UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended June 30, 2007
or
| o |
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 registrant as specified in its charter)
|
Delaware
|
94-3171943
|
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
Number)
|
|
|
2600
Kelly Road, Suite 100
|
||
|
Warrington,
Pennsylvania 18976-3622
|
||
|
(Address
of principal executive offices)
|
(215)
488-9300
(Registrant’s
telephone number, including area code)
__________________
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. YES xNO
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o Accelerated
filer x Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES oNO
x
As
of
August 7, 2007, 84,636,997 shares of the registrant’s common stock, par value
$0.001 per share, were outstanding.
Table
of Contents
PART
I - FINANCIAL INFORMATION
|
Page
|
||||
|
Item
1. Financial Statements
|
1
|
|||
|
CONSOLIDATED
BALANCE SHEETS
|
||||
|
As
of June 30, 2007 (unaudited) and December 31, 2006
|
1
|
|||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS (unaudited)
|
||||
|
For
the Three Months Ended June 30, 2007 and 2006
|
||||
|
For
the Six Months Ended June 30, 2007 and 2006
|
2
|
|||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS (unaudited)
|
||||
|
For
the Six Months Ended June 30, 2007 and 2006
|
3
|
|||
|
Notes
to Consolidated Financial Statements
|
4
|
|||
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
9
|
|||
|
Item
3. Quantitative and Qualitative Disclosures about Market Risk
|
24
|
|||
|
Item
4. Controls and Procedures
|
25
|
|||
|
PART
II - OTHER INFORMATION
|
||||
|
Item
1. Legal Proceedings
|
25
|
|||
|
Item
1A. Risk Factors
|
26
|
|||
|
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
|
26
|
|||
|
Item
3. Defaults Upon Senior Securities
|
26
|
|||
|
Item
4. Submission of Matters to a Vote of Security Holders
|
26
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|||
|
Item
5. Other Information
|
27
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|||
|
Item
6. Exhibits
|
27
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|||
|
Signatures
|
28
|
|||
ii
Unless
the context otherwise requires, all references to “we,” “us,” “our,” and the
“Company” include Discovery
Laboratories,
Inc., and its wholly-owned, presently inactive subsidiary, Acute Therapeutics,
Inc.
FORWARD-LOOKING
STATEMENTS
This
Quarterly Report on Form 10-Q contains “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 (Exchange Act). The forward-looking statements
are only predictions and provide our current expectations or forecasts of future
events and financial performance and may be identified by the use of
forward-looking terminology, including the terms “believes,” “estimates,”
“anticipates,” “expects,” “plans,” “intends,” “may,” “will” or “should” or, in
each case, their negative, or other variations or comparable terminology, though
the absence of these words does not necessarily mean that a statement is not
forward-looking. Forward-looking statements include all matters that are not
historical facts and include, without limitation statements concerning: our
business strategy, outlook, objectives, future milestones, plans, intentions,
goals, future financial conditions, our research and development programs and
planning for and timing of any clinical trials; the possibility, timing and
outcome of submitting regulatory filings for our products under development;
implementation of a corrective action and preventive plan (CAPA), including
the
manufacture of investigational batches, and remediation of manufacturing issues
related to the April 2006 process validation stability failures and plans with
respect to the release and stability testing of recently manufactured new
process validation batches of Surfaxin®;
plans
regarding strategic alliances and collaboration arrangements with pharmaceutical
companies and others to develop, manufacture and market our drug products;
research and development of particular drug products, technologies and
aerosolization drug devices; the development of financial, clinical,
manufacturing and marketing plans related to the potential approval and
commercialization of our drug products, and the period of time for which our
existing resources will enable us to fund our operations.
We
intend
that all forward-looking statements be subject to the safe-harbor provisions
of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
are subject to many risks and uncertainties that could cause our actual results
to differ materially from any future results expressed or implied by the
forward-looking statements. Examples of the risks and uncertainties include,
but
are not limited to:
| · |
the
risk that we may not successfully develop and market our products,
and
even if we do, we may not become
profitable;
|
| · |
risks
relating to the progress of our research and
development;
|
| · |
risks
relating to significant, time-consuming and costly research and
development efforts, including pre-clinical studies, clinical trials
and
testing, and the risk that clinical trials may be delayed, halted
or fail;
|
| · |
risks
relating to the rigorous regulatory approval process required for
any
products that we may develop, independently, with our development
partners
or pursuant to collaboration arrangements;
|
| · |
the
risk that changes in the national or international political and
regulatory environment may make it more difficult to gain FDA or
other
regulatory approval of our drug product
candidates;
|
| · |
risks
that the FDA or other regulatory authorities may not accept any
applications we file;
|
| · |
risks
that the FDA or other regulatory authorities may withhold or delay
consideration of any applications that we file
or
limit such applications to particular indications or apply other
label
limitations;
|
| · |
risks
that, after acceptance and review of applications that we file, the
FDA or
other regulatory authorities will not approve the marketing and sale
of
our drug product candidates;
|
| · |
risks
that we will not timely and successfully resolve the Chemistry,
Manufacturing and Controls (CMC) and current Good Manufacturing
Practices-related matters at our manufacturing operations in Totowa,
NJ
with respect to Surfaxin and our other Surfactant Replacement Therapies
(SRT) presently under development, including those identified in
connection with our process validation stability failures and matters
that
were noted by the FDA in its inspectional reports on Form FDA
483;
|
| · |
risks
that the CMC section of our NDA will not satisfy the FDA;
|
| · |
risks
relating to our own drug manufacturing operations and the drug
manufacturing operations of our third-party suppliers and contract
manufacturers;
|
| · |
risks
relating to the ability of our development partners and third-party
suppliers of materials, drug substance and aerosolization systems
and
related components to provide us with adequate supplies and expertise
to
support manufacture of drug product for initiation and completion
of our
clinical studies;
|
| · |
risks
relating to the transfer of our manufacturing technology to third-party
contract manufacturers;
|
iii
| · |
risks
relating to our ability and the ability of our collaborators and
development partners to develop and successfully manufacture and
commercialize products that combine our drug products with innovative
aerosolization technologies;
|
| · |
risks
that financial market conditions may change, additional financings
could
result in equity dilution, or we will be unable to maintain the Nasdaq
Global Market listing requirements, causing the price of our shares
of
common stock to decline;
|
| · |
the
risk that we will not be able to raise additional capital or enter
into
additional strategic alliances and collaboration arrangements (including
strategic alliances in support of our aerosol and other SRT;
|
| · |
the
risk that recurring losses, negative cash flows and the inability
to raise
additional capital could threaten our ability to continue as a going
concern;
|
| · |
risks
relating to our ability to develop or otherwise provide for a successful
sales and marketing organization in a timely manner, if at
all;
|
| · |
the
risk that we or our marketing partners will not succeed in developing
market awareness of our products;
|
| · |
the
risk that we or our development partners, collaborators or marketing
partners will not be able to attract or maintain qualified
personnel;
|
| · |
risks
relating to the maintenance, protection and expiry of the patents
and
licenses related to our SRT and the potential development of competing
therapies and/or technologies by other
companies;
|
| · |
risks
relating to the impact of securities, product liability, and other
litigation or claims that have been and may be brought against us
and our
officers and directors;
|
| · |
risks
relating to reimbursement and health care reform; and
|
| · |
other
risks and uncertainties detailed in “Risk Factors” and in the documents
incorporated by reference in this
report.
|
Pharmaceutical
and biotechnology companies have suffered significant setbacks in advanced
clinical trials, even after obtaining promising earlier trial results. Data
obtained from such clinical trials are susceptible to varying interpretations,
which could delay, limit or prevent regulatory approval.
Except
to
the extent required by applicable laws or rules, we do not undertake to update
any forward-looking statements or to publicly announce revisions to any of
the
forward-looking statements, whether as a result of new information, future
events or otherwise.
iv
PART
I - FINANCIAL INFORMATION
ITEM
1. FINANCIAL
STATEMENTS
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Balance Sheets
(in
thousands, except per share data)
|
June
30,
|
December
31,
|
||||||
|
2007
|
2006
|
||||||
|
(Unaudited)
|
|||||||
|
ASSETS
|
|||||||
|
Current
Assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
21,495
|
$
|
26,173
|
|||
|
Restricted
cash
|
647
|
829
|
|||||
|
Available-for-sale
marketable securities
|
18,611
|
--
|
|||||
|
Prepaid
expenses and other current assets
|
779
|
565
|
|||||
|
Total
Current Assets
|
41,532
|
27,567
|
|||||
|
Property
and equipment, net
|
5,618
|
4,794
|
|||||
|
Deferred
financing costs and other assets
|
1,924
|
2,039
|
|||||
|
Total
Assets
|
$
|
49,074
|
$
|
34,400
|
|||
|
LIABILITIES
& STOCKHOLDERS’ EQUITY
|
|||||||
|
Current
Liabilities:
|
|||||||
|
Accounts
payable and accrued expenses
|
$
|
6,184
|
$
|
5,953
|
|||
|
Capitalized
leases and note payable, current portion
|
1,758
|
2,015
|
|||||
|
Total
Current Liabilities
|
7,942
|
7,968
|
|||||
|
Loan
payable, non-current portion, including accrued interest
|
9,268
|
8,907
|
|||||
|
Capitalized
leases and note payable, non-current portion
|
2,487
|
2,687
|
|||||
|
Other
liabilities
|
966
|
516
|
|||||
|
Total
Liabilities
|
20,663
|
20,078
|
|||||
|
Stockholders’
Equity:
|
|||||||
|
Common
stock, $0.001 par value; 180,000 shares authorized;
84,947
and 69,871 shares issued; and 84,634 and 69,558 shares
outstanding
at June 30, 2007 and December 31, 2006, respectively.
|
85
|
70
|
|||||
|
Additional
paid-in capital
|
298,361
|
265,604
|
|||||
|
Accumulated
deficit
|
(266,992
|
)
|
(248,298
|
)
|
|||
|
Treasury
stock (at cost); 313 shares
|
(3,054
|
)
|
(3,054
|
)
|
|||
|
Other
comprehensive income
|
11
|
--
|
|||||
|
Total
Stockholders’ Equity
|
28,411
|
14,322
|
|||||
|
Total
Liabilities & Stockholders’ Equity
|
$
|
49,074
|
$
|
34,400
|
|||
See
notes to consolidated financial statements
1
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Statements of Operations
(Unaudited)
(in
thousands, except per share data)
|
Three
Months Ended
|
Six
Months Ended
|
||||||||||||
|
June
30,
|
June
30,
|
||||||||||||
|
2007
|
2006
|
2007
|
2006
|
||||||||||
|
Revenue
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
|||||
|
Expenses:
|
|||||||||||||
|
Research
and development
|
6,794
|
5,911
|
12,216
|
13,524
|
|||||||||
|
General
and administrative
|
3,465
|
4,024
|
6,219
|
12,706
|
|||||||||
|
Restructuring
charge
|
--
|
4,805
|
--
|
4,805
|
|||||||||
|
Total
expenses
|
10,259
|
14,740
|
18,435
|
31,035
|
|||||||||
|
Operating
loss
|
(10,259
|
)
|
(14,740
|
)
|
(18,435
|
)
|
(31,035
|
)
|
|||||
|
Other
income / (expense):
|
|||||||||||||
|
Interest
and other income
|
559
|
377
|
865
|
1,177
|
|||||||||
|
Interest
and other expense
|
(684
|
)
|
(332
|
)
|
(1,124
|
)
|
(632
|
)
|
|||||
|
Other
income / (expense), net
|
(125
|
)
|
45
|
(259
|
)
|
545
|
|||||||
|
Net
loss
|
$
|
(10,384
|
)
|
$
|
(14,695
|
)
|
$
|
(18,694
|
)
|
$
|
(30,490
|
)
|
|
|
Net
loss per common share -
Basic
and diluted
|
$
|
(0.12
|
)
|
$
|
(0.24
|
)
|
$
|
(0.24
|
)
|
$
|
(0.50
|
)
|
|
|
Weighted
average number of common
shares
outstanding - basic and diluted
|
83,825
|
61,652
|
76,907
|
61,411
|
|||||||||
See
notes to consolidated financial
statements
2
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Statements of Cash Flows
(Unaudited)
(in
thousands)
|
Six
Months Ended
|
|||||||
|
June
30,
|
|||||||
|
2007
|
2006
|
||||||
|
Cash
flows from operating activities:
|
|||||||
|
Net
loss
|
$
|
(18,694
|
)
|
$
|
(30,490
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used
in
operating activities:
|
|||||||
|
Depreciation
and amortization
|
781
|
448
|
|||||
|
Stock-based
compensation and 401(k) match
|
2,589
|
3,757
|
|||||
|
Loss
on disposal of property and equipment
|
3
|
--
|
|||||
|
Changes
in:
|
|||||||
|
Prepaid
expenses and other assets
|
(222
|
)
|
212
|
||||
|
Accounts
payable and accrued expenses
|
231
|
(337
|
)
|
||||
|
Other
assets
|
(159
|
)
|
1
|
||||
|
Other
liabilities and accrued interest on loan payable
|
811
|
440
|
|||||
|
Net
cash used in operating activities
|
(14,660
|
)
|
(25,969
|
)
|
|||
|
Cash
flows from investing activities:
|
|||||||
|
Purchase
of property and equipment
|
(1,326
|
)
|
(709
|
)
|
|||
|
Restricted
cash
|
182
|
(15
|
)
|
||||
|
Purchases
of marketable securities
|
(20,483
|
)
|
(4,631
|
)
|
|||
|
Proceeds
from sales or maturity of marketable securities
|
1,883
|
7,884
|
|||||
|
Net
cash (used in) / provided by investing activities
|
(19,744
|
)
|
2,529
|
||||
|
Cash
flows from financing activities:
|
|||||||
|
Proceeds
from issuance of securities, net of expenses
|
30,183
|
2,783
|
|||||
|
Equipment
financed through capital lease obligation
|
4,245
|
1,036
|
|||||
|
Principal
payments under capital lease obligation
|
(4,702
|
)
|
(762
|
)
|
|||
|
Net
cash provided by financing activities
|
29,726
|
3,057
|
|||||
|
Net
decrease in cash and cash equivalents
|
(4,678
|
)
|
(20,383
|
)
|
|||
|
Cash
and cash equivalents - beginning of period
|
26,173
|
47,010
|
|||||
|
Cash
and cash equivalents - end of period
|
$
|
21,495
|
$
|
26,627
|
|||
|
Supplementary
disclosure of cash flows information:
|
|||||||
|
Interest
paid
|
$
|
344
|
$
|
619
|
|||
|
Non-cash
transactions:
|
|||||||
|
Unrealized
gain/(loss) on marketable securities
|
11
|
2
|
|||||
See
notes to consolidated financial
statements
3
Notes
to Consolidated Financial Statements (unaudited)
Note
1 - The Company and Basis of Presentation
The
Company
Discovery
Laboratories, Inc. (referred to in these Notes as “we”, “us” and “our”) is a
biotechnology company developing our proprietary surfactant technology as
Surfactant Replacement Therapies (SRT) for respiratory disorders and diseases.
Surfactants are produced naturally in the lungs and are essential for breathing.
Our technology produces a precision-engineered surfactant that is designed
to
closely mimic the essential properties of natural human lung surfactant. We
believe that through this technology, pulmonary surfactants have the potential,
for the first time, to be developed into a series of respiratory therapies
for
patients in the Neonatal
Intensive Care Unit (NICU), Pediatric Intensive Care Unit (PICU), critical
care
unit (ICU) and other hospital settings, to treat conditions for which there
are
few or no approved therapies available.
Our
SRT
pipeline is initially focused on the most significant respiratory conditions
prevalent in the NICU. We filed a New Drug Application (NDA) with the U.S.
Food
and Drug Administration (FDA) for our lead product, Surfaxin® (lucinactant) for
the prevention of Respiratory Distress Syndrome (RDS) in premature infants.
In
April 2006, we received a second Approvable Letter from the FDA in connection
with this NDA. We are also developing Surfaxin for other
neonatal and pediatric respiratory conditions and disorders, such as
Bronchopulmonary Dysplasia (BPD) and Acute Respiratory Failure (ARF). Aerosurf™
is our proprietary SRT in aerosolized form administered through nasal continuous
positive airway pressure (nCPAP) and is being developed for the prevention
and
treatment of infants at risk for respiratory failure. Aerosurf has the potential
to obviate the need for endotracheal intubation and conventional mechanical
ventilation.
In
addition to potentially treating respiratory conditions prevalent in the
NICU
and PICU, we believe that our SRT will also potentially address a variety
of
debilitating respiratory conditions affecting other pediatric, young adult
and
adult patients in the ICU and other hospital settings, such as Acute Lung
Injury
(ALI), cystic fibrosis, chronic obstructive respiratory disorder (COPD),
asthma,
Acute Respiratory Distress Syndrome (ARDS) and other debilitating respiratory
conditions.
We
have
implemented a business strategy that includes: (i) actions intended to gain
regulatory approval for Surfaxin for the prevention of RDS in premature infants
in the United States; (ii) continued investment in development of SRT
pipeline programs, including Surfaxin for neonatal and pediatric conditions
and
Aerosurf, which uses the aerosol-generating technology rights that we have
licensed through a strategic alliance with Chrysalis Technologies, a division
of
Philip Morris USA Inc. (Chrysalis); (iii) continued investment in
enhancements to our quality systems and manufacturing capabilities, including
our operations in Totowa, NJ (which we acquired in December 2005), to produce
surfactant drug products to meet the anticipated pre-clinical, clinical and
potential future commercial requirements of Surfaxin and our other SRT product
candidates, and potentially to develop new and enhanced formulations of Surfaxin
and our other SRT product candidates. Our long-term manufacturing strategy
includes potentially building or acquiring additional manufacturing capabilities
for the production of our precision-engineered SRT drug products; and
(iv) seeking investments of additional capital including potentially
entering into collaboration agreements and strategic partnerships for the
development and commercialization of our SRT product
candidates.
Basis
of Presentation
The
accompanying unaudited consolidated financial statements have been prepared
in
accordance with accounting principles generally accepted in the United States
for interim financial information in accordance with the instructions to Form
10-Q. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States for
complete financial statements. In the opinion of management, all adjustments
(consisting of normally recurring accruals) considered for fair presentation
have been included. Operating results for the three and six month periods ended
June 30, 2007 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2007. Certain prior period balances have been
reclassified to conform to the current period presentation. For further
information, refer to the consolidated financial statements and footnotes
thereto included in our Annual Report on Form 10-K for the year ended December
31, 2006.
4
Note
2 -
Accounting Principles and Recent Accounting Pronouncements
Accounting
Principles
There
have been no changes to our critical accounting policies since December 31,
2006. For more information on critical accounting policies, refer to our
Annual Report on Form 10-K for the year ended December 31, 2006. Readers
are encouraged to review these disclosures in conjunction with the review of
this Form 10-Q.
Recent
Accounting Pronouncements
In
July
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, Accounting
for Uncertainty
in Income Taxes,
an
interpretation of FASB Statement No. 109, (FIN 48). FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. We adopted FIN 48 on January 1, 2007. The adoption of
FIN 48 did not have a material impact on the consolidated financial
statements.
Note
3 -
Net Loss Per Share
Net
loss
per share is computed based on the weighted average number of common shares
outstanding for the periods. Common shares issuable upon the exercise of options
and warrants are not included in the calculation of the net loss per share
as
their effect would be anti-dilutive.
Note
4 -
Comprehensive Loss
Total
comprehensive loss was $10.4 million and $18.7 million for the three months
and
six months ended June 30, 2007, respectively, and $14.7 million and $30.5
million for the three months and six months ended June, 2006. Total
comprehensive loss consists of the net loss and unrealized gains and losses
on
marketable securities.
Note
5 -
Restricted Cash
There
are
cash balances that are restricted as to use and we disclose such amounts
separately on our balance sheets. The primary component of Restricted Cash
is a
cash security deposit in the amount of $600,000 securing a letter of credit
in
the same amount related to our lease agreement dated May 26, 2004 for office
space in Warrington, Pennsylvania. Beginning in March 2010, the security deposit
and the letter of credit related to the lease agreement will be reduced to
$400,000 and will remain in effect through the remainder of the lease term.
Subject to certain conditions, upon expiration of the lease in February 2013,
the letter of credit will expire.
Note
6 -
Stock Based Employee Compensation
We
have a
stock-based employee compensation plan that is intended to attract, retain
and
provide incentives for employees, officers and directors, and to align
stockholder and employee interests. We use the Black-Scholes option pricing
model to determine the fair value of stock options and amortize the stock-based
compensation expense over the requisite service periods of the stock options.
The fair value of the stock options is determined on the date of grant using
the
Black-Scholes option-pricing model. The fair value of stock options is affected
by our stock price and several subjective variables, including the expected
stock price volatility over the term of the option, actual and projected
employee stock option exercise behaviors, risk-free interest rate and expected
dividends.
We
use
historical data and other factors to estimate the expected term, volatility
and
forfeiture rates within the valuation model. The risk-free interest rate is
based upon the U.S. Treasury yield curve in effect at the time of grant. We
have
not and do not anticipate paying any cash dividends in the foreseeable future
and therefore use an expected dividend yield of zero in the option valuation
model. We estimate forfeitures of unvested stock options at the time of grant
and revise those estimates in subsequent periods if actual forfeitures differ
from those estimates, resulting in recognition of stock-based compensation
expense only for those options that vest.
5
The
fair
value of each stock option is estimated on the date of grant using the
Black-Scholes option-pricing formula and the assumptions noted in the following
table:
|
June
30, 2007
|
June
30, 2006
|
||||||
|
Expected
volatility
|
97
|
%
|
101
|
%
|
|||
|
Expected
term
|
4
& 5 years
|
5
years
|
|||||
|
Risk-free
rate
|
4.6
|
%
|
5.0
|
%
|
|||
|
Expected
dividends
|
--
|
--
|
|||||
The total employee stock-based compensation for the three and six months ended June 30, 2007 and 2006 was as follows:
|
Three
Months Ended
|
Six
Months Ended
|
||||||||||||
|
June
30,
|
June
30,
|
||||||||||||
|
2007
|
2006
|
2007
|
2006
|
||||||||||
|
Research
& Development
|
$
|
555
|
$
|
516
|
$
|
789
|
$
|
903
|
|||||
|
General
& Administrative
|
1,182
|
1,038
|
1,607
|
2,311
|
|||||||||
|
Total
|
$
|
1
,737
|
$
|
1,554
|
$
|
2,396
|
$
|
3,214
|
|||||
As
of
June 30, 2007, there was $8.6 million of total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted under the
Plan. That cost is expected to be recognized over a weighted-average vesting
period of 2.07 years.
Note
7 -
Working Capital
Cash
is
required to fund our working capital needs, to purchase capital assets, and
to
pay debt service, including principal and interest payments. We do not currently
have any source of operating revenue and will require significant amounts of
cash to continue to fund operations, clinical trials and research and
development efforts until such time, if ever, that one of our products receives
regulatory approval for marketing and begins to generate sales. Since we have
not generated any revenue from the sale of any products, we have primarily
relied upon the capital markets and debt financings as our primary sources
of
funding. We will continue to be opportunistic in accessing the capital markets
to obtain financing on terms satisfactory to us. We plan to fund our future
cash
requirements through:
| · |
the
issuance of equity and debt
financings;
|
| · |
payments
from potential strategic collaborators, including license fees and
sponsored research funding;
|
| · |
sales
of Surfaxin, if approved;
|
| · |
sales
of our other product candidates, if
approved;
|
| · |
capital
lease financings; and
|
| · |
interest
earned on invested capital.
|
After
taking into account the registered direct public offering in April 2007 that
generated gross proceeds of $30.2 million ($28.1 million net), and before
taking
into account any amounts that may be potentially available through our Committed
Equity Financing Facility (CEFF) with Kingsbridge Capital Limited (Kingsbridge),
a private investment group (discussed
in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations
-
Liquidity and Capital Resources”), any potential strategic collaborations, and
any potential financings, we believe that our current working capital is
sufficient to meet planned activities into mid 2008. Use of the CEFF is subject
to certain conditions, including a limitation on the total number of shares
of
common stock that we may issue under the CEFF (not more than approximately
7.1
million shares as of June 30, 2007). In addition, during the eight trading
day
pricing period for a draw down, if the volume weighted average price of our
common stock (VWAP) for any one trading day is less than the greater of (i)
$2.00 or (ii) 85 percent of the closing price of our common stock for the
trading day immediately preceding the beginning of the draw-down period,
the
VWAP from that trading day will not be used in calculating the number of
shares
to be issued in connection with that draw down, and the draw-down amount
for
that pricing period will be reduced by one-eighth of the draw down amount
that
we had initially specified. We anticipate using the CEFF, when available,
to
support working capital needs in 2007.
6
Note
8 -
Q2 2006 Restructuring Charge
In
April
2006, we received an Approvable Letter from the FDA for Surfaxin for the
prevention of RDS in premature infants and announced that ongoing analysis
of
data from Surfaxin process validation batches that we had manufactured as a
requirement for our NDA indicated that certain stability parameters no longer
met acceptance criteria. As a result, to lower our cost structure and re-align
our operations with changed business priorities, in April 2006, we reduced
our
staff levels and reorganized corporate management. We
incurred a restructuring charge of $4.8 million in the second quarter of 2006
associated with staff reductions and the close-out of certain commercial
programs, which was accounted for in accordance with Statement No. 146
“Accounting
for Costs Associated with Exit or Disposal Activities”.
As
of
June 30, 2007, the remaining balance of the unpaid restructuring charge was
$0.6
million, of which $0.5 million was included in accounts payable and accrued
expenses and $0.1 million was classified as a long-term liability.
Note
9 -
Debt
Capital
Equipment Financing Arrangements
On
May
21, 2007, we and Merrill Lynch Capital, a division of Merrill Lynch Business
Financial Services Inc. (Merrill Lynch), entered into a Credit and Security
Agreement (Loan Agreement), pursuant to which Merrill Lynch is providing
us
$12.5 million credit facility (Facility) to fund our capital programs. Under
the
Facility, $9 million was immediately available with up to an additional $3.5
million becoming available, at a rate of $1 million for each $10 million
raised
by us through business development partnerships, stock offerings and other
similar financings. Approximately $4 million of the Facility has been drawn
to
fund the prepayment (GECC Pay Down) of all our outstanding indebtedness to
General Electric Capital Corporation (GECC) under the Master Security Agreement
with GECC dated December 20, 2002, as amended (GECC Agreement). The right
to
draw funds under the Facility will expire on May 30, 2008, subject to a best
efforts undertaking by Merrill Lynch to extend the draw down period beyond
the
expiration date for an additional six months. The minimum advance under the
Facility is $100,000. Interest on each advance will accrue at a fixed rate
per
annum equal to LIBOR plus 6.25%, determined on the funding date of such advance.
Principal and interest on all advances will be payable in equal installments
on
the first business day of each month. We may prepay advances, in whole or
in
part, at any time, subject to a prepayment penalty, which, depending on the
period of time elapsed from the closing of the Facility, will range from
4% to
1%.
We
may
use the Facility to finance (a) new property and equipment and (b) up to
approximately $1.7 million “Other Equipment” and related costs, which may
include leasehold improvements, intangible property such as software and
software licenses, specialty equipment, a pre-payment penalty which was paid
to
GECC and “soft costs” related to financed property and equipment (including,
without limitation, taxes, shipping, installation and other similar costs).
Advances to finance the acquisition of new property and equipment will be
amortized over a period of 36 months. The advance related to the GECC Pay
Down
will be amortized over a period of 27 months and Other Equipment and related
costs will be amortized over a period of 24 months.
Our
obligations to Merrill Lynch are secured by a security interest in (a) the
property and equipment financed by us under the Facility, including the property
and equipment securing GECC at the time of the GECC Pay Down, and (b) all of
our
intellectual property, subject to limited exceptions set forth in the Loan
Agreement (Supplemental Collateral). The Supplemental Collateral will be
released on the earlier to occur of (i) receipt by us of FDA approval of our
NDA
for Surfaxin for
the
prevention of RDS in premature infants, or (ii) the date on which we shall
have
maintained over a continuous 12-month period ending on or after March 31, 2008,
measured at the end of each calendar quarter, a minimum cash balance equal
to
our projected cash requirements for the following 12-month period. In addition,
we, PharmaBio Development Inc. d/b/a NovaQuest (PharmaBio), to which we are
indebted under a separate loan arrangement (discussed below), and Merrill Lynch
entered into an Intercreditor Agreement under which Merrill Lynch has agreed
to
subordinate its security interest in the Supplemental Collateral (which does
not
include all financed property and equipment) to the security interest in the
same collateral that we previously granted to PharmaBio.
7
As
of
June 30, 2007, $4.2 million was outstanding under the secured credit facility
with Merrill Lynch and $4.8 million remained available for use, subject to
the
conditions of the Facility.
Loan
with PharmaBio Development, Inc. d/b/a/ NovaQuest (PharmaBio), a strategic
investment group of Quintiles Transnational Corp.
We
have a
loan with PharmaBio in the principal amount of $8.5 million that matures on
April 30, 2010. Interest on the loan accrues at the prime lending rate, subject
to change when and as such rate changes, compounded annually, and is payable
on
the maturity date of the loan. We may repay the loan, in whole or in part,
at
any time without prepayment penalty or premium. As of June 30, 2007, $9.3
million was outstanding on this loan, which was comprised of $8.5 million of
principal and $0.8 million of accrued and unpaid interest. For further
discussion,
see “Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources.”
Note
10 - Litigation
On
March
15, 2007, the United States District Court for the Eastern District of
Pennsylvania granted defendant’s motion to dismiss the Second Consolidated
Amended Complaint filed by the Mizla Group, individually and on behalf of a
class of investors who purchased our publicly traded securities between March
15, 2004 and June 6, 2006, alleging securities laws-related violations in
connection with various of our public statements. The amended complaint had
been
filed on November 30, 2006 against us, our Chief Executive Officer, Robert
J.
Capetola, and our former Chief Operating Officer, Christopher J. Schaber, under
the caption “In re: Discovery Laboratories Securities Litigation” and sought an
order that the action proceed as a class action and an award of compensatory
damages in favor of the plaintiffs and the other class members in an unspecified
amount, together with interest and reimbursement of costs and expenses of the
litigation and other equitable or injunctive relief. On April 10, 2007,
plaintiffs filed a Notice of Appeal with the United States District Court for
the Eastern District of Pennsylvania. Plaintiffs filed an opening brief on
July
2, 2007 and defendants filed their opening brief on August 6, 2007. Plaintiffs
must file their reply brief on August 20, 2007.
On
May 1,
2007, the United States District Court for the Eastern District of Pennsylvania
granted defendant’s motion to dismiss the consolidated shareholder derivative
complaint that was filed on December 29, 2006 under the caption “In re:
Discovery Laboratories Derivative Litigation.” The complaint named as defendants
our Chief Executive Officer, Robert J. Capetola, four of our outside directors
-
Antonio Esteve, Max E. Link, Marvin E. Rosenthale, W. Thomas Amick, and
Christopher J. Schaber, our former Chief Operating Officer, and sought an award
of damages, disgorgement of profits, injunctive and other equitable relief
and
award of attorneys’ fees and costs. Although they were granted leave to file a
second amended complaint by May 15, 2007, plaintiffs did not re-file. As the
period during which an appeal may be filed has expired, this matter is
concluded.
We
intend
to vigorously defend the appeal of the securities class action. The potential
impact of this or any such actions, all of which generally seek unquantified
damages, attorneys’ fees and expenses is uncertain. Additional actions based
upon similar allegations, or otherwise, may be filed in the future. There can
be
no assurance that an adverse result in any such proceedings would not have
a
potentially material adverse effect on our business, results of operations
and
financial condition.
We
have
from time to time been involved in disputes arising in the ordinary course
of
business, including in connection with the termination in 2006 of certain
pre-launch commercial programs following our process validation stability
failure. Such claims, with or without merit, if not resolved, could be
time-consuming and result in costly litigation. While it is impossible to
predict with certainty the eventual outcome of such claims, we believe the
pending matters are unlikely to have a material adverse effect on our financial
condition or results of operations. However, there can be no assurance that
we
will be successful in any proceeding to which we are or may be a party.
8
ITEM
2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
“Management’s
Discussion and Analysis of Financial Condition and Results of Operations” should
be read in connection with our accompanying Consolidated Financial Statements
(including the notes thereto) appearing elsewhere herein.
OVERVIEW
We
are a
biotechnology company developing our proprietary surfactant technology as
Surfactant Replacement Therapies (SRT) for respiratory disorders and diseases.
Surfactants are produced naturally in the lungs and are essential for breathing.
Our technology produces a precision-engineered surfactant that is designed
to
closely mimic the essential properties of natural human lung surfactant. We
believe that through this SRT technology, pulmonary surfactants have the
potential, for the first time, to be developed into a series of respiratory
therapies for patients in the Neonatal Intensive Care Unit (NICU), Pediatric
Intensive Care Unit (PICU), critical care unit (ICU) and other hospital
settings, where there are few or no approved therapies available.
Our
SRT
pipeline is focused initially on the most significant respiratory conditions
prevalent in the NICU and PICU. We have filed a NDA with the FDA for our
lead
product, Surfaxin® (lucinactant), for the prevention of Respiratory Distress
Syndrome (RDS) in premature infants. In April 2006, we received a second
Approvable Letter from the FDA in connection with this NDA. For older children
being treated in the PICU, we recently initiated a Phase 2 clinical trial
evaluating the use of Surfaxin in children up to two years of age suffering
from
ARF. We are also developing Surfaxin for the prevention and treatment of
Bronchopulmonary Dysplasia (BPD) in premature infants, a debilitating and
chronic lung disease typically affecting premature infants who have suffered
RDS. Aerosurf™ is our proprietary SRT in aerosolized form administered through
nasal continuous positive airway pressure (nCPAP) and is being developed
for the
prevention and treatment of infants at risk for respiratory failure. Aerosurf
has the potential to obviate the need for endotracheal intubation and
conventional mechanical ventilation.
In
addition to potentially treating respiratory conditions prevalent in the
NICU
and PICU, we believe that our SRT will also potentially address a variety
of
debilitating respiratory conditions affecting other pediatric, young adult
and
adult patients in the ICU and other hospital settings, such as Acute Lung
Injury
(ALI), cystic fibrosis, chronic obstructive respiratory disorder (COPD),
asthma,
Acute Respiratory Distress Syndrome (ARDS) and other debilitating respiratory
conditions.
We
have
implemented a business strategy that includes:
| · |
actions
intended to gain regulatory approval to market and sell Surfaxin
for the
prevention of RDS in premature infants in the United States, including
(i)
finalizing and submitting our response to the April 2006 Approvable
Letter, which focused on the Chemistry, Manufacturing and Controls
(CMC)
portion of our NDA; and (ii) completing analysis and remediation of
manufacturing
issues related to the April 2006 process validation stability
failure;
|
| · |
continued
investment in the development of our SRT pipeline programs,
including Surfaxin
for neonatal and pediatric conditions and Aerosurf, which uses the
aerosol-generating technology rights that we have licensed through
a
strategic alliance with Chrysalis Technologies, a division of Philip
Morris USA Inc. (Chrysalis);
|
| · |
continued
investment in enhancements to our quality systems and our manufacturing
capabilities, including our operations in Totowa, NJ (which we acquired
in
December 2005). We plan to (i) produce surfactant drug products to
meet
the anticipated pre-clinical, clinical and potential future commercial
needs of Surfaxin and our other SRT product candidates, and (ii)
potentially develop new and enhanced formulations of Surfaxin and
our
other SRT product candidates. Our long-term manufacturing strategy
includes potentially building or acquiring additional manufacturing
capabilities for the production of our precision-engineered SRT drug
products; and
|
9
| · |
seeking
investments of additional capital and potentially entering into
collaboration agreements and strategic partnerships for the development
and commercialization of our SRT product candidates. We continue
to
evaluate a variety of strategic transactions intended to enhance
the
future growth potential of our SRT pipeline and maximize shareholder
value, including, but not limited to, potential business alliances,
commercial and development partnerships, financings and other similar
opportunities, although we cannot assure you that we will enter into
any
specific actions or transactions.
|
Since
our
inception, we have incurred significant losses and, as of June 30, 2007, we
had
an accumulated deficit of $267.0 million. The majority of our expenditures
to
date have been for and in support of research and development activities. See
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Plan of Operations.”
Historically,
we have funded our operations with working capital provided principally through
public and private equity financings, debt arrangements and strategic
collaborations. As of June 30, 2007, we had: (i) cash of $40.8 million; (ii)
approximately 7.1 million shares potentially available for issuance under our
Committed Equity Financing Facility (CEFF) with Kingsbridge Capital Limited
(Kingsbridge), a private investment group, for future financings (not to exceed
$40.5 million), subject to certain conditions that could cause the CEFF to
be
unavailable (discussed
in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources”); (iii) $9.3 million outstanding ($8.5 million
principal and $0.8 million of accrued interest as of June 30, 2007) on a loan
from PharmaBio Development Inc. d/b/a NovaQuest (PharmaBio), the strategic
investment group of Quintiles Transnational Corp. (Quintiles), which is due
and
payable together with all accrued interest on April 30, 2010; and (iv) $4.2
million debt outstanding under a $12.5 million capital equipment financing
arrangement with Merrill Lynch Capital, of which $4.0 million was applied to
prepay the outstanding capital equipment loan and prepayment penalties then
due
to General Electric Capital Corporation (GECC). See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources.”
RESEARCH
AND DEVELOPMENT
Research
and development expenses for the three and six months ended June 30, 2007 were
$6.8 million and $12.2 million, respectively. Research and development expenses
for the three and six months ended June 30, 2006 were $5.9 million and $13.5
million, respectively. These costs are charged to operations as incurred and
are
tracked by category rather than by project. Research and development costs
consist primarily of expenses associated with research, formulation development,
manufacturing development, clinical and regulatory operations and other direct
preclinical and clinical projects.
These
cost categories typically include the following expenses:
Manufacturing
Development
Manufacturing
development primarily reflects costs incurred to develop current good
manufacturing practices (cGMP) manufacturing capabilities in order to provide
clinical and commercial scale drug supply. Manufacturing development activities
include: (1) costs associated with our manufacturing operations in Totowa,
NJ
(which we acquired from our then-contract manufacturer, Laureate Pharma, Inc.
(Laureate) in December 2005) to support the production of clinical and
anticipated commercial drug supply for our SRT programs, such as employee
expenses, depreciation, the purchase of drug substances, quality control and
assurance activities, and analytical services; (2) continued investment in
our quality assurance and analytical chemistry capabilities, including
implementation of enhancements to quality controls, process assurances and
documentation requirements that support the production process and expanding
and
upgrading our quality operations to meet production needs for our SRT pipeline
in accordance with cGMP; and (3) expenses associated with our comprehensive
investigation of the April 2006 Surfaxin process validation stability failure
and remediation of our related manufacturing issues and activities associated
with developing data and other information necessary for our formal response
to
the Surfaxin Approvable Letter.
10
Unallocated
Development - Clinical, Regulatory and Formulation Development Operations
Clinical,
regulatory and formulation development operations reflect the preparation,
implementation and management of our clinical trial activities in accordance
with current good clinical practices (cGCPs) and research and development of
aerosolized and other related formulations of our precision-engineered lung
surfactant, engineering of aerosol delivery systems and analytical chemistry
activities to support the continued development of Surfaxin. Included in
unallocated clinical, regulatory and formulation development operations are
costs associated with personnel, supplies, facilities, fees to consultants,
and
other related costs for clinical trial implementation and management, clinical
quality control and regulatory compliance activities, data management and
biostatistics, including such activities associated with developing data and
other information necessary for our formal response to the Surfaxin Approvable
Letter.
Direct
Pre-Clinical and Clinical Program Expenses
Direct
pre-clinical and clinical program expenses include pre-clinical activities
associated with the development of SRT formulations prior to the initiation
of
any potential human clinical trials and activities associated with conducting
clinical trials, including patient enrollment costs, external site costs,
expense of clinical drug supply and external costs such as contract research
consultant fees and expenses.
The
following summarizes our research and development expenses by each of the
foregoing categories for the three and six months ended June 30, 2007 and
2006:
|
(
in thousands)
|
Three
Months Ended
June
30,
|
Six
Months Ended
June
30,
|
|||||||||||
|
Research
and Development Expenses:
|
2007
|
2006
|
2007
|
2006
|
|||||||||
|
Manufacturing
development
|
$
|
2,930
|
$
|
2,892
|
$
|
5,267
|
$
|
5,391
|
|||||
|
Unallocated
development - clinical and regulatory operations
|
2,307
|
2,007
|
4,335
|
4,537
|
|||||||||
|
Direct
pre-clinical and clinical program expenses
|
1,557
|
1,012
|
2,614
|
3,596
|
|||||||||
|
Total
Research & Development Expenses
|
$
|
6,794
|
$
|
5,911
|
$
|
12,216
|
$
|
13,524
|
|||||
Due
to
the significant risks and uncertainties inherent in the clinical development
and
regulatory approval processes, the nature, timing and costs of the efforts
necessary to complete projects in development are not reasonably estimable.
Results from clinical trials may not be favorable and data from clinical trials
are subject to varying interpretation and may be deemed insufficient by the
regulatory bodies reviewing applications for marketing approvals. As such,
clinical development and regulatory programs are subject to risks and changes
that may significantly impact cost projections and timelines.
Currently,
none of our drug product candidates are available for commercial sale. All
of
our potential products are in regulatory review, clinical or pre-clinical
development. The status and anticipated completion date of each of our lead
SRT
programs are discussed in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Plan of Operations.” Successful completion
of development of our SRT is contingent on numerous risks, uncertainties and
other factors, some of which are described in detail in the “Risk Factors”
section herein and those contained in our most recent Annual Report on Form
10-K.
Development
risk factors include, but are not limited to:
| · |
Completion
of pre-clinical and clinical trials of our SRT product candidates
with
scientific results that are sufficient to support further development
and/or regulatory approval;
|
| · |
Receipt
of necessary regulatory approvals;
|
| · |
Obtaining
adequate supplies of surfactant active drug substances on commercially
reasonable terms;
|
| · |
Obtaining
capital necessary to fund our operations, including our research
and
development efforts, manufacturing requirements and clinical
trials;
|
11
| · |
Performance
of our third-party collaborators and suppliers on whom we rely for
supply
of drug substances, medical device components and related services
necessary to manufacture our SRT drug product candidates, including
Surfaxin and Aerosurf;
|
| · |
Timely
and successful resolution of the CMC and cGMP-related matters at
our
manufacturing operations in Totowa, NJ with respect to Surfaxin and
our
other SRT presently under development, including those matters identified
in connection with the April 2006 process validation stability failures
and those noted by the FDA in its 2005 and 2006 inspectional reports
on
Form FDA 483;
|
| · |
Successful
manufacture at our manufacturing operations in Totowa, NJ of our
SRT drug
product candidates, including Surfaxin;
|
| · |
Successful
development and implementation of a manufacturing strategy for the
Chrysalis aerosolization device and related materials to support
clinical
studies and commercialization of Aerosurf;
and
|
| · |
Providing
for additional manufacturing capabilities, for which we presently
have
limited resources.
|
Because
these factors, many of which are outside our control, could have a potentially
significant effect on our activities, the success, timing of completion, and
ultimate cost of development of any of our product candidates is highly
uncertain and cannot be estimated with any degree of certainty. The timing
and
cost to complete drug trials alone may be impacted by, among other
things:
| · |
Slow
patient enrollment;
|
| · |
Long
treatment time required to demonstrate
effectiveness;
|
| · |
Lack
of sufficient clinical supplies and
material;
|
| · |
Adverse
medical events or side effects in treated
patients;
|
| · |
Lack
of compatibility with complimentary
technologies;
|
| · |
Lack
of effectiveness of the product candidate being tested;
and
|
| · |
Lack
of sufficient funds.
|
If
we do
not successfully complete clinical trials, we will not receive regulatory
approval to market our SRT products. Failure to obtain and maintain regulatory
approval and generate revenues from the sale of our products, would have a
material adverse effect on our value, financial condition and results of
operations.
CORPORATE
PARTNERSHIP AGREEMENTS
Chrysalis
Technologies, a Division of Philip Morris USA Inc.
In
December 2005, we entered into a strategic alliance with Chrysalis to develop
and commercialize aerosol SRT to address a broad range of serious respiratory
conditions, such as neonatal respiratory failure, ALI, cystic fibrosis, COPD,
asthma, and others. Through this alliance, we gained exclusive rights to
Chrysalis’ aerosolization technology for use with pulmonary surfactants for all
respiratory diseases. The alliance unites two complementary respiratory
technologies - our precision-engineered surfactant technology with Chrysalis’
novel aerosolization technology that is being developed to deliver therapeutics
to the deep lung.
Chrysalis
has developed a proprietary aerosol generation technology that is being designed
with the potential to enable targeted upper respiratory or deep lung delivery
of
therapies for local or systematic applications. The Chrysalis technology is
designed to produce high-quality, low velocity aerosols for possible deep lung
aerosol delivery. Aerosols are created by pumping the drug formulation through
a
small, heated capillary wherein the excipient system is substantially converted
to the vapor state. Upon exiting the capillary, the vapor stream quickly cools
and slows in velocity yielding a dense aerosol with a defined particle size.
The
defined particle size can be readily controlled and adjusted through device
modifications and drug formulation changes.
The
alliance focuses on therapies for hospitalized patients, including those in
the
NICU, PICU and ICU, and can be expanded into other hospital applications and
ambulatory settings. We and Chrysalis are utilizing our respective capabilities
and resources to support and fund the design and development of combination
drug-device systems that can be uniquely customized to address specific
respiratory diseases and patient populations. Chrysalis is responsible for
developing the design for the aerosolization device platform, disposable dose
packets and patient interface. We are responsible for aerosolized SRT drug
formulations, clinical and regulatory activities, and the manufacturing and
commercialization of the combination drug-device products. We have exclusive
rights to Chrysalis’ aerosolization technology for use with pulmonary
surfactants for all respiratory diseases and conditions in hospital and
ambulatory settings. Generally, Chrysalis will receive a tiered royalty on
product sales: the base royalty generally applies to aggregate net sales of
less
than $500 million per contract year; the royalty generally increases on
aggregate net sales in excess of $500 million per contract year, and generally
increases further on aggregate net sales of alliance products in excess of
$1
billion per contract year.
12
Our
lead
neonatal program utilizing the Chrysalis technology is Aerosurf, an aerosolized
formulation administered via nCPAP to treat premature infants in the NICU at
risk for RDS. We are also planning an adult program utilizing the Chrysalis
aerosolization technology to develop aerosolized SRT administered as a
prophylactic for patients in the hospital at risk for ALI and will be assessing
the timing for implementation of our adult program in late 2007.
Laboratorios
del Dr. Esteve, S.A.
In
December 2004, we further restructured our strategic alliance with Laboratorios
del Dr. Esteve, S.A. (Esteve) for the development, marketing and sales of our
products. We had first entered into the alliance in 1999 and had revised it
in
2002 to broaden the territory to include all of Europe, Central and South
America, and Mexico. Under the 2004 revision, we regained full commercialization
rights to our SRT, including Surfaxin for the prevention of RDS in premature
infants and the treatment of ARDS in adults, in key European markets, Central
America, and South America. Esteve will focus on Andorra, Greece, Italy,
Portugal, and Spain, and now has development and marketing rights to a broader
portfolio of potential SRT products. Esteve will pay us a transfer price on
sales of Surfaxin and other SRT. We will be responsible for the manufacture
and
supply of all of the covered products and Esteve will be responsible for all
sales and marketing in the revised territory. We also agreed to pay to Esteve
10% of cash up-front and milestone fees (not to exceed $20 million in the
aggregate) that we may receive in connection with any future strategic
collaborations for the development and commercialization of Surfaxin for RDS,
ARDS or certain other SRTs in the territory for which we had previously granted
a license to Esteve. Esteve has agreed to make stipulated cash payments to
us
upon our achievement of certain milestones, primarily upon receipt of marketing
regulatory approvals for the covered products. In addition, Esteve has agreed
to
contribute to Phase 3 clinical trials for the covered products by conducting
and
funding development performed in the revised territory.
In
October 2005, Esteve sublicensed the distribution rights to Surfaxin in Italy
to
Dompé farmaceutici s.p.a. (Dompé), a privately owned Italian company. Under the
sublicense agreement, Dompé will be responsible for sales, marketing and
distribution of Surfaxin in Italy.
PLAN
OF OPERATIONS
We
have
incurred substantial losses since inception and expect to continue to expend
substantial amounts for continued product research, development, manufacturing,
and general business activities. We will need to generate significant revenues
from product sales, related royalties and transfer prices to achieve and
maintain profitability.
Through
June 30, 2007, we had no revenues from any product sales, and had not achieved
profitability on a quarterly or annual basis. Our ability to achieve
profitability depends upon, among other things, our ability to develop products,
obtain regulatory approval for products under development and enter into
collaboration and other agreements for product development, manufacturing and
commercialization. In addition, our results are dependent upon the performance
of our strategic partners and suppliers. Moreover, we may never achieve
significant revenues or profitable operations from the sale of any of our
products or technologies.
Through
June 30, 2007, we had not generated taxable income. At December 31, 2006, net
operating losses available to offset future taxable income for Federal tax
purposes were approximately $229.8 million. The future utilization of such
loss
carryforward may be limited pursuant to regulations promulgated under Section
382 of the Internal Revenue Code. In addition, we had a research and development
tax credit carryforward of $5.2 million at December 31, 2006. The Federal net
operating loss and research and development tax credit carryforwards expire
beginning in 2008 through 2026.
13
We
anticipate that during the next 12 to 24 months:
Research
and Development
We
will
focus our research, development and regulatory activities in an effort to
develop a pipeline of potential SRT for respiratory diseases. The drug
development, clinical trial and regulatory process is lengthy, expensive and
uncertain and subject to numerous risks including, without limitation, the
applicable risks discussed in the “Risk Factors” section herein and those
contained in our most recent Annual Report on Form 10-K. See “Management’s
Discussion and Analysis - Research and Development.”
Our
major
research and development projects include:
SRT
for Neonatal and Pediatric Indications
|
In
order to address the most prevalent respiratory disorders affecting
infants in the NICU, we are conducting several NICU therapeutic programs
targeting respiratory conditions cited as some of the most significant
unmet medical needs for the neonatal community.
|
Surfaxin
for the Prevention of RDS in Premature Infants
In
April
2006, we received a second Approvable Letter from the FDA for Surfaxin for
the
prevention of RDS in premature infants. Specifically, the FDA requested
information primarily focused on the CMC section of our NDA, predominately
involving drug product specifications and stability, analytical methods and
related controls. Also in April 2006, ongoing analysis of Surfaxin process
validation batches that had been manufactured for us in 2005 by our contract
manufacturer, Laureate Pharma, Inc. (Laureate) as a requirement for our NDA
indicated that certain stability parameters no longer met acceptance criteria.
We immediately conducted a comprehensive investigation, which focused on
analysis of manufacturing processes, analytical methods and method validation
and active pharmaceutical ingredient suppliers, to identify a most probable
root
cause, and executed a corrective action and preventative action (CAPA) plan.
As
part of our comprehensive investigation, we manufactured a series of
investigational batches that are being monitored using our most predictive
stability-indicating method. These batches, which are not designated process
validation batches for the NDA and are intended to provide data to support
the
CAPA, continue to demonstrate acceptable stability, with the earliest
manufactured batches demonstrating acceptable stability through twelve months,
and the most-recently manufactured batches, through six months.
In
December 2006, we attended a meeting with the FDA, the purpose of which was
to
clarify certain of the key CMC matters identified by the FDA in the Approvable
Letter, provide information concerning the status and interim findings of our
comprehensive investigation into the process validation stability failure and
efforts to remediate the related manufacturing issues, and obtain guidance
from
the FDA on the appropriate path to potentially gain approval of Surfaxin for
the
prevention of RDS in premature infants. Following that meeting and consistent
with the guidance from the FDA, in February 2007, we completed the manufacture
of three new Surfaxin process validation batches. These process validation
batches are subjected to ongoing comprehensive stability testing on
pre-specified testing dates, initially every three months, in accordance with
an
established protocol that complies with guidelines established by the ICH
(International Conference on Harmonisation of Technical Requirements for
Registration of Pharmaceuticals for Human Use). Under our comprehensive testing
protocol, these process validation batches have demonstrated acceptable
stability through three months and continue to be monitored. The process
validation batches must demonstrate acceptable stability under our comprehensive
testing protocol through six-months before we can file our formal response
to
the Approvable Letter. We anticipate that six-month stability data will be
available in October and, if these process validation batches demonstrate
acceptable stability at that time, we plan to file our formal response to the
Approvable Letter in the October 2007 timeframe. Assuming that the FDA accepts
our response as a complete response, we anticipate a six-month FDA review period
for potential approval of our NDA for Surfaxin for the prevention of RDS in
premature infants.
14
In
June
2006, we voluntarily withdrew the Marketing Authorization Application (MAA)
filed in October 2004 with the European Medicines Agency (EMEA) for clearance
to
market Surfaxin for the prevention and rescue treatment of RDS in premature
infants in Europe because our manufacturing issues would not be resolved within
the regulatory time frames mandated by the EMEA procedure. Our withdrawal of
the
MAA precluded final resolution of certain outstanding clinical issues related
to
the Surfaxin Phase 3 clinical trials, which had been the focus of a recent
EMEA
clinical expert meeting and were expected to be reviewed at a planned Oral
Explanation before the Committee for Medicinal Products for Human Use (CHMP)
in
late June 2006. We plan in the future to have further discussions with the
EMEA
and develop a strategy to potentially gain approval for Surfaxin in Europe.
Surfaxin
for BPD in Premature Infants
In
October 2006, we announced preliminary results of our Phase 2 clinical trial
of
Surfaxin for the prevention and treatment of BPD. We believe that these results
suggest that Surfaxin may potentially represent a novel therapeutic option
for
infants at risk for BPD and anticipate determining the next development steps
for this program in late 2007 or early 2008.
Surfaxin
for Acute Respiratory Failure
In
June
2007, we initiated a Phase 2 clinical trial evaluating the use of Surfaxin
in
children up to two years of age suffering from ARF. This Phase 2 clinical
trial
is a multicenter, randomized, masked, placebo-controlled trial that will
compare
Surfaxin to standard of care with sham air control. Approximately 180 children
under the age of two with ARF will receive standard of care and be randomized
to
receive either Surfaxin at 5.8 mL/kg of body weight (expected weight range
up to
15 kg) or sham air control. The trial will be conducted at approximately
20
sites throughout the United States, Chile, and Europe. The objective of the
study is to evaluate the safety and tolerability of Surfaxin administration
and
to assess whether such treatment can decrease the duration of mechanical
ventilation in young children with ARF. The trial is expected to be completed
by
mid-year 2008.
Aerosurf, Aerosolized SRT
|
In
September 2005, we completed and announced the results of our first
pilot
Phase 2 clinical study of Aerosurf, which was designed as an open
label,
multicenter study to evaluate the feasibility, safety and tolerability
of
Aerosurf delivered using a commercially-available aerosolization
device
(Aeroneb Pro®)
via nCPAP for the prevention of RDS in premature infants administered
within 30 minutes of birth over a three hour duration. The study
showed
that it is feasible to deliver Aerosurf via nCPAP and that the treatment
was generally safe and well
tolerated.
|
We
are
presently collaborating with Chrysalis on the development of a prototype
aerosolization system to deliver Aerosurf to patients in the NICU. We have
also
met with and received guidance from the FDA with respect to the design of a
proposed Phase 2 clinical program utilizing Chrysalis’ technology. We and
Chrysalis, together with third-party engineers and manufacturers, are presently
collaborating on the development and optimization of this novel system as well
as next generation drug device systems. The initial prototype development work,
originally expected to be completed in the second half of 2007, is now
anticipated to be completed in the first quarter of 2008. Accordingly,
initiation of our Phase 2 clinical program is now anticipated in the first
quarter of 2008. See “Surfaxin
for the Prevention of RDS in Premature Infants,”
above.
SRT
for Critical Care and Hospital Indications
Surfaxin
for Acute Respiratory Failure in Children Under the Age of Two
In
June
2007, we initiated a Phase 2 clinical trial evaluating the use of Surfaxin
in
children up to two years of age suffering from ARF. This Phase 2 clinical trial
is a multicenter, randomized, masked, placebo-controlled trial that will compare
Surfaxin to standard of care with sham air control. Approximately 180 children
under the age of two with ARF will receive standard of care and be randomized
to
receive either Surfaxin at 5.8 mL/kg of body weight (expected weight range
up to
15 kg) or sham air control. The trial will be conducted at approximately 20
sites throughout the United States, Chile, and Europe. The objective of the
study is to evaluate the safety and tolerability of Surfaxin administration
and
to assess whether such treatment can decrease the duration of mechanical
ventilation in young children with ARF. The trial is expected to be completed
by
mid-year 2008.
We
are
also evaluating the potential development of our proprietary
precision-engineered SRT to address respiratory disorders such as cystic
fibrosis, ALI, chronic obstructive respiratory disorder (COPD), asthma, and
other debilitating respiratory conditions.
15
Manufacturing
Our
precision-engineered surfactant product candidates, including Surfaxin, must
be
manufactured in compliance with cGMPs established by the FDA and other
international regulatory authorities. Surfaxin is a complex drug and, unlike
many drugs, contains four active ingredients. It must be aseptically
manufactured at our facility as a sterile, liquid suspension and requires
ongoing monitoring of the stability and conformance to product specifications
of
each of the four active ingredients.
We
plan
to invest in and support our manufacturing strategy for the production of our
precision-engineered SRT to meet anticipated clinical needs and, if approved,
commercial needs in the United States, Europe and other markets:
Manufacturing
- New Jersey Operations
In
December 2005, we purchased our manufacturing operations from Laureate (our
contract manufacturer at that time) and entered into a transitional services
arrangement under which Laureate agreed to provide us with certain limited
manufacturing-related support services through December 2006. In July 2006,
we
completed the transition and terminated the arrangement with
Laureate.
Owning
the Totowa operation has provided us with direct operational control and, we
believe, potentially improved economics for the production of clinical and
potential commercial supply of our lead product, Surfaxin, and our SRT pipeline
products. This facility is the only facility in which we produce our drug
product. We view our acquisition of the Totowa operations as an initial step
of
our long-term manufacturing strategy for the continued development of our SRT
portfolio, including life cycle management of Surfaxin for new indications,
potential new formulations and formulation enhancements, and expansion of our
aerosol SRT products, beginning with Aerosurf.
In
April
2006, ongoing analysis of Surfaxin process validation batches that had been
manufactured for us in 2005 by our then contract manufacturer, Laureate, as
a
requirement for our NDA indicated that certain stability parameters no longer
met acceptance criteria. We immediately initiated a comprehensive investigation,
which focused on analysis of manufacturing processes, analytical methods and
method validation and active pharmaceutical ingredient suppliers, to determine
the cause of the failure. As a result of this investigation, we developed a
corrective action and preventative action plan to remediate the related
manufacturing issues.
In
September 2006, we submitted a request for a meeting with the FDA together
with
an information package that covered certain of the key CMC matters contained
in
the Approvable Letter and provided information concerning the status and interim
findings of our comprehensive investigation into the Surfaxin process validation
stability failure and our efforts to remediate the related manufacturing issues.
Following a meeting with the FDA on December 21, 2006, and consistent with
the
guidance from the FDA, we completed the manufacture of new Surfaxin process
validation batches, which are undergoing release and ongoing stability
testing.
Long-Term
Manufacturing Capabilities
We
are
planning to have manufacturing capabilities, primarily through our manufacturing
operation in Totowa, NJ, that should allow for sufficient commercial production
of Surfaxin, if approved, to supply the potential worldwide demand for the
prevention of RDS in premature infants, the prevention and treatment of BPD
and
all of our anticipated clinical-scale production requirements for
Aerosurf.
We
view
our acquisition of manufacturing operations in Totowa, NJ as an initial step
of
our manufacturing strategy for the continued development of our SRT portfolio,
including life cycle management of Surfaxin for new indications, potential
new
formulations and formulation enhancements, and expansion of our aerosol SRT
products, beginning with Aerosurf. The lease for our Totowa, NJ facility extends
through December 2014. In addition to customary lease terms and conditions,
the
lease contains an early termination option, first beginning in December 2009.
The early termination option can only be exercised by the landlord upon a
minimum of two years prior notice and, in the earlier years, payment to us
of
significant early termination amounts. Taking into account this early
termination option, which may cause us to move out of our Totowa, NJ facility
as
early as December 2009, our long-term manufacturing strategy includes
potentially building or acquiring additional manufacturing capabilities, as
well
as using contract manufacturers, for the production of our precision-engineered
SRT drug products.
16
Aerosol
Devices and Related Componentry
To
manufacture aerosolization systems for our planned clinical trials, we expect
to
utilize third-party contract manufacturers, suppliers and assemblers. The
manufacturing process will require assembly of the key device sub-components
that comprise the aerosolization systems, including the aerosol-generating
device, the disposable dose delivery packet and patient interface system
necessary to administer our aerosolized SRT in patients in the NICU, PICU and
ICU. We expect that third-party vendors will manufacture these key device
sub-components, and ship them to one central location for assembly and
integration into the aerosolization system. Once assembled, critical/product
contact components and/or assemblies are packaged and sterilized. Each of the
aerosolization systems will be quality-control tested prior to release for
use
in our clinical trials or, potentially, for commercial use. To complete the
combination drug-device product, we plan to manufacture the SRT drug product
at
our Totowa, NJ facility.
See
the
applicable risks discussed in the “Risk Factors” section herein and those
contained in our most recent Annual Report on Form 10-K.
General
and Administrative
We
intend
to invest in general and administrative resources in the near term primarily
to
support our legal requirements, intellectual property portfolios (including
building and enforcing our patent and trademark positions), our business
development initiatives, financial systems and controls, management information
technologies, and general management capabilities.
Potential
Collaboration Agreements and Strategic Partnerships
We
intend
to seek investments of additional capital and potentially enter into
collaboration agreements and strategic partnerships for the development and
commercialization of our SRT product candidates. To assist us in identifying
and
evaluating strategic alternatives intended to enhance the future growth
potential of our SRT pipeline and maximize shareholder value, in June 2006,
we
engaged Jefferies & Company, Inc. (Jefferies), a New York-based investment
banking firm, under an exclusive arrangement that we terminated in June 2007.
We
continue, with the assistance of Jefferies and separately, to evaluate a variety
of strategic transactions, including, but not limited to, potential business
alliances, commercial and development partnerships, financings and other similar
opportunities, although we cannot assure you that we will enter into any
specific actions or transactions.
CRITICAL
ACCOUNTING POLICIES
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.
There
have been no changes to our critical accounting policies since December 31,
2006. For more information on critical accounting policies, refer to our
Annual Report on Form 10-K for the year ended December 31, 2006. Readers
are encouraged to review these disclosures in conjunction with the review of
this Form 10-Q.
17
RESULTS
OF OPERATIONS
The
net
loss for the three and six months ended June 30, 2007 were $10.4 million (or
$0.12 per share) and $18.7 million (or $0.24 per share), respectively. The
net
loss for the three and six months ended June 30, 2006 were $14.7 million (or
$0.24 per share) and $30.5 million (or $0.50 per share), respectively.
Revenue
We
did
not earn revenue during the three and six months ended June 30, 2007 or
2006.
Research
and Development Expenses
Research
and development expenses for the three and six months ended June 30, 2007 were
$6.8 million and $12.2 million, respectively. Research and development expenses
for the three and six months ended June 30, 2006 were $5.9 million and $13.5
million, respectively. For a description of expenses and research and
development activities, see “Management’s Discussion and Analysis - Research and
Development.” For a description of the clinical programs included in research
and development, see “Management’s Discussion and Analysis - Plan of
Operations.”
Research
and development expenses for the three and six months ended June 30, 2007
compared to the same periods in 2006 primarily reflects:
| (i) |
Manufacturing
development activities (included in research and development expenses)
to
support the production of clinical and commercial drug supply for
our SRT
programs, including Surfaxin, in conformance with cGMPs. Expenses
associated with manufacturing development activities for the three
and six
months ended June 30, 2007 were $2.9 million and $5.3 million,
respectively, as compared to $2.9 million and $5.4 million for the
three
and six months ended June 30, 2006, respectively. Manufacturing
development expenses for 2007 primarily consist of (i) costs associated
with our manufacturing operations in Totowa, NJ to support the production
of clinical and anticipated commercial drug supply for our SRT programs;
(ii) continued investment in our quality assurance and analytical
chemistry capabilities including implementation of enhancements to
quality
controls, process assurances and documentation requirements that
support
the production process and expanding and upgrading our quality operations
to meet production needs for our SRT pipeline in accordance with
cGMP;
(iii) expenses associated with our comprehensive investigation of
the
April 2006 Surfaxin process validation stability failure and remediation
of our related manufacturing issues.; and (iv) activities to develop
additional formulations of our SRT; and
|
| (ii) |
Research
and development activities, excluding manufacturing development
activities, associated with infrastructure development, including
clinical
trial management, regulatory compliance, data management and
biostatistics, and medical and scientific affairs activities as well
as
direct program expenses to advance our SRT pipeline. Expenses associated
with research and development activities for the three and six months
ended June 30, 2007 were $3.9 million and $6.9 million, respectively,
as
compared to $3.0 million and $8.1 million for the three and six months
ended June 30, 2006, respectively. Research and development expenses
for
2007 primarily include: (i) costs associated with developing data
and
other information necessary for our formal response to the Surfaxin
Approvable Letter; (ii) activities associated with the ongoing Phase
2
clinical trial of Surfaxin for ARF in children up to two years of
age; and
(iii) development activities related to Aerosurf™. The decrease in the six
months ended June 30, 2007 compared to the same period last year
primarily
reflects cost incurred in 2006 for: (i) clinical activities associated
with the Phase 2 clinical trials for BPD in premature infants and
ARDS in
adults; and (ii) personnel and related costs that were later reduced
as a
result of staff reductions anda reorganization of corporate management
that occurred immediately after the April 2006 Surfaxin process validation
stability failure.
|
General
and Administrative Expenses
General
and administrative expenses for the three and six months ended June 30, 2007
were $3.5 million and $6.2 million, respectively, as compared to $4.0
million and $12.7 million for the three and six months ended June 30, 2006,
respectively. The decrease is primarily due to costs incurred in 2006 in
anticipation of the potential approval and commercial launch of Surfaxin for
the
prevention of RDS in premature infants. After the April 2006 process validation
stability failure, we took immediate steps to lower our costs and suspended
pre-launch commercial activities, reduced personnel and reorganized corporate
management. General and administrative costs for 2007 primarily include costs
associated with executive management, evaluation of various strategic business
alternatives, financial and legal management and other administrative costs.
18
2006
Restructuring Charge
Following
the April 2006 process validation stability failure, which caused us to revise
our expectations concerning the timing of potential FDA approval and pre-launch
commercial launch of Surfaxin for the prevention of RDS in premature infants,
we
reduced our staff levels and reorganized corporate management to lower our
cost
structure and re-align our operations with changed business priorities. In
connection with the workforce reduction, the employment of three senior
executives was terminated. The reduction in workforce totaled 52 employees,
representing approximately 33% of our workforce, and was focused primarily
on
our commercial infrastructure. All affected employees were eligible for certain
severance payments and continuation of benefits. Additionally, a number of
pre-launch commercial programs were discontinued and related costs will no
longer be incurred. Such commercial program expenses totaled approximately
$5.0
million for the fourth quarter of 2005 and first quarter of 2006.
We
incurred a restructuring charge of $4.8 million in the second quarter of 2006
associated with the staff reductions and close-out of certain pre-launch
commercial programs, which was accounted for in accordance with Statement No.
146 “Accounting for Costs Associated with Exit or Disposal Activities” and is
identified separately on our Statement of Operations as a Restructuring Charge.
This charge included $2.5 million of severance and benefits related to staff
reductions and $2.3 million for the termination of certain pre-launch commercial
programs. As of June 30, 2007, the remaining balance of the unpaid restructuring
charge totals $0.6 million, of which $0.5 million was included in accounts
payable and accrued expenses and $0.1 million was classified as a long-term
liability.
Other
Income and (Expense)
Other
income and (expense) for the three and six months ended June 30, 2007 were
($0.1) million and ($0.3) million, respectively. Other income and (expense)
for
the three and six months ended June 30, 2006 were $45,000 and $0.5 million,
respectively.
Interest
and other income for the three and six months ended June 30, 2007 was $0.6
million and $0.9 million, respectively, as compared to $0.4 million and $1.2
million for the three and six months ended June 30, 2006, respectively.
The
increase for the three months ended June 30, 2007 as compared to the same period
last year is primarily due to an increase in our average outstanding cash
balance and a general increase in earned market interest rates. The decrease
for
the six months ended June 30, 2007 as compared to the same period last year
is
primarily due to proceeds of $0.3 million in the first quarter of 2006 from
the
sale of our Commonwealth of Pennsylvania research and development tax credits.
Interest,
amortization and other expenses for the three and six months ended June 30,
2007
was $0.7 million and $1.1 million, respectively, as compared to $0.3 million
and
$0.6 million for the three and six month ending June 30, 2006, respectively.
The
increase is primarily due to: (i) interest expense related to the amortization
of deferred financing costs associated with warrants issued to PharmaBio in
October 2006 in consideration for renegotiating the terms on the existing $8.5
million loan and (ii) a prepayment penalty of $0.2 million incurred in the
second quarter of 2007 associated with the prepayment of our outstanding
indebtedness with GECC. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources.”
LIQUIDITY
AND CAPITAL RESOURCES
Working
Capital
We
have
incurred substantial losses since inception and expect to continue to make
significant investments for continued product research, development,
manufacturing and commercialization activities. Historically, we have funded
our
operations primarily through the issuance of equity securities and the use
of
debt and capital lease facilities.
19
We
are
subject to risks customarily associated with the biotechnology industry, which
requires significant investment for research and development. There can be
no
assurance that our research and development projects will be successful, that
products developed will obtain necessary regulatory approval, or that any
approved product will be commercially viable.
We
plan
to fund our research, development, manufacturing and potential commercialization
activities through:
| · |
the
issuance of equity and debt financings;
|
| · |
payments
from potential strategic collaborators, including license fees and
sponsored research funding;
|
| · |
sales
of Surfaxin, if approved;
|
| · |
sales
of our other product candidates, if
approved;
|
| · |
capital
lease financings; and
|
| · |
interest
earned on invested capital.
|
Our
capital requirements will depend on many factors, including the success of
the
product development and commercialization plan. Even if we succeed in developing
and subsequently commercializing product candidates, we may never achieve
sufficient sales revenue to achieve or maintain profitability. There is no
assurance that we will be able to obtain additional capital when needed with
acceptable terms, if at all.
To
assist
us in identifying and evaluating strategic alternatives intended to enhance
the
future growth potential of our SRT pipeline and maximize shareholder value,
in
2006, we engaged Jefferies under an exclusive arrangement that we terminated
in
June 2007. In November 2006, we raised $10 million in a private placement
transaction and, in April 2007, we raised $30.2 million ($28.1 million net)
in a
registered direct offering. We continue to evaluate a variety of strategic
transactions, including, but not limited to, potential business alliances,
commercial and development partnerships, financings and other similar
opportunities, although we cannot assure you that we will enter into any
specific actions or transactions.
We
have a
CEFF that allows us to raise capital, subject to certain conditions, at the
time
and in amounts deemed suitable to us, during a three-year period ending on
May
12, 2009. Use of the CEFF is subject to certain conditions (discussed at
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Committed Equity Financing
Facility”, below), including a limitation on the total number of shares of
common stock that we may issue under the CEFF (not more than approximately
7.1
million shares as of June 30, 2007). We anticipate using the CEFF, when
available, to support working capital needs in 2007.
Cash,
Cash Equivalents and Marketable Securities
As
of
June 30, 2007, we had cash, cash equivalents, restricted cash and marketable
securities of $40.8 million, as compared to $27.0 million as of December 31,
2006. The increase is primarily due to: (i) a registered direct offering in
April to institutional investors resulting in gross proceeds of $30.2 million
($28.1 million net) from the issuance of 14,050,000 shares of common stock
at
$2.15 per share and (ii) proceeds of $2.0 million from a financing pursuant
to
the CEFF; offset by $16.6 million used in operating activities, purchases of
capital expenditures and principal payments on capital lease
arrangements.
Committed
Equity Financing Facility
In
April
2006, we entered into a new CEFF with Kingsbridge, in which Kingsbridge
committed to purchase, subject to certain conditions, the lesser of up to $50
million or up to 11,677,047 shares of our common stock. Our previous Committed
Equity Financing Facility, which was with Kingsbridge, entered in July 2004
(2004 CEFF) and under which up to $47.6 million remained available,
automatically terminated on May 12, 2006, the date on which the SEC declared
effective the registration statement filed in connection with the new CEFF.
20
The
CEFF
allows us to raise capital, subject to certain conditions that we must satisfy,
at the time and in amounts deemed suitable to us, during a three-year period
that began on May 12, 2006. We are not obligated to utilize the entire $50
million available under this CEFF.
The
purchase price of shares sold to Kingsbridge under the CEFF is at a discount
ranging from 6 to 10 percent of the volume weighted average of the price of
our
common stock (VWAP) for each of the eight trading days following our initiation
of a “draw down” under the CEFF. The discount on each of these eight trading
days is determined as follows:
|
VWAP*
|
%
of VWAP (Applicable Discount)
|
||||||
|
Greater
than $10.50 per share
|
94
|
%
|
(6
|
)%
|
|||
|
Less
than or equal to $10.50 but greater than $7.00 per share
|
92
|
%
|
(8
|
)%
|
|||
|
Less
than or equal to $7.00 but greater than or equal to $2.00 per
share
|
90
|
%
|
(10
|
)%
|
|||
*
As such
term is set forth in the Common Stock Purchase Agreement.
If
on any
trading day during the eight trading day pricing period for a draw down, the
VWAP is less than the greater of (i) $2.00 or (ii) 85 percent of the closing
price of our common stock for the trading day immediately preceding the
beginning of the draw down period, no shares will be issued with respect to
that
trading day and the total amount of the draw down will be reduced by one-eighth
of the draw down amount we had initially specified.
Our
ability to require Kingsbridge to purchase our common stock is subject to
various limitations. Each draw down is limited to the lesser of 2.5 percent
of
the closing price market value of our outstanding shares of our common stock
at
the time of the draw down or $10 million. Unless Kingsbridge agrees otherwise,
a
minimum of three trading days must elapse between the expiration of any draw
down pricing period and the beginning of the next draw down pricing period.
In
addition, Kingsbridge may terminate the CEFF under certain circumstances,
including if a material adverse effect relating to our business continues for
10
trading days after notice of the material adverse effect.
In
2006,
in connection with the CEFF, we issued a Class C Investor Warrant to Kingsbridge
to purchase up to 490,000 shares of our common stock at an exercise price of
$5.6186 per share, which is fully exercisable beginning October 17, 2006 and
for
a period of five years thereafter. The warrant is exercisable for cash, except
in limited circumstances, with expected total proceeds to us, if exercised,
of
approximately $2.8 million.
In
May
2006, we completed a financing pursuant to the CEFF resulting in proceeds of
$2.2 million from the issuance of 1,078,519 shares of our common stock at an
average price per share, after the applicable discount, of $2.03.
In
October 2006, we completed a financing pursuant to the CEFF resulting in
proceeds of $2.3 million from the issuance of 1,204,867 shares of our common
stock at an average price per share, after the applicable discount, of
$1.91.
In
November 2006, we completed a financing pursuant to the CEFF resulting in
proceeds of $3 million from the issuance of 1,371,516 shares of our common
stock
at an average price per share, after the applicable discount, of approximately
$2.19.
In
February 2007, we completed a financing pursuant to the CEFF resulting in
proceeds of $2 million from the issuance of 942,949 shares of our common stock
at an average price per share, after the applicable discount, of
$2.12.
As
of
June 30, 2007, there were approximately 7.1 million shares available for
issuance under the CEFF (up to a maximum of $40.5 million in gross proceeds)
for
future financings.
In
2004,
in connection with the 2004 CEFF, we issued a Class B Investor warrant to
Kingsbridge to purchase up to 375,000 shares of our common stock at an exercise
price equal to $12.0744 per share. The warrant, which expires in January 2010,
is exercisable in whole or in part for cash, except in limited circumstances,
with expected total proceeds, if exercised, of approximately $4.5 million.
As of
December 31, 2006, the Class B Investor Warrant had not been exercised.
21
Potential
Financings under the October 2005 Universal Shelf Registration
Statement
In
October 2005, we filed a universal shelf registration statement on Form S-3
with
the SEC for the proposed offering, from time to time, of up to $100 million
of
our debt or equity securities. In December 2005, we completed a registered
direct offering of 3,030,304 shares of our common stock to select institutional
investors resulting in gross proceeds to us of $20 million. In April 2007,
we
completed a registered direct offering of 14,050,000 shares of our common stock
to select institutional investors resulting in gross proceeds of $30.2 million.
The
universal shelf registration statement may permit us, from time to time, to
offer and sell up to an additional approximately $49.8 million of equity or
debt
securities. There can be no assurance, however, that we will be able to complete
any such offerings of securities. Factors influencing the availability of
additional financing include the progress of our research and development
activities, investor perception of our prospects and the general condition
of
the financial markets, among others.
Debt
Loan
with PharmaBio
PharmaBio,
the strategic investment group of Quintiles, extended to us a secured, revolving
credit facility of $8.5 to $10 million to fund pre-marketing activities
associated with the launch of Surfaxin in the United States.
Previously,
interest
was payable quarterly in arrears at an annual rate equal to the greater of
8% or
the prime rate plus 2%. In 2004, we renegotiated the loan and the maturity
date
was extended from December 10, 2004 to December 31, 2006. The interest rate
remained unchanged. In October 2006, we restructured the existing $8.5 million
loan with PharmaBio and, as a result, the maturity date of the loan has been
further extended from December 31, 2006 to April 30, 2010.
Since
October 1, 2006, interest on the loan has accrued at the prime rate, compounded
annually. All unpaid interest, including interest payable with respect to the
quarter ending September 30, 2006, will now be payable on April 30, 2010, the
maturity date of the loan. We may repay the loan, in whole or in part, at any
time without prepayment penalty or premium.
In
connection with the restructuring, in October 2006, we and PharmaBio amended
and
restated the existing loan documents. In addition, our obligations to PharmaBio
under the loan documents are now secured by an interest in substantially all
of
our assets, subject to limited exceptions set forth in the Security Agreement
(the PharmaBio Collateral).
Also
in
October 2006, in consideration of PharmaBio’s agreement to restructure the loan,
we entered into a Warrant Agreement with PharmaBio, pursuant to which PharmaBio
has the right to purchase 1.5 million shares of our common stock at an exercise
price equal to $3.5813 per share. The warrants have a seven-year term and are
exercisable, in whole or in part, for cash, cancellation of a portion of our
indebtedness under the Loan Agreement, or a combination of the foregoing, in
an
amount equal to the aggregate purchase price for the shares being purchased
upon
any exercise. Under the Warrant Agreement, we filed a registration statement
with the SEC with respect to the resale of the shares issuable upon exercise
of
the warrants.
As
of
June 30, 2007, the outstanding balance under the loan was $9.3 million ($8.5
million of pre-restructured principal and $0.8 million of accrued interest)
and
was classified as a long-term loan payable on the Consolidated Balance
Sheets.
Capital
Lease Financing Arrangements with Merrill Lynch Capital
On
May
21, 2007, we and Merrill Lynch Capital, a division of Merrill Lynch Business
Financial Services Inc. (Merrill Lynch), entered into a Credit and Security
Agreement (Loan Agreement), pursuant to which Merrill Lynch is providing
us
$12.5 million credit facility (Facility) to fund our capital programs. Under
the
Facility, $9 million was immediately available with up to an additional $3.5
million becoming available, at a rate of $1 million for each $10 million
raised
by us through business development partnerships, stock offerings and other
similar financings. Approximately $4 million of the Facility has been drawn
to
fund the prepayment (GECC Pay Down) of all our outstanding indebtedness to
General Electric Capital Corporation (GECC) under the Master Security Agreement
with GECC dated December 20, 2002, as amended (GECC Agreement). The right
to
draw funds under the Facility will expire on May 30, 2008, subject to a best
efforts undertaking by Merrill Lynch to extend the draw down period beyond
the
expiration date for an additional six months. The minimum advance under the
Facility is $100,000. Interest on each advance will accrue at a fixed rate
per
annum equal to LIBOR plus 6.25%, determined on the funding date of such advance.
Principal and interest on all advances will be payable in equal installments
on
the first business day of each month. We may prepay advances, in whole or
in
part, at any time, subject to a prepayment penalty, which, depending on the
period of time elapsed from the closing of the Facility, will range from
4% to
1%.
22
We
may
use the Facility to finance (a) new property and equipment and (b) up to
approximately $1.7 million “Other Equipment” and related costs, which may
include leasehold improvements, intangible property such as software and
software licenses, specialty equipment, a pre-payment penalty which was paid
to
GECC and “soft costs” related to financed property and equipment (including,
without limitation, taxes, shipping, installation and other similar costs).
Advances to finance the acquisition of new property and equipment will be
amortized over a period of 36 months. The advance related to the GECC Pay
Down
will be amortized over a period of 27 months and Other Equipment and related
costs will be amortized over a period of 24 months.
Our
obligations to Merrill Lynch are secured by a security interest in (a) the
financed property and equipment, including the property and equipment securing
GECC at the time of the GECC Pay Down, and (b) all of our intellectual property,
subject to limited exceptions set forth in the Loan Agreement (Supplemental
Collateral). The Supplemental Collateral will be released on the earlier to
occur of (i) receipt by us of FDA approval of our NDA for Surfaxin for
the
prevention of respiratory distress syndrome in premature infants, or (ii) the
date on which we shall have maintained over a continuous twelve-month period
ending on or after March 31, 2008, measured at the end of each calendar quarter,
a minimum cash balance equal to our projected cash requirements for the
following twelve-month period. In addition, Merrill Lynch agreed to subordinate
its security interest in the Supplemental Collateral to the security interest
in
the same collateral that we previously granted to PharmaBio.
Previously,
our capital lease financing arrangements had been primarily with the Life
Science and Technology Finance Division of GECC pursuant to the Master Security
Agreement. Under the Master Security Agreement, we purchased capital equipment,
including manufacturing, information technology systems, laboratory, office
and
other related capital assets and subsequently finance those purchases through
capital leases. The loans were secured by the related assets. Laboratory and
manufacturing equipment were financed over 48 months and all other equipment
were financed over 36 months. Interest rates varied in accordance with changes
in the three and four year treasury rates.
As
of
June 30, 2007, $4.2 million was outstanding under the Facility ($1.7 million
classified as current liabilities and $2.5 million as long-term liabilities)
and
$4.8 million remained available for use, subject to the conditions of the
Facility.
Lease
Agreements
We
maintain facility leases for our operations in Pennsylvania, New Jersey and
California.
We
maintain our headquarters in Warrington, Pennsylvania. The facility is 39,594
square feet and serves as the main operating facility for clinical development,
regulatory, sales and marketing, and administration. In April 2007, the lease,
which originally expired in February 2010 with total aggregate payments of
$4.6
million, was extended an additional three years through February 2013 with
additional payments of $3.0 million over the extension period.
We
lease
a 21,000 square foot pharmaceutical manufacturing and development facility
in
Totowa, NJ that is specifically designed for the production of sterile
pharmaceuticals in compliance with cGMP requirements. The lease expires in
December 2014 with total aggregate payments of $1.4 million ($150,000 per year).
The lease contains an early termination option, first beginning in December
2009. The early termination option can only be exercised by the landlord upon
a
minimum of two years prior notice and payment of significant early termination
amounts to us, subject to certain conditions.
23
In
August
2006, we reduced our leased office and analytical laboratory space in
Doylestown, Pennsylvania from approximately 11,000 square feet to approximately
5,600 square feet and extended the lease that expires in August 2007 and is
thereafter subject to extensions on a monthly basis.
We
lease
office and laboratory space in Mountain View, California. The facility is 16,800
square feet and houses our aerosol and formulation development operations.
The
lease expires in June 2008 with total aggregate payments of $804,000.
If
we are
successful in commercializing our SRT portfolio, we expect that our needs for
additional leased space will increase.
Future
Capital Requirements
Unless
and until we can generate significant cash from our operations, we expect to
continue to require substantial additional funding to conduct our business,
including our manufacturing, research and product development activities and
to
repay our indebtedness. Our operations will not become profitable before we
exhaust our current resources; therefore, we will need to raise substantial
additional funds through additional debt or equity financings or through
collaborative ventures with potential corporate partners. We may in some cases
elect to develop products on our own instead of entering into collaboration
arrangements and this would increase our cash requirements. Other than our
CEFF
with Kingsbridge and our capital equipment financing facility with Merrill
Lynch, the use of which are subject to certain conditions, we have no
contractual arrangements under which we may obtain additional
financing.
To
assist
us in identifying and evaluating strategic alternatives intended to enhance
the
future growth potential of our SRT pipeline and maximize shareholder value,
in
2006, we engaged Jefferies under an exclusive arrangement that we terminated
in
June 2007. In November 2006, we raised $10 million in a private placement
transaction and, in April 2007, we raised $30.2 million ($28.1 million net)
in a
registered direct offering. We continue to evaluate a variety of strategic
transactions, including, but not limited to, potential business alliances,
commercial and development partnerships, financings and other similar
opportunities, although we cannot assure you that we will enter into any
specific actions or transactions.
If
a
transaction involving the issuance of additional equity and debt securities
is
concluded, such a transaction may result in additional dilution to our
shareholders. We cannot be certain that additional funding will be available
when needed or on terms acceptable to us, if at all. If we fail to receive
additional funding or enter into business alliances or other similar
opportunities, we may have to reduce significantly the scope of or discontinue
our planned research, development and manufacturing activities, which could
significantly harm our financial condition and operating results.
ITEM
3.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our
exposure to market risk is confined to our cash, cash equivalents and available
for sale securities. We place our investments with high quality issuers and,
by
policy, limit the amount of credit exposure to any one issuer. We currently
do
not hedge interest rate or currency exchange exposure. We classify highly liquid
investments purchased with a maturity of three months or less as “cash
equivalents” and commercial paper and fixed income mutual funds as “available
for sale securities.” Fixed income securities may have their fair market value
adversely affected due to a rise in interest rates and we may suffer losses
in
principal if forced to sell securities that have declined in market value due
to
a change in interest rates.
24
ITEM
4. CONTROLS
AND PROCEDURES
(a)
Evaluation of disclosure controls and procedures
Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls or our internal control over
financial reporting will prevent all error and all fraud. A control system,
no
matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control system’s objectives will be met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls.
The
design of any system of controls is based in part on certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of changes in
conditions or deterioration in the degree of compliance with policies or
procedures. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives and our management necessarily was required to apply its judgment
in
evaluating the cost-benefit relationship of possible controls and procedures.
Our
Chief
Executive Officer and our Chief Financial Officer have evaluated the
effectiveness of the design and operation of
our
disclosure controls and procedures (as defined in Rule 13a-15(e)
and
Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by
this
Quarterly
Report
on Form
10-Q.
Based
on this
evaluation,
our
Chief Executive Officer and our Chief Financial Officer
concluded that as
of the
end of the period covered by this report our
disclosure controls and procedures were
effective in their
design to ensure that
information
required
to be disclosed by
us
in
the
reports that
we
file
or
submit
under
the
Exchange Act
is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms.
(b) Changes
in internal controls
There
were no changes in internal controls over financial reporting or other factors
that could materially affect those controls subsequent to the date of our
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART
II - OTHER INFORMATION
ITEM
1. LEGAL
PROCEEDINGS
On
March
15, 2007, the United States District Court for the Eastern District of
Pennsylvania granted defendant’s motion to dismiss the Second Consolidated
Amended Complaint filed by the Mizla Group, individually and on behalf of a
class of investors who purchased our publicly traded securities between March
15, 2004 and June 6, 2006, alleging securities laws-related violations in
connection with various of our public statements. The amended complaint had
been
filed on November 30, 2006 against us, our Chief Executive Officer, Robert
J.
Capetola, and our former Chief Operating Officer, Christopher J. Schaber, under
the caption “In re: Discovery Laboratories Securities Litigation” and sought an
order that the action proceed as a class action and an award of compensatory
damages in favor of the plaintiffs and the other class members in an unspecified
amount, together with interest and reimbursement of costs and expenses of the
litigation and other equitable or injunctive relief. On April 10, 2007,
plaintiffs filed a Notice of Appeal with the United States District Court for
the Eastern District of Pennsylvania. Plaintiffs filed an opening brief on
July
2, 2007 and defendants filed their opening brief on August 6, 2007. Plaintiffs
must file their reply brief on August 20, 2007.
On
May 1,
2007, the United States District Court for the Eastern District of Pennsylvania
granted defendant’s motion to dismiss the consolidated shareholder derivative
complaint that was filed on December 29, 2006 under the caption “In re:
Discovery Laboratories Derivative Litigation.” The complaint named as defendants
our Chief Executive Officer, Robert J. Capetola, four of our outside directors
-
Antonio Esteve, Max E. Link, Marvin E. Rosenthale, W. Thomas Amick, and
Christopher J. Schaber, our former Chief Operating Officer, and sought an award
of damages, disgorgement of profits, injunctive and other equitable relief
and
award of attorneys’ fees and costs. Although they were granted leave to file a
second amended complaint by May 15, 2007, plaintiffs did not re-file. As the
period during which an appeal may be filed has expired, this matter is
concluded.
25
We
intend
to vigorously defend the appeal of the securities class action. The potential
impact of this or any such actions, all of which generally seek unquantified
damages, attorneys’ fees and expenses is uncertain. Additional actions based
upon similar allegations, or otherwise, may be filed in the future. There can
be
no assurance that an adverse result in any such proceedings would not have
a
potentially material adverse effect on our business, results of operations
and
financial condition.
We
have
from time to time been involved in disputes arising in the ordinary course
of
business, including in connection with the termination in 2006 of certain
pre-launch commercial programs following our process validation stability
failure. Such claims, with or without merit, if not resolved, could be
time-consuming and result in costly litigation. While it is impossible to
predict with certainty the eventual outcome of such claims, we believe the
pending matters are unlikely to have a material adverse effect on our financial
condition or results of operations. However, there can be no assurance that
we
will be successful in any proceeding to which we are or may be a party.
ITEM
1A. RISK
FACTORS
In
addition to the risks, uncertainties and other factors set forth herein, see
the
“Risk Factors” section contained in our most recent Annual Report on Form 10-K.
ITEM
2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During
the three and six months ended June 30, 2007, we did not issue any unregistered
shares of common stock pursuant to the exercise of outstanding warrants and
options. There were no stock repurchases during the three and six months ended
June 30, 2007.
ITEM
3. DEFAULTS
UPON SENIOR SECURITIES
None.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
At
our
annual meeting of the stockholders held on June 21, 2007 the following matters
were voted on by the stockholders: (i) the election of six directors; (ii)
the
approval of Ernst & Young LLP as our independent registered public
accounting firm for the fiscal year ending December 31, 2007; and (iii)
consideration and approval of Discovery Labs 2007 Long-Term Incentive Plan,
with
8.5 million shares of our common stock, par value $.001 per share, available
for
issuance under such plan. The results of such shareholder votes are as
follows:
(i) Election
of Directors
|
|
For
|
Withheld
|
|||||
|
W.
Thomas Amick
|
67,587,117
|
8,569,843
|
|||||
|
Robert
J. Capetola, Ph.D.
|
70,813,504
|
5,343,456
|
|||||
|
Antonio
Esteve, Ph.D.
|
66,267,187
|
9,889,773
|
|||||
|
Max
Link, Ph.D.
|
67,252,163
|
8,904,797
|
|||||
|
Herbert
H. McDade, Jr.
|
71,314,702
|
4,842,258
|
|||||
|
Marvin
E. Rosenthale, Ph.D.
|
67,506,812
|
8,650,148
|
|||||
26
(ii) Approval
of Ernst & Young LLP as our Independent Registered Public Accounting
Firm
|
For
|
Against
|
Abstain
|
|
75,813,959
|
268,314
|
74,687
|
(iii) Approval
of Discovery Labs 2007 Long-Term Incentive Plan
|
For
|
Against
|
Abstain
|
Non-Vote
|
|
24,804,201
|
11,800,932
|
136,377
|
39,415,450
|
ITEM
5. OTHER
INFORMATION
None.
ITEM
6. EXHIBITS
Exhibits
are listed on the Index to Exhibits at the end of this Quarterly Report. The
exhibits required by Item 601 of Regulation S-K, listed on such Index in
response to this Item, are incorporated herein by reference.
27
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
Discovery
Laboratories, Inc.
(Registrant)
|
||
| |
|
|
| Date: August 9, 2007 | By: | /s/ Robert J. Capetola |
|
Robert
J. Capetola, Ph.D.
President
and Chief Executive Officer
|
||
| Date: August 9, 2007 | By: | /s/ John G. Cooper |
|
John
G. Cooper
Executive
Vice President and Chief Financial Officer (Principal Financial
Officer)
|
||
28
INDEX
TO EXHIBITS
The
following exhibits are included with this Quarterly Report on Form 10-Q.
|
Exhibit
No.
|
Description
|
Method
of Filing
|
||
|
3.1
|
Restated
Certificate of Incorporation of Discovery, dated September 18,
2002.
|
Incorporated
by reference to Exhibit 3.1 to Discovery’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2002, as filed with the SEC on
March
31, 2003.
|
||
|
3.2
|
Amended
and Restated By-Laws of Discovery.
|
Incorporated
by reference to Exhibit 3.2 to Discovery’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2003, as filed with the SEC on
March
15, 2004.
|
||
|
3.3
|
Certificate
of Designations, Preferences and Rights of Series A Junior Participating
Cumulative Preferred Stock of Discovery, dated February 6,
2004.
|
Incorporated
by reference to Exhibit 2.2 to Discovery’s Form 8-A, as filed with the SEC
on February 6, 2004.
|
||
|
3.4
|
Certificate
of Amendment to the Certificate of Incorporation of Discovery, dated
as of
May 28, 2004.
|
Incorporated
by reference to Exhibit 3.1 to Discovery’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004, as filed with the SEC on August
9,
2004.
|
||
|
3.5
|
Certificate
of Amendment to the Restated Certificate of Incorporation of Discovery,
dated as of July 8, 2005.
|
Incorporated
by reference to Exhibit 3.1 to Discovery’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004, as filed with the SEC on August
8,
2005.
|
||
|
4.1
|
Shareholder
Rights Agreement, dated as of February 6, 2004, by and between Discovery
and Continental Stock Transfer & Trust Company.
|
Incorporated
by reference to Exhibit 10.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on February 6, 2004.
|
||
|
4.2
|
Form
of Unit Purchase Option issued to Paramount Capital, Inc.
|
Incorporated
by reference to Exhibit 4.4 to Discovery’s Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1999, as filed with the SEC
on
March 30, 2000.
|
||
|
4.3
|
Form
of Class A Investor Warrant.
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on June 20, 2003.
|
||
|
4.4
|
Class
B Investor Warrant dated July 7, 2004, issued to Kingsbridge Capital
Limited.
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K as
filed with the SEC on July 9, 2004.
|
||
|
4.5
|
Warrant
Agreement, dated as of November 3, 2004, by and between Discovery
and
QFinance, Inc.
|
Incorporated
by reference to Exhibit 4.1 of Discovery’s Quarterly Report on Form 10-Q,
as filed with the SEC on November 9,
2004.
|
29
|
|
||||
|
4.6
|
Class
C Investor Warrant, dated April 17, 2006, issued to Kingsbridge Capital
Limited
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on April 21, 2006.
|
||
|
4.7
|
Registration
Rights Agreement, dated as of July 7, 2004, by and between Kingsbridge
Capital Limited and Discovery.
|
Incorporated
by reference to Exhibit 10.2 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on July 9, 2004.
|
||
|
4.8
|
Registration
Rights Agreement, dated as of April 17, 2006, by and between Kingsbridge
Capital Limited and Discovery.
|
Incorporated
by reference to Exhibit 10.2 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on April 21, 2006.
|
||
|
4.9
|
Second
Amended and Restated Promissory Note, dated as of October 25, 2006,
issued
to PharmaBio Development Inc. (“PharmaBio”)
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on October 26, 2006.
|
||
|
4.10
|
Warrant
Agreement, dated as of October 25, 2006, by and between Discovery
and
PharmaBio
|
Incorporated
by reference to Exhibit 4.2 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on October 26, 2006.
|
||
|
4.11
|
Warrant
Agreement, dated November 22, 2006
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on November 22, 2006.
|
||
|
10.1
|
Credit
and Security Agreement, dated as of May 21, 2007, by and between
Discovery
Laboratories, Inc. and Merrill Lynch Capital, a division of Merrill
Lynch
Business Financial Services, Inc.
|
Incorporated
by reference to Exhibit 10.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on May 24, 2007.
|
||
|
10.2
|
Discovery
Laboratories, Inc. 2007 Long Term Incentive Plan
|
Incorporated
by reference to Exhibit 1.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on June 28, 2007.
|
||
|
10.3
|
Form
of Discovery Laboratories, Inc. 2007 Long-Term Incentive Plan Stock
Option
Agreement
|
Filed
herewith
|
||
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange
Act.
|
Filed
herewith.
|
||
|
31.2
|
Certification
of Chief Financial Officer and Principal Accounting Officer pursuant
to
Rule 13a-14(a) of the Exchange Act.
|
Filed
herewith.
|
||
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to
18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
Filed
herewith.
|
30
Exhibit
10.3
[bracketed
language to be included based on a determination by the Committee at the time
of
the grant.]
DISCOVERY
LABORATORIES, INC.
2007
LONG-TERM INCENTIVE PLAN
STOCK
OPTION AGREEMENT
RECITALS
A. The
Board
has adopted the Discovery Laboratories, Inc. 2007 Long-Term Incentive Plan
(the
“Plan”) for the purpose of encouraging selected Employees, Directors and
Consultants of the Company and its Subsidiaries to acquire a proprietary
interest in the growth and performance of the Company, to generate an increased
incentive to contribute to the Company’s future success and prosperity, thus
enhancing the value of the Company for the benefit of its shareholders, and
to
enhance the ability of the Company and its Subsidiaries to attract and retain
exceptionally qualified individuals upon whom, in large measure, the sustained
progress, growth and profitability of the Company depend.
The
administrator of the Plan is a committee of the Board of Directors or its
delegate (the “Committee”), as contemplated by Section 3 of the
Plan.
B. Participant
is to render valuable Services to the Company (or Subsidiary), and this Award
Agreement is executed pursuant to, and is intended to carry out the purposes
of,
the Plan in connection with the Company's grant of an option to
Participant.
C. All
capitalized terms in this Stock Option Agreement (“Award Agreement”) shall have
the meaning assigned to them in the attached Appendix or, if not otherwise
defined in the Appendix, in the Plan.
NOW,
THEREFORE,
it is
hereby agreed as follows:
1. Award
of Option.
The
Company hereby grants to Participant, as of the Award Date, an option to
purchase up to the number of Option Shares specified in the Notice of Award.
The
Option Shares shall be purchasable from time to time as specified in Paragraph
4
during the option term specified in Paragraph 2 at the Exercise Price set forth
on the Notice of Award.
2. Option
Term.
This
option shall have the term set forth on the Notice of Award, up to a maximum
term of ten (10) years measured from the Award Date and shall expire at the
close of business on the Expiration Date set forth on the Notice of Award,
unless sooner terminated in accordance with Paragraph 5 or 6.
3. Limited
Transferability.
The
option granted under this Award Agreement shall not be assignable, alienable,
saleable, or transferable by Participant other than by will or by the laws
of
descent and distribution; provided, however, that, if a procedure shall be
adopted by the Committee at any time, Participant may designate a beneficiary
or
beneficiaries to exercise the rights of Participant with respect to this option
upon Participant’s death. The option granted under this Award Agreement shall be
exercisable during Participant’s lifetime only by Participant or, if permissible
under applicable law, by Participant’s guardian or legal representative. This
option may not be pledged, alienated, attached, or otherwise encumbered, and
any
purported pledge, alienation, attachment, or encumbrance thereof shall be void
and unenforceable against the Company or any affiliate of the Company.
Notwithstanding the foregoing, if this option is designated a Non-Qualified
Stock Option in the Notice of Award, then this option may, in connection with
Participant's estate plan, be assigned, in whole or in part, during
Participant's lifetime to one or more members of Participant's immediate family
or to a trust established for the exclusive benefit of one or more such family
members. The assigned portion shall be exercisable only by the person or persons
who acquire a proprietary interest in the option pursuant to such assignment.
The terms applicable to the assigned portion shall be the same as those in
effect for this option immediately prior to such assignment and shall be set
forth in such documents issued to the assignee as the Committee may deem
appropriate.
4. Dates
of Exercise.
This
option shall vest and become exercisable for the Option Shares in one or more
installments as specified in the Notice of Award. As the option becomes
exercisable for such installments, those installments shall accumulate, and
the
option shall remain exercisable for the accumulated installments until the
Expiration Date or sooner termination of the option term under Paragraph 5
or
6.
5. Termination
of Service.
The
option term specified in Paragraph 2 shall terminate (and this option shall
expire and cease to be exercisable) prior to the Expiration Date should any
of
the following provisions become applicable:
(a) If
Participant's Service is terminated for any reason other than death, Disability
or for Cause, then Participant shall have the right to exercise, in whole or
in
part, that portion of this option that was vested and exercisable on the date
of
termination of Service until the earlier
of
(i) three (3) months after termination of Service or (ii) the Expiration
Date; and, to the extent that any portion of this option was not exercisable
on
the date of termination of Service, it will immediately terminate.
(b) If
Participant's Service is terminated on account of death (or if a Participant
dies within ninety days following termination of employment due to Disability),
then Participant's Beneficiary shall have the right to exercise, in whole or
in
part, that portion of this option that was vested and exercisable on the date
of
date until the earlier
of (A)
the first anniversary of the date of Participant’s death or (B) the Expiration
Date; and, to the extent that any portion of this option was not exercisable
on
the date of termination of Service, it will immediately terminate.
(c) If
Participant's Service is terminated on account of Disability, then Participant
or Participant’s Beneficiary shall have the right to exercise, in whole or in
part, that portion of this option that was vested and exercisable on the date
of
Disability until the earlier
of
(i) ninety (90) days after termination of Service or (ii) the Expiration
Date; and, to the extent that any portion of this option was not exercisable
on
the date of termination of Service, it will immediately terminate.
(d) If
Participant's Service is terminated for Cause or if Participant shall breach
any
post-Service duties to the Company or any post-Service covenants or agreements,
including any confidentiality or non-competition and non-solicitation agreement,
any unexercised portion of this option shall terminate immediately. Solely
for
the purposes of this Award Agreement, notwithstanding any notice period or
cure
period provided in any employment or other applicable agreement, if Participant
is terminated for Cause, the date of termination shall be deemed to be the
date
as of which the Company issues a notice of termination to Participant (subject
to any right that the Participant may have to cure). The right to exercise
any
vested and unexercised portion of this option shall be suspended during any
such
notice or cure period. Should the Company revoke any notice of termination
based
on Participant’s satisfactory cure under an employment or other applicable
agreement, the Committee may reinstate the right to exercise this option under
the original terms of this Award Agreement.
[(e)
to
be included in Award Agreements for non-employee directors only]
(e) If
Participant’s Service is as a member of the Board (“Board Service”), in lieu of
clauses (a) through (c) of this Paragraph 6, the following provisions shall
apply:
(i) The
Participant (or, in the event of the Participant's death, the personal
representative of the Participant's estate or the person or persons to whom
this
option is transferred pursuant to the Participant's will or in accordance with
the laws of descent and distribution) may exercise that
portion of this option that was vested and exercisable
until
the earlier of (A) twelve (12) months following the date of such cessation
of Board Service, or (B) the Expiration Date.
(ii) During
the post−Board Service period, this option may not be exercised in the aggregate
for more than the number of vested Shares for which the Option was exercisable
at the time of the Participant's cessation of Board Service.
(iii) Should
the Participant cease to serve as a Board member by reason of death or
Disability, then vesting under this option shall accelerate and this option
shall become exercisable with respect to the total number of Option Shares
subject to this option and may be exercised for any or all of those Option
Shares until the earlier of (A) twelve (12) months following cessation of Board
Service or (B) the Expiration Date.
(iv) This
option shall, immediately upon the Participant's cessation of Board Service
for
any reason other than death or Disability, terminate and cease to be outstanding
to the extent the Option is not otherwise at that time exercisable for vested
Shares.
6. Special
Acceleration of Option.
Except
as otherwise expressly provided in a Participant’s employment or other
applicable agreement, which shall supersede the provisions of this Paragraph
6
solely
to the
extent that the rights and privileges under such agreement, as determined by
the
Committee, in its discretion, are not reasonably likely to significantly
diminish the rights and benefits that would otherwise be provided under this
paragraph 6:
(a) In
the
event of a Corporate Transaction, vesting under this option shall automatically
accelerate so that, immediately prior to the effective date of the Corporate
Transaction, this option shall become exercisable with respect to the total
number of Option Shares at the time subject to this option and may be exercised
for any or all of those Option Shares. [However, vesting under this option
shall
not so accelerate if and to the extent: (i) this option is, in connection
with the Corporate Transaction, either to be assumed by the successor
corporation (or parent thereof) or to be replaced with a comparable option
to
purchase shares of the capital stock of the successor corporation (or parent
thereof), or (ii) this option is to be replaced with a cash incentive program
of
the successor corporation which preserves the spread existing on any unvested
Option Shares at the time of the Corporate Transaction (the excess of the Fair
Market Value of those Option Shares over the aggregate Exercise Price payable
for such Option Shares) and provides for subsequent pay-out in accordance with
the same option vesting schedule set forth in the Notice of Award. The
determination of comparability under clause (i) above shall be made by the
Committee, and its determination shall be final, binding and conclusive.
Notwithstanding the foregoing, the Committee shall have the discretion,
exercisable at any time during the term of this Award Agreement, to provide
for
the automatic acceleration of all or a portion of this option upon the
occurrence of a Corporate Transaction, whether or not this option is to be
assumed or replaced in the Corporate Transaction.]
(b) In
the
event Participant's Service is terminated by reason of an Involuntary
Termination within eighteen (18) months following the effective date of any
Corporate Transaction in which this option is assumed or replaced and does
not
otherwise accelerate, vesting under this option shall accelerate automatically
and this option shall remain exercisable until the earlier of (i) the Expiration
Date or (ii) the expiration of a one (1)−year period measured from the effective
date of the Involuntary Termination.
(c) If
this
option is assumed in connection with a Corporate Transaction, then this option
shall be appropriately adjusted, immediately after such Corporate Transaction,
to apply to the number and class of securities which would have been issuable
to
Participant in consummation of such Corporate Transaction had the option been
exercised immediately prior to such Corporate Transaction, and appropriate
adjustments shall also be made to the Exercise Price per Share, provided
the
aggregate Exercise Price shall remain the same.
(d) Upon
the
occurrence of [ a Change in Control or ] [the termination of Participant's
Service by reason of an Involuntary Termination within eighteen (18) months
following the effective date of a Change in Control], vesting under
this
option shall
accelerate automatically and this option shall become exercisable with respect
to the total number of Shares at the time subject to this option and
shall
remain exercisable until the earlier of (i) the Expiration Date or (ii) if
applicable, the expiration of the a (1)−year period measured from the effective
date of the Involuntary Termination.
(e) This
Award Agreement shall not in any way affect the right of the Company to adjust,
reclassify, reorganize or otherwise change its capital or business structure
or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
7. Repurchase
Right.
if
at any
time Participant’s Service is terminated for Cause or if Participant shall
breach any post-termination covenants set forth in any written agreement between
Participant and the Company, the Company may, in its discretion, for a period
of
one year after the termination for Cause or the actual discovery by the Company
of the breach, as the case may be, and upon 10 (ten) days’ notice to
Participant, (i) repurchase all or any portion of any Option Shares acquired
by
Participant upon Participant’s exercise of this option, and/or (ii) require
Participant to repay to the Company the amount of any profits realized by
Participant upon the sale or other disposition during the preceding three years
of any Option Shares acquired by Participant upon Participant’s exercise of this
option. The purchase price for any Shares repurchased by the Company pursuant
to
clause (i) of this Section 7 shall be the lesser of the price paid by
Participant to acquire such Shares and the Fair Market Value thereof on the
date
of such purchase by the Company.
8. Adjustment
in Option Shares.
Should
any change be made to the Common Stock by reason of any stock split, stock
dividend, recapitalization, combination of shares, exchange of shares or other
change affecting the outstanding Common Stock as a class without the Company's
receipt of consideration, appropriate adjustments shall be made to (i) the
total
number and/or class of securities subject to this option and (ii) the Exercise
Price in order to reflect such change and thereby preclude a dilution or
enlargement of benefits hereunder.
9. Stockholder
Rights.
The
holder of this option shall not have any stockholder rights with respect to
the
Option Shares until such person shall have exercised the option, paid the
Exercise Price and become a holder of record of the purchased
Shares.
10. Manner
of Exercising Option.
(a) In
order
to exercise this option with respect to all or any part of the Option Shares
for
which this option is at the time exercisable, Participant (or any other person
or persons exercising the option) must take the following actions:
(i) Execute
and deliver to the Company a Notice of Exercise for the Option Shares for which
the option is exercised.
(ii) Pay
the
aggregate Exercise Price for the purchased Shares in one or more of the
following forms:
(A) cash
or
check made payable to the Company;
(B) Shares
held by Participant (or any other person or persons exercising the option)
for
the requisite period necessary to avoid a charge to the Company's earnings
for
financial reporting purposes and valued at Fair Market Value on the Exercise
Date; or
(C) provided
that no restrictions against trading in the Shares are then in effect, as
contemplated by Paragraph 11, through a special sale and remittance procedure
pursuant to which Participant (or any other person or persons exercising the
option) shall concurrently provide irrevocable instructions (I) to a
Company-approved brokerage firm to effect the immediate sale of the purchased
Shares and remit to the Company, out of the sale proceeds available on the
settlement date, sufficient funds to cover the aggregate Exercise Price payable
for the purchased Shares plus all applicable income and employment taxes
required to be withheld by the Company by reason of such exercise and (II)
to
the Company to deliver the certificates for the purchased Shares directly to
such brokerage firm in order to complete the sale.
Except
to
the extent the sale and remittance procedure is utilized in connection with
the
option exercise, payment of the Exercise Price must accompany the Notice of
Exercise delivered to the Company in connection with the option
exercise.
(iii) Furnish
to the Company appropriate documentation that the person or persons exercising
the option (if other than Participant) have the right to exercise this
option.
(iv) Make
appropriate arrangements with the Company (or Parent or Subsidiary employing
or
retaining Participant) for the satisfaction of all income and employment tax
withholding requirements applicable to the option exercise.
(b) As
soon
as practical after the Exercise Date, the Company shall issue to or on behalf
of
Participant (or any other person or persons exercising this option) a
certificate for the purchased Option Shares, with the appropriate legends
affixed thereto.
(c) In
no
event may this option be exercised for any fractional shares.
11. Compliance
with Laws and Regulations.
(a) The
exercise of this option and the issuance of the Option Shares upon such exercise
shall be subject to compliance by the Company and Participant with all
applicable requirements of law relating thereto and with all applicable
regulations of any stock exchange (or the Nasdaq National Market, if applicable)
on which the Common Stock may be listed for trading at the time of such exercise
and issuance.
(b) The
inability of the Company to obtain approval from any regulatory body having
authority deemed by the Company to be necessary to the lawful issuance and
sale
of any Common Stock pursuant to this option shall relieve the Company of any
liability with respect to the non-issuance or sale of the Common Stock as to
which such approval shall not have been obtained. The Company, however, shall
use its best efforts to obtain all such approvals.
12. Successors
and Assigns.
Except
to the extent otherwise provided in Paragraphs 3 and 6, the provisions of this
Award Agreement shall inure to the benefit of, and be binding upon, the Company
and its successors and assigns and Participant and Participant's assigns and
Beneficiaries.
13. Notices.
Any
notice required to be given or delivered to the Company under the terms of
this
Award Agreement shall be in writing and addressed to the Company at its
principal corporate offices. Any notice required to be given or delivered to
Participant shall be in writing and addressed to Participant at the address
indicated below Participant's signature line on the Notice of Award. All notices
shall be deemed effective upon personal delivery or upon deposit in the U.S.
mail, postage prepaid and properly addressed to the party to be
notified.
14. Construction.
This
Award Agreement and the option evidenced hereby are made and granted pursuant
to
the Plan and are in all respects limited by and subject to the terms of the
Plan. All decisions of the Committee with respect to any question or issue
arising under the Plan or this Award Agreement shall be conclusive and binding
on all persons having an interest in this option.
15. Governing
Law.
The
interpretation, performance and enforcement of this Award Agreement shall be
governed by the laws of the State of Delaware without resort to that State's
conflict-of-laws rules.
16. Excess
Shares.
If the
Option Shares covered by this Award Agreement exceed, as of the Award Date,
the
number of Shares which may without stockholder approval be issued under the
Plan, then this option shall be void with respect to those excess Shares, unless
stockholder approval of an amendment sufficiently increasing the number of
Shares issuable under the Plan is obtained in accordance with the provisions
of
the Plan.
17. Additional
Terms Applicable to an Incentive Stock Option.
The
terms
of any Incentive Stock Option granted under the Plan shall be designed to comply
in all respects with the provisions of Sections 422 of the Code, or any
successor provision
thereto, and any regulations promulgated thereunder. Notwithstanding anything
in
this Section 17 to the contrary, Options designated as Incentive Stock
Options shall not be eligible for treatment under the Code as Incentive Stock
Options (and will be deemed to be Non-Qualified Stock Options) to the extent
that either (1) the aggregate Fair Market Value of Shares (determined as of
the time of grant) with respect to which such Options are exercisable for the
first time by Participant during any calendar year (under all plans of the
Company and any Subsidiary) exceeds $100,000, taking Options into account in
the
order in which they were granted, or (2) such Options otherwise remain
exercisable but are not exercised within three (3) months of termination of
employment (or such other period of time provided in Section 422 of the
Code).
18. Leave
of Absence.
The
following provisions shall apply upon Participant's commencement of an
authorized leave of absence:
(a) The
exercise schedule in effect under the Notice of Award shall be frozen as of
the
first day of the authorized leave, and this option shall not become exercisable
for any additional installments of the Option Shares during the period
Participant remains on such leave.
(b) Should
Participant resume active Employee status within sixty (60) days after the
start
date of the authorized leave, Participant shall, for purposes of the exercise
schedule set forth in the Notice of Award, receive Service credit for the entire
period of such leave. If Participant does not resume active Employee status
within such sixty (60)-day period, then no Service credit shall be given for
the
period of such leave.
(c) If
this
option is designated as an Incentive Stock Option in the Notice of Award, then
the following additional provision shall apply:
(i) If
the
leave of absence continues for more than ninety (90) days, then this option
shall automatically convert to a Non-Qualified Stock Option at the end of the
three (3)-month period measured from the ninety-first (91st) day of such leave,
unless Participant's reemployment rights are guaranteed by statute or by written
agreement. Following any such conversion of this option, all subsequent
exercises of this option, whether effected before or after Participant's return
to active Employee status, shall result in an immediate taxable event, and
the
Company shall be required to collect from Participant the income and employment
withholding taxes applicable to such exercise.
(ii) In
no
event shall this option become exercisable for any additional Option Shares
or
otherwise remain outstanding if Participant does not resume Employee status
prior to the Expiration Date of the option term.
This
page intentionally left blank.
EXHIBIT I
NOTICE
OF EXERCISE
I
hereby
notify Discovery Laboratories, Inc. (the "Company") that I elect to purchase
_________ shares
of
the Company's Common Stock (the "Purchased Shares") at the option exercise
price
of $_________ per
share
(the "Exercise Price") pursuant to that certain option (the "Option") granted
to
me under the Company's 2007 Stock Incentive Plan on
_________________ ,___ .
Concurrently
with the delivery of this Exercise Notice to the Company, I shall hereby pay
to
the Company the Exercise Price for the Purchased Shares in accordance with
the
provisions of my agreement with the Company (or other documents) evidencing
the
Option and shall deliver whatever additional documents may be required by such
agreement as a condition for exercise. Alternatively, if I am eligible I may
utilize the special broker-dealer sale and remittance procedure specified in
my
agreement to effect payment of the Exercise Price.
| ____________________ | |||
|
Date
|
|||
|
|
Participant
|
||
|
|
Address:
|
||
|
Print
name in exact manner
|
|||
|
it
is to appear on the
|
|||
|
stock
certificate:
|
|||
|
Address
to which certificate
|
|||
|
is
to be sent, if different
|
|||
|
from
address above:
|
|||
|
Social
Security Number:
|
|||
|
Employee
Number:
|
|||
This
page intentionally left blank.
APPENDIX
The
following definitions shall be in effect under the Award
Agreement:
Award
Agreement
shall
mean this Stock Option Agreement.
Award
Date
shall
mean the date of grant of the option as specified in the Notice of
Award.
Beneficiary
shall
mean, in the event the Committee implements a beneficiary designation procedure,
the person designated by Participant, pursuant to such procedure, to succeed
to
such person's rights under any outstanding awards held by Participant at the
time of death. In the absence of such procedure or designation, the Beneficiary
shall be Participant’s personal representative or the person or persons to whom
the Award is transferred by will or the laws of descent and
distribution.
Board
shall
mean the Company's Board of Directors.
Cause,
with
respect to any Employee or Consultant of the Company or a Subsidiary, shall
have
the meaning set forth in such person’s employment, consulting or other
applicable agreement, or, in the absence of any such agreement or if such term
is not defined in any such agreement, shall mean any one or more of the
following, as determined by the Committee:
|
(i)
|
willful
misconduct or gross negligence in the performance of such person’s duties;
|
|
(ii)
|
willful
and continued failure or refusal to perform satisfactorily any duties
reasonably requested in the course of such person’s employment by, or
service to, the Company (other than a failure resulting from such
person’s
disability); or
|
|
(iii)
|
fraudulent,
dishonest or other improper conduct engaged in by such person that
causes,
or has the potential to cause, harm to the Company or any of its
Subsidiaries, or its or their business or reputation, including,
without
limitation, such person’s violation of any policies of the Company
applicable to the such person, such person’s violation of laws, rules or
regulations applicable to such person, criminal activity, habitual
drunkenness or use of illegal
drugs.
|
Change
in Control
shall
have the meaning, if any, set forth in a Participant’s employment, consulting or
other applicable agreement, or, if such term is not defined in any such
agreement, shall mean the occurrence of any of the following
events:
|
(i)
|
the
acquisition, directly or indirectly by any person or related group
of
persons (other than the Company or a person that directly or indirectly
controls, is controlled by, or is under common control with, the
Company),
of beneficial ownership (within the meaning of Rule 13d-3 of the
Securities Exchange Act of 1934, as amended) of securities possessing
more
than thirty-five percent (35%) of the total combined voting power
of the
Company’s outstanding securities;
|
|
(ii)
|
a
change in the composition of the Board over a period of thirty-six
(36)
consecutive months or less such that a majority of the Board ceases
to
consist of Incumbent Members, which term means members of the Board
on the
first day of such period and any person becoming a member of the
Board
subsequent to such date whose election or nomination for election
was
approved by two-thirds of the members of the Board who then comprised
the
Incumbent Directors; or
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|
(iii)
|
the
Company combines with another company and is the surviving corporation
but, immediately after the combination, the shareholders of the Company
immediately prior to the combination hold, directly or indirectly,
by
reason of their being stockholders of the Company, fifty percent
(50%) or
less of the voting stock of the combined
entity.
|
Code
shall
mean the Internal Revenue Code of 1986, as amended from time to
time.
Committee
shall
mean a committee of the Board, acting in accordance with the provisions of
Section 3 of the Plan, designated by the Board to administer the
Plan.
Common
Stock
shall
mean the Company's common stock.
Consultant
shall
mean any person, including a Director, who is not an Employee and who is engaged
by the Company (or a Subsidiary) to render services to or for the benefit of
the
Company and is compensated for such services.
Corporate
Transaction
shall
mean a liquidation of the Company, a sale of all or substantially all of the
Company’s assets, or a merger, consolidation or similar transaction in which the
Company is not the surviving entity or survives as a wholly-owned or
majority-owned subsidiary of another entity.
Director
shall
mean a member of the Board.
Disability
shall
have the meaning set forth in Participant’s employment agreement or other
similar agreement with the Company; provided,
that,
if such term is not defined in any such agreement or if Participant is not
a
party to any such agreement, then “Disability” shall mean a permanent and total
disability, within the meaning of Section 22(e)(3) of the Code.
Employee
shall
mean any person treated as an employee (including officers and directors) in
the
records of the Company or any Subsidiary and who is subject to the control
and
direction of the Company or any Subsidiary with regard to both the work to
be
performed and the manner and method of performance.
Exercise
Date
shall
mean the date on which the option shall have been exercised in accordance with
Paragraph 10 of this Award Agreement.
Exercise
Date
shall
mean the purchase price
payable
for Option Shares under this option, as specified in the Notice of
Award.
Expiration
Date
shall
mean the date on which the option expires as specified in the Notice of
Award.
Fair
Market Value
per
share of Common Stock on any relevant date shall be determined in accordance
with the following provisions:
|
(i)
|
if
the Shares are listed or admitted for trading on any United States
national securities exchange, or if actual transactions are otherwise
reported on a consolidated transaction reporting system, the last
reported
sale price of a Share on such exchange or reporting system, as reported
in
any newspaper of general circulation, or
|
|
(ii)
|
if
clause (i) is not applicable, the mean of the high bid and low asked
quotations for a Share as reported by the National Quotation Bureau,
Incorporated if at least two securities dealers have inserted both
bid and
asked quotations for the Shares on at least five of the 10 preceding
trading days; or
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|
(iii)
|
if
the information set forth in clauses (i) through (ii) above is unavailable
or inapplicable to the Company (e.g., if the Shares are not then
publicly
traded or quoted), then the “Fair Market Value” of a Share shall be the
fair market value (i.e., the price at which a willing seller would
sell a
Share to a willing buyer when neither is acting under compulsion
and when
both have reasonable knowledge of all relevant facts) of a Share
on such
date as the Committee in its sole and absolute discretion shall determine
in a fair and uniform manner.
|
Incentive
Stock Option
shall
mean an option that is intended to meet the requirements of Section 422 of
the
Code
Involuntary
Termination
shall
mean the termination of the Service of any individual which occurs by reason
of:
|
(i)
|
such
individual’s involuntary dismissal or discharge by the Company for reasons
other than Cause, or
|
|
(ii)
|
such
individual’s voluntary resignation following (A) a change in his or her
position with the Company (or Subsidiary employing such individual)
which
materially reduces such individual’s duties and responsibilities or the
level of management to which such individual reports, (B) a reduction
in
such individual’s level of compensation (including base salary, fringe
benefits and target bonus under any corporate performance-based bonus
or
incentive programs) by more than fifteen percent (15%) or (C) a relocation
of such individual’s place of employment by more than fifty (50) miles,
provided and only if such change, reduction or relocation is effected
by
the Company without such individual’s consent.
|
Non-Employee
Director
shall
mean a Director who is not also an Employee.
Non-Qualified
Stock Option
shall
mean an option granted under this Award Agreement that is not intended to be
an
Incentive Stock Option.
Notice
of Award
shall
mean the Notice of Award of Stock Option accompanying the Award Agreement,
pursuant to which Participant has been informed of the basic terms of the option
evidenced hereby.
Notice
of Exercise
shall
mean the notice of exercise in the form attached hereto as Exhibit
I.
Option
Shares
shall
mean the number of Shares subject to the option as specified in the Notice
of
Award.
Participant
shall
mean the person to whom the option is granted as specified in the Notice of
Award.
Plan
shall
mean the Company's 2007 Long-Term Incentive Plan.
Service
shall
mean Participant's performance of services for the Company (or any Subsidiary)
in the capacity of an Employee, a Non-Employee Director or a
Consultant.
Shares
shall
mean the common shares of the Company and such other securities as may become
the subject of Awards, or become subject to Awards, pursuant to an adjustment
made under Section 4(b) of the Plan.
Subsidiary
shall
mean a subsidiary company as defined in Section 424(f) of the Code (with the
Company being treated as the employer corporation for purposes of this
definition).
Exhibit
31.1
CERTIFICATIONS
I,
Robert
J. Capetola, certify that:
1. I
have
reviewed this Quarterly Report on Form 10-Q of Discovery Laboratories, Inc.;
2. Based
on
my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on
my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The
registrant’s other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange
Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and
have:
(a)
Designed
such disclosure controls and procedures, or caused such disclosure controls
and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during
the
period in which this report is being prepared;
(b) Designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and
the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this
report based on such evaluation; and
(d)
Disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The
registrant’s other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a)
All
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b)
Any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the registrant’s internal control over financial
reporting.
| Date: August 9, 2007 | By: | /s/ Robert J. Capetola |
|
Robert J. Capetola, Ph.D. |
||
| Title: President and Chief Executive Officer | ||
Exhibit
31.2
CERTIFICATIONS
I,
John
G. Cooper, certify that:
1. I
have
reviewed this Quarterly Report on Form 10-Q of Discovery Laboratories, Inc.;
2. Based
on
my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on
my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The
registrant’s other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange
Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and
have:
(a)
Designed
such disclosure controls and procedures, or caused such disclosure controls
and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during
the
period in which this report is being prepared;
(b) Designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and
the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this
report based on such evaluation; and
(d)
Disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The
registrant’s other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a)
All
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b)
Any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the registrant’s internal control over financial
reporting.
| Date: August 9, 2007 | By: | /s/ John G. Cooper |
|
John G. Cooper |
||
| Title: Executive Vice President and Chief Financial Officer | ||
Exhibit
32.1
CERTIFICATIONS
Pursuant
to 18 U.S.C. § 1350, each of the undersigned officers of Discovery Laboratories,
Inc. (the “Company”) hereby certifies that, to his knowledge, the Company’s
Quarterly Report on Form 10-Q for the period ended June 30, 2007 (the “Report”)
fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, and that the information contained in the Report fairly
presents, in all material respects, the financial condition and results of
operations of the Company.
| Date: August 9, 2007 | By: | /s/ Robert J. Capetola |
|
Robert J. Capetola, Ph.D. |
||
| Title: President and Chief Executive Officer | ||
| Date: August 9, 2007 | By: | /s/ John G. Cooper |
|
John G. Cooper. |
||
| Title: Executive Vice President and Chief Financial Officer | ||
A
signed
original of this written statement required by Section 906 of the Sarbanes-Oxley
Act of 2002 has been provided to us and will be retained by us and furnished
to
the SEC or its staff upon request.
This
certification is being furnished pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 and shall not be deemed “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to the liability of
that
section. This certification will not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933 or the Securities Exchange
Act
of 1934.