SEC Filing | Windtree Therapeutics, Inc

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 June 30, 1998 or |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to ___________ Commission file number 000-26422 -------------------------------- DISCOVERY LABORATORIES, INC. (Exact name of small business issuer as specified in its charter) Delaware 94-3171943 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 3359 Durham Road Doylestown, Pennsylvania 10022 (Address of principal executive offices) (Zip Code) Registrants's telephone number, including area code: (215) 794-3064 Securities registered under Section 12 (b) of the Exchange Act: None Securities registered under Section 12 (g) of the Exchange Act: Common Stock, par value $.001 per share Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |X| Yes |_| No As of August 11, 1998, 4,367,581 shares of the Registrant's common stock, par value $.001 per share, were outstanding. Documents incorporated by reference: None. Transitional Small Business Disclosure Format: |_| Yes |X| No

DISCOVERY LABORATORIES, INC. Table of Contents Page PART I - FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) CONSOLIDATED BALANCE SHEETS -- As of June 30, 1998 and December 31, 1997 ........................... Page 3 CONSOLIDATED STATEMENTS OF OPERATIONS -- For the Three and Six Months Ended June 30, 1998 and June 30, 1997; and for the Period from May 18, 1993 (Inception) through June 30, 1998 ............................................. Page 4 CONSOLIDATED STATEMENTS OF CASH FLOWS -- For the Six Months Ended June 30, 1998 and June 30, 1997 and for the Period from May 18, 1993 (Inception) through June 30, 1998 ............... Page 5 Notes to Financial Statements ........................... Page 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........... Page 9 PART II - OTHER INFORMATION Item 1. Legal Proceedings. ...................................... Page 10 Item 2. Change in Securities. ................................... Page 11 Item 3. Defaults Upon Senior Securities. ........................ Page 11 Item 4. Submission of Matters to a Vote of Security Holders. .... Page 11 Item 5. Other Information. ...................................... Page 12 Item 6. Exhibits and Reports on Form 8-K. ....................... Page 12 Signatures ...................................................... Page 13 Page 2

DISCOVERY LABORATORIES, INC. AND SUBSIDIARY (a development stage company) Consolidated Balance Sheets (Unaudited) June 30, December 31, 1998 1997 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 3,384,000 $ 6,297,000 Investments 3,549,000 4,957,000 Prepaid expenses 100,000 190,000 ------------ ------------ Total current assets 7,033,000 11,444,000 Furniture and equipment, net of deprecation 157,000 181,000 Security deposits 30,000 30,000 ------------ ------------ $ 7,220,000 $ 11,655,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 886,000 $ 565,000 ------------ ------------ Dividends payable on preferred stock 340,000 238,000 ------------ ------------ Minority interest in preferred stock of subsidiary 2,039,000 Redeemable Preferred Stock, $.001 par value; 2,039 shared issued and outstanding (liquidation preference $2,039,000) 2,039,000 ------------ ------------ Commitments Stockholders' Equity: Preferred stock, $.001 par value; 5,000,000 shares authorized; 2,200,256 shares issued and outstanding (liquidation preference $29,703,000) 2,000 2,000 Common stock, $.001 par value; 20,000,000 authorized; 4,209,455 shares issued and outstanding 4,000 3,000 Additional paid-in capital 29,466,000 21,464,000 Deficit accumulated during the development stage (25,517,000) (12,656,000) ------------ ------------ Total stockholders' equity 3,955,000 8,813,000 ------------ ------------ $ 7,220,000 $ 11,655,000 ============ ============ See notes to financial statements Page 3

DISCOVERY LABORATORIES, INC. AND SUBSIDIARY (a development stage company) Consolidated Statements of Operations (Unaudited) May 18, 1993 (Inception) Three Months Ended Six Months Ended Through June 30, June 30, June 30, 1998 1997 1998 1997 1998 ------------ ----------- ------------ ------------ ------------ Interest income $ 102,000 $ 84,000 $ 226,000 $ 306,000 $ 1,144,000 ------------ ----------- ------------ ------------ ------------ Expenses: Write-off of acquired in-process research and development and supplies 8,230,000 8,230,000 14,093,000 Research and development 1,648,000 1,434,000 3,357,000 2,257,000 8,275,000 General and administrative 775,000 947,000 1,422,000 1,345,000 3,968,000 ------------ ----------- ------------ ------------ ------------ Interest 11,000 ------------ ----------- ------------ ------------ ------------ Total expenses 10,653,000 2,381,000 13,009,000 3,602,000 26,347,000 ------------ ----------- ------------ ------------ ------------ ($10,551,000) (2,297,000) ($12,783,00) (3,296,000) (25,203,000) Minority interest in net loss of subsidiary 24,000 26,000 ------------ ----------- ------------ ------------ ------------ Net loss $(10,551,000) $(2,297,000) $(12,759,000) $ (3,296,000) $(25,117,000) Net loss per share - basic and diluted $ (3.14) $ (0.88) $ (3.90) $ (1.26) Weighted average number of common shares outstanding 3,361,000 2,619,000 3,275,000 2,619,000 See notes to financial statements Page 4

DISCOVERY LABORATORIES, INC. AND SUBSIDIARY (a development stage company) Consolidated Statements of Cash Flows (Unaudited) May 18, 1993 Six Months Ended (Inception) June 30, Through ----------------------------- June 30, 1998 1997 1998 ------------ ------------ ------------ Cash flows from operating activities: Net loss $(12,759,000) $ (3,296,000) $(25,177,000) Adjustments to reconcile net loss to net cash used in operating activities: Write-off of acquired in-process research and development and supplies 8,230,000 14,093,000 Write-off of licenses 683,000 Depreciation and amortization 17,000 24,000 81,000 Changes in: Prepaid expenses 90,000 (16,000) (69,000) Accounts payable and accrued expenses 321,000 (65,000) 680,000 Other assets (15,000) (30,000) Expenses paid on behalf of company 18,000 Employee stock compensation 42,000 Reduction of research and development supplies (161,000) ------------ ------------ ------------ Net cash used in operating activities (4,101,000) (2,540,000) (9,840,000) ------------ ------------ ------------ Cash flows from investing activities: Acquisition of furniture and equipment (19,000) (52,000) (216,000) Proceeds from disposal of furniture and equipment 25,000 25,000 Acquisition of licenses (711,000) Purchase of investments (732,000) (2,613,000) (21,335,000) Proceeds from sale or maturity of investments 2,140,000 2,358,000 18,191,000 Net cash payments on merger (226,000) (1,680,000) ------------ ------------ ------------ Net cash provided by (used in) investing activities 1,188,000 (307,000) (5,726,000) ------------ ------------ ------------ Cash flows from financing activities: Proceeds on private placements of units, net of Expenses (11,000) 18,925,000 Collections on stock subscriptions and proceeds on exercise of stock options 25,000 ------------ ------------ ------------ Net cash (used in) provided by financing activities (11,000) 18,950,000 ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents (2,913,000) (2,858,000) 3,384,000 Cash and cash equivalents - beginning of period 6,297,000 4,336,000 ------------ ------------ ------------ Cash and cash equivalents - end of period $ 3,384,000 $ 1,478,000 $ 3,384,000 ============ ============ ============ Noncash transactions: Accrued dividends on redeemable Series C preferred stock $ 102,000 $ 340,000 ============ ============ See notes to financial statements Page 5

DISCOVERY LABORATORIES, INC. AND SUBSIDIARY (a development stage company) NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION The Company Discovery Laboratories, Inc. (the "Company"), formerly known as Ansan Pharmaceuticals, Inc. ("Ansan"), was incorporated in Delaware on November 6, 1992 and following formation was a wholly owned subsidiary of Titan Pharmaceuticals, Inc. ("Titan"). The Company was formed to license and develop pharmaceutical products to treat a variety of human diseases. In August 1995, Ansan issued its securities in an initial public offering and ceased to be a wholly-owned subsidiary of Titan. In November 1997, Ansan merged (the "1997 Merger") with Discovery Laboratories, Inc., a former Delaware corporation ("Old Discovery"), and was the surviving corporate entity. Subsequent to the 1997 Merger, Ansan changed its name to Discovery Laboratories, Inc. Pursuant to the 1997 Merger, each outstanding share of Old Discovery's common stock was converted into 1.167471 shares of the Company's common stock and each share of Old Discovery's Series A Convertible Preferred Stock was converted into one share of the Company's Series B Convertible Preferred Stock (the "Exchange Ratios"). The Company also assumed all outstanding options and warrants to purchase Old Discovery's common stock and Series A Convertible Preferred Stock, which options and warrants became exercisable for the Company's common stock and Series B Convertible Preferred Stock, respectively, based on the Exchange Ratios. In connection with the 1997 Merger, the Company and Titan entered into arrangements providing for the relinquishment by the Company of rights to certain drug compounds and the transfer of such rights to Titan in exchange for (i) a 2% net royalty payable by Titan to the Company from net sales of such drug compounds and (ii) the cancellation of all common stock of the Company owned by Titan. On consummation of the 1997 Merger, 13,000 shares of preferred stock of the Company held by Old Discovery were cancelled. The 1997 Merger was accounted for as a reverse acquisition with Old Discovery as the acquirer for financial reporting purposes since Old Discovery's stockholders owned approximately 92% of the merged entity on a fully diluted basis. The consolidated financial statements include the historical accounts of Old Discovery and Acute Therapeutics, Inc. ("ATI") (which was a majority-owned subsidiary of the Company until June 16, 1998, when the Company acquired the then outstanding minority interest in ATI) and the accounts of the Company from November 25, 1997 (the date of acquisition). The assets and liabilities acquired pursuant to the 1997 Merger are recorded at their fair values on the date of the 1997 Merger. The difference between the fair value of the net assets acquired and the value of the common stock issued plus 1997 Merger-related costs has been attributed to in-process research and development and has been recorded as an expense upon acquisition. On June 16, 1998, the shareholders of the Company, at the Annual Meeting of Stockholders, ratified the merger of a wholly-owned subsidiary of the Company with ATI (the "1998 Merger). Pursuant to the 1998 Merger, each outstanding share of ATI's common stock was exchanged for 3.90 shares of the Company's common stock (the "1998 Exchange Ratio") and each share of ATI's Series B preferred stock was converted into one share of the Company's Series C preferred stock. All outstanding options for the purchase of ATI Common Stock were assumed by the Company and are presently exercisable for shares of the Company's common stock on the basis of the 1998 Exchange Ratio. Pursuant to employment agreements entered into with the Company in connection with the 1998 Merger, the ATI management team was granted, in the aggregate, options to purchase (i) 338,500 shares of the Company's common stock, subject to vesting, (ii) 175,000 shares of the Company common stock at such time as the market capitalization of the Company exceeds $75 million and (iii) 160,000 shares of the Company's common stock upon consummation of a corporate partnering deal having a total value of at least $20 million. In addition, pursuant to a management agreement entered into between the Company and ATI at the time the merger agreement relating to the 1998 Merger was executed, the former members of the ATI management team were granted options to purchase 126,500 shares of the Company's common stock. The historical consolidated financial position of the Company includes the accounts of ATI. The value of the common stock of the Company issued to ATI's common stockholders plus the assumption of the outstanding ATI options and merger related costs has been attributed to in-process research and development and has been recorded as an expense upon acquisition. Page 6

DISCOVERY LABORATORIES, INC. AND SUBSIDIARY (a development stage company) The cost of the 1998 Merger is as follows: Common stock issued to ATI stockholders (1,033,500 shares at fair value) $5,038,000 Fair value of common stock issuable on exercise of options to purchase ATI common stock (net of exercise proceeds) 2,966,000 Transaction costs $ 226,000 ---------- $8,230,000 ========== The following pro forma statement of operations gives effect to the 1998 Merger as if it had occurred at the beginning of the respective periods. A non-recurring charge of $8,230,000 for in-process research and development has not been considered in the pro forma results: Six Months Ended June 30, 1998 1997 ---- ---- Net loss $(4,553,000) $(3,296,000) ----------- ----------- Net loss per common share- basic and diluted $ (1.08) $ (0.90) ----------- ----------- Weighed average number of common shares outstanding 4,222,000 3,646,000 ----------- ----------- The pro forma results are not indicative of the results that would have actually been achieved had the merger taken place as of January 1, 1998 or January 1, 1997 or of the results which may occur in the future. Basis of Presentation The accompanying financial statements include the accounts of the Company and ATI. All intercompany balances and transactions have been eliminated. The accompanying unaudited, consolidated, condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information in accordance with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normally recurring accruals) considered for fair presentation have been included. Operating results for the six month period ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's 1997 Annual Report on Form 10-KSB. The Company's activities since incorporation have primarily consisted of conducting research and development, performing business and financial planning and raising capital. Accordingly, the Company is considered to be in the development stage, and expects to incur increasing losses and require additional financial resources to achieve commercialization of its products. The Company also depends on third parties to conduct research on the Company's behalf through various research agreements. All of the Company's current products under development are subject to license agreements that will require the payment of future royalties. Page 7

DISCOVERY LABORATORIES, INC. AND SUBSIDIARY (a development stage company) Net Loss Per Share Net loss per share is computed based on the weighted average number of common shares outstanding for the periods and common shares issuable for little or no cash consideration. 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. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations When used in this report, the words "estimate", "project", "intend", "forecast", "anticipate" and similar expressions are intended to identify forward-looking statements. In addition, certain other 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 joint development or licensing arrangements with pharmaceutical companies or others, the research and development of particular compounds and technologies for particular indications and the period of time for which the Company's existing resources will enable the Company to fund its operations and the possibility of contracting with other parties additional licenses to develop, manufacture and market commercially viable products, are forward-looking and based upon the Company's current belief as to the outcome, occurrence and timing of future events or current expectations and plans. All such statements involve significant risks and uncertainties. Many important factors affect the Company's ability to achieve the stated outcomes and to successfully develop and commercialize its product candidates, including, among other things, the ability to obtain substantial additional funds, obtain and maintain all necessary patents or licenses, to demonstrate the safety and efficacy of product candidates at each state of development, to meet applicable regulatory standards and receive required regulatory approvals, to meet obligations and required milestones under its license agreements, to be capable of producing drug candidates in commercial quantities at reasonable costs, to compete successfully against other products and to market products in a profitable manner. Although the Company believes that its assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there also can be no assurance that these statements included in the report will prove to be accurate. In light of the significant uncertainties inherent in these statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved; in fact, actual results could differ materially from those contemplated by such forward-looking statements. The Company does not undertake any obligation to publicly release any revisions to these forward-looking statements or to reflect the occurrence of unanticipated events. The following discussion principally reflects the historical results of Old Discovery as the 1997 Merger was accounted for as a reverse acquisition with Old Discovery as the acquirer for financial reporting purposes. Plan of Operations Since its inception, the Company has concentrated its efforts and resources in the development and commercialization of pharmaceutical products and technologies. The Company has been unprofitable since its founding and has incurred a cumulative net loss of approximately $25,177,000 as of June 30, 1998. The Company expects to incur significantly increasing operating losses over the next several years, primarily due to the expansion of its research and development programs, including clinical trials for some or all of its existing products and technologies and other products and technologies that it may acquire or develop. The Company's ability to achieve profitability depends upon, among other things, its ability to discover and develop products, obtain regulatory approval for its proposed products, and enter into agreements for product development, manufacturing and commercialization. None of the Company's products currently generates revenues and the Company does not expect to achieve revenues for the foreseeable future. Moreover, there can be no assurance that the Company will ever achieve significant revenues or profitable operations from the sale of any of its products or technologies. The Company is currently engaged in the development and commercialization of investigational drugs for critical care that have previously been tested in humans or animals. The Company anticipates that during the next 12 Page 8

DISCOVERY LABORATORIES, INC. AND SUBSIDIARY (a development stage company) months it will conduct substantial research and development of its products under development. A Phase 2 clinical trial of Surfaxin(TM) for the treatment of meconium aspiration syndrome ("MAS") was commenced on May 27, 1997 and a pivotal Phase 2/3 clinical trial of Surfaxin(TM) for the treatment of acute respiratory distress syndrome ("ARDS") was commenced on July 14, 1998. A Phase 1/2 clinical trial of SuperVent(TM) for the treatment of cystic fibrosis ("CF") was commenced on March 17, 1997. Part A of such clinical trial was completed on March 31, 1998, and if such clinical trial is successfully completed in its entirety, a Phase 2 clinical trial of SuperVent(TM) for the treatment of chronic bronchitis will be pursued. On December 5, 1997 a Phase 1 clinical study of ST-630 as a once-daily, orally administered drug for the treatment of postmenopausal osteoporosis [in the United States] was initiated. Part B of such trial was commenced on April 2, 1998 and was successfully completed on June 29, 1998. Any clinical trials of the Company's products in development that have not yet commenced will require the receipt of approvals by the United States Food and Drug Administration (the "FDA"), and there can be no assurance as to the receipt or the timing of such approvals. Liquidity The Company anticipates that its current resources will permit it to meet its business objectives until approximately the second quarter of 1999. The Company's working capital requirements will depend upon numerous factors, including, without limitation, progress of the Company's research and development programs, preclinical and clinical testing, timing and cost of obtaining regulatory approvals, levels of resources that the Company devotes to the development of manufacturing and marketing capabilities, technological advances, status of competitors and the ability of the Company to establish collaborative arrangements with other organizations. As such there can be no assurance that the Company will not be required to raise additional capital prior to the second quarter of 1999 (or that it would be successful in doing so) or, in general, that the Company will be able to achieve its business objectives. PART II - OTHER INFORMATION Item 1. Legal Proceedings. None. Item 2. Change in Securities. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. On June 16, 1998 the Company held its Annual Meeting of Stockholders (the "Annual Meeting"). The following matters were submitted to a vote of the stockholders: Election of Directors Each of the ten nominees for the Board of Directors was elected: For Withheld --- -------- Robert Capetola 4,392,787 48,918 Steve H. Kanzer 4,392,787 48,918 Max Link 4,392,787 48,918 Richard Sperber 4,373,329 68,376 Page 9

DISCOVERY LABORATORIES, INC. AND SUBSIDIARY (a development stage company) Herbert McDade 4,373,329 68,376 David Naveh 4,373,329 68,376 Milton Packer 4,392,787 48,918 Marvin Rosenthale 4,392,787 48,918 Richard Power 4,373,329 68,376 Mark Rogers 4,392,787 48,918 DISCOVERY LABORATORIES, INC. AND SUBSIDIARY (a development stage company) Approval of the 1998 Merger The stockholders approved the 1998 Merger: Affirmative Negative Broker Votes Votes Abstentions Non-Votes ----- ----- ----------- --------- 3,898,854 41,125 16,953 484,773 Page 10

DISCOVERY LABORATORIES, INC. AND SUBSIDIARY (a development stage company) Approval of 1998 Stock Incentive Plan The stock holders approved the adoption of the Company's 1998 Stock Issuance Plan: Affirmative Negative Broker Votes Votes Abstentions Non-Votes ----- ----- ----------- --------- 3,826,084 137,241 3,222 475,158 Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: 27.1 Financial Data Schedule (b) Reports on Form 8-K: There were no reports on Form 8-K filed by the Company during the three months ended June 30, 1998. Page 11

DISCOVERY LABORATORIES, INC. AND SUBSIDIARY (a development stage company) 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: August 13, 1998 /s/ Robert J. Capetola ---------------------------------------- Robert J. Capetola, Ph.D. Chief Executive Officer Date: August 13, 1998 /s/ Evan Myrianthopoulos ---------------------------------------- Evan Myrianthopoulos Vice President, Finance (Principal Financial and Accounting Officer)

5 3-MOS DEC-31-1998 APR-01-1998 JUN-30-1998 3,384,000 3,549,000 0 0 0 7,033,000 215,000 58,000 7,220,000 886,000 0 2,039,000 2,000 4,000 29,466,000 7,220,000 0 0 0 10,653,000 0 0 0 (10,551,000) 0 0 0 0 0 (10,551,000) (3.14)

(3.14) EPS Basic and Diluted is (3.14). The Company calculates earnings per share pursuant to FASB 128.