U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
AMENDMENT NO. 1
|X| Annual Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2000
-------------------------------------------
|_| 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
------------------------------
DISCOVERY LABORATORIES, INC.
(Name of Small Business Issuer in Its Charter)
DELAWARE 94-3171943
(State or other jurisdiction (IRS Employer
of incorporation) Identification Number)
350 SOUTH MAIN STREET, SUITE 307, DOYLESTOWN, PENNSYLVANIA 18901
(Address of Principal Executive Offices Including Zip Code)
(215) 340-4699
--------------
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
- ------------------- -------------------
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
(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/A or any
amendment to this Form 10-KSB/A. |_|
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 25,546,293 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 $95,000,000
computed by reference to the closing price of such common equity on the Nasdaq
SmallCap Market on December 31, 2001.
As of December 31, 2001, 20,949,318 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 December 31, 2001, was approximately
$78,000,000. 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.
Transitional Small Business Disclosure Format: YES |_| NO |X|
This Amendment No. 1 hereby amends Part II, Item 7 of the Registrant's Annual
Report on Form 10-KSB for the year ended December 31, 2000, by replacing the
Consolidated Financial Statements referenced therein with the new Consolidated
Financial Statements set forth below in the Index to Consolidated Statements on
page F-1. The Consolidated Financial Statements filed herewith are unchanged
from those previously filed by the Registrant except for modifications to the
predecessor independent auditor's report included therein and solely with
respect to such report's reference to the registrant's reporting period from May
18, 1993 (inception) through December 31, 1999.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
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.
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: January 10, 2002
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 January 10, 2002
/s/ John G. Cooper John G. Cooper
- ---------------------- Principal Financial Officer January 10, 2002
/s/ Cynthia Davis Cynthia Davis
- ---------------------- Controller January 10, 2002
/s/ Herbert McDade Herbert McDade, Jr.
- ---------------------- Chairman of the Board of Directors January 10, 2002
/s/ Richard Power Richard Power
- ---------------------- Director January 10, 2002
/s/ Marvin Rosenthale Marvin Rosenthale
- ---------------------- Director January 10, 2002
/s/ Mark C. Rogers Mark C. Rogers, M.D.
- ---------------------- Director January 10, 2002
Max Link, Ph.D.
- ---------------------- Director January 10, 2002
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
23.1 Consent of Richard A. Eisner & Company, LLP.
23.2 Consent of Ernst & Young LLP.
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 Discovery Laboratories, Inc.'s (a development stage company)
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year ended December 31, 1999 and for the period from May 18, 1993
(inception) through December 31, 1999 (from inception through December 1999 not
presented seperately herein except for the consolidated statement of changes in
stockholders' equity). 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 audits 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 audits provide 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 and
for the period from May 18, 1993 (inception) through 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 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 audits of the consolidated financial statements as of and for the year ended December 31, 1999 and for the period from May 18, 1993 (inception) through December 31, 1999 (from inception through December 31, 1999 not presented separately therein except for the consolidated statement of changes in stockholders' equity) which report is included in the annual report on Form 10-KSB/A for the year ended December 31, 2000. /s/ Richard A. Eisner & Company, LLP New York, New York January 8, 2002
EXHIBIT 23.2
Consent of Independent Auditors
We consent to the use of our report dated March 27, 2001 included in the annual
report on Form 10-KSB of Discovery Laboratories, Inc. for the year ended
December 31, 2000, with respect to the consolidated financial statements, as
amended, included in this Form 10-KSB/A.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
January 8, 2002