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, 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 (I.R.S. Employer Identification No.)
of incorporation or organization)
3359 Durham Road
Doylestown, Pennsylvania 10022
(Address of principal executive offices) (Zip Code)
Registrants's telephone number, including area code: (215) 794-3064
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 11, 1998, 4,367,581 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>
DISCOVERY LABORATORIES, INC.
Table of Contents
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
CONSOLIDATED BALANCE SHEETS -- As of June 30,
1998 and December 31, 1997 ........................... Page 3
CONSOLIDATED STATEMENTS OF OPERATIONS -- For
the Three and Six Months Ended June 30,
1998 and June 30, 1997; and for the Period
from May 18, 1993 (Inception) through June
30, 1998 ............................................. Page 4
CONSOLIDATED STATEMENTS OF CASH FLOWS -- For
the Six Months Ended June 30, 1998 and June
30, 1997 and for the Period from May 18,
1993 (Inception) through June 30, 1998 ............... Page 5
Notes to Financial Statements ........................... Page 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........... Page 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. ...................................... Page 10
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 12
Item 6. Exhibits and Reports on Form 8-K. ....................... Page 12
Signatures ...................................................... Page 13
Page 2
<PAGE>
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,384,000 $ 6,297,000
Investments 3,549,000 4,957,000
Prepaid expenses 100,000 190,000
------------ ------------
Total current assets 7,033,000 11,444,000
Furniture and equipment, net of deprecation 157,000 181,000
Security deposits 30,000 30,000
------------ ------------
$ 7,220,000 $ 11,655,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 886,000 $ 565,000
------------ ------------
Dividends payable on preferred stock 340,000 238,000
------------ ------------
Minority interest in preferred stock of subsidiary 2,039,000
Redeemable Preferred Stock, $.001 par value; 2,039
shared issued and outstanding (liquidation
preference $2,039,000) 2,039,000
------------ ------------
Commitments
Stockholders' Equity:
Preferred stock, $.001 par value; 5,000,000 shares
authorized; 2,200,256 shares issued and outstanding
(liquidation preference $29,703,000) 2,000 2,000
Common stock, $.001 par value; 20,000,000 authorized;
4,209,455 shares issued and outstanding 4,000 3,000
Additional paid-in capital 29,466,000 21,464,000
Deficit accumulated during the development stage (25,517,000) (12,656,000)
------------ ------------
Total stockholders' equity 3,955,000 8,813,000
------------ ------------
$ 7,220,000 $ 11,655,000
============ ============
</TABLE>
See notes to financial statements
Page 3
<PAGE>
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
May 18, 1993
(Inception)
Three Months Ended Six Months Ended Through
June 30, June 30, June 30,
1998 1997 1998 1997 1998
------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest income $ 102,000 $ 84,000 $ 226,000 $ 306,000 $ 1,144,000
------------ ----------- ------------ ------------ ------------
Expenses:
Write-off of acquired
in-process research
and development and
supplies 8,230,000 8,230,000 14,093,000
Research and development 1,648,000 1,434,000 3,357,000 2,257,000 8,275,000
General and administrative 775,000 947,000 1,422,000 1,345,000 3,968,000
------------ ----------- ------------ ------------ ------------
Interest 11,000
------------ ----------- ------------ ------------ ------------
Total expenses 10,653,000 2,381,000 13,009,000 3,602,000 26,347,000
------------ ----------- ------------ ------------ ------------
($10,551,000) (2,297,000) ($12,783,00) (3,296,000) (25,203,000)
Minority interest in net loss of
subsidiary 24,000 26,000
------------ ----------- ------------ ------------ ------------
Net loss $(10,551,000) $(2,297,000) $(12,759,000) $ (3,296,000) $(25,117,000)
Net loss per share - basic and
diluted $ (3.14) $ (0.88) $ (3.90) $ (1.26)
Weighted average number of common
shares outstanding 3,361,000 2,619,000 3,275,000 2,619,000
</TABLE>
See notes to financial statements
Page 4
<PAGE>
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
May 18, 1993
Six Months Ended (Inception)
June 30, Through
----------------------------- June 30,
1998 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(12,759,000) $ (3,296,000) $(25,177,000)
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
Depreciation and amortization 17,000 24,000 81,000
Changes in:
Prepaid expenses 90,000 (16,000) (69,000)
Accounts payable and accrued expenses 321,000 (65,000) 680,000
Other assets (15,000) (30,000)
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 (4,101,000) (2,540,000) (9,840,000)
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of furniture and equipment (19,000) (52,000) (216,000)
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 2,140,000 2,358,000 18,191,000
Net cash payments on merger (226,000) (1,680,000)
------------ ------------ ------------
Net cash provided by (used in) investing activities 1,188,000 (307,000) (5,726,000)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds on private placements of units, net of
Expenses (11,000) 18,925,000
Collections on stock subscriptions and proceeds
on exercise of stock options 25,000
------------ ------------ ------------
Net cash (used in) provided by financing activities (11,000) 18,950,000
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (2,913,000) (2,858,000) 3,384,000
Cash and cash equivalents - beginning of period 6,297,000 4,336,000
------------ ------------ ------------
Cash and cash equivalents - end of period $ 3,384,000 $ 1,478,000 $ 3,384,000
============ ============ ============
Noncash transactions:
Accrued dividends on redeemable Series C preferred stock $ 102,000 $ 340,000
============ ============
</TABLE>
See notes to financial statements
Page 5
<PAGE>
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
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 Annual Meeting of
Stockholders, ratified 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>
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
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:
Six Months Ended June 30,
1998 1997
---- ----
Net loss $(4,553,000) $(3,296,000)
----------- -----------
Net loss per common share-
basic and diluted $ (1.08) $ (0.90)
----------- -----------
Weighed average number of
common shares outstanding 4,222,000 3,646,000
----------- -----------
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 six month period ended June 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>
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
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 $25,177,000 as of June 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
Page 8
<PAGE>
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
months it will conduct substantial research and development of its products
under development. A Phase 2 clinical trial of Surfaxin(TM) for the treatment of
meconium aspiration syndrome ("MAS") was commenced on May 27, 1997 and a pivotal
Phase 2/3 clinical trial of Surfaxin(TM) for the treatment of acute respiratory
distress syndrome ("ARDS") was commenced on July 14, 1998. 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, and if such clinical trial is successfully completed in its entirety, a
Phase 2 clinical trial of SuperVent(TM) for the treatment of chronic bronchitis
will be pursued. On December 5, 1997 a Phase 1 clinical study of 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. Any
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"), and there can be no assurance as to the receipt
or the timing of such approvals.
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. 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.
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.
On June 16, 1998 the Company held its Annual Meeting of Stockholders (the
"Annual Meeting"). The following matters were submitted to a vote of the
stockholders:
Election of Directors
Each of the ten nominees for the Board of Directors was elected:
For Withheld
--- --------
Robert Capetola 4,392,787 48,918
Steve H. Kanzer 4,392,787 48,918
Max Link 4,392,787 48,918
Richard Sperber 4,373,329 68,376
Page 9
<PAGE>
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Herbert McDade 4,373,329 68,376
David Naveh 4,373,329 68,376
Milton Packer 4,392,787 48,918
Marvin Rosenthale 4,392,787 48,918
Richard Power 4,373,329 68,376
Mark Rogers 4,392,787 48,918
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Approval of the 1998 Merger
The stockholders approved the 1998 Merger:
Affirmative Negative Broker
Votes Votes Abstentions Non-Votes
----- ----- ----------- ---------
3,898,854 41,125 16,953 484,773
Page 10
<PAGE>
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Approval of 1998 Stock Incentive Plan
The stock holders approved the adoption of the Company's 1998 Stock Issuance
Plan:
Affirmative Negative Broker
Votes Votes Abstentions Non-Votes
----- ----- ----------- ---------
3,826,084 137,241 3,222 475,158
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:
There were no reports on Form 8-K filed by the Company during the
three months ended June 30, 1998.
Page 11
<PAGE>
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
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 13, 1998 /s/ Robert J. Capetola
----------------------------------------
Robert J. Capetola, Ph.D.
Chief Executive Officer
Date: August 13, 1998 /s/ Evan Myrianthopoulos
----------------------------------------
Evan Myrianthopoulos
Vice President, Finance
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,384,000
<SECURITIES> 3,549,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,033,000
<PP&E> 215,000
<DEPRECIATION> 58,000
<TOTAL-ASSETS> 7,220,000
<CURRENT-LIABILITIES> 886,000
<BONDS> 0
2,039,000
2,000
<COMMON> 4,000
<OTHER-SE> 29,466,000
<TOTAL-LIABILITY-AND-EQUITY> 7,220,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 10,653,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (10,551,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,551,000)
<EPS-PRIMARY> (3.14)<F1>
<EPS-DILUTED> (3.14)<F1>
<FN>
<F1>
EPS Basic and Diluted is (3.14). The Company calculates earnings per share
pursuant to FASB 128.
</FN>
</TABLE>
