year warrants) expressly provide that under no circumstances will we be required to effect a net cash settlement of these warrants. However, these warrants contain anti-dilutive provisions that adjust the exercise price if we issue any common stock, securities convertible into common stock, or other securities (subject to certain exceptions) at a value below the then-existing exercise price of the February 2011 five-year warrants. DueAlthough by their express terms, these warrants are not subject to potential cash settlement, due to the nature of the anti-dilution provisions, these warrants have been classified as derivative liabilities and reported, at each balance sheet date, at estimated fair value determined using a trinomial pricing model.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
Selected terms and estimated fair value of warrants accounted for as derivative liabilitiesare as follows:
| | | | | | | | | Fair Value of Warrants (in thousands) | Issuance Date | | Number of Warrant Shares Issuable | | | Exercise Price | | Warrant Expiration Date | | Value at Issuance Date | | | December 31, | | 2013 | | | 2012 | | | | | | | | | | | | | | | | | | | 5/13/2009 | | | 466,667 | | | $ | 17.25 | | 5/13/2014 | | $ | 3,360 | | | $ | – | | | $ | – | | 2/23/2010 | | | 916,669 | | | | 12.75 | | 2/23/2015 | | | 5,701 | | | | 6 | | | | 104 | | 2/22/2011 | | | 4,834,950 | | | | 1.50 | | 2/22/2016 | | | 8,004 | | | | 5,419 | | | | 6,201 | | | | | | | | | | | | | | | | | $ | 5,425 | | | $ | 6,305 | |
In addition, the February 2011 five-year warrants contain anti-dilution provisions that adjust the exercise price if we issue any common stock, securities convertible into common stock, or other securities (subject to certain exceptions) at a value below the then-existing exercise price of the warrants. Accordingly, the exercise price of these warrants at issuance of $3.20 was adjusted downward to $2.80 per share at the time of the March 2012 public offering and to $1.50 per share at the time of the May 2013 public offering.
During the year ended December 31, 2013, holders of the February 2011 and 2010 are as follows:five-year warrants exercised warrants to purchase 113,800 shares of common stock for total proceeds of $170,700. During the year ended December 31, 2012, holders of the February 2011 five-year warrants exercised warrants to purchase 51,250 shares of common stock for total proceeds of $162,000.
| | | | | | | | | Fair Value of Warrants (in thousands) | | Issuance Date | | Number of Warrant Shares Issuable | | | Exercise Price | | Warrant Expiration Date | | Value at Issuance Date | | | December 31, 2011 | | | December 31, 2010 | | | | | | | | | | | | | | | | | | | 5/13/2009 | | | 466,667 | | | $ | 17.25 | | 5/13/2014 | | $ | 3,360 | | | $ | 82 | | | $ | 782 | | 2/23/2010 | | | 916,669 | | | | 12.75 | | 2/23/2015 | | | 5,701 | | | | 554 | | | | 1,687 | | 2/22/2011 | | | 5,000,000 | | | | 3.20 | | 2/22/2016 | | | 8,087 | | | | 6,360 | | | | | | | | | | | | | | | | | | | | | $ | 6,996 | | | $ | 2,469 | |
Changes in the estimated fair value of warrants classified as derivative liabilities are reported in the accompanying Consolidated Statement of Operations as the “Change in fair value of common stock warrants.”
On February 13, 2013, we entered into a secured loan facility (Deerfield Loan) with affiliates of Deerfield Management Company, L.P. (Deerfield) for up to $30 million in secured financing in 2013. As of December 31, 2013, long-term debt consists solely of amounts due under this facility as follows:
(in thousands) | | | | | Note Payable | | $ | 30,000 | | Unamortized discount | | | (11,646 | ) | Long-term debt, net of discount | | $ | 18,354 | |
Under the terms of the related agreement, Deerfield advanced funds to us in two separate disbursements. Deerfield made the first disbursement, in the amount of $10 million, on February 13, 2013, upon execution of the related agreement (First Disbursement). Deerfield made the second disbursement, in the amount of $20 million, on December 3, 2013 (Second Disbursement), following the first commercial sale of SURFAXIN.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY The loan may be prepaid in whole or in part without penalty at any time. In addition, the principal amount of the loan may be reduced to the extent that holders of the notes elect to apply all or a portion of the principal amount outstanding under the loan to satisfy the exercise price of all or a portion of the Deerfield Warrants (discussed below) upon exercise. The principal amount of the loan is payable in equal annual installments on the fourth, fifth and sixth anniversaries of the Deerfield Loan agreement, provided that the amount payable on the fourth anniversary shall be deferred for one year if either (i) our “Net Sales” (defined below) for the immediately preceding 12-month period are at least $20 million, or (ii) our “Equity Value” (defined below) is at least $200 million; and provided further, that the amount payable on the fifth anniversary (together with any amount deferred on the fourth anniversary) shall be deferred until the sixth anniversary if either (i) our “Net Sales” for the immediately preceding 12-month period are at least $30 million, or (ii) our “Equity Value” is at least $250 million. For the purposes of the foregoing deferrals of principal, “Net Sales” means, without duplication, the gross amount invoiced by us or on our behalf, any of our subsidiaries or any direct or indirect assignee or licensee for products, sold globally in bona fide, arm’s length transactions, less customary deductions determined without duplication in accordance with generally accepted accounting principles; and “Equity Value” means, with respect to each measurement date, the product of (x) the number of issued and outstanding shares of our common stock on such measurement date multiplied by (y) the per share closing price of our common stock on such measurement date. Accordingly, if the milestones are achieved in each year, payment of the principal amount could be deferred until the sixth anniversary date of the loan, on February 13, 2019.
The amount received and outstanding under the Deerfield Loan will accrue interest at an annual rate of 8.75%, payable quarterly in cash. The Deerfield Loan agreement contains customary terms and conditions but does not require us to meet minimum financial and revenue performance covenants. In connection with each advance, we paid Deerfield a transaction fee equal to 1.5% of the amount disbursed. The Deerfield Loan agreement also contains various representations and warranties and affirmative and negative covenants customary for financings of this type, including restrictions on our ability to incur additional indebtedness and grant additional liens on our assets. In addition, all amounts outstanding under the Deerfield Loan may become immediately due and payable upon (i) an “Event of Default,” as defined in the Deerfield Loan agreement, in which case Deerfield would have the right to require us to repay the outstanding principal amount of the loan, plus any accrued and unpaid interest thereon, or (ii) the occurrence of certain events as defined in the facility agreement, including, among other things, the consummation of a change of control transaction or the sale of more than 50% of our assets (a Major Transaction).
In connection with the execution of the Deerfield Loan and receipt of the First Disbursement, we issued to Deerfield warrants to purchase Note 9approximately 2.3 million shares of our common stock at an exercise price of $2.81 per share. Upon receipt of the Second Disbursement, we issued to Deerfield warrants to purchase an additional 4.7 million shares of our common stock at an exercise price of $2.81 per share (together with the warrants issued in connection with the First Disbursement, the Deerfield Warrants). The number of shares of common stock into which the Deerfield Warrants are exercisable and the exercise price of any Deerfield Warrant will be adjusted to reflect any stock splits, recapitalizations or similar adjustments in the number of outstanding shares of common stock.
The Deerfield Warrants will expire on the sixth anniversary of the facility agreement, February 13, 2019, and contain certain limitations that generally prevent the holder from acquiring shares upon exercise of the Deerfield Warrants or any part thereof that would result in the number of shares beneficially owned by such holder to exceed 9.985% of the total number of shares of our common stock then issued and outstanding. A holder of the Deerfield Warrants may exercise all or a portion of such Deerfield Warrants either for cash or on a cashless basis. In connection with a Major Transaction, as defined in the Deerfield Warrants, to the extent of consideration payable to stockholders in cash in connection with such Major Transaction, the holder may have the option to redeem the Deerfield Warrants or that portion of the Deerfield Warrant for cash in an amount equal to the Black-Scholes value (as defined in the Deerfield Warrants) of the Deerfield Warrants or that portion of the Deerfield Warrants redeemed. In addition, in connection with a Major Transaction, to the extent of any consideration payable to stockholders in securities, or in the event of an Event of Default, the holder may have the option to exercise the Deerfield Warrants and receive therefor that number of shares of Common Stock that equals the Black-Scholes value of the Deerfield Warrants or that portion of the Deerfield Warrants exercised. Prior to a holder exercising the Deerfield Warrants for shares in such transactions, the Company may elect to terminate the Deerfield Warrants or that portion of the Deerfield Warrants being exercised and pay the holder cash in an amount equal to the Black-Scholes value of the Deerfield Warrants.
We have recorded the loan as long-term debt at its face value of $30.0 million less debt discounts and issuance costs consisting of (i) $11.7 million fair value of the Deerfield Warrants issued upon the First Disbursement and the Second Disbursement (7 million warrants in total), and (ii) a $450,000 transaction fee. The discount is being accreted to the $30 million loan over its term using the effective interest method. The Deerfield Warrants are derivatives that qualify for an exemption from liability accounting as provided for in ASC Topic 815 “Derivatives and Hedging – DebtContracts in Entity’s Own Equity” (ASC 815) and have been classified as equity.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY The fair value of the Deerfield Warrants at issuance was calculated using the Black-Scholes option-pricing model. The significant Level 3 unobservable inputs used in valuing the Deerfield Warrants are the historical volatility of our common stock market price, expected term of the warrants, and the risk-free interest rate based on the U.S. Treasury yield curve in effect at the measurement date. Any significant increases or decreases in the unobservable inputs, with the exception of the risk-free interest rate, would have resulted in a significantly higher or lower fair value measurement.
Significant Unobservable Input Assumptions of Level 3 Valuations | | | | | | | | Historical volatility | | | 101 | % | Expected term (in years) | | | 5.2 – 6.0 | | Risk-free interest rate | | | 1.2% – 1.5 | % |
The following amounts comprise the Deerfield Loan interest expense for the periods presented:
(in thousands) | | December 31, | | | | 2013 | | | 2012 | | | 2011 | | | | | | | | | | | | Cash interest expense | | $ | 911 | | | $ | – | | | $ | – | | Non-cash amortization of debt discounts | | | 534 | | | | – | | | | – | | Amortization of debt costs | | | 18 | | | | – | | | | – | | Total Deerfield Loan interest expenses | | $ | 1,463 | | | $ | – | | | $ | – | |
Cash interest expense represents interest at an annual rate of 8.75% on the outstanding principal amount for the period, paid in cash on a quarterly basis. Non-cash amortization of debt discount represents the amortization of transaction fees and the fair value of the warrants issued in connection with the Deerfield Loan. The amortization of debt costs represents legal costs incurred in connection with the Deerfield Loan.
Note 10 – Equipment LoansLoan
Our equipment loan liabilities as of December 31, 2011 and 2010 are as follows:comprises the following:
(in thousands) | | 2011 | | | 2010 | | | | | | | | | Pennsylvania Machinery and Equipment Loan | | | | | | | Short-term | | $ | 66 | | | $ | 63 | | Long-term | | | 224 | | | | 296 | | Total | | | 290 | | | | 359 | | | | | | | | | | | Capitalized Leases | | | | | | | | | Short-term | | | 2 | | | | 22 | | Long-term | | | – | | | | 5 | | Total | | | 2 | | | | 27 | | | | | | | | | | | GE Business Financial Services, Inc. | | | | | | | | | Short-term | | | – | | | | 51 | | Long-term | | | – | | | | – | | Total | | | – | | | | 51 | | | | | | | | | | | Total Short-term | | | 68 | | | | 136 | | Total Long-term | | | 224 | | | | 301 | | Total | | $ | 292 | | | $ | 437 | |
(in thousands) | | December 31, | | | | 2013 | | | 2012 | | | | | | | | | Short-term | | | 73 | | | | 69 | | Long-term | | | 69 | | | | 148 | | | | $ | 142 | | | $ | 217 | |
For the years ended December 31, 2011 and 2010,In September 2008, we incurred interest expense associated with our equipment loans of $20,000 and $56,000, respectively.
Pennsylvania Machinery and Equipment Loan Fund (MELF)
We entered into a Loan Agreement and Security Agreement with the Commonwealth of Pennsylvania, Department of Community and Economic Development (Department), effective September 8, 2008, pursuant to which the Department made a loan to us from the Machinery and Equipment Loan Fund in the amount of $500,000 (MELF Loan) to fund the purchase and installation of new machinery and equipment and the upgrade of existing machinery and equipment at our analytical and development laboratory in Warrington, Pennsylvania. Principal and interest on the MELF Loan is payable in equal monthly installments over a period of seven years. Interest on the principal amount accrues at a fixed rate of five percent (5.0%) per annum. We may prepay the MELF Loan at any time without penalty.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
In addition to customary terms and conditions, the MELF Loan requires us to meet certain job retention and job creation goals in Pennsylvania within a three-year period (Jobs Covenant). If we fail to comply with the Jobs Covenant, the Department, in its discretion, may change the interest rate on the Promissory Note to a fixed rate equal to two percentage points above the current prime rate for the remainder of the term. As of September 30, 2011, the end of the three-year Jobs Covenant period, due to our efforts to conserve resources while we focused on securing approval for SURFAXIN,®, we had not complied with the Jobs Covenant. In response to a request that we filed with the Department in November 2013 for a waiver, the Department granted us an extension through AugustDecember 31, 20122014 to come into compliance with the Jobs Covenant and has waived any interest adjustment until that date.
For the years ended December 31, 2013, 2012, and 2011, we incurred interest expense of $9,000, $13,000 and $20,000, respectively, on our outstanding equipment loan.
Equipment Financing Facility with GE Business Financial Services Inc.Note 11 – Stockholders’ Equity
In May 2007, we entered into a Credit and Security Agreement (Credit Agreement) with GE Business Financial Services Inc. (GE, formerly Merrill Lynch Business Financial Services Inc), as Lender, pursuant to which GE agreed to provide us a $12.5 million facility (Facility) to fund our capital programs. The right to draw under this Facility expired and we have not received any new funding since November 2008. As of December 31, 2011, all outstanding amounts under the Facility were paid in full and all related security interests satisfied and released. Advances to finance the acquisition of property and equipment were amortized over a period of 36 months and all other equipment and related costs were amortized over a period of 24 months. The advance to prepay our prior facility was amortized over a period of 27 months. Interest on each advance accrued at a fixed rate per annum equal to one-month LIBOR plus 6.25%, determined on the funding date of such advance.Registered Public Offerings
Loan Payable – PharmaBio Development Inc.
On April 28, 2010,November 5, 2013, we restructured our $10.6 million loan with PharmaBio Development Inc (Pharma Bio), the former strategic investment subsidiarycompleted a registered public offering of Quintiles Transnational Corp. The related Payment Agreement and Loan Amendment dated April 27, 2010 (PharmaBio Agreement) provided for payment in cash of (a) an aggregate of $6.6 million, representing $4.5 million in outstanding principal and $2.1 million in accrued interest, and (b) of the remaining $4 million principal amount under the loan, $2 million of which became due and were paid on each of July 30, 2010 and September 30, 2010. All related security interests satisfied and released. Also under the PharmaBio Agreement, PharmaBio surrendered to us for cancellation warrants to purchase an aggregate of 159,57425,000,000 shares of our common stock, thatat a price of $2.00 per share resulting in gross proceeds of $50.0 million ($46.8 million net proceeds). We also granted the underwriters a 30-day option to purchase up to an additional 3,750,000 shares of common stock at an offering price of $2.00 per share. On November 8, 2013, the underwriters exercised their option in full, resulting in additional gross proceeds of $7.5 million ($7.1 million net proceeds).
On May 10, 2013, we had issued previously to PharmaBio in connection with the PharmaBio loan andcompleted a previousregistered public offering of securities. As of December 31, 2010, all9,500,000 shares of our obligations relatedcommon stock, at a price of $1.50 per share resulting in gross proceeds of $14.3 million ($13.2 million net proceeds). We also granted the underwriters a 30-day option to purchase up to an additional 1,425,000 shares of common stock at an offering price of $1.50 per share. On May 28, 2013, the loan with PharmaBio were paidunderwriters exercised their option to purchase 1,347,000 shares of common stock at a price of $1.50 per share, resulting in fulladditional gross proceeds of $2.0 million ($1.9 million net proceeds).
ForOn March 21, 2012, we completed a registered public offering of 16,071,429 shares of our common stock, at a price of $2.80 per share resulting in gross proceeds of $45.0 million ($42.1 million net proceeds). We also granted the year ended December 31, 2010, we incurred interest expense associated with the PharmaBio loanunderwriters a 30-day option to purchase up to an additional 2,410,714 shares of $0.3 million. Interest expense for the year ended December 31, 2010 included $0.2 million,common stock at an offering price of amortization of deferred financing costs for warrants issued to PharmaBio$2.80 per share, which expired unexercised in 2006 in consideration for restructuring the loan.April 2012.
Note 10 – Stockholders’ Equity
Registered Public Offerings and Private Placements
On February 22, 2011, we completed a registered public offering of 10 million10,000,000 shares of our common stock, 15-month15‑month warrants to purchase five million shares of our common stock, and five-year warrants to purchase five million shares of our common stock. The securities were sold as units, with each unit consisting of one share of common stock, a 15-month warrant to purchase one half share of common stock, and a five-year warrant to purchase one half share of common stock, at a public offering price of $2.35 per unit, resulting in gross proceeds to us of $23.5 million ($21.6 million net). The 15-month warrants expire in May 2012 and are exercisable at ahad an exercise price per share of $2.94.$2.94 and expired in May 2012. The five-year warrants expire in February 2016 and were initially exercisable at a price per share of $3.20. The exercise price of the five-year warrants is subject to adjustment if we issue or sell common stock or securities convertible into common stock (in each case, subject to certain exceptions) at a price (determined as set forth in the warrant) that is less than the exercise price of the warrant. In connection with the closing of our public offering onofferings in March 21, 2012 and May 2013, the exercise price of the five-year warrants has beenwas adjusted downward to a price per share of $2.80. See, Note 17 – Subsequent Events.$2.80 and $1.50, respectively.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
On October 12, 2010, we entered into a Securities Purchase Agreement with PharmaBio, as the sole purchaser, pursuant to which PharmaBio agreed to purchase 158,730 shares of our common stock and warrants to purchase an aggregate of 79,365 shares of common stock, sold as units with each unit consisting of one share of common stock and one warrant to purchase one-half of a share of common stock, at an offering price of $3.15 per unit. The offering resulted in gross proceeds to us of $0.5 million. The warrants generally will expire in October 2015 and are immediately exercisable, subject to an aggregate beneficial ownership limitation, at an exercise price per share of $4.10 per share. If exercised in full, the warrants would result in additional proceeds to us of approximately $0.325 million. In addition, upon 20 days’ written notice to the holder of the warrant, we may redeem any or all of the warrants at any time within 20 days following the occurrence of a “trading threshold” (as defined below) at a per-warrant redemption price of $0.001. A “trading threshold” will be deemed to have occurred on any date that the reported volume weighted average price (VWAP) for five of the immediately preceding seven consecutive trading days exceeds $6.75, provided that the minimum average daily trading volume of our common stock during the seven-day period is at least 33,333 shares (the price and volume criteria being adjusted to take into account any share dividend, share split or other similar transaction that may occur on or after the issuance).
On June 22, 2010, we completed a public offering of 2,380,952 shares of our common stock, five-year warrants to purchase 1,190,474 shares of our common stock, and nine-month warrants to purchase 1,190,474 shares of our common stock. The securities were sold as units, with each unit consisting of one share of common stock, a five-year warrant to purchase one half share of common stock, and a nine-month warrant to purchase one half share of common stock, at a public offering price of $4.20 per unit, resulting in gross proceeds to us of $10 million ($9.1 million net). The five-year warrants expire on June 22, 2015 and are immediately exercisable, subject to an aggregate beneficial ownership limitation, at a price per share of $6.00. The nine-month warrants, which were immediately exercisable, subject to an aggregate beneficial ownership limitation, at a price per share of $4.20, expired on March 22, 2011.
On April 27, 2010, we entered into a Securities Purchase Agreement with PharmaBio, as the sole purchaser, pursuant to which PharmaBio agreed to purchase 270,154 shares of common stock and warrants to purchase an aggregate of 135,077 shares of common stock, sold as units with each unit consisting of one share of common stock and one warrant to purchase one-half share of common stock, at an offering price of $8.14 per unit. The offering resulted in gross proceeds to us of $2.2 million ($2.1 million net). The warrants generally expire in April 2015 and have been exercisable since October 28, 2010, subject to an aggregate beneficial ownership limitation of 9.9%, at a price per share of $10.59.
In February 2010, we completed a public offering of 1,833,333 shares of our common stock and warrants to purchase 916,669 shares of our common stock, sold as units, with each unit consisting of one share of common stock and a warrant to purchase one-half share of common stock, at a public offering price of $9.00 per unit, resulting in gross proceeds to us of $16.5 million ($15.1 million net). The warrants expire in February 2015 and are immediately exercisable, subject to an aggregate share ownership limitation, at a price per share of $12.75.
The foregoing offerings were issued pursuant to our 2008 Universal Shelf. See, this Note – Common Shares Reserved for Future Issuance – Universal Shelf Registration Statements – 2008 Universal Shelf. With respect to the warrants issued in connection with the foregoing offerings, the exercise price and number of shares of common stock issuable upon exercise are subject to adjustment in the event of any stock split, reverse stock split, stock dividend, recapitalization, reorganization or similar transaction. The exercise price and the amount and/or type of property to be issued upon exercise of the warrants are also subject to adjustment if we engage in a “Fundamental Transaction” (such as consolidation or merger, sale or disposal of substantially all of our assets, and among others as defined in the form of the warrant). The warrants are exercisable for cash only, except that if the related registration statement or an exemption from registration is not otherwise available for the resale of the warrant shares, the holder may exercise on a cashless basis.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY At-the-Market Program (ATM Program)
Committed Equity Financing Facility (CEFF)
Since 2004, we have maintained one or more Committed Equity Financing Facilities (CEFFs) with Kingsbridge Capital Limited (Kingsbridge), a private investment group, under which Kingsbridge is committed to purchase, subject to certain conditions, newly-issued shares of our common stock. The CEFFs have allowed us, at our discretion, to raise capital, at the time and in amounts deemed suitable to us, to support our business plans. We are not obligated to utilize any of the funds available under any CEFF and our ability to access funds at any time is subject to certain conditions, including stock price and volume limitations.
As of December 31, 2011, we had one CEFF dated June 11, 2010 (2010 CEFF). Two prior CEFF agreements, dated May 22, 2008 (May 2008 CEFF) and December 12, 2008 (December 2008 CEFF), expired in June 2011 and February 2011, respectively.
2010 CEFF
The 2010 CEFF related Stock Purchase Agreement originally provided for up to 2.1 million shares, up to a maximum of $35 million, and expires in June 2013. As of December 31, 2011, there were 1.1 million shares remaining under 2010 CEFF, up to a maximum of $32.3 million. The shares issuable under the 2010 CEFF are registered under the 2011 Universal Shelf. See, this Note – Universal Shelf Registration Statements.
Each draw down extends for an eight-day trading period. To initiate a draw down, the closing price of our common stock on the trading day immediately preceding the first trading day must be at least equal to $0.20 per share. If on any trading day during the trading period, if the daily volume-weighted average price of our common stock (VWAP) is less than the Threshold Price (defined below), Kingsbridge has the right to purchase shares at the Threshold Price; otherwise no shares are purchased on that trading day and the aggregate amount that we originally designated for the overall draw down is reduced for each such day by 1/8th. The Threshold Price is either (i) 90% of the closing market price of our common stock on the trading day immediately preceding the first trading day of the draw down period or (ii) a price that we specify at our sole discretion; but not less than $0.20 per share. Unless Kingsbridge and we agree otherwise, a minimum of three trading days must elapse between the expiration of any draw-down period and the beginning of the next draw-down period.
With respect to each draw down, Kingsbridge is obligated to purchase (“Obligated Amount”) the amount determined under one of two methodologies that we choose at our discretion, subject to a maximum of the lesser of 3.5% of the closing market value of the outstanding shares of our common stock at the time of the draw down or $15 million. The methodologies for determining the Obligated Amount are:
Methodology 1 – based on Threshold Price | | Obligated Amount | | Threshold Price is: | | | | Greater than $90.00 per share | | $ | 7,250,000 | | Greater than or equal to $75.00 but less than $90.00 per share | | $ | 6,500,000 | | Greater than or equal to $60.00 but less than $75.00 per share | | $ | 4,250,000 | | Greater than or equal to $45.00 but less than $60.00 per share | | $ | 3,500,000 | | Greater than or equal to $30.00 but less than $45.00 per share | | $ | 2,750,000 | | Greater than or equal to $18.75 but less than $30.00 per share | | $ | 2,000,000 | | Greater than or equal to $11.25 but less than $18.75 per share | | $ | 1,350,000 | | Greater than or equal to $7.50 but less than $11.25 per share | | $ | 1,000,000 | | Greater than or equal to $3.75 but less than $7.50 per share | | $ | 500,000 | | Greater than or equal to $3.00 but less than $3.75 per share | | $ | 350,000 | |
Methodology 2
Under this method, the Obligated Amount is equal to: 8 (the trading days in the draw down period) multiplied by the adjusted average trading volume of our common stock (calculated as the average daily trading volume of the prior 40 trading days excluding the 5 trading days with the highest trading volume and the 5 trading days with the lowest trading volume) multiplied by the Threshold Price multiplied by 0.1985.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
In addition, the 2010 CEFF provides that in connection with any draw down notice we may, in our sole discretion, include a request that Kingsbridge purchase an additional amount over the calculated Obligated Amount (a supplemental amount). Kingsbridge may in its sole discretion choose to purchase all or a portion of any supplemental amount that we designate. If we designate a supplemental amount, we may also designate a separate threshold price for that supplemental amount, provided that the supplemental amount, when aggregated with all other amounts drawn under the 2010 CEFF, may not exceed the total commitment amount available under the 2010 CEFF. If Kingsbridge elects to purchase any of the supplemental amount, we will sell to Kingsbridge the corresponding number of shares at a price equal to the greater of (i) the daily VWAP of our common stock on the applicable trading day, or (ii) the supplemental amount threshold price designated by us, in either case less the applicable discount determined in the same manner as for the Obligated Amount.
The purchase price of shares sold to Kingsbridge under the 2010 CEFF is at a discount to the VWAP (as defined in the agreement) for each of the trading days in the draw down period as follows:
Daily VWAP | | % of VWAP | | | Applicable Discount | | Greater than $6.00 per share | | | 95.62 | % | | | 4.38 | % | Greater than or equal to $5.00 but less than $6.00 per share | | | 95.25 | % | | | 4.75 | % | Greater than or equal to $4.00 but less than $5.00 per share | | | 94.75 | % | | | 5.25 | % | Greater than or equal to $3.00 but less than $4.00 per share | | | 94.25 | % | | | 5.75 | % | Greater than or equal to $2.00 but less than $3.00 per share | | | 94.00 | % | | | 6.00 | % | Greater than or equal to $1.25 but less than $2.00 per share | | | 92.50 | % | | | 7.50 | % | Greater than or equal to $0.75 but less than $1.25 per share | | | 91.50 | % | | | 8.50 | % | Greater than or equal to $0.50 but less than $0.75 per share | | | 90.50 | % | | | 9.50 | % | Greater than or equal to $0.25 but less than $0.50 per share | | | 85.00 | % | | | 15.00 | % | Greater than or equal to $0.20 but less than $0.25 per share | | | 82.50 | % | | | 17.50 | % |
Kingsbridge may terminate the 2010 CEFF under certain circumstances, including if a material adverse event relating to our business continues for 10 trading days after notice of the material adverse event.
In connection with the 2010 CEFF and prior CEFFs, we issued the following warrants to Kingsbridge, all of which are exercisable, in whole or in part, for cash, except in limited circumstances:
| · | On June 11, 2010, a warrant to purchase up to 83,333 shares of our common stock at an exercise price of $6.69 per share. The warrant expires in December 2015 and is exercisable, in whole or in part, for cash, except in limited circumstances. |
| · | On December 22, 2008, a warrant to purchase up to 45,000 shares of our common stock at an exercise price of $22.70 per share, expiring in May 2014. |
| · | On May 22, 2008, a warrant to purchase up to 55,000 shares of our common stock at an exercise price of $37.59 per share, expiring in November 2013. |
| · | On April 17, 2006, a warrant to purchase up to 32,667 shares of our common stock at an exercise price equal to $84.29 per share. This warrant expired unexercised in October 2011. |
| · | In 2004, a warrant to purchase up to 25,000 shares of our common stock at an exercise price equal to $181.12 per share. This warrant expired unexercised in January 2010. |
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
CEFF Financings
Financings that we completed under the 2010 CEFF are as follows:
(in thousands, except per share data)
Completion Date | | Shares Issued | | | Gross Proceeds | | | Discounted Average Price Per Share | | | | | | | | | | | | October 4, 2010 | | | 351 | | | $ | 973 | | | $ | 2.77 | | November 4, 2010 | | | 166 | | | | 432 | | | | 2.60 | | January 24, 2011 | | | 314 | | | | 991 | | | | 3.16 | | October 10, 2011 | | | 35 | | | | 69 | | | | 1.97 | | October 24, 2011 | | | 37 | | | | 63 | | | | 1.71 | | November 8, 2011 | | | 129 | | | | 218 | | | | 1.69 | | | | | 1,032 | | | $ | 2,746 | | | | | |
There were no financings under the May 2008 CEFF or December 2008 CEFF during 2010 and 2011.
Stifel ATM Program
On December 14, 2011,February 11, 2013, we entered into aan At-the-Market Equity Sales Agency Agreement (Agency(ATM Agreement) with Lazard Capital Markets LLC (Lazard),Stifel, under which Lazard,Stifel, as our exclusive agent, may, at our discretion and at such times that we may determine from time to time, may sell over a two yearthree-year period up to a maximum of $15,000,000$25,000,000 of shares of our common stock (Shares) through an “at-the-market” program (ATM Program). We are not required to sell any Sharesshares at any time during the term of the ATM Program.Program.
If we issue a sale notice to Lazard,Stifel, we may designate the minimum price per share at which Sharesshares may be sold and the maximum number of Sharesshares that LazardStifel is directed to sell during any selling period. As a result, prices are expected to vary as between purchasers and during the term of the offering. LazardStifel may sell the Sharesshares by any method deemed to be an “at-the-market” equity offering as defined in Rule 415 promulgated under the Securities Act of 1933, as amended, which may include ordinary brokers’ transactions on The Nasdaq Capital Market®, or otherwise at market prices prevailing at the time of sale or prices related to such prevailing market prices, or as otherwise agreed by LazardStifel and us. Either party may suspend salesthe offering under Agencythe ATM Agreement by notice to the other party.party.
The AgencyATM Agreement will terminate upon the earliest of: (1) the sale of all Sharesshares subject to Agencythe ATM Agreement, (2) December 14, 2013February 11, 2016 or (3) the earlier termination of Agencythe ATM Agreement in accordance with its terms. Either party may terminate Agencythe ATM Agreement at any time upon written notification to the other party. party in accordance with the ATM Agreement, and upon such termination, the offering will terminate.
We haveagreed to pay Stifel a commission equal to 3.0% of the gross sales price of any shares sold pursuant to the ATM Agreement. With the exception of expenses related to the shares, Stifel will be responsible for all of its own costs and expenses incurred in connection with the offering.
On October 15, 2013, we completed an offering under the ATM Program and issued 713,920 shares of our common stock for an aggregate purchase price of approximately $2.0 million, resulting in net proceeds to us of approximately $1.8 million, after deducting commissions. As of December 31, 2013, approximately $23 million remained available under the ATM Program.
Lazard ATM Program
On December 14, 2011, we entered into a Sales Agency Agreement (Agency Agreement) with Lazard Capital Markets LLC (Lazard), under which Lazard, as our exclusive agent, at our discretion and at such times that we may determine from time to time, could sell over a two-year period up to a maximum of $15,000,000 of shares of our common stock through an “at-the-market” program (Lazard ATM Program).
We agreed to pay Lazard a commission equal to 3.0% of the gross proceeds of any sales of Shares.under the Lazard ATM Program. We also agreed to reimburse Lazard for certain expenses incurred in connection with entering into the Agency Agreement and have provided Lazard with customary representations, and warranties and indemnification rights. In connection with initiation of coverage of our stock by an analyst affiliated with Lazard, we agreed with Lazard to terminate the Lazard ATM Program effective August 6, 2012.
The Shares to be issued under the ATM Program have been registered pursuant to a prospectus supplement dated December 14, 2011 to our 2011 Universal Shelf. See, Note 17 – Subsequent Events.
As of December 31, 2011, $15.0 million remained available under the ATM Program.
ATM Financings
On March 12, 2012, we completed an offering of 350,374 shares of our common stock for an aggregate purchase price of approximately $1.56$1.6 million, resulting in net proceeds to us of approximately $1.52$1.5 million, after deducting commissions duecommissions.
Committed Equity Financing Facility (CEFF)
From 2004 through June 2013, we maintained one or more Committed Equity Financing Facilities (CEFFs) with Kingsbridge Capital Limited (Kingsbridge), a private investment group, under which Kingsbridge was committed to Lazardpurchase, subject to certain conditions, newly-issued shares of our common stock. The CEFFs allowed us, at our discretion, to raise capital, at the time and in amounts deemed suitable to us, to support our business plans. We were not obligated to utilize any of the funds available under the Sales Agency Agreement.any CEFF and our ability to access funds at any time was subject to certain conditions, including stock price and volume limitations.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY As of December 31, 2013, we did not have an active CEFF. Three CEFF agreements, dated May 22, 2008, December 12, 2008, and June 11, 2010 (2010 CEFF) expired in June 2011, February 2011, and June 2013, respectively. There were no financings under the May 2008 CEFF or December 2008 CEFF during 2013, 2012 and 2011. The 2010 CEFF Agreement originally provided for the purchase of the lesser of up to 2.1 million shares or a maximum of $35 million, and expired in June 2013. There were no financings completed under the 2010 CEFF in 2012 and 2013. In 2011, we received $1.3 million of gross proceeds from the issuance of 514,990 shares at an average discounted price of $2.56 per share under the 2010 CEFF.
401(k) Plan Employer Match
We have a voluntary 401(k) savings plan (401(k) Plan) covering eligible employees that allows for periodic discretionary company matches equal to a percentage of each participant’s contributions (up to the maximum deduction allowed, excluding “catch up” amounts). We currently provide for the company match in the form of newly-issuedby issuing shares of common stock whichthat are registered pursuant to a registration statement on Form S-8 filed with the U.S. Securities and Exchange Commission (SEC) on Form S-8.. For the years ended December 31, 20112013, 2012 and 2010,2011, the match resulted in the issuance of 265,185510,047, 316,543, and 61,158,265,185, shares of common stock, respectively. Expenses associated with the 401(k) match for the years ended December 31, 2013, 2012, and 2011 were $1.0 million, $0.8 million and $0.5 million, respectively.
Common Shares Reserved for Future Issuance
Common shares reserved for potential future issuance upon exercise of warrants
The chart below summarizes shares of our common stock reserved for future issuance upon the exercise of warrants. (in thousands, except price per share data) | | December 31, | | | Exercise Price | | Expiration Date | | | 2011 | | | 2010 | | | | | | | | | | | | | | | Former Employee Warrant | | | 30 | | | | - | | | $ | 3.20 | | 3/18/2016 | Investor Warrants – February 2011 Financing | | | 5,000 | | | | - | | | $ | 3.20 | | 2/22/2016 | Investor Warrants – February 2011 Financing | | | 5,000 | | | | - | | | $ | 2.94 | | 5/22/2012 | PharmaBio – October 2010 Financing | | | 79 | | | | 79 | | | $ | 4.10 | | 10/13/2015 | Investor Warrants – June 2010 Financing | | | 1,190 | | | | 1,190 | | | $ | 4.20 | | 6/22/2015 | Investor Warrants – June 2010 Financing | | | - | | | | 1,190 | | | $ | 6.00 | | 3/22/2011 | Kingsbridge – 2010 CEFF | | | 83 | | | | 83 | | | $ | 6.69 | | 12/11/2015 | PharmaBio – April 2010 Financing | | | 135 | | | | 135 | | | $ | 10.59 | | 4/30/2015 | Investor Warrants – February 2010 Financing | | | 917 | | | | 917 | | | $ | 12.75 | | 2/23/2015 | Investor Warrants – May 2009 Financing | | | 467 | | | | 467 | | | $ | 17.25 | | 5/13/2014 | Kingsbridge – December 2008 CEFF | | | 45 | | | | 45 | | | $ | 22.70 | | 6/12/2014 | Kingsbridge – May 2008 CEFF | | | 55 | | | | 55 | | | $ | 37.59 | | 11/22/2013 | Private Placement – 2006 | | | - | | | | 154 | | | $ | 47.70 | | 11/22/2011 | Class C Investor Warrants – 2006 CEFF | | | - | | | | 33 | | | $ | 84.29 | | 10/17/2011 | Total | | | 13,001 | | | | 4,348 | | | | | | |
warrants:
(in thousands, except price per share data) | | December 31, | | | Exercise | | Expiration | | | 2013 | | | 2012 | | | Price | | Date | | | | | | | | | | | | Deerfield – 2013 loan | | | 7,000 | | | | – | | | $ | 2.81 | | 2/13/2019 | Former employee | | | 30 | | | | 30 | | | $ | 3.20 | | 3/18/2016 | Investors – February 2011 financing | | | 4,835 | | | | 4,949 | | | $ | 1.50 | | 2/22/2016 | PharmaBio – October 2010 financing | | | 79 | | | | 79 | | | $ | 4.10 | | 10/13/2015 | Investors – June 2010 financing | | | 1,190 | | | | 1,190 | | | $ | 6.00 | | 6/22/2015 | Kingsbridge – June 2010 CEFF | | | 83 | | | | 83 | | | $ | 6.69 | | 12/11/2015 | PharmaBio – April 2010 financing | | | 135 | | | | 135 | | | $ | 10.59 | | 4/30/2015 | Investors – February 2010 financing | | | 917 | | | | 917 | | | $ | 12.75 | | 2/23/2015 | Investors – May 2009 financing | | | 467 | | | | 467 | | | $ | 17.25 | | 5/13/2014 | Kingsbridge – December 2008 CEFF | | | 45 | | | | 45 | | | $ | 22.70 | | 6/12/2014 | Kingsbridge – May 2008 CEFF | | | - | | | | 55 | | | $ | 37.59 | | 11/22/2013 | Total | | | 14,781 | | | | 7,950 | | | | | | |
Common shares reserved for potential future issuance upon exercise of stock options or granting of additional equity incentive awards
In October 2011, our stockholders approved the adoption of the 2011 EquityLong-Term Incentive Plan (the 2011 Plan). The 2011 Plan provides for the grant of long-term equity and cash incentive compensation awards and replacesreplaced the 2007 Long-Term Incentive Plan (the 2007 Plan). The 2011 Plan continues many of the features of the 2007 Plan, but is updated to reflect changes to The Nasdaq Capital Market rules regarding equity compensation, other regulatory changes and market and corporate governance developments. Awards outstanding under the 2007 and 1998 Planour previous, expired plan (1998 Plan) will continue to be governed by the terms of the respective plans and the agreements under which they were granted, although any shares returnable to the 2007 Plan as a result of cancellations, expirations and forfeitures will be returned to, and become available for issuance under, the 2011 Plan. Shares returnable to the 1998 Plan as a result of cancellations, expirations and forfeitures will not become available for issuance under the 1998 Plan or the 2011 Plan.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
Stock options and awards outstanding and available for future issuance as of December 31, 20112013 and 2010 are as follows:
(in thousands) | | As of December 31, | | | | 2011 | | | 2010 | | | | | | | | | 2011 Plan(1) | | | | | | | Outstanding | | | 1,709 | | | | – | | Available for Future Grants | | | 2,106 | | | | – | | Total | | | 3,815 | | | | – | | | | | | | | | | | 2007 Plan | | | | | | | | | Outstanding | | | 297 | | | | 564 | | Available for Future Grants | | | – | | | | 3 | | Total | | | 297 | | | | 567 | | | | | | | | | | | 1998 Plan | | | | | | | | | Outstanding | | | 432 | | | | 533 | | Available for Future Grants | | | – | | | | – | | Total | | | 432 | | | | 533 | | | | | | | | | | | Total Outstanding | | | 2,438 | | | | 1,097 | | Total Available for Future Grants | | | 2,106 | | | | 3 | | Total | | | 4,544 | | | | 1,100 | |
(1) | See, Note 11 – Stock Options and Stock-based Employee Compensation – Long-Term Incentive Plans. |
Universal Shelf Registration Statements
2011 Universal Shelf
In June 2011, we filed a universal shelf registration statement on Form S-3 (No. 333-174786) (2011 Universal Shelf) with the SEC for the proposed offering from time to time of up to $200 million of our securities, including common stock, preferred stock, varying forms of debt and warrant securities, or any combination of the foregoing, on terms and conditions that will be determined at that time. The 2011 Universal Shelf was declared effective by the SEC on June 21, 2011. As of December 31, 2011, $199.7 million remained unissued under the 2011 Universal Shelf.
2008 Universal Shelf
In June 2008, we filed a universal shelf registration statement on Form S-3 (No. 333-151654) (2008 Universal Shelf) with the SEC for the proposed offering from time to time of up to $150 million of our securities, including common stock, preferred stock, varying forms of debt and warrant securities, or any combination of the foregoing, on terms and conditions that will be determined at that time. Upon effectiveness of the 2011 Universal Shelf, the 2008 Universal Shelf expired. See, in this note – Registered Public Offering and Private Placements, for offerings made pursuant to the 2008 Universal Shelf.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
Common shares reserved for potential future issuance under CEFF arrangements
Common shares reserved for potential future financings under our CEFF arrangements2012 are as follows:
| | As of December 31, | | | | 2013 | | | 2012 | | | | | | | | | Stock Options Outstanding | | | | | | | 2011 Plan(1) | | | 4,919 | | | | 3,365 | | 2007 Plan | | | 258 | | | | 277 | | 1998 Plan | | | 251 | | | | 355 | | Total Outstanding | | | 5,428 | | | | 3,997 | | Available for Future Grants under 2011 Plan | | | 2,894 | | | | 2,966 | | Total | | | 8,322 | | | | 6,963 | |
(in thousands) | | Potential future issuance as of December 31, | | | Expiration | | 2011 | | | 2010 | | | | | | | | | | 2010 CEFF | June 11, 2013 | | | 1,074 | | | | 1,589 | | May 2008 CEFF | June 18, 2011 | | | - | | | | 851 | | December 2008 CEFF | February 6, 2011 | | | - | | | | 475 | |
(1) See, Note 12 – Stock Options and Stock-based Employee Compensation – Long-Term Incentive Plans.
Common shares reserved for potential future issuance under our 401(k) Plan
As of December 31, 20112013 and 2010,2012, we had 342,833166,243 and 58,018 shares,26,290, respectively, reserved for potential future issuance under the 401(k) Plan.
Note 1112 – Stock Options and Stock-based Employee Compensation
Long-Term Incentive Plans
In October 2011, our stockholders approved the 2011 Plan, which replaced the 2007 Plan. (See, Note 1011 – Common shares reserved for potential future issuance upon exercise of stock options or granting of additional equity incentive awards. The purpose of the 2011 Plan is to (i) encourage eligible participants to acquire a proprietary interest in our company, (ii) provide employees incentives to contribute to our future success, thereby enhancing stockholder value, and (iii) attract and retain exceptionally qualified individuals upon whom, in large measure, our sustained progress, growth and profitability depend.) The 2011 Plan continues many of the features of the 2007 Plan, but is updated to reflect changes to The Nasdaq Capital Market rules regarding equity compensation, other regulatory changes and market and corporate governance developments. Awards outstanding under the 2007 Plan and 1998 Plan continue to be governed by the terms of that planthose plans and the applicable award agreements.
Under the 2011 Plan, we may grant awards for up to 3.77.8 million shares of our common stock. Additionally, any shares returnable to the 2007 Plan as a result of cancellations, expirations, and forfeitures will become available for issuance under the 2011 Plan. As of December 31, 2011,Awards under the 2011 Plan may include stock options, stock appreciation rights (SARs), restricted stock awards with respect to 1,709,000 shares are outstanding, 114,721 shares have been made available for issuance from the 2007 Plan(RSAs), restricted stock units, other performance and 2,105,721 shares are available for grant. stock-based awards, and dividend equivalents.
An administrative committee (the Committee – currently the Compensation Committee of the Board of Directors) or Committee delegates may determine the types, the number of shares covered by, and the terms and conditions of, such awards. Eligible participants may include any of our employees, directors, advisors or consultants.
AwardsAs of December 31, 2013, under the plans may include:
Stock Options and Stock Appreciation Rights (SARs)
The Committee may award nonqualified2011 Plan, there were 4,919,333 stock options incentiveoutstanding, 18,936 restricted stock options,units (“RSUs”) that vest in June 2014 and 2,894,374 shares available for grant. No SARs, RSAs, other performance and stock-based awards, or SARs with a term of not more than ten years and a purchase price not less than 100% ofdividend equivalents have been granted under the fair market value on the date of grant. The Committee will establish the vesting schedule for stock options and the method of payment for the exercise price, which may include cash, shares, or other awards. 2011 Plan. Although individual grants may vary, option awards generally are exercisable upon vesting, vest based upon three years of continuous service, and have a 10-year term. In addition, awards under the 2011 Plan must comply with the provisions of Section 162(m) of the Internal Revenue Code.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
Restricted Stock and Restricted Stock Units
The Committee may grant restricted stock awards (RSAs) and restricted stock units and, among other things, establish the applicable restrictions, including any limitation on voting rights or the receipt of dividends, and will establish the manner and timing under which restrictions may lapse. If employment is terminated during the applicable restriction period (other than as a result of death or disability), shares of restricted stock and restricted stock units still subject to restriction will be forfeited, except as determined otherwise by the Committee.
Performance Awards and Other Stock-Based Awards
The Committee may grant performance awards, which may be denominated in cash, shares, other securities or other awards and payable to, or exercisable by, the participant upon the achievement of performance goals during performance periods, as established by the Committee. The Committee may grant other stock-based awards that are denominated or payable in shares, under the terms and conditions as the Committee determines.
Dividend Equivalents
The Committee may grant dividend equivalent awards that entitle the participant receiving such award the right to receive payments equivalent to dividends or interest with respect to the number of shares and on the terms as determined by the Committee. The Committee may provide that the amounts (if any) of such awards will be deemed to have been reinvested in additional shares or otherwise reinvested.
No SARs, Performance Awards or Dividend Equivalents have been granted under any 2011 Plan. During 2010, there were 154,333 RSAs granted under the 2007 Plan. The RSA’s granted to non-officer employees vested on the first anniversary of the grant date. The RSA’s granted to officers provided for vesting on the earliest of (i) the second anniversary of the grant date; (ii) FDA marketing approval for SURFAXIN®; or (iii) the effective date of a strategic alliance or collaboration agreement as determined by the Board of Directors. These RSAs vested on March 6, 2012 upon the issuance of FDA marketing approval for SURFAXIN. As of December 31, 2011 and 2010, there were 128,334 and 154,333 unvested restricted stock awards outstanding, respectively.
A summary of stock option activity under our long-term incentive plans during the periods ended December 31, 2011 and 2010, respectively, is presented below:
(in thousands, except for weighted-average data) | | | | | | | | Stock Options | | Shares | | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term (In Yrs) | | | | | | | | | Outstanding at December 31, 2010 | | | 943 | | | $ | 56.06 | | | Granted | | | 1,771 | | | | 1.84 | | | Forfeited or expired | | | (276 | ) | | | 44.95 | | | Outstanding at December 31, 2011 | | | 2,438 | | | $ | 17.97 | | | Granted | | | 1,724 | | | | 2.63 | | | Exercised | | | (3 | ) | | | 1.83 | | | Forfeited or expired | | | (162 | ) | | | 24.39 | | | Outstanding at December 31, 2012 | | | 3,997 | | | $ | 11.11 | | | Granted | | | 1,928 | | | | 2.30 | | | Exercised | | | (18 | ) | | | 1.85 | | | Forfeited or expired | | | (479 | ) | | | 28.09 | | | Outstanding at December 31, 2013 | | | 5,428 | | | $ | 6.51 | | 8.0 | | | | | | | | | | | Exercisable at December 31, 2013 | | | 2,346 | | | $ | 12.01 | | 6.9 |
(in thousands, except for weighted-average data)
Stock Options | | Price Per Share (range) | | | Shares | | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term (In Yrs) | | | | | | | | | | | | | | | | | | | | | | | Outstanding at December 31, 2009 | | $ | 7.35– $156.45 | | | | 1,065 | | | $ | 56.46 | | | | | | | | | | | | | | | | | Granted | | $ | 2.55 – $5.85 | | | | 20 | | | | 3.19 | | | Exercised | | | – | | | | – | | | | – | | | Forfeited or expired | | $ | 5.40 – $137.55 | | | | (142 | ) | | | 51.93 | | | Outstanding at December 31, 2010 | | $ | 2.55 – $156.45 | | | | 943 | | | $ | 56.06 | | | | | | | | | | | | | | | | | Granted | | $ | 1.58 – $3.41 | | | | 1,771 | | | $ | 1.84 | | | Exercised | | | – | | | | – | | | | – | | | Forfeited or expired | | $ | 1.83 – $137.55 | | | | (276 | ) | | $ | 44.95 | | | Outstanding at December 31, 2011 | | $ | 1.58 – $156.45 | | | | 2,438 | | | $ | 17.97 | | 8.1 | | | | | | | | | | | | | | | Exercisable at December 31, 2011 | | $ | 2.55 – $156.45 | | | | 667 | | | $ | 60.73 | | 4.2 |
(in thousands, except for weighted-average data) | | | | | | | | | | Restricted Stock Units | | Shares | | | Weighted- Average Exercise Price | | | Weighted- Average Remaining Contractual Term (In Yrs) | | | | | | | | | | | | Outstanding at December 31, 2012 | | | – | | | $ | – | | | | | Awarded | | | 19 | | | | – | | | | | Outstanding at December 31, 2013 | | | 19 | | | $ | – | | | | 0.4 | | | | | | | | | | | | | | | Exercisable at December 31, 2013 | | | – | | | $ | – | | | | 0.0 | |
Based upon application of the Black-Scholes option-pricing formula described below, the weighted-average grant-date fair value of options and awards granted during the years ended December 31, 2013, 2012, and 2011 was $1.79, $2.02, and 2010$1.45, respectively. The weighted-average grant-date fair value of RSUs granted during the year ended December 31, 2013 was $1.45$1.69. There were no RSUs granted during the years ended December 31, 2012 and $2.48, respectively.2011. For the year ended December 31, 2013, there were 18,208 options exercised, resulting in approximately $34,000 in proceeds. For the year ended December 31, 2012, there were 3,334 options exercised, resulting in approximately $6,000 in proceeds. There were no options exercised during the yearsyear ended December 31, 2011 and 2010, respectively.2011. The total intrinsic value of options outstanding, vested, and exercisable as of December 31, 20112013 is $1,155, $0$0.8 million, $0.5 million, and $0,$0.5 million, respectively. DISCOVERY LABORATORIES, INC. AND SUBSIDIARY A summary of nonvested shares issuable upon exercise of outstanding options and changes during 2011 is presented below:
(shares in thousands) | | Option Shares | | | Weighted- Average Grant- Date Fair Value | | | | | | | | | Non-vested at December 31, 2010 | | | 64 | | | $ | 10.05 | | Granted | | | 1,771 | | | | 1.84 | | Vested | | | (59 | ) | | | 10.86 | | Forfeited | | | (5 | ) | | | 7.43 | | Non-vested at December 31, 2011 | | | 1,771 | | | $ | 1.85 | |
The following table provides detail with regard to options outstanding, vested and exercisable at December 31, 2011:2013:
(shares in thousands) | (shares in thousands) | | | | | | Outstanding | | | | Vested and Exercisable | (shares in thousands) | | | Outstanding | | Vested and Exercisable | Price per share | Price per share | | | Shares | | | Weighted- Average Price per Share | | Weighted- Average Remaining Contractual Life | | Shares | | | Weighted- Average Price per Share | | Weighted- Average Remaining Contractual Life | Price per share | | | Shares | | | Weighted- Average Price per Share | | Weighted- Average Remaining Contractual Life | | Shares | | | Weighted- Average Price per Share | | Weighted- Average Remaining Contractual Life | $ | 1.58 - $3.60 | | | | 1,783 | | | $ | 1.85 | | 9.58 Years | | | 13 | | | $ | 3.08 | | 8.84 Years | 1.58 - $156.45 | | | | 5,428 | | | $ | 6.51 | | 8.0 Years | | | 2,346 | | | $ | 12.01 | | 6.9 Years | $ | 3.61 – $10.95 | | | | 12 | | | $ | 9.69 | | 6.66 Years | | | 12 | | | $ | 9.73 | | 7.85 Years | | $ | 10.96 – $156.45 | | | | 643 | | | $ | 62.78 | | 4.05 Years | | | 642 | | | $ | 62.87 | | 4.21 Years | | | | | | | 2,438 | | | | | | | | | 667 | | | | | | | |
Stock-Based Compensation
We recognized stock-based compensation expense in accordance ASC Topic 718 for the years ended December 31, 2013, 2012, and 2011, of $2.2 million, $2.4 million and 2010, of $0.9 million, and $1.4 million, respectively.
Stock-based compensation expense was classified as follows:
| | December 31, | | (in thousands) | | 2013 | | | 2012 | | | 2011 | | | | | | | | | | | | Research and development | | $ | 784 | | | $ | 487 | | | $ | 289 | | Selling, general and administrative | | | 1,426 | | | | 1,924 | | | | 578 | | Total | | $ | 2,210 | | | $ | 2,411 | | | $ | 867 | |
| | December 31, | | (in thousands) | | 2011 | | | 2010 | | | | | | | | | Research and development | | $ | 289 | | | $ | 479 | | General and administrative | | | 578 | | | | 931 | | Total | | $ | 867 | | | $ | 1,410 | |
On December 31, 2012, our former Chief Executive Officer resigned from his position and as a member of our Board. Under the terms of a separation agreement that we entered into with the former CEO, all of the former CEO’s outstanding options vested immediately and all such options shall remain exercisable to the end of their stated terms. We recognized $0.8 million in stock option modification costs related to these items.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing formula that uses assumptions noted in the following table. Expected volatilities are based upon the historical volatility of our common stock and other factors. We also use historical data and other factors to estimate option exercises, employee terminations and forfeiture rates within the valuation model. The risk-free interest rates are based upon the U.S. Treasury yield curve in effect at the time of the grant. DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
| | December 31, | | December 31, | | | | 2011 | | 2010 | | 2013 | | | 2012 | | | 2011 | | | | | | | | | | | | | | | | Weighted average expected volatility | | 113% | | 112% | | | 109 | % | | | 111 | % | | | 113 | % | Weighted average expected term | | 4.8 years | | 4.9 years | | 4.7 years | | | 4.6 years | | | 4.8 years | | Weighted average risk-free interest rate | | 1.08% | | 1.47% | | | 0.73 | % | | | 0.74 | % | | | 1.08 | % | Expected dividends | | – | | – | | | – | | | | – | | | | – | |
The total fair value of the underlying shares of the options vested during 2013, 2012, and 2011, and 2010, equals $0.6$1.9 million, $2.2 million and $1.5$0.6 million, respectively. As of December 31, 2011,2013, there was $2.5$4.0 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2011 Plan. That cost is expected to be recognized over a weighted-average vesting period of 2.71.7 years.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY Note 1213 – Corporate Partnership, Licensing and Research Funding Agreements
Laboratorios del Dr. Esteve, S.A.
We have a strategic alliance with Laboratorios del Dr. Esteve, S.A. (Esteve) for the development, marketing and sales of a broad portfolio of potential KL4 surfactant products in Andorra, Greece, Italy, Portugal, and Spain. Antonio Esteve, Ph.D., a principal of Esteve, served as a member of our Board of Directors from May 2002 until January 2013. Esteve will pay us a transfer price on sales of our KL4 surfactant products. We will be responsible for the manufacture and supply of all of the covered products and Esteve will be responsible for all sales and marketing in the territory. Esteve is obligated to make stipulated cash payments to us upon our achievement of certain milestones, primarily upon receipt of marketing regulatory approvals for the covered products. In addition, Esteve has agreed to contribute to Phasephase 3 clinical trials for the covered products by conducting and funding development performed in the territory. As part of a 2004 restructuring of this alliance in December 2004,which Esteve returned certain rights to us in consideration of Esteve returning commercialization rights in portions of the territory originally licensed to Esteve, including key European markets and Latin Americacertain territories (Former Esteve Territories), we agreed to pay to Esteve 10% of any cash up front and milestone fees (up to a maximum aggregate of $20 million in the aggregate)million) that we may receive in connection with any strategic collaborations for the development and/or commercialization of certain of our KL4 surfactant products in the Former Esteve Territories.
Licensing and Research Funding Agreements
Philip Morris USA Inc. and Philip Morris Products S.A.
Under license agreements with Philip Morris USA Inc. (PMUSA) and Philip Morris Products S.A. (PMPSA), we hold exclusive worldwide licenses to our capillary aerosolizationthe CAG technology for use with pulmonary surfactants (alone or in combination with any other pharmaceutical compound(s)) for all respiratory diseases and conditions (the foregoing uses in each territory, the Exclusive Field), and an exclusive license in the United StatesU.S. for use with other (non-surfactant)certain non-surfactant drugs to treat a wide range of pediatric and adult respiratory indications in hospitals and other health care institutions. We generally are obligated to pay royalties at a rate equal to a low single-digit percent of sales of products sold in the Exclusive Field (as defined in the license agreements) in the territories, including sales of aerosol devices and related components that are not based on the capillary aerosolization technology (unless we exercise our right to terminate the license with respect to a specific indication). We also agreed in the future to pay minimum royalties quarterly beginning in 2014, but are entitled to a reduction of future royalties in an amount equal to the excess of any minimum royalty paid over royalties actually earned in prior periods.
Johnson & Johnson and Ortho Pharmaceutical Corporation
We, Johnson & Johnson (J&J) and its wholly-owned subsidiary, Ortho Pharmaceutical Corporation, are parties to a license agreement granting to us an exclusive worldwide license to the J&J proprietary KL4 surfactant technology, including SURFAXIN®.technology. Under the license agreement, we are obligated to pay fees of up to $2.5 million in the aggregate upon our achievement of certain milestones, primarily upon receipt of marketing regulatory approvals for certain designated products. In addition, weWe have paid $450,000$950,000 to date for milestones that have been achieved.achieved including a $500,000 milestone payment in 2012 that became due as a result of the FDA’s approval of SURFAXIN. In addition, we are required to make royalty payments at different rates, depending upon type of revenue and country, in amounts in the range of a high single-digit percent of net sales (as defined in the license agreement) of licensed products sold by us or sublicensees, or, if greater, a percentage of royalty income from sublicensees in the low double digits.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
Note 1314 – Commitments
Future payments due under contractual obligations at December 31, 20112013 are as follows:
(in thousands) | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | There- after | | | Total | | Operating lease obligations | | | 1,087 | | | | 1,024 | | | | 934 | | | | 936 | | | | 158 | | | | – | | | | 4,139 | | Equipment loan obligations (1) | | | 79 | | | | 69 | | | | – | | | | – | | | | – | | | | – | | | | 148 | | Total | | $ | 1,166 | | | $ | 1,093 | | | $ | 934 | | | $ | 936 | | | $ | 158 | | | $ | – | | | $ | 4,287 | |
| (1) | See, Note 10 – Equipment Loan |
(in thousands) | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | There- after | | | Total | | Equipment loan obligations (1) | | $ | 80 | | | $ | 85 | | | $ | 85 | | | $ | 71 | | | $ | – | | | | – | | | $ | 321 | | Operating lease obligations | | | 1,166 | | | | 320 | | | | 150 | | | | – | | | | – | | | | – | | | | 1,636 | | Former Exec. VP Severance Commitment | | | 435 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 435 | | Total | | $ | 1,681 | | | $ | 405 | | | $ | 235 | | | $ | 71 | | | $ | – | | | $ | – | | | $ | 2,392 | |
(1) See, Note 9 – Debt.
Operating Leases
Our operating leases consist primarily of facility leases for our operations in Pennsylvania and New Jersey.
We maintain our headquarters in Warrington, Pennsylvania. The facility is 39,594 square feet and serves as the main operating facility for clinicaldrug and device development, regulatory, analytical technical services, research and development, and administration. In April 2007,January 2013, the lease which originally expired in February 2010 with total aggregate payments of $4.6 million, was extendedamended to extend the term an additional threefive years through February 2013 with additional2018. The total aggregate base rental payments of $3.0 million overunder the lease prior to the extension period.were approximately $7.2 million and the total aggregate base rental payments under the extended portion of the lease are approximately $4.9 million.
We lease approximately 21,000 square feet of space for our manufacturing operations in Totowa, New Jersey, at an annual rent of $150,000. This space is specifically designed for the manufacture and filling of sterile pharmaceuticals in compliance with cGMP and is our only manufacturing facility. ThisWe have secured an extension of the lease, expireswhich was scheduled to expire in December 2014, subjectuntil to June 30, 2015 for aggregate base rental payments of $306,250 under the landlord’s right, in certain circumstances and upon two years’ prior notice, to terminate the lease early. In addition, depending upon the timing of the notice, if we satisfy certain financial conditions at the time, the landlord would be obligated to make early termination payments to us. The total aggregate payments over the term of the lease are $1.4 million. In connection with our manufacturing operations in Totowa, New Jersey, we have 14 employees subject to a collective bargaining arrangement that expires on December 3, 2012. extension period. For a discussion of our manufacturing strategy, see,See, “Item 1 – Business – Business Operations – Manufacturing and Distribution,” in our Annual Report on Form 10-K.
Rent expense under all of these leases was $1.0 million for each of the years ended December 31, 20112013, 2012, and 2010 was $1.0 million and $1.0 million,2011, respectively.
Severance ArrangementRetention Plan
On July 12, 2011,September 13, 2013, our Board of Directors approved an employee severance and retention plan for employees at the Totowa Facility to take effect in the event that we entered into a Separationare unable to secure long-term utilization of Employment Agreementthe Totowa Facility beyond the scheduled lease expiration on June 30, 2015. The retention plan is intended to minimize employee turnover by providing severance and General Release Agreement (“Separation Agreement”) with our former, Executive Vice President, General Counsel and Corporate Secretary (Former Executive). Pursuantretention bonuses that encourage employees to the Separation Agreement, the Former Executive resigned his positionsstay with us effective July 31, 2011,through facility closing date (and beyond for certain employees). The plan has two components: (1) plant management (three individuals) has received an award of stock options that will vest in full, and was entitled to (i) payment of accrued vacation pay, (ii) the right to continue to holdwill be eligible for a restricted stock award for 15,000 shares (RSA) without any continuing Service (as definedretention bonus payable in the RSA) requirement, (iii) extended health benefits for up to 18 months, and, (iv) depending on the circumstances, certain outplacement services. In addition, we agreed to pay the Former Executive on February 1, 2012 severance in the amount of $400,000, which amount was reduced by any outstanding amount due under a promissory noteJune 2016, provided that the Former Executive had issued tothey remain employed with us in 2001. AsJune 2016; and (2) provided that they remain employed with us through the successful closure of the Totowa Facility, non-union employees (nine individuals) will be eligible to receive both severance and a retention bonus payable upon such closure. The total cash amount expected to be paid for severance and retention through June 2016 is approximately $1.0 million. The plan-related expense incurred during 2013 is $0.1 million and is included in research and development expense. The related liability is $0.1 million as of December 31, 2011,2013.
In addition, there are 14 employees at the outstanding aggregate principal amountTotowa Facility who are subject to a collective bargaining agreement and will be eligible to receive severance upon closure of the Note was $169,958.Totowa Facility. The Separation Agreement also contains a general releaseplan-related expense incurred during 2013 is $30,000 and is included in research and development expense. The related liability is $0.5 million as of claims by the parties and a 12-month non-competition covenant by the Former Executive.December 31, 2013.
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
Note 1415 – Litigation
We are not aware of any pending or threatened legal actions that would, if determined adversely to us, have a material adverse effect on our business and operations.
We have from time to time been involved in disputes and proceedings arising in the ordinary course of business, including in connection with the conduct of our clinical trials. In addition, as a public company, we are also potentially susceptible to litigation, such as claims asserting violations of securities laws. Any such claims, with or without merit, if not resolved, could be time-consuming and result in costly litigation. There can be no assurance that an adverse result in any future proceeding would not have a potentially material adverse effect on our business, results of operations and financial condition.
Note 1516 – Income Taxes
Since our inception, we have never recorded a provision or benefit for Federal and state income taxes.
The reconciliation of the income tax benefit computed at the Federal statutory rates to our recorded tax benefit for the years ended December 31, 20112013, 2012, and 20102011 is as follows:
(in thousands) | | December 31, | | | | 2011 | | | 2010 | | Income tax benefit, statutory rates | | $ | 7,128 | | | $ | 6,519 | | State taxes on income, net of Federal benefit | | | 1,633 | | | | 1,206 | | Research and development tax credit | | | 662 | | | | 656 | | Employee Related | | | (1,758 | ) | | | (4,746 | ) | Warrant Valuation Related | | | 1,210 | | | | 2,184 | | Other | | | – | | | | 18 | | Income tax benefit | | | 8,875 | | | | 5,837 | | Valuation allowance | | | (8,875 | ) | | | (5,837 | ) | Income tax benefit | | $ | – | | | $ | – | |
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(in thousands) | | December 31, | | | | 2013 | | | 2012 | | | 2011 | | Income tax benefit, statutory rates | | $ | 15,373 | | | $ | 12,687 | | | $ | 7,128 | | State taxes on income, net of Federal benefit | | | 2,922 | | | | 2,288 | | | | 1,633 | | Research and development tax credit | | | 517 | | | | 332 | | | | 662 | | Employee related | | | (766 | ) | | | (988 | ) | | | (1,758 | ) | Warrant valuation related | | | 259 | | | | 189 | | | | 1,210 | | Income tax benefit | | | 18,305 | | | | 14,508 | | | | 8,875 | | Valuation allowance | | | (18,305 | ) | | | (14,508 | ) | | | (8,875 | ) | Income tax benefit | | $ | – | | | $ | – | | | $ | – | |
The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities, at December 31, 20112013 and 2010,2012, are as follows:
(in thousands) | | December 31, | | | | 2013 | | | 2012 | | Long-term deferred tax assets: | | | | | | | Net operating loss carryforwards (Federal and state) | | $ | 175,258 | | | $ | 160,522 | | Research and development tax credits | | | 10,604 | | | | 9,412 | | Compensation expense on stock | | | 3,276 | | | | 3,154 | | Charitable contribution carryforward | | | 7 | | | | 7 | | Inventory reserve | | | 198 | | | | – | | Deferred revenue | | | 53 | | | | – | | Other accrued | | | 1,024 | | | | 524 | | Depreciation | | | 2,714 | | | | 2,665 | | Capitalized research and development | | | 1,326 | | | | 1,516 | | Total long-term deferred tax assets | | | 194,460 | | | | 177,800 | | Less: valuation allowance | | | (194,460 | ) | | | (177,800 | ) | Deferred tax assets, net of valuation allowance | | $ | – | | | $ | – | |
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY (in thousands) | | December 31, | | | | 2011 | | | 2010 | | Long-term deferred tax assets: | | | | | | | Net operating loss carryforwards(Federal and state) | | $ | 147,045 | | | $ | 132,994 | | Research and development tax credits | | | 9,080 | | | | 8,447 | | Compensation expense on stock | | | 3,535 | | | | 5,126 | | Charitable contribution carryforward | | | 7 | | | | 7 | | Other accrued | | | 608 | | | | 607 | | Depreciation | | | 2,682 | | | | 2,493 | | Capitalized research and development | | | 1,740 | | | | 1,932 | | Total long-term deferred tax assets | | | 164,697 | | | | 151,606 | | | | | | | | | | | Long-term deferred tax liabilities | | | – | | | | – | | Net deferred tax assets | | | 164,697 | | | | 151,606 | | Less: valuation allowance | | | (164,697 | ) | | | (151,606 | ) | Deferred tax assets, net of valuation allowance | | $ | – | | | $ | – | |
We are in a net deferred tax asset position at December 31, 20112013 and 20102012 before the consideration of a valuation allowance. Because we have never realized a profit, management has fully reserved the net deferred tax asset since realization is not assured. It is our policy to classify interest and penalties recognized on uncertain tax positions as a component of income tax expense. There was neither interest nor penalties accrued as of December 31, 2013 or 2012, nor were any incurred in 2013, 2012, or 2011.
At December 31, 20112013 and 2010,2012, we had available carryforward net operating losses for Federal tax purposes of $363.3$432.1 million and $329.7$396.7 million, respectively, and a research and development tax credit carryforward of $9.1$10.6 million and $8.4$9.4 million, respectively. The Federal net operating loss and research and development tax credit carryforwards began to expire in 2008 and will continue through 2031. Approximately $3.1 million of the $363.3 million net operating loss carryforwards expire prior to 2013.2033.
At December 31, 2011,2013, we had available carryforward Federal and State net operating losses of $5.2 million and $0.4 million, respectively, related to stock-based compensation, the tax effect of which will result in a credit to equity as opposed to income tax expense, to the extent these losses are utilized in the future.
At December 31, 20112013 and 2010,2012, we had available carryforward losses of approximately $360.1$433.7 million and $319.9$392.6 million, respectively, for state tax purposes. Of the $360.1$433.7 million state tax carryforward losses, $325.6$399.5 million is associated with the state of Pennsylvania, with the remainder associated with New Jersey and California.the other 10 states within which we have established tax nexus.
Utilization of net operating loss (NOL) and research and development (R&D) credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986 due to ownership change limitations that have occurred previously or that could occur in the future. These ownership changes may limit the amount of NOL and R&D credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. There also could be additional ownership changes in the future, which may result in additional limitations in the utilization of the carryforward NOLs and credits.
A full valuation allowance has been provided against our research and development credits and, if a future assessment requires an adjustment, an adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the consolidated balance sheet or statement of operations if an adjustment were required. DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
Note 1617 – Selected Quarterly Financial Data (Unaudited)
The following table contains unaudited statement of operations information for each quarter of 20112013 and 2010.2012. The operating results for any quarter are not necessarily indicative of results for any future period.
2011 Quarters Ended: | | | | | 2013 Quarters Ended: | | | | | (in thousands, except per share data) | | Mar. 31 | | | June 30 | | | Sept. 30 | | | Dec. 31 | | | Total Year | | | Mar. 31 | | | June 30 | | | Sept. 30 | | | Dec. 31 | | | Total Year | | Grant Revenues | | $ | 381 | | | $ | 201 | | | $ | – | | | $ | – | | | $ | 582 | | | Grant revenues | | | $ | 72 | | | $ | 182 | | | $ | 60 | | | $ | 74 | | | $ | 388 | | Expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cost of sales | | | | – | | | | – | | | | – | | | | 517 | | | | 517 | | Research and development | | | 4,620 | | | | 4,615 | | | | 3,981 | | | | 4,014 | | | | 17,230 | | | | 8,472 | | | | 6,863 | | | | 6,574 | | | | 5,752 | | | | 27,661 | | General and administrative | | | 1,820 | | | | 1,966 | | | | 2,189 | | | | 1,889 | | | | 7,864 | | | Selling, General and administrative | | | | 4,220 | | | | 4,129 | | | | 4,299 | | | | 4,070 | | | | 16,718 | | Total expenses | | | 6,440 | | | | 6,581 | | | | 6,170 | | | | 5,903 | | | | 25,094 | | | | 12,692 | | | | 10,992 | | | | 10,873 | | | | 10,339 | | | | 44,896 | | Operating loss | | | (6,059 | ) | | | (6,380 | ) | | | (6,170 | ) | | | (5,903 | ) | | | (24,512 | ) | | | (12,620 | ) | | | (10,810 | ) | | | (10,813 | ) | | | (10,265 | ) | | | (44,508 | ) | Change in fair value of common stock warrant liability | | | 2,228 | | | | (1,693 | ) | | | 1,422 | | | | 1,603 | | | | 3,560 | | | | 162 | | | | 2,525 | | | | (1,059 | ) | | | (867 | ) | | | 761 | | Other expense, net | | | (6 | ) | | | (3 | ) | | | (3 | ) | | | (1 | ) | | | (13 | ) | | | (177 | ) | | | (342 | ) | | | (352 | ) | | | (597 | ) | | | (1,468 | ) | Net loss | | $ | (3,837 | ) | | $ | (8,076 | ) | | $ | (4,751 | ) | | $ | (4,301 | ) | | $ | (20,965 | ) | | $ | (12,635 | ) | | $ | (8,627 | ) | | $ | (12,224 | ) | | $ | (11,729 | ) | | $ | (45,215 | ) | Net loss per common share - basic and diluted | | $ | (0.21 | ) | | $ | (0.34 | ) | | $ | (0.20 | ) | | $ | (0.18 | ) | | $ | (0.93 | ) | | Weighted average number of common shares outstanding | | | 18,114 | | | | 24,027 | | | | 24,106 | | | | 24,309 | | | | 22,660 | | | Net loss per common share - basic | | | $ | (0.29 | ) | | $ | (0.18 | ) | | $ | (0.22 | ) | | $ | (0.16 | ) | | $ | (0.82 | ) | Net loss per common share - diluted | | | | (0.29 | ) | | | (0.22 | ) | | | (0.22 | ) | | | (0.16 | ) | | | (0.82 | ) | Weighted average number of common shares outstanding - basic | | | | 43,657 | | | | 49,135 | | | | 54,792 | | | | 73,129 | | | | 55,258 | | Weighted average number of common shares outstanding - diluted | | | | 43,657 | | | | 49,866 | | | | 54,792 | | | | 73,129 | | | | 55,258 | |
2010 Quarters Ended: | | | | (in thousands, except per share data) | | Mar. 31 | | | June 30 | | | Sept. 30 | | | Dec. 31 | | | Total Year | | Grant Revenues | | $ | – | | | $ | – | | | $ | – | | | $ | – | | | $ | – | | Expenses: | | | | | | | | | | | | | | | | | | | | | Research and development | | | 4,133 | | | | 4,363 | | | | 4,727 | | | | 3,913 | | | | 17,136 | | General and administrative | | | 2,932 | | | | 1,865 | | | | 1,476 | | | | 2,119 | | | | 8,392 | | Total expenses | | | 7,065 | | | | 6,228 | | | | 6,203 | | | | 6,032 | | | | 25,528 | | Operating loss | | | (7,065 | ) | | | (6,228 | ) | | | (6,203 | ) | | | (6,032 | ) | | | (25,528 | ) | Change in fair value of common stock warrant liability | | | 1,230 | | | | 5,519 | | | | (365 | ) | | | 38 | | | | 6,422 | | Other expense, net | | | (223 | ) | | | (84 | ) | | | (16 | ) | | | 254 | | | | (69 | ) | Net loss | | $ | (6,058 | ) | | $ | (793 | ) | | $ | (6,584 | ) | | $ | (5,740 | ) | | $ | (19,175 | ) | Net loss per common share - basic and diluted | | $ | ($0.66 | ) | | $ | (0.07 | ) | | $ | (0.51 | ) | | $ | (0.42 | ) | | $ | (1.65 | ) | Weighted average number of common shares outstanding | | | 9,180 | | | | 10,695 | | | | 12,945 | | | | 13,525 | | | | 11,602 | |
Note 17 – Subsequent Events
We evaluated all events or transactions that occurred after December 31, 2011 up through the date we issued these financial statements. During this period we did not have any material recognized subsequent events, however, there were four nonrecognized subsequent events described below:
2012 Quarters Ended: | | | | (in thousands, except per share data) | | Mar. 31 | | | June 30 | | | Sept. 30 | | | Dec. 31 | | | Total Year | | Grant Revenues | | $ | – | | | $ | – | | | $ | – | | | $ | 195 | | | $ | 195 | | Expenses: | | | | | | | | | | | | | | | | | | | | | Research and development | | | 4,533 | | | | 5,206 | | | | 5,743 | | | | 6,088 | | | | 21,570 | | General and administrative | | | 2,047 | | | | 3,610 | | | | 4,255 | | | | 6,532 | | | | 16,444 | | Total expenses | | | 6,580 | | | | 8,816 | | | | 9,998 | | | | 12,620 | | | | 38,014 | | Operating loss | | | (6,580 | ) | | | (8,816 | ) | | | (9,998 | ) | | | (12,425 | ) | | | (37,819 | ) | Change in fair value of common stock warrant liability | | | (3,434 | ) | | | 1,680 | | | | (3,309 | ) | | | 5,618 | | | | 555 | | Other expense, net | | | (2 | ) | | | (2 | ) | | | (39 | ) | | | (8 | ) | | | (51 | ) | Net loss | | $ | (10,016 | ) | | $ | (7,138 | ) | | $ | (13,346 | ) | | $ | (6,815 | ) | | $ | ( 37,315 | ) | Net loss per common share - basic and diluted | | $ | (0.37 | ) | | $ | (0.16 | ) | | $ | (0.31 | ) | | $ | (0.16 | ) | | $ | (0.95 | ) | Weighted average number of common shares outstanding | | | 27,162 | | | | 43,369 | | | | 43,444 | | | | 43,521 | | | | 39,396 | |
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
From January 1, 2012 through March 21, 2012, (i) holders of 15-month warrants we issued in February 2011 have exercised warrants to purchase 2,233,000 shares of our common stock at an exercise price of $2.94 per share, resulting in proceeds to us of $6.6 million; and (ii) holders of the five-year warrants we issued in February 2011 have exercised warrants to purchase 46,250 shares of our common stock at an exercise price of $3.20 per share, resulting in proceeds to us of $148,000.
On March 12, 2012, we completed an offering under out ATM Program of 350,374 shares of our common stock for an aggregate purchase price of approximately $1.56 million, resulting in net proceeds to us of approximately $1.52 million, after deducting commissions due to Lazard under the Sales Agency Agreement.
On March 21, 2012, we completed a registered public offering of 16,071,429 shares of our common stock, at a price of $2.80 per share resulting in gross proceeds of $45.0 million ($42.1 million net). In addition, we granted the underwriters a 30-day option to purchase up to an additional 2,410,714 shares of common stock at a public offering price of $2.80 per share, with respect to which we potentially could realize additional net proceeds to us of $6.3 million.
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