SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ___________
Commission file number 000-26422
DISCOVERY LABORATORIES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 94-3171943
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) No.)
350 South Main Street, Suite 307
Doylestown, Pennsylvania 18901
(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code: (215) 340-4699
As of May 7, 2001, 21,173,383 shares of Common Stock, par value $.001 per share,
were outstanding.
Transitional Small Business Disclosure Format: |_| Yes |X| No
DISCOVERY LABORATORIES, INC.
Table of Contents
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS --
As of March 31, 2001 (unaudited) and December 31, 2000 ... Page 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited) --
For the Three Months Ended March 31, 2001 and 2000
and
for the Period from May 18, 1993 (Inception)
through March 31, 2001 ................................... Page 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) --
For the Three Months Ended March 31, 2001 and 2000
and
for the Period from May 18, 1993 (Inception)
through March 31, 2001 ................................... Page 5
Notes to Condensed Consolidated Financial Statements
(unaudited) ................................................ Page 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................ Page 6
PART II - OTHER INFORMATION
Item 1. Legal Proceedings .......................................... Page 9
Item 2. Changes in Securities ...................................... Page 9
Item 3. Defaults Upon Senior Securities ............................ Page 9
Item 4. Submission of Matters to a Vote of Security Holders ........ Page 9
Item 5. Other Information .......................................... Page 9
Item 6. Exhibits and Reports on Form 8-K ........................... Page 9
Signatures ......................................................... Page 10
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Condensed Consolidated Balance Sheets
March 31, December 31,
2001 2000
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 908,000 $ 7,281,000
Available-for-sale marketable securities $ 14,894,000 11,587,000
Prepaid expenses and other current assets 378,000 149,000
------------ ------------
Total current assets 16,180,000 19,017,000
Property and equipment, net of depreciation 703,000 697,000
Security deposits 3,000 3,000
------------ ------------
$ 16,886,000 $ 19,717,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,689,000 $ 2,382,000
Capitalized lease - current 18,000 17,000
------------ ------------
Total current liabilities 1,707,000 2,399,000
------------ ------------
Deferred revenue 653,000 851,000
Capitalized lease 24,000 31,000
------------ ------------
Total liabilities 2,384,000 3,281,000
------------ ------------
Stockholders' Equity:
Common stock, $.001 par value; 35,000,000 authorized; 20,875,694 and
20,871,112 shares issued and outstanding at March 31, 2001 and
December 31, 2000 respectively 21,000 21,000
Additional paid-in capital 60,896,000 60,891,000
Unearned portion of compensatory stock options (274,000) (347,000)
Deficit accumulated during the development stage (46,049,000) (43,989,000)
Treasury stock (at cost; 26,743 shares of common stock) (213,000) (213,000)
Accumulated other comprehensive income 121,000 73,000
------------ ------------
Total stockholders' equity 14,502,000 16,436,000
------------ ------------
$ 16,886,000 $ 19,717,000
============ ============
See notes to condensed consolidated financial statements Page 3
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Condensed Consolidated Statements of Operations
(Unaudited)
May 18, 1993
Three Months Ended (inception)
March 31, through
------------------------------- March 31,
2001 2000 2001
------------ ------------ ------------
Revenues:
Interest, dividends, and realized gains $ 302,000 $ 22,000 $ 2,812,000
Research and development collaborative
contracts 456,000 19,000 1,402,000
------------ ------------ ------------
758,000 41,000 4,214,000
------------ ------------ ------------
Expenses:
Write-off of acquired in-process research
and development and supplies 13,508,000
Research and development 1,664,000 774,000 21,889,000
General and administrative 1,080,000 735,000 11,461,000
Compensatory stock options 73,000 813,000 2,730,000
Interest 1,000 2,000 19,000
------------ ------------ ------------
Total expenses 2,818,000 2,324,000 49,607,000
------------ ------------ ------------
(2,060,000) (2,283,000) (45,393,000)
Minority interest in net loss of subsidiary 26,000
------------ ------------ ------------
Net loss (2,060,000) (2,283,000) (45,367,000)
============ ============ ============
Net loss per common share - basic and
diluted $ (0.10) $ (0.18)
============ ============
Weighted average number of common shares
outstanding - basic and diluted 20,872,000 12,668,000
============ ============
See notes to condensed consolidated financial statements Page 4
DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
May 18,
1993
Three Months Ended (Inception)
March 31, through
---------------------------- March 31,
2001 2000 2001
------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (2,060,000) $ (2,283,000) $(45,367,000)
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 47,000 24,000 386,000
Compensatory stock options 73,000 813,000 2,730,000
Expenses paid using treasury stock and common stock 4,000 36,000 166,000
Loss on sale of property -- -- 4,000
Changes in:
Prepaid expenses, inventory and other current assets (229,000) (56,000) 228,000
Accounts payable and accrued expenses (693,000) 269,000 1,556,000
Other assets -- -- (3,000)
Proceeds from research and development collaborative agreements -- -- 1,641,000
Amortization of deferred revenue (198,000) -- (988,000)
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 (3,056,000) (1,197,000) (25,557,000)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (53,000) (45,000) (1,547,000)
Proceeds from sale of property and equipment -- -- 575,000
Acquisition of licenses -- -- (711,000)
Purchase of marketable securities (3,259,000) -- (36,518,000)
Proceeds from sale or maturity of marketable securities -- -- 22,150,000
Net cash payments on merger -- -- (1,670,000)
------------ ------------ ------------
Net cash used in investing activities (3,312,000) (45,000) (17,721,000)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of securities, net of expenses 1,000 21,290,000 44,312,000
Purchase of treasury stock -- -- (95,000)
Principal payments under capital lease obligation (6,000) (4,000) (31,000)
------------ ------------ ------------
Net cash (used in) provided by financing activities (5,000) 21,286,000 44,186,000
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (6,373,000) 20,044,000 908,000
Cash and cash equivalents - beginning of period 7,281,000 3,547,000 --
------------ ------------ ------------
Cash and cash equivalents - end of period $ 908,000 $ 23,591,000 $ 908,000
============ ============ ============
Supplementary disclosure of cash flows information:
Interest Paid: $ 1,000 2,000 19,000
Noncash transactions:
Accrued dividends on Series C preferred stock $ -- $ 36,000 $ 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
Unrealized gain on marketable securities 48,000 -- 121,000
See notes to condensed consolidated financial statements Page 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION
The Company
Discovery Laboratories, Inc. (the "Company") was formed to license and develop
pharmaceutical products to treat a variety of human diseases. The accompanying
financial statements include the accounts of the Company and its wholly owned
subsidiary, Acute Therapeutics, Inc. ("ATI"). ATI is presently inactive, and all
intercompany balances and transactions have been eliminated.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information in accordance with the
instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normally recurring accruals)
considered for fair presentation have been included. Operating results for the
three-month period ended March 31, 2001 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2001. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's 2000 Annual Report on Form 10-KSB.
The Company's activities since incorporation have primarily consisted of
conducting research and development, performing business and financial planning
and raising capital. Accordingly, the Company is considered to be in the
development stage, and expects to incur increasing losses and require additional
financial resources to achieve commercialization of its products.
The Company also depends on third parties to conduct research on the Company's
behalf through various research agreements. All of the Company's current
products under development are subject to license agreements that will require
the payment of future royalties.
NOTE 2 - NET LOSS PER SHARE
Net loss per share is computed based on the weighted average number of common
shares outstanding for the periods. Common shares issuable upon the exercise of
options and warrants and the conversion of convertible securities are not
included in the calculation of the net loss per share as their effect would be
antidilutive.
NOTE 3 - COMPREHENSIVE LOSS
Total comprehensive loss was $2,012,000 and $2,283,000 for the three-month
periods ending March 31, 2001 and 2000, respectively.
NOTE 4 - SUBSEQUENT EVENT
In April 2001, the Company received approximately $1 million in proceeds in a
private placement sale of 296,560 shares of common stock to a limited
partnership. This partnership may be deemed to be a related party, in that one
of the partners is a member of the Company's board of directors. Such shares of
common stock have not been registered under the Securities Act of 1933 (the
"Act") and may not be offered or sold in the United States absent registration
or an applicable exemption from the registration requirements of the Act. The
investor is entitled to certain registration rights with respect to the resale
of the shares of Common Stock issued in the offering.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 inception and has
incurred a cumulative net loss of approximately $45.4 million as of March 31,
2001. 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
Page 6
products and technologies and other products and technologies that it may
acquire or develop. The Company's ability to achieve profitability depends upon,
among other things, its ability to discover and develop products, obtain
regulatory approval for its proposed products and enter into agreements for
product development, manufacturing and commercialization. None of the Company's
products currently generate revenues and the Company does not expect to achieve
product revenues for the foreseeable future. Moreover, there can be no assurance
that the Company will ever achieve significant revenues or profitable operations
from the sale of any of its products or technologies.
The Company is a development stage pharmaceutical company that is focused on
developing compounds intended for use primarily in critical care hospital
settings. The Company is developing its lead product candidate, Surfaxin(R)
(lucinactant), for the treatment of various critical care respiratory
conditions.
The Company anticipates that during the next 12 months it will conduct
substantial research and development on its products. The primary focus will be
on the conduct of clinical trials for the Surfaxin(R) indications and on
preclinical research related to using Surfaxin(R)-like formulations as an
aerosol therapeutic, as well as a platform pulmonary drug delivery technology.
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 $600,000 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. Since January 1, 2001, the Company
has hired six additional personnel due to the expansion of its clinical
development efforts regarding Surfaxin(R).
SURFAXIN(R) (lucinactant)
Meconium Aspiration Syndrome (MAS) in full-term infants
The Company commenced enrollment of a pivotal Phase 3 trial in MAS in May of
2000. The Phase 3 trial could enroll up to 200 MAS patients. Results of a Phase
2 clinical trial in MAS in full-term newborns showed an improvement in
oxygenation parameters and a savings of approximately three days on mechanical
ventilation with the use of Surfaxin(R). An Orphan Products Development Grant
awarded to the Company by the United States Food and Drug Administration (the
"FDA") Office of Orphan Products Development is expected to contribute towards
the cost of this Phase 3 trial. The Company has also received Fast Track
designation for Surfaxin(R) from the FDA for MAS. The Company has previously
been granted Orphan Drug Status for Surfaxin(R) from the FDA for MAS.
Idiopathic Respiratory Distress Syndrome (IRDS) in premature infants
The Company intends to initiate two Phase 3 multinational clinical trials in
IRDS during the second quarter of 2001. The IRDS Phase 3 trials will use
Surfaxin(R) versus active comparators that will be totally synthetic and/or
animal-derived. The Phase 3 trials can be conducted at clinical sites located in
North America, Europe and Latin America, and enrollment is expected to commence
during the second quarter of 2001. Conditioned upon the successful outcome of
such trials, the Company has committed to provide Surfaxin(R) to certain, but
limited, Latin American regions that participate in the studies at a
significantly reduced cost for a period of up to 10 years following
commercialization. Such trials, and any other clinical trials of the Company's
products in development that have not yet commenced, will require clearance by
the FDA and/or other world health authorities. There can be no assurance as to
the receipt or the timing of such clearance.
The Company has previously been granted Orphan Drug Status for Surfaxin(R) from
the FDA for IRDS.
Acute Respiratory Distress Syndrome/ Acute Lung Injury (ARDS/ALI)
In November 2000, the Company initiated a Phase 2B clinical trial for the
treatment of ARDS. This Phase 2B 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
compared to standard of care. Enrollment is expected to commence during the
second quarter of 2001. The Company has received Fast Track designation for
Surfaxin(R) from the FDA for ARDS. The Company has previously been granted
Orphan Drug Status for Surfaxin(R) from the FDA for ARDS.
SUPERVENT(TM) (tyloxapol)
Cystic Fibrosis (CF)
The Company began a Phase 2A clinical trial of SuperVent(TM) for the treatment
of CF on August 4, 1999. Analysis of the data from this randomized,
double-blind, placebo-controlled trial show that SuperVent(TM) significantly
Page 7
decreased the amount of Interleukin 8 (IL-8) 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 Phase 2A clinical
trial involved eight patients. An additional Phase 2 trial will likely be
required prior to commencement of a Phase 3 trial. Previously, the Company
completed a Phase 1 trial in 20 normal healthy volunteers and determined a dose
(1.25% tyloxapol concentration) that did not produce significant adverse
effects. In addition, the Company is establishing a development strategy for
SuperVentTM to treat certain inflammatory respiratory diseases such as chronic
bronchitis.
Results of Operations
The Company's expenses increased from $2,324,000 in the three months ended March
31, 2000, to $2,818,000 in the three months ended March 31, 2001. The increase
was primarily due to an increase in the Company's research and development
activities. The Company's total comprehensive net loss decreased from $2,283,000
in the three months ended March 31, 2000, to $2,012,000 in the three months
ended March 31, 2001. In addition, primarily due to the increase in the weighted
average common shares outstanding during the first three months of 2001, the
Company's net loss per share decreased from $0.18 in 2000 to $0.10 in 2001.
Liquidity
At March 31, 2001, the Company had working capital of approximately $14.5
million. The Company believes its current working capital is sufficient to meet
its planned research and development activities through the first quarter of
2002.
The Company will be required to raise additional capital in order to meet its
business objectives, and there can be no assurance that it will be successful in
doing so or, in general, that the Company will be able to achieve its business
objectives.
The Company's working capital requirements will depend upon numerous factors,
including, without limitation, progress of the Company's research and
development programs, preclinical and clinical testing, timing and cost of
obtaining regulatory approvals, levels of resources that the Company devotes to
the development of manufacturing and marketing capabilities, technological
advances, status of competitors and the ability of the Company to establish
collaborative arrangements with other organizations.
Safe Harbor Statement Under the Private Securities Litigation Act of 1996
Certain statements set forth in this report, including, without limitation,
statements concerning the Company's research and development programs, the
possibility of submitting regulatory filings for the Company's products under
development, the seeking of collaboration arrangements with pharmaceutical
companies or others to develop, manufacture and market products, the research
and development of particular compounds and technologies and the period of time
for which the Company's existing resources will enable the Company to fund its
operations, are forward-looking statements. All such statements involve
significant risks and uncertainties. Actual results may differ materially from
those contemplated in the forward looking statements as a result of risks and
uncertainties, including but not limited to the following: the Company's ability
to obtain substantial additional funds; the uncertainties inherent in the
process of developing products of the kind being developed by the Company; the
Company's ability to establish additional collaborative and licensing
arrangements and the degree of success of the Company's collaboration partners;
the Company's ability to obtain and maintain all necessary patents or licenses;
the Company's ability to demonstrate the safety and efficacy of product
candidates and to receive required regulatory approvals; the Company's ability
to meet obligations and required milestones under its license agreement; the
Company's ability to compete successfully against other products and to market
products in a profitable manner; and other risks and uncertainties set forth in
the Company's filings with the Securities and Exchange Commission.
Page 8
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGE IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
None.
(b) Reports on Form 8-K:
1. A Form 8-K/A was filed with the Commission on January 8, 2001
and January 9, 2001. Both such amended current reports where
amending a Form 8-K filed on December 22, 2000, that reported
a change in the Company's certifying accountant.
2. A Form 8-K was filed with the Commission on March 2, 2001,
reporting the Company's proposed plans to conduct a Phase 3
clinical trial of Surfaxin(R) in Latin America for the
treatment of IRDS.
Page 9
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Discovery Laboratories, Inc.
(Registrant)
Date: May 11, 2001 /s/ Robert J. Capetola, Ph.D.
-----------------------------------------
Robert J. Capetola, Ph.D.
President/Chief Executive Officer
Date: May 11, 2001 /s/ Deni M. Zodda, Ph.D.
-----------------------------------------
Deni M. Zodda, Ph.D.
Sr. Vice President, Business Development
(Principal Financial Officer)
Date: May 11, 2001 /s/ Cynthia Davis
-----------------------------------------
Cynthia Davis
Controller
(Principal Accounting Officer)
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