UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
|
x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended March 31, 2010
or
|
o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
transition period
from to
Commission
file number 000-26422
DISCOVERY
LABORATORIES, INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
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94-3171943
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
Number)
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|
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2600
Kelly Road, Suite 100
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||
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Warrington,
Pennsylvania 18976-3622
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||
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(Address
of principal executive offices)
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(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 x NO
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). YES o NO
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
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Large
accelerated filer
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o |
Accelerated
filer
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x | ||||
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Non-accelerated
filer
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o |
(Do
not check if a smaller reporting company)
|
Smaller
reporting company
|
o |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES o NO
x
As of May
1, 2010, 158,064,779 shares of the registrant’s common stock, par value $0.001
per share, were outstanding.
Table
of Contents
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Page
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PART I - FINANCIAL
INFORMATION
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Item
1.
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Financial Statements |
1
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CONSOLIDATED
BALANCE SHEETS
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||||
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As
of March 31, 2010 (unaudited) and December 31, 2009
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1
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|||
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CONSOLIDATED
STATEMENTS OF OPERATIONS (unaudited)
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||||
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For
the Three Months Ended March 31, 2010 and 2009
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2
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|||
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CONSOLIDATED
STATEMENTS OF CASH FLOWS (unaudited)
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||||
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For
the Three Months Ended March 31, 2010 and 2009
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3
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|||
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Notes
to Consolidated Financial Statements (unaudited)
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4
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|||
| Item 2. |
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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12
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Item
3.
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Quantitative and Qualitative Disclosures about Market Risk |
23
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Item
4.
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Controls and Procedures |
23
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PART
II - OTHER INFORMATION
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Item
1.
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Legal Proceedings |
24
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Item
1A.
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Risk Factors |
24
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Item
2.
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Unregistered Sales of Equity Securities and Use of Proceeds |
25
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Item
6.
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Exhibits |
25
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Signatures
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26
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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. 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, and future financial condition, including the period of time
for which our existing resources will enable us to fund our operations; plans
regarding our efforts to gain U.S. regulatory approval for our lead product,
Surfaxin ® (lucinactant) for the prevention of Respiratory Distress
Syndrome in premature infants; the possibility, timing and outcome of submitting
regulatory filings for our products under development; our research and
development programs for our KL4 surfactant
technology and our capillary aerosolization technology platform, including
planning for and timing of any clinical trials and potential development
milestones; the development of financial, clinical, manufacturing and
distribution plans related to the potential commercialization of our drug
products, if approved; and plans regarding potential strategic alliances and
other collaborative arrangements with pharmaceutical companies and others to
develop, manufacture and market our products.
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 actual
results to differ materially from any future results expressed or implied by the
forward-looking statements. We caution you therefore against relying
on any of these forward-looking statements. They are neither statements of
historical fact nor guarantees or assurances of future
performance. Examples of the risks and uncertainties include, but are
not limited to:
|
·
|
risks
related generally to our efforts to gain regulatory approval, in the
United States and elsewhere, for our drug product candidates, including
our lead products that we are developing to address Respiratory
Distress Syndrome (RDS) in premature infants: Surfaxin®
(lucinactant) for the prevention of RDS, Surfaxin LS™ (our lyophilized
KL4
surfactant) and Aerosurf®
(our initial aerosolized KL4 surfactant);
|
|
·
|
the
risk that we and the U.S. Food and Drug Administration (FDA) or other
regulatory authorities will not be able to agree on matters raised during
the regulatory review process, or that we may be required to conduct
significant additional activities to potentially gain approval of our
product candidates, if ever;
|
|
·
|
the
risk that the FDA or other regulatory authorities may not accept, or may
withhold or delay consideration of, any applications that we may file, or
may not approve our applications or may limit approval of our products to
particular indications or impose unanticipated label
limitations;
|
|
·
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risks
relating to the rigorous regulatory approval processes, including
pre-filing activities, required for approval of any drug or combination
drug-device products that we may develop, whether independently, with
strategic development partners or pursuant to collaboration
arrangements;
|
|
·
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the
risk that the FDA will not be satisfied with the results of our efforts to
optimize and revalidate our fetal rabbit biological activity test (BAT)
and to demonstrate that the BAT has the ability to distinguish change in
Surfaxin drug product over time, which is needed to advance our KL4 surfactant
pipeline;
|
iii
|
·
|
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
relating to our research and development activities, which involve
time-consuming and expensive preclinical studies and other efforts, and
potentially multiple clinical trials, which may be subject to potentially
significant delays or regulatory holds, or fail, and which must be
conducted using sophisticated and extensive analytical methodologies,
including an acceptable biological activity test, if required, as well as
other quality control release and stability tests to satisfy the
requirements of the regulatory
authorities;
|
|
·
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risks
relating to our ability to develop and manufacture drug products and
drug-device combination products based on our capillary aerosolization
technology for clinical studies and, if approved, for commercialization of
our products;
|
|
·
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risks
relating to the transfer of our manufacturing technology to third-party
contract manufacturers and
assemblers;
|
|
·
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the
risk that we, our contract manufacturers or any of our third-party
suppliers may encounter problems or delays in manufacturing or assembling
drug products, drug product substances, capillary aerosolization devices
and related components and other materials on a timely basis or in an
amount sufficient to support our development efforts and, if our products
are approved, commercialization;
|
|
·
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the
risk that we may be unable to identify potential strategic partners or
collaborators with whom we can develop and, if approved, commercialize our
products in a timely manner, if at
all;
|
|
·
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the
risk that we or our strategic partners or collaborators will not be able
to attract or maintain qualified
personnel;
|
|
·
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the
risk that, if approved, market conditions, the competitive landscape or
otherwise may make it difficult to launch and profitably sell our
products;
|
|
·
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the
risk that we may not be able to raise additional capital or enter into
strategic alliances or collaboration agreements (including strategic
alliances for development or commercialization of our drug products and
combination drug-device products);
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|
·
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risks
that the unfavorable credit environment will adversely affect our ability
to fund our activities, that our share price will not reach or remain at
the price level necessary for us to access capital under our Committed
Equity Financing Facilities (CEFFs), that the CEFFs may expire before we
are able to access the full dollar amount potentially available
thereunder, and that additional equity financings could result in
substantial equity dilution;
|
|
·
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the
risk that we will be unable to regain compliance with the Minimum Bid
Price Requirement of The Nasdaq Global Market prior to the expiration of
the grace period currently in effect, which could increase the probability
that our stock will be delisted from Nasdaq and cause our stock price to
decline;
|
|
·
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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;
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|
·
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the
risks that we may be unable to maintain and protect the patents and
licenses related to our products and that other companies may develop
competing therapies and/or
technologies;
|
iv
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·
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the
risk that we may become involved in securities, product liability and
other litigation;
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|
·
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risks
related to reimbursement and health care reform that may adversely affect
us;
|
|
·
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the
risk that the FDA may not approve Surfaxin® or may subject the marketing
of Surfaxin® to onerous requirements that significantly impair marketing
activities;
|
|
·
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the
risk that we may identify unforeseen problems that have not yet been
discovered or the FDA could in the future impose additional requirements
to gain approval of Surfaxin ®; and
|
| · |
other
risks and uncertainties, including those described in our most recent
Annual Report on Form 10-K and other filings with the Securities and
Exchange Commission, on Forms 10-Q and 8-K, and any amendments
thereto.
|
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. After gaining approval of a drug product, pharmaceutical
companies face considerable challenges in marketing and distributing their
products, and may never become profitable.
The
forward-looking statements contained in this report or the documents
incorporated by reference herein speak only of their respective
dates. Factors or events that could cause our actual results to
differ may emerge from time to time and it is not possible for us to predict
them all. Except to the extent required by applicable laws, rules or
regulations, we do not undertake any obligation to publicly 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.
v
PART
I - FINANCIAL INFORMATION
ITEM
1. FINANCIAL
STATEMENTS
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Balance Sheets
(in
thousands, except per share data)
|
March
31,
|
December
31,
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|||||||
|
2010
|
2009
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|||||||
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(Unaudited)
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||||||||
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ASSETS
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||||||||
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Current
Assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 24,172 | $ | 15,741 | ||||
|
Prepaid
expenses and other current assets
|
270 | 233 | ||||||
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Total Current
Assets
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24,442 | 15,974 | ||||||
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Property
and equipment, net
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4,444 | 4,668 | ||||||
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Restricted
cash
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400 | 400 | ||||||
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Other
assets
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223 | 361 | ||||||
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Total Assets
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$ | 29,509 | $ | 21,403 | ||||
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LIABILITIES
& STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Accounts
payable
|
$ | 1,147 | $ | 1,294 | ||||
|
Accrued
expenses
|
3,531 | 3,446 | ||||||
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Loan
payable, including accrued interest
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10,545 | 10,461 | ||||||
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Equipment
loans and capitalized leases, current portion
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472 | 597 | ||||||
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Total Current
Liabilities
|
15,695 | 15,798 | ||||||
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Equipment
loans and capitalized leases, non-current portion
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405 | 428 | ||||||
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Other
liabilities
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673 | 690 | ||||||
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Total
Liabilities
|
16,773 | 16,916 | ||||||
|
Stockholders’
Equity:
|
||||||||
|
Preferred
stock, $0.001 par value; 5,000 shares authorized; no shares issued or
outstanding
|
– | – | ||||||
|
Common
stock, $0.001 par value; 380,000 shares authorized; 154,325 and 126,689
shares issued, 154,012 and 126,376 shares outstanding
|
154 | 127 | ||||||
|
Additional
paid-in capital
|
380,573 | 365,063 | ||||||
|
Accumulated
deficit
|
(364,937 | ) | (357,649 | ) | ||||
|
Treasury
stock (at cost); 313 shares
|
(3,054 | ) | (3,054 | ) | ||||
|
Total Stockholders’
Equity
|
12,736 | 4,487 | ||||||
|
Total
Liabilities & Stockholders’ Equity
|
$ | 29,509 | $ | 21,403 | ||||
1
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Statements of Operations
(Unaudited)
(in
thousands, except per share data)
|
Three
Months Ended
|
||||||||
|
March 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Revenue
|
$ | – | $ | – | ||||
|
Expenses:
|
||||||||
|
Research
and development
|
4,133 | 5,607 | ||||||
|
General
and administrative
|
2,932 | 3,096 | ||||||
|
Total
expenses
|
7,065 | 8,703 | ||||||
|
Operating
loss
|
(7,065 | ) | (8,703 | ) | ||||
|
Other
income / (expense):
|
||||||||
|
Interest
and other income
|
19 | 5 | ||||||
|
Interest
and other expense
|
(242 | ) | (302 | ) | ||||
|
Other
income / (expense), net
|
(223 | ) | (297 | ) | ||||
|
Net
loss
|
$ | (7,288 | ) | $ | (9,000 | ) | ||
|
Net
loss per common share – Basic
and diluted
|
$ | (0.05 | ) | $ | (0.09 | ) | ||
|
Weighted
average number of common shares
outstanding – basic and diluted
|
137,699 | 102,093 | ||||||
2
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
Consolidated
Statements of Cash Flows
(Unaudited)
(in
thousands)
|
Three
Months Ended
|
||||||||
|
March
31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
loss
|
$ | (7,288 | ) | $ | (9,000 | ) | ||
|
Adjustments
to reconcile net loss to net cash
used in operating
activities:
|
||||||||
|
Depreciation
and amortization
|
482 | 516 | ||||||
|
Stock-based
compensation and 401(k) match
|
455 | 976 | ||||||
|
Gain
on sale of equipment
|
(16 | ) | – | |||||
|
Changes
in:
|
||||||||
|
Prepaid
expenses and other current assets
|
(37 | ) | 287 | |||||
|
Accounts
payable
|
(147 | ) | (230 | ) | ||||
|
Accrued
expenses
|
85 | (160 | ) | |||||
|
Other
assets
|
1 | 1 | ||||||
|
Other
liabilities and accrued interest on loan payable
|
67 | 92 | ||||||
|
Net
cash used in operating activities
|
(6,398 | ) | (7,518 | ) | ||||
|
Cash
flows from investing activities:
|
||||||||
|
Purchase
of property and equipment
|
(57 | ) | (53 | ) | ||||
|
Restricted
cash
|
– | 200 | ||||||
|
Proceeds
from sales or maturity of marketable securities
|
– | 2,047 | ||||||
|
Net
cash used in investing activities
|
(57 | ) | (2,194 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Proceeds
from issuance of securities, net of expenses
|
15,082 | 2,531 | ||||||
|
Principal
payments under equipment loan and capital lease
obligations
|
(196 | ) | (826 | ) | ||||
|
Net
cash provided by financing activities
|
14,886 | 1,705 | ||||||
|
Net
increase / (decrease) in cash and cash equivalents
|
8,431 | (3,619 | ) | |||||
|
Cash
and cash equivalents – beginning of period
|
15,741 | 22,744 | ||||||
|
Cash
and cash equivalents – end of period
|
$ | 24,172 | $ | 19,125 | ||||
|
Supplementary
disclosure of cash flows information:
|
||||||||
|
Interest
paid
|
$ | 21 | $ | 84 | ||||
|
Non-cash
transactions:
|
||||||||
|
Unrealized
loss on marketable securities
|
– | (1 | ) | |||||
|
Equipment
acquired through capitalized lease
|
48 | – | ||||||
3
Notes to Consolidated
Financial Statements (unaudited)
Note
1 – The Company and Basis of Presentation
The
Company
Discovery
Laboratories, Inc. (referred to as “we,” “us,” or the “Company”) is a
biotechnology company developing surfactant therapies to treat respiratory
disorders and diseases for which there frequently are few or no approved
therapies. Our novel KL4
proprietary technology produces a synthetic, peptide-containing surfactant
(KL4
surfactant) that is structurally similar to pulmonary surfactant, a substance
produced naturally in the lung and essential for survival and normal respiratory
function. In addition, our proprietary capillary aerosol-generating
technology (capillary aerosolization technology) produces a dense aerosol with a
defined particle size, to potentially deliver our aerosolized KL4 surfactant
to the lung. As many respiratory disorders are associated with
surfactant deficiency or surfactant degradation, we believe that our proprietary
technology platform makes it possible, for the first time, to develop a
significant pipeline of surfactant products targeted to treat a wide range of
previously unaddressed respiratory problems.
We are
developing our lead products, Surfaxin®(lucinactant),
Surfaxin LS™ and Aerosurf®, to
address the most significant respiratory conditions affecting pediatric
populations. In April 2009, we received a Complete Response Letter
from the U.S. Food and Drug Administration (FDA) with respect to our New Drug
Application (NDA) for Surfaxin for the prevention of Respiratory Distress
Syndrome (RDS) in premature infants, our first product based on our novel
KL4
surfactant technology. The letter focused primarily on certain
aspects of our fetal rabbit biological activity test (BAT, a quality control and
stability release test for Surfaxin and our other KL4 pipeline products),
specifically whether analysis of preclinical data from both the BAT and a
well-established preterm lamb model of RDS demonstrates the degree of
comparability that the FDA requires and whether the BAT can adequately
distinguish change in Surfaxin biological activity over time. Based
on meetings held in June and September 2009 and other interactions with the FDA,
we have optimized the BAT and have recently completed the laboratory testing to
re-validate the optimized BAT. We expect to complete our revalidation
efforts in May 2010. See, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Overview –
Business Strategy Update.”
Following completion of the BAT
optimization and revalidation, to address the sole remaining issue for Surfaxin
approval, we plan to initiate a comprehensive program that will consist of a
series of prospectively-designed, side-by-side preclinical studies employing the
optimized BAT and a well-established preterm lamb model of RDS. We
submitted the protocol for these studies to the FDA for its review and now
expect a written response from the FDA in May 2010. Subject to
confirmation that we have satisfactorily revalidated the BAT, we expect to
initiate the side-by-side preclinical programs in the next few
months. We believe that we remain on track to complete our
comprehensive program and submit our Complete Response to the FDA in the first
quarter of 2011, which could potentially lead to approval of Surfaxin for the
prevention of RDS in premature infants in 2011. If approved, Surfaxin
would be the first synthetic, peptide-containing surfactant for use in pediatric
medicine.
Surfaxin
LS, our lyophilized KL4
surfactant, is a dry powder formulation that is resuspended as a liquid prior to
use. Surfaxin LS is intended to improve ease of use for healthcare
practitioners, eliminate the need for cold-chain storage, and potentially
further improve clinical performance. Aerosurf is our proprietary
KL4
surfactant in aerosolized form, which we are developing using our capillary
aerosolization technology, initially to treat premature infants at risk for
RDS. Premature infants with RDS are treated with surfactants that are
administered by means of invasive endotracheal intubation and mechanical
ventilation, procedures that frequently result in serious respiratory conditions
and complications. If approved, we believe that Aerosurf will make it
possible to administer surfactant into the lung without subjecting patients to
such invasive procedures. We believe that Aerosurf has the potential
to enable a significant increase in the use of surfactant therapy in pediatric
medicine.
In
addition to our lead products, we plan over time to develop our KL4 surfactant
technology into a broad product pipeline that potentially will address a variety
of debilitating respiratory conditions for which there currently are no or few
approved therapies, in patient populations ranging from premature infants to
adults. Our plans include potentially taking these initiatives
through a Phase 2 proof-of-concept phase and, if successful, thereafter
determining whether to seek strategic alliances or collaboration arrangements or
to utilize other financial alternatives to fund their further
development. We have recently completed enrollment in a Phase 2
clinical trial of Surfaxin to potentially address Acute Respiratory Failure
(ARF) and expect that top line results will be available in the second quarter
2010. Our KL4 surfactant
is also the subject of an investigator-initiated Phase 2a clinical trial
assessing the safety, tolerability and short-term effectiveness (via improvement
in mucociliary clearance) of aerosolized KL4 surfactant
in patients with Cystic Fibrosis (CF). We are conducting research and
preclinical development with our KL4 surfactant
potentially to address Acute Lung Injury (ALI), and, potentially in the future,
other diseases associated with inflammation of the lung, such as Asthma and
Chronic Obstructive Pulmonary Disease (COPD). We have also initiated
exploratory preclinical studies to assess the feasibility of using our KL4 surfactant
in combination with small and large molecule therapeutics to efficiently and
effectively deliver therapies to the lung to treat a range of pulmonary
conditions and disease.
4
An
important priority is to secure strategic and financial resources to potentially
maximize the inherent value of our KL4 surfactant
technology. We prefer to accomplish our objectives through strategic
alliances, including potential business alliances, and commercial and
development partnerships. With respect to our lead products, we are
engaged in discussions with potential strategic and/or financial
partners. To secure required capital, we are also considering other
alternatives, including additional financings and other similar
opportunities. Although we continue to consider a number of potential
strategic and financial alternatives, there can be no assurance that we will
enter into any strategic alliance or otherwise consummate any financing or other
similar opportunities. Until such time as we secure the necessary
capital, we plan to continue conserving our financial resources, predominantly
by limiting investments in our pipeline programs.
Basis
of Presentation
The
accompanying interim 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 months ended March 31, 2010
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2010. 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, 2009 that we filed with the
Securities and Exchange Commission (SEC) on March 10, 2010 (2009 Annual Report
on Form 10-K).
Note
2 – Liquidity Risks and Management’s Plans
We have
incurred substantial losses since inception, due to investments in research and
development, manufacturing and potential commercialization activities and we
expect to continue to incur substantial losses over the next several
years. Historically, we have funded our business operations through
various sources, including public and private securities offerings, draw downs
under our Committed Equity Financing Facilities (CEFFs), capital equipment and
debt facilities, and strategic alliances. We expect to continue to
fund our business operations through a combination of these sources, as well as
sales revenue from our product candidates, beginning with Surfaxin for the
prevention of RDS, if approved.
Following
receipt from the FDA of a Complete Response Letter for Surfaxin in April 2009,
we made fundamental changes in our business strategy. We now believe
that it is in our best interest financially to seek to develop and commercialize
our KL4 technology
through strategic alliances or other collaboration arrangements, including in
the United States. However, there can be no assurance that any
strategic alliance or other arrangement will be successfully
concluded.
The
accompanying interim unaudited consolidated financial statements have been
prepared assuming that we will continue as a going concern, which contemplates
the realization of assets and satisfaction of liabilities in the normal course
of business. As a result of our cash position as of December 31,
2009, the audit opinion we received from our independent auditors for the year
ended December 31, 2009 contains a notation related to our ability to continue
as a going concern. Our ability to continue as a going concern is
dependent on our ability to raise additional capital, to fund our research and
development and commercial programs and meet our obligations on a timely
basis. If we are unable to successfully raise sufficient additional
capital, through strategic and collaborative arrangements with potential
partners and/or future debt and equity financings, we will likely not have
sufficient cash flows and liquidity to fund our business operations, which could
significantly limit our ability to continue as a going concern. In
that event, we may be forced to further limit development of many, if not all,
of our programs and consider other means of creating value for our stockholders,
such as licensing the development and/or commercialization of products that we
consider valuable and might otherwise plan to develop ourselves. If
we are unable to raise the necessary capital, we may be forced to curtail
all of our activities and, ultimately, cease operations. Even if we
are able to raise additional capital, such financings may only be available on
unattractive terms, or could result in significant dilution of stockholders’
interests and, in such event, the market price of our common stock may
decline. Our financial statements do not include any adjustments
relating to recoverability and classification of recorded asset amounts or the
amounts and classification of liabilities that might be necessary should we be
unable to continue in existence.
5
Our
future capital requirements will depend upon many factors, including our efforts
to secure one or more strategic alliances to support our product development
activities and commercialization plans, and the ultimate success of our product
development and commercialization plans. Currently, we are focused on
developing our lead KL4 surfactant
products to address the most significant respiratory conditions affecting
pediatric populations. However, there can be no assurance that our
research and development projects will be successful, that products developed
will obtain necessary regulatory approval, that any approved product will be
commercially viable, that any CEFF will be available for future financings, or
that we will be able to secure strategic alliances or obtain additional capital
when needed on acceptable terms, if at all. Even if we succeed in
securing strategic alliances, raising additional capital and developing and
subsequently commercializing product candidates, we may never achieve sufficient
sales revenue to achieve or maintain profitability.
As of
March 31, 2010, we had cash and cash equivalents of $24.2 million, which
includes net proceeds of $15.1 million ($16.5 million gross) from a
public offering that we completed in February 2010. As of May 7,
2010, neither the May 2008 CEFF nor the December 2008 CEFF was available to us
because the closing market price of our common stock ($0.47) was below the
minimum price required ($1.15 and $0.60, respectively) to utilize the
facility. If and when the CEFFs become available, we may potentially
raise (subject to certain conditions, including minimum stock price and volume
limitations) up to an aggregate of $69.5 million. See, Note 4 – Stockholders’
Equity, for details about our CEFFs.
As of
March 31, 2010, our $10.5 million loan with PharmaBio Development Inc
(PharmaBio), the former strategic investment subsidiary of Quintiles
Transnational Corp. (Quintiles), was classified as a current liability payable
on April 30, 2010. On April 28, 2010, we completed a restructuring of
the loan ($10.6M at the time of restructuring) pursuant to a Payment Agreement
and Loan Amendment dated April 27, 2010 (PharmaBio Agreement) that provided for
(a) payment in cash of an aggregate of $6.6 million, representing
$4.5 million in outstanding principal and $2.1 million in accrued
interest, (b) a maturity date extension for the remaining $4 million
principal amount under the loan, $2 million of which now will be due and
payable on July 30, 2010 and the remaining $2 million of which will be due
and payable on September 30, 2010, and (c) so long as we timely make each of the
remaining principal payments on or before their respective due dates, no further
interest will accrue on the outstanding principal amount. In
addition, we agreed to maintain (i) at least $10 million in cash and cash
equivalents until payment of the first $2 million installment is made on or
before July 30, 2010, and (ii) at least $8 million in cash and cash
equivalents until the payment of the second $2 million installment on or
before September 30, 2010, after which the PharmaBio loan will be paid in
full. Also under the PharmaBio Agreement, PharmaBio surrendered to us
for cancellation warrants to purchase an aggregate of 2,393,612 shares of our
common stock that we had issued previously to PharmaBio in connection with the
PharmaBio loan and a previous offering of securities. See, Note 8 – Subsequent
Events.
The
PharmaBio Agreement also provides that we and PharmaBio will negotiate in good
faith to potentially enter into a strategic arrangement under which PharmaBio
would provide funding for a research collaboration between Quintiles and us
relating to the possible research and development, and commercialization of two
of our drug product candidates, Surfaxin LS and Aerosurf, for the prevention and
treatment of RDS in premature infants. However, neither party is
obligated to enter into any such arrangement except to the extent that the
parties, in their individual and sole discretion, enter into definitive
documents with respect thereto. Accordingly, there can be no
assurances that any such arrangement will be completed. See, Note 8 – Subsequent
Events.
6
Also on
April 27, 2010, we entered into a Securities Purchase Agreement pursuant to
which PharmaBio agreed to purchase 4,052,312 shares of our common
stock and warrants to purchase an aggregate of 2,026,156 shares of common stock,
resulting in gross proceeds to us, on April 29, 2010, of $2.2 million
($2.1 million net). The shares of common stock and warrants were
sold as units, with each unit consisting of (a) one share of common stock, and
(b) one-half of a warrant to purchase a share of common stock, at an
offering price of $0.5429 per unit. The warrants generally will be
exercisable beginning 181 days after the date of issuance for a period of five
years from the original date of issuance at an exercise price of $0.7058 per
share. See,
Note 4 – Stockholders’ Equity, and Note 8 – Subsequent Events.
Note 3 – Accounting Policies and Recent
Accounting Pronouncements
Accounting
policies
There
have been no changes to our critical accounting policies since December 31,
2009. For more information on critical accounting policies, see, Note 3 – “Summary of
Significant Accounting Policies and Recent Accounting Pronouncements” to the
consolidated financial statements included in our 2009 Annual Report on Form
10-K. Readers are encouraged to review those disclosures in
conjunction with the review of this Form 10-Q.
Net loss per common
share
Basic net
loss per common share is computed by dividing the net loss by the weighted
average number of common shares outstanding for the periods. As of
March 31, 2010 and 2009, 44.0 million and 24.8 million shares of
common stock, respectively, were potentially issuable upon the exercise of
certain stock options and warrants. Due to our net loss, these
potentially issuable shares were not included in the calculation of diluted net
loss per share as the effect would be anti-dilutive, therefore basic and
dilutive net loss per share are the same.
Comprehensive
loss
Comprehensive
loss consists of net loss plus the changes in unrealized gains and losses on
available-for-sale securities. Comprehensive loss for the three
months ended March 31, 2010 and 2009 are as follows:
|
For
the three months ended
|
||||||||
|
(in
thousands)
|
March
31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Net
loss
|
$ | (7,288 | ) | $ | (9,000 | ) | ||
|
Change
in unrealized gains / (losses) on marketable securities
|
– | (1 | ) | |||||
|
Comprehensive
loss
|
$ | (7,288 | ) | $ | (9,001 | ) | ||
Recent accounting
pronouncements
In
March 2010, ASU 2010-17, Revenue Recognition—Milestone Method
(Topic 605): Milestone
Method of Revenue Recognition—a consensus of the FASB Emerging Issues Task
Force (“ASU 2010-17”) was issued and will amend the accounting for
revenue arrangements under which a vendor satisfies its performance obligations
to a customer over a period of time, when the deliverable or unit of accounting
is not within the scope of other authoritative literature, and when the
arrangement consideration is contingent upon the achievement of a milestone. The
amendment defines a milestone and clarifies whether an entity may recognize
consideration earned from the achievement of a milestone in the period in which
the milestone is achieved. This amendment is effective for fiscal years
beginning on or after June 15, 2010, with early adoption permitted. The
amendment may be applied retrospectively to all arrangements or prospectively
for milestones achieved after the effective date. We do not believe the adoption
of this ASU will have a material impact on our financial
statements.
7
Note 4 – Stockholders’
Equity
Registered Public
Offerings
In
February 2010, we completed a public offering of 27.5 million shares of our
common stock and warrants to purchase 13.8 million shares of our common
stock, sold as units, with each unit consisting of one share of common stock and
a warrant to purchase 0.5 of a share of common stock, at a public offering price
of $0.60 per unit, resulting in gross proceeds to us of $16.5 million
($15.1 million net). This offering was made pursuant to a
prospectus supplement dated April 28, 2010 and an accompanying prospectus dated
June 18, 2008 pursuant to our existing shelf registration statement on Form S-3
(File No. 333-151654), which was filed with the SEC on June 13, 2008 and
declared effective by the SEC on June 18, 2008 (2008
Shelf Registration Statement). The warrants expire in
February 2015 and are exercisable, subject to an aggregate beneficial ownership
limitation, at a price per share of $0.85. The exercise price and
number of shares of common stock issuable on exercise of the warrants will be
subject to adjustment in the event of any stock split, reverse stock split,
stock dividend, recapitalization, reorganization or similar
transaction. The exercise price and the amount and/or type of
property to be issued upon exercise of the warrants will also be subject to
adjustment if the Company engages in a “Fundamental Transaction” (as defined in
the form of warrant). The warrants are exercisable for cash only,
except that if the related registration statement or an exemption from
registration is not available for the resale of the warrant shares, the holder
may exercise on a cashless basis.
In May
2009, we completed a registered direct public offering of 14.0 million
shares of our common stock and warrants to purchase seven million shares of
common stock, sold as units to select institutional investors, with each unit
consisting of one share and a warrant to purchase 0.5 of a share of common
stock, at a price of $0.81 per unit, resulting in gross proceeds to
us of $11.3 million ($10.5 million net). This offering was
made pursuant to a prospectus supplement dated May 8, 2009 to the prospectus
dated June 18, 2008 included in our 2008 Shelf Registration
Statement. The warrants expire in May 2014 and are exercisable at a
price per share of $1.15. The exercise price and number of shares of
common stock issuable on exercise of the warrants will be subject to adjustment
in the event of any stock split, reverse stock split, stock dividend,
recapitalization, reorganization or similar transaction. The exercise
price and the amount and/or type of property to be issued upon exercise of the
warrants will also be subject to adjustment if the Company engages in a
“Fundamental Transaction” (as defined in the form of warrant). The
warrants are exercisable for cash only, except that if the related registration
statement or an exemption from registration is not available for the resale of
the warrant shares, the holder may exercise on a cashless basis.
Common Stock Offering with
PharmaBio Development Inc.
On
April 27, 2010, we entered into a Securities Purchase Agreement with
PharmaBio, as the sole purchaser, related to an offering of 4,052,312 shares of
common stock and warrants to purchase an aggregate of 2,026,156 shares of common
stock, sold as units, with each unit consisting of one share of common stock and
one half of a warrant to purchase a share of common stock, at an offering price
of $0.5429 per unit, representing the greater of (a) the
volume-weighted average sale price (“VWAP”) per share of the common stock on The
Nasdaq Global Market for the 20 trading days ending on April 27, 2010 and
(b) the last reported closing price of $0.5205 per share of the common
stock on The Nasdaq Global Market on such date. The offering resulted
in gross proceeds to us of $2.2 million ($2.1 million
net). This offering was made pursuant to a prospectus supplement
dated April 28, 2010 to the prospectus dated June 18, 2008 included in our 2008
Shelf Registration Statement. The warrants expire in April
2015 and generally will be exercisable beginning 181 days after the date of
issuance, subject to an aggregate beneficial ownership limitation of 9.9%, at a
price per share of $0.7058, which represents a 30% premium to the VWAP for the
20 trading days ending on April 27, 2010. The warrants are
exercisable for cash only, except that if the related registration statement or
an exemption from registration is not available for the resale of the warrant
shares, the holder may exercise on a cashless basis. See also, Note 8 – Subsequent
Events.
8
Committed Equity Financing
Facilities(CEFFs)
As of
March 31, 2010, we had two CEFFs with Kingsbridge Capital Limited (Kingsbridge),
under which Kingsbridge is committed to purchase, subject to certain conditions,
newly-issued shares of our common stock. The CEFFs, dated December
12, 2008 (December 2008 CEFF) and May 22, 2008 (May 2008 CEFF), allow us at our
discretion to raise capital for a period of three years ending February 6, 2011
and June 18, 2011, respectively, at the time and in amounts deemed suitable
to us. We are not obligated to utilize any of the funds available
under the CEFFs. Our ability to access funds available under the
CEFFs is subject to certain conditions, including stock price and volume
limitations.
Under the
December 2008 CEFF, as of March 31, 2010, we had 7.1 million shares
potentially available for issuance (up to a maximum of $17.7 million),
provided that the VWAP of our common stock on each trading day must be at least
equal to the greater of (i) $.60 or (ii) 90% of the closing price of our common
stock on the trading day immediately preceding the draw down period (Minimum
VWAP). Under the May 2008 CEFF, as of March 31, 2010, we had
approximately 12.8 million shares potentially available for issuance (up to
a maximum of $51.7 million), provided that the VWAP on each trading day
must be at least equal to the greater of $1.15 or the Minimum
VWAP. Use of each CEFF is subject to certain other covenants and
conditions, including aggregate share and dollar limitations for each draw
down. See,
“Item 7 –Management’s Discussion and Analysis of Financial Condition and Results
of Operations – Liquidity and Capital Resources – Committed Equity Financing
Facilities (CEFFs)” included in our 2009 Annual Report on Form
10-K. As of May 7, 2010, neither CEFF is currently available because
the market price of our common stock is less than the minimum price required to
utilize either CEFF.
To date,
we have not utilized our CEFFs in 2010. During 2009, we raised an
aggregate of $10.7 million from 10 draw-downs under our
CEFFs. If and when the closing market price of our common stock
is at least equal to the minimum price required under our CEFFs, we anticipate
using them to support our working capital needs and maintain cash availability
in 2010.
Note
5 – Fair Value of Financial Instruments
We
adopted the provisions of ASC Topic 820, Fair Value Measurements and
Disclosures, which defines fair value, establishes a framework for
measuring fair value under GAAP and enhances disclosures about fair value
measurements.
Under ASC
Topic 820, fair value is defined as the exchange price that would be received
for an asset or paid to transfer a liability in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date.
Valuation
techniques used to measure fair value must maximize the use of observable inputs
and minimize the use of unobservable inputs. The fair value hierarchy
is based on three levels of inputs, of which the first two are considered
observable and the last unobservable, that may be used to measure fair value
which are the following:
|
·
|
Level
1 – Quoted prices in active markets for identical assets and
liabilities. Level 1 is generally considered the most reliable
measurement of fair value under ASC 820.
|
|
·
|
Level
2 – Inputs other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for
substantially the full term of the assets or
liabilities.
|
|
·
|
Level
3 – Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or
liabilities.
|
9
Fair Value on a Recurring
Basis
Due to
their short-term maturity, the carrying amounts of cash, money markets and
accounts payable approximate their fair values. The table below
categorized assets measured at fair value on a recurring basis based upon the
lowest level of significant input (Level 1) to the valuations as of March 31,
2010
|
Fair
Value
|
Fair
value measurement using
|
|||||||||||||||
|
Assets
|
March
31,
2010
|
Level
1
|
Level
2
|
Level
3
|
||||||||||||
|
Money
Markets and Certificates of Deposit
|
$ | 21,890 | $ | 21,890 | $ | - | $ | - | ||||||||
|
Restricted
Cash
|
400 | 400 | - | - | ||||||||||||
|
Total
|
$ | 22,290 | $ | 22,290 | $ | - | $ | - | ||||||||
Note
6 – Stock Options and Stock-Based Employee Compensation
We
recognize all share-based payments to employees and non-employee directors in
our financial statements based on their grant date fair values, calculated using
the Black-Scholes option pricing model. Compensation expense related to
share-based awards is recognized ratably over the requisite service period,
typically three years for employees.
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option-pricing formula that uses weighted average assumptions
noted in the following table.
|
March
31,
|
March
31,
|
||||
|
2010
|
2009
|
||||
|
Expected
volatility
|
99%
|
81%
|
|||
|
Expected
term
|
4.7
years
|
4.6
years
|
|||
|
Risk-free
interest rate
|
1.7%
|
2.1%
|
|||
|
Expected
dividends
|
–
|
–
|
The total
employee stock-based compensation for the three months ended March 31, 2010 and
2009 was as follows:
|
Three
Months Ended
|
||||||||
|
March
31,
|
||||||||
|
(in
thousands)
|
2010
|
2009
|
||||||
|
Research
& Development
|
$ | 166 | $ | 209 | ||||
|
General
& Administrative
|
232 | 670 | ||||||
|
Total
|
$ | 398 | $ | 879 | ||||
As of
March 31, 2010, there was $1.8 million of total unrecognized compensation
cost related to non-vested share-based compensation arrangements granted under
the Amended and Restated 1998 Stock Incentive Plan (1998 Plan) and the 2007
Long-Term Incentive Plan (2007 Plan). That cost is expected to be
recognized over a weighted-average vesting period of 1.1 years.
Note
7 – Contractual Obligations and Commitments
Former
CEO Commitment
In
connection with the resignation in August 2009 of Robert J. Capetola, Ph.D., our
former President, Chief Executive Officer and member of our Board of Directors,
we entered into a separation agreement and general release (the “Separation
Agreement”) dated August 13, 2009, that provided, among other things, for
periodic severance payments through the earlier of (i) May 3, 2010 (Severance
Period) or (ii) the date, if ever, of a Corporate Transaction (defined
below). Under the Separation Agreement, if a Corporate Transaction
were to occur during the Severance Period, Dr. Capetola would become entitled to
receive an additional severance payment of up to $1,580,000 or, if any such
Corporate Transaction were to constitute a Change of Control, a payment of up to
$1,777,500; provided, however, that in each
case, any such payment is reduced by the sum of the aggregate cash severance
amounts already paid under the Separation Agreement.
10
A
“Corporate Transaction” was defined in the Separation Agreement to
include one or more public or private financings that were completed during the
Severance Period and resulted in cash proceeds (net of transaction costs) to us
of at least $20 million received during the Severance Period or within 90
calendar days thereafter. From August 13, 2009 through February 23,
2010, we raised approximately $21.0 million of aggregate net proceeds,
consisting of approximately $5.9 million from financing transactions under
our CEFFs throughout the period and $15.1 million from a public offering
that was completed on February 23, 2010. As these transactions
satisfied the criteria for a Corporate Transaction under the Separation
Agreement, on March 3, 2010, we paid to Dr. Capetola an additional
$1.06 million (less withholding), representing $1.58 million reduced
by the sum of the cash severance amounts previously paid under the Separation
Agreement, which totaled approximately $0.52 million. At this
time, our obligation to make periodic payments under the Separation Agreement
has been satisfied and no further payments are due to Dr. Capetola.
The full
text of the Separation Agreement is attached to our Current Report on Form 8-K
that we filed with the SEC on August 19, 2009. For a summary of the
Separation Agreement, see, “Item 11– Executive
Compensation –Resignation of our President and Chief Executive Officer,” in our
Amendment No. 1 to our 2009 Annual Report on Form 10-K that we filed with the
SEC on April 30, 2010 (2009 Form 10-K/A).
Note
8– Subsequent Events
We
evaluated all events or transactions that occurred after March 31, 2010 up
through the date we issued these financial statements. During this period we did
not have any material recognized subsequent events, however, there was one
nonrecognized subsequent event described below:
Loan
Restructuring – PharmaBio Development Inc.
As of
March 31, 2010, our $10.5 million loan with PharmaBio was classified as a
current liability, payable on April 30, 2010. On April 27, 2010, we
entered into the PharmaBio Agreement and on April 28, 2010, completed a
restructuring of the loan ($10.6M at the time of restructuring). The
PharmaBio Agreement provided for (a) payment in cash of an aggregate of
$6.6 million, representing $4.5 million in outstanding principal and $2.1
million in accrued interest, (b) a maturity date extension for the
remaining $4 million principal amount under the loan, $2 million of which
now will be due and payable on July 30, 2010 and the remaining $2 million of
which will be due and payable on September 30, 2010, and (c) so long as we
timely make each of the remaining principal payments on or before their
respective due dates, no further interest will accrue on the outstanding
principal amount. In addition, we agreed to maintain (i) at
least $10 million in cash and cash equivalents until payment of the first $2
million installment is made on or before July 30, 2010, and (ii) at least
$8 million in cash and cash equivalents until the payment of the second
$2 million installment on or before September 30, 2010, after which the
PharmaBio loan will be paid in full. Also under the PharmaBio
Agreement, PharmaBio surrendered to us for cancellation the following warrants
to purchase an aggregate of 2,393,612 shares of our common stock that we had
issued previously to PharmaBio in connection with the PharmaBio loan and a
previous offering of securities: a warrant to purchase 850,000 shares of common
stock at $7.19 per share expiring on November 3, 2014, a warrant to purchase
1,500,000 shares of common stock at $3.58 per share expiring on October 26, 2013
and a warrant to purchase 43,612 shares of the Company’s common stock at $6.875
per share expiring on September 19, 2010.
The
PharmaBio Agreement also provided that we and PharmaBio would negotiate in good
faith to potentially enter into a strategic arrangement under which PharmaBio
would provide funding for a research collaboration between Quintiles and us
relating to the possible research and development, and commercialization of two
of our drug product candidates, Surfaxin LS and Aerosurf, for the prevention and
treatment of RDS in premature infants. However, neither party is
obligated to enter into any such arrangement except to the extent that the
parties, in their individual and sole discretion, enter into definitive
documents with respect thereto. Accordingly, there can be no
assurances that any such arrangement or collaboration will be
completed.
11
Also, on
April 27, 2010, we entered into a Securities Purchase Agreement pursuant to
which PharmaBio agreed to purchase 4,052,312 shares of our common stock and
warrants to purchase an aggregate of 2,026,156 shares of our common stock,
resulting in gross proceeds to us, on April 29, 2010, of $2.2 million
($2.1 million net). The shares of common stock and warrants were
sold as units, with each unit consisting of (a) one share of common stock, and
(b) one-half of a warrant to purchase a share of common stock, at an
offering price of $0.5429 per unit. The offering price per unit was
calculated based on the greater of (a) the VWAP per share of the common stock on
The Nasdaq Global Market for the 20 trading days ending on April 27, 2010 and
(b) the last reported closing price of $0.5205 per share of the common stock on
The Nasdaq Global Market on such date. The warrants generally will be
exercisable beginning 181 days after the date of issuance for a period of five
years from the original date of issuance at an exercise price of $0.7058 per
share, which represents a 30% premium to the VWAP. The exercise price
and number of shares of our common stock issuable on exercise of the warrants
will be subject to adjustment in the event of any stock split, reverse stock
split, stock dividend, recapitalization, reorganization or similar
transaction. The exercise price and the amount and/or type of
property to be issued upon exercise of the warrants will also be subject to
adjustment if we engage in a “Fundamental Transaction” (as defined in the
Warrant). This offering was made pursuant to our 2008
Shelf Registration Statement. The offering closed on April
30, 2010.
See Also, Note 2 – Liquidity
Risks and Management’s Plans, and Note 4 – Stockholders’ Equity – Common Stock
Offering with PharmaBio Development Inc. The full text of the the
PharmaBio Agreement, the Warrant and the Securities Purchase Agreement is
attached as exhibits to our Current Report on Form 8-K that we filed with the
SEC on April 28, 2010.
|
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” is
provided as a supplement to the accompanying interim unaudited consolidated
financial statements and footnotes to help provide an understanding of our
financial condition, the changes in our financial condition and our results of
operations. This item should be read in connection with our
accompanying interim unaudited consolidated financial statements (including the
notes thereto) appearing elsewhere herein.
OVERVIEW
Discovery
Laboratories, Inc. (referred to as “we,” “us,” or the “Company”) is a
biotechnology company developing surfactant therapies to treat respiratory
disorders and diseases for which there frequently are few or no approved
therapies. Our novel KL4
proprietary technology produces a synthetic, peptide-containing surfactant
(KL4
surfactant) that is structurally similar to pulmonary surfactant, a substance
produced naturally in the lung and essential for survival and normal respiratory
function. In addition, our proprietary capillary aerosol-generating
technology (capillary aerosolization technology) produces a dense aerosol with a
defined particle size, to potentially deliver our aerosolized KL4 surfactant
to the lung. As many respiratory disorders are associated with
surfactant deficiency or surfactant degradation, we believe that our proprietary
technology platform makes it possible, for the first time, to develop a
significant pipeline of surfactant products targeted to treat a wide range of
previously unaddressed respiratory problems.
We are
developing our lead products, Surfaxin®(lucinactant),
Surfaxin LS™ and Aerosurf®, to
address the most significant respiratory conditions affecting pediatric
populations. Our research and development efforts are currently
focused on the management of RDS in premature infants. We have filed
a New Drug Application (NDA) for our first product based on our novel KL4 surfactant
technology, Surfaxin for the prevention of Respiratory Distress Syndrome (RDS)
in premature infants, and received a Complete Response Letter from the U.S. Food
and Drug Administration (FDA) in April 2009. We believe that the RDS
market represents a significant opportunity from both a medical and a business
perspective. We further believe that Surfaxin, Surfaxin LS and
Aerosurf, have the potential to greatly improve the management of RDS and,
collectively, represent the opportunity, over time, to significantly expand the
current RDS worldwide annual market.
12
In
addition to our lead products, we plan over time to develop our KL4 surfactant
technology into a broad product pipeline that potentially will address a variety
of debilitating respiratory conditions for which there currently are no or few
approved therapies, in patient populations ranging from premature infants to
adults. We have recently completed enrollment in a Phase 2 clinical
trial of Surfaxin to potentially address Acute Respiratory Failure (ARF) and
expect that top line results will be available in the second quarter
2010. Our KL4 surfactant
is also the subject of an investigator-initiated Phase 2a clinical trial
assessing the safety, tolerability and short-term effectiveness (via improvement
in mucociliary clearance) of aerosolized KL4 surfactant
in patients with Cystic Fibrosis (CF). We are conducting research and
preclinical development with our KL4 surfactant
potentially to address Acute Lung Injury (ALI), and, potentially in the future,
other diseases associated with inflammation of the lung, such as Asthma and
Chronic Obstructive Pulmonary Disease (COPD). We have also initiated
exploratory preclinical studies to assess the feasibility of using our KL4 surfactant
in combination with small and large molecule therapeutics to efficiently and
effectively deliver therapies to the lung to treat a range of pulmonary
conditions and disease.
An
important priority is to secure strategic and financial resources to potentially
maximize the inherent value of our KL4 surfactant
technology. We prefer to accomplish our objectives through strategic
alliances, including potential business alliances, commercial and development
partnerships. With respect to our lead products, we are engaged in
discussions with potential strategic and/or financial partners. In
addition, our plans include potentially taking our early stage exploratory
programs through a Phase 2 proof-of-concept phase and, if successful, thereafter
determining whether to seek strategic alliances or collaboration arrangements or
to utilize other financial alternatives to fund their further
development. To secure required capital, we are also considering
other alternatives, including additional financings and other similar
opportunities. Although we continue to consider a number of potential
strategic and financial alternatives, there can be no assurance that we will
enter into any strategic alliance or otherwise consummate any financing or other
similar opportunities. Until such time as we secure the necessary
capital, we plan to continue conserving our financial resources, predominantly
by limiting investments in our pipeline programs.
We have
focused our current resources on our lead products, primarily to address the
requirements to gain the potential approval of Surfaxin in the United
States. Until such time as we secure sufficient strategic and
financial resources to support the continuing development of our KL4 surfactant
technology and support our operations, we will continue to conserve our
resources, predominantly by curtailing and pacing investments in our pipeline
programs.
Business
Strategy Update
The
reader is referred to, and encouraged to read in its entirety “Item 1 –
Business” included in our 2009 Annual Report on Form 10-K, which contains a
discussion of our Business and Business Strategy, as well as information
concerning our proprietary technologies and our current and planned KL4 pipeline
programs.
The
following are updates to our Business Strategy:
|
·
|
Surfaxin for the
Prevention of RDS in Premature
infants
|
In
response to written guidance received in February 2010 from the FDA, we are
performing a comprehensive preclinical program to potentially address the sole
remaining issue that was identified in the April 2009 Complete Response
Letter. The letter focused primarily on certain aspects of our fetal
rabbit biological activity test (BAT, a quality control and stability release
test for Surfaxin and our other KL4 pipeline
products), specifically whether analysis of preclinical data from both the BAT
and a well-established preterm lamb model of RDS demonstrates the degree of
comparability that the FDA requires and whether the BAT can adequately
distinguish change in Surfaxin biological activity over time. A key
component of the comprehensive preclinical program is to first satisfactorily
optimize and re-validate the BAT. To optimize the BAT, we executed a
protocol that was previously submitted to the FDA for review and
comment. We expect to complete our revalidation efforts in May
2010. Additionally, we have been interacting with the FDA regarding other
important aspects of the comprehensive preclinical program, including our
proposed study design and success criteria. We plan to initiate a series of
prospectively-designed, side-by-side preclinical studies employing the optimized
BAT and a well-established preterm lamb model of RDS. We submitted
the protocol for these studies to the FDA for its review and expect a written
response from the FDA in the near future. Subject to confirmation
that we have satisfactorily revalidated the BAT, we expect to initiate the
side-by-side preclinical studies in the next few months. We believe
that we remain on track to complete our comprehensive program and submit our
Complete Response to the FDA in the first quarter of 2011, which could
potentially lead to approval of Surfaxin for the prevention of RDS in premature
infants in the United States in 2011.
13
|
·
|
Surfaxin LS and
Aerosurf Development
Programs
|
We are
currently conducting important preclinical activities for both Surfaxin LS and
Aerosurf to support regulatory requirements for our planned clinical
programs. We are preparing to further engage the FDA and interact
with international regulatory agencies with respect to our planned Phase 3
clinical program for Surfaxin LS and our Phase 2 clinical program for
Aerosurf. We are also taking steps to focus our capillary
aerosolization device development activities on the capillary aerosolization
device that we expect will support our Aerosurf clinical development
programs. We intend to initiate these clinical programs upon
determining a final regulatory strategy and after securing appropriate strategic
alliances and necessary capital.
|
·
|
Phase 2 Clinical
Trials to Address Acute Respiratory Failure and Cystic
Fibrosis
|
We have
recently completed enrollment in a Phase 2 clinical trial to determine whether
Surfaxin improves lung function and reduces the duration and related
risk-exposure of mechanical ventilation in children up to two years of age
diagnosed with Acute Respiratory Failure (ARF). ARF is a severe
respiratory disorder associated with lung injury, often involving surfactant
dysfunction. ARF occurs after patients have been exposed to serious
respiratory infections, such as influenza (including the type A serotype
referred to as H1N1) or respiratory syncytial virus (RSV). Top-line
results of this trial are now expected to be available in June
2010.
Our
aerosolized KL4 surfactant
is being evaluated in an investigator-initiated Phase 2a clinical trial in
Cystic Fibrosis (CF) patients. The trial is being conducted at a leading
research center, The University of North Carolina, and is further supported by
the Cystic Fibrosis Foundation. The trial has been designed to assess
the safety, tolerability and short-term effectiveness (via improvement in
mucociliary clearance) of aerosolized KL4 surfactant
in CF patients. Top line results for this trial are now expected in
the third quarter of 2010.
As of
March 31, 2010, we had cash and cash equivalents of $24.2 million, which
includes net proceeds of $15.1 million ($16.5 million gross) from a
public offering that we completed in February 2010. Currently, under
our two CEFFs, we may potentially raise (subject to certain conditions,
including minimum stock price and volume limitations) up to an aggregate of
$69.5 million. However, as of May 7, 2010, neither the May 2008
CEFF nor the December 2008 CEFF was available because the market price of our
common stock price was below the minimum price required ($1.15 and $0.60,
respectively) to utilize the CEFFs. See, Note 4 – Stockholders’
Equity, for details about our CEFFs.
As of
March 31, 2010, our $10.5 million loan with PharmaBio Development Inc., the
former strategic investment subsidiary of Quintiles Transnational Corp
(Quintiles), was classified as a current liability, payable on April 30,
2010. On April 28, 2010, we completed a restructuring
of the loan ($10.6M at the time of restructuring) under which we
satisfied a portion of the loan and, as a result, the principal amount is now
reduced to $4 million, $2 million of which will be due and payable on
July 30, 2010 and the remaining $2 million of which will be due and payable
on September 30, 2010. For details of the terms of the restructuring,
see, “– Liquidity and
Capital Resources – Debt – Loan with PharmaBio Development, Inc.” We
and PharmaBio also agreed to negotiate in good faith to potentially enter into a
strategic arrangement under which PharmaBio would provide funding for a research
collaboration between Quintiles and us relating to the research and development,
and commercialization of Surfaxin LS and Aerosurf for the prevention and
treatment of RDS in premature infants, although there can be no assurances that
any such arrangement or collaboration will be accomplished. Also on
April 30, 2010, we completed an offering of common stock and warrants to
PharmaBio, resulting in gross proceeds to us of $2.2 million
($2.1 million net).
See, “– Liquidity and Capital Resources – Common Stock Offerings –
Financings under the 2008 Shelf Registration Statement.”
14
Our
future capital requirements depend upon many factors, including the success of
our efforts to secure one or more strategic alliances or other collaboration
arrangements to support our product development activities and, if approved,
commercialization plans. There can be no assurance, however, that we
will be able to secure strategic partners or collaborators to support and advise
our activities, that our research and development projects will be successful,
that products developed will obtain necessary regulatory approval, that any
approved product will be commercially viable, that any CEFF will be available
for future financings, or that we will be able to obtain additional capital when
needed on acceptable terms, if at all. In addition to multiple
strategic alternatives, we continue to consider potential additional financings
and other similar opportunities to meet our capital requirements and continue
our operations. Even if we succeed in securing strategic alliances,
raising additional capital and developing and subsequently commercializing
product candidates, we may never achieve sufficient sales revenue to achieve or
maintain profitability.
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, 2009. For more information on
critical accounting policies, see our 2009 Annual Report on
Form 10-K. Readers are encouraged to review these disclosures in
conjunction with their review of this Form 10-Q.
RESULTS
OF OPERATIONS
The net
loss for the three months ended March 31, 2010 and 2009 was $7.3 million
(or $0.05 per share) and $9.0 million (or $0.09 per share),
respectively.
Research
and Development Expenses
Research
and development expenses for the three months ended March 31, 2010 and 2009 were
$4.1 million and $5.6 million, respectively. These costs
are charged to operations as incurred and are tracked by category, as
follows:
|
Three
Months Ended
March
31,
|
||||||||
|
(
in thousands)
|
2010
|
2009
|
||||||
|
Research
and Development Expenses:
|
||||||||
|
Manufacturing
development
|
$ | 2,437 | $ | 3,126 | ||||
|
Development
operations
|
1,241 | 1,752 | ||||||
|
Direct
preclinical and clinical programs
|
455 | 729 | ||||||
|
Total Research &
Development Expenses (1)
|
$ | 4,133 | $ | 5,607 | ||||
|
(1)
|
Included
in research and development expenses are charges associated with
stock-based employee compensation in accordance with the provisions of ASC
Topic 718. For the three months ended March 31, 2010 and 2009, these
charges were $0.2 million and $0.2 million,
respectively.
|
Manufacturing
Development
Manufacturing
development includes the cost of our manufacturing operations, quality assurance
and analytical chemistry capabilities to assure adequate production of clinical
and potential commercial drug supply for our KL4 surfactant
products, in conformance with current good manufacturing practices
(cGMP). These costs include employee expenses, facility-related
costs, depreciation, costs of drug substances (including raw materials),
supplies, quality control and assurance activities and analytical services,
etc.
15
The
decrease of $0.7 million in manufacturing development expenses for the
three months ended March 31, 2010, as compared to the same period in 2009, is
primarily due to our efforts to conserve financial resources following receipt
of the April 2009 Complete Response Letter and purchases in the first quarter of
2009 of active ingredients for the production of Surfaxin.
For the
three months ended March 31, 2010 and 2009, manufacturing development expenses
included charges associated with stock-based compensation of $0.1 million
and $0.1 million, respectively.
Development
Operations
Development
operations includes: (i) medical, scientific, clinical, regulatory, data
management and biostatistics activities in support of our KL4 surfactant
development programs; (ii) medical affairs activities to provide scientific
and medical education support in connection with our KL4 surfactant
technology pipeline programs; (iii) design and development for the
manufacture of our novel capillary aerosolization systems, including an aerosol
generating device, the disposable dose delivery packets and patient interface
system necessary to administer Aerosurf for our planned Phase 2 clinical trials
and; (iv) pharmaceutical development activities, including development of a
lyophilized (dry powder) formulation of our KL4
surfactant. These costs include personnel, expert consultants,
outside services to support regulatory, data management and device development
activities, symposiums at key neonatal medical meetings, facilities-related
costs, and other costs for the management of clinical trials.
The
decrease of $0.5 million in development operations expenses for the three
months ended March 31, 2010, as compared to the same period in 2009, is
primarily due to our efforts to conserve financial resources following receipt
of the April 2009 Complete Response Letter, including a reduction of our
workforce and a restructuring of certain functions in research and development,
primarily medical affairs.
For the
three months ended March 31, 2010 and 2009, development operations expenses
included charges associated with stock-based compensation of $0.1 million
and $0.1 million, respectively.
Direct Preclinical and
Clinical Programs
Direct
pre-clinical and clinical programs include: (i) pre-clinical activities,
including toxicology studies and other pre-clinical studies to obtain data to
support potential Investigational New Drug (IND) and NDA filings for our product
candidates; (ii) activities associated with conducting human clinical
trials, including patient enrollment costs, external site costs, clinical drug
supply and related external costs such as contract research consultant fees and
expenses; and (iii) activities related to addressing the items identified
in the April 2009 Complete Response Letter.
Direct
pre-clinical and clinical programs expenses for the three months ended March 31,
2010 included: (i) costs associated with activities to address issues
identified in the April 2009 Complete Response Letter, including optimization
and re-validation of the optimized BAT; (ii) activities associated with the
ongoing Phase 2 clinical trial evaluating the use of Surfaxin in children up to
two years of age suffering with ARF; and (iii) pre-clinical and preparatory
activities for anticipated Phase 2 clinical trials for Surfaxin LS and Aerosurf
for RDS in premature infants.
The
decrease of $0.3 million in direct preclinical and clinical program
expenses for the three months ended March 31, 2010, as compared to the same
period in 2009, is primarily due to costs in the first quarter of 2009
associated with preclinical activities and product characterization testing of
our lyophilized form of Surfaxin, and our efforts to conserve financial
resources following receipt of the April 2009 Complete Response
Letter.
In an
effort to conserve our financial resources, we plan to continue limiting
investments in preclinical and clinical programs until we have secured
appropriate strategic alliances and necessary capital. Where
appropriate, we plan to meet with U.S. and European regulatory authorities to
discuss the requirements for our regulatory packages, including potential trial
design requirements, to prepare for our planned clinical trials.
16
General
and Administrative Expenses
General
and administrative expenses consist primarily of the costs of executive
management, business and commercial development, finance and accounting,
intellectual property and legal, human resources, information technology,
facility and other administrative costs.
General
and administrative expenses for the three months ended March 31, 2010 and 2009
were $2.9 million and $3.1 million, respectively. Included
in general and administrative expenses for the three months ended March 31, 2010
was a one-time charge of $1.0 million associated with certain contractual cash
severance obligations to our former President and Chief Executive
Officer. Additionally, for the three months ended March 31, 2010 and
2009, general and administrative expenses included charges associated with
stock-based compensation of $0.2 million and $0.7 million,
respectively.
Excluding
the one-time charge related to our severance obligation and charges associated
with stock based compensation, general and administrative expenses decreased
$0.7 million for the three months ended March 31, 2010, as compared to the
same period in 2009. The decrease was primarily due to investments in
pre-launch commercial capabilities in the first quarter of 2009 in anticipation
of the potential approval and commercial launch of
Surfaxin. Following receipt of the April 2009 Complete Response
Letter for Surfaxin, to conserve our cash resources, we curtailed investment in
commercial capabilities, implemented cost containment measures and reduced our
workforce from 115 to 91 employees. The workforce reduction was
focused primarily in our commercial and corporate administrative
groups. We also made a fundamental change in our business
strategy. To conserve financial resources, we no longer plan to
establish our own specialty pulmonary commercial organization and we are instead
seeking to develop and commercialize our KL4 technology
through strategic alliances or other collaboration arrangements, including in
the United States. Although we are engaged in discussions with
potential strategic and financial partners, there can be no assurance that any
strategic alliance will be successfully concluded. Until such
time as we secure an alliance or access to other capital, we continue to
conserve our financial resources by predominantly limiting investments in our
pipeline programs.
Other
Income and (Expense)
Other
income and (expense) for the three months ended March 31, 2010 and 2009 were
$(0.2) million and $(0.3) million, respectively.
|
Three
months ended
|
||||||||
|
March
31,
|
||||||||
|
(Dollars
in thousands)
|
2010
|
2009
|
||||||
|
Interest
income
|
$ | 3 | $ | 5 | ||||
|
Interest
expense
|
(242 | ) | (302 | ) | ||||
|
Realized
gain on sale of equipment
|
16 | – | ||||||
|
Other
income / (expense), net
|
$ | (223 | ) | $ | (297 | ) | ||
Interest
income consists of interest earned on our cash and marketable
securities. To ensure preservation of capital, we invest most of our
cash and marketable securities in a treasury-based money market
fund.
Interest
expense consists of interest accrued on the outstanding balance of our loan with
PharmaBio and under our equipment financing facilities. In addition,
interest expense includes expenses associated with the amortization of deferred
financing costs for the warrant that we issued to PharmaBio in October 2006 as
consideration for a restructuring of our loan in 2006. The decrease
in interest expense for the three months ended March 31, 2010 as compared to the
same periods for 2009 is due to a reduction in the outstanding principal
balances on our equipment loans.
17
LIQUIDITY
AND CAPITAL RESOURCES
Overview
We have
incurred substantial losses since inception due to investments in research and
development, manufacturing and potential commercialization activities and we
expect to continue to incur substantial losses over the next several
years. Historically, we have funded our business operations through
various sources, including public and private securities offerings, draw downs
under our CEFFs, capital equipment and debt facilities, and strategic
alliances. We expect to continue to fund our business operations
through a combination of these sources, and, upon regulatory approval, also
through sales revenue from our product candidates, beginning with Surfaxin for
the prevention of RDS.
Following
receipt from the FDA of a Complete Response Letter for Surfaxin in April 2009,
we made fundamental changes in our business strategy. We now believe
that it is in our best interest financially to seek to develop and commercialize
our KL4 technology
through strategic alliances or other collaboration arrangements, including in
the United States. However, there can be no assurance that any
strategic alliance or other arrangement will be successfully
concluded.
The
accompanying interim unaudited consolidated financial statements have been
prepared assuming that we will continue as a going concern, which contemplates
the realization of assets and satisfaction of liabilities in the normal course
of business. As a result of our cash position as of December 31,
2009, the audit opinion we received from our independent auditors for the year
ended December 31, 2009 contains a notation related to our ability to continue
as a going concern. Our ability to continue as a going concern is
dependent on our ability to raise additional capital, to fund our research and
development and commercial programs and meet our obligations on a timely
basis. If we are unable to successfully raise sufficient additional
capital, through strategic and collaborative arrangements with potential
partners and/or future debt and equity financings, we will likely not have
sufficient cash flows and liquidity to fund our business operations, which could
significantly limit our ability to continue as a going concern. In
that event, we may be forced to further limit development of many, if not all,
of our programs and consider other means of creating value for our stockholders,
such as licensing the development and/or commercialization of products that we
consider valuable and might otherwise plan to develop ourselves. If
we are unable to raise the necessary capital, we may be forced to curtail all of
our activities and, ultimately, cease operations. Even if we are able
to raise additional capital, such financings may only be available on
unattractive terms, and/or could result in significant dilution of stockholders’
interests and, in such event, the market price of our common stock may
decline. Our financial statements do not include any adjustments
relating to recoverability and classification of recorded asset amounts or the
amounts and classification of liabilities that might be necessary should we be
unable to continue in existence.
Our
future capital requirements will depend upon many factors, including our efforts
to secure one or more strategic alliances to support our product development
activities and commercialization plans, and the ultimate success of our product
development and commercialization plans. Currently, we are focused on
developing our lead KL4 surfactant
products to address the most significant respiratory conditions affecting
pediatric populations. In particular, in response to
written guidance received in February 2010 from the FDA, we are performing a
comprehensive preclinical program to potentially address the sole remaining
issue that was identified in the April 2009 Complete Response Letter to gain
Surfaxin approval. See “– Business Strategy Update.” There
can be no assurance that our research and development projects (including the
ongoing preclinical program for Surfaxin) will be successful, that products
developed will obtain necessary regulatory approval, that any approved product
will be commercially viable, that any CEFF will be available for future
financings, or that we will be able to secure strategic alliances or obtain
additional capital when needed on acceptable terms, if at all. Even
if we succeed in securing strategic alliances, raising additional capital,
developing product candidates and obtaining regulatory approval and subsequently
commercializing product candidates, we may never achieve sufficient sales
revenue to achieve or maintain profitability.
As of
March 31, 2010, we had cash and cash equivalents of $24.2 million, which
includes net proceeds of $15.1 million ($16.5 million gross) from a
public offering that we completed in February 2010. As of May 7,
2010, neither the May 2008 CEFF nor the December 2008 CEFF was available to us
because the closing market price of our common stock ($0.47) was below the
minimum price required ($1.15 and $0.60, respectively) to utilize the
facility. If and when the CEFFs become available, we may potentially
raise (subject to certain conditions, including minimum stock price and volume
limitations) up to an aggregate of $69.5 million. See, Note 4 – Stockholders’
Equity, for details about our CEFFs.
18
As of
March 31, 2010, our $10.5 million loan with PharmaBio Development Inc
(PharmaBio), the former strategic investment subsidiary of Quintiles
Transnational Corp. (Quintiles), was classified as a current liability payable
on April 30, 2010. On April 28, 2010, we completed a restructuring of
the loan ($10.6M at the time of restructuring) pursuant to a Payment Agreement
and Loan Amendment dated April 27, 2010 (PharmaBio Agreement) that provided for
(a) payment in cash of an aggregate of $6.6 million, representing
$4.5 million in outstanding principal and $2.1 million in accrued
interest, (b) a maturity date extension for the remaining $4 million
principal amount under the loan, $2 million of which now will be due and
payable on July 30, 2010 and the remaining $2 million of which will be due
and payable on September 30, 2010, and (c) so long as we timely make each of the
remaining principal payments on or before their respective due dates, no further
interest will accrue on the outstanding principal amount. In
addition, we agreed to maintain (i) at least $10 million in cash and cash
equivalents until payment of the first $2 million installment is made on or
before July 30, 2010, and (ii) at least $8 million in cash and cash
equivalents until the payment of the second $2 million installment on or
before September 30, 2010, after which the PharmaBio loan will be paid in
full. Also under the PharmaBio Agreement, PharmaBio surrendered to us
for cancellation warrants to purchase an aggregate of 2,393,612 shares of our
common stock that we had issued previously to PharmaBio in connection with the
PharmaBio loan and a previous offering of securities. See, “– Debt – Loan with
PharmaBio Development, Inc.” Also, on April 30, 2010, we completed an
offering of common stock and warrants to PharmaBio, resulting in gross proceeds
of $2.2 million ($2.1 million net). See, “– Financings
Pursuant to Common Stock Offerings – Financings under the 2008
Shelf Registration Statement.”
To meet
our capital requirements, we continue to consider multiple strategic
alternatives, including, but not limited to potential business alliances,
commercial and development partnerships, additional financings and other similar
opportunities, although there can be no assurance that we will take any further
specific actions or enter into any transactions. Until such time as
we secure the necessary capital, we plan to continue conserving our financial
resources, predominantly by limiting investments in our pipeline
programs.
Cash
Flows
As of
March 31, 2010, we had cash and cash equivalents of $24.2 million compared
to $15.7 million as of December 31, 2009, an increase of
$8.5 million. In February 2010, we completed a public offering
of common stock and warrants resulting in net proceeds of
$15.1 million. Additionally, cash outflows before financings for
the first quarter of 2010 consisted of $5.3 million used for ongoing
operating activities, a one-time payment of $1.1 million to satisfy certain
contractual cash severance obligations to our former President and Chief
Executive Officer, and $0.2 million used for debt service.
Cash Flows Used in Operating
Activities
Cash
flows used in operating activities were $6.4 million and $7.5 million
the three months ended March 31, 2010 and 2009, respectively.
Our cash
flows used in operating activities are a result of our net operating losses
adjusted for non-cash items associated with stock-based compensation,
depreciation and changes in our accounts payable, accrued liabilities and
receivables. Cash flows used in operating activities for the three
months ended March 31, 2010 included a one-time payment of $1.1 million to
satisfy certain contractual cash severance obligations to our former President
and Chief Executive Officer.
Cash Flows Used in Investing
Activities
Cash
flows used in investing activities included purchases of equipment of
$0.1 million and $0.1 million for the three months ended March 31,
2010 and 2009, respectively.
19
Cash Flows from/(used in)
Financing Activities
Cash
flows from financing activities were $14.9 million and $1.7 million
for the three months ended March 31, 2010 and 2009, respectively.
Cash
flows from financing activities for the three months ended March 31, 2010
primarily included net proceeds of $15.1 million from the February 2010
public offering, partially offset by principal payments on our equipment loan
and capital lease obligations of $0.2 million. See, “– Common Stock
Offerings – Financings under the 2008 Shelf Registration
Statement.” Cash flows used in financing activities for the three
months ended March 31, 2009 included $2.5 million from financings pursuant
to our CEFFs, partially offset by $0.8 million of principal payments under
our equipment loan.
Committed
Equity Financing Facilities (CEFFs)
As of
March 31, 2010, we had two CEFFs as follows: (i) the CEFF dated December 12,
2008 (December 2008 CEFF) and; (ii) the CEFF dated May 22, 2008 (May 2008 CEFF),
which allow us, subject to minimum price requirements and volume limitations, to
raise capital for a period of three years ending February 6, 2011 and June 18,
2011, respectively, at the time and in amounts deemed suitable to
us. Under the December 2008 CEFF, as of March 31, 2010, we had
7.1 million shares potentially available for issuance (up to a maximum of
$17.7 million), provided that the volume weighted-average price of our
common stock (VWAP) on each trading day during the draw-down period must be at
least equal to the greater of (i) $.60 or (ii) 90% of the closing price of our
common stock on the trading day immediately preceding the draw down period
(Minimum VWAP). Under the May 2008 CEFF, as of March 31, 2010, we had
approximately 12.8 million shares potentially available for issuance (up to
a maximum of $51.7 million), provided that the VWAP on each trading day
must be at least the greater of $1.15 or the Minimum VWAP. Use of
each CEFF is subject to certain other covenants and conditions, including
aggregate share and dollar limitations for each draw down. See our 2009 Annual Report on
Form 10-K – “Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Liquidity and Capital Resources – Committed Equity
Financing Facility (CEFF)”). We anticipate using our CEFFs (at such
times as our stock price is at a level above the CEFF minimum price requirement)
to support our working capital needs and maintain cash availability in
2010.
To date,
we have not used the CEFFs in 2010. As the current market price of
our common stock is below the minimum price ($0.60 and $1.15) required by the
CEFFs, neither CEFF is currently available. In 2009, we raised an
aggregate of $10.7 million from 10 draw-downs under our CEFFs throughout
the year.
Common
Stock Offerings
Historically,
we have funded, and expect that we may continue to fund, our business operations
through various sources, including financings in the form of common stock
offerings. In June 2008, we filed a universal shelf registration
statement on Form S-3 (No. 333-151654) (2008 Shelf Registration
Statement) with the SEC for the proposed offering from time to time of up to
$150 million of our securities, including common stock, preferred stock,
varying forms of debt and warrant securities, or any combination of the
foregoing, on terms and conditions that will be determined at that
time.
Financings under the 2008
Shelf Registration Statement
On
April 27, 2010, we entered into a Securities Purchase Agreement with
PharmaBio, as the sole purchaser, related to an offering of 4,052,312 shares of
common stock and warrants to purchase an aggregate of 2,026,156 shares of common
stock, sold as units, with each unit consisting of one share of common stock and
a warrant to purchase 0.50 of a share of common stock, at an offering price of
$0.5429 per unit, representing the greater of (a) the
volume-weighted average sale price (“VWAP”) per share of the common stock on The
Nasdaq Global Market for the 20 trading days ending on April 27, 2010 and
(b) the last reported closing price of $0.5205 per share of the common
stock on The Nasdaq Global Market on such date. The offering resulted
in gross proceeds to us of $2.2 million ($2.1 million
net). The warrants expire in April 2015 and generally will be
exercisable beginning 181 days after the date of issuance, subject to an
aggregate beneficial ownership limitation of 9.9%, at a price per share of
$0.7058, which represents a 30% premium to the VWAP for the 20 trading days
ending on April 27, 2010. The exercise price and number of shares of common
stock issuable on exercise of the warrants will be subject to adjustment in the
event of any stock split, reverse stock split, stock dividend, recapitalization,
reorganization or similar transaction. The exercise price and the
amount and/or type of property to be issued upon exercise of the warrants will
also be subject to adjustment if the Company engages in a “Fundamental
Transaction” (as defined in the form of warrant). The warrants are
exercisable for cash only, except that if the related registration statement or
an exemption from registration is not available for the resale of the warrant
shares, the holder may exercise on a cashless basis. The offering
closed on April 30, 2010.
20
In
February 2010, we completed a public offering of 27.5 million shares of our
common stock and warrants to purchase 13.8 million shares of our common
stock, sold as units, with each unit consisting of one share of common stock and
a warrant to purchase 0.5 of a share of common stock, at a public offering price
of $0.60 per unit, resulting in gross proceeds to us of $16.5 million
($15.1 million net). The warrants expire in February 2015 and
are exercisable, subject to an aggregate share ownership limitation, at a price
per share of $0.85. The exercise price and number of shares of common
stock issuable on exercise of the warrants will be subject to adjustment in the
event of any stock split, reverse stock split, stock dividend, recapitalization,
reorganization or similar transaction. The exercise price and the
amount and/or type of property to be issued upon exercise of the warrants will
also be subject to adjustment if the Company engages in a “Fundamental
Transaction” (as defined in the warrant agreement). The warrants are
exercisable for cash only, except that if the related registration statement or
an exemption from registration is not available for the resale of the warrant
shares, the holder may exercise on a cashless basis.
As of
March 31, 2010 and May 10, 2010, there was $122.2 million and
$120.0 million, respectively, remaining available under the 2008
Shelf Registration Statement for potential future
offerings.
Debt
Historically,
we have, and expect to continue to, fund our business operations through various
sources, including debt arrangements such as credit facilities and equipment
financing facilities.
Loan
with PharmaBio Development Inc.
As of
March 31, 2010, our $10.5 million loan with PharmaBio was classified as a
current liability, payable on April 30, 2010. On April 27, 2010, we
entered into the PharmaBio Agreement and on April 28, 2010, completed a
restructuring of the loan ($10.6M at the time of restructuring). The
PharmaBio Agreement provided for (a) payment in cash of an aggregate of
$6.6 million, representing $4.5 million in outstanding principal and $2.1
million in accrued interest, (b) a maturity date extension for the
remaining $4 million principal amount under the loan, $2 million of which
now will be due and payable on July 30, 2010 and the remaining $2 million of
which will be due and payable on September 30, 2010, and (c) so long as we
timely make each of the remaining principal payments on or before their
respective due dates, no further interest will accrue on the outstanding
principal amount. In addition, we agreed to maintain (i) at
least $10 million in cash and cash equivalents until payment of the first $2
million installment is made on or before July 30, 2010, and (ii) at least
$8 million in cash and cash equivalents until the payment of the second
$2 million installment on or before September 30, 2010, after which the
PharmaBio loan will be paid in full.
Also
under the PharmaBio Agreement, PharmaBio surrendered to us for cancellation the
following warrants to purchase an aggregate of 2,393,612 shares of our common
stock that we had issued previously to PharmaBio in connection with the
PharmaBio loan and a previous offering of securities: a warrant to purchase
850,000 shares of common stock, at $7.19 per share expiring on November 3, 2014,
a warrant to purchase 1,500,000 shares of common stock at $3.58 per share
expiring on October 26, 2013 and a warrant to purchase 43,612 shares of the
Company’s common stock at $6.875 per share expiring on September 19,
2010.
The
PharmaBio Agreement also provided that we and PharmaBio would negotiate in good
faith to potentially enter into a strategic arrangement under which PharmaBio
would provide funding for a research collaboration between Quintiles and us
relating to the possible research and development, and commercialization of two
of our drug product candidates, Surfaxin LS and Aerosurf, for the prevention and
treatment of RDS in premature infants. However, neither party is
obligated to enter into any such arrangement except to the extent that the
parties, in their individual and sole discretion, enter into definitive
documents with respect thereto. Accordingly, there can be no
assurances that any such arrangement or collaboration will be
completed.
21
Also, on
April 27, 2010, we entered into a Securities Purchase Agreement pursuant to
which PharmaBio agreed to purchase 4,052,312 shares of our common stock and
warrants to purchase an aggregate of 2,026,156 shares of our common stock,
resulting in gross proceeds to us, on April 29, 2010, of $2.2 million
($2.1 million net). See, “ – Common Stock
Offerings – Financing under the 2008 Shelf Registration
Statement.”
At the
present time, we are focused on securing appropriate strategic and financial
resources to fund our research and development programs, comply with our
financial covenants under the restructured PharmaBio loan, and pay the principal
amount when due. Under our amended PharmaBio loan, PharmaBio holds a
security interest in substantially all of our assets, including our proprietary
assets and intellectual property. If we fail to comply with the cash
covenants required under the restructuring, PharmaBio would have the right to
declare all borrowings to be immediately due and payable. If we are
unable to pay when due amounts owed to PharmaBio, whether at maturity or in
connection with acceleration of the loan following a default, PharmaBio would
have the right to proceed against the collateral securing the
indebtedness.
To secure
the necessary capital to achieve our objectives, we prefer to enter into
strategic alliances, including potential business alliances, and commercial and
development partnerships, including the potential collaboration with
Quintiles. We are also considering other alternatives, including
additional financings and other similar opportunities. However, there
can be no assurance that we will achieve any strategic alliance or otherwise
consummate any financing or other similar opportunities. If we are
unable to secure the necessary capital to meet our covenants and financial
commitments, we will be forced to potentially downsize our operations and
implement further cutbacks in our program.
Equipment Financing
Facilities
In May
2007, we entered into a Credit and Security Agreement with GE Business Financial
Services Inc. (GE, formerly Merrill Lynch Business Financial Services
Inc.). The right to draw under this Facility expired on November 30,
2008. As of March 31, 2010, approximately $0.4 million was
outstanding under the facility ($0.4 million classified as current
liabilities and $36,000 as long-term liabilities).
In
September 2008, we entered into a Loan Agreement and Security Agreement with the
Commonwealth of Pennsylvania, Department of Community and Economic Development
(Department), pursuant to which the Department made a loan to us from the
Machinery and Equipment Loan Fund in the amount of $500,000 (MELF Loan). As of March
31, 2010, approximately $0.4 million was outstanding under the facility
($0.1 million classified as current liabilities and $0.3 million as
long-term liabilities).
See, our 2009 Annual Report
on Form 10-K – “Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Liquidity and Capital Resources – Debt – Equipment
Financing Facilities.”
Contractual Obligations and
Commitments
During
the three-month period ended March 31, 2010, there were no material changes to
our contractual obligations and commitments disclosures as set forth in our 2009
Annual Report on Form 10-K, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Liquidity and Capital Resources –
Contractual Obligations”, except as noted below.
In
connection with the resignation in August 2009 of Robert J. Capetola, Ph.D., our
former President, Chief Executive Officer and member of our Board of Directors,
we entered into a separation agreement and general release (the “Separation
Agreement”) dated August 13, 2009, that provided, among other things, for
periodic severance payments through the earlier of (i) May 3, 2010 (Severance
Period) or (ii) the date, if ever, of a Corporate Transaction (defined
below). Under the Separation Agreement, if a Corporate Transaction
were to occur during the Severance Period, Dr. Capetola would become entitled to
receive an additional severance payment of up to $1,580,000; provided, however, such payment
would be reduced by the sum of the aggregate cash severance amounts already paid
under the Separation Agreement.
22
A
“Corporate Transaction” was defined in the Separation Agreement to include one
or more public or private financings that were completed during the Severance
Period and resulted in cash proceeds (net of transaction costs) to us of at
least $20 million received during the Severance Period or within 90
calendar days thereafter. From August 13, 2009 through February 23,
2010, we raised approximately $21.0 million of aggregate net proceeds,
consisting of approximately $5.9 million from financing transactions under
our CEFFs throughout the period and $15.1 million from a public offering
that was completed on February 23, 2010. As these transactions
satisfied the criteria for a Corporate Transaction under the Separation
Agreement, on March 3, 2010, we paid to Dr. Capetola an additional
$1.06 million (less withholding), representing $1.58 million reduced
by the sum of the cash severance amounts previously paid under the Separation
Agreement, which totaled approximately $0.52 million. At this
time, our obligation to make periodic payments under the Separation Agreement
has been satisfied and no further payments are due to Dr. Capetola.
The full
text of the Separation Agreement is attached to our Current Report on Form 8-K
that we filed with the SEC on August 19, 2009. See also, “Item 11– Executive
Compensation – Resignation of our President and Chief Executive Officer,” in our
Amendment No. 1 to our 2009 Annual Report on Form 10-K that we filed with the
SEC on April 30, 2010 (2009 Form 10-K/A).
|
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.
ITEM
4. CONTROLS
AND PROCEDURES
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) under 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.
23
Changes in internal
controls
There
were no changes in our internal control over financial reporting identified in
connection with the evaluation required by Rule 13a-15(d) under the Exchange Act
that occurred during the quarter ended March 31, 2010 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART
II – OTHER INFORMATION
|
ITEM
1.
|
LEGAL
PROCEEDINGS
|
We are
not aware of any pending or threatened legal actions that would, if determined
adversely to us, have a material adverse effect on our business and
operations.
We have
from time to time been involved in disputes and proceedings arising in the
ordinary course of business, including in connection with the conduct of our
clinical trials. In addition, as a public company, we are also
potentially susceptible to litigation, such as claims asserting violations of
securities laws. Any such claims, with or without merit, if not
resolved, could be time-consuming and result in costly
litigation. There can be no assurance that an adverse result in any
future proceeding would not have a potentially material adverse effect on our
business, results of operations and financial condition.
|
ITEM
1A.
|
RISK
FACTORS
|
In
addition to the risks, uncertainties and other factors discussed in this Form
10-Q, see the risks and
uncertainties discussed in our 2009 Annual Report on Form 10-K and our 2009 Form
10-K/A, including the “Risk Factors” section contained in our 2009 Annual
Report on Form 10-K.
The
terms of our indebtedness may impair our ability to conduct our
business.
Our
capital requirements have been funded in part by the loan from PharmaBio,
with respect to which we completed a restructuring on April 28,
2010. Under the restructuring, we paid in cash $6.6 million of
the total outstanding ($10.6 million at the time of restructuring),
representing $4.5 million in outstanding principal and $2.1 million in
accrued interest. Of the remaining $4 million principal amount
under the loan, $2 million will now be due and payable on July 30, 2010 and
the balance of $2 million will be due and payable on September 30,
2010. If we make our payments on time, no further interest will
accrue on the outstanding principal amount. The PharmaBio loan is
secured by substantially all of our assets, including our proprietary
technologies, and contains a number of covenants and restrictions that, with
certain exceptions, restricts our ability to, among other things, incur
additional indebtedness, borrow money or issue guarantees, use assets as
security in other transactions, and sell assets to other
companies. In connection with the restructuring we agreed to an
additional covenant to maintain (i) at least $10 million in cash and cash
equivalents until payment of the first $2 million installment is made on or
before July 30, 2010, and (ii) at least $8 million in cash and cash
equivalents until the payment of the second $2 million installment on or
before September 30, 2010, after which the PharmaBio loan will be paid in
full. In order to comply with these cash covenants and to have
sufficient working capital to make payment of the remaining principal amount and
continue operate our business, we will likely need to secure sources of
additional capital. If we are unable to secure additional sources of
capital, we will be forced to further reduce our cash outflows and limit our
investments in our research and development programs. If we fail to
comply with the cash covenants required under the restructuring, PharmaBio would
have the right to declare all borrowings to be immediately due and
payable. If we are unable to pay when due amounts owed to PharmaBio,
whether at maturity or in connection with acceleration of the loan following a
default, PharmaBio would have the right to proceed against the collateral
securing the indebtedness.
24
Under the
restructuring, PharmaBio agreed to negotiate in good faith to potentially enter
into a strategic arrangement under which PharmaBio would provide funding for a
research collaboration between Quintiles and us relating to the possible
research and development, and commercialization of two of our drug product
candidates, Surfaxin LS and Aerosurf, for the prevention and treatment of RDS in
premature infants. In that event, it is possible that the remaining
principal payments might in the future be restructured, deferred or otherwise
satisfied without further cash outlays. However, neither party is
obligated to enter into any such arrangement and there can be no assurances that
any such arrangement will be completed or that we will be successful in securing
the additional capital required to continue our operations.
|
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
During
the three months ended March 31, 2010, 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 months
ended March 31, 2010.
For
disclosure on our working capital restrictions under our PharmaBio loan, please
refer to “Liquidity and Capital Resources – Overview.”
|
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.
25
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: May
10, 2010
|
By:
|
/s/ W. Thomas Amick | |
|
W.
Thomas Amick, Chairman of the Board and
Principal
Executive Officer
|
|||
|
Date: May
10, 2010
|
By:
|
/s/ John G. Cooper | |
| John G. Cooper | |||
|
Executive
Vice President and Chief Financial
Officer
(Principal Financial Officer)
|
|||
26
INDEX
TO EXHIBITS
The
following exhibits are included with this Quarterly Report on Form
10-Q.
|
Exhibit No.
|
Description
|
Method of Filing
|
||
|
3.1
|
Amended
and Restated Certificate of Incorporation of Discovery Laboratories, Inc.
(Discovery), dated December 9, 2009.
|
Incorporated
by reference to Exhibit 3.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on December 9, 2009.
|
||
|
3.2
|
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.
|
||
|
3.3
|
Amended
and Restated By-Laws of Discovery, as amended effective September 3,
2009.
|
Incorporated
by reference to Exhibit 3.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on September 4, 2009
|
||
|
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 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.
|
||
|
4.3
|
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.
|
||
|
4.4
|
Warrant
Agreement, dated as of November 3, 2004, by and between Discovery and
PharmaBio (formerly QFinance, Inc.)
|
Incorporated
by reference to Exhibit 4.1 of Discovery’s Quarterly Report on Form 10-Q
for the quarter ended September 30, 2004, as filed with the SEC on
November 9, 2004.
|
||
|
4.5
|
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.
|
||
|
4.6
|
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.
|
||
|
4.7
|
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.
|
||
|
4.8
|
Warrant
Agreement, dated November 22, 2006 by and between Discovery and Capital
Ventures International
|
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.
|
||
|
4.9
|
Warrant
Agreement dated May 22, 2008 by and between Kingsbridge Capital Limited
and Discovery.
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K as
filed with the SEC on May 28, 2008.
|
27
|
Exhibit No.
|
Description
|
Method of Filing
|
||
|
4.10
|
Warrant
Agreement dated December 12, 2008 by and between Kingsbridge Capital
Limited and Discovery.
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on December 15, 2008.
|
||
|
4.11
|
Form
of Stock Purchase Warrant issued in May 2009
|
Incorporated
by reference to Exhibit 10.3 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on May 8, 2009.
|
||
|
4.12
|
Form
of Stock Purchase Warrant issued in February 2010
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on February 18, 2010.
|
||
|
4.13
|
Warrant
Agreement, dated as of April 30, 2010, by and between Discovery and
PharmaBio
|
Incorporated
by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on April 28, 2010.
|
||
|
10.1
|
Payment
Agreement and Loan Amendment (amending the Second Amended and Restated
Loan Agreement, dated as of December 10, 2001, amended and restated as of
October 25, 2006) dated April 27, 2010, by and between Discovery and
PharmaBio
|
Incorporated
by reference to Exhibit 1.1 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on April 28, 2010.
|
||
|
10.2
|
Third
Amended Promissory Note dated April 27, 2010 (amending and restating the
Second Amended Promissory Note dated as of October 25, 2006), payable to
PharmaBio
|
Incorporated
by reference to Exhibit 1.2 to Discovery’s Current Report on Form 8-K, as
filed with the SEC on April 28, 2010.
|
||
|
10.3*
|
Retention
Letter dated May 4, 2010 by and between Robert Segal, M.D., F.A.C.P., and
Discovery
|
Filed
herewith.
|
||
|
31.1
|
Certification
of Principal 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 Principal 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.
|
|
*
|
A
management contract or compensatory plan or arrangement required to be
filed as an exhibit to this annual report pursuant to Item 15(b) of Form
10-K.
|
28
Retention
Letter
Dear Dr. Robert
Segal:
You are a
highly valuable employee of Discovery Laboratories, Inc. (the “Company”).
The Company wishes to retain you, Dr. Robert Segal (the “Executive”) as an
employee, and is therefore willing to make certain commitments in order to
induce you to remain an employee of the Company. This letter will confirm
the agreement between the Executive and the Company (“Agreement”) in that
regard. The Agreement is as follows:
1. Severance. (a) In the
event that the Executive’s employment is terminated (i) by the Company for any
reason other than for Cause or (ii) by the Executive for Good Reason (including
in the event any such for Cause or Good Reason termination occurs within
twenty-four (24) months after a Change of Control), then the Company shall make
a one-time, lump-sum payment to the Executive equal to twelve (12) months of the
then current base salary, plus a prorated Bonus award on or before the tenth day
following termination conditioned upon the receipt by the Company of the
Executive’s signed release in accordance with Section 6 herein.
|
|
(b)
|
Notwithstanding
any other provision with respect to the timing of payments under this
Section 1, in order to comply with the requirements of Section 409A of the
Internal Revenue Code of 1986 (“Section 409A”), any payment or portion
thereof, to which the Executive is entitled under this Section 1 which is
not exempt from the application of Section 409A’s “six month delay”
provision (in the Company’s sole discretion), shall be withheld until the
first business day of the seventh month following the Executive’s
termination. At such time, you shall be paid the remaining balance
otherwise owed to the Executive under this Section 1 in a lump
sum.
|
2. Definitions. For the
purposes of this Agreement, the following definitions apply:
|
|
(a)
|
“Cause”
means the Executive: (i) commits an act of dishonesty, fraud or
misrepresentation in connection with his or her employment which is
materially and demonstrably injurious to the Company; (ii) is convicted
of, or pleads nolo
contendere to, a felony; (iii) breaches any material obligation
under the Proprietary Information and Inventions Agreement or the
Company’s Code of Business Conduct and Ethics; (iv) engages in substantial
or continuing inattention to or neglect of the duties (including fiduciary
duties) and responsibilities reasonably assigned by or due to the Company;
provided such inattention or neglect remains uncured for a period of 10
days after written notice describing the same is given to the Executive;
or (v) engages in substantial or continuing acts to the detriment of the
Company or inconsistent with the Company’s policies or
practices.
|
|
|
(b)
|
“Good
Reason” means: (i) the failure of the Company to employ the Executive in
his or her current or a substantially similar position, without regard to
title, such that the Executive’s duties and responsibilities are
materially diminished without consent (ii) a reduction in Executive’s
then-current base salary without the Executive’s consent (unless such
reduction is in connection with a proportional reduction in compensation
to all or substantially all of the Company’s Executives); or (iii) a
relocation of the primary place of employment more than 30 miles from the
current site of employment without the Executive’s consent; provided
however, if any of these conditions occur, the Executive is required to
provide written notice of any such condition to the Company’s Chief
Executive Officer and General Counsel within 60 days of the initial
occurrence of the condition, and the Company will then have 20 days to
remedy the condition, prior to the existence of such condition being
deemed to be “Good Reason.”
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(c)
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a
“Change of Control” occurs: (i) when any person or entity other than the
Company or one of its subsidiaries becomes the owner of more than fifty
percent (50%) of the Company’s common stock or (ii) upon the effective
date of an agreement of acquisition, merger, or consolidation that has
been approved by the Company’s stockholders and that contemplates that all
or substantially all of the business and/or assets of the Company shall be
owned or otherwise controlled by another person or entity upon the
effective date of such agreement.
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(d)
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“Bonus”
shall mean an amount equal to the greater of either (i) the current year
target annual bonus amount or (ii) the previous year’s actual bonus; in
either case, multiplied by the fraction obtained by dividing the number of
days in the year through the date of termination by
365.
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3.
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Withholding. All
payments made by the Company under this Agreement shall be reduced by any
tax or other amounts required to be withheld by the Company under
applicable law.
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4.
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Medical and Dental
Benefits. In the event that the Executive’s employment is
terminated (i) by the Company for any reason other than for Cause or (ii)
by the Executive for Good Reason (including in the event any such for
Cause or Good Reason termination occurs within twenty-four (24) months
after a Change of Control), then the Company will maintain the Executive’s
medical and dental insurance coverage, providing substantially similar
benefits to those which the Executive and his dependents were receiving
immediately prior to the termination of employment, for a period of up to
twelve (12) months after the month in which employment
terminates. Provided, however, that Executive shall elect such
coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985
(COBRA) to the extent that COBRA benefits are available and that in any
event the Executive shall pay the employee portion for such coverage
(whether through COBRA or otherwise) by making a payment to the Company
during the first five (5) days of any month in which the continuation of
such coverage is elected and, provided further, that the Company’s
obligation to continue benefits shall be reduced to the extent that
substantially similar coverages (determined on a benefit-by-benefit basis)
are provided by a subsequent employer. The “qualifying event”
which triggers the Executive’s right to continue health insurance post
employment under COBRA shall be deemed to have occurred on the termination
date.
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5.
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No Contract of
Employment. This Agreement is not a contract of employment
for a specific term, and employment is “At Will” and may be terminated by
the Company at any time, subject to the terms of this
letter.
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6.
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Employee Release.
Any obligation of the Company to provide the Executive with severance
payments or other benefits under this Agreement is expressly conditioned
upon the Executive reviewing and signing (and not revoking during any
applicable revocation period) a general release of claims in a form
reasonably satisfactory to the Company within the time period specified in
such release. The Company shall provide the Executive with the
general release promptly after the date on which the Executive gives or
receives, as the case may be, notice of termination of
employment.
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2
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7.
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Assignment. The
Executive shall not make any assignment of this Agreement or any interest
in it, by operation of law or otherwise, without the prior written consent
of the Company. The Company may assign its rights and obligations
under this Agreement without consent. This Agreement shall inure to the
benefit of and be binding upon the Executive and the Company, and each of
our respective successors, executors, administrators, heirs and permitted
assigns, including any organization involved in a Change of
Control.
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8.
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Severability. If
any portion or provision of this Agreement shall to any extent be declared
illegal or unenforceable by a court of competent jurisdiction, then the
remainder of this Agreement, or the application of such portion or
provision in circumstances other than those as to which it is so declared
illegal or unenforceable, shall not be affected thereby, and each portion
and provision hereof shall be valid and enforceable to the fullest extent
permitted by law.
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9.
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Miscellaneous.
This Agreement will commence on the date hereof and will expire on
December 31, 2011, unless the Company experiences a Change of Control
prior to the expiration of the term of this Agreement, in which case this
Agreement will expire on the later of: (a) December 31, 2011, or (b) two
(2) years from the date of the closing of such Change of Control.
This Agreement sets forth the entire agreement between the Executive and
the Company in connection with the subject matter hereof, and replaces all
prior and contemporaneous communications, agreements and understandings,
written or oral, with respect to the subject matter hereof, other than any
obligations set forth in your employee confidentiality agreement with the
Company, which obligations shall remain in full force and effect. In
consideration of the benefits provided to the Executive hereunder, it is
agreed that, in the event of the Executive’s termination from the Company,
such benefits shall be in complete satisfaction of any and all obligations
that the Company may have to you. This Agreement may not be modified
or amended, and no breach shall be deemed to be waived, unless agreed to
in writing by the Executive and an expressly authorized representative of
the Company. This Agreement may be executed in two counterparts,
each of which shall be an original and all of which together shall
constitute one and the same instrument. This Agreement shall be
governed by the laws of the Commonwealth of Pennsylvania, without regard
to its conflicts of laws principles, and all disputes hereunder shall be
adjudicated in the courts of the Commonwealth of Pennsylvania, to whose
personal jurisdiction the Executive hereby consents
to.
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3
If the
foregoing is acceptable to you, please sign both copies of this letter in the
space provided, at which time this letter will take effect as a binding
agreement between the Executive and the Company. Please keep one original
for your records and return one original to me.
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Discovery
Laboratories, Inc.
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||
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By:
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/s/
Kathryn A.
Cole 5/4/2010
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Kathryn
A.
Cole Date
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||
Accepted
and Agreed:
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By:
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/s/
Robert
Segal 5/4/2010
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Dr.
Robert
Segal Date
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||
Exhibit
31.1
CERTIFICATIONS
I, W.
Thomas Amick, 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:
May 10, 2010
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/s/ W. Thomas
Amick
|
||
|
W.
Thomas Amick
|
|||
|
Chairman
of the Board and Interim 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:
May 10, 2010
|
|
/s/ John G. Cooper
|
|
|
John
G. Cooper
|
|||
|
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 March 31, 2010 (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:
May 10, 2010
|
||||
|
/s/
W. Thomas
Amick
|
||||
|
W.
Thomas Amick
|
||||
|
Chairman
of the Board and Interim Chief Executive
Officer
|
|
|||
| /s/ John G. Cooper | ||||
|
John
G. Cooper
|
||||
|
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.