There have been no changes to our critical accounting policies since December 31, 2012.2013. For more information on critical accounting policies, see, Note 3, “Summary of Significant Accounting Policies and Recent Accounting Pronouncements,” to the consolidated financial statements included in our 20122013 Form 10-K. Readers are encouraged to review those disclosures in conjunction with this Quarterly Report on Form 10-Q.
The table below summarizes research and development expenses for the periods presented:
Product development and manufacturing includes (i) the cost of our manufacturing operations, both in-house and with our CMO,CMOs, validation activities and quality assurance and analytical chemistry capabilities to support production of drug supply for our KL4 surfactant products in conformance with current good manufacturing practices (cGMP);, and of medical devices, including AFECTAIR, WARMING CRADLE® and CAG, in accordance with Quality System Regulations (QSR), (ii) design and development activities related to our CAG devicesdevice for use in our planned AEROSURF phase 2 clinical program; (iii) design and development activities related to our AFECTAIR aerosol-conducting airway connector; and (iv)(iii) pharmaceutical development activities, including development of a lyophilized dosage form of our KL4 surfactant. These costs include employee expenses, facility-related costs, depreciation, costs of drug substances (including raw materials), supplies, quality control and assurance activities, analytical services, and expert consultants and outside services to support pharmaceutical and device development activities.
Medical and regulatory operations includes (i) medical, scientific, clinical, regulatory, data management and biostatistics activities in support of our research and development programs; and (ii) medical affairs activities to provide scientific and medical education support related to both SURFAXIN, and AFECTAIR as well as our other KL4 surfactant and aerosol delivery products under development. These costs include personnel, expert consultants, outside services to support regulatory and data management, symposiums at key medical meetings, facilities-related costs, and other costs for the management of clinical trials.
18
Direct Preclinical and Clinical Programs
Direct preclinical and clinical programs include: (i) development activities, including for the anticipated AEROSURF clinical program, toxicology studies and other preclinical studies to obtain data to support our Investigational New Druginvestigational new drug (IND) Applicationapplications and, potentially, our New Drug Application (NDA) filings for AEROSURF, potentially SURFAXIN LS, and our other product candidates;filings; and (ii) activities if any, associated with conducting clinical trials, including patient enrollment costs, external site costs, clinical device and drug supply, and related external costs, such as research consultant fees and expenses.
Direct preclinical and clinical programs expenseexpenses for the three and nine months ended September 30, 2013March 31, 2014 increased $0.2$0.1 million as compared to the same periodsperiod in 2012 primarily due2013. Costs for the three months ended March 31, 2014 consisted of AEROSURF Phase 2a clinical trial and related activities. Costs for the three months ended March 31, 2013 consisted of pre-clinical activities to preparatory activities forsupport our planned AEROSURF phase 2 clinical trials. Such preparatory activities include the manufacture of clinic-ready CAG devices, implementation of clinical data management systemsdevelopment program and selection of clinical site locations. Costs in 2012 included a $0.5 million charge related to a milestone payment that became payable to Johnson and Johnson (J&J) upon FDA approval of SURFAXIN in March 2012.activities.
We anticipate that direct clinical program costs associated with conducting the AEROSURF phase 2 clinical program will be approximately $8 -10$10 - 11 million for 2014 and through the anticipated completion of phase 2b in 2015.
Our drug research and development activities are focused on the management of RDS in premature infants. To prepare for our AEROSURF clinical program, we previously conducted preliminary meetings with the FDA and we have engaged regulatory consultants to assist us in implementing and, as needed, refining our development plan. We also plan to retain regulatory consultants to assist us in engaging with international regulatory authorities regarding the AEROSURF development plan. We filed an IND with the FDA in October 2013. The FDA has completed its review and cleared our IND, and we expect to initiate our phase 2 program in the fourth quarter of 2013. We are also assessing a potential development plan intended to gain marketing authorization for SURFAXIN LS, a lyophilized dosage form of SURFAXIN, in the U.S. and potentially other major markets. We previously discussed with the FDA potential development activities that may be needed to support regulatory approval of SURFAXIN LS and expect to engage in further discussions with the FDA in this regard. For future development plans, we plan to leverage the development investments to date in our KL4 surfactant and aerosol technology programs to address respiratory critical care conditions in older children and adults, including potentially ALI.2015.
Research and Development Projects – Updates
Due to the significant risks and uncertainties inherent in the clinical development and regulatory approval processes, the nature, timing and costs of the efforts necessary to complete individual projects in development are not reasonably estimable. With every phase of a development project, there are unknowns that may significantly affect cost projections and timelines. As a resultIn view of the number and nature of these factors, many of which are outside our control, the success, timing of completion and ultimate cost of development of any of our product candidates is highly uncertain and cannot be estimated with any degree of certainty. Certain of the risks and uncertainties affecting our ability to estimate projections and timelines are discussed in the Risk Factors Section and elsewhere in this Quarterly Report on Form 10-Q and in our 20122013 Form 10-K, including in “Item 1 – Business – Government Regulation,” “Item 1A – Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Research and Development Expenses.”
Our leadresearch and development projects have been focused initially focused on the management of RDS in premature infants, includingand include (i) SURFAXIN liquid instillate, andwhich was approved by the FDA in 2012, (ii) our lyophilized KL4 surfactant, which we are developing initially for use in our AEROSURF development program and, if we are able to undertake a development plan that would be both capital efficient and capable of implementation within a reasonable time,potentially, in a SURFAXIN LS development program; and (ii)(iii) our aerosol delivery technology, including preparationin particular the development of a clinic-ready CAG device to support our planned AEROSURF phase 2 clinical program. These and our other productdevelopment programs are described in “– Overview – Business and Pipeline Programs Update,” and in our other periodic filings with the SEC, including our 20122013 Form 10-K, “Item 1 – Business – Proprietary Platform – Surfactant and Aerosol Technologies,” and “‑ Surfactant Replacement Therapy for Respiratory Medicine.Medicine,” and in our other periodic filings with the SEC.
With respect to activities in supportTo prepare for initiation of ourthe AEROSURF developmentphase 2 clinical program, from the beginning ofduring 2012 through September 2013, we invested approximately $7 million to develop thea clinic-ready CAG device and complete the technology transfer and further develop our lyophilized KL4 surfactant manufacturing process at DSM, in preparation for initiation of the phase 2 AEROSURF program. In addition, asDSM. As noted above, we anticipate that direct clinical program costs associated with conducting the AEROSURF phase 2 clinical program will be approximately $8 -10$10 - 11 million for 2014 and through the completion of phase 2b in 2015. We also plan to continue securing appropriate capabilities to support the further advancement of AEROSURF, including for manufacturing development of our lyophilized KL4 surfactant, the conduct of a phase 3 clinical program, and the further development of a CAG device suitable for use in a phase 3 clinical program and, if successful, commercial use.
At the present time, we are focusing our efforts primarily on the commercial introduction of SURFAXIN and development of AEROSURF through the phase 2 clinical trials. We also believe that, we may be able to leverage the information, data and know-how that we gain from our work with SURFAXIN and AEROSURF to support development of a robust product pipeline that could address serious critical care respiratory conditions in larger children and adults in pediatric intensive care units (PICUs) and adult intensive care units (ICUs), including potentially acute lung injury (ALI), chronic obstructive pulmonary disease (COPD) and cystic fibrosis (CF).
The reader is referred to and encouraged to review updates to the Pipeline Programs Update in “– Overview,” and “–Business and Pipeline Programs Update” at the beginning of this MD&A, which contain information necessary and important to this discussion. See also, “– Overview,” and “– Liquidity and Capital Resources.”
Selling, General and Administrative Expenses
| (in thousands) | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended March 31, | |
| | 2013 | | | 2012 | | | 2013 | | | 2012 | | | 2014 | | | 2013 | |
| Selling, General and Administrative Expenses | | $ | 4,299 | | | $ | 4,255 | | | $ | 12,648 | | | $ | 9,912 | | | $ | 4,423 | | | $ | 4,220 | |
Selling, general and administrative expenses consist primarily of the costs of sales and marketing activities, executive management, commercial development, including marketing and field-based sales, business development, intellectual property, finance and accounting, legal, human resources, information technology, facilityfacilities and other administrative costs.
Selling, general and administrative expenses for the ninethree months ended September 30, 2013March 31, 2014 increased $2.7$0.2 million compared to the same periodsperiod in 2012, primarily2013 due to an increased investmentsinvestment in our marketing and field-based sales organization and related marketing expenses in preparation forforce to execute the commercial introduction of SURFAXIN and the AFECTAIR device for infants.
In addition to developing our commercial marketing and sales organization, we have made additional investments to enhance certain of our general and administrative resources, including in legal, finance and accounting, and information technologies, to support the commercial introduction of our products.
Change in Fair Value of Common Stock Warrant Liability
| (in thousands) | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended March 31, | |
| | 2013 | | | 2012 | | | 2013 | | | 2012 | | | 2014 | | | 2013 | |
| Change in fair value of common stock warrant liability (Income / (Expense)) | | $ | (1,059 | ) | | $ | (3,309 | ) | | $ | 1,627 | | | $ | (5,063 | ) | |
| Change in fair value of common stock warrant liability | | | $ | 378 | | | $ | 162 | |
We account for common stock warrants in accordance with applicable accounting guidance provided in Accounting Standards Codification (ASC)ASC Topic 815 “Derivatives and Hedging – Contracts in Entity’s Own Equity” (ASC 815), either as either derivative liabilities or as equity instruments depending on the specific terms of the warrant agreement. Derivative warrant liabilities are valued at the date of initial issuance and as of each subsequent balance sheet date using the Black-Scholes or trinomial pricing models, depending on the terms of the applicable warrant agreement. Changes in the fair value of the warrants are reflected in the consolidated statement of operations as “Change in the fair value of common stock warrant liability.” See, Notes 5 and 7Note 6 to our Consolidated Financial Statements in this Quarterly Report on Form 10-Q, and our 20122013 Form 10-K, “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Change in Fair Value of Common Stock Warrant Liability.”
Changes in the fair value of common stock warrant liability generally are due primarily to changes in our common stock share price during the periods.
Other Income and (Expense)
| | Three months ended | |
| (in thousands) | | March 31, | |
| | 2014 | | | 2013 | |
| | | | | | |
| Interest income | | $ | 2 | | | $ | 1 | |
| Interest expense | | | (1,093 | ) | | | (178 | ) |
| Other income / (expense), net | | $ | (1,091 | ) | | $ | (177 | ) |
Interest Expenseincome consists of interest earned on our cash and cash equivalents. To ensure preservation of capital, we invest our cash in an interest bearing operating cash account and a U.S. treasury-based money market fund.
The table below summarizes interest expense for the periods presented:
| (in thousands) | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2013 | | | 2012 | | | 2013 | | | 2012 | |
| Interest Expense | | $ | (353 | ) | | $ | (4 | ) | | $ | (873 | ) | | $ | (12 | ) |
Interest expense in 2013 consists of interest expense associated with the Deerfield FacilityLoan (see, “– Liquidity and Capital Resources – Loan Facility with Deerfield”) Note 7 to our Consolidated Financial Statements in this Quarterly Report on Form 10-Q) and interest expense incurred under our equipment financing facilities. Interest expense for 2012 consists of interest expense incurred under our equipment financing facilities.
The following amounts comprise the Deerfield FacilityLoan interest expense for the periods presented:
| | | Three months ended | |
| (in thousands) | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | March 31, | |
| | 2013 | | | 2012 | | | 2013 | | | 2012 | | | 2014 | | | 2013 | |
| | | | | | | | | | | | | | | | | | |
| Cash interest expense | | $ | 221 | | | $ | – | | | $ | 551 | | | $ | – | | | $ | 647 | | | $ | 113 | |
| Non-cash amortization of debt discounts | | | 125 | | | | – | | | | 302 | | | | – | | |
| Non-cash amortization of debt discount | | | | 439 | | | | 57 | |
| Amortization of debt costs | | | 5 | | | | – | | | | 13 | | | | – | | | | 5 | | | | 5 | |
| Total Deerfield Facility interest expenses | | $ | 351 | | | $ | – | | | $ | 866 | | | $ | – | | |
| Total interest expense | | | $ | 1,091 | | | $ | 175 | |
Cash interest expense represents interest at an annual rate of 8.75% calculated on the outstanding principal amount for the period, paid in cash on a quarterly basis. Non-cash amortization of debt discount represents the amortization of transaction fees and the fair value of the Deerfield Warrants. The amortization of debt costs represents legal costsprofessional fees incurred in connection with the Deerfield Facility.Loan.
LIQUIDITY AND CAPITAL RESOURCES
Overview
We have incurred substantial losses since inception, due to investments in research and development, manufacturing, and, potentialmore recently, commercialization and medical affairs 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, debt facilities, strategic alliances, the use of Committed Equity Financing Facilitiescommitted equity financing facilities (CEFFs) and at-the-market equity programs, and capital equipment financings.
As of September 30, 2013,March 31, 2014, we had cash and cash equivalents of $21.2$75.9 million approximately $6.6and long-term debt of $30 million ($18.8 million net of accounts payable and accrued expenses, and $10 million of long-term debtdiscount) under our Deerfield FacilityLoan with affiliates of Deerfield Management Company, L.P. (Deerfield).
On October 15, 2013, we completed an offering under (see, Note 7, “ – Deerfield Loan,” to our At-the-Market Program (ATM Program) (Consolidated Financial Statements in this Quarterly Report on Form 10-Qsee, “– Common Stock Offerings – At-the-Market Program”) with Stifel, Nicolaus & Company, Incorporated (Stifel) and issued 713,920 shares of our common stock resulting in net proceeds to us (after deducting commissions due to Stifel) of approximately $1.9 million. Through our ATM Program, subject to market conditions, we have the ability to sell up to approximately $23 million of common stock at such times and in such amounts that we deem appropriate. However, use of the ATM Program is subject to market and other conditions and the ATM Program can be cancelled at any time by either party. There can be no assurance that the ATM Program will be available when needed, if at all.
On November 5, 2013, we completed a public offering of 25 million shares of common stock, at a price of $2.00 per share resulting in gross proceeds of $50.0 million ($46.8 million net after commissions, discounts and expenses). In addition, we also granted the underwriters a 30-day option to purchase up to an additional 3.75 million shares of common stock (over-allotment) at an offering price of $2.00 per share. On November 8, 2013, we received notification that the underwriters have exercised the full over-allotment and will purchase an additional 3.75 million shares. This transaction is expected to close on or about November 14, 2013 and result in additional net proceeds to us of approximately $7.1 million.
We also have met the conditions for, and expect in early December to receive, an additional advance of $20 million under the Deerfield Facility, which became due upon the first commercial sale of SURFAXIN drug product. See, “– Loan Facility with Deerfield.”
Before any additional financings, including under our ATM Program (see, “– Common Stock Offerings – At-the-Market Program (ATM Program),” and taking into accountNote 11, “Stockholders’ Equity – ATM Program,” to the additional approximately $7.1 million expected from the underwriters’ exercise of the over-allotmentconsolidated financial statements in our November public offering and the expected $20 million advance under the Deerfield Facility,2013 Form 10-K), we anticipate that we will have sufficient cash available to supportfund our operations and debt service obligations through the third quarter of 2015.
Our future capital requirements depend upon many factors, primarily the success of our efforts to (i) execute the commercial introduction of SURFAXIN and AFECTAIR in the U.S., as planned;; (ii) advance the AEROSURF development program to completion of the phase 2 clinical program as planned in mid-2015;the second half of 2015; and (iii) secure one or more strategic alliances or other collaboration arrangements (a) to support the development and, if approved, commercial introduction of AEROSURF in markets outside the U.S., including potentially in the European Union, and (b) to support the regulatory approval process and commercial introduction of SURFAXIN AEROSURF, AFECTAIR and potentially SURFAXIN LS, in certain markets outside the U.S. We believe that, if we are successful with the commercial introduction of SURFAXIN and if we are able to complete the AEROSURF phase 2 clinical program on a timely basis and obtain encouraging results, and if we are able to advance the commercial introduction of SURFAXIN, our ability to enter into a significant strategic alliance will be enhanced. There can be no assurance, however, that our efforts will be successful, or that, even if successful, we will be able to obtain additional capital to support our activities when needed on acceptable terms, if at all.
Even if we succeed withFor the commercial introduction of SURFAXIN and the AFECTAIR device as planned, given the time required to secure formulary acceptance of SURFAXIN at our target hospitals,next several years, we expect our revenues from SURFAXIN and AFECTAIR to be modest in the first 12-18 months and then increase over time as our products gain hospital acceptance. As a result,that our cash outflows for marketing, commercial and medical activities, development programs, operations and debt service and development programs are expected towill outpace the rate at which we may generate revenues for several years.revenues. To execute our business strategy and fund our operations over the long term,next several years, we will require significant additional infusions of capital until such time as the net revenues from SURFAXIN, AFECTAIR and, ifthe sale of approved AEROSURF, from potential strategic alliancesproducts and from other sources are sufficient to offset our cash flow requirements. ToWhile we currently intend to retain all rights and commercialize our approved products in the U.S., an important priority for us is to secure additional capital and strategic resources to support the necessary capital,continued development and commercial introduction of our RDS products in markets outside the U.S. For our AEROSURF development program, we would prefer to enter intoare seeking a significant strategic alliances or collaboration agreements with partnersalliance that potentially could provide development, regulatory and commercial market expertise as well as financial resources, (potentiallyand, if approved, support the commercial introduction of AEROSURF in the EU and other selected markets outside the U.S. Such alliances typically also would provide financial resources, in the form of upfront payments, milestone payments, commercialization royalties and a sharing of research and development expenses) and introduce our approved productsexpenses. To advance SURFAXIN in various markets outside the U.S. where regulatory marketing authorization is facilitated by the information contained in our new drug application (NDA) approved by the FDA, we would consider various financing or collaboration arrangements that could provide regulatory expertise, support the commercial introduction of SURFAXIN in markets outside the U.S., and potentially provide a sharing of revenues. Such countries could potentially include those in Latin America, North Africa and the Middle East. We also plan to consider other public and private equity offerings, including under our ATM Program, which currently may allow for the sale of up to approximately $23 million of our commons stock (see, “– At-the-Market Program (ATM Program)”), as well as other financing transactions, such as secured equipment financing facilities or other similar transactions.
As of September 30, 2013,March 31, 2014, we had outstanding warrants to purchase approximately 10.314.5 million shares of our common stock at various prices, exercisable on different dates throughinto 2019. Of these warrants, approximately 2.3warrants to purchase 7 million warrantsshares were issued to Deerfield in connection with the first advance under the Deerfield Facility. Upon receipt of the final $20 million advance under the Deerfield Facility, which is anticipated on or about December 3, 2013, we will issue warrants to purchase an additional 4.66 million shares of our common stockLoan at an exercise price of $2.81 per share (we refer to these warrants and the warrants previously issued to Deerfield as the Deerfield Warrants).share. The Deerfield Warrants may be exercised for cash or on a cashless basis. In lieu of paying cash upon exercise, the holders also may elect to reduce the principal amount of the Deerfield loanLoan in an amount sufficient to satisfy the exercise price of the Deerfield Warrants. In addition to the Deerfield Warrants, we have outstanding five-year warrants issued in February 2011 to purchase approximately 4.94.6 million shares of common stock that were issued in February 2011, are exercisable for five-years, and contain anti-dilution provisions that adjust the exercise price if we issue any common stock, securities convertible into common stock, or other securities (subject to certain exceptions) at a value below the then-existing exercise price of the warrants. These warrants were originally issued withcurrently have an exercise price of $3.20 per share and thereafter adjusted downward, first to $2.80 per share following a public offering in March 2012 and then to $1.50 per share following a public offering in May 2013.share. Although we believe that, in the future, we will secure additional capital from the exercise of at least a portion of our outstanding warrants, there can be no assurance that the market price of our common stock will equal or exceed price levels that would make exercise of outstanding warrants likely, or, even if the price levels are sufficient, that holders of the Deerfield Warrants would choose to exercise their warrants for cash, or that holders of any of our outstanding warrants willwould choose to exercise any or all of their warrants prior to the applicable warrant expiration date.dates. Moreover, if our outstanding warrants are exercised, such exercises likely will be at a discount to the then-market value of our common stock and have a dilutive effect on the value of our shares of common stock at the time of exercise.
As of September 30, 2013,March 31, 2014, 150 million shares of common stock were authorized under our Amended and Restated Certificate of Incorporation, and approximately 71.7 million shares of common stock were available for issuance and not otherwise reserved. As of November 8, 2013, following the financings under our ATM Program, our public offering, and establishment of additional reserves for the shares expected to be issued in connection with the underwriters’ exercise of the over-allotment in our November public offering and with respect to the warrants expected to be issued to Deerfield upon receipt of the $20 million advance in early December, approximately 4242.1 million shares of common stock were available for issuance and not otherwise reserved.
Although we currently believe that we will be able to successfully execute our business plan and accomplish our objectives,strategy, there can be no assurance that our AEROSURF development program will be successful within our anticipated time frame, if at all, that we will succeed in obtaining the necessary regulatory approvals in the U.S. and other markets, that any approved product, including SURFAXIN, will be commercially viable, that the ATM Program will be available when needed, if at all, or that we will be able to obtain additional capital when needed on acceptable terms, if at all, that we will be successful. There can be no assurance that weWe will be successful in securingrequire significant additional capital to satisfy debt obligations and sustain operations, and to complete the needed capital, through strategic alliances, collaboration arrangements, financings, debt arrangementsdevelopment and, other transactions.if they are approved, support the commercial introduction of our products. Failure to secure the necessary additional capital would have a material adverse effect on our business, financial condition and results of operations. Even if we succeed in raising additional capital and developing and subsequently commercializing product candidates, we may never achieve sufficient sales revenue to achieve or maintain profitability.
Cash Flows
As of September 30, 2013,March 31, 2014, we had cash and cash equivalents of $21.2$75.9 million compared to $26.9$86.3 million as of December 31, 2012.2013. Cash outflows before financingsfinancing activities for the ninethree months ended September 30, 2013March 31, 2014 consisted of $30.4$10.3 million used for ongoing operating activities and $0.2$0.5 million for purchases of property and equipment. Cash outflows before financingsprovided by financing activities were offset by a $10 million ($9.9 million net of expenses) advance in February 2013 under the Deerfield Facility and $15.1$0.4 million of net proceeds from a registered public offering that we completed in May 2013.the exercise of warrants and stock options.
Operating Activities
Net cash used in operating activities for the three months ended March 31, 2014 and 2013 was $30.4$10.3 million and $23.8$10.2 million, for the nine months ended September 30, 2013 and 2012, respectively.
Net cash used in operating activities is thea result of our net losslosses for the period, adjusted for non-cash items associated with the change in fair value of common stock warrants (income of $1.6 million in 2013 and expense of $5.1 million in 2012), stock-based compensation, including our 401(k) match, and depreciation and amortization expenses ($2.9 million in 2013 and $2.7 million in 2012); and changes in working capital.
The increase in net cash used in operating activities from 2012 to 2013 is primarily due to (i) investment in our own specialty commercial and medical affairs organizations that are specialized in neonatal/pediatric respiratory critical care in NICUs/PICUs across the U.S., and manufacturing and quality activities in preparation for the commercial introduction of SURFAXIN and the AFECTAIR device for infants; (ii) costs to develop and manufacture clinic-ready CAGs for use in our planned AEROSURF phase 2a clinical study, including work with third party device experts and work that we began in June 2012 with Battelle, which is assisting with design, testing, and manufacture of clinic-ready CAG devices; and (iii) purchases of APIs used in the production of SURFAXIN and our lyophilized KL4 surfactant, for commercial purposes, development activities, including preparation of our CAG for use in our anticipated AEROSURF phase 2 clinicalprogram, and to support the technical transfer of our manufacturing processes to our CMO.
Investing Activities
Net cash used in investing activities for the three months ended March 31, 2014 and 2013 represents capital expenditures of $0.2$0.5 million and $0.6$0.1 million, for the nine months ended September 30, 2013 and 2012, respectively. The increase in capital expenditures is due to timing of routine equipment purchases.
Financing Activities
Net cash provided by financing activities for the three months ended March 31, 2014 and 2013 was $24.9$0.4 million and $50.3$9.9 million, respectively. Net cash provided by financing activities for the ninethree months ended September 30,March 31, 2014 represents proceeds from the exercise of warrants and stock options. Net cash provided by financing activities for the three months ended March 31, 2013 and 2012, respectively, summarized as follows:represents the first advance of $10.0 million ($9.9 million, net) under the Deerfield Loan upon execution of the agreement in February 2013.
| (in thousands) | | Nine Months Ended September 30, | |
| | 2013 | | | 2012 | |
| | | | | | |
| Financings pursuant to common stock offerings | | $ | 15,114 | | | $ | 42,145 | |
| Issuance of long-term debt, net of expenses | | | 9,850 | | | | – | |
| Financings under the ATM Program | | | – | | | | 1,460 | |
| Repayment of equipment loans and capital lease obligations | | | (56 | ) | | | (57 | ) |
| Exercise of stock options and warrants | | | 1 | | | | 6,741 | |
| Cash flows from financing activities, net | | $ | 24,909 | | | $ | 50,289 | |
The following sections provide a more detailed discussion of our available financing facilities.
Common Stock Offerings
Historically, we have funded, and expect that we will continue to fund, our business operations through various sources, including financings in the form of common stock offerings. In June 2011, we filed a universal shelf registration statement on Form S-3 (No. 333-174786) (2011 Universal Shelf) with the SEC for the proposed offering from time to time of up to $200 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. The 2011 Universal Shelf replaced an earlier shelf registration statement that was declared effective by the SEC on June 21, 2008. As of September 30, 2013,March 31, 2014, after reserves for unexercised warrants and amounts remaining under our ATM Program, approximately $68.5$11.0 million remained available under the 2011 Universal Shelf. As of November 8, 2013, following the financings under our ATM Program and our public offering and establishment of a reserve related to the anticipated issuance of shares in connection with the underwriters’ exercise of the over-allotment, we had approximately $11 million available under theThe 2011 Universal Shelf.Shelf will expire in June 2014.
Registered Public OfferingsAt-the-Market Program (ATM Program)
On May 15, 2013, we completed a registered public offering of 9.5 million shares of our common stock, at a price of $1.50 per share resulting in gross proceeds of $14.3 million ($13.2 million net). We also granted the underwriter a 30-day option to purchase up to an additional 1.425 million shares of common stock at an offering price of $1.50 per share. On May 31, 2013, the underwriter exercised its option and purchased 1.347 million additional shares of common stock for net proceeds to us (after underwriter fees) of $1.9 million. In connection with this offering, we agreed not to issue or sell (with certain limited exceptions) securities for a period of 90 days after the date of the prospectus supplement ending August 8, 2013. Regarding our ATM Program, we agreed not to issue or sell securities for a period of 30 days after the date of the underwriting agreement ending on June 9, 2013.
On November 5, 2013, we completed a registered public offering of 25 million shares of our common stock, at a price of $2.00 per share resulting in gross proceeds of $50.0 million ($46.8 million net after commissions, discounts and expenses). In addition, we also granted the underwriters a 30-day option to purchase up to an additional 3.75 million shares of our common stock at a public offering price of $2.00 per share. In connection with this offering, we agreed not to issue or sell (with certain limited exceptions) securities for a period of 90 days after the date of the prospectus supplement ending February 3, 2014. Regarding our ATM Program, we agreed not to issue or sell securities for a period of 30 days after the date of the underwriting agreement ending on December 5, 2013. On November 8, 2013, we received notification that the underwriters have exercised the full over-allotment and will purchase an additional 3.75 million shares. This transaction is expected to close on or about November 14, 2013 and result in additional net proceeds to us of approximately $7.1 million.
At-the-Market Program
In February 2013, we entered into an At-the-Market Equity Offering Sales Agreement with Stifel, under which Stifel, as our exclusive agent, at our discretion and at such times that we may determine from time to time, may sell up to a maximum of $25 million of our common stock over a three-year period. We are not required to sell any shares at any time during the term of the ATM Program. We have agreed to pay Stifel a commission of 3% of gross proceeds of any sales of shares. See, Note 17, “Subsequent Events11, “Stockholders’ Equity – ATM Program,” to the consolidated financial statements in our 20122013 Form 10-K.
On October 15, 2013, we completed an offering under our ATM Program and issued 713,920 shares of our common stock for an aggregate purchase price of approximately $2.0 million, resulting in net proceeds to us of approximately $1.9 million, after deducting commissions due to Stifel. As of November 8, 2013,March 31, 2014, approximately $23 million shares of common stock remained available under the ATM Program.
Committed Equity Financing Facility (CEFF)
We had a Stock Purchase Agreement dated June 11, 2010 (CEFF) with Kingsbridge Capital Limited (Kingsbridge) that provided initially for the purchase by Kingsbridge of the lesser of up to 2.1 million shares of our common stock or a maximum of $35 million in shares. We were not obligated to issue shares at any time. This CEFF expired on June 11, 2013 with 1.1 million shares available but not issued. See, “2012 Form 10-K – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Committed Equity Financing Facility (CEFF).”
Loan Facility with Deerfield
On February 13, 2013, we entered into a secured loan facility (Deerfield Facility) with affiliates of Deerfield Management Company, L.P. (Deerfield) for up to $30 million in secured financing in 2013. Deerfield advanced to us $10 million upon execution of the agreement and agreed to advance an additional $20 million, subject to certain conditions, on or about the date of the first commercial sale of SURFAXIN drug product (Milestone Date), if the Milestone Date occurs on or before December 31, 2013. On November 8 2013, we notified Deerfield that the first commercial sale of SURFAXIN has occurred, and anticipate receipt of the $20 million advance on or about December 3, 2013.
The loan may be prepaid in whole or in part without penalty at any time. Any amounts received and outstanding under the Deerfield Facility will accrue interest at a rate of 8.75%, payable quarterly in cash. See, “– Note 6, Long-term Debt – Loan Facility with Deerfield,” to the Consolidated Financial Statements (unaudited) in this Quarterly Report on Form 10‑Q, for a description of the terms and conditions of the Deerfield Facility agreement and terms of the Deerfield Warrants.
We have recorded the loan as long-term debt at its face value of $10.0 million less debt discounts and issuance costs consisting of (i) $3.8 million fair value of warrants that we issued to Deerfield in connection with the $10 million initial advance, to purchase approximately 2.3 million shares at an exercise price of $2.81, and (ii) a $150,000 transaction fee. The discount is being accreted to the $10 million loan over its term using the effective interest method. The Deerfield Warrants are derivatives that qualify for an exemption from liability accounting as provided for in ASC 815 and are classified as equity.
Long-term debt as of September 30, 2013 consists solely of amounts due under the Deerfield Facility as follows:
| Note Payable | | $ | 10,000 | |
| Unamortized discount | | | (3,674 | ) |
| Long-term debt, net of discount | | $ | 6,326 | |
Contractual Obligations and Commitments
Future payments due under contractual obligations at September 30, 2013 are as follows:
| (in thousands) | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | There- after | | | Total | |
| Operating lease obligations | | $ | 272 | | | $ | 1,087 | | | $ | 1,024 | | | $ | 934 | | | $ | 935 | | | $ | 158 | | | $ | 4,410 | |
Deerfield Loan Facility(1) | | | – | | | | – | | | | – | | | | – | | | | 3,330 | | | | 6,670 | | | | 10,000 | |
| Equipment loan obligations | | | 13 | | | | 79 | | | | 69 | | | | – | | | | – | | | | – | | | | 161 | |
| Total | | $ | 285 | | | $ | 1,166 | | | $ | 1,093 | | | $ | 934 | | | $ | 4,265 | | | $ | 6,828 | | | $ | 14,571 | |
(1) See, “– Loan Facility with Deerfield”
|
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our exposure to market risk is confined to our cash and cash equivalents. We place our investments with high quality issuers and, by policy, we have limits as to the amount of credit exposure to any one issuer. We do not hedge interest rate or currency exchange exposure and do not use derivative financial instruments for speculation or trading purposes. We classify highly liquid investments purchased with a maturity of three months or less as “cash equivalents.” Loans under our Deerfield Facility have a fixed interest rate of 8.75%. Because of the fixed rate, a change in market interest rates would not have a material impact on interest expense associated with the loan.Not applicable.
Evaluation of disclosure controls and procedures
Our management, including our President and Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal executive officer and financial officer), does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all error and all fraud. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our President and Chief Executive Officer and our Chief Financial Officer hashave evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our President and Chief Executive Officer and our Chief Financial Officer, to allow for timely decisions regarding required disclosures, and recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in internal controls
There were no changes in our internal controlscontrol over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) under the Exchange Actdescribed above that occurred during the quarter ended September 30, 2013,March 31, 2014 that havehas materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
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.
Investing in our securities involves risks. In addition to the other information in this Quarterly Report on Form 10-Q, stockholdersStockholders and potential investors should carefully consider the risks and uncertainties discussed in the section "Item 1A. Risk Factors" in our 20122013 Form 10-K, as supplemented by the risks and uncertainties discussed below and elsewhere in this Quarterly Report on Form 10-Q. The risks and uncertainties discussed in this Quarterly Report on Form 10-Q and described in our 2013 Form 10-K are not the only ones that may materialize. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business operations. If any of the risks and uncertainties set forth belowdiscussed in this Quarterly Report on Form 10-Q or in our 20122013 Form 10-K actually materialize, our business, financial condition and/or results of operations could be materially adversely affected, the trading price of our common stock could decline and a stockholder could lose all or part of his or her investment. The risks and uncertainties set forth below and discussed elsewhere in this Quarterly Report on Form 10-Q and described in our 2012 Form 10‑K are not the only ones that may materialize. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business operations.
Even if we succeed with the commercial introduction of SURFAXIN® as planned, we nevertheless in the future will require, but may be unable to secure when needed, significant additional capital to continue our operations, pay our debt service, and commercialize our approved products and develop our products under development, including our AEROSURF® phase 2 clinical program, and to continue our other research and development programs. Moreover, any financings could result in substantial dilution to our stockholders, cause our stock price to fall and adversely affect our ability to raise capital.
Our operations have consumed substantial amounts of cash since inception. As of September 30, 2013, we have an accumulated deficit of approximately $468.2 million and we expect to continue to incur significant, increasing operating losses over the next several years. As of September 30, 2013, we had cash and cash equivalents of approximately $21.2 million and approximately $6.6 million of accounts payable and accrued expenses and $10 million of long-term debt under the Deerfield Facility. In October, we completed an offering under our ATM Program that resulted in net proceeds to us of approximately $1.9 million. On November 5, 2013, we completed a public offering that resulted in net proceeds to us of approximately $46.8 million and granted the underwriters an option to purchase an additional 3.75 million shares (the over-allotment). The over-allotment was exercised in full and, on or about November 14, 2013, we anticipate receipt of an additional approximately $7.1 million. On November 8, 2013, we announced that we have initiated the commercial launch of SURFAXIN and notified Deerfield that we had met the requirements to receive the additional $20 million available under the Deerfield Facility. Before any additional financings, including under our ATM Program and taking into account the expected $20 million advance under the Deerfield Facility and the $7.1 million expected in connection with the over-allotment, we anticipate that we will have sufficient cash available to support our operations and debt service obligations through 2015.
We expect to continue to spend substantial amounts to execute our business strategy and will require significant additional infusions of capital until such time as the net revenues from SURFAXIN and, if approved, AEROSURF, and from potential strategic alliance and collaboration arrangements and other sources, are sufficient to offset our cash flow requirements. Given the time required to secure formulary acceptance of SURFAXIN, we expect our revenues from SURFAXIN to be modest in the first 12-18 months and then increase over time. Our investments in our operations, debt service and development programs are expected to outpace the rate at which we may generate revenues for several years. See, “Part 1, Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”
We cannot be certain that additional funding will be available on acceptable terms, or at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of our products or our research and development programs. We also could be required to:
| ● | seek collaborators for one or more of our development programs for territories that we had planned to retain or on terms that are less favorable than might otherwise be available; and/or |
| ● | relinquish or license on unfavorable terms our rights to technologies or product candidates that we otherwise would seek to develop or commercialize ourselves. |
If we are unable to secure such financing, we may seek additional capital from the public markets, which could have a dilutive impact on our stockholders and the issuance, or even potential issuance, of shares could have a negative effect on the market price of our common stock.
Depending on conditions in the global financial markets, we may face significant challenges accessing the capital markets at a time when we would like or require, and at an increased cost of capital. Except for our ATM Program, we do not have arrangements to obtain additional financing. Any such financing could be difficult to obtain or only available on unattractive terms and could result in significant dilution of stockholders’ interests. In any such event, the market price of our common stock may decline. In addition, failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our business plan, financial performance and stock price and could delay new product development and clinical trial plans.
Our near-term prospects are highly dependent on the success of SURFAXIN. To the extent we fail to successfully commercialize SURFAXIN, or if our efforts to commercialize SURFAXIN are significantly delayed, our business, financial condition and results of operations would be materially adversely affected and the price of our common stock would likely decline.
In March 2012, the FDA approved SURFAXIN. Following a period in which we updated product specifications and improved an analytical chemistry method, in October 2013, we received a communication from the FDA that it agreed with our updates. We immediately manufactured SURFAXIN drug product and have initiated the commercial introduction of SURFAXIN in our target hospitals. We believe that SURFAXIN product sales may constitute substantially all or most of our total revenue over the next several years.
We currently believe that we will successfully execute the commercial introduction of SURFAXIN within our anticipated timeframe. However, our efforts are subject to a variety of risks and uncertainties that could cause actual results to be materially different.
If we successfully make our products commercially available, the commercial success of SURFAXIN and our ability to generate and increase revenues will depend on a number of factors, including the following:
| ● | the number of hospitals and critical care centers that agree to place SURFAXIN drug product on their formulary lists and the length of time required to achieve broad formulary acceptance; |
| ● | the willingness of the target hospitals to accept and employ WARMING CRADLE® dry-block heater;
|
| ● | the effectiveness of our marketing, sales and medical affairs organizations and their ability to (a) accurately describe SURFAXIN consistent with its approved labeling, and (b) educate and provide critical care providers and hospitals with medical and scientific education and information concerning our products; |
| ● | our ability to gain access to the entire market with our commercial organizations; |
| ● | the safety and efficacy of SURFAXIN, our ability to provide hospitals acceptable evidence of the safety and efficacy of SURFAXIN, and the perceived advantages of SURFAXIN over alternative treatment methods; |
| ● | the pharmacoeconomic benefits (which are determined by comparing, among other things, the cost and effects of a product when compared to different treatment options) and cost-effectiveness of our products; |
| ● | the budget impact of adding our products and devices to relevant formulary and medical device hospital lists and the availability, cost and potential advantages of alternative treatments, including less expensive generic drugs and other competitive products; |
| ● | the availability of different size drug vials and medical devices to meet the specific needs of healthcare practitioners; |
| ● | the claims, limitations, warnings and other information that appear in the package insert and labeling of SURFAXIN drug product; |
| ● | the willingness of third-party payers, including government payers, to provide coverage and reimbursements to patients, physicians and other providers who wish to prescribe and use our products; |
| ● | our ability to secure and maintain regulatory marketing approvals from the U.S. and foreign regulatory authorities; |
| ● | the rate of preterm births; |
| ● | the number of infants who are diagnosed with RDS and the number treated with SURFAXIN; |
| ● | the growth of commercial sales; |
| ● | our ability to meet commercial demand for SURFAXIN, including through maintenance of commercial supplies of our active drug substances and other excipients, and manufacturing capabilities, by ourselves and through third-party manufacturers; and commercial inventory supplies of our medical device products; and |
| ● | the sufficiency of coverage or reimbursement by third parties. |
Our efforts to achieve formulary acceptance of SURFAXIN, and to educate the medical community and third-party payers regarding the benefits of SURFAXIN will require significant, focused and competent resources and we may not be successful in achieving our objectives. SURFAXIN is approved for marketing only in the U.S. We cannot predict whether physicians, healthcare insurers or maintenance organizations, or the medical community in general, will accept or utilize SURFAXIN and our other products and devices, if approved. If we are not successful in our efforts to gain broad acceptance of SURFAXIN in our target hospitals, the revenues we generate from sales will be limited and our business may not be profitable.
Our clinical development program for AEROSURF involves significant risks and uncertainties that are inherent in the clinical development and regulatory approval processes. Our clinical trials may be delayed, or fail, which will harm our business.
The FDA has completed its review and cleared our IND for our AEROSURF® phase 2 clinical program. This initial clinical study is the first in a series of clinical studies that will be needed to gain marketing authorization for AEROSURF. Such clinical programs generally take two to five years or more to complete and may be delayed by a number of factors. We may not reach agreement with the FDA or a foreign regulator on the design of any one or more of the clinical studies necessary for approval, or we may be unable to reach agreement on a single study design that would permit us to conduct a single clinical program. Conditions imposed by the FDA and foreign regulators on our clinical studies could significantly increase the time required for completion of such clinical studies and the costs of conducting the clinical studies. For example, we may not be successful in achieving a study design that is acceptable to the FDA and regulators in other countries, which would cause us to greatly increase our investment or limit the scope of our activities. Like many biotechnology companies, even after obtaining promising results in earlier studies or in preliminary findings for such clinical studies, we may suffer significant setbacks in late-stage clinical studies. Data obtained from clinical studies are susceptible to varying interpretations that may delay, limit or prevent regulatory approval. In addition, we may be unable to enroll patients quickly enough to meet our expectations for completing any or all of these studies. The timing and completion of current and planned clinical studies of our product candidates depend on many factors, including the rate at which patients are enrolled. Delays in patient enrollment in clinical studies may occur, which would be likely to result in increased costs, program delays, or both.
Patient enrollment is a function of many factors, including:
| ● | the number of clinical sites; |
| ● | the size of the patient population; |
| ● | the eligibility and enrollment criteria for the study; |
| ● | the willingness of patients’ parents or guardians to participate in the clinical trial; |
| ● | the existence of competing clinical studies; |
| ● | the existence of alternative available products; and |
| ● | geographical and geopolitical considerations. |
If we succeed in achieving our patient enrollment targets, patients that enroll in our clinical studies could suffer adverse medical events or side effects that are known, such as a decrease in the oxygen level of the blood upon administration, or currently unknown to us. It is also possible that we, our AEROSURF Clinical Trial (ACT) Steering Committee, the Safety Review Committee (SRC), or the FDA could interrupt, delay or halt any one or more of our clinical studies for any of our product candidates. If our ACT Steering Committee, the SRC, any regulator or we believe that study participants face unacceptable health risks, any one or more of our studies could be suspended or terminated. In addition, clinical studies may be interrupted, delayed or halted, in whole or in part, for reasons other than health and safety concerns, including, among other things, matters related to the design of the study, drug availability, ACT Steering Committee and/or SRC recommendation, or business reasons.
In addition to our planned clinical programs to support AEROSURF, in the future, we also may initiate or support clinical studies evaluating other KL4 surfactant pipeline products. All of these clinical studies will be time-consuming and potentially costly. Should we fail to complete our clinical development programs or should such programs yield unacceptable results, such failures would have a material adverse effect on our business.
Our manufacturing strategy includes relying, at least in part in the future, on third parties to manufacture our current approved products as well as certain of our drug product candidates and medical devices, which exposes us to risks that may affect our ability to maintain supplies of our commercial products and/or delay our research and development activities, regulatory approval and commercialization of our drug product candidates.
We currently manufacture our SURFAXIN liquid instillate at our operations located in Totowa, New Jersey. Our strategy includes potentially manufacturing SURFAXIN drug product in the future and our lyophilized dosage form of our KL4 surfactant, as well as our CAG and AFECTAIR devices, using third-party contract manufacturing organizations (CMOs). Our planned future reliance on CMOs exposes us, among other things, to the following risks:
| ● | we may be unable to successfully identify manufacturers with whom we might establish appropriate arrangements on acceptable terms, if at all, because the number of potential manufacturers is limited and the FDA must approve any replacement CMO. This approval could take as long as a year and would require new testing and compliance inspections as well as a potentially lengthy qualification process; |
| ● | CMOs might be unable to manufacture our products in the volume and to our specifications to meet our commercial and clinical needs, or we may have difficulty scheduling the production of drug product and devices in a timely manner to meet our timing requirements; |
| ● | CMOs may not perform as agreed, or may not remain in the CMO business for a lengthy time, or may refuse to renew an expiring agreement as expected, or may fail to product a sufficient supply to meet our commercial and/or clinical needs; |
| ● | CMOs are subject to ongoing periodic unannounced inspection by the FDA, the Drug Enforcement Administration, and corresponding state agencies to ensure strict compliance with cGMP and/or quality system regulations (QSR) and other government regulations and corresponding foreign standards. We do not have control over CMO’s compliance with these regulations and standards; |
| ● | moreover, if we desire to make our drug products and/or devices available outside the U.S. for commercial or clinical purposes, our CMOs would become subject to, and may not be able to comply with, corresponding manufacturing and quality system regulations of the various foreign regulators having jurisdiction over our activities abroad. Such failures could restrict our ability to execute our business strategies; |
| ● | if any third-party manufacturer makes improvements in the manufacturing process for our products, we may not have rights to, or may have to share, the intellectual property rights to any such innovation. We may be required to pay fees or other costs for access to such improvements; and |
| ● | each of these risks could delay our commercial manufacturing plans and our development programs, the approval, if any, of our product candidates by the FDA or result in higher costs or deprive us of potential product revenues. |
We depend upon key employees and consultants in a competitive market for skilled personnel. If we are unable to attract and retain key personnel, it could adversely affect our ability to develop and market our products.
As we prepared for the commercial introduction of SURFAXIN, we implemented a plan to hire additional qualified personnel to support (i) the commercial introduction of SURFAXIN and AFECTAIR, and (ii) the advancement of our AEROSURF and SURFAXIN LS development programs. In particular, we established our field-based sales and marketing and medical affairs organizations, and continue to invest in our regulatory affairs, quality control and assurance and administrative capabilities. We compete for qualified individuals with numerous biopharmaceutical companies, universities and other research institutions. Competition for such individuals is significant and attracting and retaining qualified personnel will be critical to our success, and any failure to do so successfully may have a material adverse effect on us.
We are highly dependent upon the members of our executive management team and our directors, as well as our scientific advisory board members, consultants and collaborating scientists. Many of these individuals have been involved with us for many years, have played integral roles in our progress and we believe that they continue to provide value to us. A loss of any of our key personnel may have a material adverse effect on aspects of our business and clinical development and regulatory programs.
In March 2013, we entered into employment agreements with five executive officers, including the President and Chief Executive Officer and Chief Financial Officer; the Senior Vice President and Chief Operating Officer; the Senior Vice President, General Counsel and Corporate Secretary; the Senior Vice President, Human Resources; and the Senior Vice President, Research and Development. These agreements expire on March 31, 2015, subject to automatic renewal for additional one-year periods, unless a party provides notice of non-renewal at least 90 days in advance. In addition, we recently entered into new agreements with five other officers that also expire on March 31, 2015. The loss of services from any of our executives could significantly adversely affect our ability to develop and market our products and obtain necessary regulatory approvals. Further, we do not maintain key man life insurance.
As we prepare for the commercial introduction of our approved products and to initiate our AEROSURF phase 2 clinical program, we need to attract and retain highly-qualified personnel to join our management, commercial, medical affairs and development teams, although there can be no assurances that we will be successful in that endeavor. We may be unable to attract and retain necessary executive talent.
Our future success also will depend in part on the continued service of our key scientific and management personnel and our ability to identify, hire and retain additional personnel. While we attempt to provide competitive compensation packages to attract and retain key personnel at all levels in our organization, many of our competitors have greater resources and more experience than we do, making it difficult for us to compete successfully for key personnel. We may experience intense competition for qualified personnel and the existence of non-competition agreements between prospective employees and their former employers may prevent us from hiring those individuals or subject us to lawsuits brought by their former employers.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
During the ninethree months ended September 30, 2013,March 31, 2014, we issued an aggregate of 23,7508,750 unregistered shares of common stock to a consultant as compensation for management consulting services rendered during 2013. The shares were issued as follows: 7,500 shares on each of February 28, 2013, and May 31, 2013, and 8,750 shares on August 31, 2013.2014. The shares were issued in reliance upon the exemption from securities registration provided by Section 4(2) of the Act.
Exhibits are listed on the Index to Exhibits at the end of this Quarterly Report. The exhibits required by Item 601 of Regulation S-K, listed on such Index in response to this Item, are incorporated herein by reference.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Discovery Laboratories, Inc. |
(Registrant) | (Registrant) |
| | |
Date: NovemberMay 12, 2013 2014 | By: | /s/ John G. Cooper |
| | John G. Cooper |
| | President and Chief Executive Officer |
| | |
| Date: May 12, 2014 | By: | /s/ John G. CooperTattory |
| | President and Chief Executive Officer and Chief Financial Officer
John Tattory |
| | (Principal Executive andChief Financial Officer)Officer |
INDEX TO EXHIBITS
The following exhibits are included with this Quarterly Report on Form 10-Q.
Exhibit No. | Description | | Method of Filing |
| | | |
| 3.1 | Amended and Restated Certificate of Incorporation of Discovery Laboratories, Inc. (Discovery) filed as of August 1, 2013, including amendments reflected in a Certificate of Amendment to the Restated Certificate of Incorporation of Discovery filed on December 27, 2010, and in a Certificate of Amendment to the Restated Certificate of Incorporation of Discovery filed on October 3, 2011 | | Incorporated by reference to Exhibit 3.1 to Discovery’s Quarterly Report on Form 10-Q, for the quarter ended June 30, 2013, as filed with the SEC on August 8, 2013. |
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| 3.2 | Certificate of Designations, Preferences and Rights of Series A Junior Participating Cumulative Preferred Stock of Discovery, dated February 6, 2004 | | Incorporated by reference to Exhibit 2.2 to Discovery’s Form 8-A, as filed with the SEC on February 6, 2004. |
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| 3.3 | Amended and Restated By-Laws of Discovery, as amended effective September 3, 2009 | | Incorporated by reference to Exhibit 3.1 to Discovery’s Current Report on Form 8-K, as filed with the SEC on September 4, 2009. |
| | | |
| 4.1 | Shareholder Rights Agreement, dated as of February 6, 2004, by and between Discovery and Continental Stock Transfer & Trust Company | | Incorporated by reference to Exhibit 10.1 to Discovery’s Current Report on Form 8-K, as filed with the SEC on February 6, 2004. |
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| 4.2 | Warrant Agreement dated May 22, 2008 by and between Kingsbridge Capital Limited and Discovery | | Incorporated by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K as filed with the SEC on May 28, 2008. |
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4.3 | Warrant Agreement dated December 12, 2008 by and between Kingsbridge Capital Limited and Discovery | | Incorporated by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as filed with the SEC on December 15, 2008. |
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4.44.3 | Form of StockWarrant to Purchase WarrantCommon Stock issued in May 2009 | | Incorporated by reference to Exhibit 10.3 to Discovery’s Current Report on Form 8-K, as filed with the SEC on May 8, 2009. |
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4.54.4 | Form of StockWarrant to Purchase WarrantCommon Stock issued in February 2010 | | Incorporated by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as filed with the SEC on February 18, 2010. |
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4.64.5 | Warrant Agreement, dated as of April 30, 2010, by and between Discovery and PharmaBio | | Incorporated by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as filed with the SEC on April 28, 2010. |
| | | |
4.74.6 | Warrant Agreement dated June 11, 2010 by and between Kingsbridge Capital Limited and Discovery | | Incorporated by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as filed with the SEC on June 14, 2010. |
Exhibit No. | Description
| | Method of Filing
|
| | | |
4.84.7 | Form of Series I Warrant to Purchase Common Stock issued on June 22, 2010 (Five-Year Warrant) | | Incorporated by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as filed with the SEC on June 17, 2010. |
Exhibit No. | Description | | Method of Filing |
4.9 | | | |
| 4.8 | Warrant Agreement, dated as of October 12, 2010, by and between Discovery and PharmaBio | | Incorporated by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as filed with the SEC on October 13, 2010. |
| | | |
4.104.9 | Form of Series I Warrant to Purchase Common Stock issued on February 22, 2011 (Five-Year Warrant) | | Incorporated by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K, as filed with the SEC on February 16, 2011. |
| | | |
4.11 | Form of Series II Warrant to Purchase Common Stock issued on February 22, 2011 | | Incorporated by reference to Exhibit 4.2 to Discovery’s Current Report on Form 8-K, as filed with the SEC on February 16, 2011. |
| | | |
4.12+4.10+ | Form of Warrant dated February 13, 2013, issued to affiliates of Deerfield Private Design Fund II, L.P.Management Co., Deerfield Private Design International II, L.P., Deerfield Special Situations Fund, L.P. and Deerfield Special Situations International Master Fund, L.P. (collectively, Deerfield)LLP (Deerfield) under a Facility Agreement dated as of February 13, 20132012 between Discovery and Deerfield (Deerfield Facility) | | Incorporated by reference to Exhibit 4.1 to Discovery’s Current Report on Form 8-K/A,8-K, as filed with the SEC on March 15,June 14, 2013. |
| | | |
4.134.11+ | Form of NotesWarrant dated December 3, 2013, issued to affiliates of Deerfield evidencing loanManagement Co., LLP (Deerfield) on December 3, 2013 under a Facility Agreement dated as of February 13, 2012 between Discovery and Deerfield Facility | | Incorporated by reference to Exhibit 4.24.1 to Discovery’s Current Report on Form 8-K/A,8-K, as filed with the SEC on March 15, 2013. |
| | | |
10.1 | Extension, dated as of July 16, 2013, of Lease dated as of December 3, 2004, between Discovery, as successor-in-interest to Laureate Pharma, Inc. (Tenant), and Norwell Land Company (“Landlord”), with respect to property at 710 Union Blvd., Totowa, NJ 07512 | | Incorporated by reference to Exhibit 10.1 to Discovery’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, as filed with the SEC on August 8, 2013. |
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10.2+ | Pharmaceutical Manufacturing and Supply Agreement dated August 7, 2013 between Discovery and DSM Pharmaceuticals, Inc. (DSM) | | Incorporated by reference to Exhibit 10.2 to Discovery’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, as filed with the SEC on August 8,6, 2013. |
| | | |
| Master ServicesEmployment Agreement dated October 24, 2013as of March 21, 2014 between Discovery and DSMJohn Tattory | | Filed herewith. |
| | | |
| Certification of Chief Executive Officer andpursuant to Rule 13a-14(a) of the Exchange Act | | Filed herewith. |
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| Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act | | Filed herewith. |
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| Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | Filed herewith. |
Exhibit No. | Description
| | Method of Filing
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| 101.1 | The following consolidated financial statements from the Discovery Laboratories, Inc. QuarterlyAnnual Report on Form 10-Q for the quarter ended September 30, 2013,March 31, 2014, formatted in Extensive Business Reporting Language (“XBRL”): (i) Balance Sheets as of September 30, 2013March 31, 2014 (unaudited) and December 31, 2012,2013, (ii) Statements of Operations (unaudited) for the three and nine months ended September 30,March 31, 2014 and March 31, 2013, and September 30, 2012, (iii) Statements of Cash Flows (unaudited) for the ninethree months ended September 30,March 31, 2014 and March 31, 2013, and September 30, 2012, and (v) Notes to consolidated financial statements. | | |
Exhibit No. | Description | | Method of Filing |
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| 101.INS | Instance Document | | Filed herewith. |
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| 101.SCH | XBRL Taxonomy Extension Schema Document | | Filed herewith. |
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| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | | Filed herewith. |
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| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | | Filed herewith. |
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| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | | Filed herewith. |
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| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | | Filed herewith. |
+Confidential treatment requested as to certain portions of these exhibits. Such portions have been redacted and filed separately with the Commission.
*A management contract or compensatory plan or arrangement required to be filed as an exhibit to this quarterly report pursuant to Item 6 of Form 10-Q.Confidential treatment requested as to certain portions of this exhibit. Such portions have been redacted and filed separately with the Commission. |