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 June 30, 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 (I.R.S. Employer or organization) 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 August 10, 2000, 20,840,353 shares of Common Stock, par value $.001 per share, were outstanding. Documents incorporated by reference: None. Transitional Small Business Disclosure Format: |_| Yes |X| No Page 1 DISCOVERY LABORATORIES, INC. Table of Contents Page PART I - FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) CONSOLIDATED BALANCE SHEETS -- As of June 30, 2000 (unaudited) and December 31, 1999..................Page 3 CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) -- For the Three and Six Months Ended June 30, 2000 and June 30, 1999 and for the Period from May 18, 1993 (Inception) through June 30, 2000..................................................Page 4 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (unaudited)-- For the Six Months Ended June 30, 2000...................Page 5 CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)-- For the Six Months Ended June 30, 2000 and June 30, 1999 and for the Period from May 18, 1993 (Inception) through June 30, 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 12 Page 2 DISCOVERY LABORATORIES, INC. AND SUBSIDIARY (a development stage company) Consolidated Balance Sheets June 30, December 31, 2000 1999 ------------ ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 11,813,000 $ 3,547,000 Marketable securities $ 10,038,000 Inventory 575,000 575,000 Prepaid expenses and other current assets 233,000 66,000 ------------ ------------ Total current assets 22,659,000 4,188,000 Property and equipment, net of deprecation 527,000 426,000 Security deposits 69,000 18,000 ------------ ------------ $ 23,255,000 $ 4,632,000 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 678,000 $ 425,000 Deferred revenue 1,036,000 1,036,000 Capitalized lease - current 15,000 15,000 ------------ ------------ Total current liabilities 1,729,000 1,476,000 ------------ ------------ Capitalized lease - noncurrent 40,000 48,000 ------------ ------------ Stockholders' Equity: Preferred stock, $.001 par value; 5,000,000 shares authorized: Series B convertible; None and 1,530,756 shares issued and 0 2,000 outstanding at June 30, 2000 and December 31, 1999, respectively Series C redeemable convertible; None and 2,039 shares issued and 0 2,481,000 outstanding at June 30, 2000 and December 31, 1999, respectively Common stock, $.001 par value; 35,000,000 authorized; 20,829,652 and 21,000 10,000 9,689,240 shares issued and outstanding at June 30, 2000 and December 31, 1999 respectively Treasury stock (at cost; 33,743 and 2,000 shares of common stock at (250,000) (5,000) June 30, 2000 and December 31, 1999, respectively) Additional paid-in capital 59,536,000 33,749,000 Unearned portion of compensatory stock options (148,000) (37,000) Accumulated other comprehensive loss (44,000) Deficit accumulated during the development stage (37,629,000) (33,092,000) Total stockholders' equity 21,486,000 3,108,000 ------------ ------------ $ 23,255,000 $ 4,632,000 ------------ ------------ See notes to financial statements Page 3 DISCOVERY LABORATORIES, INC. AND SUBSIDIARY (a development stage company) Consolidated Statements of Operations (Unaudited) May 18, 1993 Three Months Ended Six Months Ended (Inception) June 30, June 30, Through --------------------------- ---------------------------- June 30, 2000 1999 2000 1999 2000 ------------ ----------- ------------ ------------ ------------ Interest $ 296,000 $ 30,000 $ 318,000 $ 67,000 $ 1,786,000 License Fees 68,000 Research Grants 19,000 156,000 ------------ ----------- ------------ ------------ ------------ 296,000 30,000 337,000 67,000 2,010,000 ------------ ----------- ------------ ------------ ------------ Expenses: Write-off of acquired in-process research and development and supplies 13,508,000 Research and development 1,259,000 472,000 2,033,000 1,891,000 14,902,000 General and administrative 620,000 686,000 1,355,000 1,322,000 8,968,000 Compensatory Stock Options 634,000 1,447,000 1,589,000 Interest 1,000 3,000 16,000 ------------ ----------- ------------ ------------ ------------ Total expenses 2,514,000 1,158,000 4,838,000 3,213,000 38,983,000 ------------ ----------- ------------ ------------ ------------ (2,218,000) (1,128,000) (4,501,000) (3,146,000) (36,973,000) Minority interest in net loss of 26,000 subsidiary ------------ ----------- ------------ ------------ ------------ Net loss (2,218,000) (1,128,000) (4,501,000) (3,146,000) (36,947,000) Other comprehensive income: Unrealized loss on marketable securities available for sale (44,000) (2,000) (44,000) (5,000) (44,000) ------------ ----------- ------------ ------------ ------------ Total comprehensive loss $ (2,262,000) $(1,130,000) $ (4,545,000) $ (3,151,000) $(36,991,000) ============ =========== ============ ============ ============ Net loss per share - basic and diluted $ (0.11) $ (0.18) $ (0.27) $ (0.51) ============ =========== ============ ============ Weighted average number of common shares outstanding 20,800,000 6,597,000 16,734,000 6,121,000 ============ =========== ============ ============ See notes to financial statements Page 4 DISCOVERY LABORATORIES, INC. AND SUBSIDIARY (a development stage company) Consolidated Statements of Changes in Stockholders' Equity January 1, 2000 through June 30, 2000 Preferred Stock ------------------------------------------- Common Stock Treasury Stock Series B Series C ------------------------------------------------------------------------------------------------------ Shares Amount Shares Amount Shares Amount Shares Amount Balance -- January 1, 2000 9,689,240 $ 10,000 (2,000) $ (5,000) 1,530,756 $2,000 2,039 $ 2,481,000 Exercise of Stock Options 492,059 (31,743) (245,000) Common placement warrant conversions 18,232 Preferred placement warrant conversions 18,511 Exercise of Class C & D Warrants 2,536,911 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) Compensation charge on vesting/exercisability of stock option Compensatory stock options granted Common stock issued in payment for services 8,036 Issuance of private placement units 2,902,846 3,000 Unrealized loss on marketable securities available for sale Net Loss ================================================================================================================================== Balance June 30, 2000 20,829,652 $ 21,000 (33,743) $(250,000) -- -- -- -- ================================================================================================================================== Deficit Accumulated Additional Unearned Portion of during Accumulated Other Paid In Compensatory Stock Development Comprehensive Capital Options Stage Income Total Balance -- January 1, 2000 $33,749,000 $ (37,000) $ (33,092,000) $ -- $ 3,108,000 Exercise of Stock Options 445,000 200,000 Common placement warrant conversions -- Preferred placement warrant conversions -- Exercise of Class C & D Warrants 3,790,000 3,793,000 Series B preferred stock conversions (3,000) -- Dividend Payable on Series C preferred stock (36,000) -- Series C prefered stock conversions 2,517,000 -- Compensation charge on vesting/exercisability of stock option 1,215,000 1,215,000 Compensatory stock options granted 343,000 232,000 Common stock issued in payment 40,000 for services 40,000 (111,000) Issuance of private placement units 17,440,000 17,443,000 Unrealized loss on marketable securities available for sale (44,000) (44,000) Net Loss (4,501,000) (4,501,000) ================================================================================================================================== Balance -- June 30, 2000 $59,536,000 $ (148,000) $ (37,629,000) $ (44,000) $ 21,486,000 ================================================================================================================================== See notes to financial statements Page 5 DISCOVERY LABORATORIES, INC. AND SUBSIDIARY (a development stage company) Consolidated Statements of Cash Flows (Unaudited) May 18, 1993 (Inception) Six Months Ended Through June 30, June 30, 2000 1999 2000 ------------ ------------ ------------ Cash flows from operating activities: Net loss $ (4,501,000) $ (3,146,000) $(36,947,000) 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 53,000 39,000 269,000 Compensatory stock options 1,447,000 124,000 1,589,000 Expenses paid using treasury stock and common stock 40,000 118,000 Changes in: Prepaid expenses and other current assets (167,000) 135,000 (202,000) Accounts payable and accrued expenses 253,000 69,000 545,000 Deferred revenue 1,036,000 Other assets (51,000) (69,000) 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 (2,926,000) (2,780,000) (19,571,000) ------------ ------------ ------------ Cash flows from investing activities: Purchase of furniture and equipment (156,000) (33,000) (702,000) Proceeds from disposal of furniture and equipment 25,000 Acquisition of licenses (711,000) Purchase of marketable securities (10,082,000) (31,827,000) Proceeds from sale or maturity of investments 1,063,000 22,150,000 Net cash payments on merger (1,670,000) ------------ ------------ ------------ Net cash provided by (used in) investing activities (10,238,000) 1,030,000 (12,735,000) ------------ ------------ ------------ Cash flows from financing activities: Proceeds on private placements of units, net of expenses 17,444,000 40,166,000 Purchase of treasury stock (5,000) (95,000) Principal payments under capital lease obligation (8,000) (18,000) Collections on stock subscriptions and proceeds on conversion of stock options and warrants 3,994,000 1,009,000 4,066,000 ------------ ------------ ------------ Net cash (used in) provided by financing activities 21,430,000 1,004,000 44,119,000 ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents 8,266,000 (745,000) 11,813,000 Cash and cash equivalents - beginning of period 3,547,000 1,474,000 ------------ ------------ ------------ Cash and cash equivalents - end of period $ 11,813,000 $ 729,000 $ 11,813,000 ============ ============ ============ Supplementary disclosure of cash flows information: Interest Paid: $ 3,000 $ $ 16,000 Noncash transactions: Accrued dividends on preferred stock $ 36,000 $ 102,000 $ 682,000 Common stock and treasury stock issued in payment of services 40,000 69,000 113,000 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 financial statements Page 6 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. ("ATI"). ATI is presently inactive, and 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 six-month period ended June 30, 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 $36.9 million as of June 30, 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 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 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 continue 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 March 2000. The Company Page 7 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) in full-term infants 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 United States Food and Drug Administration (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 fourth quarter of 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 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(R) 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 shows 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 2 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 is discussing with the licensor of DSC-103 the possibility of terminating its license. Results of Operations The Company's expenses increased from $3,213,000 in the six months ended June 30, 1999, to $4,501,000 in the six months ended June 30, 2000. The increase was primarily due to a compensation charge of $1,447,000 recorded as a result of the grant of options and the vesting of certain milestone-based employee stock options and an increase in the Company's research and development activities. The Company's total comprehensive net loss increased from $3,151,000 in the six months ended June 30, 1999, to $4,838,000 in the six months ended June 30, 2000. In addition, due to the increase in the weighted average common shares outstanding during the first half of 2000, the Company's net loss per share decreased from $0.51 in 1999 to $0.27 in 2000. Page 8 Liquidity At June 30, 2000, the Company had working capital of $20.9 million. In March 2000, the Company completed a private placement from 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 first quarter of 2002. 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. Page 9 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGE IN SECURITIES. In April 2000, the Company issued 713 shares of Common Stock, $.001 par value per share, of the Company in payment of rent. For the issuance 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 such 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. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. At an annual meeting of the stockholders of the Company, held on June 16, 2000, the following matters were voted on by the stockholders: (i) the election of six directors and (ii) approval of an amendment to the 1998 Stock Incentive Plan (the "Plan") to increase the number of shares of Common Stock available for issuance under the Plan and to modify the terms of the automatic grants to non-employee Board members. (i) Election of Directors For Withheld ---------- ------------ Robert J. Capetola, Ph.D. 11,402,869 22,798 Max Link, Ph.D. 11,380,146 45,521 Herbert H. McDade, Jr. 11,371,946 53,721 Richard G. Power 11,366,727 58,940 Mark C. Rogers, M.D. 11,415,369 10,298 Marvin E. Rosenthale, Ph.D. 11,414,969 10,698 (ii) Amendment to 1998 Stock Incentive Plan For Against Abstain - --- ------- ------- 11,022,609 227,022 176,036 Page 10 ITEM 5. OTHER INFORMATION. Form 10-QSB for the quarterly period ended March 31, 2000 was amended August, 2000, to report a restatement of first quarter 2000 financial results. The restatement reports a compensation charge of $812,500 during the first quarter due to the vesting of certain milestone-based options granted to employees. See Form 10-QSB/A for more information. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: 10.1 Amended and Restated 1998 Stock Incentive Plan. 27.1 Financial Data Schedule. Page 11 (b) Reports on Form 8-K: 1. None. Page 12 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: August 15, 2000 /s/ Robert J. Capetola, Ph.D. ------------------------------ Robert J. Capetola, Ph.D. President/Chief Executive Officer Date: August 15, 2000 /s/ Evan Myrianthopoulos ------------------------------ Evan Myrianthopoulos Vice President, Finance (Principal Financial Officer) Date: August 15, 2000 /s/ Cynthia Davis ------------------------------ Cynthia Davis Controller (Principal Accounting Officer) Page 13