SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ___________
Commission file number 000-26422
DISCOVERY LABORATORIES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 94-3171943
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
350 South Main Street, Suite 307
Doylestown, Pennsylvania 18901
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code: (215) 340-4699
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.001 per share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. |X| Yes |_| No
As of May 8, 2000, 20,781,499 shares of Common Stock, par value $.001 per share,
were outstanding.
Documents incorporated by reference: None.
Transitional Small Business Disclosure Format: |_| Yes |X| No
953293.1 Page 1
DISCOVERY LABORATORIES, INC.
Table of Contents
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
CONSOLIDATED BALANCE SHEETS --
As of March 31, 2000 (unaudited) and December 31, 1999 Page 3
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) --
For the Three Months Ended March 31, 2000 and March 31, 1999
and
for the Period from May 18, 1993 (Inception) through March 31,2000 Page 4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (unaudited)--
For the Three Months Ended March 31, 2000 Page 5
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)--
For the Three Months Ended March 31, 2000 and March 31, 1999
and
for the Period from May 18, 1993 (Inception) through March 31, 2000 Page 6
Notes to Financial Statements Page 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations Page 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. Page 10
Item 2. Change in Securities. Page 10
Item 3. Defaults Upon Senior Securities. Page 10
Item 4. Submission of Matters to a Vote of Security Holders. Page 10
Item 5. Other Information. Page 10
Item 6. Exhibits and Reports on Form 8-K. Page 10
Signatures Page 11
953293.1 Page 2
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Consolidated Balance Sheets
March 31, December 31,
2000 1999
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 23,591,000 $ 3,547,000
Inventory 575,000 575,000
Prepaid expenses and other current assets 122,000 66,000
----------------- ----------------
Total current assets 24,288,000 4,188,000
Property and equipment, net of deprecation 447,000 426,000
Security deposits 18,000 18,000
----------------- ----------------
$ 24,753,000 $ 4,632,000
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 694,000 $ 425,000
Deferred revenue 1,036,000 1,036,000
Capitalized lease - current 15,000 15,000
----------------- ----------------
Total current liabilities 1,745,000 1,476,000
----------------- ----------------
Capitalized lease - noncurrent 44,000 48,000
----------------- ----------------
Commitments
Stockholders' Equity:
Preferred stock, $.001 par value; 5,000,000 shares authorized:
Series B convertible; None and 1,530,756 shares issued and outstanding at 2,000
March 31, 2000 and December 31, 1999, respectively
Series C redeemable convertible; None and 2,039 shares issued and outstanding 2,481,000
at March 31, 2000 and December 31, 1999, respectively.
Common stock, $.001 par value; 35,000,000 authorized; 20,721,135 and 9,689,240 21,000 10,000
shares issued and outstanding at March 31, 2000 and December 31, 1999
respectively
Treasury stock (at cost; 33,743 and 2,000 shares of common stock at March 31, (250,000) (5,000)
2000 and December 31, 1999, respectively)
Additional paid-in capital 57,828,000 33,749,000
Unearned portion of compensatory stock options (37,000) (37,000)
Deficit accumulated during the development stage (34,598,000) (33,092,000)
Total stockholders' equity 22,964,000 3,108,000
----------------- ----------------
$ 24,753,000 $ 4,632,000
================= ================
See notes to financial statements Page 3
953293.1
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Consolidated Statements of Operations
(Unaudited)
May 18, 1993
Three Months Ended (Inception)
March 31, Through
--------------------------------- March 31,
2000 1999 2000
-------------- --------------- --------------
Interest $ 22,000 $ 37,000 $ 1,490,000
License Fees 68,000
Research Grants 19,000 156,000
-------------- --------------- ---------------
41,000 37,000 1,714,000
-------------- --------------- ---------------
Expenses:
Write-off of acquired in-process
research and development and
supplies 13,508,000
Research and development 774,000 1,419,000 13,643,000
General and administrative 735,000 636,000 8,490,000
Interest 2,000 15,000
-------------- --------------- ---------------
Total expenses 1,511,000 2,055,000 35,656,000
-------------- --------------- ---------------
(1,470,000) (2,018,000) (33,942,000)
Minority interest in net loss of 26,000
subsidiary -------------- --------------- ---------------
Net loss (1,470,000) (2,018,000) (33,916,000)
Other comprehensive income:
Unrealized gain on marketable
securities available for sale (3,000)
-------------- ---------------- ----------------
Total comprehensive loss $ (1,470,000) $ (2,021,000) $ (33,916,000)
=============== ================ ================
Net loss per share - basic and diluted $(0.12) $(0.36)
====== ======
Weighted average number of common
shares outstanding 12,668,000 5,613,000
========== =========
See notes to financial statements Page 4
953293.1
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Consolidated Statements of Changes in Stockholders' Equity
December 31, 1999 through March 31, 2000
Preferred Stock
Common Stock Treasury Stock Series B Series C
-------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
Balance - 12/31/99 9,689,240 $ 10,000 (2,000) $ (5,000) 1,530,756 $ 2,000 2,039 $ 2,481,000
Exercise of Stock Options 445,259 - (31,743) (245,300)
Common placement
warrant conversions 14,130 -
Preferred placement
warrant conversions 8,511 -
Exercise of Class C & D
Warrants 2,480,009 3,000
Series B preferred stock
conversions 4,765,631 5,000 (1,530,756) (2,000)
Dividend Payable on Series
C preferred stock 36,000
Series C prefered stock
conversions 398,186 (2,039) (2,517,000)
Common stock issued in
payment for services 7,323 -
Issuance of private
placement units 2,902,846 3,000
Net Loss
- ------------------------------------------------------------------------------------------------------------------------
Balance - 03/31/00 20,721,135 $ 21,000 (33,743) $(250,300) - - - -
========================================================================================================================
Deficit
Accumulated
Additional Unearned Portion of during
Paid-In Compensatory Stock Development
Capital Options Stage Total
Balance - 12/31/99 $ 33,749,000 $ (37,000) $ (33,092,000) $ 3,108,000
Exercise of Stock Options 440,000 $ 195,000
Common placement
warrant conversions - $ -
Preferred placement
warrant conversions - $ -
Exercise of Class C & D
Warrants 3,668,000 $ 3,671,000
Series B preferred stock
conversions (3,000) $ -
Dividend Payable on Series
C preferred stock (36,000) $ -
Series C prefered stock
conversions 2,517,000 $ -
Common stock issued in
payment for services 36,000 $ 36,000
Issuance of private
placement units 17,421,000 $ 17,424,000
Net Loss (1,470,000) $ (1,470,000)
- ----------------------------------------------------------------------------------------------------
Balance - 03/31/00 $ 57,828,000 $ (37,000) $ (34,598,000) $ 22,964,000
====================================================================================================
See notes to financial statements Page 5
953293.1
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended May 18, 1993
March 31, (Inception)
Through
March 31,
2000 999 2000
------------- --------------- -----------------
Cash flows from operating activities:
Net loss $ (1,470,000) $ (2,018,000) $ (33,916,000)
Adjustments to reconcile net loss to net cash used in operating
activities
Write-off of acquired in-process research and development and
supplies 13,508,000
Write-off of licenses 683,000
Depreciation and amortization 24,000 19,000 240,000
Compensatory stock options 8,000 142,000
Expenses paid using treasury stock and common stock 36,000 114,000
Changes in:
Prepaid expenses and other current assets (56,000) 126,000 (91,000)
Accounts payable and accrued expenses 269,000 279,000 561,000
Deferred revenue 1,036,000
Other assets (18,000)
Expenses paid on behalf of company 18,000
Employee stock compensation 42,000
Reduction of research and development supplies (161,000)
-------------- -------------- ----------------
Net cash used in operating activities (1,197,000) (1,586,000) (17,842,000)
-------------- -------------- ----------------
Cash flows from investing activities:
Purchase of furniture and equipment (45,000) (14,000) (591,000)
Proceeds from disposal of furniture and equipment 25,000
Acquisition of licenses (711,000)
Purchase of marketable securities (21,745,000)
Proceeds from sale or maturity of investments 1,078,000 22,150,000
Net cash payments on merger (1,670,000)
-------------- -------------- -----------------
Net cash provided by (used in) investing activities (45,000) 1,064,000 (2,542,000)
--------------- -------------- ----------------
Cash flows from financing activities:
Proceeds on private placements of units, net of expenses 17,424,000 40,146,000
Purchase of treasury stock (5,000) (95,000)
Principal payments under capital lease obligation (4,000) (14,000)
Collections on stock subscriptions and proceeds on conversion of
stock options and warrants 3,866,000 4,000 3,938,000
-------------- -------------- ----------------
Net cash (used in) provided by financing activities 21,286,000 (1,000) 43,975,000
-------------- --------------- ----------------
Net (decrease) increase in cash and cash equivalents 20,044,000 (523,000) 23,591,000
Cash and cash equivalents - beginning of period 3,547,000 1,474,000
-------------- -------------- ----------------
Cash and cash equivalents - end of period $ 23,591,000 $ 951,000 $ 23,591,000
============== ============== ================
Supplementary disclosure of cash flows information:
Interest Paid: $ 2,000 $ 15,000
Noncash transactions:
Accrued dividends on preferred stock $ 36,000 $ 51,000 $ 682,000
Common stock and treasury stock issued in payment of services 36,000 69,000 109,000
Preferred Stock issued for inventory 575,000
Treasury stock received on exercise of options 245,000 245,000
Equipment acquired through capitalized lease 73,000
Series C preferred stock dividends paid using common stock 204,000
See notes to finanical statements Page 6
593293.1
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION
The Company
Discovery Laboratories, Inc. (the "Company") was formed to license and develop
pharmaceutical products to treat a variety of human diseases. The accompanying
financial statements include the accounts of the Company and its wholly owned
subsidiary, Acute Therapeutics, Inc. All intercompany balances and transactions
have been eliminated.
The accompanying unaudited, consolidated, condensed financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information in accordance with the instructions to Form
10-QSB. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normally recurring accruals) considered for fair presentation have been
included. Operating results for the three-month period ended March 31, 2000 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2000. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's 1999 Annual
Report on form 10-KSB.
The Company's activities since incorporation have primarily consisted of
conducting research and development, performing business and financial planning
and raising capital. Accordingly, the Company is considered to be in the
development stage, and expects to incur increasing losses and require additional
financial resources to achieve commercialization of its products.
The Company also depends on third parties to conduct research on the Company's
behalf through various research agreements. All of the Company's current
products under development are subject to license agreements that will require
the payment of future royalties.
Net Loss Per Share
Net loss per share is computed based on the weighted average number of common
shares outstanding for the periods and common shares issuable for little or no
cash consideration. Common shares issuable upon the exercise of options and
warrants and the conversion of convertible securities are not included in the
calculation of the net loss per share as their effect would be antidilutive.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Plan of Operations
Since its inception, the Company has concentrated its efforts and resources on
the development and commercialization of pharmaceutical products and
technologies. The Company has been unprofitable since its inception and has
incurred a cumulative net loss of approximately $33.9 million as of March 31,
2000. The Company expects to incur significantly increasing operating losses
over the next several years, primarily due to the expansion of its research and
development programs, including clinical trials for some or all of its existing
products and technologies and other products and technologies that it may
acquire or develop. The Company's ability to achieve profitability depends upon,
among other things, its ability to discover and develop products, obtain
regulatory approval for its proposed products, and enter into agreements for
product development, manufacturing and commercialization. None of the Company's
products currently generates revenues and the Company does not expect to achieve
product revenues for the foreseeable future. Moreover, there can be no assurance
that the Company will ever achieve significant revenues or profitable operations
from the sale of any of its products or technologies.
The Company is a development stage pharmaceutical company that is focused on
developing compounds intended for neonatal use in critical care hospital
settings. The Company is also developing its lead product candidate,
Surfaxin(R), for the treatment of various critical care respiratory conditions.
The Company anticipates that during the next 12 months it will conduct
substantial research and development of its compounds.
The Company is currently engaged in the development and commercialization of
drugs for critical care that are intended to be used in a hospital setting. The
Company anticipates that during the next 12 months it will conduct substantial
research and development of its products under development and that it will
focus primarily on the conduct of clinical trials for Surfaxin(R) indications.
The Company expects to expand its research and development activities as a
result of its receipt of approximately $17.4 million of net proceeds from its
offering completed in
953293.1 Page 7
March 2000. The Company anticipates the near term acquisition of equipment
necessary to manufacture Surfaxin(R). The Company also anticipates the hiring of
further personnel to augment the clinical development of Surfaxin(R).
SURFAXIN(R) (lucinactant)
Meconium Aspiration Syndrome (MAS)
The Company recently initiated a pivotal Phase 3 trial in MAS. The trial intends
to enroll 200 MAS patients. The Company announced results of a Phase 2 clinical
trial in MAS in full-term newborns in February 1999. The 22-patient Phase 2
trial showed an improvement in oxygenation parameters and a three-day savings on
mechanical ventilation. An Orphan Products Development Grant awarded to the
Company by the FDA Office of Orphan Products Development is expected to
contribute significantly towards reducing the costs of this Phase 3 trial. The
Company has received Fast Track designation for Surfaxin(R) from the FDA for
MAS.
Respiratory Distress Syndrome (RDS) in premature infants
The Company is currently planning to commence a Phase 3 clinical trial of
Surfaxin(R) for the treatment of RDS in premature infants during 2000. Such
trial, and any other clinical trials of the Company's products in development
that have not yet commenced, will require the approvals by the United States
Food and Drug Administration (the "FDA") and/or world health authorities. There
can be no assurance as to the receipt or the timing of such approvals.
Acute Lung Injury/Acute Respiratory Distress Syndrome (ALI/ARDS)
A pivotal Phase 2/3 clinical trial of Surfaxin for the treatment of ALI/ARDS
was commenced in July 1998. This trial was stopped on January 27, 2000 due to
the Company's cash position and so that a new Phase 2 ARDS/ALI trial could be
commenced using a new, less viscous formulation of Surfaxin(R). A new Phase 2
trial is currently being planned, which the Company expects to commence
following submission of a protocol and subsequent agreement by the FDA. The
Company has received Fast Track designation for Surfaxin(R) from the FDA for
ARDS.
SUPERVENT(TM) (tyloxapol)
Cystic Fibrosis (CF)
The Company began a Phase 2A clinical trial of SuperVent(TM) for the treatment
of CF on August 4, 1999. Preliminary analysis of the data show that
SuperVent(TM) decreased the amount of Interleukin 8 (IL-8) in the sputum of
treated patients compared to controls. IL-8 is an important body chemical that
causes the migration of inflammatory cells to the site of release. The Phase 2A
clinical trial involved 8 patients. An additional Phase 2 trial will likely be
required prior to commencement of a Phase 3 trial. Previously, the Company
completed a Phase 1 trial in 20 normal healthy volunteers and determined a dose
(1.25% tyloxapol concentration) that did not produce significant adverse
effects.
Chronic Bronchitis (CB)
The Company plans to investigate the potential clinical application of
SuperVent(TM) in CB following its successful Phase 2A trial in CF. A pilot study
will be reviewed during 2000.
DSC-103 (Vitamin D analog)
Postmenopausal Osteoporosis
On December 5, 1997 a Phase 1 clinical study of DSC-103 as a once-daily, orally
administered drug for the treatment of postmenopausal osteoporosis in the United
States was initiated. Part B of such trial was commenced on April 2, 1998 and
was successfully completed on June 29, 1998. The Company has had discussions
with the licensor of D5C-103 regarding the possibility of terminating its
license.
Results of Operations
The Company's expenses decreased from $2,055,000 in the first quarter of 1999 to
$1,511,000 in the first quarter of 2000. The decrease was primarily a slow-down
in research and development due to the Company's cash position. As a result of
the receipt of proceeds from the private placement completed in March, 2000, the
Company expects to significantly increase its research and development and
clinical trial efforts. As a result of the decreases in expenses, the Company's
total comprehensive net loss decreased from $2,021,000 in the first quarter of
1999 to $1,470,000 in the first quarter of 2000. In addition, due to the
reduction in the total
593293.1 Page 8
comprehensive net loss and the increase in the weighted average common shares
outstanding during the first quarter of 2000, the Company's net loss per share
decreased from $0.36 in 1999 to $0.12 in 2000.
Liquidity
At March 31, 2000, the Company had working capital of $22.5 million. In March
2000, the Company completed a private placement pursuant to which it received
net proceeds of approximately $17.4 million. The Company believes it has
sufficient resources to meet its planned research and development activities
through the fourth quarter 2001.
The Company will be required to raise additional capital in order to meet its
business objectives, and there can be no assurance that it will be successful in
doing so or, in general, that the Company will be able to achieve its business
objectives.
The Company's working capital requirements will depend upon numerous factors,
including, without limitation, progress of the Company's research and
development programs, preclinical and clinical testing, timing and cost of
obtaining regulatory approvals, levels of resources that the Company devotes to
the development of manufacturing and marketing capabilities, technological
advances, status of competitors and the ability of the Company to establish
collaborative arrangements with other organizations.
Safe Harbor Statement Under the Private Securities Litigation Act of 1996
Certain statements set forth in this report, including, without limitation,
statements concerning the Company's research and development programs, the
possibility of submitting regulatory filings for the Company's products under
development, the seeking of collaboration arrangements with pharmaceutical
companies or others to develop, manufacture and market products, the research
and development of particular compounds and technologies and the period of time
for which the Company's existing resources will enable the Company to fund its
operations, are forward-looking statements. All such statements involve
significant risks and uncertainties. Actual results may differ materially from
those contemplated in the forward looking statements as a result of risks and
uncertainties, including but not limited to the following: the Company's ability
to obtain substantial additional funds; the uncertainties inherent in the
process of developing products of the kind being developed by the Company; the
Company's ability to establish additional collaborative and licensing
arrangements and the degree of success of the Company's collaboration partners;
the Company's ability to obtain and maintain all necessary patents or licenses;
the Company's ability to demonstrate the safety and efficacy of product
candidates and to receive required regulatory approvals; the Company's ability
to meet obligations and required milestones under its license agreement; the
Company's ability to compete successfully against other products and to market
products in a profitable manner; and other risks and uncertainties set forth in
the Company's filings with the Securities and Exchange Commission.
593293.1 Page 9
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGE IN SECURITIES.
On March 23, 2000, the Company received approximately $17,400,000 in net
proceeds from the sale of 37.74 units in a private placement. Each unit consists
of 76,923 shares of common stock and Class E warrants to purchase an additional
15,385 shares of common stock at $7.38 per share. In connection with this
private placement, the placement agent, Paramount Capital, Inc. ("Paramount")
received fees of $1,321,000 and the Company agreed to issue to Paramount
warrants to purchase 348,341 shares of common stock at $8.11 per share.
During the Quarter ended March 31, 2000, the company received $3,671,689 in
proceeds from the exercise of 2,024,792 Class D warrants and 455,217 Class C
warrants.
For each of the issuances described above, the securities received by investors
were deemed to be exempt from registration under the Act in reliance on Section
4(2) thereof because such issuance did not involve a public offering. Investors
in each financing represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the securities
certificates issued in such transactions. The investors in each financing had
adequate access to information about the Company. Moreover, such investors
represented to the Company, and the Company believed, that they were experienced
in financial matters.
On March 3, 2000, Johnson & Johnson, Inc. elected to convert their shares of
Series C Preferred stock into 398,186 shares of common stock. Subsequent to this
conversion, the Company no longer has any shares of Series C Preferred stock
outstanding.
On March 14, 2000, the Company forced the conversion of all its outstanding
Series B Preferred Stock (827,750) into common. Pursuant to Section Fourth (B)
(5) of the Restated Certificate of Incorporation of the Company, the Company
exercised its right to cause the conversion. Subsequent to this conversion, the
Company no longer has any classes of Preferred stock outstanding nor any long
term debt.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
The Company has entered into an agreement to purchase an approximately 4,000
square foot building adjacent to its current headquarters in Doylestown
Pennsylvania for $515,000. The Company intendS to close on this purchase on June
30, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
1. Form of Class E Warrant
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
1. Form 8-K filed with the Commission on February 8, 2000.
2. Form 8-K filed with the Commission on March 7, 2000.
3. Form 8-K filed with the Commission on March 20, 2000.
4. Form 8-K filed with the Commission on March 29, 2000.
593293.1 Page 10
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Discovery Laboratories, Inc.
(Registrant)
Date: May 15, 2000 /s/ Robert J. Capetola
---------------------------------
Robert J. Capetola, Ph.D.
President/Chief Executive Officer
Date: May 15, 2000 /s/ Evan Myrianthopoulos
---------------------------------
Evan Myrianthopoulos
Vice President, Finance
(Principal Financial Officer)
Date: May 15, 2000 /s/ Cynthia Davis
---------------------------------
Cynthia Davis
Controller
(Principal Accounting Officer)
953293.1 Page 11