U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
|X| Annual Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2000
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|_| Transition report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
Commission file number 0-26422
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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, PENNSYLVANIA 18901
(Address of Principal Executive Offices Including Zip Code)
(215) 340-4699
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(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
(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.
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. $741,000.
The aggregate market value of all of the registrant's outstanding common stock,
par value $0.001 per share (20,871,794 shares, including shares of common stock
held by each director and executive officer (as such term is defined in Rule
16a-1(f) of the Exchange Act) and each person who beneficially owns 10% or more
of the outstanding shares of common stock) was approximately $68 million
computed by reference to the closing price of such common equity on the Nasdaq
SmallCap Market on March 26, 2001.
As of March 26, 2001, 13,880,563 shares of the registrant's common stock were
outstanding (exclusive of shares of such common stock owned by each director and
executive officer (as such term is defined in Rule 16a-1(f) of the Exchange Act)
and each person who beneficially owns 10% or more of the outstanding shares of
common stock). The aggregate market value of voting and non-voting common equity
held by non-affiliates computed by using the closing price of such common equity
on the Nasdaq SmallCap Market on March 26, 2001, was approximately $45 million.
Shares of common stock beneficially owned by each director and executive officer
(as such term is defined in Rule 16a-1(f) of the Exchange Act) and each person
who beneficially owns 10% or more of the outstanding shares of common stock have
been excluded from the calculations set forth in this paragraph in that such
persons may be deemed affiliates of the registrant. This determination of
affiliate status is not necessarily conclusive.
The information required by Items 9 through 12 of Part III is incorporated by
reference to the Company's definitive proxy statement to be filed with the
Commission within 120 days after the end of the Company's most recent fiscal
year.
Transitional Small Business Disclosure Format: YES NO X
2
Unless the context otherwise requires, (i) all references to the "Company"
include Discovery Laboratories, Inc. ("Discovery"), and its wholly-owned,
presently inactive subsidiary, Acute Therapeutics, Inc. ("New ATI"), and (ii)
all references to the Company's activities, results of operations and financial
condition prior to November 25, 1997, insofar as business activities relating to
the Surfaxin(R) and SuperVent(TM) products described herein are concerned,
relate to Discovery Laboratories, Inc., a former Delaware corporation ("Old
Discovery"), a predecessor to the Company. See Item 1 and Item 4 in this Annual
Report on Form 10-KSB (this "Report").
FORWARD LOOKING STATEMENTS
The statements set forth under "Item 1 Description of Business" and elsewhere in
this report, including, without limitation, in "Item 1 Description of Business,
Important Factors Regarding the Company", which are not historical constitute
"Forward Looking Statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934 including
statements regarding the expectations, beliefs, intentions or strategies for the
future. We intend that all forward-looking statements be subject to the
safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements reflect our views as of the date they are made
with respect to future events and financial performance, but are subject to many
risks and uncertainties, which could cause our actual results to differ
materially from any future results expressed or implied by such forward-looking
statements.
Examples of such risks and uncertainties include, but are not limited to, the
inherent risks and uncertainties in developing products of the type we are
developing; possible changes in our financial condition; the progress of our
research and development (including the risk that our lead product candidate,
Surfaxin(R), will not prove to be safe or useful for the treatment of certain
indications); the impact of development of competing therapies and/or
technologies by other companies; our ability to obtain additional required
financing to fund our research programs; our ability to enter into agreements
with collaborators and the failure of collaborators to perform under their
agreements with us; the results of clinical trials being conducted by us; the
progress of the FDA approvals in connection with the conduct of our clinical
trials and the marketing of our products; the additional cost and delays which
may result from requirements imposed by the FDA in connection with obtaining the
required approvals; and the other risks and certainties detailed in "Item 1
Description of Business, Important Factors Regarding the Company", and in the
documents incorporated by reference in this report.
We do not undertake to update any forward-looking statements.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
We are a development stage pharmaceutical company that focuses on developing
compounds to treat respiratory diseases that affect the ability of the lungs to
absorb oxygen. We are initially developing our lead product candidate,
Surfaxin(R), for use by newborn infants to treat two respiratory conditions in
critical care units of hospitals. We are also developing this lead product
candidate for the treatment of acute respiratory distress syndrome in adult
patients ("ARDS") and acute lung injury in adult patients ("ALI", ARDS and ALI
are sometimes referred to herein collectively as "ARDS/ALI"). We believe we can
use other formulations of Surfaxin(R) or our proprietary synthetic peptide,
sinapultide, to treat other respiratory conditions. These include asthma and
chronic obstructive pulmonary disease. In addition, we believe we can use
Surfaxin(R) to deliver drugs that are currently delivered orally or by
injection. These drugs include antibiotics, pulmonary vasodilators,
bronchodilators, steroids and proteins. We are also evaluating acquiring
licenses to other drug products for the treatment of respiratory and other
neonatal critical care diseases. We may develop and market our products on our
own or seek to enter into collaborations with corporate partners for
manufacturing and marketing these drugs.
Our lead product is Surfaxin(R). Surfaxin(R) is a formulation of a humanized,
synthetic lung surfactant containing a peptide that mimics a protein. We
patterned Surfaxin(R) after human surfactant protein B. Surfactants are
substances that are produced in the lungs. They possess the ability to lower the
surface tension of the fluid normally present within the air sacs that are
inside of the lungs. In the absence of sufficient surfactants, these air sacs
tend to collapse. As a result, the lungs do not absorb sufficient oxygen.
We intend to use Surfaxin(R) for the treatment of several respiratory
conditions. Currently, we are developing Surfaxin(R) for the treatment of
idiopathic respiratory distress syndrome in premature infants ("IRDS"), meconium
aspiration syndrome in full-term infants ("MAS"), ARDS and ALI. We have also
begun developing Surfaxin(R) to treat other respiratory disorders.
IRDS in premature infants is a condition in which premature infants are born
with an insufficient amount of their own natural surfactant. MAS is a similar
condition, in which full-term infants are born with meconium in their lungs
which depletes the natural surfactant in their lungs. Meconium is the baby's
first bowel movement in the mother's womb. If the baby breathes in the meconium,
it could lead to MAS. Both IRDS and MAS can be life-threatening as a result of
the failure of the lungs to absorb sufficient oxygen. These conditions can also
deplete natural surfactants in the lungs and result in the need for mechanical
ventilation. ARDS can result from a variety of events. Some of these events are
pneumonia, septic shock, breathing in the contents of the stomach, trauma, smoke
inhalation, near drowning, pancreatitis and head injury.
The incidence of ARDS/ALI ranges between approximately 150,000 and 240,000
patients per year in the United States with a fatality rate as high as 35-55%.
IRDS in infants affects approximately 60,000 patients per year in the United
States. Twenty to forty percent of premature infants with IRDS require extended
mechanical ventilation and hospitalization. MAS affects approximately 22,000 to
26,000 newborn infants per year in the United States.
Presently, the FDA has only approved replacement surfactants for treating IRDS
in premature infants. The most commonly used of these approved replacement
surfactants come from pigs and cows and require relatively complex extractive
manufacturing processes. Surfaxin(R) is a
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humanized, synthetic surfactant modeled after the most active protein found in
human surfactant. As a result, we believe that we can manufacture Surfaxin(R)
less expensively than the animal derived surfactants. In addition, we believe
that Surfaxin(R) might possess other pharmaceutical benefits not currently found
with the animal surfactants such as its resistance to proteolytic degradation
and no potential to transmit animal-borne diseases including the brain-wasting
bovine spongiform encephalopathy (commonly called "mad-cow disease").
The FDA has not approved replacement surfactants for the treatment of MAS and
ARDS. The FDA has granted Surfaxin(R) fast track designation for the indications
of MAS and ARDS. Fast track status does not accelerate the clinical trials nor
does it mean that the regulatory requirements are less stringent. However, the
FDA will review the New Drug Application for a drug granted fast track status
within six months. The FDA has awarded us an orphan drug grant to support our
development of Surfaxin(R) in MAS and has designated Surfaxin(R) as an orphan
drug for the treatment of MAS, IRDS in babies and ARDS/ALI. In October 2000, The
Company was awarded a $1 million Fast-Track Small Business Innovative Research
(SBIR) grant by the National Institutes of Health to develop Surfaxin(R) for
ARDS/ALI.
We have begun preclinical research into converting Surfaxin(R) into an aerosol
spray for the treatment of asthma, chronic obstructive pulmonary disease, acute
and chronic bronchitis and a variety of other respiratory diseases. We are also
initiating preclinical research to evaluate Surfaxin(R) or related formulations
as a novel pulmonary drug delivery technology with the potential to deliver
other pharmaceutical products to the lungs so that such products can exert their
pharmacological effects locally or systemically.
Our second compound under development is SuperVent(TM) (active compound,
tyloxapol). We intend to use SuperVent(TM) to treat airway diseases such as
cystic fibrosis and chronic bronchitis. We deliver SuperVent(TM) to patients
using a nebulizer. A nebulizer is a device that turns liquid into mist, making
it breathable. We anticipate using SuperVent(TM) for the treatment of lung
conditions involving inflammation, excessive mucus and injurious oxidation.
Injurious oxidation is a condition in which atoms in tissue lose electrons,
which can result in damage to the tissue.
Cystic fibrosis is a progressive, lethal respiratory disease that afflicts
approximately 28,000 patients in the United States and a comparable number in
Europe. Cystic fibrosis is the most common lethal genetic disease among
Caucasians. Because of this genetic defect, mucus accumulates and clogs the
lungs, impairing breathing. This can lead to gradual destruction of the lungs of
cystic fibrosis patients. The inability to clear mucus from the lungs can lead
to blockage of the airways in the lungs. A new therapy that is intended to
minimize the complications of cystic fibrosis could have a major impact on the
length and quality of life of its patients.
We are presently enrolling patients in a pivotal Phase 3 clinical trial of
Surfaxin(R) for the treatment of MAS in neonates, and have designed pivotal
Phase 3 clinical trials for the treatment of IRDS in premature infants and
expect to commence enrollment in these trials in the second quarter of 2001. In
addition, we have initiated a Phase 2 clinical trial of Surfaxin(R) for the
treatment of ARDS. The Company is also evaluating whether to conduct further
clinical trials of SuperVent(TM) for treatment of cystic fibrosis ("CF") and is
considering entering into suitable collaborative arrangements with a partner.
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PRODUCTS AND TECHNOLOGIES UNDER DEVELOPMENT
SURFAXIN(R)
The Company's lead product is Surfaxin(R), a peptide-phospholipid formulation
containing the proprietary, synthetic peptide, sinapultide, for the treatment of
several conditions characterized by insufficient surfactant. Lung surfactants
are protein-phospholipid complexes that coat the alveoli (air sacs) of the
lungs. Lung surfactants lower surface tension in expiration and raise it during
inspiration to prevent the collapse of alveoli. Replacement surfactants are
currently approved only for treating IRDS in premature babies. Infants with
IRDS, as well as infants born with meconium (a component of the fetal bowel) in
their lungs, which can lead to MAS, typically suffer from insufficient
surfactant. MAS can lead to a life-threatening loss of pulmonary function.
Patients with ARDS/ALI, which can result from trauma, smoke inhalation, head
injury, pneumonia and a variety of other events, typically suffer from
surfactant deficiency as well. We are also evaluating Surfaxin(R) as an aerosol
formulation that may have utility in other pulmonary disorders, such as asthma.
Surfaxin(R) is an aqueous suspension of lipids containing the novel synthetic
peptide sinapultide and was invented at The Scripps Research Institute
("Scripps"). Surfaxin(R) is patterned after human surfactant protein B, shown to
have the most activity of the human surfactant proteins. Surfaxin(R) was
exclusively licensed by Scripps to Johnson & Johnson, Inc. ("J&J"), which,
together with its wholly owned subsidiary, Ortho Pharmaceutical Corporation
("Ortho"), engaged in development activities with respect to sinapultide. The
Company acquired the exclusive worldwide sublicense to the sinapultide
technology from J&J and Ortho in October 1996.
In July 1992, an investigational new drug application ("IND") submitted by
Scripps relating to the use of Surfaxin(R) to treat IRDS was approved by the
United States Food and Drug Administration (the "FDA"). J&J subsequently
completed a multi-center, Phase 2 clinical trial of Surfaxin(R) in 47 infants
with IRDS. This trial demonstrated safety and efficacy. In September 1994, an
IND was submitted by J&J relating to the use of Surfaxin(R) to treat ARDS and
was subsequently approved by the FDA. Both the IRDS IND and the ARDS IND have
been transferred to the Company. The Company subsequently received FDA approval
to amend the approved ARDS IND and re-initiate Phase 1 clinical trials of
Surfaxin(R) for the treatment of ARDS. The Company amended the existing IRDS IND
to permit the initiation of a Phase 2 clinical trial of Surfaxin(R) to treat MAS
on May 27, 1997. This trial was completed and results were announced on February
4, 1999. The Company initiated a pivotal Phase 3 trial in MAS in January 2000
and commenced enrollment in the trial in May 2000. The trial intends to enroll
200 MAS patients. In November 2000, the Company obtained FDA clearance for a 110
patient Phase 2 trial in ARDS. Pending the successful outcome of ongoing
discussions with the FDA, the Company also intends to initiate two Phase 3
multinational clinical trials for Surfaxin(R) for IRDS during the second quarter
of 2001. The IRDS Phase 3 trials will use Surfaxin(R) versus an active
comparator that will be either totally synthetic or animal derived. The Phase 3
trials can be conducted at clinical sites located in North America, Europe and
Latin America and the Company presently anticipates that such trials will not
contain a placebo-controlled arm. Conditioned upon the successful outcome of
such trials, the Company has committed to provide Surfaxin(R) to certain Latin
American regions that participate in the studies at a significantly reduced cost
for a period of 10 years following commercialization.
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SuperVent(TM)
The Company is developing SuperVent(TM) as a stable, aerosolized,
multidimensional therapy for airway diseases such as CF and chronic bronchitis,
which are characterized by inflammation, injurious oxidation and excessive
sputum. CF results from a genetic defect in the CFTR gene. The CFTR gene codes
for a membrane protein responsible for the transport of chloride ions. Because
of this genetic defect, CF mucus is excessively viscous and adherent to airway
walls. Destruction of the lungs of CF patients occurs gradually as the inability
to clear mucus from the lungs leads to blockage of the airways usually beginning
in the smaller airways and alveoli. A new therapy, which minimizes the pulmonary
complications of CF, would have a major impact on the length and quality of life
of its patients.
SuperVent's(TM) active component is tyloxapol, a compound which has been safely
used as an emulsifying agent in drug formulations by the United States
pharmaceutical industry for over 40 years. Experimental research conducted by
consultants to the Company indicates that tyloxapol may possess biological
activities beyond its well-recognized emulsification properties. In vitro
studies conducted by the inventors demonstrated that tyloxapol has three
mechanisms of action: anti-inflammatory activity, anti-oxidant activity and
mucoactive activity. This combination of pharmacological activities is not
presently found in any single, safe, effective therapy for CF or chronic
bronchitis in the United States.
The Company's clinical development plan for SuperVent(TM) is to focus first on
CF. In September 1995, the FDA approved a physician-sponsored IND to begin a
clinical trial of SuperVent(TM) for use in treating CF. The trial commenced on
March 17, 1997, at the University of Utah Health Sciences Center and is designed
to determine whether aerosolized SuperVent(TM) holds promise as a low toxicity,
anti-inflammatory, anti-oxidant and mucolytic agent for the treatment of CF.
Part A of such clinical trial was completed on March 31, 1998. The results from
this clinical trial in normal healthy volunteers have indicated that the
compound had no significant effects on any objective measure of safety (although
coughing was noted by several subjects at the highest doses tested). The Company
began a Phase 2a clinical trial of SuperVent(TM) for the treatment of CF on
August 4, 1999. Analysis of the data show that SuperVent(TM) dramatically
decreased the amount of Interleukin 8 (IL-8) and Interleukin 6 (IL-6) in the
sputum of treated patients compared to controls. IL-8 is an important body
chemical that causes the migration of inflammatory cells to the site of release.
A reduction in a CF patient's IL-8 level could potentially result in an
anti-inflammatory effect occurring in the lungs which may result in a clinical
benefit for the patient. The Phase 2a clinical trial involved 8 patients and an
additional Phase 2 trial will likely be required prior to commencement of a
Phase 3 trial.
DSC-103
The Company has determined that DSC-103 does not meet its critical care focus
and its license of DSC-103 has been terminated with the licensor, effective
September 2000. Earlier in the year, in anticipation of such action, the Company
terminated a related sublicense that had previously been granted for DSC-103.
LICENSING ARRANGEMENTS; PATENTS AND PROPRIETARY RIGHTS
J&J License Agreement: Surfaxin(R)
The Company has received an exclusive, worldwide sublicense from J&J (the "J&J
License Agreement") to commercialize Surfaxin(R) for the diagnosis, prevention
and treatment of disease.
7
The J&J License Agreement is a sublicense under certain patent rights previously
licensed to J&J by Scripps (the "Scripps Patent Rights") and a license under
certain other patent rights held by Ortho (the "Ortho Patent Rights"). The
Scripps Patent Rights principally consist of four issued United States patents
and two pending United States patent applications. The four issued patents are
U.S. Patent No. 5,407,914; U.S. Patent No. 5,260,273; U.S. Patent No. 5,164,369;
and U.S. Patent No. 6,013,619. These patents relate to humanized, synthetic
pulmonary surfactants (including Surfaxin(R)), certain related polypeptides and
a method of treating respiratory distress syndrome with these surfactants. The
first of these patents will expire in 2009. The two pending United States
applications relate to pulmonary surfactants, related polypeptides, liposomal
surfactant compositions and methods of treating respiratory distress syndromes
with these surfactants and compositions. The Ortho Patent Rights consist of
certain pending United States patent applications which relate to methods of
manufacturing certain peptides which may be used in the manufacture of
Surfaxin(R). J&J is responsible for filing, prosecuting and maintaining the
Ortho Patent Rights. In October 2000, the Company was issued European Patent No.
0350506 covering certain novel peptides and polypeptides related to the human
surfactant SP18 monomer protein.
U.S. Patent No. 6,013,619 was issued to Scripps and licensed to the Company and
covers all known synthetic (including Surfaxin(R)), animal- or human-derived
surfactants for use in any form of pulmonary lavage for respiratory distress
syndromes. Pulmonary lavage techniques (using surfactant) include lavage via a
bronchoscope in adults as well as direct pulmonary lung lavage via an
endotracheal tube in newborn babies with MAS. The Company believes that the
lavage technique may provide a clinical benefit to ARDS and MAS patients by
decreasing the amount of infectious and inflammatory debris in the lungs,
restoring the alveoli to a more normal state and possibly resulting in patients
getting off mechanical ventilation sooner.
CMHA License Agreement: SuperVent(TM)/Tyloxapol
The Company has obtained the core technology relating to SuperVent(TM) pursuant
to a license agreement (the "CMHA License Agreement") with the
Charlotte-Mecklenberg Hospital Authority ("CMHA"). The CMHA License Agreement
grants the Company an exclusive worldwide license under two issued United States
patents (U.S. Patent No. 5,474,760 and U.S. Patent No. 5,512,270) and two
pending United States patent applications held by CMHA, and any later-issued
United States and any foreign patents based on or issuing from the issued
patents and the pending patent applications. The issued United States patents
expire in 2013. The United States patents cover methods of using tyloxapol, the
active compound in SuperVent(TM), to treat cystic fibrosis and methods of
treating diseases caused by oxidant species, such as myocardial infarction,
stroke and ARDS. The two pending United States patent applications relate to the
use of tyloxapol as an anti-inflammatory and anti-oxidant agent.
Tyloxapol, the active compound in SuperVent(TM), was the subject of an issued
United States composition of matter patent which expired in 1965. The patents
and patent applications licensed to the Company differ from the expired patent,
inter alia, in that one patent application covers proprietary pharmaceutical
formulations containing high concentrations of tyloxapol and the other patents
and patent applications cover uses of tyloxapol to treat certain diseases.
Although the Company believes that high concentration formulations of tyloxapol
will represent the most practical and efficacious means to deliver the active
compound, there can be no assurance that any patent covering this formulation
will be issued or that the compound will not
8
prove similarly effective in lower concentrations which are not covered by any
of the Company's patent applications. See "Important Factors Regarding the
Company."
Scripps Agreement
The Company and Scripps were parties to a sponsored research agreement (the
"Sponsored Research Agreement") that expired during February 1999 pursuant to
which the Company contributed $460,000 per annum to Scripps' Surfaxin(R)
research efforts. The Sponsored Research Agreement was for an initial term of
two years with renewal provisions for additional one-year periods. In March
2000, the Company and Scripps entered into an agreement extending the term for
one year and pursuant to such extension the Company contributed $463,000 to
Scripps. The Company and Scripps are currently finalizing an agreement to extend
the Sponsored Research Agreement for an additional year commencing March 1,
2001. In connection therewith, it is currently contemplated that the Company
will contribute an additional $489,000 to Scripps' Surfaxin(R) research efforts
commencing March 1, 2001. The Company has an option to acquire an exclusive
worldwide license to technology developed under the Sponsored Research Agreement
prior to its expiration, which it is required to exercise within 180 days from
receipt of notice from Scripps of the development of such technology. Scripps
will own all technology that it developed pursuant to work performed under the
Sponsored Research Agreement. The Company has the right to receive 50% of the
net royalty income received by Scripps for inventions jointly developed by the
Company and Scripps to the extent the Company does not exercise its option with
respect to such inventions.
Collaboration Agreements
The Company entered into a sublicense agreement with Laboratorios del Dr.
Esteve, S.A. ("Esteve") pursuant to which the Company granted to Esteve an
exclusive license to market and sell Surfaxin(R) products in southern Europe
(with an option for Italy), Central and South America and Mexico. In addition,
the Company granted to Esteve a right of first negotiation with respect to other
products developed by the Company for distribution and sale in the licensed
territories. Under the sublicense agreement, the Company has received, and
subject to certain limitations will continue to receive, certain nonrefundable
license fees and research and development expenditure reimbursements with
respect to Surfaxin(R). In addition, the Company entered into a supply agreement
with Esteve pursuant to which Esteve agreed to purchase all of its requirements
(subject to certain limits) of the Surfaxin(R) products from the Company. The
Company will receive a percentage of the sales price of the licensed products
for the Surfaxin(R) products as the purchase price under the supply agreement.
Risk of Loss of Technology/Technological Uncertainty and Obsolescence
The Company must satisfy the terms and conditions set forth in the license
agreements described above in order to retain its license rights thereunder,
including but not limited to, diligent pursuit of product development and the
timely payment of royalty fees (including, with respect to certain such
agreements, minimum royalty payments), milestone payments and other amounts. If
the Company fails to comply with such terms and conditions as set forth in such
license agreements, its rights thereunder for individual product opportunities
could be terminated.
The patent position of firms relying upon biotechnology is highly uncertain and
involves complex legal and factual questions. To date, there has emerged no
consistent policy regarding the breadth of claims allowed in biotechnology
patents or the degree of protection afforded under
9
such patents. The Company's success will depend, in part, on its ability, and
the ability of its licensor(s), to obtain protection for its products and
technologies under United States and foreign patent laws, to preserve its trade
secrets and to operate without infringing the proprietary rights of third
parties. The Company has obtained rights to certain patents and patent
applications and may, in the future, seek rights from third parties to
additional patents and patent applications. There can be no assurance that
patent applications relating to the Company's potential products which have been
licensed to date, or that it may license from others in the future, will result
in patents being issued, that any issued patents will afford adequate protection
to the Company or not be challenged, invalidated, infringed or circumvented, or
that any rights granted thereunder will afford additional competitive advantages
to the Company. Furthermore, there can be no assurance that others have not
independently developed, or will not independently develop, similar products
and/or technologies, duplicate any of the Company's products or technologies,
or, if patents are issued to, or licensed by, the Company, design around such
patents. There also can be no assurance that the validity of any of the patents
licensed to the Company would be upheld if challenged by others in litigation or
that the Company's activities would not infringe patents owned by others. The
Company could incur substantial costs in defending itself in suits brought
against it or any of its licensors, or in suits in which the Company may assert,
against others, patents in which the Company has rights. Should the Company's
products or technologies be found to infringe patents issued to third parties,
the manufacture, use and sale of the Company's products could be enjoined and
the Company could be required to pay substantial damages. In addition, the
Company may be required to obtain licenses to patents or other proprietary
rights of third parties in connection with the development and use of its
products and technologies. No assurance can be given that any licenses required
under any such patents or proprietary rights would be made available on terms
acceptable to the Company, if at all.
The Company also relies on trade secrets and proprietary know-how. The Company
requires all employees to enter into confidentiality agreements that prohibit
the disclosure of confidential information to third parties and require
disclosure and assignment to the Company of rights to their ideas, developments,
discoveries and inventions. In addition, the Company seeks to obtain such
agreements from its consultants, advisors and research collaborators; however,
such agreements may not be possible where such persons are employed by
universities or other academic institutions that require assignment of employee
inventions to them. See "Important Factors Regarding the Company."
THIRD PARTY SUPPLIERS; MANUFACTURING AND MARKETING
To be successful, the Company's products must be manufactured in commercial
quantities and at reasonable commercial cost under good manufacturing practice
requirements set by the FDA ("GMP"). The FDA periodically inspects manufacturing
facilities in the United States and abroad in order to assure compliance with
the GMP requirements. Foreign manufacturers also are inspected by the FDA if
their drugs are marketed in the United States or if they are serving as a
contract supplier to a United States based company. Failure of the foreign or
domestic suppliers of the Company's products or failure of the manufacturers of
the Company's products to comply with GMP regulations or other FDA regulatory
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations. The Company does not have any
manufacturing capacity of its own but instead intends to rely on outside
manufacturers to produce appropriate clinical grade material for its use in
clinical studies for certain of its products. See "Important Factors Regarding
the Company."
10
The Company has acquired from J&J experimental compounds, the sinapultide and
manufacturing equipment needed to produce and meet its requirements for clinical
supplies of Surfaxin(R). The Company has entered into an agreement with Akorn,
Inc. (formerly, Taylor Pharmaceuticals, Inc.), for the manufacture of
Surfaxin(R) for use in the Company's planned clinical trials. In addition, the
Company is evaluating the purchase of additional manufacturing equipment for
approximately $500,000 in anticipation of optimizing the commercial process for
Surfaxin(R) and to allow scale up of the manufacturing process to meet expanded
clinical and commercial needs. The Company has also embarked on a program of
identifying backup suppliers of the Company's components and products.
The active compound in SuperVent(TM), tyloxapol, is presently manufactured for
several third parties pursuant to GMP standards by an affiliate of
Sanofi-Winthrop, Inc. ("Sanofi"), a multinational pharmaceutical company. Sanofi
is the sole supplier of tyloxapol that presently meets GMP standards and there
are few alternative sources of supply. Currently, the Company purchases bulk
tyloxapol from Sanofi on an as-needed basis. Although Sanofi has sold a quantity
of tyloxapol sufficient for the Company's contemplated Phase 2 clinical trial of
SuperVent(TM), the Company does not have an agreement with Sanofi to supply any
additional material, either in connection with a Phase 3 clinical trial or,
following regulatory approval, for marketing purposes. There can be no assurance
that the Company will be able to enter into a supply agreement with Sanofi or a
supplier of the formulated drug on terms acceptable to the Company, if at all.
In such case, the Company would be required to seek alternate manufacturing
sources capable of producing tyloxapol and the formulated drug. There can be no
assurance that the Company will be able to identify and contract with
alternative manufacturers on terms acceptable to it, if at all. Any interruption
in the supply of tyloxapol would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Important Factors
Regarding the Company."
The Company may elect to market Surfaxin(R) and SuperVent(TM) directly or may,
in the future, seek to enter into collaboration agreements to license these
products, if they are successfully developed. The Company currently has no
marketing and sales experience and no marketing or sales personnel. Unless a
sales force is established, the Company will be dependent on corporate partners
or other entities for the marketing and selling of its products. There can be no
assurance that the Company will be able to enter into any satisfactory
arrangements for the marketing and selling of its products. The inability of the
Company to enter into such third party distribution, marketing and selling
arrangements for its anticipated products could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Important Factors Regarding the Company."
COMPETITION
The Company is engaged in highly competitive fields of pharmaceutical research.
Competition from numerous existing companies and others entering the fields in
which the Company operates is intense and expected to increase. The Company
expects to compete with, among others, conventional pharmaceutical companies.
Most of these companies have substantially greater research and development,
manufacturing, marketing, financial, technological, personnel and managerial
resources than the Company. Acquisitions of competing companies by large
pharmaceutical or health care companies could further enhance such competitors'
financial, marketing and other resources. Moreover, competitors that are able to
complete clinical trials,
11
obtain required regulatory approvals and commence commercial sales of their
products before the Company could enjoy a significant competitive advantage.
There are also existing therapies that may be expected to compete with the
products the Company has under development. See "Important Factors Regarding the
Company."
Presently, there are no approved drugs that are specifically indicated for MAS
or ARDS/ALI. Current therapy consists of general supportive care and mechanical
ventilation. Four products are specifically approved for the treatment of IRDS.
Curosurf(TM), marketed in Europe by Chiesi Farmaceutici S.p.A., and in the
United States by Dey Laboratories, Inc., is a porcine lung extract. Exosurf(TM),
marketed by GlaxoSmithKline, plc, contains only phospholipids and synthetic
organic detergents and no stabilizing protein or peptides. Survanta(TM), which
has been shown to be more effective than Exosurf(TM) in clinical trials, is an
extract of bovine lung that contains the cow version of surfactant protein B.
Forrest Laboratories, Inc., markets its calf lung surfactant, Infasurf(TM), for
use in IRDS. Although none of the four approved surfactants for IRDS is approved
for ARDS or ALI, which are significantly larger markets, there are a significant
number of other potential therapies in development for the treatment of ARDS/ALI
that are not surfactant related. Any of these various drugs or devices could
significantly impact the commercial opportunity for Surfaxin(R). The Company
believes that synthetic surfactants such as Surfaxin(R) will be far less
expensive to produce than the animal-derived products approved for the treatment
of IRDS and will have no capability of transmitting the brain-wasting bovine
spongiform encephalopathy (commonly called "mad-cow disease").
Genentech, Inc., has marketed Pulmozyme(TM) in the United States and Canada as a
CF therapy since early 1994. Pulmozyme(TM) reduces the viscosity of CF mucus by
cleaving the DNA released from destroyed inflammatory, epithelial and bacterial
cells which collect in mucus and contribute to its abnormal viscosity and
adherence. The approximate annual cost of Pulmozyme(TM) treatment for an average
patient is $12,000. The Company believes that the high cost of this treatment
may reduce its competitive profile as compared with SuperVent(TM).
GOVERNMENT REGULATION
The testing, manufacture, distribution, advertising and marketing of drug
products are subject to extensive regulation by governmental authorities in the
United States and other countries. Prior to marketing, any pharmaceutical
products developed or licensed by the Company must undergo an extensive
regulatory approval process required by the FDA and by comparable agencies in
other countries. This process, which includes preclinical studies and clinical
trials of each pharmaceutical compound to establish its safety and efficacy and
confirmation by the FDA that good laboratory, clinical and manufacturing
practices were maintained during testing and manufacturing, can take many years,
requires the expenditure of substantial resources and gives larger companies
with greater financial resources a competitive advantage over the Company. The
FDA review process can be lengthy and unpredictable, and the Company may
encounter delays or rejections of its applications when submitted. If questions
arise during the FDA review process, approval may take a significantly longer
period of time. Generally, in order to gain FDA approval, a company first must
conduct preclinical studies in a laboratory and in animal models to obtain
preliminary information on a compound's efficacy and to identify any safety
problems. The results of these studies are submitted as part of an IND
application that the FDA must review before human clinical trials of an
investigational drug can start.
12
Clinical trials are normally done in three phases and generally take two to five
years or longer to complete. Phase 1 consists of testing the drug product in a
small number of humans to determine preliminary safety and tolerable dose range.
Phase 2 involves larger studies to evaluate the effectiveness of the drug
product in humans having the disease or medical condition for which the product
is indicated and to identify possible common adverse effects in a larger group
of subjects. Phase 3 consists of additional controlled testing to establish
clinical safety and effectiveness in an expanded patient population of
geographically dispersed test sites, to evaluate the overall benefit-risk
relationship for administering the product and to provide an adequate basis for
product labeling.
After completion of clinical trials of a new drug product, FDA and foreign
regulatory authority marketing approval must be obtained. A New Drug Application
("NDA") submitted to the FDA generally takes one to three years to obtain
approval. If questions arise during the FDA review process, approval may take a
significantly longer period of time. The testing and approval processes require
substantial time and effort and there can be no assurance that any approval will
be granted on a timely basis, if at all. Even if regulatory clearances are
obtained, a marketed product is subject to continual review, and later discovery
of previously unknown problems or failure to comply with the applicable
regulatory requirements may result in restrictions on the marketing of a product
or withdrawal of the product from the market as well as possible civil or
criminal sanctions. For marketing outside the United States, the Company also
will be subject to foreign regulatory requirements governing human clinical
trials and marketing approval for pharmaceutical products. The requirements
governing the conduct of clinical trials, product licensing, pricing and
reimbursement vary widely from country to country. None of the Company's
products under development have been approved for marketing in the United States
or elsewhere. No assurance can be given that the Company will be able to obtain
regulatory approval for any such products under development. Failure to obtain
requisite governmental approvals or failure to obtain approvals of the scope
requested will delay or preclude the Company or its licensees or marketing
partners from marketing their products, or limit the commercial use of the
products, and thereby would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Important Factors
Regarding the Company."
During October 1998, the FDA granted the Company fast track approval status for
the ARDS and MAS indications. Fast track status facilitates the development and
expedites the review of new drugs intended for treatment of life-threatening
conditions for which there is presently no medical option by providing for the
FDA's review of the NDA for a drug granted such fast track status within six
months following filing of the application. The FDA Office of Orphan Products
Development (the "OOPD") has designated Surfaxin(R) as an orphan drug for the
treatment of MAS, IRDS and ARDS. In October 2000, the Company was awarded a $1
million Fast-Track Small Business Innovative Research (SBIR) grant by the
National Institutes of Health to develop Surfaxin(R) for ARDS. In October 1998,
the OOPD awarded the Company a renewable Orphan Products Development Grant,
ranging from $194,390 for the first year to $583,170 over three or more years,
to finance the Company's MAS trial.
EMPLOYEES
The Company has approximately 36 full-time employees. The Company's future
success depends in significant part upon the continued service of its key
scientific personnel and executive officers and its continuing ability to
attract and retain highly qualified scientific and
13
managerial personnel. Competition for such personnel is intense and there can be
no assurance that the Company can retain its key employees or that it can
attract, assimilate or retain other highly qualified technical and managerial
personnel in the future. See "Important Factors Regarding the Company."
1998 Merger
On June 16, 1998, Discovery completed the acquisition of the then outstanding
minority interest in Acute Therapeutics, Inc., a Delaware corporation ("Old
ATI"), through the merger of a transitory subsidiary of Discovery with and into
Old ATI (the "1998 Merger"). Upon consummation of the 1998 Merger, (i) Dr.
Capetola became the Chief Executive Officer of the Company, (ii) the other
members of Old ATI's management team prior to the 1998 Merger assumed executive
positions with the Company comparable to their prior positions with Old ATI
and (iii) the Board of Directors of the Company was reconstituted.
1997 Merger
On November 25, 1997, Old Discovery was merged with and into the Company (the
"1997 Merger"). Pursuant to the 1997 Merger, the name of the Company was changed
from Ansan Pharmaceuticals, Inc., to Discovery Laboratories, Inc. Immediately
following the consummation of the 1997 Merger, the Company effected a 1-for-3
reverse split of its outstanding common stock, par value $0.001 per share (the
"Common Stock").
IMPORTANT FACTORS REGARDING THE COMPANY
The following important factors, among others, could cause the Company's actual
results, performance, achievements or industry results to differ materially from
those expressed in the Company's forward-looking statements contained herein and
presented elsewhere by management from time to time.
Because we are a development stage company, we may not successfully develop and
market our products, and even if we do, we may not generate enough revenue or
become profitable.
We are a development stage company. Therefore, you must evaluate us in light of
the uncertainties and complexities present in a development stage biotechnology
company. We are conducting research and development on our product candidates.
As a result, we have not begun to market or generate revenues from the
commercialization of any of these products. We will need to engage in
significant, time-consuming and costly research, development, pre-clinical
studies, clinical testing and regulatory approval for our products under
development prior to their commercialization. In addition, pre-clinical or
clinical studies may show that our products are not effective or safe for one or
more of their intended uses. We may fail in the development and
commercialization of our products. To date, we have generated significant and
increasing operating losses, and we expect to continue to incur significant
increasing operating losses over the next several years. If we succeed in the
development of our products, we still cannot assure you that we will generate
sufficient or sustainable revenues or that we will be profitable.
The types of products we are developing are subject to risks that are difficult
to foresee and we may not succeed in our development efforts.
Our development of products is subject to the risks of failure inherent in the
development of new pharmaceutical products that utilize innovative or new
technologies. During the development
14
process we could experience unforeseen problems that could delay us from
completing the development of our products. As a result, we may terminate
development of these products or applications. We cannot assure you:
- -- that we will succeed in our research and development; or
- -- that we will be able to successfully and economically manufacture and
market our proposed products.
If we cannot raise additional capital we may need to discontinue our research
and development activities. In addition, any additional financing could result
in equity dilution.
We may need substantial additional funding to conduct our research and product
development activities. Based on our current operating plan, we believe that our
available resources will be adequate to satisfy our capital needs through the
first quarter of 2002. Our future capital requirements will depend on the
results of our research and development activities, clinical studies and trials,
competitive and technological advances and the regulatory process. If our
operations do not become profitable before we exhaust our resources, we will
likely need to raise substantial additional funds through collaborative ventures
with potential corporate partners and through additional debt or equity
financings. We may in some cases elect to develop products on our own instead of
entering into collaboration arrangements. This would increase our cash
requirements for research and development. We cannot assure you that we will
obtain necessary financing.
We have not entered into arrangements to obtain any additional financing. Any
additional financing could include unattractive terms or result in significant
dilution of stockholders' interests and share prices may decline. If we fail to
enter into collaborative ventures or to receive additional funding, we may have
to delay, scale back or discontinue our research and development operations, and
consider licensing the development and commercialization of products that we
consider valuable and which we otherwise would have developed ourselves.
Furthermore, we could cease to qualify for listing of our securities on the
Nasdaq SmallCap Market. See "Important Factors Regarding the Company--The market
price of our stock may be adversely affected by market volatility."
The clinical trial and regulatory approval process for the Company's products
will be expensive and time consuming, and the outcome is uncertain.
In order to sell our products that are under development, we must receive
regulatory approvals for our products. The FDA and comparable agencies in
foreign countries extensively and rigorously regulate the testing, manufacture,
distribution, advertising, pricing and marketing of drug products. The FDA and
comparable foreign agencies require an extensive regulatory approval process
before we can market our product. This approval process includes preclinical
studies and clinical trials of each pharmaceutical compound to establish its
safety and effectiveness and confirmation by such agencies that the manufacturer
maintains good laboratory and manufacturing practices during testing and
manufacturing. The process is lengthy, expensive and uncertain. It is also
possible that the FDA or comparable foreign regulatory authorities could
interrupt, delay or halt our clinical trials. If we, or such authorities,
believe that trial participants face unacceptable health risks, the trials could
be suspended or terminated. We also may not reach agreement with the FDA and/or
comparable foreign agencies on the design of clinical studies necessary for
approval. In addition, conditions imposed by such agencies on our
15
clinical trials could significantly increase the time required for completion of
our clinical trials and the costs of conducting such clinical trials.
To succeed, clinical trials require adequate supplies of drug substance, which
may be difficult or uneconomical to procure or manufacture, and sufficient
patient enrollment. Patient enrollment is a function of several factors,
including the size of the patient population, the nature of the protocol, the
proximity of the patients to the trial sites and the eligibility criteria for
the clinical trials. Delays in patient enrollment can result in greater costs
and longer trial timeframes. Patients may also suffer adverse medical events or
side effects.
Clinical trials generally take two to five years or more to complete, and,
accordingly, our first product is not expected to be commercially available in
the Unites States until at least 2002, and our other product candidates will
take longer. The FDA has notified us that two of our intended indications for
Surfaxin(R), MAS and ARDS, have been granted designation as "fast track"
products under provisions of the Food and Drug Administration Modernization Act
of 1997, and the FDA has awarded us an orphan drug grant to support our
development of Surfaxin(R) in MAS. Fast track status does not accelerate the
clinical trials nor does it mean that the regulatory requirements are less
stringent. The fast track provisions are designed to expedite the FDA's review
of new drugs intended to treat serious or life-threatening conditions. The FDA
generally will review the NDA for a drug granted fast track status within six
months instead of the typical one to three years. Our product may not, however,
continue to qualify for expedited review and our other drug candidates may fail
to qualify for fast track development or expedited review. Even though some of
our drug candidates have qualified for expedited review, the FDA may not approve
them at all or any sooner than other drug candidates that do not qualify for
expedited review.
The FDA and comparable foreign agencies could withdraw any approvals we obtain.
Further, if there is a later discovery of unknown problems or if we fail to
comply with other applicable regulatory requirements at any stage in the
regulatory process, the FDA may restrict or delay our marketing of a product or
force us to make product recalls. In addition, the FDA could impose other
sanctions such as fines, injunctions, civil penalties or criminal prosecutions.
For marketing outside the United States, we also need to comply with foreign
regulatory requirements governing human clinical trials and marketing approval
for pharmaceutical products. The FDA and foreign regulators have not yet
approved any of our products under development for marketing in the United
States or elsewhere. If the FDA and other regulators do not approve our
products, it could prevent us from marketing our products.
Our strategy, in many cases, is to enter into collaboration agreements with
third parties with respect to our products and we may require additional
collaboration agreements. In addition, if we enter into these agreements and the
third parties do not perform, it could impair our ability to commercialize our
products.
Our strategy for the completion of the required development and clinical testing
of our products and for the manufacturing, marketing and commercialization of
our products, in many cases, depends upon entering into collaboration
arrangements with pharmaceutical companies. We have entered into a sublicense
agreement for Surfaxin(R) covering southern Europe and Latin America with an
option for Italy. We may need to enter into additional collaboration agreements.
Our success may depend upon obtaining collaboration partners. In addition, we
may depend on our partners' expertise and dedication of sufficient resources to
develop and
16
commercialize our proposed products. We may, in the future, grant to
collaboration partners rights to license and commercialize pharmaceutical
products developed under collaboration agreements. Under these arrangements our
collaboration partners may control key decisions relating to the development of
the products. Those rights would limit our flexibility in considering
alternatives for the commercialization of our products. If we fail to
successfully develop these relationships or if our collaboration partners fail
to successfully develop or commercialize any of our products, it may delay or
prevent us from developing or commercializing our products in a competitive and
timely manner.
Discoveries or developments of new technologies by our competitors or others may
make our products less competitive or make our products obsolete.
There are rapidly changing technologies and evolving industry standards in the
biotechnology and pharmaceutical markets. We intend to market our products under
development for the treatment of diseases for which other technologies and
proposed treatments are rapidly developing. Third parties conducting research
include governments, major research facilities and large multinational
corporations. Many of the third parties have greater research and development,
manufacturing, marketing, financial, technological, personnel and managerial
resources than we have, and therefore have the potential to successfully develop
and commercialize products that are more effective or less expensive than ours.
The research and development efforts of others may render our research and
product development efforts obsolete or noncompetitive.
If we cannot protect our intellectual property, other companies could use our
technology in competitive products. If we infringe the intellectual property
rights of others, other companies could prevent us from developing or marketing
our products.
We seek patent protection for our drug candidates so as to prevent others from
commercializing equivalent products in substantially less time and at
substantially lower expense. The pharmaceutical industry places considerable
importance on obtaining patent and trade secret protection for new technologies,
products and processes. Our success will depend in part on our ability and that
of parties from whom we license technology to:
- -- defend our patents and otherwise prevent others from infringing on our
proprietary rights;
- -- protect trade secrets; and
- -- operate without infringing upon the proprietary rights of others, both in
the United States and in other countries.
The patent position of firms relying upon biotechnology is highly uncertain and
involves complex legal and factual questions for which important legal
principles are unresolved. To date, the United States Patent and Trademark
Office ("USPTO") has not adopted a consistent policy regarding the breadth of
claims that the USPTO allows in biotechnology patents or the degree of
protection that these types of patents afford. As a result, there are risks that
we may not develop or obtain rights to products or processes that are or may
seem to be patentable.
Even if we obtain patents to protect our products, those patents may not be
sufficiently broad and others could compete with us.
We, or the parties licensing technologies to us, have filed various United
States and foreign patents applications with respect to the products and
technologies under our development and the
17
USPTO and foreign patent offices have issued patents with respect to our
products and technologies. These patent applications include international
applications filed under the Patent Cooperation Treaty. Our pending patent
applications, those we may file in the future or those we may license from third
parties may not result in the USPTO or foreign patent office issuing patents.
Also, if patent rights covering our products are not sufficiently broad, they
may not provide us with proprietary protection or competitive advantages against
competitors with similar products and technologies. Furthermore, if the USPTO or
foreign patent offices issue patents to us or our licensors, others may
challenge the patents or circumvent the patents, or the patent office or the
courts may invalidate the patents. Thus, any patents we own or license from or
to third parties may not provide any protection against competitors. In
particular, our issued and pending patents relating to SuperVent(TM) solely
cover relatively high concentrations of tyloxapol.
Intellectual property rights of third parties could limit our ability to market
our products.
Our commercial success also significantly depends on our ability to operate
without infringing the patents or violating the proprietary rights of others.
The USPTO keeps United States patent applications confidential while the
applications are pending. As a result, we cannot determine which inventions
third parties claim in pending patent applications that they have filed. We may
need to engage in litigation to defend or enforce our patent and license rights
or to determine the scope and validity of the proprietary rights of others. It
will be expensive and time consuming to defend and enforce patent claims. Thus,
even in those instances in which the outcome is favorable to us, these
proceedings can result in the diversion of substantial resources from our other
activities. An adverse determination may subject us to significant liabilities
or require us to seek licenses that third parties may not grant to us or may
only grant at rates that diminish or deplete the profitability of such products
to us. An adverse determination could also require us to alter our products or
processes or cease altogether any related research and development activities or
product sales.
If we cannot meet requirements under our license agreements, we could lose the
rights to our products.
We depend on licensing arrangements to maintain rights to our products under
development. These agreements require us to make payments and satisfy
performance obligations in order to maintain our rights under these licensing
arrangements. In addition, we are responsible for the cost of filing and
prosecuting certain patent applications and maintaining certain issued patents
licensed to us. If we do not meet our obligations under our license agreements
in a timely manner, we could lose the rights to our proprietary technology.
We rely on confidentiality agreements that could be breached and may be
difficult to enforce.
Although we believe that we take reasonable steps to protect our intellectual
property, including the use of agreements relating to the non-disclosure of
confidential information to third parties, as well as agreements that purport to
require the disclosure and assignment to us of the rights to the ideas,
developments, discoveries and inventions of our employees and consultants while
we employ them, such agreements can be difficult and costly to enforce.
Although, we seek to obtain these types of agreements from our consultants,
advisors and research collaborators, to the extent that they apply or
independently develop intellectual property in connection with any of our
projects, disputes may arise as to the proprietary rights to this type of
information. In such
18
case, a court may determine that the right belongs to a third party, and
enforcement of our rights can be costly and unpredictable. In addition, we will
rely on trade secrets and proprietary know-how that we will seek to protect in
part by confidentiality agreements with our employees, consultants, advisors or
others. We cannot assure you:
- -- that they will not breach these agreements;
- -- that any agreements we obtain would provide adequate remedies for this
type of breach or that our trade secrets or proprietary know-how will not
otherwise become known or competitors will not independently develop
similar technology; or
- -- that our competitors will not independently discover our proprietary
information and trade secrets.
If the parties we depend on for manufacturing our pharmaceutical products do not
timely supply these products, it may delay or impair our ability to develop and
market our products.
We rely on outside manufacturers, including Akorn, Inc., Genzyme
Pharmaceuticals, a division of the Genzyme Corporation, Avanti Polar Lipids,
Inc., and BACHEM California, Inc., for our drug substance and other active
ingredients for Surfaxin(R) and to produce appropriate clinical grade material
that meets standards for use in clinical studies for our products. We will also
rely on outside manufacturers for production of our products after marketing
approval. We may also enter into arrangements with other manufacturers for the
manufacture of materials for use in clinical testing and after marketing
approval.
Our outside manufacturers may not perform as they have agreed or may not remain
in the contract manufacturing business for a sufficient time to successfully
produce and market our product candidates. If we do not maintain important
manufacturing relationships, we may fail to find a replacement manufacturer or
develop our own manufacturing capabilities. If we cannot do so, it could delay
or impair our ability to obtain regulatory approval for our products and
substantially increase our costs or deplete any profit margins. In addition, if
we find a replacement manufacturer there could be a substantial delay before a
new facility could be qualified and registered with the FDA and foreign
regulatory authorities.
We may in the future elect to manufacture some of our products on our own. We do
not currently have a manufacturing facility, manufacturing experience or
manufacturing personnel. If we determine to manufacture products on our own and
do not successfully develop manufacturing capabilities, it will adversely affect
sales of our products.
In addition, the FDA and foreign regulatory authorities require manufacturers to
register manufacturing facilities. The FDA and corresponding foreign regulators
inspect these facilities to confirm compliance with GMP or similar requirements
that the FDA or corresponding foreign regulators establish. If our third-party
foreign or domestic suppliers or manufacturers of our products fail to comply
with GMP requirements or other FDA and comparable foreign regulatory
requirements, it could adversely affect our ability to market and develop our
products.
19
Our lack of marketing and sales experience could limit our ability to generate
revenues from future product sales.
We do not have marketing and sales experience or marketing or sales personnel.
If we do not develop a marketing and sales force, then we will depend on
arrangements with corporate partners or other entities for the marketing and
sale of our products. We may not succeed in entering into any satisfactory third
party arrangements for the marketing and sale of our products. In addition, we
may not succeed in developing marketing and sales capabilities or we may not
have sufficient resources to do so. If we fail to establish marketing and sales
capabilities or fail to enter into arrangements with third parties, it will
adversely affect sales of our products.
We depend upon key employees and consultants in a competitive market for skilled
personnel. If we are unable to attract and retain key personal, it could
adversely affect our ability to develop and market our products.
We are highly dependent upon the principal members of our management team,
especially Dr. Capetola, and our directors, as well as our scientific advisory
board members, consultants and collaborating scientists. We have an employment
agreement with Dr. Capetola that expires on December 31, 2005. We also have
employment agreements with other key personnel with termination dates in 2001
and 2002. We do not maintain key-man life insurance. Although these employment
agreements generally provide for severance payments that are contingent upon the
applicable employee's refraining from competition with us, the loss of any of
these persons' services would adversely affect our ability to develop and market
our products and obtain necessary regulatory approvals, and the applicable
noncompete provisions can be difficult and costly to monitor and enforce.
Our future success also will depend in part on the continued service of our key
scientific and management personnel and our ability to identify, hire and retain
additional personnel, including marketing and sales staff. We experience intense
competition for qualified personnel, and the existence of non-competition
agreements between prospective employees and their former employers may prevent
us from hiring those individuals or subject us to suit from their former
employers.
While we attempt to provide competitive compensation packages to attract and
retain key personnel, some of our competitors are likely to have greater
resources and more experience than we have, making it difficult for us to
compete successfully for key personnel.
Our industry is highly competitive and we have less capital and resources than
many of our competitors, which may give them an advantage in developing and
marketing products similar to ours.
Our industry is highly competitive and subject to rapid technological
innovation. We compete with numerous existing companies intensely in many ways.
We expect new companies to enter our industry and we expect competition to
increase. Many of these companies have substantially greater research and
development, manufacturing, marketing, financial, technological, personnel and
managerial resources than we have. In addition, many of these competitors,
either alone or with their collaborative partners, have significantly greater
experience than we do in:
- -- developing products;
- -- undertaking preclinical testing and human clinical trials;
20
- -- obtaining FDA and other regulatory approvals or products; and
- -- manufacturing and marketing products.
Accordingly, our competitors may succeed in obtaining patent protection,
receiving FDA or comparable foreign approval or commercializing products before
us. If we commence commercial product sales, we will compete against companies
with greater marketing and manufacturing capabilities. These are areas in which,
as yet, we have limited or no experience. In addition, developments by
competitors may render our product candidates obsolete or noncompetitive. Our
competitors may succeed in developing and marketing products that are more
effective than ours.
We also face, and will continue to face, competition from colleges,
universities, governmental agencies and other public and private research
organizations. These competitors are becoming more active in seeking patent
protection and licensing arrangements to collect royalties for use of technology
that they have developed. Some of these technologies may compete directly with
the technologies that we are developing. These institutions will also compete
with us in recruiting highly qualified scientific personnel. We expect that
therapeutic developments in the areas in which we are active may occur at a
rapid rate and that competition will intensify as advances in this field are
made. As a result, we need to continue to devote substantial resources and
efforts to research and development activities.
If product liability claims are brought against us, it may result in reduced
demand for our products or damages that exceed our insurance coverage.
The marketing and use of our products exposes us to product liability claims in
the event that the use or misuse of those products causes injury, disease or
results in adverse effects. Use of our products in clinical trials, as well as
commercial sale, could result in product liability claims. In addition, sales of
our products through third party arrangements could also subject us to product
liability claims. We presently carry product liability insurance relating to our
clinical trials of SuperVent(TM) and Surfaxin(R). However, this insurance
coverage includes various deductibles, limitations and exclusions from coverage,
and in any event might not fully cover any potential claims. We may need to
obtain additional product liability insurance coverage prior to initiating other
clinical trials. We expect to obtain product liability insurance coverage before
commercialization of our proposed products; however, this insurance is expensive
and insurance companies may not issue this type of insurance when we need it. We
cannot provide assurance that we can obtain adequate insurance in the future at
an acceptable cost. Any product liability claim, even one that was not in excess
of our insurance coverage or one that is meritless, could adversely affect our
cash available for other purposes, such as research and development. In
addition, the existence of a product liability claim could affect the market
price of our Common Stock.
We expect to face uncertainty over reimbursement and healthcare reform.
In both the United States and other countries, sales of our products will depend
in part upon the availability of reimbursement from third-party payors, which
include government health administration authorities, managed care providers,
and private health insurers. Third-party payors are increasingly challenging the
price and examining the cost effectiveness of medical products and services. In
addition, significant uncertainty exists as to the reimbursement status of newly
approved health care products. Our products may not be considered cost
effective.
21
Adequate third party reimbursement may not be available to enable us to maintain
price levels sufficient to realize an appropriate return on our investment in
the research and development of our products.
The United States and other countries continue to propose and pass legislation
designed to reduce the cost of healthcare. Accordingly, legislation and
regulations affecting the pricing of our products may change before the products
are approved for marketing to the public. Adoption of new legislation and
regulations could further limit reimbursement for our products. If third party
payors fail to provide adequate coverage and reimbursement rates for our
products, the market acceptance of the products may be adversely affected. In
that case, our business and financial condition will suffer.
Directors, executive officers, principal stockholders and affiliated entities
own a significant percentage of our capital stock, and they may make decisions
that you do not consider to be in your best interest.
As of March 26, 2001, our directors, executive officers, principal stockholders
and affiliated entities beneficially owned, in the aggregate, approximately 33%
of our outstanding voting securities. As a result, if some or all of them acted
together, they would have the ability to exert substantial influence over the
election of our Board of Directors and the outcome of issues requiring approval
by our stockholders. This concentration of ownership may have the effect of
delaying or preventing a change in control of the Company that may be favored by
other stockholders. This could prevent transactions in which stockholders might
otherwise recover a premium for their shares over current market prices.
The market price of our stock may be adversely affected by market volatility.
The market price of our Common Stock, like that of many other development stage
pharmaceutical or biotechnology companies, has been and is likely to be
volatile. In addition to general economic, political and market conditions, the
price and trading volume of our stock could fluctuate widely in response to many
factors, including:
- -- announcements of the results of clinical trials by us or our competitors;
- -- adverse reactions to products;
- -- governmental approvals, delays in expected governmental approvals or
withdrawals of any prior governmental approvals or public or regulatory
agency concerns regarding the safety or effectiveness of our products;
- -- changes in U.S. or foreign regulatory policy during the period of product
development;
- -- developments in patent or other proprietary rights, including any third
party challenges of our intellectual property rights;
- -- announcements of technological innovations by us or our competitors;
- -- announcements of new products or new contracts by us or our competitors;
- -- actual or anticipated variations in our operating results due to the level
of development expenses and other factors;
- -- changes in financial estimates by securities analysts and whether our
earnings meet or exceed such estimates;
22
- -- conditions and trends in the pharmaceutical and other industries;
- -- new accounting standards; and
- -- the occurrence of any of the risks described in these "risk factors."
For the 12-month period ended December 31, 2000, the price of our Common Stock
has ranged from $2.44 to $12.63. We expect the price of our Common Stock to
remain volatile and a more active market may never develop. The Company's Common
Stock is listed for quotation on the Nasdaq SmallCap Market. The average daily
trading volume in the Company's Common Stock varies significantly. For the
12-month period beginning January 1, 2000, through December 31, 2000, the
average daily trading volume in our Common Stock was approximately 139,000
shares and the average number of transactions per day was approximately 150. The
Company's relatively low average volume and low average number of transactions
per day may affect the ability of our stockholders to sell their shares in the
public market at prevailing prices.
In addition, we cannot assure investors that we will be able to continue to
adhere to the strict listing criteria for the Nasdaq SmallCap Market. If the
Common Stock were no longer listed on Nasdaq, investors might only be able to
trade in the over-the-counter market in the Pink Sheets(R) (a quotation medium
operated by the National Quotation Bureau, LLC), or on the NASD's OTC Bulletin
Board(R). This would impair the liquidity of our securities not only in the
number of shares that could be bought and sold at a given price, which might be
depressed by the relative illiquidity, but also through delays in the timing of
transactions and reduction in media coverage.
In the past, following periods of volatility in the market price of the
securities of companies in our industry, securities class action litigation has
often been instituted against such companies. If we face such litigation in the
future, it would result in substantial costs and a diversion of management
attention and resources, which would negatively impact our business.
A substantial number of our securities are eligible for future sale and this
could affect the market price for our stock and our ability to raise capital.
The market price of our Common Stock could drop due to sales of a large number
of shares of our Common Stock or the perception that these sales could occur. As
of March 26, 2001, there were 20,871,794 shares of Common Stock outstanding. In
addition, as of March 26, 2001, up to 5,256,463 shares of Common Stock were
issuable on exercise of outstanding options and warrants.
Holders of our stock options and warrants are likely to exercise them, if ever,
at a time when we otherwise could obtain a price for the sale of our securities
that is higher than the exercise price per security of the options or warrants.
This exercise, or the possibility of this exercise, may impede our efforts to
obtain additional financing through the sale of additional securities or make
this financing more costly, and may reduce the price of our Common Stock.
Anti-takeover provisions of our Certificate of Incorporation and Delaware law
could delay actual or potential changes of control, which could affect our
stockholders' ability to benefit from market fluctuations and changes in
management.
Our Certificate of Incorporation and Delaware law contain provisions that may
discourage transactions involving actual or potential changes in control. Our
Certificate of Incorporation allows us to issue shares of preferred stock
without any vote or further action by our shareholders. Our Board of Directors
has the authority to fix and determine the relative rights
23
and preferences of preferred shares. Our Board of Directors also has the
authority to issue these shares without further stockholder approval. As a
result, our Board of Directors could authorize the issuance of a series of
preferred stock that would grant to holders the preferred right to our assets
upon liquidation, the right to receive dividend payments before dividends are
distributed to the holders of Common Stock and the right to the redemption of
these shares, together with a premium, prior to the redemption of our Common
Stock. In addition, our Board of Directors, without further stockholder
approval, could issue large blocks of preferred stock to fend against unwanted
tender offers or hostile takeovers.
We are also subject to provisions of Delaware law that could delay or make more
difficult a merger, tender offer or proxy contest involving us. In particular,
we are subject to Section 203 of the Delaware General Corporation Law that
prohibits a Delaware corporation from engaging in any business combination with
any interested stockholder for a period of three years unless the Board of
Directors and stockholders approve the transactions in a prescribed manner. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by this type of entity or person. The possible issuance of preferred
stock and the provisions of Delaware law may have the effect of preventing
changes in our management and could have the effect of discouraging others from
making tender offers for our securities even if the events could be beneficial
to our stockholders. As a consequence, they also may inhibit fluctuations, even
favorable ones, in the market price of our Common Stock that otherwise could
result from actual or rumored takeover attempts.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company currently has its executive offices at 350 South Main Street, Suite
307, Doylestown, Pennsylvania 18901. The Company's telephone number of its
executive offices is (215) 340-4699 and its facsimile number is (215) 340-3940.
In November 2000, the Company established a satellite office in the United
Kingdom to manage and oversee its European clinical research programs. In
addition, the Company maintains offices in New York City where it conducts
certain investor relations and legal functions.
In September 2000, the Company decided not to pursue its planned occupation of a
building adjacent to its Doylestown, Pennsylvania headquarters that was
previously purchased in early-August 2000 and originally intended to house the
Company's expanded clinical research activities. As a lower cost alternative,
the Company amended its existing lease agreement in September 2000 to include an
additional approximately 4,000 square feet of space immediately adjacent to its
offices. The Company sold the adjacent building on October 30, 2000, for
approximately $565,000 in cash. After taking into account transaction costs, the
proceeds from the sale of the building approximated its purchase price.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not aware of any pending or threatened legal actions other than
disputes arising in the ordinary course of its business that would not, if
determined adversely to the Company, have a material adverse effect on the
Company.
24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matters were submitted to a vote of securityholders during the fourth quarter
of 2000.
25
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is traded on the Nasdaq SmallCap Market under the symbol
"DSCO." As of March 26, 2001, the number of stockholders of record of the Common
Stock was approximately 161, and the number of beneficial owners of shares of
the Common Stock was approximately 4,178. As of March 26, 2001, there were
approximately 20,871,794 shares of Common Stock issued and outstanding.
The following table sets forth the quarterly price ranges of the Common Stock
for the periods indicated, as reported by Nasdaq.
Low High
--- ----
First Quarter 1999.....................................$1.88 $4.00
Second Quarter 1999 ...................................$1.13 $2.50
Third Quarter 1999.....................................$1.00 $2.00
Fourth Quarter 1999....................................$1.31 $3.06
First Quarter 2000.....................................$2.44 $12.63
Second Quarter 2000 ...................................$2.75 $7.69
Third Quarter 2000.....................................$3.88 $7.63
Fourth Quarter 2000....................................$3.03 $7.44
First Quarter 2001 (through March 26, 2001)............$2.72 $5.91
The Company has not paid dividends on the Common Stock. It is anticipated that
the Company will not pay dividends on the Common Stock in the foreseeable
future.
In May 2000, the Company's units (consisting of Common Stock, Class A Warrants
and Class B Warrants) which were trading under the symbol "DSCOU" were delisted
from trading because there were too few remaining holders of those units. By
that time, most unit holders had already exercised their units for the
underlying shares of Common Stock, Class A Warrants and Class B Warrants. On
August 8, 2000, all Class A Warrants and Class B Warrants expired by their
terms.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN 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
acquiror for financial reporting purposes.
Plan of Operations
Since its inception, the Company has concentrated its efforts and resources on
the development and commercialization of pharmaceutical products and
technologies. The Company has been unprofitable since its founding and has
incurred a cumulative deficit of approximately $44 million through December 31,
2000. 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
26
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
drugs for critical care that are intended to be used primarily in a hospital
setting. The Company anticipates that during the next 12 months it will conduct
substantial research and development of its products under development. The
Company expects to continue the expansion of its research and development
activities as a result of its receipt of approximately $17.5 million of net
proceeds from its offering completed in March 2000. In continuation of its
expanded research and development efforts, the Company anticipates the near term
acquisition of approximately $500,000 of equipment in order to optimize the
commercial process for Surfaxin(R) and to scale up the manufacturing process to
meet expanded clinical and commercial needs. During 2000, the Company hired
additional personnel, including four members of senior management, due to the
expansion of its clinical development efforts regarding Surfaxin(R).
It is anticipated that the primary focus of the Company's research and
development activities will be the several clinical trials for Surfaxin(R)
indications and the evaluation of the feasibility of a Phase 2b trial for
SuperVent(TM). A pivotal Phase 2/3 clinical trial of Surfaxin(R) for the
treatment of ARDS was commenced on July 14, 1998. This trial was intended to
enroll approximately 540 patients and be conducted at up to 43 clinical sites
nationwide. This trial was stopped on January 27, 2000, due to the Company's
cash position and so that a new Phase 2 ARDS trial could be commenced using a
less viscous formulation of Surfaxin(R) that was developed at that time. The
Company initiated a new Phase 2 trial in ARDS in March 2001.
A Phase 2a clinical trial of Surfaxin(R) for the treatment of MAS was commenced
on May 27, 1997. This trial was completed and results were announced on February
4, 1999. The Company commenced enrollment of a pivotal Phase 3 trial in MAS in
May of 2000. The Phase 3 trial intends to enroll 200 MAS patients. In November
2000, the Company initiated a Phase 2b clinical trial of Surfaxin(R) for the
treatment of ARDS. This trial is designed in two parts -- Part A is a dose
ranging study and Part B will consist of select doses identified in Part A. A
total of 110 patients are expected to be enrolled in the study. Pending the
successful outcome of ongoing discussions with the FDA, the Company intends to
initiate two Phase 3 multinational clinical trials of Surfaxin(R) for IRDS
during the second quarter of 2001. The IRDS Phase 3 trials will use Surfaxin(R)
versus an active comparator that will be either totally synthetic or animal
derived. The Phase 3 trials can be conducted at clinical sites located in North
America, Europe and Latin America and the Company presently anticipates that the
trials will not contain a placebo-controlled arm. Conditioned upon the
successful outcome of the Phase 3 trials, the Company has committed to provide
Surfaxin(R) to certain Latin American regions that participate in the studies at
a significantly reduced cost for a period of ten years following
commercialization.
A Phase 1/2 clinical trial of SuperVent(TM) for the treatment of CF was
commenced on March 17, 1997. Part A of such clinical trial was completed on
March 31, 1998. The Company began a
27
Phase 2a clinical trial of SuperVent(TM) for the treatment of CF on August 4,
1999. Analysis of the data show that SuperVent(TM) decreased the amount of
Interleukin 8 (IL-8) and Interleukin 6 (IL-6) in the sputum of treated patients
compared to controls. IL-8 is an important body chemical that causes the
migration of inflammatory cells to the site of release. The Company believes
that the reduction in IL-8 could potentially lead to a decreased inflammatory
response in the lungs that may be clinically beneficial to CF patients.
The Company's expenses increased from $5,292,000 in 1999 to $12,644,000 in 2000.
The increase was primarily due to an increase in the Company's research and
development activities and a non-cash compensation charge of $2,515,000 recorded
as a result of the grant of options and the vesting of certain milestone-based
employee stock options (including 250,000 milestone options whose vesting was
accelerated by the Board of Directors). As a result of the increases in expenses
from 1999, the Company's net loss increased from $4,958,000 in 1999 to
$10,861,000 in 2000. In addition, the increase in the total comprehensive net
loss offset by the increase in the weighted average common shares outstanding
during 2000 resulted in a decrease in the Company's net loss per share from
$0.66 in 1999 to $0.58 in 2000.
Liquidity
As of December 31, 2000, the Company had working capital of approximately $16.6
million primarily due to its private placement completed in March 2000 in which
it received net proceeds of approximately $17.5 million. The Company believes
its current working capital is sufficient to meet its planned research and
development activities through the first quarter of 2002. However, the Company
will need additional financing from investors or collaborators to complete
research and development and commercialization of its current product
candidates.
Historically, the Company's working capital has been provided from the proceeds
of private financings. On April 7, 1999 (the "April 1999 Financing"), the
Company completed a private placement of shares of Common Stock and a newly
created class of warrants of the Company (the "Class C Warrants") for an
aggregate purchase price of $1,000,000. Investors in the April 1999 Financing
received, in the aggregate, 826,447 shares of Common Stock at an adjusted
purchase price of $1.21 and 569,026 Class C Warrants, each of which is
exercisable for the purchase of one share of Common Stock for an exercise price
of $2.15 at any time prior to the seventh anniversary of the issuance of such
warrant. As of March 26, 2001, 56,907 of the Class C Warrants remain
unexercised.
On July 29, 1999, the Company received approximately $2.2 million in net
proceeds when it completed a private offering of units (the "1999 Unit
Offering"), at a per Unit price of $500,000 (the "1999 Units"), each 1999 Unit
consisting of (a) 413,223 shares of Common Stock and (b) an equal number of the
Company's Class D Warrants, each of which entitled the holder thereof to
purchase one share of Common Stock at any time prior to the close of business on
July 27, 2004, at a per share purchase price equal to $1.33. As of March 26,
2001, all of the Class D Warrants had been exercised by the holders thereof.
Paramount Capital, Inc. ("Paramount"), received options (the "1999 Placement
Options") to acquire 0.49 1999 Units at a per 1999 Unit exercise price equal to
$550,000 as partial compensation for its services in connection with the 1999
Unit Offering.
Pursuant to an agreement entered into on October 28, 1999, the Company issued
317,164 shares of Common Stock to Laboratorios P.E.N., S.A., at a price equal to
$2.68 per share (based on a 50% premium over the average closing price for the
10 days prior to the closing date) for
28
aggregate proceeds of $850,000. The shares of Common Stock were issued to
Laboratorios P.E.N., S.A. in connection with the sublicense agreement with
Esteve described under "Item 1. Description of Business".
On March 22, 2000, the Company received approximately $17.5 million in net
proceeds in a private offering of units at a per unit price of $500,000 (the
"2000 Units"). Each of the 2000 Units consisted of (a) 76,923 shares of Common
Stock and (b) a number of Class E Warrants equal to 20% of the number of shares
of Common Stock included in each 2000 Unit, each of which entitles the holder to
purchase one share of Common Stock at any time prior to the close of business on
March 21, 2005, at an exercise price equal to $7.38 per share. In addition, the
placement agent, Paramount, received cash fees of approximately $1.32 million
and options (the "2000 Placement Options") to acquire 9,230 shares of Common
Stock per 2000 Unit sold, at an exercise price equal to $8.113 per share, as
partial compensation for its services in connection with the 2000 Offering.
The Company's working capital requirements will depend upon numerous factors,
including, without limitation, the 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.
ITEM 7. FINANCIAL STATEMENTS.
See Index to Consolidated Financial Statements on Page F-1.
ITEM 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable
29
PART III
The information required by Items 9 through 12 of Part III is incorporated by
reference to the Company's definitive proxy statement to be filed with the
Commission within 120 days after the end of the Company's fiscal year.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibits are listed on the Index to Exhibits at the end of this Report. The
exhibits required by Item 601 of Regulation S-B, listed on such Index in
response to this Item, are incorporated herein by reference.
(b) Reports on Form 8-K
One report on Form 8-K was filed by the Company during the three months ended
December 31, 2000. A current report was filed on December 22, 2000, as amended
on January 9, 2001, reporting the engagement of Ernst & Young LLP as the
Company's new independent accountants to audit the Company's consolidated
financial statements and the dismissal of the Company's prior accountants,
Richard A. Eisner & Co., LLP, in connection therewith.
30
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: March 29, 2001 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 March 29, 2001
/s/ Deni Zodda Deni Zodda, Ph.D.
- ----------------------- Principal Financial Officer March 29, 2001
/s/ Cynthia Davis Cynthia Davis
- ----------------------- Controller March 29, 2001
(Principal Accounting Officer)
/s/ Herbert McDade, Jr. Herbert McDade, Jr.
- ----------------------- Chairman of the Board of Directors March 29, 2001
/s/ Richard Power Richard Power
- ----------------------- Director March 29, 2001
/s/ Marvin Rosenthale Marvin Rosenthale
- ----------------------- Director March 29, 2001
/s/ Mark C. Rogers Mark C. Rogers, M.D.
- ----------------------- Director March 29, 2001
/s/ Max Link Max Link, Ph.D.
- ----------------------- Director March 29, 2001
31
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
2.1(1) Agreement and Plan of Merger dated as of March 5, 1998, among
Discovery, ATI Acquisition Corp. and Old ATI.
2.2(3) Agreement and Plan of Reorganization and Merger, dated as
of July 16, 1997, by and between Discovery and Old
Discovery.
3.1(1) Restated Certificate of Incorporation of Discovery.
3.2 Amendment to Restated Certificate of Incorporation of Discovery.
3.3(2) By-laws of Discovery.
3.4(10) Certificate of Ownership Merging ATI Acquisition Corp., into
Discovery.
4.1(6) Form of Class C Warrant.
4.2(9) Form of Class E Warrant.
4.3(10) Unit Purchase Option issued to Paramount Capital, Inc., in
connection with the March 1999 private placement.
10.1 Reference is made to Exhibits 2.1 and 2.2.
10.2(1) Investor Rights Agreement, dated as of March 20, 1996,
between Old Discovery and RAQ, LLC.
10.3(1) Registration Rights Agreement, dated as of October 28,
1996, between ATI, Johnson & Johnson Development
Corporation ("JJDC"), and Scripps.
10.4(4)+ Sublicense Agreement, dated as of October 28, 1996, between ATI,
Johnson & Johnson, Inc., and Ortho.
10.5(4)+ License Agreement, between Discovery and The
Charlotte-Mecklenburg Hospital Authority dated as of March
20, 1996.
10.6(10)+ Amendment of License Agreement between Discovery and The
Charlotte-Mecklenburg Hospital Authority, dated as of March
20, 1996.
10.7(2) Restated 1993 Stock Option Plan of Discovery.
10.8(2) 1995 Stock Option Plan of Discovery.
10.9(7) Amended and Restated 1998 Stock Incentive Plan of Discovery.
10.10(1) Management Agreement between Discovery Laboratories, Inc., and
Acute Therapeutics, Inc., dated as of March 5, 1998.
10.11(6) Indenture of Lease, dated as of July 1, 1998, between
SLTI1, LLC and Acute Therapeutics, Inc.
32
10.12 Amendment, dated as of September 15, 2000, to the Indenture
of Lease dated as of July 1, 1998, between SLTI1, LLC and
Discovery.
10.13(6) Letter Agreement, dated as of January 4, 1999, between
Discovery and Yi, Tuan & Brunstein.
10.14(6) Registration Rights Agreement, dated as of June 16, 1998,
among Discovery, JJDC and Scripps.
10.15(6) Stock Exchange Agreement, dated as of June 16, 1998,
between Discovery and JJDC.
10.16 Employment Agreement, dated January 1, 2001, between Discovery
and Robert J. Capetola, Ph.D.
10.17(6) Employment Agreement, dated as of June 16, 1998, between
Discovery and Christopher J. Schaber.
10.18(6) Employment Agreement, dated as of June 16, 1998, between
Discovery and Huei Tsai, Ph.D.
10.19(6) Employment Agreement, dated as of June 16, 1998, between
Discovery and Cynthia Davis.
10.20(6) Form of Intellectual Property and Confidential Information
Agreement.
10.21(6) Form of Stock Purchase Agreement.
10.22(8) Notice of Grant of Stock Option.
10.23(10)+ Sublicense Agreement between Discovery Laboratories, Inc., and
Laboratories del Dr. Esteve S.A., dated as of October 26, 1999.
10.24(10)+ Supply Agreement between Discovery Laboratories, Inc., and
Laboratories del Dr. Esteve S.A., dated as of October 26, 1999.
10.25(10) Securities Purchase Agreement between Discovery Laboratories,
Inc., and Laboratorios P.E.N., S.A., dated October 26, 1999.
10.26(10)+ Research Funding and Option Agreement, dated as of March 1,
2000, between Discovery and Scripps.
16.1(5) Letter dated as of January 28, 1998, from Ernst & Young LLP
to the Securities and Exchange Commission.
16.2(11) Letter dated January 9, 2001, from Richard A. Eisner & Company,
LLP, to the Securities and Exchange Commission.
21.1(1) Subsidiaries of Discovery.
23.1 Consent of Richard A. Eisner & Company, LLP.
23.2 Consent of Ernst & Young LLP.
- -------------------------------
(1) Incorporated by reference to Discovery's Annual Report on Form 10-KSB for
the year ending December 31, 1997.
33
(2) Incorporated by reference to Discovery's Registration Statement on Form
SB-2 (File No. 33-92-886).
(3) Incorporated by reference to Discovery's Registration Statement on Form
S-4 (File No. 333-34337).
(4) Incorporated by reference to Discovery's Registration Statement on Form
SB-2 (File No. 333-19375).
(5) Incorporated by reference to Discovery's Current Report on form 8-K/A
dated January 16, 1998.
(6) Incorporated by reference to Discovery's Annual Report on Form 10-K for
the year ending December 31, 1998.
(7) Incorporated by reference to Discovery's Proxy Statement on Schedule 14A
filed June 1, 1999.
(8) Incorporated by reference to Discovery's Quarterly Report on Form 10-Q for
the quarter ending September 30, 1999.
(9) Incorporated by Reference to Discovery's Current Report on Form 8-K filed
March 29, 2000.
(10) Incorporated by reference to Discovery's Annual Report on Form 10-K for
the year ending December 31, 1999.
(11) Incorporated by Reference to Discovery's Amended Current Report on Form
8-K/A filed January 9, 2001.
+ Confidential treatment requested as to certain portions of these exhibits.
Such portions have been redacted and filed separately with the Commission.
34
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Contents
Page
----
Consolidated Financial Statements
Reports of independent auditors F-2
Balance sheet as of December 31, 2000 F-4
Statements of operations for the years ended December 31, 2000 and
1999 and the period from May 18, 1993 (inception), through
December 31, 2000 F-5
Statements of changes in stockholders' equity for the period from
May 18, 1993 (inception), through December 31, 2000 F-6
Statements of cash flows for the years ended December 31, 2000 and
1999 and the period from May 18, 1993 (inception), through
December 31, 2000 F-8
Notes to financial statements F-9
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Discovery Laboratories, Inc.
Doylestown, Pennsylvania
We have audited the accompanying consolidated balance sheet of Discovery
Laboratories, Inc. (a development stage enterprise) as of December 31, 2000, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the year then ended, and for the period May 18, 1993 (inception)
through December 31, 2000. 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. The consolidated financial statements
for the period May 18, 1993 (inception) through December 31, 1999 include total
revenues and net loss of $1,673,000 and $32,446,000, respectively. Our opinion
on the consolidated statements of operations, stockholders' equity, and cash
flows for the period May 18, 1993 (inception) through December 31, 2000, insofar
as it relates to amounts for prior periods through December 31, 1999, is based
solely on the report of other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 and the report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Discovery Laboratories, Inc., at December
31, 2000, and the consolidated results of its operations and its cash flows for
the year then ended and the period from May 18, 1993 (inception) through
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 27, 2001
F-2
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Discovery Laboratories, Inc.
Doylestown, Pennsylvania
We have audited the accompanying consolidated statement of operations, changes
in stockholders' equity and cash flows of Discovery Laboratories, Inc. (a
development stage company) for the year ended December 31, 1999. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the consolidated results of operations and consolidated cash
flows of Discovery Laboratories, Inc. for the year ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Richard A. Eisner & Company, LLP
New York, New York
February 25, 2000
F-3
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Consolidated Balance Sheet
December 31, 2000
ASSETS
Current assets:
Cash and cash equivalents $ 7,281,000
Available-for-sale marketable securities 11,587,000
Prepaid expenses and other current assets 149,000
------------
Total current assets 19,017,000
Property and equipment, net of depreciation 697,000
Security deposits 3,000
------------
$ 19,717,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,382,000
Capitalized lease - current 17,000
------------
Total current liabilities 2,399,000
------------
Deferred revenue 851,000
Capitalized lease 31,000
------------
Total liabilities 3,281,000
------------
Stockholders' equity:
Common stock, $.001 par value; 35,000,000 authorized;
20,871,112 shares issued 21,000
Additional paid-in capital 60,891,000
Unearned portion of compensatory stock options (347,000)
Deficit accumulated during the development stage (43,989,000)
Treasury stock (26,743 shares of common stock at cost) (213,000)
Accumulated other comprehensive income 73,000
------------
16,436,000
$ 19,717,000
============
See notes to financial statements F-4
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Consolidated Statements of Operations
May 18, 1993
Year Ended (Inception)
December 31, Through
---------------------------- December 31,
2000 1999 2000
------------ ------------ ------------
Revenues:
Interest, dividends, and realized gains $ 1,042,000 $ 156,000 $ 2,510,000
Research and development collaborative contracts 741,000 178,000 946,000
------------ ------------ ------------
1,783,000 334,000 3,456,000
------------ ------------ ------------
Expenses:
Write-off of acquired in-process research and development
and supplies -- -- 13,508,000
Research and development 7,356,000 2,869,000 20,225,000
General and administrative 2,768,000 2,296,000 10,381,000
Compensatory stock options 2,515,000 125,000 2,657,000
Interest 5,000 2,000 18,000
------------ ------------ ------------
Total expenses 12,644,000 5,292,000 46,789,000
------------ ------------ ------------
(10,861,000) (4,958,000) (43,333,000)
Minority interest in net loss of subsidiary -- -- 26,000
------------ ------------ ------------
Net loss $(10,861,000) $ (4,958,000) $(43,307,000)
============ ============ ============
Net loss per common share $ (0.58) $ (0.66)
============ ============
Weighted average number of common shares
outstanding 18,806,000 7,545,000
============ ============
See notes to financial statements F-5
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Consolidated Statements of Changes in Stockholders' Equity
May 18, 1993 (Inception) Through December 31, 2000
Preferred Stock
------------------
Common Stock Treasury Stock Series B
------------------ ------------------ ------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
Issuance of common shares, May 1993 440,720 $1,000
Issuance of common shares, February 1995 143,016
Expenses paid on behalf of the Company,
1993
Payment on stock subscriptions, 1995
Expenses paid on behalf of the Company,
1995
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
Private placement expenses, 1997
Issuance of common shares pursuant to
Ansan Merger, November 1997 546,433
Exercise of stock options, July, August
and October 1997 17,513
Accumulated dividends on preferred stock,
1997
Issuance of common shares pursuant to ATI
Merger, June 1998 1,033,500 1,000
Fair value of common stock issuable on
Exercise of ATI options, 1998
Series C preferred stock issued pursuant
to ATI Merger, June 1998
Accrued dividends payable on Series C
Preferred stock at time of ATI Merger,
1998
Common stock issued in settlement of
Series C preferred stock dividends,
1998 49,846
Exercise of stock options, July and
December 1998 131,676
Series B preferred stock converted, 1998 685,103 1,000 (253,375)
Noncash exercise of private placement
warrants, 1998 8,372
Dividends payable on Series C preferred
stock, 1998
Treasury stock acquired, 1998 (31,750) $(90,000)
Treasury stock issued in payment for
services, 1998 16,150 51,000
Unrealized gain on marketable securities
Available for sale, 1998
Fair value of options granted, 1998
Amortization of unearned portion of
Compensatory stock options, 1998
Net loss, Inception through 12/31/98
--------- ------ ------- -------- --------- ------
Balance - December 31, 1998
(carried forward) 5,084,452 5,000 (15,600) (39,000) 1,946,881 2,000
Preferred Stock Unearned
----------------- Portion of Accumulated
Series C Stock Additional Compensatory Other
----------------- Subscriptions Paid-in Stock Comprehensive
Shares Amount Receivable Capital Options Income (loss)
------ ------ ------------- ---------- ------------ -------------
Issuance of common shares, May 1993 $(2,000) $ 1,000
Issuance of common shares, February 1995 (1,000) 1,000
Expenses paid on behalf of the Company,
1993 1,000
Payment on stock subscriptions, 1995 2,000
Expenses paid on behalf of the Company,
1995 18,000
Issuance of common shares, March 1996 5,000
Issuance of private placement units
August, October and November 1996 18,933,000
Issuance of common shares for cash and
Compensation, September 1996 42,000
Exercise of stock options, July and
October 1996 7,000
Private placement expenses, 1997 (11,000)
Issuance of common shares pursuant to
Ansan Merger, November 1997 2,459,000
Exercise of stock options, July, August
and October 1997 9,000
Accumulated dividends on preferred stock,
1997
Issuance of common shares pursuant to ATI
Merger, June 1998 5,037,000
Fair value of common stock issuable on
Exercise of ATI options, 1998 2,966,000
Series C preferred stock issued pursuant
to ATI Merger, June 1998 2,039 $2,039,000
Accrued dividends payable on Series C
Preferred stock at time of ATI Merger,
1998 238,000
Common stock issued in settlement of
Series C preferred stock dividends,
1998 (204,000) 204,000
Exercise of stock options, July and
December 1998 30,000
Series B preferred stock converted, 1998 (1,000)
Noncash exercise of private placement
warrants, 1998
Dividends payable on Series C preferred
stock, 1998 204,000
Treasury stock acquired, 1998
Treasury stock issued in payment for
services, 1998
Unrealized gain on marketable securities
Available for sale, 1998 $19,000
Fair value of options granted, 1998 142,000 $(142,000)
Amortization of unearned portion of
Compensatory stock options, 1998 18,000
Net loss, Inception through 12/31/98
------ ---------- ------- ----------- --------- -------
Balance - December 31, 1998
(carried forward) 2,039 2,277,000 -- 29,842,000 (124,000) 19,000
Deficit
Accumulated
During the
Development
Stage Total
----------- -----
Issuance of common shares, May 1993 $ --
Issuance of common shares, February 1995 --
Expenses paid on behalf of the Company,
1993 1,000
Payment on stock subscriptions, 1995 2,000
Expenses paid on behalf of the Company,
1995 18,000
Issuance of common shares, March 1996 6,000
Issuance of private placement units
August, October and November 1996 18,936,000
Issuance of common shares for cash and
Compensation, September 1996 42,000
Exercise of stock options, July and
October 1996 7,000
Private placement expenses, 1997 (11,000)
Issuance of common shares pursuant to
Ansan Merger, November 1997 2,459,000
Exercise of stock options, July, August
and October 1997 9,000
Accumulated dividends on preferred stock,
1997 (238,000) (238,000)
Issuance of common shares pursuant to ATI
Merger, June 1998 5,038,000
Fair value of common stock issuable on
Exercise of ATI options, 1998 2,966,000
Series C preferred stock issued pursuant
to ATI Merger, June 1998 2,039,000
Accrued dividends payable on Series C
Preferred stock at time of ATI Merger,
1998 238,000
Common stock issued in settlement of
Series C preferred stock dividends,
1998 --
Exercise of stock options, July and
December 1998 30,000
Series B preferred stock converted, 1998 --
Noncash exercise of private placement
warrants, 1998 --
Dividends payable on Series C preferred
stock, 1998 (204,000) --
Treasury stock acquired, 1998 (90,000)
Treasury stock issued in payment for
services, 1998 51,000
Unrealized gain on marketable securities
Available for sale, 1998 19,000
Fair value of options granted, 1998 --
Amortization of unearned portion of
Compensatory stock options, 1998 18,000
Net loss, Inception through 12/31/98 $(27,488,000) (27,488,000)
------------ ------------
Balance - December 31, 1998
(carried forward) (27,930,000) 4,052,000
See notes to financial statements F-6
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Consolidated Statements of Changes in Stockholders' Equity
May 18, 1993 (Inception) Through December 31, 2000
(continued)
Preferred Stock
------------------
Common Stock Treasury Stock Series B
------------------ ------------------ ------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
(brought forward)
Balance - December 31, 1998 5,084,452 5,000 (15,600) (39,000) 1,946,881 2,000
Comprehensive loss:
Net loss
Other comprehensive loss - unrealized
loss on marketable securities
available-for-sale
Total comprehensive loss
Common stock and warrants in a private
placement offering in March and April
1999 826,447 1,000
Issuance of private placement units in
July and August 1999 (net of offering
costs) 2,024,792 2,000
Exercise of stock options 119,732
Common stock issued in connection with
sublicense agreement 317,164 1,000
Series B preferred stock converted 1,295,485 1,000 (416,125)
Treasury stock acquired (2,000) (5,000)
Treasury stock issued in payment for
services 15,600 39,000
Common stock issued in payment for
services 21,168
Amortization of unearned portion of
Compensatory stock options
Compensatory stock options granted
Dividend payable on Series C preferred
stock
---------- ------- -------- --------- ---------- -------
Balance - December 31, 1999 9,689,240 $10,000 (2,000) $ (5,000) 1,530,756 $ 2,000
---------- ------- -------- --------- ---------- -------
Comprehensive loss:
Net loss
Other comprehensive income - unrealized
gain on marketable securities
available-for-sale
Total comprehensive loss
Exercise of stock options 532,059 (31,743) (245,000)
Common placement warrant conversions 18,232
Preferred placement warrant conversions 18,511
Exercise of Class C & D warrant
conversions 2,536,911 3,000
Series B preferred stock conversions 4,765,631 5,000 (1,530,756) (2,000)
Treasury stock issued in payment for
services 7,000 37,000
Common stock issued in payment for
services 9,496
Compensation charge on vesting of options
and warrants
Compensatory stock options and warrants
granted
Dividends payable on Series C stock
Series C preferred stock conversions 398,186
Issuance of private placement units 2,902,846 3,000
---------- ------- -------- --------- ---------- -------
Balance - December 31, 2000 20,871,112 $21,000 (26,743) $(213,000) -- $ --
========== ======= ======== ========= ========== =======
Preferred Stock Unearned
----------------- Portion of Accumulated
Series C Stock Additional Compensatory Other
----------------- Subscriptions Paid-in Stock Comprehensive
Shares Amount Receivable Capital Options Income (loss)
------ ------ ------------- ---------- ------------ -------------
(brought forward)
Balance - December 31, 1998 2,039 2,277,000 -- 29,842,000 (124,000) 19,000
Comprehensive loss:
Net loss
Other comprehensive loss - unrealized
loss on marketable securities
available-for-sale (19,000)
Total comprehensive loss
Common stock and warrants in a private
placement offering in March and April
1999 999,000
Issuance of private placement units in
July and August 1999 (net of offering
costs) 2,231,000
Exercise of stock options 17,000
Common stock issued in connection with
sublicense agreement 563,000
Series B preferred stock converted (1,000)
Treasury stock acquired
Treasury stock issued in payment for
services 14,000
Common stock issued in payment for
services 47,000
Amortization of unearned portion of
Compensatory stock options 124,000
Compensatory stock options granted 37,000 (37,000)
Dividend payable on Series C preferred
stock 204,000
------ ----------- ------- ----------- --------- -------
Balance - December 31, 1999 2,039 $ 2,481,000 $ -- $33,749,000 $ (37,000) $ --
------ ----------- ------- ----------- --------- -------
Comprehensive loss:
Net loss
Other comprehensive income - unrealized
gain on marketable securities
available-for-sale 73,000
Total comprehensive loss
Exercise of stock options 524,000
Common placement warrant conversions
Preferred placement warrant conversions
Exercise of Class C & D warrant
conversions 3,792,000
Series B preferred stock conversions (3,000)
Treasury stock issued in payment for
services
Common stock issued in payment for
services 47,000
Compensation charge on vesting of options
and warrants 2,330,000
Compensatory stock options and warrants
granted 495,000 (310,000)
Dividends payable on Series C stock 36,000
Series C preferred stock conversions (2,039) (2,517,000) 2,517,000
Issuance of private placement units 17,440,000
------ ----------- ------- ----------- --------- -------
Balance - December 31, 2000 -- $ -- $ -- $60,891,000 $(347,000) $73,000
====== =========== ======= =========== ========= =======
Deficit
Accumulated
During the
Development
Stage Total
----------- -----
(brought forward)
Balance - December 31, 1998 (27,930,000) 4,052,000
Comprehensive loss:
Net loss (4,958,000) (4,958,000)
Other comprehensive loss - unrealized
loss on marketable securities
available-for-sale (19,000)
------------
Total comprehensive loss (4,977,000)
Common stock and warrants in a private
placement offering in March and April
1999 1,000,000
Issuance of private placement units in
July and August 1999 (net of offering
costs) 2,233,000
Exercise of stock options 17,000
Common stock issued in connection with
sublicense agreement 564,000
Series B preferred stock converted --
Treasury stock acquired (5,000)
Treasury stock issued in payment for
services 53,000
Common stock issued in payment for
services 47,000
Amortization of unearned portion of
Compensatory stock options 124,000
Compensatory stock options granted --
Dividend payable on Series C preferred
stock (204,000) --
------------- ------------
Balance - December 31, 1999 $(33,092,000) $ 3,108,000
------------- ------------
Comprehensive loss:
Net loss (10,861,000) (10,861,000)
Other comprehensive income - unrealized
gain on marketable securities
available-for-sale 73,000
------------
Total comprehensive loss (10,788,000)
Exercise of stock options 279,000
Common placement warrant conversions --
Preferred placement warrant conversions --
Exercise of Class C & D warrant
conversions 3,795,000
Series B preferred stock conversions --
Treasury stock issued in payment for
services 37,000
Common stock issued in payment for
services 47,000
Compensation charge on vesting of options
and warrants 2,330,000
Compensatory stock options and warrants
granted 185,000
Dividends payable on Series C stock (36,000) --
Series C preferred stock conversions --
Issuance of private placement units 17,443,000
------------ ------------
Balance - December 31, 2000 $(43,989,000) $ 16,436,000
============ ============
See notes to financial statements F-7
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Consolidated Statements of Cash Flows
May 18, 1993
Year Ended (Inception)
December 31, Through,
---------------------------- December 31,
2000 1999 2000
------------ ------------ ------------
Cash flows from operating activities:
Net loss $(10,861,000) $ (4,958,000) $(43,307,000)
Adjustments to reconcile net loss to net cash used in operating
activities:
Write-off of acquired in-process research and development and
supplies -- -- 13,508,000
Write-off of licenses -- -- 683,000
Depreciation and amortization 123,000 87,000 339,000
Compensatory stock options 2,515,000 124,000 2,657,000
Expenses paid using treasury stock and common stock 84,000 27,000 162,000
Loss on sale of property 4,000 -- 4,000
Changes in:
Prepaid expenses, inventory and other current assets 492,000 137,000 457,000
Accounts payable and accrued expenses 1,957,000 (590,000) 2,249,000
Other assets 15,000 -- (3,000)
Proceeds from R&D collaborative contracts 605,000 1,036,000 1,641,000
Amortization of deferred revenue (790,000) -- (790,000)
Expenses paid on behalf of company -- -- 18,000
Employee stock compensation -- -- 42,000
Reduction of research and development supplies -- -- (161,000)
------------ ------------ ------------
Net cash used in operating activities (5,856,000) (4,137,000) (22,501,000)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (948,000) (114,000) (1,494,000)
Proceeds from sale of property and equipment 550,000 -- 575,000
Acquisition of licenses -- -- (711,000)
Purchase of marketable securities (11,514,000) (1,000,000) (33,259,000)
Proceeds from sale or maturity of marketable securities -- 3,525,000 22,150,000
Net cash payments on merger -- -- (1,670,000)
------------ ------------ ------------
Net cash (used in) provided by investing activities (11,912,000) 2,411,000 (14,409,000)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of securities, net of expenses 21,517,000 3,814,000 44,311,000
Purchase of treasury stock -- (5,000) (95,000)
Principal payments under capital lease obligation (15,000) (10,000) (25,000)
------------ ------------ ------------
Net cash provided by financing activities 21,502,000 3,799,000 44,191,000
------------ ------------ ------------
Net increase in cash and cash equivalents 3,734,000 2,073,000 7,281,000
Cash and cash equivalents - beginning of period 3,547,000 1,474,000 --
------------ ------------ ------------
Cash and cash equivalents - end of period $ 7,281,000 $ 3,547,000 $ 7,281,000
============ ============ ============
Supplementary disclosure of cash flows information:
Interest paid $ 5,000 $ 2,000 $ 18,000
Noncash transactions:
Accrued dividends on Series C preferred stock $ 36,000 $ 204,000 $ 682,000
Series C preferred stock dividends paid using common stock $ -- $ -- $ 204,000
Preferred stock issued for inventory $ -- $ -- $ 575,000
Equipment acquired through capitalized lease $ -- $ 73,000 $ 73,000
Unrealized gain (loss) on marketable securities $ 73,000 $ (19,000) $ 73,000
See notes to financial statements F-8
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 2000
NOTE 1 - 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 formed to license and develop pharmaceutical products to treat a
variety of human diseases. 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. 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).
Acute Therapeutics, Inc. ("Old ATI"), was formed in October 1996 upon the
Company's investment of $7,500,000 in exchange for 600,000 shares of Old ATI's
Series A preferred stock, then representing 75% of the voting securities of Old
ATI. In June 1998, ATI Acquisition Corp., a wholly owned subsidiary of the
Company, merged with and into Old ATI with Old ATI being the surviving entity
(the "Old ATI Merger"). Pursuant to the Old ATI Merger, each outstanding share
of Old ATI's common stock was exchanged for 3.90 shares of the Common stock of
the Company (the "Old ATI Exchange Ratio"), each share of Old ATI's Series B
preferred stock was converted into one share of the Company's Series C preferred
stock and all outstanding options to purchase Old ATI common stock were assumed
by the Company and are exercisable for shares of the Common stock of the Company
on the basis of the Old ATI Exchange Ratio.
In October 1999, Old ATI was merged with and into the Company. Also in October
1999, the Company created a new wholly owned subsidiary, which is currently
inactive, called Acute Therapeutics, Inc. ("New ATI").
The value of the common stock of the Company issued to Old ATI's common
stockholders plus the assumption of the outstanding Old 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 Old ATI Merger is as follows:
Common stock issued to Old ATI stockholders
(1,033,500 shares at fair value)* $ 5,038,000
Fair value of common stock issuable on exercise of options to purchase
Old 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 accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, Old ATI (through the date of its merger
into the Company) and New ATI (from October 1999). All intercompany balances and
transactions have been eliminated.
As reflected in the accompanying consolidated 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. 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.
F-9
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 2000
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
Available-for-sale marketable securities
The investments are classified as available for sale, and are
comprised of commercial paper and shares in mutual funds, which
invest in income producing securities. Investments are carried at
fair market value. Realized gains are computed using the average
cost of securities sold. Any appreciation/depreciation on these
investments is recorded as other comprehensive income in the
statements of changes in stockholders' equity until realized.
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 the (a) term of the lease or (b)
useful life of the improvements.
Use of estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
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.
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.
Research and development
Research and development costs are charged to operations as
incurred.
Revenue recognition - research and development collaborative agreements
The Company received nonrefundable fees from companies under
license, sublicense and research funding agreements (See Note 6).
The Company initially records such funds as deferred revenue and
recognizes research and development collaborative contract revenue
when the amounts are earned, which occurs over a number of years as
the Company performs research and development activities.
Additionally, the Company has been awarded grants from certain third
party organizations to help fund research for the drugs that the
Company is attempting to bring to full commercial use. Once research
and development expenditures qualifying under the grant are
incurred, grant reports are periodically completed and submitted to
the granting agency for review. If approved, the granting agency
will then remit payment to the Company. Such amounts are recorded as
revenue upon receipt.
F-10
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 2000
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
continue to apply APB 25 in accounting for its employee stock option
incentive plans and to provide the required SFAS No. 123 disclosures
- see Note 8.
Net loss per common share
Net loss per common 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. Potential common shares not included in
the calculation of net loss per share for the years ended December
31, 2000 and 1999, as the effect would be anti-dilutive, are as
follows:
Number of Potential
Common Shares
-------------------------
2000 1999
--------- ---------
Series B convertible preferred stock -- 4,766,000
Series C convertible preferred stock -- 892,000
Placement agent's option to acquire 0.49 unit 405,000 405,000
Stock options 1,653,000 595,000
Class C warrants 57,000 569,000
Class D warrants -- 2,025,000
Placement agent's common warrants (@ $0.64) 56,000 56,000
Series B preferred warrants (@ $3.53) 655,000 --
Other warrants 65,000 --
Reclassifications
Certain prior year amounts have been reclassified to conform to the
2000 presentation.
NOTE 3 - INVESTMENTS
The following is a summary of available-for-sale marketable securities at
December 31, 2000:
Cost $ 11,514,000
Gross Unrealized Gain 240,000
Gross Unrealized Loss (167,000)
------------
Estimated Fair Value $ 11,587,000
============
F-11
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 2000
NOTE 4 - PROPERTY AND EQUIPMENT
At December 31, 2000, property and equipment was comprised of the following:
Leasehold improvements $ 140,000
Furniture 141,000
Equipment 732,000
----------
1,013,000
Less accumulated depreciation 316,000
----------
$ 697,000
==========
The equipment balance includes $73,000 of property under a capital lease. The
related accumulated depreciation was $13,000 at December 31, 2000.
NOTE 5 - INCOME TAXES
Since its inception, the Company has never recorded a provision or benefit for
Federal and state income taxes.
The reconciliation of the income tax benefit computed at the Federal statutory
rates to the Company's recorded tax benefit for the years ended December 31,
2000 and 1999 is as follows:
2000 1999
----------- -----------
Income tax benefit, statutory rates $ 3,652,000 $ 1,685,000
State taxes on income, net of Federal benefit 836,000 43,000
Research and development tax credit 85,000 136,000
Other (95,000) 125,000
----------- -----------
Income tax benefit $ 4,478,000 $ 1,989,000
Valuation allowance (4,478,000) (1,989,000)
----------- -----------
Income tax benefit -- --
=========== ===========
The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities are as follows at December 31, 2000:
Long-term deferred tax assets:
Net operating loss carryforwards (Federal
and state) $14,771,000
Research and development tax credits 660,000
Capitalized research and development 363,000
-----------
Total gross long-term deferred tax assets 15,794,000
-----------
Long-term deferred tax liabilities:
Property and equipment (49,000)
-----------
Net deferred tax assets 15,745,000
Less: valuation allowance (15,745,000)
-----------
$ --
===========
The difference between the deficit accumulated during the development stage for
financial reporting purposes and the net operating loss carryforwards for tax
purposes is primarily due to the write-off of the acquired in-process research
and development and supplies, which were not deducted for tax purposes. The
Company was in a net deferred tax asset position at December 31, 2000 (before
the consideration of a valuation allowance). Due to the
F-12
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 2000
NOTE 5 - INCOME TAXES (CONTINUED)
fact that the Company is in the development stage, management believes it is
prudent at this time to fully reserve the net deferred tax asset.
At December 31, 2000, the Company had available carryforward net operating
losses (for Federal tax purposes) of approximately $36,400,000 and a research
and development tax credit carryforward of $660,000. The Federal net operating
loss and research and development tax credit carryforwards expire beginning in
2008 and continuing through 2020. Additionally, at December 31, 2000, the
Company had available carryforward losses of approximately $23,964,000 for state
tax purposes. As a result of the Ansan Merger, the utilization of $9,700,000 of
the Federal net operating loss carryforwards is subject to annual limitations in
accordance with Section 382 of the Internal Revenue Code. Certain state
carryforward net operating losses are also subject to annual limitations.
NOTE 6 - LICENSE, SUBLICENSE AND RESEARCH FUNDING AGREEMENTS
Concurrent with the Company's original investment in Old ATI, Ortho
Pharmaceuticals, Inc., a wholly owned subsidiary of Johnson & Johnson, Inc.
("J&J "), and Old ATI entered into an agreement (the "J&J License Agreement")
granting an exclusive license of the Surfaxin(R) technology to Old 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 Old
ATI common stock. J&J contributed its Surfaxin(R) raw material inventory and
manufacturing equipment to Old ATI in exchange for 2,039 (originally 2,200)
shares of nonvoting Series B preferred stock of Old ATI having a $2,039,000
(originally $2,200,000) liquidation preference and a $100 per share cumulative
annual dividend. The inventory and equipment were valued at $2,039,000 (the
value of the preferred shares issued to J&J). At December 31, 2000, based
primarily on the Company's contemplated use of such inventory and equipment in
connection with its proposed clinical trials for acute respiratory distress
syndrome and idiopathic respiratory distress syndrome, the full amount of the
inventory and equipment has been charged to research and development expense.
The Scripps Research Institute ("Scripps") received 40,000 shares of common
stock of Old ATI in exchange for its consent to the J&J License Agreement.
In October 1999, the Company granted an exclusive license to Laboratorios Del
Dr. Esteve S.A. to commercialize and sell Surfaxin(R) within Central and South
America, Mexico and certain Southern European countries (with an option to
include Italy). The license expires, on a country by country basis, on the later
of the expiration of the underlying patents or the fifteenth anniversary from
the first commercial sale of Surfaxin(R) within each country. Certain additional
terms of the agreement are:
o the Company was paid a nonrefundable license fee of $375,000;
o the Company will be the exclusive supplier (except in certain
events) of Surfaxin(R);
o Laboratorios Del Dr. Esteve S.A. agreed to reimburse certain
research and development expenditures borne by the Company in
conducting certain clinical trials in the above countries. However,
costs as defined in the license agreement, incurred in connection
with such clinical trials in excess of an agreed upon amount, will
not be reimbursed;
o Laboratorios Del Dr. Esteve S.A. paid $375,000 in advance for
Surfaxin(R)supplied for clinical trials described above;
o an affiliate of Laboratorios Del Dr. Esteve S.A. invested $850,000
in the Company in exchange for common stock of the Company issued at
a 50% premium over the ten day average closing price preceding the
closing of the investment. The Company has accounted for the premium
as additional license fees amounting to $286,000; and
o an option to an exclusive license for Italy for additional specified
payments.
F-13
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 2000
NOTE 6 - LICENSE, SUBLICENSE AND RESEARCH FUNDING AGREEMENTS (CONTINUED)
The Company has accounted for the license fees (including the premium paid for
common stock), the reimbursement of research and development expenditures and
advance payment for Surfaxin(R) to be used in clinical trials as deferred
revenue. Such deferred revenue will be recognized as it is earned.
In 1996, Old 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 for additional one-year
periods. The Company and Scripps are currently finalizing an agreement to extend
the term for one year. Pursuant to this agreement, the Company will pay $489,000
per year to fund Scripps' research efforts. The agreement provides that Scripps
shall grant an option to the Company to acquire an exclusive license for the
application of technology developed from the research program. Pursuant to the
agreement, payments to Scripps were $468,000 and $115,000 in 2000 and 1999,
respectively.
In 1996, the Company entered into a license agreement with the
Charlotte-Mecklenburg Hospital Authority (Charlotte-Mecklenberg) for the use of
the active compound in SuperVent(TM), a therapy which the Company is clinically
testing. The Company paid a license issue fee of $86,000 and has agreed to pay
amounts based on the achievement of certain milestones, royalties on future
sales and future patent-related costs. If the Company meets all milestones as
defined the agreement, payments paid to Charlotte-Mecklenburg will aggregate
$850,000. The license expires upon expiration of the underlying patents.
NOTE 7 - STOCKHOLDERS' EQUITY
2000 private placement
In March 2000, the Company received approximately $17,500,000 in net proceeds
from the sale of 37.74 units in a private placement offering. Each unit
consisted of 76,923 shares of common stock of the Company and Class E warrants
to purchase additional 15,385 shares of common stock of the Company at $7.38 per
share. The Class E warrants of the Company are exercisable through March 2005.
In connection with this private placement, the placement agent, Paramount
Capital, Inc. ("Paramount"), received fees of approximately $1,321,000 and the
Company agreed to issue to Paramount warrants to purchase 348,341 shares of
common stock of the Company at $8.113 per share.
1999 private placements
During March and April 1999 the Company raised $1.0 million in a private
placement offering of 826,447 shares of common stock and 569,026 Class C
warrants to purchase common stock of the Company at an exercise price of $2.15
per share (after adjustment to the issue price in accordance with the terms of
the offering). The Class C warrants are exercisable through April 2006. As of
December 31, 2000, approximately 512,000 Class C warrants have been exercised.
In July 1999, the Company raised approximately $2,231,000 (net of offering costs
of approximately $217,000) in a private placement offering of units. Each unit
was sold for $500,000 and consisted of 413,223 shares of common stock of the
Company and 413,223 Class D warrants to purchase shares of common stock of the
Company at an exercise price of $1.33 per share. An aggregate of 2,024,792
shares of common stock of the Company and 2,024,792 Class D warrants were
issued. The Class D warrants were exercisable through July 2004. As of December
31, 2000, all of the Class D warrants have been exercised. The placement agent,
Paramount, received fees of 7% of the gross proceeds, reimbursement of certain
expenses and an option to purchase 0.49 units at a per unit exercise price of
$550,000.
F-14
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 2000
NOTE 7 - STOCKHOLDERS' EQUITY (CONTINUED)
1996 private placement
In 1996, in 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 of the Company and 19,458
shares of common stock of the Company). Preferred stockholders had 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
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 was 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 was 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 gave the holders thereof the right
to acquire 220,026 shares of Series B preferred stock (which as a result of the
conversion of the Series B preferred stock were convertible into 685,000 shares
of common 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.
In February 2000, the Company gave notice to its Series B convertible preferred
stockholders of its intention to convert all outstanding shares of Series B
preferred stock into common stock of the Company. Pursuant to the notice, all of
the Series B shares were converted into 4,766,000 shares of common stock of the
Company effective March 14, 2000.
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 of the Company, one redeemable Class A warrant, and one Class B
warrant. Each Class A warrant entitles the holder to purchase one share of
common stock of the Company and one Class B warrant at an exercise price of
$19.50 per share. Each Class B warrant entitled the holder to purchase one share
of common stock of the Company an exercise price of $26.25 per share. All Class
A and Class B Warrants remaining unexercised at August 2000 expired by their
terms.
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 common
shares (including 115,491 shares held by the Company pending cancellation
pursuant to the Ansan Merger (Note 1)) and options to purchase 12,086 shares of
common stock into escrow (the "Escrow Shares" and "Escrow Options",
respectively). Certain contractual conditions necessary for the release of these
escrow shares and escrow options were not met by March 31, 2000, and the Escrow
Shares and Escrow Options were cancelled pursuant to their terms.
F-15
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 2000
NOTE 7 - STOCKHOLDERS' EQUITY (CONTINUED)
Common shares reserved for issuance
As of December 31, 2000, the Company has reserved shares of common stock for
issuance upon exercise of options and warrants as follows:
(i) Stock option plan 3,162,000
(ii) Placement agent:
Common stock options 56,000
Preferred B warrants 655,000
Unit options 405,000
Common stock 348,000
(iii) Class C warrants 57,000
(iv) Class E warrants 581,000
(v) Other warrants 65,000
Treasury stock/common stock issued for services
During 1998, the Company's Board of Directors approved a stock repurchase
program wherein the Company could buy its own shares from the open market and
use such shares to settle indebtedness. Such shares are accounted for as
treasury stock.
During 2000, the Company acquired 31,743 shares of common stock of the Company
in exchange for option conversions, having a value of $245,000 and issued 7,000
shares of treasury stock in satisfaction of services rendered. In addition,
during 2000, the Company issued 9,496 shares of common stock of the Company in
lieu of cash payments for services and rent.
During 1999, the Company acquired 2,000 shares of common stock of the Company
for approximately $5,000 and issued 15,600 shares of treasury stock in
settlement of $39,000 of indebtedness. The fair market value of the 15,600
shares of treasury stock on the date it was issued in 1999 was approximately
$53,000 and the difference was charged to expense and credited to
paid-in-capital.
Series C preferred stock
The Company's Series C redeemable convertible preferred stock was 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 were redeemable at
liquidation value upon the occurrence of certain events. The liquidation value
was payable at the option of the Company in either cash or shares of common
stock. Series C stockholders were entitled to dividends of 10% per annum to be
paid only upon liquidation or redemption.
On March 3, 2000, the sole shareholder, J&J, elected to convert their Series C
preferred stock shares into 398,186 shares of common stock of the Company.
NOTE 8 - STOCK OPTIONS
Ansan's 1993 Stock Option Plan as 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
F-16
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 2000
NOTE 8 - STOCK OPTIONS (CONTINUED)
options, nonstatutory stock options and options granted to 10% stockholders of
the Company or an 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 at the
exercise price paid per share. 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 Common stock of the Company - see Note 1.
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 Common stock of the Company 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 Common stock of the
Company 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. On June 16, 2000, the 1998 Stock Incentive Plan was amended to increase
the maximum number of shares of common stock reserved for issuance over the term
of the plan from 2,200,959 to 3,000,000.
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, 2000 and 1999 would have been
approximately $14,092,000 or $0.75 per share and $5,622,000 or $0.74 per share,
respectively. The weighted average fair value of the options granted are
estimated at $3.40 and $2.46 per share, respectively, for the years ended
December 31, 2000 and 1999, on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions: dividend
yield 0%, volatility of 130% and 91%, respectively, risk-free interest rate of
6% and 4.86%, respectively and expected life of three and a half years.
Additional information with respect to the stock option activity is summarized
as follows:
Year Ended December 31,
---------------------------------------------------------------------------------------------------------
2000 1999
---------------------------------------------------- --------------------------------------------------
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
Options outstanding at
Beginning of year $0.0026 - $4.87 2,475,752 $2.27 7.93 years $0.0026 - $4.87 1,886,064 $2.23 8.73 years
Options granted 1.66 - 7.00 1,147,000 4.36 0.81 - 4.44 1,108,893 2.18
Options exercised 0.08 - 4.44 (528,158) 0.98 0.0026 - 0.51 (119,732) 0.11
Options forfeited 0.32 (39,000) 0.32 0.08 - 4.44 (297,888) 3.56
Options expired -- -- -- 4.19 (101,585) 4.19
--------- ---------
Options outstanding at
end of year $0.0026 - $7.00 3,055,594 $3.39 8.33 years $0.0026 - $4.87 2,475,752 $2.42 8.50 years
========= =========
Options exercisable
at end of year $0.0026 - $7.00 3,055,594 $3.39 8.33 years $0.0026 - $4.87 2,436,752 2.27 7.93 years
========= =========
F-17
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 2000
NOTE 8 - STOCK OPTIONS (CONTINUED)
Currently, all outstanding options are immediately exercisable. Any unvested
options are subject to repurchase by the Company at the exercise price paid per
share.
In accordance with the employment agreements entered into with the Company in
connection with the Old ATI Merger, Old ATI management was granted, in the
aggregate, options to purchase (i) 338,500 shares of the Common stock of the
Company, subject to vesting and (ii) 335,000 shares of the Common stock of the
Company subject to the achievement of certain corporate milestones. In April
2000, the milestones related to 154,510 options had been achieved and the
related options vested.
In September 1999, management was granted, in the aggregate, options to purchase
500,000 shares of the Common stock of the Company subject to the achievement of
certain corporate milestones. In January 2000, 50% of the milestones related to
250,000 options had been achieved and the related options vested. In September
2000, the Board of Directors of the Company accelerated the remaining 50% of the
250,000 milestone options.
In connection with milestones being achieved, the Company incurred non-cash
compensation charges amounting to $2,515,000 and $125,000, in 2000 and 1999,
respectively, representing the excess of the fair value over the exercise price
of the options granted.
Included in the options outstanding at December 31, 2000, are options to
purchase 141,600 shares of the Common stock of the Company (at an exercise price
of $4.44) granted during 1998 which vest upon the Company achieving specified
milestones. On vesting, the Company will incur a charge amounting to the excess,
if any, of the fair value over the exercise price. In addition, pursuant to a
management agreement entered into between the Company and Old ATI at the time
the merger agreement relating to the Old ATI Merger was executed, the members of
Old ATI management were granted options to purchase 126,500 shares of the Common
stock of the Company.
NOTE 9 - COMMITMENTS
At December 31, 2000, the Company had employment agreements with seven officers
providing for an aggregate annual salary of $1,324,000. The agreements expire on
various dates through December 2005 and provide for the issuance of annual and
milestone bonuses. In addition, the Company had employment agreements with three
additional employees providing for an aggregate annual salary of $204,000. The
agreements expire on various dates through January 2002 and provide for the
issuance of annual bonuses and the granting of options based on management
recommendation. In March 2001, the Board of Directors of the Company agreed to
renew employment contracts with certain officers, which were due to expire in
June 2001, under essentially the same terms.
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.
In September 2000, the lease agreement was amended to include additional space.
Future minimum annual rents for this lease is as follows:
2001 $ 198,000
2002 205,000
2003 212,000
2004 219,000
2005 111,000
---------
$ 945,000
=========
F-18
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 2000
NOTE 9 - COMMITMENTS (continued)
In June 2000, the Company entered into a lease agreement to lease office space
in premises from a law firm that has previously provided legal services to the
Company. Future minimum annual rents for this lease is $7,000 through June 2001.
Total net rent expense for the years ended December 31, 2000 and 1999 was
approximately $181,000 and $144,000, respectively.
In September 1999, the Company entered into a four-year lease agreement to lease
laboratory equipment, which is being accounted for as a capital lease. Future
minimum lease payments for this lease are as follows:
2001 $ 20,000
2002 20,000
2003 13,000
--------
53,000
Less interest included 5,000
--------
$ 48,000
========
NOTE 10 - RELATED PARTY TRANSACTIONS
The Company currently leases office and laboratory space in premises owned by a
Company officer/stockholder. Lease payments made to this party for the years
ended December 31, 2000 and 1999 were approximately $170,000 and $142,100,
respectively.
The Company, from time to time, engages the spouse of an officer to perform
miscellaneous repairs and maintenance and improvements of office and laboratory
space. Payments made to this party for the years ended December 31, 2000 and
1999 were approximately $77,900 and $29,300, respectively.
In May 2000, the Company entered into an agreement with Clinical Data
Management, Inc. (CDM), to perform duties associated with processing data for
clinical trials. CDM is wholly owned by the spouse of the Company's President
and Chief Executive Officer. Payments made to CDM and its owner, including
payments made prior to the agreement, for the years ended December 31, 2000 and
1999 were approximately $110,700 and $24,500, respectively.
F-19
Exhibit 3.2
CERTIFICATE OF AMENDMENT
TO THE RESTATED CERTIFICATE OF INCORPORATION
OF DISCOVERY LABORATORIES, INC.
Pursuant to Section 242 of the
General Corporation Law of the State of Delaware
Discovery Laboratories, Inc., a corporation organized and existing
under the laws of the State of Delaware (the "Corporation"), DOES HEREBY
CERTIFY, that the Restated Certificate of Incorporation of the Corporation filed
with the Secretary of State of the State of Delaware is hereby amended as
follows:
1. The name of the Corporation is Discovery Laboratories, Inc.
2. The original Certificate of Incorporation of the Corporation was filed
under the name Ansan, Inc. with the Secretary of State of the State of Delaware
on November 6, 1992.
3. Paragraph A. of Article FOURTH of the Restated Certificate of
Incorporation is hereby amended in its entirety to read as follows:
A. Authorization.
The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 40,000,000 consisting
of 35,000,000 shares of common stock, par value $.001 per share (the
"Common Stock"), and 5,000,000 shares of preferred stock, par value
$.001 per share (the "Preferred Stock").
The Board of Directors may divide the Preferred Stock into any
number of series, fix the designation and number of shares of each
such series, and determine or change the designation, relative
rights, preferences, and limitations of any series of Preferred
Stock. The Board of Directors (within the limits and restrictions of
any resolutions adopted by it originally fixing the number of any
shares of any series of Preferred Stock) may increase or decrease
the number of shares initially fixed for any series, but no such
decrease shall reduce the number below the number of shares then
outstanding and shares duly reserved for issuance.
4. The foregoing amendment was duly adopted in accordance with Section 228
of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, Discovery Laboratories, Inc. has caused this
Certificate of Amendment to be signed this 15th day of July, 1999.
DISCOVERY LABORATORIES, INC.
By: /s/ Robert J. Capetola, Ph.D.
----------------------------------------
Name: Robert J. Capetola, Ph.D.
Title: Chief Executive Officer
Exhibit 10.12
ADDENDUM 1 TO LEASE
September 15, 2000
This Addendum is attached to and made part of the lease dated July 1, 1998, by
and between SLT1 L.L.C. (landlord) and ACUTE THERAPEUTICS, Inc. (tenant)(the
"Lease").
I. LEASED PREMISES
Begining on September 16, 2000 , the description of the leased premises is
hereby amended to include all 13,667 square feet of the entire building
owned by SLT1 L.L.C.
II. TERM
The term for the Lease (including the additional premises provided for in
Section I) shall commence on the 16th day of September 16, 2000 and end at
the close of business on the 31st day of August 2005.
III. RENT
Base Rent: Fourteen dollars and twenty five cents ($14.25) per square foot
per year ratably due on the first day of each calendar month begining on
September 16, 2000. Additional rent and increasing minimum rent per square
foot per year shall be as set forth in the lease.
Except as amended herein, the remaining terms and conditions of the Lease shall
remain in full force and effect.
Tenant: Discovery Laboratories, Inc. Landlord: SLT1 L.L.C.
(formerly Acute Therapeutics, Inc.)
By: /s/ Robert J. Capetola By: Huei Tsai
----------------------------- ----------------------------
Robert Capetola, President/CEO Huei Tsai
Exhibit 10.16
EMPLOYMENT AGREEMENT
This Employment Agreement ( "Agreement") shall be effective as of
January 1, 2001, by and between DISCOVERY LABORATORIES, INC., a Delaware
corporation (the "Company"), and ROBERT J. CAPETOLA, PH.D. ("Executive").
WHEREAS, the Company and Executive desire that Executive be employed
by the Company and that the terms and conditions of such employment be hereby
defined.
NOW, THEREFORE, in consideration of the employment of Executive by
the Company, the Company and Executive hereby agree as follows:
1. Terms of the Agreement. The Company shall employ Executive and
Executive shall accept employment for a period of four (4) years commencing on
January 1, 2001 (the "Commencement Date") and continuing until December 31,
2005, subject, however, to prior termination as hereinafter provided in Section
5 (such term is hereinafter referred to as the "Employment Period").
2. Executive's Duties and Obligations.
a. Duties. Executive shall serve as the Company's President
and Chief Executive Officer. Executive shall be responsible for overall
management of the Company and all duties customarily associated with his title
including, without limitation, activities regarding (i) day-to-day operational
affairs; (ii) the development and commercialization of the Company's products;
(iii) proposed strategic alliances, joint ventures and other potential
collaborations; and (iv) all other appropriate functions for the Company. All of
the operating managers of the Company shall report to Executive. Executive shall
at all times report to, and shall be subject to the policies established by, the
Board of Directors of the Company (the "Board") and any executive committee
thereof (the "Executive Committee"). The Company agrees that, at all times
during the Employment Period, it will nominate Executive for election to the
Board. Executive hereby agrees to immediately resign from any Board position
held by him at the expiration or termination of the Employment Period.
b. Location of Employment. Executive's principal place of
business shall be at the Company's headquarters to be located within thirty (30)
miles of Doylestown, Pennsylvania; provided, that Executive acknowledges and
agrees that the performance by Executive of his duties shall require frequent
travel including, without limitation, overseas travel from time to time.
c. Proprietary Information and Inventions Agreement. Executive
shall execute the Company's standard form of Intellectual Property and
Confidential Information Agreement (the "Confidentiality Agreement") a copy of
which is attached to this Agreement as
2
Exhibit A. Executive shall comply at all times with the terms and conditions of
the Confidentiality Agreement and all other reasonable policies of the Company
governing its confidential and proprietary information.
3. Devotion of Time to Company's Business
a. Full-Time Efforts. During his employment with the Company,
Executive shall devote substantially all of his time, attention and efforts to
the proper performance of his implicit and explicit duties and obligations
hereunder to the reasonable satisfaction of the Company.
b. No Other Employment. During his employment with the
Company, Executive shall not, except as otherwise provided herein, directly or
indirectly, render any services of a commercial or professional nature to any
other person or organization, whether for compensation or otherwise, without the
prior written consent of the Executive Committee or the Board.
c. Non-Competition During and After Employment. During the
Employment Period and for fifteen (15) months from the date of the termination
of Executive's employment hereunder (the "Termination Date"), Executive shall
not, directly or indirectly, without the prior written consent of the Company,
either as an employee, employer, consultant, agent, principal, partner,
stockholder, corporate officer, director, or in any other individual or
representative capacity (X) compete with the Company in the business of
developing or commercializing pulmonary surfactants, cystic fibrosis treatments
or any other category of compounds which forms the basis of the Company's
products or products under development, or (Y) solicit, encourage, induce or
endeavor to entice away from the Company, or otherwise interfere with the
relationship of the Company with, any person who is employed or engaged by the
Company as an employee, consultant or independent contractor or who was so
employed or engaged at any time during the preceding six (6) months; provided,
that nothing herein shall prevent Executive from engaging in discussions
regarding employment, or employing, any such employee, consultant or independent
contractor (i) if such person shall voluntarily initiate such discussions
without any such solicitation, encouragement, enticement or inducement prior
thereto on the part of Executive or (ii) if such discussions shall be held as a
result of or employment be the result of the response by any such person to a
written employment advertisement placed in a publication of general circulation,
general solicitation conducted by executive search firms, employment agencies or
other general employment services, not directed specifically at any such
employee, consultant or independent contractor.
d. In the event that Executive breaches any provisions of
Section 3(c) or of the Confidentiality Agreement or there is a threatened breach
thereof, then, in addition to any other rights which the Company may have, the
Company shall be entitled, without the posting of a bond or other security, to
injunctive relief to enforce the restrictions contained therein. In the event
that an actual proceeding is brought in equity to enforce the provisions of
Section 3(c) or the Confidentiality Agreement, Executive shall not urge as a
defense that there is
3
an adequate remedy at law nor shall the Company be prevented from seeking any
other remedies which may be available.
e. To the extent that the restrictions imposed by Section 3(c)
are interpreted by any court to be unreasonable in geographic and/or temporal
scope, such restrictions shall be deemed automatically reduced to the extent
necessary to coincide with the maximum geographic and/or temporal restrictions
deemed by such court not to be unreasonable.
4. Compensation and Benefits.
a. Base Compensation. During the Employment Period, the
Company shall pay to Executive (i) base annual compensation ("Base Salary") of
Two Hundred Seventy Five Thousand ($275,000), payable in accordance with the
Company's regular payroll practices and less all required withholdings and (ii)
additional compensation, if any, and benefits as hereinafter set forth in this
Section 4. Base Salary shall be reviewed at least annually for the purposes of
determining increases, if any, based on Executive's performance, the performance
of the Company, inflation, the then prevailing salary scales for comparable
positions and other relevant factors; provided, however, that such Base Salary
shall be increased annually (effective as of January 1, 2001) during the
Employment Period by a minimum of 5% per year, and provided further, that any
increase in Base Salary in excess of such 5% increase shall be solely within the
discretion of the Company.
b. Bonuses. During the Employment Period, Executive shall:
(1) be entitled to a minimum year-end bonus equal
to 20% of Base Salary for such year and, further, shall be eligible for such
additional year-end bonus, which may be paid in either cash or equity, or both,
as is awarded solely at the discretion of the Compensation Committee of the
Board, provided, that the Company shall be under no obligation whatsoever to pay
such discretionary year-end bonus for any year;
(2) incentive bonus, which may be paid in either
cash or equity, or both, as is determined at the discretion of the Compensation
Committee of the Board and in the amounts contemplated by and as otherwise set
forth in the Management Agreement dated March __, 1998, upon the achievement of
each of the following milestones (which bonuses, if any, will be paid only once
for the attainment of each of the milestones): (i) the successful completion of
Phase II studies for any Portfolio Compound, (ii) the successful completion of
Phase III studies of any Portfolio Compound, and (iii) receipt of marketing
approval in the United States for any Portfolio Compound.
c. Benefits. During the Employment Period, Executive shall be
entitled to participate in all employee benefit plans, programs and arrangements
made available generally to the Company's senior executives or to its employees
on substantially the same basis that such benefits are provided to such
executives or employees (including, without limitation profit-sharing, savings
and other retirement plans (e.g., a 401(k) plan) or programs, medical, dental,
hospitalization, vision, short-term and long-term disability and life insurance
plans or
4
programs, accidental death and dismemberment protection, travel accident
insurance, and any other employee welfare benefit plans or programs that may be
sponsored by the Company from time to time, including any plans or programs that
supplement the above-listed types of plans or programs, whether funded or
unfounded); provided, however, that nothing in this Agreement shall be construed
to require the Company to establish or maintain any such plans, programs or
arrangements. Anything contained herein to the contrary notwithstanding,
throughout the Employment Period, Executive shall be entitled to receive (i)
term life insurance on behalf of Executive's named beneficiaries in the amount
of $2,000,000 and (ii) long-term disability insurance (subject to a combined
annual premium cap of $15,000 for the first year of the Employment Period, which
cap shall be increased by 5% for each successive full year of the Employment
Period), each at no cost to the Executive, except the Company shall have no
liability whatsoever for any taxes (whether based on income or otherwise)
imposed upon or incurred by Executive in connection with any such life or
disability insurance.
d. Vacations. During the Employment Period, Executive shall be
entitled to 20 days paid vacation per year, to be earned ratably throughout the
year, 5 days of which may be carried over from year to year (provided, that in
no event shall the aggregate number of such vacation days carried over to any
succeeding year exceed 10 days).
e. Reimbursement of Business Expenses. Executive is authorized
to incur reasonable expenses in carrying out his duties and responsibilities
under this Agreement and the Company shall reimburse him for all such expenses,
in accordance with reasonable policies of the Company.
f. Company Leased Automobile: In connection with Executive's
employment hereunder, Executive shall be entitled to the use of a suitable
automobile (to be determined in the good faith discretion of Executive) (the
"Company Car") which shall be leased on Executive's behalf by the Company or, in
the Company's sole discretion, the costs therefor shall be reimbursed to
Executive. The annual total costs incurred by the Company in connection with the
Company Car (including, without limitation, lease payments, insurance,
maintenance and repairs, any governmental and regulatory fees (but excluding any
amounts Executive may receive as reimbursement for gasoline, parking and tolls
incurred in connection with his service to the Company) shall not exceed
$10,000. Executive acknowledges and agrees that the Company Car shall be for
Executive's exclusive use primarily with respect to Company business. At
Executive's sole expense, Executive shall maintain a current United States
driving license and shall immediately inform the Company's Controller if such
license is revoked or suspended. Upon any such revocation or suspension,
Executive will immediately forfeit any and all entitlement to the Company Car.
Executive hereby agrees to at all times comply with the Company's written
policies regarding Company automobiles and shall have full responsibility for
any fines incurred for motoring offenses in respect of the Company Car whether
such fines are incurred in his personal use or in connection with Company
activities.
5. Termination of Employment.
5
a. Termination for Good Cause. The Company may terminate
Executive's employment at any time for Good Cause, as such term is hereinafter
defined. For the purposes of this Agreement, "Good Cause" means Executive's
gross misconduct; Executive's gross neglect of duties; Executive's commission of
any act involving moral turpitude; Executive's material breach of this Agreement
or the Confidentiality Agreement; any act or omission of Executive involving
fraud or embezzlement against the Company; Executive's appropriation of any
property or proprietary information of the Company resulting, in either case, in
substantial harm to the Company; or Executive's conviction of a felony.
Executive shall have fifteen (15) days after receipt of written notice from the
Company to cure any conduct constituting Good Cause hereunder; provided,
however, that such fifteen (15) day period shall not apply if the Company
reasonably determines that such conduct is not capable of being cured. If
terminated for Good Cause in accordance with the provisions of this Section
5(a), Executive shall be entitled to any unpaid compensation accrued through the
last day of Executive's employment, a lump sum payment in respect of all accrued
but unused vacation days (provided, that in no event shall the aggregate number
of such accrued vacation days exceed 10 days) at his Base Salary in effect on
the date such vacation was earned, payment of any other amounts owing to
Executive but not yet paid and shall not be entitled to receive any other
compensation or benefits from the Company whatsoever (except as and to the
extent the continuation of certain benefits is required by law).
b. Termination without Good Cause. The Company may terminate
Executive's employment at any time without Good Cause. If (i) Executive's
employment is terminated by the Company without Good Cause or (ii) Executive
resigns for Good Reason (as hereinafter defined).
(1) Executive shall be entitled to the amounts set
forth in Section 5(a); and
(2) Executive shall be entitled to receive a
lump-sum severance payment equal to fifteen (15) months of his Base Salary in
effect on the date of his termination, payable within 10 business days of the
Termination Date and less all required withholdings.
(3) For purposes hereof, "Good Reason" shall mean
a resignation by Executive, upon at least 30 days prior written notice to the
Company, following the occurrence of any of the following events without
Executive's consent, unless the circumstances giving rise thereof have been
cured by the Company within such 30-day notice period: (X) an involuntary
reduction of 20% or greater in his then current Base Salary, (Y) a material
diminution in Executive's title or duties or the assignment to him of duties
that materially impair his ability to perform the duties normally assigned to a
president and chief executive officer of a corporation the size and nature of
the Company, or (Z) the failure of the Company, upon the request of the
Executive, to obtain the assumption in writing of its obligation to perform this
Agreement by any successor to all or substantially all of the assets of the
Company within 45 days after a merger, consolidation, sale or similar
transaction.
6
c. Death or Disability. This Agreement shall terminate if
Executive dies or is Disabled as herein defined. For the purposes of this
Agreement, "Disabled" shall mean a mental or physical condition that renders
Executive substantially incapable of performing his duties and obligations under
this Agreement, after taking into account provisions for reasonable
accommodation, as determined by a medical doctor (such doctor to be mutually
determined in good faith by the parties) for three (3) or more consecutive
months or for a total of six (6) months during any twelve (12) consecutive
months; provided, that during such period the Company shall give Executive at
least thirty (30) days' written notice that it considers the time period for
disability to be running. If this Agreement is terminated under this Section
5(c), Executive, his heirs, legal representatives or his estate shall be
entitled to any unpaid amounts set forth in Section 5(a) but shall not be
entitled to any severance benefits.
d. Termination by Executive. Executive shall give the Company
30 days prior notice before he voluntarily resigns his employment with the
Company. In the event of Executive's voluntary resignation (other than for Good
Reason), Executive shall be entitled to any unpaid amounts set forth in Section
5(a) but shall not be entitled to any severance benefits.
e. Lock-up Period. Executive shall not directly or indirectly, sell,
offer, contract to sell, transfer the economic risk of ownership, make any short
sale, pledge or otherwise dispose of any shares of Common Stock issued or
issuable upon the exercise of options, or any securities convertible to or
exchangeable or exercisable for such options, granted to Executive for a
one-year lock up period following any termination of Executive's employment by
(i) the Company for Good Cause or (ii) Executive, to the extent any such
termination constitutes a breach of this Agreement.
6. Miscellaneous.
a. Governing Law. This Agreement shall be interpreted,
construed, governed and enforced according to the laws of the Commonwealth of
Pennsylvania as applied to agreements among Pennsylvania residents entered into
and to be performed entirely within Pennsylvania without regard to the
application of choice of law rules.
b. Amendments. No amendment or modification of the terms or
conditions of this Agreement shall be valid unless in writing and signed by the
parties hereto.
c. Severability. If one or more provisions of this Agreement
are held to be invalid or unenforceable under applicable law, such provisions
shall be construed, if possible, so as to be enforceable under applicable law,
or such provisions shall be excluded from this Agreement and the balance of the
Agreement shall be interpreted as if such provision were so excluded and shall
be enforceable in accordance with its terms.
d. Successors and Assigns. The rights and obligations of the
Company under this Agreement shall inure to the benefit of and shall be binding
upon the successors and assigns of the Company. Executive shall not be entitled
to assign any of his rights or obligations under this Agreement.
7
e. Notices. All notices required or permitted under this
Agreement shall be in writing and shall be deemed effective upon personal
delivery, on the date of scheduled delivery by a nationally recognized overnight
service or two (2) days after deposit in the United States Post Office, by
registered or certified mail, postage prepaid, addressed to the other party at
the address shown below such party's signature, or at such other address or
addresses as either party shall designate to the other in accordance with this
Section 6(e).
f. Entire Agreement. This Agreement, including the exhibits
attached hereto, constitutes the entire agreement between the parties with
respect to the employment of Executive.
g. Survivorship. The rights and obligations of Executive and
the Company hereunder shall survive any termination of Executive's employment to
the extent necessary to the intended preservation of such rights and
obligations.
h. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall constitute an original, but all of which, when
taken together, shall constitute one document.
IN WITNESS THEREOF, the parties have executed this Agreement as of
the date set forth above.
DISCOVERY LABORATORIES, INC.
/s/ David L. Lopez
--------------------------------------------
By: David L. Lopez, CPA, Esq.
Its: Vice President and General Counsel
Address: 350 South Main Street, Suite 307
Doylestown, PA 18901
EXECUTIVE,
/s/ Robert J. Capetola, Ph.D.
--------------------------------------------
Address: 6097 Hidden Valley Drive
Doylestown, PA 18901
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement on
Form S-8 pertaining to Discovery Laboratories, Inc. Amended and Restated 1998
Stock Incentive Plan of our report dated February 25, 2000, on our audit of the
consolidated financial statements for the year ended December 31, 1999 which
report is included in the annual report on Form 10-KSB for the year ended
December 31, 2000.
/s/ Richard A. Eisner & Company, LLP
New York, New York
March 29, 2001
Exhibit 23.2
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-55900) pertaining to the Discovery Laboratories, Inc. Amended and
Restated 1998 Stock Incentive Plan and in the Registration Statements (Form S-3
No. 333-35206 and Form S-3 No. 333-86105) pertaining to the registration of
shares of common stock of our report dated March 27, 2001, with respect to the
consolidated financial statements of Discovery Laboratories, Inc. included in
the Annual Report (Form 10-KSB) for the year ended December 31, 2000.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 27, 2001