U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
AMENDMENT NO. 1
|X| Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
1934 (Fee required)
For the fiscal year ended December 31, 1998
-------------------------------------------
|_| Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (No fee required)
For the transition period from ________ to ________
Commission file number 0-26422
------------------------------
DISCOVERY LABORATORIES, INC.
(Name of Small Business Issuer 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, PA 18901
(Address of Principal Executive Offices Including Zip Code)
(215) 340-4699
--------------
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
- ------------------- -------------------
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
Class A Warrants Class B Warrants
Class C Warrants Class D Warrants
(Title of Class) (Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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.
<PAGE>
YES |X| NO |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |_|
State issuer's revenues for its most recent fiscal year. $ 0.00
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of August 25, 1999: $17,978,721(1).
State the number of shares outstanding of each class of the issuer's common
equity as of August 13, 1999: 9,014,771 shares of Common Stock, par value $.001
per share.
Documents incorporated by reference: None.
Transitional Small Business Disclosure Format: YES |_| NO |X|
- --------
(1) Outstanding shares of the issuer's Series B Convertible Preferred Stock, par
value $0.001 per share, are valued on the basis of the number of shares of the
issuer's Common Stock, par value $0.001 per share, into which such preferred
shares are convertible.
<PAGE>
The undersigned registrant hereby amends the following items of its Report on
Form 10-K for the year ended December 31, 1998 as set forth below.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATIONS
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 $27,469,000 as of December 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 a development stage pharmaceutical company that is focused on
developing compounds intended for neonatal use in critical care hospital
settings. The Company is also developing its lead product candidate for the
treatment of acute respiratory distress syndrome and acute lung injury
("ARDS/ALI"). The Company anticipates that during the next 12 months it will
conduct substantial research and development of its compounds.
SURFAXIN(R) (lucinactant)
Meconium Aspiration Syndrome (MAS)
The Company recently finished a Phase 2 clinical trial in MAS in full-term
newborns. This 22-patient trial showed an improvement in oxygenation parameters
and a three-day savings on mechanical ventilation. Based on the results of this
trial, the Company is planning a pivotal Phase 3 trial in MAS. This trial is
expected to be a multi-centered, randomized trial versus patients on standard of
care since there are no FDA approved therapies available to treat MAS. An Orphan
Products Development Grant awarded to the Company by the FDA Office of Orphan
Products Development is expected to contribute significantly to the costs of
this trial.
Respiratory Distress Syndrome (RDS)
The Company is currently planning to commence a Phase 3 clinical trial of
Surfaxin(R) for the treatment of RDS in premature infants 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") and/or world health authorities.
There can be no assurance as to the receipt or the timing of such approvals.
Acute Respiratory Distress Syndrome/Acute Lung Injury (ARDS/ALI)
A pivotal Phase 2/3 clinical trial of Surfaxin(R) for the treatment of ARDS/ALI
was commenced on July 14, 1998. All of the 43 clinical sites identified by the
Company for participation in the ALI/ALI trial have completed all internal
review board and other approvals relating to the original protocol for the
<PAGE>
trial. The protocol was recently amended and the Company is in the process of
obtaining internal review board approvals relating to the amended protocol. To
date, 14 patients have been enrolled in the ARDS/ALI trial.
SUPERVENT(TM) (tyloxapol)
Cystic Fibrosis (CF)
The Company has completed a Phase 1 trial in normal healthy volunteers and has
determined a dose (1.25%) that did not produce significant adverse effects. A
Phase 2A trial in CF patients was recently initiated where the intent is to show
inhibition of inflammatory pulmonary events in these patients.
DSC-103
On December 5, 1997 a Phase 1 clinical study of DSC-103 (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. On July 30, 1999 the Company announced that it had completed a licensing
deal for DSC-103 with YuYu Industrial Company, Ltd. of Korea. The deal is the
first one completed by Discovery for DSC-103. The privately owned YuYu
Industrial, Ltd. currently markets the natural hormonal form of vitamin D,
calcitriol, in the Korean pharmaceutical market. The sublicense agreement is
royalty based and includes small upfront fees and milestones. As part of the
agreement, YuYu has agreed to an exclusive supply agreement whereby they will
purchase DSC-103 drug substance from Discovery. It is the Company's present
intention to seek to develop DSC-103 through a corporate partnering arrangement
rather than directly.
Liquidity
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. During March and April,
1999, the Company received proceeds totaling $1 million from a private equity
financing with primarily existing investors. On July 29, the Company completed a
second private placement totaling $2.45 million through a private placement of
equity. The Company will be required to raise additional capital in order to
meet its business objectives, and there can be no assurance that it will be
successful in doing so or, in general, that the Company will be able to achieve
its business objectives. The Company has eliminated certain positions and taken
other steps to reduce its use of cash. The Company believes that such reduced
use of cash will not interfere with the achievement of the Company's major
business objectives and, accordingly, that its current resources will permit it
to meet its business objectives until the first quarter of 2000. In the event
that the Company does not achieve certain financing and/or corporate partnering
objectives during the Fall of 1999, the Company intends to further reduce its
use of cash so that its cash resources will be sufficient to continue operations
into the third quarter of 2000.
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
<PAGE>
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 has made 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(R) and SuperVentTM, 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 has confirmed Year 2000 compliant status of all contract manufacturing
and contract laboratory facilities utilized by the Company. The status of its
clinical trial sites is still under evaluation. 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 substantially complete . 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 has developed contingency plans to address any
other Year 2000 compliance risks that are uncovered by its continuing evaluation
efforts.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Contents
Page
----
Consolidated Financial Statements
Independent auditors' report F-2
Balance sheet as of December 31, 1998 F-3
Statements of operations for the years ended December 31,
1998 and 1997 and the period from May 18, 1993
(inception) through December 31, 1998 F-4
Statements of changes in stockholders' equity for the
period from May 18, 1993 (inception) through December
31, 1998 F-5
Statements of cash flows for the years ended December 31,
1998 and 1997 and the period from May 18, 1993
(inception) through December 31, 1998 F-6
Notes to financial statements F-7
Independent Auditors' Consent F-25
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Discovery Laboratories, Inc.
Doylestown, Pennsylvania
We have audited the accompanying consolidated balance sheet of Discovery
Laboratories, Inc. and subsidiary (a development stage company) as of December
31, 1998, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the years in the two-year period
ended December 31, 1998, and the period from May 18, 1993 (inception) through
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the consolidated financial position of Discovery
Laboratories, Inc. and subsidiary as of December 31, 1998 and the consolidated
results of their operations and their consolidated cash flows for each of the
years in the two-year period ended December 31, 1998, and the period from May
18, 1993 (inception) through December 31, 1998, in conformity with generally
accepted accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
February 24, 1999
With respect to the last paragraph of Note A
April 7, 1999
<PAGE>
Consolidated Balance Sheet
December 31, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,474,000
Marketable securities 2,544,000
Inventory 575,000
Prepaid expenses and other current assets 203,000
------------
Total current assets 4,796,000
Property and equipment, net of depreciation 326,000
Security deposits 18,000
------------
$ 5,140,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,088,000
------------
Commitments (Notes F and I)
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares authorized:
Series B convertible; 1,946,881 shares issued and outstanding (liquidation preference
$26,282,000) 2,000
Series C redeemable convertible; 2,039 shares issued and outstanding (liquidation
preference $2,277,000) 2,277,000
Common stock, $.001 par value; 20,000,000 authorized; 5,085,281 shares issued 5,000
Treasury stock (15,600 shares of common stock at cost) (39,000)
Additional paid-in capital 29,842,000
Unearned portion of compensatory stock options (124,000)
Deficit accumulated during the development stage (27,930,000)
Accumulated other comprehensive income: unrealized gain on marketable securities
available for sale 19,000
------------
Total stockholders' equity 4,052,000
------------
$ 5,140,000
============
</TABLE>
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
May 18, 1993
Year Ended (Inception)
December 31, Through
============================ December 31,
1998 1997 1998
============ ============ ============
<S> <C> <C> <C>
Interest income $ 394,000 $ 713,000 $ 1,312,000
------------ ------------ ------------
Expenses:
Write-off of acquired in-process research and development
and supplies 8,220,000 3,663,000 13,508,000
Research and development 5,055,000 4,378,000 9,973,000
General and administrative 2,788,000 1,836,000 5,334,000
Interest 11,000
------------ ------------ ------------
Total expenses 16,063,000 9,877,000 28,826,000
------------ ------------ ------------
(15,669,000) (9,164,000) (27,514,000)
Minority interest in net loss of subsidiary 24,000 26,000
------------ ------------ ------------
Net loss (15,645,000) (9,164,000) (27,488,000)
Other comprehensive income:
Unrealized gain on marketable securities available for sale 19,000 19,000
------------ ------------ ------------
Total comprehensive loss $(15,626,000) $ (9,164,000) $(27,469,000)
============ ============ ============
Net loss per share - basic and diluted (Note C[9]) $ (4.02) $ (3.42)
============ ============
Weighted average number of common shares
Outstanding 3,896,000 2,679,000
============ ============
</TABLE>
See notes to financial statements
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
May 18, 1993 (Inception) Through December 31, 1998
<TABLE>
<CAPTION>
Preferred Stock
------------------------------------------
Common Stock Treasury Stock Series B Series C
------------------- -------------------- ------------------ ---------------------
Shares Amount Shares Amount Shares Amount Shares Amount
--------- ------- --------- --------- --------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common shares, May 1993 440,720 $ 1,000
Net loss
Expenses paid on behalf of the Company
--------- -------
Balance - December 31, 1993 440,720 1,000
Net loss
--------- -------
Balance - December 31, 1994 440,720 1,000
Issuance of common shares, February 1995 143,016
Net loss
Payment on stock subscriptions
Expenses paid on behalf of the Company
--------- -------
Balance - December 31, 1995 583,736 1,000
Issuance of common shares, March 1996 1,070,175 1,000
Issuance of private placement units August,
October and November 1996 856,138 1,000 2,200,256 $ 2,000
Issuance of common shares for cash and
Compensation, September 1996 82,502
Exercise of stock options, July and October
1996 19,458
Net loss
--------- ------- --------- -------
Balance - December 31, 1996 2,612,009 3,000 2,200,256 2,000
Private placement expenses
Issuance of common shares pursuant to
Ansan Merger 546,433
Exercise of stock options, July, August and
October 1997 17,513
Accumulated dividends on preferred stock
Net loss
--------- ------- --------- -------
Balance - December 31, 1997 3,175,955 3,000 2,200,256 2,000
Issuance of common shares pursuant to
ATI Merger 1,033,500 1,000
Fair value of common stock issuable on
Exercise of ATI options
Series C preferred stock issued pursuant to
ATI Merger 2,039 $ 2,039,000
Accrued dividends payable on Series C
Preferred stock at time of ATI Merger 238,000
Common stock issued in settlement of
Series C preferred stock dividends 49,846 (204,000)
Exercise of stock options, July and
December 1998 131,676
Series B preferred stock converted 685,103 1,000 (253,375)
Noncash exercise of private placement
Warrants 9,201
Dividends payable on Series C preferred
stock 204,000
Treasury stock acquired (31,750) $ (90,000)
Treasury stock issued in payment for
services 16,150 51,000
Unrealized gain on marketable securities
available for sale
Fair value of options granted
Amortization of unearned portion of
compensatory stock options
Net loss
--------- ------- --------- --------- --------- ------- ------- -----------
Balance - December 31, 1998 5,085,281 $ 5,000 (15,600) $ (39,000) 1,946,881 $ 2,000 2,039 $ 2,277,000
========= ======= ========= ========= ========= ======= ======= ===========
<CAPTION>
Unearned Deficit
Portion of Accumulated Accumulated
Stock Additional Compensatory Other During the
Subscriptions Paid-in Stock Comprehensive Development
Receivable Capital Options Income Stage Total
-------- ----------- ---------- ------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common shares, May 1993 $ (2,000) $ 1,000 $ 0
Net loss $ (1,000) (1,000)
Expenses paid on behalf of the Company 1,000 1,000
-------- ----------- ------------- ------------
Balance - December 31, 1993 (1,000) 1,000 (1,000) 0
Net loss 0
-------- ----------- ------------- ------------
Balance - December 31, 1994 (1,000) 1,000 (1,000) 0
Issuance of common shares, February 1995 (1,000) 1,000 0
Net loss (17,000) (17,000)
Payment on stock subscriptions 2,000 2,000
Expenses paid on behalf of the Company 18,000 18,000
-------- ----------- ------------- ------------
Balance - December 31, 1995 0 20,000 (18,000) 3,000
Issuance of common shares, March 1996 5,000 6,000
Issuance of private placement units August,
October and November 1996 18,933,000 18,936,000
Issuance of common shares for cash and
Compensation, September 1996 42,000 42,000
Exercise of stock options, July and October
1996 7,000 7,000
Net loss (2,661,000) (2,661,000)
-------- ----------- ------------- ------------
Balance - December 31, 1996 0 19,007,000 (2,679,000) 16,333,000
Private placement expenses (11,000) (11,000)
Issuance of common shares pursuant to
Ansan Merger 2,459,000 2,459,000
Exercise of stock options, July, August and
October 1997 9,000 9,000
Accumulated dividends on preferred stock (238,000) (238,000)
Net loss (9,164,000) (9,164,000)
-------- ----------- ------------- ------------
Balance - December 31, 1997 0 21,464,000 (12,081,000) 9,388,000
Issuance of common shares pursuant to
ATI Merger 5,037,000 5,038,000
Fair value of common stock issuable on
Exercise of ATI options 2,966,000 2,966,000
Series C preferred stock issued pursuant to
ATI Merger 2,039,000
Accrued dividends payable on Series C
Preferred stock at time of ATI Merger 238,000
Common stock issued in settlement of
Series C preferred stock dividends 204,000 0
Exercise of stock options, July and
December 1998 30,000 30,000
Series B preferred stock converted (1,000) 0
Noncash exercise of private placement
Warrants 0
Dividends payable on Series C preferred
stock (204,000) 0
Treasury stock acquired (90,000)
Treasury stock issued in payment for
services 51,000
Unrealized gain on marketable securities
available for sale $19,000 19,000
Fair value of options granted 142,000 $ (142,000) 0
Amortization of unearned portion of
compensatory stock options 18,000 18,000
Net loss (15,645,000) (15,645,000)
-------- ----------- ---------- ------- ------------- ------------
Balance - December 31, 1998 $ 0 $29,842,000 $ (124,000) $19,000 $ (27,930,000) $ 4,052,000
======== =========== ========== ======= ============= ============
</TABLE>
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
May 18, 1993
Year Ended (Inception)
December 31, Through
---------------------------- December 31,
1998 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(15,645,000) $ (9,164,000) $(27,488,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Write-off of acquired in-process research and
development and supplies 8,220,000 3,663,000 13,508,000
Write-off of licenses 683,000 683,000
Depreciation and amortization 65,000 40,000 129,000
Compensatory stock options 18,000 18,000
Changes in:
Prepaid expenses and other current assets (13,000) (141,000) (172,000)
Accounts payable and accrued expenses 523,000 129,000 882,000
Other assets 12,000 (30,000) (18,000)
Expenses paid on behalf of company 18,000
Expenses paid using treasury stock 51,000 51,000
Employee stock compensation 42,000
Reduction of research and development supplies (161,000) (161,000)
------------ ------------ ------------
Net cash used in operating activities (6,769,000) (4,981,000) (12,508,000)
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment (235,000) (114,000) (432,000)
Proceeds from disposal of property and equipment 25,000 25,000
Acquisition of licenses (711,000)
Purchase of marketable securities (142,000) (7,539,000) (20,745,000)
Proceeds from sale or maturity of marketable securities 2,574,000 16,051,000 18,625,000
Net cash payments on merger (216,000) (1,454,000) (1,670,000)
------------ ------------ ------------
Net cash provided by (used in) investing activities 2,006,000 6,944,000 (4,908,000)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds on private placements of units, net of expenses (11,000) 18,925,000
Purchase of treasury stock (90,000) (90,000)
Collections on stock subscriptions and proceeds on exercise
of stock options 30,000 9,000 55,000
------------ ------------ ------------
Net cash (used in) provided by financing activities (60,000) (2,000) 18,890,000
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (4,823,000) 1,961,000 1,474,000
Cash and cash equivalents - beginning of period 6,297,000 4,336,000
------------ ------------ ------------
Cash and cash equivalents - end of period $ 1,474,000 $ 6,297,000 $ 1,474,000
============ ============ ============
Noncash transactions:
Accrued dividends on Series C preferred stock $ 204,000 $ 238,000 $ 442,000
Series C preferred stock dividends paid using common
Stock $ 204,000 $ 204,000
Preferred stock issued for inventory $ 575,000
</TABLE>
<PAGE>
NOTE A - THE COMPANY AND BASIS OF PRESENTATION
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 "Ansan Merger") with Discovery Laboratories,
Inc., a former Delaware corporation ("Old Discovery"), and was the surviving
corporate entity. Subsequent to the Ansan Merger, Ansan changed its name to
Discovery Laboratories, Inc. Pursuant to the Ansan 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 "Ansan 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 Ansan Exchange Ratios. In
connection with the Ansan 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 merger, 13,000 shares of Ansan Series A preferred stock held
by Old Discovery were cancelled.
The Ansan 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 diluted basis.
The consolidated financial statements include the accounts of Ansan from
November 25, 1997 (the date of acquisition). The assets and liabilities acquired
in the Ansan Merger were recorded at fair value on the date of the merger. The
difference between the fair value of the net assets acquired and value of the
common stock issued plus merger related costs was attributed to in-process
research and development and was recorded as an expense upon acquisition.
The following assets were acquired and the costs of the acquisition were as
follows:
Assets acquired:
Cash $ 281,000
Investments 400,000
Prepaid expenses 31,000
Furniture and equipment 25,000
In-process research and development 3,663,000
----------
$4,400,000
==========
Acquisition costs:
Assumption of accounts payable and
Accrued expenses $ 206,000
Ansan Series A preferred stock (purchased by
Old Discovery in July 1997 and cancelled
Upon completion of the Ansan Merger) 1,300,000
<PAGE>
Common stock issued to Ansan
Stockholders, 546,433 shares, at fair value 2,459,000
Transaction costs 435,000
----------
$4,400,000
==========
<PAGE>
NOTE A - THE COMPANY AND BASIS OF PRESENTATION (CONTINUED)
In June 1998, ATI Acquisition Corp., a wholly owned subsidiary of the Company
merged with and into a then majority owned subsidiary of the Company, Acute
Therapeutics, Inc. ("ATI") with ATI being the surviving entity (the "ATI
Merger"). ATI had been formed in October 1996 upon the Company's investment of
$7,500,000 in exchange for 600,000 shares of ATI Series A preferred stock,
representing 75% of the voting securities of ATI. Pursuant to the ATI Merger,
each outstanding share of ATI's common stock was exchanged for 3.90 shares of
the Company's common stock (the "ATI 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 to purchase ATI common stock were
assumed by the Company and are exercisable for shares of the Company's common
stock on the basis of the ATI Exchange Ratio. Pursuant to employment agreements
entered into with the Company in connection with the ATI Merger, ATI management
was granted, in the aggregate, options to purchase (i) 338,500 shares of the
Company's common stock, subject to vesting and (ii) 335,000 shares of the
Company's common stock subject to the achievement of certain corporate
milestones. As the options for the 335,000 shares are variable options, the
Company will incur a charge at each reporting date until the options are fully
vested for the excess, if any of the market price of the Company's common stock
over the exercise price of the options. In addition, pursuant to a management
agreement entered into between the Company and ATI at the time the merger
agreement relating to the ATI Merger was executed, the members of ATI management
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
upon management's evaluation and has been recorded as an expense upon
acquisition.
The cost of the ATI 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 216,000
----------
$8,220,000
==========
* No discount from market value was recognized in determining the fair
value of the common stock issued. The lack of a discount had no
effect on financial position.
The following pro forma unaudited statement of operations gives effect to the
mergers as if they had occurred at the beginning of the respective periods. A
nonrecurring charge of $3,663,000 related to the Ansan Merger and $8,220,000
related to the ATI Merger for in-process research and development has not been
considered in the pro forma results.
<PAGE>
Year Ended
December 31,
------------------------
1998 1997
----------- -----------
Net loss $(7,431,000) $(7,145,000)
=========== ===========
Net loss per common share - basic and diluted $ (1.70) $ (1.70)
=========== ===========
Weighted average number of common shares
Outstanding 4,370,000 4,198,000
=========== ===========
<PAGE>
NOTE A - THE COMPANY AND BASIS OF PRESENTATION (CONTINUED)
The accompanying financial statements include the accounts of the Company and
its wholly owned subsidiary, ATI. All intercompany balances and transactions
have been eliminated. No allocation of ATI's net loss for the year ended
December 31, 1997 had been attributed to the minority interest since the
accumulated losses exceed the minority's common equity interest.
As reflected in the accompanying financial statements, since inception, the
Company has incurred substantial losses from operations. As a result of the
start-up nature of its business, the Company can expect to continue incurring
substantial operating losses for at least the next several years and significant
additional financing will be required. The Company currently is exploring
alternate ways to raise financing to fund its continued research and development
activities. From March 31, 1999 through April 7, 1999, the Company received
$950,000 from the sale of 505,320 shares of common stock and warrants to
purchase an additional 505,320 shares of common stock at $2.30 per share. An
additional 26,596 shares of common stock and 26,596 warrants to purchase common
stock have been subscribed for $50,000. Additional shares of common stock may be
issued and the exercise price of warrants may be adjusted under certain
circumstances as specified in the respective stock purchase agreements. In
addition, management of the Company has taken steps to reduce the Company's uses
of cash and may take such further action, as may be necessary, if it is
unsuccessful in raising additional equity capital. Continuation of the Company
is dependent on its ability to obtain additional financing and, ultimately, on
its ability to achieve profitable operations. There is no assurance however,
that such financing will be available or that the Company's efforts will
ultimately be successful.
NOTE B - RETROACTIVE ADJUSTMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
In October 1996, pursuant to a licensing agreement with Johnson & Johnson,
Inc.'s ("J&J") wholly owned subsidiary of Ortho Pharmaceuticals, Inc., J&J
contributed manufacturing equipment and raw material inventory in exchange for
2,039 shares (originally 2,200 shares) of the Company's non-voting Series B
preferred stock which had a liquidation preference of $2,039,000. The equipment
and inventory was charged to operations as acquired in-process research and
development and supplies during the year ended December 31, 1996. However,
certain of this raw material inventory, valued at approximately $575,000, which
was then located at the vendor, had an alternative future use. Such inventory
could have been sold to other users and, was in excess of the estimated quantity
required for the Company's research and development purposes. The Company had
arranged with the vendor to defer delivery of the product. Previously issued
financial statements have been restated to reflect capitalizing such inventory
effective December 31, 1996 and a corresponding reduction in deficit accumulated
during the development stage.
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] Cash and cash equivalents:
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
[2] Marketable securities:
The investments are classified as available for sale, and are comprised of
United States government obligations and shares in a mutual fund which
invests in income producing securities.
<PAGE>
Investments are carried at fair or market value. Any
appreciation/depreciation on these investments is recorded as a separate
component of stockholders' equity until realized.
<PAGE>
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[3] Property and equipment:
Furniture and equipment is recorded at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
assets (five to seven years). Leasehold improvements are amortized over
the lower of (a) term of the lease or (b) useful life of the improvements.
[4] Licenses:
Through March 1997, licenses were capitalized and were being amortized on
a straight-line basis over their respective terms of 15 to 17 years.
During the quarter ended June 30, 1997, the Company determined that since
they will not pursue any alternative uses for the licenses, that all
license costs would be written off as research and development costs.
[5] Research and development:
Research and development costs are charged to operations as incurred.
Certain of the Company's research and development efforts are funded by a
grant awarded to the Company by the Food and Drug Administration. Draw
downs of the grant are accounted for as a reduction to research and
development expense. In 1998, the amount funded was approximately $27,000.
[6] Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
[7] Long-lived assets:
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," the Company records impairment losses on
long-lived assets used in operations, including intangible assets, when
events and circumstances indicate that the assets might be impaired and
the undiscounted cash flows estimated to be generated by those assets are
less than the carrying amounts of those assets. No such losses have been
recorded.
[8] Stock-based compensation:
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"). The provisions
of SFAS No. 123 allow companies to either expense the estimated fair value
of employee stock options or to continue to follow the intrinsic value
method set forth in Accounting Principles Board Opinion 25, "Accounting
for Stock Issued to Employees" ("APB 25") but disclose the pro forma
effects on net income (loss) had the fair value of the options been
expensed. The Company has elected to
<PAGE>
continue to apply APB 25 in accounting for its employee stock option
incentive plans. See Note H to the financial statements for further
information.
<PAGE>
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[9] Net loss per share:
Net loss per share is computed pursuant to the provisions of Statement of
Financial Accounting Standards No. 128 "Earnings per Share" and is 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 not included in the calculation of net loss per
share for the years ended December 31, 1998 and 1997, as the effect would
be anti-dilutive, are as follows (Notes H and G):
Number of Potential
Common Shares
---------------------
1998 1997
--------- ---------
Series B convertible preferred stock 6,061,000 6,850,000*
Series C convertible preferred stock 932,000
Placement agent's warrants to acquire Series B
convertible preferred stock 685,000 685,000*
Stock options 1,886,000 372,000
* Adjusted for conversion rate reset
[10] Comprehensive income:
During 1998, the Company adopted Statement of Financial accounting
Standards No. 130 "Reporting Comprehensive Income", which establishes
standards for reporting and display of comprehensive income and its
components. Accordingly, the Company revised the format of its
consolidated statements of operations to include total comprehensive
income. The adoption of this statement had no effect on the Company's
results of operations.
NOTE D - PROPERTY AND EQUIPMENT
At December 31, 1997 property and equipment comprised of the following:
Leasehold improvements $ 64,000
Furniture 53,000
Equipment 315,000
---------
432,000
Less accumulated depreciation (106,000)
---------
$ 326,000
=========
<PAGE>
NOTE E - INCOME TAXES
At December 31, 1998, the Company has available for federal income tax purposes
net operating loss carryforwards of approximately $23,000,000 expiring through
2018, that may be used to offset future taxable income. As a result of the
ownership change pursuant to the Ansan Merger, Ansan's portion of the net
operating loss carryforward of approximately $9,500,000 through November 1997,
is limited in accordance with Section 382 of the Internal Revenue Code. Pursuant
to Section 382 of the Internal Revenue Code, the utilization of these
carryforwards may become further limited if certain ownership changes occur. The
Company has research and development credit carryforwards of approximately
$566,000 which expire in 2018. Ansan's portion of these credits of approximately
$179,000 are also subject to a Section 382 limitation. There will be an annual
amount available 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 in-process
research and development and supplies and certain research and development
expenses which were not deducted for tax purposes. The Company has provided a
valuation reserve against the full amount of the deferred tax asset of
$9,278,000 since realization of this benefit is not certain. The components of
the deferred tax assets are net operating loss carryforwards of approximately
$8,362,000, research and development expenses of approximately $350,000 and
research and development credits of approximately $566,000. The valuation
reserve increased by approximately $1,924,000 and $6,124,000 for the years ended
December 31, 1998 and 1997, respectively. The difference between the statutory
federal income tax rate of 34% and the Company's effective tax rate of 0% is due
to the increase in the valuation allowance.
NOTE F - LICENSE AGREEMENTS
[1] Concurrent with the Company's original investment in ATI, Johnson &
Johnson, Inc. ("J&J"), Ortho Pharmaceuticals, Inc. (a wholly owned
subsidiary of J&J), and ATI entered into an agreement (the "J&J License
Agreement") granting an exclusive license of Surfaxin(TM) technology to
New ATI in exchange for certain license fees ($200,000 of which was paid
in November 1996), milestone payments aggregating $2,750,000, royalties
and 40,000 shares of ATI common stock. J&J contributed its Surfaxin(TM)
raw material inventory and manufacturing equipment to ATI in exchange for
2,200 shares of nonvoting Series B preferred stock of New ATI having a
$2.2 million liquidation preference and a $100 per share cumulative annual
dividend. The inventory and equipment were valued at $2,200,000 (the value
of the preferred shares issued to J&J) and were originally charged to
expense in full (See Note B). The Scripps Research Institute ("Scripps")
received 40,000 shares of common stock of New ATI in exchange for its
consent to the J&J License Agreement.
In 1997, ATI and J&J determined that certain of the raw material inventory
to be received pursuant to the J&J License Agreement was not available.
ATI negotiated with J&J a price adjustment and proportionate reduction of
the liquidation preference of the Series B preferred stock issued of
approximately $161,000 and a corresponding reduction of 161 Series B
preferred shares held by J&J. The price adjustment has been accounted as a
credit to research and development expense in 1997.
[2] ATI entered into a research funding and option agreement with Scripps to
provide certain funding of research activities. The agreement was for an
initial term of two years with renewal provisions
<PAGE>
for additional one year periods. The agreement provides for Scripps to
grant an option to ATI to acquire an exclusive license for the application
of technology developed from the research program. Pursuant to the
agreement, New ATI paid Scripps $460,000 in 1997 and 1998.
[3] In 1996, the Company entered into a license agreement with the
Charlotte-Mecklenburg Hospital Authority for the use of the active
compound in SuperVent, a therapy which the Company is clinically testing.
The Company paid a license issue fee of $86,400 and has agreed to pay
royalties on future sales and to pay future patent-related costs. The
license expires upon expiration of the underlying patents.
<PAGE>
NOTE F - LICENSE AGREEMENTS (CONTINUED)
[4] In 1996, the Company entered into a license agreement with the Wisconsin
Alumni Research Foundation ("WARF") for the use of the patented compound
ST-630 (now known as DSC 103) in the treatment of post-menopausal
osteoporosis. The Company paid WARF an option fee of $25,000 in June 1996
and a license issue fee of $400,000 in October 1996 and is obligated to
make future milestones payments aggregating $3,095,000 and pay royalties
on future sales. The license expires upon expiration of the underlying
patents. The Company is currently seeking a development partner with
respect to this compound.
NOTE G - STOCKHOLDERS' EQUITY
Private placement:
In 1996, pursuant to a private placement offering, Old Discovery sold
approximately 44 units (each unit consisting of securities converted in the
Ansan Merger into 50,000 shares of Series B convertible preferred stock and
19,458 shares of common stock of the Company). Preferred stockholders have
voting rights based upon the number of shares of common stock issuable upon
conversion of the preferred shares. Pursuant to the terms of the offering, on
December 1, 1998, the conversion rate was adjusted whereby, each share of
preferred stock is now convertible at the option of the holders into 3.11 shares
of common stock of the Company. Net proceeds from the private placement
approximated $19,000,000. The Company is restricted from declaring dividends or
distributions on its common stock without the approval of the holders of at
least 66.67% of the outstanding Series B shares as long as there is in excess of
1,100,000 Series B shares outstanding.
The placement agent for the offering received approximately $2,860,000 in cash
plus warrants which, pursuant to the merger give the holders thereof the right
to acquire 220,026 shares of Series B preferred stock at a price of $11 per
share, through November 8, 2006 and to acquire 85,625 shares of common stock at
a price of $0.64 per share, through November 8, 2006. The warrants contain
certain anti-dilution provisions and may be exercised on a "net exercise" basis
pursuant to a provision that does not require the payment of any cash to the
Company.
Unit offering:
In August 1995, Ansan issued an aggregate of 498,333 units (including 65,000
units pursuant to the underwriter's overallotment option) at $15.00 per unit in
an initial public offering (the "Offering"). Each unit consisted of one share of
common stock, one redeemable Class A warrant, and one Class B warrant. Each
Class A warrant entitles the holder to purchase one share of common stock and
one Class B warrant at an exercise price of $19.50 per share. Each Class B
warrant entitles the holder to purchase one share of common stock an exercise
price of $26.25 per share.
In connection with the Offering, the holders of the Ansan's common stock and
options to purchase common stock placed, on a pro rata basis, 121,246 shares
(including 115,491 shares held by the Company pending cancellation pursuant to
the Ansan Merger (Note A)) and options to purchase 12,086 shares of common stock
into escrow (the "Escrow Shares" and "Escrow Options", respectively). The Escrow
Shares and Escrow Options are not transferable or assignable; however, the
Escrow Shares may be voted. Holders of Escrow Options may exercise their options
prior to their release from escrow; however, the shares issuable upon any such
exercise will continue to be held in escrow. The Escrow Shares and Escrow
Options will be released from escrow if, and only if, certain earnings or market
price
<PAGE>
criteria have been met. If the conditions are not met by March 31, 2000, the
Escrow Shares and Escrow Options will be cancelled and contributed to the
Company's capital.
<PAGE>
NOTE G - STOCKHOLDERS' EQUITY (CONTINUED)
Unit offering: (continued)
The release of Escrow Shares and Escrow Options held by employees, officers,
directors, consultants and their relatives will be deemed compensatory.
Accordingly, the Company will recognize as compensation expense, during the
period in which the earnings or market price targets are met, a one-time charge
to reflect the then fair market value of the shares released from escrow. Such
charges could substantially reduce the Company's net income or increase the net
loss. The amount of compensation expense recognized by the Company will not
affect the total stockholders' equity.
Common shares reserved for issuance:
The Company has reserved shares of common stock for issuance upon conversion of
preferred stock and exercise of options as follows:
(i) Series B preferred stock 6,061,000
(ii) Series C preferred stock 932,000
(iii) Stock option plan 1,886,000
(iv) Placement agent warrants:
Conversion of preferred stock 685,000
Common stock 75,000
(v) Class A warrants 736,000
(vi) Class B warrants 1,234,000
(vii) Underwriter's option 173,000
Treasury stock/common stock issued for services:
During 1998, the Company's Board of Directors approved a stock repurchase
program wherein the Company would buy its own shares from the open market and
use such shares to settle indebtedness. Such shares are accounted for as
treasury stock.
During 1998, the Company acquired 31,750 shares of common stock for
approximately $90,000 and issued 16,150 of such shares (market value on date of
issue $51,000) in settlement of $51,000 of services rendered. Further, the
Company agreed to issue 22,400 shares of treasury stock in settlement of $38,500
of indebtedness. The remaining 6,800 shares required to settle such indebtedness
will be new common shares issued.
Series C preferred stock:
The Company's Series C redeemable convertible preferred stock is convertible at
the option of the holder into common stock at a conversion price equal to the
market price of the common stock, as defined. Such shares are redeemable at
liquidation value upon the occurrence of certain events. The liquidation value
is payable at the option of the Company in either cash or shares of common
stock. Series C stockholders are entitled to dividends of 10% per annum to be
paid only upon liquidation or redemption.
<PAGE>
NOTE H - STOCK OPTIONS
Ansan's 1993 Stock Option Plan which was amended and restated (the "1993 Plan"),
provided that incentive stock options may be granted to employees, and
nonstatutory stock options may be granted to employees, directors, consultants
and affiliates. In May 1995, Ansan adopted the 1995 Stock Option Plan (the "1995
Plan"). No further options will be granted under the 1993 Plan or 1995 Plan.
Options granted under the 1993 Plan and 1995 Plan expire no later than ten years
from the date of grant, except when the grantee is a 10% stockholder of the
Company or an affiliate company, in which case the maximum term is five years
from the date of grant. The exercise price shall be at least 100%, 85% and 110%
of the fair value of the stock subject to the option on the grant date, as
determined by the Board of Directors, for incentive stock options, nonstatutory
stock options and options granted to 10% stockholders of the Company or
affiliate company, respectively. Options granted under the 1993 Plan are
exercisable immediately upon grant, however, the shares issuable upon exercise
of the options are subject to repurchase by the Company. Such repurchase rights
lapse as the shares vest over a period of five years from the date of grant.
On consummation of the Ansan Merger, the Company assumed Old Discovery's
outstanding options which were exchanged at the Ansan Exchange Ratio for options
to purchase the Company's common stock (Note A).
In March 1998, the Company adopted its 1998 Stock Incentive Plan which includes
three equity programs (the "1998 Plan"). Under the Discretionary Option Grant
Program, options to acquire shares of the Company's common stock may be granted
to eligible persons who are employees, nonemployee directors, consultants and
other independent advisors. Pursuant to the Stock Issuance Program, such
eligible persons may be issued shares of the Company's common stock directly,
and under the Automatic Option Grant Program, eligible directors will
automatically receive option grants at periodic intervals at an exercise price
equal to 60% of fair market value per share on the date of the grant. The
maximum number of shares of common stock initially reserved for issuance over
the term of the plan shall not exceed 1,400,959.
The pro forma effects of applying SFAS No. 123 and the stock options activity
shown below are those of the 1998 Plan, Old Discovery's 1996 Stock Option/Stock
Issuance Plan through the date of the Ansan Merger and the 1993 Plan and 1995
Plan after the Ansan Merger as the Ansan Merger was accounted for as a reverse
acquisition.
The Company applies APB 25 in accounting for stock options and, accordingly,
recognizes compensation expense for the difference between the fair value of the
underlying common stock and the exercise price of the option at the date of
grant. The effect of applying SFAS No. 123 on pro forma net loss is not
necessarily representative of the effects on reported net income or loss for
future years due to, among other things, (i) the vesting period of the stock
options and (ii) the fair value of additional stock options in future years. Had
compensation cost for the Company's stock option plans been determined based
upon the fair value of the options at the grant date of awards under the plans
consistent with the methodology prescribed under SFAS No. 123, the Company's net
loss for each of the years ended December 31, 1998 and 1997 would have been
approximately $16,371,000 or $4.20 per share and $9,219,000 or $3.44 per share,
respectively. The weighted average fair value of the options granted are
estimated at $2.63 and $0.24 per share, respectively, for the years ended
December 31, 1998 and 1997, on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions: dividend
yield 0%, volatility of 40% and 0%, risk-free interest rate of 5.53% for 1998
and 6.53% for 1997, and expected life of ten years.
<PAGE>
NOTE H - STOCK OPTIONS (CONTINUED)
Additional information with respect to Old Discovery stock option activity is
summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------------------------
1998 1997
--------------------------------------------------- -------------------------------------------------
Weighted Weighted
Weighted Average Weighted Average
Price Average Remaining Price Average Remaining
Per Exercise Contractual Per Exercise Contractual
Share Shares Price Life Share Shares Price Life
------------- ---------- -------- ----------- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding beginning
of year $0.18-$4.50 371,993 $1.67 $0.26-$0.51 19,458 $0.26
Options granted $0.19-$4.87 1,027,400 4.18 $0.51 257,589 0.51
Options exercised $0.0026-$2.66 (131,676) 0.23 $0.51 (17,514) 0.51
Options forfeited $0.51 (5,999) 0.51
Ansan options
outstanding $0.18-$4.50 118,459 4.19
ATI options
assumed $0.0026-$0.32 618,345 0.43
---------- ----------
Options outstanding
at end of year $0.0026-$4.87 1,886,062 2.23 8.73 years $0.18-$4.50 371,993 1.67 6.61 years
========== ==========
Options exercisable
at end of year $0.0026-$4.87 1,512,062 2.28 8.76 years $0.18-$4.50 252,912 1.80 6.49 years
========== ==========
</TABLE>
NOTE I - COMMITMENTS
[1] In June 1998, the Company entered into employment agreements with nine
officers providing for an aggregate annual salary of $1,230,000. The
agreements expire on various dates through June 2002 and provide for the
issuance of annual and milestone bonuses and the granting of options on
the Company's achieving certain milestones.
[2] In December 1997, the Company entered into an agreement with a clinical
research institute for clinical studies to be performed on behalf of the
Company. The agreement specifies payments to be made by the Company on the
successful completion of certain phases of the study that aggregate to
approximately $394,000, $250,000 and $50,000 of which was paid and charged
to expense in 1998 and 1997, respectively.
[3] In July 1998, the Company entered into a seven year lease agreement to
lease office and laboratory space in premises owned by a Company
officer/stockholder. Future minimum annual rents for this lease is as
follows:
1999 $ 128,000
2000 130,000
2001 133,000
2002 137,000
2003 142,000
2004 146,000
2005 100,000
---------
$ 916,000
=========
<PAGE>
NOTE I - COMMITMENTS (CONTINUED)
[3] (continued)
The Company also leases additional office space pursuant to a three year
lease entered into in May 1997. Such office space is currently being
subleased at substantially the same terms and for the remaining period of
the Company's commitment.
Total net rent expense for the years ended December 31, 1998 and 1997 was
approximately $175,000 and $164,000, respectively.
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (No. 333-59945) pertaining to Discovery Laboraties, Inc. stock
incentive and stock option plans of our report dated February 24, 1999 (with
respect to the last paragraph of Note A, April 7, 1999) on our audit of the
financial statements as of and for the year ended December 31, 1998 which report
is included in the annual report on Form 10-KSB/A for the year ended December
31, 1998.
Richard A. Eisner & Company, LLP
New York, New York
August 26, 1999
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DISCOVERY LABORATORIES, INC.
Date: August 26, 1999 By: /s/ Robert J. Capetola
----------------------
Robert J. Capetola, Ph.D
Chief Executive Officer
In accordance with the Exchange Act, this Report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Name & Title Date
--------- ------------ ----
/s/ Robert J. Capetola Robert J. Capetola, Ph.D.
Chief Executive Officer August 26, 1999
/s/ Evan Myrianthopoulos Evan Myrianthopoulos
Chief Financial Officer
(Principal Accounting Officer) August 26, 1999
/s/ Cynthia Davis Cynthia Davis
Controller
(Principal Accounting Officer) August 26, 1999
/s/ Steve H. Kanzer Steve H. Kanzer, C.P.A., Esq.
Chairman of the Board August 26, 1999
Mark C. Rogers, M.D.
Director August 26, 1999
Herbert McDade, Jr.
Director August 26, 1999
/s/ Max Link Max Link, Ph.D.
Director August 26, 1999
/s/ David Naveh David Naveh, Ph.D.
Director August 26, 1999
/s/ Richard Power Richard Power
Director August 26, 1999
Richard Sperber
Director August 26, 1999
<PAGE>
/s/ Marvin Rosenthale Marvin Rosenthale
Director August 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from 10-QSB/A and
is qualified in it's entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,474,000
<SECURITIES> 2,544,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 575,000
<CURRENT-ASSETS> 4,796,000
<PP&E> 432,000
<DEPRECIATION> 106,000
<TOTAL-ASSETS> 5,140,000
<CURRENT-LIABILITIES> 1,088,000
<BONDS> 0
2,277,000
2,000
<COMMON> 5,000
<OTHER-SE> 1,768,000
<TOTAL-LIABILITY-AND-EQUITY> 5,140,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 16,063,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (15,645,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,645,000)
<EPS-BASIC> (4.02)
<EPS-DILUTED> (4.02)
</TABLE>
