DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Consolidated Balance Sheets (Unaudited)
September 30, 1997
ASSETS
Current assets:
Cash and cash equivalents $ 536,000
Investments in United States government obligations 11,633,000
Investment in Ansan Pharmaceuticals, Inc. 1,300,000
Prepaid expenses 39,000
------------
Total current assets 13,508,000
Computer equipment, net of depreciation 93,000
Deferred merger costs 327,000
Other assets 30,000
------------
$ 13,958,000
============
LIABILITIES
Accrued expenses $ 448,000
------------
Minority interest in preferred stock of subsidiary 2,200,000
------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Series A convertible preferred stock, $.001 par value; 7,000,000 shares
authorized; 2,200,256 shares issued and outstanding (liquidation
preference $29,703,000) 2,000
Other preferred stock, $.001 par value; 3,000,000 shares authorized; none
issued and outstanding
Common stock, $.001 par value, 50,000,000 shares authorized, 6,747,256
shares issued and outstanding 7,000
Additional paid-in capital 18,999,000
Deficit accumulated during the development stage (7,698,000)
------------
Total stockholders' equity 11,310,000
------------
$ 13,958,000
============
See notes to financial statements F-1
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Consolidated Statements of Operations (Unaudited)
Nine Months Ended May 18, 1993
September 30, (Inception) to
--------------------------- September 30,
1996 1997 1997
----------- ----------- -----------
Interest income $ 594,000 $ 799,000
----------- -----------
Expenses:
Research and development $ 137,000 3,503,000 6,243,000
General and administrative 117,000 1,535,000 2,245,000
Interest 5,000 11,000
----------- ----------- -----------
Total expenses 259,000 5,038,000 8,499,000
----------- ----------- -----------
(259,000) (4,444,000) (7,700,000)
----------- ----------- -----------
Minority interest in net loss of subsidiary 2,000
-----------
Net loss $ (259,000) $(4,444,000) $(7,698,000)
=========== =========== ===========
Pro forma net loss per share $ (.26) $ (1.69)
=========== ===========
Pro forma weighted average common shares outstanding 1,009,443 2,629,772
=========== ===========
See notes to financial statements F-2
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
Deficit
Accumulated
Common Stock Preferred Stock Additional During the
------------------------ ----------------- Paid-in Development
Shares Amount Shares Amount Capital Stage Total
---------- ----------- --------- ------ ----------- ----------- -----------
Balance - December 31, 1996 6,712,256 $ 7,000 2,200,256 $2,000 $19,003,000 $(3,254,000) $15,758,000
Private placement expenses (11,000) (11,000)
Exercise of stock options 35,000 7,000 7,000
Net loss (4,444,000) (4,444,000)
---------- ----------- --------- ------ ----------- ----------- -----------
Balance - September 30, 1997 6,747,256 $ 7,000 2,200,256 $2,000 $18,999,000 $(7,698,000) $11,310,000
========== =========== ========= ====== =========== =========== ===========
See notes to financial statements F-3
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Consolidated Statements of Cash Flows (Unaudited)
May 18, 1993
Nine Months Ended (Inception) to
September 30, September 30,
--------------------------
1996 1997 1997
----------- ------------ ------------
Cash flows from operating activities:
Net loss $ (259,000) $ (4,444,000) $ (7,698,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Write-off of acquired research and development
supplies 2,200,000
Write-off of licenses 683,000 683,000
Depreciation and amortization 3,000 48,000 72,000
Changes in:
Prepaid expenses (20,000) (39,000)
Other assets (30,000) (30,000)
Accrued expenses 9,000 217,000 448,000
Expenses paid on behalf of company 18,000
Employee stock compensation 42,000 42,000
----------- ------------ ------------
Net cash used in operating activities (205,000) (3,546,000) (4,304,000)
----------- ------------ ------------
Cash flows from investing activities:
Investment in Ansan Pharmaceuticals, Inc. (1,300,000) (1,300,000)
Acquisition of computer equipment (6,000) (54,000) (137,000)
Acquisition of license (111,000) (711,000)
Purchase of investments in United States government
obligations (2,613,000) (15,677,000)
Redemption of investments in United States government
obligations 4,044,000 4,044,000
Deferred merger costs (327,000) (327,000)
----------- ------------ ------------
Net cash used in investing activities (117,000) (250,000) (14,108,000)
----------- ------------ ------------
Cash flows from financing activities:
Private placement of units, net of expenses 6,482,000 (11,000) 18,925,000
Payment on stock subscriptions and proceeds on
issuance of common stock 8,000 7,000 23,000
Short-term borrowings
----------- ------------ ------------
Net cash provided by (used in) financing activities 6,490,000 (4,000) 18,948,000
----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents 6,168,000 (3,800,000) 536,000
Cash and cash equivalents - beginning of period 3,000 4,336,000
----------- ------------ ------------
Cash and cash equivalents - end of period $ 6,171,000 $ 536,000 $ 536,000
=========== ============ ============
See notes to financial statements F-4
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
NOTE A - THE COMPANY AND BASIS OF PRESENTATION
Discovery Laboratories, Inc., a former Delaware Corporation ("Old Discovery"")
was incorporated in Delaware on May 18, 1993 as MicroBio, Inc. Until Old
Discovery's merger with and into the Registrant on November 25, 1997 (the
"Merger"), Old Discovery was a development stage company formed to license and
develop pharmaceutical products to treat a variety of human diseases. The
consolidated financial statements include the accounts of Old Discovery and its
majority owned subsidiary, Acute Therapeutics, Inc. ("ATI"). Intercompany
balances and transactions have been eliminated. No allocation of the
subsidiary's net loss for the nine-month periods ended September 30, 1997 and
1996 has been attributed to the minority interest since the accumulated losses
exceed the minorities' common equity interest during such periods .
In the opinion of management, the financial statements include all adjustments,
consisting of normal recurring accruals, necessary for a fair presentation of
Old Discovey's financial position at September 30, 1997 and results of
operations and cash flows for the nine-month periods ended September 30, 1997
and 1996. The financial statements for the nine-months ended September 30, 1997
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1997.
In November 1996 Old Discovery completed a private placement of its securities
and received aggregate net proceeds of approximately $19,000,000.
NOTE B - NET LOSS PER SHARE
Pro forma net loss per share is computed based on the weighted average number of
common shares outstanding for the periods adjusted to reflect the number of
shares of the Registrant's common stock issued to the common stockholders of Old
Discovery upon consummation of the Merger. Common stock equivalents are not
included in the calculation of net loss per share as the effect would be
antidilutive.
NOTE C - COMMITMENTS
ATI entered into a four-year employment agreement with its President, Chief
Executive Officer and Chairman of the Board of Directors providing for a base
salary of $225,000 per year plus an initial sign-on bonus of $50,000 to be paid
the first week of January 1997, plus certain incentive bonuses.
ATI also entered into a three-year employment agreement with an officer
providing for an annual salary of $200,000 and various two-year consulting
agreements providing for aggregate annual fees of $300,000 plus royalties on net
commercial sales of licensed products sold by ATI or its sublicensees and an
18-month consulting agreement providing for monthly fees of $7,500.
ATI leases its office and laboratory space pursuant to an operating lease
requiring aggregate annual payments of approximately $67,000 through November
2001.
Note D - Merger
Pursuant to a merger agreement executed with the Registrant on July 16, 1997
(the "Merger Agreement"), Old Discovery's stockholders received approximately
90% of the combined entity. The Merger will be accounted for as a reverse
acquisition with Old Discovery as the acquirer for financial reporting purposes.
The Merger closed on November 25, 1997. Also on July 16, 1997 Old Discovery
purchased 13,000 shares of Series A convertible preferred stock of the
Registrant for $1,300,000 which amount was used by the Registrant to repay
certain debt owed to its principal stockholder. The Series A convertible
preferred stock was cancelled in the Merger. The Registrant's assets at
September 30, 1997 consisted primarily of cash and short-term investments.
F-5
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Note E - Income Taxes
At September 30, 1997, Old Discovery had available for federal income tax
purposes net operating loss carryforwards of approximately $2,600,000 expiring
through 2011, that may be used to offset future taxable income.
The principal difference between the deficit accumulated during the development
stage for financial reporting purposes and the net operating loss carryforward
for tax purposes is primarily due to the write-off of the acquired research and
development supplies and to certain general and administrative costs which are
not currently deductible for tax purposes. Old Discovery provided a valuation
reserve against the full amount of the deferred tax asset of $3,030,000 arising
from net operating loss benefit of approximately $1,000,000 the research and
development write-off of approximately $1,130,000 and general and administrative
costs of approximately 900,000 since the likelihood of realization cannot be
determined. The valuation reserve increased by approximately $1,223,000 and
$7,000 for the years ended December 31, 1996 and December 31, 1995,
respectively, and approximately $1,800,000 for the nine months ended September
30, 1997. Pursuant to Section 382 of the Internal Revenue Code, the utilization
of this carryforward may be limited due to ownership changes which have occurred
or may occur.
F-6