SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-QSB
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 incorporation (I.R.S. Employer Identification
or organization) No.)
509 Madison Avenue, 14th Floor 10022
New York, New York
(Address of principal executive offices) (Zip Code)
Registrants's telephone number, including area code: (212) 223-9504
Securities registered under Section 12 (b) of the Exchange Act: None
Securities registered under Section 12 (g) of the Exchange Act:
Common Stock, par value $.001 per share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. |X| Yes |_| No
As of May 14, 1998, 3,175,955 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
CONSOLIDATED BALANCE SHEETS -- As of
December 31, 1997 and March 31, 1998 (unaudited) ........... Page 3
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) -- For the Three
Months Ended March 31, 1997 and March 31, 1998; and for the
Period from May 18, 1993 (Inception) through
March 31, 1998 ............................................. Page 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) -- For the Three
Months Ended March 31, 1997 and March 31, 1998 and for the Period
from May 18, 1993 (Inception) through
March 31, 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 11
Item 6. Exhibits and Reports on Form 8-K. ....................... Page 11
Signatures ....................................................... Page 12
Page 2
<PAGE>
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,858,000 $ 6,297,000
Investments 3,502,000 4,957,000
Prepaid expenses 104,000 190,000
------------ ------------
Total current assets 9,464,000 11,444,000
Furniture and equipment, net of depreciation 150,000 181,000
Deferred acquisition costs 54,000
Security deposits 30,000 30,000
------------ ------------
$ 9,698,000 $ 11,655,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 816,000 $ 565,000
------------ ------------
Dividends payable on preferred stock 289,000 238,000
------------ ------------
Minority interest in preferred stock of subsidiary 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; 3,175,955 shares issued and
outstanding 3,000 3,000
Additional paid-in capital 21,464,000 21,464,000
Deficit accumulated during the development stage (14,915,000) (12,656,000)
------------ ------------
Total stockholders' equity 6,554,000 8,813,000
------------ ------------
$ 9,698,000 $ 11,655,000
============ ============
</TABLE>
See notes to financial statements Page 3
<PAGE>
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
May 18, 1993
(Inception)
Three Months Ended Through
March 31, March 31,
1998 1997 1998
---------------------------- ------------
<S> <C> <C> <C>
Interest income $ 124,000 $ 222,000 $ 1,402,000
------------ ------------ ------------
Expenses:
Write-off of acquired inprocess research
and development and supplies 5,863,000
Research and development 1,709,000 832,000 6,627,000
General and administrative 647,000 398,000 3,193,000
Interest 11,000
------------ ------------ ------------
Total expenses 2,356,000 1,221,000 15,694,000
------------ ------------ ------------
(2,232,000) (999,000) (14,652,000)
Minority interest in net loss of subsidiary 24,000 26,000
------------ ------------ ------------
Net loss $ (2,208,000) $ (999,000) $(14,626,000)
============ ============ ============
Net loss per share basic and diluted $ (0.69) $ (0.38)
============ ============
Weighted average number of common shares
outstanding 3,182,957 2,619,011
============ ============
</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
Three Months Ended (Inception)
March 31, Through
---------------------------- March 31,
1998 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,208,000) $ (999,000) $(14,626,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Write-off of acquired in-process
research and development and supplies 5,863,000
Write-off of licenses 683,000
Depreciation and amortization 8,000 9,000 72,000
Changes in:
Prepaid expenses 86,000 (7,000) (73,000)
Accounts payable and accrued expenses 251,000 (133,000) 610,000
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 (1,863,000) (1,145,000) (7,602,000)
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of furniture and equipment (2,000) (20,000) (199,000)
Proceeds from disposal of furniture and
equipment 25,000 25,000
Acquisition of licenses (711,000)
Purchase of investments (685,000) (1,187,000) (21,288,000)
Proceeds from sale or maturity of investments 2,140,000 18,191,000
Net cash payments on merger (1,454,000)
------------ ------------ ------------
Net cash provided by (used in) investing
activities 1,478,000 (1,207,000) (5,436,000)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds on private placements of units, net
of expenses (11,000) 18,925,000
Deferred acquisition costs (54,000) (54,000)
Collections on stock subscriptions and
proceeds on exercise of stock options 25,000
------------ ------------ ------------
</TABLE>
See notes to financial statements Page 5
<PAGE>
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net cash (used in) provided by financing
activities (54,000) (11,000) 18,896,000
------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents (439,000) (2,363,000) 5,858,000
Cash and cash equivalents - beginning of period 6,297,000 4,336,000 0
------------ ------------ ------------
Cash and cash equivalents - end of period $ 5,858,000 $ 1,973,000 $ 5,858,000
============ ============ ============
Noncash transactions:
Accrued dividends on ATI preferred stock $ 51,000 $ 289,000
============ ============
</TABLE>
See notes to financial statements Page 6
<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 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 preferred
stock (the "Exchange Ratios"). The Company also assumed all outstanding options
and warrants to purchase Old Discovery's common stock and Series A preferred
stock which became exercisable for the Company's common stock and Series B
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 Ansan common stock owned by Titan. On consummation of the
1997 Merger, 13,000 shares of Ansan Series A preferred stock 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 its majority owned subsidiary Acute Therapeutics, Inc. ("ATI") and
the accounts of Ansan from November 25, 1997 (the date of acquisition). The
assets and liabilities of Ansan acquired are recorded at fair value on the date
of the 1997 Merger. The difference between the fair value of the net assets
acquired and 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.
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 three month period ended March 31, 1998 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. For
Page 7
<PAGE>
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
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.
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. Potential common shares are not included in the calculation
of the net loss per share as their effect would be antidilutive.
Page 8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion 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 $14,652,000 as of March 31,
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 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, including, without
limitation, a Phase 1/2 clinical trial of SuperVent(TM) for the treatment of
cystic fibrosis ("CF") that was commenced by Discovery on March 17, 1997 (and,
if such clinical trial is successfully completed, a Phase 2 clinical trial of
SuperVent(TM) for the treatment of chronic bronchitis), a Phase 2 clinical trial
of SurfaxinTM for the treatment of meconium aspiration syndrome ("MAS") that was
commenced by ATI on May 27, 1997 and a pivotal Phase 2/3 clinical trial of
SurfaxinTM for the treatment of acute respiratory distress syndrome ("ARDS").
Discovery initiated 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. Any clinical trials of the Company's products
in development that have not yet commenced will require the receipt of the
United States Food and Drug Administration (the "FDA") approvals, and there can
be no assurance as to the receipt or the timing of such approvals.
In March 1997, ATI entered into an agreement with Cook Imaging Corporation
("Cook") for the manufacture of SurfaxinTM to be used in clinical trials. In
February 1998, ATI and Cook entered into an agreement to provide additional
batches of SurfaxinTM for further clinical trials. ATI does not currently intend
to seek a long-term agreement with Cook and is exploring alternatives for the
commercial manufacture of Surfaxin(TM).
Proposed Merger
The Company, its newly formed subsidiary, ATI Acquisition Corp. ("Acquisition
Corp."), and ATI have entered into an Agreement and Plan of Merger dated as of
March 5, 1998, as amended on May 1, 1998 (the "Merger Agreement"). Pursuant to
the Merger Agreement, the Company will acquire all outstanding shares of the
common stock, par value $0.001 per share, of ATI ("ATI Common Stock") through a
merger of Acquisition Corp. into ATI (the "1998 Merger"). The Company and ATI
have also entered into a
Page 9
<PAGE>
Management Agreement dated as of March 5, 1998 (the "Management Agreement")
providing for the management of the Company by the ATI management team pending
completion of the 1998 Merger. Pursuant to the Management Agreement, members of
the ATI management team have been granted options to purchase 126,500 shares of
the Company's Common Stock, par value $0.001 per share ("Company Common Stock"),
subject to vesting.
The Merger Agreement provides that the stockholders of ATI will be issued 3.90
shares of Company Common Stock in exchange for each share of ATI Common Stock
held by the stockholders of ATI prior to the 1998 Merger (the "Exchange Ratio").
Certain outstanding options for the purchase of ATI Common Stock will be assumed
by the Company and will become exercisable for Company Common Stock on the basis
of the Exchange Ratio. In addition, pursuant to employment agreements to be
entered into with the Company, the ATI management team will be granted, in the
aggregate, options to purchase (i) 338,500 shares of Company Common Stock,
subject to vesting, (ii) 175,000 shares of Company Common Stock at such time as
the market capitalization of the Company exceeds $75 million and (iii) 160,000
shares of Company Common Stock upon consummation of a corporate partnering deal
having a total value of at least $20 million. The Company Common Stock to be
issued to ATI stockholders and the options to be assumed in the 1998 Merger,
together with the options to be issued to ATI management members pursuant to
their employment agreements with the Company and the options granted pursuant to
the Management Agreement, will represent approximately 24.5% of the Company
Common Stock on a fully-diluted basis.
The closing of the 1998 Merger, which is expected to occur as soon as
practicable after the Company's Annual Meeting of Stockholders scheduled for
June 16, 1998, is subject to customary closing conditions, including approval by
the stockholders of the Company and ATI. The Merger is further conditioned upon,
among other things, (i) the execution of employment agreements by Robert J.
Capetola, Ph.D., currently Chief Executive Officer of ATI, and other key
executives of ATI and (ii) the election at the Annual Meeting of a Board of
Directors of the Company consisting of six of the Company's current directors
(three of whom are also directors of ATI) and four of ATI's current directors.
Liquidity
Due to commencement of the recently announced Phase 2/3 clinical trial of
SurfaxinTM for the treatment of ARDS, the Company anticipates that its current
resources will permit it to meet its business objectives until approximately the
first 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 abilities of the Company to
establish collaborative arrangements with other organizations, and as such there
can be no assurance that the Company will not be required to raise additional
capital prior to the first 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.
Page 10
<PAGE>
Item 2. Change in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None
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:
Four reports on Form 8-K and two amendments on Form 8-K/A were filed
by the Company during the three months ended March 31, 1998. A
report was filed on January 16, 1998 relating to a change in the
Company's certifying accountant and an amendment to that report was
filed on January 27, 1998 relating to the absence of any
disagreements with the former accountants as described in Item
304(a)(1)(iv) or Regulation S-B. An amendment to a report dated
November 25, 1997 was filed on February 6, 1998 relating to an
Agreement and Plan of Merger dated as of July 16, 1997 in connection
with the 1997 Merger in order to provide certain financial
statements and pro forma financial information that was
impracticable to provide at the time the Company filed the original
current report. A report was filed on February 9, 1998 relating to a
press release dated February 5, 1998 announcing that the Company had
executed a letter of intent to acquire all outstanding shares of
common stock of its majority-owned subsidiary, ATI. On March 11,
1998 a report was filed relating to the execution of a definitive
Agreement and Plan of Merger dated as of March 5, 1998 among the
Company, ATI Acquisition Corp. and ATI. A report was filed on March
27, 1997 relating to a letter dated March 19, 1998 in which a
director of the Company announced his intention to resign from the
Board of Directors of the Company.
Page 11
<PAGE>
Signatures
In accordance with the requirements of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Discovery Laboratories, Inc.
(Registrant)
Date: May 14, 1998
/s/ Robert J. Capetola
------------------------------
Robert J. Capetola, Ph.D.
Acting Chief Executive Officer
Date: May 14, 1998
/s/ Evan Myrianthopoulos
------------------------------
Evan Myrianthopoulos
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Page 12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,858,000
<SECURITIES> 3,502,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,464,000
<PP&E> 199,000
<DEPRECIATION> 49,000
<TOTAL-ASSETS> 9,698,000
<CURRENT-LIABILITIES> 816,000
<BONDS> 0
2,039,000
2,000
<COMMON> 3,000
<OTHER-SE> 21,464,000
<TOTAL-LIABILITY-AND-EQUITY> 9,698,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 2,356,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,208,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,208,000)
<EPS-PRIMARY> (0.69)<F1>
<EPS-DILUTED> (0.69)<F1>
<FN>
<F1>EPS Basic and Diluted is (0.69). The Company calculates Earnings Per Share
pursuant to FASB 128.
</FN>
</TABLE>
