Discovery
Laboratories, Inc.
200 Kelly
Red, Suite 100
Warrington,
PA 18976-3622
CONFIDENTIAL
VIA
EDGAR
November
8, 2010
Jim B.
Rosenberg
Division
of Corporation Finance
United
States Securities and Exchange Commission
100 F
Street, N.E.
Washington,
D.C. 20549
|
Re:
|
Discovery Laboratories, Inc. (the
“Company”)
|
Form 10-K
for the Year Ended December 31, 2009 (“2009 10-K”)
Form
10-K/A for the Year Ended December 31, 2009
Forms
10-Q for the Quarterly Periods Ended March 31 and June 30, 2010
File No.
000-26422
Dear Mr.
Rosenberg:
We refer
to the September 17, 2010 comment letter of the staff (the “Staff”) of the
Securities and Exchange Commission (the “Commission”) on the Company’s Annual
Report on Form 10-K for the Year Ended December 31, 2009, the amendment to such
Annual Report on Form 10-K/A and the Quarterly Reports on Form 10-Q for the
Periods Ended March 31 and June 30, 2010, and to the Company’s responses thereto
of October 1, 2010. By telephone call on November 5, 2010 to Messrs.
Ira Kotel and Roland Chase of our counsel, SNR Denton US LLP, Ms. Ibolya Ignat
conveyed additional comments (“Comments”) on behalf of the
Staff. This letter sets forth the Company’s responses to the
Comments. For your convenience, we have reproduced below in italics
each comment and have provided the Company’s response immediately below the
comment.
Form 10-K for the fiscal
year ended December 31, 2009
Item
1. Business
Business
Operations
Strategic Alliances and
Collaboration Arrangements
Laboratorios del Dr. Esteve,
S.A.
Philip Morris USA Inc. and
Philip Morris Products S.A., page 21
|
1.
|
We
refer to our original comment 1. You disclose in your response to our
prior comment 1 that you will provide additional disclosure in your Form
10-Q for the fiscal quarter ended September 30, 2010. We will
not be in a position to clear the comment until the disclosure has been
provided.
|
Securities
and Exchange Commission
November
8, 2010
Page 2
|
|
Response:
|
The
Company intends to include the following disclosure in its quarterly report on
Form 10-Q for the quarter ended September 30, 2010 (note, new language is underlined):
ITEM 1.
BUSINESS – Business Operations.
Strategic
Alliances and Technology License Agreements
Laboratorios
del Dr. Esteve, S.A.
We have a
strategic alliance with Laboratorios del Dr. Esteve, S.A. (Esteve) for the
development, marketing and sales of a broad portfolio of potential KL4
surfactant products in Andorra, Greece, Italy, Portugal, and
Spain. Esteve will pay us a transfer price on sales of Surfaxin and
other KL4 surfactant products. We will be responsible for the
manufacture and supply of all of the covered products and Esteve will be
responsible for all sales and marketing in the territory. Esteve is
obligated to make stipulated cash payments to us of up to $5.1 million in the
aggregate upon our achievement of certain milestones, primarily upon receipt of
marketing regulatory approvals for the covered products. In addition,
Esteve has agreed to contribute to Phase 3 clinical trials for the covered
products by conducting and funding development performed in the
territory. As part of a restructuring of this alliance in December
2004, we regained full commercialization rights to our KL4 surfactant technology
in portions of the original territory licensed to Esteve, including key European
markets, Central America, and South America (Former Esteve Territories) and
agreed to pay to Esteve 10% of any cash up-front and milestone fees (not to
exceed $20 million in the aggregate) that we may receive in connection with any
strategic collaborations for the development and/or commercialization of certain
of our KL4 surfactant products, including Surfaxin and Aerosurf in
the Former Esteve Territories. The alliance will terminate
as to each covered product, on a country-by-country basis, upon the latest to
occur of: the expiration of last patent claim related to a covered product in
such country; the first commercial sale in such country of the first-to-appear
generic formulation of the covered product, and the tenth anniversary of the
first sale of the covered product in such country. After all royalty
payment obligations have been satisfied, the license granted under the alliance
agreement becomes fully-paid. In addition to customary termination
provisions for breach of the agreement by a party, the alliance agreement may be
terminated by Esteve on 60 days’ prior written notice, up to the date of receipt
of the first marketing regulatory approval, or, on up to 6 months’ written
notice, if the first marketing regulatory approval has issued. We may
terminate the alliance agreement in the event that Esteve acquires a competitive
product (as defined in the agreement).
Securities
and Exchange Commission
November
8, 2010
Page 3
Johnson
& Johnson, Ortho Pharmaceutical Corporation and The Scripps Research
Institute
Our
precision-engineered surfactant platform technology, including Surfaxin, is
based on the proprietary synthetic peptide, KL4 (sinapultide), a 21 amino acid
protein-like substance that closely mimics the essential human lung protein
SP-B. This technology was invented at The Scripps Research Institute
(Scripps) and was exclusively licensed to and further developed by Johnson &
Johnson (J&J). We have received an exclusive, worldwide license
and sublicense from J&J and its wholly-owned subsidiary, Ortho
Pharmaceutical Corporation, for, and have rights to, a series of over 30 patents
and patent filings (worldwide) which are important, either individually or
collectively, to our strategy for commercializing our precision-engineered
surfactant technology for the diagnosis, prevention and treatment of
disease. The license and sublicense give us the exclusive rights to
such patents for the life of the patents. Under the
license agreement, we are obligated to pay licensors fees of up to $2.5 million
in the aggregate upon our achievement of certain milestones, primarily upon
receipt of marketing regulatory approvals for certain designated
products. In addition, we are required to make royalty payments at
different rates, depending upon type of revenue and country, in amounts of up to
a high single-digit percent of net sales (as defined in the agreement) of
licensed products sold by us or sublicensees, or, if greater, a percentage of
royalty income from sublicensees in the low double digits. The
license agreement will expire, on a country-by-country, upon expiration of the
last patent containing a valid claim covering a licensed product in such
country. After payment of all royalty obligations under the license
agreement, the licenses granted thereunder become fully-paid. In
addition to customary termination provisions for breach of the agreement by a
party, we may terminate the agreement, as to countries other than the U.S. and
Western Europe territories (as defined in the agreement), on a
country-by-country basis, on 6 months’ prior written notice; and as to the
entire agreement, on 60 days’ prior written notice.
Philip
Morris USA Inc. and Philip Morris Products S.A.
In March
2008, we restructured our December 2005 strategic alliance with Philip Morris
USA Inc. (PMUSA), d/b/a Chrysalis Technologies (Chrysalis), and assumed full
responsibility from Chrysalis for the further development of the capillary
aerosolization technology, including finalizing design development for the
initial prototype aerosolization device platform and disposable dose
packets. In connection with the restructuring, we restated our prior
agreement as of March 28, 2008 and entered into an Amended and Restated License
Agreement with PMUSA with respect to the United States (U.S. License Agreement),
and, as PMUSA had assigned to Philip Morris Products S.A. (PMPSA) all rights in
and to the capillary aerosolization technology outside of the United States
(International Rights), effective on the same date, we entered into a License
Agreement with PMPSA with respect to the International Rights (International
License Agreement) on substantially the same terms and conditions as the U.S.
License Agreement. We currently hold exclusive licenses to the
capillary aerosolization technology both in and outside of the United States for
use with pulmonary surfactants (alone or in combination with any other
pharmaceutical compound(s)) for all respiratory diseases and conditions (the
foregoing uses in each territory, the Exclusive Field). In addition,
under the U.S. License Agreement, our license to use the capillary
aerosolization technology includes other (non-surfactant) drugs to treat a wide
range of pediatric and adult respiratory indications in hospitals and other
health care institutions. Each License Agreement,
unless terminated earlier will expire as to each licensed product, on a
country-by-country basis, upon the latest to occur of: the date on which the
sale of such licensed product ceases to be covered by a patent claim of an
issued and unexpired patent in such country; the date a generic form of the
product is introduced in such country; and the tenth anniversary of the tenth
anniversary of the first commercial sale of such licensed product. In
addition to customary termination provisions for breach of the agreements, we
may terminate the License Agreements, in whole or in part, upon advance written
notice to the licensor. In addition, either party to each License Agreement may
terminate upon a material breach by the other party (subject to a specified cure
period).
Securities
and Exchange Commission
November
8, 2010
Page 4
As part
of the restructuring, Chrysalis completed a technology transfer, provided
development support to us through June 30, 2008, and also paid us $4.5 million
to support our future development activities. We are obligated to pay
royalties at a rate equal to a low single-digit percent of sales of products
sold in the Exclusive Field in the territories. In connection with
exclusive undertakings of PMUSA and PMPSA not to exploit the capillary
aerosolization technology for all licensed uses, we are obligated to pay
royalties on all product sales, including sales of aerosol devices and related
components that are not based on the capillary aerosolization technology;
provided, however, that no royalties are payable to the extent that we exercise
our right to terminate the license with respect to a specific
indication. We also agreed in the future to pay minimum royalties,
but are entitled to a reduction of future royalties in the amount of any minimum
royalties paid.
Form 10-Q for the quarterly
period ended June 30, 2010
Note 4 - Stockholder’s
Equity, page 8
Securities
and Exchange Commission
November
8, 2010
Page 5
|
2.
|
We
refer to your response to our original comment 6. It appears
that the warrants issued in your May 2009 registered offering and your
February 2010 public offering do not include explicit language to assure
that you would not be required in any circumstance to effect a net cash
settlement of the warrants. Notwithstanding your assertions
that you intended, and the holders agreed, that in the event that a
registration statement was not available, the holders’ only course of
action would be cashless exercise, the language in Section 1(d) of both
warrant agreements present the holder with the option to elect cashless
exercise. As the agreements merely permit the holders to opt
for cashless exercise, it appears that the holders may opt to force gross
settlement in registered shares, and since non-performance is not an
acceptable alternative under ASC 815-40-25-14, net cash settlement is
assumed. Please explain to us how the contractual provisions of
these warrants support your assertions that the holders agreed to only
exercise the warrants on a cashless basis if no registration statements
are available.
|
Response:
We advise you that, after extensive
discussions involving its management, Audit Committee, independent registered
public accounting firm and outside counsel, the Company has determined to change
its accounting treatment with respect to the warrants issued in its May 2009 and
February 2010 registered offerings to record such warrants as liabilities,
measured at fair value on the date of issue, with changes in the fair values
recognized in the Company’s quarterly statement of operations in its quarterly
financial reports. In connection therewith, the Company intends to
publish a press release and file a current report on Form 8-K on November 9,
2010 under Item 4.02(a) of Form 8-K. The Company furthermore
anticipates filing, on or before November 15, 2010, an amended Annual Report on
Form 10-K for the fiscal year ended December 31, 2009 and amended Quarterly
Reports on Form 10-Q for the quarterly periods ended March 31, 2010 and June 30,
2010, each with restated financial statements reflecting the reclassification of
the warrants, together with the Quarterly Report on Form 10-Q for the period
ended September 30, 2010.
In
addition, as discussed in our call this afternoon with Ibolya Ignat, Staff
Accountant, and Marc Brunhofer, Accounting Reviewer, in order to assist the
Staff in its review, we are enclosing as Appendix A hereto a
draft of the consolidated financial statements and related footnotes that the
Company proposes to include in its amended Annual Report on Form 10-K for the
fiscal year ended December 31, 2009, which includes draft disclosure of the
expected financial statement impact of the change in accounting treatment to
reflect the reclassification of the affected warrants from equity to a liability
in an amount equal to the fair value of the warrants, as of the dates of
issuance, calculated using the Black Scholes option pricing
model. The restatement will not have an impact on any other
amounts previously reported, including Assets; Revenues; Research and
Development Expenses and other operating expenses; Cash Flows; Loans, Equipment
Loan and Accounts Payables; and Contractual Obligations. It is
our intention to provide additional relevant draft disclosure to the Staff in
follow-up correspondence as soon as possible this week.
Securities
and Exchange Commission
November
8, 2010
Page 6
|
3.
|
We refer to the
representations in your previous response made by counsel on behalf
ofthe
registrant. We would like the Company to make those
representations.
|
Response:
The
Company hereby acknowledges that:
|
·
|
the
Company is responsible for the adequacy and accuracy of the disclosure in
the filings;
|
|
·
|
Staff
comments or changes to disclosure in response to Staff comments do not
foreclose the Commission from taking any action with respect to the
filings; and
|
|
·
|
the
Company may not assert Staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
|
If you
have any questions, or if we may be of any assistance, please do not hesitate to
contact the undersigned at (415) 488-9347 or Ira Kotel or Roland Chase at our
counsel, SNR Denton US LLP, at (973) 912-7100.
|
Sincerely,
|
|
|
/s/ Mary B.
Templeton
|
|
|
Mary
B. Templeton
|
|
|
Senior
Vice President and
|
|
|
Deputy
General Counsel
|
Copy
to:
Ibolya
Ignat, Staff Accountant
Marc
Brunhofer, Accounting Reviewer
Jennifer
C. Riegel, Staff Attorney
Division
of Corporation Finance
United
States Securities and Exchange Commission
100 F
Street, N.E.
Washington,
D.C. 20549
Securities
and Exchange Commission
November
8, 2010
Page 7
John C.
Cooper
David L.
Lopez
Discovery
Laboratories, Inc.
200 Kelly
Red, Suite 100
Warrington,
PA 18976-3622
Ira L.
Kotel
SNR
Denton US LLP
Two World
Financial Center
New York,
NY 10281-1008
Roland
Chase
SNR
Denton US LLP
101 JFK
Parkway
4th
Floor
Short
Hills, NJ 07078-2708
APPENDIX
A
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES ONLY
Consolidated
Balance Sheets
(In
thousands, except per share data)
|
December
31,
|
December
31,
|
|||||||
|
2009
|
2008
|
|||||||
|
ASSETS
|
(As
Restated)
|
|||||||
|
Current
Assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 15,741 | $ | 22,744 | ||||
|
Available-for-sale
marketable securities
|
– | 2,048 | ||||||
|
Prepaid
expenses and other current assets
|
233 | 625 | ||||||
|
Total
current assets
|
15,974 | 25,417 | ||||||
|
Property
and equipment, net
|
4,668 | 5,965 | ||||||
|
Restricted
cash
|
400 | 600 | ||||||
|
Other
assets
|
361 | 907 | ||||||
|
Total
assets
|
$ | 21,403 | $ | 32,889 | ||||
|
LIABILITIES
& STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Accounts
payable
|
$ | 1,294 | $ | 2,111 | ||||
|
Accrued
expenses
|
3,446 | 5,313 | ||||||
|
Common
stock warrant liability
|
3,191 | - | ||||||
|
Loan
payable, including accrued interest
|
10,461 | – | ||||||
|
Equipment
loan, current portion
|
597 | 2,442 | ||||||
|
Total
current liabilities
|
18,989 | 9,866 | ||||||
|
Loan
payable, including accrued interest
|
– | 10,128 | ||||||
|
Equipment
loan, non-current portion
|
428 | 1,092 | ||||||
|
Other
liabilities
|
690 | 870 | ||||||
|
Total
liabilities
|
20,107 | 21,956 | ||||||
|
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 and 180,000 shares authorized; 126,689
and 101,588 shares issued, 126,376 and 101,275 shares outstandingat
December 31, 2009 and December 31, 2008, respectively
|
127 | 102 | ||||||
|
Additional
paid-in capital
|
361,503 | 341,293 | ||||||
|
Accumulated
deficit
|
(357,280 | ) | (327,409 | ) | ||||
|
Treasury
stock (at cost); 313 shares
|
(3,054 | ) | (3,054 | ) | ||||
|
Accumulated
other comprehensive income
|
– | 1 | ||||||
|
Total
stockholders’ equity
|
1,296 | 10,933 | ||||||
|
Total
liabilities & stockholders’ equity
|
$ | 21,403 | $ | 32,889 | ||||
See
notes to consolidated financial statements
F-1
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES ONLY
Consolidated
Statements of Operations
(In
thousands, except per share data)
|
Year
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(As
Restated)
|
||||||||||||
|
Revenue
from collaborative arrangement and grants:
|
$ | – | $ | 4,600 | $ | – | ||||||
|
Expenses:
|
||||||||||||
|
Research
& development
|
19,077 | 26,566 | 26,200 | |||||||||
|
General
& administrative
|
10,120 | 16,428 | 13,747 | |||||||||
|
Total
expenses
|
29,197 | 42,994 | 39,947 | |||||||||
|
Operating
loss
|
(29,197 | ) | (38,394 | ) | (39,947 | ) | ||||||
|
Change
in fair value of common stock warrant liability
|
369 | - | - | |||||||||
|
Other
income / (expense):
|
||||||||||||
|
Interest
and other income
|
39 | 902 | 2,029 | |||||||||
|
Interest
and other expense
|
(1,082 | ) | (1,614 | ) | (2,087 | ) | ||||||
|
Other
income / (expense), net
|
(1,043 | ) | (712 | ) | (58 | ) | ||||||
|
Net
loss
|
$ | (29,871 | ) | $ | (39,106 | ) | $ | (40,005 | ) | |||
|
Net
loss per common share - basic and diluted
|
$ | (0.26 | ) | $ | (0.40 | ) | $ | (0.49 | ) | |||
|
Weighted
average number of common shares outstanding - basic and
diluted
|
115,200 | 98,116 | 81,731 | |||||||||
See
notes to consolidated financial statements
F-2
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES ONLY
Consolidated
Statements of Changes in Stockholders’ Equity
For
Years Ended December 31, 2009, 2008 and 2007
(In
thousands)
|
Common
Stock
|
Additional
Paid-in
|
Unearned
Portion
of
Compensatory
|
Accumulated
|
Treasury
Stock
|
Accumulated
Other
Com-
prehensive
Income/
|
|||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Stock
Options
|
Deficit
|
Shares
|
Amount
|
(Loss)
|
Total
|
||||||||||||||||||||||||||||
|
(As
Restated)
|
(As
Restated)
|
(As
Restated)
|
||||||||||||||||||||||||||||||||||
|
Balance
– January 1, 2007
|
69,871 | $ | 70 | $ | 265,604 | $ | – | $ | (248,298 | ) | (313 | ) | $ | (3,054 | ) | $ | – | $ | 14,322 | |||||||||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||||||||||||||
|
Net
loss
|
– | – | – | – | (40,005 | ) | – | – | – | (40,005 | ) | |||||||||||||||||||||||||
|
Other
comprehensive loss – unrealized gains on investments
|
– | – | – | – | – | – | – | 42 | 42 | |||||||||||||||||||||||||||
|
Total
comprehensive loss
|
– | – | – | – | – | – | – | – | (39,963 | ) | ||||||||||||||||||||||||||
|
Issuance
of common stock, stock option exercises
|
62 | – | 106 | – | – | – | – | – | 106 | |||||||||||||||||||||||||||
|
Issuance
of common stock, 401(k) employer match
|
118 | – | 294 | – | – | – | – | – | 294 | |||||||||||||||||||||||||||
|
Issuance
of common stock, April 2007 financing
|
14,050 | 14 | 28,131 | – | – | – | – | – | 28,145 | |||||||||||||||||||||||||||
|
Issuance
of common stock, December 2007 financing
|
10,000 | 10 | 23,550 | – | – | – | – | – | 23,560 | |||||||||||||||||||||||||||
|
Issuance
of common stock, CEFF financings
|
2,852 | 3 | 6,997 | – | – | – | – | – | 7,000 | |||||||||||||||||||||||||||
|
Stock–based
compensation expense
|
– | – | 5,317 | – | – | – | – | – | 5,317 | |||||||||||||||||||||||||||
|
Balance
– December 31, 2007
|
96,953 | $ | 97 | $ | 329,999 | $ | – | $ | (288,303 | ) | (313 | ) | $ | (3,054 | ) | $ | 42 | $ | 38,781 | |||||||||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||||||||||||||
|
Net
loss
|
– | – | – | – | (39,106 | ) | – | – | – | (39,106 | ) | |||||||||||||||||||||||||
|
Other
comprehensive loss – unrealized gains on investments
|
– | – | – | – | – | – | – | (41 | ) | (41 | ) | |||||||||||||||||||||||||
|
Total
comprehensive loss
|
– | – | – | – | – | – | – | – | (39,147 | ) | ||||||||||||||||||||||||||
|
Issuance
of common stock, stock option exercises
|
18 | – | 21 | – | – | – | – | – | 21 | |||||||||||||||||||||||||||
|
Issuance
of common stock, 401(k) employer match
|
231 | – | 380 | – | – | – | – | – | 380 | |||||||||||||||||||||||||||
|
Issuance
of common stock, CEFF financings
|
4,387 | 5 | 6,266 | – | – | – | – | – | 6,271 | |||||||||||||||||||||||||||
|
Stock-based
compensation expense
|
– | – | 4,627 | – | – | – | – | – | 4,627 | |||||||||||||||||||||||||||
|
Balance
– December 31, 2008
|
101,589 | $ | 102 | $ | 341,293 | $ | – | $ | (327,409 | ) | (313 | ) | $ | (3,054 | ) | $ | 1 | $ | 10,933 | |||||||||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||||||||||||||
|
Net
loss
|
– | – | – | – | (29,871 | ) | – | – | – | (30,240 | ) | |||||||||||||||||||||||||
|
Other
comprehensive loss – unrealized gains on investments
|
– | – | – | – | – | – | – | (1 | ) | (1 | ) | |||||||||||||||||||||||||
|
Total
comprehensive loss
|
– | – | – | – | – | – | – | – | (30,241 | ) | ||||||||||||||||||||||||||
|
Issuance
of common stock, restricted stock awards
|
21 | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
|
Issuance
of common stock, 401(k) employer match
|
347 | – | 290 | – | – | – | – | – | 290 | |||||||||||||||||||||||||||
|
Issuance
of common stock, May 2009 financing
|
14,000 | 14 | 6,891 | – | – | – | – | – | 6,905 | |||||||||||||||||||||||||||
|
Issuance
of common stock, CEFF financings
|
10,732 | 11 | 10,346 | – | – | – | – | – | 10,357 | |||||||||||||||||||||||||||
|
Stock-based
compensation expense
|
– | – | 2,683 | – | – | – | – | – | 2,683 | |||||||||||||||||||||||||||
|
Balance
– December 31, 2009
|
126,689 | $ | 127 | $ | 361,503 | $ | – | $ | (357,280 | ) | (313 | ) | $ | (3,054 | ) | $ | – | $ | 1,296 | |||||||||||||||||
See
notes to consolidated financial statements
F-3
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES ONLY
Consolidated
Statements of Cash Flows
(In
thousands)
|
Year
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Cash
flow from operating activities:
|
||||||||||||
|
Net
loss
|
$ | (29,871 | ) | $ | (39,106 | ) | $ | (40,005 | ) | |||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
1,992 | 2,215 | 2,062 | |||||||||
|
Stock–based
compensation and 401(k) match
|
2,973 | 5,007 | 5,613 | |||||||||
|
Fair
value adjustment of common stock warrants
|
(369 | ) | ||||||||||
|
Loss
on disposal of property and equipment
|
– | 110 | 18 | |||||||||
|
Changes
in:
|
||||||||||||
|
Prepaid
expenses and other current assets
|
392 | (56 | ) | (89 | ) | |||||||
|
Accounts
payable
|
(817 | ) | 1,353 | (871 | ) | |||||||
|
Accrued
expenses
|
(1,867 | ) | (1,773 | ) | 2,762 | |||||||
|
Other
assets
|
(1 | ) | 3 | 35 | ||||||||
|
Other
liabilities and accrued interest on loan payable
|
153 | 495 | 1,080 | |||||||||
|
Net
cash used in operating activities
|
(27,415 | ) | (31,752 | ) | (29,395 | ) | ||||||
|
Cash
flow from investing activities:
|
||||||||||||
|
Purchase
of property and equipment
|
(147 | ) | (632 | ) | (3,765 | ) | ||||||
|
Restricted
cash
|
200 | - | - | |||||||||
|
Purchase
of marketable securities
|
– | (25,765 | ) | (38,355 | ) | |||||||
|
Proceeds
from sale or maturity of marketable securities
|
2,047 | 39,754 | 22,319 | |||||||||
|
Net
cash provided by / (used in) investing activities
|
2,100 | 13,357 | (19,801 | ) | ||||||||
|
Cash
flow from financing activities:
|
||||||||||||
|
Proceeds
from issuance of securities, net of expenses
|
20,820 | 6,292 | 58,809 | |||||||||
|
Proceeds
from equipment loans
|
– | 896 | 2,862 | |||||||||
|
Principal
payments under equipment loan obligations
|
(2,508 | ) | (2,978 | ) | (1,948 | ) | ||||||
|
Net
cash provided by financing activities
|
18,312 | 4,210 | 59,723 | |||||||||
|
Net (decrease) /
increase in cash and cash equivalents
|
(7,003 | ) | (14,185 | ) | 10,527 | |||||||
|
Cash
and cash equivalents – beginning of year
|
22,744 | 36,929 | 26,402 | |||||||||
|
Cash and cash
equivalents – end of year
|
$ | 15,741 | $ | 22,744 | $ | 36,929 | ||||||
|
Supplementary
disclosure of cash flows information:
|
||||||||||||
|
Interest
paid
|
$ | 208 | $ | 529 | $ | 676 | ||||||
|
Non-cash
transactions:
|
||||||||||||
|
Unrealized gain / (loss) on
marketable securities
|
(1 | ) | (41 | ) | 42 | |||||||
|
Exchange of equipment loan
obligation
|
– | – | 3,968 | |||||||||
See
notes to consolidated financial statements
F-4
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES ONLY
Restatement
of Historical Financial Statements
The
accompanying consolidated balance sheet as of December 31, 2009 and the
consolidated statement of operations, equity, and cash flows for the year ended
December 31, 2009, have been restated in this report to reclassify certain
warrant contracts based on a reassessment of the applicable accounting and
classification, as more discussed in more detail in Note 2.
|
Note
1 – The
Company and Description of
Business
|
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. We met
with the FDA at an end-of-review meeting in June 2009 and by teleconference in
September 2009 to discuss specific proposals to resolve this sole remaining
Chemistry, Manufacturing & Control (CMC) issue, which must be addressed to
obtain approval of Surfaxin. Based on these and other interactions
with the FDA, we are currently implementing a protocol intended to optimize and
revalidate the BAT. This effort is ongoing and, although not
necessarily indicative of the final results, the BAT is presently meeting all
pre-specified acceptance criteria. Once the BAT is optimized and
revalidated, we plan to initiate a comprehensive preclinical program that will
consist of a series of a series of side-by-side studies comparing the results of
the BAT with those of the well-established preterm lamb model of RDS in order to
satisfy the FDA’s requirements with respect to the BAT. If these
studies are successful, we believe that we could be in a position to file a
Complete Response to the April 2009 Complete Response Letter in the first
quarter of 2011, which could lead to approval of Surfaxin for the prevention of
Respiratory Distress Syndrome (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 and 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 an ongoing Phase 2 clinical trial of Surfaxin to
potentially address Acute Respiratory Failure (ARF) and our KL4 surfactant
is 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.
F-5
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES ONLY
We are
actively assessing various strategic and financial alternatives to secure the
necessary capital to advance our KL4
respiratory pipeline programs to maximize stockholder value, although we
prefer to accomplish our objectives through strategic alliances. We
are actively engaged in current discussions with potential strategic and/or
financial partners, but there can be no assurance that any strategic alliance or
other financing alternatives will be successfully
concluded. Until we secure an alliance or other financing
alternative, we will continue to focus our financial resources on the potential
approval of Surfaxin, while minimizing investments in our other pipeline
programs.
Note
2 – Restatement of Financial Statements [Added Language]
In this Annual Report on
Form 10-K/A, we have restated our previously
issued consolidated financial statements and related disclosures for
the fiscal year ended December 31,
2009, and each of the
quarterly consolidated financial statements on Form 10-Q for the periods
ended June 30, 2009 and September 30, 2009 to reclassify
warrant contracts based on a reassessment of the applicable accounting and
classification.
We have
historically accounted for warrants, which prior to May 2009 were issued in
private transactions, as equity instruments. Our warrants generally
provide that, in the event the related registration statement or an exemption
from registration is not available for the issuance or resale of the warrant
shares, the holder may exercise the warrant on a cashless
basis. However, notwithstanding the availability of cashless
exercise, Accounting Standards Codification (ASC) Topic 815 “Derivatives and
Hedging — Contracts in Entity’s Own Equity” (ASC 815) (formerly known
as Emerging Issues Task Force Issue 00-19, “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”), as
interpreted, appears to establish a presumption that, in the absence of express
language to the contrary, registered warrants may be subject to net cash
settlement, as it is not within our absolute control to provide freely-tradable
shares in all circumstances. After extensive discussion, our
management, Ernst & Young, and our outside legal advisors concluded that,
although the interpretation and applicability of ASC 815 as it relates to
registered warrants is complex and subject to varying interpretations, it should
be applied based on a strict reading of the authoritative literature without
respect to any evaluation of remoteness or probability.
Applying
such a strict reading, the Audit Committee, together with management and in
consultation with Ernst & Young and our outside legal advisors, determined
that, notwithstanding the highly-remote and theoretical possibility of net cash
settlement, the warrants identified above should have been recorded as
liabilities, measured at fair value on the date of issue, with changes in the
fair values recognized in our quarterly statement of operations in our quarterly
financial reports. Accordingly, the Audit Committee has also
concluded on November 8, 2010 that the Company’s previously-filed consolidated
financial statements for the fiscal year ended December 31, 2009 on Form 10-K;
Ernst & Young’s reports on the financial statements and the effectiveness of
internal control over financial reporting for the fiscal year ended December 31,
2009; each of the consolidated financial statements included in the Company’s
Quarterly Reports on Form 10-Q for the periods ended June 30, 2009, September
30, 2009, March 31, 2010 and June 30, 2010; and all related earnings releases
and similar communications issued by the Company with respect to the foregoing,
should no longer be relied upon.
The
restatements reflect the reclassification of the warrants from equity to a
liability in the following amounts, which represents the fair value of the
warrants, as of the issuance dates, calculated using the Black-Scholes option
pricing model.
F-6
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES ONLY
|
Issuance
Date
|
Number
of Warrants Issued
|
Exercise
Price
|
Expiration
of Warrants
|
Fair
Value of Warrants at Issuance Date
|
|||||||||
|
(In
thousands)
|
|||||||||||||
|
May
13, 2009
|
7,000,000 | $ | 1.15 |
May
13, 2014
|
$ | 3,560 | |||||||
The
revaluation of the fair value of warrants at each subsequent balance sheet date,
results in a change in the carrying value of the liability, which change is
recorded as “Change in fair value of common stock warrant liability” in the
consolidated statement of operations. The net effect of these changes for fiscal
year ended December 31, 2009, and for each of the quarterly consolidated
financial statements on Form 10-Q for the periods ended June 30,
2009 and September 30, 2009 are as follows:
|
Reporting
Period
|
Income
(Loss) Resulting from Change in Fair Value of Common Stock Warrant Liability
|
|||
|
(In
thousands)
|
||||
|
Annual
|
||||
|
Year
ended December 31, 2009
|
$ | 369 | ||
|
Interim
(Unaudited)
|
||||
|
Quarter
ended June 30, 2009
|
$ | (1,323 | ) | |
|
Quarter
ended September 30, 2009
|
$ | (1,662 | ) | |
|
Quarter
ended December 31, 2009
|
$ | 3,354 | ||
We have
not amended our previously filed Quarterly Reports on Form 10-Q for the periods
ended June 30, 2009 and September 30, 2009 to reflect the restatements
described in this Amendment No. 2, and thus the financial statements and related
financial statement information contained in those reports should no longer be
relied upon. Throughout this Amendment No. 2, all amounts presented from prior
periods and prior period comparisons that have been revised are labeled as
“restated” and reflect the balances and amounts on a restated
basis.
The
following tables summarize the effect of the restatement on the specific items
presented in our historical consolidated financial statements included in the
Annual Report on Form 10-K as of the year ended
December 31, 2009:
|
Consolidated
Balance Sheet
|
December
31, 2009
|
December
31, 2009
|
||||||
|
(in
thousands)
|
(As
previously reported)
|
(As
restated)
|
||||||
|
Current
Liabilities:
|
||||||||
|
Common
stock warrant liability
|
$ | -- | $ | 3,191 | ||||
|
Total
Current Liabilities
|
15,798 | 18,989 | ||||||
|
Stockholders’
Equity:
|
||||||||
|
Additional
paid-in-capital
|
365,063 | 361,503 | ||||||
|
Accumulated
deficit
|
(357,649 | ) | (357,280 | ) | ||||
|
Total
Stockholders’ equity
|
4,487 | 1,296 | ||||||
|
Consolidated Statement
of Operations
|
Year
Ended
December
31, 2009
|
Year
Ended
December
31, 2009
|
||||||
|
(in
thousands)
|
(As
previously reported)
|
(As
restated)
|
||||||
|
Change
in fair value of common stock warrant liability
|
$ | -- | $ | 369 | ||||
|
Net
Loss
|
(30,240 | ) | (29,871 | ) | ||||
F-7
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES ONLY
| Note 3 – 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 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 of the April 2009 FDA Complete Response Letter for Surfaxin, 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. However, there can be no assurance that any strategic
alliance or other arrangement will be successfully concluded.
The
accompanying 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, which is included in our financial
statements in this report, 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 December 31, 2009
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. 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
December 31, 2009, we had cash and cash equivalents of $15.7
million. In February 2010, we completed a public offering resulting
in gross proceeds of $16.5 million ($15.1 million net). Also, as of
December 31, 2009, our $10.5 million loan with Quintiles (formerly PharmaBio
Development Inc. and NovaQuest™), a strategic investment group of Quintiles
Transnational Corp., is classified as a current liability, payable in April
2010. We are pursuing a potential strategic restructuring of this
loan; however, there can be no assurance that any such restructuring will occur.
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 March 5, 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 facility. See, Note 10 – Stockholders’
Equity, for details about our CEFFs. During 2009, we raised aggregate
gross proceeds of $22.0 million. In May 2009, we completed a public
offering of or common stock, resulting in gross proceeds of $11.3 million ($10.5
million net), and, throughout 2009, we raised an aggregate of $10.7 million from
10 draw-downs under our CEFFs. See, “Item 7 – Management’s
Discussion and Analysis of Financial Condition and Results of Operations –
Liquidity and Capital Resources – Committed Equity Financing Facilities
(CEFFs),” and “– Financings Pursuant to Common Stock Offerings.”
F-8
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES ONLY
| Note 4 – Summary of Significant Accounting Policies and Recent Accounting Pronouncements |
The
consolidated financial statements and accompanying notes are prepared in
accordance with accounting principles generally accepted in the United
States.
Consolidation
The
consolidated financial statements include all of the accounts of Discovery
Laboratories, Inc. and its inactive subsidiary, Acute Therapeutics,
Inc. All intercompany transactions and balances have been eliminated
in consolidation.
Use
of estimates
The
preparation of financial statements, in conformity with accounting principles
generally accepted in the United States, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
Cash,
cash equivalents and marketable securities
We
consider all highly liquid marketable securities purchased with a maturity of
three months or less to be cash equivalents.
Marketable
securities are classified as available-for-sale and carried at fair market
value, based on quoted market prices for these or similar
instruments. Realized gains and losses are computed using the average
cost of securities sold. Any appreciation/depreciation on these
marketable securities is recorded as other comprehensive income (loss) in the
statements of changes in stockholders’ equity until
realized. Realized gains (losses) on disposition of marketable
securities are recorded in the statement of operations when
disposed.
Marketable
securities are purchased pursuant to an investment policy approved by our Board
of Directors (the Board) that provides for the purchase of high-quality
marketable securities, while ensuring preservation of capital and fulfillment of
liquidity needs.
Fair
Value of Financial Instruments
Our
financial instruments consist principally of cash and cash equivalents,
marketable securities and restricted cash. The fair values of
the Company’s cash equivalents and marketable securities are based on quoted
market prices. The carrying amount of cash equivalents and marketable
securities is equal to their respective fair values at December 31, 2009 and
December 31, 2008.
Other
financial instruments, including accounts payable and accrued expenses, are
carried at cost, which the Company believes approximates fair
value.
Property
and equipment
Property
and equipment are recorded at cost and depreciated using the straight-line
method over the estimated useful lives of the assets (generally three to ten
years). Leasehold improvements are amortized over the shorter of the
estimated useful lives or the remaining term of the lease. Repairs
and maintenance costs are charged to expense as incurred.
F-9
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES ONLY
Long-lived
assets
Our
long-lived assets, primarily consisting of equipment, are reviewed for
impairment when events or changes in circumstances indicate the carrying amount
of an asset may not be recoverable, or its estimated useful life has changed
significantly. When an asset’s undiscounted cash flows are less than
its carrying value, an impairment is recorded and the asset is written down to
its estimated value. No impairment was recorded during the years
ended December 31, 2009, 2008 and 2007, as management believes there are no
circumstances that indicate the carrying amount of the assets will not be
recoverable.
Revenue
recognition under strategic alliances and collaboration agreements
Revenue
under strategic alliances and our collaboration agreements is recognized based
on the performance requirements of the contract. Upfront,
non-refundable license fees received in connection with collaboration agreements
are deferred and recognized as revenue over the life of the agreement or period
of performance obligations. Revenues derived from the achievement of
milestones are recognized when the milestone is achieved, as long as there are
no further performance obligations. Deferred revenue results from
cash received or amounts receivable in advance of revenue recognition based upon
the performance requirements of the contract. Grant revenue is
recorded upon receipt of funds.
Research
and development
Research
and development costs consist primarily of expenses associated with our
personnel, facilities, manufacturing operations, formulation development,
research, clinical, regulatory, other preclinical and clinical activities and
medical affairs. Research and development costs are charged to
operations as incurred.
Stock-based
compensation
Effective
January 1, 2006, we adopted the fair value recognition provisions of Accounting
Standards Codification (ASC) Topic 718 “Stock Compensation,” using
the modified-prospective-transition method. See, Note 11 – Stock Options
and Stock-based Employee Compensation, for a detailed description of our
recognition of stock-based compensation expense.
Warrant
accounting [Added Language]
We
account for registered common stock warrants in accordance with applicable
accounting guidance provided in ASC 815 “Derivatives and Hedging —
Contracts in Entity’s Own Equity” (formerly known as EITF 00-19). We
classify registered warrants on the consolidated balance sheet as a current
liability which is revalued at each balance sheet date subsequent to the initial
issuance. Determining the appropriate fair-value model and calculating the
fair value of registered warrants requires considerable management judgment,
including estimating stock price volatility and expected warrant life. We
develop our estimates based on historical data. A small change in the
estimates used may have a material impact in the estimated valuation. We
use the Black-Scholes pricing model to value the registered warrants.
Changes in the fair market value of the warrants are reflected in the
consolidated statement of operations as “Change in fair value of common stock
warrant liability.”
Income
taxes
We
provide for income taxes in accordance with Accounting Standards Codification
(ASC) Topic 740, “Accounting
for Income Taxes”. ASC Topic 740 requires the recognition of
deferred tax liabilities and assets for the expected future tax consequences of
temporary differences between financial statement carrying
amounts and the tax basis of assets and liabilities.
F-10
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES ONLY
We use a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. The adoption of ASC 740 on January 1, 2007 did not have a
material impact on the consolidated financial statements. Due to the
fact that we have never realized a profit, management has fully reserved the net
deferred tax asset since realization is not assured.
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 years ended
December 31, 2009, 2008 and 2007 are as follows:
|
(in
thousands)
|
December
31,
|
|||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(As
Restated)
|
||||||||||||
|
Net
loss
|
$ | (29,871 | ) | $ | (39,106 | ) | $ | (40,005 | ) | |||
|
Change
in unrealized (losses)/gains on marketable securities
|
(1 | ) | (41 | ) | 42 | |||||||
|
Comprehensive
loss
|
$ | (29,872 | ) | $ | (39,147 | ) | $ | (39,963 | ) | |||
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. For the
years ended December 31, 2009, 2008 and 2007, 30.9 million,
25.1 million and 20.3 million shares of common stock, respectively, were
potentially issuable upon the exercise of certain stock options and warrants and
vesting of restricted stock awards. 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.
Business
segments
We
currently operate in one business segment, which is the research and development
of products focused on surfactant replacement therapies for respiratory
disorders and diseases. We are managed and operated as one business. A single
management team that reports to the Chief Executive Officer comprehensively
manages the entire business. We do not operate separate lines of business with
respect to our product candidates.
Recent Accounting
Pronouncements
In
June 2009, the Financial Accounting Standards Board (FASB) issued the Accounting Standards
Codification™ (the Codification). The Codification now is the
single source of authoritative accounting principles recognized by FASB to be
applied by nongovernmental entities in the preparation of financial statements
in conformity with Generally Accepted Accounting Principles (GAAP), in the
United States. The Codification became effective for interim and
annual periods ending after September 15, 2009. All other
accounting literature not included in the Codification will be nonauthoritative,
except for additional authoritative rules and interpretive releases issued by
the United States Securities Exchange Commission (SEC). The
Codification is not intended to change GAAP; instead, it reorganizes the
thousands of US GAAP pronouncements into approximately 90 Accounting
Topics. Adoption of the Codification did not have an impact on our
consolidated financial statements.
In May
2009, FASB issued new guidance for accounting for subsequent
events. The new guidance, which is now part of Accounting Standards
Codification (ASC) Topic 855, Subsequent Events, is
consistent with existing auditing standards in its definition of subsequent
events, but requires disclosure of the date through which an entity has
evaluated subsequent events and the basis for that date. There are
two types of subsequent events: (1) events that provide additional evidence
about conditions that existed at the balance sheet date, and are recognized in
the financial statements, and (2) events that provide evidence about
conditions that did not exist at the balance sheet date, but arose before the
financial statements are issued or are available to be issued, and are not
recognized at the balance sheet date. The adoption of the new
guidance had no impact on our consolidated financial statements. We
evaluated all events or transactions that occurred after December 31, 1009 up
through March 10, 2010, the date these financial statements were issued and
filed with the SEC. During this period we had three material
nonrecognized subsequent events, which are described in Note 18.
F-11
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES ONLY
In
December 2007, FASB issued new guidance for accounting for collaborative
arrangements. The new guidance, which is now part of ASC Topic 808,
Collaborative
Arrangements, is effective for fiscal years beginning after December 15,
2008. The scope of the new guidance is limited to collaborative
arrangements where no separate legal entity exists and in which the parties are
active participants and are exposed to significant risks and rewards that depend
on the success of the activity. The new guidance requires certain
income statement presentation of transactions with third parties and of payments
between parties to the arrangement, along with disclosure about the nature and
purpose of the arrangement. The adoption of the new guidance on
January 1, 2009 did not have a material impact on our consolidated financial
statements.
In
December 2007, FASB issued new guidance for accounting for business
combinations. The new guidance, which is now part of ASC topic 805,
Business Combinations,
is effective for financial statements issued for fiscal years beginning on or
after December 15, 2008. The new guidance establishes principles
and requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree, and the goodwill acquired in the
business combination. ASC Topic 805 also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of the
business combination. We adopted the new guidance on January 1, 2009, which had
no immediate impact on our financial statements; however, it may have an impact
on the accounting for any potential future business combinations.
| Note 5 – Fair Value Measurements |
ASC Topic
820, Fair Value Measurements and Disclosures establishes a framework for
measuring fair value under GAAP and enhances disclosures about fair value
measurements.
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, as follows:
|
|
·
|
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.
|
F-12
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES ONLY
Assets
and liabilities measured at fair value on a recurring basis are categorized in
the table below based upon the lowest level of input (Level 1) as of December
31, 2009:
|
Fair
Value
|
Fair
value measurement using
|
|||||||||||||||
|
(in
thousands)
|
December
31, 2009
|
Level
1
|
Level
2
|
Level
3
|
||||||||||||
|
Assets:
|
||||||||||||||||
|
Money
markets (1)
|
$ | 14,690 | $ | 14,690 | $ | – | $ | – | ||||||||
|
Certificate
of deposit
|
600 | 600 | – | – | ||||||||||||
|
Total
T
|
$ | 15,290 | $ | 15,290 | $ | – | $ | – | ||||||||
|
(1)
Dreyfus Treasury & Agency Cash Management Fund.
|
||||||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Common
stock warrant liability
|
$ | 3,191 | $ | $ – | $ | – | $ | 3,191 | ||||||||
The
following table summarizes the activity of Level 3 inputs measured on a
recurring basis for the year ended December 31, 2009:
|
(in
thousands)
|
Fair
Value Measurements of Common Stock Warrants Using Significant Unobservable
Inputs
(Level
3)
|
|||
|
|
||||
|
Balance
at December 31, 2008
|
$
|
- | ||
|
Issuance
of common stock warrants
|
3,560 | |||
|
Change
in fair value of common stock warrant liability
|
(369 | ) | ||
|
Balance
at December 31, 2009
|
$
|
3,191 | ||
| Note 6 – Marketable Securities |
We did
not hold any available-for-sale marketable securities as of December 31,
2009. The following is a summary of available-for-sale marketable
securities as of December 31, 2008 and 2007:
F-13
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES
ONLY
|
(in
thousands)
|
Amortized
Cost Basis
|
Gross
Unrealized Holding Gains
|
Gross
Unrealized Holding Losses
|
Aggregate
Fair Value
|
||||||||||||
|
December 31,
2008
|
||||||||||||||||
|
U.S.
treasury notes
|
$ | 2,047 | $ | 1 | $ | – | $ | 2,048 | ||||||||
|
Total
|
$ | 2,047 | $ | 1 | $ | – | $ | 2,048 | ||||||||
|
December 31,
2007
|
||||||||||||||||
|
Commercial
paper
|
$ | 16,010 | $ | 42 | $ | – | $ | 16,052 | ||||||||
|
Certificates
of deposit
|
26 | – | – | 26 | ||||||||||||
|
Total
|
$ | 16,036 | $ | 42 | $ | – | $ | 16,078 | ||||||||
Available-for-sale
marketable securities consist of United States treasury notes, certificates of
deposits, and high-quality commercial paper with a maturity of greater than
three months. All available-for-sale marketable securities have a
maturity period of less than one year. These assets are measured at
fair market value at each reporting period. The fair market value is
recorded using quoted prices from active markets.
Marketable
securities are purchased pursuant to an investment policy approved by our Board
that provides for the purchase of high-quality marketable securities, while
ensuring preservation of capital and fulfillment of liquidity
needs.
| Note 7 – Restricted Cash |
Restricted
cash consists of a security deposit held by our bank in the amount of $600,000
to secure a letter of credit in the same notional amount held by our landlord to
secure our obligations under our Lease Agreement dated May 26, 2004 for our
headquarters location in Warrington, Pennsylvania (See, Note 14 – Commitments,
for further discussion on our leases). Under the terms of our Lease,
beginning in March 2010, the letter of credit (and the related security deposit)
will be reduced to $400,000 and will remain in effect at that level through the
remainder of the lease term. Subject to certain conditions, upon
expiration of the lease in February 2013, the letter of credit will expire and
the security deposit will be released.
| Note 8 – Property and Equipment |
Property
and equipment as of December 31, 2009 and 2008 was comprised of the
following:
| December 31, | ||||||||
|
(in
thousands)
|
2009
|
2008
|
||||||
|
Equipment
|
$ | 7,265 | $ | 7,143 | ||||
|
Furniture
|
791 | 791 | ||||||
|
Leasehold
improvements
|
2,838 | 2,813 | ||||||
|
Subtotal
|
10,894 | 10,747 | ||||||
|
Accumulated
depreciation and amortization
|
(6,226 | ) | (4,782 | ) | ||||
|
Property
and equipment, net
|
$ | 4,668 | $ | 5,965 | ||||
F-14
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES ONLY
Equipment
primarily consists of: (i) manufacturing equipment to produce our KL4 surfactant
products, including Surfaxin and Aerosurf, for use in our preclinical studies,
clinical trials and potential commercial needs; (ii) laboratory
equipment for manufacturing, analytical, research and development activities;
and (iii) computers and office equipment to support our overall business
activities.
Leasehold
improvements primarily consists of construction of a new analytical and
development laboratory in our Warrington, Pennsylvania headquarters, which was
completed in 2007 and where we consolidated the analytical, quality and
development activities previously located in Doylestown, Pennsylvania, and
Mountain View, California. The activities conducted in our laboratory
include release and stability testing of raw materials as well as preclinical,
clinical and, if approved, commercial drug product supply. We also
perform development work with respect to our aerosolized KL4 surfactant
and novel formulations of our KL4 surfactant
technology. The laboratory will be amortized through the end of the
lease term for our Warrington, Pennsylvania headquarters in 2013. In
addition, in 2007, we built a microbiology laboratory at our manufacturing
facility in Totowa, New Jersey, to support production of our drug product
candidates. The microbiology laboratory will be amortized through the
end of the lease term for our Totowa, New Jersey facility in 2014.
Depreciation
and amortization expense on property and equipment for the years ended December
31, 2009, 2008, and 2007 was $1.4 million, $1.6 million, and $1.5 million,
respectively.
| Note 9 – Accrued Expenses |
Accrued
expenses as of December 31, 2009 and 2008 were comprised of the
following:
|
December
31,
|
||||||||
|
(in
thousands)
|
2009
|
2008
|
||||||
|
Accrued
compensation(1)
|
$ | 1,763 | $ | 2,390 | ||||
|
Accrued
manufacturing
|
568 | 1,174 | ||||||
|
Accrued
research and development
|
332 | 374 | ||||||
|
All
other accrued expenses
|
783 | 1,375 | ||||||
|
Total
accounts payable and accrued expenses
|
$ | 3,446 | $ | 5,313 | ||||
|
Accrued
compensation consists of potential employee incentive arrangements
(pursuant to plans approved by our Board), contractual future severance
arrangements for our former President and Chief Executive Officer (see, Note 14 –
Commitments, for further discussion of this arrangement) and existing
union employees at our manufacturing operations, and employees’ unused
earned vacation.
|
||||||||
| Note 10 – Debt |
Loan Payable –
Quintiles
Quintiles
(formerly PharmaBio Development, Inc. and NovaQuest™) in 2001 extended to us a
secured, revolving credit facility, which we restructured in October
2006. The outstanding principal balance of the loan, $8.5 million, is
due and payable on April 30, 2010, together with all unpaid interest accrued
since July 1, 2006. Since October 2006, interest is calculated at the
prime rate, compounded annually. We may repay the loan, in whole or
in part, at any time without prepayment penalty or premium. In
addition, our obligations to Quintiles under the loan agreement are secured by a
security interest in substantially all of our assets, subject to limited
exceptions set forth in the related security agreement.
F-15
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES ONLY
Also in
October 2006, in consideration of Quintiles’s agreement to restructure the loan,
we entered into a Warrant Agreement with Quintiles, pursuant to which Quintiles
has the right to purchase 1.5 million shares of our common stock at an exercise
price of $3.5813 per share. The warrants have a seven-year term and
are exercisable, in whole or in part, for cash, cancellation of a portion of our
indebtedness under the Quintiles loan agreement, or a combination of the
foregoing, in an amount equal to the aggregate purchase price for the shares
being purchased upon any exercise.
As of
December 31, 2009, the outstanding balance under the loan was $10.5 million
($8.5 million principal and $2.0 million accrued interest) and was classified as
a current liability on the Consolidated Balance Sheet as of such
date.
For the
years ended December 31, 2009, 2008 and 2007, we incurred interest expense
associated with the Quintiles loan of $0.3 million, $0.5 million and $0.7
million, respectively. The decrease in interest expense in 2009 and
2008 is due to declines in the prime rate during 2008 ranging from 7.25% to
3.25%. During 2009, the prime rate remained at 3.25%. In
addition, for the years ended December 31, 2009, 2008 and 2007, we incurred
interest expense associated with the amortization of deferred financing costs in
connection with warrants issued to Quintiles in October 2006 of $0.5 million,
$0.5 million and $0.5 million, respectively.
Equipment
Loans
Our
equipment loan liabilities as of December 31, 2009 and 2008 are as
follows:
|
(in
thousands)
|
2009
|
2008
|
||||||
|
GE
Business Financial Services, Inc.
|
||||||||
|
Short-term
|
$ | 538 | $ | 2,385 | ||||
|
Long-term
|
65 | 664 | ||||||
|
Total
|
603 | 3,049 | ||||||
|
Pennsylvania
Machinery and Equipment Loan
|
||||||||
|
Short-term
|
59 | 57 | ||||||
|
Long-term
|
363 | 428 | ||||||
|
Total
|
422 | 485 | ||||||
|
Total
Short-term
|
597 | 2,442 | ||||||
|
Total
Long-term
|
428 | 1,092 | ||||||
|
Total
|
$ | 1,025 | $ | 3,534 | ||||
For the
years ended December 31, 2009, 2008 and 2007, we incurred interest expense
associated with our equipment loans of $0.2 million, $0.6 million and $0.6
million, respectively.
Equipment
Financing Facility with GE Business Financial Services Inc.
In May
2007, we entered into a Credit and Security Agreement (Credit Agreement) with GE
Business Financial Services Inc. (formerly Merrill Lynch Business Financial
Services Inc.) (GE), as Lender, pursuant to which GE agreed to provide a $12.5
million facility (Facility) to fund our capital programs. The right
to draw under this Facility expired on November 30, 2008. Over the
term of the Facility, we received $7.2 million, $4.0 million of which was
applied to prepayment of a prior facility and $2.3 million of which was
associated with construction and equipment for the analytical and development
laboratory that we built in our Warrington, Pennsylvania headquarters in
2007.
Advances
under the Facility to finance the acquisition of property and equipment are
amortized over a period of 36 months and all other equipment and related
costs are amortized over a period of 24 months. The advance to prepay
our prior facility is amortized over a period of 27 months. Interest
on each advance accrues at a fixed rate per annum equal to one-month LIBOR plus
6.25%, determined on the funding date of such advance. Principal and
interest on all advances are payable in equal installments on the first business
day of each month. We may prepay advances, in whole or in part, at
any time, subject to a prepayment penalty, which, depending on the period of
time elapsed from the closing of the Facility, will range from 4% to
1%.
F-16
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES ONLY
Our
obligations under the Facility are secured by a security interest in (i) the
financed property and equipment, and (ii) all of our intellectual property
(Supplemental Collateral), subject to limited exceptions set forth in the Loan
Agreement. The Supplemental Collateral will be released on the
earlier to occur of (a) receipt by us of FDA approval of our NDA for
Surfaxin for
the prevention of RDS in premature infants, or (b) the date on which we shall
have maintained over a continuous 12-month period ending on or after March 31,
2008, measured at the end of each calendar quarter, a minimum cash balance equal
to our projected cash requirements for the following 12-month
period. In addition, we, GE and Quintiles entered into an
Intercreditor Agreement under which GE agreed to subordinate its security
interest in the Supplemental Collateral (which does not include financed
property and equipment) to the security interest in the same collateral that we
previously granted to Quintiles as discussed above.
Pennsylvania
Machinery and Equipment Loan Fund (MELF)
We
entered into a Loan Agreement and Security Agreement with the Commonwealth of
Pennsylvania, Department of Community and Economic Development (Department),
effective September 8, 2008, 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)
to fund the purchase and installation of new machinery and equipment and the
upgrade of existing machinery and equipment at our analytical and development
laboratory in Warrington, Pennsylvania. Principal and interest on the
MELF Loan is payable in equal monthly installments over a period of seven
years. Interest on the principal amount accrues at a fixed rate of
five percent (5.0%) per annum. We may prepay the MELF Loan at any
time without penalty.
In
addition to customary terms and conditions, the MELF Agreement provides that we
must meet certain criteria regarding retention and creation of new jobs within a
three-year period. In the event that we fail to comply with this
requirement, the interest rate on the Promissory Note, except in limited
circumstances, will be adjusted to a fixed rate equal to two percentage points
above the current prime rate for the remainder of the term.
| Note 11 – Stockholders’ Equity |
Registered Public Offerings
and Private
Placements
In
February 2010, we completed a public offering of 27,500,000 shares of our common
stock and warrants to purchase 13,750,000 shares of our 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 a public offering price of $0.60
per unit, resulting in gross and net proceeds to us of $16.5 million and $15.1
million, respectively. The warrants expire in February 2015 and are
exercisable, subject to an aggregate share ownership limitation, at a price per
share of $0.85, for cash or, in the event that the related registration
statement or an exemption from registration is not available for the resale of
the warrant shares, on a cashless basis. This offering was made
pursuant to the 2008 Universal Shelf (see, Universal Shelf
Registration Statements of this Note).
In May
2009, we completed a registered direct offering of 14,000,000 shares of our
common stock and warrants to purchase 7,000,000 shares of our common stock, sold
as units to select institutional investors, 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 $0.81 per unit, resulting in gross and net proceeds to
us of $11.3 million and $10.5 million, respectively.
The
warrants expire in May 2014 and are exercisable, subject to an aggregate share
ownership limitation, at a price per share of $1.15, for cash or, in the event
that the related registration statement or an exemption from registration is not
available for the resale of the warrant shares, on a cashless
basis. This offering was made pursuant to our 2008 Universal
Shelf.
F-17
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES ONLY
In
December 2007, we completed a registered direct offering of 10,000,000 shares of
our common stock to select institutional investors. The shares were
priced at $2.50 per share resulting in gross and net proceeds to us of $25.0
million and $23.6 million, respectively. This offering was made
pursuant to the 2005 Universal Shelf (see, Universal Shelf
Registration Statements of this Note).
In April
2007, we completed a registered direct offering of 14,050,000 shares of our
common stock to select institutional investors. The shares were
priced at $2.15 per share resulting in gross and net proceeds to us of $30.2
million and $28.1 million, respectively. This offering was made
pursuant to our 2005 Universal Shelf.
Committed Equity Financing
Facilities (CEFFs)
We have
entered into four Committed Equity Financing Facilities (CEFFs) with Kingsbridge
Capital Limited (Kingsbridge), a private investment group, under which
Kingsbridge is committed to purchase, subject to certain conditions,
newly-issued shares of our common stock. The CEFFs allow us, at our
discretion, to raise capital at the time and in amounts deemed suitable to us,
to support our business plans. We are not obligated to utilize any of
the funds available under the CEFFs. Each CEFF is available for a
period of 2 to 3 years from inception. Should we choose to utilize
any of the CEFFs, our ability to access the funds available under the CEFFs is
subject to certain conditions, including stock price and volume
limitations.
As of
December 31, 2009, we had two CEFFs available for future financings as follows:
the CEFF dated December 12, 2008 (December 2008 CEFF) and the CEFF dated May 22,
2008 (May 2008 CEFF). A third CEFF entered in April 2006 expired on
May 12, 2009 and is no longer available. The following table sets
forth an overview of the “draw down” requirements and availability under each
CEFF:
|
(in
millions, except per
share
data and trading days)
|
Minimum
Price
to
Initiate Draw
Down(1)
|
Minimum VWAP for Daily Pricing(2) | # of Trading Days In Each Draw Down(2) |
Amount
per Contract
|
Potential
Availability
at
December
31, 2009
|
|||||||||||||||||||||
|
Expiration
|
Shares
|
Maximum
Proceeds
|
Shares
|
Maximum
Proceeds
|
||||||||||||||||||||||
|
May
2008 CEFF
|
June
18, 2011
|
$ | 1.15 |
90%
of the
closing
market price
on
the day
preceding
the first day
of
draw
down
|
8 | 19.3 | $ | 60.0 | 12.8 | $ | 51.8 | |||||||||||||||
|
Dec.
2008 CEFF
|
Feb.
6, 2011
|
$ | 0.60 | 6 | 15.0 | $ | 25.0 | 7.1 | $ | 17.7 | ||||||||||||||||
|
(1)
|
To
initiate a draw down, the closing price of our common stock on the trading
day immediately preceding the firsttrading day of the draw down period
must be at least equal to the minimum price set forth
above.
|
|
(2)
|
If
on any trading day, the daily volume-weighted average of our common stock
(VWAP) is less than the minimum VWAP set forth above, no shares are
purchased on that trading day and the aggregate amount that we originally
designated for the overall draw down is reduced for each such day by
1/8th
in the case of the December 2008 CEFF, and 1/6th
in the case of the May 2008 CEFF, respectively . Unless we and
Kingsbridge agree otherwise, a minimum of three trading days must elapse
between the expiration of any draw-down pricing period and the beginning
of the next draw-down pricing
period.
|
Each draw
down is limited in amount as follows:
Laboratorios del Dr. Esteve, S.A.
|
|
·
|
May
2008 CEFF – the lesser of 3.0 percent of the closing price market value of
the outstanding shares of our common stock at the time of the draw down or
$10 million; and
|
|
|
·
|
December
2008 CEFF – the lesser of 1.5 percent of the closing price market value of
the outstanding shares of our common stock at the time of the draw down or
$3 million.
|
F-18
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES ONLY
The
purchase price of shares sold to Kingsbridge under the CEFFs is at a discount to
the VWAP (as defined in the applicable agreement) for each of the trading days
following our initiation of a “draw down” under the CEFF, as
follows:
|
Daily
VWAP
|
%
of VWAP
|
Applicable Discount
|
||||||
|
May
2008 CEFF
|
||||||||
|
Greater
than $7.25 per share
|
94 | % | 6 | % | ||||
|
Less
than or equal to $7.25 but greater than $3.85 per share
|
92 | % | 8 | % | ||||
|
Less
than or equal to $3.85 but greater than $1.75 per share
|
90 | % | 10 | % | ||||
|
Less
than or equal to $1.75 but greater than or equal to $1.15 per
share
|
88 | % | 12 | % | ||||
|
December
2008 CEFF
|
||||||||
|
Greater
than $7.25 per share
|
94 | % | 6 | % | ||||
|
Less
than or equal to $7.25 but greater than $3.85 per share
|
92 | % | 8 | % | ||||
|
Less
than or equal to $3.85 but greater than $1.75 per share
|
90 | % | 10 | % | ||||
|
Less
than or equal to $1.75 but greater than or equal to $1.10 per
share
|
88 | % | 12 | % | ||||
|
Less
than or equal to $1.10 but greater than or equal to $.60
|
85 | % | 15 | % | ||||
In
addition, Kingsbridge may terminate the CEFFs under certain circumstances,
including if a material adverse event relating to our business continues for 10
trading days after notice of the material adverse event.
In
connection with the December 2008 CEFF, we issued a warrant to Kingsbridge on
December 22, 2008 to purchase up to 675,000 shares of our common stock at an
exercise price of $1.5132 per share. The warrant expires in May 2014
and is exercisable, in whole or in part, for cash, except in limited
circumstances, with expected total proceeds to us, if exercised, of
approximately $1.0 million. As of December 31, 2009, this warrant had
not been exercised.
In
connection with the May 2008 CEFF, we issued a warrant to Kingsbridge on May 22,
2008 to purchase up to 825,000 shares of our common stock at an exercise price
of $2.506 per share. The warrant expires in November 2013 and is
exercisable, in whole or in part, for cash, except in limited circumstances,
with expected total proceeds to us, if exercised, of approximately $2.1
million. As of December 31, 2009, this warrant had not been
exercised.
In
connection with the 2006 CEFF, we issued a Class C Investor Warrant to
Kingsbridge on April 17, 2006 to purchase up to 490,000 shares of our common
stock at an exercise price equal to $5.6186 per share. The warrant
expires in October 2011 and is exercisable, in whole or in part, for cash,
except in limited circumstances, with expected total proceeds to us, if
exercised, of approximately $2.8 million. As of December 31, 2009,
this Class C Investor Warrant had not been exercised.
In
connection with a CEFF that we entered in 2004, we issued a Class B Investor
Warrant to Kingsbridge to purchase up to 375,000 shares of our common stock at
an exercise price equal to $12.0744 per share. The warrant expired
unexercised in January 2010.
CEFF
Financings
The financings that we completed under
the December 2008 CEFF are:
(in
thousands, except per share data)
|
Completion Date
|
Shares Issued
|
Gross Proceeds
|
Discounted Average Price
Per Share
|
|||||||||
|
April
8, 2009
|
806 | $ | 1,000 | $ | 1.24 | |||||||
|
May
7, 2009
|
1,273 | 1,000 | 0.79 | |||||||||
|
September
23, 2009
|
1,793 | 1,583 | 0.88 | |||||||||
|
October
13, 2009
|
1,909 | 1,800 | 0.94 | |||||||||
|
October
21, 2009
|
2,101 | 1,900 | 0.90 | |||||||||
F-19
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES ONLY
The
financings that we completed under the May 2008 CEFF are:
(in
thousands, except per share data)
|
Completion Date
|
Shares Issued
|
Gross Proceeds
|
Discounted Average Price
Per Share
|
|||||||||
|
July
11, 2008
|
1,105 | $ | 1,563 | $ | 1.41 | |||||||
|
July
31, 2008
|
992 | 1,500 | 1.51 | |||||||||
|
October
17, 2008
|
914 | 1,313 | 1.44 | |||||||||
|
November
20, 2008
|
221 | 250 | 1.13 | |||||||||
|
January
2, 2009
|
479 | 500 | 1.04 | |||||||||
|
January
16, 2009
|
419 | 438 | 1.04 | |||||||||
|
February
18, 2009
|
857 | 1,000 | 1.17 | |||||||||
|
March
31, 2009
|
1,015 | 1,094 | 1.08 | |||||||||
|
October
13, 2009
|
559 | 606 | 1.09 | |||||||||
The
financings that we completed under the now expired 2006 CEFF are:
(in
thousands, except per share data)
|
Completion Date
|
Shares Issued
|
Gross Proceeds
|
Discounted Average Price
Per Share
|
|||||||||
|
May
29, 2006
|
1,079 | $ | 2,188 | $ | 2.03 | |||||||
|
October
11, 2006
|
1,205 | 2,300 | 1.91 | |||||||||
|
November
10, 2006
|
1,372 | 3,000 | 2.19 | |||||||||
|
February
22, 2007
|
943 | 2,000 | 2.12 | |||||||||
|
October
12, 2007
|
1,909 | 5,000 | 2.62 | |||||||||
|
September
9, 2008
|
676 | 1,250 | 1.85 | |||||||||
401(k) Employer
Match
We have a
voluntary 401(k) savings plan covering eligible employees that allows for
periodic discretionary matches as a percentage of each participant’s
contributions (up to the maximum deduction allowed, excluding “catch up”
amounts) in newly issued shares of common stock. For the years ended
December 31, 2009, 2008 and 2007, the match resulted in the issuance of 346,904,
231,287, and 118,330 shares of common stock, respectively.
F-20
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES ONLY
Common Shares Reserved for
Future Issuance
Common
shares reserved for potential future issuance upon exercise of
warrants
The chart
below summarizes shares of our common stock reserved for future issuance upon
the exercise of warrants.
|
(in
thousands, except price per share data)
|
|||||||||||||
|
December
31,
|
Exercise
Price
|
Expiration
Date
|
|||||||||||
|
2009
|
2008
|
||||||||||||
|
Investor
Warrants – May 2009 Financing (1)
|
7,000 | - | $ | 1.15 |
5/13/2014
|
||||||||
|
Kingsbridge
– December 2008 CEFF(2)
|
675 | 675 | $ | 1.51 |
6/12/2014
|
||||||||
|
Kingsbridge
– May 2008 CEFF(2)
|
825 | 825 | $ | 2.51 |
11/22/2013
|
||||||||
|
Private
Placement – 2006 (3)
|
2,315 | 2,315 | $ | 3.18 |
11/22/2011
|
||||||||
|
Quintiles
- 2006 Loan Restructuring (4)
|
1,500 | 1,500 | $ | 3.58 |
10/26/2013
|
||||||||
|
Class
C Investor Warrants - 2006 CEFF (2)
|
490 | 490 | $ | 5.62 |
10/17/2011
|
||||||||
|
Quintiles
- 2004 Partnership Restructuring (5)
|
850 | 850 | $ | 7.19 |
11/3/2014
|
||||||||
|
Class
B Investor Warrants - 2004 CEFF (2)
|
375 | 375 | $ | 12.07 |
1/6/2010
|
||||||||
|
Class
A Investor Warrants – 2003
|
809 | 809 | $ | 6.88 |
9/19/2010
|
||||||||
|
Total
|
14,839 | 7,839 | |||||||||||
|
|
(1)
|
Refer
to the Registered Public Offerings and Private Placements section of this
Note.
|
|
|
(2)
|
Refer
to the Registered Public Offerings and Private Placements section of this
Note.
|
|
|
(3)
|
In
Nov. 2006, in connection with a sale of 4.6 million shares of our common
stock, we issued warrants to purchase common stock at an exercise price
equal to $3.18 per share. The warrants expire in Nov. 2011 and, subject to
an aggregate share ownership limitation, are exercisable, in whole or in
part, for cash, except in limited circumstances, with expected proceeds to
us of $7.4 million. As of December 31, 2009, the warrants had not been
exercised
|
|
|
(4)
|
Refer
to Note 9 – Debt
|
|
|
(5)
|
Issued
in connection with a restructuring of a 2003 arrangement with Quintiles
Transnational Corp that resulted in cancellation of a 2001
commercialization agreement and extension of the Quintiles Loan. Refer to
Note 9 – Debt.
|
Common
shares reserved for potential future issuance upon exercise of stock
options
In June
2007, our stockholders approved the adoption of the 2007 Long-Term Incentive
Plan (the “2007 Plan”). The 2007 Plan provides for the grant of
long-term equity and cash incentive compensation awards and replaced the Amended
and Restated 1998 Stock Incentive Plan (the “1998 Plan”) whose ten-year term was
to expire in March 2008. The 2007 Plan continues many of the features
of the 1998 Plan, but is updated to reflect changes to Nasdaq rules regarding
equity compensation, other regulatory changes and market and corporate
governance developments. Awards outstanding under the 1998 Plan will
continue to be governed by the terms of the 1998 Plan and the agreements under
which they were granted.
F-21
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES ONLY
Stock
options outstanding and available for future issuance as of December 31, 2009
and 2008 are as follows:
|
(in
thousands)
|
As
of December 31,
|
|||||||
|
2009
|
2008
|
|||||||
|
2007
Plan
|
||||||||
|
Outstanding
|
6,688 | 7,296 | ||||||
|
Available for Future
Grants
|
1,812 | 1,204 | ||||||
|
Total
|
8,500 | 8,500 | ||||||
|
1998
Plan
|
||||||||
|
Outstanding
|
9,298 | 9,916 | ||||||
|
Available for Future
Grants
|
– | – | ||||||
|
Total
|
9,298 | 9,916 | ||||||
|
Total
Outstanding
|
15,986 | 17,212 | ||||||
|
Total
Available for Future Grants
|
1,812 | 1,204 | ||||||
|
Total
|
17,798 | 18,416 | ||||||
The 1998
Plan was suspended upon approval of the 2007 Plan in June 2007; therefore, no
shares were available for future grants under the 1998 Plan. See, Note 11 – Stock Options
and Stock-based Employee Compensation.
Universal
Shelf Registration Statements
2008
Universal Shelf
In June
2008, we filed a universal shelf registration statement on Form S-3 (No.
333-151654) (2008 Universal Shelf) 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. As of December 31, 2009 and March 1, 2010, respectively,
up to $138.7 million and $122.2 million of our securities are potentially
available for issuance pursuant to the 2009 Universal Shelf. See, Registered Public
Offering and Private Placements in this Note for offerings made pursuant to the
2008 Universal Shelf.
2005
Universal Shelf
In
October 2005, we filed a universal shelf registration statement on Form S-3
(File No. 333-128929) (2005 Universal Shelf) with the SEC for the proposed
offering, from time to time, of up to $100 million of our debt or equity
securities. See,
Registered Public Offering and Private Placements in this Note for a discussion
of offerings pursuant to the 2008 Universal Shelf. The October 2005
Universal Shelf expired in December 2008.
Common shares reserved for potential
future issuance under CEFF arrangements
As of
December 31, 2009, the Company had two CEFFs available for future financings, as
follows:
|
(in
thousands)
|
Potential
future issuance
as
of December 31,
|
||||||||
|
Expiration
|
2009
|
2008
|
|||||||
|
May
2008 CEFF
|
June
18, 2011
|
12,768 | 15,618 | ||||||
|
December
2008 CEFF
|
February
6, 2011
|
7,118 | 15,000 | ||||||
F-22
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES ONLY
Common
shares reserved for potential future issuance under our 401(k)
Plan
In
September 2009 and December 2008, our Board approved an increase of 160,000 and
350,000 shares, respectively, to the reserve for issuance under the 401(k)
Plan. As of December 31, 2009 and 2008, we had 137,435 and 324,339
shares, respectively, reserved for potential future issuance under the 401(k)
Plan.
Note
12 – Stock Options and Stock-based Employee Compensation
Long-Term
Incentive Plans
In June
2007, our stockholders approved the 2007 Plan, which replaced the 1998 Plan,
which by its terms would have expired in March 2008. See, Note 10 – Common shares
reserved for potential future issuance upon exercise of stock
options. The purposes of the 2007 Plan are to (i) encourage eligible
participants to acquire a proprietary interest in our company, (ii) provide
employees incentives to contribute to our future success, thereby enhancing
stockholder value, and (iii) attract and retain exceptionally qualified
individuals upon whom, in large measure, our sustained progress, growth and
profitability depend.
Under the
2007 Plan, we may grant awards for up to 8,500,000 shares of our common
stock. An administrative committee (the Committee – currently the
Compensation Committee of the Board) or Committee delegates may determine the
types, the number of shares covered by, and the terms and conditions of, such
awards. Eligible participants may include any of our employees,
directors, advisors or consultants.
The 2007
Plan continues many of the features of the 1998 Plan, but is updated to reflect
changes to Nasdaq rules regarding equity compensation, other regulatory changes
and market and corporate governance developments. Awards outstanding
under the 1998 Plan continue to be governed by the terms of that plan and the
applicable award agreements.
Award
under the two plans may include:
Stock
Options and Stock Appreciation Rights (SARs)
The
Committee may award nonqualified stock options, incentive stock options, or SARs
with a term of not more than ten years and a purchase price not be less than
100% of the fair market value on the date of grant. The Committee
will establish the vesting schedule for stock options and the method of payment
for the exercise price, which may include cash, shares, or other
awards. Although individual grants may vary, option awards generally
are exercisable upon vesting, vest based upon three years of continuous service
and have a 10-year term. In addition, the 2007 Plan provides for
limits on the number of options and SARs granted to any one participant and the
terms of any incentive stock option must comply with the provisions of Section
162(m) of the Internal Revenue Code.
Restricted
Stock and Restricted Stock Units
The
Committee may grant restricted stock awards (RSAs) and restricted stock units
and, among other things, establish the applicable restrictions, including any
limitation on voting rights or the receipt of dividends, and will establish the
manner and timing under which restrictions may lapse. If employment
is terminated during the applicable restriction period (other than as a result
of death or disability), shares of restricted stock and restricted stock units
still subject to restriction will be forfeited, except as determined otherwise
by the Committee.
Performance Awards and Other
Stock-Based Awards
The
Committee may grant performance awards, which may be denominated in cash,
shares, other securities or other awards and payable to, or exercisable by, the
participant upon the achievement of performance goals during performance
periods, as established by the Committee. The Committee may grant
other stock-based awards that are denominated or payable in shares, under the
terms and conditions as the Committee will determine. The Committee
may decide to include dividends or dividend equivalents as part of a performance
or other stock-based award, and may accrue dividends, with or without interest,
until the award is paid.
F-23
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES ONLY
Automatic
Grant of Non-Employee Director Options
Each
non-employee directors is entitled to automatic option grants on specified dates
as follows: (i) options to purchase 40,000 shares on the date of first election
or appointment to the board and (ii) options to purchase 30,000 shares on the
date of each subsequent annual stockholders meeting if such director continues
to, and has served as a director for at least six
months. Non-employee director options vest on the first anniversary
of the date of grant (subject to continued service through such date) and will
otherwise vest in full upon the termination of service as a result of death or
disability. Non-employee director options have a term of ten years
(subject to earlier termination twelve months after any termination of
service).
No SARs
or Performance Awards have been granted under either plan. No RSAs
have been granted under the 2007 Plan. Under the 1998 Plan, in 2007,
56,660 RSAs were granted to certain employees for no cash
consideration. These RSAs initially were to vest on the date that
Surfaxin for RDS first becomes widely commercially available; however, the
Committee amended the vesting provisions in 2009 to provide for vesting on the
third anniversary of the grant date. As of December 31, 2009, there
were 27,500 unvested restricted stock awards outstanding, which vested on
January 3, 2010.
Under the
2007 Plan, as of December 31, 2009, options to purchase 6,687,719 shares of
common stock were outstanding and 1,812,281 shares were available for potential
future grants. As of December 31, 2008, options to purchase 7,295,667
shares of common stock were outstanding and 1,204,333 shares were available for
potential future grants. Under the 1998 Plan, options to purchase
9,297,792 and 9,916,644 shares of common stock were outstanding as of December
31, 2009 and December 31, 2008, respectively. No shares are available
for future grants under the 1998 Plan.
A summary
of option activity under the 2007 Plan and 1998 Plan as of December 31, 2009 and
changes during the periods ended December 31, 2007, 2008 and 2009, respectively,
is presented below:
|
(in
thousands, except for weighted-average data)
Stock
Options
|
Price
Per Share
|
Shares
|
Weighted-Average
Exercise Price
|
Weighted-Average
Remaining Contractual Term (In Yrs)
|
||||||||||||
|
Outstanding
at December 31, 2006
|
$0.19 – $10.60 | 10,690 | $ | 4.89 | ||||||||||||
|
Granted
|
2.08 – 3.58 | 3,907 | 2.94 | |||||||||||||
|
Exercised
|
0.19 – 2.46 | (61 | ) | 1.72 | ||||||||||||
|
Forfeited or
expired
|
0.19 – 9.80 | (606 | ) | 5.07 | ||||||||||||
|
Outstanding
at December 31, 2007
|
$0.19 – $10.60 | 13,930 | $ | 4.35 | ||||||||||||
|
Granted
|
1.21 – 2.90 | 3,950 | 1.78 | |||||||||||||
|
Exercised
|
0.32 – 1.62 | (18 | ) | 1.21 | ||||||||||||
|
Forfeited or
expired
|
0.19 – 10.60 | (650 | ) | 5.17 | ||||||||||||
|
Outstanding
at December 31, 2008
|
$0.81 – $10.43 | 17,212 | $ | 3.72 | ||||||||||||
|
Granted
|
0.49 – 1.18 | 297 | 0.78 | |||||||||||||
|
Exercised
|
-- | -- | -- | |||||||||||||
|
Forfeited or
expired
|
0.81 – 9.17 | (1,523 | ) | 2.63 | ||||||||||||
|
Outstanding
at December 31, 2009
|
$0.49 – $10.43 | 15,986 | $ | 3.76 | 6.1 | |||||||||||
|
Exercisable
at December 31, 2009
|
$1.15 – $10.43 | 13,608 | $ | 4.09 | 5.7 | |||||||||||
F-24
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES ONLY
Based
upon application of the Black-Scholes option-pricing formula described below,
the weighted-average grant-date fair value of options granted during the years
ended December 31, 2009, 2008 and 2007 was $0.56, $0.88 and $2.05,
respectively. The total intrinsic value of options exercised during
the years ended December 31, 2009, 2008 and 2007 was $0, $13,000 and $57,000,
respectively. The total intrinsic value of options outstanding,
vested and exercisable as of December 31, 2009 is $13,000, $0 and $0,
respectively.
A summary
of the status of our nonvested shares issuable upon exercise of outstanding
options and changes during 2009 is presented below:
|
(shares
in thousands)
|
Option
Shares
|
Weighted-Average
Grant-Date Fair Value
|
||||||
|
Non-vested
at December 31, 2008
|
6,607 | $ | 1.40 | |||||
|
Granted
|
297 | .56 | ||||||
|
Vested
|
(3,636 | ) | 1.55 | |||||
|
Forfeited
|
(891 | ) | 1.33 | |||||
|
Non-vested
at December 31, 2009
|
2,377 | $ | 1.11 | |||||
The
following table provides detail with regard to options outstanding, vested and
exercisable at December 31, 2009:
|
(shares
in thousands)
|
Outstanding
|
Vested
and Exercisable
|
|||||||||||||||||
|
Price
per share
|
Shares
|
Weighted-
Average
Price
per
Share
|
Weighted-
Average
Remaining
Contractual
Life
|
Shares
|
Weighted-
Average
Price
per
Share
|
Weighted-
Average Remaining
Contractual
Life
|
|||||||||||||
|
$0.49
– $2.00
|
4,148 | $ | 1.63 |
7.86
Years
|
2,404 | $ | 1.69 |
7.23
years
|
|||||||||||
|
$2.01
– $4.00
|
7,463 | $ | 2.66 |
6.41
Years
|
6,829 | $ | 2.65 |
6.44
years
|
|||||||||||
|
$4.01
– $6.00
|
657 | $ | 4.75 |
0.88
Years
|
657 | $ | 4.75 |
0.88
years
|
|||||||||||
|
$6.01
– $8.00
|
|
1,350 | $ | 6.87 |
5.26
Years
|
1,350 | $ | 6.87 |
5.26
years
|
||||||||||
|
$8.01
– $10.00
|
2,343 | $ | 8.93 |
4.24
Years
|
2,343 | $ | 8.93 |
4.24
years
|
|||||||||||
|
$10.01
– $10.43
|
25 | $ | 10.43 |
4.22
Years
|
25 | $ | 10.43 |
4.22
years
|
|||||||||||
| 15,986 | 13,608 | ||||||||||||||||||
Stock-Based
Compensation
As a
result of adopting Accounting Standards Codification (ASC) Topic 718 “Stock Compensation,” on
January 1, 2006, we recognized compensation expense for the years ended December
31, 2009, 2008 and 2007 of $2.7 million, $4.6 million and $5.3 million,
respectively.
F-25
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES ONLY
Stock-based
compensation expenses was classified as follows:
|
Years
Ended December 31,
|
||||||||||||
|
(in
thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Research
and development
|
$ | 649 | $ | 1,501 | $ | 1,706 | ||||||
|
General
and administrative
|
2,035 | 3,127 | 3,613 | |||||||||
|
Total
|
$ | 2,684 | $ | 4,628 | $ | 5,319 | ||||||
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option-pricing formula that uses assumptions noted in the
following table. Expected volatilities are based upon the historical
volatility of our common stock and other factors. We also use
historical data and other factors to estimate option exercises, employee
terminations and forfeiture rates within the valuation model. The
risk-free interest rates are based upon the U.S. Treasury yield curve in effect
at the time of the grant.
|
Years
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Weighted
average expected volatility
|
99 | % | 81 | % | 88 | % | ||||||
|
Weighted
average expected term
|
4.7
years
|
4.6
years
|
4.8
years
|
|||||||||
|
Weighted
average risk-free interest rate
|
1.7 | % | 2.1 | % | 4.8 | % | ||||||
|
Expected
dividends
|
– | – | – | |||||||||
The total
fair value of the underlying shares of the options vested during 2009, 2008, and
2007 equals $5.6 million, $4.7 million and $4.9 million,
respectively. As of December 31, 2009, there was $2.2 million of
total unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the Plan. That cost is
expected to be recognized over a weighted-average vesting period of 1.37
years.
On August
13, 2009, Dr. Robert J. Capetola, our former President and Chief Executive
Officer, resigned his position and with us and as a member of our
Board. Under the terms of a Separation of Employment Agreement and
General Release dated August 13, 2009 between Dr. Capetola and ourselves, all of
Dr. Capetola’s outstanding RSAs and options immediately vested and all such RSAs
and options shall remain exercisable to the end of their stated
terms. During 2009, the company recognized $0.3 million in stock
option modification costs related to these items.
Note
13 – Corporate Partnership, Licensing and Research Funding
Agreements
Laboratorios del Dr. Esteve, S.A.
We have a
strategic alliance with Laboratorios del Dr. Esteve, S.A. (Esteve) for the
development, marketing and sales of a broad portfolio of potential products in
Andorra, Greece, Italy, Portugal, and Spain. Esteve will pay us a
transfer price on sales of Surfaxin and other KL4 surfactant
products. We will be responsible for the manufacture and supply of
all of the covered products and Esteve will be responsible for all sales and
marketing in the territory. Esteve is obligated to make stipulated
cash payments to us upon our achievement of certain milestones, primarily upon
receipt of marketing regulatory approvals for the covered
products. In addition, Esteve has agreed to contribute to Phase 3
clinical trials for the covered products by conducting and funding development
performed in the territory. As part of a restructuring of this
alliance in December 2004, we regained full commercialization rights to our
KL4
surfactant technology in portions of the original territory licensed to Esteve,
including key European markets, Central America, and South America (Former
Esteve Territories) and agreed to pay to Esteve 10% of any cash up-front and
milestone fees (not to exceed $20 million in the aggregate) that we may receive
in connection with any strategic collaborations for the development and
commercialization of certain of our KL4 surfactant
products, including Surfaxin and Aerosurf in the Former Esteve
Territories.
F-26
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES ONLY
Licensing
and Research Funding Agreements
Philip
Morris USA Inc. and Philip Morris Products S.A.
In March
2008, we restructured our December 2005 strategic alliance with Philip Morris
USA Inc. (PMUSA), d/b/a Chrysalis Technologies (Chrysalis), and assumed full
responsibility from Chrysalis for the further development of the capillary
aerosolization technology, including finalizing design development for the
initial prototype aerosolization device platform and disposable dose
packets. In connection with the restructuring, we restated our prior
agreement as of March 28, 2008 and entered into an Amended and Restated License
Agreement with PMUSA with respect to the United States (U.S. License Agreement),
and, as PMUSA had assigned to Philip Morris Products S.A. (PMPSA) all rights in
and to the capillary aerosolization technology outside of the United States
(International Rights), effective on the same date, we entered into a License
Agreement with PMPSA with respect to the International Rights (International
License Agreement) on substantially the same terms and conditions as the U.S.
License Agreement. We currently hold exclusive licenses to the
capillary aerosolization technology both in and outside of the United States for
use with pulmonary surfactants (alone or in combination with any other
pharmaceutical compound(s)) for all respiratory diseases and conditions (the
foregoing uses in each territory, the Exclusive Field). In addition,
under the U.S. License Agreement, our license to use the capillary
aerosolization technology includes other (non-surfactant) drugs to treat a wide
range of pediatric and adult respiratory indications in hospitals and other
health care institutions.
As part
of the restructuring, Chrysalis completed a technology transfer, provided
development support to us through June 30, 2008, and also paid us
$4.5 million to support our future development activities. We
are obligated to pay royalties at a rate equal to a low single-digit percent of
sales of products sold in the Exclusive Field in the territories. In
connection with exclusive undertakings of PMUSA and PMPSA not to exploit the
capillary aerosolization technology for all licensed uses, we are obligated to
pay royalties on all product sales, including sales of aerosol devices and
related components that are not based on the capillary aerosolization
technology; provided, however, that no royalties are payable to the extent that
we exercise our right to terminate the license with respect to a specific
indication. We also agreed in the future to pay minimum royalties,
but are entitled to a reduction of future royalties in an amount equal to the
excess of any minimum royalty paid over royalties actually earned in prior
periods.
Johnson
& Johnson and Ortho Pharmaceutical Corporation
We,
Johnson & Johnson and its wholly-owned subsidiary, Ortho Pharmaceutical
Corporation, are parties to an agreement granting to us an exclusive worldwide
license to the proprietary KL4 surfactant
technology, including Surfaxin, in exchange for certain license fees, milestone
payments aggregating up to $2,500,000 and royalties. To date, we have
paid $450,000 of such amount for milestones that have been
achieved.
Note
14 – Commercial Strategy and Cost Containment Measures
Following
receipt of the April 2009 Complete Response Letter for Surfaxin for the
prevention of RDS in premature infants, we reviewed all aspects of our business
with a view to conserving our cash and implemented a fundamental change in our
business strategy. We no longer are planning to establish our own
specialty pulmonary organization to commercialize our potential pediatric
products in the United States. Rather, to secure capital and advance our KL4 surfactant
pipeline programs, we are now seeking strategic alliances in all markets,
including the United States, to support our research and development programs
and, if approved, to commercialize our products.
In
addition, in April 2009, we implemented cost containment measures and reduced
our workforce from 115 to 91 employees, focusing primarily on our commercial and
corporate administrative groups. We continue to maintain our core
capabilities to support development of our KL4 surfactant
technology, including quality, manufacturing and research and development
resources. We incurred a charge of $0.6 million in the second quarter
of 2009 associated with staff reductions and the close-out of certain
contractual arrangements, which is included within the appropriate line items on
the Statements of Operations ($0.4 million in general and administrative
expenses and $0.2 million in research and development expenses). As
of December 31, 2009, payments totaling $0.6 million had been made related to
these items and $29,000 was unpaid, as follows:
F-27
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES ONLY
|
(in
thousands)
|
Severance
and Benefits Related
|
Termination
of Commercial Programs
|
Total
|
|||||||||
|
Q2
2009 Charge
|
$ | 554 | $ | 74 | $ | 628 | ||||||
|
Payments
/ Adjustments
|
(450 | ) | -- | (450 | ) | |||||||
|
Liability
as of June 30, 2009
|
$ | 104 | $ | 74 | $ | 178 | ||||||
|
Payments
/ Adjustments
|
(97 | ) | (4 | ) | (101 | ) | ||||||
|
Liability
as of September 30, 2009
|
$ | 7 | $ | 70 | $ | 77 | ||||||
|
Payments
/ Adjustments
|
(7 | ) | (41 | ) | (48 | ) | ||||||
|
Liability
as of December 31, 2009
|
$ | - | $ | 29 | $ | 29 | ||||||
Note
15 – Commitments
Future
payments due under contractual obligations at December 31, 2009 are as
follows:
.
(in thousands)
|
|
2010
|
2011
|
2012
|
2013
|
2014
|
There-after
|
Total
|
|||||||||||||||||||||
|
Loan
payable(1)
|
$ | 10,573 | $ | – | $ | – | $ | – | $ | – | $ | – | $ | 10,573 | ||||||||||||||
|
Equipment
loan obligations(1)
|
722 | 152 | 85 | 85 | 85 | 70 | 1,199 | |||||||||||||||||||||
|
Operating
lease obligations
|
1,127 | 1,146 | 1,166 | 320 | 150 | – | 3,909 | |||||||||||||||||||||
|
CEO
Severance obligations
|
1,211 | – | – | – | – | – | 1,211 | |||||||||||||||||||||
|
Total
|
$ | 13,633 | $ | 1,298 | $ | 1,251 | $ | 405 | $ | 235 | $ | 70 | $ | 16,892 | ||||||||||||||
(1) See, Note 9: “Debt”
Our
operating leases consist primarily of facility leases for our operations in
Pennsylvania and New Jersey.
We
maintain our headquarters in Warrington, Pennsylvania. The facility
is 39,594 square feet and serves as the main operating facility for clinical
development, regulatory, analytical technical services, research and
development, and administration. In April 2007, the lease,
which originally expired in February 2010 with total aggregate payments of $4.6
million, was extended an additional three years through February 2013 with
additional payments of $3.0 million over the extension period.
We lease
approximately 21,000 square feet of space for our manufacturing facility in
Totowa, New Jersey, at an annual rent of $150,000. This space is
specifically designed for the manufacture and filling of sterile pharmaceuticals
in compliance with cGMP and is our only manufacturing facility. The
lease expires in December 2014, subject to the landlord’s right, upon two years’
prior notice, to terminate the lease early. This early termination
right is subject to certain conditions, including that the master tenant, a
related party of the landlord, must have ceased all activities at the premises,
and, depending upon the timing of the notice, if we satisfy certain financial
conditions, the landlord would be obligated to make early termination payments
to us. At the present time, we understand that the master tenant
continues to be active in the premises. The total aggregate payments over
the term of the lease are $1.4 million. In connection with our
manufacturing operations in Totowa, New Jersey, we have 15 employees subject to
a collective bargaining arrangement which expires on December 3,
2010. For a discussion of our manufacturing strategy, see, “Item 1 – Business –
Business Operations – Manufacturing and Distribution,” in our Annual Report on
Form 10-K.
F-28
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES ONLY
Our lease
for 5,600 square feet of office and analytical laboratory space in Doylestown,
Pennsylvania was terminated effective July 31, 2008 and all activities at this
location have been consolidated into our laboratory space in Warrington,
Pennsylvania. Our lease for 16,800 square feet of office and
laboratory space at our facility in Mountain View, California, expired without
renewal or extension on June 30, 2008. In December 2007, we
consolidated these activities into our laboratory space in Warrington,
Pennsylvania.
Rent
expense under all of these leases for the years ended December 31, 2009, 2008,
and 2007 was $1.1 million, $1.2 million and $1.5 million,
respectively.
In
addition to the contractual obligations above, we have certain milestone and
royalty payment obligations to Johnson & Johnson related to our product
licenses. To date, of the $2,500,000 aggregate potential amount of
such milestone payments, we have paid $450,000 for milestones that have been
achieved.
Former
CEO Commitment
Effective
August 13, 2009, Dr. Robert J. Capetola resigned his positions as our President
and Chief Executive Officer and as a member of our Board. We entered
into a separation agreement and general release (Separation Agreement) with Dr.
Capetola providing for (i) an upfront severance payment of $250,000, and (ii)
periodic payments in an amount equal to his base salary (calculated at a rate of
$490,000 per annum), in accordance with our payroll practices and less required
withholdings. The periodic payments will end the earlier of (x) May
3, 2010 or (y) the date, if ever, that a Corporate Transaction (as defined
below) occurs. In addition, Dr. Capetola will be entitled to (A)
continuation of medical benefits and insurance coverage for a period of 24 or 27
months, depending upon circumstances, and (B) accelerated vesting of all
outstanding restricted shares and options, which shall remain exercisable to the
end of their stated terms.
The
Separation Agreement provides further that, upon the occurrence of a Corporate
Transaction prior to May 4, 2010, Dr. Capetola will receive a payment of up to
$1,580,000 (Additional Severance) or, if any such Corporate Transaction also
constitutes a Change of Control (as such term is defined in the Separation
Agreement), a payment of up to $1,777,500; provided, however, that, in each
case, any such payment will be reduced by the sum of the amounts described in
clauses (i) and (ii) of this paragraph that theretofore have been
paid. A “Corporate Transaction” is defined in the Separation
Agreement as (1) one or more corporate partnering or strategic alliance
transactions, Business Combinations or public or private financings that (A) are
completed during the Severance Period (as defined in the Separation Agreement)
and (B) result in cash proceeds (net of transaction costs) to the Company of at
least $20 million received during the Severance Period or within 90 calendar
days thereafter, or (2) an acquisition of the Company, by business combination
or other similar transaction, that occurs during the Severance Period and the
consideration paid to stockholders of the Company, in cash or securities, is at
least $20 million. For this purpose, net proceeds will be calculated
without taking into account any amounts received by the Company as reimbursement
for costs of development and research activities to be performed in connection
with any such transaction. See
also, Note 18 – Subsequent Events.
Note
16 – Litigation
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.
F-29
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES ONLY
Note
17 – Income Taxes [To Be Confirmed]
Since our
inception, we have never recorded a provision or benefit for Federal and state
income taxes.
The
reconciliation of the income tax benefit computed at the Federal statutory rates
to our recorded tax benefit for the years ended December 31, 2009, 2008 and 2007
is as follows:
|
(in
thousands)
|
December
31,
|
|||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Income
tax benefit, statutory rates
|
$ | 10,282 | $ | 13,296 | $ | 13,601 | ||||||
|
State
taxes on income, net of Federal benefit
|
423 | 2,102 | 2,363 | |||||||||
|
Research
and development tax credit
|
756 | 1,026 | 960 | |||||||||
|
Employee
Related
|
(1,471 | ) | (1,306 | ) | (1,118 | ) | ||||||
|
Other
|
(19 | ) | (32 | ) | (24 | ) | ||||||
|
Income
tax benefit
|
9,971 | 15,086 | 15,782 | |||||||||
|
Valuation
allowance
|
(9,971 | ) | (15,086 | ) | (15,782 | ) | ||||||
|
Income
tax benefit
|
$ | – | $ | – | $ | – | ||||||
The tax
effects of temporary differences that give rise to deferred tax assets and
deferred tax liabilities, at December 31, 2009 and 2008, are as
follows:
|
(in
thousands)
|
December
31,
|
|||||||
|
2009
|
2008
|
|||||||
|
Long-term
deferred tax assets:
|
||||||||
|
Net operating loss
carryforwards
(Federal and
state)
|
$ | 126,291 | $ | 115,401 | ||||
|
Research and development tax
credits
|
7,893 | 7,137 | ||||||
|
Compensation expense on
stock
|
4,730 | 4,334 | ||||||
|
Charitable contribution
carryforward
|
6 | 6 | ||||||
|
Other accrued
|
1,635 | 2,073 | ||||||
|
Depreciation
|
2,341 | 2,494 | ||||||
|
Capitalized research and
development
|
2,069 | 2,411 | ||||||
|
Total
long-term deferred tax assets
|
144,965 | 133,857 | ||||||
|
Long-term
deferred tax liabilities
|
– | – | ||||||
|
Net
deferred tax assets
|
144,632 | 133,857 | ||||||
|
Less: valuation
allowance
|
(144,965 | ) | (133,857 | ) | ||||
|
Deferred
tax assets, net of valuation allowance
|
$ | – | $ | – | ||||
We are in
a net deferred tax asset position at December 31, 2009 and 2008 before the
consideration of a valuation allowance. Due to the fact that we have
never realized a profit, management has fully reserved the net deferred tax
asset since realization is not assured.
At
December 31, 2009 and 2008, we had available carryforward net operating losses
for Federal tax purposes of $315.5 million and $292.6 million, respectively, and
a research and development tax credit carryforward of $7.9 million and $7.1
million, respectively. The Federal net operating loss and research
and development tax credit carryforwards began to expire in 2008 and will
continue through 2028. Approximately $11.9 million of the $315.5 net
operating loss carryforwards expire prior to 2013.
F-30
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES ONLY
At
December 31, 2009, we had available carryforward Federal and state net operating
losses of $1.8 million and $16,000, respectively, related to stock based
compensation. Additionally, at December 31, 2008 and 2007, we had
available carryforward losses of approximately $271.1 million and $250.2
million, respectively, for state tax purposes. Of the $271.1 state
tax carryforward losses, $246.7 million is associated with the state of
Pennsylvania, with the remainder associated with New Jersey, California and
Florida.
Utilization
of net operating loss (NOL) and research and development (R&D) credit
carryforwards may be subject to a substantial annual limitation under Section
382 of the Internal Revenue Code of 1986 due to ownership change limitations
that have occurred previously or that could occur in the
future. These ownership changes may limit the amount of NOL and
R&D credit carryforwards that can be utilized annually to offset future
taxable income and tax, respectively. There also could be additional
ownership changes in the future which may result in additional limitations in
the utilization of the carryforward NOLs and credits.
A full valuation allowance has been
provided against our research and development credits and, if a future
assessment requires an adjustment, an adjustment would be offset by an
adjustment to the valuation allowance. Thus, there would be no impact
to the consolidated balance sheet or statement of operations if an adjustment
were required.
Federal
and state net operating losses, $1.8 million and $16,000, respectively, relate
to stock-based compensation, the tax effect of which will result in a credit to
equity as opposed to income tax expense, to the extent these losses are utilized
in the future.
On
January 1, 2007, we adopted the provisions of Accounting Standards Codification
(ASC) Topic 740, “Accounting
for Income Taxes”. Topic 740 creates a single model to address
uncertainty in tax positions and clarifies the accounting for income taxes by prescribing the
minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements. The provisions of Topic 740 apply to all
material tax positions in all taxing jurisdictions for all open tax years. The adoption of Topic
740 did not have a material effect on the Company’s financial condition or
results of operations for the year ended December 31, 2009.
F-31
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES ONLY
Note
18 – Selected Quarterly Financial Data (Unaudited)
The
following table contains unaudited statement of operations information for each
quarter of 2009 and 2008. The operating results for any quarter are
not necessarily indicative of results for any future period.
|
2009
Quarters Ended:
|
||||||||||||||||||||
|
(in
thousands, except per share data)
|
Mar. 31
|
June
30
|
Sept. 30
|
Dec. 31
|
Total
Year
|
|||||||||||||||
|
(As
Restated)
|
(As
Restated)
|
(As
Restated)
|
(As
Restated)
|
|||||||||||||||||
|
Revenues
|
$ | – | $ | – | $ | – | $ | – | $ | – | ||||||||||
|
Expenses:
|
||||||||||||||||||||
|
Research
and development
|
5,607 | 5,052 | 4,530 | 3,888 | 19,077 | |||||||||||||||
|
General
and administrative
|
3,096 | 2,592 | 2,417 | 2,015 | 10,120 | |||||||||||||||
|
Total
expenses
|
8,703 | 7,644 | 6,947 | 5,903 | 29,197 | |||||||||||||||
|
Operating
loss
|
(8,703 | ) | (7,644 | ) | (6,947 | ) | (5,903 | ) | (29,197 | ) | ||||||||||
|
Change
in fair value of common stock warrant liability
|
- | (1,323 | ) | (1,662 | ) | 3,354 | 369 | |||||||||||||
|
Other
expense, net
|
(297 | ) | (264 | ) | (244 | ) | (238 | ) | (1,043 | ) | ||||||||||
|
Net
loss
|
$ | (9,000 | ) | $ | (9,231 | ) | $ | (8,853 | ) | $ | (2,787 | ) | $ | (29,871 | ) | |||||
|
Net
loss per common share - basic and diluted
|
$ | (0.09 | ) | $ | (0.08 | ) | $ | (0.07 | ) | $ | (0.02 | ) | $ | (0.26 | ) | |||||
|
Weighted
average number of common shares outstanding
|
102,093 | 112,712 | 119,993 | 125,638 | 115,200 | |||||||||||||||
|
2009
Quarters Ended:
|
||||||||||||||||
|
(in
thousands)
|
Mar. 31
|
June
30
|
Sept. 30
|
Dec. 31
|
||||||||||||
|
(As
Restated)
|
(As
Restated)
|
(As
Restated)
|
||||||||||||||
|
Total
Assets
|
$ | 26,271 | $ | 29,940 | $ | 23,809 | $ | 21,403 | ||||||||
|
Current
Liabilities
|
$ | 8,844 | $ | 22,437 | $ | 23,488 | $ | 18,989 | ||||||||
|
Total
Liabilities
|
$ | 20,832 | $ | 23,864 | $ | 24,730 | $ | 20,107 | ||||||||
|
Stockholders’
Equity
|
$ | 5,439 | $ | 6,076 | $ | (921 | ) | $ | 1,296 | |||||||
F-32
DISCOVERY
LABORATORIES, INC. AND SUBSIDIARY
DRAFT:
FOR DISCUSSION PURPOSES ONLY
|
2008
Quarters Ended:
|
||||||||||||||||||||
|
(in
thousands, except per share data)
|
Mar. 31
|
June
30
|
Sept. 30
|
Dec. 31
|
Total
Year
|
|||||||||||||||
|
Revenues
|
$ | 2,050 | $ | 2,500 | $ | 50 | $ | – | $ | 4,600 | ||||||||||
|
Expenses:
|
||||||||||||||||||||
|
Research
and development
|
7,232 | 7,439 | 6,724 | 5,170 | 26,566 | |||||||||||||||
|
General
and administrative
|
4,505 | 5,076 | 3,726 | 3,121 | 16,428 | |||||||||||||||
|
Total
expenses
|
11,737 | 12,515 | 10,450 | 8,291 | 42,994 | |||||||||||||||
|
Operating
loss
|
(9,687 | ) | (10,015 | ) | (10,400 | ) | (8,291 | ) | (38,394 | ) | ||||||||||
|
Other
expense, net
|
(27 | ) | (200 | ) | (239 | ) | (246 | ) | (712 | ) | ||||||||||
|
Net
loss
|
$ | (9,714 | ) | $ | (10,215 | ) | $ | (10,639 | ) | $ | (8,537 | ) | $ | (39,106 | ) | |||||
|
Net
loss per common share - basic and diluted
|
$ | (0.10 | ) | $ | (0.11 | ) | $ | (0.11 | ) | $ | (0.08 | ) | $ | (0.40 | ) | |||||
|
Weighted
average number of common shares outstanding
|
96,649 | 96,691 | 98,619 | 100,474 | 98,116 | |||||||||||||||
Note
19 – Subsequent Events [To be confirmed]
We
evaluated all events or transactions that occurred after December 31, 2009 up
through the date we issued these financial statements. During this period we did
not have any material recognized subsequent events, however, there were three
nonrecognized subsequent events described below:
In
February 2010, we completed a public offering of 27,500,000 shares of our common
stock and warrants to purchase 13,750,000 shares of our 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 a public offering price of $0.60
per unit, resulting in gross and net proceeds to us of $16.5 million and $15.1
million, respectively. See, Note 10 – Stockholders’
Equity – Registered Public Offerings and Private Placements, for a further
discussion of this offering.
With
respect to our Former CEO Commitment (see, Note 14 – Commitments –
Former CEO Commitment), since August 13, 2009, we have raised approximately
$5.89 million in gross proceeds utilizing our CEFFs (see, Note 10 – Stockholders’
Equity – Committed Equity Financing Facilities – CEFF Financings). In
addition, on February 23, 2010, we completed a public offering that resulted in
net proceeds to us of approximately $15.1 million (see, Note 10 – Stockholders’
Equity – Registered Public Offerings and Private Placements). As the
receipt from financings of more than $20 million qualifies as a Corporate
Transaction, our obligation under the Separation Agreement to make payment to
Dr. Capetola of the Additional Severance has matured. Therefore, in
accordance with the Separation Agreement, on March 5, 2010, we made a payment to
Dr. Capetola in the amount of approximately $1.06 million (less withholding),
representing his Additional Severance payment, reduced by the payments
previously made to him under the Severance Agreement, which total approximately
$0.52 million. Our obligation to make periodic payments under the
Separation Agreement has been satisfied and no further payments are due at this
time.
On
February 16, 2010, we announced that we had received written guidance from the
FDA advising us that, since an acceptable animal model (preterm lamb) of RDS
already exists, a PD clinical trial approach would not be
appropriate. We had previously expected, based on prior guidance
received from the FDA, that a limited, pharmacodynamic-based (PD) clinical trial
in preterm infants would be required to address the sole remaining CMC issue
relating to the BAT that must be addressed to obtain approval of Surfaxin for
the prevention of RDS in premature infants. As a result, instead of
pursuing a limited clinical trial, we are now focused on completing the
optimization and revalidation of the BAT and developing a comprehensive
preclinical plan intended to meet the FDA’s requirements. If these
studies are successful, we believe that we could be in a position to file a
Complete Response to the April 2009 Complete Response Letter in the first
quarter of 2011, which could lead to approval of Surfaxin for the prevention of
Respiratory Distress Syndrome (RDS) in premature infants in 2011.
F-33