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 September 30, 1998
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 (I.R.S. Employer
incorporation 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 November 13, 1998, 4,407,658 shares of the Registrant's common stock, par
value $.001 per share, were outstanding.
Documents incorporated by reference: None.
Transitional Small Business Disclosure Format: |_| Yes |X| No
Page 1
<PAGE>
DISCOVERY LABORATORIES, INC.
Table of Contents
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
CONSOLIDATED BALANCE SHEETS -- As of
September 30, 1998 and December 31, 1997 ................ Page 3
CONSOLIDATED STATEMENTS OF OPERATIONS -- For
the Three and Nine Months Ended September 30,
1998 and September 30, 1997; and for the
Period from May 18, 1993 (Inception) through
September 30, 1998 ...................................... Page 4
CONSOLIDATED STATEMENTS OF CASH FLOWS -- For the
Three and Nine Months Ended September 30,
1998 and September 30, 1997 and for the
Period from May 18, 1993 (Inception) through
September 30, 1998 ...................................... Page 5
Notes to Financial Statements ............................. Page 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........... Page 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. ........................................ Page 11
Item 2. Change in Securities. ..................................... Page 11
Item 3. Defaults Upon Senior Securities. .......................... Page 11
Item 4. Submission of Matters to a Vote of Security
Holders. .................................................. Page 11
Item 5. Other Information. ....................................... Page 11
Item 6. Exhibits and Reports on Form 8-K. ........................ Page 11
Signatures ........................................................ Page 12
Page 2
<PAGE>
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,701,000 $ 6,297,000
Investments 2,926,000 4,957,000
Prepaid expenses 200,000 190,000
------------ ------------
Total current assets 5,827,000 11,444,000
Furniture and equipment, net of deprecation 168,000 181,000
Security deposits 33,000 30,000
------------ ------------
$ 6,028,000 $ 11,655,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 939,000 $ 565,000
------------ ------------
Dividends payable on preferred stock 238,000
------------ ------------
Minority interest in preferred stock of subsidiary 2,039,000
------------ ------------
Stockholders' Equity:
Preferred Stock, $.001 par value; 5,000,000
shares authorized:
Series C Redeemable; 2,226,000 $
2,039 shares issued and outstanding
(liquidation preference $2,226,000)
Series B Convertible;
2,143,005 shares issued and outstanding
(liquidation preference $28,930,568) 2,000
Common stock, $.001 par value; 20,000,000 shares
authorized;
4,399,065 shares issued and outstanding 5,000 3,000
Treasury Stock (16,150 shares at cost) (51,000) --
Additional paid-in capital 29,696,000 21,464,000
Deficit accumulated during the development stage (26,789,000) (12,656,000)
------------ ------------
Total stockholders' equity 5,089,000 8,813,000
------------ ------------
$ 6,028,000 $ 11,655,000
============ ============
</TABLE>
See notes to financial statements Page 3
<PAGE>
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
May 18, 1993
(Inception)
Nine Months Ended Three Months Ended Through
September 30, September 30, September 30,
1998 1997 1998 1997 1998
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest income $ 353,000 $ 594,000 $ 127,000 $ 288,000 $ 1,271,000
------------ ------------ ------------ ------------ ------------
Expenses:
Write-off of acquired
in-process research
and development
and supplies 8,230,000 14,093,000
Research and
development 4,203,000 3,503,000 846,000 1,246,000 9,121,000
General and
administrative 1,925,000 1,535,000 503,000 190,000 4,471,000
Interest 11,000
------------ ------------ ------------ ------------ ------------
Total expenses 14,358,000 5,038,000 1,349,000 1,436,000 27,696,000
------------ ------------ ------------ ------------ ------------
$(14,005,000) (4,444,000) (1,222,000) (1,148,000) (26,425,000)
Minority interest in net
loss of subsidiary 24,000 26,000
------------ ------------ ------------ ------------ ------------
Net loss $(13,981,000) $ (4,444,000) $ (1,222,000) $ (1,148,000) $(26,399,000)
Net loss per share -
basic and diluted $ (3.85) $ (1.69) $ (0.28) $ (0.43)
Weighted average number
of common shares
outstanding 3,635,000 2,630,000 4,356,000 2,625,000
</TABLE>
See notes to financial statements Page 4
<PAGE>
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
May 18, 1993
Nine Months Ended (Inception)
September 30, Through
------------------------------- September 30,
1998 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(13,981,000) $ (4,444,000) $(26,399,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Write-off of acquired in-process
research and Development and supplies 8,230,000 14,093,000
Write-off of licenses 683,000 683,000
Depreciation and amortization 27,000 48,000 91,000
Changes in:
Prepaid expenses (10,000) (20,000) (169,000)
Accounts payable and accrued expenses 374,000 (30,000) 733,000
Other assets (3,000) 217,000 (33,000)
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 (5,363,000) (3,546,000) (11,102,000)
------------ ------------ ------------
Cash flows from investing activities:
Investment in Ansan Pharmaceuticals, Inc. (1,300,000)
Acquisition of furniture and equipment (39,000) (54,000) (236,000)
Proceeds from disposal of furniture and
equipment 25,000 25,000
Acquisition of licenses (711,000)
Purchase of investments (732,000) (2,613,000) (21,335,000)
Proceeds from sale or maturity of
investments 2,763,000 4,044,000 18,814,000
Net cash payments on merger (226,000) (327,000) (1,680,000)
------------ ------------ ------------
Net cash provided by (used in) investing
activities 1,791,000 (250,000) (5,123,000)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds on private placements of units,
net of Expenses (11,000) 18,925,000
Purchase of treasury stock (51,000) (51,000)
Collections on stock subscriptions and
proceeds on exercise of stock options 27,000 7,000 52,000
------------ ------------ ------------
Net cash (used in) provided by financing
activities (24,000) (4,000) 18,926,000
------------
Net (decrease) increase in cash and cash
equivalents (3,596,000) 3,800,000 2,701,000
Cash and cash equivalents - beginning of
period 6,297,000 4,336,000
------------ ------------
Cash and cash equivalents - end of period $ 2,701,000 $ 536,000 $ 2,701,000
Noncash transactions:
Accrued dividends on redeemable Series C
preferred stock
</TABLE>
See notes to financial statements Page 5
<PAGE>
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION
The Company
Discovery Laboratories, Inc. (the "Company"), formerly known as Ansan
Pharmaceuticals, Inc. ("Ansan"), was incorporated in Delaware on November 6,
1992 and following formation was a wholly owned subsidiary of Titan
Pharmaceuticals, Inc. ("Titan"). The Company was formed to license and develop
pharmaceutical products to treat a variety of human diseases. In August 1995,
Ansan issued its securities in an initial public offering and ceased to be a
wholly-owned subsidiary of Titan. In November 1997, Ansan merged (the "1997
Merger") with Discovery Laboratories, Inc., a former Delaware corporation ("Old
Discovery"), and was the surviving corporate entity. Subsequent to the 1997
Merger, Ansan changed its name to Discovery Laboratories, Inc. Pursuant to the
1997 Merger, each outstanding share of Old Discovery's common stock was
converted into 1.167471 shares of the Company's common stock and each share of
Old Discovery's Series A Convertible Preferred Stock was converted into one
share of the Company's Series B Convertible Preferred Stock (the "Exchange
Ratios"). The Company also assumed all outstanding options and warrants to
purchase Old Discovery's common stock and Series A Convertible Preferred Stock,
which options and warrants became exercisable for the Company's common stock and
Series B Convertible Preferred Stock, respectively, based on the Exchange
Ratios. In connection with the 1997 Merger, the Company and Titan entered into
arrangements providing for the relinquishment by the Company of rights to
certain drug compounds and the transfer of such rights to Titan in exchange for
(i) a 2% net royalty payable by Titan to the Company from net sales of such drug
compounds and (ii) the cancellation of all common stock of the Company owned by
Titan. On consummation of the 1997 Merger, 13,000 shares of preferred stock of
the Company held by Old Discovery were cancelled.
The 1997 Merger was accounted for as a reverse acquisition with Old Discovery as
the acquirer for financial reporting purposes since Old Discovery's stockholders
owned approximately 92% of the merged entity on a fully diluted basis. The
consolidated financial statements include the historical accounts of Old
Discovery and Acute Therapeutics, Inc. ("ATI") (which was a majority-owned
subsidiary of the Company until June 16, 1998, when the Company acquired the
then outstanding minority interest in ATI) and the accounts of the Company from
November 25, 1997 (the date of acquisition). The assets and liabilities acquired
pursuant to the 1997 Merger are recorded at their fair values on the date of the
1997 Merger. The difference between the fair value of the net assets acquired
and the value of the common stock issued plus 1997 Merger-related costs has been
attributed to in-process research and development and has been recorded as an
expense upon acquisition.
On June 16, 1998, the shareholders of the Company, at the Company's 1997 Annual
Meeting of Stockholders, approved the merger of a wholly-owned subsidiary of the
Company with ATI (the "1998 Merger). Pursuant to the 1998 Merger, each
outstanding share of ATI's common stock was exchanged for 3.90 shares of the
Company's common stock (the "1998 Exchange Ratio") and each share of ATI's
Series B preferred stock was converted into one share of the Company's Series C
preferred stock. All outstanding options for the purchase of ATI Common Stock
were assumed by the Company and are presently exercisable for shares of the
Company's common stock on the basis of the 1998 Exchange Ratio. Pursuant to
employment agreements entered into with the Company in connection with the 1998
Merger, the ATI management team was granted, in the aggregate, options to
purchase (i) 338,500 shares of the Company's common stock, subject to vesting,
(ii) 175,000 shares of the Company common stock at such time as the market
capitalization of the Company exceeds $75 million and (iii) 160,000 shares of
the Company's common stock upon consummation of a corporate partnering deal
having a total value of at least $20 million. In addition, pursuant to a
management agreement entered into between the Company and ATI at the time the
merger agreement relating to the 1998 Merger was executed, the former members of
the ATI management team were granted options to purchase 126,500 shares of the
Company's common stock.
The historical consolidated financial position of the Company includes the
accounts of ATI. The value of the common stock of the Company issued to ATI's
common stockholders plus the assumption of the outstanding ATI options and
merger related costs has been attributed to in-process research and development
and has been recorded as an expense upon acquisition.
Page 6
<PAGE>
The cost of the 1998 Merger is as follows:
Common stock issued to ATI
stockholders (1,033,500 shares
at fair value) $ 5,038,000
Fair value of common stock
issuable on exercise of options
to purchase ATI common stock
(net of exercise proceeds) 2,966,000
Transaction costs $ 226,000
----------
$ 8,230,000
==========
The following pro forma statement of operations gives effect to the 1998 Merger
as if it had occurred at the beginning of the respective periods. A
non-recurring charge of $8,230,000 for in-process research and development has
not been considered in the pro forma results:
Nine Months Ended September 30,
1998 1997
---- ----
Net loss $ (5,775,000) $ (4,444,000)
Net loss per common
share-basic and diluted $ (1.35) $ (1.21)
Weighed average number
of common shares outstanding 4,267,000 3,657,000
------------- -------------
The pro forma results are not indicative of the results that would have actually
been achieved had the merger taken place as of January 1, 1998 or January 1,
1997 or of the results which may occur in the future.
Basis of Presentation
The accompanying financial statements include the accounts of the Company and
ATI. 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 nine-month period ended September 30, 1998
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's 1997 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.
Page 7
<PAGE>
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
When used in this report, the words "estimate", "project", "intend", "forecast",
"anticipate" and similar expressions are intended to identify forward-looking
statements. In addition, certain other 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 joint development or
licensing arrangements with pharmaceutical companies or others, the research and
development of particular compounds and technologies for particular indications
and the period of time for which the Company's existing resources will enable
the Company to fund its operations and the possibility of contracting with other
parties additional licenses to develop, manufacture and market commercially
viable products, are forward-looking and based upon the Company's current belief
as to the outcome, occurrence and timing of future events or current
expectations and plans. All such statements involve significant risks and
uncertainties. Many important factors affect the Company's ability to achieve
the stated outcomes and to successfully develop and commercialize its product
candidates, including, among other things, the ability to obtain substantial
additional funds, obtain and maintain all necessary patents or licenses, to
demonstrate the safety and efficacy of product candidates at each state of
development, to meet applicable regulatory standards and receive required
regulatory approvals, to meet obligations and required milestones under its
license agreements, to be capable of producing drug candidates in commercial
quantities at reasonable costs, to compete successfully against other products
and to market products in a profitable manner. Although the Company believes
that its assumptions underlying the forward-looking statements are reasonable,
any of the assumptions could prove inaccurate and, therefore, there also can be
no assurance that these statements included in the report will prove to be
accurate. In light of the significant uncertainties inherent in these statements
included herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved; in fact, actual results could differ materially
from those contemplated by such forward-looking statements. The Company does not
undertake any obligation to publicly release any revisions to these
forward-looking statements or to reflect the occurrence of unanticipated events.
The following discussion principally reflects the historical results of Old
Discovery as the 1997 Merger was accounted for as a reverse acquisition with Old
Discovery as the acquirer for financial reporting purposes.
Plan of Operations
Since its inception, the Company has concentrated its efforts and resources in
the development and commercialization of pharmaceutical products and
technologies. The Company has been unprofitable since its founding and has
incurred a cumulative net loss of approximately $26,399,000 as of September 30,
1998. 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
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 currently engaged in the development and commercialization of
investigational drugs for critical care that have previously been tested in
humans or animals. The Company anticipates that during the next 12 months it
will conduct substantial research and development of its products under
development. A pivotal Phase
Page 8
<PAGE>
2/3 clinical trial of Surfaxin(TM) for the treatment of acute respiratory
distress syndrome/acute lung injury ("ARDS/ALI") was commenced on July 14, 1998.
Of the 48 clinical sites identified by the Company for participation in the
ARDS/ALI trial, 30 facilities have completed all internal review board and other
approvals. The Company anticipates that the remaining facilities will have
completed such approvals, and that all participating facilities will have been
supplied with drug product by mid-December 1998. To date, ten patients have been
enrolled in the ARDS/ALI trial.
A Phase 2A clinical trial of Surfaxin(TM) for the treatment of meconium
aspiration syndrome ("MAS") was commenced on May 27, 1997. The MAS trial was
terminated in October 1998 upon the expiration of the life of the Surfaxin(TM)
drug product used in the trial. The Company intends to analyze the results on
the Phase 2A MAS trial and believes that such will yield sufficient data to
support a Phase 2B clinical trial of Surfaxin(TM) for the treatment of MAS.
A Phase 1/2 clinical trial of SuperVent(TM) for the treatment of cystic fibrosis
("CF") was commenced on March 17, 1997. Part A of such clinical trial was
completed on March 31, 1998. The Company is in the process of revising the
design of its clinical investigation of SuperVent(TM) for the treatment of CF
and anticipates that a Phase 2 clinical trial will be commenced during the first
quarter of 1999.
On December 5, 1997 a Phase 1 clinical study of DSC103 (formerly known as
ST-630) 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. It is the Company's present intention to seek to develop DSC103 through a
corporate partnering arrangement rather than directly.
In May 1996, the Company entered into a license agreement with Boehringer
Ingelheim GmbH pursuant to which the Company previously pursued a development
program for an injectable formulation of Apafant for the treatment of acute
pancreatitis. During the third quarter of 1998, the Company determined to
discontinue all development and sublicensing efforts with respect to Apafant.
The Company is currently planning a Phase 3 clinical trial of Surfaxin(TM) for
the treatment of infant (idiopathic) respiratory distress syndrome during 1999.
Such trial, and any other clinical trials of the Company's products in
development that have not yet commenced, will require the receipt of approvals
by the United States Food and Drug Administration (the "FDA"). There can be no
assurance as to the receipt or the timing of such approvals.
In addition to its clinical research activities, the Company dedicates
substantial efforts to the development of manufacturing processes for its
Surfaxin(TM) product. During 1998, Dr. Harry Brittain, the Company's Vice
President, Pharmaceutical and Chemical Development, developed a method for
reducing the viscosity of the original product formulation which renders the
product more efficacious and easier to deliver. The Company has the capability
to manufacture Surfaxin(TM) in large quantities for the adult market.
During October 1998, the FDA granted the Company fast track approval status for
the ARDS/ALI and MAS indications. Fast track status facilitates the development
and expedites the review of new drugs intended for treatment of life-threatening
conditions for which there is presently no medical option. The FDA Office of
Orphan Products Development (the "OOPD") has designated Surfaxin(TM) as an
orphan drug for the treatment of MAS and ARDS/ALI. During October 1998, the OOPD
awarded Discovery a renewable Orphan Products Development Grant, ranging from
$194,390 for the first year to $583,170 over three years, to finance the
Company's MAS trial.
Liquidity
The Company anticipates that its current resources will permit it to meet its
business objectives until approximately the second quarter of 1999. 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.
Page 9
<PAGE>
As such there can be no assurance that the Company will not be required to raise
additional capital prior to the second quarter of 1999 (or that it would be
successful in doing so) or, in general, that the Company will be able to achieve
its business objectives.
Year 2000 Compliance
With the new millenium approaching, many institutions around the world are
reviewing and modifying their computer systems to ensure that they are Year 2000
compliant. The issue, in general terms, is that many existing computer systems
and microprocessors with data functions use only two digits to identify a year
in the date field with the assumption that the first two digits are always "19".
Consequently, on January 1, 2000, computers that are not Year 2000 compliant may
read the year as 1900. Systems that calculate, compare or sort using the
incorrect date may malfunction.
The Company is working to resolve the potential impact of the Year 2000 on the
ability of its computerized information systems to accurately process
date-sensitive information. The systems include database , networking and
accounting software licensed by the Company. The Company does not use equipment
with embedded chip technology that is date sensitive. Although the Company has
not yet completed its assessment of its internal operations, the Company has
been advised by the vendors of its office and networking software that the
Company will receive vendor certifications confirming that these systems are
Year 2000 compliant. The Company has previously been advised that its accounting
software package is Year 2000 compliant. If such software does not in fact prove
to be Year 2000 compliant, the Company would experience temporary administrative
disruptions but such disruptions would not threaten or materially interfere with
the Company's drug development activities.
The Company intends to make inquiries of suppliers and other third parties with
whom it has significant business relationships in order to determine whether
such third parties have undertaken measures to ensure that their information
technology systems will be Year 2000 compliant insofar as the Company is
concerned. These third parties include contract manufacturing facilities
utilized by the Company to produce Surfaxin(TM) and SuperVent(TM), contract
laboratories at which stability testing of raw drug product is performed,
facilities at which the Company's clinical trials are being undertaken and the
Company's transfer agent. The Company intends to transfer manufacturing and
stability testing activities away from any contract manufacturing facilities or
contract laboratories that have not confirmed Year 2000 compliant status by May
of 1999. If the contract manufacturing or contract laboratory facilities
utilized by the Company fail to achieve Year 2000 compliance, it is unlikely
that the Company would be materially affected since in most instances
recordkeeping or backup recordkeeping is maintained in hard copy. It is
possible, however, that data transmitted electronically to the FDA under such
circumstances would be inconsistent with submitted documentation, which in turn
could result in the Company receiving a citation from the FDA. The potential
consequences of a Year 2000 compliance failure on the part of a hospital or
other facility participating in the Company's clinical trials range from the
possible need to eliminate data points generated by specific facilities to delay
in completion and evaluation of such trials, and could also result in a need for
further dialogue with the FDA regarding clinical trial integrity if a
significant problem were to emerge.
The Company's Year 2000 project is expected to be substantially completed by
June 30, 1999. The Company believes that completing the program within the
time-frame it set for itself will avoid any adverse impact on its operating
systems. Assuming that the Company is not required to incur transfer costs as a
result of any failure of its vendors to achieve Year 2000 compliance in a timely
fashion, the Company anticipates that the cost of implementing its Year 2000
program will be limited to out-of-pocket costs related to making inquiries of,
and receiving and reviewing confirmations from, third parties. The Company
currently estimates that such costs will not exceed $10,000.
The Company has purchased back-up electrical generators to ensure that
temperature sensitive materials that are critical to the Company's drug
development efforts will not be harmed by any power outages at its Doylestown,
Pennsylvania facility. Although not purchased with a view toward Year
2000-related risks, these generators are available to address any interruptions
in electrical service related to Year 2000 compliance problems experienced by
local utilities. The Company intends to develop contingency plans to address any
other Year 2000 compliance risks that are uncovered by its continuing evaluation
efforts.
Page 10
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Change in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
During August 1998, the Company's Board of Directors approved the
adoption of a shareholder rights plan. Adoption of the shareholder
rights plan is contingent upon approval of the plan by holders of a
66.67% of the Company's Series B Convertible Preferred Stock. During
September 1998, the Company solicited the written consent of the
holders of such preferred stock to the adoption of the rights plan.
The Company has not yet obtained the requisite consents for the
implementation of the rights plan.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
A report on Form 8-K relating to the approval by the Company's Board
of Directors of the adoption of a shareholder rights plan was filed
by the Company on August 21, 1998.
Page 11
<PAGE>
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: November 13, 1998 /s/ Robert J. Capetola
--------------------------
Robert J. Capetola, Ph.D.
Chief Executive Officer
Date: November 13, 1998 /s/ Evan Myrianthopoulos
--------------------------
Evan Myrianthopoulos
Vice President, Finance
(Principal Financial and
Accounting Officer)
Page 12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,701,000
<SECURITIES> 2,926,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,827,000
<PP&E> 168,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,028,000
<CURRENT-LIABILITIES> 939,000
<BONDS> 0
0
2,226,000
<COMMON> 5,000
<OTHER-SE> 2,856,000
<TOTAL-LIABILITY-AND-EQUITY> 6,028,000
<SALES> 0
<TOTAL-REVENUES> 127,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,349,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,222,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,222,000)
<EPS-PRIMARY> 0.28<F1>
<EPS-DILUTED> 0.28<F1>
<FN>
<F1> EPS Basic and Diluted is $0.28. The Company calculates Earnings Per Share
pursuant to FASB 128.
</FN>
</TABLE>
